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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ...... to ......
COMMISSION FILE NUMBER 0-19654
VITESSE SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE NO. 77-0138960
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
741 CALLE PLANO, CAMARILLO, CA 93012
(Address of principal executive offices)
Registrant's telephone number, including area code: (805) 388-3700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 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 [_]
Indicate 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. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on
September 30, 1997 as reported on the Nasdaq National Market, was approximately
$1,358,898,330. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of September 30, 1997, the registrant had outstanding 35,913,738 shares
of Common Stock.
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PART I
ITEM 1. BUSINESS
Certain statements in this Annual Report on Form 10-K, including certain
statements contained in "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Operating Results."
Vitesse is a leader in the design, development, manufacturing and marketing
of digital GaAs ICs. The Company's products incorporate its proprietary H-GaAs
(high integration gallium arsenide) technology to produce high-performance ICs
primarily for telecommunications, data communications and automated test
equipment (ATE) systems providers. The Company believes H-GaAs technology
provides significant advantages over silicon-based IC technologies in addressing
the combination of speed, power dissipation and complexity requirements of these
high-performance systems providers. In fiscal 1997, sales of
telecommunications, data communications and ATE products represented 52%, 22%
and 22%, respectively, of the Company's total revenues. The Company's major
customers include Alcatel, Credence, Ericsson, Lucent, Schlumberger, Seagate,
Tellabs and Teradyne.
BACKGROUND
Telecommunications Market
As a result of deregulation and heightened competition in the worldwide
telecommunications industry over the past decade, domestic and foreign public
network service providers have been forced to differentiate themselves by being
more responsive and offering new and better services at lower costs. The volume
of information required to be transmitted across public networks has increased
significantly in recent years as a result of a variety of factors, including the
increase in data transmission and facsimile use and the development of new
applications such as video conferencing and multimedia. Public network service
providers, including interexchange long distance carriers ("IXCs") and local
exchange carriers ("LECs"), have been required to upgrade their infrastructure
to provide high-speed data services to customers to meet these needs in addition
to providing their standard telephone services. Infrastructure improvements to
public networks have most prominently included a dramatic increase in the
deployment of fiber optic technology to replace conventional copper wire. Since
optical fiber offers substantially greater capacity, is less error prone and is
easier to administer than copper wire, it has become the transmission medium of
choice for IXCs and, increasingly, LECs.
As fiber optic technology has spread, existing network standards for the
transmission of information, which had been developed primarily for copper wire
networks, have presented limitations to simultaneously transmitting voice and
data. As a result, the SONET (Synchronous Optical Network) standard in the
United States and the equivalent SDH (Synchronous Digital Hierarchy) standard in
the rest of the world emerged as the next generation standards for high-speed
optical fiber transmission. The SONET/SDH standard facilitates high data
integrity and improved performance in terms of network reliability and reduces
maintenance and other operations costs by standardizing interoperability among
different vendors' equipment.
More recently, the demand for system bandwidth is being addressed by
transmitting multiple channels on a single fiber by a technique called
wavelength division multiplexing ("WDM"). The adoption of WDM has enabled
system operators to significantly increase system bandwidth without having to
bury additional fiber cables, a long and costly process. While WDM increases
the bandwidth carried by each optical fiber, it does not reduce the number of
electronic components required. Instead, WDM has accelerated the growth of
SONET/SDH deployment by eliminating fiber installation as a growth limiter.
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Asynchronous transfer mode ("ATM") is a data transmission standard
complementary to SONET/SDH that is in an early stage of development. ATM takes
advantage of the additional capacity provided by fiber optic technology. The
SONET/SDH standard relates to the system through which data is transmitted,
while ATM is a protocol for the packaging of data for transmission over the
SONET/SDH system. ATM technology enables LAN, WAN and public network systems
designers to provide increasingly improved services to network users. LAN and
WAN equipment vendors must enable the integration of mixed high-speed, high-
volume data communications, voice, video and imaging applications, reduce
bandwidth limitations of current LANs and WANs, lower equipment costs and ease
administrative burdens imposed by current system architectures. Similarly,
equipment vendors must provide systems that can handle integrated switched high-
speed, high-volume data communications, voice, video and imaging services.
Public network equipment vendors must also seamlessly integrate their products
with both LAN and WAN equipment to reduce overall networking costs.
Fiber optic applications designed to the SONET/SDH and ATM standards use
data transmission rates of 155 MHz, 622 MHz, 2.488 GHz or 10 GHz. The Company
believes that SONET/SDH transmission systems installed by network providers
generally operate at 2.488 GHz and above. The Company also believes that
silicon-based approaches are not practicable solutions at such frequencies and,
as a result, telecommunications systems manufacturers increasingly look to GaAs
solutions because of their requirements for high bandwidth.
Data Communications Market
Performance improvements in processors and peripherals, along with the
transition to distributed architectures such as client/server, have spawned
increasingly data-intensive and high-speed networking applications. This has
led to a focus on the methods of connecting high-performance computers to
peripheral equipment in the data communications industry.
In 1988, the American National Standards Institute established a Fibre
Channel standard which is a practical, inexpensive, yet expandable method for
achieving high-speed data transfer among workstations, mainframes, data storage
devices and other peripherals. The Fibre Channel standard addresses the need
for very fast transfers of large volumes of information, while at the same time
relieving system manufacturers from the burden of supporting the variety of
networks and channels currently in place. Fibre Channel is especially effective
in situations where large blocks of data must be transferred within and between
buildings and over campus environments. Fibre Channel is substantially faster
than existing network data transmission protocols. Fibre Channel is capable of
transmitting at rates exceeding 1 gigabit per second in both directions
simultaneously and is also able to transport existing protocols over both
optical fiber and copper wire. Currently, the most prominent use of Fibre
Channel technology is in high-density rigid disk drives of 1 gigabyte or
greater.
In the LAN environment, Ethernet is currently the most widespread standard,
operating at 10 to 100 megabits per second. However, LAN backbones are rapidly
being upgraded to Gigabit Ethernet and ATM in order to increase available
bandwidth. These network protocols, which enable expanded bandwidth in excess
of one gigabit per second, are emerging as the new standards for LAN backbones.
The Company believes that CMOS silicon approaches are not practicable
solutions at the 1 gigabit per second or higher clock rates used in the Fibre
Channel and Gigabit Ethernet standards. The Company believes that its H-GaAs
solutions for these markets operate at lower power and greater performance
margins than competing ECL and BiCMOS ICs.
Automated Test Equipment Market
ATE is used for the comprehensive testing of ICs, printed circuit boards
and electronic systems. The increasing worldwide demand for ICs in recent years
has led to an increase in the demand for IC test equipment. The ATE industry
has experienced changes arising from the increasing complexity of ICs, as
manifested by growing pin counts, higher speeds and greater levels of
integration. These changes have created challenges for ATE systems designers,
since the equipment used to test these complex devices must be capable of
performance exceeding that of the devices themselves.
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These changes have also led to major revisions in ATE architectures.
Historically, ATE systems were primarily based on a central resource
architecture where timing and pattern generation hardware and software were
centralized and allocated as needed to groups of pins on the "device under test"
("DUT"). Central resource architecture works best with relatively simple ICs,
but with newer, higher complexity devices, the test environment can be
significantly different for each pin. This has led to a "tester-per-pin"
architecture in which tester resources are dedicated to each pin of the DUT.
This rapid increase in system complexity has resulted in a marked increase in
the number of electronic components needed in the pin channel. The Company
believes these factors have led ATE designers to seek to increase component
integration.
For high-performance ATE systems, the Company believes that CMOS and BiCMOS
silicon ICs are too slow and that the high power dissipation in ECL silicon ICs
limits their integration capabilities. The Company believes that the low power
dissipation and high complexity of the Company's H-GaAs ICs, which permit
systems to be built with fewer ICs, are well-suited for the increasingly
demanding requirements of present generation ATE equipment.
STRATEGY
The Company's strategy includes the following elements:
Target Growing Markets
Vitesse targets the growing telecommunications, data communications and ATE
markets. Within the telecommunications and data communications markets, the
Company's products are used in emerging high-growth markets such as SONET/SDH,
ATM, Fibre Channel, and Gigabit Ethernet, which require ICs that are capable of
high-bandwidth data transmission.
Reduce Costs of High-Performance Products
The Company continually strives to reduce the cost of its high-performance
products. The Company endeavors to continue to increase manufacturing yields
and decrease die sizes, as well as to decrease power dissipation to enable the
use of lower-cost plastic packaging.
Perform Own Wafer Fabrication Using Proprietary Manufacturing Process Technology
The Company operates its own advanced wafer fabrication facility in
Camarillo, California, and has recently completed the construction of an
additional wafer fabrication facility in Colorado Springs, Colorado, which is
not expected to begin production prior to the third quarter of fiscal 1998. The
Company believes that control of wafer fabrication assures a reliable source of
supply and provides greater opportunities to enhance product quality and
reliability. In addition, the Company believes such control facilitates new
process and product development and provides a more dependable wafer supply to
meet customer requirements.
The Company's proprietary manufacturing process utilizes industry standard
manufacturing equipment. This enables the Company to employ developments in
silicon manufacturing technology to continue to improve minimum feature size,
dimension control, deposition and etch capabilities. By eliminating the need
for "custom" wafer fabrication equipment, the Company can focus its resources on
developing leading process technology rather than on developing expensive
customized manufacturing equipment.
Develop "GaAs Transparent" Products
The Company endeavors to make the process of designing Vitesse GaAs
products "transparent" to the designer when compared to the design process for
silicon ICs. The design of its H-GaAs products is conducted using methodologies
and CAD tools essentially identical to those used to design silicon products.
Customers designing Vitesse ASIC products can use industry standard CAD tools
(including those offered by Cadence, Mentor Graphics, Synopsys and Viewlogic) in
such a manner that there are no "GaAs-unique" factors that require special
background or training beyond those for an ASIC designer generally. In
addition, the Company's products do not require electronic systems manufacturers
to change input/output interface levels or utilize power supply voltages unique
to Vitesse products.
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Establish Close Relationships with Customers' Engineering Management
The Company establishes close relationships with its customers' engineering
management and believes these relationships enable it to better understand the
customers' needs and win designs for existing and new systems.
PRODUCTS AND CUSTOMERS
Telecommunications
Telecommunications products accounted for 52% of the Company's total
revenues in both fiscal 1997 and fiscal 1996. In fiscal 1997, substantially all
of the Company's sales in the telecommunications market were for SONET/SDH
applications. In fiscal 1997, the Company's significant telecommunications
customers, each of which purchased at least $100,000 of the Company's products,
included Alcatel, Ericsson, H.Y. Associates, Lucent and Tellabs.
The Company manufactures a variety of telecommunications IC products for
the transmission and reception of data over a fiber optic network. The Company
supplies these products as Company standard products or as customer-designed
ASIC products. With respect to the transmission of data, the Company's products
take parallel data, code it and serialize it (multiplexing or "mux") for
transmission. At the receiving end of the fiber optic system, the Company's
telecommunications products decode and de-serialize the data (demultiplexing or
"demux").
In the case of telecommunications switching, the Company offers a line of
crosspoint switches for high-speed digital switching applications including data
distribution and video switching. The Company also offers a line of
photodetector/transimpedance amplifiers for both telecommunications and data
communications applications which offer a low noise and wide bandwidth solution
for converting light from a fiber optic communications channel into an
electrical signal. The following is a summary of applications and related
operating frequencies which the Company's telecommunications products address:
<TABLE>
<CAPTION>
Associated Crosspoint Transimpedance
SONET Hierarchy Clock Rate MUX/DMUX Switches Amplifiers
--------------- ---------- -------- ---------- --------------
<S> <C> <C> <C> <C>
STS/OC-3 155 MHz X X X
STS/OC-12 622 MHz X X X
STS/OC-48 2.488 GHz X
STS/OC-192 10 GHz X
</TABLE>
Data Communications
Data communications products accounted for 22% and 8% of the Company's
total revenues for fiscal 1997 and fiscal 1996, respectively. Vitesse has
developed a line of Fibre Channel products for this market, which consist
primarily of transmitters, receivers and transceivers. In fiscal 1997, the
Company's significant data communications customers, each of which purchased at
least $100,000 of the Company's products, included Cisco, IBM, Newbridge
Networks, Seagate, and Sequent.
Additionally, the Company has developed a physical layer interface product
for the recently emerging Gigabit Ethernet market. The Company is also in the
process of developing additional products for this market. To date, the
Company's revenues from sale of products in this market have not been material.
There can be no assurance that such products will ever gain market acceptance.
Automated Test Equipment
ATE products accounted for 22% and 24% of the Company's total revenues for
fiscal 1997 and fiscal 1996, respectively. Vitesse provides gate arrays and
custom products that offer a combination of high complexity, low power
dissipation and high speed for ATE. In fiscal 1997, the Company's significant
ATE customers, each of
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which purchased at least $100,000 of the Company's products, included Credence,
Hewlett-Packard, H.Y. Associates, Integrated Measurement Systems, LTX,
Schlumberger and Teradyne.
The Company's ten largest customers accounted for approximately 77% and 75%
of total revenues in fiscal 1997 and fiscal 1996, respectively. In fiscal 1997
and fiscal 1996, sales to Lucent accounted for 20% and 25%, respectively, of the
Company's total revenues, and sales to H.Y. Associates Co., Ltd., the Company's
Japanese distributor, accounted for 22% and 11%, respectively, of the Company's
total revenues.
TECHNOLOGY
The Company believes the limitations of silicon-based CMOS, BiCMOS, and ECL
ICs have become more pronounced as the requirements of the telecommunications,
data communications and ATE systems providers have increased. While CMOS offers
certain complexity advantages over the alternative silicon processes, the
Company believes it lacks the speed required for many high-performance systems.
ECL technology offers higher speeds but at the cost of high power dissipation,
which limits its use for high-complexity applications. BiCMOS offers higher
performance than is obtainable from CMOS, but less than that offered by ECL, at
levels of complexity which are greater than that available from ECL but lower
than that provided by CMOS. BiCMOS is slower than ECL and, the Company
believes, does not achieve the speed necessary for the highest performance
telecommunications, data communications and ATE systems.
GaAs has inherent physical properties which allow electrons to move several
times faster than within silicon. This higher electron mobility provides the
Company with the flexibility to manufacture ICs that operate at much higher
speeds than silicon devices or to operate at the same speeds with reduced power
consumption. The following table compares the intrinsic transistor performance
and cost per function for H-GaAs with alternative process technologies:
<TABLE>
<CAPTION>
H-GaAs ECL BiCMOS CMOS
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Speed............... Highest High Moderate Lowest
Power Dissipation... Low Highest Moderate Lowest
Complexity.......... High Lowest Higher Highest
Cost per Function... Moderate Highest Moderate Lowest
</TABLE>
The Company employs proprietary H-GaAs process technology based on a
refractory metal self-aligned gate ("SAG") process. SAG technology is
universally used in the manufacture of complex silicon ICs. The process
structure and logic implementation of the Company's GaAs ICs are similar to a
traditional silicon MOS process with the exception that the gate metal is
deposited directly on the GaAs substrate creating a metal-semiconductor junction
comparable to depositing the metal on a thin silicon layer grown on the silicon
substrate in the case of metal gate n-channel MOS.
The implementation of a SAG process in GaAs or silicon requires a gate
metal structure that can withstand the high temperature of an ion implant
activation anneal. This is in contrast to conventional microwave GaAs ("RF
GaAs") process technologies which utilize a low temperature, non-self-aligned
technology based on gold as the gate metal. The table below compares Vitesse's
H-GaAs, traditional silicon MOS and microwave RF-GaAs:
<TABLE>
<CAPTION>
Silicon Microwave
H-GaAs MOS RF-GaAs
------ -------- --------
<S> <C> <C> <C>
Self-Aligned Yes Yes No
Interconnect Aluminum Aluminum Gold
Complexity High Highest Medium
</TABLE>
Another advantage of SAG technology in GaAs is the greater control over
electrical transistor parameters compared to conventional gold gate technology.
This control of the field effect transistor ("FET") characteristics has enabled
the Company to be one of the few companies that have demonstrated the ability to
manufacture products having lower power dissipation using direct coupled FET
logic ("DCFL"). DCFL has the highest complexity, fewest elements per logic
function and best available combination of speed at low power of any n-channel
FET technology demonstrated in silicon or GaAs.
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The use of a high-temperature process also allows Vitesse to use silicon
industry standard aluminum interconnect technology. This enables the Company to
utilize standard deposition and dry etch equipment for interconnects. The
interconnect portion of the circuit represents a majority of mask levels in the
manufacturing process.
The Company has significantly improved its process technology:
<TABLE>
<CAPTION>
H-GaAs H-GaAs H-GaAs H-GaAs
I II III IV
------ ------ ------ -----
<S> <C> <C> <C> <C>
Product Announcement Year................. 1986 1988 1991 1995
Gate Length............................... 1.2um 0.8um 0.6um 0.4um
Metal Layers.............................. 2 3 4 5
Maximum Relative Speed/(1)/............... 1.0x 1.4x 2.0x 3.0x
Minimum Relative Power Dissipation/(1)/... 1.0x 0.7x 0.5x 0.3x
</TABLE>
- - -----------
(1) Compared to H-GaAs I.
The Company has recently implemented H-GaAs IV, a 0.4 micron five-layer
metal GaAs FET technology capable of achieving higher complexity and lower power
dissipation than previous Vitesse technologies. The Company has announced the
introduction of the GLX family of gate arrays and more recently the SLX family
of standard cell ICs based on H-GaAs IV technology. The GLX family of gate
arrays has been designed to offer the same speed as the H-GaAs III family of
gate arrays but with lower power dissipation. This is intended to enable ICs to
be packaged in a lower cost plastic package in the 100 MHz to 800 MHz range,
thereby offering the customer a lower cost solution in this performance range.
The Company has entered into contracts with a number of customers for the
development of ASICs based on the GLX product family. A limited number of
products in the GLX family have been shipped to date.
MANUFACTURING
Wafer Fabrication
The Company fabricates four-inch wafers at its Camarillo plant in a 6,000
square foot clean room, which has a rating of Class 10 (meaning there are fewer
than ten particles larger than 0.5 micron per cubic foot of air). Wafer
fabrication equipment used by the Company is generally identical to that used in
a sub-micron silicon MOS fabrication facility. Process technology is generally
similar to that used in advanced sub-micron silicon process technologies, with
certain modifications necessary to accommodate GaAs material properties.
As is typically the case with semiconductor manufacturing, the Company's
manufacturing yields vary significantly among products, depending on the
product's complexity and the Company's experience in manufacturing the
particular ICs. While the Company's process technology utilizes standard
silicon semiconductor manufacturing equipment, aggregate production quantities
have been relatively low and the process technology is significantly less
developed than silicon process technology used by competitors. This leads to
overall yields lower than levels typically achieved in the silicon process. The
Company expects that many of its current and future products may never be
produced in high volume.
Regardless of the process technology used, the fabrication of ICs is a
highly complex and precise process. Defects in masks, impurities in the
materials used, contamination of the manufacturing environment, equipment
failure and other difficulties in the fabrication process can cause a
substantial percentage of wafers to be rejected or numerous die on each wafer to
be non-functional.
The Company utilizes manufacturing equipment commonly used in the silicon
IC industry. This enables the Company to employ developments in silicon
manufacturing technology to continue to improve minimum feature size, dimension
control, deposition and etch capabilities. By eliminating the need for 'custom"
wafer fabrication equipment, the Company can focus its resources on developing
leading process technology rather than on developing expensive customized
manufacturing equipment.
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The Company has recently completed construction of a new six-inch wafer
fabrication facility in Colorado Springs, Colorado, to supplement its existing
facility in Camarillo. The facility initially includes a 10,000 square foot
Class 1 clean room with the capability for future expansion to 15,000 feet. The
Company is in the process of installing equipment and performing necessary
testing prior to commencing commercial production. The Company believes the new
facility will not begin commercial production prior to the third quarter of
fiscal 1998.
Assembly and Test
A majority of the Company's ICs are packaged in plastic by third parties.
The Company conducts ceramic package assembly for a portion of its ICs in its
Camarillo plant. The Company employs industry standard assembly equipment in an
automated assembly line that is intended to reduce packaging time as well as to
improve quality. For final testing, the Company utilizes advanced automated
VLSI testers and has constructed several custom testers. However, in many cases,
the Company cannot test its products at full speed and must rely on numerous
sub-circuit path measurements to determine the performance of the IC.
Components and Raw Materials
The Company purchases the majority of its ceramic packages from Kyocera.
Kyocera is the world's largest supplier of multilayer, high-performance ceramic
packages and, in many cases, is the only source of these packages. Since most
of the ceramic packages used in the Company's assembly process are designed to
the Company's specifications, there are typically no second sources for these
packages. To date, the Company has not experienced any adverse effects due to
the sole-source nature of its ceramic packages. The Company believes it
maintains an adequate inventory of sole-source ceramic packages. The level of
inventory of ceramic packages carried by the Company is substantially higher
than standard plastic packages for IC companies that utilize standard packages
available from a wide variety of sources. Since 1992, the Company has increased
its use of plastic packages, and it uses multiple contract manufacturers to
perform plastic packaging.
GaAs substrates and other raw materials and equipment used in the
production of the Company's ICs are available from several suppliers. Although
lead times are occasionally extended in the industry, the Company has not
experienced any material difficulty in obtaining raw materials or equipment.
ENGINEERING, RESEARCH AND DEVELOPMENT
The market for the Company's products is characterized by rapid changes in
both GaAs and competing silicon process technologies. Because of continual
improvements in these technologies, the Company believes that its future success
will depend largely on its ability to continue to improve its product and
process technologies, to develop new technologies in order to maintain the
performance of its products relative to competitors, to adapt its products and
process technologies to technological changes and to adopt emerging industry
standards.
Product Research and Development
The Company's present product research and development efforts are focused
on developing new products for its telecommunications, data communications and
ATE product lines. Considerable design effort is being expended to increase the
speed and complexity and reduce the power dissipation of the Company's products.
Process Research and Development
The Company has implemented H-GaAs IV, a 0.4 micron GaAs FET technology
that offers higher complexity and lower power dissipation than previous Vitesse
technologies. The Company is currently engaged in research and development
projects focused on other process-related improvements to increase yields and
improve the speed, complexity and power dissipation characteristics of its
devices.
The Company's engineering, research and development expenses in fiscal
1997, 1996 and 1995 were $16,804,000, $11,045,000 and $8,689,000, respectively.
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COMPETITION
The high-performance semiconductor market is highly competitive and subject
to rapid technological change, price erosion and heightened international
competition. The telecommunications, data communications and ATE industries,
which are the primary target areas for the Company, are also becoming intensely
competitive because of deregulation and heightened international competition,
among other factors. In the telecommunications market, the Company competes
primarily against other GaAs-based companies such as Triquint Semiconductor and
the GaAs fabrication operations of systems companies such as Rockwell. In the
data communications market and the ATE market, the Company competes primarily
against silicon ECL and BiCMOS products offered principally by semiconductor
manufacturers such as Fujitsu, Hewlett-Packard, Motorola, National Semiconductor
and Texas Instruments, and bipolar silicon IC manufacturers such as Applied
Micro Circuits Corporation and Synergy Semiconductor Corporation. Many of these
companies have significantly greater financial, technical, manufacturing and
marketing resources than the Company. In addition, in lower-frequency
applications, the Company faces increasing competition from CMOS-based products,
particularly as the performance of such products continues to improve.
Competition in the Company's markets for high-performance ICs is primarily
based on price/performance, product quality and the ability to deliver products
in a timely fashion. The Company emphasizes its products' quality and
combination of speed, complexity and power dissipation. Some prospective
customers may be reluctant to adopt Vitesse's products because of perceived
risks relating to GaAs technology. In addition, product qualification is
typically a lengthy process and certain prospective customers may be unwilling
to invest the time or incur the costs necessary to qualify suppliers such as the
Company. Prospective customers may also have concerns about the relative speed,
complexity and power advantages of the Company's products compared to more
familiar ECL or BiCMOS semiconductors or about the risks associated with relying
on a relatively small company for a critical sole-sourced component.
SALES AND CUSTOMER SUPPORT
The Company's principal method of selling its products in the United States
and Western Europe is through direct sales to systems manufacturers by the
Vitesse sales force. Other international sales, principally in Japan, are
conducted through foreign distributors.
Direct Sales
Because of the large engineering support required in connection with the
sale of high performance ICs, the Company provides its customers with field
engineering support as well as engineering support from the Company's
headquarters. Typically, a field engineer will accompany a salesperson to the
initial customer visit to understand and evaluate the customer's requirements.
The salesperson and field engineer will determine whether additional engineering
analysis will be required by engineers based at the Company's headquarters. The
Company's sales cycle is typically lengthy and requires the continued
participation of salespersons, field engineers, engineers based at the Company's
headquarters, and senior management.
The Company's sales headquarters is located in Camarillo, California. The
Company has 11 additional sales and field application support offices in the
United States and one in Germany.
Foreign Distributors
Sales in Japan are made through an unaffiliated Japanese distributor, H.Y.
Associates Co., Ltd. Sales in other countries are made through local
representatives. Export sales were $35,403,000, $15,624,000, and $12,533,000,
in fiscal 1997, 1996, and 1995, respectively
The Company generally warrants its products against defects in materials
and workmanship for a period of one year.
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LICENSES AND PATENTS
The Company has been awarded 13 U.S. patents for various aspects of design
and process innovations used in the design and manufacture of its products. The
Company has two patent applications pending in the U.S. and three patent
applications pending in Japan and is preparing to file several more patent
applications. The Company believes that patents are of less significance in its
industry than such factors as technical expertise, innovative skills and the
abilities of its personnel.
As is typical in the semiconductor industry, the Company has, from time to
time, received, and may receive in the future, letters from third parties
asserting patent rights, maskwork rights or copyrights on certain of the
Company's products and processes. None of the claims to date has resulted in
the commencement of any litigation against the Company nor has the Company to
date believed it is necessary to license any of the patent rights referred to in
such letters.
BACKLOG
Vitesse's sales are made primarily pursuant to standard purchase orders for
delivery of products. Quantities of the company's products to be delivered and
delivery schedules are frequently revised to reflect changes in customer needs.
For these reasons, the Company's backlog as of any particular date is not
representative of actual sales for any succeeding period and the Company
therefore believes that backlog is not a good indicator of future revenue. The
Company's backlog scheduled to be shipped in the next six months was $62,000,000
on September 30, 1997, compared to $36,000,000 on September 30, 1996.
ENVIRONMENTAL MATTERS
The Company is subject to a variety of federal, state and local
governmental regulations related to the use, storage, discharge and disposal of
toxic, volatile or otherwise hazardous chemicals used in its manufacturing
process. Any failure to comply with present or future regulations could result
in the imposition of fines on the Company, the suspension of production or a
cessation of operations. In addition, such regulations could restrict the
Company's ability to expand its facilities at its present location or operate
its manufacturing facility in Colorado Springs, Colorado, or could require the
Company to acquire costly equipment or incur other significant expenses to
comply with environmental regulations or clean up prior discharges.
The Company uses significant amounts of water throughout its manufacturing
process. Previous droughts in California have resulted in restrictions being
placed on water use by manufacturers and residents. In the event of future
drought, reductions in water use may be mandated generally, and it is unclear
how such reductions will be allocated among different users. No assurance can
be given that near term reductions in water allocations to manufacturers will
not occur, possibly requiring a reduction in the Company's level of production,
and materially adversely affecting the Company's operations.
EMPLOYEES
As of September 30, 1997, the Company had 443 employees, including 173 in
engineering, research and development, 28 in marketing and sales, 224 in
operations and 18 in finance and administration. The Company's ability to
attract and retain qualified personnel is essential to its continued success.
None of the Company's employees is represented by a collective bargaining
agreement, nor has the Company ever experienced any work stoppage. The Company
believes its employee relations are good.
ITEM 2. PROPERTIES
The Company's executive offices and principal research and development and
fabrication facility is located in Camarillo, California, and is being leased
under a noncancellable operating lease that expires in 1999. The total space
occupied in this building is approximately 80,000 square feet. The Company
leases an additional 10,000 square feet in Camarillo for product development and
8,000 square feet in Santa Clara, California for a product
9
<PAGE>
development and sales office. The Company's Colorado Springs, Colorado facility
is in a 100,000 square foot building that is being occupied on a five-year
operating lease with a purchase option at the end of the lease. This facility
includes a 10,000 square foot clean room for wafer fabrication, and a product
development center. The Company also leases space for two other product
development centers in Portland, Oregon and Dallas, Texas, and 12 sales and
field application support offices (11 in the United States and one in Europe).
ITEM 3. LEGAL PROCEEDINGS
The Company is currently involved in several legal proceedings; however, it
believes that none of them would have a material or adverse affect on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the last quarter of the fiscal year ended September 30, 1997.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The information required by this item which appears on page 8 of the
Company's 1997 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for each of the five years ended September 30,
1997, which appears on page 7 of the Company's 1997 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item which appears on pages 9 to 17 of the
Company's 1997 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is included in pages 19 to 32 of the
Company's 1997 Annual Report to Shareholders, and is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
10
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Louis R. Tomasetta 48 President and Chief Executive Officer, Director
Ian Burrows 43 Vice President, Wafer Fab
Robert J. Cutter 42 Vice President & General Manager, Colorado Springs
Ira Deyhimy 57 Vice President, Product Development
Christopher R. Gardner 37 Vice President & General Manager, ATE
Eugene F. Hovanec 45 Vice President, Finance & Chief Financial Officer
Jeanne Johnson 56 Vice President, Human Resources
James Mikkelson 49 Vice President, Technology Devel., Chief Technical Officer
Michael Millhollan 53 Vice President & General Manager, Data Communications
Robert Nunn 36 Vice President & General Manager, Telecommunications
Neil Rappaport 51 Vice President, Sales
Ram Venkataraman 57 Vice President, Quality
James A. Cole 55 Director
Pierre R. Lamond 67 Chairman of the Board
John C. Lewis 62 Director
Thurman J. Rodgers 49 Director
</TABLE>
Louis R. Tomasetta, a co-founder of the Company, has been President, Chief
Executive Officer and a Director since the Company's inception in February 1987.
From 1984 to 1987, he served as President of the integrated circuits division of
Vitesse Electronics Corporation. Prior to that, Dr. Tomasetta was the director
of the Advanced Technology Implementation department at Rockwell International
Corporation. Dr. Tomasetta has over 20 years experience in the management and
development of GaAs based businesses, products, and technology. He received
B.S., M.S., and Ph.D. degrees in electrical engineering from the Massachusetts
Institute of Technology.
Ian Burrows joined the Company in February 1987 as a Process Engineering
Manager, became Director of Wafer Fabrication in December 1990, and Vice
President of Wafer Fabrication Operations in April 1995. Prior to that, he held
the position of process engineering development manager at Honeywell's GaAs
product center and development process engineer at Mostek. Dr. Burrows received
a B.S. in electrical engineering from Warwick University, England, and M.S. and
Ph.D. degrees in electrical engineering from Texas Tech University.
Robert J. Cutter joined the Company in October 1996 as Vice President &
General Manager of the Colorado Springs facility. Prior to that, Mr. Cutter was
Plant Manager, Colorado Springs, for Rockwell Semiconductor Systems. From 1990
to 1995, he was Director of Operations for United Technologies Microelectronics
Center. From 1981 to 1988, he held a variety of management positions at Inmos
Corporation. Mr. Cutter graduated from University of Southhampton, United
Kingdom, with a First Class Honors Degree in Aeronautics & Astronautics.
Ira Deyhimy, a co-founder of the Company, has been Vice President of
Product Development since the Company's inception in February 1987. From 1984
to 1987 he was Vice President, Engineering at Vitesse Electronics Corporation.
Prior to that, Mr. Deyhimy was manager of Integrated Circuit Engineering at
Rockwell International Corporation. He has over 20 years of experience in GaAs
electronics. Mr. Deyhimy received a B.S. degree in physics from the University
of California at Los Angeles and an M.S. degree in physics from California State
University at Northridge.
Christopher R. Gardner joined the Company in February 1987 and held various
engineering and engineering management positions through September 1996 when he
became Vice President & General Manager, ATE. Prior to that, Mr. Gardner was a
member of technical staff at AT&T Bell Laboratories. Mr. Gardner holds a B.S.
degree in electrical engineering from Cornell University and an M.S. degree in
electrical engineering from the University of California at Berkeley.
11
<PAGE>
Eugene F. Hovanec joined the Company as Vice President, Finance and Chief
Financial Officer in December 1993. From 1989 to 1993, Mr. Hovanec served as
Vice President, Finance & Administration, and Chief Financial Officer at Digital
Sound Corporation. Prior to that, from 1984 to 1989, he served as Vice
President and Controller at Micropolis Corporation. Mr. Hovanec holds a Bachelor
of Business Administration degree from Pace University, New York. Mr. Hovanec
also serves as a Director of Interlink Electronics, Inc.
Jeanne Johnson joined the Company in August 1987 as Director, Human
Resources and became Vice President, Human Resources in September 1997. From
January 1984 to August 1987, Ms. Johnson was a human resources consultant in the
areas of compensation, benefits and training. Her human resources management
experience also includes two years as Director of Human Resources for IBIS
Systems, Inc. and eight years as Employee Relations Manager for Borg-Warner
Corporation. Ms. Johnson has a B.A. degree from the University of California,
Santa Barbara.
James Mikkelson, a co-founder of the Company, became Chief Technical
Officer in September 1997. He has served as Vice President of Technology
Development since the Company's inception in February 1987. From 1984 to 1987,
he served as Vice President, Operations at Vitesse Electronics Corporation.
Prior to that, he served as Project Manager at Hewlett-Packard Company,
responsible for the development and manufacturing of MOS VLSI circuits. Mr.
Mikkelson holds B.S. and M.S. degrees in electrical engineering from the
Massachusetts Institute of Technology.
Michael Millhollan joined the Company in July 1989 as Director of the
Sunnyvale Product Development Center and became Vice President and General
Manager of Standard Products in October 1992. From 1976 to 1989, he held
various senior design engineering positions with National Semiconductor
Corporation, a semi-conductor manufacturer, most recently as Director of
programmable logic product development. Prior to that, he was at Motorola,
Inc., a semiconductor manufacturer, for seven years in various design
engineering positions. Mr. Millhollan holds a B.S. degree in electrical
engineering from the Georgia Institute of Technology.
Robert Nunn joined the Company in July 1989, became Director of Marketing
in January 1991 and Vice President and General Manager of ASIC Products in July
1992. From August 1987 to July 1989 he served as product marketing manager at
Advanced Micro Devices, Inc. ("AMD"), a semiconductor manufacturer, where he
managed a staff focusing on international markets. From March 1986 to August
1987 Mr. Nunn held various marketing positions at Monolithic Memories, Inc.
("MMI") in their Semi-custom Products and Programmable Products Divisions before
MMI merged with AMD in 1987. Mr. Nunn holds a B.S. degree in computer
engineering from the University of California at Los Angeles and an M.B.A. from
Harvard Business School.
Neil Rappaport joined the Company as Vice President, Sales in August 1987.
From September 1982 to 1987, Mr. Rappaport was national sales manager with
Applied Micro Circuits Corporation, a manufacturer of ECL integrated circuits.
Prior to that, he held various sales positions with Signetics Corporation, a
semiconductor manufacturer. Prior to that, he was a design engineer at Hughes
Aircraft Company. Mr. Rappaport has a B.S. degree from Fairleigh Dickinson
University and an A.S. degree in electronics technology from the RCA Institute.
Ram Venkataraman joined the Company as Director of Quality in January 1990
and in August 1990 he became Vice President, Quality. From November 1984 to
January 1990, he held various positions, including manager of reliability and
quality assurance and Director of Wafer Fabrication Operations, at GigaBit
Logic, Inc., a gallium arsenide semiconductor manufacturer. Mr. Venkataraman
has over 20 years of experience in IC quality assurance and reliability spanning
both silicon and GaAs technologies. Mr. Venkataraman holds B.S. degrees in
physics and electrical engineering from Madras University, India, and an M.S.
degree in electrical engineering from the Indian Institute of Technology, India.
James A. Cole has served as a Director of the Company since February 1987.
He is a General Partner of Windward Ventures and Spectra Enterprise Associates.
He was a founder and Executive Vice President of Amplica, Inc., a GaAs microwave
IC and sub-system company. Mr. Cole also serves as a Director of Giga-Tronics,
Inc., Spectrian Corporation, and eight privately held companies.
12
<PAGE>
Pierre R. Lamond has been the Chairman of the Board of Directors since the
Company's inception in February 1987. Since August 1981, he has been a General
Partner of Sequoia Capital, a venture capital firm. Sequoia has financed
companies such as Cypress Semiconductor Corporation, Cisco, and C-Cube
Microsystems. Mr. Lamond was founder and Vice President of National
Semiconductor Corporation. He is also a Director of Cypress Semiconductor
Corporation.
John C. Lewis became a Director of the Company in January 1990. He is
currently Chairman of the Board of Directors of Amdahl Corporation, a
manufacturer of large general purpose computer storage systems and software
products. Before joining Amdahl in 1977, he was President of Xerox Business
Systems. Mr. Lewis also serves as a Director of Cypress Semiconductor
Corporation, Pinnacle Systems and Infinity Financial Technology, Inc.
Thurman J. Rodgers has served as a Director of the Company since September
1987. He is the co-founder and since 1982 has been President and Chief
Executive Officer of Cypress Semiconductor Corporation ("Cypress"). Prior to
forming Cypress, Dr. Rodgers managed the design, technical development, and
engineering for the static RAM business of Advanced Micro Devices. He also
serves as a Director of C-Cube Microsystems.
ITEM 11. EXECUTIVE COMPENSATION
This item is answered by reference to the information set forth under the
captions "Executive Compensation," "Stock Option Plans," "1991 Employee Stock
Purchase Plan," "401(k) Plan" and "Certain Transactions" in the Company's Proxy
Statement for the 1998 Annual Meeting of Shareholders to be filed with the
Commission on or before December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item is answered by reference to the information set forth under the
caption "Principal Share Ownership" in the Company's Proxy Statement for the
1998 Annual Meeting of Shareholders to be filed with the Commission on or before
December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This item is answered by reference to the information set forth under the
caption "Certain Transactions" in the Company's Proxy Statement for the 1998
Annual Meeting of Shareholders to be filed with the Commission on or before
December 31, 1997.
13
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Page in
-------
Annual Report
-------------
1. Financial Statements:
The financial statements of the Company listed
below are incorporated herein by reference to
the following pages of the 1997 Annual Report
to Shareholders:
Independent Auditors' Report 18
Balance Sheets as of September 30, 1997 and 1996 19
Statements of Operations for the years ended
September 30, 1997, 1996 and 1995 20
Statements of Shareholders' Equity for the years
ended September 30, 1997, 1996 and 1995 21
Statements of Cash Flows for the years ended
September 30, 1997, 1996 and 1995 22
Notes to Financial Statements 23
Page
----
2. Financial Statement Schedules:
The financial statement schedules of the Company
are included in Part IV of this report on the
pages indicated:
Independent Auditors' Report on Financial
Statement Schedule 18
For the three fiscal years ended September 30, 1997--
II -- Valuation and Qualifying Accounts 19
All other schedules are omitted because they are not
applicable or are not required.
3. Exhibits:
See Item 14(c) below.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the
fiscal year ended September 30, 1997.
(c) Exhibits
The exhibits listed on the accompanying index immediately following
the signature page are filed as part of this report.
(d) Financial Statement Schedules
See Item 14(a) above.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of 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.
VITESSE SEMICONDUCTOR CORPORATION
Date: December 19, 1997 By: /s/ Eugene F. Hovanec
---------------------------------------
Eugene F. Hovanec
Vice President, Finance
& Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Louis R. Tomasetta President and December 19, 1997
------------------------- Chief Executive
Louis R. Tomasetta Officer (Principal
Executive Officer)
/s/ Eugene F. Hovanec Vice President, Finance December 19, 1997
------------------------- and Chief Financial
Eugene F. Hovanec Officer
/s/ James A. Cole Director December 19, 1997
-------------------------
James A. Cole
/s/ Pierre R. Lamond Chairman of the Board December 19, 1997
------------------------- of Directors
Pierre R. Lamond
/s/ John C. Lewis Director December 19, 1997
-------------------------
John C. Lewis
/s/ T. J. Rodgers Director December 19, 1997
-------------------------
T.J. Rodgers
15
<PAGE>
ITEM 16 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
Exhibit Number
--------------
3.1/(1)/ Certificate of Incorporation of Registrant, as amended to
date.
3.2/(2)/ Bylaws of Registrant as amended to date.
4.1/(3)/ Amended Modification Agreement including Registration Rights
and Right of First Refusal dated June 12, 1991 between
Registrant and certain security holders of Registrant.
4.2/(2)/ Specimen of Company's Common Stock Certificate.
10.1/(2)/ 1987 Stock Option Plan.
10.2/(2)/ 1989 Stock Option Plan.
10.3/(2)/ 1991 Stock Option Plan.
10.4/(2)/ 1991 Employee Stock Purchase Plan.
10.5/(2)/ 1991 Directors' Stock Option Plan.
10.6/(2)/ Standard Form of Indemnification Agreement between
Registrant and its officers and directors.
10.7/(2)/ Warrant to purchase 45,000 shares of the Series F Preferred
Stock of Registrant dated June 12, 1991 held by Nippon
Enterprise Development Corp.
10.8/(2)(3)/ Loan and Security Agreement dated May 8, 1991 between
Silicon Valley Bank and Registrant.
10.9/(1)/ Amendment to Loan Agreement dated December 28, 1992 between
Silicon Valley Bank and Registrant.
10.10/(5)/ Amendment to Loan Agreement dated June 14, 1993 between
Silicon Valley Bank and Registrant.
10.11/(2)/ Master Equipment Lease Agreement dated April 18, 1988
between Equitable Life Leasing Corporation and Registrant.
10.12/(2)/ Master Lease Agreement dated June 21, 1991 between Dana
Commercial Credit Corporation and Registrant.
10.13/(2)/ Assignment of Purchase Order dated June 12, 1991 between JLA
Credit Corporation and Registrant.
10.14/(1)/ Master Equipment Lease Agreement dated October 30, 1992
between AT&T Commercial Finance Corporation and Registrant.
10.15/(1)/ First Amendment to Lease between Carson Estate Company
(formerly Victoria Partnership) and Registrant.
10.16/(2)/ Lease dated January 31, 1991 between Camarillo I Development
Corporation and Registrant.
10.17/(2)/ Standard Form Proprietary Information Agreement.
10.18/(2)/ Software License Agreement Standard Terms and Conditions
dated September 26, 1989 between Cadence Design Systems,
Inc. and Registrant.
10.19/(2)/ Purchase and License Agreement effective September 11, 1987
between Mentor Graphics Corporation and Registrant.
10.20/(2)/ License Agreement dated January 3, 1986 between the Regents
of the University of California and Registrant.
10.21/(1)/ LASAR Software Foundry Distribution Agreement dated July 13,
1989 between Teradyne, Inc. and Registrant.
10.22/(1)/ Agreement for Licensed Products dated July 13, 1989 between
Synopsys Incorporated and Registrant.
10.23/(2)/ Electronic Design Automation Software License Agreement
dated October 21, 1989 between Teradyne, Inc. and
Registrant.
10.24/(2)(3)/ International Distributor Agreement dated January 4, 1988 by
and between H.Y. Associates Company Ltd. and Registrant.
10.25/(4)/ Amendment dated March 23, 1994, to the Loan Agreement dated
May 8, 1991, as amended, by and between Silicon Valley Bank
and Registrant.
10.26/(3)(4)/ GaAs Super Microprocessor Technology Development Agreement
dated December 17, 1993 by and between National Institute of
Standards and Technology and Registrant.
10.27/(5)/ Amendment dated December 13, 1994, to the Loan Agreement
dated May 8, 1991, as amended, by and between Silicon Valley
Bank and Registrant.
10.28/(6)/ Amendment dated January 2, 1996, to the Loan Agreement dated
May 8, 1991, as amended, by and between Silicon Valley Bank
and Registrant.
16
<PAGE>
10.29 Amendment dated January 22, 1997, to the Loan Agreement
dated May 8, 1991, as amended, by and between Silicon Valley
Bank and Registrant.
10.30 Agreement dated October 30, 1996 between ABN AMRO Bank N.V.,
10.31 Agreement dated August 15, 1997 between ABN AMRO Bank N.V.,
Lease Plan North America, Inc. and Registrant.
11.1 Statement regarding computation of [*] income per share.
13.1 Annual Report to Security Holders
23.1 Report on Schedule and Consent of Independent Certified
Public Accountants. (included on page 18)
27 Financial Data Schedule
(1) Incorporated by reference from the Company's annual report on Form 10-K for
the period ended September 30, 1992.
(2) Incorporated by reference from the Company's registration statement on Form
S-1 (File no. 33-43548), effective December 10, 1991.
(3) Confidential treatment previously granted as to certain portions of these
exhibits.
(4) Incorporated by reference from the Company's quarterly report on Form 10Q
for the period ended March 30, 1994.
(5) Incorporated by reference from the Company's annual report on Form 10-K for
the period ended September 30, 1995.
(6) Incorporated by reference from the Company's annual report on Form 10-K for
the period ended September 30, 1996.
[* Confidential information]
17
<PAGE>
ACCOUNTANTS' CONSENT WITH REPORT ON SCHEDULE
The Board of Directors
Vitesse Semiconductor Corporation:
The audits referred to in our report dated October 21, 1997, included the
related financial statement schedule as of September 30, 1997, and for each of
the years in the three-year period ended September 30, 1997, included in the
registration statement. The financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on the
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, represents fairly in all material respects the
information set forth therein.
We consent to the use of our reports or incorporated herein by reference and to
the reference of our firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Los Angeles, California
December 22, 1997
18
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
SCHEDULE II -- Valuation and Qualifying Accounts
Years ended September 30, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning of Costs and at end
Period Expenses Deductions of Period
------------ ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended September 30, 1997
Deducted from Inventories:
Reserve for obsolescence $2,797 1,988 1,664 $3,121
Deducted from Accounts Receivable:
Allowance for doubtful accounts 900 500 400 1,000
Year ended September 30, 1996
Deducted from Inventories:
Reserve for obsolescence 2,493 1,347 1,043 2,797
Deducted from Accounts Receivable:
Allowance for doubtful accounts 700 200 --- 900
Year ended September 30, 1995
Deducted from Inventories:
Reserve for obsolescence 2,217 276 --- 2,493
Deducted from Accounts Receivable:
Allowance for doubtful accounts 700 --- --- 700
</TABLE>
19
<PAGE>
EXHIBIT 10.29
[LOGO OF SILICON VALLEY BANK]
Amendment to Loan Agreement
Borrower: Vitesse Semiconductor Corporation
Address: 741 Calle Plano
Camarillo, California 93012
Date: January 22, 1997
THIS AMENDMENT TO LOAN AGREEMENT is entered into between SILICON VALLEY BANK
("Silicon") and the borrower named above (the "Borrower").
The Parties agree to amend the Loan and Security Agreement between them dated
May 8, 1991, as amended by that Amendment to Loan Agreement dated May 8, 1991,
as amended by that Amendment to Loan Agreement dated August 12, 1992, as amended
by that Amendment to Loan Agreement dated December 28, 1992, as amended by that
Amendment to Loan Agreement dated June 14, 1993, as amended by that Amendment to
Loan Agreement dated December 10, 1993, as amended by that Amendment to Loan
Agreement dated March 23, 1994, as amended by that Amendment to Loan Agreement
dated December 13, 1994, and as amended by that Amendment to Loan Agreement
dated January 2, 1996 (the "Loan Agreement"; unless otherwise defined herein,
terms defined in the Loan Agreement are used herein as therein defined), as
follows, effective as of the date of hereof:
1. Deletion of Sections 1A and 1B. Sections 1A and 1B of the Loan
Agreement are hereby deleted in their entirety.
2. Modification to Section 2.2 of Loan Agreement. Section 2.2 of the Loan
Agreement is hereby deleted and replaced with the following Section 2.2 and
Section 2.2A:
2.2 Termination of Security Interest; Definition of Collateral. The
Borrower's grant of a security interest in the Collateral under the
original Loan Agreement is hereby deemed terminated and of no force
and effect; and all references to the security interest or lien of
Silicon in the Collateral as set forth in the Loan Agreement and
related documents are deemed to be of no further force or effect.
However, for definitional purposes only under this Agreement, the term
"Collateral" as used herein shall mean all of the Borrower's interest
in the types of property described below, whether now owned or
hereafter acquired, and wherever located: (a) All accounts, contract
rights, chattel paper, letters of credit, documents, securities,
money, and instruments, and all other obligations now or in the future
owing to the Borrower; (b) All inventory, goods, merchandise,
materials, raw materials, work in process, finished goods, farm
products, advertising, packaging and shipping materials, supplies, and
all other tangible personal property which is held for sale or lease
or furnished under contracts of service or consumed in the Borrower's
business, and all warehouse receipts and other documents; and (c) All
equipment, including without limitation all machinery, fixtures,
-1-
<PAGE>
trade fixtures, vehicles, furnishings, furniture, materials, tools,
machine tools, office equipment, computers and peripheral devices,
appliances, apparatus, parts, dies, and jigs; (d) All general
intangibles including, but not limited to, deposit accounts, goodwill,
names, trade names, trademarks and the goodwill of the business
symbolized thereby, trade secrets, drawings, blueprints, customer
lists, patents, patent applications, copyrights, security deposits,
loan commitment fees, federal, state and local tax refunds and claims,
all rights in all litigation presently or hereafter pending for any
cause or claim (whether in contract, tort or otherwise), and all
judgments now or hereafter arising therefrom, all claims of Borrower
against Silicon, all rights to purchase or sell real or personal
property, all rights as a licensor or licensee of any kind, all
royalties, licenses, processes, telephone numbers, proprietary
information, purchase orders, and all insurance policies and claims
(including without limitation credit, liability, property and other
insurance), and all other rights, privileges and franchises of every
kind; (e) All books and records, whether stored on computers or
otherwise maintained; and (f) All substitutions, additions and
accessions to any of the foregoing, and all products, proceeds and
insurance proceeds of the foregoing, and all guaranties of and
security for the foregoing; and all books and records relating to any
of the foregoing."
3. Schedule to Loan Agreement. The Schedule to Loan and Security
Agreement is hereby deleted and replaced with the Schedule to Loan and Security
Agreement attached hereto.
4. Financial Conditions and Statements. Section 3.7 of the Loan Agreement
is hereby deleted and replaced with the following:
3.7 Financial Condition and Statements. All financial statements now
or in the future delivered to Silicon have been, and will be, prepared in
conformity with generally accepted accounting principles and now and in the
future will completely and accurately reflect the financial condition of
the Borrower, at the times and for the periods therein stated. Since the
last date covered by any such statement, there has been no material adverse
change in the financial condition or business of the Borrower. The Borrower
is now and will continue to be solvent. The Borrower will provide Silicon:
(i) Within 5 days after the earlier of the date Borrower's 10-Q report is
filed or is required to be filed with the Securities Exchange Commission,
such 10-Q report, a quarterly financial statement prepared by the Borrower,
and a Compliance Certificate in such form as Silicon shall reasonably
specify, signed by the Chief Financial Officer of the Borrower, certifying
that at the end of such quarter the Borrower was in full compliance with
all of the terms and conditions of this Agreement, and setting forth
calculations showing compliance with the financial covenants set forth on
the Schedule and such other information as Silicon shall reasonably request
(the "Compliance Certificate") for the quarter then ended; and (ii) within
5 days after the earlier of the date Borrower's 10-K report is filed or is
required to be filed with the Securities Exchange Commission, such 10-K
report, and complete annual financial statements, certified by independent
certified public accountants acceptable to Silicon.
5. Fee. Borrower shall concurrently herewith pay to Silicon a fee in the
amount of [*], which shall be in addition to all interest and to all other
amounts payable hereunder, and which shall not be refundable.
[* Confidential information]
-2-
<PAGE>
6. Representations True. The Borrower represents and warrants to Silicon
that all representations and warranties set forth in the Loan Agreement, as
amended hereby, are true and correct.
7. General Provisions. This Amendment, the Loan Agreement, any prior
written amendments to the Loan Agreement signed by Silicon and the Borrower, and
the other written documents and agreements between Silicon and the Borrower set
forth in full all of the representations and agreements of the parties with
respect to the subject matter hereof and supersede all prior discussions,
representations, agreements and understandings between the parties with respect
to the subject hereof. Except as herein expressly amended, all of the terms and
provisions of the Loan Agreement, and all other documents and agreements between
Silicon and the Borrower shall continue in full force and effect and the same
are hereby ratified and confirmed.
Borrower: Silicon:
VITESSE SEMICONDUCTOR SILICON VALLEY BANK
CORPORATION
By /s/ [ILLEGIBLE SIGNATURE] By /s/ [ILLEGIBLE SIGNATURE]
------------------------------ ------------------------------
Vice President Title Vice President
---------------------------
By /s/ [ILLEGIBLE SIGNATURE]
------------------------------
Ass't Secretary
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<PAGE>
[LOGO OF SILICON VALLEY BANK]
Schedule to
Loan Agreement
Borrower: Vitesse Semiconductor Corporation
Address: 741 Calle Plano
Camarillo, California 93012
Date: January 22, 1997
Credit Limit An amount not to exceed $12,500,000.
(Section 1.1):
Letter of Credit Silicon, in its reasonable discretion, will from time to
Sublimit time during the term of this Agreement issue letters of
credit for the account of the Borrower ("Letters of
Credit"), in an aggregate amount at any one time outstanding
not to exceed $1,000,000, upon the request of the Borrower,
provided that, on the date the Letters of Credit are to be
issued, Borrower has available to it Loans in an amount
equal to or greater than the face amount of the Letters of
Credit to be issued. Prior to the issuance of any Letters of
Credit, Borrower shall execute and deliver to Silicon
Applications for Letters of Credit and such other
documentation as Silicon shall specify (the "Letter of
Credit Documentation"). Fees for the Letters of Credit shall
be as provided in the Letter of Credit Documentation.
Letters of Credit may have a maturity date up to twelve
months beyond the Maturity Date in effect from time to time,
provided that if on the Maturity Date, or on any earlier
effective date of termination, there are any outstanding
Letters of Credit issued by Silicon or issued by another
institution based upon an application, guarantee, indemnity
or similar agreement on the part of Silicon, then on such
date, Borrower shall provide to Silicon cash collateral in
an amount equal to the face amount of all such Letters of
Credit plus all interest, fees and costs due or to become
due in connection therewith, to secure all of the
Obligations relating to said Letters of Credit, pursuant to
Silicon's then standard form cash pledge agreement.
The Credit Limit set forth above and the Loans available
under this Agreement at any time shall be reduced by the
face amount of Letters of Credit from time to time
outstanding.
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<PAGE>
Foreign Exchange
Contract Sublimit Up to $1,000,000 (the "Contract Limit") may be utilized for
spot and future foreign exchange contracts (the "Exchange
Contracts"). The Credit Limit available at any time shall be
reduced by the following amounts (the "Foreign Exchange
Reserve") on each day (the "Determination Date"): (i) on all
outstanding Exchange Contracts on which delivery is to be
effected or settlement allowed more than two business days
from the Determination Date, 20% of the gross amount of the
Exchange Contracts; plus (ii) on all outstanding Exchange
Contracts on which delivery is to be effected or settlement
allowed within two business days after the Determination
Date, 100% of the gross amount of the Exchange Contracts. In
lieu of the Foreign Exchange Reserve for 100% of the gross
amount of any Exchange Contract, the Borrower may request
that Silicon debit the Borrower's bank account with Silicon
for such amount, provided Borrower has immediately available
funds in such amount in its bank account.
Silicon may, in its discretion, terminate the Exchange
Contracts at any time (a) that an Event of Default occurs or
(b) that there is not sufficient availability under the
Credit Limit and Borrower does not have available funds in
its bank account to satisfy the Foreign Exchange Reserve. If
either Silicon or Borrower terminates the Exchange Contracts,
and without limitation of the FX Indemnity Provisions (as
referred to below), Borrower agrees to reimburse Silicon for
any and all fees, costs and expenses relating thereto or
arising in connection therewith.
Borrower shall not permit the total gross amount of all
Exchange Contracts on which delivery is to be effected and
settlement allowed in any two business day period to be more
than $500,000 (the "Settlement Limit"), nor shall Borrower
permit the total gross amount of all Exchange Contracts to
which Borrower is a party, outstanding at any one time, to
exceed the Contract Limit.
Notwithstanding the above, however, the amount which may be
settled in any two (2) business day period may, in Silicon's
sole discretion, be increased above the Settlement Limit up
to, but in no event to exceed, the amount of the Contract
Limit (the "Discretionary Settlement Amount") under either of
the following circumstances (the "Discretionary Settlement
Circumstances"):
(i) if there is sufficient availability under the Credit
Limit in the amount of the Foreign Exchange Reserve as of
each Determination Date, provided that Silicon in advance
shall reserve the full amount of the Foreign Exchange
Reserve against the Credit Limit; or
(ii) if there is insufficient availability under the Credit
Limit as to settlements within any two (2) business day
period if
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<PAGE>
Silicon is able to: (A) verify good funds overseas prior to
crediting Borrower's deposit account with Silicon (in the
case of Borrower's sale of foreign currency); or (B) debit
Borrower's deposit account with Silicon prior to delivering
foreign currency overseas (in the case of Borrower's
purchase of foreign currency);
Provided that it is expressly understood that Silicon's
--------
willingness to adopt the Discretionary Settlement Amount is a
matter of Silicon's sole discretion and the existence of the
Discretionary Settlement Circumstances in no way means or
implies that Silicon shall be obligated to permit the Borrower
to exceed the Settlement Limit in any two business day period.
In the case of Borrower's purchase of foreign currency,
Borrower in advance shall instruct Silicon upon settlement
either to treat the settlement amount as an advance under the
Credit Limit regarding the Revolving Loan Facility, or to
debit Borrower's account for the amount settled.
The Borrower shall execute all standard form applications and
agreements of Silicon in connection with the Exchange
Contracts, and without limiting any of the terms of such
applications and agreements, the Borrower will pay all
standard fees and charges of Silicon in connection with the
Exchange Contracts.
Without limiting any of the other terms of this Loan Agreement
or any such standard form applications and agreements of
Silicon, Borrower agrees to indemnify Silicon and hold it
harmless, from and against any and all claims, debts,
liabilities, demands, obligations, actions, costs and expenses
(including, without limitation, attorneys' fees of counsel of
Silicon's choice), of every nature and description, which it
may sustain or incur, based upon, arising out of, or in any
way relating to any of the Exchange Contracts or any
transactions relating thereto or contemplated thereby
(collectively referred to as the "FX Indemnity Provisions").
The Exchange Contracts shall have maturity dates no later than
the Maturity Date, provided maturities dates later than the
Maturity Date may be permitted in Silicon's discretion if, on
the Maturity Date, for any Exchange Contracts remaining
outstanding and having maturities after the Maturity Date,
Borrower provides to Silicon cash collateral in an amount
equal to the face amount of all such Exchange Contracts, plus
all interest, fees and costs due or to become due in
connection therewith, to secure all of the Obligations
relating to said Exchange Contracts, pursuant to Silicon's
then standard form cash pledge agreement.
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<PAGE>
Interest Rate
(Section 1.2): A rate equal to the "Prime Rate" in effect from time
to time, calculated on the basis of a 360-day year
for the actual number of days elapsed. "Prime Rate"
means the rate announced from time to time by Silicon
as its "prime rate;" it is a base rate upon which
other rates charged by Silicon are based, and it is
not necessarily the best rate available at Silicon.
The interest rate applicable to the Obligations shall
change on each date there is a change in the Prime
Rate.
Loan Fee
(Section 1.3): Per the Amendment to Loan Agreement of even date.
Maturity Date
(Section 5.1): January 5, 1998.
Prior Names of Borrower
(Section 3.2): None
Trade Names of Borrower
(Section 3.2): Vitesse, VSC
Other Locations and
Addresses (Section 3.3): See Exhibit 1 hereto.
Material Adverse
Litigation (Section 3.10): None
Negative Covenants- Without Silicon's prior written consent, Borrower may
Exceptions (Section 4.6): do the following, provided that, after giving effect
thereto, no Event of Default has occurred and no
event has occurred which, with notice or passage of
time or both, would constitute an Event of Default,
and provided that the following are done in
compliance with all applicable laws, rules and
regulations: (i) repurchase shares of Borrower's
stock pursuant to any employee stock purchase or
benefit plan, provided that the total amount paid by
Borrower for such stock does not exceed $500,000 in
any fiscal year or (ii) make loans to, or guarantee
indebtedness of, individuals in the usual and
ordinary course of business, provided that the
aggregate amount of any such loans or guaranties per
individual shall not exceed $200,000.
Financial Covenants Borrower shall at the end of each quarter comply with
(Section 4.1): all of the following covenants:
Quick Ratio: Borrower shall maintain a ratio of Quick Assets to
current liabilities of not less than 2.00 to 1.
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<PAGE>
Tangible Net Borrower shall maintain a tangible net worth of not less
Worth: than $70,000,000 plus 50% of all net income (after taxes)
----
earned in each fiscal quarter ending after the date of this
Agreement (in no event shall this number be considered to be
less than zero) plus 80% of the net proceeds received by the
----
Borrower of all equity offerings and other equity
transactions of the Borrower on and after September 30,
1996.
Debt to Tangible Borrower shall maintain a ratio of total liabilities to
Net Worth Ratio: tangible net worth of not more than .75 to 1.
Definitions: "Current assets" shall have the meaning ascribed to it in
accordance with generally accepted accounting principles
("GAAP").
"Current liabilities" shall have the meaning ascribed to it
in accordance with GAAP, except that deferred revenues shall
not be included as a current liability.
"Tangible net worth" means the excess of total assets over
total liabilities, determined in accordance with generally
accepted accounting principles, excluding however (i)
liabilities which may be converted to equity at the sole
discretion of the Borrower, and (ii) all assets which would
be classified as intangible assets under generally accepted
accounting principles, including without limitation
goodwill, licenses, patents, trademarks, trade names,
copyrights, and franchises.
"Quick Assets" means cash on hand or on deposit in banks,
readily marketable securities issued by the United States,
readily marketable commercial paper rated "A-l" by Standard
& Poor's Corporation (or a similar rating by a similar
rating organization), certificates of deposit and banker's
acceptances, and accounts receivable (net of allowance for
doubtful accounts).
Subordinated Debt: "Liabilities" for purposes of the foregoing covenants do not
include (i) indebtedness which is subordinated to the
indebtedness to Silicon under a subordination agreement in
form specified by Silicon or by language in the instrument
evidencing the indebtedness which is acceptable to Silicon
or (ii) the indebtedness of the Borrower to Vitesse
Electronics Corporation, pursuant to the Asset Purchase
Agreement between Borrower and Vitesse Electronics
Corporation."
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<PAGE>
Other Covenants Borrower shall at all times comply with all of the following
(Section 4.1): additional covenants:
1. Banking Relationship. Borrower shall at all times
maintain its primary banking relationship with Silicon.
2. [Reserved]
3. Indebtedness. Without limiting any of the foregoing terms
or provisions of this Agreement, Borrower shall not in the
future incur indebtedness for borrowed money, except for (i)
indebtedness to Silicon, and (ii) financing relating to
purchase money or lease transaction in connection with the
Borrower's capital assets or lease of real estate assets.
4. Negative Pledge. Borrower shall not grant a security
interest in any of its Collateral, whether presently owned
or hereafter acquired, provided, however, Borrower may incur
-------- -------
liens on capital equipment and leases of real property
assets relating to the indebtedness incurred pursuant to
Paragraph 3 set forth above entitled "Indebtedness".
5. No Material Adverse Change; Event of Default. Without
limiting the Events of Default as set forth in the Loan
Agreement, any material adverse change in the business,
assets or prospects of Borrower after the date hereof shall
constitute an Event of Default hereunder.
Borrower:
VITESSE SEMICONDUCTOR CORPORATION
By /s/ [ILLEGIBLE SIGNATURE]
-------------------------------
Vice President
By /s/ [ILLEGIBLE SIGNATURE]
-------------------------------
Ass't Secretary
Silicon:
SILICON VALLEY BANK
By /s/ [ILLEGIBLE SIGNATURE]
-------------------------------
Vice President
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<PAGE>
EXHIBIT 10.30
- - --------------------------------------------------------------------------------
PARTICIPATION AGREEMENT
dated as of October 30, 1996
among
VITESSE SEMICONDUCTOR CORPORATION,
as Lessee,
LEASE PLAN NORTH AMERICA, INC.,
as Lessor,
ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH,
as a Participant,
and
ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH,
as Agent
- - --------------------------------------------------------------------------------
Vitesse Fab 2 Facility
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1. DEFINITIONS; INTERPRETATION ................................. -1-
SECTION 2. CLOSING DATE ................................................ -2-
SECTION 3. ACQUISITION OF THE PROPERTY; FUNDING OF ADVANCES ............ -2-
SECTION 3.1. Lessor Commitment ................................... -2-
SECTION 3.2. Participants' Commitments ........................... -2-
SECTION 3.3. Procedures for Acquisition of the Land Interest ..... -2-
SECTION 3.4. Procedures for Advances ............................. -3-
SECTION 3.5. Allocation of Commitments ........................... -3-
SECTION 3.6. Termination, Reduction or Extension of
Participants' Commitments ......................... -3-
SECTION 3.7. Interest Rates and Payment Dates .................... -5-
SECTION 3.8. Computation of Interest ............................. -6-
SECTION 3.9. Pro Rata Treatment and Payments ..................... -7-
SECTION 3.10. The Account ......................................... -8-
SECTION 3.11. Basic Rent .......................................... -8-
SECTION 3.12. Purchase Payments by Lessee ......................... -8-
SECTION 3.13. Residual Value Guarantee Amount Payment by Lessee ... -10-
SECTION 3.14. Sales Proceeds of Remarketing of Property ........... -10-
SECTION 3.15. Supplemental Rent ................................... -11-
SECTION 3.16. Excepted Payments ................................... -11-
SECTION 3.17. Distribution of Payments After Event of Default ..... -11-
SECTION 3.18. Other Payments ...................................... -12-
SECTION 3.19. Casualty and Condemnation Amounts ................... -13-
SECTION 3.20. Order of Application ............................... -13-
SECTION 4. FEES ........................................................ -13-
SECTION 4.1. Commitment Fees ..................................... -13-
SECTION 4.2. Lease Arrangement Fee ............................... -13-
SECTION 4.3. Defeasance Fee ...................................... -13-
SECTION 4.4. Administrative Fee .................................. -13-
SECTION 4.5. Overdue Fees ........................................ -14-
SECTION 5. CERTAIN INTENTIONS OF THE PARTIES ........................... -14-
SECTION 5.1. Nature of Transaction ............................... -14-
SECTION 5.2. Amounts Due Under Lease ............................. -15-
SECTION 6. CONDITIONS PRECEDENT TO ACQUISITION OF LAND INTEREST AND
ADVANCES .......................................................... -15-
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SECTION 6.1. Conditions Precedent -- Documentation ............... -15-
(a) Acquisition and Funding Request ......................... -16-
(b) Operative Documents ..................................... -16-
(c) Environmental Certificate ............................... -16-
(d) Appraisal ............................................... -16-
(e) Deed .................................................... -17-
(f) Lease Supplement; Equipment Schedule .................... -17-
(g) Survey and Title Insurance .............................. -17-
(h) Evidence of Recording and Filing ........................ -17-
(i) Evidence of Insurance ................................... -17-
(j) Evidence of Use of Proceeds ............................. -18-
(k) Taxes ................................................... -18-
(l) Opinions of Counsel ..................................... -18-
(m) Approvals ............................................... -18-
(n) Litigation .............................................. -18-
(o) Requirements of Law ..................................... -18-
(p) Responsible Officer's Certificate of the Lessee ......... -18-
(q) The Lessee's Resolutions and Incumbency
Certificate, etc. ..................................... -19-
(r) Responsible Officer's Certificate of the
Guarantor ............................................. -19-
(s) The Guarantor's Resolutions and Incumbency
Certificate, etc. ..................................... -19-
(t) Closing Date ............................................ -19-
(u) No Material Adverse Effect .............................. -19-
(v) Responsible Officer's Certificate of the Lessor ......... -20-
(w) The Lessor's Resolutions and Incumbency
Certificate, etc. ..................................... -20-
(x) Construction Budget ..................................... -20-
(y) Termination of Liens .................................... -20-
(z) Property Purchase Agreement Conditions .................. -20-
SECTION 6.2. Further Conditions Precedent ......................... -20-
(a) Representations and Warranties .......................... -21-
(b) Performance of Covenants ................................ -21-
(c) Title ................................................... -21-
(d) No Default .............................................. -21-
SECTION 7. COMPLETION DATE CONDITIONS ................................. -21-
SECTION 7.1. Conditions ........................................... -21-
(a) Architect's Certificate ................................. -22-
(b) Construction Completion ................................. -22-
(c) Lessee Certification .................................... -22-
SECTION 8. REPRESENTATIONS ............................................. -22-
SECTION 8.1. Representations of the Lessor ........................ -22-
(a) Due Organization, etc ................................... -22-
(b) Authorization; No Conflict .............................. -23-
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(c) Enforceability, etc ..................................... -23-
(d) Litigation .............................................. -23-
(e) Assignment .............................................. -23-
(f) Defaults ................................................ -23-
(g) Use of Proceeds ......................................... -23-
(h) Securities Act .......................................... -23-
(i) Chief Place of Business ................................. -24-
(j) Federal Reserve Regulations ............................. -24-
(k) Investment Company Act .................................. -24-
(l) No Plan Assets .......................................... -24-
SECTION 8.2. Representations of the Participants ..................... -24-
(a) No Plan Assets .......................................... -24-
(b) Due Organization, etc ................................... -24-
(c) Authorization; No Conflict .............................. -24-
(d) Enforceability, etc ..................................... -25-
(e) Litigation .............................................. -25-
SECTION 8.3. Representations of the Lessee ........................... -25-
(a) Corporate Status ........................................ -25-
(b) Corporate Power and Authority ........................... -25-
(c) No Violation ............................................ -26-
(d) Litigation .............................................. -26-
(e) Governmental Approvals .................................. -26-
(f) Investment Company Act .................................. -26-
(g) Public Utility Holding Company Act ...................... -26-
(h) Information ............................................. -26-
(i) Taxes ................................................... -27-
(j) Compliance with ERISA ................................... -27-
(k) Environmental and Other Regulations ..................... -27-
(l) Offer of Securities, etc ................................ -27-
(m) Financial Statements .................................... -27-
SECTION 8.4. Representations of the Lessee With Respect to
the Property on the Closing Date ...................... -28-
(a) Representations ......................................... -28-
(b) Property ................................................ -28-
(c) Title ................................................... -29-
(d) Insurance ............................................... -29-
(e) Lease .................................................. -29-
(f) Protection of Interests ................................. -29-
(g) Flood Hazard Areas ...................................... -30-
(h) Conditions Precedent .................................... -30-
SECTION 8.5. Representations of the Lessee With Respect to
Each Advance .......................................... -30-
(a) Representations ......................................... -30-
(b) Improvements ............................................ -30-
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<PAGE>
(c) No Liens ............................................... -30-
(d) Advance................................................. -30-
(e) Lease................................................... -31-
(f) Protection of Interests................................. -31-
(g) Title Insurance Date Down Endorsement................... -31-
SECTION 9. PAYMENT OF CERTAIN EXPENSES................................ -31-
SECTION 9.1. Transaction Expenses............................... -31-
SECTION 9.2. Brokers' Fees and Stamp Taxes...................... -32-
SECTION 9.3. Obligations........................................ -32-
SECTION 10. OTHER COVENANTS AND AGREEMENTS............................ -32-
SECTION 10.1. Covenants of the Lessee............................ -32-
(a) Information............................................. -32-
(b) Compliance with Laws.................................... -34-
(c) Further Assurances...................................... -34-
(d) Existence; Franchises; Businesses....................... -34-
(e) Books and Records....................................... -34-
(f) Minimum Consolidated Quick Ratio........................ -34-
(g) Minimum Consolidated Tangible Net Worth................. -34-
(h) Maximum Consolidated Total Liabilities to Consolidated
Tangible Net Worth.................................... -35-
(i) Minimum Consolidated Fixed Charge Ratio................. -35-
(j) Profitability........................................... -35-
(k) Liens................................................... -35-
(l) Fundamental Changes..................................... -35-
(m) Transactions with Affiliates............................ -36-
(n) Delivery of Cash Collateral............................. -36-
(o) Restricted Payments..................................... -37-
(p) No Impairment of Deposits............................... -37-
(q) Investments............................................. -37-
SECTION 10.2. Cooperation with the Lessee............................. -37-
SECTION 10.3. Covenants of the Lessor................................. -38-
(a) Discharge of Liens...................................... -38-
(b) Change of Chief Place of Business....................... -38-
SECTION 11. PARTICIPATIONS........................................... -38-
SECTION 11.1. Amendments; Actions on Default.......................... -38-
SECTION 11.2. General................................................. -40-
SECTION 11.3 Conflicts............................................... -40-
SECTION 11.4. Refusal to Give Consents or Fund........................ -41-
SECTION 11.5. Required Repayments..................................... -42-
SECTION 11.6. Indemnification......................................... -42-
SECTION 11.7. Required Supplemental Payments.......................... -42-
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<PAGE>
SECTION 11.8. Application of Payments Received From Defaulting
Participant As a Cure For Payment Defaults.......... -43-
SECTION 11.9. Order of Application.................................. -43-
SECTION 11.10. Investments Pending Dispute Resolution; Overnight
Investments......................................... -43-
SECTION 11.11. Agent to Exercise Lessor's Rights..................... -44-
SECTION 11.12. Exculpatory Provisions Regarding the Lessor........... -44-
SECTION 12. TRANSFERS OF PARTICIPANTS' INTERESTS.......................... -44-
SECTION 12.1. Restrictions on and Effect of Transfer by Participants. -44-
(a) Required Notice and Effective Date.......................... -45-
(b) Assumption of Obligations................................... -45-
(c) Employee Benefit Plans...................................... -45-
(d) Representations............................................. -46-
(e) Amounts; Agent's Fee........................................ -46-
(f) Applicable Law.............................................. -46-
(g) Effect...................................................... -46-
SECTION 12.2. Covenants and Agreements of Participants............... -46-
(a) Participations.............................................. -46-
(b) Transferee Indemnities...................................... -47-
SECTION 12.3. Future Participants......................................... -47-
SECTION 13. INDEMNIFICATION............................................... -47-
SECTION 13.1. General Indemnification................................ -47-
SECTION 13.2. End of Term Indemnity.................................. -49-
SECTION 13.3. Environmental Indemnity................................ -50-
SECTION 13.4. Proceedings in Respect of Claims....................... -52-
SECTION 13.5. General Impositions Indemnity.......................... -53-
(a) Indemnification............................................. -53-
(b) Payments.................................................... -53-
(c) Reports and Returns......................................... -54-
(d) Income Inclusions........................................... -54-
(e) Withholding Taxes........................................... -54-
(f) Contests of Impositions..................................... -55-
(g) Documentation of Withholding Status......................... -56-
(h) Limitation on Tax Indemnification........................... -57-
SECTION 13.6. Funding Losses........................................ -57-
SECTION 13.7. Regulation D Compensation............................. -58-
SECTION 13.8. Basis for Determining Interest Rate
Inadequate or Unfair................................ -58-
SECTION 13.9. Illegality............................................ -59-
SECTION 13.10. Increased Cost and Reduced Return..................... -60-
SECTION 13.11. Substitution of Participant........................... -61-
SECTION 13.12. Indemnity Payments in Addition to Residual
Value Guarantee Amount.............................. -61-
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SECTION 14.THE AGENT...................................................... -61-
SECTION 14.1. Appointment........................................... -61-
SECTION 14.2. Delegation of Duties.................................. -62-
SECTION 14.3. Exculpatory Provisions................................ -62-
SECTION 14.4. Reliance by Agent..................................... -62-
SECTION 14.5. Notice of Default..................................... -62-
SECTION 14.6. Non-Reliance on Agent and Other Participants.......... -63-
SECTION 14.7. Indemnification....................................... -63-
SECTION 14.8. Agent in its Individual Capacity...................... -64-
SECTION 14.9. Successor Agent....................................... -64-
SECTION 15.MISCELLANEOUS.................................................. -64-
SECTION 15.1. Survival of Agreements................................ -64-
SECTION 15.2. No Broker, etc........................................ -65-
SECTION 15.3. Notices............................................... -65-
SECTION 15.4. Counterparts.......................................... -65-
SECTION 15.5. Amendments............................................ -65-
SECTION 15.6. Headings, etc......................................... -66-
SECTION 15.7. Parties in Interest................................... -66-
SECTION 15.8. GOVERNING LAW......................................... -67-
SECTION 15.9. Severability.......................................... -67-
SECTION 15.10. Liability Limited..................................... -67-
SECTION 15.11. Further Assurances.................................... -68-
SECTION 15.12. Submission to Jurisdiction............................ -68-
SECTION 15.13. Confidentiality....................................... -68-
SECTION 15.14. WAIVER OF JURY TRIAL.................................. -69-
SECTION 15.15. Usury Savings Clause.................................. -69-
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<PAGE>
SCHEDULES
---------
SCHEDULE I Participants' Commitments
SCHEDULE II Notice Information and Funding Offices
SCHEDULE III Environmental Matters
APPENDICES
----------
APPENDIX 1 Definitions and Interpretation
EXHIBITS
--------
EXHIBIT A Form of Acquisition Request
EXHIBIT B Form of Funding Request
EXHIBIT C Form of Environmental Certificate
EXHIBIT D Opinion of Special Counsel to Lessee
EXHIBIT E Opinion of Local Counsel to Lessee
EXHIBIT F Opinion of Special Counsel to Lessor
EXHIBIT G Opinion of Internal Counsel to Lessor
EXHIBIT H Form of Architect's Completion Certificate
EXHIBIT I Form of Lessee's Completion Certificate
EXHIBIT J Form of Assignment and Acceptance
EXHIBIT K Form of Participant's Letter
EXHIBIT L Assignment of Lease and Consent to Assignment
EXHIBIT M Construction Agency Agreement
EXHIBIT N Construction Agency Agreement Assignment
EXHIBIT O Guarantee
EXHIBIT P Defeasance Deposit Agreement
EXHIBIT Q Cash Collateral Agreement
EXHIBIT R Mortgage
EXHIBIT S Form of Financial Covenant Compliance Certificate
<PAGE>
PARTICIPATION AGREEMENT
THIS PARTICIPATION AGREEMENT, dated as of October 30, 1996 (this
"Participation Agreement"), is entered into by and among VITESSE SEMICONDUCTOR
- - ------------------------
CORPORATION, a Delaware corporation, as Lessee (together with its permitted
successors and assigns, the "Lessee"); LEASE PLAN NORTH AMERICA, INC., an
------
Illinois corporation, as Lessor (together with its permitted successors and
assigns, the "Lessor"); ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH,
------
as a Participant (together with its permitted successors and assigns each a
"Participant" and collectively the "Participants"); and ABN AMRO BANK N.V., SAN
- - ------------ ------------
FRANCISCO INTERNATIONAL BRANCH, as Agent (in such capacity, together with its
successors in such capacity, the "Agent") for the Participants.
-----
PRELIMINARY STATEMENT
In accordance with the terms of this Participation Agreement, the Lease and
the other Operative Documents,
A. the Lessor contemplates purchasing certain parcels of land
designated by the Lessee located in Colorado Springs, Colorado;
B. using Advances from the Lessor, the Lessee contemplates building,
as Construction Agent, a semiconductor fabrication facility on such parcels
of land for the Lessor, acquiring certain items of Equipment to be used in
connection with such Improvements and leasing, as Lessee, such Equipment,
Improvements and Land Interests from the Lessor under the Lease; and
C. the Lessor wishes to obtain, and the Participants are willing to
provide, financing of the funding of the costs of acquisition of such Land
Interest, the construction of the Improvements and the acquisition of such
Equipment through the purchase of Participation Interests in the Lease and
the Rent.
In consideration of the mutual agreements contained in this Participation
Agreement and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
SECTION 1.
DEFINITIONS; INTERPRETATION
Unless the context shall otherwise require, capitalized terms used and not
defined herein shall have the meanings assigned thereto in Appendix 1 hereto for
----------
all purposes hereof; and the rules of interpretation set forth in Appendix 1
----------
hereto shall apply to this Participation Agreement.
<PAGE>
SECTION 2.
CLOSING DATE
The closing date (the "Closing Date") shall occur on the date of the
------------
initial Advance, which shall be the earliest date on which all the conditions
precedent thereto set forth in Sections 6.1 and 6.2 hereof shall have been
------------ ---
satisfied or waived by the applicable parties as set forth therein.
SECTION 3.
ACQUISITION OF THE PROPERTY; FUNDING OF ADVANCES
SECTION 3.1. Lessor Commitment. Subject to the conditions and terms
-----------------
hereof, the Lessor shall take the following actions at the written request of
the Lessee from time to time during the Commitment Period:
(a) make Advances (out of funds provided by the Participants) for the
purpose of financing the acquisition of the Land Interest and the Equipment and
construction of the Improvements;
(b) acquire the Land Interest and the Equipment (using funds provided
by the Participants); and
(c) lease the Property as lessor to the Lessee under the Lease.
SECTION 3.2. Participants' Commitments. Subject to the terms and
-------------------------
conditions hereof, each Participant severally shall purchase a Participation
Interest in the Advances being made by the Lessor at the request of the Lessee
from time to time during the Commitment Period by making available to the Lessor
on each Funding Date an amount in immediately available funds equal to such
Participants' Commitment Percentage of the amount of the Advance being funded on
such Funding Date. Notwithstanding any other provision hereof, no Participant
shall be obligated to purchase its Participation Interest in any Advance if (i)
the amount of such purchase would exceed its Available Commitment, or (ii) if,
after giving effect to the proposed Advance, the outstanding aggregate amount of
such Participant's Participation Interest in the Advances would exceed such
Participant's Commitment.
SECTION 3.3. Procedures for Acquisition of the Land Interest. The
-----------------------------------------------
Lessee shall give the Lessor and the Agent prior written notice not later than
10:00 a.m., San Francisco time, on the proposed Land Interest Acquisition Date,
pursuant to an Acquisition Request substantially in the form of Exhibit A (an
---------
"Acquisition Request"), specifying with respect to such Land Interest: (i) the
- - --------------------
proposed Land Interest Acquisition Date, (ii) the Land Interest to be acquired,
(iii) the Existing Owner of the Land Interest and the Land Interest Acquisition
Cost, and (iv) the date on which the
<PAGE>
Lessee will request the Lessor to fund the Land Interest Acquisition Cost of
such Land Interest. The Agent shall promptly forward a copy of such Acquisition
Request to each Participant.
SECTION 3.4. Procedures for Advances. (a) With respect to each
-----------------------
funding of an Advance, the Lessee shall give the Lessor and the Agent prior
written notice not later than 10:00 a.m., San Francisco time, three Business
Days prior to the proposed Funding Date (other than for the initial Advance,
where notice shall be one Business Day), pursuant, in each case, to a Funding
Request substantially in the form of Exhibit B (a "Funding Request"), specifying
--------- ---------------
(i) the proposed Funding Date, (ii) the amount and purpose of the Advance
requested, (iii) the initial Interest Period for such Advance, (iv) the payee of
such Advance, and (v) the allocation of such Advance to the respective Land
Interest Acquisition Cost and Property Improvements Costs of the Property (and
pro rata portions of the related remittances from the Participants shall
likewise be deemed to be so allocated). The Agent shall promptly forward a copy
of such Funding Request to each Participant. The Lessee shall not request more
than one Funding Date during any calendar month. Each Advance (other than an
Interest Payment Advance) shall be in a minimum amount of $1,000,000 or in
amounts of $100,000 in excess thereof. Subject to the satisfaction or waiver of
the conditions precedent to such Advance set forth in Section 6, each
---------
Participant shall purchase its Participation Interest in such Advance by making
available to the Lessor its proportionate share of such Advance in immediately
available federal funds by wire transfer to the Agent for deposit to the
Lessee's demand deposit account with the Agent not later than 12:00 noon, San
Francisco time, on the applicable Funding Date. Upon (i) the Lessee's receipt
of the funds provided by the Participants with respect to an Advance, and (ii)
satisfaction or waiver of the conditions precedent to such Advance set forth in
Section 6, the Lessee shall (1) in the case of an Advance for the acquisition of
- - ---------
the Land Interest, pay the acquisition price for such Land Interest to the
Existing Owner, and (2) in the case of other Advances, pay or retain as payment
or reimbursement of, Property Improvements Costs, in each case from the funds
provided by the Participants for such Advance.
(b) On each Funding Date requested pursuant to Section 3.4(a) hereof,
--------------
the Lessee shall deposit immediately available funds with the Defeasance Deposit
Depositary Bank in the amount of the Tranche A Participation Interest in the
Advance so requested pursuant to the Defeasance Deposit Agreement. Each such
deposit (collectively, the "Defeasance Deposit") shall be the property of the
------------------
Defeasance Deposit Depositary Bank and shall be held and administered in
accordance with the Defeasance Deposit Agreement.
SECTION 3.5. Allocation of Commitments. Schedule I hereto contains
------------------------- ----------
an allocation for each Participant of (i) the amount of its Commitment
representing its Tranche A Participation Interest ("Tranche A Participation
-----------------------
Interest Commitment"), (ii) the amount of its commitment representing its
- - -------------------
Tranche B Participation Interest ("Tranche B Participation Interest
--------------------------------
Commitment"), and (iii) the percentage referred to in the definition of the term
"Participation Interest". The Lessee, the Lessor and the Participants have
approved all such allocations and percentages. Schedule I shall be amended as
required to reflect changes in the allocations set forth thereon due to the
addition of additional Participants pursuant to Section 12.1.
------------
SECTION 3.6. Termination, Reduction or Extension of Participants'
----------------------------------------------------
Commitments. (a) The Lessor shall have the right, upon not less than five
- - -----------
Business Days' written notice to the Agent, to
-3-
<PAGE>
terminate the Participants' Commitments or, from time to time, to reduce the
amount of the Participants' Commitments, provided that (i) after giving effect
--------
to such reduction, the aggregate outstanding principal amount of the Tranche A
Participation Interests shall not exceed the aggregate Tranche A Participation
Interest Commitments, (ii) after giving effect to such reduction, the aggregate
outstanding principal amount of the Tranche B Participation Interests shall not
exceed the aggregate Tranche B Participation Interest Commitments, and (iii) any
such reduction shall be made pro rata among the Participants' Commitments within
each Tranche. Prior to the occurrence and continuance of an Event of Default the
Lessor shall exercise such right only as directed by the Lessee and after the
occurrence and during the continuance of an Event of Default the Lessor shall
exercise such right only as directed by the Required Participants. In the event
that, after the occurrence and during the continuance of an Event of Default,
the Lessor and the Participants exercise such right, the Lessee may exercise its
Purchase Option under Section 20.1 of the Lease upon not less than ten (10)
days' written notice to the Lessor.
(b) The Lessee may, by written request to the Lessor and Agent (which
the Agent shall promptly forward to each Participant) given not later than 90
days prior to the Maturity Date, request (an "Extension Request") that the
-----------------
Maturity Date be extended to the date that is three (3) years after the Maturity
Date. No later than the date (the "Extension Response Date") which is 30 days
-----------------------
after such request has been delivered to each of the Participants, each
Participant will notify the Lessor in writing (with a copy to the Agent and the
Lessee) whether or not it consents to such Extension Request (which consent may
be granted or denied by each Participant in its sole discretion and may be
conditioned on receipt of such financial information or other documentation as
may be specified by such Participant including without limitation satisfactory
appraisals of the Property), provided that any Participant that fails to so
--------
advise the Lessor on or prior to the Extension Response Date shall be deemed to
have denied such Extension Request. The extension of the Maturity Date
contemplated by any Extension Request shall become effective as of the Maturity
Date then in effect (the "Extension Effective Date") on or after the Extension
------------------------
Response Date on which all of the Participants (other than Non-Consenting
Participants which have been replaced by Replacement Participants in accordance
with Section 3.6(c)) shall have consented to such Extension Request; provided
-------------- --------
that:
(A) on both the date of the Extension Request and the Extension
Effective Date, (x) each of the representations and warranties made by the
Lessee and the Lessor in or pursuant to the Operative Documents shall be
true and correct in all material respects as if made on and as of each such
date, except for representations and warranties made as of a specific date,
which shall be true and correct in all material respects as of such date,
(y) no Event of Default shall have occurred and be continuing, and (z) on
each of such dates the Agent shall have received a certificate of the
Lessee and the Lessor, each as to itself, as to the matters set forth in
clause (x) above and from the Lessee as to the matters set forth in clause
---------- ------
(y) above, and
---
(B) the Agent and the Required Participants shall have received
satisfactory evidence that the Expiration Date shall, after giving effect
to any extension thereof which has
-4-
<PAGE>
become effective on or prior to such Extension Effective Date, occur on the
Maturity Date as so extended.
(c) The Lessee shall be permitted to replace any Non-Consenting
Participant with a replacement bank or other financial institution (a
"Replacement Participant") at any time on or prior to the date which is 30 days
- - ------------------------
after the relevant Extension Response Date; provided that (i) such replacement
--------
does not conflict with any Requirement of Law, (ii) the Replacement Participant
shall purchase, at par, all of the Participation Interest of such Non-Consenting
Participant on or prior to the date of replacement, (iii) the Lessee shall be
liable to such Non-Consenting Participant under Section 13 of this Agreement if
----------
any Advance (or Participation Interest therein) shall be prepaid (or purchased)
other than on the last day of the Interest Period or Interest Periods relating
thereto, (iv) the Replacement Participant, if not already a Participant, shall
be reasonably satisfactory to the Required Participants, (v) such replacement
shall be made in accordance with the provisions of Section 12 of this Agreement
----------
(provided that the relevant Replacement Participant shall be obligated to pay
--------
the Transaction Expenses arising in connection therewith), (vi) the Replacement
Participant shall have agreed to be subject to all of the terms and conditions
of this Agreement (including the extension of the Maturity Date contemplated by
the relevant Extension Request) and other Operative Documents, and (vii) prior
to the occurrence and continuance of an Event of Default, the Lessee shall have
the exclusive right to designate the Replacement Participant. The Agent hereby
agrees to cooperate with the Lessee in the Lessee's efforts to arrange one or
more Replacement Participants as contemplated by this Section 3.6(c).
--------------
(d) The Lessee shall notify the Lessor and the Participants whether it
wishes to extend the Construction Period to the date that is six months after
the initial Outside Completion Date at least thirty (30) days prior to the
initial Outside Completion Date. The Construction Period and the Outside
Completion Date shall not be extended unless each Participant, in its sole
discretion, consents thereto within fifteen (15) days of the initial Outside
Completion Date. Each Participant may make such decision based upon such credit
information regarding the Lessee, interest rates and market conditions and such
other factors as it may consider relevant. If the Construction Period is so
extended, the Lessee shall pay Commitment Fees to the Agent for the account of
the Tranche B Participants during such extension of the Construction Period.
SECTION 3.7. Interest Rates and Payment Dates. (a) Each Advance
--------------------------------
representing Tranche A Participation Interests shall bear interest at a rate per
annum determined as follows:
(i) during the Term of the Lease and ending on the initial
Expiration Date, each Advance representing Tranche A Participation
Interests shall bear interest at a rate per annum equal to [*] for the
period commencing on the initial Funding Date and ending on the initial
Expiration Date; and
(ii) during the Renewal Term of the Lease, if any, each Advance
representing Tranche A Participation Interests shall bear interest at a
rate per annum equal to [*] for the period commencing on the first day of
the Renewal Term and ending on the last day of the Renewal Term.
[* Confidential Information]
-5-
<PAGE>
Each Advance (other than the initial Advance) in respect of the
Tranche B Participation Interests shall bear interest for each day during each
Interest Period with respect thereto at a rate per annum for such Interest
Period equal to the Three Month Eurodollar Rate determined for such day plus the
Applicable Margin. The initial Advance representing Tranche B Participation
Interests shall bear interest at a rate equal to the Alternate Base Rate until
commencement of the initial Interest Period.
(b) If all or a portion of (i) the amount of any Advance, (ii) any
interest payable thereon or (iii) any other amount payable hereunder shall not
be paid when due (whether at the stated maturity, by acceleration or otherwise),
such overdue amount shall bear interest at a rate per annum which is equal to
the Overdue Rate.
(c) Interest shall be payable in cash (except as provided in
paragraphs (d) and (e) below) in arrears on each Scheduled Payment Date,
- - ----------------------
provided that (i) interest accruing pursuant to paragraph (b) of this Section
- - -------- ------------- -------
3.7 shall be payable from time to time on demand and (ii) each prepayment of
- - ---
Advances shall be accompanied by accrued interest to the date of such prepayment
on the amount of Advances so prepaid.
(d) On each date which is three Business Days prior to any Scheduled
Payment Date during the Construction Period, the Lessee shall be deemed to have
requested an Advance comprised of an Interest Payment Advance pursuant to
Section 3.4 and the Lessor shall be deemed to have requested a purchase pursuant
- - -----------
to Section 3.2 of Participation Interests in such Advance in an amount equal to
-----------
the aggregate amount of the Basic Rent due and payable on such date with respect
to accrued interest on outstanding Advances. The Funding Date with respect to
any such Interest Payment Advance and purchase of Participation Interests
therein shall be the relevant Scheduled Payment Date (provided that such Advance
--------
and the purchase of such Participation Interests shall be subject to
satisfaction of the applicable conditions precedent set forth in Section 6) and
---------
the proceeds of such payment shall be applied to pay such accrued interest. On
each such Funding Date, the Property Cost shall be increased by an amount equal
to the Basic Rent paid on such date with respect to such Property with the
proceeds of such payment, and the Land Interest Acquisition Cost and Property
Improvements Costs shall be increased by their pro rata portions of such
Advance.
(e) After the Construction Period, interest accruing on the Tranche A
Participation Interests shall be payable by offsetting interest accruing on the
Defeasance Deposit pursuant to the Defeasance Deposit Agreement as of the
applicable Payment Date.
SECTION 3.8. Computation of Interest. (a) Whenever it is calculated
-----------------------
on the basis of the Alternate Base Rate, interest shall be calculated on the
basis of a 365- (or 366-, as the case may be) day year for the actual days
elapsed; and, otherwise, interest shall be calculated on the basis of a 360-day
year for the actual days elapsed. The Agent shall as soon as practicable after
the commencement of each Interest Period notify the Lessor, the Lessee and the
Participants of each determination of a Three Month Eurodollar Rate. Any change
in the interest rate on an Advance
-6-
<PAGE>
resulting from a change in the Alternate Base Rate or the Eurocurrency Reserve
Requirements shall become effective as of the opening of business on the day on
which such change becomes effective. The Agent shall as soon as practicable
notify the Lessor, the Lessee and the Participants of the effective date and the
amount of each such change in interest rate.
(b) Each determination of an interest rate by the Agent pursuant to
any provision of this Agreement shall be conclusive and binding on the Lessor,
the Lessee and the Participants in the absence of manifest error. The Agent
shall, at the request of such parties, deliver to such parties a statement
showing the quotations used by the Agent in determining any interest rate
pursuant to Section 3.8(a).
--------------
SECTION 3.9. Pro Rata Treatment and Payments. (a) Each
-------------------------------
participation in the Advances by the Participants hereunder and each reduction
of the Commitments of the Participants shall be made pro rata among the Tranche
--- ----
A Participants and Tranche B Participants according to the respective Commitment
Percentages of each such Participant. Except as otherwise provided in Sections
--------
3.10 - 3.20, each payment (including each prepayment) by the Lessor on account
- - -----------
of Participation Interests representing the amount of and interest on the
Advances shall be made pro rata among the Tranche A Participants and Tranche B
--- ----
Participants according to the respective Participation Interests of each such
Participant. All payments (including prepayments) to be made by the Lessor
hereunder to the Participants with respect to their Participation Interests,
whether on account of principal, interest or otherwise, shall be payable to the
extent received by the Lessor from or on behalf of the Lessee and shall be made
without setoff or counterclaim and shall be made prior to 12:00 noon, San
Francisco time, on the due date thereof to the Agent, for the account of the
Participants, at the Agent's office referred to in Section 15.3 of this
------------
Agreement, in Dollars and in immediately available funds. The Agent shall
distribute such payments to the Participants promptly upon receipt in like funds
as received. If any payment hereunder (other than payments of Participation
Interests in the Advances) becomes due and payable on a day other than a
Business Day, such payment shall be extended to the next succeeding Business
Day. If any payment of Participation Interests in an Advance becomes due and
payable on a day other than a Business Day, the maturity thereof shall be
extended to the next succeeding Business Day unless the result of such extension
would be to extend such payment into another calendar month, in which event such
payment shall be made on the immediately preceding Business Day. In the case of
any extension or shortening of the due date of any payment pursuant to the
preceding two sentences, interest thereon shall be payable at the then
applicable rate during such extension or until such shortened due date, as the
case may be.
(b) Unless the Agent shall have been notified in writing by any Participant
prior to funding its Participation Interest in an Advance that such Participant
will not make its share of such Advance available to the Agent, the Agent may
assume that such Participant is making such amount available to the Agent, and
the Agent may, in reliance upon such assumption, make available to the Lessor a
corresponding amount. If such amount is not made available to the Agent by the
required time on the Funding Date therefor, such Participant shall pay to the
Agent, on demand, such amount with interest thereon at a rate equal to the daily
average Federal Funds Effective Rate for the period until such Participant makes
such amount immediately available to the Agent. A certificate of the Agent
submitted to any Participant with respect to any amounts owing under this
Section 3.9(b) shall
- - --------------
-7-
<PAGE>
be conclusive in the absence of manifest error. If such Participant's share of
such Advance is not made available to the Agent by such Participant within three
Business Days of such Funding Date, the Agent shall also be entitled to recover
such amount with interest thereon at the rate borne by such Advance, on demand,
from the Lessee, to the extent the Agent has made a corresponding amount of the
Advance to the Lessee.
