-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NEd/WJgVkyAW2Cd0CB8lQ2BqtrAxK7a4v2CkYJ+XbZwzAhIMWQ7A7mOW+nROzILq 8kKS/FjknydJxvZ6j9BV9A== 0000891618-00-002570.txt : 20000509 0000891618-00-002570.hdr.sgml : 20000509 ACCESSION NUMBER: 0000891618-00-002570 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000326 FILED AS OF DATE: 20000508 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LAM RESEARCH CORP CENTRAL INDEX KEY: 0000707549 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 942634797 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12933 FILM NUMBER: 622073 BUSINESS ADDRESS: STREET 1: 4650 CUSHING PKWY CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5106590200 MAIL ADDRESS: STREET 1: 4650 CUSHING PARKWAY CITY: FREMONT STATE: CA ZIP: 94538 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED MARCH 26, 2000 Commission File No. 0-12933 LAM RESEARCH CORPORATION (Exact name of Registrant, as specified in its charter) DELAWARE 94-2634797 ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 4650 CUSHING PARKWAY, FREMONT, CALIFORNIA 94538 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (510) 572-0200 Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- As of March 26, 2000 there were 124,411,008 shares of Registrant's Common Stock outstanding. 2 INDEX
Page No. ---- PART I. FINANCIAL INFORMATION .................................................... 3 Item 1. Financial Statements (unaudited).......................................... 3 Condensed Consolidated Balance Sheets................................ 3 Condensed Consolidated Statements of Operations...................... 4 Condensed Consolidated Statements of Cash Flows...................... 5 Notes to Condensed Consolidated Financial Statements................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 15 Results of Operations................................................ 15 Liquidity and Capital Resources...................................... 21 Risk Factors......................................................... 22 Item 3. Quantitative and Qualitative Disclosures about Market Risk................ 31 PART II. OTHER INFORMATION......................................................... 32 Item 1. Legal Proceedings......................................................... 32 Item 4. Submission of Matters to Vote of Security Holders ........................ 33 Item 6. Exhibits and Reports on Form 8-K.......................................... 33
2 3 ITEM 1. FINANCIAL STATEMENTS LAM RESEARCH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share data)
March 26, 2000 June 30, (unaudited) 1999 ----------- ----------- Assets Cash and cash equivalents $ 27,296 $ 37,965 Short-term investments 294,182 273,836 Accounts receivable, net 306,680 170,531 Inventories 217,145 183,716 Prepaid expenses and other assets 26,051 17,177 Deferred income taxes 55,645 55,645 ----------- ----------- Total Current Assets 926,999 738,870 Equipment and leasehold improvements, net 115,303 103,337 Restricted cash 60,348 60,348 Deferred income taxes 51,745 51,745 Other assets 30,953 25,151 ----------- ----------- Total Assets $ 1,185,348 $ 979,451 =========== =========== Liabilities and Stockholders' Equity Trade accounts payable $ 47,462 $ 51,216 Accrued expenses and other current liabilities 229,534 172,213 Current portion of long-term debt and capital lease obligations 7,644 20,566 ----------- ----------- Total Current Liabilities 284,640 243,995 Long-term debt and capital lease obligations, less current portion 323,057 326,500 ----------- ----------- Total Liabilities 607,697 570,495 Preferred stock: 5,000 shares authorized; none outstanding Common Stock, at par value of $0.001 per share Authorized -- 400,000 shares; issued and outstanding 124,411 shares at March 26, 2000 and 116,535 shares at June 30, 1999 124 117 Additional paid-in capital 427,895 388,868 Treasury stock -- (8,429) Accumulated other comprehensive loss (7,605) (432) Retained earnings 157,237 28,832 ----------- ----------- Total Stockholders' Equity 577,651 408,956 ----------- ----------- Total Liabilities and Stockholders' Equity $ 1,185,348 $ 979,451 =========== ===========
See Notes to Condensed Consolidated Financial Statements. 3 4 LAM RESEARCH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)
Three Months Ended Nine Months Ended ----------------------------- ----------------------------- March 26, March 31, March 26, March 31, 2000 1999 2000 1999 --------- --------- --------- --------- Total revenue $ 326,349 $ 152,976 $ 856,551 $ 437,070 Costs and expenses: Cost of goods sold - on net sales 182,212 98,674 485,927 285,520 Cost of goods sold - on restructuring charge (recovery) (849) -- (849) -- --------- --------- --------- --------- Gross margin 144,986 54,302 371,473 151,550 Research and development 45,881 35,751 125,429 104,857 Selling, general and administrative 41,147 33,175 113,647 112,589 Restructuring charge (recovery) (18,083) -- (18,083) 53,372 Purchased technology for research and development -- -- 7,460 5,000 --------- --------- --------- --------- Operating income (loss) 76,041 (14,624) 143,020 (124,268) Other income (expense), net 1,883 (100) 5,013 6 --------- --------- --------- --------- Income (loss) before taxes 77,924 (14,724) 148,033 (124,262) Income tax expense 10,909 -- 19,628 -- --------- --------- --------- --------- Net income (loss) $ 67,015 $ (14,724) $ 128,405 $(124,262) ========= ========= ========= ========= Net income (loss) per share Basic $ 0.55 $ (0.13) $ 1.07 $ (1.08) ========= ========= ========= ========= Diluted $ 0.48 $ (0.13) $ 0.97 $ (1.08) ========= ========= ========= ========= Number of shares used in per share calculations Basic 122,646 116,022 119,747 115,290 ========= ========= ========= ========= Diluted 145,931 116,022 131,752 115,290 ========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements. 4 5 LAM RESEARCH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Nine Months Ended --------------------------------- March 26, March 31, 2000 1999 ----------- ----------- Cash flows from operating activities: Net income (loss) $ 128,405 $ (124,262) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 33,822 38,997 Restructuring charge (recovery) (18,932) 34,141 Purchased technology for research and development expense 7,460 5,000 Change in certain working capital accounts (112,346) (9,314) ----------- ----------- Net cash provided by (used in) operating activities 38,409 (55,438) Cash flows from investing activities: Capital expenditures, net (38,970) (25,376) Purchase of short-term investments (1,805,611) (2,691,166) Sale/maturities of short-term investments 1,785,265 2,845,050 Cash paid for acquisition of technology for research and development (6,460) (3,000) Other (5,414) 3,163 ----------- ----------- Net cash provided by (used in) investing activities (71,190) 128,671 ----------- ----------- Cash flows from financing activities: Treasury stock repurchase (5,146) (13,216) Reissuance of treasury stock 13,575 -- Sale of stock, net of issuance costs 39,034 10,780 Principal payments on long-term debt and capital lease obligations (26,863) (22,676) Net proceeds from the issuance of short and long term debt 8,685 12,076 Foreign currency translation adjustment (7,173) (657) ----------- ----------- Net cash provided by (used in) financing activities 22,112 (13,693) ----------- ----------- Net increase (decrease) in cash and cash equivalents (10,669) 59,540 Cash and cash equivalents at beginning of period 37,965 13,509 ----------- ----------- Cash and cash equivalents at end of period $ 27,296 $ 73,049 =========== ===========
See Notes to Condensed Consolidated Financial Statements. 5 6 LAM RESEARCH CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 26, 2000 (Unaudited) NOTE A -- BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Lam Research Corporation (the "Company" or "Lam") for the fiscal year ended June 30, 1999, which are included in the Annual Report on Form 10-K, File Number 0-12933. Effective fiscal year 2000, the Company changed its reporting period to a fifty-two/fifty-three week fiscal year. The Company's fiscal year end will fall on the last Sunday of June each year. The Company's current fiscal year will end on June 25, 2000. Adoption of the change in fiscal year is not expected to have a material impact on the Company's consolidated financial statements. NOTE B -- RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". SAB 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements of all public registrants. Changes in the Company's revenue recognition policy resulting from the interpretation of SAB 101 would be reported as a change in accounting principle. The change in the revenue recognition policy would result in a cumulative adjustment in the quarter the Company adopts SAB 101. The Company is still in the process of assessing the impact of SAB 101 on its financial statements. NOTE C -- INVENTORIES Inventories consist of the following:
March 26, June 30, 2000 1999 -------- -------- (in thousands) Raw materials $150,947 $123,311 Work-in-process 56,300 44,181 Finished goods 9,898 16,224 -------- -------- $217,145 $183,716 ======== ========
6 7 NOTE D -- EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements consist of the following:
March 26, June 30, 2000 1999 --------- --------- (in thousands) Equipment $ 107,801 $ 93,112 Leasehold improvements 106,274 90,902 Furniture & fixtures 50,872 45,427 --------- --------- 264,947 229,441 Accumulated depreciation and amortization (149,644) (126,104) --------- --------- $ 115,303 $ 103,337 ========= =========
NOTE E -- STOCKHOLDERS' EQUITY On March 6, 2000, the Company held a special stockholders' meeting. At the meeting, the Company's stockholders approved an increase in the number of authorized shares of the Company's Common Stock from 90 million to 400 million shares and approved a three-for-one stock split of its outstanding shares of Common Stock. Stockholders' approval of the amendment to the Company's Certificate of Incorporation satisfies the condition for the previously announced three-for-one stock split approved by Lam's Board of Directors on January 21, 2000. All prior period shares and per share amounts have been restated to reflect the three-for-one split. NOTE F -- OTHER INCOME (EXPENSE), NET The significant components of other income (expense), net are as follows:
Three Months Ended Nine Months Ended --------------------------- --------------------------- March 26, March 31, March 26, March 31, 2000 1999 2000 1999 -------- -------- -------- -------- (in thousands) Interest expense $ (4,833) $ (5,202) $(14,588) $(15,194) Interest income 6,557 5,579 18,179 17,364 Other 159 (477) 1,422 (2,164) -------- -------- -------- -------- $ 1,883 $ (100) $ 5,013 $ 6 ======== ======== ======== ========
NOTE G -- NET INCOME (LOSS) PER SHARE Basic net income (loss) per share is calculated using the weighted average number of shares of Common Stock outstanding during the period. For the quarter ended March 26, 2000, diluted net income per share includes the assumed exercise of employee stock options and the assumed conversion of the convertible subordinated notes to common shares. For the nine months ended March 26, 2000, only the assumed exercise of employee stock options was included; the assumed conversion of convertible subordinated notes to common shares was excluded from the computation of diluted net income per share because the effect would have been antidilutive. Options outstanding during 7 8 the three and nine month periods ended March 31, 1999 were excluded from the computation of diluted net loss per share because the effect in periods with a net loss would have been antidilutive. The shares potentially issuable under the third party put option transactions have been excluded from the computation of net income per share because the effect would have been antidilutive. The Company's basic and diluted net income (loss) per share amounts are as follows:
Three Months Ended Nine Months Ended -------------------------- -------------------------- March 26, March 31, March 26, March 31, 2000 1999 2000 1999 --------- --------- --------- --------- (in thousands except per share data) Numerator: Numerator for basic net income (loss) per share $ 67,015 $ (14,724) $ 128,405 $(124,262) --------- --------- --------- --------- Add: Interest expense on convertible subordinated notes, net of income taxes 3,717 -- -- -- --------- --------- --------- --------- Numerator for diluted net income (loss) per share $ 70,732 $ (14,724) $ 128,405 $(124,262) ========= ========= ========= ========= Denominator: Basic net income (loss) per share - average shares outstanding 122,646 116,022 119,747 115,290 --------- --------- --------- --------- Effect of potential dilutive securities: Convertible subordinated notes 10,596 -- -- -- Employee stock options 12,689 -- 12,005 -- --------- --------- --------- --------- Total potential net dilutive common shares 23,285 -- 12,005 -- --------- --------- --------- --------- Diluted net income (loss) per share - average shares outstanding and other potential common shares 145,931 116,022 131,752 115,290 ========= ========= ========= ========= Basic net income (loss) per share $ 0.55 $ (0.13) $ 1.07 $ (1.08) ========= ========= ========= ========= Diluted net income (loss) per share $ 0.48 $ (0.13) $ 0.97 $ (1.08) ========= ========= ========= =========
NOTE H -- COMPREHENSIVE INCOME (LOSS) The components of comprehensive income (loss), net of tax, are as follows:
Three Months Ended Nine Months Ended --------------------------- --------------------------- March 26, March 31, March 26, March 31, 2000 1999 2000 1999 --------- --------- --------- --------- (in thousands) Net income (loss) $ 67,015 $ (14,724) $ 128,405 $(124,262) Foreign currency translation adjustment (579) (94) (7,173) (657) --------- --------- --------- --------- Comprehensive income (loss) $ 66,436 $ (14,818) $ 121,232 $(124,919) ========= ========= ========= =========
8 9 Accumulated other comprehensive income (loss) presented on the accompanying consolidated condensed balance sheets consists of the accumulated foreign currency translation adjustment. NOTE I -- COMMITMENTS During the third quarter of fiscal 2000, the Company entered into a five year Operating Lease Agreement (the "Agreement"), relating to certain buildings at its Fremont, California campus, in order to obtain more favorable terms and to reduce the amount of the previous minimum lease payments. As part of the Agreement, the Company is required to provide a guaranteed residual value of $25.2 million at the end of the lease term. NOTE J -- RESTRUCTURING During the Company's first fiscal 1997 quarter ended September 30, 1996, the Company projected and announced that revenues would be lower than previous quarters due to a projected 20% general market decline. The Company's revenues during that quarter fell to $299.2 million, a decrease of 24% from the prior quarter. The Company assessed that market conditions would remain depressed and, therefore, that its revenues would continue to be adversely affected. Accordingly, and as announced on August 26, 1996, the Company organizationally restructured its business units into a more centralized structure and cut its workforce by approximately 11%. The Company's quarterly revenue would eventually decline to $233.3 million in the March 1997 quarter, 40% lower than the peak reached in the quarter ended June 1996. Subsequently, in the latter part of calendar 1997, the industry rebounded quickly and entered into what eventually became a short-lived upturn cycle. During the June 1997 quarter, the Company's revenues grew back to $282.6 million and reached $292.1 million by the December 1997 quarter. However, the Company's outlook in late January 1998 was that the industry was again entering into a steep downturn brought on by depressed DRAM pricing and the Asian financial crisis. The Company therefore announced a further set of restructuring activities in a news release on February 12, 1998. At that time, the Company's assessment related to industry conditions was that its revenues for the March and June 1998 quarters would decline by approximately 20%. The Company's restructuring plans aligned its cost structure to this level of revenues by exiting part of its Chemical Vapor Deposition ("CVD") business and all of its Flat Panel Display ("FPD") business, consolidating its manufacturing facilities and substantially reducing its remaining infrastructure and workforce. The Company's actual June 1998 revenues were in line with those expectations; however, by the mid-June 1998 time frame the industry conditions further deteriorated and the outlook for future quarters significantly worsened. The Company projected revenues to drop to a run rate of approximately $180 million per quarter and determined it needed once more to reduce its cost structure in line with the projected reductions in revenue. Accordingly, another separate restructuring plan was developed and announced in June 1998. As a result of the restructurings in fiscal 1998, the Company reduced its global workforce by approximately 28% and exited the remainder of its CVD operations. 9 10 The Company's revenue outlook in June 1998 was based on the Company's projection that the worldwide wafer fabrication industry would deteriorate from a quarterly revenue amount of $4.2 billion to $3.2 billion, or a 25% decline. The semiconductor equipment market contracted beyond what was anticipated, to quarterly revenues of $2.6 billion. The Company's shortfall of revenues during the September 1998 quarter declined in line with the industry as a whole, and resulted in lower than anticipated revenues, falling to $142.2 million. At that point in time, the Company projected that its quarterly revenues would remain closer to the $140-$150 million levels for at least the next several quarters. This necessitated another restructuring plan and further cost reductions via employee terminations, facilities consolidation and a contraction of operating activities, all of which resulted in the additional write-off of plant related assets. This plan was announced and publicly communicated on November 12, 1998. As a result of the fiscal 1999 restructuring, the Company reduced further its global workforce by approximately 15%. Beginning in late fiscal 1999, there were indications of a recovery in the semiconductor industry. On a global basis, semiconductor makers began adding new capacity to address an increase in the demand for semiconductors. In addition to new capacity, the semiconductor industry accelerated a migration to new materials such as copper and the new interconnect processes required to implement them. At the end of the second quarter of fiscal 2000, the Company determined that the upturn would be sustained and is anticipated to continue through the end of the calendar year. During the third quarter of fiscal 2000 the Company completed the majority of its restructuring activities in accordance with its previously established and announced plans. As a result of the stronger than anticipated recovery of the semiconductor capital equipment market, the Company was able to recover a portion of the restructuring charges recorded in prior periods of approximately $18.9 million. Of this amount, $1.4 million was recovered due to outplacement services guaranteed by the Company for terminated employees and other exit costs not being utilized. Another $5.6 million was recovered from a change in the Company's assessment of its ability to utilize certain manufacturing and administrative facilities under long-term operating leases which had been vacated by the Company. Management had or was in the process of securing subleases for these facilities prior to the upturn in market conditions. Currently, the Company believes it can reoccupy these facilities and fully utilize them through the end of their respective lease terms. The Company also recovered $3.1 million through the sale of previously abandoned and written off facilities in Korea. Additionally, the Company anticipates future use of leasehold improvements of $5.5 million in certain manufacturing and administration facilities under operating lease which have been or will be reoccupied as a result of the stronger than anticipated rebound in the Company's business. Approximately $0.8 million was recovered from the salvage of CVD inventories previously segregated and written off due to requests from former customers to purchase certain piece parts. The remaining $2.5 million was recovered due to 10 11 certain customers not utilizing system return credits they requested and which were issued by the Company as a result of the decision to exit the CVD and FPD businesses. Below is a table summarizing restructuring activity relating to the fiscal 1999 restructuring:
Severance Lease Payments Credit on and on Vacated Abandoned Returned Benefits Facilities Fixed Assets Equipment Total --------- -------------- ------------ --------- -------- (in thousands) Fiscal year 1999 provision $ 16,521 $ 1,125 $ 28,141 $ 7,585 $ 53,372 Cash payments (11,663) (440) -- (258) (12,361) Non-cash charges -- -- (28,141) (1,959) (30,100) -------- -------- -------- -------- -------- Balance at June 30, 1999 4,858 685 -- 5,368 10,911 Recovery of assets -- -- 4,218 -- 4,218 Cash payments (1,738) (509) -- (275) (2,522) Non-cash Charges -- -- -- (806) (806) Reversal of restructuring reserve (274) (176) (4,218) (749) (5,417) -------- -------- -------- -------- -------- Balance at March 26, 2000 $ 2,846 $ -- $ -- $ 3,538 $ 6,384 ======== ======== ======== ======== ========
Severance and Benefits relates to the salary and fringe benefit expense for the involuntarily terminated employees representing approximately 15% of the global workforce. Prior to the date of the financial statements, management, with the proper level of authority, approved and committed the Company to a plan of termination and determined the benefits the employees being terminated would receive. Prior to the financial statement date, the expected termination benefits were communicated to employees in enough detail that they could determine their type and amount of benefit. The termination of employees occurred shortly after the plan of restructuring was finalized. The Severance and Benefits reserve balance of $2.8 million as of March 26, 2000 will be utilized through the remainder of those former employees' separation contracts. Lease Payments on Vacated Facilities generally relates to 24 months of rent and common area maintenance expense for the vacated facilities. The Company also estimated, given the then-current real estate market conditions, that it would take approximately 24 months to sub-lease its excess facilities in Fremont, California. The Company wrote-off all leasehold improvements for the excess facilities, computer equipment, furniture and fixtures related to the involuntarily terminated employees, and other assets deemed to have no future use as a result of the restructuring. Credit on Returned Equipment relates to the charge associated with the anticipated return of previously purchased CVD systems and spare parts by certain customers of the Company. Most of the Credit on Return Equipment reserve balance of $3.5 million as of March 26, 2000 will be utilized by the end of the current calendar year. 11 12 Below is a table summarizing restructuring activity relating to the fiscal 1998 restructuring:
Lease Payments Abandoned Excess and Credit on Other Severance On Vacated Fixed Obsolete Returned Exit and Benefits Facilities Assets Inventory Equipment Costs Total ------------ ---------- --------- ---------- --------- --------- --------- (in thousands) Fiscal year 1998 provision $ 40,317 $ 16,998 $ 47,341 $ 31,933 $ 6,547 $ 5,722 $ 148,858 Cash payments (9,766) (1,518) -- -- -- -- (11,284) Non-cash charges -- -- (47,341) (31,933) (4,135) (5,722) (89,131) --------- --------- --------- --------- --------- --------- --------- Balance at June 30, 1998 30,551 15,480 -- -- 2,412 -- 48,443 Adjustment -- -- -- -- 1,528 -- 1,528 Cash payments (19,777) (3,039) -- -- (2,150) -- (24,966) --------- --------- --------- --------- --------- --------- --------- Balance at June 30, 1999 10,774 12,441 -- -- 1,790 -- 25,005 Recovery of assets -- -- 4,390 849 -- 146 5,385 Cash payments (1,104) (1,930) -- -- -- -- (3,034) Non-cash charges -- (66) -- -- -- -- (66) Reversal of restructuring charges (958) (5,382) (4,390) (849) (1,790) (146) (13,515) --------- --------- --------- --------- --------- --------- --------- Balance at March 26, 2000 $ 8,712 $ 5,063 $ -- $ -- $ -- $ -- $ 13,775 ========= ========= ========= ========= ========= ========= =========
Severance and Benefits relates to the salary and fringe benefit expense for the involuntarily terminated employees of the CVD and FPD operations which were exited, the shutdown of the Wilmington, Massachusetts manufacturing facility, and the employees impacted by the overall across-the-board reduction of the employee base. Prior to the date of the financial statements, management, with the proper level of authority, approved and committed the Company to a plan of termination and determined the benefits the employees being terminated would receive. Prior to the financial statement date, the expected termination benefits were communicated to employees in enough detail that they could determine their type and amount of benefit. The restructuring plans resulted in the Company reducing its global workforce by approximately 28%. The termination of employees occurred shortly after the plan of restructuring was finalized. The Severance and Benefits reserve balance of $8.7 million as of March 26, 2000 will be utilized through the remainder of those former employees' separation contracts. Lease Payments on Vacated Facilities which was included in the restructuring charge generally related to remaining rent and common area maintenance on the closed Wilmington, Massachusetts manufacturing facility. The Company also estimated, given the then-current real estate market conditions, that it would take approximately 24 months to sub-lease its excess facilities in Fremont, California. The Company, therefore, included 24 months of rent and common area maintenance expense related to excess facilities in its restructuring charge. Subsequently, the Company has subleased some of its excess facilities. The Company wrote-off all fixed assets relating to the operations which were exited, leasehold improvements for the excess facilities, computer equipment, furniture and fixtures related to the involuntarily terminated employees, and other assets deemed to have no future use as a result of the restructuring. 12 13 The inventory write-off included in the restructuring charge related to inventory from the operations which were exited. The inventory write-off included raw material on hand and inventory purchased under non-cancelable commitments from suppliers, spare parts, work-in-process and finished goods related to the products from the exited operations. Credit on Returned Equipment relates to the charge associated with the anticipated return previously purchased CVD systems and spare parts by certain customers of the Company. During fiscal 1999, the Company recorded an adjustment to the restructuring reserve of $1.5 million for the recovery of a previously written off machine. Other Exit Costs of $5.7 million relates to the net book value of licensing and manufacturing agreements related to the restructured operations. Below is a table summarizing restructuring activity relating to the fiscal 1997 restructuring:
Lease Severance Payments on Abandoned and Vacated Fixed Benefits Facilities Assets Total --------- ----------- ---------- ------- (in thousands) Fiscal year 1997 provision $ 6,170 $ 1,789 $ 1,062 $ 9,021 Cash payments (5,592) (703) -- (6,295) Non-cash charges -- -- (1,062) (1,062) ------- ------- ------- ------- Balance at June 30, 1997 578 1,086 -- 1,664 Adjustment 1,086 (1,086) -- -- Cash payments (406) -- -- (406) ------- ------- ------- ------- Balance at June 30, 1998 1,258 -- -- 1,258 Cash payments (409) -- -- (409) ------- ------- ------- ------- Balance at June 30, 1999 849 -- -- 849 Cash payments (134) -- -- (134) ------- ------- ------- ------- Balance at March 26, 2000 $ 715 $ -- $ -- $ 715 ======= ======= ======= =======
Severance and Benefits relates to the salary and fringe benefit expense for the involuntarily terminated employees, which represented approximately 11% of the global workforce. Prior to the date of the financial statements, management, with the proper level of authority, approved and committed the Company to a plan of termination and determined the benefits the employees being terminated would receive. Prior to the financial statement date, the expected termination benefits were communicated to employees in enough detail that they could determine their type and amount of benefit. The termination of employees occurred shortly after the plan of restructuring was finalized. During fiscal 1998, the Company revised its estimate relating to severance and benefits and transferred the excess balance of remaining lease payments on vacated facilities to severance and benefits. The Severance and Benefits reserve balance of $0.7 million as of March 26, 2000 will be utilized through the remainder of those former employees' separation contracts. 13 14 Lease Payments on Vacated Facilities generally relates to remaining rent and common area maintenance expense for the vacated facilities. The Company wrote-off all leasehold improvements for the excess facilities, computer equipment, furniture and fixtures related to the involuntarily terminated employees, and other assets deemed to have no future use as a result of the restructuring. NOTE K -- CHANGE IN FUNCTIONAL CURRENCY The Company has determined that the functional currency of its European and Asia Pacific foreign subsidiaries is no longer the U.S. dollar but the individual subsidiary's local currency. The following are the reasons for the Company's change in functional currency: the Company's European and Asia Pacific foreign subsidiaries primarily generate and expend cash in their local currency; their labor and services are primarily in local currency (workforce is paid in local currency); their individual assets and liabilities are primarily denominated in the local foreign currency and do not materially impact the Company's cash flows and there is an active local sales market for the foreign subsidiaries' products and services. The European and Asia Pacific foreign subsidiaries are currently less dependent on the Company's US corporate office with their daily operations. In addition, the European community adopted a new Single European Currency, the Euro, which required implementation of that currency as of January 1, 1999 and transition through January 1, 2002. Upon implementation of the functional currency to the individual subsidiaries' local currency as of July 1, 1999, all balance sheet accounts are translated at the current exchange rate, and income statement accounts are translated at an average rate for the period. The resulting translation adjustments are recorded as currency translation adjustments, which is a component of accumulated other comprehensive income (loss). Previously, some balance sheet accounts were translated at a historic rate and translation adjustments were made directly to the statement of operations. The impact of the change in functional currency was not material to the Company's financial statements. NOTE L -- LITIGATION See Part II, item 1 for discussion of litigation. NOTE M -- PURCHASED TECHNOLOGY FOR RESEARCH AND DEVELOPMENT During the second quarter of fiscal 2000, the Company purchased intellectual property rights related to the semiconductor equipment industry from Oliver Design, Inc. ("Oliver"). The Company recognized an expense for the purchase of research development technology of approximately $7.5 million and capitalized $1.5 million related to acquired patents, which will be amortized ratably over five years. The technology is being used in a single discrete next generation post-CMP wafer cleaning product development project and has no future alternative use. The Company may make up to $2.0 million in additional license payments to Oliver based on product sales in the event it is successful in commercialization of the technology. 14 15 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations With the exception of historical facts, the statements contained in this discussion are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and are subject to the Safe Harbor provisions created by that statute. Such forward-looking statements include, but are not limited to, statements that relate to our future revenue, product development, demand, acceptance and market share, competitiveness, royalty income, gross margins, levels of research and development and operating expenses, our management's plans and objectives for our current and future operations, and the sufficiency of financial resources to support future operations and capital expenditures. Such statements are based on current expectations and are subject to risks, uncertainties, and changes in condition, significance, value and effect, including those discussed below under the heading Risk Factors, and other documents we may file from time to time with the Securities and Exchange Commission, specifically our last filed Annual Report on Form 10-K for the fiscal year ended June 30, 1999. Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from those expressed herein and in ways not readily foreseeable. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and of information currently and reasonably known. We undertake no obligation to release any revisions to these forward-looking statements which may be made to reflect events or circumstances which occur after the date hereof or to reflect the occurrence or effect of anticipated or unanticipated events. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes presented thereto on pages 3 to 14 of this Form 10-Q for a full understanding of our financial position and results of operations for the three and nine month periods ended March 26, 2000. RESULTS OF OPERATIONS Total Revenue Our total revenue for the three and nine month periods ended March 26, 2000 increased 113.3% and 96.0%, respectively, compared to the prior fiscal year periods. We experienced increased revenues for all of our products during both the three and nine month periods of fiscal 2000 compared to the year-ago periods. Our increased revenue in Alliance(TM) cluster system, which utilizes from one to four chambers each, was the major contributor to our higher total revenue for both three and nine month periods ended March 26, 2000 compared to the year ago periods. 15 16 Geographic breakdown of revenue is as follows:
Three Months Ended Nine Months Ended ---------------------------- -------------------------- March 26, March 31, March 26, March 31, 2000 1999 2000 1999 --------- --------- --------- --------- North America 23% 40% 30% 49% Europe 32% 26% 28% 23% Asia Pacific 30% 23% 29% 19% Japan 15% 11% 13% 9%
During calendar 1998, the global semiconductor industry experienced a slowdown driven by depressed DRAM pricing, production overcapacity, as well as uncertainty in the worldwide financial markets. This brought on a slowdown in equipment demand, which unfavorably impacted our sales for the first nine months of fiscal 1999. In the last quarter of fiscal 1999, the global semiconductor equipment industry began to recover, as a result of increased sales and profitability of semiconductor manufacturers. We experience and anticipate greater demand for our systems as our customers continue to add capacity in their most advanced lines, migrate to new lines, small geometries and new materials such as copper. We expect our net revenue for the next quarter to be higher than the revenue achieved in the third quarter of fiscal year 2000. Gross Margin Our gross margin percentage increased to 44.4% and 43.4%, respectively, in the three and nine month periods ended March 26, 2000, compared with 35.5% and 34.7%, respectively, for the year-ago periods. The increase in our gross margin percentage is due in large part to material cost reductions and greater sales volume. Also contributing to the gross margin percentage increase is a one time restructuring reversal credit related to previously written off inventory. We anticipate that our gross margins will continue to improve through fiscal 2000. Research and Development Research and development ("R&D") expenses for the three and nine month periods ended March 26, 2000 were 28.3% and 19.6% higher than the year-ago periods, respectively. However, as a percentage of revenue, R&D expenses were 14.1% and 14.6% of total revenue for the three and nine month periods of fiscal 2000, respectively, compared with 23.4% and 24.0%, respectively, for the three and nine month periods of fiscal 1999. The increase in R&D expenses was a result of our continued investments in advanced etch applications and to make enhancements to our existing products, including developing the technology necessary to incorporate 300MM wafer processing capabilities into our products. We believe that in order to remain competitive, we must continue to invest substantially in R&D. Selling, General and Administrative Selling, general and administrative ("SG&A") expenses increased by 24.0% and 1.0% for the three and nine month periods ended March 26, 2000 when compared to the year-ago periods. As a percentage of revenue, SG&A expenses for the three and nine month periods ended March 26, 2000 were 12.6% and 13.3%, respectively, of total revenue compared to 21.7% and 25.8%, respectively, of total revenue for the 16 17 year-ago periods. The increase in SG&A expenses for the three and nine month periods ended March 26, 2000, when compared to the prior year period, was a result of higher sales and marketing expenses related to higher sales volume and an overall increase in headcount. We anticipate SG&A expenses will increase at a slower rate than our revenues will expand in the last quarter of fiscal 2000. Restructuring Charge Our overall outlook in late January 1998 was that the industry had entered into a steep downturn brought on by depressed DRAM pricing and the Asian financial crisis. We therefore announced a set of restructuring activities in a news release on February 12, 1998. At that time, our assessment related to industry conditions was that our revenues for the March and June 1998 quarters would decline by approximately 20%. Our restructuring plans aligned our cost structure to a lower level of revenues by exiting part of our CVD business and our FPD business, consolidating our manufacturing facilities and substantially reducing our remaining infrastructure and workforce. Our actual June 1998 revenues were in line with those expectations; however, by the mid-June 1998 time-frame the industry conditions further deteriorated and the outlook for future quarters significantly worsened. We projected revenues to decrease to a run-rate of approximately $180 million per quarter and determined that, once more, reductions of our cost structure were required to align with the projected reductions in revenue. Accordingly, another separate restructuring plan was developed and announced in June 1998. During fiscal 1998, we incurred a total restructuring charge of $148.9 million relating to severance and benefits, lease payments on vacated facilities, the write-off of fixed assets, excess and obsolete inventory, returned equipment credits and other exit costs. As a result of the fiscal 1998 restructurings, we reduced our global workforce by approximately 28%. During fiscal 1999, we recorded an adjustment to the restructuring reserve of $1.5 million for the recovery of a previously written-off machine. The Severance and Benefits reserve balance of $8.7 million as of March 26, 2000 will be utilized through the remainder of those former employees' separation contracts. 17 18 Below is a table summarizing restructuring activity relating to the fiscal 1998 restructurings:
Lease Payments Abandoned Excess and Credit on Other Severance On Vacated Fixed Obsolete Returned Exit and Benefits Facilities Assets Inventory Equipment Costs Total ------------ ---------- --------- ---------- --------- --------- --------- (in thousands) Fiscal year 1998 provision $ 40,317 $ 16,998 $ 47,341 $ 31,933 $ 6,547 $ 5,722 $ 148,858 Cash payments (9,766) (1,518) -- -- -- -- (11,284) Non-cash charges -- -- (47,341) (31,933) (4,135) (5,722) (89,131) --------- --------- --------- --------- --------- --------- --------- Balance at June 30, 1998 30,551 15,480 -- -- 2,412 -- 48,443 Adjustment -- -- -- -- 1,528 -- 1,528 Cash payments (19,777) (3,039) -- -- (2,150) -- (24,966) --------- --------- --------- --------- --------- --------- --------- Balance at June 30, 1999 10,774 12,441 -- -- 1,790 -- 25,005 Recovery of assets -- -- 4,390 849 -- 146 5,385 Cash payments (1,104) (1,930) -- -- -- -- (3,034) Non-cash charges -- (66) -- -- -- -- (66) Reversal of restructuring charges (958) (5,382) (4,390) (849) (1,790) (146) (13,515) --------- --------- --------- --------- --------- --------- --------- Balance at March 26, 2000 $ 8,712 $ 5,063 $ -- $ -- $ -- $ -- $ 13,775 ========= ========= ========= ========= ========= ========= =========
During the quarter ended September 30, 1998, the semiconductor equipment market contracted beyond the anticipated $3.2 billion revenue level to $2.6 billion, according to Dataquest. Our shortfall of revenues during the September 1998 quarter was in line with the industry as a whole, and resulted in our revenues falling to $142.2 million for the quarter ended September 30, 1998. At that point in time, we projected that our quarterly revenues would remain closer to the $140-$150 million levels for at least the next several quarters. This necessitated another restructuring plan and further cost reductions through employee terminations, facilities consolidation and a contraction of operating activities, and the write-off of vacated plant related assets. This plan was announced and publicly communicated on November 12, 1998. During the second quarter of fiscal 1999, we recorded a restructuring charge of $53.4 million, relating to severance compensation and benefits for involuntarily terminated employees worldwide (representing approximately 15% of the global workforce), lease payments on abandoned facilities, the write-off of related leasehold improvements and fixed assets and returned equipment credits issued to certain customers. The Severance and Benefits reserve balance of $2.8 million as of March 26, 2000 will be utilized through the remainder of those former employees' separation contracts. Most of the Credit on Return Equipment reserve balance of $3.5 million as of March 26, 2000 will be utilized by the end of the current calendar year. 18 19 Below is a table summarizing restructuring activity relating to the fiscal 1999 restructuring:
Severance Lease Payments Credit on and on Vacated Abandoned Returned Benefits Facilities Fixed Assets Equipment Total --------- -------------- ------------ ---------- -------- (in thousands) Fiscal year 1999 provision $ 16,521 $ 1,125 $ 28,141 $ 7,585 $ 53,372 Cash payments (11,663) (440) -- (258) (12,361) Non-cash charges -- -- (28,141) (1,959) (30,100) -------- -------- -------- -------- -------- Balance at June 30, 1999 4,858 685 -- 5,368 10,911 Recovery of assets -- -- 4,218 -- 4,218 Cash payments (1,738) (509) -- (275) (2,522) Non-cash Charges -- -- -- (806) (806) Reversal of restructuring reserve (274) (176) (4,218) (749) (5,417) -------- -------- -------- -------- -------- Balance at March 26, 2000 $ 2,846 $ -- $ -- $ 3,538 $ 6,384 ======== ======== ======== ======== ========
We have carried-out, and continue to carry-out, our restructuring activities according to our original plans. We intend to operate at levels of spending that are consistent with our ability to generate revenues, therefore our spending levels may increase or decrease depending upon our assessment of our current needs. Beginning in late fiscal 1999, there were indications of a recovery in the semiconductor industry. On a global basis, semiconductor makers began adding new capacity to address an increase in the demand for semiconductors. In addition to new capacity, the semiconductor industry accelerated a migration to new materials such as copper and the new interconnect processes required to implement them. At the end of the second quarter of fiscal 2000, we determined that the upturn would be sustained and is anticipated to continue through the end of the calendar year. During the third quarter of fiscal 2000 we completed the majority of our restructuring activities in accordance with its previously established and announced plans. As a result of the stronger than anticipated recovery of the semiconductor capital equipment market, we were able to recover a portion of the restructuring charges recorded in prior periods of approximately $18.9 million. Of this amount, $1.4 million was recovered due to outplacement services guaranteed by us for terminated employees and other exit costs not being utilized. Another $5.6 million was recovered from a change in our assessment of the ability to utilize certain manufacturing and administrative facilities under long-term operating leases which had been vacated by us. Our management had or was in the process of securing subleases for these facilities prior to the upturn in market conditions. Currently, we believe we can reoccupy these facilities and fully utilize them through the end of their respective lease terms. We also recovered $3.1 million through the sale of previously abandoned and written off facilities in Korea. Additionally, we anticipate future use of leasehold improvements of $5.5 million in certain manufacturing and administration facilities under operating lease which have been or will be reoccupied as a result of the stronger than anticipated rebound in our business. Approximately $0.8 million was recovered from the salvage of CVD inventories previously segregated and written off due to requests from former customers to purchase certain piece parts. The remaining $2.5 million was recovered due to certain 19 20 customers not utilizing system return credits they requested and which were issued by us as a result of the decision to exit the CVD and FPD businesses. Purchased Technology for Research and Development During the second quarter of fiscal 2000, we purchased intellectual property rights related to the semiconductor equipment industry from Oliver Design, Inc ("Oliver"). We recognized an expense for the purchase of research development technology of approximately $7.5 million and capitalized $1.5 million related to acquired patents, which will be amortized ratably over five years. The technology is being used in a single discrete next generation post-CMP wafer cleaning product development project and has no future alternative use. We may make up to $2.0 million in additional license payments to Oliver based on product sales in the event we are successful in the commercialization of this technology. Tax Expenses Our third fiscal quarter income tax provision was 14% of profits, in accordance with a revised estimated effective tax rate of 13% for the fiscal year ending June 25, 2000. This rate reflects the benefit of net operating losses and research and development tax credits carried over from prior periods. We expect to increase the effective income tax rate to approximately 30% in fiscal year 2001, based on our current revenue and profit outlook for that period. Transition to Single European Currency During fiscal 1999, we established a team to address issues raised by the introduction of the Single European Currency ("Euro") for initial implementation as of January 1, 1999, and through the transition period to January 1, 2002. We met all related legal requirements by January 1, 1999, and we expect to meet all legal requirements through the transition period. We do not expect the cost of any related system modifications to be material and do not currently expect that the introduction and use of the Euro will materially affect our foreign exchange and hedging activities, or will result in any material increase in transaction costs. We will continue to evaluate the impact over time of the introduction of the Euro; however, based on currently available information, our management does not believe that the introduction of the Euro has or will have a material adverse impact on our financial condition or results of our operations. Year 2000 Issues To date, we have not experienced any material Year 2000 related issues, and we expect minimal future Year 2000 issues based on the performance to date of internal systems that we use and the products we supply to our customers. 20 21 LIQUIDITY AND CAPITAL RESOURCES As of March 26, 2000, we had $321.5 million in cash, cash equivalents and short-term investments, compared with $311.8 million at June 30, 1999. We have a total of $100.0 million available under a syndicated bank line of credit which is due to expire in April 2001. Borrowings are subject to our compliance with financial and other covenants set forth in the credit documents. The syndicated bank line bears interest at rates ranging from 0.55% to 1.25% over London Interbank Offered Rate ("LIBOR"). At March 26, 2000, we were in compliance with all our financial and other covenants. During the third quarter of fiscal 2000, we entered into a five-year Operating Lease Agreement (the "Agreement"), relating to certain buildings at our Fremont, California campus, in order to obtain more favorable terms and to reduce the amount of the previous minimum lease payments. As part of the Agreement, we are required to provide a guaranteed residual value of $25.2 million at the end of the lease term. Net cash provided by operating activities was $38.4 million for the nine months ended March 26, 2000. This primarily resulted from net income of $128.4 million and uses of working capital, particularly increases in accounts receivable and inventories required to support the increase in sales volume offset by increase in accrued liabilities related to employee tax accrual. Also included in net cash provided by operating activities was the restructuring recovery of $18.9 million and purchased technology for research and development for $7.5 million. Cash used in investing activities was $71.2 million, which was primarily from the net purchase of short-term investments of $20.3 million and net capital expenditures of $39.0 million. Net cash provided by financing activities was $22.1 million. We made principal payments on long-term debt and capital lease obligations of $26.9 million offset by proceeds from the issuance of short-term debt of $8.7 million. We repurchased $5.1 million of Common Stock and reissued $13.6 million of our treasury stock through our employee option and stock purchase programs. Net proceeds from the issuance of our Common Stock generated $39.0 million. Cash payments relating to our restructurings were approximately $5.7 million. Given the cyclical nature of the semiconductor equipment industry, we believe that maintenance of sufficient liquidity reserves is important to ensure our ability to maintain levels of investment in R&D and capital infrastructure through ensuing business cycles. Based upon our current business outlook, our cash, cash equivalents, short-term investments and available lines of credit at March 26, 2000 are expected to be sufficient to support our currently anticipated levels of operations and capital expenditures through at least the next 12 months. 21 22 RISK FACTORS OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE UNPREDICTABLE Our revenues and operating results may fluctuate significantly from quarter to quarter due to a number of factors, not all of which are in our control. These factors include: - economic conditions in the semiconductor industry generally, and the equipment industry specifically; - customer capacity requirements; - the size and timing of orders from customers; - customer cancellations or delays in our shipments; - our ability in a timely manner to develop, introduce and market new, enhanced and competitive products; - our competitors' introduction of new products; - legal or technical challenges to our products and technology; - changes in average selling prices and product mix; and - exchange rate fluctuations. We base our expense levels in part on our expectations of future revenues. If revenue levels in a particular quarter do not meet our expectations, our operating results are adversely affected. We derive our revenue primarily from the sale of a relatively small number of high-priced systems. Our systems can range in price from approximately $400,000 to $4 million per unit. Our operating results for a quarter may suffer substantially if: - we sell fewer systems than we anticipate in any quarter; - we do not receive anticipated orders in time to enable actual shipment during that quarter; - one or more customers delay or cancel anticipated shipments; or - shipments are delayed by procurement shortages or manufacturing difficulties. Further, because of our continuing consolidation of manufacturing operations and capacity at our Fremont, California facility, natural, physical, logistical or other events or disruptions affecting this facility (including labor disruptions) could adversely impact our financial performance. WE MAY EXPERIENCE DIFFICULTY TRANSITIONING TO OUR NEW ENTERPRISE RESOURCE SYSTEM We implemented a new next-generation enterprise resource planning and information system in the current quarter of fiscal 2000. It replaced most of the transactional systems utilized in the past, including core manufacturing, finance, service, sales, shipping, inventory and warranty operations and other significant operational systems. Delays in our ability to transition to this new planning and information system, or disruptions in our internal operations or systems caused by the transition or the need to free up additional support and resources in order to ensure our timely transition, could 22 23 temporarily disrupt certain of our operations. This could include a temporary delay in our ability to manufacture and ship equipment and/or spare parts to our customers, which could cause a near-term short fall in quarterly operating results, including revenues and earnings. THE SEMICONDUCTOR EQUIPMENT INDUSTRY IS VOLATILE, WHICH AFFECTS OUR REVENUES AND FINANCIAL RESULTS Our business depends on the capital equipment expenditures of semiconductor manufacturers, which in turn depend on the current and anticipated market demand for integrated circuits and products using integrated circuits. The semiconductor industry is cyclical in nature and historically experiences periodic downturns. During the past two years the semiconductor industry has experienced severe swings of product demand and volatility in product pricing. In early fiscal 1999 and fiscal 1998, the semiconductor industry reduced or delayed significantly purchases of semiconductor manufacturing equipment and construction of new fabrication facilities because of an industry downturn. However, beginning in late fiscal 1999, we saw indications of a recovery, which is expected to extend through calendar 2000. Fluctuating levels of investment by the semiconductor manufacturers and pricing volatility will continue to affect materially our aggregate bookings, revenues and operating results. Even during periods of reduced revenues, we must continue to invest in research and development and to maintain extensive ongoing worldwide customer service and support capabilities to remain competitive, which may harm our financial results. WE DEPEND ON NEW PRODUCTS AND PROCESSES FOR OUR SUCCESS. FOR THIS REASON, WE ARE SUBJECT TO RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGE Rapid technological changes in semiconductor manufacturing processes subject us to increased pressure to maintain technological parity with deep submicron process technology. We believe that our future success depends in part upon our ability to develop, manufacture and introduce successfully new products and product lines with improved capabilities, and to continue to enhance our existing products. Due to the risks inherent in transitioning to new products, we must forecast accurately demand for new products while managing the transition from older products. If new products have reliability or quality problems, reduced orders, higher manufacturing costs, delays in acceptance of and payment for new products and additional service and warranty expenses may result. In the past, product introductions caused some delays and reliability and quality problems. We may be unable to develop and manufacture new products successfully, or new products that we introduce may fail in the marketplace, which would materially and adversely affect our results from operations. We expect to continue to make significant investments in research and development and to pursue joint development relationships with customers or other members of the industry. We must manage product transitions or joint development relationships successfully, as introduction of new products could adversely affect our sales of existing products. Future technologies, processes or product developments may render our current product offerings obsolete, or we may be unable in a timely manner to develop and introduce new products 23 24 or enhancements to our existing products which satisfy customer needs or achieve market acceptance. Furthermore, if we are unsuccessful in the marketing and selling of advanced processes or equipment to customers with whom we have strategic alliances, we may be unsuccessful in selling existing products to those customers. In addition, in connection with the development of new products, we will invest in significant levels of initial production inventory. Our failure in a timely manner to complete commercialization of these new products could result in inventory obsolescence, which would adversely affect our financial results. WE ARE SUBJECT TO RISKS ASSOCIATED WITH THE INTRODUCTION OF A NEW PRODUCT During the second quarter of fiscal 1999, we began shipping units of our Teres(TM) chemical mechanical planarization system. We expect to face significant competition from multiple current and future competitors. Among the companies currently offering polishing systems are Applied Materials, Inc., Ebara Corporation and SpeedFam-IPEC, Inc. We believe that other companies are developing polishing systems and are planning to introduce new products to this market, which may affect our ability to sell this new product. During the first quarter of fiscal 2000, we began shipping units of our Exelan(TM) oxide etch system. We expect to face significant competition. Among the companies currently offering oxide etch systems are Applied Materials, Inc., and Tokyo Electron Limited. WE ARE SUBJECT TO RISKS RELATING TO PRODUCT CONCENTRATION AND LACK OF PRODUCT REVENUE DIVERSIFICATION We derive a substantial percentage of our revenues from a limited number of products, and we expect these products to continue to account for a large percentage of our revenues in the near term. Continued market acceptance of our primary products is, therefore, critical to our future success. Our business, operating results, financial condition and cash flows could therefore be adversely affected by: - a decline in demand for our products; - a failure to achieve continued market acceptance of our products; - an improved version of products being offered by a competitor in the market we participate in; - technological change which we are unable to match in our products; and - a failure to release new enhanced versions of our products on a timely basis. 24 25 WE ARE DEPENDENT UPON A LIMITED NUMBER OF KEY SUPPLIERS We obtain certain components and sub-assemblies included in our products from a single supplier or a limited group of suppliers. Each of our key suppliers has a one year blanket purchase contract under which we may issue purchase orders. We may renew these contracts periodically. Each of these suppliers sold us products during at least the last four years, and we expect that we will continue to renew these contracts in the future or that we will otherwise replace them with competent alternative source suppliers. We believe that we could obtain alternative sources to supply these products. Nevertheless, a prolonged inability to obtain certain components could adversely affect our operating results and result in damage to our customer relationships. ONCE A SEMICONDUCTOR MANUFACTURER COMMITS TO PURCHASE A COMPETITOR'S SEMICONDUCTOR MANUFACTURING EQUIPMENT IT TYPICALLY CONTINUES TO PURCHASE THAT EQUIPMENT, MAKING IT MORE DIFFICULT FOR LAM TO SELL ITS EQUIPMENT TO THAT CUSTOMER The semiconductor equipment industry is highly competitive. We expect to continue to face substantial competition throughout the world. Semiconductor manufacturers must make a substantial investment to install and integrate capital equipment into a semiconductor production line. We believe that once a semiconductor manufacturer selects a particular supplier's capital equipment, the manufacturer generally relies upon that equipment for that specific production line application. Accordingly, we expect it to be more difficult to sell to a given customer if that customer initially selects a competitor's equipment. We believe that to remain competitive we will require significant financial resources to offer a broad range of products, to maintain customer service and support centers worldwide and to invest in product and process research and development. WE MAY LACK THE FINANCIAL RESOURCES OR TECHNOLOGICAL CAPABILITIES OF CERTAIN OF OUR COMPETITORS NEEDED TO CAPTURE INCREASED MARKET SHARE Large semiconductor equipment manufacturers who have the resources to support customers on a worldwide basis are increasingly dominating the semiconductor equipment industry. Certain of our competitors have substantially greater financial resources and more extensive engineering, manufacturing, marketing and customer service and support resources than we do. In addition, there are smaller emerging semiconductor equipment companies that may provide innovative technology which may have performance advantages over systems we currently, or expect to, offer. We expect our competitors to continue to improve the design and performance of their current products and processes and to introduce new products and processes with enhanced performance characteristics. If our competitors enter into strategic relationships with leading semiconductor manufacturers covering products similar to those we sell or may develop, it could adversely affect our ability to sell products to those manufacturers. For these reasons, we may fail to continue to compete successfully worldwide. 25 26 Our present or future competitors may be able to develop products comparable or superior to those we offer or that adapt more quickly to new technologies or evolving customer requirements. In particular, while we currently are developing additional product enhancements that we believe will address customer requirements, we may fail in a timely manner to complete the development or introduction of these additional product enhancements successfully, or these product enhancements may not achieve market acceptance or be competitive. Accordingly, we may be unable to continue to compete effectively in our markets, competition may intensify or future competition may have a material adverse effect on our revenues, operating results, financial condition and cash flows. OUR FUTURE SUCCESS DEPENDS ON INTERNATIONAL SALES International sales accounted for approximately 54% of our total revenue in fiscal 1999, 55% in fiscal 1998, 57% in fiscal 1997, 70% for the nine months ended March 26, 2000 and 51% for the nine months ended March 31, 1999. We expect that international sales will continue to account for a significant portion of our total revenue in future years. International sales are subject to risks, including: - foreign exchange risks; and - economic, banking and currency problems in the relevant region. We currently enter into foreign currency forward contracts to minimize the short term impact of exchange rate fluctuations on yen-denominated assets, and will continue to enter into hedging transactions in the future. A FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS MAY ADVERSELY AFFECT OUR OPERATING RESULTS We are subject to a variety of governmental regulations related to the discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in the manufacturing process. We believe that we are in general compliance with these regulations and that we have obtained (or will obtain or are otherwise addressing) all necessary environmental permits to conduct our business. These permits generally relate to the disposal of hazardous wastes. Nevertheless, the failure to comply with present or future regulations could result in fines being imposed on us, suspension of production, cessation of our operations or reduction in our customers' acceptance of our products. These regulations could require us to alter our current operations, to acquire significant equipment or to incur substantial other expenses to comply with environmental regulations. Our failure to control the use, sale, transport or disposal of hazardous substances could subject us to future liabilities. 26 27 OUR ABILITY TO MANAGE POTENTIAL GROWTH; INTEGRATION OF POTENTIAL ACQUISITIONS AND POTENTIAL DISPOSITION OF PRODUCT LINES AND TECHNOLOGIES CREATES RISKS FOR US Our management may face significant challenges in improving financial and business controls, management processes, information systems and procedures on a timely basis, and expanding, training and managing our work force if we experience additional growth. There can be no assurance that we will be able to perform such actions successfully. In the future, we may make additional acquisitions of complementary companies, products or technologies, or we may reduce or dispose of certain product lines or technologies which no longer complement our long-term strategy, such as our exiting of Flat Panel Display and Chemical Vapor Deposition operations. Managing an acquired business or disposing of product technologies entails numerous operational and financial risks, including difficulties in assimilating acquired operations and new personnel or separating existing business or product groups, diversion of management's attention to other business concerns, amortization of acquired intangible assets and potential loss of key employees or customers of acquired or disposed operations. Our success will depend, to a significant extent, on the ability of our executive officers and other members of our senior management to identify and respond to these challenges effectively. There can be no assurance that we will be able to achieve and manage effectively any such growth, integration of potential acquisitions or disposition of product lines or technologies, or that our management, personnel or systems will be adequate to support continued operations. Any such inabilities or inadequacies would have a material adverse effect on our business, operating results, financial condition and cash flows. An important element of our management strategy is to review acquisition prospects that would complement our existing products, augment our market coverage and distribution ability, or enhance our technological capabilities. We may acquire additional businesses, products or technologies in the future. Any acquisitions could result in changes such as potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and the amortization expense related to goodwill and other intangible assets, any of which could materially adversely affect our business, financial condition and results of operations and/or the price of our Common Stock. THE MARKET FOR OUR COMMON STOCK IS VOLATILE, WHICH MAY AFFECT OUR ABILITY TO RAISE CAPITAL OR MAKE ACQUISITIONS The market price for our Common Stock is volatile and has fluctuated significantly over the past years. The trading price of our Common Stock could continue to be highly volatile and fluctuate widely in response to factors, including the following: - general market or semiconductor industry conditions; - variations in our quarterly operating results; - shortfalls in our revenues or earnings from levels securities analysts expect; 27 28 - announcements of restructurings, technological innovations, reductions in force, departure of key employees, consolidations of operations or introduction of new products; - government regulations; - developments in or claims relating to patent or other proprietary rights; - disruptions with key customers; or - political, economic or environmental events occurring globally or in our key sales regions. In addition, the stock market has in recent years experienced significant price and volume fluctuations. Recent fluctuations affecting our Common Stock were tied in part to the actual or anticipated fluctuations in interest rates and the price of and market for semiconductors generally. These broad market and industry factors may adversely affect the market price of our Common Stock, regardless of our actual operating performance. In the past, following volatile periods in the market price of stock, many companies become the object of securities class action litigation. If we are sued in a securities class action, we could incur substantial costs and it could divert management's attention and resources and have an effect on the market price for our Common Stock. RISK ASSOCIATED WITH OUR CALL AND PUT OPTIONS We have entered into third party option transactions for the purchase and sale of our stock. The option position will be of value to us if our stock price exceeds the exercise price of the call options at the time the options are exercised. Conversely, our stock price could also decline. If our stock price on the exercise date of the options were below the put option exercise price, we would have to settle the put obligation by paying cash or the equivalent value of our Common Stock obligation. During fiscal 1999, we entered into third party option transactions for the purchase and sale of our Common Stock, in order to offset the dilutive effect of a potential conversion into Common Stock of the $310.0 million Convertible Subordinated Notes (the "Notes") we previously issued and which are due September 2, 2002. We have as of March 26, 2000 acquired call options to purchase 3.72 million shares of our Common Stock. The weighted average exercise price of these options is $11.29. The call options provide that our maximum benefit at expiration is $17.97 per option share (the difference between $29.26, which is the conversion price of the Notes, and the weighted average exercise price of the call options). We have also entered into put options with the same third parties covering 5.58 million shares of our Common Stock, giving those third parties the right to sell to us shares of our Common Stock at a weighted average price of $9.48 per share. 28 29 THE POTENTIAL ANTI-TAKEOVER EFFECTS OF OUR BYLAWS PROVISIONS AND THE RIGHTS PLAN WE HAVE IN PLACE MAY AFFECT OUR STOCK PRICE AND INHIBIT A CHANGE OF CONTROL DESIRED BY SOME OF OUR STOCKHOLDERS On January 23, 1997, Lam adopted a Rights Plan (the "Rights Plan") in which rights were distributed as a dividend at the rate of one right for each share of our Common Stock, held by stockholders of record as of the close of business on January 31, 1997, and thereafter. In connection with the adoption of the Rights Plan, our Board of Directors also adopted a number of amendments to our Bylaws, including amendments requiring advance notice of stockholder nominations of directors and stockholder proposals. The Rights Plan may have certain anti-takeover effects. The Rights Plan will cause substantial dilution to a person or group that attempts to acquire Lam in certain circumstances. Accordingly, the existence of the Rights Plan and the issuance of the related rights may deter certain acquirers from making takeover proposals or tender offers. The Rights Plan, however, is not intended to prevent a takeover. Rather it is designed to enhance the ability of our Board of Directors to negotiate with a potential acquirer on behalf of all of our stockholders. In addition, our Certificate of Incorporation authorizes issuance of 5,000,000 shares of undesignated Preferred Stock. Our Board of Directors, without further stockholder approval, may issue this Preferred Stock on such terms as the Board of Directors may determine, which also could have the effect of delaying or preventing a change in control of Lam. The issuance of Preferred Stock could also adversely affect the voting power of the holders of our Common Stock, including causing the loss of voting control. Our Bylaws and indemnity agreements with certain officers, directors and key employees provide that we will indemnify officers and directors against losses that they may incur in legal proceedings resulting from their service to Lam. Moreover, Section 203 of the Delaware General Corporation Law restricts certain business combinations with "interested stockholders", as defined by that statute. INTELLECTUAL PROPERTY AND OTHER CLAIMS AGAINST US CAN BE COSTLY AND COULD RESULT IN THE LOSS OF SIGNIFICANT RIGHTS WHICH ARE NECESSARY TO OUR CONTINUED BUSINESS AND PROFITABILITY Other parties may assert infringement, unfair competition or other claims against us. Additionally, from time to time, other parties send us notices alleging that our products infringe their patent or other intellectual property rights. In such cases, it is our policy either to defend the claims or to negotiate licenses on commercially reasonable terms. However, we may be unable in the future to negotiate necessary licenses on commercially reasonable terms, or at all, and any litigation resulting from these claims by other parties may materially adversely affect our business and financial results. In October 1993, Varian Associates, Inc. ("Varian") sued us in the United States District Court for the Northern District of California, seeking monetary damages and injunctive relief based on our alleged infringement of certain patents Varian held. We asserted defenses that the subject patents are invalid and unenforceable, and 29 30 that our products do not infringe these patents. Litigation is inherently uncertain and we may fail to prevail in this litigation. However, we believe that the Varian lawsuit will not materially adversely affect our operating results or financial position. See Part II Item 1 of this Form 10-Q for a discussion of the Varian lawsuit. Additionally, in September 1999, Tegal Corporation ("Tegal") sued us in the United States District Court for the Eastern District of Virginia, seeking monetary damages and injunctive relief based on our alleged infringement of certain patents Tegal holds. Specifically, Tegal identified our 4520XLe(TM) and Exelan(TM) products as infringing the patents Tegal is asserting. Litigation is inherently uncertain and we may fail to prevail in this litigation. However, we believe that the Tegal lawsuit will not materially adversely affect our operating results or financial position. See Part II Item 1 of this Form 10-Q for a discussion of the Tegal lawsuit. WE MAY FAIL TO PROTECT OUR PROPRIETARY TECHNOLOGY RIGHTS, WHICH WOULD AFFECT OUR BUSINESS Our success depends in part on our proprietary technology. While we attempt to protect our proprietary technology through patents, copyrights and trade secret protection, we believe that our success depends on increasing our technological expertise, continuing our development of new systems, increasing market penetration and growth of our installed base, and providing comprehensive support and service to our customers. However, we may be unable to protect our technology in all instances, or our competitors may develop similar or more competitive technology independently. We currently hold a number of United States and foreign patents and pending patent applications. However, other parties may challenge or attempt to invalidate or circumvent any patents the United States or foreign governments issue to us or these governments may fail to issue pending applications. In addition, the rights granted or anticipated under any of these patents or pending patent applications may be narrower than we expect or in fact provide no competitive advantages. YEAR 2000 COMPLIANCE See discussion of Year 2000 issues in the section of this report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations". 30 31 ITEM 3. Quantitative And Qualitative Disclosures about Market Risk For financial market risks related to changes in interest rates and foreign currency exchange rates, refer to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Company's Annual Report on Form 10-K for the year ended June 30, 1999. During fiscal 1999, we entered into third party option transactions for the purchase and sale of our Common Stock, in order to offset the dilutive effect of a potential conversion into Common Stock of the $310.0 million Convertible Subordinated Notes (the "Notes") we previously issued and which are due September 2, 2002. We have as of March 26, 2000 acquired call options to purchase 3.72 million shares of our Common Stock. The weighted average exercise price of these options is $11.29. The call options provide that our maximum benefit at expiration is $17.97 per option share (the difference between $29.26, which is the conversion price of the Notes, and the weighted average exercise price of the call options). We have also entered into put options with the same third parties covering 5.58 million shares of our Common Stock, giving those third parties the right to sell to us shares of our Common Stock at a weighted average price of $9.48 per share. Below is a table showing, at assumed exercise prices for the put and call options and market prices for our Common Stock, our gain or (loss) under the put and call options upon exercise or upon maturity of the option transactions.
