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 For the Fiscal Year Ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 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.)
209 Redwood Shores Parkway
Redwood City, California 94065
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 628-1500
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 1, 1999 was $2,069,031,141.
As of June 1, 1999, there were 61,588,965 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 1999 Annual Meeting of Stockholders are incorporated by reference into Part
III hereof.
This report consists of 57 sequentially numbered pages. The Exhibit Index is
located at sequentially numbered page 57.
Page 1 of 57
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ELECTRONIC ARTS INC.
1999 FORM 10-K ANNUAL REPORT
Table of Contents
PAGE
----
PART I
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 4A. Executive Officers of the Registrant 13
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 27
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosures 48
PART III
Item 10. Directors and Executive Officers of the Registrant 49
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain Beneficial Owners and Management 49
Item 13. Certain Relationships and Related Transactions 49
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K 50
Signatures 55
Exhibit Index 57
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PART I
This Annual Report on Form 10-K, including Item 1 ("Business") and Item 7
("Management's Discussion and Analysis of Financial Condition and Results of
Operations"), contains forward looking statements regarding future events or our
future financial performance that involve certain risks and uncertainties
including those discussed in "Risk Factors" below at pages 25 to 26. Actual
events or actual future results may differ materially from any forward looking
statements due to such risks and uncertainties.
Item 1: BUSINESS
Overview
Electronic Arts was initially incorporated in California in 1982. In
September 1991, we were reincorporated under the laws of Delaware. Our principal
executive offices are located at 209 Redwood Shores Parkway, Redwood City,
California 94065 and our telephone number is (650) 628-1500.
We create, market and distribute interactive entertainment software for
a variety of hardware platforms. As of March 31, 1999, we marketed approximately
111 titles developed and/or published under one of our brand names in North
America, including older titles marketed as "Classics" or "Publisher's Choice."
Additionally, we distribute localized versions of these products in the rest of
the world. We also distributed approximately 21 additional titles developed by
other software publishers ("Affiliated Labels") in North America and over 1,000
Affiliated Label titles in the rest of the world. Since our inception, we have
developed products for 38 different computer hardware platforms, including the
following: IBM PC-CD and compatibles, 16-bit Sega Genesis video game system,
16-bit Super Nintendo Entertainment System, PlayStation, Nintendo 64 and
PlayStation II. Our fiscal 1999 product releases were for PC-CD, PlayStation and
Nintendo N64 cartridge products. As of March 31, 1999, we were developing
products for five different hardware platforms.
Our product development methods and organization are modeled on those
used in the entertainment industry. We also market our products with techniques
borrowed from other entertainment companies such as record producers, magazine
publishers and video distributors. Our employees called "producers", who are
each responsible for the development of one or more products, oversee product
development and direct teams comprised of both our employees and outside
contractors. Our 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 we have had contracts include: FIFA, NASCAR, John
Madden, the National Basketball Association, the PGA TOUR, Tiger Woods, the
National Hockey League, World Championship Wrestling Inc., Football Association
Premier League, Formula One, and Sammy Sosa. We maintain development studios in
California, Canada, United Kingdom, Florida, Texas, Japan, Washington, Maryland
and Nevada.
We invest in the creation of state-of-the-art software tools and
utilities that are then used in product development. These tools allow for more
cost-effective product development and the ability to more efficiently convert
products from one hardware platform to another. We have also made investments in
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.
We distribute our products and those of our Affiliated Labels primarily
by direct sales to retail chains and outlets in the United States and Europe. In
Japan and the Asia Pacific region, we distribute products both directly to
retailers and through third party distributors. Our products are available in
over 58,000 retail
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locations worldwide. In fiscal 1999, approximately 42% of our net revenues were
generated by international operations, compared to 43% in fiscal 1998 and 45% in
fiscal 1997.
Investments and Joint Ventures
Acquisitions
Westwood Studios
In September 1998, we completed the acquisition of Westwood Studios,
Inc. and certain assets of the Irvine, California-based Virgin Studios
(collectively "Westwood") for approximately $122,688,000 in cash, including
transaction expenses. The transaction was accounted for under the purchase
method. Westwood has produced 13 titles in the past two years and is best known
for its successful PC-CD franchises, Command and Conquer and Lands of Lore. See
note 11 of the Notes to the Consolidated Financial Statements, included in item
8 hereof.
ABC Software
In July 1998, we acquired ABC Software AG, in Switzerland, and ABC
Software GmbH, in Austria (collectively "ABC"), independent distributors of
entertainment, edutainment and application software, for approximately
$9,466,000 in cash (net of cash acquired of $5,099,000) and $570,000 in other
consideration. The transaction has been accounted for under the purchase method.
See note 11 of the Notes to the Consolidated Financial Statements, included in
item 8 hereof.
Joint Ventures
In May 1998, Electronic Arts and Square Co., Ltd. ("Square"), a leading
developer and publisher of entertainment software in Japan, completed the
formation of two new joint ventures, in North America and Japan. In North
America, the companies formed Square Electronic Arts, LLC ("Square EA"), which
has exclusive publishing rights in North America for future interactive
entertainment PlayStation titles created by Square. We own a 30% minority
interest in this joint venture while Square owns 70%. Additionally, we have the
exclusive right to distribute in North America products published by this joint
venture.
In Japan, the companies established Electronic Arts Square KK ("EA
Square KK"), which localizes and publishes in Japan our properties originally
created in North America and Europe, as well as develops and publishes original
video games in Japan. We own a 70% majority interest, while Square owns 30%. See
note 11 of the Notes to the Consolidated Financial Statements, included in item
8 hereof.
Investments
We have made investments as part of our overall strategy and currently
hold minority equity interests in several companies, including NovaLogic, Inc.,
Firaxis Software, Inc., Kodiak Inc., Pixel Inc. and The 3DO Company ("3DO").
Market
Historically, no hardware platform or system has achieved long-term
dominance in the interactive entertainment market. Accordingly, we have
developed products at one time or another for 38 different hardware platforms.
In fiscal 1999, Sony's PlayStation was the dominant hardware platform in our
industry. In
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addition, the installed base of multimedia-enabled home computers, including
those with Internet accessibility, has continued to grow as Personal Computer
("PC") prices have declined and the quality and choices of software have
increased dramatically. We develop and publish products for multiple platforms,
and this diversification continues to be a cornerstone of our strategy.
<TABLE>
The following table sets forth the year of release in North America of
each of the hardware platforms for which we have published titles and the
technology on which such platforms are based:
<CAPTION>
- -----------------------------------------------------------------------------------------------
Date of Introduction in
Manufacturer Platform Name North America Technology
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sega Genesis 1989 16-bit
Nintendo SNES 1991 16-bit
Matsushita 3DO Interactive Multiplayer 1993 32-bit
Sega Saturn 1995 32-bit
Sony PlayStation 1995 32-bit
Nintendo Nintendo N64 1996 64-bit
- -----------------------------------------------------------------------------------------------
</TABLE>
Sega launched DreamcastTM in Japan in December 1998 and it is expected
to be released in North America in late calendar 1999. Sega designed Dreamcast
to combine features from the console and PC platforms.
Sony is scheduled to launch PlayStation II in Japan in March 2000 and
the rest of the world starting in September 2000. PlayStation II specifications
have been announced by Sony to be a 128-bit, Digital Versatile Disk ("DVD")
based system that is Internet and cable ready, and backward compatible with
PlayStation I software.
Nintendo announced its plan for a next generation system to be released
in September 2000. Nintendo's new system will offer a DVD drive and have a modem
for Internet access.
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 online
networks and the Internet have increased the competition in the markets in which
we compete. Our new product releases in fiscal year 2000 will be primarily for
the IBM PC-CD and compatibles, PlayStation and N64. We are also scheduled to
release one or more online network gaming products during fiscal 2000. See Risk
Factors - "New video game platforms create additional technical and business
model uncertainties" at page 25 and "The business models and technology for
e-commerce and online gaming are unproven" at page 25.
The early investment in products for the 32-bit market, including both
Compact Disk personal computer ("PC-CD") and CD-dedicated video game ("CD-video
game") platforms, has been strategically important in positioning us for the
current generation of 32-bit and 64-bit machines. We believe that such
investment continues to be important, and we will continue aggressive
development activities for 32-bit and 64-bit platforms. The PlayStation has
achieved significant market acceptance in all geographical territories, however,
as the PlayStation console market matures, we believe that its growth will not
continue at the present rates. In addition, our revenues and earnings are
dependent on our ability to meet our product release schedule and our failure to
meet those schedules could result in revenues and earnings which fall short of
analysts' expectations in any individual quarter. See Risk Factors - "Product
development schedules are frequently unreliable and make predicting quarterly
results difficult" at page 25.
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Competition
See Risk Factors - "Our platform licensors are our chief competitors
and frequently control the manufacturing of our video game products" at page 26.
Relationships with Significant Hardware Platform Companies
Sony
In fiscal 1999, approximately 43% of our net revenues were derived from
sales of software for the PlayStation compared to 42% in fiscal 1998. During
fiscal 1999, we released 21 PlayStation games compared to 25 in fiscal 1998.
Among these releases were FIFA 99, World Cup 98 and Madden NFL 99. The volume of
sales of PlayStation products significantly increased in fiscal 1999 due to the
increase in the installed base of PlayStation consoles worldwide and the quality
and timely release of our key franchise titles. Although revenues from the sales
of PlayStation products in fiscal 2000 are expected to continue to grow, we do
not expect to maintain these growth rates. See Risk Factors - "Product
development schedules are frequently unreliable and make predicting quarterly
results difficult" at page 25.
Under the terms of a licensing agreement entered into with Sony
Computer Entertainment of America in July 1994 (the "Sony Agreement"), as
amended, we are authorized to develop and distribute CD-based software products
compatible with the PlayStation. Pursuant to the Sony Agreement, we engage Sony
to supply its PlayStation CDs for distribution by us. Accordingly, we have
limited ability to control our supply of PlayStation CD products or the timing
of their delivery. See Risk Factors - "Our platform licensors are our chief
competitors and frequently control the manufacturing of our video game products"
at page 26.
Nintendo
During fiscal 1999, we released nine new titles for the N64 compared to
two titles in fiscal 1998. In fiscal 1999, approximately 12% of our net revenues
were derived from the sale of N64 products compared to 6% in 1998. In March
1997, we signed a licensing agreement with Nintendo (the "N64 Agreement") to
develop, publish and market certain sports and other products for the N64. We do
not expect significant growth in revenues for N64 products in fiscal 2000.
Under the terms of the N64 Agreement, we engage Nintendo to manufacture
our N64 cartridges for distribution by us. Accordingly, we have limited ability
to control our supply of N64 cartridges or the timing of their delivery. A
shortage of microchips or other factors outside our control could impair our
ability to obtain an adequate supply of cartridges.
In connection with our purchases of N64 cartridges for distribution in
North America, Nintendo requires us to provide irrevocable letters of credit
prior to Nintendo's acceptance of purchase orders from us for purchases of these
cartridges. For purchases of N64 cartridges for distribution in Japan and
Europe, Nintendo requires us to make cash deposits. Furthermore, Nintendo
maintains a policy of not accepting returns of N64 cartridges. Because of these
and other factors, the carrying of an inventory of cartridges entails
significant capital and risk. See Risk Factors - "Our platform licensors are our
chief competitors and frequently control the manufacturing of our video game
products" at page 26.
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Products and Product Development
In fiscal 1999, we generated approximately 65% of our revenues from
products released during the year. See Risk Factors - "Product development
schedules are frequently unreliable and make predicting quarterly results
difficult" at page 25. As of March 31, 1999, we were actively marketing
approximately 111 titles, comprising approximately 193 stock keeping units
("sku's"), that were published by our development divisions and subsidiaries
("EA Studios"). During fiscal 1999, we introduced over 39 EA Studios titles,
representing over 59 sku's, compared to 44 EA Studios titles, comprising over 71
sku's, in fiscal 1998.
The products published by EA Studios are designed and created by our
in-house designers and artists and by independent software developers
("independent artists"). We typically pay the independent artists royalties
based on the sales of the specific products, as defined in the related
independent artist agreements.
For fiscal 1999 and 1998, no title represented revenues greater than
10% of the total fiscal 1999 and 1998 net revenues. For fiscal 1997, we had one
title, Madden Football `97, published on five platforms, which represented
approximately 10% of the total fiscal 1997 net revenues.
We publish 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. Our sports-related products,
marketed under the EA Sports brand name, accounted for a significant percentage
of net revenues in fiscal years 1999 and 1998. There can be no assurance that we
will be able to maintain our market share in the sports category.
The front line retail selling prices in North America of our products,
excluding older titles (marketed as "Classics" and "Publisher's Choice"),
typically range from $35.00 to $55.00. "Classics" and "Publisher's Choice"
titles have retail selling prices that range from $10.00 to $30.00. The retail
selling prices of EA titles outside of North America vary based on local market
conditions.
We currently develop or publish products for five different hardware
platforms and have, from time to time, developed and marketed products on 38
different and incompatible platforms in the past. In fiscal 1999, our product
releases were predominantly for PC-CD, 32-bit and 64-bit video game systems. Our
planned product introductions for fiscal 2000 are predominantly for the PC-CD,
PlayStation, N64 as well as for online Internet play. See Risk Factors -
"Product development schedules are frequently unreliable and make predicting
quarterly results difficult" at page 25 and "New video game platforms create
additional technical and business model uncertainties" at page 25.
As compact discs have emerged as the preferred medium for interactive
entertainment, education, and information software, we continued our investment
in the development of CD-ROM tools and technologies in fiscal 1999. The
PlayStation has achieved significant market acceptance in all geographic
territories, however, as the PlayStation console market matures, we believe that
its growth will not continue at the present rates. Most of the CD-video game
products will be convertible for use on multiple advanced hardware systems. We
had research and development expenditures of $202.1 million in fiscal 1999,
$146.2 million in fiscal 1998, and $130.8 million in fiscal 1997. See Risk
Factors - "Product development schedules are frequently unreliable and make
predicting quarterly results difficult" at page 25.
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Marketing and Distribution
We distribute 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 us as
completed products. As of March 31, 1999, we distributed 21 Affiliated Label
titles in North America and over 1,000 Affiliated Label titles in the rest of
the world. No single Affiliated Label Publisher has accounted for more than 10%
of our net revenue in any of the last three fiscal years.
In May 1998, Electronic Arts and Square Co., Ltd. formed a new joint
venture in North America, creating Square Electronic Arts, LLC ("Square EA") as
discussed in note 11 in the Notes to the Consolidated Financial Statements,
included in Item 8 hereof. In conjunction with the formation of this joint
venture, we will have the exclusive right in North America to distribute
products published by this joint venture. In fiscal 1999, Square EA published
Parasite Eve for the PlayStation, which was a top ten selling title for
Electronic Arts and expects to release Final Fantasy 8 in fiscal 2000.
In February 1998, we announced that we entered into an international
co-publishing agreement with Metro-Goldwyn-Mayer ("MGM") to be the exclusive
distributor of MGM Interactive titles in all territories except North America.
Under this agreement, we will distribute such titles as Tomorrow Never Dies.
We generated approximately 90% of our North American net revenues from
direct sales to retailers through a field sales organization of professionals
and a group of telephone sales representatives. The remaining 10% of our North
American sales were made through a limited number of specialized and regional
distributors and rack jobbers in markets where we believe direct sales would not
be economical. For the fiscal year ended March 31, 1999, we had sales to one
customer, Wal-Mart Stores, Inc., which represented 12% of total net revenues. We
had no sales to any one customer in excess of 10% of total net revenues for the
fiscal years ended March 31, 1998 and 1997.
We are using the Internet to market our products, build brand equity
and increase our understanding of our customers' expectations. We have various
EA websites offering game tips, user bulletin boards and matching service for
head to head competition and tournaments.
The video game and PC businesses have become increasingly "hits"
driven, requiring significantly greater expenditures for marketing and
advertising, particularly for television advertising. There can be no assurance
that we will continue to produce "hit" titles, or that advertising for any
product will increase sales sufficiently to recoup those advertising expenses.
We have stock-balancing programs for our personal computer products
that, under certain circumstances and up to a specified amount, allow for the
exchange of personal computer products by resellers. We also typically provide
for price protection for our personal computer and video game system products
that, under certain conditions, allows the reseller a price reduction from us
for unsold products. We maintain a policy of exchanging products or giving
credits, but do not give cash refunds. Moreover, the risk of product returns may
increase as new hardware platforms become more popular or market factors force
us to make changes in our distribution system. We monitor and manage the volume
of our 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. We believe
that we provide adequate reserves for returns and price protection which are
based on estimated future returns of products, taking into account promotional
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activities, the timing of new product introductions, distributor and retailer
inventories of our products and other factors, and that our current reserves
will be sufficient to meet return and price protection requirements for current
in-channel inventory. However, there can be no assurance that actual returns or
price protection will not exceed our reserves.
We also have a fulfillment group that sells product directly to
consumers through a toll-free number and through our websites listed in
advertising by us and our Affiliated Labels. This group is also responsible for
targeted direct mail marketing and sells product 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 development of remote and
electronic delivery systems will create further changes. The bankruptcy or other
business difficulties of a distributor or retailer could render our accounts
receivable from such entity uncollectible, which could have an adverse effect on
our operating results and financial condition. In addition, an increasing number
of companies are competing for access to these channels. Our arrangements with
our distributors and retailers may be terminated by either party at any time
without cause. Distributors and retailers often carry products that compete with
ours. Retailers of our 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 our
products or provide our products with adequate levels of shelf space and
promotional support.
International Operations
We have wholly owned subsidiaries throughout the world, including
offices in the United Kingdom, France, Spain, Germany, Australia, Canada, South
Africa, Singapore, Sweden, Japan, Malaysia, Brazil and Holland. The amounts of
net revenues, operating profit and identifiable assets attributable to each of
our geographic regions for each of the last three fiscal years are set forth in
Note 16 of the Notes to the Consolidated Financial Statements included in Item 8
hereof. International net revenues increased by 33% to $516,865,000, or 42% of
consolidated fiscal 1999 net revenues, compared to $389,429,000, or 43% of
consolidated fiscal 1998 net revenues. Europe's net revenues increased by
$117,999,000 primarily due to an increase in sales of PlayStation and AL
products. Japan's net revenues increased by $11,371,000 primarily due to the
sales of FIFA: Road to World Cup 98. Asia Pacific net revenues decreased by
$1,934,000 due to the weaknesses in Asian currencies. In local currency, in
spite of weak economies, net revenues for Asia Pacific increased compared to the
prior year.
Though international revenues are expected to grow in fiscal 2000,
international revenues may not grow at as high a rate as in prior years. See
Risk Factors - "Our business, our products, and our distribution are subject to
increasing regulation in key territories" at page 25 and "Foreign Sales and
Currency Fluctuations" at page 26.
Manufacturing
In many instances, we are able to acquire materials on a
volume-discount basis. We have multiple potential sources of supply for most
materials. Except with respect to our PlayStation and N64 products, we also have
alternate sources for the manufacture and assembly of most of our products. To
date, we have not experienced any material difficulties or delays in production
of our software and related documentation and packaging. However, a shortage of
components or other factors beyond our control could impair our ability to
manufacture, or have manufactured, our products. See Risk Factors - "Our
platform licensors are our chief competitors and frequently control the
manufacturing of our video game products" at page 26.
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Backlog
We normally ship products within a few days after receipt of an order.
However, a backlog may occur for EA Studio and Affiliated Label products that
have been announced for release but not yet shipped. We do not consider backlog
to be an indicator of future performance.
Seasonality
Our business is highly seasonal. We typically experience our 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 the June quarter of
our fiscal year 2000, we expect these seasonal trends to be magnified due to the
lack of significant product releases during the quarter. Additionally, we had
exceptional results for the same period in fiscal 1999 due to the shipment and
success of World Cup 98.
Employees
As of March 31, 1999, we employed approximately 2,500 people, of whom
over 1,200 were outside the United States. We believe that our ability to
attract and retain qualified employees is an important factor in our growth and
development and that our future success will depend, in large measure, on our
ability to continue to attract and retain qualified employees. To date, we have
been successful in recruiting and retaining sufficient numbers of qualified
personnel to conduct our business successfully. See Risk Factors - "We face
intense competition for talent from highly valued Internet companies" at page
26.
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ITEM 2: PROPERTIES
Our principal administrative, sales and marketing, research and
development, and support facility is located in two modern buildings in Redwood
City, California, 20 miles south of San Francisco. We moved into this facility
in October 1998. We presently occupy approximately 350,000 sq. ft. in these
buildings under an operating lease for the buildings and certain adjoining land
that will expire on December 1, 2001. Monthly lease payments vary based upon the
London InterBank Offered Rate. We have the option to purchase the property for
the unamortized financed balance at any time after the non-cancelable lease
term, or we may terminate the lease at any time after the non-cancelable term by
arranging a third party sale or by making a termination payment. In April 1999,
we exercised our option to purchase a parcel of land under the lease and sold it
to a third party. The proceeds will mitigate a portion of the occupancy costs
for this facility. Should we elect to terminate the lease, we will guarantee a
residual value of up to 85% of the unamortized value of the property. As part of
the agreement, we must also comply with certain financial covenants.
Our North American distribution is supported by a 54,000 sq. ft. leased
facility used as an office and warehouse in Hayward, California, and an 84,000
sq. ft. warehouse facility in Louisville, Kentucky. Effective April 1999, we
entered into a lease agreement that increases the Kentucky warehouse facility's
square footage to 250,000 sq. ft. We also occupy sales offices in the
metropolitan areas of Toronto, Chicago, Dallas and New York.
In addition to our Redwood City development studio, we own a 206,000
sq. ft. development facility in Burnaby, British Columbia, Canada and rent a
33,000 sq. ft. facility in Seattle, Washington. The move to the new Canadian
offices was completed in June 1999. We also own a 180,000 sq. ft. development
facility in Austin, Texas and lease a 42,400 sq. ft. development facility in
Walnut Creek, California.
Our United Kingdom subsidiary occupies administrative and sales
facilities in Langley, England, under a lease for a total of 44,000 sq. ft. and
a 22,000 sq. ft. development facility in Surrey, England. In Europe, we also
lease a distribution hub in Heerlen, Holland and two administrative and sales
facilities in Germany, as well as sales and distribution facilities in: Madrid,
Spain; Lyon, France; Johannesberg, South Africa; Neudorf, Austria and Zurich,
Switzerland. Additionally, we have sales offices throughout Europe.
In Asia and the South Pacific, we maintain a 5,500 sq. ft. sales and
distribution facility in Brisbane, Australia. We also have sales and
distribution facilities in Singapore, Malaysia and Taiwan, and representative
offices in Beijing, Hong Kong and Shanghai, China. We also maintain a 27,000 sq.
ft. sales and development office in Tokyo, Japan. See Notes 3 and 9 of the Notes
to the Consolidated Financial Statements included in Item 8 hereof.
We believe that these facilities are adequate for our current needs. We
believe that suitable additional or substitute space will be available as needed
to accommodate our future needs.
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ITEM 3: LEGAL PROCEEDINGS
We are 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 our
consolidated financial condition or results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the quarter ended March 31, 1999.
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ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding the executive
officers of Electronic Arts, who are chosen by and serve at the discretion of
the Board of Directors:
Name Age Position
---- --- --------
Lawrence F. Probst III 49 Chairman and Chief Executive Officer
Don A. Mattrick 35 President, Worldwide Studios
John S. Riccitiello 39 President and Chief Operating Officer
William Bingham Gordon 49 Executive Vice President and Chief
Creative Officer
E. Stanton McKee, Jr. 54 Executive Vice President and Chief
Financial and Administrative Officer
Nancy L. Smith 46 Executive Vice President and General
Manager, North American Publishing
Ruth A. Kennedy 44 Senior Vice President, General Counsel
and Secretary
J. Russell Rueff, Jr. 37 Senior Vice President, Human Resources
David L. Carbone 48 Vice President, Finance
Mr. Probst has been a director of Electronic Arts since January 1991
and currently serves as Chairman and Chief Executive Officer. He was elected as
Chairman in July 1994. Mr. Probst has previously served as President of
Electronic Arts; as Senior Vice President of EA Distribution, Electronic Arts'
distribution division, from January 1987 to January 1991; and from September
1984, when he joined Electronic Arts, until December 1986, served as Vice
President of Sales. Mr. Probst holds a B.S. degree from the University of
Delaware.
Mr. Mattrick has served as President of Worldwide Studios since
September 1997. Prior to this, he served as Executive Vice President, North
American Studios, since October 1996. From July 1991 to October 1996, he served
as Senior Vice President, North American Studios, Vice President of Electronic
Arts and Executive Vice President/General Manager for EA Canada. Mr. Mattrick
was founder and former chairman of Distinctive Software Inc. from 1982 until it
was acquired by us in 1991.
Mr. Riccitiello has served as President and Chief Operating Officer
since October 1997. Prior to joining Electronic Arts, Mr. Riccitiello served as
President and Chief Executive Officer of the worldwide bakery division at Sara
Lee Corporation. Before joining Sara Lee, he served as President and CEO of
Wilson Sporting Goods Co. and has also held executive management positions at
Haagen-Dazs, PepsiCo, Inc. and The Clorox Company. Mr. Riccitiello holds a
degree in Economics and Marketing from the University of California, Berkeley.
Mr. Gordon has served as Executive Vice President and Chief Creative
Officer since March 1998. Prior to this, he served as Executive Vice President,
Marketing since October 1995. From August 1993 to October
13
<PAGE>
1995, he served as Executive Vice President of EA Studios and as Senior Vice
President of Entertainment Production since February 1992. He also served as
Senior Vice President of Marketing, as General Manager of EA Studios, as Vice
President of Marketing, as Director of Advertising and as Vice President of our
former entertainment division while employed by us. Mr. Gordon holds a B.A.
degree from Yale University and an M.B.A. degree from Stanford University.
Mr. McKee joined Electronic Arts in March 1989 and is currently
Executive Vice President and Chief Financial and Administrative Officer. Prior
to October 1996, he served as Senior Vice President and Chief Financial and
Administrative Officer. Mr. McKee holds B.A. and M.B.A. degrees from Stanford
University and is also a Certified Public Accountant.
Ms. Smith has served as Executive Vice President and General Manager,
North American Publishing since March 1998. Prior to this, she served as
Executive Vice President, North American Sales since October 1996. She
previously held the position of Senior Vice President of North American Sales
and Distribution from July 1993 to October 1996 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 Electronic Arts in 1984. Ms. Smith
holds a B.S. degree in management and organizational behavior from the
University of San Francisco.
Ms. Kennedy has been employed by Electronic Arts since February 1990.
She served as Corporate Counsel until March 1991 and is currently Senior Vice
President, General Counsel and Secretary. Prior to October 1996, she served as
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.
Mr. Rueff has served as Senior Vice President of Human Resources since
October of 1998. Prior to joining Electronic Arts, Mr. Rueff held various
positions with the PepsiCo companies for over 10 years, including: Vice
President, International Human Resources; Vice President, Staffing and
Resourcing at Pepsi-Cola International; Vice President, Restaurant Human
Resources for Pizza Hut; and also various other management positions within the
Frito-Lay Company. Mr. Rueff holds a M.S. degree in Counseling and a B.A. degree
in Radio and Television from Purdue University in Indiana.
Mr. Carbone has been with Electronic Arts since February 1991 as Vice
President, Finance. He was elected Assistant Secretary of the Company in March
1991. Mr. Carbone holds a B.S. degree in accounting from King's College and is a
Certified Public Accountant.
14
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our 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
our Common Stock from April 1, 1997 through March 31, 1999. Such prices
represent prices between dealers and does not include retail mark-ups,
mark-downs or commissions and may not represent actual transactions.
Closing Sales Prices
-----------------------------
High Low
---- ---
Fiscal Year Ended March 31, 1998:
First Quarter $35.38 $20.13
Second Quarter 37.50 30.75
Third Quarter 39.56 29.94
Fourth Quarter 46.94 34.94
Fiscal Year Ended March 31, 1999:
First Quarter $54.81 $41.63
Second Quarter 55.56 38.13
Third Quarter 56.00 33.88
Fourth Quarter 52.19 38.25
There were approximately 1,900 holders of record of our Common Stock as of June
1, 1999. We believe that a significant number of beneficial owners of our Common
Stock hold their shares in street names.
Dividend Policy
We have not paid any cash dividends and do not anticipate paying cash
dividends in the foreseeable future.
15
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
<TABLE>
ELECTRONIC ARTS AND SUBSIDIARIES
SELECTED FIVE-YEAR FINANCIAL DATA
Years Ended March 31 (In thousands, except per share data)
<CAPTION>
INCOME STATEMENT DATA 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 1,221,863 $ 908,852 $ 673,028 $ 587,299 $ 531,493
Cost of goods sold 625,547 480,766 328,943 291,491 277,543
------------------------------------------------------------------------
Gross profit 596,316 428,086 344,085 295,808 253,950
Operating expenses:
Marketing and sales 163,407 128,308 102,072 85,771 70,764
General and administrative 75,556 57,838 48,489 37,711 33,492
Research and development 202,080 146,199 130,755 108,043 79,910
Charge for acquired in-process technology 44,115 1,500 -- 2,232 --
Merger costs -- 10,792 -- -- --
Amortization of intangibles 5,880 -- -- -- --
------------------------------------------------------------------------
Total operating expenses 491,038 344,637 281,316 233,757 184,166
------------------------------------------------------------------------
Operating income 105,278 83,449 62,769 62,051 69,784
Interest and other income, net 13,180 24,811 13,279 7,514 13,476
------------------------------------------------------------------------
Income before provision for income taxes and minority
interest 118,458 108,260 76,048 69,565 83,260
Provision for income taxes 45,414 35,726 26,003 22,584 26,859
------------------------------------------------------------------------
Income before minority interest 73,044 72,534 50,045 46,981 56,401
Minority interest in consolidated joint venture (172) 28 1,282 (304) 2,620
------------------------------------------------------------------------
Income from continuing operations 72,872 72,562 51,327 46,677 59,021
Discontinued operations:
Gain on disposal of discontinued operations (net of
income tax expense of $173 in fiscal 1995) -- -- -- -- 303
------------------------------------------------------------------------
Net income $ 72,872 $ 72,562 $ 51,327 $ 46,677 $ 59,324
------------------------------------------------------------------------
Per share amounts:
Income from continuing operations:
Basic $ 1.20 $ 1.23 $ 0.89 $ 0.84 $ 1.13
Diluted $ 1.15 $ 1.19 $ 0.86 $ 0.80 $ 1.06
Net income:
Basic $ 1.20 $ 1.23 $ 0.89 $ 0.84 $ 1.13
Diluted $ 1.15 $ 1.19 $ 0.86 $ 0.80 $ 1.07
Number of shares used in computation:
Basic 60,748 58,867 57,544 55,685 52,446
Diluted 63,272 60,958 59,557 58,190 55,546
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA AT FISCAL YEAR END
- ------------------------------------------------------------------------------------------------------------------------------------
Cash, cash equivalents and short-term investments $ 312,822 $ 374,560 $ 268,141 $ 190,873 $ 182,776
Marketable securities 4,884 3,721 5,548 37,869 10,725
Working capital 333,256 408,098 284,863 247,001 180,714
Long-term investments 18,400 24,200 34,478 30,319 14,200
Total assets 901,873 745,681 584,041 489,496 359,866
Total liabilities 236,209 181,713 136,237 108,668 107,894
Minority interest 2,733 -- 28 1,277 1,148
Redeemable preferred stock -- -- -- -- 11,363
Total stockholders' equity 662,931 563,968 447,776 379,551 239,461
</TABLE>
16
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition and
Results of Operations", contains forward looking statements regarding future
events or our future financial performance that involve certain risks and
uncertainties including those discussed in "Risk Factors" at pages 25 to 26 of
this Annual Report on Form 10-K. Actual events or actual future results may
differ materially from any forward looking statements due to such risks and
uncertainties.
RESULTS OF OPERATIONS
Comparison of Fiscal 1999 to 1998
1999 1998 % change
- --------------------------------------------------------------------------------
Net revenues $1,221,863,000 $ 908,852,000 34.4
- --------------------------------------------------------------------------------
We derive revenues primarily from shipments of entertainment software, which
includes EA Studio CD products for dedicated entertainment systems ("CD-video
games"), EA Studio CD personal computer products ("PC-CD"), EA Studio cartridge
products and Affiliated Label ("AL") products that are published by third
parties and distributed by us. We also derive revenues from licensing of EA
Studio products and AL products through hardware companies ("OEMs") and online
subscription revenues.
Our total net revenues increased compared to the prior year due to increased
sales of products on PlayStation , Nintendo N64 , PC-CD and increased worldwide
distribution of AL products. This increase was partially offset by a decrease in
sales of Sega Saturn(R) products and 16-bit video game products.
Sales of PlayStation products in fiscal 1999 increased to $519,830,000, or 43%
of total revenue, compared to $380,299,000, or 42% of total revenue in fiscal
1998. We released 21 new PlayStation titles in fiscal 1999 compared to 25 in
fiscal 1998. The increase in sales was attributable to the greater installed
base of PlayStation game consoles and the releases of key titles for this
platform including FIFA 99, World Cup 98 and Madden NFL 99. We expect revenues
from PlayStation products to continue to grow in fiscal 2000, but as revenues
for these products increase, we do not expect to maintain these growth rates.
Net revenues derived from other 32-bit products, primarily for Saturn, were
$749,000 in fiscal 1999 compared to $17,507,000 in fiscal 1998. We released no
new Saturn titles in fiscal 1999 compared to eight in fiscal 1998. We do not
expect to release any new Saturn titles in fiscal 2000 and revenues from the
sales of Saturn products are not expected to be significant in future years.
Net revenues from PC-CD products increased to $270,793,000 in fiscal 1999,
representing 22% of total net revenues, from $231,034,000, or 25% of total net
revenues in fiscal 1998. We released 29 PC-CD titles in fiscal 1999 compared to
30 PC-CD titles in fiscal 1998. The worldwide increase in sales of PC-CD
products was primarily attributable to an increase in sales in Europe and North
America due to the related releases of key titles for this platform including
Sim City 3000.
Net revenues derived from N64 video game cartridge products were $152,349,000,
or 12% of total net revenues, compared to $56,677,000, or 6%, in fiscal 1998.
The increase in N64 revenues was primarily due to more title releases for this
platform compared to last year and a larger N64 market. We released nine titles
in fiscal 1999, including NASCAR 99,compared to two titles in fiscal 1998. We do
not expect significant growth in revenues for N64 products in fiscal 2000.
Net revenues from shipments of AL products in fiscal 1999 increased to
$248,105,000, or 20% of total revenue, compared to $185,865,000, or 20% of total
revenue in fiscal 1998. The increase was due to higher sales of AL products in
North America and Europe. This increase was primarily attributable to the
distribution of products published by Square EA in North America and the
acquisition of ABC Software in Switzerland. We expect revenues from AL products
to continue to grow in fiscal 2000, but as revenues for these products increase,
we do not expect to maintain these growth rates.
Net revenues generated by 16-bit video game cartridge-based products were
$635,000 in fiscal 1999, compared to $17,314,000, or 2% of net revenues in
fiscal 1998. As the 16-bit video game market has been replaced by 32-bit and
64-bit systems, we did not release any new titles in fiscal 1999. We do not
expect to release any new titles in fiscal 2000 and revenues from the sales of
16-bit products are not expected to be significant.
Licensing of EA Studio products generated $17,788,000 in fiscal 1999, compared
to $15,431,000 in fiscal 1998. The increase was primarily the result of an
increase in the revenues generated by the licensing of our products in Europe.
North America net revenues increased by 36% to $704,998,000 in fiscal 1999 as
compared to $519,423,000 in fiscal 1998. The increase was mainly attributable to
strong growth in N64 and PlayStation systems, the distribution of AL titles and
growth in PC-CD sales. Net revenues from PlayStation and N64 revenues increased
$148,181,000 due to a larger market and greater installed base for these
platforms as well as more title releases for N64 in comparison to the prior
year. North America AL sales increased by
17
<PAGE>
$39,813,000, compared to the prior year primarily due to the distribution of
products published by Square EA. PC-CD revenues increased by $13,439,000 due to
key title releases during the year.
International net revenues increased by 33% to $516,865,000, or 42% of
consolidated fiscal 1999 net revenues, compared to $389,429,000, or 43% of the
fiscal 1998 total. Europe's net revenues increased by $117,999,000 primarily due
to an increase in sales of PlayStation and AL products. Japan's net revenues
increased by $11,371,000 primarily due to the sales of FIFA: Road to World Cup
98. Asia Pacific net revenues decreased by $1,934,000 due to the weakness in
Asian currencies. In local currency, in spite of weak economies, net revenues
for Asia Pacific increased compared to the prior year.
================================================================================
1999 1998 % change
- --------------------------------------------------------------------------------
Cost of goods sold $625,547,000 $480,766,000 30.1
As a percentage of net
revenues 51.2% 52.9%
- --------------------------------------------------------------------------------
Cost of goods sold as a percentage of revenues decreased in fiscal 1999
primarily due to lower artist royalties, including savings related to an
acquisition of a software development company during fiscal 1999, partially
offset by higher sales of lower margin N64 products.
================================================================================
Operating %
Expenses 1999 1998 change
- -------------------------------------------------------------------------------
Marketing and sales $163,407,000 $ 128,308,000 27.4
As a percentage of
net revenues 13.4% 14.1%
- -------------------------------------------------------------------------------
General and
administrative $ 75,556,000 $ 57,838,000 30.6
As a percentage of
net revenues 6.2% 6.4%
- -------------------------------------------------------------------------------
Research and
development $202,080,000 $ 146,199,000 38.2
As a percentage of
net revenues 16.5% 16.1%
- -------------------------------------------------------------------------------
The increase in marketing and sales expenses was primarily attributable to
increased print, Internet and television advertising to support new releases and
increased cooperative advertising associated with higher revenues in North
America and Europe as compared to the prior year. Increases in marketing and
sales expenses were also due to additional headcount related to the continued
expansion of our worldwide distribution business and the acquisitions of ABC
Software and Westwood Studios.
The increase in general and administrative expenses was primarily due to an
increase in headcount and occupancy costs to support the increase in growth in
North America and Europe operations, including the opening of additional
international offices in Europe and the acquisition of ABC Software.
The increase in research and development expenses was due to additional
headcount-related expenses attributable to the acquisition of Westwood Studios,
Inc. and certain assets of the Irvine, California-based Virgin Studio
(collectively "Westwood") in September 1998 and Tiburon Entertainment, Inc. in
April 1998, higher development costs per title, as products are including more
content and are more complex and time consuming to develop, and an increase in
development costs for Ultima Online.
We released a total of 59 new products in fiscal 1999 compared to 71 in fiscal
1998.
================================================================================
Other Operating %
Expenses 1999 1998 change
- --------------------------------------------------------------------------------
Amortization of
intangibles $ 5,880,000 $ -- N/M
As a percentage of
net revenues 0.5% N/A
- --------------------------------------------------------------------------------
Charge for acquired
in-process technology $ 44,115,000 $ 1,500,000 N/M
As a percentage of
net revenues 3.6% 0.2%
- --------------------------------------------------------------------------------
Merger costs $ -- $ 10,792,000 (100.0)
As a percentage of
net revenues N/A 1.2%
- --------------------------------------------------------------------------------
Amortization of intangibles results from the acquisitions of Westwood and ABC
Software in the second quarter of fiscal 1999.
In connection with the purchase of Westwood in September 1998, we allocated and
expensed $41,836,000 of the $122,688,000 purchase price to in-process research
and development projects. This allocation represents the estimated fair value
based on risk-adjusted cash flows related to the incomplete research and
development projects. At the date of acquisition, this amount was expensed as a
non-recurring charge as the in-process technology had not yet reached
technological feasibility and had no alternative future uses. Westwood had three
major PC-CD projects in progress at the time of the acquisition including two in
the best-selling franchise Command and Conquer and one in the critically
acclaimed Lands of Lore series. As of the acquisition date, costs to complete
the Westwood projects acquired were expected to be approximately $9.1 million in
fiscal 1999, $10.6 million in fiscal 2000 and $1.0 million in fiscal 2001. We
believe there have been no significant changes to these estimates as of March
31, 1999. We currently expect to complete the development of these projects at
various dates
18
<PAGE>
through fiscal 2001 and to publish the products upon completion.
The nature of the efforts required to develop the acquired in-process technology
into commercially viable products principally relate to the completion of all
planning, designing and testing activities necessary to establish that the
product can be produced to meet our design requirements including functions,
features and technical performance requirements. Though we currently expect that
the acquired in-process technology will be successfully developed, there can be
no assurance that commercial or technical viability of these products will be
achieved. Furthermore, future developments in the entertainment software
industry, changes in computer or video game console technology, changes in other
product offerings or other developments may cause us to alter or abandon these
plans.
The value assigned to purchased in-process technology was determined by
estimating the completion percentage of research and development efforts at the
acquisition date, forecasting risk adjusted revenues considering the completion
percentage, estimating the resulting net cash flows from the projects and
discounting the net cash flows to their present values. The completion
percentages were estimated based on cost incurred to date, importance of the
completed development tasks and the elapsed portion of the total project time.
The revenue projection used to value the in-process research and development is
based on unit sales forecasts for worldwide sales territories and adjusted to
consider only the revenue related to development achievements completed at the
acquisition date. Net cash flow estimates include cost of goods sold and sales,
marketing and general and administrative expenses and taxes forecasted based on
historical operating characteristics. In addition, net cash flow estimates were
adjusted to allow for fair return on working capital and fixed assets, charges
for franchise and technology leverage and return on other intangibles.
Appropriate risk adjusted discount rates ranging from 20% to 22.5% were used to
discount the net cash flows back to their present value. The remaining
identified intangibles will be amortized on a straight-line basis over two to
twelve years based on expected useful lives of franchise tradenames, existing
products and technologies, retention of workforce, and other intangible assets.
If these projects are not successfully developed, we may not realize the value
assigned to the in-process research and development projects. In addition, the
value of other acquired intangible assets may also become impaired.
In conjunction with the merger of Westwood, we accrued approximately $1,500,000
related to direct transaction costs and other related accruals. At March 31,
1999, there were $725,000 in accruals remaining related to these items.
Additionally, for fiscal 1999, the charge for in-process research and
development also included write-offs of $2,279,000 associated with the
acquisition of two software development companies in the first quarter.
For fiscal 1998, we incurred a charge of $1,500,000 for acquired in-process
technology in connection with the acquisition of the remaining 35% minority
ownership interest in Electronic Arts Victor, Inc. in December 1997. This charge
was made after we concluded that the in-process technology had no alternative
future use after taking into consideration the potential for usage of the
software in different products and resale of the software.
On July 25, 1997, we completed a merger with Maxis, Inc. ("Maxis"). In
conjunction with the merger, we recorded costs of $10,792,000 which included
direct transaction fees and costs associated with integrating the operations of
the two companies. At March 31, 1999, there were no accruals remaining related
to these merger costs.
================================================================================
1999 1998 % change
- --------------------------------------------------------------------------------
Operating income $105,278,000 $83,449,000 26.2
As a percentage of
net revenues 8.6% 9.2%
- --------------------------------------------------------------------------------
Operating income increased due to higher net revenues and related gross profit
partially offset by increased operating expenses including the charges for
acquired in-process technology of $44,115,000 in the current fiscal year
partially offset by merger costs of $10,792,000 and a charge for acquired
in-process technology of $1,500,000 related to the acquisitions in the prior
fiscal year.
================================================================================
1999 1998 % change
- --------------------------------------------------------------------------------
Interest and other
income, net $13,180,000 $24,811,000 (46.9)
As a percentage of
net revenues 1.1% 2.7%
- --------------------------------------------------------------------------------
The decrease in interest and other income, net, was primarily attributable to
the sale of our 50% ownership interest in Creative Wonders, LLC in December
1997. The sale resulted in a gain in the prior year of $12,625,000.
================================================================================
1999 1998 % change
- --------------------------------------------------------------------------------
Income taxes $45,414,000 $35,726,000 27.1
Effective tax rate 38.3% 33.0%
- --------------------------------------------------------------------------------
Our effective tax rate for fiscal 1999 was negatively affected as there was no
tax benefit recorded for a portion of the charges related to the acquired
in-process technology. Excluding the effect of these charges, the effective tax
rate for the current fiscal year would have been 32.0% as compared to a 33.0%
tax rate in the corresponding prior year periods. The lower rate of 32.0%
results primarily from a higher portion of international income subject to a
lower foreign tax rate as
19
<PAGE>
compared to the prior year and an increase in the federal research and
experimental credit.
================================================================================
1999 1998 % change
- --------------------------------------------------------------------------------
Minority interest in
consolidated joint venture $(172,000) $28,000 N/M
As a percentage of
net revenues 0.0% 0.0%
- --------------------------------------------------------------------------------
In the first quarter of fiscal 1999, we formed EA Square KK which is seventy
percent owned by us and thirty percent owned by Square Co. Ltd. ("Square"), a
leading developer and publisher of entertainment software in Japan. Minority
interest for fiscal 1999 represents Square's 30% interest in the net income of
EA Square KK.
For fiscal 1998, the minority interest represented the 35% interest in
Electronic Arts Victor, Inc. ("EAV") owned by Victor Entertainment Industries,
Inc. ("VEI"). We acquired the remaining 35% minority ownership interest in EAV
held by VEI in December 1997.
================================================================================
1999 1998 % change
- --------------------------------------------------------------------------------
Net income $72,872,000 $72,562,000 0.4
As a percentage of
net revenues 6.0% 8.0%
- --------------------------------------------------------------------------------
Reported net income was flat due to the one-time charges related to acquisitions
offsetting significantly higher operating income. The increase in net income,
excluding one-time charges, was due to higher revenues and gross profits, offset
by higher operating expenses. For fiscal 1998, net income included a one-time
gain on sale of Creative Wonders, LLC in the amount of $8,459,000, net of taxes,
offset by Maxis merger costs and a charge for acquired in-process developments
of $8,236,000, net of taxes. For fiscal 1999, net income included one-time
charges for acquired in-process technology of $37,506,000, net of taxes.
Excluding one-time items in both years, as noted above, net income increased to
$110,378,000 from $72,339,000, or 53% over the prior year.
RESULTS OF OPERATIONS
Comparison of Fiscal 1998 to 1997
1998 1997 % change
- --------------------------------------------------------------------------------
Net revenues $908,852,000 $673,028,000 35.0
- --------------------------------------------------------------------------------
Our total net revenues increased compared to the prior year due to increased
sales of PlayStation products, increased worldwide distribution of AL products,
sales of N64 video game cartridge products and sales of PC-CD products. This
increase was partially offset by a decrease in sales of 16-bit video game
cartridges and License/OEM revenues.
Net revenues from 32-bit CD-video game products, primarily for the PlayStation,
were $397,806,000 in fiscal 1998, representing 44% of the total net revenues
compared to $225,875,000, or 34% of total net revenues in fiscal 1997. The
increase in sales of 32-bit video game products was attributable to the greater
installed base of PlayStation game consoles and related releases of key titles
for this platform during the year offset by a decline in revenues from sales of
products for Saturn.
Sales of PlayStation products in fiscal 1998 increased to $380,299,000, or 42%
of total revenue, compared to $187,531,000, or 28% of total revenue in fiscal
1997. We released 25 new PlayStation titles in fiscal 1998 compared to 14 in
fiscal 1997.
Net revenues derived from the sales of other 32-bit products, primarily from
Saturn, were $17,507,000 in fiscal 1998 compared to $38,344,000 in fiscal 1997.
As the installed base of Saturn consoles did not achieve the growth rates of
PlayStation consoles, our revenues from sales of Saturn products declined. We
released eight new Saturn titles in fiscal 1998 compared to 12 in fiscal 1997.
Net revenues from shipments of AL products in fiscal 1998 increased to
$185,865,000, or 20% of total revenue, compared to $96,696,000, or 14% of total
revenue in fiscal 1997. This increase was due to higher sales of AL products in
North America, Europe and Asia Pacific. This increase was attributable to the
product releases under a worldwide exclusive distribution agreement with
DreamWorks Interactive, including The Lost World: Jurassic Park, and due to
continued distribution of products from Accolade, Inc. which began in the fourth
quarter of fiscal 1997. AL revenues also increased as a result of our exclusive
distribution agreement with Twentieth Century Fox Home Entertainment outside
North America.
Net revenues derived from N64 video game cartridge products were $56,677,000, or
6% of total net revenues, compared to $17,804,000 in fiscal 1997. We released
two titles in fiscal 1998 compared to one title in fiscal 1997.
Net revenues from PC-CD products increased to $231,034,000 in fiscal 1998,
representing 25% of total net revenues, from $216,338,000, or 32% of total net
revenues in fiscal 1997. We released 30 PC-CD titles in fiscal 1998 compared to
32 PC-CD titles in fiscal 1997. The increase in sales of PC-CD products was
attributable to the worldwide growth in the PC market and the expansion of our
direct distribution worldwide. PC-CD sales growth for fiscal 1998 was partially
offset by a decline in titles published by Maxis. Maxis' PC-CD revenues for
fiscal 1998 decreased by $17,010,000 or 45% compared to fiscal 1997.
Net revenues generated by 16-bit video game cartridge-based products were
$17,314,000, or 2% of total revenues in fiscal
20
<PAGE>
1998, compared to $89,160,000, or 13% of net revenues in fiscal 1997.
Licensing of EA Studio products generated $15,431,000 in fiscal 1998, compared
to $26,749,000 in fiscal 1997. The decrease was primarily the result of a
decrease in the revenues generated by the licensing of our products in Europe
and Japan.
North America net revenues increased by 39% to $519,423,000 in fiscal 1998 as
compared to $372,616,000 in fiscal 1997. The increase was mainly attributable to
strong growth in PlayStation and N64 systems as well as AL product revenues
partially offset by the decline in 16-bit cartridge and Saturn product sales.
Net revenues from PlayStation and N64 products increased $172,496,000 while
sales of 16-bit cartridge and Saturn products decreased $62,671,000 in
comparison to the prior year. North America AL sales increased $34,355,000,
compared to the prior year.
International net revenues increased by 30% to $389,429,000, or 43% of
consolidated fiscal 1998 net revenues, compared to $300,412,000, or 45% of the
fiscal 1997 total. The increase in international revenues was due to higher
worldwide sales of PlayStation products and increased sales of PC-CD, N64 and AL
products in Europe and Asia Pacific. This was partially offset by a decrease in
32-bit product sales in Japan, international 16-bit video game cartridge
revenues and licensing of our products.
================================================================================
1998 1997 % change
- --------------------------------------------------------------------------------
Cost of goods sold $480,766,000 $328,943,000 46.2
As a percentage of net
revenues 52.9% 48.9%
- --------------------------------------------------------------------------------
Cost of goods sold as a percentage of revenues in fiscal 1998 reflected
increased product costs associated with increased sales of lower margin
affiliated label and N64 titles, a decrease in higher margin PC-CD sales as a
proportion of total net revenues and higher professional and celebrity royalties
on CD-video game and PC-CD titles as well as higher manufacturing royalties on
CD-video game titles.
================================================================================
%
Operating Expenses 1998 1997 change
- --------------------------------------------------------------------------------
Marketing and sales $128,308,000 $102,072,000 25.7
As a percentage of
net revenues 14.1% 15.2%
- --------------------------------------------------------------------------------
General and
administrative $ 57,838,000 $ 48,489,000 19.3
As a percentage of
net revenues 6.4% 7.2%
- --------------------------------------------------------------------------------
Research and
development $146,199,000 $130,755,000 11.8
As a percentage of
net revenues 16.1% 19.4%
- --------------------------------------------------------------------------------
The increase in marketing and sales expenses was primarily attributable to
increased television and print advertising to support new releases and increased
cooperative advertising associated with higher revenues as compared to the prior
year. Increases in marketing and sales expenses were also due to additional
headcount related to the continued expansion of our worldwide distribution
business.
The increase in general and administrative expenses was primarily due to an
increase in payroll and occupancy costs due to the opening of additional
international offices and additional depreciation related to the installation of
new management information systems worldwide. This increase was partially offset
by lower spending in Japan.
The increase in marketing and sales as well as general and administrative
expenses were partially offset by savings attributable to the integration of
Maxis in the second quarter of fiscal 1998.
The increase in research and development expenses was due to additional
headcount related expenses in North America and Europe attributable to increased
in-house development capacity, higher development costs per title and additional
depreciation of computer equipment.
We released a total of 71 new products in fiscal 1998 compared to 68 in fiscal
1997.
================================================================================
Other Operating Expenses
1998 1997 % change
- --------------------------------------------------------------------------------
Charge for acquired
in-process technology $ 1,500,000 $-- N/M
As a percentage of
net revenues 0.2% N/A
- --------------------------------------------------------------------------------
Merger costs $10,792,000 $-- N/M
As a percentage of
net revenues 1.2% N/A
- --------------------------------------------------------------------------------
In connection with the acquisition of the remaining 35% minority ownership
interest in EAV in December 1997, we incurred a charge of $1,500,000 for
acquired in-process technology. This charge was made after we concluded that the
in-process technology had no alternative future use after taking into
consideration the potential for usage of the software in different products and
resale of the software.
On July 25, 1997, we completed a merger with Maxis. In conjunction with the
merger, we recorded costs of $10,792,000 which included direct transaction fees
and costs associated with integrating the operations of the two companies.
21
<PAGE>
================================================================================
1998 1997 % change
- --------------------------------------------------------------------------------
Operating income $83,449,000 $62,769,000 32.9
As a percentage of
net revenues 9.2% 9.3%
- --------------------------------------------------------------------------------
Operating income increased due to higher net revenues and related gross profit
partially offset by increased operating expenses including the charge for
acquired in-process technology as well as merger costs related to the
acquisition of Maxis.
================================================================================
1998 1997 % change
- --------------------------------------------------------------------------------
Interest and other
income, net $24,811,000 $13,279,000 86.8
As a percentage of
net revenues 2.7% 2.0%
- --------------------------------------------------------------------------------
The increase in other income is primarily due to higher interest income
attributable to higher cash balances as compared to the previous year and the
sale of our 50% ownership interest in Creative Wonders, LLC in December 1997.
The sale of Creative Wonders resulted in a gain of $12,625,000. This increase
was partially offset by lower gains on sales of marketable securities in the
amount of $4,098,000 compared to $8,393,000 in the prior year.
================================================================================
1998 1997 % change
- --------------------------------------------------------------------------------
Income taxes $35,726,000 $26,003,000 37.4
Effective tax rate 33.0% 34.2%
- --------------------------------------------------------------------------------
Our effective tax rate was lower for the year as a result of a higher proportion
of international income subject to a lower foreign tax rate as compared to the
prior year and the reinstatement of the federal research and development tax
credit for the full fiscal year 1998.
================================================================================
1998 1997 % change
- --------------------------------------------------------------------------------
Minority interest in
consolidated joint venture $28,000 $1,282,000 (97.8)
As a percentage of net
revenues 0.0% 0.2%
- --------------------------------------------------------------------------------
As discussed above, we acquired the remaining minority ownership interest in EAV
in December 1997. Prior to the acquisition, EAV was sixty-five percent owned by
us and thirty-five percent owned by VEI. Minority interest for the year
reflected only a portion of reported losses for EAV as the net equity of EAV
fell below zero in the first quarter of fiscal 1998.
================================================================================
1998 1997 % change
- --------------------------------------------------------------------------------
Net income $72,562,000 $51,327,000 41.4
As a percentage of
net revenues 8.0% 7.6%
- --------------------------------------------------------------------------------
The increase in net income was due to the growth in revenues and gross margins
offset by higher operating expenses. The impact of the gain on sale of Creative
Wonders, LLC was offset by the charge for acquired in-process technology and
merger costs.
22
<PAGE>
================================================================================
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, our working capital was $333,256,000 compared to
$408,098,000 at March 31, 1998. Cash, cash equivalents and short-term
investments decreased by approximately $61,738,000 in fiscal 1999. We generated
$150,768,000 of cash from operations in fiscal 1999. In addition, $30,577,000
was provided through the sale of equity securities under our stock plans.
Reserves for bad debts and sales returns increased from $51,575,000 at March 31,
1998 to $72,850,000 at March 31, 1999. 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 1999, we invested $122,688,000 in cash for the acquisition of
Westwood Studios, Inc., $9,466,000 for the acquisition of ABC Software,
approximately $7,800,000 for investment in affiliates and approximately
$8,000,000 in long-term licenses. In addition, we invested approximately
$78,800,000 for new facilities in Europe and Canada and $17,800,000 in computer
equipment worldwide. In addition, we repurchased 222,500 shares of our common
stock for approximately $9,001,000.
Our principal source of liquidity is $312,822,000 in cash, cash equivalents
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 next twelve months and the foreseeable future.
================================================================================
YEAR 2000 READINESS DISCLOSURE
Background of Year 2000 Issues
Many currently installed computer systems and software products are unable to
distinguish between twentieth century dates and twenty-first century dates
because such systems may have been developed using two digits rather than four
to determine the applicable year. For example, computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This error could result in system failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced to comply with such "Year
2000" requirements.
State of Readiness
Our business is dependent on the operation of numerous systems that could
potentially be impacted by Year 2000 related problems. Those systems include,
among others: hardware and software systems used to deliver products to our
customers; communications networks such as the Internet and private intranets,
which we depend on to receive orders for products from our customers; the
internal systems of our customers and suppliers; products sold to customers; the
hardware and software systems used internally in the management of our business;
and non-information technology systems and services used in the management of
our business, such as power, telephone systems and building systems.
Based on an analysis of the systems potentially impacted by conducting
business in the twenty-first century, we are applying a phased approach to
making such systems, and accordingly, our operations, ready for the year 2000.
Beyond awareness of the issues and scope of systems involved, the phases of
activities in progress include: an assessment of specific underlying computer
systems, programs and hardware; renovation, replacement or redeployment of Year
2000 non-compliant technology; validation and testing of technologically
compliant Year 2000 solutions; and implementation of the Year 2000 compliant
systems.
As a third party providing software products, we are dependent on the
hardware and software products used to deliver such products and services. If
such products are inoperable due to Year 2000 issues, our business, financial
condition and results of operations could be adversely affected. An inventory of
our internal business systems has been completed and planned software and
hardware upgrades to ensure Year 2000 compliance are in process. The upgrades to
these systems are expected to be completed by June, 1999.
Costs
To date we have not incurred significant costs directly related to Year 2000
issues, even in cases where non-compliant information technology systems were
redeployed or replaced.
We believe that future expenditures to upgrade internal systems and
applications will not have a material adverse effect on our business, financial
condition and results of operations and are primarily included within our
ongoing system development plan. In addition, while the potential costs of
redeploying personnel and of any delays in implementing other projects are not
known, the costs are anticipated to be immaterial.