SECTION 3.10. The Account. The Agent may if it so desires establish
-----------
an account (the "Account") into which the Agent shall deposit all payments,
-------
receipts and other consideration of any kind whatsoever paid under the Lease and
received by the Agent pursuant to this Agreement, the Lease and any other
Operative Document. The Agent shall make distributions of such payments,
receipts and other consideration (and, if an Account is used, from the Account)
pursuant to the requirements of Sections 3.11 - 3.20 hereof. Notwithstanding
--------------------
anything contained in this Section 3 or the other Operative Documents to the
contrary, to the extent Tranche A Basic Rent, the Residual Value Guarantee
Amount or any portion of Asset Termination Value payable to the Lessor on
account of the Tranche A Participation Interests in the Advances is to be paid
from the interest accruing on, or the principal amount of, the Defeasance
Deposit pursuant to any provision of the Lease or the Defeasance Deposit
Agreement, (i) such payments shall not require a cash transfer from the Lessee
but shall be payable by means of an offset against interest accruing on, or the
applicable amount of principal of, the Defeasance Deposit and (ii) the Lessee
shall not be required to make any such transfer of such amounts to the Tranche A
Participants.
SECTION 3.11. Basic Rent. (a) Each payment (or portion thereof) of
----------
Basic Rent comprising interest on the Advances (and any payment of interest on
overdue installments of such component of Basic Rent) received by the Agent
shall be distributed by the Agent as promptly as possible (it being understood
-- ----- ----------
that any payments of such component of Basic Rent received by the Agent on a
timely basis and in accordance with the provisions of the Lease shall be
distributed on the date received in the funds so received) to the Participants
pro rata in accordance with, and for application to, the portion of their
- - --- ----
Participation Interests in such portion of Basic Rent, as well as in any overdue
interest due to such Participant (to the extent permitted by applicable law);
provided, that (i) interest accruing on the Defeasance Deposit shall only be
applied to pay Basic Rent owing to the Tranche A Participants; and (ii) Basic
Rent paid in cash by the Lessee in respect of interest accruing on the Tranche B
Participation Interests shall only be applied to pay Basic Rent owing to the
Tranche B Participants.
(b) Each payment (or portion thereof) of Basic Rent comprising
principal of the Advances (and any payment of interest on overdue installments
of such component of Basic Rent) received by the Agent shall be distributed as
promptly as possible (it being understood that any payments of such component of
-- ----- ----------
Basic Rent received by the Agent on a timely basis and in accordance with the
provisions of the Lease shall be distributed on the date received in the funds
so received) to the Participants pro rata in accordance with, and for
--- ----
application to, the portion of their Participation Interests in such portion of
Basic Rent then due each Participant.
SECTION 3.12. Purchase Payments by Lessee. Any payment received by
---------------------------
the Agent as a result of:
-8-
<PAGE>
(a) the purchase of the Lessor's interest in the Property in
connection with the Lessee's exercise of its Purchase Option under Section 20.1
of the Lease, or
(b) the Lessee's compliance with its obligation to purchase the
Lessor's interest in the Property in accordance with Section 20.2 of the Lease,
or
(c) the payment of the Asset Termination Value in accordance with
Sections 16.2(b), 16.3 or 16.4 of the Lease, or
(d) the Lessee failing to fulfill one or more of the conditions to
exercise of the Remarketing Option pursuant to Section 22.1 of the Lease and the
Agent's receipt pursuant to the next-to-last paragraph of Section 22.1 of the
Lease of the Asset Termination Value in accordance with Section 20.2 of the
Lease,
shall be distributed by the Agent as promptly as possible (it being understood
-- ----- ----------
that any such payment received by the Agent on a timely basis and in accordance
with the provisions of the Lease shall be distributed on the date on which such
funds are so received) to pay in full the Participant Balance of each
Participant and in the case that the amount so distributed shall be insufficient
to pay in full as aforesaid, then pro rata among the Participants without
--- ----
priority of one over the other, in the proportion that the Participant Balance
of each bears to the aggregate of all of the Participant Balances; provided,
that (i) any payment received by means of offset against the Defeasance Deposit
shall be applied in the following order of priority:
first, to the Tranche A Participants for application to pay in full
-----
the Tranche A Participation Interest Balance of each Tranche A Participant;
and
second, to the Tranche B Participants for application to pay in full
------
the Tranche B Participation Interest Balance of each Tranche B Participant,
and in the case where the amounts so distributed shall be insufficient to
pay in full as aforesaid, then pro rata among the Tranche B Participants
--- ----
without priority of one Tranche B Participant over the other in the
proportion that each such Tranche B Participant's Tranche B Participation
Interest Balance bears to the aggregate Tranche B Participation Interest
Balances of all Tranche B Participants; and
(ii) any payment received by means of offset against the Cash
Collateral shall be applied in the following order of priority:
first, to the Tranche B Participants for application to pay in full
-----
the Tranche B Participation Interest Balance of each Tranche B Participant;
and
second, to the Tranche A Participants for application to pay in full
------
the Tranche A Participation Interest Balance of each Tranche A Participant,
and in the case where the amount so distributed shall be insufficient to
pay in full as aforesaid, then pro rata among the Tranche A Participants
--- ----
without priority of one Tranche A Participant over the other in the
-9-
<PAGE>
proportion that each Tranche A Participant's Tranche A Participation
Interest Balance bears to the aggregate Tranche A Participation Interest
Balances of all Tranche A Participants. To the extent that any amount of
the Defeasance Deposit Collateral or Cash Collateral remains in any Account
(as defined in the Defeasance Deposit Agreement or the Cash Collateral
Agreement, as applicable) after all payments required to be made by this
Section 3.12 have been made and the Participation Interests have been paid
------------
in full, the Agent shall cause such remaining amount to be refunded
promptly to the Lessee.
(e) Notwithstanding any other provision in this Agreement, the Lease
or any other Operative Document to the contrary, the Lessee, the Agent, the
Participants and the Lessor agree that upon the maturity or acceleration of the
Lessee's obligation to pay the Asset Termination Value, Residual Value Guarantee
Amount or Purchase Option Price, any and all amounts of Defeasance Deposit
Collateral or Cash Collateral that have been deposited by the Lessee pursuant to
the Defeasance Deposit Agreement or the Cash Collateral Agreement, as
applicable, and that have not been withdrawn by the Lessee or offset or applied
by the Lessor, the Agent or any Participant (in accordance with the terms of the
Defeasance Deposit Agreement or Cash Collateral Agreement, as applicable) as of
such maturity or acceleration date, shall be required to be applied by the Agent
and the Lessor to satisfy the Lessee's obligation to pay such portion of the
Asset Termination Value, Purchase Option Price or Residual Value Guarantee
represented by the Defeasance Deposit Collateral or the Cash Collateral
notwithstanding the fact that such amounts may not then be actually available,
for any reason attributable to the Lessor, the Agent or any Participant
(including, without limitation any fraud or misapplication of funds by the
Lessor, the Agent or any Participant, decline in value of the Collateral or the
filing by or against the Lessor, the Agent or any Participant of any insolvency,
bankruptcy, dissolution, liquidation, reorganization or similar proceeding, but
except to the extent resulting from a proceeding involving the insolvency of the
Lessee), at Defeasance Deposit Depositary Bank or Depositary Bank to pay such
obligation.
SECTION 3.13. Residual Value Guarantee Amount Payment by Lessee. The
-------------------------------------------------
payment by the Lessee of the Residual Value Guarantee Amount to the Agent in
accordance with Article XXII of the Lease (including payment by means of offset
against the Defeasance Deposit) upon the Lessee's exercise of the Remarketing
Option shall be distributed by the Agent as promptly as possible (it being
understood that any such payment received by the Agent on a timely basis in
accordance with the provisions of the Lease shall be distributed on the date on
which such funds are so received) in the following order of priority:
first, to the Tranche A Participants for application to pay in full
-----
the Tranche A Participation Interest Balance of each Tranche A Participant;
and
second, to the Tranche B Participants for application to pay in full
------
the Tranche B Participation Interest Balance of each Tranche B Participant,
and in the case where the amounts so distributed shall be insufficient to
pay in full as aforesaid, then pro rata among the Tranche B Participants
--- ----
without priority of one Tranche B Participant over the other in the
proportion that each such Tranche B Participant's Tranche B Participation
Interest Balance bears to the aggregate Tranche B Participation Interest
Balances of all Tranche B Participants.
-10-
<PAGE>
SECTION 3.14. Sales Proceeds of Remarketing of Property. Any
-----------------------------------------
payments received by the Agent as proceeds from the sale of the Property sold
pursuant to the Lessee's exercise of the Remarketing Option pursuant to Article
XXII of the Lease, together with any payment made by the Lessee as a result of
an appraisal pursuant to Section 13.2 of this Agreement, shall be distributed by
------------
the Agent as promptly as possible (it being understood that any such payment
-- ----- ----------
received by the Agent on a timely basis and in accordance with the provisions of
the Lease shall be distributed on the date received) in the funds so received in
the following order of priority:
first, to the Tranche B Participants for application to pay in full
-----
the Tranche B Participation Interest Balance of each Tranche B Participant,
and in the case where the amount so distributed shall be insufficient to
pay in full as aforesaid, then pro rata among the Tranche B Participants
--- ----
without priority of one Tranche B Participant over the other in the
proportion that each Tranche B Participant's Tranche B Participation
Interest Balance bears to the aggregate Tranche B Participation Interest
Balances of all Tranche B Participants;
second, to the Tranche A Participants for application to pay in full
------
the Tranche A Participation Interest Balance of each Tranche A Participant,
and in the case where the amount so distributed shall be insufficient to
pay in full as aforesaid, then pro rata among the Tranche A Participants
--- ----
without priority of one Tranche A Participant over the other in the
proportion that each Tranche A Participant's Tranche A Participation
Interest Balance bears to the aggregate Tranche A Participation Interest
Balances of all Tranche A Participants; and
third, the balance, if any, shall be promptly distributed to, or as
-----
directed by, the Lessee.
SECTION 3.15. Supplemental Rent. All payments of Supplemental Rent
-----------------
received by the Agent (excluding any amounts payable pursuant to the preceding
provisions of this Section 3) shall be distributed promptly by Agent upon
---------
receipt thereof to the Persons entitled thereto pursuant to the Operative
Documents.
SECTION 3.16. Excepted Payments. Notwithstanding any other provision
-----------------
of this Agreement or the Operative Documents, any Excepted Payment received at
any time by the Agent shall be distributed promptly to the Person entitled to
receive such Excepted Payment pursuant to the Operative Documents.
SECTION 3.17. Distribution of Payments After Event of Default. (a)
-----------------------------------------------
All payments received and amounts realized by the Lessor or the Agent after an
Event of Default exists, including under the Guarantee, the Defeasance Deposit
Agreement or the Cash Collateral Agreement and proceeds from the sale of any of
the Property, proceeds of any amounts from any insurer or any Governmental
Authority in connection with any Casualty or Condemnation, or from Lessee as
payment in accordance with the Lease, including any payment received from Lessee
pursuant to Section 17 of the Lease, shall, if received by Lessor, be paid to
the Agent as promptly as possible and shall be distributed by the Agent as
promptly as possible (it being understood that any such payment received by the
-- ----- ----------
Agent on a timely basis and in accordance with the provisions of the
-11-
<PAGE>
Operative Documents shall be distributed on the date received in the funds so
received) in the following order of priority:
first, so much of such payment or amount as shall be required to
-----
reimburse the Lessor or the Agent for any tax, expense or other loss
incurred by the Lessor or the Agent (including, to the extent not
previously reimbursed, those incurred in connection with any duties of the
Agent as the Agent) and any unpaid ongoing fees of the Lessor and the Agent
shall be distributed to each of them for its own account;
second, so much of such payments or amounts as shall be required to
------
reimburse the then existing or prior Participants for payments made by them
to the Lessor pursuant to Section 18.1 of the Lease (to the extent not
previously reimbursed) and to pay such then existing or prior Participants
the amounts payable to them pursuant to any expense reimbursement or
indemnification provisions of the Operative Documents shall be distributed
to each such Participant without priority of one over the other in
accordance with the amount of such payment or payments payable to each such
Person;
third, (i) in the case of a sale of the Property or application of the
-----
Cash Collateral, in the order of priority set forth in Section 3.14, (ii)
------------
in the case of the application of the Defeasance Deposit, in the order of
priority set forth in Section 3.13 and (iii) in all other cases, so much of
------------
such amount as shall be required to pay in full the Participant Balance of
each Participant, and in the case that the amounts so distributed shall be
insufficient to pay in full as aforesaid, then pro rata among the
--- ----
Participants without priority of one over the other, in the proportion that
the Participant Balance of each bears to the aggregate Participant Balances
of all the Participants; and
fourth, the balance, if any, of such payment or amounts remaining
------
thereafter shall be promptly distributed to, or as directed by, the Lessee.
SECTION 3.18. Other Payments. (a) Except as otherwise provided in
--------------
Sections 3.11, 3.12, 3.17 and paragraph (b) below,
- - ------------- ---- ---- -------------
(i) any payment received by the Agent for which no provision as
to the application thereof is made in the Operative Documents or elsewhere
in this Section 3, and
---------
(ii) all payments received and amounts realized by the Agent
under the Lease or otherwise with respect to the Property, the Defeasance
Deposit or the Cash Collateral to the extent received or realized at any
time after indefeasible payment in full of the Participant Balances of all
of the Participants and any other amounts due and owing to the Lessor, the
Participants or the Agent,
shall be distributed forthwith by the Agent in the order of priority set forth
in Section 3.12 (in the case of any payment described in clause (i) above) or in
------------ ----------
Section 3.17 hereof (in the case of any payment described in clause (ii) above),
- - ------------ -----------
except, that (i) in the case of any payment described in
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<PAGE>
clause (ii) above, such payment shall be distributed omitting clause third of
- - ---------- ------------
such Section 3.17; and the balance, if any (in the case of any payment described
------------
in clause (i) or (ii) above), shall be distributed to, or as directed by, the
---------- ----
Lessee, and (ii) any payments received under the Guaranty shall be distributed
solely to the Participants in accordance with the priorities set forth in
Section 3.17.
- - ------------
(b) Except as otherwise provided in Sections 3.11 and 3.12 hereof, any
------------- ----
payment received by the Agent for which provision as to the application thereof
is made in an Operative Document but not elsewhere in this Section 3 shall be
---------
distributed forthwith by the Agent to the Person and for the purpose for which
such payment was made in accordance with the terms of such Operative Document.
SECTION 3.19. Casualty and Condemnation Amounts. Any amounts payable
---------------------------------
to the Lessor as a result of a Casualty or Condemnation pursuant to Section 15.1
of the Lease (but excluding any amounts payable pursuant to Section 16.2 of the
Lease) shall, if no Lease Event of Default exists, be paid over to Lessee for
the rebuilding or restoration of that portion of the Property to which such
Casualty or Condemnation applied, and any excess proceeds shall be paid to the
Lessee. If a Lease Event of Default exists, then during the continuance of such
Lease Event of Default, all such amounts shall be held by the Agent as Cash
Collateral and upon exercise of the Lessor's remedies hereunder shall be
distributed pursuant to Section 3.17.
------------
SECTION 3.20. Order of Application. To the extent any payment made
--------------------
to any Participant pursuant to Sections 3.12, 3.13, 3.14 or 3.15 is insufficient
------------- ---- ---- ----
to pay in full the Participant Balance of such Participant, then each such
payment shall first be applied to its Participation Interest in accrued interest
and then to its Participation Interest in principal of the Advances.
SECTION 4.
FEES
SECTION 4.1. Commitment Fees. The Lessee shall pay to the Agent for
---------------
the account of each Tranche B Participant a commitment fee (the "Commitment
----------
Fees") for the period from and including the Closing Date to the earlier of (i)
the Completion Date or (ii) the Outside Completion Date, computed in the case of
each Tranche B Participant at a rate per annum equal to the Commitment Fee Rate
on the amount of the Available Tranche B Commitment of such Participant, in each
case during the period for which payment is made, payable on each Commitment Fee
Payment Date. Commitment Fees shall be calculated on the basis of a 365- (or
366-, as the case may be) day year for the actual days elapsed.
SECTION 4.2. Lease Arrangement Fee. The Lessee shall pay to the
---------------------
Arranger the lease arrangement fee (the "Lease Arrangement Fee") referred to in
---------------------
that certain commitment letter from the Arranger to the Lessee dated as of
October 9, 1996, at such times as are specified in such letter.
-13-
<PAGE>
SECTION 4.3. Defeasance Fee. The Lessee shall pay to the Agent for
--------------
the account of each Tranche A Participant a defeasance fee (the "Defeasance
----------
Fee") in the amount of [*] of the aggregate Tranche A Participation Interest
Commitment on the Closing Date.
SECTION 4.4. Administrative Fee. The Lessee shall pay an
------------------
administrative fee (the "Administrative Fee") to the Arranger in the amount of
------------------
[*] payable in advance on the Closing Date.
SECTION 4.5. Overdue Fees. If all or a portion of any fee due
------------
hereunder shall not be paid when due, such overdue amount shall bear interest,
payable by the Lessee on demand, at a rate per annum equal to the Overdue Rate
from the date of such nonpayment until such amount is paid in full (as well
after as before judgment).
SECTION 5.
CERTAIN INTENTIONS OF THE PARTIES
SECTION 5.1. Nature of Transaction. (a) It is the intent of the
---------------------
parties hereto that: (i) the Lease constitutes an "operating lease" pursuant to
Statement of Financial Accounting Standards No. 13, as amended, for purposes of
Lessee's financial reporting, and (ii) for purposes of federal, state and local
income or franchise taxes and for any other tax imposed on or measured by
income, the transaction contemplated hereby is a financing arrangement and
preserves ownership in the Property in the Lessee. Nevertheless, the Lessee
acknowledges and agrees that neither the Agent, the Lessor nor any Participant
has made any representations or warranties to the Lessee concerning the tax,
accounting or legal characteristics of the Operative Documents and that the
Lessee has obtained and relied upon such tax, accounting and legal advice
concerning the Operative Documents as it deems appropriate.
Notwithstanding any provision of this Participation Agreement to the
contrary, the parties hereto agree and declare that: (i) the transactions
contemplated by the Lease are intended to have a dual, rather than single, form;
and (ii) all references in this Participation Agreement to the "lease" of the
Property which fail to reference such dual form do so as a matter of convenience
only and do not reflect the intent of the parties hereto as to the true form of
such arrangements. The parties hereto agree that, in accordance with their
intentions expressed herein and the substance of the transactions contemplated
hereby, Lessee (and not Lessor) shall be treated as the owner of the Property
for federal, state, and local income and property tax purposes and the Lease
shall be treated as a financing arrangement. Lessee shall be entitled to take
any deduction, credit, allowance or other reporting, filing or other tax
position consistent with such characterizations. The Lessor and the
Participants shall file any federal, state or local income tax returns, reports
or other statements in a manner which is consistent with the foregoing
provisions of this Section 5.1, provided that the Lessor and any Participant may
--------
take a position that is inconsistent with the Lessee's status as owner of the
Property if: (x) there has been a change in law or regulation so requiring as
supported by an opinion of counsel reasonably acceptable to the Lessee that
there is not substantial authority for such
[* Confidential Information]
-14-
<PAGE>
a consistent reporting position; or (y) (A) there has been an administrative or
judicial holding that the Lessee is not the owner of the Property for such tax
purposes, (B) the Lessee has no right to contest such holding pursuant to
Section 13.5 of the Participation Agreement, and (C) the Lessee's lack of right
- - ------------
to contest is not the result of an Indemnitee's waiver of its right to
indemnification pursuant to Section 13.5(f)(iii) of the Participation
--------------------
Agreement or failure of the amount at issue to exceed the minimum amount set
forth in Section 13.5(f)(iv)(B) of the Participation Agreement.
----------------------
(b) Specifically, without limiting the generality of subsection (a) of
--------------
this Section 5.1, the parties hereto intend and agree that with respect to the
-----------
nature of the transactions evidenced by the Lease in the context of the exercise
of remedies under the Operative Documents, including, without limitation, in the
case of any insolvency or receivership proceedings or a petition under the
United States bankruptcy laws or any other applicable insolvency laws or statute
of the United States of America or any State or Commonwealth thereof affecting
the Lessee, the Lessor or any Participant or any enforcement or collection
actions, (i) the transactions evidenced by the Operative Documents are loans
made by the Lessor and the Participants as unrelated third party lenders to the
Lessee secured by the Property, (ii) the obligations of the Lessee under the
Lease to pay Basic Rent and Supplemental Rent or Asset Termination Value in
connection with any purchase of the Property pursuant to the Lease shall be
treated as payments of interest on and principal of, respectively, loans from
the Lessor and the Participants to the Lessee, (iii) the Lease grants a security
interest and mortgage or deed of trust or lien, as the case may be, in the
Property and the collateral described in the Mortgage to the Lessor, the Agent
and the Participants to secure the Lessee's performance and payment of all
amounts under the Lease and the other Operative Documents.
SECTION 5.2. Amounts Due Under Lease. Anything else herein or
-----------------------
elsewhere to the contrary notwithstanding, it is the intention of the Lessee,
the Lessor, the Participants and the Agent that: (i) the amount and timing of
installments of Basic Rent due and payable from time to time from the Lessee
under the Lease shall be equal to the aggregate payments due to the Participants
in respect of their Participation Interests on each Payment Date; (ii) if the
Lessee elects the Purchase Option or becomes obligated to purchase the Property
under the Lease, the Participation Interests, all fees and all of the interest
on overdue amounts thereon and all other obligations of the Lessee owing to the
Lessor, the Participants and the Agent shall be paid in full by the Lessee;
(iii) if the Lessee properly elects the Remarketing Option, the Lessee shall
only be required to pay to the Lessor the proceeds of the sale of the Property,
the Residual Value Guarantee Amount and any amounts due pursuant to Section 13
----------
of this Participation Agreement and Section 22.2 of the Lease (which aggregate
amounts may be less than the Asset Termination Value); and (iv) upon an Event of
Default resulting in an acceleration of the Lessee's obligation to purchase the
Property under the Lease, the amounts then due and payable by the Lessee under
the Lease shall include all amounts necessary to pay in full the Asset
Termination Value, plus all other amounts then due from the Lessee to the
Participants, the Agent and the Lessor under the Operative Documents.
SECTION 6.
CONDITIONS PRECEDENT TO
-15-
<PAGE>
ACQUISITION OF LAND INTEREST AND ADVANCES
SECTION 6.1. Conditions Precedent -- Documentation. The obligation
-------------------------------------
of the Lessor to acquire the Land Interest on the Land Interest Acquisition Date
and to make the Advance in respect of such Property on the Funding Date
applicable thereto, the obligation of the Lessor to make an Advance to finance
the acquisition of Equipment or the construction of any Improvements or the
funding of any Interest Payment Advance on any Funding Date, and the obligation
of each Participant to purchase its Participation Interest in, and to make
available to the Lessor its related portion of, each such Advance on such
Funding Date are subject to satisfaction or waiver of the following conditions
precedent and the conditions precedent set forth in Section 6.2 (it being
-----------
understood that the Lessor's obligation to acquire such Land Interest or to
finance such Equipment, if any, or Improvements shall not be subject to the
conditions precedent set forth in this Section 6.1 or Section 6.2 to the extent
----------- -----------
such conditions are actions required of the Lessor) on or prior to the Closing
Date or such Funding Date, as the case may be:
(a) Acquisition and Funding Request. Prior to the Closing Date, the
-------------------------------
Agent and the Lessor shall have received a fully executed counterpart of the
Acquisition Request, and prior to each Funding Date the Agent and the Lessor
shall have received a fully executed counterpart of the related Funding Request,
appropriately completed by the Lessee, in accordance with Sections 3.3 and 3.4,
------------ ---
respectively; provided, that this condition shall be deemed to have been
satisfied in connection with an Interest Payment Advance pursuant to Section
-------
3.7(d) hereof.
- - ------
(b) Operative Documents. On or prior to the Closing Date, each of the
-------------------
Operative Documents to be entered into on the Closing Date shall have been duly
authorized, executed and delivered by the parties thereto, and shall be in full
force and effect, including, without limitation, (i) this Participation
Agreement, (ii) the Lease, (iii) the Lease Supplement; (iv) the Guarantee, (v)
the Defeasance Deposit Agreement, (vi) the Cash Collateral Agreement, (vii) the
Construction Agency Agreement, (viii) the Construction Agency Agreement
Assignment, (ix) the Mortgage, (x) the Assignment of Lease and Supplement to
Assignment of Lease, (xi) the Consent to Assignment, (xii) the Property Purchase
Agreement, and (xiii) the Deed. No Default or Event of Default shall exist
thereunder and be continuing (both before and after giving effect to the
transactions contemplated by the Operative Documents), and the Lessor, the Agent
and each Participant shall each have received a fully executed copy of each of
such Operative Documents (other than the Lease and Lease Supplement, of which
the Agent shall receive the original and the Lessor and the Participants shall
receive specimens). On or prior to the Closing Date, the Operative Documents
(or memoranda thereof), any supplements thereto and any financing statements in
connection therewith required under the Uniform Commercial Code shall have been
recorded, registered and filed, if necessary, in such manner as to enable the
Lessee's counsel to render its opinion referred to in clauses l(i)(A) and (B)
-----------------------
below.
(c) Environmental Certificate. The Agent, each Participant and the
-------------------------
Lessor shall have received an Environmental Certificate substantially in the
form of Exhibit C (an "Environmental Certificate") with respect to the Property,
--------- -------------------------
provided that such Environmental Certificate shall be delivered not less than
- - --------
five (5) Business Days prior to the Closing Date and shall
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<PAGE>
have been approved by the Agent, the Required Participants and the Lessor, and
accompanied by the Environmental Audit for the Property prepared by C. C.
Thompson, Inc. dated June 17, 1996.
(d) Appraisal. On or prior to the Closing Date, the Agent, the Lessor
---------
and the Participants shall have received an Appraisal of the Property, which
Appraisal shall (i) show that the Fair Market Sales Value of the Land Interest
with respect to such Property as of the projected Completion Date shall not
exceed 25% of the Fair Market Sales Value of such Land Interest and the
Improvements to be constructed thereon in accordance with the Plans and
Specifications for Property, and (ii) show as of the projected Completion Date
the Fair Market Sales Value of such Land Interest and the Improvements to be
constructed thereon in accordance with the Plans and Specifications, and (iii)
meet the other applicable requirements set forth in the definition of the term
"Appraisal" contained in Appendix 1.
----------
(e) Deed. On or prior to the Closing Date, the Lessor shall have
----
received a special warranty deed (the "Deed"), in conformity with Applicable Law
----
and appropriate for recording with the applicable Governmental Authorities, with
respect to the Land Interest (and all Improvements located thereon), conveying
fee simple title to the Land Interest (and all Improvements located thereon) to
the Lessor, subject only to Permitted Exceptions.
(f) Lease Supplement; Equipment Schedule. The Lessee and the Lessor
------------------------------------
shall have delivered (i) on or prior to the Closing Date, the original
counterpart of the Lease Supplement executed by the Lessee and the Lessor to the
Agent and (ii) on or prior to the applicable Funding Date, a duly executed
Equipment Schedule covering any Equipment, if any, being acquired with the
proceeds of such Advance by the Lessor, together with invoices or appraisals in
form and substance satisfactory to the Agent, the Lessor and the Participants.
(g) Survey and Title Insurance. On or prior to the Closing Date, the
--------------------------
Lessee shall have delivered (i) an ALTA/ACSM (1992)(Urban) Survey of the
Property, including Table A numbers 1, 2, 3, 4, 6, 8, 9, 10 and 11, certified to
the Lessor, the Participants and the title company and otherwise in form
reasonably acceptable to the Participants, (ii) an ALTA (1992) owners title
insurance policy with extended coverage over the general exceptions, insuring
fee title in the Lessor to the Property, subject only to the Permitted
Exceptions, (iii) an ALTA (1992) Loan Policy insuring the Agent that the Lien of
the Mortgage is a first and primary lien in the Lessor's interest in the Master
Lease and in the fee title to the Property, subject only to pending
disbursements for construction and the Permitted Exceptions, and (iv) an ALTA
(1992) Loan Policy insuring the Agent that the Lien of the Master Lease is a
first and primary Lien in the Lessee's interest in the Property; such policies
each in an amount not less than the estimated Property Cost and to be reasonably
satisfactory to the Lessor, the Agent and the Participants with extended
coverage, access, tax parcel, survey identicality, variable rate, future
advances, usury, comprehensive, fraudulent conveyances, doing business,
mechanics liens and zoning endorsements and such other endorsements as and to
the extent available in such jurisdiction where the Property is located, if
requested by the Agent.
-17-
<PAGE>
(h) Evidence of Recording and Filing. On the Closing Date, the Agent
--------------------------------
shall have received evidence reasonably satisfactory to it that each of the
Deed, the Lease Supplement, the Assignment of Lease and Supplement to Assignment
of Lease, the Consent to Assignment and the Mortgage shall have been or are
being recorded with the appropriate Governmental Authorities in the order in
which such documents are listed in this clause, and the UCC Financing Statements
with respect to the Property being acquired shall have been or are being filed
with the appropriate Governmental Authorities.
(i) Evidence of Insurance. On or prior to the Closing Date, the
---------------------
Agent, the Lessor and each Participant shall have received evidence of insurance
with respect to the Property required to be maintained pursuant to the Lease,
setting forth the respective coverages, limits of liability, carrier, policy
number and period of coverage.
(j) Evidence of Use of Proceeds. On or prior to each Advance, the
---------------------------
Agent and each Participant shall have received evidence reasonably satisfactory
to the Agent and each Participant as to the use of the proceeds of the Advance
in accordance with the provisions of Section 8.1(g).
--------------
(k) Taxes. On the Closing Date, all taxes, fees and other charges in
-----
connection with the execution, delivery, recording, filing and registration of
the Operative Documents shall have been paid or provisions for such payment
shall have been made to the satisfaction of the Agent, each Participant and the
Lessor.
(l) Opinions of Counsel. On the Closing Date, (i) the Lessee shall
-------------------
have delivered to the Agent, each Participant and the Lessor (A) an opinion of
Wilson, Sonsini, Goodrich & Rosati, counsel to the Lessee, as to the matters set
forth in Exhibit D; and (B) an opinion of local counsel licensed to practice in
---------
the jurisdiction where the Property is located as to the matters set forth in
Exhibit E; and (ii) the Lessor shall have delivered to the Agent and each
- - ---------
Participant (A) an opinion of special counsel in the form set forth on Exhibit
-------
F; and (B) an opinion of internal counsel to the Lessor to the effect and in the
form set forth in Exhibit G.
---------
(m) Approvals. On or prior to the Closing Date or each Funding Date,
---------
as applicable, all necessary (or, in the reasonable opinion of the Lessor, the
Participants or the Agent or any of their respective counsel, advisable)
Governmental Actions and covenants and approvals of or by any Governmental
Authority or other Person, in each case required by any Requirement of Law,
covenant or restriction affecting the Property or the transactions contemplated
thereby to have been obtained by such date shall have been obtained or made and
be in full force and effect.
(n) Litigation. As of each Funding Date, no action or proceeding
----------
shall have been instituted, nor shall any action or proceeding be threatened,
before any Governmental Authority, nor shall any order, judgment or decree have
been issued or proposed to be issued by any Governmental Authority (i) to set
aside, restrain, enjoin or prevent the full performance of this Participation
Agreement, the Lease or any other Operative Document or any transaction
-18-
<PAGE>
contemplated hereby or thereby or (ii) which is reasonably likely to have a
Material Adverse Effect.
(o) Requirements of Law. As of the Closing Date and each Funding
-------------------
Date, in the reasonable opinion of the Lessor, the Participants, the Agent and
their respective counsel, the transactions contemplated by the Operative
Documents do not and will not violate any Requirement of Law and do not and will
not subject the Lessor, the Agent or any Participant to any adverse regulatory
or tax prohibitions or constraints.
(p) Responsible Officer's Certificate of the Lessee. On the Closing
-----------------------------------------------
Date, the Lessor, each Participant and the Agent shall each have received a
Responsible Officer's Certificate, dated as of the Closing Date, of the Lessee
stating that (i) each and every representation and warranty of the Lessee
contained in the Operative Documents to which it is a party is true and correct
on and as of the Closing Date; (ii) no Default or Event of Default under the
Lease, the Property Purchase Agreement or the Construction Agency Agreement has
occurred and is continuing; (iii) each Operative Document to which the Lessee is
a party is in full force and effect with respect to it; and (iv) the Lessee has
duly performed and complied with all covenants, agreements and conditions
contained herein or in any Operative Document required to be performed or
complied with by it on or prior to the Closing Date.
(q) The Lessee's Resolutions and Incumbency Certificate, etc. On the
---------------------------------------------------------
Closing Date, the Lessor, each Participant and the Agent shall each have
received (i) a certificate of the Secretary or an Assistant Secretary of the
Lessee attaching and certifying as to (A) the resolutions of the Board of
Directors of the Lessee, duly authorizing the execution, delivery and
performance by the Lessee of documents and agreements of the type represented by
each Operative Document to which it is or will be a party, (B) its articles of
incorporation and bylaws, and (C) the incumbency and signature of persons
authorized to execute and deliver on its behalf the Operative Documents to which
it is a party, and (ii) a good standing certificate from the appropriate officer
of the state in which the Property is located.
(r) Responsible Officer's Certificate of the Guarantor. On the
--------------------------------------------------
Closing Date, the Lessor, each Participant and the Agent shall each have
received a Responsible Officer's Certificate, dated as of the Closing Date, of
the Guarantor stating that (i) each and every representation and warranty of the
Guarantor contained in the Operative Documents to which it is a party is true
and correct on and as of the Closing Date; (ii) no Default or Event of Default
under the Guarantee has occurred and is continuing; (iii) each Operative
Document to which the Guarantor is a party is in full force and effect with
respect to it; and (iv) the Guarantor has duly performed and complied with all
covenants, agreements and conditions contained herein or in any Operative
Document required to be performed or complied with by it on or prior to the
Closing Date.
(s) The Guarantor's Resolutions and Incumbency Certificate, etc. On
------------------------------------------------------------
the Closing Date, the Lessor, each Participant and the Agent shall each have
received a certificate of the Secretary or an Assistant Secretary of the
Guarantor attaching and certifying as to (i) the
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<PAGE>
resolutions of its Board of Directors duly authorizing the execution, delivery
and performance by the Guarantor of documents and agreements of the type
represented by each Operative Document to which it is or will be a party (ii)
its articles of incorporation and by-laws, and (iii) the incumbency and
signature of persons authorized to execute and deliver on its behalf the
Operative Documents to which it is a party.
(t) Closing Date. The Closing Date shall occur on or prior to
------------
October 31 , 1996.
(u) No Material Adverse Effect. As of the Closing Date, there shall
--------------------------
not have occurred any Material adverse change in the Lessee's or the Guarantor's
capital structure, ownership or consolidated assets, liabilities, results of
operations, or financial condition from that set forth or contemplated in the
most recent financial statements referred to in Section 8.3(m), and no event or
--------------
condition shall have occurred that would result in a Material Adverse Effect.
(v) Responsible Officer's Certificate of the Lessor. On the Closing
-----------------------------------------------
Date, the Lessee, the Agent and each Participant shall have received a
certificate of an authorized officer of the Lessor, dated as of the Closing
Date, stating that (i) each and every representation and warranty of the Lessor
contained in the Operative Documents to which it is a party is true and correct
on and as of the Closing Date, (ii) each Operative Document to which the Lessor
is a party is in full force and effect with respect to it, and (iii) the Lessor
has duly performed and complied with all covenants, agreements and conditions
contained herein or in any Operative Document required to be performed or
complied with by it on or prior to the Closing Date.
(w) The Lessor's Resolutions and Incumbency Certificate, etc. On the
---------------------------------------------------------
Closing Date, the Lessee, the Agent and each Participant shall have received a
certificate of the Secretary or an Assistant Secretary of the Lessor attaching
and certifying as to (i) the resolutions of the Board of Directors duly
authorizing the execution, delivery and performance by the Lessor of documents
and agreements of the type represented by each Operative Document to which it is
or will be a party, (ii) the pertinent provisions of its by-laws and (iii) the
incumbency and signature of persons authorized to execute and deliver on its
behalf the Operative Documents to which it is a party.
(x) Construction Budget. On or prior to the Closing Date, the Lessor,
-------------------
the Agent and each Participant shall have received a construction budget with
respect to the Property reasonably satisfactory to each of them.
(y) Termination of Liens. On or prior to the Closing Date, the Agent,
--------------------
each Participant and the Lessor shall have received a pay-off letter from each
Existing Lender, together with duly executed UCC-3 termination statements,
mortgage releases and such other instruments, in form and substance satisfactory
to the Agent, each Participant and the Lessor, as shall be necessary to
terminate and satisfy all Liens created pursuant to the Existing Financing and
all other Liens except Permitted Exceptions.
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<PAGE>
(z) Property Purchase Agreement Conditions. On or prior to the
--------------------------------------
Closing Date, the conditions to closing under the Property Purchase Agreement
shall have been satisfied to satisfaction of, or waived by, the Lessor, the
Agent and the Participants and the Assignment of Purchase Option Agreement shall
have been duly authorized, executed and delivered and shall be in full force and
effect.
SECTION 6.2. Further Conditions Precedent. The obligation of the
----------------------------
Lessor to acquire the Land Interest on the Land Acquisition Date or to make an
Advance on any Funding Date and the obligation of each Participant to purchase
its Participation Interest in, and to make available its related portion of,
such Advance on such Funding Date are subject to satisfaction or waiver of the
following conditions precedent and to satisfaction on or before the Closing
Date, Land Interest Acquisition Date or such Funding Date of the conditions
precedent set forth in Section 6.1 (it being understood that the Lessor's
-----------
obligations to acquire the Land Interest and to make Advances to the Lessee and
each Participant's obligation to fund the purchase of its Participation Interest
in an Advance shall not be subject to the conditions precedent set forth in
Section 6.1 and this Section 6.2 to the extent such conditions are actions
- - ----------- -----------
required of the Lessor or such Participant):
(a) Representations and Warranties. (i) On the Closing Date, the
------------------------------
representations and warranties of the Lessee, the Guarantor, the Lessor and each
Participant contained herein and in each of the other Operative Documents shall
be true and correct as though made on and as of such date, except to the extent
such representations or warranties relate solely to an earlier date, in which
case such representations and warranties shall have been true and correct on and
as of such earlier date; and (ii) on the Land Interest Acquisition Date (if such
date occurs after the Closing Date) and each other Funding Date, the
representations and warranties of the Lessee contained herein and in each of the
Operative Documents shall be true and correct as though made on and as of such
date; in each case except to the extent such representations or warranties
relate solely to an earlier date, in which case such representations and
warranties shall have been true an correct on and as of such earlier date.
(b) Performance of Covenants. (i) On the Closing Date the parties
------------------------
hereto shall have performed their respective agreements contained herein and in
the other Operative Documents to be performed by them on or prior to such date,
and (ii) on the Land Interest Acquisition Date (if such date occurs after the
Closing Date) and each other Funding Date the Lessee shall have performed its
respective agreements contained herein and in the other Operative Documents to
be performed by it on or prior to such date.
(c) Title. Title to the Property shall conform to the
-----
representations and warranties set forth in Section 8.4(c).
--------------
(d) No Default. There shall not have occurred and be continuing any
----------
Default or Event of Default under any of the Operative Documents, and no Default
or Event of Default under any of the Operative Documents will have occurred
after giving effect to the acquisition of
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the Property and/or the making of the Advance requested by such Funding Request,
as the case may be.
If any of the conditions precedent set forth in this Section 6.2 or in
-----------
Section 6.1 (if such conditions apply to subsequent Funding Dates) shall not
- - -----------
have been satisfied on any Funding Date subsequent to the initial Funding Date
and the Lessor and the Participants refuse to fund the requested Advance, the
Lessee may exercise its Purchase Option under Section 20.1 of the Lease upon not
less than ten (10) days' written notice to the Lessor, the Agent and the
Participants.
SECTION 7.
COMPLETION DATE CONDITIONS
SECTION 7.1. Conditions. The occurrence of the Completion Date
----------
shall be subject to the fulfillment to the satisfaction of, or waiver by, the
Required Participants of the following conditions precedent:
(a) Architect's Certificate. The Lessee shall have furnished to the
-----------------------
Lessor and Agent a (i) certificate of the Architect (substantially in the form
of Exhibit H) dated at or about the Completion Date and stating that (a) the
---------
Improvements have been completed substantially in accordance with the Plans and
Specifications and the Property is ready for occupancy, (b) the Property, as so
completed, complies in all material respects with all Applicable Laws, and
certifying that attached thereto are true and complete copies of an "as built"
or "record" set of the Plans and Specifications, and a plat of survey of the
Property "as built" showing all paving, driveways, fences and exterior
improvements; and (ii) a date-down endorsement to or amendment and restatement
of the title insurance policies described in Section 6.1(g).
(b) Construction Completion. The construction of the Improvements
-----------------------
shall have been completed substantially in accordance with the Plans and
Specifications and all Applicable Law, and such Property shall be ready for
occupancy and operation. All fixtures, furniture, furnishings, Equipment and
other property contemplated under the Plans and Specifications to be
incorporated into or installed in the Property shall have been incorporated or
installed free and clear of all Liens except for Permitted Liens.
(c) Lessee Certification. The Lessee shall have furnished the Lessor
--------------------
and the Agent with a certification of the Lessee (substantially in the form of
Exhibit I) as follows:
- - ---------
(i) The representations and warranties of the Lessee with respect
to the Property set forth in Section 8.4(b) are true and correct as of the
--------------
Completion Date. All amounts owing to third parties for the construction
of the Improvements have been paid in full.
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<PAGE>
(ii) No changes or modifications were made to the related Plans
and Specifications after the Closing Date that have had a Material adverse
effect on the value, use or useful life of the Property.
SECTION 8.
REPRESENTATIONS
SECTION 8.1. Representations of the Lessor. The Lessor represents
-----------------------------
and warrants to each of the other parties hereto as follows:
(a) Due Organization, etc. It is a corporation duly organized,
---------------------
validly existing and in good standing under the laws of the State of Illinois
and has the corporate power and authority to enter into and perform its
obligations under each of the Operative Documents to which it is or will be a
party and each other agreement, instrument and document to be executed and
delivered by it in connection with or as contemplated by each such Operative
Document to which it is or will be a party.
(b) Authorization; No Conflict. The execution, delivery and
--------------------------
performance of each Operative Document to which it is or will be a party has
been duly authorized by all necessary action on its part and neither the
execution and delivery thereof, nor the consummation of the transactions
contemplated thereby, nor compliance by it with any of the terms and provisions
thereof (i) does or will require any approval or consent of any trustee or
holders of any of its indebtedness or obligations, (ii) does or will contravene
any current United States or Illinois law, governmental rule or regulation,
(iii) does or will contravene or result in any breach of or constitute any
default under, or result in the creation of any Lien upon any of its property
under, its articles of incorporation or by-laws, or any indenture, mortgage,
deed of trust, conditional sales contract, credit agreement or other agreement
or instrument to which it is a party or by which it or its properties may be
bound or affected or (iv) does or will require any Governmental Action by any
Governmental Authority, except such as have been obtained on the Lessee's or the
Lessor's behalf.
(c) Enforceability, etc. Each Operative Document to which the Lessor
-------------------
is or will be a party has been, or on or before the Closing Date will be, duly
executed and delivered by the Lessor and each such Operative Document to which
the Lessor is a party constitutes, or upon execution and delivery will
constitute, a legal, valid and binding obligation enforceable against the Lessor
in accordance with the terms thereof, except as the same may be limited by
insolvency, bankruptcy, reorganization or other laws relating to or affecting
creditors' rights or by general equitable principles.
(d) Litigation. There is no action or proceeding pending or, to its
----------
knowledge, threatened to which it is a party, before any Governmental Authority
that, if adversely determined, would materially and adversely affect its ability
to perform its obligations under the
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<PAGE>
Operative Documents to which it is a party, would have a material adverse effect
on the financial condition of the Lessor or would question the validity or
enforceability of any of the Operative Documents to which it is or will become a
party.
(e) Assignment. It has not assigned or transferred any of its right,
----------
title or interest in or under the Lease except to the Agent, for the benefit of
the Participants, in accordance with this Agreement and the other Operative
Documents.
(f) Defaults. No Default or Event of Default under the Operative
--------
Documents attributable to it has occurred and is continuing.
(g) Use of Proceeds. The proceeds of the purchase of the
---------------
Participation Interests shall be applied by the Lessor solely in accordance with
the provisions of the Operative Documents.
(h) Securities Act. Neither the Lessor nor any Person authorized by
--------------
the Lessor to act on its behalf has offered or sold any interest in the Lease,
or in any similar security relating to the Property, or in any security the
offering of which for the purposes of the Securities Act would be deemed to be
part of the same offering as the offering of the aforementioned securities to,
or solicited any offer to acquire any of the same from, any Person other than
the Agent and the Participants, and neither the Lessor nor any Person authorized
by the Lessor to act on its behalf will take any action which would subject the
issuance or sale of any interest in the Lease or the Property to the provisions
of Section 5 of the Securities Act or require the qualification of any Operative
Document under the Trust Indenture Act of 1939, as amended.
(i) Chief Place of Business. The Lessor's chief place of business,
-----------------------
chief executive office and office where the documents, accounts and records
relating to the transactions contemplated by this Participation Agreement and
each other Operative Document are kept are located at 135 South LaSalle Street,
Chicago, Illinois 60603.
(j) Federal Reserve Regulations. The Lessor is not engaged
---------------------------
principally in, and does not have as one of its important activities, the
business of extending credit for the purpose of purchasing or carrying any
margin stock (within the meaning of Regulation U of the Board), and no part of
the proceeds of the purchase of the Participation Interests will be used by it
to purchase or carry any margin stock or to extend credit to others for the
purpose of purchasing or carrying any such margin stock or for any purpose that
violates, or is inconsistent with, the provisions of Regulation G, T, U, or X of
the Board.
(k) Investment Company Act. The Lessor is not an "investment company"
----------------------
or a company controlled by an "investment company" within the meaning of the
Investment Company Act.
-24-
<PAGE>
(l) No Plan Assets. The Lessor is not acquiring its interests in the
--------------
Property with the assets of any "employee benefit plan" (as defined in Section
3(3) of ERISA) which is subject to Title I of ERISA, or "plan" (as defined in
Section 4975(e)(1) of the Code).
SECTION 8.2. Representations of the Participants. Each Participant
-----------------------------------
represents and warrants to the Lessor, each of the other Participants and the
Lessee as follows:
(a) No Plan Assets. Such Participant is not and will not be funding
--------------
its Participation Interest hereunder, and is not performing its obligations
under the Operative Documents, with the assets of an "employee benefit plan" (as
defined in Section 3(3) of ERISA) which is subject to Title I of ERISA, or
"plan" (as defined in Section 4975(e)(1) of the Code). The advancing of any
amount with respect to its Participation Interest on any Funding Date shall
constitute an affirmation by the subject Participant of the preceding
representation and warranty.
(b) Due Organization, etc. It is either (i) a duly organized and
---------------------
validly existing corporation in good standing under the laws of the state of its
incorporation, or (ii) a national banking association duly organized and validly
existing under the laws of the United States or (iii) a banking corporation duly
organized and validly existing under the laws of the jurisdiction of its
organization, and, in each case, has the corporate power and authority to
execute, deliver and carry out the terms and provisions of the Operative
Documents to which it is a party.
(c) Authorization; No Conflict. The execution, delivery and
--------------------------
performance of each Operative Document to which it is or will be a party has
been duly authorized by all necessary action on its part and neither the
execution and delivery thereof, nor the consummation of the transactions
contemplated thereby, nor compliance by it with any of the terms and provisions
thereof (i) does or will require any approval or consent of any trustee or
holders of any of its indebtedness or obligations, (ii) does or will contravene
any current law, governmental rule or regulation of the United States or the
state or country of its organization, (iii) does or will contravene or result in
any breach of or constitute any default under, or result in the creation of any
Lien upon any of its property under, its certificate of incorporation or bylaws,
articles of association or other organizational documents or any indenture,
mortgage, deed of trust, conditional sales contract, credit agreement or other
agreement or instrument to which it is a party or by which it or its properties
may be bound or affected or (iv) does or will require any Governmental Action by
any Governmental Authority.
(d) Enforceability, etc. Each Operative Document to which it is a
-------------------
party has been, or on or before the Closing Date will be, duly executed and
delivered by it and each such Operative Document to which it is a party
constitutes, or upon execution and delivery will constitute, a legal, valid and
binding obligation enforceable against it in accordance with the terms thereof,
except as the same may be limited by insolvency, bankruptcy, reorganization or
other laws relating to or affecting creditors' rights or by general equitable
principles.
(e) Litigation. There is no action or proceeding pending or, to its
----------
knowledge, threatened to which it is or will be a party before any Governmental
Authority that is reasonably
-25-
<PAGE>
likely to be adversely determined and, if adversely determined, would materially
and adversely affect its ability to perform its obligations under the Operative
Documents to which it is a party.
SECTION 8.3. Representations of the Lessee. The Lessee represents
-----------------------------
and warrants to each of the other parties hereto that:
(a) Corporate Status. The Lessee (i) is a corporation duly organized,
----------------
validly existing and in good standing under the laws of the State of Delaware
and (ii) has duly qualified and is authorized to do business and has obtained a
certificate of authority to transact business as a foreign corporation in the
States of California and Colorado and in each other jurisdiction where the
failure to so qualify is reasonably likely to be Material.
(b) Corporate Power and Authority. The Lessee has corporate power and
-----------------------------
authority to execute, deliver and carry out the terms and provisions of the
Operative Documents to which it is or will be a party and has taken all
necessary corporate action to authorize the execution, delivery and performance
of the Operative Documents to which it is or will be a party and has or will
have duly executed and delivered each Operative Document required to be executed
and delivered by it and, assuming the due authorization, execution and delivery
thereof on the part of each other party thereto, each such Operative Document
constitutes or will constitute a legal, valid and binding obligation enforceable
against it in accordance with its terms, except as the same may be limited by
insolvency, bankruptcy, reorganization or other laws relating to or affecting
the enforcement of creditors' rights or by general equitable principles.
(c) No Violation. Neither the execution, delivery and performance by
------------
the Lessee of the Operative Documents to which it is or will be a party nor
compliance with the terms and provisions thereof, nor the consummation by the
Lessee of the transactions contemplated therein (i) will result in a violation
by the Lessee of any applicable provision of any law, statute, rule, regulation,
order, writ, injunction or decree of any court or governmental instrumentality
having jurisdiction over the Lessee or the Property that would (x) adversely
affect the validity or enforceability of the Operative Documents to which the
Lessee is a party, or the title to, or value or condition of, the Property, or
(y) have a Material Adverse Effect on the consolidated financial position,
business or consolidated results of operations of the Lessee, or (z) have an
adverse effect on the ability of the Lessee to perform its obligations under the
Operative Documents, (ii) will conflict with or result in any breach under, or
(other than pursuant to the Operative Documents) result in the creation or
imposition of (or the obligation to create or impose) any Lien upon any of the
property or assets of Lessee pursuant to the terms of, any indenture, loan
agreement or other agreement for borrowed money to which the Lessee is a party
or by which it or any of its property or assets is bound or to which it may be
subject (other than Permitted Liens), or (iii) will violate any provision of the
certificate or articles of incorporation or bylaws of the Lessee.
(d) Litigation. There are no actions, suits or proceedings pending
----------
or, to the knowledge of the Lessee, threatened (i) that are reasonably likely to
have a Material Adverse Effect or (ii) that question the validity of the
Operative Documents or the rights or remedies of
-26-
<PAGE>
the Lessor, the Agent or the Participants with respect to the Lessee or the
Property under the Operative Documents.
(e) Governmental Approvals. No Governmental Action by any
----------------------
Governmental Authority having jurisdiction over the Lessee or the Property is
required to authorize or is required in connection with (i) the execution,
delivery and performance by the Lessee of any Operative Document or (ii) the
legality, validity, binding effect or enforceability against the Lessee of any
Operative Document, except for the filing or recording of the Operative
Documents listed in Section 8.4(f) hereof with the appropriate Governmental
--------------
Authorities, all of which will have been completed on or prior to the Closing
Date.
(f) Investment Company Act. The Lessee is not an "investment
----------------------
company" or a company "controlled" by an "investment company," within the
meaning of the Investment Company Act.
(g) Public Utility Holding Company Act. The Lessee is not a "holding
----------------------------------
company, or a "subsidiary company," or an "affiliate" of a "holding company, or
of a "subsidiary company" of a "holding company", within the meaning of the
Public Utility Holding Company Act of 1935, as amended.
(h) Information. All regular or periodic reports filed by the Lessee
-----------
with the Securities and Exchange Commission prior to the Closing Date and all
other written information and material regarding the Lessee and the Property
which were provided by the Lessee to one or more of the Participants prior to
the Closing Date are true and accurate in all material respects on the date as
of which such information and materials are dated or certified and not
incomplete by omitting to state any material fact necessary to make such
information not misleading at such time in light of the circumstances under
which such information was provided.
(i) Taxes. All United States federal income tax returns and all other
-----
Material tax returns which are required to have been filed have been or will be
prepared in accordance with applicable law and filed by or on behalf of the
Lessee by the respective due dates, including extensions, and all taxes due with
respect to the Lessee pursuant to such returns or pursuant to any assessment
received by the Lessee have been or will be paid. The charges, accruals and
reserves on the books of the Lessee in respect of taxes or other governmental
charges are, in the opinion of the Lessee, adequate.
(j) Compliance with ERISA. Each member of the ERISA Group has
---------------------
fulfilled its obligations under the minimum funding standards of ERISA and the
Code with respect to each Plan and is in compliance in all Material respects
with the presently applicable provisions of ERISA and the Code with respect to
each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum
funding standard under Section 412 of the Code in respect of any Plan, (ii)
failed to make any contribution or payment to any Plan or Multiemployer Plan or
in respect of any Benefit Arrangement, or made any amendment to any Plan or
Benefit Arrangement, which has resulted or could result in the imposition of a
Lien or the posting of a bond or other
-27-
<PAGE>
security under ERISA or the Code or (iii) incurred any liability under Title IV
of ERISA other than a liability to the PBGC for premiums under Section 4007 of
ERISA.
(k) Environmental and Other Regulations. Except as set forth in
-----------------------------------
Schedule III attached hereto, the Lessee and the Property are in compliance with
all Environmental Laws relating to pollution and environmental control or
employee safety in the jurisdiction in which the Property is located and in all
other domestic jurisdictions, other than, with respect to such other
jurisdictions, those Environmental Laws the non-compliance with which would not
have a Material Adverse Effect.
(l) Offer of Securities, etc. Neither the Lessee nor the Guarantor
------------------------
nor any Person authorized to act on their behalf has, directly or indirectly,
offered any interest in the Property or the Lease or any other interest similar
thereto (the sale or offer of which would be integrated with the sale or offer
of such interest in the Property or the Lease), for sale to, or solicited any
offer to acquire any of the same from, any Person other than the Participants,
the Lessor and other "accredited investors" (as defined in Regulation D of the
Securities and Exchange Commission).
(m) Financial Statements. The audited consolidated statement of
--------------------
financial position of the Lessee and its consolidated Subsidiaries as of
September 30, 1996 and the related consolidated statements of income,
shareholder's equity and cash flows for the fiscal year then ended, reported on
by KPMG Peat Marwick, a copy of which has been delivered to each of the Lessor,
the Participants and the Agent, present fairly in all material respects, in
conformity with generally accepted accounting principles, the financial position
of the Lessee as of such date and its results of operations and cash flows for
such fiscal year.
SECTION 8.4. Representations of the Lessee With Respect to the
-------------------------------------------------
Property on the Closing Date. The Lessee hereby represents and warrants as
- - ----------------------------
follows:
(a) Representations. The representations and warranties of the
---------------
Construction Agent and the Lessee set forth in the Operative Documents are true
and correct. The Construction Agent and the Lessee are in compliance in with
their respective obligations under the Operative Documents and there exists no
Default or Event of Default.
(b) Property. Such Property consists of the Land Interest on which a
--------
semiconductor fabrication facility will be constructed pursuant to the
Construction Agency Agreement. Such Property is located in the State of
Colorado. Such Property as improved in accordance with the related Plans and
Specifications and the use thereof by the Lessee and its agents, assignees,
employees, invitees, lessees, licensees, contractors and tenants will comply in
all material respects with all Requirements of Law (including, without
limitation, Title III of the Americans with Disabilities Act, all zoning and
land use laws and Environmental Laws) and Insurance Requirements, except for
such Requirements of Law as the Lessee shall be contesting in good faith by
appropriate proceedings. The related Plans and Specifications have been or will
be prepared in all material respects in accordance with applicable Requirements
of Law
-28-
<PAGE>
(including, without limitation, Title III of the Americans with Disabilities
Act, applicable Environmental Laws and building, planning, zoning and fire
codes) and upon completion of the facility in accordance with the Plans and
Specifications, such facility and the other Improvements on such Property will
not encroach in any manner onto any adjoining land (except as permitted by
express written easements or as insured by appropriate title insurance) and such
facility and other Improvements will comply in all Material respects with all
applicable Requirements of Law (including, without limitation, Title III of the
Americans with Disabilities Act, all applicable Environmental Laws and building,
planning, zoning and fire codes). Upon completion of such facility in accordance
with the related Plans and Specifications, the Improvements including, without
limitation, structural members, the plumbing, heating, air conditioning and
electrical systems thereof, and all water, sewer, electric, gas, telephone and
drainage facilities will be completed in a workmanlike manner and in accordance
with the Plans and Specifications and will be in first class working condition
and fit for use as a semiconductor fabrication facility, and all other utilities
required to adequately service the Improvements for their intended use are or
will be available and "tapped on" and hooked up pursuant to adequate permits
(including any that may be required under applicable Environmental Laws). There
is no action, suit or proceeding (including any proceeding in condemnation or
eminent domain or under any Environmental Law) pending or, to the best of the
Lessee's knowledge, threatened with respect to the Lessee, its Affiliates or
such Property which adversely affects the title to, or the use, operation or
value of, the Property. As of the Closing Date, no fire or other casualty with
respect to the Property shall have occurred, and as of each other Funding Date,
no fire or other casualty with respect to the Property shall have occurred that
constitutes a Significant Casualty with respect to which the Lessee shall have
delivered a Termination Notice under Section 16.1 of the Lease. The Property has
available all material services of public facilities and other utilities
necessary for use and operation of such facility and the other Improvements for
their primary intended purposes, including, without limitation, adequate water,
gas and electrical supply, storm and sanitary sewerage facilities, telephone,
other required public utilities and means of access to such facility from
publicly dedicated streets and public highways for pedestrians and motor
vehicles. All utilities serving such Property, or proposed to serve such
Property in accordance with the related Plans and Specifications, are located
in, and vehicular access to the Improvements on such Property is provided by,
either public rights-of-way abutting such Property or Appurtenant Rights. All
material licenses, approvals, authorizations, consents, permits (including,
without limitation, building, demolition and environmental permits, licenses,
approvals, authorizations and consents), easements and rights-of-way, including
proof and dedication, required for (x) the use, treatment, storage, transport,
disposal or disposition of any Hazardous Substance on, at, under or from such
Property during the construction of the Improvements thereon, and (y)
construction of such Improvements in accordance with the related Plans and
Specifications and the Construction Agency Agreement have either been obtained
from the appropriate Governmental Authorities having jurisdiction or from
private parties, as the case may be, or will be obtained from the appropriate
Governmental Authorities having jurisdiction or from private parties, as the
case may be, prior to commencing any such construction or use and operation, as
applicable and will in each case be maintained by the Lessee during the periods
for which they are required by Applicable Law or such Governmental Authorities.
-29-
<PAGE>
(c) Title. The Deed providing for the acquisition of the Property is
-----
sufficient to convey title to the Property in fee simple, subject only to
Permitted Exceptions. Upon conveyance of the Deed on the Closing Date, the
Lessor will own fee simple title in the Land Interest and any Improvements and
will have the right to grant the Mortgage on the Property. The Lessor will at
all times during the Term have good title to all Equipment wherever located and
to any Improvements.
(d) Insurance. The Lessee has obtained insurance coverage covering
---------
the Property which meets the requirements of Article XIV of the Lease, and such
coverage is in full force and effect.
(e) Lease. Upon the execution and delivery of the Lease Supplement to
-----
the Lease, (i) the Lessee will have unconditionally accepted the Property and
will be bound by the terms of the Lease Supplement and will have a valid
leasehold or subleasehold interest in the Property, subject only to the
Permitted Exceptions; (ii) the Lessee's obligation to pay Rent will be an
independent covenant and no right of deduction or offset will exist with respect
to any Rent or other sums payable under the Lease; and (iii) no Rent under the
Lease will have been prepaid and the Lessee will have no right to prepay the
Rent, except as specifically set forth therein.
(f) Protection of Interests. (i) On the Closing Date, the Lease
-----------------------
Supplement, the Assignment of Lease, the Supplement to Assignment of Lease, the
Consent to Assignment and the Mortgage are each in a form sufficient, and have
been recorded in all recording offices necessary, to grant perfected first
priority liens on the Property to the Agent or the Lessor, as the case may be,
(ii) the Agent Financing Statements are each in a form sufficient, and have been
filed in all filing offices necessary, to create a valid and perfected first
priority security interest in the Lessor's interest in all Equipment, if any, to
be located on the Property and the Improvements; and (iii) the Lessor Financing
Statements are each in a form sufficient, and have been filed in all filing
offices necessary, to perfect the Lessor's interest under the Lease to the
extent the Lease is a security agreement.
(g) Flood Hazard Areas. No portion of the Property is located in an
------------------
area identified as a special flood hazard area by the Federal Emergency
Management Agency or other applicable agency, or if any portion of the Property
is located in an area identified as a special flood hazard area by the Federal
Emergency Management Agency or other applicable agency, then flood insurance has
been obtained for the Property or such portion thereof in accordance with
Section 14.2(b) of the Lease and in accordance with the National Flood Insurance
Act of 1968, as amended.
(h) Conditions Precedent. All conditions precedent contained in this
--------------------
Agreement and in the other Operative Documents relating to the acquisition and
leasing of the Property by the Lessor have been satisfied in full or waived.
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<PAGE>
SECTION 8.5. Representations of the Lessee With Respect to Each
--------------------------------------------------
Advance. The Lessee hereby represents and warrants as of each Funding Date on
- - -------
which an Advance is made as follows:
(a) Representations. The representations and warranties of the
---------------
Construction Agent and the Lessee set forth in the Operative Documents
(including the representations and warranties set forth in Sections 8.3 and 8.4)
------------ ---
are true and correct in all Material respects on and as of such Funding Date,
except to the extent such representations or warranties relate solely to an
earlier date, in which case such representations and warranties shall have been
true and correct in all Material respects on and as of such earlier date. The
Construction Agent and the Lessee are in compliance in all Material respects
with their respective obligations under the Operative Documents and there exists
no Default or Event of Default which is continuing. No Default or Event of
Default will occur as a result of, or after giving effect to, the Advance
requested by the Acquisition Request or the Funding Request on such date.
(b) Improvements. Construction of the Improvements to date has been
------------
performed in a good and workmanlike manner, substantially in accordance with the
Plans and Specifications and in compliance with all Insurance Requirements and
Requirements of Law.
(c) No Liens. There have been no Liens against the Property since the
--------
recordation of the Deed, the Lease Supplement, the Assignment of Lease, the
Consent to Assignment or the Mortgage other than Permitted Exceptions and Liens
that have been removed or bonded by or on behalf of the Lessee to the
satisfaction of the Lessor and the Agent. The Participation Interests funding
such Advance are secured by the Lien of the Mortgage.
(d) Advance. The amount of the Advance requested represents amounts
-------
owing in respect of the acquisition price of the Land Interest or amounts that
the Lessee reasonably believes will be due in the sixty (60) days following such
Advance from the Lessee to third parties in respect of Property Improvements
Costs, or amounts paid by the Lessee to third parties in respect of Property
Costs for which the Lessee has not previously been reimbursed by an Advance.
The conditions precedent to such Advance and the related remittances by the
Participants with respect thereto set forth in Section 6 have been satisfied.
---------
(e) Lease. Upon the execution and delivery of each Equipment Schedule
-----
to the Lease, the Lessee will have unconditionally accepted the Equipment, if
any, subject to the Lease Supplement and will have good and marketable title to
a valid and subsisting leasehold interest in such Equipment, subject only to
Permitted Exceptions.
(f) Protection of Interests. On each Funding Date for the acquisition
-----------------------
of Equipment, (i) the Lease Supplement, the applicable Equipment Schedule and
the Mortgage are each a form sufficient to grant perfected Liens on the Lessee's
and the Lessor's interests, respectively, in the Equipment to the Lessor and
Agent, respectively, (ii) the Agent Financing Statements are each in a form
sufficient, and have been filed in all filing offices necessary, to create a
valid and perfected first priority security interest in such interest in such
Equipment, and
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(iii) the Lessor Financing Statements are each in a form sufficient, and have
been filed in all filing offices necessary, to perfect the Lessor's interest in
such Equipment under the Lease to the extent the Lease is a security agreement.
(g) Title Insurance Date Down Endorsement. Prior to each Advance
-------------------------------------
during the Construction Period and prior to an Advance following the
Construction Period for Property Improvement Costs to which a mechanics' lien
could take priority over the lien of the Mortgage or the lien of the Lease, the
Lessee shall furnish the Lessor at the Lessee's expense an endorsement or other
coverage reasonably acceptable to the Agent from the title insurance company
issuing the policies pursuant to Section 6.1, insuring the Lessor and the Agent
-----------
that (i) all mechanics' or similar liens and claims for such liens which could
arise from that part of the Property Improvements Costs previously paid for, if
any, or to be paid for with the then proposed Advance, have been waived and (ii)
there has not been filed with respect to all or any parts of the Land Interest
and Improvements any mechanics' or similar liens or claims of such liens that
are not discharged of record, or insured over by the title insurance company,
in respect of any part of the Land Interest and Improvements.
SECTION 9.
PAYMENT OF CERTAIN EXPENSES
The Lessee agrees, for the benefit of the Lessor, the Agent and the
Participants, that:
SECTION 9.1. Transaction Expenses. (a) The Lessee shall pay, or
--------------------
cause to be paid, from time to time all Transaction Expenses in respect of the
transactions consummated on the Closing Date or any Funding Date, it being
--------
understood and agreed that neither the Agent, the Lessor nor any Participant
- - ---------------------
shall be required to advance any Transaction Expenses in connection with the
closing. Such Transaction Expenses, the Defeasance Fee and the Lease
Arrangement Fee may be added to the Property Cost to the extent supported by the
Appraisal and agreed by the Agent and the Participants.
(b) The Lessee shall pay or cause to be paid (i) all Transaction
Expenses of the Lessor, (ii) the Commitment Fees, (iii) the Defeasance Fee,
(iv) the Lease Arrangement Fee, (v) the Administrative Fee, (vi) all Transaction
Expenses incurred by the Lessee, the Agent, ABN AMRO or the Lessor in entering
into any future amendments or supplements with respect to any of the Operative
Documents, whether or not such amendments or supplements are ultimately entered
into, or giving or withholding of waivers or consents hereto or thereto, in each
case (except after the occurrence of an Event of Default) which have been
requested by or approved by the Lessee, (vii) all Transaction Expenses incurred
by the Lessor, the Lessee, ABN AMRO or the Agent in connection with any purchase
of the Property by the Lessee or other Person pursuant to Articles XVI, XVII, XX
or XXII of the Lease, and (viii) all Transaction
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Expenses incurred by any of the other parties hereto in respect of enforcement
of any of their rights or remedies against the Lessee in respect of the
Operative Documents.
SECTION 9.2. Brokers' Fees and Stamp Taxes. The Lessee shall pay or
-----------------------------
cause to be paid any brokers' fees and any and all stamp, transfer and other
similar taxes, fees and excises, if any, including any interest and penalties,
which are payable in connection with the transactions contemplated by this
Participation Agreement and the other Operative Documents.
SECTION 9.3. Obligations. The Lessee shall pay, on or before the
-----------
due date thereof, all costs, expenses and other amounts required to be paid by
the Mortgage and the Assignment of Lease.
SECTION 10.
OTHER COVENANTS AND AGREEMENTS
SECTION 10.1. Covenants of the Lessee. The Lessee hereby agrees that
-----------------------
so long as this Participation Agreement is in effect:
(a) Information. The Lessee will deliver to the Lessor, the
-----------
Participants and the Agent:
(i) as soon as available and in any event within ninety (90)
days after the end of each fiscal year of the Lessee, a statement of
financial position of the Lessee and its consolidated subsidiaries as of
the end of such fiscal year and the related consolidated statements of
income, shareholder's equity and cash flows for such fiscal year, setting
forth in each case in comparative form the figures for the previous fiscal
year, all reported on by independent public accountants of nationally
recognized standing, together with (i) a Responsible Officer's Certificate
from the chief financial officer of the Lessee substantially in the form of
Exhibit S hereto containing a computation of, and showing compliance with,
---------
each of the financial ratios and restrictions contained in this Section
-------
10.1 and (ii) a certificate from such accountants to the effect that, in
----
making the examination necessary for the signing of such annual audit
report by such accountants, they have not become aware of any Event of
Default or Default that has occurred and is continuing, or if they have
become aware of any such Event of Default or Default, describing it and the
steps, if any, being taken to cure it;
(ii) as soon as available and in any event within forty-five
(45) days after the end of each of the first three quarters of each fiscal
year of the Lessee, an unaudited consolidated statement of financial
position of the Lessee as of the end of such period and the related
consolidated statements of income, shareholders' equity and cash flows for
such period and for the portion of the Lessee's fiscal year ended at the
end of such period, together with a Responsible Officer's Certificate of
the chief financial officer
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of the Lessee or other officer responsible for the financial affairs of the
Lessee containing a computation of, and showing compliance with, each of
the financial ratios and restrictions contained in this Section 10.1 and
------------
stating that no Default or Event of Default has occurred or is continuing
or, if any Default or Event of Default has occurred and is continuing,
describing it and the steps, if any, being taken to cure it;
(iii) promptly after the filing thereof, if applicable, copies
(without exhibits thereto other than, in the case of reports on Form 10-K,
the portions of the annual report incorporated therein by reference) of all
reports on Forms 10-K, 10-Q and 8-K (or their equivalents), which the
Lessee shall have filed with the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended;
(iv) if and when any member of the ERISA Group (1) gives or is
required to give notice to the PBGC of any "reportable event" (as defined
in Section 4043 of ERISA) with respect to any Plan which might constitute
grounds for a termination of such Plan under Title IV or ERISA, or knows
that the plan administrator of any Plan has given or is required to give
notice of any such reportable event, a copy of the notice of such
reportable event given or required to be given to the PBGC; (2) receives
notice of complete or partial withdrawal liability under Title IV of ERISA
or notice that any Multiemployer Plan is in reorganization, is insolvent or
has been terminated, a copy of such notice; (3) receives notice from the
PBGC under Title IV of ERISA of an intent to terminate, impose liability
(other than for premiums under Section 4007 of ERISA) in respect of, or
appoint a trustee to administer any Plan, a copy of such notice; (4)
applies for a waiver of the minimum funding standard under Section 412 of
the Code, a copy of such application; (5) gives notice of intent to
terminate any Plan under Section 4041(c) of ERISA, a copy of such notice
and other information filed with the PBGC; (6) gives notice of withdrawal
from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or
(7) fails to make any payment or contribution to any Plan or Multiemployer
Plan or in respect of any Benefit Arrangement or makes any amendment to any
Plan or Benefit Arrangement which has resulted or could result in the
imposition of a Lien or the posting of a bond or other security, a
certificate of the chief financial officer or the chief accounting officer
of the Lessee setting forth details as to such occurrence and action, if
any, which the Lessee or applicable member of the ERISA Group is required
or proposes to take;
(v) promptly after the occurrence of any Default or Event of
Default, notice thereof in writing, together with information regarding the
steps, if any, being taken to cure it; and
(vi) from time to time such additional information regarding
the Lessee, the Lessee or the Property as the Lessor or the Agent, at the
request of any Participant, may reasonably request.
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(b) Compliance with Laws. The Lessee will, and will cause its
--------------------
Subsidiaries to, comply in all material respects with all applicable laws,
ordinances, rules, regulations, orders and requirements of governmental
authorities (including, without limitation, Environmental Laws and ERISA and the
rules and regulations thereunder) except where the necessity of compliance
therewith is contested in good faith by appropriate proceedings and such contest
is not reasonably likely to result in a Material Adverse Effect.
(c) Further Assurances. The Lessee shall take or cause to be taken
------------------
from time to time all action necessary to assure during the Term that title to
the Property remains in the Lessor as contemplated by Section 12.1 of the Lease,
that the Lessor holds a perfected Lien on the Property securing the Lease
Balance as contemplated by Section 7.1 of the Lease, and that the Agent holds a
perfected Lien on the Property and the Lease securing the repayment of the
Participation Interests.
(d) Existence; Franchises; Businesses. Except as otherwise expressly
---------------------------------
permitted in this Agreement, the Lessee shall, and shall cause each Subsidiary
to (i) maintain in full force and effect its separate existence and all rights,
licenses, leases and franchises reasonably necessary to the conduct of its
business, and (ii) continue doing business as a whole in the lines of business
in which they were engaged on the Closing Date.
(e) Books and Records. The Lessee shall, and shall cause each
-----------------
Subsidiary to, maintain its books and records in accordance with GAAP, and
permit the Lessor and each Participant to make or cause to be made inspections
and audits of any books, records and papers of the Lessee and its Subsidiaries
and to make extracts therefrom at all such reasonable times and as often as any
such Person may reasonably require.
(f) Minimum Consolidated Quick Ratio. The Lessee shall maintain at
--------------------------------
all times a minimum Consolidated Quick Ratio of [*].
(g) Minimum Consolidated Tangible Net Worth. At no time will the
---------------------------------------
Lessee's Consolidated Tangible Net Worth be less than an amount equal to the sum
of (i) [*] of the Lessee's Consolidated Tangible Net Worth at September 30,
1996 plus (ii) an amount equal to [*] of the Lessee's Consolidated Net Income
----
for each fiscal quarter of the Lessee beginning with the quarter ending on
December 31, 1996 (but with no deduction on account of negative Consolidated Net
Income for any fiscal quarter) plus (iii) one hundred percent (100%) of the
----
aggregate net proceeds, including the fair market value of property other than
cash (as determined in good faith by the Board of Directors of the Lessee),
received by the Lessee from the issuance and sale after September 30, 1996 of
any capital stock of the Lessee (including the issuance and sale of any capital
stock (x) to a Subsidiary of the Lessee or (y) which is required to be redeemed,
or is redeemable at the option of the holder, if certain events or conditions
occur or exist or otherwise) or in connection with the conversion or exchange of
any Indebtedness of the Lessee into capital stock of the Lessee after September
30, 1996.
[* confidential information]
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(h) Maximum Consolidated Total Liabilities to Consolidated Tangible
---------------------------------------------------------------
Net Worth. At no time shall the ratio of the Lessee's Consolidated Total
- - ---------
Liabilities to Consolidated Tangible Net Worth be greater than [*].
(i) Minimum Consolidated Fixed Charge Ratio. The Lessee shall
---------------------------------------
maintain at all times a minimum Consolidated Fixed Charge Ratio of [*],
commencing with the four quarter period ending on December 31, 1996.
(j) Profitability. The Lessee (i) shall not incur net losses (but
-------------
excluding any non-recurring non-cash charges) in any two consecutive fiscal
quarters as measured at the end of any fiscal quarter commencing with the fiscal
quarter ending on December 31, 1996 and (ii) shall not permit Consolidated Net
Income (but excluding any non-recurring non-cash charges) to be less than $0, as
measured at the end of any fiscal quarter for the previous four quarters on a
rolling four-quarter basis commencing with the four quarter period ending on
December 31, 1996. In the event the Lessee incurs a net loss in any fiscal
quarter, no such net loss shall exceed [*].
(k) Liens. The Lessee shall not, and shall not permit any Subsidiary
-----
to, create, assume, or permit to exist, any Lien on any of its property or
assets now owned or hereafter acquired except (i) Liens in favor of the Lessor
or the Agent under the Operative Documents, (ii) statutory Liens of landlords,
(iii) easements, rights-of-way, zoning and similar restrictions and other
similar charges or encumbrances not interfering with the ordinary conduct of
business on assets other than the Property and which do not detract materially
from the value of the property to which they attached or impair materially the
use thereof, (iv) Liens created to secure purchase money Indebtedness,
Capitalized Lease Obligations or Off-Balance Sheet Debt, provided that such
Liens are only in respect of the property or assets subject to, and secure only,
such Indebtedness, and (v) Permitted Liens. Notwithstanding the foregoing there
shall be no Liens on any of the Defeasance Deposit, the Cash Collateral or the
Collateral other than Liens in favor of the Lessor and the Agent, for the
benefit of the Participants.
(l) Fundamental Changes. The Lessee shall not, nor shall it permit
-------------------
any Subsidiary to, enter into any merger, consolidation or amalgamation, or
liquidate, wind-up or dissolve itself (or suffer any liquidation or
dissolution); convey, sell, assign, transfer or otherwise dispose of all or
substantially all of the property, business or assets of the Lessee and its
Subsidiaries; provided, however, that if (i) at least thirty (30) days prior to
-------- -------
the consummation of such transaction the Lessee shall have furnished to the
Lessor, the Participants and the Agent a Responsible Officer's Certificate of
the chief financial officer of the Lessee that no Default or Event of Default
shall occur after giving effect thereto, and (ii) no Default or Event of Default
shall have occurred before or after giving effect thereto:
(A) any Subsidiary of the Lessee may be merged or consolidated with or
into the Lessee (provided, however, that the Lessee shall be the continuing or
-------- -------
surviving corporation) or with or into any one or more wholly-owned Subsidiaries
of the Lessee (provided, however,
-------- -------
[* confidential information]
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<PAGE>
that the wholly-owned Subsidiary or Subsidiaries shall be the continuing or
surviving corporation);
(B) any wholly-owned Subsidiary may sell, lease, transfer or otherwise
dispose of any or all of its assets (upon voluntary liquidation or otherwise) to
the Lessee or any other wholly-owned Subsidiary of the Lessee; and
(C) the Lessee may merge or consolidate with any other Person so long
as the Lessee is the surviving corporation.
(m) Transactions with Affiliates. The Lessee shall not, nor shall it
----------------------------
permit any Subsidiary to, conduct any business or enter into any transaction or
series of similar transactions (including the purchase, sale, lease or exchange
of any property or the rendering of any service) with any Affiliate of the
Lessee or any legal or beneficial owner of 5% or more of any class of capital
stock of the Lessee or with any Affiliate of such owner unless the terms of such
business, transaction or series of transactions are (i) as favorable to the
Lessee or such Subsidiary as terms that would be obtainable at the time for a
comparable transaction or series of similar transactions in arm's-length
dealings with an unrelated third Person or, if such transaction is not one which
by its nature could be obtained from such Person, is on fair and reasonable
terms and (ii) are in the ordinary course of business or, if not in the ordinary
course of business, are set forth in writing and the board of directors of the
Lessee or such Subsidiary, as the case may be, has determined in good faith that
such business or transaction or series of transactions meet the applicable
criteria set forth in clause (i) above.
(n) Delivery of Cash Collateral. If either of the following ratios
---------------------------
shall not be met at the end of any fiscal quarter of the Lessee (which ratios
shall be calculated and reported as of the end of each fiscal quarter):
(i) if the ratio of (A) unencumbered cash and cash equivalents
(including all Cash Collateral and the amount of the Defeasance Deposit for
this purpose) to (B) Debt shall fall below [*]; or
(ii) if the ratio of Debt to Consolidated Tangible Net Worth shall
exceed [*];
then, the Lessee immediately shall deliver pursuant to the Cash Collateral
Agreement Cash Collateral with a market value of 100% of the then current amount
of the Tranche B Participation Interests; provided, however, that such Cash
Collateral shall be released in accordance with the terms of the Cash Collateral
Agreement after delivery to the Agent of evidence reasonably satisfactory to the
Agent and the Tranche B Participants that neither of the events set forth in (i)
or (ii) above is continuing.
[* confidential information]
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<PAGE>
In addition, the Lessee may deliver pursuant to the Cash Collateral
Agreement Cash Collateral with a market value of up to 100% of the then current
amount of the Tranche B Participation Interests at any time.
For so long as such amount of Cash Collateral is on deposit pursuant
to this Section 10.1(n), the Applicable Margin shall be as set forth in clause
---------------
(i)(b) of the definition of such term. In the event that the Lessee withdraws
any portion of the principal amount of any Cash Collateral it had previously
elected to deliver to the Depositary Bank when it was not required to do so and
the Lessee is not required to maintain Cash Collateral at the time of such
withdrawal, the Lessee shall pay to the Agent, for the account of the Tranche B
Participants, a fee (the "Cash Collateral Return Fee") in an amount equal to the
--------------------------
sum, for each separate deposit of Cash Collateral so withdrawn, of the product
of (i) 0.0175, multiplied by (ii) the amount of such deposit of Cash Collateral,
multiplied by (iii) the quotient of (A) the number of days (not to exceed 180
regardless of the length of time such amount has been on deposit), divided by
(B) 360.
(o) Restricted Payments. The Lessee shall not, nor shall it cause or
-------------------
permit any of its Subsidiaries to, make any Restricted Payment; provided, that
-------- ----
(i) Lessee's Subsidiaries may make dividends, distributions and payments to the
Lessee, and (ii) the Lessee may (A) make loans to its employees and purchase the
Lessee's stock from its employees in the ordinary course of business, (B) make
other Restricted Payments in the ordinary course of business and (C) make other
Restricted Payments, provided that the aggregate of which Restricted Payments
-------- ----
made under clauses (ii)(A), (B) and (C) shall not exceed $5,000,000 during the
Term.
(p) No Impairment of Deposits. The Lessee shall not, nor shall it
-------------------------
permit any of its Subsidiaries to, directly or indirectly, enter into or become
bound by any agreement, instrument, indenture or other obligation which could
directly or indirectly restrict, prohibit or require the consent of any Person
to the making by the Lessee of any deposit of Cash Collateral or any deposit
constituting part of the Defeasance Deposit or the realization thereon or
utilization thereof (or of any earnings thereon or of any other Collateral) by
the Lessor, the Agent or any of the Participants.
(q) Investments. The Lessee shall not, nor shall it permit any of its
-----------
Subsidiaries to, make any investment in, or make or accrue loans or advances of
money to any Person, through the direct or indirect lending of money, holding of
securities or otherwise, other than Permitted Investments, and except as
permitted or required in Sections 10.1(l), (n) and (o).
--------------------- ---
SECTION 10.2. Cooperation with the Lessee. The Lessor, the
---------------------------
Participants and the Agent shall, to the extent reasonably requested by the
Lessee (but without assuming additional liabilities, duties or other obligations
on account thereof), at the Lessee's expense, cooperate with the Lessee in
connection with its covenants contained herein including, without limitation, at
any time and from time to time, upon the request of the Lessee, to promptly and
duly execute and deliver any and all such further instruments, documents and
financing statements (and
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continuation statements related thereto) as the Lessee may reasonably request in
order to perform such covenants.
SECTION 10.3. Covenants of the Lessor. The Lessor hereby agrees that
-----------------------
so long as this Participation Agreement is in effect:
(a) Discharge of Liens. The Lessor will not create or permit to exist
------------------
at any time, and will, at its own cost and expense, promptly take such action as
may be necessary duly to discharge, or to cause to be discharged, all Lessor
Liens on the Property attributable to it; provided, however, that the Lessor
-------- -------
shall not be required to so discharge any such Lessor Lien while the same is
being contested in good faith by appropriate proceedings diligently prosecuted
so long as such proceedings shall not involve any material danger of impairment
of the Liens of the Lease or the Security Documents or of the sale, forfeiture
or loss of, and shall not interfere with the use or disposition of, the Property
or title thereto or any interest therein or the payment of Rent.
(b) Change of Chief Place of Business. The Lessor shall give prompt
---------------------------------
notice to the Lessee and the Agent if the Lessor's chief place of business or
chief executive office, or the office where the records concerning the accounts
or contract rights relating to the Property are kept, shall cease to be located
at 135 South LaSalle Street, Chicago, Illinois 60603, or if it shall change its
name, identity or corporate structure.
SECTION 11.
PARTICIPATIONS
SECTION 11.1. Amendments; Actions on Default. (a) The Lessor shall
------------------------------
have the right to forebear from exercising rights against the Lessee to the
extent the Lessor shall determine in good faith that such forbearance is
appropriate and is permitted by Section 15.5 and Sections 11.1, 11.2 and 11.3.
------------ ----------------------------
Upon the direction of the Required Participants, the Lessor shall execute any
waiver, modification or amendment of the Lease or the Construction Agency
Agreement requested by the Lessee; provided, that: (i) the waiver, modification
--------
or amendment is not prohibited by the forgoing provisions of this Agreement,
(ii) the waiver, modification or amendment does not (A) increase the amount the
Lessor may be required to pay to the Lessee or anyone else, or (B) reduce or
postpone (and cannot reasonably be expected to reduce or postpone) any payments
that the Lessor would, but for such modification or amendment, be expected to
receive, or (C) release the Lessor's interest in all or a substantial part of
the Property; and (iii) the Lessor is not excused from executing the waiver,
modification or amendment by Section 11.3.
------------
(b) The Lessor will, with reasonable promptness, provide each
Participant with copies of all default notices it sends or receives under the
Lease or Construction Agency Agreement and notify each Participant of any Event
of Default under the Lease of which it is
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aware and of any other matters which, in the Lessor's reasonable judgment, are
likely to materially affect the payments each Participant will be required to
make or be entitled to receive under this Agreement, but the Lessor will not in
any event be liable to any Participant for the Lessor's failure to do so unless
such failure constitutes gross negligence or willful misconduct on the part of
the Lessor.
(c) Before taking possession of the Property or exercising foreclosure
or offset rights against the Property or filing any lawsuit against the Lessee
because of any breach by the Lessee of the Operative Documents or if requested
in writing by any Participant at any time when an Event of Default has occurred
and is continuing, the Lessor shall promptly call a meeting with each
Participant and the Agent to discuss what, if anything, the Lessor should do.
Such meeting shall be scheduled during regular business hours in the offices of
the Agent, or another appropriate location in San Francisco, California, not
earlier than five (5) and not later than twenty (20) Business Days after the
Lessor's receipt of the written request from a Participant. If the Required
Participants shall direct the Lessor in writing to (a) send any default notices
required before a Default can become an Event of Default, or (b) bring a lawsuit
against the Lessee to enforce the Operative Documents when an Event of Default
has occurred and is continuing, then the Lessor shall send the notice or bring
the suit, and the Lessor shall prosecute any such suit with reasonable diligence
using reputable counsel. However, if the Agent is not a member of the Required
Participants voting pursuant to this subsection 11.1(d) in favor of the giving
------------------
of any such notice or the bringing of any such suit, then the Lessor may require
that it first receive the written agreement (in form reasonably acceptable to
the Lessor) of the members of the Required Participants so voting to indemnify
the Agent and the Lessor from and against all costs, liabilities and claims that
may be incurred by or asserted against the Lessor because of the action the
Required Participants direct the Agent or the Lessor to take. In no event shall
any Participant instigate any suit or other action directly against the Lessee
with respect to the Operative Documents or the Property, even if such
Participant would, but for this agreement, be entitled to do so as a third party
beneficiary or otherwise under the Operative Documents.
(d) In the event the Lessee or its designee fails to purchase the
Property after any exercise of its Purchase Option or Expiration Date Purchase
Obligation or following the occurrence and continuance of an Event of Default,
the Lessor shall, if the Required Participants shall agree in writing, bring
suit against the Lessee to enforce the Operative Documents in such form as shall
be recommended by reputable counsel, and thereafter the Lessor shall prosecute
the suit with reasonable diligence in accordance with the advice of reputable
counsel. If the Lessor acquires the interests of the Lessee in any of the
Property as a result of such suit or otherwise, the Lessor shall thereafter
proceed with reasonable diligence to sell the Property in a commercially
reasonable manner to one or more bona fide third party purchasers and shall in
any event endeavor to consummate the sale of the entire Property (through a
single sale of the entire Property or a series of sales of parts) within five
(5) years following the date the Lessor recovers possession of the Property at
the best price or prices the Lessor believes are reasonably attainable within
such time. Further, after the Designated Payment Date and prior to the Lessor's
sale of the entire Property, the Lessor shall retain a property management
company experienced in the area where the Property is located to manage the
operation of the Property and pursue the leasing of
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any completed Improvements which are part of the Property. The Lessor shall not
retain an Affiliate of the Lessor to act as the property manager except under a
bona fide, arms-length management contract containing commercially reasonable
terms. Further, after the Designated Payment Date and until the Lessor sells the
Property, the Lessor shall (i) endeavor in good faith to maintain, or shall
obtain the agreement of one or more of such tenants to maintain, the Property in
good order and repair, (ii) procure and maintain casualty insurance against
risks customarily insured against by owners of comparable properties, in amounts
sufficient to eliminate the effects of coinsurance, (iii) keep and allow each
Participant to review accurate books and records covering the operation of the
Property, and (iv) pay prior to delinquency all taxes and assessments lawfully
levied against the Property.
(e) Notwithstanding the foregoing, Defaulting Participants shall have
no voting or consent rights under this Section 11.1 and no rights to require the
------------
Lessor to call a meeting pursuant to Section 11.1(d) until they cease to be
---------------
Defaulting Participants. During any period that any Defaulting Participants
have no voting rights under this Section 11.1, only the Commitment Percentages
------------
of the other Participants that still have voting rights will be considered for
purposes of determining the Required Participants.
SECTION 11.2. General. Subject to the limitations set forth in
-------
Section 11.1 and Section 14:
- - ------------ ----------
(a) The Lessor shall have the exclusive right to take any action and
to exercise any available powers, rights and remedies to enforce the obligations
of the Lessee under the Operative Documents, or to refrain from taking any such
action or exercising any such power, right or remedy.
(b) The Lessor shall be entitled to (i) give any consent, waiver or
approval requested by the Lessee with respect to any construction or other
approval contemplated in the Lease or (ii) waive or consent to any adverse title
claims affecting the Property, provided that, in either case, such action will
not have a material adverse effect on the Lessee's obligations or ability to
make the payments required under the Operative Documents, the Lessor's rights
and remedies under the Operative Documents or any Participant's rights
hereunder.
SECTION 11.3 Conflicts. Notwithstanding anything to the contrary
---------
herein contained, the Lessor shall be entitled, even over the objection of each
Participant or the Required Participants, (i) to take any action required of the
Lessor by, or to refrain from taking any action prohibited by, the Operative
Documents or any law, rule or regulation to which the Lessor is subject
(provided, that this Section shall not be construed to authorize the Lessor to
take any action required by a modification of the Operative Documents prohibited
by Section 11.1), and (ii) after notice to the Participants, to bring and
-------------
prosecute a suit against the Lessee in the form recommended by and in accordance
with advice of reputable counsel at any time when a breach of the Operative
Documents by the Lessee shall have put the Lessor (or any of its officers or
employees) at risk of criminal prosecution or significant liability to third
parties or at any time after the Lessee or its designee fails to purchase the
Property on the Designated Payment Date.
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Nothing herein contained shall be construed to require the Lessor to agree to
modify the Operative Documents or to take any action or refrain from taking any
action in any manner that could increase the Lessor's liability to the Lessee or
others, that could reduce or postpone payments to which the Lessor is entitled
thereunder, or that could reduce the scope and coverage of the indemnities
provided for the Lessor's benefit therein.
SECTION 11.4. Refusal to Give Consents or Fund. If any Participant
--------------------------------
declines to consent to any amendment, modification, waiver, release or consent
for which such Participant's consent is requested or required by reason of this
Agreement, or if any Participant fails to pay any amount owed by it hereunder,
the Lessor shall have the right, but not the obligation and without limiting any
other remedy of the Lessor, to terminate such Participant's rights to receive
any further payments under Section 3 of this Agreement (other than payments
---------
required because of the Lessor's collection of any Rent applied by the Lessor as
reimbursement for a Defaulted Amount or interest on a Defaulted Amount) by
paying such Participant a termination fee equal to the total of:
(i) all amounts actually advanced by such Participant to the Lessor
under Section 3.4 hereof before the termination; excluding, however, any
-----------
such amounts that were repaid to such Participant before the termination by
actual payments made to such Participant by the Lessor of, or the Lessor's
offset against, sums representing:
(A) Such Participant's Commitment Percentage times any payments
of Rent received by the Lessor under the Lease; plus
(B) Such Participant's Commitment Percentage times any sales
proceeds received by the Lessor under the Lease; and
(ii) Such Participant's Commitment Percentage, times:
(A) the then accrued but unpaid Basic Rent and Commitment Fees
due under the Lease and hereunder; plus
(B) interest on past due amounts described in the preceding
clause (A) computed at the Federal Funds Effective Rate; plus
(C) interest on any amounts (other than interest itself) past
due from the Lessee or its designees under the Operative
Documents, computed at the Federal Funds Effective Rate.
Such Participant's rights to receive payments equal to such Participant's
Commitment Percentage of any Rent applied by the Lessor as reimbursement for a
Defaulted Amount or interest on a Defaulted Amount shall not be impaired or
affected by any termination contemplated in this Section 11.4; accordingly, the
------------
Lessor shall not, as a condition to such a termination, be required
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to reimburse such Participant for any payments such Participant has made in
connection with Defaulted Amounts pursuant to Section 3.3.
-----------
SECTION 11.5. Required Repayments. Each Participant shall repay to
-------------------
the Lessor, upon written request or demand by the Lessor (i) any sums paid by
the Lessor to such Participant under this Agreement from, or that were computed
by reference to, any Rent or other amounts which the Lessor shall be required to
return or pay over to another party, whether pursuant to any bankruptcy or
insolvency law or proceeding or otherwise and (ii) any interest or other amount
that the Lessor is also required to pay to another party with respect to such
sums. Such repayment by any Participant shall not constitute a release of such
Participant's right to receive such Participant's Commitment Percentage times
the amount of any such Rent or any such other amount (or any interest thereon)
that the Lessor may later recover.
SECTION 11.6. Indemnification. Each Participant agrees to indemnify
---------------
and defend the Lessor (to the extent not reimbursed by the Lessee within ten
(10) days after demand) from and against such Participant's Commitment
Percentage of any and all liabilities, obligations, claims, expenses or
disbursements (including reasonable fees of attorneys, accountants, experts and
advisors) of any kind or nature whatsoever (in this Section 11.6 collectively
------------
called "Covered Liabilities") which to any extent (in whole or in part) may be
-------------------
imposed on, incurred by or asserted against the Lessor growing out of, resulting
from or in any other way associated with the Property or the Operative Documents
(including the enforcement thereof, whether exercised upon the Lessor's own
initiative or upon the direction of the Required Participants) and the
transactions and events at any time associated therewith or contemplated
therein. The foregoing indemnification shall apply whether or not such Covered
Liabilities are in any way or to any extent caused, in whole or in part, by any
negligent act or omission of any kind by the Lessor; provided, only that no
Participant shall be obligated under this Section 11.6 to indemnify the Lessor
------------
(i) for Covered Liabilities incurred in connection with any transfer or
assignment by the Lessor of its right to receive Rent or its rights and
interests in and to the Property, the Operative Documents or this Agreement to
its Affiliates or (ii) for that portion or percentage, if any, of any of the
Covered Liabilities which is proximately caused by: (A) the Lessor's own gross
negligence or willful misconduct; (B) any representation made by the Lessor in
the Operative Documents that is false in any material respect and that the
Lessor knew was false at the time of the Lessor's execution of the Operative
Documents; or (C) Lessor Liens not claimed by, through or under any of the
Participants. After each Participant has paid its Percentage of any Covered
Liabilities, each Participant shall be entitled to payment from the Lessor of an
amount equal to the Adjusted Percentage (as defined below) of any payments
subsequently received by the Lessor as Excess Reimbursement (as defined below)
for such Covered Liabilities. As used in this Section "Adjusted Percentage"
-------------------
shall equal (i) such Participant's Commitment Percentage, divided by (ii) the
sum of the Commitment Percentages of all Participants who have paid the Lessor
their respective shares of the Covered Liabilities at issue. As used in this
Section, the term "Excess Reimbursement" shall mean, for the Covered Liabilities
--------------------
at issue, amounts reimbursed or paid by the Lessee to or on behalf of the Lessor
on account of such Covered Liabilities in excess of (i) such Covered
Liabilities, times (ii) the Commitment Percentages of any Participants that have
not paid the Lessor their respective Percentages of such Covered Liabilities.
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SECTION 11.7. Required Supplemental Payments. In the event that the
------------------------------
Lessee fails to pay any Required Supplemental Payment when due (a "Defaulted
---------
Amount"), the Lessor shall notify each Participant of such Defaulted Amount,
- - ------
whereupon each Participant shall pay to the Lessor an amount equal to such
Participant's Commitment Percentage times the Defaulted Amount; such payment
from Participant to the Lessor shall be due prior to 2:00 p.m., San Francisco
time, on the date of such notice if such notice is given by 12:00 noon, San
Francisco time, otherwise prior to 12:00 noon, San Francisco time, on the next
Business Day following such notice. After payment of a Participant's Commitment
Percentage times the Defaulted Amount, any payments subsequently received by the
Lessor from the Lessee as reimbursement for such Defaulted Amount, and any
interest received by the Lessor from the Lessee that accrued on the Defaulted
Amount after the date of such Participant's payment of its Commitment Percentage
times the Defaulted Amount, will constitute Supplemental Rent for purposes of
computing payments due such Participant under this Agreement.
SECTION 11.8. Application of Payments Received From Defaulting
------------------------------------------------
Participant As a Cure For Payment Defaults. If after a failure to make a
- - ------------------------------------------
payment required by Section 3.4, any Defaulting Participant cures such failure,
-----------
in whole or in part, by paying to the Lessor all or part of such payment and
interest thereon at the Late Payment Rate, then the Lessor shall apply the
payments so made to the Lessor, net of the costs of collecting such payments
(the "Net Cure Proceeds"), or other funds available to the Lessor equal to the
-----------------
Net Cure Proceeds, in the following order before applying the same to any other
purpose:
(i) first, to make payments to the Lessor itself equal to its Excess
Investment (if any) until the Lessor shall no longer have any Excess
Investment; and
(ii) second, to make further Advances to the Lessee under this
Agreement to the extent the Lessor is required or deems it appropriate to
do so; provided, that such further Advances do not cause the total Property
Cost to exceed the sum of the Commitments.
