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<SEC-DOCUMENT>0000950005-99-000599.txt : 19990630
<SEC-HEADER>0000950005-99-000599.hdr.sgml : 19990630
ACCESSION NUMBER: 0000950005-99-000599
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 10
CONFORMED PERIOD OF REPORT: 19990331
FILED AS OF DATE: 19990629
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ELECTRONIC ARTS INC
CENTRAL INDEX KEY: 0000712515
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372]
IRS NUMBER: 942838567
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0331
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 000-17948
FILM NUMBER: 99655069
BUSINESS ADDRESS:
STREET 1: 1450 FASHION ISLAND BLVD
CITY: SAN MATEO
STATE: CA
ZIP: 94404
BUSINESS PHONE: 4155717171
FORMER COMPANY:
FORMER CONFORMED NAME: ELECTRONIC ARTS
DATE OF NAME CHANGE: 19911211
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<DESCRIPTION>FORM 10-K
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____________________ to
____________________
Commission File No. 0-17948
ELECTRONIC ARTS INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-2838567
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
209 Redwood Shores Parkway
Redwood City, California 94065
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 628-1500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ___
Indicated by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's common stock, $.01 par value,
held by non-affiliates of the Registrant on June 1, 1999 was $2,069,031,141.
As of June 1, 1999, there were 61,588,965 shares of Registrant's common stock,
$.01 par value, outstanding.
Documents Incorporated by Reference
Portions of Registrant's definitive proxy statement (the "Proxy Statement") for
its 1999 Annual Meeting of Stockholders are incorporated by reference into Part
III hereof.
This report consists of 57 sequentially numbered pages. The Exhibit Index is
located at sequentially numbered page 57.
Page 1 of 57
<PAGE>
ELECTRONIC ARTS INC.
1999 FORM 10-K ANNUAL REPORT
Table of Contents
PAGE
----
PART I
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 4A. Executive Officers of the Registrant 13
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 27
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosures 48
PART III
Item 10. Directors and Executive Officers of the Registrant 49
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain Beneficial Owners and Management 49
Item 13. Certain Relationships and Related Transactions 49
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K 50
Signatures 55
Exhibit Index 57
2
<PAGE>
PART I
This Annual Report on Form 10-K, including Item 1 ("Business") and Item 7
("Management's Discussion and Analysis of Financial Condition and Results of
Operations"), contains forward looking statements regarding future events or our
future financial performance that involve certain risks and uncertainties
including those discussed in "Risk Factors" below at pages 25 to 26. Actual
events or actual future results may differ materially from any forward looking
statements due to such risks and uncertainties.
Item 1: BUSINESS
Overview
Electronic Arts was initially incorporated in California in 1982. In
September 1991, we were reincorporated under the laws of Delaware. Our principal
executive offices are located at 209 Redwood Shores Parkway, Redwood City,
California 94065 and our telephone number is (650) 628-1500.
We create, market and distribute interactive entertainment software for
a variety of hardware platforms. As of March 31, 1999, we marketed approximately
111 titles developed and/or published under one of our brand names in North
America, including older titles marketed as "Classics" or "Publisher's Choice."
Additionally, we distribute localized versions of these products in the rest of
the world. We also distributed approximately 21 additional titles developed by
other software publishers ("Affiliated Labels") in North America and over 1,000
Affiliated Label titles in the rest of the world. Since our inception, we have
developed products for 38 different computer hardware platforms, including the
following: IBM PC-CD and compatibles, 16-bit Sega Genesis video game system,
16-bit Super Nintendo Entertainment System, PlayStation, Nintendo 64 and
PlayStation II. Our fiscal 1999 product releases were for PC-CD, PlayStation and
Nintendo N64 cartridge products. As of March 31, 1999, we were developing
products for five different hardware platforms.
Our product development methods and organization are modeled on those
used in the entertainment industry. We also market our products with techniques
borrowed from other entertainment companies such as record producers, magazine
publishers and video distributors. Our employees called "producers", who are
each responsible for the development of one or more products, oversee product
development and direct teams comprised of both our employees and outside
contractors. Our designers regularly work with celebrities and organizations in
sports, entertainment and other areas to develop products that provide gaming
experiences that are as realistic and interactive as possible. Celebrities and
organizations with whom we have had contracts include: FIFA, NASCAR, John
Madden, the National Basketball Association, the PGA TOUR, Tiger Woods, the
National Hockey League, World Championship Wrestling Inc., Football Association
Premier League, Formula One, and Sammy Sosa. We maintain development studios in
California, Canada, United Kingdom, Florida, Texas, Japan, Washington, Maryland
and Nevada.
We invest in the creation of state-of-the-art software tools and
utilities that are then used in product development. These tools allow for more
cost-effective product development and the ability to more efficiently convert
products from one hardware platform to another. We have also made investments in
facilities and equipment to facilitate the creation and editing of digital forms
of video and audio recordings and product development efforts for new hardware
platforms.
We distribute our products and those of our Affiliated Labels primarily
by direct sales to retail chains and outlets in the United States and Europe. In
Japan and the Asia Pacific region, we distribute products both directly to
retailers and through third party distributors. Our products are available in
over 58,000 retail
3
<PAGE>
locations worldwide. In fiscal 1999, approximately 42% of our net revenues were
generated by international operations, compared to 43% in fiscal 1998 and 45% in
fiscal 1997.
Investments and Joint Ventures
Acquisitions
Westwood Studios
In September 1998, we completed the acquisition of Westwood Studios,
Inc. and certain assets of the Irvine, California-based Virgin Studios
(collectively "Westwood") for approximately $122,688,000 in cash, including
transaction expenses. The transaction was accounted for under the purchase
method. Westwood has produced 13 titles in the past two years and is best known
for its successful PC-CD franchises, Command and Conquer and Lands of Lore. See
note 11 of the Notes to the Consolidated Financial Statements, included in item
8 hereof.
ABC Software
In July 1998, we acquired ABC Software AG, in Switzerland, and ABC
Software GmbH, in Austria (collectively "ABC"), independent distributors of
entertainment, edutainment and application software, for approximately
$9,466,000 in cash (net of cash acquired of $5,099,000) and $570,000 in other
consideration. The transaction has been accounted for under the purchase method.
See note 11 of the Notes to the Consolidated Financial Statements, included in
item 8 hereof.
Joint Ventures
In May 1998, Electronic Arts and Square Co., Ltd. ("Square"), a leading
developer and publisher of entertainment software in Japan, completed the
formation of two new joint ventures, in North America and Japan. In North
America, the companies formed Square Electronic Arts, LLC ("Square EA"), which
has exclusive publishing rights in North America for future interactive
entertainment PlayStation titles created by Square. We own a 30% minority
interest in this joint venture while Square owns 70%. Additionally, we have the
exclusive right to distribute in North America products published by this joint
venture.
In Japan, the companies established Electronic Arts Square KK ("EA
Square KK"), which localizes and publishes in Japan our properties originally
created in North America and Europe, as well as develops and publishes original
video games in Japan. We own a 70% majority interest, while Square owns 30%. See
note 11 of the Notes to the Consolidated Financial Statements, included in item
8 hereof.
Investments
We have made investments as part of our overall strategy and currently
hold minority equity interests in several companies, including NovaLogic, Inc.,
Firaxis Software, Inc., Kodiak Inc., Pixel Inc. and The 3DO Company ("3DO").
Market
Historically, no hardware platform or system has achieved long-term
dominance in the interactive entertainment market. Accordingly, we have
developed products at one time or another for 38 different hardware platforms.
In fiscal 1999, Sony's PlayStation was the dominant hardware platform in our
industry. In
4
<PAGE>
addition, the installed base of multimedia-enabled home computers, including
those with Internet accessibility, has continued to grow as Personal Computer
("PC") prices have declined and the quality and choices of software have
increased dramatically. We develop and publish products for multiple platforms,
and this diversification continues to be a cornerstone of our strategy.
<TABLE>
The following table sets forth the year of release in North America of
each of the hardware platforms for which we have published titles and the
technology on which such platforms are based:
<CAPTION>
- -----------------------------------------------------------------------------------------------
Date of Introduction in
Manufacturer Platform Name North America Technology
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sega Genesis 1989 16-bit
Nintendo SNES 1991 16-bit
Matsushita 3DO Interactive Multiplayer 1993 32-bit
Sega Saturn 1995 32-bit
Sony PlayStation 1995 32-bit
Nintendo Nintendo N64 1996 64-bit
- -----------------------------------------------------------------------------------------------
</TABLE>
Sega launched DreamcastTM in Japan in December 1998 and it is expected
to be released in North America in late calendar 1999. Sega designed Dreamcast
to combine features from the console and PC platforms.
Sony is scheduled to launch PlayStation II in Japan in March 2000 and
the rest of the world starting in September 2000. PlayStation II specifications
have been announced by Sony to be a 128-bit, Digital Versatile Disk ("DVD")
based system that is Internet and cable ready, and backward compatible with
PlayStation I software.
Nintendo announced its plan for a next generation system to be released
in September 2000. Nintendo's new system will offer a DVD drive and have a modem
for Internet access.
New entrants in the interactive entertainment and multimedia
industries, such as cable television, telephone and diversified media and
entertainment companies, and a proliferation of new technologies, such as online
networks and the Internet have increased the competition in the markets in which
we compete. Our new product releases in fiscal year 2000 will be primarily for
the IBM PC-CD and compatibles, PlayStation and N64. We are also scheduled to
release one or more online network gaming products during fiscal 2000. See Risk
Factors - "New video game platforms create additional technical and business
model uncertainties" at page 25 and "The business models and technology for
e-commerce and online gaming are unproven" at page 25.