23
<PAGE>
Risks of the Year 2000 Issues
Our financial information systems include an integrated suite of business
applications developed and supported by Oracle Corporation. These applications
systems are in place and currently support daily operations in the United States
and in Europe. Based on representations made by Oracle Corporation and upon our
limited tests, we believe these systems to be Year 2000 compliant.
We believe our software products are Year 2000 compliant; however, success
of our Year 2000 compliance efforts may depend on the success of our customers
dealing with their Year 2000 issues. Customer difficulties with Year 2000 issues
might require us to devote additional resources to resolve underlying problems.
Failures of our and/or third parties' computer systems could have a material
adverse impact on our ability to conduct business. For example, a significant
percentage of purchase orders received from our customers are computer generated
and electronically transmitted. In addition, the Year 2000 could affect the
ability of consumers to use our PC based products. If the computer systems on
which the consumers use our products are not Year 2000 compliant, such
noncompliance could affect the consumers' ability to use such products.
Contingency Plans
We continue to assess certain of our Year 2000 exposure areas in order to
determine what additional steps beyond those identified by our internal review
in the United States are advisable. We are currently developing a contingency
plan for handling Year 2000 problems that are not detected and corrected prior
to their occurrence. We expect this plan will be completed by June 30, 1999. We
believe that the systems, which represent the principal exposures, have been
identified, and to the extent necessary, are in the process of being modified to
become Year 2000 compliant. Additionally, we will be conducting tests of our
principal business systems to verify that those systems are Year 2000 compliant.
Any failure to address any unforeseen Year 2000 issue could adversely affect our
business, financial condition and results of operations.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing currencies (the
"legacy currency") and the one common legal currency known as the "Euro". From
January 1, 1999 through June 30, 2002 the countries will be able to use their
legacy currencies or the Euro to transact business. By July 1, 2002, at the
latest, the conversion to the Euro will be complete at which time the legacy
currencies will no longer be legal tender. The conversion to the Euro will
eliminate currency exchange rate risk between the member countries.
We do not anticipate any material impact from the Euro conversion on our
financial information systems which currently accommodate multiple currencies.
Computer software changes necessary to comply with the Year 2000 issue are
generally compliant to the Euro conversion issue. Due to numerous uncertainties,
we cannot reasonably estimate the effect that the Euro conversion issue will
have on our pricing or market strategies, and the impact, if any, it will have
on our financial condition and results of operations.
24
<PAGE>
- --------------------------------------------------------------------------------
RISK FACTORS
EA's business is subject to many risks and uncertainties which may affect
our future financial performance. Some of those important risks and
uncertainties which may cause our operating results to vary or which may
materially and adversely affect our operating results are as follows:
- - Product development schedules are frequently unreliable and make predicting
quarterly results difficult. Product development schedules, particularly for new
hardware platforms and high-end multimedia PCs are difficult to predict because
they involve creative processes, use of new development tools for new platforms
and the learning process, research and experimentation associated with
development for new technologies. For example, SimCity 3000, the follow on
product to SimCity 2000, was expected to ship in fiscal 1998, at the time of the
merger with Maxis. Due to additional development delays, that product did not
ship until the fourth quarter of fiscal year 1999. Also, Tiberian Sun, which was
expected to ship in fiscal 1999 at the time of the acquisition of Westwood
Studios, is not expected to be released until the second quarter of fiscal 2000
due to development delays. Additionally, development risks for CD-ROM products
can cause particular difficulties in predicting quarterly results because brief
manufacturing lead times allow finalizing products and projected release dates
late in a quarter. Our revenues and earnings are dependent on our ability to
meet our product release schedules, and our failure to meet those schedules
could result in revenues and earnings which fall short of analysts' expectations
for any individual quarter and the fiscal year.
- - New video game platforms create additional technical and business model
uncertainties. A large portion of our revenues are derived from the sale of
products for play on proprietary video game platforms such as the PlayStation
and the N64. The success of our products is significantly affected by acceptance
of the new video game hardware systems and the life span of older hardware
platforms and our ability to accurately predict which platforms will be most
successful.
Sometimes we will spend development and marketing resources on products designed
for new video game systems that have not yet achieved large installed bases or
will continued product development for older hardware platforms that may have
shorter life cycles than we expected. Conversely, if we do not develop for a
platform that achieves significant market acceptance, or discontinue development
for a platform that has a longer life cycle than expected, our revenue growth
may be adversely affected.
For example, while the Sega Dreamcast console is scheduled to launch in the
United States in late calendar 1999 and has already launched in Japan, we have
no products under development for this platform. Accordingly, we will not have
products available should this platform achieve wide market acceptance.
Similarly, we intend to launch a variety of products for the new Sony
PlayStation platform, the PlayStation II, expected to be released in the Untied
States in September 2000. Should that platform not achieve wide acceptance by
consumers, we will have spent a disproportionate amount of our resources for
this platform. Additionally, we have not negotiated publishing agreements with
Sony, Sega or Nintendo for their next generation platforms, and we do not know
whether the terms of those agreements will be favorable.
- - The business models and technology for e-commerce and online gaming are
unproven. While we do not currently derive significant revenues from online
sales of our packaged products or from games played online, we believe that both
will become a more significant factor in our business and in the interactive
gaming business generally in the future.
E-commerce is becoming an increasingly popular method for conducting business
with consumers. How that form of distribution will affect the more traditional
retail distribution, at which we have historically excelled, and over what time
period, is uncertain. Additionally, technology, staffing and support for sales
direct to consumers differ from that required for sales to resellers.
Online gaming, and particularly multiplayer online gaming such as our Ultima
Online product, has many risks not currently associated with most packaged good
sales including, but not limited to, the following:
In "massively multiplayer" games such as Ultima Online, unanticipated
player conduct significantly affects the performance of the game, and social
issues raised by players' conduct frequently determine player satisfaction. Our
ability to effectively proctor such games is uncertain.
The current business model is as yet experimental and maybe unsustainable;
whether revenues will continue to be sufficient to maintain the significant
support, service and product enhancement demands of online users is uncertain.
We have little experience in pricing strategies for online games or in
predicting usage patterns of our customers.
Additionally, the speed and reliability of the Internet and the performance
of a user's Internet service provider are not controlled by us but impact both
e-commerce and online game performance. Whether the Internet infrastructure will
be adequate to meet increasing demand will affect our ability to grow our
Internet dependent businesses.
- - Our business, our products, and our distribution are subject to increasing
regulation in key territories. Legislation is increasingly introduced which may
affect the content of our products and their distribution. For example, privacy
rules in the United States and Europe impose various
25
<PAGE>
restrictions on our web sites. Those rules vary by territory while of course the
Internet recognizes no geographical boundaries. Other countries such as Germany
have adopted laws regulating content transmitted over the Internet that are
stricter than current United States laws. In the United States, in response to
recent events, the federal and several state governments are considering content
restrictions on products such as those made by us as well as restrictions on
distribution of such products. Any one or more of these factors could harm our
business.
- - Our platform licensors are our chief competitors and frequently control the
manufacturing of our video game products. Our agreements with hardware
licensors, which are also our chief competitors, typically give significant
control to the licensor over the approval and manufacturing of our products.
This fact could, in certain circumstances, leave us unable to get our products
approved, manufactured and shipped to customers. In most events, control of the
approval and manufacturing process by the platform licensors increases both our
manufacturing lead times and costs as compared to those we can achieve
independently. For example, in prior years, we experienced delays in obtaining
approvals for and manufacturing of PlayStation products which caused delays in
shipping those products. The potential for additional delay or refusal to
approve or manufacture our products continues with our platform licensors. Such
occurrences would harm our business and adversely affect our financial
performance.
- - We face intense competition for talent from highly valued Internet companies.
Competition for employees in the interactive software business continues to be
intense. Recently, the most intense competition for recruiting and retaining key
employees is from Internet companies. The high market valuations, large equity
positions for key executives and creative talent and fast stock price
appreciation of these companies make their compensation packages attractive to
those who are already working in more mature companies. This situation creates
difficulty for us to compete for the attraction and retention of executive and
key creative talent.
- - Foreign Sales and Currency Fluctuations. For fiscal 1999, international net
revenues comprised 42% of total consolidated net revenues. We expect foreign
sales to continue to account for a significant and growing portion of our
revenues. Such sales are subject to unexpected regulatory requirements, tariffs
and other barriers. Additionally, foreign sales are primarily made in local
currencies which may fluctuate. As a result of current economic conditions in
Asia, we are subject to additional foreign currency risk. Though we do not
currently derive a significant portion of revenues and operating profits from
sales in Asia and other developing countries, our foreign currency exposure may
increase as operations in these countries grow and if current economic trends in
Asia continue. Any of these factors may significantly harm our business.
- - Fluctuations in Stock Price. Due to analysts' expectations of continued growth
and other factors, any shortfall in earnings could have an immediate and
significant adverse effect on the trading price of our common stock in any given
period. As a result of the factors discussed in this report and other factors
that may arise in the future, the market price of our common stock historically
has been, and may continue to be subject to significant fluctuations over a
short period of time. These fluctuations may be due to factors specific to us,
to changes in analysts' earnings estimates, or to factors affecting the
computer, software, entertainment, media or electronics industries or the
securities markets in general. For example, during the fiscal year 1999, the
price per share of our common stock ranged from $33.88 to $56.00. During the
fiscal year 1998, the price per share of our common stock ranged from $20.13 to
$46.94.
Because of these and other factors affecting our 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.
26
<PAGE>
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Market Risk
We are exposed to various market risks, including the changes in foreign
currency exchange rates and interest rates. Market risk is the potential loss
arising from changes in market rates and prices. Foreign exchange contracts used
to hedge foreign currency exposures and short-term investments are subject to
market risk. We do not consider our cash and cash equivalents to be subject to
interest rate risk due to their short maturities. We do not enter into
derivatives or other financial instruments for trading or speculative purposes.
Foreign Currency Exchange Rate Risk
We utilize foreign exchange contracts to hedge foreign currency exposures of
underlying assets and liabilities, primarily certain intercompany receivables
that are denominated in foreign currencies thereby limiting our risk. Gains and
losses on foreign exchange contracts are reflected in the income statement. At
March 31, 1999, we had foreign exchange contracts, all with maturities of less
than nine months to purchase and sell approximately $178,178,000 in foreign
currencies, primarily British Pounds, Canadian Dollars, German Deutschmarks,
Japanese Yen and other European currencies.
Fair value represents the difference in value of the contracts at the spot rate
and the forward rate, plus the unamortized premium or discount. At March 31,
1999, fair value of these contracts is not significant. The counterparties to
these contracts are substantial and creditworthy multinational commercial banks.
The risks of counterparty nonperformance associated with these contracts are not
considered to be material. Notwithstanding our efforts to manage foreign
exchange risks, there can be no assurances that our hedging activities will
adequately protect us against the risks associated with foreign currency
fluctuations.
The table below provides information about our foreign currency forward exchange
contracts at March 31, 1999. The information is provided in U.S. dollar
equivalents and presents the notional amount (forward amount), the weighted
average contractual foreign currency exchange rates and fair value. All
contracts mature within nine months.
- --------------------- ----------------- ------------ -----------------
Weighted-
Average
Contract Contract
Amount Rate Fair Value
- --------------------- ----------------- ------------ -----------------
(in thousands) (in thousands)
Foreign currency to
be sold under
contract:
British Pound $93,044 1.63 $ 331
Canadian Dollar 29,118 1.53 (278)
Japanese Yen 9,862 115.33 408
South African 2,000 7.24 (321)
Rand
Australian 1,554 0.62 (34)
Dollar
Brazilian Real 1,441 1.91 (111)
- --------------------- ----------------- ------------ -----------------
Total $137,019 $ (5)
- --------------------- ----------------- ------------ -----------------
Foreign currency to
be purchased under
contract:
British Pound $41,159 1.61 $1,459
- --------------------- ----------------- ------------ -----------------
Total $41,159 $1,459
- --------------------- ----------------- ------------ -----------------
- --------------------- ----------------- ------------ -----------------
Grand total $178,178 $1,454
- --------------------- ----------------- ------------ -----------------
While the contract amounts provide one measurement of the volume of these
transactions, they do not represent the amount of our exposure to credit risk.
The amounts (arising from the possible inabilities of counterparties to meet the
terms of their contracts) are generally limited to the amounts, if any, by which
the counterparties' obligations exceed our obligations as these contracts can be
settled on a net basis at our option. We control credit risk through credit
approvals, limits and monitoring procedures.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates primarily
to our investment portfolio. We do not use derivative financial instruments in
our investment portfolio. We manage our interest rate risk by maintaining an
investment portfolio primarily consisting of debt instruments of high credit
quality and relatively short average maturities. We also manage our interest
rate risk by maintaining sufficient cash and cash equivalent balances such that
we are typically able to hold our investments to maturity. At March 31, 1999,
our cash equivalents, short-term and long-term investments included debt
securities of $224,581,000. Notwithstanding our efforts
27
<PAGE>
to manage interest rate risks, there can be no assurances that we will be
adequately protected against the risks associated with interest rate
fluctuations.
The table below presents the amounts and related weighted average interest rates
of our investment portfolio at March 31, 1999:
- ----------------------- ------------------ ------------ --------------
Average Interest
Rate Cost Fair Value
- ----------------------- ------------------ ------------ --------------
(Dollars in thousands)
Cash equivalents(1)
Fixed rate 0.00% -- --
Variable rate 4.70% $135,567 $135,567
Short-term
investments(1)
Fixed rate 4.64% $ 21,197 $ 21,700
Variable rate 3.94% $ 48,800 $ 48,964
Long-term
investments(1)
Fixed rate 0.00% -- --
Variable rate 5.69% $ 18,400 $ 18,503
- ----------------------- ------------------ ------------ --------------
(1) See definition in note 1 of the Notes to the Consolidated Financial
Statements, included in item 8 hereof.
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 47.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Electronic Arts Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Electronic Arts
Inc. and subsidiaries as of March 31, 1999 and 1998, 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, 1999. 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 did not audit the financial statements of
Maxis, Inc., a company acquired by Electronic Arts Inc. in a business
combination accounted for as a pooling of interests as described in Note 11 to
the consolidated financial statements, which statements reflect total revenues
constituting 7% for the year ended March 31, 1997, of the related consolidated
totals. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Maxis, Inc., is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Electronic Arts Inc. and
subsidiaries as of March 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 1999, in conformity with generally accepted accounting principles.
Mountain View, California KPMG LLP
April 30, 1999
29
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(In thousands, except share data)
As of March 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-term investments $ 312,822 $ 374,560
Marketable securities 4,884 3,721
Receivables, less allowances of $72,850 and $51,575, respectively 149,468 139,374
Inventories 22,376 19,626
Other current assets 79,915 52,530
-----------------------------
Total current assets 569,465 589,811
Property and equipment, net 181,266 105,095
Long-term investments 18,400 24,200
Investment in affiliates 25,864 20,541
Goodwill and other intangibles 90,682 1,585
Other assets 16,196 4,449
-----------------------------
$ 901,873 $ 745,681
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 63,881 $ 56,233
Accrued liabilities 172,328 125,480
-----------------------------
Total current liabilities 236,209 181,713
Minority interest in consolidated joint venture 2,733 --
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 1,000,000 shares -- --
Common stock, $0.01 par value. Authorized 104,000,000 shares;
issued 61,291,849 and 60,159,601 shares; outstanding 613 602
61,169,286 and 60,159,601 shares, respectively
Paid-in capital 267,699 234,294
Treasury stock, at cost; 122,563 shares in 1999 (4,926) --
Retained earnings 402,112 330,540
Accumulated other comprehensive loss (2,567) (1,468)
-----------------------------
Total stockholders' equity 662,931 563,968
-----------------------------
$ 901,873 $ 745,681
=============================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
30
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
(In thousands, except per share data)
Years Ended March 31,
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $ 1,221,863 $ 908,852 $ 673,028
Cost of goods sold 625,547 480,766 328,943
--------------------------------------------
Gross profit 596,316 428,086 344,085
Operating expenses:
Marketing and sales 163,407 128,308 102,072
General and administrative 75,556 57,838 48,489
Research and development 202,080 146,199 130,755
Charge for acquired in-process technology 44,115 1,500 --
Merger costs -- 10,792 --
Amortization of intangibles 5,880 -- --
--------------------------------------------
Total operating expenses 491,038 344,637 281,316
--------------------------------------------
Operating income 105,278 83,449 62,769
Interest and other income, net 13,180 24,811 13,279
--------------------------------------------
Income before provision for income taxes and minority interest 118,458 108,260 76,048
Provision for income taxes 45,414 35,726 26,003
--------------------------------------------
Income before minority interest 73,044 72,534 50,045
Minority interest in consolidated joint venture (172) 28 1,282
--------------------------------------------
Net income $ 72,872 $ 72,562 $ 51,327
============================================
Net income per share:
Basic $ 1.20 $ 1.23 $ 0.89
Diluted $ 1.15 $ 1.19 $ 0.86
Number of shares used in computation:
Basic 60,748 58,867 57,544
Diluted 63,272 60,958 59,557
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
31
<PAGE>
<TABLE>
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Years Ended March 31, 1999, 1998 and 1997
(In thousands)
Accumulated
Other
Common Stock Comprehensive Treasury Stock
-------------------- Paid-In Retained Income ---------------------
Shares Amount Capital Earnings (Loss) Shares Amount Total
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1996 56,747 $567 $158,144 $206,651 $14,189 -- $ -- $379,551
Net income 51,327 51,327
Change in unrealized
appreciation of investments,
net (8,176) (8,176)
Reclassification adjustment for
gains realized in net income,
net (5,497) (5,497)
Translation adjustment 152 152
-----------
Comprehensive income 37,806
Proceeds from sales of shares
through stock plans 1,516 16 20,985 21,001
Tax benefit related to stock
options 9,210 9,210
Repayment of notes receivable 101 101
Amortization of deferred 107 107
compensation
-------------------------------------------------------------------------------------------
Balances at March 31, 1997 58,263 583 188,547 257,978 668 -- -- 447,776
Net income 72,562 72,562
Change in unrealized
appreciation of investments,
net 1,882 1,882
Reclassification adjustment for
gains realized in net income,
net (2,745) (2,745)
Translation adjustment (1,273) (1,273)
-----------
Comprehensive income 70,426
Proceeds from sales of shares
through stock plans 1,897 19 37,729 37,748
Tax benefit related to stock
options 7,931 7,931
Repayment of notes receivable 87 87
-------------------------------------------------------------------------------------------
Balances at March 31, 1998 60,160 602 234,294 330,540 (1,468) -- -- 563,968
Net income 72,872 72,872
Change in unrealized
appreciation of investments,
net 2,533 2,533
Reclassification adjustment for
gains realized in net income,
net (989) (989)
Translation adjustment (2,643) (2,643)
-----------
Comprehensive income 71,773
Proceeds from sales of shares
through stock plans 1,132 11 27,791 (1,300) 100 4,075 30,577
Purchase of treasury stock (223) (9,001) (9,001)
Tax benefit related to stock
options 5,614 5,614
--------------------------------------------------------------------------------------------
Balances at March 31, 1999 61,292 $613 $267,699 $402,112 $(2,567) (123) $(4,926) $662,931
============================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
32
<PAGE>
<TABLE>
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended March 31,
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES: $ 72,872 $ 72,562 $ 51,327
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest in consolidated joint venture 172 (28) (1,282)
Equity in net loss of affiliates 155 1,162 1,566
Gain on sale of affiliate -- (12,625) --
Depreciation and amortization 40,461 26,907 22,986
Loss on sale of fixed assets 729 1,813 164
Loss on disposition of assets related to merger -- 5,607 --
Gain on sale of marketable securities (1,454) (4,098) (8,393)
Provision for doubtful accounts 6,027 4,302 4,840
Charge for acquired in-process technology 44,115 1,500 --
Change in assets and liabilities, net of acquisitions:
Receivables (11,702) (40,432) (28,018)
Inventories 1,282 (1,753) (1,626)
Other assets (24,266) (5,660) 8,142
Accounts payable 1,622 12,783 4,824
Accrued liabilities 32,797 29,217 24,307
Deferred income taxes (12,042) (12,264) 1,165
--------------------------------------------
Net cash provided by operating activities 150,768 78,993 80,002
--------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 8,281 25 171
Proceeds from sales of marketable securities 1,818 7,276 21,152
Purchase of marketable securities -- (2,762) --
Capital expenditures (115,820) (45,238) (39,124)
Investment in affiliates, net (5,478) 16,579 (11,271)
Purchase of held-to-maturity securities -- (1,008) (23,627)
Proceeds from maturity of securities 17,306 13,338 20,598
Change in short-term investments, net 76,755 (34,504) (62,132)
Acquisition of Westwood Studios, Inc. (122,688) -- --
Acquisition of other subsidiaries, net of cash acquired (11,805) (3,225) --
--------------------------------------------
Net cash used in investing activities (151,631) (49,519) (94,233)
--------------------------------------------
FINANCING ACTIVITIES:
Proceeds from sales of shares through stock plans 30,577 37,748 21,001
Purchase of treasury shares (9,001) -- --
Repayment of notes receivable -- 87 101
Tax benefit from exercise of stock options 5,614 7,931 9,210
Proceeds from minority interest investment in consolidated joint venture 2,109 -- --
--------------------------------------------
Net cash provided by financing activities 29,299 45,766 30,312
--------------------------------------------
Translation adjustment (2,191) (1,273) 185
--------------------------------------------
Increase in cash and cash equivalents 26,245 73,967 16,266
Beginning cash and cash equivalents 215,963 141,996 125,730
--------------------------------------------
Ending cash and cash equivalents 242,208 215,963 141,996
Short-term investments 70,614 158,597 126,145
--------------------------------------------
Ending cash, cash equivalents and short-term investments $ 312,822 $ 374,560 $ 268,141
============================================
Supplemental cash flow information:
Cash paid during the year for income taxes $ 43,050 $ 32,888 $ 15,323
============================================
Non-cash investing activities:
Change in unrealized appreciation of investments and marketable securities $ 1,805 $ (1,411) $ (19,562)
============================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
33
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999, 1998 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The accompanying consolidated financial statements include the accounts of
Electronic Arts Inc. and its wholly-owned and majority-owned subsidiaries (the
"Company"). 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. The results of operations for fiscal
1999, 1998 and 1997 contain 52 weeks. 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
The Company's revenue recognition policies are in compliance with American
Institute of Certified Public Accountants Statement of Position ("SOP") 97-2,
"Software Revenue Recognition", and SOP 98-4 "Deferral of the Effective Date of
a Provision of SOP 97-2", which provide guidance on generally accepted
accounting principles for recognizing revenue on software transactions. SOP 97-2
requires that revenue recognized from software arrangements be allocated to each
element of the arrangement based on the relative fair values of the elements.
The Company has adopted the provisions of these SOPs as of April 1, 1998. The
adoption has, in certain circumstances, resulted in the deferral of certain
revenues associated with the Company's sales promotions and products with
multiple deliverable elements. Neither the changes in certain business practices
nor the deferral of certain revenues have resulted in a material impact on the
Company's operating results, financial position or cash flows for the period
ended March 31, 1999. Total deferred revenue at March 31, 1999 and 1998 was
$8,206,000, and $2,797,000, respectively.
Product Sales: Revenue is generally 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 recognized net of an allowance for
returns and price protection.
Online Subscription Revenues: Monthly online subscription revenues are
recognized over the period in which the services are provided.
Software Licenses: For those agreements which provide the customers the right to
multiple copies in exchange for guaranteed minimum royalty 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 $17,788,000, $15,431,000, and
$26,749,000 for the fiscal years ended March 31, 1999, 1998 and 1997,
respectively.
(c) Cash and Investments
Cash equivalents consist of highly liquid investments with insignificant rate
risk and with maturities of three months or less at the date of purchase.
Short-term investments include securities with maturities greater than three
months and less than one year, except for certain investments with stated
maturities greater than one year. Long-term investments consist of securities
with maturities greater than one year.
The Company accounts for investments under Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," ("SFAS 115"). The Company's policy is to protect the value of its
investment portfolio and to minimize principal risk by earning returns based on
current interest rates. Management determines the appropriate classification of
its debt and equity securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Securities classified as held-to-maturity are
carried at amortized cost, which is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in interest
income. Debt securities, not classified as held-to-maturity, are classified as
available-for-sale and are stated at fair value. Securities sold is based on
the specific identification method.
(d) Prepaid Royalties
Prepaid royalties consist primarily of prepayments for manufacturing royalties,
original equipment manufacturer (OEM) fees and license fees paid to celebrities
and professional sports organizations for use of their trade name. Also included
in prepaid royalties are prepayments made to independent software developers
under development arrangements that have alternative future uses. Prepaid
royalties are expensed at the contractual royalty rate as cost of
34
<PAGE>
goods sold based on actual net product sales. Management evaluates the future
realization of prepaid royalties quarterly and charges to income any amounts
that management deems unlikely to be realized through product sales. Royalty
advances are classified as current and non-current assets based upon estimated
net product sales for the following year. The current portion of prepaid
royalties, included in other current assets, was $35,057,000 and $20,470,000 at
March 31, 1999 and 1998, respectively. The long-term portion of prepaid
royalties, included in other assets, was $7,602,000 and $2,289,000 at March 31,
1999 and 1998, respectively.
(e) Software Development Costs
Research and development costs, which consist primarily of software development
costs, are expensed as incurred. SFAS No. 86 provides for the capitalization of
certain software development costs incurred after technological feasibility of
the software is established or for development costs that have alternative
future uses. Under the Company's current practice of developing new products,
the technological feasibility of the underlying software is not established
until substantially all product development is complete, which generally
includes the development of a working model. The software development costs that
have been capitalized to date have been insignificant.
(f) Inventories
Inventories are stated at the lower of cost or market. Inventories at March 31,
1999 and 1998 consisted of:
================================================================================
1999 1998
- --------------------------------------------------------------------------------
(in thousands)
Raw materials and work in process $ 2,983 $ 2,392
Finished goods 19,393 17,234
- --------------------------------------------------------------------------------
$22,376 $19,626
- --------------------------------------------------------------------------------
(g) Advertising Costs
The Company generally expenses advertising costs as incurred, except for
production costs associated with media campaigns which are deferred and charged
to expense at the first run of the ad. Cooperative advertising with distributors
and retailers is accrued when revenue is recognized. Cooperative advertising
credits are reimbursed when qualifying claims are submitted. For the fiscal
years ended March 31, 1999, 1998 and 1997, advertising expenses totaled
approximately $72,437,000, $55,090,000 and $36,159,000, respectively.
(h) Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the
accelerated and straight-line methods over the following useful lives:
- --------------------------------------------------------------------------------
Buildings 20 to 25 years
- --------------------------------------------------------------------------------
Computer equipment 3 to 7 years
- --------------------------------------------------------------------------------
Furniture and equipment 3 to 7 years
- --------------------------------------------------------------------------------
Leasehold improvements Lesser of the lease terms or the estimated
useful lives of the improvements
- --------------------------------------------------------------------------------
(i) Intangible Assets
Intangible assets net of amortization at March 31, 1999 and 1998, of
$90,682,000, and $2,148,000, respectively, include goodwill, 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 from two to twelve years. Amortization expense for
fiscal years ended March 31, 1999, 1998 and 1997 was $5,880,000, $692,000, and
$654,000, respectively. The Company assesses the recoverability of goodwill by
determining whether the carried value of the assets may be recovered through
estimated future cash flows.
(j) Income Taxes
Income tax expense is based on reported earnings before income taxes. Deferred
income taxes reflect the impact of temporary differences between assets and
liabilities recognized for financial reporting purposes and such amounts
recognized for tax purposes.
(k) 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 accumulated other comprehensive income (loss) in 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 losses of $1,168,000, $517,000 and
$1,024,000, for the fiscal years ended March 31, 1999, 1998 and 1997,
respectively.
(l) Net Income Per Share
The following summarizes the computations of Basic Earnings Per Share ("EPS")
and Diluted EPS. Basic EPS is computed as net earnings divided by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable
through stock-based compensation plans including stock options, restricted stock
awards, warrants and other convertible securities using the treasury stock
method.
35
<PAGE>
(in thousands, except for per share amounts):
================================================================================
Years Ended March 31,
1999 1998 1997
- --------------------------------------------------------------------------------
Net income $72,872 $72,562 $51,327
- --------------------------------------------------------------------------------
Shares used to compute
net income per share:
Weighted-average
common shares 60,748 58,867 57,544
Dilutive stock options 2,524 2,091 2,013
- --------------------------------------------------------------------------------
Dilutive potential common
shares 63,272 60,958 59,557
- --------------------------------------------------------------------------------
Net income per share:
Basic $1.20 $1.23 $ 0.89
Diluted $1.15 $1.19 $ 0.86
Excluded from the above computation of weighted-average shares for diluted EPS
for the fiscal years ended March 31, 1999, 1998 and 1997 were options to
purchase 645,000, 137,000 and 623,000 shares of common stock, respectively, as
the options' exercise price was greater than the average market price of the
common shares. For the fiscal year ended March 31, 1999, the weighted-average
exercise price of the respective options was $47.33.
(m) Employee Benefits
The Company has a 401(k) Plan covering substantially all of its U.S. employees.
The 401(k) Plan permits the Company to make discretionary contributions to
employees' accounts based on the Company's financial performance. The Company
contributed $2,092,000, $902,000 and $925,000 to the Plan in fiscal 1999, fiscal
1998 and fiscal 1997, respectively.
(n) Stock-based Compensation
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25").
(o) Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS 133
is effective as of the beginning of the first quarter of the fiscal year
beginning after June 15, 2000. The Company is determining the effect of SFAS 133
on its financial statements.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". SOP 98-1 requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software. SOP 98-1 is effective for
financial statements issued for fiscal years beginning after December 15, 1998.
The adoption of SOP 98-1 is not expected to have a material impact on the
Company's results of operations.
In December 1998, the Accounting Standards Executive Committee of the AICPA
issued SOP 98-9, "Software Revenue Recognition, with Respect to Certain
Arrangements," which required recognition of revenue using the "residual method"
in a multiple element arrangement when fair value does not exist for one or more
of the undelivered elements in the arrangement. SOP 98-9 is effective for
transactions entered into after March 15, 1999. Under the "residual method", the
total fair value of the undelivered elements is deferred and subsequently
recognized in accordance with SOP 97-2. The Company will adopt SOP 98-9 in
fiscal year 2000 and does not expect a material change to its accounting for
revenues as a result of the provisions of SOP 98-9.
(p) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Such
estimates include provisions for doubtful accounts, sales returns and
allowances, warranty provisions, and estimates regarding the recoverability of
prepaid royalty advances and inventories. Actual results could differ from those
estimates.
(q) Reclassifications
Certain amounts have been reclassified to conform to fiscal 1999 presentation.
(r) Long-Lived Assets
The Company evaluates long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds its fair value.
36
<PAGE>
(2) FINANCIAL INSTRUMENTS
(a) Cash and Investments
================================================================================
March 31,
1999 1998
- --------------------------------------------------------------------------------
(in thousands)
Cash and cash equivalents:
Cash $106,641 $ 88,241
Municipal securities -- 16,272
Money market funds 135,567 111,450
- --------------------------------------------------------------------------------
Cash and cash equivalents 242,208 215,963
- --------------------------------------------------------------------------------
Short-term investments:
Available-for-sale
Commercial paper -- 15,452
Municipal securities 21,700 24,601
Money market preferreds 43,114 101,438
Held-to-maturity
Municipal securities -- 17,106
U.S. Treasury securities 5,800 --
- --------------------------------------------------------------------------------
Short-term investments 70,614 158,597
- --------------------------------------------------------------------------------
Cash, cash equivalents and short-
term investments $312,822 $374,560
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Long-term investments:
U.S. Treasury securities $18,400 $24,200
- --------------------------------------------------------------------------------
Long-term and short-term held-to-maturity investments include commercial notes
with original maturities of five to eight years secured by U.S. Treasury Notes
which enable the Company to take advantage of certain tax incentives from its
Puerto Rico operation. These investments are treated as held-to-maturity for
financial reporting purposes.
The fair value of held-to-maturity securities at March 31, 1999 was $24,353,000
which included gross unrealized gains of $153,000. The fair value of
held-to-maturity securities at March 31, 1998 was $41,326,000 which included
gross unrealized gains of $27,000 and gross unrealized losses of $7,000.
(b) Marketable Securities
Marketable securities are comprised 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 net unrealized appreciation
reported as a separate component of accumulated other comprehensive income
(loss) in stockholders' equity. Marketable securities had an aggregate cost of
$585,000 and $1,143,000 at March 31, 1999 and 1998, respectively. At March 31,
1999, marketable securities included gross unrealized gains of $4,299,000. At
March 31, 1998 marketable securities included gross unrealized gains of
$2,771,000 and gross unrealized losses of $193,000.
For the fiscal years ended March 31, 1999 and 1998, the fair value of marketable
securities sold was $1,818,000 and $7,276,000, respectively. The gross realized
gains from these sales totaled $1,454,000 and $4,098,000 for fiscal 1999 and
1998, respectively. The gain on sale of investments is based on the specific
identification method.
(c) Foreign Currency Forward Exchange Contracts
The Company utilizes foreign currency forward exchange contracts to hedge
foreign currency market exposures of underlying assets, liabilities and other
obligations, primarily certain intercompany receivables that are denominated in
foreign currencies. The Company does not use forward exchange contracts for
speculative or trading purposes. The Company's accounting policies for these
instruments are based on the Company's designation of such instruments as
hedging transactions. The criteria the Company uses for designating an
instrument as a hedge include the instrument's effectiveness in risk reduction
and one-to-one matching of forward exchange contracts to underlying
transactions. Gains and losses on currency forward contracts that are designated
and effective as hedges of firm commitments are deferred and recognized in
income in the same period that the underlying transactions are settled. Gains
and losses on currency forward contracts that are designated and effective as
hedges of existing transactions are recognized in income in the same period as
losses and gains on the underlying transactions are recognized and generally
offset. Gains and losses on any instruments not meeting the above criteria would
be recognized in income in the current period. The Company transacts business in
various foreign currencies. At March 31, 1999, the Company had foreign exchange
contracts, all with maturities of less than nine months, to purchase and sell
approximately $178,178,000 in foreign currencies, primarily in British Pounds,
Canadian Dollars, German Deutschmarks, Japanese Yen and other European
currencies.
Fair value represents the difference in value of the contracts at the spot rate
and the forward rate, plus the unamortized premium or discount. At March 31,
1999, fair value of these contracts is not significant. The counterparties to
these contracts are substantial and creditworthy multinational commercial banks.
The risks of counterparty nonperformance associated with these contracts are not
considered to be material.
(3) COMMITMENTS
Lease Obligations
The Company leases certain of 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.
37
<PAGE>
In February 1995, the Company entered into a master operating lease, as
subsequently amended, 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
November 30, 1998. Monthly lease payments are based upon the London InterBank
Offered 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, 1999 are:
- --------------------------------------------------------------------------------
Year Ended March 31: (in thousands)
2000 $18,284
2001 13,758
2002 6,144
2003 4,709
2004 3,770
Thereafter 5,024
- --------------------------------------------------------------------------------
$51,689
- --------------------------------------------------------------------------------
Total rent expense for all operating leases was $19,480,000, $13,842,000 and
$11,430,000, for the fiscal years ended March 31, 1999, 1998 and 1997,
respectively.
(4) CONCENTRATION OF CREDIT RISK
The Company extends credit to various companies in the retail and mass
merchandising industry. Collection of trade receivables may be affected by
changes in economic or other industry conditions and may, accordingly, impact
the Company's overall credit risk. Although the Company generally does not
require collateral, the Company performs ongoing credit evaluations of its
customers and reserves for potential credit losses are maintained.
Short-term investments are placed with high credit-quality financial
institutions or in short-duration high quality securities. The Company limits
the amount of credit exposure in any one institution or type of investment
instrument.
(5) 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.
(6) PREFERRED STOCK
At March 31, 1999 and 1998, 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.
(7) TREASURY STOCK
In February 1999, the Board of Directors approved a plan to purchase up to two
million shares of the Company's common stock. For the year ended March 31, 1999,
the Company repurchased 222,500 shares for approximately $9,001,000 under this
program. Of these, 99,937 shares were reissued under the Company's Stock Plans
as of March 31, 1999.
When treasury shares are reissued, any excess of the average acquisition cost of
the shares over the proceeds from reissuance is charged to retained earnings.
(8) STOCK PLANS
(a) Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan program 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 program commenced in September 1991. In fiscal 1999,
241,514 shares were purchased by the Company and distributed to employees at
prices ranging from $26.19 to $36.60. In fiscal 1998, 199,680 shares were
purchased by the Company and distributed to employees at prices ranging from
$26.14 to $26.19. In fiscal 1997, 184,596 shares were purchased by the Company
and distributed to employees at prices ranging from $21.25 to $25.18 per share.
The weighted average fair value of the fiscal 1999, fiscal 1998 and fiscal 1997
awards was $18.27, $9.43, and $10.41, respectively. Under the Employee Stock
Purchase Plan 30,928 shares were distributed from reissued treasury stock in
fiscal 1999. No shares were distributed from reissued treasury stock in fiscal
1998 or fiscal 1997. At March 1999, the Company had 237,444 shares of its Common
Stock reserved for future issuance under the Plan.
Prior to the Maxis merger in July 1997, Maxis employees were eligible to
participate in an employee stock purchase plan. In fiscal 1998 and 1997, Maxis
purchased 7,684, and 18,220 shares, respectively, under this plan which were
distributed to participating employees. Shares were purchased at prices ranging
from $27.70 to $27.99 in fiscal 1998, and $28.56 to $46.08 in fiscal 1997.
(b) Stock Option Plans
The Company's 1991 Stock Option Plan, 1993 Stock Option Plan, 1995 Stock Option
Plan and Directors' Plan ("Option Plans") provide stock options for employees,
officers and
38
<PAGE>
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 celebrities,
employees of certain companies in which the Company has an equity investment,
and directors, at not less than the fair market value on the date of grant.
Under the Company's stock option plans, 69,009 shares were reissued from
treasury stock in fiscal 1999. No shares were distributed from reissued treasury
stock in fiscal 1998 or fiscal 1997.
The options generally expire ten years from the date of grant and are generally
exercisable in monthly increments over 50 months. Certain options assumed in
connection with the Maxis merger in fiscal 1998 expire ten years from the date
of grant, and vest and become exercisable at a rate of 25% on the first
anniversary of the date of grant and 25% of the shares each year thereafter.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS
123"). Accordingly, no compensation expense has been recognized for options
granted under the Company's employee-based stock option plans. Had compensation
expense been determined based on the fair value at the grant dates for awards
under those plans in accordance with the provisions of SFAS 123, the Company's
pro forma net income and net income per share for fiscal 1999, 1998 and 1997
would have been:
(In thousands, except per share data)
================================================================================
1999 1998 1997
- --------------------------------------------------------------------------------
Net Income
As reported $72,872 $72,562 $51,327
Pro forma $45,886 $52,892 $37,343
Earnings per Share
As reported - basic $1.20 $1.23 $0.89
Pro forma - basic $0.77 $0.91 $0.66
As reported - diluted $1.15 $1.19 $0.86
Pro forma - diluted $0.74 $0.88 $0.64
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The following weighted-average assumptions
are used for grants made in 1999, 1998 and 1997 under the stock plans: risk-free
interest rates of 4.39% to 5.55% in 1999, 5.31% to 6.42% in 1998; and 5.48% to
6.36% in 1997; expected volatility of 59% in fiscal 1999 and 58% in both fiscal
1998 and fiscal 1997; expected lives of 2.27 years in fiscal 1999 and 2.25 years
in fiscal 1998 and fiscal 1997 under the Option Plans and one year for the
Employee Stock Purchase Plan. No dividends are assumed in the expected term. The
Company's calculations are based on a multiple option valuation approach and
forfeitures are recognized when they occur. The above disclosures include
options granted under the former Maxis option plans as if they were initially
granted by the Company.
Because SFAS 123 is applicable only to options granted subsequent to March 31,
1995, the impact of non-vested stock options granted prior to this date has been
excluded from the pro forma calculation. Accordingly, pro forma adjustments are
not indicative of future period pro forma adjustments as the pro forma effect
will not be fully reflected until subsequent years.
39
<PAGE>
<TABLE>
Additional information regarding options outstanding as of March 31, 1999 is as
follows:
<CAPTION>
==============================================================================
------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number of Contractual Exercise Number of Exercise
Range of Exercise Prices Shares Life Price Shares Price
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.720 - $13.500 1,226,919 3.32 $ 8.41 1,226,919 $ 8.41
$13.625 - $23.500 1,987,338 5.91 20.46 1,434,963 19.36
$23.750 - $27.500 1,133,743 7.59 25.00 555,025 25.18
$27.625 - $29.875 1,150,460 7.15 29.73 688,097 29.72
$30.000 - $34.875 1,169,984 7.53 33.30 580,610 32.96
$35.000 - $36.750 1,198,743 8.48 35.44 210,790 35.46
$37.000 - $43.125 1,363,386 9.18 40.54 169,835 40.03
$43.625 - $45.063 1,228,737 9.47 43.82 160,660 43.71
$45.500 - $54.250 979,949 9.33 47.53 67,176 47.18
- --------------------------------------------------------------------------------------------------------------
$ 0.720 - $54.250 11,439,259 7.42 $30.65 5,094,075 $22.79
==============================================================================================================
</TABLE>
<TABLE>
The following summarizes the activity under the Company's stock option plans
during the fiscal years ended March 31, 1999, 1998 and 1997:
<CAPTION>
===============================================
Options Outstanding
-----------------------------------------------
Weighted-Average
Shares Exercise Price
-----------------------------------------------
<S> <C> <C>
Balance at March 31, 1996 7,922,159 $17.46
Granted 2,501,965 31.64
Canceled (779,514) 23.57
Exercised (1,321,042) 12.19
-----------------------------------------------
Balance at March 31, 1997 (3,748,864 shares were
exercisable at a weighted average price of $15.20) 8,323,568 21.97
Granted 3,833,539 32.92
Canceled (616,275) 37.96
Exercised (1,688,702) 18.92
-----------------------------------------------
Balance at March 31, 1998 (3,961,559 shares were
exercisable at a weighted average price of $18.83) 9,852,130 25.76
Granted 3,147,216 44.18
Canceled (568,983) 34.74
Exercised (991,104) 22.73
-----------------------------------------------
Balance at March 31, 1999 11,439,259 $30.65
-----------------------------------------------
Options available for grant at March 31, 1999 787,427
</TABLE>
40
<PAGE>
(9) PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1999 and 1998 consisted of:
================================================================================
1999 1998
- --------------------------------------------------------------------------------
(in thousands)
Computer equipment $127,330 $105,183
Buildings 62,413 31,239
Land 50,570 14,885
Office equipment, furniture and fixtures 21,296 18,670
Leasehold improvements 5,749 12,071
Warehouse equipment and other 3,813 4,414
- --------------------------------------------------------------------------------
271,171 186,462
Less accumulated depreciation and
amortization (89,905) (81,367)
- --------------------------------------------------------------------------------
$181,266 $105,095
- --------------------------------------------------------------------------------
Depreciation and amortization expenses associated with property and equipment
amounted to $34,581,000, $26,215,000 and $22,332,000, for the fiscal years ended
March 31, 1999, 1998 and 1997, respectively.
(10) ACCRUED LIABILITIES
Accrued liabilities at March 31, 1999 and 1998 consisted of:
================================================================================
1999 1998
- --------------------------------------------------------------------------------
(in thousands)
Accrued expenses $ 46,595 $ 25,872
Accrued compensation and benefits 46,541 29,318
Accrued royalties 36,429 36,830
Accrued income taxes 23,724 26,095
Deferred revenue 8,206 2,797
Warranty reserve 7,900 3,462
Deferred income taxes 2,933 1,106
- --------------------------------------------------------------------------------
$172,328 $125,480
- --------------------------------------------------------------------------------
(11) BUSINESS COMBINATIONS AND DIVESTITURE
(a) Westwood Studios
In September 1998, the Company completed the acquisition of Westwood Studios,
Inc. and certain assets of the Irvine, California - based Virgin Studio
(collectively "Westwood") for approximately $122,688,000 in cash, including
transaction expenses. The adjusted allocation of the excess purchase price over
the net tangible liabilities assumed was $128,573,000 of which, based on
management's estimates prepared in conjunction with a third party valuation
consultant, $41,836,000 was allocated to purchased in-process research and
development and $86,737,000 was allocated to other intangible assets. Amounts
allocated to other intangibles include franchise trade names of $32,357,000,
existing technology of $6,510,000, workforces of $1,680,000 and other goodwill
of $46,190,000 and are being amortized over lives ranging from two to twelve
years. Purchased in-process research and development includes the value of
products in the development stage that are not considered to have reached
technological feasibility or to have alternative future use. Accordingly, this
non-recurring item was expensed in the Consolidated Statement of Income upon
consummation of the acquisition. The non-recurring charge for in-process
research and development reduced diluted earnings per share by approximately
$0.59 in the fiscal year 1999. The results of the operations of Westwood and the
estimated fair value of assets acquired and liabilities assumed are included in
the Company's financial statements from the date of acquisition.
In conjunction with the merger of Westwood, the Company accrued approximately
$1,500,000 related to direct transaction costs and other related accruals. At
March 31, 1999, there were $725,000 in accruals remaining related to these
items.
In connection with the Westwood acquisition, the purchase price has been
allocated to the assets and liabilities assumed based upon the fair values on
the date of acquisition, as follows (in thousands):
================================================================================
Current assets $ 4,500
Property and equipment 3,257
In-process technology 41,836
Other intangible assets 86,737
Current liabilities (13,642)
- --------------------------------------------------------------------------------
Total purchase price $122,688
- --------------------------------------------------------------------------------
The following table reflects unaudited pro forma combined results of operations
of the Company and Westwood on the basis that the acquisition had taken place at
the beginning of the fiscal year for each of the periods presented (in
thousands, except per share data):
================================================================================
1999 1998
- --------------------------------------------------------------------------------
Revenues $1,229,055 $1,011,234
Net income $ 111,308 $ 64,604
Net income per share - basic $1.83 $1.10
Net income per share - diluted $1.76 $1.06
Number of shares used in computation - basic 60,748 58,867
Number of shares used in computation - diluted 63,272 60,958
- --------------------------------------------------------------------------------
41
<PAGE>
In management's opinion, the unaudited pro forma combined results of operations
are not indicative of the actual results that would have occurred had the
acquisition been consummated at the beginning of fiscal 1998 or at the beginning
of fiscal 1999 or of future operations of the combined companies under the
ownership and management of the Company.
(b) ABC Software
In July 1998, the Company acquired ABC Software AG and ABC Software GmbH
(collectively "ABC"), independent distributors of entertainment, edutainment and
application software in Switzerland and Austria, respectively, for approximately
$9,466,000 in cash (net of cash acquired of $5,099,000) and $570,000 in other
consideration. The transaction has been accounted for under the purchase method.
The excess purchase price over the fair value of the net tangible assets
acquired of approximately $7,377,000 was allocated to goodwill and is being
amortized over 7 years.
(c) Square Co., Ltd.
In May 1998, the Company and Square Co., Ltd. ("Square"), a leading developer
and publisher of entertainment software in Japan, completed the formation of two
new joint ventures in North America and Japan. In North America, the companies
formed Square Electronic Arts, LLC ("Square EA"), which has exclusive publishing
rights in North America for future interactive entertainment titles created by
Square. Additionally, the Company has the exclusive right to distribute in North
America products published by this joint venture. The Company contributed
$3,000,000 and owns a 30% minority interest in this joint venture while Square
owns 70%. This joint venture is accounted for under the equity method.
In Japan, the companies established Electronic Arts Square KK ("EA Square KK"),
which will localize and publish in Japan the Company's properties originally
created in North America and Europe, as well as develop and publish original
video games in Japan. The Company contributed cash and has a 70% majority
ownership interest, while Square contributed cash and owns 30%. Accordingly, the
assets, liabilities and results of operations for EA Square KK are included in
the Company's Consolidated Balance Sheets and Results of Operations since June
1, 1998, the date of formation. Square's 30% interest in EA Square KK has been
reflected as "Minority interest in consolidated joint venture" on the Company's
Consolidated Financial Statements.
(d) Maxis, Inc.
On July 25, 1997, the Company competed a merger with Maxis, Inc. ("Maxis"), a
California-based interactive software developer. Under the transaction,
approximately 4.1 million shares of Electronic Arts' stock were exchanged for
all outstanding Maxis common stock. The transaction was accounted for as a
pooling of interests. The accompanying financial statements, notes and analyses
have been restated for all periods presented to reflect this transaction.
In conjunction with the merger of Maxis, the Company recorded costs of
$10,792,000. This charge included direct transaction fees for investment
bankers, attorneys, accountants, and other related costs of approximately
$2,781,000 and costs associated with integrating the operations of the two
companies of approximately $8,011,000. Included in the integration costs were
redundant facility costs, severance payments, equipment abandonment costs and
other asset write downs, contract termination charges and other related
expenses. Of the total merger costs, approximately $5,185,000 related to cash
expenditures while approximately $5,607,000 related to noncash charges. At March
31, 1999, there were no accruals remaining related to these merger related
costs.
Total net revenue and net income (loss) for the individual entities for the
fiscal year ended March 31, 1997 is as follows (in thousands):
================================================================================
Electronic
Arts Maxis Combined
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
Net revenue $624,766 $48,262 $673,028
Net income (loss) 53,002 (1,675) 51,327
- --------------------------------------------------------------------------------
(e) Creative Wonders, LLC
In December 1997, the Company completed the sale of its 50% ownership interest
in Creative Wonders, LLC, a joint venture company formed with the Walt Disney
Company for $16,750,000 in cash. The Company recognized a gain of $12,625,000,
which is included in interest and other income. Prior to the sale, the Company
distributed children's interactive titles published and sold by the joint
venture into the retail channel. The investment was accounted for under the
equity method prior to sale.
(f) Other Business Combinations
Additionally, during the quarter ended June 30, 1998, the Company acquired two
software development companies. In connection with these acquisitions, the
Company incurred a charge of $2,279,000 for acquired in-process technology. The
charge was made after the Company concluded that the in-process technology had
not reached technological feasibility and had no alternative future use after
taking into consideration the potential for usage of the software in different
products and resale of the software.
(12) INCOME TAXES
The Company's pretax income from operations for the fiscal years ended March
31, 1999, 1998 and 1997 consisted of the following components:
42
<PAGE>
================================================================================
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Domestic $ 79,789 $ 51,620 $27,614
Foreign 38,669 56,640 48,434
- --------------------------------------------------------------------------------
Total pretax income $118,458 $108,260 $76,048
- --------------------------------------------------------------------------------
Income tax expense (benefit) for the fiscal years ended March 31, 1999, 1998 and
1997 consisted of:
================================================================================
(in thousands) Current Deferred Total
- --------------------------------------------------------------------------------
1999:
Federal $31,204 $(10,340) $20,864
State 4,401 (2,590) 1,811
Foreign 15,715 1,410 17,125
Charge in lieu of taxes
from employee stock plans
5,614 -- 5,614
- --------------------------------------------------------------------------------
$56,934 $(11,520) $45,414
- --------------------------------------------------------------------------------
1998:
Federal $14,751 $ (7,585) $ 7,166
State 1,361 (727) 634
Foreign 18,561 1,434 19,995
Charge in lieu of taxes
from employee stock plans
7,931 -- 7,931
- --------------------------------------------------------------------------------
$42,604 $ (6,878) $35,726
- --------------------------------------------------------------------------------
1997:
Federal $ 3,145 $ (3,472) $ (327)
State 804 (674) 130
Foreign 16,543 447 16,990
Charge in lieu of taxes
from employee stock plans
9,210 -- 9,210
- --------------------------------------------------------------------------------
$29,702 $ (3,699) $26,003
- --------------------------------------------------------------------------------
The components of the net deferred tax assets as of March 31, 1999 and 1998
consist of:
================================================================================
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
Deferred tax assets:
Accruals, reserves and other expenses $ 76,015 $ 50,096
Maxis Federal and State loss carryforwards -- 2,088
Foreign loss and credit carryforwards -- 11,514
- --------------------------------------------------------------------------------
Total gross deferred tax assets 76,015 63,698
Less: valuation allowance -- (11,514)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 76,015 $ 52,184
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Undistributed earnings of DISC (1,784) (2,081)
Prepaid royalty expenses (43,681) (32,422)
Unrealized gains on marketable
securities (1,395) (848)
Other (949) (147)
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities $(47,809) $(35,498)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 28,206 $ 16,686
- --------------------------------------------------------------------------------
At March 31, 1999, deferred tax assets of $25,406,000 were included in other
current assets.
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, 1999, 1998 and 1997 were as follows:
================================================================================
1999 1998 1997
- --------------------------------------------------------------------------------
Statutory Federal tax rate 35.0% 35.0% 35.0%
State taxes, net of Federal benefit 1.5 1.0 0.8
Differences between statutory rate
and foreign effective tax rate (2.5) (2.2) (1.0)
Foreign loss without tax benefit -- -- 1.7
Research and development credits (2.1) (0.6) --
Nondeductible acquisition costs 7.4 -- --
Other (1.0) (0.2) (2.3)
- --------------------------------------------------------------------------------
38.3% 33.0% 34.2%
- --------------------------------------------------------------------------------
The Company provides for U.S. taxes on an insignificant portion of the
undistributed earnings of its foreign subsidiaries and does not provide taxes on
the remainder. At March 31, 1999, the undistributed foreign earnings of the
foreign subsidiaries amounted to approximately $122,000,000. 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 U.S. income tax returns for the years 1992 through 1995 have been
examined by the Internal Revenue Service (IRS). In 1998, the Company received a
notice of deficiencies from the IRS. These deficiencies relate primarily to
operations in Puerto Rico, which the Company is contesting in Tax Court. The
Company believes that any additional liabilities, if any, that arise from the
outcome of this examination will not be material to the Company's consolidated
financial statements.
43
<PAGE>
(13) INTEREST AND OTHER INCOME, NET
Interest and other income, net for the years ended March 31, 1999, 1998 and 1997
consisted of:
================================================================================
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Interest income $12,625 $13,649 $ 9,699
Gain on disposition of assets, net 725 14,910 8,229
Foreign currency losses (1,168) (517) (1,024)
Equity in net loss of affiliates (155) (1,162) (1,566)
Other income (expense), net 1,153 (2,069) (2,059)
- --------------------------------------------------------------------------------
$13,180 $24,811 $13,279
- --------------------------------------------------------------------------------
(14) Comprehensive Income
In fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in financial
statements. SFAS 130 requires classification of other comprehensive income in a
financial statement and display of other comprehensive income separately from
retained earnings and additional paid-in capital. Other comprehensive income
includes primarily foreign currency translation adjustments and unrealized gains
(losses) on investments.
The change in the components of accumulated other comprehensive income, net of
taxes, is summarized as follows (in thousands):
================================================================================
Foreign Unrealized Accumu-
currency gains lated other
translation (losses) on comprehen-
adjustments investments sive income
- --------------------------------------------------------------------------------
Balance at
March 31, 1996 $ (2,077) $ 16,266 $ 14,189
Other
comprehensive
income (loss) 152 (13,673) (13,521)
- --------------------------------------------------------------------------------
Balance at
March 31, 1997 (1,925) 2,593 668
Other
comprehensive
income (loss) (1,273) (863) (2,136)
- --------------------------------------------------------------------------------
Balance at
March 31, 1998 (3,198) 1,730 (1,468)
Other
comprehensive
income (loss) (2,643) 1,544 (1,099)
- --------------------------------------------------------------------------------
Balance at
March 31, 1999 $ (5,841) $ 3,274 $ (2,567)
- --------------------------------------------------------------------------------
Change in unrealized gains (losses) on investments, net are shown net of taxes
of $727,000, $(426,000) and $(7,202,000) in fiscal 1999, 1998 and 1997,
respectively.
The currency translation adjustments are not adjusted for income taxes as they
relate to indefinite investments in non-U.S. subsidiaries.
(15) 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, cash equivalents, short-term investments, receivables, accounts payable
and accrued liabilities - the carrying amount approximates fair value because of
the short maturity of these instruments.
Long-term investments, investments classified as held-to-maturity and marketable
securities - fair value is based on quoted market prices.
44
<PAGE>
(16) SEGMENT INFORMATION
<TABLE>
In 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise". SFAS No. 131 establishes
standards for the reporting by public business enterprises of information about
product lines, geographic areas and major customers. The method for determining
what information to report is based on the way that management organizes the
operating segments within the Company for making operational decisions and
assessments of financial performance. The Company's chief operating decision
maker is considered to be the Company's Chief Executive Officer ("CEO"). The CEO
reviews financial information presented on a consolidated basis accompanied by
disaggregated information about revenues by geographic region and by product
lines for purposes of making operating decisions and assessing financial
performance. The Company has four reportable segments: North America, Europe,
Asia Pacific and Japan, which are organized, managed and analyzed geographically
and operate in one industry segment: the creation, marketing and distribution of
entertainment software. Information about the Company's operations in the North
America and foreign areas for the fiscal years ended March 31, 1999, 1998 and
1997 is presented below:
<CAPTION>
Asia
(in thousands) Pacific
North (excluding
America Europe Japan) Japan Eliminations Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1999:
Net revenues from unaffiliated
customers $704,998 $443,937 $39,560 $ 33,368 $ -- $1,221,863
Intersegment sales 32,216 15,062 2,800 12 (50,090) --
-----------------------------------------------------------------------------------------
Total net revenues $737,214 $458,999 $42,360 $ 33,380 $(50,090) $1,221,863
=========================================================================================
Operating income $ 78,826 $ 21,052 $ 3,208 $ 2,192 $ -- $ 105,278
Interest income $ 9,931 $ 2,551 $ 143 $ -- $ -- $ 12,625
Depreciation and amortization $ 29,272 $ 9,399 $ 506 $ 1,284 $ -- $ 40,461
Identifiable assets $596,357 $268,152 $20,938 $ 16,426 $ -- $ 901,873
Capital expenditures $ 54,029 $ 58,383 $ 418 $ 2,990 $ -- $ 115,820
Fiscal 1998:
Net revenues from unaffiliated
customers $519,423 $325,938 $41,494 $ 21,997 $ -- $ 908,852
Intersegment sales 45,913 21,613 513 133 (68,172) --
-----------------------------------------------------------------------------------------
Total net revenues $565,336 $347,551 $42,007 $ 22,130 $(68,172) $ 908,852
=========================================================================================
Operating income (loss) $ 31,852 $ 51,807 $ 6,995 $(7,205) $ -- $ 83,449
Interest income $ 10,931 $ 2,471 $ 247 $ -- $ -- $ 13,649
Depreciation and amortization $ 20,826 $ 4,541 $ 661 $ 879 $ -- $ 26,907
Identifiable assets $515,728 $201,988 $17,347 $ 10,618 $ -- $ 745,681
Capital expenditures $ 25,423 $ 18,035 $ 669 $ 1,111 $ -- $ 45,238
Fiscal 1997:
Net revenues from unaffiliated
customers $372,616 $233,614 $28,072 $ 38,726 $ -- $ 673,028
Intersegment sales 54,530 6,938 603 122 (62,193) --
-----------------------------------------------------------------------------------------
Total net revenues $427,146 $240,552 $28,675 $ 38,848 $(62,193) $ 673,028
=========================================================================================
Operating income (loss) $ 17,035 $ 43,295 $ 5,652 $(3,213) $ -- $ 62,769
Interest income $ 7,820 $ 1,662 $ 217 $ -- $ -- $ 9,699
Depreciation and amortization $ 17,450 $ 4,609 $ 252 $ 675 $ -- $ 22,986
Identifiable assets $430,055 $121,673 $12,820 $ 19,493 $ -- $ 584,041
Capital expenditures $ 29,627 $ 7,370 $ 399 $ 1,728 $ -- $ 39,124
</TABLE>
45
<PAGE>
For the fiscal year ended March 31, 1999, the Company had sales to one customer
which represented 12% of total net revenues. The Company had no sales to any one
customer in excess of 10% of total net revenues for fiscal years ended March 31,
1998 and 1997.
