<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED) For the Fiscal Year Ended March 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from
___ to ___
Commission File No. 0-17948
ELECTRONIC ARTS INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2838567
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1450 FASHION ISLAND BOULEVARD
SAN MATEO, CALIFORNIA 94404
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 571-7171
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicated by check mark 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. [ ]
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON STOCK, $.01 PAR VALUE,
HELD BY NON-AFFILIATES OF THE REGISTRANT ON JUNE 6, 1995 WAS $882,003,773.
AS OF JUNE 6, 1995, THERE WERE 51,060,338 SHARES OF REGISTRANT'S COMMON STOCK,
$.01 PAR VALUE, OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement (the "Proxy Statement") for
its 1995 Annual Meeting of Stockholders are incorporated by reference into Part
III hereof.
This report consists of 154 sequentially numbered pages. The Exhibit Index is
located at sequentially numbered page 51.
Page 1 of 154
<PAGE>
ELECTRONIC ARTS
1995 FORM 10-K ANNUAL REPORT
Table of Contents
Page
PART I ----
Item 1. Business 3
Item 2. Properties 17
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 4A. Executive Officers of the Registrant 19
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholders Matters 22
Item 6. Selected Financial Data 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 24
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 43
PART III
Item 10. Directors and Executive Officers of the Registrant 44
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial Owners and Management 44
Item 13. Certain Relationships and Related Transactions 44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 45
Signatures 49
Exhibit Index 51
2
<PAGE>
PART I
ITEM 1: BUSINESS
OVERVIEW
Electronic Arts' predecessor was incorporated in California in 1982. In
September 1991, Electronic Arts was reincorporated under the laws of Delaware.
Unless otherwise indicated, the "Company" or "Electronic Arts" refers to
Electronic Arts Inc., a Delaware corporation, its California predecessor and its
wholly-owned and majority-owned subsidiaries. Electronic Arts' principal
executive offices are located at 1450 Fashion Island Boulevard, San Mateo,
California 94404. Its telephone number is (415) 571-7171.
Electronic Arts creates, markets and distributes interactive entertainment
software for a variety of hardware platforms. As of March 31, 1995, the Company
marketed approximately 119 titles developed by it and/or published under one of
its brand names, and distributed approximately 135 additional titles developed
by other software publishers ("Affiliated Labels"). As of March 31, 1995, the
Company had developed over 60 titles that had each generated life-to-date net
revenues in excess of $5,000,000. Since its inception, the Company has
developed products for 32 different computer hardware platforms, including the
following: IBM personal computer and compatibles, Commodore 64, Amiga, Apple
II, Apple Macintosh, 8-bit Nintendo Entertainment System (the "NES"), Nintendo
"Game Boy" and Sega "Game Gear" hand-held units, 16-bit Sega Genesis videogame
system (the "Genesis"), 16-bit Super Nintendo Entertainment System (the "SNES"),
Sega CD-ROM (Compact Disc-Read Only Memory) peripheral device, IBM PC-CD and
compatibles, Macintosh CD and 3DO Interactive Multiplayer. Substantially all of
the Company's products sold during the Company's 1995 fiscal year were developed
for 16-bit and 32-bit platforms. The Company is currently developing software
products for use with the new generation of hardware platforms including Sega
Saturn and Sony PlayStation. As of March 31, 1995, the Company was developing
products for 14 different hardware platforms.
The Company's product development methods and organization are modeled on
those used in the entertainment industry, and the Company markets its products
with techniques borrowed from other entertainment companies such as record
producers, magazine publishers and video distributors. Company employees called
"producers", who are each responsible for the development of one or more
products, oversee product development and direct teams comprised of both
Electronic Arts employees and outside contractors. Electronic Arts' designers
regularly work with celebrities and organizations in sports, entertainment and
other areas to develop products that provide gaming experiences that are as
realistic and interactive as possible. Celebrities and organizations with whom
the company has had contracts include: Mario Andretti, Michael Jordan,
Shaquille O'Neil, Gary Kasparov, John Madden, Tony LaRussa, Chuck Yaeger, the
National Basketball Association and the National Hockey League. The Company
maintains development studios in California, Texas, Canada, Japan and the United
Kingdom.
3
<PAGE>
The Company invests in the creation of state-of-the-art software tools and
utilities that are then used in product development. These tools, such as the
Company's "Artist Workstation," allow for more cost-effective product
development and the ability to more efficiently convert products from one
hardware platform to another. The Company has also made investments in new
facilities and equipment to facilitate the creation and editing of digital forms
of video and audio recordings and product development efforts for new hardware
platforms.
Additionally, the Company produces film, videotape and audio recordings to
include in its products. Two of the Company's subsidiaries, Electronic Arts
Productions Inc. (d/b/a Crocodile Productions) and Electronic Arts Productions
Ltd., have signed agreements with the Screen Actors Guild (SAG) and American
Federation of Television and Radio Artists (AFTRA) in the United States and with
British Actors Equity Association (Equity) in the UK, respectively, giving the
Company access to a wide range of talent for use in Company-produced film and
video for inclusion in the Company's products.
Electronic Arts distributes its products and those of its Affiliated Labels
primarily by direct sales to retail chains and outlets in the United States and
primarily through third party distributors in Asia. In Europe, historically,
the Company has distributed its products primarily through third party
distributors, but is currently distributing primarily directly to retailers. The
Company's products are available in over 50,000 retail locations worldwide. In
fiscal 1995, approximately 32% of the Company's net revenues were generated by
international operations, compared to 25% and 30% in fiscal 1994 and fiscal
1993, respectively.
ACQUISITIONS, INVESTMENTS AND JOINT VENTURE
ACQUISITIONS
In November 1994, Electronic Arts acquired DROSoft, an independent
distributor of entertainment software, based in Madrid, Spain. In February,
1995, the Company acquired Kingsoft GmbH, a European distributor of interactive
software based in Aachen, Germany. These acquisitions have expanded the
Company's direct distribution capabilities in the European market. In January
1995, the Company acquired Bullfrog Productions Ltd., an interactive software
developer based in the United Kingdom. This acquisition has expanded the
Company's development resources. See Note 13 of the Notes to Consolidated
Financial Statements included in Item 8 hereof.
These acquisitions have placed, and will continue to place, a substantial
strain on the Company's management, operational, financial and administrative
resources, particularly in the Company's international business. There can be no
assurance that the Company will be able to successfully integrate these entities
or derive any substantial benefits or synergies from such acquisitions, or that
such acquisitions will be profitable for the Company.
4
<PAGE>
INVESTMENTS
The Company has made strategic investments as part of its overall growth
strategy and currently holds minority equity interests in several companies,
including SportsLab, Inc., Visual Concepts, Novalogic, Inc. and The 3DO Company.
There can be no assurance that the Company will realize long term benefits from
any or all of these investments or that it will continue to carry any or all of
these investments at their current value.
JOINT VENTURE
In December 1994, Electronic Arts and Capital Cities/ABC, Inc. formed a
joint venture company, Creative Wonders, LLC. (formerly ABC/EA Home Software,
LLC), to develop and publish children's edutainment and interactive
entertainment titles as well as reference products. See Note 12 of the Notes to
Consolidated Financial Statements included in Item 8 hereof. The Company
currently distributes Creative Wonders' products as one of the Company's
Affiliated Labels.
MARKET
Historically, no hardware platform or system has achieved long-term
dominance in the interactive entertainment market. This phenomenon has resulted
in the Company developing products at one time or another for 32 different
hardware platforms. Today, the competition in the market for hardware platforms
has intensified, with the introduction and planned introduction of new 32-bit
and 64-bit videogame systems and the rising installed base of multimedia-enabled
home computers. This multi-platform approach continues to be a cornerstone of
the Company's strategy and the Company plans to continue to develop and publish
products for multiple platforms.
Early generation computer systems for which interactive software products
were published such as the Apple II and the Commodore 64 were 8-bit floppy-disk-
based personal computers. Several years ago these systems were eclipsed by more
powerful personal computer systems based on 16-bit microprocessors, such as the
IBM PC and compatibles, the Commodore Amiga and the Apple Macintosh. Current
computer systems utilize 32-bit microprocessor technology and typically run both
floppy disk and CD-ROM based products.
5
<PAGE>
Videogame systems have likewise changed significantly over time. In 1986
and 1987, Nintendo Co., Ltd. ("Nintendo") and Sega Enterprises, Ltd. ("Sega")
introduced 8-bit videogame systems that, compared to existing general-purpose
computer systems available at the time, were low in price, easy to use and had
more sophisticated audio-video capabilities. In late 1989, Sega began shipping
its Genesis system, a more-powerful 16-bit videogame system. In August 1991,
Nintendo introduced its 16-bit SNES videogame system. In late 1992, Sega
introduced the Sega CD-ROM drive as an add-on peripheral to its Genesis system.
Currently, the interactive software industry is undergoing another
significant change due in part to the introduction or planned introduction of
new hardware platforms, as well as remote and electronic delivery systems. The
new generation of systems are based on 32-bit and 64-bit microprocessors that
incorporate dedicated graphics chipsets. Many of these systems utilize CD-ROM
drives. The Company began development of 32-bit software products over three
years ago by creating the original software development system for the first of
these advanced products, the 3DO Interactive Multiplayer, which began selling in
calendar 1993. Sega and Sony each began distribution of their next generation
hardware systems (named the "Saturn" and "PlayStation", respectively) in Japan
during the quarter ended December 1994. Sega began limited shipment of the
Saturn in North America in May 1995 and Sony has announced plans to begin
shipping the PlayStation in North America in September 1995. The team of
Nintendo and Silicon Graphics announced plans to manufacture and distribute the
Ultra 64 advanced system for initial shipment in the spring of 1996. The 3DO
Company has announced its next generation system, the M2, with first shipment
scheduled in the first half of calendar year 1996.
New entrants in the interactive entertainment and multimedia industries,
such as cable television, telephone and diversified media and entertainment
companies, and a proliferation of new technologies, such as on-line networks and
the Internet, are making market forecasting and prediction of financial results
increasingly difficult for the Company. However, in the near term, the Company
expects that the transition from 16-bit cartridge-based game machines to the
advanced systems described above will continue to adversely affect the near term
financial results of the Company. An increasing portion of the Company's new
product releases in its 1996 fiscal year will be for advanced platforms,
including the IBM PC-CD and compatibles, the Sega Saturn and Sony PlayStation,
which will, in the near term, have substantially smaller installed bases than
the current 16-bit videogame systems. In the near term, the increase in unit
sales of advanced platforms may be less than the decline in unit sales of 16-bit
systems. As a result, while the Company expects to release more titles during
fiscal 1996 than during fiscal 1995, the majority of these new products will be
directed to the 32-bit systems and the Company's potential market during this
transition period may be smaller. This set of circumstances will adversely
affect the financial results of the Company in fiscal 1996, and most
particularly in the first two quarters of fiscal 1996, before Sega's full roll-
out of the Saturn and Sony's expected launch of the PlayStation in North
America.
6
<PAGE>
As the 16-bit cartridge market matures, hardware sales have declined and
will continue to decline. Accordingly, software sales for the 16-bit cartridge
systems are declining rapidly and are expected to continue to decline in fiscal
1996. In addition, sales in the 16-bit software market have become more "hits"
driven. Fewer products in that market are successful and publishers of these
games, including the Company, must incur additional marketing and sales expenses
to promote retailers' sales of their 16-bit cartridge products. In fiscal 1995,
the Company released fewer titles for these platforms, concentrated releases
during the year-end holiday seasons and focused marketing efforts on promoting
hit products. In fiscal 1996, the Company plans to follow the same strategy and
intends to release even fewer products for these platforms. The Company's total
net revenues derived from 16-bit videogames declined in fiscal 1995 and is
expected to significantly decline in fiscal 1996.
The interactive software market has historically been a volatile and highly
dynamic industry affected by seasonality, changing technology, limited hardware
platform life cycles, hit products, competition, component supplies, consumer
spending and other economic trends. Each of these factors affect the operating
results of the Company, often in combinations that make predicting those
operating results difficult. In particular, the Company believes that consumer
spending trends are adversely affecting the interactive software market at this
time, and that retailers, in reaction to the rapidly declining 16-bit cartridge
market, are attempting to reduce their inventories by buying more cautiously.
These factors can be expected to continue to depress sales of the Company's
software products for the 16-bit as this market is succeeded by the 32-bit
market.
The Company believes that early investment in products for the 32-bit
market is strategically important and the Company is therefore continuing its
aggressive development activities for 32-bit platforms. This investment in
advanced technology development, together with declining revenues in 16-bit
products during this period may result in slow or insignificant growth in
revenue and earnings for the 1996 fiscal year and reduced revenues and/or net
loss for the first half of fiscal 1996.
The eventual increase in the 32-bit market will in large part depend on the
successful launch of the new hardware platforms. Delays by the hardware
companies in the launch of these hardware platforms in key territories, or
slower than anticipated acceptance by consumers, will slow the growth and
prolong the transition from the 16-bit to 32-bit platforms.
7
<PAGE>
COMPETITION
The interactive consumer software market is highly competitive.
Important factors in marketing both entertainment and educational software
include content quality and entertainment value, product features, manufacturing
quality and reliability, brand recognition, hardware compatibility, ease of
understanding and operation, dealer merchandising, access to existing
distribution channels and retail shelf space, advertising, pricing, and
availability and quality of support services. A variety of companies offer
products that compete directly with one or more of Electronic Arts' products.
These direct competitors vary in size from very small companies with limited
resources to companies with financial, managerial and technical resources
comparable to or greater than those of Electronic Arts. Manufacturers of
hardware platform systems, videogame cartridges and CD-ROM's such as Nintendo,
Sega and Sony (together with their licensees) diversified media and
entertainment companies such as Disney, Viacom and Time-Warner Inc. and
publishers of personal computer software such as Microsoft Corporation also
compete directly with the Company in providing interactive software products to
consumers. In addition, companies in industries such as cable television and
telecommunications, many of which have significant financial resources, have
begun to diversify or have announced plans to enter the interactive software
market. These new entrants have the potential to become significant competitors.
RELATIONSHIPS WITH SIGNIFICANT HARDWARE PLATFORM COMPANIES
SEGA
Under the terms of a licensing agreement entered into with Sega in July
1992, the Company is authorized to develop and manufacture ROM-cartridge
software products compatible with the Sega Genesis system through December 1995
and to distribute those cartridges through June 1996. In addition, the Company
is authorized to develop and distribute CD-ROM software products compatible with
the Sega CD add-on drive for the Genesis through December 1996. Genesis
cartridges are manufactured by the Company in Puerto Rico. Genesis CD-ROM
products are manufactured by third party manufacturers. A shortage of
components, or other factors outside the control of the Company could impair the
Company's ability to obtain an adequate supply of cartridges or CD-ROMs.
Videogame cartridges are more expensive to produce than CD-ROM products and at
this time are generally produced in higher volumes.
During fiscal 1995, the Company released seventeen Genesis games. Among
these releases were NHL HOCKEY `95, MADDEN FOOTBALL `95, NBA LIVE `95, FIFA
SOCCER `95, SHAQ-FU, BILL WALSH COLLEGE FOOTBALL `95 AND URBAN STRIKE, each of
which achieved net revenues in excess of $10,000,000. All seventeen Genesis
titles released by the Company in fiscal 1995 achieved net revenues in excess of
$1,000,000.
8
<PAGE>
Also during fiscal 1995, the Company released three products for the Sega
CD peripheral. One Sega CD product, FIFA INTERNATIONAL SOCCER, generated more
than $2,000,000 in revenues.
The Company currently derives a significant portion of its revenues
from products developed for the Sega Genesis. In the fiscal year ended March
31, 1995, approximately 43% of the Company's net revenue came from sales of Sega
Genesis products. The volume of sales of Sega Genesis products declined in
fiscal 1995 and is expected to decline significantly in fiscal 1996. The
Company plans to continue to develop and distribute titles for the Sega Genesis,
though on a more limited scale than in the past, throughout fiscal 1996.
NINTENDO
The Company released six SNES games in fiscal 1995; among these releases
were JOHN MADDEN FOOTBALL `95, NBA LIVE `95 and NHL HOCKEY `95, each of which
achieved net revenues in excess of $10,000,000. All six SNES titles released by
the Company in fiscal 1995 achieved net revenues in excess of $2,000,000.
In fiscal 1995, approximately 14% of the Company's net revenues were
derived from sales of software for the SNES platform. The Company licensed its
products for publication in Europe on SNES to a third party and therefore did
not sell SNES products in that territory during fiscal 1995. The Company has
received and expects to receive additional license fees based on sales of its
products published by such third party for the SNES in Europe. While gross
margins on license fees are significantly higher than gross margin on sales of
SNES products, the Company's net revenues from SNES products attributable to
Europe was significantly lower in fiscal 1995 than in fiscal 1994, due to
licensing of SNES products there. World-wide, the volume of sales of SNES
products declined in fiscal 1995 and is expected to continue to decline in
fiscal 1996.
Under the terms of its licensing agreement with Nintendo, the Company
engages Nintendo to manufacture its SNES cartridges. The Company has little
ability to control its supply of cartridges or the timing of their delivery. A
shortage of microchips, or other factors outside the control of the Company
could impair the Company's ability to obtain an adequate supply of cartridges.
In connection with the Company's purchases of Nintendo cartridges to be
distributed in North America, Nintendo requires that the Company provide it with
irrevocable letters of credit prior to Nintendo's acceptance of purchase orders
from the Company. For purchases of Nintendo cartridges for distribution in
Japan, Nintendo requires the Company to make cash deposits. Furthermore,
Nintendo maintains a policy of not accepting returns. Because of these and
other factors, the carrying of an inventory of cartridges entails significant
investment and risk. Videogame cartridges, particularly for the SNES, are more
expensive to produce than floppy disks and CD-ROMs and are manufactured in
higher volumes. Accordingly, if the SNES cartridge segment of Electronic Arts'
sales mix increases, the Company will be exposed to greater inventory costs and
increased product return risks.
9
<PAGE>
3DO
One of the advanced 32-bit platforms currently supported by the Company is
the 3DO Interactive Multiplayer. 3DO, originally formed as a joint venture
between Electronic Arts and a small development company, has subsequently raised
equity capital from Time Warner, Matsushita and AT&T. 3DO completed the initial
public offering of its common stock in May 1993 and a subsequent financing in
June 1994. The Company currently owns approximately 18% of the common stock of
3DO.
During fiscal 1995, the Company released eleven 3DO games, among these
releases were ROAD RASH, SHOCKWAVE, J-LEAGUE VIRTUAL STADIUM SOCCER, THE NEED
FOR SPEED, and FIFA INTERNATIONAL SOCCER, each of which achieved net revenues in
excess of $2,000,000. The Company has achieved a leading position in 3DO
software sales and has generated profits from sales of 3DO products in fiscal
1995. However, the Company's 3DO products have not achieved the sales levels of
the Company's Genesis products primarily because the 3DO Interactive Multiplayer
has not achieved market acceptance comparable to the Genesis and SNES platforms.
The Company believes that its development methods for the 3DO platform are not
materially different from those the Company uses to develop products for other
CD-ROM based platforms and therefore a substantial portion of its development
activities for the 3DO platform is portable to other platforms. Furthermore,
the Company believes that through its 3DO development efforts it has gained
valuable early experience in developing products for advanced 32-bit platforms.
There can be no assurance that the 3DO platform or 3DO as a company will be
successful. Because of the Company's equity stake in and historical association
with 3DO, a material adverse effect on the business or prospects of 3DO or a
substantial adverse change in the stock price of 3DO could have a material
adverse effect on the Company's stock price.
OTHER PLATFORMS
The Company is also licensed to develop, publish and distribute products
for play on the Sony PlayStation and the Sega Saturn and is currently developing
products for those platforms.
10
<PAGE>
PRODUCTS AND PRODUCT DEVELOPMENT
In fiscal 1995, the Company generated approximately three-quarters of its
revenues from products released during the year. Interactive entertainment
software products typically have life spans of only 3 to 12 months.
Accordingly, the Company must constantly develop and bring to market new
products that achieve market acceptance quickly. The Company's future success
will depend in large part on its ability to develop and introduce new products
on a timely basis. New products must keep pace with competitive offerings,
adapt to new hardware platforms and emerging industry standards and provide
additional functionality. If the Company were unable, due to resource
constraints or technological or other reasons, to develop and introduce such
products in a timely manner, this inability would have a material adverse effect
on its operating results and financial condition.
As of March 31, 1995, Electronic Arts was actively marketing approximately
119 titles, comprising approximately 232 stock keeping units ("sku's"), that
were published by the Company's development divisions and subsidiaries ("EA
Studios"). During fiscal 1995, the Company introduced over 51 EA Studios titles,
representing over 85 sku's, compared to more than 55 EA Studio titles,
comprising over 80 sku's, in fiscal 1994. From the inception of the Company
through March 31, 1995, the EA Studios organization had created and published
more than 60 titles that had each generated more than $5,000,000 in life-to-date
net revenues for the Company.
The products published by EA Studios are designed and created by its in-
house designers and artists and by independent software developers ("independent
artists"). The Company typically pays the independent artists royalties ranging
from 4% to 15% of net revenues, as defined in the related independent artist
agreements.
No one product accounted for more than 10% of the Company's net revenues
for fiscal 1995 and fiscal 1993. For fiscal 1994, the Company had two
products, JOHN MADDEN FOOTBALL `94, published on three platforms, and NHL HOCKEY
`94, published on four platforms, which represented approximately 13% and 11%,
respectively, of the total 1994 net revenues.
The Company publishes products in a number of categories such as sports,
action and interactive movies, strategy, simulations, role playing and
adventure, each of which is becoming increasingly competitive. The Company's
sports-related products, marketed under the EA Sports brand name, accounted for
a significant percentage of net revenues in fiscal years 1995 and 1994. There
can be no assurance that the Company will be able to maintain its market share
in the sports category.
The retail selling prices of the Company's products, excluding older titles
(marketed as "Classics"), typically range from $34.95 to $59.95. "Classics"
have a retail selling price of $14.95.
11
<PAGE>
The Company currently develops or publishes products for 14 different
hardware platforms and has from time to time developed and marketed products on
32 different and incompatible platforms in the past. The Company makes
substantial investments in research and development of products for operation on
new hardware platforms which the Company anticipates will become more popular.
Such investment occurs one to two years in advance of shipment of products on
such platforms. If the Company invests in a platform that does not achieve
significant market penetration, the Company's planned revenues from those
products will not be achieved and the Company may not recover its development
investment. Conversely, if the Company does not choose to develop for a
platform that achieves significant market success, its revenue growth may also
be adversely affected. There can be no assurance that the Company will
correctly make such platform choices.
The Company's current and planned product introductions are predominantly
for 16-bit platforms such as the SNES and the Genesis videogame systems, and 32-
bit platforms such as the IBM PC and compatibles, the Apple Macintosh, the 3DO
Interactive Multiplayer, the Sega Saturn and the Sony PlayStation. During the
fiscal years 1995, 1994 and 1993, the Company had research and development
expenditures of $73.9 million, $62.6 million and $37.5 million, respectively.
The Company currently believes that compact discs will emerge as the
preferred medium for interactive entertainment, education, and information
software for the next several years. The Company continued its investment in
the development of CD-ROM tools and technologies in fiscal 1995 and currently
has more than 40 titles in development for new CD-ROM platforms, including the
IBM PC and compatibles, the Apple Macintosh, the 3DO Interactive Multiplayer,
the Sega Saturn and the Sony PlayStation. Most of these products will be
convertible for use on multiple advanced hardware systems.
Product development schedules, particularly for new hardware platforms, are
difficult to predict because they involve creative processes, use of new
development tools for new platforms and the learning process associated with
development for new technologies, as well as other factors. Floppy-disk and CD-
ROM products frequently include more content and are more complex, time-
consuming and costly to develop than cartridge products and, accordingly, cause
additional development and scheduling risk. In addition, these development
risks for floppy-disk and CD-ROM products can cause particular difficulties in
predicting quarterly results because brief manufacturing lead times allow
finalization of products and projected release dates late in a quarter. Failure
to meet product development schedules may cause a shortfall in shipments in any
quarter and may cause the operating results for such quarter to fall
significantly below anticipated levels.
12
<PAGE>
Additionally, the Company produces film and videotape to include in certain
products pursuant to agreements between certain of the company's subsidiaries
with SAG, AFTRA and Equity. See BUSINESS OVERVIEW above. However, the costs of
video production are significantly higher than for software production, and for
products which include a substantial amount of video (such as products in the
interactive movie category), the costs of producing the video component is
significantly higher than the cost of developing the software component,
resulting in higher overall development costs for such products. Accordingly,
significantly more units of such products must be sold to recoup the development
and production costs. Extensive use of video in some of the Company's products,
particularly its products in the interactive movie category, are experimental
product development efforts for the Company and there can be no assurance that
the significantly higher sales levels required to make these products successful
will be achieved.
MARKETING AND DISTRIBUTION
The Company distributes both EA Studio products and products developed and
published by other software publishers known as "Affiliated Labels".
In most cases, Affiliated Label products are delivered to the Company as
completed products. As of March 31, 1995, the Company distributed approximately
135 Affiliated Label products. During fiscal 1995 the Company introduced over
130 Affiliated Label products, as compared to more than 130 titles in fiscal
1994. The Company has added several new Affiliated Labels over the past two
years focusing on PC-CD product lines. No single Affiliated Label has accounted
for more than 10% of the Company's net revenue in any of the last three fiscal
years.
The Company generated approximately 83% of its North American net revenues
from direct sales through a field sales organization of professionals and a
group of telephone sales representatives. The remaining 17% of its North
American sales were made through a limited number of specialized and regional
distributors and rack jobbers in markets where the Company believes direct sales
would not be economical. The Company had no customers accounting for more than
10% of total net revenues for the years ended March 31, 1995 and 1993. The
Company had sales to one customer which represented 10.8% of total net revenues
for fiscal 1994.
As discussed above, (See MARKET above) the 16-bit videogame business has
become increasingly "hits" driven, requiring significantly greater expenditures
for advertising, particularly for television advertising. There can be no
assurance that the Company will continue to produce hit products or that
advertising expenditures will increase sales sufficiently to recoup the
advertising expenditures.
13
<PAGE>
The Company has stock-balancing programs for its personal computer products
(whether provided on floppy-disk or CD-ROM) that, under certain circumstances
and up to a specified amount, allow for the exchange of personal computer
products by resellers. The Company also typically provides for price protection
for its personal computer and videogame system products that, under certain
conditions, allows the reseller a price reduction from the Company for unsold
products. The Company maintains a policy of exchanging products or giving
credits, but does not give cash refunds. The risk of price protection
requirements is increasing as a result of the maturing and the increasingly hit-
based nature of the 16-bit video cartridge market. Moreover, the risk of product
returns may increase as new hardware platforms become more popular or market
factors force the Company to make changes in its distribution system. The
Company monitors and manages the volume of its sales to retailers and
distributors and their inventories as substantial overstocking in the
distribution channel can result in high returns or the requirement for
substantial price protection in subsequent periods. The Company believes that
it provides adequate reserves for returns and price protection which are based
on estimated future returns of products, taking into account promotional
activities, the timing of new product introductions, distributor and retailer
inventories of the Company's products and other factors, and that its current
reserves will be sufficient to meet return and price protection requirements for
the foreseeable future. However, there can be no assurance that actual returns
or price protection will not exceed the Company's reserves.
The Company also has a fulfillment group that sells product directly to
consumers through a toll-free number listed in advertising by the Company and
its Affiliated Labels. This group is also responsible for targeted direct mail
marketing and sells product upgrades, backups and accessories to registered
customers.
The distribution channels through which consumer software products are sold
have been characterized by change, including consolidations and financial
difficulties of certain distributors and retailers and the emergence of new
retailers such as general mass merchandisers. The bankruptcy or other business
difficulties of a distributor or retailer could render Electronic Arts' accounts
receivable from such entity uncollectible, which could have an adverse effect on
the operating results and financial condition of the Company. Uncollectible
receivables from certain accounts in Japan resulted in an increase in bad debt
reserves in fiscal 1995. In addition, an increasing number of companies are
competing for access to these channels. Electronic Arts' arrangements with its
distributors and retailers may be terminated by either party at any time without
cause. Distributors and retailers often carry products that compete with those
of the Company. Retailers of Electronic Arts' products typically have a limited
amount of shelf space and promotional resources for which there is intense
competition. There can be no assurance that distributors and retailers will
continue to purchase Electronic Arts' products or provide Electronic Arts'
products with adequate levels of shelf space and promotional support.
14
<PAGE>
INTERNATIONAL OPERATIONS
The Company has wholly-owned subsidiaries in the United Kingdom, France,
Spain, Germany, Australia, Canada, and Puerto Rico as well as a majority-owned
subsidiary in Japan. The amounts of net revenues, operating profit and
identifiable assets attributable to each of the Company's geographic regions for
each of the last three fiscal years are set forth in Note 17 of the Notes to the
Consolidated Financial Statements included in Item 8 hereof. In comparison to
fiscal 1994, international net revenues increased by 49% due primarily to the
sale of CD-based products, together with an increase in licensing activities in
Europe. This increase was partially offset by reduced SNES revenue in Europe
and Japan. International revenues are not expected to continue to grow at the
same rate as during fiscal 1995.
MANUFACTURING
The Company's Genesis cartridge products are manufactured by the Company in
Puerto Rico under the terms of a manufacturing license agreement with Sega. The
assembly of the final packaged product is performed by outside organizations
under the supervision of the Company's operations organization. The Company's
SNES products are purchased as finished goods from Nintendo. Manufacturing and
assembly of floppy-disk and CD products is performed by outside organizations
under the supervision of the Company's operations organization. The
manufacturing process for all software involves the duplication of software code
onto floppy diskettes, ROM chips, or CD's, printing of packaging and
documentation, and assembly of the final packaged product. Quality control
tests are performed on all products by Company employees, and the products are
then warehoused and shipped to customers by the Company.
In many instances, the Company is able to acquire materials on a volume-
discount basis. The Company has multiple potential sources of supply for most
materials. Except with respect to its SNES products, the Company also has
alternate sources for the manufacture and assembly of most of its products. To
date, the Company has not experienced any material difficulties or delays in
production of its software and related documentation and packaging. However, a
shortage of components or other factors beyond the control of the Company could
impair the Company's ability to manufacture, or have manufactured, its products.
BACKLOG
The Company normally ships product within a few days after receipt of an
order. However, a backlog may occur for EA Studios and Affiliated Label
products that have been announced for release but not yet shipped. The Company
does not consider backlog to be an indicator of future performance.
15
<PAGE>
SEASONALITY
The Company's business is highly seasonal. The Company typically
experiences its highest revenues and profits in the calendar year-end holiday
season and a seasonal low in revenues and profits in the quarter ending in June.
In its 1996 fiscal year, and particularly in the June and September quarters,
the Company expects these seasonal trends to be magnified by general economic
and industry factors, including the current transition from 16-bit cartridge-
based game machines to the new 32-bit systems, and the concentration of the
Company's product releases in the second half of fiscal 1996.
EMPLOYEES
As of March 31, 1995, the Company employed approximately 1,172 people, of
whom over 450 were outside the United States. The Company believes that its
ability to attract and retain qualified employees is an important factor in its
growth and development and that its future success will depend, in large
measure, on its ability to continue to attract and retain qualified employees.
To date, the Company has been successful in recruiting and retaining sufficient
numbers of qualified personnel to conduct its business successfully. However,
competition for employees in the interactive software business is intense and
increasing as competition in the industry increases (See COMPETITION above), and
there can be no assurance that the Company will continue to be able to attract
and retain enough qualified employees in the future. None of the Company's
employees is subject to a collective bargaining agreement, and the Company
believes that its employee relations are excellent.
OTHER RISK FACTORS
In addition to those discussed above, the Company's business is subject to
a number of other risks. Some of those risks are described below. Other risks
are presented elsewhere in this report.
A substantial majority of the total revenue of the Company in any quarter
typically results from orders received in that quarter and products introduced
in that quarter. The Company's expenses are based, in part, on expected future
revenues. Certain overhead and product development expenses do not vary
directly in relation to revenues. As a result, the Company's quarterly results
of operations are difficult to predict, and small delays in product deliveries
may cause quarterly revenues, operating results and net income to fall
significantly below anticipated levels. The Company's revenues and net income
could also be materially and adversely affected by cancellation of orders,
changes in customer base or product mix, and increased competition.
16
<PAGE>
The Company typically receives orders shortly before shipments, making
backlog, particularly early in any quarter, an unreliable indicator of quarterly
results. Therefore, quarterly results may be difficult to predict until the end
of the quarter. A shortfall in shipments at the end of any particular quarter
may cause the results of that quarter to fall significantly short of anticipated
levels. Due to analysts' expectations of continued growth and other factors,
any such shortfall in earnings could have an immediate and significant adverse
effect on the trading price of the Company's common stock in any given period.
As a result of the foregoing factors and other factors that may arise in the
future, the market price of the Company's common stock may be subject to
significant fluctuations over a short period of time. These fluctuations may be
due to factors specific to the Company, to changes in analysts' earnings
estimates, or to factors affecting the computer, software, entertainment, media
or electronics industries or the securities markets in general.
Because of the foregoing factors, as well as other factors affecting the
Company's operating results and financial condition, past financial performance
should not be considered a reliable indicator of future performance, and
investors should not use historical trends to anticipate results or trends in
future periods.
ITEM 2: PROPERTIES
The Company's principal administrative, sales and marketing, research and
development, and support facility is located in four modern buildings in San
Mateo, California, 15 miles south of San Francisco. The Company presently
occupies approximately 196,000 square feet in these buildings, under leases that
expire at various times between August 1998 and April 1999.
In addition, the Company leases and occupies a 54,000 square foot facility,
used as an office and warehouse in Hayward, California, as well as sales offices
in the metropolitan areas of Toronto, Chicago, Dallas and New York. The
Company's United Kingdom subsidiary occupies administrative, sales, and
distribution facilities in Langley, England, under a long-term lease for a total
of 28,000 square feet as well as 7,000 square foot development facility in
Surrey, England, a 2,000 square foot administrative, sales and distribution
facility in Lyon, France and two administrative, sales and distribution
facilities in Germany, one for 1,000 square feet and another for 17,000 square
feet. The Company also maintains an 8,000 square foot sales and distribution
facility in Australia, an 10,000 square foot sales, distribution and development
facility in Tokyo, Japan, a 37,000 square foot development facility in Burnaby,
British Columbia, Canada, and a manufacturing facility in Puerto Rico. The
Company also owns a 55,000 square foot development facility in Austin, Texas.
See Notes 4 and 10 to Notes to Consolidated Financial Statements included in
Item 8 hereof.
17
<PAGE>
In February 1995, the Company entered into a master operating lease for
land and a building to be constructed in Redwood City, California. The facility
is to be used as a corporate headquarters for EA. The above mentioned rental
space EA currently occupies is expected to be vacated upon the completion of the
new corporate headquarters. The square footage of the new facilities is
expected to be approximately 375,000.
Commencing in the first quarter of fiscal 1996, the Company opened a
120,000 square foot facility, used as a warehouse in Louisville, Kentucky, and
purchased a 178,000 square foot facility in Austin, Texas.
The Company believes that these facilities are adequate for its current
needs. The Company believes that suitable additional or substitute space will
be available as needed to accommodate the Company's future needs.
ITEM 3: LEGAL PROCEEDINGS
The Company is subject to a number of routine pending litigation matters.
Management, after review and consultation with counsel, considers that any
liability from the disposition of such matters would not have a material adverse
effect upon the financial condition or results of operations of the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended March 31, 1995.
18
<PAGE>
ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, who are chosen by and serve at the
discretion of the Board of Directors, are as follows:
Name Age Position
---- --- --------
Lawrence F. Probst III 45 Chairman of the Board of
Directors, President and Chief
Executive Officer
William Bingham Gordon 45 Executive Vice President, EA
Studios
John W. Heistand 42 Senior Vice President, Corporate
Business Development
Mark S. Lewis 45 Senior Vice President,
International
E. Stanton McKee, Jr. 50 Senior Vice President, Chief
Financial and Administrative
Officer
Steve Salyer 45 Senior Vice President, Business
Development
Nancy L. Smith 42 Senior Vice President, Sales
David L. Carbone 44 Vice President, Finance
Ruth A. Kennedy 40 Vice President, General
Counsel and Secretary
Linda R. Palmor 40 Controller
MR. PROBST has been a director of the Company since January 1991 and
currently serves as Chairman of the Board of Directors, President and Chief
Executive Officer. He was elected as Chairman in July 1994. Mr. Probst served
as Senior Vice President of EA Distribution, the Company's distribution
division, from January 1987 to January 1991, and from September 1984, when he
joined the Company, until December 1986, served as Vice President of Sales. Mr.
Probst holds a B.S. degree from the University of Delaware.
MR. GORDON has served as Executive Vice President of EA Studios since
August 1993. Prior to this, he served as Senior Vice President of Entertainment
Production since February 1992. From December 1989 to January 1992, he served
as the Senior Vice President of Marketing. He also served as General Manager of
EA Studios, as Vice President of Marketing, Director of Advertising and Vice
President of the Company's former entertainment division while employed by the
company. Mr. Gordon holds a B.A. degree from Yale University and an M.B.A.
degree from Stanford University.
19
<PAGE>
MR. HEISTAND has served as Senior Vice President, Corporate Business
Development since January 1995. From March 1994 to December 1994, he served as
Senior Vice President and General Manager of the EA Sports Division. Upon
joining the Company in July 1992, he served as Senior Vice President, Marketing.
Prior to this he served as Vice President of Magazine Development for Hearst
Magazine where he was the founding publisher of SmartMoney (The Wall Street
Journal Magazine) from January 1989 to July 1992. He also served as Vice
President for Consumer Marketing at Esquire Magazine Group, Inc. from October
1984 to December 1986, prior to its acquisition by the Hearst Corporation in
1986. Mr. Heistand holds a Bachelors Degree from Whitman College and a Masters
in Management from J.L. Kellogg Graduate School of Management at Northwestern
University.