The early investment in products for the 32-bit market, including both
Compact Disk personal computer ("PC-CD") and CD-dedicated video game ("CD-video
game") platforms, has been strategically important in positioning us for the
current generation of 32-bit and 64-bit machines. We believe that such
investment continues to be important, and we will continue aggressive
development activities for 32-bit and 64-bit platforms. The PlayStation has
achieved significant market acceptance in all geographical territories, however,
as the PlayStation console market matures, we believe that its growth will not
continue at the present rates. In addition, our revenues and earnings are
dependent on our ability to meet our product release schedule and our failure to
meet those schedules could result in revenues and earnings which fall short of
analysts' expectations in any individual quarter. See Risk Factors - "Product
development schedules are frequently unreliable and make predicting quarterly
results difficult" at page 25.
5
<PAGE>
Competition
See Risk Factors - "Our platform licensors are our chief competitors
and frequently control the manufacturing of our video game products" at page 26.
Relationships with Significant Hardware Platform Companies
Sony
In fiscal 1999, approximately 43% of our net revenues were derived from
sales of software for the PlayStation compared to 42% in fiscal 1998. During
fiscal 1999, we released 21 PlayStation games compared to 25 in fiscal 1998.
Among these releases were FIFA 99, World Cup 98 and Madden NFL 99. The volume of
sales of PlayStation products significantly increased in fiscal 1999 due to the
increase in the installed base of PlayStation consoles worldwide and the quality
and timely release of our key franchise titles. Although revenues from the sales
of PlayStation products in fiscal 2000 are expected to continue to grow, we do
not expect to maintain these growth rates. See Risk Factors - "Product
development schedules are frequently unreliable and make predicting quarterly
results difficult" at page 25.
Under the terms of a licensing agreement entered into with Sony
Computer Entertainment of America in July 1994 (the "Sony Agreement"), as
amended, we are authorized to develop and distribute CD-based software products
compatible with the PlayStation. Pursuant to the Sony Agreement, we engage Sony
to supply its PlayStation CDs for distribution by us. Accordingly, we have
limited ability to control our supply of PlayStation CD products or the timing
of their delivery. See Risk Factors - "Our platform licensors are our chief
competitors and frequently control the manufacturing of our video game products"
at page 26.
Nintendo
During fiscal 1999, we released nine new titles for the N64 compared to
two titles in fiscal 1998. In fiscal 1999, approximately 12% of our net revenues
were derived from the sale of N64 products compared to 6% in 1998. In March
1997, we signed a licensing agreement with Nintendo (the "N64 Agreement") to
develop, publish and market certain sports and other products for the N64. We do
not expect significant growth in revenues for N64 products in fiscal 2000.
Under the terms of the N64 Agreement, we engage Nintendo to manufacture
our N64 cartridges for distribution by us. Accordingly, we have limited ability
to control our supply of N64 cartridges or the timing of their delivery. A
shortage of microchips or other factors outside our control could impair our
ability to obtain an adequate supply of cartridges.
In connection with our purchases of N64 cartridges for distribution in
North America, Nintendo requires us to provide irrevocable letters of credit
prior to Nintendo's acceptance of purchase orders from us for purchases of these
cartridges. For purchases of N64 cartridges for distribution in Japan and
Europe, Nintendo requires us to make cash deposits. Furthermore, Nintendo
maintains a policy of not accepting returns of N64 cartridges. Because of these
and other factors, the carrying of an inventory of cartridges entails
significant capital and risk. See Risk Factors - "Our platform licensors are our
chief competitors and frequently control the manufacturing of our video game
products" at page 26.
6
<PAGE>
Products and Product Development
In fiscal 1999, we generated approximately 65% of our revenues from
products released during the year. See Risk Factors - "Product development
schedules are frequently unreliable and make predicting quarterly results
difficult" at page 25. As of March 31, 1999, we were actively marketing
approximately 111 titles, comprising approximately 193 stock keeping units
("sku's"), that were published by our development divisions and subsidiaries
("EA Studios"). During fiscal 1999, we introduced over 39 EA Studios titles,
representing over 59 sku's, compared to 44 EA Studios titles, comprising over 71
sku's, in fiscal 1998.
The products published by EA Studios are designed and created by our
in-house designers and artists and by independent software developers
("independent artists"). We typically pay the independent artists royalties
based on the sales of the specific products, as defined in the related
independent artist agreements.
For fiscal 1999 and 1998, no title represented revenues greater than
10% of the total fiscal 1999 and 1998 net revenues. For fiscal 1997, we had one
title, Madden Football `97, published on five platforms, which represented
approximately 10% of the total fiscal 1997 net revenues.
We publish products in a number of categories such as sports, action
and interactive movies, strategy, simulations, role playing and adventure, each
of which is becoming increasingly competitive. Our sports-related products,
marketed under the EA Sports brand name, accounted for a significant percentage
of net revenues in fiscal years 1999 and 1998. There can be no assurance that we
will be able to maintain our market share in the sports category.
The front line retail selling prices in North America of our products,
excluding older titles (marketed as "Classics" and "Publisher's Choice"),
typically range from $35.00 to $55.00. "Classics" and "Publisher's Choice"
titles have retail selling prices that range from $10.00 to $30.00. The retail
selling prices of EA titles outside of North America vary based on local market
conditions.
We currently develop or publish products for five different hardware
platforms and have, from time to time, developed and marketed products on 38
different and incompatible platforms in the past. In fiscal 1999, our product
releases were predominantly for PC-CD, 32-bit and 64-bit video game systems. Our
planned product introductions for fiscal 2000 are predominantly for the PC-CD,
PlayStation, N64 as well as for online Internet play. See Risk Factors -
"Product development schedules are frequently unreliable and make predicting
quarterly results difficult" at page 25 and "New video game platforms create
additional technical and business model uncertainties" at page 25.
As compact discs have emerged as the preferred medium for interactive
entertainment, education, and information software, we continued our investment
in the development of CD-ROM tools and technologies in fiscal 1999. The
PlayStation has achieved significant market acceptance in all geographic
territories, however, as the PlayStation console market matures, we believe that
its growth will not continue at the present rates. Most of the CD-video game
products will be convertible for use on multiple advanced hardware systems. We
had research and development expenditures of $202.1 million in fiscal 1999,
$146.2 million in fiscal 1998, and $130.8 million in fiscal 1997. See Risk
Factors - "Product development schedules are frequently unreliable and make
predicting quarterly results difficult" at page 25.
7
<PAGE>
Marketing and Distribution
We distribute both EA Studio products and products developed and
published by other software publishers known as "Affiliated Labels."
In most cases, Affiliated Label products are delivered to us as
completed products. As of March 31, 1999, we distributed 21 Affiliated Label
titles in North America and over 1,000 Affiliated Label titles in the rest of
the world. No single Affiliated Label Publisher has accounted for more than 10%
of our net revenue in any of the last three fiscal years.
In May 1998, Electronic Arts and Square Co., Ltd. formed a new joint
venture in North America, creating Square Electronic Arts, LLC ("Square EA") as
discussed in note 11 in the Notes to the Consolidated Financial Statements,
included in Item 8 hereof. In conjunction with the formation of this joint
venture, we will have the exclusive right in North America to distribute
products published by this joint venture. In fiscal 1999, Square EA published
Parasite Eve for the PlayStation, which was a top ten selling title for
Electronic Arts and expects to release Final Fantasy 8 in fiscal 2000.
In February 1998, we announced that we entered into an international
co-publishing agreement with Metro-Goldwyn-Mayer ("MGM") to be the exclusive
distributor of MGM Interactive titles in all territories except North America.
Under this agreement, we will distribute such titles as Tomorrow Never Dies.
We generated approximately 90% of our North American net revenues from
direct sales to retailers through a field sales organization of professionals
and a group of telephone sales representatives. The remaining 10% of our North
American sales were made through a limited number of specialized and regional
distributors and rack jobbers in markets where we believe direct sales would not
be economical. For the fiscal year ended March 31, 1999, we had sales to one
customer, Wal-Mart Stores, Inc., which represented 12% of total net revenues. We
had no sales to any one customer in excess of 10% of total net revenues for the
fiscal years ended March 31, 1998 and 1997.
We are using the Internet to market our products, build brand equity
and increase our understanding of our customers' expectations. We have various
EA websites offering game tips, user bulletin boards and matching service for
head to head competition and tournaments.
The video game and PC businesses have become increasingly "hits"
driven, requiring significantly greater expenditures for marketing and
advertising, particularly for television advertising. There can be no assurance
that we will continue to produce "hit" titles, or that advertising for any
product will increase sales sufficiently to recoup those advertising expenses.
We have stock-balancing programs for our personal computer products
that, under certain circumstances and up to a specified amount, allow for the
exchange of personal computer products by resellers. We also typically provide
for price protection for our personal computer and video game system products
that, under certain conditions, allows the reseller a price reduction from us
for unsold products. We maintain a policy of exchanging products or giving
credits, but do not give cash refunds. Moreover, the risk of product returns may
increase as new hardware platforms become more popular or market factors force
us to make changes in our distribution system. We monitor and manage the volume
of our sales to retailers and distributors and their inventories as substantial
overstocking in the distribution channel can result in high returns or the
requirement for substantial price protection in subsequent periods. We believe
that we provide adequate reserves for returns and price protection which are
based on estimated future returns of products, taking into account promotional
8
<PAGE>
activities, the timing of new product introductions, distributor and retailer
inventories of our products and other factors, and that our current reserves
will be sufficient to meet return and price protection requirements for current
in-channel inventory. However, there can be no assurance that actual returns or
price protection will not exceed our reserves.
We also have a fulfillment group that sells product directly to
consumers through a toll-free number and through our websites listed in
advertising by us and our Affiliated Labels. This group is also responsible for
targeted direct mail marketing and sells product backups and accessories to
registered customers.
