-----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, JnfnNS08uoe/VAT9D6vSxuVGP46vcgF202lrAnraMbKPV+rXsfP59s6zSmJw67RQ xNjYlMFj40qoQs1fk0PPmw== 0000950149-96-000427.txt : 19960429 0000950149-96-000427.hdr.sgml : 19960429 ACCESSION NUMBER: 0000950149-96-000427 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19960128 FILED AS OF DATE: 19960426 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WILLIAMS SONOMA INC CENTRAL INDEX KEY: 0000719955 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOME FURNITURE, FURNISHINGS & EQUIPMENT STORES [5700] IRS NUMBER: 942203880 STATE OF INCORPORATION: CA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12704 FILM NUMBER: 96551768 BUSINESS ADDRESS: STREET 1: 100 N POINT ST CITY: SAN FRANCISCO STATE: CA ZIP: 94133 BUSINESS PHONE: 4156168345 MAIL ADDRESS: STREET 1: 100 NORTH POINT STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94133 10-K 1 FOR FISCAL YEAR ENDED JANUARY 28,1996 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended January 28, 1996 ---------------- Commission file number 2-83992 ------- WILLIAMS-SONOMA, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) California 94-2203880 - ------------------------------------------------------------------------------------------------------ (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
3250 Van Ness Avenue, San Francisco, CA 94109 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (415) 421-7900 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock Indicate by checkmark 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 --- --- Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. --- As of April 22, 1996, the approximate aggregate market value of voting stock held by non-affiliates of the Registrant was $413,107,128 using the closing sales price on this day of $23.125. It is assumed for purposes of this computation an affiliate includes all persons registered as Company insiders with the Securities and Exchange Commission, as well as the Company's Employee Profit Sharing and Stock Incentive Plan. As of April 22, 1996, 25,440,140 shares of the Registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the following documents have been incorporated herein by reference: 1) Registrant's Annual Report to Shareholders for the Fiscal Year ended January 28, 1996 (the "1995 Annual Report") in Parts I and II hereof and attached hereto as Exhibit 13; 2 2) Registrant's Proxy Statement for the 1995 Annual Meeting (the "Proxy Statement") in Part III hereof. 3 WILLIAMS-SONOMA, INC. FORM 10-K ANNUAL REPORT FISCAL YEAR ENDED JANUARY 28, 1996 TABLE OF CONTENTS
PART I PAGE ---- Item 1. Business 3 Item 2. Properties 6 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security 7 Holders PART II Item 5. Market for the Registrant's Common Equity 8 and Related Stockholder Matters Item 6. Selected Financial Data 8 Item 7. Management's Discussion and Analysis of 8 Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data 9 Item 9. Changes in and Disagreements with Accountants 9 on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the 10 Registrant Item 11. Executive Compensation 10 Item 12. Security Ownership of Certain Beneficial 10 Owners and Management Item 13. Certain Relationships and Related Transactions 10 PART IV Item 14. Exhibits, Financial Statement Schedules 11 and Reports on Form 8-K
2 4 PART I ITEM 1. BUSINESS Williams-Sonoma, Inc., together with its subsidiaries (the Company), is a national specialty retailer of fine quality cooking and serving equipment, home furnishings and home and garden accessories, which it markets through 240 retail stores and five mail order catalogs. The Company believes that it is one of the country's largest specialty retailers of such equipment, furnishings and accessories. Retail sales accounted for approximately 61% of the Company's net sales during the fiscal year ended January 28, 1996 (Fiscal 1995), while mail order sales accounted for the balance. The Company offers high quality, home-centered merchandise through five concepts, each of which is focused on a different area of the home: Williams-Sonoma offers culinary and serving equipment; Pottery Barn features items in casual home furnishings, flatware and table accessories; Hold Everything offers innovative household storage products; Gardeners Eden features home gardening equipment and accessories; and Chambers offers high quality bed and bath products. Together, these concepts help customers satisfy their home-centered needs from the kitchen and garden to the bedroom and bath. The Company was founded in 1956 in Sonoma, California, by Charles E. Williams, currently Vice Chairman and a director of the Company. Williams-Sonoma was one of the first retailers of fine quality cookware in the United States. Two years later, the Sonoma store was moved to San Francisco. In 1972, the Company began to offer its Williams-Sonoma kitchen products through mail order catalogs. The Company expanded into areas of the home-centered business beyond kitchen products by acquiring: Gardeners Eden, a mail order merchandiser of home gardening equipment and accessories and housewares, in 1982; Pottery Barn, a retailer of home furnishings, accessories and housewares, in 1986; and California Closet Company, Inc., a direct marketer and installer of customized closet systems, in 1990. The Company also internally developed Hold Everything, a retail and mail order merchandiser of innovative household storage products, and Chambers, a mail order merchandiser of high-quality bed and bath products. In August 1994 the Company sold California Closet Company, Inc., which accounted for 2% of sales for the fiscal year ended January 30, 1994 (Fiscal 1993). MERCHANDISING CONCEPTS The Company has five merchandising concepts: Williams-Sonoma, Pottery Barn, Hold Everything, Gardeners Eden, and Chambers. The Company believes that these specialty concepts together can fulfill a customer's home-centered needs, from the kitchen and garden to the bedroom and bath. 3 5 RETAIL STORES Three of the Company's five merchandising concepts are marketed through retail stores - Williams-Sonoma, Pottery Barn and Hold Everything. Williams-Sonoma stores offer a wide selection of culinary and serving equipment, including cookware, cookbooks, cutlery, informal dinnerware, glassware and table linen. In addition, these stores carry a variety of quality foods, including a line of Williams-Sonoma food products, such as gourmet coffees and pasta sauces. Pottery Barn stores feature a large assortment of items in casual home furnishings, flatware and table accessories from around the world that are designed to be combined to create a dynamic look in the home. The Hold Everything concept was developed by the Company to offer innovative solutions to household storage needs by providing efficient organization solutions for every room in the house. As of January 28, 1996 the Company operated 240 retail stores, located in 32 states and the District of Columbia. This represents 139 Williams-Sonoma, 67 Pottery Barn, 32 Hold Everything, and 2 outlet stores. During Fiscal 1995 the Company opened 34 new large format stores and expanded 9 existing store sites to the larger format. The 27 larger format Williams-Sonoma stores are, on average, 56% larger than the average Williams-Sonoma store. The 16 large format Pottery Barn stores are, on average, 268% larger than the average Pottery Barn store. The Company plans 27 new or expanded large-format stores in Fiscal 1996 -- 14 Williams-Sonoma and 13 Pottery Barn. During Fiscal 1995, the Company closed 1 Williams-Sonoma store, 3 Hold Everything stores and 4 Pottery Barn stores. MAIL ORDER OPERATIONS The Company's mail order business began in 1972 when it introduced its flagship catalog, "A Catalog for Cooks," which markets the Williams-Sonoma concept. Since then, it has expanded its mail order business to include the four other concepts - - Pottery Barn, Hold Everything, Gardeners Eden and Chambers. The mail order business complements the retail business by building customer awareness of a concept and acting as an effective advertising vehicle. In addition, the Company believes that the mail order catalogs act as a cost efficient means of testing market acceptance of new products. The Company sends its catalogs to addresses from its proprietary customer list, as well as to names from lists which the Company receives in exchange or rents from other mail order merchandisers, magazines and other companies. In accordance with prevailing industry practice, the Company rents its list to other merchandisers. The Company's customer list is continually updated to include new prospects and eliminate non-responders. During the 1994 and 1995 holiday seasons, the Company experienced difficulty in fulfilling some of its mail orders due to a delay in completing planned upgrades to the mail order equipment and computer systems in its Memphis facility. In addition, the increased volume of telephone orders and customer service calls during the two holiday seasons at times exceeded the handling capacity of the telemarketing center. The Company expects to resolve these issues by completing the Memphis upgrades in July 1996 and by building another call center in Las Vegas, Nevada which will effectively double the Company's ability to process mail orders. SUPPLIERS The Company purchases its merchandise from numerous foreign and domestic manufacturers and importers, none of which accounted for more than 5% of purchases during Fiscal 1995. Approximately 39% of the Company's merchandise is foreign-sourced. The primary sources for imported merchandise are located in Europe and Asia. The Company relies on long-standing arrangements with many of its buying agents. 4 6 MANAGEMENT INFORMATION SYSTEMS The Company's management information systems (MIS) are designed to provide its management and other personnel with information necessary to control and manage its business. In 1995, the Company completed several key projects, including the expansion and upgrade of its automatic call directing phone switch which routes mail order customer calls, and enhanced merchandise receiving and electronic forms modules in the stores. In 1996, the Company is in the process of significantly upgrading the information systems and order processing equipment in the mail order distribution facility. The upgrade, originally scheduled for completion in the fall of 1995, is designed to address the problems the Company experienced in fulfilling customers' mail orders during the last two seasons due to inadequate equipment and systems. The Company expects to complete the upgrade in July 1996. COMPETITION AND SEASONALITY The specialty retail business is highly competitive. The Company's specialty retail stores and mail order catalogs compete with other retail stores, including specialty stores and department stores and other mail order catalogs. Certain of the Company's competitors have greater financial, distribution and marketing resources than the Company. The recent substantial sales growth in the mail order catalog industry has encouraged the entry of many new competitors and an increase in competition from established companies. The Company competes on the basis of the quality of its merchandise, service to its customers and its proprietary customer list. The Company's business is subject to substantial seasonal variations in demand. Historically, a significant portion of the Company's sales and net income have been realized during the period from October through December, and levels of net sales and net income have generally been significantly lower during the period from February through July. The Company believes this is the general pattern associated with the mail order and retail industries. In anticipation of its peak season, the Company hires a substantial number of additional employees in its retail stores and mail order processing and distribution areas, and incurs significant fixed catalog production and mailing costs. (See Quarterly Financial Information on page 31 of the 1995 Annual Report which is incorporated herein by reference). EMPLOYEES At January 28, 1996, the Company employed approximately 8,700 persons, approximately 2,900 of whom were full-time employees. During the 1995 peak season the Company hired approximately 3,000 temporary employees in its stores and in its mail order processing and distribution areas. 5 7 ITEM 2. PROPERTIES The Company's corporate offices are located in two facilities in San Francisco, California. The primary headquarters building was purchased in 1993 with plans to consolidate the entire headquarters staff in the spring of 1995. As a result, in the fourth quarter of Fiscal 1993 the Company recorded a $3,000,000 reserve for the estimated cost of sub-leasing the leased space it planned to vacate when it moved into the new building prior to the expiration of the existing leases. Sales growth experienced in 1994 and planned growth in Fiscal 1995 required the Company to retain some of the leased space. Therefore, in the fourth quarter of Fiscal 1994 the Company reversed $2,000,000 of the lease reserves. In April 1994 the Company entered into a mortgage agreement with a bank, secured by the new corporate headquarters. The call center and second corporate office is held under a lease which was amended in January 1996. A third facility was in use as a call center at the end of the 1995 fiscal year but was subsequently closed and its employees relocated to the remaining offices. On January 2, 1996, the Company entered an agreement to lease a 53,787 square-foot build-to-suit call center in Las Vegas, Nevada, which will approximately double the Company's capacity to process mail orders. The lease covers a ten-year term with three optional five-year renewal periods. The Company plans to occupy 35,867 square feet of the building in August 1996 and has an option for an additional 17,920 square-foot expansion. In July 1984, the Company began distributing its merchandise through a centralized leased facility of approximately 243,000 square feet located in Memphis, Tennessee. In October 1986 an additional 190,000 square feet of distribution center was constructed. The lessor is a partnership consisting of two directors and/or officers of the Company. The construction of the entire facility was financed by the partnership through the aggregate issuance of $2,900,000 of industrial development bonds. The lease had an initial non-cancelable term of ten years expiring on June 30, 1994 with two optional five-year renewals by the Company. In December 1993, the Company exercised the two five-year renewal options and is now obligated to lease the space until June 30, 2004. In addition, the Company is obligated to renew the lease annually so long as the bonds which financed the project are outstanding. Effective July 1, 1994, the fixed basic monthly rent is $51,500. In connection with the December 1993 transaction, both the partnership and the Company provided to an unaffiliated bank an indemnity against certain environmental liabilities. In August 1990, the Company entered into a lease agreement for an additional 307,000 square feet of distribution space adjacent to its existing Memphis facility. The lessor is a partnership that includes three directors and/or officers of the Company. The construction was financed by the partnership through the sale of $10,550,000 of industrial development bonds. In September 1994 the lease was amended to include an approximately 306,000 square-foot expansion, financed by the lessor through a $500,000 capital contribution from its partners and the sale of $9,825,000, 9.01% principal amount of industrial development bonds. The expansion was completed in October 1995. The amended lease has an initial, non-cancelable term of fifteen years, with three optional five-year renewals, and mandatory annual renewals so long as the bonds are outstanding. (See Note F of the Company's Consolidated Financial Statements). The Company's net selling area totaled approximately 690,000 square feet of leased space at January 28, 1996 for 240 stores. All of the existing stores are leased by the Company with original lease terms ranging from three to twenty-five years, expiring between 1996 and 2015, except for one store with a 49-year lease term extending through 2040. Most leases for the Company's stores provide for contingent rent based upon sales. (See Note E of the Company's Consolidated Financial Statements). 6 8 ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings against the Company. The Company is, however, involved in routine litigation arising in the ordinary course of its business, and, while the results of the proceedings cannot be predicted with certainty, the Company believes that the final outcome of such matters will not have a materially adverse effect on the Company's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the 1995 fiscal year. 7 9 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's common stock is currently traded on the NASDAQ National Market System. Information contained under the caption "Common Stock" on page 31 of the 1995 Annual Report is incorporated herein by reference. The closing sales price of the Company's stock in the NASDAQ National Market System on April 22, 1996 was $23.125. SHAREHOLDERS The number of shareholders of record as of April 22, 1996 was approximately 619. This number excludes shareholders whose stock is held in nominee or street name by brokers. DIVIDEND POLICY The Company has never declared or paid a cash dividend on its common stock, and the current policy of its Board of Directors is to retain its earnings to finance future growth. In addition, the Company is prohibited from paying cash dividends by certain covenants in its bank credit agreement, its sublease for the Memphis distribution center, and its 7.2% Senior Notes due 2005. STOCK SPLITS In January 1994 the Company declared a 3-for-2 stock split to shareholders of record as of January 28, 1994. The split was effected on February 18, 1994 with the issuance of 5,574,594 additional shares. In August 1994 the Company declared a 3-for-2 stock split to shareholders of record as of September 7, 1994. The split was effected on September 27, 1994 with the issuance of 8,414,056 additional shares. ITEM 6. SELECTED FINANCIAL DATA Information contained under the caption "Five Year Selected Financial Data" on page 17 of the 1995 Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information contained under the caption "Management's Discussion and Analysis" on pages 18 - 20 of the 1995 Annual Report is incorporated herein by reference. 8 10 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following documents are incorporated by reference to pages 21 through 30 of the 1995 Annual Report to Shareholders filed as Exhibit 13 to this Annual Report on Form 10-K: Independent Auditors' Report Consolidated Balance Sheets as of January 28, 1996 and January 29, 1995 Consolidated Statements of Earnings for each of the three fiscal years in the period ended January 28, 1996 Consolidated Statements of Shareholders' Equity for each of the three fiscal years in the period ended January 28, 1996 Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended January 28, 1996 Notes to Consolidated Financial Statements The quarterly information contained under the caption "Quarterly Financial Information" on page 31 of the 1995 Annual Report is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 9 11 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information contained in the table under the caption "Election of Directors" in the Proxy Statement is incorporated herein by reference. Information contained in the last paragraph under the caption "Voting Securities and Principal Shareholders" on page 4 of the Proxy Statement is incorporated herein by reference. At each Annual Meeting, directors are elected to serve until the next annual meeting of shareholders or until the election and qualification of their successors. The Company's Bylaws provide for not less than six nor more than eleven directors, the exact number having been fixed by the Board of Directors at ten. Executive officers of the Company are elected by the Board of Directors at the annual organizational meeting held immediately following the Annual Meeting and serve at the pleasure of the Board. Information contained in the first table under the caption "Information Concerning Executive Officers" on page 8 of the Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information relating to the aggregate cash compensation paid by the Company to each of its five most highly compensated executive officers for the fiscal year ended January 28, 1996, is contained under the caption "Executive Compensation" on pages 9 through 14 of the Proxy Statement and is incorporated herein by reference (except the information contained in the Compensation Committee Report and the Performance Graph). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT a) Information with respect to those persons known to the Company to be beneficial owners of more than 5% of its common stock as of April 22, 1996, is contained under the caption "Voting Securities and Principal Shareholders" on pages 2 through 4 of the Proxy Statement and is incorporated herein by reference. b) Information concerning the beneficial ownership of the Company's common stock by its directors, by each executive officer named in the "Summary Compensation Table" set forth on page 9 of the Proxy Statement, and by its directors and officers as a group, as of April 22, 1996, is contained in the tables under the captions "Voting Securities and Principal Shareholders" and "Election of Directors" on pages 1 through 8 of the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to certain relationships and related transactions is contained under the caption "Certain Transactions" on page 8 of the Proxy Statement and is incorporated herein by reference (see Note F of Notes to Consolidated Financial Statements). 10 12 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Documents filed as part of the Form 10-K: See Item 8 for a list of Financial Statements incorporated herein by reference. (a)(2) Financial Statement Schedules Description Page ----------- ---- Independent Auditors' Report on Financial Statement Schedule 12 Schedule II Valuation and Qualifying Accounts 13 Schedules other than those referred to above have been omitted because they are not required or are not applicable. (b) Reports on Form 8-K: No Form 8-K filings were made during the last quarter of the fiscal year ended January 28, 1996. (c) Exhibits: See Exhibit Index on pages 16 through 19. 11 13 [DELOITTE & TOUCHE LLP LETTERHEAD] INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Shareholders of Williams-Sonoma, Inc. We have audited the consolidated financial statements of Williams-Sonoma, Inc. and subsidiaries as of January 28, 1996 and January 29, 1995, and for each of the three fiscal years in the period ended January 28, 1996, and have issued our report thereon dated April 15, 1996; such financial statements and report are included in your 1995 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedule of Williams-Sonoma, Inc. and subsidiaries listed on Item 14. This financial statement schedule is the reponsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP April 15, 1996 12 14 SCHEDULE II WILLIAMS-SONOMA, INC. & SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E - -------- -------- -------- -------- -------- Additions Balance at Charged to Balance at Beginning Costs and End of Description of Period Expenses Deductions Period - ----------- --------- -------- ---------- ------ Period Ended January 30, 1994: Allowance for Doubtful Accounts $628,000 $ 42,000 $332,000 (A) $338,000 Period Ended January 29, 1995: Allowance for Doubtful Accounts $338,000 $ 14,000 $113,000 (B) $239,000 Period Ended January 28, 1996: Allowance for Doubtful Accounts $239,000 $119,000 $120,000 (A) $238,000
(A) Consists of direct write-offs charged against the allowance account during the period. (B) Includes $4,000 of direct write-offs and $109,000 allowance included in the financial statements of a wholly-owned subsidiary that was sold in August 1994. 13 15 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WILLIAMS-SONOMA, INC. Date: April 26, 1996 By /s/W. Howard Lester ------------------- Chairman and Chief Executive Officer Pursuant to the requirements of Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: April 26, 1996 /s/W. Howard Lester ------------------- W. Howard Lester Chairman Chief Executive Officer Date: April 26, 1996 /s/Dennis A. Chantland ---------------------- Dennis A. Chantland Executive Vice President Chief Administrative Officer Acting Chief Financial Officer Secretary Date: April 26, 1996 /s/Jerry S. B. Dratler ------------------- Jerry S. B. Dratler Vice President Controller Chief Accounting Officer Date: April 26, 1996 /s/Charles E. Williams ---------------------- Charles E. Williams Vice-Chairman Director Date: April 26, 1996 /s/Gary G. Friedman ------------------- Gary G. Friedman Executive Vice President President-Retail Division Director Date: April 26, 1996 /s/Patrick J. Connolly ---------------------- Patrick J. Connolly Executive Vice President General Manager, Catalog Director 14 16 Date: April 26, 1996 /s/James A. McMahan ------------------- James A. McMahan Director Date: April 26, 1996 /s/Nathan Bessin ---------------- Nathan Bessin Director Date: April 26, 1996 /s/F. Warren Hellman -------------------- F. Warren Hellman Director Date: April 26, 1996 /s/Millard S. Drexler --------------------- Millard S. Drexler Director Date: April 26, 1996 /s/John Martin -------------- John Martin Director Date: April 26, 1996 /s/ James M. Berry ------------------ James M. Berry Director 15 17 EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 28, 1996
EXHIBIT NUMBER EXHIBIT DESCRIPTION PAGE NO. 3.1 Certificate of Amendment of the Restated Articles of Incorporation, (incorporated by reference to Exhibit 4.1 to the Company's registration statement on Form S-2 filed with the Commission on June 28, 1990 as amended by amendment number 1 on Form S-2 filed with the Commission on July 17, 1990) 3.1 A Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Report on Form 10-K for the fiscal year ended January 31, 1988, as filed with the Commission on April 29, 1988) 3.1 B Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Report on Form 10-Q for the period ended October 29, 1995, as filed with the Commission on December 12, 1995) 3.2 Restated and Amended Bylaws of Registrant (incorporated by reference to Exhibit 3.2 to the Company's Report on Form 10-K for the fiscal year ended January 31, 1988, as filed with the Commission on April 29, 1988) 10.1 1983 Incentive Stock Option Plan and Form of Agreement (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1, as filed with the Commission on May 25, 1983) 10.1 A 1976 Stock Option Plan and Form of Agreement as amended (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1993 as filed with the Commission on May 3, 1993) 10.1 B 1993 Stock Option Plan approved by the Shareholders at the 1993 Annual Meeting (incorporated by reference to Exhibit 10.22 to the Company's Report on Form 10-Q for the period ended May 2, 1993 as filed with the Commission on June 16, 1993) 10.2 Warehouse - distribution facility lease dated July 1, 1983 between the Lester-McMahan Partnership as lessor and the Company as lessee (incorporated by reference to Exhibit 10.28 to the Company's Report on Form 10-Q for the period ended September 30, 1983, as filed with the Commission on October 14, 1983)
16 18 10.2 A The Amendment, dated December 1, 1985, to the lease for the distribution center, dated July 1, 1983 between the Company as lessee and the Lester-McMahan Partnership as lessor (incorporated by reference to Exhibit 10.48 to the Company's Report on Form 10-K for the fiscal year ended February 3, 1985, as filed with the Commission on April 26, 1985) 10.2 B The Sublease, dated as of August 1, 1990, by and between Hewson-Memphis Partners and the Company (incorporated by reference to Exhibit 10 to the Company's Report on Form 10-Q for the period ended October 28, 1990, as filed with the Commission on December 12, 1990) 10.2 C Second Amendment to Lease between the Company and the Lester-McMahan Partnership, dated December 1, 1993 (incorporated by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1994 as filed with the Commission on April 29, 1994) 10.2 D Second Amendment to Sublease between the Company and Hewson-Memphis Partners, dated September 1, 1994 (incorporated by reference to Exhibit 10.38 to the Company's Report on Form 10-Q for the period ended October 30, 1994 as filed with the Commission on December 13, 1994) 10.2 E Third Amendment to Sublease between the Company and Hewson-Memphis Partners, dated October 24, 1995 (incorporated by reference to Exhibit 10.2E to the Company's Report on Form 10-Q for the period ended October 29, 1995 as filed with the Commission on December 12, 1995) 10.3 The lease for the Company's Corporate Offices at 100 North Point Street, San Francisco, California dated January 13, 1986, between the Company as lessee and Northpoint Investors as lessor (incorporated by reference to Exhibit 10.49 to the Company's Report on Form 10-K for the year ended February 3, 1985, as filed with the Commission on April 26, 1985) 10.3 A First amendment to the lease for the Company's Corporate Offices at 100 North Point Street, San Francisco, California dated January 5, 1996, between the Company as lessee and Northpoint Investors as lessor 10.4 Joint Venture Agreement and Trade Name and Trade Mark Licensing Agreement, dated May 3, 1988 between the Company and Tokyu Department Store Co., Ltd. (incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q for the period ended July 31, 1988, as filed with the Commission on September 15, 1988)
17 19 10.4 A Stock Purchase Agreement dated as of May 15, 1989, by and between the Company and Tokyu Department Store Co., Ltd. (incorporated by reference to Exhibit 4.1 to the Company's registration statement on Form S-2 filed with the Commission on June 28, 1990 as amended by amendment Number 1 on Form S-2 filed with the Commission on July 17, 1990) 10.5 Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive Plan effective as of February 1, 1989 (incorporated by reference to Exhibit 4.2 of the Company's Form S-8 (File No. 33-33693) filed February 22, 1990) 10.5 A Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive Plan Trust Agreement, dated September 20, 1989 (incorporated by reference to Exhibit 4.2 of the Company's Form S-8 (File No. 33-33693) filed February 22, 1990) 10.5 B Amendment Number One to the Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive Plan, dated April 27, 1990 (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 1991, as amended by a Form 8 Amendment to Form 10-K, filed with the Commission on July 26, 1991) 10.5 C Amendment Number Two to the Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive Plan, dated December 12, 1990 (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 1991, as amended by a Form 8 Amendment to Form 10-K, filed with the Commission on July 26, 1991) 10.5 D Amendment Number Three to the Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive Plan, dated March 10, 1992 (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1993 as filed with the Commission on May 3, 1993) 10.5 E Amendment Number Four to the Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive Plan, dated June 9, 1993 (incorporated by reference to Exhibit 10.24 to the Company's Report on Form 10-Q for the period ended May 2, 1993 as filed with the Commission on June 16, 1993) 10.6 Indemnity Agreement by the Company in favor of Bank of America, NT & SA, dated December 1, 1993 (incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1994 as filed with the Commission on April 29, 1994)
18 20 10.6 A Standing Loan Agreement and Deed of Trust between the Company and Bank of America, NT & SA, dated March 9, 1994 (incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1994 as filed with the Commission on April 29, 1994) 10.6 B Continuing Guaranty from Pottery Barn East Inc. to Bank of America, NT & SA, dated August 7, 1995 (incorporated by reference to Exhibit 10.6 F to the Company's Report on Form 10-Q for the period ended July 30, 1995 as filed with the Commission on September 12, 1995) 10.6 C Continuing Guaranty from Hold Everything, Inc. to Bank of America, NT & SA, dated August 7, 1995 (incorporated by reference to Exhibit 10.6 G to the Company's Report on Form 10-Q for the period ended July 30, 1995 as filed with the Commission on September 12, 1995) 10.6 D Continuing Guaranty from Williams-Sonoma Stores, Inc. to Bank of America, NT & SA, dated August 7, 1995 (incorporated by reference to Exhibit 10.6 H to the Company's Report on Form 10-Q for the period ended July 30, 1995 as filed with the Commission on September 12, 1995) 10.6 E Continuing Guaranty from Chambers Catalog Company, Inc. to Bank of America, NT & SA, dated August 7, 1995 (incorporated by reference to Exhibit 10.6 I to the Company's Report on Form 10-Q for the period ended July 30, 1995 as filed with the Commission on September 12, 1995) 10.6 F Continuing Guaranty from Gardener's Eden, Inc. to Bank of America, NT & SA, dated August 7, 1995 (incorporated by reference to Exhibit 10.6 J to the Company's Report on Form 10-Q for the period ended July 30, 1995 as filed with the Commission on September 12, 1995) 10.6 G Second Amended and Restated Credit Agreement between the Company and Bank of America, NT & SA, dated March 29, 1996 10.7 Purchase and Sale Agreement between the Company and Bancroft-Whitney, a division of Thomson Legal Publishing, Inc., dated December 14, 1993 (incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1994 as filed with the Commission on April 29, 1994) 10.7 A Standing Loan Agreement and Deed of Trust between the Company and Bank of America, NT & SA, dated March 9, 1994 (incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1994 as filed with the Commission on April 29, 1994) 10.7 B Master Agreement between the Company and Bank of America, NT & SA, dated March 30, 1994 (incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1994 as filed with the Commission on April 29, 1994)
19 21 10.8 Stock Purchse Agreement between the Company and Bill Levine, dated August 12, 1994 (incorporated by reference to Exhibit 10.36 to the Company's Report on Form 10-Q for the period ended July 31, 1994 as filed with the Commission on September 13, 1994) 10.9 Note Agreement for $40,000,000 7.2% Senior Notes, dated August 1, 1995 (incorporated by reference to Exhibit 10.9 to the Company's Report on Form 10-Q for the period ended July 30, 1995 as filed with the Commission on September 12, 1995) 10.9A Guaranty Agreement for $40,000,000 Senior Notes, dated August 1, 1995 (incorporated by reference to Exhibit 10.9A to the Company's Report on Form 10-Q for the period ended July 30, 1995 as filed with the Commission on September 12, 1995) 10.9B Intercreditor Agreement for $40,000,000 Senior Notes, dated August 1, 1995 (incorporated by reference to Exhibit 10.9B to the Company's Report on Form 10-Q for the period ended July 30, 1995 as filed with the Commission on September 12, 1995) 10.10 Purchase Agreement for $40,000,000 5.25% Convertible, Subordinated Notes, dated April 10, 1996 10.10 A Indenture for $40,000,000 Convertible, Subordinated Notes, dated April 15, 1996 10.10 B Registration Rights Agreement relating to $40,000,000 Convertible, Subordinated Notes, dated April 15, 1996 10.11 Lease dated January 2, 1996, between Howard Hughes Properties, Limited Partnership, as lessor and the Company as lessee 10.11 A Reimbursement Agreement between Howard Hughes Properties, Limited Partnership, and the Company, dated December 11, 1995 11 Statement re computation of per share earnings 13 Annual report to security holders 21 Subsidiaries 23 Independent Auditors' Consent 27 Financial Data Schedule
20 EX-10.3A 2 FIRST AMENDMENT TO OFFICE LEASE 1 EXHIBIT 10.3A FIRST AMENDMENT TO OFFICE LEASE THIS FIRST AMENDMENT TO OFFICE LEASE (the "First Amendment") is made as of this 5th day of January, 1996, by and between NORTHPOINT INVESTORS, a California limited partnership ("Landlord"), and WILLIAMS SONOMA, INC., a California corporation ("Tenant"). RECITALS: On January 13, 1986, Landlord and Tenant entered into that certain 100 North Point Office Lease (the "Lease"), under the terms of which Landlord leased to Tenant, and Tenant leased from Landlord, certain premises comprising approximately fifty-four thousand nine hundred eighty-nine (54,989) square feet (the "Premises"), within the building located at 100 North Point Street, San Francisco, California (the "Building"). The Building and the land contained within the site commonly known as 100 North Point Street, San Francisco, California, are hereinafter collectively referred to as the "Property." On October 11, 1989, Tenant exercised its option to lease the Expansion Premises in accordance with the provisions of Section 48 of the Lease, and Tenant now occupies one hundred percent (100%) of the Building. Landlord and Tenant now desire to amend the Lease to provide for an extension of the Term through May 31, 2001. NOW, THEREFORE, Landlord and Tenant hereby agree as follows: 1. All defined terms as used in this First Amendment shall have the same meanings as set forth in the Lease, unless otherwise expressly set forth herein. 2. Section 1.2 of the Lease is hereby amended to provide that the Premises comprise approximately fifty-eight thousand three hundred sixty-nine (58,369) rentable square feet. 3. Section 1.3 of the Lease is hereby amended to provide that the term shall expire on May 31, 2001. The period commencing June 1, 1996 and expiring on May 31, 2001 is hereinafter referred to as the "Extended Term." 4. Section 1.4 of the Lease is hereby amended to provide that the Minimum Monthly Rent payable for the Extended Term shall be in an amount equal to Sixty-Five Thousand Six Hundred Sixty-Five and 13/100 Dollars ($65,665.13). 5. Section 1.6 of the Lease is hereby amended to provide that Tenant shall reimburse Landlord for one hundred 2 percent (100%) of Operating Expenses over the Base Year Operating Expenses. 6. Section 1.7 of the Lease is hereby amended to provide that Tenant's Address for Notices shall be: Williams Sonoma, Inc. 3250 Van Ness Avenue San Francisco, CA 94109 Telephone: 415-421-7900 Telecopy: 415-616-7915 7. Section 8.1 of the Lease is hereby amended to provide that the Base Year applicable to the Extended Term shall be calendar year 1996 and during the Extended Term, Tenant shall pay one hundred percent (100%) of the estimated increase in Operating Expenses over the Extended Term's Base Year. 8. The First Paragraph of Section 8.2 of the Lease is deleted in its entirety and the following is substituted in the place: 8.2 "Operating Expenses" as used herein shall include all costs of administration, operation and maintenance of the Property as determined in accordance with generally accepted accounting practices consistently applied including but not limited to the following: Taxes and assessments (specified in Section 9.2 hereof), property and public liability insurance premiums (specified in Section 10.1 hereof) excluding premiums for earthquake insurance, the cost of labor, materials and service for the operation and maintenance of the Building, including license, permit and inspection fees (except for any new construction or alterations), elevator maintenance and repair service, plumbing service, costs of maintenance contracts, including maintenance services related to the heating, ventilation, and air conditioning systems, watchmen, guards and personnel engaged in administration, operation and maintenance of the Property, together with payroll taxes, employee compensation insurance, and employee benefits applicable thereto, supplies, materials, salaries of foremen and supervisory employees whose duties directly concern the management and operation of the Property, reasonable management fees calculated at a rate not in excess of that charged by independent property managers for services not involving leasing which are comparable to those provided in connection with the management of the Building, the cost of maintaining and repairing the roadways, sidewalks, curbs, gutters and parking surfaces located on the Property and in providing gardening services or personnel to the Property, the cost of repairs and general maintenance, cost of improvements required by governmental agencies, exclusive of expenses such as the alteration of premises for the accommodation of a specific tenant or tenants, and exclusive also for expenditures made for capital investments or improvements, except that in the event Landlord eliminates or reduces Operating Expenses 2 3 as a result of a capital investment or labor-saving devices then the cost of the capital investment or labor-saving devices will be amortized over the useful life of the equipment or labor-saving devices but the amortization charge in any year shall not exceed the annual amount of the Operating Expense that has been eliminated or the annual reduction in the Operating Expense that has been reduced. 9. Section 12.1 of the Lease is deleted in its entirety and the following is substituted in its place: 12.1 Landlord shall furnish to the Premises, at the times and to the extent required by Tenant in the conduct of its business, the following services and utilities: (i) heat and air conditioning for the Premises; (ii) electric current in amounts sufficient for lighting the Premises and powering business machines and equipment used thereon; (iii) elevator service; (iv) window cleaning on the exterior surface of the exterior windows; and (v) replacement of light bulbs and fluorescent tubes in all light fixtures installed in the Premises. During the Extended Term, Tenant shall be responsible and pay for one hundred percent (100%) of the costs of electricity, water, gas and sewer use charges associated with the Property, and Tenant shall supply and pay for all janitorial and custodial services to the Premises (including garbage and waste disposal, and the provision of all necessary custodial and janitorial supplies and interior window cleaning), all of which costs are specifically excluded from the Extended Term's Base Year Operating Expenses. To the extent Tenant requests that Landlord provides for any janitorial or custodial services, Tenant shall pay Landlord its direct costs (including, without limitation, wages and salary, employer taxes and costs, fringe benefits and supplies). 10. The first sentence of 12.2 is deleted in its entirety and the following is substituted in its place: 12.2 Landlord shall also maintain the parking area adjacent to the Building and the access ways thereto, and shall replace any broken plate glass windows or doors in the Building unless such breakage is caused through the fault of Tenant. 11. Section 22.2 of the Lease is hereby amended by the addition of the following: Landlord has the remedy described in California Civil Code Section 1951.4. (Landlord may continue the Lease in effect after Tenant's breach and abandonment and recover rent as it becomes due, if Tenant has the right to sublet or assign, subject only to reasonable limitations). 3 4 12. Section 45 of the Lease is hereby amended to provide that Landlord and Tenant shall each bear their own costs incurred in connection with this First Amendment, including, without limitation, attorneys' fees, consultant fees, and brokerage fees and commissions. Landlord shall be fully responsible for payment of any fees due Colliers Damner Pike in connection with the execution of this First Amendment. Tenant shall be responsible for the payment of any commission due to AMB Corporate Real Estate Advisors, Inc. in connection with Tenant's execution of this First Amendment. Tenant and Landlord shall indemnify, defend, protect and hold the other party harmless from any and all claims for commissions for other brokerage services or fees for other services by reason of any dealings or action of the indemnifying party in connection with this First Amendment. 13. Section 47 of the Lease is hereby deleted in its entirety. 14. Before, or as soon as reasonably possible following the date of this First Amendment, Landlord shall, at its sole cost and expense, (a) retrofit all ceiling-mounted lamps and ballasts throughout the Premises as specified in the Brayer Lighting, Inc. proposal, dated October 13, 1995 (Exhibit "A" attached hereto); (b) divide the HVAC system serving floors two and three of the Premises into four (4) zones, comprising two (2) zones per floor; and (c) cause its electrical contractors, Brayer Electric Company, to install a motion-sensor lighting control system on floors one, two and three of the Premises. 15. Before, or as soon as reasonably possible following the date of this First Amendment (and weather permitting), Tenant, at its sole cost and expense, shall commence installation of the necessary variable frequency drives in accordance with the specifications described in the "Alternate Bid" outlined in the Pacific Coast Trane Service Letter to Wilsey, Bennett Co., dated October 6, 1995 (Exhibit "B" attached hereto) and installation of a closed-loop cooling tower as specified in the Pacific Coast Trane Service Letter to Wilsey, Bennett Co., dated November 6, 1995 (Exhibit "C" attached hereto). 16. On June 1, 1996, Landlord shall provide to Tenant a tenant improvement allowance (the "Allowance") in an amount of Seven Hundred Twenty-Nine Thousand Six Hundred Twelve and 50/100 Dollars ($729,612.50). To the extent Tenant expends money between January 1, 1996 and June 1, 1996 in connection with the performance by Tenant of the tenant improvements described in paragraph 14 above or any other tenant improvements, which shall be performed in accordance with Article 17 of the Lease, Landlord shall fund against the Allowance the costs incurred by Tenant in connection with such improvements upon receipt of request therefor from Tenant together with reasonable supporting documentation evidencing the amounts so spent by Tenant. Such request or requests for work performed in accordance with Article 17 of the Lease and paragraph 4 5 14 of this Amendment shall be cumulated by Tenant and may not be submitted more often than once each calendar month and shall be payable ten (10) days after submission to Landlord. 17. In all other respects, the Lease remains unchanged and in full force and effect. IN WITNESS WHEREOF, Landlord and Tenant have executed this First Amendment as of the dates set forth below, and it shall be effective as of the latter of such dates. TENANT: LANDLORD: WILLIAMS SONOMA, INC., NORTHPOINT INVESTORS, a a California corporation California partnership NP Associates, a California By: /s/ Dennis A. Chantland By: limited partnership ------------------------------ ----------------------------------- Its: Chief Administrative Officer Its: General Partner ------------------------------ ---------------------------------- Date: 1/16/96 Date: January 5, 1996 ---------------------------- --------------------------------- Wilsey Bennett, Inc., a By: Delaware corporation ----------------------------------- Its: General Partner ---------------------------------- By: /s/ William R. Anderson ----------------------------------- William R. Anderson Its: Vice President and Treasurer ---------------------------------- 5 EX-10.6G 3 2ND AMEND & RESTAT. AGREE BET WILL-SON & BANK OF 1 ================================================================================ Exhibit 10.6G SECOND AMENDED AND RESTATED CREDIT AGREEMENT BETWEEN WILLIAMS-SONOMA, INC. AND BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION DATED MARCH 29, 1996 ================================================================================ 2 TABLE OF CONTENTS
1. FACILITY NO. 1: LINE OF CREDIT FOR ADVANCES............................ 1 1.1 Line of Credit Amount......................................... 1 1.2 Availability Period........................................... 1 1.3 Interest Rate................................................. 1 1.4 Repayment Terms............................................... 2 1.5 Optional Interest Rates....................................... 2 1.6 Offshore Rate................................................. 2 2. FACILITY NO. 2: LETTER OF CREDIT FACILITY.............................. 4 2.1 Letters of Credit............................................. 4 2.2 Amount........................................................ 4 2.3 Other Terms................................................... 4 3. FEES AND EXPENSES...................................................... 5 3.1 Fees.......................................................... 5 3.2 Expenses...................................................... 5 4. DISBURSEMENTS, PAYMENTS AND COSTS...................................... 6 4.1 Requests for Credit........................................... 6 4.2 Disbursements and Payments.................................... 6 4.3 Telephone Authorization....................................... 6 4.4 Direct Debit.................................................. 6 4.5 Banking Days.................................................. 7 4.6 Taxes......................................................... 7 4.7 Additional Costs.............................................. 7 4.8 Interest Calculation.......................................... 8 4.9 Default Rate.................................................. 8 5. CONDITIONS............................................................. 8 5.1 Authorizations................................................ 8 5.2 Insurance..................................................... 8 5.3 Guaranties.................................................... 8 5.4 Other Items................................................... 8 6. REPRESENTATIONS AND WARRANTIES......................................... 8 6.1 Organization of Borrower...................................... 8 6.2 Authorization................................................. 9 6.3 Enforceable Agreement......................................... 9 6.4 Good Standing................................................. 9 6.5 No Conflicts.................................................. 9 6.6 Financial Information......................................... 9 6.7 Lawsuits...................................................... 9 6.8 Permits, Franchises........................................... 9 6.9 No Event of Default........................................... 9 6.10 ERISA Plans................................................... 10 6.11 Location of Borrower.......................................... 10 7. CONVENANTS............................................................. 10 7.1 Use of Proceeds............................................... 11 7.2 Financial Information......................................... 11 7.3 Adjusted Tangible Net Worth................................... 11
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7.4 Debt to Tangible Net Worth...................................... 12 7.5 Fixed Charge Coverage Ratio..................................... 12 7.6 Additional Subordinated Debt.................................... 13 7.7 Other Debts..................................................... 13 7.8 Other Liens..................................................... 14 7.9 Capital Expenditures............................................ 15 7.10 Dividends....................................................... 17 7.11 Out of Debt Period.............................................. 17 7.12 Notices to Bank................................................. 17 7.13 Books and Records............................................... 17 7.14 Audits.......................................................... 18 7.15 Compliance with Laws............................................ 18 7.16 Preservation of Rights.......................................... 18 7.17 Maintenance of Properties....................................... 18 7.18 Cooperation..................................................... 18 7.19 Insurance....................................................... 18 7.20 Additional Negative Covenants................................... 19 7.21 ERISA Plans..................................................... 19 8. DEFAULT.................................................................. 20 8.1 Failure to Pay.................................................. 20 8.2 False Information............................................... 20 8.3 Bankruptcy...................................................... 20 8.4 Receivers....................................................... 20 8.5 Lawsuits........................................................ 21 8.6 Judgments....................................................... 21 8.7 Government Action............................................... 21 8.8 Material Adverse Change......................................... 21 8.9 Cross-default................................................... 21 8.10 Default under Guaranty or Subordination Agreement............... 21 8.11 Other Bank Agreements........................................... 21 8.12 ERISA Plans..................................................... 21 8.13 Default of Certain Covenants.................................... 22 8.14 Other Breach Under Agreement.................................... 22 9. ENFORCING THIS AGREEMENT; MISCELLANEOUS.................................. 22 9.1 GAAP............................................................ 22 9.2 California Law.................................................. 22 9.3 Successors and Assigns.......................................... 22 9.4 Arbitration..................................................... 23 9.5 Severability; Waivers........................................... 25 9.6 Costs........................................................... 25 9.7 Attorneys' Fees................................................. 25 9.8 One Agreement................................................... 25 9.9 Notices......................................................... 26 9.10 Headings........................................................ 26 9.11 Counterparts.................................................... 26
-ii- 4 SECOND AMENDED AND RESTATED CREDIT AGREEMENT This Agreement dated as of March 29, 1996, is between Bank of America National Trust and Savings Association (the "Bank") and Williams-Sonoma, Inc. (the "Borrower"), and amends and restates in its entirety the Amended and Restated Credit Agreement dated October 13, 1994, as previously amended. 1. FACILITY NO. 1: LINE OF CREDIT FOR ADVANCES 1.1 Line of Credit Amount. (a) During the availability period described below, the Bank will provide a line of credit to the Borrower. The maximum amount of principal which may be outstanding under this Facility 1 at any time plus the amount of letters of credit and shipside bonds outstanding under Facility No. 2 (including the drawn and unreimbursed amounts of the letters of credit) shall not exceed the amounts specified below (the "Facility 1 Commitment"):
Period Commitment Amount ------ ----------------- From the date of this Agreement through 05/06/96 $90,000,000 05/07/96 through 07/01/96 $75,000,000 07/02/96 through 12/23/96 $90,000,000 12/24/96 through the Expiration Date $60,000,000
(b) In addition, the principal amount of advances outstanding under this Facility No. 1 shall not exceed the following:
Period Advances Amount ------ --------------- From the date of this Agreement through 05/06/96 $80,000,000 05/07/96 through 07/01/96 $55,000,000 07/02/96 through 12/23/96 $75,000,000 12/24/96 through the Expiration Date $35,000,000
(c) This is a revolving line of credit for advances. During the availability period, the Borrower may repay principal amounts and reborrow them. (d) Each advance must be for at least One Hundred Thousand Dollars ($100,000), or for the amount of the remaining available line of credit, if less. 1.2 Availability Period. The line of credit is available between the date of this Agreement and March 27, 1997 (the "Expiration Date") unless the Borrower is in default. 1.3 Interest Rate. Unless the Borrower elects an optional interest rate as described below, the interest rate is -1- 5 the Bank's Reference Rate plus seventy-five one-hundredths of one (0.75) percentage point; provided, however, that upon fulfillment of the requirements of Paragraph 7.6 below, the interest rate shall be reduced to the Reference Rate plus twenty-five one-hundredths (0.25) of one percentage point. The Reference Rate is the rate of interest publicly announced from time to time by the Bank in San Francisco, California, as its Reference Rate. The Reference Rate is set by the Bank based on various factors, including the Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans. The Bank may price loans to its customers at, above, or below the Reference Rate. Any change in the Reference Rate shall take effect at the opening of business on the day specified in the public announcement of a change in the Bank's Reference Rate. 1.4 Repayment Terms. (a) The Borrower will pay interest on the first day of each month until payment in full of any principal outstanding under this line of credit. (b) The Borrower will repay in full all principal and any unpaid interest or other charges outstanding under this line of credit no later than the Expiration Date. 1.5 Optional Interest Rates. (a) Instead of the interest rate based on the Bank's Reference Rate, the Borrower may elect to have all or portions of the line of credit bear interest at the following rate during an interest period agreed to by the Bank and the Borrower: the Offshore Rate plus one and one-half (1.50) percentage points; provided, however, that upon fulfillment of the requirements of Paragraph 7.6 below, the interest rate shall be reduced to the Offshore Rate plus one (1.0) percentage point. (b) Each interest rate is a rate per year. Interest will be paid on the first day of every month and on the last day of each interest period. At the end of any interest period, the interest rate will revert to the rate based on the Reference Rate, unless the Borrower has designated another optional interest rate for the portion. 1.6 Offshore Rate. Designation of an Offshore Rate portion is subject to the following requirements: (a) The interest period during which the Offshore Rate will be in effect will be no longer than one year. The last day of the interest period will be determined by the Bank using the practices of the offshore dollar inter-bank market. -2- 6 (b) Each Offshore Rate portion will be for an amount not less than Five Hundred Thousand Dollars ($500,000) for interest periods of 30 days or longer. For shorter maturities, each Offshore Rate portion will be for an amount which, when multiplied by the number of days in the applicable interest period, is not less than fifteen million (15,000,000) dollar-days. (c) The "Offshore Rate" means the interest rate determined by the following formula, rounded upward to the nearest 1/100 of one percent. (All amounts in the calculation will be determined by the Bank as of the first day of the interest period.) Grand Cayman Rate Offshore Rate = --------------------------- (1.00 - Reserve Percentage) Where, (i) "Grand Cayman Rate" means the interest rate (rounded upward to the nearest 1/16th of one percent) at which the Bank's Grand Cayman Branch, Grand Cayman, British West Indies, would offer U.S. dollar deposits for the applicable interest period to other major banks in the offshore dollar inter-bank market. (ii) "Reserve Percentage" means the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities, as defined in Federal Reserve Board Regulation D, rounded upward to the nearest 1/100 of one percent. The percentage will be expressed as a decimal, and will include, but not be limited to, marginal, emergency, supplemental, special, and other reserve percentages. (d) The Borrower may not elect an Offshore Rate with respect to any portion of the principal balance of the line of credit which is scheduled to be repaid before the last day of the applicable interest period. (e) Any portion of the principal balance of the line of credit already bearing interest at the Offshore Rate will not be converted to a different rate during its interest period. (f) Each prepayment of an Offshore Rate portion, whether voluntary, by reason of acceleration or otherwise, will be accompanied by the amount of accrued interest on the amount prepaid, and a prepayment fee equal to the amount (if any) by which -3- 7 (i) the additional interest which would have been payable on the amount prepaid had it not been paid until the last day of the interest period, exceeds (ii) the interest which would have been recoverable by the Bank by placing the amount prepaid on deposit in the offshore dollar market for a period starting on the date on which it was prepaid and ending on the last day of the interest period for such portion. (g) The Bank will have no obligation to accept an election for an Offshore Rate portion if any of the following described events has occurred and is continuing: (i) Dollar deposits in the principal amount, and for periods equal to the interest period, of an Offshore Rate portion are not available in the offshore Dollar inter-bank market; or (ii) the Offshore Rate does not accurately reflect the cost of an Offshore Rate portion. 2. FACILITY NO. 2: LETTER OF CREDIT FACILITY 2.1 Letters of Credit. At the request of the Borrower, between the date of this Agreement and the Expiration Date, the Bank will issue for the account of the Borrower commercial and standby letters of credit and shipside bonds. Each letter of credit shall have a maximum term no longer than one year. In addition, each letter of credit shall have a maximum maturity not to extend beyond March 27, 1998. Each commercial letter of credit will require drafts payable at sight. 2.2 Amount. In addition to the restrictions stated in paragraph 1.1(a), the amount of the letters of credit and shipside bonds outstanding at any one time (including the drawn and unreimbursed amounts of the letters of credit) may not exceed Twenty-Five Million Dollars ($25,000,000) (the "Letter of Credit Sublimit"). As a further restriction, the amount of standby letters of credit outstanding at any one time (including the drawn and unreimbursed amounts of the standby letters of credit) may not exceed Four Million Dollars ($4,000,000). The amount of shipside bonds outstanding at any one time may not exceed Fifth Thousand Dollars ($50,000). 2.3 Other Terms. The Borrower agrees: (a) any sum owed to the Bank under a letter of credit or shipside bond may, at the option of the Bank, be added to the principal amount outstanding under Facility 1 of this Agreement. The amount will bear interest and be due as described elsewhere in this Agreement. In addition, if -4- 8 credit is available under Facility 1, the Borrower may request an advance thereunder to repay the amount owed under the letter of credit, if the Bank has not theretofore exercised the above-mentioned option. (b) if the Bank declares an Event of Default under this Agreement, the Borrower shall, upon demand, prepay and make the Bank whole for any outstanding letters of credit and shipside bonds. (c) the issuance of any letter of credit, any amendment to a letter of credit and any shipside bond is subject to the Bank's written approval and must be in form and content reasonably satisfactory to the Bank and in favor of a beneficiary reasonably acceptable to the Bank. (d) to sign the Bank's application, security agreement and other standard forms for letters of credit and shipside bonds, and to pay any issuance and/or other fees that the Bank notifies the Borrower will be charged for issuing and processing letters of credit and shipside bonds for the Borrower; provided, however, that certain fees are set forth on Exhibit A attached hereto. (e) to allow the Bank to automatically charge its checking account for applicable fees, discounts, and other charges. (f) to pay the Bank a non-refundable fee equal to one percent (1.0%) per annum of the outstanding undrawn amount of each standby letter of credit, payable annually in advance, calculated on the basis of the face amount outstanding on the day the fee is calculated. 3. FEES AND EXPENSES 3.1 Fees. Periodic fee. The Borrower agrees to pay a fee, on the first day of each calendar quarter, equal to fifteen one-hundredths of one percent (0.15%) per annum of the weighted average, during the quarter, of the difference of the Facility 1 Commitment minus the Letter of Credit Sublimit, payable in advance. This fee is due on the first day of each calendar quarter until the Expiration Date (including any extended Expiration Date). 3.2 Expenses. The Borrower agrees to reimburse the Bank for any reasonable expenses it incurs in the preparation of this Agreement and any agreement or instrument required by this Agreement. Expenses include, but are not limited to, reasonable attorneys' fees, including any allocated costs of the Bank's in-house counsel. -5- 9 4. DISBURSEMENTS, PAYMENTS AND COSTS 4.1 Requests for Credit. Each request for an extension of credit will be made in writing in a manner acceptable to the Bank, or by another means acceptable to the Bank. 4.2 Disbursements and Payments. Each disbursement by the Bank and each payment by the Borrower will be: (a) made at the Bank's San Francisco Regional Commercial Banking Office, or other location reasonably selected by the Bank from time to time after not less than 15 days prior written notice to the Borrower; (b) made for the account of the Bank's branch selected by the Bank from time to time; (c) made in immediately available funds; (d) evidenced by records kept by the Bank, absent manifest error. In addition, the Bank may, at its discretion, require the Borrower to sign one or more promissory notes to evidence the obligations hereunder, which notes shall be expressly subject to the terms of this Agreement. 4.3 Telephone Authorization. (a) The Bank may honor telephone instructions for advances or repayments or for the designation of optional interest rates given by any one of the individual signer(s) of this Agreement or a person or persons authorized by any one of the signer(s) of this Agreement. (b) Advances will be deposited in and repayments will be withdrawn from the Borrower's account number 14999-01347, or such other accounts with the Bank as designated in writing by the Borrower. (c) The Borrower indemnifies and excuses the Bank (including its officers, employees, and agents) from all liability, loss, and costs in connection with any act resulting from telephone instructions it reasonably believes are made by a signer of this Agreement or a person authorized by a signer; provided, however, that the Bank shall not be indemnified for its own gross negligence or willful misconduct. This indemnity and excuse will survive this Agreement's termination. -6- 10 4.4 Direct Debit. (a) The Borrower agrees that interest and any fees will be deducted automatically on the due date from checking account number 14999-01347. (b) The Bank will debit the account on the dates the payments become due. If a due date does not fall on a banking day, the Bank will debit the account on the first banking day following the due date. (c) The Borrower will maintain sufficient funds in the account on the dates the Bank enters debits authorized by this Agreement. If there are insufficient funds in the account on the date the Bank enters any debit authorized by this Agreement, the debit will be reversed. 4.5 Banking Days. Unless otherwise provided in this Agreement, a banking day is a day other than a Saturday or a Sunday on which the Bank is open for business in California. For amounts bearing interest at an offshore rate (if any), a banking day is a day other than a Saturday or a Sunday on which the Bank is open for business in California and dealing in offshore dollars. All payments and disbursements which would be due on a day which is not a banking day will be due on the next banking day. All payments received on a day which is not a banking day will be applied to the credit on the next banking day. 4.6 Taxes. The Borrower will not deduct any taxes from any payments it makes to the Bank. If any government authority imposes any taxes or charges on any payments made by the Borrower, the Borrower will pay the taxes or charges. Upon request by the Bank, the Borrower will confirm that it has paid the taxes by giving the Bank official tax receipts (or notarized copies) within 30 days after the due date. However, the Borrower will not pay the Bank's net income taxes. 4.7 Additional Costs. The Borrower will pay the Bank, on written demand, for the Bank's costs or losses arising from any statute or regulation, or any request or requirement of a regulatory agency which is applicable to all national banks or a class of all national banks, including the Bank. The written demand shall set forth in reasonable detail the basis for the demand and the calculations used by the Bank. The costs and losses will be allocated to the loan in a manner determined by the Bank, using any reasonable method. The costs included the following: (a) any reserve or deposit requirements; and (b) any capital requirements relating to the Bank's assets and commitments for credit. -7- 11 4.8 Interest Calculation. Except as otherwise stated in this Agreement, all interest and fees, if any, will be computed on the basis of a 360-day year and the actual number of days elapsed. This results in more interest or a higher fee than if a 365-day year is used. 4.9 Default Rate. Upon the occurrence and during the continuation of any Event of Default under this Agreement, principal amounts outstanding under this Agreement will at the option of the Bank bear interest at a rate per annum which is one (1) percentage point higher than the rate of interest otherwise provided under this Agreement. This will not constitute a waiver of any default. Installments of principal which are not paid when due under this Agreement shall continue to bear interest until paid. Any interest, fees or costs which are not paid when due shall bear interest at the Bank's Reference Rate plus one (1) percentage point. This may result in compounding of interest. 5. CONDITIONS The Bank must receive the following items, in form and content acceptable to the Bank, before it is required to extend any credit to the Borrower under this Agreement: 5.1 Authorizations. Evidence that the execution, delivery and performance by the Borrower and each guarantor or subordinating creditor of this Agreement and any instrument or agreement required under this Agreement have been duly authorized. 5.2 Insurance. Evidence of insurance coverage, as required in the "Covenants" section of this Agreement. 5.3 Guaranties. Guaranties signed by Williams-Sonoma Stores, Inc.; Pottery Barn East, Inc.; Gardener's Eden, Inc.; Chambers Catalog Company, Inc.; and Hold Everything, Inc., each in the amount of One Hundred Twenty Million Dollars ($120,000,000). 5.4 Other Items. Any other items that the Bank reasonably requires. 6. REPRESENTATIONS AND WARRANTIES The Borrower makes the following representations and warranties. Each request for an extension of credit constitutes a renewed representation that: 6.1 Organization of Borrower. The Borrower is a corporation duly formed and existing under the laws of its state of incorporation. -8- 12 6.2 Authorization. This Agreement, and any instrument or agreement required hereunder, are within the Borrower's powers, have been duly authorized, and do not conflict with any of its organizational papers. 6.3 Enforceable Agreement. This Agreement is a legal, valid and binding agreement of the Borrower, enforceable against the Borrower in accordance with its terms, and any instrument or agreement required hereunder, when executed and delivered, will be similarly legal, valid, binding and enforceable. 6.4 Good Standing. In each state in which the Borrower does business, it is properly licensed, in good standing, and, where required, in compliance with fictitious name statutes, in each instance where failure to comply will have a material adverse effect on the business of the Borrower and the guarantors taken as a whole. 6.5 No Conflicts. This Agreement does not conflict with any law, material agreement or obligation by which the Borrower is bound. 6.6 Financial Information. All financial and other information that has been or will be supplied to the Bank has been or will be prepared in accordance with GAAP and presents or will present fairly the financial condition of the Borrower or any applicable guarantor, subject, however, to year-end adjustments. 6.7 Lawsuits. The Borrower has no knowledge of any lawsuit, tax claim or other dispute pending or threatened against the Borrower which, if lost, would impair the Borrower's financial condition or ability to repay the loan, except as have been disclosed in writing to the Bank including, without limitation, disclosure in the financial statements of the Borrower. 6.8 Permits, Franchises. The Borrower possesses all permits, memberships, franchises, contracts and licenses required and all trademark rights, trade name rights, patent rights and fictitious name rights necessary to enable it to conduct the business in which it is now engaged, provided that any failure by the Borrower to have any of the foregoing rights, licenses and/or privileges shall not constitute a breach of this representation and warranty if such failure would not materially impact the ability of Borrower to repay the credit provided under this Agreement. 6.9 No Event of Default. No event has occurred and is continuing or would result from the extension of credit under this Agreement which constitutes or would constitute an Event of Default. -9- 13 6.10 ERISA Plans. (a) The Borrower has fulfilled its obligations, if any, under the minimum funding standards of ERISA and the Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and has not incurred any liability with respect to any Plan under Title IV of ERISA. (b) No reportable event has occurred under Section 4043(c) of ERISA for which the PBGC requires 30 day notice. (c) No action by the Borrower to terminate or withdraw from any Plan has been taken and no notice of intent to terminate a Plan has been filed under Section 4041 of ERISA. (d) No proceeding has been commenced with respect to a Plan under Section 4042 of ERISA, and no event has occurred or condition exists which might constitute grounds for the commencement of such a proceeding. (e) The following terms have the meanings indicated for purposes of this Agreement: (i) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (ii) "ERISA" means the Employee Retirement Income Act of 1974, as amended from time to time. (iii) "PBGC" means the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA. (iv) "Plan" means any employee pension benefit plan maintained or contributed to by the Borrower and insured by the Pension Benefit Guaranty Corporation under Title IV of ERISA. 6.11 Location of Borrower. The Borrower's place of business (or, if the Borrower has more than one place of business, its chief executive office) is located at the address listed under the Borrower's signature on this Agreement, unless otherwise indicated by the Borrower in a notice to the Bank pursuant to paragraph 9.9 of this Agreement. 7. COVENANTS The Borrower agrees, so long as credit is available under this Agreement and until the Bank is repaid in full, unless the Bank waives compliance in writing: -10- 14 7.1 Use of Proceeds. To use the credit provided under this Agreement only to finance seasonal inventory growth and a portion of the Borrower's capital expenditures program; facilitate the Borrower's merchandise importation program; and obtain letters of credit in the ordinary course of business. 7.2 Financial Information. To provide the following financial information and statements and such additional information as requested by the Bank from time to time: (a) Within 120 days of the Borrower's fiscal year end, the Borrower's annual financial statements. The financial statements shall include at least the Borrower's balance sheet, statement of income and retained earnings and statement of cash flow. These financial statements must be audited (with an unqualified opinion) by a Certified Public Accountant ("CPA") acceptable to the Bank. The statements shall be prepared on a consolidated basis and shall include operating statements reflecting the profitability of each of the Borrower's and guarantors' business divisions, substantially in the form previously supplied by the Borrower to the Bank (the "Operating Statements"). The statements shall be accompanied by a copy of the Borrower's Form 10-K as filed with the Securities and Exchange Commission. (b) Within 60 days after the end of each fiscal quarter of the Borrower: (i) Copies of the Borrower's Form 10-Q Quarterly Report; and (ii) A compliance certificate substantially in the form set forth on Exhibit B attached hereto, executed by any of the Chief Executive Officer, President, Chief Administrative Officer or Chief Financial Officer of the Borrower. (c) Within 30 days of each month's end, the Borrower's monthly financial statements. These financial statements may be Borrower prepared. The statements shall be prepared on a consolidated basis and shall include the Operating Statements. (d) As soon as available, copies of all management letters or reports and any other reports submitted to the Borrower by the Borrower's CPA. 7.3 Adjusted Tangible Net Worth. To maintain on a consolidated basis, as of each date indicated below, Adjusted Tangible Net Worth, exclusive of the proceeds of any stock sold by the Borrower after the date of this Agreement and exclusive of -11- 15 the proceeds of the conversion of any debt to stock, equal to at least the amounts indicated for each date specified below:
Date Amount ---- ------ 04/28/96 $115,000,000 07/28/96 113,000,000 10/27/96 113,000,000 12/29/96 133,000,000
"Tangible Net Worth" means the gross book value of the Borrower's assets (excluding Intangibles and monies due from affiliates, officers, directors or shareholders of the Borrower) less total liabilities, including but not limited to accrued and deferred income taxes, and any reserves against assets. "Intangibles" means goodwill, patents, trademarks, favorable lease rights, trade names, organization expense, treasury stock, unamortized debt discount and expense, deferred research and development costs, deferred marketing expenses (not including any prepaid catalog expenses), and other like intangibles. "Adjusted Tangible Net Worth" shall be equal to Tangible Net Worth, except that the amount of Intangibles shall be assumed to be One Million Five Hundred Thousand Dollars ($1,500,000). 7.4 Debt to Tangible Net Worth. To maintain on a consolidated basis, as of each date indicated below, a ratio of total liabilities to Tangible Net Worth, as defined above (exclusive of the proceeds of any stock sold by the Borrower after the date of this Agreement and exclusive of the proceeds of the conversion of any debt to stock) not exceeding the amounts indicated for each date specified below:
Date Ratio ---- ----- 04/28/96 1.95:1 07/28/96 2.35:1 10/27/96 2.65:1 12/29/96 1.85:1
"Total liabilities" means the sum of current liabilities plus long term liabilities, including (a) the amount of tax credits booked by the Borrower as negative liabilities; (b) deferred lease incentives; and (c) subordinated debt. 7.5 Fixed Charge Coverage Ratio. To maintain on a consolidated basis as of the end of each fiscal quarter a Fixed Charge Coverage Ratio of at least the amount indicated below:
Period Ending Ratio ------------- ----- 4/28/96 1.15:1 7/28/96 1.15:1 10/27/96 1.25:1 2/2/97 1.25:1