Information about the Company's net revenues by product line for the fiscal
years ended March 31, 1999, 1998 and 1997 is presented below (in thousands):
================================================================================
1999 1998 1997
- --------------------------------------------------------------------------------
PlayStation $ 519,830 $380,299 $187,531
PC-CD 270,793 231,034 216,338
Affiliated label 248,105 185,865 96,696
N64 152,349 56,677 17,804
Saturn 756 17,543 38,424
License, OEM and Other 30,030 37,434 116,235
- --------------------------------------------------------------------------------
$1,221,863 $908,852 $673,028
- --------------------------------------------------------------------------------
46
<PAGE>
<TABLE>
QUARTERLY FINANCIAL AND MARKET INFORMATION (UNAUDITED)
<CAPTION>
Quarter Ended
------------------------------------------------------- Year
June 30 Sept. 30 Dec. 31 March 31 Ended
- ------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Fiscal 1999
Net revenues $ 178,221 $ 245,763 $ 520,155 $ 277,724 $ 1,221,863
Operating income (loss) 3,050 (29,545) 102,439 29,334 105,278
Net income (loss) 3,700 (25,273) 72,531 21,914 72,872
Net income (loss) per share - basic $ 0.06 $ (0.42) $ 1.19 $ 0.36 $ 1.20
Net income (loss) per share - diluted $ 0.06 $ (0.42) $ 1.15 $ 0.35 $ 1.15
Common stock price per share
High $ 54.81 $ 55.56 $ 56.00 $ 52.19 $ 56.00
Low $ 41.63 $ 38.13 $ 33.88 $ 38.25 $ 33.88
Fiscal 1998
Net revenues $ 123,712 $ 189,828 $ 391,245 $ 204,067 $ 908,852
Operating income (loss) (4,807) (3,080) 70,983 20,353 83,449
Net income (loss) (1,451) 41 58,620 15,352 72,562
Net income (loss) per share - basic $ (0.02) $ -- $ 0.99 $ 0.26 $ 1.23
Net income (loss) per share - diluted $ (0.02) $ -- $ 0.96 $ 0.25 $ 1.19
Common stock price per share
High $ 35.38 $ 37.50 $ 39.56 $ 46.94 $ 46.94
Low $ 20.13 $ 30.75 $ 29.94 $ 34.94 $ 20.13
Fiscal 1997
Net revenues $ 88,735 $ 137,271 $ 290,849 $ 156,173 $ 673,028
Operating income (loss) (9,038) 727 58,641 12,439 62,769
Net income(loss) (1,381) 3,388 38,703 10,617 51,327
Net income (loss) per share - basic $ (0.02) $ 0.06 $ 0.67 $ 0.18 $ 0.89
Net income (loss) per share - diluted $ (0.02) $ 0.06 $ 0.65 $ 0.18 $ 0.86
Common stock price per share
High $ 34.50 $ 39.13 $ 37.63 $ 36.13 $ 39.13
Low $ 25.25 $ 24.75 $ 27.88 $ 26.25 $ 24.75
</TABLE>
The Company's common stock is traded in the over-the-counter market under the
Nasdaq Stock Market symbol ERTS. The closing prices for the common stock in the
table above represent the high and low closing prices as reported on the Nasdaq
National Market.
47
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
48
<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 our
definitive Proxy Statement for the 1999 Annual Meeting of Stockholders (the
"Proxy Statement") under the caption "Proposal No. 1 - Re-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 "Compensation of Executive
Officers" specifically excluding the "Compensation Committee Report on Executive
Compensation".
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 "Amount and Nature of
Shares Beneficially Owned."
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."
49
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE 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, 1999
and 1998 30
Consolidated Statements of Income for the Years Ended
March 31, 1999, 1998 and 1997 31
Consolidated Statements of Stockholders' Equity for the
Years Ended March 31, 1999, 1998 and 1997 32
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1999, 1998 and 1997 33
Notes to Consolidated Financial Statements for the Years
Ended March 31, 1999, 1998 and 1997 34-47
2. Financial Statement Schedule.
The following financial statement schedule of Electronic Arts for
the years ended March 31, 1999, 1998 and 1997 is 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 2000 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)
50
<PAGE>
Number Exhibit Title
------ -------------
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)
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)
10.13 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)
10.22 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. (25)
10.30 Guarantee from Electronic Arts Inc. to Flatirons Funding, LP
dated February 14, 1995. (25)
51
<PAGE>
Number Exhibit Title
------ -------------
10.31 Lease Agreement by and between Registrant and Dixie Warehouse
& Cartage Co., dated April 10, 1995. (25)
10.32 Commercial Earnest Money Contract between Novell, Inc. and
ORIGIN Systems, Inc. dated April 13, 1995. (26)
10.33 First Amendment to Commercial Earnest Money Contract between
Novell, Inc. and ORIGIN Systems, Inc. dated June 1, 1995. (27)
10.34 Amendment No. 1 to Agreement between Registrant and Sega
Enterprises, Inc. effective December 31, 1995. (28)
10.35 Lease Agreement by and between Registrant and Don Mattrick
dated October 16, 1996. (29)
10.36 Amended and Restated Guaranty from Electronic Arts Inc. to
Flatirons Funding, LP dated March 7, 1997. (30)
10.37 Amended and Restated Agreement for Lease between Flatirons
Funding, LP and Electronic Arts Redwood Inc. dated March 7,
1997. (30)
10.38 Amendment No. 1 to Lease Agreement between Electronic Arts
Redwood Inc. and Flatirons Funding, LP dated March 7,
1997. (30)
10.39 Employment Agreement by and between the Registrant and John
Riccitiello dated August 29, 1997. (31)
10.40 Lease Agreement by and between Registrant and John Riccitiello
dated August 29, 1997. (31)
10.41 Employment Agreement by and between Registrant and James
"Rusty" Russell Rueff, Jr. dated September 9, 1998.
10.42 Lease Agreement by and between Registrant and Louisville
Commerce Realty Corporation, dated April 1, 1999.
10.43 Option agreement, agreement of purchase and sale, and escrow
instructions for Zones 2 and 4, Electronic Arts Business Park,
Redwood Shores California, dated April 5, 1999.
21.01 Subsidiaries of the Registrant.
23.01 Report on Financial Statement Schedule and Consent of KPMG
LLP, Independent Auditors.
23.02 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
99.01 Report of Ernst & Young LLP, Independent Auditors
----------------
(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).
52
<PAGE>
(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.
(16) Not Used.
(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
Registrants Annual Report on Form 10-K for the year ended
March 31, 1993.
(20) Incorporated by reference to Exhibit 19.01 of Registrant's
Quarterly 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.
53
<PAGE>
(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").
(25) Incorporated by reference to similarly numbered exhibits to
Registrant's Annual Report on Form 10-K for the year ended
March 31, 1995 (the "1995 Form 10-K").
(26) Incorporated by reference to Exhibit 10.01 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1995.
(27) Incorporated by reference to Exhibit 10.02 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1995.
(28) Incorporated by reference to similarly numbered exhibits to
Registrant's Annual Report on Form 10-K for the year ended
March 31, 1996 (the "1996 Form 10-K").
(29) Incorporated by reference to Exhibit 10.35 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended December
31, 1996.
(30) Incorporated by reference to similarly numbered exhibits to
Registrant's Annual Report on Form 10-K for the year ended
March 31, 1997 (the "1997 Form 10-K").
(31) Incorporated by reference to similarly numbered exhibits to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1997.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended March 31,
1999.
(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 Schedule:
The Registrant hereby files as part of this Form 10-K the financial
statement schedule listed in Item 14(a)2, as set forth on page 56.
54
<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 and Chief Executive
Officer)
Date: June 29, 1999
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 29th of June 1999.
Name Title
---- -----
/s/ Lawrence F. Probst III Chairman of the Board
- ---------------------------------- and Chief Executive Officer
(Lawrence F. Probst III)
/s/ E. Stanton McKee, Jr. Executive Vice President and Chief
- ---------------------------------- Financial and Administrative Officer
(E. Stanton McKee, Jr.) (Principal Accounting Officer)
/s/ David L. Carbone Vice President, Finance
- ----------------------------------
(David L. Carbone)
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/ Gary M. Kusin Director
- ----------------------------------
(Gary M. Kusin)
/s/ Timothy J. Mott Director
- ----------------------------------
(Timothy J. Mott)
55
<PAGE>
<TABLE>
ELECTRONIC ARTS INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended March 31, 1999, 1998 and 1997
(in thousands)
<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>
Year Ended March 31, 1999
Allowance for doubtful
accounts and returns $ 51,575 $ 161,297 $ (369) $ 139,653 $ 72,850
========= ========= ========= ========= =========
Year Ended March 31, 1998
Allowance for doubtful
accounts and returns $ 43,268 $ 82,706 $ (3,243) $ 71,156 $ 51,575
========= ========= ========= ========= =========
Year Ended March 31, 1997
Allowance for doubtful
accounts and returns $ 33,176 $ 63,114 $ 2,240 $ 55,262 $ 43,268
========= ========= ========= ========= =========
<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).
</FN>
</TABLE>
56
<PAGE>
ELECTRONIC ARTS INC.
1999 FORM 10-K ANNUAL REPORT
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
10.03 Description of Registrant's FY 2000 Executive Bonus Plan
10.41 Employment Agreement by and between Registrant and James "Rusty"
Russell Rueff, Jr. dated September 9, 1998.
10.42 Lease Agreement by and between Registrant and Louisville Commerce
Realty Corporation, dated April 1, 1999.
10.43 Option agreement, agreement of purchase and sale, and escrow
instructions for Zones 2 and 4, Electronic Arts Business Park, Redwood
Shores California, dated April 5, 1999.
21.01 Subsidiaries of the Registrant.
23.01 Report on Financial Statement Schedule and Consent of KPMG LLP,
Independent Auditors.
23.02 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
99.01 Report of Ernst & Young LLP, Independent Auditors
57
EXHIBIT 10.03
ELECTRONIC ARTS INC. AND SUBSIDIARIES
DESCRIPTION OF REGISTRANT'S FISCAL YEAR 2000
EXECUTIVE BONUS PLAN
Target annual bonuses are set for each executive based upon a percentage of base
salary. Bonuses are generally paid in two parts, one of which relates only to
the Company's earnings results, and the second part is discretionary and is
measured against each individual executive's contributions. Some executives may
have a third part which relates to a specific business unit's or product's
financial performance achievement. Bonuses are paid after the end of the fiscal
year. If profits in any period are less than 85% of plan, no bonus based on the
Company's performance is paid for that period. If profits exceed plan during a
period, the bonus rate is accelerated for the incremental profits above plan,
with a maximum of 200% payout of the bonus target.
ELECTRONIC ARTS
1450 FASHION ISLAND BLVD.
SAN MATEO, CA 94404
TEL 415 571 7171
[LOGO]
September 9, 1998
Rusty Rueff
181-12 Turn of River Road
Stamford, CT 06905
Dear Rusty:
I am pleased to offer you a regular full-time position as Senior Vice President
Human Resources reporting to me. Your annual base salary will be $240,000 with a
50% target bonus. The bonus will be guaranteed at 100% of target in the fiscal
year ending March 31, 1999, and 75% of target in the fiscal year ending March
31, 2000.
I will recommend to the Board of Directors that you be granted a Non-qualified
Option to purchase 70,000 shares of Electronic Arts common stock in accordance
with our Stock Option Plan. This grant will vest at a rate of 2% per month over
a 50 month period commencing with your hire date. Your unvested equity position
will be reviewed on an annual basis in conjunction with the EA executive stock
option program.
Electronic Arts will provide you with a $2,500 per month (net of taxes) housing
allowance for a three-year period. We agree to pay the difference between your
acquisition cost and the sale price on your property at 181-12 Turn of River
Road if the selling price is less than the initial purchase price of $612,500.
In addition, Electonic Arts will be responsible for all normal and reasonable
relocation costs associated with moving to Northern California.
Your employment with Electronic Arts is for an indefinite term. In other words,
the employment relationship is "at will" and you have the right to terminate
that employment relationship at any time. Also, although I hope that you will
remain with us and be successful here, Electronic Arts must, and does retain the
right to terminate the employment relationship at any time. Should you be
terminated without cause prior to March 31, 2000, you will receive one year's
salary plus bonus as severence.
This offer assumes that you have the legal right to work in the United States
and can submit appropriate proof. If you accept the offer, please so indicate by
signing this letter where indicated and returning it to my attention.
Electronic Arts' mission is to make fun software for consumers and to help
interactive entertainment become a part of everyday life. To play a leading role
in this new industry, EA needs a dedicated team of pioneers with vision, a
passion for quality, a willingness to innovate and a desire to achieve great
things while vigilantly maintaining our integrity. I would be delighted to have
you join us.
Sincerely,
/s/ Larry Probst
Larry Probst
Chaiman & CEO
Electronic Arts
Accepted: /s/ Rusty Rueff
--------------------
Date: 9/18/98
-------------------------
<PAGE>
September 17, 1998
Rusty Rueff
181-12 Turn of River Road
Stamford, CT 06905
Dear Rusty:
This will confirm our discussion on Tuesday, September 15. EA will provide you
with a one-time $50,000 (gross) signing bonus to help offset the expected loss
on improvements made to your current residence, and the temporary loss of income
you will experience in conjunction with Patti's resignation from Pepsi.
We also agree to extend vesting on your stock option grant for a period of six
months if you are terminated without cause prior to March 31, 2000.
EA agrees to provide a relocation program similar to the Frito-Lay plan with the
exception that we will not be responsible for any loan points nor will we
provide one month's salary in conjunction with your move to Northern California.
I am thrilled that you have decided to join Electronic Arts, and very much look
forward to working with you. Would you please acknowledge acceptance of the
offer by signing in the space below and returning to my attention at your
earliest convenience. Thank you.
Sincerely,
/s/ Larry Probst
Larry Probst
Chairman & CEO
Accepted: ___________________________________________
Date: _______________________________________________
Exhibit 10.42
LEASE
THIS LEASE, (hereinafter referred to as "Lease"), is made as of this
1st day of April, 1999, by and between LOUISVILLE COMMERCE REALTY CORPORATION, a
Delaware corporation, or assigns (hereinafter referred to as "Landlord") and
ELECTRONIC ARTS, INC., a Delaware corporation (hereinafter referred to as
"Tenant").
W I T N E S S E T H:
WHEREAS, Landlord and Tenant desire to create a leasehold estate in
favor of Tenant in the Premises (as hereinafter defined).
NOW, THEREFORE, in consideration of the premises, and of the covenants
and agreements herein contained, the parties hereto agree as follows:
1. PREMISES. Effective as of the Commencement Date, Landlord shall
lease unto Tenant and Tenant shall lease from Landlord approximately 250,000
rentable square feet as outlined in Exhibit A ("Premises"), on the east side of
a building of approximately 400,000 square feet ("Building"), which Building is
located on a parcel of land ("Property") as shown on Exhibit A, and that
machinery and equipment installed in and upon the Premises by Landlord, together
with all additions and accessions thereto, substitutions therefor and
replacements thereof permitted by this Lease (collectively, the "Equipment").
The exact square footage of the Premises shall be determined by the Landlord's
architect.
Landlord shall be responsible for constructing, at its expense, the
"Building Shell" as described in Exhibit B hereto, and Tenant shall, at Tenant's
sole expense (subject to Paragraph 8(b) below), and upon the terms set forth
herein, make improvements to the Premises (the "Tenant Improvements") specified
by Tenant as generally depicted in a preliminary space plan (the "Preliminary
Space Plan") to be submitted to Landlord.
2. COMMENCEMENT DATE AND LEASE TERM. The initial term of this Lease
shall be for a period of five (5) years (hereafter referred to as "Term"),
commencing on the "Commencement Date." The Commencement Date shall be the
earlier of (i) June 15, 1999, or (ii) the date Tenant commences beneficial use
of the Premises, determined as set forth hereinbelow. Any use of the Premises by
Tenant prior to the Commencement Date shall be subject to the terms and
conditions of this Lease (except the payment of Rent). Tenant shall be deemed to
have commenced beneficial use of the Premises when Tenant begins to move
furniture, furnishings, or inventory into the Premises or any portion thereof.
In no event shall Landlord be liable for Tenant's failure to complete
construction by June 15, 1999. Tenant shall use reasonable efforts to keep
Landlord informed of the progress of construction. The initial twelve (12) month
period after the Commencement Date and each successive twelve (12) month period
thereafter during the initial Term and any renewal periods shall be hereinafter
referred to as a "Lease Year." If the Commencement Date is not the first day of
a month, then the Term shall be the period set forth above plus the partial
month in which the Commencement Date occurs.
3. RENT. As rent for the Premises (all of which is hereinafter referred
to collectively as "Rent"), Tenant shall pay to Landlord all of the following:
(a) Base Rent. Tenant shall pay, without offset, demand or
counterclaim, as base rent (hereafter referred to as the "Base Rent") for each
Lease Year the sums identified on the attached Exhibit C, Rent Schedule. The
monthly installments shall be payable in advance on the first day of each and
every month during the said term at the office of Landlord c/o J.P. Morgan
Investment Management, Inc., 522 Fifth Avenue at 44th Street, New York, New York
10036, or at such other place as Landlord may hereafter designate in writing.
Rent checks are to be made payable to Landlord, or such other person, firm or
corporation as Landlord may hereafter designate in writing, except that the
first such installment, in the amount of Twenty-Seven Thousand Dollars ($27,000)
shall be due contemporaneously with the execution of this Lease.
(b) Intentionally Omitted.
(c) Intentionally Omitted.
(d) Intentionally Omitted.
(e) Tax on Lease. Tenant's pro rata share (based on the
Premises) of any federal, state or local tax (including gross receipts tax)
assessment, levy or other charge (other than any income tax or real property
tax) (hereinafter collectively referred to as "Tax") if now or hereafter
directly or indirectly upon (a) Landlord with respect to this Lease or the value
thereof, (b) Tenant's use or occupancy of the Premises, or (c) the Base Rent or
any other sum payable under this Lease, shall be paid by Tenant as Additional
Rent.
<PAGE>
Landlord shall annually notify Tenant of the amount
which Landlord estimates will be the Tax for each tax year, and Tenant shall pay
such amount in equal monthly installments in advance on or before the first day
of each of the twelve (12) months after the date of such notice. Landlord shall
annually submit to Tenant a statement showing Tenant's pro rata share of the
actual Tax for the current tax year, the amount thereof theretofore paid by
Tenant, and the amount of the resulting balance due thereon or overpayment
thereof. Such balance due shall be paid by Tenant, without interest, within
thirty (30) days after the date of such statement. Official tax bills rendered
by the taxing authority shall be presumptive evidence of the actual amount of
Tax. Tenant shall have the right to audit Landlord's records pertaining to such
Tax in accordance with Paragraph 11 below.
(f) Acceptance. Tenant does hereby take and hold the Premises
at the Rent hereinabove specifically reserved and payable as aforesaid, and upon
and subject to the terms and conditions herein contained.
(g) Late Payment. If Tenant fails to pay any installment of
Rent on or before the fifth (5th) day of the calendar month when such
installment becomes due and payable, Tenant shall pay to Landlord a late charge
of five per cent (5%) of the amount of such installment, and, in addition, any
unpaid installment shall bear interest at that rate per annum which is two per
cent (2%) greater than the "prime rate" then in effect at Morgan Guaranty Trust
Company of New York, New York, New York, from the date such installment became
due and payable to the date of payment by Tenant; provided, however, that
nothing herein contained shall be construed or implemented in such a manner as
to allow Landlord to charge or receive interest in excess of the maximum legal
rate than allowed by law. Such late charge and interest shall constitute
Additional Rent hereunder and shall be due and payable with the next monthly
installment of Rent. Nothing in this paragraph shall be deemed to be in
derogation of Landlord's rights under Paragraph 17.
(h) Additional Rent. With respect to this Lease, Additional
Rent shall mean any and all monetary obligations for which Tenant is responsible
under the terms, covenants and conditions of this Lease, including but not
limited to, Base Rent, Tax, late fees, interest payments and Operating Costs.
(i) Tenant's Proportionate Share. Landlord and Tenant agree
that Tenant's "pro rata share" for purposes of Paragraphs 3(e) and 11 shall be
sixty-two and one-half percent (62.5%), the approximate and agreed upon ratio
that the area of the Premises bears to the total rentable area of the Building.
4. OPTION TO EXTEND TERM.
(a) Renewal Period. Provided that (i) Tenant is in occupancy
of the Premises and conducting operations therein; (ii) this Lease is in full
force and effect, (iii) no material adverse change in Tenant's financial
condition has occurred, and (iv) Tenant shall not have been in default during
the term of the Lease, and (v) shall not then be in default and shall not
default in the performance of any of its obligations under this Lease at any
time between the date of issuance of the notice contemplated by Paragraph 4(b)
below and the expiration of the then current lease term, Tenant shall have the
option to renew this Lease for one (1) additional two (2) year term, with the
annual base rent in such renewal period, being equal to One Million Dollars
($1,000,000) payable in equal monthly installments of Eighty-Three Thousand
Three Hundred Thirty-Three Dollars and Thirty-Three Cents ($83,333.33) each.
(b) Notice Required. Tenant shall give Landlord written notice
of its intent to exercise its option to extend the Lease Term at least One
Hundred Eighty (180) days, but no more than Three Hundred Sixty (360) days,
prior to the end of the initial term, time being of the essence. Should Tenant
fail to notify Landlord of its intent to exercise such renewal option within the
aforementioned notice period, time being of the essence, then Tenant's renewal
option shall expire without action by either party and Landlord shall not need
to advise Tenant in writing of Tenant's neglect in reference to the notice
period.
5. USE OF PREMISES.
(a) Tenant may occupy and use the Premises for general office
and warehousing purposes and for no other purpose without the consent of
Landlord, subject, however, to the terms and provisions of any covenants,
easements, conditions or restrictions which affect the use of the Premises.
Tenant shall not permit any unlawful occupation, business or trade to be
conducted on any of the Premises or any use to be made thereof contrary to
applicable laws or regulations. Tenant shall not use or occupy or permit any of
the Premises to be used or occupied, nor do or permit anything to be done in or
on any of the Premises, in a manner which would (i) violate any certificate of
occupancy affecting any of the Premises, (ii) make void or voidable any
insurance then in force with respect to any of the Premises, (iii) make it
difficult or impossible to obtain fire or other insurance which is required
hereunder, or cause the cost of maintaining such insurance to increase [unless
Tenant pays such increase in full], (iv) cause structural damage to the
Building, or (v) constitute a public or private nuisance or waste. In no event
shall Tenant conduct any retail sales in the Premises.
2
<PAGE>
(b) As part of its obligation to comply with laws and other
requirements under Paragraph 5(a) of this Lease, Tenant shall not (either with
or without negligence) generate, use, store, or cause or permit the escape,
disposal or release of any Hazardous Materials in or about the Building or the
Property or the Premises. Hazardous Materials shall mean (a) "hazardous wastes",
as defined by the Resource Conservation and Recovery Act of 1976, as amended
from time to time, (b)"hazardous substances", as defined by the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended from
time to time, (c)"toxic substances", as defined by the Toxic Substances Control
Act, as amended from time to time, (d) "hazardous materials", as defined by the
Hazardous Materials Transportation Act, as amended from time to time, (e) any
applicable state or local laws and the regulations adopted under these acts, as
amended from time to time, (f) oil or other petroleum products whether refined
or unrefined, (g) any highly combustible substance and (h) any substance whose
presence in Landlord's reasonable judgment could be detrimental to the Building
or the Property or the Premises or hazardous to health or the environment. If
any lender or governmental agency shall ever require testing to ascertain
whether or not there has been any release of Hazardous Materials, then the
reasonable costs thereof shall be reimbursed by Tenant to Landlord upon demand
as additional charges if such requirement applies to the Premises; provided
however, the foregoing shall not include any Phase I environmental reports
customarily required by lenders and shall be applicable only if Tenant, its
agents, employees, contractors, subtenants or licensees is suspected of having
directly or indirectly caused a release of Hazardous Materials in or about the
Premises which gives rise to the testing. In addition, Tenant shall execute
affidavits, representations and the like from time to time at Landlord's request
concerning Tenant's best knowledge and belief regarding the presence of
Hazardous Materials in the Premises. In all events, Tenant shall indemnify and
hold Landlord harmless of and from any and all costs and expenses of any nature
arising from the release of Hazardous Materials in the Premises occurring while
Tenant is in possession, or elsewhere on the Property and any adjacent real
estate owned by Landlord, if caused by Tenant or persons acting under Tenant.
The within covenants shall survive the expiration or earlier termination of the
Lease.
(c) If Tenant fails to comply with any applicable law or
regulation or if Landlord reasonably believes the violation of any law or
regulation is threatened, Landlord shall have the right (but not the obligation)
following thirty (30) days notice to Tenant unless Tenant commences to act
during or prior to such period, and diligently pursues the cure of such failure
to comply (unless such failure or threatened failure causes imminent threat to
life or property in which case no notice is required), to act in place of Tenant
and to take such action as it may deem necessary or desirable to ensure
compliance or to mitigate, abate or correct the violation or threatened
violation. All costs of any kind whatsoever incurred by Landlord in connection
therewith, including consultants' and reasonable attorneys' fees, shall be
payable on demand, shall bear interest at the default rate until paid, and shall
constitute additional rent.
(d) Tenant shall indemnify, defend and hold Landlord harmless
from and against any and all claims, losses, damages, liabilities, cost and
expenses, including attorneys' fees, arising from Tenant's failure to comply
with all applicable laws and regulations. The foregoing provisions shall survive
the expiration or earlier termination of this Lease.
6. [INTENTIONALLY DELETED]
7. CONSTRUCTION OF PREMISES.
Tenant warrants that the Premises shall be improved in a good
and workmanlike manner in conformance with all applicable federal, state and
local codes and regulations in effect at that time, including but not limited to
the Americans With Disabilities Act, as amended.
8. TENANT IMPROVEMENTS.
(a) Tenant shall construct, at Tenant's sole cost (subject to
the Tenant Work Allowance as provided in Paragraph 8(b) below), improvements to
the Premises (the "Tenant Improvements") substantially in accordance with the
Space Plan approved by Landlord prior to commencement of construction. Tenant
shall, in consultation with Landlord, coordinate the design of the Tenant
Improvements, and the budgeting of the costs thereof. Tenant shall arrange for
the preparation of "Construction Drawings and Specifications," consisting of
construction working drawings, the mechanical, electrical and other technical
specifications, and the finishing details, including wall finishes and colors
and technical and mechanical equipment installation, if any, all of which
details the installation of the Tenant Improvements in the Premises. The
architects and engineers who prepare such Construction Drawings and
Specifications shall be selected by Tenant subject to Landlord's approval which
shall not be unreasonably withheld. Within ten (10) business days of its receipt
of any of (i) proposed Construction Drawings and Specifications and any
amendments thereto, (ii) the estimated budget for the Tenant Work and any
amendments thereto, (iii) proposed change orders, Landlord shall provide to
Tenant notice of any refusal to approve any aspect of any such item, which
notice shall state with particularity those elements thereof as to which
Landlord does not approve, and the detailed reasons therefor. Should Landlord
fail to provide such notice to Tenant within such period, such item shall
conclusively be deemed to have been approved. Following approval by Landlord of
Construction Drawings and Specifications, and the estimated budget therefor,
which approval shall be reflected by Landlord's initialing as approved such
Construction Drawings and Specifications, and the budget therefor, Tenant will
solicit bids from one or more general contractors for the construction of the
Tenant Improvements, and Tenant shall, following
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consultation with Landlord, contract for the construction of the Tenant
Improvements with a contractor reasonably acceptable to Landlord, and Tenant
shall thereafter coordinate and supervise such construction and consult with
Landlord regarding such construction.
(b) Tenant shall receive an amount equal to the lesser of the
actual cost of Tenant Work or Six Hundred Eighty-Seven Thousand Five Hundred
Dollars ($687,500) (the "Tenant Work Allowance") to be applied against the costs
associated with the design and construction of the Tenant Improvements (such
design and construction being referred to herein as the "Tenant Work"). The
costs of the Tenant Work shall include all costs to be expended in connection
with the design and construction of the Tenant Improvements, including but not
limited to the (i) architectural and engineering fees and expenses incurred in
connection with the Tenant Work, including the preparation of the Space Plan and
the Construction Drawings and Specifications; (ii) governmental agency plan
check, building and other permits and other fees (including any code compliance
changes required by any governmental entity or authority having jurisdiction
thereof); (iii) sales and use taxes, if any; (iv) insurance fees associated with
the construction of the Tenant Work; (v) testing and inspecting costs; (vi) the
actual costs and charges for material and labor, contractor's profit and
contractor's general overhead incurred in constructing the Tenant Work,
including the cost of any change orders; (vii) the cost of constructing the
demising walls; and (viii) utility hook-up and tap-in fees. The parties
anticipate that the cost of the Tenant Work will exceed the Tenant Work
Allowance. Landlord shall pay to Tenant the Tenant Work Allowance on the last of
the following to occur: (a) completion of the Tenant Improvements, or (b) ten
(10) days after Landlord's receipt of Tenant's payment of rent for the second
month of the Term; and (c) thirty (30) days following Tenant's presentation of
all final and unconditional lien waivers, a certificate of occupancy and
Tenant's written acceptance of the Tenant Improvements in form and substance
satisfactory to Landlord.
(c) Tenant designates Pam Samson, whose address is 209 Redwood
Shores, Redwood CA 94065-1175 or such other person as Tenant may designate in
writing to Landlord ("Tenant's Authorized Representative") as the person
authorized to (i) initial as approved all Construction Drawings and
Specifications, budgets, change orders, and approvals pursuant to this Paragraph
8 and (ii) communicate with Landlord regarding the decisions, elections and
requests of Tenant. Landlord shall not be obligated to respond to or act upon
any such item until such item has been initialed by Tenant's Authorized
Representative.
9. LANDLORD'S LIABILITY.
(a) Landlord's Indemnity. Subject to the provisions of this
Paragraph 9, Landlord agrees to protect, indemnify, hold harmless and defend
Tenant and its respective members, directors, officers, agents, employees,
successors and assigns, where herein permitted, from and against any and all
loss, cost, damage, liability or expense as incurred (including but not limited
to actual attorneys' fees and legal costs) arising out of or related to any
claim, suit or judgment brought by or in favor of any person or persons for
damage, loss or expense due to, but not limited to, bodily injury, including
death, or property damage sustained by such person or persons which arises out
of, is occasioned by or is in any way attributable to the use or occupancy of
any common areas of the Building, except that caused by the negligence or
willful misconduct of Tenant, its successors or assigns, and their respective
agents, employees and invitees.
(b) Limitation of Liability. Notwithstanding anything to the
contrary contained in this Lease, it is expressly understood and agreed by and
between the parties hereto that: (i) the recourse of Tenant or its successors or
assigns against Landlord with respect to the alleged breach by or on the part of
Landlord of any representation, warranty, covenant, undertaking or agreement
contained in the Lease or otherwise arising out of Tenant's use of the Premises
or the Property (collectively, "Landlord's Lease Undertakings") shall extend
only to Landlord's interest in the real estate of which the Premises demised
under the Lease are a part ("Landlord's Real Estate") and not to any other
assets of Landlord or its owners; and (ii) except to the extent of Landlord's
interest in Landlord's Real Estate, no personal liability or personal
responsibility of any sort with respect to any of Landlord's Lease Undertakings
or any alleged breach thereof is assumed by, or shall at any time be asserted or
enforceable against, Landlord, J.P. Morgan Investment Management Inc.,
Landlord's property manager, or against any of their respective directors,
officers, employees, agents, constituent parties, beneficiaries, trustees,
shareholders or representatives.
(c) Transfer of Landlord's Interest. In the event of any
transfer of Landlord's interest in the Property, Landlord shall be automatically
freed and relieved from all applicable liability accruing thereafter with
respect to performance of any covenant or obligation on the part of Landlord
provided any deposits or advance rents held by Landlord are turned over to the
grantee and said grantee expressly assumes, subject to the limitations of this
Paragraph 9, all of the terms, covenants and conditions of this Lease to be
performed on the part of Landlord, it being intended hereby that the covenants
and obligations contained in this Lease on the part of Landlord shall, subject
to all the provisions of this Paragraph 9, be binding on Landlord, its
successors and assigns, only during their respective periods of ownership.
10. GUARANTY. [Intentionally Deleted]
11. OPERATING COSTS. Tenant shall pay as Additional Rent its pro rata
share of Operating Costs of the Building and Property. This amount shall be
adjusted on an annual basis in accordance with the procedures outlined below.
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(a) Definition. As used herein, the term "Operating Costs"
means (except as specifically excluded below) the actual costs incurred in
owning, operating and maintaining the Building and Property during each year of
the Lease Term. Such operation and maintenance costs shall include, by way of
example rather than of limitation, (i) real property, county, and other similar
taxes or assessments, including but not limited to any special assessments,
levied against any or all of the Building and Property; (ii) charges or fees
for, and taxes on, the furnishing of water, sewer service, gas, fuel,
electricity, drainage or other utility services to the Premises and common areas
of the Building and Property; (iii) costs of providing trash removal service,
landscaping service, snow removal service, and of maintaining grounds, common
areas of the Property, access easements, parking areas, and mechanical systems
of the Building; (iv) all other reasonable costs of maintaining, repairing or
replacing any or all of the Building or Property, except (a) costs for repairs,
maintenance and replacements required due to defective materials, installations
or workmanship at the time of initial construction of the Building and Property
and expenses incurred in connection with the enforcement of any warranty rights
in connection therewith, or (b) costs to repair the roof, foundation, interior
load bearing partitions, exterior walls and window systems, except to the extent
any such structural repair is required due to Tenant's negligence or willful
misconduct; (v) charges or fees for any necessary governmental permits; (vi)
management fees (not to exceed three percent of annual base rentals from the
Property) under a management agreement, and related overhead and expenses; (vii)
premiums for hazard, liability, workmen's compensation or similar insurance upon
any or all of the Building and Property as maintained by Landlord under
Paragraph 20; (viii) costs arising under service contracts with independent
contractors for servicing, maintenance and repair of Building equipment and
systems; (ix) any assessments or charges imposed on Landlord or the Property
pursuant to the Declaration of Covenants, Conditions and Restrictions dated as
of April 30, 1998 of record in Deed Book 7033, Page 714 in the Office of the
Clerk of Jefferson County, Kentucky as amended from time to time provided such
assessments or charges are not included in any of the other costs described in
this subparagraph (a); and (x) the cost of any other items which, under
generally accepted accounting principles consistently applied from year to year
with respect to the Building and Property, constitute operating or maintenance
costs attributable to any or all of the Premises. Landlord and its agents
reserve the right to enter onto the Premises at reasonable times upon reasonable
notice from Landlord or its agent and accompanied by a representative of Tenant,
excepting emergency, for the specific purpose of managing and maintaining the
Premises. Landlord agrees that it shall make no profit from its collection of
Operating Costs.
(b) Notwithstanding anything to the contrary herein, Operating
Costs shall not include (i) any costs (including payments of principal and
interest under any mortgage and any ground rental payments) associated with the
initial construction of the Building, (ii) costs of development of the Property
or the Premises, (iii) costs of painting or decorating areas of the Building
other than common and public areas, and exterior elements (iv) brokerage
commissions, legal fees, construction costs and concessions or inducements to
any tenant in connection with leasing premises in the Building, and advertising
expenses in connection with the leasing of the Building, (v) legal fees relating
to tenant leases, financings of the Building, and zoning and land-use issues and
violations by Landlord under tenant leases, (vi) salaries and other compensation
paid to officers or executives of Landlord or any partner, principal or owner of
the entity comprising Landlord, (vii) fees or charges paid to any party
affiliated with Landlord on account of the provision by such entity of goods or
services constituting Operating Costs of the Building to the extent such fees or
charges exceed the fees or charges that would have been incurred to an
independent entity in an arm's length transaction, (viii) any expenses
reimbursable by any tenant of the Building, insurance company or condemning
authority, or actually reimbursed by any other source, (ix) charges for heating
and air conditioning service furnished to other tenants of the Building during
other than normal business hours as determined by Landlord, (x) advertising and
marketing costs, (xi) Landlord's income taxes, (xii) repairs or other work
occasioned by fire or other casualty of an insurable nature, but only to the
extent of any recovery actually received by Landlord, and (xiii) costs arising
from Landlord's civic activities or charitable or political contributions, all
of which costs are the responsibility of the Landlord except where agreed to
otherwise by the parties in writing.
(c) In order to provide for current payments, a statement of
Landlord's estimate of expenses as initially set forth in Paragraph 11 (a)
above, together with the amount of Tenant's Additional Rent resulting therefrom,
shall be submitted by Landlord to Tenant prior to the beginning of each calendar
year or part thereof during the Term. Tenant shall pay monthly, one-twelfth
(1/12th) of Tenant's pro rata share of Landlord's estimate of Operating Costs.
Further, from time to time during any calendar year, Landlord may submit to
Tenant a revised statement of Landlord's estimate of Tenant's pro rata share of
any Operating Costs and within thirty (30) days after delivery of such statement
(including any statement delivered after the expiration or termination of this
Lease), Tenant shall pay monthly to Landlord, as Additional Rent an amount equal
to one-twelfth (1/12th) of the revised amount so estimated. After the end of
each fiscal year, Landlord will, as soon as practical, submit to Tenant a
statement of the actual expenses, incurred for Operating Costs for the preceding
fiscal year. Such statement shall also indicate the amount of Tenant's excess
payment or underpayment based on the Landlord's estimate.
If Additional Rent paid by Tenant during the
preceding calendar year shall be in excess of, or less than its share of the
actual expenses incurred by Landlord for Operating Costs for that year, Landlord
and Tenant agree to make the appropriate adjustment following the submission of
Landlord's statement by Tenant paying any Additional Rent due with the
installment of rent due for the month following submission of Landlord's
statement, or Tenant deducting its excess payment from the installment of rent
for such month.
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During the final year of the Lease Term if Tenant
overpays its portion of Operating Costs, said over payment amount shall be
returned by Landlord within thirty (30) days of termination provided no event of
default has occurred or is occurring.
Within thirty (30) days after the receipt of
Landlord's statement showing actual figures for the year, Tenant shall have the
right to request copies of a statement of "Operating Costs of the Building"
prepared by the Landlord which shall be supplied to the Tenant within a
reasonable time after Tenant's written request, but no such request shall extend
the time for payment as set forth in Paragraph 11(c). Unless Tenant asserts
specific error(s) within fifteen (15) days after Landlord has complied with
Tenant's request, the statement submitted by Landlord shall be deemed to be
correct. Provided Tenant timely asserts such specific errors, and is current in
its obligations to Landlord for the payment of all sums due to Landlord as Rent
under this Lease, and is not otherwise in default in its obligations under this
Lease, Tenant shall have the right, exercisable no more than once per Lease
Year, to cause Landlord's books and records showing Tax and Operating Costs for
the prior Lease Year to be examined by a Certified Public Accountant engaged by
Tenant upon no less than thirty (30) days prior written notice and during normal
business hours at any time within one hundred and eighty (180) days following
the expiration of the prior Lease Year. No such Certified Public Accountant may
be engaged on a contingent fee basis. Such examination shall, at Landlord's
option, occur at the offices of the Landlord's management agent, and shall not
take more than thirty (30) days to complete. Any information obtained by Tenant
from such examination will be treated as confidential unless and until such
information has been publicly disclosed by Landlord; provided, however, that
nothing herein contained shall limit or impair the right or obligation of Tenant
to disclose such information when required to do so by law or to appropriate
regulatory authorities having jurisdiction over its affairs, or to use the same
in connection with the enforcement of the terms and conditions of the Lease. As
a condition of such examination, Landlord may require any party reviewing or
having access to Landlord's records to execute and deliver to Landlord a
confidentiality agreement substantially in the form attached hereto as Exhibit
E. In the event that Operating Costs or Tax for any Lease Year have been
overstated by seven percent (7%) or more, Landlord shall promptly reimburse or
credit Tenant for the reasonable costs of such audit, in addition to refunding
all overpayments previously made by Tenant. In the event that Operating Costs or
Tax for any Lease Year have been overstated by less than seven percent (7%),
Tenant shall bear the costs of the audit but Landlord shall promptly refund or
credit all overpayments previously made by Tenant.
In addition to the Rent and Additional Rent provided
elsewhere herein, Tenant shall be responsible for making direct payment of all
costs incurred in operating the Premises to the parties providing service to the
Premises, including without limitation, all utility costs, trash removal and
janitorial services. Tenant shall at all times maintain the Premises in a neat
and clean manner, and shall place all trash in its dumpster.
12. ASSIGNMENT AND SUBLETTING.
(a) Tenant shall not mortgage, pledge or encumber this Lease
without Landlord's prior written consent, which consent shall not be
unreasonably withheld or delayed.
(b) Tenant shall have the right to assign this Lease or sublet
all or any portion of the Premises throughout the Term, subject to Landlord's
prior written consent and approval, which consent shall not be unreasonably
withheld or delayed, provided, that Tenant remains fully liable for the
performance of all terms and conditions of this Lease including but not limited
to the payment of Base Rent and Additional Rent and that the assignee or
subtenant agrees to be bound by all terms, conditions, and provisions of this
Lease. If Tenant wants to assign, sublet or otherwise transfer all or part of
the Premises or this Lease, then Tenant shall give Landlord written notice
("Tenant's Request Notice") of the identity of the proposed assignee or
subtenant and its business, all terms of the proposed assignment or subletting,
the commencement date of the proposed assignment or subletting (the "Proposed
Sublease Commencement Date"), the area proposed to be assigned or sublet (the
"Proposed Sublet Space") and such other information as Landlord may reasonably
request. Tenant shall also transmit therewith the most recent financial
statement or other evidence of financial responsibility of such assignee or
subtenant and a certification executed by Tenant and such proposed assignee or
subtenant stating whether any premium or other consideration is being paid for
the proposed assignment or sublease. Any sublease, assignment or other transfer
shall be effective on forms approved by Landlord and Tenant. Tenant assigns to
Landlord any sum due to Tenant from any assignee, subtenant or occupancy of
Tenant as security for Tenant's performance of its obligations pursuant to this
Lease, provided, however, that Tenant shall have the license to collect such
rents provided prior to the occurrence of an Event of Default. Following an
Event of Default, Tenant authorizes each such assignee, subtenant or occupant to
pay such sum directly to Landlord if such assignee, subtenant or occupant
receives written notice from Landlord specifying that such rent shall be paid
directly to Landlord. Landlord's collection of such rent shall not be construed
as an acceptance of such assignee, subtenant or occupant as a tenant nor a
waiver of any default hereunder by Tenant. Notwithstanding anything in this
Paragraph 12 to the contrary, provided no Event of Default exists under this
Lease, or would exist but for the pendency of any cure periods provided for
under Paragraph 17, Tenant may, without Landlord's consent, but after providing
written notice to Landlord, assign this Lease or sublet all or any portion of
the Premises to any Related Entity (as hereinafter defined) provided that (i) in
the event of an assignment, such Related Entity assumes in full all of Tenant's
obligations under this Lease; (ii) Landlord is provided with a counterpart of
the fully executed agreement of assignment or sublease, which shall be in a form
reasonably satisfactory to Landlord; (iii) to the extent Tenant
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remains in existence Tenant remains liable under the terms of this Lease; (iv)
such Related Entity is not a governmental entity or agency; (v) such Related
Entity's use requirement does not differ from the Permitted Use described in
Paragraph 5 hereof; and (vi) such Related Entity does not require additional
services other than those agreed to be provided by Landlord under the terms of
this Lease. "Related Entity" shall be defined as (i)any parent company,
subsidiary, or affiliate of Tenant, which controls, is controlled by, or is
under common control with Tenant, and/or (ii) any entity into which Tenant shall
be merged or consolidated, or which purchases substantially all of the assets of
Tenant and assumes the liabilities of Tenant under this Lease and continues in
the same business as that of Tenant.
(c) Intentionally Omitted.
(d) If Tenant proposes to assign this Lease other than to a
Related Entity, Landlord may, at its option, upon written notice to Tenant given
within ten (10) business days after its receipt of Tenant's Request Notice,
together with all other necessary information, elect to recapture the Premises
and terminate this Lease. If Tenant proposes to sublease all or part of the
Premises for the remainder of the Term, Landlord may, at its option upon written
notice to Tenant given within ten (10) business days after its receipt of
Tenant's Request Notice, together with all other necessary information, elect to
recapture such portion of the Premises as Tenant proposes to sublease and upon
such election by Landlord, this Lease shall terminate as to the portion of the
Premises recaptured. If a portion of the Premises is recaptured, the Rent
payable under this Lease shall be proportionately reduced based on the square
footage of the Rentable Square Feet retained by Tenant and the square footage of
the Rentable Square Feet leased by Tenant immediately prior to such recapture
and termination, and Landlord and Tenant shall thereupon execute an amendment to
this Lease in accordance therewith. Landlord may thereafter, without limitation,
lease the recaptured portion of the Premises to the proposed assignee or
subtenant without further liability to Tenant. Upon any such termination,
Landlord and Tenant shall have no further obligations or liabilities to each
other under this Lease with respect to the recaptured portion of the Premises,
except with respect to obligations or liabilities which accrue or have accrued
hereunder as of the date of such termination (in the same manner as if the date
of such termination were the date originally fixed for the expiration of the
term hereof).
(e) If any sublease, assignment or other transfer (whether by
operation of law or otherwise) provides that the subtenant, assignee or other
transferee (or any affiliate thereof) is to pay any amount in excess of the rent
and other charges due under this Lease, then, whether such excess be in the form
of an increased rental, lump sum payment, payment for the sale or lease of
fixtures or other leasehold improvements or any other form (and if the
applicable space does not constitute the entire Premises, the amount and
existence of such excess shall be determined on a prorata basis), Tenant shall
pay to Landlord fifty percent (50%) of any such excess within ten (10) days.
Tenant shall in all events diligently pursue the collection of all amounts owed
by any subtenant, assignee or other transferee. Landlord shall have the right to
inspect and audit Tenant's books and records relating to any sublease,
assignment or other transfer.
13. CASUALTY DAMAGE. In the event of damage or destruction of the
Premises by fire or any other casualty, this Lease shall not be terminated, but
the Premises shall be promptly and fully repaired or restored, as the case may
be, by Landlord at its own cost and expense in an amount not to exceed the
amount of insurance proceeds available. Due allowance, however, shall be given
for reasonable time required for adjustment and settlement of insurance claims,
and for such other delays as may result from government restrictions, and
controls on construction, if any, and for strikes, national emergencies and
other conditions beyond the control of Landlord. It is agreed that in any of the
aforesaid events, this Lease shall continue in full force and effect, but if the
condition is such so as to make the entire Premises untenantable for practical
use for Tenant's purposes, then the Rent which Tenant is obligated to pay
hereunder shall abate as of the date of the occurrence until the Premises have
been fully and completely restored by Landlord. Any unpaid or prepaid Rent for
the month in which said condition occurs shall be prorated. If the Premises are
partially damaged or destroyed but the Tenant can still make practical use of
the balance of the Premises; then during the period that Tenant is deprived of
the use of the damaged portion of said Premises, Tenant shall be required to pay
Rent covering only that part of the Premises that it is able to occupy, based on
that portion of total rent which the amount of square foot area remaining that
can be occupied bears to the total square foot area of all the Premises covered
by this Lease. In the event that twenty five percent (25%) or more of the
Premises are damaged or destroyed by fire or other casualty so as to be
untenantable for practical use for Tenant's purposes and it shall require more
than one hundred eighty (180) days for Landlord to substantially complete
restoration of same as reasonably concurred on by Tenant, then either party
hereto upon written notice delivered within thirty (30) days of the fire or
other casualty to the other party may terminate this Lease, in which case the
Rent shall be apportioned and paid to the date of said fire or other casualty.
Subject to the foregoing, no compensation, or claim, or diminution of Rent will
be allowed or paid, by Landlord, by reason of consequential damages,
inconvenience, annoyance, or injury to business, arising from the necessity of
repairing the Premises or any portion of the Building of which they are a part,
however the necessity may occur.
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14. MAINTENANCE AND REPAIRS.
(a) Subject to Tenant's responsibilities set forth in
Paragraph 14 (d), Landlord shall keep the Building and all machinery, equipment
and fixtures attached to, or used in connection with the operation of the
Building, including all electrical, heating, mechanical, sanitary, sprinkler,
utility, power, plumbing, cleaning, refrigeration, ventilating, air conditioning
and elevator systems and equipment (excluding, however, lines, improvements,
systems and machinery for water, gas, steam and electricity owned and maintained
by any public utility company or governmental agency or body and excluding also
any of Tenant's property or plate glass) in good order and repair. Landlord
reserves the right of access to the Premises for the purposes of such operation,
cleaning, maintenance, safety, security and repairs, and agrees that it shall
use reasonable efforts (except in the case of emergency) to provide reasonable
advance notice to Tenant of its intent to enter the Premises for such purposes.
The cost for maintaining the Building and Premises in good order and repair as
contemplated by this Paragraph 14 (a) shall be an Operating Cost for purposes of
Paragraph 11 hereof. There shall be no abatement in rents due and payable
hereunder and no liability on the part of Landlord by reason of any
inconvenience, annoyance or disruption arising from Landlord's making reasonable
repairs, additions or improvements to the Building or Premises in accordance
with its obligations hereunder provided Landlord is diligently pursuing same.
Tenant will not do or permit anything to be done in the Premises or the Building
of which they form a part or bring or keep anything therein which shall in any
way increase the rate of fire or other insurance for said Building, or on the
property kept therein, or obstruct, or interfere with the rights of other
tenants, or in any way injure or annoy them, or those having business with them,
or conflict with them or conflict with the fire laws or regulations, or with any
insurance policy upon said Building or any part thereof, or with any statutes,
rules or regulations enacted or established by the appropriate governmental
authority. If any increase in the rate of fire insurance or other insurance is
stated by any insurance company or by any insurance rate bureau due to any
activity or equipment of Tenant, such statement shall be conclusive evidence
that the increase in such rate is caused by such activity or equipment, and
Tenant shall be liable for such increase and shall reimburse Landlord therefor
upon demand, and any such sum shall be considered Additional Rent payable
hereunder.
In the event Landlord elects to make substantial
improvements or additions to the Building, Property or Premises, such
improvements or additions shall not adversely affect Tenant's use of or access
to the Premises unless Landlord has obtained the prior written consent of
Tenant, which consent shall not be unreasonably withheld, to make such
improvements or additions which affect Tenant's Premises in an adverse manner.
Landlord shall be free to make improvements or additions to the Building,
Property or Premises which do not have an adverse effect on Tenant's use of or
access to the Premises.
(b) After substantial completion of Building or Premises,
except as hereinafter expressly set forth Tenant will not make any alterations,
installments, changes, replacements, additions or improvements, collectively
"Alterations", in or to the Premises or any part thereof, without the prior
written consent of Landlord, not to be unreasonably withheld or delayed. In the
event Landlord elects to have the Alterations remain upon the Premises, said
written consent shall include Landlord's election. It is expressly understood
that all Alterations shall be performed in a good and workmanlike manner and
shall conform to all rules and regulations established from time to time by any
applicable underwriter's association and conform to all requirements of local,
state and federal governments. All Alterations shall be made at Tenant's sole
expense, by contractors, or subcontractors reasonably approved by Landlord, and
only after (i) Tenant has obtained all necessary permits from governmental
authorities and (ii) Tenant has submitted complete plans and specifications to
Landlord with respect to the Alterations and Landlord has approved them. If any
mechanic's lien is filed against the Premises or the Building for work or
materials furnished to Tenant, the lien shall be discharged or bonded off by
Tenant, solely at Tenant's expense, within thirty (30) days after Tenant
receives notice thereof. Tenant shall indemnify and hold harmless Landlord from
any and all expenses (including attorney's fees), liens and claims or damage to
persons, property, or the Building which may arise from the making of any
Alterations. Tenant will deliver to Landlord an architect's certification that
the Alterations were constructed in accordance with the plans and specifications
previously approved by Landlord.
It is also expressly understood that all Alterations
upon the Premises (whether with or without Landlord's consent), shall at the
election of Landlord, as provided in the written consent required herein above,
remain upon the Premises and be surrendered with the Premises at the expiration
of this Lease without disturbance, molestation or injury. Notwithstanding the
foregoing, provided (i) this Lease is in full force and effect, (ii) no material
adverse change in Tenant's financial condition has occurred, and (iii) that
Tenant shall not have been in default more than twice during the term of this
Lease and shall not then be in default in the performance of any obligation
under this Lease, Tenant shall have the right to remove, prior to the expiration
or termination of this Lease, all movable furniture, fixtures or equipment
installed in the Premises solely at Tenant's expense. Should Landlord elect that
alterations, installments, changes, replacements, additions to or improvements
made by Tenant are not to remain on the Premises, Tenant hereby agrees that
within five (5) days following the expiration of the Term of this Lease,
Landlord shall have the right to cause same to be removed at Tenant's sole cost
and expense. Tenant hereby agrees to reimburse Landlord for the reasonable cost
of such removal together with the cost of restoring the Premises to its original
condition.
(c) Tenant shall not install any other equipment of any kind
or nature whatsoever which will or may necessitate any changes, replacements or
additions to or require the use of the water system, air conditioning system or
the electrical system of the Premises without the prior written consent of the
Landlord, which consent shall not be unreasonably withheld or
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delayed. In the event that Tenant wishes to install machinery or mechanical
equipment which may cause noise or vibration to be transmitted to the structure
of the Building or any space therein, such machinery shall be installed and
maintained by Tenant, at Tenant's expense, on vibration eliminators or other
devices sufficient to eliminate such noise and vibration. Tenant may, at its
expense, install and remove additional equipment and machinery used or useful in
Tenant's business, which equipment and machinery shall remain the property of
Tenant and shall not become part of the real estate, provided that such
installation shall not reduce the value of the Premises or its usefulness. Any
equipment of Tenant not removed by Tenant within ten (10) days after the
expiration or earlier termination of this Lease shall be considered abandoned by
Tenant and may be appropriated, sold, destroyed or otherwise disposed of by
Landlord without first giving notice thereof and without obligation to account
therefor. Notwithstanding any other provision of this Lease, Tenant may not
install any equipment which emits electromagnetic, microwave, ultrasonic, laser,
or other radiation which Landlord determines causes a risk to persons or
property, or interferes with telecommunications transmissions or computer use.
(d) Subject to Landlord's obligations to maintain and repair
the Premises in accordance with this Paragraph 14, Tenant agrees that it will
take good care of the Premises and the fixtures and plate glass therein and
will, at the expiration or other termination of the Term hereof, surrender and
deliver up the same in like good order and conditions as the same now is or
shall be at the commencement of the Term hereof, ordinary wear and tear excepted
and shall repair any damage caused by its removal of trade fixtures. Without
limiting the generality of the foregoing, Tenant shall promptly make all repairs
to the Premises or to any part of the Building, to the extent such repairs are
not covered by insurance and if such repairs are necessitated by any act or
omission of Tenant, any subtenant, assignee or concessionaire of Tenant, any of
its respective agents or employees, or by the failure of Tenant to perform any
of its obligations under this Lease.
15. PARKING AND LOADING AREAS.
(a) During the Term of this Lease, and any renewal thereof,
Tenant shall have, without charge, the right to utilize two hundred (200)
vehicle parking spaces in the Building's parking facilities on a nonexclusive
basis with other tenants of the Building, upon such non-financial terms and
conditions as may from time to time be established by Landlord. Landlord
reserves the right in its absolute discretion to determine whether the parking
facilities are becoming crowded and to allocate and assign parking spaces among
Tenant and the other tenants. It is understood and agreed that Landlord assumes
no responsibility, and shall not be held liable, unless caused by Landlord's
negligence, for any damage or loss to any automobiles parked in the parking
facilities or to any personal property located therein, or for any injury
sustained by any person in or about the parking facilities.
(b) During the Term of this Lease, and any renewal thereof,
Tenant shall have, without charge, the right to utilize the paved areas adjacent
to the Premises which have been designed and constructed for use as loading
docks to serve the Premises and to provide access to the drive-in door in the
Premises. Landlord shall not be liable to Tenant as a result of any inability of
Tenant to access such docks or drive-in door due to the parking of vehicles in
the vicinity of such loading docks and drive-in area, or otherwise.
16. SIGNAGE. Tenant shall be entitled to install, at its sole expense,
one (1) building mounted exterior sign and one (1) monument sign providing
identification of Tenant, at Tenant's expense, subject to Landlord's reasonable
approval as to location, design, color, lighting, and specifications, and to
applicable Jefferson County regulations and restrictions of record.
17. EVENT OF DEFAULT.
(a) Definition. As used in the provisions of this Lease, each
of the following events shall constitute, and is hereinafter referred to as, an
"Event of Default":
(i) If Tenant (1) fails to pay Rent, Additional Rent
or any other sum which Tenant is obligated to pay by any provision of this
Lease, when and as it is due and payable hereunder and without demand therefor,
or (2) in any material respect violates any of the terms, conditions or
covenants set forth in the provisions of this Lease; or
(ii) If Tenant (1) applies for or consents to the
appointment of a receiver, trustee or liquidator of Tenant or of all or a
substantial part of its assets, (2) files a voluntary petition in bankruptcy or
admits in writing its inability to pay its debts as they come due, (3) makes an
assignment for the benefit of its creditors, (4) files a petition or an answer
seeking a reorganization or an arrangement with creditors, or seeks to take
advantage of any insolvency law, (5) performs any other act of bankruptcy, or
(6) files an answer admitting the material allegations of a reorganization
insolvency proceeding.