The distribution channels through which consumer software products are
sold have been characterized by change, including consolidations and financial
difficulties of certain distributors and retailers and the emergence of new
retailers such as general mass merchandisers. The development of remote and
electronic delivery systems will create further changes. The bankruptcy or other
business difficulties of a distributor or retailer could render our accounts
receivable from such entity uncollectible, which could have an adverse effect on
our operating results and financial condition. In addition, an increasing number
of companies are competing for access to these channels. Our arrangements with
our distributors and retailers may be terminated by either party at any time
without cause. Distributors and retailers often carry products that compete with
ours. Retailers of our products typically have a limited amount of shelf space
and promotional resources for which there is intense competition. There can be
no assurance that distributors and retailers will continue to purchase our
products or provide our products with adequate levels of shelf space and
promotional support.
International Operations
We have wholly owned subsidiaries throughout the world, including
offices in the United Kingdom, France, Spain, Germany, Australia, Canada, South
Africa, Singapore, Sweden, Japan, Malaysia, Brazil and Holland. The amounts of
net revenues, operating profit and identifiable assets attributable to each of
our geographic regions for each of the last three fiscal years are set forth in
Note 16 of the Notes to the Consolidated Financial Statements included in Item 8
hereof. International net revenues increased by 33% to $516,865,000, or 42% of
consolidated fiscal 1999 net revenues, compared to $389,429,000, or 43% of
consolidated fiscal 1998 net revenues. Europe's net revenues increased by
$117,999,000 primarily due to an increase in sales of PlayStation and AL
products. Japan's net revenues increased by $11,371,000 primarily due to the
sales of FIFA: Road to World Cup 98. Asia Pacific net revenues decreased by
$1,934,000 due to the weaknesses in Asian currencies. In local currency, in
spite of weak economies, net revenues for Asia Pacific increased compared to the
prior year.
Though international revenues are expected to grow in fiscal 2000,
international revenues may not grow at as high a rate as in prior years. See
Risk Factors - "Our business, our products, and our distribution are subject to
increasing regulation in key territories" at page 25 and "Foreign Sales and
Currency Fluctuations" at page 26.
Manufacturing
In many instances, we are able to acquire materials on a
volume-discount basis. We have multiple potential sources of supply for most
materials. Except with respect to our PlayStation and N64 products, we also have
alternate sources for the manufacture and assembly of most of our products. To
date, we have not experienced any material difficulties or delays in production
of our software and related documentation and packaging. However, a shortage of
components or other factors beyond our control could impair our ability to
manufacture, or have manufactured, our products. See Risk Factors - "Our
platform licensors are our chief competitors and frequently control the
manufacturing of our video game products" at page 26.
9
<PAGE>
Backlog
We normally ship products within a few days after receipt of an order.
However, a backlog may occur for EA Studio and Affiliated Label products that
have been announced for release but not yet shipped. We do not consider backlog
to be an indicator of future performance.
Seasonality
Our business is highly seasonal. We typically experience our highest
revenues and profits in the calendar year-end holiday season and a seasonal low
in revenues and profits in the quarter ending in June. In the June quarter of
our fiscal year 2000, we expect these seasonal trends to be magnified due to the
lack of significant product releases during the quarter. Additionally, we had
exceptional results for the same period in fiscal 1999 due to the shipment and
success of World Cup 98.
Employees
As of March 31, 1999, we employed approximately 2,500 people, of whom
over 1,200 were outside the United States. We believe that our ability to
attract and retain qualified employees is an important factor in our growth and
development and that our future success will depend, in large measure, on our
ability to continue to attract and retain qualified employees. To date, we have
been successful in recruiting and retaining sufficient numbers of qualified
personnel to conduct our business successfully. See Risk Factors - "We face
intense competition for talent from highly valued Internet companies" at page
26.
10
<PAGE>
ITEM 2: PROPERTIES
Our principal administrative, sales and marketing, research and
development, and support facility is located in two modern buildings in Redwood
City, California, 20 miles south of San Francisco. We moved into this facility
in October 1998. We presently occupy approximately 350,000 sq. ft. in these
buildings under an operating lease for the buildings and certain adjoining land
that will expire on December 1, 2001. Monthly lease payments vary based upon the
London InterBank Offered Rate. We have the option to purchase the property for
the unamortized financed balance at any time after the non-cancelable lease
term, or we may terminate the lease at any time after the non-cancelable term by
arranging a third party sale or by making a termination payment. In April 1999,
we exercised our option to purchase a parcel of land under the lease and sold it
to a third party. The proceeds will mitigate a portion of the occupancy costs
for this facility. Should we elect to terminate the lease, we will guarantee a
residual value of up to 85% of the unamortized value of the property. As part of
the agreement, we must also comply with certain financial covenants.
Our North American distribution is supported by a 54,000 sq. ft. leased
facility used as an office and warehouse in Hayward, California, and an 84,000
sq. ft. warehouse facility in Louisville, Kentucky. Effective April 1999, we
entered into a lease agreement that increases the Kentucky warehouse facility's
square footage to 250,000 sq. ft. We also occupy sales offices in the
metropolitan areas of Toronto, Chicago, Dallas and New York.
In addition to our Redwood City development studio, we own a 206,000
sq. ft. development facility in Burnaby, British Columbia, Canada and rent a
33,000 sq. ft. facility in Seattle, Washington. The move to the new Canadian
offices was completed in June 1999. We also own a 180,000 sq. ft. development
facility in Austin, Texas and lease a 42,400 sq. ft. development facility in
Walnut Creek, California.
Our United Kingdom subsidiary occupies administrative and sales
facilities in Langley, England, under a lease for a total of 44,000 sq. ft. and
a 22,000 sq. ft. development facility in Surrey, England. In Europe, we also
lease a distribution hub in Heerlen, Holland and two administrative and sales
facilities in Germany, as well as sales and distribution facilities in: Madrid,
Spain; Lyon, France; Johannesberg, South Africa; Neudorf, Austria and Zurich,
Switzerland. Additionally, we have sales offices throughout Europe.
In Asia and the South Pacific, we maintain a 5,500 sq. ft. sales and
distribution facility in Brisbane, Australia. We also have sales and
distribution facilities in Singapore, Malaysia and Taiwan, and representative
offices in Beijing, Hong Kong and Shanghai, China. We also maintain a 27,000 sq.
ft. sales and development office in Tokyo, Japan. See Notes 3 and 9 of the Notes
to the Consolidated Financial Statements included in Item 8 hereof.
We believe that these facilities are adequate for our current needs. We
believe that suitable additional or substitute space will be available as needed
to accommodate our future needs.
11
<PAGE>
ITEM 3: LEGAL PROCEEDINGS
We are subject to pending claims and litigation. Management, after
review and consultation with counsel, considers that any liability from the
disposition of such lawsuits would not have a material adverse effect upon our
consolidated financial condition or results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the quarter ended March 31, 1999.
12
<PAGE>
ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding the executive
officers of Electronic Arts, who are chosen by and serve at the discretion of
the Board of Directors:
Name Age Position
---- --- --------
Lawrence F. Probst III 49 Chairman and Chief Executive Officer
Don A. Mattrick 35 President, Worldwide Studios
John S. Riccitiello 39 President and Chief Operating Officer
William Bingham Gordon 49 Executive Vice President and Chief
Creative Officer
E. Stanton McKee, Jr. 54 Executive Vice President and Chief
Financial and Administrative Officer
Nancy L. Smith 46 Executive Vice President and General
Manager, North American Publishing
Ruth A. Kennedy 44 Senior Vice President, General Counsel
and Secretary
J. Russell Rueff, Jr. 37 Senior Vice President, Human Resources
David L. Carbone 48 Vice President, Finance
Mr. Probst has been a director of Electronic Arts since January 1991
and currently serves as Chairman and Chief Executive Officer. He was elected as
Chairman in July 1994. Mr. Probst has previously served as President of
Electronic Arts; as Senior Vice President of EA Distribution, Electronic Arts'
distribution division, from January 1987 to January 1991; and from September
1984, when he joined Electronic Arts, until December 1986, served as Vice
President of Sales. Mr. Probst holds a B.S. degree from the University of
Delaware.
Mr. Mattrick has served as President of Worldwide Studios since
September 1997. Prior to this, he served as Executive Vice President, North
American Studios, since October 1996. From July 1991 to October 1996, he served
as Senior Vice President, North American Studios, Vice President of Electronic
Arts and Executive Vice President/General Manager for EA Canada. Mr. Mattrick
was founder and former chairman of Distinctive Software Inc. from 1982 until it
was acquired by us in 1991.
Mr. Riccitiello has served as President and Chief Operating Officer
since October 1997. Prior to joining Electronic Arts, Mr. Riccitiello served as
President and Chief Executive Officer of the worldwide bakery division at Sara
Lee Corporation. Before joining Sara Lee, he served as President and CEO of
Wilson Sporting Goods Co. and has also held executive management positions at
Haagen-Dazs, PepsiCo, Inc. and The Clorox Company. Mr. Riccitiello holds a
degree in Economics and Marketing from the University of California, Berkeley.
Mr. Gordon has served as Executive Vice President and Chief Creative
Officer since March 1998. Prior to this, he served as Executive Vice President,
Marketing since October 1995. From August 1993 to October
13
<PAGE>
1995, he served as Executive Vice President of EA Studios and as Senior Vice
President of Entertainment Production since February 1992. He also served as
Senior Vice President of Marketing, as General Manager of EA Studios, as Vice
President of Marketing, as Director of Advertising and as Vice President of our
former entertainment division while employed by us. Mr. Gordon holds a B.A.
degree from Yale University and an M.B.A. degree from Stanford University.
Mr. McKee joined Electronic Arts in March 1989 and is currently
Executive Vice President and Chief Financial and Administrative Officer. Prior
to October 1996, he served as Senior Vice President and Chief Financial and
Administrative Officer. Mr. McKee holds B.A. and M.B.A. degrees from Stanford
University and is also a Certified Public Accountant.
Ms. Smith has served as Executive Vice President and General Manager,
North American Publishing since March 1998. Prior to this, she served as
Executive Vice President, North American Sales since October 1996. She
previously held the position of Senior Vice President of North American Sales
and Distribution from July 1993 to October 1996 and as Vice President of Sales
from 1988 to 1993. Ms. Smith has also served as Western Regional Sales Manager
and National Sales Manager since she joined Electronic Arts in 1984. Ms. Smith
holds a B.S. degree in management and organizational behavior from the
University of San Francisco.