MR. LEWIS has served as Senior Vice President of International since July
1993. From August 1991 to July 1993, he served as President of Electronic Arts,
Limited, a wholly-owned subsidiary of the Company which serves the European
market from its base in Langley, England. He has also served as Managing
Director of Electronic Arts, Ltd., Director of European Publishing, and as a
Producer and Manager of Product Support and Acquisitions during his tenure with
the Company. He has been employed by the Company since 1984. Mr. Lewis is a
graduate of Yale University.
MR. MCKEE joined the Company as Senior Vice President and Chief Financial
and Administrative Officer in March 1989. Mr. McKee holds B.A. and M.B.A.
degrees from Stanford University and is also a Certified Public Accountant.
MR. SALYER has served as Senior Vice President of Business Development
since July 1993. He joined the Company as Vice President of Business
Development in May 1989.
MS. SMITH has served as Senior Vice President of Sales since July 1993 and
as Vice President of Sales from 1988 to 1993. Ms. Smith has also served as
Western Regional Sales Manager and National Sales Manager since she joined the
Company in 1984. Ms. Smith holds a B.S. degree in management and organizational
behavior from the University of San Francisco.
MR. CARBONE has been with the Company since February 1991 as Vice
President, Finance. He was elected Assistant Secretary of the Company in March
1991. Prior to joining the Company, Mr. Carbone served as Controller for
Magnetic Pulse, Inc., a privately held designer of tools for hydrocarbon
exploration, and was previously employed as Vice President of Finance for Vicom
Systems Inc., a supplier of high-end graphics and imaging systems, from August
1989 to February 1990. Mr. Carbone holds a B.S. degree in accounting from
King's College and is a Certified Public Accountant.
20
<PAGE>
MS. KENNEDY has been employed by the Company since February 1990. She
served as Corporate Counsel until March 1991 and is currently Vice President,
General Counsel and Secretary. Ms. Kennedy was elected Secretary in September
1994. Ms. Kennedy is a member of the State Bars of California and New York and
received her B.A. degree from William Smith College and her Juris Doctor from
the State University of New York.
MS. PALMOR has been employed by the Company since February 1995. Prior to
joining the Company, she held the position of Director of Accounting for The
Disney Store, Inc. from December 1993 to January 1995. Ms. Palmor was Director
of Corporate Reporting for The Walt Disney Company from July 1991 to December
1993. From September 1990 to July 1991, Ms. Palmor acted as financial
consultant to several Los Angeles based distribution companies. She also served
as Chief Financial Officer for L.A. Entertainment, Inc. from May 1989 to
September 1990. Ms. Palmor holds a B.S. degree in Biochemistry from Manchester
University and is a Certified Public Accountant and Chartered Accountant.
21
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the National Market under the symbol
"ERTS". The following table sets forth the quarterly high and low closing sales
prices of the Company's Common Stock from April 1, 1993 through March 31, 1995.
Such prices represent prices between dealers, do not include retail mark-ups,
mark-downs or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
CLOSING SALES PRICES
--------------------
HIGH LOW
---- ---
<S> <C> <C>
Fiscal Year Ended March 31, 1994:
First Quarter $37.50 $25.50
Second Quarter 35.75 26.50
Third Quarter 41.50 29.25
Fourth Quarter 32.75 23.75
Fiscal Year Ended March 31, 1995:
First Quarter $25.75 $13.00
Second Quarter 18.75 13.50
Third Quarter 22.50 17.50
Fourth Quarter 25.75 16.75
</TABLE>
There were approximately 2,492 holders of record of the Company's Common Stock
as of June 6, 1995. The Company believes that a significant number of
beneficial owners of its Common Stock hold their shares in street names.
DIVIDEND POLICY
The Company has not paid any cash dividends and does not anticipate paying
cash dividends in the foreseeable future.
22
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
Year Ended March 31
(In thousands, except per share data)
<TABLE>
<CAPTION>
INCOME STATEMENT DATA 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $493,346 $418,289 $298,386 $175,094 $113,098
Cost of goods sold 263,357 224,606 160,578 90,915 61,847
---------------------------------------------------------------------------------
Gross profit 229,989 193,683 137,808 84,179 51,251
Operating expenses:
Marketing and sales 61,951 46,847 38,465 22,679 15,153
General and administrative 29,308 23,767 20,713 13,962 9,218
Research and development 73,902 62,570 37,451 21,533 12,372
---------------------------------------------------------------------------------
Total operating expenses 165,161 133,184 96,629 58,174 36,743
---------------------------------------------------------------------------------
Operating income 64,828 60,499 41,179 26,005 14,508
Interest and other income, net 13,250 3,782 2,537 1,522 1,243
---------------------------------------------------------------------------------
Income before provision for income
taxes and minority interest 78,078 64,281 43,716 27,527 15,751
Provision for income taxes 24,980 19,450 13,421 8,839 4,914
---------------------------------------------------------------------------------
Income before minority interest 53,098 44,831 30,295 18,688 10,837
Minority interest in consolidated 2,620 (94) 563 -- --
joint venture ---------------------------------------------------------------------------------
Net income $ 55,718 $44,737 $ 30,858 $ 18,688 $ 10,837
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Net income per share $ 1.07 $ 0.86 $ 0.62 $ 0.40 $ 0.24
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
BALANCE SHEET DATA AT FISCAL YEAR END
- -------------------------------------------------------------------------------------------------------------------------------
Cash and short-term investments $174,121 $ 130,318 $ 98,029 $ 59,053 $ 27,579
Marketable securities 10,725 11,931 -- -- --
Working capital 169,142 135,741 85,094 57,375 33,437
Long term investment 14,200 -- -- -- --
Total assets 341,239 273,651 181,257 105,773 65,674
Total liabilities 103,018 97,988 67,687 37,764 22,020
Minority interest 1,148 3,485 2,999 -- --
Total stockholders' equity 237,073 172,178 110,571 68,009 43,654
</TABLE>
23
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Comparison of Fiscal 1995 to 1994
<TABLE>
<CAPTION>
1995 1994 % change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $493,346,000 $418,289,000 17.9
- -------------------------------------------------------------------------------
</TABLE>
Electronic Arts ("the Company" or "EA") derives revenues from shipments of EA
Studio cartridge products, EA Studio Compact Disk ("CD") and floppy-disk
personal computer products (primarily entertainment software), EA Studio CD
products on dedicated entertainment systems, licensing of EA Studio products,
distribution of EA Studio products through hardware companies ("OEMs") and
shipments of Affiliated Label CD and floppy-disk products that are created by
third parties.
Total net revenues increased compared to the prior year primarily due to an
increase in net revenues derived from a higher volume of CD based products
(personal computer and 3DO Interactive Multiplayer), EA License/OEM products and
Affiliated Label products. This was partially offset by a decrease in sales of
16-bit Super Nintendo Entertainment System ("Super NES") and EA floppy-disk
products.
Net revenues generated by cartridge based products were $293,375,000 or 60%
of consolidated net revenues in fiscal 1995 compared to $311,936,000 or 75% of
net revenues in fiscal 1994. The mix of net revenue in fiscal 1995 reflects the
impact of the current transition from the mature 16-bit cartridge based market
to the emerging 32-bit CD based market. As the 16-bit market has matured,
hardware sales have slowed and the sales of the related software have declined
and are expected to continue to decline. Additionally, as the 16-bit market has
become more "hits-driven", the Company released fewer titles for these platforms
and intends even fewer releases in fiscal 1996.
Sales of EA Studio Sega Genesis ("Genesis") cartridge products in fiscal
1995 declined to $213,471,000, or 43% of total revenue, compared to
$220,327,000, or 53% of total revenue in fiscal 1994. The Company released 17
new Genesis titles in fiscal 1995 compared to 24 in fiscal 1994.
Net revenues derived from cartridge products for the Super NES were
$68,462,000, or 14% of total revenue, in fiscal 1995 compared to $89,602,000, or
21% of total revenue in fiscal 1994. The Company released six new titles for
the Super NES in fiscal 1995 compared to eight in fiscal 1994.
Net revenues generated by hand-held cartridge products were $11,442,000 for
fiscal 1995 compared to $2,007,000 in fiscal 1994. The Company does not expect
to produce any new games for hand-held hardware in fiscal 1996 and accordingly,
revenues are expected to decline.
Net revenues from CD personal computer products increased to $72,227,000 in
fiscal 1995, representing 15% of total net revenues, from $4,968,000, or 1% of
total net revenues in fiscal 1994. The Company released 30 CD-ROM titles in
fiscal 1995 compared to eight in fiscal 1994.
CD products for dedicated entertainment systems, primarily the 3DO
Interactive Multiplayer, generated net revenues of $31,632,000 in fiscal 1995,
representing 6% of the total net revenues compared to $8,676,000, or 2% of total
net revenues in fiscal 1994. The Company released 11 of these titles in fiscal
1995 compared to seven in fiscal 1994.
Net revenues from floppy-disk based products decreased to $26,631,000, or
5% of the total in fiscal 1995, from $50,998,000, or 12 % in fiscal 1994.
Results reflected the rapid market shift from floppy-disk based personal
computer products to CD-based personal computer products. In fiscal 1995, the
Company released 14 floppy disk titles, compared to 35 in fiscal 1994.
Licensing of EA Studio products generated $21,001,000 in fiscal 1995,
compared to $8,495,000 in fiscal 1994. The increase was primarily a result of
the licensing of the Company's Super NES products to a third party in Europe and
increased distribution of its products through OEMs.
Net revenues from shipments of Affiliated Label products in fiscal 1995
increased to $48,480,000 from $33,216,000 in fiscal 1994. The increase,
primarily attributable to higher net revenues for CD based products, was
partially offset by a decrease in net revenues derived from floppy-disk based
computer products. Affiliated Label CD based products represented 59% of total
Affiliated Label net revenues in fiscal 1995, compared to 32% in fiscal 1994.
North American net revenue totaled $335,303,000 in fiscal 1995,
representing an increase of 7% over the $311,986,000 in net revenue generated in
the prior year. The increase was primarily due to the significant increase in
CD based products for both personal computers and dedicated entertainment
systems. This increase was offset by a decrease in the volume of sales in the
mature 16-bit cartridge market in North America. International net revenues
increased 49% to $158,043,000 in fiscal 1995 from $106,303,000 in fiscal 1994.
The increase in international revenues was due primarily to the sale of CD based
products, together with an increase in licensing activities in Europe. This was
partially offset by reduced Super NES revenue in Europe and Japan.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1995 1994 % change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of goods sold $263,357,000 $224,606,000 17.3
As a percentage of
net revenues 53.4% 53.7%
- -------------------------------------------------------------------------------
</TABLE>
Cost of goods sold as a percentage of revenues in fiscal 1995 reflects the
higher margin associated with CD based products offset by the higher cartridge
costs on Genesis and Super NES products resulting from larger cartridge
configurations as well as higher professional and celebrity royalties.
24
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Operating Expenses 1995 1994 % change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Marketing and sales $61,951,000 $46,847,000 32.2
As a percentage of
net revenues 12.6% 11.2%
- -------------------------------------------------------------------------------
General and
administrative $29,308,000 $23,767,000 23.3
As a percentage of
net revenues 5.9% 5.7%
- -------------------------------------------------------------------------------
Research and
development $73,902,000 $62,570,000 18.1
As a percentage of
net revenues 15.0% 15.0%
-------------------------------------------------------------------------------
</TABLE>
The increase in marketing and sales expenses was primarily attributable to an
increase in television advertising oriented to the "hits-driven" 16-bit
cartridge business during the holiday season and an increase in cooperative
advertising to support the 16-bit cartridge market.
General and administrative expenses increased due to bad debt experienced
in the joint venture in Japan and legal costs associated with business
development activities in Europe.
The increase in research and development expenses was primarily due to an
increase in the number of products under development, higher average development
costs for CD based products than for cartridge products, continued investment in
new technologies for next generation systems and the acquisition of Bullfrog
Productions Ltd., a United Kingdom based development company. The Company
released a total of 86 new products in fiscal 1995 compared to 82 in fiscal
1994.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1995 1994 % change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating income $64,828,000 $60,499,000 7.2
As a percentage
of net revenues 13.1% 14.5%
- -------------------------------------------------------------------------------
</TABLE>
The increase in operating income was primarily due to higher net revenues,
reduced by an increase in operating expenses.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1995 1994 % change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and other
income, net $13,250,000 $3,782,000 250.3
As a percentage
of net revenues 2.7% 0.9%
- -------------------------------------------------------------------------------
</TABLE>
The increase in other income was primarily due to a one-time payment of
$8,600,000 from Broderbund Software, Inc. ("Broderbund"), net of costs of
$1,400,000 incurred by the Company, associated with the termination of the
merger agreement between the Company and Broderbund.
Additionally, interest income was higher in fiscal 1995 due to higher average
balances together with higher average interest rates.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1995 1994 % change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes $24,980,000 $19,450,000 28.4
Effective tax rate 32.0% 30.3%
- -------------------------------------------------------------------------------
</TABLE>
The effective tax rate for fiscal 1995 increased over the prior year primarily
due to the impact of the current year operating loss reported by Electronic Arts
Victor ("EAV").
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1995 1994 % change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Minority interest in
consolidated joint
venture $2,620,000 ($94,000) N/M
As a percentage
of net revenues 0.5% --
- -------------------------------------------------------------------------------
</TABLE>
EAV is sixty-five percent owned by the Company and thirty-five percent owned by
Victor Entertainment Industries, Inc. ("VEI"), a wholly owned subsidiary of
Victor Company of Japan, Limited. Minority interest for fiscal 1995 represents
VEI's pro rata share of net loss from EAV's operations. Conversely, the fiscal
1994 minority interest represents VEI's pro rata share of EAV's net operating
income for that period.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1995 1994 % change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $55,718,000 $44,737,000 24.5
As a percentage
of net revenues 11.3% 10.7%
- -------------------------------------------------------------------------------
</TABLE>
The increase in net income was due to the after-tax net gain of approximately
$5,800,000 from a one-time payment associated with the termination of the merger
as well as higher revenues, partially offset by higher operating expenses and
the impact of a higher effective tax rate.
25
<PAGE>
RESULTS OF OPERATIONS
Comparison of Fiscal 1994 to 1993
<TABLE>
<CAPTION>
1994 1993 % change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $418,289,000 $298,386,000 40.2
- -------------------------------------------------------------------------------
</TABLE>
Net revenues from Genesis cartridge products were $220,327,000 in fiscal
1994 compared to $167,447,000 in fiscal 1993. Genesis cartridge revenues
represented 53% of total net revenues in fiscal 1994 and 56% in fiscal 1993.
The Company released 24 new cartridge titles for the Genesis in fiscal 1994
compared to 17 in fiscal 1993.
Net revenues derived from Super NES cartridge products were $89,602,000 in
fiscal 1994 compared to $53,515,000 in fiscal 1993. Super NES revenues grew to
21% of total revenues in fiscal 1994 up from 18% in fiscal 1993. The Company
released eight new titles for the Super NES in fiscal 1994 compared to six in
fiscal 1993.
Revenue derived from the sale of Gameboy cartridge products were $2,007,000
in fiscal 1994, compared to $611,000 in fiscal 1993.
Overall cartridge sales rose 41% to $311,936,000 in fiscal 1994 compared to
$221,573,000 in fiscal 1993. Cartridge products provided 75% of net revenues in
fiscal 1994 compared to 74% in fiscal 1993.
Net revenues derived from EA Studio CD based products (CD based personal
computer products, Genesis CD products and the 3DO Interactive Multiplayer
products) increased to $13,644,000 in fiscal 1994 from $1,410,000 in fiscal
1993. CD based products provided 3% of net revenues in fiscal 1994 compared to
less than 1% in fiscal 1993. EA Studio floppy-disk based products increased 45%
to $50,998,000 in fiscal 1994 from $35,088,000 in fiscal 1993. EA Studio
floppy-disk based products provided 12% of net revenues in fiscal 1994 and
fiscal 1993. The increase in sales of EA Studio floppy-disk based products was
due to an increase in the number of titles released in fiscal 1994 to 35 up from
26 in fiscal 1993.
Net revenues derived from licensing of EA Studio products of $8,495,000 was
approximately $1,116,000 lower than fiscal 1993. The Company emphasized the
publication and distribution of its own products instead of licensing its
products to third party publishers or distributing its products through OEMs.
Net revenues derived from licensing of EA Studio products provided 2% of net
revenues in fiscal 1994 compared to 3% in fiscal 1993.
Net revenues from shipments of Affiliated Label products increased to
$33,216,000 in fiscal 1994, up from $30,704,000 in fiscal 1993. The increase
was primarily attributable to higher net revenues for CD based product of
several new and existing affiliates. Fiscal 1994 Affiliated Label net revenues
included $10,741,000 of sales for CD products compared to $2,322,000 in the
prior year. Affiliated Label products provided 8% of net revenues in fiscal
1994 compared to 10% in fiscal 1993.
On a geographic basis, in fiscal 1994, the Company derived 75% of net
revenues from North America, 17% from Europe and 8% from the rest of the world,
compared to 70% in North America, 25% in Europe and 5% from the rest of the
world in fiscal 1993. European revenues declined 6% in US dollars due to
continued weakness in the videogame cartridge market in that territory and the
unfavorable currency exchange rate comparisons.
<TABLE>
<CAPTION>
1994 1993 % change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of goods sold $224,606,000 $160,578,000 39.9
As a percentage of
net revenues 53.7% 53.8%
- -------------------------------------------------------------------------------
</TABLE>
Cost of goods sold in fiscal 1994, as a percentage of net revenues, was
comparable to the prior year. Higher product costs associated with larger
capacity cartridge configurations were offset by a reduction in freight expenses
on cartridge products as a result of shipping a higher percentage of units by
sea versus by air.
26
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Operating Expenses 1994 1993 % change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Marketing and sales $46,847,000 $38,465,000 21.8
As a percentage of
net revenues 11.2% 12.9%
- -------------------------------------------------------------------------------
General and
administrative $23,767,000 $20,713,000 14.7
As a percentage of
net revenues 5.7% 6.9%
- -------------------------------------------------------------------------------
Research and
development $62,570,000 $37,451,000 67.1
As a percentage
of net revenues 15.0% 12.6%
- -------------------------------------------------------------------------------
</TABLE>
The increase in marketing and sales expenses was primarily attributable to
increased television advertising, costs associated with the completion of
Electronic Arts Victor, Inc.'s ("EAV") first full year of operations in fiscal
1994, increased headcount in North America and Europe and variable costs
associated with the release of new products which increased over fiscal 1993.
General and administrative expenses were higher than the prior year due to
additional headcount, increased facility related expenses associated with
additional office space acquired in order to accommodate growth, costs
associated with the completion of EAV's first full year of operations and
increased accruals for bad debts related to higher revenues.
The increase in research and development expenses was primarily due to
additional headcount and related expenses associated with an increase in the
number of products under development, continued investment in development
efforts for CD platforms and more in-house development. Additional investments
were made in new interactive movie production facilities which utilize digitized
audio and video information and product development efforts for new hardware
platforms. The Company released 82 new products in fiscal 1994 compared to 51
in fiscal 1993.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1994 1993 % change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating income $60,499,000 $41,179,000 46.9
As a percentage
of net revenues 14.5% 13.8%
- -------------------------------------------------------------------------------
</TABLE>
The increase in operating income was primarily due to higher net revenues.
Operating income increased at a higher rate than net revenues due to lower
operating expenses as a percentage of net revenues.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1994 1993 % change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and other
income, net $3,782,000 $2,537,000 49.1
As a percentage
of net revenues 0.9% 0.9%
- -------------------------------------------------------------------------------
</TABLE>
Other income in fiscal 1994 increased over the prior year as a result of
interest earned on higher average cash balances and foreign currency gains.
This increase was partially offset by slightly lower interest rates.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1994 1993 % change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes $19,450,000 $13,421,000 44.9
Effective tax rate 30.3% 30.7%
- -------------------------------------------------------------------------------
</TABLE>
The effective tax rate decreased primarily due to tax benefits associated with
the Company's first full year of manufacturing operations in Puerto Rico and the
reinstatement of the research and development credits. This was partially
offset by an increase in the federal statutory tax rate.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1994 1993 % change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Minority interest in
consolidated joint
venture $(94,000) $563,000 (116.7)
As a percentage
of net revenues -- 0.2%
- -------------------------------------------------------------------------------
</TABLE>
EAV is sixty-five percent owned by the Company and thirty-five percent owned by
Victor Entertainment Industries, Inc. ("VEI"), (formerly Victor Musical
Industries, Inc.), a wholly owned subsidiary of Victor Company of Japan,
Limited. Minority interest for fiscal 1994 represents VEI's pro rata share of
net income from EAV's operations. Conversely, the fiscal 1993 minority interest
represents VEI's pro rata share of EAV's net operating losses for that period.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1994 1993 % change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $44,737,000 $30,858,000 45.0
As a percentage
of net revenues 10.7% 10.3%
- -------------------------------------------------------------------------------
</TABLE>
As noted above, the increase in net income was a result of higher net revenues.
27
<PAGE>
- -------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1995, the Company's working capital was $169,142,000, compared
to $135,741,000 at March 31, 1994. Cash and short-term investments increase by
approximately $43,803,000 in fiscal 1995. The Company generated $63,797,000 of
cash from operations in fiscal 1995. This amount included approximately
$5,800,000 after-tax associated with the termination of the merger agreement
between the Company and Broderbund. In addition, approximately $7,220,000 was
provided through the sale of equity securities under the Company's employee
stock plans.
Reserves for bad debts and sales returns increased from $29,113,000 at March
31, 1994 to $33,567,000 at March 31, 1995. Reserves have been charged for
returns of product and price protection credits issued for products sold in
prior periods. Management believes these reserves are adequate based on
historical experience and its current estimate of potential returns and
allowances.
During fiscal 1995 the Company invested approximately $16,503,000 relating to
computer hardware and software purchases required to support the Company's
development efforts, particularly as those efforts relate to the new generation
of 32-bit based systems.
Inventory levels at March 31, 1995 increased compared to March 31, 1994 to
support the Company's expanded international distribution network, including the
addition of Kingsoft in Germany and DROSoft (now "EA Spain") in Spain.
In March 1995, the Company made a $14,200,000 long-term investment to enable
it to take advantage of certain tax exemptions in its Puerto Rico operation.
In connection with the Company's purchases of cartridges to be distributed in
Japan, Nintendo of Japan requires cash deposits in lieu of letters of credit. At
March 31, 1995, EAV had remaining cash deposits for purchases of Nintendo
cartridges of approximately $803,000. Also in lieu of letters of credit, EAV
utilizes a line of credit to fund these deposits and purchases of Nintendo
cartridges. At March 31, 1995, EAV had an outstanding balance on this line of
approximately $3,400,000.
The Company's principal source of liquidity is $174,121,000 in cash and
short-term investments. Management believes the existing cash, cash equivalents,
short-term investments, marketable securities and cash generated from operations
will be sufficient to meet cash and investment requirements for the foreseeable
future.
28
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Auditors, Consolidated Financial Statements and Notes
to Consolidated Financial Statements follow below on pages 29 through 42.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Electronic Arts and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Electronic Arts
and subsidiaries as of March 31, 1995 and 1994 and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended March 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Electronic
Arts and subsidiaries at March 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1995, in conformity with generally accepted accounting
principles.
Palo Alto, California
April 21, 1995 KPMG Peat Marwick LLP
29
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31
1995 1994
- -------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and short-term investments $174,121 $130,318
Marketable securities 10,725 11,931
Receivables, less allowances of $33,567 and $29,113, respectively 56,389 65,115
Inventories 12,358 9,691
Prepaid royalties 8,318 8,642
Deferred income taxes 3,142 5,284
Other current assets 7,107 2,748
----------------------------
Total current assets 272,160 233,729
Property and equipment, net 30,528 25,147
Prepaid royalties 6,633 6,879
Long-term investments 14,200 --
Investment in affiliate 6,475 --
Deferred income taxes 77 4,738
Other assets 11,166 3,158
----------------------------
$341,239 $273,651
----------------------------
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 34,247 $35,852
Accrued liabilities 68,771 62,136
----------------------------
Total current liabilities 103,018 97,988
Minority interest in consolidated joint venture 1,148 3,485
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 1,000,000 shares -- --
Common stock, $0.01 par value. Authorized 70,000,000 shares;
issued and outstanding 50,863,455 and 49,908,595 shares, respectively 509 477
Paid-in capital 77,144 65,677
Retained earnings 161,512 108,878
Unrealized depreciation of investments (1,206) --
Translation adjustment (886) (2,854)
----------------------------
Total stockholders' equity 237,073 172,178
----------------------------
$341,239 $273,651
----------------------------
----------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended March 31
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $493,346 $418,289 $298,386
Cost of goods sold 263,357 224,606 160,578
--------------------------------------------
Gross profit 229,989 193,683 137,808
Operating expenses:
Marketing and sales 61,951 46,847 38,465
General and administrative 29,308 23,767 20,713
Research and development 73,902 62,570 37,451
--------------------------------------------
Total operating expenses 165,161 133,184 96,629
--------------------------------------------
Operating income 64,828 60,499 41,179
Interest and other income, net 13,250 3,782 2,537
--------------------------------------------
Income before provision for income taxes and minority interest 78,078 64,281 43,716
Provision for income taxes 24,980 19,450 13,421
--------------------------------------------
Income before minority interest 53,098 44,831 30,295
Minority interest in consolidated joint venture 2,620 (94) 563
--------------------------------------------
Net income $ 55,718 $44,737 $30,858
--------------------------------------------
--------------------------------------------
Net income per share $ 1.07 $0.86 $0.62
--------------------------------------------
--------------------------------------------
Number of shares used in computation 52,230 52,219 49,925
--------------------------------------------
--------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended March 31, 1995, 1994 and 1993 Common Stock
(In thousands) ---------------------
Unrealized
Paid-In Retained Investments Translation
Shares Amount Capital Earnings Depreciation Adjustment Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1992 46,205 $440 $28,591 $39,223 $0 $(245) $68,009
Proceeds from sales of shares
through employee stock plans and other plans 1,626 16 5,341 5,357
Tax benefit related to stock options 9,060 9,060
Purchase of technology and buyout of profit
participation agreements 606 6 6,778 6,784
Adjustment for change in Origin Systems,
Inc. fiscal year end (5,578) (5,578)
S-corporation dividends (362) (362)
Translation adjustment (3,557) (3,557)
Net income 30,858 30,858
----------------------------------------------------------------------------------
Balances at March 31, 1993 48,437 462 49,770 64,141 0 (3,802) 110,571
Proceeds from sales of shares through
employee stock plans and other plans 1,472 15 9,845 9,860
Tax benefit related to stock options 6,062 6,062
Translation adjustment 948 948
Net income 44,737 44,737
----------------------------------------------------------------------------------
Balances at March 31, 1994 49,909 477 65,677 108,878 0 (2,854) 172,178
Proceeds from sales of shares through
employee stock plans and other plans 954 10 7,210 7,220
Tax benefit related to stock options 4,242 4,242
Adjustment effect of poolings on prior
periods 22 15 (1,698) (1,661)
Adjustment for change in Kingsoft, GmbH
fiscal year end (1,386) (1,386)
Unrealized gains (losses) on investments (1,206) (1,206)
Translation adjustment 1,968 1,968
Net income 55,718 55,718
Balances at March 31, 1995 50,863 $509 $77,144 $161,512 $(1,206) $(886) $237,073
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands) Years ended March 31
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $55,718 $44,737 $30,858
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in consolidated joint venture (2,620) 94 (563)
Depreciation and amortization 10,763 7,865 3,994
Loss on sale of fixed assets 76 28 216
Deferred rent 160 26 866
Adjustment for change in Kingsoft, GmbH fiscal year end (1,386) -- --
Change in assets and liabilities:
Receivables 8,726 (38,733) (6,581)
Inventories (2,887) 2,887 (3,235)
Prepaid royalties (5,120) (5,804) (4,705)
Other assets (11,306) 2,616 (3,777)
Accounts payable (1,605) 2,081 19,181
Accrued liabilities 6,475 21,173 9,876
Deferred income taxes 6,803 3,857 (3,468)
------------------------------------------
Net cash provided by operating activities 63,797 40,827 42,662
------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sale of furniture and equipment 527 93 64
Capital expenditures (16,503) (13,962) (17,810)
Investment in affiliate (472) -- --
Short-term investments 5,700 (36,831) (11,500)
Long-term investments (14,200) -- --
Acquisition of DROsoft (1,397) -- --
Adjustment for effect of poolings on prior periods (1,661) -- --
------------------------------------------
Net cash used in investing activities (28,006) (50,700) (29,246)
------------------------------------------
FINANCING ACTIVITIES:
Proceeds from sales of shares through employee 7,220 9,860 5,357
stock plans and other plans
Tax benefit from stock option exercises 4,242 6,062 9,060
S-corporation dividends -- -- (362)
Proceeds from minority interest investment in -- -- 3,500
consolidated joint venture
------------------------------------------
Net cash provided by financing activities 11,462 15,922 17,555
------------------------------------------
Translation adjustment 1,968 948 (3,557)
Minority interest on translation adjustment 282 392 62
------------------------------------------
Increase in cash and cash equivalents 49,503 7,389 27,476
Beginning cash and cash equivalents 93,918 86,529 59,053
------------------------------------------
Ending cash and cash equivalents 143,421 93,918 86,529
Short-term investments 30,700 36,400 11,500
------------------------------------------
Ending cash and short-term investments $174,121 $130,318 $98,029
------------------------------------------
------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 6,390 $ 4,815 $ 8,315
------------------------------------------
------------------------------------------
NON-CASH INVESTING ACTIVITIES:
Transfer of assets at net book value to affiliated company 6,003 -- --
Unrealized losses on investments $ (1,206) $ -- $ --
------------------------------------------
------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Electronic Arts, Inc. and its wholly owned subsidiaries (the "Company") and its
majority owned subsidiary Electronic Arts Victor, Inc. All significant
intercompany balances and transactions have been eliminated in consolidation.
A summary of the significant accounting policies applied in the
preparation of the accompanying consolidated financial statements of the Company
follows:
(a) FISCAL YEAR
The Company's fiscal year is reported on a 52/53-week period that ends on the
Saturday nearest to March 31 in each year. Since the results of an additional
week are not material, and for clarity of presentation herein, all fiscal
periods are treated as ending on a calendar month end.
(b) REVENUE RECOGNITION
Product Sales: Revenue is recognized when the product is shipped. Subject to
certain limitations, the Company permits customers to obtain exchanges within
certain specified periods, and provides price protection on certain unsold
merchandise. Revenue is reflected net of an allowance for returns and price
protection.
Software Licenses: For those agreements which provide the customers
the right to multiple copies in exchange for guaranteed amounts, revenue is
recognized at delivery of the product master or the first copy. Per copy
royalties on sales that exceed the guarantee are recognized as earned.
Revenue from the licensing of software was $21,001,000, $8,495,000 and
$9,611,000 for the fiscal years ended March 31, 1995, 1994 and 1993,
respectively.
(c) CASH AND INVESTMENTS
Cash equivalents consist of highly liquid investments with maturities of three
months or less at the date of purchase.
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES, ("SFAS 115") as of April 1, 1994. Under SFAS 115,
investments in equity and debt securities are classified in three categories and
accounted for based upon the classification. The Company has accounted for
short-term investments in debt securities as available-for-sale and has stated
applicable investments at fair value, which approximates cost. The cost of
securities sold is based upon the specific identification method. In accordance
with the provisions of SFAS 115, prior period financial statements have not been
restated to reflect the change in accounting principle. The cumulative effect,
net of income taxes, as of April 1, 1994, of adopting SFAS 115 was immaterial to
the prior period financial statements.
(d) PREPAID ROYALTIES
Prepaid royalties represent prepayments made to independent software developers
under development agreements. Prepaid royalties are expensed at the contractual
royalty rate as cost of goods sold based on actual net product sales.
Management evaluates the future realization of prepaid royalties quarterly, and
charges to research and development expense any amounts that management deems
unlikely to be amortized at the contract royalty rate through product sales.
Royalty advances are classified as current and noncurrent assets based upon
estimated net product sales within the next year.
(e) SOFTWARE DEVELOPMENT COSTS
Statement of Financial Accounting Standards No. 86 provides for the
capitalization of certain software development costs once technological
feasibility is established. The capitalized costs are then amortized on a
straight-line basis over the estimated product life, or on the ratio of current
revenues to total projected product revenues, whichever is greater. No software
development costs have been capitalized to date as the impact on the financial
statements for all periods presented is immaterial.
(f) INVENTORIES
Inventories are stated at the lower of average cost or market. Inventories at
March 31, 1995 and 1994 consisted of:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Raw materials and work in process $ 2,799 $ 3,704
Finished goods 9,559 5,987
- -------------------------------------------------------------------------------
$12,358 $ 9,691
- -------------------------------------------------------------------------------
</TABLE>
(g) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of furniture and
equipment is computed using the declining balance method over the estimated
useful lives of the respective assets, which range from three to seven years.
The building is being depreciated using the declining balance method over 20
years. Amortization of leasehold improvements is computed using the declining
balance method over the lesser of the lease terms or the estimated useful lives
of the improvements.
34
<PAGE>
(h) INTANGIBLE ASSETS
Intangible assets net of amortization at March 31, 1995 and 1994 of $2,340,000
and $1,136,000 are included in other current and noncurrent assets and include
costs of obtaining product technology and noncompete covenants which are
amortized using the straight-line method over the lesser of their estimated
useful lives or the agreement terms, typically no more than five years, and
goodwill resulting from the purchase of DROSoft (now known as EA Spain) in
November 1994. Amortization expense for fiscal years ended March 31, 1995, 1994
and 1993 was $337,000, $318,000, and $144,000, respectively.
(i) INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, ACCOUNTING FOR INCOME TAXES ("SFAS 109"). SFAS 109 requires
an asset and liability approach to account for income taxes. The Company
adopted SFAS 109 during fiscal 1994. Previously, the Company used Accounting
Principles Board Opinion Number 11 in which deferred income taxes are recognized
for income and expense items that are reported in different years for financial
reporting purposes and income tax purposes using the tax rate applicable for the
year of calculation. The adoption of SFAS 109 did not have a material impact on
the Company s consolidated financial statements.
(j) FOREIGN CURRENCY TRANSLATION
For each of the Company's foreign subsidiaries the functional currency is its
local currency. Assets and liabilities of foreign operations are translated into
U.S. dollars using current exchange rates, and revenues and expenses are
translated into U.S. dollars using average exchange rates. The effects of
foreign currency translation adjustments are deferred and included as a
component of stockholders' equity.
Foreign currency transaction gains and losses are a result of the
effect of exchange rate changes on transactions denominated in currencies other
than the functional currency. Included in interest and other income in the
statements of income are foreign currency transaction gains of $785,000,
$1,418,000 and $310,000 for the fiscal years ended March 31, 1995, 1994 and
1993, respectively.
(k) NET INCOME PER SHARE
Net income per share is based on the weighted average number of common stock and
common stock equivalents from stock options outstanding during the period.
There is no significant difference between primary and fully diluted earnings
per share.
(l) EMPLOYEE BENEFITS
The Company has deferred savings and profit sharing plans for its employees.
The Profit Sharing Plan was terminated effective March 31, 1995 and all employee
account balances transferred to employee s accounts in the 401(k) Plan.
Accordingly, there were no contributions to the Profit Sharing Plan for the
fiscal year ended March 31, 1995 compared to $615,000 for the fiscal year ended
March 31, 1994.
The 401(k) Plan was amended to permit the Company to make discretionary
contributions to employee s accounts based on the Company s financial
performance. No such contribution was made during fiscal year 1995.
(m) RECLASSIFICATIONS
Certain amounts have been reclassified to conform to fiscal 1995 presentation.
(2) CASH AND INVESTMENTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Cash and equivalents:
Cash $ 21,023 $ 4,037
Municipal securities 42,813 17,659
Money market funds 25,437 44,245
Mutual fund preferreds -- 1,999
Commercial paper 54,148 4,500
Government backed bonds -- 10,127
Certificates of deposit -- 5,801
Variable rate demand bonds -- 5,550
- -------------------------------------------------------------------------------
Cash and equivalents 143,421 93,918
- -------------------------------------------------------------------------------
Short-term investments:
Municipal securities 8,500 15,100
Mutual fund preferreds -- 10,900
Money market preferreds 22,200 10,400
- -------------------------------------------------------------------------------
Short-term investments 30,700 36,400
- -------------------------------------------------------------------------------
Cash and short-term investments $174,121 $130,318
- -------------------------------------------------------------------------------
Long-term investments $ 14,200 $ --
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
Long-term investments are in the form of commercial notes with maturities of
five to eight years secured by U.S. Treasury Notes. Such investments enable the
Company to take advantage of certain tax incentives in its Puerto Rico operation
and are treated as held to maturity for financial reporting purposes.
(3) MARKETABLE SECURITIES
Marketable securities consist of equity securities. The Company has accounted
for investments in equity securities as "available-for-sale" and has stated
applicable investments at fair value, with unrealized losses reported as a
separate component of stockholders' equity. Marketable securities had an
aggregate cost of $11,931,000 at March 31, 1995.
35
<PAGE>
(4) COMMITMENTS AND CONTINGENCIES
(a) LEASE OBLIGATIONS
The Company leases its current facilities and certain equipment under
non-cancelable operating lease agreements. The Company is required to pay
property taxes, insurance and normal maintenance costs for certain of its
facilities and will be required to pay any increases over the base year of
these expenses on the remainder of the Company's facilities.