-12- 16 "Fixed Charge Coverage Ratio" means the ratio of Adjusted EBIT to the sum of positive income tax expense, interest expense, rent expense and the current portion of long-term liabilities. "Adjusted EBIT" means the sum of net income, plus income taxes, plus interest expense, depreciation, amortization (excluding amortization of deferred lease incentives), and rent expense; provided, however, that income taxes will be added to net income only to the extent that they were deducted in determining net income. This ratio will be calculated at the end of each fiscal quarter, using the results of that quarter and each of the 3 immediately preceding quarters. The current portion of long term liabilities will be measured as of the quarter end and will, for the purposes of this covenant, exclude outstandings under Facility 1. For purposes of this paragraph, "rent expense" shall include, but not be limited to, operating lease expense, minimum rent, deferred lease rent, percentage rent, offsite storage, and other rent and lease expense. 7.6 Additional Subordinated Debt. To obtain, no later than May 6, 1996, not less than Thirty Eight Million Dollars ($38,000,000) net cash proceeds from the sale of stock or the issuance of a loan subordinated to the Borrower's obligations to the Bank. The terms and conditions of such loan must be reasonably acceptable to the Bank. 7.7 Other Debts. Not to have outstanding or incur (and not permit any guarantor to have outstanding or incur) any direct or contingent debts or capital lease obligations (excluding real property leases and excluding obligations to the Bank), or become liable for the debts of others without the Bank's written consent. This does not prohibit: (a) Acquiring goods, supplies, or merchandise on normal trade credit terms. (b) Endorsing negotiable instruments received in the ordinary course of business. (c) Obtaining or executing surety bonds or other similar undertakings in the ordinary course of business. (d) Debts, lines of credit and leases in existence on the date of this Agreement disclosed in writing to the Bank including, without limitation, any disclosure in the financial statements of the Borrower; and including the existing privately placed unsecured senior term loan in the initial principal amount of up to Forty Million Dollars ($40,000,000), due August 8, 2005 (the "Private Placement"). (e) Guaranties by Williams-Sonoma Stores, Inc.; The Pottery Barn East, Inc.; Gardener's Eden, Inc.; Hold Everything, Inc.; and Chambers Catalog -13- 17 Company, Inc., of the obligations of the Borrower under the Private Placement. (f) The subordinated loan referred to in Paragraph 7.6 above. 7.8 Other Liens. Not to create, assume, or allow any security interest or lien (including judicial liens) on property the Borrower or any guarantor now or later owns, except: (a) Liens for taxes not yet delinquent. (b) Liens outstanding on the date of this Agreement disclosed in writing to the Bank, including, without limitation, any disclosure in the financial statements of the Borrower. (c) Liens in favor of the Bank. (d) Cash collateral and security deposits provided in connection with operating lease obligations incurred to finance the acquisition of fixed assets (excluding real property and excluding security deposits with utility companies); provided that the amount of such collateral and security deposits must not exceed Three Million Dollars ($3,000,000) at any time. (e) liens for property taxes and assessments or governmental charges for levies and liens securing claims or demands of mechanics and materialmen, provided that payment thereof is not at the time delinquent. (f) liens of or resulting from any judgment or award, the time for the appeal or petition for rehearing of which shall not have expired, or in respect of which Borrower or a guarantor shall at the time in good faith be prosecuting an appeal or proceeding for a review and in respect of which a stay of execution pending such appeal or proceeding for review shall have been secured within 30 days after the entry of such judgment or award. (g) liens incidental to the conduct of business or the ownership of properties and assets (including liens in connection with worker's compensation, unemployment insurance and other like laws, warehousemen's and attorneys' liens and statutory landlords' liens) and liens to secure the performance of bids, tenders or trade contracts, or to secure statutory obligations, surety or appeal bonds or other liens of like general nature and not incurred in connection with the borrowing of money, provided in each case, the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate actions or proceedings. -14- 18 (h) survey and title exceptions, encumbrances, easements, encroachments, covenants or reservations, or rights of others for rights-of-way, utilities and other similar purposes, or zoning or other restrictions as to the use of real properties, which do not in any event materially impair their use in the operation of the business of the Borrower and the guarantors. (i) unperfected liens arising by operation of law under Article 2 of the Uniform Commercial Code in favor of unpaid sellers or prepaying buyers of goods relating to amounts that are not past due in accordance with their respective terms of sale. 7.9 Capital Expenditures. Not to exceed the following limits with regard to Capital Expenditures, measured in the aggregate for the Borrower and all guarantors. "Capital Expenditures" means amounts spent or obligations incurred to acquire fixed assets consisting of either real or personal property. If a fixed asset consisting of personal property is obtained through an operating lease or capital lease, then the purchase price of the fixed asset shall be considered a Capital Expenditure in the accounting period in which the asset is first acquired. Leases of real property and capitalized interest shall not be included as Capital Expenditures. "Landlord Allowance" means a cash payment received or to be received from a landlord for leasehold improvements. The limits are as follows: (a) Capital Expenditures to be made during the fiscal year ending February 2, 1997, with respect to capital projects that will be completed during the fiscal year ending February 2, 1997 shall not exceed Thirty Million Dollars ($30,000,000) in the aggregate. In calculating the amount of Capital Expenditures for this subparagraph (a) only, the following shall apply: (i) There will be excluded from the amount of Capital Expenditures an amount up to Five Million Dollars ($5,000,000) with respect to fixed assets acquired through operating leases. (ii) Amounts expended on or before January 28, 1996 (not exceeding Six Million Four Hundred Thousand Dollars ($6,400,000) will not be included in the calculation of Capital Expenditures. (iii) The amount of the Capital Expenditure for a particular net fixed asset which is replacing an existing asset will be reduced by the amount which is realized by the Borrower from disposing of the old asset (including the amount of the original stated value of the old asset, if the asset was obtained through an operating lease which is being cancelled); -15- 19 provided that the Capital Expenditure shall not be reduced to less than zero. (iv) The amount of Landlord Allowances with respect to a particular fixed asset will be deducted from the amount of the Capital Expenditure for such asset. (v) A limit on Capital Expenditures to be made during the fiscal year ending January 31, 1998, has not yet been agreed upon between the Bank and the Borrower. However, it is the intention of the parties that if the Borrower does not use the entire Thirty Million Dollars ($30,000,000) of Capital Expenditures permitted by this paragraph (a) for the fiscal year ending February 2, 1997, then up to Four Million Dollars ($4,000,000) of the unused portion will be carried forward into the next fiscal year, and the limitation for that fiscal year to be agreed between the Bank and the Borrower is intended to reflect such amount carried forward. Nothing in this paragraph shall be deemed to be a commitment to renew this Agreement past the Expiration Date. (b) During the two fiscal quarters ending July 28, 1996, the Borrower shall not commit to Capital Expenditures to be incurred during the fiscal year ending January 31, 1998 that exceed Eleven Million Dollars ($11,000,000) in the aggregate. In calculating the amount of Capital Expenditures for this subparagraph (b) only, the following shall apply: (i) The amount of the Capital Expenditure will not be reduced by the amount received on disposing of an old asset. (ii) The amount of Landlord Allowances with respect to a particular fixed asset will be deducted from the amount of the Capital Expenditure for such asset. (c) Capital Expenditures to be made during the fiscal year ending February 2, 1997, with respect to capital projects that will be completed during the fiscal year ending January 31, 1998, shall not exceed Eleven Million Dollars ($11,000,000) in the aggregate. In calculating the amount of Capital Expenditures for this subparagraph (c) only, the following shall apply: (i) The amount of the Capital Expenditure will not be reduced by the amount received on disposing of an old asset. -16- 20 (ii) The amount of Landlord Allowances with respect to a particular fixed asset will not be deducted from the amount of the Capital Expenditure for such asset. 7.10 Dividends. Not to declare or pay any dividends on any of its shares, and not to purchase, redeem or otherwise acquire for value any of its shares, except: (a) dividends payable in its capital stock; and (b) the Borrower may purchase stock from its employees for a consideration not exceeding Two Million Dollars ($2,000,000) in the aggregate during any fiscal year. 7.11 Out of Debt Period. The Borrower shall have no advances (excluding the undrawn amount of letters of credit) outstanding under Facility 1 for a period of at least 30 consecutive days during the 75 day period from December 16 through February 28 of each year. 7.12 Notices to Bank. To promptly notify the Bank in writing upon becoming aware of: (a) the commencement of any lawsuit where the amount claimed is over One Million Dollars ($1,000,000) against the Borrower or any guarantor. (b) any substantial dispute between the Borrower or any guarantor and any government authority, the adverse determination of which would materially impair the Borrower's or any guarantor's financial condition or ability to repay its obligations under this Agreement or any guaranty pursuant hereto. (c) any Event of Default or an event which with notice or lapse of time, or both, would become an Event of Default. (d) any material adverse change in the Borrower's or any guarantor's financial condition or operations. (e) any change in the Borrower's name, legal structure, place of business, or chief executive office if the Borrower has more than one place of business; (f) any default under any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation. 7.13 Books and Records. To maintain adequate books and records for the Borrower and guarantors on a consolidated basis. -17- 21 7.14 Audits. To allow the Bank and its agents to inspect the Borrower's and each guarantor's property and examine, audit and make copies of books and records at any reasonable time during normal business hours and upon reasonable prior written notice. If any of the Borrower's or guarantor's properties, books or records are in the possession of a third party, the Borrower authorizes that third party (not including Borrower's or guarantor's attorneys) to permit the Bank or its agents to have access to perform inspections or audits and to respond to the Bank's requests for information concerning such properties, books and records, provided the Bank notifies the Borrower before any such inspections and offers the Borrower an opportunity to be present at such inspections. 7.15 Compliance with Laws. To comply (and cause each guarantor to comply) with the laws (including any fictitious name statute), regulations, and orders of any government body with authority over the Borrower's or such guarantor's business and which are applicable to the Borrower's or such guarantor's business, and where failure to comply would result in a material adverse change in Borrower's and the guarantor's financial condition, operations or ability to repay the obligations under this Agreement. 7.16 Preservation of Rights. To maintain and preserve all rights, privileges, and franchises the Borrower and each guarantor now has which are necessary for the conduct of Borrower's or guarantor's business; provided that any failure by the Borrower or any guarantor to have any of the foregoing rights, licenses and/or privileges shall not constitute a breach of this representation and warranty if such failure would not materially impact the collective ability of Borrower and the guarantors to repay the credit provided under this Agreement. 7.17 Maintenance of Properties. To make any repairs, renewals, or replacements to keep the Borrower's and each guarantor's properties in good working condition subject, however, to the limitations on Capital Expenditures in this Agreement. 7.18 Cooperation. To take any action reasonably requested by the Bank to carry out the provisions of this Agreement. 7.19 Insurance. (a) General Business Insurance. To maintain (and cause each guarantor to maintain) insurance as is usual for the business it is in. (b) Evidence of Insurance. Upon the request of the Bank, to deliver to the Bank a copy of each insurance -18- 22 policy, or, if permitted by the Bank, a certificate of insurance listing all insurance in force. 7.20 Additional Negative Covenants. Not to, (and not permit any guarantor to), without the Bank's written consent: (a) engage in any business activities substantially different from the Borrower's or any guarantor's present business. (b) liquidate or dissolve the Borrower's or any guarantor's business. (c) enter into any consolidation, merger, pool, joint venture, syndicate, or other combination, except within the consolidated group of the Borrower and the guarantors, provided that with respect to any such consolidation or merger involving the Borrower, the Borrower shall be the surviving entity. (d) lease, dispose of all or a substantial part of the Borrower's or any guarantor's business or the Borrower's or any guarantor's assets except (i) in the ordinary course of business; (ii) obsolete or worn out assets or assets no longer used or useful in the business of the Borrower or any guarantor; and (iii) an additional aggregate amount not exceeding One Million Dollars ($1,000,000) per fiscal year in the aggregate for the Borrower and all guarantors disposed in arm's length transactions. (e) acquire or purchase a business or its assets. (f) enter into any sale and leaseback agreement covering any of its fixed or capital assets; provided, however, that Borrower and guarantors may enter into sale and leaseback transactions with an aggregate consideration not exceeding One Million Dollars ($1,000,000) per fiscal year. (g) voluntarily suspend its business for more than 4 days in any 30-day period. (h) make any prepayment under any subordinated indebtedness or the Private Placement except with the consent of the Bank; or agree to any material amendment of any such subordinated indebtedness or the Private Placement. 7.21 ERISA Plans. To give prompt written notice to the Bank of: -19- 23 (a) The occurrence of any reportable event under Section 4043(c) of ERISA for which the PBGC requires 30 day notice. (b) Any action by the Borrower to terminate or withdraw from a Plan or the filing of any notice of intent to terminate under Section 4041 of ERISA. (c) Any notice of noncompliance made with respect to a Plan under Section 4041(b) of ERISA. (d) The commencement of any proceeding with respect to a Plan under Section 4042 of ERISA. 8. DEFAULT If any of the following events (each an "Event of Default") occurs and is continuing, the Bank may do one or more of the following: declare the Borrower in default, stop making any additional credit available to the Borrower, and require the Borrower to repay its entire debt immediately and without prior notice. If a bankruptcy petition is filed with respect to the Borrower, the entire debt outstanding under this Agreement will automatically be due immediately. 8.1 Failure to Pay. The Borrower fails to pay: (i) within three (3) banking days of the date due, any interest on the principal amount of loans made hereunder; (ii) when due, any installment of principal, or (iii) within five (5) banking days after written demand, any other sum due under this Agreement in accordance with the terms of this Agreement. 8.2 False Information. The Borrower or any guarantor has delivered to the Bank information or representation which proves to be false or misleading in any material respect as of when delivered. 8.3 Bankruptcy. The Borrower or any guarantor files a bankruptcy petition, a bankruptcy petition is filed against the Borrower or any guarantor (unless any such petition is dismissed within a period of 60 days after the filing thereof, and Borrower or such guarantor shall not have consented thereto prior to the expiration of such 60-day period), or the Borrower or any guarantor makes a general assignment for the benefit of creditors. 8.4 Receivers. A receiver or similar official is appointed for the Borrower's or any guarantor's business (unless such appointment is set aside or withdrawn or ceases to be in effect within 60 days after the filing or appointment), or the business is terminated. -20- 24 8.5 Lawsuits. Any lawsuit or lawsuits are filed on behalf of one or more trade creditors against the Borrower or any guarantor in an aggregate amount of Eight Million Dollars ($8,000,000) or more in excess of any insurance coverage. 8.6 Judgments. Any judgments or arbitration awards are entered against the Borrower or any guarantor, or the Borrower or any guarantor enters into any settlement agreements with respect to any litigation or arbitration, in an aggregate amount of One Million Dollars ($1,000,000) or more in excess of any insurance coverage, and such judgment or judgments shall not have been vacated or discharged, or stayed or bonded pending appeal within 60 days of its entry; provided, however, that if at any time the judgment is executable, then an immediate Event of Default shall occur. 8.7 Government Action. Any government authority takes action that the Bank reasonably believes materially impairs the Borrower's and any guarantor's financial condition or their collective ability to repay. 8.8 Material Adverse Change. A material adverse change occurs in the financial condition, properties or prospects, of the Borrower and the guarantors and which impairs their collective ability to repay the loan. 8.9 Cross-default. Any default occurs under any agreement in connection with any indebtedness for borrowed money the Borrower or any guarantor has obtained from anyone else or which the Borrower (or any guarantor) has guaranteed if the default consists of failing to make a payment when due or gives the other lender the right to accelerate the obligation after the expiration of any applicable notice, grace or cure periods. 8.10 Default under Guaranty or Subordination Agreement. Any guaranty or subordination required by this Agreement is violated, revoked or no longer in effect. 8.11 Other Bank Agreements. The Borrower or any guarantor fails to meet the conditions of, or fails to perform any obligation under any other agreement the Borrower or any guarantor has with the Bank or any affiliate of the Bank; provided, however, that if the agreement in question is of a type other than an agreement for borrowed money or an interest rate swap or other interest rate protection agreement, then there shall be no Event of Default under this Agreement unless the failure to comply with the other agreement continues without cure for 15 calendar days after the Borrower or any guarantor becomes aware of such failure. 8.12 ERISA Plans. The occurrence of any one or more of the following events with respect to the Borrower, provided such event or events could reasonably be expected, in the judgment of -21- 25 the Bank, to subject the Borrower to any tax, penalty or liability (or any combination of the foregoing) which, in the aggregate, could have a material adverse effect on the financial condition of the Borrower with respect to a Plan: (a) A reportable event shall occur with respect to a Plan which is, in the reasonable judgment of the Bank likely to result in the termination of such Plan for purposes of Title IV of ERISA. (b) Any Plan termination (or commencement of proceedings to terminate a Plan) or the Borrower's full or partial withdrawal from a Plan. 8.13 Default of Certain Covenants. The Borrower or any guarantor defaults under any of the provisions of Paragraphs 7.1, 7.3 through 7.11, or 7.20 of this Agreement. 8.14 Other Breach Under Agreement. The Borrower fails to meet the conditions of, or fails to perform any obligation under, any term of this Agreement not specifically referred to in this Article; provided, however, that there shall be no Event of Default under this Paragraph unless the failure to comply continues without cure for 15 calendar days after the Borrower or any guarantor becomes aware of such failure. 9. ENFORCING THIS AGREEMENT; MISCELLANEOUS 9.1 GAAP. Except as otherwise stated in this Agreement, all financial information provided to the Bank and all financial covenants will be made under generally accepted accounting principles, consistently applied; provided, however, that if there shall be a change in GAAP so as to affect the premises on which the financial covenants are predicated, then in addition to the financial statements prepared in accordance with GAAP, the Borrower will provide a reconciliation calculating the financial covenants under the provisions of GAAP as in effect on the date of this Agreement, and the Borrower's compliance with the financial covenants will be measured based on such unchanged provisions of GAAP. 9.2 California Law. This Agreement is governed by California law. 9.3 Successors and Assigns. This Agreement is binding on the Borrower's and the Bank's successors and assignees. The Borrower agrees that it may not assign this Agreement without the Bank's prior consent. The Bank may sell participation in or assign this loan, and may exchange financial information about the Borrower with actual or potential participants or assignees provided such actual or potential participants or assignees shall agree in writing to treat all non-public financial information exchanged as confidential. If a participation is sold or the -22- 26 loan is assigned and the Bank shall have provided Borrower with written notice thereof and the identity of the purchaser, the purchaser will have the right of set-off against the Borrower. The Bank acknowledges and agrees that it will nevertheless remain liable to fund loans and issue letters of credit hereunder notwithstanding any participation/assignment of its interest hereunder. 9.4 Arbitration. (a) This paragraph concerns the resolution of any controversies or claims between the Borrower and the Bank, including but not limited to those that arise from: (i) This Agreement (including any renewals, extensions or modifications of this Agreement); (ii) Any document, agreement or procedure related to or delivered in connection with this Agreement; (iii) Any violation of this Agreement; or (iv) Any claims for damages resulting from any business conducted between the Borrower and the Bank, including claims for injury to persons, property or business interests (torts), which arise out of the transactions contemplated by this Agreement. (b) At the request of the Borrower or the Bank, any such controversies or claims will be settled by arbitration in accordance with the United States Arbitration Act. The United States Arbitration Act will apply even though this Agreement provides that it is governed by California law. (c) Arbitration proceedings will be administered by the American Arbitration Association and will be subject to its commercial rules of arbitration. (d) For purposes of the application of the statute of limitations, the filing of an arbitration pursuant to this paragraph is the equivalent of the filing of a lawsuit, and any claim or controversy which may be arbitrated under this paragraph is subject to any applicable statute of limitations. The arbitrators will have the authority to decide whether any such claim or controversy is barred by the statute of limitations and, if so, to dismiss the arbitration on that basis. (e) If there is a dispute as to whether an issue is arbitrable, the arbitrators will have the authority to resolve any such dispute. -23- 27 (f) The decision that results from an arbitration proceeding may be submitted to any authorized court of law to be confirmed and enforced. (g) The procedure described above will not apply if the controversy or claim, at the time of the proposed submission to arbitration, arises from or relates to an obligation to the Bank secured by real property located in California. In this case, both the Borrower and the Bank must consent to submission of the claim or controversy to arbitration. If both parties do not consent to arbitration, the controversy or claim will be settled as follows: (i) The Borrower and the Bank will designate a referee (or a panel of referees) selected under the auspices of the American Arbitration Association in the same manner as arbitrators are selected in Association-sponsored proceedings; (ii) The designated referee (or the panel of referees) will be appointed by a court as provided in California Code of Civil Procedure Section 638 and the following related sections; (iii) The referee (or the presiding referee of the panel) will be an active attorney or a retired judge; and (iv) The award that results from the decision of the referee (or the panel) will be entered as a judgment in the court that appointed the referee, in accordance with the provisions of California Code of Civil Procedure Sections 644 and 645. (h) This provision does not limit the right of the Borrower or the Bank to: (i) exercise self-help remedies such as setoff; (ii) foreclose against or sell any real or personal property collateral; or (iii) act in a court of law, before, during or after the arbitration proceeding to obtain: (A) an interim remedy; and/or (B) additional or supplementary remedies. (i) The pursuit of or a successful action for interim, additional or supplementary remedies, or the filing -24- 28 of a court action, does not constitute a waiver of the right of the Borrower or the Bank, including the suing party, to submit the controversy or claim to arbitration if the other party contests the lawsuit. However, if the controversy or claim arises from or relates to an obligation to the Bank which is secured by real property located in California at the time of the proposed submission to arbitration, this right is limited according to the provision above requiring the consent of both the Borrower and the Bank to seek resolution through arbitration. (j) If the Bank forecloses against any real property securing this Agreement, the Bank has the option to exercise the power of sale under the deed of trust or mortgage, or to proceed by judicial foreclosure. 9.5 Severability; Waivers. If any part of this Agreement is not enforceable, the rest of the Agreement may be enforced. The Bank retains all rights, even if it makes a loan after default. If the Bank waives a default, it may enforce a later default. Any consent or waiver under this Agreement must be in writing. 9.6 Costs. If the Bank incurs any expenses in connection with administering or enforcing this Agreement, or if the Bank takes collection action under this Agreement, it is entitled to costs and reasonable attorneys' fees, including any allocated costs of in-house counsel. 9.7 Attorneys' Fees. In the event of a lawsuit or arbitration proceeding, the prevailing party is entitled to recover costs and reasonable attorneys' fees incurred in connection with the lawsuit or arbitration proceeding, as determined by the court or arbitrator. In the event that any case is commenced by or against the Borrower under the Bankruptcy Code (Title 11, United States Code) or any similar or successor statute, the Bank is entitled to recover costs and reasonable attorneys' fees incurred by the Bank related to the preservation, protection, or enforcement of any rights of the Bank in such a case. As used in this paragraph, "attorneys' fees" includes the allocated costs of the Bank's in-house counsel. 9.8 One Agreement. This Agreement and any related security or other agreements required by this Agreement, collectively: (a) represent the sum of the understandings and agreements between the Bank and the Borrower concerning this credit; (b) replace any prior oral or written agreements between the Bank and the Borrower concerning this credit; and -25- 29 (c) are intended by the Bank and the Borrower as the final, complete and exclusive statement of the terms agreed to by them. In the event of any conflict between this Agreement and any other agreements required by this Agreement, this Agreement will prevail. 9.9 Notices. All notices required under this Agreement shall be personally delivered, faxed or sent by first class mail, postage prepaid, to the addresses on the signature page of this Agreement, or to such other addresses as the Bank and the Borrower may specify from time to time in writing. Notice shall be effective upon receipt if personally delivered or faxed, or three (3) banking days after deposited in first class mail, postage prepaid. 9.10 Headings. Article and paragraph headings are for reference only and shall not affect the interpretation or meaning of any provisions of this Agreement. 9.11 Counterparts. This Agreement may be executed in as many counterparts as necessary or convenient, and by the different parties on separate counterparts each of which, when so -26- 30 executed, shall be deemed an original but all such counterparts shall constitute but one and the same agreement. This Agreement is executed as of the date stated at the top of the first page. Bank of America National Williams-Sonoma, Inc. Trust and Savings Association By /s/ Hagop V. Bouldoukian By /s/ W. Howard Lester ---------------------------- ----------------------------- Hagop V. Bouldoukian W. Howard Lester Vice President Chairman and Chief Executive Officer By ______________________________ Typed Name ______________________ Title ___________________________ Address where notices to Address where notices to the Bank are to be sent: the Borrower are to be sent: San Francisco Commercial 3250 Van Ness Avenue Banking #1499 San Francisco, CA 94109 345 Montgomery Street Attn: Chief Financial Officer San Francisco, CA 94104 Fax: (415) 616-8359 Attn: Hagop V. Bouldoukian Fax: (415) 622-1878 [Attach Exhibit A - Commercial L/C and Shipside Bonds fees] [Attach Exhibit B - Compliance Certificate] -27- 31 EXHIBIT "A" Section 2.3(d): Letter of Credit Fees: - Issuance: 1/16%, $50 minimum - Amendment: 1/8th%, $50 minimum - Negotiations: 3/16%, $75 minimum - Discrepancy: $40 - Shipside bonds: Standard. 32 EXHIBIT "B" Williams-Sonoma, Inc. Compliance Certificate ---------------------- [Financial Statement] Date: ____________, 199__ Reference is made to that certain Second Amended and Restated Credit Agreement, dated as of March 29, 1996 (as extended, renewed, amended, or restated from time to time, the "Credit Agreement") between Williams-Sonoma, Inc. ("Borrower") and Bank of America National Trust and Savings Association ("Bank"). Unless otherwise defined herein, capitalized terms used herein have the respective meanings assigned to them in the Credit Agreement. This Compliance Certificate is being delivered in accordance with Paragraph 7.2(c) of the Credit Agreement to certify as to compliance with the terms and provisions thereof as of [insert date of financial statements as referenced above]. The undersigned hereby certifies as follows: 1. To the best of the undersigned's knowledge, Borrower has, as of the date of this Compliance Certificate, observed, performed, or satisfied all of the covenants and other agreements, and satisfied every condition of the Credit Agreement to be observed, performed, or satisfied by Borrower, and the undersigned has no knowledge of any Event of Default. Each representation and warranty of Borrower contained in the Credit Agreement is true and correct as of the date of this Compliance Certificate. 2. The Tangible Net Worth, Leverage, Fixed Charge Coverage and Capital Expenditures calculations set forth on Schedule 1 hereto are true and accurate on and as of the date of the financial statements noted above. IN WITNESS WHEREOF, the undersigned have executed this Compliance Certificate as of ________________, 199__. WILLIAMS-SONOMA, INC. By __________________________ Title _______________________ 33 [Sample] SCHEDULE 1 to the Compliance Certificate 1. TANGIBLE NET WORTH (Section 7.3): Date: ____________ Covenant: ____________ Actual: ____________ 2. DEBT TO TANGIBLE NET WORTH (Section 7.4): Date: ____________ Covenant: ____________ Actual: ____________ 3. FIXED CHARGE COVERAGE (Section 7.5): Rolling four-quarter detailed calculations, including components of definition, per attached example ("Fixed Charge Coverage Appendix"). Date: ____________ Covenant: ____________ Actual: ____________ 4. CAPITAL EXPENDITURES (Section 7.9): Section 7.9(a): Capital Expenditures not to exceed $30,000,000 for the fiscal year ending February 2, 1997. Reporting Period: January 29, 1996 through __________________ (date of attached financial statements) Actual: ___________ Section 7.9(a)(i): Operating leases for the acquisition of up to $5,000,000 in fixed assets to be excluded from calculation of the $30,000,000 Capital Expenditures covenant (Section 7.9[a]). Reporting Period: January 29, 1996 through __________________ (date of attached financial statements) Actual: ___________ Section 7.9(b): During the two fiscal quarters ending July 28, 1996, Borrower shall not commit to Capital Expenditures, to be incurred during the fiscal year ending January 31, 1998, in excess of $11,000,000. Reporting Period: January 29, 1996 through __________________ (date of attached financial statements) Actual: ___________ Section 7.9(c): Capital Expenditures to be made during the fiscal year ending February 2, 1997, with respect to capital projects that will be completed during the fiscal year ending January 31, 1998, shall not exceed $11,000,000. Reporting Period: January 29, 1996 through __________________ (date of attached financial statements) Actual: ___________ 34 FIXED CHARGE COVERAGE APPENDIX
- -------------------------------------------------------------------------------- IQ Q Q Q TOTALS (the most recent fiscal quarter) - -------------------------------------------------------------------------------- THE SUM OF: net income income taxes* interest expense depreciation amortization** rent expense*** - -------------------------------------------------------------------------------- (A) numerator SUM OF ADJUSTED totals EBIT FIGURES (4 QUARTERS) - -------------------------------------------------------------------------------- DIVIDED BY THE SUM OF: positive income tax expense interest expense rent expense*** current portion long term debt - -------------------------------------------------------------------------------- (B) denominator SUM OF FIXED totals CHARGES (4 QUARTERS) - -------------------------------------------------------------------------------- (A) DIVIDED BY (B) ROLLING 4 QUARTER FCC RATIO - --------------------------------------------------------------------------------
* Added only to the extent that they were deducted in determining net income ** Amortization expense, as defined for purposes of calculating this covenant in Paragraph 7.5 of the Credit Agreement, excludes amortization of Deferred Lease Incentives. *** Rent expense shall include, but not be limited to: * minimum rent * deferred lease rent * percentage rent * offsite storage * other rent and lease expense * operating lease expense 35 ================================================================================ [LOGO] BANK OF AMERICA CORPORATE RESOLUTIONS TO OBTAIN CREDIT - -------------------------------------------------------------------------------- RESOLVED, that this corporation, Williams-Sonoma, Inc., may: 1. borrow money from BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("Bank"); 2. obtain for the account of this corporation commercial and standby letters of credit issued by Bank; 3. obtain for the account of this corporation Bank's acceptance of drafts and other instruments; and 4. discount with or sell to Bank notes, acceptances, drafts, receivables and other evidences of indebtedness, and assign or otherwise transfer to Bank any security interest or lien for such obligations; from time to time, in such amount or amounts as in the judgement of the Authorized Officers (as hereinafter defined) this corporation may require (the credit facilities described in the first part of this resolution are collectively referred to herein as the "Credit Facilities"), provided, however, that the aggregate principal amount outstanding at any one time under the Credit Facilities authorized by this resolution shall not exceed sum of One Hundred Million Dollars ($100,000,000), which sum shall be in addition to such other amount or amounts as otherwise may be authorized. RESOLVED FURTHER, that the Authorized Officers are hereby authorized and directed, as security for any obligation or obligations of this corporation to Bank, whether arising pursuant to these Resolutions or otherwise, to grant in favor of Bank a security interest in or lien on any real or personal property belonging to or under the control of this corporation. RESOLVED FURTHER, that 1. If only one signature is obtained, any one of the following: a. b. c. d. e. f. 2. If two signature are obtained, any one of the following: a. b. c. d. e. f. together with any one of the following: g. h. i. j. k. l. of this corporation, acting individually or in any combination as may be set forth above (the "Authorized Officers"), are hereby authorized and directed, in the name of this corporation, to execute and deliver to Bank, and Bank is requested to accept: a. the notes, credit agreements, advance account agreements, acceptance agreements, letter of credit applications and agreements, purchase agreements or other instruments, agreements and documents which evidence the obligations of this corporation under the Credit Facilities obtained or to be obtained pursuant to these resolutions; b. any and all security agreements, deeds of trust, mortgages, financing statements, fixture filings or other instruments, agreements and documents with respect to any security interest or lien authorized to be given pursuant to these resolutions; and c. any other instruments, agreements and documents as Bank may require and the Authorized Officers may approve. - -------------------------------------------------------------------------------- -1- 36 - -------------------------------------------------------------------------------- RESOLVED FURTHER, that the Authorized Officers are hereby authorized and directed, in the name of this corporation, to endorse, assign to Bank, and deliver to Bank, any and all notes, acceptances, drafts, receivables and other evidences of indebtedness discounted with or sold to Bank, together with any security interest or lien for such obligations, and to guarantee the payment of the same to Bank. RESOLVED FURTHER, that any and all of the instruments, agreements and documents referred to above may contain such recitals, covenants, agreements and other provisions as Bank may require and the Authorized Officers may approve, and the execution of such instruments, agreements and documents by the Authorized Officers shall be conclusive evidence of such approval, and that the Authorized Officers are authorized from time to time to execute renewals or extensions of any and all such instruments, agreements and documents. RESOLVED FURTHER, that Bank is authorized to act upon the foregoing resolutions until written notice of revocation is received by Bank, and that the authority hereby granted shall apply with equal force and effect to the successors in office of the Authorized Officers. CORPORATE SECRETARY'S CERTIFICATE I, Dennis A. Chantland, Secretary of Williams-Sonoma, Inc., a corporation organized and existing under the laws of the State of California (the "Corporation"), hereby certify that the foregoing is a full, true and correct copy of resolutions of the Board of Directors of the Corporation, duly and regularly adopted by the Board of Directors of the Corporation in all respects as required by law and the by-laws of the Corporation on __________________, at a meeting at which a quorum of the Board of Directors of the Corporation was present and the requisite number of such directors voted in favor of said resolutions, or by the unanimous consent in writing of all members of the Board of Directors of the Corporation to the adoption of said resolutions. I further certify that said resolutions are still in full force and effect and have not been amended or revoked, and that the specimen signatures appearing below are the signatures of the officers authorized to sign for the Corporation by virtue of such resolutions. IN WITNESS WHEREOF, I have hereunto set my hand as Secretary of the Corporation, and affixed the corporate seal of the Corporation, on ________________. AUTHORIZED SIGNATURES: X X - ------------------------------ ------------------------------ Dennis A. Chantland, Secretary of Williams-Sonoma, Inc. X a California Corporation - ------------------------------ X Affix Corporate Seal Here. - ------------------------------ X - ------------------------------ X - ------------------------------ X - ------------------------------ - -------------------------------------------------------------------------------- -2- EX-10.10 4 PURCHASE AGREEMENT 1 Exhibit 10.10 WILLIAMS-SONOMA, INC. 5 1/4% CONVERTIBLE SUBORDINATED NOTES DUE APRIL 15, 2003 PURCHASE AGREEMENT April 10, 1996 Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004. Ladies and Gentlemen: Williams-Sonoma, Inc., a California corporation (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to you (the "Purchaser") an aggregate of U.S.$40,000,000 principal amount of the 5 1/4% Convertible Subordinated Notes due April 15, 2003, convertible into Common Stock, par value $0.01 per share (the "Stock"), of the Company, specified above (the "Securities"). As used herein, the term "Purchaser" shall be deemed to include Goldman Sachs International ("GSI"), who is acting as your selling agent in making certain resales of the Securities pursuant to Section 3. The Purchaser and other holders (including subsequent transferees) of Securities will be entitled to the benefits of the registration rights agreement, to be dated as of the Time of Delivery (as defined below) (the "Registration Rights Agreement") between the Company and the Purchaser, in the form attached hereto as Exhibit B. Pursuant to the Registration Rights Agreement, the Company will agree to file with the United States Securities and Exchange Commission (the "Commission") under the circumstances set forth therein a shelf registration statement pursuant to Rule 415 under the Securities Act relating to the resale of (i) such Securities and (ii) the shares of Stock initially issuable upon conversion of the Securities by holders thereof, and to use its best efforts to cause such shelf registration statement to be declared effective. 1. The Company represents and warrants to, and agrees with, the Purchaser that: (a) An offering circular dated April 10, 1996 (the "Offering Circular", including the international supplement thereto, any reference herein to which term shall be deemed to refer to and include the Company's Annual Report to Shareholders on Form 10-K for the fiscal year ended January 29, 1995 and Quarterly Report on Form 10-Q for the quarter ended October 29, 1995, attached to and made a part of the Offering Circular, and the other Appendices thereto) has been prepared in connection with the offering of the Securities and the shares of Stock issuable upon conversion thereof. Any reference to the Offering Circular shall be deemed to refer to and include the Company's most recent Annual Report on Form 10-K and all subsequent documents filed with the Commission pursuant to Section 13(a), 13(c) or 15(d) of the United 2 States Securities Exchange Act of 1934, as amended (the "Exchange Act") on or prior to the date of the Offering Circular and any reference to the Offering Circular, as amended or supplemented, as of any specified date, shall be deemed to include (i) any documents filed with the Commission pursuant to Section 13(a), 13(c) or 15(d) of the Exchange Act after the date of the Offering Circular and prior to such specified date and any Additional Issuer Information (as defined in Section 5(g)) furnished by the Company prior to the completion of the distribution of the Securities; and all documents filed under the Exchange Act and so deemed to be included in the Offering Circular or any amendment or supplement thereto are hereinafter called the "Exchange Act Reports". The Exchange Act Reports, when they were or are filed with the Commission, conformed or will conform in all material respects to the applicable requirements of the Exchange Act and the applicable rules and regulations of the Commission thereunder. The Offering Circular and any amendments or supplements thereto and the Exchange Act Reports did not and will not, as of their respective dates, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by you expressly for use therein; (b) Neither the Company nor any of its subsidiaries has sustained since the date of the latest audited consolidated financial statements of the Company included in the Offering Circular any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Offering Circular; and, since the respective dates as of which information is given in the Offering Circular, there has not been any material change in the capital stock or long-term debt of the Company or any of its subsidiaries or any material adverse change, or any development which in the opinion of the Company is reasonably likely to result in a prospective material adverse change, in or affecting the general affairs, management, financial position, shareholders' equity or results of operations of the Company and its subsidiaries taken as a whole, otherwise than as set forth or contemplated in the Offering Circular; (c) The Company and its subsidiaries have good and marketable title (legal or equitable, as applicable) to all real and personal property owned by them, in each case free and clear of all liens, encumbrances and defects except such as are described in the Offering Circular or such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries; -2- 3 (d) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of California, with power and authority (corporate and other) to own its properties and conduct its business as described in the Offering Circular, and has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification, or is subject to no material liability or disability by reason of the failure to be so qualified in any such jurisdiction; and each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; (e) The Company has an authorized capitalization as set forth in the Offering Circular, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued and are fully paid and non-assessable; the shares of Stock initially issuable upon conversion of the Securities have been duly and validly authorized and reserved for issuance and, when issued and delivered in accordance with the provisions of the Securities and the Indenture referred to below, will be duly and validly issued, fully paid and non-assessable and will conform to the description of the Stock contained in the Offering Circular; (f) The Securities have been duly authorized by the Company and, when issued and delivered pursuant to this Agreement and the Indenture (hereinafter defined), will have been duly executed, authenticated, issued and delivered and will constitute valid and legally binding obligations of the Company, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles, and will be entitled to the benefits provided by the Indenture to be dated as of April 15, 1996 (the "Indenture") between the Company and Bankers Trust Company, as trustee (the "Trustee"), under which they are to be issued, which will be substantially in the form previously delivered to you; the Indenture has been duly authorized and, when executed and delivered by the parties thereto, will constitute a valid and legally binding instrument, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles; and the Securities and the Indenture will conform to the descriptions thereof in the Offering Circular and will be in substantially the form previously delivered to you; (g) None of the transactions contemplated by this Agreement (including, without limitation, the use of the proceeds from the sale of the Securities) will violate or result in a violation of Section 7 of the Exchange Act, or any regulation promulgated thereunder, including, without limitation, Regulations G, T, U, and X of the Board of Governors of the Federal Reserve System; (h) Prior to the date hereof, neither the Company nor any of its affiliates has taken any action which is designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company in connection with the offering of the Securities; -3- 4 (i) The issue and sale of the Securities, and the compliance by the Company with all of the provisions of the Securities, the Indenture, the Registration Rights Agreement and this Agreement and the consummation of the transactions herein and therein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will such action result in any violation of the provisions of the Articles of Incorporation or By-laws of the Company or any United States statute or any order, rule or regulation of any United States court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties; and no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Securities or the consummation by the Company of the transactions contemplated by this Agreement, the Registration Rights Agreement or the Indenture, except such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Securities by the Purchaser; (j) Except as disclosed in the Offering Circular, neither the Company nor any of its subsidiaries is in violation of its Articles of Incorporation or By-laws or in default in the performance or observance of any material obligation, covenant or condition contained in any material contract, indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which it is a party or by which it or any of its properties may be bound; (k) The statements set forth in the Offering Circular under the captions "Description of Notes" and "Description of Capital Stock", insofar as they purport to constitute a summary of the terms of the Securities, the capital stock of the Company and the documents and laws therein described, and under the captions "Notice to Investors", "United States Taxation" and "Offer and Resale", insofar as they purport to describe the provisions of the laws and documents referred to therein, are accurate and complete; (l) Other than as set forth in the Offering Circular, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate reasonably be expected to have a material adverse effect on the current consolidated financial position, shareholders' equity or results of operations of the Company and its subsidiaries and, to the best of the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (m) The Company is subject to Section 13 or 15(d) of the Exchange Act; -4- 5 (n) When the Securities are issued and delivered pursuant to this Agreement, such Securities will not be of the same class (within the meaning of Rule 144A under the Securities Act) as securities which are listed on a national securities exchange registered under Section 6 of the Exchange Act, or quoted in a U.S. automated inter-dealer quotation system; (o) The Company is not, and after giving effect to the offering and sale of the Securities, will not be an "investment company", or an entity "controlled" by an "investment company", as such terms are defined in the United States Investment Company Act of 1940, as amended (the "Investment Company Act"); (p) Neither the Company nor any person acting on its behalf has offered or sold the Securities by means of any general solicitation or general advertising within the meaning of Rule 502(c) under the Securities Act or, with respect to Securities sold outside the United States to non-U.S. persons (as defined in Rule 902 under the Securities Act), by means of any directed selling efforts within the meaning of Rule 902 under the Securities Act and the Company, any affiliate of the Company and any person acting on its or their behalf has complied with and will implement the "offering restriction" within the meaning of such Rule 902; (q) Within the preceding six months, neither the Company nor any other person acting on behalf of the Company has offered or sold to any person any Securities, or any securities of the same or a similar class as the Securities, other than Securities offered or sold to the Purchaser hereunder. The Company will take reasonable precautions designed to insure that any offer or sale, direct or indirect, in the United States or to any U.S. person (as defined in Rule 902 under the Securities Act) of any Securities or any substantially similar security issued by the Company, within six months subsequent to the date on which the distribution of the Securities has been completed (as notified to the Company by Goldman, Sachs & Co.), is made under restrictions and other circumstances reasonably designed not to affect the status of the offer and sale of the Securities in the United States and to U.S. persons contemplated by this Agreement as transactions exempt from the registration provisions of the Securities Act; (r) It is not necessary in connection with the offer, sale and delivery of the Securities to the Purchaser, or in connection with the initial resale of the Securities by the Purchaser in accordance with this Agreement, to register the Securities under the Securities Act or to qualify the Indenture under the Trust Indenture Act of 1939, as amended (the "TIA"); (s) The Securities have been designated PORTAL eligible securities in accordance with the rules and regulations of the National Association of Securities Dealers, Inc.; (t) The Company has all corporate power to enter into this Agreement and the Registration Rights Agreement. This Agreement has been and, as of the Time of Delivery, the Registration Rights Agreement will have been, duly authorized, executed and delivered by the Company and upon such execution by the Company (assuming -5- 6 the due authorization, execution and delivery of such agreements by the other parties thereto) this Agreement and the Registration Rights Agreement will constitute the valid and binding obligations of the Company enforceable against the Company in accordance with the terms hereof or thereof, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles, and except as the enforcement of indemnification and contribution provisions hereof and thereof may be limited by applicable law; (u) There are no persons with registration rights or other similar rights to have any securities of the Company (other than the Securities) registered under any Securities Act registration statement; (v) None of the holders of outstanding shares of capital stock of the Company and no other person has or will have any preemptive or other rights to purchase, subscribe for or otherwise acquire (i) the shares of Stock to be issued upon conversion of the Securities or any rights to such shares or (ii) as a result of or in connection with the transactions contemplated by the Indenture, this Agreement or the Registration Rights Agreement, any other capital stock of the Company or rights thereto; (w) Each of the directors and officers of the Company listed in Schedule I hereto has entered into a written agreement with the Company in the form of Exhibit A hereto (each such agreement, a "Lock-up Agreement"), and executed originals of each Lockup Agreement have been delivered to you; (x) The Company and its subsidiaries directly or indirectly own free of adverse claims as to title such trademarks (and goodwill appertaining thereto) as are necessary to conduct the business of the Company as described in the Offering Circular; except as described in the Offering Circular, there are no pending or threatened claims by others that the Company or its subsidiaries is infringing or otherwise violating any valid trademarks or trademark rights of others which individually or in the aggregate could reasonably be expected to have a material adverse effect on the Company and its subsidiaries taken as a whole; and, to the best of the Company's knowledge, there are no infringements of any of the Company's or its subsidiaries' trademarks which individually or in the aggregate could reasonably be expected to have a material adverse effect on the Company and its subsidiaries taken as a whole; (y) Neither the Company nor any of its affiliates does business with the government of Cuba or with any person or affiliate located in Cuba within the meaning of Section 517.075, Florida Statutes; and (z) Deloitte & Touche LLP, who have certified certain financial statements of the Company and its subsidiaries, are independent public accountants with respect to the Company and its subsidiaries as required by the Securities Act and the rules and regulations of the Commission thereunder. -6- 7 2. Subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the Purchaser, and the Purchaser agrees to purchase from the Company, at a purchase price of 97.5% of the principal amount thereof, plus accrued interest, if any, from April 15, 1996 to the Time of Delivery hereunder, U.S.$40,000,000 principal amount of Securities. 3. The Purchaser proposes to offer the Securities for sale upon the terms and conditions set forth in this Agreement and the Offering Circular and the Purchaser hereby represents and warrants to, and agrees with the Company that: (a) It will offer and sell the Securities only to: (i) persons who it reasonably believes are "qualified institutional buyers" ("QIBs") within the meaning of Rule 144A under the Securities Act in transactions meeting the requirements of Rule 144A, (ii) institutions which it reasonably believes are "accredited investors" ("Institutional Accredited Investors") within the meaning of Rule 501 under the Securities Act or, (iii) upon the terms and conditions set forth in Annex I to this Agreement; (b) It is an Institutional Accredited Investor; and (c) It will not offer or sell the Securities by any form of general solicitation or general advertising, including but not limited to the methods described in Rule 502(c) under the Securities Act. 4. (a) The Securities to be purchased will be represented (i) in the case of Securities purchased by Goldman, Sachs & Co. (except in the case of Securities to be acquired by Institutional Accredited Investors), by one or more definitive global Securities in book-entry form which will be deposited by or on behalf of the Company with The Depository Trust Company ("DTC") or its designated custodian and (ii) in the case of Securities purchased by GSI, by one or more definitive global Securities in book-entry form which will be deposited by or on behalf of the Company with DTC or its designated custodian for the benefit of Morgan Guaranty Trust Company of New York (Brussels office), as operator of the Euroclear System, or Cedel Bank, Societe Anonyme, or both, for credit to the account of GSI, unless otherwise directed by GSI. The Company will deliver the Securities to Goldman, Sachs & Co., for its account, against payment by or on behalf of the Purchaser of the purchase price therefor by certified or official bank check or checks, or by wire transfer, payable to the order of the Company in Federal (same day) funds, by causing DTC to credit the Securities to the respective accounts of Goldman, Sachs & Co. and GSI, as the case may be, at DTC. The Company will cause the certificates representing the Securities to be made available to Goldman, Sachs & Co. for checking at least twenty-four hours prior to the Time of Delivery (as defined below) at the office of DTC or its designated custodian (the "Designated Office"). The time and date of such delivery and payment shall be 9:30 a.m., New York City time, on April 15, 1996 or such other time and date as the Purchaser and the Company may agree upon in writing, and is herein called the "Time of Delivery". (b) The documents to be delivered at the Time of Delivery by or on behalf of the parties hereto pursuant to Section 7 hereof, including the cross-receipt for the Securities and any additional documents requested by the Purchaser pursuant to Section 7(j) hereof, will be -7- 8 delivered at the offices of Sullivan & Cromwell, 444 South Flower Street, Los Angeles, California 90071 (the "Closing Location"), and the Securities will be delivered at the Designated Office, all at the Time of Delivery. A meeting will be held at the Closing Location at 1:00 p.m., Los Angeles time, on the Business Day next preceding the Time of Delivery, at which meeting the final drafts of the documents to be delivered pursuant to the preceding sentence will be available for review by the parties hereto. For the purposes of this Section 4, "Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York City or Los Angeles, California are generally authorized or obligated by law or executive order to close. 5. The Company agrees with the Purchaser: (a) To prepare the Offering Circular in a form approved by you; to make no amendment or supplement to the Offering Circular which shall be reasonably disapproved by you promptly after reasonable notice thereof; and to furnish you with copies thereof; (b) To furnish you with nine copies of the Offering Circular and each amendment or supplement thereto signed by an authorized officer of the Company with the independent accountants' report(s) in the Offering Circular, and any amendment or supplement containing amendments to the financial statements covered by such report(s), signed by the accountants, and additional copies thereof in such quantities as you may from time to time reasonably request, and if, at any time prior to the expiration of nine months after the date of the Offering Circular, any event shall have occurred as a result of which the Offering Circular as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Offering Circular is delivered, not misleading, or, if for any other reason it shall be necessary or desirable during such same period to amend or supplement the Offering Circular, to notify you and upon your request to prepare and furnish without charge to you and to any dealer in securities as many copies as you may from time to time reasonably request of an amended Offering Circular or a supplement to the Offering Circular which will correct such statement or omission or effect such compliance; (c) (i) During the period beginning from the date hereof and continuing to and including the date 90 days after the date of the Offering Circular, not to offer, sell, contract to sell or otherwise dispose of any Stock (other than upon conversion of the Securities), any securities of the Company substantially similar to the Securities or the Stock or any securities of the Company convertible into or exchangeable or exercisable for shares of Stock or substantially similar securities, except (a) pursuant to the Company's stock option or purchase plans existing as of the date hereof or other options granted by the Company to employees or (b) as consideration for acquisitions of businesses, properties or assets, provided that (except with respect to an aggregate of not more than 50,000 shares of Common Stock issued in consideration of all such acquisitions) the offerees, purchasers or other transferees of any such shares shall agree in writing to restrictions substantially identical to those contained in this subsection; and (ii) that it will use reasonable efforts to cause each person who has entered into a Lock-up Agreement to comply therewith, will not grant any waivers or consents to non-compliance therewith and will enforce its rights under each such -8- 9 agreement; in each case unless and to the extent that it shall have obtained your prior written consent; (d) To use its best efforts to have the shares of Stock issuable upon conversion of the Securities accepted for quotation on the Nasdaq National Market prior to the time the definitive Securities become available for delivery; (e) To use the net proceeds received by it from the sale of the Securities pursuant to this Agreement in the manner specified in the Offering Circular under the caption "Use of Proceeds"; (f) Not to be or become, at any time prior to the expiration of three years after the Time of Delivery, an open-end investment company, unit investment trust, closed-end investment company or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act; (g) At any time when the Company is not subject to Section 13 or 15(d) of the Exchange Act, for the benefit of holders from time to time of Securities and the Stock issuable upon conversion thereof, to furnish at its expense, upon request, to holders of Securities and the Stock issuable upon conversion thereof and prospective purchasers of Securities and the Stock issuable upon conversion thereof securities information (the "Additional Issuer Information") satisfying the requirements of subsection (d)(4)(i) of Rule 144A under the Securities Act; (h) To use its best efforts to cause the Securities sold in reliance on Rule 144A to be eligible for the PORTAL trading system of the National Association of Securities Dealers, Inc.; (i) To file with the Commission, not later than 15 days after the Time of Delivery, five copies of a notice on Form D under the Securities Act (one of which will be manually signed by a person duly authorized by the Company); to otherwise comply with the requirements of Rule 503 under the Securities Act; and to furnish promptly to you evidence of each such required timely filing (including a copy thereof); (j) To furnish to the holders of the Securities as soon as practicable after the end of each fiscal year an annual report (including a balance sheet and statements of income, shareholders' equity and cash flows of the Company and its consolidated subsidiaries certified by independent public accountants) and, as soon as practicable after the end of each of the first three quarters of each fiscal year (beginning with the fiscal quarter ending after the date of the Offering Circular), consolidated summary financial information of the Company and its subsidiaries for such quarter in reasonable detail; (k) During a period of five years from the date of the Offering Circular, to furnish to you copies of all reports or other communications (financial or other) furnished to shareholders of the Company, and to deliver to you (i) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission or any securities exchange on which the Securities or any class of securities of the Company is listed; and (ii) such additional information concerning the business and financial condition of the Company as you -9- 10 may from time to time reasonably request (such financial statements to be on a consolidated basis to the extent the accounts of the Company and its subsidiaries are consolidated in reports furnished to its shareholders generally or to the Commission); (l) During the period of three years after the Time of Delivery, the Company will not, and will not permit any of its "affiliates" (as defined in Rule 144 under the Securities Act) to, resell any of the Securities which constitute "restricted securities" under Rule 144 that have been reacquired by any of them; (m) Promptly from time to time to take such action as you may reasonably request to qualify the Securities and the Stock issuable upon conversion thereof for offering and sale under the securities laws of such United States jurisdictions as you may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of such Securities and the Stock issuable upon conversion thereof, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction; (n) To reserve and keep available at all times, free of preemptive rights, shares of Stock for the purpose of enabling the Company to satisfy any obligations to issue shares of Stock upon conversion of the Securities; and (o) Until such time as any Security or any Stock issuable upon conversion thereof is registered under the Securities Act pursuant to the Registration Rights Agreement and transferred pursuant to such registration, to include a legend on the Securities and the Stock issuable upon the conversion thereof to the effect set forth under "Notice to Investors". 6. The Company covenants and agrees with the Purchaser that the Company will pay or cause to be paid the following: (i) the fees, disbursements and expenses of the Company's counsel and accountants and all other expenses of the Company in connection with the issue and listing of the Securities and the Stock issuable upon conversion thereof, the preparation and delivery of the Securities in temporary and definitive forms, the preparation and printing of the Offering Circular and any amendments and supplements thereto and the mailing and delivering of copies thereof to the Purchaser and dealers; (ii) the cost of printing or producing this Agreement, the Indenture, the Registration Rights Agreement, any Blue Sky and Legal Investment Memoranda, closing documents (including any compilations thereof) and any other documents in connection with the offering, purchase, sale and delivery of the Securities; (iii) the fees and expenses of the Trustee and any agent of the Trustee and the fees and disbursements of counsel for the Trustee and any such agent in connection with the Indenture and the Securities; (iv) all fees, expenses and charges in connection with the qualification of the Securities for trading in the PORTAL System of the National Association of Securities Dealers, Inc., the listing of the Stock issuable upon conversion of the Securities on the Nasdaq National Market System and any other listing of the Securities and the Stock issuable upon conversion thereof on any exchange or quotation service; (v) the fees and expenses of DTC and any other depositary used in connection with the Securities and of any transfer or conversion agent or registrar for the Securities or the Stock issuable upon conversion of the Securities; (vi) fees, if any, charged by securities rating services for rating the Securities; -10- 11 (vii) all expenses in connection with the qualification of the Securities and the shares of Stock issuable upon the conversion of the Securities for offering and sale under state securities laws as provided in Section 5(m) hereof, including the fees and disbursements of counsel for the Purchaser in connection with the Blue Sky and legal investment surveys; and (viii) all other costs and expenses incident to the performance of the Company's obligations hereunder which are not otherwise specifically provided for in this Section including any expenses incurred in connection with complying with Section 5(g) hereof; and to indemnify and hold harmless the Purchaser from any documentary stamp or similar issue tax and any related interest or penalties on the issue, sale or delivery of the Securities to the Purchaser which are or may be due. It is understood, however, that, except as provided in this Section and Sections 8 and 10 hereof, the Purchaser will pay all of its own costs and expenses, including the fees of its counsel, transfer taxes on resale of any of the Securities by it, and any advertising expenses connected with any offers it may make. 7. The obligations of the Purchaser hereunder shall be subject, in its discretion, to the condition that all representations and warranties and other statements of the Company herein are, at and as of the Time of Delivery, true and correct, the condition that the Company shall have performed all of its obligations hereunder theretofore to be performed, and the following additional conditions: (a) Sullivan & Cromwell, counsel for the Purchaser, shall have furnished to you such opinion or opinions, dated the Time of Delivery, with respect to the incorporation of the Company, the validity of the Indenture, the Securities, the shares of Stock issuable upon conversion of the Securities, the Offering Circular and other related matters as you may reasonably request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters; (b) Irell & Manella LLP, United States counsel for the Company, shall have furnished to you their written opinion or opinions, dated the Time of Delivery, in form and substance satisfactory to you, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of California, with corporate power and authority to own its properties and conduct its business as described in the Offering Circular; (ii) The Company has an authorized capitalization as set forth in the Offering Circular, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued and, to such counsel's knowledge, are fully paid and non-assessable; the shares of Stock initially issuable upon conversion of the Securities have been duly and validly authorized and reserved for issuance and, when issued and delivered in accordance with the provisions of the Securities and the Indenture, will be duly and validly issued, fully paid and non-assessable and will conform to the description of the Stock contained in the Offering Circular; -11- 12 (iii) The Company has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each of the jurisdictions listed on Schedule I to such counsel's opinion; (iv) Each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; and all of the issued shares of capital stock of each such subsidiary have been duly and validly authorized and issued, to such counsel's knowledge, are fully paid and non-assessable, and are owned directly or indirectly by the Company, free and clear of any perfected security interest (such counsel being entitled to rely in respect of the opinion in this clause upon opinions of local counsel and in respect of matters of fact upon certificates of officers of the Company or its subsidiaries, provided that such counsel shall state that they believe that both you and they are justified in relying upon such opinions and certificates); (v) To such counsel's knowledge and other than as set forth in the Offering Circular, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate reasonably be expected to have a material adverse effect on the current consolidated financial position, shareholders' equity or results of operations of the Company and its subsidiaries taken as a whole; and, to such counsel's knowledge, no such proceedings are threatened by governmental authorities or by others; (vi) This Agreement, the Registration Rights Agreement and the Indenture have each been duly authorized, executed and delivered by the Company; the Securities have been duly authorized, executed, authenticated, issued and delivered by the Company; and the Securities and the Indenture conform to the descriptions thereof in the Offering Circular; (vii) Based on and subject to the analysis and qualifications set forth in the Schedule attached to such opinion, in any action or proceeding arising out of or relating to the Registration Rights Agreement, the Securities or the Indenture (collectively, the "Documents"), in any court of the State of California or in any federal court sitting in California, such court should recognize and give effect to the governing laws provisions of the Documents wherein the parties thereto agree that the Documents shall be governed by, and construed in accordance with, the laws of the State of New York. However, if a court were to hold that the Documents are governed by, and are to be construed in accordance with, the laws of the State of California, each Document would be, under the laws of the State of California, the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles; -12- 13 (viii) While general in nature, the statements set forth in the Offering Circular under the caption "United States Taxation," insofar as they purport to describe the provisions of the laws and documents referred to therein, accurately describe the material tax consequences to holders of the Securities; (ix) The issue and sale of the Securities, the issuance of the Stock upon conversion of the Securities and the compliance by the Company with all of the provisions of the Securities, the Indenture, the Registration Rights Agreement and this Agreement and the consummation of the transactions herein and therein contemplated will not result in any violation of the provisions of the Articles of Incorporation or Bylaws of the Company or to such counsel's knowledge any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties, nor will such action, to such counsel's knowledge, conflict with or result in a breach or violation of any of the terms or provisions of, or to such counsel's knowledge constitute a default under, any material indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument known to such counsel to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject; (x) To such counsel's knowledge, no consent, approval, authorization, order, registration or qualification of or with any court or governmental agency or body of the United States of America or any political subdivision thereof is required for the issue and sale of the Securities, the issuance of the Stock upon conversion of the Securities or the consummation of the transactions contemplated by this Agreement, the Registration Rights Agreement or the Indenture, except such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Securities by the Purchaser; (xi) Neither the Company nor any of its subsidiaries is in violation of its Articles of Incorporation or By-laws or to such counsel's knowledge in default in the performance or observance of any obligation, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which it is a party or by which it or any of its properties may be bound, the default of which would have a material adverse effect on the Company or on the ability of any of the parties hereto to consummate any of the transactions contemplated hereby; (xii) The statements set forth in the Offering Circular under the caption "Description of the Notes" and "Description of Capital Stock", insofar as they purport to constitute a summary of the terms of the Securities, the capital stock of the Company and the documents and laws therein described and under the captions "Notice to Investors" and "Offer and Resale", insofar as they purport to describe the provisions of the laws and documents referred to therein, are accurate and complete in all material respects; -13- 14 (xiii) No registration of the Securities under the Securities Act, and no qualification of an indenture under the TIA with respect thereto, is required for the offer and sale by the Company and the offer and initial resale of the Securities by the Purchaser in the manner contemplated by this Agreement; (xiv) The Exchange Act Reports (other than the financial statements and related schedules therein, as to which such counsel need express no opinion), when they were filed with the Commission, complied as to form in all material respects with the requirements of the Exchange Act, and the rules and regulations of the Commission thereunder; and to such counsel's knowledge, none of such documents, when they were so filed, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such documents were so filed, not misleading, except to the extent that any matters covered by any such Exchange Act Report were described differently in any subsequently filed Exchange Act Report or in the Offering Circular (and with respect to any such matters, such counsel may express no view); (xv) To such counsel's knowledge neither the Offering Circular nor any further amendments or supplements thereto made by the Company prior to the Time of Delivery (other than the financial statements therein, as to which such counsel need express no opinion) contained as of its date or contains as of the Time of Delivery an untrue statement of a material fact or omitted or omits, as the case may be, to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (xvi) The Company is not an "investment company" or an entity "controlled" by an "investment company", as such terms are defined in the Investment Company Act. Such counsel may state that the foregoing opinions are limited to the Federal laws of the United States and the laws of the State of California. (c) Owen, Wickersham & Erickson, P.C., special trademark counsel for the Company, shall have furnished to you their written opinion, dated the Time of Delivery, in form and substance satisfactory to you, to the effect that the Company and its subsidiaries directly or indirectly own free of adverse claims as to title such trademarks and servicemarks (and goodwill appertaining thereto) as are necessary to conduct the business of the Company as described in the Offering Circular, such counsel is not aware of any pending or threatened claim by others that the Company or its subsidiaries is infringing or otherwise violating any valid trademarks or servicemarks or trademark or servicemark rights of others which could materially affect the Company and its subsidiaries; and such counsel is not aware of any infringement of any of the Company's or its subsidiaries' trademarks or servicemarks which could affect materially the Company and its subsidiaries; (d) On the date of the Offering Circular prior to the execution of this Agreement, and also at the Time of Delivery, Deloitte & Touche LLP shall have furnished to you a letter or letters, dated the respective date of delivery thereof, in form and substance satisfactory to -14- 15 you, to the effect set forth in Annex II hereto and as to such other matters as you may reasonably request; (e) (i) Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements of the Company included in the Offering Circular any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Offering Circular, and (ii) since the respective dates as of which information is given in the Offering Circular there shall not have been any material change in the capital stock or long-term debt of the Company or any of its subsidiaries or any change, or any development involving a prospective change, in or affecting the general affairs, management, financial position, shareholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Offering Circular, the effect of which, in any such case described in clause (i) or (ii), is in your judgment so material and adverse as to make it impracticable or inadvisable to proceed with the offering or the delivery of the Securities on the terms and in the manner contemplated in this Agreement and in the Offering Circular; (f) On or after the date hereof, (i) no downgrading shall have occurred in the rating accorded the Company's debt securities by any "nationally recognized statistical rating organization", as that term is defined by the Commission for purposes of Rule 436(g)(2) under the Securities Act, and (ii) no such organization shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Company's debt securities; (g) On or after the date hereof there shall not have occurred any of the following: (i) a suspension or material limitation in trading in securities generally on the New York Stock Exchange or the Nasdaq National Market; (ii) a suspension or material limitation in trading in the Company's securities on the Nasdaq National Market; (iii) a general moratorium on commercial banking activities declared by either Federal or New York or California State authorities; (iv) the outbreak or escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war, if the effect of any event specified in this clause (iv) in your judgment makes it impracticable or inadvisable to proceed with the offering or the delivery of the Securities on the terms and in the manner contemplated in the Offering Circular; (h) The Securities have been designated for trading on PORTAL; (i) Each Lock-up Agreement shall have been duly executed and delivered to the Company and you and there shall have occurred no breach of any Lock-up Agreement; and (j) The Company shall have furnished or caused to be furnished to you at the Time of Delivery certificates of officers of the Company satisfactory to you as to the accuracy of the representations and warranties of the Company herein at and as of the Time of Delivery, as to the performance by the Company of all of its obligations hereunder to be performed at or prior to the Time of Delivery, as to the matters set forth in subsection (d) of this Section and as to such other matters as you may reasonably request. -15- 16 8. (a) The Company will indemnify and hold harmless each Purchaser against any losses, claims, damages or liabilities, joint or several, to which such Purchaser may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in the Offering Circular, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading, and will periodically reimburse each Purchaser for any legal or other expenses reasonably incurred by such Purchaser in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Offering Circular or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Purchaser through Goldman, Sachs & Co. expressly for use therein. (b) Each Purchaser will indemnify and hold harmless the Company against any losses, claims, damages or liabilities to which the Company may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in the Offering Circular, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Offering Circular or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Purchaser through Goldman, Sachs & Co. expressly for use therein; and will reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. (c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it of any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other -16- 17 than reasonable costs of investigation. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to, or an admission of, fault, culpability or a failure to act, by or on behalf of any indemnified party. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Purchaser on the other from the offering of the Securities. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Purchaser on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Purchaser on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Purchaser, in each case as set forth in the Offering Circular. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Purchaser on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Purchaser agree that it would not be just and equitable if contribution pursuant to this subsection (d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no Purchaser shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to investors exceeds the amount of any damages which such Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. -17- 18 (e) The obligations of the Company under this Section 8 shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls the Purchaser within the meaning of the Securities Act; and the obligations of the Purchaser under this Section 8 shall be in addition to any liability which the Purchaser may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company and to each person, if any, who controls the Company within the meaning of the Securities Act. 9. The respective indemnities, agreements, representations, warranties and other statements of the Company and the Purchaser, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by the Purchaser or any controlling person of the Purchaser, or the Company or any officer or director or controlling person of the Company, and shall survive delivery of and payment for the Securities. 10. If for any reason the Securities are not delivered by or on behalf of the Company as provided herein, the Company will reimburse the Purchaser for all out-of-pocket expenses, including fees, disbursements and expenses of counsel, reasonably incurred by the Purchaser in making preparations for the purchase, sale and delivery of the Securities, but the Company shall then be under no further liability to the Purchaser except as provided in Sections 6 and 8 hereof. 11. All statements, requests, notices and agreements hereunder shall be in writing, and if to the Purchaser shall be delivered or sent by mail, telex or facsimile transmission to you at 85 Broad Street, New York, New York 10004, Attention: Registration Department; and if to the Company shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Offering Circular, Attention: Chief Financial Officer. Any such statements, requests, notices or agreements shall take effect upon receipt thereof. 12. This Agreement shall be binding upon, and inure solely to the benefit of, the Purchaser, the Company and, to the extent provided in Sections 8 and 9 hereof, the officers and directors of the Company and each person who controls the Company or any Purchaser, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Securities from the Purchaser shall be deemed a successor or assign by reason merely of such purchase. 13. Time shall be of the essence of this Agreement. 14. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 15. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such respective counterparts shall together constitute one and the same instrument. -18- 19 If the foregoing is in accordance with your understanding, please sign and return to us four counterparts hereof, and upon the acceptance hereof by you, this letter and such acceptance hereof shall constitute a binding agreement between the Purchaser and the Company. Very truly yours, WILLIAMS-SONOMA, INC. By: ---------------------------- Name: Title: Accepted as of the date hereof: - ------------------------------- (Goldman, Sachs & Co.) -19- EX-10.10A 5 INDENTURE 1 EXECUTION COPY Exhibit 10.10A WILLIAMS-SONOMA, INC. ISSUER AND BANKERS TRUST COMPANY TRUSTEE -------------------- INDENTURE Dated as of April 15, 1996 -------------------- U.S. $40,000,000 5 1/4% CONVERTIBLE SUBORDINATED NOTES DUE APRIL 15, 2003 2 TABLE OF CONTENTS