SECTION 11.9. Order of Application. For purposes of this Agreement,
--------------------
the Lessor shall be entitled, but not required, to apply any payments received
from the Lessee under the Operative Documents to satisfy (1) unpaid Required
Supplemental Payments (and interest thereon) not included in Rent, if any, and
(2) costs incurred by the Lessor because of any sale under the Lease before
applying such payments to satisfy the Lessee's other obligations, regardless of
how the Lessee may have designated such payments.
SECTION 11.10. Investments Pending Dispute Resolution; Overnight
-------------------------------------------------
Investments. Whenever the Lessor in good faith determines that it does not have
- - -----------
all information needed to determine how payments to Participants must be made on
account of any then existing Participation Interests which the Lessor has
received, or whenever the Lessor in good faith determines that there is any
dispute among the Participants about payments which must be made on account of
Participation Interests actually received by the Lessor, the Lessor may choose
to defer the payments which are the subject of such missing information or
dispute. However, to
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minimize any such deferral, the Lessor shall attempt diligently to obtain any
missing information needed to determine how payments to the Participants must be
made. Also, pending any such deferral, or if the Lessor is otherwise required to
invest funds pending distribution to the Participants, the Lessor shall invest
funds equal to (i) the total of the Commitment Percentages of all Participants
to whom payments have not been made with respect to the Participation Interests
at issue, times (ii) the total percentages at issue. In addition, the Lessor
shall endeavor to invest payments of Participation Interests it receives after
12:00 noon, San Francisco time, on the day in question that are to be paid to a
Participant on the next Business Day pursuant to Section 3; provided that the
---------
Lessor shall have no liability to any Participant if the Lessor is unable to
make such investments. Investments by the Lessor shall be in the overnight
federal funds market pending distribution, and the interest earned on each
dollar of principal so invested shall be paid to the Person entitled to receive
such dollar of principal when the principal is paid to such Person.
SECTION 11.11. Agent to Exercise Lessor's Rights. The Lessor has
---------------------------------
assigned its interest in the Lease to the Agent, for the benefit of the
Participants, pursuant to the Assignment of Lease. To the extent provided
therein, the rights, remedies, duties and responsibilities of the Lessor
contained in this Section 11 and in the other Operative Documents with respect
----------
thereto shall be exercisable by, binding upon and inure to the benefit of the
Agent, for the benefit of the Participants.
SECTION 11.12. Exculpatory Provisions Regarding the Lessor. Subject
-------------------------------------------
to the provisions of Section 11.11, each Participant hereby irrevocably
-------------
authorizes the Lessor to take such actions on its behalf as are expressly
vested in or delegated to the Lessor by the terms of this Agreement and the
other Operative Documents, together with such powers as are reasonably
incidental thereto. The provisions of the following Sections of this Agreement
are hereby incorporated by reference into this Section 11.12, substituting the
--------------
word "Lessor" for "Agent" therein:
(i) Section 14.1 - second sentence.
------------
(ii) Section 14.2 - all.
------------
(iii) Section 14.3 - all.
-----
(iv) Section 14.4 - all.
-----
(v) Section 14.5 - first sentence.
-----
(iv) Section 14.6 - last sentence.
-----
SECTION 12.
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TRANSFERS OF PARTICIPANTS' INTERESTS
SECTION 12.1. Restrictions on and Effect of Transfer by Participants.
-------------------------------------------------------
No Participant may (without the prior written consent of the Agent and Lessee
(not to be unreasonably withheld)) assign, convey or otherwise transfer
(including pursuant to a participation) all or any portion of its right, title
or interest in, to or under its Participation Interest or any of the Operative
Documents or the Property, provided that (x) any Participant may pledge its
--------
interest without the consent of the Agent or the Lessee to any Federal Reserve
Bank, and (y) without the prior written consent of the Agent, any Participant
may transfer all or any portion of its interest to any Affiliate of such
Participant or to any other existing Participant; provided that in the case of
--------
any transfer (other than to such Affiliate) each of the following conditions and
any other applicable conditions of the other Operative Documents are satisfied:
(a) Required Notice and Effective Date. Any Participant desiring to
----------------------------------
effect a transfer of its interest shall give written notice of each such
proposed transfer to the Lessee, the Agent and each other Participant at least
five (5) Business Days prior to such proposed transfer, setting forth the name
of such proposed transferee, the percentage or interest to be retained by such
Participant, if any, and the date on which such transfer is proposed to become
effective. All reasonable out-of-pocket costs (including, without limitation,
legal expenses) incurred by the Lessor, the Agent or any Participant in
connection with any such disposition by a Participant under this Section 12.1
------------
shall be borne by such transferring Participant. In the event of a transfer
under this Section 12.1, any expenses incurred by the transferee in connection
------------
with its review of the Operative Documents and its investigation of the
transactions contemplated thereby shall be borne by such transferee or the
relevant Participant, as they may determine, but shall not be considered costs
and expenses which the Lessee is obligated to pay or reimburse under Section 9.
---------
Any such proposed transfer shall become effective upon the later of (i) the date
proposed in the transfer notice referred to above and (ii) the date on which all
conditions to such transfer set forth in this Section 12.1 shall have been
------------
satisfied.
(b) Assumption of Obligations. Any transferee pursuant to this
-------------------------
Section 12.1 shall execute and deliver to the Agent and the Lessee an Assignment
- - ------------
and Acceptance in substantially the form attached as Exhibit J ("Assignment and
--------- --------------
Acceptance"), duly executed by such transferee and the transferring Participant,
- - ----------
and a letter in substantially the form of the Participant's Letter attached
hereto as Exhibit K ("Participant's Letter"), and thereupon the obligations of
--------- --------------------
the transferring Participant under the Operative Documents shall be
proportionately released and reduced to the extent of such transfer. Upon any
such transfer as above provided, the transferee shall be deemed to be bound by
all obligations (whether or not yet accrued) under, and to have become a party
to, all Operative Documents to which its transferor was a party, shall be deemed
the pertinent "Participant" for all purposes of the Operative Documents and
shall be deemed to have made that portion of the payments pursuant to this
Participation Agreement previously made or deemed to have been made by the
transferor represented by the interest being conveyed; and each reference herein
and in the other Operative Documents to the pertinent "Participant" shall
thereafter be deemed a reference to the transferee, to the extent of such
transfer, for all purposes. Upon any such transfer, the Agent shall deliver to
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each Participant, the Lessor and the Lessee a new Schedule I and Schedule II to
---------- -----------
this Agreement, revised to reflect the relevant information for such new
Participant and the Commitment of such new Participant (and the revised
Commitment of the transferor Participant if it shall not have transferred its
entire interest).
(c) Employee Benefit Plans. No Participant may make any such
----------------------
assignment, conveyance or transfer to or in connection with any arrangement or
understanding in any way involving any employee benefit plan (or its related
trust), as defined in Section 3(3) of ERISA, or with the assets of any such plan
(or its related trust), as defined in Section 4975(e)(1) of the Code.
(d) Representations. Notwithstanding anything to the contrary set
---------------
forth above, no Participant may assign, convey or transfer its interest to any
Person, unless such Person shall have delivered to the Agent and the Lessee a
certificate confirming the accuracy of the representations and warranties set
forth in Section 8 with respect to such Person (other than as such
---------
representation or warranty relates to the execution and delivery of Operative
Documents) and representing that such Person has, independently and without
reliance upon the Agent, any other Participant or, except to the extent of the
Lessee's representations made under the Operative Documents when made, the
Lessee, and based on such documents and information as it has deemed
appropriate, made its own appraisal of and investigation into this transaction,
the Property and the Lessee and made its own decision to enter into this
transaction.
(e) Amounts; Agent's Fee. Any transfer of a Participation Interest
--------------------
shall be in a principal amount which is equal to or greater than $2,000,000.
Each transferring Participant shall pay to the Agent a transfer fee of $2,500.
(f) Applicable Law. Such transfer shall comply with Applicable Law
--------------
and shall not require registration under any securities law applicable thereto.
(g) Effect. From and after any transfer of its Participation Interest
------
the transferring Participant shall be released, to the extent assumed by the
transferee, from its liability and obligations hereunder and under the other
Operative Documents to which such transferor is a party in respect of
obligations to be performed on or after the date of such transfer. Upon any
transfer by a Participant as above provided, any such transferee shall be deemed
a "Participant" for all purposes of such documents and each reference herein to
a Participant shall thereafter be deemed a reference to such transferee for all
purposes to the extent of such transfer, except as the context may otherwise
require. Notwithstanding any transfer as provided in this Section 12.1, the
------------
transferor shall be entitled to all benefits accrued and all rights vested prior
to such transfer, including, without limitation, rights to indemnification under
this Participation Agreement or any other Operative Document.
SECTION 12.2. Covenants and Agreements of Participants.
----------------------------------------
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(a) Participations. Each Participant covenants and agrees that it
--------------
will not grant Participations in its Participation Interest to any Person (a
"Sub-Participant") unless such participation complies with Applicable Law and
- - ----------------
does not require registration under any securities law applicable thereto and
such Sub-Participant (i) is a bank or other financial institution and (ii)
represents and warrants, in writing, to such Participant for the benefit of the
Participants, the Lessor and the Lessee that (A) no part of the funds used by it
to acquire an interest in any Participation Interest constitutes assets of any
"employee benefit plan" (as defined in Section 3(3) of ERISA) which is subject
to Title I of ERISA, or "plan" (as defined in Section 4975(e)(1) of the Code)
and (B) such Sub-Participant is acquiring its interest for investment purposes
without a view to the distribution thereof. Any such Person shall require any
transferee of its interest in its Participation Interest to make the
representations and warranties set forth in the preceding sentence, in writing,
to such Person for its benefit and the benefit of the Participants, the Lessor
and Lessee. In the event of any such sale by a Participant of a participating
interest in its Participation Interest to a Sub-Participant, such Participant's
obligations under this Participation Agreement and under the other Operative
Documents shall remain unchanged, such Participant shall remain solely
responsible for the performance thereof, such Participant shall remain the
holder of its Participation Interest, for all purposes under this Participation
Agreement and under the other Operative Documents, and the Lessor, the Agent
and, except as set forth in Section 12.2(b), the Lessee shall continue to deal
---------------
solely and directly with such Participant in connection with such Participant's
rights and obligations under this Participation Agreement and under the other
Operative Documents.
(b) Transferee Indemnities. Each Sub-Participant shall be entitled to
----------------------
the benefits of Sections 13.5, 13.6, and 13.7 and 13.10 with respect to its
------------- ---- ---- -----
participation in the Participation Interests outstanding from time to time;
provided that no Sub-Participant shall be entitled to receive any greater amount
- - --------
pursuant to such Sections than the transferor Participant would have been
entitled to receive in respect of the amount of the participation transferred by
such transferor Participant to such Sub-Participant had no such transfer or
participation occurred.
SECTION 12.3. Future Participants. Each Participant shall be deemed
-------------------
to be bound by and, upon compliance with the requirements of this Section 12,
----------
will be entitled to all of the benefits of the provisions of, this Participation
Agreement.
SECTION 13.
INDEMNIFICATION
SECTION 13.1. General Indemnification. The Lessee agrees, whether or
-----------------------
not any of the transactions contemplated hereby shall be consummated, to assume
liability for, and to indemnify, protect, defend, save and keep harmless each
Indemnitee, on an After Tax Basis, from and against, any and all Claims that may
be imposed on, incurred by or asserted against such Indemnitee (whether because
of action or omission by such Indemnitee or otherwise), whether or not such
Indemnitee shall also be indemnified as to any such Claim by any other Person
and
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whether or not such Claim arises or accrues prior to the Closing Date or
after the Expiration Date, in any way relating to or arising out of:
(a) any of the Operative Documents or any of the transactions
contemplated thereby or any violation thereof, and any amendment, modification
or waiver in respect thereof;
(b) the Property, the Lease or any part thereof or interest therein;
(c) the purchase, design, construction, preparation, installation,
inspection, delivery, non-delivery, acceptance, rejection, ownership,
management, possession, operation, rental, lease, sublease, repossession,
maintenance, repair, alteration, modification, addition or substitution,
storage, transfer of title, redelivery, use, financing, refinancing,
disposition, operation, condition, sale (including, without limitation, any sale
pursuant to Sections 16.2, 16.3, 16.4, 17.2(c), 17.2(e) or 17.4 of the Lease or
any sale pursuant to Articles XX or XXII of the Lease, return or other
disposition of all or any part or any interest in the Property or the imposition
of any Lien (or incurring of any liability to refund or pay over any amount as a
result of any Lien) thereon, including, without limitation: (1) Claims or
penalties arising from any violation of federal, state or local law, rule,
regulation or order or in tort (strict liability or otherwise), (2) latent or
other defects, whether or not discoverable, (3) any Claim based upon a violation
or alleged violation of the terms of any restriction, easement, condition or
covenant or other matter affecting title to the Property, (4) the making of any
Modifications in violation of any standards imposed by any insurance policies
required to be maintained by Lessee pursuant to the Lease which are in effect at
any time with respect to the Property or any part thereof, (5) any Claim for
patent, trademark or copyright infringement, and (6) Claims arising from any
public improvements with respect to the Property resulting in any charge or
special assessments being levied against the Property or any plans to widen,
modify or realign any street or highway adjacent to the Property;
(d) [reserved];
(e) the breach by the Lessee of any covenant, representation or
warranty made by it or deemed made by it in any Operative Document or any
certificate required to be delivered by any Operative Document;
(f) the retaining or employment of any broker, finder or financial
advisor by the Lessee to act on its behalf in connection with this Participation
Agreement, or the incurring of any fees or commissions to which the Lessor might
be subjected by virtue of entering into the transactions contemplated by this
Participation Agreement;
(g) the existence of any Lien on or with respect to the Property, the
Improvements, the Equipment, any Basic Rent or Supplemental Rent, title thereto,
or any interest therein including any Liens which arise out of the possession,
use, occupancy, construction, repair or rebuilding of the Property or by reason
of labor or materials furnished or claimed to have been furnished to the Lessee,
the Existing Owner, the Lessor or any of their contractors or
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agents or by reason of the financing of the Property or any personalty or
equipment purchased or leased by the Lessee or Improvements or Modifications
constructed by the Lessee, except Lessor Liens and Liens in favor of the Agent
or the Lessor;
(h) the transactions contemplated by the Lessee hereby or by any other
Operative Document, in respect of the application of Parts 4 and 5 of Subtitle B
of Title I of ERISA and any prohibited transaction described in Section 4975(c)
of the Code (other than any Claim resulting from a breach of representation or
warranty of the Lessor or any Participant); or
(i) the Existing Financing, any documentation relating thereto, the
Existing Participants, the Existing Owner, or the purchase of the Property by
the Lessor, or any matters arising therefrom or related thereto;
provided, however, the Lessee shall not be required to indemnify (x) the Lessor
- - -------- -------
for any Claim to the extent arising from any misrepresentation by the Lessor
under Section 8.1 (e) or (l) or from the failure by the Lessor to comply with
----------- ----------
Section 10.3 (a), or (y) any Indemnitee under this Section 13.1 for any of the
- - ---------------- ------------
following: (1) any Claim to the extent resulting from the willful misconduct or
gross negligence of such Indemnitee (it being understood that the Lessee shall
-------------------
be required to indemnify an Indemnitee even if the ordinary (but not gross)
negligence of such Indemnitee caused or contributed to such Claim), (2) any
Claim resulting from Lessor Liens which the Lessor is responsible for
discharging under the Operative Documents, (3) any Claim to the extent
attributable to acts or events occurring after the expiration of the Term or the
termination of the Lessee's right to possess and control the Property (but not
any claim to the extent attributable to acts or events occurring prior to or
during the Term or occurring at any time that the Lessee is in actual possession
or control of the Property), (4) any Imposition or other claims for Taxes, and
(5) any Claims of the type(s) described in Sections 13.2 (only with respect to
-------------
claims in respect of a decline in the Fair Market Sales Value of the Property as
a result of an event described in Section 13.2(b) and the Lessee's exercise of
the Remarketing Option), 13.6, 13.7, 13.8 and 13.10. It is expressly understood
---- ---- ---- -----
and agreed that the indemnity provided for herein shall survive the expiration
or termination of and shall be separate and independent from any remedy under
the Lease or any other Operative Document. Without limiting the express rights
of any Indemnitee under this Section 13.1, this Section 13.1 shall be construed
------------ ------------
as an indemnity only and not a guaranty of residual value of the Property or as
a guaranty of the Participation Interests.
SECTION 13.2. End of Term Indemnity.
---------------------
(a) If the Lessee elects the Remarketing Option and there would, after
giving effect to the proposed remarketing transactions, be a Shortfall Amount,
then prior to the Maturity Date and as a condition to the Lessee's right to
complete the remarketing of the Property pursuant to Section 22.1 of the Lease,
the Lessee shall cause to be delivered to the Lessor at least 30 days prior to
the Expiration Date, at the Lessee's sole cost and expense, a report from an
appraiser selected by the Lessor and reasonably satisfactory to the Agent and
the Required Participants in form and substance satisfactory to the Lessor, the
Agent and the Required Participants (the "End
---
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of the Term Report") which shall state the appraiser's conclusions as to the
- - ------------------
reason for any decline in the Fair Market Sales Value of the Property from that
anticipated for such date in the Appraisal delivered on the Closing Date.
(b) Prior to the Expiration Date, the Lessee shall pay to the Lessor
an amount (not to exceed the Shortfall Amount) equal to the portion of the
Shortfall Amount that the End of the Term Report demonstrates was the result of
a decline in the Fair Market Sales Value of the Property due to:
(i) extraordinary wear and tear, excessive usage, failure to
maintain, to repair, to restore, to rebuild or to replace, failure to
comply with the Lease and all applicable laws, failure to use, workmanship,
method of installation or removal or maintenance, repair, rebuilding or
replacement (excepting in each case ordinary wear and tear);
(ii) any Modification made to, or any rebuilding of, the
Property or any part thereof by the Lessee; or
(iii) the existence of any Hazardous Activity, Hazardous
Substance or Environmental Violations; or
(iv) any restoration or rebuilding carried out by the Lessee; or
(v) any condemnation of any portion of the Property pursuant to
Article XV of the Lease; or
(vi) any use of the Property or any part thereof by the Lessee
other than as permitted by the Operative Documents; or
(vii) any grant, release, dedication, transfer, annexation or
amendment made pursuant to Section 12.2 of the Lease; or
(viii) the failure of the Lessor to have good and marketable fee
title to the Property free and clear of all Liens (including Permitted
Liens) and exceptions to title, except (A) such Liens or exceptions to
title that existed on the Closing Date and were disclosed in the policy of
title insurance delivered pursuant to Section 6.1; (B) Lessor Liens; and
-----------
(C) to the extent any such liability arising as a result of a title defect
is offset by the proceeds of title insurance.
SECTION 13.3. Environmental Indemnity. Without limitation of the
-----------------------
other provisions of this Section 13, the Lessee hereby agrees to indemnify, hold
----------
harmless and defend each Indemnitee from and against any and all claims
(including without limitation third party claims for personal injury or real or
personal property damage), losses (including but not limited to any loss of
value of the Property), damages, liabilities, fines, penalties, charges,
administrative and
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judicial proceedings (including informal proceedings) and orders, judgments,
remedial action, requirements, enforcement actions of any kind, and all
reasonable and documented costs and expenses incurred in connection therewith
(including but not limited to reasonable and documented attorneys' and/or
paralegals' fees and expenses), including, but not limited to, all costs
incurred in connection with any investigation or monitoring of site conditions
or any clean-up, remedial, removal or restoration work by any federal, state or
local government agency, which such Indemnitee becomes subject to because of its
involvement with the Property, the transactions contemplated by the Operative
Documents or any other matter referred to in paragraphs (a) through (i) of
Section 13.1 arising in whole or in part, out of:
- - ------------
(a) the presence on or under the Property of any Hazardous Substances,
or any Releases or discharges of any Hazardous Substances on, under, from or
onto the Property;
(b) any activity, including, without limitation, construction, carried
on or undertaken on or off the Property, and whether by the Lessee, the Lessor,
the Existing Owner or any predecessor in title or any employees, agents,
contractors or subcontractors of the Lessee, the Lessor (if such activity was
undertaken with the consent or at the direction of the Lessee), the Existing
Owner or any predecessor in title, or any other Persons (including such
Indemnitee), in connection with the handling, treatment, removal, storage,
decontamination, cleanup, transport or disposal of any Hazardous Substances that
at any time are located or present on or under or that at any time migrate,
flow, percolate, diffuse or in any way move onto or under the Property;
(c) loss of or damage to any property or the environment (including,
without limitation, cleanup costs, response costs, remediation and removal
costs, cost of corrective action, costs of financial assurance, fines and
penalties and natural resource damages), or death or injury to any Person, and
all expenses associated with the protection of wildlife, aquatic species,
vegetation, flora and fauna, and any mitigative action required by or under
Environmental Laws;
(d) any claim concerning lack of compliance with Environmental Laws,
or any act or omission causing an environmental condition that requires
remediation or would allow any Governmental Authority to record a Lien on the
land records;
(e) any residual contamination on or under the Property, or affecting
any natural resources, or any contamination of any property or natural resources
arising in connection with the generation, use, handling, storage, transport or
disposal of any such Hazardous Substances, and irrespective of whether any of
such activities were or will be undertaken in accordance with applicable
Environmental Laws; or
(f) any material inaccuracies, misrepresentations, misstatements, and
omissions and any conflicting information contained in or omitted from the
Environmental Audit;
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provided, however, the Lessee shall not be required to indemnify any Indemnitee
- - -------- -------
under this Section 13.3 for (1) any Claim to the extent resulting from the
------------
willful misconduct or gross negligence of such Indemnitee (it being understood
-- ----- ----------
that the Lessee shall be required to indemnify an Indemnitee even if the
ordinary (but not gross) negligence of such Indemnitee caused or contributed to
such Claim), (2) subject to the provisions Section 15.2 of the Lease, any Claim
to the extent attributable to acts or events occurring after the expiration of
the Term or the termination of the Lessee's right to possess and control the
Property (but not any claim to the extent attributable to acts or events
occurring prior to or during the Term or occurring at any time that the Lessee
is in actual possession or control of the Property), (3) any Imposition or other
claims for Taxes of the type(s) described in Section 13.5 or (4) any Claims of
------------
the type(s) described in Sections 13.2 (only with respect to claims in respect
-------------
of a decline in the Fair Market Sales Value of the Property and the Lessee's
exercise of the Remarketing Option), 13.6, 13.7, 13.8 and 13.10. It is expressly
---- ---- ---- -----
understood and agreed that the indemnity provided for herein shall survive the
expiration or termination of and shall be separate and independent from any
remedy under the Lease or any other Operative Document.
SECTION 13.4. Proceedings in Respect of Claims. With respect to any
--------------------------------
amount that the Lessee is requested by an Indemnitee to pay by reason of Section
-------
13.1 or 13.3, such Indemnitee shall, if so requested by the Lessee and prior to
- - ---- ----
any payment, submit such additional information to the Lessee as the Lessee may
reasonably request and which is in the possession of such Indemnitee to
substantiate properly the requested payment.
In case any action, suit or proceeding shall be brought against any
Indemnitee, such Indemnitee shall notify the Lessee of the commencement thereof,
and the Lessee shall be entitled, at its expense, to participate in, and, to the
extent that the Lessee desires to, assume and control the defense thereof;
provided, however, that the Lessee shall have acknowledged in writing its
- - -------- -------
obligation to fully indemnify such Indemnitee in respect of such action, suit or
proceeding, and the Lessee shall keep such Indemnitee fully apprised of the
status of such action, suit or proceeding and shall provide such Indemnitee with
all information with respect to such action, suit or proceeding as such
Indemnitee shall reasonably request, and provided further, that the Lessee shall
-------- -------
not be entitled to assume and control the defense of any such action, suit or
proceeding if and to the extent that, (A) in the reasonable opinion of such
Indemnitee, (x) such action, suit or proceeding involves any possibility of
imposition of criminal liability or any risk of material civil liability on such
Indemnitee or will involve a material risk of the sale, forfeiture or loss of,
or the creation of any Lien (other than a Permitted Lien) on the Property or any
part thereof unless, in the case of civil liability or Lien, the Lessee shall
have posted a bond or other security satisfactory to the relevant Indemnitee in
respect to such risk or (y) the control of such action, suit or proceeding would
involve an actual or potential conflict of interest, (B) such proceeding
involves Claims not fully indemnified by the Lessee which the Lessee and the
Indemnitee have been unable to sever from the indemnified claim(s), or (C) an
Event of Default under the Lease has occurred and is continuing. The Indemnitee
may participate in a reasonable manner at its own expense and with its own
counsel in any proceeding conducted by the Lessee in accordance with the
foregoing. The Lessee shall not enter into any settlement or other compromise
with respect to any Claim which is entitled to be indemnified under Section 13.1
------------
or
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<PAGE>
13.3 without the prior written consent of the Indemnitee which consent shall
- - ----
not be unreasonably withheld in the case of a money settlement not involving an
admission of liability of such Indemnitee.
Each Indemnitee shall at the expense of the Lessee cooperate with and
supply the Lessee with such information and documents reasonably requested by
the Lessee as are necessary or advisable for the Lessee to participate in any
action, suit or proceeding to the extent permitted by Section 13.1 or 13.3.
------------ ----
Unless an Event of Default under the Lease shall have occurred and be
continuing, no Indemnitee shall enter into any settlement or other compromise
with respect to any Claim which is entitled to be indemnified under Section 13.1
------------
or 13.3 without the prior written consent of the Lessee, which consent shall not
----
be unreasonably withheld, unless such Indemnitee waives its right to be
indemnified under Section 13.1 or 13.3 with respect to such Claim.
------------ ----
Upon payment in full of any Claim by the Lessee pursuant to Section 13.1 or
------------
13.3 to or on behalf of an Indemnitee, the Lessee, without any further action,
- - ----
shall be subrogated to any and all claims that such Indemnitee may have relating
thereto (other than claims in respect of insurance policies maintained by such
Indemnitee at its own expense), and such Indemnitee shall execute such
instruments of assignment and conveyance, evidence of claims and payment and
such other documents, instruments and agreements as may be necessary to preserve
any such claims and otherwise cooperate with the Lessee and give such further
assurances as are necessary or advisable to enable the Lessee vigorously to
pursue such claims.
Any amount payable to an Indemnitee pursuant to Section 13.1 or 13.3 shall
------------ ----
be paid to such Indemnitee promptly upon receipt of a written demand therefor
from such Indemnitee, accompanied by a written statement describing in
reasonable detail the basis for such indemnity and the computation of the amount
so payable and, if requested by the Lessee, such determination shall be verified
by a nationally recognized independent accounting firm mutually acceptable to
the Lessee and the Indemnitee at the expense of the Lessee.
SECTION 13.5. General Impositions Indemnity.
-----------------------------
(a) Indemnification. The Lessee shall pay and assume liability for,
---------------
and does hereby agree to indemnify, protect and defend the Property and all
Indemnitees, and hold them harmless against, all Impositions on an After Tax
Basis.
(b) Payments. (i) Subject to the terms of Section 13.5(f), the Lessee
-------- ---------------
shall pay or cause to be paid all Impositions directly to the taxing authorities
where feasible and otherwise to the Indemnitee, as appropriate, and the Lessee
shall at its own expense, upon such Indemnitee's reasonable request, furnish to
such Indemnitee copies of official receipts or other satisfactory proof
evidencing such payment.
(ii) In the case of Impositions for which no contest is conducted
pursuant to Section 13.5(f) and which the Lessee pays directly to the taxing
---------------
authorities, the Lessee shall pay such Impositions prior to the latest time
permitted by the relevant taxing authority for timely
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<PAGE>
payment. In the case of Impositions for which the Lessee reimburses an
Indemnitee, the Lessee shall do so within twenty (20) days after receipt by the
Lessee of demand by such Indemnitee describing in reasonable detail the nature
of the Imposition and the basis for the demand (including the computation of the
amount payable), but in no event shall the Lessee be required to pay such
reimbursement prior to ten (10) days before the latest time permitted by the
relevant taxing authority for timely payment. In the case of Impositions for
which a contest is conducted pursuant to Section 13.5(f), the Lessee shall pay
---------------
such Impositions or reimburse such Indemnitee for such Impositions, to the
extent not previously paid or reimbursed pursuant to subsection (a), prior to
--------------
the latest time permitted by the relevant taxing authority for timely payment
after conclusion of all contests under Section 13.5(f).
---------------
(iii) At the Lessee's request, the amount of any indemnification
payment by the Lessee pursuant to subsection (a) shall be verified and certified
--------------
by an independent public accounting firm mutually acceptable to the Lessee and
the Indemnitee. The fees and expenses of such independent public accounting
firm shall be paid by the Lessee unless such verification shall result in an
adjustment in the Lessee's favor of 5% or more of the payment as computed by the
Indemnitee, in which case such fee shall be paid by the Indemnitee.
(c) Reports and Returns. (i) The Lessee shall be responsible for
-------------------
preparing and filing any real and personal property or ad valorem tax returns in
respect of the Property. In case any other report or tax return shall be
required to be made with respect to any obligations of the Lessee under or
arising out of subsection (a) and of which the Lessee has knowledge or should
--------------
have knowledge, the Lessee, at its sole cost and expense, shall notify the
relevant Indemnitee of such requirement and (except if such Indemnitee notifies
the Lessee that such Indemnitee intends to file such report or return) (A) to
the extent required or permitted by and consistent with Applicable Law, make and
file in its own name such return, statement or report; and (B) in the case of
any other such return, statement or report required to be made in the name of
such Indemnitee, advise such Indemnitee of such fact and prepare such return,
statement or report for filing by such Indemnitee or, where such return,
statement or report shall be required to reflect items in addition to any
obligations of the Lessee under or arising out of subsection (a), provide such
--------------
Indemnitee at the Lessee's expense with information sufficient to permit such
return, statement or report to be properly made with respect to any obligations
of the Lessee under or arising out of subsection (a). Such Indemnitee shall,
--------------
upon the Lessee's request and at the Lessee's expense, provide any data
maintained by such Indemnitee (and not otherwise available to or within the
control of the Lessee) with respect to the Property which the Lessee may
reasonably require to prepare any required tax returns or reports. Each
Indemnitee agrees to use its best efforts to send to the Lessee a copy of any
written request or other notice that the Indemnitee receives with respect to any
reports or returns required to be filed with respect to the Property or the
transactions contemplated by the Operative Documents, it being understood that
no Indemnitee shall have any liability for failure to provide such copies.
(d) Income Inclusions. If as a result of the payment or reimbursement
-----------------
by the Lessee of any expenses of the Lessor or the payment of any Transaction
Expenses incurred in connection with the transactions contemplated by the
Operative Documents, the Lessor or any
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<PAGE>
Participant shall suffer a net increase in any federal, state or local income
tax liability, the Lessee shall indemnify such Persons (without duplication of
any indemnification required by subsection (a)) on an After Tax Basis for the
---------------
amount of such increase. The calculation of any such net increase shall take
into account any current or future tax savings realized or reasonably expected
to be realized by such person in respect thereof, as well as any interest,
penalties and additions to tax payable by the Lessor, or any Participant or such
Affiliate, in respect thereof.
(e) Withholding Taxes. As between the Lessee on one hand, and the
-----------------
Lessor or the Agent and any Participant on the other hand, the Lessee shall be
responsible for, and, subject to the provisions of Sections 13.5(g) and (h), the
---------------- ---
Lessee shall indemnify and hold harmless the Lessor, the Agent and the
Participants (without duplication of any indemnification required by subsection
----------
(a)) on an After Tax Basis against, any obligation for United States or foreign
- - ---
withholding taxes imposed in respect of payments with respect to the
Participation Interests or with respect to Rent payments under the Lease or
payments of the Asset Termination Value or Purchase Option Price (and, if the
Lessor, the Agent or any Participant receives a demand for such payment from any
taxing authority, the Lessee shall discharge such demand on behalf of the
Lessor, the Agent or such Participant). Notwithstanding the foregoing
provisions of this Section 13.5(e) or any other provision of any Operative
---------------
Document to the contrary, the Lessee shall not be responsible for and shall not
be required to indemnify or otherwise hold harmless any Person from or against
any withholding tax imposed as a collection device for, or in substitution or
lieu of, an income, franchise or similar tax to the extent such income,
franchise or similar tax would not otherwise be subject to indemnification
pursuant to this Section 13.5 (a "Qualified Withholding Tax"). As used herein,
------------
Qualified Withholding Taxes include, without limitation, any withholding taxes
arising under Section 871, 881, 1441 or 1442 of the Code and any similar taxes
arising under state, local or foreign law as well as any withholding tax imposed
as a collection device for, or in substitution or lieu of the Imposition that
qualifies as an "income tax" within the meaning of United States Treasury
Regulation Section 1.901-2.
(f) Contests of Impositions. (i) If a written claim is made against
-----------------------
any Indemnitee or if any proceeding shall be commenced against such Indemnitee
(including a written notice of such proceeding), for any Impositions, such
Indemnitee shall promptly notify the Lessee in writing and shall not take action
with respect to such claim or proceeding without the consent of the Lessee for
thirty (30) days after the receipt of such notice by the Lessee; provided,
however, that, in the case of any such claim or proceeding, if action shall be
required by law or regulation to be taken prior to the end of such 30-day
period, such Indemnitee shall, in such notice to the Lessee, inform the Lessee
of such shorter period, and no action shall be taken with respect to such claim
or proceeding without the consent of the Lessee before 2 days before the end of
such shorter period; provided, further, that the failure of such Indemnitee to
give the notices referred to this sentence shall not diminish the Lessee's
obligation hereunder except to the extent such failure precludes the Lessee from
contesting all or part of such claim.
(ii) If, within thirty (30) days of receipt of such notice from the
Indemnitee (or such shorter period as the Indemnitee has notified the Lessee is
required by law or regulation for the Indemnitee to commence such contest), the
Lessee shall request in writing that
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<PAGE>
such Indemnitee contest such Imposition, the Indemnitee shall, at the expense of
the Lessee, in good faith conduct and control such contest (including, without
limitation, by pursuit of appeals) relating to the validity, applicability or
amount of such Impositions (provided, however, that (A) if such contest involves
a tax other than a tax on net income and can be pursued independently from any
other proceeding involving a tax liability of such Indemnitee, the Indemnitee,
at the Lessee's request, shall allow the Lessee to conduct and control such
contest and (B) in the case of any contest, the Indemnitee may request the
Lessee to conduct and control such contest) by, in the sole discretion of the
Person conducting and controlling such contest, (1) resisting payment thereof,
(2) not paying the same except under protest, if protest is necessary and
proper, (3) if the payment be made, using reasonable efforts to obtain a refund
thereof in appropriate administrative and judicial proceedings, or (4) taking
such other action as is reasonably requested by the Lessee from time to time.
(iii) The party controlling any contest shall consult in good faith
with the non-controlling party and shall keep the non-controlling party
reasonably informed as to the conduct of such contest; provided, that all
decisions ultimately shall be made in the sole discretion of the controlling
party except that no decision shall be made to concede an indemnified issue
without the prior consent of Lessee (which consent shall not be unreasonably
withheld). The parties agree that an Indemnitee may at any time decline to take
further action with respect to the contest of any Imposition and may settle such
contest if such Indemnitee shall waive its rights to any indemnity from the
Lessee that otherwise would be payable in respect of such claim (and any future
claim by any taxing authority, the contest of which is precluded by reason of
such resolution of such claim) and shall pay to the Lessee any amount previously
paid or advanced by the Lessee pursuant to this Section 13.5 by way of
------------
indemnification or advance for the payment of an Imposition other than expenses
of such contest.
(iv) Notwithstanding the foregoing provisions of this Section 13.5,
------------
an Indemnitee shall not be required to take any action and the Lessee shall not
be permitted to contest any Impositions in its own name or that of the
Indemnitee unless (A) the Lessee shall have agreed such Imposition is subject
to indemnity hereunder and shall pay to such Indemnitee on demand and on an
After Tax Basis all reasonable costs, losses and expenses that such Indemnitee
actually incurs in connection with contesting such Impositions, including,
without limitation, all reasonable legal, accounting and investigatory fees and
disbursements, (B) in the case of a claim that must be pursued in the name of an
Indemnitee (or an Affiliate thereof), the amount of the potential indemnity
(taking into account all similar or logically related claims that have been or
could be raised in any audit involving such Indemnitee for which the Lessee may
be liable to pay an indemnity under this Section 13.5) exceeds $10,000, (C) the
------------
Indemnitee shall have reasonably determined that the action to be taken will not
result in any material danger of sale, forfeiture or loss of the Property, or
any part thereof or interest therein, will not interfere with the payment of
Rent, and will not result in risk of criminal liability, (D) if such contest
shall involve the payment of the Imposition prior to the contest, the Lessee
shall provide to the Indemnitee an interest-free advance in an amount equal to
the Imposition that the Indemnitee is required to pay (with no additional net
after-tax cost to such Indemnitee), (E) in the case of a claim that must be
pursued in the name of an Indemnitee (or an Affiliate thereof), the Lessee
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<PAGE>
shall have provided to such Indemnitee an opinion of independent tax counsel
selected by the Indemnitee and reasonably satisfactory to the Lessee stating
that a reasonable basis exists to contest such claim (or, in the case of an
appeal of an adverse judicial determination, an opinion of such counsel to the
effect that there is substantial authority for the position asserted in such
appeal) and (F) no Event of Default hereunder shall have occurred and be
continuing. In no event shall an Indemnitee be required to appeal an adverse
judicial determination to the United States Supreme Court. In addition, an
Indemnitee shall not be required to contest any claim in its name (or that of an
Affiliate) if the subject matter thereof shall be of a continuing nature and
shall have previously been decided adversely by a court of competent
jurisdiction pursuant to a contest completed in accordance with the provisions
of this Section 13.5, unless there shall have been a change in law
------------
(or interpretation thereof) and the Indemnitee shall have received, at the
Lessee's expense, an opinion of independent tax counsel selected by the
Indemnitee and reasonably acceptable to the Lessee stating that as a result of
such change in law (or interpretation thereof), it is more likely than not that
the Indemnitee will prevail in such contest.
(g) Documentation of Withholding Status. Each Participant (or any
-----------------------------------
successor thereto or transferee thereof) that is organized under the laws of a
jurisdiction outside of the United States of America and each Lessor that is
organized under the laws of a jurisdiction outside of the United States of
America shall:
(i) on or before the date it becomes a party to any Operative
Document, deliver to the Lessee any certificates, documents, or other
evidence that shall be required by the Code or Treasury Regulations issued
pursuant thereto to establish its exemption from United States Federal
withholding requirements, including (A) two valid, duly completed, original
copies of Internal Revenue Service Form 1001 or Form 4224 or successor
applicable form, properly and duly executed, certifying in each case that
such party is entitled to receive payments pursuant to the Operative
Documents without deduction or withholding of United States Federal income
taxes, or (B) a valid, duly completed, original copy of Internal Revenue
Service Form W-8 or Form W-9 or applicable successor form, properly and
duly executed, certifying that such party is entitled to an exemption from
United States of America backup withholding tax; and
(ii) so long as it shall be legally entitled to do so, on or
before the date that any such form described above expires or becomes
obsolete, or after the occurrence of any event requiring a change in the
most recent such form previously delivered to the Lessee, deliver to the
Lessee two further valid, duly completed, original copies of any such form
or certification, properly and duly executed.
(h) Limitation on Tax Indemnification. The Lessee shall not be
---------------------------------
required to indemnify any Indemnitee, or to pay any increased amounts to any
Indemnitee or tax authority with respect to any Impositions pursuant to this
Section 13.5 to the extent that (i) such Imposition is attributable to such
- - ------------
Indemnitee's failure to comply with the provisions of Section
-------
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<PAGE>
13.5(g); or (ii) to the extent such Imposition constitutes or is collected by
- - -------
means of a Qualified Withholding Tax.
(i) Tax Savings. In the event an Indemnitee receives a refund (or
-----------
similar tax savings) in respect of any Imposition paid or reimbursed by the
Lessee which was not considered in calculating the After Tax Basis with respect
to such payment or reimbursement by Lessee, such Indemnitee shall within thirty
(30) days thereafter remit the amount of such refund (or tax savings) to the
Lessee, provided that the amount so remitted shall not exceed the lesser of: (i)
the amount received by such Indemnitee as a refund (or tax savings) net of all
reasonable costs and expenses incurred by such Indemnitee in connection with
obtaining and paying such amount; and (ii) (a) the amount of all prior payments
by the Lessee to such Indemnitee with respect to Impositions, plus any refunded
interest, less (b) the amount of all prior payments by the Indemnitee to the
Lessee under this Section 13.5(i).
---------------
SECTION 13.6. Funding Losses. If any payment of any Advance
--------------
representing Tranche B Participation Interests or any portion of any Tranche B
Participation Interest is made on any day other than the last day of an Interest
Period applicable thereto, or if the Lessee fails to utilize the proceeds of any
purchase of Participation Interests after notice has been given to any
Participant in accordance with Section 3 or 4, the Lessee shall reimburse each
--------- -
Participant within fifteen (15) days after demand for any resulting loss or
expense incurred by it, including (without limitation) any loss incurred in
obtaining, liquidating or employing deposits from third parties, provided that
--------
such Participant shall have delivered to the Lessee a certificate as to the
amount of such loss or expense, which certificate shall be conclusive in the
absence of manifest error, and provided further that such loss shall in no event
-------- -------
exceed the interest on the Advances which would have been payable for the
balance of such Interest Period or other period, less the amount actually earned
by such Participant on such Advances. Such Participant will, at the request of
the Lessee, furnish such additional information concerning the determination of
such loss as the Lessee may reasonably request.
SECTION 13.7. Regulation D Compensation. For so long as any
-------------------------
Participant is required to increase its existing reserve percentage against
"Eurocurrency Liabilities" (or any other category of liabilities which include
deposits by reference to which the interest rate on its Participation Interest
in any Advance is determined or any category of extensions of credit or other
assets which includes loans by a non-United States office of such Participant to
United States residents), and, as a result, the cost to such Participant (or its
Funding Office) of purchasing or maintaining its Participation Interest in any
Advance is increased, then such Participant may require the Lessee to pay,
contemporaneously with each payment of interest on the Advances an additional
amount on the Participation Interest of such Participant in the Advances at a
rate per annum up to but not exceeding the excess of (i) (A) the applicable
Eurodollar Rate divided by (B) one minus the Eurocurrency Reserve Requirements
-----
and (ii) the applicable Eurodollar Rate. Any Participant wishing to require
payment of such additional amount (x) shall so notify the Lessee and the Agent,
in which case such additional interest on its Participation Interest in any
Advance shall be payable to such Participant at the place indicated in such
notice with respect to each Interest Period commencing at least three (3)
Business Days
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<PAGE>
after the giving of such notice and (y) shall furnish to the Lessee at least
five (5) Business Days prior to each date on which interest is payable on the
Advance an officer's certificate setting forth the amount to which such
Participant is then entitled under this Section (which shall be consistent with
such Participant's good faith estimate of the level at which the related
reserves are maintained by it). Each such certificate shall be accompanied by
such information as the Lessee may reasonably request as to the computation set
forth therein.
SECTION 13.8. Basis for Determining Interest Rate Inadequate or
-------------------------------------------------
Unfair. If on or prior to the first day of any Interest Period:
- - ------
(a) deposits in dollars (in the applicable amounts) are not being
offered to the Agent in the relevant market for such Interest Period or any
Participants shall advise the Agent that the Eurodollar Rate as determined by
the Agent will not adequately and fairly reflect the cost to such Participant of
funding its Tranche B Participation Interest in any Advance for such Interest
Period; or
(b) any Participant determines that, by reason of the adoption, on or
after the date of this Participation Agreement, of any applicable law, rule or
regulation, or any change therein, or any change in the interpretation or
administration thereof by any Governmental Authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by any Participant (or its Funding Office) with any request or directive
(whether or not having the force of law) of any such authority, central bank or
governmental agency, it is restricted, directly or indirectly, in the amount it
may hold of (i) a category of liabilities that includes deposits by reference to
which, or on the basis of which, the interest rates applicable to Advances to
fund its Tranche B Participation Interest Commitment based on the Eurodollar
Rate are directly or indirectly determined, or (ii) the category of assets which
includes Advances to fund its Tranche B Participation Interest Commitment based
on the Eurodollar Rate;
the Agent shall forthwith give notice thereof to the Lessee and the
Participants, whereupon until the Agent notifies the Lessee that the
circumstances giving rise to such suspension no longer exist, each outstanding
Advance shall begin to bear interest on the last day of the then current
Interest Period applicable thereto at a rate per annum equal to the sum of (i)
the Participants' average cost of funds employed to fund their Tranche B
Participation Interests, as notified to the Agent and the Lessee, plus (ii) the
Applicable Margin for Eurodollar Rate-based Advances at such time.
SECTION 13.9. Illegality. If, on or after the date of this
----------
Participation Agreement, the adoption of any applicable law, rule or regulation,
or any change therein, or any change in the interpretation or administration
thereof by any Governmental Authority, central bank or comparable agency charged
with the interpretation or administration thereof, or compliance by any
Participant (or its Funding Office) with any request or directive (whether or
not having the force of law) of any such authority, central bank or comparable
agency, shall make it unlawful or impossible for any Participant (or its Funding
Office) to purchase, maintain or fund its Participation Interest in any Advance
and such Participant shall so notify the Agent, the Agent
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<PAGE>
shall forthwith give notice thereof to the other Participants and the Lessee,
whereupon until such Participant notifies the Lessee and the Agent that the
circumstances giving rise to such suspension no longer exist, the obligation of
such Participant to purchase its Participation Interest in any Advance shall be
suspended. Before giving any notice to the Agent pursuant to this Section, such
Participant shall, if practicable, with the consent of the Lessee (which consent
shall not unreasonably be withheld), designate a different Funding Office if
such designation will avoid the need for giving such notice and will not, in the
judgment of such Participant, be otherwise disadvantageous to such Participant.
If such notice is given (i) the Lessee shall be entitled upon its request to a
reasonable explanation of the factors underlying such notice and (ii) each
outstanding Participation Interest in any Advance of such Participant then
outstanding shall begin to bear interest at the Alternate Base Rate plus the
Applicable Margin for Eurodollar Rate-based Advances either (a) on the last day
of the then current Interest Period applicable to such Advance if such
Participant may lawfully continue to maintain and fund such Participation
Interest to such day or (b) immediately if such Participant shall determine that
it may not lawfully continue to maintain and fund such Participation Interest to
such day. If such notice is given the Lessee may exercise its Purchase Option
under Section 20.1 of the Lease upon not less than ten (10) days' written notice
to the Lessor, the Agent and the Participants.
SECTION 13.10. Increased Cost and Reduced Return. (a) In the event
---------------------------------
that the adoption of any applicable law, rule or regulation, or any change
therein or in the interpretation or application thereof by any Governmental
Authority, central bank or comparable agency charged with the interpretation or
administration thereof or compliance by any Participant with any request or
directive after the date hereof (whether or not having the force of law) of any
such authority, central bank or comparable agency:
(i) does or shall subject such Participant to any additional tax
of any kind whatsoever with respect to the Operative Documents or any
purchase of a Participation Interest in any Advance, or change the basis or
the applicable rate of taxation of payments to such Participant of its
Participation Interest or any other amount payable hereunder (except for
the imposition of or change in any tax on or measured by the overall net
income of such Participant including, without limitation, any tax that
qualifies as an "income tax" within the meaning of United States Treasury
Regulation Section 1.901-2 and which is not an Imposition);
(ii) does or shall impose, modify or hold applicable any reserve,
special deposit, insurance assessment, compulsory loan or similar
requirement against assets held by, or deposits or other liabilities in or
for the account of, advances or loans by, or other credit extended by, or
any other acquisition of funds by, any office of such Participant which are
not otherwise included in determination of the rate of interest on Advances
hereunder; or
(iii) does or shall impose on such Participant any other
condition;
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and the result of any of the foregoing is to increase the cost to such
Participant of purchasing or maintaining its Participation Interest in any
Advance or to reduce any amount receivable hereunder with respect thereto, then
in any such case, the Lessee shall promptly pay such Participant, upon its
demand, any additional amounts necessary to compensate such Participant for such
increased cost or reduced amount receivable which such Participant deems to be
material as determined by such Participant.
(b) If any Participant shall have determined that, after the date
hereof, the adoption of any applicable law, rule or regulation regarding capital
adequacy, or any change therein, or any change in the interpretation or
administration thereof by any Governmental Authority, central bank or comparable
agency charged with the interpretation or administration thereof, or any request
or directive regarding capital adequacy (whether or not having the force of law)
of any such authority, central bank or comparable agency has or would have the
effect of reducing the rate of return on capital of such Participant (or any
entity directly or indirectly controlling such Participant) as a consequence of
such Participant's obligations under the Operative Documents to a level below
that which such Participant (or any entity directly or indirectly controlling
such Participant) could have achieved but for such adoption, change, request or
directive (taking into consideration its policies with respect to capital
adequacy) by an amount deemed by such Participant to be material, then from time
to time, within 15 days after demand by such Participant (with a copy to the
Agent), the Lessee shall pay to such Participant such additional amount or
amounts as will compensate such Participant (or its parent) for such reduction.
(c) Each Participant will promptly notify the Lessee and the Agent of
any event of which it has knowledge, occurring after the date hereof, which will
entitle such Participant to compensation pursuant to this Section and will, if
practicable, with the consent of the Lessee (which consent shall not
unreasonably be withheld), designate a different Funding Office or take any
other reasonable action if such designation or action will avoid the need for,
or reduce the amount of, such compensation and will not, in the judgment of such
Participant, be otherwise disadvantageous to such Participant. A certificate of
any Participant claiming compensation under this Section and setting forth in
reasonable detail its computation of the additional amount or amounts to be paid
to it hereunder shall be conclusive in the absence of manifest error. In
determining such amount, such Participant may use any reasonable averaging and
attribution methods. This Section shall survive the termination of this
Participation Agreement and payment of the outstanding Advances and
Participation Interests.
SECTION 13.11. Substitution of Participant. If (i) the obligation of
---------------------------
any Participant to purchase or maintain its Participation Interest has been
suspended pursuant to this Section 13, or (ii) any Participant has demanded
----------
compensation or given notice of its intention to demand compensation under
Section 13.10, the Lessee shall have the right, with the assistance of the
- - -------------
Agent, to seek one or more mutually satisfactory substitute banks or financial
institutions (which may be one or more of the Participants) to replace such
Participant under the Operative Documents.
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SECTION 13.12. Indemnity Payments in Addition to Residual Value
------------------------------------------------
Guarantee Amount. The Lessee acknowledges and agrees that its obligations to
- - ----------------
make indemnity payments under this Section 13 are separate from, in addition to,
----------
and do not reduce, its obligation to pay the Residual Value Guarantee Amount
under the Lease; provided, that except as otherwise set forth in Section 13.2
------------
hereof, the Shortfall Amount payable by the Lessee in connection with the
Remarketing Option under the Lease shall not be increased under this Section 13.
----------
SECTION 14.
THE AGENT
SECTION 14.1. Appointment. Each Participant hereby irrevocably
-----------
designates and appoints the Agent as the agent of such Lender under this
Agreement and the other Operative Documents, and each Participant irrevocably
authorizes the Agent, in such capacity, to take such action on its behalf under
the provisions of this Agreement and the other Operative Documents and to
exercise such powers and perform such duties as are expressly delegated to the
Agent by the terms of this Agreement and the other Operative Documents, together
with such other powers as are reasonably incidental thereto. Notwithstanding
any provision to the contrary elsewhere in this Agreement, the Agent shall not
have any duties or responsibilities, except those expressly set forth herein, or
any fiduciary relationship with any Participant or any other party to the
Operative Documents, and no implied covenants, functions, responsibilities,
duties, obligations or liabilities shall be read into this Agreement or any
other Operative Document or otherwise exist against the Agent.
SECTION 14.2. Delegation of Duties. The Agent may execute any of its
--------------------
duties under this Agreement and the other Operative Documents by or through
agents or attorneys-in-fact and shall be entitled to advice of counsel
concerning all matters pertaining to such duties. The Agent shall not be
responsible for the negligence or misconduct of any agents or attorneys-in-fact
selected by it with reasonable care.
SECTION 14.3. Exculpatory Provisions. Neither the Agent nor any of
----------------------
its officers, directors, employees, agents, attorneys-in-fact or Affiliates
shall be (a) liable for any action lawfully taken or omitted to be taken by it
or such Person under or in connection with this Agreement or any other Operative
Document (except for its or such Person's own gross negligence or willful
misconduct) or (b) responsible in any manner to any of the Participants or any
other party to the Operative Documents for any recitals, statements,
representations or warranties made by the Lessor or the Lessee or any officer
thereof contained in this Agreement or any other Operative Document or in any
certificate, report, statement or other document referred to or provided for in,
or received by the Agent under or in connection with, this Agreement or any
other Operative Document or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement or any other Operative Document
or for any failure of the Lessor or the Lessee to perform its obligations
hereunder or thereunder. The Agent shall not be under any obligation to any
Participant or any other party to the Operative
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Documents to ascertain or to inquire as to the observance or performance of any
of the agreements contained in, or conditions of, this Agreement or any other
Operative Document, or to inspect the properties, books or records of the Lessor
or the Lessee.
SECTION 14.4. Reliance by Agent. The Agent shall be entitled to
-----------------
rely, and shall be fully protected in relying, upon any writing, resolution,
notice, consent, certificate, affidavit, letter, telecopy, telex or teletype
message, statement, order or other document or conversation believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons and upon advice and statements of legal counsel (including, without
limitation, counsel to the Lessor or the Lessee), independent accountants and
other experts selected by the Agent. The Agent shall be fully justified in
failing or refusing to take any action under this Agreement or any other
Operative Document unless it shall first receive such advice or concurrence of
the Required Participants as it deems appropriate or it shall first be
indemnified to its satisfaction by the Participants against any and all
liability and expense which may be incurred by it by reason of taking or
continuing to take any such action. The Agent shall in all cases be fully
protected in acting, or in refraining from acting, under this Agreement and the
other Operative Documents in accordance with a request of the Required
Participants, and such request and any action taken or failure to act pursuant
thereto shall be binding upon all the Participants.
SECTION 14.5. Notice of Default. The Agent shall not be deemed to
-----------------
have knowledge or notice of the occurrence of any Default or Event of Default
unless the Agent has received notice from a Participant, the Lessor or the
Lessee describing such Default or Event of Default and stating that such notice
is a "notice of default". In the event that the Agent receives such a notice,
the Agent shall give notice thereof to the other parties hereto. Subject to the
provisions of Section 11 and Section 15.5 hereof, the Agent shall take such
---------- ------------
action with respect to such Default or Event of Default as shall be reasonably
directed by the Required Participants; provided that unless and until the Agent
--------
shall have received such directions, the Agent may (but shall not be obligated
to) take such action, or refrain from taking such action, with respect to such
Default or Event of Default as it shall deem advisable in the best interests of
the Participants.
SECTION 14.6. Non-Reliance on Agent and Other Participants. Each
--------------------------------------------
Participant expressly acknowledges that neither the Agent nor any of its
officers, directors, employees, agents, attorneys-in-fact or Affiliates has made
any representations or warranties to it and that no act by the Agent hereinafter
taken, including any review of the affairs of the Lessor or the Lessee, shall be
deemed to constitute any representation or warranty by the Agent to any
Participant. Each Participant represents to the Agent that it has,
independently and without reliance upon the Agent or any other Participant, and
based on such documents and information as it has deemed appropriate, made its
own appraisal of and investigation into the business, operations, property,
financial and other condition and creditworthiness of the Lessor, the Lessee and
the Property and made its own decision to purchase its Participation Interest
hereunder and enter into this Agreement. Each Participant also represents that
it will, independently and without reliance upon the Agent, the Lessor or any
other Participant, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own
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credit analysis, appraisals and decisions in taking or not taking action under
this Agreement and the other Operative Documents, and to make such investigation
as it deems necessary to inform itself as to the business, operations, property,
financial and other condition and creditworthiness of the Lessor and the Lessee.
Except for notices, reports and other documents expressly required to be
furnished to the Participants by the Agent hereunder, the Agent shall not have
any duty or responsibility to provide any Participant with any credit or other
information concerning the business, operations, property, condition (financial
or otherwise), prospects or creditworthiness of the Lessor or the Lessee which
may come into the possession of the Agent or any of its officers, directors,
employees, agents, attorneys-in-fact or Affiliates.
SECTION 14.7. Indemnification. The Participants agree to indemnify
---------------
the Agent in its capacity as such (to the extent not reimbursed by the Lessee
and without limiting the obligation of the Lessee to do so), ratably according
to their respective Commitment Percentages in effect on the date on which
indemnification is sought under this Section 14.7 (or, if indemnification is
------------
sought after the date upon which the Commitments shall have terminated and the
Participation Interests shall have been paid in full, ratably in accordance with
their Commitment Percentages immediately prior to such date), from and against
any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind whatsoever which
may at any time (including, without limitation, at any time following the
payment of the Participation Interests) be imposed on, incurred by or asserted
against the Agent in any way relating to or arising out of, the Commitments,
this Agreement, the Property, any of the other Operative Documents or any
documents contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby or any action taken or omitted by any of them
under or in connection with any of the foregoing; provided that no Participant
--------
shall be liable for the payment of any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting solely from the gross negligence or willful misconduct
of the Agent. The agreements in this Section 14.7 shall survive the payment of
------------
the Participation Interests and all other amounts payable hereunder.
SECTION 14.8. Agent in its Individual Capacity. The Agent and its
--------------------------------
Affiliates may make loans to, accept deposits from and generally engage in any
kind of business with the Lessor or the Lessee as though the Agent were not the
Agent hereunder and under the other Operative Documents. With respect to its
Participation Interest purchased by it, the Agent shall have the same rights and
powers under this Agreement and the other Operative Documents as any Participant
and may exercise the same as though it were not the Agent, and the terms
"Participant" and "Participants" shall include the Agent in its individual
capacity.
SECTION 14.9. Successor Agent. The Agent may resign as Agent upon 20
---------------
days' notice to the Participants, the Lessor or the Lessee. If the Agent shall
resign as Agent under this Agreement and the other Operative Documents, then the
Required Participants shall appoint a successor agent for the Participants,
which successor agent shall be a commercial bank organized under the laws of the
United States of America or any State thereof or under the laws of another
country which is doing business in the United States of America and having a
combined capital, surplus and undivided profits of at least $100,000,000 (and if
no Default or Event of Default
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exists, shall be approved by the Lessee (which consent shall not be unreasonably
withheld)), whereupon such successor agent shall succeed to the rights, powers
and duties of the Agent, and the term "Agent" shall mean such successor agent
effective upon such appointment and approval, and the former Agent's rights,
powers and duties as Agent shall be terminated, without any other or further act
or deed on the part of such former Agent or any of the parties to this
Agreement. If no successor Agent has accepted appointment as Agent by the date
which is 20 days following a resigning Agent's notice of resignation, the
resigning Agent's resignation shall nevertheless thereupon become effective and
the Participants shall perform all of the duties of the Agent hereunder until
such time, if any, as the Required Participants appoint a successor Agent as
provided above. After any retiring Agent's resignation as Agent, all of the
provisions of this Section 14 shall inure to its benefit as to any actions taken
----------
or omitted to be taken by it while it was Agent under this Agreement and the
other Operative Documents.
SECTION 15.
MISCELLANEOUS
SECTION 15.1. Survival of Agreements. The representations,
----------------------
warranties, covenants, indemnities and agreements of the parties provided for in
the Operative Documents, and the parties' obligations under any and all thereof,
shall survive the execution and delivery of this Participation Agreement, the
transfer of the Property to the Lessor, the construction of any Improvements,
any disposition of any interest of the Lessor in the Property or any
Improvements, payment of the Advances and the Participation Interests and any
disposition thereof and shall be and continue in effect notwithstanding any
investigation made by any party and the fact that any party may waive compliance
with any of the other terms, provisions or conditions of any of the Operative
Documents. Except as otherwise expressly set forth herein or in other Operative
Documents, the indemnities of the parties provided for in the Operative
Documents shall survive the expiration or termination of any thereof.
SECTION 15.2. No Broker, etc. Each of the parties hereto represents
--------------
to the others that it has not retained or employed any broker, finder or
financial adviser to act on its behalf in connection with this Participation
Agreement or the transactions contemplated herein, nor has it authorized any
broker, finder or financial adviser retained or employed by any other Person so
to act. Any party who is in breach of this representation shall indemnify and
hold the other parties harmless from and against any liability arising out of
such breach of this representation.
SECTION 15.3. Notices. Unless otherwise specifically provided
-------
herein, all notices, consents, directions, approvals, instructions, requests and
other communications required or permitted by the terms hereof to be given to
any Person shall be given in writing and delivered (i) personally, (ii) by a
nationally recognized overnight courier service, (iii) by mail (by registered or
certified mail, return receipt requested, postage prepaid) or (iv) by facsimile,
in each case directed to the address of such Person as indicated on Schedule II.
------------
Any such notice shall be effective upon receipt or refusal.
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From time to time any party may designate a new address for purposes of
notice hereunder by written notice to each of the other parties hereto in
accordance with this Section.
SECTION 15.4. Counterparts. This Participation Agreement may be
------------
executed by the parties hereto in separate counterparts, each of which when so
executed and delivered shall be an original, but all such counterparts shall
together constitute but one and the same instrument.
SECTION 15.5. Amendments. Subject to the provisions of Section 11
---------- ----------
hereof, no Operative Document nor any of the terms thereof may be terminated,
amended, supplemented, waived or modified with respect to the Lessee, the
Lessor, the Agent or any Participant, except (a) in the case of a termination,
amendment, supplement, waiver or modification to be binding on the Lessee, the
Lessor or the Agent, with the written agreement or consent of such party, and
(b) in the case of a termination, amendment, supplement, waiver or modification
to be binding on the Participants, with the written agreement or consent of the
Required Participants; provided, however, that
-------- -------
(x) no such termination, amendment, supplement, waiver or modification
shall without written agreement or consent of each Participant:
(i) modify any of the provisions of Section 11 of this Agreement
----------
or this Section 15.5, change the definition of "Required Participants" or
------------ ---------------------
modify or waive any provision of an Operative Agreement requiring action by
the foregoing;
(ii) amend, modify, waive or supplement any of the provisions of
Sections 3.6, 3.7 or 3.10 - 3.20 of this Agreement or the representations
--------------------------------
of such Participant in Section 8 or the covenants in Sections 7 and 10 of
--------- ---------- --
this Participation Agreement;
(iii) reduce, modify, amend or waive any fees or indemnities in
favor of any Participant, including without limitation amounts payable
pursuant to Section 13 (except that any Person may consent to any
----------
reduction, modification, amendment or waiver of any indemnity payable to
it);
(iv) modify, postpone, reduce or forgive, in whole or in part,
any payment of Rent (other than pursuant to the terms of any Operative
Agreement), any payment in respect of its Participation Interest, or any
payment of the Asset Termination Value, Commitment Fee, Residual Value
Guarantee Amount, amounts due pursuant to Section 22.2 of the Lease, or
interest or, subject to clause (iii) above, any other amount payable under
------------
the Lease or this Participation Agreement, or modify the definition or
method of calculation of Rent (other than pursuant to the terms of any
Operative Agreement), Participation Interest, Asset Termination Value,
Commitment Fee, Shortfall Amount, Residual Value Guarantee Amount, Required
Supplemental Payments, Property Improvements Cost, Participant Balance,
Tranche A Participation Interest Balance,
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Tranche B Participation Interest Balance, or any other definition which
would affect the amounts to be advanced or which are payable under the
Operative Documents; or
(v) consent to any assignment of the Lease, releasing the Lessee
from its obligations in respect of the payments of Rent and the Asset
Termination Value or changing the absolute and unconditional character of
such obligation; and
(y) no other termination, amendment, supplement, waiver or
modification shall, without the written agreement or consent of the Lessor and
the Required Participants, be made to the Lease or Section 6 of this
---------
Participation Agreement or the definition of "Event of Default".
----------------
SECTION 15.6. Headings, etc. The Table of Contents and headings of
-------------
the various Sections of this Agreement are for convenience of reference only and
shall not modify, define, expand or limit any of the terms or provisions hereof.
SECTION 15.7. Parties in Interest. Except as expressly provided
-------------------
herein, none of the provisions of this Participation Agreement are intended for
the benefit of any Person except the parties hereto. Subject to the provisions
of Section 25.1 of the Lease, the Lessee shall not assign or transfer any of its
------------
rights or obligations under the Operative Documents without the prior written
consent of the Lessor, the Agent and the Participants, except that the Lessee
may without such consent assign rights or obligations of the Lessee under the
Operative Documents to an Affiliate of the Lessee, provided that the Lessee
--------
remains primarily liable with respect to such obligations and provides its full
unconditional and irrevocable guaranty of such Subsidiary's obligations under
the Operative Documents, such guaranty to be in form and substance reasonably
satisfactory to the Required Participants. If the Lessor, the Agent and the
Participants consent to any such assignment or transfer to a Person not an
Affiliate of the Lessee, the Lessee shall remain primarily liable with respect
to such obligations and provide its full and unconditional guaranty of such
Person's obligations under the Operative Documents, such guaranty to be in form
and substance reasonably satisfactory to the Required Participants.
SECTION 15.8. GOVERNING LAW. THIS PARTICIPATION AGREEMENT SHALL IN
-------------
ALL RESPECTS BE GOVERNED BY THE LAW OF THE STATE OF ILLINOIS (EXCLUDING ANY
CONFLICT-OF-LAW OR CHOICE-OF-LAW RULES WHICH MIGHT LEAD TO THE APPLICATION OF
THE INTERNAL LAWS OF ANY OTHER JURISDICTION) AS TO ALL MATTERS OF CONSTRUCTION,
VALIDITY AND PERFORMANCE.
SECTION 15.9. Severability. Any provision of this Participation
------------
Agreement that is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
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SECTION 15.10. Liability Limited. (a) The parties hereto agree that
-----------------
the Lessor shall have no personal liability whatsoever to the Lessee, the Agent
or any Participant or their respective successors and assigns for any claim
based on or in respect of the Lease or any of the other Operative Documents or
arising in any way from the transactions contemplated hereby or thereby;
provided, however, that the Lessor shall be liable in its individual capacity
- - -------- -------
(a) for its own willful misconduct or gross negligence (or negligence in the
handling of funds), (b) for liabilities that may result from its breach of the
covenant to remove Lessor Liens set forth in Section 10.3, or (c) for any Tax
------------
based on or measured by any fees, commission or compensation received by it for
acting as the Lessor as contemplated by the Operative Documents. It is
understood and agreed that, except as provided in the preceding proviso: (i) the
Lessor shall have no personal liability under any of the Operative Documents;
(ii) all obligations of the Lessor to the Lessee, the Agent and the Participants
are solely nonrecourse obligations and shall be enforceable solely against the
interest of the Lessor in the Property; and (iii) all such personal liability of
the Lessor is expressly waived and released as a condition of, and as
consideration for, the execution and delivery of the Operative Documents by the
Lessor. Notwithstanding anything contained herein, the restrictions stated in
the preceding provisions of this Section 15.10(a) shall not apply to liability
----------------
of the Lessor arising because of a breach of the Lessor's obligation to remove
Lessor Liens or because of its receiving Advances and failing to disburse
Advances to the Lessee in accordance with the Operative Documents, or failure to
disburse proceeds from the sale of the Property in accordance with this Lease.
(b) No Participant shall have any obligation to any other Participant
or to the Lessee, the Lessor or the Agent with respect to transactions
contemplated by the Operative Documents, except those obligations of such
Participant expressly set forth in the Operative Documents or except as set
forth in the instruments delivered in connection therewith, and no Participant
shall be liable for performance by any other party hereto of such other party's
obligations under the Operative Documents except as otherwise so set forth.
SECTION 15.11. Further Assurances. The parties hereto shall promptly
------------------
cause to be taken, executed, acknowledged or delivered, at the sole expense of
the Lessee, all such further acts, conveyances, documents and assurances as the
other parties may from time to time reasonably request in order to carry out and
effectuate the intent and purposes of this Participation Agreement, the other
Operative Documents, and the transactions contemplated hereby and thereby
(including, without limitation, the preparation, execution and filing of any and
all Uniform Commercial Code financing statements and other filings or
registrations which the parties hereto may from time to time request to be filed
or effected). The Lessee, at its own expense and without need of any prior
request from any other party, shall take such action as may be necessary
(including any action specified in the preceding sentence), or (if the Lessor
shall so request) as so requested, in order to maintain and protect all security
interests provided for hereunder or under any other Operative Document.
SECTION 15.12. Submission to Jurisdiction. The Lessee hereby submits
--------------------------
to the nonexclusive jurisdiction of the United States District Court for the
Northern District of Illinois and of any Illinois state court sitting in Cook
County for purposes of all legal proceedings arising
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out of or relating to the Operative Documents or the transactions contemplated
hereby. The Lessee irrevocably waives, to the fullest extent permitted by law,
any objection which it may now or hereafter have to the laying of the venue of
any such proceeding brought in such a court and any claim that any such
proceeding brought in such a court has been brought in an inconvenient forum.
SECTION 15.13. Confidentiality. The Lessor, the Agent and each
---------------
Participant represent that they will maintain the confidentiality of the
transactions contemplated by, and of any written or oral information provided
under, the Operative Documents by or on behalf of the Lessee (hereinafter
collectively called "Confidential Information"), subject to the Lessor's, the
------------------------
Agent's and each Participant's (a) obligation to disclose any such Confidential
Information pursuant to a request or order under applicable laws and regulations
or pursuant to a subpoena or other legal process, (b) right to disclose any such
Confidential Information to its bank examiners, Affiliates, auditors, counsel
and other professional advisors and to other Participants, (c) right to disclose
any such Confidential Information in connection with any litigation or dispute
involving the Participants and the Lessee or any of its Subsidiaries and
Affiliates and (d) right to provide such information to Sub-Participants,
prospective Sub-Participants to which sales of participating interests are
permitted pursuant to this Participation Agreement and prospective assignees to
which assignments of interests are permitted pursuant to this Participation
Agreement, but only if (i) such Sub-Participant, prospective Sub-Participant or
prospective assignee agrees in writing to maintain the confidentiality of such
information on terms substantially similar to those of this Section as if it
were a "Participant" party hereto and (ii) the Lessee receives copies of such
written agreement prior to the release of such information. Notwithstanding the
foregoing, any such information supplied to a Participant, Sub-Participant,
prospective Sub-Participant or prospective assignee under this Participation
Agreement shall cease to be Confidential Information if it is or becomes known
to such Person by other than unauthorized disclosure, or if it becomes a matter
of public knowledge.
SECTION 15.14. WAIVER OF JURY TRIAL. EACH OF THE LESSEE, THE AGENT,
--------------------
THE LESSOR, AND EACH PARTICIPANT HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO
TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THE
OPERATIVE DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 15.15. Usury Savings Clause. Nothing contained in this
--------------------
Participation Agreement or the other Operative Documents shall be deemed to
require the payment of interest or other charges by the Lessee or any other
Person in excess of the amount which may be may lawfully be charged under any
applicable usury laws. In the event that the Lessor or any other Person shall
collect moneys under the Participation Agreement or any other Operative Document
which are deemed to constitute interest (including, without limitation, the
Basic Rent or Supplemental Rent) which would increase the effect interest rate
to a rate in excess of that permitted to be charged by applicable law, all such
sums deemed to constitute interest in excess of the legal rate shall, upon such
determination, at the option of the Person to whom such
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payment was made, be returned to the Person making such payment or credited
against other amounts owed by the person making such payment.
[SIGNATURE PAGES FOLLOW]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Participation
Agreement to be duly executed by their respective officers thereunto duly
authorized as of the day and year first above written.
VITESSE SEMICONDUCTOR CORPORATION,
as Lessee
By: ______________________________________
Eugene F. Hovanec, Vice President, Finance &
Chief Financial Officer
LEASE PLAN NORTH AMERICA, INC., as
Lessor
By: ______________________________________
E. Bruce Mumford, Vice President
ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL
BRANCH, as Agent
By: ABN AMRO NORTH AMERICA, INC.,
as its agent
By: __________________________________
David M. Shipley, Vice President
By: __________________________________
E. Bruce Mumford, Senior Vice
President
<PAGE>
ABN AMRO BANK N.V., SAN FRANCISCO
INTERNATIONAL BRANCH, as Participant
By: ABN AMRO NORTH AMERICA, INC.,
as its agent
By: __________________________________
David M. Shipley, Vice President
By: __________________________________
E. Bruce Mumford, Senior Vice
President
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Commitment
Participant Commitments Percentage
- - ----------- ----------- ----------
<S> <C> <C> <C>
ABN AMRO BANK N.V., Tranche A
SAN FRANCISCO Participation
INTERNATIONAL BRANCH Interest: $23,100,000 84.00000000%
Tranche B
Participation
Interest $ 4,400,000 16.00000000%
TOTAL COMMITMENT: $27,500,000 100.00000000%
=========== ============
</TABLE>
<PAGE>
SCHEDULE II
Notice Information and Funding Offices
Lessee: VITESSE SEMICONDUCTOR CORPORATION
741 Calle Plano
Camarillo, California 93012
Attention: Eugene F. Hovanec
Vice President, Finance and Chief
Financial Officer
Telephone: (805) 389-7136
Facsimile: (805) 388-7565
Lessor: LEASE PLAN NORTH AMERICA, INC.
135 S. LaSalle Street, Suite 711
Chicago, Illinois 60603
Attention: E. Bruce Mumford, Vice President
Telephone: (312) 904-6705
Facsimile: (312) 904-6217
Agent: ABN AMRO BANK N.V., SAN FRANCISCO
INTERNATIONAL BRANCH
101 California Street, Suite 4500
San Francisco, CA 94111
Attention: Bruce W. Swords
Vice President, Director
Telephone: (415) 984-3721
Facsimile: (415) 362-3524
Operations Contact:
ABN AMRO BANK N.V., SAN FRANCISCO
INTERNATIONAL BRANCH
101 California Street, Suite 4500
San Francisco, CA 94111
Attention: Ms. Gloria Chang Lee
Telephone: (415) 984-3720
<PAGE>
Facsimile: (415) 362-3524
Participant: ABN AMRO BANK N.V., SAN FRANCISCO
INTERNATIONAL BRANCH
101 California Street, Suite 4500
San Francisco, CA 94111
Attention: Bruce W. Swords
Vice President, Director
Telephone: (415) 984-3721
Facsimile: (415) 362-3524
Payment
Instructions: Bank: Federal Reserve Bank of New York
Acct: ABN AMRO New York
ABA#: 026009580
Further
Credit to: ABN AMRO San Francisco
Acct#: 6510010545-41
Re: Vitesse Semiconductor
<PAGE>
SCHEDULE III
Environmental Matters
Four metal drums were observed on the Property by CTL/Thompson, Inc. Consulting
Engineers ("CTL") as disclosed in the Phase I Environmental Site Assessment
prepared by CTL dated June 17, 1996 and delivered to the Lessor and the Agent.
The Lessee has been told that such drums were removed and believes that they
were so removed by the seller of the Property. The Lessee does not know, and
can give no assurances as to, whether such drums were removed and disposed of in
compliance with Environmental Laws.
<PAGE>
Prepared by and upon recording return to:
Richard W. Pearse, Esq.
Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601
- - --------------------------------------------------------------------------------
MASTER LEASE
dated as of October 30, 1996
between
LEASE PLAN NORTH AMERICA, INC.,
as the Lessor
and
VITESSE SEMICONDUCTOR CORPORATION,
as the Lessee
- - --------------------------------------------------------------------------------
Vitesse Fab 2 Facility
- - --------------------------------------------------------------------------------
This Lease is superior to a deed of trust in favor of ABN AMRO Bank N.V., San
Francisco International Branch, as Agent (the "Agent") under the Participation
-----
Agreement dated as of October 30, 1996, among the Lessee, the Lessor, the Agent
and the Participants. This Lease has been executed in counterparts. To the
extent, if any, that this Lease constitutes chattel paper (as such term is
defined in the Uniform Commercial Code as in effect in any applicable
jurisdiction), no lien on this Lease may be created through the transfer or
possession of any counterpart other than the original counterpart containing the
receipt therefor executed by the Agent on the signature page hereof.
THIS LEASE IS NOT INTENDED TO CONSTITUTE A TRUE LEASE FOR INCOME TAX PURPOSES.
SEE ARTICLE VII.
<PAGE>
MASTER LEASE
THIS MASTER LEASE (including all Lease Supplements and Equipment
Schedules from time to time executed and delivered, this "Lease"), dated as of
-----
October 30, 1996, between LEASE PLAN NORTH AMERICA, INC., an Illinois
corporation, having its principal office at 135 S. LaSalle Street, Chicago,
Illinois 60603, as the lessor (the "Lessor"), and VITESSE SEMICONDUCTOR
------
CORPORATION, a Delaware corporation, having a principal office at 741 Calle
Plano, Camarillo, California 93012, as the lessee (the "Lessee").
------
W I T N E S S E T H:
-------------------
A. WHEREAS, the Lessor will purchase the Land Interest from the Existing
Owner on the Closing Date;
B. WHEREAS, the Lessor desires to lease to the Lessee, and the Lessee
desires to lease from the Lessor, such Property; and
C. WHEREAS, with respect to such Property the Lessee, as Construction
Agent, will construct certain Improvements which as constructed will be the
property of the Lessor and will become part of such Property and subject to the
terms of this Lease;
NOW, THEREFORE, in consideration of the foregoing, and of other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE 1
1.1 Definitions; Interpretation. Capitalized terms used but not otherwise
---------------------------
defined in this Lease have the respective meanings specified in Appendix 1 to
----------
this Lease; and the rules of interpretation set forth in Appendix 1 to this
----------
Lease shall apply to this Lease.
ARTICLE 2
2.1 Acceptance and Lease of Property. Effective as of the Closing Date,
--------------------------------
the Lessor, subject to the satisfaction or waiver of the conditions set forth in
Section 6 of the Participation Agreement, hereby agrees to accept delivery of
the Land Interest to be delivered on the Closing Date pursuant to the terms of
the Participation Agreement, and simultaneously to lease to the Lessee hereunder
for the Term (as defined in Section 2.3), the Lessor's interest in such Land
-----------
Interest and the Lessor's interest in any Improvements existing thereon, and to
lease to the Lessee any Improvements which thereafter may be constructed thereon
and any Equipment, if any, which may
-2-
<PAGE>
be purchased for use in connection therewith pursuant to the Construction Agency
Agreement, this Lease or the Participation Agreement, and the Lessee hereby
agrees, expressly for the direct benefit of the Lessor, to lease commencing on
the Closing Date from the Lessor for the Term, the Lessor's interest in such
Land Interest to be delivered on such Closing Date and any Improvements existing
thereon and to lease any Improvements which thereafter may be constructed
thereon and such Equipment pursuant to the Construction Agency Agreement, this
Lease or the Participation Agreement.
2.2 Acceptance Procedure. (a) The Lessor hereby authorizes one or more
--------------------
employees of the Lessee, to be designated by the Lessee, as the authorized
representative or representatives of the Lessor to accept delivery on behalf of
the Lessor of the Property identified on the Acquisition Request or an Equipment
Schedule.
(b) The Lessee hereby agrees that such acceptance of delivery by such
authorized representative or representatives and the execution and delivery by
the Lessee on the Closing Date of a Lease Supplement in the form of Exhibit A
---------
hereto (appropriately completed) shall, without further act, constitute the
irrevocable acceptance by the Lessee of the Property which is the subject
thereof for all purposes of this Lease and the other Operative Documents on the
terms set forth therein and herein, and that the Property (including the
Improvements constructed thereon) shall be deemed to be included in the
leasehold estate of this Lease and shall be subject to the terms and conditions
of this Lease as of the Closing Date.
(c) The Lessee hereby agrees that such acceptance of delivery by such
authorized representative or representatives and the execution and delivery by
the Lessee of an Equipment Schedule in the form of Exhibit B hereto
---------
(appropriately completed) on or prior to the applicable Funding Date with
respect to the acquisition of Equipment shall, without further act, constitute
the irrevocable acceptance of the Equipment which is the subject thereof for all
purposes of this Lease and the other Operative Documents on the terms set forth
therein and herein, and that the Equipment shall be deemed to be included in the
leasehold estate of this Lease and shall be subject to the terms and conditions
of this Lease as of such Funding Date.
2.3 Lease Term. The term of this Lease (the "Term") shall begin on the
---------- ----
Closing Date and shall end on the fifth anniversary of the Closing Date, unless
the Term is renewed or earlier terminated in accordance with the provisions of
this Lease.
2.4 Title. The Property is leased to the Lessee without any
-----
representation or warranty of title, condition of the Improvements or permitted
uses, express or implied, by the Lessor and subject to the rights of parties in
possession, the existing state of title (including, without limitation, the
Permitted Exceptions) and all applicable Requirements of Law. The Lessee shall
in no event have any recourse against the Lessor for any defect in or exception
to title to the Property, other than for any such defect or exception
constituting a Lessor Lien. The Lessee expressly waives and releases the Lessor
from any common law or statutory covenant of quiet enjoyment, provided that the
Lessor shall be obligated to remove Lessor Liens.
-3-
<PAGE>
ARTICLE 3
3.1 Rent. (a) During the Term, the Lessee shall pay Basic Rent on each
----
Payment Date, on the date required under Section 22.1(i) in connection with the
---------------
Lessee's exercise of the Remarketing Option and on any date on which this Lease
shall terminate.
(b) Basic Rent shall be due and payable (i) during the Construction Period,
in the manner set forth in Section 3.7(d) of the Participation Agreement and
(ii) thereafter, (A) with respect to the Tranche B Participation Interests, in
lawful money of the United States and shall be paid by wire transfer of
immediately available funds on the due date therefor to such account or accounts
at such bank or banks or to the Agent or in such other manner as the Agent shall
from time to time direct and (B) with respect to the Tranche A Participation
Interests in the manner set forth in Section 3.7(e) of the Participation
Agreement.
(c) Neither the Lessee's inability or failure to take possession of all or
any portion of the Property when delivered by the Lessor, nor the Lessor's
inability or failure to deliver all or any portion of the Property to the Lessee
on or before the Closing Date or the applicable Funding Date, whether or not
attributable to any act or omission of the Lessee or any act or omission of the
Lessor, or for any other reason whatsoever, shall delay or otherwise affect the
Lessee's obligation to pay Rent for the Property from and after commencement of
the Term.
3.2 Payment of Basic Rent. Basic Rent shall be paid absolutely net to the
---------------------
Lessor, so that this Lease shall yield to the Lessor the full amount thereof,
without setoff, deduction or reduction, whether or not the Lessee's quiet
possession of the Property is disturbed, except as otherwise expressed herein
and in Section 13.5(e) of the Participation Agreement.
3.3 Supplemental Rent. The Lessee shall pay to the Lessor or the Person
-----------------
entitled thereto any and all Supplemental Rent promptly as the same shall become
due and payable, and if the Lessee fails to pay any Supplemental Rent, the
Lessor shall have all rights, powers and remedies provided for herein or by law
or equity or otherwise in the case of nonpayment of Basic Rent. The Lessee
shall pay to the Lessor, as Supplemental Rent, among other things, on demand, to
the extent permitted by Applicable Law, interest at the applicable Overdue Rate
on any installment of Basic Rent not paid when due for the period for which the
same shall be overdue and on any payment of Supplemental Rent not paid when due
or demanded by the Lessor for the period from the due date or the date of any
such demand, as the case may be, until the same shall be paid. The expiration
or other termination of the Lessee's obligations to pay Basic Rent hereunder
shall not limit or modify the obligations of the Lessee with respect to
Supplemental Rent. Unless expressly provided otherwise in this Lease, in the
event of any failure on the part of the Lessee to pay and discharge any
Supplemental Rent as and when due, the Lessee shall also promptly pay and
discharge any fine, penalty, interest or cost which may be assessed or added
under any agreement with a third party for
-4-
<PAGE>
nonpayment or late payment of such Supplemental Rent, all of which shall also
constitute Supplemental Rent.
3.4 Method of Payment. Each payment of Rent shall be made by the Lessee
-----------------
to the Agent by 12:00 noon, San Francisco time at the place of payment in funds
consisting of lawful currency of the United States of America which shall be
immediately available on the scheduled date when such payment shall be due,
unless such scheduled date shall not be a Business Day, in which case such
payment shall be made on the next succeeding Business Day or as otherwise
required by the definition of the term "Interest Period" set forth in Appendix 1
hereto. Payments initiated after 12:00 noon, San Francisco time shall be deemed
received on the next succeeding Business Day.
ARTICLE 4
4.1 Utility Charges. The Lessee shall pay or cause to be paid all charges
---------------
for electricity, power, gas, oil, water, telephone, sanitary sewer service and
all other rents and utilities used in or on the Property during the Term. The
Lessee shall be entitled to receive any credit or refund with respect to any
utility charge paid by the Lessee and the amount of any credit or refund
received by the Lessor on account of any utility charges paid by the Lessee, net
of the costs and expenses reasonably incurred by the Lessor in obtaining such
credit or refund, shall be promptly paid over to the Lessee. All charges for
utilities imposed with respect to the Property for a billing period during which
this Lease expires or terminates shall be adjusted and prorated on a daily basis
between the Lessor and the Lessee, and each party shall pay or reimburse the
other for each party's pro rata share thereof, except that if the Lessee retains
possession of the Property after termination or expiration of this Lease, no
such adjustment and proration shall be made.
ARTICLE 5
5.1 Quiet Enjoyment. Subject to the rights of the Lessor contained in
---------------
Section 17.2 and the other terms of this Lease and so long as no Event of
- - ------------
Default shall have occurred and be continuing, the Lessee shall peaceably and
quietly have, hold and enjoy the property for the Term, free of any claim or
other action by the Lessor or anyone rightfully claiming by, through or under
the Lessor (other than the Lessee) with respect to any matters arising from and
after the Closing Date.
ARTICLE 6
6.1 Net Lease. This Lease shall constitute a net lease. It is the
---------
further express intent of Lessor and Lessee that the obligations of Lessor and
Lessee hereunder shall be separate and independent covenants and agreements and
that the Basic Rent and Supplemental Rent, and all other charges and sums
payable by Lessee hereunder, shall commence at the times provided herein and
-5-
<PAGE>
shall continue to be payable in all events unless the obligations to pay the
same shall be terminated pursuant to an express provision in this Lease. Any
present or future law to the contrary notwithstanding, this Lease shall not
terminate, nor shall the Lessee be entitled to any abatement, suspension,
deferment, reduction, setoff, counterclaim, or defense with respect to the Rent,
nor shall the obligations of the Lessee hereunder be affected (except as
expressly herein permitted and by performance of the obligations in connection
therewith) by reason of: (i) any defect in the condition, merchantability,
design, construction, quality or fitness for use of the Property or any part
thereof, or the failure of the Property to comply with all Requirements of Law,
including any inability to occupy or use the Property by reason of such non-
compliance; (ii) any damage to, removal, abandonment, salvage, loss,
contamination of or Release from, scrapping or destruction of or any requisition
or taking of the Property or any part thereof; (iii) any restriction, prevention
or curtailment of or interference with any use of the Property or any part
thereof including eviction; (iv) any defect in title to or rights to the
Property or any Lien on such title or rights or on the Property (other than
Lessor Liens); (v) any change, waiver, extension, indulgence or other action or
omission or breach in respect of any obligation or liability of or by the
Lessor, the Agent or any Participant; (vi) any bankruptcy, insolvency,
reorganization, composition, adjustment, dissolution, liquidation or other like
proceedings relating to the Lessee, the Lessor, the Agent, any Participant, or
any other Person, or any action taken with respect to this Lease by any trustee
or receiver of the Lessee, the Lessor, the Agent, any Participant or any other
Person, or by any court, in any such proceeding; (vii) any claim that the Lessee
has or might have against any Person, including without limitation the Lessor,
any vendor, manufacturer, contractor of or for the Property, the Agent or any
Participant; (viii) any failure on the part of the Lessor to perform or comply
with any of the terms of this Lease, any other Operative Document or any other
agreement; (ix) any invalidity or unenforceability or illegality or
disaffirmance of this Lease or against or by the Lessee or any provision hereof
or any of the other Operative Documents or any provision of any thereof; (x) the
impossibility or illegality of performance by the Lessee, the Lessor or both;
(xi) any action by any court, administrative agency or other Governmental
Authority; (xii) any restriction, prevention or curtailment of or interference
with the construction on or any use of the Property or any part thereof; or
(xiii) any other cause or circumstances whether similar or dissimilar to the
foregoing and whether or not the Lessee shall have notice or knowledge of any of
the foregoing. The parties intend that the obligations of the Lessee hereunder
shall be covenants and agreements that are separate and independent from any
obligations of the Lessor hereunder or under any other Operative Documents and
the obligations of the Lessee shall continue unaffected unless such obligations
shall have been modified or terminated in accordance with an express provision
of this Lease.
6.2 No Termination or Abatement. The Lessee shall remain obligated under
---------------------------
this Lease in accordance with its terms and shall not take any action to
terminate, rescind or avoid this Lease, notwithstanding any action for
bankruptcy, insolvency, reorganization, liquidation, dissolution, or other
proceeding affecting the Lessor, the Agent or any Participant, or any action
with respect to this Lease or any Operative Document which may be taken by any
trustee, receiver or liquidator of the Lessor, the Agent or any Participant or
by any court with respect to the Lessor, the Agent or any Participant. The
Lessee hereby waives all right (i) to terminate or surrender this Lease (except
as provided herein) or (ii) except as otherwise provided in this Lease or the
Participation Agreement
-6-
<PAGE>
with regard to withholding taxes, to avail itself of any abatement, suspension,
deferment, reduction, setoff, counterclaim or defense (other than the defense of
payment) with respect to any Rent. The Lessee shall remain obligated under this
Lease in accordance with its terms and the Lessee hereby waives any and all
rights now or hereafter conferred by statute or otherwise to modify or to avoid
strict compliance with its obligations under this Lease. Notwithstanding any
such statute or otherwise, the Lessee shall be bound by all of the terms and
conditions contained in this Lease.
ARTICLE 7
7.1 Ownership of the Property. (a) It is the intent of the parties hereto
-------------------------
that: (i) this Lease constitutes an "operating lease" pursuant to Statement of
Financial Accounting Standards No. 13, as amended, for purposes of Lessee's
financial reporting, and (ii) for purposes of federal, state, and local income
or franchise taxes and for any other tax imposed on or measured by income, the
transaction contemplated hereby is a financing arrangement and preserves
ownership in the Property in the Lessee. Nevertheless, the Lessee acknowledges
and agrees that neither the Agent, the Lessor nor any Participant has made any
representations or warranties to the Lessee concerning the tax, accounting or
legal characteristics of the Operative Documents and that the Lessee has
obtained and relied upon such tax, accounting and legal advice concerning the
Operative Documents as it deems appropriate. Accordingly, and notwithstanding
any provision of this Lease to the contrary, the Lessor and the Lessee agree and
declare that: (i) the transactions contemplated hereby are intended to have a
dual, rather than a single, form; and (ii) all references in this Lease to the
"lease" of the Property which fail to reference such dual form do so as a matter
of convenience only and do not reflect the intent of the Lessor and the Lessee
as to the true form of such arrangements.
(b) Anything to the contrary in the Operative Documents notwithstanding,
the Lessor and the Lessee intend and agree that with respect to the nature of
the transactions evidenced by this Lease in the context of the exercise of
remedies under the Operative Documents, including, without limitation, in the
case of any insolvency or receivership proceedings or a petition under the
United States bankruptcy laws or any other applicable insolvency laws or statute
of the United States of America or any State or Commonwealth thereof affecting
the Lessee, the Lessor, or any Participant or any enforcement or collection
actions, (i) the transactions evidenced by this Lease are loans made by the
Lessor and the Participants as unrelated third party lenders to the Lessee
secured by the Property, (ii) the obligations of the Lessee under this Lease to
pay Basic Rent and Supplemental Rent or Asset Termination Value in connection
with a purchase of the Property pursuant to this Lease shall be treated as
payments of interest on and principal of, respectively, loans from the Lessor
and the Participants to the Lessee, and (iii) this Lease grants a security
interest and mortgage or deed of trust or lien, as the case may be, in the
Property and the collateral described in the Mortgage to the Lessor, the Agent
and the Participants to secure the Lessee's performance under and payment of all
amounts under this Lease and the other Operative Documents.
(c) Specifically, without limiting the generality of subsection (b) of this
--------------
Section 7.1, the Lessor and the Lessee further intend and agree that, for the
- - -----------
purpose of securing the Lessee's
-7-
<PAGE>
obligations for the repayment of the above-described loans from the Lessor and
the Participants to the Lessee, (i) this Lease shall also be deemed to be a
security agreement and financing statement within the meaning of Article 9 of
the Uniform Commercial Code (and specifically, a construction mortgage, as said
term is defined in Section 9-313(1)(c) of the Uniform Commercial Code) and a
real property mortgage or deed of trust; (ii) the conveyance provided for in
Article II shall be deemed to be a grant by the Lessee to the Lessor, the Agent
- - ----------
and the Participants of a mortgage lien and security interest in all of the
Lessee's right, title and interest in and to the Property and the collateral
described in the Mortgage and all proceeds of the conversion, voluntary or
involuntary, of the foregoing into cash, investments, securities or other
property, whether in the form of cash, investments, securities or other property
(it being understood that the Lessee hereby mortgages and warrants and grants a
security interest in the Property and the collateral described in the Mortgage
to the Lessor, the Agent and the Participants to secure such loans); (iii) the
possession by the Lessor or any of its agents of notes and such other items of
property as constitute instruments, money, negotiable documents or chattel paper
shall be deemed to be "possession by the secured party" for purposes of
perfecting the security interest pursuant to Section 9-305 of the Uniform
Commercial Code; and (iv) notifications to Persons holding such property, and
acknowledgments, receipts or confirmations from financial intermediaries,
bankers or agents (as applicable) of the Lessee shall be deemed to have been
given for the purpose of perfecting such security interest under Applicable Law.
The Lessor and the Lessee shall, to the extent consistent with this Lease, take
such actions and execute, deliver, file and record such other documents,
financing statements, mortgages and deeds of trust as may be necessary to ensure
that, if this Lease were deemed to create a security interest in the Property in
accordance with this Section, such security interest would be deemed to be a
perfected security interest of first priority under Applicable Law and will be
maintained as such throughout the Term.
(d) Specifically, without limiting the generality of anything contained in
this Section 7.1, the Lessor and the Lessee further intend and agree that, for
-----------
purposes of filing federal, state and local returns, reports and other
statements relating to income or franchise taxes, or any other taxes imposed
upon or measured by income, (i) the Lessee shall be entitled to take any
deduction, credit, allowance or other reporting position consistent with its
status as owner of the Property; and (ii) neither the Lessor nor the
Participants shall take a position on their respective federal, state and local
returns, reports and other statements relating to income or franchise taxes that
is inconsistent with the Lessee's status as owner of the Property, provided that
--------
the Lessor and any Participant may take a position that is inconsistent with the
Lessee's status as owner of the Property if: (x) there has been a change in law
or regulation so requiring as supported by an opinion of counsel reasonably
acceptable to the Lessee that there is not substantial authority for such a
consistent reporting position; or (y) (A) there has been an administrative or
judicial holding that the Lessee is not the owner of the Property for such tax
purposes, (B) the Lessee has no right to contest such holding pursuant to
Section 13.5 of the Participation Agreement, and (C) the Lessee's lack of right
- - ------------
to contest is not the result of an Indemnitee's waiver of its right to
indemnification pursuant to Section 13.5(f)(iii) of the Participation Agreement
--------------------
or failure of the amount at issue to exceed the minimum amount set forth in
Section 13.5(f)(iv)(B) of the Participation Agreement.
- - ----------------------
-8-
<PAGE>
ARTICLE 8
8.1 Condition of the Property. THE LESSEE ACKNOWLEDGES AND AGREES THAT
-------------------------
ALTHOUGH THE LESSOR WILL HOLD FEE TITLE TO THE PROPERTY, THE LESSEE IS SOLELY
RESPONSIBLE FOR THE IMPROVEMENTS AND ANY ALTERATIONS OR MODIFICATIONS. THE
LESSEE FURTHER ACKNOWLEDGES AND AGREES THAT IT IS LEASING THE PROPERTY "AS IS"
WITHOUT REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) BY THE LESSOR,
THE AGENT OR ANY PARTICIPANT AND IN EACH CASE SUBJECT TO (A) THE EXISTING STATE
OF TITLE, (B) THE RIGHTS OF ANY PARTIES IN POSSESSION THEREOF, (C) ANY STATE OF
FACTS WHICH AN ACCURATE SURVEY OR PHYSICAL INSPECTION MIGHT SHOW, AND (D)
VIOLATIONS OF REQUIREMENTS OF LAW WHICH MAY EXIST ON THE DATE HEREOF. NEITHER
THE LESSOR, THE AGENT NOR ANY PARTICIPANT HAS MADE OR SHALL BE DEEMED TO HAVE
MADE ANY REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) OR SHALL BE
DEEMED TO HAVE ANY LIABILITY WHATSOEVER AS TO THE TITLE (INCLUDING BUT NOT
LIMITED TO ANY IMPLIED LIABILITY RELATING TO A COVENANT OF QUIET ENJOYMENT,
WHICH THE LESSEE HEREBY EXPRESSLY WAIVES), VALUE, HABITABILITY, USE, CONDITION,
DESIGN, OPERATION, OR FITNESS FOR USE OF THE PROPERTY (OR ANY PART THEREOF), OR
ANY OTHER REPRESENTATION, WARRANTY OR COVENANT WHATSOEVER, EXPRESS OR IMPLIED,
WITH RESPECT TO THE PROPERTY (OR ANY PART THEREOF) AND NEITHER THE LESSOR, THE
AGENT NOR ANY PARTICIPANT SHALL BE LIABLE FOR ANY LATENT, HIDDEN, OR PATENT
DEFECT THEREIN OR THE FAILURE OF THE PROPERTY, OR ANY PART THEREOF, TO COMPLY
WITH ANY REQUIREMENT OF LAW. THE FOREGOING IS SUBJECT TO THE PROVISIONS OF
SECTION 5.1 HEREOF.