(iii) If an order of relief or other order, judgement
or decree is entered by any court of competent jurisdiction adjudicating Tenant
as insolvent, or otherwise entitled to the protection of or subject to any
bankruptcy statute, approving a petition seeking such a reorganization, or
appointing a receiver, trustee or liquidator of Tenant or otherwise commence
with respect to Tenant or any of its assets any proceeding under any bankruptcy,
reorganization, arrangement, insolvency, readjustment,
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receivership or similar law, and if such order, judgement, decree or proceeding
continues unstayed for more than sixty (60) consecutive days after the
expiration of any stay thereof.
(b) Notice to Tenant, Grace Period. Anything contained in the
provisions of this Paragraph to the contrary notwithstanding, upon the
occurrence of an Event of Default Tenant shall not be deemed to be in default,
and Landlord shall not exercise any right or remedy which it holds under any
provision of this Lease or under applicable law unless and until;
(i) Landlord has given written notice thereof to
Tenant, and
(ii) Tenant has failed, (1) if such Event of Default
consists of the failure to pay money, within three (3) calendar days after the
date Landlord presents notice, to pay all of such money, together with interest
thereon and any late payment charge which may be due hereunder of five percent
(5%) levied on all monies due to Landlord as of the Notice of Default in
accordance with Paragraph 3(g), or (2) if such Event of Default consists of
something other than the failure to pay money, within fifteen (15) business days
thereafter to commence actively, diligently and in good faith to proceed to cure
such Event of Default and to continue to do so until it is fully cured; provided
however, if Tenant commences to cure such default during such fifteen (15)
business day period, and such default cannot be cured within such period despite
diligent effort, Tenant shall be afforded such additional time as may reasonably
required to effect a cure provided that Tenant continues to diligently pursue
such cure.
(iii) No such notice shall be required, and Tenant
shall be entitled to no such grace period, (1) more than twice with respect to
monetary default during each twelve (12) month period of the Term, or (2) if
Tenant has substantially terminated or is in the process of substantially
terminating its continuous occupancy and use of the Premises for the purpose set
forth in the provisions of Paragraph 5, or (3) if any Event of Default
enumerated in the provisions of Paragraphs 17(a)(ii), 17(a)(iii) or 17(b)(ii)
has occurred.
(c) Landlord's Rights upon Event of Default. Upon the
occurrence of an Event of Default, Landlord, at its option, may terminate this
Lease, and with our without terminating this Lease, may pursue any and all other
remedies available to it under the laws of the Commonwealth of Kentucky,
including, by way of example rather than of limitation, the rights to:
(i) re-enter and repossess the Premises, with lawful
force, and any and all improvements thereon and additions thereto;
(ii) at Landlord's option, immediately recover an
amount equal to the present value (as of the date of Tenant's default) of the
Base Rent and Additional Rent which would have become due through the date on
which the Lease Term would have expired but for Tenant's default, which damages
shall be payable to Landlord in a lump sum on demand. For purposes of this
Section, present value shall be computed by discounting at a rate equal to one
(1) whole percent point above the "prime rate" then in effect at Morgan Guaranty
Trust Company of New York, and collect such balance in any manner not
inconsistent with applicable law; and/or
(iii) relet any or all of the Premises for Tenant's
account for any or all of the remainder of the Lease Term, or pay to Landlord,
any deficiency in the Rent and any other sum which Tenant is obligated to pay
resulting, with respect to such remainder, from such reletting, as well as the
out-of-pocket cost to Landlord of any reasonable fees relating to reletting of
the Premises including but not limited to construction costs, brokerage fees,
reasonable attorney's fees or of any repairs or other action (including those
taken in exercising Landlord's rights under any provision of this Lease) taken
by Landlord on account of such Event of Default.
Landlord's rights and remedies set forth in this Lease are cumulative and in
addition to Landlord's other rights and remedies at law or in equity, including
those available as a result of any anticipatory breach of this Lease. Landlord's
exercise of any such right or remedy shall not prevent the concurrent or
subsequent exercise of any other right or remedy. Landlord's delay or failure to
exercise or enforce any of Landlord's rights or remedies or Tenant's obligations
shall not constitute a waiver of any such rights, remedies or obligations.
Landlord shall not be deemed to have waived any default unless such waiver
expressly set forth in an instrument signed by Landlord. Any such waiver shall
not be construed as a waiver of any covenant or condition except as to the
specific circumstances described in such waiver. Neither Tenant's payment of an
amount less than a sum due nor Tenant's endorsement or statement on any check or
letter accompanying such payment shall be deemed an accord and satisfaction.
Notwithstanding any request or designation by Tenant, Landlord may apply any
payment received from Tenant to any payment then due. Landlord may accept the
same without prejudice to Landlord's right to recover the balance of such sum or
to pursue other remedies. Re-entry and acceptance of keys shall not be
considered an acceptance of a surrender of this Lease.
(d) Right of Landlord to Cure Tenant's Default. If Tenant
defaults in the performance of any of its obligations under this Lease, then
Landlord shall have the right (but not the duty) to perform such obligation, and
Tenant shall reimburse Landlord for any costs and expenses thereby incurred,
together with interest thereon at that rate per annum which is two
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percent (2%) greater than the "prime rate" then in effect at Morgan Guaranty
Trust Company of New York, from the date such costs and expenses are incurred by
Landlord to the date of payment thereof by Tenant; provided, however, that
nothing herein contained shall be construed or implemented in such a manner as
to allow Landlord to charge or receive interest in excess of the maximum legal
rate then allowed by law. Such payment and interest shall constitute Additional
Rent hereunder, which shall be due and payable with the next monthly installment
of Rent; but the making of such payment or the taking of such action by Landlord
shall not operate to cure such default or to stop Landlord from the pursuit of
any remedy to which Landlord would otherwise be entitled.
(e) Lien on Personal Property. Pursuant to KRS 383.070,
Landlord shall have a lien on all of Tenant's tangible and intangible personal
property now or hereafter located upon the Premises to secure the payment of
four (4) months' rent. Landlord's rights and remedies provided in this section
shall be in addition to, and not in lieu of, any other rights and remedies
available to Landlord pursuant to the terms of this Lease or pursuant to
applicable law.
(f) No Waiver. If Landlord institutes legal proceedings
against Tenant as to any matter under this Lease and a compromise or settlement
is made, Landlord shall not be deemed to have waived any rights under this Lease
except as explicitly set forth in a written agreement signed by Landlord
evidencing such compromise or settlement. No waiver by Landlord of any breach of
any covenant, condition, or agreement in this Lease shall operate as a waiver of
such covenant or condition itself or of any subsequent breach thereof. No
payment by Tenant or receipt by Landlord of a lesser amount than the monthly
installments of Rent herein stipulated shall be deemed to be other than a
payment on account, nor shall any endorsement or statement on any check or
letter accompanying a check for payment of Rent be deemed an accord and
satisfaction, and Landlord may accept such check prepayment without prejudice to
Landlord's right to recover the balance of such Rent or to pursue any other
remedy provided in the Lease. No re-entry by Landlord, and no acceptance by
Landlord of keys from Tenant, shall be considered an acceptance of a surrender
of the Lease.
18. HOLDING OVER. Tenant acknowledges that it is extremely important
that Landlord have substantial advance notice of the date on which Tenant will
vacate the Premises, because Landlord will (a) require an extensive period to
locate a replacement tenant, and (b) plan its entire leasing and renovation
program for the Building in reliance on its lease expiration dates. Tenant also
acknowledges that if Tenant fails to surrender the Premises at the expiration or
earlier termination of the Lease Term, then it will be conclusively presumed
that the value to Tenant of remaining in possession, and the loss that will be
suffered by Landlord as a result thereof, far exceed the Base Rent and
Additional Rent that would have been payable had the Lease Term continued during
such holdover period. Therefore, if Tenant (or anyone claiming through Tenant)
does not immediately surrender the Premises or any portion thereof upon the
expiration or earlier termination of the Lease Term, then the rent shall be
increased to equal the greater of (1) the fair market rent for the Premises, or
two hundred percent (200%) of the Base Rent, Additional Rent and other sums that
would have been payable pursuant to the provisions of this Lease if the Lease
Term had continued during such holdover period. Such rent shall be computed by
Landlord on a monthly basis and shall be payable on the first day of such
holdover period and the first day of each calendar month thereafter during such
holdover period until the Premises have been vacated. Notwithstanding any other
provision of this Lease, Landlord's acceptance of such rent shall not in any
manner adversely affect Landlord's other rights and remedies, including
Landlord's right to evict Tenant and to recover all damages. Any holdover shall
be deemed to be a tenancy-at-sufferance and not a tenancy-at-will or tenancy
from month-to-month; provided, however, that Landlord may, in addition to its
other remedies, elect, in its sole discretion, to treat such holdover as the
creation of a month-to-month tenancy with Tenant. In no event shall any holdover
be deemed a permitted extension or renewal of the Lease Term, and nothing
contained herein shall be construed to constitute Landlord's consent to any
holdover or to give Tenant any right with respect thereto. Except as otherwise
specifically provided in this Article, all terms of this Lease shall remain in
full force and effect during the holdover period.
19. LANDLORD'S RIGHT OF ENTRY. Landlord and its agents shall be
entitled to enter the Premises at any reasonable time, with reasonable prior
notice except in emergency,
(a) To inspect the Premises;
(b) To exhibit the Premises to any existing or prospective
purchaser or mortgagee thereof or, during the last nine (9) months of the Term,
any prospective tenant thereof;
(c) To make any reasonable and necessary alteration,
improvement or repair to the Premises; or
(d) For any other reasonable purpose relating to the operation
or maintenance of the Premises; provided, that Landlord shall (i) give Tenant
reasonable prior notice of its intention to enter the Premises, except in the
case of emergency, and (ii) use reasonable efforts to avoid thereby interfering
any more than is reasonably necessary with Tenant's use and enjoyment thereof.
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20. LIABILITY, TENANT'S INDEMNITY, INSURANCE.
(a) Landlord shall not be liable for, and Tenant shall
indemnify and hold Landlord harmless from and against, any injury, loss or
damage of whatever nature to any persons or property arising within the Premises
unless caused by the willful act or gross negligence of Landlord, its agents,
employees or contractors. Commencing with the date on which the Premises are
made available to Tenant and continuing thereafter throughout the Lease Term,
Tenant shall maintain, at its sole expense, (i) general comprehensive public
liability insurance, including bodily injury, property damage or other loss,
insuring Tenant, Landlord, Landlord's Lender, and Landlord's appointed agent
with respect to the Premises and their appurtenances, in a company or companies
reasonably satisfactory to Landlord, in an amount not less than Three Million
Dollars ($3,000,000), (ii) all-risk property and casualty insurance, including
theft, written at replacement cost value and with replacement cost endorsement,
covering all of Tenant's personal property in the Premises, and (iii) if, and to
the extent required by law, worker's compensation or similar insurance offering
statutory coverage and containing statutory limits. All such insurance shall:
(1) be issued by a company that is licensed to do business in the jurisdiction
in which the Building is located, that has been approved in advance by Landlord
and that has a rating equal to or exceeding A:XI from Best's Insurance Guide;
(2) name Landlord, its managing agent (or its successor) and the holder of any
Mortgage as additional insureds and/or loss payees as applicable (as their
interests may appear), except that the liability insurance shall not name
Landlord's Mortgage holder as an additional insured; (3) contain an endorsement
that such insurance shall remain in full force and effect notwithstanding that
the insured may have waived its right of action against any person or entity
prior to the occurrence of a loss (Tenant hereby waiving its right of action and
recovery against and releasing Landlord and its employees, affiliates, partners
and agents from any and all liabilities, claims and losses for which they may
otherwise be liable to the extent Tenant is covered by insurance carried or
required to be carried under this Lease); (4) provide that the insurer waives
all right of recovery by way of subrogation against Landlord, its partners,
affiliates, agents and employees, (5) be acceptable in form and content to
Landlord; (6) be primary and non-contributory; and (7) contain an endorsement
prohibiting cancellation, failure to renew, reduction in amount of insurance or
change of coverage (A) as to the interests of Landlord or the holder of the
Mortgage by reason of any act or omission of Tenant, and (B) without the
insurer's giving Landlord thirty (30) days' prior written notice of such action.
No such policy shall contain any deductible provision except as otherwise
approved in writing by Landlord, which approval shall not be unreasonably
withheld. Landlord reserves the right from time to time to require Tenant to
obtain higher minimum amounts or different types of insurance. Tenant shall
deliver a certificate of all such insurance and receipts evidencing payment of
the premium for such insurance (and, upon request, copies of all required
insurance policies, including endorsements and declarations) to Landlord
concurrently with Tenant's execution of this Lease and at least annually
thereafter.
In addition, Tenant shall require any contractor
retained by it to perform any Alteration to carry and maintain at Tenant's or
such contractor's expense (and furnish the policy, policies or certificates
thereof to Landlord and Landlord's Lender) during such times as contractor is
working in the Premises, (i) comprehensive general liability insurance policy,
including, but not limited to, contractor's liability coverage, contractual
liability coverage, complete operations coverage, broad form property damage
endorsement and contractor's protective liability coverage, to afford protection
with limits per person and for each occurrence, of not less than One Million
Dollars ($1,000,000), combined single limit, with respect to personal injury and
death and property damage, such insurance to provide for no deductible, to name
Landlord and Landlord's Lender as additional insureds and (ii) worker's
compensation insurance or similar insurance in form and amounts as required by
law.
Landlord shall maintain insurance coverage for the
Building, the cost of such insurance shall be an Operating Cost for purposes of
Paragraph 11 hereof, in such amounts and with such carriers as shall be
reasonable and necessary from time to time including (a) fire insurance, with
standard extended coverage endorsement including demolition costs, increased
costs of construction, and contingent liability from changes in building codes
on the Premises, in an amount not less than the full replacement value from time
to time of the Premises; (b) flood insurance in an amount Landlord may from time
to time reasonably require, if the Premises are located in an area designated as
"flood prone" pursuant to the national Flood Insurance Act of 1968 and the Flood
Disaster Protection Act; (c) difference-in-conditions coverage (including flood
and earthquake to the extent available) to the extent not covered under (a) and
(b) above, in an amount Landlord from time to time may reasonably require; (d)
rental value insurance in an amount equal to one (1) year gross rent; (e) steam
boiler and machinery breakdown direct damage insurance and third-party liability
coverage (if applicable and if not covered under the comprehensive general
liability policy), with full comprehensive coverage on a repair and replacement
cost basis, for all boilers and machinery which form a part of the Premises,
including business interruption insurance in connection therewith in accordance
with (d) above; and (f) such other insurance as Landlord may require against
such other insurable hazards which at the time are customary and prudent under
the circumstances.
(b) All damages to the Premises or the Building of which they
are a part, caused by Tenant, or the agents, servants, employees and invitees of
Tenant, will be repaired by Landlord at the expense of Tenant, to the extent not
covered by insurance proceeds, with the right on the part of Landlord to elect
in its discretion to regard the same as Additional Rent, in which event such
cost or charge shall become Additional Rent payable with the installment of Rent
next becoming due or thereafter falling due under the terms of this Lease. This
provision shall be construed as an additional remedy granted to Landlord and not
in limitation of any other rights and remedies which Landlord has or may have in
said circumstances.
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(c) All personal property of Tenant in the Premises or in the
Building of which the Premises is a part shall be at the sole risk of Tenant.
Landlord shall not be liable for any accident to or damage to the property of
Tenant resulting from the use or operation of the heating, cooling, electrical
or plumbing apparatus or any other cause whatsoever. Landlord shall not be
liable in damages, nor shall this Lease be affected, for conditions arising or
resulting, and which may affect the Building of which the Premises is a part,
due to construction on contiguous premises unless such construction renders the
Premises untenantable or of no practical use for Tenant's purposes.
(d) Landlord assumes no liability or responsibility whatsoever
in the conduct and operations of the business to be conducted in the Premises.
Landlord shall not be liable for any accident to or injury to any person or
persons or property in or about the Premises which are caused by the conduct and
operation of said business or by virtue of equipment or property of Tenant in
said Premises.
(e) Except to the extent caused by the willful misconduct or
gross negligence of Landlord, its agents or employees, Landlord shall have no
liability to Tenant, its employees, agents, invitees, licensees, customers,
clients, family members or guests for any damage, compensation or claim arising
from the repair by Landlord of any portion of the Premises or the Building, any
interruption in the use of the Premises, accident or damage resulting from the
use or operation (by Landlord, Tenant or any other person) of heating, cooling,
electrical or plumbing equipment or apparatus, or from untenantability of the
Premises resulting from fire or other casualty subject to Paragraph 13, or from
any robbery, theft, mysterious disappearance and/or any other casualty, or from
any leakage in any part or portion of the Premises or the Building, or from
water, rain or snow that may leak into or flow from any part of the Premises, or
from drains, pipes or plumbing work in the Building, or from any other cause
whatsoever. Any goods, property or personal effects, stored or placed by Tenant
in or about the Premises shall be at the risk of Tenant, and Landlord shall not
in any manner be held responsible therefor. The employees of Landlord are
prohibited from receiving any packages or other articles delivered to the
Premises for Tenant, and if any such employee receives any such package or
article, at the request of Tenant, such employee shall be the agent of Tenant
for such purposes and not of Landlord.
21. WAIVER OF SUBROGATION. If either party hereto is paid or
indemnified by any proceeds under any policy of insurance naming such party as
an insured (or would have been paid or indemnified by such proceeds if it had
maintained all of the insurance coverages it is required under this Lease to
maintain), on account of any loss, damage or liability, then such party hereby
releases the other party hereto from any and all liability for such loss, damage
or liability, notwithstanding that such loss, damage or liability, may arise out
of the negligent act or omission of the other party, its agents or employees.
22. EMINENT DOMAIN.
(a) If any or all of the Premises are taken by the exercise of
any power of eminent domain or are conveyed to or at the direction of any
governmental entity under a threat of any such taking (each of which is
hereinafter referred to as a "Condemnation"), Landlord, subject to subparagraph
(c) below shall be entitled to collect from the condemning authority thereunder
the entire amount of any award made in any such proceeding or as consideration
for such deed, without deduction therefrom for any leasehold or other estate
held by Tenant by virtue of this Lease.
(b) Tenant, subject to subparagraph (c) below, hereby (i)
assigns to Landlord all of Tenant's right, title and interest, if any, in and to
any such award, (ii) waives any right which it may otherwise have in connection
with such Condemnation, against Landlord or such condemning authority, to any
payment for (a) the value of the then unexpired portion of the Term, (b)
leasehold damages (except the unamortized portion of any improvements paid for
by Tenant and title to which is retained by Tenant, provided such amount does
not diminish and/or delay any award or payment which Landlord would otherwise
receive as a result of such condemnation), and (c) any damage to or diminution
of the value of Tenant's leasehold interest hereunder or any portion of the
Premises not covered by such Condemnation; and (iii) agrees to execute any and
all further documents which may be required in order to facilitate the
Landlord's collection of any and all such awards.
(c) Notwithstanding the foregoing provisions of this
Paragraph, Tenant may seek a separate award, so long as such separate award in
no way diminishes and/or delays any award or payment which Landlord would
otherwise receive as a result of such Condemnation.
23. EFFECT OF CONDEMNATION.
(a) If (i) all of the Premises are covered by a Condemnation,
or (ii) if any part of the Premises is covered by a Condemnation and the
remainder thereof is insufficient for the reasonable operation therein of
Tenant's business, or (iii) any of the Building is covered by a Condemnation
and, in Landlord's reasonable opinion, reasonably concurred in by Tenant, it
would be impractical to restore the remainder thereof, then, in any such event,
the Term shall terminate on the date upon which possession of so much of the
Premises as is covered by such Condemnation is taken by the condemning authority
thereunder, and all Rent (including, by way of example rather than of
limitation, any Operating Costs payable pursuant to the provisions of Paragraph
11), Tax, and other charges payable hereunder shall be prorated and paid to such
date.
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(b) If there is a Condemnation and the Term does not terminate
pursuant to the foregoing provisions of this Paragraph, the operation and effect
of this Lease shall be unaffected by such Condemnation, except that the Base
Monthly Rent payable under the provisions of Paragraph 3 shall be reduced in
proportion to the square footage, if any, of the Premises covered by such
Condemnation.
(c) If there is a Condemnation, Landlord shall have no
liability to Tenant on account of any (i) interruption of Tenant's business upon
the Premises, (ii) diminution in Tenant's ability to use the Premises, or (iii)
other injury or damage sustained by Tenant as a result of such Condemnation.
(d) Except for any separate award to Tenant under the
provisions of Paragraph 22(c), Landlord shall be entitled to conduct any such
condemnation proceeding and any settlement thereof free of interference from
Tenant, and Tenant hereby waives any right which it might otherwise have to
participate therein.
24. MECHANIC'S AND MATERIALMEN'S LIENS. Tenant shall bond, remove or
have removed any mechanic's, materialmen's or other lien filed or claimed
against any or all of the Premises, by reason of labor or materials provided for
or at the request of Tenant or any of its contractors or subcontractors within
thirty (30) days of notice of filing said lien.
25. QUIET ENJOYMENT. Landlord hereby covenants that Tenant, on paying
the Rent and performing the covenants set forth herein, shall without
interference from Landlord peaceably and quietly hold and enjoy, throughout the
Term, (i) the Premises, and (ii) such rights as Tenant may hold hereunder with
respect to the Premises.
26. SURRENDER.
(a) Upon the expiration or earlier termination of the Term,
Tenant shall surrender the Premises to Landlord in good order, cleanliness and
repair, ordinary wear and tear excepted.
(b) Subject to Paragraph 14(c) hereof, any and all
improvements, repairs, alterations and all other property attached to, used in
connection with or otherwise installed upon the Premises (i) shall, immediately
upon the completion of the installation thereof, be and become Landlord's
property without payment therefor by Landlord, and (ii) shall be surrendered to
Landlord upon the expiration or earlier termination of the Term, except that any
machinery, equipment or fixtures installed by Tenant and used in the conduct of
Tenant's trade or business (rather than to service the Premises) shall remain
Tenant's property and shall be removed by Tenant within five (5) days after the
expiration or earlier termination of the Term, and Tenant shall promptly and
thereafter fully restore any of the Premises or the Building damaged by such
installation or removal thereof.
27. SUBORDINATION. This Lease is subject and subordinate to all ground
or underlying leases and to all mortgages and/or deeds of trust which may now or
hereafter affect such leases or the real property of which the Premises form a
part,(the "Mortgage") and to all renewals, modifications, consolidations,
re-castings, replacements and extensions thereof. The holder of the Mortgage to
which this Lease is subordinate shall have the right at any time to declare this
Lease to be superior to the lien, provisions, operation and effect of such
Mortgage and Tenant shall execute, acknowledge and deliver all confirming
documents required by such holder. In confirmation of the foregoing
subordination, Tenant shall at Landlord's request promptly execute any requisite
or appropriate document. Tenant appoints Landlord as Tenant's attorney-in-fact
to execute any such document for Tenant if Tenant fails to execute same within
ten (10) business days after request therefor. Tenant waives the provisions of
any statute or rule of law now or hereafter in effect which may give or purport
to give Tenant any right to terminate or otherwise adversely affect this Lease
or Tenant's obligations in the event any such foreclosure proceeding is
prosecuted or completed or in the event the Property, the Building or Landlord's
interest therein is sold at a foreclosure sale or by deed in lieu of
foreclosure. If this Lease is not extinguished upon such sale or by the
purchaser following such sale, then, at the request of such purchaser, Tenant
shall attorn to such purchaser and shall recognize such purchaser as the
landlord under this Lease. Upon such attornment such purchaser shall not be (a)
bound by any payment of the Base Rent or Additional Rent more than one (1) month
in advance, (b) bound by any amendment of this Lease made without the consent of
the holder of the Mortgage existing as of the date of such amendment, (c) liable
for damages for any breach, act or omission of any prior landlord, or (d)
subject to any offset or defenses which Tenant might have against any prior
landlord. Within five (5) business days after receipt, Tenant shall execute,
acknowledge and deliver any requisite or appropriate document submitted to
Tenant confirming such attornment.
28. ESTOPPEL CERTIFICATE. Landlord and Tenant agree from time to time,
upon not less than ten (10) business days' prior written notice by the other
party, to execute, acknowledge and deliver to such party or to any existing or
prospective owner or mortgagee of the Building or land upon which such Building
has been built, or any interest in either, a statement in writing (a) certifying
that this Lease is unmodified and in full force and effect (or if there have
been modifications, stating the modifications and that the Lease is in full
force and effect as modified), (b) stating the dates to which the Rent and any
other charges hereunder have been paid by Tenant, (c) stating whether or not, to
the knowledge of such party, the other party is in default in the performance of
any covenant, agreement or condition contained in this Lease, and if so,
specifying each such default of which such
14
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party may have knowledge, (d) stating that Tenant shall give notice to any
mortgagee prior to seeking to terminate the Lease by reason of any act or
omission of Landlord until such mortgagee has had reasonable time, at its
option, to remedy such act or omission, and (e) stating the address to which
notices to Tenant, or Landlord, as the case may be, should be sent. Any such
statement may be relied upon by any existing or prospective owner or mortgagee
of the Building or aforesaid land or any interest in either or any assignee of
any such person.
29. NOTICES. Any notice, demand, consent, approval request or other
communication or document to be provided hereunder to a party hereto, shall be
in writing and shall be deemed to have been provided after being sent by
certified or registered mail, return receipt requested, in the United States
mail or by personal delivery or commercial courier, against receipt. Any and all
notices or other communications to Landlord and Tenant shall be given as
follows:
Landlord: Louisville Commerce Realty Corporation
c/o J.P. Morgan Investment Management, Inc.
522 Fifth Avenue at 44th Street
New York, New York 10036
Copy to: Louisville Commerce Realty Corporation
c/o Burnham Partners, LLC
150 South Wacker Drive, Suite 2410
Chicago, Illinois 60606
Attn: Robert Halpin, President
Copy to: Michael B. Vincenti, Esq.
Wyatt, Tarrant & Combs
2700 Citizens Plaza
500 West Jefferson Street
Louisville, Kentucky 40202
Tenant: Electronic Arts, Inc.
209 Redwood Shores
Redwood, California 94065-1175
Attn: Pamela Samson
Copy to: Electronic Arts, Inc.
209 Redwood Shores
Redwood, California 94065-1175
Attn: General Counsel
Copy to: Cynthia DeReamer Rollins, Esq.
Brown, Todd & Heyburn
400 W. Market Street
32nd Floor
Louisville, Kentucky 40202
Either party may hereafter designate a new address for notice
purposes, by giving notice as provided hereunder.
30. GENERAL.
(a) Complete Understanding. This Lease, including without
limitation all exhibits, represents the complete understanding between the
parties hereto as to the subject matter hereof, and supersedes all prior
negotiations, representations, warranties, statements or agreements, either
written or oral, between the parties hereto as to the same.
(b) Amendment. This Lease may be amended by and only by an
instrument executed and delivered by each party hereto.
(c) Applicable Law. This Lease shall be given effect and
construed by application of the laws of the Commonwealth of Kentucky.
(d) Time of Essence. Time shall be of the essence of this
Lease.
15
<PAGE>
(e) Headings. The headings of the Paragraphs and subparagraphs
hereof are provided herein for and only for convenience or reference, and shall
not be considered in construing their contents.
(f) Exhibits. Each writing or plat referred to herein as being
attached hereto as an exhibit or otherwise designated herein as an exhibit
hereto is hereby made a part hereof.
(g) Severability. No determination by any court, governmental
body or otherwise that any provision of this Lease or any amendment hereof is
invalid or unenforceable in any instance shall affect the validity or
enforceability of (i) any other provision thereof, or (ii) such provision in any
circumstance not controlled by such determination. Each such provision shall be
valid and enforceable to the fullest extent allowed by, and shall be construed
wherever possible as being consistent with, applicable law.
(h) Definition of "Landlord". As used herein, the term
"Landlord" means the entity hereinabove named as such, and its successors and
assigns.
(i) Definition of "Tenant". As used herein, the term "Tenant"
means each person hereinabove named as such and such person's heirs, personal
representatives, successors and assigns, each of whom shall have the same
obligations, liabilities, rights and privileges as it would have possessed had
it originally executed this Lease, that no such right or privilege shall inure
to the benefit of any assignee of Tenant, immediate or remote, unless the
assignment to such assignee is made in accordance with the provisions of
Paragraph 12. Whenever two or more persons constitute Tenant, all such persons
shall be jointly and severally liable for the performance of Tenant's
obligations hereunder.
(j) Successors. It is agreed that all rights, remedies and
liabilities herein given to or imposed upon either of the parties hereto, shall
extend to their respective heirs, executors, administrators, successors and
assigns.
(k) Warranty. Landlord warrants that it is the owner of the
Premises and has the full right and authority to make this Lease. Landlord
hereby releases the Premises to Tenant in accordance with the provision of this
Lease. Tenant hereby accepts this Lease.
(l) Force Majeure. In the event that Landlord or Tenant shall
be delayed, or hindered, or prevented from the performance of any act required
hereunder (except for the payment of monies), by reason of government
restrictions, scarcity of labor or materials, or for other reasons beyond its
reasonable control, the performance of such act shall be excused for the period
of delay and the period for the performance of any such act shall be extended
for a period equivalent to the period of such delay.
(m) Recordation. The parties agree to execute a short form of
this Lease, which may, at Landlord's sole option, be recorded among the land
records of the jurisdiction where the Premises are located. The expense thereof
shall be borne by Landlord.
(n) Tenant's Authority. Tenant hereby warrants and represents
that each individual executing this Lease on behalf of Tenant is duly authorized
to execute and deliver this Lease and that Tenant is a duly organized
corporation under the laws of Delaware, is qualified to do business in the
Commonwealth of Kentucky, and has the power and authority to enter into this
Lease, and that all action requisite to authorize Tenant to enter into this
Lease has been duly taken.
(o) Commission. Landlord and Tenant warrant that they have not
had any dealings with any realtor, broker or agent in connection with the
negotiation of this Lease, except for Capstone Realty, Inc. and CB Richard Ellis
Nicklies ("Brokers") whose commission shall be paid for by Landlord pursuant to
the terms of a separate agreement between Landlord and the Brokers. Should any
claim for a commission be established by any other broker or agent, the parties
hereby expressly agree to hold one another harmless with respect thereto to the
extent that one or the other is shown to have been responsible for the creation
of such claim.
(p) No Representations By Landlord. Tenant acknowledges that
neither Landlord or any broker, agent or employee of Landlord has made any
representations or promises with respect to the Premises or the Building except
as herein expressly set forth, and no rights, privileges, assessments or
licenses are acquired by Tenant except as herein expressly provided.
(q) Authority of Landlord. Landlord hereby represents and
warrants that it is a corporation duly organized and in good standing under the
laws of the State of Delaware, that each individual or entity executing this
Lease on behalf of Landlord is authorized to do so, and that all action
necessary to authorize Landlord to enter into this Lease has been duly taken.
(r) Third-Party Consents. Landlord hereby represents and
warrants that (i) the execution and delivery of this Lease by Landlord, and the
performance of Landlord's obligations hereunder, do not conflict with or result
in any breach under the terms of Landlord's articles of incorporation or any
agreement to which Landlord is a party or by which Landlord or the Premises is
bound and (ii) all consents of any third parties, including without limitation
any ground lessor or mortgagee of the Premises,
16
<PAGE>
required in connection with the execution and delivery of this Lease have been
obtained by Landlord, and Landlord shall furnish evidence of such consents.
(s) Litigation. The prevailing party shall recover all
reasonable attorney's fees and costs incurred by or on behalf of such prevailing
party if (i) either party institutes litigation for a breach of the terms and
conditions of this Lease, (ii) either party institutes litigation for possession
of the Premises, or (iii) either party is made party to litigation instituted by
a third party relating to Premises. Such attorney's fees and costs may be levied
against the party whose conduct necessitated the use of an attorney whether or
not litigation is prosecuted to judgement.
(t) Assignment by Landlord. Landlord may freely assign its
interest hereunder. The term "Landlord" as used herein shall be deemed to be
related only to a person or entity during the time of his or its ownership of
Landlord's interest in this Lease.
(u) Waiver of Jury Trial. LANDLORD AND TENANT WAIVE TRIAL BY
JURY IN ANY ACTION, CLAIM OR COUNTERCLAIM BROUGHT IN CONNECTION WITH
LANDLORD-TENANT RELATIONSHIP, TENANT'S USE OR OCCUPANCY OF THE PREMISES OR ANY
CLAIM OF INJURY OR DAMAGE. Tenant consents to service of process and any
pleading relating to any such action at the Premises; provided, however, that
nothing herein shall be construed as requiring such service at the Premises.
Landlord and Tenant waive any objection to the venue of any action filed in any
court situated in the jurisdiction in which the Building is located and waive
any right under the doctrine of forum non conveniens or otherwise to transfer
any such action filed in any such court to any other court.
(v) Modifications. In the event any lender to Landlord
requires, as a condition to financing, modifications to this Lease, then,
provided such modifications do not materially alter the approved working plans
and do not increase the Rent to be paid hereunder, or increase Tenant's
obligations or liabilities under this Lease or decrease the benefits accruing to
Tenant hereunder, Landlord shall submit to Tenant a written amendment with such
required modifications. Tenant shall have the right to approve such amendment,
which approval shall not be unreasonably withheld. If Tenant unreasonably fails
to execute and return the same within ten (10) business days after the amendment
has been submitted, then Landlord may elect to execute such amendment and may
bring an action for specific performance to require the same.
IN WITNESS WHEREOF, each party hereto has executed this Lease, or has
caused it to be executed on its behalf by its duly authorized representatives,
the day and year first above written.
ATTEST: LANDLORD: LOUISVILLE COMMERCE REALTY
CORPORATION
/s/ Susan Kessel By: /s/ James C. McLoughlin
- ----------------------- ---------------------------------------
Name: James C. McLoughlin
-------------------------------------
Title: Vice President
------------------------------------
ATTEST: TENANT: ELECTRONIC ARTS, INC.
By: /s/ Pamela S. Samson
- ----------------------- ---------------------------------------
Name: Pamela S. Samson
-------------------------------------
Title: V.P. Operations
------------------------------------
EXHIBIT A: Legal Description of Property and Depiction of Premises
EXHIBIT B: Description of Building Shell
EXHIBIT C: Rent Schedule
EXHIBIT D: Guaranty [Intentionally Deleted]
EXHIBIT E: Confidentiality Agreement
17
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EXHIBIT A
DESCRIPTION OF PREMISES AND PROPERTY
BEING TRACT 3, as shown on the Minor Subdivision Plat attached to and made a
part of a Deed dated April 30, 1998, of record in Deed Book 7033, Page 702, in
the Office of the Clerk of Jefferson County, Kentucky, which Minor Subdivision
Plat was approved by the Louisville and Jefferson County Planning Commission on
April 24, 1998, Docket No. 98-123.
Said land being the same as:
BEGINNING at an iron pin at the intersection of the North line of a 70 foot
Public Utility, Sewer, Drainage and Private Access Easement named Interchange
Drive and the East line of a 70 foot Public Utility Sewer, Drainage and Private
Access Easement named Commerce Crossings Drive, as shown on a Minor Subdivision
Plat prepared by Birch, Trautwein and Mims, Inc. and approved by the Louisville
and Jefferson County Planning Commission, Order Number 97-439; thence with said
East easement line, North 28 degrees 00 minutes 00 seconds East, 703.31 feet to
an iron pin; thence leaving said East easement line, South 62 degrees 00 minutes
00 seconds East, 400.00 feet to an iron pin; thence North 28 degrees 00 minutes
00 seconds East, 445.00 feet to an iron pin; thence South 15 degrees 33 minutes
59 seconds East, 396.51 feet to an iron pin; thence South 38 degrees 09 minutes
52 seconds East, 366.88 feet to an iron pin; thence South 56 degrees 02 minutes
37 seconds East, 164.00 feet to an iron pin; thence South 07 degrees 15 minutes
25 seconds West 244.80 feet to an iron pin; thence South 21 degrees 59 minutes
25 seconds East, 86.49 feet to an iron pin; thence South 47 degrees 43 minutes
00 seconds West, 511.26 feet to an iron pin; thence South 47 degrees 43 minutes
00 seconds West, 511.26 feet to an iron pin; thence with a curve to the left
having a radius of 635.00 feet and a chord of North 47 degrees 53 minutes 24
seconds West, 79.73 feet to an iron pin; thence continuing with said curve to
the left having a radius of 635.00 feet and a chord of North 56 degrees 44
minutes 40 seconds West, 116.32 feet to an iron pin; thence North 62 degrees 00
minutes 00 seconds West, 24.67 feet to the aforesaid North easement line of
Interchange Drive; thence continuing North 62 degrees 00 minutes 00 seconds
West, with said North easement line, 894.61 feet to an iron pin a total of
919.28 feet; thence with a curve to the right having a radius of 40.00 feet and
a chord of North 17 degrees 00 minutes 00 seconds West, 56.57 feet to the
beginning.
TOGETHER with non-exclusive easement rights as created and set out in a
Declaration of Covenants, Conditions and Restrictions, dated as of April 30,
1998, of record in Deed Book 7033, Page 714, in the Office of the Clerk of
Jefferson County, Kentucky.
TOGETHER with a non-exclusive access easement for "Commerce Crossings Drive" and
"Interchange Drive", as shown on the Minor Subdivision Plat of record in Deed
Book 7033, Page 702, in the Office aforesaid.
[See Exhibit A-1 for depiction of Premises]
<PAGE>
EXHIBIT A-1
[MAP]
FLOOR PLAN
Commerce Crossings Distribution Center
Louisville, Kentucky
February 11, 1999
<PAGE>
EXHIBIT B
DESCRIPTION OF BUILDING SHELL
The Landlord shall cause the Building Shell to be constructed in substantial
accordance with the construction drawings prepared by Tucker & Booker, Inc.
("Landlord's Architect") dated January 30, 1998 for Commerce Crossings
Distribution Center as more fully described in the following:
INDEX OF DRAWINGS
X-1 Title
CIVIL
1 Cover Sheet
2 Topographic Mapping
3 Site Construction Plan
4 Layout & Utility Plan
5 Grading Plan
6 Drainage & Erosion Control Plan
7 Site Details
8 Article 12 Compliance
9 Landscape Details
STRUCTURAL
S1.1 Overall Foundation Plan
S1.2 Partial Foundation Plan
S1.3 Partial Foundation Plan
S2.1 Overall Roof Framing Plan
S2.2 Partial Roof Framing Plan
S2.3 Partial Roof Framing Plan
S3.1 Foundation Details
S4.1 Framing Details
S5.1 Panels Elevation
S5.2 Panels Elevation
S5.3 Panels Elevation
S5.4 Panels Elevation
S5.5 Panels Elevation
S5.6 Panels Elevation
S5.7 Panels Elevation
S5.8 Panels Elevation
S5.9 Panels Elevation
S5.10 Panels Elevation
S6.1 Specifications
ARCHITECTURAL
A1.1 Floor Plan
A1.2 Enlarged Floor Plans
A2.1 Elevations & Building Sections
A3.1 Wall Sections
A3.2 Wall Sections & Details
A3.3 Wall Sections & Details
AT.1 Tenant Prototype Plan
FIRE PROTECTION
FP-1 Floor Plan-Fire Protections
<PAGE>
PLUMBING
P-1 Floor Plan-Plumbing
P-2 Waste & Vent Riser
ELECTRICAL
E-1 Floor Plan-Electrical
E-2 One Line Diagram & Panel Schedules
<PAGE>
EXHIBIT C
RENT SCHEDULE
COMMERCE DISTRIBUTION CENTER
Dates Annual Base Rent Monthly Base Rent
- ----- ---------------- -----------------
Commencement Date
through June 30, 1999 $324,000 $27,000
July 1, 1999 through
March 31, 2000 $648,000 $54,000
April 1, 2000 through
April 30, 2004 $925,000 $77,083.33
<PAGE>
EXHIBIT E
CONFIDENTIALITY AGREEMENT
(OPERATING COSTS AND TAX AUDIT)
THIS CONFIDENTIALITY AGREEMENT (the "Agreement") is made and entered
into this ____ day of____________, 199___ by and between Louisville Commerce
Realty Corporation, a Delaware corporation ("Landlord"), Electronic Arts, Inc.,
a Delaware corporation ("Tenant") and ________________________ ("Contractor").
Preamble
Pursuant to the provisions of that certain Lease between Landlord and
Tenant, dated as of April ___, 1999, (the "Lease"), Tenant was provided with
certain limited rights to audit the annual Operating Costs and Tax (as those
terms are defined in the Lease). In this regard, Tenant has engaged the services
of Contractor to perform an audit of the Operating Costs and Tax for the ____
Calendar Year ( the "Audit"). In connection with the Audit, Tenant and
Contractor will be given access to various documents, files and other
information relating to the Operating Costs and Tax for their review and
inspection (the "Confidential Information"). The Confidential Information may
include economic, commercial, marketing and financial information that is
confidential and/or proprietary in nature. Therefore, Landlord has determined to
require Tenant and Contractor to execute and deliver this Agreement as a
condition of their review and inspection of the Confidential Information.
In consideration of being granted the opportunity to review and inspect
the Confidential Information, Tenant and Contractor agree as follows:
Agreement
Section 1. Purpose. Tenant and Contractor agree that their review and
inspection of the Confidential Information shall be solely to conduct an audit,
on Tenant's behalf and not as an agent, representative or broker of any
undisclosed party, to verify the accuracy of Operating Costs and Tax for the
_____ Calendar Year which Tenant paid under the Lease.
Section 2. Non-Disclosure and Use of Confidential Information.
(a) Tenant and Contractor agree that, except as set forth below, all
Confidential Information shall be used by Tenant and Contractor solely for the
purposes stated in Section 1 hereof. Tenant and Contractor further agree not to
disclose any of the Confidential Information without the prior written consent
of Landlord to any third party other than to their respective (i) employees,
officers, directors, and (ii) agents and representatives, including attorneys,
accountants and financial advisors (collectively, the "Representatives"), in
each case who (i) have a need to know the Confidential Information for the
limited purpose stated in Section 1 hereof, and (ii) have entered into an
agreement with Tenant and Contractor substantially in the form of this
Agreement.
(b) The term "Confidential Information" shall not include information
which: (a) is already known to Tenant or Contractor from non-Landlord sources
not known by Tenant or Contractor to be subject to any confidentiality
obligations to Landlord; (b) is or becomes generally available to the public
other than as a result of a disclosure by Tenant or Contractor or any of their
Representatives; or (c) is required to be disclosed by law or by regulatory or
judicial process.
(c) In the event Tenant or Contractor or any of their Representatives
fails in any respect to comply with its obligations under this Agreement, Tenant
and Contractor shall be liable to Landlord for breach of this Agreement. In
addition, in the event of any such failure, Landlord may, in its sole
discretion, refuse to allow Tenant the opportunity to perform an audit with
respect to any other Calendar Years.
(d) The rights, powers and remedies provided for in the preceding
subsection (c) shall be in addition to and do not preclude the exercise of any
other right, power or remedy available to Landlord under law or in equity. No
forbearance, failure or delay in exercising any such right, power or remedy
shall operate as a waiver thereof or preclude its further exercise.
Section 3. Review of Confidential Information. The Confidential
Information will be made available for review by appointment only, at a location
determined by Landlord, to Representatives of Tenant and/or Contractor whose
duties include the review and inspection of such information in other similar
transactions or evaluations for Tenant.
Section 4. Duplication. Tenant and Contractor agree to refrain from
making any reproductions, other than handwritten summaries or notes and
self-generated computer records, of any item of Confidential Information without
the prior written consent of Landlord.
Section 5. Limited Access. Tenant and Contractor shall inform each of
their Representatives that receives any of the Confidential Information of the
requirements of this Agreement and shall require each such Representative to
comply with such requirements.
<PAGE>
Section 6. Tenant Contact. Tenant and Contractor agree not to
communicate with any other tenants in the Project known as Commerce Distribution
Center in connection with the Audit without the prior written consent of
Landlord.
Section 7. Entire Agreement. This Agreement represents the entire
agreement between Tenant, Contractor and Landlord relating to the treatment of
Confidential Information heretofore or hereafter reviewed or inspected by Tenant
or Contractor in connection with the Audit. This Agreement supersedes all other
agreements relating to such matters which have previously been executed by
Tenant and/or Contractor in favor of Landlord.
Section 8. Reliance by Landlord's Management Company. Landlord's
property management company and its employees shall be authorized to accept a
copy of this Agreement (as executed by Tenant and Contractor) as a basis for
allowing Tenant or Contractor to review and inspect the Confidential Information
in connection with the Audit.
IN WITNESS WHEREOF, a duly authorized representative for both Tenant
and Contractor have executed this Agreement as of the date set forth below.
TENANT: LANDLORD:
ELECTRONIC ARTS, INC., LOUISVILLE COMMERCE REALTY CORPORATION
a Delaware corporation a Delaware corporation
By:________________________________ By:___________________________________
Name:_____________________________ Name:_________________________________
Title:______________________________ Title:________________________________
Date of Execution:___________________ Date of Execution:____________________
CONTRACTOR:
________________________________
By:_______________________________
Name:_____________________________
Title:____________________________
Date of Execution:________________
Exhibit 10.43
OPTION AGREEMENT,
AGREEMENT OF PURCHASE AND SALE
AND
ESCROW INSTRUCTIONS
FOR
ZONES 2 AND 4
ELECTRONIC ARTS BUSINESS PARK
REDWOOD SHORES, CALIFORNIA
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
<S> <C> <C>
ARTICLE 1: DEFINITIONS............................................................................Page 1
ARTICLE 2: OPTION TO PURCHASE.....................................................................Page 6
2.1 Payment of Option Price................................................................Page 6
2.2 Exercise of Option.....................................................................Page 6
2.3 Approval of Title Condition............................................................Page 7
2.3.1 Title Report and Survey.......................................................Page 7
2.3.2 Objectionable Title Matters and Permitted Exceptions..........................Page 7
2.3.3 Cure of Objectionable Title Matters...........................................Page 7
2.3.4 Removal of Liens..............................................................Page 7
2.4 Items to be Delivered Outside of Escrow................................................Page 8
2.4.1 Property Records and Documents................................................Page 8
2.4.2 Buyer's Financial Statements; Financial Condition.............................Page 8
2.4.3 Return of Documents; Copies of Buyer Reports..................................Page 8
2.5 Due Diligence..........................................................................Page 8
2.6 Effect of Exercise of Option...........................................................Page 9
ARTICLE 3: COVENANT OF PURCHASE AND SALE AND
INSTRUCTIONS TO ESCROW AGENT...........................................................Page 9
3.1 Payment of Purchase Price..............................................................Page 9
3.1.1 Deposit.......................................................................Page 9
3.1.1.1 Deposit Amount and Payment ..........................................Page 9
3.1.1.2 Investment of Deposit. ..............................................Page 9
3.1.1.3 Application of Deposit ..............................................Page 9
3.1.1.4 EINs ................................................................Page 9
3.1.2 Down Payment and Other Funds Required for Closing.............................Page 9
3.1.3 Balance of Purchase Price.....................................................Page 10
3.2 Escrow Deposits........................................................................Page 10
3.2.1 Instruments for Conveyance of the Property ...................................Page 10
3.2.2 Other Escrow Deposits by Seller...............................................Page 10
3.2.2 Other Escrow Deposits by Buyer................................................Page 11
3.3 Prorations and Credits.................................................................Page 11
3.3.1 Prorated Items................................................................Page 11
3.3.1.1 Taxes ...............................................................Page 11
3.3.1.2 Association Assessments .............................................Page 11
3.3.1.3 Other Revenue and Expenses ..........................................Page 11
3.3.2 Determination of Prorations and Credits.......................................Page 12
3.3.3 Utility Charges...............................................................Page 12
3.4 Closing Costs..........................................................................Page 12
3.4.1 Allocation of Closing Costs...................................................Page 12
3.4.2 Preliminary Closing Statement.................................................Page 13
3.5 Closing................................................................................Page 13
-i-
<PAGE>
3.5.1 Time and Place................................................................Page 13
3.5.2 Closing Instructions..........................................................Page 13
3.6 Cancellation of Escrow Without Closing.................................................Page 14
3.7 Supplemental Escrow Agreement..........................................................Page 15
ARTICLE 4: FURTHER AGREEMENTS BETWEEN BUYER AND SELLER
(OF NO CONCERN TO ESCROW AGENT EXCEPT AS
EXPRESSLY REFERENCED IN ARTICLES 1 OR 3)...............................................Page 15
4.1 Warranties, Representations and Covenants..............................................Page 15
4.1.1 By Seller.....................................................................Page 15
4.1.2 By Buyer......................................................................Page 17
4.1.3 Survival......................................................................Page 18
4.2 Conditions to Buyer's Obligation.......................................................Page 19
4.2.1 Performance of Seller's Obligations...........................................Page 19
4.2.2 Accuracy of Warranties and Representations....................................Page 19
4.2.3 City Approvals................................................................Page 19
4.3 Conditions to Seller's Obligation......................................................Page 19
4.3.1 Performance of Buyer's Obligations............................................Page 19
4.3.2 No Material Change in Financial Condition.....................................Page 19
4.3.3 Satisfactory Title............................................................Page 20
4.3.4 Accuracy of Warranties and Representations....................................Page 20
4.4 Indemnities............................................................................Page 20
4.4.1 Buyer's Activities on the Property............................................Page 20
4.4.2 Survival......................................................................Page 20
4.5 Damage, Destruction or Condemnation....................................................Page 20
4.5.1 Termination Rights............................................................Page 20
4.5.2 If No Termination.............................................................Page 20
4.5.3 Materiality...................................................................Page 21
4.6 Assignment by Buyer....................................................................Page 21
4.7 Rights of Parties Upon Default.........................................................Page 21
4.7.1 Seller's Rights ..............................................................Page 21
4.7.2 Buyer's Rights ...............................................................Page 22
4.8 Termination............................................................................Page 22
4.8.1 By Buyer......................................................................Page 22
4.8.2 By Seller.....................................................................Page 22
4.8.3 Effect of Termination.........................................................Page 22
4.9 Brokerage Commission...................................................................Page 23
4.10 Post-Closing Prorations and Adjustments................................................Page 23
4.10.1 Real Estate Taxes and Assessments.............................................Page 23
4.10.2 Determinations of Post-Closing Prorations and Adjustments.....................Page 23
4.11 Design Review..........................................................................Page 24
4.12 Buyer's Covenants and Agreements.......................................................Page 24
4.12.1 Agreement for Covenants Running With the Land.................................Page 24
4.12.2 Development Agreement.........................................................Page 24
4.12.3 Payment for Improvements......................................................Page 25
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4.12.4 Facility Charges, School Facilities Fees and Proposed
Impact Fees...................................................................Page 26
4.12.5 Surplus Earth Material........................................................Page 27
4.12.6 San Carlos Airport............................................................Page 27
4.12.7 Density; Height of Construction...............................................Page 27
4.12.8 No Construction Area..........................................................Page 28
4.13 Enforcement Costs......................................................................Page 28
4.14 Notices................................................................................Page 29
4.15 Binding Effect.........................................................................Page 30
4.16 Entire Agreement; Modification.........................................................Page 30
4.17 Captions...............................................................................Page 30
4.18 Interpretation.........................................................................Page 30
4.19 Mutual Cooperation; Further Assurances.................................................Page 30
4.20 Exhibits...............................................................................Page 30
4.21 Counterparts...........................................................................Page 31
4.22 Governing Law..........................................................................Page 31
4.23 Recording..............................................................................Page 31
4.24 TIME OF THE ESSENCE....................................................................Page 31
4.25 Confidentiality........................................................................Page 31
4.26 Buyer's Financing Covenants; Remedies..................................................Page 32
4.26.1 Permits and Legal Requirements................................................Page 32
4.26.2 Notices of Change.............................................................Page 32
4.26.3 Insurance.....................................................................Page 32
4.26.4 Financial Covenants and Future Financial Condition............................Page 33
4.26.5 Environmental Compliance......................................................Page 33
4.26.6 Default and Remedies..........................................................Page 33
Exhibit
- -------
A Description of Property
B Form of Grant Deed
C Form of Transferor's Certification of Non-Foreign Status
D Form of Seller's Closing Certificate
E Exceptions to Seller's Representations and Warranties
F Schedule of Property Records
G Form of Assumption and Covenants Agreement
H Terms of Surplus Earth Materials Option
I Form of Assignment of Sewage Treatment Capacity
J Form of Assignment and Assumption of Development Agreement and Permits
K Form of Promissory Note
L Form of Deed of Trust
M Form of Continuing Guaranty
N No Build Zones
O Form of Easement Agreement
P Form of Exercise Notice
</TABLE>
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OPTION AGREEMENT,
AGREEMENT OF PURCHASE AND SALE
AND
ESCROW INSTRUCTIONS
FOR
ZONES 2 AND 4
ELECTRONIC ARTS BUSINESS PARK
REDWOOD SHORES, CALIFORNIA
THIS AGREEMENT AND THESE ESCROW INSTRUCTIONS ("Agreement") are made as
of April 5, 1999, by and between ELECTRONIC ARTS REDWOOD, INC., a Delaware
corporation ("Seller"), and Spieker Properties, L.P., a California limited
partnership ("Buyer").
Article 1 of this Agreement consists of definitions used throughout
this Agreement.
Article 2 of this Agreement consists of the Option to Purchase granted
to Buyer, and includes certain instructions to Escrow Agent.
Article 3 of this Agreement constitutes instructions to Escrow Agent
(defined below), as well as agreements between Buyer and Seller.
Article 4 of this Agreement consists of further agreements between
Buyer and Seller, with which Escrow Agent need not be concerned (except as
otherwise directed in Article 3). Escrow Agent may rely entirely on the
instructions contained in Article 3; however, as between Buyer and Seller, the
provisions of Article 4 shall control if there is any inconsistency between
those provisions and the instructions in Article 3.
NOW, in consideration of the mutual covenants and conditions contained
herein, Seller and Buyer hereby agree as follows:
ARTICLE 1: DEFINITIONS
The following terms, wherever used in this Agreement, shall have the respective
meanings set forth below:
1.1 Broker. "Broker" means The Commercial Property Services Company,
1740 Technology Drive, Suite 180, San Jose, California 95110.
1.2 Buyer's Closing Documents. "Buyer's Closing Documents" has the
meaning specified in Section 3.2.3.
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1.3 Buyer's Title Policy. "Buyer's Title Policy" means a standard CLTA
Owner's Policy of Title Insurance in the amount of the Purchase Price, insuring
fee title to the Property in Buyer subject only to Permitted Exceptions,
together with such endorsements as the Title Company commits to issue.
1.4 Closing Date. "Closing Date" means the date upon which Closing
occurs, which shall be two (2) business days after the Parties have secured the
City Approvals required pursuant to Section 4.3.3; provided, however, in the
event title to the Property has not been conveyed to Seller by FFLP on or before
the said Closing Date, the Closing Date shall be delayed up to sixty (60) days
after the Option Date to permit such conveyance.
1.5 Closing. "Closing" means the recordation of the Deed in the
Official Records of San Mateo County, California, concurrently with the delivery
of the Down Payment, the Note, the Deed of Trust, and the Guaranty.
1.6 Contract Assignment. "Contract Assignment" has the meaning
specified in Section 3.2.1.
1.7 Days and Business Days. The term "day" means a calendar day, and
the term "Business Day" means any day on which commercial banks are generally
open for business in the State of California. Any period of time specified in
this Agreement which would otherwise end upon a non-Business Day shall be
extended to, and shall end upon, the next following Business Day.
1.8 Deed. "Deed" means a grant deed in the form attached hereto as
Exhibit B, conveying the Property to Buyer.
1.9 Deed of Trust. "Deed of Trust" means a deed of trust of Buyer
substantially in the form of Exhibit L attached hereto covering the Property and
securing the Note. The Deed of Trust shall be a first priority lien on the
Property.
1.10 Deposit. "Deposit" shall have the meaning ascribed to that term in
Section 3.1.1.
1.11 Development Agreement. "Development Agreement" means that certain
Development Agreement dated as of November 7, 1996, by and between Flatirons
Funding, Limited Partnership, a Delaware limited partnership, and the City of
Redwood City (the "City") and recorded November 8, 1996, as Instrument No.
96-138988, Official Records, San Mateo County, California, as amended by that
First Amendment to Development Agreement dated as of April 15, 1998 and recorded
on April 15, 1998, as Instrument No. 98-054809, Official Records, San Mateo
County, California; that First Amendment to Development Agreement dated as of
April 6, 1998 and recorded on August 25, 1998 (recorded to correct typographical
errors of the First Amendment recorded on April 15, 1998), as Instrument No.
98-135753, Official Records, San Mateo County, California; and that Second
Amendment to Development Agreement dated as of August 31, 1998 and recorded on
September 2, 1998, as Instrument No. 98-141937, Official Records, San Mateo
County, California.
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1.12 District Agreement. "District Agreement" means that certain
Development Agreement GID 1-64, dated June 16, 1982, by and between Redwood
Shores Properties (as assignee of Redwood Shores, Inc.), City, and the Redwood
City General Improvement District No. 1-64, and recorded July 8, 1982, as
Instrument No. 82-057195, Official Records, San Mateo County, California, as
amended.
1.13 Down Payment. "Down Payment" means that amount equal to seventeen
percent (17%) of the Purchase Price.
1.14 Effective Date. "Effective Date" means the date first above
written.
1.15 Environmental Laws. "Environmental Laws" means any federal, state,
local or administrative agency ordinance, law, rule, regulation, order or
requirement relating to environmental conditions or Hazardous Substances.
1.16 Environmental Report. "Environmental Report" means that certain
"Environmental Site Assessment" dated February 7, 1995, prepared by Applied
Geosciences, Inc. together with that certain "Phase II Subsurface Investigation"
dated February 13, 1995, prepared by Applied Geosciences, Inc., covering the
Property.
1.17 Escrow Agent. "Escrow Agent" means the Title Company, acting
through its offices at 1737 North First Street, Suite 100, San Jose, California
95112, Attn: Susan Melton.
1.18 Escrow. "Escrow" means the escrow established by and pursuant to
this Agreement, with Escrow Agent, for purposes of consummating the sale and
purchase of the Property in accordance with this Agreement.
1.19 Exercise Notice. "Exercise Notice" means the notice from Buyer to
Seller whereby Buyer elects to exercise its option to purchase set forth in
Article 2, such notice to be in the form of Exhibit P attached hereto.
1.20 FFLP. "FFLP" means Flatirons Funding, Limited Partnership, a
Delaware limited partnership.