At March 26, 2000 At Maturity ----------------- ----------- Stock Value (in thousands) - ----------- $ 5.00 $(20,441) $(24,883) $ 15.00 $ 7,372 $ 13,988 $ 25.00 $ 22,597 $ 50,417 $ 35.00 $ 31,852 $ 66,162 $ 45.00 $ 37,880 $ 66,722 $ 55.00 $ 42,009 $ 66,729
31 32 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings In October 1993, Varian brought suit against us in the United States District Court, for the Northern District of California, seeking monetary damages and injunctive relief based on our alleged infringement of certain patents held by Varian. By order of the Court, those proceedings were bifurcated into an initial phase to determine the validity of the Varian patents and Lam's infringement (if any), and a secondary phase to determine damages to Varian (if any) and whether Lam's infringement (if shown) was willful. On April 13, 1999, the Court issued an interlocutory order construing the meaning of the terms of the patent claims at issue in the action. To date, however, there has been no determination as to the actual scope of those claims, or whether our products have infringed or are infringing Varian's patents. The trial date previously scheduled for March 2000 has been vacated, pending the court's decision of certain motions. There have been no findings in the action which have caused us reasonably to believe that any infringement, if found, or any damages, if awarded, would have a material adverse effect on our operating results or our financial position. In September 1999, Tegal brought suit against us in the United States District Court for the Eastern District of Virginia, seeking monetary damages and injunctive relief based on our alleged infringement of certain patents held by Tegal. Specifically, Tegal identified our 4520XLE and Exelan products as infringing the patents Tegal is asserting. On our motion, this case was transferred to California and is now pending in the United States District Court for the Northern District of California. To date, however, there has been no determination as to the actual scope of those claims, or whether our products have infringed or are infringing Tegal's patents. No trial date is currently scheduled in the action. Furthermore, there have been no findings in the action which have caused us reasonably to believe that any infringement, if found, or any damages, if awarded, could have a material adverse effect on our operating results or our financial position. From time to time, we have received notices from third parties alleging infringement of such parties' patent or other intellectual property rights by our products. In such cases, it is our policy to defend the claims or negotiate licenses on commercially reasonable terms, where considered appropriate. However, no assurance can be given that we will be able in the future to negotiate necessary licenses on commercially reasonable terms, or at all, or that any litigation resulting from such claims would not have a material adverse effect on our business and financial results. 32 33 ITEM 4. Submission of Matters to Vote of Security Holders A Special Meeting of our stockholders (the "Meeting") was held at the principal executive offices located at 4650 Cushing Parkway, Fremont, California 94538, at 11:00 A.M. on Monday, March 6, 2000. According to the certified list of stockholders at the date of the Meeting, there were 40,547,716 shares of our Common Stock outstanding and entitled to vote. There were present at the Meeting, in person or by proxy, the holders of 37,415,913 shares of our Common Stock, representing 92% of the total votes eligible to be cast, constituting a majority and more than a quorum of the outstanding shares entitled to vote. At the meeting, our stockholders approved an increase in the number of authorized shares of our Common Stock from 90 million to 400 million shares and approved a three-for-one stock split of our outstanding shares of Common Stock. Stockholders' approval of the amendment to our Certificate of Incorporation satisfies the condition for the previously announced three-for-one stock split approved by our Board of Directors on January 21, 2000. For 29,005,035 Against 8,392,992 Abstain 17,886 Broker Non-vote N/A
ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 10.70 Lease Agreement between Lam Research Corporation and Scotiabanc Inc., dated January 10, 2000. Exhibit 10.71 Participation Agreement between Lam Research Corporation, Scotiabanc Inc., and The Bank of Nova Scotia, dated January 19, 2000. Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K We filed a Form 8-K on January 24, 2000 making an Item 5 disclosure to disclose our announcement of the Board of Directors approval, subject to obtaining stockholder approval for a three-for-one split of our outstanding Common Stock and an increase in our authorized number of shares of Common Stock to 400 million shares (up from 90 million authorized shares). We filed a Form 8-K on March 6, 2000 making an Item 5 disclosure to disclose our announcement of our stockholders approval for a three-for-one stock split of our outstanding shares of Common Stock and increase of our authorized Common Stock to 400 million shares. 33 34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 8, 2000 LAM RESEARCH CORPORATION By: /s/ Mercedes Johnson ---------------------------------------- Mercedes Johnson, Vice President, Finance & Chief Financial Officer 34 35 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION -------------- ----------- Exhibit 10.70 Lease Agreement between Lam Research Corporation and Scotiabanc Inc., dated January 10, 2000. Exhibit 10.71 Participation Agreement between Lam Research Corporation, Scotiabanc Inc., and The Bank of Nova Scotia, dated January 19, 2000. Exhibit 27 Financial Data Schedule
EX-10.70 2 EXHIBIT-10.70 1 EXHIBIT 10.70 - -------------------------------------------------------------------------------- LEASE between SCOTIABANC INC., AS LESSOR, and LAM RESEARCH CORPORATION, AS LESSEE ---------------------------------- Dated as of January 10, 2000 ---------------------------------- - -------------------------------------------------------------------------------- 2 LEASE BETWEEN SCOTIABANC INC. AND LAM RESEARCH CORPORATION This LEASE (this "LEASE"), dated as of January 10, 2000, between SCOTIABANC INC., having an office at 600 Peachtree Street NE, Suite 2700, Atlanta, Georgia 30308, as lessor ("LESSOR"), and LAM RESEARCH CORPORATION, a Delaware corporation, having its principal office at 4650 Cushing Parkway, Fremont, California 94538, as lessee ("LESSEE"). In consideration of the mutual agreements herein contained, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: - - DEFINITIONS. Capitalized terms used but not otherwise defined in this Lease have the respective meanings specified in Annex A to the Participation Agreement dated as of the date hereof among Lessee, Lessor, Agent and the Rent Purchasers named therein. - - PROPERTY. Subject to the terms and conditions hereinafter set forth, Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Property more fully described in Schedule 1 to the Lease Supplement. - LEASE TERM. The Property is leased for the Term, unless extended or earlier terminated in accordance with the provisions of this Lease. - TITLE. The Property is leased to Lessee without any representation or warranty, express or implied, by Lessor and subject to the rights of parties in possession, the existing state of title (including, without limitation, the Permitted Exceptions) and all applicable Legal Requirements. Lessee shall in no event have any recourse against Lessor for any defect in title to the Property except for the failure of Lessor to remove Lessor Liens at the expiration or earlier termination of this Lease. - LEASE SUPPLEMENT. On the Funding Date, Lessee and Lessor shall each execute and deliver a Lease Supplement [Land] and Lease Supplement [Improvements] for the Property to be leased on such date in substantially the form of Exhibit A hereto and thereafter the Property shall be subject to the terms of this Lease. 1. 3 - - RENT. - On each applicable Payment Date and on any date when this Lease shall terminate, Lessee shall pay Basic Rent for the Property. - Basic Rent shall be due and payable in lawful money of the United States and shall be paid by wire transfer of immediately available funds on the due date therefor to such account or accounts at such bank or banks or to such other Person or in such other manner as Lessor shall from time to time direct. - Neither Lessee's inability or failure to take possession of all, or any portion, of the Property when delivered by Lessor, nor Lessor's inability or failure to deliver all or any portion of the Property to Lessee, whether or not attributable to any act or omission of Lessee or any act or omission of Lessor, or for any other reason whatsoever, shall delay or otherwise affect Lessee's obligation to pay Rent in accordance with the terms of this Lease. - PAYMENT OF BASIC RENT. Basic Rent shall be paid absolutely net to Lessor, so that this Lease shall yield to Lessor the full amount thereof, without setoff, deduction or reduction. - SUPPLEMENTAL RENT. - Lessee shall pay to Lessor or the Person entitled thereto any and all Supplemental Rent promptly as the same shall become due and payable, and if Lessee fails to pay any Supplemental Rent, Lessor shall have all rights, powers and remedies provided for herein or by law or equity or otherwise in the case of nonpayment of Basic Rent. Lessee shall pay to Lessor as Supplemental Rent, among other things, on demand, to the extent permitted by applicable Requirements of Law, interest at the applicable Overdue Rate on any installment of Basic Rent not paid when due for the period for which the same shall be overdue and on any payment of Supplemental Rent not paid when due or demanded by Lessor for the period from the due date or the date of any such demand, as the case may be, until the same shall be paid. The expiration or other termination of Lessee's obligations to pay Basic Rent hereunder shall not limit or modify the obligations of Lessee with respect to Supplemental Rent. Unless expressly provided otherwise in this Lease or any other Operative Agreement, in the event of any failure on the part of Lessee to pay and discharge any Supplemental Rent as and when due, Lessee shall also promptly pay and discharge any fine, penalty, interest or cost which may be assessed or added for nonpayment or late payment of such Supplemental Rent, all of which shall also constitute Supplemental Rent. - Lessee shall make a payment of Supplemental Rent equal to the Maximum Residual Guarantee Amount in accordance with Section 21.1(c). 2. 4 - PERFORMANCE ON A NON-BUSINESS DAY. If any payment is required hereunder on a day that is not a Business Day, then such payment shall be due on the next succeeding Business Day (subject to the definition of the term "INTEREST PERIOD"). - METHOD OF PAYMENT. Each payment of Rent payable by Lessee to Lessor under this Lease or any other Operative Agreement shall be made by Lessee to Lessor prior to 10:00 a.m. Pacific Time to the Account in immediately available funds consisting of lawful currency of the United States of America on the date when such payment shall be due. Payments received after 10:00 a.m. Pacific Time on the date due shall for the purpose of Section 17.1 hereof be deemed received on such day; provided, however, that for the purposes of the second sentence of Section 3.3(a), such payments shall be deemed received on the next succeeding Business Day and shall accrue interest at the Overdue Rate as provided in such Section 3.3(a). - - UTILITY CHARGES. Lessee shall pay, or cause to be paid, all charges for electricity, power, gas, oil, water, telephone, sanitary sewer service and all other rents and utilities used in or on the Property during the Term. Lessee shall be entitled to receive any credit or refund with respect to any utility charge paid by Lessee and the amount of any credit or refund received by Lessor on account of any utility charges paid by Lessee, net of the costs and expenses incurred by Lessor in obtaining such credit or refund, shall be promptly paid over to Lessee. All charges for utilities imposed with respect to the Property for a billing period during which this Lease expires or terminates shall be adjusted and prorated on a daily basis between Lessor and Lessee, and each party shall pay or reimburse the other for each party's pro rata share thereof. - - QUIET ENJOYMENT. So long as no Event of Default shall have occurred and be continuing, Lessee shall peaceably and quietly have, hold and enjoy the Property for the Term, free of any claim or other action by Lessor or anyone rightfully claiming by, through or under Lessor with respect to any matters arising from and after the Closing Date. Such right of quiet enjoyment is independent of, and shall not affect the rights of Lessor (or anyone claiming by, through or under Lessor) otherwise to initiate legal action to enforce, the obligations of Lessee under this Lease. - - NET LEASE; NO SETOFF; ETC. This Lease shall constitute a net lease and, notwithstanding any other provision of this Lease, it is intended that Basic Rent and Supplemental Rent shall be paid without counterclaim, setoff, deduction or defense of any kind and without abatement, suspension, deferment, diminution or reduction of any kind, and Lessee's obligation to pay all such amounts, throughout the Term, is absolute and unconditional. The obligations and liabilities of Lessee hereunder shall in no way be released, discharged or otherwise affected for any reason, including, without limitation, to the maximum extent permitted by law: (a) any defect in the condition, merchantability, 3. 5 design, construction, quality or fitness for use of any portion of the Property, or any failure of the Property to comply with all Legal Requirements, including any inability to occupy or use the Property by reason of such noncompliance; (b) any damage to, abandonment, loss, contamination of or Release from or destruction of or any requisition or taking of the Property or any part thereof, including eviction; (c) any restriction, prevention or curtailment of or interference with any use of the Property or any part thereof, including eviction; (d) any defect in title to or rights to the Property or any Lien on such title or rights or on the Property; (e) any change, waiver, extension, indulgence or other action or omission or breach in respect of any obligation or liability of or by Lessor or any Rent Purchaser; (f) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceedings relating to Lessee, Lessor, Agent or any Rent Purchaser, or any action taken with respect to this Lease by any trustee or receiver of Lessee, Lessor, Agent any Rent Purchaser or any other Person, or by any court, in any such proceeding; (g) any claim that Lessee has or might have against any Person, including, without limitation, Lessor, Agent or any Rent Purchaser; (h) any failure on the part of Lessor to perform or comply with any of the terms of this Lease, any other Operative Agreement or of any other agreement; (i) any invalidity, unenforceability or disaffirmance against or by Lessee of this Lease, or any of the other Operative Agreements, or any provision hereof or thereof; (j) the impossibility or illegality of performance by Lessee, Lessor or either of them; (k) any action by any court, administrative agency or other Governmental Authority; (l) any restriction, prevention or curtailment of or any interference with the construction on or any use of the Property or any part thereof; or (m) any other occurrence whatsoever, whether similar or dissimilar to the foregoing, whether or not Lessee shall have notice or knowledge of any of the foregoing. This Lease shall be noncancellable by Lessee for any reason whatsoever except as expressly provided herein, and Lessee, to the extent permitted by Legal Requirements, waives all rights now or hereafter conferred by statute or otherwise to quit, terminate or surrender this Lease, or to any diminution, abatement or reduction of Rent payable by Lessee hereunder. If for any reason whatsoever this Lease shall be terminated in whole or in part by operation of law or otherwise, except as otherwise expressly provided herein, Lessee shall, unless prohibited by any Requirements of Law, nonetheless pay to Lessor (or, in the case of Supplemental Rent, to whomsoever shall be entitled thereto) an amount equal to each Rent payment at the time and in the manner that such payment would have become due and payable under the terms of this Lease if it had not been terminated in whole or in part, and in such case, so long as such payments are made and no Event of Default shall have occurred and be continuing, Lessor will deem this Lease to have remained in effect. Each payment of Rent made by Lessee hereunder shall be final and, absent manifest error in the computation of the amount thereof, Lessee shall not seek or have any right to recover all or any part of such payment from Lessor or any Rent Purchaser or any party to any agreements related thereto for any reason whatsoever. Lessee assumes the sole responsibility for the condition, use, operation, maintenance and management of the Property and Lessor shall have no responsibility in respect thereof or any liability for damage to the property of Lessee or any subtenant of Lessee on any account or for any reason whatsoever. Nothing in this Article 6 shall relieve Lessor from liability to Lessee arising from the gross negligence or willful misconduct of, or breach of its obligations by, Lessor hereunder. 4. 6 - NO TERMINATION OR ABATEMENT. Lessee shall remain obligated under this Lease in accordance with its terms and shall not take any action to terminate, rescind or avoid this Lease, notwithstanding any action for bankruptcy, insolvency, reorganization, liquidation, dissolution or other proceeding affecting any Participant, or any action with respect to this Lease which may be taken by any trustee, receiver or liquidator of any Participant or by any court with respect to any Participant, except as otherwise expressly provided herein. Lessee hereby waives all right (i) to terminate or surrender this Lease, except as otherwise expressly provided herein, or (ii) to avail itself of any abatement, suspension, deferment, reduction, setoff, counterclaim or defense with respect to any Rent. Lessee shall remain obligated under this Lease in accordance with its terms and Lessee hereby waives any and all rights now or hereafter conferred by statute or otherwise to modify or to avoid strict compliance with its obligations under this Lease. Notwithstanding any such statute or otherwise, Lessee shall be bound by all of the terms and conditions contained in this Lease. - - OWNERSHIP OF THE PROPERTY. The parties hereto intend that (a) for financial accounting purposes with respect to Lessee, Lessor, Agent and Rent Purchasers (i) this Lease will be treated as an "operating lease" pursuant to Statement of Financial Accounting Standards (SFAS) No. 13, as amended, (ii) Lessor will be treated as the owner and lessor of the Property, and (iii) Lessee will be treated as the lessee of the Property, but (a) for federal, state and local income tax and all other purposes (i) this Lease will be treated as a financing arrangement, (ii) Lessor and Rent Purchasers will be treated as lenders making loans to Lessee in an amount equal to the sum of the Lessor Contribution and the Rent Purchaser Advances, which loans are secured by the Property, and (iii) Lessee will be treated as the owner of the Property and will be entitled to all tax benefits ordinarily available to an owner of land and improvements like the Property for such tax purposes. - LIENS AND SECURITY INTERESTS. - The parties hereto further intend and agree that, for the purpose of securing Lessee's obligations for the repayment of the above-described loans, (i) this Lease shall also be deemed to be a security agreement and financing statement within the meaning of Article 9 of the Uniform Commercial Code and a real property mortgage or deed of trust, as applicable; (ii) Lessee grants to Lessor a security interest in Lessee's interest in the Trust Property (defined in subsection 7.2(c) below); (iii) the conveyance provided for in Article 2 shall be deemed a grant of a security interest in Lessee's beneficial ownership interest in the Property and all proceeds of the conversion, voluntary or involuntary, of the foregoing into cash, investments, securities or other property, whether in the form of cash, investments, securities or other property, for the benefit of Lessor to secure Lessee's payment of all amounts owed by Lessee under this Lease and the other Operative Agreements and Lessor holds title to the Property so as to create and grant a first lien and prior security interest in the Property pursuant to this Lease for the benefit of Lessor to secure to Lessor the obligations of Lessee under the Lease; (iv) the possession by Lessor or any of its agents of notes and such other items of property as constitute instruments, money, negotiable documents or chattel paper shall be deemed to 5. 7 be "possession by the secured party" for purposes of perfecting the security interest pursuant to Section 9-305 of the Uniform Commercial Code; and (v) notifications to Persons holding such property, and acknowledgments, receipts or confirmations from financial intermediaries, bankers or agents (as applicable) of Lessee shall be deemed to have been given for the purpose of perfecting such security interest under applicable law. In such event, Lessor shall have all of the rights, powers and remedies of a grantee and a secured party available under applicable law, including, without limitation, judicial or nonjudicial foreclosure or power of sale, as and to the extent available under applicable law. The filing of this Lease (or a memorandum hereof) shall be deemed to constitute the filing of a deed to secure debt and the filing of any financing statement in connection with this Lease shall be deemed to constitute the filing of a financing statement to perfect the deed to secure debt and security interests in the Property as aforesaid to secure the payment of all amounts due from time to time from Lessee to Lessor under this Lease and the other Operative Documents. If this transaction is treated as a financing, the obligation arising hereunder shall be with full recourse to Lessee and shall not be treated as recourse only to the Property. To the fullest extent permitted by applicable law, Lessor and Lessee intend that the Property (other than the Land) be and remain at all times personal property regardless of the manner or extent to which any of the Property (other than the Land) may be attached or affixed to any real property. Except as required by applicable law, Lessee shall not under any circumstances take any action or make any filing or recording which could cause the Property (other than the Land) to be deemed to be real property or permit any Person to obtain any interest in the Property (other than the Land) as a result of the Property (other than the Land) being deemed to be in whole or in part real property. This Lease secures and shall be security for any and all future advances made by Lessor to Lessee. Nothing contained herein shall be deemed an obligation on the part of Lessor to make any further advances. The parties hereto shall, to the extent consistent with this Lease, take such actions as may be necessary to ensure that, if this Lease were deemed to create a security interest in the Property in accordance with this Section 7.2, such security interest would be deemed to be a perfected security interest of first priority under applicable law and will be maintained as such throughout the Term. Nevertheless, Lessee acknowledges and agrees that neither Lessor nor any Rent Purchaser has provided nor will provide tax, accounting or legal advice to Lessee regarding this Lease, the Operative Agreements or the transactions contemplated hereby and thereby, or made any representations or warranties concerning the tax, accounting or legal characteristics of the Operative Agreements, and that Lessee has obtained and relied upon such tax, accounting and legal advice concerning the Operative Agreements as it deems appropriate. - The parties hereto further intend and agree that in the event of any insolvency or receivership proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency laws or statutes of the United States of America or any State or Commonwealth thereof affecting any party hereto, the transactions evidenced by this Lease shall be regarded as loans made by an unrelated third party lender to Lessee. - Specifically, but without limiting the foregoing or the generality of Section 7.1, Lessee, as trustor, hereby grants, bargains, sells, warrants, conveys, aliens, remises, releases, assigns, sets over and confirms to Lessor, as beneficiary, WITH POWER OF SALE, AND RIGHT OF ENTRY AND INSPECTION, all of Lessee's present and future right, 6. 8 title, and interest in and to the following (collectively, the "TRUST Property"): (i) the Land and the Property and Appurtenant Rights relating thereto and all proceeds, both cash and noncash thereof; (ii) all easements, rights-of-way, strips and gores of land, vaults, streets, ways, alleys, passages, sewer rights, waters, water courses, water rights, minerals, flowers, shrubs, crops, trees, timber and other emblements now or hereafter located on the Land or under or above the same or any part or parcel thereof, and all estates, rights, titles, interests, tenements, hereditaments and appurtenances, reversions and remainders whatsoever, in any way belonging, relating or appertaining to the Land and the Property or any part thereof, or which hereafter shall in any way belong, relate or be appurtenant thereto, whether now owned or hereafter acquired by Lessee; (iii) all articles of personal property of every kind and nature whatsoever, tangible or intangible, now, heretofore or hereafter acquired with any proceeds of the Advances and now, heretofore or hereafter (A) arising out of or related to the ownership of the Property, or (B) located in, on or about the Property, or (C) used or intended to be used with or in connection with the construction, use, operation or enjoyment of the Property; (iv) all right, title and interest of Lessee in any and all leases, rental agreements and arrangements of any sort now or hereafter affecting the Property or any portion thereof and providing for or resulting in the payment of money to Lessee for the use of the Property or any portion thereof, whether the user enjoys the Property or any portion thereof as tenant for years, licensee, tenant at sufferance or otherwise, and irrespective of whether such leases, rental agreements and arrangements be oral or written, and including any and all extensions, renewals and modifications thereof (the "SUBJECT LEASES") and guaranties of the performance or obligations of any tenants or lessees thereunder, together with all income, rents, issues, profits and revenues from the Subject Leases (including all tenant security deposits and all other tenant deposits, whether held by Lessee or in a trust account, and all other deposits and escrow funds relating to any Subject Leases), and all the estate, right, title, interest, property, possession, claim and demand whatsoever at law, as well as in equity, of Lessee of, in and to the same; provided, however, that although this Lease contains (and it is hereby agreed that this Lease contains) a present, current, unconditional and absolute assignment of all of said income, rents, issues, profits and revenues, Lessee shall collect and apply such rental payments and revenues as provided in the Lease and the other Operative Agreements; (v) all right, title and interest of Lessee to and under all agreements, management contracts, consents, authorizations, certificates and other rights of every kind and character of any Governmental Authority affecting the Property, to the extent the same are transferable, service contracts, utility contracts, leases of equipment, documents and agreements relating to the construction of any Improvements (including any and all construction contracts, architectural contracts, engineering contracts, designs, plans, specifications, drawings, surveys, tests, reports, bonds and governmental approvals) and all other contracts, licenses and permits now or hereafter affecting the Property or any part thereof and all guaranties and warranties with respect to any of the foregoing (the "SUBJECT CONTRACTS"); (vi) all right, title and interest of Lessee in any insurance policies or binders now or hereafter relating to the Property, including any unearned premiums thereon, as further provided in this Lease; (vii) all right, title and interest of Lessee in any and all awards, payments, proceeds and the right to receive the same, either before or after any foreclosure hereunder, as a result of any temporary or permanent injury or 7. 9 damage to, taking of or decrease in the value of the Property by reason of casualty, condemnation or otherwise as further provided in this Lease; (viii) all right, title and interest of Lessee in all utility, escrow and all other deposits (and all letters of credit, certificates of deposit, negotiable instruments and other rights and evidence of rights to cash) now or hereafter relating to the Property or the purchase, construction or operation thereof; (ix) all claims and causes of action arising from or otherwise related to any of the foregoing, and all rights and judgments related to any legal actions in connection with such claims or causes of action; and (x) all Modifications, extensions, additions, improvements, betterments, renewals and replacements, substitutions, or proceeds of any of the foregoing, and all property of any nature constituting proceeds acquired with proceeds of any of the property described hereinabove; all of which foregoing items are hereby declared and shall be deemed to be a portion of the security for the indebtedness and Advances herein described, a portion of the above described collateral being located upon the Land. - - CONDITION OF THE PROPERTY. LESSEE ACKNOWLEDGES AND AGREES THAT IT IS RENTING THE PROPERTY "AS IS" WITHOUT REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) BY LESSOR AND SUBJECT TO (A) THE EXISTING STATE OF TITLE, (B) THE RIGHTS OF ANY PARTIES IN POSSESSION THEREOF, (C) ANY STATE OF FACTS WHICH AN ACCURATE SURVEY OR PHYSICAL INSPECTION MIGHT SHOW, AND (D) VIOLATIONS OF LEGAL REQUIREMENTS WHICH MAY EXIST ON THE DATE HEREOF. NEITHER LESSOR NOR ANY PARTICIPANT HAS MADE OR SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED, INCLUDING THE CONDITION OF ANY IMPROVEMENTS THEREON, THE SOIL CONDITION, OR ANY ENVIRONMENTAL OR HAZARDOUS MATERIAL CONDITION) OR SHALL BE DEEMED TO HAVE ANY LIABILITY WHATSOEVER AS TO THE TITLE, VALUE, HABITABILITY, USE, CONDITION, DESIGN, OPERATION OR FITNESS FOR USE OF THE PROPERTY (OR ANY PART THEREOF), OR ANY OTHER REPRESENTATION, WARRANTY OR COVENANT WHATSOEVER (EXPRESS OR IMPLIED), WITH RESPECT TO THE PROPERTY (OR ANY PART THEREOF) AND NEITHER LESSOR NOR ANY PARTICIPANT SHALL BE LIABLE FOR ANY LATENT, HIDDEN OR PATENT DEFECT THEREIN OR THE FAILURE OF THE PROPERTY, OR ANY PART THEREOF, TO COMPLY WITH ANY LEGAL REQUIREMENT. - POSSESSION AND USE OF THE PROPERTY. The Property shall be used for office, manufacturing and research and development purposes. Lessee shall pay, or cause to be paid, all charges and costs required in connection with the use of the Property. Lessee shall not commit or permit any waste of the Property or any part thereof. - 8. 10 - COMPLIANCE WITH LEGAL REQUIREMENTS AND INSURANCE REQUIREMENTS. Subject to the terms of Article 13 relating to permitted contests, Lessee, at its sole cost and expense, shall (a) comply with all Legal Requirements (including all Environmental Laws) and Insurance Requirements relating to the Property, including the use, construction, operation, maintenance, repair and restoration thereof, whether or not compliance therewith shall require structural or extraordinary changes in the Improvements or interfere with the use and enjoyment of the Property, and (b) procure, maintain and comply in all material respects with all licenses, permits, orders, approvals, consents and other authorizations required for the construction, renovation, use, maintenance and operation of the Property and for the use, operation, maintenance, repair and restoration of the Improvements. - - MAINTENANCE AND REPAIR; RETURN. - Lessee, at its sole cost and expense, shall maintain the Property in good condition (ordinary wear and tear excepted) and make all necessary repairs thereto, of every kind and nature whatsoever, whether interior or exterior, ordinary or extraordinary, structural or nonstructural or foreseen or unforeseen, in each case as required by all Legal Requirements and Insurance Requirements and on a basis reasonably consistent with the operation and maintenance of commercial properties comparable in type and location to the Property subject, however, to the provisions of Article 15 with respect to Condemnation and Casualty. - Lessor's obligation to make the Lessor Contribution is as set forth in Section 2.1 of the Participation Agreement. Under no circumstances shall Lessor itself be required to build any Improvements on the Property, make any repairs, replacements, alterations or renewals of any nature or description to the Property, make any expenditure whatsoever in connection with this Lease or maintain the Property in any way. Lessor shall not be required to maintain, repair or rebuild all or any part of the Property, and Lessee waives the right to (i) require Lessor to maintain, repair or rebuild all or any part of the Property, or (ii) make repairs at the expense of Lessor pursuant to any Legal Requirement, Insurance Requirement, contract, agreement, covenants, condition or restriction at any time in effect. - Lessee shall, upon the expiration or earlier termination of the Term with respect to the Property not including a purchase thereof by Lessee, vacate, surrender and transfer the Property to Lessor or, at Lessor's request, the independent purchaser thereof, at Lessee's own expense, free and clear of all Liens other than Permitted Liens and Lessor Liens, in as good condition as it was on the Closing Date, ordinary wear and tear excepted, and in compliance with all Legal Requirements and the other requirements of this Lease (and in any event without (x) any asbestos installed or maintained in any part of the Property, (y) any polychlorinated biphenyls (PCBs) in, on or used, stored or located at the Property, and (z) any other Hazardous Substances). Lessee shall cooperate with any independent purchaser of the Property in order to facilitate the ownership or leasing and operation by such purchaser of the Property after such expiration or earlier termination of the Term, 9. 11 including providing all books, reports and records regarding the maintenance, repair and ownership of the Property and all data and technical information relating thereto, granting or assigning all licenses necessary for the operation and maintenance of the Property and cooperating in seeking and obtaining all necessary licenses, permits and approvals of Governmental Authorities. Lessee shall have also paid the total cost for the completion of all Modifications commenced prior to such expiration or earlier termination of the Term. The obligation of Lessee under this Section 10.1(c) shall survive the expiration or termination of this Lease. - RIGHT OF INSPECTION. Lessor or any Rent Purchaser may, each not more than twice each year unless an Event of Default exists, at reasonable times, and with reasonable prior written notice and in a manner which minimizes the disruption of Lessee's use of the Property, enter upon, inspect and examine at its own cost and expense (unless an Event of Default exists, in which case the out-of-pocket costs and expenses of such parties shall be paid by Lessee), the Property. Lessee shall furnish to Lessor statements, no more than once per year, accurate in all material respects, regarding the condition and state of repair of the Property. Lessor shall have no duty to make any such inspection or inquiry and shall not incur any liability or obligation by reason of not making any such inspection or inquiry. - ENVIRONMENTAL INSPECTION. Upon surrender of possession of the Property, or not more than one hundred twenty (120) days nor less than thirty (30) days prior to the Expiration Date or earlier termination of the Term (unless Lessee has previously irrevocably exercised the Purchase Option or Maturity Date Purchase Option), Lessee shall, at its sole cost and expense, provide to Lessor a report by an environmental consultant selected by Lessee and reasonably satisfactory to Lessor certifying that there has been no Release at, on or from the Property and Hazardous Substances have not at any time during the Term been generated, used, treated or stored on, transported to or from, or deposited at or on the Property other than (a) as necessary to use, operate, maintain, repair and restore the Property and (b) in full compliance with all Environmental Laws, and no portion of the Property has been used for such purposes other than in full compliance with all Environmental Laws. If such is not the case, the report shall set forth a remedial response plan relating to the Property (which remedial response plan, if required by any Environmental Law or Governmental Authority, shall be approved by the appropriate Governmental Authority). Such remedial response plan shall include, if relevant, but shall not be limited to, plans for full response, remediation, removal or other corrective action, and the protection, or mitigative action associated with the protection, of natural resources including wildlife, aquatic species and vegetation associated with the Property, as required by all applicable Environmental Laws. If such report includes a remedial response plan, Lessee shall promptly deposit funds in escrow with Lessor sufficient to ensure the full execution and implementation of such plan. 10. 12 - - MODIFICATIONS, SUBSTITUTIONS AND REPLACEMENTS. - So long as no Event of Default has occurred and is continuing, Lessee, at its sole cost and expense, may at any time and from time to time make alterations, renovations, improvements and additions to the Property or any part thereof (collectively, "MODIFICATIONS"); provided, that: (i) except for any Modification required to be made pursuant to a Legal Requirement or an Insurance Requirement, no Modification, individually, or when aggregated with any (A) other Modification or (B) grant, dedication, transfer or release pursuant to Section 12.2, shall impair the value of the Property or the utility or useful life of the Property from that which existed immediately prior to such Modification; (ii) the Modification shall be performed expeditiously and in a good and workmanlike manner; (iii) Lessee shall comply with all Legal Requirements (including all Environmental Laws) and all Insurance Requirements applicable to the Modification, including the obtaining of all permits and certificates of occupancy, and the structural integrity of the Property shall not be adversely affected; (iv) Lessee shall maintain or cause to be maintained builders' risk insurance at all times when a Modification is in progress; (v) subject to the terms of Article 13 relating to permitted contests, Lessee shall pay all costs and expenses and discharge any Liens arising with respect to the Modification; (vi) such Modifications shall comply with Sections 8.2 and 10.1 and shall not change the primary character of the Property; and (vii) the Improvements shall not be demolished in total in the making of the Modification. All Modifications (other than those that may be readily removed without impairing the value, utility or remaining useful life of the Property) shall remain part of the Improvements and shall be subject to this Lease, and title thereto shall immediately vest in Lessor. So long as no Event of Default has occurred and is continuing, Lessee may place upon the Property any inventory, trade fixtures, machinery, equipment or other property belonging to Lessee or third parties and may remove the same at any time during the term of this Lease; provided that such inventory, trade fixtures, machinery, equipment or other property, or their respective operations, do not materially impair the value, utility or remaining useful life of the Property. - Lessee shall notify Lessor of the undertaking of any construction, repairs or alterations to the Property the cost of which is anticipated to exceed $1,000,000. Prior to undertaking any such construction or alterations, Lessee shall deliver to Lessor (i) a brief narrative of the work to be done and a copy of the plans and specifications relating to such work; and (ii) an Officer's Certificate stating that such work when completed will not impair the value, utility or remaining useful life of the Property. Lessor, by itself or its agents, shall have the right, but not the obligation, from time to time to inspect such construction to ensure that the same is completed consistent with such plans and specifications. - Lessee shall not, without the consent of Lessor, undertake any construction or alterations to the Property if such construction or alterations cannot, in the reasonable judgement of Lessor, be completed on or prior to the date that is one hundred eighty (180) days prior to the Expiration Date. 11. 13 - - WARRANTY OF TITLE. - Lessee agrees that, except as otherwise provided herein and subject to the terms of Article 13 relating to permitted contests, Lessee shall not directly or indirectly create or allow to remain, and shall promptly discharge at its sole cost and expense, any Lien, defect, attachment, levy, title retention agreement or claim, other than a Lessor Lien, upon the Property or any Modifications or any Lien, attachment, levy or claim with respect to the Rent or with respect to any amounts held by Lessor or the Collateral Agent pursuant to the Participation Agreement or the Pledge Agreement, other than with respect to the Property only, Permitted Liens. Lessee shall promptly notify Lessor in the event it receives actual knowledge that a Lien (other than a Permitted Lien) exists with respect to the Property or that a Lien exists with respect to the Rent or the Collateral. - Nothing contained in this Lease shall be construed as constituting the consent or request of Lessor, expressed or implied, to or for the performance by any contractor, mechanic, laborer, materialman, supplier or vendor of any labor or services or for the furnishing of any materials for any construction, alteration, addition, repair or demolition of or to the Property or any part thereof. NOTICE IS HEREBY GIVEN THAT NEITHER LESSOR NOR ANY PARTICIPANT IS OR SHALL BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO LESSEE, OR TO ANYONE HOLDING THE PROPERTY OR ANY PART THEREOF THROUGH OR UNDER LESSEE, AND THAT NO MECHANIC'S OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF LESSOR IN AND TO THE PROPERTY. - GRANTS AND RELEASES OF EASEMENTS. Provided that no Event of Default shall have occurred and be continuing and subject to the provisions of Articles 8, 9, 10 and 11, Lessor hereby consents to the following actions by Lessee, in the name and stead of Lessor, but at Lessee's sole cost and expense: (a) the granting of easements, licenses, rights-of-way and other rights and privileges in the nature of easements and incurring of other obligations of Lessee reasonably necessary or desirable for the development, construction, use, repair, renovation or maintenance of the Property as herein provided; (b) the release of existing easements or other rights in the nature of easements which are for the benefit of the Property or adjacent properties (owned by Lessee); (c) the dedication or transfer of unimproved portions of the Property for road, highway or other public purposes; (d) the execution of petitions to have the Property annexed to any municipal corporation or utility district; and (e) the execution of amendments to any covenants and restrictions affecting the Property; provided, that in each case Lessee shall have delivered to Lessor an Officer's Certificate stating that: (i) such grant, release, dedication or transfer does not materially impair the value, utility or remaining useful life of the Property, (ii) such grant, release, dedication or transfer is necessary in connection with the construction, use, maintenance, alteration, renovation or improvement of the Property or adjacent properties (owned or leased by Lessee), (iii) Lessee shall remain obligated under this Lease and under any instrument executed by Lessee consenting to the assignment of Lessor's interest in this Lease as security for indebtedness, in each such 12. 14 case in accordance with their terms, as though such grant, release, dedication or transfer, had not been effected, and (iv) Lessee shall pay and perform any obligations of Lessor under such grant, release, dedication or transfer. Without limiting the effectiveness of the foregoing, provided that no Event of Default shall have occurred and be continuing, Lessor shall, upon the request of Lessee, and at Lessee's sole cost and expense, promptly execute and deliver any instruments necessary or appropriate to confirm any such grant, release, dedication or transfer to any Person permitted under this Section 12.2. - - PERMITTED CONTESTS OTHER THAN IN RESPECT OF IMPOSITIONS. Except to the extent otherwise provided for in Section 11.2(f) of the Participation Agreement, Lessee, on its own or on Lessor's behalf but at Lessee's sole cost and expense, may contest, by appropriate administrative or judicial proceedings conducted in good faith and with due diligence, the amount, validity or application, in whole or in part, of any Legal Requirement or utility charges payable pursuant to Section 4.1, or any Lien, attachment, levy, encumbrance or encroachment, and Lessor agrees not to pay, settle or otherwise compromise any such item, provided that (a) the commencement and continuation of such proceedings shall suspend the collection thereof from, and suspend the enforcement thereof against, the Property, the Rent, the Collateral, Lessor, Agent and Rent Purchasers; (b) there shall be no risk of the imposition of a Lien (other than a Permitted Lien) on the Property, or any Lien on any Rent or the Collateral, and no part of the Property nor any Rent nor any of the Collateral would be in any danger of being sold, forfeited, lost or deferred; (c) at no time during the permitted contest shall there be a risk of the imposition of criminal liability or civil liability on Lessor or any Participant for failure to comply therewith; and (d) in the event that, at any time, there shall be a material risk of extending the application of such item beyond the Expiration Date, then Lessee shall deliver to Lessor an Officer's Certificate certifying as to the matters set forth in clauses (a), (b) and (c) of this Section 13.1. Lessor, at Lessee's sole cost and expense, shall execute and deliver to Lessee such authorizations and other documents as may reasonably be required in connection with any such contest and, if reasonably requested by Lessee, shall join as a party therein at Lessee's sole cost and expense. - - PUBLIC LIABILITY AND WORKERS' COMPENSATION INSURANCE. During the Term, Lessee shall procure and carry, at Lessee's sole cost and expense, commercial general liability insurance for claims for injuries or death sustained by persons or damage to property while on the Property. Such insurance shall be on terms and in amounts that are no less favorable than insurance maintained by owners of similar properties, that are in accordance with normal industry practice. The policy shall be endorsed to name Lessor and each Rent Purchaser as additional insureds. The policy shall also specifically provide that the policy shall be considered primary insurance which shall apply to any loss or claim before any contribution by any insurance which Lessor or any Rent Purchaser may have in force. Lessee shall, in the operation of the Property, comply with the applicable workers' compensation laws and protect Lessor and each Rent Purchaser against any liability under such laws. 13. 