8.2 Possession and Use of the Property. The Property may be used only for
----------------------------------
such purposes as are permitted by Applicable Law and consistent with all
Insurance Requirements and in compliance with any covenants, conditions and
restrictions of record and any ordinance or law affecting the use and occupancy
of the Property; and provided that such uses do not Materially increase the
liability, directly or indirectly, of the Lessor or Materially adversely affect
the value, utility or remaining useful life of the Property from that which
would obtain if the Property were to be used in a semiconductor wafer
manufacturing facility. The Lessee shall pay, or cause to be paid, all charges
and costs required in connection with the use of the Property as contemplated by
this Lease and the Construction Agency Agreement. The Lessee shall not commit
or permit any waste of the Property or any part thereof (provided, that waste
shall not include ordinary wear and tear and damage by fire or other peril).
ARTICLE 9
-9-
<PAGE>
9.1 Compliance with Requirements of Law and Insurance Requirements.
--------------------------------------------------------------
Subject to the terms of Article XIII relating to permitted contests, the Lessee,
------------
at its sole cost and expense, shall (a) comply with all Requirements of Law
(including all Environmental Laws) and comply with all Insurance Requirements
relating to the Property, including the construction, use, operation,
maintenance, repair and restoration thereof and the remarketing thereof pursuant
to Article XXII, whether or not compliance therewith shall require structural or
------------
extraordinary changes in the Improvements or interfere with the use and
enjoyment of the Property, and (b) procure, maintain and comply with all
licenses, permits, orders, approvals, consents and other authorizations required
for the construction, use, maintenance and operation of the Property and for the
use, operation, maintenance, repair and restoration of the Improvements.
ARTICLE 10
10. Maintenance and Repair; Return. (a) Except for ordinary wear and tear,
------------------------------
the Lessee, at its sole cost and expense, shall maintain the Property in good
working order, mechanical condition and repair and make all necessary repairs
thereto, of every kind and nature whatsoever, whether interior or exterior,
ordinary or extraordinary, structural or nonstructural or foreseen or
unforeseen, in each case as required by all Requirements of Law and Insurance
Requirements and on a basis consistent with the operation and maintenance of
commercial properties comparable in type and location to the Property and in
compliance with prudent industry practice.
(b) The Lessor shall under no circumstances be required to build any
improvements on the Property, make any repairs, replacements, alterations or
renewals of any nature or description to the Property, make any expenditure
whatsoever in connection with this Lease (except for Advances required under the
Participation Agreement) or maintain the Property in any way. The Lessor shall
not be required to maintain, repair or rebuild all or any part of the Property,
and the Lessee waives any right to (i) require the Lessor to maintain, repair,
or rebuild all or any part of the Property, or (ii) make repairs at the expense
of the Lessor pursuant to any Requirement of Law, Insurance Requirement,
contract, agreement, or covenant, condition or restriction in effect at any time
during the Term.
(c) The Lessee shall, upon the expiration or earlier termination of this
Lease, vacate and surrender the Property to the Lessor in its then-current, "AS
IS" condition, subject to the Lessee's obligations under Sections 9.1, 10.1(a),
------------ -------
11.1, 12.1, 15.1(e), 15.2, 20.1, 22.1 and 23.1.
- - ---- ---- ------- ---- ---- ---- ----
(d) The Lessee warrants that it shall cause the Improvements currently
under construction or currently planned to be constructed on the Property to be
designed and constructed in a workmanlike manner and in accordance with all
Requirements of Law, prior to the Outside Completion Date so that, prior to such
date, such Improvements will be fit for their intended purpose.
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<PAGE>
ARTICLE 11
11.1. Modifications, Substitutions and Replacements. (a) The Lessee, at
---------------------------------------------
its sole cost and expense, may at any time and from time to time make
alterations, renovations, improvements and additions to the Property or any part
thereof and substitutions and replacements therefor (collectively,
"Modifications"); provided that: (i) no Modification shall Materially impair the
- - -------------- --------
value, utility or useful life of the Property or any part thereof from that
which existed immediately prior to such Modification; (ii) the Modification
shall be done expeditiously and in a good and workmanlike manner; (iii) the
Lessee shall comply with all Requirements of Law (including all Environmental
Laws) and comply with all Insurance Requirements applicable to the Modification,
including the obtaining of all permits and certificates of occupancy, and the
structural integrity of the Property shall not be adversely affected; (iv)
subject to the terms of Article XIII relating to permitted contests, the Lessee
------------
shall pay all costs and expenses and shall discharge (or cause to be insured or
bonded over) within sixty (60) days after the same shall be filed (or otherwise
become effective) any Liens arising with respect to the Modification; and (v)
such Modifications shall comply with Sections 8.2 and 10.1. All Modifications
------------ ----
(other than those that both are not Modifications required to be made pursuant
to a Requirement of Law or an Insurance Requirement ("Required Modification")
---------------------
and are readily removable without impairing the value, utility or remaining
useful life of the Property) shall remain part of the realty and shall be
subject to this Lease, and title thereto shall immediately vest in the Lessor.
So long as no Lease Event of Default has occurred and is continuing, the Lessee
may place upon the Property any trade fixtures, machinery, equipment or other
property belonging to the Lessee or third parties and may remove the same at any
time during the Term, subject, however, to the terms of Section 10.1(a);
---------------
provided that such trade fixtures, machinery, equipment or other property do not
- - --------
impair the value, utility or remaining useful life of the Property; provided,
--------
further, that the Lessee shall keep and maintain at the Property and shall not
- - -------
remove from the Property any Equipment.
(b) The Lessee shall deliver to the Lessor and the Agent a brief written
narrative of the work to be done in connection with any Modification to the
Property the cost of which is anticipated to exceed $500,000 in the aggregate.
ARTICLE 12
12.1. Warranty of Title. (a) The Lessee agrees that except as otherwise
-----------------
provided herein and subject to the terms of Article XIII relating to permitted
------------
contests, the Lessee shall not directly or indirectly create or allow to remain,
and shall promptly discharge at its sole cost and expense, any Lien, defect,
attachment, levy, title retention agreement or claim upon the Property (or the
Lessor's interest therein) or any Modifications or any Lien, attachment, levy or
claim with respect to the Rent or with respect to any amounts held by the Agent
pursuant to the Participation Agreement or the other Operative Documents, other
than Permitted Exceptions and Lessor Liens.
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<PAGE>
(b) Nothing contained in this Lease shall be construed as constituting the
consent or request of the Lessor, expressed or implied, to or for the
performance by any contractor, mechanic, laborer, materialman, supplier or
vendor of any labor or services or for the furnishing of any materials for any
construction, alteration, addition, repair or demolition of or to the Property
or any part thereof. NOTICE IS HEREBY GIVEN THAT NEITHER THE LESSOR, ANY
PARTICIPANT NOR THE AGENT IS OR SHALL BE LIABLE FOR ANY LABOR, SERVICES OR
MATERIALS FURNISHED OR TO BE FURNISHED TO THE LESSEE OR TO ANYONE HOLDING THE
PROPERTY OR ANY PART THEREOF THROUGH OR UNDER THE LESSEE AND THAT NO MECHANIC'S
OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR
AFFECT THE INTEREST OF THE LESSOR IN AND TO THE PROPERTY.
12.2. Grants and Releases of Easements. Provided that no Lease Event of
--------------------------------
Default shall have occurred and be continuing and subject to the provisions of
Articles VIII, IX, X and XI, the Lessor hereby consents in each instance to the
following actions by the Lessee, in the name and stead of the Lessor, but at the
Lessee's sole cost and expense: (a) the granting of easements, licenses, rights-
of-way and other rights and privileges in the nature of easements reasonably
necessary or desirable for the completion of construction of the Improvements,
use, repair, operation or maintenance of the Property as herein provided; (b)
the release of existing easements or other rights in the nature of easements
which are for the benefit of the Property; (c) the execution of petitions to
have the Property annexed to any municipal corporation or utility district; and
(d) the execution of amendments to any covenants and restrictions affecting the
Property; provided, however, in each case the Lessee shall have delivered to the
-------- -------
Lessor a Responsible Officer's Certificate stating that (i) such grant, release,
dedication or transfer does not materially impair the value, utility and
remaining useful life of the Property, (ii) such grant, release, dedication or
transfer is reasonably necessary in connection with the completion of
construction of the Improvements, use, operation maintenance, alteration or
improvement of the Property, (iii) the Lessee shall remain obligated under this
Lease and under any instrument executed by the Lessee consenting to the
assignment of the Lessor's interest in this Lease as security for indebtedness,
in each such case in accordance with their terms, as though such grant, release,
dedication or transfer, had not been effected, and (iv) the Lessee shall pay and
perform any obligations of the Lessor under such grant, release, dedication or
transfer, and (v) such easements, rights-of-way and other rights shall be
subordinate and subject to the Lien of the Mortgage. Without limiting the
effectiveness of the foregoing, provided that no Lease Event of Default shall
have occurred and be continuing, the Lessor shall, upon the request of the
Lessee, and at the Lessee's sole cost and expense, execute and deliver any
instruments necessary or appropriate to confirm any such grant, release,
dedication or transfer to any Person permitted under this Section 12.2.
------------
ARTICLE 13
13.1. Permitted Contests Other Than in Respect of Indemnities. Except to
-------------------------------------------------------
the extent otherwise provided for in Section 13 of the Participation Agreement,
the Lessee, on its own or on the Lessor's behalf but at the Lessee's sole cost
and expense, may contest, by appropriate
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<PAGE>
administrative or judicial proceedings conducted in good faith and with due
diligence, the amount, validity or application, in whole or in part, of any
Requirement of Law, or utility charges payable pursuant to Section 4.1 or any
-----------
Lien, attachment, levy, encumbrance or encroachment, and the Lessor agrees not
to pay, settle or otherwise compromise any such item, provided that (a) the
commencement and continuation of such proceedings shall suspend the collection
thereof from, and suspend the enforcement thereof against, the Property, the
Lessor, the Agent and the Participants or the Lessee shall have bonded or
otherwise secured such amount in a manner satisfactory to the Lessor and the
Agent; (b) there shall be no risk of the imposition of a Lien (other than
Permitted Exceptions) on the Property and no part of the Property nor any Rent
would be in any danger of being sold, forfeited, lost or deferred; (c) at no
time during the permitted contest shall there be a risk of the imposition of
criminal liability or material civil liability on the Lessor, the Agent or any
Participant for failure to comply therewith (unless, in the case of civil
liability, the Lessee shall have bonded or otherwise secured such amount in a
manner satisfactory to the Lessor and the Agent); and (d) in the event that, at
any time, there shall be a material risk of extending the application of such
item beyond the end of the Term, then the Lessee shall deliver to the Lessor a
Responsible Officer's Certificate certifying as to the matters set forth in
clauses (a), (b) and (c) of this Section 13.1. The Lessor, at the Lessee's sole
------------
cost and expense, shall execute and deliver to the Lessee such authorizations
and other documents as may reasonably be required in connection with any such
contest and, if reasonably requested by the Lessee, shall join as a party
therein at the Lessee's sole cost and expense.
ARTICLE 14
14.1. Public Liability and Workers' Compensation Insurance. During the
----------------------------------------------------
Term, the Lessee shall procure and carry, at the Lessee's sole cost and expense,
commercial general liability insurance, including contractual liability, for
claims for injuries or death sustained by persons or damage to property while on
the Property and such other public liability coverages as are ordinarily
procured by Persons who own or operate similar properties and consistent with
prudent business practice, which policies shall include contractual liability
endorsements covering the Lessee's indemnification obligations in Section 14.4.
------------
Such insurance shall be on terms and in amounts (which shall be reasonably
acceptable to the Lessor and in the event of liability insurance shall not
require coverage in excess of $10,000,000) that are no less favorable than
insurance maintained by the Lessee with respect to similar properties that it
owns and that are in accordance with prudent business practice and may be
provided under blanket policies maintained by or on behalf of the Lessee. The
policy shall be endorsed to name the Lessor, the Agent and each Participant as
additional insureds. The policy shall also specifically provide that the policy
shall be considered primary insurance which shall apply to any loss or claim
before any contribution by any insurance which the Lessor, the Agent or the
Participants may have in force. The Lessee shall, in the construction of the
Improvements and the operation of the Property (including in connection with any
Modifications thereof) comply with the applicable workers' compensation laws and
protect the Lessor, the Agent and the Participants against any liability under
such laws.
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<PAGE>
14.2. Hazard and Other Insurance. During the Term, the Lessee shall keep,
--------------------------
or cause to be kept, the Property insured against loss or damage by fire, flood,
and other risks in an amount not less than the then current replacement cost of
the buildings and improvements on the Property and on terms that are no less
favorable than insurance covering other similar properties owned or leased by
the Lessee or any of its Affiliates and that are in accordance with prudent
business practice. The Lessee may provide such coverage under blanket policies
maintained by the Lessee. During the construction of any Improvements the
Lessee shall also maintain builders' risk insurance. Each policy of insurance
maintained by the Lessee pursuant to this Section 14.2 shall provide that all
------------
insurance proceeds in respect of any loss or occurrence shall be paid to and
adjusted solely by the Lessee except from and after the date on which the
insurer receives written notice from the Lessor or the Agent that a Lease Event
of Default exists (and unless and until such insurer receives written notice
from the Lessor or the Agent that all Lease Events of Default have been cured),
all losses shall be adjusted solely by, and all insurance proceeds shall be paid
solely to, the Agent (or the Lessor if the Participation Interests have been
fully paid) for application pursuant to Article XV.
----------
14.3. Coverage. (a) The Lessee shall furnish the Lessor and the Agent with
--------
certificates showing the insurance required under Sections 14.1 and 14.2 to be
------------- ----
in effect and naming the Lessor, the Agent and each Participant as additional
insureds and, with respect to the insurance required under Section 14.2, loss
------------
payees, and showing the mortgagee endorsement required by Section 14.3(c). All
---------------
such insurance shall be at the cost and expense of the Lessee. Such
certificates shall include a provision for thirty (30) days' advance written
notice by the insurer to the Lessor and the Agent in the event of cancellation
of or any significant reduction in the coverage provided by such insurance.
(b) The Lessee agrees that the insurance policy or policies required by
Sections 14.1 and 14.2 shall include (i) an appropriate clause pursuant to which
- - ------------- ----
such policy shall provide that it will not be invalidated should the Lessee
waive, in writing, prior to a loss, any or all rights of recovery against any
party for losses covered by such policy, and that the insurance in favor of the
Lessor, the Agent and the Participants, and their respective rights under and
interests in said policies shall not be invalidated or reduced by any act or
omission or negligence of the Lessee or any other Person having any interest in
the Property, and (ii) a so-called "Waiver of Subrogation Clause". The Lessee
hereby waives any and all such rights against the Lessor, the Agent and the
Participants to the extent of payments made under such policies. The Lessor
hereby waives all such rights against the Lessee to the extent of payments made
to the Lessor under any of such policies.
(c) All such insurance shall be written by reputable insurance companies
that are financially sound and solvent and otherwise reasonably appropriate
considering the amount and type of insurance being provided by such companies.
Any insurance company selected by the Lessee which is rated in Best's Key Rating
Guide or any successor thereto (or if there be none, an organization having a
similar national reputation) shall have a general policyholder rating of "A" and
a financial rating of at least 12 in Best's Key Rating Guide or be otherwise
acceptable to the Lessor, the Agent and the Required Participants. All
insurance policies required by Section 14.2 shall include a standard form
------------
mortgagee endorsement in favor of the Agent.
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<PAGE>
(d) The Lessor shall not carry separate insurance concurrent in kind or
form or contributing in the event of loss with any insurance required under this
Article XIV except that the Lessor may carry separate liability insurance (at
- - -----------
its sole cost) so long as (i) the Lessee's insurance is designated as primary
and in no event excess or contributory to any insurance the Lessor may have in
force which would apply to a loss covered under the Lessee's policy and (ii)
each such insurance policy will not cause the Lessee's insurance required under
this Article XIV to be subject to a coinsurance exception of any kind.
-----------
(e) The Lessee shall pay as they become due all premiums for the insurance
required by Section 14.1 and Section 14.2, and shall renew or replace each
------------ ------------
policy prior to the expiration date thereof. Throughout the Term, at the time
each of the Lessee's insurance policies is renewed (but in no event less
frequently than once each year), the Lessee shall deliver to the Lessor and the
Agent certificates of insurance evidencing that all insurance required by this
Article XIV is being maintained by the Lessee with respect to the Property and
- - -----------
is in effect.
(f) Notwithstanding the other provisions of this Article XIV, the Lessee
-----------
may provide the insurance coverage required under this Article XIV through its
-----------
self-insurance program, so long as the Lessee remains in compliance with the
Minimum Consolidated Tangible Net Worth covenant in Section 10.1(g) of the
---------------
Participation Agreement.
(g) The Lessee hereby waives, releases and discharges the Lessor, the Agent
and each Participant and their agents and employees from all claims whatsoever
arising out of loss, claim, expense or damage to or destruction covered or
coverable by insurance required under this Article XIV notwithstanding that such
-----------
loss, claim, expense or damage may have been caused by the Lessor, the Agent or
any Participant or any of their agents or employees, and the Lessee agrees to
look to the insurance coverage only in the event of such loss. The Lessor
hereby waives, releases and discharges the Lessee and its agents and employees
from all claims whatsoever arising out of loss, claim, expense, or damage to or
destruction covered by insurance required under this Article XIV to the extent
-----------
of payments made to the Lessor notwithstanding that such loss, claim, expense or
damage may have been caused by the Lessee or any of its agents or employees.
14.4. Indemnification. In addition to the indemnification provisions
---------------
provided for in Section 13 of the Participation Agreement, to the fullest extent
allowed by law, the Lessee shall at all times during the Term, and to the extent
resulting from acts or events occurring prior to or during the Term or during
any other period when the Lessee is in possession and control of the Property,
indemnify, defend and hold each Indemnitee harmless against and from any and all
Claims by or on behalf of any Person arising from the construction of the
Improvements or conduct or management, or from any work or things whatsoever
done in or about the Property, and will further indemnify, defend and hold each
Indemnitee harmless against and from any and all Claims arising during the Term
of this Lease, from any condition of the Property, the Improvements or any
street, curb or sidewalk adjoining the Property, or of any passageways or space
therein or appurtenant thereto, or arising from any breach or default on the
part of the Lessee in the performance of any covenant or
-15-
<PAGE>
agreement on the part of the Lessee to be performed, pursuant to the terms of
this Lease or the Construction Agency Agreement, or arising from any act or
negligence of the Lessee, its agents, servants, employees or licensees, or
arising from any accident, injury or damage whatsoever caused to any Person
occurring during the term of this Lease, in or about the Property, or upon the
sidewalk and the land adjacent thereto, other than any Claim resulting from a
voluntary act or omission of the Lessor not in compliance with any of the terms
of the Operative Documents not caused by or attributable to acts or omissions of
the Lessee or any third party. Any action, suit or proceeding in respect of any
such Claim shall be handled in the manner set forth in Section 13.4 of the
Participation Agreement.
ARTICLE 15
15.1. Casualty and Condemnation. (a) Subject to the provisions of this
-------------------------
Article XV and Article XVI (in the event the Lessee delivers, or is obligated to
- - ---------- -----------
deliver, a Termination Notice), and prior to the occurrence and continuation of
a Lease Default, the Lessee shall be entitled to receive (and the Lessor shall
pay over to the Lessee, if received by the Lessor, and hereby irrevocably
assigns to the Lessee all of the Lessor's right, title and interest in) any
award, compensation or insurance proceeds to which the Lessee or the Lessor may
become entitled by reason of their respective interests in the Property (i) if
all or a portion of the Property is damaged or destroyed in whole or in part by
a Casualty or (ii) if the use, access, occupancy, easement rights or title to
the Property or any part thereof, is the subject of a Condemnation; provided,
--------
however, if a Lease Default shall have occurred and be continuing, such award,
- - -------
compensation or insurance proceeds shall be paid directly to the Agent or, if
received by the Lessee, shall be held in trust for the Agent, and shall be paid
over by the Lessee to the Agent (or, if the Participation Interests have been
fully paid, to the Lessor) and held in accordance with the terms of this
paragraph (a). If, contrary to such provision, any such award, compensation or
- - -------------
insurance proceeds are paid to the Lessor or the Lessee rather than to the
Agent, the Lessor and the Lessee, as the case may be, hereby agree to transfer
any such payment to the Agent. All amounts held by the Lessor or the Agent when
a Lease Default exists hereunder on account of any award, compensation or
insurance proceeds either paid directly to the Lessor or the Agent or turned
over to the Lessor or the Agent shall either be (i) paid to the Lessee for the
repair of damage caused by such Casualty or Condemnation in accordance with
paragraph (e) of this Section 15.1, or (ii) applied to the purchase price of the
- - ------------- ------------
Property on the Termination Date, with any Excess Proceeds being payable to the
Lessee.
(b) The Lessee may appear in any proceeding or action to negotiate,
prosecute, adjust or appeal any claim for any award, compensation or insurance
payment on account of any such Casualty or Condemnation and shall pay all
expenses thereof. At the Lessee's reasonable request, and at the Lessee's sole
cost and expense, the Lessor and the Agent shall participate in any such
proceeding, action, negotiation, prosecution or adjustment. The Lessor and the
Lessee agree that this Lease shall control the rights of the Lessor and the
Lessee in and to any such award, compensation or insurance payment.
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<PAGE>
(c) If the Lessor or the Lessee shall receive notice of a Casualty or of an
actual, pending or threatened Condemnation of the Property or any interest
therein, the Lessor or the Lessee, as the case may be, shall give notice thereof
to the other and to the Agent promptly after the receipt of such notice.
(d) In the event of a Casualty or receipt of notice by the Lessee or the
Lessor of a Condemnation, the Lessee may deliver to the Lessor and the Agent a
Termination Notice with respect to the Property pursuant to Section 16.1. If the
------------
Lessee does not deliver a Termination Notice within ninety (90) days after such
occurrence, then this Lease shall (subject to the terms and conditions thereof)
remain in full force and effect, and the Lessee shall, at the Lessee's sole cost
and expense, promptly and diligently restore the Property pursuant to paragraph
---------
(e) of this Section 15.1 and otherwise in accordance with this Lease. If the
- - --- ------------
Lessee delivers a Termination Notice within ninety (90) days after such
occurrence, a Significant Event shall irrevocably be deemed to have occurred
with respect to the Property, and, in such event, this Lease shall terminate and
the Lessee shall purchase the Property on the next Payment Date (or, if such
Payment Date is within fifteen (15) days of the Lessor's receipt of such
Termination Notice, on the Payment Date next following such Payment Date) (a
"Termination Date") pursuant to Article XVI hereof.
- - ----------------- -----------
(e) If pursuant to this Section 15.1 this Lease shall continue in full
------------
force and effect following a Casualty or Condemnation, the Lessee shall, at its
sole cost and expense (and, without limitation, if any award, compensation or
insurance payment is not sufficient to restore the Property in accordance with
this paragraph, the Lessee shall pay the shortfall), promptly and diligently
repair any damage to the Property caused by such Casualty or Condemnation or
substitute new Equipment for the affected Equipment in conformity with the
requirements of Sections 10.1 and 11.1 using the as-built Plans and
------------- ----
Specifications for the Property (as modified to give effect to any subsequent
Modifications, any Condemnation affecting the Property and all applicable
Requirements of Law) so as to restore the Property to at least the same
condition, operation, function and value as existed immediately prior to such
Casualty or Condemnation; provided, the substitution of any Equipment for any
--------
such affected Equipment shall, at the Lessor's reasonable request, be subject to
delivery of an independent third-party appraisal reasonably satisfactory to the
Lessor and the Required Participants by an appraiser satisfactory to the Lessor
and the Required Participants showing both (i) a current Fair Market Sales Value
and (ii) expected Fair Market Sales Value as of the then current Expiration Date
and the dates on which any potential Renewal Term would expire, in each case
equal to or greater than such values at such dates for the Equipment being
replaced. In the event of such restoration, title to the Property shall remain
with the Lessor; provided, that (i) title to any such substituted equipment
--------
shall vest in the Lessor and such equipment shall constitute Equipment
thereafter for all purposes of this Lease, and (ii) the Lessor shall assign all
of its right, title and interest to the Lessee in any such replaced equipment
without representation or warranty of any kind other than that such equipment is
free of Lessor Liens. Upon completion of such restoration, the Lessee shall
furnish the Lessor an architect's certificate of substantial completion and a
Responsible Officer's Certificate confirming that such restoration has been
completed pursuant to this Lease.
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<PAGE>
(f) In no event shall a Casualty or Condemnation with respect to which this
Lease remains in full force and effect under this Section 15.1 affect the
------------
Lessee's obligations to pay Rent pursuant to Section 3.1 or to perform its
-----------
obligations and pay any amounts due on the Expiration Date or pursuant to
Articles XIX and XX.
- - ------------ --
(g) Any Excess Proceeds received by the Lessor or the Agent in respect of a
Casualty or Condemnation shall be turned over to the Lessee, provided that no
Lease Event of Default or Lease Default has occurred and is continuing. Any
Excess Proceeds which are not turned over to the Lessee due to the existence of
a Lease Event of Default or a Lease Default shall be applied against the
Lessee's obligations under the Lease.
15.2. Environmental Matters. Promptly upon the Lessee's actual knowledge
---------------------
of the presence of Hazardous Substances in any portion of the Property in
concentrations and conditions that constitute an Environmental Violation, the
Lessee shall notify the Lessor in writing of such condition. In the event of
such Environmental Violation, the Lessee shall, not later than thirty (30) days
after the Lessee has actual knowledge of such Environmental Violation, either,
if such Environmental Violation is a Significant Event, deliver to the Lessor
and the Agent a Responsible Officer's Certificate and a Termination Notice with
respect to the Property pursuant to Section 16.1, or, if such Environmental
Violation is not a Significant Event, at the Lessee's sole cost and expense,
promptly and diligently commence any Response Actions necessary to investigate,
remove, clean up or remediate the Environmental Violation in accordance with the
terms of Section 9.1. If the Lessee does not deliver a Termination Notice with
-----------
respect to the Property pursuant to Section 16.1, the Lessee shall, upon
completion of Response Actions by the Lessee, cause to be prepared by an
environmental consultant reasonably acceptable to the Lessor a report describing
the Environmental Violation and the Response Actions taken by the Lessee (or its
agents) for such Environmental Violation, and a statement by the consultant that
the Environmental Violation has been remedied in compliance in all material
respects with applicable Environmental Law. Each such Environmental Violation
shall be remedied prior to the Expiration Date. Nothing in this Article XV shall
----------
reduce or limit the Lessee's obligations under Sections 13.1, 13.2 or 13.3 of
the Participation Agreement.
15.3. Notice of Environmental Matters. Promptly, but in any event within
-------------------------------
the thirty (30) Business Days from the date the Lessee has actual knowledge
thereof, the Lessee shall provide to the Lessor written notice of any material
pending or threatened claim, action or proceeding involving any Environmental
Law or any Release on or in connection with the Property. All such notices
shall describe in reasonable detail the nature of the claim, action or
proceeding and the Lessee's proposed response thereto. In addition, the Lessee
shall provide to the Lessor, within thirty (30) Business Days of receipt, copies
of all material written communications with any Governmental Authority relating
to any Environmental Law in connection with the Property. The Lessee shall also
promptly provide such detailed reports of any such Material environmental claims
as may reasonably be requested by the Lessor and the Agent.
ARTICLE 16
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<PAGE>
16.1. Termination by the Lessee upon Certain Events. If either: (i) the
---------------------------------------------
Lessee or the Lessor shall have received notice of a Condemnation, and the
Lessee shall have delivered to the Lessor a Responsible Officer's Certificate
that such Condemnation is a Significant Condemnation; or (ii) a Casualty occurs,
and the Lessee shall have delivered to the Lessor a Responsible Officer's
Certificate that such Casualty is a Significant Casualty; or (iii) an
Environmental Violation occurs or is discovered and the Lessee shall have
delivered to the Lessor a Responsible Officer's Certificate stating that, in the
reasonable, good-faith judgment of the Lessee, the cost to remediate the same
will cause the same to be a Significant Event, or (iv) if the Lessee shall not
have delivered a Termination Notice with respect to such Environmental Violation
described in clause (iii) but the requirements of Section 16.4 are met with
respect to such Environmental Violation; then, (A) the Lessee shall,
simultaneously with the delivery of the Responsible Officer's Certificate
pursuant to the preceding clause (i), (ii) or (iii) deliver a written notice in
---------- ---- -----
the form described in Section 16.2(a) (a "Termination Notice"), or (B) if clause
--------------- ------------------
(iv) is applicable, the Lessor may deliver Termination Notice pursuant to
Section 16.4.
16.2. Procedures. (a) A Termination Notice shall contain: (i) notice of
----------
termination of this Lease with respect to the Property or the affected portion
thereof on a date that is no later than thirty (30) days after the occurrence of
the applicable event described in clause (i), (ii) or (iii) of Section 16.1 (the
---------- ---- ----- ------------
"Termination Date"), such termination to be effective upon the Lessee's payment
----------------
of the Asset Termination Value (or portion thereof representing the Property
Cost of the affected portion of the Property) (offsetting against such amount
the aggregate amount of the Defeasance Deposit Collateral and Cash Collateral,
if any); and (ii) a binding and irrevocable agreement of the Lessee to pay the
Asset Termination Value (offsetting against such amount the aggregate amount of
the Defeasance Deposit Collateral and Cash Collateral, if any), and purchase the
Property on the Termination Date.
(b) On the Termination Date, the Lessee shall pay to the Lessor the Asset
Termination Value (or such portion thereof, as applicable), plus all other
amounts owing in respect of Rent for the Property (including Supplemental Rent)
theretofore accruing, and the Lessor shall convey the Lessor's interest in the
Property or such portion thereof to the Lessee (or the Lessee's designee) all in
accordance with Section 19.1, as well as any Net Proceeds with respect to the
------------
Casualty or Condemnation giving rise to the termination of this Lease with
respect to the Property theretofore received by the Lessor.
16.3. Termination by the Lessor upon Certain Events. If the Lessor
---------------------------------------------
reasonably determines that any change in, or change in the interpretation of,
any applicable law after the date hereof would result in it or any Participant
being unable to continue to hold legal or beneficial title to all or any portion
of the Property or, except as provided in Section 16.4 hereof, subject it or any
------------
Participant to onerous regulations or onerous liability on account thereof, the
Lessor may deliver a Termination Notice with respect to the Lease to the Agent,
the Participants and the Lessee, such termination to be effective on the
Termination Date specified therein. In the event the Lessor exercises its
termination option, the Lessee may exercise the Remarketing Option provided in
Section 22.1 hereof
- - ------------
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<PAGE>
by giving notice to the Lessor within ten (10) Business Days of receipt of the
notice from the Lessor. If the Lessee does not exercise its Remarketing Option,
the Lessee shall be obligated to purchase the Property in accordance with
Section 20.2 hereof on the Termination Date for the purchase price set forth
- - ------------
therein.
16.4. Purchase of Property. Upon receipt of any notice pursuant to Section
-------------------- -------
15.2 or 15.3, the Lessor or the Required Participants, at the Lessee's expense,
- - ------------
shall have the right to select an independent environmental consultant
acceptable to the Lessee, which acceptance shall not be unreasonably withheld or
delayed, to determine the estimated cost of conducting any clean-up or
remediation required as a result of the Environmental Violation disclosed in
such notice. If such independent environmental consultant determines that the
cost of any such clean-up or remediation would exceed $5,000,000, the Lessor
shall, at the direction of the Required Participants, by written notice require
the Lessee to purchase, or arrange for an Affiliate or other third party to
purchase, the Property on the Expiration Date by delivering a Termination Notice
following the requirements of Section 16.2 hereof.
------------
ARTICLE 17
17.1. Lease Events of Default. The occurrence of any one or more of the
-----------------------
following events (whether such event shall be voluntary or involuntary or come
about or be effected by operation of law or pursuant to or in compliance with
any judgment, decree or order of any court or any order, rule or regulation of
any administrative or governmental body) shall constitute a "Lease Event of
--------------
Default":
- - -------
(a) the Lessee shall fail to make payment of (i) any Basic Rent (other than
a payment of Basic Rent due on the Expiration Date or Termination Date) within
five (5) Business Days after the same has become due and payable or (ii) Basic
Rent, Purchase Option Price, Asset Termination Value or Residual Value Guarantee
Amount or other amounts due on the Expiration Date or the Termination Date,
including, without limitation, amounts due pursuant to Sections 16.2, 16.3,
------------- ----
16.4, 20.1, 20.2, 20.3 or 22.1, after the same has become due and payable;
- - ---- ---- ---- ---- ----
(b) the Lessee shall fail to make payment of any Supplemental Rent (other
than Supplemental Rent referred to in clause (a) of this Section) due and
----------
payable within thirty (30) days after written notice thereof;
(c) the Lessee shall fail to maintain insurance as required by Article XIV
-----------
of this Lease, and such failure is either a failure to have in force a policy of
insurance substantially meeting the requirements of Article XIV, or if such
policy is in effect, then any deviation of such policy from the requirements of
Article XIV is not cured within thirty (30) days after the earlier of (i)
receipt of written notice thereof or (ii) the Lessee having knowledge thereof;
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<PAGE>
(d) the Lessee shall fail to observe or perform any term, covenant or
condition of the Lessee under this Lease, the Participation Agreement or any
other Operative Document to which it is a party other than those described in
Section 17.1(a), (b),or (c) hereof, or any representation or warranty set forth
- - --------------- --- ---
in this Lease or in any other Operative Document or in any document entered into
in connection herewith or therewith or in any document, certificate or financial
or other statement delivered in connection herewith or therewith shall be false
or inaccurate in any Material way, and such failure or misrepresentation or
breach of warranty shall remain uncured for a period of thirty (30) days after
receipt of written notice thereof; provided, that if such failure to perform is
--------
not capable of being cured within such period but is capable of being cured
within one hundred eighty (180) days after the occurrence of such default and
the Lessee is proceeding diligently to cure such default, the Lessee shall be
entitled to request an additional period (not to exceed one hundred eighty (180)
days from the date of such default) to cure such default, which extended cure
period shall be granted by the Lessor if commercially reasonable to do so;
(e) the Lessee shall (i) admit in writing its inability to pay its debts
generally as they become due, (ii) file a petition under the United States
bankruptcy laws or any other applicable insolvency law or statute of the United
States of America or any State or Commonwealth thereof, (iii) make a general
assignment for the benefit of its creditors, (iv) consent to the appointment of
a receiver of itself or the whole or any substantial part of its property, (v)
fail to cause the discharge of any custodian, trustee or receiver appointed for
the Lessee or the whole or a substantial part of its property within sixty (60)
days after such appointment, or (vi) file a petition or answer seeking or
consenting to reorganization under the United States bankruptcy laws or any
other applicable insolvency law or statute of the United States of America or
any State or Commonwealth thereof;
(f) insolvency proceedings or a petition under the United States bankruptcy
laws or any other applicable insolvency law or statute of the United States of
America or any State or Commonwealth thereof shall be filed against the Lessee
and not dismissed within sixty (60) days from the date of its filing, or a court
of competent jurisdiction shall enter an order or decree appointing, without the
consent of the Lessee, a receiver of the Lessee or the whole or a substantial
part of its property, and such order or decree shall not be vacated or set aside
within sixty (60) days from the date of the entry thereof;
(g) if any of the following shall occur, and the aggregate liability of the
Lessee in respect thereof would exceed $5,000,000: (i) any member of the ERISA
Group shall fail to pay when due an amount or amounts aggregating in excess of
$5,000,000 which it shall have become liable to pay under Title IV of ERISA; or
(ii) notice of intent to terminate a Material Plan shall be filed under Title IV
of ERISA by any member of the ERISA Group, any plan administrator or any
combination of the foregoing; or (iii) the PBGC shall institute proceedings
under Title IV of ERISA to terminate, to impose liability (other than for
premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be
appointed to administer any Material Plan; or a condition shall exist by reason
of which the PBGC would be entitled to obtain a decree adjudicating that any
Material Plan must be terminated; or (iv) there shall occur a complete or
partial withdrawal from, or a default, within the meaning of Section 4219(c)(5)
of ERISA, with respect to, one or more Multiemployer Plans which
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<PAGE>
could cause one or more members of the ERISA Group to incur a current payment
obligation in excess of $5,000,000;
(h) a judgment or order for the payment of money in excess of $1,000,000
shall be rendered against the Lessee or any Subsidiary and such judgment or
order shall continue unsatisfied and unstayed (pursuant to laws, rules or court
orders) for a period of thirty (30) days;
(i) the Guarantor, the Lessee or any of their respective Subsidiaries (i)
shall default in the payment when due, whether at stated maturity or otherwise,
of principal or interest in respect of Indebtedness (other than under the
Operative Documents) or obligations in respect of Off-Balance Sheet Debt having
an aggregate principal amount of $5,000,000 or more; or (ii) shall fail to
perform or observe any other condition or covenant, or any other event shall
occur or condition exist, under any agreement or instrument relating to any such
Indebtedness or Off-Balance Sheet Debt, if the effect of any such failure, event
or condition is to cause, or to permit the holder or holders of such
Indebtedness or beneficiary or beneficiaries of such Indebtedness (or a trustee
or agent on behalf of such holder or holders or beneficiary or beneficiaries) or
the lessor or the lenders under any such Off-Balance Sheet Debt to cause such
Indebtedness or Off-Balance Sheet Debt to be declared to be due and payable
prior to its stated maturity, or cash collateral in respect thereof to be
demanded or, in the case of Off-Balance Sheet Debt, demand that the Lessee
purchase the property covered by such Off-Balance Sheet Debt;
(j) a Guarantee Event of Default shall have occurred and be continuing;
(k) if the Lessee shall not have exercised its Purchase Option pursuant to
Section 20.1 hereof and the Lessee shall have validly exercised its Remarketing
- - ------------
Option pursuant to Section 22.1 hereof, the Lessee shall have failed (A) to
------------
consummate a sale of the Property in the manner provided therein on the
Expiration Date and to pay to the Agent (or such other Person as the Agent may
direct) pursuant to such Section the Residual Value Guarantee Amount and the
other amounts required thereby, or (B) to purchase the Lessor's interest in the
Property on the Expiration Date as provided in Section 20.2 hereof and to pay to
------------
the Lessor the Asset Termination Value therefor on the Expiration Date as
required thereby;
(l) a Construction Agency Agreement Event of Default shall have occurred
and be continuing;
(m) the Lessee shall have abandoned or constructively abandoned all or any
material portion of the Property for a period of thirty (30) consecutive days;
or
(n) an Environmental Violation shall occur that, in the reasonable opinion
of the Lessor and the Required Participants, based on an Environmental Audit,
constitutes a Significant Event and the Lessee shall not, within thirty (30)
days after notice from the Lessor, have delivered a Termination Notice with
respect thereto pursuant to Section 16.1 hereof or, if so delivered, repurchase
------------
of the Property shall not have been consummated on the Termination Date pursuant
to Section 16.2 hereof; or
------------
-22-
<PAGE>
(o) the Lessee shall have elected to or be required to purchase the
Property pursuant to Sections 16.3 or 16.4 hereof and such purchase shall not
---------------------
have been consummated on the Termination Date pursuant to either such Section.
17.2. Remedies. Upon the occurrence of any Lease Event of Default and at
--------
any time thereafter, the Lessor may, so long as such Lease Event of Default is
continuing, do one or more of the following as the Lessor in its sole discretion
shall determine, without limiting any other right or remedy the Lessor may have
on account of such Lease Event of Default (including, without limitation, the
obligation of the Lessee to purchase the Property as set forth in Section 20.3):
-------------
(a) The Lessor may, by notice to the Lessee, rescind or terminate this
Lease only as to all of the Property as of the date specified in such notice;
however, (i) no reletting, reentry or taking of possession of the Property (or
any portion thereof) by the Lessor will be construed as an election on the
Lessor's part to terminate this Lease unless a written notice of such intention
is given to the Lessee, (ii) notwithstanding any reletting, reentry or taking of
possession, the Lessor may at any time thereafter elect to terminate this Lease
for a continuing Lease Event of Default, and (iii) no act or thing done by the
Lessor or any of its agents, representatives or employees and no agreement
accepting a surrender of the Property shall be valid unless the same be made in
writing and executed by the Lessor;
(b) The Lessor may (i) demand that the Lessee, and the Lessee shall upon
the written demand of the Lessor, return the Property promptly to the Lessor in
the manner and condition required by, and otherwise in accordance with all of
the provisions of, Articles VIII, IX and X hereof as if the Property were being
------------- -- -
returned at the end of the Term, and the Lessor shall not be liable for the
reimbursement of the Lessee for any costs and expenses incurred by the Lessee in
connection therewith and (ii) without prejudice to any other remedy which the
Lessor may have for possession of the Property, and to the extent and in the
manner permitted by Applicable Law, enter upon the Property and take immediate
possession of (to the exclusion of the Lessee) the Property or any part thereof
and expel or remove the Lessee and any other Person who may be occupying the
Property, by summary proceedings or otherwise, all without liability to the
Lessee for or by reason of such entry or taking of possession, whether for the
restoration of damage to property caused by such taking or otherwise and, in
addition to the Lessor's other damages, to the extent and in the manner
permitted by Applicable Law with respect to remedies for a breach of a real
estate lease, the Lessee shall be responsible for all costs and expenses
incurred by the Lessor and/or the Agent or the Participants in connection with
any reletting, including, without limitation, brokers' fees and all costs of any
alterations or repairs made by the Lessor;
(c) The Lessor may (i) sell all or any part of the Property at public or
private sale, as the Lessor may determine, free and clear of any rights of the
Lessee and without any duty to account to the Lessee with respect to such action
or inaction or any proceeds with respect thereto (except to the extent required
by clause (ii) below if the Lessor shall elect to exercise its rights
-----------
thereunder) in which event the Lessee's obligation to pay Basic Rent hereunder
for periods commencing after the date of
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<PAGE>
such sale shall be terminated or proportionately reduced, as the case may be;
and (ii) if the Lessor shall so elect, demand that the Lessee pay to the Lessor,
and the Lessee shall pay to the Lessor, on the date of such sale, as liquidated
damages for loss of a bargain and not as a penalty (the parties agreeing that
the Lessor's actual damages would be difficult to predict, but the
aforementioned liquidated damages represent a reasonable approximation of such
amount) (in lieu of Basic Rent due for periods commencing on or after the
Payment Date coinciding with such date of sale (or, if the sale date is not a
Payment Date, the Payment Date next preceding the date of such sale)), an amount
equal to (A) the excess, if any, of (1) the Asset Termination Value calculated
as of such Payment Date (including all Rent due and unpaid to and including such
Payment Date) less the aggregate amount of the Defeasance Deposit Collateral and
Cash Collateral, if any, permitted to be retained by the Lessor, the Agent or
the Participants, over (2) the net proceeds of such sale, if any (that is, after
deducting all costs and expenses incurred by the Lessor, the Agent and the
Participants incident to such conveyance, including, without limitation,
repossession costs, brokerage commissions, prorations, transfer taxes, fees and
expenses for counsel, title insurance fees, survey costs, recording fees, and
any repair or alteration costs); plus (B) interest at the Overdue Rate on the
foregoing amount from such Payment Date until the date of payment;
(d) The Lessor may, at its option, not terminate the Lease with respect to
the Property, and continue to collect all Basic Rent, Supplemental Rent, and all
other amounts due the Lessor (together with all costs of collection) and enforce
the Lessee's obligations under this Lease as and when the same become due, or
are to be performed, and at the option of the Lessor, upon any abandonment of
the Property by the Lessee or re-entry of same by the Lessor, the Lessor may, in
its sole and absolute discretion, elect not to terminate this Lease and may make
such reasonable alterations and necessary repairs in order to relet the
Property, and relet the Property or any part thereof for such term or terms
(which may be for a term extending beyond the Term of this Lease) and at such
rental or rentals and upon such other terms and conditions as the Lessor in its
reasonable discretion may deem advisable; and upon each such reletting all
rentals actually received by the Lessor from such reletting shall be applied to
the Lessee's obligations hereunder and the other Operative Documents in such
order, proportion and priority as the Lessor may elect in the Lessor's sole and
absolute discretion. If such rentals received from such reletting during any
period be less than the Rent with respect to the Property to be paid during that
period by the Lessee hereunder, the Lessee shall pay any deficiency, as
calculated by the Lessor, to the Lessor on the next Payment Date;
(e) Unless the Property has been sold in its entirety, the Lessor may,
whether or not the Lessor shall have exercised or shall thereafter at any time
exercise any of its rights under paragraph (b), (c) or (d) of this Section 17.2
------------- --- --- ------------
with respect to the Property or portions thereof, demand, by written notice to
the Lessee specifying a date (a "Termination Date") not earlier than 10 days
----------------
after the date of such notice, that the Lessee purchase, on such Termination
Date, the Property (or the remaining portion thereof) in accordance with the
provisions of Article XIX and Section 20.3;
----------- ------------
(f) The Lessor may exercise any other right or remedy that may be available
to it under the Operative Documents or otherwise under Applicable Law, or
proceed by appropriate court action (legal or equitable) to enforce the terms
hereof or to recover damages for the breach hereof. Separate
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<PAGE>
suits may be brought to collect any such damages for any period(s), and such
suits shall not in any manner prejudice the Lessor's right to collect any such
damages for any subsequent period(s), or the Lessor may defer any such suit
until after the expiration of the Term, in which event such suit shall be deemed
not to have accrued until the expiration of the Term; or
(g) The Lessor may retain and apply against the Lessor's damages all sums
which the Lessor would, absent such Lease Event of Default, be required to pay
to, or turn over to, the Lessee pursuant to the terms of this Lease.
17.3. Waiver of Certain Rights. If this Lease shall be terminated pursuant
to Section 17.2, the Lessee waives, to the fullest extent permitted by law, (a)
------------
any notice of re-entry or the institution of legal proceedings to obtain re-
entry or possession; (b) any right of redemption, re-entry or repossession; (c)
the benefit of any laws now or hereafter in force exempting property from
liability for rent or for debt or limiting the Lessor with respect to the
election of remedies; and (d) any other rights which might otherwise limit or
modify any of the Lessor's rights or remedies under this Article XVII.
------------
17.4. Power of Sale and Foreclosure. In the event that a court of
-----------------------------
competent jurisdiction rules that this Lease constitutes a mortgage, deed of
trust or other secured financing as is the intent of the parties pursuant to
Section 7.1, and subject to the availability of such remedy under applicable
- - -----------
law, then the Lessor and the Lessee agree that (i) the Lessee hereby grants a
Lien against the Property WITH POWER OF SALE, and that, upon the occurrence of
any Lease Event of Default the Lessor shall have the power and authority, to the
extent provided by law, after proper notice and lapse of such time as may be
required by law, to sell the Property at the time and place of sale fixed by the
Lessor in said notice of sale, either as a whole, or in separate lots or parcels
or items and in such order as the Lessor may elect, at auction to the highest
bidder for cash in lawful money of the United States payable at the time of
sale; accordingly, it is acknowledged that A POWER OF SALE HAS BEEN GRANTED IN
THIS INSTRUMENT; A POWER OF SALE MAY ALLOW THE LESSOR TO TAKE THE PROPERTY AND
SELL IT WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY THE
LESSEE UNDER THIS INSTRUMENT, and (ii) upon the occurrence of a Lease Event of
Default, the Lessor, in lieu of or in addition to exercising any power of sale
hereinabove given, may proceed by a suit or suits in equity or at law, whether
for a foreclosure hereunder, or for the sale of the Property, or against the
Lessee on a recourse basis for the Asset Termination Value, or the specific
performance of any covenant or agreement herein contained or in aid of the
execution of any power herein granted, or for the appointment of a receiver
pending any foreclosure hereunder or the sale of the Property, or for the
enforcement of any other appropriate legal or equitable remedy. The parties
hereto intend that, in addition to any other debt or obligation secured by the
Lien granted pursuant to this Section 17.4, such Lien shall secure unpaid
------------
balances of Rent and Supplemental Rent and other extensions of credit made by
the Lessor to the Lessee after this Lease is delivered to the appropriate
recording offices of Colorado, whether made pursuant to an obligation of the
Lessee or otherwise, and such Rent and Supplemental Rent shall be secured to the
same extent as if such future payment obligations of Rent and Supplemental Rent
were on account of obligatory advances to be made under a construction
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<PAGE>
loan; provided such obligations secured hereby at any one time shall not exceed
the lesser of : (i) the maximum principal sum permitted by the laws of Colorado;
or (ii) Fifty-five Million Dollars ($55,000,000) together with interest thereon
calculated at the rates provided in the Participation Agreement.
17.5. Remedies Cumulative. The remedies herein provided shall be
-------------------
cumulative and in addition to (and not in limitation of) any other remedies
available at law, equity or otherwise, including, without limitation, any
mortgage foreclosure remedies.
17.6. Lessee's Right to Cure. Notwithstanding any provision contained in
----------------------
the Lease or any other Operative Agreement, if a Lease Event of Default has
occurred and is continuing, the Lessee shall have the right to cure such Lease
Event of Default by exercising its Purchase Option at any time prior to such
time as a foreclosure upon or sale of the Property has been completed.
ARTICLE 18
18.1. The Lessor's Right to Cure the Lessee's Lease Defaults. The Lessor,
------------------------------------------------------
without waiving or releasing any obligation or Lease Event of Default, may (but
shall be under no obligation to) remedy any Lease Default or Lease Event of
Default (other than those described in Sections 7.1(g), (h) and (i))for the
--------------- --- ---
account and at the sole cost and expense of the Lessee, including the failure by
the Lessee to maintain the insurance required by Article XIV, and may, to the
-----------
fullest extent permitted by law, and notwithstanding any right of quiet
enjoyment in favor of the Lessee, enter upon the Property for such purpose and
take all such action thereon as may be necessary or appropriate therefor. No
such entry shall be deemed an eviction of the Lessee. All out-of-pocket costs
and expenses so incurred (including fees and expenses of counsel), together with
interest thereon at the Overdue Rate from the date on which such sums or
expenses are paid by the Lessor, shall be paid by the Lessee to the Lessor on
demand, as Supplemental Rent.
ARTICLE 19
19.1. Provisions Relating to the Lessee's Termination of this Lease or
----------------------------------------------------------------
Exercise of Purchase Option or Obligation and Conveyance Upon Remarketing and
- - -----------------------------------------------------------------------------
Conveyance Upon Certain Other Events. (a) In connection with any termination of
- - ------------------------------------
this Lease pursuant to the terms of Article XVI (if the Lessee is obligated to
-----------
purchase the Property), or in connection with the Lessee's exercise of its
Purchase Option or Expiration Date Purchase Obligation, upon the date on which
this Lease is to terminate or upon the Expiration Date, and upon tender by the
Lessee of the amounts set forth in Sections 16.2(b), 20.1, 20.2 or 20.3, as
---------------- ---- ---- ----
applicable, (i) the Lessor shall execute and deliver to the Lessee (or to the
Lessee's designee) at the Lessee's cost and expense a quitclaim or warranty deed
to the extent required by local custom and by the Lessee's title insurance
company to the extent necessary to enable the Lessee to obtain customary title
insurance at closing of the Lessor's right, title and interest in the Property
(which shall include a release, quitclaim and assignment of all of
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<PAGE>
the Lessor's right, title and interest in and to any Net Proceeds not previously
received by the Lessor), subject to the Permitted Exceptions (other than Lessor
Liens) and any encumbrance caused by the fault, neglect or intention of the
Lessee, in recordable form and otherwise in conformity with local custom and
free and clear of the Mortgage and any Lessor Liens attributable to the Lessor;
provided that in the event a warranty deed is required, the Lessee shall defend,
- - --------
indemnify and hold harmless the Lessor from and against any and all Claims
relating to title to the Property other than Lessor Liens. The Improvements and
the Equipment shall be conveyed to the Lessee "AS IS" and in their then present
condition of title and physical condition.
(b) If the Lessee properly exercises the Remarketing Option, then the
Lessee shall, on the Expiration Date, and at its own cost, transfer possession
of the Property to the independent purchaser thereof, by surrendering the same
into the possession of the Lessor or such purchaser, as the case may be, free
and clear of all Liens other than Lessor Liens, in good condition (as modified
by Modifications permitted by this Lease), ordinary wear and tear excepted, in
compliance with Applicable Law, and in "broom-swept clean" condition. The
Lessee shall cooperate reasonably with the Lessor and the independent purchaser
of the Property in order to facilitate the purchase by such purchaser of the
Property which cooperation shall include the following, all of which the Lessee
shall do on or before the Expiration Date: providing all books and records
regarding the maintenance and ownership of the Property and all know-how, data
and technical information relating thereto, providing a current copy of the "as
built" Plans and Specifications for the Property, granting or assigning all
licenses necessary for the operation and maintenance of the Property and
cooperating reasonably in seeking and obtaining all necessary Governmental
Action. The obligations of the Lessee under this paragraph shall survive the
expiration or termination of this Lease.
(c) The Lessee and the Lessor agree that upon the maturity or acceleration
of the Lessee's obligation to pay the Asset Termination Value, Purchase Option
Price or Residual Value Guarantee Amount, any and all amounts of such portion of
the Defeasance Deposit Collateral or Cash Collateral that have been deposited by
the Lessee pursuant to the Defeasance Deposit Agreement or the Cash Collateral
Agreement, as applicable, and that have not been withdrawn by the Lessee or
offset or applied by the Lessor, the Agent or any Participant (in accordance
with the terms of the Defeasance Deposit Agreement or Cash Collateral Agreement,
as applicable) as of such maturity or acceleration date, shall be applied by the
Agent and the Lessor to satisfy the Lessee's obligation to pay such portion of
the Asset Termination Value, Purchase Option Price or Residual Value Guarantee
Amount represented by the Defeasance Deposit Collateral or the Cash Collateral
notwithstanding the fact that such amounts may not then be actually available,
for any reason attributable to the Lessor, the Agent or any Participant
(including, without limitation any fraud or misapplication of funds by the
Lessor, the Agent or any Participant, decline in value of the Collateral or the
filing by or against the Lessor, the Agent or any Participant of any insolvency,
bankruptcy, dissolution, liquidation, reorganization or similar proceeding, but
except to the extent resulting from a proceeding involving the insolvency of the
Lessee), at Defeasance Deposit Depositary Bank or Depositary Bank to pay such
obligation.
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<PAGE>
ARTICLE 20
20.1. Purchase Option. Without limitation of the Lessee's purchase
---------------
obligation pursuant to Sections 20.2 or 20.3, unless the Lessee shall have given
------------- ----
notice of its intention to exercise the Remarketing Option and the Lessor shall
have entered into a binding contract to sell the Property, the Lessee shall have
the option (exercisable by giving the Lessor irrevocable written notice (the
"Purchase Notice") of the Lessee's election to exercise such option) to
- - ----------------
purchase, or to designate a third party to purchase, the Property on the date
specified in such Purchase Notice, which date shall be a Payment Date. The
purchase price shall be equal to the Asset Termination Value plus all other
amounts owing in respect of Rent (including Supplemental Rent) theretofore
accruing (offsetting against such amount the aggregate amount of the Defeasance
Deposit Collateral and Cash Collateral, if any) (the "Purchase Option Price").
---------------------
The Lessee shall deliver the Purchase Notice to the Lessor not less than ninety
(90) days prior to the purchase date. If the Lessee exercises its option to
purchase the Property pursuant to this Section 20.1 (the "Purchase Option"), the
------------ ---------------
Lessor shall transfer to the Lessee all of the Lessor's right, title and
interest in and to the Property as of the date specified in the Purchase Notice
upon receipt of the Purchase Option Price and all Rent and other amounts then
due and payable under this Lease and any other Operative Document, in accordance
with Section 19.l(a). The Lessee may assign the Purchase Option to a third
---------------
party separately from any permitted assignment by the Lessee of its rights and
obligations under Section 25.1 hereof without the consent of the Lessor;
------------
provided that the Lessee shall remain primarily liable for the performance of
any such assignees in connection with the exercise of the Purchase Option in
accordance with the provisions of Section 25.1 hereof.
------------
20.2. Expiration Date Purchase Obligation. Unless (a) the Lessee shall have
-----------------------------------
properly exercised the Purchase Option pursuant to Section 20.1 and purchased
------------
the Property pursuant thereto, (b) the Lessee shall have properly exercised the
Remarketing Option and shall have fulfilled all of the conditions of clauses (a)
-----------
through (k) of Section 22.1 hereof and the Lessor shall have sold its interest
--- ------------
in the Property pursuant thereto, or (c) the Lessee shall have properly
exercised the Renewal Option pursuant to Section 21.1 and the terms and
------------
conditions of a Renewal Term shall have been agreed upon pursuant to such
Section, then, subject to the terms, conditions and provisions set forth in this
Article, and in accordance with the terms of Section 19.1(a), the Lessee shall
---------------
purchase from the Lessor, and the Lessor shall assign to the Lessee without
recourse, on the Expiration Date of the Term (as such Term may be renewed
pursuant to Section 21.1) all of the Lessor's right, title and interest in the
------------
Property (subject to all existing Liens, other than the Mortgage and Lessor
Liens) for an amount equal to the Asset Termination Value (offsetting against
such amount the aggregate amount of the Defeasance Deposit Collateral and Cash
Collateral, if any). The Lessee may designate, in a notice given to the Lessor
not less than ten (10) Business Days prior to the closing of such purchase (time
being of the essence), the transferee or transferees to whom the conveyance
shall be made (if other than to the Lessee), in which case such conveyance shall
(subject to the terms and conditions set forth herein) be made to such designee;
provided, however, that such designation of a transferee or transferees shall
- - -------- -------
not cause the Lessee to be released, fully or partially, from any of its
obligations under this Lease, including, without limitation, the obligation to
pay the Lessor an
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<PAGE>
amount equal to the Asset Termination Value that was not fully and finally paid
by such designee on such Expiration Date.
20.3. Acceleration of Purchase Obligation. (a) The Lessee shall be obligated
-----------------------------------
to purchase for an amount equal to the Asset Termination Value (offsetting
against such amount the aggregate amount of the Defeasance Deposit Collateral
and Cash Collateral, if any, permitted to be retained by the Lessor, the Agent
and the Participants), the Lessor's interest in the Property (notwithstanding
any prior election to exercise its Purchase Option pursuant to Section 20.1) (i)
------------
automatically and without notice upon the occurrence of any Lease Event of
Default specified in clause (e) or (f) of Section 17.1, and (ii) as provided for
---------- --- ------------
at Section 17.2(e) immediately upon written demand of the Lessor upon the
---------------
occurrence of any other Lease Event of Default.
(b) The Lessee shall be obligated to purchase for an amount equal to the
Asset Termination Value (plus all other amounts owing in respect of Rent
(including Supplemental Rent) theretofore accruing) (offsetting against such
amount the aggregate amount of the Defeasance Deposit Collateral and Cash
Collateral, if any, permitted to be retained by the Lessor, the Agent and the
Participants), immediately upon written demand of the Lessor the Lessor's
interest in the Property at any time during the Term when the Lessor's interest
in the Property is foreclosed due to an event arising out of a violation of the
warranty of title contained in Section 12.1 hereof and the Lessor ceases to have
------------
title as contemplated by Section 12.1.
------------
ARTICLE 21
21.1. Renewal.
-------
(a) Subject to the conditions set forth herein, the Lessee shall have the
option (the "Renewal Option") by written request (the "Renewal Request") to the
-------------- ---------------
Lessor, each Participant and the Agent given not later than 180 days prior to
the Expiration Date to renew the Term for a three-year period commencing on the
date following the Expiration Date then in effect. No later than the date (the
"Renewal Response Date") which is thirty (30) days after such request has been
---------------------
delivered to each of the Lessor, each Participant and the Agent, the Lessor will
notify the Lessee in writing (with a copy to the Agent) whether or not it
consents to such Renewal Request (which consent may be granted or denied in its
sole discretion and may be conditioned on receipt of such financial information
or other documentation as may be specified by the Lessor including without
limitation a satisfactory appraisal of the Property), provided that if the
--------
Lessor shall fail to notify the Lessee on or prior to the Renewal Response Date,
it shall be deemed to have denied such Renewal Request. The renewal of the Term
contemplated by any Renewal Request shall become effective as of the Expiration
Date then in effect on or after the Renewal Response Date on which the Lessor
shall have consented to such Renewal Request; provided that such renewal shall
--------
be subject to and conditioned upon the following:
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(A) on both the Expiration Date then in effect and the date of the
Renewal Request, (i) no Lease Default or Lease Event of Default shall have
occurred and be continuing, and (ii) the Lessor and the Agent shall have
received a Responsible Officer's Certificate of the Lessee as to the
matters set forth in clause (i) above,
----------
(B) the Lessee shall not have exercised the Remarketing Option, and
(C) the Participants shall have agreed to extend the Maturity Date
contemporaneously therewith pursuant to Section 3.6 of the Participation
Agreement such that the Renewal Term will expire on the same date as the
extended Maturity Date.
(b) The renewal of this Lease shall be on the same terms and conditions as
are set forth in this Lease for the original Term, with such modifications
thereto, if any, as the parties hereto and to the other Operative Documents may
negotiate based upon the current credit information regarding the Lessee,
interest rates and such other factors as the Lessor may consider relevant. No
more than one Renewal Term shall be permitted hereunder.
ARTICLE 22
22.1. Option to Remarket. Subject to the fulfillment of each of the
------------------
conditions set forth in this Section 22.1, the Lessee shall have the option (the
------------
"Remarketing Option") to market for the Lessor and complete the sale of all, but
------------------
not less than all, of the Lessor's interest in the Property on the Expiration
Date for the Lessor.
The Lessee's effective exercise and consummation of the Remarketing Option
shall be subject to the due and timely fulfillment of each of the following
provisions as of the dates set forth below.
(a) Not later than one hundred eighty (180) days prior to the Expiration
Date, the Lessee shall give to the Lessor written notice of the Lessee's
exercise of the Remarketing Option, which exercise shall be irrevocable (except
by delivery of a Purchase Notice and consummation of the exercise of the
Purchase Option prior to the earlier of (i) the Expiration Date or (ii) the date
on which the Lessor enters into a binding contract to sell the Property pursuant
to the exercise of the Remarketing Option).
(b) The Lessee shall deliver to the Lessor an Environmental Audit of the
Property together with its notice of exercise of the Remarketing Option. Such
Environmental Audit shall be prepared by an environmental consultant selected by
the Lessor in the Lessor's reasonable discretion and shall contain conclusions
reasonably satisfactory to the Lessor as to the environmental status of the
Property. If such Environmental Audit indicates any material exceptions
reasonably requiring remedy or further investigation, the Lessee shall have also
delivered a Phase Two environmental assessment by such environmental consultant
prior to the Expiration Date showing the completion of the remedying of such
exceptions in compliance with Applicable Law.
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(c) On the date of the Lessee's notice to the Lessor of the Lessee's
exercise of the Remarketing Option, no Lease Event of Default or Lease Default
shall exist, and thereafter, no uncured Lease Event of Default or Lease Default
shall exist.
(d) The Lessee shall have completed in all Material respects all
Modifications, restoration and rebuilding of the Property pursuant to Sections
--------
11.1 and 15.1 (as the case may be) and shall have fulfilled in all Material
- - ---- ----
respects all of the conditions and requirements in connection therewith pursuant
to said Sections, in each case by the date on which the Lessor receives the
Lessee's notice of the Lessee's exercise of the Remarketing Option (time being
of the essence), regardless of whether the same shall be within the Lessee's
control. The Lessee shall have also paid the cost of all Modifications
commenced prior to the Expiration Date. The Lessee shall not have been excused
pursuant to Section 13.1 from complying with any Applicable Law that involved
------------
the extension of the ultimate imposition of such Applicable Law beyond the last
day of the Term. Any Liens on the Property that were contested by the Lessee
shall have been removed before the Expiration Date.
(e) During the Marketing Period, the Lessee shall, as nonexclusive agent
for the Lessor, use commercially reasonable efforts to sell the Lessor's
interest in the Property on or prior to the Expiration Date (without diminishing
the Lessee's obligation to consummate the sale on the Expiration Date) and will
attempt to obtain the highest purchase price therefor and for not less than the
Fair Market Sales Value. The Lessee will be responsible for hiring and
compensating brokers and making the Property available for inspection by
prospective purchasers. The Lessee shall promptly upon request permit
inspection of the Property and any maintenance records relating to the Property
by the Lessor, any Participant and any potential purchasers, and shall otherwise
do all things necessary to sell and deliver possession of the Property to any
purchaser. All such marketing of the Property shall be at the Lessee's sole
expense. The Lessee shall allow the Lessor and any potential qualified
purchaser reasonable access to the Property for the purpose of inspecting the
same.
(f) The Lessee shall submit all bids to the Lessor, the Agent and the
Participants, and the Lessor will have the right to review the same and the
right to submit any one or more bids. All bids shall be on an all-cash basis
unless the Lessor, the Agent and the Participants shall otherwise agree in their
sole discretion. The Lessee shall procure bids from one or more bona fide
prospective purchasers and shall deliver to the Lessor, the Agent and the
Participants not less than ninety (90) days prior to the Expiration Date a
binding written unconditional (except as set forth below), irrevocable offer by
such purchaser or purchasers offering the highest bid to purchase the Property.
No such purchaser shall be the Lessee, or any Subsidiary or Affiliate of the
Lessee. The written offer must specify the Expiration Date as the closing date
unless the Lessor, the Agent and the Participants shall otherwise agree in their
sole discretion.
(g) In connection with any such sale of the Property, the Lessee will
provide to the purchaser all customary "seller's" indemnities, representations
and warranties regarding title, absence
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<PAGE>
of Liens (except Lessor Liens) and the condition of the Property, as well as
such other terms and conditions as may be negotiated between the Lessee and the
purchaser. The Lessee shall have obtained, at its cost and expense, all required
governmental and regulatory consents and approvals and shall have made all
filings as required by Applicable Law in order to carry out and complete the
transfer of the Property. As to the Lessor, any such sale shall be made on an
"as is, with all faults" basis without representation or warranty by the Lessor
other than the absence of Lessor Liens. Any agreement as to such sale shall be
made subject to the Lessor's rights hereunder.
(h) The Lessee shall pay directly, and not from the sale proceeds, all
prorations, credits, costs and expenses of the sale of the Property, whether
incurred by the Lessor or the Lessee, including without limitation, the cost of
all title insurance, surveys, environmental reports, appraisals, transfer taxes,
the Lessor's and the Agent's reasonable attorneys' fees, the Lessee's attorneys'
fees, commissions, escrow fees, recording fees, and all applicable documentary
and other transfer taxes.
(i) The Lessee shall pay to the Agent on or prior to the Expiration Date
(or to such other Person as the Agent shall notify the Lessee in writing, or in
the case of Supplemental Rent, to the Person entitled thereto) an amount equal
to the Residual Value Guarantee Amount less the amount of the Defeasance
Deposit, plus all Rent and all other amounts under this Lease and the other
----
Operative Documents which have accrued or will accrue prior to or as of the
Expiration Date, in the type of funds specified in Section 3.4 hereof.
-----------
(j) If the selling price of the Property is less than the difference
between (A) the Asset Termination Value minus (B) the Residual Value Guarantee
Amount, then the Lessee shall have caused to be delivered to the Lessor, the
Agent and each Participant the appraisal required by Section 13.2 of the
------------
Participation Agreement thirty (30) Business Days prior to the Expiration Date
and shall pay to the Agent on or prior to the Expiration Date (or to such other
person as the Agent shall notify the Lessee in writing) the amounts required to
be paid pursuant to Section 13.2 of the Participation Agreement.
------------
(k) The purchase of the Property shall be consummated on the Expiration
Date following the payment by the Lessee pursuant to paragraphs (i) and (j)
-------------- ---
above and contemporaneously with the Lessee's surrender of the Property pursuant
to Section 19.1(b) and the gross proceeds (the "Gross Proceeds") of the sale of
--------------- --------------
the Property (i.e., without deduction for any marketing, closing or other costs,
prorations or commissions) shall be paid directly to the Agent; provided,
--------
however, that if the sum of the Gross Proceeds from such sale plus the Residual
- - -------
Value Guarantee Amount paid by the Lessee pursuant to paragraph (i) above
-------------
exceeds the Asset Termination Value, then the excess shall be paid to the Lessee
on the Expiration Date.
(l) The Lessee shall not be entitled to exercise or consummate the
Remarketing Option if a circumstance that would permit the Lessor to require the
Lessee to repurchase the Property under Section 16.3 exists and is continuing.
------- ----
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<PAGE>
If one or more of the foregoing provisions shall not be fulfilled as of the
date set forth above, or the Property is not purchased as aforesaid, then the
Lessor shall declare by written notice to the Lessee the Remarketing Option to
be null and void (whether or not it has been theretofore exercised by the
Lessee) as to the Property, in which event all of the Lessee's rights under this
Section 22.1 shall immediately terminate and the Lessee shall be obligated to
- - ------------
purchase all of the Lessor's interest in the Property pursuant to Section 20.2
------------
on the Expiration Date. Notwithstanding the foregoing, the Lessee may at any
time during the Marketing Period exercise its Purchase Option in accordance with
Section 20.2 hereof, provided, that the Lessee shall bear all costs arising out
- - ------------
of or attributable to the cessation of remarketing efforts, including any costs,
expenses, damages or liability which may be alleged by any prospective purchaser
of the Property.
Except as expressly set forth herein, the Lessee shall have no right, power
or authority to bind the Lessor in connection with any proposed sale of the
Property.
22.2. Certain Obligations Continue. During the Marketing Period, the
----------------------------
obligation of the Lessee to pay Rent (including the installment of Basic Rent
due on the fifth anniversary of the Closing Date or at the end of a Renewal
Term, or on the Expiration Date, as the case may be) shall continue undiminished
until payment in full to the Agent of the Gross Proceeds, the Residual Value
Guarantee Amount, and all other amounts due to the Lessor with respect to the
Property under the Operative Documents. The Lessor shall have the right, but
shall be under no duty, to solicit bids, to inquire into the efforts of the
Lessee to obtain bids or otherwise to take action in connection with any such
sale, other than as expressly provided in this Article XXII.
------------
22.3. Support Obligations. In the event that the Lessee does not elect to
-------------------
purchase the Property on the Expiration Date or, pursuant to the Lessor's
exercise of remedies under Article XVII, this Lease is terminated, the Lessee
------------
shall provide the Lessor, effective on the Expiration Date, with (i) all
permits, certificates of occupancy, governmental licenses and authorizations
necessary to use and operate the Property for its intended purposes (to the
extent such items are transferable or may be obtained by the Lessee on behalf of
another party), (ii) such easements, licenses, rights-of-way and other rights
and privileges in the nature of an easement as are reasonably necessary or
desirable in connection with the use, repair, access to or maintenance of the
Property as the Lessor shall request, and (iii) a services agreement covering
such services as the Lessor may request in order to use and operate the Property
for its intended purposes at such rates (not in excess of arm's length fair
market rates) as shall be acceptable to the Lessor and the Lessee. All
assignments, licenses, easements, agreements and other deliveries required by
clauses (i) and (ii) of this Section 22.3 shall be in form satisfactory to the
------------
Lessor and shall be fully assignable (including both primary assignments and
assignments given in the nature of security) without payment of any fee, cost or
other charge.
ARTICLE 23
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<PAGE>
23.1. Holding Over. If the Lessee shall for any reason remain in possession
------------
of the Property after the expiration or earlier termination of this Lease
(unless the Property is conveyed to the Lessee), such possession shall be as a
tenancy at sufferance during which time the Lessee shall continue to pay
Supplemental Rent that would be payable by the Lessee hereunder were the Lease
then in full force and effect and the Lessee shall continue to pay Basic Rent at
an annual rate equal to 110% of the average rate of Basic Rent payable hereunder
during the Term. Such Basic Rent shall be payable from time to time upon demand
by the Lessor. During any period of tenancy at sufferance, the Lessee shall,
subject to the second preceding sentence, be obligated to perform and observe
all of the terms, covenants and conditions of this Lease, but shall have no
rights hereunder other than the right, to the extent given by law to tenants at
sufferance, to continue its occupancy and use of the Property. Nothing
contained in this Article XXIII shall constitute the consent, express or
-------------
implied, of the Lessor to the holding over of the Lessee after the expiration or
earlier termination of this Lease (unless the Property is conveyed to the
Lessee), and nothing contained herein shall be read or construed to relieve the
Lessee of its obligations to purchase or remarket the Property on the Expiration
Date pursuant to Article XX or Article XXII or as preventing the Lessor from
---------- ------------
maintaining a suit for possession of the Property or exercising any other remedy
available to the Lessor at law or in equity or hereunder.
ARTICLE 24
24.1. Risk of Loss. During the Term the risk of loss of or decrease in the
------------
enjoyment and beneficial use of the Property as a result of the damage or
destruction thereof by fire, the elements, casualties, thefts, riots, wars or
otherwise is assumed by the Lessee, and the Lessor shall in no event be
answerable or accountable therefor.
ARTICLE 25
25.1. Subletting and Assignment. The Lessee may assign with recourse this
-------------------------
Lease or any of its rights or obligations hereunder in whole or in part to any
Person, in which case the Lessee shall guarantee performance of the obligations
of such assignee under this Lease by a guaranty in form and substance acceptable
to the Lessor and the Required Participants. The Lessee may, without the
consent of the Lessor, sublease the Property or portion thereof to any Person,
provided, that no such sublease shall, materially and adversely affect any of
- - --------
the Lessor's interests, rights or remedies under the Lease or the Lessor's title
to the Property. No assignment, sublease or other relinquishment of possession
of the Property shall in any way discharge or diminish any of the Lessee's
obligations to the Lessor hereunder and the Lessee shall remain directly and
primarily liable under this Lease as to the Property, or portion thereof, so
assigned or sublet. Any sublease of the Property shall be made subject to and
subordinated to this Lease and to the rights of the Lessor hereunder, and shall
expressly provide for the surrender of the Property (or portion thereof) if,
after a Lease Event of Default has occurred, the Lease is terminated. All such
subleases shall expressly provide for termination at or prior to the earlier of
the applicable Expiration Date or other date of termination
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<PAGE>
of this Lease unless the Lessee shall have purchased the Property pursuant to
Article XX. No assignee or sublessee shall be permitted to engage in any
- - ----------
activities on the Property to the extent they are substantially different from
those engaged in by the Lessee without the prior written consent of the Lessor,
which consent shall not be unreasonably withheld, except that any Assignee or
Sublessee may use the Property for light manufacturing, research and
development, office, storage, and related uses and for any other lawful use that
is not more burdensome than Lessee's intended use as a semiconductor wafer
manufacturing facility so long as such use is permitted by Applicable Law, is
approved by Lessor, which approval shall not be unreasonably withheld, and does
not adversely affect the value, utility or remaining useful life of the
Property.
ARTICLE 26
26.1. Estoppel Certificates. At any time and from time to time upon not
---------------------
less than twenty (20) days' prior request by the Lessor or the Lessee (the
"Requesting Party"), the other party (whichever party shall have received such
- - -----------------
request, the "Certifying Party") shall furnish to the Requesting Party (but not
----------------
more than four times per year unless required to satisfy the requirements of any
sublessees and only to the extent that the required information has been
provided to the Certifying Party by the other party) a certificate signed by an
individual having the office of vice president or higher in the Certifying Party
certifying that this Lease is in full force and effect (or that this Lease is in
full force and effect as modified and setting forth the modifications); the
dates to which the Basic Rent and Supplemental Rent have been paid; to the best
knowledge of the signer of such certificate, whether or not the Requesting Party
is in default under any of its obligations hereunder (and, if so, the nature of
such alleged default); and such other matters under this Lease as the Requesting
Party may reasonably request. Any such certificate furnished pursuant to this
Article XXVI may be relied upon by the Requesting Party, and any existing or
- - ------------
prospective mortgagee, purchaser or lender, and any accountant or auditor, of,
from or to the Requesting Party (or any Affiliate thereof).
ARTICLE 27
27.1. Right to Inspect. During the Term, the Lessee shall upon reasonable
----------------
notice from the Lessor (except that no notice shall be required if a Lease Event
of Default has occurred and is continuing), permit the Lessor, the Agent and
their respective authorized representatives to inspect the Property during
normal business hours, provided that such inspections shall not unreasonably
interfere with the Lessee's business operations at the Property.
27.2. No Waiver. No failure by the Lessor or the Lessee to insist upon the
---------
strict performance of any term hereof or to exercise any right, power or remedy
upon a default hereunder, and no acceptance of full or partial payment of Rent
during the continuance of any such default, shall constitute a waiver of any
such default or of any such term. To the fullest extent permitted by law, no
waiver of any default shall affect or alter this Lease, and this Lease shall
continue in full force and effect with respect to any other then existing or
subsequent default.
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<PAGE>
ARTICLE 28
28.1. Acceptance of Surrender. No surrender to the Lessor of this Lease or
-----------------------
of all or any portion of any Property or of any part of any thereof or of any
interest therein shall be valid or effective unless agreed to and accepted in
writing by the Lessor and, prior to the payment or performance of all
obligations owed to the Participants under the Participation Agreement or the
other Operative Documents and termination of the Participants' Commitments, the
Agent, and no act by the Lessor or the Agent or any representative or agent of
the Lessor or the Agent, other than a written acceptance, shall constitute an
acceptance of any such surrender.
ARTICLE 29
29.1. No Merger of Title. There shall be no merger of this Lease or of the
------------------
leasehold estate created hereby by reason of the fact that the same Person may
acquire, own or hold, directly or indirectly, in whole or in part, (a) this
Lease or the leasehold estate created hereby or any interest in this Lease or
such leasehold estate, or (b) the fee estate in the Property, except as may
expressly be stated in a written instrument duly executed and delivered by the
appropriate Person.
ARTICLE 30
30.1. Notices. All notices, demands, requests, consents, approvals and
-------
other communications hereunder shall be in writing and delivered (i) personally,
(ii) by a nationally recognized overnight courier service, (iii) by mail (by
registered or certified mail, return receipt requested, postage prepaid) or (iv)
by facsimile, addressed to the respective parties, as follows:
If to the Lessee:
Vitesse Semiconductor Corporation
741 Calle Plano
Camarillo, California 93012
Attention: Eugene F. Hovanec
Vice President, Finance & Chief Financial Officer
Telephone: (805) 389-7136
Facsimile: (805) 388-7565
If to the Lessor:
Lease Plan North America, Inc.
135 S. LaSalle Street, Suite 711
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<PAGE>
Chicago, Illinois 60603
Attention: E. Bruce Mumford
Telephone: (312) 904-6705
Facsimile: (312) 904-6217
If to the Agent:
ABN AMRO Bank N.V., San Francisco International Branch
101 California Street
Suite 4550
San Francisco, California 94111
Attention: Bruce W. Swords
Telephone: (415) 984-3721
Facsimile: (415) 362-3524
or such additional parties and/or other address as such party may hereafter
designate (provided, however, in no event shall either party be obligated to
notify, in the aggregate, more than five (5) designees of the other party), and
shall be effective upon receipt or refusal thereof.
ARTICLE 31
31.1. Miscellaneous. Anything contained in this Lease to the contrary
-------------
notwithstanding, all claims against and liabilities of the Lessee or the Lessor
arising from events commencing prior to the expiration or earlier termination of
this Lease shall survive such expiration or earlier termination. If any term or
provision of this Lease or any application thereof shall be declared invalid or
unenforceable, the remainder of this Lease and any other application of such
term or provision shall not be affected thereby. If any right or option of the
Lessee provided in this Lease, including any right or option described in
Articles XV, XVI, XX, XXI or XXII, would, in the absence of the limitation
- - ----------- --- -- --- ----
imposed by this sentence, be invalid or unenforceable as being in violation of
the rule against perpetuities or any other rule of law relating to the vesting
of an interest in or the suspension of the power of alienation of property, then
such right or option shall be exercisable only during the period which shall end
twenty-one (21) years after the date of death of the last survivor of the
descendants of Franklin D. Roosevelt, the former president of the United States,
Henry Ford, the deceased automobile manufacturer, and John D. Rockefeller, the
founder of the Standard Oil Company, known to be alive on the date of the
execution, acknowledgment and delivery of this Lease.
31.2 Amendments and Modifications. Subject to the requirements,
----------------------------
restrictions and conditions set forth in the Participation Agreement, neither
this Lease, any Lease Supplement nor any provision hereof may be amended,
waived, discharged or terminated except by an instrument in writing in
recordable form signed by the Lessor and the Lessee. In the event of any
conflict or
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<PAGE>
inconsistency between the terms hereof and the terms of the Participation
Agreement, the Participation Agreement shall control.
31.3. Successors and Assigns. All the terms and provisions of this Lease
----------------------
shall inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
31.4. Headings and Table of Contents. The headings and table of contents in
------------------------------
this Lease are for convenience of reference only and shall not limit or
otherwise affect the meaning hereof.
31.5. Counterparts. This Lease may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which shall
together constitute one and the same instrument.
31.6. GOVERNING LAW. THIS LEASE SHALL BE GOVERNED BY, AND CONSTRUED AND
-------------
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS, WITHOUT
REGARD TO CONFLICTS OF LAW PRINCIPLES, EXCEPT AS TO MATTERS RELATING TO THE
CREATION OF THE LEASEHOLD ESTATE HEREUNDER AND THE EXERCISE OF RIGHTS AND
REMEDIES WITH RESPECT THERETO, WHICH SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAW OF THE STATE IN WHICH SUCH ESTATE IS LOCATED. WITHOUT
LIMITING THE FOREGOING, IN THE EVENT THAT THIS LEASE IS DEEMED TO CONSTITUTE A
FINANCING, WHICH IS THE INTENTION OF THE PARTIES, THE LAWS OF THE STATE OF
ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, SHALL GOVERN THE
CREATION, TERMS AND PROVISIONS OF THE INDEBTEDNESS EVIDENCED HEREBY, BUT THE
LIEN CREATED HEREBY AND THE ENFORCEMENT OF SAID LIEN SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE IN WHICH SUCH ESTATE IS
LOCATED.
31.7. Limitations on Recourse. The parties hereto agree that the Lessor
-----------------------
shall have no personal liability whatsoever to the Lessee or its respective
successors and assigns for any claim based on or in respect of this Lease or any
of the other Operative Documents or arising in any way from the transactions
contemplated hereby or thereby; provided, however, that the Lessor shall be
-------- -------
liable in its individual capacity (a) for its own willful misconduct or gross
negligence (or negligence in the handling of funds), (b) for liabilities that
may result from the incorrectness of any representation or warranty expressly
made by it in Section 8.1 of the Participation Agreement or (c) for any Taxes
based on or measured by any fees, commission or compensation received by it for
acting as the Lessor as contemplated by the Operative Documents. It is
understood and agreed that, except as provided in the preceding proviso: (i) the
Lessor shall have no personal liability under any of the Operative Documents as
a result of acting pursuant to and consistent with any of the Operative
Documents; (ii) all obligations of the Lessor to the Lessee are solely
nonrecourse obligations except to the extent that it has received payment from
others and are enforceable solely against the Lessor's interest in the
Property; and (iii) all such personal liability of the Lessor is expressly
waived and released as a condition of, and as consideration for, the execution
and delivery of the Operative Documents by the Lessor. Notwithstanding anything
contained herein, the restriction stated in the
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<PAGE>
preceding provisions of this Section 31.7 shall not apply to liability of the
------------
Lessor arising because of a breach of the Lessor's obligation to remove Lessor
Liens or because of its receiving Advances and failing to disburse Advances to
Lessee in accordance with the Operative Documents, or failure to disburse
proceeds from sale of the Property in accordance with this Lease.
31.8. Original Lease. The single executed original of this Lease marked
--------------
"THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART" on the signature page
thereof and containing the receipt of the Agent therefor on or following the
signature page thereof shall be the Original Executed Counterpart of this Lease
(the "Original Executed Counterpart"). To the extent that this Lease
-----------------------------
constitutes chattel paper, as such term is defined in the Uniform Commercial
Code as in effect in any applicable jurisdiction, no security interest in this
Lease may be created through the transfer or possession of any counterpart other
than the Original Executed Counterpart.
31.9. Usury Savings Clause. Nothing continued in this Lease or the other
--------------------
Operative Documents shall be deemed to require the payment of interest or other
charges by the Lessee or any other Person in excess of the amount which may
lawfully be charged under any applicable usury laws. In the event that the
Lessor or any other Person shall collect moneys under this Lease or any other
Operative Document which are deemed to constitute interest (including, without
limitation, the Basic Rent or Supplemental Rent) which would increase the
effective interest rate to a rate in excess of that permitted to be charged by
applicable law, all such sums deemed to constitute interest in excess of the
legal rate shall, upon such determination, at the option of the Person to whom
such payment was made, be returned to the Person making such payment or credited
against other amounts owed by the person making such payment.
[SIGNATURE PAGE FOLLOWS]
-39-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Lease be duly executed and
delivered as of the date first above written.
LEASE PLAN NORTH AMERICA, INC.,
an Illinois corporation, as Lessor
By: ______________________________________
E. Bruce Mumford, Vice President
VITESSE SEMICONDUCTOR CORPORATION,
a Delaware corporation, as Lessee
By: ______________________________________
Eugene F. Hovanec, Vice President,
Finance & Chief Financial Officer
<PAGE>
STATE OF ILLINOIS )
) SS.:
COUNTY OF COOK )
Before me, the undersigned, a Notary Public within and for the State
and County aforesaid, personally appeared E. Bruce Mumford, with whom I am
personally acquainted (or proved to me on the basis of satisfactory evidence),
and who, upon oath, acknowledged himself to be a Vice President of LEASE PLAN
NORTH AMERICA, INC., the within named bargainor, a corporation, and that he as
such Vice President, being duly authorized so to do, executed the foregoing
instrument for the purposes therein contained by signing the name of the
corporation by himself as such Vice President.
WITNESS my hand and seal, at office, on this the ____ day of October,
1996.
______________________________
Notary Public
My Commission Expires:
____________________________
<PAGE>
STATE OF CALIFORNIA )
) SS.:
COUNTY OF VENTURA )
Before me, the undersigned, a Notary Public within and for the State
and County aforesaid, personally appeared Eugene F. Hovanec, with whom I am
personally acquainted (or proved to me on the basis of satisfactory evidence),
and who, upon oath, acknowledged himself to be the Vice President, Finance &
Chief Financial Officer of VITESSE SEMICONDUCTOR CORPORATION, the within named
bargainor, a corporation, and that he as such Vice President, Finance & Chief
Financial Officer being duly authorized so to do, executed the foregoing
instrument for the purposes therein contained by signing the name of the
corporation by himself as such Vice President, Finance & Chief Financial
Officer.
WITNESS my hand and seal, at office, on this the ____day of October,
1996.
______________________________
Notary Public
My Commission Expires:
____________________________
<PAGE>
THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART.
Receipt of this original counterpart of the foregoing Lease is hereby
acknowledged as of October __, 1996.
ABN AMRO BANK N.V., SAN FRANCISCO
INTERNATIONAL BRANCH, as Agent
By: ABN AMRO NORTH AMERICA, INC,
as its agent
By: __________________________________
David M. Shipley, Vice President
By: __________________________________
E. Bruce Mumford, Senior Vice President
<PAGE>
SCHEDULE 1
TO THE LEASE
Amortization of Property Improvements Cost
-------------------------------------------
None
<PAGE>
Prepared by and upon recording return to:
Richard W. Pearse, Esq.
Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601
EXHIBIT A TO
THE LEASE
---------
LEASE SUPPLEMENT NO. 1
(And Memorandum of Lease)
THIS LEASE SUPPLEMENT NO. 1 (And Memorandum of Lease) (this "Lease
-----
Supplement") dated as of October 30, 1996, between Lease Plan North America,
- - ----------
Inc., an Illinois corporation, not in its individual capacity but solely as
lessor (the "Lessor"), and Vitesse Semiconductor Corporation, a Delaware
------
corporation, as lessee (the "Lessee").
------
WHEREAS, the Lessor is the fee owner of the Land Interest described on
Schedule 1 hereto and wishes to lease the Land Interest and all Improvements
thereon or which may thereafter be constructed thereon pursuant to the
Construction Agency Agreement or the Lease to the Lessee (the Land Interest and
such Improvements being collectively called the "Property");
----------
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. Definitions; Interpretation. For purposes of this Lease
---------------------------
Supplement, capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to them in Appendix 1 to the Master Lease, dated as
of October 30, 1996, between the Lessee and the Lessor; and the rules of
interpretation set forth in Appendix 1 to the Lease shall apply to this Lease
Supplement.
SECTION 2. The Property. Attached hereto as Schedule I is the
------------
description of a certain Land Interest. Effective upon the execution and
delivery of this Lease Supplement by the Lessor and the Lessee, the Property
shall be subject to the terms and provisions of the Lease. Subject to the terms
and conditions of the Lease, the Lessor hereby leases to the Lessee for the Term
(as defined below) of the Lease, the Lessor's interest in the Property, and the
Lessee hereby agrees, expressly for the direct benefit of the Lessor, to lease
from the Lessor for the Term, the Lessor's interest in the Property.
SECTION 3. Parties and Addresses. The Lease is dated as of October 30,
---------------------
1996, between the Lessor, whose principal office is at 135 S. LaSalle Street,
Chicago, Illinois 60603 and the Lessee,
<PAGE>
whose principal office is 741 Calle Plano, Camarillo, California 93012.
SECTION 4. Lease Term. The term of this Lease (the "Term") shall begin
---------- ----
on October 30, 1996, and shall end on October 30, 2001, unless the Term is
renewed or earlier terminated in accordance with the provisions of the Lease.
The Lease contains one option period of three years, which give Lessee the
right, subject to the terms thereof, to extend the term of the Lease to October
30, 2004.
SECTION 5. Ownership of the Property. (a) It is the intent of the
-------------------------
parties hereto that: (i) the Lease constitutes an "operating lease" pursuant to
Statement of Financial Accounting Standards No. 13, as amended, for purposes of
Lessee's financial reporting, and (ii) for purposes of Federal and state income
tax, the transaction contemplated hereby and by the Lease is a financing
arrangement and preserves ownership in the Property in the Lessee.
Nevertheless, the Lessee acknowledges and agrees that neither the Agent, the
Lessor nor any Participant has made any representations or warranties to the
Lessee concerning the tax, accounting or legal characteristics of the Operative
Documents and that the Lessee has obtained and relied upon such tax, accounting
and legal advice concerning the Operative Documents as it deems appropriate.
Accordingly, and notwithstanding any provision of this Lease to the contrary,
the Lessor and the Lessee agree and declare that: (i) the transactions
contemplated hereby are intended to have a dual, rather than a single, form; and
(ii) all references in this Lease to the "lease" of the Property which fail to
reference such dual form do so as a matter of convenience only and do not
reflect the intent of the Lessor and the Lessee as to the true form of such
arrangements.
(b) Anything to the contrary in the Operative Documents notwithstanding,
the Lessor and the Lessee intend and agree that with respect to the nature of
the transactions evidenced by the Lease in the context of the exercise of
remedies under the Operative Documents, including, without limitation, in the
case of any insolvency or receivership proceedings or a petition under the
United States bankruptcy laws or any other applicable insolvency laws or statute
of the United States of America or any State or Commonwealth thereof affecting
the Lessee, the Lessor or any Participant or any enforcement or collection
actions, (i) the transactions evidenced by the Lease are loans made by the
Lessor and the Participants as unrelated third party lenders to the Lessee
secured by the Property, (ii) the obligations of the Lessee under the Lease to
pay Basic Rent and Supplemental Rent or Asset Termination Value in connection
with any purchase of the Property pursuant to the Lease shall be treated as
payments of interest on and principal of, respectively, loans from the Lessor
and the Participants to the Lessee, and (iii) the Lease grants a security
interest and mortgage or deed of trust or lien, as the case may be, in the
Property and the Collateral described in the Mortgage to the Lessor, the Agent
and the Participants to secure the Lessee's performance under and payment of all
amounts under the Lease and the other Operative Documents.
(c) Specifically, but without limiting the generality of subsection (b) of
--------------
this Section 5, the Lessor and the Lessee further intend and agree that, for the
---------
purpose of securing the Lessee's obligations for the repayment of the above-
described loans from the Certificate Purchaser and the Lenders to the Lessee,
(i) the Lease shall also be deemed to be a security agreement and financing
statement within the meaning of Article 9 of the Uniform Commercial Code and a
real property mortgage or deed of trust; (ii) the conveyance provided for hereby
and in Article II of the Lease shall be deemed to be a grant by the Lessee to
----------
the Lessor, the Agent and the Participants of a mortgage
<PAGE>
lien and security interest in all of the Lessee's right, title and interest in
and to the Property and the Collateral described in the Mortgage and all
proceeds of the conversion, voluntary or involuntary, of the foregoing into
cash, investments, securities or other property, whether in the form of cash,
investments, securities or other property (it being understood that the Lessee
hereby mortgages and warrants and grants a security interest in the Property and
the Collateral described in the Mortgage to the Lessor, the Agent and the
Participants to secure the loans); (iii) the possession by the Lessor or any of
its agents of notes and such other items of property as constitute instruments,
money, negotiable documents or chattel paper shall be deemed to be "possession
by the secured party" for purposes of perfecting the security interest pursuant
to Section 9-305 of the Uniform Commercial Code; and (iv) notifications to
Persons holding such property, and acknowledgments, receipts or confirmations
from financial intermediaries, bankers or agents (as applicable) of the Lessee
shall be deemed to have been given for the purpose of perfecting such security
interest under Applicable Law. The Lessor and the Lessee shall, to the extent
consistent with the Lease, take such actions and execute, deliver, file and
record such other documents, financing statements, mortgages and deeds of trust
as may be necessary to ensure that, if the Lease and this Lease Supplement were
deemed to create a security interest in the Property in accordance with this
Section, such security interest would be deemed to be a perfected security
interest of first priority under Applicable Law and will be maintained as such
throughout the Term.
(d) Specifically, without limiting the generality of anything contained in
this Section 5, the Lessor and the Lessee further intend and agree that, for
---------
purposes of filing federal, state and local returns, reports and other
statements relating to income or franchise taxes, or any other taxes imposed
upon or measured by income, (i) the Lessee shall be entitled to take any
deduction, credit, allowance or other reporting position consistent with its
status as owner of the Property; and (ii) the Lessor and the Participants shall
take a position on their respective federal, state and local returns, reports
and other statements relating to income or franchise taxes that is consistent
with the Lessee's status as owner of the Property, provided that the Lessor and
--------
any Participant may take a position that is inconsistent with the Lessee's
status as owner of the Property if: (x) there has been a change in law or
regulation so requiring as supported by an opinion of counsel reasonably
acceptable to the Lessee that there is not substantial authority for such a
consistent reporting position; or (y) (A) there has been an administrative or
judicial holding that the Lessee is not the owner of the Property, (B) the
Lessee has no right to contest such holding pursuant to Section 13.5 of the
------------
Participation Agreement, and (C) the Lessee's lack of right to contest is not
the result of an Indemnitee's waiver of its right to indemnification pursuant to
Section 13.5(b)(iii) of the Participation Agreement or failure of the amount at
- - --------------------
issue to exceed the minimum amount set forth in Section 13.5(f)(iv)(B) of the
----------------------
Participation Agreement.
SECTION 6. Remedies. Without limiting any other remedies set forth in
--------
the Lease, in the event that a court of competent jurisdiction rules that the
Lease constitutes a mortgage, deed or trust or other secured financing as is the
intent of the parties, then the Lessor and the Lessee agree that (i) the Lessee
hereby grants a Lien against the Property WITH POWER OF SALE, and that upon the
occurrence of a Lease Event of Default, the Lessor shall have the power and
authority, to the extent provided by law, after proper notice and lapse of such
time as may be required by law, to sell the Property at the time and place of
sale fixed by the Lessor in said notice of sale, either as a whole, or in
separate lots or parcels or items and in such order as the Lessor may elect, at
auction to the
<PAGE>
highest bidder for cash in lawful money of the United States payable at the time
of sale; accordingly, it is acknowledged that A POWER OF SALE HAS BEEN GRANTED
IN THIS INSTRUMENT; A POWER OF SALE MAY ALLOW THE LESSOR TO TAKE THE PROPERTY
AND SELL IT WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY THE
LESSEE UNDER THIS INSTRUMENT, and (ii) upon the occurrence of a Lease Event of
Default, the Lessor, in lieu of or in addition to exercising any power of sale
hereinabove given, may proceed by a suit or suits in equity or at law, whether
for a foreclosure hereunder, or for the sale of the Property, or against the
Lessee on a recourse basis for the Asset Termination Value, or for the specific
performance of any covenant or agreement herein contained or in aid of the
execution of any power herein granted, or for the appointment of a receiver
pending any foreclosure hereunder or the sale of the Property, or for the
enforcement of any other appropriate legal or equitable remedy. The parties
hereto intend that, in addition to any other debt or obligation secured by the
Lien granted pursuant to this Section 6, such Lien shall secure unpaid balances
---------
of Rent and Supplemental Rent and other extensions of credit made by the Lessor
to the Lessee after this Lease is delivered to the appropriate recording offices
of Colorado, whether made pursuant to an obligation of the Lessee or otherwise,
and such Rent and Supplemental Rent shall be secured to the same extent as if
such future payment obligations of Rent and Supplemental Rent were on account of
obligatory advances to be made under a construction loan; provided such
obligations secured hereby at any one time shall not exceed the lesser of : (i)
the maximum principal sum permitted by the laws of Colorado; or (ii) Fifty-five
Million Dollars ($55,000,000) together with interest thereon calculated at the
rates provided in the Participation Agreement.
SECTION 7. Purchase Option. Sections 19 and 20 of the Lease contain
---------------
various purchase options which may be exercised by Lessee during the term of the
Lease subject to the terms and conditions of said Sections 19 and 20 of the
Lease.
SECTION 8. Liens. (a) THIS LEASE IS SUPERIOR TO A MORTGAGE IN FAVOR OF
-----
ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH AS AGENT (THE "AGENT")
-----
UNDER THE PARTICIPATION AGREEMENT DATED AS OF OCTOBER 30, 1996, AMONG THE
LESSEE, THE LESSOR, THE AGENT AND THE PARTICIPANTS, EXCEPT AS AMENDED OR
SUPPLEMENTED.