1.21 Gross Building Floor Area. "Gross Building Floor Area" or "GBFA"
means the sum total of all floor areas contained within the exterior walls of
office buildings and special purpose accessory structures, including but not
limited to cafeteria, day care, fitness and conferencing facilities, constructed
on the Property including stairways, elevator shafts, other shafts, mechanical
rooms, vents, and internal support facilities, but excluding those portions of
mechanical or utility structures and storage areas located on the roof to the
extent such structures are not considered by the City as building floor area for
purposes of determining parking requirements, traffic generation, building
density or other similar development limitations under existing development
regulations.
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1.22 Guaranty. "Guaranty" means the corporate guaranty of Spieker
Properties, Inc. substantially in the form of Exhibit M attached hereto provided
by Buyer as additional security for the Note.
1.23 Hazardous Substance. "Hazardous Substance" means any petroleum or
petroleum-related product, any materials containing friable asbestos or any
other hazardous or toxic waste or substance (as such terms are used in
applicable federal and/or state Laws regulating the generation, storage,
transportation, discharge, disposal, release or removal of environmentally
hazardous substances).
1.24 Last Closing Date. "Last Closing Date" means [60 days after Option
Date].
1.25 Laws. "Laws" means any and all:
(i) Constitutions, statutes, ordinances, rules, regulations,
orders, rulings or decrees of the United States, the State of
California, or of the county and any municipality in which the Property
is located or any authority, agency, division, district, court or other
authority thereof; and
(ii) Agreements with or covenants or commitments to any
government agency or other authority which are binding upon Seller or
any of the Property (including, without limitation, any requirements or
conditions for the use or enjoyment of any license, permit, approval,
authorization or consent legally required for the operation of the
Property).
1.26 Note. "Note" means a promissory note in the form of Exhibit K
attached hereto, secured by the Deed of Trust and the Guaranty.
1.27 Option Date. "Option Date" means April 9, 1999.
1.28 Option Price. "Option Price" means $250,000.00 (Two Hundred Fifty
Thousand Dollars).
1.29 Park. "Park" means the Electronic Arts Business Park.
1.30 Park CC&Rs. "Park CC&Rs" shall mean that certain Declaration of
Covenants, Conditions, Easements and Restrictions of the Electronic Arts
Business Park, dated September 3, 1998, and recorded September 18, 1998, as
Instrument No. 98-150182 in the Official Records, San Mateo County, California.
1.31 Parties and Party. "Parties" means Buyer and Seller together and
"Party" may mean either Buyer or Seller, as the case may be.
1.32 Permit. "Permit" means any permit, certificate, license or other
form of authorization or approval issued by a government agency or authority and
legally required for the proper operation and use of the Property (including,
without limitation, any conditional use
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permits and zoning variances) to the extent held and assignable by Seller or
otherwise transferable with the Property.
1.33 Permitted Exceptions. "Permitted Exceptions" means (i) liens for
real property taxes and assessments for the current year, not yet delinquent,
(ii) liens or encumbrances arising out of any activity of Buyer with respect to
the Property, (iii) the Development Agreement; (iv) the District Agreement, (v)
covenants, conditions, easements, and restrictions of record approved by Buyer
pursuant to Section 2.3, (vi) the Park CC&Rs, (vii) standard "printed form"
exceptions and exclusions from coverage customarily included within the form of
the Buyer's Title Policy, and (viii) any other matter deemed to be a Permitted
Exception pursuant to Section 2.3.
1.34 Property. "Property" means (1) that certain parcel described in
Exhibit A hereto, together with (2) all appurtenant rights (including, without
limitation, rights of access to adjoining streets and rights-of-way, water and
riparian rights, and easements).
1.35 Purchase Price. "Purchase Price" means the gross purchase price
being paid by Buyer to Seller for the Property, namely $35,500,000.00 (Thirty
Five Million Five Hundred Thousand Dollars).
1.36 Right of Way Easement. "Right of Way Easement" means that easement
from FFLP to Buyer set forth in Exhibit O.
1.37 RSP. "RSP" means Redwood Shores Properties, a California joint
venture general partnership.
1.38 Seller's Closing Documents. "Seller's Closing Documents" has the
meaning specified in Section 3.2.2.
1.39 Seller's Knowledge. "Seller's Knowledge" means the actual (and not
the constructive) current knowledge of James F. Healey, who is responsible for
asset management of the Property, and does not imply any inspection, examination
or other inquiry undertaken by Seller or said individual to determine the
accuracy of any representation, warranty or other statement made "to Seller's
Knowledge" in this Agreement or in any of Seller's Closing Documents.
1.40 Seller's Title Policy. "Seller's Title Policy" means an ALTA
Lender's Policy of Title Insurance in the amount of the Note, showing title to
the Property vested in Buyer, subject only to the first deed of trust lien of
the Deed of Trust and to the Permitted Exceptions.
1.41 Shores CC&Rs means that certain The Shores Business Center
Declaration of Covenants, Conditions, Restrictions and Charges for Commercial
Development dated January 8, 1981, and recorded February 6, 1981, as Instrument
No. 69666AS, Official Records, San Mateo County, California.
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1.42 Survey. "Survey" means that certain ALTA survey of the Park,
prepared by Bohley/Maley Associates, as job number 97023 and certified as of
March 27, 1998, by Lisa M. Maley, L.S.
1.43 Title Report. "Title Report" means the Preliminary Report prepared
by Title Company pursuant to Section 2.3.1.
1.44 Title Company. "Title Company" means First American Title
Insurance Company.
1.45 Title Policies. "Title Policies" means, collectively, the Buyer's
Title Policy and the Seller's Title Policy.
1.46 Other Definitions. Terms defined in any other part of this
Agreement shall have the defined meanings wherever capitalized herein. As used
in this Agreement, the terms "herein," "hereof" and "hereunder" refer to this
Agreement in its entirety and are not limited to any specific sections; and the
term "person" means any natural person, other legal entity, or combination of
natural persons and/or other legal entities acting as a unit. Wherever
appropriate in this Agreement, the singular shall be deemed to refer to the
plural and the plural to the singular, and pronouns of certain genders shall be
deemed to comprehend either or both of the other genders.
ARTICLE 2: OPTION TO PURCHASE
In accordance with and subject to the terms of this Agreement, Seller grants
Buyer an option to purchase the Property in consideration for Buyer's payment to
Seller of the Option Price. No later than two Business Days after the Effective
Date, Buyer shall open Escrow by delivery of a copy of this Agreement to Escrow
Agent, and Escrow Agent shall promptly notify Seller of such delivery and shall
evidence its agreement to act as Escrow Agent hereunder by countersigning and
delivering to each Party a copy of this Agreement.
2.1 Payment of Option Price. Concurrently with the execution of this
Agreement, Buyer shall pay to Seller the Option Price. The Option Price shall be
deemed fully earned and not refundable except as expressly provided herein, and
Seller may deposit the Option Price in Seller's own accounts without
restrictions. At the Closing, the Option Price shall be applied against the Down
Payment.
2.2 Exercise of Option. At any time on or before 5:00 p.m. Pacific Time
on the Option Date, Buyer may elect to purchase the Property in accordance with
the terms of this Agreement by delivering the Exercise Notice in the form of
Exhibit P to Seller in accordance with the provisions of Section 4.14 hereof,
and by simultaneously depositing the Deposit into Escrow in accordance with the
provisions of Section 3.1.1 hereof. Delivery of the Exercise Notice and Deposit
shall be irrevocable except as specifically provided herein.
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2.3 Approval of Title Condition.
2.3.1 Title Report and Survey. Within two (2) business days
after the Effective Date, Seller shall deliver the Survey to Buyer and
shall cause Title Company to prepare the Title Report and to deliver
the Title Report to Buyer, together with copies of all recorded
documents referenced in the Title Report or on the Survey.
2.3.2 Objectionable Title Matters and Permitted Exceptions.
Buyer shall promptly review the Title Report and shall within ten (10)
days after receipt thereof advise Seller in writing of any exceptions
to or defects in Seller's title to which Buyer objects ("Objectionable
Title Matters"). In case any exceptions to or defects in Seller's title
may be first disclosed to or discovered by Buyer after delivery of the
Title Report, Buyer shall have five (5) days to review and approve or
object to such exceptions, in the latter case such objections also
becoming Objectionable Title Matters. All exceptions and other defects
disclosed by the Title Report or the Survey or as disclosed to or
discovered by Buyer after delivery of the Title Report and which Seller
has not elected to cure in accordance with Section 2.3.3, shall, from
and after the Option Date, be deemed Permitted Exceptions. No
exceptions for a mortgage, deed of trust, or other consensual lien for
repayment of money shall be deemed to be a Permitted Exception.
2.3.3 Cure of Objectionable Title Matters. Seller shall have
no obligation to cure any Objectionable Title Matter. Seller may, at
Seller's option, elect to cure any Objectionable Title Matter by any of
the following, delivered to Buyer prior to the Option Date:
(i) Where such Objectionable Title Matter would
otherwise be within the scope of coverage of Buyer's Title
Policy, written confirmation from the Title Company that such
Objectionable Title Matter will not be scheduled as an
exception in Buyer's Title Policy,
(ii) Written confirmation from the Title Company that
it will affirmatively insure Buyer against loss resulting from
such Objectionable Title Matter, by an endorsement to Buyer's
Title Policy in a form reasonably satisfactory to Buyer,
provided that Buyer shall not be obligated to incur any cost
or liability with respect to an endorsement over an
Objectionable Title Matter, or
(iii) Seller's unconditional written undertaking to
take, at or before Closing, such steps as the Title Company
requires to accomplish either (i) or (ii) above.
2.3.4 Removal of Liens. Notwithstanding any other provision
hereof, Seller shall obtain the full reconveyance, release or other
discharge, of record, at or prior to Closing, or any mortgage, deed of
trust or other consensual lien created by Seller, Seller shall instruct
the Escrow Agent to pay all such liens from funds in Escrow, and Seller
shall convey the Property to Buyer free of any such lien.
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2.4 Items to be Delivered Outside of Escrow.
2.4.1 Property Records and Documents. Within 2 days after the
Effective Date, Seller shall deliver to Buyer, or make available to
Buyer in Seller's office, each of the items specified in the schedule
of Property Records attached hereto as Exhibit F, to the extent such
item is within Seller's possession or control. On receipt of such
items, Buyer shall acknowledge that it has received delivery of the
items indicated to be delivered to it on Exhibit F and that it has
generally had access, at such location, to the other items indicated on
Exhibit F.
2.4.2 Buyer's Financial Statements; Financial Condition. Buyer
shall submit to Seller, for approval by Seller, Buyer's financial
statements for its two most recent fiscal years and a year-to-date
financial statement for the period from the date of the last financial
statement. After review of Buyer's financial statements, Seller may
request, in its sole discretion, additional collateral for Buyer's
obligations under the Note. If Buyer fails or refuses to provide such
additional collateral, Seller may terminate this Agreement without any
further liability to Buyer and Seller shall promptly repay the Option
Price to Buyer. Buyer shall not be entitled to any interest on the
Option Price.
2.4.3 Return of Documents; Copies of Buyer Reports. If this
Agreement terminates without Closing, each party shall promptly return
to the other each item provided pursuant to this Section 2.4, and shall
diligently undertake either to have delivered to such other party or
destroyed every copy, digest or summary made of any such item; and
Buyer shall also furnish Seller with the original or a true and
complete copy of each survey, inspection report and other written study
concerning the Property which Buyer obtained from other sources, but
without any representation or warranty by Buyer.
2.5 Due Diligence. During the period between the Effective Date and the
Option Date, Buyer shall conduct its due diligence, including but not limited
to, the following:
(i) The environmental integrity of the Property;
(ii) All other aspects of the physical condition of the
Property;
(iii) The condition of Seller's title to the Property;
(iv) The condition of the entitlements and permits for the
Property;
(v) The operating history of the Property;
(vi) Acquisition of a commitment from the Title Company to
issue Buyer's Title Policy in accordance with Section
2.7.2.
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2.6 Effect of Exercise of Option. Upon Buyer's delivery of the Exercise
Notice to Seller, Buyer shall be deemed to have waived all its due diligence
requirements and to have accepted the Property in accordance with the terms of
this Agreement with title subject to the Permitted Exceptions as determined
under Section 2.3 hereof.
ARTICLE 3: COVENANT OF PURCHASE AND SALE AND INSTRUCTIONS TO ESCROW AGENT
Upon Buyer's exercise of the Option to purchase granted in Article 2 hereof, in
accordance with and subject to the terms and conditions of this Agreement,
Seller shall sell and convey the Property to Buyer, and Buyer shall purchase and
accept the Property from Seller, for the Purchase Price. In connection with the
administration of Escrow and Closing, Buyer and Seller hereby agree, and advise
and instruct Escrow Agent, as follows:
3.1 Payment of Purchase Price.
3.1.1 Deposit.
3.1.1.1 Deposit Amount and Payment. Concurrently with
delivery of the Exercise Notice, Buyer shall deliver the
Deposit into Escrow. For purposes of this Agreement, the
"Deposit" shall be that amount equal to the difference between
the Down Payment and the Option Price, or the sum of
$5,785,000.00 (Five Million Seven Hundred Eighty Five Thousand
Dollars).
3.1.1.2 Investment of Deposit. The Deposit, while
held in Escrow, shall be held by the Escrow Agent in a
federally-insured, interest-bearing account with a national
banking association. All interest earned on the Deposit while
in Escrow shall be added to, and become part of, the Deposit.
3.1.1.3 Application of Deposit. If Buyer, in breach
of its obligations under this Agreement, fails to purchase the
Property, Seller upon termination of this Agreement shall be
entitled to retain the Deposit as liquidated damages (and not
as a penalty), as provided in Section 4.7 (with which Escrow
Agent need not otherwise be concerned after its delivery of
the Deposit to Seller). At Closing, the Deposit shall be
applied against the Down Payment.
3.1.1.4 EINs. For Escrow Agent's information, Buyer's
Employer Identification Number is 94-3188774 and Seller's
Employer Identification Number is 94-2838567.
3.1.2 Down Payment and Other Funds Required for Closing. Not
later than five (5) Business Days after the Option Date, Buyer shall
deposit in Escrow current funds in an amount equal to Buyer's share of
Closing costs under Section 3.4, plus or minus (as the case may be) the
net amount of prorations and other credits under Section 3.3.
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3.1.3. Balance of Purchase Price. Not later than five (5)
Business Days after the Option Date, Buyer shall deposit in Escrow the
Note and Deed of Trust for the balance of the Purchase Price. The Note
shall bear interest at the rate of seven percent (7%) per annum.
Principal and interest shall be payable in level quarterly payments of
principal and interest, due the twentieth day of March, June,
September, and December of each year, commencing September 20, 1999,
with a final payment of all unpaid principal and accrued and unpaid
interest due on June 20, 2001. Buyer shall have no right to prepay the
Note. Seller shall have the right to call all or any portion of the
outstanding principal upon thirty (30) days written notice.
3.2 Escrow Deposits.
3.2.1 Instruments for Conveyance of the Property. Except as
noted in this Section 3.2.1, not later than five (5) Business Days
after the Option Date, Seller shall deposit or cause to be deposited in
Escrow:
(i) The Deed; provided the Deed may be deposited into
Escrow up to two (2) Business Days after the deed from FFLP
conveying title to the Property to Seller is deposited into
Escrow if such date is later than the date specified above.
(ii) Two counterparts of an assignment and assumption
agreement (the "Contract Assignment"), substantially in the
form attached hereto as Exhibit J, assigning to Buyer the
Development Agreement and the Permits.
(iii) Two counterparts of a covenants agreement (the
"Covenants Agreement") in the form attached hereto as Exhibit
G, in accordance with Section 4.13.1 hereof.
(iv) Right of Way Easement.
3.2.2 Other Escrow Deposits by Seller. In addition to the
deposits required under Section 3.2.1, Seller shall also deposit in
Escrow, at least one Business Day prior to the Closing Date:
(i) A Certificate of Non-Foreign Ownership with
respect to the Property (a "FIRPTA Certificate"),
substantially in the form attached hereto as Exhibit C,
together with the California equivalent thereof.
(ii) A certificate, dated as of Closing,
substantially in the form attached hereto as Exhibit D, that
all of the warranties and representations of Seller contained
in Section 3.2.1 are true and correct in all material respects
as of the Closing Date, except for matters specified in such
certificate ("Seller's Closing Certificate").
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(iii) Such other documents as the Title Company may
reasonably require to effect Closing (but without materially
increasing Seller's obligations, liabilities or expenses
hereunder).
Each of the documents specified in this Section and in Section 3.2.1
("Seller's Closing Documents") shall have been duly executed and, if
appropriate, acknowledged, by Seller.
3.2.3 Other Escrow Deposits by Buyer. In addition to the
deposit of funds under Section 3.1.2 and documents under Section 3.1.3,
Buyer shall deposit in Escrow, not later than five (5) Business Days
after the Option Date:
(i) The Note.
(ii) The Deed of Trust.
(iii) The Guaranty.
(iv) Two counterparts of the Contract Assignment.
(v) Two counterparts of the Covenants Agreement.
(vi) Such other documents as the Title Company may
reasonably require to effect Closing (but without materially
increasing Buyer's obligations, liabilities or expenses
hereunder); provided that for any documents which Title
Company first request after the Option Date, Buyer shall have
five (5) Business Days after such request to deposit such
documents into Escrow.
Each of the documents specified in this Section ("Buyer's Closing
Documents") shall have been duly executed and, if appropriate, acknowledged by
Buyer.
3.3 Prorations and Credits.
3.3.1 Prorated Items. The following items shall be prorated
between Seller and Buyer as of 12:00:01 a.m., local time, on the
Closing Date:
3.3.1.1 Taxes. All real estate taxes and assessments
(including, without limitation, the current year's installment
of any bond assessments) and all personal property taxes with
respect to the Property.
3.3.1.2 Association Assessments. All Assessments due
the Shores Business Center Association or the Electronic Arts
Business Park Association.
3.3.1.3 Other Revenue and Expenses. All other
periodic revenues and periodic charges attributable to the
Property, but excluding insurance premiums.
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(Seller's insurance with respect to the Property shall
terminate as of Closing and shall not be assigned to Buyer.)
3.3.2 Determination of Prorations and Credits. The prorations
and credits provided for in this Section 3.3 shall be effected through
Escrow, based upon:
(i) In the case of real estate taxes and assessments,
the most recent available tax bill for the Property;
(ii) In the case of all other prorations and credits,
a proration statement which Buyer and Seller shall jointly
prepare and deliver to Escrow Agent not later than five (5)
Business Days after the Option Date, to be updated at least
two (2) Business Days prior to the Closing Date.
After taking all such prorations and credits into account, the net
amount owing to Seller or Buyer (as the case may be) shall be added to
or deducted from the proceeds of the Down Payment payable to Seller at
Closing.
3.3.3 Utility Charges. Notwithstanding any other provision
hereof, use charges for any utility serving the Property shall be
prorated only if Seller and Buyer are unable to arrange for a final
billing to Seller through the day preceding Closing, without
interruption of such utility service. The Parties shall cooperate, each
using reasonable efforts, to make such arrangements for each utility
serving the Property.
3.4 Closing Costs.
3.4.1 Allocation of Closing Costs. Closing costs shall be
allocated between Buyer and Seller as follows:
(i) Seller shall pay:
(A) Applicable County transfer taxes; and
(B) Recording charges.
(ii) Buyer shall pay:
(A) All costs associated with the issuance
of the Title Policies, including without limitation,
the charges for any title insurance endorsements
requested by Buyer, and the cost of updating or
replacing the Survey;
(B) Escrow Agent's fees and expenses for
administering Escrow; and
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(C) All fees charges and expenses related to
Buyer's financing for the purchase of the Property
(including, without limitation, any additional
premium for a lender's policy of title insurance).
Any other charges and expenses incurred by Escrow Agent in effecting
Closing shall be allocated between the Parties in accordance with the
custom of the county in which the Property is located. Each of the
parties shall pay the fees of its attorneys, accountants and
consultants.
3.4.2 Preliminary Closing Statement. At least one Business Day
prior to the Closing Date, Escrow Agent shall prepare and submit to
each of Buyer and Seller preliminary Closing statements, showing the
Parties' respective amounts of Closing costs, the Deposit balance
(including interest earned to such date), the net credit due to Seller
or Buyer under Section 3.3 and the net amount of funds required to be
deposited by Buyer in order to effect Closing hereunder.
3.5 Closing.
3.5.1 Time and Place. Closing shall take place at the Escrow
Agent's offices, as soon as the conditions specified in clauses (i)
through (iii) of Section 3.5.2 are satisfied. If Escrow Agent is unable
to close Escrow by the Last Closing Date in compliance with Section
3.5.2, Escrow Agent shall hold Escrow open and effect Closing as soon
as it is able to do so in compliance with such provision, unless Escrow
Agent receives written demand from either Buyer or Seller for
cancellation of Escrow (in which event, Escrow Agent shall proceed in
accordance with Section 3.6).
3.5.2 Closing Instructions. As soon as:
(i) Seller has delivered into Escrow Seller's Closing
Documents and Buyer has approved each of the same as
satisfying the requirements of this Agreement; and
(ii) Buyer has delivered into Escrow the funds
required to effect Closing hereunder and Buyer's Closing
Documents, and Seller has approved Buyer's Closing Documents
as satisfying the requirements of this Agreement; and
(iii) Title Company is prepared (a) to issue to Buyer
the Buyer's Title Policy in the amount of the Purchase Price
subject only to the Permitted Exceptions and (b) to issue to
Seller the Seller's Title Policy in the amount of the Note,
subject only to the first deed of trust lien as to the Deed of
Trust and to the Permitted Exceptions; and
(iv) City has delivered to Escrow the duly signed
resolutions authorizing and approving the Contracts Assignment
in accordance with Section 4.12.2;
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Escrow Agent shall cause the Title Company to record the Deed
and shall then close Escrow by:
(iv) Disbursing the funds in Escrow as follows:
(A) To cover Closing costs and payment of
commissions to Seller's Broker;
(B) To Seller, the amount of the Down
Payment, plus the net credit, if any, to Seller under
Section 3.3 and minus (1) the net credit, if any, to
Buyer under Section 3.3 and (2) Seller's share of
Closing costs; and
(C) To Buyer, any funds remaining in Escrow
after the foregoing disbursement to Seller and
payment of all of the Closing costs;
(v) Delivering to Buyer a copy of the Deed as
recorded, showing the recording data thereon, and the rest of
Seller's Closing Documents; and
(vi) Delivering to Seller Buyer's Closing Documents.
3.6 Cancellation of Escrow Without Closing. After the Last Closing
Date, upon receiving a written demand from either Party for cancellation of
Escrow, Escrow Agent shall promptly deliver a copy of such demand to the other
Party and shall then proceed as follows:
(i) If, by close of business on the fifth Business Day after
Escrow Agent gives the other Party a copy of such demand for
cancellation, Escrow Agent has not received from such other Party
written instructions which conflict in any way with such demand, Escrow
Agent shall cancel Escrow, disburse the Deposit as directed in such
demand (or, if no directions are given in such demand regarding the
Deposit, disburse the Deposit to Seller) and return every other item
deposited in Escrow to the Party which deposited the same; or
(ii) If, by close of business on the fifth Business Day after
Escrow Agent gives the other Party a copy of such demand for
cancellation, Escrow Agent has received conflicting written
instructions from such other Party, Escrow Agent shall take no further
actions with respect to Escrow (other than to continue to invest and
reinvest the Deposit as provided in Section 3.1.1) except (A) in
accordance with joint written instructions of Seller and Buyer or (B),
upon advice of Escrow Agent's legal counsel, in accordance with a
certified copy of the order or judgment of court; provided, however,
that if Seller and Buyer have not provided Escrow Agent with joint
written instructions as to the disposition of Escrow (and all items
deposited therein) within 60 days after Escrow Agent's receipt of such
demand for cancellation, Escrow Agent shall have the right (at any time
thereafter) to commence an action in interpleader against Seller and
Buyer and, in connection therewith, to deposit all funds and other
items held in Escrow with the
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court hearing such action, whereupon Escrow Agent shall be relieved of
all further obligations and duties with respect to Escrow.
Buyer and Seller, jointly and severally, shall hold harmless and indemnify
Escrow Agent from and against any costs and expenses incurred by it in
connection with any interpleader action commenced pursuant to clause (ii) above.
Upon cancellation of Escrow, either pursuant to this Section or other joint
written instructions of the Parties, Buyer and Seller shall each pay one-half of
Escrow Agent's reasonable and customary cancellation fees.
3.7 Supplemental Escrow Agreement. Buyer and Seller shall execute such
supplemental escrow instructions or supplemental escrow agreement as Escrow
Agent may reasonably request, provided the provisions of such instructions or
agreement do not materially conflict with the provisions of this Agreement. In
the event of any conflict between this Agreement and such supplemental
instructions, this Agreement shall control.
ARTICLE 4: FURTHER AGREEMENTS BETWEEN BUYER AND SELLER (OF NO CONCERN TO ESCROW
AGENT EXCEPT AS EXPRESSLY REFERENCED IN ARTICLES 1 OR 3)
4.1 Warranties, Representations and Covenants.
4.1.1 By Seller. Seller hereby warrants, represents and/or
covenants to Buyer that, except as disclosed in Exhibit E attached
hereto:
(i) Title to the Property is held of record by FFLP.
Seller has the contractual right and ability to acquire record
title to the Property at or before the Closing hereunder. In
all other respects, Seller has full right and power to convey
the Property in accordance with this Agreement.
(ii) To Seller's Knowledge, Seller has not received
written notice from any government authority, agency or
officer that the current condition, occupancy or use of the
Property causes a material violation of any applicable Law.
(iii) There are no lawsuits pending or, to Seller's
Knowledge, threatened whose outcome could adversely affect
title to or the use, occupancy or operation of the Property or
Seller's ability to convey any of the Property to Buyer under
this Agreement (including, without limitation, actions for
condemnation).
(iv) Seller is a corporation organized and existing
under the laws of the State of Delaware; is in good standing
and qualified to do business in every other jurisdiction where
such qualification is legally required; has full power to
enter into this Agreement and to fulfill its obligations
hereunder; and has caused this Agreement to be duly executed
and delivered to Buyer.
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(v) No government or third party approvals or
consents are required for Seller's execution and delivery of,
or performance of its obligations under, this Agreement.
Seller's execution and performance of this Agreement do not
and will not violate, and are not restricted by, any other
contractual obligation or any Law to which Seller is a party
or by which Seller or any of the Property is bound.
(vi) With respect to environmental matters affecting
the Property:
(A) To Seller's Knowledge, the Property is
not in violation of any of the Environmental Laws
(hereinafter defined). Neither Seller nor to Seller's
Knowledge any third party has engaged in any
operations or activities upon, or any use or
occupancy of the Property, or any portion thereof,
for the purpose of or in any way involving the
handling, manufacture, treatment, storage, use,
generation, release, discharge, refining, dumping or
disposal of any Hazardous Substance (whether legal or
illegal, accidental or intentional) on, under or in
the Property, or transported any Hazardous Substance
to, from or across the Property.
(B) No Hazardous Substance has been
constructed, deposited, stored, or otherwise located
on, under or in the Property by Seller or to Seller's
Knowledge by any third party.
(C) Seller has not received notice, nor is
Seller aware, that any Hazardous Substance has
migrated from other properties upon or beneath the
Property.
(vii) Except for Broker, Seller has not engaged or
dealt with any broker, finder or similar agent in connection
with the transaction contemplated by this Agreement.
(viii) During the period from the Effective Date to
Closing, Seller shall:
(A) Maintain the Property in its present
condition and state of repair and maintenance
(subject to casualty damage and to normal wear and
tear); and
(B) Take reasonable measures to preserve and
enforce all of its rights and remedies with respect
to the Property and the Development Agreement.
(ix) During the period from the Effective Date to
Closing, Seller shall not do anything else which would impair
its title to any of the Property or materially alter the
operation of the Property.
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(x) During the period from the Effective Date to
Closing, Seller shall provide to Buyer, its agents,
consultants, accountants and counsel upon 24 hours' prior
notice (which may be by telephone or facsimile transmission),
(A) access at all reasonable times to all of Seller's
contracts, books and records and other documents, pertaining
to the period of time commencing February 15, 1995, and
relating to the acquisition, occupancy, operation, maintenance
and repair of the Property by Seller (excluding any
appraisals, internal valuations or attorney-client privileged
materials), with the right to make photocopies thereof, (B)
subject to the foregoing exclusions, access to all such other
information pertaining to the period of time commencing
February 15, 1995 regarding the Property and in Seller's
possession or control (including copies of such contracts,
books and records and other documents) as Buyer may reasonably
request, and (C) access to the Property at all reasonable
times for purposes of conducting (at Buyer's expense and
liability) any examinations, surveys and tests as Buyer may
reasonably require; provided, however, that Buyer shall not
have any right to conduct any drilling, boring or other
intrusive or destructive testing of the Property without
Seller's prior written consent.
4.1.2 By Buyer. Buyer hereby warrants, represents and
covenants to Seller that:
(i) Buyer is a limited partnership duly organized,
validly existing and in good standing under the laws of the
state of California; is in good standing and qualified to do
business in every other jurisdiction where such qualification
is legally required; has full power to enter into this
Agreement and to fulfill its obligations hereunder; and has
caused this Agreement to be duly executed and delivered to
Seller.
(ii) No government or other third-party approvals or
consents are required for Buyer's execution and delivery of or
performance of its obligations under, this Agreement. Buyer's
execution and performance of this Agreement do not and will
not violate, and are not restricted by any other contractual
obligation or applicable Law to which Buyer is a party or by
which Buyer is otherwise bound.
(iii) There are no lawsuits pending or, to Buyer's
knowledge, threatened whose outcome could adversely affect
Buyer's ability to purchase the Property under this Agreement
or to make payments required under the Note.
(iv) Buyer's Financial Statements have been and will
be prepared in accordance with generally accepted accounting
principles and do or will fairly present the financial
condition of the Buyer for the period covered.
(v) Except for Broker, Buyer has not engaged or dealt
with any broker, finder or similar agent in connection with
the transaction contemplated by this Agreement.
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(vi) BUYER'S PURCHASE OF THE PROPERTY HEREUNDER WILL
BE "AS-IS, WHERE IS, WITH ALL FAULTS" AND, EXCEPT FOR THE
WARRANTIES, REPRESENTATIONS AND COVENANTS OF SELLER EXPRESSLY
SET FORTH IN SECTION 4.1.1, BUYER WILL BE CONCLUDING THE
PURCHASE OF THE PROPERTY BASED SOLELY ON ITS INSPECTION AND
INVESTIGATION OF THE PROPERTY AND ON ALL DOCUMENTS RELATED
THERETO. WITHOUT LIMITING THE FOREGOING, BUYER ACKNOWLEDGES
THAT SELLER HAS NOT MADE ANY REPRESENTATIONS AND WARRANTIES,
EXCEPT AS EXPRESSLY SET FORTH IN SECTION 4.1.1, ON WHICH BUYER
IS RELYING AS TO ANY MATTERS CONCERNING THE PROPERTY
(INCLUDING, WITHOUT LIMITATION, THE LAND, IMPROVEMENTS,
DEVELOPMENT RIGHTS, POWER TRANSMISSION LINES, TAXES, BONDS,
PERMISSIBLE USES, WATER OR WATER RIGHTS, TOPOGRAPHY,
UTILITIES, ZONING, SOIL, SUBSOIL, THE PURPOSES FOR WHICH THE
PROPERTY IS TO BE USED, LATENT OR PATENT PHYSICAL, OR
ENVIRONMENTAL CONDITIONS, VALUATION, OPERATING HISTORY OR
PROJECTIONS, DRAINAGE, ENVIRONMENTAL OR BUILDING LAWS, RULES
OR REGULATIONS, ANY WORK TO BE PERFORMED OR SERVICES TO BE
PROVIDED PURSUANT TO THE DEVELOPMENT AGREEMENT, OR ANY OTHER
REPRESENTATIONS OR WARRANTIES). UPON CLOSING, BUYER SHALL
ASSUME THE RISK THAT ADVERSE MATERIAL MATTERS, INCLUDING BUT
NOT LIMITED TO ADVERSE PHYSICAL AND ENVIRONMENTAL CONDITIONS,
MAY EXIST ON THE PROPERTY.
AS A MATERIAL PART OF THE CONSIDERATION TO SELLER FOR THE SALE
OF THE PROPERTY. BUYER HEREBY IRREVOCABLY WAIVES, AND RELEASES
SELLER (AND SELLER'S SHAREHOLDERS, AFFILIATES, DIRECTORS,
OFFICERS, EMPLOYEES AND AGENTS, INCLUDING (WITHOUT
LIMITATION), BROKER, ELECTRONIC ARTS, INC. (AND THEIR
RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AFFILIATES)
FROM, ANY AND ALL CLAIMS (OTHER THAN FOR INTENTIONAL FRAUD)
BASED ON ANY WARRANTY OR REPRESENTATION (INCLUDING, WITHOUT
LIMITATIONS, THOSE IMPLIED BY LAW) NOT EXPRESSLY CONTAINED IN
THIS AGREEMENT; OR ANY MISREPRESENTATION OR FAILURE TO
DISCLOSE INFORMATION RELATING TO THE PROPERTY OTHER THAN A
CLAIM BASED ON A REPRESENTATION OR WARRANTY CONTAINED HEREIN;
OR ANY DEFAULTS, DEFECTS, INADEQUACIES, OR OTHER MATTERS
RELATED EITHER DIRECTLY OR INDIRECTLY TO THE WORK TO BE
PERFORMED OR SERVICES TO BE PROVIDED PURSUANT TO THE
DEVELOPMENT AGREEMENT.
4.1.3 Survival. Except as provided below, the foregoing
warranties, representations and covenants (and the Parties' respective
liability for any breach thereof)
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shall survive Closing and shall not be deemed to merge in the Deed or
any other instrument. Notwithstanding any other provision of this
Agreement or Seller's Closing Documents, any claim based on a breach of
Seller's representations, warranties, and covenants in Section 4.1.1 or
in Seller's Closing Certificate shall be forever barred, and Buyer
shall bring no action thereon, unless (A) Buyer gives Seller written
notice of such claim within one hundred eighty (180) days of the
Closing Date, describing with particularity in such notice each
representation, warranty, or covenant of Seller which Buyer claims to
have been breached and the facts on which such claim is based, and (B)
Buyer commences action on such claim on or before the first anniversary
of the Closing Date.
4.2 Conditions to Buyer's Obligation. Buyer's obligation to close
Escrow shall be subject to timely satisfaction of each of the following
conditions:
4.2.1 Performance of Seller's Obligations. Performance by
Seller of all of Seller's obligations under this Agreement to be
performed at or before Closing.
4.2.2 Accuracy of Warranties and Representations. The accuracy
in all material respects, as of Closing, of each of the warranties and
representations of Seller set forth in Section 4.1.1.
4.2.3 City Approvals. Approval by the City within sixty (60)
days after the Option Date of the Assignment and Assumption of
Development Agreement in accordance with Section 4.12.2, and delivery
by the City of an Estoppel Certificate pursuant to Section 27 of the
Development Agreement substantially in the form of Exhibit Q.
4.2.4 Satisfactory Title. Acquisition of a commitment from the
Title Company to issue Buyer's Title Policy in accordance with Section
3.5.2.
If any of the foregoing conditions is not timely satisfied (or waived by Buyer
in writing), Buyer shall have the right to terminate this Agreement before
Closing by written notice of such termination to Seller and Escrow Agent given
at any time prior to the satisfaction of such condition; but once Closing has
occurred all of the foregoing conditions, to the extent not satisfied at
Closing, shall be deemed to have been irrevocably waived. If this Agreement is
terminated prior to Closing and provided Buyer has cooperated in good faith with
Seller's efforts to secure City approval of the Assignment of the Development
Agreement in accordance with Section 4.12.2, all funds deposited by Buyer with
the Escrow Agent shall promptly be returned to Buyer and Seller shall promptly
repay the Option Price (without interest) to Buyer.
4.3 Conditions to Seller's Obligation. Seller's obligation to close
Escrow shall be subject to the timely satisfaction of each of the follow
conditions:
4.3.1 Performance of Buyer's Obligations. Performance by Buyer
of all of Buyer's obligations under this Agreement to be performed at
or before Closing.
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4.3.2 No Material Change in Financial Condition. No material
adverse change in Buyer's financial condition between the Effective
Date and the Closing Date. Buyer shall provide Seller with a
certificate to that effect at least three (3) business days prior to
the Closing Date, together with a year-to-date financial statement for
the period since the most recent annual financial statement.
4.3.3 Satisfactory Title. Acquisition of a commitment from the
Title Company to issue Seller's Title Policy in accordance with Section
3.5.2.
4.3.4 Accuracy of Warranties and Representations. The accuracy
in all material respects, as of Closing, of each of the warranties and
representations of Buyer set forth in Section 4.1.2.
If any such condition is not timely satisfied (or waived by Seller in writing),
Seller shall have the right to terminate this Agreement before Closing by
written notice of such termination to Buyer and Escrow Agent given at any time
prior to the satisfaction of such condition; but once Closing has occurred all
of the foregoing conditions, to the extent not satisfied at Closing, shall be
deemed to have been irrevocably waived.
4.4 Indemnities.
4.4.1 Buyer's Activities on the Property. Buyer shall hold
harmless, indemnify and defend FFLP and Seller from and against any and
all claims, liability and losses, and expenses related thereto
(including reasonable attorneys' fees), which FFLP or Seller incurs by
reason of any damage to the Property caused by, or any third-person
claim against FFLP or Seller arising or asserted to arise out of, any
activity of Buyer, or any of Buyer's agents, conducted on the Property
prior to Closing. Buyer shall, with reasonable promptness, repair any
damage caused to the Property by any such activity.
4.4.2 Survival. The provisions of, and Buyer's obligations
under, this Section 4.4 shall survive Closing or termination of this
Agreement. The indemnifications contained in this Section 4.4 shall run
to the benefit of FFLP and Seller and their respective constituent
partners, shareholders, directors, officers, employees, agents,
successors and assigns.
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4.5 Damage, Destruction or Condemnation.
4.5.1 Termination Rights. If, prior to Closing, the Property
suffers any material damage, destruction or taking by eminent domain (a
"Casualty"), Buyer shall have the right, at its election, to terminate
this Agreement, by written notice given to the Seller prior to the Last
Closing Date. If a Casualty occurs fewer than ten Business Days before
the Last Closing Date, Seller shall have the right in its sole
discretion to extend the Last Closing Date until the tenth Business Day
after the occurrence of such Casualty in order for Buyer to make the
election permitted by this Section.
4.5.2 If No Termination. In the event that a Casualty occurs
and Buyer either does not have or does not elect to exercise a right to
terminate this Agreement, this Agreement shall continue in force and,
upon Closing, Buyer shall be entitled to all insurance proceeds,
condemnation awards or other amounts which have been paid or may
thereafter be payable to FFLP or Seller by any person in connection
with such Casualty ("Proceeds"), and at Closing Seller shall pay over
to Buyer the amount of any Proceeds already received by FFLP or Seller
and shall assign Buyer all of Seller's or FFLP's rights to Proceeds
which may then be or thereafter become payable.
4.5.3 Materiality. For purposes hereof, a material Casualty is
one in which the extent of the damage, destruction or taking (measured
by the cost of repairing or replacing the damaged, destroyed or taken
portion of the Property) exceeds twenty-five percent (25%) of the
Purchase Price.
4.6 Assignment by Buyer. Because Buyer has been selected by Seller to
purchase this Property through a bid process and the identity of the Buyer is of
the utmost important to Seller, prior to Closing Buyer shall have no right to
assign or transfer its rights under this Agreement except with prior written
consent of Seller, which Seller may in its sole discretion deny; provided,
however, that Seller will not unreasonably withhold its consent if Buyer seeks
to assign its rights under this Agreement to a corporation or partnership which
is at least fifty percent (50%) owned by Buyer. Sale of shares or partnership
interests or other ownership units in Buyer (other than on a nationally
recognized stock exchange or over-the-counter market) shall constitute an
assignment subject to the terms of this Section. Seller shall have no obligation
to respect any assignment in violation of this Section and such an assignment
shall constitute a material breach of this Agreement on the part of Buyer. No
assignment shall relieve or excuse Buyer of its obligations and liability
hereunder. Seller's consent to any one assignment shall not be deemed consent to
any other assignment or a waiver of the requirement for its consent to any other
assignment.
4.7 Rights of Parties Upon Default.
4.7.1 Seller's Rights. IF CLOSING FAILS TO OCCUR UNDER THIS
AGREEMENT DUE TO A DEFAULT ON THE PART OF BUYER, SELLER SHALL BE
ENTITLED, AS ITS SOLE AND EXCLUSIVE REMEDY ON ACCOUNT OF SUCH FAILURE
AND IN CONSIDERATION OF ITS WITHDRAWAL OF THE
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PROPERTY FROM THE MARKET DURING THE TERM OF THIS AGREEMENT, TO RECEIVE
AND RETAIN, AS LIQUIDATED DAMAGES (AND NOT AS A PENALTY), THE DEPOSIT;
AND SELLER SPECIFICALLY WAIVES ANY RIGHT SPECIFICALLY TO ENFORCE
BUYER'S OBLIGATION HEREUNDER TO PURCHASE THE PROPERTY.
BUYER AND SELLER ACKNOWLEDGE THAT SUCH LIQUIDATED DAMAGES ARE
REASONABLE IN AMOUNT CONSIDERING ALL OF THE CIRCUMSTANCES EXISTING ON
THE DATE OF THIS AGREEMENT, INCLUDING THE PARTIES' ESTIMATION OF THE
POSSIBLE RANGE OF DAMAGES TO SELLER IN THE EVENT OF SUCH A BREACH, THE
DIFFICULTY AND IMPRACTICABILITY OF ASCERTAINING OR PROVING WITH ANY
DEGREE OF CERTAINTY THE AMOUNT OF SUCH DAMAGES AND THE DESIRE OF BUYER
TO LIMIT ITS POTENTIAL LIABILITY TO SELLER IN THE EVENT OF SUCH A
BREACH. THE FOREGOING SHALL NOT, HOWEVER, LIMIT SELLER'S RIGHTS AND
REMEDIES TO ENFORCE OBLIGATIONS OF BUYER UNDER SECTIONS 2.4.2, 2.4.3,
4.4.1, and 4.13 (INCLUDING COSTS OF ENFORCING THIS LIQUIDATED DAMAGES
PROVISION) OR, IF CLOSING OCCURS, TO ENFORCE ANY OTHER OBLIGATIONS OF
BUYER HEREUNDER.
/s/ /s/
---------------- -----------------
Buyer's Initials Seller's Initials
4.7.2 Buyer's Rights. IF CLOSING FAILS TO OCCUR UNDER THIS
AGREEMENT DUE TO A DEFAULT ON THE PART OF SELLER, BUYER SHALL BE
ENTITLED, AS ITS SOLE AND EXCLUSIVE REMEDY ON ACCOUNT OF SUCH FAILURE,
TO THE FOLLOWING: (i) REIMBURSEMENT OF BUYER'S ACTUAL OUT-OF-POCKET
COSTS INCURRED IN ITS REVIEW AND INVESTIGATION OF THE PROPERTY, PAYABLE
UPON DELIVERY TO SELLER OF VALID RECEIPTS THEREFOR; (ii) RETURN OF THE
OPTION PRICE (WITHOUT INTEREST THEREON); (iii) RELEASE AND RETURN OF
THE DEPOSIT AND ANY OTHER FUNDS DEPOSITED BY BUYER INTO ESCROW; AND
(iv) SOLELY IF CLOSING FAILS TO OCCUR UNDER THIS AGREEMENT DUE TO
SELLER'S INTENTIONAL FAILURE TO DELIVER DOCUMENTS INTO ESCROW AND TO
CLOSE THE PURCHASE AND SALE HEREUNDER, LIQUIDATED DAMAGES IN THE AMOUNT
OF $1,000,000; AND BUYER SPECIFICALLY WAIVES ANY RIGHT SPECIFICALLY TO
ENFORCE SELLER'S OBLIGATION HEREUNDER TO SELL THE PROPERTY; AND,
FURTHER, BUYER SPECIFICALLY WAIVES ANY RIGHT TO RECORD A LIS PENDENS
AGAINST THE PROPERTY OR ANY PART THEREOF, IN THE OFFICIAL RECORDS OF
SAN MATEO COUNTY.
BUYER AND SELLER ACKNOWLEDGE THAT SUCH THE SPECIFIED LIQUIDATED DAMAGES
ARE NOT BY WAY OF A PENALTY AND ARE REASONABLE IN AMOUNT CONSIDERING
ALL OF THE CIRCUMSTANCES
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EXISTING ON THE DATE OF THIS AGREEMENT, INCLUDING THE PARTIES'
ESTIMATION OF THE POSSIBLE RANGE OF DAMAGES TO BUYER IN THE EVENT OF
SUCH A BREACH, THE DIFFICULTY AND IMPRACTICABILITY OF ASCERTAINING OR
PROVING WITH ANY DEGREE OF CERTAINTY THE AMOUNT OF SUCH DAMAGES AND THE
DESIRE OF SELLER TO LIMIT ITS POTENTIAL LIABILITY TO BUYER IN THE EVENT
OF SUCH A BREACH. THE FOREGOING SHALL NOT, HOWEVER, LIMIT BUYER'S
RIGHTS AND REMEDIES TO ENFORCE OBLIGATIONS OF SELLER UNDER SECTION 4.13
(INCLUDING COSTS OF ENFORCING THIS LIQUIDATED DAMAGES PROVISION).
4.8 Termination.
4.8.1 By Buyer. If Buyer has and timely exercises any right
hereunder to terminate this Agreement, Buyer shall be immediately
entitled to the return of the Deposit and all undisbursed interest
earned thereon while in Escrow and, promptly upon receiving notice of
such termination, Seller shall join with Buyer in a written notice to
Escrow Agent acknowledging the termination of this Agreement and
instructing Escrow Agent to return the Deposit to Buyer and to return
every other item deposited in Escrow to the Party which deposited the
same. In addition, Seller shall promptly repay the Option Price
(without interest) to Buyer.
4.8.2 By Seller. If Seller has and exercises any right
hereunder to terminate this Agreement for a breach by Buyer of its
obligations, warranties or representations hereunder, promptly upon
receiving notice of such termination Buyer shall join with Seller in a
written notice to Escrow Agent acknowledging the termination of this
Agreement and instructing the Title Company to deliver the Deposit to
Seller and to return all other funds and every other item deposited in
Escrow to the Party which deposited the same. If Seller terminates this
Agreement for any other reason, including without limitation, pursuant
to the provisions of Sections 2.4.2, 4.3 (except as a result of Buyer's
breach), and 4.5.1, Seller shall promptly, upon Buyer's written
request, join with Buyer in a written notice to Escrow Agent
acknowledging the termination of this Agreement and instructing Escrow
Agent to return the Deposit to Buyer and to return every other item
deposited in Escrow to the Party which deposited the same and Seller
shall promptly repay the Option Price (without interest) to Buyer.
4.8.3 Effect of Termination. Upon any termination of this
Agreement, neither Party shall have any further obligation or liability
to the other hereunder except (i) any remaining obligation or liability
of Buyer under Section 2.4.3 (for return, destruction and/ or delivery
of documents to Seller) or under Section 4.4.1 (with respect to
activities of Buyer or its agents upon the Property), (ii) any
liability which either Party may have hereunder by reason of the fact
that such termination either (A) was wrongfully made by it or (B)
resulted from a breach of its warranties, covenants or other
obligations hereunder, and (iii) any obligation under Section 4.13.
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4.9 Brokerage Commission. Upon Closing, Seller shall pay any commission
due to Broker, in connection with the sale and purchase of the Property as set
forth in this Agreement, under a separate, written agreement between Seller and
Broker. Nothing contained herein shall be deemed to make Broker a third-party
beneficiary of this Agreement or to create any obligation on the part of either
Party to close the sale and purchase of the Property for Broker's benefit. Each
Party shall hold harmless, indemnify and defend the other from and against any
claim or liability for a commission, fee or other compensation to broker,
salesman, finder or similar intermediary, and for any expenses (including,
without limitation, reasonable attorneys' fees and expenses) related to the
defense of any such claim, which results constitute a breach of such Party's
representation, contained in Section 4.1.1(vii) or Section 4.1.2(iv).
4.10 Post-Closing Prorations and Adjustments. After Closing, the
Parties shall make the following additional prorations and settlements:
4.10.1 Real Estate Taxes and Assessments. If Closing
prorations of real estate taxes and assessments are based on other than
the current year's tax bill, within 30 days after such bill is issued
to Buyer, Buyer shall recompute such proration. If such recomputation
results in a larger proration credit to Seller, Buyer shall pay Seller
the additional amount due Seller within such 30 days. If such
recomputation results in a larger proration credit to Buyer, Seller
shall pay Buyer the additional amount due Buyer within 30 days after
receiving Buyer's written recomputation of such proration, accompanied
by a copy of such tax bill.
4.10.2 Determinations of Post-Closing Prorations and
Adjustments. Except where expressly provided otherwise, Buyer shall
make the required determinations and computations of all post-Closing
prorations and other adjustments under this Section 4.10 (the
"Post-Closing Prorations") and shall provide Seller with a reasonably
detailed written summary of each Post-Closing Proration, concurrently
with or prior to making any payment to or requesting any payment from
Seller under this Section 4.10 with respect thereto. Seller shall have
the right to audit all of Buyer's books and records pertaining to the
Post-Closing Prorations. For this purpose, Buyer shall allow Seller's
designated representatives access to such books and records, at the
Property or Buyer's principal place of business within the United
States, at any time during normal business hours, and Seller shall have
the right to make copies of such books and records (and the right to
use Buyer's photocopying equipment to make such copies, paying Buyer
its actual out-of-pocket cost for such copying). Except to the extent
that Seller, before the second anniversary of the Closing Date, gives
Buyer written notice of objections to Buyer's determinations of the
Post-Closing Prorations, Buyer's determinations and computations of
such prorations and adjustments shall be conclusive, if made in good
faith and with full disclosure to Seller. If Seller does give Buyer
timely written notice of objection to Buyer's determination of any
Post-Closing Proration and the Parties are unable to resolve such
objection by mutual agreement within 30 days thereafter, either Party
shall have the right to submit such dispute to binding arbitration by,
and under the applicable rules of, the American Arbitration
Association, in San Mateo or San Francisco counties, California. The
arbitrator in such arbitration shall, to the extent reasonably
necessary to
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the enforcement of Seller's rights hereunder, order the production to
Seller of any or all of Buyer's books and records pertaining to the
Post-Closing Prorations. The arbitrator shall endeavor to resolve any
such submitted dispute and render a written award within 90 days after
the arbitrator's appointment.
4.11 Design Review. The Property is subject to the Shores CC&Rs, which
provides for design review of any proposed improvements to be constructed by
Buyer. Pursuant to the Shores CC&Rs, the Shores Business Center Association
Architectural Review Committee ("Shores Review Committee") has been formed, and
said Review Committee has promulgated Guidelines. Buyer acknowledges its
receipt, review and acceptance of the Shores CC&Rs and the Guidelines, and
agrees that it shall, at all times, comply with said Shores CC&Rs and the
Guidelines and any existing or future supplements or amendments thereto. Buyer
agrees that it shall inform itself of the procedures of the Review Committee and
shall comply with such procedures, including, without limitation, lead times for
the submission of plans and documents to be reviewed.
4.12 Buyer's Covenants and Agreements. Buyer hereby covenants and
agrees with Seller as follows:
4.12.1 Agreement for Covenants Running With the Land. On or
before Closing, Buyer and FFLP shall execute in recordable form and
deliver into Escrow, for recording at Closing, that certain "Covenants
Agreement" in the form attached hereto as Exhibit G. At Closing, the
Covenants Agreement shall be recorded against the Property immediately
after the Grant Deed and prior to the recording of any other documents,
instruments or conveyances.
4.12.2 Development Agreement. Buyer acknowledges receipt of a
copy of the Development Agreement. Buyer further acknowledges it is
aware of the terms thereof, including in particular, the following
provisions:
Section 3: Term
Section 4: Land Use: Density; and Intensity; including
provisions concerning minimum and maximum
Gross Building Floor Area, minimum, and
maximum height.
Section 5: Project Timing.
Section 6: Project Review and Approval Process.
Section 8: The Facilities and Site Evaluation;
including the obligation to dedicate lands
for right and left turn lanes on Redwood
Shores Parkway, and including the
obligation to comply with engineering
design standards and construction standards
developed by Declarant pursuant to said
Section.
Section 9: Facilities Fees and other Exactions.
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Section 11: On-Site Privately Owned Improvements;
including the obligation of Owner to fund
such Improvements located on Owner's
Parcels.
Section 12: Traffic Assessment District.
Section 17: Construction Requirements
Section 20: Annual Review; including the obligation to
initiate such review and demonstrate good
faith compliance with Owner's Parcel.
Section 24: Events of Default; Remedies; Termination;
Attorneys' Fees.
Promptly upon Buyer's delivery of the Exercise Notice, Seller
shall undertake to obtain the City's approval of the Assignment of the
Development Agreement and Permits in accordance with Section 29 of the
Development Agreement. Buyer shall cooperate fully and in good faith
with Seller in connection with obtaining such approval and shall
promptly deliver any documents or other information required by the
City in its discretion to process the request for approval.
4.12.3 Payment for Improvements. Buyer acknowledges and agrees
that Seller shall not be required to pay any funds, perform any acts,
or dedicate, donate or grant any property (whether real or personal) to
satisfy any condition imposed on development of the Property, whether
such condition is imposed by a governmental authority or entity or by
the terms of any recorded document which constitutes a Permitted
Exception. Buyer acknowledges and agrees that the construction of any
and all improvements and utilities required to be installed within the
perimeter of the Property in order to serve the Property, as developed
by Buyer (collectively, the "On-Site Improvements"), and all costs and
expenses of such On-Site Improvements, shall be the sole and exclusive
responsibility of Buyer, including, without limitation, the following:
(i) the obligation to pay for, construct, furnish or install and
maintain all on-site utility extensions to serve the Property,
including, without limitation, water from the public water lines within
the public streets, sanitary and storm sewers from the public sewer
system within the public streets, electricity and gas from the off-site
facilities designated by Pacific Gas & Electric Company, and
electricity and gas by payment or reimbursement to the electric and gas
utility company in excess of the extension allowance (if any); (ii)
payment for all City, District or utility company connection, extension
or hook-up fees, facilities fees, license fees or charges for water,
sewer, electricity, gas, telephone, garbage or other utility service
for the Property or any part thereof; (iii) addition or removal of any
fill required in order to alter the elevation of the Property, or any
part thereof; and (iv) any grading, piling, excavation, bulkhead or
foundation work required for the Property. Buyer further acknowledges
and agrees that none of Seller's representatives and Seller's
affiliates has made any covenants, representations, warranties, or
undertakings, of any nature whatsoever, concerning or regarding the
availability, quantity or quality of water, gas, sewer, telephone or
electrical services available to or at the Property. Buyer acknowledges
and agrees that it is the responsibility of Buyer to deal directly with
any and all utility companies in order to procure all utility services.
Buyer further
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acknowledges that the costs of extending utilities to the Property may
exceed the utility company's free extension allowance, if any, and that
Buyer shall be solely responsible for all such costs. The parties
acknowledge that Buyer has further improvement obligations relative to
the Property, as such obligations are set forth in the Covenants
Agreement.
4.12.4 Facility Charges, School Facilities Fees and Proposed
Impact Fees. Buyer acknowledges (i) that FFLP and the City have entered
into a Development Agreement which during its term sets the amount of
facilities fees and other exactions which may be charged by the City
for the issuance of building permits for the Property; (ii) that the
City has adopted an ordinance and recorded an agreement requiring
property owners to pay a facilities fee as a condition precedent to
receiving a building permit, and that said ordinance and agreement
applies to the Property; (iii) that an application fee may be required
by the Architectural Review Committees described in Section 4.11; (iv)
that a fire service fee and participation in the cost of a reclaimed
water system program may be imposed upon Buyer and the Property by the
City; (v) that the Belmont School District and the Sequoia Union High
School District have adopted a requirement that the property owners
within said districts pay a school facilities fee as a condition
precedent to receiving a building permit (the "School Facilities Fees")
and that said requirement applies to the Property; (vi) that the
Sequoia Union High School District has formed a landscaping and
lighting maintenance assessment district, and that such assessment
district includes the Property; and (vii) that a multi-jurisdictional
traffic assessment district for improvements to Highway 101 and other
area-wide traffic improvements has been proposed and is being
considered by the City and other nearby cities (including, without
limitation, the City of Belmont and the City of San Carlos), that such
assessment district would include the Property and that in Section 12
of the Development Agreement, FFLP has waived objection, subject to the
limitations in Section 12 of the Development Agreement, on behalf of
itself, its successors and assigns, including Buyer, to the formation
thereof. Buyer acknowledges and agrees that Buyer, and neither Seller
nor FFLP, shall be solely responsible for the payment of the City's
facilities fee and the School Facilities Fees and for all other
charges, taxes, fees or costs, of any nature whatsoever, which are
imposed or incurred after Closing and which are related (whether
directly or indirectly) to the development of the Property, it being
specifically agreed that neither Seller nor FFLP has and shall not have
any responsibility or liability of any nature whatsoever to pay, or
contribute to the payment of, any of the fees, costs, taxes or charges
contemplated in this Agreement and imposed or incurred from and after
the Closing. Buyer acknowledges that pursuant to the Development
Agreement, Seller or FFLP may be required to prepay certain facilities
fees to the City which could be credited against facilities fees and
exactions Buyer would otherwise be required to pay. If such
circumstance occurs, Buyer shall, simultaneously with Buyer's payment
of facilities fees and other exactions to the City, reimburse Seller
the full amount of any such credit Buyer receives. The provisions of
this Section 4.12.4 are solely for the benefit of Seller, Buyer and
FFLP and not for the benefit of any other person or entity (including,
without limitation, the Belmont School District and the Sequoia Union
High School District), and no party other than FFLP and Seller (and
Seller's successors and assigns) shall be entitled to rely on the
provisions of this section or receive any benefit therefrom or enforce
against Buyer any of the provisions of this section.
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4.12.5 Surplus Earth Material. Buyer acknowledges that FFLP
has granted RSP, its successors and assigns an exclusive and
irrevocable option to acquire surplus earth material generated from the
development of the Property and that FFLP and RSP executed and recorded
a Memorandum thereof. The terms, provisions, and conditions of the
option, as set forth in Section 11.8 of that certain Agreement of
Purchase and Sale by and between RSP and FFLP predecessor in interest
("Terms") and the Memorandum of Option are set forth as Exhibit H
hereto. Buyer agrees that it is bound, as to the Property, as successor
in interest to FFLP, to the Terms and the Memorandum of Option, and
undertakes to comply with each and every term, provision, and condition
thereof imposed upon FFLP thereby as it applies to the Property.