15 - HAZARD AND OTHER INSURANCE. - During the Term, Lessee shall keep the Property insured against loss or damage by fire, earthquake and other risks on terms and in amounts that are no less favorable than insurance maintained by owners of similar properties, that are in accordance with normal industry practice, and are in amounts at least equal to the Lease Balance and in the case of earthquake coverage, with a deductible which is commercially reasonable for the geographical location of the property. So long as no Event of Default exists, any loss payable under the insurance policy required by this Section 14.2 will be paid to and adjusted solely by Lessee, subject to Article 15. So long as no Event of Default exists, any loss payable under any title insurance policy covering the Property will be paid to and adjusted solely by Lessee, subject to Article 15. - If at any time during the Term the area in which the Property is located is designated a "flood-prone" area pursuant to the Flood Disaster Protection Act of 1973 or any amendments or supplements thereto, then Lessee shall comply with the National Flood Insurance Program as set forth in the Flood Disaster Protection Act of 1973, as may be amended. In addition, Lessee will fully comply with the requirements of the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as each may be amended from time to time, and with any other Legal Requirement concerning flood insurance to the extent that it applies to the Property. - COVERAGE. - Lessee shall furnish Lessor with certificates showing the insurance required under Sections 14.1 and 14.2 to be in effect and naming Lessor as loss payee with respect to property insurance and Lessor and each Rent Purchaser as an additional insured with respect to liability insurance and showing the mortgagee endorsement required by Section 14.3(c). All such insurance may be maintained under blanket policies and shall be at the cost and expense of Lessee and provided by nationally recognized, financially sound insurance companies having a rating by A.M. Best's Key Rating Guide of at least an A and a Financial Performance Rating of at least VIII. Such certificates shall include a provision in which the insurer agrees to provide thirty (30) days' advance written notice by the insurer to Lessor (on behalf of the beneficiaries of such insurance coverage) in the event of cancellation or material alteration of such insurance. If an Event of Default has occurred and is continuing and Lessor so requests, Lessee shall deliver to Lessor copies of all insurance policies required by this Lease. - Lessee agrees that the insurance policy or policies required by this Lease shall include an appropriate clause pursuant to which such policy shall provide that it will not be invalidated should Lessee waive, in writing, prior to a loss, any or all rights of recovery against any party for losses covered by such policy. Lessee hereby waives any and all such rights against Lessor and each Rent Purchaser to the extent of payments made under such policies. - All insurance policies required by Section 14.2 shall include a "New York" or standard form mortgagee endorsement in favor of Lessor. 14. 16 - Neither Lessor nor any Rent Purchaser shall carry separate insurance concurrent in kind or form or contributing in the event of loss with any insurance required under this Lease except that Lessor and any Rent Purchaser may carry separate liability insurance so long as (i) Lessee's insurance is designated as primary and in no event excess or contributory to any insurance such party may have in force which would apply to a loss covered under Lessee's policy and (ii) each such insurance policy will not cause Lessee's insurance required under this Lease to be subject to a coinsurance exception of any kind. - Lessee shall pay as they become due all premiums for the insurance required by this Lease, shall renew or replace each policy prior to the expiration date thereof, shall promptly deliver to Lessor and Rent Purchaser certificates for renewal and replacement policies, and otherwise maintain the coverage required by this Lease without any lapse in coverage. - - CASUALTY AND CONDEMNATION. - Subject to the provisions of this Article 15 and Article 16 (in the event Lessee delivers, or is obligated to deliver, a Termination Notice), and prior to the occurrence and continuation of an Event of Default, Lessee shall be entitled to receive (and Lessor hereby irrevocably assigns to Lessee all of Lessor's right, title and interest during such time in) any award, compensation or insurance proceeds to which Lessee or Lessor may become entitled by reason of their respective interests in the Property (i) if all or a portion of the Property is damaged or destroyed in whole or in part by a Casualty or (ii) if the use, access, occupancy, easement rights or title to the Property or any part thereof is the subject of a Condemnation; provided, however, if a Default shall have occurred and be continuing, such award, compensation or insurance proceeds shall be paid directly to Lessor or, if received by Lessee, shall be held in trust for Lessor, and shall be paid over by Lessee to Lessor; and provided, further, that in the event of any Casualty or Condemnation, the estimated cost of restoration of which is in excess of $3,000,000, any such award, compensation or insurance proceeds shall be paid directly to Lessor, or if received by Lessee, shall be held in trust for Lessor and shall be paid over by Lessee to Lessor, subject to disbursement in full to Lessee in accordance with Section 15.1(d) or (e), as applicable. - So long as no Event of Default has occurred and is continuing, Lessee may appear in any proceeding or action to negotiate, prosecute, adjust or appeal any claim for any award, compensation or insurance payment on account of any such Casualty or Condemnation and shall pay all expenses thereof; provided that if the estimated cost of restoration of the Property or the payment on account of such title defect is in excess of $3,000,000, then Lessor shall be entitled to participate in any such proceeding or action. At Lessee's reasonable request, and at Lessee's sole cost and expense, Lessor shall participate in any such proceeding, action, negotiation, prosecution or adjustment. Lessor and Lessee agree that this Lease shall control the rights of Lessor, Participants and Lessee in and to any such award, compensation or insurance payment. 15. 17 - If any party shall receive notice of a Casualty or a possible Condemnation of the Property or any interest therein, such party, as the case may be, shall give notice thereof to Lessor and Lessee promptly after the receipt of such notice. - In the event of a Casualty or receipt of notice by Lessee or Lessor of a Condemnation, Lessee shall, not later than thirty (30) days after such occurrence, deliver to Lessor an Officer's Certificate stating that either (i) (x) such Casualty is not a Significant Casualty or (y) such Condemnation is neither a Total Condemnation nor a Significant Condemnation and that this Lease shall remain in full force and effect with respect to the Property and, at Lessee's sole cost and expense, Lessee shall promptly and diligently restore the Property in accordance with the terms of Section 15.1(e) or (ii) this Lease shall terminate with respect to the Property in accordance with Section 16.1. - If pursuant to Section 15.1(d), this Lease shall continue in full force and effect following a Casualty or Condemnation with respect to the Property, Lessee shall, at its sole cost and expense, promptly and diligently repair any damage to the Property caused by such Casualty or Condemnation in conformity with the requirements of Sections 10.1 and 11.1 using the as-built plans and specifications for the Property (as modified to give effect to any subsequent Modifications, any Condemnation affecting the Property and all applicable Legal Requirements) so as to restore the Property to the same condition, operation, function and value as existed immediately prior to such Casualty or Condemnation. In such event, title to the Property shall remain with Lessor. - In no event shall a Casualty or Condemnation with respect to which this Lease remains in full force and effect under this Section 15.1 affect Lessee's obligations to pay Rent pursuant to Section 3.1. - Notwithstanding anything to the contrary set forth in Section 15.1(a) or Section 15.1(e), if during the Term a Casualty occurs with respect to the Property or Lessee receives notice of a Condemnation with respect to the Property, and following such Casualty or Condemnation, the Property cannot reasonably be restored on or before the date which is one hundred eighty (180) days prior to the Maturity Date to substantially the same condition as existed immediately prior to such Casualty or Condemnation or before such day the Property is not in fact so restored, then Lessee shall exercise its Purchase Option with respect to the Property on the next Payment Date or irrevocably agree in writing to exercise the Maturity Date Purchase Option with respect to the Property, and in either such event such remaining Casualty or Condemnation proceeds shall be paid to Lessor, which shall pay such funds to Lessee upon the closing of the purchase of the Property on the Maturity Date. - ENVIRONMENTAL MATTERS. Promptly upon Lessee's actual knowledge of the presence of Hazardous Substances in any portion of the Property in concentrations and conditions that constitute an Environmental Violation, Lessee shall notify Lessor in writing of such condition. In the event of such Environmental Violation, Lessee shall, not later than thirty (30) days after Lessee has actual knowledge of such Environmental Violation, either deliver to Lessor an Officer's Certificate and a Termination Notice with respect to the Property pursuant to Section 16.1, if applicable, or, at Lessee's sole cost and expense, 16. 18 promptly and diligently undertake any response, clean up, remedial or other action necessary to remove, cleanup or remediate the Environmental Violation in accordance with the terms of Section 9.1. If Lessee does not deliver a Termination Notice with respect to the Property pursuant to Section 16.1, Lessee shall, upon completion of remedial action by Lessee, cause to be prepared by an environmental consultant reasonably acceptable to Lessor a report describing the Environmental Violation and the actions taken by Lessee (or its agents) in response to such Environmental Violation, and a statement by the consultant that the Environmental Violation has been remedied in full compliance with applicable Environmental Laws. - NOTICE OF ENVIRONMENTAL MATTERS. Promptly, but in any event within five (5) Business Days from the date Lessee has actual knowledge thereof, Lessee shall provide to Lessor written notice of any material pending or threatened claim, action or proceeding involving any Environmental Law or any Release on or in connection with the Property. All such notices shall describe in reasonable detail the nature of the claim, action or proceeding and Lessee's proposed response thereto. In addition, Lessee shall provide to Lessor, within five (5) Business Days after receipt, copies of all written communications with any Governmental Authority relating to any Environmental Violation in connection with the Property. Lessee shall also promptly provide such detailed reports of any such environmental claims as reasonably may be requested by Lessor. - - TERMINATION UPON CERTAIN EVENTS. - If: (i) Lessor or Lessee shall have received notice of a Total Condemnation; or (ii) Lessee or Lessor shall have received notice of a Condemnation, and Lessee shall have delivered to Lessor an Officer's Certificate that such Condemnation is a Significant Condemnation; or (iii) a Casualty occurs, and Lessee shall have delivered to Lessor an Officer's Certificate that such Casualty is a Significant Casualty; or (iv) an Environmental Violation occurs or is discovered and Lessee shall have delivered to Lessor an Officer's Certificate stating that, in the reasonable, good-faith judgment of Lessee, the cost to remediate the same will exceed $3,000,000; then Lessee shall, within thirty (30) days after Lessee receives notice of a Total Condemnation pursuant to the preceding clause (i), or simultaneously with the delivery of the Officer's Certificate pursuant to the preceding clause (ii), (iii) or (iv), deliver a notice of termination of this Lease to Lessor in the form described in Section 16.2(a) (a "TERMINATION NOTICE"). - PROCEDURES. - A Termination Notice shall contain: (i) notice of termination of this Lease on a date not more than thirty (30) days after Lessor's receipt of such Termination Notice (the "TERMINATION DATE"); (ii) a binding and irrevocable agreement of Lessee to pay the Termination Value and purchase the Property on such Termination Date; and (iii) the Officer's Certificate described in Section 16.1. 17. 19 - On the Termination Date, Lessee shall pay to Lessor the Termination Value for the Property, plus all amounts owing in respect of Rent for such Property (including Supplemental Rent) theretofore accruing and Lessor shall convey the Property to Lessee (or Lessee's designee) all in accordance with Section 19.1. - - EVENTS OF DEFAULT. If any one or more of the following events (each an "EVENT OF DEFAULT") shall occur: - Lessee shall fail to make payment of (i) any Basic Rent within three (3) days after the same has become due and payable, (ii) the Maximum Residual Guarantee Amount, Purchase Option Price or Termination Value after the same has become due and payable or (iii) any Supplemental Rent other than as provided in clause (ii) within three (3) days after receipt of notice thereof; or - Lessee shall fail to maintain insurance as required by Article 14 of this Lease; or - Lessee shall fail to observe or perform any term, covenant or condition of Lessee under this Lease, the Participation Agreement or any other Operative Agreement to which it is a party (specifically including without limitation, that affirmative covenant of Lessee set forth in Section 9.3(f) of the Participation Agreement, but other than those set forth in Section 17.1(a) or (b), hereof) which failure, if capable of cure, continues for thirty (30) days after written notice thereof to Lessee by Lessor (provided that, in the event such cure cannot be reasonably completed within such 30-day period, then Lessee shall have such additional time as shall be reasonably necessary, so long as Lessee commences such cure within such 30-day period and diligently thereafter prosecutes same to completion) or any representation or warranty by Lessee set forth in this Lease or in any other Operative Agreement or in any document entered into in connection herewith or therewith or in any document, certificate or financial or other statement delivered in connection herewith or therewith shall be false or inaccurate in any material way when made or deemed made; or - Lessee shall (i) admit in writing its inability to pay its debts generally as they become due, (ii) file a petition under the United States bankruptcy laws or any other applicable insolvency law or statute of the United States of America or any State or Commonwealth thereof, (iii) make a general assignment for the benefit of its creditors, (iv) consent to the appointment of a receiver of itself or the whole or any substantial part of its property, (v) fail to cause the discharge of any custodian, trustee or receiver appointed for Lessee or the whole or a substantial part of its property within sixty (60) days after such appointment, or (vi) file a petition or answer seeking or consenting to reorganization under the United States bankruptcy laws or any other applicable insolvency law or statute of the United States of America or any State or Commonwealth thereof; or - insolvency proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency law or statute of the United States of America or any State or Commonwealth thereof shall be filed against Lessee and not dismissed within sixty (60) 18. 20 days from the date of its filing, or a court of competent jurisdiction shall enter an order or decree appointing, without the consent of Lessee, a receiver of Lessee or the whole or a substantial part of its property, and such order or decree shall not be vacated or set aside within sixty (60) days from the date of the entry thereof; or - Lessee shall fail to (i) provide the Collateral in accordance with the terms of the Operative Agreements, or (ii) replenish the Collateral as required by the terms of the Operative Agreements; or - there shall be entered against Lessee or any Subsidiary one or more judgments or decrees in an aggregate amount at any one time outstanding in excess of $10,000,000, and such judgments or decrees shall not have been satisfied, vacated, discharged, or stayed or bonded pending appeal within sixty (60) days from entry thereof; or - with respect to any Plan (other than a Multiemployer Plan) as to which Lessee or any ERISA Affiliate of Lessee may have any liability, there shall exist, for a period of thirty (30) days, a deficiency which is material to the consolidated financial condition of Lessee and its Subsidiaries in the Plan assets available to satisfy the benefits guaranteeable under ERISA with respect to such Plan, and (i) steps are undertaken to terminate such Plan, (ii) such Plan is terminated, or (iii) any Reportable Event which presents a material risk of termination with respect to such Plan shall occur; or - Lessee or any of its Subsidiaries (i) shall default in the payment beyond any applicable grace period, whether at stated maturity or otherwise, of principal, interest or rent in respect of Indebtedness in excess of $10,000,000, including, without limitation, the Credit Facility and the Subordinated Notes; or (ii) shall fail to perform or observe any other condition or covenant, such that an event of default shall occur or exist, under any agreement or instrument relating to any such Indebtedness; or - Any Operative Agreement shall cease to be in full force and effect or Lessee or any Person acting by or on behalf of Lessee shall deny or disaffirm its obligations thereunder or contest the validity of any Operative Agreement or any Lien granted thereunder in any respect, either directly or indirectly; or - (i) any Person or two (2) or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934), directly or indirectly, of voting stock of Lessee (or other securities convertible into such voting stock) representing greater than fifty percent (50%) of the combined voting power of all voting stock of Lessee; or (ii) the first day on which a majority of the members of the board of directors of Lessee are not Continuing Directors. A "Continuing Director" shall mean any director who is either (A) a member of such board of directors on the Closing Date or (B) nominated or elected to such board of directors with the approval of a majority of the Continuing Directors who were members of such board at the time of such nomination or election; or (iii) any Person or two (2) or more Persons acting in concert shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that, upon consummation, will result in its or their acquisition of, the power to exercise, 19. 21 directly or indirectly, a controlling influence over the management or policies of Lessee, or control over voting stock of Lessee (or other securities convertible into such securities) representing more than fifty percent (50%) of the combined voting power of all voting stock of Lessee; then, in any such event, Lessor may, in addition to the other rights and remedies provided for in this Article 17 and in Section 18.1, terminate this Lease by giving Lessee three (3) Business Days' notice of such termination, and this Lease shall terminate. Lessee shall, to the fullest extent permitted by law, pay as Supplemental Rent all costs and expenses incurred by or on behalf of Lessor, including fees and expenses of counsel, as a result of any Event of Default hereunder. A POWER OF SALE HAS BEEN GRANTED IN THIS LEASE. A POWER OF SALE MAY ALLOW LESSOR TO TAKE THE PROPERTY AND SELL THE PROPERTY WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON THE OCCURRENCE OF AN EVENT OF DEFAULT. - FINAL LIQUIDATED DAMAGES. If an Event of Default shall have occurred and be continuing, Lessor shall have the right to recover, by demand to Lessee and at Lessor's election, and Lessee shall pay to Lessor, exclusive of the indemnities payable under Section 11 of the Participation Agreement, and in lieu of all damages beyond the date of such demand, the sum of (a) the Termination Value, plus (b) all other amounts owing in respect of Rent and Supplemental Rent theretofore accruing under this Lease. Upon payment of the amount specified pursuant to the first sentence of this Section 17.2, Lessee shall be entitled to receive from Lessor, at Lessee's request and cost, an assignment of Lessor's right, title and interest in the Property, the Improvements, the Fixtures and the Modifications, in each case in recordable form and otherwise in conformity with local custom and free and clear of any Lessor Liens. The Property shall be conveyed to Lessee (or Lessee's designee) "AS IS" and in its then present physical condition. If any statute or rule of law shall limit the amount of such final liquidated damages to less than the amount agreed upon, Lessor shall be entitled to the maximum amount allowable under such statute or rule of law; provided that Lessee shall not be entitled to receive an assignment of Lessor's interest in the Property, the Improvements, the Fixtures and the Modifications unless Lessee shall have paid in full the Termination Value of the Property and all such Rent and Supplemental Rent. - LEASE REMEDIES. Lessor and Lessee intend that for commercial law and bankruptcy law purposes, this Lease will be treated as a financing arrangement, as set forth in Article 7. If, as a result of applicable state law, which cannot be waived, this Lease is deemed to be a lease of the Property, rather than a financing arrangement, and Lessor is unable to enforce the remedies set forth in Section 17.2, the following remedies shall be available to Lessor: - SURRENDER OF POSSESSION. If an Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessee shall, upon thirty (30) days' written notice, surrender to Lessor possession of the Property and Lessee shall quit the same. Lessor may enter upon and repossess the Property by such 20. 22 means as are available at law or in equity, and may remove Lessee and all other Persons and any and all personal property and Lessee's equipment and personality and severable Modifications from the Property. Lessor shall have no liability by reason of any such entry, repossession or removal performed in accordance with applicable law. - RELETTING. If an Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessor may, but shall be under no obligation to, relet all, or any portion, of the Property, for the account of Lessee or otherwise, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Term) and on such conditions (which may include concessions or free rent) and for such purposes as Lessor may reasonably determine, and Lessor may collect, receive and retain the rents resulting from such reletting which rents shall be applied against amounts owing by Lessee. Lessor shall not be liable to Lessee for any failure to relet the Property or for any failure to collect any rent due upon such reletting. - DAMAGES. None of (i) the termination of this Lease pursuant to Section 17.1; (ii) the repossession of the Property; or (iii) except to the extent required by applicable law, the failure of Lessor to relet all, or any portion, of the Property, the reletting of all or any portion thereof, nor the failure of Lessor to collect or receive any rentals due upon any such reletting shall relieve Lessee of its liability and obligations hereunder, all of which shall survive any such termination, repossession or reletting. If any Event of Default shall have occurred and be continuing and notwithstanding any termination of this Lease pursuant to Section 17.1, Lessee shall forthwith pay to Lessor all Basic Rent and other sums due and payable hereunder or under the Operative Agreements to and including the date of such termination. Thereafter, on the days on which the Basic Rent or Supplemental Rent, as applicable, are payable under this Lease or would have been payable under this Lease if the same had not been terminated pursuant to Section 17.1 and until the end of the Term or what would have been the Term in the absence of such termination, Lessee shall pay Lessor, as current liquidated damages (it being agreed that it would be impossible accurately to determine actual damages) an amount equal to the Basic Rent and Supplemental Rent that are payable under this Lease or under the Operative Agreements or would have been payable by Lessee hereunder or under the Operative Agreements if this Lease had not been terminated pursuant to Section 17.1, less the net proceeds, if any, which are actually received by Lessor with respect to the period in question of any reletting of the Property or any portion thereof; provided that Lessee's obligation to make payments of Basic Rent and Supplemental Rent under this Section 17.3(c) shall continue only so long as Lessor shall not have received the amounts specified in Section 17.2 or Section 17.3(d). In calculating the amount of such net proceeds from reletting, there shall be deducted all of Lessor's and any Rent Purchaser's reasonable expenses in connection therewith, including repossession costs, brokerage commissions, fees and expenses for counsel and any necessary repair or alteration costs and expenses reasonably incurred in preparation for such reletting. To the extent Lessor receives any damages pursuant to this Section 17.3(c), such amounts shall be regarded as amounts paid on account of Rent. 21. 23 - ACCELERATION OF RENT. If an Event of Default shall have occurred and be continuing, and this Lease shall not have been terminated pursuant to Section 17.1, and whether or not Lessor shall have collected any current liquidated damages pursuant to Section 17.3(c), Lessor may upon written notice to Lessee accelerate all payments of Basic Rent due hereunder and, upon such acceleration, Lessee shall immediately pay Lessor, as and for final liquidated damages and in lieu of all current liquidated damages on account of such Event of Default beyond the date of such acceleration (it being agreed that it would be impossible accurately to determine actual damages) an amount equal to the sum of (i) all Basic Rent (assuming interest at a rate per annum equal to the Overdue Rate and including any charges for funding losses), as applicable, due from the date of such acceleration until the end of the Term, plus (ii) the Maximum Residual Guarantee Amount that would be payable under Section 21.1(c) assuming the proceeds of the sale pursuant to such Section 21.1(c) are equal to zero, which sum is then discounted to present value at a rate equal to the rate then being paid on United States treasury securities with maturities corresponding to the then remaining Term. Following payment of such amount by Lessee, Lessee will be permitted to stay in possession of the Property for the remainder of the Term, subject to the terms and conditions of this Lease, including the obligation to pay Supplemental Rent, provided that no further Event of Default shall occur and be continuing, following which Lessor shall have all the rights and remedies set forth in this Article 17 (but not including those set forth in this Section 17.3). If any statute or rule of law shall limit the amount of such final liquidated damages to less than the amount agreed upon, Lessor shall be entitled to the maximum amount allowable under such statute or rule of law. - SUBLETTING OF THE PROPERTY. In addition to the other rights and remedies set forth herein, Lessor shall have the right to continue this Lease in effect and, to enforce, by suit or otherwise, all covenants and conditions hereof to be performed or complied with by Lessee and exercise all of Lessor's rights and remedies under this Lease, including, without limitation, the right to recover Basic Rent and Supplemental Rent from Lessee as it becomes due under this Lease, even though Lessee shall have breached this Lease and abandoned the Property. Acts of maintenance or preservation, or efforts by Lessor or on Lessor's behalf to relet the Property, or the appointment of a receiver upon the initiative of Lessor to protect Lessor's interest under this Lease shall not constitute a termination of Lessee's right to possession of the Property; provided, however, that the foregoing enumeration shall not be construed as in any way limiting the actions Lessor may take without terminating Lessee's right to possession. In furtherance of the rights hereby granted to Lessor, and to the extent, permitted by law, Lessee hereby appoints Lessor its agent and attorney-in-fact, which appointment shall be deemed to be coupled with an interest and is irrevocable, with power of substitution, to enter the Property upon an Event of Default hereunder and remove therefrom all persons and property (with the right to store such property on the Property in a public warehouse or elsewhere at the cost and risk and for the account of Lessee) and to alter the Property in such manner as Lessor may deem necessary or advisable so as to put the Property in good order and to make the same rentable and from time to time sublet the Property or any part thereof for such term or terms whether or not extending beyond the then current term of this Lease (but such sublease may provide for a new and successive lease to commence immediately upon the 22. 24 termination of this Lease), at such rentals and upon such other terms as Lessor in its sole discretion may deem advisable, and with the right to make alterations and repairs to the Property; and Lessee agrees to pay to Lessor on demand all reasonable expenses incurred by Lessor in such subletting, and in altering, repairing and putting the Property in good order and condition, and in reletting the same, including fees of attorneys and architects, and all other reasonable expenses or commissions. Lessor shall be Lessee's agent and representative on the Property in respect of all matters arising under or in connection with any such sublease made for Lessee by Lessor. Under each such sublease, Lessee shall retain the right to enter upon and use the Property, subject to the terms and conditions of such sublease and the rights of the sublessee thereunder. Lessee further agrees to pay to Lessor, following the date of such subletting, to and including the date provided in this Lease for the expiration of the Lease Term, the sums of money which would have been payable by Lessee as Basic Rent and Supplemental Rent, deducting only the net amount of rent, if any, which Lessor shall actually receive (after deducting from the gross receipts the expenses, costs and payments of Lessor which in accordance with the terms of this Lease would have been borne by Lessee) in the meantime from and by any such subletting of the Property, and Lessee hereby agrees to remain liable for all sums otherwise payable by Lessee under this Lease, including, but not limited to, the expenses of Lessor aforesaid, as well as for any deficiency aforesaid. Lessor shall have the right from time to time to begin and maintain successive actions or other legal proceedings against Lessee for the recovery of such deficiency, expenses or damages or for a sum equal to any installments of Basic Rent or Supplemental Rent and other sums payable hereunder, and to recover the same upon the liability of Lessee herein provided, which liability it is expressly covenanted shall survive the commencement or determination of any action to secure possession of the Property. Nothing herein contained shall be deemed to require Lessor to wait to begin such action or other legal proceedings until the date when this Lease would have expired by limitation had there been no such Event of Default. Notwithstanding any such subletting without termination, pursuant to the terms hereof, Lessor shall retain the right to and may at any time thereafter elect to terminate this Lease or Lessee's right to possession of the Property for any previous breach which remains uncured or for any subsequent breach by giving Lessee written notice thereof as herein provided, and in such event Lessee shall forfeit any rights or interest under any such sublease and thereafter the obligations of any such sublessee shall run directly to Lessor for its own account. Upon application by Lessor, a receiver may be appointed to take possession of the Property, exercise all rights granted to Lessor as agent and attorney-in-fact for Lessee set forth in this Section 17.3(e) and apply any rentals collected from the Property as hereinabove provided. No taking of possession of the Property or other act by Lessor as the agent and attorney-in-fact for Lessee pursuant to the foregoing provisions, nor any subletting by Lessor for Lessee pursuant to the foregoing provisions, nor any such appointment of a receiver shall constitute or be construed as an election by Lessor to terminate this Lease or Lessee's right to possession of the Property unless a written notice of such intention be given to Lessee. - REPOSSESSION AND RECOVERABLE AMOUNTS. In the event of any termination of the Term pursuant to Section 17.1 or as permitted by law, Lessee shall quit and surrender the Property to Lessor, and Lessor may without further notice enter upon, reenter, possess and repossess the same by summary proceedings, ejectment or otherwise, and again have, 23. 25 repossess and enjoy the same as if this Lease had not been made, and in any such event neither Lessee nor any Person claiming through or under Lessee by virtue of any law or an order of any court shall be entitled to possession or to remain in possession of the Property but shall forthwith quit and surrender the Property, and Lessor shall, notwithstanding any other provision of this Lease, be entitled to recover from Lessee the aggregate of all amounts Lessor is permitted to recover from Lessee, including: - the worth at the time of award, as computed below, of the unpaid rent (including, without limitation, Basic Rent and Supplemental Rent) which had been earned at the time of termination of this Lease; - the worth at the time of award of the amount by which the unpaid rent (including, without limitation, Basic Rent and Supplemental Rent) which would have been earned after the time of termination of this Lease until the time of award exceeds the amount of such rental loss that Lessee proves could have been reasonably avoided; - the worth at the time of award of the amount by which the unpaid rent (including, without limitation, Basic Rent and Supplemental Rent) for the balance of the Term after the time of award exceeds the amount of such rental loss for said balance of the Term that Lessee proves could be reasonably avoided; and - any other amount necessary to compensate Lessor for all the detriment proximately caused by Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom; including without limitation any loss or damage arising out of the failure of Lessor to receive the benefit of the performance by Lessee of any obligation to purchase the Property under the provisions of this Lease. Lessee acknowledges and agrees that, in reliance upon this Lease and Lessee's covenants and agreements hereunder and the creditworthiness and financial condition of Lessee, Lessor has entered into certain special transactions to finance the costs of acquiring the Land and the Improvements and, in connection with such financing transactions, Lessor has incurred and will continue to incur indebtedness and liabilities under and pursuant to the Participation Agreement and the other Operative Agreements. Lessee acknowledges and agrees that an Event of Default will cause Lessor substantial damage and detriment due to its obligations and liabilities under the Participation Agreement and the other Operative Agreements, including, without limitation, the failure of Lessor to be fully compensated for the Advances made to Lessee. Accordingly, in order to compensate Lessor for all detriment proximately caused by Lessee's failure to perform its obligations under this Lease, Lessor shall be permitted to recover from Lessee, without limitation, all amounts necessary for Lessor to be fully compensated for all of the Advances made to Lessee. The "worth at the time of award," of the amounts referred to in the foregoing subsections 17.3(f) (i) and (ii) shall be computed by allowing interest at the Overdue Rate (or at the highest rate permitted by applicable law, whichever is less) on 24. 26 each rental installment from the date the same was due hereunder to the time of award. The "worth at the time of award" of the amount referred to in the foregoing subsection (iii) shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of New York at the time of the award plus one percent (1%). As used herein, the term "time of award" shall mean either (A) the date upon which Lessee pays to Lessor the amount recoverable by Lessor as hereinabove set forth or (B) the date of entry of any determination, order or judgment of any court, other legally constituted body, or any arbitrator(s), determining the amount recoverable, whichever first occurs. If the time of award is determined under clause (B), above, then the amount recoverable by Lessor hereunder shall bear interest from the time of award until paid at the Overdue Rate (or at the highest rate permitted by applicable law, whichever is less). Nothing herein contained shall limit or prejudice the right of Lessor, and Lessor is hereby expressly granted the right, in any bankruptcy or reorganization or insolvency proceedings, to prove for and obtain as damages by reason of such termination, an amount equal to the maximum allowed by any statute or rule of law whether such amount shall be greater or less than the amounts referred to above. - WAIVER OF CERTAIN RIGHTS. If this Lease shall be terminated pursuant to Section 17.1, Lessee waives, to the fullest extent permitted by law, (a) any notice of re-entry or the institution of legal proceedings to obtain re-entry or possession; (b) any right of redemption, re-entry or repossession; (c) the benefit of any laws now or hereafter in force exempting property from liability for rent or for debt; and (d) any other rights which might otherwise limit or modify any of Lessor's rights or remedies under this Article 17. - ASSIGNMENT OF RIGHTS UNDER CONTRACTS. If an Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessee shall upon Lessor's demand immediately assign, transfer and set over to Lessor all of Lessee's right, title and interest in and to each agreement executed by Lessee in connection with the construction, renovation, development, use or operation of the Property (including, without limitation, all right, title and interest of Lessee with respect to all warranty, performance, service and indemnity provisions), as and to the extent that the same relate to the construction, renovation, and operation of the Property. - POWER OF SALE AND FORECLOSURE. Except as expressly provided in this Lease, for purposes of this Section 17.6, presentment, demand, protest and all other notices of any kind are hereby expressly waived. In addition (subject to Article 21 below), upon the occurrence of any Event of Default, Lessor, as beneficiary, may immediately take such action, without notice or demand, as it deems advisable to protect and enforce its rights against Lessee, as trustor, in and to the Trust Property, including the following actions, at such time and in such manner as Lessor may determine, in its sole discretion, without impairing or otherwise affecting the other rights and remedies of Lessor: - Either in person or by agent, with or without bringing any action or proceeding, or by a receiver appointed by a court and without regard to the adequacy of its security, enter upon and take possession of the Trust Property or any part thereof, with or without legal 25. 27 action, and do any acts which it deems necessary or desirable to preserve the value, marketability or rentability of the Trust Property, or any part thereof (including entering into new leases of all or any part of the Trust Property) and, with or without taking possession of the Trust Property, sue for or otherwise collect the rents, issues and profits thereof, including those past due and unpaid, and apply the same, less costs and expenses of operation and collection including reasonable attorneys' fees, to the payment of all of Lessee's obligations hereunder (including, without limitation, the payment of Basic Rent, Supplemental Rent and the Termination Value or Purchase Option Price) (collectively, the "Lease Payment Obligations"), all in such order as Lessor may determine. The entering upon and taking possession of the Trust Property, the collection of such rents, issues and profits and the application thereof as aforesaid, shall not cure or waive any default or notice of default hereunder or invalidate any act done in response to such default or pursuant to such notice of default and, notwithstanding the continuance in possession of the Trust Property or the collection, receipt and application of rents, issues or profits, Lessor shall be entitled to exercise every right provided for herein and the other Operative Documents or by law. Bring an action in any court of competent jurisdiction to foreclose on the Trust Property, to appoint a receiver or to enforce any of the covenants, terms or conditions hereof and Lessor shall have the right to specific performance, injunction and any other equitable right or remedy as though other remedies were not provided in this Lease. Elect to cause the Trust Property or any part thereof to be sold as follows, Lessee hereby expressly waiving any right which it may have to direct the order in which any of the Trust Property may be sold: (i) Lessor may proceed as if all of the Trust Property were real property, in accordance with subparagraph (ii) below, or Lessor may elect to treat any of the Trust Property which consists of personal property, in accordance with the Section of this Lease entitled "Security Agreement and Fixture Filing," separate and apart from the sale of the Land, the remainder of the Trust Property being treated as real property; (ii) Lessor may cause any such sale or other disposition to be conducted immediately following the expiration of any grace period, if any, herein provided or Lessor may delay any such sale or other disposition for such period of time as Lessor deems to be in its best interest. Should Lessor desire that more than one such sale or other disposition be conducted, Lessor may, at its option, cause the same to be conducted simultaneously, or successively on the same day, or at such different days or times and in such order as Lessor may deem to be in its best interest; (iii) Should Lessor elect to sell the Trust Property and Lessor elects to proceed under the laws governing foreclosure of or sales pursuant to deeds of trust, Lessor (or any trustee designated by Lessor) shall give such notice of default 26. 28 and election to sell as may then be required by law. Thereafter, upon the expiration of such time and the giving of such notice of sale as may then be required by law, Lessor (or any trustee designated by Lessor), at the time and place specified by the notice of sale, shall sell such Trust Property, or any portion thereof specified by Lessor, at public auction to the highest bidder for cash in lawful money of the United States. Lessor may postpone, from time to time, the sale by public announcement thereof at the time and place noticed therefor. If the Trust Property consists of several lots or parcels, Lessor may elect to sell the Trust Property either as a whole or in separate lots or parcels. If Lessor elects to sell in separate lots or parcels, Lessor may designate the order in which such lots or parcels shall be offered for sale or sold. Any person, including Lessee or Lessor, may purchase at the sale. Upon any sale, Lessor shall execute and deliver to the purchaser or purchasers a deed or deeds conveying the property so sold, but without any covenant or warranty whatsoever, express or implied, whereupon such purchaser or purchasers shall be let into immediate possession; (iv) In the event of a sale or other disposition of any such property, or any part thereof, and the execution of a deed or other conveyance pursuant thereto, the recitals therein of facts, such as an Event of Default, the giving of notice of default and notice of sale, demand that such sale should be made, postponement of sale, terms of sale, sale, purchase, payments of purchase money, and any other fact affecting the regularity or validity of such sale or disposition shall be conclusive proof of the truth of such facts; and any such deed or conveyance shall be conclusive against all persons as to such facts recited therein; and (v) After deducting all costs, fees and expenses of Lessor, including all costs of evidence of title and attorneys' fees in connection with sale, Lessor shall apply the proceeds of sale to payment of all sums so expended under the terms hereof not then repaid; the payment of all other sums then secured hereby; and the remainder, if any, to the Person or Persons legally entitled thereto; - Exercise all other rights and remedies provided herein, in the other Operative Documents or otherwise available at law or equity. - With or without notice, and without releasing Lessee from any obligation hereunder, to cure any default of Lessee and, in connection therewith, to enter upon the Property and to perform such acts and things as Lessor deems necessary or desirable to inspect, investigate, assess and protect the Property, including, without limitation of any of its other rights: to obtain a court order to enforce Lessor's right to enter and inspect the Property pursuant to California Civil Code Section 2929.5, to which the decision of Lessor as to whether there exists a release or threatened release of a Hazardous Substance onto the Property shall be deemed reasonable and conclusive as between the parties hereto; to have a receiver appointed pursuant to California Code of Civil Procedure Section 564 to enforce Lessor's right to enter and inspect the Property for Hazardous Substances; to appear in and defend any action or proceeding purporting to affect the 27. 