In February 1995, the Company entered into a master operating lease for land
and a building to be constructed in Redwood City, California. The initial term
of the lease is for a period of three years from the date of completion of
construction. Monthly lease payments are based upon the London interbank
offering rate. The Company has the option to purchase the property for the
unamortized financed balance at any time after the non-cancelable lease term, or
it may terminate the lease at any time after the non-cancelable term by
arranging a third party sale or by making a termination payment. Should the
Company elect to terminate the lease, it will guarantee a residual value of up
to 85% of the unamortized value of the property. As part of the agreement, the
Company must also comply with certain financial covenants.
Total future minimum lease commitments as of March 31, 1995 are:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Year Ending: (in thousands)
<S> <C>
1996 $ 6,195
1997 5,469
1998 4,970
1999 5,646
2000 3,259
Thereafter 10,024
- ----------------------------------------------------------
$35,563
- ----------------------------------------------------------
</TABLE>
Total rent expense for all operating leases was $5,274,000, $5,558,000 and
$2,761,000 for the fiscal years ended March 31, 1995, 1994 and 1993,
respectively.
The current portion of deferred rent of $736,000 and $896,000 at March 31,
1995 and 1994, respectively, represents the obligation accrued for rent,
calculated on the straight-line method over the lease term and is included in
accrued liabilities.
(b) LETTERS OF CREDIT
Nintendo of America, Inc. requires irrevocable letters of credit ("LC") prior to
accepting purchase orders from the Company. At March 31, 1995, the Company had
no LC's compared to three LC's totaling $4,739,000, issued and outstanding at
March 31, 1994.
(5) MAJOR CUSTOMER
The Company had no sales to any one customer in excess of 10% of total net
revenues for the years ended March 31, 1995 and 1993.
For the fiscal year ended March 31, 1994, the Company had sales to one customer
which represented 10.8% of total net revenues.
(6) LITIGATION
The Company is subject to pending claims and litigation. Management, after
review and consultation with counsel, considers that any liability from the
disposition of such lawsuits would not have a material adverse effect upon the
consolidated financial condition of the Company.
(7) PREFERRED STOCK
At March 31, 1995 and 1994, the Company had 1,000,000 shares of Preferred Stock
authorized but unissued. The rights, preferences, and restrictions of the
Preferred Stock may be designated by the Board of Directors without further
action by the Company's stockholders.
(8) STOCK PLANS
(a) EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan whereby eligible employees may
authorize payroll deductions of up to 10% of their compensation to purchase
shares at 85% of the lower of the fair market value of the Common Stock on the
date of commencement of the offering or on the last day of the six-month
purchase period. The Plan commenced in September 1991. In fiscal 1995, 169,187
shares were purchased by the Company and distributed to employees at prices
ranging from $15.09 to $15.51 per share. In fiscal 1994, 164,456 shares were
purchased by the Company and distributed to employees at prices ranging from
$11.37 to $21.46. In fiscal 1993, 183,935 shares were purchased by the Company
and distributed to employees at prices ranging from $5.74 to $11.37. At March
1995, the Company had 317,750 shares of its Common Stock reserved for future
issuance under the Plan.
36
<PAGE>
(b) STOCK OPTION PLANS
The Company's 1991 Stock Option Plan and Directors' Plan provide stock options
for employees, officers and independent contractors, and for directors,
respectively. Pursuant to these Option Plans, the Board of Directors may grant
non-qualified and incentive stock options to employees and officers and
non-qualified options to independent contractors, and directors, at not less
than the fair market value on the date of grant. The Company adopted an
additional stock option plan providing non-qualified stock options for other
purposes in fiscal 1995. The Company's 1982 Stock Option Plan ("1982 Plan")
expired in September 1992.
The options generally expire ten years from the date of grant and are
generally exercisable in monthly increments over 50 months.
At March 31, 1995, 3,497,818 shares of the outstanding options were
exercisable at prices ranging from $1.938 to $34.750.
At March 31, 1994, 2,145,214 shares of the outstanding options were
exercisable at prices ranging from $1.594 to $39.000.
At March 31, 1993, 2,087,066 shares of the outstanding options were
exercisable at prices ranging from $1.219 to $28.750.
37
<PAGE>
The following summarizes the activity under the Company's stock option plans
during the fiscal years ended March 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
----------------------------------------------------------------
Options ---------------------------------------------------
Available Options Outstanding
for Grant Shares Price Per Share
----------------------------------------------------------------
<S> <C> <C> <C>
Balance at March 31, 1992 985,922 5,290,126 $ 1.125 - 12.750
Additional authorized options 3,500,000 -- --
Options: Granted (3,473,717) 3,473,717 9.750 - 29.000
Canceled 177,009 (177,009) 1.219 - 16.250
Exercised -- (1,442,352) 1.125 - 17.125
Expired - 1982 Plan (73,906) -- --
----------------------------------------------------------------
Balance at March 31, 1993 1,115,308 7,144,482 $ 1.219 - 29.00
Additional authorized options 2,000,000 -- --
Options: Granted (1,212,400) 1,212,400 24.250 - 39.000
Canceled - 1982 Plan -- (93,802) 1.594 - 13.750
Canceled - other plans 375,805 (375,805) 4.469 - 34.750
Exercised -- (1,306,478) 1.219 - 33.250
----------------------------------------------------------------
Balance at March 31, 1994 2,278,713 6,580,797 $ 1.594 - 39.000
Additional authorized options 2,350,000 - -
Options: Granted (3,173,931) 3,173,931 13.500 - 25.750
Canceled - 1982 Plan -- (54,115) 1.594 - 13.625
Canceled - other plans 1,541,503 (1,541,503) 4.469 - 39.000
Exercised -- (810,673) 1.594 - 24.125
----------------------------------------------------------------
Balance at March 31, 1995 2,996,285 7,348,437 $1.938 - 34.750
----------------------------------------------------------------
----------------------------------------------------------------
</TABLE>
(9) STOCK REPURCHASE PROGRAM
On July 22, 1994, the Board of Directors of the Company authorized the
repurchase of up to 2 million shares depending on market
conditions. The shares were allocated to the newly adopted stock option plan
and for general corporate purposes.
38
<PAGE>
(10) PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1995 and 1994 consisted of:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1995 1994
(in thousands)
- -----------------------------------------------------------------------------
<S> <C> <C>
Computer equipment $36,123 $24,002
Office equipment, furniture and
fixtures 6,915 7,302
Leasehold improvements 6,365 5,304
Building 2,216 2,139
Warehouse equipment and other 3,043 1,916
- -----------------------------------------------------------------------------
54,662 40,663
- -----------------------------------------------------------------------------
Less accumulated depreciation and
amortization (24,134) (15,516)
- -----------------------------------------------------------------------------
$30,528 $25,147
- -----------------------------------------------------------------------------
</TABLE>
Depreciation and amortization expenses associated with property and equipment
amounted to $9,339,000, $7,589,000, and $3,850,000 for the fiscal years ended
March 31, 1995, 1994 and 1993, respectively.
(11) ACCRUED LIABILITIES
Accrued liabilities at March 31, 1995 and 1994 consisted of:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Accrued expenses $24,718 $21,482
Accrued royalties 16,040 13,511
Accrued compensation and benefits 10,524 9,969
Accrued income taxes 16,069 16,324
Deferred revenue 1,420 850
- -------------------------------------------------------------------------
$68,771 $62,136
- -------------------------------------------------------------------------
</TABLE>
(12) INVESTMENT AND JOINT VENTURES
(a) INVESTMENT
THE 3DO COMPANY
The Company has approximately 18% ownership interest in The 3DO Company. Other
investors include Time Warner Enterprises, a unit of Time Warner, Inc.,
Matsushita Electric Industrial Co., Ltd., MCA, AT&T and two venture capital
firms. The investment is accounted for under the equity method.
(b) JOINT VENTURE
ELECTRONIC ARTS VICTOR, INC.
The Company has a majority interest in a joint venture corporation, Electronic
Arts Victor, Inc. ("EAV"), for the development and distribution of entertainment
software products in Japan as well as certain Asian countries. EAV commenced
operations during the third quarter of fiscal 1993. EAV is sixty-five percent
owned by the Company and thirty-five percent owned by Victor Entertainment
Industries, Inc. ("VEI"), (formerly Victor Musical Industries, Inc.) a wholly
owned subsidiary of Victor Company of Japan, Limited. The Company has
consolidated 100% of the assets, liabilities and results of operations for EAV.
VEI's 35% interest in EAV and the profits or losses therefrom has been reflected
as "Minority interest in consolidated joint venture" on the Company's
Consolidated Financial Statements.
(c) JOINT VENTURE
CREATIVE WONDERS, INC.
In December 1994, the Company and Capital Cities/ABC, Inc. announced the
formation of a joint venture company to develop and publish software for
personal computers and new generation entertainment machines. The new venture,
Creative Wonders, Inc. (formerly ABC/EA Home Software, Inc.) will publish
children's edutainment and interactive entertainment multimedia titles as well
as reference products under the name Creative Wonders. Under the terms of the
agreement, each company will maintain a 50% ownership interest in the joint
venture company. The investment is accounted for under the equity method.
Electronic Arts will be the exclusive distributor of any interactive titles sold
by the joint venture in the retail channel. As part of the agreement, the
Company contributed assets consisting primarily of inventories, prepaid
royalties, and certain intangible assets.
(13) BUSINESS COMBINATIONS
ACQUISITIONS OF DROSOFT, BULLFROG PRODUCTIONS LIMITED AND KINGSOFT GMBH
In November 1994, the Company paid approximately $1,397,000 to acquire DROSoft,
an independent distributor of entertainment software, headquartered in Madrid,
Spain. The acquisition was accounted for under the purchase method. This
resulted in approximately $762,000 of goodwill which is amortized over a five
year period. In addition, there is a covenant not to compete by the prior
DROSoft stockholders for approximately $942,000 which is amortized over a four
year period. Additionally, the Company acquired trade receivables and assumed
certain liabilities. DROSoft is now known as EA Spain.
In January 1995, the Company acquired Bullfrog Productions Ltd. ("Bullfrog"),
an interactive software developer based in the United Kingdom. Bullfrog has had
a seven-year history with the Company as a strategic partner in designing and
developing interactive game software. The acquisition has been accounted for
under the pooling of interests method. Accordingly, the Company's financial
statements have been restated to include the accounts and operations of Bullfrog
for the year ended March 31,1995.
In February 1995, the Company acquired Kingsoft GmbH ("Kingsoft"), a
European distributor of interactive software based in Aachen, Germany, with
which the Company has had a relationship for over two years. The acquisition
has been accounted for under the pooling of interests method. Kingsoft had a
December 31 year end. Accordingly, the Company's financial statements have been
restated to include the accounts and operations of Kingsoft for the year ended
December 31, 1994.
39
<PAGE>
In order to effect these two poolings the Company issued a total of 2,240,041
shares of common stock in exchange for all of the acquirees' outstanding common
stock. The impact of the poolings on all periods prior to fiscal 1995 is
immaterial and therefore results for those periods have not been restated, other
than to reflect the stock issuance's noted above.
Separate and combined results for the Company, Bullfrog and Kingsoft for the
twelve months ended March 31, 1995 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year-Ended March 31, 1995
(in thousands)
- -------------------------------------------------------------------------------
Bullfrog
Electronic and
Arts Kingsoft Adjustments Combined
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net
revenues $480,300 $19,860 $(6,814) $493,346
- -------------------------------------------------------------------------------
Net income
(loss) $54,390 $(259) $1,587 $55,718
- -------------------------------------------------------------------------------
</TABLE>
The adjustments impacting net income were the elimination of intercompany
revenues and royalties and the related impact on the
provision for taxes.
Effective March 31, 1995, Kingsoft changed its fiscal year end from December
31 to March 31. Therefore, Kingsoft's separate results of operations for the
three months ended March 31, 1995 are not reflected in the consolidated
statements of income but were charged directly to retained earnings. Kingsoft's
revenues, operating loss and net loss for the three month period ending
March 31, 1995 were $4,483,000, $1,333,000 and $1,386,000 respectively.
(14) INCOME TAXES
Effective April 1, 1993, the Company adopted the provisions of SFAS 109. As of
April 1, 1993, there was no material cumulative
effect on the consolidated financial statements of the Company from the adoption
of SFAS 109.
The Company's pretax income from operations for the fiscal years ended March
31, 1995, 1994 and 1993 consisted of the following
components:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(in thousands) 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $41,330 $41,156 $22,259
Foreign 36,748 23,125 21,457
- -------------------------------------------------------------------------------
Total pretax income $78,078 $64,281 $43,716
- -------------------------------------------------------------------------------
</TABLE>
Income tax expense (benefit) for the fiscal years ended March 31, 1995, 1994 and
1993 consisted of:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(in thousands) Current Deferred Total
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
1995:
Federal $3,676 $5,955 $9,631
State 353 2,688 3,041
Foreign 8,066 -- 8,066
Charge in lieu of taxes
from employee stock
plans 4,242 4,242
- ------------------------------------------------------------------------------
$16,337 $8,643 $24,980
- ------------------------------------------------------------------------------
1994:
Federal $2,597 $3,690 $6,287
State 140 167 307
Foreign 6,794 -- 6,794
Charge in lieu of taxes
from employee stock
plans 6,062 -- 6,062
- ------------------------------------------------------------------------------
$15,593 $3,857 $19,450
- ------------------------------------------------------------------------------
1993:
Federal $ 7,669 $(3,045) $ 4,624
State 3,050 (423) 2,627
Foreign 6,170 -- 6,170
- ------------------------------------------------------------------------------
$16,889 $(3,468) $13,421
- ------------------------------------------------------------------------------
</TABLE>
The components of the net deferred tax assets as of March 31, 1995 and 1994
consist of:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
(in thousands) 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accruals, reserves and other expenses $15,369 $16,791
Credit carryforwards -- 6,976
Foreign loss and credit carryforwards 7,178 3,435
- ------------------------------------------------------------------------------------------
Total gross deferred tax assets 22,547 27,202
Less: valuation allowance (7,178) (3,435)
- ------------------------------------------------------------------------------------------
Net deferred tax assets 15,369 23,767
- ------------------------------------------------------------------------------------------
Deferred tax liabilities:
Undistributed earnings of DISC (2,527) (2,808)
Prepaid royalty expenses (11,463) (10,937)
- ------------------------------------------------------------------------------------------
Total gross deferred tax
liabilities (13,990) (13,745)
- ------------------------------------------------------------------------------------------
Net deferred tax assets $ 1,379 $10,022
- ------------------------------------------------------------------------------------------
</TABLE>
The valuation allowance relates solely to the foreign loss and foreign credit
carryforwards, for which the utilization is uncertain
in future periods.
40
<PAGE>
The differences between the statutory income tax rate and the Company's
effective tax rate, expressed as a percentage of income before provision for
income taxes, for the years ended March 31, 1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory Federal tax rate 35.0% 35.0% 34.0%
State taxes, net of Federal benefit 2.9 5.3 4.0
Differences between statutory rate
and foreign effective tax rate (1.8) (0.4) (0.3)
Foreign loss without tax benefit 3.4 -- 1.3
Research and development credits (1.2) (4.5) (0.3)
Tax exemptions on Puerto Rico
operation (5.0) (4.7) (8.2)
Other (1.3) (0.4) .2
- ------------------------------------------------------------------------------
32.0% 30.3% 30.7%
- ------------------------------------------------------------------------------
</TABLE>
The Company does not provide for U.S. taxes on undistributed earnings of its
foreign subsidiaries. At March 31, 1995, the undistributed foreign earnings of
the foreign subsidiaries amounted to approximately $20,000,000. If these
earnings were distributed to the parent company, foreign tax credits available
under current law would substantially eliminate the resulting Federal tax
liability.
The Company's manufacturing subsidiary in Puerto Rico operates under a Puerto
Rican tax incentive program which grants the Company certain percentage
exemptions from Puerto Rican income, property and municipal taxes for a period
of 20 years from the date of the commencement of operations. The U.S. tax
benefit derived for the year-ended March 31, 1995 was approximately $3,886,000.
Long-term reinvestment in Puerto Rico of the undistributed earnings of the
Puerto Rico subsidiary enables the Company to take advantage of certain tax
incentives.
(15) INTEREST AND OTHER INCOME, NET
Interest and other income, net for the years ended March 31, 1995, 1994 and 1993
consisted of:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 4,748 $ 3,042 $ 2,909
Interest expense (51) (52) (69)
Merger-related fee 8,600 -- --
Other income (expense), net (47) 792 (303)
- --------------------------------------------------------------------------------
$13,250 $ 3,782 $ 2,537
- --------------------------------------------------------------------------------
</TABLE>
(16) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH, INVESTMENTS, MARKETABLE SECURITIES, RECEIVABLES, ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES
The carrying amount approximates fair value because of the short maturity of
these instruments. The carrying values for investments are based on market.
41
<PAGE>
(17) OPERATIONS BY GEOGRAPHIC AREAS
The Company operates in one industry segment. Information about the Company's
operations in the United States and foreign areas for the fiscal years ended
March 31, 1995, 1994 and 1993 is presented below:
<TABLE>
<CAPTION>
North
(in thousands) America Europe Australia Japan Eliminations Total
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FISCAL 1995:
Net revenues from unaffiliated
customers $335,303 $112,907 $13,139 $31,997 -- $493,346
Intersegment sales 55,444 3,850 101 34 (59,429) --
----------------------------------------------------------------------------------------------
Total net revenues $390,747 $116,757 $13,240 $32,031 $(59,429) $493,346
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Operating income (loss) $44,276 $25,997 $2,123 $(7,568) -- $64,828
Identifiable assets $272,577 $50,910 $6,268 $11,484 -- $341,239
FISCAL 1994:
Net revenues from unaffiliated
customers $311,986 $71,105 $6,879 $28,319 -- $418,289
Intersegment sales 35,508 2,855 51 -- $(38,414) --
----------------------------------------------------------------------------------------------
Total net revenues $347,494 $73,960 $6,930 $28,319 $(38,414) $418,289
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Operating income (loss) $47,883 $11,792 $994 $ (170) -- $60,499
Identifiable assets $195,849 $47,801 $6,498 $23,503 -- $273,651
FISCAL 1993:
Net revenues from unaffiliated
customers $209,401 $75,356 $5,588 $8,041 -- $298,386
Intersegment sales 23,126 2,261 -- -- $(25,387) --
----------------------------------------------------------------------------------------------
Total net revenues $232,527 $77,617 $5,588 $8,041 $(25,387) $298,386
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Operating income (loss) $28,287 $14,336 $304 $(1,748) -- $41,179
Identifiable assets $128,348 $35,242 $3,559 $14,108 -- $181,257
</TABLE>
42
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
During the Company's last two fiscal years, there have been no changes in
independent accountants nor disagreements with such accountants as to accounting
and financial disclosures of the type required to be disclosed in Item 9.
43
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors who are nominated for re-election required
by Item 10 is incorporated herein by reference to the information in the
Company's definitive Proxy Statement for the 1995 Annual Meeting of Stockholders
(the "Proxy Statement") under the caption "Proposal No. 1 - Election of
Directors." The information regarding executive officers required by Item 10 is
included in Item 4A hereof.
ITEM 11: EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the
information in the Proxy Statement under the caption "Director and Executive
Officer Compensation" specifically excluding the "Compensation Committee Report
on Executive Compensation," and "Stock Option Plan," and "Employee Stock
Purchase Plan."
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to the
information in the Proxy Statement under the caption "Security Ownership of
Certain Beneficial Owners and Management."
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to the
information in the Proxy Statement under the caption "Certain Transactions."
44
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
1. INDEX TO FINANCIAL STATEMENTS. Page(s) in Form 10-K
Independent Auditors' Report 29
Consolidated Balance Sheets as of March 31, 1995
and 1994 30
Consolidated Statements of Income for the Years Ended
March 31, 1995, 1994 and 1993 31
Consolidated Statements of Stockholders' Equity for the
Years Ended March 31, 1995, 1994 and 1993 32
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1995, 1994 and 1993 33
Notes to Consolidated Financial Statements for the Years
Ended March 31, 1995, 1994 and 1993 34
2. FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedules of Electronic Arts for the
years ended March 31, 1995, 1994 and 1993 are filed as part of this report
and should be read in conjunction with the Consolidated Financial
Statements of Electronic Arts.
Schedule II - Valuation and Qualifying Accounts
Other financial statement schedules are omitted because the information
called for is not required or is shown either in the Consolidated Financial
Statements or the notes thereto.
3. EXHIBITS.
The following exhibits are filed as part of, or incorporated by reference
into, this report:
Number Exhibit Title
------ -------------
3.01 Registrant's Certificate of Incorporation, as amended to December
1, 1992. (1)
3.02 Registrant's Certificate of Amendment of Certificate of
Incorporation. (2)
3.03 Registrant's By-Laws, as amended to date. (3)
4.01 Specimen Certificate of Registrant's Common Stock. (4)
10.01 Registrant's 1982 Stock Option Plan, as amended to date, and
related documents. (5) (6)
10.02 Registrant's Directors Stock Option Plan and related documents.
(6) (7)
10.03 Description of Registrant's FY 1996 Executive Bonus Plan. (6)
10.04 Directors and Officers and Company Reimbursement Indemnity Policy
by and between Registrant and certain underwriters at Lloyd's,
London and Continental Insurance Company, dated June 20, 1992.
(8)
10.05 Lease by and between Registrant, Electronic Arts Limited and
Allied Dunbar Assurance PLC, dated June 24, 1987, for the
Registrant's U.K. facilities. (9)
10.06 Lease by and between Registrant and H.G.C. Associates, dated June
24, 1992, for the Registrant's warehouse and production
facilities. (10)
10.07 Lease Agreement by and between Registrant and 1450 Fashion Island
Boulevard Associates, L.P., dated March 22, 1991. (11)
45
<PAGE>
NUMBER EXHIBIT TITLE
10.08 Registrants' 1991 Stock Option Plan and related documents as
amended. (6) (12)
10.09 Form of Indemnity Agreement with Directors. (13)
10.10 Registrants' Employee Stock Purchase Plan and related documents
as amended. (6) (14)
10.11 Lease Agreement by and between Registrant and The Canada Life
Assurance Company, dated December 20, 1991, for the Registrant's
Canadian facilities. (15)
10.12 Description of Registrant's FY 1994 Executive Bonus Plan. (6)
(16)
10.13 Amendment to Lease Agreement by and between Registrant and 1450
Fashion Island Boulevard Associates, L.P., dated March 22, 1991.
(17)
10.14 Agreement between Registrant and Sega Enterprises, Ltd., dated
July 14, 1992. (18) (19)
10.15 Lease Agreement by and between Registrant and Century Centre II
Associates, dated July 27, 1992. (19)
10.16 Amendment to Lease Agreement by and between Registrant and 1450
Fashion Island Boulevard Associates, L.P., dated October 1, 1992.
(19)
10.17 Amendment to Lease Agreement by and between Registrant and
Century Centre II Associates, dated February 2, 1993. (19)
10.18 Amendment to Lease Agreement by and between Registrant and
Century Centre II Associates, dated February 22, 1993. (19)
10.19 Directors and Officers and Company Reimbursement Indemnity Policy
by and between Registrant and certain underwriters at Lloyd's,
London and Continental Insurance Company, dated June 20, 1993.
(19)
10.20 Lease by and between Registrant and 1450 Fashion Island Boulevard
Associates, L.P., dated August 27, 1992 for additional space at
corporate headquarters. (10)
10.21 Lease by and between Registrant and Sowa Urban Development Co.,
Ltd. (Sowa Toshi Kaihatsu K.K.), dated October 1, 1992 for the
Registrant's Japan facilities. (10)
10.22 Lease by and between Registrant, Electronic Arts Limited and
Heron Slough Limited, dated June 12, 1992, for the
Registrant's U.K. facilities. (20)
10.23 Lease by and between Registrant and the Travelers Insurance
Company, dated April 14, 1993, for the Registrant's production
facilities. (21)
10.24 Amendment to Lease Agreement by and between Registrant and 1450
Fashion Island Boulevard Associates, L.P., dated June 1, 1993.
(22)
10.25 Amendment to Lease Agreement by and between Registrant and the
Travelers Insurance Company, dated November 30, 1993. (23)
10.26 Amendment to Lease Agreement by and between Registrant and the
Travelers Insurance Company, dated November 30, 1993. (23)
10.27 Lease Agreement by and between Registrant and Arthur J. Rogers &
Co., dated January 14, 1994. (24)
10.28 Lease Agreement by and between Registrant and the Prudential
Insurance Company of America, dated January 10, 1994. (24)
10.29 Agreement for Lease between Flatirons Funding, LP and Electronic
Arts Redwood, Inc. dated February 14, 1995.
10.30 Guarantee from Electronic Arts Inc. to Flatirons Funding, LP
dated February 14, 1995.
10.31 Lease Agreement by and between Registrant and Dixie Warehouse &
Cartage Co., dated April 10, 1995.
11.01 Statement Re Computation of Per Share Earnings.
46
<PAGE>
NUMBER EXHIBIT TITLE
------ -------------
21.01 Subsidiaries of the Registrant.
23.01 Consent of Independent Public Accountants.
27.01 Financial Data Schedules.
(1) Incorporated by reference to Exhibit 3.01 to Registrant's Current
Report on Form 8-K filed on October 16, 1991.
(2) Incorporated by reference to Exhibit 4.01 to Registrant's Registration
Statement on Form S-8 filed on December 1, 1992 (File No. 33-55212)
(the "1992 Form S-8").
(3) Incorporated by reference to Exhibit 3.02 to Registrant's Current
Report on Form 8-K filed on October 16, 1991.
(4) Incorporated by reference to Exhibit 4.01 to Registrant's Registration
Statement on Form S-4 filed on March 3, 1994 (File No. 33-75892).
(5) Incorporated by reference to Exhibit 4.03 to Post-Effective Amendment
No. 2 to Registrant's Registration Statement on Form S-8 filed on
November 6, 1991 (File No. 33-32616) ("S-8 Amendment No. 2").
(6) Management contract or compensatory plan or arrangement.
(7) Incorporated by reference to Exhibit 4.04 to S-8 Amendment No. 2.
(8) Incorporated by reference to Exhibit 10.08 to Registrant's Annual
Report on Form 10-K for the year ended March 31, 1992 (the "1992 Form
10-K").
(9) Incorporated by reference to Exhibit 10.07 to the Registrant's
Registration Statement on Form S-1 filed on September 20, 1989, and
all amendments thereto (File No. 33-30346) (the "Form S-1").
(10) Incorporated by reference to similarly numbered exhibits to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992.
(11) Incorporated by reference to Exhibit 10.11 to Registrant's Annual
Report on Form 10-K for the year ended March 31, 1991.
(12) Incorporated by reference to Exhibit 4.01 to the Registrant's
Registration Statement on Form S-8 filed on July 29, 1993 (File No.
33-66836) (the "1993 Form S-8").
(13) Incorporated by reference to Exhibit 10.09 to the Form S-1.
(14) Incorporated by reference to Exhibit 4.02 to 1993 Form S-8.
(15) Incorporated by reference to Exhibit 10.16 to the 1992 Form 10-K.
47
<PAGE>
(16) Incorporated by reference to Exhibit 10.03 to Registrant's Annual
Report on Form 10-K for the year ended March 31, 1993 (the "1993 Form
10-K").
(17) Incorporated by reference to Exhibit 10.18 to the 1992 Form 10-K.
(18) Confidential treatment has been granted with respect to certain
portions of this document.
(19) Incorporated by reference to similarly numbered exhibits to the 1993
Form 10-K.
(20) Incorporated by reference to Exhibit 19.01 of Registrant's Current
Report on Form 10-Q for the quarter ended June 30, 1992.
(21) Incorporated by reference to Exhibit 10.23 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993.
(22) Incorporated by reference to Exhibit 10.24 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1993.
(23) Incorporated by reference to similarly numbered exhibits to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1993.
(24) Incorporated by reference to similarly numbered exhibits to
Registrant's Annual Report on Form 10-K for the year ended March 31,
1994 (the "1994 Form 10-K").
(B) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended March 31, 1995.
(C) EXHIBITS:
The Registrant hereby files as part of this Form 10-K the exhibits listed
in Item 14(a)3, as set forth above.
(D) FINANCIAL STATEMENT SCHEDULES:
The Registrant hereby files as part of this Form 10-K the financial
statement schedules listed in Item 14(a)2, as set forth on page 50.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ELECTRONIC ARTS
By: /s/ Lawrence F. Probst III
----------------------------------------
(Lawrence F. Probst III, Chairman of the
Board, President and Chief Executive
Officer)
Date: June 28, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, on behalf of the
Registrant in the capacities indicated and on the 28th of June 1995.
NAME TITLE
/s/ Lawrence F. Probst III Chairman of the Board, President
- ----------------------------------- and Chief Executive Officer
(Lawrence F. Probst III)
/s/ E. Stanton McKee, Jr. Senior Vice President and Chief
- ----------------------------------- Financial and Administrative Officer
(E. Stanton McKee, Jr.)
/s/ David L. Carbone Vice President Finance
- -----------------------------------
(David L. Carbone)
/s/ Linda R. Palmor Controller
- -----------------------------------
(Linda R. Palmor)
Directors:
/s/ M. Richard Asher Director
- -----------------------------------
(M. Richard Asher)
/s/ William J. Byron Director
- -----------------------------------
(William J. Byron)
/s/ Daniel H. Case III Director
- -----------------------------------
(Daniel H. Case III)
/s/ Robert Cohn Director
- -----------------------------------
(Robert Cohn)
/s/ Timothy J. Mott Director
- -----------------------------------
(Timothy J. Mott)
49
<PAGE>
ELECTRONIC ARTS INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts(1) Deductions of Period
- ----------- ---------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Years Ended March 31, 1995
Allowance for doubtful
accounts and returns $29,113 $56,371 $ 2,540 $54,457 $33,567
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Year Ended March 31, 1994
Allowance for doubtful
accounts and returns $18,653 $31,539 $ 314 $21,393 $29,113
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Year Ended March 31, 1993
Allowance for doubtful
accounts and returns $11,442 $19,629 ($186) $12,232 $18,653
------- ------- ------- ------- -------
------- ------- ------- ------- -------
<FN>
(1) Primarily the translation effect of using the average exchange rate for
expense items and the year-ended exchange rate for the balance sheet item
(allowance account).
</TABLE>
50
<PAGE>
ELECTRONIC ARTS INC.
1995 FORM 10-K ANNUAL REPORT
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE PAGE
- -------- ------------- ----
10.03 Description of Registrant's FY 1996 Executive Bonus Plan. 52
10.29 Agreement for Lease between Flatirons Funding, LP and
Electronic Arts Redwood, Inc. dated February 14, 1995. 53
10.30 Guarantee from Electronic Arts Inc. to Flatirons Funding,
LP dated February 14, 1995. 107
10.31 Lease Agreement by and between Registrant and Dixie
Warehouse & Cartage Co., dated April 10, 1995. 123
11.01 Statement Re Computation of Per Share Earnings. 151
21.01 Subsidiaries of the Registrant. 152
23.01 Consent of Independent Public Accountants. 153
27.01 Financial Data Schedules. 154
- ------------------
51
<PAGE>
EXHIBIT 10.03
ELECTRONIC ARTS INC. AND SUBSIDIARIES
DESCRIPTION OF REGISTRANT'S FISCAL YEAR 1996
EXECUTIVE BONUS PLAN
Target annual bonuses are set for each executive based upon a percentage of
salary. Bonuses are paid in six parts, five of which relate only to the
Company's earnings results: one part measured against the Company's performance
in each fiscal quarter for a total of four parts, and one part measured against
the Company's performance for the fiscal year. The sixth part is measured
against each individual executive's contributions. Bonuses are paid quarterly
for the prior quarter, and after the end of the fiscal year for those portions
based on fiscal year performance and individual contributions. If profits in
any period are less than 90% of plan, no bonus is paid for that period. If
profits exceed plan by up to 20% during a period, the bonus rate is doubled for
the incremental profits above plan. If profits exceed plan by more than 20%,
the bonus rate is tripled for profits in excess of 120% of plan.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT FOR LEASE
between
Flatirons Funding, Limited Partnership
and
Electronic Arts Redwood, Inc.
Dated as of February 14, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THIS AGREEMENT HAS BEEN ASSIGNED AS SECURITY
FOR INDEBTEDNESS OF THE OWNER. SEE SECTION 17.
This Agreement has been manually executed in 8 counterparts, numbered
consecutively from 1 through 8, of which this is No. 2. To the extent, if
any, that this Agreement constitutes chattel paper (as such term is defined
in the Uniform Commercial Code as in effect in any jurisdiction), no security
interest in this Agreement may be created or perfected through the transfer
or possession of any counterpart other than the original counterpart which
shall be the counterpart identified as counterpart No. 1.
<PAGE>
TABLE OF CONTENTS
PAGE
SECTION 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2. APPOINTMENT OF AGENT . . . . . . . . . . . . . . . . . 9
SECTION 3. ADVANCES . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 4. CONDITIONS PRECEDENT TO THE INITIAL
ADVANCE WITH RESPECT TO A UNIT . . . . . . . . . . . . 13
SECTION 5. CONDITIONS PRECEDENT TO OWNER'S OBLIGATION TO MAKE
INTERIM ADVANCES AFTER THE INITIAL ADVANCE WITH RESPECT
TO A UNIT . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 6. CONDITIONS PRECEDENT TO THE FINAL
ADVANCE WITH RESPECT TO A UNIT . . . . . . . . . . . . 20
SECTION 7. CONDITIONS PRECEDENT TO THE COMPLETION ADVANCE WITH
RESPECT TO A UNIT . . . . . . . . . . . . . . . . . . . 22
SECTION 8. REPRESENTATIONS AND WARRANTIES OF AGENT . . . . . . . . 23
SECTION 9. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . 26
SECTION 10. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . 31
SECTION 11. EVENTS OF DEFAULT AND EVENTS OF UNIT TERMINATION . . . 32
SECTION 12. INDEMNITIES . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 13. LEASEHOLD INTERESTS . . . . . . . . . . . . . . . . . . 41
SECTION 14. PURCHASES . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 15. OWNER'S RIGHT TO TERMINATE . . . . . . . . . . . . . . 41
SECTION 16. PERMITTED CONTESTS . . . . . . . . . . . . . . . . . . 42
(i)
<PAGE>
SECTION 17. SALE OR ASSIGNMENT BY OWNER . . . . . . . . . . . . . . 43
SECTION 18. GENERAL CONDITIONS . . . . . . . . . . . . . . . . . . 44
Exhibit A The Lease
Exhibit B Form of AFL Unit Leasing Record
Exhibit C Form of Acquisition Certificate
Exhibit D Form of Interim Advance Certificate
Exhibit E Form of Certificate of Substantial Completion
Exhibit F Form of Certificate of Increased Cost
Exhibit G FF&E Specifications
Exhibit H Environmental Affidavit
Exhibit I Issues to be Addressed in Environmental Report
Exhibit J Conditions for Acceptance by Owner of Joint Protection
Title Insurance Policy
Exhibit K Waiver Letter for Unit Premises at Twin Dolphin Drive and
Redwood Shores Parkway, Redwood City, California
(ii)
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
AGREEMENT FOR LEASE
-------------------
Agreement for Lease dated as of February 14, 1995 (as the same may be
amended, restated, modified or supplemented from time to time, this
"Agreement"), between Flatirons Funding, Limited Partnership, a Delaware limited
partnership ("Owner") and Electronic Arts Redwood, Inc., a Delaware corporation
("Agent").
WHEREAS, Owner may from time to time acquire either (i) a fee interest or
(ii) a leasehold interest pursuant to a Ground Lease (hereinafter defined) in
certain Unit Premises (hereinafter defined); and
WHEREAS, Agent is an Affiliate (hereinafter defined) of the Guarantor
(hereinafter defined); and
WHEREAS, on or about the date of this Agreement, Owner and Agent propose
to enter into a lease agreement (hereinafter defined), providing for the lease
or sublease by Agent of certain Unit Improvements (hereinafter defined) which
will be constructed and furnished on such Unit Premises pursuant to the terms of
this Agreement; and
WHEREAS, Owner desires to appoint Agent to act as agent for Owner in
connection with the selection of Owner's fee and/or leasehold interests in Unit
Premises from time to time, and with the construction of Unit Improvements and
the installation of Unit FF&E thereon, if any, and in connection with all
matters related to such construction, and Agent wishes to accept such
appointment.
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Owner and Agent hereby agree as follows:
SECTION 1. DEFINITIONS
1.1 DEFINED TERMS. For the purposes of this Agreement each of the
following terms shall have the meaning specified with respect thereto:
ACCRUED DEFAULT OBLIGATIONS: Defined pursuant to subsection 11.2
hereof.
ACQUISITION CERTIFICATE: The written certification of Agent to be
delivered to Owner in connection with the making of the Initial Advance
hereunder, which contains the information and representations of Agent as
required by Section 4 of this Agreement, and which is substantially in the form
of Exhibit C hereto.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 2 -
AFFILIATE: Defined pursuant to subsection 1.2 hereof.
AFL UNIT LEASING RECORD: An instrument, substantially in the form of
Exhibit B hereto, evidencing the sublease of a Unit under the Lease, which Unit
is subject to a Ground Lease, or an instrument evidencing the lease of a Unit
under the Lease.
AGREEMENT: This Agreement for Lease, as the same may be amended,
restated, modified or supplemented from time to time.
ASSIGNEE: Defined pursuant to subsection 1.2 hereof.
AVAILABLE COMMITMENT: At a particular time, an amount equal to the
excess of (a) the sum of (i) the aggregate commitment to lend under a Credit
Agreement or Credit Agreements and (ii) Owner's existing equity capital and
additional equity capital contributions which are in Owner's sole judgment then
available to Owner over (b) the sum of (i) the aggregate amount of all advances
theretofore made pursuant to Section 3 hereof with respect to Units subject to
this Agreement at such time, (ii) Financing Costs theretofore incurred by Owner
and not reimbursed by Agent with respect to Units subject to this Agreement at
such time, (iii) the aggregate Adjusted Acquisition Cost (as defined in the
Lease) of all Property and Equipment (as said terms are defined in the Lease)
leased under the Lease at such time and (iv) $2,000,000, or such other amount as
Owner and Agent may agree to from time to time. For purposes of this definition
of Available Commitment, when a Unit is made subject to the Lease pursuant to
the terms of subsection 2.3 hereof, such Unit shall cease to be "subject to this
Agreement".