Ms. Kennedy has been employed by Electronic Arts since February 1990.
She served as Corporate Counsel until March 1991 and is currently Senior Vice
President, General Counsel and Secretary. Prior to October 1996, she served as
Vice President, General Counsel and Secretary. Ms. Kennedy was elected Secretary
in September 1994. Ms. Kennedy is a member of the State Bars of California and
New York and received her B.A. degree from William Smith College and her Juris
Doctor from the State University of New York.
Mr. Rueff has served as Senior Vice President of Human Resources since
October of 1998. Prior to joining Electronic Arts, Mr. Rueff held various
positions with the PepsiCo companies for over 10 years, including: Vice
President, International Human Resources; Vice President, Staffing and
Resourcing at Pepsi-Cola International; Vice President, Restaurant Human
Resources for Pizza Hut; and also various other management positions within the
Frito-Lay Company. Mr. Rueff holds a M.S. degree in Counseling and a B.A. degree
in Radio and Television from Purdue University in Indiana.
Mr. Carbone has been with Electronic Arts since February 1991 as Vice
President, Finance. He was elected Assistant Secretary of the Company in March
1991. Mr. Carbone holds a B.S. degree in accounting from King's College and is a
Certified Public Accountant.
14
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the National Market under the symbol "ERTS". The
following table sets forth the quarterly high and low closing sales prices of
our Common Stock from April 1, 1997 through March 31, 1999. Such prices
represent prices between dealers and does not include retail mark-ups,
mark-downs or commissions and may not represent actual transactions.
Closing Sales Prices
-----------------------------
High Low
---- ---
Fiscal Year Ended March 31, 1998:
First Quarter $35.38 $20.13
Second Quarter 37.50 30.75
Third Quarter 39.56 29.94
Fourth Quarter 46.94 34.94
Fiscal Year Ended March 31, 1999:
First Quarter $54.81 $41.63
Second Quarter 55.56 38.13
Third Quarter 56.00 33.88
Fourth Quarter 52.19 38.25
There were approximately 1,900 holders of record of our Common Stock as of June
1, 1999. We believe that a significant number of beneficial owners of our Common
Stock hold their shares in street names.
Dividend Policy
We have not paid any cash dividends and do not anticipate paying cash
dividends in the foreseeable future.
15
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
<TABLE>
ELECTRONIC ARTS AND SUBSIDIARIES
SELECTED FIVE-YEAR FINANCIAL DATA
Years Ended March 31 (In thousands, except per share data)
<CAPTION>
INCOME STATEMENT DATA 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 1,221,863 $ 908,852 $ 673,028 $ 587,299 $ 531,493
Cost of goods sold 625,547 480,766 328,943 291,491 277,543
------------------------------------------------------------------------
Gross profit 596,316 428,086 344,085 295,808 253,950
Operating expenses:
Marketing and sales 163,407 128,308 102,072 85,771 70,764
General and administrative 75,556 57,838 48,489 37,711 33,492
Research and development 202,080 146,199 130,755 108,043 79,910
Charge for acquired in-process technology 44,115 1,500 -- 2,232 --
Merger costs -- 10,792 -- -- --
Amortization of intangibles 5,880 -- -- -- --
------------------------------------------------------------------------
Total operating expenses 491,038 344,637 281,316 233,757 184,166
------------------------------------------------------------------------
Operating income 105,278 83,449 62,769 62,051 69,784
Interest and other income, net 13,180 24,811 13,279 7,514 13,476
------------------------------------------------------------------------
Income before provision for income taxes and minority
interest 118,458 108,260 76,048 69,565 83,260
Provision for income taxes 45,414 35,726 26,003 22,584 26,859
------------------------------------------------------------------------
Income before minority interest 73,044 72,534 50,045 46,981 56,401
Minority interest in consolidated joint venture (172) 28 1,282 (304) 2,620
------------------------------------------------------------------------
Income from continuing operations 72,872 72,562 51,327 46,677 59,021
Discontinued operations:
Gain on disposal of discontinued operations (net of
income tax expense of $173 in fiscal 1995) -- -- -- -- 303
------------------------------------------------------------------------
Net income $ 72,872 $ 72,562 $ 51,327 $ 46,677 $ 59,324
------------------------------------------------------------------------
Per share amounts:
Income from continuing operations:
Basic $ 1.20 $ 1.23 $ 0.89 $ 0.84 $ 1.13
Diluted $ 1.15 $ 1.19 $ 0.86 $ 0.80 $ 1.06
Net income:
Basic $ 1.20 $ 1.23 $ 0.89 $ 0.84 $ 1.13
Diluted $ 1.15 $ 1.19 $ 0.86 $ 0.80 $ 1.07
Number of shares used in computation:
Basic 60,748 58,867 57,544 55,685 52,446
Diluted 63,272 60,958 59,557 58,190 55,546
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA AT FISCAL YEAR END
- ------------------------------------------------------------------------------------------------------------------------------------
Cash, cash equivalents and short-term investments $ 312,822 $ 374,560 $ 268,141 $ 190,873 $ 182,776
Marketable securities 4,884 3,721 5,548 37,869 10,725
Working capital 333,256 408,098 284,863 247,001 180,714
Long-term investments 18,400 24,200 34,478 30,319 14,200
Total assets 901,873 745,681 584,041 489,496 359,866
Total liabilities 236,209 181,713 136,237 108,668 107,894
Minority interest 2,733 -- 28 1,277 1,148
Redeemable preferred stock -- -- -- -- 11,363
Total stockholders' equity 662,931 563,968 447,776 379,551 239,461
</TABLE>
16
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition and
Results of Operations", contains forward looking statements regarding future
events or our future financial performance that involve certain risks and
uncertainties including those discussed in "Risk Factors" at pages 25 to 26 of
this Annual Report on Form 10-K. Actual events or actual future results may
differ materially from any forward looking statements due to such risks and
uncertainties.
RESULTS OF OPERATIONS
Comparison of Fiscal 1999 to 1998
1999 1998 % change
- --------------------------------------------------------------------------------
Net revenues $1,221,863,000 $ 908,852,000 34.4
- --------------------------------------------------------------------------------
We derive revenues primarily from shipments of entertainment software, which
includes EA Studio CD products for dedicated entertainment systems ("CD-video
games"), EA Studio CD personal computer products ("PC-CD"), EA Studio cartridge
products and Affiliated Label ("AL") products that are published by third
parties and distributed by us. We also derive revenues from licensing of EA
Studio products and AL products through hardware companies ("OEMs") and online
subscription revenues.
Our total net revenues increased compared to the prior year due to increased
sales of products on PlayStation , Nintendo N64 , PC-CD and increased worldwide
distribution of AL products. This increase was partially offset by a decrease in
sales of Sega Saturn(R) products and 16-bit video game products.
Sales of PlayStation products in fiscal 1999 increased to $519,830,000, or 43%
of total revenue, compared to $380,299,000, or 42% of total revenue in fiscal
1998. We released 21 new PlayStation titles in fiscal 1999 compared to 25 in
fiscal 1998. The increase in sales was attributable to the greater installed
base of PlayStation game consoles and the releases of key titles for this
platform including FIFA 99, World Cup 98 and Madden NFL 99. We expect revenues
from PlayStation products to continue to grow in fiscal 2000, but as revenues
for these products increase, we do not expect to maintain these growth rates.
Net revenues derived from other 32-bit products, primarily for Saturn, were
$749,000 in fiscal 1999 compared to $17,507,000 in fiscal 1998. We released no
new Saturn titles in fiscal 1999 compared to eight in fiscal 1998. We do not
expect to release any new Saturn titles in fiscal 2000 and revenues from the
sales of Saturn products are not expected to be significant in future years.
Net revenues from PC-CD products increased to $270,793,000 in fiscal 1999,
representing 22% of total net revenues, from $231,034,000, or 25% of total net
revenues in fiscal 1998. We released 29 PC-CD titles in fiscal 1999 compared to
30 PC-CD titles in fiscal 1998. The worldwide increase in sales of PC-CD
products was primarily attributable to an increase in sales in Europe and North
America due to the related releases of key titles for this platform including
Sim City 3000.
Net revenues derived from N64 video game cartridge products were $152,349,000,
or 12% of total net revenues, compared to $56,677,000, or 6%, in fiscal 1998.
The increase in N64 revenues was primarily due to more title releases for this
platform compared to last year and a larger N64 market. We released nine titles
in fiscal 1999, including NASCAR 99,compared to two titles in fiscal 1998. We do
not expect significant growth in revenues for N64 products in fiscal 2000.
Net revenues from shipments of AL products in fiscal 1999 increased to
$248,105,000, or 20% of total revenue, compared to $185,865,000, or 20% of total
revenue in fiscal 1998. The increase was due to higher sales of AL products in
North America and Europe. This increase was primarily attributable to the
distribution of products published by Square EA in North America and the
acquisition of ABC Software in Switzerland. We expect revenues from AL products
to continue to grow in fiscal 2000, but as revenues for these products increase,
we do not expect to maintain these growth rates.
Net revenues generated by 16-bit video game cartridge-based products were
$635,000 in fiscal 1999, compared to $17,314,000, or 2% of net revenues in
fiscal 1998. As the 16-bit video game market has been replaced by 32-bit and
64-bit systems, we did not release any new titles in fiscal 1999. We do not
expect to release any new titles in fiscal 2000 and revenues from the sales of
16-bit products are not expected to be significant.
Licensing of EA Studio products generated $17,788,000 in fiscal 1999, compared
to $15,431,000 in fiscal 1998. The increase was primarily the result of an
increase in the revenues generated by the licensing of our products in Europe.