Page ---- RECITALS ......................................................................... 1 ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 1.1 Definitions.............................................................. 1 SECTION 1.2 Compliance Certificates and Opinions; Form of Documents Delivered to Trustee................................... 9 SECTION 1.3 Acts of Holders of Securities............................................ 10 SECTION 1.4 Notices, Etc............................................................. 12 SECTION 1.5 Notice to Holders of Securities; Waiver.................................. 13 SECTION 1.6 Effect of Headings and Table of Contents................................. 13 SECTION 1.7 Successors and Assigns................................................... 13 SECTION 1.8 Separability Clause...................................................... 13 SECTION 1.9 Benefits of Indenture.................................................... 13 SECTION 1.10 Governing Law............................................................ 14 SECTION 1.11 Legal Holidays........................................................... 14 SECTION 1.12 Conflict with Trust Indenture Act........................................ 14 ARTICLE II SECURITY FORMS SECTION 2.1 Forms Generally.......................................................... 14 SECTION 2.2 Form of Face of Security................................................. 16 SECTION 2.3 Form of Reverse of Security.............................................. 20 SECTION 2.4 Form of Trustee's Certificate of Authentication.......................... 26 ARTICLE III THE SECURITIES SECTION 3.1 Title and Terms.......................................................... 26 SECTION 3.2 Denominations............................................................ 27 SECTION 3.3 Execution, Authentication, Delivery and Dating........................... 27 SECTION 3.4 Temporary Securities..................................................... 28 SECTION 3.5 Registration, Registration of Transfer and Exchange; Restrictions on Transfer................................... 28
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Page ---- SECTION 3.6 Mutilated, Destroyed, Lost or Stolen Securities.......................... 33 SECTION 3.7 Payment of Interest, Interest Rights Preserved........................... 33 SECTION 3.8 Persons Deemed Owners.................................................... 35 SECTION 3.9 Cancellation............................................................. 35 SECTION 3.10 Computation of Interest.................................................. 35 SECTION 3.11 CUSIP Numbers............................................................ 35 ARTICLE IV SATISFACTION AND DISCHARGE SECTION 4.1 Satisfaction and Discharge of Indenture.................................. 36 SECTION 4.2 Application of Trust Money............................................... 37 ARTICLE V REMEDIES SECTION 5.1 Events of Default........................................................ 37 SECTION 5.2 Acceleration of Maturity; Rescission and Annulment............................................................ 38 SECTION 5.3 Collection of Indebtedness and Suits for Enforcement by Trustee............................................... 39 SECTION 5.4 Trustee May File Proofs of Claim......................................... 40 SECTION 5.5 Trustee May Enforce Claims Without Possession of Securities................................................. 41 SECTION 5.6 Application of Money Collected........................................... 41 SECTION 5.7 Limitation on Suits...................................................... 41 SECTION 5.8 Unconditional Right of Holders to Receive Principal and Interest and to Convert.................................... 42 SECTION 5.9 Restoration of Rights and Remedies....................................... 42 SECTION 5.10 Rights and Remedies Cumulative........................................... 43 SECTION 5.11 Delay or Omission Not Waiver............................................. 43 SECTION 5.12 Control by Holders of Securities......................................... 43 SECTION 5.13 Waiver of Past Defaults.................................................. 43 SECTION 5.14 Undertaking for Costs.................................................... 44 SECTION 5.15 Waiver of Stay or Extension Laws......................................... 44
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Page ---- ARTICLE VI THE TRUSTEE SECTION 6.1 Certain Duties and Responsibilities...................................... 44 SECTION 6.2 Notice of Defaults....................................................... 45 SECTION 6.3 Certain Rights of Trustee................................................ 46 SECTION 6.4 Not Responsible for Recitals or Issuance of Securities................................................... 47 SECTION 6.5 May Hold Securities, Act as Trustee Under Other Indentures......................................................... 47 SECTION 6.6 Money Held in Trust...................................................... 47 SECTION 6.7 Compensation and Indemnification of Trustee and Its Prior Claims............................................. 47 SECTION 6.8 Corporate Trustee Required; Eligibility.................................. 48 SECTION 6.9 Resignation and Removal; Appointment of Successor........................ 48 SECTION 6.10 Acceptance of Appointment by Successor................................... 49 SECTION 6.11 Appointment of Co-Trustee or Separate Trustee............................ 50 SECTION 6.12 Merger, Conversion, Consolidation or Succession to Business................................................................. 51 SECTION 6.13 Authenticating Agent..................................................... 51 SECTION 6.14 Disqualification; Conflicting Interests.................................. 52 ARTICLE VII HOLDER'S LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 7.1 Company to Furnish Trustee Names and Addresses of Holders..................................................... 52 SECTION 7.2 Preservation of Information; Communications to Holders............................................................... 53 SECTION 7.3 Reports by the Company................................................... 53 ARTICLE VIII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 8.1 Company May Consolidate, Etc., Only on Certain Terms............................................................ 53 SECTION 8.2 Successor Substituted.................................................... 54
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Page ---- ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.1 Supplemental Indentures Without Consent of Holders of Securities................................................. 54 SECTION 9.2 Supplemental Indentures with Consent of Holders of Securities.................................................... 55 SECTION 9.3 Trustee Protected........................................................ 56 SECTION 9.4 Execution of Supplemental Indentures..................................... 56 SECTION 9.5 Effect of Supplemental Indentures........................................ 57 SECTION 9.6 Reference in Securities to Supplemental Indentures....................... 57 SECTION 9.7 Notice of Supplemental Indentures........................................ 57 ARTICLE X MEETINGS OF HOLDERS OF SECURITIES SECTION 10.1 Purposes for Which Meetings May Be Called................................ 57 SECTION 10.2 Call, Notice and Place of Meetings....................................... 57 SECTION 10.3 Persons Entitled to Vote at Meetings..................................... 58 SECTION 10.4 Quorum; Action........................................................... 58 SECTION 10.5 Determination of Voting Rights; Conduct and Adjournment of Meetings.............................................. 59 SECTION 10.6 Counting Votes and Recording Action of Meetings.......................... 59 ARTICLE XI COVENANTS SECTION 11.1 Payment of Principal and Interest........................................ 60 SECTION 11.2 Maintenance of Offices or Agencies....................................... 60 SECTION 11.3 Money for Security Payments To Be Held in Trust.......................... 61 SECTION 11.4 Corporate Existence...................................................... 62 SECTION 11.5 Maintenance of Properties................................................ 62 SECTION 11.6 Compliance with Laws..................................................... 62 SECTION 11.7 Payment of Taxes and Other Claims........................................ 63 SECTION 11.8 Delivery of Certain Information.......................................... 63 SECTION 11.9 Statement by Officers as to Default...................................... 63 SECTION 11.10 Resale of Certain Securities............................................. 64
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Page ---- SECTION 11.11 Waiver of Certain Covenants.............................................. 64 SECTION 11.12 Registration Rights...................................................... 64 SECTION 11.13 Book-Entry System........................................................ 65 ARTICLE XII REDEMPTION OF SECURITIES SECTION 12.1 Right of Redemption...................................................... 65 SECTION 12.2 Applicability of Article................................................. 65 SECTION 12.3 Election to Redeem; Notice to Trustee.................................... 66 SECTION 12.4 Notice of Redemption..................................................... 66 SECTION 12.5 Deposit of Redemption Price.............................................. 66 SECTION 12.6 Securities Payable on Redemption Date.................................... 67 ARTICLE XIII CONVERSION OF SECURITIES SECTION 13.1 Conversion Privilege and Conversion Rate................................. 67 SECTION 13.2 Exercise of Conversion Privilege......................................... 68 SECTION 13.3 Fractions of Common Shares............................................... 69 SECTION 13.4 Adjustment of Conversion Rate............................................ 69 SECTION 13.5 Notice of Adjustments of Conversion Rate................................. 73 SECTION 13.6 Notice of Certain Corporate Action....................................... 73 SECTION 13.7 Company to Reserve Common Shares......................................... 74 SECTION 13.8 Taxes on Conversions..................................................... 74 SECTION 13.9 Covenant as to Common Shares............................................. 75 SECTION 13.10 Cancellation of Converted Securities..................................... 75 SECTION 13.11 Provision in Case of Consolidation, Merger or Conveyance of Assets........................................... 75 SECTION 13.12 Responsibility of Trustee for Conversion Provisions...................... 76 ARTICLE XIV SUBORDINATION SECTION 14.1 Securities Subordinate to Senior Debt.................................... 76 SECTION 14.2 Payment Over of Proceeds Upon Dissolution, Etc........................... 76 SECTION 14.3 No Payment When Senior Debt in Default................................... 78 SECTION 14.4 Payment Permitted If No Default.......................................... 78 SECTION 14.5 Subrogation to Rights of Holders of Senior Debt.......................... 78
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Page ---- SECTION 14.6 Provisions Solely to Define Relative Rights.............................. 79 SECTION 14.7 Trustee to Effectuate Subordination...................................... 79 SECTION 14.8 No Waiver of Subordination Provisions.................................... 79 SECTION 14.9 Notice to Trustee........................................................ 80 SECTION 14.10 Reliance on Judicial Order or Certificate of Liquidating Agent..................................................... 80 SECTION 14.11 Trustee Not Fiduciary for Holders of Senior Debt......................... 81 SECTION 14.12 Rights of Trustee as Holder of Senior Debt; Preservation of Trustee's Rights......................................... 81 SECTION 14.13 Article Applicable to Paying Agents...................................... 81 SECTION 14.14 Subsidiaries............................................................. 81 SECTION 14.15 Rescission............................................................... 81 SECTION 14.16 Payment.................................................................. 81 ARTICLE XV REPURCHASE OF SECURITIES AT THE OPTION OF THE HOLDER UPON A CHANGE IN CONTROL SECTION 15.1 Right to Require Repurchase.............................................. 82 SECTION 15.2 Notices; Method of Exercising Repurchase Right, Etc...................... 82 SECTION 15.3 Certain Definitions...................................................... 85
Note: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. vi 8 INDENTURE, dated as of April 15, 1996, between WILLIAMS-SONOMA, INC., a California corporation (herein called the "Company"), and BANKERS TRUST COMPANY, a New York banking corporation, as Trustee hereunder (herein called the "Trustee"). RECITALS The Company has duly authorized the creation of an issue of its 5 1/4% Convertible Subordinated Notes due April 15, 2003 (herein called the "Securities") of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. All things necessary to make the Securities, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company, and to make this Indenture a valid agreement of the Company in accordance with their and its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 1.1 Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) Unless the context otherwise requires, any reference to an "Article" or a "Section," or to an "Annex," refers to an Article or Section of, or an Annex attached to, this Indenture, as the case may be; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles in the United States prevailing at the time of any relevant computation hereunder; and (4) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; provided, however that where such words are used in any form of Security, form of notice or form of certificate, such words shall refer only to the 9 particular form of Security, form of notice or form of certificate, as the case may be, in which such words are contained. "Act," when used with respect to any Holder of a Security, has the meaning specified in Section 1.3. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control," when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agent Members" has the meaning specified in Section 3.5. "Applicable Procedures" has the meaning specified in Section 3.5. "Authenticating Agent" means any Person authorized by the Trustee pursuant to Section 6.13 to act on behalf of the Trustee to authenticate Securities. "Authorized Newspaper" means a newspaper, in an official language of the country of publication or in the English language, customarily published on each Business Day, whether or not published on Saturdays, Sundays or holidays, and of general circulation in the place in connection with which the term is used or in the financial community of such place. Where successive publications are required to be made in Authorized Newspapers, the successive publications may be made in the same or in different newspapers in the same city meeting the foregoing requirements and in each case on any Business Day. "Board of Directors," when used with reference to the Company, means the board of directors of the Company, or any committee of the board of directors of the Company, empowered to act for the Company, as the case may be, with respect to this Indenture. "Board Resolution" means a resolution duly adopted by the Board of Directors, a copy of which, certified by the Secretary or an Assistant Secretary of the Company, as the case may be, to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, shall have been delivered to the Trustee. "Business Day" means, with respect to any particular place of payment, place of conversion or any other place, as the case may be, each Monday, Tuesday, Wednesday, Thursday and Friday, other than any such day on which banking institutions in The City of New York, New York or in such particular place are authorized or obligated by law or executive order to close. If any day on which any delivery, request, surrender, payment or other action is required or permitted hereunder to be taken by or on behalf of a Holder is not a Business Day in any place where such action is permitted hereunder to be taken, then such actions may be taken at such or any other permitted place on the next succeeding Business Day at such place with the same force and effect as if taken at the same time on such day that is not a business day at such place. "CEDEL" means Cedel Bank Societe Anonyme. -2- 10 "Change in Control" has the meaning specified in Section 15.3. "Closing Price Per Share" means, with respect to the Common Shares of the Company, for any day, the reported last sales price regular way per share on such day or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case (i) on the principal (as determined by the Company's Board of Directors) national securities exchange on which the Common Shares are listed or admitted to trading or (ii) if not listed or admitted to trading on any national securities exchange, on the Nasdaq National Market or (iii) if the Common Shares are not listed or admitted to trading on any national securities exchange or quoted on such National Market, the average of the closing bid and asked prices in the over-the-counter market as furnished by any New York Stock Exchange member firm selected from time to time by the Company for that purpose. "Code" means the United States Internal Revenue Code of 1986, as amended. "Commission" means the U.S. Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under applicable law, then the body performing such duties at such time. "Common Shares" includes any stock of any class of the Company which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which is not subject to redemption by the Company. However, subject to the provisions of Section 13.12, shares issuable on conversion of Securities shall include only shares of the class designated as Common Shares of the Company at the date of this instrument or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which are not subject to redemption by the Company; provided, however, that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor corporation shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor corporation. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by any one of its Chairman of the Board, its Chief Executive Officer, its President, or any Vice President, and by any one of its Chief Financial Officer, Treasurer, any Assistant Treasurer, its Secretary or any Assistant Secretary, and delivered to the Trustee. "Constituent Person" has the meaning specified in Section 13.11. "Conversion Agent" means any Person authorized by the Company to convert Securities in accordance with Article XIII. -3- 11 "Conversion Price" and "Conversion Rate" have the meanings specified in Section 13.1 hereof, as adjusted in accordance with Section 13.4. "Conversion Securities" means the securities delivered on conversion of Securities (or any securities successor thereto), together with any securities successor thereto to those so delivered on conversions. "Corporate Trust Office" means the office of the Trustee at which at any particular time its corporate trust business shall be principally administered (which at the date of this Indenture is located at 4 Albany Street, New York, New York 10006), Attention: Corporate Market Services. "Corporation" means a corporation, association, company, joint-stock company or business trust. "Defaulted Interest" has the meaning specified in Section 3.7. "Depository" means, with respect to the Securities issued in whole or in part in the form of one or more Global Securities, the clearing agency registered under the Exchange Act, specified for that purpose as contemplated by Section 2.1 or any successor clearing agency registered under the Exchange Act as contemplated by Section 2.1. "Dollar" or "U.S.$" means a dollar or other equivalent unit in such coin or currency of the United States as at the time shall be legal tender for the payment of public and private debts. "DTC" means The Depository Trust Company. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, including any successor or amendatory statutes. "Euroclear" means the Euroclear System. "Event of Default" has the meaning specified in Section 5.1. "Exchange Act" means the U.S. Securities Exchange Act of 1934 (including any successor act thereto), as it may be amended from time to time, and (unless the context otherwise requires) includes the rules and regulations of the Commission promulgated thereunder. "Expiration Date" has the meaning specified in Section 1.3(g). "Global Security" means any of the Restricted Global Security and the Regulation S Global Security. "Holder" means, with respect to any Security, a Person in whose name such Security is registered in the Security Register. "IAI Letter" has the meaning specified in Section 2.1. -4- 12 "Indebtedness" means obligations (other than nonrecourse obligations) of, or guaranteed or assumed by, the Company for borrowed money, including obligations evidenced by bonds, debentures, notes or other similar instruments and reimbursement and cash collateralization of letters of credit, bankers' acceptances, interest rate hedge and currency hedge agreements. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof including, for all purposes of this instrument and any such supplemental indenture, the Annexes attached to this instrument. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Securities. "Institutional Accredited Investor" means an institutional accredited investor within the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act. "Liquidated Damages" has the meaning specified in Section 11.12. "Maturity," when used with respect to any Security, means the date on which the principal of such Security becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption, exercise of the repurchase right set forth in Article XV or otherwise. "Non-Conversion Period" has the meaning specified in Section 2.3. "Non-Electing Share" has the meaning specified in Section 13.11. "Officer," when used with reference to the Company, means the Chairman of the Board, the Chief Executive Officer, the President, the Chief Financial Officer, the Treasurer, the Controller, an Assistant Treasurer, an Assistant Controller, the Secretary, an Assistant Secretary or any Vice President of the Company. "Officers' Certificate," when used with reference to the Company, means a written certificate signed by any one of the Chairman of the Board, the Chief Executive Officer, the President, the Chief Financial Officer or any Vice President of the Company and by any one of the Treasurer, the Controller, an Assistant Treasurer, an Assistant Controller, the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee; provided, however, that, for purposes of Section 11.9, an "Officers' Certificate" means a written certificate signed by the principal executive, financial or accounting officer of the Company and any one of the other Officers referred to above and delivered to the Trustee. "Opinion of Counsel" means a written opinion of independent counsel selected by the Company, which counsel shall be reasonably acceptable to the Trustee. "Outstanding," when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (i) Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation; -5- 13 (ii) Securities for the payment or redemption of which money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities, provided that if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and (iii) Securities which have been paid pursuant to Section 3.6 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Securities are present at a meeting of Holders of Securities for quorum purposes or have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in conclusively relying upon any such determination as to the presence of a quorum or upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which a Responsible Officer of the Trustee actually knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor. "Paying Agent" means any Person authorized by the Company to pay the principal of or interest on any Securities on behalf of the Company. "Person" means any individual, corporation, company, partnership, joint venture, association, joint-stock company, trust, estate, unincorporated organization or other legal entity or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 3.6 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. "Qualified Institutional Buyer" has the meaning specified in Rule 144A. "Record Date" means any Regular Record Date or Special Record Date. "Redemption Date," when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. -6- 14 "Redemption Price," when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "Registration Rights Agreement" has the meaning specified in Section 11.12. "Regular Record Date" for interest payable in respect of any Security on any Interest Payment Date means the April 1 or October 1 (whether or not a Business Day) next preceding the relevant Interest Payment Date. "Regulation S" means Regulation S under the Securities Act (including any successor regulation thereto), as it may be amended from time to time. "Regulation S Global Security" has the meaning specified in Section 2.1. "Repurchase Date" has the meaning specified in Section 15.1. "Repurchase Price" has the meaning specified in Section 15.1. "Responsible Officer," when used with respect to the Trustee, shall mean any officer of the Trustee within the Corporate Trust Office including any Vice President, Managing Director, Assistant Vice President, Secretary, Assistant Secretary or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also, with respect to a particular matter, any other officer to whom such matter is referred because of such officer's knowledge and familiarity with the particular subject. "Restricted Global Security" has the meaning specified in Section 2.1. "Restricted Period" has the meaning specified in Section 2.1. "Restricted Securities" has the meaning specified in Section 2.1. "Rule 144" means Rule 144 under the Securities Act (including any successor rule thereto), as the same may be amended from time to time. "Rule 144A" means Rule 144A under the Securities Act (including any successor rule thereto), as the same may be amended from time to time. "Rule 144A Information" has the meaning specified in Section 11.8. "Securities" has the meaning ascribed to it in the first paragraph under the caption "Recitals." "Securities Act" means the Securities Act of 1933 (including any successor act thereto), as it may be amended from time to time, and (unless the context otherwise requires) includes the rules and regulations of the Commission promulgated thereunder. "Securities Payment" has the meaning specified in Section 14.2. -7- 15 "Security Register" and "Security Registrar" have the respective meanings specified in Section 3.5. "Senior Debt" means the principal of and interest on, and all other amounts (including, without limitation, collection expenses, attorney's fees and late charges) owing with respect to, the following, whether direct or indirect, absolute or contingent, secured or unsecured, due or to become due, outstanding at the date of execution of this Indenture or thereafter incurred or created: (a) indebtedness of the Company for money borrowed or evidenced by a note or similar instrument or written agreement given in connection with the acquisition of any businesses, properties or assets, including securities, (b) indebtedness of the Company to banks, insurance companies or other financial institutions evidenced by notes or other written obligations (including bank overdrafts), (c) indebtedness of the Company evidenced by notes, debentures, bonds or other securities issued under the provisions of an indenture or similar instrument, (d) indebtedness of others of the kinds described in the preceding clauses (a), (b) and (c) that the Company has assumed, guaranteed or otherwise assured the payment thereof, directly or indirectly, (e) obligations of the Company as lessee under leases required to be capitalized on the balance sheet of the lessee under United States generally accepted accounting principles and/or (f) deferrals, renewals, extensions and refundings of, or bonds, debentures, notes or other evidences of indebtedness issued in exchange for, or amendments, modifications or supplements to, or covenants and other obligations of the Company in connection with, the indebtedness described in the preceding clauses (a) through (e) whether or not there is any notice to or consent of the Holders of Securities; except (i) indebtedness and advances among the Company and its direct and indirect Subsidiaries, and (ii) any particular indebtedness, deferral, renewal, extension or refunding, if it is expressly stated in the governing terms or in the assumption thereof that the indebtedness involved is not Senior Debt. "Shelf Registration Statement" has the meaning specified in Section 11.12. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 3.7. "Stated Maturity," when used with respect to any Security or any installment of interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such installment of interest is due and payable. "Subsidiary" means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "Trading Days" means (i) if the Common Shares are listed or admitted for trading on any national securities exchange, days on which such national securities exchange is open for business or (ii) if the Common Shares are not listed or admitted for trading on any national securities exchange, days on which trades may be made on the Nasdaq National Market or any similar system of automated dissemination of quotations of securities prices on which the Common Shares are quoted or (iii) if the Common Shares are not listed or admitted to trading on any national securities exchange or quoted on such National Market or similar system, days on which -8- 16 the Common Shares are traded regular way in the over-the-counter market and for which a closing bid and a closing asked price for the Common Shares are available. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Trust Indenture Act" means the United States Trust Indenture Act of 1939 (including any successor act thereto), as it may be amended from time to time, and (unless the context otherwise requires) includes the rules and regulations of the Commission thereunder. "U.S. Depository" means DTC until a successor U.S. Depository shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "U.S. Depository" shall mean such successor U.S. Depository. "United States person" means a citizen or resident of the United States, a domestic partnership, a domestic corporation or any estate or trust the income of which is subject to United States federal income taxation regardless of its source. "Unrestricted Securities" has the meaning specified in Section 2.1. "Vice President," when used with respect to the Company, means any Vice President, whether or not designated by a number or a word or words added before or after the title "Vice President." "Western Europe" means Austria, Belgium, Denmark, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. SECTION 1.2 Compliance Certificates and Opinions; Form of Documents Delivered to Trustee. (a) Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; -9- 17 (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. (b) In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an Officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such Officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which such certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an Officer or Officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 1.3 Acts of Holders of Securities. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given or taken by Holders of Securities may be embodied in and evidenced by (1) one or more instruments of substantially similar tenor signed by such Holders in person or by agent or proxy duly appointed in writing, (2) the record of Holders of Securities voting in favor thereof, either in person or by proxies duly appointed in writing, at any meeting of Holders of Securities duly called and held in accordance with the provisions of Article X or (3) a combination of such instruments and any such record. Except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments or record or both are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments and record (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders of Securities signing such instrument or instruments and so voting at such meeting. Proof of execution of any such instrument or of a writing appointing any such agent or proxy, or of the holding by any Person of a Security, shall be sufficient for any purpose of this Indenture and -10- 18 (subject to Section 6.1) conclusive in favor of the Trustee and the Company if made in the manner provided in this Section. The record of any meeting of Holders of Securities shall be proved in the manner provided in Section 10.6. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgements of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. (c) The ownership of Securities shall be proven by the Security Register. (d) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. (e) The Company may set any day as a record date for the purpose of determining the Holders of Outstanding Securities entitled to give, make or take any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given, made or taken by Holders of Securities, provided that the Company may not set a record date for, and the provisions of this paragraph shall not apply with respect to, the giving or making of any notice, declaration, request or direction referred to in the next paragraph. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities on such record date, and no other Holders, shall be entitled to take the relevant action, whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities on such record date. Nothing in this paragraph shall be construed to prevent the Company from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be canceled and of no effect), and nothing in this paragraph shall be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Company, at its own expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Trustee in writing and to each Holder of Securities in the manner set forth in Section 1.5. (f) The Trustee may set any day as a record date for the purpose of determining the Holders of Outstanding Securities entitled to join in the giving or making of (i) any Notice of Default, (ii) any declaration of acceleration referred to in Section 5.2, (iii) any request to institute proceedings referred to in Section 5.7(2) or (iv) any direction referred to in Section 5.12. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities on such record date, and no other Holders, shall be entitled to join in such notice, declaration, request or direction, whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date -11- 19 by Holders of the requisite principal amount of Outstanding Securities on such record date. Nothing in this paragraph shall be construed to prevent the Trustee from setting a new record date for any action (whereupon the record date previously set shall automatically and without any action by any Person be canceled and of no effect), nor shall anything in this paragraph be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Trustee, at the Company's expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Company in writing and to each Holder of Securities in the manner set forth in Section 1.5. (g) With respect to any record date set pursuant to this Section, the party hereto that sets such record date may designate any day as the "Expiration Date" and from time to time may change the Expiration Date to any earlier or later day, provided that no such change shall be effective unless notice of the proposed new Expiration Date is given to the other party hereto in writing, and to each Holder of Securities in the manner set forth in Section 1.5, on or prior to the existing Expiration Date. If an Expiration Date is not designated with respect to any record date set pursuant to this Section, the party hereto that set such record date shall be deemed to have initially designated the 180th day after such record date as the Expiration Date with respect thereto, subject to its right to change the Expiration Date as provided in this paragraph. Notwithstanding the foregoing, no Expiration Date shall be later than the 180th day after the applicable record date. Without limiting the foregoing, a Holder entitled hereunder to take any action hereunder with regard to any particular Security may do so with regard to all or any part of the principal amount of such Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any part of such principal amount. SECTION 1.4 Notices, Etc. Any request, demand, authorization, direction, notice, consent, election, waiver or other Act of Holders of Securities or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder of Securities or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee and received at its Corporate Trust Office, Attention: Corporate Market Services, or (2) the Company by the Trustee or by any Holder of Securities shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing, mailed, first-class postage prepaid, or telexed or telecopied and confirmed by mail, first-class postage prepaid, or delivered by hand or overnight courier, addressed to the Company at 3250 Van Ness Avenue, San Francisco, California 94109, telephone no.: (415) 421-7900; telecopy no.: (415) 616-8359, Attention: Chief Financial Officer, or at any other address previously furnished in writing to the Trustee by the Company. Except for a notice to the Trustee, which is deemed given only when received, if a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. -12- 20 Any request, demand, authorization, direction, notice, consent, election or waiver required or permitted under this Indenture shall be in the English language, except that any published notice may be in an official language of the country of publication. SECTION 1.5 Notice to Holders of Securities; Waiver. Except as otherwise provided herein, where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his registered address as recorded in the Security Register. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Holder entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. SECTION 1.6 Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 1.7 Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its respective successors and assigns, whether so expressed or not. SECTION 1.8 Separability Clause. In case any provision in this Indenture or the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 1.9 Benefits of Indenture. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors and assigns hereunder, the holders of Senior Debt of the Company and the Holders of Securities and, solely with respect to this Article I and Sections 11.8, 13.8, and 13.9, the holders of Conversion Securities, any benefit or legal or equitable right, remedy or claim under this Indenture. This Article I and Sections 11.8, 13.8 and 13.9 shall not be amended or modified, and neither compliance by the Company with, nor any default by it under, such Article or any such -13- 21 Sections, shall be waived, in any manner that adversely affects the interest of any holder of a Conversion Security at the time outstanding without such Holder's consent. SECTION 1.10 Governing Law. THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, THE UNITED STATES OF AMERICA. SECTION 1.11 Legal Holidays. In any case where any Interest Payment Date, Redemption Date, Repurchase Date or Stated Maturity of any Security or the last day on which a Holder of a Security has a right to convert his Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal or delivery for conversion of such Security need not be made on or by such day, but may be made on or by the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, Redemption Date, Repurchase Date, or at the Stated Maturity or by such last day for conversion, as the case may be; provided, however, that in the case that payment is made on such succeeding Business Day, no interest shall accrue on the amount so payable for the period from and after such Interest Payment Date, Redemption Date, Repurchase Date, Stated Maturity or last day for conversion, as the case may be. SECTION 1.12 Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act that is required under such Act to be a part of and govern this Indenture (or would be required to be a part of and govern this Indenture if this Indenture were required to be qualified under the Trust Indenture Act), the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. ARTICLE II SECURITY FORMS SECTION 2.1 Forms Generally. The Securities shall be in substantially the forms set forth in this Article, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or Depository thereof, the Internal Revenue Code of 1986, as amended (the "Code"), and regulations thereunder, or as may, consistently herewith, be determined by the Officers executing such Securities, as evidenced by their execution thereof. The Company shall approve the form of the Securities and any notation, legend or endorsement on the Securities. -14- 22 The definitive Securities shall be printed, lithographed or engraved or produced by any combination of these methods on steel engraved borders or may be produced in any other manner permitted by the rules of any securities exchange on which the Securities may be listed, all as determined by the Officers executing such Securities as evidenced by their execution thereof. In certain cases described elsewhere herein, the legends set forth in the first four paragraphs of Section 2.2 may be omitted from Securities issued hereunder. Securities offered and sold in their initial distribution in reliance on Regulation S shall be initially represented by one or more Regulation S Global Notes issued in fully registered form without interest coupons, substantially in the form of Security set forth in Sections 2.2 and 2.3, with such applicable legends as are provided for in Section 2.2. Such Regulation S Global Security shall be registered in the name of the U.S. Depository or its nominee and deposited with the Trustee, at its New York office, as custodian for the U.S. Depository, duly executed by the Company and authenticated by the Trustee as hereinafter provided, for credit to the respective accounts at the U.S. Depository of the depositories for Morgan Guaranty Trust Company of New York, Brussels office, as operator of Euroclear, or CEDEL. Until such time as the Restricted Period shall have terminated, investors may hold beneficial interests in such global Notes only through Euroclear and CEDEL, unless delivery of such beneficial interest shall be made through the Restricted Global Note in accordance with the certification requirements discussed below in Section 3.5(b)(3). After such time as the Restricted Period shall have terminated, such certification requirements shall no longer be required for such transfers. As used herein, the term "Restricted Period" means the period up to (but not including) the 40th day following the later of (i) the day that Goldman, Sachs & Co., as initial purchaser of the Securities, advises the Company and the Trustee of the day on which the Securities are first offered to persons other than distributors (as defined in Regulation S) in reliance on Regulation S and (ii) April 15, 1996. The Regulation S Global Security following the Restricted Period and all other Securities that are not Restricted Securities shall collectively be referred to herein as the "Unrestricted Securities." Securities offered and sold in their initial distribution in reliance on Rule 144A shall be issued in the form of one or more Global Securities (collectively, the "Restricted Global Security") in fully registered form without interest coupons, substantially in the form of Security set forth in Sections 2.2 and 2.3, with such applicable legends as are provided for in Section 2.2, except as otherwise permitted herein. Such Global Security shall be registered in the name of the U.S. Depository or its nominee and deposited with the Trustee, at its New York office, as custodian for the U.S. Depository, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Restricted Global Security may be increased or decreased from time to time by adjustments made on the records of the Trustee, as custodian for the U.S. Depository, in connection with a corresponding decrease or increase in the aggregate principal amount of the Regulation S Global Security, as hereinafter provided. The Restricted Global Security and all other Securities evidencing the debt, or any portion of the debt, initially evidenced by such Global Security, other than Securities transferred or exchanged upon certification as provided in Section 3.5(b)(2) or (4), shall collectively be referred to herein as the "Restricted Securities." The Securities will be issued only in registered form. The Securities will be issued in minimum denominations of $1,000, as provided in Section 3.2, except that Securities offered other than in reliance on Regulation S or to Qualified Institutional Buyers will be issued only in definitive certificated form and will be issued initially in minimum denominations of $250,000 -15- 23 and integral multiples of $1,000 in excess thereof. Such Securities (i.e., Securities sold to Institutional Accredited Investors) will also be considered to be Restricted Securities hereunder, and will be subject to restrictions on transfer in accordance with a form of Letter for Institutional Accredited Investors (the "IAI Letter"), that such investors will be required to sign, the form of which is attached hereto as Annex D. SECTION 2.2 Form of Face of Security. [INCLUDE IF SECURITY IS A REGULATION S GLOBAL SECURITY -- THIS SECURITY IS A REGULATION S GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE REFERRED TO HEREINAFTER. EXCEPT IN THE CIRCUMSTANCES DESCRIBED IN SECTION 3.5(b) OF THE INDENTURE, NO TRANSFER OR EXCHANGE OF AN INTEREST IN THIS REGULATION S GLOBAL SECURITY MAY BE MADE FOR AN INTEREST IN THE RESTRICTED GLOBAL SECURITY DURING THE RESTRICTED PERIOD.] [INCLUDE IF SECURITY IS A RESTRICTED SECURITY -- THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THIS SECURITY AND ANY COMMON SHARES ISSUABLE UPON ITS CONVERSION MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. SECURITIES MAY ONLY BE SOLD IN ACCORDANCE WITH THE INDENTURE, COPIES OF WHICH ARE AVAILABLE FOR INSPECTION AT THE CORPORATE TRUST OFFICE OF THE TRUSTEE. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF WILLIAMS- SONOMA, INC. THAT (A) THIS SECURITY AND ANY COMMON SHARES ISSUABLE UPON ITS CONVERSION MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (I) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT, (III) UNLESS PREVIOUSLY AGREED WITH THE COMPANY, TO AN INSTITUTIONAL ACCREDITED INVESTOR IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, (IV) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), OR (V) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND IN EACH OF CASES (I) THROUGH (V) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF THE STATES AND OTHER JURISDICTIONS OF THE UNITED STATES, AND THAT (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE. -16- 24 CONVERSION OF THIS SECURITY IS SUBJECT TO CERTIFICATION AND OTHER REQUIREMENTS, AND ANY SECURITIES ISSUED ON SUCH CONVERSION WILL BE SUBJECT TO THE TRANSFER RESTRICTIONS REFERRED TO ABOVE.] [INCLUDE IF SECURITY IS A GLOBAL SECURITY -- THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A SECURITY REGISTERED, AND NO TRANSFER OF THIS SECURITY IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITORY OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.] [INCLUDE IF SECURITY IS A GLOBAL SECURITY AND THE DEPOSITORY TRUST COMPANY IS THE U.S. DEPOSITORY -- UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY ("DTC"), A NEW YORK CORPORATION, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF CEDE & CO. (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE THEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.] -17- 25 WILLIAMS-SONOMA, INC. 5 1/4% CONVERTIBLE SUBORDINATED NOTES DUE APRIL 15, 2003 No. _________ U.S.$ CUSIP No.: ___________________ Common Code: _________________ ISIN: ________________________ WILLIAMS-SONOMA, INC., a California corporation (herein called the "Company," which term includes any successor Person under the Indenture referred to on the reverse hereof), for value received, hereby promises to pay to _______________, or registered assigns, the principal sum of _____________ U.S. Dollars, [or such other amount (not to exceed forty million dollars ($40,000,000) when taken together with all of the Company's 5 1/4% Convertible Subordinated Notes due April 15, 2003 issued and outstanding in definitive certificated form or in the form of another Global Security) as may from time to time represent the principal amount of the Company's 5 1/4% Convertible Subordinated Notes due April 15, 2003 in respect of which beneficial interests are held through the U.S. Depositary in the form of a [Restricted] [Regulation S] Global Security,] -- [omit from Non-Global Securities] on April 15, 2003, and to pay interest thereon from April 15, 1996 or from the most recent Interest Payment Date (as defined below) to which interest has been paid or duly provided for, semi-annually in arrears on April 15 and October 15 in each year, commencing on October 15, 1996, and at Maturity at the rate of 5 1/4% per annum, until the principal hereof is paid or made available for payment, provided that any amount of such principal or interest that is overdue shall bear interest at the rate of 5 1/4% per annum (to the extent that payment of such interest shall be legally enforceable), from the date such amount is due until it is paid or made available for payment, and such interest on any overdue amount shall be payable on demand. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the April 1 or October 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice thereof shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of the principal of and interest on this Security will be made in immediately available funds and in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, at the office or agency of the Company maintained for that purpose in the Borough of Manhattan, The City of New York or, at the option of the Holder and subject to any fiscal or other laws and regulations, at any other office or agency maintained by the Company for such purpose; provided, however, that upon written application (including wire payment instructions) by the Holder to the Security Registrar -18- 26 not later than the 10th day immediately preceding the relevant Regular Record Date, such Holder may receive payment by wire transfer to a U.S. Dollar account (such transfers to be made only to Holders of an aggregate principal amount in excess of U.S. $2,000,000) maintained by the payee with a bank in The City of New York; and, provided, further, that, subject to the preceding proviso, payment of interest may, at the option of the Company, be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register; and, provided, further, that payment of principal of, or interest on this Security and payment of any Liquidated Damages (as defined on the reverse hereof) may be made at an office or agency of the Corporate Trust Office of the Trustee in The City of New York, if (but only if) payment of the full amount of such principal, interest or Liquidated Damages, as the case may be, at all offices outside the United States maintained for such purpose by the Company in accordance with the Indenture is illegal or effectively precluded because of exchange controls or other similar restrictions on the full payment or receipt of such amounts in United States Dollars, as determined by the Company. Unless such designation is revoked, any such designation made by the Holder with respect to this Security will remain in effect with respect to future payments with respect to this Security payable to the Holder. The Company will pay any administrative costs imposed by banks in connection with making any such payments upon application of such Holder for reimbursement. If this Security is a Global Security, then, notwithstanding the second sentence of this paragraph, each such payment will be made in accordance with the procedures of the U.S. Depository as then in effect. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by the manual signature of one of its authorized signatories, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this Security to be duly executed under its corporate seal. WILLIAMS-SONOMA, INC. [Corporate Seal] By ---------------------------- Title: Attest: - ---------------------- Title: -19- 27 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities referred to in the within-mentioned Indenture. Dated: BANKERS TRUST COMPANY, as Trustee By: ------------------------------ Authorized Signatory SECTION 2.3 Form of Reverse of Security. This Security is one of a duly authorized issue of securities of the Company designated as its "5 1/4% Convertible Subordinated Notes due April 15, 2003" (herein called the "Securities"), limited in aggregate principal amount to U.S.$40,000,000, issued and to be issued under an Indenture, dated as of April 15, 1996 (herein called the ("Indenture") between the Company and Bankers Trust Company, as Trustee (herein called the "Trustee," which term includes any successor trustee under the Indenture), to which the Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee, the Holders of Senior Debt of the Company and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. No sinking fund is provided for in the Securities. The Securities may not be redeemed at the option of the Company prior to April 15, 1998. Thereafter, the Securities may be redeemed at the option of the Company, in whole or in part, at the Redemption Prices set forth below; provided, that the Company may redeem the Securities from April 15, 1998 to April 14, 2000 only if the last reported sale price of the Common Shares for each of the 30 consecutive Trading Days ending on the Trading Day prior to the date of the notice of redemption shall have equalled or exceeded 140% of the Conversion Price then in effect. The Redemption Prices (expressed as a percentage of principal amount) are as follows for the 12-month period beginning on April 15 of the following years:
Redemption Year Price ---- ----- 1998 103.75 1999 103.00 2000 102.25 2001 101.50 2002 100.75
and thereafter at a Redemption Price equal to 100% of the principal amount, in each case together with accrued interest to the Redemption Date. -20- 28 Notice of redemption (which notice shall be irrevocable) will be given by first-class mail to Holders of Securities at their registered addresses as recorded in the Security Register. Notice will be given not more than 60 nor less than 30 days prior to the Redemption Date, as provided in the Indenture. In any case where the due date for the payment of the principal of or interest, including Liquidated Damages, on any Security or the last day on which a Holder of a Security has a right to convert his Security shall be at any place of payment or place of conversion, as the case may be, a day on which banking institutions at such place of payment or place of conversion are authorized or obligated by law or executive order to close, then payment of principal or interest, including Liquidated Damages, or delivery for conversion of such Security need not be made on or by such date at such place but may be made on or by the next succeeding day at such place which is not a day on which banking institutions are authorized or obligated by law or executive order to close, with the same force and effect as if made on the date for such payment or the date fixed for redemption or repurchase, or at the Stated Maturity or by such last day for conversion, and no interest shall accrue for the period after such date. Subject to and upon compliance with the provisions of the Indenture, the Holder of this Security is entitled, at his option, at any time after July 15, 1996 (the "Non-Conversion Period") and prior to the close of business on April 15, 2003, or in case this Security is called for redemption or the Holder hereof has exercised its right to require the Company to repurchase this Security, then in respect of this Security until and including, but (unless the Company defaults in making the payment due upon redemption or repurchase, as the case may be) not after, the close of business on the Redemption Date or the Repurchase Date, as the case may be, to convert this Security into newly issued fully paid and nonassessable Common Shares of the Company at an initial Conversion Rate equal to 38.3142 Common Shares per U.S.$1,000 principal amount of Securities (or at the current adjusted Conversion Rate if an adjustment has been made as provided in the Indenture) by surrender of this Security, and also a duly executed conversion notice, substantially in the form provided in Annex A of the Indenture (including the tax certification contained in such notice), to the Company, subject to any laws or regulations applicable thereto and subject to the right of the Company to terminate the appointment of the Conversion Agent (as defined below), at the principal corporate trust office of the Trustee in The City of New York or at such other offices or agencies outside the United States that the Company may designate (each a "Conversion Agent"). No payment or adjustment is to be made on conversion for cash dividends on the Common Shares issued on conversion or, if the date of conversion is not an Interest Payment Date, interest accrued hereon from the Interest Payment Date next preceding the date of conversion. No fractions of shares or scrip representing fractions of shares will be issued on conversion, but instead of any fractional interest (calculated to the nearest 1/100th of a share) the Company shall pay a cash adjustment as provided in the Indenture, or alternatively the Company shall round up the conversion transaction to the next higher whole share. In addition, the Indenture provides that in case of certain consolidations or mergers to which the Company is a party or the sale or transfer of all or substantially all of the assets of the Company, the Indenture shall be amended, without the consent of any Holders of Securities, so that this Security, if then Outstanding, will be convertible thereafter, during the period this Security shall be convertible as specified above, only into the kind and amount of securities, cash and other property receivable upon consolidation, merger, sale or transfer by a holder of the number of Common Shares of the Company into which this Security might have been converted immediately prior to such consolidation, merger, sale or transfer (assuming such holder of Common Shares failed to exercise any rights of election and received per share the kind and -21- 29 amount received per share by a plurality of Non-Electing Shares). Adjustments in the Conversion Rate of less than one percent of such price will not be required, but any adjustment that would otherwise be required to be made will be carried forward and taken into account in the computation of any subsequent adjustment. Notwithstanding any provision hereof, no securities will be delivered on conversion of this Security or any portion hereof unless the certification and other requirements described in the Indenture are satisfied. Subject to certain limitations in the Indenture, at any time when the Company is not subject to Section 13 or 15(d) of the United States Securities Exchange Act of 1934, as amended, upon the request of a Holder of a Restricted Security or the holder of Common Shares issued upon conversion thereof, the Company will promptly furnish or cause to he furnished Rule 144A Information (as defined below) to such Holder of Restricted Securities or such holder of Common Shares issued upon conversion of Restricted Securities, or to a prospective purchaser of any such security designated by any such Holder or holder, as the case may be, to the extent required to permit compliance by any such holder with Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). "Rule 144A Information" shall be such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act (or any successor provision thereto). The Holder of this Security and the Common Shares of the Company issuable upon conversion thereof is entitled to the benefits of a Registration Rights Agreement (subject to the provisions thereof), dated as of April 10, 1996, between the Company and Goldman, Sachs & Co. (the "Registration Rights Agreement"). Pursuant to the Registration Rights Agreement, the Company has agreed for the benefit of the Holders from time to time of the Securities and the Common Shares issuable upon conversion thereof that it will, at its expense, (a) within 90 days after the date of issuance of the original Securities, file a shelf registration statement (the "Shelf Registration Statement") with the Commission with respect to resales of the Securities and the Common Shares issuable upon conversion thereof, (b) use its best efforts to cause such Shelf Registration Statement to be declared effective by the Commission within 90 days after the date on which the Shelf Registration Statement is filed, and (c) use its best efforts to maintain such Shelf Registration Statement continuously effective under the Securities Act, until the third anniversary of the date of the effectiveness of the Shelf Registration Statement or such earlier date as is provided in the Registration Rights Agreement. If (i) on or prior to 90 days following the date of original issuance of the Securities, a Shelf Registration Statement has not been filed with the Commission, or (ii) on or prior to the 90th day following the filing of such Shelf Registration Statement, such Shelf Registration Statement is not declared effective (each, a "Registration Default"), additional interest ("Liquidated Damages") will accrue on this Security from and including the day following such Registration Default to but excluding the day on which such Registration Default has been cured. Liquidated Damages will be paid semi-annually in arrears, with the first semi-annual payment due on the first interest payment date in respect of the Securities following the date on which such Liquidated Damages begin to accrue, and will accrue at a rate per annum equal to an additional one-quarter of one percent (0.25%) of the principal amount of the Securities to and including the 90th day following such Registration Default and at a rate per annum equal to one-half of one percent (0.50%) thereof from and after the 91st day following such Registration Default. In the event that the Shelf Registration Statement ceases to be effective prior to the third annual -22- 30 anniversary of the initial effective date of the Shelf Registration Statement or such earlier date as is provided in the Registration Rights Agreement for a period in excess of 60 days, whether or not consecutive, during any 12-month period, then the interest rate borne by the Securities shall increase by an additional one-half of one percent (0.50%) per annum from the 61st day of the applicable 12-month period such Shelf Registration Statement ceases to be effective to but excluding the day on which the Shelf Registration Statement again becomes effective. Whenever in this Security there is a reference, in any context, to the payment of the principal of, premium, if any, or interest on, or in respect of, any Security such mention shall be deemed to include mention of the payment of Liquidated Damages payable as described in the preceding paragraph to the extent that, in such context, Liquidated Damages are, were or would be payable in respect of such Security and express mention of the payment of Liquidated Damages (if applicable) in any provisions of this Security shall not be construed as excluding Liquidated Damages in those provisions of this Security where such express mention is not made. The Holder of this Security, by its acceptance thereof, agrees to be bound by the terms of the Registration Rights Agreement relating to the Securities and the Common Shares issuable upon conversion thereof. If a Change in Control occurs, the Holder of this Security shall have the right, at the Holder's option in accordance with the provisions of the Indenture, to require the Company to repurchase this Security (or any portion of the principal amount hereof that is an integral multiple of $1,000) for cash at a Repurchase Price equal to 100% of the principal amount thereof plus interest accrued to the Repurchase Date. At the option of the Company, the Repurchase Price may be paid in cash or, except as otherwise provided in the Indenture, by delivery of Common Shares having a fair market value equal to the Repurchase Price; provided that payment may not be made in Common Shares unless at the time of payment such stock is listed on a national securities exchange or quoted on the Nasdaq National Market. For purposes of this paragraph, the fair market value of shares of Common Shares shall be determined by the Company and shall be equal to 95% of the average of the Closing Prices Per Share for the five consecutive Trading Days ending on and including the third Trading Day immediately preceding the Repurchase Date. Whenever in this Security there is a reference, in any context, to the principal of any Security as of any time, such reference shall be deemed to include reference to the Repurchase Price payable in respect of such Security to the extent that such Repurchase Price is, was or would be so payable at such time, and express mention of the Repurchase Price in any provision of this Security shall not be construed as excluding the Repurchase Price in those provisions of this Security when such express mention is not made. The indebtedness evidenced by this Security is, to the extent and in the manner provided in the Indenture, subordinate and subject in right of payment to the prior payment in full of all amounts then or thereafter to become due on all Senior Debt of the Company, and this Security is issued subject to such provisions of the Indenture with respect thereto. Each Holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on its behalf to take such action as may be necessary or appropriate to effectuate the subordination so provided and (c) appoints the Trustee its attorney-in-fact for any and all such purposes. If an Event of Default shall occur and be continuing, the principal of all the Securities may be declared due and payable to the extent, in the manner and with the effect provided in the -23- 31 Indenture. Upon payment (i) of the amount of principal so declared due and payable and (ii) of interest on any overdue principal and overdue interest, all of the Company's obligations in respect of the payment of the principal of and interest on the Securities shall terminate. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities under the Indenture at any time by the Company and the Trustee with either (a) the written consent of the Holders of a majority in principal amount of the Securities at the time outstanding, or (b) by the adoption of a resolution, at a meeting of Holders of the Outstanding Securities at which a quorum is present by the Holders of 66-2/3% in aggregate principal amount of the Outstanding Securities represented at such meeting. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Securities at the time Outstanding, on behalf of the Holders of all the Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security or such other Security. As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default, the Holders of not less than 25% in aggregate principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default and offered the Trustee indemnity satisfactory to it and the Trustee shall not have received from the Holders of a majority in principal amount of the Securities Outstanding a direction inconsistent with such request and shall have failed to institute any such proceedings for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or interest hereon (including any Liquidated Damages) on or after the respective due dates expressed herein. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligations of the Company, which are absolute and unconditional, to pay the principal of and interest (including Liquidated Damages) on this Security at the times, places and rate, and in the coin or currency, herein prescribed or to convert this Security as provided in the Indenture. The Securities are issuable only in fully registered form, without exception, and, except as provided in Section 2.1 of the Indenture, in denominations of $1,000 and any integral multiples of $1,000 in excess thereof. As provided in the Indenture and subject to certain limitations and satisfaction of certain requirements therein set forth, Securities are exchangeable for a like aggregate principal amount of securities of the same or a different authorized denomination, as requested by the Holder surrendering the same. As provided in the Indenture and subject to certain limitations and satisfaction of certain requirements therein set forth, the transfer of this Security is registrable on the Security Register upon surrender of this Security for registration of transfer at the office or agency of the Company -24- 32 as may be designated by it for such purpose in the Borough of Manhattan, The City of New York, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to recover any tax or other governmental charge payable in connection therewith. Prior to due presentation of this Security for registration of transfer the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered, as the owner thereof for all purposes, whether or not such Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. THE INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, THE UNITED STATES OF AMERICA. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. ELECTION OF HOLDER TO REQUIRE REPURCHASE 1. Pursuant to Section 15.1 of the Indenture, the undersigned hereby elects to have this Security repurchased by the Company. 2. The undersigned hereby directs the Trustee or the Company to pay it or _______________________ an amount in cash or, at the Company's election, Common Stock valued as set forth in the Indenture, equal to 100% of the principal amount hereof, plus interest accrued to the Repurchase Date, as provided in the Indenture. Dated: ------------------------ ------------------------------ Signature ------------------------------ Signature Guaranteed Principal amount to be repurchased: ------------------- Remaining principal amount following such repurchase: ------ -25- 33 NOTICE: The signature to the foregoing Election must correspond to the Name as written upon the face of this Security in every particular, without alteration or any change whatsoever. SECTION 2.4 Form of Trustee's Certificate of Authentication. This is one of the Securities referred to in the within-mentioned Indenture. DATED: BANKERS TRUST COMPANY, as Trustee By: Authorized Signatory ARTICLE III THE SECURITIES SECTION 3.1 Title and Terms. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to U.S.$40,000,000, except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Sections 3.4, 3.5, 3.6, 9.5, or 13.2. The Securities shall be known and designated as the "5 1/4% Convertible Subordinated Notes due April 15, 2003" of the Company. Their Stated Maturity shall be April 15, 2003 and they shall bear interest at the rate of 5 1/4% per annum from April 15, 1996 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, as the case may be, payable semi-annually in arrears on April 15 and October 15 of each year, commencing October 15, 1996, and at Maturity, until the principal thereof is paid or made available for payment, provided that any amount of such principal or interest that is overdue shall bear interest at the rate of 5 1/4% per annum (to the extent that payment of such interest shall be legally enforceable), from the date such amount is due until it is paid or made available for payment, and such interest on any overdue amount shall be payable on demand. The principal of and interest on the Securities shall be payable in immediately available funds and in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, at the Corporate Trust Office of the Trustee in the Borough of Manhattan, The City of New York or, at the option of the Holder and subject to any fiscal or other laws and regulations applicable thereto, at any other office of the Trustee or any Paying Agent outside The City of New York; provided, however, that upon application (including wire payment instructions) by the Holder to the Trustee not later than the relevant Regular Record Date, such Holder may receive payment by wire transfer to a U.S. Dollar account (such transfers to be made only to Holders of an aggregate principal amount in excess of U.S. $2,000,000) maintained by the payee with a bank in The City of New York, New York; and provided, further, that, subject to the preceding proviso, payment of interest may, at the option of the Company, be made by check mailed to the address of the Person entitled thereto -26- 34 as such address shall appear in the Security Register. Unless such designation is revoked, any such designation made by such Holder with respect to such Security will remain in effect with respect to any future payments with respect to such Security payable to such Holder. The Company will pay any administrative costs imposed by banks in connection with making such payments, upon application by the relevant Holder. Notwithstanding the second sentence of this paragraph, each payment of principal and interest in respect of a Global Security will be made in accordance with the procedures of the U.S. Depository as then in effect. The Securities shall be redeemable at the Company's option, in whole or in part, under the circumstances and at the Redemption Prices specified in the form of Securities set forth in Sections 2.2 and 2.3. The Securities shall be convertible as provided in Article XIII. The Securities shall be subordinated in right of payment to Senior Debt of the Company as provided in Article XIV. The Securities shall be subject to repurchase by the Company at the option of the Holders as provided in Article XV. SECTION 3.2 Denominations. The Securities shall be issuable only in registered form without coupons and, except as provided in Section 2.1, only in denominations of $1,000 and any integral multiple of $1,000 in excess thereof. SECTION 3.3 Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by any one of its Chairman of the Board, its Chief Executive Officer, its President, or any one of its Vice Presidents, under a facsimile of its corporate seal reproduced thereon attested by its Secretary or one of its Assistant Secretaries. Any such signature may be manual or facsimile. Securities bearing the manual or facsimile signature of individuals who were at any time the proper Officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with such Company Order shall authenticate and make available for delivery such Securities as in this Indenture provided and not otherwise. In connection with any Company Order for authentication, a compliance certificate and Opinion of Counsel pursuant to Section 1.2 shall not be required. Each Security shall be dated the date of its authentication. -27- 35 No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee or the Authenticating Agent by manual signature of an authorized signatory, and such certificate upon such Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. SECTION 3.4 Temporary Securities. Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and make available for delivery, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the Officers executing such Securities may determine, as evidenced by their execution of such Securities. If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at any office or agency of the Company designated pursuant to Section 11.2, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities the Company shall execute and the Trustee shall authenticate and make available for delivery in exchange therefor a like principal amount of definitive Securities of authorized denominations. Until so exchanged the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. SECTION 3.5 Registration, Registration of Transfer and Exchange; Restrictions on Transfer. (a) The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency designated pursuant to Section 11.2 being herein sometimes collectively referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The Trustee is hereby appointed "Security Registrar" for the purpose of registering Securities and transfers of Securities as herein provided. Upon surrender for registration of transfer of any Security at an office or agency of the Company designated pursuant to Section 11.2 for such purpose, and subject to the other provisions of this Section 3.5, the Company shall execute, and the Trustee shall authenticate and make available for delivery, in the name of the designated transferee or transferees, one or more new Securities of any authorized denominations and of a like aggregate principal amount. At the option of the Holder, and subject to the other provisions of this Section 3.5, Securities may be exchanged for other Securities of any authorized denominations and of a like aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, and subject to the other provisions of this Section 3.5, the Company shall execute, and the Trustee shall authenticate and make available for delivery, the Securities which the Holder making the exchange is entitled to receive. -28- 36 All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and subject to the other provisions of this Section 3.5, entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange of securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 3.4, 13.2 or 15.2(f) not involving any transfer and subject to Section 13.9. (b) Notwithstanding any other provisions of this Indenture or the Securities (but subject to Section 2.1), transfers of a Global Security, in whole or in part, transfers and exchanges of interests therein of the kinds described in clauses (2), (3), (4) and (5) below and exchanges of interests in Global Securities, and transfers or exchanges of other Securities as described in clause (6) below, shall be made only in accordance with this Section 3.5(b). Transfers and exchanges subject to this Section 3.5 shall also be subject to the other provisions of this Indenture that are not inconsistent with this Section 3.5. (1) Limitation on Transfers of a Global Security. A Global Security may not be transferred, in whole or in part, to any Person other than the U.S. Depository or a nominee thereof, and no such transfer to any such other Person may be registered; provided that this clause (1) shall not prohibit any transfer of a Security that is issued in exchange for a Global Security but is not itself a Global Security. No transfer of a Security to any Person shall be effective under this Indenture or the Securities unless and until such Security has been registered in the name of such Person. Nothing in this Section 3.5(b)(1) shall prohibit or render ineffective any transfer of a beneficial interest in a Global Security effected in accordance with the other provisions of this Section 3.5(b). (2) Restricted Global Security to Regulation S Global Security. If the holder of a beneficial interest in the Restricted Global Security wishes at any time to transfer such interest to a Person who wishes to take delivery thereof in the form of a beneficial interest in the Regulation S Global Security, such transfer may be effected, subject to the rules and procedures of the U.S. Depository, Euroclear and CEDEL, in each case to the extent applicable (the "Applicable Procedures"), only in accordance with this Section 3.5(b)(2). Upon receipt by the Trustee, as Security Registrar, at its office in The City of New York of (A) written instructions given in accordance with the Applicable Procedures from an Agent Member directing the Trustee to credit or cause to be credited to a specified Agent Member's account a beneficial interest in the Regulation S Global Security in a principal amount equal to that of the beneficial interest in the Restricted Global Security to be so transferred, (B) a written order given in accordance with the Applicable Procedures containing information regarding the account of the Agent Member (and, if applicable, the Euroclear or CEDEL account, as the case may be) to be -29- 37 credited with, and the account of the Agent Member to be debited for, such beneficial interest and (C) a certificate in substantially the form set forth in Annex B given by the holder of such beneficial interest, the Trustee, as Security Registrar, shall instruct the U.S. Depository to reduce the principal amount of the Restricted Global Security, and to increase the principal amount of the Regulation S Global Security, by the principal amount of the beneficial interest in the Restricted Global Security to be so transferred, and to credit or cause to be credited to the account of the Person specified in such instructions (which during the Restricted Period shall be the Agent Member for Euroclear or CEDEL or both, as the case may be) a beneficial interest in the Regulation S Global Security having a principal amount equal to the amount by which the principal amount of the Restricted Global Security was reduced upon such transfer. (3) Regulation S Global Security to Restricted Global Security. If during the Restricted Period the holder of a beneficial interest in the Regulation S Global Security wishes to transfer such interest to a Person who wishes to take delivery thereof in the form of a beneficial interest in the Restricted Global Security, such transfer may be effected, subject to the Applicable Procedures, only in accordance with this Section 3.5(b)(3). Upon receipt by the Trustee, as Security Registrar, at its office in The City of New York of (A) written instructions given in accordance with the Applicable Procedures from an Agent Member directing the Trustee to credit or cause to be credited to a specified Agent Member's account a beneficial interest in the Restricted Global Security in a principal amount equal to that of the beneficial interest in the Regulation S Global Security to be so transferred, (B) a written order given in accordance with the Applicable Procedures containing information regarding the account of the Agent Member to be credited with, and the account of the Agent Member (and, if applicable, the Euroclear or CEDEL account, as the case may be) to be debited for, such beneficial interest and (C) a certificate in substantially the form set forth in Annex C given by the holder of such beneficial interest, the Trustee, as Security Registrar, shall instruct the U.S. Depository to reduce the principal amount of the Regulation S Global Security and to increase the principal amount of the Restricted Global Security, by the principal amount of the beneficial interest in the Regulation S Global Security to be so transferred, and to credit or cause to be credited to the account of the Person specified in such instructions a beneficial interest in the Restricted Global Security having a principal amount equal to the amount by which the principal amount of the Regulation S Global Security, as the case may be, was reduced upon such transfer. (4) Exchanges. In the event that a Restricted Global Security or any portion thereof is exchanged for a Regulation S Global Security or Securities other than Global Securities, such other Securities may in turn be exchanged (on transfer or otherwise) for Securities that are not Global Securities or for beneficial interests in a Global Security (if any is then outstanding) only in accordance with such procedures, which shall be substantially consistent with the provisions of clauses (1) through (3) above and (5) below (including the certification requirements intended to insure that transfers and exchanges of beneficial interests in a Global Security comply with Rule 144A, Rule 144 or Regulation S, as the case may be) and any Applicable Procedures, as may be from time to time adopted by the Company and the Trustee. (5) Interests in Regulation S Global Security to be Held Through Euroclear or CEDEL. Until the termination of the Restricted Period, interests in the Regulation S -30- 38 Global Security may be held only through Agent Members acting for and on behalf of Euroclear and CEDEL, provided that this Clause (5) shall not prohibit any transfer in accordance with Section 3.5(b)(3) hereof. (6) Securities originally issued to Institutional Accredited Investors. Securities may be issued other than in reliance on Rule 144A or Regulation S, and such Securities will be issued only in definitive certificated form and, initially, only in minimum denominations of $250,000 and integral multiples of $1,000 in excess thereof. Such Securities (i.e., Securities sold to Institutional Accredited Investors) will be considered to be Restricted Securities hereunder, and will be subject to restrictions on transfer in accordance with the IAI Letter. The IAI Letter permits transfers to be made only: (i) pursuant to Rule 144A, (ii) pursuant to Regulation S, (iii) pursuant to Rule 144 (if available) or (iv) pursuant to an effective registration statement under the Securities Act. Therefore, transfers of Securities by an Institutional Accredited Investor may not be made to another Institutional Accredited Investor in reliance upon an exemption from securities registration under the Securities Act (for example in a purported private transaction), except as provided in the preceding sentence. In case a Security held by an Institutional Accredited Investor is to be transferred in a transaction in which the purchaser wishes to receive an interest in a Global Security, clauses (4) and (5) above shall be applicable. Furthermore, in case a Security held by an Institutional Accredited Investor is to be transferred (whether during or after the Restricted Period) in a transaction exempt (i) pursuant to Rule 144A, then the transferor shall deliver a certificate substantially in the form of Annex C hereto, or (ii) pursuant to Regulation S, then the transferor shall deliver a certificate substantially in the form of Annex B hereto, in each case with such changes in the second paragraph thereof as are appropriate to reflect the facts and circumstances, including that the Holder will be transferring a Security in the form of a definitive registered certificate. (However, a transfer or exchange that does not involve any change in beneficial ownership shall not be considered to be a transfer that triggers these certification requirements.) The Company may vary these procedures or impose other reasonable procedures to ensure compliance with the agreement of such Holder contained in its IAI Letter. (c) Each Restricted Security and Global Security issued hereunder shall, upon issuance, bear the legends required by Section 2.2 to be applied to such a Security and such required legends shall not be removed from such Security except as provided in the next sentence or paragraph (d) of this Section 3.5. The legend required for a Restricted Security may be removed from a Security if there is delivered to the Company such satisfactory evidence, which may include an opinion of independent counsel licensed to practice law in the State of New York, as may be reasonably required by the Company that neither such legend nor the restrictions on transfer set forth therein are required to ensure that transfers of such Security will not violate the registration requirements of the Securities Act. Upon provision of such satisfactory evidence, the Trustee, at the written direction of the Company, shall authenticate and deliver in exchange for such Security another Security or Securities having an equal aggregate principal amount that does not bear such legend. If such a legend required for a Restricted Security has been removed from a Security as provided above, no other Security issued in exchange for all or any part of such Security shall bear such legend, unless the Company has reasonable cause to believe that such other Security is a "restricted security" within the meaning of Rule 144 and instructs the Trustee in writing to cause a legend to appear thereon. -31- 39 (d) The provisions of clauses (1), (2), (3) and (4) below shall apply only to Global Securities: (1) Each Global Security authenticated under this Indenture shall be registered in the name of the U.S. Depository or a nominee thereof and delivered to such U.S. Depository or a nominee thereof or custodian therefor, and each such Global Security shall constitute a single Security for all purposes of this Indenture. (2) Notwithstanding any other provision in this Indenture or the Securities, no Global Security may be exchanged in whole or in part for Securities registered, and no transfer of a Global Security in whole or in part may be registered, in the name of any Person other than the U.S. Depository or a nominee thereof unless (A) the U.S. Depository (i) has notified the Company that it is unwilling or unable to continue as U.S. Depository for such Global Security or (ii) has ceased to be a clearing agency registered under the Exchange Act, (B) in the case of a Global Security held for an account of Euroclear or CEDEL, Euroclear or CEDEL, as the case may be, (i) is closed for business for a continuous period of 14 days (other than by reason of statutory or other holidays) or (ii) announces an intention permanently to cease business or does in fact do so, (C) there shall have occurred and be continuing an Event of Default with respect to such Global Security or (D) a request for certificates has been made upon 60 days' prior written notice given to the Trustee in accordance with the U.S. Depository's customary procedures and a copy of such notice has been received by the Company from the Trustee. Any Global Security exchanged pursuant to clause (A) or (B) above shall be so exchanged in whole and not in part and any Global Security exchanged pursuant to clause (C) or (D) above may be exchanged in whole or from time to time in part as directed by the U.S. Depository. Any Security issued in exchange for a Global Security or any portion thereof shall be a Global Security, provided that any such Security so issued that is registered in the name of a Person other than the U.S. Depository or a nominee thereof shall not be a Global Security. (3) Securities issued in exchange for a Global Security or any portion thereof pursuant to clause (2) above shall be issued in definitive, fully registered form, without interest coupons, shall have an aggregate principal amount equal to that of such Global Security or portion thereof to be so exchanged, shall be registered in such names and be in such authorized denominations as the U.S. Depository shall designate and shall bear any legends required hereunder. Any Global Security to be exchanged in whole shall be surrendered by the U.S. Depository to the Trustee, as Security Registrar. With regard to any Global Security to be exchanged in part, either such Global Security shall be so surrendered for exchange or, if the Trustee is acting as custodian for the U.S. Depository or its nominee with respect to such Global Security, the principal amount thereof shall be reduced, by an amount equal to the portion thereof to be so exchanged, by means of an appropriate adjustment made on the records of the Trustee. Upon any such surrender or adjustment, the Trustee shall authenticate and make available for delivery the Security issuable on such exchange to or upon the written order of the U.S. Depository or an authorized representative thereof. (4) In the event of the occurrence of any of the events specified in clause (2) above, the Company will promptly make available to the Trustee a reasonable supply of certificated Securities in definitive, fully registered form, without interest coupons. -32- 40 (5) Neither any members of, or participants in, the U.S. Depository ("Agent Members") nor any other Persons on whose behalf Agent Members may act (including Euroclear and CEDEL and account holders and participants therein) shall have any rights under this Indenture with respect to any Global Security, or under any Global Security, and the U.S. Depository or such nominee, as the case may be, may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner and holder of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the U.S. Depository or such nominee, as the case may be, or impair, as between the U.S. Depository, its Agent Members and any other person on whose behalf an Agent Member may act, the operation of customary practices of such Persons governing the exercise of the rights of a holder of any Security. SECTION 3.6 Mutilated, Destroyed, Lost or Stolen Securities. If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and make available for delivery in exchange therefor a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and the Trustee shall authenticate and make available for delivery, in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security. A Holder shall bear the cost to the Company of replacing a mutilated, destroyed, stolen or lost Security. Upon the issuance of any new Security under this Section, the Company also may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. -33- 41 SECTION 3.7 Payment of Interest, Interest Rights Preserved. Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest. Any interest on any Security which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder of Securities at such Holder's address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following Clause (2). (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section and Section 3.5, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. In the case of any Security which is converted after any Regular Record Date and on or prior to the next succeeding Interest Payment Date (other than any Security whose Maturity is -34- 42 prior to such Interest Payment Date), interest whose Stated Maturity is on such Interest Payment Date shall be payable on such Interest Payment Date notwithstanding such conversion, and such interest (whether or not punctually paid or duly provided for) shall be paid to the Person in whose name such Security (or one or more Predecessor Securities) is registered at the close of business on such Regular Record Date. Except as otherwise expressly provided in the immediately preceding sentence, in the case of any Security which is converted, interest whose Stated Maturity is after the date of conversion of such Security shall not be payable. SECTION 3.8 Persons Deemed Owners. Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee shall treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of and (subject to Sections 3.5 and 3.7) interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 3.9 Cancellation. All Securities surrendered for payment, redemption, repurchase, registration of transfer or exchange or conversion shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee. All Securities so delivered shall be canceled promptly by the Trustee. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly canceled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section 3.9 except as expressly permitted by this Indenture. All canceled Securities and any certificates in connection therewith shall be held by the Trustee in accordance with its customary practices until destroyed by the Trustee; provided, however, that the Trustee shall not be required to destroy such Securities. The Company may not issue new Securities to replace Securities it has paid in full or delivered to the Trustee for cancellation. SECTION 3.10 Computation of Interest. Interest on the Securities shall be computed on the basis of a 360-day year of twelve 30-day months. SECTION 3.11 CUSIP Numbers. The Company in issuing the Securities may use "CUSIP" and "CINS" numbers (if then generally in use), and the Trustee shall use CUSIP numbers or CINS numbers, as the case may be, in notices of redemption, repurchase or exchange as a convenience to the Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of redemption, repurchase or exchange and that reliance may be placed only on the other identification numbers printed on the Securities. -35- 43 ARTICLE IV SATISFACTION AND DISCHARGE SECTION 4.1 Satisfaction and Discharge of Indenture. This Indenture shall upon Company Request cease to be of further effect (except as to any surviving rights of conversion, or replacement of Securities herein expressly provided for and any right to receive the payment of principal of, or interest on, such Securities or Liquidated Damages under the ninth paragraph on the reverse of the form of Securities set forth in Section 2.3), and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (1) either (A) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 3.6 and (ii) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 11.3) have been delivered to the Trustee for cancellation; or (B) all such Securities not theretofore delivered to the Trustee for cancellation (other than Securities referred to in clauses (i) and (ii) of clause (1)(A) above) (i) have become due and payable, or (ii) will have become due and payable at their Stated Maturity within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of clause (i), (ii) or (iii) above, has deposited or caused to be deposited with the Trustee as trust funds (immediately available to the Holders in the case of clause (i)) in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with, and that any consents required under any document evidencing and/or securing Senior Debt have been obtained and are in full force and effect. -36- 44 Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 6.7 and, if money shall have been deposited with the Trustee pursuant to clause (1)(B) of this Section 4.1, the obligations of the Trustee under Section 4.2 and the last paragraph of Section 11.3 shall survive. Funds held in trust pursuant to this Section are not subject to the provisions of Article XIV. SECTION 4.2 Application of Trust Money. Subject to the provisions of the last paragraph of Section 11.3, all money deposited with the Trustee pursuant to Section 4.1 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal and interest for whose payment such money has been deposited with the Trustee. All moneys deposited with the Trustee pursuant to Section 4.1 (and held by it or any Paying Agent) for the payment of Securities subsequently converted shall be returned to the Company upon Company Request. ARTICLE V REMEDIES SECTION 5.1 Events of Default. "Event of Default," whenever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be occasioned by the provisions of Article XIV or be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest (including any Liquidated Damages) upon any Security when it becomes due and payable, whether or not such payment is prohibited pursuant to Article XIV hereof, and continuance of such default for a period of 30 days; or (2) default in the payment of the principal or Redemption Price of any Security at its Maturity, whether or not such payment is prohibited pursuant to Article XIV hereof; or (3) default in the Company's obligation to provide notice of a Change in Control as provided by Section 15.2; or (4) default in the performance, or breach, of any covenant of the Company in this Indenture (other than a covenant a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 120 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Outstanding Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or -37- 45 (5) Indebtedness of the Company for borrowed money in an outstanding principal amount in excess of $5,000,000 in the aggregate, whether such Indebtedness now exists or shall hereafter be created, is not paid at final maturity (either upon its stated maturity or upon acceleration thereof) and such default in payment or acceleration has not been cured or rescinded within a period of 90 days after there shall have been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities a written notice specifying such default and requiring the Company to cause such indebtedness to be discharged or cause such acceleration to be rescinded or annulled and stating that such notice is a "Notice of Default" hereunder; provided, however, that the Trustee shall have no obligation, either express or implied, to give any notice, make any demand, make any collection, initiate any judicial proceeding, file any proofs of claim or take any action as a result of an Event of Default described in this clause (5), unless and until the Trustee has received written notice of such Event of Default from the Company, a Holder of a Security or a holder of Indebtedness of the Company; (6) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under the Bankruptcy Code or any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (7) the commencement by the Company of a voluntary case or proceeding under the Bankruptcy Code or any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due. SECTION 5.2 Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Section 5.1(1), (2), (6) and (7)) occurs and is continuing, then and in every such case the Trustee shall, at the written request of the Holders of not less than 25% in aggregate principal amount of the Outstanding Securities, or the Holders of not less than 25% in aggregate principal amount of the Outstanding Securities shall directly, by notice in writing to the Company, declare the principal of all the Securities to be due and payable immediately, and upon any such declaration such principal and any accrued interest and any unpaid Liquidated Damages thereon shall become immediately due and payable. If an Event of Default specified in Section 5.1(1) or (2) occurs and is continuing, -38- 46 the Holder of any Outstanding Security may, by notice in writing to the Company (with a copy to the Trustee), declare the principal of such Security to be due and payable immediately, and upon any such declaration such principal and (subject to Section 3.7) any accrued interest and Liquidated Damages thereon shall become immediately due and payable. If an Event of Default specified in Sections 5.1(6) and (7) occurs and is continuing, the principal and any accrued interest, together with any Liquidated Damages thereon, on all of the Securities then Outstanding shall ipso facto become due and payable immediately without any declaration or other Act on the part of the Trustee or any Holder. At any time after such declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article V provided, the Holders of a majority in principal amount of the Outstanding Securities, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest and any Liquidated Damages thereon on all Securities, (B) the principal of any Securities which have become due otherwise than by such declaration of acceleration and any interest thereon at the rate borne by the Securities, (C) to the extent that payment of such interest is lawful, interest upon overdue interest at a rate of 5 1/4% per annum, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default, other than the non-payment of the principal of, and any interest on, Securities which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 5.13. No such rescission or annulment shall affect any subsequent default or impair any right consequent thereon. SECTION 5.3 Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if (1) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (2) default is made in the payment of the principal of any Security at the Maturity thereof, -39- 47 the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal and on any overdue interest, at a rate of 5 1/4% per annum, and in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Securities, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 5.4 Trustee May File Proofs of Claim. (a) In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor or either of their creditors, the Trustee (irrespective of whether the principal of, and any interest on, the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (1) to file and prove a claim for the whole amount of principal and interest owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee and each predecessor Trustee, its agents and counsel) and of the Holders of Securities allowed in such judicial proceeding, and (2) to collect and receive any moneys or other property payable or deliverable on any such claim and to distribute the same, and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder of Securities by his acceptance thereof to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders of Securities, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, and each predecessor Trustee, its agents and counsel and any other amounts due the Trustee under Section 6.7. -40- 48 Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder of a Security any plan of reorganization, arrangement, adjustment, or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder of a Security in any such proceeding; provided, however, that the Trustee may, on behalf of such Holders, vote for the election of a trustee in bankruptcy or similar official and be a member of a creditors' or other similar committee. (b) If, as of the third day prior to the bar date for filing proofs of claim in connection with any bankruptcy, reorganization or similar judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor, the Trustee has failed to file such proofs of claim under subparagraph (a) of this Section for any and all amounts owing and unpaid in respect of the Securities, the holders of Senior Debt shall be entitled and empowered to file proofs of claim on behalf of the Trustee in accordance with sub- paragraph (a) of this Section. SECTION 5.5 Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, and each predecessor Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which judgment has been recovered. SECTION 5.6 Application of Money Collected. Any money collected by the Trustee pursuant to this Article V shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 6.7; SECOND: Subject to Article XIV, to the payment of the amounts then due and unpaid for principal of and interest (including Liquidated Damages, if any) on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal and interest, respectively; and THIRD: Subject to Article XIV, any remaining amounts shall be repaid to the Company. SECTION 5.7 Limitation on Suits. No Holder of any Security shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: -41- 49 (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (2) the Holders of not less than 25% in aggregate principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee indemnity satisfactory to it against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in aggregate principal amount of the Outstanding Securities; it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all such Holders. In the event the Trustee shall receive conflicting or inconsistent requests and indemnity from two or more groups of the Holders, each representing less than a majority in aggregate principal amount of the Outstanding Securities, the Trustee in its sole discretion may determine what action, if any, shall be taken, notwithstanding any other provisions of this Indenture, and shall have no liability to any person for such action or inaction. SECTION 5.8 Unconditional Right of Holders to Receive Principal and Interest and to Convert. Notwithstanding any other provision in this Indenture, but subject to the provisions of Article XIV, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of and (subject to Section 3.7) interest on such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption or repurchase, on the Redemption Date or Repurchase Date, as the case may be), and to convert such Security in accordance with Article XIII, provided, that such Holder delivers the conversion notice required by Section 13.2, and to institute suit for the enforcement of any such payment and right to convert, and such rights shall not be impaired without the consent of such Holder. SECTION 5.9 Restoration of Rights and Remedies. If the Trustee or any Holder of a Security has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders of Securities shall be restored severally and respectively to their former positions -42- 50 hereunder and thereafter all rights and remedies of the Trustee and such Holders shall continue as though no such proceeding had been instituted. SECTION 5.10 Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 3.6, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders of Securities is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 5.11 Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or any acquiescence therein. Every right and remedy given by this Article V or by law to the Trustee or to the Holders of Securities may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders of Securities, as the case may be. SECTION 5.12 Control by Holders of Securities. The Holders of a majority in principal amount of the Outstanding Securities shall, subject to Section 6.3(e), have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee, provided that (1) such direction shall not be in conflict with any rule of law or with this Indenture, and (2) the Trustee shall not be obligated to follow any direction which may involve it in personal liability or which may be unduly prejudicial to Holders not joining therein, and (3) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction or this Indenture. SECTION 5.13 Waiver of Past Defaults. The Holders, either (a) through the written consent of not less than a majority in principal amount of the Outstanding Securities, or (b) by the adoption of a resolution, at a meeting of Holders of the Outstanding Securities at which a quorum is present, by the Holders of at least 66-2/3% in aggregate principal amount of the Outstanding Securities represented at such meeting, may on behalf of the Holders of all the Securities waive any past default hereunder and its consequences, except a default (1) in the payment of the principal of or interest on any Security, or (2) in respect of a covenant or provision hereof which under Article IX cannot be modified or amended without the consent of the Holders of each Outstanding Security affected. -43- 51 Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 5.14 Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 5.14 shall not apply to any suit instituted by the Company, to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in aggregate principal amount of the Outstanding Securities, or to any suit instituted by any Holder of any Security for the enforcement of the payment of the principal of or interest on any Security on or after the respective Stated Maturity or Maturities expressed in such Security (or, in the case of redemption or repurchase, on or after the Redemption Date or the Repurchase Date, as the case may be) or for the enforcement of the right to convert any Security in accordance with Article XIII. SECTION 5.15 Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE VI THE TRUSTEE SECTION 6.1 Certain Duties and Responsibilities. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (b) Except during the continuance of an Event of Default, -44- 52 (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture. (c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own wilful misconduct, except that (1) this paragraph (c) shall not be construed to limit the effect of paragraph (b) of this Section; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (3) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a majority in principal amount of the Outstanding Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; and (4) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or indemnity satisfactory to it against such risk or liability is not assured to it. (d) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. SECTION 6.2 Notice of Defaults. Within 90 days after the occurrence of any default hereunder, the Trustee shall give to all Holders of Securities, in the manner provided in Section 1.5, notice of such default hereunder actually known to a Responsible Officer of the Trustee, unless such default shall have been cured or waived; provided, however, that in the case of any default of the character specified in Section 5.1(4), no such notice to Holders of Securities shall be given until at least 30 days after the occurrence of such default. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default. -45- 53 SECTION 6.3 Certain Rights of Trustee. Subject to the provisions of Section 6.1: (a) the Trustee may conclusively rely and shall be protected in acting or refraining from acting upon any resolution, Officers' Certificate, other certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors of the Company shall be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, conclusively rely upon an Officers' Certificate or an Opinion of Counsel; (d) the Trustee may consult with counsel (at the expense of the Company) and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders of Securities pursuant to this Indenture, unless such Holders shall have offered to the Trustee security or indemnity satisfactory to it against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, attorneys, custodians or nominees and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent, attorney, custodian or nominee appointed with due care by it hereunder; (h) the Trustee shall not be deemed to have notice of any Event of Default under Section 5.1 unless a Responsible Officer of the Trustee shall have actual knowledge thereof; and -46- 54 (i) in the event that the Trustee is also acting as authenticating agent, conversion agent, payment agent or securities registrar hereunder, the rights and protections afforded to the Trustee pursuant to this Article VI shall also be afforded to the Trustee in such capacities. SECTION 6.4 Not Responsible for Recitals or Issuance of Securities. The recitals contained herein and in the Securities (except the Trustee's certificates of authentication) shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. SECTION 6.5 May Hold Securities, Act as Trustee Under Other Indentures. The Trustee, any Authenticating Agent, any Paying Agent, any Conversion Agent or any other agent of the Company or the Trustee, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Conversion Agent or such other agent. The Trustee may become and act as trustee under other indentures under which other securities, or certificates of interest or participation in other Securities, of the Company are outstanding in the same manner as if it were not Trustee hereunder. SECTION 6.6 Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company in writing. SECTION 6.7 Compensation and Indemnification of Trustee and Its Prior Claims. The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) and the Company covenants and agrees to pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by or on behalf of it in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all agents and other Persons not regularly in its employ), except to the extent that any such expense, disbursement or advance is due to its negligence or bad faith. The Company also covenants to indemnify the Trustee and its directors, officers, employees and agents for, and to hold the Trustee and its directors, officers, employees and agents harmless against, any loss, liability or expense incurred by the Trustee or its directors, officers, employees and agents, arising out of or in connection with the acceptance or administration of this Indenture or the trusts hereunder or the performance of the Trustee's duties hereunder, including the costs and expenses of defending the Trustee or its directors, officers, employees and agents against or investigating any claim or liability in the premises, except to the extent that any such loss, liability or expense was due to the Trustee's negligence or bad faith. The obligations of the Company under this Section 6.7 to compensate and indemnify the Trustee -47- 55 and its directors, officers, employees and agents and to pay or reimburse the Trustee and its directors, officers, employees and agents for expenses, disbursements and advances shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture or the earlier resignation and removal of the Trustee. The Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee including, without limitation, all money or property held or collected by the Trustee in trust to pay the principal of, or interest on, or any other amounts on any Securities, and such lien shall survive the satisfaction and discharge of the Indenture and any other termination of the Indenture including any termination under any bankruptcy law. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Sections 5.1(6) or (7), the Holders by their acceptance of the Securities hereby agree that such expenses and the compensation for such services are intended to constitute expenses of administration under Title 11 of the United States Code or any other applicable Federal or state bankruptcy, insolvency or similar law. "Trustee" for purposes of this Section 6.7 shall include any predecessor Trustee, but the negligence or bad faith of any Trustee shall not affect the indemnification of any other Trustee. SECTION 6.8 Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which shall be a corporation organized and doing business under the laws of the United States of America, any State thereof, or the District of Columbia, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least U.S.$50,000,000, subject to supervision or examination by Federal or State authority, in good standing and having an established place of business in The City of New York. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 6.9 Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 6.10. (b) The Trustee may resign at any time by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by this Section 6.9 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by an Act of the Holders of a majority in principal amount of the Outstanding Securities, delivered to the Trustee and the Company. (d) If at any time: -48- 56 (1) the Trustee shall cease to be eligible under Section 6.8 and shall fail to resign after written request therefor by the Company or by any Holder of a Security who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case (i) the Company by a Board Resolution may remove the Trustee, or (ii) subject to Section 5.14, any Holder of a Security who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee and shall comply with the applicable requirements of this Section 6.9. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of this Section 6.9, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders of Securities and accepted appointment in the manner required by this Section 6.9, any Holder of a Security who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to all Holders of Securities in the manner provided in Section 1.5. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. Notwithstanding the replacement of the Trustee pursuant to this Section 6.9, the Company's obligations under Section 6.7 shall continue for the benefit of the retiring Trustee. The retiring Trustee shall not be liable for the acts or omissions of any successor Trustee hereunder. SECTION 6.10 Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the Successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver -49- 57 an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be eligible under this Article. Upon the acceptance of appointment by any successor Trustee, all fees, charges and expenses of the retiring Trustee shall become immediately due and payable upon the rendering of a statement thereof. SECTION 6.11 Appointment of Co-Trustee or Separate Trustee. (a) Notwithstanding any other provisions of this Indenture, at any time, for the purpose of meeting any legal requirement of any jurisdiction in which any part of the trust may at the time be located, the Trustee shall have the power and may execute and deliver all instruments to appoint one or more Persons reasonably acceptable to the Company to act as a co-trustee or co-trustees, or separate trustee or separate trustees, and to vest in such Person or Persons, in such capacity and for the benefit of the Security Holders, such title to the Securities, or any part hereof, and, subject to the other provisions of this Section, such powers, duties, obligations, rights and trusts as the Trustee may consider necessary or desirable. No co-trustee or separate trustee hereunder shall be required to meet the terms of eligibility as a successor trustee under Section 6.9 and no notice to Security Holders of the appointment of any co-trustee or separate trustee shall be required under Section 6.9 hereof. All fees, charges and expenses of any co-trustee or separate trustee appointed pursuant to this Section 6.11 shall be paid by the Company. (b) Every separate trustee and co-trustee shall, to the extent permitted by law, be appointed and act subject to the following provisions and conditions: (i) all rights, powers, duties and obligations conferred or imposed upon the Trustee shall be conferred or imposed upon and exercised or performed by the Trustee and such separate trustee or co-trustee jointly (it being understood that such separate trustee or co-trustee is not authorized to act separately without the Trustee joining in such act), except to the extent that under any law of any jurisdiction in which any particular act or acts are to be performed, the Trustee shall be incompetent or unqualified to perform such act or acts, in which event such rights, powers, duties and obligations, (including the holding of title to the trust or any portion thereof in any such jurisdiction) shall be exercised and performed singly by such separate trust or co-trustee, but solely at the direction of the Trustee; (ii) the Trustee shall not be personally liable by reason of any act or omission of any separate trustee or co-trustee (subject to the provisions of Section 6.1 hereof); (iii) the Trustee may at any time accept the resignation of or remove any separate trustee or co-trustee. -50- 58 (c) Any notice, request or other writing given to the Trustee shall be deemed to have been given to each of the separate trustees and co-trustees, as effectively as if given to each of them. Every instrument appointing any separate trustee or co-trustee shall refer to this Agreement and the conditions of this Article VI. Each separate trustee and co-trustee, upon its acceptance of the trusts conferred, shall be vested with the estates or property specified in its instrument of appointment, either jointly with the Trustee or separately, as may be provided therein, subject to all the provisions of this Indenture, specifically including every provision of this Indenture relating to the conduct of, affecting the liability of, or affording protection to, the Trustee. Every such instrument shall be filed with the Trustee. SECTION 6.12 Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. SECTION 6.13 Authenticating Agent. The Trustee may appoint an Authenticating Agent or Agents acceptable to the Company with respect to the Securities which shall be authorized to act on behalf of the Trustee to authenticate Securities issued upon exchange or substitution pursuant to this Indenture. Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder, and every reference in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall at all times be a corporation organized and doing business under the laws of the United States of America or any State thereof and authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than U.S.$50,000,000 or its equivalent in another currency or composite currencies and subject to supervision or examination by government authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section 6.13, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section 6.13, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section 6.13. Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding -51- 59 to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section 6.13, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section 6.13, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section 6.13. If an Authenticating Agent is appointed with respect to the Securities pursuant to this Section 6.13, the Securities may have endorsed thereon, in addition to or in lieu of the Trustee's certification of authentication, an alternative certificate of authentication in the following form: This is one of the Securities referred to in the within-mentioned Indenture. DATED: BANKERS TRUST COMPANY, as Trustee By [Authenticating Agent or authorized representative], as Authenticating Agent By: ------------------------- Authorized Signatory SECTION 6.14 Disqualification; Conflicting Interests. If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. -52- 60 ARTICLE VII HOLDER'S LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 7.1 Company to Furnish Trustee Names and Addresses of Holders. The Company will furnish or cause to be furnished to the Trustee (a) semi-annually, not more than 15 days after the Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders of Securities as of such Regular Record Date, and (b) at such other times as the Trustee may reasonably request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; excluding from any such list names and addresses received by the Trustee in its capacity as Security Registrar. SECTION 7.2 Preservation of Information; Communications to Holders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 7.1 and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it pursuant to Section 7.1 upon receipt of a new list so furnished. (b) The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and duties of the Trustee, shall be as provided by the Trust Indenture Act for holders of securities issued under an indenture qualified pursuant to the Trust Indenture Act. (c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act or the Code. SECTION 7.3 Reports by the Company. (a) The Company shall file with the Trustee, within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may by rules and regulations prescribe) which the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. In the event the Company is not subject to Section 13 or 15(d) of the Exchange Act, it shall file with the Trustee upon request the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. -53- 61 (b) The Company shall file with the Trustee such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants provided for in this Indenture as may be requested from time to time by the Trustee. ARTICLE VIII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 8.1 Company May Consolidate, Etc., Only on Certain Terms. The Company shall not amalgamate or consolidate with or merge into any other Person or, directly or indirectly, convey, transfer, sell or lease or otherwise dispose of all or substantially all of its properties and assets to any Person (other than a wholly owned subsidiary), and the Company shall not permit any Person (other than a wholly owned Subsidiary of the Company) to amalgamate or consolidate with or merge into the Company or convey, transfer, sell or lease all or substantially all of its properties and assets to the Company, unless: (1) in case the Company shall consolidate with or merge into another Person or convey, transfer, sell or lease all or substantially all of its properties and assets to any Person, the Person formed by such amalgamation or consolidation or into which the Company is merged or the Person which acquires by conveyance, transfer or sale, or which leases, all or substantially all of the properties and assets of the Company shall be a corporation, partnership or trust, shall be organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, the due and punctual payment of the principal of and interest (including Liquidated Damages payable, if any, pursuant to Section 11.12) on all of the Securities, as applicable, and the performance or observance of every covenant of this Indenture on the part of the Company to be performed or observed and shall have provided for conversion rights in accordance with Section 13.12; (2) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer, sale or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 8.2 Successor Substituted. Upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer, sale or lease of all or the properties and assets of the Company in accordance with Section 8.1, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the -54- 62 Company herein, and thereafter the predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Securities. ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.1 Supplemental Indentures Without Consent of Holders of Securities. Without the consent of any Holders of Securities, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants and obligations of the Company herein and in the Securities as permitted by this Indenture; or (2) to add to the covenants of the Company for the benefit of the Holders of Securities, or to surrender any right or power herein conferred upon the Company; or (3) to secure the Securities; or (4) to modify the restrictions on, and procedures for, resale and other transfers of the Securities to the extent required by any change in applicable law or regulation (or the interpretation thereof) or in practice relating to the resale or transfer of restricted securities generally; or (5) to make provision with respect to the conversion rights of Holders of Securities pursuant to Section 13.12; or (6) to accommodate the issuance, if any, of Securities in book-entry or definitive form and matters related thereto which do not adversely affect the interest of the Holders of Securities; or (7) to comply with any requirements of the Commission in order to effect and maintain the qualification of this Indenture under the Trust Indenture Act; or (8) to cure any ambiguity, to correct or supplement any provision herein, which may be inconsistent with any other provision herein or which is otherwise defective, or to make any other provisions with respect to matters or questions arising under this Indenture as the Company and the Trustee may deem necessary or desirable, provided, such action pursuant to this clause (8) shall not adversely affect the interests of the Holders of Securities in any material respect. Upon Company Request, accompanied by a Board Resolution authorizing the execution of any such supplemental indenture, and subject to and upon receipt by the Trustee of the documents described in Section 9.4 hereof, the Trustee shall join with the Company in the -55- 63 execution of any supplemental indenture authorized or permitted by the terms of this Indenture and any further appropriate agreements and stipulations which may be therein contained. SECTION 9.2 Supplemental Indentures with Consent of Holders of Securities. With either (a) the written consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities, by the Act of said Holders delivered to the Company and the Trustee, or (b) by the adoption of a resolution, at a meeting of Holders of the Outstanding Securities at which a quorum is present, by the Holders of 66-2/3% in aggregate principal amount of the Outstanding Securities represented at such meeting (subject to Section 9.4), the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of Securities under this Indenture; provided, however, that no such supplemental indenture shall, without the consent or affirmative vote of the Holder of each Outstanding Security affected thereby, (1) change the Stated Maturity of the principal of, or any installment of interest on, any Security, or reduce the principal amount thereof or the rate of interest payable thereon or any premium payable upon redemption or mandatory repurchase thereof, or change the coin or currency in which any Security or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption or repurchase, on or after the Redemption Date or Repurchase Date, as the case may be) or, except as permitted by Section 13.12, adversely affect the right to convert any Security as provided in Article XIII, or modify the provisions of this Indenture with respect to the subordination of the Securities in a manner adverse to the Holders of Securities, or (2) reduce the requirements of Section 10.4 for quorum or voting, or reduce the percentage in aggregate principal amount of the Outstanding Securities the consent of whose Holders is required for any such supplemental indenture or the consent of whose Holders is required for any waiver provided for in this Indenture, or (3) modify the obligation of the Company to maintain an office or agency in The City of New York pursuant to Section 11.2, or (4) modify any of the provisions of this Section, Section 5.13 or Section 11.11, except to increase any percentage contained herein or therein or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby, or (5) modify any of the provisions of Sections 11.6, 11.8, 11.10 or 11.12, or (6) modify any provisions of Article XIII, XIV or XV in a manner adverse to the Holders. It shall not be necessary for any Act of Holders of Securities under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. -56- 64 SECTION 9.3 Trustee Protected. If, in the opinion of the Trustee hereunder, any document required to be executed pursuant to the terms of Section 9.2 hereof adversely affects any right, duty, immunity or indemnity with respect to it under this Indenture, the Trustee in its discretion may decline to execute such document. SECTION 9.4 Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 6.1) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture and an Officers' Certificate to the effect that all conditions precedent have been satisfied. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 9.5 Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 9.6 Reference in Securities to Supplemental Indentures. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Company and the Trustee, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities. SECTION 9.7 Notice of Supplemental Indentures. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of Section 9.2, the Company shall give notice to all Holders of Securities, in the manner provided in Section 1.5, of such fact, setting forth in general terms the substance of such supplemental indenture. Any failure of the Company to give such notice, or any defect therein, shall not in any way impair or affect the validity of any such supplemental indenture. -57- 65 ARTICLE X MEETINGS OF HOLDERS OF SECURITIES SECTION 10.1 Purposes for Which Meetings May Be Called. A meeting of Holders of Securities may be called at any time and from time to time pursuant to this Article to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be made, given or taken by Holders of Securities. SECTION 10.2 Call, Notice and Place of Meetings. (a) The Trustee may at any time call a meeting of Holders of Securities for any purpose specified in Section 10.1, to be held at such time and at such place in The City of New York as the Trustee shall determine. Notice of every meeting of Holders of Securities, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given, in the manner provided in Section 1.5, not less than 21 nor more than 180 days prior to the date fixed for the meeting. (b) In case at any time the Company, pursuant to a Board Resolution, or the Holders of at least 10% in aggregate principal amount of the Outstanding Securities shall have requested the Trustee to call a meeting of the Holders of Securities for any purpose specified in Section 10.1, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have made the first publication of the notice of such meeting within 21 days after receipt of such request or shall not thereafter proceed to cause the meeting to be held as provided herein, then the Company or the Holders of Securities in the amount specified, as the case may be, may determine the time and the place in The City of New York for such meeting and may call such meeting for such purposes by giving notice thereof as provided in paragraph (a) of this Section. SECTION 10.3 Persons Entitled to Vote at Meetings. To be entitled to vote at any meeting of Holders of Securities, a Person shall be (a) a Holder of one or more Outstanding Securities, or (b) a Person appointed by an instrument in writing as proxy for a Holder or Holders of one or more Outstanding Securities by such Holder or Holders. The only Persons who shall be entitled to be present or to speak at any meeting of Holders shall be the Persons entitled to vote at such meeting and their counsel, any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. SECTION 10.4 Quorum; Action. The Persons entitled to vote a majority in principal amount of the Outstanding Securities shall constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of Holders of Securities, be dissolved. In any other case, the meeting may be adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further -58- 66 adjourned for a period not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such adjourned meeting (subject to repeated applications of this sentence). Notice of the reconvening of any adjourned meeting shall be given as provided in Section 10.2(a), except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly the percentage of the principal amount of the Outstanding Securities which shall constitute a quorum. Subject to the foregoing, at the reconvening of any meeting adjourned for a lack of a quorum, the persons entitled to vote 25% in aggregate principal amount of the Outstanding Securities at the time shall constitute a quorum for the taking of any action set forth in the notice of the original meeting. At a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid, any resolution and all matters (except as limited by the proviso to Section 9.2) shall be effectively passed and decided if passed or decided by the Persons entitled to vote not less than 66 2/3% in aggregate principal amount of Outstanding Securities represented and voting at such meeting. Any resolution passed or decisions taken at any meeting of Holders of Securities duly held in accordance with this Section shall be binding on all the Holders of Securities, whether or not present or represented at the meeting. SECTION 10.5 Determination of Voting Rights; Conduct and Adjournment of Meetings. (a) Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Holders of Securities in regard to proof of the holding of Securities and of the appointment of proxies and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem appropriate. Except as otherwise permitted or required by any such regulations, the holding of Securities shall be proved in the manner specified in Section 1.3 and the appointment of any proxy shall be proved in the manner specified in Section 1.3. Such regulations may provide that written instruments appointing proxies, regular on their face, may be presumed valid and genuine without the proof specified in Section 10.3 or other proof. (b) The Trustee shall, by an instrument in writing, appoint a temporary chairman (which may be the Trustee) of the meeting, unless the meeting shall have been called by the Company or by Holders of Securities as provided in Section 10.2(b), in which case the Company or the Holders of Securities calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the Persons entitled to vote a majority in principal amount of the Outstanding Securities represented at the meeting. (c) At any meeting, each Holder of a Security or proxy shall be entitled to one vote for each U.S.$1,000 principal amount of Securities held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Security challenged as not Outstanding and ruled by the chairman of the meeting to be not Outstanding. The chairman of the meeting shall have no right to vote, except as a Holder of a Security or proxy. -59- 67 (d) Any meeting of Holders of Securities duly called pursuant to Section 10.2 at which a quorum is present may be adjourned from time to time by Persons entitled to vote a majority in principal amount of the Outstanding Securities represented at the meeting, and the meeting may be held as so adjourned without further notice. SECTION 10.6 Counting Votes and Recording Action of Meetings. The vote upon any resolution submitted to any meeting of Holders of Securities shall be by written ballots on which shall be subscribed the signatures of the Holders of Securities or of their representatives by proxy and the principal amounts and serial numbers of the Outstanding Securities held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record, at least in duplicate, of the proceedings of each meeting of Holders of Securities shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more Persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was given as provided in Section 10.2 and, if applicable, Section 10.4. Each copy shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one such copy shall be delivered to the Company and another to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. ARTICLE XI COVENANTS SECTION 11.1 Payment of Principal and Interest. The Company will duly and punctually pay the principal of and interest on the Securities in accordance with the terms of the Securities and this Indenture. SECTION 11.2 Maintenance of Offices or Agencies. The Company hereby appoints the Corporate Trust Office of the Trustee as its agent in The City of New York where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer or exchange, where conversion notices, certificates and other items required to be delivered to effect conversion may be delivered and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company hereby appoints the principal corporate trust office of the Trustee as Paying Agent for the payment of principal of and interest on the Securities and as Conversion Agent for the Conversion of any of the Securities in accordance with Article XIII, and appoints the office of the Trustee as transfer agent where Securities may be surrendered for registration of transfer or exchange. -60- 68 The Company may at any time and from time to time vary or terminate the appointment of any such agent or appoint any additional agents with or without cause for any or all of such purposes; provided, however, that until all of the Securities have been delivered to the Trustee for cancellation, or moneys sufficient to pay the principal of and interest on the Securities have been made available for payment and either paid or returned to the Company pursuant to the provisions of Section 11.3, the Company will maintain (i) in the Borough of Manhattan, The City of New York, an office or agency where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer or exchange, where Securities may be surrendered for conversion and where notices and demands to or upon the Company, in respect of the Securities and this Indenture may be served, and (ii) subject to any laws or regulations applicable thereto, in any city in a Western European country, an office or agency where Securities may be presented and surrendered for payment and where Securities may be presented for registration of transfer or exchange or conversion thereof. The Company will give prompt written notice to the Trustee, and will give notice to Holders of Securities in the manner specified in Section 1.5, of the appointment or termination of any such agents and of the location and any change in the location of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency, or shall fail to furnish the Trustee with the address thereof, presentations and surrenders may be made and notices and demands may be served on and Securities may be surrendered for conversion to the Corporate Trust Office of the Trustee, and the Company hereby appoints the same as its agent to receive such respective presentations, surrenders, notices and demands. SECTION 11.3 Money for Security Payments To Be Held in Trust. If the Company at any time shall act as its own Paying Agent, it will, on or before each due date of the principal of or interest on any of the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and the Company will promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents, it will, prior to or on each due date of the principal of or interest on any Securities, deposit with a Paying Agent a sum sufficient to pay the principal or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of any failure so to act. The Company will cause each Paying Agent other than the Trustee or affiliate of the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (1) hold all sums held by it for the payment of the principal of or interest on Securities in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee written notice of any default by the Company (or any other obligor upon the securities) in the making of any payment of principal or interest; and -61- 69 (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of or interest on (together with any Liquidated Damages in respect thereof) any Security and remaining unclaimed for two years after such principal or interest (together with any Liquidated Damages in respect thereof) has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as a general unsecured creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before making any such repayment, may at the expense of the Company cause to be published once, in an Authorized Newspaper in the Borough of Manhattan, The City of New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company, and provided, further, that any such publication shall not relieve the Trustee or any Paying Agent of their obligation to pay any amounts to the Company in the manner provided in this Section 11.3. SECTION 11.4 Corporate Existence. Subject to Article VIII, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights (charter and statutory) and franchises; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Holders. SECTION 11.5 Maintenance of Properties. The Company will cause all material properties used or useful in the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made (subject, however, to any limitations on expenditures in any document evidencing and/or securing Senior Debt) all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section 11.5 shall prevent the Company from discontinuing the operation or maintenance of any of such properties if such discontinuance is, in the judgment of the Company, -62- 70 desirable in the conduct of its business or the business of any Subsidiary and not disadvantageous in any material respect to the Holders. SECTION 11.6 Compliance with Laws. The Company will comply, and cause each Subsidiary to comply, with the requirements of all applicable laws, ordinances, rules, regulations, and requirements of any governmental authority (including, without limitation, ERISA and the rules and regulations thereunder), except where the necessity of compliance therewith is contested in good faith by appropriate proceedings or where the failure to comply would not have a material adverse effect upon the Company and its Subsidiaries taken as a whole. SECTION 11.7 Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary, and (2) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Company or any Subsidiary; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. SECTION 11.8 Delivery of Certain Information. The Company will use its best efforts to be, at all times, prior to April 15, 1999, subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act or is exempt from such requirements pursuant to Rule 12g3-2(b) under the Exchange Act. At any time when the Company is not subject to Section 13 or 15(d) of the Exchange Act or is exempt therefrom, upon the request of a Holder of a Restricted Security or the holder of Common Shares issued upon conversion thereof, the Company will promptly furnish or cause to be furnished Rule 144A Information (as defined below) to such Holder of Restricted Securities or such holder of Common Shares issued upon conversion of Restricted Securities, or to a prospective purchaser of such security designated by any such Holder or holder, as the case may be, to the extent required to permit compliance by such holder with Rule 144A under the Securities Act (or any successor provision thereto) in connection with the resale of such Security by such Holder; provided, however, that the Company shall not be required to furnish such information in connection with any request made on or after the date which is three years from the later of (i) the date such a security (or any predecessor security) was acquired from the Company or (ii) the date such a security (or any predecessor security) was last acquired from the Company or an "affiliate" of the Company within the meaning of Rule 144 under the Securities Act (or any successor provision thereto); and provided, further, that the Company shall not be required to furnish such information at any time to a prospective purchaser located outside the United States who is not a "U.S. Person" within the meaning of Regulation S under the Securities Act if such Security may then be sold to such prospective purchaser in accordance with Rule 904 under the Securities Act (or any successor provision thereto). "Rule 144A Information" shall be such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act (or any successor provision thereto). -63- 71 SECTION 11.9 Statement by Officers as to Default. The Company shall deliver to the Trustee within 120 days after the end of each fiscal year of the Company an Officers' Certificate stating that a review of the activities of the Company and its Subsidiaries during the preceding fiscal year has been made under the supervision of the Officers signing such certificate, with a view to determining whether any default exists in the performance and observance of any of the terms, provisions and conditions of this Indenture and whether the Company has observed, performed and fulfilled its obligations under this Indenture. If the Officers signing the Certificate know of such a default, the Officers' Certificate shall describe such default and its status with particularity. The Company shall also promptly notify the Trustee if the Company's fiscal year is changed so that the end thereof is on any date other than the then current fiscal year end date. The Company will also deliver to the Trustee, forthwith upon any Officer becoming aware of any Event of Default, an Officers' Certificate specifying with particularity such default or Event of Default and further stating what action the Company has taken, is taking or proposes to take with respect thereto. Any notice required to be given under this Section 11.9 shall be delivered to the Trustee at its Corporate Trust Office and need not comply with Section 1.4. SECTION 11.10 Resale of Certain Securities. During the period beginning on April 15, 1996 and ending on April 15, 1999, the Company will not, and will not permit any of its "affiliates" (as defined under Rule 144 under the Securities Act or any successor provision thereto) to, resell (x) any Securities which constitute "restricted securities" under Rule 144 or (y) any securities into which such Securities have been converted under this Indenture, which constitute "restricted securities" under Rule 144 that in either case have been reacquired by any of them. The Trustee shall have no responsibility in respect of the Company's performance of its agreement in the preceding sentence. SECTION 11.11 Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any covenant or condition set forth in Sections 11.5 or 11.6 if before the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Securities (or such lesser amount as shall have acted at a meeting pursuant to the provisions of this Indenture) shall either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition shall remain in full force and effect. SECTION 11.12 Registration Rights. The holders of the Securities and the Common Shares issuable upon conversion thereof are entitled to the benefits of a Registration Rights Agreement, dated as of April 10, 1996, between the Company and Goldman, Sachs & Co. (the "Registration Rights Agreement"). Pursuant to the Registration Rights Agreement, the Company has agreed for the benefit of the -64- 72 holders from time to time of the Securities and the Common Shares issuable upon conversion thereof that it will, at its expense, (i) within 90 days after the date of issuance of the original Securities, file a shelf registration statement (the "Shelf Registration Statement") with the Commission with respect to resales of the Securities and the Common Shares issuable upon conversion thereof, (ii) use its best efforts to cause such Shelf Registration Statement to be declared effective by the Commission within 90 days after the date on which the Shelf Registration Statement is filed and (iii) use its best efforts to maintain such Shelf Registration Statement continuously effective under the Securities Act until the third annual anniversary of the date of the effectiveness of the Shelf Registration Statement or such earlier date as is provided in the Registration Rights Agreement. If (i) on or prior to 90 days following the date of original issuance of the Securities, a Shelf Registration Statement has not been filed with the Commission, or (ii) on or prior to the 90th day following the filing of such Shelf Registration Statement, such Shelf Registration Statement is not declared effective (each, a "Registration Default"), additional interest ("Liquidated Damages") will accrue on the Securities from and including the day following such Registration Default to but excluding the day on which such Registration Default has been cured. Liquidated Damages will be paid semi-annually in arrears, with the first semi-annual payment due on the first Interest Payment Date in respect of the Securities following the date on which such Liquidated Damages begin to accrue, and will accrue at a rate per annum equal to an additional one-quarter of one percent (0.25%) of the principal amount of the Securities to and including the 90th day following such Registration Default and at a rate per annum equal to one-half of one percent (0.50%) thereof from and after the 91st day following such Registration Default. In the event that the Shelf Registration Statement ceases to be effective prior to the third annual anniversary of the initial effective date of the Shelf Registration Statement or such earlier date as is provided in the Registration Rights Agreement for a period in excess of 60 days, whether or not consecutive, during any 12-month period, then the interest rate borne by the Securities shall increase by an additional one-half of one percent (0.50%) per annum on the 61st day of the applicable 12-month period such Shelf Registration Statement ceases to be effective to but excluding the day on which the Shelf Registration Statement again becomes effective. Whenever in this Indenture there is mentioned, in any context, the payment of the principal of, premium, if any, or interest on, or in respect of, any Security, such mention shall be deemed to include mention of the payment of Liquidated Damages provided for in this Section to the extent that, in such context, Liquidated Damages are, were or would be payable in respect thereof pursuant to the provisions of this Section and express mention of the payment of Liquidated Damages (if applicable) in any provisions hereof shall not be construed as excluding Liquidated Damages in those provisions hereof where such express mention is not made. SECTION 11.13 Book-Entry System. If the Securities cease to trade in the U.S. Depository's book-entry settlement system, the Company covenants and agrees that it shall use reasonable efforts to make such other book-entry arrangements that it determines are reasonable for the Securities. -65- 73 ARTICLE XII REDEMPTION OF SECURITIES SECTION 12.1 Right of Redemption. The Securities shall be redeemable at the Company's option, in whole or in part, under the circumstances and at the Redemption Prices specified in the form of Securities set forth in Sections 2.2 and 2.3. SECTION 12.2 Applicability of Article. Redemption of Securities at the election of the Company, as permitted or required by any provision of the Securities or this Indenture, shall be made in accordance with such provision and this Article XII. SECTION 12.3 Election to Redeem; Notice to Trustee. The election of the Company to redeem any Securities pursuant to Section 12.1 shall be evidenced by a Board Resolution. In the case of any redemption at the election of the Company of all of the Securities, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee in writing of such Redemption Date. If the Securities are to be redeemed pursuant to an election of the Company which is subject to a condition specified in the forms of Securities set forth in Section 2.2, the Company shall furnish the Trustee with (a) an Officers' Certificate stating that the Company is entitled to effect such redemption and setting forth a statement of facts demonstrating the same and (b) an Opinion of Counsel to the effect that the Company is entitled to effect such redemption, and such redemption is not otherwise in violation of any provisions of Senior Debt. SECTION 12.4 Notice of Redemption. Notice of redemption shall be given in the manner provided in Section 1.5 to the Holders of Securities to be redeemed. Notice shall be given at least once not less than 30 nor more than 60 days prior to the Redemption Date. All notices of redemption shall state: (1) the Redemption Date, (2) the Redemption Price, and the amount of accrued interest, if any, (3) that on the Redemption Date the Redemption Price, and accrued interest, if any, will become due and payable, and that interest thereon shall cease to accrue on and after said date, (4) the Conversion Date, the date on which the right to convert the Securities will terminate and the places where the Securities may be surrendered for conversion, and -66- 74 (5) the place or places where the Securities are to be surrendered for payment of the Redemption Price and accrued interest, if any. Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name of and at the expense of the Company, and such notice, when given to the Holders, shall be irrevocable. SECTION 12.5 Deposit of Redemption Price. Prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as Paying Agent, segregate and hold in trust as provided in Section 11.3) an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Securities which are to be redeemed on that date other than any Securities called for redemption on that date which have been converted prior to the date of such deposit. If any Security called for redemption is converted, any money deposited with the Trustee or with a Paying Agent or so segregated and held in trust for the redemption of such Security shall (subject to any right of the Holder of such Security or any Predecessor Security to receive interest as provided in the last paragraph of Section 3.7) be paid to the Company on Company Request or, if then held by the Company, shall be discharged from such trust. SECTION 12.6 Securities Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price herein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, the Holder of such Security shall be paid the Redemption Price, together with accrued interest to the Redemption Date; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 3.7. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal shall, until paid, bear interest from the Redemption Date at the rate of interest borne by the Security. ARTICLE XIII CONVERSION OF SECURITIES SECTION 13.1 Conversion Privilege and Conversion Rate. Subject to and upon compliance with the provisions of this Article, at the option of the Holder thereof, any Security or any portion of the principal amount thereof which is $1,000 or any integral multiple of $1,000 in excess thereof, may be converted at any time after the Non- -67- 75 Conversion Period (as such term is defined in Section 2.3 hereof) at the principal amount thereof, or of such portion thereof, into fully paid and nonassessable Common Shares of the Company (calculated as to each conversion to the nearest 1/100 of a share) at the Conversion Rate, determined as hereinafter provided, in effect at the time of conversion. Such conversion right shall expire at the close of business on April 15, 2003; subject, in the case of conversion of a Global Security, to any applicable book-entry procedures of the Depository for such conversion. In case a Security or portion thereof is called for redemption at the election of the Company or is delivered for repurchase at the option of the Holder, such conversion right in respect of the Security or portion thereof so called shall expire at the close of business on the Redemption Date or the Repurchase Date, unless the Company defaults in making the payment due upon redemption or the repurchase, as the case may be (subject as aforesaid to any applicable book-entry procedures). The rate at which Common Shares shall be delivered upon conversion (herein called the "Conversion Rate") shall be initially 38.3142 Common Shares for each U.S.$1,000 principal amount of Securities. The Conversion Rate shall be adjusted in certain instances as provided in this Article 13. The price at which Common Shares shall be delivered upon conversion (herein called the "Conversion Price") shall at any time be equal to U.S. $1,000 divided by the then applicable Conversion Rate (and rounded to the nearest cent). SECTION 13.2 Exercise of Conversion Privilege. In order to exercise the conversion privilege with respect to any Security or portion thereof, the Holder of any Security to be converted or any other person acting on its behalf shall surrender such Security, duly endorsed or assigned to the Company or in blank at any office or agency of the Company maintained for that purpose pursuant to Section 11.2, accompanied by a duly signed conversion notice substantially in the form set forth in Annex A stating that the Holder elects to convert such Security or, if less than the entire principal amount thereof is to be converted, the portion thereof to be converted. Alternatively, if such security is represented by a Global Security, conversion may be effected by written order given to the Trustee in accordance with the applicable procedures of the U.S. Depository then in effect. Each Security surrendered for conversion (in whole or in part) during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business on such Interest Payment Date shall (except in the case of any Security or portion thereof which has been called for redemption on a Redemption Date or repurchase on a Repurchase Date occurring within such period) be accompanied by payment in New York Clearing House funds or other funds acceptable to the Company of an amount equal to the interest payable on such Interest Payment Date on the principal amount of such Security (or part thereof as the case may be) being surrendered for conversion. The interest so payable on such Interest Payment Date in respect of such Security (or portion thereof, as the case may be) surrendered for conversion shall be paid to the Holder of such Security as of such Regular Record Date. Interest payable in respect of any Security surrendered for conversion on or after an Interest Payment Date shall be paid to the Holder of such Security as of the next preceding Regular Record Date, notwithstanding the exercise of the right of conversion. Except as provided in this paragraph and subject to the last paragraph of Section 3.7, no cash payment or adjustment shall be made on account of any cash dividends on the Common Shares issued upon conversion or, if the date of conversion is not an Interest Payment Date, on account of any interest accrued from the Interest Payment Date next preceding the conversion date, in respect of any Security (or part thereof, as the case may be) surrendered for conversion. -68- 76 Securities shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Securities for conversion in accordance with the foregoing provisions, and at such time the rights of the Holders of such Securities as Holders shall cease, and the Person or Persons entitled to receive the Common Shares issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Shares at such time. As promptly as practicable on or after the conversion date, the Company shall issue and deliver, out of its authorized but previously unissued Shares of Common Stock, at the office of such Conversion Agent a certificate or certificates for the number of full shares of newly issued Common Shares issuable upon conversion, together with payment in lieu of any fraction of a share, as provided in Section 13.3. All Common Shares delivered upon such conversion of Restricted Securities shall bear a restrictive legend substantially in the form of the legend required to be set forth on the Restricted Securities pursuant to Section 2.2 and shall be subject to the restrictions on transfer provided in such legend. Neither the Trustee nor any agent maintained for the purpose of such conversion shall have any responsibility for the inclusion or content of any such restrictive legend on such Common Shares; provided, however, that the Trustee or any agent maintained for the purpose of such conversion shall have provided, to the Company or to the Company's transfer agent for such Common Shares, prior to or concurrently with a request to the Company to deliver to such agent maintained for the purpose of such conversion certificates for such Common Shares, written notice that the Securities delivered for conversion are Restricted Securities. In the case of any Security which is converted in part only, upon such conversion the Company shall execute and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Company, a new Security or Securities of authorized denominations in an aggregate principal amount equal to the unconverted portion of the principal amount of such Security. If Common Shares to be issued upon conversion of a Security, or Securities to be issued upon conversion of a Security in part only, are to be registered in a name other than that of the Holder of such Security, the Security Registrar shall, prior to the conversion of such Security, record in the Security Register the transfer of that portion of the Security to be so converted in the name of the person in whose name such Common Shares or Securities are to be registered. SECTION 13.3 Fractions of Common Shares. No fractional Common Shares or scrip certificates in respect thereof shall be issued upon conversion of any Security or Securities. If more than one Security shall be surrendered for conversion at one time by the same Holder, the number of full shares which shall be issuable upon conversion thereof shall be computed on the basis of the aggregate principal amount of the Securities so surrendered. Instead of any fractional Common Shares which would otherwise be issuable upon conversion of any Security or Securities, the Company shall pay a cash adjustment in respect of such fraction (calculated to the nearest 1/100 of a share) in an amount in Dollars equal to the same fraction of the current market price per Common Share (calculated in accordance with Section 13.4(8) below) at the close of business on the day of conversion, or alternatively the Company shall round up the conversion transaction to the next higher whole share. -69- 77 SECTION 13.4 Adjustment of Conversion Rate. The Conversion Rate shall be subject to adjustments from time to time as follows: (1) In case at any time after the date hereof, the Company shall pay or make a dividend or other distribution on all or any portion of its Common Shares or shall pay or make a dividend or other distribution on any other class of capital stock of the Company which dividend or distribution includes Common Shares, the Conversion Rate in effect at the opening of business on the day following the date fixed for the determination of shareholders entitled to receive such dividend or other distribution shall be increased by dividing such Conversion Rate by a fraction of which the numerator shall be the number of Common Shares outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such increase to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (1), the number of Common Shares at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates, if any, issued in lieu of fractions of Common Shares. (2) In case at any time after the date hereof, the Company shall pay or make a dividend or other distribution on all of its Common Shares consisting of, or shall otherwise issue to all holders of its Common Shares, rights, warrants or options (not being available on an equivalent basis to Holders of the Securities upon conversion) entitling the holders of its Common Shares to subscribe for or purchase Common Shares at a price per share less than the current market price per share (determined as provided in paragraph (8) of this Section 13.4) of the Common Shares on the date fixed for the determination of shareholders entitled to receive such rights, warrants or options (other than pursuant to a dividend reinvestment plan), the Conversion Rate in effect at the opening of business on the day following the date fixed for such determination shall be increased by dividing such Conversion Rate by a fraction of which the numerator shall be the number of Common Shares outstanding at the close of business on the date fixed for such determination plus the number of Common Shares which the aggregate of the offering price of the total number of Common Shares so offered for subscription or purchase would purchase at such current market price and the denominator shall be the number of Common Shares outstanding at the close of business on the date fixed for such determination plus the number of Common Shares so offered for subscription or purchase, such increase to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (2), the number of Common Shares at any time outstanding shall not include shares held in the treasury of the Company but will include shares issuable in respect of scrip certificates, if any, issued in lieu of fractions of Common Shares. The Company will not issue any rights or warrants in respect of Common Shares held in the treasury of the Company (or, if rights or warrants are issued in respect of all of the Common Shares of the Company, will not exercise any such rights or warrants in respect of Common Shares held in the treasury of the Company). (3) In case at any time after the date hereof, all or any portion of the Common Shares outstanding shall be subdivided into a greater number of Common Shares, the Conversion Rate in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately increased, and, conversely in case at any time after the date hereof, all or any portion of the Common Shares outstanding shall each be combined into -70- 78 a smaller number of Common Shares, the Conversion Rate in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately reduced, such increase or reduction, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (4) In case at any time after the date hereof, the Company shall, by dividend or otherwise, distribute to all holders of its Common Shares evidences of its indebtedness or assets (including securities, but excluding any rights, warrants or options referred to in paragraph (2) of this Section 13.4, any dividend or distribution paid exclusively in cash and any dividend or distribution referred to in paragraph (1) of this Section 13.4), the Conversion Rate shall be increased so that the same shall equal the rate determined by dividing the Conversion Rate in effect immediately prior to the close of business on the date fixed for the determination of shareholders entitled to receive such distribution by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph (8) of this Section 13.4) of the Common Shares on the date fixed for such determination less the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution filed with the Trustee) of the portion of the assets or evidences of indebtedness so distributed applicable to one Common Share and the denominator shall be such current market price per share of the Common Shares, such adjustment to become effective immediately prior to the opening of business on the day following the date fixed for the determination of shareholders entitled to receive such distribution. (5) In case at any time after the date hereof, the Company shall, by dividend or otherwise, make a distribution to all holders of its Common Shares consisting exclusively of cash (excluding any cash that is distributed upon a merger or consolidation or a sale or transfer of all or substantially all of the assets of the Company to which Section 13.11 applies or as part of a distribution referred to in paragraph (4) of this Section 13.4) in an aggregate amount that, combined together with (I) the aggregate amount of any other distributions to all holders of its Common Shares made exclusively in cash within the 12 months preceding the date of payment of such distribution and in respect of which no adjustment pursuant to this paragraph (5) has been made and (II) the aggregate of any cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution filed with the Trustee) of consideration payable in respect of any tender offer by the Company or any of its Subsidiaries for all or any portion of the Common Shares concluded within the 12 months preceding the date of payment of such distribution and in respect of which no adjustment pursuant to paragraph (6) of this Section 13.4 has been made, exceeds 10% of the product of the current market price per share of the Common Shares on the date for the determination of holders of Common Shares entitled to receive such distribution times the number of Common Shares outstanding on such date, then, and in each such case, immediately after the close of business on such date for determination, the Conversion Rate shall be increased so that the same shall equal the rate determined by dividing the Conversion Rate in effect immediately prior to the close of business on the date fixed for determination of the shareholders entitled to receive such distribution by a fraction (i) the numerator of which shall be equal to the current market price per share (determined as provided in paragraph (8) of this Section 13.4) of the Common Shares on the date fixed for such determination less an amount equal to the quotient of (x) the excess of such combined amount over such 10% and (y) the number of Common Shares outstanding on such date for determination and (ii) the denominator of which shall be equal to the current market -71- 79 price per share (determined as provided in paragraph (8) of this Section 13.4) of the Common Shares on such date for determination. (6) In case a tender or exchange offer made by the Company or any Subsidiary for all or any portion of the Common Shares shall expire and such tender or exchange offer (as amended upon the expiration thereof) shall require the payment to shareholders (based on the acceptance (up to any maximum specified in the terms of the tender offer) of Purchased Shares (as defined below)) of an aggregate consideration having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution filed with the Trustee) that combined together with (I) the aggregate of the cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution), as of the expiration of such tender or exchange offer, of consideration payable in respect of any other tender or exchange offer, by the Company or any Subsidiary for all or any portion of the Common Shares expiring within the 12 months preceding the expiration of such tender or exchange offer and in respect of which no adjustment, pursuant to this paragraph (6) has been made and (II) the aggregate amount of any distributions to all holders of the Company's Common Shares made exclusively in cash within 12 months preceding the expiration of such tender or exchange offer and in respect of which no adjustment pursuant to paragraph (5) of this Section 13.4 has been made, exceeds 10% of the product of the current market price per share of the Common Shares (determined as provided in paragraph (8) of this Section 13.4) as of the last time (the "Expiration Time") tenders or exchanges could have been made pursuant to such tender or exchange offer (as it may be amended) times the number of Common Shares outstanding (including any tendered or exchanged shares) on the Expiration Time, then, and in each such case, immediately prior to the opening of business on the day after the date of the Expiration Time, the Conversion Rate shall be adjusted so that the same shall equal the rate determined by dividing the Conversion Rate immediately prior to the close of business on the date of the Expiration Time by a fraction (i) the numerator of which shall be equal to (A) the product of (I) the current market price per share of the Common Shares (determined as provided in paragraph (8) of this Section 13.4) on the date of the Expiration Time and (II) the number of shares of Common Shares outstanding (including any tendered or exchanged shares) on the date of the Expiration Time less (B) the amount of cash plus the fair market value (determined as aforesaid) of the aggregate consideration payable to shareholders based on the acceptance (up to any maximum specified in the terms of the tender offer) of Purchased Shares, and (ii) the denominator of which shall be equal to the product of (A) the current market price per share of the Common Shares (determined as provided in paragraph (8) of this Section 13.4) as of the Expiration Time and (B) the number of Common Shares outstanding (including any tendered or exchanged shares) as of the Expiration Time less the number of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted up to any such maximum, being referred to as the "Purchased Shares"). (7) The reclassification of Common Shares into securities other than Common Shares (other than any reclassification upon a consolidation or merger to which Section 13.11 applies) shall be deemed to involve (a) a distribution of such securities other than Common Shares to all holders of Common Shares (and the effective date of such reclassification shall be deemed to be "the date fixed for the determination of shareholders entitled to receive such distribution" and "the date fixed for such determination" within the meaning of paragraph (4) of this Section 13.4), and (b) a subdivision or combination, as the case may be, of the number of Common Shares outstanding immediately prior to such reclassification into the number of Common Shares -72- 80 outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision becomes effective" or "the day upon which such combination becomes effective," as the case may be, and "the day upon which such subdivision or combination becomes effective" within the meaning of paragraph (3) of this Section 13.4). (8) For the purpose of any computation under paragraphs (2), (4), (5) or (6) of this Section 13.4, the current market price per share of Common Shares on any date shall be deemed to be the average of the daily Closing Prices Per Share for the five consecutive Trading Days selected by the Company commencing not more than 20 Trading Days before, and ending not later than, the earlier of the day in question and the day before the "ex" date with respect to the issuance or distribution requiring such computation. For purposes of this paragraph, the term "'ex' date," when used with respect to any issuance or distribution, means the first date on which the Common Shares trades regular way on the applicable securities exchange or in the applicable securities market without the right to receive such issuance or distribution. (9) No adjustment in the Conversion Rate shall be required unless such adjustment (plus any adjustments not previously made by reason of this paragraph (9)) would require an increase or decrease of at least one percent in such rate; provided, however, that any adjustments which by reason of this paragraph (9) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. In the case of any adjustment deferred pursuant to this paragraph (9), the Company shall make appropriate elections under the Treasury Regulations promulgated pursuant to Section 305 of the Internal Revenue Code of 1986, as amended. (10) The Company may make such increases in the Conversion Rate, for the remaining term of the Securities or any shorter term, in addition to those required by paragraphs (1), (2), (3), (4), (5) and (6) of this Section 13.4, as it considers to be advisable in order to avoid or diminish any income tax to any holders of Common Shares resulting from any dividend or distribution of stock or issuance of rights or warrants to purchase or subscribe for stock or from any event treated as such for United States federal income tax purposes or for any other reasons. The Company shall have the power to resolve any ambiguity or correct any error in this paragraph (10) and its actions in so doing shall be final and conclusive. SECTION 13.5 Notice of Adjustments of Conversion Rate. Whenever the Conversion Rate is adjusted as herein provided: (1) the Company shall compute the adjusted Conversion Rate in accordance with Section 13.4 and shall prepare a certificate signed by the Treasurer of the Company setting forth the adjusted Conversion Rate and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith promptly be filed with the Trustee and with each Conversion Agent; and (2) a notice stating that the Conversion Rate has been adjusted and setting forth the adjusted Conversion Rate shall forthwith be prepared, and as soon as practicable after it is prepared, such notice shall be provided by the Company to all Holders in accordance with Section 1.5. -73- 81 Neither the Trustee nor any Conversion Agent shall be under any duty or responsibility with respect to any such certificate, except to exhibit the same to any Holder of Securities desiring inspection thereof at its office during normal business hours. SECTION 13.6 Notice of Certain Corporate Action. In case: (1) the Company shall declare a dividend (or any other distribution) on its Common Shares payable otherwise than in cash out of funds from which such dividend or other distribution is properly payable; or (2) the Company shall authorize the granting to the holders of its Common Shares of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (3) of any reclassification of the Common Shares of the Company (other than a subdivision or combination of its outstanding Common Shares), or of any consolidation, merger or share exchange to which the Company is a party and for which approval of any shareholders of the Company is required, or of any tender offer by the Company or any Subsidiary for all or any portion of the Common Shares, or of the conveyance, transfer, sale or lease of all or substantially all of the assets of the Company; or (4) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of Securities pursuant to Section 11.2, and shall cause to be provided to all Holders in accordance with Section 1.5, at least 20 days (or 10 days in any case specified in clause (1) or (2) above) prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the effective date as of which the holders of Common Shares of record to be entitled to such dividend, distribution, rights or warrants are to be determined, or (y) the date on which such reclassification, consolidation, merger, share exchange, conveyance, transfer, sale, lease, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Shares of record shall be entitled to exchange their Common Shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, share exchange, conveyance, transfer, sale, lease, dissolution, liquidation or winding up. Neither the failure to give such notice or the notice referred to in the following paragraph nor any defect therein shall affect the legality or validity of the proceedings described in clauses (1) through (4) of this Section 13.6. If at the time the Trustee shall not be the Conversion Agent, a copy of such notice and any notice referred to in the following paragraph shall also forthwith be filed by the Company with the Trustee. The Company shall cause to be filed at each office or agency maintained for the purpose of conversion of Securities pursuant to Section 11.2, and shall cause to be provided to all Holders in accordance with Section 1.5, notice of any tender offer by the Company or any Subsidiary for -74- 82 all or any portion of the Common Shares at or about the time that such notice of tender offer is provided to the public generally. SECTION 13.7 Company to Reserve Common Shares. The Company shall at all times while any Securities are Outstanding reserve and keep available, free from preemptive rights, out of its authorized but previously unissued Common Shares, for the purpose of effecting the conversion of Securities, the full number of Common Shares then issuable upon the conversion of all such Outstanding Securities. SECTION 13.8 Taxes on Conversions. Except as provided in the next sentence, the Company will pay any and all transfer, stamp, documentary and other similar taxes and duties that may be payable in respect of the issue or delivery of Common Shares on conversion of Securities pursuant hereto. A Holder delivering a Security for conversion will be required to pay any tax or duty which may be payable in respect of any transfer involved in the issue and delivery of Common Shares in a name other than that of the Holder of the Security or Securities to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax or duty or has established to the satisfaction of the Company that such tax or duty has been paid. SECTION 13.9 Covenant as to Common Shares. The Company covenants that all Common Shares which may be delivered upon conversion of Securities will be newly issued shares and upon such delivery, will have been fully paid and nonassessable and, except as provided in Section 13.8, the Company will pay all taxes, liens and charges with respect to the issue thereof. SECTION 13.10 Cancellation of Converted Securities. All Securities delivered for conversion shall be delivered to the Trustee to be canceled by or at the direction of the Trustee, which shall dispose of the same as provided in Section 3.9. SECTION 13.11 Provision in Case of Consolidation, Merger or Conveyance of Assets. In case of any consolidation of the Company with, or merger of the Company into, any other Person, any merger of another Person into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding Common Shares of the Company (other than cancellation of Common Shares of the Company held by such other Person)) or any sale or transfer of all or substantially all of the assets of the Company, the Person formed by such consolidation or resulting from such merger or which acquires such assets, as the case may be, shall execute and deliver to the Trustee a supplemental indenture executed in accordance with Article IX providing that the Holder of each Security then Outstanding shall have the right thereafter, during the period such Security shall be convertible as specified in Section 13.1, to convert such Security only into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer by a holder of the number of Common Shares of the Company into which such Security might have been converted immediately prior to such consolidation, merger, sale or transfer, assuming such holder -75- 83 of Common Shares of the Company (i) is not a Person with which the Company amalgamated or consolidated or into which the Company merged or which merged into the Company or to which such sale or transfer was made, as the case may be ("Constituent Person"), or an Affiliate of a Constituent Person and (ii) failed to exercise his rights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer (provided that if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer is not the same for each Common Share of the Company held immediately prior to such consolidation, merger, sale or transfer by other than a Constituent Person or an Affiliate thereof and in respect of which such rights of election shall not have been exercised ("Non-Electing Share"), then for the purpose of this Section 13.11 the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer by the holders of each Non-electing Share shall be deemed to be the kind and amount so receivable per share by a plurality of the Non-Electing Shares). Such supplemental indenture shall provide for adjustments which, for events subsequent to the effective date of such supplemental indenture, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article. The above provisions of this Section 13.11 shall similarly apply to successive consolidations, mergers, sales or transfer. Notice of the execution of such a supplemental indenture shall be given by the Company to the Holder of each Security as provided in Section 1.5 promptly upon such execution. Neither the Trustee nor any Paying Agent shall be under any responsibility to determine the correctness of any provisions contained in any such supplemental indenture relating either to the kind or amount of shares of stock or other securities or property or cash receivable by Holders of Securities upon the conversion of their Securities after any such consolidation, merger, sale or transfer or to any such adjustment, but may accept as conclusive evidence of the correctness of any such provisions, and shall be protected in relying upon, an Opinion of Counsel with respect thereto, which the Company shall cause to be furnished to the Trustee upon request. SECTION 13.12 Responsibility of Trustee for Conversion Provisions. The Trustee, subject to the provisions of Section 6.1, and any Conversion Agent shall not at any time be under any duty or responsibility to any Holder of Securities to determine whether any facts exist which may require any adjustment of the Conversion Rate, or with respect to the nature, extent or amount of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same, or whether a supplemental indenture need be entered into. Neither the Trustee, subject to the provisions of Section 6.1, nor any Conversion Agent shall be accountable with respect to the validity or value (or the kind or amount) of any Common Shares, or of any other securities or property or cash, which may at any time be issued or delivered upon the conversion of any Security; and it or they do not make any representation with respect thereto. Neither the Trustee, subject to the provisions of Section 6.1, nor any Conversion Agent shall be responsible for any failure of the Company to make any cash payment or to issue, transfer or deliver any Common Shares or share certificates or other securities or property or cash upon the surrender of any Security for the purpose of conversion; and the Trustee, subject to the provisions of Section 6.1, and any Conversion Agent shall not be responsible for any failure of the Company to comply with any of the covenants of the Company contained in this Article. -76- 84 ARTICLE XIV SUBORDINATION SECTION 14.1 Securities Subordinate to Senior Debt. The Company covenants and agrees, and each Holder of a Security, by his acceptance thereof, likewise covenants and agrees, that, to the extent and in the manner hereinafter set forth in this Article (subject to the provisions of Article IV), the indebtedness represented by the Securities, and the payment of the principal of, interest on and all other amounts, if any, owing with respect to each and all of the Securities are hereby expressly made subordinate and subject in right of payment to the prior payment in full in cash or other immediately available funds of all Senior Debt of the Company. SECTION 14.2 Payment Over of Proceeds Upon Dissolution, Etc. In the event of (a) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, relative to the Company or to its creditors, as such, or to its assets, or (b) any liquidation, dissolution or other winding up of the Company, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or any other marshalling of assets and liabilities of the Company, then and in any such event specified in (a), (b) or (c) above (each such event, if any, herein sometimes referred to as a "Proceeding") the holders of Senior Debt shall be entitled to receive payment in full of all amounts due or to become due on or in respect of all Senior Debt, in cash or other immediately available funds or provision shall be made for such payment in cash or other immediately available funds or otherwise in a manner satisfactory to each holder of Senior Debt with respect to its indebtedness, before the Holders of the Securities are entitled to receive any payment or distribution of any kind or character, whether (a) in cash, property or securities, on account of principal of, interest on or any other amount, if any, owing with respect to the Securities or on account of any purchase or other acquisition of Securities by the Company or any Subsidiary of the Company, (b) by way of cancellation, forgiveness or offset of the indebtedness evidenced by the Securities against any indebtedness owed by a Holder to the Company or (c) payable or deliverable by reason of the payment of any other indebtedness of the Company being subordinated to the payment of the Securities (all such payments, distributions, purchases and acquisitions herein referred to, individually and collectively, as a "Securities Payment"), and to that end the holders of all Senior Debt shall be entitled to receive, for application to the payment thereof, any Securities Payment which may be payable or deliverable in respect of the Securities in any such Proceeding. In the event that, notwithstanding the foregoing provisions of this Section, the Trustee or the Holder of any Security shall have received any Securities Payment before all Senior Debt is paid in full in cash or other immediately available funds or otherwise in a manner satisfactory to each holder of Senior Debt with respect to its indebtedness, and if such fact shall, at or prior to the time of such Securities Payment, have been made actually known to a Responsible Officer of the Trustee or, as the case may be, such Holder, then and in such event such Securities Payment shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of the Company for application to the payment of all Senior Debt, to the extent necessary -77- 85 to pay all Senior Debt in full, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt. For purposes of this Article only, the words "any payment or distribution of any kind or character, whether in cash, property or securities" shall not be deemed to include a payment or distribution of stock or securities of the Company provided for by a plan of reorganization or readjustment giving effect to these subordination provisions authorized by an order or decree of a court of competent jurisdiction in a reorganization proceeding under any applicable bankruptcy law or of any other corporation provided for by such plan of reorganization or readjustment which stock or securities are subordinated in right of payment to all then outstanding Senior Debt to substantially the same extent as the Securities are so subordinated as provided in this Article, which shall require that (i) the final maturity of any such subordinated securities shall exceed the term of the Senior Debt provided for by such plan of reorganization or readjustment, and there shall not be any scheduled principal payment in respect of such subordinated securities prior to that of such Senior Debt and (ii) such subordinated securities shall be unsecured and unguaranteed. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution of the Company following the conveyance, transfer, sale or lease of all or substantially all of its properties and assets to another Person upon the terms and conditions set forth in Article VIII shall not be deemed a Proceeding for the purposes of this Section if the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance, transfer, sale or lease such properties and assets, as the case may be, shall, as a part of such consolidation, merger, conveyance, transfer, sale or lease comply with the conditions set forth in Article VIII. SECTION 14.3 No Payment When Senior Debt in Default. In the event that any Securities are declared or otherwise shall become due and payable before their Stated Maturity (including by reason of a Change in Control), then and in such event the holders of the Senior Debt outstanding at the time such Securities so become due and payable shall be entitled to receive payment in full of all amounts due or to become due on or in respect of all Senior Debt in cash or other immediately available funds or otherwise in a manner satisfactory to the holders of such Senior Debt, before the Holders of the Securities are entitled to receive any Securities Payment. In the event and during the continuation of any default in the payment of any amount owing in respect of any Senior Debt beyond any applicable grace period with respect thereto, or in the event that any event of default with respect to any Senior Debt shall have occurred and be continuing permitting the holders of such Senior Debt (or a trustee or other representative on behalf of the holders thereof) to declare such Senior Debt due and payable prior to the date on which it would otherwise have become due and payable, unless and until such event of default shall have been cured or waived or shall have ceased to exist and such acceleration shall have been rescinded or annulled, or in the event any judicial proceeding shall be pending with respect to any such default in payment or event of default, then no Securities Payment shall be made. In the event that, notwithstanding the foregoing, the Company shall make any Securities Payment to the Trustee or any Holder prohibited by the foregoing provisions of this Section, and if (i) such fact shall, at or prior to the time of such Securities Payment, have been made actually known to a Responsible Officer of the Trustee or, as the case may be, such Holder or (ii) the -78- 86 Securities have been accelerated, then and in such event such Securities Payment shall be paid over and delivered forthwith to the Company. The provisions of this Section shall not apply to any Securities Payment with respect to which Section 14.2 would be applicable. SECTION 14.4 Payment Permitted If No Default. Nothing contained in this Article or elsewhere in this Indenture or in any of the Securities shall prevent (a) the Company, at any time except during the pendency of any proceeding referred to in Section 14.2 or under the conditions described in Section 14.3, from making Securities Payments, or (b) the application by the Trustee of any money deposited with it hereunder to Securities Payments or the retention of such Securities Payment by the Holders, if, at the time of such application by the Trustee, it did not have actual knowledge that such Securities Payment would have been prohibited by the provisions of this Article. SECTION 14.5 Subrogation to Rights of Holders of Senior Debt. Subject to the payment in full of all amounts due or to become due on or in respect of Senior Debt, in cash or other immediately available funds or otherwise in a manner satisfactory to the holders of Senior Debt, the Holders of the Securities shall be subrogated to the rights of the holders of such Senior Debt to receive payments and distributions of cash, property and securities applicable to the Senior Debt until the principal of and interest on the Securities shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of the Senior Debt of any cash, property or securities to which the Holders of the Securities or the Trustee would be entitled except for the provisions of this Article, and no payments over pursuant to the provisions of this Article to the holders of Senior Debt by Holders of the Securities or the Trustee, shall, as among the Company, its creditors other than holders of Senior Debt and the Holders of the Securities, be deemed to be a payment or distribution by the Company to or on account of the Senior Debt. SECTION 14.6 Provisions Solely to Define Relative Rights. The provisions of this Article are and are intended solely for the purpose of defining the relative rights of the Holders of the Securities on the one hand and the holders of Senior Debt on the other hand. Nothing contained in this Article or elsewhere in this Indenture or in the Securities is intended to or shall (a) impair, as among the Company, the creditors of the Company other than holders of Senior Debt and the Holders of the Securities, the obligation of the Company, which is absolute and unconditional (and which, subject to the rights under this Article of the holders of Senior Debt, is intended to rank equally with all other general obligations of the Company), to pay to the Holders of the Securities the principal of and interest on the Securities as and when the same shall become due and payable in accordance with their terms; or (b) affect the relative rights against the Company of the Holders of the Securities and creditors of the Company other than the holders of Senior Debt; or (c) prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article of the holders of Senior Debt to receive cash, property and securities otherwise payable or deliverable to the Trustee or such Holder. -79- 87 SECTION 14.7 Trustee to Effectuate Subordination. Each Holder of a Security by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article and appoints the Trustee his attorney-in-fact for any and all such purposes. SECTION 14.8 No Waiver of Subordination Provisions. No right of any present or future holder of any Senior Debt to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Debt may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Securities, without incurring responsibility to the Holders of the Securities and without impairing or releasing the subordination provided in this Article or the obligations hereunder of the Holders of the Securities to the holders of Senior Debt, do any one or more of the following: (i) change the manner, place or terms of payment or the time of payment of, or renew or alter, Senior Debt, or otherwise amend or supplement in any manner Senior Debt or any instrument evidencing the same or any agreement under which Senior Debt is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Debt; (iii) release any Person liable in any manner for the collection of Senior Debt; and (iv) exercise or refrain from exercising any rights against the Company and any other Person. SECTION 14.9 Notice to Trustee. The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment to or by the Trustee in respect of the Securities. Notwithstanding the provisions of this Article or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee in respect of the Securities, unless and until the Trustee shall have received written notice thereof from the Company or a holder of Senior Debt or from any trustee therefor or representative thereof; and, prior to the receipt of any such written notice, the Trustee shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section at least two Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of, the principal of or interest on any Security), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purpose for which such money was received and shall not be affected by any notice to the contrary which may be received by it within two Business Days prior to such date. -80- 88 The Trustee shall be entitled to rely conclusively on the delivery to it of a written notice, and proof of ownership acceptable to the Trustee, by a Person representing himself to be a holder of Senior Debt (or a trustee therefor or representative thereof) to establish that such notice has been given by a holder of Senior Debt (or a trustee therefor or representative thereof). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Debt to participate in any payment or distribution pursuant to this Article, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Debt held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article, and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. SECTION 14.10 Reliance on Judicial Order or Certificate of Liquidating Agent. Upon any payment or distribution of assets of the Company referred to in this Article, the Trustee and the Holders of the Securities shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such Proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of Securities, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of the Senior Debt and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article. SECTION 14.11 Trustee Not Fiduciary for Holders of Senior Debt. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Debt and shall not be liable to any such holders if it shall in good faith and absent gross negligence or willful misconduct, mistakenly pay over or distribute to Holders of Securities or to the Company or to any other Person cash, property or securities to which any holders of Senior Debt shall be entitled by virtue of this Article or otherwise. SECTION 14.12 Rights of Trustee as Holder of Senior Debt; Preservation of Trustee's Rights . The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article with respect to any Senior Debt which may at any time be held by it, to the same extent as any other holder of Senior Debt, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. Nothing in this Article shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.7. SECTION 14.13 Article Applicable to Paying Agents. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article shall in such case (unless the context otherwise requires) be construed as extending to and including -81- 89 such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article in addition to or in place of the Trustee; provided, however, that Sections 14.9 and 14.12 shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as Paying Agent. SECTION 14.14 Subsidiaries. No payment, distribution of assets or other action may be taken by any Subsidiary of the Company with respect to the Securities if the Company would be prohibited by this Article 14 from taking such action. SECTION 14.15 Rescission. The provisions of this Article 14 shall continue to be effective or be reinstated, as the case may be, if at any time any payment in respect of any of the Senior Debt is rescinded or must otherwise be returned by the holder thereof upon the insolvency, bankruptcy or reorganization of the Company or otherwise, all as though such payment had not been made. SECTION 14.16 Payment. For purposes of this Article XIV, "payment in full" of Senior Debt shall mean prior payment in full (including payment of reimbursement obligations under letters of credit) of such Senior Debt (including all interest accruing after the commencement of any bankruptcy or similar proceeding, whether or not a claim for post-petition interest is allowed as a claim in any such proceeding) in cash or other immediately available funds and termination, cash collateralization or replacement of contingent obligations (including all letters of credit issued thereunder but excluding only any unasserted indemnity obligations) and termination of all commitments thereunder. ARTICLE XV REPURCHASE OF SECURITIES AT THE OPTION OF THE HOLDER UPON A CHANGE IN CONTROL SECTION 15.1 Right to Require Repurchase. In the event that a Change in Control (as hereinafter defined) shall occur, then each Holder shall have the right, at the Holder's option, to require the Company to repurchase, and upon the exercise of such right the Company shall repurchase, all of such Holder's Securities, or any portion of the principal amount thereof that is equal to U.S.$1,000 or any integral multiple of U.S.$1,000 in excess thereof, on the date (the "Repurchase Date") that is 45 days after the date of the Company Notice (as defined in Section 15.2) at a purchase price equal to 100% of the principal amount of the Securities to be repurchased (the "Repurchase Price") plus interest accrued to the Repurchase Date; provided, however, that installments of interest on Securities whose Stated Maturity is on or prior to the Repurchase Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such on the relevant Record Date according to their terms and the provisions of Section 3.7. Such right to require the repurchase of the Securities shall not continue after a discharge of the Company from its -82- 90 obligations with respect to the Securities in accordance with Article IV, unless a Change in Control shall have occurred prior to such discharge. At the option of the Company, the Repurchase Price may be paid in cash or, except as otherwise provided in Section 15.2(j), by delivery of shares of Common Shares having a fair market value equal to the Repurchase Price; provided that payment may not be made in Common Shares unless at the time of payment such stock is listed on a national securities exchange or quoted on the Nasdaq National Market. For purposes of this Section, the fair market value of shares of Common Shares shall be determined by the Company and shall be equal to 95% of the average of the Closing Prices Per Share for the five consecutive Trading Days ending on and including the third Trading Day immediately preceding the Repurchase Date. Whenever in this Indenture there is a reference, in any context, to the principal of any Security as of any time, such reference shall be deemed to include reference to the Repurchase Price payable in respect of such Security to the extent that such Repurchase Price is, was or would be so payable at such time, and express mention of the Repurchase Price in any provision of this Indenture shall not be construed as excluding the Repurchase Price in those provisions of this Indenture when such express mention is not made. SECTION 15.2 Notices; Method of Exercising Repurchase Right, Etc. (a) Unless the Company shall have theretofore called for redemption all of the Outstanding Securities, on or before the 30th day after the occurrence of a Change in Control, the Company or, at the request and expense of the Company, the Trustee, shall give to all Holders of Securities, in the manner provided in Section 1.5, notice (the "Company Notice") of the occurrence of the Change in Control and of the repurchase right set forth herein arising as a result thereof. The Company shall also deliver a copy of such notice of a repurchase right to the Trustee. Each notice of a repurchase right shall state: (1) the Repurchase Date, (2) the date by which the repurchase right must be exercised, (3) the Repurchase Price, (4) a description of the procedure which a Holder must follow to exercise a repurchase right, and the place or places where such Securities are to be surrendered for payment of the Repurchase Price and accrued interest, if any, (5) that on the Repurchase Date the Repurchase Price, and accrued interest, if any, will become due and payable upon each such Security designated by the Holder to be repurchased, and that interest thereon shall cease to accrue on and after said date, (6) the Conversion Rate then in effect, the date on which the right to convert the principal amount of the Securities to be repurchased will terminate and the place or places where such Securities may be surrendered for conversion, and (7) the place or places that the certificate required by Section 2.3 shall be delivered, and the form of such certificate. -83- 91 In addition, at least two Business Days preceding the Repurchase Date, the Company shall give to all Holders of the Securities, in the manner provided in Section 1.5, notice specifying whether the Repurchase Price will be payable in cash or Common Shares and shall deliver a copy of such notice to the Trustee. No failure of the Company to give the foregoing notices or defect therein shall limit any Holder's right to exercise a repurchase right or affect the validity of the proceedings for the repurchase of Securities. If any of the foregoing provisions or other provisions of this Article are inconsistent with applicable law, such law shall govern. (b) To exercise a repurchase right, a Holder shall deliver to the Trustee or any Paying Agent on or before the 30th day after the date of the Company Notice (i) written notice of the Holder's exercise of such right, which notice shall set forth the name of the Holder, the principal amount of the Securities to be repurchased (and, if any Security is to repurchased in part, the serial number thereof, the portion of the principal amount thereof to be repurchased and the name of the Person in which the portion thereof to remain Outstanding after such repurchase is to be registered) and a statement that an election to exercise the repurchase right is being made thereby, and, in the event that the Repurchase Price shall be paid in Common Shares, the name or names (with addresses) in which the certificate or certificates for Common Shares shall be issued, and (ii) the Securities with respect to which the repurchase right is being exercised. Such written notice shall be irrevocable, except that the right of the Holder to convert the Securities with respect to which the repurchase right is being exercised shall continue until the close of business on the Repurchase Date. (c) In the event a repurchase right shall be exercised in accordance with the terms hereof, the Company shall pay or cause to be paid to the Trustee or the Paying Agent the Repurchase Price in cash or Common Shares, as provided above, for payment to the Holder on the Repurchase Date or, if Common Shares are to be paid, as promptly after the Repurchase Date as practicable, together with accrued and unpaid interest to the Repurchase Date payable with respect to the Securities as to which the purchase right has been exercised; provided, however, that installments of interest that mature on or prior to the Repurchase Date shall be payable in cash, in the case of Securities, to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Regular Record Date, in each case according to the terms and provisions of Article Three. (d) If any Security (or portion thereof) surrendered for repurchase shall not be so paid on the Repurchase Date, the principal amount of such Security (or portion thereof, as the case may be) shall, until paid, bear interest to the extent permitted by applicable law from the Repurchase Date at the rate of 5 1/4% per annum, and each Security shall remain convertible into Common Shares until the principal of such Security (or portion thereof, as the case may be) shall have been paid or duly provided for. (e) Any Security which is to be repurchased only in part shall be surrendered to the Trustee (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and make available for delivery to the Holder of such Security -84- 92 without service charge, a new Security or Securities, containing identical terms and conditions, each in an authorized denomination in aggregate principal amount equal to and in exchange for the unrepurchased portion of the principal of the Security so surrendered. (f) Any issuance of Common Shares in respect of the Repurchase Price shall be deemed to have been effected immediately prior to the close of business on the Repurchase Date and the Person or Persons in whose name or names any certificate or certificates for Common Shares shall be issuable upon such repurchase shall be deemed to have become on the Repurchase Date the holder or holders of record of the shares represented thereby; provided, however, that any surrender for repurchase on a date when the stock transfer books of the Company shall be closed shall constitute the Person or Persons in whose name or names the certificate or certificates for such shares are to be issued as the recordholder or holders thereof for all purposes at the opening of business on the next succeeding day on which such stock transfer books are open. No payment or adjustment shall be made for dividends or distributions on any Common Shares issued upon repurchase of any Security declared prior to the Repurchase Date. (g) No fractions of shares shall be issued upon repurchase of Securities. If more than one Security shall be repurchased from the same Holder and the Repurchase Price shall be payable in Common Shares, the number of full shares which shall be issuable upon such repurchase shall be computed on the basis of the aggregate principal amount of the Securities so repurchased. Instead of any fractional Common Share which would otherwise be issuable on the repurchase of any Security or Securities, the Company will deliver to the applicable Holder its check for the current market value of such fractional share. The current market value of a fraction of a share is determined by multiplying the current market price of a full share by the fraction, and rounding the result to the nearest cent. For purposes of this Section, the current market price of a Common Share is the Closing Price Per Share of the Common Shares on the last Trading Day prior to the Repurchase Date. (h) Any issuance and delivery of certificates for Common Shares on repurchase of Securities shall be made without charge to the Holder of Securities being repurchased for such certificates or for any tax or duty in respect of the issuance or delivery of such certificates or the securities represented thereby; provided, however, that the Company shall not be required to pay any tax or duty which may be payable in respect of (i) income of the Holder or (ii) any transfer involved in the issuance or delivery of certificates for Common Shares in a name other than that of the Holder of the Securities being repurchased, and no such issuance or delivery shall be made unless and until the Person requesting such issuance or delivery has paid to the Company the amount of any such tax or duty or has established, to the satisfaction of the Company, that such tax or duty has been paid. (i) If any Common Shares to be issued upon repurchase of Securities hereunder require registration with or approval of any governmental authority under any federal or state law before such shares may be validly issued or delivered upon repurchase, the Company covenants that it will in good faith and as expeditiously as possible endeavor to secure such registration or approval, as the case may be; provided, however, that nothing in this Section shall be deemed to affect in any way the obligations of the Company to repurchase Securities as provided in this Article and if such registration is not completed or does not become effective or such approval is not obtained prior to the Repurchase Date, the Repurchase Price shall be paid in cash. -85- 93 (j) The Company covenants that all Common Shares which may be issued upon repurchase of Securities will upon issue be duly and validly issued and fully paid and non-assessable. SECTION 15.3 Certain Definitions. For purposes of this Article XV, (a) the term "beneficial owner" shall be determined in accordance with Rule 13d-3, as in effect on the date of the original execution of this Indenture, promulgated by the Commission pursuant to the Exchange Act; (b) a "Change in Control" shall be deemed to have occurred at the time, after the original issuance of the Securities, of: (i) the acquisition by any Person of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of transactions, of shares of capital stock of the Company entitling such Person to exercise 50% or more of the total voting power of all shares of capital stock of the Company entitled to vote generally in the elections of directors (any shares of voting stock of which such person or group is the beneficial owner that are not then outstanding being deemed outstanding for purposes of calculating such percentage) other than any such acquisition by the Company, any Subsidiary of the Company or any employee benefit plan of the Company; or (ii) any consolidation of the Company with, or merger of the Company into, any other Person, any merger of another Person into the Company, or any sale or transfer of all or substantially all of the assets of the Company to another Person (other than a merger (x) which does not result in any reclassification, conversion, exchange or cancellation of outstanding Common Shares or (y) which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding Common Shares into solely Common Shares); provided, however, that a Change in Control shall not be deemed to have occurred if either (x) the Closing Price Per Share of the Common Shares for any five Trading Days within the period of 10 consecutive Trading Days ending immediately after the later of the date of the Change in Control or the date of the public announcement of the Change in Control (in the case of a Change in Control under Clause (i) above) or the period of 10 consecutive Trading Days ending immediately prior to the date of the Change in Control (in the case of a Change in Control under Clause (ii) above) shall equal or exceed 105% of the Conversion Price in effect on such trading day or (y) all of the consideration (excluding cash payments for fractional shares) to be paid for the Common Shares in a transaction or transactions constituting the Change in Control as described in Clause (ii) above consists of shares of common stock traded on a national securities exchange or quoted on the Nasdaq National Market and as a result of such transaction or transactions the Securities become convertible solely into such common stock; and (c) the term "Person" shall include any syndicate or group which would be deemed to be a "person" under Section 13(d)(3) of the Exchange Act, as in effect on the date of the original execution of this Indenture. -86- 94 ---------------------- This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. WILLIAMS-SONOMA, INC. By -------------------------------------- Name: Title: [SEAL] Attest: - ------------------------------- Name: ------------------------- Title: ------------------------- ------------------------- BANKERS TRUST COMPANY, not in its individual capacity but solely as Trustee By -------------------------------------- Name: Title: [SEAL] Attest: - ------------------------------- Name: ------------------------- Title: ------------------------- ------------------------- -87- 95 STATE OF _____________ ) : ss.: COUNTY OF _______________ ) On the ___ day of April 1996, before me personally came ______________, to me known, who, being by me duly sworn, did depose and say that he is ______________________ of Williams-Sonoma, Inc., one of the corporations described in and which executed the foregoing instrument; that he/she knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation; and that he/she signed his name thereto by like authority. ------------------------------------- Notary Public STATE OF ___________ ) : ss.: COUNTY OF _____________ ) On the ___ day of April 1996, before me personally came ______________, to me known, who, being by me duly sworn, did depose and say that he/she is ______________________ of Bankers Trust Company, one of the corporations described in and which executed the foregoing instrument; that he/she knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation; and that he/she signed his name thereto by like authority. ------------------------------------- Notary Public -88- EX-10.10B 6 REGISTRATION RIGHTS AGREEMENT 1 Exhibit 10.10B WILLIAMS-SONOMA, INC. 5 1/4% CONVERTIBLE SUBORDINATED NOTES DUE APRIL 15, 2003 REGISTRATION RIGHTS AGREEMENT Dated as of April 10, 1996 Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004. Ladies and Gentlemen: Williams-Sonoma, Inc., a California corporation (the "Company"), proposes to issue and sell to Goldman, Sachs & Co. (the "Purchaser") upon the terms set forth in a purchase agreement dated April 10, 1996 (the "Purchase Agreement") between the Purchaser and the Company, its 5 1/4% Convertible Subordinated Notes Due April 15, 2003 (the "Securities"). As an inducement to the Purchaser to enter into the Purchase Agreement and in satisfaction of a condition to the obligations of the Purchaser thereunder, the Company agrees with the Purchaser, (i) for the benefit of the Purchaser and (ii) for the benefit of the holders from time to time of the Securities and the Common Stock, par value $0.01 per share (the "Stock"), of the Company issuable upon conversion of the Securities (collectively, the "Registrable Securities"), including the Purchaser (each of the foregoing a "Holder" and, together, the "Holders"), as follows: 1. DEFINITIONS. Capitalized terms used herein without definition shall have their respective meanings set forth in or pursuant to the Purchase Agreement or the Offering Circular, dated April 10, 1996, in respect of the Securities. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Act" or "Securities Act" means the United States Securities Act of 1933, as amended. "Affiliate" of any specified person means any other person which, directly or indirectly, is in control of, is controlled by, or is under common control with such specified person. For purposes of this definition, control of a person means the power, direct or indirect, to direct or cause the direction of the management and policies of such person whether by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Commission" means the United States Securities and Exchange Commission. "DTC" means The Depository Trust Company. 2 "Effectiveness Period" has the meaning set forth in Section 2(b) hereof. "Exchange Act" means the United States Securities and Exchange Act of 1934, as amended. "Managing Underwriters" means the investment banker or investment bankers and manager or managers that shall administer an underwritten offering, if any, as set forth in Section 6 hereof. "Person" shall mean an individual, partnership, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof. "Prospectus" means the prospectus included in any Shelf Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A under the Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities. "Shelf Registration" means a registration effected pursuant to Section 2 hereof. "Shelf Registration Statement" means a shelf registration statement of the Company pursuant to the provisions of Section 2 hereof filed with the Commission which covers some or all of the Registrable Securities, as applicable, on an appropriate form under Rule 415 under the Act, or any similar rule that may be adopted by the Commission, amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "underwriter" means any underwriter of Registrable Securities in connection with an offering thereof under a Shelf Registration Statement. 2. SHELF REGISTRATION. (a) The Company shall, within 90 days following the date of original issuance (the "Issue Date") of the Securities, file with the Commission a Shelf Registration Statement relating to the offer and sale of the Registrable Securities by the Holders from time to time in accordance with the methods of distribution elected by such Holders and set forth in such Shelf Registration Statement and, thereafter, shall use its best efforts to cause such Shelf Registration Statement to be declared effective under the Act within 90 calendar days after the date of filing of such Shelf Registration Statement; provided, however, that no Holder shall be entitled to have the Registrable Securities held by it covered by such Shelf Registration unless such Holder is in compliance with Section 3(m) hereof. (b) The Company shall use its best efforts: (i) To keep the Shelf Registration Statement continuously effective in order to permit the Prospectus forming part thereof to be usable by Holders for a period of three years from the date the Shelf Registration Statement is declared effective or such shorter period that will terminate upon the earlier of the following: (A) when all the -2- 3 Securities covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement, (B) when all shares of Stock issued upon conversion of any such Securities that had not been sold pursuant to the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement and (C) when, in the written opinion of independent counsel to the Company, all outstanding Registrable Securities held by persons that are not affiliates of the Company may be resold without registration under the Act pursuant to Rule 144(k) under the Act or any successor provision thereto (in any such case, such period being called the "Effectiveness Period"); and (ii) After the effectiveness of the Shelf Registration Statement, promptly upon the request of any Holder, to take any action reasonably necessary to register the sale of any Registrable Securities of such Holder and to identify such Holder as a selling securityholder. The Company shall be deemed not to have used its best efforts to keep the Shelf Registration Statement effective during the requisite period if the Company voluntarily takes any action that would result in Holders of Registrable Securities covered thereby not being able to offer and sell any such Registrable Securities during that period, unless (i) such action in required by applicable law, or (ii) the continued effectiveness of the Shelf Registration Statement would require the Company to disclose a material financing, acquisition or other corporate transaction, and the Board of Directors shall have determined in good faith that such disclosure is not in the best interests of the Company and its stockholders, and, in the case of clause (i) above, the Company thereafter promptly complies with the requirements of paragraph 3(i) below. 3. REGISTRATION PROCEDURES. In connection with any Shelf Registration Statement, the following provisions shall apply: (a) The Company shall furnish to the Purchaser, prior to the filing thereof with the Commission, a copy of any Shelf Registration Statement, and each amendment thereof and each amendment or supplement, if any, to the Prospectus included therein and shall use its best efforts to reflect in each such document, when so filed with the Commission, such comments as the Purchaser reasonably may propose. (b) The Company shall take such action as may be necessary so that (i) any Shelf Registration Statement and any amendment thereto and any Prospectus forming part thereof and any amendment or supplement thereto (and each report or other document incorporated therein by reference in each case) complies in all material respects with the Securities Act and the Exchange Act and the respective rules and regulations thereunder, (ii) any Shelf Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any Prospectus forming part of any Shelf Registration Statement, and any amendment or supplement to such Prospectus, does not include an untrue statement of a material fact or omit to state a material fact necessary in -3- 4 order to make the statements, in the light of the circumstances under which they were made, not misleading. (c) (1) The Company shall advise the Purchaser and, in the case of clause (i), the Holders and, if requested by the Purchaser or any such Holder, confirm such advice in writing: (i) when a Shelf Registration Statement and any amendment thereto has been filed with the Commission and when the Shelf Registration Statement or any post-effective amendment thereto has become effective; and (ii) of any request by the Commission for amendments or supplements to the Shelf Registration Statement or the Prospectus included therein or for additional information. (2) The Company shall advise the Purchaser and the Holders and, if requested by the Purchaser or any such Holder, confirm such advice in writing of: (i) the issuance by the Commission of any stop order suspending effectiveness of the Shelf Registration Statement or the initiation of any proceedings for that purpose; (ii) the receipt by the Company of any notification with respect to the suspension of the qualification of the securities included therein for sale in any jurisdiction or the initiation of any proceeding for such purpose; and (iii) the happening of any event that requires the making of any changes in the Shelf Registration Statement or the Prospectus so that, as of such date, the Shelf Registration Statement and the Prospectus do not contain an untrue statement of a material fact and do not omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading (which advice shall be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made). (d) The Company shall use its best efforts to prevent the issuance, and if issued to obtain the withdrawal, of any order suspending the effectiveness of any Shelf Registration Statement at the earliest possible time. (e) The Company shall furnish to each Holder of Registrable Securities included within the coverage of any Shelf Registration Statement, without charge, at least one copy of such Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if the Holder so requests in writing, all reports, other documents and exhibits (including those incorporated by reference). (f) The Company shall, during the Effectiveness Period, deliver to each Holder of Registrable Securities included within the coverage of any Shelf Registration Statement, -4- 5 without charge, as many copies of the Prospectus (including each preliminary Prospectus) included in such Shelf Registration Statement and any amendment or supplement thereto as such Holder may reasonably request; and the Company consents (except during the continuance of any event described in Section 3(c)(2)(iii)) to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of Registrable Securities in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto during the Shelf Registration Period. (g) Prior to any offering of Registrable Securities pursuant to any Shelf Registration Statement, the Company shall register or qualify or cooperate with the Holders of Registrable Securities included therein and their respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or blue sky laws of such jurisdictions as any such Holders reasonably request in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such jurisdictions of the Registrable Securities covered by such Shelf Registration Statement; provided, however, that in no event shall the Company be obligated to (i) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be required to so qualify but for this Section 3(g) or (ii) file any general consent to service of process in any jurisdiction where it is not as of the date hereof then so subject. (h) Unless any Registrable Securities shall be in book-entry only form, the Company shall cooperate with the Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold pursuant to any Shelf Registration Statement free of any restrictive legends and in such permitted denominations and registered in such names as Holders may request in connection with the sale of Registrable Securities pursuant to such Shelf Registration Statement. (i) Upon the occurrence of any event contemplated by paragraph 3(c)(2)(iii) above, the Company shall promptly prepare a post-effective amendment to any Shelf Registration Statement or an amendment or supplement to the related Prospectus or file any other required document so that, as thereafter delivered to purchasers of the Registrable Securities included therein, the Prospectus will not include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. If the Company notifies the Holders of the occurrence of any event contemplated by paragraph 3(c)(2)(iii) above, the Holders shall suspend the use of the Prospectus until the requisite changes to the Prospectus have been made. (j) Not later than the effective date of any Shelf Registration Statement hereunder, the Company shall provide a CUSIP number for the Securities registered under such Shelf Registration Statement. (k) The Company shall use its best efforts to comply with all applicable rules and regulations of the Commission and shall make generally available to their security -5- 6 holders or otherwise provide in accordance with Section 11(a) of the Securities Act as soon as practicable after the effective date of the applicable Shelf Registration Statement an earnings statement satisfying the provisions of Section 11(a) of the Securities Act. (l) The Company shall cause the Indenture and the Securities to be qualified under the Trust Indenture Act in a timely manner. (m) The Company may require each Holder of Registrable Securities to be sold pursuant to any Shelf Registration Statement to furnish to the Company such information regarding the Holder and the distribution of such Registrable Securities as may be required by applicable law or regulation for inclusion in such Shelf Registration Statement and the Company may exclude from such registration the Registrable Securities of any Holder that fails to furnish such information within a reasonable time after receiving such request. (n) The Company shall, if requested, promptly include or incorporate in a Prospectus supplement or post-effective amendment to a Shelf Registration Statement, such information as the Managing Underwriters reasonably agree should be included therein and to which the Company does not reasonably object and shall make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after they are notified of the matters to be included or incorporated in such Prospectus supplement or post-effective amendment. (o) The Company shall enter into such customary agreements (including underwriting agreements in customary form) to take all other appropriate actions in order to expedite or facilitate the registration or the disposition of the Registrable Securities, and in connection therewith, if an underwriting agreement is entered into, cause the same to contain indemnification provisions and procedures substantially identical to those set forth in Section 5 (or such other provisions and procedures acceptable to the Managing Underwriters, if any) with respect to all parties to be indemnified pursuant to Section 5. (p) The Company shall: (i) make reasonably available for inspection by the Holders of Registrable Securities to be registered thereunder, any underwriter participating in any disposition pursuant to such Shelf Registration Statement, and any attorney, accountant or other agent retained by such Holders or any such underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries; (ii) cause the Company's officers, directors and employees to make reasonably available for inspection all relevant information reasonably requested by such Holders or any such underwriter, attorney, accountant or agent in connection with any such Shelf Registration Statement, in each case, as is customary for similar due diligence examinations; provided, however, that any -6- 7 information that is designated in writing by the Company, in good faith, as confidential at the time of delivery of such information shall be kept confidential by such Holders or any such underwriter, attorney, accountant or agent, unless such disclosure is made in connection with a court proceeding or required by law, or such information becomes available to the public generally or through a third party without an accompanying obligation of confidentiality; and provided further that the foregoing inspection and information gathering shall, to the greatest extent possible, be coordinated on behalf of the Holders and the other parties entitled thereto by one counsel designated by and on behalf of such Holders and other parties; (iii) make such representations and warranties to the Holders of Registrable Securities registered thereunder and the underwriters, if any, in form, substance and scope as are customarily made by the Company to underwriters in primary underwritten offerings and covering matters including, but not limited to, those set forth in the Purchase Agreement; (iv) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the Managing Underwriters, if any) addressed to each selling Holder and the underwriters, if any, covering such matters as are customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such Holders and underwriters (it being agreed that the matters to be covered by such opinion or written statement by such counsel delivered in connection with such opinions shall include in customary form, without limitation, as of the date of the opinion and as of the effective date of the Shelf Registration Statement or most recent post-effective amendment thereto, as the case may be, the absence from such Shelf Registration Statement and the prospectus included therein, as then amended or supplemented, including the documents incorporated by reference therein, of an untrue statement of a material fact or the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; (v) obtain "cold comfort" letters and updates thereof from the independent public accountants of the Company (and, if necessary, any other independent public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Shelf Registration Statement), addressed to each such Holder of Registrable Securities registered thereunder and the underwriters, if any, in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with primary underwritten offerings; (vi) deliver such documents and certificates as may be reasonably requested by any such Holders and the Managing Underwriters, if any, including those to evidence compliance with Section 3(i) and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. -7- 8 The foregoing actions set forth in clauses (iii), (iv), (v) and (vi) of this Section 3(p) shall be performed at each closing under any underwritten offering to the extent required thereunder. (q) The Company will use its best efforts to cause the Securities and the Stock issuable upon conversion thereof to be listed for quotation on the Nasdaq National Market or other stock exchange or trading system on which the Stock primarily trades on or prior to the effective date of any Shelf Registration Statement hereunder. (r) In the event that any broker-dealer registered under the Exchange Act shall underwrite any Registrable Securities or participate as a member of an underwriting syndicate or selling group or "assist in the distribution" (within the meaning of the Rules of Fair Practice and the By-Laws of the National Association of Securities Dealers, Inc. ("NASD")) thereof, whether as a Holder of such Registrable Securities or as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, assist such broker-dealer in complying with the requirements of such Rules and By-Laws, including, without limitation, by (A) such Rules or By-Laws, including Schedule E thereto, shall so require, engaging a "qualified independent underwriter" (as defined in Schedule E) to participate in the preparation of the Shelf Registration Statement relating to such Registrable Securities and to exercise usual standards of due diligence in respect thereto, (B) indemnifying any such qualified independent underwriter to the extent of the indemnification of underwriters provided in Section 5 hereof and (C) providing such information to such broker-dealer as may be required in order for such broker-dealer to comply with the requirements of the Rules of Fair Practice of the NASD. (s) The Company shall use its best efforts to take all other steps necessary to effect the registration, offering and sale of the Registrable Securities covered by the Shelf Registration Statement contemplated hereby. 