(b) NOTICE IS HEREBY GIVEN THAT NEITHER THE LESSOR, ANY PARTICIPANT NOR THE
AGENT IS OR SHALL BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO
BE FURNISHED TO THE LESSEE, OR TO ANYONE HOLDING THE PROPERTY OR ANY PART
THEREOF THROUGH OR UNDER THE LESSEE, AND THAT NO MECHANICS'S OR OTHER LIENS FOR
ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF
THE LESSOR IN AND TO THE PROPERTY.
SECTION 9. Ratification. Except as specifically modified hereby, the
------------
terms and provisions of the Lease are hereby ratified and confirmed and remain
in full force and effect.
SECTION 10. Original Lease Supplement. The single executed original of
-------------------------
this Lease Supplement marked "THIS COUNTERPART IS THE ORIGINAL EXECUTED
COUNTERPART"
<PAGE>
on the signature page thereof and containing the receipt of the Agent therefor
on or following the signature page thereof shall be the Original Executed
Counterpart of this Lease Supplement (the "Original Executed Counterpart"). To
-----------------------------
the extent that this Lease Supplement constitutes chattel paper, as such term is
defined in the Uniform Commercial Code as in effect in any applicable
jurisdiction, no security interest in this Lease Supplement may be created
through the transfer or possession of any counterpart other than the Original
Executed Counterpart.
SECTION 11. GOVERNING LAW. THE LEASE SHALL BE GOVERNED BY, AND
-------------
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS,
WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES, EXCEPT AS TO MATTERS RELATING TO
THE CREATION OF THE LEASEHOLD ESTATE THEREUNDER AND THE EXERCISE OF RIGHTS AND
REMEDIES WITH RESPECT THERETO, WHICH SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAW OF THE STATE IN WHICH THE ESTATE IS LOCATED. WITHOUT
LIMITING THE FOREGOING, IN THE EVENT THAT THE LEASE IS DEEMED TO CONSTITUTE A
FINANCING, WHICH IS THE INTENTION OF THE PARTIES, THE LAWS OF THE STATE OF
ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, SHALL GOVERN THE
CREATION, TERMS AND PROVISIONS OF THE INDEBTEDNESS EVIDENCED HEREBY, BUT THE
LIEN CREATED HEREBY AND THE ENFORCEMENT OF SAID LIEN SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE IN WHICH THE ESTATE IS
LOCATED.
SECTION 12. Counterpart Execution. This Lease Supplement may be executed
---------------------
in any number of counterparts and by each of the parties hereto in separate
counterparts, all such counterparts together constituting but one and the same
instrument.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Lease
Supplement to be duly executed by an officer thereunto duly authorized as of the
date and year first above written.
LEASE PLAN NORTH AMERICA, INC.,
an Illinois corporation, as Lessor
By: ______________________________________
E. Bruce Mumford, Vice President
VITESSE SEMICONDUCTOR CORPORATION,
a Delaware corporation, as Lessee
By: ______________________________________
Eugene F. Hovanec, Vice President,
Finance & Chief Financial Officer
<PAGE>
STATE OF ILLINOIS )
) SS.:
COUNTY OF COOK )
Before me, the undersigned, a Notary Public within and for the State
and County aforesaid, personally appeared E. Bruce Mumford, with whom I am
personally acquainted (or proved to me on the basis of satisfactory evidence),
and who, upon oath, acknowledged himself to be a Vice President of LEASE PLAN
NORTH AMERICA, INC., the within named bargainor, a corporation, and that he as
such Vice President, being duly authorized so to do, executed the foregoing
instrument for the purposes therein contained by signing the name of the
corporation by himself as such Vice President.
WITNESS my hand and seal, at office, on this the ____ day of October
1996.
______________________________
Notary Public
My Commission Expires:
____________________________
<PAGE>
STATE OF CALIFORNIA )
) SS.:
COUNTY OF VENTURA )
Before me, the undersigned, a Notary Public in and for the State and
County aforesaid, personally appeared Eugene F. Hovanec, with whom I am
personally acquainted (or proved to me on the basis of satisfactory evidence),
and who, upon oath, acknowledged himself to be the Vice President, Finance &
Chief Financial Officer of VITESSE SEMICONDUCTOR CORPORATION, the within named
bargainor, a corporation, and that he as such Vice President, Finance & Chief
Financial Officer, being duly authorized so to do, executed the foregoing
instrument for the purposes therein contained by signing the name of the
corporation by himself as such Vice President, Finance & Chief Financial
Officer.
WITNESS my hand and seal, at office, on this the ____ day of October,
1996.
______________________________
Notary Public
My Commission Expires:
____________________________
<PAGE>
THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART.
Receipt of this original counterpart of the foregoing Lease Supplement is hereby
acknowledged as of October __, 1996.
ABN AMRO BANK N.V., SAN FRANCISCO
INTERNATIONAL BRANCH, as Agent
By: ABN AMRO NORTH AMERICA, INC.,
as its agent
By: __________________________________
David M. Shipley, Vice President
By: __________________________________
E. Bruce Mumford, Senior Vice President
<PAGE>
SCHEDULE I
TO THE LEASE SUPPLEMENT NO. 1
-----------------------------
Property Description
--------------------
S-1
<PAGE>
Prepared by and upon recording return to:
Richard W. Pearse, Esq.
Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601
EXHIBIT A TO
THE LEASE
---------
LEASE SUPPLEMENT NO. 1
(And Memorandum of Lease)
THIS LEASE SUPPLEMENT NO. 1 (And Memorandum of Lease) (this "Lease
-----
Supplement") dated as of October 30, 1996, between Lease Plan North America,
- - ----------
Inc., an Illinois corporation, not in its individual capacity but solely as
lessor (the "Lessor"), and Vitesse Semiconductor Corporation, a Delaware
------
corporation, as lessee (the "Lessee").
------
WHEREAS, the Lessor is the fee owner of the Land Interest described on
Schedule 1 hereto and wishes to lease the Land Interest and all Improvements
thereon or which may thereafter be constructed thereon pursuant to the
Construction Agency Agreement or the Lease to the Lessee (the Land Interest and
such Improvements being collectively called the "Property");
----------
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. Definitions; Interpretation. For purposes of this Lease
---------------------------
Supplement, capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to them in Appendix 1 to the Master Lease, dated as
of October 30, 1996, between the Lessee and the Lessor; and the rules of
interpretation set forth in Appendix 1 to the Lease shall apply to this Lease
Supplement.
SECTION 2. The Property. Attached hereto as Schedule I is the
------------
description of a certain Land Interest. Effective upon the execution and
delivery of this Lease Supplement by the Lessor and the Lessee, the Property
shall be subject to the terms and provisions of the Lease. Subject to the terms
and conditions of the Lease, the Lessor hereby leases to the Lessee for the Term
(as defined below) of the Lease, the Lessor's interest in the Property, and the
Lessee hereby agrees, expressly for the direct benefit of the Lessor, to lease
from the Lessor for the Term, the Lessor's interest in the Property.
<PAGE>
SECTION 3. Parties and Addresses. The Lease is dated as of October 30,
---------------------
1996, between the Lessor, whose principal office is at 135 S. LaSalle Street,
Chicago, Illinois 60603 and the Lessee, whose principal office is 741 Calle
Plano, Camarillo, California 93012.
SECTION 4. Lease Term. The term of this Lease (the "Term") shall begin
---------- ----
on October 30, 1996, and shall end on October 30, 2001, unless the Term is
renewed or earlier terminated in accordance with the provisions of the Lease.
The Lease contains one option period of three years, which give Lessee the
right, subject to the terms thereof, to extend the term of the Lease to October
30, 2004.
SECTION 5. Ownership of the Property. (a) It is the intent of the
-------------------------
parties hereto that: (i) the Lease constitutes an "operating lease" pursuant to
Statement of Financial Accounting Standards No. 13, as amended, for purposes of
Lessee's financial reporting, and (ii) for purposes of Federal and state income
tax, the transaction contemplated hereby and by the Lease is a financing
arrangement and preserves ownership in the Property in the Lessee.
Nevertheless, the Lessee acknowledges and agrees that neither the Agent, the
Lessor nor any Participant has made any representations or warranties to the
Lessee concerning the tax, accounting or legal characteristics of the Operative
Documents and that the Lessee has obtained and relied upon such tax, accounting
and legal advice concerning the Operative Documents as it deems appropriate.
Accordingly, and notwithstanding any provision of this Lease to the contrary,
the Lessor and the Lessee agree and declare that: (i) the transactions
contemplated hereby are intended to have a dual, rather than a single, form; and
(ii) all references in this Lease to the "lease" of the Property which fail to
reference such dual form do so as a matter of convenience only and do not
reflect the intent of the Lessor and the Lessee as to the true form of such
arrangements.
(b) Anything to the contrary in the Operative Documents notwithstanding,
the Lessor and the Lessee intend and agree that with respect to the nature of
the transactions evidenced by the Lease in the context of the exercise of
remedies under the Operative Documents, including, without limitation, in the
case of any insolvency or receivership proceedings or a petition under the
United States bankruptcy laws or any other applicable insolvency laws or statute
of the United States of America or any State or Commonwealth thereof affecting
the Lessee, the Lessor or any Participant or any enforcement or collection
actions, (i) the transactions evidenced by the Lease are loans made by the
Lessor and the Participants as unrelated third party lenders to the Lessee
secured by the Property, (ii) the obligations of the Lessee under the Lease to
pay Basic Rent and Supplemental Rent or Asset Termination Value in connection
with any purchase of the Property pursuant to the Lease shall be treated as
payments of interest on and principal of, respectively, loans from the Lessor
and the Participants to the Lessee, and (iii) the Lease grants a security
interest and mortgage or deed of trust or lien, as the case may be, in the
Property and the Collateral described in the Mortgage to the Lessor, the Agent
and the Participants to secure the Lessee's performance under and payment of all
amounts under the Lease and the other Operative Documents.
(c) Specifically, but without limiting the generality of subsection (b) of
--------------
this Section 5, the Lessor and the Lessee further intend and agree that, for the
---------
purpose of securing the Lessee's obligations for the repayment of the above-
described loans from the Certificate Purchaser and the
<PAGE>
Lenders to the Lessee, (i) the Lease shall also be deemed to be a security
agreement and financing statement within the meaning of Article 9 of the Uniform
Commercial Code and a real property mortgage or deed of trust; (ii) the
conveyance provided for hereby and in Article II of the Lease shall be deemed to
----------
be a grant by the Lessee to the Lessor, the Agent and the Participants of a
mortgage lien and security interest in all of the Lessee's right, title and
interest in and to the Property and the Collateral described in the Mortgage and
all proceeds of the conversion, voluntary or involuntary, of the foregoing into
cash, investments, securities or other property, whether in the form of cash,
investments, securities or other property (it being understood that the Lessee
hereby mortgages and warrants and grants a security interest in the Property and
the Collateral described in the Mortgage to the Lessor, the Agent and the
Participants to secure the loans); (iii) the possession by the Lessor or any of
its agents of notes and such other items of property as constitute instruments,
money, negotiable documents or chattel paper shall be deemed to be "possession
by the secured party" for purposes of perfecting the security interest pursuant
to Section 9-305 of the Uniform Commercial Code; and (iv) notifications to
Persons holding such property, and acknowledgments, receipts or confirmations
from financial intermediaries, bankers or agents (as applicable) of the Lessee
shall be deemed to have been given for the purpose of perfecting such security
interest under Applicable Law. The Lessor and the Lessee shall, to the extent
consistent with the Lease, take such actions and execute, deliver, file and
record such other documents, financing statements, mortgages and deeds of trust
as may be necessary to ensure that, if the Lease and this Lease Supplement were
deemed to create a security interest in the Property in accordance with this
Section, such security interest would be deemed to be a perfected security
interest of first priority under Applicable Law and will be maintained as such
throughout the Term.
(d) Specifically, without limiting the generality of anything contained in
this Section 5, the Lessor and the Lessee further intend and agree that, for
---------
purposes of filing federal, state and local returns, reports and other
statements relating to income or franchise taxes, or any other taxes imposed
upon or measured by income, (i) the Lessee shall be entitled to take any
deduction, credit, allowance or other reporting position consistent with its
status as owner of the Property; and (ii) the Lessor and the Participants shall
take a position on their respective federal, state and local returns, reports
and other statements relating to income or franchise taxes that is consistent
with the Lessee's status as owner of the Property, provided that the Lessor and
--------
any Participant may take a position that is inconsistent with the Lessee's
status as owner of the Property if: (x) there has been a change in law or
regulation so requiring as supported by an opinion of counsel reasonably
acceptable to the Lessee that there is not substantial authority for such a
consistent reporting position; or (y) (A) there has been an administrative or
judicial holding that the Lessee is not the owner of the Property, (B) the
Lessee has no right to contest such holding pursuant to Section 13.5 of the
------------
Participation Agreement, and (C) the Lessee's lack of right to contest is not
the result of an Indemnitee's waiver of its right to indemnification pursuant to
Section 13.5(b)(iii) of the Participation Agreement or failure of the amount at
- - --------------------
issue to exceed the minimum amount set forth in Section 13.5(f)(iv)(B) of the
----------------------
Participation Agreement.
SECTION 6. Remedies. Without limiting any other remedies set forth in
--------
the Lease, in the event that a court of competent jurisdiction rules that the
Lease constitutes a mortgage, deed or trust
-3-
<PAGE>
or other secured financing as is the intent of the parties, then the Lessor and
the Lessee agree that (i) the Lessee hereby grants a Lien against the Property
WITH POWER OF SALE, and that upon the occurrence of a Lease Event of Default,
the Lessor shall have the power and authority, to the extent provided by law,
after proper notice and lapse of such time as may be required by law, to sell
the Property at the time and place of sale fixed by the Lessor in said notice of
sale, either as a whole, or in separate lots or parcels or items and in such
order as the Lessor may elect, at auction to the highest bidder for cash in
lawful money of the United States payable at the time of sale; accordingly, it
is acknowledged that A POWER OF SALE HAS BEEN GRANTED IN THIS INSTRUMENT; A
POWER OF SALE MAY ALLOW THE LESSOR TO TAKE THE PROPERTY AND SELL IT WITHOUT
GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY THE LESSEE UNDER THIS
INSTRUMENT, and (ii) upon the occurrence of a Lease Event of Default, the
Lessor, in lieu of or in addition to exercising any power of sale hereinabove
given, may proceed by a suit or suits in equity or at law, whether for a
foreclosure hereunder, or for the sale of the Property, or against the Lessee on
a recourse basis for the Asset Termination Value, or for the specific
performance of any covenant or agreement herein contained or in aid of the
execution of any power herein granted, or for the appointment of a receiver
pending any foreclosure hereunder or the sale of the Property, or for the
enforcement of any other appropriate legal or equitable remedy. The parties
hereto intend that, in addition to any other debt or obligation secured by the
Lien granted pursuant to this Section 6, such Lien shall secure unpaid balances
---------
of Rent and Supplemental Rent and other extensions of credit made by the Lessor
to the Lessee after this Lease is delivered to the appropriate recording offices
of Colorado, whether made pursuant to an obligation of the Lessee or otherwise,
and such Rent and Supplemental Rent shall be secured to the same extent as if
such future payment obligations of Rent and Supplemental Rent were on account of
obligatory advances to be made under a construction loan; provided such
obligations secured hereby at any one time shall not exceed the lesser of : (i)
the maximum principal sum permitted by the laws of Colorado; or (ii) Fifty-five
Million Dollars ($55,000,000) together with interest thereon calculated at the
rates provided in the Participation Agreement.
SECTION 7. Purchase Option. Sections 19 and 20 of the Lease contain
---------------
various purchase options which may be exercised by Lessee during the term of the
Lease subject to the terms and conditions of said Sections 19 and 20 of the
Lease.
SECTION 8. Liens. (a) THIS LEASE IS SUPERIOR TO A MORTGAGE IN FAVOR OF
-----
ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH AS AGENT (THE "AGENT")
-----
UNDER THE PARTICIPATION AGREEMENT DATED AS OF OCTOBER 30, 1996, AMONG THE
LESSEE, THE LESSOR, THE AGENT AND THE PARTICIPANTS, EXCEPT AS AMENDED OR
SUPPLEMENTED.
(b) NOTICE IS HEREBY GIVEN THAT NEITHER THE LESSOR, ANY PARTICIPANT NOR THE
AGENT IS OR SHALL BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO
BE FURNISHED TO THE LESSEE, OR TO ANYONE HOLDING THE PROPERTY OR ANY PART
THEREOF THROUGH OR UNDER THE LESSEE, AND THAT NO MECHANICS'S OR OTHER LIENS FOR
ANY SUCH LABOR, SERVICES OR
-4-
<PAGE>
MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF THE LESSOR IN AND TO THE
PROPERTY.
SECTION 9. Ratification. Except as specifically modified hereby, the
------------
terms and provisions of the Lease are hereby ratified and confirmed and remain
in full force and effect.
SECTION 10. Original Lease Supplement. The single executed original of
-------------------------
this Lease Supplement marked "THIS COUNTERPART IS THE ORIGINAL EXECUTED
COUNTERPART" on the signature page thereof and containing the receipt of the
Agent therefor on or following the signature page thereof shall be the Original
Executed Counterpart of this Lease Supplement (the "Original Executed
-----------------
Counterpart"). To the extent that this Lease Supplement constitutes chattel
- - -----------
paper, as such term is defined in the Uniform Commercial Code as in effect in
any applicable jurisdiction, no security interest in this Lease Supplement may
be created through the transfer or possession of any counterpart other than the
Original Executed Counterpart.
SECTION 11. GOVERNING LAW. THE LEASE SHALL BE GOVERNED BY, AND
-------------
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS,
WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES, EXCEPT AS TO MATTERS RELATING TO
THE CREATION OF THE LEASEHOLD ESTATE THEREUNDER AND THE EXERCISE OF RIGHTS AND
REMEDIES WITH RESPECT THERETO, WHICH SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAW OF THE STATE IN WHICH THE ESTATE IS LOCATED. WITHOUT
LIMITING THE FOREGOING, IN THE EVENT THAT THE LEASE IS DEEMED TO CONSTITUTE A
FINANCING, WHICH IS THE INTENTION OF THE PARTIES, THE LAWS OF THE STATE OF
ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, SHALL GOVERN THE
CREATION, TERMS AND PROVISIONS OF THE INDEBTEDNESS EVIDENCED HEREBY, BUT THE
LIEN CREATED HEREBY AND THE ENFORCEMENT OF SAID LIEN SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE IN WHICH THE ESTATE IS
LOCATED.
SECTION 12. Counterpart Execution. This Lease Supplement may be executed
---------------------
in any number of counterparts and by each of the parties hereto in separate
counterparts, all such counterparts together constituting but one and the same
instrument.
[SIGNATURE PAGE FOLLOWS]
-5-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Lease
Supplement to be duly executed by an officer thereunto duly authorized as of the
date and year first above written.
LEASE PLAN NORTH AMERICA, INC.,
an Illinois corporation, as Lessor
By: ______________________________________
E. Bruce Mumford, Vice President
VITESSE SEMICONDUCTOR CORPORATION,
a Delaware corporation, as Lessee
By: ______________________________________
Eugene F. Hovanec, Vice President,
Finance & Chief Financial Officer
<PAGE>
STATE OF ILLINOIS )
) SS.:
COUNTY OF COOK )
Before me, the undersigned, a Notary Public within and for the State
and County aforesaid, personally appeared E. Bruce Mumford, with whom I am
personally acquainted (or proved to me on the basis of satisfactory evidence),
and who, upon oath, acknowledged himself to be a Vice President of LEASE PLAN
NORTH AMERICA, INC., the within named bargainor, a corporation, and that he as
such Vice President, being duly authorized so to do, executed the foregoing
instrument for the purposes therein contained by signing the name of the
corporation by himself as such Vice President.
WITNESS my hand and seal, at office, on this the ____ day of October
1996.
______________________________
Notary Public
My Commission Expires:
____________________________
<PAGE>
STATE OF CALIFORNIA )
) SS.:
COUNTY OF VENTURA )
Before me, the undersigned, a Notary Public in and for the State and
County aforesaid, personally appeared Eugene F. Hovanec, with whom I am
personally acquainted (or proved to me on the basis of satisfactory evidence),
and who, upon oath, acknowledged himself to be the Vice President, Finance &
Chief Financial Officer of VITESSE SEMICONDUCTOR CORPORATION, the within named
bargainor, a corporation, and that he as such Vice President, Finance & Chief
Financial Officer, being duly authorized so to do, executed the foregoing
instrument for the purposes therein contained by signing the name of the
corporation by himself as such Vice President, Finance & Chief Financial
Officer.
WITNESS my hand and seal, at office, on this the ____ day of October,
1996.
______________________________
Notary Public
My Commission Expires:
____________________________
<PAGE>
THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART.
Receipt of this original counterpart of the foregoing Lease Supplement is hereby
acknowledged as of October __, 1996.
ABN AMRO BANK N.V., SAN FRANCISCO
INTERNATIONAL BRANCH, as Agent
By: ABN AMRO NORTH AMERICA, INC.,
as its agent
By: __________________________________
David M. Shipley, Vice President
By: __________________________________
E. Bruce Mumford, Senior Vice President
<PAGE>
SCHEDULE I
TO THE LEASE SUPPLEMENT NO. 1
-----------------------------
Property Description
--------------------
S-1
<PAGE>
EXHIBIT B TO THE LEASE
----------------------
[FORM OF EQUIPMENT SCHEDULE]
EQUIPMENT SCHEDULE NO.
---------------------------
Forming a part of Master Lease dated as of October 30, 1996 (the "Lease"),
between Lease Plan North America, Inc., as Lessor (the "Lessor"), and Vitesse
Semiconductor Corporation, a Delaware corporation, as Lessee (the "Lessee").
1. EQUIPMENT. The Equipment leased hereunder shall be as set forth in
the schedule attached hereto as Annex A.
TOTAL PROPERTY IMPROVEMENTS COST: $____________
2. TERM. Upon and after the date of execution hereof, the Equipment
shall be subject to the terms and conditions provided herein and in the Lease
(which is incorporated herein by reference).
3. RENT. From and after the date hereof, the Basic Rent for said
Equipment during the Basic Lease Term shall be payable on the dates and in the
amounts set forth in Article III of the Lease which is incorporated herein by
reference.
4. LESSEE CONFIRMATION. Lessee hereby confirms and warrants to Lessor
that the Equipment: (a) was duly delivered to Lessee on or prior to the date
hereof at the locations specified in Section 5 hereof; (b) has been received,
inspected and determined to be in compliance with all applicable specifications
and that the Equipment is hereby accepted for all purposes of the Lease; and (c)
is a part of the "Equipment" referred to in the Lease and is taken subject to
all terms and conditions therein and herein provided.
5. LOCATION OF EQUIPMENT. The locations of the Equipment are specified
on the Schedule of Equipment attached hereto as Annex A.
6. FINANCING STATEMENTS. Annex B attached hereto specifies the
location of all UCC financing statements or other similar documents under
applicable law covering the Equipment.
Date of Execution: ____________, ____
LEASE PLAN NORTH AMERICA, INC., VITESSE SEMICONDUCTOR
an Illinois corporation CORPORATION, a Delaware corporation
By: By:
----------------------------- ------------------------------------
Name: Name:
---------------------------- ----------------------------------
B-1
<PAGE>
Title: Title:
--------------------------- ---------------------------------
B-2
<PAGE>
ANNEX A TO
EQUIPMENT SCHEDULE
EQUIPMENT
---------
Approved by _____________________________ Page No. ___ of ___ total pages
(Lessee to initial each
page)
Attached Bill of Sale dated Equipment located at:
_______________, ____
--------------------------------------
and Street No.
------- -------- ---------- ------
Equipment Schedule No. ___. City County State Zip
This location is ___ owned, x leased, x mortgaged.
--- ---
Manufacturer and/or
Vendor Name & Description Equipment Cost
Invoice No.
See Schedule 1 Attached
B-3
<PAGE>
ANNEX B TO
EQUIPMENT SCHEDULE
FINANCING STATEMENTS COVERING
EQUIPMENT
---------------------------------------------
<TABLE>
<CAPTION>
Secured Party Statement No. Filing Date Filing Location
- - ---------------- ------------- ----------- ---------------
<S> <C> <C> <C>
</TABLE>
B-4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I............................................................................ 2
1.1. Definitions; Interpretation...................................... 2
ARTICLE II........................................................................... 2
2.1. Acceptance and Lease of Property................................. 2
2.2. Acceptance Procedure............................................. 3
2.3. Lease Term....................................................... 3
2.4. Title............................................................ 3
ARTICLE III.......................................................................... 4
3.1. Rent............................................................. 4
3.2. Payment of Basic Rent............................................ 4
3.3. Supplemental Rent................................................ 4
3.4. Method of Payment................................................ 5
ARTICLE IV........................................................................... 5
4.1. Utility Charges.................................................. 5
ARTICLE V............................................................................ 5
5.1. Quiet Enjoyment.................................................. 5
ARTICLE VI........................................................................... 5
6.1. Net Lease........................................................ 5
6.2. No Termination or Abatement...................................... 6
ARTICLE VII.......................................................................... 7
7.1. Ownership of the Property........................................ 7
ARTICLE VIII......................................................................... 8
8.1. Condition of the Property........................................ 8
8.2. Possession and Use of the Property............................... 9
ARTICLE IX........................................................................... 9
9.1. Compliance with Requirements of Law and Insurance Requirements... 9
ARTICLE X............................................................................ 9
10.1. Maintenance and Repair; Return................................... 9
ARTICLE XI........................................................................... 10
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
11.1. Modifications, Substitutions and Replacements.................... 10
ARTICLE XII.......................................................................... 11
12.1. Warranty of Title................................................ 11
12.2. Grants and Releases of Easements................................. 11
ARTICLE XIII......................................................................... 12
13.1. Permitted Contests Other Than in Respect of Indemnities.......... 12
ARTICLE XIV.......................................................................... 13
14.1. Public Liability and Workers' Compensation Insurance............. 13
14.2. Hazard and Other Insurance....................................... 13
14.3. Coverage......................................................... 13
14.4. Indemnification.................................................. 15
ARTICLE XV........................................................................... 15
15.1. Casualty and Condemnation........................................ 15
15.2. Environmental Matters............................................ 17
15.3. Notice of Environmental Matters.................................. 18
ARTICLE XVI.......................................................................... 18
16.1. Termination by the Lessee upon Certain Events.................... 18
16.2. Procedures....................................................... 18
16.3. Termination by the Lessor upon Certain Events.................... 19
16.4. Purchase of Property............................................. 19
ARTICLE XVII......................................................................... 19
17.1. Lease Events of Default.......................................... 19
17.2. Remedies......................................................... 22
17.3. Waiver of Certain Rights......................................... 24
17.4. Power of Sale and Foreclosure.................................... 24
17.5. Remedies Cumulative.............................................. 25
17.6. Lessee's Right to Cure........................................... 25
ARTICLE XVIII........................................................................ 25
18.1. The Lessor's Right to Cure the Lessee's Lease Defaults........... 25
ARTICLE XIX.......................................................................... 26
19.1. Provisions Relating to the Lessee's Termination of this Lease or
Exercise of Purchase Option or Obligation and Conveyance Upon
Remarketing and Conveyance Upon Certain Other Events.............. 26
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE XX........................................................................... 27
20.1. Purchase Option.................................................. 27
20.2. Expiration Date Purchase Obligation.............................. 27
20.3. Acceleration of Purchase Obligation.............................. 28
ARTICLE XXI.......................................................................... 28
21.1. Renewal.......................................................... 28
ARTICLE XXII......................................................................... 29
22.1. Option to Remarket............................................... 29
22.2. Certain Obligations Continue..................................... 32
22.3. Support Obligations.............................................. 32
ARTICLE XXIII........................................................................ 32
23.1. Holding Over..................................................... 32
ARTICLE XXIV......................................................................... 33
24.1. Risk of Loss..................................................... 33
ARTICLE XXV.......................................................................... 33
25.1. Subletting and Assignment........................................ 33
ARTICLE XXVI......................................................................... 34
26.1. Estoppel Certificates............................................ 34
ARTICLE XXVII........................................................................ 34
27.1. Right to Inspect................................................. 34
27.2. No Waiver........................................................ 34
ARTICLE XXVIII....................................................................... 34
28.1. Acceptance of Surrender.......................................... 34
ARTICLE XXIX......................................................................... 35
29.1. No Merger of Title............................................... 35
ARTICLE XXX.......................................................................... 35
30.1. Notices.......................................................... 35
ARTICLE XXXI......................................................................... 36
31.1. Miscellaneous.................................................... 36
iii
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
31.2. Amendments and Modifications..................................... 36
31.3. Successors and Assigns........................................... 36
31.4. Headings and Table of Contents................................... 37
31.5. Counterparts..................................................... 37
31.6. GOVERNING LAW.................................................... 37
31.7. Limitations on Recourse.......................................... 37
31.8. Original Lease................................................... 37
31.9. Usury Savings Clause............................................. 38
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
</TABLE>
vii
<PAGE>
APPENDICES
SCHEDULE 1 Amortization of Property Improvements Cost
EXHIBITS
EXHIBIT A Form of Lease Supplement
EXHIBIT B Form of Equipment Schedule
SCHEDULE
APPENDIX I Definitions and Interpretation
viii
<PAGE>
================================================================================
GUARANTEE
dated as of October 30, 1996
from
VITESSE SEMICONDUCTOR CORPORATION,
as Guarantor
to
ABN AMRO BANK N.V.,
SAN FRANCISCO INTERNATIONAL BRANCH,
as Agent
================================================================================
<PAGE>
GUARANTEE
GUARANTEE (this "Guarantee"), dated as of October 30, 1996, made by
---------
VITESSE SEMICONDUCTOR CORPORATION, a Delaware corporation (the "Guarantor"), in
---------
favor of ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH, as Agent (in
such capacity, together with its successors in such capacity, the "Agent") for
-----
the Participants (as defined herein).
W I T N E S S E T H:
-------------------
WHEREAS, Lease Plan North America, Inc., an Illinois corporation
(together with its permitted successors and assigns, the "Lessor") is to acquire
------
certain real property and construct Improvements thereon as contemplated by the
Participation Agreement, dated as of the date hereof (as amended, modified or
supplemented after the date hereof, the "Participation Agreement"), among the
-----------------------
Lessor, Vitesse Semiconductor Corporation, a Delaware corporation (together with
its permitted successors and assigns, the "Lessee"), the Agent and ABN AMRO Bank
------
N.V., San Francisco International Branch, as a Participant (together with its
permitted successors and assigns, each a "Participant" and collectively the
-----------
"Participants"), which Property shall in turn be leased to the Lessee; and
- - -------------
WHEREAS, it is a condition precedent to the obligations of the Lessor,
the Agent and the Participants under the Participation Agreement that the
Guarantor shall have executed and delivered this Guarantee to the Agent.
NOW, THEREFORE, in consideration of the premises and to induce the
Lessor to enter into the Lease and the other Operative Documents to which it is
a party and the Participants to enter into the Participation Agreement and to
purchase their Participation Interests, the Guarantor hereby agrees as follows:
SECTION 1. Defined Terms. (a) As used herein, the following terms
-------------
shall have the following respective meanings:
"Guarantee Event of Default" shall mean any of the events specified in
--------------------------
Section 11.1; provided, however, that any requirement for the giving of
-------- -------
notice, the lapse of time, or both, or any other condition, has been
satisfied.
"Obligations" means the collective reference to (i) the obligation of
-----------
the Lessor under the Operative Documents to repay the Participant Balances
of all Participants (including without limitation, interest accruing at the
then applicable rate provided in the Lease or the Participation Agreement
after the Maturity Date and interest accruing at the then applicable rate
provided in the Lease or the Participation Agreement after the filing of
any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding,
<PAGE>
relating to the Lessor or the Lessee, whether or not a claim for post-
filing or post-petition interest is allowed in such proceeding), whether
direct or indirect, absolute or contingent, due or to become due, now
existing or hereafter incurred, which may rise under, out of, or in
connection with, the Participation Agreement, the other Security Documents
or any other document made, delivered or given in connection therewith,
whether on account of Advances, interest, premium, reimbursement
obligations, fees and disbursements of counsel to the Agent or to the
Participants that are required to be paid by the Lessor pursuant to the
terms of the Participation Agreement or any Security Document) and (ii) all
other amounts payable by the Lessor under the Lease or the Participation
Agreement to the Agent and/or Participants.
"Unmatured Event of Default" shall mean an event, act, condition or
--------------------------
occurrence which with the giving of notice or the lapse of time (or both)
would become a Guarantee Event of Default.
(b) Unless otherwise defined herein, terms defined in Appendix 1 to
the Participation Agreement and used herein shall have the respective meanings
set forth in Appendix 1 to the Participation Agreement.
(c) The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Guarantee shall refer to this Guarantee as a whole and
not to any particular provision of this Guarantee, and Section references are to
this Guarantee unless otherwise specified.
(d) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
SECTION 2. Guarantee (a) The Guarantor hereby unconditionally and
---------
irrevocably guarantees to the Agent, for the benefit of the Participants and
their respective successors, indorsees, transferees and assigns, the prompt and
complete payment and performance by the Lessor when due of the Obligations;
provided that anything to the contrary herein notwithstanding, the Guarantor
- - --------
shall not be required to make any payment hereunder in respect of the
Obligations unless at such time a Lease Event of Default shall have occurred and
is continuing.
(b) The Guarantor further agrees to pay any and all reasonable
expenses (including, without limitation, all reasonable fees and disbursements
of counsel) which may be paid or incurred by the Agent or the Participants or
any of their respective successors, indorsees, transferees or assigns after the
occurrence of a Lease Event of Default in enforcing, or obtaining advice of
counsel in respect of, any rights with respect to, or collecting, any or all of
the Obligations and/or enforcing any rights with respect to, or collecting
against, the Guarantor under this Guarantee. This Guarantee shall remain in
full force and effect until the Obligations and all amounts owing hereunder are
paid in full or, if earlier, until the obligations of the Lessee to the Lessor
the Agent and the Participants under the Lease, the Participation Agreement and
the other Operative Documents shall have been paid in full.
-3-
<PAGE>
(c) No payment or payments made by the Lessor, any guarantor or any
other Person (other than full and final payment made by the Guarantor or the
Lessee) or received or collected by the Agent or the Participants from the
Lessor, any guarantor or any other Person (other than full and final payment
made by the Guarantor or the Lessee) by virtue of any action or proceeding or
any set-off or appropriation or application at any time or from time to time in
reduction of or in payment of the Obligations shall be deemed to modify, reduce,
release or otherwise affect the liability of the Guarantor hereunder which
shall, notwithstanding any such payment or payments other than payments made by
the Guarantor in respect of the Obligations or by the Lessee in respect of the
Lease or payments received or collected from the Guarantor in respect of the
Obligations or from the Lessee in respect of the Lease, remain liable for the
Obligations up to the maximum liability of the Guarantor hereunder until the
Obligations and all amounts owing hereunder are paid in full.
(d) Notwithstanding anything to the contrary in this Guarantee (but
subject to the provisions of Section 7 hereof), (a) the Guarantor's obligation
to make any payment on account of any Obligation hereunder shall be exonerated
to the extent that the Lessee or any other Person shall have tendered, following
any Lease Event of Default, full and final payment of a like amount to the Agent
or the Lessor pursuant to the Operative Documents, and (b) that in no event
shall Guarantor be liable for any failure by the Lessor to pay or any
unenforceability of the Obligations as a result of any of the following: (i) any
act, omission, misrepresentation, or breach of warranty of the Lessor (including
without limitation, any fraud, negligence or misapplication of funds by the
Lessor) except for a failure by the Lessor to pay to the extent caused by a
Lease Event of Default; (ii) the filing by or against the Lessor of any
insolvency, bankruptcy, dissolution, liquidation, reorganization or similar
proceedings; (iii) the making by the Lessor of any assignment for the benefit of
creditors; (iv) the appointment of a trustee, custodian or receiver for the
Lessor or with respect to its assets; (v) the granting or creation, whether
voluntary or involuntary, of any lien by the Lessor upon the payments due to the
Lessor under the Lease (other than in favor of the Agent or the Participants) or
any foreclosure or other sale pursuant thereto; or (vi) the execution by any
judgment creditor of the Lessor of any judgment lien upon the payments due to
the Lessor under the Lease. Notwithstanding anything to the contrary in this
Guarantee, in no event shall the Agent exercise any right of offset or
appropriation (i) with respect to any amount due on account of any Obligations
to the extent that the Lessee or any other Person shall have tendered, following
any Lease Event of Default, full and final payment of a like amount to the Agent
or the Lessor pursuant to the Operative Documents; (ii) if the Agent is able to
exercise remedies against the Collateral provided in the Cash Collateral
Agreement and the Defeasance Deposit Agreement without interference from the
Lessee or the Guarantor, except to the extent that the amounts due with respect
to the Obligations at such time exceed the value of the Collateral held at such
time; or (iii) on account of any amount due as a result of any of the events
described in the immediately preceding sentence.
SECTION 3. Right of Setoff. In addition to any rights now or
---------------
hereafter granted under applicable law or otherwise, and not by way of
limitation of any such rights, upon the occurrence of a Guarantee Event of
Default at the time when a Lease Event of Default has occurred
-4-
<PAGE>
and is continuing, the Agent is hereby authorized at any time or from time to
time, without presentment, demand, protest or other notice of any kind to the
Lessor, the Lessee or the Guarantor or to any other Person, any such notice
being hereby expressly waived, to set off and to appropriate and apply any and
all deposits (general or special) (including, without limitation, the Defeasance
Deposit, the Cash Collateral and the Collateral)and any other indebtedness at
any time held or owing by the Agent or by the Defeasance Deposit Depositary Bank
or the Depositary Bank (including, without limitation, by branches and agencies
of the Agent wherever located) to or for the credit or the account of the
Guarantor against and on account of the obligations and liabilities of the
Guarantor hereunder, and all other claims of any nature or description arising
out of or connected with this Guarantee or any other Operative Document,
irrespective of whether or not the Agent shall have made any demand hereunder
and although said obligations, liabilities or claims, or any of them, shall be
contingent or unmatured. By its acceptance hereof the Agent, on behalf of the
Participants, agrees that if the Lessor is exercising remedies against the
Lessee for the collection of the Purchase Option Price, Asset Termination Value,
Residual Value Guarantee Amount or any other amount, or if the Agent or the
Participants are exercising any remedy under this Guarantee, the Lessor, the
Agent and the Participants shall first be required to exercise their rights to
collect the Collateral under the Cash Collateral Agreement and the Defeasance
Deposit Agreement prior to exercising any remedy under the Lease or the Security
Documents in the nature of a foreclosure against the Property or against the
Lessee or the Guarantor personally for such amounts; provided, that the
restrictions set forth in this sentence shall not apply, and the Lessor, the
Agent and the Participants shall not be so restricted, if the Lessee at any time
permits or causes any interference with, or raises any defense against or
objection to, any such exercise of rights against any such Collateral.
SECTION 4. No Subrogation. Notwithstanding any payment or
--------------
payments made by the Guarantor hereunder or any setoff or application of funds
of the Guarantor by the Agent, the Guarantor shall not be entitled to be
subrogated to any of the rights of the Agent against the Lessor, the Lessee or
any other Person or any collateral security or guarantee or right of offset held
by the Agent for the payment of the Obligations, nor shall the Guarantor seek or
be entitled to seek any contribution or reimbursement from the Lessor, the
Lessee or any other Person in respect of payments made by the Guarantor
hereunder, until all amounts owing to the Agent hereunder are paid in full, at
which time the Guarantor shall be subrogated to all such rights held by the
Agent and the Participants, who agree by acceptance hereof to execute such
documents and take such actions as are reasonably necessary to transfer such
rights to the Guarantor and to enable the Guarantor to enforce such rights, at
the Guarantor's expense. If any amount shall be paid to the Guarantor on
account of such subrogation rights at any time when all of the Obligations and
all amounts owing hereunder shall not have been paid in full, such amount shall
be held by the Guarantor in trust for the Agent, segregated from other funds of
the Guarantor, and shall, forthwith upon receipt by the Guarantor, be turned
over to the Agent in the exact form received by the Guarantor (duly indorsed by
the Guarantor to the Agent, if required), to be applied against the Obligations,
whether matured or unmatured, in such order as the Agent may determine. Nothing
contained in this Section 4 shall restrict the Lessee from exercising any rights
that it has under any of the Operative Documents (other than the rights that
exist because of its status as the Guarantor under the Guarantee). The
Guarantor waives all rights and defenses arising out of an election of remedies
by the Agent, for the benefit of
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<PAGE>
the Participants, even though that election of remedies, such as a nonjudicial
foreclosure with respect to security for a guaranteed obligation, has destroyed
the Guarantor's rights of subrogation and reimbursement against the principal by
the operation of Section 580d of the California Code of Civil Procedure or
otherwise.
SECTION 5. Amendments, etc. with respect to the Obligations; Waiver of
-----------------------------------------------------------
Rights. The Guarantor shall remain obligated hereunder notwithstanding that,
- - ------
without any reservation of rights against the Guarantor and without notice to or
further assent by the Guarantor, any demand for payment of any of the
Obligations made by the Agent may be rescinded by such party and any of the
Obligations continued, and the Obligations, or the liability of any other party
upon or for any part thereof, or any collateral security or guarantee therefor
or right of offset with respect thereto, may, from time to time, in whole or in
part, be renewed, extended, amended, modified, accelerated, compromised, waived,
surrendered or released by the Agent, and the Participation Agreement and the
other Operative Documents and any other documents executed and delivered in
connection therewith may be amended, modified, supplemented or terminated, in
whole or in part, as the Agent may deem advisable from time to time, and any
collateral security, guarantee or right of offset at any time held by the Agent
for the payment of the Obligations may be sold, exchanged, waived, surrendered
or released; provided, that notwithstanding the foregoing, (i) the Operative
--------
Documents which create a Lien in favor of the Agent, for the benefit of the
Participants, shall not be subject to any Material amendment or modification
without the written consent of the Guarantor, (ii) any Operative Document to
which the Lessee is a party may only be modified with the Lessee's written
consent, and (iii) unless the Agent first obtains the written consent of the
Guarantor to such action, the Agent shall not take any action which would
materially and adversely affect the security interests or obligations secured
thereby which interests are granted to the Agent by the Lessor under the
Operative Documents as security for the performance of the Lessor's obligations
under the Operative Documents if the Guarantor were to become subrogated to the
rights of the Agent pursuant to Section 4 hereof. The Agent shall not have any
obligation to protect, secure, perfect or insure any Lien at any time held by it
as security for the Obligations or for this Guarantee or any property subject
thereto. When making any demand hereunder against the Guarantor, the Agent may,
but shall be under no obligation to, make a similar demand on the Lessor, the
Lessee or any other guarantor, and any failure by the Agent to make any such
demand or to collect any payments from the Lessor, the Lessee or any such other
guarantor or any release of the Lessor, the Lessee or such other guarantor shall
not relieve the Guarantor of its obligations or liabilities hereunder, and shall
not impair or affect the rights and remedies, express or implied, or as a matter
of law, of the Agent against the Guarantor. For the purposes hereof "demand"
shall include the commencement and continuance of any legal proceedings.
SECTION 6. Guarantee Absolute and Unconditional. The Guarantor
------------------------------------
waives any and all notice of the creation, renewal, extension or accrual of any
of the Obligations and notice of or proof of reliance by the Agent or the
Participants upon this Guarantee or acceptance of this Guarantee; the
Obligations, and any of them, shall conclusively be deemed to have been created,
contracted or incurred, or renewed, extended, amended or waived, in reliance
upon this Guarantee; and all dealings between the Lessor and the Guarantor, on
the one hand, and the Agent, on the other
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<PAGE>
hand, likewise shall be conclusively presumed to have been had or consummated in
reliance upon this Guarantee. The Guarantor waives diligence, presentment,
protest, demand for payment and notice of default or nonpayment to or upon the
Lessor or the Guarantor with respect to the Obligations. The Guarantor
understands and agrees that this Guarantee shall be construed as a continuing,
absolute and unconditional guarantee of payment without regard to (a) the
validity, regularity or enforceability of the obligations of the Lessee or the
Guarantor under the Lease or any other Operative Document, or of the Lessor
under any of the Obligations or any other collateral security therefor or
guarantee or right of offset with respect thereto at any time or from time to
time held by the Agent, (b) any defense, set-off or counterclaim (other than a
defense of payment or performance) which may at any time be available to or be
asserted by the Lessor or the Lessee against the Agent, or (c) any other
circumstance whatsoever (with or without notice to or knowledge of the Lessor,
the Lessee or the Guarantor) which constitutes, or might be construed to
constitute, an equitable or legal discharge of the Lessor for the Obligations,
or of the Guarantor under this Guarantee, in bankruptcy or in any other
instance. When pursuing its rights and remedies hereunder against the Guarantor,
the Agent may, but shall be under no obligation to, pursue such rights and
remedies as it may have against the Lessor or any other Person or against any
collateral security or guarantee for the Obligations or any right of offset with
respect thereto, and any failure by the Agent to pursue such other rights or
remedies or to collect any payments from the Lessor or any such other Person or
to realize upon any such collateral security or guarantee or to exercise any
such right of offset, or any release of the Lessor or any such other Person or
any such collateral security, guarantee or right of offset, shall not relieve
the Guarantor of any liability hereunder, and shall not impair or affect the
rights and remedies, whether express, implied or available as a matter of law,
of the Agent against the Guarantor. This Guarantee shall remain in full force
and effect and be binding in accordance with and to the extent of its terms upon
the Guarantor and its successors and assigns, and shall inure to the benefit of
the Agent, and its successors, indorsees, transferees and assigns, until all the
Obligations shall have been satisfied by payment in full, notwithstanding that
from time to time during the term of the Lease the Lessor may be free from any
Obligations, but subject to Section 2 hereof.
---------
SECTION 7. Reinstatement. This Guarantee shall continue to be
-------------
effective, or be reinstated, as the case may be, if at any time payment, or any
part thereof, of any of the Obligations is rescinded or must otherwise be
restored or returned by the Agent upon the insolvency, bankruptcy, dissolution,
liquidation or reorganization of the Lessor (but only if such proceeds were
returned to the Lessee or the Guarantor), the Lessee or the Guarantor, or upon
or as a result of the appointment of a receiver, intervenor or conservator of,
or trustee or similar officer for, the Lessor, the Lessee or the Guarantor or
any substantial part of its property, or otherwise, all as though such payments
had not been made.
SECTION 8. Payments. The Guarantor hereby guarantees that payments
--------
hereunder will be paid to the Agent without set-off or counterclaim in United
States Dollars at the office of the Agent located at 101 California Street,
Suite 4550, San Francisco, California 94111-5812.
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<PAGE>
SECTION 9. Representations, Warranties and Agreements. In order to
------------------------------------------
induce the Lessor and the Participants to enter into the Participation Agreement
and the other Operative Documents to which they are a party and to induce the
Lessor to acquire and construct the Property and to lease the same to the
Lessee, the Guarantor makes the following representations and warranties to, and
agreements with, the Agent, all of which shall survive the execution and
delivery of the Operative Documents, the making of the Advances and the purchase
of the Participation Interests therein (with the occurrence of each Advance
under the Participation Agreement and the purchase of the Participation
Interests therein being deemed to constitute a representation and warranty that
the matters specified in this Section 9 are true and correct in all material
respects on and as of, and after giving effect to, such Advance on the Funding
Date therefor, unless such representation and warranty expressly indicates that
it is being made as of any specific date in which case such representation and
warranty shall be true and correct in all material respects as of such specific
date):
9.1. Representations of the Guarantor. The Guarantor represents and
--------------------------------
warrants to each of the other parties hereto that:
(a) Corporate Status. The Guarantor (i) is a corporation duly
----------------
organized, validly existing and in good standing under the laws of the State of
Delaware and (ii) has duly qualified and is authorized to do business and has
obtained a certificate of authority to transact business as a foreign
corporation in the States of California and Colorado and in each other
jurisdiction where the failure to so qualify is reasonably likely to be
Material.
(b) Corporate Power and Authority. The Guarantor has corporate power
-----------------------------
and authority to execute, deliver and carry out the terms and provisions of the
Operative Documents to which it is or will be a party and has taken all
necessary corporate action to authorize the execution, delivery and performance
of the Operative Documents to which it is or will be a party and has or will
have duly executed and delivered each Operative Document required to be executed
and delivered by it and, assuming the due authorization, execution and delivery
thereof on the part of each other party thereto, each such Operative Document
constitutes or will constitute a legal, valid and binding obligation enforceable
against it in accordance with its terms, except as the same may be limited by
insolvency, bankruptcy, reorganization or other laws relating to or affecting
the enforcement of creditors' rights or by general equitable principles.
(c) No Violation. Neither the execution, delivery and performance by
------------
the Guarantor of the Operative Documents to which it is or will be a party nor
compliance with the terms and provisions thereof, nor the consummation by the
Guarantor of the transactions contemplated therein (i) will result in a
violation by the Guarantor of any applicable provision of any law, statute,
rule, regulation, order, writ, injunction or decree of any court or governmental
instrumentality having jurisdiction over the Guarantor or the Property that
would (x) adversely affect the validity or enforceability of the Operative
Documents to which the Guarantor is a party, or the title to, or value or
condition of, the Property, or (y) have a Material Adverse Effect on the
consolidated financial position, business or consolidated results of operations
of the Guarantor, or (z) have an adverse effect
-8-
<PAGE>
on the ability of the Guarantor to perform its obligations under the Operative
Documents, (ii) will conflict with or result in any breach under, or (other than
pursuant to the Operative Documents) result in the creation or imposition of (or
the obligation to create or impose) any Lien upon any of the property or assets
of Guarantor pursuant to the terms of, any indenture, loan agreement or other
agreement for borrowed money to which the Guarantor is a party or by which it or
any of its property or assets is bound or to which it may be subject (other than
Permitted Liens), or (iii) will violate any provision of the certificate or
articles of incorporation or bylaws of the Guarantor.
(d) Litigation. There are no actions, suits or proceedings pending
----------
or, to the knowledge of the Guarantor, threatened (i) that are reasonably likely
to have a Material Adverse Effect or (ii) that question the validity of the
Operative Documents or the rights or remedies of the Lessor, the Agent or the
Participants with respect to the Guarantor or the Property under the Operative
Documents.
(e) Governmental Approvals. No Governmental Action by any
----------------------
Governmental Authority having jurisdiction over the Guarantor or the Property is
required to authorize or is required in connection with (i) the execution,
delivery and performance by the Guarantor of any Operative Document or (ii) the
legality, validity, binding effect or enforceability against the Guarantor of
any Operative Document, except for the filing or recording of the Operative
Documents listed in Section 8.4(f) of the Participation Agreement with the
--------------
appropriate Governmental Authorities, all of which will have been completed on
or prior to the Closing Date.
SECTION 10. Covenants. The Guarantor shall comply with the covenants
---------
set forth in Section 10.1 of the Participation Agreement to be performed by the
Lessee which are incorporated herein by reference.
SECTION 11. Events of Default; Remedies.
---------------------------
11.1. Events of Default. Each of the following events shall
-----------------
constitute a Guarantee Event of Default (whether any such event shall be
voluntary or involuntary or come about or be effected by operation of law or
pursuant to or in compliance with any judgment, decree or order of any court or
any order, rule or regulation of any governmental authority) and each such
Guarantee Event of Default shall continue so long as, but only as long as, it
shall not have been remedied:
(a) the Guarantor shall default in the payment when due of any amount
owing hereunder; or
(b) the Guarantor shall fail to observe or perform any term, covenant
or condition of the Guarantor under this Guarantee (other than those
described in clause (a) of this Section 11.1), or any representation or
warranty set forth in this Guarantee or in any document entered into by the
Guarantor or the Lessee or in any document, certificate or financial or
other statement delivered by the Lessee in connection herewith shall be
false or inaccurate in any Material way, and such failure or
misrepresentation or breach of warranty shall remain
-9-
<PAGE>
uncured for a period of thirty (30) days after receipt of written notice
thereof; provided, that if such failure to perform is not capable of being
--------
cured within such period but is capable of being cured within one hundred
eighty (180) days after the occurrence of such default and the Guarantor is
proceeding diligently to cure such default, the Guarantor shall be entitled
to request an additional period (not to exceed one hundred eighty (180)
days from the date of such default) to cure such default, which extended
cure period shall be granted by Required Participants if commercially
reasonable to do so; or
(c) the Guarantor shall (i) admit in writing its inability to pay its
debts generally as they become due, (ii) file a petition under the United
States bankruptcy laws or any other applicable insolvency law or statute of
the United States of America or any State or Commonwealth thereof, (iii)
make a general assignment for the benefit of its creditors, (iv) consent to
the appointment of a receiver of itself or the whole or any substantial
part of its property, (v) fail to cause the discharge of any custodian,
trustee or receiver appointed for the Guarantor or the whole or a
substantial part of its property within sixty (60) days after such
appointment, or (vi) file a petition or answer seeking or consenting to
reorganization under the United States bankruptcy laws or any other
applicable insolvency law or statute of the United States of America or any
State or Commonwealth thereof; or
(d) insolvency proceedings or a petition under the United States
bankruptcy laws or any other applicable insolvency law or statute of the
United States of America or any State or Commonwealth thereof shall be
filed against the Guarantor and not dismissed within sixty (60) days from
the date of this filing, or a court of competent jurisdiction shall enter
an order or decree appointing, without the consent of the Guarantor, a
receiver of the Guarantor or the whole or a substantial part of its
property, and such order or decree shall not be vacated or set aside within
sixty (60) days from the date of the entry thereof; or
(e) a judgment or order for the payment of money in excess of
$1,000,000 shall be rendered against the Guarantor or any Subsidiary and
such judgment or order shall continue unsatisfied and unstayed (pursuant to
laws, rules or court orders) for a period of thirty (30) days; or
(f) the Guarantor or any of its Subsidiaries (i) shall default in the
payment when due, whether at stated maturity or otherwise, of principal or
interest in respect of Indebtedness (other than under the Operative
Documents) or obligations in respect of Off-Balance Sheet Debt having an
aggregate principal amount of $5,000,000 or more; or (ii) shall fail to
perform or observe any other condition or covenant, or any other event
shall occur or condition exist, under any agreement or instrument relating
to any such Indebtedness or Off-Balance Sheet Debt, if the effect of any
such failure, event or condition is to cause, or to permit the holder or
holders of such Indebtedness or beneficiary or beneficiaries of such
Indebtedness (or a trustee or agent on behalf of such holder or holders or
beneficiary or beneficiaries) or the lessor or the lenders under any such
Off-Balance Sheet Debt to cause such Indebtedness or Off-Balance Sheet Debt
to be declared to be due and payable prior to
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<PAGE>
its stated maturity, or cash collateral in respect thereof to be demanded
or, in the case of Off-Balance Sheet Debt, demand that the Guarantor
purchase the property covered by such Off-Balance Sheet Debt.
11.2. Remedies. No remedy may be enforced by the Agent or any other
--------
beneficiary of this Guarantee against the Guarantor unless and until a Guarantee
Event of Default occurs and is continuing. Upon the occurrence of any Guarantee
Event of Default and so long as the same shall be continuing, the Agent or its
successors, indorsees, transferees and assigns, as the case may be, may, at its
option, declare a default by written notice to the Guarantor and at any time
thereafter the Agent or such other authorized person may:
(a) exercise any right or remedy that may be available hereunder or
under any other Operative Document; or
(b) exercise any other right or remedy that may be available under
applicable law or proceed by appropriate court action to enforce the terms
hereof or to recover damages for the breach hereof.
11.3. Costs and Expenses. The Guarantor shall be liable for any and
------------------
all accrued and unpaid amounts due hereunder before, after or during the
exercise of any of the foregoing remedies, including all reasonable legal fees
and other reasonable costs and expenses incurred by the Agent or its successors,
indorsees, transferees or assigns by reason of the occurrence of any Guarantee
Event of Default or the exercise of remedies with respect thereto.
11.4. Remedies Cumulative. Except as expressly provided above, no
-------------------
remedy under this Section 11 is intended to be exclusive, but each shall be
cumulative and in addition to any other remedy provided under this Section 11 or
otherwise available at law or in equity. The exercise by the Agent or its
successors, indorsees, transferees or assigns of any one or more of such
remedies shall not preclude the simultaneous or later exercise by any such
Person or any other Person so entitled of any other remedy or remedies. No
express or implied waiver by the Agent or its successors, indorsees, transferees
or assigns of any Guarantee Event of Default shall in any way be, or be
construed to be, a waiver of any future or subsequent Guarantee Event of
Default. The failure or delay of the Agent or its successors, indorsees,
transferees or assigns in exercising any rights granted it hereunder upon any
occurrence of any of the contingencies set forth herein shall not constitute a
waiver of any such right upon the continuation or recurrence of any such
contingencies or similar contingencies and any single or partial exercise of any
particular right by the Agent or its successors, indorsees, transferees or
assigns shall not exhaust the same or constitute a waiver of any other right
provided herein.
SECTION 12. Notices. All notices, requests and demands to or upon
-------
the Agent or the Guarantor shall be in writing and delivered (i) personally,
(ii) by a nationally recognized overnight courier service, (iii) by mail (by
registered or certified mail, return receipt requested, postage prepaid) or (iv)
by facsimile, in each case addressed as follows:
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<PAGE>
(a) if to the Agent, at its address or transmission number for notices
provided in Section 15.3 of the Participation Agreement; and
(b) if to the Guarantor, at its address or transmission number for
notices set forth opposite its signature below.
Any such notice shall be effective upon receipt or refusal thereof.
The Agent and the Guarantor may change its address and transmission numbers for
notices by notice in the manner provided in this Section 12.
SECTION 13. Severability. Any provision of this Guarantee which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
SECTION 14. Integration. This Guarantee represents the agreement of
-----------
the Guarantor with respect to the subject matter hereof and there are no
promises or representations by the Agent relative to the subject matter hereof
not reflected herein.
SECTION 15. Amendments in Writing; No Waiver; Cumulative Remedies.
------------------------------------------------------
(a) None of the terms or provisions of this Guarantee may be waived, amended,
supplemented or otherwise modified except as provided in Section 15.5 of the
Participation Agreement.
(b) The Lessor shall not by any act (except by a written instrument
pursuant to Section 15(a) hereof), delay, indulgence, omission or otherwise be
deemed to have waived any right or remedy hereunder or to have acquiesced in any
Unmatured Default or Guarantee Event of Default or in any breach of any of the
terms and conditions hereof. No failure to exercise, nor any delay in
exercising, on the part of the Agent any right, power or privilege hereunder
shall operate as a waiver thereof. No single or partial exercise of any right,
power or privilege hereunder shall preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. A waiver by the
Agent of any right or remedy hereunder on any one occasion shall not be
construed as a bar to any right or remedy which the Agent would otherwise have
on any future occasion.
(c) The rights and remedies herein provided are cumulative, may be
exercised singly or concurrently and are not exclusive of any other rights or
remedies provided by law.
SECTION 16. Section Headings. The section headings used in this
----------------
Guarantee are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.
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<PAGE>
SECTION 17. Successors and Assigns. This Guarantee shall be binding
----------------------
upon the successors and assigns of the Guarantor and shall inure to the benefit
of the Agent and its successors and assigns.
SECTION 18. SUBMISSION TO JURISDICTION; WAIVERS. THE GUARANTOR HEREBY
-----------------------------------
IRREVOCABLY AND UNCONDITIONALLY:
(a) SUBMITS FOR ITSELF AND ITS PROPERTY IN ALL LEGAL ACTION OR
PROCEEDING RELATING TO THIS GUARANTEE OR ANY OTHER OPERATIVE DOCUMENT TO
WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN
RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF
THE STATE OF ILLINOIS, THE COURTS OF THE UNITED STATES FOR THE NORTHERN
DISTRICT OF ILLINOIS, AND APPELLATE COURTS FROM ANY THEREOF;
(b) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN
SUCH COURTS AND WAIVES TRIAL BY JURY AND ANY OBJECTION THAT IT MAY NOW OR
HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH
COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN ANY INCONVENIENT
COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME;
(c) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR
PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR
CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE
PREPAID, TO IT AT ITS ADDRESS SET FORTH HEREIN OR AT SUCH OTHER ADDRESS OF
WHICH THE AGENT SHALL HAVE BEEN NOTIFIED PURSUANT THERETO; AND
(d) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT
SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE
RIGHT TO SUE IN ANY OTHER JURISDICTION.
SECTION 19. Indemnity. The Guarantor agrees to indemnify the Agent
---------
and the Participants and their respective officers, directors, employees,
representatives and agents from and hold each of them harmless against any and
all losses, liabilities, claims, damages or expenses incurred by any of them as
a result of, or arising out of, or in any way related to, or by reason of those
matters set forth in Section 13 of the Participation Agreement, the provisions
of which are incorporated herein by reference, provided that in each case the
indemnifying party shall be the Guarantor and not the Lessee. The agreements in
this Section 19 shall survive payment and performance of the Obligations and all
other amounts payable hereunder or under the other Operative Documents.
SECTION 20. GOVERNING LAW. THIS GUARANTEE SHALL IN ALL RESPECTS BE
-------------
GOVERNED BY THE LAW OF THE STATE OF ILLINOIS (EXCLUDING
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<PAGE>
ANY CONFLICT-OF-LAW OR CHOICE-OF-LAW RULES WHICH MIGHT LEAD TO THE APPLICATION
OF THE INTERNAL LAWS OF ANY OTHER JURISDICTION) AS TO ALL MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE, EXCEPT AS TO MATTERS RELATING TO THE
CREATION OF LIENS AND THE EXERCISE OF REMEDIES WITH RESPECT THERETO, WHICH SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE IN WHICH
THE PROPERTY IS LOCATED.
SECTION 21. Nature of Transaction. (a) The Guarantor acknowledges
---------------------
that it is the intent of the parties to the Participation Agreement and the
Lease that: (i) the Lease constitutes an "operating lease" pursuant to
Statement of Financial Accounting Standards No. 13, as amended, for purposes of
the Lessee's financial reporting, and (ii) for purposes of federal, state, and
local income or franchise taxes and for any other tax imposed on or measured by
income, the transaction contemplated by the Lease is a financing arrangement and
preserves ownership in the Property in the Lessee. Nevertheless, the Guarantor
acknowledges and agrees that neither the Agent, the Lessor nor any Participant
has made any representations or warranties to the Guarantor concerning the tax,
accounting or legal characteristics of the Operative Documents and that the
Guarantor has obtained and relied upon such tax, accounting and legal advice
concerning the Operative Documents as it deems appropriate. Accordingly, and
notwithstanding any provision of the Operative Documents to the contrary, the
Guarantor acknowledges that: (i) the transactions contemplated by the Operative
Documents are intended to have a dual, rather than a single, form; and (ii) all
references in the Lease to the "lease" of the Property which fail to reference
such dual form do so as a matter of convenience only and do not reflect the
intent of the Lessor and the Lessee as to the true form of such arrangements.
(b) Anything to the contrary in the Operative Documents
notwithstanding, the Guarantor further acknowledges that the Agent and the
Lessee intend and have agreed that with respect to the nature of the
transactions evidenced by the Lease in the context of the exercise of remedies
under the Operative Documents, including, without limitation, in the case of any
insolvency or receivership proceedings or a petition under the United States
bankruptcy laws or any other applicable insolvency laws or statute of the United
States of America or any State or Commonwealth thereof affecting the Lessee, the
Agent, or any Participant or any enforcement or collection actions but other
than for purposes of Lessee's financial reporting, (i) the transactions
evidenced by the Lease are loans made by the Participants as unrelated third
party lenders to the Lessee secured by the Property, (ii) the obligations of the
Lessee under the Lease to pay Basic Rent and Supplemental Rent or Asset
Termination Value in connection with a purchase of the Property pursuant to the
Lease shall be treated as payments of interest on and principal of,
respectively, loans from the Lessor and the Participants to the Lessee, and
(iii) the Lease grants a security interest and mortgage or deed of trust or
lien, as the case may be, in the Property and the collateral described in the
Mortgage to the Lessor, the Agent and the Participants to secure the Lessee's
performance under and payment of all amounts under the Lease and the other
Operative Documents.
(c) Specifically, without limiting the generality of subsection (b)
--------------
of this Section 21, the Guarantor acknowledges that the Lessor and the Lessee
----------
further intend and agree that, for the purpose of securing the Lessee's
obligations for the repayment of the above-described loans from
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<PAGE>
the Lessor and the Participants to the Lessee, (i) the Lease shall also be
deemed to be a security agreement and financing statement within the meaning of
Article 9 of the Uniform Commercial Code (and specifically, a construction
mortgage, as said term is defined in Section 9-313(1)(c) of the Uniform
Commercial Code) and a real property mortgage or deed of trust; (ii) the
conveyance provided for in Article II of the Lease shall be deemed to be a grant
----------
by the Lessee to the Lessor, the Agent and the Participants of a mortgage lien
and security interest in all of the Lessee's right, title and interest in and to
the Property and the collateral described in the Mortgage and all proceeds of
the conversion, voluntary or involuntary, of the foregoing into cash,
investments, securities or other property, whether in the form of cash,
investments, securities or other property (it being understood that Lessee
hereby mortgages and warrants and grants a security interest in the Property and
the collateral described in the Mortgage to Lessor, the Agent and the
Participants to secure such loans); (iii) the possession by the Lessor or any of
its agents of notes and such other items of property as constitute instruments,
money, negotiable documents or chattel paper shall be deemed to be "possession
by the secured party" for purposes of perfecting the security interest pursuant
to Section 9-305 of the Uniform Commercial Code; and (iv) notifications to
Persons holding such property, and acknowledgments, receipts or confirmations
from financial intermediaries, bankers or agents (as applicable) of the Lessee
shall be deemed to have been given for the purpose of perfecting such security
interest under Applicable Law. The Lessor and the Lessee shall, to the extent
consistent with the Lease, take such actions and execute, deliver, file and
record such other documents, financing statements, mortgages and deeds of trust
as may be necessary to ensure that, if the Lease were deemed to create a
security interest in the Property in accordance with this Section, such security
interest would be deemed to be a perfected security interest of first priority
under Applicable Law and will be maintained as such throughout the Term.
(d) Specifically, without limiting the generality of anything
contained in this Section 21, the Guarantor acknowledges that the Lessor and the
----------
Lessee further intend and agree that, for purposes of filing federal, state and
local returns, reports and other statements relating to income or franchise
taxes, or any other taxes imposed upon or measured by income, (i) the Lessee
shall be entitled to take any deduction, credit, allowance or other reporting
position consistent with its status as owner of the Property; and (ii) the
Lessor and the Participants shall take an initial position on their respective
federal, state and local returns, reports and other statements relating to
income or franchise taxes that is consistent with the Lessee's status as owner
of the Property to the extent they may do so without incurring any penalties.
(e) The Guarantor hereby agrees not to take any action or to assert
any position in any insolvency, receivership, bankruptcy or similar proceedings
which is contrary to the intentions and agreements with respect to the nature of
the Lease set forth in Sections 21 (a), (b), (c) and (d) and waives any and all
of such rights.
[SIGNATURE PAGE FOLLOWS]
-15-
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Guarantee to be duly
executed and delivered by its duly authorized officer as of day and year first
above written.
VITESSE SEMICONDUCTOR CORPORATION,
a Delaware corporation
By:__________________________________________
Eugene F. Hovanec,
Vice President, Finance
& Chief Financial Officer
Address: 741 Calle Plano
Camarillo, California 93012
Attention: Eugene F. Hovanec,
Vice President, Finance and Chief
Financial Officer
Telecopy: (805) 388-7565
-16-
<PAGE>
ATTACHMENT 2
TO DEFEASANCE DEPOSIT AGREEMENT
-------------------------------
NOTICE OF SECURITY INTEREST
---------------------------
[____________,_____]
[Name of Defeasance Deposit Depositary Bank]
------------------------------------------
[Address of Defeasance Deposit Depositary Bank]
---------------------------------------------
1. Reference is made to:
(a) The Participation Agreement dated as of October 30, 1996 (the
"Participation Agreement") among Vitesse Semiconductor Corporation
-----------------------
("Lessee"), Lease Plan North America, Inc. ("Lessor"), the financial
------ ------
institutions which are from time to time participants under such
Participation Agreement (collectively, the "Participants") and ABN AMRO
------------
Bank N.V., San Francisco International Branch, acting in its capacity as
agent for the Participants (in such capacity, ("Agent"); and
-----
(b) The Defeasance Deposit Agreement dated as of October 30, 1996 (the
"Defeasance Deposit Agreement") among Lessee, Lessor and Agent.
----------------------------
Unless otherwise defined herein, all capitalized terms used in this Notice of
Security Interest have the respective meanings given to those terms in the
Participation Agreement and the Defeasance Deposit Agreement.
2. Lessee has informed Agent that Lessee has established with the
addressee of this Notice (the "Defeasance Deposit Depositary Bank") the
----------------------------------
following Accounts)[describe each Account separately by type (i.e., time deposit
account or certificate of deposit), Account Office and account number]:
Account Account
Type Office Account Number
------- ------- --------------
- ---------------------
- ---------------------
- ---------------------
- ---------------------
<PAGE>
Lessee has further informed Agent that Lessee intends to maintain Defeasance
Deposit Collateral in the aggregate principal amount of the Tranche A
Participation Interest in the Advances in such Account(s).
3. Lessee and Agent hereby notify the Defeasance Deposit Depositary Bank
that, pursuant to the Defeasance Deposit Agreement, Lessee has granted to Agent,
for the ratable benefit of Lessor, the Tranche A Participants and Agent as
security for the Obligations, a security interest in all Accounts and other
Collateral maintained by Lessee with the Defeasance Deposit Depositary Bank
including, without limitation, the Account(s) described in paragraph 2 above.
-----------
4. In furtherance of such grant, Lessee and Agent hereby authorize and
direct the Defeasance Deposit Depositary Bank to:
(a) Hold all Collateral for Agent and as Agent's bailee;
(b) Make a notation in its books and records of Agent's interest in
the Collateral;
(c) Take such other steps as Agent may reasonably request to perfect
its security interest in the Collateral; and
(d) Upon receipt of notice from Agent that (i) Lessee is purchasing
the Property, (ii) Lessee has exercised its Remarketing Option under the Lease
or (iii) an Event of Default has occurred, transfer and deliver to Agent or its
nominee, together with all necessary endorsements, all or such portion of the
Collateral held by Defeasance Deposit Depositary Bank as Agent shall direct.
5. Lessee and Agent agree that (a) the possession by Defeasance Deposit
Depositary Bank of all money, instruments, chattel paper and other property
constituting Collateral shall be deemed to be possession by Agent or a person
designated by Agent, for purposes of perfecting the security interest granted to
Agent hereunder pursuant to Section 9305, 8313 or 8321 of the Uniform Commercial
------------ ---- ----
Code, as the case may be, and (b) notifications to Defeasance Deposit Depositary
Bank by other Persons holding any such property, and acknowledgments, receipts
or confirmations from such Persons delivered to Defeasance Deposit Depositary
Bank, shall be deemed notifications to, or acknowledgments, receipts or
confirmations from, financial intermediaries, bailees or agents (as applicable)
of Defeasance Deposit Depositary Bank for the benefit of Agent for the purposes
of perfecting such security interests under applicable law.
6. Please acknowledge the Defeasance Deposit Depositary Bank's receipt of
this notice, acknowledge that the Defeasance Deposit Depositary Bank will hold
the Collateral for Agent, confirm that the Defeasance Deposit Depositary Bank
will comply with the other authorizations and directions set forth herein and
confirm the representations and warranties set forth in the Defeasance Deposit
Agreement by executing the attached copy of this letter in the space provided
and returning
<PAGE>
it to Agent. The authorizations and directions set forth herein may not be
revoked or modified without the written consent of Agent.
VITESSE SEMICONDUCTOR CORPORATION
By:
-------------------------------------
Name:
----------------------------------
Title:
----------------------------------
ABN AMRO BANK N.V., SAN FRANCISCO
INTERNATIONAL BRANCH, as Agent
By: ABN AMRO NORTH AMERICA, INC., as its agent
By:
--------------------------------------
Name:
---------------------------------
Title:
---------------------------------
By:
--------------------------------------
Name:
---------------------------------
Title:
---------------------------------
P(1)-3
<PAGE>
ACKNOWLEDGMENT AND AGREEMENT
OF DEFEASANCE DEPOSIT DEPOSITARY BANK
-------------------------------------
The Defeasance Deposit Depositary Bank hereby acknowledges receipt of the
above notice, acknowledges that it will hold the Collateral for Agent, agrees to
comply with the authorizations and directions set forth above and represents to
Lessee, Lessor, the Participants and Agent as follows:
(a) The Defeasance Deposit Depositary Bank is a commercial bank
organized under the laws of the United States of America or a State
thereof or under the laws of another country which is doing business in
the United States of America.
(b) The Defeasance Deposit Depositary Bank has undivided profits of
at least $
-------------------.
(c) The Defeasance Deposit Depositary Bank has a debt rating of at
least "A" from [Standard & Poors Ratings Group][Moody's Investors
Service].
(d) The information set forth above regarding the Account(s) is
accurate. Such Account(s) is (are) currently open and the Defeasance
Deposit Depositary Bank has no prior notice of any other security interest,
Lien or interest in such Account(s).
(e) All actions necessary to perfect the security interest of Agent
in such Account(s) have been taken under the laws of the jurisdiction in
which the applicable Account Office(s) is (are) located.
[ ]
---------------------------------------
By:
---------------------------------------
Name:
----------------------------------
Title:
--------------------------------
[Date]
P(1)-4
<PAGE>
CASH COLLATERAL AGREEMENT
-------------------------
THIS CASH COLLATERAL AGREEMENT (this "Cash Collateral Agreement"), dated as
-------------------------
of October 30, 1996, is entered into among:
(1) VITESSE SEMICONDUCTOR CORPORATION, a Delaware corporation
("Lessee");
------
(2) ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH, acting in
its capacity as agent for the Participants (as hereafter defined) under the
Participation Agreement referred to in Recital A below (in such capacity,
"Agent"); and
------
(3) LEASE PLAN NORTH AMERICA, INC., an Illinois corporation
("Lessor").
------
RECITALS
--------
A. Pursuant to the Participation Agreement dated as of October 30, 1996
(the "Participation Agreement"), among Lessee, Lessor, the financial
-----------------------
institutions which are from time to time participants under the Participation
Agreement (collectively, the "Participants") and Agent, Lessor and the
------------
Participants have agreed to provide certain lease facilities to Lessee upon the
terms and subject to the conditions set forth therein.
B. Pursuant to certain provisions of the Participation Agreement, Lessee
may be required from time to time to deliver cash collateral for certain of its
obligations under the Participation Agreement and related documents, instruments
and agreements. Pursuant to certain other provisions of the Participation
Agreement, Lessee may at its option from time to time deliver such cash
collateral to reduce the interest rate used to calculate the rent payable by
Lessee with respect to the Tranche B Participation Interest in the Advances
under the lease facilities. This Cash Collateral Agreement sets forth the terms
and conditions governing such cash collateral.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the above recitals and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
<PAGE>
1. DEFINITIONS AND INTERPRETATION. When used in this Cash Collateral
------------------------------
Agreement, the following terms shall have the following respective meanings:
"Account" shall mean a certificate of deposit, deposit account or
-------
other account established and maintained by Lessee with Depositary Bank
pursuant to this Cash Collateral Agreement.
"Account Office" shall mean, with respect to any Account maintained by
--------------
Depositary Bank, the office of Depositary Bank at which such Account is
maintained.
"Agent" shall have the meaning given to that term in the introductory
-----
paragraph hereof.
"Cash Collateral" shall mean and include all cash of Lessee which
---------------
Lessee has delivered to Depositary Bank pursuant to this Cash Collateral
Agreement and all forms of investments of such cash by Depositary Bank on
behalf of Lessee, including, without limitation, Accounts issued or
maintained by Depositary Bank. (This definition is not meant to expand the
investments permitted by Subparagraph 3(c) hereof or to limit the right of
-----------------
Lessee under such subparagraph to direct such investments.)
"Collateral" shall have the meaning given to that term in paragraph 2
---------- -----------
hereof.
"Depositary Bank" shall mean, to the extent any such Person holds Cash
---------------
Collateral pursuant to this Cash Collateral Agreement, (a) Agent, or (b)
if, at any time, Agent is an affiliate of a bank but not itself a bank,
then a bank affiliate of Agent acting in lieu of such Participant or (c)
another bank acting as Depositary Bank pursuant to Section 4(a)(ii) of this
Cash Collateral Agreement.
"Lessee" shall have the meaning given to that term in the introductory
------
paragraph hereof.
"Lessor" shall have the meaning given to that term in the introductory
------
paragraph hereof.
"Notice of Security Interest" shall mean a Notice of Security Interest
---------------------------
in the form of Attachment 1.
------------
"Participants" shall have the meaning given to that term in Recital A
------------ ---------
hereof.
"Participation Agreement" shall have the meaning given to that term in
-----------------------
Recital A hereof.
---------
<PAGE>
"Obligations" shall mean and include all Rent, Advances and other
-----------
liabilities and obligations, direct or indirect, absolute or contingent,
due or to become due, now existing or hereafter arising, owed by Lessee to
Lessor, any Tranche B Participant or Agent in respect of the Tranche B
Participation Interests pursuant to the terms of the Participation
Agreement or any of the other Operative Documents, including without
limitation all Rent, interest, fees, charges, expenses and attorneys' fees
chargeable to Lessee or payable by Lessee thereunder.
"UCC" shall mean the Uniform Commercial Code as in effect in the State
---
of California from time to time.
"Value" shall mean, with respect to any Cash Collateral at any time,
-----
the current principal amount of such Cash Collateral.
Unless otherwise defined herein, all other capitalized terms used herein and
defined in Appendix 1 to the Participation Agreement shall have the respective
meanings given to those terms therein, and all terms defined in the UCC shall
have the respective meanings given to those terms in the UCC. The rules of
construction set forth in Appendix 1 to the Participation Agreement shall, to
-----------------------------------------
the extent not inconsistent with the terms of this Cash Collateral Agreement,
apply to this Cash Collateral Agreement and are hereby incorporated by
reference.
2. GRANT OF SECURITY INTEREST. As security for the Obligations, Lessee
--------------------------
hereby pledges and assigns to Agent (for the ratable benefit of Lessor, the
Tranche B Participants and Agent) and grants to Agent (for the ratable benefit
of Lessor, the Tranche B Participants and Agent) a security interest in all
right, title and interest of Lessee in and to the following property, whether
now owned or hereafter acquired (collectively and severally, the "Collateral"):
----------
(a) All Accounts and other Cash Collateral; all documents,
instruments and agreements evidencing the same; all extensions, renewals,
modifications and replacements of the foregoing; and all interest and other
amounts payable in connection therewith; and
(b) All proceeds of the foregoing (including, without limitation,
whatever is receivable or received when Collateral or proceeds is sold,
collected, exchanged, returned, substituted or otherwise disposed of,
whether such disposition is voluntary or involuntary, including rights to
payment and return premiums and insurance proceeds under insurance with
respect to any Collateral, and all rights to payment with respect to any
cause of action affecting or relating to the Collateral).
The pledge, assignment and grant of a security interest made by Lessee hereunder
is for security of the Obligations only. The parties hereto do not intend for
the Collateral to constitute advance payment of any Obligations or liquidated
damages nor do the parties intend for the Collateral to increase the Obligations
owed by Lessee to Lessor, the Participants and Agent under the Operative
Documents. Without limiting the generality of the foregoing, the parties
acknowledge and agree
Q-3
<PAGE>
that, upon the exercise by Lessee of the Remarketing Option in accordance with
Article XXII of the Lease, the Obligations of Lessee shall be limited as
- - -------------------------
provided therein.
3. DELIVERY AND MAINTENANCE OF CASH COLLATERAL. The parties acknowledge
-------------------------------------------
that no Cash Collateral is being delivered to Depositary Bank upon execution of
this Agreement. Lessee shall be obligated to deliver Cash Collateral pursuant
hereto when required under Section 10.1(n) of the Participation Agreement. In
addition, Lessee may deliver Cash Collateral pursuant hereto as provided in
Section 10.1(n) of the Participation Agreement. Cash Collateral may be
delivered only to, and Cash Collateral may be maintained only by, Depositary
Bank, subject to the following terms and conditions:
(a) The Lessee shall deliver to Agent, at least three (3) Business
Days prior to Lessee's delivery of any Cash Collateral, a written notice
of its intention to deliver such Cash Collateral, in the form of Attachment
----------
1, setting forth, among other things, (i) the total amount of such Cash
-
Collateral to be delivered and (ii) the proposed date of delivery. Agent
shall promptly notify Depositary Bank and the Tranche B Participants of the
contents of each such notice.
(b) At or prior to the time Depositary Bank receives Cash Collateral
for inclusion in an Account:
(i) Agent and Lessee shall have completed, executed and
delivered to Depositary Bank a Notice of Security Interest in the
form of Attachment 3 (a "Notice of Security Interest") which
------------ --------- -----------------
specifically identifies such Account; and
(ii Depositary Bank shall have executed the Acknowledgment and
Agreement at the end of such Notice of Security Interest and returned
the same to Agent and Lessee.
(c) Unless a Default or an Event of Default has occurred and is
continuing, Lessee may direct Depositary Bank to hold such Cash
Collateral in the form of certificates of deposit issued by Depositary Bank
or time deposit accounts of Depositary Bank. The term of any certificate
of deposit or time deposit account shall be three (3) months, except that
no such term shall extend beyond the Expiration Date of the Lease. If a
Default or an Event of Default has occurred and is continuing, all Cash
Collateral shall, at the end of the current terms of all investments
thereof, be maintained in time deposit accounts of Depositary Bank with
terms not exceeding one (1) week.
(d) Such certificates of deposit or time deposit accounts shall bear
interest at a per annum rate equal to Depositary Bank's three month
Eurodollar rate for certificates of deposit or time deposits of a
comparable amount, except that if any provision of the Participation
Agreement requires that the Tranche B Participation Interests in the
Advances bear interest at the Alternate Base Rate or the Participants'
average cost of funds, such
Q-4
<PAGE>
certificates of deposit or time deposit accounts shall bear interest at
such rates and during such periods as are applicable to the Tranche B
Participation Interests.
(e) If no Default or Event of Default has occurred and is continuing,
Lessee shall be entitled to receive all interest payable on Cash
Collateral as and when payable, free and clear of all liens and security
interests hereunder.
(f) Lessee and Agent agree that (i) the possession by Depositary Bank
of any money, instruments, chattel paper or other property constituting
Collateral or evidencing Collateral shall be deemed to be possession by
Agent or a person designated by Agent, for purposes of perfecting the
security interest granted to Agent hereunder pursuant to Section 9305, 8313
------------ ----
or 8321 of the Uniform Commercial Code, as the case may be, and (ii)
----
notifications to Depositary Bank by other Persons holding any such
property, and acknowledgments, receipts or confirmations from any such
Persons delivered to Depositary Bank, shall be deemed notifications to, or
acknowledgments, receipts or confirmations from, financial intermediaries,
bailees or agents (as applicable) of Depositary Bank for the benefit of
Agent for the purposes of perfecting such security interests under
applicable law.
4. WITHDRAWAL OR OFFSET OF CASH COLLATERAL. (a) Lessee may not withdraw
---------------------------------------
Cash Collateral from Depositary Bank, except as follows:
(i) Lessee may withdraw interest as provided in Subparagraph
------------
3(e).
(ii) If the representations and warranties of Agent, as
Depositary Bank, set forth in Subparagraph 5(b), or a Participant, as a
-----------------
replacement Depositary Bank, cease to be true and correct at any time,
Lessee may direct Agent or such Participant, as the case may be, to
transfer all Cash Collateral then held by Agent or such Participant to
another Participant or another bank that can make the representations and
warranties of a Depositary Bank set forth in such subparagraph to be held
by such Participant (or such Depositary Bank) in such a manner as is
consistent with the terms and conditions of this Cash Collateral Agreement.
(iii) If no Default or Event of Default has occurred and is
continuing and Lessee is not required to maintain Cash Collateral
pursuant to Section 10.1(n) of the Participation Agreement or any other
----------------------------------------------
provision of any operative Document, Lessee may withdraw Cash Collateral
from Depositary Bank, free and clear of all liens and security interests
hereunder, provided that:
(A) Lessee gives Depositary Bank and Agent at least three (3)
Business Days prior written notice of such withdrawal;
(B) Lessee shall not make more than three (3) withdrawals from
Depositary Bank in any calendar quarter; and
Q-5
<PAGE>
(C) On the day of such withdrawal Lessee pays the Cash Collateral
Return Fee pursuant to Section 10.1(n) of the Participation Agreement.
----------------------------------------------
(iv If no Default or Event of Default has occurred and is continuing
but Lessee is required to maintain Cash Collateral pursuant to Section
-------
10.1(n) of the Participation Agreement or any other provision of any
---------------------------- ---------
Operative Document, Lessee may withdraw Cash Collateral from Depositary
Bank, free and clear of all liens and security interests hereunder,
provided that:
(A) Such withdrawal does not cause the Value of the Cash
Collateral then held by Depositary Bank to be less than the amount of
Cash Collateral then required by Section 10.1(n) of the Participation
------------------------------------
Agreement or such other provision of any Operative Document;
---------
(B) Lessee gives Depositary Bank and Agent at least three (3)
Business Days prior written notice of such withdrawal; and
(C) Lessee shall not make more than three (3) withdrawals from
Depositary Bank in any calendar quarter.
If Lessee withdraws any Cash Collateral from an Account prior to the last day of
any term thereof, Lessee shall pay to Depositary Bank all applicable early
withdrawal penalties and other breakage charges specified at or prior to the
time such Account was initially established, except that Lessee shall not be
liable to pay any such penalties or charges and shall not otherwise suffer any
other loss of interest or principal as a result of any transfer of Cash
Collateral from Depositary Bank to a successor Depositary Bank (i) in connection
with a transfer by Agent pursuant to Section 12 of the Participation Agreement
-----------------------------------------
of its interests in the Operative Documents to the successor Agent or any
Affiliate thereof (unless such transfer was requested or directed by Lessee) or
(ii) in connection with a transfer pursuant to Section 4(a)(ii).
----------------
(b) Lessee agrees that Agent shall withdraw or offset against Cash
Collateral for the benefit of the Tranche B Participants payment of that portion
of the Asset Termination Value or Purchase Option Price representing the Tranche
B Participation Interests (i) if Lessee so directs, in connection with a
purchase by Lessee of the Property pursuant to any of Sections 16.2, 16.3, 16.4,
17.2(e), 20.1, 20.2 or 20.3 of the Lease or (ii) pursuant to an exercise of
remedies set forth in Section 8 hereof. Agent shall apply any such Cash
---------
Collateral so withdrawn or offset in accordance with Section 3 of the
Participation Agreement. Lessee, Agent and Lessor further agree that upon the
maturity or acceleration of Lessee's obligation to pay the Asset Termination
Value or Purchase Option Price, any and all amounts of Cash Collateral that have
been deposited by Lessee pursuant to this Cash Collateral Agreement and that
have not been withdrawn by Lessee or offset or applied by Lessor, Agent or any
Participant (in accordance with the terms of this Cash Collateral Agreement) as
of such maturity or acceleration date, shall be required to be applied by Agent
and Lessor to
Q-6
<PAGE>
satisfy Lessee's obligation to pay such portion of the Asset Termination Value
or Purchase Option Price represented by such remaining Cash Collateral
notwithstanding the fact that such amounts may not then be actually available,
for any reason attributable to Lessor, Agent or any Participant (including,
without limitation any fraud or misapplication of funds by Lessor, Agent or any
Participant, any decline in value of the Cash Collateral or the filing by or
against Lessor, Agent or any Participant of any insolvency, bankruptcy,
dissolution, liquidation, reorganization or similar proceeding, but except to
the extent resulting from a proceeding involving the insolvency of Lessee), at
Depositary Bank to pay such obligation.
5. REPRESENTATIONS AND WARRANTIES.
------------------------------
(a) Lessee represents and warrants to Lessor, Agent and the
Participants as follows:
(i) Lessee is the legal and beneficial owner of the Collateral
(or, in the case of after-acquired Collateral, at the time Lessee
acquires rights in the Collateral, will be the legal and beneficial
owner thereof). No other Person has (or, in the case of after-
acquired Collateral, at the time Lessee acquires rights therein, will
have) any right, title, claim or interest (by way of Lien, purchase
option or otherwise) in, against or to the Collateral.
(ii) Agent has (or in the case of after-acquired Collateral, at
the time Lessee acquires rights therein, will have) a first priority
perfected security interest in the Collateral.
(iii) Lessee has delivered to Agent, together with all necessary
stock powers, endorsements, assignments and other necessary
instruments of transfer, the originals of all documents, instruments
and agreements evidencing Cash Collateral.
(iv) Lessee's chief executive office is located at 741 Calle
Plano, Camarillo, California 93012.
(b) Depositary Bank represents and warrants to Lessee, Lessor, Agent
and the Participants as follows:
(i) Depositary Bank is a commercial bank organized under the laws
of the United States of America or a State thereof or under the laws
of another country which is doing business in the United States of
America and has the power to issue and maintain Accounts.
(ii) Depositary Bank has a combined capital, surplus and
undivided profits of at least $500,000,000.
Q-7
<PAGE>
(iii) Depositary Bank has a debt rating of "A" (or its
equivalent) or better from Standard & Poors Ratings Group and/or a
debt rating of "A" (or its equivalent) or better from Moody's
Investors Service.
(iv) With respect to each Notice of Security Interest
acknowledged by Depositary Bank, at the time of such acknowledgment
(A) the information regarding Account(s) maintained by Depositary Bank
which is set forth in such Notice of Security Interest will be
accurate, (B) such Account(s) will be currently open and (C)
Depositary Bank will have no prior notice of any other security
interest, Lien or interest in such Account(s).
(v) All actions necessary to perfect the security interest of
Agent in each Account established or maintained by Depositary Bank
will have been taken under the laws of the jurisdiction in which the
applicable Account Office(s) is (are) located at or prior to the time
Depositary Bank acknowledges the Notice of Security Interest relating
to such Account.
6. COVENANTS.
---------
(a) Lessee hereby agrees as follows:
(i) Lessee, at Lessee's expense, shall promptly procure, execute
and deliver to Agent all documents, instruments and agreements and
perform all acts which are reasonably necessary or desirable, or which
Agent may reasonably request (to the extent the Agent is authorized to
do so by the Operative Documents), to establish, maintain, preserve,
protect and perfect the Collateral, the security interest granted to
Agent therein and the first priority of such security interest or to
enable Agent to exercise and enforce its rights and remedies hereunder
with respect to any Collateral. Without limiting the generality of
the preceding sentence, Lessee shall (A) procure, execute and deliver
to Agent all stock powers, endorsements, assignments, financing
statements and other instruments of transfer requested by Agent and,
(B) deliver to Agent promptly upon receipt all originals of Collateral
consisting of instruments, documents and chattel paper.
(ii) Lessee shall not use or permit any Collateral to be used in
violation of (A) any provision of the Participation Agreement, this
Cash Collateral Agreement or any other Operative Document or (B) any
Applicable Law.
(iii) Lessee shall pay promptly when due all taxes and other
governmental charges, all Liens and all other charges now or hereafter
imposed upon, relating to or affecting any Collateral.
Q-8
<PAGE>
(iv) Without thirty (30) days, prior written notice to Agent,
Lessee shall not change Lessee's name or place of business (or, if
Lessee has more than one place of business, its chief executive
office).
(v) For each time deposit account and certificate of deposit
maintained by Lessee pursuant to this Cash Collateral Agreement,
Lessee shall (A) execute and deliver to Depositary Bank a Notice of
Security Interest and (B) cause Depositary Bank to execute and deliver
to Agent an Acknowledgment and Agreement in the form set forth in such
Notice of Security Interest.
(vi) Lessee shall appear in and defend any action or proceeding
which may affect its title to or Agent's interest in the Collateral.
(vii) Subject to Lessee's and Agent's withdrawal rights
hereunder, Lessee shall not surrender or lose possession of (other
than to Agent or Depositary Bank pursuant hereto), sell, encumber,
lease, rent, option, or otherwise dispose of or transfer any
Collateral or right or interest therein except as permitted in the
Participation Agreement or the Lease, and, notwithstanding any
provision of the Participation Agreement or the Lease, Lessee shall
keep the Collateral free of all Liens.
(b) Depositary Bank hereby agrees as follows:
(i) Depositary Bank shall notify Lessee, Lessor and Agent if
the representations and warranties made by Depositary Bank in
Subparagraph 5(b) hereof cease to be true and correct.
-----------------
(ii) Depositary Bank shall hold all Cash Collateral and other
Collateral received by it for Agent and as Agent's bailee.
(iii) Depositary Bank shall make a notation in its books and
records of Agent's and Lessee's interest in the Collateral held by
Depositary Bank.
(iv) Depositary Bank shall take such other steps as Agent may
reasonably request to perfect its security interest in the Collateral
held by Depositary Bank. Prior to its receipt of any Cash Collateral
to be maintained in an Account, Depositary Bank shall notify Agent of
any steps which must be taken under the laws of the jurisdiction in
which the applicable Account Office(s) is (are) located to perfect
Agent's security interest in such Account.
7. AUTHORIZED ACTION BY AGENT. Lessee hereby irrevocably appoints Agent
--------------------------
as its attorney-in-fact and agrees that Agent may perform (but Agent shall not
be obligated to and shall incur no liability to Lessee or any third party for
failure so to do) any act which Lessee is obligated
Q-9
<PAGE>
by this Cash Collateral Agreement to perform, and to exercise such rights and
powers as Lessee might exercise with respect to the Collateral, including,
without limitation, the right to (a) collect by legal proceedings or otherwise
and endorse, receive and receipt for all dividends, interest, payments, proceeds
and other sums and property now or hereafter payable on or on account of the
Collateral; (b) enter into any extension, reorganization, deposit, merger,
consolidation or other agreement pertaining to, or deposit, surrender, accept,
hold or apply other property in exchange for the Collateral; (c) insure,
process, preserve and enforce the Collateral; (d) make any compromise or
settlement, and take any action it deems advisable, with respect to the
Collateral; (e) pay any indebtedness of Lessee relating to the Collateral; and
(f) execute UCC financing statements and other documents, instruments and
agreements required hereunder; provided, however, that Agent may not exercise
-------- -------
such powers unless an Event of Default has occurred and is continuing. Lessee
agrees to reimburse Agent upon demand for all reasonable costs and expenses,
including attorneys' fees, Agent may incur while acting as Lessee's attorney-in-
fact hereunder, all of which costs and expenses are included in the Obligations.
Lessee agrees that such care as Agent gives to the safekeeping of its own
property of like kind shall constitute reasonable care of the Collateral when in
Agent's possession; provided, however, that Agent shall not be required to make
-------- -------
any presentment, demand or protest, or give any notice and need not take any
action to preserve any rights against any prior party or any other Person in
connection with the Obligations or with respect to the Collateral.
8. DEFAULT AND REMEDIES. Lessee shall be deemed in default under this
--------------------
Cash Collateral Agreement upon the occurrence and during the continuance of an
Event of Default, as that term is defined in Appendix 1 to the Participation
-------------------------------
Agreement. In addition to all other rights and remedies granted to Agent and
- - ---------
the Participants by this Cash Collateral Agreement, the Participation Agreement,
the other Operative Documents, the UCC and other Applicable Laws, Agent and the
Tranche B Participants may, upon the occurrence and during the continuance of
any Event of Default, exercise any one or more of the following rights and
remedies (to the extent allowed by Applicable Law):
(a) Agent may collect, receive, appropriate or realize upon the
Collateral or otherwise foreclose or enforce Agent's security interests in
any or all Collateral in any manner permitted by Applicable Law or in this
Cash Collateral Agreement; or
(b) Agent may notify Depositary Bank to pay all or any portion of the
Collateral held by Depositary Bank directly to Agent.
Agent shall distribute the proceeds of all Collateral received by Agent after
the occurrence of an Event of Default to Lessor, the Tranche B Participants and
Agent for application to the Obligations owed to such Persons pursuant to the
Participation Agreement and the Lease. If any proceeds of Collateral remain
after all Obligations have been paid in full, Agent and Depositary Bank shall
deliver the same to Lessee or other Person entitled thereto. In any case where
notice of any sale or disposition of any Collateral is required, Lessee hereby
agrees that seven (7) days notice of such sale or disposition is reasonable.
Q-10
<PAGE>
9. MISCELLANEOUS.
-------------
(a) Notices. Except as otherwise specified herein, all notices,
-------
requests, demands, consents, instructions or other communications to or
upon Lessee, Agent or any Participant under this Cash Collateral Agreement
shall be given as provided in Section 15.3 of the Participation Agreement.
--------------------------------- ---------
(b) Waivers; Amendments. Any term, covenant, agreement or condition
-------------------
of this Cash Collateral Agreement may be amended or waived only as provided
in the Participation Agreement. No failure or delay by Agent or any
Participant in exercising any right hereunder shall operate as a waiver
thereof or of any other right nor shall any single or partial exercise of
any such right preclude any other further exercise thereof or of any other
right. Unless otherwise specified in any such waiver or consent, a waiver
or consent given hereunder shall be effective only in the specific instance
and for the specific purpose for which given.
(c) Successors and Assigns. This Cash Collateral Agreement shall be
----------------------
binding upon and inure to the benefit of Lessee, Lessor, Agent and the
Participants and their respective permitted successors and assigns;
provided, however, that Lessee, Agent and such Participants may sell,
-------- -------
assign and delegate their respective rights and obligations hereunder only
as permitted by the Participation Agreement. Agent, Lessor and the
Participants may disclose this Cash Collateral Agreement as provided in the
Participation Agreement.
(d) Partial Invalidity. If at any time any provision of this Cash
------------------
Collateral Agreement is or becomes illegal, invalid or unenforceable in any
respect under the law or any jurisdiction, neither the legality, validity
or enforceability of the remaining provisions of this Cash Collateral
Agreement nor the legality, validity or enforceability of such provision
under the law of any other jurisdiction shall in any way be affected or
impaired thereby.