North America net revenues increased by 36% to $704,998,000 in fiscal 1999 as
compared to $519,423,000 in fiscal 1998. The increase was mainly attributable to
strong growth in N64 and PlayStation systems, the distribution of AL titles and
growth in PC-CD sales. Net revenues from PlayStation and N64 revenues increased
$148,181,000 due to a larger market and greater installed base for these
platforms as well as more title releases for N64 in comparison to the prior
year. North America AL sales increased by
17
<PAGE>
$39,813,000, compared to the prior year primarily due to the distribution of
products published by Square EA. PC-CD revenues increased by $13,439,000 due to
key title releases during the year.
International net revenues increased by 33% to $516,865,000, or 42% of
consolidated fiscal 1999 net revenues, compared to $389,429,000, or 43% of the
fiscal 1998 total. Europe's net revenues increased by $117,999,000 primarily due
to an increase in sales of PlayStation and AL products. Japan's net revenues
increased by $11,371,000 primarily due to the sales of FIFA: Road to World Cup
98. Asia Pacific net revenues decreased by $1,934,000 due to the weakness in
Asian currencies. In local currency, in spite of weak economies, net revenues
for Asia Pacific increased compared to the prior year.
================================================================================
1999 1998 % change
- --------------------------------------------------------------------------------
Cost of goods sold $625,547,000 $480,766,000 30.1
As a percentage of net
revenues 51.2% 52.9%
- --------------------------------------------------------------------------------
Cost of goods sold as a percentage of revenues decreased in fiscal 1999
primarily due to lower artist royalties, including savings related to an
acquisition of a software development company during fiscal 1999, partially
offset by higher sales of lower margin N64 products.
================================================================================
Operating %
Expenses 1999 1998 change
- -------------------------------------------------------------------------------
Marketing and sales $163,407,000 $ 128,308,000 27.4
As a percentage of
net revenues 13.4% 14.1%
- -------------------------------------------------------------------------------
General and
administrative $ 75,556,000 $ 57,838,000 30.6
As a percentage of
net revenues 6.2% 6.4%
- -------------------------------------------------------------------------------
Research and
development $202,080,000 $ 146,199,000 38.2
As a percentage of
net revenues 16.5% 16.1%
- -------------------------------------------------------------------------------
The increase in marketing and sales expenses was primarily attributable to
increased print, Internet and television advertising to support new releases and
increased cooperative advertising associated with higher revenues in North
America and Europe as compared to the prior year. Increases in marketing and
sales expenses were also due to additional headcount related to the continued
expansion of our worldwide distribution business and the acquisitions of ABC
Software and Westwood Studios.
The increase in general and administrative expenses was primarily due to an
increase in headcount and occupancy costs to support the increase in growth in
North America and Europe operations, including the opening of additional
international offices in Europe and the acquisition of ABC Software.
The increase in research and development expenses was due to additional
headcount-related expenses attributable to the acquisition of Westwood Studios,
Inc. and certain assets of the Irvine, California-based Virgin Studio
(collectively "Westwood") in September 1998 and Tiburon Entertainment, Inc. in
April 1998, higher development costs per title, as products are including more
content and are more complex and time consuming to develop, and an increase in
development costs for Ultima Online.
We released a total of 59 new products in fiscal 1999 compared to 71 in fiscal
1998.
================================================================================
Other Operating %
Expenses 1999 1998 change
- --------------------------------------------------------------------------------
Amortization of
intangibles $ 5,880,000 $ -- N/M
As a percentage of
net revenues 0.5% N/A
- --------------------------------------------------------------------------------
Charge for acquired
in-process technology $ 44,115,000 $ 1,500,000 N/M
As a percentage of
net revenues 3.6% 0.2%
- --------------------------------------------------------------------------------
Merger costs $ -- $ 10,792,000 (100.0)
As a percentage of
net revenues N/A 1.2%
- --------------------------------------------------------------------------------
Amortization of intangibles results from the acquisitions of Westwood and ABC
Software in the second quarter of fiscal 1999.
In connection with the purchase of Westwood in September 1998, we allocated and
expensed $41,836,000 of the $122,688,000 purchase price to in-process research
and development projects. This allocation represents the estimated fair value
based on risk-adjusted cash flows related to the incomplete research and
development projects. At the date of acquisition, this amount was expensed as a
non-recurring charge as the in-process technology had not yet reached
technological feasibility and had no alternative future uses. Westwood had three
major PC-CD projects in progress at the time of the acquisition including two in
the best-selling franchise Command and Conquer and one in the critically
acclaimed Lands of Lore series. As of the acquisition date, costs to complete
the Westwood projects acquired were expected to be approximately $9.1 million in
fiscal 1999, $10.6 million in fiscal 2000 and $1.0 million in fiscal 2001. We
believe there have been no significant changes to these estimates as of March
31, 1999. We currently expect to complete the development of these projects at
various dates
18
<PAGE>
through fiscal 2001 and to publish the products upon completion.
The nature of the efforts required to develop the acquired in-process technology
into commercially viable products principally relate to the completion of all
planning, designing and testing activities necessary to establish that the
product can be produced to meet our design requirements including functions,
features and technical performance requirements. Though we currently expect that
the acquired in-process technology will be successfully developed, there can be
no assurance that commercial or technical viability of these products will be
achieved. Furthermore, future developments in the entertainment software
industry, changes in computer or video game console technology, changes in other
product offerings or other developments may cause us to alter or abandon these
plans.
The value assigned to purchased in-process technology was determined by
estimating the completion percentage of research and development efforts at the
acquisition date, forecasting risk adjusted revenues considering the completion
percentage, estimating the resulting net cash flows from the projects and
discounting the net cash flows to their present values. The completion
percentages were estimated based on cost incurred to date, importance of the
completed development tasks and the elapsed portion of the total project time.
The revenue projection used to value the in-process research and development is
based on unit sales forecasts for worldwide sales territories and adjusted to
consider only the revenue related to development achievements completed at the
acquisition date. Net cash flow estimates include cost of goods sold and sales,
marketing and general and administrative expenses and taxes forecasted based on
historical operating characteristics. In addition, net cash flow estimates were
adjusted to allow for fair return on working capital and fixed assets, charges
for franchise and technology leverage and return on other intangibles.
Appropriate risk adjusted discount rates ranging from 20% to 22.5% were used to
discount the net cash flows back to their present value. The remaining
identified intangibles will be amortized on a straight-line basis over two to
twelve years based on expected useful lives of franchise tradenames, existing
products and technologies, retention of workforce, and other intangible assets.
If these projects are not successfully developed, we may not realize the value
assigned to the in-process research and development projects. In addition, the
value of other acquired intangible assets may also become impaired.
In conjunction with the merger of Westwood, we accrued approximately $1,500,000
related to direct transaction costs and other related accruals. At March 31,
1999, there were $725,000 in accruals remaining related to these items.
Additionally, for fiscal 1999, the charge for in-process research and
development also included write-offs of $2,279,000 associated with the
acquisition of two software development companies in the first quarter.
For fiscal 1998, we incurred a charge of $1,500,000 for acquired in-process
technology in connection with the acquisition of the remaining 35% minority
ownership interest in Electronic Arts Victor, Inc. in December 1997. This charge
was made after we concluded that the in-process technology had no alternative
future use after taking into consideration the potential for usage of the
software in different products and resale of the software.
On July 25, 1997, we completed a merger with Maxis, Inc. ("Maxis"). In
conjunction with the merger, we recorded costs of $10,792,000 which included
direct transaction fees and costs associated with integrating the operations of
the two companies. At March 31, 1999, there were no accruals remaining related
to these merger costs.
================================================================================
1999 1998 % change
- --------------------------------------------------------------------------------
Operating income $105,278,000 $83,449,000 26.2
As a percentage of
net revenues 8.6% 9.2%
- --------------------------------------------------------------------------------
Operating income increased due to higher net revenues and related gross profit
partially offset by increased operating expenses including the charges for
acquired in-process technology of $44,115,000 in the current fiscal year
partially offset by merger costs of $10,792,000 and a charge for acquired
in-process technology of $1,500,000 related to the acquisitions in the prior
fiscal year.
================================================================================
1999 1998 % change
- --------------------------------------------------------------------------------
Interest and other
income, net $13,180,000 $24,811,000 (46.9)
As a percentage of
net revenues 1.1% 2.7%
- --------------------------------------------------------------------------------
The decrease in interest and other income, net, was primarily attributable to
the sale of our 50% ownership interest in Creative Wonders, LLC in December
1997. The sale resulted in a gain in the prior year of $12,625,000.
================================================================================
1999 1998 % change
- --------------------------------------------------------------------------------
Income taxes $45,414,000 $35,726,000 27.1
Effective tax rate 38.3% 33.0%
- --------------------------------------------------------------------------------
Our effective tax rate for fiscal 1999 was negatively affected as there was no
tax benefit recorded for a portion of the charges related to the acquired
in-process technology. Excluding the effect of these charges, the effective tax
rate for the current fiscal year would have been 32.0% as compared to a 33.0%
tax rate in the corresponding prior year periods. The lower rate of 32.0%
results primarily from a higher portion of international income subject to a
lower foreign tax rate as
19
<PAGE>
compared to the prior year and an increase in the federal research and
experimental credit.
================================================================================
1999 1998 % change
- --------------------------------------------------------------------------------
Minority interest in
consolidated joint venture $(172,000) $28,000 N/M
As a percentage of
net revenues 0.0% 0.0%
- --------------------------------------------------------------------------------
In the first quarter of fiscal 1999, we formed EA Square KK which is seventy
percent owned by us and thirty percent owned by Square Co. Ltd. ("Square"), a
leading developer and publisher of entertainment software in Japan. Minority
interest for fiscal 1999 represents Square's 30% interest in the net income of
EA Square KK.
For fiscal 1998, the minority interest represented the 35% interest in
Electronic Arts Victor, Inc. ("EAV") owned by Victor Entertainment Industries,
Inc. ("VEI"). We acquired the remaining 35% minority ownership interest in EAV
held by VEI in December 1997.