4.12.6 San Carlos Airport. Buyer acknowledges that (i) the San
Carlos Airport and its flight path are in close proximity to the
Property, and (ii) that the San Mateo County Airport Land Use
Commission has been presented with and is considering an amendment to
the San Mateo County Airport Land Use Plan which would, in part,
require local land owners within the Redwood Shores Project to grant
avigation easements to the County. Buyer acknowledges that such
proximity to the San Carlos Airport, and any proposed amendments to the
San Mateo County Airport Land Use Plan may have an impact or effect on
the Property or Buyer's use of the Property, including, without
limitation, (a) the production of noise, odors, pollution, traffic,
glare and/or other impacts, and (b) requiring that development of the
Property be conditioned on the granting of an avigation easement(s)
and/or other restrictions (collectively, the "Airport Matters"). Buyer
expressly acknowledges and agrees that Seller shall have no
responsibility for any costs, expenses, liabilities or obligations of
any kind or nature whatsoever arising out of or in any way related to
the Airport Matters.
4.12.7 Density; Height of Construction. Buyer acknowledges
that matters of density and height of buildings constructed on the
Property are governed by the terms of the Development Agreement and of
that certain Covenants Agreement by and between RSP and FFLP dated
February 14, 1995, and recorded February 15, 1995, as Instrument No.
95015506, Official Records, San Mateo County, California, as the same
has been amended, and by other factors such as available sewer
capacity. Buyer covenants and agrees to the following restrictions with
respect to the improvements to be constructed on the Property:
Zone 2 Zone 4
Maximum Square Footage of GBFA 200,000 140,000
Minimum Number of Stories per Building 4 4
Maximum Number of Stories per Building 8 8
Maximum Height of Permitted Structures 130 Ft. 130 Ft.
subject to the following conditions:
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(a) The Maximum Square Footage of GBFA
assumes that Buyer secures adequate sewer capacity to permit such
construction. Seller has advised Buyer that FFLP has received an
assignment from RSP of allocation of sewage treatment capacity with the
South Bayside System Authority sufficient to permit FFLP to construct
up to 885,000 square feet of GBFA in the Park, which has been confirmed
in that certain Second Amendment to Development Agreement dated August
31, 1998, by and between the City and FFLP (the "Second Amendment").
Furthermore, the City, pursuant to the Development Agreement, as
amended by the Second Amendment, has agreed to sell to FFLP additional
sanitary sewage treatment capacity up to 25,000 gallons per day ("gpd")
at $2.50 per gpd, as needed to permit construction of the full
1,000,000 square feet of GBFA authorized for office space in the Park
by the Development Agreement. At Closing, Seller shall cause FFLP to
assign to Buyer, by an Assignment in the form of Exhibit I hereto,
sufficient sewage treatment capacity from its rights received from RSP
to construct an aggregate 340,000 square feet of GBFA in Zones 2 and 4.
Buyer acknowledges that the foregoing assignments are the entirety of
what Seller can and will offer to Buyer for sewage treatment capacity
and Seller has no further or greater obligation to Buyer. If additional
sewage treatment capacity is still required, Buyer must purchase,
lease, or otherwise acquire such capacity on the open market at Buyer's
sole expense.
(b) The Maximum Height of Permitted
Structures is calculated as the height to the highest point of the
building and all superstructures above mean sea level.
4.12.8 No Construction Area. Buyer, on behalf of itself, its
successors and assigns, covenants that it shall not construct, nor seek
or accept any authorization to construct, any structure or portion
thereof (excluding landscaping, surface roadways and parking, awnings
or other protrusions over entrance doorways, covered walkways, patio
facilities, related outbuildings not to exceed fifteen (15) feet in
height, and related installations such as light standards) in those
portions of Zone 2 described in Exhibit N attached hereto and
incorporated herein. Buyer shall execute and record at Closing such
documents as Seller shall reasonably request to memorialize this
obligation of record.
4.13. Enforcement Costs. Should either Party institute any action or
proceeding to enforce any provision of this Agreement or for damages by reason
of an alleged breach of any provision hereof (including, without limitation, an
arbitration proceeding under Section 4.10), the prevailing Party shall be
entitled to receive all costs and expenses (including reasonable attorneys'
fees) incurred by such prevailing Party in connection with such action or
proceeding.
A Party entitled to recover costs and expenses under this Section shall
also be entitled to recover all costs and expenses (including reasonable
attorneys' fees) incurred in the enforcement of any judgment or settlement
obtained in such action or proceeding and provision (and in any such judgment
provision shall be made for the recovery of such postjudgment costs and
expenses).
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4.14 Notices. Except in the case (if any) where this Agreement
expressly provides for an alternate form of communication, any notice, consent,
demand or other communication to be delivered to a Party hereunder shall be
deemed delivered and received when made in writing and transmitted to the
applicable Party either by receipted courier service, or by the United States
Postal Service, first class registered or certified mail, postage prepaid,
return receipt requested, or by electronic facsimile transmission ("Fax"), at
the address or addresses indicated for such Party below (and/or to such other
address as such Party may from time to time by written notice designate to the
other):
If to Seller: Electronic Arts Redwood, Inc.
207 Redwood Shores Parkway
Redwood City, California 94065
Fax No. (650) 628-1384
Attn: James F. Healey, President
and a copy to: Electronic Arts, Inc.
207 Redwood Shores Parkway
Redwood City, California 94065
Fax No. (650) 628-1422
Attn: Ruth Kennedy, General Counsel
and a copy to: Nossaman, Guthner, Knox & Elliott, LLP
50 California Street, 34th Floor
San Francisco, CA 94111
Fax No. (415) 398-2438
Attention: David L. Kimport, Esq.
If to Buyer: Spieker Properties, L.P.
1255 Treat Boulevard Ste 150
Walnut Creek, Ca. 94596
Fax No.: 925-935-5619
Attention: Peter H. Schnugg
with a copy to: Spieker Properties, L.P.
2180 Sand Hill Road
Menlo Park, Ca. 94526
Fax No.:
Attention: Sara Steppe, General Counsel
and shall be deemed delivered and received only upon actual delivery or
attempted delivery (as evidenced by receipt) or upon completion of facsimile
transmission (as evidenced by telecopier confirmation sheet) provided that such
facsimile transmission is confirmed within three Business Days by duplicate
notice delivered as otherwise provided herein.
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4.15 Binding Effect. Except as otherwise expressly provided herein,
this Agreement shall bind and inure to the benefit of the Parties and their
respective successors and assigns.
4.16 Entire Agreement; Modification. This Agreement constitutes the
entire agreement between the Parties pertaining to the subject matter hereof and
supersedes all prior agreements, understandings and representations of the
Parties with respect to the subject matter hereof (including, without
limitation, any letter of intent or other such written proposal). This Agreement
may not be modified, amended, supplemented or otherwise changed, except by a
writing executed by both Parties.
4.17 Captions. Article and section headings used herein are for
convenience of reference only and shall not affect the construction of any
provision of this Agreement.
4.18 Interpretation. Each Party acknowledges that it and its legal
counsel have participated substantially in the drafting of this Agreement and
agree that, accordingly, in the interpretation and construction of this
Agreement, no ambiguity, real or apparent, in any provision hereof shall be
construed against either Party by reason of the role of such Party or its
counsel in the drafting of such provision.
4.19 Mutual Cooperation; Further Assurances. The Parties shall
cooperate with each other as reasonably necessary to effect the provisions of
this Agreement, shall use reasonable and good faith efforts to satisfy
conditions to Closing and, at and after Closing, shall each execute and deliver
such additional instruments or other documents as the other may reasonably
request to accomplish the purposes and intent of this Agreement; provided,
however, that nothing in this Section shall be deemed to enlarge the obligations
of the Parties hereunder or to require either Party to incur any material
expense or liability not otherwise required of it hereunder.
4.20 Exhibits. Each of the following Exhibits hereto:
Exhibit Title
------- -----
A Description of Property
B Form of Deed
C Form of Transferor's Certification of
Non-Foreign Status
D Form of Seller's Closing Certificate
E Exceptions to Seller's Warranties and
Representations
F Schedule of Property Records
G Form of Covenants Agreement
H Terms of Surplus Earth Materials Option
I Form of Assignment of Sewage Treatment
Capacity
J Form of Assignment and Assumption of
Development Agreement and Permits
K Form of Note
L Form of Deed of Trust
M Form of Guaranty
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N No Build Zones
O Right of Way Easement
P Exercise Notice
is hereby incorporated herein.
4.21 Counterparts. This Agreement, and any amendment hereto, may be
executed in any number of counterparts and by each Party on separate
counterparts, each of which when so executed and delivered shall be deemed an
original and all of which taken together shall constitute but one and the same
instrument.
4.22 Governing Law. This Agreement shall be deemed to be an agreement
made under the laws of California and for all purposes shall be governed by and
construed in accordance with such laws.
4.23 Recording. Neither this Agreement nor any notice or memorandum
hereof shall be recorded in any public record. A violation of this prohibition
shall constitute a material breach of this Agreement.
4.24 TIME OF THE ESSENCE. TIME IS OF THE ESSENCE OF THIS AGREEMENT, AND
OF EACH COVENANT, AGREEMENT AND CONDITION REPRESENTED HEREOF WHICH PROVIDES FOR
NOTICE TO BE GIVEN OR ACTION TAKEN ON A SPECIFIC DATE OR WITHIN A SPECIFIED
PERIOD OF TIME.
4.25 Confidentiality. Buyer and its representatives shall hold in
strictest confidence the terms of this transaction, the contents of all items
delivered to Buyer pursuant to Section 2.4, and all data and information
obtained with respect to the Property or Seller or its business, whether
obtained before or after the Effective Date, and until after the Option Date,
the existence of this Agreement, and shall not disclose the same to others;
provided, however, that it is understood and agreed that Buyer may disclose such
data and information to employees, consultants, accountants and attorneys of
Buyer provided that such persons agree in writing to treat such data and
information confidentially and not to disclose any such information or data to
others. In the event of a breach or threatened breach by Buyer or its agent or
representatives of this Section 4.25, Seller shall be entitled to an injunction
restraining Buyer from disclosing, in whole or in part, such confidential
information. Nothing herein shall be construed as prohibiting Seller from
pursuing any other available remedy at law or in equity for such breach or
threatened breach. Prior to Closing, Buyer and Seller shall confer and agree on
a press release to be issued jointly by Buyer and Seller disclosing the
transaction and the appropriate time for making such release. Buyer shall not
issue any press releases with respect to the transaction contemplated in this
Agreement without Seller's prior written approval. Notwithstanding the first
sentence in this Section, Buyer shall be permitted to make any disclosures
necessary to comply with SEC rules and regulations, or any other applicable laws
and regulations governing Buyer. Subject to the foregoing, any press release
regarding this transaction shall be subject to the prior written approval of
both parties. The provisions of this Section 4.25 shall survive Closing.
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4.26 Buyer's Financing Covenants; Remedies. Until the Note has been
paid in full, Buyer covenants and agrees with the Seller as follows:
4.26.1 Permits and Legal Requirements. Buyer will comply with
and keep in effect all permits and approvals obtained from any governmental
bodies that relate to Buyer's ownership and operation of the Property and the
development and construction on the Property of one or more buildings
(collectively, the "Buildings"), together with parking, landscaping and common
areas and all infrastructure required of Buyer in connection with the
development and construction of the Buildings (collectively, the
"Improvements"). Buyer will comply with all existing and future laws,
regulations, orders, and requirements of all governmental, judicial, or legal
authorities having jurisdiction over the Property or the Improvements, and with
all recorded restrictions affecting the Property.
4.26.2 Notices of Change. Buyer shall give Seller written
notice of any material adverse change, fact, or circumstance relating to the
business of Buyer or of the interest of Seller under this Agreement, which may
materially affect Buyer's ability to make payments pursuant to the Note, within
five (5) days of such change, fact, or circumstance.
4.26.3 Insurance. Buyer shall purchase and maintain all
insurance required by its construction lender and its permanent lender. Buyer
shall at its own cost, and at all times, provide, maintain, and keep in full
force and effect:
(a) Policies of insurance insuring the Property and
the Improvements against loss or damage by risks embraced in coverage
of the type now known as the broad form of all-risk, extended coverage,
including, without limitation, coverage against loss by fire,
vandalism, and malicious mischief, in an amount not less than the
lesser of (i) the Note; or (ii) the full replacement cost of the
Improvements (exclusive of the cost of excavations, foundations, and
footings below the lowest basement floor, but including any
Improvements hereafter made); subject to reasonable deductibles from
the loss payable for any casualty.
(b) Comprehensive public liability insurance,
including coverage for completed operations for two years after the
construction of such Improvements has been completed, on an "occurrence
basis" against claims for "personal injury," including, without
limitation, bodily injury, death or property damage, occurring on, in
or about the Property and the adjoining streets and sidewalks, or
arising from or connected with the use, conduct or operation of Buyer's
business or interest, in an amount of not less than ONE MILLION DOLLARS
($1,000,000) per occurrence and THREE MILLION DOLLARS ($3,000,000) per
annum, in the aggregate, with respect to personal injury or death of
one or more persons and with respect to damage to property.
(c) Such other insurance against such risks or
hazards, or other risks and hazards, and in such amounts, as may from
time to time be reasonably required by Seller.
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All policies of insurance shall be issued by companies
licensed to do business in California with a financial rating of at least A+
rating in the most recent edition of Best's Insurance Reports, shall contain the
Standard Non-Contributory mortgagee clause and the Standard Lender's Loss
Payable Clause, or their equivalents, in favor of Seller, and shall provide that
the proceeds thereof shall be payable to Seller to the extent of its interest.
In the event of the foreclosure of the Deed of Trust or other transfer of title
to the Property in extinguishment, in whole or in part, of the indebtedness
secured hereby, all right, title and interest of Buyer in and to any policy then
in force shall pass to the purchaser or grantee. Seller shall be furnished with
a certificate of insurance of each policy required to be provided by Buyer
hereunder, which policy shall provide that it shall not be modified or canceled
without thirty (30) days' written notice to Seller.
4.26.4 Financial Covenants and Future Financial Condition.
(a) Buyer shall not, as disclosed in its financial
statements previously presented to and approved by Seller, suffer
material adverse change, and shall not suffer any lien, judgment, writs
or attachment or other obligation which may materially affect Buyer's
ability to make payments pursuant to the Note without immediate
disclosure thereof to Seller in writing.
(b) Buyer shall deliver, or caused to be delivered,
to Seller audited year end financial statements, prepared by a
certified public accounting firm, of Buyer within 90 days of each
fiscal year end.
4.26.5 Environmental Compliance. Except as specifically
disclosed to and permitted by Seller, Buyer shall not use, generate,
manufacture, produce, store, release, discharge, or dispose of any Hazardous
Substance on, under or about the Property (including leasehold interests) or
transport to or from the Property any Hazardous Substance, in each case in
violation of applicable Requirements of Law.
4.26.6 Default and Remedies. In the event:
(a) Buyer fails to make any payment of principal or
interest to Seller under the Note within three (3) Business
Days after receipt of written notice from Seller; or
(b) Buyer fails to comply with any covenant or
obligation contained in this Agreement, the Note, the Deed of
Trust, or the Guaranty, and does not cure that failure within
thirty (30) days, unless such failure is capable of being
cured but is not reasonably capable of being cured within such
thirty (30) day period and Buyer commences action to cure such
failure within such thirty (30) day period and diligently and
continuously prosecutes such action to completion; or
(c) (i) A petition for relief under any present or
future state or federal law regarding bankruptcy,
reorganization or other relief to debtors is filed by or
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against Buyer (and, if filed against Buyer, is not discharged
within thirty (30) days of the date of such filing); (ii) a
receiver, liquidator, sequestrator, trustee, conservator or
other similar official of any property of Buyer, is appointed;
(iii) Buyer makes a general assignment for the benefit of
creditors, becomes insolvent, or unable to pay its debts
generally as they mature; (iv) an attachment or execution is
levied against any substantial portion of the Property; or (v)
a liquidation or dissolution of Buyer or a filing by or
against Buyer of a petition for liquidation or dissolution of
Buyer; or
(d) An event of default occurs under any lien or deed
of trust having priority over the Deed of Trust,
then Seller may exercise any one or more of the following rights or remedies:
(i) Any right or remedy it has under the Note, the Deed of
Trust, or the Guaranty; or
(ii) Declare the principal of and interest on the obligations
owing under the Note immediately due and payable; or
(iii) Pursue any other action available to Seller at law or in
equity.
All of Seller's rights and remedies will be cumulative. The
exercise of any rights of Seller hereunder shall not in any way constitute a
cure or waiver of a default hereunder or elsewhere, or invalidate any act done
pursuant to any notice of default, or prejudice Seller in the exercise of any of
its other rights hereunder or elsewhere unless, in the exercise of said rights,
Seller realizes all amounts owed to it hereunder. Notwithstanding the foregoing,
whether or not Seller elects to employ any or all of the remedies available to
it upon a default, Seller shall not be liable for the construction or failure to
construct or complete or protect the Improvements or for payment of any expense
incurred in connection with the exercise of any remedy available to Seller or
for the construction or completion of the Improvements or for the performance of
any other obligation of Buyer.
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<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed and delivered by their respective representatives, thereunto duly
authorized, as of the date first above written.
SELLER:
ELECTRONIC ARTS REDWOOD, INC.
a Delaware corporation
By: /s/ E. Stanton McKee
-------------------------------------
Name: E. Stanton McKee
-----------------------------------
Title: Exec Vice President
----------------------------------
BUYER:
Spieker Properties, L.P.,
a California limited Partnership
By: Spieker Properties, Inc.,
a Maryland corporation
By: /s/ Peter H. Schnugg
-------------------------------------
Name: Peter H. Schnugg
-----------------------------------
Title: Senior Vice President
----------------------------------
The undersigned agrees to serve as Escrow
Agent under the foregoing Agreement:
By:
-------------------------------------
Susan Melton, Escrow Officer
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<PAGE>
EXHIBIT A
DESCRIPTION OF PROPERTY
PARCEL I:
Parcel 1, as shown on Parcel Map No. 98-6 filed September 2, 1998, Book 70 of
Parcel Maps, pages 78 and 79, San Mateo County Records.
PARCEL II:
Parcel 2, as shown on Parcel Map No. 98-6 filed September 2, 1998, Book 70 of
Parcel Maps, pages 78 and 79, San Mateo County Records.
PARCEL III:
Non-exclusive easements appurtenant to Parcels I and II above for utilities as
defined in that certain Easement and Covenants Agreement dated March 27, 1997,
by and between Shores Business Center Association and Flatirons Funding, Limited
Partnership, recorded March 27, 1997, Document No. 97034607, San Mateo County
Records, as amended by First Amendment to Easement and Covenants Agreement dated
August 31, 1998, recorded September 2, 1998, Document No. 98-141940, San Mateo
County Records ("First Amendment") over under and across that area described as
"Utility Easement No. l -- Parcel A" in Exhibit D of the First Amendment.
PARCEL IV:
Non-exclusive easements appurtenant to Parcel I above for ingress/egress as
defined in that certain Easement and Covenants Agreement dated March 27, 1997,
by and between Shores Business Center Association and Flatirons Funding, Limited
Partnership, recorded March 27, 1997, Document No. 97034607, San Mateo County
Records, as amended by First Amendment to Easement and Covenants Agreement dated
August 31, 1998, recorded September 2, 1998, Document No. 98-141940, San Mateo
County Records ("First Amendment") over under and across that area described as
"Ingress/Egress Easement No. 2 -- Parcel B" in Exhibit D of the First Amendment.
PARCEL V:
Non-exclusive easements appurtenant to Parcels I and II above for utilities as
defined in that certain Easement and Covenants Agreement dated March 27, 1997,
by and between Shores Business Center Association and Flatirons Funding, Limited
Partnership, recorded March 27, 1997, Document No. 97034607, San Mateo County
Records, as amended by First Amendment to
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Easement and Covenants Agreement dated August 31, 1998, recorded September 2,
1998, Document No. 98-141940, San Mateo County Records ("First Amendment") over
under and across that area described as "Utility Easement No. 9 -- Parcel B" in
Exhibit D of the First Amendment.
PARCEL VI:
Easements appurtenant to Parcels I and II above for the purposes set forth in
Sections 11.4(a), 11.4(c), 11.5, 11.6 and 11.7 in the Declaration of Covenants,
Conditions, Easements and Restrictions Electronic Arts Business Park recorded
September 18, 1998, Document No. 98-150182, San Mateo County Records.
A.P. No.: 095-221-080 JPN 127 086 000 01 A
095-221-090 127 086 000 02 A
095-221-110
095-233-130
095-233-140
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EXHIBIT B
RECORDING REQUESTED BY AND x
WHEN RECORDED MAIL TO: x
x
x
x
x
- --------------------------------------------------------------------------------
Above Space for Recorder's Use Only
FORM OF
GRANT DEED
The undersigned Grantor declares that Documentary Transfer Tax is not
part of the public records and is being paid in accordance with a separate
statement:
FOR VALUE RECEIVED, ELECTRONIC ARTS REDWOOD, INC., a Delaware
corporation ("Grantor"), grants to __________________________________, a
_______________________ ("Grantee"), all that certain real property ("Property")
located in the City of Redwood City, County of San Mateo, State of California,
as more particularly described on Exhibit A attached hereto.
RESERVING THEREFROM easements as set forth in Sections 11.4, 11.5, 11.6
and 11.7 in the Declaration of Covenants, Conditions, Easements and Restrictions
Electronic Arts Business Park recorded September 18, 1998, Document No.
98-150182, San Mateo County Records.
AND RESERVING THEREFROM the non-exclusive right to use and enjoy and to
grant and to convey to others on a non-exclusive basis the easements described
as Parcels III, IV, and V in Exhibit A hereof.
This Grant Deed is made by Grantor and accepted by Grantee subject to:
(i) non-delinquent real property taxes and assessments; (ii) all covenants,
conditions, restrictions and easements and all rights of way, encumbrances, and
all other exceptions to title of record; (iii) all matters ascertainable by a
reasonable inspection or survey of the Property; and (iv) all matters affecting
the condition of title to the Property suffered or created by or with the
written consent of Grantee.
[Continued on Next Page]
MAIL TAX STATEMENTS:
- --------------------
- --------------------
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<PAGE>
IN WITNESS WHEREOF, Grantor has executed this Grant Deed this ___ day
of __________, 1999.
GRANTOR:
ELECTRONIC ARTS REDWOOD, INC., a
Delaware corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
---------------------------------
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<PAGE>
SEPARATE STATEMENT OF
DOCUMENTARY TRANSFER TAX
County Recorder
San Mateo County
Dear Sir/Madam:
In accordance with Revenue and Taxation Code Section 11932, it is
requested that this Statement of Documentary Transfer Tax due not be recorded
with the attached deed, but be affixed to the deed after recordation and before
return as directed on the deed.
The deed names the undersigned, as Grantor, and ______________________
__________________________, a __________________________, as Grantee. The real
property being transferred is located in the City of Redwood City, County of San
Mateo, State of California, as more particularly described in the attached deed.
The amount of the documentary transfer tax due on the attached deed is
$______________, computed on the basis of:
(__) computed on the consideration or value of property conveyed; or
(__) computed on the consideration or value less liens or encumbrances
remaining at the time of sale.
Very truly yours,
ELECTRONIC ARTS REDWOOD, INC., a
Delaware corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
---------------------------------
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<PAGE>
EXHIBIT C
FORM OF
TRANSFEROR'S CERTIFICATION OF NON-FOREIGN STATUS
To inform Name, entity, jurisdiction of Buyer or nominees
("Transferee"), that withholding of tax under Section 1445 of the Internal
Revenue Code of 1986, as amended (the "Code"), will not be required upon the
transfer of certain real property to Transferee by ELECTRONIC ARTS REDWOOD,
INC., a Delaware corporation, the undersigned hereby certifies the following on
behalf of Transferor:
1. Transferor is not a foreign corporation, foreign partnership,
foreign trust, or foreign estate (as those terms are defined in the Code and the
Income Tax Regulations promulgated thereunder);
2. Transferor's U.S. employer identification number is 94-2838567; and
3. Transferor's office address is 207 Redwood Shores Parkway, Redwood
City, California 94065.
Transferor understands that this Certification may be disclosed to the
Internal Revenue Service by Transferee and that any false statement contained
herein could be punished by fine, imprisonment, or both.
Under penalty of perjury the undersigned declares that he or she has
examined this Certification and to the best of his/her knowledge and belief it
is true, correct and complete, and the undersigned further declares that he/she
has authority to sign this document on behalf of Transferor.
Dated: ___________________ ELECTRONIC ARTS REDWOOD, INC.,
a Delaware corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
---------------------------------
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<PAGE>
EXHIBIT D
FORM OF
SELLER'S CLOSING CERTIFICATE
ELECTRONIC ARTS REDWOOD, INC. ("Seller"), a Delaware corporation, and
_________________________ ("Buyer"), a __________________________, have entered
into that certain Agreement of Purchase and Sale and Escrow Instructions dated
Insert date of Agreement (the "Purchase Agreement"). Seller hereby certifies to
Buyer that, as of the date of this certificate, the representations and
warranties contained in Section 3.2.1 of the Purchase Agreement, as qualified by
references to Seller's Knowledge, are true in all material respects, except as
otherwise expressly disclosed in the schedule of exceptions attached to this
Certificate.
Dated: ___________________ ELECTRONIC ARTS REDWOOD, INC.,
a Delaware corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
---------------------------------
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<PAGE>
EXHIBIT E
EXCEPTIONS TO SELLER'S REPRESENTATIONS AND WARRANTIES
Nothing in this schedule constitutes an admission of any liability or
obligation of Buyer to any third party, nor an admission to any third party of
Buyer's interests. Documents referenced herein form an integral part of this
disclosure and are incorporated herein by reference for all purposes set forth
herein. Matters reflected in this schedule are not necessarily limited to
matters required by the Agreement to be reflected herein; such additional
matters are included for informational purposes only. Capitalized terms used
herein and not otherwise defined herein shall have the meanings ascribed to them
in the Agreement.
Section 3.2.1(vi)
1. Equipment used for staging materials, storage of hazardous
substances and other construction-related functions have been
operated on the Property and have traversed the property, in a
manner consistent with accepted construction practices.
2. The possible presence of Hazardous Substances in the soil of
the Property, as set forth in the Preliminary Geotechnical
Report issued by Treadwell and Rollo, dated as of February 14,
1995, and the Phase I and Phase II reports issued by Applied
Geosciences.
Section 3.2.1(viii)
1. Prior to Closing, Seller may engage in hydro-seeding of the
Property.
2. Seller may install roads, sidewalks and landscaping, in
accordance with the Landscaping Drawings prepared by the SWA
Group dated February 12, 1997 and the Civil Drawings prepared
by Bohley, Malley Associates dated as of February 12, 1997.
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<PAGE>
EXHIBIT F
SCHEDULE OF PROPERTY RECORDS
1. ALTA survey of the Real Property, prepared by Bohley/Maley Associates,
as job number 97023 and certified as of March 27, 1998, by Lisa M.
Maley, L.S.
2. Applications dated January 6, 1996, for (a) a Vesting Tentative Map and
(b) a Planned Development Permit with schedules and exhibits.
3. Development Agreement dated as of November 7, 1996, by and between
Flatirons Funding, Limited Partnership, a Delaware limited partnership,
and the City of Redwood City and recorded November 8, 1996, as
Instrument No. 96-138988, Official Records, San Mateo County,
California, as amended by First Amendment to Development Agreement
dated April 15, 1998 and recorded April 15, 1998, as Instrument No.
98-054809, Official Records, San Mateo County, California, by First
Amendment to Development Agreement dated April 6, 1998, and recorded
August 25, 1998, as Instrument No. 98-135753 (recorded to correct
typographical errors in document recorded April 15, 1998), and by
Second Amendment dated August 31, 1998 and recorded September 2, 1998,
as Instrument No. 98-141937, Official Records, San Mateo County,
California.
4. Phase I and Phase II Environmental Assessment Reports prepared by
Applied Geosciences, Inc., dated February 7, 1995, and February 13,
1995, respectively.
5. Preliminary Geotechnical Investigation prepared by Treadwell & Rollo,
Inc., dated February 14, 1995.
6. All real estate tax assessments and bills affecting the Property
(including, without limitation, special assessments) for the current
tax year.
7. Covenants, Conditions, Easements and Restrictions of the Electronic
Arts Business Park dated August 31, 1998 and recorded September 18,
1998, as Instrument No. 98-150182, Official Records, San Mateo County,
California.
8. Covenants Agreement by and between Redwood Shores Properties and
Flatirons Funding, Limited Partnership, dated February 14, 1995, and
recorded February 15, 1995, as Instrument No. 95015506, Official
Records, San Mateo County, California, as amended by an Amendment to
Covenants Agreement, dated March 27, 1997.
9. Assignment of Sewage Treatment Capacity dated February 14, 1995, by and
between Redwood Shores Properties and Flatirons Funding, Limited
Partnership.
10. Shores Center Development Handbook.
11. Documents concerning Entitlements.
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EXHIBIT G
RECORDING REQUESTED BY, AND )
WHEN RECORDED MAIL TO: )
)
Nossaman, Guthner, Knox & Elliott, LLP )
50 California Street, 34th Floor )
San Francisco, California 94111 )
Attention: David L. Kimport, Esq. )
)
- --------------------------------------------------------------------------------
FORM OF
ASSUMPTION AND COVENANTS AGREEMENT
THIS ASSUMPTION AND COVENANTS AGREEMENT ("Covenants Agreement") is made
and entered into as of this ___ day of __________________, 1999, by and between
FLATIRONS FUNDING, LIMITED PARTNERSHIP, a Delaware limited partnership,
("FFLP"), and __________________________, a _______________________________
("Buyer") (FFLP and Buyer are the "Parties" to this Covenants Agreement).
ELECTRONIC ARTS REDWOOD, INC., a Delaware corporation ("EAR") is a party with
respect to Sections 1.3, 6, and 9 only.
RECITALS
A. Concurrent with the recording of this Covenants Agreement, FFLP has
sold and conveyed to EAR and EAR has sold and conveyed to Buyer, and Buyer has
purchased from EAR, approximately 13.85 gross acres of vacant land comprised of
two (2) legal lots in the City of Redwood City, County of San Mateo, California,
as more particularly described in Exhibit A attached hereto (the "Conveyed
Property").
B. FFLP is the owner of four (4) legal lots in the City of Redwood
City, County of San Mateo, California, as more particularly described in Exhibit
B attached hereto (the "Retained Property"). (The term "Property" alone is used
occasionally to refer to either the Retained Property or the Conveyed Property
as the context may require and the term "Properties" is used occasionally to
refer to the Conveyed Property and the Retained Property collectively.)
C. FFLP acquired the Conveyed Property, the Retained Property and
certain other real property in the vicinity of the Conveyed Property
(collectively, the "Project") on February
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<PAGE>
15, 1995. The Project has common or related service needs, infrastructure
components (including landscaping, parks, utilities, sewer, drainage, road,
highway components), and building density limitations.
D. In connection with its acquisition of the Project, FFLP entered into
that certain Covenants Agreement dated February 14, 1995, by and between FFLP
and Redwood Shores Properties, and recorded February 15, 1995, as Instrument No.
95-015506, Official Records, San Mateo County, California, as amended by an
Amendment to Covenants Agreement dated March 27, 1997, and recorded March 27,
1997, as Instrument No. 97-034602, Official Records, San Mateo County,
California ("Redwood Shores Covenants Agreement").
E. As a material inducement and condition to EAR selling the Conveyed
Property to Buyer, and as an integral part of the negotiations between EAR and
Buyer as to the purchase price, terms and conditions of sale of the Conveyed
Property by EAR, Buyer has agreed to execute this Covenants Agreement (i) to
assume FFLP's duties and obligations with respect to the Conveyed Property under
the Redwood Shores Covenants Agreement; (ii) to create personal covenants of the
Parties and their Successors (as defined in Section 4 below) to and for the
exclusive benefit of each other and their Designated Assigns (as defined in
Section 4 below) and (iii) to also create covenants running with the land under
California Civil Code Section 1468 in favor of and benefiting the Properties.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by each of FFLP and Buyer, the
parties agree as follows:
1. Assumption of Redwood Shores Covenants Agreement.
1.1 Assignment. FFLP, for itself, its successors and assigns,
expressly and unconditionally assigns to Buyer, its successors and assigns, all
of its rights and benefits under the Redwood Shores Covenants Agreements with
respect to the Conveyed Property. FFLP expressly hereby (i) designates Buyer as
being entitled to enforce all provisions of the Redwood Shores Covenants
Agreement insofar as they affect the Conveyed Property in the same manner and to
the same extent as FFLP has heretofore been entitled; (ii) designates Buyer as
being entitled to participate in amendments to the Redwood Shores Covenants
Agreement insofar as they affect the Conveyed Property in the same manner and to
the same extent as FFLP has heretofore been entitled; and (iii) declares that
Buyer is FFLP's "Assign" as that term is used in Section 3 of the Redwood Shores
Covenants Agreement.
1.2 Assumption. Buyer, for itself, its successors and assigns,
expressly and unconditionally assumes all of the obligations and liabilities of
FFLP under the Redwood Shores Covenants Agreement with respect to the Conveyed
Property arising from and after the date hereof, and agrees to perform and
comply with all covenants of FFLP with respect to the Conveyed Property as set
forth in the Redwood Shores Covenants Agreement. Buyer covenants that Buyer
shall at all times fully comply with, and the development, construction and use
of the
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<PAGE>
Conveyed Property and Improvements shall at all times be in full compliance
with, the Redwood Shores Covenants Agreement.
1.3 Indemnification. Buyer shall indemnify and hold FFLP, its
successors and assigns, and including EAR, its successors and assigns, harmless
from any and all liability, cost, loss, damage, or expense, including attorney's
fees, arising out of Buyer's failure to observe and perform any of the
obligations, liabilities, and covenants hereby assumed. EAR shall indemnify and
hold Buyer, its successors and assigns, harmless from any and all liability,
cost, loss, damage, or expense, including attorney's fees, arising out of EAR's
or FFLP's failure to observe and perform any of the obligations, liabilities,
and covenants hereby retained.
2. Mutual Covenants. In connection with and as a material inducement
and condition to EAR's sale of the Conveyed Property to Buyer, FFLP and Buyer
make the following covenants. Each of these covenants shall constitute both (i)
the personal covenants of the covenantor and its Successors to and for the
exclusive benefit of the covenantee and its Designated Assigns (as defined in
Section 4 below), and (ii) covenants running with the land in favor of and
benefiting the Retained Property or the Conveyed Property, as the case may be.
2.1 Buyer's Covenant Not to Exceed Density. Buyer covenants to
FFLP that at all times during the term of this covenant (as such term is set
forth in Section 6 below) the Buildings on the Conveyed Property shall not
contain more than an aggregate three hundred forty thousand (340,000) square
feet of Gross Building Floor Area (as defined below) in Zones 2 and 4,
distributed among Zones 2 and 4 in accordance with that certain Development
Agreement dated November 7, 1996, by and between FFLP and the City of Redwood
City and recorded November 8, 1996, as Instrument No. 96-138988, as the same may
be amended from time to time (the "Development Agreement"); and that Buyer shall
not develop and construct more than an aggregate 340,000 square feet of Gross
Building Floor Area on Zones 2 and 4 on the Conveyed Property. The term "Gross
Building Floor Area" shall mean the sum total of all areas contained within the
exterior walls of all Buildings including, without limitation, stairways,
elevator shafts, other shafts, mechanical rooms, vents, and internal support
facilities, but excluding those portions of mechanical or utility structures and
storage areas located on the roof to the extent such structures are not
considered by the City as building floor area for purposes of determining
parking requirements, traffic generation, building density or other similar
development limitations.
2.2 FFLP's Covenant Not to Exceed Density. FFLP covenants to
Buyer that at all times during the term of this covenant (as such term is set
forth in Section 6 below) the Buildings on the Retained Property shall not
contain more than six hundred sixty thousand (660,000) square feet of Gross
Building Floor Area for office space nor more than 50,000 square feet of special
purpose accessory structures and that FFLP shall not develop and construct more
than 660,000 square feet of Gross Building Floor Area for office space nor more
than 50,000 square feet of special purpose accessory structures on the Retained
Property. Moreover, FFLP covenants to Buyer that it shall not commence
construction of more than 550,000 square feet of Gross Building Floor Area for
office space nor of more than 50,000 square feet of special
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<PAGE>
purpose accessory structures (including all construction commenced from and
after November 8, 1996) on the Retained Property prior to November 8, 2000.
2.3 Compliance with Declaration. Each of Buyer and FFLP
covenants to the other that it shall at all times fully comply with, and that
the development, construction and use of the Conveyed Property or the Retained
Property, as the case may be, and the Improvements shall at all times be in full
compliance with, the Declaration of Covenants, Conditions, Easements and
Restrictions of the Electronic Arts Business Park dated August 31, 1998, and
recorded in the Official Records of San Mateo County on September 18, 1998, as
Document No. 98-150182 ("Park Declaration").
2.4 Buyer's Covenant Not to Build. Buyer shall not construct
any structure or portion thereof within that portion of the Conveyed Property
described in Exhibit C attached hereto and incorporated herein by reference;
except for landscaping, surface roadways and parking, awnings or other
protrusions over entrance doorways, covered walkways, outdoor patio facilities,
related outbuildings not exceeding fifteen (15) feet in height above the grade
of the Property, as of the date hereof, and related installations such as light
standards.
3. Benefit and Burden of Covenants Generally; Equitable Enforcement.
Buyer and FFLP acknowledge and agree that the assumptions set forth in Section 1
above and the covenants set forth in Section 2 above relate to the use, repair,
maintenance, improvement and development of, or payment of taxes and assessments
on, the Project or some part thereof, and that these covenants are intended to
both bind Buyer and Buyer's Successors (as defined in Section 4 hereof) for the
personal benefit of FFLP and FFLP's Designated Assigns (as defined in Section 4
hereof), or to bind FFLP and FFLP's Successors for the personal benefit of Buyer
and Buyer's Designated Assigns, as the case may be, as more fully set forth in
Section 4 below, and to burden the Conveyed Property for the benefit of the
Retained Property, or to burden the Retained Property for the benefit of the
Conveyed Property, as the case may be, as more fully set forth in Section 5
below. Each of Buyer and FFLP acknowledges and agrees that the assumptions set
forth in Section 1 and the covenants set forth in Section 2 above and all other
terms and provisions of this Covenants Agreement have been negotiated between
Buyer and FFLP in an arm's length commercial transaction between sophisticated,
knowledgeable parties, each possessing substantial experience in real estate
transactions and represented by independent counsel; that this Covenants
Agreement has been an integral part of negotiations concerning the purchase
price, terms and conditions of the sale of the Conveyed Property to Buyer; that
the Parties' execution, delivery and recording of this Covenants Agreement
constitutes a material part of their agreement to purchase and sell the Conveyed
Property and that the Parties would not close the sale of the Conveyed Property
to Buyer without the execution, delivery and recording of this Covenants
Agreement; that each Party has a legitimate personal business interest in the
other's development and construction of the Improvements on their respective
Property in conjunction with the continued development and sale of the balance
of the Project; that the purchase price paid by Buyer for the Conveyed Property
takes into account the assumption set forth in Section 1 and the covenants set
forth in Section 2 above (including, without limitation, the density limitations
set forth in Sections 2.1 and 2.2 and the covenant not to build set forth in
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<PAGE>
Section 2.4); and that it is and shall be equitable for the Parties and their
Designated Assigns or any beneficial owner of the Property, in its sole and
absolute discretion and without any obligation to do so, to enforce any breach
of these covenants by a Party or its Successors in accordance with the
provisions of Section 8.3 below, notwithstanding that the use of the respective
Property unrestricted by said covenants might be more profitable to its owner or
that enforcement of these covenants might financially benefit the enforcing
Party or its Designated Assigns.
4. Covenants as Personal Covenants. Each of Buyer and FFLP acknowledges
and agrees that each of the covenants assumed as set forth in Section 2 above
constitutes a personal covenant of the covenanting Party and its successors,
assigns, transferees, grantees, devisees, executors, administrators and
representatives (collectively "Successors") (whether such Successors have
succeeded to the Party's interest in the respective Property in whole or in
part, directly, indirectly (whether by merger, consolidation, liquidation,
reorganization, sale of assets or sale of stock of the Party), by operation of
law or through foreclosure, deed in lieu of foreclosure, trustee's sale or
otherwise), to and for the sole benefit of (i) the other Party (the "Benefited
Party") and only such of the Benefited Party's successors, assigns, transferees,
grantees, heirs, devisees, executors, administrators and representatives (x) who
hold an interest in real property within the Project and (y) who have been
expressly designated by the Benefited Party (in a written designation document
recorded by the Benefited Party against the applicable Property) as being
entitled to enforce all or certain specified provisions of this Covenants
Agreement (collectively, a Party's "Designated Assigns") and (ii) the beneficial
owner(s) of the Benefited Party's Property. Buyer further acknowledges and
agrees that the indemnification obligation set forth in Section 1 above
constitutes a personal covenant of Buyer and Buyer's Successors (whether such
Buyer's Successors have succeeded to Buyer's interest in the Property in whole
or in part, directly, indirectly (whether by merger, consolidation, liquidation,
reorganization, sale of assets or sale of stock of Buyer), by operation of law
or through foreclosure, deed in lieu of foreclosure, trustee's sale or
otherwise), to and for the sole benefit of (i) FFLP and FFLP's Designated
Assigns and including EAR and (ii) the beneficial owner(s) of the Retained
Property. The indemnity and defense obligations set forth in this Section shall
survive for twenty (20) years after the date of recordation of this Covenants
Agreement notwithstanding that a Party may no longer possess any beneficial
ownership interest in the Property. Except as expressly set forth above and in
Section 5 below, the covenants set forth in Section 2 above shall not be for the
benefit of or enforceable by any other person or entity owning any property in
the Project. Neither FFLP or Buyer or their Designated Assigns nor the
beneficial owner(s) of either the Retained Property or the Conveyed Property
shall have any obligation to enforce any such covenants for the benefit of any
other person or entity.
5. Covenants Running With the Land. All covenants and restrictions
contained in Section 2 above shall also be covenants running with the land for
the benefit of the Retained Property, or the Conveyed Property, as the case may
be, and shall, in any event, and without regard to technical classification or
designation, legal or otherwise, be to the fullest extent permitted by law and
equity, binding for the benefit of and in favor of, and enforceable by any
person (including, without limitation, the Parties and their Designated Assigns)
having any
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<PAGE>
beneficial ownership in the Retained Property or the Conveyed Property, as the
case may be. Buyer and FFLP acknowledge and agree that given the close vicinity
of the Conveyed Property and the Retained Property, that the development,
construction and operation of the Improvements on the Properties pursuant to the
covenants in Section 2 above shall directly benefit each Party's Property by
enhancing the value of each Party's Property.
6. Term. The Assumption and Indemnification set forth in Section 1
shall be of the same duration as that of the Redwood Shores Covenants Agreement.
The covenants set forth in Sections 2.1, 2.2, and 2.4 above shall automatically
terminate and become null and void on the date twenty (20) years after the
recordation date of this Covenants Agreement. The covenants set forth in Section
2.3 above shall be of the same duration as that of the Park Declaration.
7. Priority of Mortgage Lien. No violation or breach of the covenants,
conditions, restrictions, provisions or limitations contained in this Covenants
Agreement shall defeat or render invalid or in any way impair the lien or charge
of any mortgage or deed of trust or security interest recorded against either
the Conveyed Property or the Retained Property; provided, however, that any
subsequent owner of the Conveyed Property or Retained Property, as the case may
be, or portion thereof shall constitute a Successor and be bound by such
remaining covenants, conditions, restrictions, limitations, and provisions,
whether such owner's title was acquired by foreclosure, deed in lieu of
foreclosure, trustee's sale or otherwise.
8. Defaults: No Waiver of Rights; Remedies.
8.1 Defaults. If a Party should breach any of the covenants
set forth herein or default in the performance of any of its obligations
hereunder, then the other Party, its Designated Assigns or the beneficial
owner(s) of a Property shall have the immediate and absolute right to enforce
any or all of the remedies set forth in Section 8.3 below without the necessity
of providing the breaching Party with any notice of the default or opportunity
to cure the default.
8.2 No Waiver of Rights. Any failures or delays by a
non-breaching Party or its Designated Assigns or the beneficial owner(s) of a
Property to provide any default notices to a breaching Party or to assert any of
their rights and remedies as to any breach or default by a breaching Party under
this Covenants Agreement shall not deprive them of their right to later
institute and maintain any actions or proceedings which they or any one of them
may deem necessary to protect, assert or enforce any such rights or remedies.
Each Party acknowledges and agrees that the other Party reserves the right to
determine whether or not and when, if at all, it will seek to enforce any of its
rights and remedies with respect to a breach of any of the covenants in this
Covenants Agreement and that any delay of or reservation in enforcing such
rights and remedies shall not constitute a waiver or relinquishment of any
future enforcement of this Covenants Agreement by a Party or its Designated
Assigns or the beneficial owner(s) of a Property.
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8.3 Remedies. A Party, its Designated Assigns or the
beneficial owner(s) of a Property may institute any legal or equitable action to
cure, correct, or remedy any default, to recover damages for any default, or to
obtain any other remedy consistent with the purposes of this Covenants
Agreement, including, without limitation, specific performance and/or injunctive
relief (both mandatory and prohibitory), abatement proceedings, constructive
trust or equitable liens. The rights and remedies of the Parties, their
Designated Assigns and/or the beneficial owner of a Property are cumulative, and
the exercise by the Parties, their Designated Assigns or the beneficial owner of
a Property of one or more of such rights or remedies shall not preclude the
exercise by it, at the same or different times, of any other rights or remedies
for the same default or any other default.
9. General Provisions.
9.1 Attorneys' Fees. In the event of litigation between the
parties in connection with this Covenants Agreement, the prevailing party shall
be entitled to its reasonable costs and expenses incurred in connection with
such litigation, including reasonable attorneys' fees and costs.
9.2 No Merger. None of the terms, covenants, agreements or
conditions heretofore agreed upon in writing in any other agreements between the
parties to this Covenants Agreement with respect to obligations to be performed,
kept or observed by Buyer or FFLP in respect to said Conveyed Property or
Retained Property or any part thereof shall be deemed to be merged with this
Covenants Agreement.
9.3 Construction. Headings in this Covenants Agreement are for
convenience and reference use only, and are not part of this Covenants
Agreement, and shall be of no legal force or effect. When the context so
requires, words in the masculine, feminine or neuter gender shall include each
other gender; and words in the singular or plural shall include each other.
Recitals A through E above and Exhibits A, B, and C, are incorporated into this
Covenants Agreement by this reference. This Covenants Agreement is executed and
delivered in the State of California, and shall be construed and enforced in
accordance with, and governed by, the laws of the State of California.
9.4 Notices. Any notice, demand or request which may be
permitted, required or desired to be given in connection with this Covenants
Agreement shall be given in writing and directed as follows:
If to FFLP: Flatirons Funding, Limited Partnership
c/o ML Leasing Equipment Corp.
North Tower, 27th Floor
World Financial Center
250 Vesey Street
New York, New York 10281-1327
Attn: Jean M. Tomaselli
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With a copy to: Electronic Arts Redwood, Inc.
207 Redwood Shores Parkway
Redwood City, California 94065
Attn: James F. Healey, President
and a copy to: Nossaman, Guthner, Knox & Elliott, LLP
50 California Street, 34th Floor
San Francisco, California 94111
Attn: Michael B. Wilmar, Esq.
If to Buyer:
With a copy to:
Notices shall be either (i) personally delivered (including delivery by Federal
Express or other courier service) to the offices set forth above, in which case
they shall be deemed delivered on the date of delivery to said offices; (ii)
sent by telecopy, in which case they shall be deemed delivered on the date sent
(provided, however, that any notices sent by telecopy shall also be sent by
overnight courier on the same day); or (iii) sent by certified mail, postage
prepaid, return receipt requested, in which case they shall be deemed delivered
on the date shown on the receipt unless delivery is refused or delayed by the
addressee, in which event the notice shall be deemed delivered on the date of
deposit in the United States mail. The addresses and addressees may be changed
by giving notice of such change in the manner provided for in this Section 9.4.
9.5 Severability. In the event any portion of this Covenants
Agreement shall be declared by any court of competent jurisdiction to be
invalid, illegal or unenforceable, such portion shall be deemed severed from
this Covenants Agreement, and the remaining parts of this Covenants Agreement
shall remain in full force and effect, as fully as though such invalid, illegal
or unenforceable portion had never been part of this Covenants Agreement.
9.6 Due Execution. The persons executing this Covenants
Agreement on behalf of Buyer, FFLP, and EAR, respectively, represent and warrant
that they have the right, power, legal capacity and authority to execute this
Covenants Agreement and to bind the party for whom they are signing.
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<PAGE>
9.7 No Liability of Parties.
(a) FFLP. None of FFLP, FFLP's Designated Assigns or
the beneficial owner(s) of the Retained Property or any of their respective
present or future partners, officers, directors, shareholders, agents,
employees, guarantors, parents, subsidiaries or affiliates, and including EAR
(collectively the "FFLP Parties") shall be directly or indirectly liable or
responsible for any loss, claim, cause of action, liability, indebtedness,
damage or injury of any kind or character to any person, entity or property
(collectively, "Claims") arising from any construction on, or occupancy or use
of, any of the Conveyed Property or Improvements, including, without limitation,
any Claims caused by, or arising from: (i) any defect in any building,
structure, grading, fill, landscaping or other improvements on the Conveyed
Property or in any on-site or off-site improvement or other facility; (ii) any
act or omission of Buyer or any of Buyer's agents, employees, independent
contractors, licensees or invitees; (iii) any accident in, on or about the
Conveyed Property or Improvements, or any fire, flood, or other casualty or
hazard or Act of God thereon; (iv) the failure of Buyer, any of Buyer's
licensees, employees, invitees, agents, independent contractors or other
representatives to maintain all or any part of the Conveyed Property or the
Improvements in a safe condition; and (v) any nuisance made or suffered on any
part of the Conveyed Property or Improvements. In addition, none of the FFLP
Parties shall be liable to Buyer or any other party on the basis of any actions
or failure to act under this Covenants Agreement, including, without limitation,
mistakes of judgment, negligent or otherwise, unless and to the extent resulting
from the FFLP Parties' intentional torts or willful misconduct.
(b) Buyer. None of Buyer, Buyer's Designated Assigns
or the beneficial owner(s) of the Conveyed Property or any of their respective
present or future partners, officers, directors, shareholders, members, agents,
employees, guarantors, parents, subsidiaries or affiliates (collectively the
"Buyer Parties") shall be directly or indirectly liable or responsible for any
loss, claim, cause of action, liability, indebtedness, damage or injury of any
kind or character to any person, entity or property (collectively, "Claims")
arising from any construction on, or occupancy or use of, any of the Retained
Property or Improvements, including, without limitation, any Claims caused by,
or arising from: (i) any defect in any building, structure, grading, fill,
landscaping or other improvements on the Retained Property or in any on-site or
off-site improvement or other facility; (ii) any act or omission of FFLP or any
of FFLP's agents, employees, independent contractors, licensees or invitees, and
including EAR; (iii) any accident in, on or about the Retained Property or
Improvements, or any fire, flood, or other casualty or hazard or Act of God
thereon; (iv) the failure of FFLP, any of FFLP's licensees, employees, invitees,
agents, independent contractors or other representatives to maintain all or any
part of the Retained Property or the Improvements in a safe condition; and (v)
any nuisance made or suffered on any part of the Retained Property or
Improvements. In addition, none of the Buyer Parties shall be liable to FFLP or
any other party on the basis of any actions or failure to act under this
Covenants Agreement, including, without limitation, mistakes of judgment,
negligent or otherwise, unless and to the extent resulting from the Buyer
Parties' intentional torts or willful misconduct.
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<PAGE>
9.8 Limitation on Liability.
(a) Buyer. Notwithstanding anything set forth in this
Agreement to the contrary, the officers, directors, shareholders, partners,
members, and direct and indirect owners of Buyer shall not be liable for any
debts or other obligations of Buyer or in respect of any claims against Buyer
arising under this Covenants Agreement, and any such debts, obligations or
claims shall be satisfied solely out of the assets of Buyer. No personal
judgment shall be sought or obtained against any officer, director, shareholder,
partner, member, or direct or indirect owner of Buyer.
(b) EAR. Notwithstanding anything set forth in this
Agreement to the contrary, the officers, directors, shareholders, partners,
members, and direct and indirect owners of EAR shall not be liable for any debts
or other obligations of EAR or in respect of any claims against EAR arising
under this Covenants Agreement, and any such debts, obligations or claims shall
be satisfied solely out of the assets of EAR. No personal judgment shall be
sought or obtained against any officer, director, shareholder, partner, member,
or direct or indirect owner of EAR.
9.9 Certain Obligations of FFLP Non-Recourse. FFLP's
obligations hereunder are intended to be the obligations of the limited
partnership and of the corporations which are the managing general partner and
any other general partner thereof only, and no recourse for the payment of any
amount due under this Covenants Agreement or for any claim based thereon or
otherwise in respect thereof, shall be held against any limited partner of FFLP
or any incorporator, shareholder, officer, director or affiliate, as such, past,
present or future of such corporate managing general partner or other general
partner or of any corporate limited partner or of any successor corporation to
such corporate managing general partner or other general partner or any
corporate limited partner of FFLP, or against any direct or indirect parent
corporation of such corporate managing general partner or other general partner
or of any limited partner of FFLP or any other subsidiary or affiliate of 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 FFLP is a limited
partnership formed for the purpose of acquiring and owning the Project and
acting as lessor to Electronic Arts Redwood, Inc., on the express understanding
aforesaid. Nothing contained in this Section 9.9 shall be construed to limit the
exercise or enforcement, in accordance with the terms of this Covenants
Agreement and any other documents referred to herein, of rights and remedies
against the limited partnership or the corporate managing general partner or any
other general partner of FFLP or the assets of the limited partnership or the
corporate managing general partner or any other general partner of FFLP. As used
in this Section 9.9, "affiliate" means any other person controlling, controlled
by or under direct or indirect common control with such person; "person" means
any individual, corporation, partnership, limited liability company, private
limited company, joint venture, association joint-stock company, trust,
unincorporated association, organ of government or any agency or political
subdivision thereof; and "control," when used with any specified person, means
the power to direct the management and policies of such person, directly or
indirectly, whether through the ownership of voting
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securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
9.10 Amendment. This Covenants Agreement may be amended or
modified only by a written amendment executed and acknowledged by each of Buyer
and FFLP, (and EAR if such amendment or modification would affect EAR's rights
or obligations under this Covenants Agreement), and their respective Successors
(if any), Designated Assigns (if any, and if and to the extent Buyer or FFLP has
granted them the right to participate in any amendments to this Covenant
Agreement in the recorded designation document referred to in Section 4 above)
and the beneficial owner(s) of the Retained Property or the Conveyed Property,
as the case may be, and recorded with the San Mateo County recorder. The party
recording such amendment shall be entitled to rely on such executed and
acknowledged amendment as the valid, enforceable and insurable amendment to this
Covenants Agreement. Each Party shall deliver to any of its Successor copies of
all amendments to this Covenants Agreement (with written evidence of such
notification to the other Party), all as more fully set forth in Section 4
above.
THIS COVENANTS AGREEMENT IS EXECUTED as of the date first written
above.
FLATIRONS FUNDING, LIMITED PARTNERSHIP,
a Delaware limited partnership
By: Flatirons Capital, Inc.
Managing General Partner
By:
--------------------------------
Its:
------------------------------
BUYER
-----------------------------------------,
a
------------------------
By:
--------------------------------------
Its:
--------------------------------------
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FOR VALUABLE CONSIDERATION, the receipt and adequacy of which is acknowledged
hereby, the undersigned executes this Assignment and becomes a party thereto for
the purposes of Sections 1.3, 6, and 9 only.
ELECTRONIC ARTS REDWOOD, INC., a
Delaware corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
---------------------------------
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EXHIBIT H
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EXHIBIT I
FORM OF
ASSIGNMENT OF SEWAGE TREATMENT CAPACITY
THIS ASSIGNMENT ("Assignment") is made and entered into as of
___________________, 1999, by and between FLATIRONS FUNDING, LIMITED
PARTNERSHIP, ("Assignor"), and _____________________________________________, a
__________________ ("Assignee").
RECITALS
A. Electronic Arts Redwood, Inc. ("EAR") and Assignee, as
successor-in-interest, are parties to that certain Agreement of Purchase and
Sale dated ______________ (the "Purchase Agreement") whereby EAR agreed to sell
to Assignee, and Assignee agreed to purchase from EAR, certain real property (as
more particularly described in Exhibit "A" of the Purchase Agreement) (the
"Property"), all in accordance with the terms and conditions of the Purchase
Agreement.
B. Pursuant to the Purchase Agreement, EAR agreed to cause
Assignor to assign to Assignee, at the closing under the Purchase Agreement
("Closing"), a sufficient allocation of sewage treatment capacity from sources
available to Assignor to permit Assignee to construct up to an aggregate of
Three Hundred Forty Thousand (340,000) square feet of Gross Building Floor Area
on Zones 2 and 4 ("Maximum Square Footage") (but no more) on the Property. As
used in this Assignment, the term "Gross Building Floor Area" or "GBFA" means
the sum total of all floor areas contained within the exterior walls of all
Buildings including, without limitation, stairways, elevator shafts, other
shafts, mechanical rooms, vents, and internal support facilities, but excluding
those portions of mechanical or utility structures and storage areas located on
the roof to the extent such structures are not considered by the City as
building floor area for purposes of determining parking requirements, traffic
generation, building density or other similar development limitations.
C. Assignor holds certain rights to sewage treatment capacity
applicable to the Property and other lands owned by Assignor consisting of (a)
rights to sufficient sewage treatment capacity to construct 885,000 square feet
of GBFA for office use derived by mesne assignments from a grant by the City of
Redwood City (the "City") to Mobil Oil Estates (Redwood) Limited dated May 1,
1978 (the "Mobil Rights") which the City and Assignor confirmed in that certain
Second Amendment to Development Agreement dated August 31, 1998, ("Second
Amendment") and (b) rights to purchase additional sewage treatment capacity from
the City up to 25,000 gallons per day ("gpd"), as needed, at $2.50 per gpd as
confirmed in and pursuant to the Second Amendment (the "Purchase Rights").
Assignor intends to assign to
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<PAGE>
Assignee sufficient sewage treatment capacity from the Mobil Rights to enable
Assignee to construct the Maximum Square Footage.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Assignor and Assignee
hereby agree as follows:
1. Assignment. Assignor hereby assigns to Assignee the
following rights to sewage treatment capacity (the "Sewage Capacity Rights"):
(a) Assignor assigns to Assignee from its Mobil
Rights sufficient sewage treatment capacity with the South Bayside System
Authority ("SBSA") to permit construction of 340,000 square feet of GBFA for
office use.