29 Property or the rights or powers of Lessor hereunder; to pay, purchase, contest or compromise any encumbrance, charge, lien or claim of lien which, in the judgment of Lessor, is prior or superior hereto, the judgment of Lessor being conclusive as between the parties hereto; to pay any premiums or charges with respect to insurance required to be carried hereunder; and to employ counsel, accountants, contractors and other appropriate persons to assist Lessor; - To commence and maintain an action or actions in any court of competent jurisdiction pursuant to California Code of Civil Procedure Section 736, whether commenced prior to foreclosure of the Property or after foreclosure of the Property, and to seek the recovery of any and all costs, damages, expenses, fees, penalties, fines, judgments, indemnification payments to third parties, and other out-of-pocket costs or expenses actually incurred by Lessor (collectively, the "ENVIRONMENTAL COSTS") incurred or advanced by Lessor relating to the cleanup, remediation or other response action required by Legal Requirements or which Lessor believes necessary to protect its interest in the Property, it being conclusively presumed between Lessor and Lessee that all such Environmental Costs incurred or advanced by Lessor relating to the cleanup, remediation or other response action of or to the Property were made by Lessor in good faith. All Environmental Costs incurred by Lessor pursuant to this Section 17.6(g) (including, without limitation, court costs, consultants' fees and attorneys' fees, whether incurred in litigation or not and whether before or after judgment) shall bear interest at the Overdue Rate from the date of expenditure until said sums have been paid. Lessor shall be entitled to bid, at the sale of the Property held pursuant to Section 17.6(c) above, the amount of said costs, expenses and interest in addition to the amount of the other Lease Payment Obligations hereby secured as a credit bid, the equivalent of cash. For the purposes of any action brought under this Section 17.6(f), Lessee hereby waives the defense of laches and any applicable statute of limitations; and - To waive its lien against the Property or any portion thereof, whether fixtures or personal property, to the extent such property is found to be environmentally impaired in accordance with California Code of Civil Procedure Section 726.5 and to exercise any and all rights and remedies of an unsecured creditor against Lessee and all of Lessee's assets and property for the recovery of any deficiency and Environmental Costs, including, but not limited to, seeking an attachment order pursuant to California Code of Civil Procedure Section 483.010. As between Lessor and Lessee, for purposes of California Code of Civil Procedure Section 726.5, Lessee shall have the burden of proving that Lessee or any related party (or any affiliate or agent of Lessee or any related party) was not in any way negligent in permitting the release or threatened release of the Hazardous Substance. For the purposes of any action brought under this paragraph, Lessee hereby waives the defense of laches and any applicable statute of limitations. - All costs and expenses incurred by Lessor pursuant to this Section 17.6 (including without limitation court costs, consultants' fees and attorneys' fees, whether incurred in litigation or not and whether before or after judgment) shall bear interest at the Overdue Rate, from the date of expenditure until said sums have been paid. Lessor shall be entitled to bid, at the sale of the Property held pursuant to subsection 17.4(c) above, the amount of said costs, expenses and interest in addition to the amount of the other Lease 28. 30 Payment Obligations hereby secured as a credit bid, which shall be deemed the equivalent of cash. - In no event shall Lessor (or any trustee designation by Lessor), in the exercise of the remedies provided in this Section 17.6 (including, without limitation, in connection with the appointment of a receiver and the entry of such receiver on to all or any part of the Trust Property), be deemed a "mortgagee in possession," and Lessor shall not in any way be made liable for any act, either of commission or omission, in connection with the exercise of such remedies. - Lessee hereby waives any right to require that any security given hereunder or under any other agreement securing the Lease Payment Obligations be marshaled and further waives any right otherwise available in respect to marshalling of assets which secure any Lease Payment Obligation or to require Lessor to pursue its remedies against any such assets. - SECURITY AGREEMENT AND FIXTURE FILING. - It is the intention of the parties hereto that this Lease shall constitute a Security Agreement within the meaning of the Uniform Commercial Code (the "UCC") of the State of California. If an Event of Default shall occur under this Lease, then in addition to having any other right or remedy available at law or in equity, Lessor shall have the option of either (i) proceeding under the UCC and exercising such rights and remedies as may be provided to a secured party by the UCC with respect to all or any portion of the Trust Property which is personal property (including, without limitation, taking possession of and selling such property) or (ii) treating such property as real property and proceeding with respect to both the real and personal property constituting the Trust Property in accordance with Lessor's rights, powers and remedies with respect to the real property (in which event the default provisions of the UCC shall not apply). If Lessor shall elect to proceed under the UCC, then ten (10) business days notice of sale of the personal property shall be deemed reasonable notice and the reasonable expenses of retaking, holding, preparing for sale, selling and the like incurred by Lessor shall include, but not be limited to, attorneys' fees and legal expenses. At Lessor's request, Lessee shall assemble the personal property and make it available to Lessor at a place designated by Lessor which is reasonably convenient to both parties. - Lessee and Lessor agree, to the extent permitted by law, that this Lease (or a memorandum thereof) upon recording or registration in the real estate records of the proper office shall constitute a financing statement filed as a "fixture filing" within the meaning of Sections 9313 and 9402 of the UCC. - Lessee, upon request by Lessor from time to time, shall execute, acknowledge and deliver to Lessor one or more separate security agreements, in form reasonably satisfactory to Lessor, covering all or any part of the Trust Property and will further execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, any financing statement, affidavit, continuation statement or certificate or other document as Lessor may reasonably request in order to perfect, preserve, maintain, continue or extend 29. 31 the security interest under and the priority of this Lease and such security instrument. Lessee further agrees to pay to Lessor on demand all reasonable costs and expenses incurred by Lessor in connection with the preparation, execution, recording, filing and re-filing of any such document and all reasonable costs and expenses of any record searches for financing statements Lessor shall reasonably require. Lessee shall from time to time, on request of Lessor, deliver to Lessor an inventory in reasonable detail of any of the Trust Property which constitutes personal property. If Lessee shall fail to furnish any financing or continuation statement within ten (10) days after request by Lessor, then pursuant to the provisions of the UCC, Lessee hereby authorizes Lessor, without the signature of Lessee, to execute and file any such financing and continuation statements. The filing of any financing or continuation statements in the records relating to personal property or chattels shall not be construed as in any way impairing the right of Lessor to proceed against any personal property encumbered by this Lease as real property, as set forth above. - REMEDIES CUMULATIVE. The remedies herein provided shall be cumulative and in addition to (and not in limitation of) any other remedies available at law, equity or otherwise. - LESSEE'S RIGHT TO CURE. Notwithstanding any provision contained in this Lease or any other Operative Agreement, if an Event of Default has occurred and is continuing, Lessee shall have the right to cure such Event of Default by exercising its Purchase Option at any time prior to such time as a foreclosure upon or sale of the Property has been completed. - - LESSOR'S RIGHT TO CURE LESSEE'S DEFAULTS. Lessor, without waiving or releasing any obligation or Event of Default, may (but shall be under no obligation to) remedy any Event of Default for the account and at the sole cost and expense of Lessee, including the failure by Lessee to maintain any insurance required by Article 14, and may, to the fullest extent permitted by law, and notwithstanding any right of quiet enjoyment in favor of Lessee, enter upon the Property for such purpose and take all such action thereon as may be necessary or appropriate therefor. No such entry shall be deemed an eviction of Lessee. All out-of-pocket costs and expenses so incurred (including the fees and expenses of counsel), together with interest thereon at the Overdue Rate from the date on which such sums or expenses are paid by Lessor, shall be paid by Lessee to Lessor on demand as Supplemental Rent. - - PROVISIONS RELATING TO LESSEE'S TERMINATION OF THIS LEASE OR EXERCISE OF PURCHASE OPTIONS. In connection with any termination of this Lease with respect to the Property pursuant to the terms of Section 16.2 or Article 17, or in connection with Lessee's exercise of its Purchase Option or Maturity Date Purchase Option, upon the date on which this Lease is to terminate with respect to the Property or upon the Expiration Date with respect to the Property, and upon tender by Lessee of the amounts set forth in Section 16.2(b), 17.2, 20.1 or 20.2, as applicable: 30. 32 - Lessor shall execute and deliver to Lessee (or to Lessee's designee) at Lessee's cost and expense an assignment of Lessor's entire interest in the Property, in each case in recordable form and otherwise in conformity with local custom and free and clear of the Lien of this Lease and any Lessor Liens; and - The Property shall be conveyed to Lessee "AS IS" and in its then present physical condition. - - PURCHASE OPTION. Subject to Section 17.8, Lessee shall have the option on any Payment Date (exercisable by giving Lessor irrevocable written notice (the "PURCHASE NOTICE") of Lessee's election to exercise such option not less than thirty (30) days prior to the date of purchase pursuant to such option) to purchase the Property on the date specified in such Purchase Notice at a price equal to the Termination Value plus all Basic Rent and Supplemental Rent due and owing on such date of purchase (the "PURCHASE OPTION PRICE") (which the parties do not intend to be a "bargain" purchase price) of the Property. If Lessee exercises its option to purchase the Property pursuant to this Section 20.1 (the "PURCHASE OPTION"), Lessor shall transfer to Lessee or Lessee's designee all of Lessor's right, title and interest in and to the Property as of the date specified in the Purchase Notice upon receipt of the Purchase Option Price and all Rent and other amounts then due and payable under this Lease and any other Operative Agreement, in accordance with Section 19.1. - MATURITY DATE PURCHASE OPTION. Not less than one hundred eighty (180) days prior to the Maturity Date, Lessee may give Lessor and Agent irrevocable written notice (the "MATURITY DATE ELECTION NOTICE") that Lessee is electing to exercise the Maturity Date Purchase Option or its option to remarket the Property pursuant to Section 21.1. If Lessee does not give a Maturity Date Election Notice on or before the date one hundred eighty (180) days prior to the Maturity Date, then Lessee shall be deemed to have exercised its Maturity Date Purchase Option. If Lessee has elected, or is deemed to have elected, to exercise the Maturity Date Purchase Option, then on the Maturity Date Lessee shall pay to Lessor an amount equal to the Termination Value plus all Basic Rent and Supplemental Rent due and owing on such date of purchase for the Property (which the parties do not intend to be a "bargain" purchase price) and, upon receipt of such amount plus all Rent and other amounts then due and payable under this Lease and any other Operative Agreement, Lessor shall transfer to Lessee or Lessee's designee all of Lessor's right, title and interest in and to the Property in accordance with Section 19.1. - EXTENSION OF EXPIRATION DATE. Lessee may extend the Expiration Date and the Maturity Date subject to, and in accordance with, the terms and conditions of Section 16 of the Participation Agreement. 31. 33 - - SALE PROCEDURE. - Provided that no Default or Event of Default shall have occurred and be continuing, at the expiration of the Term, unless Lessee shall have (i) elected to extend the Expiration Date, (ii) elected (or be deemed to have elected) to purchase the Property and paid the Purchase Option Price with respect thereto, or (iii) otherwise terminated this Lease with respect thereto and paid the Termination Value with respect thereto, Lessee may elect to terminate this Lease and remarket the Property as provided in Section 20.2, in which event Lessee shall (i) pay to Lessor the Maximum Residual Guarantee Amount for the Property, and (ii) sell the Property to one or more third parties for cash in accordance with Section 21.1(b). In the event that Lessee elects to terminate the Lease and remarket the Property, Lessee hereby covenants and agrees that, to the extent the Property is not in compliance with all Legal Requirements, or would not be in such compliance upon its sale to a third party, and the cost to put the Property into such compliance is in excess of $200,000, Lessee shall pay such excess to Lessor immediately upon demand. - During the Marketing Period, Lessee, as nonexclusive broker for Lessor, shall use its best efforts to obtain bids for the cash purchase of the Property for the highest price available in the relevant market, shall notify Lessor promptly of the name and address of each prospective purchaser and the cash price which each prospective purchaser shall have offered to pay for the Property and shall provide Lessor with such additional information about the bids and the bid solicitation procedure as Lessor may request from time to time. Lessor may reject any and all bids and may assume sole responsibility for obtaining bids by giving Lessee written notice to that effect; provided, however, that notwithstanding the foregoing, Lessor may not reject a bid if such bid is greater than or equal to the sum of the Limited Recourse Amount and all costs and expenses of sale and is a bona fide offer by a third party purchaser who is not an Affiliate of Lessee. If the price which a prospective purchaser shall have offered to pay for all or any of the Property is less than the sum of the Limited Recourse Amount and all costs and expenses of sale, Lessor may elect to retain the Property by giving Lessee at least two (2) Business Days' prior written notice of Lessor's election to retain the Property, and upon receipt of such notice, Lessee shall surrender the Property to Lessor pursuant to Section 10.1(c). Unless Lessor shall have elected to retain the Property pursuant to the preceding sentence, Lessor shall sell the Property free of any Lessor Liens attributable to it, without recourse or warranty, for cash to the purchaser or purchasers identified by Lessee or Lessor, as the case may be, and Lessee shall surrender the Property to such purchaser in the condition specified in Section 10.1. - On the date during the Marketing Period on which the Property is sold pursuant to Section 21.1(b), or on the Maturity Date if the Property remains unsold, Lessee shall pay to Lessor the Maximum Residual Guarantee Amount for the Property. - APPLICATION OF PROCEEDS OF SALE. Lessor shall apply the proceeds of sale of the Property pursuant to the provisions of Section 12.4 of the Participation Agreement; provided, however, upon any sale of the Property pursuant to this Article 21, the Lessor shall obtain 32. 34 an appraisal which shall allocate the proceeds of such sale between the Land and the Improvements thereon. To the extent such appraisal indicates that the respective proceeds received with respect to Land and Improvements exceeds, after giving effect to the payment required under Section 21.1(c) hereof, the remaining Land Investment Balance and Improvements Investment Balance, respectively, such excess shall be promptly returned to Lessee. In no event shall any excess proceeds received with respect to the Land be applied to any deficiency with respect to the Improvements Investment Balance, nor shall any excess proceeds received with respect to the Improvements be applied to any deficiency with respect to the Land Investment Balance. - INDEMNITY FOR EXCESSIVE WEAR. If the proceeds of the sale described in Section 21.1(b) with respect to the Property, less all expenses incurred by Lessor in connection with such sale, shall be less than the Limited Recourse Amount for the Property at the time of such sale and if it shall have been determined (pursuant to the Appraisal Procedure) that the Fair Market Sales Value of the Property shall have been impaired by greater than expected wear and tear during the Term, Lessee shall pay to Lessor within ten (10) days after receipt of Lessor's written statement (a) the amount of such excess wear and tear determined by the Appraisal Procedure or (b) the amount of the Net Sale Proceeds Shortfall, whichever amount is less. - APPRAISAL PROCEDURE. For determining the Fair Market Sales Value of the Property or any other amount which may, pursuant to any provision of any Operative Agreement, be determined by an appraisal procedure, Lessor and Lessee shall use the following procedure (the "APPRAISAL PROCEDURE"). Lessor and Lessee shall endeavor to reach a mutual agreement as to such amount for a period of ten (10) days from commencement of the Appraisal Procedure, and if they cannot agree within ten (10) days, then two qualified appraisers, one chosen by Lessee and one chosen by Lessor, shall mutually agree thereupon, but if either party shall fail to choose an appraiser within twenty (20) days after notice from the other party of the selection of its appraiser, then the appraisal by such appointed appraiser shall be binding on Lessee and Lessor. If the two appraisers cannot agree within twenty (20) days after both shall have been appointed, then a third appraiser shall be selected by the two appraisers or, failing agreement as to such third appraiser within thirty (30) days after both shall have been appointed, by the American Arbitration Association. The decisions of the three appraisers shall be given within twenty (20) days of the appointment of the third appraiser and the decision of the appraiser most different from the average of the other two shall be discarded and such average shall be binding on Lessor and Lessee; provided that if the highest appraisal and the lowest appraisal are equidistant from the third appraisal, the third appraisal shall be binding on Lessor and Lessee. The fees and expenses of all of the appraisers shall be paid by Lessee. - CERTAIN OBLIGATIONS CONTINUE. During the Marketing Period, the obligation of Lessee to pay Rent with respect to the Property (including the installment of Basic Rent due on the Maturity Date) shall continue undiminished until payment in full to Lessor of the sale proceeds, the Maximum Residual Guarantee Amount, if any, the amount due under Section 21.3, if any, and all other amounts due to Lessor with respect to the Property. Lessor shall have the right, but shall be under no duty, to solicit bids, to inquire into the 33. 35 efforts of Lessee to obtain bids or otherwise to take action in connection with any such sale, other than as expressly provided in this Article 21. - - HOLDING OVER. If Lessee shall for any reason remain in possession of the Property after the expiration or earlier termination of this Lease (unless the Property is conveyed to Lessee), such possession shall be as a tenancy at sufferance during which time Lessee shall continue to pay Supplemental Rent that would be payable by Lessee hereunder were the Lease then in full force and effect with respect to the Property and Lessee shall continue to pay Basic Rent at an annual rate equal to the rate payable hereunder immediately preceding such expiration or earlier termination; provided, however, that from and after the sixtieth (60th) day Lessee shall remain in possession of the Property after such expiration or earlier termination, Lessee shall pay Basic Rent at an annual rate equal to two hundred percent (200%) of the Basic Rent payable hereunder immediately preceding such expiration or earlier termination. Such Basic Rent shall be payable from time to time upon demand by Lessor. During any period of tenancy at sufferance, Lessee shall, subject to the second preceding sentence, be obligated to perform and observe all of the terms, covenants and conditions of this Lease, but shall have no rights hereunder other than the right, to the extent given by law to tenants at sufferance, to continue its occupancy and use of the Property. Nothing contained in this Article 22 shall constitute the consent, express or implied, of Lessor to the holding over of Lessee after the expiration or earlier termination of this Lease as to the Property and nothing contained herein shall be read or construed as preventing Lessor from maintaining a suit for possession of the Property or exercising any other remedy available to Lessor at law or in equity. - - RISK OF LOSS. The risk of loss of or decrease in the enjoyment and beneficial use of the Property as a result of the damage or destruction thereof by fire, the elements, casualties, thefts, riots, wars or otherwise is assumed by Lessee, and Lessor shall in no event be answerable or accountable therefor. - - SUBLETTING AND ASSIGNMENT. Lessee may not assign this Lease or any of its rights or obligations hereunder in whole or in part. Lessee may, without the consent of Lessor, sublease the Property or a portion thereof to any Person. No sublease or other relinquishment of possession of the Property shall in any way discharge or diminish any of Lessee's obligations to Lessor hereunder and Lessee shall remain directly and primarily liable under this Lease as to the Property, or any portion thereof, so sublet. Any sublease of the Property shall be made subject to and subordinate to this Lease and to the rights of Lessor hereunder, and shall expressly provide for the surrender of the Property after an Event of Default hereunder. 34. 36 - SUBLEASES. Promptly following the execution and delivery of any sublease permitted by this Article 24, Lessee shall deliver a copy of such executed sublease to Lessor. - - ESTOPPEL CERTIFICATES. At any time and from time to time upon not less than twenty (20) days' prior request by Lessor, Lessee shall furnish to Lessor a certificate signed by an individual having the office of vice president or higher in Lessee certifying that this Lease is in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications); the dates to which the Basic Rent and Supplemental Rent have been paid; to the best knowledge of the signer of such certificate, whether or not Lessor is in default under any of its obligations hereunder (and, if so, the nature of such alleged default); and such other matters under this Lease as Lessor may reasonably request. Any such certificate furnished pursuant to this Article 25 may be relied upon by Lessor, and any existing or prospective mortgagee, purchaser or lender, and any accountant or auditor, of, from or to Lessor (or any Affiliate thereof). - - NO WAIVER. No failure by Lessor or Lessee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy upon a default hereunder, and no acceptance of full or partial payment of Rent during the continuance of any such default, shall constitute a waiver of any such default or of any such term. To the fullest extent permitted by law, no waiver of any default shall affect or alter this Lease, and this Lease shall continue in full force and effect with respect to any other then existing or subsequent default. - - ACCEPTANCE OF SURRENDER. Except as otherwise expressly provided in this Lease, no surrender to Lessor of this Lease or of all or any portion of the Property or of any interest therein shall be valid or effective unless agreed to and accepted in writing by Lessor and no act by Lessor or any representative or agent of Lessor, other than a written acceptance, shall constitute an acceptance of any such surrender. - - NO MERGER OF TITLE. There shall be no merger of this Lease or of the leasehold estate created hereby by reason of the fact that the same Person may acquire, own or hold, directly or indirectly, in whole or in part, (a) this Lease or the leasehold estate created hereby or any interest in this Lease or such leasehold estate, (b) the fee estate in the Property, except as may expressly be stated in a written instrument duly executed and delivered by the appropriate Person, or (c) a beneficial interest in Lessor. 35. 37 - - NOTICES. Unless otherwise specifically provided herein, all notices, consents, directions, approvals, instructions, requests and other communications required or permitted by the terms hereof to be given to any Person shall be given in writing by nationally recognized courier service and any such notice shall become effective one Business Day after delivery to such nationally recognized courier service specifying overnight delivery and shall be directed to the address of such Person as indicated: If to Lessee: LAM RESEARCH CORPORATION 4650 Cushing Parkway Fremont, California 94538 Attn: Craig Garber, Treasurer Telephone No: (510) 572-1875 Telecopy No: (510) 572-1586 If to Lessor: Scotiabanc Inc. 600 Peachtree Street NE, Suite 2700 Atlanta, Georgia 30308 Attention: William Brown, Managing Director Telephone No.: (404) 877-1501 Telecopy No.: (404) 888-8998 or such additional parties and/or other address as such party may hereafter designate. - - MISCELLANEOUS. Anything contained in this Lease to the contrary notwithstanding, all claims against and liabilities of Lessee or Lessor arising from events commencing prior to the expiration or earlier termination of this Lease shall survive such expiration or earlier termination. If any term or provision of this Lease or any application thereof shall be declared invalid or unenforceable, the remainder of this Lease and any other application of such term or provision shall not be affected thereby. If any right or option of Lessee provided in this Lease, including any right or option described in Articles 15, 16, 20 or 21, would, in the absence of the limitation imposed by this sentence, be invalid or unenforceable as being in violation of the rule against perpetuities or any other rule of law relating to the vesting of an interest in or the suspension of the power of alienation of property, then such right or option shall be exercisable only during the period which shall end twenty-one (21) years after the date of death of the last survivor of the descendants of Franklin D. Roosevelt, the former President of the United States, Henry Ford, the deceased automobile manufacturer, and John D. Rockefeller, the founder of the Standard Oil Company, known to be alive on the date of the execution and delivery of this Lease. 36. 38 - AMENDMENTS AND MODIFICATIONS. Neither this Lease nor any provision hereof may be amended, waived, discharged or terminated except by an instrument in writing signed by Lessor and Lessee. - SUCCESSORS AND ASSIGNS. All the terms and provisions of this Lease shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. - HEADINGS AND TABLE OF CONTENTS. The headings and table of contents in this Lease are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. - COUNTERPARTS. This Lease may be executed in any number of counterparts, each of which shall be an original, but all of which shall together constitute one and the same instrument. - GOVERNING LAW. THIS LEASE HAS BEEN DELIVERED IN, AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED - ENTIRELY WITHIN SUCH STATE, EXCEPT AS TO MATTERS RELATING TO THE CREATION, PERFECTION AND ENFORCEMENT OF LIENS AND SECURITY INTERESTS AND THE EXERCISE OF REMEDIES WITH RESPECT THERETO, WHICH SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED. - LIMITATIONS ON RECOURSE. Except as expressly set forth in the Operative Agreements, Lessee agrees to look solely to Lessor's estate and interest in the Property, the proceeds of sale thereof, any insurance proceeds or any other award or any third party proceeds received by Lessor in connection with the Property for the collection of any judgment requiring the payment of money by Lessor in the event of liability by Lessor, and no other property or assets of Lessor or any shareholder, owner or partner (direct or indirect) thereof, or any director, officer, employee, beneficiary, Affiliate of any of the foregoing shall be subject to levy, execution or other enforcement procedure for the satisfaction of Lessee's remedies under or with respect to this Lease, the relationship of Lessor and Lessee hereunder or Lessee's use of the Property or any other liability of Lessor to Lessee; provided that nothing in this Section 30.7 shall be construed to impair or limit the rights of Lessee against Lessor under the Operative Agreements. Nothing in this Section 30.7 shall be interpreted so as to limit the terms of Section 6.1 or 6.2. - RECORDATION OF LEASE. A memorandum of this Lease shall be recorded in the jurisdiction in which the Property is located, at Lessee's sole cost and expense. 37. 39 IN WITNESS WHEREOF, the parties have caused this Lease be duly executed and delivered as of the date first above written. LESSEE: LAM RESEARCH CORPORATION By: /s/ Craig Garber ------------------------------- Name: Craig Garber ------------------------------- Title: Treasurer ------------------------------- LESSOR: SCOTIABANC INC. By: /s/ F.C.H. Ashby ------------------------------- Name: F.C.H. Ashby ------------------------------- Title: Senior Manager, Loan Operations ------------------------------- 40 EXHIBIT A LEASE SUPPLEMENT 41 EXHIBIT B
LAND INVESTMENT BALANCE $10,695,405.14 IMPROVEMENTS INVESTMENT BALANCE $16,450,780.11 -------------- $27,146,185.25 ==============
42 TABLE OF CONTENTS
PAGE ---- article 1.............................................................................. 1.1 Definitions.............................................................1 article 2.............................................................................. 2.1 Property................................................................1 2.2 Lease Term..............................................................1 2.3 Title...................................................................1 article 3.............................................................................. 3.1 Rent....................................................................2 3.2 Payment of Basic Rent...................................................2 3.3 Supplemental Rent.......................................................2 3.4 Performance on a Non-Business Day.......................................2 3.5 Method of Payment.......................................................3 article 4.............................................................................. 4.1 Utility Charges.........................................................3
i. 43 TABLE OF CONTENTS (CONTINUED)
PAGE ---- article 5.............................................................................. 5.1 Quiet Enjoyment.........................................................3 article 6.............................................................................. 6.1 Net Lease; No Setoff; Etc...............................................3 6.2 No Termination or Abatement.............................................4 article 7.............................................................................. 7.1 Ownership of the Property...............................................5 7.2 Liens and Security Interests............................................5 article 8.............................................................................. 8.1 Condition of the Property...............................................7 8.2 Possession and Use of the Property......................................8 article 9.............................................................................. 9.1 Compliance with Legal Requirements and Insurance Requirements...........8 article 10............................................................................. 10.1 Maintenance and Repair; Return..........................................8
ii. 44 TABLE OF CONTENTS (CONTINUED)
PAGE ---- 10.2 Right of Inspection.....................................................9 10.3 Environmental Inspection................................................9 article 11............................................................................. 11.1 Modifications, Substitutions and Replacements...........................10 article 12............................................................................. 12.1 Warranty of Title.......................................................11 12.2 Grants and Releases of Easements........................................11 article 13............................................................................. 13.1 Permitted Contests Other Than in Respect of Impositions.................12 article 14............................................................................. 14.1 Public Liability and Workers' Compensation Insurance....................12 14.2 Hazard and Other Insurance..............................................13 14.3 Coverage................................................................13 article 15............................................................................. 15.1 Casualty and Condemnation...............................................14
iii. 45 TABLE OF CONTENTS (CONTINUED)
PAGE ---- 15.2 Environmental Matters...................................................15 15.3 Notice of Environmental Matters.........................................16 article 16............................................................................. 16.1 Termination upon Certain Events.........................................16 16.2 Procedures..............................................................16 article 17............................................................................. 17.1 Events of Default.......................................................17 17.2 Final Liquidated Damages................................................19 17.3 Lease Remedies..........................................................19 17.4 Waiver of Certain Rights................................................23 17.5 Assignment of Rights Under Contracts....................................24 17.6 Power of Sale and Foreclosure...........................................24 17.7 Security Agreement and Fixture Filing...................................27 17.8 Remedies Cumulative.....................................................28 17.9 Lessee's Right to Cure..................................................28
iv. 46 TABLE OF CONTENTS (CONTINUED)
PAGE ---- article 18............................................................................. 18.1 Lessor's Right to Cure Lessee's Defaults................................28 article 19............................................................................. 19.1 Provisions Relating to Lessee's Termination of this Lease or Exercise of Purchase Options............................................29 article 20............................................................................. 20.1 Purchase Option.........................................................29 20.2 Maturity Date Purchase Option...........................................29 20.3 Extension of Expiration Date............................................30 article 21............................................................................. 21.1 Sale Procedure..........................................................30 21.2 Application of Proceeds of Sale.........................................31 21.3 Indemnity for Excessive Wear............................................31 21.4 Appraisal Procedure.....................................................31 21.5 Certain Obligations Continue............................................31
v. 47 TABLE OF CONTENTS (CONTINUED)
PAGE ---- article 22............................................................................. 22.1 Holding Over............................................................32 article 23............................................................................. 23.1 Risk of Loss............................................................32 article 24............................................................................. 24.1 Subletting and Assignment...............................................32 24.2 Subleases...............................................................32 article 25............................................................................. 25.1 Estoppel Certificates...................................................33 article 26............................................................................. 26.1 No Waiver...............................................................33 article 27............................................................................. 27.1 Acceptance of Surrender.................................................33 article 28............................................................................. 28.1 No Merger of Title......................................................33
vi. 48 TABLE OF CONTENTS (CONTINUED)
PAGE ---- article 29............................................................................. 29.1 Notices.................................................................33 article 30............................................................................. 30.1 Miscellaneous...........................................................34 30.2 Amendments and Modifications............................................34 30.3 Successors and Assigns..................................................34 30.4 Headings and Table of Contents..........................................34 30.5 Counterparts............................................................35 30.6 Governing Law...........................................................35 30.7 Limitations on Recourse.................................................35 30.8 Recordation of Lease....................................................35 Exhibit A LEASE SUPPLEMENT.....................................................37