================================================================================
1999 1998 % change
- --------------------------------------------------------------------------------
Net income $72,872,000 $72,562,000 0.4
As a percentage of
net revenues 6.0% 8.0%
- --------------------------------------------------------------------------------
Reported net income was flat due to the one-time charges related to acquisitions
offsetting significantly higher operating income. The increase in net income,
excluding one-time charges, was due to higher revenues and gross profits, offset
by higher operating expenses. For fiscal 1998, net income included a one-time
gain on sale of Creative Wonders, LLC in the amount of $8,459,000, net of taxes,
offset by Maxis merger costs and a charge for acquired in-process developments
of $8,236,000, net of taxes. For fiscal 1999, net income included one-time
charges for acquired in-process technology of $37,506,000, net of taxes.
Excluding one-time items in both years, as noted above, net income increased to
$110,378,000 from $72,339,000, or 53% over the prior year.
RESULTS OF OPERATIONS
Comparison of Fiscal 1998 to 1997
1998 1997 % change
- --------------------------------------------------------------------------------
Net revenues $908,852,000 $673,028,000 35.0
- --------------------------------------------------------------------------------
Our total net revenues increased compared to the prior year due to increased
sales of PlayStation products, increased worldwide distribution of AL products,
sales of N64 video game cartridge products and sales of PC-CD products. This
increase was partially offset by a decrease in sales of 16-bit video game
cartridges and License/OEM revenues.
Net revenues from 32-bit CD-video game products, primarily for the PlayStation,
were $397,806,000 in fiscal 1998, representing 44% of the total net revenues
compared to $225,875,000, or 34% of total net revenues in fiscal 1997. The
increase in sales of 32-bit video game products was attributable to the greater
installed base of PlayStation game consoles and related releases of key titles
for this platform during the year offset by a decline in revenues from sales of
products for Saturn.
Sales of PlayStation products in fiscal 1998 increased to $380,299,000, or 42%
of total revenue, compared to $187,531,000, or 28% of total revenue in fiscal
1997. We released 25 new PlayStation titles in fiscal 1998 compared to 14 in
fiscal 1997.
Net revenues derived from the sales of other 32-bit products, primarily from
Saturn, were $17,507,000 in fiscal 1998 compared to $38,344,000 in fiscal 1997.
As the installed base of Saturn consoles did not achieve the growth rates of
PlayStation consoles, our revenues from sales of Saturn products declined. We
released eight new Saturn titles in fiscal 1998 compared to 12 in fiscal 1997.
Net revenues from shipments of AL products in fiscal 1998 increased to
$185,865,000, or 20% of total revenue, compared to $96,696,000, or 14% of total
revenue in fiscal 1997. This increase was due to higher sales of AL products in
North America, Europe and Asia Pacific. This increase was attributable to the
product releases under a worldwide exclusive distribution agreement with
DreamWorks Interactive, including The Lost World: Jurassic Park, and due to
continued distribution of products from Accolade, Inc. which began in the fourth
quarter of fiscal 1997. AL revenues also increased as a result of our exclusive
distribution agreement with Twentieth Century Fox Home Entertainment outside
North America.
Net revenues derived from N64 video game cartridge products were $56,677,000, or
6% of total net revenues, compared to $17,804,000 in fiscal 1997. We released
two titles in fiscal 1998 compared to one title in fiscal 1997.
Net revenues from PC-CD products increased to $231,034,000 in fiscal 1998,
representing 25% of total net revenues, from $216,338,000, or 32% of total net
revenues in fiscal 1997. We released 30 PC-CD titles in fiscal 1998 compared to
32 PC-CD titles in fiscal 1997. The increase in sales of PC-CD products was
attributable to the worldwide growth in the PC market and the expansion of our
direct distribution worldwide. PC-CD sales growth for fiscal 1998 was partially
offset by a decline in titles published by Maxis. Maxis' PC-CD revenues for
fiscal 1998 decreased by $17,010,000 or 45% compared to fiscal 1997.
Net revenues generated by 16-bit video game cartridge-based products were
$17,314,000, or 2% of total revenues in fiscal
20
<PAGE>
1998, compared to $89,160,000, or 13% of net revenues in fiscal 1997.
Licensing of EA Studio products generated $15,431,000 in fiscal 1998, compared
to $26,749,000 in fiscal 1997. The decrease was primarily the result of a
decrease in the revenues generated by the licensing of our products in Europe
and Japan.
North America net revenues increased by 39% to $519,423,000 in fiscal 1998 as
compared to $372,616,000 in fiscal 1997. The increase was mainly attributable to
strong growth in PlayStation and N64 systems as well as AL product revenues
partially offset by the decline in 16-bit cartridge and Saturn product sales.
Net revenues from PlayStation and N64 products increased $172,496,000 while
sales of 16-bit cartridge and Saturn products decreased $62,671,000 in
comparison to the prior year. North America AL sales increased $34,355,000,
compared to the prior year.
International net revenues increased by 30% to $389,429,000, or 43% of
consolidated fiscal 1998 net revenues, compared to $300,412,000, or 45% of the
fiscal 1997 total. The increase in international revenues was due to higher
worldwide sales of PlayStation products and increased sales of PC-CD, N64 and AL
products in Europe and Asia Pacific. This was partially offset by a decrease in
32-bit product sales in Japan, international 16-bit video game cartridge
revenues and licensing of our products.
================================================================================
1998 1997 % change
- --------------------------------------------------------------------------------
Cost of goods sold $480,766,000 $328,943,000 46.2
As a percentage of net
revenues 52.9% 48.9%
- --------------------------------------------------------------------------------
Cost of goods sold as a percentage of revenues in fiscal 1998 reflected
increased product costs associated with increased sales of lower margin
affiliated label and N64 titles, a decrease in higher margin PC-CD sales as a
proportion of total net revenues and higher professional and celebrity royalties
on CD-video game and PC-CD titles as well as higher manufacturing royalties on
CD-video game titles.
================================================================================
%
Operating Expenses 1998 1997 change
- --------------------------------------------------------------------------------
Marketing and sales $128,308,000 $102,072,000 25.7
As a percentage of
net revenues 14.1% 15.2%
- --------------------------------------------------------------------------------
General and
administrative $ 57,838,000 $ 48,489,000 19.3
As a percentage of
net revenues 6.4% 7.2%
- --------------------------------------------------------------------------------
Research and
development $146,199,000 $130,755,000 11.8
As a percentage of
net revenues 16.1% 19.4%
- --------------------------------------------------------------------------------
The increase in marketing and sales expenses was primarily attributable to
increased television and print advertising to support new releases and increased
cooperative advertising associated with higher revenues as compared to the prior
year. Increases in marketing and sales expenses were also due to additional
headcount related to the continued expansion of our worldwide distribution
business.
The increase in general and administrative expenses was primarily due to an
increase in payroll and occupancy costs due to the opening of additional
international offices and additional depreciation related to the installation of
new management information systems worldwide. This increase was partially offset
by lower spending in Japan.
The increase in marketing and sales as well as general and administrative
expenses were partially offset by savings attributable to the integration of
Maxis in the second quarter of fiscal 1998.
The increase in research and development expenses was due to additional
headcount related expenses in North America and Europe attributable to increased
in-house development capacity, higher development costs per title and additional
depreciation of computer equipment.
We released a total of 71 new products in fiscal 1998 compared to 68 in fiscal
1997.
================================================================================
Other Operating Expenses
1998 1997 % change
- --------------------------------------------------------------------------------
Charge for acquired
in-process technology $ 1,500,000 $-- N/M
As a percentage of
net revenues 0.2% N/A
- --------------------------------------------------------------------------------
Merger costs $10,792,000 $-- N/M
As a percentage of
net revenues 1.2% N/A
- --------------------------------------------------------------------------------
In connection with the acquisition of the remaining 35% minority ownership
interest in EAV in December 1997, we incurred a charge of $1,500,000 for
acquired in-process technology. This charge was made after we concluded that the
in-process technology had no alternative future use after taking into
consideration the potential for usage of the software in different products and
resale of the software.
On July 25, 1997, we completed a merger with Maxis. In conjunction with the
merger, we recorded costs of $10,792,000 which included direct transaction fees
and costs associated with integrating the operations of the two companies.
21
<PAGE>
================================================================================
1998 1997 % change
- --------------------------------------------------------------------------------
Operating income $83,449,000 $62,769,000 32.9
As a percentage of
net revenues 9.2% 9.3%
- --------------------------------------------------------------------------------
Operating income increased due to higher net revenues and related gross profit
partially offset by increased operating expenses including the charge for
acquired in-process technology as well as merger costs related to the
acquisition of Maxis.
================================================================================
1998 1997 % change
- --------------------------------------------------------------------------------
Interest and other
income, net $24,811,000 $13,279,000 86.8
As a percentage of
net revenues 2.7% 2.0%
- --------------------------------------------------------------------------------
The increase in other income is primarily due to higher interest income
attributable to higher cash balances as compared to the previous year and the
sale of our 50% ownership interest in Creative Wonders, LLC in December 1997.
The sale of Creative Wonders resulted in a gain of $12,625,000. This increase
was partially offset by lower gains on sales of marketable securities in the
amount of $4,098,000 compared to $8,393,000 in the prior year.
================================================================================
1998 1997 % change
- --------------------------------------------------------------------------------
Income taxes $35,726,000 $26,003,000 37.4
Effective tax rate 33.0% 34.2%
- --------------------------------------------------------------------------------
Our effective tax rate was lower for the year as a result of a higher proportion
of international income subject to a lower foreign tax rate as compared to the
prior year and the reinstatement of the federal research and development tax
credit for the full fiscal year 1998.