(e) Cumulative Rights, etc. The rights, powers and remedies of Agent
----------------------
and the Participants under this Cash Collateral Agreement shall be in
addition to all rights, powers and remedies given to Agent and the
Participants by virtue of any Applicable Law, the Participation Agreement,
any other Operative Document or any other agreement, all of which rights,
powers, and remedies shall be cumulative and may be exercised successively
or concurrently without impairing Agent's rights hereunder.
Notwithstanding the foregoing, if the Lessor is exercising remedies against
the Lessee for the collection of the Purchase Option Price, Asset
Termination Value, Residual Value Guarantee Amount or any other amount, or
if the Agent or the Participants are exercising any remedy under the
Guarantee, the Lessor, the Agent and the Participants shall first be
required to exercise their rights hereunder to collect the Collateral and
under the Defeasance Deposit Agreement to collect the Collateral (as
defined therein) prior to exercising any remedy under the Lease or the
Security Documents in the nature of a foreclosure against the Property or
against the Lessee
Q-11
<PAGE>
personally for such amounts; provided, that the restrictions set forth in
this sentence shall not apply, and the Lessor, the Agent and the
Participants shall not be so restricted, if the Lessee at any time permits
or causes any interference with, or raises any defense against or objection
to, any such exercise of rights against any such Collateral. Except as
provided in the preceding sentence, Lessee waives any right to require
Agent or any Participant to proceed against any Person or to exhaust any
Collateral or to pursue any remedy in Agent's or such Participant's power.
(f) Governing Law. This Cash Collateral Agreement shall be governed
-------------
by and construed in accordance with the laws of the State of California
without reference to conflicts of law rules (except to the extent otherwise
provided in the UCC).
[SIGNATURE PAGE FOLLOWS]
Q-12
<PAGE>
IN WITNESS WHEREOF, Lessee and Agent have caused this Cash Collateral
Agreement to be executed as of the day and year first above written.
VITESSE SEMICONDUCTOR CORPORATION
By: ______________________________________
Eugene F. Hovanec, Vice President, Finance &
Chief Financial Officer
ABN AMRO BANK N.V., SAN FRANCISCO
INTERNATIONAL BRANCH, as Agent
By: ABN AMRO NORTH AMERICA, INC.,
as its agent
By: __________________________________
David M. Shipley, Vice President
By: __________________________________
E. Bruce Mumford, Senior Vice President
Q-13
<PAGE>
ATTACHMENT 1
TO CASH COLLATERAL AGREEMENT
----------------------------
NOTICE OF DEPOSIT
-----------------
[__________, ____]
[Name of Agent]
[Address of Agent]
________________________
________________________
1. Reference is made to:
(a) The Participation Agreement dated as of October 30, 1996 (the
"Participation Agreement") among Vitesse Semiconductor Corporation
------------------------
("Lessee"), Lease Plan North America, Inc. ("Lessor"), the financial
------ ------
institutions which are from time to time participants under such
Participation Agreement (collectively, the "Participants") and ABN AMRO
------------
Bank N.V., San Francisco International Branch, acting in its capacity as
agent for the Participants (in such capacity, "Agent"); and
-----
(b) The Cash Collateral Agreement dated as of October 30, 1996 (the
"Cash Collateral Agreement") among Lessee, Lessor and Agent.
--------------------------
Unless otherwise defined herein, all capitalized terms used in this Notice of
Deposit have the respective meanings given to those terms in the Participation
Agreement and the Cash Collateral Agreement.
2. Pursuant to Section 3(a) of the Cash Collateral Agreement, Lessee
hereby notifies the Agent that Lessee intends to deposit Cash Collateral in the
amount of $______ on __________ and requests that such deposit be held in an
Account as a three month [time deposit[ (certificate of deposit) and reinvested
upon maturity in a similar Account.
VITESSE SEMICONDUCTOR CORPORATION
By:
----------------------------
Name:
-------------------
Title:
------------------
<PAGE>
ATTACHMENT 2
TO CASH COLLATERAL AGREEMENT
----------------------------
NOTICE OF SECURITY INTEREST
---------------------------
[_______________, _____]
[Name of Depositary Bank]
-----------------------
[Address of Depositary Bank]
- - ----------------------------
1. Reference is made to:
(a) The Participation Agreement dated as of October ___, 1996 (the
"Participation Agreement") among Vitesse Semiconductor Corporation
------------------------
("Lessee"), Lease Plan North America, Inc. ("Lessor"), the financial
------ ------
institutions which are from time to time participants under such
Participation Agreement (collectively, the "Participants") and ABN AMRO
------------
Bank N.V., San Francisco International Branch, acting in its capacity as
agent for the Participants (in such capacity, "Agent"); and
-----
(b) The Cash Collateral Agreement dated as of October ___, 1996 (the
"Cash Collateral Agreement") among Lessee, Lessor and Agent.
--------------------------
Unless otherwise defined herein, all capitalized terms used in this Notice of
Security Interest have the respective meanings given to those terms in the
Participation Agreement and the Cash Collateral Agreement.
2. Lessee has informed Agent that Lessee has established with the
addressee of this Notice (the "Depositary Bank") the following Accounts)
---------------
[describe each Account separately by type (i.e., time deposit account or
certificate of deposit), Account Office and account number]:
Account Account
Type Office Account Number
-------- -------- --------------
--- ---------------------
--- ---------------------
--- ---------------------
--- ---------------------
<PAGE>
Lessee has further informed Agent that Lessee intends to maintain Cash
Collateral in the aggregate principal amount of $ ______ in such Account(s).
3. Lessee and Agent hereby notify Depositary Bank that, pursuant to the
Cash Collateral Agreement, Lessee has granted to Agent, for the ratable benefit
of Lessor, the Tranche B Participants and Agent as security for the Obligations,
a security interest in all Accounts and other Collateral maintained by Lessee
with Depositary Bank including, without limitation, the Account(s) described in
paragraph 2 above.
- - -----------
4. In furtherance of such grant, Lessee and Agent hereby authorize and
direct Depositary Bank to:
(a) Hold all Collateral for Agent and as Agent's bailee;
(b) Make a notation in its books and records of Agent's interest in
the Collateral;
(c) Take such other steps as Agent may reasonably request to perfect
its security interest in the Collateral; and
(d) Upon receipt of notice from Agent that (i) Lessee is purchasing
the Property or (ii) an Event of Default has occurred, transfer and deliver
to Agent or its nominee, together with all necessary endorsements, all or
such portion of the Collateral held by Depositary Bank as Agent shall
direct.
5. Lessee and Agent agree that (a) the possession by Depositary Bank of
all money, instruments, chattel paper and other property constituting Collateral
shall be deemed to be possession by Agent or a person designated by Agent, for
purposes of perfecting the security interest granted to Agent hereunder pursuant
to Section 9305, 8313 or 8321 of the Uniform Commercial Code, as the case may
------------ ---- ----
be, and (b) notifications to Depositary Bank by other Persons holding any such
property, and acknowledgments, receipts or confirmations from such Persons
delivered to Depositary Bank, shall be deemed notifications to, or
acknowledgments, receipts or confirmations from, financial intermediaries,
bailees or agents (as applicable) of Depositary Bank for the benefit of Agent
for the purposes of perfecting such security interests under applicable law.
6. Please acknowledge Depositary Bank's receipt of this notice,
acknowledge that Depositary Bank will hold the Collateral for Agent, confirm
that Depositary Bank will comply with the other authorizations and directions
set forth herein and confirm the representations and warranties set forth in the
Cash Collateral Agreement by executing the attached copy of this letter in the
space provided and returning it to Agent. The authorizations and directions set
forth herein may not be revoked or modified without the written consent of
Agent.
ABN AMRO BANK N.V., SAN FRANCISCO
INTERNATIONAL BRANCH, as Agent
<PAGE>
By: ABN AMRO NORTH AMERICA, INC., as its agent
By:
-------------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
By:
-------------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
VITESSE SEMICONDUCTOR CORPORATION
By:
-------------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
Q(1)-3
<PAGE>
ACKNOWLEDGMENT AND AGREEMENT
OF DEPOSITARY BANK
-----------------------------
Depositary Bank hereby acknowledges receipt of the above notice,
acknowledges that it will hold the Collateral for Agent, agrees to comply with
the authorizations and directions set forth above and represents to Lessee,
Lessor, the Participants and Agent as follows:
(a) Depositary Bank is a commercial bank organized under the laws of
the United States of America or a State thereof or under the laws of
another country which is doing business in the United States of America.
(b) Depositary Bank has undivided profits of at least $______.
(c) Depositary Bank has a debt rating of at least "A" from [Standard
& Poors Ratings Group][Moody's Investors Service].
(d) The information set forth above regarding the Account(s) is
accurate. Such Account (s) is (are) currently open and Depositary Bank has
no prior notice of any other security interest, Lien or interest in such
Account(s).
(e) All actions necessary to perfect the security interest of Agent in
such Account(s) have been taken under the laws of the jurisdiction in which
the applicable Account Office(s) is (are) located.
[ ]
By:
-------------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
[Date]
Q(1)-4
<PAGE>
DEFEASANCE DEPOSIT AGREEMENT
----------------------------
THIS DEFEASANCE DEPOSIT AGREEMENT (this "Defeasance Deposit Agreement"),
----------------------------
dated as of October 30, 1996, is entered into among:
(1) VITESSE SEMICONDUCTOR CORPORATION, a Delaware corporation
("Lessee");
------
(2) ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH, acting in
its capacity as agent for the Participants (as hereafter defined) under the
Participation Agreement referred to in Recital A below (in such capacity,
"Agent"); and
------
(3) LEASE PLAN NORTH AMERICA, INC., an Illinois corporation
("Lessor").
------
RECITALS
--------
A. Pursuant to the Participation Agreement dated as of October 30, 1996
(the "Participation Agreement"), among Lessee, Lessor, the financial
-----------------------
institutions which are from time to time participants under the Participation
Agreement (collectively, the "Participants") and Agent, Lessor and the
------------
Participants have agreed to provide certain lease facilities to Lessee upon the
terms and subject to the conditions set forth therein.
B. Pursuant to certain provisions of the Participation Agreement, Lessee
is required from time to time to deliver cash collateral for its obligations in
respect of the Tranche A Participation Interests in the Advances under the
Participation Agreement and related documents, instruments and agreements. This
Defeasance Deposit Agreement sets forth the terms and conditions governing such
cash collateral.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the above recitals and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. DEFINITIONS AND INTERPRETATION. When used in this Defeasance Deposit
------------------------------
Agreement, the following terms shall have the following respective meanings:
<PAGE>
"Account" shall mean a certificate of deposit, deposit account or
-------
other account established and maintained by Lessee with Defeasance Deposit
Depositary Bank pursuant to this Defeasance Deposit Agreement.
"Account Office" shall mean, with respect to any Account maintained by
--------------
the Defeasance Deposit Depositary Bank, the office of Defeasance Deposit
Depositary Bank at which such Account is maintained.
"Agent" shall have the meaning given to that term in the introductory
-----
paragraph hereof.
"Defeasance Deposit Collateral" shall mean and include all cash of
-----------------------------
Lessee constituting the Defeasance Deposit which Lessee has delivered to
the Defeasance Deposit Depositary Bank pursuant to this Defeasance Deposit
Agreement and Section 3.4(b) of the Participation Agreement and all forms
of investments of such cash by Defeasance Deposit Depositary Bank on behalf
of Lessee, including, without limitation, Accounts issued or maintained by
Defeasance Deposit Depositary Bank.
"Collateral" shall have the meaning given to that term in paragraph 2
---------- -----------
hereof.
"Defeasance Deposit Depositary Bank" shall mean, to the extent any
----------------------------------
such Person holds Defeasance Deposit Collateral pursuant to this Defeasance
Deposit Agreement, (a) Agent or (b) if, at any time, Agent is an affiliate
of a bank but not itself a bank, then a bank affiliate of Agent acting in
lieu of such Participant or (c) another bank acting as Depositary Bank
pursuant to Section 4(a)(ii) of this Defeasance Deposit Agreement.
"Lessee" shall have the meaning given to that term in the introductory
------
paragraph hereof.
"Lessor" shall have the meaning given to that term in the introductory
------
paragraph hereof.
"Notice of Security Interest" shall mean a Notice of Security Interest
---------------------------
in the form of Attachment 1.
------------
"Participants" shall have the meaning given to that term in Recital A
------------
hereof.
"Participation Agreement" shall have the meaning given to that term in
-----------------------
Recital A hereof.
---------
"Obligations" shall mean and include all Rent, Advances, Purchase
-----------
Option Price, Asset Termination Value, Residual Value Guarantee Amount and
other liabilities and obligations, direct or indirect, absolute or
contingent, due or to become due, now existing or
P-2
<PAGE>
hereafter arising, owed by Lessee to Lessor, any Tranche A Participant or
Agent in respect of the Tranche A Participation Interests pursuant to the
terms of the Participation Agreement, the Lease or any of the other
Operative Documents, including without limitation all Rent, interest, fees,
charges, expenses and attorneys' fees chargeable to Lessee or payable by
Lessee thereunder.
"UCC" shall mean the Uniform Commercial Code as in effect in the State
---
of California from time to time.
Unless otherwise defined herein, all other capitalized terms used herein and
defined in Appendix 1 to the Participation Agreement shall have the respective
meanings given to those terms therein, and all terms defined in the UCC shall
have the respective meanings given to those terms in the UCC. The rules of
construction set forth in Appendix 1 to the Participation Agreement shall, to
-----------------------------------------
the extent not inconsistent with the terms of this Defeasance Deposit Agreement,
apply to this Defeasance Deposit Agreement and are hereby incorporated by
reference.
2. GRANT OF SECURITY INTEREST. As security for the Obligations, Lessee
--------------------------
hereby pledges and assigns to Agent (for the ratable benefit of Lessor, the
Tranche A Participants and Agent) and grants to Agent (for the ratable benefit
of Lessor, the Tranche A Participants and Agent) a security interest in all
right, title and interest of Lessee in and to the following property, whether
now owned or hereafter acquired (collectively and severally, the "Collateral"):
----------
(a) All Accounts and other Defeasance Deposit Collateral; all
documents, instruments and agreements evidencing the same; all extensions,
renewals, modifications and replacements of the foregoing; and all interest
and other amounts payable in connection therewith; and
(b) All proceeds of the foregoing (including, without limitation,
whatever is receivable or received when Collateral or proceeds is sold,
collected, exchanged, returned, substituted or otherwise disposed of,
whether such disposition is voluntary or involuntary, including rights to
payment and return premiums and insurance proceeds under insurance with
respect to any Collateral, and all rights to payment with respect to any
cause of action affecting or relating to the Collateral).
The pledge, assignment and grant of a security interest made by Lessee hereunder
is for security of the Obligations only. The parties hereto do not intend for
the Collateral to constitute advance payment of any Obligations or liquidated
damages nor do the parties intend for the Collateral to increase the Obligations
owed by Lessee to Lessor, the Participants and Agent under the Operative
Documents.
3. DELIVERY AND MAINTENANCE OF DEFEASANCE DEPOSIT COLLATERAL. The
---------------------------------------------------------
parties acknowledge that no Defeasance Deposit Collateral is being delivered to
the Defeasance Deposit Depositary Bank upon execution of this Defeasance Deposit
Agreement. Lessee shall be obligated
P-3
<PAGE>
to deliver a portion of the Defeasance Deposit Collateral pursuant hereto when
required under Section 3.4(b) of the Participation Agreement. The Defeasance
Deposit Collateral may be delivered only to, and the Defeasance Deposit
Collateral may be maintained only by, the Defeasance Deposit Depositary Bank,
subject to the following terms and conditions:
(a) The Lessee shall deliver to Agent, at least three (3) Business
Days prior to Lessee's delivery of any portion of the Defeasance Deposit
Collateral, a written notice of its intention to deliver such portion of
the Defeasance Deposit, in the form of Attachment 1 setting forth, among
------------
other things, (i) the total amount of the Defeasance Deposit Collateral to
be delivered (which shall be the full amount of the Tranche A Participation
Interest in the Advance to be made on the applicable Funding Date), and
(ii) the proposed date of delivery (which shall be the Funding Date for the
related Advance requested by Lessee pursuant to Section 3.4(a) of the
Participation Agreement). Agent shall promptly notify the Defeasance
Deposit Depositary Bank and the Tranche A Participants of the contents of
each such notice.
(b) At or prior to the time Defeasance Deposit Depositary Bank
receives a portion of the Defeasance Deposit Collateral for inclusion in an
Account:
(i) Agent and Lessee shall have completed, executed and
delivered to the Defeasance Deposit Depositary Bank a Notice of
Security Interest in the form of Attachment 2 (a "Notice of Security
------------ --------- --------
Interest") which specifically identifies such Account; and
--------
(ii) The Defeasance Deposit Depositary Bank shall have executed
the Acknowledgment and Agreement at the end of such Notice of Security
Interest and returned the same to Agent and Lessee.
(c) Unless a Default or an Event of Default has occurred and is
continuing, the Defeasance Deposit Depositary Bank shall hold the
Defeasance Deposit Collateral in the form of certificates of deposit issued
by the Defeasance Deposit Depositary Bank or time deposit accounts of the
Defeasance Deposit Depositary Bank. Such amounts shall mature on the
Expiration Date or, if the Expiration Date is extended pursuant to exercise
of the Lessee's Renewal Option, on the Expiration Date as so extended. If
a Default or an Event of Default has occurred and is continuing, the
Defeasance Deposit Collateral shall, at the end of the current terms of all
investments thereof, be maintained in time deposit accounts with terms not
exceeding one (1) week.
(d) The Agent guarantees that each deposit of Defeasance Deposit
Collateral shall bear interest as follows, such that the amount of interest
accruing on the Defeasance Deposit Collateral and the Tranche A
Participation Interests in the Advances shall be identical:
P-4
<PAGE>
(i) during the Term of the Lease and ending on the Expiration
Date, each such deposit shall bear interest at a rate per annum equal
to [*]; and
(ii) during the Renewal Term of the Lease, if any, each such
deposit shall bear interest at a rate per annum equal to the Agent's
time deposit rate for deposits of comparable amounts for the period
commencing on the first day of the Renewal Term and ending on the last
day of the Renewal Term.
(e) Interest shall be payable on each Payment Date applicable to the
Tranche A Participation Interests during the Lease Term and the Renewal
Term, if any. During the Construction Period interest shall accrue on the
Defeasance Deposit Collateral and the Collateral. After the Construction
Period, no interest earned on the Defeasance Deposit Collateral or the
Collateral shall be paid to Lessee in cash but instead shall be used to
offset interest payable by Lessee as Basic Rent in respect of the Tranche A
Participation Interests in the Advances pursuant to Section 3.7(e) of the
Participation Agreement. Such portion of Basic Rent shall not be paid to
the Agent or the Tranche A Participants in cash but shall instead be used
to offset the obligation of the Defeasance Deposit Depositary Bank to pay
interest earned on the Defeasance Deposit Collateral and the Collateral to
Lessee. Such amounts are intended to be equal and offsetting; therefore,
no cash shall change hands with respect to such interest.
(f) Lessee and Agent agree that (i) the possession by Defeasance
Deposit Depositary Bank of any money, instruments, chattel paper or other
property constituting Collateral or evidencing Collateral shall be deemed
to be possession by Agent or a person designated by Agent, for purposes of
perfecting the security interest granted to Agent hereunder pursuant to
Section 9305, 8313 or 8321 of the Uniform Commercial Code, as the case may
------------ ---- ----
be, and (ii) notifications to the Defeasance Deposit Depositary Bank by
other Persons holding any such property, and acknowledgments, receipts or
confirmations from any such Persons delivered to the Defeasance Deposit
Depositary Bank, shall be deemed notifications to, or acknowledgments,
receipts or confirmations from, financial intermediaries, bailees or agents
(as applicable) of the Defeasance Deposit Depositary Bank for the benefit
of Agent for the purposes of perfecting such security interests under
applicable law.
4. WITHDRAWAL OR OFFSET OF THE DEFEASANCE DEPOSIT COLLATERAL. (a) Lessee
---------------------------------------------------------
may not withdraw the Defeasance Deposit Collateral from the Defeasance Deposit
Depositary Bank, except that if the representations and warranties of Agent, as
Defeasance Deposit Depositary Bank, or a Participant, as a replacement
Defeasance Deposit Depositary Bank, set forth in Subparagraph 5(b) cease to be
-----------------
true and correct at any time, Lessee may direct Agent or such Participant, as
the case may be, to transfer all Defeasance Deposit Collateral then held by
Agent or such Participant to another Participant or another bank that can make
the representations and warranties of a Defeasance Deposit Depositary Bank set
forth in such subparagraph, to be held by such Participant (or such
[* confidential information]
P-5
<PAGE>
Defeasance Deposit Depositary Bank) in such a manner as is consistent with the
terms and conditions of this Defeasance Deposit Agreement. If Lessee withdraws
any of the Defeasance Deposit Collateral from an Account prior to the last day
of any term thereof, Lessee shall pay to the Defeasance Deposit Depositary Bank
all applicable early withdrawal penalties and other breakage charges specified
at or prior to the time such Account was initially established, except that
Lessee shall not be liable to pay any such penalties or charges and shall not
otherwise suffer any other loss of interest or principal as a result of any
transfer of the Defeasance Deposit Collateral from the Defeasance Deposit
Depositary Bank to a successor Defeasance Deposit Depositary Bank (i) in
connection with a transfer by Agent pursuant to Section 12 of the Participation
-------------------------------
Agreement of its interests in the Operative Documents to the successor Agent or
- - ---------
any Affiliate thereof (unless such transfer was requested or directed by Lessee)
or (ii) in connection with a transfer pursuant to this Section 4(a).
------------
(b) Lessee agrees that Agent shall withdraw or offset against the
Defeasance Deposit Collateral for the benefit of the Tranche A Participants
payment of that portion of the Asset Termination Value, Residual Value Guarantee
Amount or Purchase Option Price representing the Tranche A Participation
Interests (i) to satisfy Lessee's obligations in connection with a purchase by
Lessee of the Property pursuant to any of Sections 16.2, 16.3, 16.4, 17.2(e),
20.1, 20.2 or 20.3 of the Lease, (ii) to satisfy Lessee's obligations to pay the
Residual Value Guarantee Amount to the Agent, for the benefit of the Tranche A
Participants, in connection with Lessee's exercise of the Remarketing Option
pursuant to Section 22.1 of the Lease or (iii) pursuant to an exercise of
remedies set forth in Section 8 hereof. Agent shall apply any portion of the
---------
Defeasance Deposit Collateral so withdrawn or offset in accordance with Section
3 of the Participation Agreement. Lessee, Agent and Lessor further agree that
upon the maturity or acceleration of Lessee's obligation to pay the Asset
Termination Value, Residual Value Guarantee Amount or Purchase Option Price, any
and all amounts of Defeasance Deposit Collateral that have been deposited by
Lessee pursuant to this Defeasance Deposit Agreement and that have not been
withdrawn by Lessee or offset or applied by Lessor, Agent or any Participant (in
accordance with the terms of this Defeasance Deposit Agreement) as of such
maturity or acceleration date, shall be required to be applied by Agent and
Lessor to satisfy Lessee's obligation to pay such portion of the Asset
Termination Value, Residual Value Guarantee Amount or Purchase Option Price
represented by such remaining Defeasance Deposit Collateral notwithstanding the
fact that such amounts may not then be actually available, for any reason
attributable to Lessor, Agent or any Participant (including, without limitation
any fraud or misapplication of funds by Lessor, Agent or any Participant,
decline in value of the Defeasance Deposit Collateral or the filing by or
against Lessor, Agent or any Participant of any insolvency, bankruptcy,
dissolution, liquidation, reorganization or similar proceeding, but except to
the extent resulting from a proceeding involving the insolvency of Lessee), at
Defeasance Deposit Depositary Bank to pay such obligation.
5. REPRESENTATIONS AND WARRANTIES.
------------------------------
(a) Lessee represents and warrants to Lessor, Agent and the
Participants as follows:
P-6
<PAGE>
(i) Lessee is the legal and beneficial owner of the
Collateral (or, in the case of after-acquired Collateral, at the time
Lessee acquires rights in the Collateral, will be the legal and
beneficial owner thereof). No other Person has (or, in the case of
after-acquired Collateral, at the time Lessee acquires rights therein,
will have) any right, title, claim or interest (by way of Lien,
purchase option or otherwise) in, against or to the Collateral.
(ii) Agent has (or in the case of after-acquired Collateral,
at the time Lessee acquires rights therein, will have) a first
priority perfected security interest in the Collateral.
(iii) Lessee has delivered to Agent, together with all
necessary stock powers, endorsements, assignments and other necessary
instruments of transfer, the originals of all documents, instruments
and agreements evidencing Defeasance Deposit Collateral.
(iv) Lessee's chief executive office is located at 741 Calle
Plano, Camarillo, California 93012.
(b) The Defeasance Deposit Depositary Bank represents and warrants to
Lessee, Lessor, Agent and the Participants as follows:
(i) The Defeasance Deposit Depositary Bank is a commercial
bank organized under the laws of the United States of America or a
State thereof or under the laws of another country which is doing
business in the United States of America and has the power to issue
and maintain Accounts.
(ii) The Defeasance Deposit Depositary Bank has a combined
capital, surplus and undivided profits of at least $500,000,000.
(iii) The Defeasance Deposit Depositary Bank has a debt rating
of "A" (or its equivalent) or better from Standard & Poors Ratings
Group and/or a debt rating of "A" (or its equivalent) or better from
Moody's Investors Service.
(iv) With respect to each Notice of Security Interest
acknowledged by the Defeasance Deposit Depositary Bank, at the time of
such acknowledgment (A) the information regarding Account(s)
maintained by the Defeasance Deposit Depositary Bank which is set
forth in such Notice of Security Interest will be accurate, (B) such
Account(s) will be currently open and (C) the Defeasance Deposit
Depositary Bank will have no prior notice of any other security
interest, Lien or interest in such Account(s).
P-7
<PAGE>
(v) All actions necessary to perfect the security interest of
Agent in each Account established or maintained by the Defeasance
Deposit Depositary Bank will have been taken under the laws of the
jurisdiction in which the applicable Account Office(s) is (are)
located at or prior to the time the Defeasance Deposit Depositary Bank
acknowledges the Notice of Security Interest relating to such Account.
6. COVENANTS.
---------
(a) Lessee hereby agrees as follows:
(i) Lessee, at Lessee's expense, shall promptly procure,
execute and deliver to Agent all documents, instruments and agreements
and perform all acts which are reasonably necessary or desirable, or
which Agent may reasonably request (to the extent the Agent is
authorized to do so by the Operative Documents), to establish,
maintain, preserve, protect and perfect the Collateral, the security
interest granted to Agent therein and the first priority of such
security interest or to enable Agent to exercise and enforce its
rights and remedies hereunder with respect to any Collateral. Without
limiting the generality of the preceding sentence, Lessee shall (A)
procure, execute and deliver to Agent all stock powers, endorsements,
assignments, financing statements and other instruments of transfer
requested by Agent and (B) deliver to Agent promptly upon receipt all
originals of Collateral consisting of instruments, documents and
chattel paper.
(ii) Lessee shall not use or permit any Collateral to be used
in violation of (A) any provision of the Participation Agreement, this
Defeasance Deposit Agreement or any other Operative Document or (B)
any Applicable Law.
(iii) Lessee shall pay promptly when due all taxes and other
governmental charges, all Liens and all other charges now or hereafter
imposed upon, relating to or affecting any Collateral.
(iv) Without thirty (30) days, prior written notice to Agent,
Lessee shall not change Lessee's name or place of business (or, if
Lessee has more than one place of business, its chief executive
office).
(v) For each time deposit account and certificate of deposit
maintained by Lessee pursuant to this Defeasance Deposit Agreement,
Lessee shall (A) execute and deliver to the Defeasance Deposit
Depositary Bank a Notice of Security Interest and (B) cause the
Defeasance Deposit Depositary Bank to execute and deliver to Agent an
Acknowledgment and Agreement in the form set forth in such Notice of
Security Interest.
P-8
<PAGE>
(vi) Lessee shall appear in and defend any action or
proceeding which may affect its title to or Agent's interest in the
Collateral.
(vii) Subject to Lessee's and Agent's withdrawal rights
hereunder, Lessee shall not surrender or lose possession of (other
than to Agent or the Defeasance Deposit Depositary Bank pursuant
hereto), sell, encumber, lease, rent, option, or otherwise dispose of
or transfer any Collateral or right or interest therein except as
permitted in the Participation Agreement or the Lease, and,
notwithstanding any provision of the Participation Agreement or the
Lease, Lessee shall keep the Collateral free of all Liens.
(b) The Defeasance Deposit Depositary Bank hereby agrees as follows:
(i) The Defeasance Deposit Depositary Bank shall notify
Lessee, Lessor and Agent if the representations and warranties made by
the Defeasance Deposit Depositary Bank in Subparagraph 5(b) hereof
-----------------
cease to be true and correct.
(ii) The Defeasance Deposit Depositary Bank shall hold all
Defeasance Deposit Collateral and other Collateral received by it for
Agent and as Agent's bailee.
(iii) The Defeasance Deposit Depositary Bank shall make a
notation in its books and records of Agent's interest in the
Collateral held by the Defeasance Deposit Depositary Bank.
(iv) The Defeasance Deposit Depositary Bank shall take such
other steps as Agent may reasonably request to perfect its security
interest in the Collateral held by the Defeasance Deposit Depositary
Bank. Prior to its receipt of any Defeasance Deposit Collateral to be
maintained in an Account, the Defeasance Deposit Depositary Bank shall
notify Agent of any steps which must be taken under the laws of the
jurisdiction in which the applicable Account Office(s) is (are)
located to perfect Agent's security interest in such Account.
7. AUTHORIZED ACTION BY AGENT. Lessee hereby irrevocably appoints Agent
--------------------------
as its attorney-in-fact and agrees that Agent may perform (but Agent shall not
be obligated to and shall incur no liability to Lessee or any third party for
failure so to do) any act which Lessee is obligated by this Defeasance Deposit
Agreement to perform, and to exercise such rights and powers as Lessee might
exercise with respect to the Collateral, including, without limitation, the
right to (a) collect by legal proceedings or otherwise and endorse, receive and
receipt for all dividends, interest, payments, proceeds and other sums and
property now or hereafter payable on or on account of the Collateral; (b) enter
into any extension, reorganization, deposit, merger, consolidation or other
agreement pertaining to, or deposit, surrender, accept, hold or apply other
property in exchange for the Collateral; (c) insure, process, preserve and
enforce the Collateral; (d) make any compromise or settlement, and take any
action it deems advisable, with respect to the Collateral; (e) pay any
P-9
<PAGE>
indebtedness of Lessee relating to the Collateral; and (f) execute UCC financing
statements and other documents, instruments and agreements required hereunder;
provided, however, that, subject to Sections 3(e) and 4(b), Agent may not
- - -------- ------- ----------------------
exercise such powers unless an Event of Default has occurred and is continuing.
Lessee agrees to reimburse Agent upon demand for all reasonable costs and
expenses, including attorneys' fees, Agent may incur while acting as Lessee's
attorney-in-fact hereunder, all of which costs and expenses are included in the
Obligations. Lessee agrees that such care as Agent gives to the safekeeping of
its own property of like kind shall constitute reasonable care of the Collateral
when in Agent's possession; provided, however, that Agent shall not be required
-------- -------
to make any presentment, demand or protest, or give any notice and need not take
any action to preserve any rights against any prior party or any other Person in
connection with the Obligations or with respect to the Collateral.
8. DEFAULT AND REMEDIES. Lessee shall be deemed in default under this
--------------------
Defeasance Deposit Agreement upon the occurrence and during the continuance of
an Event of Default, as that term is defined in Appendix 1 to the Participation
-------------------------------
Agreement. In addition to all other rights and remedies granted to Agent and
- - ---------
the Participants by this Defeasance Deposit Agreement, the Participation
Agreement, the other Operative Documents, the UCC and other Applicable Laws,
Agent and the Tranche A Participants may, upon the occurrence and during the
continuance of any Event of Default, exercise any one or more of the following
rights and remedies (to the extent allowed by Applicable Law):
(a) Agent may collect, receive, appropriate or realize upon the
Collateral or otherwise foreclose or enforce Agent's security interests in
any or all Collateral in any manner permitted by Applicable Law or in this
Defeasance Deposit Agreement; or
(b) Agent may notify the Defeasance Deposit Depositary Bank to pay all
or any portion of the Collateral held by the Defeasance Deposit Depositary
Bank directly to Agent.
Agent shall distribute the proceeds of all Collateral received by Agent after
the occurrence of an Event of Default to Lessor, the Tranche A Participants and
Agent for application to the Obligations owed to such Persons pursuant to the
Participation Agreement and the Lease. If any proceeds of Collateral remain
after all Obligations have been paid in full, Agent and the Defeasance Deposit
Depositary Bank shall deliver the same to Lessee or other Person entitled
thereto. In any case where notice of any sale or disposition of any Collateral
is required, Lessee hereby agrees that seven (7) days notice of such sale or
disposition is reasonable.
9. MISCELLANEOUS.
-------------
(a) Notices. Except as otherwise specified herein, all notices,
-------
requests, demands, consents, instructions or other communications to or
upon Lessee, Agent or any Participant under this Defeasance Deposit
Agreement shall be given as provided in Section 15.3 of the Participation
---------------------------------
Agreement.
---------
P-10
<PAGE>
(b) Waivers; Amendments. Any term, covenant, agreement or condition
-------------------
of this Defeasance Deposit Agreement may be amended or waived only as
provided in the Participation Agreement. No failure or delay by Agent or
any Participant in exercising any right hereunder shall operate as a waiver
thereof or of any other right nor shall any single or partial exercise of
any such right preclude any other further exercise thereof or of any other
right. Unless otherwise specified in any such waiver or consent, a waiver
or consent given hereunder shall be effective only in the specific instance
and for the specific purpose for which given.
(c) Successors and Assigns. This Defeasance Deposit Agreement shall
----------------------
be binding upon and inure to the benefit of Lessee, Lessor, Agent and the
Participants and their respective permitted successors and assigns;
provided, however, that Lessee, Agent and such Participants may sell,
-------- -------
assign and delegate their respective rights and obligations hereunder only
as permitted by the Participation Agreement. Agent, Lessor and the
Participants may disclose this Defeasance Deposit Agreement as provided in
the Participation Agreement.
(d) Partial Invalidity. If at any time any provision of this
------------------
Defeasance Deposit Agreement is or becomes illegal, invalid or
unenforceable in any respect under the law or any jurisdiction, neither the
legality, validity or enforceability of the remaining provisions of this
Defeasance Deposit Agreement nor the legality, validity or enforceability
of such provision under the law of any other jurisdiction shall in any way
be affected or impaired thereby.
(e) Cumulative Rights, etc. The rights, powers and remedies of Agent
----------------------
and the Participants under this Defeasance Deposit Agreement shall be in
addition to all rights, powers and remedies given to Agent and the
Participants by virtue of any Applicable Law, the Participation Agreement,
any other Operative Document or any other agreement, all of which rights,
powers, and remedies shall be cumulative and may be exercised successively
or concurrently without impairing Agent's rights hereunder.
Notwithstanding the foregoing, if the Lessor is exercising remedies against
the Lessee for the collection of the Purchase Option Price, Asset
Termination Value, Residual Value Guarantee Amount or any other amount, or
if the Agent or the Participants are exercising any remedy under the
Guarantee, the Lessor, the Agent and the Participants shall first be
required to exercise their rights hereunder to collect the Collateral and
under the Cash Collateral Agreement to collect the Collateral (as defined
therein) prior to exercising any remedy under the Lease or the Security
Documents in the nature of a foreclosure against the Property or against
the Lessee personally for such amounts; provided, that the restrictions set
forth in this sentence shall not apply, and the Lessor, the Agent and the
Participants shall not be so restricted, if the Lessee at any time permits
or causes any interference with, or raises any defense against or objection
to, any such exercise of rights against any such Collateral. Except as
provided in the preceding sentence, Lessee waives any right to require
Agent or any Participant to proceed against any Person or to exhaust any
Collateral or to pursue any remedy in Agent's or such Participant's power.
P-11
<PAGE>
(f) Governing Law. This Defeasance Deposit Agreement shall be
-------------
governed by and construed in accordance with the laws of the State of
California without reference to conflicts of law rules (except to the
extent otherwise provided in the UCC).
[SIGNATURE PAGE FOLLOWS]
P-12
<PAGE>
IN WITNESS WHEREOF, Lessee and Agent have caused this Defeasance Deposit
Agreement to be executed as of the day and year first above written.
VITESSE SEMICONDUCTOR CORPORATION
By: ______________________________________
Eugene F. Hovanec, Vice President, Finance &
Chief Financial Officer
ABN AMRO BANK N.V., SAN FRANCISCO
INTERNATIONAL BRANCH, as Agent
By: ABN AMRO NORTH AMERICA, INC.,
as its agent
By: _______________________________________
David M. Shipley, Vice President
By: _______________________________________
E. Bruce Mumford, Senior Vice President
P-13
<PAGE>
ATTACHMENT 1
TO DEFEASANCE DEPOSIT AGREEMENT
-------------------------------
NOTICE OF DEPOSIT
-----------------
[__________, ____]
[Name of Agent]
[Address of Agent]
________________________
________________________
1. Reference is made to:
(a) The Participation Agreement dated as of October 30, 1996 (the
"Participation Agreement") among Vitesse Semiconductor Corporation
------------------------
("Lessee"), Lease Plan North America, Inc. ("Lessor"), the financial
------ ------
institutions which are from time to time participants under such
Participation Agreement (collectively, the "Participants") and ABN AMRO
------------
Bank N.V., San Francisco International Branch, acting in its capacity as
agent for the Participants (in such capacity, "Agent"); and
-----
(b) The Defeasance Deposit Agreement dated as of October 30, 1996 (the
"Defeasance Deposit Agreement") among Lessee, Lessor and Agent.
----------------------------
Unless otherwise defined herein, all capitalized terms used in this Notice of
Deposit have the respective meanings given to those terms in the Participation
Agreement and the Defeasance Deposit Agreement.
2. Pursuant to Section 3(a) of the Defeasance Deposit Agreement, Lessee
hereby notifies the Agent that Lessee intends to deposit Defeasance Deposit
Collateral in the amount of $______ on __________ and requests that such deposit
be held in an Account.
VITESSE SEMICONDUCTOR CORPORATION
By:_______________________________________
Name:_______________________________
Title:______________________________
P-14
<PAGE>
ATTACHMENT 2
TO DEFEASANCE DEPOSIT AGREEMENT
-------------------------------
NOTICE OF SECURITY INTEREST
---------------------------
[_______________, _____]
[Name of Defeasance Deposit Depositary Bank]
------------------------------------------
[Address of Defeasance Deposit Depositary Bank]
- - -----------------------------------------------
1. Reference is made to:
(a) The Participation Agreement dated as of October 30, 1996 (the
"Participation Agreement") among Vitesse Semiconductor Corporation
------------------------
("Lessee"), Lease Plan North America, Inc. ("Lessor"), the financial
------ ------
institutions which are from time to time participants under such
Participation Agreement (collectively, the "Participants") and ABN AMRO
------------
Bank N.V., San Francisco International Branch, acting in its capacity as
agent for the Participants (in such capacity, "Agent"); and
-----
(b) The Defeasance Deposit Agreement dated as of October 30, 1996 (the
"Defeasance Deposit Agreement") among Lessee, Lessor and Agent.
----------------------------
Unless otherwise defined herein, all capitalized terms used in this Notice of
Security Interest have the respective meanings given to those terms in the
Participation Agreement and the Defeasance Deposit Agreement.
2. Lessee has informed Agent that Lessee has established with the
addressee of this Notice (the "Defeasance Deposit Depositary Bank") the
----------------------------------
following Accounts) [describe each Account separately by type (i.e., time
deposit account or certificate of deposit), Account Office and account number]:
Account Account
Type Office Account Number
------- ------- --------------
--- ------------------
--- ------------------
--- ------------------
--- ------------------
<PAGE>
Lessee has further informed Agent that Lessee intends to maintain Defeasance
Deposit Collateral in the aggregate principal amount of the Tranche A
Participation Interest in the Advances in such Account(s).
3. Lessee and Agent hereby notify the Defeasance Deposit Depositary Bank
that, pursuant to the Defeasance Deposit Agreement, Lessee has granted to Agent,
for the ratable benefit of Lessor, the Tranche A Participants and Agent as
security for the Obligations, a security interest in all Accounts and other
Collateral maintained by Lessee with the Defeasance Deposit Depositary Bank
including, without limitation, the Account(s) described in paragraph 2 above.
-----------
4. In furtherance of such grant, Lessee and Agent hereby authorize and
direct the Defeasance Deposit Depositary Bank to:
(a) Hold all Collateral for Agent and as Agent's bailee;
(b) Make a notation in its books and records of Agent's interest in
the Collateral;
(c) Take such other steps as Agent may reasonably request to perfect
its security interest in the Collateral; and
(d) Upon receipt of notice from Agent that (i) Lessee is purchasing
the Property, (ii) Lessee has exercised its Remarketing Option under the
Lease or (iii) an Event of Default has occurred, transfer and deliver to
Agent or its nominee, together with all necessary endorsements, all or such
portion of the Collateral held by Defeasance Deposit Depositary Bank as
Agent shall direct.
5. Lessee and Agent agree that (a) the possession by Defeasance Deposit
Depositary Bank of all money, instruments, chattel paper and other property
constituting Collateral shall be deemed to be possession by Agent or a person
designated by Agent, for purposes of perfecting the security interest granted to
Agent hereunder pursuant to Section 9305, 8313 or 8321 of the Uniform Commercial
------------ ---- ----
Code, as the case may be, and (b) notifications to Defeasance Deposit Depositary
Bank by other Persons holding any such property, and acknowledgments, receipts
or confirmations from such Persons delivered to Defeasance Deposit Depositary
Bank, shall be deemed notifications to, or acknowledgments, receipts or
confirmations from, financial intermediaries, bailees or agents (as applicable)
of Defeasance Deposit Depositary Bank for the benefit of Agent for the purposes
of perfecting such security interests under applicable law.
6. Please acknowledge the Defeasance Deposit Depositary Bank's receipt of
this notice, acknowledge that the Defeasance Deposit Depositary Bank will hold
the Collateral for Agent, confirm that the Defeasance Deposit Depositary Bank
will comply with the other authorizations and directions set forth herein and
confirm the representations and warranties set forth in the Defeasance Deposit
Agreement by executing the attached copy of this letter in the space provided
and returning
<PAGE>
it to Agent. The authorizations and directions set forth herein may not be
revoked or modified without the written consent of Agent.
VITESSE SEMICONDUCTOR CORPORATION
By:______________________________________________
Name:________________________________________
Title:_______________________________________
ABN AMRO BANK N.V., SAN FRANCISCO
INTERNATIONAL BRANCH, as Agent
By: ABN AMRO NORTH AMERICA, INC., as its agent
By:______________________________________________
Name:________________________________________
Title:_______________________________________
By:______________________________________________
Name:________________________________________
Title:_______________________________________
P(1)-3
<PAGE>
ACKNOWLEDGMENT AND AGREEMENT
OF DEFEASANCE DEPOSIT DEPOSITARY BANK
-------------------------------------
The Defeasance Deposit Depositary Bank hereby acknowledges receipt of the
above notice, acknowledges that it will hold the Collateral for Agent, agrees to
comply with the authorizations and directions set forth above and represents to
Lessee, Lessor, the Participants and Agent as follows:
(a) The Defeasance Deposit Depositary Bank is a commercial bank
organized under the laws of the United States of America or a State thereof
or under the laws of another country which is doing business in the United
States of America.
(b) The Defeasance Deposit Depositary Bank has undivided profits of at
least $__________.
(c) The Defeasance Deposit Depositary Bank has a debt rating of at
least "A" from [Standard & Poors Ratings Group][Moody's Investors
Service].
(d) The information set forth above regarding the Account(s) is
accurate. Such Account (s) is (are) currently open and the Defeasance
Deposit Depositary Bank has no prior notice of any other security interest,
Lien or interest in such Account(s).
(e) All actions necessary to perfect the security interest of Agent in
such Account(s) have been taken under the laws of the jurisdiction in which
the applicable Account Office(s) is (are) located.
[________________________________________________]
By:______________________________________________
Name:________________________________________
Title:_______________________________________
[Date]
P(1)-4
<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
PARTICIPATION AGREEMENT
dated as of August 15, 1997
among
VITESSE SEMICONDUCTOR CORPORATION,
as Lessee,
LEASE PLAN NORTH AMERICA, INC.,
as Lessor,
ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH,
as a Participant,
and
ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH,
as Agent
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Vitesse Fab 2 Equipment Lease Facility
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
SECTION 1.
<S> <C>
DEFINITIONS; INTERPRETATION ..........................................................1
SECTION 2.
CLOSING DATE .........................................................................2
SECTION 3.
ACQUISITION OF THE PROPERTY; FUNDING OF ADVANCES .....................................2
SECTION 3.1. Lessor Commitment ....................................................2
SECTION 3.2. Participants' Commitments ............................................2
SECTION 3.3. [Intentionally Omitted] ..............................................2
SECTION 3.4. Procedures for Advances ..............................................2
SECTION 3.5. Allocation of Commitments ............................................3
SECTION 3.6. Termination, Reduction or Extension of Participants'
Commitments ..........................................................3
SECTION 3.7. Interest Rates and Payment Dates .....................................4
SECTION 3.8. Computation of Interest ..............................................6
SECTION 3.9. Pro Rata Treatment and Payments ......................................6
SECTION 3.10. The Account ..........................................................7
SECTION 3.11. Basic Rent ...........................................................7
SECTION 3.12. Purchase Payments by Lessee ..........................................7
SECTION 3.13. Residual Value Guarantee Amount Payment or Renewal Term
Payments by Lessee ...................................................9
SECTION 3.14. Sales Proceeds of Remarketing of Property ............................9
SECTION 3.15. Supplemental Rent ...................................................10
SECTION 3.16. Excepted Payments ...................................................10
SECTION 3.17. Distribution of Payments After Event of Default .....................10
SECTION 3.18. Other Payments ......................................................11
SECTION 3.19. Casualty and Condemnation Amounts ...................................11
SECTION 3.20. Order of Application ................................................11
SECTION 4.
FEES ................................................................................12
SECTION 4.1. Commitment Fees .....................................................12
SECTION 4.2. Lease Arrangement Fee ...............................................12
SECTION 4.3. Defeasance Fee ......................................................12
SECTION 4.4. Overdue Fees ........................................................12
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
SECTION 5.
<S> <C>
CERTAIN INTENTIONS OF THE PARTIES ..................................................12
SECTION 5.1. Nature of Transaction ..............................................12
SECTION 5.2. Amounts Due Under Lease ............................................13
SECTION 6.
CONDITIONS PRECEDENT TO
ACQUISITION OF EQUIPMENT AND ADVANCES ..............................................14
SECTION 6.1. Conditions Precedent Documentation .................................14
(a) Funding Request ........................................................14
(b) Operative Documents ....................................................14
(c) [Intentionally Omitted] ................................................15
(d) Appraisal ..............................................................15
(e) [Intentionally Omitted] ................................................15
(f) Equipment Schedule and Bill of Sale ....................................15
(g) [Intentionally Omitted] ................................................15
(h) Evidence of Recording and Filing .......................................15
(i) Evidence of Insurance ..................................................15
(j) Evidence of Use of Proceeds ............................................15
(k) Taxes ..................................................................15
(l) [Intentionally Omitted] ................................................15
(m) Approvals ..............................................................15
(n) Litigation .............................................................16
(o) Requirements of Law ....................................................16
(p) Responsible Officer's Certificate of the Lessee ........................16
(q) The Lessee's Resolutions and Incumbency Certificate, etc. ..............16
(r) Responsible Officer's Certificate of the Guarantor .....................16
(s) The Guarantor's Resolutions and Incumbency Certificate, etc. ...........17
(t) Closing Date ...........................................................17
(u) No Material Adverse Effect .............................................17
(v) Responsible Officer's Certificate of the Lessor ........................17
(w) The Lessor's Resolutions and Incumbency Certificate, etc. ..............17
SECTION 6.2. Further Conditions Precedent .......................................17
(a) Representations and Warranties .........................................18
(b) Performance of Covenants ...............................................18
(c) Title ..................................................................18
(d) No Default .............................................................18
SECTION 7.
[Intentionally Omitted] ............................................................18
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
SECTION 8.
<S> <C>
REPRESENTATIONS ....................................................................18
SECTION 8.1. Representations of the Lessor ......................................18
(a) Due Organization, etc. .................................................19
(b) Authorization; No Conflict .............................................19
(c) Enforceability, etc. ...................................................19
(d) Litigation .............................................................19
(e) Assignment .............................................................19
(f) Defaults ...............................................................19
(g) Use of Proceeds ........................................................19
(h) Securities Act .........................................................20
(i) Chief Place of Business ................................................20
(j) Federal Reserve Regulations ............................................20
(k) Investment Company Act .................................................20
(l) No Plan Assets .........................................................20
SECTION 8.2. Representations of the Participants ................................20
(a) No Plan Assets .........................................................20
(b) Due Organization, etc. .................................................20
(c) Authorization; No Conflict .............................................21
(d) Enforceability, etc. ...................................................21
(e) Litigation .............................................................21
SECTION 8.3. Representations of the Lessee ......................................21
(a) Corporate Status .......................................................21
(b) Corporate Power and Authority ..........................................21
(c) No Violation ...........................................................22
(d) Litigation .............................................................22
(e) Governmental Approvals .................................................22
(f) Investment Company Act .................................................22
(g) Public Utility Holding Company Act .....................................22
(h) Information ............................................................22
(i) Taxes ..................................................................23
(j) Compliance with ERISA ..................................................23
(k) Environmental and Other Regulations ....................................23
(l) Offer of Securities, etc. ..............................................23
(m) Financial Statements ...................................................23
SECTION 8.4. Representations of the Lessee With Respect to the Property on
the Closing Date ...................................................24
(a) Representations ........................................................24
(b) Property ...............................................................24
(c) Title ..................................................................25
(d) Insurance ..............................................................25
(e) Lease ..................................................................25
(f) Protection of Interests ................................................25
(g) [Intentionally Omitted] ................................................25
</TABLE>
-iii-
<PAGE>
<TABLE>
<S> <C>
(h) Conditions Precedent........................................25
SECTION 8.5. Representations of the Lessee With Respect to
Each Advance...........................................25
(a) Representations.............................................25
(b) Equipment...................................................26
(c) No Liens....................................................26
(d) Advance.....................................................26
(e) Lease.......................................................26
(f) Protection of Interests.....................................26
SECTION 9.
PAYMENT OF CERTAIN EXPENSES............................................26
SECTION 9.1 Transaction Expenses...................................26
SECTION 9.2. Brokers' Fees and Stamp Taxes..........................27
SECTION 9.3. Obligations............................................27
SECTION 10.
OTHER COVENANTS AND AGREEMENTS.........................................27
SECTION 10.1. Covenants of the Lessee................................27
(a) Information.................................................27
(b) Compliance with Laws........................................29
(c) Further Assurances..........................................29
(d) Existence; Franchises; Businesses...........................29
(e) Books and Records...........................................29
(f) Minimum Consolidated Quick Ratio............................29
(g) Minimum Consolidated Tangible Net Worth.....................29
(h) Maximum Consolidated Total Liabilities to Consolidated
Tangible Net Worth..........................................30
(i) Minimum Consolidated Fixed Charge Ratio.....................30
(j) Profitability...............................................30
(k) Liens.......................................................30
(l) Fundamental Changes.........................................30
(m) Transactions with Affiliates................................31
(n) Restricted Payments.........................................31
(o) No Impairment of Deposits...................................31
(p) Investments.................................................31
SECTION 10.2. Cooperation with the Lessee............................32
SECTION 10.3. Covenants of the Lessor................................32
(a) Discharge of Liens..........................................32
(b) Change of Chief Place of Business...........................32
</TABLE>
-iv-
<PAGE>
<TABLE>
<CAPTION>
SECTION 11.
<S> <C>
PARTICIPATIONS.................................................................32
SECTION 11.1. Amendments; Actions on Default................................32
SECTION 11.2. General.......................................................34
SECTION 11.3. Conflicts.....................................................34
SECTION 11.4. Refusal to Give Consents or Fund..............................35
SECTION 11.5. Required Repayments...........................................35
SECTION 11.6 Indemnification...............................................36
SECTION 11.7. Required Supplemental Payments................................36
SECTION 11.8. Application of Payments Received From Defaulting Participant
As a Cure For Payment Defaults................................37
SECTION 11.9. Order of Application..........................................37
SECTION 11.10. Investments Pending Dispute Resolution; Overnight
Investments...................................................37
SECTION 11.11. Agent to Exercise Lessor's Rights.............................38
SECTION 11.12. Exculpatory Provisions Regarding the Lessor...................38
SECTION 12.
TRANSFERS OF PARTICIPANTS' INTERESTS...........................................38
SECTION 12.1. Restrictions on and Effect of Transfer by Participants.........38
(a) Required Notice and Effective Date................................38
(b) Assumption of Obligations.........................................39
(c) Employee Benefit Plans............................................39
(d) Representations...................................................39
(e) Amounts; Agent's Fee..............................................40
(f) Applicable Law....................................................40
(g) Effect............................................................40
SECTION 12.2. Covenants and Agreements of Participants.......................40
(a) Participations....................................................40
(b) Transferee Indemnities............................................41
SECTION 12.3. Future Participants............................................41
SECTION 13.
INDEMNIFICATION................................................................41
SECTION 13.1. General Indemnification........................................41
SECTION 13.2. End of Term Indemnity..........................................43
SECTION 13.3. Environmental Indemnity........................................44
SECTION 13.4. Proceedings in Respect of Claims...............................45
SECTION 13.5. General Impositions Indemnity..................................46
(a) Indemnification...................................................46
(b) Payments..........................................................46
(c) Reports and Returns...............................................47
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
(d) Income Inclusions ..............................................47
(e) Witholding Taxes ...............................................48
(f) Contests of Impositions ........................................48
(g) Documentations of Withholding Status ...........................50
(h) Limitation of Tax Indemnification ..............................50
SECTION 13.6. Funding Losses ..............................................51
SECTION 13.7. Regulation D Compensation ...................................51
SECTION 13.8. Basis for Determining Interest Rate Inadequate or Unfair.....51
SECTION 13.9. Illegality...................................................52
SECTION 13.10. Increased Cost and Reduced Return............................53
SECTION 13.11. Substitution of Participant..................................54
SECTION 13.12. Indemnity Payment in Addition to Residual Value Guarantee
Amount................................................................54
SECTION 14.
THE AGENT ....................................................................54
SECTION 14.1. Appointment..................................................54
SECTION 14.2. Delegation of Duties.........................................55
SECTION 14.3. Exculpatory Provisions.......................................55
SECTION 14.4. Reliance by Agent............................................55
SECTION 14.5. Notice of Default............................................55
SECTION 14.6. NonReliance on Agent and Other Participants..................56
SECTION 14.7. Indemnification..............................................56
SECTION 14.8. Agent in its Individual Capacity.............................57
SECTION 14.9. Successor Agent..............................................57
SECTION 15.
MISCELLANEOUS ................................................................57
SECTION 15.1. Survival of Agreements.......................................57
SECTION 15.2. No Broker, etc ..............................................58
SECTION 15.3. Notices......................................................58
SECTION 15.4. Counterparts.................................................58
SECTION 15.5. Amendments ..................................................58
SECTION 15.6. Headings, etc ...............................................59
SECTION 15.7. Parties in Interest..........................................59
SECTION 15.8. GOVERNING LAW ...............................................60
SECTION 15.9. Severability ................................................60
SECTION 15.10. Liability limited............................................60
SECTION 15.11. Further Assurances...........................................60
SECTION 15.12. Submission to Jurisdiction...................................61
SECTION 15.13. Confidentiality..............................................61
SECTION 15.14. WAIVER OF JURY TRIAL.........................................61
SECTION 15.15. Usury Savings Clause.........................................61
</TABLE>
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<PAGE>
SCHEDULES
SCHEDULE I Participants' Commitments
SCHEDULE II Notice Information and Funding Offices
SCHEDULE III Environmental Matters
APPENDICES
APPENDIX 1 Definitions and Interpretation
EXHIBITS
EXHIBIT A Intentionally Omitted
EXHIBIT B Form of Funding Request
EXHIBIT C Intentionally Omitted
EXHIBIT D Intentionally Omitted
EXHIBIT E Intentionally Omitted
EXHIBIT F Intentionally Omitted
EXHIBIT G Intentionally Omitted
EXHIBIT H Intentionally Omitted
EXHIBIT I Form of Lessee's Completion Certificate
EXHIBIT J Form of Assignment and Acceptance
EXHIBIT K Form of Participant's Letter
EXHIBIT L Assignment of Lease and Consent to Assignment
EXHIBIT M Construction Agency Agreement
EXHIBIT N Construction Agency Agreement Assignment
EXHIBIT O Guarantee
EXHIBIT P Defeasance Deposit Agreement
EXHIBIT Q Intentionally Omitted
EXHIBIT R Security Agreement
EXHIBIT S Form of Financial Covenant Compliance Certificate
-vii-
<PAGE>
PARTICIPATION AGREEMENT
THIS PARTICIPATION AGREEMENT, dated as of August 15, 1997 (this
"Participation Agreement"), is entered into by and among VITESSE SEMICONDUCTOR
-----------------------
CORPORATION, a Delaware corporation, as Lessee (together with its permitted
successors and assigns, the "Lessee"); LEASE PLAN NORTH AMERICA, INC., an
------
Illinois corporation, as Lessor (together with its permitted successors and
assigns, the "Lessor"); ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH,
------
as a Participant (together with its permitted successors and assigns each a
"Participant" and collectively the "Participants"); and ABN AMRO BANK N.V., SAN
----------- ------------
FRANCISCO INTERNATIONAL BRANCH, as Agent (in such capacity, together with its
successors in such capacity, the "Agent") for the Participants.
-----
PRELIMINARY STATEMENT
In accordance with the terms of this Participation Agreement, the Lease and
the other Operative Documents,
A. the Lessor contemplates purchasing certain items of Equipment to
be used in connection with the Lessee's semiconductor fabrication facility
located in Colorado Springs, Colorado and leasing, as Lessor, such
Equipment to the Lessee under the Lease; and
C. the Lessor wishes to obtain, and the Participants are willing to
provide, financing of the funding of the costs of acquisition of such
Equipment through the purchase of Participation Interest in the Lease and
the Rent.
In consideration of the mutual agreements contained in this Participation
Agreement and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
SECTION 1.
DEFINITIONS; INTERPRETATION
Unless the context shall otherwise require, capitalized terms used and not
defined herein shall have the meanings assigned thereto in Appendix 1 hereto for
----------
all purposes hereof; and the rules of interpretation set forth in Appendix 1
----------
hereto shall apply to this Participation Agreement.
<PAGE>
SECTION 2.
CLOSING DATE
The closing date (the "Closing Date") shall occur on the date of the
------------
initial Advance, which shall be the earliest date on which all the conditions
precedent thereto set forth in Sections 6.1 and 6.2 hereof shall have been
------------ ---
satisfied or waived by the applicable parties as set forth therein.
SECTION 3.
ACQUISITION OF THE PROPERTY; FUNDING OF ADVANCES
SECTION 3.1. Lessor Commitment. Subject to the conditions and terms
-----------------
hereof, the Lessor shall take the following actions at the written request of
the Lessee from time to time during the Commitment Period:
(a) make Advances (out of funds provided by the Participants) for
the purpose of financing the acquisition of the Equipment;
(b) acquire the Equipment (using funds provided by the
Participants); and
(c) lease the Property as lessor to the Lessee under the Lease.
SECTION 3.2 Participants' Commitments. Subject to the terms and
-------------------------
conditions hereof, each Participant severally shall purchase a Participation
Interest in the Advances being made by the Lessor at the request of the Lessee
from time to time during the Commitment Period by making available to the Lessor
on each Funding Date an amount in immediately available funds equal to such
Participants' Commitment Percentage of the amount of the Advance being funded on
such Funding Date. Notwithstanding any other provision hereof, no Participant
shall be obligated to purchase its Participation Interest in any Advance if (i)
the amount of such purchase would exceed its Available Commitment, or (ii) if,
after giving effect to the proposed Advance, the outstanding aggregate amount of
such Participant's Participation Interest in the Advances would exceed such
Participant's Commitment.
SECTION 3.3 [Intentionally Omitted].
SECTION 3.4 Procedures for Advances. (a) With respect to each funding of
-----------------------
an Advance, the Lessee shall give the Lessor and the Agent prior written notice
not later than 10:00 a.m., San Francisco time, three Business Days prior to the
proposed Funding Date, pursuant, in each case, to a Funding Request
substantially in the for of Exhibit B (a "Funding Request"), specifying (i) the
--------- ---------------
proposed funding Date, (ii) the amount and purpose of the Advance requested,
(iii) the initial Interest Period for such Advance, (iv) the payee of such
Advance, and (v) the Property Costs of the applicable Property. The Agent shall
promptly forward a copy of such Funding REquest to each Participant. The
Lessee shall not request more than one Funding Date during any calendar month.
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<PAGE>
Each Advance (other than an Interest Payment Advance and the initial Advance)
shall be in a minimum amount of $1,000,000 or in amounts of $100,000 in excess
thereof. Subject to the satisfaction or waiver of the conditions precedent to
such Advance set forth in Section 6, each Participant shall purchase its
---------
Participation Interest in such Advance by making available to the Lessor its
proportionate share of such Advance in immediately available federal funds by
wire transfer to the Agent for deposit to the Lessee's demand deposit account
with the Agent not later than 12:00 noon, San Francisco time, on the applicable
Funding Date. Upon (i) the Lessee's receipt of the funds provided by the
Participants with respect to an Advance, and (ii) satisfaction or waiver of the
conditions precedent to such Advance set forth in Section 6, the Lessee shall
---------
pay or retain as payment or reimbursement of, Property Costs, in each case from
the funds provided by the Participants for such Advance.
(b) On each Funding Date requested pursuant to Section 3.4(a), the
--------------
Lessee shall deposit immediately available funds with the Defeasance Deposit
Depositary Bank in the amount of the Tranche A Participation Interest in the
Advance so requested pursuant to the Defeasance Deposit Agreement. Each such
deposit (collectively, the "Defeasance Deposit") shall be the property of the
------------------
Defeasance Deposit Depositary Bank and shall be held and administered in
accordance with the Defeasance Deposit Agreement.
SECTION 3.5. ALLOCATION OF COMMITMENTS. Schedule I hereto contains an
------------------------- ----------
allocation for each Participant of (i) the amount of its Commitment
representing its Tranche A Participation Interest ("Tranche A Participation
-----------------------
Interest Commitment"), (ii) the amount of its commitment representing its
- - -------------------
Tranche B Participation Interest ("Tranche B Participation Interest
---------------------------------
Commitment"), and (iii) the percentage referred to in the definition of the term
- - ----------
"Participation Interest". The Lessee, the Lessor and the Participants have
approved all such allocations and percentages. Schedule I shall be amended (i)
as required to reflect changes in the allocations set forth thereon due to the
addition of additional Participants pursuant to Section 12.1 and (ii) to reflect
------------
the payment of any Renewal Term Payment pursuant to Section 21.1 of the Lease
and the distribution of such payment to the Participants pursuant to Section
-------
3.13.
- - ----
SECTION 3.6 Termination, Reduction or Extension of Participants'
---------------------------------------------------
Commitments. (a) The Lessor shall have the right, upon not less than five
- - -----------
Business Days' written notice to the Agent, to terminate the Participants'
Commitments or, from time to time, to reduce the amount of the Participants'
Commitments, provided that (i) after giving effect to such reduction the
-------- ----
aggregate outstanding principal amount of the Tranche A Participation Interests
shall not exceed the aggregate Tranche A Participation Interest Commitments,
(ii) after giving effect to such reduction, the aggregate outstanding principal
amount of the Tranche B Participation Interests shall not exceed the aggregate
Tranche B Participation Interest Commitments, and (iii) any such reduction shall
be made pro rata among the Participants' Commitments within each Tranche. Prior
to the occurrence and continuance of an Event of Default the Lessor shall
exercise such right only as directed by the Lessee and after the occurrence and
during the continuance of an Event of Default the Lessor shall exercise such
right only as directed by the Required Participants. In the event that, after
the occurrence and during the continuance of any Event of Default, the Lessor
and the Participants exercise such right, the Lessee may exercise its Purchase
Option under Section 20.1 of the Lease upon not less than ten (10) days' written
notice to the Lessor.
-3-
<PAGE>
(b) The Lessee may, by written request to the Lessor and Agent (which
the Agent shall promptly forward to each Participant) given not later than 90
days prior to the Maturity Date then in effect, request (an "Extension Request")
-----------------
that the Maturity Date be extended for up to two one (1) - year periods
commencing on the date following the Maturity Date then in effect. The extension
of the Maturity Date contemplated by any Extension Request shall become
effective as of the date following the Maturity Date then in effect; (the
"Extension Effective Date") provided that:
------------------------
(A) on both the date of the Extension Request and the Extension
Effective Date, (x) each of the representations and warranties made by the
Lessee and the Lessor in or pursuant to the Operative Documents shall be
true and correct in all material respects as if made on and as of each such
date, except for representations and warranties made as of a specific date,
which shall be true and correct in all material respects as of such date,
(y) no Event of Default shall have occurred and be continuing, and (z) on
each of such dates the Agent shall have received a certificate of the
Lessee and the Lessor, each as to itself, as to the matters set forth in
clause (x) above and from the Lessee as to the matters set forth in clause
----------- ------
(y) above,
---
(B) the Agent and the Required Participants shall have received
satisfactory evidence that the Expiration Date shall, after giving effect
to any extension thereof which has become effective on or prior to such
Extension Effective Date, occur on the Maturity Date as so extended,
(C) on or prior to November 1 of the year in which an
Extension Request is made, the Lessor shall have received a Renewal Term
Appraisal, and
(D) on the Maturity Date then in effect the Lessee
shall pay to the Lessor the Renewal Term Payment.
(c) The Lessee shall notify the Lessor and the Participants whether
it wishes to extend the Construction Period to the date that is six months after
the initial Outside Completion Date at least thirty (30) days prior to the
initial Outside Completion Date. The Construction Period and the Outside
Completion Date shall not be extended unless each Participant, in its sole
discretion, consents thereto within fifteen (15) days of the initial Outside
Completion Date. Each Participant may make such decision based upon such credit
information regarding the Lessee, interest rates and market conditions and such
other factors as it may consider relevant. If the Construction Period is so
extended, the Lessee shall pay Commitment Fees to the Agent for the account of
the Tranche B Participants during such extension of the Construction Period.
SECTION 3.7. Interest Rates and Payment Dates. (a) Each Advance
--------------------------------
representing Tranche A Participation Interests shall bear interest at a rate per
annum determined as follows:
(i) during the Term of the Lease and ending on the initial
Expiration Date, each Advance representing Tranche A Participation
Interests shall bear interest at a rate per annum equal to [*] for the
period commencing on the initial Funding Date and ending on the initial
Expiration Date; and
[* CONFIDENTIAL INFORMATION]
4
<PAGE>
(ii) during any Renewal Term of the Lease, if any, each Advance
representing Tranche A Participation Interests shall bear interest at a
rate per annum equal to [*] for the period commencing on the first day of
such Renewal Term and ending on the last day of such Renewal Term.
Each Advance in respect of the Tranche B Participation Interests shall bear
interest for each day during each Interest Period with respect thereto at a rate
per annum for such Interest Period equal to the Three Month Eurodollar Rate
determined for such day plus the Applicable Margin.
(b) If all or a portion of(i) the amount of any Advance, (ii) any interest
payable thereon or (iii) any other amount payable hereunder shall not be paid
when due (whether at the stated maturity, by acceleration or otherwise), such
overdue amount shall bear interest at a rate per annum which is equal to the
Overdue Rate.
(c) Interest shall be payable in cash (except as provided in paragraphs (d)
and (e) below) in arrears on each Scheduled Payment Date, provided that (i)
interest accruing pursuant to paragraph (b) of this Section 3.7 shall be payable
from time to time on demand and (ii) each prepayment of Advances shall be
accompanied by accrued interest to the date of such prepayment on the amount of
Advances so prepaid.
(d) On each date which is three Business Days prior to any Scheduled
Payment Date during the Interest Capitalization Period, the Lessee shall be
deemed to have requested an Advance comprised of an Interest Payment Advance
pursuant to Section 3.4 and the Lessor shall be deemed to have requested a
purchase pursuant to Section 3.2 of Participation Interests in such Advance in
an amount equal to the aggregate amount of the Basic Rent due and payable on
such date with respect to accrued interest on outstanding Advances. The Funding
Date with respect to any such Interest Payment Advance and purchase of
Participation Interests therein shall be the relevant Scheduled Payment Date
(provided that such Advance and the purchase of such Participation Interests
shall be subject to satisfaction of the applicable conditions precedent set
forth in Section 6) and the proceeds of such payment shall be applied to pay
such accrued interest. On each such Funding Date, the Property Cost shall be
increased by an amount equal to the Basic Rent paid on such date with respect to
such Property with the proceeds of such payment, and the Property Cost of each
item of Equipment shall be increased by its pro rata portion of such Advance.
(e) After the Interest Capitalization Period, interest accruing on the
Tranche A Participation Interests shall be payable by offsetting interest
accruing on the Defeasance Deposit pursuant to the Defeasance Deposit Agreement
as of the applicable Payment Date.
SECTION 3.8. Computation of Interest. (a) Whenever it is calculated on the
basis of the Alternate Base Rate, interest shall be calculated on the basis of a
365- (or 366-, as the case may be) day year for the actual days elapsed; and,
other, vise, interest shall be calculated on the basis of a 360-day year for the
actual days elapsed. The Agent shall as soon as practicable after the
commencement of each Interest Period notify the Lessor, the Lessee and the
Participants of each determination of a Three Month Eurodollar Rate. Any change
in the interest rate on an Advance
[* CONFIDENTIAL INFORMATION]
5
<PAGE>
resulting from a change in the Alternate Base Rate or the Eurocurrency Reserve
Requirements shall become effective as of the opening of business on the day on
which such change becomes effective. The Agent shall as soon as practicable
notify the Lessor, the Lessee and the Participants of the effective date and the
amount of each such change in interest rate.
(b) Each determination of an interest rate by the Agent pursuant to any
provision of this Agreement shall be conclusive and binding on the Lessor, the
Lessee and the Participants in the absence of manifest error. The Agent shall,
at the request of such parties, deliver to such parties a statement showing the
quotations used by the Agent in determining any interest rate pursuant to
Section 3.8(a).
SECTION 3.9. Pro Rata Treatment and Payments. (a) Each participation in the
Advances by the Participants hereunder and each reduction of the Commitments of
the Participants shall be made pro rata among the Tranche A Participants and
Tranche B Participants according to the respective Commitment Percentages of
each such Participant. Except as otherwise provided in Sections 3.10 - 3.20,
.each payment (including each prepayment) by the Lessor on account of
Participation Interests representing the amount of and interest on the Advances
shall be made pro rata among the Tranche A Participants and Tranche B
Participants according to the respective Participation Interests of each such
Participant. All payments (including prepayments) to be made by the Lessor
'hereunder to the Participants with respect to their Participation Interests,
whether on account of principal, interest or otherwise, shall be payable to the
extent received by the Lessor from or on behalf of the Lessee and shall be made
without setoff or counterclaim and shall be made prior to 12:00 noon, San
Francisco time, on the due date thereof to the Agent, for the account of the
Participants, at the Agent's office referred to in Section 15.3 of this
Agreement, in Dollars and in immediately available funds. The Agent shall
distribute such payments to the Participants promptly upon receipt in like funds
as received. If any payment hereunder (other than payments of Participation
Interests in the Advances) becomes due and payable on a day other than a
Business Day, such payment shall be extended to the next succeeding Business
Day. If any payment of Participation Interests in an Advance becomes due and
payable on a day other than a Business Day, the maturity thereof shall be
extended to the next succeeding Business Day unless the result of such extension
would be to extend such payment into another calendar month, in which event such
payment shall be made on the immediately preceding Business Day. In the case of
any extension or shortening of the due date of any payment pursuant to the
preceding two sentences, interest thereon shall be payable at the then
applicable rate during Such extension or until such shortened due date, as the
case may be.
(b) Unless the Agent shall have been notified in writing by any Participant
prior to funding its Participation Interest in an Advance that such Participant
will not make its share of such Advance available to the Agent, the Agent may
assume that such Participant is making such amount available to the Agent, and
the Agent may, in reliance upon such assumption, make available to the Lessor a
corresponding amount. If such amount is not made available to the Agent by the
required time on the Funding Date therefor, such Participant shall pay to the
Agent, on demand, such amount with interest thereon at a rate equal to the daily
average Federal Funds Effective Rate for the period until such Participant makes
such amount immediately available to the Agent. A certificate of the Agent
submitted to any Participant with respect to any amounts owing under this
Section 3.9(b) shall
6
<PAGE>
be conclusive in the absence of manifest error. If such Participant's share of
such Advance is not made available to the Agent by such Participant within three
Business Days of such Funding Date, the Agent shall also be entitled to recover
such amount with interest thereon at the rate borne by such Advance, on demand,
from the Lessee, to the extent the Agent has made a corresponding amount of the
Advance to the Lessee.
SECTION 3.10. The Account. The Agent may if it so desires establish an account
-----------
(the "Account") into which the Agent shall deposit all payments, receipts and
-------
other consideration of any kind whatsoever paid under the Lease and received by
the Agent pursuant to this Agreement, the Lease and any other Operative
Document. The Agent shall make distributions of such payments, receipts and
other consideration (and, if an Account is used, from the Account) pursuant to
the requirements of Sections 3.11 -3.20 hereof. Notwithstanding anything
-------------------
contained in this Section 3 or the other Operative Documents to the contrary, to
the extent Tranche A Basic Rent, the Residual Value Guarantee Amount or any
portion of Asset Termination Value payable to the Lessor on account of the
Tranche A Participation Interests in the Advances is to be paid from the
interest accruing on, or the principal amount of, the Defeasance Deposit
pursuant to any provision of the Lease or the Defeasance Deposit Agreement, (i)
such payments shall not require a cash transfer from the Lessee but shall be
payable by means of an offset against interest accruing on, or the applicable
amount of principal of, the Defeasance Deposit and (ii) the Lessee shall not be
required to make any such transfer of such amounts to the Tranche A
Participants.
SECTION 3.11. Basic Rent. Each payment (or portion thereof) of Basic Rent
----------
comprising interest on the Advances (and any payment of interest on overdue
installments of such component of Basic Rent) received by the Agent shall be
distributed by the Agent as promptly as possible (it being understood that any
-------------------
payments of such component of Basic Rent received by the Agent on a timely basis
and in accordance with the provisions of the Lease shall be distributed on the
date received in the funds so received) to the Participants pro rata in
--------
accordance with, and for application to, the portion of their Participation
Interests in such portion of Basic Rent, as well as in any overdue interest due
to such Participant (to the extent permitted by applicable law); provided, that
(i) interest accruing on the Defeasance Deposit shall only be applied to pay
Basic Rent owing to the Tranche A Participants; and (ii) Basic Rent paid in cash
by the Lessee in respect of interest accruing on the Tranche B Participation
Interests shall only be applied to pay Basic Rent owing to the Tranche B
Participant.s.
SECTION 3.12. Purchase Payments by Lessee. Any payment received by the Agent as
---------------------------
a result of:
(a) the purchase of the Lessor's interest in the Property in connection with the
Lessee's exercise of its Purchase Option or Partial Purchase Option under
Section 20.1 of the Lease, or
(b) the Lessee's compliance with its obligation to purchase the Lessor's
interest in the Property in accordance with Section 20.2 of the Lease, or
7
<PAGE>
(c) the payment of the Asset Termination Value in accordance with Sections
16.2(b), I6.3 or 16.4 of the Lease, or
(d) the Lessee falling to fulfill one or more of the conditions to exercise of
the Remarketing Option pursuant to Section 22.1 of the Lease and the Agent's
receipt pursuant to the next-to-last paragraph of Section 22.1 of the Lease of
the Asset Termination Value in accordance with Section 20.2 of the Lease,
shall be distributed by the Agent as promptly as possible (it being understood
that any such payment received by the Agent on a timely basis and in accordance
with the provisions of the Lease shall be distributed on the date on which such
funds are so received) to pay in full the Participant Balance of each
Participant and in the case that the amount so distributed shall be insufficient
to pay in full as aforesaid, then pro rata among the Participants without
priority of one over the other, in the proportion that the Participant Balance
of each bears to the aggregate of all of the Participant Balances; provided,
that any payment received by means of offset against the Defeasance Deposit
shall be applied in the following order of priority:
first, to the Tranche A Participants for application to pay in full the Tranche
- - -----
A Participation Interest Balance of each Tranche A Participant; and
second, to the Tranche B Participants for application to pay in full the Tranche
- - ------
B Participation Interest Balance of each Tranche B Participant, and in the case
where the amounts so distributed shall be insufficient to pay in full as
aforesaid, then pro rata among the Tranche B Participants without priority of
--------
one Tranche B Participant over the other in the proportion that each such
Tranche B Participant's Tranche B Participation Interest Balance bears to the
aggregate Tranche B Participation Interest Balances of all Tranche B
Participants. To the extent that any amount of the Defeasance Deposit Collateral
remains in any Account (as defined in the Defeasance Deposit Agreement) after
all payments required to be made by this Section 3.12 and Section 3.13 have been
made and the Participation Interests have been paid in full, the Agent shall
cause such remaining amount to be refunded promptly to the Lessee.
(e) Notwithstanding any other provision in this Agreement, the Lease or any
other Operative Document to the contrary, the Lessee, the Agent, the
Participants and the Lessor agree that upon the maturity or acceleration of the
Lessee's obligation to pay the Asset Termination Value, Residual Value Guarantee
Amount or Purchase Option Price, any and all amounts of Defeasance Deposit
Collateral that have been deposited by the Lessee pursuant to the Defeasance
Deposit Agreement and that have not been withdrawn by the Lessee or offset or
applied by the Lessor, the Agent or any Participant (in accordance with the
terms of the Defeasance Deposit Agreement) as of such maturity or acceleration
date, shall be required to be applied by the Agent and the Lessor to satisfy the
Lessee's obligation to pay such portion of the Asset Termination Value, Purchase
Option Price or Residual Value Guarantee represented by the Defeasance Deposit
Collateral notwithstanding the fact that such amounts may not then be actually
available, for any reason attributable to the Lessor, the Agent or any
Participant (including, without limitation any fraud or misapplication of funds
by the Lessor, the Agent or any Participant, decline in value of the
8
<PAGE>
Collateral or the filing by or against the Lessor, the Agent or any Participant
of any insolvency, bankruptcy, dissolution, liquidation, reorganization or
similar proceeding, but except to the extent resulting from a proceeding
involving the insolvency of the Lessee), at Defeasance Deposit Depositary Bank
to pay such obligation.
SECTION 3.13. Residual Value Guarantee Amount Payment or Renewal Term
-------------------------------------------------------
Payments by Lessee. The payment by the Lessee to the Agent of (i) the Residual
- - ------------------
Value Guarantee Amount in accordance with Article XXII of the Lease (including
payment by means of offset against the Defeasance Deposit) upon the Lessee's
exercise of the Remarketing Option or (ii) a Renewal Term Payment in accordance
with Section 21.1 of the Lease (including payment by means of offset against the
Defeasance Deposit) in connection with the Lessee's exercise of a Renewal Option
shall be distributed by the Agent as promptly as possible (it being understood
that any such payment received by the Agent on a timely basis in accordance with
the provisions of the Lease shall be distributed on the date on which such funds
are so received) in the following order of priority:
first, to the Tranche A Participants for application to pay in full
-----
the Tranche A Participation Interest Balance of each Tranche A Participant;
and
second, to the Tranche B Participants for application to pay in full
------
the Tranche B Participation Interest Balance of each Tranche B Participant,
and in the case where the amounts so distributed shall be insufficient to
pay in full as aforesaid, then pro rata among the Tranche B Participants
without priority of one Tranche B Participant over the other in the
proportion that each such Tranche B Participant's Tranche B Participation
Interest Balance bears to the aggregate Tranche B Participation Interest
Balances of all Tranche B Participants.
SECTION 3.14. Sales Proceeds of Remarketing of Property. Any payments
-----------------------------------------
received by the Agent as proceeds from the sale of the Property sold pursuant to
the Lessee's exercise of the Remarketing Option pursuant to Article XXII of the
Lease, together with any payment made by the Lessee as a result of an appraisal
pursuant to Section 13.2 of this Agreement, shall be distributed by the Agent as
------------
promptly as possible (it being understood that any such payment received by the
-------------------
Agent on a timely basis and in accordance with the provisions of the Lease shall
be distributed on the date received) in the funds so received in the following
order of priority:
first, to the Tranche B Participants for application to pay in full the
-----
Tranche B Participation Interest Balance of each Tranche B Participant, and
in the case where the amount so distributed shall be insufficient to pay in
full as aforesaid, then pro rata among the Tranche B Participants without
priority of one Tranche B Participant over the other in the proportion that
each Tranche B Participant's Tranche B Participation Interest Balance bears
to the aggregate Tranche B Participation Interest Balances of all Tranche B
Participants;
second, to the Tranche A Participants for application to pay in full
------
the Tranche A Participation Interest Balance of each Tranche A Participant,
and in the case where the amount so distributed shall be insufficient to
pay in full as aforesaid, then pro rata among
--------
9
<PAGE>
the Tranche A Participants without priority of one Tranche A Participant
over the other in the proportion that each Tranche A Participant's Tranche
A Participation Interest Balance bears to the aggregate Tranche A
Participation Interest Balances of all Tranche A Participants; and
third, the balance, if any, shall be promptly distributed to, or as
directed by, the Lessee.
SECTION 3.15. Supplemental Rent. All payments of Supplemental Rent received
by the Agent (excluding any amounts payable pursuant to the preceding provisions
of this Section 3) shall be distributed promptly by Agent upon receipt thereof
to the Persons entitled thereto pursuant to the Operative Documents.
SECTION 3.16. Excepted Payments. Notwithstanding any other provision of
this Agreement or the Operative Documents, any Excepted Payment received at any
time by the Agent shall be distributed promptly to the Person entitled to
receive such Excepted Payment pursuant to the Operative Documents.
SECTION 3.17. Distribution of Payments After Event of Default. (a) All
payments received and amounts realized by the Lessor or the Agent after an Event
of Default exists, including under the Guarantee or the Defeasance Deposit
Agreement and proceeds from the sale of any of the Property, proceeds of any
amounts from any insurer or any Governmental Authority in connection with any
Casualty or Condemnation, or from Lessee as payment in accordance with the
Lease, including any payment received from Lessee pursuant to Section 17 of the
Lease, shall, if received by Lessor, be paid to the Agent as promptly as
possible and shall be distributed by the Agent as promptly as possible (it being
understood that any such payment received by the Agent on a timely basis and in
accordance with the provisions of the Operative Documents shall be distributed
on the date received in the funds so received) in the following order of
priority:
first, so much of such payment or amount as shall be required to
reimburse the Lessor or the Agent for any tax, expense or other loss
incurred by the Lessor or the Agent (including, to the extent not
previously reimbursed, those incurred in connection with any duties of the
Agent as the Agent) and any unpaid ongoing fees of the Lessor and the Agent
shall be distributed to each of them for its own account;
second, so much of such payments or amounts as shall be required to
reimburse the then existing or prior Participants for payments made by them
to the Lessor pursuant to Section 18.1 of the Lease (to the extent not
previously reimbursed) and to pay such then existing or prior Participants
the amounts payable to them pursuant to any expense reimbursement or
indemnification provisions of the Operative Documents shall be distributed
to each such Participant without priority of one over the other in
accordance with the amount of such payment or payments payable to each such
Person;
third, (i) in the case of a sale of the Property, in the order of
priority set forth in Section 3.14, (ii) in the case of the application of
the Defeasance Deposit, in the order of
10
<PAGE>
priority set forth in Section 3.13 and (iii) in all other cases, so much
of such amount as shall be required to pay in full the Participant
Balance of each Participant, and in the case that the amounts so
distributed shall be insufficient to pay in full as aforesaid, then pro
rata among the Participants without priority of one over the other, in the
proportion that the Participant Balance of each bears to the aggregate
Participant Balances of all the Participants; and
fourth, the balance, if any, of such payment or amounts remaining
thereafter shall be promptly distributed to, or as directed by, the Lessee.
SECTION 3.18. Other Payments. (a) Except as otherwise provided in Sections
3.11, 3.12, 3.17 and paragraph (b) below,
(i) any payment received by the Agent for which no provision as to the
application thereof is made in the Operative Documents or elsewhere in this
Section 3, and
(ii) all payments received and amounts realized by the Agent under the
Lease or otherwise with respect to the Property or the Defeasance Deposit
to the extent received or realized at any time after indefeasible payment
in full of the Participant Balances of all of the Participants and any
other amounts due and owing to the Lessor, the Participants or the Agent,
shall be distributed forthwith by the Agent in the order of priority set forth
in Section 3.12 (in the case of any payment described in clause (i) above) or
in Section 3.17 hereof (in the case of any payment described in clause (ii)
above), except, that (i) in the case of any payment described in clause (ii)
above, such payment shall be distributed omitting clause third of such Section
3.17; and the balance, if any (in the case of any payment described in clause
(i) or (ii) above), shall be distributed to, or as directed by, the Lessee, and
(ii) any payments received under the Guaranty shall be distributed solely to
the Participants in accordance with the priorities set forth in Section 3.17.
(b) Except as otherwise provided in Sections 3.11 and 3.12 hereof, any
payment received by the Agent for which provision as to the application thereof
is made in an Operative Document but not elsewhere in this Section 3 shall be
distributed forthwith by the Agent to the Person and for the purpose for which
such payment was made in accordance with the terms of such Operative Document.
SECTION 3.19. Casualty and Condemnation Amounts. Any amounts payable to the
Lessor as a result of a Casualty or Condemnation pursuant to Section 15.1 of the
Lease (but excluding any amounts payable pursuant to Section 16.2 of the Lease)
shall, if no Lease Event of Default exists, be paid over to Lessee for the
rebuilding, replacement or restoration of that portion of the Property to which
such Casualty or Condemnation applied, and any excess proceeds shall be paid to
the Lessee.
SECTION 3.20. Order of Application. To the extent any payment made to any
Participant pursuant to Sections 3.1-2, 3.13, 3.14 or 3.15 is insufficient to
pay in full the Participant Balance of
11
<PAGE>
such Participant, then each such payment shall first be applied to its
Participation Interest in accrued interest and then to its Participation
Interest in principal of the Advances.
SECTION 4.
FEES
SECTION 4.1. Commitment Fees. The Lessee shall pay to the Agent for the
account of each Tranche B Participant a commitment fee (the "Commitment Fees")
for the period from and including the Closing Date to the earlier of (i) the
Completion Date or (ii) the Outside Completion Date, computed in the case of
each Tranche B Participant at a rate per annum equal to the Commitment Fee Rate
on the amount of the Available Tranche B Commitment of such Participant, in each
case during the period for which payment is made, payable on each Commitment Fee
Payment Date. Commitment Fees shall be calculated on the basis of a 365- (or
366-, as the case may be) day year for the actual days elapsed.
SECTION 4.2. Lease Arrangement Fee. The Lessee shall pay to the Arranger
the lease arrangement fee (the "Lease Arrangement Fee") referred to in that
certain commitment letter from the Arranger to the Lessee dated as of June 26,
1997, at such times as are specified in such letter.
SECTION 4.3. Defeasance Fee. The Lessee shall pay to the Agent for the
account of each Tranche A Participant a defeasance fee (the "Defeasance Fee") in
the amount of [*] of the aggregate Tranche A Participation Interest Commitment
on the Closing Date.
SECTION 4.4. Overdue Fees. If all or a portion of any fee due hereunder
shall not be paid when due, such overdue amount shall bear interest, payable by
the Lessee on demand, at a rate per annum equal to the Overdue Rate from the
date of such nonpayment until such amount is paid in full (as well after as
before judgment).
SECTION 5.
CERTAIN INTENTIONS OF THE PARTIES
SECTION 5.1. Nature of Transaction. (a) It is the intent of the parties
hereto that: (i) the Lease constitutes an "operating lease" pursuant to
Statement of Financial Accounting Standards No. 13, as amended, for purposes of
the Lessee's financial reporting, and (ii) for purposes of federal, state and
local income or franchise taxes and for any other tax imposed on or measured by
income, the transaction contemplated hereby is a financing arrangement and
preserves ownership in the Property in the Lessee. Nevertheless, the Lessee
acknowledges and agrees that neither the Agent, the Lessor nor any Participant
has made any representations or warranties to the Lessee concerning the tax,
accounting or legal characteristics of the Operative Documents and that the
Lessee has obtained and relied upon such tax, accounting and legal advice
concerning the Operative Documents as it deems appropriate.
[* CONFIDENTIAL INFORMATION]
12
<PAGE>
Notwithstanding any provision of this Participation Agreement to the
contrary, the parties hereto agree and declare that: (i) the transactions
contemplated by the Lease are intended to have a dual, rather than single, form;
and (ii) all references in this Participation Agreement to the "lease" of the
Property which fail to reference such dual form do so as a matter of convenience
only and do not reflect the intent of the parties hereto as to the true form of
such arrangements. The parties hereto agree that, in accordance with their
intentions expressed herein and the substance of the transactions contemplated
hereby, the Lessee (and not the Lessor) shall be treated as the owner of the
Property for federal, state, and local income and property tax purposes and the
Lease shall be treated as a financing arrangement. The Lessee shall be entitled
to take any deduction, credit, allowance or other reporting, filing or other tax
position consistent with such characterizations. The Lessor and the Participants
shall file any federal, state or local income tax returns, reports or other
statements in a manner which is consistent with the foregoing provisions of this
Section 5.1, provided that the Lessor and any Participant may take a position
that is inconsistent with the Lessee's status as owner of the Property if: (x)
there has been a change in law or regulation so requiring as supported by an
opinion of counsel reasonably acceptable to the Lessee that there is not
substantial authority for such a consistent reporting position; or (y) (A) there
has been an administrative or judicial holding that the Lessee is not the owner
of the Property for such tax purposes, (B) the Lessee has no fight to contest
such holding pursuant to Section 13.5 of the Participation Agreement, and (C)
the Lessee's lack of right to contest is not the result of an Indemnitee's
waiver of its fight to indemnification pursuant to Section 13.5(f)(iii) of the
Participation Agreement or failure of the amount at issue to exceed the minimum
amount set forth in Section 13.5(f)(iv)(B) of the Participation Agreement.
(b) Specifically, without limiting the generality of subsection (a) of this
Section 5.1, the parties hereto intend and agree that with respect to the nature
of the transactions evidenced by the Lease in the context of the exercise of
remedies under the Operative Documents, including, without limitation, in the
case of any insolvency or receivership proceedings or a petition under the
United States bankruptcy laws or any other applicable insolvency laws or statute
of the United States of America or any State or Commonwealth thereof affecting
the Lessee, the Lessor or any Participant or any enforcement or collection
actions, (i) the transactions evidenced by the Operative Documents are loans
made by the Lessor and the Participants as unrelated third party lenders to the
Lessee secured by the Property, (ii) the obligations of the Lessee under the
Lease to pay Basic Rent and Supplemental Rent or Asset Termination Value in
connection with any purchase of the Property pursuant to the Lease shall be
treated as payments of interest on and principal of, respectively, loans from
the Lessor and the Participants to the Lessee, (iii) the Lease grants a security
interest and lien on the Property and the collateral described in the Security
Agreement to the Lessor, the Agent and the Participants to secure the Lessee's
performance and payment of all amounts under the Lease and the other Operative
Documents.
SECTION 5.2. Amounts Due Under Lease. Anything else herein or elsewhere to
the contrary notwithstanding, it is the intention of the Lessee, the Lessor, the
Participants and the Agent that: (i) the amount and timing of installments of
Basic Rent due and payable from time to time from the Lessee under the Lease
shall be equal to the aggregate payments due to the Participants in respect of
their Participation Interests on each Payment Date; (ii) if the Lessee elects
the Purchase Option or becomes obligated to purchase the Property under the
Lease, the Participation Interests,
13
<PAGE>
all fees and all of the interest on overdue amounts thereon and all other
obligations of the Lessee owing to the Lessor, the Participants and the Agent
shall be paid in full by the Lessee; (iii) if the Lessee properly elects the
Remarketing Option, the Lessee shall only be required to pay to the Lessor the
proceeds of the sale of the Property, the Residual Value Guarantee Amount and
any amounts due pursuant to Section 13 of this Participation Agreement and
Section 22.2 of the Lease (which aggregate amounts may be less than the Asset
Termination Value); and (iv) upon an Event of Default resulting in an
acceleration of the Lessee's obligation to purchase the Property under the
Lease, the amounts then due and payable by the Lessee under the Lease shall
include all amounts necessary to pay in full the Asset Termination Value, plus
all other amounts then due from the Lessee to the Participants, the Agent and
the Lessor under the Operative Documents.
SECTION 6.
CONDITIONS PRECEDENT TO
ACQUISITION OF EQUIPMENT AND ADVANCES
SECTION 6.1. Conditions Precedent-- Documentation. The obligation of the
Lessor to acquire Equipment on any Funding Date and to make an Advance to
finance the acquisition of Equipment or the funding of any Interest Payment
Advance on any Funding Date, and the obligation of each Participant to purchase
its Participation Interest in, and to make available to the Lessor its related
portion of, each such Advance on such Funding Date are subject to satisfaction
or waiver of the following conditions precedent and the conditions precedent set
forth in Section 6.2 (it being understood that the Lessor's obligation to
acquire such Equipment, shall not be subject to the conditions precedent set
forth in this Section 6.1 or Section 6.2 to the extent such conditions are
actions required of the Lessor) on or prior to the Closing Date or such Funding
Date, as the case may be:
(a) Funding Request. Prior to each Funding Date the Agent and the Lessor
shall have received a fully executed counterpart of the related Funding Request,
appropriately completed by the Lessee, in accordance with Section 3.4; provided,
that this condition shall be deemed to have been satisfied in connection with an
Interest Payment Advance pursuant to Section 3.7(d) hereof.
(b) Operative Documents. On or prior to the Closing Date, each of the
Operative Documents to be entered into on the Closing Date shall have been duly
authorized, executed and delivered by the parties thereto, and shall be in full
force and effect, including, without limitation, (i) this Participation
Agreement, (ii) the Lease, (iii) the Guarantee, (iv) the Defeasance Deposit
Agreement, (v) the Construction Agency Agreement, (vi) the Construction Agency
Agreement Assignment, (vii) the Security Agreement, (viii) the Assignment of
Lease and Supplement to Assignment of Lease and (ix) the Consent to Assignment.
No Default or Event of Default shall exist thereunder and be continuing (both
before and after giving effect to the transactions contemplated by the Operative
Documents), and the Lessor, the Agent and each Participant shall each have
received a fully executed copy of each of such Operative Documents (other than
the Lease, of which the Agent shall receive the original and the Lessor and the
Participants shall receive specimens). On or prior to the Closing Date, any
financing statements in connection therewith required under
14
<PAGE>
the Uniform Commercial Code shall have been recorded, registered and filed, if
necessary, in such manner as to enable the Lessee's counsel to render its
opinion referred to in clauses l(i)(A) and (B) below.
------------------------
(c) [Intentionally Omitted].
(d) Appraisal. On or prior to the Closing Date, the Agent, the Lessor
-----------
and the Participants shall have received an Appraisal of the Property, which
Appraisal shall meet the requirements set forth in the definition of the term
"Appraisal" contained in Appendix 1.
-----------
(e) [Intentionally Omitted].
(f) Equipment Schedule and Bill of Sale. The Lessee, the Lessor
-------------------------------------
and/or the vendor of the Equipment, as the case may be, shall have delivered, on
or prior to the applicable Funding Date, a duly executed Equipment Schedule and
Bill of Sale covering the Equipment being acquired with the proceeds of such
Advance by the Lessor, together with invoices in form and substance satisfactory
to the Agent, the Lessor and the Participants.
(g) [Intentionally Omitted].
(h) Evidence of Recording, and Filing. On the Closing Date, the Agent
-----------------------------------
shall have received evidence reasonably satisfactory to it that each of the UCC
Financing Statements with respect to the Property to be acquired pursuant to the
Operative Documents shall have been or are being filed with the appropriate
Governmental Authorities.
(i) Evidence of Insurance. On or prior to the Closing Date, the
-----------------------
Agent, the Lessor and each Participant shall have received evidence of insurance
with respect to the Property required to be maintained pursuant to the Lease,
setting forth the respective coverages, limits of liability, carrier, policy
number and period of coverage.
(j) Evidence of Use of Proceeds. On or prior to each Advance, the
-----------------------------
Agent and each Participant shall have received evidence reasonably satisfactory
to the Agent and each Participant as to the use of the proceeds of the Advance
in accordance with the provisions of Section 8.1(g).
-------
(k) Taxes. On the Closing Date, all taxes, fees and other charges in
-------
connection with the execution, delivery, filing and registration of the
Operative Documents shall have been paid or provisions for such payment shall
have been made to the satisfaction of the Agent, each Participant and the
Lessor.
(1) [Intentionally Omitted].
(m) Approvals. On or prior to the Closing Date or each Funding Date,
-----------
as applicable, all necessary (or, in the reasonable opinion of the Lessor, the
Participants or the Agent or any of their respective counsel, advisable)
Governmental Actions and covenants and approvals
15
<PAGE>
of or by any Governmental Authority or other Person, in each case required by
any Requirement of Law, covenant or restriction affecting the Property or the
transactions contemplated thereby to have been obtained by such date shall have
been obtained or made and be in full force and effect.
(n) Litigation. As of each Funding Date, no action or proceeding shall have
been instituted, nor shall any action or proceeding be threatened, before any
Governmental Authority, nor shall any order, judgment or decree have been issued
or proposed to be issued by any Governmental Authority (i) to set aside,
restrain, enjoin or prevent the full performance of this Participation
Agreement, the Lease or any other Operative Document or any transaction
contemplated hereby or thereby or (ii) which is reasonably likely to have a
Material Adverse Effect.