BUSINESS DAY: Defined pursuant to subsection 1.2 hereof.
CERTIFICATE OF INCREASED COST: The certificate delivered by Agent to
Owner pursuant to Section 7 hereof in connection with a request for a Completion
Advance, and which is substantially in the form of Exhibit F hereto.
CERTIFICATE OF SUBSTANTIAL COMPLETION: The certificate or
certificates delivered by Agent to Owner pursuant to Section 6 hereof in
connection with a request for a Final Advance, and which is substantially in the
form of Exhibit E hereto.
COMMERCIAL PAPER: Defined pursuant to subsection 1.2 hereof.
COMPLETION ADVANCE: Any advance made by Owner upon satisfaction of
the conditions set forth in Section 7 hereof.
CONSENT: Defined pursuant to subsection 1.2 hereof.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 3 -
CONSTRUCTION AGREEMENT: Each agreement between Agent, acting on
behalf of Owner, and a General Contractor, providing for the construction of
Unit Improvements, as the same may be amended, restated, modified or
supplemented from time to time in accordance with this Agreement.
CONSTRUCTION DOCUMENTS: The collective reference to the Construction
Agreement(s), the Unit Plans, the Permits and all other agreements entered into
by Agent with respect to constructing, equipping, furnishing and decorating the
Unit.
CREDIT AGREEMENT: Defined pursuant to subsection 1.2 hereof.
EFFECTIVE DATE: Defined pursuant to subsection 1.2 hereof.
EVENT OF DEFAULT: Any of the events specified in subsection 11.1
hereof; provided, that any requirement for the giving of notice, the lapse of
time, or both, or any other condition, has been satisfied.
EVENT OF UNIT TERMINATION: Any of the events specified in subsection
11.3 hereof.
FF&E SPECIFICATIONS: The master list, if any, of furniture, fixtures
and equipment which will be used in connection with the Unit Improvements (which
list shall be specific with respect to the kind, quality and quantities)
appended hereto as Exhibit G, as the same may be amended, modified, or
supplemented from time to time with Owner's prior written consent, which consent
shall not be unreasonably withheld or delayed.
FINAL ADVANCE: The advance made by Owner upon satisfaction of the
conditions of Section 6 hereof.
FINANCING COSTS: All interest costs (including, without limitation,
interest at a default rate), other costs, fees and expenses incurred by Owner
under a Credit Agreement, and all costs incurred (i) in connection with
obtaining and maintaining equity financing, including, without limitation,
return on equity capital and fees payable under Owner's partnership agreement to
any general partner or managing general partner, (ii) in connection with the
issuance of Commercial Paper, including discount on Commercial Paper and (iii)
in connection with any other financing arrangement of Owner.
FIXED CHARGE COVERAGE RATIO: Defined pursuant to 1.2 hereof.
FORCE MAJEURE DELAY: Any delay caused by conditions beyond the
control of Agent, including, without limitation, acts of God or the elements,
fire, strikes, labor
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 4 -
disputes, delays in delivery of material and disruption of shipping, which does
not have the effect of extending the Unit Completion Date beyond ninety (90)
days in the aggregate.
GENERAL CONTRACTOR: Any contractor or contractors as may be engaged
by Agent from time to time for construction of Unit Improvements.
GOVERNMENTAL ACTION: Defined in subsection 8.5 hereof.
GOVERNMENTAL AUTHORITY: Any nation or government, any state or other
political subdivision thereof, and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
GROUND LEASE: Each ground lease (which must be a Mortgageable Ground
Lease) pursuant to which a leasehold interest in a Unit Premises is being leased
to Owner.
GUARANTY: The Guaranty, dated as of the date hereof, by and between
Guarantor and Owner, as it may be amended, restated, modified or supplemented,
from time to time.
GUARANTOR: Electronic Arts Inc., a Delaware corporation (an Affiliate
of Agent), and its successors.
INDEBTEDNESS: Defined pursuant to subsection 1.2 hereof.
INDEMNIFIED PERSON: Any Person as defined in Section 12 hereof.
INITIAL ADVANCE: The advance made by Owner upon satisfaction of the
conditions set forth in Section 4 hereof.
INSURANCE REQUIREMENTS: Defined pursuant to subsection 1.2 hereof.
INTERIM ADVANCE: An advance made by Owner upon satisfaction of the
conditions set forth in Section 5 hereof.
INTERIM ADVANCE CERTIFICATE: The certificate delivered by Agent to
Owner pursuant to Section 5 hereof in connection with a request for an Interim
Advance, and which is substantially in the form of Exhibit D hereto.
LEASE: The Lease Agreement, dated as of the date hereof, by and
between Owner, as lessor or sublessor, and Agent, as lessee or sublessee, as the
case may be, as it may be amended, restated, modified or supplemented from time
to time, a copy of which is attached as Exhibit A hereto.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 5 -
LEGAL REQUIREMENTS: All laws, judgments, decrees, ordinances and
regulations and any other governmental rules, orders and determinations and all
requirements having the force of law, now or hereinafter enacted, made or
issued, whether or not presently contemplated, and all agreements, covenants,
conditions and restrictions, applicable to each Unit and/or the construction,
ownership, operation or use thereof, including, without limitation, compliance
with all requirements of labor laws and environmental statutes, compliance with
which is required at any time from the date hereof through the term of this
Agreement, whether or not such compliance shall require structural, unforeseen
or extraordinary changes to any Unit or the operation, occupancy or use thereof.
LIEN: Defined pursuant to subsection 1.2 hereof.
LEVEL 1: Defined pursuant to subsection 1.2 hereof.
LEVEL 2: Defined pursuant to subsection 1.2 hereof.
LEVEL 3: Defined pursuant to subsection 1.2 hereof.
LEVEL 4: Defined pursuant to subsection 1.2 hereof.
LEVEL 5: Defined pursuant to subsection 1.2 hereof.
MERRILL: Merrill Lynch Money Markets Inc., a Delaware corporation.
MERRILL LEASING: ML Leasing Equipment Corp., a Delaware corporation.
MERRILL LYNCH: Merrill Lynch & Co., Inc., a Delaware corporation.
MORTGAGEABLE GROUND LEASE: Defined pursuant to subsection 1.2 hereof.
OWNER: Flatirons Funding, Limited Partnership or any successor or
successors to all of its rights and obligations as Owner hereunder and, for
purposes of Section 12 hereof, shall include any Person or entity which computes
its liability for income or other taxes on a consolidated basis with Flatirons
Funding, Limited Partnership or the income of which for purposes of such taxes
is, or may be, determined or affected directly or indirectly by the income of
Owner or its successor or successors.
PERMITS: All consents, licenses, building, and operating permits
required for construction, completion, and operation of any Unit in accordance
with all Legal Requirements affecting such Unit.
PERMITTED CONTEST: Defined pursuant to paragraph (a) of Section 16
hereof.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 6 -
PERMITTED LIENS: Defined pursuant to subsection 1.2 hereof.
PERSON: Defined pursuant to subsection 1.2 hereof.
POTENTIAL DEFAULT: Any event which, but for the lapse of time, or
giving of notice, or both, would constitute an Event of Default.
POTENTIAL EVENT OF UNIT TERMINATION: Any event which, but for the
lapse of time, or giving of notice, or both, would constitute an Event of Unit
Termination.
RESPONSIBLE OFFICER: The chief or senior financial officer of Agent
and each director of Agent and any other employee of the Agent or, if acting as
agent of Agent, any employee of the Guarantor primarily responsible for
administering the obligations of Agent hereunder.
SUBSTANTIAL COMPLETION: With respect to any Unit, the satisfaction of
all requirements of Section 6 hereof.
TAKING: Any event which is described in paragraph (k) of subsection
11.3 hereof.
TANGIBLE NET WORTH: Defined pursuant to subsection 1.2 hereof.
TITLE COMPANY: First American Title Insurance Company, or such other
title insurance company as may be specifically approved by Owner in writing,
together with such reinsurers or coinsurers of such title company as may be
approved by Owner in writing.
UNIT: Any Unit Premises and any Unit Improvements thereon and related
Unit FF&E.
UNIT ACQUISITION COST: With respect to any Unit the sum of (a) the
aggregate amount of advances made pursuant to this Agreement with respect to the
Unit and (b) all other costs of Owner (including, without limitation, costs
incurred by Agent but reimbursed by Owner) with respect to the Unit (except
costs, whether or not such costs may be capitalized pursuant to generally
accepted accounting principles, for which Owner has been or chooses, in lieu of
capitalization hereunder, to be reimbursed by Agent, pursuant to the provisions
of subsection 9.5 or Section 12 hereof) arising from the acquisition,
construction, equipping, and financing (including, without limitation, Financing
Costs and Owner's out-of-pocket expenses and fee obligations in connection
therewith) prior to the lease or sublease of the Unit under the Lease. Unit
Acquisition Cost shall include an amount paid by Agent to the party which shall
have assigned to Owner its right to purchase the initial Unit subject hereto in
order to terminate any right to sublease the Unit or a portion thereof granted
to
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 7 -
such party. All costs of Owner related to this Agreement incurred during a
calendar year which were not previously allocated to a Unit and not reimbursed
by Agent shall be allocated among Units and Parcels of Property (as defined in
the Lease) by Owner on or prior to January 10th of the next succeeding year on a
pro rata basis based upon the Unit Acquisition Cost for all Units or Acquisition
Cost (as defined in the Lease) for all Parcels of Property with respect to which
an Initial Advance was made during such previous calendar year, and such
allocation by Owner shall be in Owner's sole judgment and shall be conclusive.
Unit Acquisition Cost shall not include Owner's rating agency fees, issuing and
paying agency fees and audit fees, which expenses shall be reimbursed by Agent
pursuant to subsection 9.5 hereof.
UNIT BUDGET: The budget to be prepared by Agent and delivered to
Owner prior to the Initial Advance with respect to any Unit, which budget may
include costs relating to such of the following as Agent deems to be
appropriate: (a) the installation of Unit FF&E, if any, thereon; (b) all costs,
including, without limitation, the purchase price, survey and survey inspection
charges, appraisal, architectural, engineering, environmental analysis, soil
analysis and market analysis fees, title insurance premiums, brokerage
commissions, transfer fees and taxes that are customarily the responsibility of
the purchaser, closing adjustments for taxes, utilities and the like, escrow and
closing fees, recording and filing fees, the legal fees of Owner and Agent, and
all related costs and expenses incurred in acquiring and maintaining marketable
fee or leasehold title to such Unit and in leasing or subleasing such Unit to
Agent; (c) the costs of completion of the Unit Improvements in conformity with
the Unit Plans, the Construction Agreement or any contracts in replacement
thereof, including without limitation, costs of site preparation, acquiring or
granting easements necessary for completion of the Unit Improvements, making
utility connections, demolition, streets, parking areas, landscaping,
development, off-site improvements, design and related construction of the Unit
Improvements and related facilities and the costs of necessary studies, surveys,
plans and permits, insurance and examination and incidental costs and expenses
related thereto incurred in acquiring and maintaining marketable fee or
leasehold title to such Unit and in leasing or subleasing such Unit and Unit
FF&E to Agent; (d) the costs of architects', attorneys', engineers' and other
professionals' fees and disbursements, in connection with the development,
planning, renovation, construction, and construction financing of the Unit
Improvements, including, without limitation, the fees and disbursements of
Owner's counsel in connection with this Agreement and the duties of Owner
hereunder, the Construction Agreement, and in all other matters involving or
reasonably related to this transaction; (e) costs of all charges and assessments
for the construction, improvement, maintenance, repair and restoration of
streets, roads, walks, sewer, gas, electrical, telephone and water lines and
other improvements levied upon the Unit until the Effective Date; (f) the costs
of all insurance, real estate, property and excise tax assessments, sales and
use taxes on materials used in construction, and other operating and carrying
costs paid, accrued, or levied upon the Unit or Owner in connection with the
Unit during the period from acquisition of the Unit Premises until the Effective
Date for such
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 8 -
Unit; (g) costs of Agent's project representatives (inspectors, consultants,
etc.) incurred in its capacity as agent for Owner; and (h) any and all other
costs arising from or in connection with the construction period for such Unit
Improvements and until the Effective Date for such Unit.
UNIT COMPLETION DATE: With respect to the initial Unit subject
hereto, thirty-six (36) months from the date on which the Initial Advance is
made by Owner to Agent pursuant to Section 4 hereof and not more than twenty-
four (24) months from the beginning of construction and with respect to any
other Unit, such date as shall be agreed to in writing between Owner and Agent.
UNIT FF&E: The specific items, if any, from the FF&E Specifications
which are installed or (if such FF&E Specifications have been acquired by Owner
for installation) to be installed in a particular Unit Improvement and for which
advances are made by Owner hereunder.
UNIT FF&E SPECIFICATIONS: The list of specific items chosen from FF&E
Specifications to be installed with the proceeds of advances hereunder in a
particular Unit Improvement.
UNIT IMPROVEMENTS: The improvements to be constructed on an
individual Unit Premises in accordance with the Unit Plans for the Unit
Improvements to be built on such Unit Premises.
UNIT PLANS: The plans and specifications for the construction of any
Unit Improvements, including, without limitation, installation of curbs,
sidewalks, gutters, landscaping, utility connections (whether on or off the Unit
Premises) and all fixtures necessary for construction, operation and occupancy
of the Unit and certain equipment to be used in connection therewith, prepared
or to be prepared by an architect and Agent and approved by Owner and any
Assignee, including such amendments, modifications and supplements thereto as
may from time to time be made by Agent; provided, that any subsequent material
deviation from the Unit Plans selected for the Unit shall be made only with
Owner's and Assignee's prior written consent, which consent shall not be
unreasonably withheld or delayed.
UNIT PREMISES: Each individual parcel of land, in which either a fee
interest or a leasehold interest has been acquired by Owner for the construction
of Unit Improvements thereon.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 9 -
1.2 OTHER DEFINITIONAL PROVISIONS.
(a) For purposes of this Agreement, the terms, "Affiliate",
"Assignee", "Business Day", "Commercial Paper", "Consent", "Credit Agreement",
"Effective Date", "Fixed Charge Coverage Ratio", "Indebtedness", "Insurance
Requirements", "Level 1", "Level 2", "Level 3", "Level 4", "Level 5", "Lien",
"Mortgageable Ground Lease", "Permitted Liens", "Person" and "Tangible Net
Worth" shall have the meanings set forth opposite those terms in the Lease,
except that, for purposes of this Agreement, the terms "the Lessor", "the
Lessee" and "this Lease" if used in those definitions in the Lease shall be
deemed to be the terms "Owner", "Agent" and "this Agreement", respectively, and
if used in those definitions in the Lease, each of the terms "Parcel", "Parcel
of Property" and "Property" shall be deemed to be the phrase "Unit Premises and
related Unit Improvements" and each of the terms "Unit of Equipment" and "Unit",
shall be deemed to be an item of "Unit FF&E".
(b) All terms defined in this Agreement shall have their defined
meanings when used in any certificate or other document made or delivered
pursuant hereto.
(c) The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement, and section, subsection,
paragraph, schedule and exhibit references are to this Agreement unless
otherwise specified.
SECTION 2. APPOINTMENT OF AGENT
2.1 APPOINTMENT AND DUTIES OF AGENT. Subject to the terms hereof,
including, without limitation, the requirements of Section 4 hereof, Owner
hereby appoints Agent as its agent for selection of Unit Premises for
acquisition, as well as for the design, construction, equipping, and
installation on each Unit Premises of the Unit Improvements, and, if and to the
extent identified in Exhibit G hereto, Unit FF&E and Agent hereby accepts such
appointment. Unit Improvements must be of a type permitted to be leased under
the Lease, as set forth in Exhibit A to the Lease. Agent agrees all in
accordance with its best business judgment and this Agreement to select Unit
Premises for acquisition by Owner and to contract for and supervise the good and
workmanlike completion of the Unit Improvements and installation of the Unit
FF&E on each Unit Premises, suitable for its intended use.
2.2 COST AND COMPLETION OF A UNIT. Owner and Agent agree that (a)
the maximum cost for the acquisition of any individual Unit Premises and the
construction of Unit Improvements thereon and the cost (including installation)
of all Unit FF&E therein shall be no more than $120,000,000 with respect to the
initial Unit subject hereto, and such amount as is agreed to in writing between
Owner and Agent with respect to any other Unit,
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 10 -
and (b) the cost of the Unit FF&E constituting personal property and not
fixtures shall be no more than $15,000,000 with respect to the initial Unit
subject hereto, and such amount as is agreed to in writing between Owner and
Agent with respect to any other Unit. Agent agrees to effect Substantial
Completion of any Unit Improvements on or before the applicable Unit Completion
Date. After receiving the Initial Advance with respect to a Unit, Agent may, to
the extent permitted hereunder, from time to time amend, modify or supplement
the Unit Plans, Unit Budget or Unit FF&E Specifications relating thereto;
provided, that no such amendment, modification or supplement shall increase the
Unit Budget to an amount in excess of the maximum cost for acquisition set forth
in the first sentence of this subsection 2.2 or result in a diminution of the
value or usefulness for its intended purpose of the Unit or result in a breach
under subsection 10.1 of this Agreement. Agent shall promptly deliver to Owner
and any Assignee any such amended, modified or supplemented Unit Plans, Unit
Budget or Unit FF&E Specifications.
2.3 LEASE OF A UNIT.
(a) Upon Substantial Completion of any Unit Improvements, Agent will
deliver to Owner the Certificate of Substantial Completion in the form of
Exhibit E hereto with respect to such Unit Improvements (including the AFL Unit
Leasing Record), and Agent shall request the Final Advance with respect to such
Unit Improvements. If the conditions set forth in Section 6 hereof have been
satisfied in the reasonable judgment of Owner, Owner, within five (5) Business
Days of receipt of the Certificate of Substantial Completion, a fully completed
AFL Unit Leasing Record executed by Agent and the other documents required in
Section 6 hereof, shall execute and deliver to Agent such AFL Unit Leasing
Record. Such AFL Unit Leasing Record shall have an Effective Date as of the
date of execution by Owner of the AFL Unit Leasing Record. The Final Advance
shall be made by Owner on the date of execution by Owner of the AFL Unit Leasing
Record. Execution and delivery by Agent of the AFL Unit Leasing Record shall
constitute (i) acknowledgment by Agent that each Unit included therein is in
good condition and has been accepted for lease or sublease by Agent as of the
Effective Date of the AFL Unit Leasing Record, (ii) acknowledgment by Agent that
each such Unit is subject to all of the covenants, terms and conditions of the
Lease, and (iii) certification by Agent that the representations and warranties
contained in Section 2 of the Lease are true and correct on and as of the
Effective Date of the AFL Unit Leasing Record as though made on and as of such
date and that there exists on such date no (1) Event of Default or, with respect
to such Unit, Event of Unit Termination under this Agreement or Event of Default
(as defined in the Lease) or (2) Potential Default or, with respect to such
Unit, Potential Event of Unit Termination under this Agreement or Potential
Default (as defined in the Lease).
(b) Notwithstanding the foregoing, but subject to the terms of
subsection 3.1 hereof, Agent may, by delivering to Owner a Certificate of
Increased Cost, at any time up to three (3) months after the Final Advance has
been made with respect to a Unit, request
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 11 -
a Completion Advance in order to pay to Agent construction costs that were not
the subject of any previous advance. Owner, within five (5) Business Days of
receipt and upon Owner's approval of a request for the Completion Advance and
the Certificate of Increased Cost, shall execute and deliver to Agent a revised
AFL Unit Leasing Record for such Unit reflecting such increased cost, and Agent,
within five (5) Business Days of receipt of such revised AFL Unit Leasing
Record, shall sign the revised AFL Unit Leasing Record and return it to Owner.
The Completion Advance shall be made by Owner upon receipt of the revised AFL
Unit Leasing Record signed by Agent.
2.4 POWERS OF AGENT. Agent shall have the right to act for and on
behalf of Owner with full and complete authority to appear before each
applicable Governmental Authority and each land owner's association to resolve
issues related to the platting, zoning and use of the Unit Premises, to, so long
as no Event of Default has occurred and is continuing, contest on its own and
Owner's behalf any proposed taking of a Unit Premises or the amount of any award
in connection therewith, to obtain all Permits, to grant and obtain minor
easements for the benefit of any Unit Premises or which are deemed reasonably
necessary by Agent for the intended use of such Unit Premises, voluntarily to
dedicate or convey portions of any Unit Premises for road, highway and other
public purposes as required in the good faith judgment of Agent in order to
obtain the use of all or part of such Unit Premises for the purposes intended
(provided that no such action shall materially adversely affect either the
market value of such Unit Premises or the use of such Unit Premises for its
intended purpose), appoint, employ and deal with the architects, engineers,
consultants and contractors, purchase and arrange for delivery of all materials,
supplies, furniture, fixtures, and equipment, and to approve all related
vouchers, invoices and statements. Owner agrees, at Agent's request and
expense, to confirm to third parties Agent's rights and obligations in this
regard. No payment shall be made for any property or services of such
architects, engineers, consultants, or contractors relating to the acquisition,
construction and equipping of any Unit without the prior approval of Agent, and
each amount so approved and paid shall be in accordance with the Unit Budget,
and shall be part of the Unit Acquisition Cost of such Unit. If Agent has
unreasonably delayed or withheld giving the approvals required to make such
payments, Owner may make payments to any architects, engineers, consultants,
contractors, vendors or suppliers which are properly due and payable in
accordance with the contracts with said parties, and any such payment so made
shall be and become a part of the Unit Acquisition Cost of the Unit; provided,
however, that Owner shall not make any such payment if it is subject to a
Permitted Contest. Agent agrees that, in any contract entered into pursuant to
this Agreement in which Owner is identified as an obligor rather than, or in
addition to, Agent, the substance of the text of subsection 18.5 hereof shall be
included therein.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 12 -
SECTION 3. ADVANCES
3.1 AGREEMENT TO MAKE ADVANCES. Subject to the conditions and upon
the terms herein provided, including, without limitation, that the Available
Commitment not be exceeded, Owner agrees to make available to Agent advances
from time to time for each Unit up to an aggregate principal amount for such
Unit determined in accordance with the Unit Budget for such Unit and not in
excess of the maximum amount per Unit set forth in subsection 2.2 hereof.
Subject to the terms of this Agreement, Owner agrees to make (a) an Initial
Advance with respect to a Unit in accordance with Section 4 of this Agreement,
(b) Interim Advances from time to time in accordance with Section 5 of this
Agreement, (c) a Final Advance in accordance with Section 6 of this Agreement
and (d) a Completion Advance in accordance with Section 7 of this Agreement.
3.2 PROCEDURE FOR ADVANCES. Agent shall give Owner notice in
accordance with Sections 4, 5, 6 and 7 hereof of its irrevocable request for an
advance pursuant to this Agreement, specifying a Business Day on which such
advance is to be made and the amount of the advance. Not later than 2:00 P.M.
New York time on the date for the advance specified in such notice, provided all
conditions to that advance have been satisfied, Owner shall provide to Agent, in
immediately available funds, the amount of the advance then requested. Owner
shall have no obligation to make advances with respect to a Unit more often than
once every thirty (30) days.
3.3 DETERMINATION OF AMOUNTS OF ADVANCES.
(a) INITIAL ADVANCE. The amount of an Initial Advance with respect
to a Unit shall be made within the limits of the Unit Budget and in accordance
with the Acquisition Certificate, and shall be sufficient to pay in full all
acquisition and closing costs of the respective Unit Premises, including,
without limitation, the purchase price, survey and survey inspection charges,
recording and filing fees, brokerage commissions, appraisal, architectural,
engineering, environmental analysis, soil analysis and market analysis fees,
transfer fees and taxes that are customarily the responsibility of the
purchaser, title insurance premiums, closing adjustments for taxes, utilities,
and the like, escrow fees, if any, construction materials and existing
structures, and the legal fees of Owner and Agent. All such costs for which the
Initial Advance is requested shall be specifically set forth in the Unit Budget
attached to the Acquisition Certificate, and in the request for the Initial
Advance, and Owner shall have no obligation to advance any funds in the Initial
Advance which are not so specifically set forth in such documents.
(b) INTERIM ADVANCES. Disbursements for costs of constructing and
equipping a Unit shall be made as the same are incurred within the limits of the
Unit Budget, based upon the certifications of the Agent contained in an Interim
Advance Certificate.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 13 -
Owner shall have no obligation to make disbursements for the cost of materials
not in place, whether stored on or off site.
(c) FINAL ADVANCE. The amount of the Final Advance shall be made
within the limits of the Unit Budget and in accordance with the Certificate of
Substantial Completion, and shall be sufficient, subject to the provisions of
paragraph (d) of this subsection 3.3, for payment in full of all costs of
designing, furnishing, constructing and equipping the Unit in connection with
Substantial Completion of the Unit, free of all Liens other than Permitted
Liens. Owner shall have no obligation to make the Final Advance unless Owner is
satisfied that all such costs as set forth in the Unit Budget, the Certificate
of Substantial Completion, and the request for the Final Advance have been
actually incurred, or in the case of punch list items will be incurred, in
construction and equipping of the Unit, free of all Liens, except for Permitted
Liens and shall not cause the Unit Acquisition Cost of the Unit to exceed the
Unit Budget.
(d) COMPLETION ADVANCE. The amount of the Completion Advance shall
be made in accordance with and shall not exceed the amount set forth in the
Certificate of Increased Cost, shall not cause the Unit Acquisition Cost of the
Unit to exceed the Unit Budget, and shall be sufficient for payment in full of
all costs that were not the subject of any previous advance with respect to such
Unit. Owner shall have no obligation to make the Completion Advance unless
Owner is satisfied that all such costs were reasonably estimated in the Unit
Budget and are adequately set forth in the Certificate of Increased Cost and
will be sufficient for payment in full of all costs with respect to such Unit.
3.4 PARTIAL ADVANCES. If any or all conditions precedent to any
advance have not been satisfied on the applicable date for a requested advance,
Owner, in its sole discretion, and with the consent of Assignee may, but shall
have no obligation to, disburse a part of the requested advance.
SECTION 4. CONDITIONS PRECEDENT TO THE INITIAL ADVANCE WITH RESPECT TO
A UNIT
Owner's acquisition of any Unit Premises and Owner's obligation to make
the Initial Advance with respect to a Unit shall both be subject to the
satisfaction of the conditions set forth in this Section 4 and to the receipt by
Owner and any Assignee of the documents set forth in this Section 4, in each
case in form and substance reasonably satisfactory to Owner and any Assignee.
Owner shall have at least seven (7) Business Days to review the Acquisition
Certificate and its attachments prior to making any Initial Advance.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 14 -
Subject to Exhibit K hereof, the following are the documents to be
received by Owner and any Assignee and the conditions to be satisfied:
(a) LEASE AND GUARANTY. With respect to the first advance only under
this Agreement, a fully executed copy of the Lease and a fully executed
copy of the Guaranty.
(b) ACQUISITION CERTIFICATE. A duly executed copy of the Acquisition
Certificate.
(c) DEED. Where fee title is being acquired by Owner, a photocopy of
the executed purchase and sale agreement and the warranty deed, or, in the
case of Unit Premises located in California, the grant deed to be executed
and delivered at the closing of the acquisition of Owner's fee interest in
such Unit Premises, conveying marketable title to Owner, free of all Liens
other than Permitted Liens. For purposes of the Initial Advance, Permitted
Liens shall NOT include any mechanics' liens or materialmen's liens, or any
taxes, assessments, governmental charges or levies, except to the extent
that such taxes, assessments, governmental charges or levies are due and
payable but not yet delinquent, and have been properly apportioned with the
seller at closing.
(d) MEMORANDUM OF LEASE AGREEMENT. Two original counterparts of a
memorandum of lease agreement in the appropriate form for recording in the
jurisdiction in which the Unit Premises are located, executed by Agent, as
lessee, and otherwise reasonably acceptable to Owner and Assignee.
(e) GROUND LEASE. Where a leasehold interest is being acquired by
Owner, an original of each Ground Lease, including a true and complete copy
of the metes and bounds legal description of the Unit Premises, intended to
be executed and delivered at the closing of the acquisition of Owner's
leasehold interest, in a form approved by Owner, and complying and
certified by Agent as complying in all respects with this Agreement and
with Section 29 of the Lease, and not subject to any Liens other than
Permitted Liens, along with a memorandum of ground lease in statutory
recordable form and any necessary estoppel certificates, recognition and
attornment agreements, confirmations, and subordinations required by
Owner's and any Assignee's counsel regarding the Ground Lease. For
purposes of the Initial Advance, Permitted Liens shall NOT include any
taxes, assessments, governmental charges or levies, except to the extent
that such taxes, assessments, governmental charges or levies are due and
payable but not yet delinquent.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 15 -
(f) TAXES. Certification by Agent that all past and current taxes
and assessments (excluding those which are due and payable but not yet
delinquent) applicable to the Unit Premises have been paid in full.
(g) TITLE INSURANCE POLICY. Satisfactory evidence that Owner shall
receive at closing either (i) an ALTA owner's policy (which, if available
in the state in which the Unit Premises are located, may be issued as a
joint protection policy simultaneously insuring both Owner's interest and
Agent's interest in such Unit Premises, provided that Agent shall deliver
to Owner in connection with the Acquisition Certificate for such Unit
Premises a letter executed by Agent in which Agent explicitly agrees to the
conditions set forth on Exhibit J of this Agreement) with a pending
improvements clause, or (ii) a construction binder marked at closing for
the benefit of Owner and Assignee, constituting the irrevocable commitment
of the Title Company to issue a joint protection policy simultaneously
insuring both Owner's and Agent's interest in such Unit Premises in
accordance with the conditions of (i) above and upon completion of the Unit
Improvements, in each case issued by the Title Company with respect to the
Unit Premises in the amount of the total Unit Budget, acceptable to Owner
and Assignee in all respects (including such additional endorsements as may
be reasonably requested by Owner or Assignee), together with legible
photocopies of all underlying documents of record affecting the Unit
Premises. Owner shall have received evidence satisfactory to it that all
premiums in respect of such policies have been paid at the closing of
title, which policy or binder shall provide the substantive coverage
contemplated to be provided above.
(h) SURVEY. A current survey of the Unit Premises certified to Owner
and Assignee by an independent, licensed registered public land surveyor,
and dated a date within ninety (90) days prior to the date of the Initial
Advance. Such survey shall show the following: (i) lot lines of the Unit
Premises shown in metes and bounds, and the lines of streets abutting the
Unit Premises and the width thereof; (ii) all access and other easements
appurtenant to or used in connection with the Unit Premises; (iii) all
roadways, paths, driveways, easements, set-backs, encroachments and
overhanging projections and similar encumbrances affecting the Unit
Premises, whether recorded, apparent from a physical inspection of the Unit
Premises, or otherwise known to the surveyor; (iv) any encroachments on any
adjoining property by the building structures and improvements on the Unit
Premises; and (v) if the Unit Premises are described by reference to a
filed map, a legend relating the survey to said map.
(i) SITE PLAN. A site plan prepared by Agent showing the proposed
location of the Unit Improvements to be constructed on the Unit Premises.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 16 -
(j) AVAILABILITY OF UTILITIES. Certification by Agent that all
utility services and facilities (including, without limitation, gas,
electrical, water and sewage services and facilities) (i) which are
necessary and required during the construction period have been completed
or will be available in such a manner as to assure Owner that construction
will not be impeded by a lack thereof and (ii) which are necessary for
operation and occupancy of the Unit are or will be completed in such a
manner and at such a time as will assure the opening and operation of the
Unit on or before the Unit Completion Date.
(k) FLOOD ZONE. A certification by the surveyor or an official of an
appropriate Governmental Authority as to whether the Unit Premises are
located in a flood plain.
(l) PERMITS. All Permits and governmental approvals required for the
construction of the Unit Improvements have been or will be issued or
obtained in such a manner as to assure Owner that construction will not be
impeded by a lack thereof and all Permits and governmental approvals
required therefor which have been issued or obtained are in full force and
effect.
(m) OPINION OF COUNSEL FOR AGENT. With respect to the first advance
only under this Agreement, an opinion of Nossaman, Guthner, Knox & Elliott,
counsel for Agent, in form and substance reasonably satisfactory to Owner
and Assignee and, with respect to an Initial Advance with respect to a Unit
Premises in a state in which no Unit Premises has previously been acquired
under this Agreement, an opinion of local counsel for Agent, in form and
substance reasonably satisfactory to Owner and Assignee. With respect to
an Initial Advance for a Unit Premises in a state in which such opinion of
local counsel for Agent has previously been delivered, if Owner and
Assignee have reason to believe that the laws of such state have changed
since the date of the previous local counsel opinion for Agent in such
state, then an opinion of local counsel for Agent shall be delivered, in
form and substance reasonably satisfactory to Owner and Assignee.
(n) OPINION OF COUNSEL FOR GUARANTOR. With respect to the first
advance only under this Agreement, an opinion of Nossaman, Guthner, Knox &
Elliott, counsel for Guarantor, in form and substance satisfactory to Owner
and Assignee.
(o) CONSTRUCTION AGREEMENT. A fully executed and complete copy of
the Construction Agreement, if any.
(p) UNIT PLANS. A copy of the Unit Plans satisfactory to Owner and
Assignee.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 17 -
(q) UNIT BUDGET. A copy of the Unit Budget and certification by
Agent that such Unit Budget is (i) true, complete and correct, (ii)
accurately representative of all expected costs of the Unit and (iii)
within the dollar limits set forth in the first sentence of subsection 2.2
hereof.
(r) CERTIFICATES OF INSURANCE. Certificates of insurance or other
evidence reasonably acceptable to Owner certifying that the insurance then
carried or maintained on the Unit required by subsection 9.3 hereof
complies with the terms of such subsection.
(s) REQUEST FOR ADVANCE. A duly executed AIA Document G722 (or
substantially similar document), stating the total amount of the Initial
Advance requested, the date on which the advance is to be made, the name,
address and, if applicable, the escrow reference number of the escrow or
closing agent or party to whom the Initial Advance is to be tendered,
wiring instructions and an itemization of the various costs constituting
the amount of the Initial Advance in such detail as will be necessary to
provide disbursement instructions to the escrow or closing agent,
including, specifically, an accounting of all expenditures for costs shown
on the Unit Budget for which payment or reimbursement is being requested
with respect to the Unit.
(t) CONTINUING REPRESENTATIONS OF GUARANTOR. All representations and
warranties made in the Guaranty are and remain true and correct on and as
of the date of the Initial Advance as if made on and as of the date of the
Initial Advance (except to the extent such representations and warranties
expressly relate specifically to an earlier date) and no default under the
Guaranty has occurred and is continuing on the date such Initial Advance is
to be made or by reason of giving effect to such Initial Advance.
(u) UNIT FF&E SPECIFICATIONS. If applicable, a true and complete
copy of the Unit FF&E Specifications with respect to the Unit.
(v) ENVIRONMENTAL AFFIDAVIT AND REPORT. An environmental affidavit
in the form of Exhibit H hereto, duly executed by Agent, and an
environmental report certified to Owner and any Assignee and satisfactory
to Owner and any Assignee in all respects, prepared by a reputable
environmental consulting or environmental engineering firm acceptable to
Owner and Assignee which addresses the matters set forth on Exhibit I
hereto. If Owner or Assignee shall reasonably require additional assurance
as to any matter or matters contained or not adequately addressed in such
environmental report, Owner or Assignee may require that a supplemental or
additional environmental report with respect to such matter or matters,
satisfactory to Owner and Assignee in all respects, be delivered.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 18 -
(w) USE OF PROCEEDS, NO LIENS AND REPRESENTATIONS OF AGENT. (i) All
costs and expenses which are the subject of the Initial Advance requested
have been paid in full or will be paid in full out of the proceeds of the
Initial Advance, (ii) there are no Liens on the Unit Premises of which
Agent has knowledge that are not Permitted Liens, (iii) all representations
and warranties made in this Agreement, in the Lease, and in connection with
the Initial Advance, are and remain true and correct on and as of the date
of the Initial Advance and (iv) no Event of Default, Potential Default or,
with respect to the Unit for which the Initial Advance is requested, Event
of Unit Termination or Potential Event of Unit Termination, under this
Agreement has occurred and is continuing on the date such Initial Advance
is to be made or by reason of giving effect to such Initial Advance.
(x) ADDITIONAL MATTERS. Such other documents and legal matters in
connection with a request for an Initial Advance as are reasonably
requested by Owner and Assignee.
SECTION 5. CONDITIONS PRECEDENT TO OWNER'S OBLIGATION TO MAKE INTERIM
ADVANCES AFTER THE INITIAL ADVANCE WITH RESPECT TO A UNIT
Owner's obligation to make any Interim Advance with respect to a Unit
after the Initial Advance with respect to such Unit shall be subject to the
satisfaction of the conditions set forth in this Section 5 and to the receipt by
Owner and any Assignee of the documents set forth in this Section 5, in each
case in form and substance reasonably satisfactory to Owner and any Assignee.
Owner shall have at least seven (7) Business Days to review the Interim Advance
Certificate and its attachments prior to making any Interim Advance.
The following are the documents to be received by Owner and any
Assignee and the conditions to be satisfied:
(a) INTERIM ADVANCE CERTIFICATE. A duly executed Interim Advance
Certificate.