================================================================================
1998 1997 % change
- --------------------------------------------------------------------------------
Minority interest in
consolidated joint venture $28,000 $1,282,000 (97.8)
As a percentage of net
revenues 0.0% 0.2%
- --------------------------------------------------------------------------------
As discussed above, we acquired the remaining minority ownership interest in EAV
in December 1997. Prior to the acquisition, EAV was sixty-five percent owned by
us and thirty-five percent owned by VEI. Minority interest for the year
reflected only a portion of reported losses for EAV as the net equity of EAV
fell below zero in the first quarter of fiscal 1998.
================================================================================
1998 1997 % change
- --------------------------------------------------------------------------------
Net income $72,562,000 $51,327,000 41.4
As a percentage of
net revenues 8.0% 7.6%
- --------------------------------------------------------------------------------
The increase in net income was due to the growth in revenues and gross margins
offset by higher operating expenses. The impact of the gain on sale of Creative
Wonders, LLC was offset by the charge for acquired in-process technology and
merger costs.
22
<PAGE>
================================================================================
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, our working capital was $333,256,000 compared to
$408,098,000 at March 31, 1998. Cash, cash equivalents and short-term
investments decreased by approximately $61,738,000 in fiscal 1999. We generated
$150,768,000 of cash from operations in fiscal 1999. In addition, $30,577,000
was provided through the sale of equity securities under our stock plans.
Reserves for bad debts and sales returns increased from $51,575,000 at March 31,
1998 to $72,850,000 at March 31, 1999. Reserves have been charged for returns of
product and price protection credits issued for products sold in prior periods.
Management believes these reserves are adequate based on historical experience
and its current estimate of potential returns and allowances.
During fiscal 1999, we invested $122,688,000 in cash for the acquisition of
Westwood Studios, Inc., $9,466,000 for the acquisition of ABC Software,
approximately $7,800,000 for investment in affiliates and approximately
$8,000,000 in long-term licenses. In addition, we invested approximately
$78,800,000 for new facilities in Europe and Canada and $17,800,000 in computer
equipment worldwide. In addition, we repurchased 222,500 shares of our common
stock for approximately $9,001,000.
Our principal source of liquidity is $312,822,000 in cash, cash equivalents
and short-term investments. Management believes the existing cash, cash
equivalents, short-term investments, marketable securities and cash generated
from operations will be sufficient to meet cash and investment requirements for
the next twelve months and the foreseeable future.
================================================================================
YEAR 2000 READINESS DISCLOSURE
Background of Year 2000 Issues
Many currently installed computer systems and software products are unable to
distinguish between twentieth century dates and twenty-first century dates
because such systems may have been developed using two digits rather than four
to determine the applicable year. For example, computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This error could result in system failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced to comply with such "Year
2000" requirements.
State of Readiness
Our business is dependent on the operation of numerous systems that could
potentially be impacted by Year 2000 related problems. Those systems include,
among others: hardware and software systems used to deliver products to our
customers; communications networks such as the Internet and private intranets,
which we depend on to receive orders for products from our customers; the
internal systems of our customers and suppliers; products sold to customers; the
hardware and software systems used internally in the management of our business;
and non-information technology systems and services used in the management of
our business, such as power, telephone systems and building systems.
Based on an analysis of the systems potentially impacted by conducting
business in the twenty-first century, we are applying a phased approach to
making such systems, and accordingly, our operations, ready for the year 2000.
Beyond awareness of the issues and scope of systems involved, the phases of
activities in progress include: an assessment of specific underlying computer
systems, programs and hardware; renovation, replacement or redeployment of Year
2000 non-compliant technology; validation and testing of technologically
compliant Year 2000 solutions; and implementation of the Year 2000 compliant
systems.
As a third party providing software products, we are dependent on the
hardware and software products used to deliver such products and services. If
such products are inoperable due to Year 2000 issues, our business, financial
condition and results of operations could be adversely affected. An inventory of
our internal business systems has been completed and planned software and
hardware upgrades to ensure Year 2000 compliance are in process. The upgrades to
these systems are expected to be completed by June, 1999.
Costs
To date we have not incurred significant costs directly related to Year 2000
issues, even in cases where non-compliant information technology systems were
redeployed or replaced.
We believe that future expenditures to upgrade internal systems and
applications will not have a material adverse effect on our business, financial
condition and results of operations and are primarily included within our
ongoing system development plan. In addition, while the potential costs of
redeploying personnel and of any delays in implementing other projects are not
known, the costs are anticipated to be immaterial.
23
<PAGE>
Risks of the Year 2000 Issues
Our financial information systems include an integrated suite of business
applications developed and supported by Oracle Corporation. These applications
systems are in place and currently support daily operations in the United States
and in Europe. Based on representations made by Oracle Corporation and upon our
limited tests, we believe these systems to be Year 2000 compliant.
We believe our software products are Year 2000 compliant; however, success
of our Year 2000 compliance efforts may depend on the success of our customers
dealing with their Year 2000 issues. Customer difficulties with Year 2000 issues
might require us to devote additional resources to resolve underlying problems.
Failures of our and/or third parties' computer systems could have a material
adverse impact on our ability to conduct business. For example, a significant
percentage of purchase orders received from our customers are computer generated
and electronically transmitted. In addition, the Year 2000 could affect the
ability of consumers to use our PC based products. If the computer systems on
which the consumers use our products are not Year 2000 compliant, such
noncompliance could affect the consumers' ability to use such products.
Contingency Plans
We continue to assess certain of our Year 2000 exposure areas in order to
determine what additional steps beyond those identified by our internal review
in the United States are advisable. We are currently developing a contingency
plan for handling Year 2000 problems that are not detected and corrected prior
to their occurrence. We expect this plan will be completed by June 30, 1999. We
believe that the systems, which represent the principal exposures, have been
identified, and to the extent necessary, are in the process of being modified to
become Year 2000 compliant. Additionally, we will be conducting tests of our
principal business systems to verify that those systems are Year 2000 compliant.
Any failure to address any unforeseen Year 2000 issue could adversely affect our
business, financial condition and results of operations.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing currencies (the
"legacy currency") and the one common legal currency known as the "Euro". From
January 1, 1999 through June 30, 2002 the countries will be able to use their
legacy currencies or the Euro to transact business. By July 1, 2002, at the
latest, the conversion to the Euro will be complete at which time the legacy
currencies will no longer be legal tender. The conversion to the Euro will
eliminate currency exchange rate risk between the member countries.
We do not anticipate any material impact from the Euro conversion on our
financial information systems which currently accommodate multiple currencies.
Computer software changes necessary to comply with the Year 2000 issue are
generally compliant to the Euro conversion issue. Due to numerous uncertainties,
we cannot reasonably estimate the effect that the Euro conversion issue will
have on our pricing or market strategies, and the impact, if any, it will have
on our financial condition and results of operations.
24
<PAGE>
- --------------------------------------------------------------------------------
RISK FACTORS
EA's business is subject to many risks and uncertainties which may affect
our future financial performance. Some of those important risks and
uncertainties which may cause our operating results to vary or which may
materially and adversely affect our operating results are as follows:
- - Product development schedules are frequently unreliable and make predicting
quarterly results difficult. Product development schedules, particularly for new
hardware platforms and high-end multimedia PCs are difficult to predict because
they involve creative processes, use of new development tools for new platforms
and the learning process, research and experimentation associated with
development for new technologies. For example, SimCity 3000, the follow on
product to SimCity 2000, was expected to ship in fiscal 1998, at the time of the
merger with Maxis. Due to additional development delays, that product did not
ship until the fourth quarter of fiscal year 1999. Also, Tiberian Sun, which was
expected to ship in fiscal 1999 at the time of the acquisition of Westwood
Studios, is not expected to be released until the second quarter of fiscal 2000
due to development delays. Additionally, development risks for CD-ROM products
can cause particular difficulties in predicting quarterly results because brief
manufacturing lead times allow finalizing products and projected release dates
late in a quarter. Our revenues and earnings are dependent on our ability to
meet our product release schedules, and our failure to meet those schedules
could result in revenues and earnings which fall short of analysts' expectations
for any individual quarter and the fiscal year.
- - New video game platforms create additional technical and business model
uncertainties. A large portion of our revenues are derived from the sale of
products for play on proprietary video game platforms such as the PlayStation
and the N64. The success of our products is significantly affected by acceptance
of the new video game hardware systems and the life span of older hardware
platforms and our ability to accurately predict which platforms will be most
successful.
Sometimes we will spend development and marketing resources on products designed
for new video game systems that have not yet achieved large installed bases or
will continued product development for older hardware platforms that may have
shorter life cycles than we expected. Conversely, if we do not develop for a
platform that achieves significant market acceptance, or discontinue development
for a platform that has a longer life cycle than expected, our revenue growth
may be adversely affected.
For example, while the Sega Dreamcast console is scheduled to launch in the
United States in late calendar 1999 and has already launched in Japan, we have
no products under development for this platform. Accordingly, we will not have
products available should this platform achieve wide market acceptance.
Similarly, we intend to launch a variety of products for the new Sony
PlayStation platform, the PlayStation II, expected to be released in the Untied
States in September 2000. Should that platform not achieve wide acceptance by
consumers, we will have spent a disproportionate amount of our resources for
this platform. Additionally, we have not negotiated publishing agreements with
Sony, Sega or Nintendo for their next generation platforms, and we do not know
whether the terms of those agreements will be favorable.
- - The business models and technology for e-commerce and online gaming are
unproven. While we do not currently derive significant revenues from online
sales of our packaged products or from games played online, we believe that both
will become a more significant factor in our business and in the interactive
gaming business generally in the future.
E-commerce is becoming an increasingly popular method for conducting business
with consumers. How that form of distribution will affect the more traditional
retail distribution, at which we have historically excelled, and over what time
period, is uncertain. Additionally, technology, staffing and support for sales
direct to consumers differ from that required for sales to resellers.
Online gaming, and particularly multiplayer online gaming such as our Ultima
Online product, has many risks not currently associated with most packaged good
sales including, but not limited to, the following:
In "massively multiplayer" games such as Ultima Online, unanticipated
player conduct significantly affects the performance of the game, and social
issues raised by players' conduct frequently determine player satisfaction. Our
ability to effectively proctor such games is uncertain.