(b) If for any reason the foregoing grant is not
sufficient to permit Assignee to construct the Maximum Square Footage, Assignee
must purchase, lease, or otherwise acquire any needed sewage treatment capacity
on the open market. Neither City, EAR, nor Assignor is in any way obligated to
provide Assignee with sewage treatment capacity except as set forth herein, and
in particular, neither EAR nor Assignor has any obligation to assign to Assignee
any of the Purchase Rights. City has agreed in the Development Agreement to use
its best efforts to assist Assignor in obtaining any additional capacity deemed
necessary, and Assignor, to the extent such agreement of the City is assignable,
hereby assigns to Assignee such agreement of the City to use best efforts.
(c) Assignee acknowledges and agrees that the
foregoing assignment of Sewage Capacity Rights specifically excludes any right
by Assignee to sell, assign, convey or otherwise transfer in any way (and,
therefore, Assignee is specifically prohibited from selling, assigning,
conveying or otherwise transferring in any way) such Sewage Capacity Rights to
any third party for any use outside the Property. Any Sewage Capacity Rights
assigned hereunder but not actually required by Assignee for the construction of
the Maximum Square Footage shall revert to Assignor. Assignee further
acknowledges and agrees that, other than the limited assignment of the Sewage
Capacity Rights hereunder, Assignor is not assigning, conveying or transferring
to Assignee any other right, title or interest of Assignor of any nature
whatsoever.
2. Representations and Warranties. Assignor represents and
warrants that it holds sufficient Sewage Capacity Rights to enable it to make
this Assignment and that it has due power and authorization to make this
Assignment.
3. No Further Obligations. Neither Assignor nor EAR shall have
any obligation or liability whatsoever with respect to the Sewage Capacity
Rights, including, without limitation, any obligation to obtain the City's, the
SBSA's or any other governmental or other entity's approval or consent to this
Assignment, or to incur any costs, expenses or other liabilities or pay any fees
(whether directly or indirectly), dedicate any land, provide any parking or
reduce the density on, or the allotment of sewage treatment capacity with
respect to, any other property owned by Assignor or EAR, or in any other manner
adversely affect Assignor or EAR or any property owned by Assignor or EAR or
take any action whatsoever with respect to the Sewage
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<PAGE>
Capacity Rights or in pursuit of any development rights or approvals whatsoever.
Notwithstanding the foregoing, Assignor shall cooperate with and provide
Assignee all reasonable assistance in perfecting Assignee's Sewage Capacity
Rights hereunder.
4. Attorneys' Fees. In the event of litigation between the
parties with respect to this Assignment, the prevailing party (by way of
settlement, dismissal or final judgment) shall be entitled to its reasonable
costs and expenses incurred in connection with such litigation, including,
without limitation, reasonable attorneys' fees. For purposes of this provision,
"prevailing party" shall include a party which dismisses such litigation in
exchange for payment of the sum allegedly due, performance of covenants
allegedly breached, or consideration substantially equal to the relief sought in
the litigation.
5. Certain Obligations Non-Recourse. Assignor's obligations
hereunder are intended to be the obligations of the limited partnership and of
the corporations which are the managing general partner and any other general
partner thereof only, and no recourse for the payment of any amount due under
this Agreement or for any claim based thereon or otherwise in respect thereof,
shall be held against any limited partner of Assignor or any incorporator,
shareholder, officer, director or affiliate, as such, past, present or future of
such corporate managing general partner or other general partner or of any
corporate limited partner or of any successor corporation to such corporate
managing general partner or other general partner or any corporate limited
partner of Assignor, or against any direct or indirect parent corporation of
such corporate managing general partner or other general partner or of any
limited partner of Assignor or any other subsidiary or affiliate of 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 Assignor is a limited
partnership formed for the purpose of acquiring and owning the Property and
acting as lessor to Electronic Arts Redwood, Inc., on the express understanding
aforesaid. Nothing contained in this Section 6 shall be construed to limit the
exercise or enforcement, in accordance with the terms of this Agreement and any
other documents referred to herein, of rights and remedies against the limited
partnership or the corporate managing general partner or any other general
partner of Assignor or the assets of the limited partnership or the corporate
managing general partner or any other general partner of Assignor. As used in
this Section 6, "affiliate" means any other person controlling, controlled by or
under direct or indirect common control with such person; "person" means any
individual, corporation, partnership, limited liability company, private limited
company, joint venture, association joint-stock company, trust, unincorporated
association, organ of government or any agency or political subdivision thereof;
and "control," when used with any specified person, means the power to direct
the management and policies of such person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the foregoing.
6. Governing Law. This Assignment shall be governed by and
construed in accordance with the laws of the State of California.
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IN WITNESS WHEREOF, the parties have executed this Assignment
as of the date first written above.
ASSIGNOR: FLATIRONS FUNDING, LIMITED PARTNERSHIP
a Delaware limited partnership
By:
-----------------------------------
Name:
---------------------------------
Title:
---------------------------------
ASSIGNEE: ---------------------------------------,
a
------------------------------
By:
-----------------------------------
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EXHIBIT J
RECORDING REQUESTED BY, AND )
WHEN RECORDED MAIL TO: )
)
Nossaman, Guthner, Knox & Elliott, LLP )
50 California Street, 34th Floor )
San Francisco, California 94111 )
Attention: David L. Kimport, Esq. )
)
- --------------------------------------------------------------------------------
FORM OF
ASSIGNMENT AND ASSUMPTION OF
DEVELOPMENT AGREEMENT AND PERMITS
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT is made as of ___________,
1999, by and between FLATIRONS FUNDING, LIMITED PARTNERSHIP, a Delaware limited
partnership ("Assignor"), and ____________________, a ________________________,
whose address is ________________________________________________ ("Assignee").
ELECTRONIC ARTS REDWOOD, INC., a Delaware corporation ("EAR"), is a party with
respect to Sections 3 through 13 only.
RECITALS
A. EAR and Assignee entered into that certain Agreement of
Purchase and Sale dated ___________________, 1999 (the "Purchase Agreement")
whereby EAR agreed to sell to Assignee, and Assignee agreed to purchase from
EAR, certain real property as more particularly described in Exhibit "A" of the
Purchase Agreement (the "Property"), which consists of Zones 2 and 4 as set
forth in the Development Agreement, all in accordance with the terms and
conditions of the Purchase Agreement.
B. Pursuant to the Purchase Agreement, EAR agreed to cause
Assignor to assign to Assignee, and Assignee to assume, the Development
Agreement dated November 7, 1996, by and between Assignor and the City of
Redwood City and recorded November 8, 1996, as Instrument No. 96-138988, as the
same may be amended from time to time (the "Development Agreement"), as the same
applies to or affects the Property; and further to cause Assignor to assign to
Assignee all permits, licenses, governmental approvals, and development rights
pertaining to the Property, to the extent of Seller's rights, title, and
interest therein and thereto and ability to assign the same (the "Other
Rights"), subject to the terms and conditions set forth in this Assignment.
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NOW, THEREFORE, in consideration of the foregoing, and of the mutual
covenants and conditions herein contained, the parties hereto (together, the
"Parties," and each sometimes a "Party") hereby act and agree as follows:
1. Assignment. Assignor hereby assigns, sets over and transfers to
Assignee, and Assignee hereby takes and accepts from Assignor, (A) all of
Assignor's rights in, under and to the Development Agreement as it applies to
the Property and to all benefits and privileges hereafter accruing to Assignor
thereunder, including without limitation Assignee's right to build an aggregate
340,000 square feet of Gross Building Floor Area (as that term is defined in the
Development Agreement and subject to the restrictions set forth in Section 4(e)
of the Development Agreement) distributed among Zones 2 and 4 in accordance with
the Development Agreement, and, (B) to the extent assignable, all of Seller's
right, title and interest (if any) in and to of the Other Rights.
2. Assumption of Obligations and Liabilities by Assignee. Assignee
hereby expressly and unconditionally assumes all of the obligations and
liabilities of Assignor under the Development Agreement as it applies to the
Property accruing from and after the date hereof. Assignee covenants that
Assignee shall at all times fully comply with, and that the development,
construction and use of the Property shall at all times be in full compliance
with the Development Agreement.
3. Covenant and Indemnification. Assignor and Assignee covenant to
perform all their respective obligations under the Development Agreement.
Assignee shall indemnify and hold Assignor and EAR harmless from any and all
liability, cost, loss, damage, or expense, including attorneys fees, arising out
of Assignee's failure to observe or perform any of the obligations or
liabilities so assumed. EAR shall indemnify and hold Assignee harmless from any
and all liability, cost, loss, damage, or expense, including attorneys fees,
arising out of FFLP's or EAR's failure to observe or perform any of its
obligations or liabilities under the Development Agreement other than those
expressly assumed by Assignee hereunder.
4. No Impairment of Purchase Agreement Provisions. Nothing contained in
this Assignment shall be deemed to limit, waive or otherwise derogate from any
warranty, representation, covenant or indemnification made in the Purchase
Agreement by either Party, or to waive or abrogate any limits on liability
specified in the Purchase Agreement, and none of such provisions in the Purchase
Agreement shall be deemed to have merged into the assignment made by this
Assignment. To the extent any rights granted under the Development Agreement may
be limited or restricted by terms of the Purchase Agreement or of that certain
Assumption and Covenants Agreement dated as of August 31, 1998, by and between
Assignor and Assignee ("Covenants Agreement"), the terms of the Purchase
Agreement or the Covenants Agreement shall prevail.
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<PAGE>
5. Further Assurances. Assignor shall promptly execute and deliver to
Assignee any additional instrument or other document which Assignee reasonably
requests to evidence or better effect the assignment contained herein.
6. Counterparts. This Assignment may be executed in any number of
counterparts and by each Party on a separate counterpart or counterparts, each
of which when so executed and delivered shall be deemed an original and all of
which taken together shall constitute but one and the same instrument.
7. Governing Law. This Assignment shall be deemed to be an agreement
made under the laws of the State of California and for all purposes shall be
governed by and construed in accordance with such laws.
8. Binding Effect. This Assignment shall be binding upon and inure to
the benefit of each of the Parties and its successors and assigns.
9. Warranty of Signers. Each individual executing and delivering this
Assignment on behalf of a Party hereby represents and warrants to the other
Party that such individual has been duly authorized and empowered to make such
execution and delivery.
10. Notices. Any notice, demand or request which may be permitted,
required or desired to be given in connection with this Assignment shall be
given in writing and directed as follows:
If to Assignor: Flatirons Funding Limited Partnership
c/o ML Leasing Equipment Corp.
North Tower, 27th Floor
World Financial Center
250 Vesey Street
New York, New York 10281-1327
Attn: Jean M. Tomaselli
With a copy to: Electronic Arts Redwood, Inc.
207 Redwood Shores Parkway
Redwood City, California 94065
Attn: James F. Healey, President
and a copy to: Nossaman, Guthner, Knox & Elliott, LLP
50 California Street, 34th Floor
San Francisco, California 94111
Attn: Michael B. Wilmar, Esq.
If to Assignee:
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<PAGE>
With a copy to:
Notices shall be either (i) personally delivered (including delivery by Federal
Express or other courier service) to the offices set forth above, in which case
they shall be deemed delivered on the date of delivery to said offices; (ii)
sent by telecopy, in which case they shall be deemed delivered on the date sent
(provided, however, that any notices sent by telecopy shall also be sent by
overnight courier on the same day); or (iii) sent by certified mail, postage
prepaid, return receipt requested, in which case they shall be deemed delivered
on the date shown on the receipt unless delivery is refused or delayed by the
addressee, in which event the notice shall be deemed delivered on the date of
deposit in the United States mail. The addresses and addressees may be changed
by giving notice of such change in the manner provided for in this Section 10.
11. No Liability. None of Assignor, Assignor's Assigns, or the
beneficial owner(s) of the Property or any of their respective present or future
partners, officers, directors, shareholders, agents, employees, guarantors,
parents, subsidiaries or affiliates, and including Electronic Arts Redwood, Inc.
(collectively the "Assignor Parties") shall be directly or indirectly liable or
responsible for any loss, claim, cause of action, liability, indebtedness,
damage or injury of any kind or character to any person, entity or property
(collectively, "Claims") arising from any construction on, or occupancy or use
of, any of the Property or Improvements, including, without limitation, any
claims caused by, or arising from: (i) any defect in any building, structure,
grading, fill, landscaping or other improvements on the Property or in any
on-site or off-site improvement or other facility; (ii) any act or omission of
Assignee or any of Assignee's agents, employees, independent contractors,
licensees or invitees; (iii) any accident in, on or about the Property or
Improvements, or any fire, flood, or other casualty or hazard or Act of God
thereon; (iv) the failure of Assignee, any of Assignee's licensees, employees,
invitees, agents, independent contractors or other representatives to maintain
all or any part of the Property or the Improvements in a safe condition; and (v)
any nuisance made or suffered on any part of the Property or Improvements. In
addition, none of the Assignor Parties shall be liable to Assignee or any other
party on the basis of any actions or failure to act under this Assignment,
including, without limitation, mistakes of judgment, negligent or otherwise,
unless and to the extent resulting from the Assignor Parties' intentional torts
or willful misconduct.
12. Limitation on Liability.
(a) Assignee. Notwithstanding anything set forth in this
Assignment to the contrary, the officers, directors, shareholders, partners,
members, and direct and indirect owners
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of Assignee shall not be liable for any debts or other obligations of Assignee
or in respect of any claims against Assignee arising under this Assignment, and
any such debts, obligations or claims shall be satisfied solely out of the
assets of Assignee. No personal judgment shall be sought or obtained against any
officer, director, shareholder, partner, member, or direct or indirect owner of
Assignee.
(b) EAR. Notwithstanding anything set forth in this Assignment
to the contrary, the officers, directors, shareholders, partners, members, and
direct and indirect owners of EAR shall not be liable for any debts or other
obligations of EAR or in respect of any claims against EAR arising under this
Assignment, and any such debts, obligations or claims shall be satisfied solely
out of the assets of EAR. No personal judgment shall be sought or obtained
against any officer, director, shareholder, partner, member, or direct or
indirect owner of EAR.
13. Certain Obligations of Assignor Non-Recourse. Assignor's
obligations hereunder are intended to be the obligations of the limited
partnership and of the corporations which are the managing general partner and
any other general partner thereof only, and no recourse for the payment of any
amount due under this Assignment or for any claim based thereon or otherwise in
respect thereof, shall be held against any limited partner of Assignor or any
incorporator, shareholder, officer, director or affiliate, as such, past,
present or future of such corporate managing general partner or other general
partner or of any corporate limited partner or of any successor corporation to
such corporate managing general partner or other general partner or any
corporate limited partner of Assignor, or against any direct or indirect parent
corporation of such corporate managing general partner or other general partner
or of any limited partner of Assignor or any other subsidiary or affiliate of
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 Assignor is a limited
partnership formed for the purpose of acquiring and owning the Project and
acting as lessor to Electronic Arts Redwood, Inc., on the express understanding
aforesaid. Nothing contained in this Section 13 shall be construed to limit the
exercise or enforcement, in accordance with the terms of this Assignment and any
other documents referred to herein, of rights and remedies against the limited
partnership or the corporate managing general partner or any other general
partner of Assignor or the assets of the limited partnership or the corporate
managing general partner or any other general partner of Assignor. As used in
this Section 13, "affiliate" means any other person controlling, controlled by
or under direct or indirect common control with such person; "person" means any
individual, corporation, partnership, limited liability company, private limited
company, joint venture, association joint-stock company, trust, unincorporated
association, organ of government or any agency or political subdivision thereof;
and "control," when used with any specified person, means the power to direct
the management and policies of such person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the foregoing.
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<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Assignment to be
executed and delivered by their respective representatives, thereunto duly
authorized, as of the date first above written.
ASSIGNOR
FLATIRONS FUNDING, LIMITED PARTNERSHIP,
a Delaware limited partnership
By:
-----------------------------------
Name:
---------------------------------
Title:
---------------------------------
ASSIGNEE
---------------------------------------,
a
----------------------------
By:
-----------------------------------
Name:
---------------------------------
Title:
---------------------------------
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<PAGE>
FOR VALUABLE CONSIDERATION, the receipt and adequacy of which is acknowledged
hereby, the undersigned executes this Assignment and becomes a party thereto for
the purposes of Sections 3 through 13 only.
ELECTRONIC ARTS REDWOOD, INC., a
Delaware corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
---------------------------------
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<PAGE>
EXHIBIT K
FORM OF
PROMISSORY NOTE
Redwood City, California
$____________________ ________________, 1999
FOR VALUE RECEIVED, the undersigned, [Buyer], a
__________________________ (herein called "Maker"), and subject to the terms
hereof, hereby promises to pay on or before June 20, 2001 to the order of
ELECTRONIC ARTS REDWOOD, INC., a Delaware corporation (herein together with all
subsequent holders hereof called "Holder"), at 207 Redwood Shores Parkway,
Redwood City, California, or at any other address identified by Holder for that
purpose, in lawful money of the United State of America, the principal sum of
_______________________ Dollars ($___________), together with interest thereon
at the rate of _____ percent (__%) per annum until paid. This Note is executed
and delivered pursuant to that certain Agreement of Purchase and Sale and Escrow
Instructions between Maker and Holder dated ______________, 1999 (the "Purchase
Agreement").
1.Payment. Principal and interest shall be payable in level quarterly
installments of ________________________ Dollars ($_____________) each, due the
twentieth day of March, June, September, and December of each year ("payment
dates"), commencing September 20, 1999, and continuing until paid in full. The
entire principal and all accrued and unpaid interest, if any, shall be due and
payable on June 20, 2001. Notwithstanding the foregoing, Holder may demand
payment of all or any part of the outstanding principal on a payment date upon
thirty (30) days prior written notice to Maker.
2. Security. This Note is secured by a Deed of Trust and Assignment of
Rents ("Deed of Trust") of even date herewith encumbering certain unimproved
real property ("Property") in the City of Redwood City, County of San Mateo,
State of California and by [description of Guaranty] (the "Guaranty").
3. Default; Acceleration. Failure to pay an installment of principal
and interest when due shall, upon three (3) business days notice from Holder,
constitute a default hereunder. In addition to any other remedies specified
herein, upon the occurrence of any default in payment hereunder, or of an event
of default specified in the Purchase Agreement, the Deed of Trust, or the
Guaranty, Holder shall have the option of declaring the principal balance hereof
and all accrued and unpaid interest to be immediately due and payable.
4. No Prepayment. Except upon demand by Holder pursuant to Section 1 or
acceleration by Holder pursuant to Section 3, this Note may not be prepaid.
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<PAGE>
5. Maker's Waiver. Maker and all endorsers of this Note hereby
severally waive demand, presentment, notice of dishonor, notice of default,
notice of protest and nonpayment and diligence in taking any action to collect
any sums owed under this Note.
6. Waiver. No waiver of any default or failure of condition under the
terms of this Note, the Deed of Trust, or the Guaranty shall be implied from any
failure of Holder to take, or any delay by Holder in taking, action with respect
to any default or failure of condition, or from any previous waiver. A waiver of
any term in this Note must be made in writing and shall be limited to the
express written terms of such waiver.
7. Attorneys' Fees. In the event Holder incurs any attorneys' fees or
other costs because of Maker's default or to enforce or defend any provision of
this Note, Maker shall pay reasonable attorneys' fees and all costs incurred by
Holder. All costs and fees incurred by Holder together with interest thereon
shall be added to the principal owing hereunder and shall also be secured by the
Deed of Trust.
8. Time of Essence. Time is of the essence with respect to every
provision hereof.
9. Controlling Law. This Note shall be construed, interpreted and
enforced in accordance with laws of the State of California.
10. Remedies Cumulative. The remedies of Holder as provided herein or
in the Deed of Trust or in the Guaranty or in law or in equity, shall be
cumulative and concurrent, and may be pursued singularly, successively, or
together at the sole discretion of the Holder, and may be exercised as often as
occasion therefor shall occur; and the failure to exercise any such right or
remedy shall in no event be construed as a waiver or a release thereof.
11. Purchase Money Note. This Note is given as part of the purchase
price for the Property.
12. Binding Nature. The terms, covenants and conditions contained
herein shall be binding upon the heirs, successors and assigns of Maker and
shall inure to the benefit of the successors and assigns of Holder.
[BUYER], a _____________________________
By:_____________________________________
Name:___________________________________
Title:__________________________________
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<PAGE>
EXHIBIT L
Recording requested by:
And when recorded mail to:
NOSSAMAN, GUTHNER, KNOX & ELLIOTT, LLP
50 California Street, 34th Floor
San Francisco, California 94111
Attention: David L. Kimport, Esq.
================================================================================
SPACE ABOVE THIS LINE FOR RECORDER'S USE
FORM OF
DEED OF TRUST
ATTENTION: COUNTY RECORDER--THIS INSTRUMENT COVERS GOODS THAT ARE OR
ARE TO BECOME FIXTURES ON THE REAL PROPERTY DESCRIBED HEREIN AND IS TO
BE FILED FOR RECORD IN THE RECORDS WHERE DEEDS OF TRUST ON REAL ESTATE
ARE RECORDED. ADDITIONALLY, THIS INSTRUMENT SHOULD BE APPROPRIATELY
INDEXED, NOT ONLY AS A DEED OF TRUST, BUT ALSO AS A FINANCING STATEMENT
COVERING GOODS THAT ARE OR ARE TO BECOME FIXTURES ON THE REAL PROPERTY
DESCRIBED HEREIN. THE MAILING ADDRESSES OF THE TRUSTOR (DEBTOR) AND
BENEFICIARY (SECURED PARTY) ARE SET FORTH IN SECTION 5.06 OF THIS DEED
OF TRUST.
THIS DEED OF TRUST AND FIXTURE FILING (this "Deed of Trust")
dated as of _____________, 1999, for reference purposes only, is made by
______________________, a _______________________ ("Trustor"), whose principal
place of business is ______________________ ___________________, to FIRST
AMERICAN TITLE COMPANY, as Trustee ("Trustee"), for the benefit of ELECTRONIC
ARTS REDWOOD, INC., a Delaware corporation ("Beneficiary"), whose address is 207
Redwood Shores Parkway, Redwood City, California 94065.
THIS DEED OF TRUST is given in connection with that certain
Promissory Note made as of _______________, 1999 by Trustor to the order of
Beneficiary (the "Note")
FOR GOOD AND VALUABLE CONSIDERATION, including the
indebtedness herein recited and the trust herein created, the receipt and
adequacy of which are hereby acknowledged, Trustor hereby irrevocably grants,
transfers, sets over, conveys and assigns to Trustee, IN TRUST, WITH POWER OF
SALE, for the benefit and security of Beneficiary, under and subject to the
terms and conditions hereinafter set forth, all rights, titles, interests,
estates, power and privileges that Trustor now has or may hereafter acquire in
or to the following property and interests therein to the extent the same
constitute real property under the laws of the State of California
(collectively, the "Trust Estate"):
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THAT CERTAIN REAL PROPERTY in San Mateo County, State of
California, more particularly described on Exhibit A attached hereto and
incorporated herein by this reference (the "Land");
TOGETHER WITH any and all buildings, landscaping and other
improvements now or hereafter erected in or on the Land, including, without
limitation, the fixtures, attachments, appliances, equipment, machinery, and
other articles attached to said buildings and improvements (collectively, the
"Improvements," and together with the Land, the "Property"), all of which shall
be deemed and construed to be a part of the realty;
TOGETHER WITH all interests, estates or other claims, both in
law and in equity, which Trustor now has or may hereafter acquire in the
Property;
TOGETHER WITH all easements, rights-of-way and rights now
owned or hereafter acquired by Trustor used in connection with the Property as a
means of access to the Property, including, without limiting the generality of
the foregoing, all rights pursuant to any trackage agreement and all rights to
the nonexclusive use of common drive entries, and all tenements, hereditaments
and appurtenances thereof and thereto, and all water and water rights and shares
of stock evidencing the same;
TOGETHER WITH all oil and gas and other mineral rights in or
pertaining to the Land, if any, and all royalty, leasehold and other rights of
Trustor pertaining thereto;
TOGETHER WITH all right, title and interest now owned or
hereafter acquired by Trustor in and to any land lying within the right-of-way
of any street, open or proposed, adjoining the Land, and any and all sidewalks,
alleys and strips and gores of land adjacent to or used in connection with the
Land or the Property;
TOGETHER WITH all furniture, furnishings, fixtures, equipment,
appliances, machinery, attachments, construction materials and supplies, goods,
agreements with architects and engineers relating to the design of the
Improvements, plans and specifications and permits for the development and
construction of the Improvements, agreements with contractors and vendors
relating to the construction and installation of the Improvements, and other
personal property (to the extent any of which constitute personal property under
applicable law) (the "Personal Property"), and all replacements, additions,
substitutions and proceeds thereof or thereto, now or hereafter owned by Trustor
or in which Trustor now or hereafter has any rights and which is now or
hereafter located on or at, or affixed or attached to, or used in connection
with the ownership, development, design, construction, operation, management,
maintenance or repair of the Property or the Improvements; and
TOGETHER WITH all the estate, interest, right, title, other
claim or demand, both in law and in equity, including claims or demands with
respect to the proceeds of insurance in effect with respect thereto, which
Trustor now has or may hereafter acquire in the Property, and any and all awards
made for the taking by eminent domain, or by any proceeding or purchase in lieu
thereof, of the whole or any part of the Trust Estate including, without
limitation, any award resulting from a change of grade of streets and any award
for severance damages (collectively, "Proceeds").
FOR THE PURPOSE OF SECURING:
1. Payment and performance of all obligations of Trustor under the
Note, as the same may be modified, amended, restated and supplemented from time
to time.
2. Performance of all obligations of Trustor under this Deed of Trust
and performance of each covenant and agreement of Trustor in this Deed of Trust,
and all modifications, amendments, replacements, extensions and renewals thereof
and substitutions therefor.
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<PAGE>
3. Payment of all sums advanced by Beneficiary to protect the security
of this Deed of Trust or the Trust Estate, with interest thereon at the rate of
11% per annum (the "Advance Interest Rate").
This Deed of Trust, the Note, and any other instrument (excluding any
guaranty or indemnity not secured by this Deed of Trust) given to evidence or
further secure the payment and performance of any indebtedness or obligation
secured hereby may hereafter be referred to collectively as the "Loan
Instruments." Capitalized terms used but not defined herein shall have the
meanings set forth in the Note.
TO PROTECT THE PREMISES AND THE SECURITY GRANTED BY THIS DEED OF TRUST, TRUSTOR
HEREBY COVENANTS AND AGREES AS FOLLOWS:
ARTICLE I
COVENANTS AND AGREEMENTS OF TRUSTOR
1.01. Payment of Secured Obligations. Trustor shall pay when due the
principal, interest, premium, if any, and all other amounts due to Beneficiary
under the Loan Instruments; the principal of and interest on any sum advanced in
the future and secured by this Deed of Trust; and the principal of and interest
on any other sum secured by this Deed of Trust.
1.02. Maintenance, Repair, Alterations. Trustor: (i) shall maintain,
keep and preserve the Trust Estate in good condition and repair; (ii) shall
comply with all laws, ordinances, rules, regulations, covenants, conditions and
restrictions now or hereafter affecting the Trust Estate or any part thereof or
requiring any alteration or improvement to be made thereon or thereto, subject
to Trustor's right to contest Impositions as defined in Subsection 1.08(a) of
this Deed of Trust in accordance with the provisions of Subsection 1.08(d)
hereof; (iii) shall not commit, suffer or permit any act to be done in, upon or
to the Trust Estate or any part thereof in violation of any law, ordinance,
rule, regulation or order; (iv) shall not commit or permit any waste or
deterioration of the Trust Estate; (v) shall keep and maintain abutting grounds,
sidewalks, roads, parking and landscape areas in good and neat order and repair;
(vi) will not take any action which, if taken (or fail to take any action, if
not taken), would increase in any way the risk of fire or other hazard occurring
to or affecting the Property or otherwise would impair the security of
Beneficiary in the Trust Estate; (vii) shall not abandon the Trust Estate or any
portion thereof or leave the Property unprotected, unguarded, vacant or
deserted, provided, however, nothing in this clause (vii) shall require Trustor
to protect or guard the Property more than a prudent operator would protect or
guard property similar to the Property under the same or similar conditions;
(viii) shall secure and maintain in full force and effect all permits necessary
for the use, occupancy and operation of the Trust Estate; and (ix) except as
otherwise prohibited or restricted by the Loan Instruments, or any of them,
shall do any and all other acts which may be reasonably necessary to protect and
preserve the value of the Trust Estate and the rights of Trustee and Beneficiary
with respect thereto.
1.03. Required Insurance.
(a) Trustor shall at all times provide, maintain, keep in full
force and effect or cause to be provided, maintained, and kept in full force and
effect, at no expense to Trustee or Beneficiary, policies of standard broad
form/all-risk insurance excluding earthquake in such form and amounts, with such
deductibles, and issued by companies, associations or organizations reasonably
satisfactory to Beneficiary.
(b) All policies of insurance required by the terms of this
Deed of Trust or the Note shall either have attached thereto a lender's loss
payable endorsement for the benefit of Beneficiary in form satisfactory
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<PAGE>
to Beneficiary or shall name Beneficiary as additional insured and shall contain
an endorsement or agreement by the insurer that any loss shall be payable in
accordance with the terms of such policy notwithstanding any act or negligence
of Trustor or any party holding under Trustor which might otherwise result in
forfeiture of said insurance and the further agreement of the insurer waiving
all rights of setoff, counterclaim and deduction against Trustor.
1.04. Delivery of Policies; Payment of Premium. At Beneficiary's
option, Trustor shall furnish Beneficiary with an original certificate of
insurance for each policy of insurance required under Section 1.03 hereof
setting forth the coverage, the limits of liability, the deductibles, if any,
the name of the carrier, the policy number, and the period of coverage, which
certificates shall have been executed by authorized officials of the companies
issuing such insurance, or by agents or attorneys-in-fact authorized to issue
said certificates (in which event each such certificate shall be accompanied by
a notarized affidavit, agency agreement or power of attorney evidencing the
authority of the signatory to issue such certificate on behalf of the insurer
named therein). If Beneficiary consents, Trustor may provide any of the required
insurance through blanket policies carried by Trustor and covering more than one
location, or by policies procured by a tenant or other party holding under
Trustor; provided, however, all such policies shall be in form and substance and
issued by companies satisfactory to Beneficiary. At least thirty (30) days prior
to the expiration of each required policy, Trustor shall deliver to Beneficiary
evidence satisfactory to Beneficiary of the payment of premium and the renewal
or replacement of such policy continuing insurance in form as required by this
Deed of Trust. All such policies shall contain a provision that, notwithstanding
any contrary agreement between Trustor and the insurance company, such policies
will not be canceled, allowed to lapse without renewal, surrendered or
materially amended (which term shall include any reduction in the scope or
limits of coverage) without at least thirty (30) days' prior written notice to
Beneficiary. All consents and approvals of Beneficiary required by this Section
1.04 shall be given or withheld in the reasonable discretion of Beneficiary. If
Trustor fails to provide, maintain, keep in force or deliver to Beneficiary the
policies of insurance required by this Deed of Trust or by any of the Loan
Instruments, Beneficiary may (but shall have no obligation to) procure such
insurance, or single interest insurance for such risks covering Beneficiary's
interests, and Trustor will pay all premiums therefor promptly upon demand by
Beneficiary; and until such payment is made by Trustor, the amount of all such
premiums, together with interest thereon at the Advance Interest Rate, shall be
secured by this Deed of Trust.
l.05. Casualties. Trustor shall give prompt written notice thereof to
Beneficiary after the happening of any casualty to or in connection with the
Trust Estate or any part thereof, whether or not covered by insurance.
1.06. Assignment of Policies Upon Foreclosure. In the event of
foreclosure of this Deed of Trust or other transfer of title or assignment of
the Trust Estate in extinguishment, in whole or in part, of the debt secured
hereby, then, except with respect to blanket policies of insurance carried by
Trustor, all right, title and interest of Trustor in and to all other policies
of insurance required by Section 1.03 hereof and any unearned premiums paid
thereon shall, without further act, be assigned to and shall inure to the
benefit of and pass to the successor in interest to Trustor or the purchaser or
grantee of the Trust Estate, and Trustor hereby irrevocably appoints Beneficiary
its lawful attorney-in-fact to execute an assignment thereof and any other
document necessary to effect such transfer. The foregoing power of attorney is
coupled with an interest and cannot be revoked.
1.07. Subrogation: Waiver of Offset.
(a) Trustor waives any and all right to claim or recover
against Beneficiary, its officers, employees, agents and representatives, for
loss of or damage to Trustor, the Trust Estate, Trustor's property or the
property of others under Trustor's control from any cause insured against or
required to be insured against by the provisions of this Deed of Trust;
provided, however, that this waiver of subrogation shall not be effective with
respect to any policy of insurance permitted or required by this Deed of Trust
if (i) such policy prohibits, or if
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coverage thereunder would be reduced as a result of, such waiver of subrogation
and (ii) Trustor is unable to obtain from a carrier issuing such insurance a
policy that, by special endorsement or otherwise, permits such a waiver of
subrogation.
(b) Except as otherwise specifically provided herein, all sums
payable by Trustor pursuant to this Deed of Trust shall be paid without notice,
demand, counterclaim, setoff, deduction or defense and without abatement,
suspension, deferment, diminution or reduction, and the obligations and
liabilities of Trustor hereunder shall in no way be released, discharged or
otherwise affected (except as expressly provided herein) by reason of: (i) any
damage to or destruction of or any condemnation or similar taking of the Trust
Estate or any part thereof; (ii) any restriction or prevention of or
interference by any unaffiliated third party with any use of the Trust Estate or
any part thereof; (iii) any title defect or encumbrance or any eviction from the
Property or any part thereof by title paramount or otherwise; (iv) any
bankruptcy, insolvency, reorganization, composition, adjustment, dissolution,
liquidation or other like proceeding relating to Beneficiary, or any action
taken with respect to this Deed of Trust by any trustee or receiver of
Beneficiary, or by any court, in any such proceeding; (v) any claim which
Trustor has or might have against Beneficiary; (vi) any default or failure on
the part of Beneficiary to perform or comply with any of the terms hereof or of
any other agreement with Trustor; or (vii) any other occurrence whatsoever,
whether similar or dissimilar to the foregoing; whether or not Trustor shall
have notice or knowledge of any of the foregoing. Except as expressly provided
herein, Trustor waives all rights now or hereafter conferred by statute or
otherwise to any abatement, suspension, deferment, diminution or reduction of
any sum secured hereby and payable by Trustor.
1.08 Taxes and Impositions.
(a) Trustor shall pay, or cause to be paid prior to
delinquency, all real property taxes and assessments, general and special, and
all other taxes and assessments of any kind or nature whatsoever including,
without limitation, non-governmental levies or assessments such as maintenance
charges, levies or charges resulting from covenants, conditions and restrictions
affecting the Trust Estate, which are assessed or imposed upon the Trust Estate,
or upon Trustor as owner or operator of the Trust Estate, or become due and
payable, and which create, may create or appear to create a lien upon the Trust
Estate or any part thereof, or upon any personal property, equipment or other
facility used in the operation or maintenance thereof (all of the above
hereinafter referred to, collectively, as "Impositions"); provided, however,
that if, by law, any such Imposition is payable, or may at the option of the
taxpayer be paid, in installments, Trustor may pay the same or cause it to be
paid, together with any accrued interest on the unpaid balance of such
Imposition, in installments as the same become due and before any fine, penalty,
interest or cost may be added thereto for the nonpayment of any such installment
and interest.
(b) If at any time after the date hereof there shall be
assessed or imposed (i) a tax or assessment on the Trust Estate in lieu of or in
addition to the Impositions payable by Trustor pursuant to subsection 1.08(a)
hereof, or (ii) a license fee, tax or assessment imposed on Beneficiary and
measured by or based in whole (or in part) upon the amount of the outstanding
obligations secured hereby, then all (or said part of) such taxes, assessments
or fees shall be deemed to be included within the term "Impositions" as defined
in subparagraph (a) hereof, and Trustor shall pay and discharge the same as
herein provided with respect to the payment of Impositions. If Trustor fails to
pay such Impositions prior to delinquency or if Trustor is prohibited by law
from paying such Impositions, Beneficiary may at its option declare all
obligations secured hereby together with all accrued interest thereon,
immediately due and payable. Anything to the contrary herein notwithstanding,
Trustor shall have no obligation to pay any franchise, estate, inheritance,
income, excess profits or similar tax levied on Beneficiary or on the
obligations secured hereby.
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(c) Subject to the provisions of Subsection 1.08(d) and upon
request by Beneficiary, Trustor shall deliver to Beneficiary within thirty (30)
days after the date upon which any such Imposition is delinquent official
receipts of the appropriate taxing authority, or other proof satisfactory to
Beneficiary, evidencing the payment thereof.
(d) Trustor shall have the right before any delinquency occurs
to contest or object to the amount or validity of any such Imposition by
appropriate legal proceedings, but this shall not be deemed or construed in any
way as relieving, modifying or extending Trustor's covenant to pay any such
Imposition at the time and in the manner provided herein unless Trustor has
given prior written notice to Beneficiary of Trustor's intent to so contest or
object to an Imposition, and unless, at Beneficiary's sole option, (i) Trustor
shall demonstrate to Beneficiary's satisfaction that the legal proceedings shall
conclusively operate to prevent the sale of the Trust Estate, or any part
thereof, to satisfy such Imposition prior to final determination of such
proceedings; or (ii) Trustor shall furnish a good and sufficient bond, surety or
other assurances of payment as requested by and satisfactory to Beneficiary; or
(iii) Trustor shall demonstrate to Beneficiary's satisfaction that Trustor has
provided a good and sufficient undertaking as may be required or permitted by
law to accomplish a stay of any such sale.
(e) Trustor shall not suffer, permit or initiate the joint
assessment of any real and personal property which may constitute all or a
portion of the Trust Estate or suffer, permit or initiate any other procedure
whereby the lien of the real property taxes and the lien of the personal
property taxes shall be assessed, levied or charged to the Trust Estate as a
single lien.
1.09. Utilities. Trustor shall pay or shall cause to be paid when due
all utility charges which are incurred for the benefit of the Trust Estate
(excluding therefrom utility charges, if any, incurred by tenants which are not
the obligation of the Trustor to pay under the terms of the leases) or which may
become a charge or lien against the Trust Estate for gas, electricity, water or
sewer services furnished to the Trust Estate and all other assessments or
charges of a similar nature, whether public or private, affecting or related to
the Trust Estate or any portion thereof, whether or not such taxes, assessments
or charges are or may become liens thereon.
1.10. Defense of Actions and Costs. Trustor, at no cost or expense to
Beneficiary or Trustee, shall appear in and defend any action or proceeding
purporting to affect the security hereof, the other Loan Instruments, any
additional or other security for the obligations secured hereby, the interest of
Beneficiary, or the rights, powers or duties of Beneficiary hereunder. If
Beneficiary elects to become a party to such action or proceeding, or is made a
party thereto or to any other action or proceeding, of whatever kind or nature,
concerning the Note, this Deed of Trust, any of the Loan Instruments, the Trust
Estate or any part thereof or interest therein, or the occupancy thereof,
Trustor shall to the extent such action or proceeding relates to or arises from
events occurring subsequent to Trustor's acquisition of the Property: (i)
indemnify, defend and hold Trustee and Beneficiary harmless from all liability,
damage, cost and expense incurred by Trustee and Beneficiary, or either of them,
by reason of said action or proceeding (including, without limitation, Trustee's
fees and expenses, the fees of attorneys for Trustee and for Beneficiary, and
other expenses, of whatever kind or nature, incurred by Trustee or Beneficiary,
or either of them, as a result of such action or proceeding), whether or not
such action or proceeding is prosecuted to judgment or decision; and (ii) upon
written notice from Trustee or Beneficiary, assume the investigation and defense
of said action or proceeding, including the employment of counsel reasonably
acceptable to Beneficiary and the payment of all expenses. Trustee or
Beneficiary, as the case may be, shall have the right to employ separate counsel
in any action or proceeding and to participate in the defense thereof, but
unless such separate counsel is employed with the Trustor shall not be required
to pay the fees and expenses of such separate counsel.
Notwithstanding the foregoing, however, this provisions shall
not require Trustor to indemnify Beneficiary or Trustee for any claims, costs,
fees, expenses or liabilities arising from (i) the gross negligence or
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willful misconduct of Beneficiary or Trustee and/or (ii) related to or arising
from events or conditions occurring prior to Trustor's acquisition and
possession of the Property. Immediately upon demand therefor by Trustee or
Beneficiary, Trustor shall pay thereto an amount equal to Trustor's liability to
such person under this Section 1.10, together with interest thereon from date of
expenditure at the Advance Interest Rate; and until paid, such sums shall be
secured hereby.
1.11. Action by Beneficiary to Preserve Trust Estate. If Trustor fails
to make any payment or to do any act as and in the manner provided in any of the
Loan Instruments, Beneficiary, in its own discretion, without obligation so to
do, without releasing Trustor from any obligation, and subject only to the
notice and cure provisions of the Note, may make or do the same in such manner
and to such extent as Beneficiary may deem necessary to protect the security
hereof. In connection therewith (without limiting their general and other
powers, whether conferred herein, in another Loan Instrument or by law),
Beneficiary shall have and is hereby given the right, but not the obligation:
(i) to enter upon and take possession of the Trust Estate; (ii) to make
additions, alterations, repairs and improvements to the Trust Estate which
Beneficiary may consider necessary or proper to keep the Trust Estate in good
condition and repair; (iii) to appear and participate in any action or
proceeding affecting or which may affect the security hereof or the rights or
powers of Beneficiary or Trustee; (iv) to pay, purchase, contest or compromise
any encumbrance, claim, charge, lien or debt which in the judgment of
Beneficiary may affect or appears to affect the security of this Deed of Trust
or to be prior or superior hereto; and (v) in exercising such powers, to pay
necessary expenses, including employment of counsel or other necessary or
desirable consultants. Trustor shall, immediately upon demand therefor by
Beneficiary pay to Beneficiary an amount equal to all costs and expenses
incurred by it in connection with the exercise by Beneficiary of the foregoing
rights including, without limitation, costs of evidence of title, court costs,
appraisals, surveys and receiver's, trustee's and attorneys' fees, costs and
expenses whether or not an action is actually commenced in connection therewith,
together with interest thereon from the date of such expenditures until
Beneficiary has been repaid such amount at the Advance Interest Rate and, until
paid, said sums shall be secured hereby.
1.12. Survival of Warranties. Trustor shall fully and faithfully
satisfy and perform the obligations of Trustor contained in the Loan
Instruments, each agreement of Trustor incorporated by reference therein or
herein and each agreement the performance of which is secured hereby, and any
modification or amendment thereof. All representations, warranties and covenants
of Trustor contained in any such Loan Instrument or agreement between Trustor
and Beneficiary shall survive the execution and delivery hereof and shall remain
continuing obligations of Trustor during any time when any portion of the
obligations secured hereby remain outstanding.
1.13. Condemnation and Other Awards. Immediately upon its obtaining
knowledge of the institution or the threatened institution of any proceeding for
the condemnation or other taking for public or quasi-public use of the Trust
Estate or any part thereof, or if the same be taken or damaged by reason of any
public improvement or condemnation proceeding, or in any other manner, or should
Trustor receive any notice or other information regarding such proceeding,
action, taking or damage, Trustor shall promptly notify Trustee and Beneficiary
of such fact. Trustor shall then, if requested by Beneficiary, file or defend
its rights thereunder and prosecute the same with due diligence to its final
disposition and shall cause any award or settlement to be paid over to
Beneficiary for disposition pursuant to the terms of this Deed of Trust. If the
Trust Estate or any part thereof is taken or diminished in value, or if a
consent settlement is entered, by or under threat of such proceeding, all
compensation, awards, damages, rights of action, proceeds and settlements
payable to Trustor by virtue of its interest in the Trust Estate (the
"Condemnation Proceeds") shall be and hereby are assigned, transferred and set
over unto Beneficiary to be held by it, in trust, subject to the lien and
security interest of this Deed of Trust. Any such Condemnation Proceeds shall be
first applied to reimburse Trustee and Beneficiary for all costs and expenses,
including reasonable attorneys fees, incurred in connection with the collection
of such award or settlement and costs of any restoration of the Property. The
balance of such award or settlement shall be applied in accordance with the
terms of the Note, as applicable. Application or release of the Condemnation
Proceeds as provided herein
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shall not cure or waive any default or notice of default hereunder or invalidate
any act done pursuant to such notice.
1.14. Additional Security. No other security now existing, or hereafter
taken, to secure the obligations secured hereby nor the liability of any maker,
surety, guarantor or endorser with respect to such obligations, or any of them,
shall be impaired or affected by the execution of this Deed of Trust; and all
additional security shall be taken, considered and held as cumulative. The
taking of additional security, execution of partial releases of the security, or
any extension of the time of payment of the indebtedness shall not diminish the
force, effect or lien of this Deed of Trust and shall not affect or impair the
liability of any maker, surety, guarantor or endorser for the payment of said
indebtedness. In the event Beneficiary at any time holds additional security for
any of the obligations secured hereby, it may enforce the sale thereof or
otherwise realize upon the same, at its option, either before, concurrently, or
after a sale is made hereunder.
1.15. Inspections. Beneficiary, Trustee and the agents, representatives
or workers of each of them, are authorized to enter upon reasonable notice at
any reasonable time upon or in any part of the Trust Estate for the purpose of
inspecting the same and for the purpose of performing any of the acts it is
authorized to perform hereunder or under the terms of any of the Loan
Instruments.
1.16. Liens. Except for liens, encumbrances and charges approved by
Beneficiary in writing, Trustor shall pay and promptly discharge when due, at
Trustor's cost and expense, all liens, encumbrances and charges upon the Trust
Estate, or any part thereof or interest therein; provided that the existence of
any mechanic's, laborer's, materialman's, supplier's or vendor's lien or right
thereto shall not constitute a violation of this Section 1.16 if payment is not
yet due under the contract which is the foundation thereof and if such contract
does not postpone payment for more than forty-five (45) days after the
performance thereof. Trustor shall have the right to contest in good faith the
validity of any such lien, encumbrance or charge, provided Trustor shall first
deposit with Beneficiary a bond or other security satisfactory to Beneficiary in
such amounts as Beneficiary shall reasonably require, but not more than one
hundred fifty percent (150%) of the amount of the claim, and provided further
that Trustor shall thereafter diligently proceed to cause such lien, encumbrance
or charge to be removed and discharged. If Trustor shall fail either to remove
and discharge any such lien, encumbrance or charge or to deposit security in
accordance with the preceding sentence, if applicable, then, in addition to any
other right or remedy of Beneficiary, Beneficiary may, but shall not be
obligated to, discharge the same, without inquiring into the validity of such
lien, encumbrance or charge nor into the existence of any defense or offset
thereto, either by paying the amount claimed to be due, or by procuring the
discharge of such lien, encumbrance or charge by depositing in a court a bond or
the amount claimed or otherwise giving security for such claim, or in such
manner as is or may be prescribed by law. Trustor shall, immediately upon demand
therefor by Beneficiary, pay to Beneficiary an amount equal to all costs and
expenses incurred by Beneficiary in connection with the exercise by Beneficiary
of the foregoing right to discharge any such lien, encumbrance or charge,
together with interest thereon from the date of such expenditure at the Advance
Interest Rate, and, until paid, such sums shall be secured hereby.
Notwithstanding the foregoing, Beneficiary consents to the lien of any deed(s)
of trust securing financing for the construction of the Improvements provided
such lien shall be subordinate to the lien of this Deed of Trust. Beneficiary
further agrees to execute such agreements and/or other documents as reasonably
requested by the beneficiary of any such subordinate deed of trust in connection
with any financing of the Improvements, including reasonable amendments to this
Deed of Trust, provided the same shall not materially impair the first lien
priority position of this Deed of Trust or Beneficiary's rights hereunder or the
adequacy of the Property to secure Trustor's obligations hereunder.
1.17. Beneficiary's Powers. Without affecting the liability of any
other person liable for the payment of any obligation herein mentioned, and
without affecting the lien or charge of this Deed of Trust upon any portion of
the Trust Estate not then or theretofore released as security for the full
amount of all unpaid obligations,
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Beneficiary may, from time to time and without notice (i) release any person so
liable, (ii) extend the maturity or alter any of the terms of any such
obligation, (iii) grant other indulgences, (iv) release or reconvey or cause to
be released or reconveyed at any time at Beneficiary's option any parcel,
portion or all of the Trust Estate, (v) take or release any other or additional
security for any obligation herein mentioned, or (vi) make compositions or other
arrangements with debtors in relation thereto. By accepting payment or
performance of any obligation secured by this Deed of Trust after the payment or
performance thereof is due or after the filing of a notice of default and
election to sell, Beneficiary shall not have thereby waived its right to require
prompt payment or performance, when due, of all other obligations secured
hereby, or to declare a default for failure so to pay or perform, or to proceed
with the sale under any notice of default and election to sell theretofore given
by Beneficiary, or with respect to any unpaid balance of the indebtedness
secured hereby. The acceptance by Beneficiary of any sum in an amount less than
the sum then due shall not constitute a waiver of the obligation of Trustor to
pay the entire sum then due. Trustor's failure to pay the entire sum then due
shall continue to be a default, notwithstanding the acceptance of partial
payment, and, until the entire sum then due shall have been paid, Beneficiary or
Trustee shall at all times be entitled to declare a default and to exercise all
the remedies herein conferred, and the right to proceed with a sale under any
notice of default and election to sell shall in no way be impaired, whether or
not such amounts are received prior or subsequent to such notice. No delay or
omission of Trustee or Beneficiary in the exercise of any right or power
hereunder shall impair such right or power or any other right or power nor shall
the same be construed to be a waiver of any default or any acquiescence therein.
1.18. Environmental Compliance.
(a) As used in this Deed of Trust, the following definitions
shall apply:
(i) "Environmental Laws" shall mean all federal,
state and local laws, ordinances, rules and regulations now or hereafter in
force, as amended from time to time, in any way relating to or regulating human
health or safety, or industrial hygiene or environmental conditions, or
protection of the environment, or pollution or contamination of the air, soil,
surface water or groundwater, and includes the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, 42 U.S.C. ss 9601, et seq.,
the Resource Conservation and Recovery Act, 42 U.S.C. ss 6901, et seq., the
Clean Water Act, 33 U.S.C. ss 1251, et seq., the Hazardous Substance Account
Act, California Health and Safety Code ss 25100, et seq., the Medical Waste
Management Act, California Health and Safety Code ss 25015, et seq., and the
Porter-Cologne Water Quality Control Act, California Water Code ss 13000, et
seq.
(ii) "Hazardous Substances" shall mean any substance
or material that is described as a toxic or hazardous substance, waste or
material or a pollutant or contaminant, or words of similar import, in any of
the Environmental Laws, and includes asbestos, petroleum (including crude oil or
any fraction thereof, natural gas, natural gas liquids, liquefied natural gas,
or synthetic gas usable for fuel, or any mixture thereof), petroleum products,
polychlorinated biphenyls, urea formaldehyde, radon gas, radioactive matter,
medical waste, and chemicals which may cause cancer or reproductive toxicity.
(iii) "Person" shall mean any natural person, any
organization or legal entity of any kind, and any government or governmental
agency or authority of any kind, including the U.S. Environmental Protection
Agency, the California Environmental Protection Agency and the California
Department of Toxic Substances Control.
(iv) "Release" shall mean any spilling, leaking,
pumping, pouring, emitting, emptying, discharging, injecting, escaping,
leaching, dumping or disposing into the environment, including continuing
migration, of Hazardous Substances into or through soil, surface water or
groundwater.
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(b) Trustor shall not use, produce, process, manufacture,
generate, treat, handle, store or dispose of any Hazardous Substances in, on or
under the Trust Estate, or use the Trust Estate for any such purposes, or
Release any Hazardous Substances into any air, soil, surface water or
groundwater comprising the Trust Estate, or permit any Person using or occupying
the Trust Estate or any part thereof to do any of the foregoing. The preceding
sentence shall not prohibit the ordinary use of Hazardous Substances normally
used in the operation or maintenance of properties similar to the Trust Estate,
provided that the amount of such Hazardous Substances does not exceed the
quantity necessary for the normal operation and maintenance of the Trust Estate
in the ordinary course of business and the use, storage and disposal of such
Hazardous Substances strictly comply with all applicable Environmental Laws.
Trustor shall comply, and shall cause all Persons using or occupying the Trust
Estate or any part thereof to comply, with all Environmental Laws applicable to
the Trust Estate, or the use or occupancy thereof, or any operations or
activities therein or thereon. Trustor shall obtain all permits, licenses and
approvals required by all applicable Environmental Laws for the use and
occupancy of, and all operations and activities in, the Trust Estate, comply
fully with all such permits, licenses and approvals, and keep all such permits,
licenses and approvals in full force and effect. Immediately after Trustor
obtains any information indicating that any Hazardous Substances may be present
or any Release or threatened Release of any Hazardous Substances may have
occurred in, on or under the Trust Estate (or any nearby real property which
could migrate to the Trust Estate) or that any violation of any Environmental
Laws may have occurred at the Trust Estate, Trustor shall give notice thereof to
Beneficiary with a reasonably detailed description of the event, occurrence or
condition in question. Trustor shall immediately furnish to Beneficiary copies
of all written communications received by Trustor from any Person (including
notices, claims or citations that any Release or threatened Release of any
Hazardous Substances or any violation of any Environmental Laws has actually or
allegedly occurred) or given by Trustor to any Person concerning any past or
present Release or threatened Release of any Hazardous Substances in, on or
under the Trust Estate (or any nearby real property which could migrate to the
Trust Estate) or any past or present violation of any Environmental Laws at the
Trust Estate. If Beneficiary obtains any information that Beneficiary believes
in good faith indicates a reasonable possibility that any Hazardous Substances
may be present or any Release or threatened Release of any Hazardous Substances
may have occurred in, on or under the Trust Estate (or any nearby real property
which could migrate to the Trust Estate) or any violation of any Environmental
Laws may have occurred at the Trust Estate, then Trustor shall, at the expense
of Trustor, promptly after a request by Beneficiary, have a qualified
environmental engineer investigate the presence, Release or threatened Release
of such Hazardous Substances and the existence of such violation of
Environmental Laws and prepare and submit to Beneficiary a written report
containing the findings and conclusions resulting from such investigation. The
environmental engineer who will prepare the report, the scope of the
investigation to be undertaken (which may include soil and groundwater sampling)
and the methodology to be used shall be subject to the prior approval of
Beneficiary. Beneficiary (and its representatives) shall have the right, at all
reasonable times and after reasonable prior notice (except no notice shall be
required in an emergency), to inspect the Trust Estate and every part thereof
and to review all books, records and files of Trustor relating to any past or
present Release or threatened Release of any Hazardous Substances in, on or
under the Trust Estate or any past or present violation of any Environmental
Laws at the Trust Estate. Trustor shall give Beneficiary (and its
representatives) access to the Trust Estate and every part thereof at all
reasonable times (and at any time in an emergency) for such purposes. Trustor
shall promptly furnish in writing to Beneficiary all information concerning any
past or present Release or threatened Release of any Hazardous Substances in, on
or under the Trust Estate or any past or present violation of any Environmental
Laws at the Trust Estate that is requested from time to time by Beneficiary.
(c) If any Release or threatened Release of any Hazardous
Substances in, on or under the Trust Estate exists or occurs, Trustor shall
immediately give notice of the condition to Beneficiary, and Trustor shall
promptly clean up and remove all Hazardous Substances and restore the Trust
Estate (the "Remediation Work"). Trustor shall comply with the orders and
directives of all Persons having jurisdiction over the Trust Estate or the
Remediation Work. Trustor shall submit to Beneficiary, for Beneficiary's prior
approval, complete plans and specifications for all Remediation Work to be done
by Trustor before any Remediation Work is
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performed, except in an emergency. Such plans and specifications shall be
prepared by qualified licensed engineers or contractors approved in writing by
Beneficiary, shall comply with all applicable Environmental Laws and other
applicable laws, ordinances, rules and regulations, shall be in a form
sufficient to secure the approval of all Persons with jurisdiction over the
Trust Estate or the Remediation Work, and shall be otherwise satisfactory to
Beneficiary. Trustor shall cause all Remediation Work to be performed in a good
and workmanlike manner by a qualified licensed contractor approved in writing by
Beneficiary, under the supervision of a qualified environmental engineer
approved in writing by Beneficiary, in accordance with the plans and
specifications for the Remediation Work approved in writing by Beneficiary, and
in compliance with all applicable Environmental Laws and other applicable laws,
ordinances, rules and regulations. Trustor shall obtain all required permits,
licenses and approvals for the Remediation Work, prosecute the Remediation Work
diligently, and complete the Remediation Work in a timely manner. Trustor shall
pay for all Remediation Work, including the cost of plans and specifications,
utilities, permits, fees, taxes and insurance premiums in connection therewith.
Trustor shall, on demand, pay to Beneficiary all direct costs and reimburse
Beneficiary for all expenses incurred by Beneficiary in connection with any
review, approval or inspection by Beneficiary relating to any Remediation Work,
together with interest thereon from the date of expenditure until paid at the
Advance Interest Rate except to the extent the Remediation Work relates to or
arises from events or conditions occurring prior to Trustor's acquisition and
possession of the Property. Under no circumstances shall Beneficiary be liable
to Trustor for any damage, loss, cost or expense incurred by Trustor on account
of any plans and specifications for the Remediation Work, the performance of any
Remediation Work, or any delay in completion of any Remediation Work except to
the extent the Remediation Work relates to or arises from events or conditions
occurring prior to Trustor's acquisition and possession of the Property. Trustor
shall furnish to Beneficiary, promptly upon receipt or preparation, copies of
all reports, studies, analyses, investigations, contracts, correspondence,
claims, complaints, pleadings and other information and communications received
or prepared by Trustor at any time in connection with any Remediation Work, or
any past or present Release or threatened Release of any Hazardous Substances
in, on or under the Trust Estate (or any nearby real property which could
migrate to the Trust Estate), or any past or present violation of any
Environmental Laws at the Trust Estate. Beneficiary shall have the right, but no
obligation, to participate in any action or proceeding relating to any past or
present Release or threatened Release of any Hazardous Substances in, on or
under the Trust Estate, or any past or present violation of any environmental
Laws at the Trust Estate, or the necessity for or adequacy of any Remediation
Work.