4. REGISTRATION EXPENSES. Except as otherwise provided in Section 6, the Company shall bear all fees and expenses incurred in connection with the performance of its obligations under Sections 2 and 3 hereof and shall bear or reimburse the Holders for the reasonable fees and disbursements of one firm of counsel designated by the Company and reasonably acceptable to the Holders of a majority of the Registrable Securities covered by the Shelf Registration Statement to act as counsel therefor in connection therewith. 5. INDEMNIFICATION AND CONTRIBUTION. (a) In connection with any Shelf Registration Statement, the Company shall indemnify and hold harmless the Purchaser, each Holder, each underwriter who participates in an offering of Registrable Securities, each person, if any, who controls any of such parties within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and each of their respective directors, officers, employees, trustees and agents, as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, including any amounts paid in settlement of any investigation, litigation, proceeding or claim, joint or several, as incurred, arising out of any untrue statement or alleged untrue -8- 9 statement of a material fact contained in any Shelf Registration Statement (or any amendment thereto) covering Registrable Securities, including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, that the Company shall not be liable under this clause (i) for any settlement of any action effected without its written consent, which consent shall not be unreasonably withheld; and (ii) against any and all expenses whatsoever, as incurred (including reasonable fees and disbursements of counsel chosen by the Holders, such Holder or any underwriter (except to the extent otherwise expressly provided in Section 5(c) hereof)), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any court or governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under subparagraph (i) of this Section 5(a); provided that this indemnity shall not apply to any loss, liability, claim, damage or expense to the extent arising out of an untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by the Purchaser, such Holder or any underwriter in writing expressly for use in the Shelf Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto). Any amounts advanced by the Company to an indemnified party pursuant to this Section 5 as a result of such losses shall be returned to the Company if it shall be finally determined by such a court in a judgment not subject to appeal or final review that such indemnified party was not entitled to indemnification by the Company. (b) Each Holder agrees, severally and not jointly, to indemnify and hold harmless the Company, the Purchaser, each underwriter who participates in an offering of Registrable Securities and the other selling Holders and each of their respective directors, officers (including each officer of the Company who signed the Shelf Registration Statement), employees, trustees and agents and each Person, if any, who controls the Company, the Purchaser, any underwriter or any other selling Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all loss, liability, claim, damage and expense whatsoever described in the indemnity contained in Section 5(a)(i) and (ii) hereof, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Shelf Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such selling Holder expressly for use in the Shelf Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto); provided, however, that, no such Holder shall be -9- 10 liable for any claims hereunder in excess of the amount of net proceeds received by such Holder from the sale of Registrable Securities pursuant to the Shelf Registration Statement. (c) Each indemnified party shall give prompt notice to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, enclosing a copy of all papers served on such indemnified party, but failure to so notify an indemnifying party shall not relieve it of any liability which it may have to the indemnified party otherwise than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of any such action. If an indemnifying party so elects within a reasonable time after receipt of such notice, such indemnifying party, jointly with any other indemnifying party, may assume the defense of such action with counsel chosen by it and approved by the indemnified party or parties defendant in such action, provided that if any such indemnified party reasonably determines that there may be legal defenses available to such indemnified party which are different from or in addition to those available to such indemnifying party or that representation of such indemnifying party and any indemnified party by the same counsel would present a conflict of interest, then such indemnifying party or parties shall not be entitled to assume such defense. If an indemnifying party is not entitled to assume the defense of such action as a result of the proviso to the preceding sentence, counsel for such indemnifying party shall be entitled to conduct the defense of such indemnifying party and counsel for each indemnified party or parties shall be entitled to conduct the defense of such indemnified party or parties. If an indemnifying party assumes the defense of an action in accordance with and as permitted by the provisions of this paragraph, such indemnifying party shall not be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter in connection with such action. In no event shall the indemnifying party or parties be liable for the fees and expenses of more than one counsel (in addition to any local counsel) separate from its own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. (d) In order to provide for just and equitable contribution in circumstances in which the indemnity provision agreement provided for in this Section 5 is for any reason held to be unavailable to the indemnified parties although applicable in accordance with its terms, the Company, the Purchaser and the Holders shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by said indemnity agreement incurred by the Company, the Purchaser and the Holders, as incurred; provided that no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person that was not guilty of such fraudulent misrepresentation. As between the Company, the Purchaser and the Holders, such parties shall contribute to such aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity agreement in such proportion as shall be appropriate to reflect the relative fault of the Company, on the one hand, and the Purchaser and the Holders, on the other hand, with respect to the statements or omissions which resulted in such loss, liability, claim, damage or expense, or action in respect thereof, as well as any other relevant equitable considerations. The relative fault of the Company, on the one hand, and of the Purchaser and the Holders, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the -10- 11 Company, on the one hand, or by or on behalf of the Purchaser or the Holders, on the other, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. the Company, the Purchaser and the Holders of the Registrable Securities agree that it would not be just and equitable if contribution pursuant to this Section 5 were to be determined by pro rata allocation or by any other method of allocation that does not take into account the relevant equitable considerations. For purposes of this Section 5(d), each director, officer, employee, trustee, agent and Person, if any, who controls the Purchaser or a Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Purchaser or such Holder, and each director, officer, employee, trustee and agent of the Company, and each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Company. No party shall be liable for contribution with respect to any action, suit, proceeding or claim settled without its written consent. 6. UNDERWRITTEN OFFERING. The Holders of Registrable Securities covered by the Shelf Registration Statement who desire to do so may sell such Registrable Securities in an underwritten offering. In any such underwritten offering, the investment banker or bankers and manager or managers that will administer the offering will be selected by, and the underwriting arrangements with respect thereto will be approved by the Holders of a majority of the Registrable Securities to be included in such offering; provided, however, that (i) such investment bankers and managers and underwriting arrangements must be reasonably satisfactory to the Company and (ii) the Company shall not be obligated to arrange for more than one underwritten offering during the Effectiveness Period. No Holder may participate in any underwritten offering contemplated hereby unless such Holder (a) agrees to sell such Holder's Registrable Securities in accordance with any approved underwriting arrangements, (b) completes and executes all reasonable questionnaires, powers of attorney, indemnities, underwriting agreements, lock-up letters and other documents required under the terms of such approved underwriting arrangements and (c) at least 20% of the outstanding Registrable Securities are included in such underwritten offering. The Holders participating in any underwritten offering shall be responsible for any expenses customarily borne by selling securityholders, including underwriting discounts and commissions and fees and expenses of counsel to the selling securityholders and shall reimburse the Company for the fees and disbursements of their counsel, their independent public accountants and any printing expenses incurred in connection with such underwritten offerings. Notwithstanding the foregoing or the provisions of Section 3(n) hereof, upon receipt of a request from the Managing Underwriter or a representative of Holders of a majority of the Registrable Securities outstanding to prepare and file an amendment or supplement to the Shelf Registration Statement and Prospectus in connection with an underwritten offering, the Company may delay the filing of any such amendment or supplement for up to 90 days if the Company in good faith has a valid business reason for such delay. 7. MISCELLANEOUS. (a) Other Registration Rights. The Company may grant registration rights that would permit any Person that is a third party the right to piggy-back on any Shelf Registration Statement, provided that if the Managing Underwriter, if any, of such offering delivers an -11- 12 opinion to the selling Holders that the total amount of securities which they and the holders of such piggy-back rights intend to include in any Shelf Registration Statement is so large as to materially adversely affect the success of such offering (including the price at which such securities can be sold), then only the amount, the number or kind of securities to be offered for the account of holders of such piggy-back rights will be reduced to the extent necessary to reduce the total amount of securities to be included in such offering to the amount, number or kind recommended by the Managing Underwriter prior to any reduction in the amount of Registrable Securities to be included. (b) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, qualified, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of the Purchaser. (c) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery: (1) if to a Holder, at the most current address given by such Holder to the Company in accordance with the provisions of this Section 6(c); (2) if to the Purchaser, initially at the address set forth in the Purchase Agreement; and (3) if to the Company, initially at its address set forth in the Purchase Agreement. All such notices and communications shall be deemed to have been duly given when received. The Purchaser or the Company by notice to the other may designate additional or different addresses for subsequent notices or communications. (d) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties and the Holders, including, without the need for an express assignment or any consent by the Company thereto, subsequent Holders of Registrable Securities. The Company hereby agrees to extend the benefits of this Agreement to any Holder of Registrable Securities and any such Holder may specifically enforce the provisions of this Agreement as if an original party hereto. (e) Counterparts. This agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (f) Headings. The headings in this agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. -12- 13 (g) Governing Law. This agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to any provisions relating to conflicts of laws. (h) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected thereby, it being intended that all of the rights and privileges of the parties shall be enforceable to the fullest extent permitted by law. -13- 14 Please confirm that the foregoing correctly sets forth the agreement between the Company and you. Very truly yours, WILLIAMS-SONOMA, INC. By: ------------------------------- Name: Title: The foregoing Registration Rights Agreement is hereby confirmed and accepted as of the date first above written. - ------------------------------- (Goldman, Sachs & Co.) -14- EX-10.11 7 STANDARD FORM OFFICE LEASE 1 EXHIBIT 10.11 STANDARD FORM OFFICE LEASE THIS LEASE is made as of the 2nd day of January, 1996, by and between Landlord and Tenant. W I T N E S S E T H: 1. Terms and Definitions. For the purposes of this Lease, the following terms shall have the following definitions and meanings: (a) LANDLORD: HOWARD HUGHES PROPERTIES, LIMITED PARTNERSHIP, a Delaware limited partnership. (b) LANDLORD'S ADDRESS: Howard Hughes Corporation 1635 Village Center Circle Suite 140 Las Vegas, Nevada 89134 Attn: Barbara Helgren (c) TENANT: WILLIAMS-SONOMA, INC., a California corporation. (d) TENANT'S ADDRESS: Copy to: Williams-Sonoma, Inc. Irell & Manella 3250 Van Ness Avenue 1800 Avenue of the Stars, #900 San Francisco, California 94109 Los Angeles, California 90067 Attn: Mr. Patrick Connolly Attn: Sandra G. Kanengeiser, Esq. (e) PREMISES ADDRESS: 10,000 Covington Cross Drive, Las Vegas, Nevada (subject to confirmation upon receipt of a building permit for the Improvements). (f) PREMISES: Those certain premises defined in Subparagraph 2(a) hereinbelow. (g) APPROXIMATE RENTABLE SQUARE FEET WITHIN IMPROVEMENTS: 35,867. (h) TERM: Ten (10) Lease Years, with three (3) five (5) year options to extend. (i) IMPROVEMENTS: Those improvements constructed by Landlord as set forth in the Work Letter. (j) ESTIMATED COMMENCEMENT DATE: August 1, 1996. (k) COMMENCEMENT DATE: Subject to Tenant Delays, as defined in the Work Letter Agreement, the date upon which the Improvements have been substantially completed as determined by Landlord's architect or space planner. The Improvements shall be deemed substantially completed upon (i) completion of the Improvements other than the Punch List Items, (ii) receipt of a Certificate of Occupancy or Temporary Certificate of Occupancy (or its equivalent) for the Improvements and (iii) Tenant's receipt of written notice from Landlord specifying the date upon which Landlord projects that the Improvements will be substantially completed, which notice 2 shall be delivered by Landlord at least five (5) business days, but no more than thirty (30) days, prior to the projected date for substantial completion. (l) ANNUAL BASIC RENT; MONTHLY BASIC RENT: Lease Years Annual Basic Rent Monthly Basic Rent 1-5 $529,396.92 $44,116.41 6-10 $598,261.56 $49,855.13 (m) OPERATING EXPENSES ALLOWANCE: Operating Expenses for calendar year 1996. In the event the Landlord has not incurred Operating Expenses during the entire 1996 calendar year, then Landlord will annualize those Operating Expenses incurred during the partial calendar year in order to determine the Operating Expenses Allowance. (n) PERMITTED USE: Any use permitted by applicable law which is consistent with other uses then existing within The Crossing Business Center in Las Vegas, Nevada (the "PROJECT") and subject to Paragraph 8 below. (o) BROKERS: CB Commercial Real Estate Services. (p) LANDLORD'S CONSTRUCTION REPRESENTATIVE: Frank Beck. (q) TENANT'S CONSTRUCTION REPRESENTATIVE: Susan Browne. (r) LEASE YEAR: A period of twelve (12) consecutive months, the first such period commencing on the Commencement Date and consecutive periods beginning on each consecutive anniversary thereof. (s) EXHIBITS: "A" through "G" inclusive, which Exhibits are attached to this Lease and are incorporated herein by this reference. 2. Premises Leased. (a) Initial Premises. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the parcel of real property legally described on Exhibit "A" attached hereto and outlined on the Site Plan attached hereto as Exhibit "B", and all improvements from time to time located thereon, including the Improvements to be constructed by Landlord as described in the Work Letter Agreement attached hereto as Exhibit "C" (the "PREMISES"), said Premises being agreed, for the purposes of this Lease, to have the number of rentable square feet as designated in Subparagraph 1(g) (subject to adjustment as provided in Exhibit "D" attached hereto). Upon the Commencement Date, Landlord and Tenant shall compile a list of incomplete and/or corrective Improvement items (collectively, "PUNCH LIST ITEMS"), which items Landlord shall complete and/or correct promptly thereafter and Landlord shall remain responsible for the completion and/or correction of such items. In addition, Landlord shall be responsible, at Landlord's sole cost and expense, for any latent defects in the Improvements and for any other defects disclosed in writing by Tenant to Landlord within the first year after the Commencement Date. Landlord shall construct the Improvements in compliance with all laws in effect at the time of construction. The parties hereto agree that said letting and hiring is upon and subject to the terms, covenants and conditions herein set forth and Tenant covenants as a material part of the consideration for this Lease to keep and perform each and all of said terms, covenants and conditions by it to be kept and performed and that this Lease is made upon the condition of such performance. (b) Expansion Premises. Tenant shall have the option ("EXPANSION OPTION") to cause Landlord to expand the Premises to accommodate an additional 17,920 rentable square feet of improved space, together with parking areas for an additional 135 -2- 3 cars, in the location depicted on Exhibit "B" attached hereto and described in Exhibit "A" attached hereto (the "EXPANSION PREMISES"). The Expansion Option shall not, at Landlord's election, be exercisable if Tenant is in default under Paragraph 25 of this Lease at the time Tenant attempts to exercise the Expansion Option. The Expansion Option is personal to the Tenant named in Subparagraph 1(c) ("ORIGINAL TENANT") or to any "Affiliate Assignee" (as that term is defined in Paragraph 26 below) and may not be exercised by any other person or entity. In order to exercise the Expansion Option, Tenant must deliver written notice ("EXPANSION NOTICE") thereof to Landlord prior to the expiration of the third (3rd) Lease Year. Upon Tenant's timely exercise of the Expansion Option, Landlord shall cause the construction of the Expansion Premises in accordance with the terms of the Work Letter Agreement, except that: (i) the Preliminary Plans prepared pursuant to Paragraph 2.2 of the Work Letter Agreement shall be based upon the preliminary plans for the original Improvements; (ii) the Allowance shall be the product of $25.00 per rentable square foot of the improvements to be constructed for the Expansion Premises multiplied by a fraction, the numerator of which is the number of months remaining in the initial Term following the Estimated Commencement Date for the Expansion Premises, and the denominator of which is one hundred twenty (120); (iii) the schedule set forth in Paragraph 6 of the Work Letter Agreement will be modified as mutually agreed by Landlord and Tenant in good faith as soon as reasonably possible after the date of Landlord's receipt of the Expansion Notice and (iv) Paragraph 7.2 of the Work Letter Agreement shall not apply to construction of the Expansion Premises. Subject to applicable laws, the Base Improvements provided by Landlord for the Expansion Premises shall be substantially the same as the Base Improvements provided by Landlord for the original Improvements. The Estimated Commencement Date for the Expansion Premises will be twelve (12) months following the date of Landlord's receipt of the Expansion Notice; provided, however, that upon request from Tenant, Landlord shall use commercially reasonable efforts to accelerate construction of improvements in the Expansion Premises. The actual Commencement Date for Tenant's lease of the Expansion Premises will be the date upon which the Expansion Premises has been substantially completed as determined by Landlord's architect or space planner (as substantial completion is defined in Subparagraph 1(k) above and subject to acceleration for Tenant Delays). The Term of Tenant's lease of the Expansion Premises shall be co-terminous with the Term of Tenant's lease of the original Premises. Effective upon the Commencement Date for the Expansion Premises, (i) the Expansion Premises shall become a portion of the Premises for all purposes under this Lease, (ii) Annual Basic Rent shall be increased by an amount equal to the product of the then-current Annual Basic Rent (on a rentable square foot basis) multiplied by the rentable square footage contained in the improvements to be constructed for the Expansion Premises and (iii) the Operating Expenses Allowance shall be increased by an amount equal to the product of the Operating Expenses Allowance (on a rentable square foot basis) multiplied by the rentable square footage contained in the improvements to be constructed for the Expansion Premises. (c) Service Facilities. Landlord reserves the right, and Tenant shall have no right, of access to the Service Facilities, as defined in Subparagraph 14(a)(ii). 3. Term. (a) Initial Term. The Term of this Lease shall be for the period designated in Subparagraph 1(h) commencing on the Commencement Date, and ending on the expiration of such period, unless such Term shall be sooner terminated or extended as hereinafter provided. The Commencement Date and the date upon which the Term of this Lease shall end shall be determined in accordance with the provisions of Subparagraph 1(k) and said dates will be specified in Landlord's Notice of Lease Term Dates ("NOTICE"), in the form of Exhibit "E" attached hereto, and shall be served upon Tenant as provided in Paragraph 9, after Landlord delivers or tenders possession of the Premises to Tenant and Tenant has accepted possession of the Premises in accordance with the terms of this Lease. The Notice shall be binding upon Tenant unless Tenant objects to the Notice in writing, served upon Landlord as provided for in Paragraph 9 hereof, within ten (10) business days of Tenant's receipt of the Notice. -3- 4 (b) Options to Extend. (i) Option Rights. Landlord hereby grants to Tenant three (3) options ("EXTENSION OPTIONS") to extend the Lease Term for periods of five (5) years each ("OPTION TERMS"). The Extension Option shall not, at Landlord's election, be exercisable if Tenant is in default under Paragraph 25 of this Lease after expiration of applicable cure periods at the time Tenant attempts to exercise the Extension Option or, following such exercise, prior to the commencement of the Option Term. The Extension Option is personal to the Original Tenant or any assignee of the Original Tenant's entire interest in this Lease where such assignment is permitted pursuant to Paragraph 26 below and may not be exercised by any other person or entity. Provided Tenant has properly and timely exercised an Extension Option, the then current Term shall be extended for the period specified above, and all terms, covenants and conditions of this Lease shall remain unmodified and in full force and effect except that Annual Basic Rent payable by Tenant during the Option Term shall be adjusted as set forth in Subparagraph 2(b)(ii). In no event shall Tenant be entitled to exercise the second (2nd) Extension Option unless Tenant has properly and timely exercised the first Extension Option and in no event shall Tenant be entitled to exercise the third (3rd) Extension Option unless Tenant has properly and timely exercised the first and second (2nd) Extension Options. In no event shall Tenant be entitled to extend the Lease Term beyond the third (3rd) Option Term. (ii) Option Rent. The Annual Basic Rent payable by Tenant during the Option Term (the "OPTION RENT") shall be one hundred percent (100%) of the "Fair Market Rental Rate" for the Premises; however, the Annual Basic Rent for the Option Term shall not be below the Annual Basic Rent payable for the Lease Year immediately preceding the Option Term. The term "FAIR MARKET RENTAL RATE" shall mean the annual amount that a willing, non-equity, third-party tenant would pay and a willing, comparable landlord would accept, on a non-renewal basis, at arm's length, for space unencumbered by any other tenant's expansion rights, which space is comparable to the Premises and similarly improved in projects of comparable age, size and quality in Las Vegas, Nevada, including The Crossing Business Center ("COMPARABLE PROJECTS"), giving appropriate consideration to appropriate concessions and to all economic terms, such as annual rental rates, escalation clauses (including type, such as net, base year or expense stop), abatement provisions reflecting free rent, if any, parking terms and availability, length of lease term, size and location of premises being leased, and other generally acceptable terms and conditions for the tenancy of the space in question (but without any deduction for the absence of an obligation of the landlord to pay a brokerage commission if a comparable transaction does not include such an obligation). The parties agree that if Landlord is not obligated to pay a broker's commission in connection with an Extension Option, that the Fair Market Rental Rate shall reflect that Landlord will be entitled to retain fifty percent (50%) of the savings resulting from the fact that no such commission (calculated at the rate then generally paid for comparable transactions in Comparable Projects) is paid and that Tenant is entitled to the remaining fifty percent (50%) of the savings from the fact that no such commission is being paid. (iii) Exercise of Options. The Extension Options shall be exercised by Tenant, if at all, only in the following manner: (A) Tenant shall deliver written notice to Landlord not more than fifteen (15) months nor less than eleven (11) months prior to the expiration of the initial Term (or preceding Option Term, as applicable) stating that Tenant is interested in exercising the Extension Option, (B) Landlord, after receipt of Tenant's notice, shall deliver notice (the "OPTION RENT NOTICE") to Tenant within forty-five (45) days after Landlord's receipt of such notice from Tenant setting forth Landlord's initial determination of the Option Rent, which shall be applicable to this Lease during the Option Term; and (C) if Tenant wishes to exercise the Extension Option, Tenant shall, on or before the date occurring thirty (30) days after Tenant's receipt of the Option Rent -4- 5 Notice, exercise the Extension Option by delivering written notice thereof to Landlord, and upon, and concurrent with, such exercise, Tenant may, at its option, object in writing to the Option Rent contained in the Option Rent Notice, in which case the parties shall follow the procedure, and the Option Rent shall be determined, as set forth in Subparagraph 2(b)(iv) below. (iv) Determination of Option Rent. In the event Tenant timely objects in writing to the Option Rent initially determined by Landlord, Landlord and Tenant shall attempt to agree upon the Option Rent using their best good-faith efforts. If Landlord and Tenant fail to reach agreement within forty-five (45) days following Tenant's objection to the Option Rent (the "OUTSIDE AGREEMENT DATE"), then each party shall submit to the other party a separate written determination of the Option Rent within five (5) days after the Outside Agreement Date, and such determinations shall be submitted to arbitration in accordance with clauses (A) through (G) below. Failure of Tenant or Landlord to submit a written determination of the Option Rent within such five (5) day period shall conclusively be deemed to be the non-determining party's approval of the Option Rent submitted within such five (5) day period by the other party. (A) Each party shall, within ten (10) days following the Outside Agreement Date, appoint a licensed, disinterested M.A.I. Appraiser having substantial experience with comparable buildings in Las Vegas, Nevada (a "QUALIFIED APPRAISER") and give written notice of such appointment to the other. If either party fails to notify the other of the appointment of its Qualified Appraiser within the time period specified above, then the Qualified Appraiser appointed shall be the sole appraiser to determine the Option Rent; (B) In the event two (2) Qualified Appraisers are chosen as herein provided, the Qualified Appraisers so chosen shall meet within ten (10) business days after they are appointed as aforesaid, and, if within ten (10) business days after such first meeting, the two (2) Qualified Appraisers fail to come to a mutual determination as to the appropriate Option Rent, they themselves shall appoint a third Qualified Appraiser, who shall be a competent and disinterested person with qualifications similar to those required of the first two (2) Qualified Appraisers as herein provided. In the event the first two (2) Qualified Appraisers fail to agree upon and select a third Qualified Appraiser within ten (10) days after the expiration of said ten (10) day period, the third Qualified Appraiser shall be selected by any judge with authority under Nevada law and the parties shall not raise any questions or objections as to such judge's full power, jurisdiction, and authority to select said Qualified Appraiser; (C) Within ten (10) days after appointment of the third Qualified Appraiser, each of the three (3) Qualified Appraisers selected shall state in writing his or her respective opinion as to the appropriate Option Rent, supported by the reasons therefor with counterpart copies to each party; (D) The Qualified Appraisers shall arrange for a simultaneous exchange of such determinations promptly. The opinion as to the Option Rent which is the furthest from the middle value shall be excluded and the Option Rent for purposes hereof shall be the average of the remaining two (2) opinions and shall constitute the decision of the Qualified Appraisers and be final and binding on Landlord and Tenant; provided, however, that if both other opinions are equally distant in opposite directions from the middle value, then the middle value shall constitute the Option Rent. The Qualified Appraisers shall give written notice to the parties stating their determination, and shall furnish to each -5- 6 party a signed copy of such determination. The Qualified Appraisers shall have no power to modify the provisions of this Lease. (E) In the event of a failure, refusal or inability of any Qualified Appraiser to act, a successor shall be appointed by the party who originally appointed the Qualified Appraiser, but in the case of the third Qualified Appraiser, the third Qualified Appraiser's successor shall be appointed in the same manner as provided for appointment of the third Qualified Appraiser. Each party shall pay the fees and expenses of the party's own Qualified Appraiser and shall share equally the fees and expenses of the third Qualified Appraiser and all other expenses of the appraisal. 4. Possession. Tenant agrees that in the event of the inability of Landlord to deliver possession of the Premises to Tenant on the Estimated Commencement Date, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom, except as expressly provided in Paragraph 7.2 of Exhibit "C". 5. Annual Basic Rent. Tenant agrees to pay Landlord as Annual Basic Rent for the Premises the Annual Basic Rent designated in Subparagraph 1(l) in twelve (12) equal monthly installments, each in advance on the first day of each and every calendar month during the Term, except that the first full month's rent shall be paid upon the execution hereof. In the event the Term of this Lease commences or ends on a day other than the first day of a calendar month, then the rental for such periods shall be prorated in the proportion that the number of days this Lease is in effect during such periods bears to thirty (30), and such rental shall be paid at the commencement of such periods. In addition to said Annual Basic Rent, Tenant agrees to pay the amount of the rental adjustments as additional rent when hereinafter provided in this Lease. Said Annual Basic Rent, additional rent, and rental adjustments shall be paid to Landlord, without any prior demand therefor and without any deduction or offset whatsoever (except as expressly provided in this Lease), in lawful money of the United States of America, which shall be legal tender at the time of payment, at the address of Landlord designated in Subparagraph 1(b) or to such other person or at such other place as Landlord may from time to time designate in writing. Further, all charges to be paid by Tenant hereunder, including, without limitation, payments for Operating Expenses and repairs shall be considered additional rent for the purposes of this Lease, and the word "RENT" in this Lease shall include such additional rent unless the context specifically or clearly implies that only the Annual Basic Rent is referenced. 6. Rental Adjustment. (a) For the purposes of this Subparagraph 6(a), the following terms are defined as follows: Operating Expenses Allowance. Operating Expenses Allowance shall mean that portion of the Operating Expenses which Landlord has included in the Annual Basic Rent and which amount is set forth in Subparagraph 1(m) above. Operating Expenses. Operating Expenses shall consist of all direct costs of operation and maintenance of the Premises, as determined by standard accounting practices, consistently applied, including the following costs by way of illustration, but not limitation: real property taxes and assessments and any taxes or assessments hereafter imposed in lieu thereof; rent taxes, gross receipt taxes (whether assessed against Landlord or assessed against Tenant and collected by Landlord, or both); relamping; the net cost and expense of insurance obtained by Landlord under Paragraph 21(d) below (provided, however, that such insurance may be obtained by Landlord for the entirety of The Crossing Business Center in which case Landlord shall reasonably prorate the cost and expense of such insurance to each separate building within The Crossing Business Center project based upon square footage of either land or improvements); security (but -6- 7 nothing contained herein shall be deemed to require Landlord to provide security); labor; the cost (fully amortized over useful life in accordance with generally accepted accounting principles together with interest at the rate of Landlord's cost of borrowing unsecured funds, as of the date of installation of the Improvements or commencement of the replacement or repair, on the unamortized balance) of (a) any capital improvements made to the Premises by the Landlord, with Tenant's consent, which are designed to reduce other Operating Expenses by an amount at least equal to the amortized cost of such improvement, or made to the Premises by Landlord to comply with any governmental law or regulation that was not applicable to the Improvements at the time they were constructed, or (b) replacement or repair of any building equipment (but not repair or replacement of the roof, any exterior or other load bearing walls or the foundation of the Improvements) needed to operate the Premises at the same quality levels as prior to the replacement or repair; costs incurred in the management of the Premises (including without limitation supplies, wages and salaries of employees used in the management, operation and maintenance of the Premises, and payroll taxes and similar governmental charges with respect thereto, management office rental (which shall be reasonably allocated to all projects managed from such office) and a management fee not to exceed four percent (4%) of Landlord's gross revenues from the Premises) but Operating Expenses shall not include a parking management fee if Landlord hires a third party to manage parking; supplies, materials, equipment, tools, repair and maintenance of those portions of the Premises for which Landlord is responsible to clean, repair and maintain pursuant to this Lease, including the obligations of Landlord under Subparagraphs 15(b) and 18(a) (but not any costs attributable to repairs made by Landlord pursuant to Paragraph 2(a)); rental of personal property used in maintenance; costs and expenses of gardening and landscaping; maintenance of signs (other than Tenant's signs); personal property taxes levied on or attributable to personal property used in connection with the Premises; assessments against the Premises pursuant to CC&Rs; and costs and expenses of repairs, resurfacing, repairing, maintenance, painting, lighting, cleaning (including cleaning of exterior windows), and similar items related to the Premises (including, without limitation, the parking areas). Notwithstanding anything to the contrary contained in this Lease or the CC&Rs, in no event shall Operating Expenses include any costs related to common areas of the Project. To the extent that the cost of any repairs or maintenance (but not any start-up corrections attributable to new construction) performed during the 1996 base year is covered by warranties or guaranties, then for any period of time during the Term in which such warranties or guaranties are not in effect, the cost of such repairs and maintenance shall be included in the 1996 base year Operating Expenses for purposes of computing Tenant's obligations under Paragraph 6(b) below. In addition, if Landlord elects to carry a type of insurance as an Operating Expense, and if such type of insurance was not carried during the 1996 base year, then during such periods that such new type of insurance premiums are so included in a comparison year, Operating Expenses for the 1996 base year shall be deemed to be increased by the amount of the premium for comparable coverage which would have been payable had the coverage been carried during the 1996 base year. Further, the same treatment shall be applied to material elements of Operating Expenses which are added voluntarily by Landlord to Operating Expenses on or after January 1, 1997, and the inclusion of such amounts in Operating Expenses for the 1996 base year shall only include the amount Landlord would have incurred had such items been included in Operating Expenses during the 1996 base year, with any increases being an additional Operating Expense payable by Tenant pursuant to Paragraph 6(b) below. Real property taxes for the 1996 base year shall be calculated as if the initial Improvements were complete throughout the entire year. Finally, Operating Expenses shall not include the following: (i) bad debt expenses and interest, principal, points and fees on debts (except in connection with the financing of items which may be included in Operating Expenses) or amortization on any mortgage or mortgages or any other debt instrument encumbering the Premises; (ii) real estate brokers' leasing commissions; -7- 8 (iii) the cost of providing any service to the extent directly paid by Tenant; (iv) any costs expressly excluded from Operating Expenses elsewhere in this Lease; (v) costs of any items (including, but not limited to, costs incurred by Landlord for the repair of damage to the Premises) to the extent Landlord receives reimbursement from insurance proceeds or from a third party, except that any commercially reasonable deductible amount under any insurance policy shall be included within Operating Expenses; (vi) costs of capital improvements, except those expressly set forth in the definition of Operating Expenses above; (vii) rentals and other related expenses for leasing equipment (except when needed in connection with normal repairs and maintenance of the Premises) which if purchased, rather than rented, would constitute a capital improvement not includable in Operating Expenses pursuant to this Lease; (viii) depreciation, amortization and interest payments, except as specifically included in Operating Expenses pursuant to the terms of this Lease and except on materials, tools, supplies and vendor-type equipment purchased by Landlord to enable Landlord to supply services Landlord might otherwise contract for with a third party, where such depreciation, amortization and interest payments would otherwise have been included in the charge for such third party's services, all as determined in accordance with generally accepted accounting principles, consistently applied, and when depreciation or amortization is permitted or required, the item shall be amortized over its reasonably anticipated useful life; (ix) costs incurred by Landlord for alterations (including structural additions), repairs (including, without limitation, capital repairs resulting from casualty but including in Operating Expenses insurance deductibles expended for such repairs), equipment and tools which are of a capital nature and/or which are considered capital improvements or replacements under generally accepted accounting principles, consistently applied, except as specifically includable in Operating Expenses pursuant to the terms of this Lease; (x) Landlord's general corporate overhead and general and administrative expenses; (xi) advertising and promotional expenditures; (xii) janitorial costs, electric power costs or other utility costs to the extent Tenant pays such costs directly pursuant to Paragraph 18 below; (xiii) tax penalties incurred as a result of Landlord's negligence, inability or unwillingness to make payments or file returns when due; (xiv) costs arising from Landlord's charitable or political contributions; (xv) costs necessitated by or resulting from the negligence of Landlord, or any of its agents, employees or independent contractors; (xvi) any ground lease rental; (xvii) all costs associated with any hazardous waste remediation; (xviii) any reserves; and -8- 9 (xix) overhead and profit increment paid to Landlord or to subsidiaries or affiliates of Landlord for goods and/or services for the Premises (other than a management fee) to the extent the same exceeds the cost of such goods and/or services generally charged by unaffiliated third parties on a competitive basis. As used herein, the term "REAL PROPERTY TAXES" shall include any form of assessment, license fee, license tax, business license fee, commercial rental tax, levy, charge, penalty, tax or similar imposition imposed by any authority having the direct power to tax, including any city, county, state or federal government, or any school, agricultural, lighting, drainage or other improvement or special assessment district thereof, as against any legal or equitable interest of Landlord in the Premises, including, but not limited to, the following: (i) any tax on Landlord's "right" to rent or "right" to other income from the Premises or as against Landlord's business of leasing the Premises; (ii) any assessment, tax, fee, levy or charge in substitution, partially or totally, of any assessment, tax, fee, levy or charge previously included within the definition of real estate tax, recognizing that real property taxes shall also include any governmental assessments or contributions towards a governmentally required cost/sharing agreement for the purpose of augmenting or improving the quality of services and amenities normally provided by governmental agencies, and it is the intention of Tenant and Landlord that all such new and increased assessments, taxes, fees, levies and charges be included within the definition of "real property taxes" for the purposes of this Lease, including, without limitation, those calculated to increase tax increments to governmental agencies or to pay for such services as fire protection, street, sidewalk and road maintenance, refuse removal or other governmental services which may have been formerly provided without charge to property owners or occupants; (iii) any assessment, tax, fee, levy or charge allocable to or measured by the area of the Premises or the rent payable hereunder, including, without limitation, any gross income tax or excise tax levied by the State, city or federal government, or any political subdivision thereof, with respect to the receipt of such rent, or upon or with respect to the possession, leasing, operating, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, or any portion thereof; (iv) any assessment, tax, fee, levy or charge upon this transaction or any document to which Tenant is a party, creating or transferring an interest or an estate in the Premises (but not any documents requested by Landlord); (v) any assessment, fee, levy or charge by any governmental agency related to any transportation plan, fund or system instituted within the geographic area of which the Premises are a part (provided that all assessments which may be paid in installments shall be included in Operating Expenses under the assumption that such assessments are paid by Landlord in the maximum number of installments permitted by law whether or not such assessments are actually paid in installments); or (vi) reasonable legal and other professional fees, costs and disbursements incurred in connection with proceedings to contest, determine or reduce real property taxes, but only to the extent of the reduction reasonably anticipated by Landlord as a result of such proceedings. Notwithstanding any provision of this Subparagraph 6(a) expressed or implied to the contrary, "real property taxes" shall not include Landlord's federal or state income, franchise, inheritance or estate taxes. -9- 10 (b) By the first day of March of each calendar year during the Term of this Lease, or as soon thereafter as is reasonably possible (but in any event prior to July 1) Landlord shall deliver to Tenant a statement, itemized on a line item basis ("ESTIMATE STATEMENT"), wherein Landlord shall estimate the Operating Expenses for the current calendar year, and the amount, if any, by which the Operating Expenses are in excess of the Operating Expenses Allowance. Provided, however, if Landlord determines that the Operating Expenses for such current calendar year are greater than that set forth in the Estimate Statement, then Landlord may deliver on the first day of June, September, or December, as appropriate, a revised Estimate Statement and Tenant shall pay to Landlord, within thirty (30) days of the delivery of such revised Estimate Statement, the difference between such revised Estimate Statement and the original Estimate Statement for the portion of the current calendar year which has then expired, and Tenant shall pay during the balance of such current calendar year through February of the succeeding calendar year a fraction of the balance of such difference as would fully amortize such excess over the remaining months of the then current calendar year through and including February of the succeeding calendar year. If the Operating Expenses estimated in the Estimate Statement exceed the Operating Expenses Allowance, then such excess amount shall be divided into twelve (12) equal monthly installments and Tenant shall pay to Landlord, concurrently with the regular monthly rent payment next due following the receipt of such statement, an amount equal to one (1) monthly installment multiplied by the number of months from January in the calendar year in which said statement is submitted (or, from the calendar month of the Commencement Date for the first year of the Term) to the month of such payment, both months inclusive. Subsequent installments shall be paid concurrently with the regular monthly rent payments for the balance of the calendar year and shall continue until the next calendar year's Estimate Statement is rendered. By the first day of March of each succeeding calendar year during the Term of this Lease or as soon thereafter as is reasonably possible (but in any event prior to July 1), Landlord shall deliver to Tenant a statement ("ACTUAL STATEMENT") wherein Landlord shall state the actual Operating Expenses for the preceding calendar year. If the Actual Statement reveals a greater increase in Operating Expenses than was estimated by Landlord in the Estimate Statement delivered as provided herein, then upon receipt of the Actual Statement from Landlord, Tenant shall pay a lump sum equal to said total increase over the Operating Expenses Allowance, less the total of the monthly installments of increases set forth on the Estimate Statement which were paid in the previous calendar year. If, in any calendar year, Operating Expenses are less than the preceding calendar year, then upon receipt of Landlord's Actual Statement, any overpayment made by Tenant on the monthly installment basis provided above shall be credited toward the next monthly rent falling due and the monthly installment of Operating Expenses to be paid pursuant to the then current Estimate Statement shall be adjusted to reflect such lower expenses for the most recent calendar year, or if this Lease has been terminated, such excess shall be credited against any amount which Tenant owes Landlord pursuant to this Lease and, to the extent all amounts which Tenant owes Landlord pursuant to this Lease have been paid, Landlord shall promptly pay such excess to Tenant. Any delay or failure by Landlord in delivering any estimate or statement pursuant to this Subparagraph 6(b) shall not constitute a waiver of its right to require an increase in rent nor shall it relieve Tenant of its obligations pursuant to this Subparagraph 6(b), except that (i) the failure of Landlord to deliver to Tenant the Actual Statement for any calendar year by that date which is two (2) years after the last day of such calendar year shall preclude Landlord from enforcing its rights under this Paragraph 6 against Tenant only with respect to those Operating Expenses for which Landlord or Landlord's employees, agents or contractors (including, without limitation, any person or entity that manages the Premises for Landlord) was solely responsible for the determination and calculation thereof, and (ii) Tenant shall not be obligated to make any payments based on such estimate or statement until thirty (30) days after receipt of such estimate or statement. Tenant or an independent certified public accountant (which accountant is a member of a nationally or regionally recognized accounting firm) designated by Tenant may, after reasonable notice to Landlord and at reasonable times, inspect and photocopy Landlord's records relating to Operating Expenses at Landlord's offices or wherever records are located, provided that Tenant is not then in default after expiration of all applicable cure periods (or if Landlord contends that Tenant is in default, no good faith dispute exists between Landlord and -10- 11 Tenant as to whether Tenant is in default) and provided further that Tenant and such accountant shall, and each of them shall, use their commercially reasonable efforts to cause their respective agents and employees to, maintain all information contained in Landlord's records in strict confidence. Notwithstanding the foregoing, Tenant shall only have the right to review Landlord's records one (1) time during any twelve (12) month period. In the event Tenant shall dispute the amount set forth in the Actual Statement described above in this Subparagraph 6(b), Tenant shall have the right not later than eighteen (18) months following receipt of such Actual Statement to cause Landlord's books and records with respect to the preceding calendar year to be audited by a certified public accountant mutually acceptable to Landlord and Tenant. The amounts payable under this Subparagraph 6(b) by Landlord to Tenant or by Tenant to Landlord as the case may be shall be appropriately adjusted on the basis of such audit plus interest from the date of payment until the date of adjustment at the "Interest Rate". The term "INTEREST RATE" means the lesser of (a) the "Prime Rate" or "Reference Rate" announced from time to time by Bank of America (or such reasonable comparable national banking institution as is selected by Landlord in the event Bank of America ceases to exist or to publish a Prime Rate or Reference Rate), plus two percent (2%), or (b) the maximum rate permitted by law. If such audit discloses a liability for further refund by Landlord to Tenant in excess of five percent (5%) of the Operating Expenses for any calendar year, the cost of such audit shall be borne by Landlord; otherwise the cost of such audit shall be borne by Tenant. If Tenant shall not request an audit in accordance with the provisions of this Subparagraph 6(b) within eighteen (18) months of receipt of Landlord's Actual Statement, such Actual Statement shall be conclusively binding upon Landlord and Tenant. Even though the Term has expired and Tenant has vacated the Premises, when the final determination is made of Operating Expenses for the year in which this Lease terminates, Tenant shall pay, within thirty (30) days after receipt of written notice, any increase due over the estimated expenses paid and conversely any overpayment made in the event the estimated expenses paid exceed actual expenses shall be credited against any amount which Tenant owes Landlord pursuant to this Lease and, to the extent all amounts which Tenant owes Landlord pursuant to this Lease have been paid, Landlord shall promptly refund such overpayment to Tenant. Notwithstanding anything contained in this Paragraph 6, Tenant shall not be entitled to any credit or payment from Landlord in the event that Operating Expenses are less than the Operating Expenses Allowance for any calendar year. 7. Security Deposit. Intentionally Omitted. 8. Use. (a) Tenant shall use the Premises for the use specified in Subparagraph 1(n), and shall not use or permit the Premises to be used for any other purpose. Notwithstanding anything to the contrary contained herein, in no event shall any portion of the Premises be used for gaming purposes including, without limitation, slot machines or other gaming equipment. Tenant shall not use or occupy the Premises in violation of such Rules and Regulations as Landlord may from time to time reasonably adopt for the safety, care and cleanliness of the Premises or The Crossing Business Center, or of any recorded covenants, conditions and restrictions ("CC&RS") recorded as of the date of this Lease and affecting the Premises or of any law or of the Certificate of Occupancy issued for the Premises, and shall, upon five (5) days written notice from Landlord, discontinue any use of the Premises which is in violation of any CC&Rs or is declared by any governmental authority having jurisdiction to be a violation of any law or of said Certificate of Occupancy. Landlord agrees that any Rules and Regulations or CC&Rs added to the Premises after the date of this Lease, or any modification to the existing Rules and Regulations or CC&Rs after the date of this Lease, shall not increase Tenant's obligations under this Lease nor decrease Tenant's rights under this Lease. Tenant shall not install any radio or television antenna, loudspeaker or other device on the roof or -11- 12 exterior walls of the Premises without Landlord's consent, which shall not be unreasonably withheld. Subject to Landlord's repair obligations under Paragraph 15(b) below, Tenant shall comply with any direction of any governmental authority having jurisdiction which shall, by reason of the nature of Tenant's use or occupancy of the Premises, impose any duty upon Tenant or Landlord with respect to the Premises or with respect to the use or occupation thereof. Tenant shall not do or permit to be done anything which will invalidate or increase the cost of any fire, extended coverage or any other insurance policy covering the Premises and/or property located therein and shall comply with all rules, orders, regulations and requirements of any applicable fire rating bureau or any other organization performing a similar function, to the extent such rules, orders, regulations and requirements apply to the interior of the Improvements. Tenant shall promptly upon demand reimburse Landlord as additional rent for any additional premium charged for such policy by reason of Tenant's failure to comply with the provisions of this Paragraph 8. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of The Crossing Business Center, or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall not commit or suffer to be committed any waste in or upon the Premises and shall keep the Premises in first class repair and appearance, ordinary wear and tear excepted. Tenant shall not place a load upon the Premises exceeding the average pounds of live load per square foot of floor area specified for the Premises by Landlord's architect, with the partitions to be considered part of the live load. Landlord reserves the right to prescribe the weight and position of all safes, files and heavy equipment which Tenant desires to place in the Premises so as to distribute properly the weight thereof. (b) Landlord represents and warrants to Tenant that (i) Tenant's use of the Premises on a 24-hour per day, 7-day per week basis is not prohibited by any document of record, (ii) easements recorded on the Premises as of the date of this Lease shall not interfere with the Improvements contemplated in Exhibit "C" and (iii) any easements voluntarily added by Landlord to the Premises after the date of this Lease shall not interfere with any Improvements in parking of Tenant. Landlord shall defend, indemnify and hold Tenant harmless against and from any and all costs, expenses, liabilities and claims arising from the breach of the foregoing representations and warranties. 9. Payments and Notices. (a) All rents and other sums payable by Tenant to Landlord hereunder shall be paid to Landlord at the address designated by Landlord in Subparagraph 1(b) above or at such other places as Landlord may hereafter designate in writing. Any notice required or permitted to be given hereunder must be in writing and may be given by personal delivery or by mail, and if given by mail shall be deemed sufficiently given if sent by registered or certified mail addressed to Tenant at the address designated in Subparagraph 1(d) or to Landlord at both of the addressees designated in Subparagraph 1(b). Either party may by written notice to the other specify a different address for notice purposes. If more than one person or entity constitutes the "Tenant" under this Lease, service of any notice upon any one of said person or entities shall be deemed as service upon all of said persons or entities. (b) Tenant acknowledges that the late payment by Tenant to Landlord of any sums due under this Lease will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impractical to fix. Such costs include, without limitation, processing and accounting charges, and late charges that may be imposed on Landlord by the terms of any encumbrance and note secured by any encumbrance covering the Premises. Therefore, if any monthly installment of Annual Basic Rent is not received by Landlord by the date when due, or if Tenant fails to pay any other sum of money due hereunder and such failure continues for ten (10) days after written notice thereof by Landlord, Tenant shall pay to Landlord, as additional rent, the sum of five percent (5%) of the overdue amount as a late charge. -12- 13 Such overdue amount shall also bear interest, as additional rent, at the maximum rate permissible by law calculated, as appropriate, from the date either (a) the monthly installment of Annual Basic Rent is due, or (b) ten (10) days after receipt of said notice, until the date of payment to Landlord. Landlord's acceptance of any late charge or interest shall not constitute a waiver of Tenant's default with respect to the overdue amount or prevent Landlord from exercising any of the other rights and remedies available to Landlord under this Lease or any law now or hereafter in effect. 10. Brokers. The parties recognize that the brokers who negotiated this Lease are the brokers whose names are stated in Subparagraph 1(o), and agree that Landlord shall be solely responsible for the payment of brokerage commissions to said brokers, and that Tenant shall not have responsibility therefor. As part of the consideration for the granting of this Lease, each party represents and warrants to the other that to such party's knowledge no other broker, agent or finder negotiated or was instrumental in negotiating or consummating this Lease and that such party knows of no other real estate broker, agent or finder who is, or might be, entitled to a commission or compensation in connection with this Lease. Any broker, agent or finder of either party whom such party has failed to disclose herein shall be paid by the non-disclosing party. Each party shall hold the other harmless from all damages and indemnify the other for all said damages paid or incurred by the other resulting from any claims that may be asserted against such party by any broker, agent or finder undisclosed herein. 11. Holding Over. If Tenant holds over after the expiration or earlier termination of the Term hereof without the express written consent of Landlord, Tenant shall become a tenant at sufferance only, at a rental rate equal to one hundred fifty percent (150%) of the Annual Basic Rent which would be applicable to the Premises upon the date of such expiration (subject to adjustment as provided in Paragraph 6 hereof and prorated on a daily basis), and otherwise subject to the terms, covenants and conditions herein specified, so far as applicable. Acceptance by Landlord of rent after such expiration or earlier termination shall not constitute a holdover hereunder or result in a renewal. The foregoing provisions of this Paragraph 11 are in addition to and do not affect Landlord's right of re-entry or any rights of Landlord hereunder or as otherwise provided by law. If Tenant fails to surrender the Premises upon the expiration or earlier termination of this Lease despite demand to do so by Landlord, Tenant shall indemnify and hold Landlord harmless from all loss or liability, including without limitation, any claim made by any succeeding tenant founded on or resulting from such failure to surrender. 12. Taxes on Tenant's Property. Tenant shall be liable for and shall pay at least ten (10) days before delinquency, taxes levied against any personal property or trade fixtures placed by Tenant in or about the Premises. If any such taxes on Tenant's personal property or trade fixtures are levied against Landlord or Landlord's property or if the assessed value of the Premises is increased by the inclusion therein of a value placed upon such personal property or trade fixtures of Tenant and if Landlord, after written notice to Tenant, pays the taxes based upon such increased assessments which Landlord shall have the right to do regardless of the validity thereof, but only upon prior notice to Tenant and under proper protest if requested by Tenant, Tenant shall upon demand repay to Landlord the taxes levied against Landlord, or the proportion of such taxes resulting from such increase in the assessment; provided that in any such event, at Tenant's sole cost and expense, Tenant shall have the right, in the name of Landlord and with Landlord's full cooperation, to bring suit in any court of competent jurisdiction to recover the amount of any such taxes so paid under protest, any amount so recovered to belong to Tenant. 13. Condition of Premises. Intentionally Omitted. -13- 14 14. Alterations. The parties acknowledge that this Paragraph 14 shall apply only to Changes made after the Commencement Date, that the design and construction of the initial Improvements shall be governed by the Work Letter Agreement attached hereto as Exhibit "C" and that this Paragraph 14 shall not apply to the design and construction of the initial Improvements. (a) Tenant may, at any time and from time to time during the Term of this Lease but subject to Landlord's approval pursuant to Subparagraph 14(b), at its sole cost and expense, make alterations, additions, installations, substitutions, improvements and decorations (hereinafter collectively called "CHANGES") in and to the Premises, on the following conditions, and providing such Changes will not result in a violation of or require a change in the Certificate of Occupancy (or its equivalent) applicable to the Premises: (i) The outside appearance, character or permitted use of the Premises shall not be affected, and no Changes shall weaken or impair the structural strength or, in the reasonable opinion of Landlord, lessen the value of the Premises or create the potential for unusual expenses to be incurred upon the removal of Changes and the restoration of the Premises upon the termination of this Lease. (ii) The proper functioning of any of the mechanical, electrical, sanitary and other service systems or installations of the Premises ("SERVICE FACILITIES") shall not be adversely affected and there shall be no construction which might interfere with Landlord's free access to the Service Facilities or interfere with the moving of Landlord's equipment to or from the enclosures containing the Service Facilities. (iii) In performing the work involved in making such Changes, Tenant shall be bound by and observe all of the conditions and covenants contained in this Paragraph 14. (iv) All work shall be done at such times and in such manner as Landlord from time to time may reasonably designate. (v) Tenant shall not be permitted to install and make part of the Premises any materials, fixtures or equipment which are subject to liens, conditional sales contracts or chattel mortgages. (vi) At the date upon which the Term of this Lease shall end, or the date of any earlier termination of this Lease, Tenant shall on Landlord's written request (which request must be made, if at all, at the time of Landlord's consent to the Change) restore the Premises to their condition prior to the making of any Changes permitted by this Paragraph 14, reasonable wear and tear excepted. Notwithstanding the foregoing, Tenant may make Changes which do not affect the Service Facilities of the Improvements, the exterior appearance of the Improvements, or structural aspects of the Improvements which cost One Hundred Thousand Dollars ($100,000.00) or less ("COSMETIC CHANGES") upon at least fifteen (15) days prior written notice to Landlord, but without the necessity of obtaining Landlord's prior written consent thereto. (b) Before proceeding with any Change (exclusive of Cosmetic Changes), Tenant shall submit to Landlord, for Landlord's written approval, plans and specifications, including any applicable mechanical, electrical and plumbing drawings, for the work to be done. Landlord's approval shall not be unreasonably withheld. If Landlord shall disapprove of any of Tenant's plans, Tenant shall be advised of the reasons for such disapproval. In any event, Tenant agrees to pay to Landlord, as additional rent, the actual and reasonable cost of Landlord's third party consultants for review of such -14- 15 plans and specifications, immediately upon receipt of invoices either from Landlord or such consultants. Any Change for which approval has been received shall be performed in accordance with the approved plans and specifications, and no amendments or additions to such plans and specifications shall be made without the prior written consent of Landlord, which consent shall not be unreasonably withheld. Following construction of the work, Tenant shall prepare or cause to be prepared, at Tenant's expense, a "record set" of as-built plans reflecting the actual construction of the work. (c) After Landlord's written approval has been sent to Tenant, Tenant shall enter into an agreement for the performance of the work to be done pursuant to this Paragraph 14 with a contractor reasonably approved by Landlord. All subcontractors used by the contractor shall be subject to Landlord's approval, which approval shall not be unreasonably withheld or delayed. Tenant's contractors shall obtain on behalf of Tenant and at Tenant's sole cost and expense, (i) all necessary governmental permits and certificates for the commencement and prosecution of Tenant's Changes and for final approval thereof upon completion, and (ii) for Changes reasonably expected to cost in excess of One Hundred Thousand Dollars ($100,000.00), a completion and lien indemnity bond, or other surety, satisfactory to Landlord, for the Changes. In the event Tenant shall request any changes in the work to be performed after the submission of the plans referred to in this Paragraph 14, such changes shall be subject to the same approvals and notices as the Changes initially submitted by Tenant. (d) If Tenant requests Landlord to act as general contractor for any Changes, and if Landlord agrees to so act as general contractor, Tenant shall pay to Landlord for Landlord's services in connection with the work performed pursuant to this Paragraph 14, a fee equal to fifteen percent (15%) of the total cost of the Changes, and Landlord's reasonable overhead related thereto. If Landlord does not perform as such general contractor, in addition to the requirement that Tenant pay the actual and reasonable cost of Landlord's third-party consultants as specified in Paragraph 14(b) above, Tenant shall pay to Landlord, as additional rent, an hourly fee reasonably determined by Landlord for any personnel of Landlord or its affiliates who are involved in overseeing and/or reviewing Tenant's Change. (e) All Changes and the performance thereof shall at all times comply with (i) all laws, rules, orders, ordinances, directions, regulations and requirements of all governmental authorities, agencies, offices, departments, bureaus and boards having jurisdiction thereof, (ii) all rules, orders, directions, regulations and requirements of any applicable fire rating bureau, or of any similar insurance body or bodies, and (iii) all rules and regulations of Landlord, and Tenant shall cause Changes to be performed in compliance therewith and in good and first class workmanlike manner, using materials and equipment at least equal in quality to the original installations of the Premises. Changes shall be performed in such manner as not to delay or impose any additional expense upon Landlord in construction, maintenance or operation of the Premises, and shall be performed by contractors or mechanics approved by Landlord pursuant to this Paragraph 14, who shall coordinate their work in cooperation with any other work being performed by Landlord with respect to the Premises. Throughout the performance of Changes, Tenant, at its expense, shall carry, or cause its contractors to carry, worker's compensation insurance in statutory limits, and general liability insurance for any occurrence in or about the Premises, of which Landlord and its managing agent shall be named as additional parties insured, in such limits as Landlord may reasonably prescribe. Such policies shall comply with Paragraph 21(b) hereof. (f) Tenant further covenants and agrees that any mechanic's lien filed against the Premises for work claimed to have been done for, or materials claimed to have been furnished to Tenant, will be discharged by Tenant, by bond or otherwise, within thirty (30) days after the filing thereof, at the cost and expense of Tenant. All permanently installed alterations, decorations, additions or improvements upon the Premises, made by either party, including (without limiting the generality of the foregoing) all wallcovering, built-in cabinet work, paneling and the like, shall, unless Landlord elects otherwise, become the property of Landlord, and shall remain upon, and -15- 16 be surrendered with the Premises, as a part thereof, at the end of the Term hereof, except that Landlord may by written notice to Tenant, given concurrently with Landlord's consent to the Change, require Tenant to remove all partitions, counters, railings and the like installed by Tenant, and Tenant shall repair any damage to the Premises arising from such removal and if Tenant fails to so remove such items at the end of the Term, Tenant shall pay to the Landlord all of Landlord's costs of such removal and repair. (g) All articles of personal property and all business and trade fixtures, machinery and equipment, furniture and movable partitions owned by Tenant or installed by Tenant at its expense in the Premises shall be and remain the property of Tenant and may be removed by Tenant at any time during the lease Term, provided that Tenant shall repair any damage caused by such removal. If Tenant shall fail to remove all of its effects from said Premises upon termination of this Lease for any cause whatsoever, Landlord may, at its option, remove the same in any manner that Landlord shall choose, and store said effects without liability to Tenant for loss thereof, and Tenant agrees to pay Landlord upon demand any and all expenses incurred in such removal, including court costs and reasonable attorney's fees and storage charges on such effects for any length of time that the same shall be in Landlord's possession or Landlord may, at its option, without notice, but subject to the rights of equipment lessors (where Landlord has been notified of such rights) sell said effects, or any of the same, at private sale and without legal process, for such price as Landlord may obtain and apply the proceeds of such sale to any amounts due under this Lease from Tenant to Landlord and to the expense incident to the removal and sale of said effects. (h) Nothing contained in this Paragraph 14 shall be deemed to relieve Tenant of any duty, obligation or liability with respect to making any repair, replacement or improvement or complying with any laws, order or requirement of any government or other authority and nothing contained in this Paragraph 14 shall be deemed or construed to impose upon Landlord any obligation, responsibility or liability whatsoever, for the care, supervision or repair of the Premises or any part thereof other than as otherwise provided in this Lease. 