(b) CONTINUING REPRESENTATIONS OF AGENT. All representations and
warranties made in this Agreement, in the Lease, and in connection with the
Interim Advance, are and remain true and correct on and as of the date of
the Interim Advance as if made on and as of the date of the Interim Advance
and no Event of Default, Potential Default or, with respect to the Unit for
which such Interim Advance is requested, Event of Unit Termination or
Potential Event of Unit Termination, under this Agreement has occurred and
is continuing on the date such Interim Advance is to be made or by reason
of giving effect to such Interim Advance.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 19 -
(c) CONTINUING REPRESENTATIONS OF GUARANTOR. All representations and
warranties in the Guaranty are and remain true and correct on and as of the
date of the Interim Advance as if made on and as of the date of such
Interim Advance (except to the extent such representations and warranties
expressly relate specifically to an earlier date) and no default under the
Guaranty has occurred and is continuing on the date such Interim Advance is
to be made or by reason of giving effect to such Interim Advance.
(d) SATISFACTORY TITLE. A notice of title continuation or an
endorsement to the title insurance policy indicating that since the last
disbursement, there have been no changes in the state of title, except
Permitted Liens and no additional survey exceptions not theretofore
specifically approved in writing by Owner and, if such Unit Premises are
subject to a Ground Lease, an estoppel certificate confirming that there
are no defaults under the Ground Lease, and such other information as may
be requested by Owner or Assignee.
(e) CONSTRUCTION PROGRESS. If required by Owner or any Assignee,
Owner shall have received and approved (i) an inspection report from an
independent party satisfactory to Owner or any Assignee, if any, covering
conformity of the work to the Unit Plans, quality of work completed,
percentage of work completed and (ii) true copies of unpaid invoices,
receipted bills and Lien waivers, and such other reasonably available
supporting information as Owner or any Assignee may reasonably request.
(f) EVIDENCE OF COMPLIANCE. Agent shall furnish Owner and any
Assignee with such additional or updated documents, reports, certificates,
affidavits and other information, in form and substance satisfactory to
Owner and any Assignee in its reasonable judgment, as Owner and any
Assignee may reasonably require to evidence compliance by Agent with all of
the provisions of this Agreement.
(g) REQUEST FOR ADVANCE. A duly executed AIA Document G722 (or a
substantially similar document), stating the total amount of the Interim
Advance requested, the date on which such Interim Advance is to be made,
and a specific breakdown of items and costs for which the Interim Advance
is being made.
(h) NO OTHER SECURITY INTERESTS. All materials and fixtures
incorporated in the construction of the Unit Improvements have been
purchased so that title thereto or a leasehold interest therein, as the
case may be, shall have vested in Owner immediately upon delivery thereof
to the Unit Premises, except for Permitted Liens, and Agent shall have
produced and furnished, if required by Owner, the contracts, bills of sale,
statements, receipted vouchers, or other documents under which title
thereto or a leasehold interest therein is claimed.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 20 -
(i) STATEMENT OF EXPENDITURES. At Owner's request, Agent shall
supply Owner and any General Contractor with a statement setting forth the
names, addresses and amounts due or to become due as well as the amounts
previously paid to every contractor, subcontractor or Person furnishing
materials, performing labor or entering into the construction of any part
of the Unit Improvements.
SECTION 6. CONDITIONS PRECEDENT TO THE FINAL ADVANCE WITH RESPECT TO A
UNIT
Owner's obligation to make the Final Advance with respect to a Unit
shall be subject to the satisfaction of the conditions set forth in this Section
6 and to the receipt by Owner and any Assignee of the documents set forth in
this Section 6, in each case in form and substance reasonably satisfactory to
Owner and any Assignee. When all of the conditions set forth in this Section 6
shall have been satisfied to the reasonable satisfaction of Owner and any
Assignee, Substantial Completion of a Unit shall be deemed to occur. Owner
shall have at least seven (7) Business Days to review the Certificate of
Substantial Completion and its attachments prior to making a Final Advance.
The following are the documents to be received by Owner and any
Assignee and the conditions to be satisfied:
(a) CERTIFICATE OF SUBSTANTIAL COMPLETION. A duly executed
Certificate of Substantial Completion.
(b) SATISFACTORY TITLE. A notice of title continuation issued by the
Title Company policy indicating that since the Initial Advance for such
Unit Premises, there have been no changes in the state of title, except for
Permitted Liens, and no additional survey exceptions not theretofore
specifically approved in writing by Owner and, if such Unit Premises are
subject to a Ground Lease, an estoppel certificate from the ground lessor
certifying that there are no defaults under the Ground Lease, and such
other information as may be requested by Owner or Assignee at least three
(3) Business Days prior to the making of a Final Advance.
(c) CONSTRUCTION AND EQUIPPING OF THE UNIT. The Unit Improvements
(including all interior finish work, but exclusive of punch list items)
have been completed within the Unit Budget and in all material respects in
accordance with the Unit Plans and are accepted by Agent and all Unit FF&E
for that Unit has been installed and conforms in all material respects to
the Unit FF&E Specifications and are accepted by Agent. Agent shall
deliver to Owner and any Assignee a specific itemization of all items of
Unit FF&E installed in such Unit.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 21 -
(d) PERMITS. All Permits and governmental approvals necessary for
the occupancy and primary use and operation of the Unit have been issued or
obtained.
(e) LIENS. The Unit, including interior finish work, has been
completed as contemplated in paragraph (c) above, free of all Liens, except
for Permitted Liens (all of which are to be itemized as to the nature,
amount, claimant and status), and there are no current Permitted Contests
with respect to the Unit (or, if any, the nature, amount, claimant and
status thereof).
(f) FINAL SURVEY. A final as-built survey, certified to Owner and
any Assignee by an independent, licensed registered public land surveyor,
with a metes and bounds description of the perimeter of the Unit Premises,
and showing the completed Unit Improvements, all easements on the Unit
Premises, and indicating the location of access to the Unit Premises and
all utility and water easements directly affecting the Unit Premises. No
encroachments are to exist by the Unit Improvements or on the Unit Premises
other than those that are Permitted Liens or that may have been consented
to by Owner and all set-back requirements have been complied with. If any
discrepancies exist between the legal description set forth on the survey
delivered pursuant to paragraph (h) of Section 4 hereof and the legal
description set forth on the final as-built survey, Owner and Agent shall
cooperate in amending the legal descriptions in all recorded documents
creating or affecting the Unit Premises, including, without limitation, any
easements, to reflect the correct as-built description.
(g) UTILITIES. Direct connection has been made to all appropriate
utility facilities and the Unit Improvements are ready for occupancy and
operation.
(h) FLOOD ZONE. If the Unit Premises are located in a flood plain, a
policy of flood insurance in an amount equal to the lesser of (A) the
maximum limit of coverage available under the National Flood Insurance Act
of 1968, as amended, or (B) the amount of the Unit Acquisition Cost for the
Unit, unless Agent is self-insured for such risks as permitted in the
Lease.
(i) CONTINUING REPRESENTATIONS OF AGENT. All representations and
warranties made in this Agreement, in the Lease, and in connection with the
Final Advance are to remain true and correct on and as of the date of the
Final Advance as if made on and as of the date of the Final Advance and no
Event of Default, Potential Default or, with respect to the Unit for which
the Final Advance is requested, Event of Unit Termination or Potential
Event of Unit Termination, under this Agreement has occurred and is
continuing on the date such Final Advance is to be made or by reason of
giving effect to such Final Advance.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 22 -
(j) CONTINUING REPRESENTATIONS OF GUARANTOR. All representations and
warranties made in the Guaranty are and remain true and correct on and as
of the date of the Final Advance as if made on and as of the date of the
Final Advance (except to the extent such representations and warranties
expressly relate specifically to an earlier date) and no default under the
Guaranty has occurred and is continuing on the date such Final Advance is
to be made or by reason of giving effect to such Final Advance.
(k) AFL UNIT LEASING RECORD. An AFL Unit Leasing Record prepared and
duly executed by Agent.
(l) REQUEST FOR ADVANCE. A duly executed AIA Document G722 (or a
substantially similar document), stating the total amount of the Final
Advance requested, the date on which such advance is to be made, wiring
instructions and a specific breakdown of items and costs for which the
Final Advance is to be made.
SECTION 7. CONDITIONS PRECEDENT TO THE COMPLETION ADVANCE WITH RESPECT
TO A UNIT
Owner's obligation to make the Completion Advance with respect to a
Unit shall be subject to the satisfaction of the conditions set forth in this
Section 7 and to the receipt by Owner and any Assignee of the documents set
forth in this Section 7, in each case in form and substance reasonably
satisfactory to Owner and Assignee. The proceeds of the Completion Advance
shall be used to pay in full all costs relating to completion of such Unit for
which Agent has received invoices subsequent to such Effective Date. Owner
shall have at least seven (7) Business Days to review the Certificate of
Increased Cost and its attachments prior to making the Completion Advance.
The following are the documents to be received by Owner and any
Assignee and the conditions to be satisfied:
(a) CERTIFICATE OF INCREASED COST. A duly executed Certificate of
Increased Cost.
(b) CONTINUING REPRESENTATIONS OF AGENT. All representations and
warranties made in this Agreement, in the Lease, and in connection with the
Completion Advance are and remain true and correct on and as of the date of
the Completion Advance as if made on and as of the date of the Completion
Advance and no Event of Default, Potential Default or, with respect to the
Unit for which the Completion Advance is requested, Event of Unit
Termination or Potential Event of Unit Termination under this Agreement has
occurred and is continuing on the date
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 23 -
such Completion Advance is to be made or by reason of giving effect to such
Completion Advance.
(c) CONTINUING REPRESENTATIONS OF GUARANTOR. All representations and
warranties made in the Guaranty are and remain true and correct on and as
of the date of the Completion Advance as if made on and as of the date of
the Completion Advance (except to the extent such representations and
warranties expressly relate specifically to an earlier date) and no default
under the Guaranty has occurred and is continuing on the date such
Completion Advance is to be made or by reason of giving effect to such
Completion Advance.
(d) REQUEST FOR ADVANCE. A duly executed AIA Document G722 (or a
substantially similar document), stating the total amount of the Completion
Advance requested, the date on which such advance is to be made, wiring
instructions and a specific breakdown of items and costs for which the
Completion Advance is to be made.
(e) REVISED AFL UNIT LEASING RECORD. A revised AFL Unit Leasing
Record prepared by Agent pursuant to subsection 2.3(b) hereof.
SECTION 8. REPRESENTATIONS AND WARRANTIES OF AGENT
Agent represents and warrants to Owner now and on the date of each
advance that:
8.1 CORPORATE MATTERS. Agent (i) has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the State
of Delaware, (ii) has full power, authority and legal right to own and operate
its properties and to conduct its business as presently conducted and to
execute, deliver and perform its obligations under the Lease, this Agreement,
any Consent and the Construction Documents and (iii) is duly qualified to do
business as a foreign corporation in good standing in each jurisdiction in which
its ownership or leasing of properties or the conduct of its business requires
such qualification.
8.2 POWER AND AUTHORITY. The consummation of the transactions herein
contemplated and the performance and observance of Agent's obligations under
this Agreement and any Consent have been, and the Construction Documents have
been or will be, duly authorized by all necessary corporate action on the part
of Agent. The execution, delivery and performance by Agent of this Agreement,
any Consent and the Construction Documents will not result in any violation of
any term of the articles of incorporation or the by-laws of Agent, do not
require stockholder approval or the approval or consent of any trustee or
holders of indebtedness of Agent except such as have been obtained prior to the
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 24 -
date hereof and will not conflict with or result in a breach of any terms or
provisions of, or constitute a default under, or result in the creation or
imposition of any Lien (other than a Permitted Lien) upon any property or assets
of Agent under, any indenture, mortgage or other agreement or instrument to
which Agent is a party or by which it or any of its property is bound, or any
existing applicable law, rule, regulation, license, judgment, order or decree of
any Governmental Authority or court having jurisdiction over Agent or any of its
activities or properties.
8.3 BINDING AGREEMENT. Each of this Agreement and any Consent has
been, and each of the Construction Documents will be, duly authorized, executed
and delivered by Agent and, assuming the due authorization, execution and
delivery of this Agreement and any Consent by Owner and the Construction
Documents by the parties thereto other than Agent, this Agreement and any
Consent are, and each of the Construction Documents when executed and delivered
will be, legal, valid and binding obligations of Agent, enforceable according to
their terms.
8.4 NO LITIGATION. There is no action, suit, proceeding or
investigation at law or in equity by or before any court, governmental body,
agency, commission or other tribunal now pending or threatened against or
affecting Agent or Guarantor or any property or rights of Agent or Guarantor
which questions the enforceability of this Agreement, which affects any Unit
Premises, Unit Improvements, Unit FF&E, or Unit, which may have a material
adverse impact on the financial condition, business, operations or property of
Agent or Guarantor or which, if adversely determined, would materially impair
the ability of Agent to perform its obligations hereunder or under any of the
Construction Documents or of Guarantor to perform its obligations under the
Guaranty.
8.5 CONSENTS, APPROVALS, AUTHORIZATIONS, ETC. There are no consents,
permits, licenses, orders, authorizations, approvals, waivers, extensions or
variances of, or notices to or registrations or filings with (each a
"Governmental Action"), any Governmental Authority or public body or authority
which are or will be required in connection with the valid execution, delivery
and performance of this Agreement, any Consent and the Construction Documents,
or any Governmental Action (i) which is or will be required in connection with
any participation by Owner in the transaction contemplated by any bill of sale,
deed, assignment, assumption, ownership agreement, or operating agreement
relating to any Unit Premises, Unit Improvements, Unit FF&E or Unit or (ii)
which is or will be required to be obtained by Owner, Agent, Merrill, Merrill
Leasing, any Assignee or an Affiliate of the foregoing, during the term of this
Agreement, with respect to any Unit Premises, Unit Improvements, Unit FF&E or
Unit except such Governmental Actions, (A) as have been duly obtained, given or
accomplished, with true copies thereof delivered to the Lessor, and (B) as may
be required by applicable law not now in effect.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 25 -
8.6 COMPLIANCE WITH LEGAL REQUIREMENTS AND INSURANCE REQUIREMENTS.
The construction, operation, use, and physical condition of each Unit Premises,
the Unit Improvements, Unit, and item of Unit FF&E comply with all Legal
Requirements and Insurance Requirements.
8.7 NO DEFAULT. Neither Agent nor Guarantor is in violation of or in
default under or with respect to any Legal Requirement in any respect which
could be materially adverse to the business, operations, properties or financial
or other condition of Agent or Guarantor, or which could materially adversely
affect the ability of Agent to perform its obligations under this Agreement or
any of the Construction Documents or of the Guarantor to perform its obligations
under the Guaranty.
8.8 OWNERSHIP; LIENS. No Unit Premises, Unit Improvements, Unit
FF&E, or Unit is subject to any Lien, except for Permitted Liens.
8.9 FINANCIAL STATEMENTS. Agent has furnished to Owner copies of
Guarantor's Annual Report on Form 10-K for the year ended March 31, 1994, and
Guarantor's Quarterly Reports on Form 10-Q for the quarters ended June 30, 1994
and September 30, 1994. The financial statements contained in such documents
fairly present the financial position, results of operations and statements of
cash flows of Guarantor as of the dates and for the periods indicated therein
and have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis.
8.10 CHANGES. Since January 31, 1995, in the case of the Agent, and
March 31, 1994, in the case of the Guarantor, there has been no material adverse
change in the financial condition or business of Agent or of Guarantor, nor any
change which would materially impair the ability of Agent to perform its
obligations under this Agreement or any of the Construction Documents or which
would materially impair the ability of Guarantor to perform its obligations
under the Guaranty.
8.11 SUITABILITY OF EACH UNIT PREMISES. Each Unit Premises is
suitable in all material respects (including, without limitation, ground
conditions, utilities, and condition of title) for the construction of the
related Unit Improvements.
8.12 ERISA. Agent has not established and does not maintain or
contribute to any employee benefit plan that is covered by Title IV of the
Employee Retirement Income Security Act of 1974, as amended from time to time.
8.13 GROUND LEASE. Each Ground Lease is a Mortgageable Ground Lease
except to the extent agreed to in writing by Owner and Assignee, and is in full
force and effect and has not been modified, amended or changed in any manner
that has not been disclosed in writing to Owner and any Assignee, nor is there
any material default under any
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 26 -
Ground Lease nor event which, with the giving of notice or the passage of time
or both, would constitute a default under such Ground Lease, nor to the best
knowledge of Agent has any party under any Ground Lease commenced any action or
given or received any notice for the purpose of terminating any Ground Lease,
and all rents, additional rents and other sums due and payable under the Ground
Lease have been paid in full.
8.14 STATUS OF AGENT. All of Agent's common stock is owned
beneficially and of record by Guarantor.
SECTION 9. AFFIRMATIVE COVENANTS
Agent hereby agrees that, so long as this Agreement remains in effect,
Agent shall keep and perform fully each and all of the following covenants:
9.1 PERFORMANCE UNDER OTHER AGREEMENTS. Agent shall duly perform and
observe all of the covenants, agreements and conditions on its part to be
performed and observed hereunder and shall duly perform and observe all of the
covenants, agreements and conditions on its part which it is obligated to
perform or observe under the Construction Documents and all other agreements
related to each Unit.
9.2 NO ENCROACHMENTS. The Unit Improvements shall be constructed
entirely on the related Unit Premises and shall not encroach upon or overhang
(unless consented to by the affected property owner) any easement or right-of-
way or the land of others, and when erected shall be wholly within any building
restriction lines, however established. Upon request of Owner, Agent shall
furnish from time to time satisfactory evidence of compliance with the foregoing
covenants, including, without limitation, a survey prepared by a registered
surveyor or engineer. If any discrepancies exist between the legal description
set forth on the survey described in Section 4(h) hereof and the final as-built
survey described in Section 6(f) hereof, Owner and Agent shall cooperate, at
Agent's expense, in amending the legal descriptions in all recorded documents
creating or encumbering or otherwise affecting the Unit Premises, including,
without limitation, any easements, to reflect the correct as-built description.
9.3 INSURANCE.
(a) INSURANCE WITH RESPECT TO EACH UNIT PREMISES, THE UNIT
IMPROVEMENTS, UNIT FF&E AND UNIT. Agent will maintain or cause to be maintained
on each Unit Premises, the Unit Improvements, Unit FF&E and Unit insurance of
the same types, in the same amounts and on the same terms and conditions as the
insurance required by paragraph (c) and paragraphs (f) through (1) of Section 10
of the Lease, except that the terms "Owner", "Agent" and "this Agreement" shall
substitute for the terms "the Lessor", "the Lessee" and "this Lease",
respectively, the phrase "Unit Premises, Unit Improvements, Unit FF&E and
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 27 -
Unit" shall substitute for the phrase "Parcel of Property", and references to
"Equipment" or "Unit of Equipment" shall be deemed deleted, and the phrase "Unit
Acquisition Cost" shall substitute for the phrase "Adjusted Acquisition Cost";
provided, that in lieu of the insurance required by paragraph (c)(i) of Section
10 of the Lease, Agent shall maintain or cause to be maintained All Risk
Builders' Risk Completed Value Non-Reporting Form Insurance, including collapse
coverage and fire insurance with extended coverage, in an amount not less than
one hundred percent (100%) of the completed insurable value of the respective
Unit Improvements and Unit FF&E. The term "completed insurable value" as used
herein means the actual replacement cost, including the cost of debris removal,
but excluding the cost of constructing foundation and footings.
(b) Agent covenants that it will not use, carry on construction with
respect to, or occupy any Unit or permit the use, construction, or occupancy of
any Unit Premises, Unit Improvements, Unit FF&E or Unit at a time when the
insurance required by paragraph (a) of this subsection is not in force with
respect to such Unit Premises, Unit Improvements, Unit FF&E or Unit.
9.4 INSPECTION OF BOOKS AND RECORDS. Upon reasonable notice, Owner
or Assignee or any authorized representatives of either of them, shall have the
right of entry and free access to each Unit Premises, the Unit Improvements,
Unit FF&E and each Unit and the right to inspect all work done, labor performed
and materials furnished in and about each Unit Premises, the Unit Improvements,
Unit FF&E and each Unit and at reasonable times the right to inspect all books,
contracts and records of Agent relating to each Unit Premises, the Unit
Improvements, Unit FF&E and each Unit.
9.5 EXPENSES. Agent shall pay upon demand all obligations, costs and
expenses incurred by Owner with respect to any and all transactions contemplated
herein and the preparation of any document reasonably required hereunder and the
prosecution or defense of any action or proceeding or other litigation affecting
Agent or any Unit Premises, Unit Improvements, Unit FF&E or Unit, including
(without limiting the generality of the foregoing) all Financing Costs not
capitalized by Owner in Unit Acquisition Cost and amounts required to reimburse
Owner for its obligations, costs and expenses arising in connection with the
termination of any Credit Agreement (whether as a result of a default thereunder
or otherwise), costs incurred in connection with terminating and obtaining
Owner's equity financing, costs incurred in connection with obligations of Owner
under or in respect of any interest rate swap, cap, collar or other financial
hedging arrangement, including, without limitation, costs incurred by Owner
under any such arrangement to reduce the notional amount thereof by the amount
of any prepayment of any borrowing to which such interest rate swap, cap, collar
or other financial hedging arrangement relates, title and conveyancing charges,
recording and filing fees and taxes, title search fees, rent under the Ground
Leases, mortgage taxes, intangible personal property taxes, escrow fees, revenue
and tax stamp expenses, insurance premiums (including title insurance premiums),
brokerage
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 28 -
commissions, finders' fees, placement fees, court costs, surveyors',
photographers', appraisers', architects', engineers', rating agencies',
accountants' and reasonable attorneys' fees and disbursements, and will
reimburse to Owner all expenses paid by Owner of the nature described in this
subsection 9.5 which have been or may be incurred by Owner with respect to any
and all of the transactions contemplated herein. In the event Agent shall fail
to reimburse Owner within ten (10) Business Days after presentation of a bill
and demand for payment therefor, Owner may pay or deduct from the advances to be
made any of such expenses and any proceeds so applied shall be deemed advances
under this Agreement, and deducted from the total funds available to Agent under
this Agreement. Notwithstanding anything to the contrary contained in the
foregoing, Agent shall not be required to reimburse Owner for any of the
foregoing obligations, costs and expenses which constitute properly
capitalizable costs and which Owner has agreed to capitalize and to include as
an element of the Unit Acquisition Cost of a Unit. Expenses incurred by Owner
(including, without limitation, Financing Costs) in financing obligations, costs
and expenses pending allocation as a capitalized cost to a Unit shall be payable
by Agent hereunder, if not capitalized by Owner. Agent shall pay to any limited
partner of Owner an amount equal to commitment fees incurred by any limited
partner of Owner in connection with borrowing from a bank amounts to be invested
by such limited partner in Owner.
9.6 CERTIFICATES; OTHER INFORMATION. Agent shall furnish to Owner:
(a) concurrently with the delivery of the financial statements
referred to in subsection 9.6(b) hereof, a certificate of a Responsible
Officer stating that, to the best of such Responsible Officer's knowledge,
Agent during such period has observed or performed all of its covenants and
other agreements, and satisfied every condition contained in this Agreement
and in the Construction Documents to be observed, performed or satisfied by
it, and that such Responsible Officer has obtained no knowledge of any
Event of Default or Potential Default or Event of Unit Termination or
Potential Event of Unit Termination except as specified in such
certificate;
(b) from time to time, (i) promptly upon their becoming available,
and, in any event, not more than 120 days after the end of each fiscal year
of the Guarantor, copies of Guarantor's Annual Reports on Form 10-K, and,
promptly upon their becoming available, and, in any event, not more than
sixty (60) days after the end of each fiscal quarter of the Guarantor,
copies of the Guarantor's Quarterly Reports on Form 10-Q and, promptly upon
filing, any other reports it files with the Securities and Exchange
Commission, (ii) promptly, and in any event within five (5) Business Days
upon request, such other information with respect to Agent's and
Guarantor's operations, business, property, assets, financial condition or
litigation as Owner or any Assignee shall reasonably request, (iii)
promptly, and in any event within five (5) Business Days after a
Responsible Officer of Agent obtains knowledge of any Event of Default or
Potential Default or Event of
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 29 -
Unit Termination or Potential Event of Unit Termination, a certificate of a
Responsible Officer of Agent specifying the nature and period of existence
of such Event of Default or Potential Default or Event of Unit Termination
or Potential Event of Unit Termination, and what action, if any, Agent has
taken, is taking, or proposes to take with respect thereto, (iv) promptly,
and in any event within five (5) Business Days after a Responsible Officer
of Agent obtains knowledge of any material adverse change in the financial
condition or business of Agent or Guarantor or of any litigation of the
type described in subsection 8.4 hereof, a certificate of a Responsible
Officer of Agent describing such change or litigation as the case may be,
(v) promptly, and in any event within five (5) Business Days after a
Responsible Officer of Agent obtains knowledge of any and all Liens other
than Permitted Liens on any Unit Premises, Unit Improvements, Unit FF&E, or
Unit, a detailed statement of a Responsible Officer describing each such
Lien and (vi) within thirty (30) days of the close of each fiscal quarter,
a certificate of a Responsible Officer of Agent which states the
applicability to the Guarantor of Level 1, Level 2, Level 3, Level 4, or
Level 5, as the case may be and the Guarantor's Tangible Net Worth and
Fixed Charge Coverage Ratio. As used in this paragraph the words "obtains
knowledge" are intended to mean the receipt of such evidence as to permit a
judgment to be formed that an event has occurred.
9.7 CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. Agent shall
preserve, renew and keep in full force and effect its corporate existence
(except as otherwise permitted herein), and take all reasonable action to
maintain all rights, privileges and franchises material to the conduct of its
business, and comply with all Legal Requirements; provided, however, that
nothing contained in this subsection 9.7 shall prevent Agent from ceasing or
omitting to exercise any rights, privileges or franchises which in the
reasonable judgment of Agent can no longer be profitably exercised or prevent
Agent from selling, abandoning or otherwise disposing of any property, the
retention of which in the reasonable judgment of Agent is inadvisable to the
business of Agent, or prevent any liquidation of any subsidiary of Agent, or any
merger, consolidation or sale, permitted by the provisions of subsection 10.2
hereof.
9.8 NOTICES. Agent shall give notice to Owner promptly upon, and in
any event not more than five (5) Business Days after, the occurrence of:
(a) any litigation or proceeding affecting any Unit Premises, Unit
Improvements, Unit FF&E, or Unit in which the amount of damages requested
exceeds $100,000 or more and is not covered by insurance or in which
injunctive or similar relief is sought;
(b) any notice given by or to Agent pursuant to any of the
Construction Documents that a default has occurred thereunder;
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 30 -
(c) any condition which results or is reasonably likely to result in
a Force Majeure Delay in completion of the Unit Improvements; and
(d) notices received from the lessor under any Ground Lease.
Each notice pursuant to this subsection shall be accompanied by a statement of a
Responsible Officer setting forth details of the occurrence referred to therein
and stating what action, if any, Agent proposes to take with respect thereto.
9.9 LEGAL REQUIREMENTS AND INSURANCE REQUIREMENTS. Agent shall
comply with every Insurance Requirement and Legal Requirement affecting (i) the
execution, delivery and performance of this Agreement and the Construction
Documents and (ii) any Unit Premises, Unit Improvements, item of Unit FF&E or
Unit; and Agent will not do or permit any act or thing which is contrary to any
Insurance Requirement or which is contrary to any Legal Requirement, or which
might impair, other than in the normal use thereof, the value or usefulness of
any Unit Premises, Unit Improvements, item of Unit FF&E or Unit.
9.10 PAYMENT OF TAXES. With respect to any Unit Premises, Unit
Improvements, Unit FF&E, or Unit, Agent shall make all required reports to the
appropriate taxing authorities and shall pay during the term of this Agreement
the taxes that Agent would be required to pay if such Unit Premises, Unit
Improvements or Unit was a Parcel of Property under paragraph (c) of Section 9
of the Lease. Payment of such taxes shall be on the terms set forth in
paragraph (c) of Section 9 of the Lease.
9.11 FILINGS, ETC. Agent shall promptly and duly execute, deliver,
file, and record, at Agent's expense, all such documents, statements, filings,
and registrations, and take such further action as Owner shall from time to time
reasonably request in order to establish, perfect and maintain Owner's title to
and interest in any Unit Premises, Unit Improvements, Unit FF&E and any Unit and
any Assignee's interest in this Agreement, any Unit Premises, Unit Improvements,
Unit FF&E or any Unit as against Agent or any third party in any applicable
jurisdiction.
9.12 USE OF PROCEEDS. The proceeds of each advance shall be used by
Agent for payment of costs specified in the applicable request for the advance
and in accordance with the respective Unit Budget.
9.13 COMPLIANCE WITH OTHER REQUIREMENTS. Agent shall use every
precaution to prevent loss or damage to any Unit Premises, Unit Improvements,
Unit FF&E, or any Unit and to prevent injury to third Persons or property of
third Persons. Agent shall cooperate fully with Owner and all insurance
companies providing insurance pursuant to subsection 9.3 hereof in the
investigation and defense of any claims or suits arising from the ownership or
operation of equipment or ownership, use, or occupancy of any Unit Premises,
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 31 -
Unit Improvements, Unit FF&E, or any Unit; provided, that nothing contained in
this subsection shall be construed as imposing on Owner any duty to investigate
or defend any such claims or suits. Agent shall comply and shall use its best
efforts to cause all Persons operating equipment on, using or occupying any Unit
Premises, Unit Improvements, Unit FF&E, or any Unit to comply at Agent's expense
with (i) every Insurance Requirement and Legal Requirement regarding acquiring,
titling, registering, leasing, subleasing, insuring, using, occupying, operating
and disposing of any Unit Premises, Unit Improvements, Unit FF&E, or any Unit,
and, if applicable, the licensing of operators thereof and (ii) any agreement in
respect of maintenance, development or use of any Unit Premises entered into by
Owner with the seller to Owner of the Unit Premises or any requirements of a
property owner or similar association to which the Unit Premises is subject.
9.14 CONSTRUCTION COMMENCEMENT. Agent shall commence construction of
a headquarters office building on the initial Unit Premises subject to this
Agreement not later than eighteen (18) months after the date on which the
Initial Advance in respect of such Unit Premises is made. For purposes of this
subsection 9.14, commencement of construction shall mean the initiation of the
excavation of the foundation of such building.
SECTION 10. NEGATIVE COVENANTS
Agent hereby agrees that, so long as this Agreement remains in effect,
Agent shall not directly or indirectly:
10.1 CHANGES IN UNIT PLANS OR UNIT BUDGET PLANS. (a) Modify or
supplement in any material respect any Unit Plans or any Unit Budget without the
prior written consent of all Governmental Authorities which previously have
approved the matters to be changed, or (b) receive advances with respect to a
Unit which exceed the Unit Budget for such Unit.
10.2 PROHIBITION OF FUNDAMENTAL CHANGES. Consolidate with or merge
into any other Person as such prohibition is set forth in Section 26 of the
Lease, except that the term "Owner" shall substitute for the term "the Lessor"
and the term "Agent" shall substitute for the term "the Lessee".
10.3 NOTIFICATION OF OPENING OF A UNIT. Open or operate a Unit prior
to the delivery to Owner of the Certificate of Substantial Completion and the
AFL Unit Leasing Record for the Unit.
10.4 ACQUIRE FEE OR LEASEHOLD INTEREST. Acquire a fee or leasehold
interest on behalf of Owner in any Unit Premises until Agent has delivered all
documents required by Section 4 hereof and in the reasonable judgment of Owner
satisfied the conditions set forth in such Section 4.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 32 -
10.5 ASSIGNMENT OF OBLIGATIONS. Assign its obligations hereunder to
any other party.
SECTION 11. EVENTS OF DEFAULT AND EVENTS OF UNIT TERMINATION
11.1 EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an Event of Default:
(a) FAILURE TO MAKE PAYMENTS. Failure to pay the purchase price of a
Unit when due in the event of a required purchase by Agent hereunder or
failure by Agent to pay any other amount hereunder within ten (10) days
from demand for such payment.
(b) UNAUTHORIZED ASSIGNMENTS, ETC. Assignment by Agent of any
interest in this Agreement or any advance to be made hereunder or any
interest in either.
(c) MISREPRESENTATIONS. Any representation or warranty made herein
or which is contained in any certificate, document or financial or other
statement furnished under or in connection with this Agreement shall prove
to have been false or inaccurate in any material respect on or as of the
date made or deemed made.
(d) INVOLUNTARY BANKRUPTCY, ETC. The entry of a decree or order for
relief in respect of Agent by a court having jurisdiction in the premises,
or the appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or other similar official) of Agent or of any substantial
part of its property, or ordering the winding up or liquidation of its
affairs, in an involuntary case under the Federal bankruptcy laws, as now
or hereafter constituted, or any other applicable Federal or state
bankruptcy, insolvency or other similar law and such decree or order
remains unstayed and in effect for thirty (30) consecutive days; or the
commencement against Agent of an involuntary case under the Federal
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal or State bankruptcy, insolvency or other similar law, and the
continuance of any such case unstayed and in effect for a period of thirty
(30) consecutive days.
(e) VOLUNTARY BANKRUPTCY, ETC. The suspension or discontinuance of
Agent's or Guarantor's business operations, Agent's or Guarantor's
insolvency (however evidenced) or Agent's or Guarantor's admission of
insolvency or bankruptcy, or the commencement by Agent or Guarantor of a
voluntary case under the Federal bankruptcy laws, as now or hereafter
constituted, or any other applicable Federal or state bankruptcy,
insolvency or other similar law, or the consent by Agent or Guarantor to
the appointment of or taking possession by a receiver, liquidator,
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 33 -
assignee, custodian, trustee, sequestrator (or other similar official) of
Agent or Guarantor or of any substantial part of Agent's or Guarantor's
property, or the making by Agent or Guarantor of an assignment for the
benefit of creditors, or the failure of Agent or Guarantor generally to pay
their debts as such debts become due, or the taking of corporate action by
Agent or Guarantor in furtherance of any such action.
(f) NEGATIVE COVENANTS. Agent shall default in the performance or
observance of any agreement, covenant or condition contained in Section 10
hereof.
(g) OTHER DEFAULTS. Agent shall default in the performance or
observance of any other term, covenant, condition or obligation contained
in this Agreement and, in the case of such default other than a default
arising under subsection 9.3 hereof, such default shall continue for ten
(10) days after written notice shall have been given to Agent by Owner
specifying such default and requiring such default to be remedied;
provided, that an Event of Unit Termination shall not constitute an Event
of Default hereunder.
(h) DEFAULT UNDER LEASE. An Event of Default (as defined in the
Lease) shall occur under the Lease.
(i) PAYMENT OF OBLIGATIONS. A default or event of default, the
effect of which is to permit the holder or holders of any Indebtedness, or
a trustee or agent on behalf of such holder or holders, to cause such
Indebtedness to become due prior to its stated maturity, shall occur under
the provisions of any agreement pursuant to which such Indebtedness was
created or instrument evidencing such Indebtedness of Agent or Guarantor in
excess of $10,000,000 in the aggregate or any obligation of Agent or
Guarantor for the payment of such Indebtedness shall become or be declared
to be due and payable prior to its stated maturity, or shall not be paid
when due.
(j) DEFAULTS UNDER OTHER AGREEMENTS. Any material default by Agent
shall occur under any of the material Construction Documents and any
required notice shall have been given and/or any applicable grace period
shall have expired.
(k) JUDGMENT DEFAULTS. Any final non-appealable judgment or
judgments for the payment of money in excess of $250,000 in the aggregate
shall be rendered against Agent or, in excess of $2,000,000 in the
aggregate shall be rendered against the Guarantor, by any court of
competent jurisdiction and the same shall remain undischarged for a period
of thirty (30) days during which execution of such judgment or judgments
shall not be effectively stayed.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 34 -
(l) Agent shall breach its obligations under Exhibit K hereto.
11.2 OWNER'S RIGHTS UPON AN EVENT OF DEFAULT. Upon the occurrence and
continuation of any Event of Default Owner may do any one or more of the
following:
(a) Terminate this Agreement and/or Owner's obligations to make any
further advances hereunder;
(b) Take immediate possession of any Unit Premises, Unit
Improvements, Unit FF&E, and Unit and remove any equipment or property of
Owner in the possession of Agent, wherever situated, and for such purpose,
enter upon any Unit Premises, Unit Improvements or Unit without liability
to Agent for so doing;
(c) Whether or not any action has been taken under paragraph (a) or
(b) above, sell any Unit Premises, Unit Improvements, Unit FF&E or Unit
(with or without the concurrence or request of Agent) at public or private
sale (judicially or non-judicially) pursuant to such notices and procedures
as may be required by law, to the extent such requirements are not
effectively waived by Agent hereunder, provided that the disposition of any
Unit Premises, Unit Improvements, Unit FF&E or Unit shall take place in a
commercially reasonable manner;
(d) Hold, use, occupy, operate, remove, lease, sublease or keep idle
any Unit Premises, Unit Improvements, Unit FF&E, or Unit as Owner in its
sole discretion may determine, without any duty to account to Agent with
respect to any such action or inaction or for any proceeds thereof; and
(e) Exercise any other right or remedy which may be available under
applicable law and in general proceed by appropriate judicial proceedings,
either at law or in equity, to enforce the terms hereof or to recover
damages for the breach hereof.
Suit or suits for the recovery of any default in the payment of any sum
due hereunder or for damages may be brought by Owner from time to time at
Owner's election, and nothing herein contained shall be deemed to require Owner
to await the date whereon this Agreement or the term hereof would have expired
by limitation had there been no such default by Agent or no such termination or
cancellation.