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viii. EX-10.71 3 EXHIBIT-10.71 1 EXHIBIT 10.71 - -------------------------------------------------------------------------------- PARTICIPATION AGREEMENT among LAM RESEARCH CORPORATION, as Lessee, SCOTIABANC INC., as Lessor, THE BANK OF NOVA SCOTIA, as a Rent Purchaser and as Agent for the Rent Purchasers ----------------------------- Dated as of January 19, 2000 ----------------------------- - -------------------------------------------------------------------------------- 2 PARTICIPATION AGREEMENT THIS PARTICIPATION AGREEMENT, dated as of January 19, 2000 (this "Agreement"), is among LAM RESEARCH CORPORATION, a Delaware corporation (the "Lessee"); SCOTIABANC INC., a Delaware corporation, as Lessor (the "Lessor"), and THE BANK OF NOVA SCOTIA, as a Rent Purchaser (together with the other financial institutions as may from time to time become Rent Purchasers, the "Rent Purchasers") and as Agent for the Rent Purchasers (in such capacity, the "Agent"). Capitalized terms used but not otherwise defined in this Agreement shall have the meanings set forth in Annex A hereto. PRELIMINARY STATEMENT In consideration of the mutual agreements herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: - THE RENT PURCHASE The Rent Purchasers have agreed to purchase from the Lessor an interest in the Lease Balance ("Rent Purchaser Advances") in an aggregate principal amount of up to $23,942,935.39 in order for the Lessor to acquire the Land and Improvements, and to pay other Project Costs. In consideration of the receipt of the proceeds of such Rent Purchaser Advances, the Lessor does hereby absolutely sell, assign, transfer and convey unto the Rent Purchasers all of the Lessor's right, title and interest in and to the interests with respect to the Lease Balance Debt; provided that this sale is without recourse to the Lessor (except to the extent of its representations expressly set forth herein). The sale of the interests in the Lease Balance Debt herein is a presently effective, absolute and unconditional assignment and transfer of such interests. As a further inducement to the Rent Purchasers, the Lessor covenants and agrees not to assert any claim or cause of action against the Rent Purchasers or seek to recover such interests on the grounds that the agreement in this Section 1 is a collateral assignment or is given as security for indebtedness rather than as an absolute present assignment. The Rent Purchasers shall receive interest on the Rent Purchaser Advances at the Lease Rate applicable to LIBOR Rent Purchaser Advances or ABR Rent Purchaser Advances, as the case may be, and shall be entitled to the benefits of the Pledge Agreement in accordance with their pro rata share of the Lease Balance together with the Lessor. On the Funding Date, each Rent Purchaser shall make a payment in respect of its purchase of the interest being funded by it on such date by making its Rent Purchaser Advance available to the Agent prior to 12:00 noon New York time by wire transfer in 1. 3 immediately available funds at the account of the Agent at its payment office as set forth on SCHEDULE 2.6, or at such other account as to which the Agent shall notify such Rent Purchaser in writing, and the Agent shall forward such amounts to the Lessor's account at its payment office as set forth on SCHEDULE 2.6, or such other account as the Lessor may specify in writing, not later than 2:00 p.m. New York time on the same date. In the event a Rent Purchaser shall fail to make available to the Agent the full amount of such Rent Purchaser Advance by 12:00 noon New York time and unless Agent receives notice from such Rent Purchaser that it will not make available its pro rata share of the Rent Purchaser Advance, the Agent may (but shall not be required to) fund such Rent Purchaser Advance, and the amount of the Rent Purchaser Advance so funded shall be for the account of such Rent Purchaser. Such Rent Purchaser shall pay to the Agent on demand the amount of such Advance with interest thereon at a rate equal to the average federal funds rate for the period from the Funding Date to the date on which such Rent Purchaser makes such Advance available to the Agent in immediately available funds at the account referenced above. If such Rent Purchaser does not make such advance available to the Agent within three (3) Business Days after the Funding Date, the Agent shall be entitled to recover such advance with interest thereon at the Overdue Rate, on demand, from the Rent Purchaser. Upon the request of a Rent Purchaser, the Lessor agrees that it will cause a Uniform Commercial Code financing statement or statements covering all the interests sold to such Rent Purchaser pursuant to this Agreement to be executed and delivered by the Lessor, as debtor, specifying such Rent Purchaser as secured party, and such financing statement or statements will be duly filed in all places necessary to perfect the sale of the interests sold to such Rent Purchaser pursuant to this Agreement, and all filing and recordation fees payable in connection therewith will be paid by such Rent Purchaser. Such financing statements shall state that they are being filed to perfect a sale of such interests, and that no inference that a security interest has been granted to such Rent Purchaser shall be made as a result of such filing. - LESSOR CONTRIBUTIONS - LESSOR CONTRIBUTIONS. Subject to the terms and conditions of this Agreement, and in reliance on the representations and warranties of each of the parties hereto contained herein or made pursuant hereto, on the Funding Date the Lessor shall contribute ("Lessor Contribution") an amount equal to the Lessor's Commitment Percentage of the amount of the aggregate Advance requested by the Lessee prior to the Funding Date. The aggregate amount of the Lessor Contribution made by the Lessor shall not exceed the Lessor Commitment as set forth in SCHEDULE 2.1 hereto. Notwithstanding any other provision hereof, the Lessor shall not be obligated to make any Advance if, after giving effect thereto, (i) the aggregate outstanding amounts of the Rent Purchaser Advances and the Lessor Contribution would exceed the Aggregate Commitment Amount, or (ii) the Lease Balance would exceed the lesser of (x) 110 percent of the Project Costs and (y) the 2. 4 Fair Market Sales Value of the Property as set forth in the Appraisal of the Property delivered pursuant to Section 6.2 hereof. Notwithstanding any other provision hereof, Lessor shall not be obligated to make available the Lessor Contribution if, after giving effect to the proposed Lessor Contribution, the outstanding aggregate amount of the Lessor Contribution would exceed the Lessor Commitment. The Lessor shall use the Lessor Contribution to pay a portion of the Project Costs simultaneously and pro rata with the fundings by the Rent Purchasers. - YIELD. - The amount of outstanding Rent Purchaser Advances shall accrue interest as set forth in SECTION 1 hereof. The amount of Lessor contributions outstanding from time to time shall accrue yield at the Lease Rate applicable to LIBOR Lessor Contributions or ABR Lessor Contributions, as the case may be. Such interest and yield are referred to collectively herein as "Yield". - Yield shall be calculated using the actual number of days elapsed and on , when the Lease Rate is based on the Adjusted LIBOR, a 360-day year basis and, if calculated at the ABR, a 360-day year basis if the ABR is calculated at the Federal Funds Effective Rate, and a 365-, or, if applicable, 366-, day year basis if the ABR is calculated at the Base Rate. If all or any portion of the Lease Balance, any interest or Yield payable thereon or any other amount payable hereunder shall not be paid when due (whether at stated maturity, acceleration thereof or otherwise), such overdue amount shall bear interest at a rate per annum which is equal to the Overdue Rate. Upon the occurrence, and during the continuance of an Event of Default, the amount of and, to the extent permitted by law, interest on (or Yield on) the Lease Balance and any other amounts owing hereunder or under the other Operative Agreements shall bear interest, payable on demand, at a per annum rate which is equal to the Overdue Rate. - The Lessor shall distribute, in accordance with Section 12.1, the Lessor Basic Rent, the Debt Basic Rent and all other amounts due with respect to the Lessor Contribution and Rent Purchaser Advances paid to the Lessor by the Lessee under the Lease or the other Operative Agreements from time to time. - Yield on the outstanding Lessor Contribution and Rent Purchaser Advances shall be due and payable by the Lessee in cash on each Specified Interest Payment Date. - If not repaid sooner, the outstanding aggregate Lessor Contribution and Rent Purchaser Advances shall be repaid in full on the Maturity Date. - INTEREST PERIOD SELECTION ELECTIONS. By delivering an Interest Period Selection Notice to the Lessor with respect to the Lessor Contribution and to the Agent with respect to Rent Purchaser Advances, respectively, the Lessee may from time to time during the Term irrevocably select, on not less than three (3) nor more than five (5) Business Days' notice (other than the initial Interest Period with respect to the Advance to be made on the Funding Date, where such Advance is to bear interest at a rate equal to the ABR and notice may be given on the Funding Date), the duration for the next succeeding Interest Period; provided, however, that (a) in the absence of a delivery of an Interest Period 3. 5 Selection Notice with respect to any Rent Purchaser Advance or Lessor Contribution at least three (3) Business Days before the last day of the then current Interest Period with respect thereto, the Lessee shall be deemed to have selected a one (1) month Interest Period for such Rent Purchaser Advance or Lessor Contribution, (b) each such selection shall be prorated among the applicable outstanding Rent Purchaser Advances and Lessor Contribution of all Participants, and (c) the outstanding Rent Purchaser Advances and Lessor Contribution may not be apportioned into more than five (5) separate Interest Periods pursuant to this Section 2.3 at any one time. - PREPAYMENTS. - VOLUNTARY PREPAYMENTS. The Lessee shall have the right to prepay an amount equal to the aggregate outstanding Lease Balance in whole, but not in part, pursuant to the exercise of the purchase options permitted under the Lease without premium or penalty, except for any payments due pursuant to Section 11.6 below. - MANDATORY PREPAYMENTS. - If at any time the sum of the aggregate amount of outstanding Rent Purchaser Advances and Lessor Contribution shall exceed the Aggregate Commitment Amount, the Lessee shall immediately make payment on the Rent Purchaser Advances or Lessor Contribution in an amount sufficient to eliminate such excess. Payments required to be made hereunder shall be applied first to ABR Rent Purchaser Advances or ABR Lessor Contributions and second to LIBOR Rent Purchaser Advances or LIBOR Lessor Contributions in direct order of their Interest Period maturities. All amounts payable by the Lessee pursuant to Article 15, 16, 17, 20 or 21 of the Lease shall be applied to the Rent Purchaser Advances and the Lessor Contribution in the manner set forth in Section 12. - NOTICE. The Lessee will provide irrevocable notice to the Lessor and the Agent of any prepayment of the Lessor Contribution or Rent Purchaser Advances at least three (3) Business Days prior to the date of prepayment. - FEES. The Lessee agrees to pay to the Lessor, the Agent and the Rent Purchasers fees in accordance with the Fee Letter. - PAYMENTS. All payments (including prepayments) to be made by the Lessee hereunder and under the Lease, whether on account of the Lessor Contribution, Rent Purchaser Advances or Yield or interest thereon or otherwise, shall be made without setoff or counterclaim and shall be made prior to 10:00 a.m., San Francisco time, on the due date thereof to the Lessor for the account of the Rent Purchasers and the Lessor, at the 4. 6 Lessor's office specified in SCHEDULE 2.6 hereto, in Dollars and in immediately available funds. - SUMMARY OF THE TRANSACTIONS - OPERATIVE AGREEMENTS. On the Closing Date, each of the respective parties thereto shall execute and deliver this Agreement, the Lease, the Pledge Agreement and such other documents, instruments, certificates and opinions of counsel as are required by the terms hereof or agreed to by the parties hereto. - PROPERTY ACQUISITION AND LEASE. On the Funding Date and subject to the terms and conditions of this Agreement, (a) the Lessor will make the Lessor Contribution in accordance with Section 2 hereof, (b) the Rent Purchasers will make Rent Purchaser Advances in accordance with Section 5 hereof, (c) the Lessor will acquire the Land and the Improvements, and (d) the Lessor will simultaneously lease all of its right, title and interest in the Property to the Lessee. - THE CLOSING All documents and instruments required to be delivered on the Closing Date shall be delivered at the offices of Cooley Godward LLP, 5 Palo Alto Square, 3000 El Camino Real, Palo Alto, CA 94306, or at such other location as may be determined by the Lessor and the Lessee. - FUNDING OF ADVANCES - GENERAL. To the extent funds have been made available to or advanced by the Lessor as Rent Purchaser Advances and the Lessor Contribution, the Lessor will make advances of such funds in accordance with the terms and conditions of this Agreement and the other Operative Agreements in order to provide sufficient funds to: (i) allow the Lessor, at the direction of the Lessee, to acquire the Land and the Improvements in accordance with the terms of this Agreement and the other Operative Agreements; (ii) allow the Lessor, on behalf of the Lessee, to pay Transaction Expenses; and (iii) pay all other Project Costs. - PROCEDURES FOR FUNDING. - Not less than three (3) Business Days prior to the proposed Funding Date (other than the Advance to be made on the Funding Date, where such Advance is to bear interest at a rate equal to the ABR and notice may be given on the Funding Date), the Lessee shall deliver to the Lessor and the Agent, a request for Advance and an Interest Period Selection Notice. - So long as no Default or Event of Default has occurred and is continuing and subject to the Lessor and the Agent having each received the materials required by Section 6.2 on 5. 7 the Funding Date (i) the Rent Purchasers shall make Rent Purchaser Advances to the Lessor in an aggregate amount equal to eighty-eight and two tenths percent (88.20%) of the funds requested up to an aggregate principal amount equal to the Available Rent Purchaser Commitments; (ii) the Lessor shall make the Lessor Contribution in an amount equal to eleven and eight tenths percent (11.8%) of the funds requested, up to an amount equal to the Available Lessor Commitment; and (iii) the total amount of such Rent Purchaser Advances and the Lessor Contribution shall be paid to the Lessor to pay the Project Costs. - ALLOCATION OF ADVANCES BETWEEN LAND AND IMPROVEMENTS. In the event the Fair Market Sales Value of the Land leased pursuant to the Lease as set forth in the Appraisal is greater than twenty-five percent of the aggregate Fair Market Sales Value of the Property as set forth in the Appraisal, Lessor shall determine a separate Land Investment Balance and Improvements Investment Balance for the Property and the same as of the Closing Date shall be set forth in Exhibit B to the Lease, and Lessee shall execute and deliver a separate Lease Supplement for each of the Land and the Improvements. - PLEDGED COLLATERAL. - MANDATORY PLEDGED COLLATERAL. If as of the last day of any Fiscal Quarter (i) the Lessee's EBITDA equals an amount less than (x) through the Fiscal Quarter ending December 31, 1999, $92,000,000, (y) from January 1, 2000 through March 31, 2000, $167,000,000, and (z) thereafter, $200,000,000, or (ii) the Lessee's Cash Balance equals an amount less than $200,000,000, provided, that if as of the date six (6) months prior to the Maturity Date, the Lessee has not refinanced the Subordinated Notes, there shall be deducted from the Cash Balance at all times thereafter the principal amount of such outstanding Subordinated Notes in determining the Cash Balance under this clause (ii), then (x) in the case of clause (i), on or before the third Business Day (or if such date is not a Business Day, the next succeeding Business Day) (the "Deposit Date") following the date on which financial statements are delivered pursuant to Section 9.3(a)(i) or (ii) hereof until the third Business Day following the date on which financial statements are delivered pursuant to Section 9.3(a)(i) or (ii) hereof for the Fiscal Quarter when the Lessee shall satisfy such tests, and (y) in the case of clause (ii), on such specified date (also, a "Deposit Date") for so long as any Obligations remain outstanding or until the third Business Day following the date on which financial statements are delivered pursuant to Section 9.3(a)(i) or (ii) hereof for the second consecutive Fiscal Quarter when the Lessee shall satisfy such tests, the Lessee shall deliver Pledged Collateral to the Collateral Agent in an amount equal to 100% of the aggregate outstanding Advances plus $300,000. Thereafter, the Lessee covenants to maintain the Value of the Pledged Collateral at a level equal to 100% of the aggregate outstanding Advances plus $300,000, and within two (2) Business Days after receipt of notice from the Collateral Agent that the Value of the Pledged Collateral is less than 100% of the aggregate outstanding Advances plus $300,000, the Lessee shall be obligated to deliver a portion of the Pledged Collateral in an amount required to maintain the Value of the Pledged Collateral at a level equal to 100% of the aggregate outstanding Advances plus $300,000. Each such deposit (collectively, the "Pledge") shall be the 6. 8 property of the Collateral Agent and shall be held and administered in accordance with the Pledge Agreement. - OPTIONAL PLEDGED COLLATERAL. Notwithstanding the requirements of Section 5.4(a), from time to time, the Lessee may make a deposit of additional Pledged Collateral to the Collateral Agent in an amount equal to not less than 100% of the aggregate outstanding Advances in order to have a lower Applicable Margin apply to the outstanding Advances. In order to maintain a lower Applicable Margin, the Lessee covenants to maintain the Value of the Pledged Collateral at a level equal to 100% of the aggregate outstanding Advances, and within two (2) Business Days after receipt of notice from the Collateral Agent that the Value of the Pledged Collateral is less than 100% of the aggregate outstanding Advances, the Lessee shall deliver a portion of Pledged Collateral in an amount required to maintain the Value of the Pledged Collateral at a level equal to 100% of the aggregate outstanding Advances. Each such deposit shall constitute part of the Pledge, shall be the property of the Collateral Agent and shall be held and administered in accordance with the Pledge Agreement. - CONDITIONS OF THE CLOSING AND ADVANCES - GENERAL CONDITIONS TO THE CLOSING DATE. The Closing Date is subject to the satisfaction, immediately prior to or concurrently therewith, of the following conditions precedent: - OPERATIVE AGREEMENTS. Each of the Operative Agreements entered into on the Closing Date or subsequently shall have been duly authorized, executed, acknowledged and delivered by the parties thereto and shall be in full force and effect, and no Default shall exist thereunder (both before and after giving effect to the transactions contemplated by the Operative Agreements), and the Rent Purchasers and the Lessor shall have received a fully executed copy of each of the Operative Agreements. - TAXES. All taxes, fees and other charges in connection with the execution, delivery, and, where applicable, recording, filing and registration of the Operative Agreements shall have been paid or provisions for such payment shall have been made to the reasonable satisfaction of the Agent and the Lessor. - GOVERNMENTAL APPROVALS. All necessary (or, in the reasonable opinion of the Agent, the Lessor and their respective counsel, advisable) Governmental Actions shall have been obtained or made and be in full force and effect. - LITIGATION. No action or proceeding shall have been instituted before any Governmental Authority, nor shall any order, judgment or decree have been issued or proposed to be issued by any Governmental Authority (i) to set aside, restrain, enjoin or prevent the full 7. 9 performance of this Agreement, any other Operative Agreement or any of the transactions contemplated hereby or thereby or (ii) other than as set forth on Schedule 7.2, which is reasonably likely to have a Material Adverse Effect. - LEGAL REQUIREMENTS. In the opinion of the Agent, the Lessor and their respective counsel, the transactions contemplated by the Operative Agreements do not and will not violate in any material respect any Legal Requirements and do not and will not subject the Rent Purchasers or the Lessor to any adverse regulatory prohibitions or constraints. - CORPORATE PROCEEDINGS OF THE LESSEE. The Agent and the Lessor shall have received a copy of the resolutions or minutes, in form and substance reasonably satisfactory to the Agent and the Lessor, of the Board of Directors of the Lessee authorizing the execution, delivery and performance of this Agreement and the other Operative Agreements to which it is a party, certified by the Secretary or an Assistant Secretary of the Lessee as of the Closing Date, which certificate shall be in form and substance reasonably satisfactory to the Agent and the Lessor and shall state that the resolutions or minutes thereby certified have not been amended, modified, revoked or rescinded. - LESSEE INCUMBENCY CERTIFICATE. The Agent and the Lessor shall have received a certificate of the Lessee, dated the Closing Date, as to the incumbency and signature of the officers of the Lessee executing any Operative Agreement reasonably satisfactory in form and substance to the Agent and the Lessor, executed by the Secretary or any Assistant Secretary of the Lessee. - LESSEE'S OFFICER'S CERTIFICATE. The Agent and the Lessor shall each have received a Certificate of the President or any Vice President of the Lessee, dated as of the Closing Date, stating that (i) each and every representation and warranty of the Lessee contained in the Operative Agreements to which it is a party is true and correct on and as of the Closing Date; (ii) no Default or Event of Default has occurred and is continuing under any Operative Agreement; (iii) each Operative Agreement to which the Lessee is a party is in full force and effect with respect to it; and (iv) the Lessee has duly performed and complied with all covenants, agreements and conditions contained herein or in any Operative Agreement required to be performed or complied with by it on or prior to the Closing Date. - GOOD STANDING. The Agent and the Lessor shall have received (i) Certificates of the Secretaries of State of the State of Delaware and the State of California dated as of a recent date stating that the Lessee is a corporation in good legal standing under the laws of such states, and (ii) Certificates of the Franchise Tax Boards of the State of Delaware and the State of California dated as of a recent date stating that the Lessee is in good standing under the laws of such states. - LESSEE'S CORPORATE DOCUMENTS. The Agent and the Lessor shall have received true and complete copies of the certificate or articles of incorporation and by-laws of the Lessee, certified as of the Closing Date as complete and correct copies thereof by the Secretary or an Assistant Secretary of the Lessee. 8. 10 - CONSENTS, LICENSES AND APPROVALS. The Agent and the Lessor shall have received a certificate of the President or a Vice President of the Lessee stating that any consents, licenses and filings required to consummate the transaction contemplated by this Agreement are in full force and effect, and each such consent, authorization and filing shall be in form and substance reasonably satisfactory to the Agent and the Lessor. - LEGAL OPINION. The Agent and the Lessor shall have received the executed legal opinion of Heller Ehrman White & McAuliffe, special counsel to the Lessee. - ENVIRONMENTAL AUDIT. - The Lessor and the Agent shall have received not less than ten (10) days prior to the Funding Date an Environmental Audit with respect to the Land being acquired on the Funding Date, prepared by the Environmental Engineer, and the results of the Environmental Audit shall be in form and substance satisfactory to the Lessor and the Agent; and - the Lessor and the Agent shall have received letters from the Environmental Engineer stating, among other things, that the Rent Purchasers and the Lessor may rely in all respects on the Environmental Audit and other environmental reports with respect to the Property which have been prepared by such firm as if they were addressed to them. - SURVEY. The Lessor and the Agent shall have received, and the Title Company shall have received, a survey of the Property being acquired on the Funding Date, certified to the Lessor and the Title Company in a manner satisfactory to them, dated as of a date within three (3) months of the Funding Date, by an independent professionally licensed land surveyor satisfactory to the Lessor, which survey shall be made in accordance with the Minimum Standard Detail Requirements for Land Title Surveys jointly established and adopted by the American Land Title Association and the American Congress on Surveying and Mapping in 1992, and, without limiting the generality of the foregoing, there shall be surveyed and shown on such survey the following: (i) the locations on such Property of all the buildings, structures and other improvements, if any, and the established building setback lines; (ii) the lines of streets abutting such Property; (iii) all access and other easements appurtenant to such Property; (iv) all roadways, paths, driveways, easements, encroachments and overhanging projections and similar encumbrances affecting such Property, whether recorded, apparent from a physical inspection of the Property or otherwise known to the surveyor; (v) any encroachments on any adjoining property by the building, structures and improvements on such Property; and (vi) if such Property is described as being on a filed map, a legend relating the survey to said map. - APPRAISAL. The Lessor and the Agent shall have received an Appraisal of the Property, which Appraisal shall show as of the Funding Date the Fair Market Sales Value of the Property, and meet the other applicable requirements set forth in the definition of the term "Appraisal" contained in Annex A. - LIEN SEARCHES. The Lessor and the Agent shall have received the results of a recent search by a Person reasonably satisfactory to the Lessor and the Agent, of the Uniform 9. 11 Commercial Code, judgement and tax lien filings which may have been filed in State of California with respect to personal property of the Lessee, and the results of such search shall be satisfactory to the Lessor and the Agent. - REPRESENTATIONS. The representations and warranties of the Lessee and the Lessor contained herein and in each of the other Operative Agreements shall be true and correct. - PERFORMANCE OF AGREEMENTS. The parties hereto and thereto shall have performed their respective agreements to be performed on or prior to the Closing Date contained herein and in the other Operative Agreements on or prior to the Closing Date. - FEES. The Lessor and the Agent and the Rent Purchasers shall have received the fees pursuant to the Fee Letter. - CONDITIONS TO RENT PURCHASERS' AND LESSOR'S OBLIGATIONS TO MAKE RENT PURCHASER ADVANCES AND LESSOR CONTRIBUTIONS. The agreement of each Rent Purchaser to make the Rent Purchaser Advance to the Lessor, and of the Lessor to make the Lessor Contribution is further subject to the satisfaction, immediately prior to or concurrently with the making of such Rent Purchaser Advances and Lessor Contribution, of the following conditions precedent: - TITLE. Title to the Property being acquired on the Funding Date shall conform to the representations and warranties set forth in Section 7.2(w). - TITLE POLICY. The Lessor shall have received an owner's title policy, or marked up unconditional binder for such insurance, dated the Funding Date, for the Property being acquired on the Funding Date, insuring the Lessor that the Lien of the Lease is a first and primary Lien in the Lessee's interest in the Improvements and the Land; and the Lessor shall have received evidence reasonably satisfactory to it that all premiums in respect of such policy have been paid or provision made therefor. - TITLE DOCUMENTS. The Lessor shall have received a copy of all recorded documents referred to, or listed as exceptions to title in, the title policy referred to above. - INSURANCE. The Lessor and the Agent shall have received evidence in form and substance satisfactory to them that all of the requirements of Article 14 of the Lease shall have been satisfied. - LEASE. The Lessor and the Agent shall have received the Lease Supplement, executed by the Lessee, and assuming proper recordation of the Memorandum of Lease, the Lease shall constitute a valid and perfected first lien on the Property and the Improvements, subject only to Permitted Exceptions. - ACTIONS TO PERFECT LIENS. The Lessor shall have received evidence in form and substance satisfactory to it that all filings, recordings, registrations and other actions, including, without limitation, the filing of duly executed financing statements on form 10. 12 UCC-1, necessary or, in the opinion of the Lessor and the Agent, desirable to perfect the Liens created by the Security Documents shall have been completed. - BRINGDOWN CERTIFICATE. The Lessor and the Agent shall have received an Officer's Certificate on behalf of the Lessee dated as of the Funding Date stating that (i) the representations and warranties of the Lessee contained herein and in each of the other Operative Agreements are true and correct in all material respects as of the Funding Date as though made as of the Funding Date, and (ii) no Default or Event of Default has occurred and is continuing. - PERFORMANCE OF AGREEMENTS. The parties hereto and thereto shall have performed their respective agreements contained herein and in the other Operative Agreements on or prior to such Funding Date. - REPRESENTATIONS AND WARRANTIES - REPRESENTATIONS AND WARRANTIES OF THE LESSOR ON THE CLOSING DATE. The Lessor represents and warrants to each of the other parties hereto as of the Closing Date as follows: - DUE ORGANIZATION, ETC. It is a duly organized and validly existing corporation in good standing under the laws of the jurisdiction of its organization and has the power and authority to carry on its business as now conducted and to enter into and perform its obligations under this Agreement, each Operative Agreement to which it is a party and each other agreement, instrument and document executed and delivered by it on the Closing Date in connection with or as contemplated by each such Operative Agreement to which it is or will be a party. - AUTHORIZATION; NO CONFLICT. The execution, delivery and performance of each Operative Agreement to which it is a party have been duly authorized by all necessary action on its part and neither the execution and delivery thereof by the Lessor, nor the consummation of the transactions contemplated thereby by the Lessor, nor compliance by it with any of the terms and provisions thereof (i) requires or will require any approval of (which approval has not been obtained) the shareholders of, or approval or consent of any trustee or holders of any indebtedness or obligations of the Lessor, (ii) contravenes or will contravene any Legal Requirement applicable to or binding on it as of the date hereof, (iii) does or will contravene or result in any breach of or constitute any default under its articles of incorporation or by-laws or equivalent documents, or result in the creation of any Lessor Lien upon the Property or any part thereof, or (iv) does or will require any Governmental Action by any Governmental Authority. - ENFORCEABILITY, ETC. Each Operative Agreement to which it is a party has been duly executed and delivered by it and constitutes a legal, valid and binding obligation enforceable against it in accordance with the terms thereof, subject, in each case, as to enforceability, bankruptcy, insolvency, reorganization and other similar laws affecting enforcement of creditor rights generally (insofar as any such law relates to the bankruptcy, insolvency, reorganization or similar event of the Lessor) and, as to the 11. 13 availability of specific performance or other injunctive relief, subject to the discretionary power of a court to deny such relief and to general equitable principles. - ERISA. The Lessor is making the Lessor Contribution contemplated to be made by it hereunder for its own account and with its general corporate assets in the ordinary course of its business, and no part of such amount constitutes the assets of any Employee Benefit Plan. - LITIGATION. No litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or threatened by or against the Lessor (a) with respect to any of the Operative Agreements or any of the transactions contemplated hereby or thereby, or (b) which could reasonably be expected to have a material adverse effect on the assets, liabilities, operations, business or financial condition of the Lessor. - ASSIGNMENT. It has not assigned or transferred any of its right, title or interest in or under the Lease, any Operative Document or the Property, except in accordance with the other Operative Agreements. - NO DEFAULT. The Lessor is not in default under or with respect to any of its Contractual Obligations in any respect which could have a material adverse effect on the assets, liabilities, operations, business or financial condition of the Lessor. No Default or Event of Default attributable to it has occurred and is continuing. - USE OF PROCEEDS. The proceeds of the Rent Purchaser Advances and the Lessor Contribution shall be applied by the Lessor solely in accordance with the provisions of the Operative Agreements. - CHIEF PLACE OF BUSINESS. The Lessor's chief place of business, chief executive office and office where the documents, accounts and records relating to the transactions contemplated by this Agreement and each other Operative Agreement are kept are located at 600 Peachtree Street NE, Suite 2700, Atlanta, Georgia 30308. - REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Lessor set forth in the Operative Agreements are true and correct. The Lessor is in compliance with its respective obligations under the Operative Agreements. - CONDITIONS PRECEDENT CONTAINED IN THE OPERATIVE AGREEMENTS. All conditions precedent contained in this Agreement and in the other Operative Agreements to be satisfied by the Lessor relating to the Advances have been satisfied in full. - REPRESENTATIONS AND WARRANTIES OF THE LESSEE ON THE CLOSING DATE AND THE FUNDING DATE. Subject to SCHEDULE 7.2 hereto, the Lessee represents and warrants to each of the other parties hereto as of the Closing Date and the Funding Date as follows: - ORGANIZATION; POWERS. Each of the Lessee and its Subsidiaries (i) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (ii) has all requisite power and authority to own its property and assets and 12. 14 to carry on its business as now conducted and as proposed to be conducted, (iii) is qualified to do business in every jurisdiction where such qualification is required, except where the failure so to qualify would not result in a Material Adverse Effect, and (iv) has the power and authority to execute, deliver and perform its obligations under each of the Operative Agreements and each other agreement or instrument contemplated thereby to which it is or will be a party. - AUTHORIZATION. The execution, delivery and performance by the Lessee of each of the Operative Agreements to which it is a party (i) have been duly authorized by all requisite action, including, if required, stockholder action on the part of the Lessee and (ii) will not (A) violate (1) any provision of law, statute, rule or regulation, or of the certificate or articles of incorporation or other constitutive documents or by-laws of the Lessee or any Subsidiary, (2) any order of any Governmental Authority, or (3) any provision of any indenture, agreement or other instrument to which the Lessee or any Subsidiary is a party or by which any of them or any of their property is or may be bound, including, without limitation, the Credit Facility and the Subordinated Notes, (B) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any such indenture, agreement or other instrument, or (C) result in the creation or imposition of any Lien upon or with respect to any property or assets now owned or hereafter acquired by the Lessee or any Subsidiary except in accordance with the Operative Agreements. - ENFORCEABILITY. This Agreement and each of the other Operative Agreements to which the Lessee is a party has been duly executed and delivered by the Lessee and constitutes a legal, valid and binding obligation of the Lessee enforceable against the Lessee in accordance with its terms, subject, in each case as to enforceability, to bankruptcy, insolvency, reorganization and other similar laws affecting enforcement of creditor rights generally (insofar as any such law relates to the bankruptcy, insolvency, reorganization or similar event of the Lessee) and, as to the availability of specific performance or other injunctive relief, subject to the discretionary power of a court to deny such relief and to general equitable principles. - GOVERNMENTAL APPROVALS. No action, consent or approval of, registration or filing with or any other action by any Governmental Authority is or will be required by the Lessee in connection with the purchase, leasing or financing of the Property (the "Transactions"), except such as have been made or obtained and are in full force and effect. - FINANCIAL STATEMENTS. The consolidated balance sheet of the Lessee and its Subsidiaries as at June 30, 1999, and the related consolidated statements of income and cash flows of the Lessee and its Subsidiaries for the fiscal year then ended, accompanied by an opinion of Ernst & Young LLP, independent auditors, and the consolidated balance sheet of the Lessee and its Subsidiaries as at September 30, 1999, and the related consolidated statements of income and cash flows of the Lessee and its Subsidiaries for the three (3) months then ended, duly certified by the chief financial officer of the Lessee, copies of which have been furnished to the Lessor and the Agent, fairly present, subject, in the case of said balance sheet as at September 30, 1999, and said statements of income and cash flows for the three (3) months then ended, to year-end audit adjustments, the consolidated financial condition of the Lessee and its Subsidiaries as at such dates and the consolidated results of the Lessee and its Subsidiaries for the periods ended on such dates, all in 13. 15 accordance with GAAP consistently applied. Since June 30, 1999, no event has occurred which could have a Material Adverse Effect. - NO MATERIAL ADVERSE CHANGE. As of the Closing Date, there has been no material adverse change in the business, assets, property or condition, financial or otherwise, of the Lessee and its Subsidiaries since June 30, 1999. - TITLE TO PROPERTIES; POSSESSION UNDER LEASES. - Each of the Lessee and its Subsidiaries has good and marketable title to, or valid leasehold interests in, all its material properties and assets. All such properties and assets are free and clear of Liens, other than Liens expressly permitted by any of the Operative Agreements. - Each of the Lessee and its Subsidiaries has complied with all obligations under all leases to which it is a party and all such leases are in full force and effect. Each of the Lessee and its Subsidiaries enjoys peaceful and undisturbed possession under all such leases. - LITIGATION, COMPLIANCE WITH LAWS. - There are not any actions, suits or proceedings at law or in equity or by or before any Governmental Authority now pending or threatened against the Lessee or any Subsidiary or any business, property or rights of any such person (A) which involve any Operative Agreements or the Transactions or (B) to the Lessee's knowledge, which might have a Material Adverse Effect. - Neither the Lessee nor any of its Subsidiaries is in violation of any law, rule or regulation, or in default with respect to any judgment, writ, injunction or decree of any Governmental Authority, where such violation or default could reasonably be anticipated to result in a Material Adverse Effect. - FEDERAL RESERVE REGULATIONS. Neither the Lessee nor any of its Subsidiaries is engaged principally in, and does not have as one of its most important activities, the business of extending credit for the purpose of purchasing or carrying any margin stock (within the meaning of Regulation U of the Board), and no part of the proceeds of the Advances will be used by it to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock or for any purpose that violates, or is inconsistent with, the provisions of Regulations T, U or X of the Board. - INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Lessor nor any of its Subsidiaries is (i) an "investment company" or a company controlled by an "investment company" within the meaning of the Investment Company Act, or (ii) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. - AGREEMENTS. 14. 16 - Neither the Lessee nor any of its Subsidiaries is a party to any agreement or instrument or subject to any corporate or other restriction that has resulted or could reasonably be anticipated to result in a Material Adverse Effect. - Neither the Lessee nor any of its Subsidiaries is in default in any manner under any provision of any indenture or other agreement or instrument evidencing Indebtedness, or any other material agreement or instrument to which it is a party or by which it or any of its properties or assets are or may be bound, where such default could reasonably be anticipated to result in a Material Adverse Effect. - TAX RETURNS. Each of the Lessee and its Subsidiaries has filed or caused to be filed all Federal, state, local and foreign tax returns required to have been filed by it and has paid or caused to be paid all taxes shown to be due and payable on such returns or on any assessments received by it, except taxes that are being contested in good faith by appropriate proceedings and for which the Lessee or such Subsidiary shall have set aside on its books adequate reserves. - NO MATERIAL MISSTATEMENTS. No information, report, financial statement, exhibit or schedule furnished by or on behalf of the Lessee to the Lessor, the Agent or any Rent Purchaser in connection with the negotiation of any Operative Agreement or included therein or delivered pursuant thereto contained, contains or will contain any misstatement of a material fact or omitted, omits or will omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were, are or will be made, not misleading. - EMPLOYEE BENEFIT PLANS. Each of the Lessee and its ERISA Affiliates is in compliance in all material respects with the applicable provisions of ERISA and the regulations and published interpretations thereunder. No Reportable Event has occurred as to which the Lessee or any ERISA Affiliate was required to file a report with the PBGC, and the present value of all benefit liabilities under each Plan (based on those assumptions used to fund such Plan) did not, as of the last annual valuation date applicable thereto, exceed by more than $1,000,000 the value of the assets of such Plan. Neither the Lessee nor any ERISA Affiliate has incurred any Withdrawal Liability which remains unpaid and that could result in a Material Adverse Effect. Neither the Lessee nor any ERISA Affiliate has received any notification that any Multiemployer Plan is in reorganization or has been terminated within the meaning of Title IV of ERISA, and to the best knowledge of the Lessee no Multiemployer Plan is reasonably expected to be in reorganization or to be terminated, where such reorganization or termination has resulted or could reasonably be expected to result, through increases in the contributions required to be made to such Plan or otherwise, in a Material Adverse Effect. - ENVIRONMENTAL MATTERS. To the best of Lessee's knowledge after due inquiry, the Property is free of contamination from any Release of Hazardous Substances. Neither the Lessee nor any of its Subsidiaries has any material contingent liability related to noncompliance with any Environmental Laws, or related to any Release or threatened Release of a Hazardous Substance or the generation, use, storage or disposal of Hazardous Substances associated with the Property. The Lessee and each Subsidiary is conducting its respective business in compliance with all applicable Environmental Laws. 15. 17 Neither the Lessee nor any of its Subsidiaries has received notice of any failure to so comply. The Lessee and its Subsidiaries, at the Lessee's and its Subsidiaries' facilities, do not manage any hazardous wastes, hazardous substances, hazardous materials, toxic substances, toxic pollutants or substances similarly denominated, as those terms or similar terms are used in the Environmental Laws, in violation of any such law or any regulations promulgated pursuant thereto. Neither the Lessee nor any of its Subsidiaries has caused or suffered to occur any Release with respect to any Hazardous Substance at, under, above or upon any real property which it owns or leases or to which it transported, disposed or arranged for disposal of Hazardous Substances that would result in a Material Adverse Effect. Neither the Lessee nor any of its Subsidiaries is involved in operations which are reasonably likely to result in the imposition of any material liability on the Lessee or any of its Subsidiaries under any Environmental Law, and neither the Lessee nor any of its Subsidiaries has permitted any tenant or occupant of such premises to engage in any such activities. - INSURANCE. The Lessee has obtained insurance coverage covering the Property which meets the requirements of Section 14.1 of Lease and such coverage is in full force and effect. - NATURE OF THE PROPERTY. The Lessee shall use the Property for office, manufacturing and research and development purposes. - FLOOD ZONE. No portion of the Property being acquired by the Lessor on the Funding Date is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, or if the Property is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, then flood insurance has been obtained for such Property in accordance with Section 14.2(b) of the Lease and in accordance with the National Flood Insurance Act of 1968, as amended. - LEGAL REQUIREMENTS. The Property being acquired by the Lessor complies with all Legal Requirements (including all zoning and land use laws and Environmental Laws). - CONSENTS, ETC. All consents, licenses and building permits required by all Legal Requirements by the time required by such Legal Requirements for construction, completion, occupancy and operation of the Property have been or will be obtained and are or will be in full force and effect. - SOLVENCY. The fair salable value of Lessee's assets exceeds the fair value of its liabilities; the Lessee is not left with unreasonably small capital after consummation of the transactions contemplated by the Operative Documents; and Lessee is able to pay its debts (including trade debts) as they mature. - YEAR 2000. Lessee has reviewed the areas within its business and operations which could be adversely affected by, and has developed or is developing a program to address on a timely basis, the "Year 2000 Problem" (that is, the risk that computer applications used by Lessee may be unable to recognize and properly perform date-sensitive functions 16. 18 involving certain dates prior to, on or after December 31, 1999). Based on such review and program, the Year 2000 Problem could not reasonably be expected to have a Material Adverse Effect. - TITLE TO PROPERTY. As of the Funding Date, the Lessor has a valid fee interest in the Land, subject only to the Permitted Exceptions. The Lessor will at all times have good and marketable title to the Improvements, subject only to Permitted Exceptions. - PROPERTY-RELATED MATTERS. The Property will comply with all Legal Requirements (including all applicable zoning and land use laws and Environmental Laws) and Insurance Requirements. No Improvements on the Property will encroach in any manner onto any adjoining land (except as permitted by express written easements or variance) and such Improvements and the use thereof by the Lessee and its agents, assignees, employees, invitees, lessees, licensees and tenants will comply with all applicable Legal Requirements (including all applicable Environmental Laws and building, planning, zoning and fire codes). There are no defects to such Improvements including, without limitation, the plumbing, heating, air conditioning and electrical systems thereof, and all water, sewer, electric, gas, telephone and drainage facilities and all other utilities required to adequately service such Improvements for their intended use will be available pursuant to adequate permits (including any that may be required under applicable Environmental Laws). There is no action, suit or proceeding (including any proceeding in condemnation or eminent domain or under any applicable Environmental Law) pending or threatened which adversely affects the title to, or the use, operation or value of, the Property. No fire or other casualty with respect to the Property has occurred which fire or other casualty involves an uninsured loss in excess of $500,000. All utilities serving the Property are located in, and in the future will be located in, and vehicular access to the Improvements on the Property is provided by, either public rights-of-way abutting the Property or Appurtenant Rights. All applicable licenses, approvals, authorizations, consents, permits (including, without limitation, building, demolition and environmental permits, licenses, approvals, authorizations and consents), easements and rights-of-way, including proof of dedication, required for the use and operation of the Improvements as permitted pursuant to the Lease have been obtained from the appropriate Governmental Authorities having jurisdiction or from private parties. - LEASE REQUIREMENTS. The Improvements will comply with all requirements and conditions set forth in the Lease and all other conditions and requirements of the Operative Documents. - PAYMENT OF CERTAIN EXPENSES The Lessee agrees, for the benefit of the Lessor, the Agent and each of the Rent Purchasers, to: - TRANSACTION EXPENSES. On the Closing Date and the Funding Date, pay, or cause to be paid, all fees, expenses and disbursements of each of the Lessor, the Agent and their respective counsel in connection with the transactions contemplated by the Operative Agreements and incurred in connection with the Closing Date and the Funding Date, 17. 19 including all Transaction Expenses, reasonable syndication expenses and all other expenses in connection with the Closing Date and the Funding Date, including all expenses relating to the Appraisal, and all fees, taxes and expenses for the recording, registration and filing of documents. - BROKERS' FEES AND STAMP TAXES. Pay or cause to be paid brokers' fees and any and all stamp, transfer and other similar taxes, fees and excises, if any, including any interest and penalties, which are payable in connection with the transactions contemplated by this Agreement and the other Operative Agreements. - CERTAIN FEES AND EXPENSES. (a) Pay or cause to be paid (i) all costs and expenses incurred by the Lessee, the Lessor, the Agent and each Rent Purchaser in entering into any future amendments or supplements with respect to any of the Operative Agreements, whether or not such amendments or supplements are ultimately entered into, or giving or withholding of waivers of consents hereto or thereto, which have been requested by the Lessee, and (ii) all costs and expenses incurred by the Lessor and each Rent Purchaser (A) in connection with any purchase of all or any portion of Property by the Lessee or any other Person pursuant to Articles 16, 17, 20 or 21 of the Lease, or (B) in respect of enforcement of any of their rights and remedies in respect of the Operative Agreements. - COMMITMENT FEE. During the Commitment Period, the Lessee agrees to pay or to cause to be paid to the Lessor for the account of the Lessor and each Rent Purchaser, respectively, a commitment fee (the "Commitment Fee") equal to the product of the Commitment for the Lessor and each Rent Purchaser multiplied by .500% per annum. Such Commitment Fee shall be calculated on the basis of a year of three hundred sixty (360) days for the actual days elapsed and shall be payable in arrears on the Commitment Fee Payment Date. If all or a portion of any such Commitment Fee shall not be paid when due, such overdue amount shall bear interest, payable by the Lessee on demand, at the Overdue Rate from the date of such non-payment until such amount is paid in full. - OTHER COVENANTS AND AGREEMENTS - COOPERATION WITH THE LESSEE. The Lessor, the Agent and the Rent Purchasers shall, to the extent reasonably requested by the Lessee (but without assuming additional liabilities on account thereof), at the Lessee's expense, cooperate with the Lessee in connection with its covenants contained herein or in any of the Operative Agreements, including, without limitation, at any time and from time to time, upon the request of the Lessee, to promptly and duly execute and deliver any and all such further instruments, documents and financing statements (and continuation statements related thereto) as the Lessee may reasonably request in order to perform such covenants. The Lessor agrees that, to the extent it shall obtain actual knowledge of the occurrence of a Default caused by the Lessor or any of its Affiliates, it shall promptly notify the Lessee describing the same in reasonable detail. - COVENANTS OF THE LESSOR. The Lessor hereby agrees as to itself that so long as this Agreement is in effect: 18. 