15. Repairs. (a) Subject to Subparagraph 15(b), Tenant shall, when and if needed or whenever reasonably requested by Landlord to do so, at Tenant's sole cost and expense, maintain and make all repairs to the Premises and every part thereof, to keep, maintain and preserve the Premises in the same condition as when received, excepting ordinary wear and tear. Any such maintenance and repairs shall be performed by Landlord's designated contractor, or by a contractor reasonably approved by Landlord, at Tenant's option. Tenant shall upon the expiration or sooner termination of the Term hereof surrender the Premises to Landlord in the same condition as when received, reasonable wear and tear excepted. Except as provided elsewhere in this Lease, Landlord shall have no obligation to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof, and the parties hereto affirm that Landlord has made no representations to Tenant respecting the condition of the Premises except as specifically herein set forth. (b) Anything contained in Subparagraph 15(a) above to the contrary notwithstanding, Landlord shall, as an Operating Expense (to the extent permitted by Paragraph 6 above and otherwise at Landlord's sole cost and expense), repair and maintain in good condition those portions of the Premises consisting of the "Base Improvements," as described in the Work Letter Agreement, and all areas of the Premises located outside of the Improvements (including, without limitation, parking areas), unless such maintenance and repairs are caused in part or in whole by the neglect, fault of or omission of any duty by Tenant, its agents, servants, employees or invitees, in which case Tenant shall pay to Landlord as additional rent, the reasonable cost of such maintenance and repairs. Landlord shall not be liable for any failure to make any such repairs, or to perform any maintenance unless such failure shall persist for an unreasonable time (under the circumstances) after written notice of the need of such repairs or maintenance is given to Landlord by Tenant and Landlord shall use commercially reasonable efforts to -16- 17 minimize any interference or interruption in Tenant's business resulting from any such repairs or maintenance. Landlord agrees not to make any repairs within the Improvements during the months of November and December, except where such repairs are required by law to be made at that time, required by an emergency or otherwise requested by Tenant. Except as provided in Paragraph 15(c) below and in Paragraph 22 and in Paragraph 25(e) hereof, there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Premises or in or to fixtures, appurtenances and equipment therein. Except as provided in Paragraph 15(c) below, Tenant waives the right to make repairs at Landlord's expense under any law, statute or ordinance now or hereafter in effect. (c) If Tenant provides notice to Landlord of an event or circumstance which requires the action of Landlord with respect to repairs and/or maintenance as set forth in Paragraph 15(b) above, and Landlord fails to provide such action as required by the terms of this Lease, then Tenant may proceed to take the required action upon delivery of an additional ten (10) business days notice (or immediately after notice in the case of an emergency) to Landlord specifying that Tenant is taking such required action, and if such action was required under the terms of this Lease to be taken by Landlord, then Tenant shall be entitled to prompt reimbursement by Landlord of Tenant's reasonable costs and expenses in taking such action plus interest at the Interest Rate. In the event Tenant takes such action, and such work will affect the Service Facilities, structural integrity of the Improvements or exterior appearance of the Improvements, Tenant shall use only those contractors used by Landlord in the Improvements for such work unless such contractors are unwilling or unable to perform such work, in which event Tenant may utilize the services of any other qualified contractor which normally and regularly performs similar work in comparable first-class projects in Las Vegas, Nevada. Further, if Landlord does not deliver a detailed written objection to Tenant, within thirty (30) days after receipt of an invoice by Tenant of its costs of taking action which Tenant claims should have been taken by Landlord, and if such invoice from Tenant sets forth a reasonably particularized breakdown of its costs and expenses in connection with taking such action on behalf of Landlord, then Tenant shall be entitled to deduct from Monthly Basic Rent payable by Tenant under this Lease, the amount set forth in such invoice together with interest at the Interest Rate. If, however, Landlord delivers to Tenant within thirty (30) days after receipt of Tenant's invoice, a written objection to the payment of such invoice, setting forth with reasonable particularity Landlord's reasons for its claim that such action did not have to be taken by Landlord pursuant to the terms of this Lease or that the charges are excessive (in which case Landlord shall pay the amount it contends would not have been excessive), then Tenant shall not be entitled to such deduction from Rent, but as Tenant's sole remedy, Tenant may proceed to institute legal proceedings against Landlord to collect the amount set forth in the subject invoice. In the event Tenant prevails in such legal proceedings against Landlord and receives a final judgment against Landlord, then Landlord shall pay such judgment to Tenant within thirty (30) days of such judgment being entered. If such judgment is not so paid when due, then Tenant shall be entitled to deduct from Monthly Basic Rent next due and payable by Tenant the amount of such final judgment, together with interest, at the Interest Rate from the date of entry of such judgment until the date of such deduction. 16. Liens. Tenant shall not knowingly permit any mechanic's, materialmen's or other liens to be filed against the real property of which the Premises form a part nor against the Tenant's leasehold interest in the Premises. Landlord shall have the right at all reasonable times to post and keep posted on the Premises any notices which it deems necessary for protection from such liens. If any such liens are filed and are not discharged by Tenant by bond or otherwise within thirty (30) days after the filing thereof, Landlord may, without waiving its rights and remedies based on such breach of Tenant and without releasing Tenant from any of its obligations, cause such liens to be released by any means it shall deem proper, including payment in satisfaction of the claim giving rise to such lien. Tenant shall pay to Landlord at once, upon notice by -17- 18 Landlord, any sum paid by Landlord to remove such liens, together with interest at the maximum rate per annum permitted by law from the date of such payment by Landlord. 17. Entry by Landlord. Subject to Landlord's agreement to minimize any disturbance of Tenant's use of the Premises by exercise of the following rights, Landlord reserves and shall at any and all times have the right to enter the Premises upon reasonable notice to Tenant (except that no notice shall be required in the case of an emergency) to inspect the same, to supply any service to be provided by Landlord to Tenant hereunder, to submit said Premises to prospective purchasers accompanied by Landlord or, during the last nine (9) months of the Term of this Lease, to prospective tenants accompanied by Landlord, to post notices of nonresponsibility, or to repair the Premises, all without being deemed guilty of any eviction of Tenant, and may, in order to carry out such purposes, erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed, provided that the business of Tenant shall be interfered with as little as is reasonably practicable. Except as expressly provided to the contrary in this Lease, Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby. For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in, upon and about the Premises, excluding Tenant's vaults and safe, and Landlord shall have the means which Landlord may deem proper to open said doors in an emergency in order to obtain entry to the Premises, and any entry to the Premises obtained by Landlord by any of said means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant from the Premises or any portion thereof. It is understood and agreed that no provision of this Lease shall be construed as obligating Landlord to perform any repairs, alterations or decoration except as otherwise expressly agreed herein to be performed by Landlord. Landlord shall, in the exercise of its rights under this Paragraph 17, use commercially reasonable efforts to minimize any disturbance of Tenant's use and possession of the Premises and to provide as much notice to Tenant as may be reasonably possible prior to any such exercise of Landlord's rights under this Paragraph 17. 18. Utilities and Services. (a) Cleaning and Maintenance. During the Term, Tenant shall, at its own expense, keep all interior portions of the Premises in a neat and clean condition, including, but not limited to, removal of debris and garbage from the Premises with a refuse removal company reasonably approved by Landlord and cleaning of all interior windows and window frames of the Premises. Tenant shall separately contract at its sole expense for janitorial services for all interior portions of the Premises with reputable, bonded janitorial contractors in accordance with the maintenance standards set forth in this Lease. Landlord shall keep the exterior portions of the Premises in a neat and clean condition. (b) Utilities. During the Term, Tenant shall provide in the Premises at its own expense, water, gas, electricity, sewer, and other necessary utilities and services, and Tenant shall make payment directly to the entities providing such utilities and services. Landlord, at Landlord's sole cost and expense, shall pay any fees necessary to bring utilities to the Leased Premises for construction of the Base Improvements; provided, however, that any utility fees incurred in connection with the Tenant Improvements (including, without limitation, any sewer connection fees) shall be a Work Cost charged to the Allowance. (c) Interruption of Utilities. Tenant agrees that, except as provided in Paragraph 15(c) above and Paragraph 19 and Paragraph 25(e) below, Landlord shall not be liable for damages, by abatement of rent or otherwise, for failure, delay, diminution or interruption of any utilities or services for any reason, and such failure, delay, diminution or interruption shall never be deemed to constitute an eviction or disturbance of Tenant's use and possession of the Premises or relieve Tenant from paying rent or performing any of its obligations under this Lease. Furthermore, except as provided in Paragraph 19 -18- 19 below, Landlord shall not be liable under any circumstances for a loss of, or injury to, property or for any injury to, or interference with, Tenant's business, including, without limitation, loss of profits, however occurring, through or in connection with or incidental to any such failure, delay, diminution or interruption of such utilities or services. 19. Indemnification. Tenant hereby agrees to defend, indemnify and hold Landlord harmless against and from any and all loss, cost, liability, damage or expense including, but not limited to, penalties, fines, attorneys' fees and costs (collectively, "CLAIMS") arising from Tenant's use of the Premises or the conduct of its business or from any activity, work, or thing done, permitted or suffered by Tenant, its agents, contractors, employees or invitees in or about the Premises. Notwithstanding the foregoing, Tenant shall not be required to defend, indemnify and hold Landlord harmless from any Claims to any person, property or entity to the extent resulting from the negligence or willful misconduct of Landlord or its agents, employees or licensees in connection with Landlord's activities at the Premises (except for damage to the Tenant Improvements and Tenant's personal property, trade fixtures, furniture and equipment in the Premises, to the extent Tenant is required to obtain the requisite insurance coverage pursuant to this Lease). The Claims for which Tenant is not required to defend, indemnify and hold Landlord harmless pursuant to the immediately preceding sentence may be referred to herein as "OVERRIDDEN CLAIMS." Landlord hereby indemnifies, agrees to defend and holds Tenant harmless from any Overridden Claims, provided that with respect to Base Improvements, because Landlord is required to maintain insurance on the Base Improvements and Tenant compensates Landlord for such insurance as part of Operating Expenses and because of the existence of waivers of subrogation set forth in Paragraph 21(g) below, Landlord hereby indemnifies, agrees to defend and holds Tenant harmless from any Claims to the Base Improvements to the extent that such Claim is covered by such insurance, even if resulting from the negligent acts, omissions or willful misconduct of Tenant or those of its agents, employees or licenses. Similarly, since Tenant must carry insurance pursuant to Paragraph 21(a) below to cover its personal property within the Premises and the Tenant Improvements, Tenant hereby indemnifies and holds Landlord harmless from any Claim to any property within the Improvements, to the extent such Claim is covered by such insurance, even if resulting from the negligent acts, omissions or willful misconduct of Landlord or those of its agents, employees or licensees. In case any action or proceeding may be brought against Landlord or Tenant by reason of any such Claim, Landlord or Tenant (as the case may be) upon notice from the other hereby agrees to defend the same at their expense by counsel reasonably approved in writing by the other. 20. Damage to Tenant's Property. Except as provided elsewhere in this Lease to the contrary, Landlord or its agents shall not be liable for any damage to property entrusted to employees of Landlord or Landlord's manager, nor for loss of or damage to any property by theft or otherwise, nor for any injury or damage to person or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak from any part of the Premises or from the pipes, appliances or plumbing works therein or from the roof, street or sub-surface or from any other place or resulting from dampness or any other patent or latent cause whatsoever. Landlord or its agents shall not be liable for interference with the light or other incorporeal hereditaments. Tenant shall give prompt notice to Landlord in case of fire or accidents in the Premises or of defects therein or in the fixtures or equipment located therein. 21. Insurance. (a) Tenant at its sole cost and expense shall, during the entire Term hereof, obtain, maintain and keep in full force and effect, the following insurance: (i) Property insurance including fire, extended coverage, vandalism, malicious mischief and all risks coverage upon property of every description and kind owned by Tenant and located in the Premises or for which Tenant is legally liable or installed by or on behalf of Tenant including, without limitation, leasehold improvements, alterations, furniture, fixtures and any other -19- 20 personal property, in an amount not less than eighty percent (80%) of the full replacement cost thereof. (ii) A policy of Comprehensive Liability Insurance coverage to include personal injury, broad form property damage, premises/operations, owner's protective coverage, host liquor liability insurance, blanket contractual liability, products and completed operations liability and owned/non-owned auto liability, in limits not less than Two Million Dollars ($2,000,000) inclusive. Such policy shall name Landlord, Landlord's managing agent and Landlord's mortgagees as additional insureds and shall contain the following provision: "Such insurance as afforded by this policy for the benefit of Landlord shall be primary as respects any claims, losses or liabilities arising out of the use of the Premises by the Tenant or by Tenant's operation and any insurance carried by Landlord shall be excess and non-contributing." (iii) Loss of income and extra expense insurance in such amounts as will reimburse Tenant for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent tenants or attributable to prevention of access to the Premises as a result of such perils. (iv) Any other form or forms of insurance as Tenant or Landlord or the mortgagees of Landlord may reasonably require from time to time in form, in amounts and for insurance risks against which a prudent tenant would protect itself, but in no event shall (A) such increased amounts of insurance or such other reasonable types of insurance be in excess of that required by landlords of comparable projects in Las Vegas, Nevada nor (B) Landlord require an increase in the insurance limits described in this Paragraph (a) above during the first five (5) years of the Term. (b) All policies shall be taken out with insurers reasonably acceptable to Landlord and in form satisfactory from time to time to Landlord. Tenant agrees that certificates of insurance or, if required by Landlord or the mortgagees of Landlord, certified copies of each such insurance policy, will be delivered to Landlord as soon as practicable after the placing of the required insurance, but in no event later than ten (10) days after Tenant takes possession of all or any part of the Premises, including possession taken under Paragraph 4 hereof. All policies shall contain an undertaking by the insurers to notify Landlord and the mortgagees of Landlord in writing not less than thirty (30) days prior to any material change, reduction in coverage, cancellation, or other termination thereof. (c) In the event of damage to or destruction of the Premises entitling either party to terminate this Lease pursuant to Paragraph 22 hereof, Tenant will immediately pay to Landlord all of Tenant's insurance proceeds relating to leasehold improvements and alterations (but not to Tenant's trade fixtures, equipment, furniture or other personal property) in the Improvements. (d) Landlord covenants and agrees that throughout the Term, it will insure the Premises (including the Base Improvements, but excluding any property with respect to which Tenant is obligated to insure pursuant to the provisions of Subparagraph 21(a) above) against damage by fire and standard extended coverage perils and public liability insurance in such reasonable amounts (but not less than eighty percent (80%) of replacement cost as to property insurance) with such reasonable deductibles as would be carried by a prudent owner of a similar building in Las Vegas, Nevada. Landlord may, but shall not be obligated to, take out and carry any other form or forms of insurance as it or the mortgagees of Landlord may reasonably determine advisable. Notwithstanding any contribution by Tenant to the cost of insurance premiums with respect to the Premises, as provided herein, Tenant acknowledges that it has no right to receive any proceeds from any such insurance policies carried by Landlord, although Landlord shall -20- 21 use such proceeds in the repair and reconstruction of the Premises unless Landlord elects to terminate this Lease pursuant to Paragraph 22. Landlord will not carry insurance of any kind on Tenant's furniture or furnishings or on any equipment of Tenant under this Lease, and except as provided in Paragraph 19 above, Landlord shall not be obligated to repair any damage thereto or replace the same. (e) Tenant shall promptly comply with all reasonable requirements of the insurance authority or of any insurer now or hereafter in effect relating to the Premises. (f) If any insurance policy carried by Landlord, as provided by Subparagraph 21(d) above, shall be canceled or cancellation shall be threatened or the coverage thereunder reduced or threatened to be reduced, in any way by reason of the use or occupation of the Premises or any part thereof by Tenant or by any assignee or subtenant of Tenant or by anyone permitted by Tenant to be upon the Premises and, if Tenant fails to remedy the condition giving rise to cancellation, threatened cancellation or reduction of coverage within forty-eight (48) hours after written notice thereof, Landlord may, at its option enter upon the Premises and attempt to remedy such condition and Tenant shall forthwith pay the cost thereof to Landlord as additional rent. Landlord shall not be liable for any damage or injury caused to any property of Tenant or of others located in the Premises as a result of such entry. In the event that Landlord shall be unable to remedy such condition, then Landlord shall have all of the remedies provided for in this Lease in the event of a default by Tenant. Notwithstanding the foregoing provisions of this Subparagraph 21(f), if Tenant fails to remedy as aforesaid, Tenant shall be in default of its obligations hereunder and Landlord shall have no obligation to attempt to remedy such default. (g) Any policy or policies of fire, extended coverage or similar casualty insurance, which either party obtains in connection with the Premises and the insurance required to be obtained by Tenant pursuant to the provisions of Subparagraph 21(a)(iii) above shall include a clause or endorsement denying the insurer any rights of subrogation against the other party to the extent rights have been waived by the insured prior to the occurrence of injury or loss. Landlord and Tenant waive any rights of recovery against the other for injury or loss due to hazards covered by insurance containing such a waiver of subrogation clause or endorsement to the extent of the injury or loss covered thereby. 22. Damage or Destruction. (a) (i) In the event the Premises are damaged by fire or other perils covered by insurance required to be carried by Landlord under this Lease and if the damage thereto is such that the Premises may be repaired, reconstructed or restored within a period of two hundred seventy (270) days from the date Landlord learns of the necessity for repairs as a result of the damage, Landlord shall commence and proceed diligently with the work of repair, reconstruction and restoration and this Lease shall continue in full force and effect. If such work of repair, reconstruction and restoration is such as to require a period longer than such two hundred seventy (270) day period or if Paragraph 22(e) below applies, Landlord either may elect to so repair, reconstruct or restore the Premises and this Lease shall continue in full force and effect or Landlord may elect not to repair, reconstruct or restore the Premises and this Lease shall in such event terminate. Under any of the conditions of this Subparagraph 22(a), Landlord shall give written notice ("DAMAGE NOTICE") to Tenant of its intention within sixty (60) days from the date Landlord learns of the necessity for repairs as a result of the damage. Upon the occurrence of any damage to the Premises, Tenant shall assign to Landlord (or to any party designated by Landlord) all insurance proceeds payable to Tenant under Tenant's insurance for the leasehold improvements and alterations to the extent required to repair the damage; provided, however, that if the cost of such repair by Landlord exceeds the amount of insurance proceeds received by Landlord from Tenant's insurance carrier, as assigned by Tenant, the -21- 22 cost of such repairs shall be paid by Tenant to Landlord prior to Landlord's repair of the damage. In the event Landlord elects not to restore the Premises, this Lease shall be deemed to have terminated as of the date of such destruction. (ii) If Landlord does not elect to terminate this Lease pursuant to Landlord's termination right as provided in Paragraph 22(a)(i) above, and the repairs cannot, in the reasonable opinion of Landlord as stated in the Damage Notice, be completed within two hundred seventy (270) days after being commenced (which 270-day period shall not be subject to extension as a result of any Force Majeure), Tenant may elect, no earlier than sixty (60) days after the date of Tenant's receipt of the Damage Notice and not later than ninety (90) days after the date of Tenant's receipt of the Damage Notice, to terminate this Lease by written notice to Landlord effective as of the date specified in the notice, which date shall not be more than sixty (60) days after the date such notice is given by Tenant. Furthermore, if neither Landlord nor Tenant have terminated this Lease, and the repairs are not actually completed within such 270-day period, Tenant shall have the right to terminate this Lease within five (5) business days of the end of such period and thereafter during the first five (5) business days of each calendar month following the end of such period until such time as the repairs are complete, by notice to Landlord (the "DAMAGE TERMINATION NOTICE"), effective as of a date set forth in the Damage Termination Notice (the "DAMAGE TERMINATION DATE"), which Damage Termination Date shall not be less than five (5) business days following the end of such period or each such month, as the case may be. Notwithstanding the foregoing, if Tenant delivers a Damage Termination Notice to Landlord, then Landlord shall have the right to suspend the occurrence of the Damage Termination Date for a period ending thirty (30) days after the Damage Termination Date set forth in the Damage Termination Notice by delivering to Tenant, within five (5) business days of Landlord's receipt of the Damage Termination Notice, a certificate of Landlord's contractor responsible for the repair of the damage certifying that it is such contractor's good faith judgment that the repairs shall be substantially completed within thirty (30) days after the Damage Termination Date. If repairs shall be substantially completed prior to the expiration of such thirty-day period, then the Damage Termination Notice shall be of no force or effect, but if the repairs shall not be substantially completed within such thirty-day period, then this Lease shall terminate upon the expiration of such thirty-day period. At any time, from time to time, after the date occurring sixty (60) days after the date of the damage, Tenant may request that Landlord inform Tenant of Landlord's reasonable opinion of the date of completion of the repairs and Landlord shall respond to such request within five (5) business days. (b) Upon any termination of this Lease under any of the provisions of this Paragraph 22, the parties shall be released thereby without further obligation to the other from the date possession of the Premises is surrendered to Landlord except for items which have theretofore accrued and are then unpaid. (c) In the event of repair, reconstruction and restoration by Landlord as herein provided, the rent provided to be paid under this Lease shall be abated proportionately with the degree to which Tenant's use of the Premises is impaired during the period of such repair, reconstruction or restoration. Except as provided in Paragraph 19 to the contrary, Tenant shall not be entitled to any compensation or damages for loss in the use of the whole or any part of the Premises and/or any inconvenience or annoyance occasioned by such damage, repair, reconstruction or restoration. (d) Tenant shall not be released from any of its obligations under this Lease except to the extent and upon the conditions expressly stated in this Paragraph 22. (e) In the event that damage is due to any cause other than fire or other peril covered by extended coverage insurance or required to be insured by Landlord under Paragraph 21(d) above, Landlord may elect to terminate this Lease. -22- 23 (f) It is hereby understood that if Landlord is obligated to or elects to repair or restore as herein provided, Landlord shall be obligated to make repairs or restoration only of those portions of the Premises (i) which were originally provided at Landlord's expense or (ii) which were required to be insured by Landlord hereunder or (iii) for which Landlord has received insurance proceeds from insurance required to be carried by Tenant hereunder or (iv) which were damaged as a result of the negligence or willful misconduct of Landlord or of its agents, contractors or employees (provided that this Subparagraph (f) is not intended to, and shall not, relieve Tenant's insurance carriers of their obligations, to the extent such carriers are required to pay for the cost of repair of any such damage), and the repair and restoration of all other items shall be the obligation of Tenant. (g) Notwithstanding anything to the contrary contained in this Paragraph 22, Landlord shall not have any obligations whatsoever to repair, reconstruct or restore the Premises when the damage resulting from any casualty covered under this Paragraph 22 occurs during the last twelve (12) months of the Term of this Lease or any Option Term unless Tenant exercises, in accordance with Paragraph 3(b)(iii), an available Extension Option to extend the then current Term for the upcoming Option Term on or before the date which is sixty (60) days after the date of Tenant's receipt of the Damage Notice. (h) The provisions of this Lease, including this Paragraph 22, constitute an express agreement between Landlord and Tenant with respect to any and all damage to, or destruction of, all or any part of the Premises, and any statute or regulation with respect to any rights or obligations concerning damage or destruction in the absence of an express agreement between the parties, and any other statute or regulation, now or hereafter in effect, shall have no application to this Lease or any damage or destruction to all or any part of the Premises. 23. Eminent Domain. (a) In case the whole of the Premises, or such part thereof as shall substantially interfere with Tenant's use and occupancy thereof (including, without limitation, the parking areas of the Premises), shall be taken for any public or quasi-public purpose by any lawful power or authority by exercise of the right of appropriation, condemnation or eminent domain, or sold to prevent such taking, Tenant shall have the right to terminate this Lease effective as of the date possession is required to be surrendered to said authority. Tenant shall not assert any claim against Landlord or the taking authority for any compensation because of such taking and, except as provided in this Paragraph 23(a) below, Landlord shall be entitled to receive the entire amount of any award without deduction for any estate or interest of Tenant. In the event the amount of property or the type of estate taken shall not interfere with the conduct of Tenant's business, Landlord shall be entitled to the entire amount of the award without deduction for any estate or interest of Tenant and Landlord shall promptly proceed to restore the Premises to substantially their same condition prior to such partial taking, and a proportionate allowance shall be made to Tenant for the rent corresponding to the time during which, and to the part of the Premises of which, Tenant shall be so deprived on account of such taking and restoration. Nothing contained in this Paragraph shall be deemed to give Landlord any interest in any award separately made to Tenant for the taking of personal property and trade fixtures belonging to Tenant or for moving costs incurred by Tenant in relocating Tenant's business or any other item Tenant is entitled to recover under law or at equity provided that Landlord and Tenant shall each be entitled to receive fifty percent (50%) of the "bonus value" of the leasehold estate in connection therewith, which bonus value shall be equal to the sum paid by the condemning authority as the award for compensation for taking the leasehold created by this Lease. (b) In the event of taking of the Premises or any part thereof for temporary use, (i) this Lease shall be and remain unaffected thereby and rent shall not abate, and (ii) Tenant shall be entitled to receive for itself such portion or portions of any award made for such use with respect to the period of the taking which is within the -23- 24 Term, provided that if such taking shall remain in force at the expiration or earlier termination of this Lease, Tenant shall then pay to Landlord a sum equal to the reasonable cost of performing Tenant's obligations under Paragraph 34 with respect to surrender of the Premises and upon such payment shall be excused from such obligations. For purposes of this Subparagraph 23(b), a temporary taking shall be defined as a taking for a period of one hundred eighty (180) days or less. 24. Bankruptcy. If Tenant shall file a petition in bankruptcy under federal bankruptcy law as then in effect, or if Tenant is adjudicated a bankrupt in involuntary bankruptcy proceedings and such adjudication shall not have been vacated within thirty (30) days from the date thereof, or if a receiver or trustee be appointed of Tenant's property and the order appointing such receiver or trustee not be set aside or vacated within thirty (30) days after the entry thereof, or if Tenant shall assign Tenant's estate or effects for the benefit of creditors, or if this Lease shall otherwise by operation of law pass to any persons other than Tenant, then and in any such event Landlord may, if Landlord so elects, with or without notice of such election and with or without entry or action by Landlord, forthwith terminate this Lease, and notwithstanding any other provisions of this Lease, Landlord, in addition to any and all rights and remedies allowed by law or equity, shall upon such termination be entitled to recover damages in the amount provided in Subparagraph 25(b) below and neither Tenant nor any person claiming through or under Tenant or by virtue of any statute or order of any court shall be entitled to possession of the Premises but shall forthwith quit and surrender the Premises to Landlord. Nothing herein contained shall limit or prejudice the right of Landlord to prove and obtain as damages by reason of any such termination an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater, equal to, or less than the amount of damages recoverable under the provisions of this Paragraph 24. 25. Defaults and Remedies. (a) After the passage in full of the cure periods described below, the occurrence of any one or more of the following events shall constitute a default hereunder by Tenant: (i) The abandonment of the Premises by Tenant. (ii) The failure by Tenant to make any payment of rent or additional rent or any other payment required to be made by Tenant hereunder, as and when due, where such failure shall continue for a period of five (5) business days after written notice thereof from Landlord to Tenant; provided however, that any such notice shall be in lieu of, and not in addition to, any notice required under Nevada law. (iii) The failure by Tenant to observe or perform any of the express or implied covenants or provisions of this Lease to be observed or performed by Tenant, other than as specified in Subparagraph 25(a)(i) or (ii) above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Landlord to Tenant; provided, however, that any such notice shall be in lieu of and not in addition to, any notice required under Nevada law; provided, further, that if the nature of Tenant's default is such that more than thirty (30) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant shall commence such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (iv) (1) The making by Tenant of any general assignment for the benefit of creditors; (2) the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); (3) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located -24- 25 at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within sixty (60) days; or (4) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease where such seizure is not discharged within sixty (60) days. (b) In the event of any such default by Tenant, in addition to any other remedies available to Landlord at law or in equity, including, without limitation, Landlord's right to continue the Lease in effect after Tenant's breach and abandonment and recover rent as it becomes due, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder. In the event that Landlord shall elect to so terminate this Lease then Landlord may recover from Tenant: (i) the worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the Term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; plus (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom. As used in Subparagraphs 25(b)(i) and (ii) above, the "worth at the time of award" is computed by allowing interest at the maximum rate permitted by law per annum. As used in Subparagraph 25(b)(iii) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). (c) In the event of any such default by Tenant, Landlord shall also have the right, with or without terminating this Lease, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant for such period of time as may be required by applicable law after which time Landlord may dispose of such property in accordance with applicable law. No re-entry or taking possession of the Premises by Landlord pursuant to this Subparagraph 25(c) shall be construed as an election to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. (d) All rights, options and remedies of Landlord contained in this Lease shall be construed and held to be cumulative, and no one of them shall be exclusive of the other, and Landlord shall have the right to pursue any one or all of such remedies or any other remedy or relief which may be provided by law, whether or not stated in this Lease. No waiver of any default of Tenant hereunder shall be implied from any acceptance by Landlord of any rent or other payments due hereunder or any omission by Landlord to take any action on account of such default if such default persists or is repeated, and no express waiver shall affect defaults other than as specified in said waiver. The consent or approval of Landlord to or of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent or approval to or of any subsequent similar acts by Tenant. (e) (i) Notwithstanding anything to the contrary set forth in this Lease, Landlord shall not be in default in the performance of any obligation -25- 26 required to be performed by Landlord pursuant to this Lease unless Landlord fails to perform such obligation within thirty (30) days after the receipt of notice from Tenant specifying in detail Landlord's failure to perform; provided, however, if the nature of Landlord's obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be in default under this Lease if it shall commence such performance within such thirty (30) day period and shall thereafter diligently pursue the same to completion. Upon any such default by Landlord under this Lease, Tenant may, except as otherwise specifically provided in this Lease to the contrary, exercise any of its rights provided at law or in equity. (ii) In the event that Tenant is prevented from using, and does not use, the Improvements or any portion thereof, as a result of any repair, maintenance or alteration performed by Landlord, or which Landlord failed to perform, after the Commencement Date and required by the Lease, which substantially interferes with Tenant's use of the Premises (an "ABATEMENT EVENT"), then Tenant shall give Landlord notice of such Abatement Event, and if such Abatement Event continues for five (5) consecutive days after the giving of any such notice or ten (10) days after the giving of any such notices in any twelve (12) month period (the "ELIGIBILITY PERIOD"), then the Monthly Basic Rent and Tenant's obligation to pay any Operating Expenses shall be abated or reduced, as the case may be, after expiration of the Eligibility Period for such time that Tenant continues to be so prevented from using, and does not use, the Premises or a portion thereof, in the proportion that the rentable area of the portion of the Improvements that Tenant is prevented from using, and does not use, bears to the total rentable area of the Improvements; provided, however, in the event that Tenant is prevented from using, and does not use, a portion of the Improvements for a period of time in excess of the Eligibility Period and the remaining portion of the Improvements is not sufficient to allow Tenant to effectively conduct its business therein, and if Tenant does not conduct its business from such remaining portion, then for such time after expiration of the Eligibility Period during which Tenant is so prevented from effectively conducting its business therein, the Monthly Basic Rent and Tenant's obligation to pay for Operating Expenses shall be abated for such time as Tenant continues to be so prevented from using, and does not use, the Improvements. If, however, Tenant reoccupies any portion of the Improvements during such period, the rent allocable to such reoccupied portion, based on the proportion that the rentable area of such reoccupied portion of the Improvements bears to the total rentable area of the Improvements, shall be payable by Tenant from the date Tenant reoccupies such portion of the Improvements. To the extent Tenant is entitled to abatement without regard to the Eligibility Period, because of an event described in Paragraphs 22 or 23 of this Lease, then the Eligibility Period shall not be applicable. 26. Assignment and Subletting. Tenant shall not voluntarily assign or encumber its interest in this Lease or in the Premises, or sublease all or any part of the Premises, or allow any other person or entity to occupy or use all or any part of the Premises, without first obtaining Landlord's prior written consent, which shall not be unreasonably withheld. Any assignment, encumbrance or sublease without Landlord's prior written consent shall be voidable, at Landlord's election, and shall constitute a default. For purposes hereof, in the event Tenant is a partnership, a withdrawal or change of partners, or change of ownership of partners, owning more than a fifty percent (50%) interest in the partnership, or if Tenant is a closely held corporation (i.e., a corporation which is not publicly traded), any transfer of fifty percent (50%) or more of its stock, shall constitute a voluntary assignment and shall be subject to these provisions. A change of partners owning less than fifty percent (50%) interest in a partnership, or a transfer of less than fifty percent (50%) of a corporation's stock, may also be deemed to constitute a voluntary assignment subject to these provisions (but not where the corporation is publicly traded) if it results in a change of control of the partnership or corporation. No consent to an assignment, encumbrance, or sublease shall constitute a further waiver of the provisions of this Paragraph. Tenant shall notify Landlord in -26- 27 writing of Tenant's intent to assign this Lease, or encumber, or sublease Tenant's interest in the Premises, the name of the proposed assignee or sublessee, information concerning the financial responsibility of the proposed assignee or sublessee and the terms of the proposed assignment or subletting, and Landlord shall, within fifteen (15) days of receipt of such written notice, and additional information reasonably requested by Landlord concerning the proposed assignee's or sublessee's financial responsibility, elect one of the following: (a) Consent to such proposed assignment, encumbrance or sublease; or (b) Refuse such consent, which refusal shall be on reasonable grounds. Without limiting Landlord's grounds for disapproval, Landlord's disapproval shall be deemed reasonable if it is based on Landlord's analysis that (x) the proposed assignee's or sublessee's credit, character and reputation is not consistent with the quality of the Project or (y) the assignee or sublessee's use and occupancy of the Premises will be inconsistent with Subparagraph 1(n) and Paragraph 8 of the Lease. As a condition for granting its consent to any assignment, encumbrance or sublease, Landlord may require that the assignee or sublessee remit directly to Landlord, on a monthly basis, all monies due to Landlord as provided in this Paragraph 26 below. In the event that Landlord shall consent to an assignment or sublease under the provisions of this Paragraph 26, Tenant shall pay Landlord's reasonable processing costs and attorneys' fees incurred in giving such consent, not to exceed One Thousand Five Hundred Dollars ($1,500.00) during the initial ten (10) year Term. If for any proposed assignment or sublease Tenant receives rent or other consideration, whether cash or any other form whatsoever, either initially or over the term of the assignment or sublease, in excess of the rent called for hereunder, or, in case of the sublease of a portion of the Premises, in excess of such rent fairly allocable to such portion, after appropriate adjustments to assure that all other payments called for hereunder are taken into account, and after deducting any reasonable out-of-pocket costs incurred by Tenant in connection with such assignment or sublease, Tenant shall pay to Landlord as additional rent hereunder fifty percent (50%) of the excess value of each such payment of rent or other consideration received by Tenant promptly after its receipt. Landlord's waiver or consent to any assignment or subletting shall not relieve Tenant from any obligation under this Lease. Occupancy of all or part of the Premises by parent, subsidiary, or affiliated companies of Tenant shall not be deemed an assignment or subletting. In addition, notwithstanding anything to the contrary contained in this Lease, neither (i) an assignment of Tenant's interest under this Lease to a transferee of all or substantially all of the assets of Tenant, (ii) an assignment of Tenant's interest under this Lease to a transferee which is the resulting entity of a merger, reorganization or consolidation of Tenant with another entity, nor (iii) an assignment or subletting of all or a portion of the Premises to an affiliate of Tenant (an entity which is controlled by, controls or is under common control with Tenant), shall require Landlord's consent nor shall result in an obligation of Tenant to share any consideration from such transaction with Landlord, provided that Tenant notifies Landlord of any such assignment or sublease and promptly supplies Landlord with any documents or information reasonably requested by Landlord regarding such transfer or transferee and that such assignment or sublease is not a subterfuge by Tenant to avoid its obligations under this Lease. Any assignee of Tenant's interest under this Lease for which Landlord's consent is not required as provided in this Paragraph 26 above may be referred to herein as an "AFFILIATE ASSIGNEE." 27. Quiet Enjoyment. Landlord covenants and agrees with Tenant that upon Tenant paying the rent required under this Lease and paying all other charges and performing all of the covenants and provisions aforesaid on Tenant's part to be observed and performed under this Lease, Tenant shall and may peaceably and quietly have, hold and enjoy the Premises in accordance with this Lease, free from any person claiming by, through or under Landlord. 28. Subordination. Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, and at the election of Landlord or any first mortgagee with a lien on the Premises or any ground lessor with respect to the Premises, this Lease shall be subject and subordinate at all times to: (a) all ground leases or underlying leases which may now -27- 28 exist or hereafter be executed affecting the Premises or the land upon which the Premises are situated or both, (b) the lien of any mortgage or deed of trust which may now exist or hereafter be executed in any amount for which the Premises, land, ground leases or underlying leases, or Landlord's interest or estate in any of said items is specified as security, and (c) any CC&Rs (as defined in Paragraph 8) affecting the Premises provided that any CC&Rs added to the Premises after the date of this Lease, or any modification to the existing CC&Rs after the date of this Lease, shall not increase Tenant's obligations under this Lease nor decrease Tenant's rights under this Lease. Notwithstanding the foregoing, Landlord shall have the right to subordinate or cause to be subordinated any such ground leases or underlying leases or any such liens to this Lease. Landlord hereby agrees to provide Tenant with commercially reasonable non-disturbance and attornment agreements which expressly honor provisions in this Lease concerning the application of insurance and condemnation proceeds from any mortgage holders or deed of trust beneficiaries who later come into existence at any time prior to expiration of the Term in consideration of, and as a condition precedent to, Tenant's agreement to subordinate its interest to such mortgage or deed of trust. In the event that any ground lease or underlying lease terminates for any reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, if requested by the ground lessor, mortgagee or beneficiary, as applicable, attorn to and become the Tenant of the successor in interest to Landlord and in such event Tenant's right to possession of the Premises shall not be disturbed if Tenant is not in default and so long as Tenant shall pay the rent and all other amounts required to be paid to Landlord pursuant to the terms hereof and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. Tenant hereby waives its rights under any current or future law which gives or purports to give Tenant any right to terminate or otherwise adversely affect this Lease and the obligations of Tenant hereunder in the event of any such foreclosure proceeding or sale. Tenant covenants and agrees to execute and deliver, upon demand by Landlord and in the form reasonably requested by Landlord, any additional documents evidencing Tenant's agreement to attorn as set forth in this Paragraph 28 and the priority or subordination of this Lease with respect to any such CC&Rs, ground leases or underlying leases or the lien of any such mortgage or deed of trust. 29. Estoppel Certificate. Within ten (10) business days following any written request which Landlord may make from time to time, Tenant shall execute and deliver to Landlord a statement, in a form substantially similar to the form of Exhibit "F" attached hereto, certifying: (i) the Commencement Date of this Lease; (ii) the fact that this Lease is unmodified and in full force and effect (or, if there have been modifications hereto, that this Lease is in full force and effect, as modified, and stating the date and nature of such modifications); (iii) the date to which the rental and other sums payable under this Lease have been paid; (iv) the fact that, to Tenant's actual knowledge, there are no current defaults under this Lease by either Landlord or Tenant except as specified in Tenant's statement; and (v) such other matters reasonably requested by Landlord. Landlord and Tenant intend that any statement delivered pursuant to this Paragraph 29 may be relied upon by any mortgagee, beneficiary, purchaser or prospective purchaser of the Premises or any interest therein, including Tenant's interest. In connection with a proposed assignment or sublease by Tenant, or any other transfer of substantially all of Tenant's assets or stock, Landlord hereby agrees to provide to Tenant an estoppel certificate signed by Landlord, containing the same types of information, and within the same period of time as set forth in this Paragraph 29(a) above, with such changes as are reasonably necessary to reflect that the estoppel certificate is being granted and signed by Landlord to Tenant, rather than from Tenant to Landlord or a lender. 30. Building Planning. Intentionally Omitted. 31. Rules and Regulations. Tenant shall faithfully observe and comply with all reasonable rules and regulations from time to time put into effect by Landlord as it deems reasonably necessary or appropriate in its sole discretion (the "RULES AND REGULATIONS"). Landlord shall apply any such Rules and Regulations on a non-discriminatory basis and Landlord agrees that any such Rules -28- 29 and Regulations shall not deprive Tenant of rights expressly provided to Tenant under this Lease nor increase any obligations of Tenant under this Lease. 32. Choice of Law. This Lease shall be governed by and construed pursuant to the laws of the State of Nevada. 33. Successors and Assigns. Except as otherwise provided in this Lease, all of the covenants, conditions and provisions of this Lease shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. 34. Surrender of Premises. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Landlord, operate as an assignment to it of any or all subleases or subtenancies. Upon the expiration or termination of this Lease, Tenant shall peaceably surrender the Premises and all alterations and additions thereto broom- clean, in good order, repair and condition, reasonable wear and tear excepted, and shall comply with the provisions of Subparagraphs 14(g). The delivery of keys to any employee of Landlord or to Landlord's agent or any employee thereof shall not be sufficient to constitute a termination of this Lease or a surrender of the Premises. 35. Professional Fees. In the event that Landlord should bring suit for the possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provisions of this Lease, or for any other relief against Tenant hereunder, or should either party bring suit against the other with respect to matters arising from or growing out of this Lease, then all reasonable, out-of-pocket costs and expenses, including without limitation, professional fees such as appraisers', accountants' and attorneys' fees, incurred by the prevailing party therein shall be paid by the other party. 36. Performance by Tenant. Intentionally Omitted. 37. Mortgage and Senior Lessor Protection. No act or failure to act on the part of Landlord which would entitle Tenant under the terms of this Lease, or by law, to be relieved of Tenant's obligations hereunder or to terminate this Lease, shall result in a release of such obligations or a termination of this Lease unless (a) Tenant has given notice by registered or certified mail to any beneficiary of a deed of trust or mortgage covering the Premises and to the lessor under any master or ground Lease covering the Premises or any interest therein whose identity and address shall have been furnished to Tenant in writing, and (b) Tenant offers such beneficiary, mortgagee or lessor a reasonable opportunity to cure the default, which cure period shall not extend for more than sixty (60) days beyond the thirty (30) day cure period provided to Landlord pursuant to Paragraph 25(e)(i) above. However, this Paragraph 37 is not intended to, and shall not, extend any of the time periods for rental abatement specified in Paragraph 25(e)(ii) above. 38. Definition of Landlord. The term "Landlord" as used in this Lease, so far as covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner or owners, at the time in question, of the fee title to, or a lessee's interest in a ground lease of, the Premises. In the event of any transfer, assignment or other conveyance or transfers of any such title or interest, and assumption of Landlord's obligations under this Lease by the assignee/transferee, Landlord herein named (and in case of any subsequent transfers or conveyances, the then grantor) shall be automatically freed and relieved from and after the date -29- 30 of such transfer, assignment or conveyance of all liability as respects the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed and, without further agreement, the transferee of such title or interest shall have assumed and agreed to observe and perform any and all obligations of Landlord hereunder, during its ownership of the Premises. Landlord may transfer its interest in the Premises without the consent of Tenant and such transfer or subsequent transfer shall not be deemed a violation on Landlord's part of any of the terms and conditions of this Lease. 39. Waiver. The failure of Landlord to seek redress for violation of, or to insist upon strict performance of, any term, covenant or condition of this Lease or the Rules and Regulations shall not be deemed a waiver of such violation or prevent a subsequent act which would have originally constituted a violation from having all the force and effect of an original violation, nor shall any custom or practice which may become established between the parties in the administration of the terms hereof be deemed a waiver of, or in any way affect, the right of Landlord to insist upon the performance by Tenant in strict accordance with said terms. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. 40. Identification of Tenant. Unless the provisions of Paragraph 54 hereinbelow are applicable to this Lease, if more than one entity executes this Lease as Tenant, (a) each of them is jointly and severally liable for the keeping, observing and performing of all of the terms, covenants, conditions, provisions and agreement of this Lease to be kept, observed and performed by Tenant, and (b) the term "Tenant" as used in this Lease shall mean and include each of them jointly and severally and the act of or notice from, or notice or refund to, or the signature of, any one or more of them, with respect to the tenancy or this Lease, including, but not limited to, any renewal, extension, expiration, termination or modification of this Lease, shall be binding upon each and all of the entities executing this Lease as Tenant with the same force and effect as if each and all of them had so acted or so given or so received such notice or refund or so signed. 41. Parking and Transportation. (a) Tenant shall have the right to use all parking areas located upon the Premises, subject to such parking rules and regulations as Landlord deems reasonably necessary or appropriate in its sole discretion for the operation of said parking. Landlord may refuse to permit any person who violates with unreasonable frequency the parking rules and regulations to park in the parking areas, and any violation of the rules shall subject the car to removal. Tenant agrees to use its best efforts to acquaint all employees and visitors with the parking rules and regulations. Landlord shall have no responsibility for damage to cars in the parking areas, except as provided in Paragraph 19. (b) Tenant agrees that it will cooperate in governmentally required programs to reduce peak levels of commuter traffic. Such programs may begin prior to the Commencement Date and may include, but shall not be limited to, an annual survey of commuter practices; designation of an employee of Tenant as a contact for transportation management purposes; assembly of commuter information from Tenant's employees; carpools; vanpools and other ridesharing programs; public and private transit programs; and flexible work hours. (c) Upon reasonable advance notice to Landlord, Landlord shall make available to Tenant temporary parking areas containing no more than seven (7) parking spaces for each one thousand (1,000) rentable square feet of the Improvements (including the improvements constructed on the Expansion Premises, if applicable) upon any undeveloped land owned by Landlord within The Crossing Business Center that is suitable for providing temporary parking. Any preparation of such undeveloped land for such parking shall be subject to Landlord's reasonable approval and shall be at Tenant's -30- 31 sole cost and expense. Tenant's use of such temporary parking areas shall not exceed forty-five (45) days during any calendar year. The temporary parking areas will be deemed to constitute a portion of the Premises during the period of Tenant's use thereof for purposes of Paragraph 19. If Landlord no longer has undeveloped land within The Crossing Business Center suitable for providing temporary parking, then any additional parking that Tenant may need in excess of the parking available upon the Premises must be satisfied by utilizing the public streets adjacent to the Premises. Landlord makes no representation as to the availability of unimproved land within The Crossing Business Center for temporary parking or the availability of any parking on the adjacent public streets; however, if (i) undeveloped land within The Crossing Business Center suitable for providing temporary parking is not available and (ii) either (A) parking is prohibited by law on the adjacent public streets during the period of Tenant's temporary parking requirement or (B) Tenant reasonably determines that six (6) parking spaces for each one thousand (1,000) rentable square feet of the Improvements is not available on those portions of the adjacent public streets designated on Exhibit "G" during the period of Tenant's temporary parking requirement, Landlord shall provide Tenant with a temporary parking area for such period at some other location within reasonable proximity to the Premises and if a shuttle vehicle is required in order to provide transportation for Tenant's employees to and from such other parking location, Landlord shall promptly reimburse Tenant for the cost of operating such shuttle vehicle during such temporary period. The provisions of this Paragraph 41(c) shall apply only to the Original Tenant, any Affiliate Assignee and any other assignee of Tenant's entire interest in this Lease which is permitted pursuant to the provisions of Paragraph 26 above, but only where such other assignee does not have a need for temporary parking requirements which are greater than those of the Original Tenant. (d) All parking provided to Tenant under this Paragraph 41 shall be free of charge during the initial Term and during any Option Term, except that Tenant shall be responsible for any tax or other governmental assessment imposed on Tenant's parking. 42. Terms and Headings. The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. Words used in any gender include other genders. The Paragraph headings of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. 43. Examination of Lease. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for Lease, and it is not effective as a Lease or otherwise until execution by and delivery to both Landlord and Tenant. 44. Time. Time is of the essence with respect to the performance of every provision of this Lease in which time or performance is a factor. 45. Prior Agreement; Amendments. This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Lease, and no prior agreement or understanding, oral or written, express or implied, pertaining to any such matter shall be effective for any purpose. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. The parties acknowledge that all prior agreements, representations and negotiations are deemed superseded by the execution of this Lease to the extent they are not incorporated herein. -31- 32 46. Severability. Any provision of this Lease which shall prove to be invalid, void or illegal in no way affects, impairs or invalidates any other provision hereof, and such other provisions shall remain in full force and effect. 47. Recording. Neither Landlord nor Tenant shall record this Lease nor a short form memorandum thereof without the consent of the other and if such recording occurs, it shall be at the sole cost and expense of the party requesting the recording, specifically including any documentary transfer taxes. 48. Limitation on Liability. The obligations of Landlord under this Lease do not constitute personal obligations of the individual partners, directors, officers or shareholders of Landlord, and Tenant shall not seek recourse against the individual partners, directors, officers or shareholders of Landlord or any of their personal assets for satisfaction of any liability in respect to this Lease. Any liability of Landlord under this Lease shall be limited to Landlord's interest in the Premises, but in no event shall such interest be deemed to be less than One Million One Hundred Twenty- Five Thousand Dollars ($1,125,000.00) for purposes of this Paragraph 48. 49. Riders. Clauses, plats, exhibits and riders, if any, affixed to this Lease are a part hereof. 50. Signs. Tenant shall not place any sign within any area of the Premises which is visible from outside the Premises without Landlord's prior written consent. Landlord's consent shall not be unreasonably withheld, provided that any such signage shall comply with Landlord's standard graphics package for the Project and no building-top signage shall be permitted. Landlord shall have the right to remove any sign which has not been previously approved in writing. 51. Modification for Lender. If in connection with obtaining construction, interim or permanent financing for the Premises, the lender shall request reasonable modifications in this Lease as a condition to such financing, Tenant will not unreasonably withhold, delay or defer its consent thereto, provided that such modifications do not increase the obligations of Tenant hereunder in any way and do not adversely affect the leasehold interest hereby created or Tenant's rights hereunder. 52. Accord and Satisfaction. No payment by Tenant or receipt by Landlord of a lesser amount than the rent payment herein stipulated shall be deemed to be other than on account of the rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy provided in this Lease. Tenant agrees that each of the foregoing covenants and agreements shall be applicable to any covenant or agreement whether expressly contained in this Lease or imposed by any statute or at common law. 53. Financial Statements. If required in connection with a prospective sale or financing of the Premises at any time during the term of this Lease, Tenant shall, upon thirty (30) days prior written notice from Landlord, provide Landlord with a current financial statement and financial statements of the two (2) years prior to the current financial statement year. Such statements shall be prepared in accordance with generally accepted accounting principles and, if such is the normal practice of Tenant, shall be audited by an independent certified public accountant. If Tenant is not publicly -32- 33 held, Landlord shall keep, and shall direct any prospective purchaser or lender to keep, such financial statements confidential except to the extent disclosure is required to any accountants or other consultants retained by Landlord or such prospective purchaser or lender. 54. Tenant as Corporation. If Tenant executes this Lease as a corporation, then Tenant represents and warrants that the individuals executing this Lease on Tenant's behalf are duly authorized to execute and deliver this Lease on its behalf in accordance with a duly adopted resolution of the board of directors of Tenant, a copy of which is to be delivered to Landlord upon request, and in accordance with the By-Laws of Tenant. 55. No Partnership or Joint Venture. Nothing in this Lease shall be deemed to constitute Landlord and Tenant as partners or joint venturers. It is the express intent of the parties hereto that their relationship with regard to this Lease be and remain that of landlord and tenant. 56. Force Majeure. Any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God, inability to obtain services, labor, or materials or reasonable substitutes therefor, governmental actions, civil commotions, fire or other casualty, and other causes beyond the reasonable control of the party obligated to perform (collectively, the "FORCE MAJEURE"), except with respect to (i) the obligations imposed with regard to rent and other charges to be paid by Tenant or any monetary obligations to be paid by Landlord pursuant to this Lease, and (ii) Landlord's obligations to make timely payments of the Allowance pursuant to the Work Letter Agreement, notwithstanding anything to the contrary contained in this Lease, shall excuse the performance of such party for a period equal to any such prevention, delay or stoppage and, therefore, if this Lease specifies a time period for performance of an obligation of either party, that time period shall be extended by the period of any delay in such party's performance caused by a Force Majeure. IN WITNESS WHEREOF, the parties have executed this Lease the day and year first above written. TENANT: LANDLORD: WILLIAMS-SONOMA, INC., a California HOWARD HUGHES PROPERTIES, corporation LIMITED PARTNERSHIP, a Delaware limited partnership By: _______________________________ Print Name:____________________ By: THE HOWARD HUGHES Print Title:___________________ CORPORATION (formerly known as Summa Corporation), a Delaware corporation, its sole general partner By: _________________________________ Print Name:______________________ Print Title:_____________________ -33- 34 EXHIBIT "A" LEGAL DESCRIPTION OF PREMISES (To be attached) EXHIBIT "A" -1- 35 EXHIBIT "A" -2- 36 EXHIBIT "A" -3- 37 EXHIBIT "A" -4- 38 EXHIBIT "A" -5- 39 EXHIBIT "A" -6- 40 EXHIBIT "B" SITE PLAN [Site Plan needs to depict the Premises and the Expansion Premises] EXHIBIT "B" -1- 41 EXHIBIT "C" WORK LETTER AGREEMENT This Work Letter Agreement supplements the Office Lease (the "LEASE") dated concurrently herewith, by and between Landlord and Tenant, covering certain premises described in the Lease (the "PREMISES"). All terms not defined herein shall have the same meaning as set forth in the Lease. 1. Construction of Base Improvements and Tenant Improvements. Landlord shall construct, through its designated contractor, the "BASE IMPROVEMENTS" described on Schedule 1 attached hereto. In addition, Landlord shall construct, through its designated contractor, all other portions of the building to be occupied by Tenant pursuant to the Lease (collectively, the "TENANT IMPROVEMENTS") in accordance with the Final Plans for the Tenant Improvements approved by Landlord and Tenant pursuant to Paragraph 2 below. The Base Improvements and Tenant Improvements are collectively referred to as the "IMPROVEMENTS." All Improvements shall be constructed pursuant to this Work Letter Agreement and shall be performed only by Landlord's designated contractor. 2. Plans and Specifications for Improvements. 2.1 All plans and specifications, and approvals or disapprovals thereof for the Tenant Improvements shall be submitted in accordance with the schedule set forth in Paragraph 6 below. 2.2 Tenant shall retain an architect reasonably approved by Landlord to prepare and deliver to Landlord for approval preliminary plans for the Tenant Improvements based upon Tenant's Outline Specifications dated September 25, 1995 (the "PRELIMINARY PLANS"). If Landlord shall disapprove of any portion of the Preliminary Plans, Landlord shall advise Tenant of such revisions, and reasons therefor, as are reasonably required by Landlord for the purpose of obtaining approval. Tenant shall then submit to Landlord, for Landlord's approval, a redesign of the Preliminary Plans, incorporating the revisions required by Landlord and such modifications thereof as are suggested by Tenant, said modifications to be subsequently approved by Landlord prior to Tenant's submission of Final Plans. 2.3 Tenant shall cause its architect to prepare from the approved Preliminary Plans complete architectural plans, drawings and specifications for the Tenant Improvements and, utilizing Landlord's designated mechanical, electrical and structural engineers, complete engineered and cross coordinated mechanical, electrical and structural working drawings for the Tenant Improvements. Such complete plans, drawings and specifications are referred to herein as the "FINAL PLANS". All items shown on the Final Plans other than the Base Improvements shall be considered to be Tenant Improvements. Tenant shall submit the Final Plans for the approval of Landlord in the same manner as provided in Subparagraph 2.2 above for approval by Landlord of the Preliminary Plans. 2.4 Tenant acknowledges that, unless specifically shown as Landlord's responsibility on the Final Plans, the Improvements shall not include, and Landlord shall not be responsible for, the design, construction or installation of, various nonstructural items which Tenant may find desirable for the Premises including, without limitation, furniture, trade fixtures, office equipment, telephone, telecommunications and data equipment and systems, plantscaping, artwork or cabling required in connection with any of these items and Tenant may enter the Premises to install these items as provided in, and subject to, Paragraph 5 below. 3. Allowance for Work and Work Cost. 3.1 Landlord shall construct the Base Improvements at Landlord's cost. Tenant shall receive from Landlord an allowance (the "ALLOWANCE") of $896,675.00 (i.e., $25.00 per rentable square foot multiplied by 35,867 rentable square feet of the Improvements), which EXHIBIT "C" -1- 42 Allowance shall be used solely for Work Costs for the Tenant Improvements. All Tenant Improvements, whether or not the cost thereof is covered by the Allowance, shall become the property of Landlord upon expiration or earlier termination of the Lease and shall remain on the Premises at all times during the Term of this Lease. Tenant shall be entitled to no payment or rent reduction for any part of the Allowance not used by Tenant. Tenant shall have the option, exercisable by written notice to Landlord at any time prior to the time Tenant would otherwise be required to pay any excess Work Costs to Landlord pursuant to Paragraph 3.7 below, to increase the amount of the Allowance by up to Ten Dollars ($10.00) per rentable square foot of the Improvements. If Tenant exercises such option, the Monthly Basic Rent shall be increased by an amount calculated to fully amortize the amount by which the Allowance is so increased, based upon equal monthly payments of principal and interest, with interest imputed at the rate of twelve percent (12%) per annum on the outstanding principal balance, over a ten (10) year amortization period commencing as of the Commencement Date (or, as to the Expansion Premises, over the period from the commencement of Tenant's lease of the Expansion Premises until the expiration of the initial ten (10) year initial Term). 3.2 As used herein, "WORK COSTS" mean (i) all out-of-pocket fees and expenses incurred by Landlord in connection with the design and construction of the Tenant Improvements, including, without limitation, architectural and engineering fees for the preparation of the Preliminary Plans and Final Plans, (ii) the actual contractor costs and charges for material and labor, contractor's profit, overhead and general conditions incurred by Landlord in having the Tenant Improvements constructed in accordance with the Final Plans, (iii) Governmental agency plan check, permit and other fees and sales and use taxes, (iv) testing and inspection costs, (v) any paint touch-up or repair work necessary due to Tenant's move into the Premises, and (vi) all other reasonable costs expended or to be expended by Landlord in the construction of the Tenant Improvements. 3.3 As promptly as practicable following Tenant's approval of the Final Plans, Landlord shall submit to Tenant a written estimate of the Work Costs for the Tenant Improvements. Thereupon, Tenant shall either approve the estimate or disapprove specific items and submit to Landlord proposed revisions of Final Plans to reflect the deletion of and/or substitution for such disapproved items. Any such deletions and/or substitutions to the Final Plans will be processed in accordance with Subparagraphs 3.8 and 3.9 below. Upon Tenant's final written approval of said estimate, such approved estimate to be referred to herein as the "WORK COST STATEMENT", Landlord shall have the right to purchase special materials requiring extended delivery time as set forth on the Final Plans and to commence the construction of the items included in said Work Cost Statement pursuant to Paragraph 4 hereof. 3.4 The contractor cost of improvements shall be the sum of the actual cost to Landlord's contractor, plus a contractor's fee for profit, overhead and general conditions. The fee for profit shall not exceed five point five percent (5.5%) of all other items under the contract and overhead and general conditions shall be allocated by Landlord to the Base Improvements and the Tenant Improvements based upon their respective costs. Wherever practicable, Landlord shall cause its contractor to obtain a minimum of three (3) bids. 3.5 If any amendment or supplement to the Final Plans shall require changes in the Base Improvements, the increased cost of the Base Improvements caused by such changes shall be charged as a Work Cost. The cost thereof shall include all direct architectural and/or engineering fees and expenses in connection therewith. 3.6 Landlord's written estimate of the Work Costs shall include a reasonable contingency to allow for changes in the Tenant Improvements and/or other unforeseen costs and expenses arising after Tenant's approval thereof. 3.7 In the event that the Work Cost Statement exceeds the Allowance (as may be increased by Tenant pursuant to Paragraph 3.1 above), Tenant shall pay fifty percent (50%) of the excess to Landlord within five (5) business days of its delivery of final written approval of the Work Cost Statement. The remaining fifty percent (50%) of any such excess shall be paid by Tenant to Landlord, as additional rent, within five (5) business days after the Commencement Date. EXHIBIT "C" -2- 43 3.8 In the event that changes to the Final Plans are requested by Tenant and approved by Landlord or required by any governmental agency subsequent to Landlord's approval thereof, the changes shall be incorporated into the work by means of change order. 3.9 Any change orders to the approved Final Plans which are requested by Tenant and approved by Landlord or required by any governmental agency shall be forwarded to Landlord for approval and costing. Tenant shall be given a written cost estimate for the completion of said change order which must be approved and paid for by Tenant prior to the commencement of work; provided, however, that Landlord shall pay the cost of the change to the extent of any remaining Allowance (as may be increased as provided in Paragraph 3.1 above). 3.10 Except as provided in Paragraph 3.7 hereof, Tenant shall pay Landlord all amounts due under this Work Letter Agreement within five (5) business days of billing. Should Tenant reasonably dispute the amount of any billing, Tenant shall make payment on all portions which are not disputed. Any unpaid portions, whether undisputed or disputed on which Landlord ultimately prevails, shall bear interest from the due date at the Interest Rate. 3.11 The parties acknowledge that the Allowance shall not be charged for any costs required to correct any errors or omissions of Landlord or the general contractor retained by Landlord or for any costs resulting from the negligence or willful misconduct of Landlord or the general contractor retained by Landlord. 4. Construction. 4.1 Following Tenant's approval of Landlord's Work Cost estimate, Tenant's payment of any amount by which such estimate exceeds the Allowance (as provided in, and subject to, Paragraph 3.7 above) and receipt by Landlord of all relevant governmental agency approvals and permits, Landlord shall cause its general contractor to commence the construction of the Improvements. Landlord and/or such general contractor shall have the right to cause all or any portion of such work to be performed by one or more subcontractors. Landlord shall furnish Tenant with a schedule setting forth the projected completion dates therefor and showing the deadlines for any actions required to be taken by Tenant during such construction, and Landlord may from time to time during the prosecution of the Improvements modify or amend such schedule due to delays encountered by Landlord; provided, however, that this sentence is not intended to, and shall not, supersede Paragraphs 7.2 and 7.3 below. Landlord shall endeavor to meet such schedule (as the same may be modified or amended). Except as provided in Paragraphs 7.2 and 7.3 below, Landlord shall not be liable for any direct or indirect damages as a result of delays in construction. 4.2 If Tenant shall request any change in the Final Plans ("CHANGE ORDER"), Tenant shall cause the architect to prepare and submit to Landlord a revised set of the Final Plans prepared in accordance with Subparagraph 2.3 above, for Landlord's approval. Any approved Change Orders shall initiate a new written estimate of Work Costs which must be approved by Tenant pursuant to the procedures set forth in Subparagraph 3.3 above. In order to account for Landlord's administrative services, Landlord shall be entitled to add an administrative charge to the Work Cost in an amount equal to five percent (5%) of any additional costs resulting from a Change Order in excess of Fifty Thousand Dollars ($50,000.00). No such fee shall be charged for Change Orders of less than Fifty Thousand Dollars ($50,000.00). Any delay in the construction of Improvements as a result of any Change Orders requested by Tenant shall be a Tenant Delay (as defined in Paragraph 7 below). 4.3 In connection with the construction of the Improvements, each party shall be entitled to rely upon the other party's construction representative who shall be as follows: Landlord's Construction Representative: Frank Beck, Tenant's Construction Representative: Susan Brown. Each respective construction representative shall have the authority to make binding commitments relative to the Improvements on behalf of the party appointing such construction representative. All inquiries of Tenant pertaining to construction of the Improvements shall be directed in writing to Landlord's Construction Representative. A party may designate a substitute construction representative by giving written notice to the other party EXHIBIT "C" -3- 44 at any time. Any representatives of Tenant who desire to visit the Premises during construction of the Improvements must obtain the prior consent of Landlord and the general contractor. 5. Decorating by Tenant. Landlord shall make the Premises reasonably available to Tenant during the last thirty (30) days of construction of the Improvements for the purpose of decorating, furnishing and moving into the Premises and installation of Tenant's telephone system and cabling. Such early entry by Tenant shall be subject to scheduling by Landlord and such rules and regulations as Landlord may establish in order to minimize any interference in Landlord's completion of the Improvements. If at any time such entry shall cause or threaten a delay in the construction of the Improvements, Landlord may terminate Tenant's right to such early entry. Prior to Tenant's entry, Tenant shall deliver evidence to Landlord that Tenant has obtained the insurance required under Paragraph 21 of the Lease. Tenant shall be responsible for any damage to the Improvements caused by Tenant's entry. 6. Schedule. Preparation and approval of the Preliminary Plans, Final Plans and the Work Cost Statement shall proceed as indicated below.