(d) Trustor shall indemnify and defend Beneficiary (and its
directors, officers, employees, agents and representatives) against and hold
Beneficiary (and its directors, officers, employees, agents and representatives)
harmless from all claims, demands, liabilities, losses, damages, costs and
expenses (collectively, "Claims") in any way arising from, relating to or
connected with the existence, location, nature, use, generation, manufacture,
storage, disposal, handling, or present or future Release or threatened Release
of any Hazardous Substances in, on or under the Trust Estate, or any present or
future violation of any Environmental Laws at the Trust Estate, or any breach of
any representation or warranty made by Trustor in this Deed of Trust, or any
failure to perform any obligation of Trustor in accordance with this Deed of
Trust except to the extent such Claims relate to or arise from events or
conditions occurring prior to Trustor's acquisition and possession of the
Property. The foregoing indemnification shall include all expenses of
investigation and monitoring, costs of containment, abatement, removal, repair,
cleanup, restoration and remedial work, penalties and fines, attorneys' fees and
disbursements, and other response costs. If Trustor fails to perform any
obligation of Trustor in accordance with this Deed of Trust, Beneficiary shall
have the right, but no obligation, to perform such obligation on behalf of
Trustor. Trustor shall, on demand, pay to Beneficiary all sums expended by
Beneficiary in the performance of any such obligations of Trustor, together with
interest thereon from the date of expenditure until paid at the Advance Interest
Rate. If any Event of Default occurs under this Deed of Trust, Beneficiary shall
have the right, but no obligation, at the expense of Trustor, to have a
comprehensive environmental assessment of the Trust Estate, including soil and
groundwater sampling and in scope satisfactory to Beneficiary, prepared by an
engineer selected by Beneficiary in order to ascertain whether any hazardous
substances are present or any Release or threatened
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Release of any Hazardous Substances has occurred in, on or under the Trust
Estate (or any nearby real property which could migrate to the Trust Estate) or
any violation of any Environmental Laws exists at the Trust Estate. Trustor
shall, on demand, pay to Beneficiary all sums expended by Beneficiary in
connection with any such comprehensive environmental assessment, together with
interest thereon from the date of expenditure until paid at the Advance Interest
Rate.
(e) The obligation of Trustor under this Section 1.18 are
separate from and in addition to the payment and performance of the other
obligations under this Deed of Trust and the Note. The liability of Trustor
under this Section 1.18 shall not be limited to or measured by the amount of the
indebtedness owed under the Note or this Deed of Trust or the value of the Trust
Estate. Trustor shall be fully and personally liable for all obligations of
Trustor under this Section 1.18 and a separate action may be brought and
prosecuted against Trustor under this Section 1.18. The liability of Trustor
under this Section 1.18 shall not be subject to any limitation set forth in the
Note or elsewhere in this Deed of Trust, or the recourse of Beneficiary for
satisfaction of such obligations. Trustor agrees that no action for the
enforcement of or recovery of damages under this Section 1.18 shall constitute
an action within the meaning of California Code of Civil Procedure ss 726, which
shall not apply to this Section 1.18, and no judgment against Trustor in any
action pursuant to this Section 1.18 shall constitute a money judgment or a
deficiency judgment within the meaning of California Code of Civil Procedure ss
ss 580a, 580b, 580d or 726. This Section 1.18 and the obligations of Trustor
hereunder shall survive, and remain in full force and effect after, any
reconveyance of this Deed of Trust or any foreclosure of this Deed of Trust
(whether by judicial action, exercise of the power of sale, deed in lieu of
foreclosure, or otherwise) with respect to any past, present or future Release
or threatened Release of any Hazardous Substances in, on or under the Trust
Estate or any past, present or future violation of any Environmental Laws at the
Trust Estate which occurred, or the onset of which occurred, before such
reconveyance or foreclosure, and Beneficiary shall have the right to enforce
this Section 1.18 after any such reconveyance or foreclosure. Trustor waives the
right to assert any statute of limitations as a bar to the enforcement of this
Section 1.18 or to any action brought to enforce this Section 1.18. This Section
1.18 shall not affect, impair or waive any rights or remedies of Beneficiary or
Trustor or any obligations of Beneficiary or of Trustor with respect to
Hazardous Substances created or imposed by Environmental Laws (including
Beneficiary's rights of reimbursement or contribution under Environmental Laws).
The remedies in this Section 1.18 are cumulative and in addition to all remedies
provided by law.
1.19. Other Instruments. Except as otherwise expressly provided in
Subsection 1.08(d) hereof with respect to Impositions, Trustor shall punctually
pay all amounts due and payable, and shall promptly and faithfully perform or
observe each and every other obligation or condition to be performed or
observed, under each deed of trust, mortgage or other lien or encumbrance,
lease, sublease, declaration, covenant, condition, restriction, license, order
or other instrument or agreement which affects or appears to affect the Trust
Estate, whether at law or in equity.
ARTICLE II
INTENTIONALLY OMITTED
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ARTICLE III
SECURITY AGREEMENT
3.01. Creation of Security Interest. Trustor hereby grants to
Beneficiary a security interest in the Personal Property and in all amounts of
money now or at any time hereafter deposited with or in the possession of
Beneficiary (all of the foregoing items are referred to collectively as the
"Collateral") for the purpose of securing the indebtedness and obligations
secured by this Deed of Trust.
3.02. Warranties, Representations and Covenants of Trustor. Trustor
hereby warrants, represents and covenants as follows:
(a) Except for the security interest granted hereby, Trustor
is, and as to portions of the Collateral to be acquired after the date hereof
will be, the sole owner of the Collateral, free from any lien, security
interest, encumbrance or adverse claim thereon of any kind whatsoever. Trustor
shall notify Beneficiary of, and shall indemnify and defend Beneficiary and the
Collateral against, all claims and demands of all persons at any time claiming
the Collateral or any part thereof or any interest therein.
(b) The Collateral is not, and shall not be, used or bought
for personal, family or household purposes.
(c) The Personal Property shall be kept on or at the Property
and Trustor shall not remove the Personal Property from the Property without the
prior consent of Beneficiary, except for such portions or items of Personal
Property as are consumed or worn out in ordinary usage, all of which Trustor
shall promptly replace with new items of equal or better quality.
(d) Trustor maintains a place of business in the State of
California at the address set forth in this Deed of Trust and Trustor shall
immediately notify Beneficiary in writing of any change in its place of
business.
(e) At the request of Beneficiary, Trustor shall execute one
or more financing statements and continuations and amendments thereof pursuant
to the Uniform Commercial Code of California in form satisfactory to
Beneficiary, and Trustor shall pay the cost of filing the same in all public
offices whenever and wherever filing is deemed by Beneficiary to be necessary or
desirable.
(f) All covenants and agreements of Trustor in this Deed of
Trust relating to the Trust Estate shall be deemed to apply to the Personal
Property whether or not expressly referred to herein.
(g) This Deed of Trust constitutes a security agreement as
that term is used in the Uniform Commercial Code of California. This Deed of
Trust is also a financing statement (fixture filing), covers goods which are or
are to become fixtures, and is to be recorded in the real estate records.
Trustor is the record owner of the Property.
ARTICLE IV
REMEDIES UPON DEFAULT
4.01. Event of Default. Any of the following events shall be deemed to
be an event of default ("Event of Default") hereunder:
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(a) Default shall be made in the payment, when due, of
any sum secured hereby and such default is not cured
within ten (10) days of written notice to Trustor
that such sums are due; or
(b) There shall occur a breach of or default under any
other covenant, agreement or obligation of Trustor
contained herein, and such breach or default shall
remain unremedied for thirty (30) days following
written notice to Trustor of such default unless such
default cannot reasonably be remedied within such
thirty (30) day period and provided Trustor commences
and diligently proceeds to remedy the default within
such period;
(c) There shall occur a default under the Note beyond any
applicable grace period; or
(d) There shall occur a default under any of the other
Loan Instruments.
4.02. Acceleration Upon Default: Additional Remedies. Upon the
occurrence of an Event of Default, Beneficiary may, at its option, declare all
indebtedness and obligations secured hereby to be immediately due and payable
without any presentment, demand, protest or notice of any kind; and whether or
not Beneficiary exercises said option, Beneficiary may:
(a) Either in person or by agent, with or without bringing any
action or proceeding, appointed by a court and without regard to the adequacy of
its security, enter upon and take possession of the Trust Estate, or any part
thereof, in its own name or in the name of Trustee, and do any act which it
deems necessary or desirable to preserve the value, marketability or rentability
of the Trust Estate, or part thereof or interest therein, increase the income
therefrom or protect the security hereof and, with or without taking possession
of the Trust Estate. The entering upon and taking possession of the Trust Estate
shall not cure or waive any default or notice of default hereunder or invalidate
any act done in response to such default or pursuant to such notice of default
and, notwithstanding the continuance in possession by Trustee, Beneficiary or a
receiver of all or any portion of the Trust Estate, the Trustee or Beneficiary
shall be entitled to exercise every right provided for in any of the Loan
Instruments or by law upon occurrence of any Event of Default, including the
right to exercise the power of sale;
(b) Commence an action to foreclose this Deed of Trust as a
mortgage, appoint a receiver, or specifically enforce any of the covenants
hereof;
(c) Deliver to Trustee a written declaration of default and
demand for sale, and a written notice of default and election to cause Trustor's
interest in the Trust Estate to be sold, which notice the Trustee or Beneficiary
shall cause to be duly filed for record in the Official Records of the County in
which the Land is located; or
(d) Exercise all other rights and remedies provided herein, in
any Loan Instrument or other document or agreement now or hereafter securing all
or any portion of the obligations secured hereby, or provided by law.
4.03. Foreclosure By Power of Sale.
(a) Should Beneficiary elect to foreclose by exercise of the
power of sale herein contained, Beneficiary shall notify Trustee and shall
deposit with Trustee this Deed of Trust and such receipts and evidence of
expenditures made and secured hereby as Trustee may require.
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(b) Upon receipt of such notice from Beneficiary, Trustee
shall cause to be recorded, published and delivered to Trustor such Notice of
Default and Election to Sell as is then required by law. Trustee shall, without
demand on Trustor, after lapse of such time as may then be required by law and
after recordation of such Notice of Default and after Notice of Sale having been
given as required by law, sell the Trust Estate at the time and place of sale
fixed by it in said Notice of Sale, either as a whole, or in separate lots or
parcels or items, and in such order as Beneficiary may direct Trustee so to do,
at public auction to the highest bidder for cash in lawful money of the United
States payable at the time of sale. Trustee shall deliver to such purchaser or
purchasers thereof its good and sufficient deed or deeds conveying the property
so sold, but without any covenant or warranty, express or implied. The recitals
in such deed of any matter or fact shall be conclusive proof of the truthfulness
thereof. Any person including, without limitation, Trustor, Trustee or
Beneficiary may purchase at such sale.
(c) After deducting all costs, fees and expenses of
Beneficiary and Trustee, including costs of evidence of title in connection with
sale, Beneficiary shall apply the proceeds of sale in the following priority, to
payment of (i) first, all sums expended under the terms hereof, not then repaid,
with accrued interest at the Advance Interest Rate; (ii) second, all other sums
then secured hereby; and (iii) the remainder, if any, to the person or persons
legally entitled thereto.
(d) Subject to California Civil Code Section 2924g, Trustee
may postpone sale of all or any portion of the Trust Estate by public
announcement at such time and place of sale, and from time to time thereafter
may postpone such sale by public announcement or subsequently noticed sale, and
without further notice make such sale at the time fixed by the last
postponement, or may, in its discretion, give a new notice of sale.
(e) A sale of less than the whole of the Trust Estate or any
defective or irregular sale made hereunder shall not exhaust the power of sale
provided for herein; and subsequent sales may be made hereunder until all
obligations secured hereby have been satisfied, or the entire Trust Estate sold,
without defect or irregularity.
4.04. Intentionally Omitted.
4.05. Application of Funds After Default. Except as otherwise herein
provided, upon the occurrence and during the continuance of an Event of Default
hereunder, Beneficiary may, at any time without notice, apply any or all sums or
amounts received and held by Beneficiary to pay insurance premiums, Impositions,
or either of them, or as rents or income of the Trust Estate, or as insurance or
condemnation proceeds, and all other sums or amounts received by Beneficiary
from or on account of Trustor or the Trust Estate, or otherwise, upon any
indebtedness or obligation of Trustor secured hereby, in such manner and order
as Beneficiary may elect, notwithstanding that said indebtedness or the
performance of said obligation may not yet be due. The receipt, use or
application of any such sum or amount shall not be construed to affect the
maturity of any indebtedness secured by this Deed of Trust, or any of the rights
or powers of Beneficiary or Trustee under the terms of the Loan Instruments, or
any of the obligations of Trustor or any guarantor under the Loan Instruments;
or to cure or waive any default or notice of default under any of the Loan
Instruments or to invalidate any act of Trustee or Beneficiary.
4.06. Costs of Enforcement. If any Event of Default occurs, Beneficiary
and Trustee, and each of them, may employ an attorney or attorneys to protect
their rights hereunder. Trustor promises to pay to Beneficiary, on demand, the
reasonable fees and expenses of such attorneys and all other actual costs of
enforcing the obligations secured hereby including, without limitation,
recording fees, the expense of a Trustee's Sale Guarantee, Trustee's fees and
expenses, receivers' fees and expenses, and all other expenses, of whatever kind
or nature, incurred by Beneficiary and Trustee, and each of them, in connection
with the enforcement of the obligations secured hereby,
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whether or not such enforcement includes the filing of a lawsuit. Until paid,
such sums shall by secured hereby and shall bear interest, from date of
expenditure, at the Advance Interest Rate.
4.07. Remedies Not Exclusive. Trustee and Beneficiary, and each of
them, shall be entitled to enforce payment and performance of any indebtedness
or obligation secured hereby and to exercise all rights and powers under this
Deed of Trust or under any Loan Instrument or other agreement or any law now or
hereafter in force, notwithstanding some or all of the said indebtedness and
obligations secured hereby may now or hereafter be otherwise secured, whether by
guaranty, mortgage, deed of trust, pledge, lien, assignment or otherwise.
Neither the acceptance of this Deed of Trust nor its enforcement whether by
court action or pursuant to the power of sale or other powers herein contained,
shall prejudice or in any manner affect Trustee's or Beneficiary's right to
realize upon or enforce any other security now or hereafter held by Trustee or
Beneficiary, it being agreed that Trustee and Beneficiary, and each of them,
shall be entitled to enforce this Deed of Trust and any other security now or
hereafter held by Beneficiary or Trustee in such order and manner as they may in
their absolute discretion determine. No remedy herein conferred upon or reserved
to Trustee or Beneficiary is intended to be exclusive of any other remedy herein
or by law provided or permitted, but each shall be cumulative and shall be in
addition to every other remedy given hereunder or now or hereafter existing at
law or in equity or by statute. Every power or remedy given by any of the Loan
Instruments to Trustee or Beneficiary or to which either of them may be
otherwise entitled may be exercised, concurrently or independently, from time to
time and as often as may be deemed expedient by Trustee or Beneficiary, and
either of them may pursue inconsistent remedies.
4.08. Request For Notices. Trustor hereby requests that a copy of any
notice of default and a copy of any notice of sale hereunder be mailed to it at
the addresses specified for Trustor in Section 4.06 hereof.
ARTICLE V
MISCELLANEOUS COVENANTS AND AGREEMENTS
5.01. Amendments. This instrument cannot be waived, changed, discharged
or terminated orally, but only by an instrument in writing signed by the party
against whom enforcement of any waiver, change, discharge or termination is
sought. A copy of said instrument shall be sent by said party to all other
parties in the manner specified in Section 5.06 hereof.
5.02. Trustor's Waiver of Rights. Trustor waives, to the extent
permitted by law, (i) the benefit of all laws now existing or that may hereafter
be enacted providing for any appraisement before sale of any portion of the
Trust Estate, and, whether now existing or hereafter arising or created, (ii)
all rights of redemption, valuation, appraisement, stay of execution, notice of
election to mature or declare due the whole of the secured indebtedness and
marshaling in the event of foreclosure of the liens hereby created, and (iii)
all rights and remedies which Trustor may have or be able to assert by reason of
the laws of the State of California pertaining to the rights and remedies of
sureties; provided, however, nothing contained herein shall be deemed to be a
waiver of Trustor's rights under Section 2924c of the California Civil Code.
5.03. Statement by Trustor. Trustor shall, within ten (10) days after
written notice thereof from Beneficiary, deliver to Beneficiary a written
statement setting forth the amounts then unpaid and secured by this Deed of
Trust and stating whether any offset or defense exists against payment of such
amounts.
5.04. Beneficiary Statement. For any statement or accounting requested
by Trustor or any other entitled person pursuant to Section 2943 or Section 2954
of the California Civil Code or pursuant to any other provision of applicable
law, or any other document or instrument furnished to Trustor by Beneficiary,
Beneficiary may charge the maximum amount permitted by law at the time of the
request therefor, or if there be no such maximum, then in
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accordance with Beneficiary's customary charges therefor or the actual cost to
Beneficiary therefor, whichever is more.
5.05. Reconveyance by Trustee. So long as no default shall have
occurred in the performance or observance of Trustor's covenants, agreements and
obligations under the Note, then upon written request of Beneficiary stating
that all sums and obligations secured hereby have been paid and fully performed,
and upon surrender by Beneficiary of this Deed of Trust to Trustee for
cancellation and retention and upon payment by Trustor of Trustee's fees and the
costs and expenses of executing and recording any requested Reconveyance,
Trustee shall reconvey to Trustor, or to the person or persons legally entitled
thereto, without warranty, any portion of the Trust Estate then held hereunder.
The recitals in any such reconveyance of any matter of fact shall be conclusive
proof of the truthfulness thereof. The grantee in any such reconveyance may be
described as "the person or persons legally entitled thereto."
5.06. Notices. All notices and other communications to be made or
permitted to be made hereunder to any party hereto shall be in writing and shall
be delivered to the addresses shown below or such other addresses that the
parties may provide to one another in accordance herewith. Such notices and
other communications shall be given by any of the following means: (a) by
personal service; (b) by prepaid telegram; (c) by national express air courier,
provided such courier maintains written verification of actual delivery; or (d)
by facsimile, provided such facsimile transmission is confirmed by sending a
written copy of same by national express air courier. Any notice or other
communication given by subsection (a) or (c) above shall be deemed effective
upon the date of receipt or of refusal to accept delivery by the party to whom
such notice or other communication has been sent. Any notice or other
communication given by subsection (b) or (d) above shall be deemed effective on
the Business Day immediately following the date on which the telegraphic or
facsimile transmission, as applicable, occurs.
To Beneficiary: Electronic Arts, Redwood, Inc.
207 Redwood Shores Parkway
Redwood City, California 94065
Fax: (650) 628-________
Attn: James F. Healy, President
with a copy to: Nossaman, Guthner, Knox & Elliott, LLP
50 California Street, 34th Floor
San Francisco, California 94111
Attn: David L. Kimport, Esq.
To Trustor:
with a copy to:
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5.07. Acceptance by Trustee. Trustee accepts this Trust when this Deed
of Trust is duly executed and acknowledged and is made a public record as
provided by law.
5.08. Captions. The captions or headings at the beginning of Articles,
Sections and Subsections hereof are for the convenience of the parties, are not
a part of this Deed of Trust, and shall not be used in construing it.
5.09. Invalidity of Certain Provisions. Every provision of this Deed of
Trust is intended to be severable. In the event any term or provision hereof is
declared to be illegal, invalid or unenforceable for any reason whatsoever by a
court of competent jurisdiction, such illegality, invalidity or unenforceability
shall not affect the balance of the terms and provisions hereof, which terms and
provisions shall remain binding and enforceable. If the lien of this Deed of
Trust is invalid or unenforceable as to any part of the debt, or if the lien is
invalid or unenforceable as to any part of the Trust Estate, the unsecured or
partially secured portion of the debt shall be completely paid prior to the
payment of the remaining and secured or partially secured portion of the debt,
and all payments made on the debt, whether voluntary or under foreclosure or
other enforcement action or procedure, shall be considered to have been first
paid on and applied to the full payment of that portion of the debt which is not
secured or fully secured by the lien of this Deed of Trust.
5.10. No Merger of Leases. Upon the foreclosure of the lien created by
this Deed of Trust on the Trust Estate pursuant to the provisions hereof, any
lease or sublease then existing and affecting all or any portion of the Trust
Estate shall not be destroyed or terminated by application of the law of merger
or as a matter of law or as a result of such foreclosure unless Beneficiary or
any purchaser at such foreclosure sale shall so elect. No act by or on behalf of
Beneficiary or any such purchaser shall constitute a termination of any lease or
sublease unless Beneficiary or such purchaser shall give written notice of such
termination to such tenant or subtenant. If both the lessor's and lessee's
estate under any lease or any portion thereof which constitutes a part of the
Trust Estate shall at any time become vested in one owner, this Deed of Trust
and the lien created hereby shall not be destroyed or terminated by application
of the doctrine of merger unless Beneficiary so elects as evidenced by recording
a written declaration so stating, and, unless and until Beneficiary so elects,
Beneficiary shall continue to have and enjoy all of the rights and privileges of
Beneficiary hereunder as to the separate estates.
5.11. Governing Law. This Deed of Trust shall be governed by and
construed in accordance with the laws of the State of California.
5.12. Statute of Limitations. Except insofar as now or hereafter
prohibited by law, the right to plead, use or assert any statute of limitations
as a plea or defense or bar of any kind, or for any purpose, to any debt, demand
or obligation secured or to be secured hereby, or to any complaint or other
pleading or proceeding filed, instituted or maintained for the purpose of
enforcing this Deed of Trust or any rights hereunder, is hereby waived by
Trustor.
5.13. Joint and Several Obligations. Should this Deed of Trust be
signed by more than one party, all obligations herein contained shall be deemed
to be the joint and several obligations of each party executing this Deed of
Trust. Any married person signing this Deed of Trust agrees that recourse may be
had against community assets and against his or her separate property for the
satisfaction of all obligations contained herein.
5.l4. Interpretation. In this Deed of Trust the singular shall include
the plural and the masculine shall include the feminine and neuter and vice
versa, if the context so requires; and the word "person" shall include
corporation, partnership or other form of association.
5.15. Trust Irrevocable: No Offset. The Trust created hereby is
irrevocable by Trustor. No offset or claim that Trustor now or may in the future
have against Beneficiary shall relieve Trustor from paying the indebtedness or
performing any other obligation contained herein or secured hereby.
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5.16. Corrections. Trustor shall, upon request of Beneficiary, promptly
correct any defect, error or omission which may be discovered in the contents
hereof or in the execution or acknowledgment hereof, and will execute,
acknowledge and deliver such further instruments and do such further acts as may
be necessary or as may be reasonably requested by Beneficiary to carry out more
effectively the purposes hereof, to subject to the lien and security interest
hereby created any of Trustor's properties, rights or interest covered or
intended to be covered hereby, or to perfect and maintain such lien and security
interest.
5.17. Further Assurances. Trustor, Beneficiary and Trustee agree to do
or to cause to be done such further acts and things and to execute and deliver
or to cause to be executed and delivered such additional assignments,
agreements, powers and instruments, as any of them may reasonably require or
deem advisable to keep valid and effective the charges and lien hereof, to carry
into effect the purposes of this Deed of Trust or to better assure and confirm
unto any of them their rights, powers and remedies hereunder; and, upon request
by Beneficiary, shall supply evidence of fulfillment of each of the covenants
herein contained concerning which a request for such evidence has been made.
5.18. Execution of Documents by Trustee. At any time, and from time to
time, without liability therefor and without notice, upon written request of
Beneficiary and presentation of this Deed of Trust, and without affecting the
personal liability of any person for payment of the indebtedness or the
performance of any other obligation secured hereby or the effect of this Deed of
Trust upon the remainder of said Trust Estate, Trustee may (i) reconvey any part
of said Trust Estate, (ii) consent in writing to the making of any map or plat
thereof, (iii) join in granting any easement thereon, or (iv) join in any
extension agreement, agreement subordinating the lien or charge hereof, or other
agreement or instrument relating hereto or to the Trust Estate or any portion
thereof.
5.19. Appointment of Successor Trustee. Trustee or any successor acting
hereunder may resign and thereupon be discharged of the trusts hereunder upon
thirty (30) days' written notice to Beneficiary. Regardless of whether such
resignation occurs, Beneficiary may, from time to time, substitute a successor
or successors to any Trustee named herein or acting hereunder in accordance with
any statutory procedure for such substitution; or if Beneficiary, in its sole
discretion, so elects, Beneficiary may substitute such successor or successors
by recording in the office of the recorder of the county or counties where the
Land is situated, an instrument executed by Beneficiary, and containing the name
of the original Trustor, Trustee and Beneficiary hereunder, the book and page
where this Deed of Trust is recorded and the name and address of the new
Trustee, which instrument shall be conclusive proof of proper substitution of
such successor Trustee or Trustees, who shall succeed, without conveyance from
the predecessor Trustee, all its title, estate, rights, powers and duties
hereunder.
5.20. Successors and Assigns. This Deed of Trust applies to, inures to
the benefit of and binds Trustor and its heirs, legatees, devisees,
administrators, personal representatives, executors and the successors and
assigns thereof, Trustee and Beneficiary. As used herein, the term "Beneficiary"
shall mean the holder or holders of the Note from time to time, whether or not
named as Beneficiary herein; the term "Trustee" shall mean the trustee appointed
hereunder from time to time, whether or not notice of such appointment is given;
and the term "Trustor" shall mean the Trustor named herein and the
successors-in-interest, if any, of said named Trustor in and to the Trust Estate
or any part thereof. If there be more than one Trustor hereunder, their
obligations shall be joint and several.
5.21. Priority. This Deed of Trust is intended to have and retain
priority over all other liens and encumbrances upon the Trust Estate, excepting
only: (i) such impositions as at the date hereof have, or by law gain, priority
over the lien created hereby; (ii) covenants, conditions, restrictions,
easements, and rights of way which are of record or are disclosed of record and
which affect the Trust Estate on the date hereof; and (iii) leases, liens,
encumbrances and other matters as to which Beneficiary hereafter expressly
subordinates the lien of this
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Deed of Trust by written instrument in recordable form. Under no circumstance
shall Beneficiary be obligated or required to subordinate the lien hereof to any
lease, lien, encumbrance, covenant or other matter affecting the Trust Estate or
any portion thereof. Beneficiary may, however, at Beneficiary's option,
exercisable in its sole and absolute discretion, subordinate the lien of this
Deed of Trust, in whole or in part, to any or all leases, liens, encumbrances or
other matters affecting all or any portion of the Trust Estate by executing and
recording in the Office of the County Recorder of the County and State in which
the Land is located, a unilateral declaration of such subordination specifying
the lease, lien, encumbrance or other matter or matters to which this Deed of
Trust shall thereafter be subordinate. Notwithstanding the foregoing, upon the
request of Trustor, Beneficiary agrees to execute a nondisturbance and
attornment agreement with tenant(s) under any lease(s) of the Property providing
that so long as such tenant is not in default of the terms of its lease, upon
and following a foreclosure of this Deed of Trust, Beneficiary shall not disturb
the possession of such tenant in accordance with the terms of its lease.
5.22. Financing Statement and Fixture Filing.
(a) This Deed of Trust constitutes a financing statement and
fixture filing in the Official Records of the County Recorder of the County and
State in which the Property is located with respect to any and all Fixtures (as
hereinafter defined) included with the term "Improvements" as used herein and
with respect to any goods, collateral or other personal property that may now be
or hereafter become Fixtures. As used herein, the term "Fixtures" shall mean all
fixtures located upon or within the Improvements or now or hereafter installed
in, or used in connection with any of the Improvements, including, but not
limited to, any and all partitions, screens, awnings, motors, engines, boilers,
furnaces, pipes, plumbing, elevators, cleaning and sprinkler systems, fire
extinguishing apparatus and equipment, water tanks, heating, ventilating, air
conditioning, and air cooling equipment, refrigerators, washer and dryer units,
and gas and electric machinery, appurtenances and equipment, whether or not
permanently affixed to the Property or Improvements.
(b) It is understood and agreed that, to protect the
Beneficiary against the effect of California Commercial Code Section 9313, as
amended from time to time, in the event that (x) any Fixture owned by the
Trustor in the Trust Estate, or any part thereof, is replaced or added to, or
any new Fixture owned by the Trustor is installed by the Trustor, and in each
case such Fixture has a cost or fair market value in excess of Ten Thousand
Dollars ($10,000.00), and (y) such Fixture is or may be subject to a security
interest held by a seller or any other party:
(i) Trustor or any owner of all or any part of the
Trust Estate shall, before the replacement, addition, or installation of any
such Fixture, obtain the prior written approval of the Beneficiary, and give the
Beneficiary written notice that a security agreement with respect to such
Fixture has been or will be consummated, which notice shall contain the
following information:
(A) a description of the Fixtures to be
replaced, added to, installed or
substituted;
(B) a recital of the location at which
the Fixtures will be replaced, added
to, installed or substituted;
(C) a statement of the name and address
of the holder and amount of the
security interest; and
(D) the date of the purchase of such
Fixtures.
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Neither this subparagraph nor any consent by the Beneficiary
pursuant to this subparagraph shall constitute an agreement to subordinate any
right of the Beneficiary in Fixtures or other property covered by this Deed of
Trust.
(ii) The Beneficiary may, at its option, at any time,
pay the balance due under said security agreement and the amount so paid shall
be (A) secured by this Deed of Trust and shall be a lien on the Trust Estate
enjoying the same priorities vis-a-vis the estates and interests encumbered
hereby as this Deed of Trust, and (B) payable on demand with interest at the
Advance Interest Rate from the time of such payment as aforesaid; and the
Beneficiary shall have the privilege of acquiring by assignment from the holder
of said security interest any and all contract rights, accounts receivable,
chattel paper, negotiable or non-negotiable instruments, or other evidence of
the Trustor's indebtedness for such Fixtures, and, upon acquiring such interest
aforesaid by assignment, shall have the right to enforce the security interest
as assignee thereof, in accordance with the terms and provisions of the
California Commercial Code, as amended or supplemented, and in accordance with
the law.
(iii) Whether or not the Beneficiary has paid or
taken an assignment of such security interest, if at any time the Trustor shall
be in default under the security agreement covering the Fixtures beyond the
applicable cure period therefor, if any, as specified therein, such default
shall be a material breach of the Trustor's covenants under this Deed of Trust,
and shall at the option of the Beneficiary constitute a default under this Deed
of Trust.
(iv) The provisions of subparagraphs (ii) and (iii)
above shall not apply if the goods which may become Fixtures are of at least
equivalent value and quality as any property being replaced and if the rights of
the party holding such security interest have been expressly subordinated, at no
cost to the Beneficiary, to the lien of this Deed of Trust in a manner
satisfactory to the Beneficiary, including, without limitation, at the option of
the Beneficiary, providing to the Beneficiary a satisfactory opinion of counsel
to the effect that this Deed of Trust constitutes a valid and subsisting first
lien on such Fixtures which is not subordinate to the lien of such security
interest under any applicable law, including, without limitation, the provisions
of Section 9313 of the California Commercial Code.
IN WITNESS THEREOF, Trustor has caused this Deed of Trust to
be executed by its duly authorized agents and representatives as of the date
first above written.
TRUSTOR
______________________, a _______________
By:_____________________________________
Name:___________________________________
Title:__________________________________
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EXHIBIT A
Legal Description of the Land
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EXHIBIT M
FORM OF
CONTINUING GUARANTY
To induce ELECTRONIC ARTS REDWOOD, INC. (hereinafter called "Lender")
to grant credit and or make financial accommodation to
____________________________, a _____________________________ (hereinafter
called "Borrower") and in consideration thereof of any loans, advances, or
financial accommodations heretofore or hereafter granted by Lender to or for the
account of Borrower, the undersigned (hereinafter called "Guarantor")
unconditionally guarantees and promises to pay Lender, or order, on demand, in
lawful money of the United States, any and all indebtedness (as hereinafter
defined) of Borrower to Lender under any existing or future agreement or
otherwise, and also guarantee the due performance by Borrower of all of its
obligations under all existing and future contracts and agreements with Lender.
1. The word "indebtedness" means the loan evidenced by that certain
Promissory Note made by Borrower to Lender in the original principal amount of
________________________________Dollars ($________________) (the "Note"),
secured by a deed of trust on the property located at Redwood Shores, Redwood
City, California, as described in Exhibit A attached hereto, together with all
renewals, extensions, modifications and/or substitutions of or for the Note,
including all principal, interest, collection costs and expenses relating to the
Note or any collateral for the Note. Collection costs and expenses include,
without limitation, all of Lender's attorneys' fees and legal expenses, whether
or not suit is instituted, and all foreclosure expenses.
2. This Guaranty is a Continuing Guaranty which shall remain effective
until all of the indebtedness has been finally paid in full, at which time it
shall be of no further force or effect.
3. The obligations hereunder are joint and several, and independent of
the obligations of Borrower, and a separate action or actions may be brought and
prosecuted against Guarantor, whether action is brought against Borrower or
whether Borrower is joined in any such action or actions, and Guarantor waives
the benefit of any statute of limitations affecting their liability hereunder or
the enforcement hereof.
4. Guarantor authorizes Lender, without notice or demand and without
affecting their liability hereunder, from time to time to (a) renew, compromise,
extend, accelerate or otherwise change the time for payment of, or otherwise
change the terms of the indebtedness or any part thereof; (b) take and hold
security for the payment of this Guaranty or the indebtedness guaranteed, and
exchange, enforce, waive and release any such security; (c) apply such security
and direct the order or manner of sale thereof as Lender in its sole discretion
may determine; and (d) assign, without notice, this Guaranty in whole or in part
and/or Lender's rights hereunder to anyone at any time.
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5. Guarantor waives all rights and defenses arising out of an election
of remedies by Lender, even though that election of remedies, such as
nonjudicial foreclosure with respect to security for a guaranteed obligation,
has destroyed Guarantor's rights of subrogation and reimbursement against
Borrower by the operation of Section 580d of the Code of Civil Procedure or
otherwise, and/or any similar law of California, or of any other State, or of
the United States. Guarantor waives any right to require Lender to (a) proceed
against Borrower; (b) proceed against or exhaust any security held from
Borrower; or (c) pursue any other remedy in Lender's power whatsoever. Guarantor
waives any defense arising by reason of any disability or other defense of
Borrower or by reason of the cessation from any cause whatsoever of the
liability of Borrower. Guarantor also agrees that nothing shall discharge or
satisfy the liability of Guarantor hereunder except the full payment and
performance of all of Borrower's debts and obligations to Lender with interest.
Guarantor waives all presentments, demands for performance, notices of
nonperformance, protests, notices of protest, notices of dishonor, notices of
default, notices of acceptance of this Guaranty and all other notices to which
Guarantors or any of them might otherwise be entitled, and the right to a jury
trial in any action hereunder or arising out of Lender's transactions with
Borrower.
6. Guarantor agrees that it is its responsibility to keep informed of
the financial status of Borrower and of any circumstance which may affect
Guarantor's obligations or Borrower, and Guarantor recognizes and agrees that
Lender is not obligated to keep Guarantor informed of any such circumstances.
Where Borrower is a corporation or partnership it is not necessary for Lender to
inquire into the powers of Borrower, of the officers, directors, partners or
agents acting or purporting to act on its behalf, and any indebtedness made or
created in reliance upon the professed exercise of such powers shall be
guaranteed hereunder.
7. Guarantor agrees to pay a reasonable attorney's fee and all other
costs and expenses which may be incurred by Lender in the enforcement of this
Guaranty or any claim hereunder or under any other instrument or guaranty.
8. No termination or modification of this Guaranty shall be effective
for any purpose unless it is in writing and executed by an officer of Lender
authorized to do so.
9. All acts and transactions hereunder and the rights and obligations
of the parties hereto shall be governed, construed, and interpreted in
accordance with the laws of the State of California.
10. Guarantor shall deliver, or caused to be delivered, to Lender
audited year end financial statements, prepared by a certified public accounting
firm, of Guarantor within 90 days of each fiscal year end and, if reasonably
requested by Lender, more frequently (but in no event more than quarterly).
-2-
<PAGE>
IN WITNESS WHEREOF, the undersigned Guarantor has executed this
Guaranty this ____ day of __________, 1999.
GUARANTOR:
___________________, a
__________________
By:_____________________________________
Name:___________________________________
Title:__________________________________
-3-
<PAGE>
EXHIBIT N
LEGAL DESCRIPTION
of
NO-BUILD ZONE No. 1
Lands of Electronic Arts
All that real property being a portion of Parcel 2, as shown on that certain
Parcel Map entitled "Parcel Map No. 98-6," recorded in Volume 70 of Parcel Maps
at Pages 78-79, Records of San Mateo County, State of California, bounded to the
northwest by the northwesterly property line of said Parcel 2, designated North
43 degrees 19'38" East 169.07 feet, bounded to the southeast by a line parallel
to and offset 127.00 feet southeasterly from said northwesterly properly line of
said Parcel 2, bounded to the southwest by the southwesterly property line of
said Parcel 2, and bounded to the northeast by the northeasterly property line
of said Parcel 2.
LEGAL DESCRIPTION
of
NO-BUILD ZONE No. 2
Lands of Electronic Arts
All that real property being a portion of Parcel 2, as shown on that certain
Parcel Map entitled "Parcel Map No. 98-6," recorded in Volume 70 of Parcel Maps
at Pages 78-79, Records of San Mateo County, State of California, bounded to the
northeast by the northeasterly property line of said Parcel 2, bounded to the
southwest by a line parallel to and offset 79.00 feet southwesterly from the
northeasterly property line of said Parcel 2 designated North 46 degrees 40'22"
West 292.00 feet, bounded to the northwest by a line parallel to and offset
127.00 feet southeasterly from said northwesterly properly line of said Parcel 2
designated North 43 degrees 19'38" East 169.07 feet, and bounded to the
southeast by a line parallel to and offset 400.00 feet southeasterly from the
northwesterly property line of said Parcel 2 designated North 43 degrees 19'38"
East 169.07 feet.
-1-
<PAGE>
EXHIBIT O
RECORDING REQUESTED BY AND
WHEN RECORDED MAIL TO:
================================================================================
SPACE ABOVE THIS LINE FOR RECORDER'S USE
FORM OF
EASEMENT AGREEMENT
(ACCESS)
This Easement Agreement is made this _____ day of _________________,
1999, by and between FLATIRONS FUNDING, LIMITED PARTNERSHIP, a Delaware limited
partnership ("FFLP"), ELECTRONIC ARTS REDWOOD, INC., a Delaware corporation
("EAR"), and _____________________, a _____________________ ("Buyer").
WHEREAS, FFLP is the owner of certain real property located in Redwood
City, San Mateo County, California, more particularly described in Exhibit A
attached hereto, hereinafter referred to as the "Servient Tenement;" and
WHEREAS, EAR is the lessee of the Servient Tenement and adjacent
buildings; and
WHEREAS, Buyer is the owner of certain real property adjacent to the
Servient Tenement, more particularly described in Exhibit B attached hereto,
hereinafter referred to as the "Dominant Tenement;" and
WHEREAS, EAR as of the date hereof has sold the Dominant Tenement to
Buyer, and one of the conditions of the sale is that FFLP grants the easement
described herein to Buyer, its successors and assigns, on the terms and
conditions hereinafter set forth; and
WHEREAS, FFLP wishes to grant the easement and EAR consents to such
grant;
NOW, THEREFORE, it is agreed as follows:
1. Grant of Easement. FFLP hereby grants to Buyer, its successors and
assigns, in perpetuity, as appurtenant to the Dominant Tenement, a non-exclusive
right-of-way easement as described in Section 2 below (the "Right-of-Way
Easement"). Persons designated in Section 2 as entitled to use the Right-of-Way
Easement are collectively referred to as "Permittees."
-1-
<PAGE>
2. Description of Right-Of-Way Easement. The Right-of-Way Easement
granted herein is a right-of-way for Buyer, its successors, assigns, and tenants
of the buildings located or to be located on the Dominant Tenement, and their
respective employees, agents, visitors, and invitees, to cross that portion of
the Servient Tenement described in Exhibit C attached hereto en route to or from
the entrance to the buildings located or to be located on the Dominant Tenement.
3. Maintenance, Repair, and Replacement. FFLP shall be responsible for
the maintenance, repair, and replacement of the right of way located on the
Servient Tenement.
(a) Costs. FFLP shall be responsible for the cost of such
maintenance, repair, or replacement; provided, however, that if any repair or
maintenance to the right of way is required by reason of the negligence, willful
misconduct or other fault of Buyer or its Permittees, unless otherwise agreed
Buyer shall be obligated to pay for the entire cost of such repair or
maintenance. If FFLP initially pays the cost of such maintenance or repair,
Buyer shall remit payment in full to FFLP within thirty (30) days from the date
of receipt of a written request for payment from FFLP. Nothing contained in this
Agreement shall limit the right of Buyer to charge, allocate, pass through or
apportion all or any part of such expense to any Permittees of Buyer.
(b) Access. For purposes of repairing, maintaining, or
replacing the right of way, FFLP shall have the right to temporarily suspend or
block use of or access to portions of the Servient Tenement to the extent
reasonably necessary to undertake such repairs or maintenance, without being
deemed to be in violation of the terms and conditions of this Agreement;
provided, however, that, except in an emergency, such work shall be performed at
times and in a manner reasonably convenient to the continued and uninterrupted
operation of the businesses located on the Dominant Tenement.
(c) Reallocation of Obligations. Maintenance and repair
obligations and costs may be reallocated between the parties and/or additional
or substitute parties in the future by an amendment to this Agreement signed,
acknowledged and duly recorded by the parties.
4. Damage and Destruction; Eminent Domain. In the event of any damage
to or destruction of all or any portion of the Servient Tenement, or a taking of
all or any portion of the Servient Tenement by power of eminent domain, FFLP
shall rebuild and restore the remainder, if any, of the Servient Tenement to the
extent possible. In the event of a taking by power of eminent domain of part or
all of the Servient Tenement, the obligations of FFLP pursuant to this Agreement
shall cease as of the date of the taking with respect to the portion of the
Servient Tenement so taken. Nothing contained herein shall be construed to give
Buyer any interest in any award or payment made to FFLP in connection with any
exercise of eminent domain or transfer in lieu thereof affecting any portion of
the Servient Tenement.
5. Payment of Property Taxes. FFLP shall pay or cause to be paid
promptly when due all real property taxes and other special taxes and
assessments which may be levied or assessed against the Servient Tenement;
provided, however, that in the event any real property taxes or other special
taxes or assessments are separately assessed or levied against Buyer's interest
under this Agreement, Buyer shall pay or cause to be paid promptly when due all
such taxes or assessments.
-2-
<PAGE>
6. Insurance. Each of FFLP and Buyer shall provide, keep in force, and
maintain commercial general liability insurance with a reputable and solvent
insurance company covering their respective interests in the Servient Tenement.
Such policies (a) shall insure against bodily injury, death and property damage
with a combined single limit of coverage of not less than Five Million Dollars
($5,000,000); (b) shall name the other party and EAR as an additional insured;
and (c) shall be increased from time to time to amounts reasonable and customary
for similar properties in the area where the Servient Tenement is located. All
such policies shall provide that the same shall not be canceled without thirty
(30) days' prior written notice to the named and additional insureds. Each of
FFLP and Buyer shall provide the other with certificates of insurance on July 1
of each year and upon any renewal or replacement of insurance during the year.
If a party fails to procure the required insurance, the other party may obtain
such insurance in the defaulting party's name and bill the defaulting party for
such costs.
7. Indemnity. Buyer shall indemnify, defend and hold harmless against
all penalties, losses, liability and claims of any nature whatsoever, including,
without limitation, claims or liabilities for loss or damage to property or for
injury to or death of persons, and all costs and attorneys' fees, arising out of
the activities of Buyer or its Permittees upon or using the Servient Tenement;
provided, however, that the foregoing indemnification shall not apply to matters
resulting directly or indirectly from the negligence or willful misconduct of
FFLP or EAR, or their respective successors, assigns, tenants, visitors, or
invitees.
8. Default. In the event a party hereunder breaches or defaults in its
obligations hereunder, the other party may sue for damages in the event of
failure to pay money or seek specific performance in the event of a failure to
maintain or repair. Neither party may block or inhibit access to the Servient
Tenement as a result of a breach or default hereunder.
9. EAR Consent and Assumption. FFLP hereby assigns and delegates all of
its duties and obligations hereunder to EAR, its successors and assigns, for so
long as EAR, its successors and assigns, are tenants of the Servient Tenement
under lease from FFLP or its successors or assigns. EAR accepts such assignment
and delegation, hereby consents to FFLP's granting the within easements, and
hereby subordinates its leasehold interest to the within easements.
10. Mortgages. No breach of this Agreement shall defeat, render
invalid, diminish or impair the lien of any first mortgage or deed of trust on
the Servient Tenement made in good faith and for value, but the covenants,
conditions and restrictions contained herein shall be binding upon and effective
against any mortgagee who acquires title to either of the Parcels or any portion
thereof by foreclosure, trustee's sale, deed in lieu of foreclosure or
otherwise, pursuant to a mortgage or deed of trust created after the date of
this Agreement.
11. Entire Agreement. This instrument contains the entire agreement
between the parties relating to the rights herein granted and the obligations
herein assumed. Any oral representations or modifications concerning this
instrument shall be of no force or effect except in a subsequent modification in
writing, signed by the party to be charged.
-3-
<PAGE>
12. Attorney's Fees. In the event of any controversy, claim, or dispute
relating to this instrument or the breach thereof, the prevailing party shall be
entitled to recover from the losing party reasonable expenses, attorney's fees,
and costs.
13. Binding Effect. This instrument shall be binding on and shall inure
to the benefit of the heirs, executors, administrators, successors, and assigns
of FFLP, EAR, and Buyer, and each of them.
14. No Dedication. Nothing contained in this Agreement shall be deemed
to be a gift or dedication of any portion of the Servient Tenement to or for the
general public or for any public purposes whatsoever. It is the intention of the
parties that this Agreement shall be strictly limited to and for the purposes
expressed herein.
15. Covenants Running With the Land. All of the provisions, agreements,
rights, powers, covenants, conditions and obligations contained in this
Agreement shall be binding upon and shall inure to the benefit of the FFLP,
Buyer, EAR and their respective successors (by merger, consolidation or
otherwise), assigns, and representatives, and all other persons acquiring an
interest in all or any portion of the Servient Tenement or the Dominant
Tenement. All of the provisions of this Agreement shall constitute covenants
running with the land and equitable servitudes pursuant to any and all
applicable laws.
16. Estoppel Certificates. Either FFLP, EAR, or Buyer may, at any time
and from time to time, in connection with the sale, transfer, financing or
refinancing of its Tenement, deliver a written notice to the other parties
requesting that the other parties execute a certificate certifying that the
requesting party is not in default in the performance of its obligations under
this Agreement or, if in default, describing therein the nature and amount of
any default. Such certificate shall be executed and returned within ten (10)
days following the receipt of the notice from the requesting party. Failure by a
party to execute and return the certificate within the specified period shall be
deemed an admission by such party that the requesting party is current and not
in default in the performance of its obligations under this Agreement. Any such
certificate may be relied upon by all transferees, mortgagees, and deed of trust
beneficiaries.
17. Certain Obligations of FFLP Non-Recourse. FFLP's obligations
hereunder are intended to be the obligations of the limited partnership and of
the corporations which are the managing general partner and any other general
partner thereof only, and no recourse for the payment of any amount due under
this Easement Agreement or for any claim based thereon or otherwise in respect
thereof, shall be held against any limited partner of FFLP or any incorporator,
shareholder, officer, director or affiliate, as such, past, present or future of
such corporate managing general partner or other general partner or of any
corporate limited partner or of any successor corporation to such corporate
managing general partner or other general partner or any corporate limited
partner of FFLP, or against any direct or indirect parent corporation of such
corporate managing general partner or other general partner or of any limited
partner of FFLP or any other subsidiary or affiliate of 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 FFLP is a limited partnership
formed for the purpose of
-4-
<PAGE>
acquiring and owning property including the Servient Tenement and acting as
lessor to Electronic Arts Redwood, Inc., on the express understanding aforesaid.
Nothing contained in this Section 17 shall be construed to limit the exercise or
enforcement, in accordance with the terms of this Easement Agreement and any
other documents referred to herein, of rights and remedies against the limited
partnership or the corporate managing general partner or any other general
partner of FFLP or the assets of the limited partnership or the corporate
managing general partner or any other general partner of FFLP. As used in this
Section 17, "affiliate" means any other person controlling, controlled by or
under direct or indirect common control with such person; "person" means any
individual, corporation, partnership, limited liability company, private limited
company, joint venture, association joint-stock company, trust, unincorporated
association, organ of government or any agency or political subdivision thereof;
and "control," when used with any specified person, means the power to direct
the management and policies of such person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the foregoing.
IN WITNESS WHEREOF, the parties hereto have executed this Easement
Agreement as of the date first-above written.
FLATIRONS FUNDING, LIMITED PARTNERSHIP,
a Delaware limited partnership
By: Flatirons Capital, Inc.
Managing General Partner
By: ___________________________________
Its: __________________________________
_______________________________,
a _______________________
By: ___________________________________
Its: __________________________________
ELECTRONIC ARTS REDWOOD, INC.,
a Delaware corporation
By: ___________________________________
Name: _________________________________
Title: ________________________________
-5-
<PAGE>
Acknowledgment
State of California
County of _____________
On ________________, 1999, before me, ____________________________,
personally appeared _________________________________________ [personally known
to me or proved to me on the basis of satisfactory evidence] to be the person[s]
whose name[s] _______________ ____________________________________ [is or are]
subscribed to the within instrument and acknowledged to me that
_______________________ [he or she or they] executed the same in
______________________________ [his or her or their] authorized
______________________ [capacity or capacities], and that by [his or her or
their] signature[s] on the instrument the person[s], or the entity upon behalf
of which the person[s] acted, executed the instrument.
WITNESS my hand and official seal.
____________________________________ _____________________________
[Signature] [Seal]
-1-
<PAGE>
EXHIBIT P
FORM OF
EXERCISE NOTICE
Electronic Arts, Redwood, Inc.
207 Redwood Shores Parkway
Redwood City, California 94065
Attn: James F. Healy, President
Re: Option Agreement, Agreement of Purchase and Sale and
Joint Escrow Instructions, dated _______________,
1999 (the "Purchase Agreement") between Electronic
Arts Redwood, Inc. ("Seller") and
______________________________("Buyer")
Gentlemen and Ladies:
This letter constitutes the Exercise Notice contemplated by the
above-referenced Purchase Agreement and is delivered to exercise Buyer's option
granted under the Purchase Agreement to purchase the Property (as defined in the
Purchase Agreement) on the terms and for the price stated in the Purchase
Agreement.
Buyer hereby expressly confirms to Seller that Buyer has completed to
its satisfaction the inspection and review contemplated by Article 2 of the
Purchase Agreement. Buyer further confirms that it has deposited the full
Deposit (as defined in the Purchase Agreement) with the Escrow Agent.
Accordingly, Buyer is prepared to proceed with the purchase of the
Property in accordance with the terms of the Purchase Agreement subject only to
the satisfaction or waiver of the conditions described in Section 4.2 of the
Purchase Agreement.
Very truly yours,
[BUYER]
By:_____________________________________
Name:___________________________________
Title:__________________________________
-1-
<PAGE>
EXHIBIT Q
FORM OF
ESTOPPEL CERTIFICATE
TO: [BUYER]
Re: Development Agreement dated November 7, 1996
The undersigned The City of Redwood City (the "City") understands that
[BUYER] has contracted to purchase that certain real property located
in Redwood City, California, identified as Zones 2 and 4 of the
Electronic Arts Business Park (the "Property"), which is subject to the
terms and conditions of that certain Development Agreement dated as of
November 7, 1996, by and between Flatirons Funding, Limited
Partnership, a Delaware limited partnership ("FFLP"), and the City and
recorded November 8, 1996, as Instrument No. 96-138988, Official
Records, San Mateo County, California, as the same may be amended
through the date hereof (the "Development Agreement"). The City hereby
certifies the following information with respect to the Development
Agreement and agrees that you and your assigns may rely upon the same
in purchasing said real property:
1. The Development Agreement is in full force and effect, constitutes a
binding obligation of the parties, and has not been modified or amended
either orally or in writing except by (i) that First Amendment to
Development Agreement dated as of April 15, 1998 and recorded on April
15, 1998, as Instrument No. 98-054809, Official Records, San Mateo
County, California; (ii) that First Amendment to Development Agreement
dated as of April 6, 1998 and recorded on August 25, 1998 (recorded to
correct typographical errors of the First Amendment recorded on April
15, 1998), as Instrument No. 98-135753, Official Records, San Mateo
County, California; and (iii) that Second Amendment to Development
Agreement dated as of August 31, 1998 and recorded on September 2,
1998, as Instrument No. 98-141937, Official Records, San Mateo County,
California.
2. The City finds that FFLP has demonstrated good faith compliance with
the terms of the Development Agreement and has met all its obligations,
both monetary and non-monetary, under the Development Agreement.
3. The City asserts no claim of default under the Development Agreement
and to the best of the City's knowledge and belief, there is no default
by FFLP under the Development Agreement.
Dated: __________, 1999.
Very truly yours,
THE CITY OF REDWOOD CITY
By
_______________________________
Michael Church
Planning and
Redevelopment Manager
-1-
<TABLE>
SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.01
<CAPTION>
Name in Jurisdiction
Corporate Articles Doing Business As of Incorporation
------------------ ----------------- ----------------
<S> <C> <C>
ORIGIN Systems, Inc. ORIGIN Systems, Inc. Texas
Electronic Arts, Proprietary Limited (formerly Electronic Arts, Pty. Ltd. (formerly Commonwealth of
Entertainment and Computer Proprietary, Entertainment and Computer Proprietary, Australia
Limited) Limited)
Electronic Arts (Canada) Inc. Electronic Arts (Canada) Inc. (formerly British Columbia,
(formerly Distinctive Software, Inc.) Distinctive Software, Inc.) Canada
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 K.K. Electronic Arts K.K. Japan
Electronic Arts Productions, Inc. Crocodile Productions Delaware
Electronic Arts Puerto Rico Inc. Electronic Arts Puerto Rico Inc. Delaware
Electronic Arts International Corporation Electronic Arts International Corporation California
Electronic Arts Software S.A. (formerly Electronic Arts Software S.A. (formerly Spain
DROSoft) DROSoft)
Bullfrog Productions Ltd. Bullfrog Productions Ltd. United Kingdom
Kingsoft GmbH Kingsoft GmbH Germany
Electronic Arts Productions Ltd. Electronic Arts Productions Ltd. United Kingdom
Electronic Arts Nordic Aktienbolag Electronic Arts Nordic AB Sweden
Electronic Arts Asia Pacific PTE., LTD Electronic Arts Asia Pacific PTE., LTD Singapore
Electronic Arts Seattle Inc. Electronic Arts Seattle Inc. Washington
Vision Software (Pty) Limited Vision Software (Pty) Limited South Africa
Electronic Arts V.I., Inc. Electronic Arts V.I., Inc. Virgin Islands (U.S.)
Linear Arts, Inc. Linear Arts, Inc. Delaware
EA UK Holding Co. EA UK Holding Co. Delaware
<PAGE>
EA Islands Ltd. EA Islands Ltd. British Virgin Islands
Electronic Arts Limitada EA Brazil Brazil
Electronic Arts Nederland B.V. i.o. Electronic Arts BV The Netherlands
Electronic Arts Portugal Electronic Arts Portugal Portugal
Octopus Interactive C.V. Octopus Interactive C.V. Amsterdam
Electronic Arts Project Inc. Electronic Arts Project Inc. Delaware
Maxis K.K. Maxis K.K. Japan
Electronic Arts Redwood Inc. Electronic Arts Redwood Inc. Delaware
Electronic Arts Handelsges.m.b.H Electronic Arts Austria Austria
Electronic Arts Square K.K. Electronic Arts Square Japan
Electronic Arts Switzerland GmbH Electronic Arts Switzerland Switzerland
Tiburon Entertainment, Inc. Tiburon Florida
Westwood Studios, Inc. Westwood Nevada
</TABLE>
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 30, 1999, include the related
financial statement schedule as of March 31, 1999, and for each of the years in
the three-year period ended March 31, 1999, included in Electronic Arts Inc.'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, based on our audits and the report of the other auditors, 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, 33-82166, 33-61781, 33-61783,
333-01397, 333-09683, 333-09893, 333-32239, 333-32771, 333-46937, 333-60513, and
333-60517) on Form S-8 of Electronic Arts Inc. of our reports included herein
relating to the consolidated balance sheets of Electronic Arts Inc. and
subsidiaries as of March 31, 1999 and 1998, 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, 1999, and the related financial
statement schedule, which reports appear in the March 31, 1999, annual report on
Form 10-K of Electronic Arts Inc.
KPMG LLP
Mountain View, California
June 28, 1999
Exhibit 23.02
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Electronic Arts Inc., and the incorporation by reference in the registration
statements (Nos. 33-66836, 33-55212, 33-53302, 33-41955, 33-82166, 33-61781,
33-61783, 333-01397, 333-09683 and 333-09893) on Form S-8, pertaining to the
Employee Stock Purchase Plans and the Employee Stock Option Plans of Electronic
Arts Inc., of our reports dated May 5, 1997, except for Note 14 as to which the
date is June 4, 1997, with respect to the consolidated financial statements and
schedules of Maxis, Inc. for the year ended March 31, 1997, included in its
Annual Report (Form 10-K) filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Walnut Creek, California
June 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 312,822
<SECURITIES> 4,884
<RECEIVABLES> 222,318
<ALLOWANCES> 72,850
<INVENTORY> 22,376
<CURRENT-ASSETS> 569,465
<PP&E> 271,171
<DEPRECIATION> 89,905
<TOTAL-ASSETS> 901,873
<CURRENT-LIABILITIES> 236,209
<BONDS> 0
0
0
<COMMON> 613
<OTHER-SE> 662,318
<TOTAL-LIABILITY-AND-EQUITY> 901,873
<SALES> 1,221,863
<TOTAL-REVENUES> 1,221,863
<CGS> 625,547
<TOTAL-COSTS> 625,547
<OTHER-EXPENSES> 491,038
<LOSS-PROVISION> 6,027
<INTEREST-EXPENSE> 32
<INCOME-PRETAX> 118,458
<INCOME-TAX> 45,414
<INCOME-CONTINUING> 73,044
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,872
<EPS-BASIC> 1.20
<EPS-DILUTED> 1.15
</TABLE>
Exhibit 99.01
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Maxis, Inc.
We have audited the consolidated statements of operations,
stockholders' equity (deficit), and cash flows of Maxis, Inc. for the year ended
March 31, 1997 (not presented separately herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of its
operations and its cash flows for the year ended March 31, 1997, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Walnut Creek, California
May 5, 1997, except for Note 14 as to which
the date is
June 4, 1997