20 - DISCHARGE OF LIENS. The Lessor will not create or permit to exist at any time, and will, at its own cost and expense, promptly take such action as may be necessary duly to discharge, or to cause to be discharged, all Lessor Liens on the Property attributable to it or any of its Affiliates; provided, however, that the Lessor shall not be required to so discharge any such Lessor Lien while the same is being contested in good faith by appropriate proceedings diligently prosecuted so long as such proceedings shall not involve any material danger of impairment of the Liens of the Security Documents or of the sale, forfeiture or loss of, and shall not interfere with the use or disposition of, the Property or title thereto or any interest therein or the payment of Rent. - CHANGE OF CHIEF PLACE OF BUSINESS. The Lessor shall give prompt notice to the Lessee and the Agent if the Lessor's chief place of business or chief executive office, or the office where the records concerning the accounts or contract rights relating to the Property are kept, shall cease to be located at the address set forth on SCHEDULE 2.1 hereto or if it shall change its name. - OPERATIVE DOCUMENTS. Neither Lessor nor Agent shall: - Modify this Section 9.2 without the consent of all of the Rent Purchasers; - increase the aggregate amount of any Rent Purchaser's Commitment, increase the aggregate amount of any Advances required to be made by a Rent Purchaser pursuant to its Commitments, or extend the Term without the consent of such Rent Purchaser; - extend the due date for any scheduled repayment of principal of any Rent Purchaser's Advance or reduce the principal amount of or rate of interest on any Rent Purchaser's Advance or extend the date on which interest or fees are payable in respect of such Rent Purchaser's Advance, in each case, without the consent of such Rent Purchaser; - reduce the percentage set forth in the definition of "Majority Rent Purchasers" or any requirement hereunder that any particular action be taken by all Rent Purchasers without the consent of all Rent Purchasers; - except as otherwise expressly provided in this Agreement or another Operative Agreement, release all or any substantial part of the Collateral under the Operative Agreements, in either case without the consent of all Rent Purchasers; or - without the prior written consent of Majority Rent Purchasers, execute any other waiver, modification or amendment of the Operative Agreements, except a waiver, modification or amendment that the Lessee requests pursuant to express provisions of the Operative Agreements and that the Lessor believes in good faith it must execute to satisfy the requirements of the Operative Agreements. - COVENANTS OF THE LESSEE. The Lessee hereby agrees that so long as this Agreement is in effect: 19. 21 - INFORMATION. The Lessee will deliver to the Lessor and the Agent: - as soon as available and in any event within one hundred (100) days after the end of each fiscal year of the Lessee a statement of financial position of the Lessee and its consolidated subsidiaries as of the end of such fiscal year and the related consolidated statements of income, shareholder's equity and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by independent accountants of nationally recognized standing, together with an Officer's Certificate from the chief financial officer of the Lessee substantially containing a computation of, and showing compliance with, each of the financial ratios and restrictions contained in this Section 9.3 and stating that no Default or Event of Default has occurred or is continuing or, if any Default or Event of Default has occurred and is continuing, describing it and the steps, if any, being taken to cure it; - as soon as available and in any event within fifty (50) days after the end of each of the first three (3) quarters of each fiscal year of the Lessee, an unaudited consolidated statement of financial position of the Lessee as of the end of such period and the related consolidated statements of income, shareholders' equity and cash flows for such period and for the portion of the Lessee's fiscal year ended at the end of such period, setting forth in each case in comparative form the figures for the same period in the previous fiscal year, together with an Officer's Certificate of the chief financial officer of the Lessee or other officer responsible for the financial affairs of the Lessee containing a computation of, and showing compliance with, each of the financial ratios and restrictions contained in this Section 9.3 and stating that no Default or Event of Default has occurred or is continuing or, if any Default or Event of Default has occurred and is continuing, describing it and the steps, if any, being taken to cure it; - promptly after the filing thereof, if applicable, copies of all reports on Forms 10-K, 10-Q and 8-K (or their equivalents), prospectuses and registration statements which the Lessee shall have filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended; - if and when any member of the ERISA Group (1) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV or ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (2) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (3) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (4) applies for a waiver of the minimum funding standard under Section 412 of the Code, a copy of such application; (5) gives notice of intent to terminate any Plan under Section 4041(c) 20. 22 of ERISA, a copy of such notice and other information filed with the PBGC; (6) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (7) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Lessee setting forth details as to such occurrence and action, if any, which the Lessee or applicable member of the ERISA Group is required or proposes to take; - promptly after the occurrence of any Default or Event of Default, notice thereof in writing by an authorized officer of the Lessee, together with information regarding the steps, if any, being taken or proposed to be taken to cure it; - at least ten (10) Business Days prior to the expiration of any policy of insurance required by Section 14 of the Lease, confirmation of renewal; - within three days of the end of each month during which Lessee is required to maintain Pledged Collateral pursuant to Section 5.4(a)(ii) hereof, a written certification of the Chief Financial Officer of Lessee as to Lessee's Cash Balance at the end of such month; and - from time to time such additional information regarding the Lessee or the Property as the Lessor or the Agent, at the request of the Lessor or any Rent Purchaser, may reasonably request. - COMPLIANCE WITH LAWS. The Lessee will, and will cause its Subsidiaries to, comply in all material respects with all applicable laws, ordinances, rules, regulations, orders and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder) except where the necessity of compliance therewith is contested in good faith by appropriate proceedings and such contest is not reasonably likely to result in a Material Adverse Effect. - FURTHER ASSURANCES. The Lessee shall take or cause to be taken from time to time all action necessary to assure during the Term that title to the Property remains in the Lessor as contemplated by Section 12.1 of the Lease, that the Lessor holds a perfected Lien on the Property securing the Lease Balance as contemplated by Section 7.1 of the Lease, and that the Lessor and the Agent for the benefit of the Rent Purchasers hold a perfected Lien on the Pledged Collateral securing the Obligations. - EXISTENCE; FRANCHISES; BUSINESSES. Except as otherwise expressly permitted in this Agreement, the Lessee shall, and shall cause each Subsidiary to (i) maintain in full force and effect its separate existence and all rights, licenses, leases and franchises reasonably necessary to the conduct of its business, and (ii) continue doing business as a whole in the substantially the same types of business in which they were engaged on the Closing Date. - BOOKS AND RECORDS. The Lessee shall, and shall cause each Subsidiary to, maintain its books and records in accordance with GAAP, and permit the Lessor and the Agent to 21. 23 make or cause to be made inspections and audits of any books, records and papers of the Lessee and its Subsidiaries and to make extracts therefrom at all such reasonable times and as often as any such Person may reasonably require. - FUNDAMENTAL CHANGES. The Lessee shall not, nor shall it permit any Subsidiary to, enter into any merger, consolidation or amalgamation, where it is not the surviving entity, or liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution); convey, sell, assign, transfer or otherwise dispose of all or substantially all of the property, business or assets of the Lessee and its Subsidiaries; provided, however, that if (i) at least thirty (30) days prior to the consummation of such transaction the Lessee shall have furnished to the Lessor and the Agent an Officer's Certificate of the chief financial officer of the Lessee that no Default or Event of Default shall occur after giving effect thereto, and (ii) no Default or Event of Default shall have occurred before or after giving effect thereto, then: - any Subsidiary of the Lessee may be merged or consolidated with or into the Lessee (provided, however, that the Lessee shall be the continuing or surviving corporation) or with or into any one or more wholly-owned Subsidiaries of the Lessee (provided, however, that the wholly-owned Subsidiary or Subsidiaries shall be the continuing or surviving corporation); and - any wholly-owned Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Lessee or any other wholly-owned Subsidiary of the Lessee. - LIENS. The Lessee shall not create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, except for: - any Lien existing on property of the Lessee on the Funding Date and set forth in SCHEDULE 9.3 securing Indebtedness outstanding on such date; - any Lien created under any Operative Document; - Liens for taxes, fees, assessments or other governmental charges which are not delinquent or remain payable without penalty; - carrier's, warehousemen's, mechanics', landlords', materialmen's, repairmen's or other similar Liens arising in the ordinary course of business which are not delinquent or remain payable without penalty; - Liens (other than any Lien imposed by ERISA) consisting of pledges or deposits required in the ordinary course of business in connection with workers' compensation, unemployment insurance and other social security legislation; - Liens on the property of the Lessee securing (A) the non-delinquent performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, (B) contingent obligations on surety and appeal bonds, and (C) other 22. 24 non-delinquent obligations of a like nature; in each case, incurred in the ordinary course of business; - Liens arising solely by virtue of any statutory or common law provisions relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a depository institution; provided, however, that (A) such deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by the Lessee in excess of those set forth by regulations promulgated by the Board, and (B) such deposit account is not intended by the Lessee or any Subsidiary to provide collateral to the depository institution; - Permitted Liens; and - Liens otherwise permitted under the Credit Facility as of the Closing Date. - INTENTIONALLY OMITTED. - FINANCIAL COVENANTS OF LESSEE. The Lessee and its Subsidiaries shall maintain, on a consolidated basis, all of the following financial covenants. The Lessee agrees and understands that (except as expressly provided herein) all covenants under this Section 9.3(i) shall be subject to compliance as measured as of the last day of each Fiscal Quarter. - MINIMUM QUICK RATIO. Maintain a Quick Ratio of not less than 1.35 to 1.0. - MAXIMUM SENIOR INDEBTEDNESS RATIO. Maintain a Senior Indebtedness Ratio of not greater than 0.25 to 1.0. - MINIMUM TANGIBLE NET WORTH. Maintain Tangible Net Worth on any date of determination (such date to be referred to herein as a "determination date") which occurs after December 27, 1998 (such date to be referred to herein as the "base date") to be less than the sum on such determination date of the following: (A) $350,000,000; plus (B) Seventy-five percent (75%) of the sum of the Lessee's consolidated quarterly net income (ignoring any quarterly losses) for each quarter ending after the base date through and including the quarter ending immediately prior to the determination date; plus (C) one hundred percent (100%) of the Net Issuance Proceeds of all Equity Securities issued by the Lessee and its Subsidiaries during the period commencing on the base date and ending on the determination date; plus (D) one hundred percent (100%) of the aggregate decrease in the total liabilities of the Lessee and its Subsidiaries resulting from conversions of convertible Subordinated Indebtedness or other liabilities of the Lessee and its Subsidiaries into Equity Securities of the Lessee and its Subsidiaries during the period commencing on the base date and ending on the determination date. - MINIMUM DEBT SERVICE COVERAGE RATIO. Maintain a Debt Service Coverage Ratio of not less than the ratio set forth opposite such period below: 23. 25 Through December 26, 1999 1.50 to 1.00 December 27, 1999 - March 26, 2000 1.75 to 1.00 March 27, 2000 - June 25, 2000 2.00 to 1.00 June 26, 2000 - September 24, 2000 2.75 to 1.00 Thereafter 3.00 to 1.00 - TRANSFER OF INTEREST - ASSIGNMENTS. Each Participant may, after consultation with, and, so long as no Default or Event of Default then exists, the agreement of, the Lessee (such agreement not to be unreasonably withheld and provided that no agreement by Lessee shall be required in the case of an assignment to an Eligible Rent Purchaser), assign all or a portion of its rights and obligations hereunder pursuant to an assignment agreement substantially in the form of EXHIBIT B (an "Assignment and Acceptance") to one or more Persons, with respect to Rent Purchaser Commitments and Rent Purchaser Advances or the Lessor Commitment and Lessor Contribution, provided that each such assignment shall be of a constant, not varying, percentage of all of the assigning Participant's rights and obligations under the Operative Agreements. In the case of assignments made by a Rent Purchaser, any such assignment shall (a) be to an Eligible Rent Purchaser and (b) be in a minimum aggregate amount of $5,000,000 of its Rent Purchaser Commitment (or the balance of such Rent Purchaser Commitment, if less) and the aggregate remaining Rent Purchaser Commitment of the assigning Rent Purchaser shall, after giving effect to the proposed assignment, be at least $5,000,000 or if less, zero. In the case of assignments made by Lessor, any such assignment shall (a) be to an Eligible Lessor and (b) be in a minimum aggregate amount of $1,000,000 of its Lessor Commitment (or the balance of such Lessor Commitment, if less) and the aggregate remaining Lessor Commitment of the assigning Lessor shall, after giving effect to the proposed assignment, be at least $1,000,000 or if less, zero. Any assignment hereunder shall be effective upon delivery to the Lessor of written notice of the assignment together with a transfer fee of $3,500 payable by the assignor Participant or the assignee Participant to the Agent for its own account. The assigning Participant will give prompt notice to the Agent and the Lessee of any such assignment. Upon the effectiveness of any such assignment (and after notice to and agreement of the Lessee and the Lessor, as provided herein), the assignee shall become a "Rent Purchaser" or "Lessor," as the case may be, for all purposes of the Operative Agreements and, to the extent of such assignment, the assigning Participant shall be relieved of its obligations hereunder to the extent of the Advances or Lessor Contribution, as the case may be, and Commitment components being assigned. The Lessee shall not be responsible for any costs or expenses incurred by any Participant in connection with an assignment of all or any of its rights and obligations in connection with an assignment pursuant to this Section 10.1. 24. 26 - PARTICIPATIONS. Each Participant may sell, transfer, grant or assign participations in all or any part of such Participant's interests and obligations hereunder; provided, that (a) such selling Participant shall remain a "Rent Purchaser" or "Lessor", as the case may be, for all purposes under the Operative Agreements (such selling Participant's obligations under the Operative Agreements remaining unchanged) and the sub-participant shall not constitute a Rent Purchaser or a Lessor, as the case may be, hereunder, (b) no such sub-participant shall have, or be granted, rights to approve any amendment or waiver relating to the Operative Agreements except to the extent any such amendment or waiver would (i) reduce the principal of or rate of interest on or fees in respect of any Rent Purchaser Advances or the Lessor Contribution in which the sub-participant is participating, (ii) postpone the date fixed for any payment of principal (including extension of the Expiration Date or the date of any mandatory prepayment), interest or fees in which the sub-participant is participating, or (iii) release all or substantially all of the collateral or guarantees (except as expressly provided in the Operative Agreements) supporting any of the Rent Purchaser Advances or Lessor Contribution or Commitments in which the sub-participant is participating, and (c) sub-sub-participations by the sub-participant (except to an Affiliate, parent company or Affiliate of a parent company of the participant) shall be prohibited. In the case of any such participation, the sub-participant shall not have any rights under the Operative Agreements (the sub-participants rights against the selling Participant in respect of such participation to be those set forth in the participation agreement with such Participant creating such participation) and all amounts payable by the Lessee hereunder shall be determined as if such Participant had not sold such participation; provided, however, that such sub-participant shall be entitled to receive additional amounts under Sections 11.2 and 11.6 on the same basis as if it were a Participant (but only to the extent that the Participant would have been entitled to receive such additional amounts with respect to the interest participated had it not sold such participation). The Lessee shall not be responsible for any costs or expenses incurred by any Participant in connection with a sale, transfer, grant or assignment of participations pursuant to this Section 10.2. - DISCLOSURE OF INFORMATION; PLEDGE UNDER REGULATION A. - Any Participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 10, disclose to such assignee or participant or proposed assignee or participant, any information relating to Lessee or the Transactions, provided, that prior to such disclosure such proposed assignee or participant shall have agreed in writing to keep any such information confidential substantially on the terms of Section 10.3(b). - The Agent, the Rent Purchasers and the Lessor understand that some of the information and documents furnished to it pursuant to the Operative Agreements may be confidential and each of them agrees that it will keep all non-public information, documents and agreements so furnished to it confidential and will make no disclosure to other Persons of such information or agreements until it shall have become public, except disclosure may be made (i) to the extent required in connection with matters involving operations under or enforcement or amendment of the Operative Agreements; (ii) to the Rent Purchasers' and the Lessor's examiners and auditors or in accordance with the Rent Purchasers' or Lessor's obligations under law or regulations or pursuant to subpoenas or other process to 25. 27 make information available to governmental agencies and examiners or to others; (iii) to any corporate Affiliate of any Participant so long as such Affiliate agrees to accept such information or agreement subject too the restrictions provided in this Section 10.3(b); (iv) to the Participant's counsel and other professional advisors so long as such Persons are instructed to keep such information confidential in accordance with the provisions of this Section 10.3(b); (v) to proposed assignees and participants in accordance with Section 10.3(a); and (vi) with the prior written consent of the Lessee. - Anything in this Section 10 to the contrary notwithstanding, any Participant may without the consent of Lessee, the Agent, the Rent Purchasers or the Lessor assign and pledge all or any portion of the Obligations held by it to any Federal Reserve Bank, the United States Treasury or to any other financial institution as collateral security pursuant to Regulation A of the Federal Reserve Board and any operating circular issued by the Federal Reserve System and/or the Federal Reserve Bank or otherwise; provided, any payment by Lessee for the benefit of the assigning or pledging Participant shall be deemed to satisfy the Lessee's obligations with respect thereto. - INDEMNIFICATION - GENERAL INDEMNITY. The Lessee, whether or not any of the transactions contemplated hereby shall be consummated, hereby assumes liability for and agrees to defend, indemnify and hold harmless each Indemnified Person on an After Tax Basis from and against any Claims which may be imposed on, incurred by or asserted against an Indemnified Person in any way relating to or arising or alleged to arise out of (a) the financing, refinancing, ground lease purchase, acceptance, rejection, ownership, design, construction, delivery, acceptance, nondelivery, leasing, subleasing, possession, use, operation, repair, maintenance, modification, transportation, condition, operation, sale, return, repossession (whether by summary proceedings or otherwise), or any other disposition of the Property or any part thereof, (b) any latent or other defects in any property whether or not discoverable by an Indemnified Person or the Lessee; (c) a violation of any Legal Requirement or Requirement of Law, including any violation of Environmental Laws, the Release, presence or use of Hazardous Substances on, at, under or emanating from the Property or other loss of or damage relating to the Property; (d) the Operative Agreements, or any transaction contemplated thereby; (e) any breach by the Lessee of any of its representations or warranties under the Operative Agreements or failure by the Lessee to perform or observe any covenant or agreement to be performed by it under any of the Operative Agreements; (f) personal injury, death or property damage relating to the Property, including Claims based on strict liability in tort; (g) the existence of any Lien on or with respect to the Property, the Improvements, the Equipment, any Basic Rent or Supplemental Rent, title thereto, or any interest therein, including any Liens which arise out of the possession, use, occupancy, construction, repair or rebuilding of the Property or by reason of labor or materials furnished or claimed to have been furnished to the Lessee, the Lessor, or any of their contractors or agents or by reason of the financing of the Property or any personally or equipment purchased or leased by the Lessee or Improvements or Modifications constructed by the Lessee, except Lessor Liens and Liens in favor of the Agent or the Lessor; and (h) the Transactions contemplated hereby or by any other Operative Agreement, in respect of the 26. 28 application of Parts 4 and 5 of Subtitle B of Title I of ERISA and any prohibited transaction described in Section 4975(c) of the Code; but in any event excluding (x) Claims to the extent such Claims arise solely out of events occurring after the expiration of the Term and after the Lessee's discharge of all its obligations under the Lease and the other Operative Agreements or (y) as to any Indemnified Person, any Claim to the extent resulting from the willful misconduct or gross negligence of such Indemnified Person. The Lessee shall be entitled to control, and shall assume full responsibility for the defense of, any Claim; provided, however, that any Indemnified Person named in such Claim may retain separate counsel reasonably acceptable to the Lessee at the expense of the Lessee in the event of and to the extent of an actual conflict. The Lessee and each Indemnified Person agree to give each other prompt written notice of any Claim hereby indemnified against but the giving of any such notice by an Indemnified Person shall not be a condition to the Lessee's obligations under this Section 11.1, except to the extent failure to give such notice materially prejudices the Lessee's rights hereunder. After an Indemnified Person has been fully indemnified for a Claim pursuant to this Section 11.1, and so long as no Event of Default shall have occurred and be continuing, the Lessee shall be subrogated to any right of such Indemnified Person with respect to such Claim. None of the Indemnified Persons shall settle a Claim without the consent of the Lessee, which consent shall not be unreasonably withheld or delayed. - GENERAL IMPOSITIONS INDEMNITY. - INDEMNIFICATION. The Lessee shall pay and assume liability for, and does hereby agree to indemnify, protect and defend the Property and all Indemnified Persons, and hold them harmless against, all Impositions on an After Tax Basis. - PAYMENTS. - Subject to the terms of Section 11.2(f), the Lessee shall pay or cause to be paid all Impositions directly to the taxing authorities where feasible and otherwise to the Indemnified Person, as appropriate, and the Lessee shall at its own expense, upon such Indemnified Person's reasonable request, furnish to such Indemnified Person copies of official receipts or other satisfactory proof evidencing such payment. - In the case of Impositions for which no contest is conducted pursuant to Section 11.2(f) and which the Lessee pays directly to the taxing authorities, the Lessee shall pay such Impositions thirty (30) days prior to the latest time permitted by the relevant taxing authority for timely payment. In the case of Impositions for which the Lessee reimburses an Indemnified Person, the Lessee shall do so within twenty (20) days after receipt by the Lessee of demand by such Indemnified Person describing in reasonable detail the nature of the Imposition and the basis for the demand (including the computation of the amount payable), but in no event shall the Lessee be required to pay such reimbursement prior to thirty (30) days before the latest time permitted by the relevant taxing authority for timely payment. In the case of Impositions for which a contest is conducted pursuant to Section 11.2(f), the Lessee shall pay such Impositions or reimburse such Indemnified Person for such Impositions, to the extent not previously paid or 27. 29 reimbursed pursuant to subsection (a), thirty (30) days prior to the latest time permitted by the relevant taxing authority for timely payment after conclusion of all contests under Section 11.2(f). - Impositions imposed with respect to the Property for a billing period during which the Lease expires or terminates (unless a Renewal Term is to apply or the Lessee has exercised the Purchase Option or the Maturity Date Purchase Option with respect to the Property) shall be adjusted and prorated on a daily basis between the Lessee and the Lessor, whether or not such Imposition is imposed before or after such expiration or termination and each party shall pay or reimburse the other for each party's pro rata share thereof. - At the Lessee's request, the amount of any indemnification payment by the Lessee pursuant to subsection (a) shall be verified and certified by an independent public accounting firm mutually acceptable to the Lessee and the Indemnified Person. The fees and expenses of such independent public accounting firm shall be paid by the Lessee unless such verification shall result in an adjustment in the Lessee's favor of 10% or more of the payment as computed by the Indemnified Person, in which case such fee shall be paid by the Indemnified Person. - REPORTS AND RETURNS. (i) The Lessee shall be responsible for preparing and filing any real and personal property or ad valorem tax returns in respect of the Property. In case any other report or tax return shall be required to be made with respect to any obligations of the Lessee under or arising out of subsection (a) and of which the Lessee has knowledge or should have knowledge, the Lessee, at its sole cost and expense, shall notify the relevant Indemnified Person of such requirement and (except if such Indemnified Person notifies the Lessee that such Indemnified Person intends to file such report or return) (A) to the extent required or permitted by and consistent with applicable law, make and file in its own name such return, statement or report; and (B) in the case of any other such return, statement or report required to be made in the name of such Indemnified Person, advise such Indemnified Person of such fact and prepare such return, statement or report for filing by such Indemnified Person or, where such return, statement or report shall be required to reflect items in addition to any obligations of the Lessee under or arising out of subsection (a), provide such Indemnified Person at the Lessee's expense with information sufficient to permit such return, statement or report to be properly made with respect to any obligations of the Lessee under or arising out of subsection (a). Such Indemnified Person shall, upon the Lessee's request and at the Lessee's expense, provide any data maintained by such Indemnified Person (and not otherwise available to or within the control of the Lessee) with respect to the Property which the Lessee may reasonably require to prepare any required tax returns or reports. Each Indemnified Person agrees to use commercially reasonable efforts to send to the Lessee a copy of any written request or other notice that the Indemnified Person receives with respect to any reports or returns required to be filed with respect to the Property or the transactions contemplated by the Operative Documents, it being understood that no Indemnified Person shall have any liability for failure to provide such copies. - INCOME INCLUSIONS. If as a result of the payment or reimbursement by the Lessee of any expenses of any Lessor or the payment of any Transaction Expenses incurred in 28. 30 connection with the transactions contemplated by the Operative Documents, the Lessor or any Rent Purchaser shall suffer a net increase in any federal, state or local income tax liability, the Lessee shall indemnify such Persons (without duplication of any indemnification required by subsection (a)) on an After Tax Basis for the amount of such increase. The calculation of any such net increase shall take into account any current or future tax savings realized or reasonably expected to be realized by such person in respect thereof, as well as any interest, penalties and additions to tax payable by the Lessor, the Lender or such Affiliate, in respect thereof. - WITHHOLDING TAXES. As between the Lessee on one hand, and any Participant on the other hand, the Lessee shall be responsible for, and, subject to the provisions of Sections 11.2(g) and (h), the Lessee shall indemnify and hold harmless the Participants (without duplication of any indemnification required by subsection (a)) on an After Tax Basis against, any obligation for United States or foreign withholding taxes imposed in respect of payments with respect to the Rent Purchaser Advances or the Lessor Contribution or with respect to Rent payments under the Lease or payments of the Termination Value or the Purchase Option Price (and, if any Participant receives a demand for such payment from any taxing authority, the Lessee shall discharge such demand on behalf of such Participant). - CONTESTS OF IMPOSITIONS. - If a written claim is made against any Indemnified Person or if any proceeding shall be commenced against such Indemnified Person (including a written notice of such proceeding), for any Impositions, such Indemnified Person shall promptly notify the Lessee in writing and shall not take action with respect to such claim or proceeding without the consent of the Lessee for thirty (30) days after the receipt of such notice by the Lessee; provided, however, that, in the case of any such claim or proceeding, if action shall be required by law or regulation to be taken prior to the end of such 30-day period, such Indemnified Person shall, in such notice to the Lessee, inform the Lessee of such shorter period, and no action shall be taken with respect to such claim or proceeding without the consent of the Lessee before two days before the end of such shorter period; provided, further, that the failure of such Indemnified Person to give the notices referred to in this sentence shall not diminish the Lessee's obligation hereunder except to the extent such failure precludes the Lessee from contesting all or part of such claim. - If, within thirty (30) days of receipt after such notice from the Indemnified Person (or such shorter period as the Indemnified Person has notified the Lessee as required by law or regulation for the Indemnified Person to commence such contest), the Lessee shall request in writing that such Indemnified Person contest such Imposition, the Indemnified Person shall, at the expense of the Lessee, in good faith conduct and control such contest (including, without limitation, by pursuit of appeals) relating to the validity, applicability or amount of such Impositions (provided, however, that (A) if such contest involves a tax other than a tax on net income and can be pursued independently from any other proceeding involving a tax liability of such Indemnified Person, the Indemnified Person, at the Lessee's request, shall allow the Lessee to conduct and control such contest 29. 31 and (B) in the case of any contest, the Indemnified Person may request the Lessee to conduct and control such contest) by, in the sole discretion of the Person conducting and controlling such contest, (1) resisting payment thereof, (2) not paying the same except under protest, if protest is necessary and proper, or (3) if the payment be made, using reasonable efforts to obtain a refund thereof in appropriate administrative and judicial proceedings. - The party controlling any contest shall consult in good faith with the non-controlling party and shall keep the non-controlling party reasonably informed as to the conduct of such contest; provided, that all decisions ultimately shall be made in the sole discretion of the controlling party. The parties agree that an Indemnified Person may at any time decline to take further action with respect to the contest of any Imposition and may settle such contest if such Indemnified Person shall waive its rights to any indemnity from the Lessee that otherwise would be payable in respect of such claim and shall pay to the Lessee any amount previously paid or advanced by the Lessee pursuant to this Section 11.2 by way of indemnification or advance for the payment of an Imposition other than expenses of such contest. - Notwithstanding the foregoing provisions of this Section 11.2, an Indemnified Person shall not be required to take any action and the Lessee shall not be permitted to contest any Impositions in its own name or that of the Indemnified Person unless (A) the Lessee shall have agreed to pay in writing and shall pay to such Indemnified Person on demand and on an After Tax Basis all reasonable costs, losses and expenses that such Indemnified Person actually incurs in connection with contesting such Impositions, including, without limitation, all reasonable legal, accounting and investigatory fees and disbursements and the contested claim if ultimately required to be paid, (B) in the case of a claim that must be pursued in the name of an Indemnified Person (or an Affiliate thereof), the amount of the potential indemnity exceeds $50,000, (C) the Indemnified Person shall have reasonably determined that the action to be taken will not result in any material danger of sale, forfeiture or loss of the Property or the Defeasance Deposit Collateral, or any part thereof or interest therein, will not interfere with the payment of Rent, and will not result in risk of criminal liability, (D) if such contest shall involve the payment of the Imposition prior to the contest, the Lessee shall provide to the Indemnified Person an interest-free advance in an amount equal to the Imposition that the Indemnified Person is required to pay (with no additional net after-tax cost to such Indemnified Person), (E) the Lessee shall have provided to such Indemnified Person an opinion of independent tax counsel selected by the Lessee and reasonably satisfactory to the Indemnified Person stating that a reasonable basis exists to contest such claim (or, in the case of an appeal of an adverse determination, an opinion of such counsel to the effect that the position asserted in such appeal will more likely than not prevail), and (F) no Event of Default shall have occurred and be continuing. In no event shall an Indemnified Person be required to appeal an adverse judicial determination to the United States Supreme Court. In addition, an Indemnified Person shall not be required to contest any claim in its name (or that of an Affiliate) if the subject matter thereof shall be of a continuing nature and shall have previously been decided adversely by a court of competent jurisdiction pursuant to the contest provisions of this Section 11.2, 30. 32 unless there shall have been a change in law (or interpretation thereof) and the Indemnified Person shall have received, at the Lessee's expense, an opinion of independent tax counsel selected by the Indemnified Person and reasonably acceptable to the Lessee stating that as a result of such change in law (or interpretation thereof), it is more likely than not that the Indemnified Person will prevail in such contest. - DOCUMENTATION OF WITHHOLDING STATUS. Each Participant (or any successor thereto or Transferee thereof) that is organized under the laws of a jurisdiction outside of the United States of America shall: - on or before the date it becomes a party to any Operative Agreement, deliver to the Lessee any certificates, documents or other evidence that shall be required by the Code or Treasury Regulations issued pursuant thereto to establish its exemption from United States Federal withholding requirements, including (A) two (2) valid, duly completed, original copies of Internal Revenue Service Form 1001 or Form 4224 or successor applicable form, properly and duly executed, certifying in each case that such party is entitled to receive payments pursuant to the Operative Documents without deduction or withholding of United States Federal income taxes, and (B) a valid, duly completed, original copy of Internal Revenue Service Form W-8 or Form W-9 or applicable successor form, properly and duly executed, certifying that such party is entitled to an exemption from United States of America backup withholding tax; and - or before the date that any such form described above expires or becomes obsolete, or after the occurrence of any event requiring a change in the most recent such form previously delivered to the Lessee, deliver to the Lessee two (2) further valid, duly completed, original copies of any such form or certification, properly and duly executed. - LIMITATION ON TAX INDEMNIFICATION. The Lessee shall not be required to indemnify any Indemnified Person, or to pay any increased amounts to any Indemnified Person or tax authority with respect to any Impositions pursuant to this Section 11.2 to the extent that (i) any obligation to withhold, deduct, or pay amounts with respect to Tax existed on the date such Indemnified Person became a party to any Operative Agreement (and, in such case, the Lessee may deduct and withhold such Tax from payments pursuant to the Operative Agreements), or (ii) such Indemnified Person fails to comply with the provisions of Section 11.2(g) (and, in such case, the Lessee may deduct and withhold all Taxes required by law as a result of such noncompliance from payments made by the Lessee pursuant to the Operative Agreements). With respect to any Transferee of any Participant (including a transfer resulting from any change in the designation of the lending office of a Participant), the Transferee shall not be entitled to any greater payment or indemnification under this Section 11.2 than the transferor would have been entitled to. - LIBOR LENDING UNLAWFUL. Notwithstanding any other provision herein, if the adoption of or any change in any Requirement of Law or in the interpretation or application thereof occurring after the Closing Date shall make it unlawful for any Participant to make, continue or maintain LIBOR Rent Purchaser Advances or LIBOR Lessor Contributions as contemplated by the Operative Agreements, (a) such Participant shall 31. 33 promptly give written notice of such circumstances to the Lessee, the Lessor and the Rent Purchasers (which notice shall be withdrawn whenever such circumstances no longer exist), (b) such Participant shall undertake reasonable efforts to propose a money rate comparable to LIBOR (the "LIBOR Alternative"), (c) the commitment of such Rent Purchaser or Lessor, as the case may be, hereunder to make, continue or maintain LIBOR Rent Purchaser Advances or LIBOR Lessor Contributions shall forthwith be canceled and, until such time as it shall no longer be unlawful for such Participant to make, continue or maintain LIBOR Rent Purchaser Advances or LIBOR Lessor Contributions, such Participant shall then have a commitment only to make or maintain Rent Purchaser Advances or the Lessor Contributions based on ABR or the LIBOR Alternative, if any, when a LIBOR Rent Purchaser Advance or LIBOR Lessor Contribution is requested and (d) such Participant's Rent Purchaser Advances and Lessor Contributions then outstanding as LIBOR Rent Purchaser Advances or LIBOR Lessor Contributions, if any, shall be converted automatically to Rent Purchaser Advances or Lessor Contributions based on ABR or the LIBOR Alternative, if any, on the respective last days of the then current Interest Periods with respect to such Rent Purchaser Advances and Lessor Contributions or within such earlier period as required by law. If any such conversion of LIBOR Rent Purchaser Advances or LIBOR Lessor Contributions occurs on a day which is not the last day of the then current Interest Period with respect thereto, the Lessee shall pay to such Participant such amounts, if any, as may be required pursuant to Section 11.6. In any such case, interest and principal (if any) shall be payable contemporaneously with the related LIBOR Rent Purchaser Advances or LIBOR Lessor Contributions of the other Participants. - DEPOSITS UNAVAILABLE. If any of the Participants shall have determined that: - Dollar deposits in the relevant amount and for the relevant Interest Period are not available to the Participant in its relevant market; or - by reason of circumstances affecting the Participant's relevant market, adequate means do not exist for ascertaining the interest rate or Yield, as the case may be, applicable to such Participant's LIBOR Rent Purchaser Advances or LIBOR Lessor Contributions; then, upon notice from such Participant to the Lessee and the other Participants, (x) the obligations of the Participants to make or continue any Rent Purchaser Advances or the Lessor Contributions as, or to convert any Rent Purchaser Advances or the Lessor Contribution into, LIBOR Rent Purchaser Advances or LIBOR Lessor Contributions shall be suspended, and (y) each outstanding LIBOR Rent Purchaser Advance or LIBOR Lessor Contribution shall automatically convert into an Rent Purchaser Loan or Lessor Contribution based on ABR or the LIBOR Alternative, if any, on the last day of the current Interest Period applicable thereto. - INCREASED COSTS, ETC. - If the adoption of or any change in a Requirement of Law or in the interpretation or application thereof applicable to any Participant, or compliance by any Participant with any request or directive (whether or not having the force of law) from any central bank or 32. 