The receipt of any payments under this Agreement by Owner with
knowledge of any breach of this Agreement by Agent or of any default by Agent in
the performance of any of the terms, covenants or conditions of this Agreement,
shall not be deemed to be a waiver of any provision of this Agreement.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 35 -
No receipt of moneys by Owner from Agent after the termination or
cancellation hereof in any lawful manner shall reinstate or continue this
Agreement, or operate as a waiver of the right of Owner to recover possession of
any Unit Premises, Unit Improvements, Unit FF&E, or Unit by proper suit, action,
proceedings or remedy or operate as a waiver of the right to receive any and all
amounts owing by Agent to or on behalf of Owner hereunder; it being agreed that,
after the service of notice to terminate or cancel this Agreement, and the
expiration of the time therein specified, if the default has not been cured in
the meantime, or after the commencement of suit, action or summary proceedings
or of any other remedy, or after a final order, warrant or judgment for the
possession of any Unit Premises, Unit Improvements, Unit FF&E, or Unit, Owner
may demand, receive and collect any moneys payable hereunder, without in any
manner affecting such notice, proceedings, suit, action, order, warrant or
judgment; and any and all such moneys so collected shall be deemed to be
payments on account for the use, operation and occupation of the Unit Premises,
Unit Improvements, Unit FF&E, or Unit, or at the election of Owner, on account
of Agent's liability hereunder.
After any Event of Default, Agent shall be liable for, and Owner may
recover from Agent, (i) all of Owner's obligations, costs and expenses incurred
in connection with its obligations under this Agreement and for which Owner may
demand reimbursement pursuant to subsection 9.5 hereof, (ii) all amounts payable
pursuant to subsection 11.4 and Section 12 hereof and (iii) in addition, all
losses, damages (but not consequential damages), costs and expenses (including,
without limitation, attorneys' fees and expenses, commissions, filing fees and
sales or transfer taxes) sustained by Owner by reason of such Event of Default
and the exercise of Owner's remedies with respect thereto, including, in the
event of a sale by Owner of any Unit Premises, Unit Improvements, Unit FF&E or
Unit pursuant to this subsection 11.2, all costs and expenses associated with
such sale. The amounts payable in clauses (i) through (iii) above are
hereinafter sometimes referred to as the "Accrued Default Obligations".
After an Event of Default, Owner may sell its interest in any Unit
Premises, Unit Improvements, Unit FF&E, and Unit upon any terms that Owner deems
satisfactory, free of any rights of Agent or any Person claiming through or
under Agent. In the event of any such sale, in addition to the Accrued Default
Obligations, Owner shall be entitled to recover from Agent, as liquidated
damages, and not as a penalty, an amount equal to the Unit Acquisition Cost of
any Unit Premises, Unit Improvements, Unit FF&E or Unit so sold, minus the
proceeds of such sale received by Owner. Proceeds of sale received by Owner in
excess of the Unit Acquisition Cost of such Unit Premises, Unit Improvements,
Unit FF&E or Unit sold shall be credited against the Accrued Default Obligations
Agent is required to pay under this subsection 11.2. If such proceeds exceed
the Accrued Default Obligations, or, if Agent has paid all amounts required to
be paid under this subsection 11.2, such excess shall be paid by Owner to Agent.
As an alternative to any such sale, or if Agent converts any Unit Premises, Unit
Improvements, Unit FF&E or Unit after an Event of
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 36 -
Default, or if such Unit Premises, Unit Improvements, Unit FF&E or Unit is lost
or destroyed, in addition to the Accrued Default Obligations, Owner may cause
Agent to pay to Owner, and Agent shall pay to Owner, as liquidated damages and
not as a penalty, an amount equal to the Unit Acquisition Cost of such Unit
Premises, Unit Improvements, Unit FF&E or Unit. In the event Owner receives
payment pursuant to the previous sentence of this paragraph, Owner shall
transfer all of Owner's right, title and interest in and to the Unit Premises,
Unit Improvements, Unit FF&E and Unit to Agent.
In the event of a sale pursuant to this subsection 11.2, upon receipt
by Owner of the amounts payable hereunder, Owner shall transfer all of Owner's
right, title and interest in and to the Unit Premises, Unit Improvements, Unit
FF&E and Unit to Agent or a purchaser other than Agent, as the case may be.
No remedy referred to in this subsection 11.2 is intended to be
exclusive, but each shall be cumulative and in addition to any other remedy
referred to above or otherwise available to Owner at law or in equity, and the
exercise in whole or in part by Owner of any one or more of such remedies shall
not preclude the simultaneous or later exercise by Owner of any or all such
other remedies. No waiver by Owner of any Event of Default hereunder shall in
any way be, or be construed to be, a waiver of any future or subsequent Event of
Default.
With respect to the termination of this Agreement as to any Unit
Premises, Unit Improvements, Unit FF&E, or Unit as a result of an Event of
Default, Agent hereby waives service of any notice of intention to re-enter.
Agent hereby waives any and all rights to recover or regain possession of any
Unit Premises, Unit Improvements, Unit FF&E, or Unit or to reinstate this
Agreement as permitted or provided by or under any statute, law or decision now
or hereafter in force and effect.
11.3 EVENTS OF UNIT TERMINATION. The occurrence of any of the
following shall constitute an Event of Unit Termination with respect to a Unit,
except that an Event of Unit Termination applicable to all Units shall occur in
the case of (l) below:
(a) UNSATISFACTORY TITLE. If at any time title to any Unit Premises,
Unit Improvements or Unit is not reasonably satisfactory to Owner by reason
of any Lien, encumbrance, or other environmental defect (even though the
same may have existed at the time of any prior advance), except for
Permitted Liens, and such Lien, encumbrance or other defect is not corrected
within thirty (30) days after notice to Agent.
(b) DAMAGE OR DESTRUCTION. If any Unit Improvements are partially or
totally damaged or destroyed by fire or any other cause and the restoration
thereof
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 37 -
cannot reasonably be expected to be completed so that the Unit Improvements
will be completed on or before the applicable Unit Completion Date.
(c) CESSATION OF CONSTRUCTION. If there is any cessation of
construction of the Unit Improvements for any period after the date
construction shall commence in excess of thirty (30) successive calendar
days, unless the conditions of each of subparagraphs (1), (2), (3) and (4)
hereof shall have been satisfied:
(1) the cessation of construction shall have been caused by
Force Majeure Delay;
(2) Agent shall have made adequate provision, reasonably
acceptable to Owner, for the protection of materials stored on site and
for the protection of the Unit Improvements, to the extent then
constructed, against deterioration and against other loss or damage and
theft;
(3) Agent shall have furnished to Owner reasonably satisfactory
evidence that such cessation of construction will not (i) adversely
affect or jeopardize the rights of Agent under material agreements
relating to the construction or operation of the Unit Improvements or
(ii) materially increase the cost of construction of the Unit
Improvements; and
(4) from time to time upon Owner's reasonable request therefor
during any such cessation of construction, Agent shall furnish to Owner
reasonably satisfactory evidence that (notwithstanding such cessation
of construction) the completion of the Unit Improvements can be
accomplished on or before the respective Unit Completion Date and
within the Unit Budget.
(d) NONCONFORMING WORK. If the construction of the Unit Improvements,
or any part thereof, is made in a manner other than as herein provided and
Agent fails to correct such nonconforming work in a reasonably prompt and
satisfactory fashion after notice and demand by Owner, or if Agent shall
fail to correct promptly any structural defect in the Unit Improvements upon
demand of Owner.
(e) OTHER SECURITY AGREEMENTS. If (i) Agent executes any chattel
mortgage or other security agreement on any materials, fixtures or articles
of personal property used in the construction or operation of the Unit
Improvements or if any such materials, fixtures or articles are purchased
pursuant to any conditional sales contract or other security agreement or
otherwise so that the title thereto will not vest in Owner free from
encumbrance or (ii) any such materials, fixtures or articles are not in
accordance with the Unit Plans or (iii) Agent does not furnish to Owner upon
request the contracts, bills of sale, statements, receipted vouchers and
other agreements and
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 38 -
documents, or any of them, under which Owner claims title to such materials,
fixtures or articles.
(f) NON-COMPLIANCE WITH LEGAL REQUIREMENTS. If Agent fails to comply
with any Legal Requirement relating solely to such Unit Premises, Unit
Improvements, Unit FF&E or Unit.
(g) FAILURE TO COMPLETE. If as of the close of business on a Unit
Completion Date, the related Unit Improvements have not been completed as
herein provided, or if the Certificate of Substantial Completion and AFL
Unit Leasing Record have not been executed and delivered by the respective
Unit Completion Date, or if Owner shall reasonably determine during the
course of construction that the Unit Improvements cannot be completed by the
Unit Completion Date, subject to Force Majeure Delay.
(h) PERMITS. If Agent shall fail to obtain or be unable to obtain any
Permit, or if any Permit shall be revoked or otherwise cease to be in full
force and effect unless, if such revocation or cessation shall not be due to
Agent's negligence or willful misconduct, Agent shall have obtained
reinstatement or reissuance of such Permit within thirty (30) days after the
revocation or expiration thereof, or if such reinstatement or reissuance is
of a nature that it cannot be completely effected within thirty (30) days,
Agent shall have diligently commenced application for such reinstatement or
reissuance and shall thereafter be diligently proceeding to complete said
reinstatement or reissuance.
(i) DEFAULT UNDER GROUND LEASE. Agent shall default in the observance
or performance of any material term, covenant or condition of the Ground
Lease relating to such Unit Premises on the part of Owner, as tenant
thereunder, to be observed or performed, unless any such observance or
performance shall have been waived or not required by the landlord under
such Ground Lease, or if any one or more of the events referred to in such
Ground Lease shall occur which would cause such Ground Lease to terminate
without notice or action by the landlord thereunder or which would entitle
the landlord under such Ground Lease to terminate such Ground Lease and the
term thereof by the giving of notice to Owner without opportunity to cure,
as tenant thereunder, or if any Ground Lease shall be terminated or canceled
for any reason or under any circumstance whatsoever, or if any of the terms,
covenants or conditions of any Ground Lease shall in any manner be modified,
changed, supplemented, altered or amended in any material respect without
the consent of Owner and Assignee.
(j) TAKINGS. If the use, occupancy or title to any Unit is taken,
requisitioned or sold in, by or on account of actual or threatened eminent
domain proceedings or other action by any Person or authority having the
power of eminent
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 39 -
domain (such events collectively referred to as a "Taking") and such Taking
relates to all or a substantial portion of a Unit. Upon receipt of proceeds
from any award or sale made in connection with such Taking, so long as no
Event of Default or Potential Default has occurred and is continuing, and so
long as Agent has made all payments to Owner required under subsection 11.4
hereof, Owner shall remit to Agent the net amount of such proceeds remaining
after reimbursement for all costs and expenses (including, without
limitation, reasonable attorneys' fees) incurred by Owner in connection with
the negotiation and settlement of any proceedings related to such Taking.
If such proceeds are received prior to Agent making the payments required
under subsection 11.4 hereof, the net proceeds shall be applied to the
amount payable thereunder. A Taking shall be deemed "to affect a
substantial portion" of a Unit if after such Taking such Unit is, or will
be, unusable for Agent's ordinary business purposes.
(k) INSUFFICIENT AVAILABLE COMMITMENT. If Owner shall reasonably
determine that the Available Commitment is not, or will not be, sufficient
to allow Owner to make advances for completion of the Unit Improvements and
acquisition and installation of Unit FF&E in accordance with the Unit
Budget.
(l) FUNDAMENTAL CHANGE. If a "Change of Control Event" (as described
below) of the Guarantor shall occur. For purposes of this paragraph (l) of
subsection 11.3, a "Change of Control Event" shall occur on the earlier of
any date on which the Guarantor shall (i) announce its intention to
consummate, (ii) shall enter into an agreement to consummate or (iii) shall
consummate, any transaction which does or would, if consummated, violate
paragraph (b) of Section 26 of the Lease.
(m) MATERIAL ADVERSE CHANGE EVENT. If a "Material Adverse Change
Event" (as described below) shall occur. For purposes of this paragraph (m)
of subsection 11.3, a "Material Adverse Change Event" shall mean a change in
the condition (financial or otherwise) or business of the Guarantor which
could reasonably be expected to cause the Guarantor's Tangible Net Worth to
be reduced by 50% or more from that reflected in the Guarantor's most recent
audited financial statements delivered to the Lessor pursuant to paragraph
(b) of subsection 9.6 hereof, other than any such reduction caused by a
change in accounting principles mandated by the Financial Accounting
Standards Board, and excluding any write-off of intangibles, PROVIDED, that
it can be reasonably expected that the impairment which relates to the
write-off of such intangibles will be mitigated within two years.
11.4 OWNER'S RIGHTS UPON EVENT OF UNIT TERMINATION. If any Event of
Unit Termination with respect to a Unit shall occur, Owner shall have no further
obligation to make advances to Agent with respect to such Unit, and Owner may,
as liquidated damages and not as a penalty, require Agent to purchase such Unit
within fifteen (15) days after
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 40 -
notice by Owner at a price equal to the Unit Acquisition Cost for such Unit. At
the time of such sale, Agent shall be required to pay to Owner Owner's
obligations, costs, losses, damages, and expenses (including, without
limitation, reasonable attorneys' fees and expenses) sustained by Owner by
reason of such Event of Unit Termination and exercise of Owner's rights under
this subsection 11.4.
SECTION 12. INDEMNITIES
(a) Agent shall indemnify and hold harmless Owner, Merrill, Merrill
Lynch, Merrill Leasing, any Assignee, any successor or successors and any
Affiliate of each of them, and their respective officers, directors,
incorporators, shareholders, partners (managing general and limited, including,
without limitation, the managing general and limited partners of Owner),
employees, agents and servants (each of the foregoing an "Indemnified Person")
from and against all liabilities (including, without limitation, strict
liability in tort and environmental law), taxes, losses, obligations, claims
(including, without limitation, strict liability in tort), damages, penalties,
causes of action, suits, costs and expenses (including, without limitation,
reasonable attorneys' and accountants' fees and expenses) or judgments of any
nature relating to or in any way arising out of:
(i) The ordering, delivery, acquisition, purchase agreement for
the acquisition, construction, title on acquisition, rejection,
installation, possession, titling, retitling, registration,
reregistration, custody by Agent of title and registration documents,
ownership, use, non-use, misuse, financing (including without
limitation all obligations of Owner under or in respect of any interest
rate swap, cap, collar or other financial hedging arrangement and any
amounts payable by Owner under any such arrangement to reduce the
notional amount thereof by the amount of any prepayment of any
borrowing to which such interest rate swap, cap, collar or other
financial hedging arrangement relates), lease, sublease, operation,
transportation, repair, control or disposition of any Unit Premises,
Unit Improvements, item of Unit FF&E, or Unit, or the release of
hazardous substances on, under, to or from, or the generation or
transportation of hazardous substances to or from, any Unit Premises;
and
(ii) Any of the claims, liabilities, demands, fees, taxes,
violations of contract, or any other matter or situation described in
or contemplated by the indemnification provisions of subparagraphs (b),
(c), (d) and (e) of Section 11 of the Lease, except that this Agreement
shall substitute the terms "Owner" for "the Lessor", "Agent" for "the
Lessee", "this Agreement" for "this Lease", and shall substitute the
phrase "Unit Premises, Unit Improvements, Unit FF&E or Unit" for the
phrase "Property or Equipment."
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 41 -
(b) The indemnification required under this Section 12 shall be upon
the terms provided in the paragraphs of Section 11 of the Lease following
paragraph (d) thereof, except that this Agreement shall substitute the terms in
the same manner as described in subparagraph (a)(ii) above.
SECTION 13. LEASEHOLD INTERESTS
The provisions of Section 29 of the Lease shall govern each Ground
Lease hereunder, except this Agreement shall substitute the terms "Owner" for
"the Lessor", "Agent" for "the Lessee", "Unit Premises, Unit Improvements, Unit
FF&E and Unit" for "Parcel of Property" and "Section 13" for "Section 29".
SECTION 14. PURCHASES
In connection with, and as a condition to, the purchase of any Unit
Premises, Unit Improvements, Unit FF&E, or Unit pursuant hereto, (i) Agent shall
pay at the time of purchase, in addition to the Unit Acquisition Cost and all
other amounts payable by Agent under this Agreement, all transfer taxes,
transfer gains taxes, mortgage recording tax, if any, recording and filing fees
and all other similar taxes, fees (including, without limitation, brokerage
fees), expenses and closing costs (including reasonable attorneys' fees) in
connection with the conveyance of such Unit Premises, Unit Improvements, Unit
FF&E, or Unit to Agent and all other amounts owing hereunder, and (ii) when
Owner transfers title, such transfer shall be on an as-is, non-installment sale
basis, without warranty by, or recourse to, Owner, but free of any Lien created
pursuant to a Credit Agreement.
SECTION 15. OWNER'S RIGHT TO TERMINATE
(a) Owner shall have the right, upon written notice to Agent, to
terminate this Agreement with respect to each and every Unit Premises, Unit
Improvements, Unit FF&E, or Unit as of the date stipulated in such notice if,
(i) at any time, for any reason (other than an Event of Default by the Lessor
under a Credit Agreement (as therein defined), which has not been caused by or
resulted from an Event of Default under this Agreement or an Event of Default
(as defined in the Lease) under the Lease or by a breach by Agent of its
obligations under any agreement or document executed and delivered in connection
with this Agreement or the Lease), Commercial Paper cannot be issued by Owner
upon terms reasonably acceptable to Owner, Owner cannot arrange for bank
borrowings to finance or refinance its obligations hereunder with respect to
such Unit Premises, Unit Improvements, Unit FF&E or Unit upon terms reasonably
acceptable to Owner, and Owner may no longer make or continue borrowings under a
Credit Agreement sufficient to finance or refinance such obligations, (ii) at
any time, for any reason (other than an Event of Default by Owner under a Credit
Agreement (as therein defined) which has not been caused by or resulted from an
Event of Default under this Agreement or from a breach by Agent of its
obligations under
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 42 -
any agreement or document executed and delivered in connection with this
Agreement), a limited partner or partners of Owner cannot arrange for borrowings
from the bank or banks acting as lender under a Credit Agreement in an amount
equal to such limited partners' limited partnership interest or interests in
Owner or (iii) such bank or banks which shall act as lender to a limited partner
or partners of the Owner shall make a material change in the terms of any such
lending arrangement a condition precedent to the extension of such lending
arrangement without a corresponding change being effected under the Credit
Agreement to which such lender is a party.
(b) In the event of a termination with respect to any Unit Premises,
Unit Improvements, Unit FF&E, or Unit pursuant to paragraph (a) of this Section
15, Agent shall be required to purchase, on the date stipulated in the written
notice contemplated by paragraph (a) of this Section 15, such Unit or any Unit
Premises, Unit Improvements or Unit FF&E constituting a part of such Unit as
identified by Owner in such notice, for cash at its or their Unit Acquisition
Cost.
SECTION 16. PERMITTED CONTESTS
(a) Agent shall not be required, nor shall Owner have the right, to
pay, discharge or remove any tax, assessment, levy, fee, rent, charge, Lien or
encumbrance, or to comply or cause any Unit Premises, Unit Improvements, item of
Unit FF&E, or Unit to comply with any Legal Requirement applicable to any Unit
Premises, Unit Improvements, item of Unit FF&E, or Unit or the occupancy, use or
operation thereof, so long as no Event of Default exists under this Agreement,
and, in the opinion of Agent's counsel, Agent shall have reasonable grounds to
contest the existence, amount, applicability or validity thereof by appropriate
proceedings, which proceedings in the reasonable judgment of Owner, (i) shall
not involve any material danger that any Unit Premises, Unit Improvements, item
of Unit FF&E, or Unit would be subject to sale, forfeiture or loss, as a result
of failure to comply therewith, (ii) shall not affect the payment of any sums
due and payable hereunder or result in any such sums being payable to any Person
other than Owner or any Assignee, (iii) will not place Owner or any Assignee in
any danger of civil liability which is not adequately indemnified (Agent's
obligations under Section 12 of this Agreement shall be deemed to be adequate
indemnification if no Event of Default or Potential Default exists and if such
civil liability is reasonably likely to be less than $100,000 per Unit or
$500,000 with respect to all Units) or to any criminal liability, (iv) if
involving taxes, shall suspend the collection of the taxes, and (v) shall be
permitted under and be conducted in accordance with the provisions of any other
instrument to which Agent or any Unit Premises, Unit Improvements, item of Unit
FF&E, or Unit is subject and shall not constitute a default thereunder (the
"Permitted Contest"). Agent shall conduct all Permitted Contests in good faith
and with due diligence and shall promptly after the final determination
(including appeals) of any Permitted Contest, pay and discharge all amounts
which shall be determined to be payable therein. Owner shall
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 43 -
cooperate in good faith with Agent with respect to all Permitted Contests
conducted by Agent pursuant to this Section 16.
(b) In the event Owner deems, in its sole discretion, that its
interests under this Agreement or in any Unit Premises, Unit Improvements, item
of Unit FF&E or Unit are not adequately protected in connection with a Permitted
Contest brought by Agent under this Section 16, Agent shall give such reasonable
security, as may be demanded by Owner to insure payment of such tax, assessment,
levy, fee, rent, charge or Lien and compliance with any Legal Requirement and to
prevent any sale or forfeiture of any Unit Premises, Unit Improvements, item of
Unit FF&E, or Unit or any other amount due by reason of such nonpayment or
noncompliance. Agent hereby agrees that Owner may assign such security provided
by Agent to any Assignee.
(c) At least ten (10) days prior to the commencement of any Permitted
Contest, Agent shall notify Owner in writing thereof if the amount in contest
exceeds $100,000, and shall describe such proceeding in reasonable detail. In
the event that a taxing authority or subdivision thereof proposes an additional
assessment or levy of any tax for which Agent is obligated to reimburse Owner
under this Agreement, or in the event that Owner is notified of the commencement
of an audit or similar proceeding which could result in such an additional
assessment, then Owner shall in a timely manner notify Agent in writing of such
proposed levy or proceeding.
SECTION 17. SALE OR ASSIGNMENT BY OWNER
(a) Owner shall have the right to obtain equity and debt financing
for the acquisition and ownership of any Unit Premises, Unit Improvements, Unit
FF&E, and Unit by selling or assigning its right, title and interest in any or
all amounts due from Agent or any third Person under this Agreement; provided,
that any such sale or assignment shall be subject to the rights and interests of
Agent under this Agreement.
(b) Any Assignee shall, except as otherwise agreed by Owner and
Assignee, have all the rights, powers, privileges and remedies of Owner
hereunder, and Agent's obligations as between itself and such Assignee hereunder
shall not be subject to any claims or defense that Agent may have against Owner.
Upon written notice to Agent of any such assignment, Agent shall thereafter make
payments of any and all sums due hereunder to Assignee, to the extent specified
in such notice, and such payments shall discharge the obligation of Agent to
Owner hereunder to the extent of such payments. Anything contained herein to
the contrary notwithstanding, no Assignee shall be obligated to perform any
duty, covenant or condition required to be performed by Owner hereunder, and any
such duty, covenant or condition shall be and remain the sole obligation of
Owner.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 44 -
SECTION 18. GENERAL CONDITIONS
The following conditions shall be applicable throughout the term of
this Agreement:
18.1 SURVIVAL. All agreements, representations, and warranties, and
the obligation to pay Additional Rent (as defined in the Lease) shall survive
the expiration or other termination hereof.
18.2 NO WAIVERS. No advance hereunder shall constitute a waiver of
any of the conditions of Owner's obligation to make further advances nor, in the
event Agent is unable to satisfy any such condition, shall any waiver of such
condition have the effect of precluding Owner from thereafter declaring such
inability to be an Event of Default as herein provided. Any advance made by
Owner and any sums expended by Owner pursuant to this Agreement shall be deemed
to have been made pursuant to this Agreement, notwithstanding the existence of
an uncured Event of Default. No advance shall constitute a waiver of the right
of Owner to require compliance with the covenant contained in subsection 10.1
hereof with respect to any such defects or material departures from any Unit
Plans not theretofore discovered by or called to the attention of Owner. No
advance at a time when an Event of Default exists shall constitute a waiver of
any right or remedy of Owner existing by reason of such Event of Default,
including, without limitation, the right to refuse to make further advances.
18.3 OWNER AND ASSIGNEE SOLE BENEFICIARIES. All conditions of the
obligation of Owner to make advances hereunder are imposed solely and
exclusively for the benefit of Owner and Assignee and their assigns and no other
Person shall have standing to require satisfaction of such conditions in
accordance with their terms or be entitled to assume that Owner will refuse to
make advances in the absence of strict compliance with any or all thereof and no
other Person shall, under any circumstances, be deemed to be a beneficiary of
such conditions, any or all of which may be freely waived in whole or in part by
Owner, with the consent of Assignee, at any time if in its sole discretion, it
deems it advisable to do so. Inspections and approvals of any Unit Plans, Unit
Premises, Unit Improvements, Unit FF&E, and Unit and the workmanship and
materials used therein impose no responsibility or liability of any nature
whatsoever on Owner, and no Person shall, under any circumstances, be entitled
to rely upon such inspections and approvals by Owner for any reason. Owner's
sole obligation hereunder is to make the advances if and to the extent required
by this Agreement.
18.4 NO OFFSETS, ETC. The obligations of Agent to pay all amounts
payable pursuant to this Agreement and to purchase a Unit hereunder shall be
absolute and unconditional under any and all circumstances of any character, and
such amounts shall be paid without notice, demand, defense, setoff, deduction or
counterclaim and without abatement,
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 45 -
suspension, deferment, diminution or reduction of any kind whatsoever, except as
herein expressly otherwise provided. The obligation of Agent to lease or
sublease and pay Basic Rent (as defined in the Lease) for a Unit upon
Substantial Completion is without any warranty or representation, express or
implied, as to any matter whatsoever on the part of Owner or any Assignee or any
Affiliate of either, or anyone acting on behalf of any of them.
AGENT HAS SELECTED AND SHALL SELECT ALL UNIT PREMISES, UNIT IMPROVEMENTS,
UNITS AND ITEMS OF UNIT FF&E CONSTRUCTED, ACQUIRED OR ORDERED ON THE BASIS OF
ITS OWN JUDGMENT. NEITHER OWNER NOR ANY ASSIGNEE NOR ANY AFFILIATE OF EITHER,
NOR ANYONE ACTING ON BEHALF OF ANY OF THEM, MAKES ANY REPRESENTATION OR WARRANTY
OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, AS TO
THE SAFETY, TITLE, CONDITION, QUALITY, QUANTITY, FITNESS FOR USE,
MERCHANTABILITY, CONFORMITY TO SPECIFICATION, OR ANY OTHER CHARACTERISTIC, OF
ANY UNIT PREMISES, UNIT IMPROVEMENTS, UNIT, OR ITEM OF UNIT FF&E, OR AS TO
WHETHER ANY UNIT PREMISES, UNIT IMPROVEMENTS, UNIT, OR ITEM OF UNIT FF&E, OR THE
OWNERSHIP, USE, OCCUPANCY OR POSSESSION THEREOF COMPLIES WITH ANY LAWS, RULES,
REGULATIONS OR REQUIREMENTS OF ANY KIND.
AS BETWEEN OWNER AND AGENT, ANY ASSIGNEE OR ANY INDEMNIFIED PERSON, AGENT
ASSUMES ALL RISKS AND WAIVES ANY AND ALL DEFENSES, SET-OFFS, DEDUCTIONS,
COUNTERCLAIMS (OR OTHER RIGHTS), EXISTING OR FUTURE, TO ITS OBLIGATION TO PAY
ALL AMOUNTS PAYABLE HEREUNDER, INCLUDING, WITHOUT LIMITATION, ANY RELATING TO:
(A) THE SAFETY, TITLE, CONDITION, QUALITY, QUANTITY, FITNESS FOR USE,
MERCHANTABILITY, CONFORMITY TO SPECIFICATION, OR ANY OTHER QUALITY OR
CHARACTERISTIC OF ANY UNIT PREMISES, UNIT IMPROVEMENTS, UNIT, OR ITEM OF UNIT
FF&E, LATENT OR NOT;
(B) ANY SET-OFF, COUNTERCLAIM, RECOUPMENT, ABATEMENT, DEFENSE OR OTHER
RIGHT WHICH AGENT MAY HAVE AGAINST OWNER, ANY ASSIGNEE, OR ANY INDEMNIFIED
PERSON FOR ANY REASON WHATSOEVER ARISING OUT OF THIS OR ANY OTHER TRANSACTION OR
MATTER;
(C) ANY DEFECT IN TITLE OR OWNERSHIP OF ANY UNIT PREMISES, UNIT
IMPROVEMENTS, OR UNIT OR ANY TITLE ENCUMBRANCE NOW OR HEREAFTER EXISTING WITH
RESPECT TO THE UNIT PREMISES, UNIT IMPROVEMENTS, UNIT, OR ITEMS OF UNIT FF&E;
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 46 -
(D) ANY FAILURE OR DELAY IN DELIVERY OR ANY LOSS, THEFT OR DESTRUCTION
OF, OR DAMAGE TO, ANY UNIT PREMISES, UNIT IMPROVEMENTS, UNIT, OR ITEM OF UNIT
FF&E IN WHOLE OR IN PART, OR CESSATION OF THE USE OR POSSESSION OF ANY UNIT
PREMISES, UNIT IMPROVEMENTS, UNIT, OR ITEM OF UNIT FF&E BY AGENT FOR ANY REASON
WHATSOEVER AND OF WHATEVER DURATION, OR ANY CONDEMNATION, CONFISCATION,
REQUISITION, SEIZURE, PURCHASE, TAKING OR FORFEITURE OF ANY UNIT PREMISES, UNIT
IMPROVEMENTS, ITEM OF UNIT FF&E OR UNIT, IN WHOLE OR IN PART;
(E) ANY INABILITY OR ILLEGALITY WITH RESPECT TO THE USE, OWNERSHIP,
OCCUPANCY OR POSSESSION OF THE UNIT PREMISES, UNIT IMPROVEMENTS, UNIT, OR ITEMS
OF UNIT FF&E BY AGENT;
(F) ANY INSOLVENCY, BANKRUPTCY, REORGANIZATION OR SIMILAR PROCEEDING BY
OR AGAINST AGENT OR OWNER OR ANY ASSIGNEE;
(G) ANY FAILURE TO OBTAIN, OR EXPIRATION, SUSPENSION OR OTHER TERMINATION
OF, OR INTERRUPTION TO, ANY REQUIRED LICENSES, PERMITS, CONSENTS,
AUTHORIZATIONS, APPROVALS OR OTHER LEGAL REQUIREMENTS;
(H) THE INVALIDITY OR UNENFORCEABILITY OF THIS AGREEMENT OR ANY OTHER
INFIRMITY HEREIN OR ANY LACK OF POWER OR AUTHORITY OF OWNER OR AGENT TO ENTER
INTO THIS AGREEMENT; OR
(I) ANY OTHER CIRCUMSTANCES OR HAPPENING WHATSOEVER, WHETHER OR NOT
SIMILAR TO ANY OF THE FOREGOING.
AGENT HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY AND
ALL RIGHTS WHICH IT MAY NOW HAVE OR WHICH AT ANY TIME HEREAFTER MAY BE CONFERRED
UPON IT, BY STATUTE OR OTHERWISE, TO TERMINATE, CANCEL, QUIT, RESCIND OR
SURRENDER THIS AGREEMENT EXCEPT IN ACCORDANCE WITH THE EXPRESS TERMS HEREOF.
The making of payments under this Agreement by Agent shall not be deemed
to be a waiver of any claim or claims that Agent may assert against Owner or any
other Person. Owner agrees to repay Agent amounts paid to Owner to the extent
such payments were in error and are not required by any of the terms and
provisions of this Agreement.
18.5 NO RECOURSE. Owner's obligations hereunder are intended to be
the obligations of the limited partnership and of the corporations which are the
managing general
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 47 -
partner or general partner thereof only and no recourse for the payment of any
amount due under this Agreement or the Construction Documents, or for any claim
based thereon or otherwise in respect thereof, shall be had against any limited
partner of Owner or any incorporator, shareholder, officer, director or
Affiliate, as such, past, present or future, of such corporate managing general
partner or general partner or of any corporate limited partner or of any
successor corporation to such corporate managing general partner or general
partner or any corporate limited partner of Owner, or against any direct or
indirect parent corporation of such corporate managing general partner or
general partner or of any limited partner of Owner or any other subsidiary or
Affiliate or any such direct or indirect parent corporation or any incorporator,
shareholder, officer or director, as such, past, present or future, of any such
parent or other subsidiary or Affiliate, it being understood that Owner is a
limited partnership formed for the purpose of the transactions involved in and
relating to this Agreement, the Lease and the Construction Documents on the
express understanding aforesaid. Nothing contained in this subsection 18.5
shall be construed to limit the exercise or enforcement, in accordance with the
terms of this Agreement, the Lease and the Construction Documents and any other
documents referred to herein, of rights and remedies against the limited
partnership or the managing corporate general partner or general partner of
Owner or the assets of the limited partnership or the corporate managing general
partner or general partner of Owner.
18.6 NOTICES.
(a) All notices, offers, acceptances, approvals, waivers, requests,
demands and other communications hereunder or under any other instrument,
certificate or other document delivered in connection with the transactions
described herein shall be in writing, shall be addressed as provided below and
shall be considered as properly given (i) if delivered in person, (ii) if sent
by express courier service (including, without limitation, Federal Express,
Emery, DHL, Airborne Express, and other similar express delivery services),
(iii) in the event overnight delivery services are not readily available, if
mailed by international airmail, postage prepaid, registered or certified with
return receipt requested, or (iv) if sent by telecopy and confirmed; provided,
that in the case of a notice by telecopy, the sender shall in addition confirm
such notice by writing sent in the manner specified in clauses (i), (ii) or
(iii) of paragraph (a) of this subsection 18.6. All notices shall be effective
upon receipt by the addressee; provided, however, that if any notice is tendered
to an addressee and the delivery thereof is refused by such addressee, such
notice shall be effective upon such tender. For the purposes of notice, the
addresses of the parties shall be as set forth below; provided, however, that
any party shall have the right to change its address for
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 48 -
notice hereunder to any other location by giving written notice to the other
pain the manner set forth herein. The initial addresses of the parties hereto
are as follows:
If to Owner:
Flatirons Funding, Limited Partnership
c/o ML Leasing Equipment Corp.
Project and Lease Finance Group
North Tower - 27th Floor
World Financial Center
250 Vesey Street
New York, New York 10281-1327
Attention: Jean M. Tomaselli
Telephone: (212) 449-7925
Telecopy: (212) 449-2854
With a copy of all notices under this subsection 18.6 to be simultaneously
given, delivered, or served to Martin J. McInerney at the following address:
ML Leasing Equipment Corp.
Controller's Office
World Financial Center
South Tower - 14th Floor
225 Liberty Street
New York, New York 10080-6114
If to Agent:
Electronic Arts Redwood, Inc.
1450 Fashion Island Boulevard
San Mateo, California 94404
Attention: Ruth Kennedy
Secretary
Telephone: 415-571-6375
Telecopy: 415-513-7552
With a copy of all notices under this subsection 18.6 to any Assignee at such
address as such Assignee may specify by written notice to Owner and Agent.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 49 -
(b) Owner shall within five (5) Business Days give to Agent a copy of
all notices received by Owner pursuant to any Credit Agreement and any other
notices received with respect to any Unit Premises, Unit Improvements, item of
Unit FF&E, or Unit.
18.7 MODIFICATIONS. Neither this Agreement nor any provision hereof
may be changed, waived or terminated, orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver or
termination is sought.
18.8 RIGHTS CUMULATIVE. All rights, powers and remedies herein given
to Owner are cumulative and not alternative, and are in addition to all statutes
or rules of law; any forbearance or delay by Owner in exercising the same shall
not be deemed to be a waiver thereof, and the exercise of any right or partial
exercise thereof shall not preclude the further exercise thereof, and the same
shall continue in full force and effect until specifically waived by an
instrument in writing executed by Owner. All representations and covenants by
Agent shall survive the making of the advances, and the provisions hereof shall
be binding upon and inure to the benefit of the respective successors and
permitted assigns, if any, of the parties hereto. Agent may not, however,
assign its rights or obligations as agent hereunder.
18.9 GOVERNING LAW. THIS AGREEMENT HAS BEEN EXECUTED AND DELIVERED IN
THE STATE OF NEW YORK. AGENT AND OWNER AGREE THAT, TO THE MAXIMUM EXTENT
PERMITTED BY THE LAWS OF THE STATE OF NEW YORK, THIS AGREEMENT, AND THE RIGHTS
AND DUTIES OF AGENT AND OWNER HEREUNDER, SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT
LIMITATION SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW)
IN ALL RESPECTS, INCLUDING WITHOUT LIMITATION IN RESPECT OF ALL MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE. AGENT HEREBY IRREVOCABLY SUBMITS, FOR
ITSELF AND ITS PROPERTIES, TO THE JURISDICTION OF THE UNITED STATES DISTRICT
COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND THE SUPREME COURT OF THE STATE
OF NEW YORK IN THE COUNTY OF NEW YORK IN ANY ACTION, SUIT OR PROCEEDING BROUGHT
AGAINST IT AND RELATED TO OR IN CONNECTION WITH THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY, AND TO THE EXTENT PERMITTED BY APPLICABLE LAW,
AGENT HEREBY WAIVES AND AGREES NOT TO ASSERT BY WAY OF MOTION, AS A DEFENSE OR
OTHERWISE IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT
PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT THE SUIT, ACTION OR
PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT,
ACTION OR PROCEEDING IS IMPROPER, OR THAT
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 50 -
THIS AGREEMENT OR ANY DOCUMENT OR ANY INSTRUMENT REFERRED TO HEREIN OR THE
SUBJECT MATTER HEREOF MAY NOT BE LITIGATED IN OR BY SUCH COURT. TO THE EXTENT
PERMITTED BY APPLICABLE LAW, AGENT AGREES NOT TO SEEK AND HEREBY WAIVES THE
RIGHT TO ANY REVIEW OF THE JUDGMENT OF ANY SUCH COURT BY ANY COURT OF ANY OTHER
NATION OR JURISDICTION WHICH MAY BE CALLED UPON TO GRANT AN ENFORCEMENT OF SUCH
JUDGMENT. AGENT AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY CERTIFIED
OR REGISTERED MAIL TO THE ADDRESS FOR NOTICES SET FORTH IN THIS AGREEMENT OR ANY
METHOD AUTHORIZED BY THE LAWS OF NEW YORK. OWNER AND AGENT EXPRESSLY WAIVE ALL
RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM RELATED TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. OWNER AND AGENT ACKNOWLEDGE
THAT THE PROVISIONS OF THIS SUBSECTION 18.9 HAVE BEEN BARGAINED FOR AND THAT
THEY HAVE BEEN REPRESENTED BY COUNSEL IN CONNECTION THEREWITH.