(o) Requirements of Law. As of the Closing Date and each Funding Date, in
the reasonable opinion of the Lessor, the Participants, the Agent and their
respective counsel, the transactions contemplated by the Operative Documents do
not and will not violate any Requirement of Law and do not and will not subject
the Lessor, the Agent or any Participant to any adverse regulatory or tax
prohibitions or constraints.
(p) Responsible Officer's Certificate of the Lessee. On the Closing Date,
the Lessor, each Participant and the Agent shall each have received a
Responsible Officer's Certificate, dated as of the Closing Date, of the Lessee
stating that (i) each and every representation and warranty of the Lessee
contained in the Operative Documents to which it is a party is true and correct
on and as of the Closing Date; (ii) no Default or Event of Default under the
Lease or the Construction Agency Agreement has occurred and is continuing; (iii)
each Operative Document to which the Lessee is a party is in full force and
effect with respect to it; and (iv) the Lessee has duly performed and complied
with all covenants, agreements and conditions contained herein or in any
Operative Document required to be performed or complied with by it on or prior
to the Closing Date.
(q) The Lessee's Resolutions and Incumbency Certificate, etc. On the
Closing Date, the Lessor, each Participant and the Agent shall each have
received (i) a certificate of the Secretary or an Assistant Secretary of the
Lessee attaching and certifying as to (A) the resolutions of the Board of
Directors of the Lessee, duly authorizing the execution, delivery and
performance by the Lessee of documents and agreements of the type represented by
each Operative Document to which it is or will be a party, (B) its articles of
incorporation and bylaws, and (C) the incumbency and signature of persons
authorized to execute and deliver on its behalf the Operative Documents to which
it is a party, and (ii) a good standing certificate from the appropriate officer
of the state in which the Property is located.
(r) Responsible Officer's Certificate of the Guarantor. On the Closing
Date, the Lessor, each Participant and the Agent shall each have received a
Responsible Officer's Certificate, dated as of the Closing Date, of the
Guarantor stating that (i) each and every representation and warranty of the
Guarantor contained in the Operative Documents to which it is a party is true
and correct on and as of the Closing Date; (ii) no Default or Event of Default
under the Guarantee has occurred and is continuing; (iii) each Operative
Document to which the Guarantor is a party is in full force and effect with
respect to it; and (iv) the Guarantor has duly performed and complied with
16
<PAGE>
all covenants, agreements and conditions contained heroin or in any Operative
Document required to be performed or complied with by it on or prior to the
Closing Date.
(s) The Guarantor's Resolutions and Incumbency Certificate, etc. On the
Closing Date, the Lessor, each Participant and the Agent shall each have
received a certificate of the Secretary or an Assistant Secretary of the
Guarantor attaching and certifying as to (i) the resolutions of its Board of
Directors duly authorizing the execution, delivery and performance by the
Guarantor of documents and agreements of the type represented by each Operative
Document to which it is or will be a party (ii) its articles of incorporation
and by-laws, and (iii) the incumbency and signature of persons authorized to
execute and deliver on its behalf the Operative Documents to which it is a
party.
(t) Closing Date. The Closing Date shall occur on or prior to August 31,
1997.
(u) No Material Adverse Effect. As of the Closing Date, there shall not
have occurred any Material adverse change in the Lessee% or the Guarantor%
capital structure, ownership or consolidated assets, liabilities, results of
operations, or financial condition from that set forth or contemplated in the
most recent financial statements referred to in Section 8.3(m), and no event or
condition shall have occurred that would result in a Material Adverse Effect.
(v) Responsible Officer's Certificate of the Lessor. On the Closing Date,
the Lessee, the Agent and each Participant shall have received a certificate of
an authorized officer of the Lessor, dated as of the Closing Date, stating that
(i) each and every representation and warranty of the Lessor contained in the
Operative Documents to which it is a party is true and correct on and as of the
Closing Date, (ii) each Operative Document to which the Lessor is a party is in
full force and effect with respect to it, and (iii) the Lessor has duly
performed and complied with all covenants, agreements and conditions contained
herein or in any Operative Document required to be performed or complied with by
it on or prior to the Closing Date.
(w) The Lessor's Resolutions and Incumbency Certificate, etc. On the
Closing Date, the Lessee, the Agent and each Participant shall have received a
certificate of the Secretary or an Assistant Secretary of the Lessor attaching
and certifying as to (i) the resolutions of the Board of Directors duly
authorizing the execution, delivery and performance by the Lessor of documents
and agreements of the type represented by each Operative Document to which it is
or will be a party, (ii) the pertinent provisions of its by-laws and (iii) the
incumbency and signature of persons authorized to execute and deliver on its
behalf the Operative Documents to which it is a party.
SECTION 6.2. Further Conditions Precedent. The obligation of the Lessor to
make an Advance on any Funding Date and the obligation of each Participant to
purchase its Participation Interest in, and to make available its related
portion of, such Advance on such Funding Date are subject to satisfaction or
waiver of the following conditions precedent and to satisfaction on or before
the Closing Date or such Funding Date of the conditions precedent set forth in
Section 6.1 (it being understood that the Lessor's obligations to make Advances
to the Lessee and each Participant's obligation to fund the purchase of its
Participation Interest in an Advance shall not be
17
<PAGE>
subject to the conditions precedent set forth in Section 6.1 and this Section
6.2 to the extent such conditions are actions required of the Lessor or such
Participant):
(a) Representations and Warranties. (i) On the Closing Date, the
representations and warranties of the Lessee, the Guarantor, the Lessor and each
Participant contained herein and in each of the other Operative Documents shall
be true and correct as though made on and as of such date, except to the extent
such representations or warranties relate solely to an earlier date, in which
case such representations and warranties shall have been true and correct on and
as of such earlier date; and (ii) on each Funding Date, the representations and
warranties of the Lessee Contained herein and in each of the Operative Documents
shall be true and correct as though made on and as of such date; in each case
except to the extent such representations or warranties relate solely to an
earlier date, in which case such representations and warranties shall have been
true an correct on and as of such earlier date.
(b) Performance of Covenants. (i) On the Closing Date the parties hereto
shall have performed their respective agreements contained herein and in the
other Operative Documents to be performed by them on or prior to such date, and
(ii) on each other Funding Date the Lessee shall have performed its respective
agreements contained herein and in the other Operative Documents to be performed
by it on or prior to such date.
(c) Tide. Tide to the Property shall conform to the representations and
warranties set forth in Section 8.4(c).
(d) No Default. There shall not have occurred and .be continuing any
Default or Event of Default under any of the Operative Documents, and no Default
or Event of Default under any of the Operative Documents will have occurred
after giving effect to the acquisition of the Property and/or the making of the
Advance requested by such Funding Request, as the case may be.
If any of the conditions precedent set forth in this Section 6.2 or in
Section 6.1 (if such conditions apply to subsequent Funding Dates) shall not
have been satisfied on any Funding Date subsequent to the initial Funding Date
and the Lessor and the Participants refuse to fund the requested Advance, the
Lessee may exercise its Purchase Option under Section 20.1 of the Lease upon not
less than ten (10) days' written notice to the Lessor, the Agent and the
Participants.
SECTION 7.
[Intentionally Omitted]
SECTION 8.
REPRESENTATIONS
18
<PAGE>
SECTION 8.1. Representations of the Lessor. The Lessor represents and
warrants to each of the other parties hereto as follows:
(a) Due Organization, etc. It is a corporation duly organized, validly
existing and in good standing under the laws of the State of Illinois and has
the corporate power and authority to enter into and perform its obligations
under each of the Operative Documents to which it is or will be a party and each
other agreement, instrument and document to be executed and delivered by it in
connection with or as contemplated by each such Operative Document to which it
is or will be a party.
(b) Authorization; No Conflict. The execution, delivery and performance of
each Operative Document to which it is or will be a party has been duly
authorized by all necessary action on its part and neither the execution and
delivery thereof, nor the consummation of the transactions contemplated thereby,
nor compliance by it with any of the terms and provisions thereof (i) does or
will require any approval or consent of any trustee or holders of any of its
indebtedness or obligations, (ii) does or will contravene any current United
States or Illinois law, governmental rule or regulation, (iii) does or will
contravene or result in any breach of or constitute any default under, or result
in the creation of any Lien upon any of its property under, its articles of
incorporation or by-laws, or any indenture, mortgage, deed of trust, conditional
sales contract, credit agreement or other agreement or instrument to which it is
a party or by which it or its properties may be bound or affected or (iv) does
or will require any Governmental Action by any Governmental Authority, except
such as have been obtained on the Lessee's or the Lessor's behalf.
(c) Enforceability, etc. Each Operative Document to which the Lessor is or
will be a party has been, or on or before the Closing Date will be, duly
executed and delivered by the Lessor and each such Operative Document to which
the Lessor is a party constitutes, or upon execution and delivery will
constitute, a legal, valid and binding obligation enforceable against the Lessor
in accordance with the terms thereof, except as the same may be limited by
insolvency, bankruptcy, reorganization or other laws relating to or affecting
creditors' rights or by general equitable principles.
(d) Litigation. There is no action or proceeding pending or, to its
knowledge, threatened to which it is a party, before any Governmental Authority
that, if adversely determined, would materially and adversely affect its ability
to perform its-obligations under the Operative Documents to which it is a party,
would have a material adverse effect on the financial condition of the Lessor or
would question the validity or enforceability of any of the Operative Documents
to which it is or will become a party.
(e) Assignment. It has not assigned or transferred any of its right, title
or interest in or under the Lease except to the Agent, for the benefit of the
Participants, in accordance with this Agreement and the other Operative
Documents.
(f) Defaults. No Default or Event of Default under the Operative Documents
attributable to it has occurred and is continuing.
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(g) Use of Proceeds. The proceeds of the purchase of the Participation Interests
shall be applied by the Lessor solely in accordance with the provisions of the
Operative Documents.
(h) Securities Act. Neither the Lessor nor any Person authorized by the Lessor
to act on its behalf has offered or sold any interest in the Lease, or in any
similar security relating to the Property, or in any security the offering of
which for the purposes of the Securities Act would be deemed to be part of the
same offering as the offering of the aforementioned securities to, or solicited
any offer to acquire any of the same from, any Person other than the Agent and
the Participants, and neither the Lessor nor any Person authorized by the Lessor
to act on its behalf will take any action which would subject the issuance or
sale of any interest in the Lease or the Property to the provisions of Section 5
of the Securities Act or require the qualification of any Operative Document
under the Trust Indenture Act of 1939, as amended.
(i) Chief Place of Business. The Lessor's chief place of business, chief
executive office and office where the documents, accounts and records relating
to the transactions contemplated by this Participation Agreement and each other
Operative Document are kept are located at 135 South LaSalle Street, Chicago,
Illinois 60603.
(j) Federal Reserve Regulations. The Lessor is not engaged principally in, and
does not have as one of its important activities, the business of extending
credit for the purpose of purchasing or carrying any margin stock (within the
meaning of Regulation U of the Board), and no part of the proceeds of the
purchase of the Participation Interests will be used by it to purchase or carry
any margin stock or to extend credit to others for the purpose of purchasing or
carrying any such margin stock or for any purpose that violates, or is
inconsistent with, the provisions of Regulation G, T, U, or X of the Board.
(k) Investment Company Act. The Lessor is not an "investment company" or a
company controlled by an "investment company" within the meaning of the
Investment Company Act.
(1) No Plan Assets. The Lessor is not acquiring its interests in the Property
with the assets of any "employee benefit plan" (as defined in Section 3(3) of
ERISA) which is subject to Title I of ERISA, or "plan" (as defined in Section
4975(e)(1 ) of the Code).
SECTION 8.2. Representations of the Participants. Each Participant represents
and warrants to the Lessor, each of the other Participants and the Lessee as
follows:
(a) No Plan Assets. Such Participant is not and will not be funding its
Participation Interest hereunder, and is not performing its obligations under
the Operative Documents, with the assets of an "employee benefit plan" (as
defined in Section 3(3) of ERISA) which is subject to Title I of ERISA, or
"plan" (as defined in Section 4975(e)(1 ) of the Code). The advancing of any
amount with respect to its Participation Interest on any Funding Date shall
constitute an affirmation by the subject Participant of the preceding
representation and warranty.
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(b) Due Organization, etc. It is either (i) a duly organized and validly
existing corporation in good standing under the laws of the state of its
incorporation, or (ii) a national banking association duly organized and validly
existing under the laws of the United States or (iii) a banking corporation duly
organized and validly existing under the laws of the jurisdiction of its
organization, and, in each case, has the corporate power and authority to
execute, deliver and carry out the terms and provisions of the Operative
Documents to which it is a party.
(c) Authorization; No Conflict. The execution, delivery and performance of
each Operative Document to which it is or will be a party has been duly
authorized by all necessary action on its part and neither the execution and
delivery thereof, nor the consummation of the transactions contemplated thereby,
nor compliance by it with any of the terms and provisions thereof (i) does or
will require any approval or consent of any trustee or holders of any of its
indebtedness or obligations, (ii) does or will contravene any current law,
governmental role or regulation of the United States or the state or country of
its organization, (iii) does or will contravene or result in any breach of or
constitute any default under, or result in the creation of any Lien upon any of
its property under, its certificate of incorporation or bylaws, articles of
association or other organizational documents or any indenture, mortgage, deed
of trust, conditional sales contract, credit agreement or other agreement or
instrument to which it is a party or by which it or its properties may be bound
or affected or (iv) does or will require any Governmental Action by any
Governmental Authority.
(d) Enforceability, etc. Each Operative Document to which it is a party has
been, or on or before the Closing Date will be, duly executed and delivered by
it and each such Operative Document to which it is a party constitutes, or upon
execution and delivery will constitute, a legal, valid and binding obligation
enforceable against it in accordance with the terms thereof, except as the same
may be limited by insolvency, bankruptcy, reorganization or other laws relating
to or affecting creditors' rights or by general equitable principles.
(e) Litigation. There is no action or proceeding pending or, to its
knowledge, threatened to which it is or will be a party before any Governmental
Authority that is reasonably likely to be adversely determined and. if adversely
determined, would materially and adversely affect its ability to perform its
obligations under the Operative Documents to which it is a party.
SECTION 8.3. Representations of the Lessee. The Lessee represents and
warrants to each of the other parties hereto that:
(a) Corporate Status. The Lessee (i) is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and (ii) has duly qualified and is authorized to do business and has obtained a
certificate of authority to transact business as a foreign corporation in the
States of California and Colorado and in each other jurisdiction where the
failure to so qualify is reasonably likely to be Material.
(b) Corporate Power and Authority. The Lessee has corporate .power and
authority to execute, deliver and carry out the terms and provisions of the
Operative Documents to which it is or will be a party and has taken all
necessary corporate action to authorize the execution,
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delivery and performance of the Operative Documents to which it is or will be a
party and has or will have duly executed and delivered each Operative Document
required to be executed and delivered by it and, assuming the due authorization,
execution and delivery thereof on the part of each other party thereto, each
such Operative Document constitutes or will constitute a legal, valid and
binding obligation enforceable against it in accordance with its terms, except
as the same may be limited by insolvency, bankruptcy, reorganization or other
laws relating to or affecting the enforcement of creditors' rights or by general
equitable principles.
(c) No Violation. Neither the execution, delivery and performance by the Lessee
of the Operative Documents to which it is or will be a party nor compliance with
the terms and provisions thereof; nor the consummation by the Lessee of the
transactions contemplated therein (i) will result in a violation by the Lessee
of any applicable provision of any law, statute, rule, regulation, order, writ,
injunction or decree of any court or governmental instrumentality having
jurisdiction over the Lessee or the Property that would (x) adversely affect the
validity or enforceability of the Operative Documents to which the Lessee is a
party, or the title to, or value or condition of, the Property, or (y) have a
Material Adverse Effect on the consolidated financial position, business or
consolidated results of operations of the Lessee, or (z) have an adverse effect
on the ability of the Lessee to perform its obligations under the Operative
Documents, (ii) will conflict with or result in any breach under, or (other than
pursuant to the Operative Documents) result in the creation or imposition of (or
the obligation to create or impose) any Lien upon any of the property or assets
of Lessee pursuant to the terms of, any indenture, loan agreement or other
agreement for borrowed money to which the Lessee is a party or by which it or
any of its property or assets is bound or to which it may be subject (other than
Permitted Liens), or (iii) will violate any provision of the certificate or
articles of incorporation or bylaws of the Lessee.
(d) Litigation. There are no actions, suits or proceedings pending or, to the
knowledge of the Lessee, threatened (i) that are reasonably likely to have a
Material Adverse Effect or (ii) that question the validity of the Operative
Documents or the rights or remedies of the Lessor, the Agent or the Participants
with respect to the Lessee or the Property under the Operative Documents.
(e) Governmental Approvals. No Governmental Action by any Governmental Authority
having jurisdiction over the Lessee or the Property is required to authorize or
is required in connection with (i) the execution, delivery and performance by
the Lessee of any Operative Document or (ii) the legality, validity, binding
effect or enforceability against the Lessee of any Operative Document, except
for the filing or recording of the Operative Documents listed in Section 8.4(f)
hereof with the appropriate Governmental Authorities, all of which will have
been completed on or prior to the Closing Date.
(f) Investment Company Act. The Lessee is not an "investment company" or a
company "controlled" by an "investment company," within the meaning of the
Investment Company Act.
(g) Public Utility Holding Company Act. The Lessee is not a "holding company, or
a "subsidiary company," or an "affiliate" of a "holding company, or of a
"subsidiary company"
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of a "holding company", within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
(h) Information. All regular or periodic reports filed by the Lessee with the
Securities and Exchange Commission prior to the Closing Date and all other
written information and material regarding the Lessee and the Property which
were provided by the Lessee to one or more of the Participants prior to the
Closing Date are true and accurate in all material respects on the date as of
which such information and materials are dated or certified and not incomplete
by omitting to state any material fact necessary to make such information not
misleading at such time in light of the circumstances under which such
information was provided.
(i) Taxes. All United States federal income tax returns and all other Material
tax returns which are required to have been filed have been or will be prepared
in accordance with applicable law and filed by or on behalf of the Lessee by the
respective due dates, including extensions, and all taxes due with respect to
the Lessee pursuant to such returns or pursuant to any assessment received by
the Lessee have been or will be paid. The charges, accruals and reserves on the
books of the Lessee in respect of taxes or other governmental charges are, in
the opinion of the Lessee, adequate.
(j) Compliance with ERISA. Each member of the ERISA Group has fulfilled its
obligations under the minimum funding standards of ERISA and the Code with
respect to each Plan and is in compliance in all Material respects with the
presently applicable provisions of ERISA and the Code with respect to each Plan.
No member of the ERISA Group has (i) sought a waiver of the minimum funding
standard under Section 412 of the Code in respect of any Plan, (ii) failed to
make any contribution or payment to any Plan or Multiemployer Plan or in respect
of any Benefit Arrangement, or made any amendment to any Plan or Benefit
Arrangement, which has resulted or could result in the imposition of a Lien or
the posting of a bond or other security under ERISA or the Code or (iii)
incurred any liability under Title IV of ERISA other than a liability to the
PBGC for premiums under Section 4007 of ERISA.
(k) Environmental and Other Regulations. Except as set forth in Schedule III
attached hereto, the Lessee and the Property are in compliance with all
Environmental Laws relating to pollution and environmental control or employee
safety in the jurisdiction in which the Property is located and in all other
domestic jurisdictions, other than, with respect to such other jurisdictions,
those Environmental Laws the non-compliance with which would not have a Material
Adverse Effect.
(1) Offer of Securities, etc. Neither the Lessee nor the Guarantor nor any
Person authorized to act on their behalf has, directly or indirectly, offered
any interest in the Property or the Lease or any other interest similar thereto
(the sale or offer of which would be integrated with the sale or offer of such
interest in the Property or the Lease), for sale to, or solicited any offer to
acquire any of the same from, any Person other than the Participants, the Lessor
and other "accredited investors" (as defined in Regulation D of the Securities
and Exchange Commission).
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(m) Financial Statements. The audited consolidated statement of financial
position of the Lessee and its consolidated Subsidiaries as of September 30,
1996 and the related consolidated statements of income, shareholder's equity and
cash flows for the fiscal year then ended, reported on by KPMG Peat Marwick, a
copy of which has been delivered to each of the Lessor, the Participants and the
Agent, present fairly in all material respects, in conformity with generally
accepted accounting principles, the financial position of the Lessee as of such
date and its results of operations and cash flows for such fiscal year.
SECTION 8.4. Representations of the lessee With Respect to the Property on
the closing Date. The Lessee hereby represents and warrants as of the Closing
Date as follows:
(a) Representations. The representations and warranties of the Construction
Agent and the Lessee set forth in the Operative Documents are true and correct.
The Construction Agent and the Lessee are in compliance in with their respective
obligations under the Operative Documents and there exists no Default or Event
of Default.
(b) Property. Such Property consists of the Equipment to be contacted and
installed at the Lessee's semiconductor fabrication facility pursuant to the
Construction Agency Agreement. Such Facility is, and the Property will be,
located in the State of Colorado. Such Property as constructed and installed in
accordance with the related Plans and Specifications and the use thereof by the
Lessee and its agents, assignees, employees, invitees, lessees, licensees,
contractors and tenants will comply in all material respects with all
Requirements of Law (including, without limitation, Title III of the Americans
with Disabilities Act, all zoning and land use laws and Environmental Laws) and
Insurance Requirements, except for such Requirements of Law as the Lessee shall
be contesting in good faith by appropriate proceedings. The related Plans 'and
Specifications have been or will be prepared in all material respects in
accordance with applicable Requirements of Law (including, without limitation,
Title III of the Americans with Disabilities Act, applicable Environmental Laws
and building, planning, zoning and fire codes) and upon completion of the
construction and installation of the Equipment in accordance with the Plans and
Specifications, such Equipment will comply in all Material respects with all
applicable Requirements of Law (including, without limitation, Title Ill of the
Americans with Disabilities Act, all applicable Environmental Laws and building,
planning, zoning and fire codes). Upon completion of the construction and
installation of the Equipment in accordance with the related Plans and
Specifications, installation of the Equipment will be completed in a workmanlike
manner and in accordance with the Plans and Specifications and the Equipment
will be in first class working condition and fit for its intended use. There is
no action, suit or proceeding (including any proceeding in condemnation or
eminent domain or under any Environmental Law) pending or, to the best of the
Lessee's knowledge, threatened with respect to the Lessee, its Affiliates or
such Property which adversely affects the title to, or the use, operation or
value of, the Property. As of the Closing Date, no fire or other casualty with
respect to the Property shall have occurred, and as of each other Funding Date,
no fire or other casualty with respect to the Property shall have occurred that
constitutes a Significant Casualty with respect to which the Lessee shall have
delivered a Termination Notice under Section 16.1 of the Lease. All material
licenses, approvals, authorizations, consents, permits (including, without
limitation, building, demolition and environmental permits, licenses, approvals,
authorizations and consents), easements and
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rights-of-way, including proof and dedication, required for construction and
installation of such Equipment in accordance with the related Plans and
Specifications and the Construction Agency Agreement have either been obtained
from the appropriate Governmental Authorities having jurisdiction or from
private parties, as the case may be, or will be obtained from the appropriate
Governmental Authorities having jurisdiction or from private parties, as the
case may be, prior to commencing any such construction or use and operation, as
applicable and will in each case be maintained by the Lessee during the periods
for which they are required by Applicable Law or such Governmental Authorities.
(c) Title. The Bills of Sale providing for the acquisition of the Property
are sufficient to convey good and marketable title to the Property subject only
to Permitted Liens. The Lessor will at all times during the Term have good title
to all Equipment wherever located.
(d) Insurance. The Lessee has obtained insurance coverage covering the
Property acquired and leased to the Lessee on the Closing Date which meets the
requirements of Article XIV of the Lease, and such coverage is in full force and
effect.
(e) Lease. Upon the execution and delivery of each Equipment Schedule, (i)
the Lessee will have unconditionally accepted the Property subject thereto and
will be bound by the terms of the Lease with respect to such Properly and will
have a valid leasehold interest in the Property, subject only to the Permitted
Liens; (ii) the Lessee's obligation to pay Rent will be an independent covenant
and no right of deduction or offset will exist with respect to any Rent or other
sums payable under the Lease; and (iii) no Rent under the Lease will have been
prepaid and the Lessee will have no right to prepay the Rent, except as
specifically set forth therein.
(f) Protection of Interests. (i) On the Closing Date, the Lease, the
Assignment of Lease, the Supplement to Assignment of Lease, the Consent to
Assignment and the Security Agreement are each in a form sufficient, to grant
liens on the Property to the Agent or the Lessor, as the case may be, (ii) the
Agent Financing Statements are each in a form sufficient, and have been filed in
all filing offices necessary, to perfect a first priority security interest in
the Lessor's interest in all Equipment to be located on the Facility subject to
Permitted Liens; and (iii) the Lessor Financing Statements are each in a form
sufficient, and have been filed in all filing offices necessary, to perfect the
Lessor's interest under the Lease to the extent the Lease is a security
agreement.
(g) [Intentionally Omitted].
(h) Conditions Precedent. All conditions precedent contained in this
Agreement and in the other Operative Documents relating to the acquisition and
leasing of the Property by the Lessor have been satisfied in full or waived.
SECTION 8.5. Representations of the Lessee With Respect to Each Advance.
The Lessee hereby represents and warrants as of each Funding Date on which an
Advance is made as follows:
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(a) Representations. The representations and warranties of the Construction
Agent arid the Lessee set forth in the Operative Documents (including the
representations and warranties set forth in Sections 8.3 and 8.4) are true and
correct in all Material respects on and as of such Funding Date, except to the
extent such representations or warranties relate solely to an earlier date, in
which case such representations and warranties shall have been true and correct
in all Material respects on and as of such earlier date. The Construction Agent
and the Lessee are in compliance in all Material respects with their respective
obligations under the Operative Documents and there exists no Default or Event
of Default which is continuing. No Default or Event of Default will occur as a
result of, or after giving effect to, the Advance requested by the Funding
Request on such date.
(b) Equipment. Construction and installation of the Equipment to date has
been performed in a good and workmanlike manner, substantially in accordance
with the Plans and Specifications and in compliance with all Insurance
Requirements and Requirements of Law.
(c) No Liens. There have been no Liens against the Property other than
Permitted Liens and Liens that have been removed or bonded by or on behalf of
the Lessee to the satisfaction of the Lessor and the Agent. The Participation
Interests funding such Advance are secured by the Lien of the Security Agreement
and the Tranche A Participation Interests funding such Advance are secured by
the Defeasance Deposit and the other Collateral.
(d) Advance. The amount of the Advance requested represents amounts that
the Lessee reasonably believes will be due in the sixty (60) days following such
Advance from the Lessee to third parties in respect of Property Costs, or
amounts paid by the Lessee to third parties in respect of Property Costs for
which the Lessee has not previously been reimbursed by an Advance. The
conditions precedent to such Advance and the related remittances by the
Participants with respect thereto set forth in Section 6 have been satisfied.
(e) Lease. Upon the execution and delivery of each Equipment Schedule to
the Lease and a Bill of Sale with respect thereto, the Lessee will have
unconditionally accepted the Equipment subject thereto and will have good and
marketable title to such Equipment, subject only to Permitted Liens.
(f) Protection of Interests. On each Funding Date for the acquisition of
Equipment, (i) the applicable Equipment Schedule and the Security Agreement are
each a form sufficient to grant perfected Liens on the Lessee's and the Lessor's
interests, respectively, in the Equipment to the Lessor and Agent, respectively,
(ii) the Agent Financing Statements are each in a form sufficient, and have been
filed in all filing offices necessary, to create a valid and perfected first
priority security interest in such interest in such Equipment, and (iii) the
Lessor Financing Statements are each in a form sufficient, and have been filed
in all filing offices necessary, to perfect the Lessor's interest in such
Equipment under the Lease to the extent the Lease is a security agreement.
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SECTION 9.
PAYMENT OF CERTAIN EXPENSES
The Lessee agrees, for the benefit of the Lessor, the Agent and the
Participants, that:
SECTION 9.1. Transaction Expenses. (a) The Lessee shall pay, or cause to be
paid, from time to time all Transaction Expenses in respect of the transactions
consummated on the Closing Date or any Funding Date, it being understood and
agreed that neither the Agent, the Lessor nor any Participant shall be required
to advance any Transaction Expenses in connection with the closing. Such
Transaction Expenses, the Defeasance Fee and the Lease Arrangement Fee may be
added to the Property Cost to the extent supported by the Appraisal and agreed
by the Agent and the Participants.
(b) The Lessee shall pay or cause to be paid (i) all Transaction Expenses
of the Lessor, (ii) the Commitment Fees, (iii) the Defeasance Fee, (iv) the
Lease Arrangement Fee, (v) all Transaction Expenses incurred by the Lessee, the
Agent, ABN AMRO or the Lessor in entering into any future amendments or
supplements with respect to any of the Operative Documents, whether or not such
amendments or supplements are ultimately entered into, or giving or withholding
of waivers or consents hereto or thereto, in each case (except after the
occurrence of an Event of Default) which have been requested by or approved by
the Lessee, (vi) all Transaction Expenses incurred by the Lessor, the Lessee,
ABN AMRO or the Agent in connection with any purchase of the Property by the
Lessee or other Person pursuant to Articles XVI, XVII, XX or XXII of the Lease,
and (vii) all Transaction Expenses incurred by any of the other parties hereto
in respect of enforcement of any of their rights or remedies against the Lessee
in respect of the Operative Documents.
SECTION 9.2. Brokers' Fees and Stamp Taxes. The Lessee shall pay or cause
to be paid any brokers' fees arising from the Lessee's relationship with any
Person and any and all stamp, transfer and other similar taxes, fees and
excises, if any, including any interest and penalties, which are payable in
connection with the transactions contemplated by this Participation Agreement
and the other Operative Documents.
SECTION 9.3. Obligations. The Lessee shall pay, on or before the due date
thereof, all costs, expenses and other amounts required to be paid by the
Security Agreement and the Assignment of Lease.
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SECTION 10.
OTHER COVENANTS AND AGREEMENTS
SECTION 10.1. Covenants of the Lessee. The Lessee hereby agrees that so
long as this Participation Agreement is in effect:
(a) Information. The Lessee will deliver to the Lessor, the Participants
and the AGENT:
(i) as soon as available and in any event within ninety (90) days
after the end of each fiscal year of the Lessee, a statement of financial
position of the Lessee and its consolidated subsidiaries as of the end of
such fiscal year and the related consolidated statements of income,
shareholder's equity and cash flows for such fiscal year, setting forth in
each case in comparative form the figures for the previous fiscal year, all
reported on by independent public accountants of nationally recognized
standing, together with (i) a Responsible Officer's Certificate from the
chief financial officer of the Lessee substantially in the form of Exhibit
S hereto containing a computation of, and showing compliance with, each of
the financial ratios and restrictions contained in this Section 10.1 and
(ii) a certificate from such accountants to the effect that, in making the
examination necessary for the signing of such annual audit report by such
accountants, they have not become aware of any Event of Default or Default
that has occurred and is continuing, or if they have become aware of any
such Event of Default or Default, describing it and the steps, if any,
being taken to cure it;
(ii) as soon as available and in any event within forty-five (45) days
after the end of each of the first three quarters of each fiscal year of
the Lessee, an unaudited consolidated statement of financial position of
the Lessee as of the end of such period and the related consolidated
statements of income, shareholders' equity and cash flows for such period
and for the portion of the Lessee's fiscal year ended at the end of such
period, together with a Responsible Officer's Certificate of the chief
financial officer of the Lessee or other officer responsible for the
financial affairs of the Lessee containing a computation of, and showing
compliance with, each of the financial ratios and restrictions contained in
this Section 10.1 and stating that no Default or Event of Default has
occurred or is continuing or, if any Default or Event of Default has
occurred and is continuing, describing it and the steps, if any, being
taken to cure it;
(iii) promptly after the filing thereof, if applicable, copies
(without exhibits thereto other than, in the case of reports on Form 10-K,
the portions of the annual report incorporated therein by reference) of all
reports on Forms 10oK, 10-Q and 8-K (or their equivalents), which the
Lessee shall have filed with the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended;
(iv) if and when any member of the ERISA Group (1) gives or is
required to give notice to the PBGC of any "reportable event" (as defined
in Section 4043 of ERISA)
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with respect to any Plan which might constitute grounds for a termination of
such Plan under Title IV or ERISA, or knows that the plan administrator of any
Plan has given or is required to give notice of any such reportable event, a
copy of the notice of such reportable event given or required to be given to the
PBGC; (2) receives notice of complete or partial withdrawal liability under
Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is
insolvent or has been terminated, a copy of such notice; (3) receives notice
from the PBGC under Title IV of ERISA of an intent to terminate, impose
liability (other than for premiums under Section 4007 of ERISA) in respect of,
or appoint a trustee to administer any Plan, a copy of such notice; (4) applies
for a waiver of the minimum funding standard under Section 412 of the Code, a
copy of such application; (5) gives notice of intent to terminate any Plan under
Section 4041(c) of ERISA, a copy of such notice and other information filed with
the PBGC; (6) gives notice of withdrawal from any Plan pursuant to Section 4063
of ERISA, a copy of such notice; or (7) fails to make any payment or
contribution to any Plan or Multiemployer Plan or in respect of any Benefit
Arrangement or makes any amendment to any Plan or Benefit Arrangement which has
resulted or could result in the imposition of a Lien or the posting of a bond or
other security, a certificate of the chief financial officer or the chief
accounting officer of the Lessee setting forth details as to such occurrence and
action, if any, which the Lessee or applicable member of the ERISA Group is
required or proposes to take;
(v) promptly after the occurrence of any Default or Event of Default, notice
thereof in writing, together with information regarding the steps, if any, being
taken to cure it; and
(vi) from time to time such additional information regarding the Lessee, the
Lessee or the Property as the Lessor or the Agent, at the request of any
Participant, may reasonably request.
(b) Compliance with Laws. The Lessee will, and will cause its Subsidiaries to,
comply in all material respects with all applicable laws, ordinances, rules,
regulations, orders and requirements of governmental authorities (including,
without limitation, Environmental Laws and ERISA and the rules and regulations
thereunder) except where the necessity of compliance therewith is contested in
good faith by appropriate proceedings and such contest is not reasonably likely
to result in a Material Adverse Effect.
(c) Further Assurances. The Lessee shall take or cause to be taken from time
to time all action necessary to assure during the Term that title to the
Property remains in the Lessor as contemplated by Section 12.1 of the Lease,
that the Lessor holds a perfected Lien on the Property securing the Lease
Balance as contemplated by Section 7.1 of the Lease, and that the Agent holds a
perfected Lien on the Property and the Lease securing the repayment of the
Participation Interests.
(d) Existence; Franchises; Businesses. Except as otherwise expressly permitted
in this Agreement, the Lessee shall, and shall cause each Subsidiary to (i)
maintain in full force and effect its separate existence and all rights,
licenses, leases and franchises reasonably necessary to
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the conduct of its business, and (ii) continue doing business as a whole
in the lines of business in which they were engaged on the Closing Date.
(e) Books and Records. The Lessee shall, and shall cause each Subsidiary
to, maintain its books and records in accordance with GAAP, and permit the
Lessor and each Participant to make or cause to be made inspections and audits
of any books, records and papers of the Lessee and its Subsidiaries and to make
extracts therefrom at all such reasonable times and as often as any such Person
may reasonably require.
(f) Minimum Consolidated Quick Ratio. The Lessee shall maintain at all
times a minimum Consolidated Quick Ratio of [*].
(g) Minimum Consolidated Tangible Net Worth. At no time will the Lessee's
Consolidated Tangible Net Worth be less than an amount equal to the sum of (i)
[*] of the Lessee's Consolidated Tangible Net Worth at
September 30, 1996 plus (ii) an amount equal to [*] of the Lessee's Consolidated
Net Income for each fiscal quarter of the Lessee beginning with the quarter
ending on December 31, 1996 (but with no deduction on account of negative
Consolidated Net Income for any fiscal quarter) plus (iii) one hundred percent
(100%) of the aggregate net proceeds, including the fair market value of
property other than cash (as determined in good faith by the Board of Directors
of the Lessee), received by the Lessee from the issuance and sale after
September 30, 1996 of any capital stock of the Lessee (including the issuance
and sale of any capital stock (x) to a Subsidiary of the Lessee or (y) which is
required to be redeemed, or is redeemable at the option of the holder, if
certain events or conditions occur or exist or otherwise) or in connection with
the conversion or exchange of any Indebtedness of the Lessee into capital stock
of the Lessee after September 30, 1996.
(h) Maximum Consolidated Total Liabilities to Consolidated Tangible Net
Worth. At no time shall the ratio of the Lessee's Consolidated Total Liabilities
to Consolidated Tangible Net Worth be greater than [*].
(i) Minimum Consolidated Fixed Charge Ratio. The Lessee shall maintain at
all times a minimum Consolidated Fixed Charge Ratio of [*], commencing
with the four quarter period ending on December 31, 1996.
(j) Profitability. The Lessee (i) shall not incur net losses (but excluding
any non-recurring non-cash charges) in any two consecutive fiscal quarters as
measured at the end of any fiscal quarter commencing with the fiscal quarter
ending on December 31, 1996 and (ii) shall not permit Consolidated Net Income
(but excluding any non-recurring non-cash charges) to be less than $0, as
measured at the end of any fiscal quarter for the previous four quarters on a
rolling four-quarter basis commencing with the four quarter period ending on
December 31, 1996. In the event the Lessee incurs a net loss in any fiscal
quarter, no such net loss shall exceed [*].
(k) Liens. The Lessee shall not, and shall not permit any Subsidiary to,
create, assume, or permit to exist, any Lien on any of its property or assets
now owned or hereafter acquired except (i) Liens in favor of the Lessor or the
Agent under the Operative Documents, (ii) statutory
[* CONFIDENTIAL INFORMATION]
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Liens of landlords, (iii) easements, rights-of-way, zoning and similar
restrictions and other similar charges of encumbrances not interfering with the
ordinary conduct of business on assets other than the Property and which do not
detract materially from the value of the property to which they attached or
impair materially the use thereof, (iv) Liens created to secure purchase money
Indebtedness, Capitalized Lease Obligations or Off-Balance Sheet Debt, provided
that such Liens are only in respect of the property or assets subject to, and
secure only, such Indebtedness, (v) Permitted Liens and (vi) Liens permitted
under the Fab 2 Real Property Participation Agreement and related Operative
Documents. Notwithstanding the foregoing there shall be no Liens on (A) any of
the Defeasance Deposit or the Collateral other than Liens in favor of the Lessor
and the Agent, for the benefit of the Participants or on (B) the Fab 2 Real
Property Cash Collateral, the Fab 2 Defeasance Deposit or the Collateral (as
defined in the Fab 2 Real Property Participation Agreement), except as permitted
in such Participation Agreement.
(1) Fundamental Changes. The Lessee shall not, nor shall it permit any
Subsidiary to, enter into any merger, consolidation or amalgamation, or
liquidate, wind-up or dissolve itself (or suffer any liquidation or
dissolution); convey, sell, assign, transfer or otherwise dispose of all or
substantially all of the property, business or assets of the Lessee and its
Subsidiaries; provided, however, that if(i) at least thirty (30) days prior to
the consummation of such transaction the Lessee shall have furnished to the
Lessor, the Participants and the Agent a Responsible Officer's Certificate of
the chief financial officer of the Lessee that no Default or Event of Default
shall occur after giving effect thereto, and (ii) no Default or Event of Default
shall have occurred before or after giving effect thereto:
(A) any Subsidiary of the Lessee may be merged or consolidated with or into
the Lessee (provided, however, that the Lessee shall be the continuing or
surviving corporation) or with or into any one or more wholly-owned Subsidiaries
of the Lessee (provided, however, that the wholly-owned Subsidiary or
Subsidiaries shall be the continuing or surviving corporation);
(B) any wholly-owned Subsidiary may sell, lease, transfer or otherwise
dispose of any or all of its assets (upon voluntary liquidation or otherwise) to
the Lessee or any other wholly-owned Subsidiary of the Lessee; and
(C) the Lessee may merge or consolidate with any other Person so long as
the Lessee is the surviving corporation.
(m) Transactions with Affiliates. The Lessee shall not, nor shall it permit
any Subsidiary to, conduct any business or enter into any transaction or series
of similar transactions (including the purchase, sale, lease or exchange of any
property or the rendering of any service) with any Affiliate of the Lessee or
any legal or beneficial owner of 5% or more of any class of capital stock of the
Lessee or with any Affiliate of such owner unless the terms of such business,
transaction or series of transactions are (i) as favorable to the LeSsee or such
Subsidiary as terms that would be obtainable at the time for a comparable
transaction or series of similar transactions in arm's-length dealings with an
unrelated third Person or, if such transaction is not one which by its nature
could be obtained from such Person, is on fair and reasonable terms and (ii) are
in the ordinary course of business or, if not in the ordinary course of
business, are set forth in writing and the board of
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directors of the Lessee or such Subsidiary, as the case may be, has determined
in good faith that such business or transaction or series of transactions meet
the applicable criteria set forth in clause (i) above.
(n) Restricted Payments. The Lessee shall not, nor shall it cause or permit any
of its Subsidiaries to, make any Restricted Payment; provided, that (i) Lessee's
Subsidiaries may make dividends, distributions and payments to the Lessee, and
(ii) the Lessee may (A) make loans to its employees and purchase the Lessee's
stock from its employees in the ordinary course of business, (B) make other
Restricted Payments in the ordinary course of business and (C) make other
Restricted Payments, provided that the aggregate of which Restricted Payments
made under clauses (ii)(A), (B) and (C) shall not exceed $5,000,000 during the
Term.
(o) No Impairment of Deposits. The Lessee shall not, nor shall it permit any of
its Subsidiaries to, directly or indirectly, enter into or become bound by any
agreement, instrument, indenture or other obligation which could directly or
indirectly restrict, prohibit or require the consent of any Person to the making
by the Lessee of any deposit constituting part of the Defeasance Deposit or the
realization thereon or utilization thereof (or of any earnings thereon or of any
other Collateral) by the Lessor, the Agent or any of the Participants.
(p) Investments. The Lessee shall not, nor shall it permit any of its
Subsidiaries to, make any investment in, or make or accrue loans or advances of
money to any Person, through the direct or indirect lending of money, holding of
securities or otherwise, other than Permitted Investments, and except as
permitted or required in Sections 10.1 (1) and (n).
SECTION 10.2. Cooperation with the Lessee. The Lessor, the Participants and the
Agent shall, to the extent reasonably requested by the Lessee (but without
assuming additional liabilities, duties or other obligations on account
thereof), at the Lessee's expense, cooperate with the Lessee in connection with
its covenants contained herein including, without limitation, at any time and
from time to time, upon the request of the Lessee, to promptly and duly execute
and deliver any and all such further instruments, documents and financing
statements (and continuation statements related thereto) as the Lessee may
reasonably request in order to perform such covenants.
SECTION 10.3. Covenants of the Lessor. The Lessor hereby agrees that so long as
this Participation Agreement is in effect:
(a) Discharge of Liens. The Lessor will not create or permit to exist at any
time, and will, at its own cost and expense, promptly take such action as may be
necessary duly to discharge, or to cause to be discharged, all Lessor Liens on
the Property attributable to it; provided, however, that the Lessor shall not be
required to so discharge any such Lessor Lien while the same is being contested
in good faith by appropriate proceedings diligently prosecuted so long as such
proceedings shall not involve any material danger of impairment of the Liens of
the Lease or the Security Documents or of the sale, forfeiture or loss of, and
shall not interfere with the use or disposition of, the Property or title
thereto or any interest therein or the payment of Rent.
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(b) Change of Chief Place of Business. The Lessor shall give prompt notice to
the Lessee and the Agent if the Lessor's chief place of business or chief
executive office, or the office where the records concerning the accounts or
contract rights relating to the Property are kept, shall cease to be located at
135 South LaSalle Street, Chicago, Illinois 60603, or if it shall change its
name, identity or corporate structure.
SECTION 11. PARTICIPATIONS
SECTION 11.1. Amendments; Actions on Default. (a) The Lessor shall have the
right to forebear from exercising rights against the Lessee to the extent the
Lessor shall determine in good faith that such forbearance is appropriate and is
permitted by Section 15.5 and Sections 11.1, 11.2 and 11.3. Upon the direction
of the Required Participants, the Lessor shall execute any waiver, modification
or amendment of the Lease or the Construction Agency Agreement requested by the
Lessee; provided, that: (i) the waiver, modification or amendment is not
prohibited by the forgoing provisions of this Agreement, (ii) the waiver,
modification or amendment does not (A) increase the amount the Lessor may be
required to pay to the Lessee or anyone else, or (B) reduce or postpone (and
cannot reasonably be expected to reduce or postpone) any payments that the
Lessor would, but for such modification or amendment, be expected to receive, or
(C) release the Lessor's interest in all or a substantial part of the Property;
and (iii) the Lessor is not excused from executing the waiver, modification or
amendment by Section 11-3.
(b) The Lessor will, with reasonable promptness, provide each Participant with
copies of all default notices it sends or receives under the Lease or
Construction Agency Agreement and notify each Participant of any Event of
Default under the Lease of which it is aware and of any other matters which, in
the Lessor's reasonable judgment, are likely to materially affect the payments
each Participant will be required to make or be entitled to receive under this
Agreement, but the Lessor will not in any event be liable to any Participant for
the Lessor's failure to do so unless such failure constitutes gross negligence
or willful misconduct on the part of the Lessor.
(c) Before taking possession of the Property or exercising foreclosure or
offset rights against the Property or filing any lawsuit against the Lessee
because of any breach by the Lessee of the Operative Documents or if requested
in writing by any Participant at any time when an Event of Default has occurred
and is continuing, the Lessor shall promptly call a meeting with each
Participant and the Agent to discuss what, if anything, the Lessor should do.
Such meeting shall be scheduled during regular business hours in the offices of
the Agent, or another appropriate location in San Francisco, California, not
earlier than five (5) and not later than twenty (20) Business Days after the
Lessor's receipt of the written request from a Participant. If the Required
Participants shall direct the Lessor in writing to (a) send any default notices
required before a Default can become an Event of Default, or (b) bring a lawsuit
against the Lessee to enforce the Operative Documents when an Event of Default
has occurred and is continuing, then the Lessor shall send the notice or bring
the suit, and the Lessor shall prosecute any such suit with reasonable diligence
using reputable counsel. However, if the Agent is not a member of the Required
Participants voting
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pursuant to this subsection 11.1 (d) in favor of the giving of any such notice
or the bringing of any such suit, then the Lessor may require that it first
receive the written agreement (in form reasonably acceptable to the Lessor) of
the members of the Required Participants so voting to indemnify the Agent and
the Lessor from and against all costs, liabilities and claims that may be
incurred by or asserted against the Lessor because of the action the Required
Participants direct the Agent or the Lessor to take. In no event shall any
Participant instigate any suit or other action directly against the Lessee with
respect to the Operative Documents or the Property, even if such Participant
would, but for this agreement, be entitled to do so as a third party beneficiary
or otherwise under the Operative Documents.
(d) In the event the Lessee or its designee fails to purchase the Property after
any exercise of its Purchase Option or Expiration Date Purchase Obligation or
following the occurrence and continuance of an Event of Default, the Lessor
shall, if the Required Participants shall agree in writing, bring suit against
the Lessee to enforce the Operative Documents in such form as shall be
recommended by reputable counsel, and thereafter the Lessor shall prosecute the
suit with reasonable diligence in accordance with the advice of reputable
counsel. If the Lessor acquires the interests of the Lessee in any of the
Property as a result of such suit or otherwise, the Lessor shall thereafter
proceed with reasonable diligence to sell the Property in a commercially
reasonable manner to one or more bona fide third party purchasers and shall in
any event endeavor to consummate the sale of the entire Property (through a
single sale of the entire Property or a series of sales of parts) within five
(5) years following the date the Lessor recovers possession of the Property at
the best price or prices the Lessor believes are reasonably attainable within
such time. Further, after the Designated Payment Date and until the Lessor sells
the Property, the Lessor shall (i) endeavor in good faith to maintain, or shall
obtain the agreement of one or more of such tenants to maintain, the Property in
good order and repair, (ii) procure and maintain casualty insurance against
risks customarily insured against by owners of comparable properties, in amounts
sufficient to eliminate the effects of coinsurance, (iii) keep and allow each
Participant to review accurate books and records covering the operation of the
Property, and (iv) pay prior to delinquency all taxes and assessments lawfully
levied against the Property.
(e) Notwithstanding the foregoing, Defaulting Participants shall have no voting
or consent rights under this Section 11.1 and no rights to require the Lessor to
call a meeting pursuant to Section 11.1 (d) until they cease to be Defaulting
Participants. During any period that any Defaulting Participants have no voting
rights under this Section 11.1. only the Commitment Percentages of the other
Participants that still have voting rights will be considered for purposes of
determining the Required Participants.
SECTION 11.2. General. Subject to the limitations set forth in
Section 11.1 and Section 14:
(a) The Lessor shall have the exclusive right to take any action and to exercise
any available powers, rights and remedies to enforce the obligations of the
Lessee under the Operative Documents, or to refrain from taking any such action
or exercising any such power, right or remedy.
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(b) The Lessor shall be entitled to (i) give any consent, waiver or approval
requested by the Lessee with respect to any construction or other approval
contemplated in the Lease or (ii) waive or consent to any adverse title claims
affecting the Property, provided that, in either case, such action will not have
a material adverse effect on the Lessee's obligations or ability to make the
payments required under the Operative Documents, the Lessor's rights and
remedies under the Operative Documents or any Participant's rights hereunder.
SECTION 11.3 Conflicts. Notwithstanding anything to the contrary herein
contained, the Lessor shall be entitled, even over the objection of each
Participant or the Required Participants, (i) to take any action required of the
Lessor by, or to refrain from taking any action prohibited by, the Operative
Documents or any law, rule or regulation to which the Lessor is subject
(provided, that this Section shall not be construed to authorize the Lessor to
take any action required by a modification of the Operative Documents prohibited
by Section 11.1), and (ii) after notice to the Participants, to bring and
prosecute a suit against the Lessee in the form recommended by and in accordance
with advice of reputable counsel at any time when a breach of the Operative
Documents by the Lessee shall have put the Lessor (or any of its officers or
employees) at risk of criminal prosecution or significant liability to third
parties or at any time after the Lessee or its designee fails to purchase the
Property on the Designated Payment Date. Nothing herein contained shall be
construed to require the Lessor to agree to modify the Operative Documents or to
take any action or refrain from taking any action in any manner that could
increase the Lessor's liability to the Lessee or others, that could reduce or
postpone payments to which the Lessor is entitled thereunder, or that could
reduce the scope and coverage of the indemnities provided for the Lessor's
benefit therein.
SECTION 11.4. Refusal to Give Consents or Fund. If any Participant declines to
consent to any amendment, modification, waiver, release or consent for which
such Participant's consent is requested or required by reason of this Agreement,
or if any Participant fails to pay any amount owed by it hereunder, the Lessor
shall have the right, but not the obligation and without limiting any other
remedy of the Lessor, to terminate such Participant's rights to receive any
further payments under Section 3 of this Agreement (other than payments required
because of the Lessor's collection of any Rent applied by the Lessor as
reimbursement for a Defaulted Amount or interest on a Defaulted Amount) by
paying such Participant a termination fee equal to the total of:
(i) all amounts actually advanced by such Participant to the Lessor under
Section 3.4 hereof before the termination; excluding, however, any such amounts
that were repaid to such Participant before the termination by actual payments
made to such Participant by the Lessor of, or the Lessor's offset against, sums
representing:
(A) Such Participant's Commitment Percentage times any payments of Rent received
by the Lessor under the Lease; plus
(B) Such Participant's Commitment Percentage times any sales proceeds received
by the Lessor under the Lease; and
(ii) Such Participant's Commitment Percentage, times:
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(A) the then accrued but unpaid Basic Rent and Commitment Fees due
under the Lease and hereunder; plus
(B) interest on past due amounts described in the preceding clause (A)
computed at the Federal Funds Effective Rate; plus
(C) interest on any amounts (other than interest itself) past due from
the Lessee or its designees under the Operative Documents, computed at the
Federal Funds Effective Rate.
Such Participant's rights to receive payments equal to such Participant's
Commitment Percentage of any Rent applied by the Lessor as reimbursement for a
Defaulted Amount or interest on a Defaulted Amount shall not be impaired or
affected by any termination contemplated in this Section 11.4; accordingly, the
Lessor shall not, as a condition to such a termination, be required to reimburse
such Participant for any payments such Participant has made in connection with
Defaulted Amounts pursuant to Section 3.3.
SECTION 11.5. Required Repayments. Each Participant shall repay to the
Lessor, upon written request or demand by the Lessor (i) any sums paid by the
Lessor to such Participant under this Agreement from, or that were computed by
reference to, any Rent or other amounts which the Lessor shall be required to
return or pay over to another party, whether pursuant to any bankruptcy or
insolvency law or proceeding or otherwise and (ii) any interest or other amount
that the Lessor is also required to pay to another party with respect to such
sums. Such repayment by any Participant shall not constitute a release of such
Participant's right to receive such Participant's Commitment Percentage times
the amount of any such Rent or any such other amount (or any interest thereon)
that the Lessor may later recover.
SECTION 11.6. Indemnification. Each Participant agrees to indemnify and
defend the Lessor (to the extent not reimbursed by the Lessee within ten (10)
days after demand) from and against such Participant's Commitment Percentage of
any and all liabilities, obligations, claims, expenses or disbursements
(including reasonable fees of attorneys, accountants, experts and advisors) of
any kind or nature whatsoever (in this Section 11.6 collectively called "Covered
Liabilities") which to any extent (in whole or in part) may be imposed on,
incurred by or asserted against the Lessor growing out of, resulting from or in
any other way associated with the Property or the Operative Documents (including
the enforcement thereof, whether exercised upon the Lessor's own initiative or
upon the direction of the Required Participants) and the transactions and events
at any time associated therewith or contemplated therein. The foregoing
indemnification shall apply whether or not such Covered Liabilities are in any
way or to any extent caused, in whole or in part, by any negligent act or
omission of any kind by the Lessor; provided, only that no Participant shall be
obligated under this Section 11.6 to indemnify the Lessor (i) for Covered
Liabilities incurred in connection with any transfer or assignment by the Lessor
of its right to receive Rent or its rights and interests in and to the Property,
the Operative Documents or this Agreement to its Affiliates or (ii) for that
portion or percentage, if any, of any of the Covered Liabilities which is
proximately caused by: (A) the Lessor's own gross negligence or willful
misconduct; (B) any representation made by the Lessor in the Operative Documents
that is false in any material respect and that the Lessor knew
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was false at the time of the Lessor's execution of the Operative Documents; or
(C) Lessor Liens not claimed by, through or under any of the Participants. After
each Participant has paid its Percentage of any Covered Liabilities, each
Participant shall be entitled to payment from the Lessor of an amount equal to
the Adjusted Percentage (as defined below) of any payments subsequently received
by the Lessor as Excess Reimbursement (as defined below) for such Covered
Liabilities. As used in this Section "Adjusted Percentage" shall equal (i) such
Participant's Commitment Percentage, divided by (ii) the sum of the Commitment
Percentages of all Participants who have paid the Lessor their respective shares
of the Covered Liabilities at issue. As used in this Section, the term "Excess
Reimbursement" shall mean, for the Covered Liabilities at issue, amounts
reimbursed or paid by the Lessee to or on behalf of the Lessor on account of
such Covered Liabilities in excess of (i) such Covered Liabilities, times (ii)
the Commitment Percentages of any Participants that have not paid the Lessor
their respective Percentages of such Covered Liabilities.
SECTION 11.7. Required Supplemental Payments. In the event that the Lessee fails
to pay any Required Supplemental Payment when due (a "Defaulted Amount"), the
Lessor shall notify each Participant of such Defaulted Amount, whereupon each
Participant shall pay to the Lessor an amount equal to such Participant's
Commitment Percentage times the Defaulted Amount; such payment from Participant
to the Lessor shall be due prior to 2:00 p.m., San Francisco time, on the date
of such notice if such notice is given by 12:00 noon, San Francisco time,
otherwise prior to 12:00 noon, San Francisco time, on the next Business Day
following such notice. After payment of a Participant's Commitment Percentage
times the Defaulted Amount, any payments subsequently received by the Lessor
from the Lessee as reimbursement for such Defaulted Amount, and any interest
received by the Lessor from the Lessee that accrued on the Defaulted Amount
after the date of such Participant's payment of its Commitment Percentage times
the Defaulted Amount, will constitute Supplemental Rent for purposes of
computing payments due such Participant under this Agreement.
SECTION 11.8. Application of Payments Received From Defaulting Participant As a
Cure For Payment Defaults. If after a failure to make a payment required by
Section 3.4, any Defaulting Participant cures such failure, in whole or in part,
by paying to the Lessor all or pan of such payment and interest thereon at the
Late Payment Rate, then the Lessor shall apply the payments so made to the
Lessor, net of the costs of collecting such payments (the "Net Cure Proceeds"),
or other funds available to the Lessor equal to the Net Cure Proceeds, in the
following order before applying the same to any other purpose:
(i) first, to make payments to the Lessor itself equal to its Excess Investment
(if any) until the Lessor shall no longer have any Excess Investment; and
(ii) second, to make further Advances to the Lessee under this Agreement to the
extent the Lessor is required or deems it appropriate to do so; provided, that
such further Advances do not cause the total Property Cost to exceed the sum of
the Commitments.
SECTION 11.9. Order of Application. For purposes of this Agreement, the Lessor
shall be entitled, but not required, to apply any payments received from the
Lessee under the Operative Documents to satisfy (1) unpaid Required Supplemental
Payments (and interest thereon) not
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included in Rent, if any, and (2) costs incurred by the Lessor because of any
sale under the Lease before applying such payments to satisfy the Lessee's other
obligations, regardless of how the Lessee may have designated such payments.
SECTION 11.10. Investments Pending Dispute Resolution; Overnight
Investments. Whenever the Lessor in good faith determines that it does not have
all information needed to determine how payments to Participants must be made on
account of any then existing Participation Interests which the Lessor has
received, or whenever the Lessor in good faith determines that there is any
dispute among the Participants about payments which must be made on account of
Participation Interests actually received by the Lessor, the Lessor may choose
to defer the payments which are the subject of such missing information or
dispute. However, to minimize any such deferral, the Lessor shall attempt
diligently to obtain any missing information needed to determine how payments to
the Participants must be made. Also, pending any such deferral, or if the Lessor
is otherwise required to invest funds pending distribution to the Participants,
the Lessor shall invest funds equal to (i) the total of the Commitment
Percentages of all Participants to whom payments have not been made with respect
to the Participation Interests at issue, times (ii) the total percentages at
issue. In addition, the Lessor shall endeavor to invest payments of
Participation Interests it receives after 12:00 noon, San Francisco time, on the
day in question that are to be paid to a Participant on the next Business Day
pursuant to Section 3; provided that the Lessor shall have no liability to any
Participant if the Lessor is unable to make such investments. Investments by the
Lessor shall be in the overnight federal funds market pending distribution, and
the interest earned on each dollar of principal so invested shall be paid to the
Person entitled to receive such dollar of principal when the principal is paid
to such Person.
SECTION 11.11. Agent to Exercise Lessor's Rights. The Lessor has assigned
its interest in the Lease to the Agent, for the benefit of the Participants,
pursuant to the Assignment of Lease. To the extent provided therein, the rights,
remedies, duties and responsibilities of the Lessor contained in this Section 11
and in the other Operative Documents with respect thereto shall be exercisable
by, binding upon and inure to the benefit of the Agent, for the benefit of the
Participants.
SECTION 11.12. Exculpatory Provisions Regarding the Lessor. Subject to the
provisions of Section 11.11, each Participant hereby irrevocably authorizes the
Lessor to take such actions on its behalf as are expressly vested in or
delegated to the Lessor by the terms of this Agreement and the other Operative
Documents, together with such powers as are reasonably incidental thereto. The
provisions of the following Sections of this Agreement are hereby incorporated
by reference into this Section 11.12, substituting the word "Lessor" for "Agent"
therein:
(i) Section 14.1 - second sentence.
(ii) Section 14.2 - all.
(iii) Section 14.3 - all.
(iv) Section 14.4 - all.
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(V) SECTION 14.5 - first sentence.
(IV) SECTION 14.6 - last sentence.
SECTION 12.
TRANSFERS OF PARTICIPANTS' INTERESTS
SECTION 12.1. Restrictions on and Effect of Transfer by Participants. No
Participant may (without the prior written consent of the Agent and Lessee (not
to be unreasonably withheld)) assign, convey or otherwise transfer (including
pursuant to a participation) all or any portion of its right, title or interest
in, to or under its Participation Interest or any of the Operative Documents or
the Property, provided that (x) any Participant may pledge its interest without
the consent of the Agent or the Lessee to any Federal Reserve Bank, and (y)
without the prior written consent of the Agent, any Participant may transfer all
or any portion of its interest to any Affiliate of such Participant or to any
other existing Participant; provided that in the case of any transfer (other
than to such Affiliate) each of the following conditions and any other
applicable conditions of the other Operative Documents are satisfied:
(a) Required Notice and Effective Date. Any Participant desiring to effect a
transfer of its interest shall give written notice of each such proposed
transfer to the Lessee, the Agent and each other Participant at least five (5)
Business Days prior to such proposed transfer, setting forth the name of such
proposed transferee, the percentage or interest to be retained by such
Participant, if any, and the date on which such transfer is proposed to become
effective. All reasonable out-of-pocket costs (including, without limitation,
legal expenses) incurred by the Lessor, the Agent or any Participant in
connection with any such disposition by a Participant under this Section 12.1
shall be borne by such transferring Participant. In the event of a transfer
under this Section 12.1, any expenses incurred by the transferee in connection
with its review of the Operative Documents and its investigation of the
transactions contemplated thereby shall be borne by such transferee or the
relevant Participant, as they may determine, but shall not be considered costs
and expenses which the Lessee is obligated to pay or reimburse under Section 9.
Any such proposed transfer shall become effective upon the later of(i) the date
proposed in the transfer notice referred to above and (ii) the date on which all
conditions to such transfer set forth in this Section 12.1 shall have been
satisfied.
(b) Assumption of Obligations. Any transferee pursuant to this Section 12.1
shall execute and deliver to the Agent and the Lessee an Assignment and
Acceptance in substantially the form attached as Exhibit J ("Assignment and
Acceptance"), duly executed by such transferee and the transferring Participant,
and a letter in substantially the form of the Participant's Letter attached
hereto as Exhibit K ("Participant's Letter"), and thereupon the obligations of
the transferring Participant under the Operative Documents shall be
proportionately released and reduced to the extent of such transfer. Upon any
such transfer as above provided, the transferee shall be deemed to be bound by
all obligations (whether or not yet accrued) under, and to have become a party
to, all Operative Documents to which its transferor was a party, shall be deemed
the pertinent
39
<PAGE>
"Participant" for all purposes of the Operative Documents and shall be deemed to
have made that portion of the payments pursuant to this Participation Agreement
previously made or deemed to have been made by the transferor represented by the
interest being conveyed; and each reference herein and in the other Operative
Documents to the pertinent "Participant" shall thereafter be deemed a reference
to the transferee, to the extent of such transfer, for all purposes. Upon any
such transfer, the Agent shall deliver to each Participant, the Lessor and the
Lessee a new Schedule I and Schedule II to this Agreement, revised to reflect
the relevant information for such new Participant and the Commitment of such new
Participant (and the revised Commitment of the transferor Participant if it
shall not have transferred its entire interest).
(c) Employee Benefit Plans. No Participant may make any such assignment,
conveyance or transfer to or in connection with any arrangement or understanding
in any way involving any employee benefit plan (or its related trust), as
defined in Section 3(3) of ERISA, or with the assets of any such plan (or its
related trust), as defined in Section 4975(e)(1 ) of the Code.
(d) Representations. Notwithstanding anything to the contrary set forth
above, no Participant may assign, convey or transfer its interest to any Person,
unless such Person shall have delivered to the Agent and the Lessee a
certificate confirming the accuracy of the representations and warranties set
forth in Section 8 with respect to such Person (other than as such
representation or warranty relates to the execution and delivery of Operative
Documents) and representing that such Person has, independently and without
reliance upon the Agent, any other Participant or, except to the extent of the
Lessee's representations made under the Operative Documents when made, the
Lessee, and based on such documents and information as it has deemed
appropriate, made its own appraisal of and investigation into this transaction,
the Property and the Lessee and made its own decision to enter into this
transaction.
(e) Amounts; Agent's Fee. Any transfer of a Participation Interest shall be
in a principal amount which is equal to or greater than $2,000,000. Each
transferring Participant shall pay to the Agent a transfer fee of $2,500.
(f) Applicable Law. Such transfer shall comply with Applicable Law and
shall not require registration under any securities law applicable thereto.
(g) Effect. From and after any transfer of its Participation Interest the
transferring Participant shall be released, to the extent assumed by the
transferee, from its liability and obligations hereunder and under the other
Operative Documents to which such transferor is a party in respect of
obligations to be performed on or after the date of such transfer. Upon any
transfer by a Participant as above provided, any such transferee shall be deemed
a "Participant" for all purposes of such documents and each reference herein to
a Participant shall thereafter be deemed a reference to such transferee for all
purposes to the extent of such transfer, except as the context may otherwise
require. Notwithstanding any transfer as provided in this Section 12.1, the
transferor shall be entitled to all benefits accrued and all fights vested prior
to such transfer, including, without limitation, fights to indemnification under
this Participation Agreement or any other Operative Document.
40
<PAGE>
SECTION 12.2. Covenants and
Agreements of Participants.
(a) Participations. Each
Participant covenants and
agrees that it will not
grant Participations in its
Participation Interest to
any Person (a
"Sub-Participant") unless
such participation complies
with Applicable Law and does
not require registration
under any securities law
applicable thereto and such
Sub-Participant (i) is a
bank or other financial
institution and (ii)
represents and warrants, in
writing, to such Participant
for the benefit of the
Participants, the Lessor and
the Lessee that (A) no part
of the funds used by it to
acquire an interest in any
Participation Interest
constitutes assets of any
"employee benefit plan" (as
defined in Section 3(3) of
ERISA) which is subject to
Title I of ERISA, or "plan"
(as defined in Section
4975(e)(1) of the Code) and
(B) such Sub-Participant is
acquiring its interest for
investment purposes without
a view to the distribution
thereof. Any such Person
shall require any transferee
of its interest in its
Participation Interest to
make the representations and
warranties set forth in the
preceding sentence, in
writing, to such Person for
its benefit and the benefit
of the Participants, the
Lessor and Lessee. In the
event of any such sale by a
Participant of a
participating interest in
its Participation Interest
to a Sub-Participant, such
participant's obligations
under this Participation
Agreement and under the
other Operative Documents
shall remain unchanged, such
Participant shall remain
solely responsible for the
performance thereof, such
Participant shall remain the
holder of its Participation
Interest, for all purposes
under this Participation
Agreement and under the
other Operative Documents,
and the Lessor, the Agent
and, except as set forth in
Section 12.2(b), the Lessee
shall continue to deal
solely and directly with
such Participant in
connection with such
Participant's rights and
obligations under this
Participation Agreement and
under the other Operative
Documents.
(b) Transferee Indemnities.
Each Sub-Participant shall
be entitled to the benefits
of Sections 13.5, 13.6, and
13.7 and 13.10 with respect
to its participation in the
Participation Interests
outstanding from time to
time; provided that no
Sub-Participant shall be
entitled to receive any
greater amount pursuant to
such Sections than the
transferor Participant would
have been entitled to
receive in respect of the
amount of the participation
transferred by such
transferor Participant to
such Sub-Participant had no
such transfer or
participation occurred.
SECTION 12.3. Future Participants.
Each Participant shall be deemed
to be bound by and, upon
compliance with the requirements
of this Section 12, will be
entitled to all of the benefits
of the provisions of, this
Participation Agreement.
SECTION 13.
INDEMNIFICATION
SECTION 13.1. General
Indemnification. The Lessee
agrees, whether or not any of the
transactions contemplated hereby
shall be consummated, to assume
liability for, and to indemnify,
protect, defend, save and keep
harmless each Indemnitee, on an
After Tax Basis, from and
against, any and all Claims that
may be imposed on, incurred by or
asserted against such Indemnitee
(whether because of action or
omission by such Indemnitee or
otherwise), whether or not such
Indemnitee shall also be
indemnified as to any such Claim
by any other Person and whether
or not
41
<PAGE>
such Claim arises or accrues prior to
the Closing Date or after the
Expiration Date, in any way relating
to or arising out of:
(a) any of the Operative
Documents or any of the
transactions contemplated
thereby or any violation
thereof, and any amendment,
modification or waiver in
respect thereof;
(b) the Property, the Lease or any part
thereof or interest therein;
(c) the purchase, design,
construction, preparation,
installation, inspection,
delivery, non-delivery,
acceptance, rejection,
ownership, management,
possession, operation,
rental, lease, sublease,
repossession, maintenance,
repair, alteration,
modification, addition or
substitution, storage,
transfer of title,
redelivery, use, financing,
refinancing, disposition,
operation, condition, sale
(including, without
limitation, any sale
pursuant to Sections 16.2,
16.3, 16.4, 17.2(c), 17.2(e)
or 17.4 of the Lease or any
sale pursuant to Articles XX
or XXII of the Lease, return
or other disposition of all
or any part or any interest
in the Property or the
imposition of any Lien (or
incurring of any liability
to refund or pay over any
amount as a result of any
Lien) thereon, including,
without limitation: (1)
Claims or penalties arising
from any violation of
federal, state or local law,
nile, regulation or order or
in tort (strict liability or
otherwise), (2) latent or
other defects, whether or
not discoverable, (3) any
Claim based upon a violation
or alleged violation of the
terms of any restriction,
easement, condition or
covenant or other matter
affecting title to the
Property, (4) the making of
any Modifications in
violation of any standards
imposed by any insurance
policies required to be
maintained by Lessee
pursuant to the Lease which
are in effect at any time
with respect to the Property
or any part thereof, (5) any
Claim for patent, trademark
or copyright infringement,
and (6) Claims arising from
any public improvements with
respect to the Property
resulting in any charge or
special assessments being
levied against the Property
or any plans to widen,
modify or realign any street
or highway adjacent to the
Property;
(d) [reserved];
(e) the breach by the
Lessee of any covenant,
representation or warranty
made by it or deemed made by
it in any Operative Document
or any certificate required
to be delivered by any
Operative Document;
(f) the retaining or
employment of any broker,
finder or financial advisor
by the Lessee to act on its
behalf in connection with
this Participation
Agreement, or the incurring
of any fees or commissions
to which the Lessor might be
subjected by virtue of
entering into the
transactions contemplated by
this Participation Agreement;
(g) the existence of any Lien
on or with respect to the
Property, any Basic Rent or
Supplemental Rent, title
thereto, or any interest
therein including any Liens
which arise out of the
possession, use, occupancy,
construction, repair or
rebuilding of the Property
or by reason of labor or
materials furnished or
claimed to have been
furnished to the Lessee, the
Lessor or any of their
contractors or agents or by
reason of the financing of
the Property or
Modifications constructed by
the Lessee, except Lessor
Liens and Liens in favor of
the Agent or the Lessor; or
42
<PAGE>
(h) the transactions
contemplated by the Lessee
hereby or by any other
Operative Document, in
respect of the application
of Parts 4 and 5 of Subtitle
B of Title I of ERISA and
any prohibited transaction
described in Section 4975(c)
of the Code (other than any
Claim resulting from a
breach of representation or
warranty of the Lessor or
any Participant);
provided, however, the Lessee shall not
be required to indemnify (x) the
Lessor for any Claim to the extent
arising from any misrepresentation by
the Lessor under Section 8.1 (e) or
(l) or from the failure by the Lessor
to comply with SectiOn 10.3 (a), or
(y) any Indemnitee under this Section
13.1 for any of the following: (1) any
Claim to the extent resulting from the
willful misconduct or gross negligence
of such Indemnitee (it being
understood that the Lessee shall be
required to indemnify an Indemnitee
even if the ordinary (but not gross)
negligence of such Indemnitee caused
or contributed to such Claim), (2) any
Claim resulting from Lessor Liens
which the Lessor is responsible for
discharging under the Operative
Documents, (3) any Claim to the extent
attributable to acts or events
occurring after the expiration of the
Term or the termination of the
Lessee's right to possess and control
the Property (but not any claim to the
extent attributable to acts or events
occurring prior to or during the Term
or occurring at any time that the
Lessee is in actual possession or
control of the Property), (4) any
Imposition or other claims for Taxes,
and (5) any Claims of the type(s)
described in Sections 13.2 (only with
respect to claims in respect of a
decline in the Fair Market Sales Value
of the Property as a result of an
event described in Section 13.2(b) and
the Lessee's exercise of the
Remarketing Option), 13.6, 13.7, 13.8
and 13.10. It is expressly understood
and agreed that the indemnity provided
for herein shall survive the
expiration or termination of and shall
be separate and independent from any
remedy under the Lease or any other
Operative Document. Without limiting
the express rights of any Indemnitee
under this Section 13.1, this Section
13.1 shall be construed as an
indemnity only and not a guaranty of
residual value of the Property or as a
guaranty of the Participation
Interests.
SECTION 13.2. End of Term
Indemnity.
(a) If the Lessee elects
the Remarketing Option and
there would, after giving
effect to the proposed
remarketing transactions, be
a Shortfall Amount, then
prior to the Maturity Date
and as a condition to the
Lessee's fight to complete
the remarketing of the
Property pursuant to Section
22.1 of the Lease, the
Lessee shall cause to be
delivered to the Lessor at
least 30 days prior to the
Expiration Date, at the
Lessee's sole cost and
expense, a report from an
appraiser selected by the
Lessor and reasonably
satisfactory to the Agent
and the Required
Participants in form and
substance satisfactory to
the Lessor, the Agent-and
the Required Participants
(the "End of the Term
Report") which shall state
the appraiser's conclusions
as to the reason for any
decline in the Fair Market
Sales Value of the Property
from that anticipated for
such date in the Appraisal
delivered on the Closing
Date.
(b) Prior to the Expiration
Date, the Lessee shall pay
to the Lessor an amount (not
to exceed the Shortfall
Amount) equal to the portion
of the Shortfall Amount that
the End of the Term Report
demonstrates was the result
of a decline in the Fair
Market Sales Value of the
Property due to:
43
<PAGE>
(i) extraordinary wear and tear, excessive usage, failure to
maintain, to repair, to restore, to rebuild or to replace, failure to
comply with the Lease and all applicable laws, failure to use, workmanship,
method of installation or removal or maintenance, repair, rebuilding or
replacement (excepting in each case ordinary wear and tear);
(ii) any Modification made to, or any rebuilding of, the Property
or any part thereof by the Lessee; or
(iii) the existence of any Hazardous ActiVity, Hazardous
Substance or Environmental Violations; or
(iv) any restoration or rebuilding carried out by the Lessee; or
(v) any condemnation of any portion of the Property pursuant to
Article XV of the Lease; or
(vi) any use of the Property or any part thereof by the Lessee
other than as permitted by the Operative Documents; or
(vii) any grant, release, dedication, transfer, annexation or
amendment made pursuant to Section 12.2 of the Lease; or
(viii) the failure of the Lessor to have good and marketable fee
title to the Property free and clear of all Liens (including Permitted
Liens) and exceptions to title, except Lessor Liens.
SECTION 13.3. Environmental Indemnity. Without limitation of the other
-------------------------
provisions of this Section 13, the Lessee hereby agrees to indemnify, hold
------------
harmless and defend each Indemnitee from and against any and all claims
(including without limitation third party claims for personal injury or real or
personal property damage), losses (including but not limited to any loss of
value of the Property), damages, liabilities, fines, penalties, charges,
administrative and judicial proceedings (including informal proceedings) and
orders, judgments, remedial action, requirements, enforcement actions of any
kind, and all reasonable and documented costs and expenses incurred in
connection therewith (including but not limited to reasonable and documented
attorneys' and/or paralegals' fees and expenses), including, but not limited to,
all costs incurred in connection with any investigation or monitoring of site
conditions or any clean-up, remedial, removal or restoration work by any
federal, state or local government agency, which such Indemnitee becomes subject
to because of its involvement with the Property, the transactions contemplated
by the Operative Documents or any other matter referred to in paragraphs (a)
through (i) of Section 13.1 arising in whole or in part, out of:
-----
(a) the presence on or under the Property or the Facility of any
Hazardous Substances, or any Releases or discharges of any Hazardous Substances
on, under, from or onto the Property or the Facility;
44
<PAGE>
(b) any activity, including,
without limitation,
construction, carried on or
undertaken on or off the
Facility, and whether by the
Lessee, the Lessor or any
predecessor in title or any
employees, agents,
contractors or
subcontractors of the
Lessee, the Lessor (if such
activity was undertaken with
the consent or at the
direction of the Lessee) or
any predecessor in title, or
any other Persons (including
such Indemnitee), in
connection with the
handling, treatment,
removal, storage,
decontamination, cleanup,
transport or disposal of any
Hazardous Substances that at
any time are located or
present on or under or that
at any time migrate, flow,
percolate, diffuse or in any
way move onto or under the
Property or the Facility;
(c) loss of or damage to
any property or the
environment (including,
without limitation, cleanup
costs, response costs,
remediation and removal
costs, cost of corrective
action, costs of financial
assurance, fines and
penalties and natural
resource damages), or death
or injury to any Person, and
all expenses associated with
the protection of wildlife,
aquatic species, vegetation,
flora and fauna, and any
mitigative action required
by or under Environmental
Laws;
(d) any claim concerning lack
of compliance with
Environmental Laws, or any
act or omission causing an
environmental condition that
requires remediation or
would allow any Governmental
Authority to record a Lien
on the land records;
(e) any residual
contamination on or under
the Facility, or affecting
any natural resources, or
any contamination of any
property or natural
resources arising in
connection with the
generation, use, handling,
storage, transport or
disposal of any such
Hazardous Substances, and
irrespective of whether any
of such activities were or
will be undertaken in
accordance with applicable
Environmental Laws; or
(f) any material
inaccuracies,
misrepresentations,
misstatements, and omissions
and any conflicting
information contained in or
omitted from any
environmental audit
previously delivered to the
Lessor or the Agent in
connection with the Fab 2
Real Property Participation
Agreement;
provided, however, the Lessee shall not
be required to indemnify any
Indemnitee under this Section 13.3 for
(1) any Claim to the extent resulting
from the willful misconduct or gross
negligence of such Indemnitee (it
being understood that the Lessee shall
be required to indemnify an Indemnitee
even if the ordinary (but not gross)
negligence of such Indemnitee caused
or contributed to such Claim), (2)
subject to the provisions Section 15.2
of the Lease, any Claim to the extent
attributable to acts or events
occurring after the expiration of the
Term or the termination of the
Lessee's right to possess and control
the Property (but not any claim to the
extent attributable to acts or events
occurring prior to or during the Term
or occurring at any time that the
Lessee is in actual possession or
control of the Property), (3) any
Imposition or other claims for Taxes
of the type(s) described in Section
13.5 or (4) any Claims of the type(s)
described in Sections 13.2 (only with
respect to claims in respect of a
decline in the Fair Market Sales Value
of the Property and the Lessee's
exercise of the Remarketing Option),
13.6, 13.7, 13.8 and 13.10. It is
expressly understood and agreed that
the indemnity provided for herein
shall survive the expiration or
termination of and shall be separate
and independent from any remedy under
the Lease or any other Operative
Document.
45
<PAGE>
SECTION 13.4. Proceedings in
Respect of Claims. With respect
to any amount that the Lessee is
requested by an Indemnitee to pay
by reason of Section 13.1 or
13.3, such Indemnitee shall, if
so requested by the Lessee and
prior to any payment, submit such
additional information to the
Lessee as the Lessee may
reasonably request and which is
in the possession of such
Indemnitee to substantiate
properly the requested payment.
In case any action, suit or
proceeding shall be brought
against any Indemnitee, such
Indemnitee shall notify the
Lessee of the commencement
thereof, and the Lessee shall be
entitled, at its expense, to
participate in, and, to the
extent that the Lessee desires
to, assume and control the
defense thereof; provided,
however, that the Lessee shall
have acknowledged in writing its
obligation to fully indemnify
such Indemnitee in respect of
such action, suit or proceeding,
and the Lessee shall keep such
Indemnitee fully apprised of the
status of such action, suit or
proceeding and shall provide such
Indemnitee with all information
with respect to such action, suit
or proceeding as such Indemnitee
shall reasonably request, and
provided further, that the Lessee
shall not be entitled to assume
and control the defense of any
such action, suit or proceeding
if and to the extent that, (A) in
the reasonable opinion of such
Indemnitee, (x) such action, suit
or proceeding involves any
possibility of imposition of
criminal liability or any risk of
material civil liability on such
Indemnitee or will involve a
material risk of the sale,
forfeiture or loss of, or the
creation of any Lien (other than
a Permitted Lien) on the Property
or any part thereof unless, in
the case of civil liability or
Lien, the Lessee shall have
posted a bond or other security
satisfactory to the relevant
Indemnitee in respect to such
risk or (y) the control of such
action, suit or proceeding would
involve an actual or potential
conflict of interest, (B) such
proceeding involves Claims not
fully indemnified by the Lessee
which the Lessee and the
Indemnitee have been unable to
sever from the indemnified
claim(s), or (C) an Event of
Default under the Lease has
occurred and is continuing. The
Indemnitee may participate in a
reasonable manner at its own
expense and with its own counsel
in any proceeding conducted by
the Lessee in accordance with the
foregoing. The Lessee shall not
enter into any settlement or
other compromise with respect to
any Claim which is entitled to be
indemnified under Section 13.1 or
13.3 without the prior written
consent of the Indemnitee which
consent shall not be unreasonably
withheld in the case of a money
settlement not involving an
admission of liability of such
Indemnitee.
Each Indemnitee shall at the
expense of the Lessee cooperate
with and supply the Lessee with
such information and documents
reasonably requested by the
Lessee as are necessary or
advisable for the Lessee to
participate in any action, suit
or proceeding to the extent
permitted by Section 13.1 or
13.3. Unless an Event of Default
under the Lease shall have
occurred and be continuing, no
Indemnitee shall enter into any
settlement or other compromise
with respect to any Claim which
is entitled to be indemnified
under Section 13.1 or 13.3
without the prior written consent
of the Lessee, which consent
shall not be unreasonably
withheld, unless such Indemnitee
waives its right to be
indemnified under Section 13.1 or
13.3 with respect to such Claim.
Upon payment in full of any Claim
by the Lessee pursuant to Section
13.1 or 13.3 to or on behalf of
an Indemnitee, the Lessee,
without any further action, shall
be subrogated to any and all
claims that such Indemnitee may
have relating thereto (other than
claims in respect of insurance
policies maintained by such
Indemnitee at its own expense),
and such Indemnitee shall execute
such instruments of assignment
and conveyance, evidence of
claims and payment and such other
46
<PAGE>
documents, instruments and agreements
as may be necessary to preserve any
such claims and otherwise cooperate
with the Lessee and give such further
assurances as are necessary or
advisable to enable the Lessee
vigorously to pursue such claims.
Any amount payable to an
Indemnitee pursuant to Section
13.1 or 13.3 shall be paid to
such Indemnitee promptly upon
receipt of a written demand
therefor from such Indemnitee,
accompanied by a written
statement describing in
reasonable detail the basis for
such indemnity and the
computation of the amount so
payable and, if requested by the
Lessee, such determination shall
be verified by a nationally
recognized independent accounting
firm mutually acceptable to the
Lessee and the Indemnitee at the
expense of the Lessee.
SECTION 13.5. General Impositions
Indemnity.
(a) Indemnification. The
Lessee shall pay and assume
liability for, and does
hereby agree to indemnify,
protect and defend the
Property and all
Indemnitees, and hold them
harmless against, all
Impositions on an After Tax
Basis.
(b) Payments. (i) Subject to
the terms of Section
13.5(f), the Lessee shall
pay or cause to be paid all
Impositions directly to the
taxing authorities where
feasible and otherwise to
the Indemnitee, as
appropriate, and the Lessee
shall at its own expense,
upon such Indemnitee's
reasonable request, furnish
to such Indemnitee copies of
official receipts or other
satisfactory proof
evidencing such payment.
(ii) In the case of
Impositions for which
no contest is conducted
pursuant to Section
13.5(f) and which the
Lessee pays directly to
the taxing authorities,
the Lessee shall pay
such Impositions prior
to the latest time
permitted by the
relevant taxing
authority for timely
payment. In the case of
Impositions for which
the Lessee reimburses
an Indemnitee, the
Lessee shall do so
within twenty (20) days
after receipt by the
Lessee of demand by
such Indemnitee
describing in
reasonable detail the
nature of the
Imposition and the
basis for the demand
(including the
computation of the
amount payable), but in
no event shall the
Lessee be required to
pay such reimbursement
prior to ten (10) days
before the latest time
permitted by the
relevant taxing
authority for timely
payment. In the case of
Impositions for which a
contest is conducted
pursuant to Section
13.5(f), the Lessee
shall pay such
Impositions or
reimburse such
Indemnitee for such
Impositions, to the
extent not previously
paid or reimbursed
pursuant to subsection
(a), prior to the
latest time permitted
by the relevant taxing
authority for timely
payment after
conclusion of all
contests under Section
13.5(f).
(iii) At the Lessee's
request, the amount of
any indemnification
payment by the Lessee
pursuant to subsection
(a) shall be verified
and certified by an
independent public
accounting firm
mutually acceptable to
the Lessee and the
Indemnitee. The fees
and expenses of such
independent public
accounting firm shall
be paid by the Lessee
unless such
verification shall
result in an adjustment
in the Lessee's favor
of 5% or more of the
payment as computed by
the Indemnitee, in
which case such fee
shall be paid by the
Indemnitee.
47
<PAGE>
(c) Reports and
Returns. (i) The
Lessee shall be
responsible for
preparing and
filing any real
and personal
property or ad
valorem tax
returns in respect
of the Property.
In case any other
report or tax
return shall be
required to be
made with respect
to any obligations
of the Lessee
under or arising
out of subsection
(a) and of which
the Lessee has
knowledge or
should have
knowledge, the
Lessee, at its
sole cost and
expense, shall
notify the
relevant
Indemnitee of such
requirement and
(except if such
Indemnitee
notifies the
Lessee that such
Indemnitee intends
to file such
report or return)
(A) to the extent
required or
permitted by and
consistent with
Applicable Law,
make and file in
its own name such
return, statement
or report; and (B)
in the case of any
other such return,
statement or
report required to
be made in the
name of such
Indemnitee, advise
such Indemnitee of
such fact and
prepare such
return, statement
or report for
filing by such
Indemnitee or,
where such return,
statement or
report shall be
required to
reflect items in
addition to any
obligations of the
Lessee under or
arising out of
subsection (a),
provide such
Indemnitee at the
Lessee's expense
with information
sufficient to
permit such
return, statement
or report to be
properly made with
respect to any
obligations of the
Lessee under or
arising out of
subsection (a).
Such Indemnitee
shall, upon the
Lessee's request
and at the
Lessee's expense,
provide any data
maintained by such
Indemnitee (and
not otherwise
available to or
within the control
of the Lessee)
with respect to
the Property which
the Lessee may
reasonably require
to prepare any
required tax
returns or
reports. Each
Indemnitee agrees
to use its best
efforts to send to
the Lessee a copy
of any written
request or other
notice that the
Indemnitee
receives with
respect to any
reports or returns
required to be
filed with respect
to the Property or
the transactions
contemplated by
the Operative
Documents, it
being understood
that no Indemnitee
shall have any
liability for
failure to provide
such copies.
(d) Income
Inclusions. If as
a result of the
payment or
reimbursement by
the Lessee of any
expenses of the
Lessor or the
payment of any
Transaction
Expenses incurred
in connection with
the transactions
contemplated by
the Operative
Documents, the
Lessor or any
Participant shall
suffer a net
increase in any
federal, state or
local income tax
liability, the
Lessee shall
indemnify such
Persons (without
duplication of any
indemnification
required by
subsection (a)) on
an After Tax Basis
for the amount of
such increase. The
calculation of any
such net increase
shall take into
account any
current or future
tax savings
realized or
reasonably
expected to be
realized by such
person in respect
thereof, as well
as any interest,
penalties and
additions to tax
payable by the
Lessor, or any
Participant or
such Affiliate, in
respect thereof.
(e) Withholding
Taxes. As between
the Lessee on one
hand, and the
Lessor or the
Agent and any
Participant on the
other hand, the
Lessee shall be
responsible for,
and, subject to
the provisions of
Sections 13.5(g)
and (h), the
Lessee shall
indemnify and hold
harmless the
Lessor, the Agent
and the
Participants
(without
duplication of any
indemnification
required by
subsection (a)) on
an After Tax Basis
against, any
obligation for
United States or
foreign
withholding taxes
imposed in respect
of payments with
respect to the
Participation
Interests or with
respect to Rent
payments under the
Lease or payments
of the Asset
Termination Value
or Purchase Option
Price (and, if the
Lessor, the Agent
or any Participant
receives a demand
for such payment
from any taxing
authority, the
Lessee shall
discharge such
demand on behalf
of the Lessor, the
Agent or such
Participant).
Notwithstanding
the foregoing
provisions of this
Section 13.5(e) or
any other
provision of any
Operative Document
to the contrary,
the Lessee shall
not be responsible
for and shall not
be required to
indemnify or
otherwise hold
harmless any
Person from or
against any
withholding tax
48
<PAGE>
imposed as a collection device for, or in substitution or lieu of, an income,
franchise or similar tax to the extent such income, franchise or similar tax
would not otherwise be subject to indemnification pursuant to this Section 13.5
(a "Qualified Withholding Tax"). As used herein, Qualified Withholding Taxes
include, without limitation, any withholding taxes arising under Section 871,
881, 1441 or 1442 of the Code and any similar taxes arising under state, local
or foreign law as well as any withholding tax imposed as a collection device
for, or in substitution or lieu of the Imposition that qualifies as an "income
tax" within the meaning of United States Treasury Regulation Section 1.901 -2.
(f) Contests of Impositions. (i) If a written claim is made against any
Indemnitee or if any proceeding shall be commenced against such Indemnitee
(including a written notice of such proceeding), for any Impositions, such
Indemnitee shall promptly notify the Lessee in writing and shall not take action
with respect to such claim or proceeding without the consent of the Lessee for
thirty (30) days after the receipt of such notice by the Lessee; provided,
however, that, in the case of any such claim or proceeding, if action shall be
required by law or regulation to be taken prior to the end of such 30-day
period, such Indemnitee shall, in such notice to the Lessee, inform the Lessee
of such shorter period, and no action shall be taken with respect to such claim
or proceeding without the consent of the Lessee before 2 days before the end of
such shorter period; provided, further, that the failure of such Indemnitee to
give the notices referred to this sentence shall not diminish the Lessee's
obligation hereunder except to the extent such failure precludes the Lessee from
contesting all or part of such claim.
(ii) If, within thirty (30) days of receipt of such notice from the Indemnitee
(or such shorter period as the Indemnitee has notified the Lessee is required by
law or regulation for the Indemnitee to commence such contest), the Lessee shall
request in writing that such Indemnitee contest such Imposition, the Indemnitee
shall, at the expense of the Lessee, in good faith conduct and control such
contest (including, without limitation, by pursuit of appeals) relating to the
validity, applicability or amount of such Impositions (provided, however, that
(A) if such contest involves a tax other than a tax on net income and can be
pursued independently from any other proceeding involving a tax liability of
such Indemnitee, the Indemnitee, at the Lessee's request, shall allow the Lessee
to conduct and control such contest and (B) in the case of any contest, the
Indemnitee may request the Lessee to conduct and control such contest) by, in
the sole discretion of the Person conducting and controlling such contest, (1)
resisting payment thereof, (2) not paying the same except under protest, if
protest is necessary and proper, (3) if the payment be made, using reasonable
efforts to obtain a refund thereof in appropriate administrative and judicial
proceedings, or (4) taking such other action as is reasonably requested by the
Lessee from time to time.
(iii) The party controlling any contest shall consult in good faith with the
non-controlling party and shall keep the non-controlling party reasonably
informed as to the conduct of such contest; provided, that all decisions
ultimately shall be made in the sole discretion of the controlling party except
that no decision shall be made to concede an indemnified issue without the prior
consent of Lessee (which consent shall not be unreasonably withheld). The
parties agree that an Indemnitee may at any time decline to take further action
with respect to the contest of any Imposition and may settle such contest if
such Indemnitee shall waive its fights to any indemnity from the Lessee that
otherwise would be payable in respect of such claim (and any future claim by
49
<PAGE>
any taxing authority, the contest of
which is precluded by reason of such
resolution of such claim) and shall
pay to the Lessee any amount
previously paid or advanced by the
Lessee pursuant to this Section 13.5
by way of indemnification or advance
for the payment of an Imposition other
than expenses of such contest.
(iv) Notwithstanding the
foregoing provisions of
this Section 13.5, an
Indemnitee shall not be
required to take any
action and the Lessee
shall not be permitted
to contest any
Impositions in its own
name or that of the
Indemnitee unless (A)
the Lessee shall have
agreed such Imposition
is subject to indemnity
hereunder and shall pay
to such Indemnitee on
demand and on an After
Tax Basis all
reasonable costs,
losses and expenses
that such Indemnitee
actually incurs in
connection with
contesting such
Impositions, including,
without limitation, all
reasonable legal,
accounting and
investigatory fees and
disbursements, (B) in
the case of a claim
that must be pursued in
the name of an
Indemnitee (or an
Affiliate thereof), the
amount of the potential
indemnity (taking into
account all similar or
logically related
claims that have been
or could be raised in
any audit involving
such Indemnitee for
which the Lessee may be
liable to pay an
indemnity under this
Section 13.5) exceeds
$10,000, (C) the
Indemnitee shall have
reasonably determined
that the action to be
taken will not result
in any material danger
of sale, forfeiture or
loss of the Property,
or any part thereof or
interest therein, will
not interfere with the
payment of Rent, and
will not result in risk
of criminal liability,
(D) if such contest
shall involve the
payment of the
Imposition prior to the
contest, the Lessee
shall provide to the
Indemnitee an
interest-free advance
in an amount equal to
the Imposition that the
Indemnitee is required
to pay (with no
additional net
after-tax cost to such
Indemnitee), (E) in the
case of a claim that
must be pursued in the
name of an Indemnitee
(or an Affiliate
thereof), the Lessee
shall have provided to
such Indemnitee an
opinion of independent
tax counsel selected by
the Indemnitee and
reasonably satisfactory
to the Lessee stating
that a reasonable basis
exists to contest such
claim (or, in the case
of an appeal of an
adverse judicial
determination, an
opinion of such counsel
to the effect that
there is substantial
authority for the
position asserted in
such appeal) and (F) no
Event of Default
hereunder shall have
occurred and be
continuing. In no event
shall an Indemnitee be
required to appeal an
adverse judicial
determination to the
United States Supreme
Court. In addition, an
Indemnitee shall not be
required to contest any
claim in its name (or
that of an Affiliate)
if the subject matter
thereof shall be of a
continuing nature and
shall have previously
been decided adversely
by a court of competent
jurisdiction pursuant
to a contest completed
in accordance with the
provisions of this
Section 13.5, unless
there shall have been a
change in law (or
interpretation thereof)
and the Indemnitee
shall have received, at
the Lessee's expense,
an opinion of
independent tax counsel
selected by the
Indemnitee and
reasonably acceptable
to the Lessee stating
that as a result of
such change in law (or
interpretation
thereof), it is more
likely than not that
the Indemnitee will
prevail in such contest.
(g) Documentation of
Withholding Status. Each
Participant (or any
successor thereto or
transferee thereof) that is
organized under the laws of
a jurisdiction outside of
the United States of America
and each Lessor that is
organized under the laws of
a jurisdiction outside of
the United States of America
shall:
(i) on or before the
date it becomes a party
to any Operative
Document, deliver to
the Lessee any
certificates,
documents, or other
evidence that shall be
required by the Code or
Treasury Regulations
issued pursuant thereto
to establish its
50
<PAGE>
exemption from United States Federal withholding requirements, including (A) two
valid, duly completed, original copies of Internal Revenue Service Form 1001 or
Form 4224 or successor applicable form, properly and duly executed, certifying
in each case that such party is entitled to receive payments pursuant to the
Operative Documents without deduction or withholding of United States Federal
income taxes, or (B) a valid, duly completed, original copy of Internal Revenue
Service Form W-8 or Form W-9 or applicable successor form, properly and duly
executed, certifying that such party is entitled to an exemption from United
States of America backup withholding tax; and
(ii) so long as it shall be legally entitled to do so, on or before the date
that any such form described above expires or becomes obsolete, or after the
occurrence of any event requiring a change in the most recent such form
previously delivered to the Lessee, deliver to the Lessee two further valid,
duly completed, original copies of any such form or certification, properly and
duly executed.
(h) Limitation on Tax Indemnification. The Lessee shall not be required to
indemnify any Indemnitee, or to pay any increased amounts to any Indemnitee or
tax authority with respect to any Impositions pursuant to this Section 13.5 to
the extent that (i) such Imposition is attributable to such Indemnitee's failure
to comply with the provisions of Section 13.5(g); or (ii) to the extent such
Imposition constitutes or is collected by means of a Qualified Withholding Tax.
(i) Tax Savings. In the event an Indemnitee receives a retired (or similar tax
savings) in respect of any Imposition paid or reimbursed by the Lessee which was
not considered in calculating the After Tax Basis with respect to such payment
or reimbursement by Lessee, such Indemnitee shall within thirty (30) days
thereafter remit the amount of such refund (or tax savings) to the Lessee,
provided that the amount so remitted shall not exceed the lesser of: (i) the
amount received by such Indemnitee as a refund (or tax savings) net of all
reasonable costs and expenses incurred by such Indemnitee in connection with
obtaining and paying such amount; and (ii) (a) the amount of all prior payments
by the Lessee to such Indemnitee with respect to Impositions, plus any refunded
interest, less (b) the amount of all prior payments by the Indemnitee to the
Lessee under this Section 13.5(i).