34 other Governmental Authority, in each case made subsequent to the Closing Date (or, if later, the date on which such Participant becomes a Participant): - shall subject such Participant to any tax of any kind whatsoever with respect to any LIBOR Rent Purchaser Advances or LIBOR Lessor Contributions made, continued or maintained by it or its obligation to make, continue or maintain LIBOR Rent Purchaser Advances or LIBOR Lessor Contributions, or change the basis of taxation of payments to such Participant in respect thereof; or - shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, Rent Purchaser Advances and the Lessor Contribution, advances or other extensions of credit by, or any other acquisition of funds by, any office of such Participant which is not otherwise included in the determination of the Adjusted LIBOR Rate hereunder; or - shall impose on such Participant any other condition (excluding any Tax of any kind) whatsoever in connection with the Operative Agreements; and the result of any of the foregoing is to increase the cost to such Participant, by an amount which such Participant reasonably deems to be material, of making, continuing or maintaining LIBOR Advances or LIBOR Lessor Contributions or to reduce any amount receivable hereunder in respect thereof, then, in any such case, upon notice to the Lessee from such Participant, through the Lessor or the Agent, in accordance herewith, the Lessee shall pay such Participant any additional amounts necessary to compensate such Participant for such increased cost or reduced amount receivable; provided, that, in any such case, the Lessee may elect to convert the LIBOR Rent Purchaser Advances or LIBOR Lessor Contributions made by such Participant hereunder to Rent Purchaser Advances or Lessor Contributions based on ABR or the LIBOR Alternative, if any, by giving the Lessor and the Agent at least one (1) Business Day's notice of such election, in which case the Lessee shall promptly pay to such Participant, upon demand, without duplication, such amounts, if any, as may be required pursuant to Section 11.6. All payments required by this Section 11.5 shall be made by the Lessee within ten (10) Business Days after demand by the affected Participant. The Lessee shall not be obligated to reimburse any Participant for any increased cost or reduced return incurred more than one hundred eighty (180) days after the date that such Participant receives actual notice of such increased cost or reduced return unless such Participant gives notice thereof to the Lessee in accordance with this Section 11.5 during such one hundred eighty (180) day period. If any Participant becomes entitled to claim any additional amounts pursuant to this subsection, it shall provide prompt notice thereof to the Lessee, through the Lessor, certifying (x) that one of the events described in this clause (a) has occurred and describing in reasonable detail the nature of such event, (y) as to the increased cost or reduced amount resulting from such event, and (z) as to the additional amount demanded by such Participant and a reasonably detailed explanation of the calculation thereof (including the method by which such Participant allocated such amounts to the Lessee). Such a certificate as to any additional amounts payable pursuant to this clause submitted by such Participant, through the Lessor, to the Lessee shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and the payment of the Rent Purchaser Advances and the Lessor Contribution and all other amounts payable hereunder. 33. 35 - Each Participant shall use its reasonable efforts to reduce or eliminate any claim for compensation pursuant to this Section 11.5, including, without limitation, a change in the office of such Participant at which its obligations related to this Agreement are maintained if such change will avoid the need for or reduce the amount of, such compensation and will not, in the reasonable judgment of such Participant, be otherwise disadvantageous to it. If any such claim for compensation shall not be eliminated or waived, the Lessee shall have the right to replace the affected Participant with a new financial institution that shall succeed to the rights of such Participant under this Participation Agreement; provided, that such Participant shall not be replaced hereunder until it has been paid in full such claim and all other amounts owed to it hereunder. - FUNDING LOSSES. The Lessee agrees to indemnify each Indemnified Person and to hold each Indemnified Person harmless from any loss or expense which such Indemnified Person may sustain or incur (other than through such Person's own gross negligence or willful misconduct) as a consequence of (a) default by the Lessee in making a borrowing of or continuation of Rent Purchaser Advances or the Lessor Contribution which are LIBOR Rent Purchaser Advances or LIBOR Lessor Contributions after the Lessee has given a notice requesting the same in accordance with the provisions of this Agreement, (b) default by the Lessee in making any prepayment of a Rent Purchaser Advance or the Lessor Contribution which is a LIBOR Rent Purchaser Advance or a LIBOR Lessor Contribution after the Lessee has given a notice thereof in accordance with the provisions of this Agreement, or (c) the making of a prepayment of Rent Purchaser Advances or the Lessor Contribution which are LIBOR Rent Purchaser Advances or LIBOR Lessor Contributions on a day which is not the last day of an Interest Period with respect thereto. This covenant shall survive the termination of this Agreement or any other Operative Agreement and the payment of the Rent Purchaser Advances, the Lessor Contribution and all other amounts payable under the Operative Agreements. - CAPITAL ADEQUACY. - If the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Participant with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, in each case made subsequent to the Closing Date, has or will have the effect of reducing the rate of return on any Participant's or its parent company's capital by an amount such Participant reasonably deems to be material, as a consequence of its commitments or obligations hereunder to a level below that which such Participant or its parent company could have achieved but for such adoption, effectiveness, change or compliance (taking into consideration such Participant's or its parent company's policies with respect to capital adequacy), then, upon notice from such Participant, the Lessee shall pay to such Participant such additional amount or amounts as will compensate such Participant and its parent company for such reduction (it being understood that such parent company shall not be reimbursed to the extent its subsidiary Participant is reimbursed by the Lessee in connection with the same or a similar law, rule, regulation, change, request or directive applicable to such Participant). All payments required by this Section 11.7 shall be made by the Lessee within ten (10) Business Days 34. 36 after demand by the affected Participant. The Lessee shall not be obligated to reimburse any Participant for any reduced return incurred more than one hundred eighty (180) days after the date that such Participant receives actual notice of such reduced return unless such Participant gives notice thereof to the Lessee in accordance with this Section 11.7 during such one hundred eighty (180) day period. If any Participant becomes entitled to claim any additional amounts pursuant to this Section 11.7, it shall provide prompt notice thereof to the Lessee, through the Lessor and the Agent, certifying (i) that one of the events described in this clause (a) has occurred and describing in reasonable detail the nature of such event, (ii) as to the increased cost or reduced amount resulting from such event and (iii) as to the additional amount demanded by such Participant and a reasonably detailed explanation of the calculation thereof. Such a certificate as to any additional amounts payable pursuant to this clause submitted by such Participant, through the Lessor, to the Lessee shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and the other Operative Agreements and the payment of the Rent Purchaser Advances, the Lessor Contribution and all other amounts payable hereunder and thereunder. - Each Participant shall use its commercially reasonable efforts to reduce or eliminate, any claim for compensation pursuant to this Section 11.7, including, without limitation, a change in the office of such Participant at which its obligations related to the Operative Agreements are maintained if such change will avoid the need for, or reduce the amount of, such compensation and will not, in the reasonable judgment of such Participant, be otherwise disadvantageous to it. If any such claim for compensation shall not be eliminated or waived, the Lessee shall have the right to replace the affected Participant with a new financial institution that shall succeed to the rights of such Participant under the Operative Agreements; provided, however, that such Participant shall not be replaced hereunder until it has been paid in full such claim and all other amounts owed to it hereunder. - DISTRIBUTION - BASIC RENT. Each payment of Basic Rent (and any payment of interest on overdue installments of Basic Rent) received by the Lessor shall be distributed by the Lessor to the Lessor and the Agent for the Rent Purchasers pro rata in accordance with, and for application to the Basic Rent then due, as well as any overdue interest or Yield due to the Lessor or the Rent Purchasers (to the extent permitted by applicable law). - PURCHASE PAYMENTS BY THE LESSEE. Any payment received by the Lessor as a result of: - the purchase of the Property in connection with the exercise of the Purchase Option or Maturity Date Purchase Option under Section 20.1 or 20.2 of the Lease; or - compliance with the obligation to purchase the Property in accordance with Section 17.2 of the Lease; or 35. 37 - the payment of the Termination Value in accordance with Section 16.1 of the Lease shall be distributed by the Lessor to the Lessor and the Rent Purchasers in the following order of priority: First, to the Rent Purchasers, pro rata, to pay the Lease Balance Debt; and Second, to the Lessor to pay the Lease Balance Equity. - PAYMENT OF LEASE BALANCE DEBT. In accordance with Section 21.1 of the Lease upon the exercise of the remarketing option, the payment of the Maximum Residual Guarantee Amount received by the Lessor shall be distributed to the Agent on behalf of the Rent Purchasers for application to pay in full the Participant Balance of each Rent Purchaser, pro rata among the Rent Purchasers without priority of one over the other in the proportion that the Participant Balance of each such Rent Purchaser bears to the aggregate Participant Balances of all Rent Purchasers. - SALES PROCEEDS OF REMARKETING OF PROPERTY. Any payments received by the Lessor as proceeds from the sale of the Property sold pursuant to the exercise of the remarketing option pursuant to Article 21 of the Lease, together with any payment made as a result of an appraisal pursuant to Section 21.3 of the Lease, shall be distributed by the Lessor in the funds so received in the following order of priority: First, to cover the costs and expenses of such sale; Second, to the extent not previously paid as required by Section 12.3 hereof, an amount equal to the amount of the Lease Balance Debt remaining unpaid shall be distributed to the Rent Purchasers, pro rata, as set forth in Section 12.3; Third, an amount equal to the aggregate Lease Balance Equity shall be distributed to the Lessor for application to the Participant Balance of the Lessor; and Fourth, the balance, if any, shall be promptly paid to the Lessee. - SUPPLEMENTAL RENT. All payments of Supplemental Rent received by the Lessor (excluding any amounts payable pursuant to the preceding provisions of this Section 12) shall be distributed promptly by the Lessor upon receipt thereof to the Persons entitled thereto pursuant to the Operative Agreements. - DISTRIBUTION OF PAYMENTS AFTER EVENT OF DEFAULT. - During the continuance of an Event of Default and subject to clause (b) below, all proceeds received by the Lessor from the sale of the Property shall be distributed by the Lessor in the following order of priority: First, so much of such payment or amount as shall be required to pay or reimburse the Lessor and the Agent for any tax, fees, expense, indemnification or other 36. 38 loss incurred by the Lessor or the Agent (to the extent incurred in connection with any duties as the Lessor or as the Agent), shall be distributed to the Lessor for its own account in accordance with the amount of such payment or amount payable to such Person; Second, so much of such payments or amounts as shall be required to pay the Rent Purchasers and the Lessor the amounts payable to them pursuant to any expense reimbursement or indemnification provisions of the Operative Documents shall be distributed to each such Rent Purchaser and the Lessor without priority of one over the other in accordance with the amount of such payment or payments payable to each such Person; Third, to the Rent Purchasers for application to pay in full the Lease Balance Debt, pro rata among the Rent Purchasers without priority of one over the other in the proportion that the Participant Balance of each such Rent Purchaser bears to the aggregate Participant Balances of all Rent Purchasers and, in the case where the amounts so distributed shall be insufficient to pay in full as aforesaid, then pro rata among the Rent Purchasers without priority of one over the other in the proportion that the Participant Balance of each such Rent Purchaser bears to the aggregate Participant Balances of all Rent Purchasers; Fourth, to the Lessor in an amount equal to the aggregate Lease Balance Equity shall be distributed to the Lessor for application to the Participant Balance of the Lessor; and Fifth, the balance, if any, of such payment or amounts remaining thereafter shall be promptly distributed to, or as directed by, the Lessee. - All payments received and amounts realized by the Lessor in connection with any Casualty or Condemnation during the continuance of an Event of Default shall be distributed by the Lessor as follows: - in the event that the Lessor elects to pay all or a portion of such amounts to the Lessee for the repair of damage caused by such Casualty or Condemnation, then such amounts shall be distributed to the Lessee; and - in the event that the Lessor elects to apply all or a portion of such amounts to the purchase price of the Property, then such amounts shall be distributed in accordance with clause (a) above. - OTHER PAYMENTS. - Except as otherwise provided in Sections 12.1, 12.2, 12.6 and clause (b) below, any payment received by the Lessor for which no provision as to the application thereof is made in the Operative Agreements or elsewhere in this Section 12 (including any balance remaining after the application in full of amounts to satisfy any expressed provision) shall 37. 39 be distributed pro rata among the Rent Purchasers and the Lessor without priority of one over the other, in the proportion that the Participant Balance of each bears to the aggregate of all the Participant Balances. - Except as otherwise provided in Sections 12.1, 12.2 and 12.6, all payments received and amounts realized by the Lessor under the Lease or otherwise with respect to the Property to the extent received or realized at any time after the indefeasible payment in full of the Participant Balances of all of the Rent Purchasers and the Lessor and any other amounts due and owing to the Rent Purchasers or the Lessor, shall be distributed forthwith by the Lessor, in the order of priority set forth in Section 12.6(a). - Except as otherwise provided in Sections 12.1 and 12.2, any payment received by the Lessor for which provisions as to the application thereof is made in an Operative Agreement but not elsewhere in this Section 12 shall be distributed forthwith by the Lessor to the Person and for the purpose for which such payment was made in accordance with the terms of such Operative Agreement. - CASUALTY AND CONDEMNATION AMOUNTS. Subject to Section 12.6(b), any amounts payable to and received by the Lessor as a result of a Casualty or Condemnation pursuant to Section 15.1 of the Lease shall be distributed as follows: - all amounts payable to and received by the Lessee for the repair of damage caused by such Casualty or Condemnation in accordance with Section 15.1(a) of the Lease shall be distributed to the Lessee; and - all amounts that are to be applied to the purchase price of the Property in accordance with Article 16 of the Lease shall be distributed by the Lessor upon receipt thereof to the Rent Purchasers and the Lessor in the following order of priority: First, to the Rent Purchasers, pro rata, to pay the Lease Balance Debt; and Second, to the Lessor to pay the Lease Balance Equity. - ORDER OF APPLICATION. To the extent any payment made to any Rent Purchaser or the Lessor pursuant to Sections 12.2, 12.3, 12.4, 12.6 or 12.7 is insufficient to pay in full the Participant Balance of such Rent Purchaser or the Lessor, then each such payment shall first be applied to accrued Yield and then to principal on the Rent Purchaser Advances or the Lessor Contributions, as applicable. - THE LESSOR - DELEGATION OF DUTIES. The Lessor may execute any of its duties hereunder or under the other Operative Agreements by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Lessor shall not be responsible for the negligence or misconduct of any agents or attorneys in fact selected by it with reasonable care. 38. 40 - ACTION BY LESSOR. The obligations of the Lessor hereunder and under the other Operative Agreements are only those expressly set forth herein and therein. Without limiting the generality of the foregoing, the Lessor shall not be required to take any action with respect to any Default or Event of Default, except as expressly provided herein and in the other Operative Agreements. - CONSULTATION WITH EXPERTS. The Lessor may consult with legal counsel (who may be counsel for the Lessee, a Rent Purchaser or any Affiliate of any of them), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. - EXCULPATORY PROVISIONS. Neither the Lessor nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be responsible for or have any duty to ascertain, inquire into or verify (a) any statement, warranty or representation made in connection with the Operative Agreements; (b) the performance or observance of any of the covenants or agreements of the Lessee; (c) the satisfaction of any condition precedent specified herein or in any other Operative Agreement; (d) the validity, effectiveness or genuineness of any of the Operative Agreements or any other instrument or writing furnished in connection herewith or therewith; (e) the use of the proceeds of any Advance; (f) the existence of any Default or Event of Default; or (g) the properties, books or records of the Lessee. - RELIANCE ON COMMUNICATIONS. The Lessor shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation reasonably believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Lessee, independent accountants and other experts selected by the Lessor). The Lessor may deem and treat the Rent Purchasers as the owners of their respective interests hereunder and under the other Operative Agreements for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Lessor in accordance with Section 10 of this Agreement. The Lessor, acting in its capacity as Lessor, shall be fully justified in failing or refusing to take any action under this Agreement or under any of the other Operative Agreements unless it shall first receive such advice or concurrence of the Rent Purchasers as it deems appropriate or it shall first be indemnified to its satisfaction by the Rent Purchasers against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Lessor shall in all cases be fully protected in acting, or in refraining from acting, hereunder or under any of the other Operative Agreements in accordance with a request of the Rent Purchasers and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Rent Purchasers (including their successors and assigns). - NOTICE OF DEFAULT. The Lessor shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Lessor has received notice from a Rent Purchaser or the Lessee referring to the Operative Agreement, describing such Default or Event of Default and stating that such notice is a "notice of 39. 41 default." In the event that the Lessor receives such a notice, the Lessor shall give prompt notice thereof to the Rent Purchasers. The Lessor shall (subject to Section 9.2) take such action with respect to such Default or Event of Default as shall be directed by the Majority Rent Purchasers; provided that unless and until the Lessor shall have received such directions, the Lessor may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Rent Purchasers except to the extent that this Agreement expressly requires that such action be taken, or not be taken, only with the consent or upon the authorization of the Majority Rent Purchasers or all Rent Purchasers. - NON-RELIANCE ON LESSOR AND OTHER PARTICIPANTS. Each Rent Purchaser expressly acknowledges that neither the Lessor (other than in its role as Participant) nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Lessor or any affiliate thereof hereafter taken, including any review of the affairs of the Lessee, shall be deemed to constitute any representation or warranty by the Lessor to any Participant. Each Participant represents to the Lessor that it has, independently and without reliance upon the Lessor or any other Participant, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, assets, operations, property, financial and other conditions, prospects and creditworthiness of the Lessee and made its own decision to make its proportionate share of the Rent Purchaser Advances hereunder and under the other Operative Agreements and enter into this Participation Agreement and the other Operative Agreements. Each Participant also represents that it will, independently and without reliance upon the Lessor or any other Participant, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Participation Agreement, and to make such investigation as it deems necessary to inform itself as to the business, assets, operations, property, financial and other conditions, prospects and creditworthiness of Lessee. Except for notices, reports and other documents expressly required to be furnished to the Participants by the Lessor hereunder, the Lessor shall not have any duty or responsibility to provide any Participant with any credit or other information concerning: the business, operations, assets, property, financial or other conditions, prospects or creditworthiness of Lessee which may come into the possession of the Lessor or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. - FAILURE TO ACT. Except for action expressly required of the Lessor hereunder, the Lessor shall in all cases be fully justified in failing or refusing to act hereunder unless it shall be indemnified to its satisfaction by the Rent Purchasers against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. - DISTRIBUTIONS. The Lessor shall, as promptly as practicable, distribute to each Participant its appropriate portion, if any, of payments received (in good, collected funds) by the Lessor from the Lessee for the account of the Participants or of any such payments so received for the account of such Participant. 40. 42 - THE AGENT - APPOINTMENT AND AUTHORIZATION; "AGENT". Each Rent Purchaser hereby irrevocably (subject to Section 14.9) appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Operative Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Operative Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Operative Document, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Agent have or be deemed to have any fiduciary relationship with any Rent Purchaser, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Operative Document or otherwise exist against the Agent. Without limiting the generality of the foregoing sentence, the use of the term "agent" in this Agreement with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. - DELEGATION OF DUTIES. The Agent may execute any of its duties under this Agreement or any other Operative Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. - LIABILITY OF AGENT. Neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates (collectively, the "Agent-Related Persons") shall (a) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Operative Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (b) be responsible in any manner to any of the Rent Purchasers for any recital, statement, representation or warranty made by the Lessee or any Subsidiary or Affiliate of the Lessee, or any officer thereof, contained in this Agreement or in any other Operative Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Operative Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Operative Document, or for any failure of the Lessee or any other party to any Operative Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Rent Purchaser to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Operative Document, or to inspect the properties, books or records of the Lessee or any of the Lessee's Subsidiaries or Affiliates. - RELIANCE BY AGENT. 41. 43 - The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Lessee), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Operative Document unless it shall first receive such advice or concurrence of the Majority Rent Purchasers as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Rent Purchasers against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Operative Document in accordance with a request or consent of the Majority Rent Purchasers and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Rent Purchasers. - For purposes of determining compliance with the conditions specified in Sections 6.1 and 6.2, each Rent Purchaser that has executed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by the Agent to such Rent Purchaser for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to the Rent Purchaser. - NOTICE OF DEFAULT. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Agent for the account of the Rent Purchasers, unless the Agent shall have received written notice from a Rent Purchaser or the Lessee referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default." The Agent will notify the Rent Purchasers of its receipt of any such notice. The Agent shall take such action with respect to such Default or Event of Default as may be requested by the Majority Rent Purchasers in accordance with Section 13.6 hereof; provided, however, that unless and until the Agent has received any such request, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Rent Purchasers. - CREDIT DECISION. Each Rent Purchaser acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by the Agent hereinafter taken, including any review of the affairs of the Lessee and its Subsidiaries, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Rent Purchaser. Each Rent Purchaser represents to the Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and credit worthiness of the Lessee and its Subsidiaries, and all applicable Rent Purchaser regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement. Each Rent Purchaser also represents that it will, independently and without reliance upon any Agent-Related Person and based on 42. 44 such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Operative Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and credit worthiness of the Lessee. Except for notices, reports and other documents expressly herein required to be furnished to the Rent Purchasers by the Agent, the Agent shall not have any duty or responsibility to provide any Rent Purchaser with any credit or other information concerning the business, prospects, operations, property, financial and other condition or credit worthiness of the Lessee which may come into the possession of any of the Agent-Related Persons. - INDEMNIFICATION OF AGENT. Whether or not the transactions contemplated hereby are consummated, the Rent Purchasers shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of the Lessee and without limiting the obligation of the Lessee to do so), pro rata, from and against any and all Indemnified Liabilities; provided, however, that no Rent Purchaser shall be liable for the payment to the Agent-Related Persons of any portion of such Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Rent Purchaser shall reimburse the Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including fees and disbursements of any law firm or internal or external counsel) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Operative Document, or any document contemplated by or referred to herein, to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Lessee. The undertaking in this Section 14.7 shall survive the termination of this Agreement and the resignation or replacement of the Agent. - AGENT IN INDIVIDUAL CAPACITY. The Bank of Nova Scotia and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of lending, trust, financial advisory, underwriting or other business with the Lessee and its Subsidiaries and Affiliates as though The Bank of Nova Scotia were not the Agent hereunder and without notice to or consent of the Rent Purchasers. The Rent Purchasers acknowledge that, pursuant to such activities, The Bank of Nova Scotia or its Affiliates may receive information regarding the Lessee or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Lessee or such Subsidiary) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to its Rent Purchaser Commitment, The Bank of Nova Scotia shall have the same rights and powers under this Agreement as any other Rent Purchaser and may exercise the same as though it were not the Agent, and the terms "Rent Purchaser" and "Rent Purchasers" include The Bank of Nova Scotia in its individual capacity. - SUCCESSOR AGENT. The Agent may resign as Agent upon thirty (30) days' notice to the Rent Purchasers. If the Agent resigns under this Agreement, the Majority Rent Purchasers shall appoint from among the Rent Purchasers a successor agent for the Rent Purchasers. If no successor agent is appointed prior to the effective date of the resignation of the 43. 45 Agent, the Agent may appoint, after consulting with the Rent Purchasers and the Lessee, a successor agent from among the Rent Purchasers. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor agent and the retiring Agent's appointment, powers and duties as the Agent shall be terminated. After any retiring Agent's resignation hereunder as the Agent, the provisions of this Section 14 and Sections 11.1 and 11.2 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is thirty (30) days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Rent Purchasers shall perform all of the duties of the Agent hereunder until such time, if any, as the Majority Rent Purchasers appoint a successor agent as provided for above. - MISCELLANEOUS - SURVIVAL OF AGREEMENTS. The representations, warranties, covenants, indemnities and agreements of the parties provided for in the Operative Agreements, and the parties' obligations under any and all thereof, shall survive the execution and delivery of this Agreement, any disposition of any interest of the Lessor in the Property or the Improvements, the payment of the Rent Purchaser Advances and any disposition thereof and shall be and continue in effect notwithstanding any investigation made by any party and the fact that any party may waive compliance with any of the other terms, provisions or conditions of any of the Operative Agreements. Except as otherwise expressly set forth herein or in other Operative Agreements, the indemnities of the parties provided for in the Operative Agreements shall survive the expiration or termination of any thereof. - NO BROKER, ETC. Each of the parties hereto represents to the others that it has not retained or employed any broker, finder or financial adviser to act on its behalf in connection with this Agreement, nor has it authorized any broker, finder or financial adviser retained or employed by any other Person so to act except as set forth on SCHEDULE 15.2 hereto. Any party who is in breach of this representation or who has retained or employed a broker, finder or financial advisor shall indemnify and hold the other parties harmless from and against any liability arising out of such breach of this representation, retainage or employment. - NOTICES. Unless otherwise specifically provided herein, all notices, consents, directions, approvals, instructions, requests and other communications required or permitted by the terms hereof to be given to any Person shall be given in writing by nationally recognized courier service and any such notice shall become effective one (1) Business Day after delivery to a nationally recognized courier service specifying overnight delivery and shall be directed to the address of such Person as indicated: If to the Lessee, to it at: Lam Research Corporation 4650 Cushing Parkway 44. 46 Fremont, CA 94538 Attention: Craig Garber, Treasurer Telephone No.: (510) 572-1875 Telecopy No.: (510) 572-1586 If to the Lessor, to it at: Scotiabanc Inc. 600 Peachtree Street NE, Suite 2700 Atlanta, Georgia 30308 Attention: William Brown, Managing Director Telephone No.: (404) 877-1501 Telecopy No.: (404) 888-8998 If to the Agent, to it at: The Bank of Nova Scotia 580 California Street, Suite 2100 San Francisco, California 94104 Attention: Chris Osborn Telephone No.: (415) 986-1100 Telecopy No.: (415) 397-0791 If to any Rent Purchaser, to it at such address as may be specified on SCHEDULE 2.1 or otherwise in writing to the other parties hereto. From time to time any party may designate a new address for purposes of notice hereunder by notice to each of the other parties hereto. - COUNTERPARTS. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. - AMENDMENTS AND TERMINATION. Neither this Agreement nor any of the terms hereof may be terminated, amended, supplemented, waived or modified except by an instrument in writing signed by the party against which the enforcement of the termination, amendment, supplement, waiver or modification shall be sought. This Agreement may be terminated by an agreement signed in writing by the parties hereto. - HEADINGS, ETC. The Table of Contents and headings of the various Sections and Subsections of this Agreement are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof. - PARTIES IN INTEREST. Except as expressly provided herein, none of the provisions of this Agreement are intended for the benefit of any Person except the parties hereto. 45. 47 - GOVERNING LAW; WAIVER OF JURY TRIAL. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. THE LESSEE, THE AGENT, THE RENT PURCHASERS AND THE LESSOR EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER OPERATIVE DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE LESSEE, THE AGENT, THE RENT PURCHASERS AND THE LESSOR EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER OPERATIVE DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER OPERATIVE DOCUMENTS. - SEVERABILITY. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. - LIABILITY LIMITED. - The parties hereto agree that except as specifically set forth herein or in any other Operative Agreement, the Lessor shall have no personal liability whatsoever to any Participant or their respective successors and assigns for any claim based on or in respect hereof or any of the other Operative Agreements or arising in any way from the transactions contemplated hereby or thereby and recourse, if any, shall be solely had against the Lessor's interest in the Property; provided, however, that the Lessor shall be liable in its individual capacity (i) for its own willful misconduct or gross negligence, (ii) breach of any of its representations, warranties or covenants under the Operative Agreements, or (c) for any Tax based on or measured by any fees, commission or compensation received by it for acting as a Lessor as contemplated by the Operative Agreements. It is understood and agreed that, except as provided in the preceding sentence: (i) the Lessor shall have no personal liability under any of the Operative 46. 48 Agreements as a result of acting pursuant to and consistent with any of the Operative Agreements; (ii) all obligations of the Lessor to any Rent Purchaser are solely nonrecourse obligations except to the extent that the Lessor has received the proceeds to the Rent Purchaser Advances); and (iii) all such personal liability of the Lessor is expressly waived and released as a condition of, and as consideration for, the execution and delivery of the Operative Agreements by the Lessor. - No Participant shall have any obligation to any other Participant or to Lessee, the Lessor or the Rent Purchasers with respect to transactions contemplated by the Operative Agreements, except those obligations of such Participant expressly set forth in the Operative Agreements or except as set forth in the instruments delivered in connection therewith, and no Participant shall be liable for performance by any other party hereto of such other party's obligations under the Operative Agreements except as otherwise so set forth. - FURTHER ASSURANCES. The parties hereto shall promptly cause to be taken, executed, acknowledged or delivered, at the sole expense of the Lessee, all such further acts, conveyances, documents and assurances as the other parties may from time to time reasonably request in order to carry out and effectuate the intent and purposes of this Agreement, the other Operative Agreements and the transactions contemplated hereby and thereby (including, without limitation, the preparation, execution and filing of any and all Uniform Commercial Code financing statements and other filings or registrations which the parties hereto may from time to time request to be filed or effected). The Lessee, at its own expense, shall take such action as may be reasonably requested in order to maintain and protect all security interests provided for hereunder or under any other Operative Agreement. - SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. - RENEWALS - EXTENSIONS OF MATURITY DATE AND EXPIRATION DATE. So long as the Lessee has not elected the remarketing option, and no Default or Event of Default shall then exist, the Lessee may, not earlier than one (1) year before the Maturity Date, direct a written request to the Lessor and the Agent that the Expiration Date then in effect under the Lease be extended on terms mutually agreeable to Lessor, Agent and Lessee. Any such renewal term (each, a "Renewal Term") shall be effective only upon the consent of all Participants and each Participant may grant or deny its consent to a renewal of the Lease in its sole discretion. 47. 49 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. LAM RESEARCH CORPORATION, as Lessee By: /s/ Craig Garber ------------------------------- Name: Craig Garber ------------------------------- Title: Treasurer ------------------------------- [PARTICIPATION AGREEMENT] 50 SCOTIABANC INC., as Lessor By: /s/ F.C.H. Ashby ------------------------------- Name: F.C.H. Ashby ------------------------------- Title: Senior Manager, Loan Operations ------------------------------- 51 THE BANK OF NOVA SCOTIA, as Agent By: /s/ Chris Osborn ------------------------- Name: Chris Osborn ------------------------- Title: Director ------------------------ THE BANK OF NOVA SCOTIA, as a Rent Purchaser By: /s/ Chris Osborn ------------------------- Name: Chris Osborn ------------------------- Title: Director ------------------------ [PARTICIPATION AGREEMENT] 52 SCHEDULE 2.1 LESSOR COMMITMENT
Amount of Lessor Name and Address of Lessor Commitment - ---------------------------- ---------------- Scotiabanc Inc. 600 Peachtree Street NE, Suite 2700 Atlanta, Georgia 30308 $3,203,249.86
RENT PURCHASER COMMITMENT
Amount of Rent Name and Address of Rent Purchaser Purchaser Commitment - ---------------------------------- -------------------- The Bank of Nova Scotia 580 California Street San Francisco, California 94104 $23,942,935.39
53 SCHEDULE 2.6 Payment Instructions FOR THE BANK OF NOVA SCOTIA: The Bank of Nova Scotia New York Agency 1 Liberty Plaza New York, NY ABA # 026002532 Credit Account # 0610135 BNS San Francisco -- Loan Service Reference -- Lam Research Corporation FOR SCOTIABANC INC.: The Bank of Nova Scotia New York Agency 1 Liberty Plaza New York, NY ABA # 026002532 Credit Account # 0735639 Scotiabanc Inc. Reference -- Lam Research Corporation 54 SCHEDULES Schedule 2.1 Lessor Commitment and Rent Purchaser Commitments Schedule 2.6 Payment Instructions Schedule 7.2 Exceptions to Representations and Warranties of the Lessee Schedule 15.2 Brokers, Finders and Financial Advisors EXHIBITS Exhibit A Form of Pledge Agreement Exhibit B Form of Assignment and Acceptance Exhibit C Form of Officer's Certificate 55 TABLE OF CONTENTS
PAGE ---- SECTION 1 THE RENT PURCHASE...................................................1 SECTION 2 LESSOR CONTRIBUTIONS................................................2 2.1 Lessor Contributions...................................................2 2.2 Yield..................................................................2 2.3 Interest Period Selection Elections....................................3 2.4 Prepayments............................................................4 2.5 Fees...................................................................4 2.6 Payments...............................................................4 SECTION 3 SUMMARY OF THE TRANSACTIONS.........................................4 3.1 Operative Agreements...................................................4 3.2 Property Acquisition and Lease.........................................4 SECTION 4 THE CLOSING.........................................................5 SECTION 5 FUNDING OF ADVANCES.................................................5 5.1 General.................................................................5 5.2 Procedures for Funding.................................................5 5.4 Pledged Collateral.....................................................6 SECTION 6 CONDITIONS OF THE CLOSING AND ADVANCES..............................7 6.1 General Conditions to the Closing Date.................................7 6.2 Conditions to Rent Purchasers' and Lessor's Obligations to Make Rent Purchaser Advances and Lessor Contributions..................9 SECTION 7 REPRESENTATIONS AND WARRANTIES.....................................10 7.1 Representations and Warranties of the Lessor on the Closing Date......10 7.2 Representations and Warranties of the Lessee on the Closing Date and the Funding Date..................................................12 SECTION 8 PAYMENT OF CERTAIN EXPENSES........................................17 8.1 Transaction Expenses..................................................17 8.2 Brokers' Fees and Stamp Taxes.........................................17 8.3 Certain Fees and Expenses.............................................17 8.4 Commitment Fee........................................................17 SECTION 9 OTHER COVENANTS AND AGREEMENTS.....................................18 9.1 Cooperation with the Lessee...........................................18 9.2 Covenants of the Lessor...............................................18 9.3 Covenants of the Lessee...............................................19 SECTION 10 TRANSFER OF INTEREST..............................................23 10.1 Assignments...........................................................23 10.2 Participations........................................................24 10.3 Disclosure of Information; Pledge Under Regulation A. ................24 SECTION 11 INDEMNIFICATION...................................................25 11.1 General Indemnity.....................................................25
i. 56 TABLE OF CONTENTS (CONTINUED)
PAGE ---- 11.2 General Impositions Indemnity....................................26 11.3 LIBOR Lending Unlawful...........................................30 11.4 Deposits Unavailable.............................................31 11.5 Increased Costs, etc.............................................31 11.6 Funding Losses...................................................33 11.7 Capital Adequacy.................................................33 SECTION 12 DISTRIBUTION.....................................................34 12.1 Basic Rent.......................................................34 12.2 Purchase Payments by the Lessee..................................34 12.3 Payment of Lease Balance Debt....................................34 12.4 Sales Proceeds of Remarketing of Property........................35 12.5 Supplemental Rent................................................35 12.6 Distribution of Payments after Event of Default..................35 12.7 Other Payments...................................................36 12.8 Casualty and Condemnation Amounts................................36 12.9 Order of Application.............................................37 SECTION 13 THE LESSOR.......................................................37 13.1 Delegation of Duties.............................................37 13.2 Action by Lessor.................................................37 13.3 Consultation with Experts........................................37 13.4 Exculpatory Provisions...........................................37 13.5 Reliance on Communications.......................................38 13.6 Notice of Default................................................38 13.7 Non-Reliance on Lessor and Other Participants....................38 13.8 Failure to Act...................................................39 13.9 Distributions....................................................39 SECTION 14 THE AGENT........................................................39 14.1 Appointment and Authorization; "Agent"...........................39 14.2 Delegation of Duties.............................................39 14.3 Liability of Agent...............................................40 14.4 Reliance by Agent................................................40 14.5 Notice of Default................................................40 14.6 Credit Decision..................................................41 14.7 Indemnification of Agent.........................................41 14.8 Agent in Individual Capacity.....................................42 14.9 Successor Agent..................................................42 SECTION 15 MISCELLANEOUS....................................................42 15.1 Survival of Agreements...........................................42 15.2 No Broker, etc...................................................42
ii. 57 TABLE OF CONTENTS (CONTINUED)
PAGE 15.3 Notices.............................................. 43 15.4 Counterparts......................................... 44 15.5 Amendments and Termination........................... 44 15.6 Headings, etc........................................ 44 15.7 Parties in Interest.................................. 44 15.8 Governing Law; Waiver Of Jury Trial.................. 44 15.9 Severability......................................... 44 15.10 Liability Limited.................................... 45 15.11 Further Assurances................................... 45 15.12 Successors and Assigns............................... 45 SECTION 16 RENEWALS........................................... 45 16.1 Extensions of Maturity Date and Expiration Date...... 45
iii. EX-27 4 EXHIBIT-27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF OPERATIONS, THE CONSOLIDATED BALANCE SHEET AND THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JUN-25-2000 JUL-01-1999 MAR-26-2000 27,296 294,182 310,846 4,166 217,145 926,999 264,947 149,644 1,185,348 284,640 309,868 0 0 124 577,527 1,185,348 856,551 856,551 485,078 713,531 0 0 14,588 148,033 19,628 128,405 0 0 0 128,405 1.07 0.97
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