18.10 CONFIDENTIALITY. Agent agrees to treat information concerning
the structure and documentation of this Agreement and the Lease confidentially,
except to the extent that disclosure is required by law (in which circumstance
Agent will notify Owner prior to such disclosure of any information). The
foregoing constraint shall not include: (i) information that is now in the
public domain or subsequently enters the public domain without fault on the part
of Agent; (ii) information currently known to Agent from its own sources as
evidenced by its prior written records; and (iii) information that Agent
receives from a third party not under any obligation to keep such information
confidential.
18.11 CAPTIONS. The captions in this Agreement are for convenience of
reference only, and shall not be deemed to affect the meaning or construction of
any of the provisions hereof.
<PAGE>
THIS AGREEMENT FOR LEASE IS
CONFIDENTIAL AND PROPRIETARY
- 51 -
IN WITNESS WHEREOF, the parties have executed this Agreement the day
and year first above written.
Flatirons Funding, Limited Partnership by
Flatirons Capital, Inc., its Managing
General Partner
By _________________________
Name:
Title:
Electronic Arts Redwood, Inc.
By _________________________
Name:
Title:
<PAGE>
GUARANTY
from
ELECTRONIC ARTS INC.
to
FLATIRONS FUNDING, LIMITED PARTNERSHIP
Dated as of February 14, 1995
<PAGE>
GUARANTY
GUARANTY, dated as of February 14, 1995 (the "Guaranty"),
from ELECTRONIC ARTS INC., a Delaware corporation (the "Guarantor"), to
FLATIRONS FUNDING, LIMITED PARTNERSHIP, a Delaware limited partnership (the
"Lessor").
W I T N E S S E T H:
WHEREAS, the Guarantor wishes to induce the Lessor to enter
into a certain Agreement for Lease (the "Agreement for Lease") and a certain
Lease Agreement (the "Master Lease") both dated as of the date hereof and both
entered into with Electronic Arts Redwood, Inc., a Delaware corporation and a
wholly-owned subsidiary of the Guarantor (the "Guaranteed Subsidiary") (the
Agreement for Lease and the Master Lease, as each of them may be amended,
modified, supplemented, or extended from time to time, are collectively referred
to hereinafter as the "Guaranteed Agreements"); and
WHEREAS, the Lessor is unwilling to enter into the Guaranteed
Agreements with the Guaranteed Subsidiary unless the Guarantor enters into this
Guaranty.
NOW, THEREFORE, in order to induce the Lessor to enter into
the Guaranteed Agreements and to consummate the transactions contemplated
thereby, the Guarantor hereby agrees as follows:
1. GUARANTY. (a) The Guarantor unconditionally and irrevocably
guarantees to the Lessor the due and punctual performance of and compliance by
the Guaranteed Subsidiary with all obligations, covenants, warranties,
undertakings and conditions contained in or arising under the Guaranteed
Agreements, including, but not limited to, the full and punctual payment by the
Guaranteed Subsidiary, when due, whether at the stated due date, by acceleration
or otherwise, of any and all rent, obligations, liabilities, indebtedness and
other amounts of every kind arising out of the Guaranteed Agreements, all
amounts in respect of the indemnities provided for in the Guaranteed Agreements,
and all damages (whether provided for in the Guaranteed Agreements or otherwise
permitted by law) in respect of any failure or refusal by the Guaranteed
Subsidiary to make any such payment, howsoever created, arising or evidenced,
voluntary or involuntary, whether direct or indirect, absolute or contingent,
now or hereafter existing or owing to the Lessor (all the foregoing obligations
and undertakings are collectively referred to hereinafter as the "Obligations").
(b) This Guaranty is an absolute and unconditional guaranty
of performance and payment when due under the Guaranteed Agreements and not of
collection of any
<PAGE>
indebtedness contained in or arising under the Guaranteed Agreements. This
Guaranty is in no way conditioned upon any attempt to collect from the
Guaranteed Subsidiary or upon any other event or contingency, and shall be
binding upon and enforceable against the Guarantor without regard to the
validity or enforceability of the Guaranteed Agreements or of any term thereof.
If for any reason the Guaranteed Subsidiary shall fail or be unable duly and
punctually to pay any such amount when due under the Guaranteed Agreements, the
Guarantor will forthwith pay, if not already paid by the Guaranteed Subsidiary,
the same immediately upon demand.
(c) In case either of the Guaranteed Agreements shall be
terminated as a result of the rejection thereof by any trustee, receiver or
liquidating agent of the Guaranteed Subsidiary or any of its properties in any
bankruptcy, insolvency, reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar proceeding, the Guarantor's obligations
hereunder shall continue to the same extent as if such agreement had not been so
rejected. The Guarantor agrees that this Guaranty shall continue to be effective
or be reinstated, as the case may be, if at any time payment to the Lessor of
the Obligations or any part thereof is rescinded or must otherwise be returned
by the Lessor upon the insolvency, bankruptcy or reorganization of the
Guaranteed Subsidiary, or otherwise, as though such payment to the Lessor had
not been made.
(d) The Guarantor shall pay all reasonable costs, expenses
and damages incurred (including, without limitation, attorneys' fees and
disbursements) in connection with the enforcement of (i) the Obligations to the
extent that such costs, expenses and damages are not paid by the Guaranteed
Subsidiary and (ii) the obligations of the Guarantor under this Guaranty.
2. GUARANTY CONTINUING AND UNLIMITED. The obligations of the
Guarantor hereunder shall be continuing and unlimited, shall not be subject to
any counterclaim, set-off, deduction or defense (other than payment or
performance) based upon any claim the Guarantor may have against the Lessor or
the Guaranteed Subsidiary or any other Person, and shall remain in full force
and effect without regard to, and shall not be released, discharged or in any
way affected by any circumstance or condition (whether or not the Guarantor
shall have any knowledge or notice thereof) whatsoever which might constitute a
legal or equitable discharge or defense including, but not limited to (a) any
express or implied amendment or modification of or supplement to the Guaranteed
Agreements or any other agreement referred to in either thereof, or any other
instrument applicable to the Guaranteed Subsidiary or to the Obligations, or any
part thereof, or any assignment or transfer of any thereof; (b) any failure on
the part of the Guaranteed Subsidiary to perform or comply with the Guaranteed
Agreements or any failure of any other Person to perform or comply with any term
of the Guaranteed Agreements, or any other agreement as aforesaid; (c) any
waiver, consent, change, extension, indulgence or other action or any action or
inaction under or in respect of the Guaranteed Agreements, or any other
agreement as aforesaid, or this Guaranty, whether or not the Lessor, the
Guaranteed Subsidiary or the Guarantor has notice or knowledge of any of the
foregoing; (d) any bankruptcy, insolvency, reorganization, arrangement,
readjustment, composition, liquidation or similar proceeding with respect to the
Guarantor or the Guaranteed Subsidiary, or their respective properties or their
creditors, or any action taken by any trustee or receiver or by any court in any
such proceeding; (e) any furnishing or acceptance of additional security or any
release of any security (and the Guarantor authorizes the Lessor to furnish,
accept or release said security);
2
<PAGE>
(f) any limitation on the liability or Obligations of the Guaranteed Subsidiary
under the Guaranteed Agreements (other than any limitation expressly provided
for therein) or any termination, cancellation, frustration, invalidity or
unenforceability, in whole or in part, of the Guaranteed Agreements, or any term
of any thereof; (g) any lien, charge or encumbrance on or affecting the
Guarantor's or the Guaranteed Subsidiary's respective assets and properties; (h)
any act, omission or breach on the part of the Lessor under the Guaranteed
Agreements, or any other agreement at any time existing between the Lessor and
the Guaranteed Subsidiary or any other law, governmental regulation or other
agreement applicable to the Lessor or any Obligation; (i) any claim as a result
of any other dealings among the Lessor, the Guarantor or the Guaranteed
Subsidiary or any of them; (j) the assignment of the Guaranteed Agreements by
the Lessor to any other Person, or the assignment of this Guaranty by the Lessor
to any Person permitted under Section 6 of that certain Guarantor's Consent
dated as of the date hereof among the Guarantor, the Lessor and The Dai-Ichi
Kangyo Bank, Ltd., New York Branch; or (k) any change in the name of the Lessor,
the Guaranteed Subsidiary or any other person referred to herein.
The unconditional obligations of the Guarantor set forth herein
constitute the full recourse obligations of the Guarantor enforceable against it
to the full extent of all of its present and future income, assets and
properties.
3. WAIVER. The Guarantor unconditionally waives: (a) notice of any
of the matters referred to in Section 2 hereof; (b) all notices which may be
required by statute, rule of law or otherwise to preserve any rights against the
Guarantor hereunder, including, without limitation, notice of the acceptance of
this Guaranty, or the creation, renewal, extension, modification or accrual of
the Obligations or notice of any other matters relating thereto, any
presentment, demand, notice of dishonor, protest, nonpayment of any damages or
other amounts payable under the Guaranteed Agreements; (c) any requirement for
the enforcement, assertion or exercise of any right, remedy, power or privilege
under or in respect of the Guaranteed Agreements, including, without limitation,
diligence in collection or protection of or realization upon the Obligations or
any part thereof or any collateral therefor; (d) any requirement of diligence;
(e) any requirement to mitigate the damages resulting from a default by the
Guaranteed Subsidiary under the Guaranteed Agreements; (f) the occurrence of
every other condition precedent to which the Guarantor or the Guaranteed
Subsidiary may otherwise be entitled; and (g) the right to require the Lessor to
proceed against the Guaranteed Subsidiary or any other Person liable on the
Obligations, to proceed against or exhaust any security held from the Guaranteed
Subsidiary or any other Person, or to pursue any other remedy in the Lessor's
power whatsoever, and the Guarantor waives the right to have the property of the
Guaranteed Subsidiary first applied to the discharge of the Obligations.
The Lessor may, at its election, exercise any right or remedy it may
have against the Guaranteed Subsidiary or any security held by the Lessor,
including, without limitation, the right to foreclose upon any such security by
judicial or nonjudicial sale, without affecting or impairing in any way the
liability of the Guarantor hereunder, except to the extent the Obligations have
been paid, and the Guarantor waives any defense arising out of the absence,
impairment or loss of any right of reimbursement, contribution or subrogation or
any other right or remedy of the Guarantor against the Guaranteed Subsidiary or
any such security, whether resulting from such election by the Lessor or
otherwise. The Guarantor understands that the
3
<PAGE>
liability of the Guaranteed Subsidiary to the Lessor for the Obligations may be
secured by real property and that the Guarantor shall be liable for the full
amount of its liability hereunder notwithstanding foreclosure on such real
property by trustee sale or any other reason impairing the Guarantor's right to
proceed against the Guaranteed Subsidiary. Guarantor waives all rights and
defenses arising out of an election of remedies by the creditor (Lessor), even
though that election of remedies, such as a nonjudicial foreclosure with respect
to security for a guaranteed obligation, has destroyed the Guarantor's rights of
subrogation and reimbursement against the principal (Guaranteed Subsidiary) by
the operation of Section 580d of the California Code of Civil Procedure or
otherwise. The Guarantor waives any defense arising by reason of any disability
or other defense of the Guaranteed Subsidiary or by reason of the cessation from
any cause whatsoever of the liability, either in whole or in part, of the
Guaranteed Subsidiary to the Lessor for the Obligations. The Guarantor hereby
waives, to the fullest extent permitted by law, all rights and benefits under
section 2809 of the California Civil Code purporting to reduce a guarantor's
obligations in proportion to the principal obligation, all rights and benefits
under section 580a of the California Code of Civil Procedure governing
determination of fair market value following the exercise of power of sale, all
rights and benefits under section 580b of the California Code of Civil Procedure
stating that no deficiency may be recovered on a real property purchase money
obligation and all rights and benefits under section 580d of the California Code
of Civil Procedure stating that no deficiency may be recovered on a note secured
by a deed of trust on real property in case such real property is sold under the
power of sale contained in such deed of trust, and all rights and benefits under
section 726 of the California Code of Civil Procedure and any and all similar
laws now in effect or hereafter enacted in the State of California regarding the
procedures to be followed by a creditor with real property security and/or
limiting the right of such a creditor to a deficiency judgment, including,
without limitation, the California law now in effect stating that the Lessor
must first proceed against any real property collateral before commencing an
action to collect the Obligations, if such sections, or any of them, have any
application hereto or any application to the Guarantor. The Guarantor expressly
waives any and all benefits under the California Civil Code sections 2808, 2810,
2819, 2821, 2825, 2839, 2845 through 2850, 2854 and 2855.
The Guarantor understands that the Lessor's exercise of certain rights
and remedies contained in the Guaranteed Agreements may affect or eliminate the
Guarantor's rights of subrogation against the Guaranteed Subsidiary and that the
Guarantor may therefore incur partially or totally nonreimbursable liability
hereunder; nevertheless, the Guarantor hereby authorizes and empowers the
Lessor, its successors, endorsees and/or assignees, to exercise in its or their
sole discretion, any rights and remedies, or any combination thereof, which may
then be available, it being the purpose and intent of the Guarantor that its
obligations hereunder shall be absolute, independent and unconditional under any
and all circumstances.
The Guarantor assumes the responsibility for being and keeping
informed of the financial condition of the Guaranteed Subsidiary and of all
other circumstances bearing upon the risk of nonpayment of the Obligations and
agrees that the Lessor shall not have any duty to advise the Guarantor of
information regarding any condition or circumstance or any change in such
condition or circumstance. The Guarantor acknowledges that the Lessor has not
made any representation to the Guarantor concerning the financial condition of
the Guaranteed Subsidiary.
4
<PAGE>
4. REPRESENTATIONS AND WARRANTIES OF THE GUARANTOR. The Guarantor
represents and warrants to the Lessor that:
(a) CORPORATE EXISTENCE. The Guarantor (i) is duly organized, validly
existing and in good standing under the laws of the State of Delaware, (ii) has
the corporate power, authority and legal right to own or operate its properties
or to lease the properties it operates and to conduct the business in which it
is currently engaged and (iii) is duly qualified as a foreign corporation and in
good standing under the laws of each jurisdiction where its ownership, lease or
operation of properties or the conduct of its business requires such
qualification, except where such failure to qualify would not have a material
adverse effect on the financial condition or business of Guarantor and its
subsidiaries, taken as a whole.
(b) CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The
Guarantor has the corporate power, authority and legal right to make, deliver
and perform this Guaranty and has taken all necessary corporate action to
authorize the execution, delivery and performance of this Guaranty. No
consent of any other Person (including, without limitation, stockholders and
creditors of the Guarantor), and no authorization of, notice to, or other act by
any governmental authority, agency or instrumentality is required in connection
with the execution, delivery, performance, validity or enforceability of this
Guaranty. This Guaranty has been duly executed and delivered on behalf of the
Guarantor and constitutes a legal, valid and binding obligation of the
Guarantor, enforceable against the Guarantor in accordance with its terms.
(c) NO LEGAL BAR. The execution, delivery and performance by
the Guarantor of this Guaranty will not violate any provision of any law or
regulation applicable to the Guarantor or of any award, order or degree
applicable to the Guarantor of any court, arbitrator or governmental authority,
or of the Certificate of Incorporation or By-Laws of the Guarantor, or of any
security issued by the Guarantor or of any material mortgage, indenture, lease,
contract or other agreement or undertaking to which the Guarantor is a party or
by which the Guarantor or any of its properties or assets may be bound.
(d) NO MATERIAL LITIGATION. There is no action, suit, proceeding or
investigation at law or in equity by or before any court, governmental body,
agency, commission or other tribunal now pending or, to the best knowledge of
Guarantor, threatened against or affecting the Guarantor or any of its property
or rights which questions the enforceability of this Guaranty or which, if
adversely determined, would have a material adverse impact on the financial
condition or business of the Guarantor and its subsidiaries, taken as a whole,
or which, if adversely determined, would materially impair the ability of the
Guarantor to perform its obligations hereunder.
(e) EMPLOYEE BENEFIT PLANS. Each Plan and, to the best knowledge of
the Guarantor, each Multiemployer Plan, has been administered in accordance with
its terms in all material respects and complies in all material respects with
all applicable requirements of law and regulations, and, to the extent
applicable, (i) no Reportable Event has occurred with respect to any Plan or, to
the best knowledge of the Guarantor, any Multiemployer Plan which would have a
materially adverse effect on the financial condition or business of the
Guarantor and its affiliates, taken as a whole; (ii) no steps have been taken to
terminate any Plan or to appoint a
5
<PAGE>
receiver to administer any Plan or, to the best knowledge of the Guarantor, to
terminate or appoint a receiver to administer any Multiemployer Plan, and
neither the Guarantor nor any of its affiliates has withdrawn from any
Multiemployer Plan or initiated steps to do so; (iii) there is no Unfunded
Vested Liability or withdrawal liability with respect to any Plan or, to the
best knowledge of the Guarantor, any Multiemployer Plan, that would have, in the
event of termination of such Plan or withdrawal from such Multiemployer Plan, a
materially adverse effect on the financial condition or business of the
Guarantor and its affiliates, taken as a whole; (iv) no contribution failure has
occurred with respect to any Plan sufficient to give rise to a lien under
Section 302(f) of the Employee Retirement Income Security Act of 1974, as
amended, and any regulations promulgated and rulings issued thereunder
("ERISA"); and (v) no condition exists or event or transaction has occurred with
respect to any Plan or, to the best knowledge of the Guarantor, any
Multiemployer Plan, which could reasonably be expected to result in the
incurrence by the Guarantor or any of its affiliates of any material liability,
fine or penalty. For purposes of this Guaranty: (A) Plan shall mean an "employee
pension benefit plan", as such term is defined in Section 3(2) of ERISA, which
is subject to Title IV of ERISA (other than a Multiemployer Plan) and to which
the Guarantor or any corporation, trade or business that is, at any relevant
time, required to be aggregated with the Guarantor, under Sections 414(b), (c),
(m) or (o) of the Internal Revenue Code of 1986, as amended, and any regulations
promulgated and rulings issued thereunder (the "Code") or Section 4001 of ERISA,
may have any liability, including any liability by reason of having been a
substantial employer within the meaning of Section 4063 of ERISA, at any time
during the preceding five years, or by reason of being deemed to be a
contributing sponsor under Section 4069 of ERISA; (B) Multiemployer Plan shall
mean a plan described in Section 3(37) of ERISA and to which the Guarantor or
any corporation, trade or business that is, at any relevant time, required to be
aggregated with the Guarantor, under Sections 414(b), (c), (m) or (o) or of the
Code or Section 4001 of ERISA may have any liability; (C) Reportable Event shall
mean a "reportable event" as defined in Section 4043 of ERISA and the
regulations issued thereunder; and (D) Unfunded Vested Liability shall mean,
relative to any Plan, at any time, the excess (if any) of (I) the present value
of all vested nonforfeitable benefits under such Plan over (II) the fair market
value of all Plan assets allocable to such benefits, all determined as of the
then most recent valuation date for such Plan, but only to the extent that such
excess represents a potential liability of the Guarantor or any affiliate to the
Pension Benefit Guaranty Corporation or any successor thereto (the "PBGC") or
the Plan under Title IV of ERISA. Neither the Guarantor nor any entity required
(at any relevant time) to be aggregated with the Guarantor under Section 414(b),
(c), (m) or (o) of the Code or Section 4001 of ERISA has ever sponsored or
maintained, had any obligation to contribute to, had liability under or has
otherwise been a party to, any (i) "employee pension benefit plan" (as such term
is defined in ERISA) subject to Section 412 of the Code, Part 3 of Subtitle B of
Title I of ERISA or Title IV of ERISA, or (ii) a "welfare plan" (as such term is
defined ERISA) that provides for continuing benefits or coverage for any
participant or beneficiary of a participant after such participant's termination
of employment except to the extent required by applicable law.
(f) GUARANTEED SUBSIDIARY. The Guarantor owns and will continue to
own, directly or indirectly, not less than all of the issued and outstanding
shares of capital stock of the Guaranteed Subsidiary. All such shares have been
validly issued, are fully paid and non-assessable and are free and clear of any
liens or encumbrances.
6
<PAGE>
(g) TAXES. The Guarantor and each of its subsidiaries has filed all
federal and other income tax returns and reports required by law to have been
filed by it and has paid all taxes and governmental charges thereby shown to be
owing, except any such taxes or charges which are being diligently contested in
good faith by appropriate proceedings and for which adequate reserves in
accordance with generally accepted accounting principles shall have been set
aside on its books.
(h) COMPLIANCE WITH LAWS. The Guarantor and each of its subsidiaries
is in compliance with all applicable laws, rules, regulations and orders of any
governmental authority (including, without limitation, all applicable laws,
rules, regulations and orders relating to environmental protection, the use and
disposal of hazardous substances and building and land use), except those the
non-compliance with which would not, either singly or in the aggregate,
materially adversely effect the financial condition or business of the Guarantor
and its subsidiaries taken as a whole or impair the ability of the Guarantor to
perform its obligations hereunder.
5. PAYMENTS. Each payment by the Guarantor to the Lessor under this
Guaranty shall be made by transferring the amount thereof to the Lessor or an
account designated by the Lessor in immediately available funds without set-off
or counterclaim. The making of any payments by the Guarantor hereunder shall not
constitute a waiver of any rights not waived pursuant hereto that the Guarantor
may have against the Lessor or the Guaranteed Subsidiary.
6. PARTIES. This Guaranty shall inure to the benefit of the Lessor
and its successors, assigns or transferees, and shall be binding upon the
Guarantor and its successors and assigns. The Guarantor may not delegate any of
its duties under this Guaranty without the prior written consent of the Lessor
or any Person to whom the Lessor has assigned this Guaranty. Upon notice to the
Guarantor, the Lessor and its successors, assigns and transferees may assign its
or their rights and benefits under this Guaranty to any financial institution
providing financing to the Lessor in connection with the Guaranteed Agreements.
7. NOTICES. All notices, demands and other communications
between the Lessor and the Guarantor under this Guaranty shall be in writing and
shall be delivered or sent to the address or telecopier number shown below, or
to such other address or telecopier number as either party may by written notice
to the other have designated for such purpose. Any such notice, demand or other
communication shall not be effective until actually received.
If to the Lessor:
c/o ML Leasing Equipment Corp. -
Project and Lease Finance Group
World Financial Center
North Tower - 27th Floor
250 Vesey Street
New York, New York 10281-1327
Attention: Jean Tomaselli
7
<PAGE>
Telecopier: (212) 449-2854
Telephone: (212) 449-7925
With a copy of each such notice to be
simultaneously given, delivered or served to Gary
Carlin at the following address:
ML Leasing Equipment Corp.
Controllers Office
World Financial Center
South Tower - 8th Floor
225 Liberty Street
New York, New York 10080-6108
Attention: Marty McInerney
Telecopier:(212) 236-7584
Telephone: (212) 236-7203
If to the Guarantor:
Electronic Arts Inc.
1450 Fashion Island Boulevard
San Mateo, California 94404
Attention: Ruth Kennedy, Esq.
Vice President and General Counsel
Telecopier: (415) 513-7552
Telephone: (415) 571-6375
8. REMEDIES. The Guarantor stipulates that the remedies at law in
respect of any default or threatened default by the Guarantor in the performance
of or compliance with any of the terms of this Guaranty are not and will not be
adequate, and that any of such terms may be specifically enforced by a decree
for specific performance or by an injunction against violation of any such terms
or otherwise.
9. RIGHTS TO DEAL WITH THE GUARANTEED SUBSIDIARY. At any time and
from time to time, without terminating, affecting or impairing the validity of
this Guaranty or the obligations of the Guarantor hereunder, the Lessor may deal
with the Guaranteed Subsidiary in the same manner and as fully as if this
Guaranty did not exist and shall be entitled, among other things, to grant the
Guaranteed Subsidiary, without notice or demand and without affecting the
Guarantor's liability hereunder, such extension or extensions of time to
perform, renew, compromise, accelerate or otherwise change the time for payment
of or otherwise change the terms of payment or any part thereof contained in or
arising under the Guaranteed Agreements, or to waive any Obligation of the
Guaranteed Subsidiary to perform, any act or acts as the Lessor may deem
advisable.
10. SUBROGATION. The Guarantor irrevocably waives any and all rights
to which it may be entitled, by operation of law or otherwise, upon making any
payment hereunder to be subrogated to the rights of the payee against the
Guaranteed Subsidiary with respect to such
8
<PAGE>
payment or otherwise to be reimbursed, indemnified or exonerated by the
Guaranteed Subsidiary in respect thereof until the Obligations have been
fully,finally and indefeasibly paid in cash to the Lessor and the Guaranteed
Agreement and all obligations of the Lessor thereunder terminated.
11. GUARANTOR'S COVENANTS. The Guarantor hereby covenants and agrees
that until the Obligations and all obligations of the Guarantor under this
Guaranty have been paid or discharged in full:
(a) COMPLIANCE WITH LAW. The Guarantor shall comply, and shall
cause each of its subsidiaries to comply, in all material respects with all
applicable laws, rules, regulations and orders of any governmental authority
having jurisdiction over its or such subsidiary's business, as the case may be,
except (i) such noncompliance as would not materially adversely affect the
financial condition or business of the Guarantor and its subsidiaries, taken as
a whole,or (ii) such noncompliance as is being contested in good faith by
appropriate proceedings.
(b) PAYMENT OF TAXES. The Guarantor shall, and shall cause each of
its subsidiaries to, pay and discharge all taxes, assessments and governmental
charges or levies imposed upon it or such subsidiary or upon its or such
subsidiary's income or properties, as the case may be, prior to the date on
which penalties attach thereto, except to the extent that (i) any such tax,
assessment, charge or levy is being contested in good faith by appropriate
proceedings and adequate reserves therefor have been established by the
Guarantor or such subsidiary, as the case may be, or (ii) the failure so to pay
or discharge any such tax, assessment, charge or levy would not materially
adversely affect the financial condition or business of the Guarantor and its
subsidiaries, taken as a whole.
(c) MAINTENANCE OF INSURANCE. The Guarantor shall maintain, and
shall cause each of its subsidiaries to maintain, with financially sound and
reputable independent insurers, insurance with respect to its or such
subsidiary's properties and business, as the case may be, against loss or damage
of the kinds customarily insured against by entities engaged in the same or
similarly situated business, of such types and in such amounts as are
customarily carried under similar circumstances by such other entities.
(d) CONSOLIDATED TANGIBLE NET WORTH. The Guarantor shall maintain at
all times a consolidated tangible net worth of not less than the sum of (a)
$180,000,000 plus (b) 50% of the Guarantor's cumulative positive net income for
each of its fiscal quarters that shall have elapsed during the period from the
date of this Guaranty to the date such determination is being made, commencing
with the fiscal quarter ended June 30, 1995; PROVIDED, HOWEVER, that in no event
shall the Guarantor's consolidated tangible net worth at any time during the
periods set forth below be less than the amount set forth opposite such period:
9
<PAGE>
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
February 14, 1995 to March 30, 1996 $180,000,000
March 31, 1996 to March 30, 1997 $210,000,000
March 31, 1997 to March 30, 1998 $245,000,000
Thereafter $290,000,000
</TABLE>
For purposes of this Section 11(d): (i) consolidated tangible net worth shall
mean the total stockholder's equity of the Guarantor and its subsidiaries less
the amount of all intangible assets (excluding software acquired by the
Guarantor or any subsidiary which is capitalized in accordance with generally
accepted accounting principles) of the Guarantor and its subsidiaries, in each
case determined on a consolidated basis in accordance with generally accepted
accounting principles; and (ii) net income shall mean, for any period, the net
income (or loss) of the Guarantor and its subsidiaries for such period, LESS
(PLUS) the amount of any extraordinary or non-recurring gains (or losses) for
such period included in net income, determined in each case on a consolidated
basis in accordance with generally accepted accounting principles.
(e) FIXED CHARGE COVERAGE RATIO. The Guarantor shall not permit the
ratio of its consolidated EBITDAR to consolidated fixed charges as of the end of
any measurement period to be less than 3:1. For purposes of this Section 11(e):
(i) EBITDAR shall mean, with respect to the Guarantor and its subsidiaries for
any period, the sum of (a) the consolidated net income of the Guarantor and its
subsidiaries for such period before any extraordinary items and deduction of
interest expenses and income taxes, PLUS (b) depreciation and amortization
expenses of the Guarantor and its subsidiaries for such period to the extent
such expenses were deducted in computing the net income of the Guarantor and its
subsidiaries for such period, PLUS (c) the aggregate amount of all rentals paid
during such period by the Guarantor and its subsidiaries under any lease (other
than leases capitalized or required under generally accepted accounting
principles to be capitalized on the balance sheet of the Guarantor and its
subsidiaries) to the extent such rentals were deducted in computing the net
income of the Guarantor and its subsidiaries for such period, in each case
determined on a consolidated basis in accordance with generally accepted
accounting principles; (ii) consolidated fixed charges shall mean, with respect
to the Guarantor and its subsidiaries for any period, the sum (without
duplication) of (a) the aggregate amount of all interest payments due during
such period in respect of any Indebtedness (as defined in the Master Lease) or
other liabilities of the Guarantor and its subsidiaries (including, without
limitation, the portion of any rent payable under any lease capitalized or
required under generally accepted accounting principles to be capitalized on the
balance sheet of the Guarantor and its subsidiaries attributable to interest),
PLUS (b) the aggregate amount of all rentals paid by the Guarantor and its
subsidiaries during such period under any lease (other than leases capitalized
or required under generally accepted accounting principles to be capitalized on
the balance sheet of the Guarantor and its subsidiaries), in each case
determined on a consolidated basis in accordance with generally accepted
accounting principles; and (iii) measurement period shall mean, with respect to
any fiscal quarter of the Guarantor, the period of four fiscal quarters ending
on the last day of such fiscal quarter.
(f) TOTAL CONSOLIDATED DEBT. The Guarantor shall not at any time
permit its total consolidated debt to exceed 60% of its total consolidated
capital. As used in this Section 11(f): (i) total consolidated debt shall mean
the sum (without duplication) of (a) all Indebtedness
10
<PAGE>
(as defined in the Master Lease) of the Guarantor and its subsidiaries, PLUS (b)
the aggregate amount of the Obligations as reasonably determined by the
Guarantor in good faith, but in no event less than the total Adjusted
Acquisition Cost of all Property (as such terms are defined in the Guaranteed
Agreements) and (ii) total consolidated capital shall mean, with respect to the
Guarantor and its subsidiaries, the sum of (a) the total consolidated
stockholders equity of the Guarantor and its subsidiaries as reflected in
accordance with generally accepted accounting principles on its most recent
consolidated balance sheet, PLUS (b) total consolidated debt (as defined in
clause (i) above) of the Guarantor and its subsidiaries.
(g) DIVIDENDS. The Guarantor shall not, nor shall it permit any of
its subsidiaries to declare, pay or make any dividend on, or make any payment on
account of, or purchase, redeem, defease, return or otherwise acquire, or set
apart assets for a sinking or other analogous fund for the purchase, redemption,
defeasance, retirement or other acquisition of, any shares of any class of stock
of the Guarantor or any option or warrant thereon, whether now or hereafter
outstanding, or make any other distribution in respect thereof or on any warrant
or option thereon, whether directly or indirectly, whether in cash or property
or in obligations of the Guarantor or any subsidiary (all of the foregoing,
"Dividends"), except that, provided the Guarantor is not in default of any of
its obligations under this Guaranty, the Guarantor may (i) during any fiscal
year pay Dividends in an amount not in excess of 50% of the Guarantor's net
income (as defined in Section 11(d)) for such fiscal year, (ii) repurchase up to
two million shares of its common stock (after any adjustment for any stock
splits or combinations) pursuant to a share repurchase program authorized by
written consent of the Guarantor's Board of Directors on July 22, 1994 (it being
understood that amounts paid to repurchase shares pursuant to this clause (ii)
shall be excluded for purposes of determining the amount of any Dividends
permitted to be paid pursuant to clause (i)) and (iii) declare and pay Dividends
on its common stock provided such Dividends are payable solely in additional
shares of its common stock or warrants, options or rights to acquire additional
shares of its common stock or split-ups combinations of its shares of common
stock into more or less such shares, as the case may be).
(h) DELIVERY OF FINANCIAL STATEMENTS, COMPLIANCE CERTIFICATE AND
NOTICES. The Guarantor shall, for so long as this Guaranty shall remain in
effect, furnish to the Lessor and any Assignee each of following:
(i) as soon as available, but in any event within 120 days after
the end of each fiscal year of the Guarantor, a copy of the audited
consolidated balance sheet of the Guarantor as at the end of such year
and the related audited consolidated statements of income,
stockholders' investment and cash flows for such year, setting forth
in each case in comparative form the figures as of the end of and for
the previous year, all in reasonable detail, certified, without
qualification, by a firm of independent accountants of nationally
recognized standing acceptable to the Lessor;
(ii) as soon as available, but in any event not later than 60
days after the end of each of the first three fiscal quarters of each
fiscal year of the Guarantor, a copy of the unaudited consolidated
balance sheet of the Guarantor as at the end of each such fiscal
quarter and the related unaudited consolidated statements of income,
stockholders' investment and cash flows of
11
<PAGE>
the Guarantor for such quarter and the portion of the fiscal year
through such date, all in reasonable detail and setting forth in
comparative form the figures as of the end of and for the
corresponding period of the previous year, certified as to fairness of
presentation by the Chief Financial Officer, the Vice President of
Finance or the Controller of the Guarantor;
all such financial statements to be complete and correct in all
material respects (subject, in the case of interim statements, to
normal year-end audit adjustments) and to be prepared in reasonable
detail and in accordance with generally accepted accounting principles
(except, in the case of interim financial statements, that such
financial statements need not contain footnotes and shall be prepared
substantially in accordance with generally accepted accounting
principles) applied consistently throughout the periods reflected
therein (except as approved by the Guarantor's independent accountants
and disclosed therein);
(iii) concurrently with the delivery of the financial
statements referred to in clauses (i) and (ii), a certificate signed
by the Chief Financial Officer, the Vice President of Finance or the
Controller of the Guarantor setting forth computations in reasonable
detail demonstrating compliance with the financial covenants set forth
in Section 11(d), (e) and (f), together with a statement that, to the
best of such officer's knowledge, the Guarantor during the relevant
period has observed or performed all of its covenants and other
agreements hereunder, and satisfied every condition contained herein
to be observed, performed or satisfied by it, and that such officer
has obtained no knowledge of any default hereunder except as described
in such certificate (any such description to be in reasonable detail
and to include a description of any action to be taken with respect to
such default); and
(iv) promptly upon obtaining knowledge thereof, notice of the
occurrence of a Reportable Event under, or the institution of steps by
the Guarantor or any of its affiliates to withdraw from any
Multiemployer Plan, or the institution of any steps to terminate any
Plan or the failure to make a required contribution to any Plan, or
the taking of any action with respect to a Plan or, to the best of its
knowledge, any Multiemployer Plan, which could reasonably be expected
to result in the requirement that the Guarantor or any of its
affiliates furnish a bond or other security to the PBGC or such Plan
or Multiemployer Plan, or the occurrence of any event with respect to
any Plan or, to the best of its knowledge, any Multiemployer Plan,
which could reasonably be expected to result in the incurrence by the
Guarantor or any of its affiliates of any material liability, fine or
penalty, or the occurrence of any material increase in the contingent
liability of the Guarantor or any of its affiliates with respect to
any post-retirement "welfare plan" (as such term is defined in ERISA)
benefit, and in each case the action which the Guarantor proposes to
take with respect thereto.
12. SURVIVAL OF REPRESENTATIONS, WARRANTIES, ETC. All
representations, warranties, covenants and agreements made herein and in
statements or certificates delivered
12
<PAGE>
pursuant hereto shall survive any investigation or inspection made by or on
behalf of the Lessor and shall continue in full force and effect until all of
the obligations of the Guarantor under this Guaranty shall be fully performed in
accordance with the terms hereof, and until the payment in full of all sums
payable by the Guaranteed Subsidiary under the Guaranteed Agreements and the
performance in full of all obligations of the Guaranteed Subsidiary in
accordance with the terms and provisions of such agreements.
13. GOVERNING LAW AND CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL.
(A) THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
SUBSTANTIVE LAWS OF THE STATE OF NEW YORK. THE GUARANTOR HEREBY IRREVOCABLY
SUBMITS TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN
DISTRICT OF NEW YORK AND ANY COURT IN THE STATE OF NEW YORK LOCATED IN THE CITY
AND COUNTY OF NEW YORK IN ANY ACTION, SUIT OR PROCEEDING BROUGHT AGAINST IT AND
RELATED TO OR IN CONNECTION WITH THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED
THEREBY, AND TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE GUARANTOR HEREBY
WAIVES AND AGREES NOT TO ASSERT BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE IN
ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT
TO THE JURISDICTION OF SUCH COURTS, THAT THE SUIT, ACTION OR PROCEEDING IS
BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR
PROCEEDING IS IMPROPER, OR THAT THIS GUARANTY OR ANY DOCUMENT OR ANY INSTRUMENT
REFERRED TO HEREIN OR THE SUBJECT MATTER HEREOF MAY NOT BE LITIGATED IN OR BY
SUCH COURTS. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE GUARANTOR AGREES NOT
TO SEEK AND HEREBY WAIVES THE RIGHT TO ANY REVIEW OF THE JUDGMENT OF ANY SUCH
COURT BY ANY COURT OF ANY OTHER NATION OR JURISDICTION WHICH MAY BE CALLED UPON
TO GRANT AN ENFORCEMENT OF SUCH JUDGMENT. THE GUARANTOR AGREES THAT SERVICE OF
PROCESS MAY BE MADE UPON IT BY CERTIFIED OR REGISTERED MAIL TO THE ADDRESS FOR
NOTICES SET FORTH IN THIS GUARANTY OR ANY METHOD AUTHORIZED BY THE LAWS OF NEW
YORK. THE REFERENCES IN THIS GUARANTY TO CALIFORNIA STATUTES ARE PRECAUTIONARY
ONLY, AND NEITHER THE GUARANTOR NOR THE LESSOR DESIRES OR INTENDS THAT THIS
GUARANTY OR THE RIGHTS AND REMEDIES OF THE LESSOR HEREUNDER SHALL IN ANY RESPECT
BE GOVERNED BY THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK.