SECTION 13.6. Funding Losses. If any payment of any Advance representing Tranche
B Participation Interests or any portion of any Tranche B Participation Interest
is made on any day other than the last day of an Interest Period applicable
thereto, or if the Lessee fails to utilize the proceeds of any purchase of
Participation Interests after notice has been given to any Participant in
accordance with Section 3 or 4, the Lessee shall reimburse each Participant
within fifteen (15) days after demand for any resulting loss or expense incurred
by it, including (without limitation) any loss incurred in obtaining,
liquidating or employing deposits from third parties, provided that such
Participant shall have delivered to the Lessee a certificate as to the amount of
such loss or expense, which certificate shall be conclusive in the absence of
manifest error, and provided further that such loss shall in no event exceed the
interest on the Advances which would have been payable for the balance of such
Interest Period or other period, less the amount actually earned by such
Participant
51
<PAGE>
on such Advances. Such Participant will, at the request of the Lessee, furnish
such additional information concerning the determination of such loss as the
Lessee may reasonably request.
SECTION 13.7. Regulation D Compensation. For so long as any Participant is
required to increase its existing reserve percentage against "Eurocurrency
Liabilities" (or any other category of liabilities which include deposits by
reference to which the interest rate on its Participation Interest in any
Advance is determined or any category of extensions of credit or other assets
which includes loans by a non-United States office of such Participant to United
States residents), and, as a result, the cost to such Participant (or its
Funding Office) of purchasing or maintaining its Participation Interest in any
Advance is increased, then such Participant may require the Lessee to pay,
contemporaneously with each payment of interest on the Advances an additional
amount on the Participation Interest of such Participant in the Advances at a
rate per annum up to but not exceeding the excess of (i) (A) the applicable
Eurodollar Rate divided by (B) one minus the Eurocurrency Reserve Requirements
and (ii) the applicable Eurodollar Rate. Any Participant wishing to require
payment of such additional amount (x) shall so notify the Lessee and the Agent,
in which case such additional interest on its Participation Interest in any
Advance shall be payable to such Participant at the place indicated in such
notice with respect to each Interest Period commencing at least three (3)
Business Days after the giving of such notice and (y) shall furnish to the
Lessee at least five (5) Business Days prior to each date on which interest is
payable on the Advance an officer's certificate setting forth the amount to
which such Participant is then entitled under this Section (which shall be
consistent with such Participant's good faith estimate of the level at which the
related reserves are maintained by it). Each such certificate shall be
accompanied by such information as the Lessee may reasonably request as to the
computation set forth therein.
SECTION 13.8. Basis for Determining Interest Rate Inadequate or Unfair. If on or
prior to the first day of any Interest Period:
(a) deposits in dollars (in the applicable amounts) are not being offered to the
Agent in the relevant market for such Interest Period or any Participants shall
advise the Agent that the Eurodollar Rate as determined by the Agent will not
adequately and fairy reflect the cost to such Participant of funding its Tranche
B Participation Interest in any Advance for such Interest Period; or
(b) any Participant determines that, by reason of the adoption, on or after the
date of this Participation Agreement, of any applicable law, rule or regulation,
or any change therein, or any change in the interpretation or administration
thereof by any Governmental Authority, central bank or comparable agency charged
with the interpretation or administration thereof, or compliance by any
Participant (or its Funding Office) with any request or directive (whether or
not having the force of law) of any such authority, central bank or governmental
agency, it is restricted, directly or indirectly, in the amount it may hold of
(i) a category of liabilities that includes deposits by reference to which, or
on the basis of which, the interest rates applicable to Advances to fund its
Tranche B Participation Interest Commitment based on the Eurodollar Rate are
directly or indirectly determined, or (ii) the category of assets which includes
Advances to fund its Tranche B Participation Interest Commitment based on the
Eurodollar Rate;
52
<PAGE>
the Agent shall forthwith give notice thereof to the Lessee and the
Participants, whereupon until the Agent notifies the Lessee that the
circumstances giving rise to such suspension no longer exist, each outstanding
Advance shall begin to bear interest on the last day of the then current
Interest Period applicable thereto at a rate per annum equal to the sum of(i)
the Participants' average cost of funds employed to fund their Tranche B
Participation Interests, as notified to the Agent and the Lessee, plus (ii) the
Applicable Margin for Eurodollar Rate-based Advances at such time.
SECTION 13.9. Illegality. If, on or after the date of this Participation
Agreement, the adoption of any applicable law, rule or regulation, or any change
therein, or any change in the 'interpretation or administration thereof by any
Governmental Authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by any Participant (or
its Funding Office) with any request or directive (whether or not having the
force of law) of any such authority, central bank or comparable agency, shall
make it unlawful or impossible for any Participant (or its Funding Office) to
purchase, maintain or fund its Participation Interest in any Advance and such
Participant shall so notify the Agent, the Agent shall forthwith give notice
thereof to the other Participants and the Lessee, whereupon until such
Participant notifies the Lessee and the Agent that the circumstances giving rise
to such suspension no longer exist, the obligation of such Participant to
purchase its Participation Interest in any Advance shall be suspended. Before
giving any notice to the Agent pursuant to this Section, such Participant shall,
if practicable, with the consent of the Lessee (which consent shall not
unreasonably be withheld), designate a different Funding Office if such
designation will avoid the need for giving such notice and will not, in the
judgment of such Participant, be otherwise disadvantageous to such Participant.
If such notice is given (i) the Lessee shall be entitled upon its request to a
reasonable explanation of the factors underlying such notice and (ii) each
outstanding Participation Interest in any Advance of such Participant then
outstanding shall begin to bear interest at the Alternate Base Rate plus the
Applicable Margin for Eurodollar Rate-based Advances either (a) on the last day
of the then current Interest Period applicable to such Advance if such
Participant may lawfully continue to maintain and fund such Participation
Interest to such day or (b) immediately if such Participant shall determine that
it may not lawfully continue to maintain and fund such Participation Interest to
such day. If such notice is given the Lessee may exercise its Purchase Option
under Section 20.1 of the Lease upon not less than ten (10) days' written notice
to the Lessor, the Agent and the Participants.
SECTION 13.10. Increased Cost and Reduced Return. (a) In the event that the
adoption of any applicable law, rule or regulation, or any change therein or in
the interpretation or application thereof by any Governmental Authority, central
bank or comparable agency charged with the interpretation or administration
thereof or compliance by any Participant with any request or directive after the
date hereof (whether or not having the force of law) of any such authority,
central bank or comparable agency:
(i) does or shall subject such Participant to any additional tax of any kind
whatsoever with respect to the Operative Documents or any purchase of a
Participation Interest in any Advance, or change the basis or the applicable
rate of taxation of payments to such Participant of its Participation Interest
or any other amount payable hereunder (except for the imposition of or change in
any tax on or measured by the overall net income of such Participant including,
without limitation, any tax that qualifies as an "income tax"
53
<PAGE>
within the meaning of United States Treasury Regulation Section 1.901-2 and
which is not an Imposition);
(ii) does or shall impose, modify or hold applicable any reserve, special
deposit, insurance assessment, compulsory loan or similar requirement against
assets held by, or deposits or other liabilities in or for the account of,
advances or loans by, or other credit extended by, or any other acquisition of
funds by, any office of such Participant which are not otherwise included in
determination of the rate of interest on Advances hereunder; or
(iii) does or shall impose on such Participant any other condition;
and the result of any of the foregoing is to increase the cost to such
Participant of purchasing or maintaining its Participation Interest in any
Advance or to reduce any amount receivable hereunder with respect thereto, then
in any such case, the Lessee shall promptly pay such Participant, upon its
demand, any additional amounts necessary to compensate such Participant for such
increased cost or reduced amount receivable which such Participant deems to be
material as determined by such Participant.
(b) If any Participant shall have determined that, after the date hereof, the
adoption of any applicable law, rule or regulation regarding capital adequacy,
or any change therein, or any change in the interpretation or administration
thereof by any Governmental Authority, central bank or comparable agency charged
with the interpretation or administration thereof, or any request or directive
regarding capital adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency has or would have the effect of
reducing the rate of return on capital of such Participant (or any entity
directly or indirectly controlling such Participant) as a consequence of such
Participant's obligations under the Operative Documents to a level below that
which such Participant (or any entity directly or indirectly controlling such
Participant) could have achieved but for such adoption, change, request or
directive (taking into consideration its policies with respect to capital
adequacy) by an amount deemed by such Participant to be material, then from time
to time, within 15 days after demand by such Participant (with a copy to the
Agent), the Lessee shall pay to such Participant' such additional amount or
amounts as will compensate such Participant (or its parent) for such reduction.
(c) Each Participant will promptly notify the Lessee and the Agent of any event
of which it has knowledge, occurring after the date hereof, which will entitle
such Participant to compensation pursuant to this Section and will, if
practicable, with the consent of the Lessee (which consent shall not
unreasonably be withheld), designate a different Funding Office or take any
other reasonable action if such designation or action will avoid the need for,
or reduce the amount of, such compensation and will not, in the judgment of such
Participant, be otherwise disadvantageous to such Participant. A certificate of
any Participant claiming compensation under this Section and setting forth in
reasonable detail its computation of the additional amount or amounts to be paid
to it hereunder shall be conclusive in the absence of manifest error. In
determining such amount, such Participant may use any reasonable averaging and
attribution methods. This Section shall survive
54
<PAGE>
the termination of this Participation Agreement and payment of the outstanding
Advances and Participation Interests.
SECTION 13.11. Substitution of Participant. If (i) the obligation of any
Participant to purchase or maintain its Participation Interest has been
suspended pursuant to this Section 13, or (ii) any Participant has demanded
compensation or given notice of its intention to demand compensation under
Section 13.10, the Lessee shall have the right, with the assistance of the
Agent, to seek one or more mutually satisfactory substitute banks or financial
institutions (which may be one or more of the Participants) to replace such
Participant under the Operative Documents.
SECTION 13.12. Indemnity Payments in Addition to Residual Value Guarantee
Amount. The Lessee acknowledges and agrees that its obligations to make
indemnity payments under this Section 13 are separate from, in addition to, and
do not reduce, its obligation to pay the Residual Value Guarantee Amount under
the Lease; provided, that except as otherwise set forth in Section 13.2 hereof,
the Shortfall Amount payable by the Lessee in connection with the Remarketing
Option under the Lease shall not be increased under this Section 13.
SECTION 14.
THE AGENT
SECTION 14.1. Appointment. Each Participant hereby irrevocably designates and
appoints the Agent as the agent of such Lender under this Agreement and the
other Operative Documents, and each Participant irrevocably authorizes the
Agent, in such capacity, to take such action on its behalf under the provisions
of this Agreement and the other Operative Documents and to exercise such powers
and perform such duties as are expressly delegated to the Agent by the terms of
this Agreement and the other Operative Documents, together with such other
powers as are reasonably incidental thereto. Notwithstanding any provision to
the contrary elsewhere in this Agreement, the Agent shall not have any duties or
responsibilities, except those expressly set forth herein, or any fiduciary
relationship with any Participant or any other party to the Operative Documents,
and no implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or any other Operative Document or
otherwise exist against the Agent.
SECTION 14.2. Delegation of Duties. The Agent may execute any of its duties
under this Agreement and the other Operative Documents by or through agents or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Agent shall not be responsible for the
negligence or misconduct of any agents or attorneys-in-fact selected by it with
reasonable care.
SECTION 14.3. Exculpatory Provisions. Neither the Agent nor any of its officers,
directors, employees, agents, attorneys-in-fact or Affiliates shall be (a)
liable for any action lawfully taken or omitted to be taken by it or such Person
under or in connection with this Agreement or any other Operative Document
(except for its or such Person's own gross negligence or willful
55
<PAGE>
misconduct) or (b)
responsible in any manner to
any of the Participants or
any other party to the
Operative Documents for any
recitals, statements,
representations or
warranties made by the
Lessor or the Lessee or any
officer thereof contained in
this Agreement or any other
Operative Document or in any
certificate, report,
statement or other document
referred to or provided for
in, or received by the Agent
under or in connection with,
this Agreement or any other
Operative Document or for
the value, validity,
effectiveness, genuineness,
enforceability or
sufficiency of this
Agreement or any other
Operative Document or for
any failure of the Lessor or
the Lessee to perform its
obligations hereunder or
thereunder. The Agent shall
not be under any obligation
to any Participant or any
other party to the Operative
Documents to ascertain or to
inquire as to the observance
or performance of any of the
agreements contained in, or
conditions of, this
Agreement or any other
Operative Document, or to
inspect the properties,
books or records of the
Lessor or the Lessee.
SECTION 14.4. Reliance
by Agent. The Agent
shall be entitled to
rely, and shall be
fully protected in
relying, upon any
writing, resolution,
notice, consent,
certificate, affidavit,
letter, telecopy, telex
or teletype message,
statement, order or
other document or
conversation believed
by it to be genuine and
correct and to have
been signed, sent or
made by the proper
Person or Persons and
upon advice and
statements of legal
counsel (including,
without limitation,
counsel to the Lessor
or the Lessee),
independent accountants
and other experts
selected by the Agent.
The Agent shall be
fully justified in
failing or refusing to
take any action under
this Agreement or any
other Operative
Document unless it
shall first receive
such advice or
concurrence of the
Required Participants
as it deems appropriate
or it shall first be
indemnified to its
satisfaction by the
Participants against
any and all liability
and expense which may
be incurred by it by
reason of taking or
continuing to take any
such action. The Agent
shall in all cases be
fully protected in
acting, or in
refraining from acting,
under this Agreement
and the other Operative
Documents in accordance
with a request of the
Required Participants,
and such request and
any action taken or
failure to act pursuant
thereto shall be
binding upon all the
Participants.
SECTION 14.5. Notice of
Default. The Agent
shall not be deemed to
have knowledge or
notice of the
occurrence of any
Default or Event of
Default unless the
Agent has received
notice from a
Participant, the Lessor
or the Lessee
describing such Default
or Event of Default and
stating that such
notice is a "notice of
default". In the event
that the Agent receives
such a notice, the
Agent shall give notice
thereof to the other
parties hereto. Subject
to the provisions of
Section 11 and Section
15.5 hereof, the Agent
shall take such action
with respect to such
Default or Event of
Default as shall be
reasonably directed by
the Required
Participants; provided
that unless and until
the Agent shall have
received such
directions, the Agent
may (but shall not be
obligated to) take such
action, or refrain from
taking such action,
with respect to such
Default or Event of
Default as it shall
deem advisable in the
best interests of the
Participants.
SECTION 14.6.
Non-Reliance on Agent
and Other Participants.
Each Participant
expressly acknowledges
that neither the Agent
nor any of its
officers, directors,
employees, agents,
attorneys-in-fact or
Affiliates has made any
representations or
warranties to it and
that no act by the
Agent hereinafter
taken, including any
review of the affairs
of the Lessor or the
Lessee, shall be deemed
to constitute any
representation or
warranty by the Agent
to any Participant.
Each Participant
represents to the Agent
that it has,
independently and
without reliance upon
the Agent or any other
Participant, and based
on such documents and
information as it has
deemed appropriate,
56
<PAGE>
made its own appraisal of and
investigation into the business,
operations, property, financial and
other condition and creditworthiness
of the Lessor, the Lessee and the
Property and made its own decision to
purchase its Participation Interest
hereunder and enter into this
Agreement. Each Participant also
represents that it will, independently
and without reliance upon the Agent,
the Lessor or any other Participant,
and based on such documents and
information as it shall deem
appropriate at the time, continue to
make its own credit analysis,
appraisals and decisions in taking or
not taking action under this Agreement
and the other Operative Documents, and
to make such investigation as it deems
necessary to inform itself as to the
business, operations, property,
financial and other condition and
creditworthiness of the Lessor and the
Lessee. Except for notices, reports
and other documents expressly required
to be furnished to the Participants by
the Agent hereunder, the Agent shall
not have any duty or responsibility to
provide any Participant with any
credit or other information concerning
the business, operations, property,
condition (financial or otherwise),
prospects or creditworthiness of the
Lessor or the Lessee which may come
into the possession of the Agent or
any of its officers, directors,
employees, agents, attorneys4n-fact or
Affiliates.
SECTION 14.7. Indemnification. The
Participants agree to indemnify
the Agent in its capacity as such
(to the extent not reimbursed by
the Lessee and without limiting
the obligation of the Lessee to
do so), ratably according to
their respective Commitment
Percentages in effect on the date
on which indemnification is
sought under this Section 14.7
(or, if indemnification is sought
after the date upon which the
Commitments shall have terminated
and the Participation Interests
shall have been paid in full,
ratably in accordance with their
Commitment Percentages
immediately prior to such date),
from and against any and all
liabilities, obligations, losses,
damages, penalties, actions,
judgments, suits, costs, expenses
or disbursements of any kind
whatsoever which may at any time
(including, without limitation,
at any time following the payment
of the Participation Interests)
be imposed on, incurred by or
asserted against the Agent in any
way relating to or arising out
of, the Commitments, this
Agreement, the Property, any of
the other Operative Documents or
any documents contemplated by or
referred to herein or therein or
the transactions contemplated
hereby or thereby or any action
taken or omitted by any of them
under or in connection with any
of the foregoing; provided that
no Participant shall be liable
for the payment of any portion of
such liabilities, obligations,
losses, damages, penalties,
actions, judgments, suits, costs,
expenses or disbursements
resulting solely from the gross
negligence or willful misconduct
of the Agent. The agreements in
this Section 14.7 shall survive
the payment of the Participation
Interests and all other amounts
payable hereunder.
SECTION 14.8. Agent in its
Individual Capacity. The Agent
and its Affiliates may make loans
to, accept deposits from and
generally engage in any kind of
business with the Lessor or the
Lessee as though the Agent were
not the Agent hereunder and under
the other Operative Documents.
With respect to its Participation
Interest purchased by it, the
Agent shall have the same fights
and powers under this Agreement
and the other Operative Documents
as any Participant and may
exercise the same as though it
were not the Agent, and the terms
"Participant" and "Participants"
shall include the Agent in its
individual capacity.
SECTION 14.9. Successor Agent. The
Agent may resign as Agent upon 20
days' notice to the Participants,
the Lessor or the Lessee. If the
Agent shall resign as Agent under
this Agreement and the other
Operative Documents, then the
Required Participants shall
appoint a
57
<PAGE>
successor agent for the Participants,
which successor agent shall be a
commercial bank organized under the
laws of the United States of America
or any State thereof or under the laws
of another country which is doing
business in the United States of
America and having a combined capital,
surplus and undivided profits of at
least $100,000,000 (and if no Default
or Event of Default exists, shall be
approved by the Lessee (which consent
shall not be unreasonably withheld)),
whereupon such successor agent shall
succeed to the rights, powers and
duties of the Agent, and the term
"Agent" shall mean such successor
agent effective upon such appointment
and approval, and the former Agent's
rights, powers and duties as Agent
shall be terminated, without any other
or further act or deed on the pan of
such former Agent or any of the
parties to this Agreement. If no
successor Agent has accepted
appointment as Agent by the date which
is 20 days following a resigning
Agent's notice of resignation, the
resigning Agent's resignation shall
nevertheless thereupon become
effective and the Participants shall
perform all of the duties of the Agent
hereunder until such time, if any, as
the Required Participants appoint a
successor Agent as provided above.
After any retiring Agent's resignation
as Agent, all of the provisions of
this Section 14 shall inure to its
benefit as to any actions taken or
omitted to be taken by it while it was
Agent under this Agreement and the
other Operative Documents.
SECTION 15. MISCELLANEOUS
SECTION 15.1. Survival of
Agreements. The representations,
warranties, covenants,
indemnifies and agreements of the
parties provided for in the
Operative Documents, and the
parties' obligations under any
and all thereof, shall survive
the execution and delivery of
this Participation Agreement, the
transfer of the Property to the
Lessor, the construction and
installation of any Equipment,
any disposition of any interest
of the Lessor in the Property,
payment of the Advances and the
Participation Interests and any
disposition thereof and shall be
and continue in effect
notwithstanding any investigation
made by any party and the fact
that any party may waive
compliance with any of the other
terms, provisions or conditions
of any of the Operative
Documents. Except as otherwise
expressly set forth herein or in
other Operative Documents, the
indemnities of the parties
provided for in the Operative
Documents shall survive the
expiration or termination of any
thereof.
SECTION 15.2. No Broker, etc. Each
of the parties hereto represents
to the others that it has not
retained or employed any broker,
finder or financial adviser to
act on its behalf in connection
with this Participation Agreement
or the transactions contemplated
herein, nor has it authorized any
broker, finder or financial
adviser retained or employed by
any other Person so to act. Any
party who is in breach of this
representation shall indemnify
and hold the other parties
harmless from and against any
liability arising out of such
breach of this representation.
SECTION 15.3. Notices. Unless
otherwise specifically provided
herein, all notices, consents,
directions, approvals,
instructions, requests and other
communications required or
permitted by the terms hereof to
be given to any Person shall be
given in writing and delivered
(i) personally, (ii) by a
nationally recognized overnight
courier service, (iii) by mail
(by registered or
58
<PAGE>
certified mail, return receipt
requested, postage prepaid) or (iv) by
facsimile, in each case directed to
the address of such Person as
indicated on Schedule II. Any such
notice shall be effective upon receipt
or refusal.
From time to time any party may
designate a new address for
purposes of notice hereunder by
written notice to each of the
other parties hereto in
accordance with this Section.
SECTION 15.4. Counterparts. This
Participation Agreement may be
executed by the parties hereto in
separate counterparts, each of
which when so executed and
delivered shall be an original,
but all such counterparts shall
together constitute but one and
the same instrument.
SECTION 15.5. Amendments. Subject
to the provisions of Section 11
hereof, no Operative Document nor
any of the terms thereof may be
terminated, amended,
supplemented, waived or modified
with respect to the Lessee, the
Lessor, the Agent or any
Participant, except (a) in the
case of a termination, amendment,
supplement, waiver or
modification to be binding on the
Lessee, the Lessor or the Agent,
with the written agreement or
consent of such party, and (b) in
the case of a termination,
amendment, supplement, waiver or
modification to be binding on the
Participants, with the written
agreement or consent of the
Required Participants; provided,
however, that
(x) no such termination,
amendment, supplement,
waiver or modification shall
without written agreement or
consent of each Participant:
(i) modify any of the
provisions of Section
11 of this Agreement or
this Section 15.5,
change the definition
of "Required
Participants" or modify
or waive any provision
of an Operative
Agreement requiring
action by the foregoing;
(ii) amend, modify,
waive or supplement any
of the provisions of
Sections 3.6, 3.7 or
3.10 - 3.20 of this
Agreement or the
representations of such
Participant in Section
8-8- or the covenants
in Sections 7 and 10 of
this Participation
Agreement;
(iii) reduce, modify,
amend or waive any fees
or indemnities in favor
of any Participant,
including without
limitation amounts
payable pursuant to
Section 13 (except that
any Person may consent
to any reduction,
modification, amendment
or waiver of any
indemnity payable to
it);
(iv) modify, postpone,
reduce or forgive, in
whole or in part, any
payment of Rent (other
than pursuant to the
terms of any Operative
Agreement), any payment
in respect of its
Participation Interest,
or any payment of the
Asset Termination
Value, Commitment Fee,
Residual Value
Guarantee Amount,
amounts due pursuant to
Section 22.2 of the
Lease, or interest or,
subject to clause (iii)
above, any other amount
payable under the Lease
or this Participation
Agreement, or modify
the definition or
method of calculation
of Rent (other than
pursuant to the terms
of any Operative
Agreement),
Participation Interest,
Asset Termination
Value, Commitment Fee,
Shortfall Amount,
Residual Value
Guarantee Amount,
Required Supplemental
Payments, Property
Cost, Participant
Balance, Tranche A
59
<PAGE>
Participation Interest
Balance, Tranche B
Participation Interest
Balance, or any other
definition which would
affect the amounts to
be advanced or which
are payable under the
Operative Documents; or
(v) consent to
any assignment
of the Lease,
releasing the
Lessee from its
obligations in
respect of the
payments of
Rent and the
Asset
Termination
Value or
changing the
absolute and
unconditional
character of
such
obligation; and
(y) no other
termination,
amendment,
supplement, waiver
or modification
shall, without the
written agreement
or consent of the
Lessor and the
Required
Participants, be
made to the Lease
or Section 6 of
this Participation
Agreement or the
definition of
"Event of Default".
SECTION 15.6. Headings,
etc. The Table of
Contents and headings
of the various Sections
of this Agreement are
for convenience of
reference only and
shall not modify,
define, expand or limit
any of the terms or
provisions hereof.
SECTION 15.7. Parties in
Interest. Except as
expressly provided
herein, none of the
provisions of this
Participation Agreement
are intended for the
benefit of any Person
except the parties
hereto. Subject to the
provisions of Section
25.1 of the Lease, the
Lessee shall not assign
or transfer any of its
rights or obligations
under the Operative
Documents without the
prior written consent
of the Lessor, the
Agent and the
Participants, except
that the Lessee may
without such consent
assign rights or
obligations of the
Lessee under the
Operative Documents to
an Affiliate of the
Lessee, provided that
the Lessee remains
primarily liable with
respect to such
obligations and
provides its full
unconditional and
irrevocable guaranty of
such Affiliate's
obligations under the
Operative Documents,
such guaranty to be in
form and substance
reasonably satisfactory
to the Required
Participants. If the
Lessor, the Agent and
the Participants
consent to any such
assignment or transfer
to a Person not an
Affiliate of the
Lessee, the Lessee
shall remain primarily
liable with respect to
such obligations and
provide its full and
unconditional guaranty
of such Person's
obligations under the
Operative Documents,
such guaranty to be in
form and substance
reasonably satisfactory
to the Required
Participants.
SECTION 15.8. GOVERNING
LAW. THIS PARTICIPATION
AGREEMENT SHALL IN ALL
RESPECTS BE GOVERNED BY
THE LAW OF THE STATE OF
ILLINOIS (EXCLUDING ANY
CONFLICT-OF-LAW OR
CHOICE-OF-LAW RULES
WHICH MIGHT LEAD TO THE
APPLICATION OF THE
INTERNAL LAWS OF ANY
OTHER JURISDICTION) AS
TO ALL MATTERS OF
CONSTRUCTION, VALIDITY
AND PERFORMANCE.
SECTION 15.9.
Severability. Any
provision of this
Participation Agreement
that is prohibited or
unenforceable in any
jurisdiction shall, as
to such jurisdiction,
be ineffective to the
extent of such
prohibition or
unenforceability
without invalidating
the remaining
provisions hereof, and
any such prohibition or
unenforceability in any
jurisdiction shall not
invalidate or render
unenforceable such
provision in any other
jurisdiction.
60
<PAGE>
SECTION 15.10. Liability Limited.
(a) The parties hereto agree that
the Lessor shall have no personal
liability whatsoever to the
Lessee, the Agent or any
Participant or their respective
successors and assigns for any
claim based on or in respect of
the Lease or any of the other
Operative Documents or arising in
any way from the transactions
contemplated hereby or thereby;
provided, however, that the
Lessor shall be liable in its
individual capacity (a) for its
own willful misconduct or gross
negligence (or negligence in the
handling of funds), (b) for
liabilities that may result from
its breach of the covenant to
remove Lessor Liens set forth in
Section 10.3, or (c) for any Tax
based on or measured by any fees,
commission or compensation
received by it for acting as the
Lessor as contemplated by the
Operative Documents. It is
understood and agreed that,
except as provided in the
preceding proviso: (i) the Lessor
shall have no personal liability
under any of the Operative
Documents; (ii) all obligations
of the Lessor to the Lessee, the
Agent and the Participants are
solely nonrecourse obligations
and shall be enforceable solely
against the interest of the
Lessor in the Property; and (iii)
all such personal liability of
the Lessor is expressly waived
and released as a condition of,
and as consideration for, the
execution and delivery of the
Operative Documents by the
Lessor. Notwithstanding anything
contained herein, the
restrictions stated in the
preceding provisions of this
Section 15.10(a) shall not apply
to liability of the Lessor
arising because of a breach of
the Lessor's obligation to remove
Lessor Liens or because of its
receiving Advances and failing to
disburse Advances to the Lessee
in accordance with the Operative
Documents, or failure to disburse
proceeds from the sale of the
Property in accordance with this
Lease.
(b) No Participant shall have
any obligation to any other
Participant or to the
Lessee, the Lessor or the
Agent with respect to
transactions contemplated by
the Operative Documents,
except those obligations of
such Participant expressly
set forth in the Operative
Documents or except as set
forth in the instruments
delivered in connection
therewith, and no
Participant shall be liable
for performance by any other
party hereto of such other
party's obligations under
the Operative Documents
except as otherwise so set
forth.
SECTION 15.11. Further Assurances.
The parties hereto shall promptly
cause to be taken, executed,
acknowledged or delivered, at the
sole expense of the Lessee, all
such further acts, conveyances,
documents and assurances as the
other parties may from time to
time reasonably request in order
to carry out and effectuate the
intent and purposes of this
Participation Agreement, the
other Operative Documents, and
the transactions contemplated
hereby and thereby (including,
without limitation, the
preparation, execution and filing
of any and all Uniform Commercial
Code financing statements and
other filings or registrations
which the parties hereto may from
time to time request to be filed
or effected). The Lessee, at its
own expense and without need of
any prior request from any other
party, shall take such action as
may be necessary (including any
action specified in the preceding
sentence), or (if the Lessor
shall so request) as so
requested, in order to maintain
and protect all security
interests provided for hereunder
or under any other Operative
Document.
SECTION 15.12. Submission to
Jurisdiction. The Lessee hereby
submits to the nonexclusive
jurisdiction of the United States
District Court for the Northern
District of Illinois and of any
Illinois state court sitting in
Cook County for purposes of all
legal proceedings arising out of
or relating to the Operative
Documents or the transactions
contemplated hereby. The Lessee
irrevocably waives, to the
fullest extent permitted by law,
any objection which it may now or
61
<PAGE>
hereafter have to the laying of the
venue of any such proceeding brought
in such a court and any claim that any
such proceeding brought in such a
court has been brought in an
inconvenient forum.
SECTION 15.13. Confidentiality.
The Lessor, the Agent and each
Participant represent that they
will maintain the confidentiality
of the transactions contemplated
by, and of any written or oral
information provided under, the
Operative Documents by or on
behalf of the Lessee (hereinafter
collectively called "Confidential
Information"), subject to the
Lessor's, the Agent's and each
Participant's (a) obligation to
disclose any such Confidential
Information pursuant to a request
or order under applicable laws
and regulations or pursuant to a
subpoena or other legal process,
(b) right to disclose any such
Confidential Information to its
bank examiners, Affiliates,
auditors, counsel and other
professional advisors and to
other Participants, (c) right to
disclose any such Confidential
Information in connection with
any litigation or dispute
involving the Participants and
the Lessee or any of its
Subsidiaries and Affiliates and
(d) right to provide such
information to Sub-Participants,
prospective Sub-Participants to
which sales of participating
interests are permitted pursuant
to this Participation Agreement
and prospective assignees to
which assignments of interests
are permitted pursuant to this
Participation Agreement, but only
if (i) such Sub-Participant,
prospective Sub-Participant or
prospective assignee agrees in
writing to maintain the
confidentiality of such
information on terms
substantially similar to those of
this Section as if it were a
"Participant" party hereto and
(ii) the Lessee receives copies
of such written agreement prior
to the release of such
information. Notwithstanding the
foregoing, any such information
supplied to a Participant,
Sub-Participant, prospective
Sub-Participant or prospective
assignee under this Participation
Agreement shall cease to be
Confidential Information if it is
or becomes known to such Person
by other than unauthorized
disclosure, or if it becomes a
matter of public knowledge.
SECTION 15.14. WAIVER OF JURY
TRIAL. EACH OF THE LESSEE, THE
AGENT, THE LESSOR, AND EACH
PARTICIPANT HEREBY IRREVOCABLY
WAIVES ANY AND ALL RIGHT TO TRIAL
BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATING TO THE
OPERATIVE DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 15.15. Usury Savings
Clause. Nothing contained in this
Participation Agreement or the
other Operative Documents shall
be deemed to require the payment
of interest or other charges by
the Lessee or any other Person in
excess of the amount which may be
may lawfully be charged under any
applicable usury laws. In the
event that the Lessor or any
other Person shall collect moneys
under the Participation Agreement
or any other Operative Document
which are deemed to constitute
interest (including, without
limitation, the Basic Rent or
Supplemental Rent) which would
increase the effect interest rate
to a rate in excess of that
permitted to be charged by
applicable law, all such sums
deemed to constitute interest in
excess of the legal rate shall,
upon such determination, at the
option of the Person to whom such
payment was made, be returned to
the Person making such payment or
credited against other amounts
owed by the person making such
payment.
[SIGNATURE PAGES FOLLOW]
62
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Participation
Agreement to be duly executed by their respective officers thereunto duly
authorized as of the day and year first above written.
VITESSE SEMICONDUCTOR CORPORATION, as Lessee
By:
-------------------------------------------
Eugene F. Hovanec,
Vice President, Finance
& Chief Financial Officer
By:
-------------------------------------------
David M. Shipley, Vice President
ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL
BRANCH, as Agent
By: /s/ ??
-------------------------------------------
Title: V.P & Director
----------------------------------------
By: /s/ ??
-------------------------------------------
Title: ?
----------------------------------------
ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL
BRANCH, as Participant
By: /s/ ??
-------------------------------------------
Title: V.P. & Director
----------------------------------------
By: /s/ ?
-------------------------------------------
Title: ?
----------------------------------------
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
Commitment
Participant Commitments Percentage
- - ---------------------------------------------------------------------------
<S> <C> <C>
ABN AMRO BANK N.V., Tranche A
SAN FRANCISCO Participation
INTERNATIONAL BRANCH Interest: $36,000,000 80.00000000%
Tranche B
Participation
Interest: $ 9,000,000 20.00000000%
----------- -----------
TOTAL COMMITMENT: $45,000,000 $100.00000000%
=========== =============
</TABLE>
<PAGE>
SCHEDULE II
Notice Information and Funding Offices
Lessee: VITESSE SEMICONDUCTOR CORPORATION
741 Calle PIano
Camarillo, California 93012
Attention: Eugene F. Hovanec
Vice President, Finance and Chief
Financial Officer
Telephone: (805) 389-7136
Facsimile: (805) 388-7565
Lessor: LEASE PLAN NORTH AMERICA, INC.
135 S. LaSalle Street, Suite 711
Chicago, Illinois 60603
Attention: David M. Shipley, Vice President
Telephone: (312) 904-2183
Facsimile: (312) 904-6217
Agent: ABN AMRO BANK N.V., SAN FRANCISCO
INTERNATIONAL BRANCH
101 California Street, Suite 4550
San Francisco, CA 94111
Attention: Bruce W. Swords
Vice President, Director
Telephone: (415) 984-3721
Facsimile: (415) 362-3524
Operations Contact:
ABN AMRO BANK N.V., SAN FRANCISCO INTERNATIONAL BRANCH
101 California Street, Suite 4550
San Francisco, CA 94111
Attention: Ms. Gloria Chang Lee
Telephone: (415) 984-3720
Facsimile: (415) 362-3524
<PAGE>
Participant: ABN AMRO BANK N.V., SAN FRANCISCO
INTERNATIONAL BRANCH
101 Califomia Street, Suite 4550
San Francisco, CA 94111
Attention: Brace W. Swords
Vice President, Director
Telephone: (415) 984-3721
Facsimile: (415) 362-3524
Payment
Instructions: Bank: Federal Reserve Bank of New York
Acct: ABN AMRO New York
ABA#: 026009580
Further
Credit to: ABN AMRO San Francisco
Acct#: 6510010545-41
Re: Vitesse Semiconductor
<PAGE>
SCHEDULE III
Environmental Matters
Four metal drums were observed on the Property of CTL/Thompson, Inc. Consulting
Engineers("CTL") as disclosed in the Phase I Environmental Site Assessment
prepared by ETL dated June 17, 1996 and delivered to the Lessor and the Agent.
The Lessee has been told that such drums were removed and believees that they
were so removed by the seller of the Property. The Lessee does not know, and can
give no assurances as to, whether such drums were removed and disposed of in
compliance with Environmental Laws.
<PAGE>
Exhibit 11.1
VITESSE SEMICONDUCTOR CORPORATION
STATEMENT REGARDING COMPUTATION OF INCOME PER SHARE
(in thousands except share and per share data)
<TABLE>
<CAPTION>
Fiscal Years ended September 30,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net income $ 32,888 $ 12,645 $ 1,507
=========== =========== ===========
Shares
Weighted average common shares outstanding 34,195,298 26,075,516 22,793,247
Common stock options (as determined by
application of the treasury stock method) 3,950,177 4,141,112 3,167,263
----------- ----------- -----------
Adjusted weighted average common and common
equivalent shares outstanding 38,145,475 30,216,628 25,960,510
=========== =========== ===========
Net income per share of common stock $ 0.86 $ 0.42 $ 0.06
=========== =========== ===========
</TABLE>
<PAGE>
THE COMPANY
Vitesse Semiconductor Corporation is a leader in the design, development,
manufacturing and marketing of digital gallium arsenide (GaAs) integrated
circuits (ICs). The Company's products address the needs of high-performance
systems manufacturers who demand a combination of high speed, high complexity
and low power dissipation. Vitesse ICs are used in a wide variety of products,
primarily in the high-performance telecommunications, data communications, test
and instrumentation markets.
Vitesse has developed a proprietary high integration gallium arsenide (H-GaAs)
process technology to manufacture ICs that take advantage of the faster speeds
inherent in GaAs and offer performance advantages over ICs manufactured using
CMOS, BiCMOS and ECL IC process technologies.
The H-GaAs process is designed to permit the Company's products to be
manufactured using equipment and techniques commonly used in the manufacture of
silicon ICs. The Vitesse H-GaAs process also permits systems designers to use
industry standard CAD tools in designing high-performance ICs to be manufactured
by the Company.
<PAGE>
LETTER TO SHAREHOLDERS OF VITESSE SEMICONDUCTOR CORPORATION
December 1997
It is a pleasure to report to you that fiscal 1997 has been our most successful
year. Our strategy since 1994 has been to focus our efforts on developing the
intellectual property expertise and the advanced semiconductor process
technology needed to be the dominant supplier of high-performance integrated
circuits for the communications and test equipment markets.
Specific highlights for 1997 were:
. Revenues exceeded $100 million for the first time, reaching $104.8 million, a
59% increase over the $66 million achieved in 1996.
. Operating income grew to $28.7 million from $13.4 million in 1996, a 113%
increase.
. Earnings per share grew to $0.86 from $0.42 in 1996, a 105% increase.
. Bookings were strong throughout the year. Backlog grew to $62 million from
$36 million.
In 1997, revenues increased by 59% over the prior year, principally from very
strong growth in our focus markets of telecommunications, data communications
and test equipment. Combined revenues for these focus areas grew 80% from 1996.
As in 1996, revenues increased by more than 10% sequentially in each quarter.
While revenue growth in 1997 was strong, customer demand was even greater and we
were unable to meet all customer requests in a timely manner due to capacity
limitations.
As a result, we have accelerated the completion of our second fab in Colorado
Springs by almost six months from early fiscal 1999 to the middle of fiscal
1998. We began construction of this facility in November 1996. In July 1997, we
completed the clean room and by September had installed the equipment and
started on process development. In order to accelerate the process transfer and
qualification efforts, Jim Mikkelson, co-founder of the Company and Chief
Technical Officer, relocated to Colorado Springs with key members of the process
technology group.
<PAGE>
As a result of the strong revenue growth, both gross margins and operating
margins improved, resulting in a 113% increase in operating income and a 105%
increase in income per share. Due to continued cost controls, operating expense
grew at a rate lower than revenue, despite the addition of over 30 personnel
added to equip and qualify the Colorado Springs facility.
TELECOMMUNICATIONS
Over the past few years, Vitesse has become one of the dominant suppliers of
physical layer integrated circuits for high-performance optical fiber
communication systems. Vitesse telecommunication products are used in SONET/SDH
transmission systems. SONET/SDH is the international standard for high-speed
fiber-optic transmission that is being used in the communication infrastructure
by both long-distance carriers and local operating companies. In 1997, SONET/SDH
applications represented approximately 52% of the Company's revenue. Industry
sources estimate that the market for physical layer SONET/SDH circuits will
increase from approximately $125 million in 1996 to over $500 million in 2000.
This growth is being driven by the need to add a nearly fivefold increase in
system bandwidth to accommodate the explosion of digital data transmission
resulting from increased use of the Internet, fax/modems and dedicated data
lines. The need for system bandwidth is being addressed in three ways: increased
speed in each transmission channel, transmitting multiple channels on a single
fiber by a technique called wavelength division multiplexing (WDM) and by
installing additional fiber cables. Today, most systems utilize the 2.5 Gb/s
standard (OC48, STM16) and initial demonstrations are being made with the 10
Gb/s standard (OC192, STM 48). These data rates are beyond the capability of
conventional silicon CMOS technology and are a natural application where Vitesse
brings the performance and cost-effectiveness through our GaAs technology. The
widespread adoption of WDM has enabled system operators to dramatically increase
their system bandwidth without the need to bury additional fiber cables, a long
and costly process. While WDM increases the bandwidth carried by each optical
fiber by a factor of 8 to 32, it does not reduce the number of electronic
components required. Instead, WDM has accelerated the growth of
<PAGE>
SONET/SDH demand by eliminating fiber installation as a growth limiter. In 1997,
we continued to upgrade our OC48 (2.5 Gb/s) and OC192 (10 Gb/s) physical layer
product offering and began sampling our initial laser driver and modulator
driver circuits.
DATA COMMUNICATIONS
In 1997, we increased our datacom revenue to $22 million from $5 million in
1996, a 340% increase. This dramatic increase in revenue from a relative small
base was a result of the ramp in production in 1.06 Gb/s Fibre Channel products,
which are used in a wide variety of high speed applications, including serial
SCSI disk drives and disk arrays, backplanes in switches and routers and point-
to-point data links. In addition to Fibre Channel, 1997 began the initial ramp
of ATM (Asynchronous Transfer Mode), 1000T Ethernet (Gigabit Ethernet) and a
number of datacom-oriented optoelectronic products.
We believe that ATM and Gigabit Ethernet will become leading high-performance
private and Internet-related protocols over the next four years. To support
these markets, we introduced 15 new products in 1997.
Among the new products introduced were: 20 bit transceivers for Gigabit Ethernet
(VSC7136) and Fibre Channel (VSC7126), a quad gigabit per second backplane
interface device (VSC7214), 2.5 Gb/s laser drivers (VSC7924 and VSC7925) and
transimpedance amplifiers for 155 Mb/s and 622 Mb/s systems (VSC7903 and
VSC7912).
TEST EQUIPMENT
Our automatic test equipment (ATE) business grew rapidly in 1997 as we continued
to displace bipolar silicon technology with our H-GaAs technology that offers
higher speed, lower power, higher levels of integration and the ability to
combine high speed logic, high speed SRAM and very precise analog functions. In
1997, ATE revenues grew to $23 million from $16 million in 1996, accounting for
22% of total revenues. Demand accelerated sharply in the second half of 1997 as
a number of new systems were introduced in the United States and Japan. We
expect this trend to continue as prototypes shipped in 1997 begin production in
1998.
<PAGE>
MANUFACTURING
Our single most important competitive advantage in the markets we serve is our
ability to manufacture very complex, very high speed integrated circuits using
GaAs as the semiconducting material. The Vitesse GaAs technology, called H-GaAs
for highly integrated GaAs, is based on conventional CMOS equipment and
techniques compared to the more common RF GaAs technology used in extremely low
complexity circuits for applications such as cellular phones. Over the past ten
years, our technology has matured and by exploiting the advances made in CMOS
equipment and technology, has enabled Vitesse to achieve a substantial cost and
performance advantage over any of the older and obsolete (at least for VLSI
digital and mixed signal applications) silicon bipolar technologies, which
suffer from greater manufacturing complexity, larger die size and higher power.
In 1997, our manufacturing groups increased wafer production by almost 50% and
significantly increased device yield. Our test group supported an approximate
100% increase in units. By the end of 1997, Vitesse had established itself as a
leader in GaAs IC manufacturing.
To meet the current demand, we have accelerated the start of production of the
Colorado Springs facility by six months from early fiscal 1999 to mid fiscal
1998. This Class 1 fab will further improve our competitive position because it
will significantly improve our die cost through the use of six-inch wafers
compared to four-inch wafers used in our Camarillo facility. Six-inch wafers
will more than double the number of available die per wafer. Moreover, the
equipment used in Colorado Springs is state-of-the-art silicon equipment, which
will be capable of supporting 0.25 micron or better design rules. This will
allow future products and selected current products to have a significantly
smaller die size and thus more available die per wafer.
<PAGE>
BALANCE SHEET IMPROVEMENT
In 1997, we continued to improve our balance sheet through aggressive management
of inventory and accounts receivable. In addition, we generated more than $55
million in cash from operations. During 1997, we also raised $118 million in a
secondary offering. We ended 1997 with $155 million in cash and investments, the
bulk of our Colorado Springs capital equipment in place, strong cash flow from
operations and essentially no debt. We believe we have taken the necessary steps
to be in a strong financial position.
SUMMARY
In 1997, we extended and improved on our growth in 1996, continuing
the strategy set forth in the 1994 Annual Report. While it is impossible
to predict every opportunity that might arise, we believe we have selected
outstanding growth opportunities that are well matched to our technology and
expertise.
Moreover, our employees have continued to focus on making Vitesse a leading
supplier of high-performance circuits for communications and instrumentation. We
greatly appreciate your support and remain fully committed to make Vitesse an
outstanding company and an outstanding investment.
/s/ Louis R. Tomasetta
Louis R. Tomasetta
President
Chief Executive Officer
<PAGE>
<TABLE>
<CAPTION>
FIVE-YEAR SELECTED FINANCIAL DATA
Year ended September 30,
1997 1996 1995 1994 1993
..................................................................................................
(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Operating Results
Total revenues $104,850 $ 66,046 $42,882 $35,581 $ 26,364
Income (loss) from operations 28,662 13,432 2,788 (3,233) (18,238)
Net income (loss) 32,888 12,645 1,507 (4,141) (19,069)
Net income (loss) per share 0.86 0.42 0.06 (0.19) (0.88)
Balance Sheet
Cash and short-term investments 155,844 52,436 6,315 5,171 10,256
Working capital 177,615 70,215 17,889 14,644 16,562
Total assets 292,280 100,416 42,111 39,496 43,975
Long-term debt, less current portion 147 406 5,518 6,029 8,953
Net shareholders' equity 265,102 88,370 25,000 21,517 24,598
</TABLE>
<PAGE>
QUARTERLY RESULTS AND STOCK MARKET DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
(in thousands except stock price and per share amounts)
<S> <C> <C> <C> <C> <C>
Fiscal Year 1997
Total revenues $21,832 $24,562 $27,607 $30,849 $104,850
Net income 6,003 7,782 8,955 10,148 32,888
Net income per share (A) 0.17 0.20 0.23 0.26 0.86
Common stock price range (B):
High 33.17 36.58 37.00 53.88 53.88
Low 20.83 22.50 27.50 32.13 20.83
Fiscal Year 1996
Total revenues $14,022 $15,628 $17,274 $19,122 $ 66,046
Net income 1,778 2,562 3,788 4,517 12,645
Net income per share (A) 0.07 0.09 0.12 0.14 0.42
Common stock price range (B):
High 9.25 15.83 22.58 28.75 28.75
Low 7.08 6.92 12.00 14.00 6.92
Fiscal Year 1995
Total revenues $ 9,762 $10,024 $11,033 $12,063 $ 42,882
Net income (loss) 562 (1,048) 762 1,231 1,507
Net income (loss) per share (A) 0.02 (0.05) 0.03 0.05 0.06
Common stock price range (B):
High 3.75 3.92 5.42 9.50 9.50
Low 2.83 2.92 3.04 5.13 2.83
</TABLE>
(A) Net income (loss) per share computations for each quarter are independent
and may not add to the net income (loss) per share computation for the year.
(B) The Company's common stock is traded on the Nasdaq National Market System
under the symbol VTSS. At September 30, 1997, there were approximately 565
shareholders of record. Common stock prices are closing prices as reported
on the Nasdaq National Market System. All share and per share data for all
periods presented have been adjusted to reflect a 3 for 2 stock split of the
common stock that was effected on February 28, 1997. The Company has never
paid cash dividends and has no present plans to do so. The Company's bank
line of credit agreement and synthetic lease agreements prohibit the payment
of dividends without the banks' consent. See Notes 4 and 5 of Notes to
Financial Statements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the Financial Statements and
Notes thereto included elsewhere in this Annual Report. The information set
forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" below includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act
that involve risks and uncertainties. Factors that realistically could cause
results to differ materially from those projected in the forward-looking
statements are set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Overview and Factors Affecting Future
Operating Results."
OVERVIEW
The Company is a leader in the design, development, manufacturing and marketing
of digital GaAs ICs. The Company's target customers are systems manufacturers in
the telecommunications, data communications and automatic test equipment (ATE)
markets. As a result of the deployment of new transmission standards such as
SONET/SDH and ATM as well as other advances, there has been growing demand for
high-performance ICs to meet the increasingly rigorous standards of the
telecommunications and data communications industries. The requirements for
high-performance ICs in the ATE industry have also become more stringent in
order to meet testing requirements of increasingly faster and more complex ICs.
In fiscal 1997, sales of telecommunications, data communications and ATE
products represented 52%, 22% and 22%, respectively, of the Company's total
revenues.
The Company has two principal components of revenues: production revenues and
development revenues. Production revenues are generally recognized upon shipment
of the product, and costs associated with production are included in cost of
revenues. Development revenues are generally recognized upon attainment of
milestones established under customer contracts, such as the release or shipment
of the Company's cell library or design tools, the release by the customer of a
design net list or design tape and the Company's shipment of prototype ICs. The
majority of costs associated with development revenues, including prototype
fabrication costs, are included in cost of revenues, and the remaining portion
is expensed as engineering, research and development expenses. The Company
believes such revenues will continue to decline as a percentage of total
revenues in the foreseeable future.
Inventory is valued at the lower of cost or market. Because allocable
manufacturing costs can be high, new product inventory is sometimes valued at
market. In addition, most work-in-process inventory consists of wafers in
various stages of fabrication. Consequently, the Company estimates yields per
wafer in order to estimate the value of inventory. If yields are materially
different from projected, work-in-process inventory may need to be revalued. In
addition, the ability of customers to change designs and to cancel or reschedule
orders can also result in adverse adjustments to inventory. There can be no
assurance that such adjustments will not occur in the future and have a material
adverse effect on the Company's results of operations.
<PAGE>
The Company has focused its sales efforts on a relatively small number of
systems manufacturers who require high-performance ICs. Sales to the Company's
ten largest customers represented approximately 77%, 75% and 70% of total
revenues in fiscal 1997, 1996 and 1995, respectively.
As of September 30, 1997, the Company had $60,466,000 and $15,734,000 of federal
and state net operating loss carryforwards, respectively, which will be
recoverable only if future taxable income is sufficient to utilize such tax loss
carryforwards. Based on historical results of operations, estimated future
taxable income and other factors, management believes that it is more likely
than not that a portion of the tax benefits associated with such loss
carryforwards will not be realized. The Company has partially reserved deferred
tax assets associated with its available loss carryforward benefits for
financial reporting purposes, which will be recoverable only if future taxable
income is sufficient to utilize such tax loss carryforwards. In 1996 and 1997,
recognition of a portion of the Company's net operating loss carryforward
benefits resulted in relatively low effective income tax rates for the Company.
This reduction of the available future benefit related to these net operating
loss carryforwards will result in the Company experiencing higher effective
income tax rates in fiscal 1998 and thereafter. See Note 8 of Notes to Financial
Statements.
RESULTS OF OPERATIONS
The following table sets forth statements of operations data of the Company
expressed as a percentage of total revenues for the fiscal years indicated:
<TABLE>
<CAPTION>
Year Ended September 30,
1997 1996 1995
............................................................................
<S> <C> <C> <C>
Revenues, net:
Production 94.6% 90.1% 80.9%
Development 5.4 9.9 19.1
.................................
Total revenues 100.0 100.0 100.0
.................................
Costs and expenses:
Cost of revenues 43.4 48.1 52.5
Engineering, research and development 16.0 16.7 20.3
Selling, general and administrative 13.2 14.9 20.7
................................
Total costs and expenses 72.7 79.7 93.5
................................
Income from operations 27.3 20.3 6.5
Other income (expense):
Interest income 7.7 2.1 0.2
Interest expense (0.1) (1.2) (3.0)
Other (0.1) - -
................................
Total other income (expense) 7.5 0.9 (2.8)
................................
Income before income taxes 34.8 21.3 3.7
Income taxes 3.5 2.1 0.2
................................
Net income 31.4% 19.1% 3.5%
================================
</TABLE>
<PAGE>
YEAR ENDED SEPTEMBER 30, 1997, AS COMPARED TO
YEAR ENDED SEPTEMBER 30, 1996
Revenues. Total revenues in fiscal 1997 were $104,850,000, a 59% increase over
the $66,046,000 recorded in fiscal 1996. The increase in total revenues was due
to a 67% increase in production revenues as a result of the growth of shipments
to customers in the data communications, telecommunications and ATE markets.
Development revenues in fiscal 1997 were $5,671,000 compared to $6,555,000 in
fiscal 1996.
Cost of Revenues. Cost of revenues as a percentage of total revenues in fiscal
1997 was 43.4% compared to 48.1% in fiscal 1996. The decrease in cost of
revenues as a percentage of total revenues resulted from a reduction in per unit
costs associated with increased production as well as increased manufacturing
yields.
Engineering, Research and Development. Engineering, research and development
expenses were $16,804,000 in fiscal 1997 compared to $11,045,000 in fiscal 1996.
The increase was principally due to increased headcount and higher costs to
support the Company's continuing efforts to develop new products. The Company's
engineering, research and development costs are expensed as incurred. The
Company intends to continue to increase the dollar amount of engineering,
research and development expenses in the future. As a percentage of total
revenues, engineering, research and development expenses declined to 16.0% in
fiscal 1997 from 16.7% in fiscal 1996 due primarily to the Company's revenues
growing faster than these expenses.
Selling, General and Administrative. Selling, general and administrative
expenses were $13,884,000 in fiscal 1997 compared to $9,777,000 in fiscal 1996.
This increase was principally due to increased headcount, salary increases,
higher commissions resulting from increased sales and increased advertising
costs. As a percentage of total revenues, selling, general and administrative
expenses declined to 13.2% in fiscal 1997 from 14.9% in fiscal 1996 primarily as
a result of the Company's revenues growing faster than these expenses.
Interest Income. Interest income increased to $8,119,000 in fiscal 1997 from
$1,364,000 in fiscal 1996 due to a higher average cash balance in fiscal 1997 as
compared to fiscal 1996 resulting primarily from the Company's equity offerings
in March 1996 and November 1996.
Interest Expense. Interest expense decreased to $157,000 in fiscal 1997 from
$772,000 in fiscal 1996, primarily due to a decrease in the Company's average
debt balance.
Income Taxes. The Company recorded a provision for income taxes in the amount of
$3,652,000 in fiscal 1997 and $1,405,000 in fiscal 1996.
Net Operating Loss Carryforwards. As of September 30, 1997, the Company had
federal net operating loss carryforwards of approximately $60,466,000, state net
operating loss carryforwards of approximately $15,734,000 and federal and state
research and development tax credits of approximately $3,028,000 and $1,448,000,
respectively. The Company accounts for income taxes pursuant to the provisions
of Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109).
<PAGE>
YEAR ENDED SEPTEMBER 30, 1996, AS COMPARED TO
YEAR ENDED SEPTEMBER 30, 1995
Revenues. Total revenues in fiscal 1996 were $66,046,000, a 54% increase over
the $42,882,000 recorded in fiscal 1995. The increase in total revenues was due
to a 71% increase in production revenues as a result of the growth of shipments
to customers in the telecommunications and ATE markets. Development revenues in
fiscal 1996 were $6,555,000 compared to $8,179,000 in fiscal 1995.
Cost of Revenues. Cost of revenues as a percentage of total revenues in fiscal
1996 was 48.1% compared to 52.5% in fiscal 1995. The decrease in cost of
revenues as a percentage of total revenues resulted from increased manufacturing
yields as well as a reduction in per unit costs associated with increased
production.
Engineering, Research and Development. Engineering, research and development
expenses were $11,045,000 in fiscal 1996 compared to $8,689,000 in fiscal 1995.
The increase was principally due to increased headcount and higher costs to
support the Company's continuing efforts to develop new products. As a
percentage of total revenues, engineering, research and development expenses
declined to 16.7% in fiscal 1996 from 20.3% in fiscal 1995 due primarily to the
Company's revenues growing faster than these expenses.
Selling, General and Administrative. Selling, general and administrative
expenses were $9,777,000 in fiscal 1996 compared to $8,900,000 in fiscal 1995.
This increase was principally due to increased headcount, salary increases,
higher commissions resulting from increased sales and increased advertising
costs. Included in selling, general and administrative expenses for fiscal 1995
is a $1,405,000 charge for the write-off of receivables, work-in-process
inventories and certain test hardware related to one of the Company's
supercomputer customers who filed for bankruptcy in February 1995. As a
percentage of total revenues, selling, general and administrative expenses
declined to 14.9% in fiscal 1996 from 20.7% in fiscal 1995 primarily as a result
of the Company's revenues growing faster than these expenses.
Interest Income. Interest income increased to $1,364,000 in fiscal 1996 from
$93,000 in fiscal 1995 due to a higher average cash balance in fiscal 1996 as
compared to fiscal 1995 resulting primarily from the Company's equity offering
in March 1996.
Interest Expense. Interest expense decreased to $772,000 in fiscal 1996 from
$1,304,000 in fiscal 1995, primarily due to a decrease in the Company's average
debt balance.
Income Taxes. The Company recorded a provision for income taxes in the amount of
$1,405,000 in fiscal 1996 and $79,000 in fiscal 1995 principally for federal
alternative minimum taxes, state income taxes and taxes due to foreign
jurisdictions, in light of the Company's net operating loss carryforwards.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
The Company generated $55,184,000 and $16,736,000 from operating activities in
fiscal 1997 and fiscal 1996, respectively. The increase in cash flow from
operating activities was primarily due to an increase in profitability.
Investing Activities
Capital expenditures, primarily for manufacturing and test equipment, were
$30,730,000, $11,003,000 and $3,362,000 in fiscal 1997, 1996 and 1995,
respectively. Included in the amounts for fiscal 1996 and 1995 is equipment
costing $245,000 and $400,000, respectively, that was financed by term loans.
As a result of increased demand for its products, the Company has been
increasing capacity at its Camarillo plant and has also recently completed
construction of an additional wafer fabrication facility in Colorado Springs.
Consequently, the Company incurred a significant increase in capital
expenditures in fiscal 1997. The majority of the costs associated with the
Colorado Springs facility were financed through two operating lease
transactions. See Note 4 of Notes to Financial Statements. The Company intends
to continue investing in new manufacturing, test and engineering equipment and
currently expects to spend approximately $15 million to $20 million for capital
expenditures through fiscal 1998.
Financing Activities
In fiscal 1997, the Company generated $124,510,000 of cash from financing
activities consisting of $125,444,000 of proceeds from the issuance and sale of
common stock in the Company's public offering in November 1996 and proceeds from
the issuance of common stock pursuant to the Company's stock option and stock
purchase plans offset by $934,000 in repayments of debt obligations. In fiscal
1996, the Company generated $40,388,000 in financing activities consisting of
$50,725,000 of proceeds from the issuance and sale of common stock in the
Company's public offering in March 1996 and from the issuance of common stock
pursuant to the Company's stock purchase and stock option plans, offset by
$10,337,000 in repayment of debt obligations. Following the Company's public
offering in March 1996, the Company accelerated the repayment of several of its
debt obligations, including its short-term borrowings and substantial portions
of its term loans and capital lease obligations.
The Company has a revolving line of credit agreement with a bank, which
agreement expires on January 5, 1998. The maximum amount available under the
revolving line of credit is $12,500,000. The interest rate on borrowings under
this revolving line of credit is equal to the bank's prime rate. See Note 5 of
Notes to Financial Statements.
<PAGE>
Management believes that the Company's cash flow from operations and revolving
line of credit agreement are adequate to finance its planned growth and
operating needs for the next 12 months. The Company believes it can meet its
wafer fabrication needs through the second quarter of fiscal 1998 at its
Camarillo facility assuming that the Company successfully completes planned
incremental increases in production capacity at the facility. The Company has
recently completed construction of a new wafer fabrication facility in Colorado
Springs, Colorado and is currently in the process of installing various
equipment in the facility. The Company estimates that upon completion of
equipment installation, the cost of the new wafer fabrication facility will be
at least $72 million, of which approximately $27 million relates to the purchase
of land and the construction of the building and $45 million relates to capital
equipment purchases.
In 1997, the Company entered into two operating lease transactions providing for
the financing of $27.5 million for the acquisition and construction of the new
wafer fabrication facility and $45 million for the acquisition of capital
equipment. Payments under these leases will commence in fiscal 1998 and are
based on LIBOR rates plus a spread of 1.75% (for the facility lease) and 1.50%
(for the equipment lease). If at the end of the lease term the Company does not
purchase the property, the Company would guarantee a residual value to the
lessor equal to a specified percentage of the lessor's cost of the facility and
equipment. Under the leases, the Company is required to meet certain financial
and other covenants, including a restriction on the payment of cash dividends to
its shareholders. As of September 30, 1997, the Company was in compliance with
all covenants.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share." SFAS No. 128 specifies new standards designed to improve
the earnings per share (EPS) information provided in financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements and increasing the comparability of EPS data on an international
basis. Some of the changes made to simplify the EPS computations include: (a)
eliminating the presentation of primary EPS and replacing it with basic EPS, for
which common stock equivalents are not considered, (b) eliminating the modified
treasury stock method and 3% materiality provision and (c) revising the
contingent share provision and the supplemental EPS data requirements. SFAS No.
128 also makes a number of changes to existing disclosure statements issued for
periods ending after December 15, 1997, including interim periods.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. The Company has determined that the impact of adopting the standard
would not be material to the financial position or results of operations of the
Company.
<PAGE>
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the reporting of operating segment information in
annual financial statements and in interim financial reports issued to
shareholders. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. The Company has determined that the impact of adopting the
standard would not be material to the financial position or results of
operations of the Company.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Customer and Industry Concentration
The Company is, and intends to continue, focusing its sales efforts on a
relatively small number of companies in the telecommunications, data
communications and ATE markets that require high-performance ICs. Certain of
these companies are also competitors of Vitesse. In fiscal 1997, three customers
accounted for 22%, 20% and 12% of total revenues.
Variability of Quarterly Results
The Company's quarterly results of operations have varied significantly in the
past and may continue to do so in the future. These variations have been due to
a number of factors, including the loss of major customers, variations in
manufacturing yields, the timing and level of new product and process
development costs, changes in inventory levels, changes in the type and mix of
products being sold, changes in manufacturing capacity and variations in the
utilization of this capacity, and customer design changes, delays or
cancellations. From time to time, the Company has also incurred significant new
product and process development costs due to the Company's policy of expensing
costs as incurred relating to the manufacture of new products and the
development of new process technology. There can be no assurance that the
Company will not incur such charges or experience revenue declines in the
future.
Product and Process Development and Technological Change
The market for the Company's products is characterized by rapid changes in both
product and process technologies. The Company believes that its future success
will depend, in part, upon its ability to continue to improve its product and
process technologies and develop new technologies in order to maintain its
competitive position, to adapt its products and processes to technological
changes and to adopt emerging industry standards. There can be no assurance that
the Company will be able to improve its product and process technologies and
develop new technologies in a timely manner or that such improvements or
developments will result in products that achieve market acceptance. The failure
to successfully improve its existing technologies or develop new technologies in
a timely manner could adversely affect the Company's business, operating results
and financial condition.
<PAGE>
Dependence on Third Parties
The Company depends on third parties for performing certain processes and
providing a variety of components and materials necessary for the production of
its H-GaAs ICs. The Company packages certain of its ICs in its Camarillo
facility using customized ceramic packaging, which is presently available from
only one source. The balance of the Company's ICs are packaged in plastic by
third parties because the Company has no internal capability to perform such
plastic packaging. Other components and materials for H-GaAs ICs are available
from only a limited number of sources. The inability to obtain sufficient sole-
or limited-source services or components as required could result in delays or
reductions in product shipments, which could adversely affect the Company's
business, operating results and financial condition.
Variability of Manufacturing Yields
The Company's manufacturing yields vary significantly among products, depending
on a particular IC's complexity and the Company's experience in manufacturing
it. Historically, the Company has experienced difficulties achieving acceptable
yields on some ICs, which has resulted in shipment delays. The Company's overall
yields are lower than yields experienced in a silicon process because of the
large number of different products manufactured in limited volume and because
the Company's H-GaAs process technology is significantly less developed. The
Company expects that many of its current and future products may never be
produced in volume.
Regardless of the process technology used, the fabrication of semiconductors is
a highly complex and precise process. Defects in masks, impurities in the
materials used, contamination of the manufacturing environment, equipment
failure and other difficulties in the fabrication process can cause a
substantial percentage of wafers to be rejected or numerous die on each wafer to
be nonfunctional.
Because the majority of the Company's costs of manufacturing are relatively
fixed, maintenance of the number of shippable die per wafer is critical to the
Company's results of operations. Yield decreases can result in substantially
higher unit costs and may result in reduced gross profit and net income. The
Company estimates yields per wafer in order to estimate the value of inventory.
If yields are different from projected, work-in-process inventory may need to be
revalued. There can be no assurance that the Company will not suffer periodic
yield problems in connection with new or existing products, which could cause
the Company's business, operating results and financial condition to be
materially adversely affected.
<PAGE>
Manufacturing Capacity Limitations; New Production Facility
The Company currently manufactures all of its ICs at its four-inch wafer
fabrication facility located in Camarillo, California. The Company believes that
this facility should be able to satisfy its production needs through the second
quarter of fiscal 1998, assuming that the Company successfully completes planned
substantial incremental increases in production capacity at the facility through
such date. The Company will be required to purchase additional equipment and to
successfully hire, train and manage additional production personnel in order to
successfully increase its production capacity in accordance with its time
schedule. In the event the Company's expansion plans were not implemented on a
timely basis for any reason, the Company could become subject to production
capacity constraints. Such constraints could have a material adverse effect on
the Company's business, operating results or financial condition.
The Company has recently completed construction of a new six-inch wafer
fabrication facility in Colorado Springs, Colorado, to supplement its existing
facility in Camarillo. As planned, the facility includes a 10,000-square-foot
Class 1 clean room with the capability for future expansion to 15,000 square
feet. The Company is currently in the process of installing equipment and
performing necessary testing prior to commencing commercial production at the
facility, a process that the Company anticipates will not be completed prior to
the second quarter of fiscal 1998. Accordingly, the Company believes the new
facility will not begin commercial production prior to the third quarter of
fiscal 1998.
The successful operation of the new wafer fabrication facility, as well as the
Company's overall production operations, will also be subject to numerous risks.
The Company has no prior experience with the operation of equipment or the
processes involved in producing finished six-inch wafers, which differ
significantly from those involved in the production of four-inch wafers. The
Company will be required to hire, train and manage production personnel
successfully in order to effectively operate the new facility. The Company does
not have excess production capacity at its Camarillo facility to offset any
failure of the new facility to meet planned production goals. As a result of
these and other factors, the failure of the Company to successfully operate the
new wafer fabrication facility would have a material adverse effect on its
business, operating results or financial condition. The Company will also have
to effectively coordinate and manage the Colorado Springs and Camarillo
facilities to successfully meet its overall production goals. The Company has no
experience in coordinating and managing full-scale production facilities that
are located at different sites. The failure to successfully coordinate and
manage the two sites would adversely affect the Company's overall production and
would have a material adverse effect on its business, operating results or
financial condition.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Vitesse Semiconductor Corporation:
We have audited the accompanying balance sheets of Vitesse Semiconductor
Corporation as of September 30, 1997 and 1996, and the related statements of
operations, shareholders' equity and cash flows for each of the years in the
three-year period ended September 30, 1997. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Vitesse Semiconductor
Corporation as of September 30, 1997 and 1996 and the results of its operations
and its cash flows for each of the years in the three-year period ended
September 30, 1997 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
October 21, 1997
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1997 and 1996 September 30,
(in thousands, except share data) 1997 1996
...................................................................................................................................
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 97,358 $ 52,436
Short-term investments 58,486
Receivables:
Trade accounts receivable, net of allowance for doubtful accounts
of $1,000 in 1997 and $900 in 1996 20,903 18,423
Other 169 196
................................................................................................................................
21,072 18,619
Inventories, net:
Raw material 2,421 1,678
Work in process 6,762 5,436
Finished goods 2,626 2,845
................................................................................................................................
11,809 9,959
Prepaid expenses 1,121 841
Deferred tax assets (Note 8) 14,800 -
..................................................................................................................................
Total current assets 204,646 81,855
................................................................................................................................
Property and equipment, net (Notes 2 and 3) 41,684 17,892
Restricted long-term deposits (Note 4) 45,556 -
Other assets 394 669
...................................................................................................................................
$ 292,280 $ 100,416
--------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity
Current liabilities:
Current installments of capital lease obligations and term loans (Notes 2 and 3) $ 256 $ 931
Accounts payable 19,758 6,731
Accrued expenses and other current liabilities (Note 6) 7,017 3,978
..................................................................................................................................
Total current liabilities 27,031 11,640
.................................................................................................................................
Capital lease obligations and term loans, less current installments (Notes 2 and 3) 147 406
Commitments (Note 4)
Shareholders' equity (Note 7):
Preferred stock, $.01 par value. Authorized 10,000,000 shares; none issued
or outstanding - -
Common stock, $.01 par value. Authorized 50,000,000 shares; issued and
outstanding 35,913,738 and 29,109,791 shares at September 30, 1997
and 1996, respectively 359 291
Additional paid-in capital 277,169 133,393
Accumulated deficit (12,426) (45,314)
................................................................................................................................
Net shareholders' equity 265,102 88,370
..............................................................................................................................
$ 292,280 $ 100,416
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended September 30, 1997, 1996 and 1995 Years ended September 30,
(in thousands, except share and per share data) 1997 1996 1995
...................................................................................................................................
<S> <C> <C> <C>
Revenues, net: (Note 9)
Production $ 99,179 $ 59,491 $ 34,703
Development 5,671 6,555 8,179
...................................................................................................................................
Total revenues 104,850 66,046 42,882
.................................................................................................................................
Costs and expenses:
Cost of revenues 45,500 31,792 22,505
Engineering, research & development 16,804 11,045 8,689
Selling, general & administrative 13,884 9,777 8,900
...................................................................................................................................
Total costs and expenses 76,188 52,614 40,094
.................................................................................................................................
Income from operations 28,662 13,432 2,788
Other (income) expense:
Interest income 8,119 1,364 93
Interest expense (157) (772) (1,304)
Other (84) 26 9
...................................................................................................................................
Total other income (expense) 7,878 618 (1,202)
.................................................................................................................................
Income before income taxes 36,540 14,050 1,586
Income taxes (Note 8) 3,652 1,405 79
...................................................................................................................................
Net income $ 32,888 $ 12,645 $ 1,507
- - -----------------------------------------------------------------------------------------------------------------------------------
Net income per share $0.86 $0.42 $0.06
- - -----------------------------------------------------------------------------------------------------------------------------------
Weighted average common and common equivalent
shares outstanding 38,145,475 30,216,628 25,960,510
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Net
Years ended September 30, 1997, 1996 and 1995 Common Stock Paid-in Accumulated Shareholders'
(in thousands, except share data) Shares Amount Capital Deficit Equity
<S> <C> <C> <C> <C> <C>
Balance, October 1, 1994 22,470,386 $225 $ 80,758 $(59,466) $ 21,517
Exercise of stock options 467,514 5 1,105 - 1,110
Exercise of warrants 6,909 - 41 - 41
Shares issued under Employee
Stock Purchase Plan 319,828 3 822 - 825
Net income - - - 1,507 1,507
...................................................................................................................................
Balance, September 30, 1995 23,264,637 233 82,726 (57,959) 25,000
Exercise of stock options 1,458,624 15 3,396 - 3,411
Exercise of warrants 85,415 - 15 - 15
Shares issued under Employee
Stock Purchase Plan 161,115 2 973 - 975
Issuance of common stock,
net of expenses 4,140,000 41 46,283 - 46,324
Net income - - - 12,645 12,645
...................................................................................................................................
Balance, September 30, 1996 29,109,791 291 133,393 (45,314) 88,370
Exercise of stock options 1,560,279 15 5,637 - 5,652
Shares issued under Employee
Stock Purchase Plan 71,208 1 1,596 - 1,597
Issuance of common stock,
net of expenses 5,175,000 52 118,146 - 118,198
Repurchase of fractional shares
related to stock split (2,540) (3) (3) -
Tax benefit of disqualifying
dispositions (Note 8) - - 18,400 - 18,400
Net income - - - 32,888 32,888
...................................................................................................................................
Balance, September 30, 1997 35,913,738 $359 $277,169 $(12,426) $265,102
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended September 30, 1997, 1996 and 1995 Years ended September 30,
(in thousands) 1997 1996 1995
..........................................................................................................
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 32,888 $ 12,645 $ 1,507
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 6,938 4,973 5,316
Changes in assets and liabilities:
(Increase) decrease in:
Receivables, net (2,453) (5,889) (756)
Inventories, net (1,850) (64) (937)
Prepaid expenses (280) (299) (51)
Other assets 275 98 195
Increase (decrease) in:
Accounts payable 13,027 3,178 94
Accrued expenses and other current liabilities 6,639 2,094 (80)
.....................................................................................................
Net cash provided by operating activities 55,184 16,736 5,288
....................................................................................................
Cash flows from investing activities:
Short-term investments (58,486) - 1,000
Restricted long-term deposits (45,556) - -
Capital expenditures (30,730) (11,003) (3,362)
.........................................................................................................
Net cash used in investing activities (134,772) (11,003) (2,362)
....................................................................................................
Cash flows from financing activities:
Principal payments under capital lease obligations and term loans (934) (7,632) (3,858)
Proceeds from term loans - 245 400
Short-term borrowings (payments) - (2,950) 700
Net proceeds from issuance of common stock 125,444 50,725 1,976
.........................................................................................................
Net cash provided by (used in) financing activities 124,510 40,388 (782)
....................................................................................................
Net increase in cash and cash equivalents 44,922 46,121 2,144
Cash and cash equivalents at beginning of year 52,436 6,315 4,171
..........................................................................................................
Cash and cash equivalents at end of year $ 97,358 $ 52,436 $ 6,315
- - ----------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 165 $ 656 $ 1,275
Income taxes $ 296 $ 347 $ 44
-------------------------------------------------------------------------------------------------------
</TABLE>
In 1995 the Company renegotiated certain capital leases resulting in an
extension of the terms of these leases beyond their original maturities and the
conversion of certain capital leases to operating leases. The net effect of
these transactions was a $1,876,000 increase in the property and equipment and
capital lease obligation accounts.
See accompanying notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
Vitesse Semiconductor Corporation (the Company) was incorporated under the laws
of Delaware on February 3, 1987. The Company is a leader in the design,
development, manufacturing and marketing of digital GaAs ICs.
Revenue Recognition
Production revenue is recognized when products are shipped to customers. Revenue
from development contracts is recognized upon attainment of specific milestones
established under customer contracts. Revenue from products deliverable under
development contracts, including design tools and prototype products, is
recognized upon delivery. Amounts billed in excess of revenue recognized are
included as deferred revenue in the accompanying balance sheets. Costs related
to development contracts are expensed as incurred.
Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. Cash equivalents and short-term
investments are principally composed of money market accounts and obligations of
the U.S. government and its agencies. Pursuant to Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS No. 115), the Company classifies its securities
included under short-term investments as held-to-maturity securities, which are
recorded at amortized cost, adjusted for the amortization or accretion of
premiums or discounts. As of September 30, 1997 and 1996, carrying value was
substantially the same as market value.
Inventories
Inventories are stated at the lower of cost (determined by the first-in, first-
out method) or market (net realizable value). Costs associated with the
manufacture of a new product are charged to engineering, research and
development expense as incurred until the product is proven through testing and
acceptance by the customer. Inventories are shown net of a valuation reserve of
$3,121,000 and $2,797,000 at September 30, 1997 and 1996, respectively.
Depreciation
Depreciation of property and equipment is provided on the straight-line method
over the estimated useful lives of the related assets as follows:
Machinery and equipment 5 years
Furniture and fixtures 5 years
Computer equipment 3 years
Leasehold improvements Term of lease
Income Taxes
The Company accounts for income taxes pursuant to the provisions of Financial
Accounting Standards Board Statement No. 109. Under the asset and liability
method of Statement No. 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Research and Development Costs
The Company charges all research and development costs to expense when incurred.
Manufacturing costs associated with the development of a new fabrication process
or a new product are expensed until such times as these processes or products
are proven through final testing and initial acceptance by the customer.
Costs related to revenues on nonrecurring engineering services billed to
customers are generally classified as cost of revenues; however, certain related
contract engineering and research costs are included in engineering, research
and development expense because these costs cannot be directly related to
individual contracts.
<PAGE>
Computation of Net Income Per Share
The net income per share of common stock is computed using the weighted average
number of common shares outstanding and common stock equivalents using the
application of the treasury stock method for all periods presented.
Financial Instruments
The Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments,"
defines fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The Company's carrying value of cash equivalents, short-term investments, trade
accounts receivable, other receivable, accounts payable, accrued expenses, term
loans and borrowings approximates fair value because the instrument has a short-
term maturity or because the applicable interest rates are comparable to current
borrowing rates of those instruments.
Long-Lived Assets
In 1997, the Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." This statement provides guidelines for recognition of
impairment of losses related to long-term assets. The adoption of this new
standard did not have a material effect on the Company's financial statements.
Accounting for Stock Options
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation," was issued. This statement
encourages, but does not require, a fair value based method of accounting for
employee stock options. The Company has elected to continue to measure and to
recognize compensation costs under APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and to adopt the disclosure-only requirements of Statement
No. 123.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
Reclassifications and Restatements
Certain reclassifications have been made to the prior year financial statements
to conform to the current year presentation.
On January 29, 1997, the Company's Board of Directors announced a 3 for 2 stock
split of the common stock effected in the form of a stock dividend to
shareholders of record as of February 12, 1997. Accordingly, historical share
and per share amounts have been restated to reflect retroactively the stock
split.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share." SFAS No. 128 specifies new standards designed to improve
the earnings per share (EPS) information provided in financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements and increasing the comparability of EPS data on an international
basis. Some of the changes made to simplify the EPS computations include: (a)
eliminating the presentation of primary EPS and replacing it with basic EPS, for
which common stock equivalents are not considered, (b) eliminating the modified
treasury stock method and the 3% materiality provision and (c) revising the
contingent share provision and the supplemental EPS data requirements. SFAS No.
128 also makes a number of changes to existing disclosure statements issued for
periods ending after December 15, 1997, including interim periods. Had EPS been
computed under the guidelines of SFAS No. 128, the Company's EPS would have been
reported as the pro forma amounts indicated on the following page.
<PAGE>
<TABLE>
<CAPTION>
1997 1996
.........................................................
<S> <C> <C>
Earnings per share -- as reported $0.86 $0.42
Basic earnings per share -- pro forma 0.96 0.48
Diluted earnings per share -- pro forma 0.87 0.43
</TABLE>
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. The Company has determined that the impact of adopting the standard
would not be material to the financial position or results of operations of the
Company.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the reporting of operating segment information in
annual financial statements and in interim financial reports issued to
shareholders. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. The Company has determined that the impact of adopting the
standard would not be material to the financial position or results of
operations of the Company.
NOTE 2 -- PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, are summarized as follows:
<TABLE>
<CAPTION>
September 30,
1997 1996
..........................................................
(in thousands)
<S> <C> <C>
Machinery and equipment $53,807 $30,739
Furniture and fixtures 747 144
Computer equipment 10,652 6,542
Leasehold improvements 4,423 3,966
.......................
69,629 41,391
.......................
Less accumulated depreciation 27,945 23,499
.......................
$41,684 $17,892
-----------------------
</TABLE>
Included in property and equipment are items not yet placed in service of
$17,688,000 and $4,713,000 as of September 30, 1997 and 1996, respectively.
Balances applicable to assets acquired under capitalized leases, which are
included in property and equipment, are summarized as follows:
<TABLE>
<CAPTION>
September 30,
1997 1996
.........................................................
(in thousands)
<S> <C> <C>
Machinery and equipment $1,657 $2,308
Furniture and fixtures 14 14
Computer equipment 1,199 2,038
......................
2,870 4,360
Less accumulated depreciation 2,770 3,629
......................
$ 100 $ 731
----------------------
</TABLE>
<PAGE>
NOTE 3 -- CAPITAL LEASE OBLIGATIONS AND TERM LOANS
The Company has various capital leases and equipment term loans totaling
$403,000 bearing interest rates between 9% and 10.2% per annum payable in
monthly installments through fiscal 2000.
Future principal payments under the capital leases and term loans are as
follows:
<TABLE>
<CAPTION>
(in thousands)
.........................................
<S> <C>
Year ending September 30:
1998 $256
1999 131
2000 16
......
$403
------
</TABLE>
NOTE 4 -- COMMITMENTS
The Company leases facilities under noncancellable operating leases that expire
through 2001. The Company also leases certain machinery and equipment under
noncancellable operating leases that expire through 1999.
Approximate minimum rental commitments under these operating leases as of
September 30, 1997, were as follows:
<TABLE>
<CAPTION>
(in thousands)
............................................
<S> <C>
Year ending September 30:
1998 $1,595
1999 652
2000 367
2001 353
2002 74
......
$3,041
------
</TABLE>
Rent expense under operating leases was approximately $1,980,000, $2,507,000 and
$2,147,000 for the years ended September 30, 1997, 1996 and 1995, respectively.
In October 1996, the Company entered into a five-year operating lease agreement
with a bank providing for $27.5 million of financing for the acquisition and
construction of a wafer fabrication facility in Colorado Springs, Colorado.
Payments under this lease will commence in fiscal 1998 and are based on LIBOR
rates plus a spread of 1.75%. If at the end of the lease term the Company does
not purchase the property, the Company would guarantee a residual value to the
lessor equal to a specified percentage of the lessor's cost of the facility. As
of September 30, 1997, the lessor had advanced a total of $24,900,000 under this
lease and had held $20,916,000 as cash collateral, which amount is included in
restricted long-term deposits.
In August 1997, the Company entered into a three-year operating lease
arrangement with the same bank providing for $45 million of financing for the
acquisition of capital equipment for the Colorado Springs wafer fabrication
facility. The Company has the option to renew the lease for up to two one-year
extensions. Payments under this lease will commence in fiscal 1998 and are based
on LIBOR rates plus a spread of 1.50%. If at the end of the lease term the
Company does not purchase the equipment, the Company would guarantee a residual
value to the lessor equal to a specified percentage of the lessor's cost of the
equipment. As of September 30, 1997, the lessor had advanced a total of
$30,800,000 under this lease and had held $24,640,000 as cash collateral, which
amount is included in long-term deposits.
<PAGE>
Both leases require the Company to meet certain financial and other covenants,
including a restriction on the payment of cash dividends to its shareholders. As
of September 30, 1997, the Company was in compliance with all covenants.
NOTE 5 -- SHORT-TERM BORROWINGS
The Company has a $12,500,000 revolving line of credit agreement with a bank,
which expires in January 1998. The agreement provides for interest to be paid
monthly at the bank's prime rate (8.5% on September 30, 1997). The Company must
adhere to certain requirements and provisions to be in compliance with the terms
of the agreement and is prohibited from paying dividends without the consent of
the bank. As of September 30, 1997 and 1996, no amounts were outstanding under
the line of credit.
NOTE 6 -- ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
September 30,
1997 1996
...............................................................
(in thousands)
<S> <C> <C>
Accrued vacation $ 756 $ 489
Accrued salaries, wages and bonuses 3,156 725
Accrued taxes 825 1,108
Other 2,280 1,656
......................
$7,017 $3,978
----------------------
</TABLE>
NOTE 7 -- SHAREHOLDERS' EQUITY
Preferred Stock
In fiscal 1991, the Board of Directors authorized 10,000,000 shares of
undesignated preferred stock. The Company has no present plans to issue any of
this preferred stock.
Common Stock
In 1997, the Company's shareholders approved an increase in the number of
authorized shares of common stock from 25,000,000 to 50,000,000.
Stock Option Plans
The Company currently has three stock option plans in place: the 1987 Stock
Option Plan, the 1989 Stock Option Plan and the 1991 Stock Option Plan
(collectively referred to as the Plans). The 1987 Stock Option Plan expired in
fiscal 1997 and consequently no additional options are available for grant from
this plan.
The 1989 Plan was adopted by the Board of Directors in April 1989 and approved
by the shareholders in April 1990. Pursuant to the 1989 Plan, 1,750,000 shares
of the Company's common stock were reserved for issuance.
<PAGE>
The 1991 Plan was adopted by the Board of Directors and approved by the
shareholders in August 1991. A total of 3,000,000 shares of common stock were
reserved for issuance under the 1991 Plan. In January 1995, the shareholders
approved an amendment to the 1991 Plan to increase the number of shares reserved
thereunder by an aggregate of 750,000 shares, and on an annual basis beginning
in 1995, to automatically increase the shares reserved by a number of shares
equal to 3.5% of the Company's common stock outstanding at the end of the fiscal
year.
The Plans provide for the granting of incentive stock options to employees of
the Company and for the granting of nonstatutory stock options to employees and
consultants of the Company. Options granted under the Plans generally vest and
become exercisable at the rate of 25% per year; however, certain options granted
prior to June 30, 1992, under the 1991 Plan and all of the options under the
1987 and 1989 Plans vest and become exercisable at the rate of 24% at the end of
the first year, and thereafter at a rate of 2% of the shares subject to the
options per month.
The exercise price of all incentive and nonstatutory stock options granted under
the Plans must be at least equal to the fair market value of the shares of
common stock on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting power of all classes of stock of
the Company, the exercise price of any incentive stock option granted must equal
at least 110% of the fair market value on the grant date and, in the case of the
1991 Plan, the maximum term of such options must not exceed five years. The term
of all other options under the 1991 Plan and all options under the 1987 Plan and
1989 Plan may not exceed ten years.
In June 1993, substantially all outstanding stock options granted under the
1987, 1989 and 1991 Plans with an exercise price in excess of $2.42 per share
were canceled and replaced with new options for a like number of shares having
an exercise price of $2.42 per share, the fair market value on the grant date.
The new options have certain restrictions relating to the sale of the shares.
Under the 1987 Plan, the 1989 Plan and the 1991 Plan, as of September 30, 1997,
options to purchase an aggregate of 4,248,144 shares had been exercised, options
to purchase an aggregate of 4,625,199 shares were outstanding at a weighted
average exercise price of $11.78 per share and 227,251 shares (which increased
to 1,484,231 effective October 1, 1997, pursuant to the terms of the 1991 Plan)
remained available for future grant. Of the 4,625,199 options outstanding,
748,419 options were vested and exercisable under the Plans pursuant to
incentive stock options and 175,036 options were vested and exercisable pursuant
to nonstatutory stock options.
1991 Directors' Stock Option Plan
The 1991 Directors' Stock Option Plan (the Directors' Plan) was adopted by the
Board of Directors and approved by the shareholders in August 1991 and 300,000
shares of common stock have been reserved for issuance under the Directors'
Plan. In January 1996, the shareholders approved an amendment to the Directors'
Plan to increase the number of shares reserved thereunder by an aggregate of
300,000 shares. As of September 30, 1997, 420,000 options had been granted under
the Directors' Plan; 226,650 of such grants had been exercised and 15,000 had
been canceled. At September 30, 1997, 54,150 options were exercisable.
The Directors' Plan provides that each non-employee director automatically will
be granted a nonstatutory option to purchase 10,000 shares (except in the case
of the Chairman of the Board of the Company who shall receive an option to
purchase 15,000 shares) of common stock upon first becoming a director. In
addition, the Directors' Plan provides that each director serving on January 1
of each calendar year will automatically be granted a nonstatutory option to
purchase 10,000 shares (except in the case of the Chairman of the Board of the
Company who shall receive an option to purchase 15,000 shares) of common stock.
The options granted to the non-employee directors are for a ten-year term and
vest at the rate of 2% of the shares subject to the option at the end of each
month following the date of grant. The exercise price of the options may not be
less than the fair market value of the common stock on the last business day
prior to the date of grant of the option.
<PAGE>
Activity under the 1987, 1989 and 1991 Plans and the 1991 Directors' Stock
Option Plan is as follows:
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share Aggregate
.............................................................................................
(in thousands)
<S> <C> <C> <C>
Options outstanding at October 1, 1994 4,134,648 $ .02- 7.17 $10,744
Options:
Granted 1,550,400 2.92- 7.75 5,362
Exercised (467,514) .02- 3.75 (1,110)
Canceled or expired (443,999) 1.08- 3.92 (1,375)
.............................................................................................
Options outstanding at September 30, 1995 4,773,535 .02- 7.75 13,621
Options:
Granted 1,785,900 7.33- 23.83 15,346
Exercised (1,458,624) .02- 6.25 (3,411)
Canceled or expired (213,772) 2.42- 9.25 (1,057)
.............................................................................................
Options outstanding at September 30, 1996 4,887,039 .02- 23.83 24,499
Options:
Granted 1,548,201 20.83- 50.50 38,977
Exercised (1,560,279) .02- 28.13 (5,652)
Canceled or expired (71,412) 2.75- 28.92 (959)
.............................................................................................
Options outstanding at September 30, 1997 4,803,549 $ .02- 50.50 $56,865
- - ---------------------------------------------------------------------------------------------
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation." The
Company used the Black-Scholes option pricing model to value stock options for
pro forma presentation. The assumptions used to estimate the value of options
under the various stock option plans and the shares under the Employee Stock
Purchase Plan are as follows:
<TABLE>
<CAPTION>
Employee
Stock Option Stock Purchase
Plan Shares Plan Shares
1997 1996 1997 1996
.................................................................................
<S> <C> <C> <C> <C>
Average expected life (years) 5.45 5.45 0.50 0.50
Expected volatility 0.55 0.55 0.55 0.55
Risk-free interest rate 5.81% 5.81% 5.50% 5.50%
Dividends - - - -
Weighted average fair values $14.14 $4.94 $10.26 $3.01
</TABLE>
Pro forma compensation costs for fiscal 1997 and 1996 awards under the stock
option and stock purchase plans recognized in accordance with SFAS No. 123 would
reduce the Company's net income from $32.9 million ($0.86 per share) to $27.1
million ($0.71 per share) in fiscal 1997, and from $12.6 million ($0.42 per
share) to $11 million ($0.36 per share) in fiscal 1996. Pro forma net income
reflects only options granted and shares issued in fiscal 1997 and fiscal 1996.
Because the pro forma compensation cost for the stock option program is
recognized over the four-year vesting period, the foregoing pro forma reductions
in the Company's net income are not representative of anticipated amounts in
future years.
<PAGE>
1991 Employee Stock Purchase Plan
The Company's 1991 Employee Stock Purchase Plan (the Purchase Plan) was adopted
by the Board of Directors and approved by the shareholders effective December
11, 1991. A total of 1,500,000 shares of common stock has been reserved for
issuance under the Purchase Plan. Under the Purchase Plan, eligible employees
may purchase shares of the Company's common stock at six-month intervals at 85%
of the lower of the fair market value on the first or the last day of each six-
month period. Employees may purchase shares having a value not exceeding 20% of
their compensation, including commissions and overtime, but excluding bonuses.
Employees may end their participation in the offering at any time during the
offering period, and participation ends automatically on termination of
employment with the Company. In fiscal 1997 and 1996, 71,208 and 161,115 shares,
respectively, were issued under the Purchase Plan at average prices of $22.416
and $6.049. At September 30, 1997, 444,200 shares were reserved for future
issuance.
Stock Warrants
In September and October 1991, the Company entered into a note and warrant
financing pursuant to which 9% promissory notes in the aggregate amount of
$3,000,000 were issued. Warrants issued in connection with the financing were
exercisable at $6 per share and expired in October 1996. A total of 99,789
warrants were issued in connection with the financing. In fiscal 1996 and 1995,
2,564 and 6,909 such warrants were exercised for total proceeds of $15,000 and
$41,000, respectively. No warrants were exercised in fiscal 1997. As of
September 30, 1997, no warrants were outstanding.
NOTE 8 -- INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
September 30,
1997 1996 1995
..............................................
(in thousands)
<S> <C> <C> <C>
Current:
Federal $ - $ 300 $ 60
State 101 755 19
Foreign - 350 -
..............................................
$ 101 $1,405 $ 79
- - ----------------------------------------------
Deferred:
Federal $3,018 $ - $ -
State 533 - -
..............................................
$3,551 $ - $ -
..............................................
Total:
Federal $3,018 $ 300 $ 60
State 634 755 19
Foreign 350
..............................................
$3,652 $1,405 $ 79
- - ----------------------------------------------
</TABLE>
<PAGE>
The actual income tax expense differs from the expected tax expense computed by
applying the federal corporate tax rate of 35% for the years ended September 30,
1997 and 1996, and 34% for the year ended September 30, 1995, to income before
income taxes as follows:
<TABLE>
<CAPTION>
September 30,
1997 1996 1995
...............................................................................
(in thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate $ 12,790 $ 4,918 $ 539
State income taxes, net of federal benefit 2,146 755 19
Alternative minimum taxes - 300 -
Foreign income taxes - 350 -
Research & development credits (700) - -
Adjustment for deferred tax assets for
enacted changes in tax laws and rates (479) - -
Reduction in valuation allowance (10,105) (4,918) (479)
...............................................................................
$ 3,652 $ 1,405 $ 79
- - -------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to a significant portion
of the deferred tax assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
1997 1996
................................................................................
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 22,626 $ 19,646
Research & development tax credits 5,292 3,239
Allowances and reserves 2,229 1,257
Accumulated depreciation & amortization 1,700 2,072
Other - 938
...............................................................................
Total gross deferred tax assets 31,847 27,152
Less valuation allowance (17,047) (27,152)
-------------------------------------------------------------------------------
Net deferred tax assets $ 14,800 $ -
-----------------------------------------------------------------------------
</TABLE>
During fiscal 1997, the Company recognized tax benefits associated with employee
stock options aggregating $18,400,000. Such benefits have been recorded directly
to shareholders' equity. For financial reporting purposes, the Company
recognized net operating loss carryforwards of $25,824,000 in 1997.
In assessing the realizability of deferred tax assets, management considered
whether it is more likely than not that some portions or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent on the generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the
projected future taxable income and tax planning strategies in making this
assessment. Based on the level of historical taxable income and projections for
future taxable income over the periods in which the deferred tax assets are
deductible, the Company has established a valuation allowance for all deductible
differences. Management believes that it is more likely than not that the
results of future operations will generate sufficient taxable income to realize
the net deferred tax assets. In order to fully realize the net deferred tax
assets, the Company will need to generate future taxable income of $37,000,000
prior to the expiration of net operating loss carryforwards, without
consideration of tax benefits associated with employee stock options.
<PAGE>
As of September 30, 1997, the Company had net operating loss carryforwards for
federal and state income tax purposes of $60,466,000 and $15,734,000,
respectively, which are available to offset future taxable income, if any,
through 2009. Additionally, the Company had research and development tax credit
carryforwards for federal and state income tax purposes of $3,028,000 and
$1,448,000, respectively, which are available to offset future income taxes, if
any, through 2010.
NOTE 9 -- SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK AND SEGMENT
INFORMATION
In fiscal 1997, three customers accounted for 22%, 20% and 12% of total
revenues. In fiscal 1996, two customers accounted for 25% and 11% of total
revenues. In fiscal 1995, two customers accounted for 19% and 17% of total
revenues.
The Company generally sells its products to customers engaged in the design
and/or manufacture of high technology products either recently introduced or not
yet introduced to the marketplace. Substantially all the Company's trade
accounts receivable are due from such sources. The Company's major customers who
account for more than 10% of total revenues aggregated 44% and 37% of total
trade receivables at September 30, 1997 and 1996, respectively.
Export revenues are summarized by geographic areas as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
.......................................
<S> <C> <C> <C>
Europe $ 6,452 $ 6,505 $ 3,968
Japan 24,102 7,972 8,211
Other 4,849 1,147 354
.......................................
$35,403 $15,624 $12,533
- - ---------------------------------------
</TABLE>
NOTE 10 -- RETIREMENT SAVINGS PLAN
The Company has a qualified retirement plan under the provisions of Section
401(k) of the Internal Revenue Code covering substantially all employees.
Participants in this plan may defer up to the maximum annual amount allowable
under IRS regulations. The contributions are fully vested and nonforfeitable at
all times. The Company does not make matching contributions under the plan.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1997 ANNUAL
REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1996
<PERIOD-START> OCT-01-1996 OCT-01-1995
<PERIOD-END> SEP-30-1997 SEP-30-1996
<CASH> 97,358 52,436
<SECURITIES> 58,486 0
<RECEIVABLES> 21,903 19,323
<ALLOWANCES> 1,000 900
<INVENTORY> 11,809 9,959
<CURRENT-ASSETS> 204,646 81,855
<PP&E> 69,629 41,391
<DEPRECIATION> 27,945 23,499
<TOTAL-ASSETS> 292,280 100,416
<CURRENT-LIABILITIES> 27,031 11,640
<BONDS> 147 406
0 0
0 0
<COMMON> 277,528 133,684
<OTHER-SE> (12,426) (45,314)
<TOTAL-LIABILITY-AND-EQUITY> 292,280 100,416
<SALES> 104,850 66,046
<TOTAL-REVENUES> 104,850 66,046
<CGS> 45,500 31,792
<TOTAL-COSTS> 76,188 52,614
<OTHER-EXPENSES> (84) 26
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 157 772
<INCOME-PRETAX> 36,540 14,050
<INCOME-TAX> 3,652 1,405
<INCOME-CONTINUING> 32,888 12,645
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 32,888 12,645
<EPS-PRIMARY> 0.86 0.42
<EPS-DILUTED> 0.86 0.42
</TABLE>