Action Responsibility Due Date ------ -------------- -------- (i) Submission and approval of the Landlord and Tenant To be prepared by Preliminary Plans Tenant's architect and approved by Landlord and Tenant based upon regularly scheduled meetings during January, 1996. (ii) Submission of Final Plans to Tenant January 31, 1996 Landlord (iii) Delivery of written notice Landlord Three (3) business days approving or disapproving Final after (ii) Plans (iv) Submission, if necessary, of Tenant Five (5) business days redesign of Final Plans after (iii) (v) Delivery of written notice of final Landlord Three (3) business days approval of Final Plans (if (iv) is after (iv) necessary) (vi) Submission of Work Cost estimate Landlord Two (2) business days to Tenant after Landlord's approval of Final Plans (vii) Delivery of written notice of final Tenant Two (2) business days approval of Work Cost Statement after (vi)
7. Delays. 7.1 Notwithstanding the Estimated Commencement Date provided in Subparagraph 1(j) of the Lease, Tenant's obligation for the payment of rent as defined within the Lease shall not commence until the actual Commencement Date as defined in Subparagraph 1(k) of the Lease; provided, however, that if Landlord shall be delayed in substantially completing the Improvements as a result of any of the following ("TENANT DELAYS"): EXHIBIT "C" -4- 45 (i) Tenant's failure to complete any action item which is the responsibility of Tenant on or before the due date specified in Paragraph 6 above, or (ii) Tenant's changes to Final Plans after the final submission date in Subparagraph 6(vii) above, or Tenant's approval thereof, whichever is earlier, or (iii) Any delay caused by Tenant's entry pursuant to Paragraph 5, or (iv) Any delay of Tenant in making payment to Landlord for Tenant's share of Work Cost as provided in Subparagraph 3.7 above, or (v) Any other delay caused by Tenant, then the Term of the Lease shall nevertheless commence and the Commencement Date shall be the date it would have been had the delay not occurred. 7.2 The term "OUTSIDE DATE" shall mean August 1, 1996; provided, however, that such August 1, 1996 date shall be extended on a day-for-day basis to the extent that Landlord is delayed in substantially completing the Improvements as a result of any Tenant Delays and/or Force Majeure. In the event that the Commencement Date does not occur on or before the Outside Date (as so extended), then (i) Tenant's obligation to pay Monthly Basic Rent shall not commence until the Commencement Date, (ii) for each day after the Outside Date (as so extended) in which the Commencement Date has not occurred, (a) Tenant's first obligations to pay Monthly Basic Rent shall be abated for two days and (b) the date of expiration of the initial Term shall be extended for two (2) days. By way of example only, and not as limitation upon the foregoing, if there are ten (10) days of Force Majeure delays and five (5) days of Tenant Delays and if the Commencement Date occurs on August 20, 1996, then the Outside Date shall be August 15, 1996, Tenant's obligation to pay Monthly Basic Rent shall be abated until August 30, 1996 and the initial Term shall expire on August 30, 2006. 7.3 The term "OUTSIDE TRAINING DATE" shall mean September 1, 1996; provided, however, that such September 1, 1996 date shall be extended on a day-for-day basis to the extent that Landlord is delayed in substantially completing the Improvements as a result of any Tenant Delays and/or Force Majeure. In the event that the Commencement Date does not occur on or before the Outside Training Date (as so extended), then in addition to Tenant's rights under Paragraph 7.2 above, (i) Landlord shall reimburse Tenant, within thirty (30) days after Landlord's receipt of a reasonably particularized invoice and other evidence of payment reasonably requested by Landlord, for the excess ("TRAINING EXCESS") of any actual, out-of-pocket costs incurred by Tenant in order to train Tenant's employees who will be working from the Premises as of the Commencement Date over and above the amount of actual, out-of-pocket expenses Tenant would have incurred in order to train such employees had the Commencement Date occurred on or before the Outside Training Date (as so extended), and (ii) the date of expiration of the Initial Term shall be extended (in addition to the extension described in Subparagraph 7.2(ii)(b) above) for a sufficient number of days so that the Monthly Basic Rent paid by Tenant for the Premises during such extension shall be equivalent to the amount of the Training Excess so paid by Landlord. EXHIBIT "C" -5- 46 TENANT: LANDLORD: WILLIAMS-SONOMA, INC., a California HOWARD HUGHES PROPERTIES, corporation LIMITED PARTNERSHIP, a Delaware limited partnership By: _______________________________ Print Name:____________________ By: THE HOWARD HUGHES Print Title:___________________ CORPORATION (formerly known as Summa Corporation), a Delaware corporation, its sole general partner By: _________________________________ Print Name: Print Title: EXHIBIT "C" -6- 47 SCHEDULE 1 DESCRIPTION OF BASE IMPROVEMENTS The following is a description of Base Improvements for the Premises. Any items not specifically identified are intended to be included with the Tenant Improvements. Reference the attached plans and elevations which approximate the contemplated base building design. Sitework - Parking will be provided for approximately 245 cars. Paving sections will be installed as recommended in the geotechnical report. - Handicapped parking will be provided adjacent to the main entrance. - Utilities will be brought to the building with all necessary fees paid to obtain a TCO for the base building. Sewer connection fees are paid when fixtures are designed and installed. Sewer connection fees will be paid as part of the Tenant Improvements. - A secondary source for telephone was requested by Tenant and the second service will be installed with the Base Improvements but paid for as part of the Tenant Improvements. - The emergency generator will be sized and accounted for with the Tenant Improvements. Allowances will be made with the Base Improvements to support the generator location at the northwest corner of Phase I. All costs to support the generator are part of the Tenant Improvements. - Site lighting shall meet code with a minimum 1 fc in the parking lot area. - The transformer will be located unscreened adjacent to the generator. - A concrete patio and adjacent landscaped area will be located at the rear of the building. - A monument sign meeting Summerlin guidelines will be designed and installed at a single location at the building entrance. Base Building - The structure is to be tilt-up concrete panels with glass area as shown on the attached elevations. - The roof system will be an unpainted wood panelized system with 16' clear to the bottom of the trusses. Roofing will be a 4-ply built-up roof with 3-1/2" of rigid insulation to eliminate batt insulation in the space. - The roof system will be designed to support 5 ton units throughout the building. - Roof insulation will be designed to meet the Energy Guide requirements and to meet the local design standards. The roof insulation is anticipated to be rigid insulation. Wall insulation will be installed as a part of the Tenant Improvements. This will accommodate the need to install facilities in the exterior walls. - Window coverings will be designed and installed with the Tenant Improvements. - 4' x 8' skylights will be installed throughout the call center. - A canopy will be provided at the main entrance. - Other than bringing primary service into the building, no in-slab facilities have been identified for Tenant Improvements. SCHEDULE 1 -1- 48 EXHIBIT "D" RENTABLE SQUARE FEET 1. The term "RENTABLE SQUARE FEET" of the Improvements as used in the Lease shall be deemed to mean the Construction Area of the Improvements as determined in accordance with the Method for Measuring Floor Area in Office Buildings, ANSI Z65.1-1980 (the "BOMA STANDARD"). 2. For purposes of establishing the initial Annual Basic Rent and Monthly Basic Rent as shown in Paragraph 1 of the Lease and the amount of the Allowance, the number of rentable square feet of the Improvements is deemed to be as set forth in Subparagraph 1(g) of the Lease. Within ninety (90) days following the Commencement Date, Landlord's architect will redetermine the actual number of rentable square feet of the Improvements, based upon the criteria set forth in Paragraph 1 above, and thereupon Annual Basic Rent, Monthly Basic Rent and the Allowance shall be retroactively adjusted accordingly. EXHIBIT "D" -1- 49 EXHIBIT "E" SAMPLE FORM OF NOTICE OF LEASE TERM DATES TO:________________________ Date: _________________ Re: Lease dated __________________________, 19__ between HOWARD HUGHES PROPERTIES, LIMITED PARTNERSHIP, a Delaware limited partnership, Landlord, and WILLIAMS-SONOMA, INC., a California corporation, Tenant, concerning Premises located at __________ Covington Cross Drive, Las Vegas, Nevada ____________. Gentlemen: In accordance with the subject Lease, we wish to advise and/or confirm as follows: 1. That the Premises have been accepted herewith by the Tenant as being substantially complete in accordance with the subject Lease. 2. That the Tenant has possession of the subject Premises and acknowledges that under the provisions of the subject Lease, the Term of said Lease shall commence as of __________ for a term of ten (10), ending on ___________________, with one (1) option to extend for five (5) years. 3. That in accordance with the subject Lease, rental commenced to accrue on_________________________. 4. If the commencement date of the subject Lease is other than the first day of the month, the first billing will contain a pro rata adjustment. Each billing thereafter, with the exception of the final billing, shall be for the full amount of the monthly installment as provided for in said Lease. 5. Rent is due and payable in advance on the first day of each and every month during the term of said Lease. Your rent checks should be made payable to __________________________________ at ____________________________. AGREED AND ACCEPTED TENANT: LANDLORD: WILLIAMS-SONOMA, INC., a California HOWARD HUGHES PROPERTIES, corporation LIMITED PARTNERSHIP, a Delaware limited partnership By: _______________________________ Print Name:____________________ By: THE HOWARD HUGHES Print Title:___________________ CORPORATION (formerly known as Summa Corporation), a Delaware corporation, its sole general partner By: _________________________________ Print Name:______________________ Print Title:_____________________ EXHIBIT "E" -1- 50 EXHIBIT "F" SAMPLE FORM OF ESTOPPEL CERTIFICATE The undersigned, HOWARD HUGHES PROPERTIES, LIMITED PARTNERSHIP, a Delaware limited partnership ("LANDLORD"), with a mailing address c/o ___________________________________, _______________________________, and WILLIAMS-SONOMA, INC., a California corporation ("TENANT"), hereby certify to _____________________________________, a _________________________________ as follows: 1. Attached hereto is a true, correct and complete copy of that certain lease dated __________, 19__ between Landlord and Tenant (the "LEASE"), which demises premises located at _________________________________. The Lease is now in full force and effect and has not been amended, modified or supplemented, except as set forth in paragraph 4 below. 2. The term of the Lease commenced on __________, 19__. 3. The term of the Lease shall expire on __________, 19__. 4. The Lease has: (Initial one) ( ) not been amended, modified, supplemented, extended, renewed or assigned. ( ) been amended, modified, supplemented, extended, renewed or assigned by the following described agreements, copies of which are attached hereto:_____ _______________________________________________________________________________. 5. Tenant is now in possession of said premises. 6. Tenant and Landlord acknowledge that the Lease will be assigned to __________________________ and no modification, adjustment, revision or cancellation of the lease or amendments thereto shall be effective unless written consent by _____________________ is obtained, and that until further notice, payments under the Lease may continue as heretofore. 7. The amount of fixed monthly rent is $_______________. 8. The amount of security deposits (if any) is $____________. No other security deposits have been made. 9. Tenant is paying the full lease rental, which has been paid in full as of the date hereof. No rent under the Lease has been paid more than thirty (30) days in advance of its due date. 10. All known work required to be performed by Landlord under the Lease has been completed. 11. To Tenant's actual knowledge, there are no defaults on the part of the Landlord or Tenant under the Lease. 12. To Tenant's actual knowledge, Tenant has no defense as to its obligations under the Lease and claims no set-off or counterclaim against Landlord. 13. Tenant has no right to any concession (rental or otherwise) or similar compensation in connection with renting the space it occupies except as provided in the Lease. All provisions of the Lease and amendments thereto (if any) referred to above are hereby ratified. EXHIBIT "F" -1- 51 The foregoing certification is made with the knowledge that ___________ _______________ is about to fund a loan to Landlord or purchase the demised premises from Landlord, and that ________________________ is relying upon the representations herein made in connection with such transaction. DATED: ______________, 19__ TENANT: LANDLORD: WILLIAMS-SONOMA, INC., a California HOWARD HUGHES PROPERTIES, corporation LIMITED PARTNERSHIP, a Delaware limited partnership By: _______________________________ Print Name:____________________ By: THE HOWARD HUGHES Print Title:___________________ CORPORATION (formerly known as Summa Corporation), a Delaware corporation, its sole general partner By: _________________________________ Print Name:______________________ Print Title:_____________________ EXHIBIT "F" -2- 52 EXHIBIT "G" PUBLIC STREET PARKING AREAS EXHIBIT "G" -1- 53 STANDARD FORM LEASE BY AND BETWEEN HOWARD HUGHES PROPERTIES, LIMITED PARTNERSHIP, A DELAWARE LIMITED PARTNERSHIP "LANDLORD" AND WILLIAMS-SONOMA, INC., A CALIFORNIA CORPORATION "TENANT" 54 TABLE OF CONTENTS
PARAGRAPH PAGE - --------- ---- 1. Terms and Definitions.......................................... 1 2. Premises Leased................................................ 2 3. Term........................................................... 3 4. Possession..................................................... 6 5. Annual Basic Rent.............................................. 6 6. Rental Adjustment.............................................. 6 7. Security Deposit............................................... 11 8. Use............................................................ 11 9. Payments and Notices........................................... 12 10. Brokers........................................................ 13 11. Holding Over................................................... 13 12. Taxes on Tenant's Property..................................... 13 13. Condition of Premises.......................................... 13 14. Alterations.................................................... 14 15. Repairs........................................................ 16 16. Liens.......................................................... 17 17. Entry by Landlord.............................................. 18 18. Utilities and Services......................................... 18 19. Indemnification................................................ 19 20. Damage to Tenant's Property.................................... 19 21. Insurance...................................................... 19 22. Damage or Destruction.......................................... 21 23. Eminent Domain................................................. 23 24. Bankruptcy..................................................... 24 25. Defaults and Remedies.......................................... 24 26. Assignment and Subletting...................................... 26 27. Quiet Enjoyment................................................ 27 28. Subordination.................................................. 27 29. Estoppel Certificate........................................... 28 30. Building Planning.............................................. 28 31. Rules and Regulations.......................................... 28 32. Choice of Law.................................................. 29 33. Successors and Assigns......................................... 29 34. Surrender of Premises.......................................... 29 35. Professional Fees.............................................. 29 36. Performance by Tenant.......................................... 29 37. Mortgage and Senior Lessor Protection.......................... 29 38. Definition of Landlord......................................... 29 39. Waiver......................................................... 30 40. Identification of Tenant....................................... 30 41. Parking and Transportation..................................... 30 42. Terms and Headings............................................. 31 43. Examination of Lease........................................... 31 44. Time........................................................... 31 45. Prior Agreement; Amendments.................................... 31 46. Severability................................................... 32 47. Recording...................................................... 32 48. Limitation on Liability........................................ 32 49. Riders......................................................... 32 50. Signs.......................................................... 32 51. Modification for Lender........................................ 32 52. Accord and Satisfaction........................................ 32 53. Financial Statements........................................... 32
-i- 55 54. Tenant as Corporation.......................................... 33 55. No Partnership or Joint Venture................................ 33 56. Force Majeure.................................................. 33
Principal Reference Exhibit in Paragraph - ------- ------------ "A" Legal Description of Premises 2(a) "B" Site Plan Showing Initial Premises and Expansion 2(a) Premises "C" Work Letter Agreement 2(a) "D" Rentable Square Feet 2(a) "E" Sample Form of Notice of Lease Term Dates 13 "F" Sample Form of Tenant Estoppel Certificate 29 "G" Public Street Parking Areas 41
-ii- 56 INDEX OF DEFINED TERMS
DEFINED TERM PAGE - ------------ ---- Abatement Event.............................................................25 Actual Statement............................................................10 Affiliate Assignee..........................................................27 Allowance............................................................Exhibit C Annual Basic Rent; Monthly Basic Rent........................................2 Approximate Rentable Square Feet within Improvements.........................1 Base Improvements....................................................Exhibit C BOMA Standard........................................................Exhibit D Brokers......................................................................2 CC&Rs.......................................................................11 Change Order.........................................................Exhibit C Changes.....................................................................13 Claims......................................................................18 Commencement Date............................................................1 Comparable Projects..........................................................4 Cosmetic Changes............................................................14 Damage Notice...............................................................21 Damage Termination Date.....................................................21 Damage Termination Notice...................................................21 Eligibility Period..........................................................25 Estimate Statement...........................................................9 Estimated Commencement Date..................................................1 Exhibits.....................................................................2 Expansion Notice.............................................................3 Expansion Option.............................................................2 Expansion Premises...........................................................2 Extension Options............................................................3 Fair Market Rental Rate......................................................4 Final Plans..........................................................Exhibit C Force Majeure...............................................................32 Improvements.................................................................1 Interest Rate...............................................................10 Landlord.....................................................................1 Landlord's Address...........................................................1 Landlord's Construction Representative.......................................2 Lease Year...................................................................2 Notice.......................................................................3 Operating Expenses Allowance.................................................2 Option Rent..................................................................4 Option Rent Notice...........................................................4 Option Terms.................................................................4 Original Tenant..............................................................3 Outside Agreement Date.......................................................5 Outside Date.................................................................5 Outside Training Date........................................................5 Overridden Claims...........................................................18 Permitted Use................................................................2 Preliminary Plans....................................................Exhibit C Premises.....................................................................1 Premises Address.............................................................1 Project......................................................................2 Punch List Items.............................................................2 Qualified Appraiser..........................................................5 real property taxes..........................................................8 rentable square feet.................................................Exhibit D Rules and Regulations.......................................................28 Service Facilities..........................................................14 Tenant.......................................................................1 Tenant Delays........................................................Exhibit C Tenant Improvements..................................................Exhibit C Tenant's Address.............................................................1 Tenant's Construction Representative.........................................2 Term.........................................................................1 Training Excess..............................................................5 Work Cost Statement..................................................Exhibit C Work Costs...........................................................Exhibit C
-iii- 57 -iv- EX-10.11A 8 REIMBURSEMENT AGREEMENT 1 EXHIBIT 10.11A REIMBURSEMENT AGREEMENT THIS REIMBURSEMENT AGREEMENT (this "Agreement") is made as of the 11th day of December, 1995 by and between Howard Hughes Properties, Limited Partnership, a Delaware limited partnership ("HHP") and Williams-Sonoma, Incorporated, a California corporation ("User"). R E C I T A L S: A. HHP and User have entered into negotiations for a build to suit lease by User of approximately thirty-five thousand (35,000) square feet located at The Crossing Business Center, Las Vegas, Nevada, as depicted in Exhibit "A" (the "Premises"). B. It is contemplated by the parties hereto that HHP will construct all improvements ("Improvements") on the Premises. C. To facilitate construction of the Improvements, User has requested that HHP engage various consultants to perform work related to and associated with the preparation of plans and specifications ("Plans") of the Improvements. D. In the event User and HHP fail to execute a lease agreement with respect to the Premises, User desires to reimburse HHP for all costs associated with the preparation of the Plans. 2 A G R E E M E N T NOW THEREFORE, in consideration of the mutual covenants and agreements set forth herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Consultants. HHP may engage all consultants ("Consultants"), including without limitation, architects and other design engineers, which HHP, in its reasonable discretion, deems necessary to facilitate preparation of the Plans. Subject to Paragraph 2 below, User agrees to pay all costs and expenses incurred by HHP with respect to the Consultants provided that such costs and expenses have been (i) expended pursuant to a budget approved in writing in advance by User; or (ii) approved in writing in advance by User on a case by case basis ("Total Costs"). 2. Reimbursement. In the event HHP and User do not execute and enter into a lease agreement for the Premises on or before April 1, 1996 (the "Execution Date"), then within thirty (30) days of receipt of written demand (the "Demand Notice") from HHP setting forth the Total Costs, User shall pay to HHP, in cash, an amount equal to the Total Costs. The Demand Notice shall include copies of all Consultant invoices in HHP's possession. With respect to the first One Hundred Thousand Dollars ($100,000) of Total Costs, HHP and User shall each pay one half (1/2) of the amount of such Total Costs. User further agrees to pay all Total Costs in excess of One Hundred Thousand Dollars ($100,000) not to exceed Twenty -2- 3 Thousand Dollars ($20,000). In no event shall User's share of the Total Costs exceed Seventy Thousands Dollars ($70,000). In no event shall HHP's obligation hereunder for the Total Costs exceed Fifty Thousand Dollars ($50,000). 3. Restriction on Leasing. Until the earlier of execution of the lease agreement or the termination of negotiations thereof, HHP shall not advertise, market, or enter into any negotiations whatsoever with any other party with respect to the Premises. 4. Refund. HHP agrees to refund to User any and all monies paid by user to HHP pursuant to Section 2 hereof, provided, that within ninety (90) days after the Execution Date, User and HHP have mutually executed a lease with respect to the Premises. 5. Notices. All notices, demands, requests, consents, approvals or other communications (for the purposes of this Section 4 collectively called "Notices") required or permitted to be given hereunder or which are given with respect to this Agreement shall be in writing and shall be delivered by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: To HHP: HOWARD HUGHES PROPERTIES, LIMITED PARTNERSHIP 1231 Town Center Drive, Suite 200 Las Vegas, Nevada 89134 Attention: Vice President Leasing & Sales, Commercial and Industrial Division -3- 4 To USER: WILLIAMS-SONOMA, INCORPORATED 3250 Van Ness Avenue San Francisco, California 94109 Attention: Mr. Patrick Connolly, Senior Vice President Marketing & Mail Order Operations 6. Governing Law. This Agreement shall be governed by, interpreted under, and construed and enforced in accordance with the laws of the State of Nevada applicable to agreements made and to be performed wholly within the State of Nevada. 7. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior understandings, if any, with respect thereto. This Agreement may not be modified, changed or supplemented, nor may any obligations hereunder be waived, except by written instrument signed by all parties hereto or by their agents duly authorized in writing or as otherwise expressly stated herein. The parties do not intend to confer any benefit hereunder on any person, firm or corporation other than the parties hereto. 8. Waivers; Extensions. No waiver of any breach of any agreement or provision herein contained shall be deemed a waiver of any preceding or succeeding breach thereof or of any other agreement or provision herein contained. No extension of time for performance of any obligation or acts shall be deemed an extension or the time performance of any other obligations or acts. 9. Non-Waiver of Rights. No failure or delay of either party in the exercise of any right given to such party -4- 5 hereunder shall constitute a waiver thereof unless the time specified herein for exercise of such right has expired, nor shall any single or partial exercise or any right preclude any other or further exercise thereof or of any other right. The waiver of any breach hereunder shall not be deemed to be waiver of any other or any subsequent breach hereof. 10. Exhibits. Each of the Exhibits referred to herein and attached hereto is an integral part of this Agreement and is incorporated herein by this reference. 11. Partial Invalidity. The determination that any covenant, agreement, condition or provision of this Agreement is invalid shall not effect the enforceability of the remaining covenants, agreements, conditions or provisions hereof and, in the event of any such determination, this Agreement shall be construed as if such invalid covenant, agreement, condition or provision were not included herein. -5- 6 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. HOWARD HUGHES PROPERTIES, LIMITED PARTNERSHIP, a Delaware limited partnership By: THE HOWARD HUGHES CORPORATION (formerly known as Summa Corporation), a Delaware corporation, its sole general partner By: /s/ Robert E. Morrison --------------------------- Print Name: Robert E. Morrison ------------------ Print Title: Sr. V.P. ----------------- THE ABOVE IS HEREBY AGREED TO AND CONFIRMED THIS 8TH DAY OF DECEMBER, 1995 WILLIAMS-SONOMA, INCORPORATED a California Corporation By: /s/ Pat Connolly ---------------------------- Print Name: Pat Connolly -------------------- Print Title: Sr. V.P. Mail Order ------------------- -6- EX-11 9 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 21 2 EXHIBIT 11: COMPUTATION OF EARNINGS PER SHARE
52 Weeks Ended 52 Weeks Ended 52 Weeks Ended January 28, 1996 January 29, 1995 January 30, 1994 ---------------- ---------------- ---------------- Net earnings $ 2,536,000 $19,572,000 $11,221,000 ----------- ----------- ----------- Average shares of common stock outstanding during period 25,362,000 25,155,000 25,015,000 Incremental shares from assumed exercise of stock options (primary) 776,000 972,000 479,000 ----------- ----------- ----------- 26,138,000 26,127,000 25,494,000 ----------- ----------- ----------- Primary earnings per share $0.10 $0.75 $0.44 ===== ===== ===== Average shares of common stock outstanding during period 25,362,000 25,155,000 25,015,000 Incremental shares from assumed exercise of stock options (fully diluted) 792,000 1,001,000 539,000 ----------- ----------- ----------- 26,154,000 26,156,000 25,554,000 ----------- ----------- ----------- Fully diluted earnings per share $0.10 $0.75 $0.44 ===== ===== =====
Note: Amounts have been restated to reflect the 3-for-2 stock splits in February 1994 and September 1994. 22 EX-13 10 1995 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 1995 ANNUAL REPORT TO SHAREHOLDERS This is available as a separate document. It is included as Exhibit 13 only in the electronic filing format. 23 2 EXHIBIT 13: 1995 ANNUAL REPORT TO SHAREHOLDERS 24 3 EXHIBIT 13 WILLIAMS-SONOMA, INC. - -------------------------------------------------------------------------------- CORPORATE PROFILE WILLIAMS-SONOMA, INC. operates high-quality, service-oriented retail concepts focused on the home: Williams-Sonoma professional-style cooking and related products, Pottery Barn casual home decor, Hold Everything organizational solutions, Gardeners Eden garden-related merchandise and Chambers luxury linens. Each concept is marketed throughout the United States via direct mail catalogs, with mailings totaling 132 million catalogs in 1995. The company operates 240 Williams-Sonoma, Pottery Barn and Hold Everything stores in 32 states and Washington, D.C. (A joint venture with Tokyu Department Store handles direct mail and 12 stores in Japan.) Williams-Sonoma, Inc. common stock is quoted on the NASDAQ National Market System under the symbol WSGC. FINANCIAL HIGHLIGHTS
Fiscal Year Dollars in thousands 1995 1994 1993 1992 1991 except per share data -------- -------- -------- -------- -------- Net Sales $644,653 $528,543 $410,056 $344,944 $312,654 Net Earnings 2,536 19,572 11,221 1,799 1,611 Net Earnings Per Share .10 .75 .44 .07 .06 Total Assets $319,096 $217,878 $167,604 $147,087 $138,120 Working Capital 39,076 49,506 40,405 32,909 29,050 Stockholders' Equity $121,653 $118,216 $ 95,311 $ 83,540 $ 79,546
1 4 WILLIAMS-SONOMA, INC. - -------------------------------------------------------------------------------- FIVE-YEAR SELECTED FINANCIAL DATA
52 Weeks Ended January 28 January 29 January 30 January 31 February 2 Dollars in thousands except percentages, 1996 1995 1994 1993 1992 per share amounts and retail stores data ---------- ---------- ---------- ---------- ---------- Result of Operations Net Sales $ 644,653 $ 528,543 $ 410,056 $ 344,944 $ 312,654 Earnings before income taxes 4,373 33,435 19,398 3,048 2,731 Net earnings 2,536 19,572 11,221 1,799 1,611 Primary and fully diluted net earnings per share(1) $ .10 $ .75 $ .44 $ .07 $ .06 Financial Position Working capital $ 39,076 $ 49,506 $ 40,405 $ 32,909 $ 29,050 Long-term debt 46,757 6,781 587 723 1,144 Total assets 319,096 217,878 167,604 147,087 138,120 Shareholders' equity per share (book value)(1) $ 4.78 $ 4.70 $ 3.80 $ 3.34 $ 3.25 Catalog Sales Catalogs mailed in year 131,800 126,833 99,807 94,326 95,618 Catalog sales growth 16.2% 55.0% 23.9% (.2%) (3.8%) Catalog sales as percent of total sales 38.8% 40.8% 33.9% 32.4% 36.0% Number of orders filled during year 2,828 2,729 1,921 1,749 1,996 Retail Stores Number of stores at year-end 240 214 209 213 189 Comparable store sales growth 3.4% 16.5% 13.8% 2.1% 0.5% Store selling area at year-end (sq. ft.) 690,256 537,969 487,883 493,434 433,958
(1) Per share amounts have been restated to reflect the 3-for-2 stock splits in February 1994 and September 1994. 5 WILLIAMS-SONOMA, INC. - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS NET SALES Net sales consist of the following components:
52 Weeks Ended January 28 January 29 January 30 Dollars in thousands 1996 % Total 1995 % Total 1994 % Total -------- ------- -------- ------- -------- ------- Catalog sales $250,372 39% $215,458 41% $139,038 34% Retail sales 394,281 61% 307,327 58% 260,572 64% California Closet revenue -- -- 5,758 1% 10,446 2% -------- --- -------- --- -------- --- Total net sales $644,653 100% $528,543 100% $410,056 100% ======== === ======== === ======== ===
Net sales for Williams-Sonoma , Inc. and subsidiaries ( the Company) for the fiscal year ended January 28,1996 (fiscal 1995) increased $116,110,000 (22%) compared to net sales for the fiscal year ended January 29,1995 (fiscal 1994). Net sales for fiscal 1994 increased 29% over net sales for the fiscal year ended January 30, 1994 (fiscal 1993). In August of 1994 the Company sold California Closet Company, Inc., a wholly-owned subsidiary which markets custom home closet systems, primarily through a network of franchise stores. The Company does not expect the sale of this business to significantly impact future net sales. Catalog sales in fiscal 1995 and 1994 increased 16% and 55%, respectively, over those of the prior year. The Company attributes most of the growth in catalog sales to the "re-merchandising" of the Pottery Barn concept in 1992 and the change in the Williams-Sonoma catalog format in 1994. The change from the smaller digest format to a larger format improved the productivity of the Williams-Sonoma catalog. The number of catalogs mailed increased 4% and 27% in fiscal 1995 and fiscal 1994, respectively. Pottery Barn accounted for 78% of the catalog sales growth in fiscal 1995 and 42% in fiscal 1994. Williams-Sonoma accounted for 11% of the catalog sales growth in fiscal 1995 and 32% in fiscal 1994.
52 Weeks Ended January 28 January 29 January 30 Dollars in thousands 1996 1995 1994 ---------- ---------- ---------- Retail sales $394,281 $307,327 $260,572 Total net sales $644,653 $528,543 $410,056 Retail growth percentage 28.3% 17.9% 16.6% Comparable store sales growth 3.4% 16.5% 13.8% Number of stores - beginning of year 214 209 213 Number of new stores 34 11 -- Number of closed stores 8 6 4 --- --- --- Number of stores - end of year 240 214 209 Number of remodeled or expanded stores 10 9 2
Retail sales in fiscal 1995 increased 28% over retail sales in fiscal 1994. The increase is primarily due to the opening of 34 new stores (20 Williams-Sonoma and 14 Pottery Barn) and the remodeling of 10 stores (8 Williams-Sonoma and 2 Pottery Barn). Growth in comparable stores sales accounted for 3.4 percentage points of the growth in fiscal 1995. Retail sales in fiscal 1994 grew 18% over the prior fiscal year. 16.5 percentage points of this growth is attributable to comparable stores sales growth. The balance of the growth reflects a net increase of 5 stores in fiscal 1994. Pottery Barn, with 28% of the store locations at the end of fiscal 1995, accounted for 50% and 39% of the retail sales growth in fiscal 1995 and 1994, respectively. The new Williams-Sonoma and Pottery Barn stores opened during fiscal 1994 and fiscal 1995 have approximately 34% and 215% more selling square feet, respectively, than the existing stores. The larger format stores enable the Company to more clearly display merchandise. The Company plans to open 27 new or expanded large format stores in fiscal 1996-13 Pottery Barn and 14 Williams-Sonoma. 6 WILLIAMS-SONOMA, INC. - -------------------------------------------------------------------------------- Comparable stores are defined as those whose gross square feet did not change by more than 20% in the previous twelve months and which have been open for at least twelve months. Comparable store sales are compared monthly for purposes of this analysis. The exclusion of expanded stores from the comparable store sales computation may depress comparable store sales growth in fiscal 1996. COST OF GOODS SOLD AND OCCUPANCY Cost of goods sold and occupancy expense expressed as a percentage of net sales in fiscal 1995 increased 3.8 percentage points to 63.7% from 59.9% in fiscal 1994. Gross margins were adversely affected by higher occupancy expenses, a promotional program initiated in the fourth fiscal quarter to reduce excess inventory, a reserve established at year-end for excess inventory and higher-than-planned shortage results. Higher occupancy expenses were partly attributable to the cost of temporary off-site storage facilities for inventory. Excess inventory was due to the combined effect of above-plan inventory purchases and delayed retail store openings. In fiscal 1994, double-digit comparable store sales growth, dramatic growth in catalog sales (which have a higher gross margin than retail sales) and new stores were responsible for a 2.4 percentage point reduction in cost of goods sold and occupancy expense expressed as a percentage of total net sales. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expense expressed as a percentage of net sales increased 1.5 percentage points in fiscal 1995 to 35.0% from 33.5% in fiscal 1994. Approximately half of the rate increase is due to an increase in miscellaneous income and expense, which is primarily due to the fact that fiscal 1994 includes the reversal of a reserve (discussed below). The balance of the increase is generally attributable to higher operating expenses in most areas of the business. Operational and execution problems at the Company's distribution and telemarketing facilities also contributed significantly to the increase. Sales volumes exceeded the capacity of these facilities during the peak holiday season for October through December. As a result, the Company was required to hire substantially more seasonal employees than normal. In December of 1993 the Company purchased a headquarters building with plans to consolidate the headquarters staff in the building. In the fourth quarter of fiscal 1993 the Company established a $3,000,000 reserve for the estimated cost of vacating leased office space prior to the expiration of the leases. Sales growth experienced in fiscal 1994 and planned growth in fiscal 1995 required the Company to retain some of the leased office space it planned to sublease. Therefore, in the fourth quarter of fiscal 1994 the Company reversed $2,000,000 of the lease reserve established in 1993. INTEREST EXPENSE Average month-end short-term borrowings increased 262% from $12,977,000 in fiscal 1994 to $47,033,000 in fiscal 1995 due to the growth in merchandise inventories, new store construction, and the expansion and upgrade of the Memphis distribution center. On August 8,1995, the Company issued $40,000,000 in principal amount of 10-year unsecured 7.2% Senior Notes. In December 1993, the Company purchased a new headquarters building with working capital and then secured a seven-year, $7 million, 7.8% mortgage on the building in April 1994. The Company's weighted average interest rate on short-term borrowings increased to 7.0 % in fiscal 1995 from 6.3% in fiscal 1994. Net interest expense in fiscal 1995 increased $3,218,000 from the prior year. INCOME TAXES The Company's effective tax rate was 42.0% for fiscal 1995 - an increase of 0.5 percentage points from fiscal 1994. This is a result of the higher aggregate state tax rates based on the mix of retail sales and catalog sales in the various states where the Company has sales or conducts business. LIQUIDITY Working capital at January 28, 1996, declined by $10,430,000 over that at January 29, 1995. Net cash provided by operating activities declined from $21,729,000 in fiscal 1994 to $2,353,000 in fiscal 1995. The decline is primarily attributable to the decline in net income of $17,036,000 in fiscal 1995 and the increase in accounts receivable and merchandise inventories, which was largely offset by increases in deferred lease incentives, accounts payable, and accrued expenses and other liabilities. The increase in 7 WILLIAMS-SONOMA, INC. - -------------------------------------------------------------------------------- merchandise inventories is due principally to increased sales activity, above-plan inventory purchases and delayed retail store openings. The increase in accounts receivable is attributable to landlord construction allowances for stores opened in the second half of fiscal 1995. Deferred lease incentives represent landlord new store construction allowances that are amortized over the life of the store lease. Cash used in investing activities was a record $85,774,000 in fiscal 1995. $53,951,000 was spent on new and remodeled stores, and $16,666,000 on the expansion and upgrade of the Memphis distribution center. The Company financed the above activities through a $40,000,000 private placement of 7.2% senior notes (Senior Notes) due August 8, 2005, and a $29,600,000 increase in net bank borrowings. The Company's existing credit agreement was renewed on March 29, 1996, with a 360-day, combined line of credit and letter of credit facility. The aggregate principal amount available under the renewed line of credit varies according to seasonal requirements from a high of $90 million ($80 million for cash advances) to a low of $60 million ($35 million for cash advances). This represents a lower overall commitment of funds for the Company than was available in fiscal 1995 under the prior credit agreement. The new agreement replaces the Company's prior credit agreement, dated October 13, 1994, which had been amended during fiscal 1995 to increase the maximum combined borrowing limit under the line of credit and letter of credit facilities from $90 million to $110 million. Additional amendments to the October agreement modified the terms of certain financial ratios in favor of the Company and waived the Company's failure to comply with certain covenants, including the thirty-day "out of debt period," during which no borrowings were permitted under the line of credit facility. On April 15, 1996, the Company issued $40,000,000 principal amount of 5.25% convertible notes (Convertible Notes) due April 15, 2003. The Convertible Notes will be convertible at any time on or after July 15, 1996, into shares of the Company's common stock at a conversion price of $26.10 per share (or 38.3 shares per $1,000 principal amount). IMPACT OF INFLATION The impact of inflation on results of operations has not been significant. SEASONALITY The Company's business is subject to substantial seasonal variations in demand. Historically, a significant portion of the Company's sales and net income have been realized during the period from October through December, and levels of net sales and net income have generally been significantly lower during the period from February through July. The Company believes this is the general pattern associated with the mail-order and retail industries. In anticipation of its peak season, the Company hires a substantial number of additional employees in its retail stores and mail-order processing and distribution areas, and incurs significant fixed catalog production and mailing costs. FORWARD-LOOKING STATEMENTS Except for historical information contained herein, the matters discussed in this Annual Report to Shareholders are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in such forward-looking statements. Such risks and uncertainties include, without limitation, the Company's ability to improve planning and control processes and other infrastructure issues, the potential for construction and other delays in store openings, the Company's dependence on external funding sources, a limited operating history for the Company's new large-format stores, the potential for changes in consumer spending patterns, consumer preferences and overall economic conditions, the Company's dependence on foreign suppliers and increasing competition in the specialty retail business. Other factors that could cause actual results to differ materially from those set forth in such forward-looking statements include the risks and uncertainties detailed in the Company's most recent Form 10-K and its other filings with the Securities and Exchange Commission. 8 WILLIAMS-SONOMA, INC. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF EARNINGS
52 Weeks Ended Dollars and shares in thousands, January 28 January 29 January 30 except per share amounts 1996 1995 1994 ---------- ---------- ---------- Net sales $644,653 $528,543 $410,056 Costs and expenses Cost of goods sold and occupancy 410,335 316,827 255,650 Selling, general and administrative 225,418 176,972 133,835 Interest expense-net 4,527 1,309 1,173 -------- -------- -------- Earnings before income taxes 4,373 33,435 19,398 Income taxes 1,837 13,863 8,177 -------- -------- -------- Net earnings $ 2,536 $ 19,572 $ 11,221 ======== ======== ======== Primary and fully diluted earnings per share $ .10 $ .75 $ .44 Average number of common shares outstanding Primary 26,138 26,127 25,494 Fully diluted 26,154 26,156 25,554
See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Retained Dollars and shares in thousands Shares Amount Earnings Total ------------------------ --------- -------- Balance at January 31, 1993 24,998 $ 43,533 $ 40,007 $ 83,540 Issuance pursuant to stock option plans and tax benefit from sale of optioned stock by employees 88 550 - 550 Net earnings - - 11,221 11,221 ------ -------- --------- -------- Balance at January 30, 1994 25,086 44,083 51,228 95,311 Issuance pursuant to stock option plans and tax benefit from sale of optioned stock by employees 256 3,333 - 3,333 Net earnings - - 19,572 19,572 ------ -------- --------- -------- Balance at January 29, 1995 25,342 47,416 70,800 118,216 Issuance pursuant to stock option plans and tax benefit from sale of optioned stock by employees 84 901 - 901 Net earnings - - 2,536 2,536 ------ -------- --------- -------- Balance at January 28, 1996 25,427 $ 48,317 $ 73,336 $121,653
See Notes to Consolidated Financial Statements. 9 WILLIAMS-SONOMA, INC. - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET
January 28 January 29 Dollars in thousands 1996 1995 ---------- ---------- ASSETS Current assets Cash and cash equivalents $ 4,166 $ 17,481 Accounts receivable (less allowance for doubtful accounts of $238 and $239) 13,157 5,394 Merchandise inventories 121,603 87,949 Prepaid expenses and other assets 6,506 5,849 Prepaid catalog expenses 15,613 11,205 Deferred income taxes 139 259 -------- -------- Total current assets 161,184 128,137 Property and equipment-net 147,302 79,395 Investments and other assets (less accumulated amortization of $755 and $1,000) 6,570 6,325 Deferred income taxes 4,040 4,021 -------- -------- $319,096 $217,878 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 58,295 $ 49,357 Accrued expenses 8,323 4,407 Accrued salaries and benefits 8,666 8,138 Income taxes payable 1,947 8,329 Line of credit 29,600 -- Current portion of long-term obligations 125 141 Customer deposits 9,587 5,631 Other liabilities 5,565 2,628 -------- -------- Total current liabilities 122,108 78,631 Deferred lease credits 28,578 14,250 Long-term debt 46,757 6,781 Shareholders' equity Preferred stock, $.01 par value, authorized 7,500,000 shares, none issued -- -- Common stock, $.01 par value, authorized 126,562,500 shares, issued and outstanding 25,426,890 and 25,342,077 shares 48,317 47,416 Retained earnings 73,336 70,800 Total shareholders' equity 121,653 118,216 -------- -------- $319,096 $217,878 ======== ========
See Notes to Consolidated Financial Statements. 10 WILLIAMS-SONOMA, INC. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
52 Weeks Ended January 28 January 29 January 30 Dollars in thousands 1996 1995 1994 ---------- ---------- ---------- Cash flows from operating activities: Net earnings $ 2,536 $ 19,572 $11,221 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 16,476 11,632 11,190 Store closing reserve (208) (445) (119) Reserve for termination of corporate headquarters leases - (2,000) 3,000 Reserve for California Closet Company, Inc. - - (392) Amortization of deferred lease incentives (1,950) (1,122) (988) Change in allowance for doubtful accounts (1) 10 (290) Change in deferred rents (57) 290 (188) Change in deferred income taxes 101 1,305 (2,535) Loss on disposal of assets 948 1,329 355 Tax benefit from sale of optioned stock by employees 343 2,167 177 Change in: Accounts receivable (7,613) (2,443) 625 Merchandise inventories (33,654) (18,510) (7,195) Prepaid catalog expenses (4,408) (5,487) (809) Prepaid expenses and other assets (657) (3,216) (271) Accounts payable 8,389 14,298 (437) Accrued expenses and other liabilities 11,783 3,998 5,247 Deferred lease incentives 16,707 1,622 115 Income taxes payable (6,382) (1,271) 8,876 --------- --------- ------- Net cash provided by operating activities 2,353 21,729 27,582 Cash flows from investing activities: Purchase of property and equipment (86,513) (30,145) (13,955) Proceeds from the sale of property and equipment 797 - - Other (58) 87 133 --------- --------- ------- Net cash used in investing activities (85,774) (30,058) (13,822) Cash flows from financing activities: Change in cash overdrafts 549 7,095 2,699 Borrowings under line of credit 226,600 120,400 72,500 Repayments under line of credit (197,000) (120,400) 81,200) Proceeds from issuance of long-term debt 40,000 7,000 - Repayments of long-term debt (141) (208) (284) Proceeds from exercise of stock options 558 1,166 373 Debt issuance costs (460) - - --------- --------- ------- Net cash provided by financing activities 70,106 15,053 (5,912) Net increase (decrease) in cash and cash equivalents (13,315) 6,724 7,848 Cash and cash equivalents at beginning of year 17,481 10,757 2,909 --------- --------- ------- Cash and cash equivalents at end of year $ 4,166 $ 17,481 $10,757 ========= ========= =======
In 1994 in a non-cash transaction, the Company received a $2,100,000 note as partial proceeds from the sale of a subsidiary. See Notes to Consolidated Financial Statements. 11 WILLIAMS-SONOMA, INC. - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company and its subsidiaries are specialty retailers of products for the home, which are merchandised through five direct-mail catalogs and three retail businesses: Williams-Sonoma, Pottery Barn, Hold Everything, Chambers (catalog only) and Gardeners Eden (catalog only). Based on net sales, retail accounts for 61.2% of the business and catalog accounts for 38.8%. The principal concepts in both retail and catalog are Williams-Sonoma and Pottery Barn, which sell cookware essentials and contemporary tableware and home furnishings, respectively. The catalogs reach customers throughout the United States, while the three retail businesses currently operate 240 stores in 32 states. These consolidated financial statements include Williams-Sonoma, Inc. and its subsidiaries. Significant intercompany transactions and accounts have been eliminated. Cash equivalents consist of short-term investments with original maturities of 90 days or less. Merchandise inventories are stated at the lower of cost (moving weighted-average method) or market. Approximately 39% of the Company's merchandise is foreign-sourced. The primary sources for imported merchandise are located in Europe and Asia. At January 28, 1996, a small portion of $122 million of inventory is in excess of current requirements based on the recent level of sales. Management has developed a program to reduce this inventory to desired levels over the near term and has established a reserve in anticipation of expected losses on its disposition. Should this program not be successful, additional amounts may be required to be accrued and carrying amounts of inventories may need to be reduced. Prepaid catalog expenses consist of the cost to produce, print and distribute catalogs. Such costs are amortized over the expected sales life of each catalog. Typically, over 90% of the cost of a catalog is amortized in the first four months. At January 28, 1996, and January 29, 1995, $15,613,000 and $11,205,000, respectively, of prepaid advertising was reported as assets. Prepaid catalog expenses amounted to $78,131,000, $62,816,000 and $42,998,000 in fiscal 1995, 1994 and 1993, respectively. Property and equipment are stated at cost. Depreciation is computed using the straight-line method based upon the estimated remaining useful lives of the assets ranging from 3 to 39 years. Amortization of improvements to leased properties is based upon the remaining term of the applicable lease or the estimated useful lives of such assets, whichever is shorter. Investments and other assets include non-current receivables, long-term deposits, and lease rights and interests which are being amortized over the life of the respective leases (5 to 49 years). Deferred lease incentives include construction allowances received from landlords, which are amortized on a straight-line basis over the initial lease term. For leases which contain fixed escalations of the minimum annual lease payment during the original term of the lease, the Company recognizes rental expense on a straight-line basis and records the difference between rent expense and the amount currently payable as deferred lease incentives. New accounting pronouncements: In 1995, the Financial Standards Board issued SFAS NO. 123, "Accounting for Stock-Based Compensation," whose accounting and disclosure provisions must be adopted in 1996. The new standard defines a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. The new standard encourages, but does not require, adoption of the fair value method of accounting for employee stock-based transactions. SFAS NO. 123 permits companies to continue to account for such transactions under Accounting Principles Board Opinion (APBO) NO. 25, "Accounting for Stock Issued to Employees," but requires a pro forma net income and earnings per share as if the company had applied the new method of accounting. Williams-Sonoma, Inc. has elected to continue to account for stock-based compensation under APBO NO. 25 and will adopt the disclosure requirements of SFAS NO. 123 in 1996. In 1996, the Company will be subject to the provisions of Statement of Financial Accounting Standards NO. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." SFAS NO. 121 establishes recognition and measurement criteria for impairment losses when a company no longer expects to recover the carrying value of a long-lived asset. Based on management's evaluation of long-lived assets, the Company does not expect the adoption of SFAS NO. 121 in 1996 to have a material effect on the Company's operating results or financial position. 12 WILLIAMS-SONOMA, INC. - -------------------------------------------------------------------------------- Earnings per share: Primary and fully diluted earnings per share were computed based on the weighted average number of common shares outstanding during the year plus common stock equivalents consisting of shares subject to stock options. Earnings per share, number of shares and stock options for all periods have been restated to reflect a 3-for-2 stock split in February 1994 and September 1994. Management estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications: Certain items in the prior years' consolidated financial statements have been reclassified to conform to the fiscal 1995 presentation. Note B PROPERTY AND EQUIPMENT
Property and equipment consist of the following: January 28 January 29 Dollars in thousands 1996 1995 ---------- ---------- Land and buildings $ 11,008 $ 8,041 Leasehold improvements 113,040 69,474 Fixtures and equipment 70,278 45,008 Construction in progress 16,707 8,104 -------- -------- 211,033 130,627 Less accumulated depreciation and amortization 63,731 51,232 -------- -------- Total property and equipment-net $147,302 $ 79,395 ======== ========
Note C BORROWING ARRANGEMENTS
Long-term debt consists of the following: January 28 January 29 Dollars in thousands 1996 1995 ---------- ---------- Senior Notes $ 40,000 -- Mortgage 6,780 $ 6,922 Other 102 -- -------- -------- 46,882 6,922 Less current maturities 125 141 -------- -------- Total long-term debt $ 46,757 $ 6,781 ======== ========
On August 8, 1995, the Company issued $40,000,000 principal amount of Senior Notes to reduce the Company's dependency on short-term bank borrowings and to fund new store and corporate infrastructure expansion. The Senior Notes are due on August 8, 2005, and interest is payable semi-annually at 7.2%. Annual principal payments of $5,714,000 begin on August 8, 1999, and continue through August 8, 2004. The remaining principal amount is due and payable upon maturity. The Senior Notes contain certain restrictive loan covenants, including minimum net worth requirements, fixed charge coverage ratios and limitations on current and funded debt. The Company was in compliance with these covenants at January 28, 1996. On April 1, 1994, the Company entered into an agreement with a bank for a $7,000,000 mortgage at LIBOR plus 1.25%. The Company then fixed the mortgage interest rate at 7.8% for the full term by entering into an interest rate swap agreement with the bank. Interest and principal payments are due quarterly through March 2001. The mortgage is secured by the new corporate headquarters building purchased by the Company in December 1993. On March 29, 1996, the Company renewed its line of credit and entered into a second amended and restated credit agreement. The new agreement consists of a single revolving credit facility for cash advances maturing March 27, 1997, and letters of credit 13 WILLIAMS-SONOMA, INC. - -------------------------------------------------------------------------------- maturing March 29, 1998. The aggregate amount under the facility varies during the year, from a minimum of $60,000,000 (with a maximum of $35,000,000 in the form of cash advances) up to $90,000,000 (with a maximum of $80,000,000 in the form of cash advances). The Company has a choice of interest rates between the bank's reference rate plus .25% or the offshore dollar cost of funds plus 1.0%. The agreement contains certain restrictive loan covenants, including minimum debt-to-equity ratios, minimum tangible net worth, restrictions on capital expenditures and a prohibition on payment of cash dividends. This new bank agreement replaces the October 13, 1994 bank agreement which had been amended to increase the borrowing limit under the line of credit and letter of credit facility to $110,000,000 during the peak holiday season. Additional amendments to the October agreement modified the terms of certain financial ratios in favor of the Company and waived the Company's failure to comply with certain covenants. At January 28, 1996, $45,000,000 and $25,000,000 was available in line of credit and letter of credit facilities, respectively, of which $29,600,000 and $9,956,000 was outstanding, respectively. The Company had the choice of borrowing at either the bank's reference rate, or the offshore rate plus .875%. On April 15, 1996, the Company issued $40,000,000 principal amount of 5.25% convertible, subordinated notes (Convertible Notes) due April 15, 2003. Net proceeds from the transaction amounted to $38,739,000 and will be used to provide the Company with a long-term source of working capital. Interest is payable semi-annually beginning in October 1996. The Convertible Notes are convertible into shares of common stock at any time on or after July 15, 1996, at a conversion price of $26.10 per share (equivalent to a conversion rate of 38.3 shares per $1,000 principal amount). The conversion price is subject to adjustment in certain events, including stock splits and stock dividends. Except as discussed below, the Convertible Notes are redeemable at the option of the Company in the form of cash or common stock, on or after April 15, 1998, in whole or in part, at redemption prices (expressed as a percentage of principal amount) ranging from 103.75% to 100% in the last year. For the period April 15, 1998, through April 14, 2000, redemption may not occur unless the ratio of the stock price to the conversion price has achieved a minimum as defined in the agreement. In the event of a change in control, holders of the Convertible Notes may, at their option, require the Company to repurchase all or any portion of the principal amount. The agreement does not restrict the Company from incurring additional indebtedness. Interest expense was $4,703,000, $1,509,000 and $1,210,000 for fiscal 1995, 1994 and 1993, respectively, excluding capitalized interest of $663,000 in fiscal 1995. Interest paid was $3,805,000, $1,505,000 and $1,198,000 for the same periods. Accounts payable at January 28, 1996, and January 29, 1995, includes cash overdrafts of $17,285,000 and $16,736,000, respectively, for checks issued and not presented to the bank for payment. As of April 15, 1996, the Company's debt, including the Convertible Notes, is scheduled to mature as follows: $125,000 in each of fiscal years 1996, 1997 and 1998, $5,840,000 in each of fiscal years 1999 and 2000, and $74,827,000 thereafter. Note D INCOME TAXES
The provision for income taxes consists of the following: 52 Weeks Ended January 28 January 29 January 30 Dollars in thousands 1996 1995 1994 ---------- ---------- ---------- Current payable Federal $1,338 $10,910 $ 7,467 State 397 1,648 3,245 ------ ------- ------- 1,735 12,558 10,712 Deferred Federal 193 1,067 (1,534) State (91) 238 (1,001) ------ ------- ------- 102 1,305 (2,535) ------ ------- ------- $1,837 $13,863 $ 8,177 ====== ======= =======
14 WILLIAMS-SONOMA, INC. - -------------------------------------------------------------------------------- Income taxes paid were $10,453,000, $11,535,000 and $1,962,000 for fiscal 1995, 1994 and 1993, respectively. A reconciliation of income taxes at the federal statutory corporate rate to the effective rate is as follows:
52 Weeks Ended January 28 January 29 January 30 1996 1995 1994 ---------- ---------- ---------- Federal income taxes at the statutory rate 35.0% 35.0% 35.0% State income tax rate, less federal benefit 6.5% 5.9% 6.2% Other .5% .6% 1.0% ---- ---- ---- 42.0% 41.5% 42.2%
Significant components of the Company's deferred tax accounts are as follows:
January 28, 1996 January 29, 1995 Dollars in thousands Deferred Tax Assets Deferred Tax Liabilities Deferred Tax Assets Deferred Tax Liabilities ---------------------------------------------- ---------------------------------------------- Current: Compensation $ 1,662 -- $ 1,195 -- Inventory 4,056 -- 2,315 -- Reserves 771 -- 695 -- Other 331 $ 123 713 $ 82 Deferred catalog costs -- 6,558 -- 4,577 -------- -------- -------- -------- Total current 6,820 6,681 4,918 4,659 -------- -------- -------- -------- Non-Current: Depreciation 5,059 -- 4,495 -- Deferred rent 859 -- 859 -- Deferred lease incentives -- 1,878 -- 1,333 Capital loss 5,160 -- 5,160 -- Valuation allowance (5,160) -- (5,160) -- -------- -------- -------- -------- Total non-current 5,918 1,878 5,354 1,333 -------- -------- -------- -------- Total $ 12,738 $ 8,559 $ 10,272 $ 5,992 ======== ======== ======== ========
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. The Company has established a valuation allowance as of January 28, 1996, and January 29, 1995, due to the uncertainty of realizing future tax benefits from its capital loss carryforwards. Note E LEASES The Company leases store locations and its warehouses and certain equipment under operating leases for original terms ranging from 3 to 25 years extending through 2015, except for one store lease with a 49-year term extending through 2040. Most store leases require the payment of minimum rentals against percentage rentals based on store sales. Certain leases contain renewal options for periods of up to 20 years. In December 1993 the Company purchased a headquarters building with plans to consolidate the headquarters staff in the building. In the fourth quarter of fiscal 1993 the Company established a $3,000,000 reserve for the estimated cost of vacating leased office space prior to the expiration of the leases. Sales growth experienced in fiscal 1994 and planned growth in fiscal 1995 required the Company to retain some of the leased office space it planned to sublease. Therefore, in the fourth quarter of fiscal 1994 the Company reversed $2,000,000 of the lease reserve established in 1993. On January 2, 1996, the Company entered into an agreement to lease a 53,787-square-foot build-to-suit call center in Summerlin, Nevada. The lease covers a ten-year term with three optional five-year renewals. The Company plans to occupy 35,867 square feet 15 WILLIAMS-SONOMA, INC. - -------------------------------------------------------------------------------- of the building in August 1996 and expects to complete a 17,920-square-foot expansion for use in fiscal 1997. Rent is expected to commence in August 1996 at an annual basic rent amount of $529,000 for each of the first five years of the lease and increasing to $598,000 annually for the remaining five years. Total rental expense for all operating leases was as follows:
52 Weeks Ended January 28 January 29 January 30 Dollars in thousands 1996 1995 1994 ---------- ---------- ---------- Minimum rent expense $27,462 $21,766 $20,812 Contingent rent expense 2,261 2,407 1,230 ------- ------- ------- Total rent expense $29,723 $24,173 $22,042 ======= ======= =======
The aggregate minimum annual rental payments under noncancelable operating leases in effect at January 28, 1996, were as follows:
Dollars in thousands Fiscal 1996 $ 34,702 Fiscal 1997 32,523 Fiscal 1998 30,557 Fiscal 1999 27,850 Fiscal 2000 26,577 Later years 128,233 -------- Total minimum lease commitment $280,442 ========
Note F RELATED PARTY LEASE TRANSACTIONS The Company's warehouse and distribution center is located in Memphis, Tennessee, and leased from two partnerships whose partners include directors, executive officers and/or significant shareholders of the Company. The distribution center consists of two separate facilities-one for mail-order operations and one for retail store operations. Mail-Order Operating Facility In July 1984, the Company entered into an agreement to lease a 243,000-square-foot distribution center. The lessor is a partnership comprised of W. Howard Lester, chairman, chief executive officer and significant shareholder of the Company, and James A. McMahan, a director and significant shareholder of the Company and member of the Compensation Committee. The partnership financed the construction through the sale of $6,300,000 principal amount of industrial development bonds due June 2008. The lease had an initial, noncancelable term of ten years expiring on June 30, 1994, with two optional five-year renewals by the Company. In December 1985, the partnership financed the construction of an additional 190,000 square feet of space through the sale of $2,900,000 principal amount of industrial development bonds due 2010. The Company's lease with the partnership was amended to include additional rent plus interest on the new bonds for the same lease term as the original lease. In December 1993, the Company exercised the two five-year renewal options and is now obligated to lease the space until June 30, 2004. Effective July 1, 1994, the fixed basic monthly rent is $51,500. Rental payments consist of the basic monthly rent, plus interest on the bonds (a floating rate equal to 55% of the prime rate of a designated bank), applicable taxes, insurance and maintenance expenses. In connection with the December 1993 transaction, both the partnership and the Company provided to an unaffiliated bank an indemnity against certain environmental liabilities. 16 WILLIAMS-SONOMA, INC. - -------------------------------------------------------------------------------- Retail Store Operating Facility In August 1990, the Company entered into a separate agreement to lease a second distribution center, consisting of approximately 307,000 square feet adjacent to the existing distribution center in Memphis, Tennessee. The lessor is a partnership that includes Messrs. Lester, McMahan and Robert K. Earley, Senior Vice President of Distribution. The partnership financed the construction of the distribution center through the sale of $10,550,000, 10.36% principal amount of industrial development bonds due in August 2015. In September 1994, this lease was amended to include an approximately 306,000-square-foot expansion of the facility. The expansion was completed in October 1995. The lessor financed the construction of the expansion through a $500,000 capital contribution from its partners and the sale of $9,825,000, 9.01% principal amount of industrial development bonds due in August 2015. The amended lease has an initial, noncancelable term of 15 years beginning in August 1991 and ending in July 2006, with three optional five-year renewals. Rentals (including interest on the bonds, sinking fund payments and fees) for the primary term are payable at an average rate of $711,000 per quarter plus applicable taxes, insurance and maintenance expenses. Both facilities (including the 1994 expansion) are constructed to the Company's specifications. After the option periods, the Company is obligated to renew each lease annually so long as the bonds which financed the specific projects remain outstanding. The facility leases qualify as operating leases for accounting purposes. The Company believes that the facility leases are on terms no less favorable than the Company could have obtained from third parties in arm's-length transactions. Note G STOCK OPTIONS The Company's 1993 Stock Option Plan (the 1993 Plan), which provides for grants of incentive and non-qualified stock options up to an aggregate of 2,250,000 shares, was approved and adopted in 1993. The 1993 Plan replaces the 1976 non-qualified plan which was terminated and the 1983 Incentive Stock Option Plan, which expired on March 27, 1993. Options granted under the 1976 and 1983 Plans remain in force until they are exercised or expire. All incentive stock option grants made under the 1993 Plan have a maximum term of ten years, except those issued to 10% shareholders which have a term of five years. The exercise price of all incentive stock options shall be 100% of the fair market value of the stock at the option grant date or 110% for a 10% shareholder. The exercise price for non-qualified options shall not be less than 75% of the fair market value of the stock at the option grant date. Total options exercisable in all plans were 722,573 and 500,605 as of January 28, 1996, and January 29, 1995, respectively. The following table reflects the activity under the Company's stock option plans:
Options Average Price Per Share 1993 Plan 1983 Plan 1976 Plan Total 1993 Plan 1983 Plan 1976 Plan Total --------- --------- --------- ----- --------- --------- --------- ----- Balance at January 31, 1993 - 536,332 367,200 903,532 - $ 5.12 $ 4.71 $ 4.95 Granted 587,365 - 135,000 722,365 $ 9.99 - 5.28 9.11 Exercised - 81,484 6,750 88,234 - 4.14 5.89 4.27 Canceled 8,325 47,633 - 55,958 7.11 5.77 - 5.97 --------- ------- ------- --------- ------- ------- ------- ------- Balance at January 30, 1994 579,040 407,215 495,450 1,481,705 10.04 5.24 4.85 6.98 Granted 279,075 - - 279,075 21.84 - - 21.84 Exercised 14,985 159,910 81,250 256,145 7.11 4.37 4.48 4.57 Canceled 7,067 3,564 - 10,631 11.38 9.99 - 10.91 --------- ------- ------- --------- ------- ------- ------- ------- Balance at January 29, 1995 836,063 243,741 414,200 1,494,004 14.02 5.75 4.92 10.14 Granted 414,150 - - 414,150 18.92 - - 18.92 Exercised 16,783 63,508 4,500 84,791 7.11 6.53 5.28 6.58 Canceled 119,405 10,440 2,430 132,275 18.83 7.23 5.11 17.66 --------- ------- ------- --------- ------- ------- ------- ------- Balance at January 28, 1996 1,114,025 169,793 407,270 1,691,088 $ 15.43 $ 5.36 $ 4.91 $ 11.88
17 WILLIAMS-SONOMA, INC. - -------------------------------------------------------------------------------- Note H EMPLOYEE PROFIT SHARING AND STOCK INCENTIVE PLAN In fiscal 1989, the Company established a defined contribution retirement plan, which is qualified under the Internal Revenue Code 401(a) and 401(k), for eligible employees. The amount of the annual profit sharing contribution is determined by the Board of Directors subject to limitations based upon resolutions adopted by the directors. The plan permits employees to make salary deferral contributions in accordance with Internal Revenue Code Section 401(k) regulations. The fund options were determined by the Administrative Committee and represent a money market reserve fund, a balanced mutual fund portfolio and Williams-Sonoma, Inc. stock. The Company matches a portion of the employee's contributions invested in Williams-Sonoma, Inc. stock under a predetermined formula. The Company's contributions under this plan vest on behalf of the employee over a five-year period. The Company's contributions to the plan for fiscal 1994 and 1993 were $770,000, and $602,000, respectively. No contributions were made in fiscal 1995. Note I ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of the estimated fair value of financial instruments. The carrying value of cash and cash equivalents, accounts receivable, investments, accounts payable and debt approximates their estimated fair values at January 28, 1996, and January 29, 1995. INDEPENDENT AUDITORS' REPORT To the Board of Directors and the Shareholders of Williams-Sonoma, Inc.: We have audited the accompanying consolidated balance sheets of Williams-Sonoma, Inc. and subsidiaries (the Company) as of January 28, 1996, and January 29, 1995, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three fiscal years in the period ending January 28, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Williams-Sonoma, Inc. and subsidiaries as of January 28, 1996, and January 29, 1995, and the results of its operations and its cash flows for each of the three fiscal years in the period ending January 28, 1996, in conformity with generally accepted accounting principles. /s/ DELOTTE & TOUCHE LLP ------------------------- San Francisco, California April 15, 1996 18 WILLIAMS-SONOMA, INC. - -------------------------------------------------------------------------------- QUARTERLY FINANCIAL INFORMATION
Fiscal 1995, dollars in thousands Quarter Ended except per share amounts April 30 July 30 October 29 January 28 --------- --------- ---------- ---------- Net sales $ 118,160 $ 127,733 $ 138,363 $ 260,397 Gross profit 44,382 43,628 48,130 98,178 Earnings (loss) before income taxes (552) (1,404) (6,230) 12,559 --------- --------- --------- --------- Net earnings (loss) (326) (814) (3,669) 7,345 ========= ========= ========= ========= Primary and fully diluted earnings (loss) per share(1) $ (.01) $ (.03) $ (.14) $ .28 Fiscal 1994, dollars in thousands Quarter Ended except per share amounts May 1 July 31 October 30 January 29 --------- --------- ---------- ---------- Net sales $ 102,842 $ 108,014 $ 113,443 $ 204,244 Gross profit 39,390 40,858 42,984 88,484 Earnings before income taxes 3,082 3,669 3,928 22,756 --------- --------- --------- --------- Net earnings 1,788 2,124 2,282 13,378 ========= ========= ========= ========= Primary and fully diluted earnings per share(1) $ .07 $ .08 $ .09 $ .51
Note: The fourth quarter ended January 28, 1996, includes an after-tax charge to net earnings of $1,679,000 ($.06 per share) primarily related to the reserves established for inventory. The fourth quarter ended January 28, 1995, includes an after-tax credit to net earnings of $1,170,000 ($.04 per share) related to the reserve established in fiscal 1993 for the cost of vacating the headquarters buildings prior to termination of the leases. (See Management's Discussion and Analysis - Cost of Goods Sold and Occupancy and Selling, General and Administrative.) (1) These amounts have been restated to reflect the 3-for-2 stock splits in February 1994 and September 1994. COMMON STOCK Williams-Sonoma's common stock is traded on the Over-The-Counter Market under the NASDAQ symbol WSGC. The following table sets forth the high and low closing sales prices in the NASDAQ National Market System for the periods indicated. On April 12, 1996, there were 619 shareholders of record, excluding shareholders whose stock is held in nominee or street name by brokers. The Company's present policy is to retain its earnings to finance future growth, and it does not intend to pay cash dividends. In addition, the Company's bank line of credit prohibits payment of cash dividends (see Note C of Notes to Consolidated Financial Statements).
Fiscal 1995 High Low ------ ------ 1st Quarter 28 17 7/8 2nd Quarter 24 1/2 16 3/4 3rd Quarter 23 1/8 15 13/16 4th Quarter 21 5/8 13 3/4 Fiscal 1994(1) High Low ------ ------ 1st Quarter 26 1/4 15 3/4 2nd Quarter 23 7/8 18 3/4 3rd Quarter 34 1/2 21 3/8 4th Quarter 34 3/4 23 7/8
(1) These amounts have been restated to reflect the 3-for-2 stock splits in February 1994 and September 1994. 19 WILLIAMS-SONOMA, INC. - -------------------------------------------------------------------------------- DIRECTORS AND EXECUTIVE OFFICERS W. Howard Lester Director Chairman of the Board and Chief Executive Officer of the Company Charles E. Williams Director Founder and Vice Chairman of the Board of the Company James M. Berry Director Vice Chairman (Retired) and Director of NCNB Texas Nathan Bessin Director Managing Partner J. Arthur Greenfield and Company, Certified Public Accountants Dennis A. Chantland Executive Vice President, Chief Administrative Officer and Secretary of the Company Patrick J. Connolly Director Executive Vice President of the Company General Manager, Catalog Millard S. Drexler Director Chief Executive Officer and President The GAP, Inc. Robert K. Earley Senior Vice President of the Company, Distribution Gary Friedman Director Chief Merchandising Officer of the Company and President, Retail Division F. Warren Hellman Director Partner, Hellman and Friedman John E. Martin Director Chairman and Chief Executive Officer Taco Bell Corporation Worldwide James A. McMahan Director Chief Executive Officer McMahan Furniture Company G. Andrew Rich Senior Vice President of the Company, Human Resources CORPORATE INFORMATION Corporate Headquarters Williams-Sonoma, Inc. 3250 Van Ness Avenue San Francisco, CA 94109 Distribution Center 4300 Concorde Road Memphis, TN 38118 Transfer Agent Chemical Mellon Shareholder Services 50 California Street 10th Floor San Francisco, CA 94111 Independent Auditors Deloitte & Touche LLP San Francisco, CA Trademarks A Catalog for Cooks, Gardeners Eden, Hold Everything, Pottery Barn and Chambers are trademarks of Williams-Sonoma, Inc. EX-21 11 SUBSIDIARIES OF WILLIAMS-SONOMA AS OF 01/28/96 1 EXHIBIT 21 SUBSIDIARIES OF WILLIAMS-SONOMA, INC. AS OF FISCAL YEAR ENDED JANUARY 28, 1996 23 2 EXHIBIT 21: SUBSIDIARIES OF WILLIAMS-SONOMA, INC. AS OF FISCAL YEAR END JANUARY 28, 1996
Subsidiary Name State/Date of Incorporation - --------------- --------------------------- Williams-Sonoma Stores, Inc. California, October 29, 1984 Gardener's Eden, Inc. California, October 29, 1984 The Pottery Barn East, Inc. California, August 18, 1986 Hold Everything, Inc. California, September 30, 1986 Chambers Catalog Company, Inc. California, February 1, 1995
24 EX-23 12 INDEPENDENT AUDITORS' CONSENT 1 EXHIBIT 23 [DELOITTE & TOUCHE LLP LETTERHEAD] INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 2-89801, No. 33-28490, No. 33-33693, No. 33-60787, and No. 33-65656 on Form S-8 of Williams-Sonoma, Inc. of our reports dated April 15, 1996, appearing in and incorporated by reference in the Annual Report on Form 10-K of Williams-Sonoma, Inc. for the fiscal year ended January 28, 1996. /s/ Deloitte & Touche LLP April 24, 1996 25 EX-27 13 FINANCIAL DATA SCHEDULE
5 YEAR JAN-28-1996 JAN-28-1996 4,166,000 0 13,395,000 238,000 121,603,000 161,184,000 211,033,000 63,731,000 319,096,000 122,108,000 46,757,000 0 0 11,466,000 110,187,000 319,096,000 644,653,000 644,653,000 410,335,000 225,418,000 0 0 4,527,000 4,373,000 1,837,000 2,536,000 0 0 0 2,536,000 0.10 0.10
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