(b) THE PARTIES HERETO KNOWINGLY, VOLUNTARILY AND EXPRESSLY WAIVE ALL
RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ENFORCING OR
DEFENDING ANY RIGHTS ARISING OUT OF OR RELATING TO THIS GUARANTY OR THE
TRANSACTIONS CONTEMPLATED HEREBY. The Guarantor acknowledges that the provisions
of this Section 13(b) have been bargained for and that it has been represented
by counsel in connection therewith.
13
<PAGE>
14. MISCELLANEOUS. If any term of this Guaranty or any application
thereof shall be invalid or unenforceable, the remainder of this Guaranty and
any other application of such term shall not be affected thereby. Any term of
this Guaranty may be amended, waived, discharged or terminated only by an
instrument in writing signed by the Guarantor and the Lessor. The headings in
this Guaranty are for purposes of reference only and shall not limit or define
the meaning hereof. This Guaranty may be executed in any number of counterparts,
each of which shall be an original, but all of which together shall constitute
one instrument.
14
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Guaranty to be
executed and delivered as of the day and year first above written.
ELECTRONIC ARTS INC.,
as Guarantor
By: /s/ David L Carbone
---------------------------
Name: David L. Carbone
Title: Vice President, Finance
and Assistant Secretary
Acknowledged and Agreed:
FLATIRONS FUNDING, LIMITED PARTNERSHIP
By: Flatirons Capital, Inc.,
Managing General Partner
By: /s/ Teresa A Miles
--------------------
Name: Teresa A. Miles
Title: Vice President and
Assistant Secretary
15
<PAGE>
EXHIBIT 10.31
LEASE
THIS LEASE is made and entered into in the City of Louisville, Jefferson
County, Kentucky, on this 10th day of April, 1995, by and between DIXIE
WAREHOUSE & CARTAGE CO., a Kentucky corporation, of Louisville, Jefferson
County, Kentucky, doing business as Dixie Industry and Commerce Park
(hereinafter designated as "Lessor"), and Electronic Arts, Inc., a Delaware
corporation, 1450 Fashion Island Boulevard, San Mateo, California 94404-2064
(hereinafter designated as "Lessee").
WITNESSETH:
1. PREMISES: That for and in consideration of the rental, covenants, and
conditions hereinafter stipulated to be paid and performed by Lessee, Lessor
does hereby accept and lease unto Lessee and Lessee does hereby accept and lease
from Lessor 120,000 square feet, being Sections 501 through 510 of Building 5,
Dixie Industry and Commerce Park, 6708 Grade Lane, Louisville, Kentucky (the
"Premises").
2. TERM: To have and to hold the Premises for a term commencing
April 28, 1995 and ending at 12:00 p.m. on April 28, 1996, unless sooner
terminated as hereinafter provided.
3. IMPROVEMENTS BY LESSOR: Lessee agrees to construct certain office
facilities, at Lessee's sole expense, on the Premises generally as set forth on
EXHIBIT A ("Lessee's
<PAGE>
Improvements"). The exact nature of these improvements will be shown by plans
(The "Lessee Improvement Plans") to be prepared by Genco, Inc. or any other
general contractor chosen by Lessor and approved by Lessee ("Genco"), and which
Lessee Improvement Plans shall be approved and signed by both parties. The
Lessee Improvement Plans shall be attached hereto and made a part hereof as
EXHIBIT A1. Lessor agrees to construct, at its sole expense, certain additional
improvements (the "Lessor Improvements") on the Premises. The exact nature of
these Lessor Improvements will be shown on plans (the "Lessor Improvements") to
be prepared by Genco, and the Lessor Improvement Plans shall be signed by both
parties. The Lessor Improvement Plans shall be attached hereto and made a part
hereof as EXHIBIT B. Lessor shall cause the construction of the Lessor
Improvements to begin promptly upon the execution of this Lease and the
signature by both parties of the Lessor Improvement Plans. During the time of
construction of the Lessor Improvements, until May 15, 1995, Genco or such other
contractor as Lessor may designate, shall have continuos access to the Premises
and may be provided by Lessor with keys to the Premises, which shall be returned
on completion of the construction. Lessee releases Lessor, Genco, and any such
other contractor of any liability to Lessee for damage to Lessee's inventory
which may result during the
-2-
<PAGE>
construction of the Lessor Improvements, which Lessor Improvements shall be
completed no later than May 15, 1995.
4. RENT: Lessee covenants to pay to Lessor, or to such persons or
corporations as Lessor may from time to time designate in writing, a yearly rent
of $403,200.00, payable in monthly installments in advance of $33,600.00,
without previous demand therefor, on the first day of each and every calendar
month during the term of this Lease and commencing on April 28, 1995; provided,
however, Lessee shall pay during the one month period beginning April 28, 1995
and ending May 27, 1995, only such proportionate share of the monthly
installment as is equal to the percentage of the Premises delivered on May 1,
1995 without possession by others. However, such exclusion shall not apply to
any portion of the Premises occupied by Lessee's contractor or Genco, Inc. for
purposes of constructing either the Lessee Improvements or the Lessor
Improvements.
The rental payments are to be made to Dixie Warehouse & Cartage Co.
and mailed to Lessor at P.O. Box 36158, Louisville, Kentucky 40233. In the
event that any rental payment for any month is not made within 5 days of the
first day of the month in which such payment is due, the rent for the Premises
for that particular month shall be increased by $250, without notice from Lessor
to Lessee.
-3-
<PAGE>
5. USE: The Premises shall be continuously used and occupied by Lessee
throughout the term hereof only for the purposes of storage, repackaging and
distribution of software and other related merchandise and for general office
use.
(a) Lessee will comply with all lawful requirements of City, County,
State and other public authorities affecting the use and occupancy of the
Premises, regardless of whether notice of violation of said requirements shall
be served on Lessor or Lessee;
(b) Lessor shall have the right, but shall not be required, to cure
Lessee's default under such notice of violation referred to in paragraph 5(a)
above, upon at least 24 hours notice given by Lessor to any "Management
Employee" (as defined on EXHIBIT C attached hereto and made a part hereof, and
which EXHIBIT C may be amended from time to time by written notice by Lessee to
Lessor) of Lessee at the Premises, or upon notice given as provided in paragraph
23; in the event Lessor so cures such default, Lessor shall have the right to
charge the cost of such curing to Lessee as additional rent; notwithstanding the
foregoing, Lessor's right to cure such default shall apply only (i) in the
event of an emergency involving damage, or imminent danger of such damage, to
persons or property, or (ii) in circumstances where Lessor could be held liable
for violations of law; and
-4-
<PAGE>
(c) Lessee shall not permit persons to interfere with quiet and
peaceful possession of other tenants, permit such persons to be employed on the
Premises, or anyone to habituate therein.
6. COMMON AREAS: Lessor has constructed parking areas and drives which
are available to all tenants in common, their customers and invitees, and Lessor
agrees to repair and maintain said common areas. Lessee shall not obstruct the
walks, parking lot or areaways adjacent to the Premises. Lessee shall not leave
any truck or tractor trailer continuously parked either against the loading
docks or in the common areas devoted to parking, nor shall Lessee use for
storage or warehouse purposes any truck or tractor trailer parked against the
loading docks or in any common area devoted to parking, nor shall Lessee park or
permit any of its employees to park any boats or recreational vehicles in any
common area devoted to parking.
Lessor may promulgate other reasonable rules and regulations not
otherwise in contravention of the terms of this Lease, including, but not
limited to, reasonable rules governing security and fire prevention, and
reasonable rules concerning the use of the common areas, which shall be for the
good or welfare of all occupants of the property in the area controlled by
Lessor, and these rules shall bind Lessee as a covenant of this Lease.
-5-
<PAGE>
7. SIGNS: Lessor shall furnish one sign concerning Lessee's business on
the exterior wall of the Premises, of the type and character of, and in keeping
with other signs approved by Lessor for such purpose. Lessee agrees to maintain
such sign in a good state of repair and to save Lessor harmless from any loss,
cost or damage as a result of the erection, maintenance, existence and removal
of same. Upon the termination of this Lease, the sign shall be the property of
Lessor; provided, however, Lessor agrees to remove and dispose of the sign upon
the termination of this Lease. Other than the sign identified above, Lessee
shall not post, display, or use, or permit the posting, display or use by any
third party, of any other sign anywhere upon the Premises, the common areas, or
elsewhere in Dixie Industry and Commerce Park without the prior written consent
of Lessor.
8. TAXES: Lessor shall pay all property taxes and assessments levied
upon the Premises, including the land and improvements thereon, and shall pay
all property taxes on all common areas, including driveways, parking areas, and
rail spur track.
9. SUBORDINATION: At Lessor's option, this Lease shall be subordinated
to any existing mortgages covering the Premises, and any extension or renewal
thereof, or to any new mortgages which may be placed thereon from time to time.
Upon request, Lessee
-6-
<PAGE>
shall promptly execute whatever instruments may be required to effect such
subordination.
10. CARE OF PREMISES: Lessee shall not perform any acts or carry on any
practices which may injure any building on the Premises, commit waste to same,
or be a nuisance or menace to other tenants; and shall keep the Premises under
its control, including the adjacent area, clean and free from rubbish at all
times; and shall not store trash or garbage within the Premises; and shall
arrange for the regular removal of such trash and garbage. Lessee shall not
burn any trash or garbage in or about the Premises. Lessor represents that the
working elements of the Premises are, or will be at the time of Lessee's
occupancy thereof, in good working order. Lessee agrees that it will surrender
and deliver up the Premises in broom-clean condition at the end of the term
hereof, or earlier if this Lease shall be terminated as hereinafter provided, in
as good order and condition as at the time of Lessee's occupancy of same,
reasonable use and ordinary wear and tear thereof and accidents by fire
excepted, and shall at such time surrender all keys for the Premises to Lessor
at the place then fixed for payment of rent. At the date of surrender of the
Premises, representatives of Lessor and Lessee shall meet and inspect the
Premises together. Lessee agrees that, at such time, independent of any other
obligation of Lessee under this Lease, it shall reimburse
-7-
<PAGE>
Lessor for any necessary or appropriate repair or expenditure to put in good
working order any of the following items with respect to the Premises: (a)
fluorescent bulbs or ballasts; (b) metal halide warehouse lights; (c) any unit
heater, thermostat, or vent not in good working order; (d) any overhead door,
overhead door track, or related hardware, which is dented, damaged, punctured,
or otherwise not in good working order; (e) any plumbing fixture not in good
working order; and (f) dock levellers and dock seals.
11. CLEANUP AND TRASH REMOVAL: Lessee agrees to keep the truck loading
dock areas clean at all times and to have full trash containers promptly hauled
away. Trash containers are to be located only on the exterior of the Premises
and immediately adjacent to the south wall of the Premises in a gravel-surfaced
area. If Lessee fails to do so, Lessor may, upon 24 hours oral notice to any
Management Employee of Lessee, undertake such cleaning or hauling itself and
bill its cost to Lessee as additional rent on the next date fixed for the
payment of rent.
12. REPAIRS AND MAINTENANCE: Lessor shall keep the foundations, exterior
walls, roof, gutters and downspouts in good repair, except that Lessor shall not
be required to make any repairs which become necessary by reason of the
negligence of Lessee, its employees, agents, patrons, or suppliers' delivery
truck drivers or helpers. In all other respects the Premises and appurtenances,
including sanitary, systems and equipment, shall
-8-
<PAGE>
at all times be kept in good order, condition, and repair, serviced, replaced,
and maintained by Lessee. Lessee shall, at its own cost, replace any broken
glass, including plate glass, in the Premises. If Lessee fails to repair,
service and maintain according to its obligation herein, Lessor may so repair,
service and maintain for Lessee and bill the cost of such repair to Lessee as
additional rent on the next date fixed for the payment of rent.
13. ALTERATIONS AND IMPROVEMENTS: Lessee shall not make any changes,
improvements, alterations, or additions to the Premises without the prior
written consent of Lessor. Such changes, improvements, alterations, and
additions as are approved will revert to Lessor, or will be promptly removed in
their entirety from the Premises at the termination of the within Lease, and
the Premises restored to their original condition by Lessee prior to the
termination of this Lease, at the option of Lessor. Lessee agrees to indemnify
and hold harmless Lessor against any liens, costs, damages, or expenses that may
arise from such alterations or order of removal as provided above.
Notwithstanding the foregoing, Lessee shall be required to remove only such
improvements as are so designated on EXHIBITS A AND B.
14. CONDUCT OF BUSINESS: Lessee shall not use any advertising medium that
shall be a nuisance to Lessor or Lessor's other tenants, such as loud speakers,
phonographs or radio, in a
-9-
<PAGE>
manner to be heard outside of the Premises. Lessee shall not install any
exterior lighting, shades, or awnings or any exterior decorations, or paintings,
or build any fences; nor shall Lessee install any radio or television antennae,
loud speakers, sound amplifiers, or similar devices on the roof or exterior
walls of the building unless with the advance written consent of Lessor. Lessee
shall continuously conduct its business in a normal manner and so as not to be a
nuisance or menace or interference to other tenants, and so as not to impair in
any way the business reputation and merchandising standards of Dixie Warehouse &
Cartage Co.
15. INSURANCE. If, during the term hereof, Lessee by reason of its use
and occupancy of the Premises causes any increase in rates payable for insurance
which Lessor or Lessor's other tenants carry on the Premises, or upon the
building in which the Premises are located, then such additional premiums shall
be paid by Lessee as additional rent upon demand. Any insurance carried by or
for the benefit of Lessor or Lessee on the Premises shall be without recourse
against Lessee or Lessor for any liability thereunder, and Lessor and Lessee
shall not subrogate or assign to any insurance carrier, or reserve to Lessor or
Lessee, any rights or causes of action against Lessor or Lessee for any reason
whatsoever; provided, however, that such coverage is available at reasonable
cost.
-10-
<PAGE>
Lessee agrees that during the term of this Lease it shall hold Lessor
harmless and shall fully indemnify Lessor at all times against any and all loss,
claim, damage or liability arising out of or in any way connected with
accidents, injury sustained, or other like happenings in, upon or about the
building, appurtenances, and other areas demised to Lessee under this Lease.
However, such indemnification by Lessee shall not extend to damage caused by
Lessor's willful misconduct or gross negligence. In addition, Lessee shall have
delivered to Lessor a certificate or certificates of public liability insurance
in the amount of $1,000,000 combined single limit coverage bodily injury and
property damage. Lessee shall maintain workers' compensation coverage on its
employees.
16. ASSIGNMENT OR SUBLETTING: Lessee shall not sell, assign, mortgage,
pledge, sublease, or in any manner transfer this Lease or any estate or interest
therein, nor rent the Premises or any part or parts thereof, nor grant any
license or concessions therein, without the previous written consent of Lessor
in each instance; provided, however, Lessor agrees that Lessee may sublease
40,000 square feet of the Premises (the "Subleased Space") to Extron, which
Subleased Space shall be used for the sole purpose of receiving, assembling and
shipping software components. Lessor shall not unreasonably withhold such
consent. Consent by Lessor to one assignment of this Lease or to
-11-
<PAGE>
one subletting of the Premises shall not be a waiver of Lessor's rights under
this paragraph as to subsequent assignment or subletting. Notwithstanding
consent, including, but not limited to Lessee's sublease to Extron, such
assignment or subletting shall not relieve Lessee of any obligation imposed on
it upon terms and conditions of the within Lease, and Lessee shall remain
primarily liable for rent for the balance of the term. Lessor's rights to sell,
assign, or otherwise transfer this Lease are and shall remain unqualified.
17. ACCESS TO PREMISES: Lessor reserves the right to enter upon the
Premises at all reasonable hours for the purpose of inspecting the same, or of
making repairs, additions, or alterations to the building in which the Premises
are located or to exhibit the Premises to prospective tenants, purchasers or
others. Notwithstanding the foregoing, Lessor agrees to coordinate any such
entry into the building on the Premises with Lessee's security personnel prior
to Lessor's arrival on the Premises and that Lessee's security personnel shall
remain with Lessor during any such entry by Lessor.
18. UTILITIES: Lessor shall pay all water and sewage charges for normal
restroom usage, and Lessee shall pay for all other water and sewage charges.
Lessee shall pay all charges for heat, electricity, and garbage disposal
services, and all other utilities used on or about the Premises. Lessee shall
at all
-12-
<PAGE>
times maintain sufficient heat in the Premises to prevent freezing and bursting
of the plumbing, water and sprinkler lines.
19. EMINENT DOMAIN: If the Premises be subjected to any eminent domain
proceedings, this Lease shall terminate if all of the Premises are taken or if
the portion taken is so extensive that in Lessee's reasonable judgment the
residue is wholly inadequate for Lessee's purposes, as set out in paragraph 5
hereof. If the taking be partial, and Lessee does not terminate, then Lessee's
rent shall be reduced in the proportion which the space taken bears to the space
originally leased. In such condemnation proceedings, Lessee may claim
compensation for the taking of any removable installations which by the terms of
this Lease Lessee would be permitted to remove at the expiration of this Lease,
but Lessee shall be entitled to no additional award (subject to Lessee's
entitlement, if any, to receive relocation benefits from the condemning agency),
it being agreed that all damages allocable to full fee simple ownership of the
entire Premises shall in any event be payable to Lessor.
20. FIRE CLAUSE: In case the Premises shall be so injured or damaged by
fire or other causes as to be rendered untenable, and so that necessary repairs
or rebuilding cannot be made within ninety (90) days, Lessor or Lessee may
terminate this Lease, and Lessee shall be allowed an abatement of rent from the
time the Premises were rendered untenable. If the damage
-13-
<PAGE>
is such that rebuilding and repairs can be completed within ninety (90) days or
if neither Lessor nor Lessee elects to terminate as hereinabove provided, Lessor
agrees to make such repairs with reasonable promptness and dispatch, and to
allow Lessee an abatement in rent for such time as the building remains
untenantable, and Lessee covenants and agrees that the terms of this Lease shall
not otherwise be affected.
21. PROHIBITION OF INVOLUNTARY ASSIGNMENT; BANKRUPTCY OR INSOLVENCY:
(a) Neither this Lease nor the leasehold estate of Lessee nor any
interest of Lessee hereunder in the Premises or in the building or improvements
thereon shall be subject to involuntary assignment, transfer or sale, or to
assignment, transfer or sale by operation of law in any manner whatsoever, and
any such attempt at involuntary assignment, transfer or sale shall be void and
of no effect.
(b) Without limiting the generality of paragraph 21(a), Lessee agrees
that in the event any proceedings are instituted in a court of competent
jurisdiction for the reorganization, liquidation or involuntary dissolution of
Lessee, or for its adjudication as a bankrupt or insolvent, or for the
appointment of a receiver of the property of Lessee and such proceedings are not
dismissed and any receiver, trustee or liquidator appointed therein discharged
within thirty (30) days
-14-
<PAGE>
after the institution of such proceedings, such action shall be deemed to
constitute a breach of this Lease by Lessee, and Lessor may at its election,
without notice or entry or other action of Lessor, terminate this Lease and also
all rights of Lessee under this Lease in and to the demised Premises and also
all rights of any persons claiming under Lessee.
22. REMEDIES: In addition to all other remedies provided by law, Lessor
may terminate the estate and term demised without further liability whatsoever
on its part by written notice to Lessee upon the happening of any one of the
following events, if the same are not remedied within thirty (30) days after
transmittal of notice in accordance with the provisions of paragraph 23 hereof
to Lessee:
(a) The making by Lessee of an assignment of this Lease for the
benefit of its creditors;
(b) The levying of a writ of execution or attachment on or against
the property of Lessee on the Premises;
(c) The doing, or permitting to be done, by Lessee of any act which
creates a mechanic's lien or claim (a "Lien") therefor against the land or
building of which the Premises are a part; provided that Lessee shall have
thirty days after receipt of such notice to either pay or bond off the Lien;
(d) The failure of Lessee to perform any other of its covenants under
this Lease provided that if such failure cannot
-15-
<PAGE>
reasonably be remedied within thirty (30) days, Lessee shall not be at fault
hereunder if such remedy is begun within such thirty (30 days) and pursued
diligently thereafter;
(e) The "Abandonment" by Lessee of the Premises before the end of the
demised term. For purpose of this Lease, the term "Abandonment" shall mean the
failure of Lessee to (i) keep security personnel on the Premises during normal
business hours; (ii) maintain HVAC on the Premises at a minimum temperature
required to prevent damage to the Premises or any portion thereof ; and (iii)
keep secure all outside entrances to the Premises;
(f) The failure of Lessee to pay an installment of rent or additional
rent, or any part thereof within ten (10) days after due, in which event no
thirty (30) days notice is required, and Lessor may terminate the estate
immediately upon written notice to Lessee.
Upon termination of the estate Lessor may re-enter the Premises with
or without process of law using such force as may be necessary, expel all
persons and chattels therefrom, and thus repossess and enjoy the Premises as
Lessor's former estate; and Lessor may distrain for any rent that may be due on
any property belonging to Lessee, whether the same be exempt from execution and
distress by law or not; and Lessee covenants that in case of such termination it
will continue primarily liable for the
-16-
<PAGE>
payment of rent hereunder, and that it will indemnify Lessor against all loss of
rent which Lessor may incur by reason of such termination during the remainder
of the term, and Lessor may sue Lessee for the rent from time to time as it
accrues hereunder. Lessor shall not be liable in damages or otherwise by reason
of re-entry or termination of this Lease.
In the event of any breach hereunder by Lessee, Lessor may
immediately, or at any time thereafter, without notice, cure such breach for the
account and at the expense of Lessee. If Lessor at any time, by reason of such
breach, is compelled to pay, or elects to pay, any sum of money, or is compelled
to incur any expense, in instituting or prosecuting any action or proceeding to
enforce Lessor's rights hereunder, the sum or sums so paid by Lessor, with
interest thereon at the rate of twelve percent (12%) per annum from the date of
payment thereof, shall be deemed to be additional rent hereunder and shall be
due from Lessee to Lessor on the first day of the month following the payment of
such respective sums or expenses.
All rights and remedies of Lessor herein enumerated shall be
cumulative and none shall exclude any other right or remedy allowed by law, and
such rights and remedies may be exercised and enforced concurrently and whenever
and as often as occasion therefor arises.
-17-
<PAGE>
Should Lessor be in default under the terms of this Lease, Lessor
shall have reasonable and adequate time in which to cure the same after written
notice to Lessor by Lessee of such default.
23. NOTICES: Any notice required or permitted under this Lease must be in
writing and shall be deemed sufficiently given or served if sent by certified or
registered mail to Lessee at 1450 Fashion Boulevard, San Mateo, California
94404-2064 to the attention of Ms. Pam Samson, and to Lessor at the address then
fixed for the payment of rent, and either party may by like notice at any time
and from time to time designate different addresses to which notices shall be
sent. Notices given in accordance with these provisions shall be deemed
received when mailed.
24. GENERAL: Nothing contained in this Lease shall be deemed or construed
by the parties hereto or by any third party to create the relationship of
principal or agent or of partnership or of joint venture or of any association
between Lessor and Lessee, it being expressly understood and agreed that neither
any provision contained in this Lease nor any acts of the parties hereto shall
be deemed to create any relationship between Lessor and Lessee other than the
relationship of Lessor and Lessee. No waiver of any default of Lessee hereunder
shall be implied from any omission by Lessor to take any action on account
-18-
<PAGE>
of such default if such default persists or is repeated and no express waiver
shall affect any default other than the default specified in the express waiver,
and that only for the time and to the extent therein stated. One or more
waivers of any covenant, term or condition of this Lease by Lessor shall not be
construed as a waiver of a subsequent breach of the same covenant, term or
condition. The consent or approval by Lessor to or of any act by Lessee
requiring Lessor's consent or approval shall not be deemed to waive or render
unnecessary Lessor's consent or approval to or of any subsequent similar act by
Lessee. The invalidity or unenforceability of any provision hereof shall not
affect or impair any other provisions. The necessary grammatical changes
required to make the provisions of this Lease apply in the plural sense where
there is more than one Lessee and to either corporations, associations,
partnerships, or individuals, males or females, shall in all instances by
assumed as though in each case fully expressed. The laws of the State of
Kentucky shall govern the validity, performance and enforcement of this Lease.
The submission of this Lease for examination does not constitute a reservation
of or option for the Premises and this Lease becomes effective as a lease only
upon execution and delivery thereof by Lessor and by Lessee. The marginal
headings of the several paragraphs contained herein are for convenience
-19-
<PAGE>
only and do not define, limit or construe the contents of such paragraphs.
25. MODIFICATION: This Lease constitutes the whole agreement by and
between the parties hereto, and there are no terms, obligations, covenants,
provisions or conditions other than as contained and set forth in this Lease,
except Lessor's regulations referred to above. No modifications or variations
of this Lease and of the terms, provisions, covenants and conditions hereof
shall be deemed valid, unless reduced to writing and attached hereto as a part
hereof, signed by both parties hereto.
26. SUCCESSORS AND ASSIGNS: The terms, covenants and conditions hereof
shall be binding upon and inure to the successors in interest and assigns of the
parties hereto.
27. QUIET POSSESSION: If Lessee shall discharge the obligations and
comply with each and all of the covenants, conditions, terms and provisions of
this Lease to be kept, done, and performed by it, then Lessor shall provide and
Lessee shall have and enjoy, during the term of this Lease, the quiet possession
of the Premises, the building constructed thereon, as hereinafter provided,
together with all appurtenances thereto belonging, for the uses and purposes
hereinabove described.
28. HAZARDOUS MATERIALS; INDEMNITY: Lessee shall not cause or permit any
Hazardous Material(s), as hereinafter defined, to be brought upon, kept, used or
disposed in or about the Premises
-20-
<PAGE>
by Lessee, its agents, employees, contractors or invitees, but specifically
excluding Lessor (the "Responsible Parties"), without the prior written consent
of Lessor (which Lessor shall not unreasonably withhold provided that Lessee
demonstrates to Lessor's reasonable satisfaction that such Hazardous Material is
necessary or useful to Lessee's business and will be used, stored and disposed
of in accordance with all applicable laws, rules and regulations relating to
such materials). Should the Responsible Party violate the provisions of the
preceding sentence, or if the presence of Hazardous Materials on the Premises,
caused or permitted by the Responsible Party, results in contamination of the
Premises, or if the presence of Hazardous Material on the Premises otherwise
results in injury to persons or property, Lessee shall indemnify, defend and
hold Lessor harmless from any and all claims, judgments, or settlements of any
nature, including but not limited to, a claim for damages, penalties, fines,
costs, liabilities or losses (including, without limitation, diminution in value
of the Premises or other affected property, damages for the loss or restriction
on use of rentable or usable space of any amenity of the Premises, damages
arising from any adverse impact on marketing of space, and sums paid in
settlement of claims, attorneys' fees, consultant fees and expert fees) which
arise out of or in connection with Hazardous Materials on the Premises.
-21-
<PAGE>
This indemnification of Lessor by Lessee includes, without limitation, costs of
any clean-up, remedial, removal or restoration work, including, but not limited
to, soil and groundwater clean-up or remediation, required by any federal, state
or local governmental agency or political subdivision because of Hazardous
Material brought upon, kept, used or disposed in or about the Premises by the
Responsible Parties. Without limiting the foregoing, if the presence of any
Hazardous Material on the Premises caused or permitted by the Responsible
Parties results in any contamination of the Premises, Lessee shall promptly take
all actions at its sole expense as are necessary to return the Premises to the
condition existing prior to the introduction of any such Hazardous Material to
the Premises; provided that Lessor's approval of such actions shall first be
obtained, which approval shall not be unreasonably withheld, and provided that
such actions are in accord with all applicable laws. Notwithstanding any other
provision hereof, Lessee shall have no liability for any Hazardous Material, or
any clean-up costs in connection therewith, existing on the Premises prior to
the execution of this Lease. Lessee shall cause a Phase I environmental
assessment (the "Pre-Lease Assessment") to be conducted by an environmental
consulting firm of Lessee's choice (the "Environmental Consultant") at Lessee's
sole cost and expense (except that Lessor agrees to contribute $500.00 towards
-22-
<PAGE>
the cost of the Pre-Lease Assessment). Lessee shall also cause a second Phase I
environment assessment (the "Post-Lease Assessment") to be conducted by the
Environmental Consultant at the end of the Lease term at Lessee's sole cost and
expense. Lessee agrees that the results of the Pre-Lease Assessment and/or the
Post-Lease Assessment, absent other evidence provided by Lessee to Lessor, shall
not necessarily absolve Lessee from its liability to Lessor hereunder. Both the
Pre-Lease Assessment and the Post-Lease Assessment shall name both the Lessor
and Lessee as beneficiaries thereunder. Lessor represents and warrants to
Lessee that no underground storage tank ("UST") has been installed on the
property (the "Property") of which the Premises are a part during the
approximately thirty (30) years in which Lessor has owned the Property.
Furthermore, no UST, to the best of Lessor's knowledge, has ever been on the
Property, which Property was farmland prior to its acquisition by Lessor.
As used herein, the term Hazardous Material(s) means any toxic or
hazardous substance, material or waste which is or becomes regulated by any
local governmental authority, the Commonwealth of Kentucky or the United States
Government. The term "toxic or hazardous substances" includes, without
limitation, any material or substance which is (i) defined as a "hazardous
substance" or a "pollutant or contaminant" under KRS 224.01-400, (ii) petroleum,
(iii) asbestos, (iv) designated as a
-23-
<PAGE>
"hazardous substance" pursuant to Section 311 of the Federal Water Pollution
Control Act (33 U.S.C. 1321), (v) defined as a "hazardous waste" pursuant to
Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C.
6901 ET SEQ. (42 U.S.C. 6903), (vi) defined as a "hazardous substance" pursuant
to Section 101 of the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. 9601 ET SEQ. (42 U.S.C. 9601) or (vii) defined as a
"regulated substance" pursuant to Subchapter IX, Solid Waste Disposal Act
(Regulation of Underground Storage Tanks), 42 U.S.C. 6901 ET SEQ., (viii)
substances regulated by the Hazardous Material Transportation Act, 49 U.S.C.
1801 ET SEQ., and (ix) substances regulated under the Toxic Substances Control
Act, 15 U.S.C. 2601 ET SEQ.
This indemnification and hold harmless shall survive the termination
of this Lease for whatever reason and shall inure to the benefit of Lessor, its
heirs, successors and assigns.
29. OPTION TO RENEW. Lessor hereby grants to Lessee two options to renew
the within Lease (i) once (the "First Option") for a period of six (6) months,
commencing April 29, 1996 and ending October 28, 1996 (the "First Option Term");
and (ii) once (the "Second Option") for a period of six (6) months commencing
October 29, 1996 and ending April 28, 1997, both upon the same terms and
conditions as this Lease. Notice of the exercise of
-24-
<PAGE>
the First Option shall be in writing delivered to Lessor on or before three (3)
months prior to the expiration of the original one (1) year term hereof; and
notice of the exercise of the Second Option shall be in writing delivered to
Lessor on or before three (3) months prior to the expiration of the First Option
Term.
IN WITNESS WHEREOF, Lessor and Lessee have hereunto executed this Lease and
affixed their seals as of the day and year first above written.
LESSOR: DIXIE WAREHOUSE & CARTAGE CO.
By: /s/
-----------------------------------
Title: Chairman
--------------------------------
LESSEE: ELECTRONIC ARTS, INC.
By: /s/ James F. Healey
-----------------------------------
Title: VP, Operations
--------------------------------
-25-
<PAGE>
EXHIBIT A
ELECTRONIC ARTS TENANT IMPROVEMENTS* **
1) CD-ROM Clean Room
2) Demising Wall
3) Cabling/Elect.
4) Dock Leveler Elect.
5) A/C for Computer Room
6) Office Repairs & Extm.
7) Office Exit Steps
* Electronic Arts is to provide Dixie with a detailed account of the nature
and scope of these improvements within fourteen (14) calendar days from the date
of execution of the Lease Agreement. The Lease Agreement shall be subject to
the approval by both parties of the nature and scope of the improvements set
forth in Exhibits A and B.
** Dixie will handle Electronic Arts' tenant improvements except for
Cabling/Elect. (3) with a 10% handling fee on construction costs.
<PAGE>
EXHIBIT B
DIXIE TENANT IMPROVEMENTS*
1) Restroom
2) Handicapped Ramp
3) Air/Heat Office
4) Dock Leveler/Spr (2)
5) Entrance/Extron
6) Office Repair
* Dixie is to provide Electronic Arts with a detail account of the nature
and scope of these improvements within fourteen (14) calendar days from the date
of execution of the Lease Agreement. The Lease Agreement shall be subject to
the approval by both parties of the nature and scope of the improvements set
forth in Exhibits A and B.
<PAGE>
EXHIBIT C
James Healey
Vice President Operations
Electronic Arts Inc.
1450 Fashion Island Boulevard
San Mateo, California 9444-2064
-and-
Pamela Samson
Director of Operations
Electronic Arts Inc.
1450 Fashion Island Boulevard
San Mateo, California 94404-2064
<PAGE>
EXHIBIT 11.01
ELECTRONIC ARTS INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------------------------------
1995 1994 1993
------------------------------------------------
<S> <C> <C> <C>
Net Income $55,718,000 $44,737,000 $30,858,000
Weighted average number of outstanding
shares used in computation:
Preferred Stock -- -- --
Common Stock 50,264,483 49,131,087 47,089,262
Number of common stock equivalents as a
result of stock options outstanding using
the treasury stock method 1,965,468 3,087,802 2,835,608
---------- ---------- ----------
Total common stock and equivalents 52,229,951 52,218,889 49,924,870
---------- ---------- ----------
---------- ---------- ----------
Primary and fully diluted net income per
share $1.07 $0.86 $0.62
</TABLE>
<PAGE>
EXHIBIT 21.01
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Name in Jurisdiction
Corporate Articles Doing Business As of Incorporation
------------------ ----------------- ----------------
<S> <C> <C>
ORIGIN Systems, Inc. ORIGIN Systems, Inc. Texas
Electronic Arts, Proprietary Electronic Arts, Pty. Ltd. Commonwealth of Australia
Limited (formerly Entertainment (formerly Entertainment and
and Computer Proprietary, Limited) Computer Proprietary, Limited)
Electronic Arts (Canada) Inc. Electronic Arts (Canada) Inc. British Columbia, Canada
(formerly Distinctive Software, (formerly Distinctive Software,
Inc.) Inc.)
Electronic Arts, Limited Electronic Arts, Limited United Kingdom
Electronic Arts S.A. Electronic Arts S.A. France
Electronic Arts GmbH Electronic Arts GmbH Germany
Electronic Arts Victor Inc. Electronic Arts Victor, Inc. Japan
Electronic Arts Productions, Inc. Crocodile Productions Delaware
Electronic Arts Puerto Rico Inc. Electronic Arts Puerto Rico Inc. Delaware
Electronic Arts International Electronic Arts International California
Corporation Corporation
Electronic Arts Software S.A. Electronic Arts Software S.A. Spain
(formerly DROSoft) (formerly DROSoft)
Bullfrog Productions Ltd. Bullfrog Productions Ltd. United Kingdom
Kingsoft GmbH Kingsoft GmbH Germany
</TABLE>
<PAGE>
EXHIBIT 23.01
REPORT ON FINANCIAL STATEMENT SCHEDULE AND
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Electronic Arts, Inc.:
The audits referred to in our report dated April 21, 1995, included the related
financial statement schedule for each of the years in the three-year period
ended March 31, 1995, included in the Company's Annual Report on Form 10-K.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule 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.
We consent to the incorporation by reference in the Registration Statements
(Nos. 33-66836, 33-55212, 33-53302, 33-41955, and 33-82166) on Form S-8 of our
reports included herein.
KPMG Peat Marwick LLP
Palo Alto, California
June 28, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-01-1994
<PERIOD-END> MAR-31-1995
<CASH> 174,121
<SECURITIES> 10,725
<RECEIVABLES> 89,956
<ALLOWANCES> 33,567
<INVENTORY> 12,358
<CURRENT-ASSETS> 272,160
<PP&E> 54,662
<DEPRECIATION> 24,134
<TOTAL-ASSETS> 341,239
<CURRENT-LIABILITIES> 103,018
<BONDS> 0
<COMMON> 509
0
0
<OTHER-SE> 237,073
<TOTAL-LIABILITY-AND-EQUITY> 341,239
<SALES> 493,346
<TOTAL-REVENUES> 493,346
<CGS> 263,357
<TOTAL-COSTS> 263,357
<OTHER-EXPENSES> 165,161
<LOSS-PROVISION> 7,003
<INTEREST-EXPENSE> 51
<INCOME-PRETAX> 78,078
<INCOME-TAX> 24,980
<INCOME-CONTINUING> 53,098
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,718<F1>
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.07
<FN>
<F1>Includes minority interest in consolidated joint venture of 2,620
</FN>
</TABLE>