The current business model is as yet experimental and maybe unsustainable;
whether revenues will continue to be sufficient to maintain the significant
support, service and product enhancement demands of online users is uncertain.
We have little experience in pricing strategies for online games or in
predicting usage patterns of our customers.
Additionally, the speed and reliability of the Internet and the performance
of a user's Internet service provider are not controlled by us but impact both
e-commerce and online game performance. Whether the Internet infrastructure will
be adequate to meet increasing demand will affect our ability to grow our
Internet dependent businesses.
- - Our business, our products, and our distribution are subject to increasing
regulation in key territories. Legislation is increasingly introduced which may
affect the content of our products and their distribution. For example, privacy
rules in the United States and Europe impose various
25
<PAGE>
restrictions on our web sites. Those rules vary by territory while of course the
Internet recognizes no geographical boundaries. Other countries such as Germany
have adopted laws regulating content transmitted over the Internet that are
stricter than current United States laws. In the United States, in response to
recent events, the federal and several state governments are considering content
restrictions on products such as those made by us as well as restrictions on
distribution of such products. Any one or more of these factors could harm our
business.
- - Our platform licensors are our chief competitors and frequently control the
manufacturing of our video game products. Our agreements with hardware
licensors, which are also our chief competitors, typically give significant
control to the licensor over the approval and manufacturing of our products.
This fact could, in certain circumstances, leave us unable to get our products
approved, manufactured and shipped to customers. In most events, control of the
approval and manufacturing process by the platform licensors increases both our
manufacturing lead times and costs as compared to those we can achieve
independently. For example, in prior years, we experienced delays in obtaining
approvals for and manufacturing of PlayStation products which caused delays in
shipping those products. The potential for additional delay or refusal to
approve or manufacture our products continues with our platform licensors. Such
occurrences would harm our business and adversely affect our financial
performance.
- - We face intense competition for talent from highly valued Internet companies.
Competition for employees in the interactive software business continues to be
intense. Recently, the most intense competition for recruiting and retaining key
employees is from Internet companies. The high market valuations, large equity
positions for key executives and creative talent and fast stock price
appreciation of these companies make their compensation packages attractive to
those who are already working in more mature companies. This situation creates
difficulty for us to compete for the attraction and retention of executive and
key creative talent.
- - Foreign Sales and Currency Fluctuations. For fiscal 1999, international net
revenues comprised 42% of total consolidated net revenues. We expect foreign
sales to continue to account for a significant and growing portion of our
revenues. Such sales are subject to unexpected regulatory requirements, tariffs
and other barriers. Additionally, foreign sales are primarily made in local
currencies which may fluctuate. As a result of current economic conditions in
Asia, we are subject to additional foreign currency risk. Though we do not
currently derive a significant portion of revenues and operating profits from
sales in Asia and other developing countries, our foreign currency exposure may
increase as operations in these countries grow and if current economic trends in
Asia continue. Any of these factors may significantly harm our business.
- - Fluctuations in Stock Price. Due to analysts' expectations of continued growth
and other factors, any shortfall in earnings could have an immediate and
significant adverse effect on the trading price of our common stock in any given
period. As a result of the factors discussed in this report and other factors
that may arise in the future, the market price of our common stock historically
has been, and may continue to be subject to significant fluctuations over a
short period of time. These fluctuations may be due to factors specific to us,
to changes in analysts' earnings estimates, or to factors affecting the
computer, software, entertainment, media or electronics industries or the
securities markets in general. For example, during the fiscal year 1999, the
price per share of our common stock ranged from $33.88 to $56.00. During the
fiscal year 1998, the price per share of our common stock ranged from $20.13 to
$46.94.
Because of these and other factors affecting our operating results and financial
condition, past financial performance should not be considered a reliable
indicator of future performance, and investors should not use historical trends
to anticipate results or trends in future periods.
26
<PAGE>
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Market Risk
We are exposed to various market risks, including the changes in foreign
currency exchange rates and interest rates. Market risk is the potential loss
arising from changes in market rates and prices. Foreign exchange contracts used
to hedge foreign currency exposures and short-term investments are subject to
market risk. We do not consider our cash and cash equivalents to be subject to
interest rate risk due to their short maturities. We do not enter into
derivatives or other financial instruments for trading or speculative purposes.
Foreign Currency Exchange Rate Risk
We utilize foreign exchange contracts to hedge foreign currency exposures of
underlying assets and liabilities, primarily certain intercompany receivables
that are denominated in foreign currencies thereby limiting our risk. Gains and
losses on foreign exchange contracts are reflected in the income statement. At
March 31, 1999, we had foreign exchange contracts, all with maturities of less
than nine months to purchase and sell approximately $178,178,000 in foreign
currencies, primarily British Pounds, Canadian Dollars, German Deutschmarks,
Japanese Yen and other European currencies.
Fair value represents the difference in value of the contracts at the spot rate
and the forward rate, plus the unamortized premium or discount. At March 31,
1999, fair value of these contracts is not significant. The counterparties to
these contracts are substantial and creditworthy multinational commercial banks.
The risks of counterparty nonperformance associated with these contracts are not
considered to be material. Notwithstanding our efforts to manage foreign
exchange risks, there can be no assurances that our hedging activities will
adequately protect us against the risks associated with foreign currency
fluctuations.
The table below provides information about our foreign currency forward exchange
contracts at March 31, 1999. The information is provided in U.S. dollar
equivalents and presents the notional amount (forward amount), the weighted
average contractual foreign currency exchange rates and fair value. All
contracts mature within nine months.
- --------------------- ----------------- ------------ -----------------
Weighted-
Average
Contract Contract
Amount Rate Fair Value
- --------------------- ----------------- ------------ -----------------
(in thousands) (in thousands)
Foreign currency to
be sold under
contract:
British Pound $93,044 1.63 $ 331
Canadian Dollar 29,118 1.53 (278)
Japanese Yen 9,862 115.33 408
South African 2,000 7.24 (321)
Rand
Australian 1,554 0.62 (34)
Dollar
Brazilian Real 1,441 1.91 (111)
- --------------------- ----------------- ------------ -----------------
Total $137,019 $ (5)
- --------------------- ----------------- ------------ -----------------
Foreign currency to
be purchased under
contract:
British Pound $41,159 1.61 $1,459
- --------------------- ----------------- ------------ -----------------
Total $41,159 $1,459
- --------------------- ----------------- ------------ -----------------
- --------------------- ----------------- ------------ -----------------
Grand total $178,178 $1,454
- --------------------- ----------------- ------------ -----------------
While the contract amounts provide one measurement of the volume of these
transactions, they do not represent the amount of our exposure to credit risk.
The amounts (arising from the possible inabilities of counterparties to meet the
terms of their contracts) are generally limited to the amounts, if any, by which
the counterparties' obligations exceed our obligations as these contracts can be
settled on a net basis at our option. We control credit risk through credit
approvals, limits and monitoring procedures.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates primarily
to our investment portfolio. We do not use derivative financial instruments in
our investment portfolio. We manage our interest rate risk by maintaining an
investment portfolio primarily consisting of debt instruments of high credit
quality and relatively short average maturities. We also manage our interest
rate risk by maintaining sufficient cash and cash equivalent balances such that
we are typically able to hold our investments to maturity. At March 31, 1999,
our cash equivalents, short-term and long-term investments included debt
securities of $224,581,000. Notwithstanding our efforts
27
<PAGE>
to manage interest rate risks, there can be no assurances that we will be
adequately protected against the risks associated with interest rate
fluctuations.
The table below presents the amounts and related weighted average interest rates
of our investment portfolio at March 31, 1999:
- ----------------------- ------------------ ------------ --------------
Average Interest
Rate Cost Fair Value
- ----------------------- ------------------ ------------ --------------
(Dollars in thousands)
Cash equivalents(1)
Fixed rate 0.00% -- --
Variable rate 4.70% $135,567 $135,567
Short-term
investments(1)
Fixed rate 4.64% $ 21,197 $ 21,700
Variable rate 3.94% $ 48,800 $ 48,964
Long-term
investments(1)
Fixed rate 0.00% -- --
Variable rate 5.69% $ 18,400 $ 18,503
- ----------------------- ------------------ ------------ --------------
(1) See definition in note 1 of the Notes to the Consolidated Financial
Statements, included in item 8 hereof.
28
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Auditors, Consolidated Financial Statements and Notes
to Consolidated Financial Statements follow below on pages 29 through 47.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Electronic Arts Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Electronic Arts
Inc. and subsidiaries as of March 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended March 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the financial statements of
Maxis, Inc., a company acquired by Electronic Arts Inc. in a business
combination accounted for as a pooling of interests as described in Note 11 to
the consolidated financial statements, which statements reflect total revenues
constituting 7% for the year ended March 31, 1997, of the related consolidated
totals. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Maxis, Inc., is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Electronic Arts Inc. and
subsidiaries as of March 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 1999, in conformity with generally accepted accounting principles.
Mountain View, California KPMG LLP
April 30, 1999
29
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(In thousands, except share data)
As of March 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-term investments $ 312,822 $ 374,560
Marketable securities 4,884 3,721
Receivables, less allowances of $72,850 and $51,575, respectively 149,468 139,374
Inventories 22,376 19,626
Other current assets 79,915 52,530
-----------------------------
Total current assets 569,465 589,811
Property and equipment, net 181,266 105,095
Long-term investments 18,400 24,200
Investment in affiliates 25,864 20,541
Goodwill and other intangibles 90,682 1,585
Other assets 16,196 4,449
-----------------------------
$ 901,873 $ 745,681
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 63,881 $ 56,233
Accrued liabilities 172,328 125,480
-----------------------------
Total current liabilities 236,209 181,713
Minority interest in consolidated joint venture 2,733 --
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 1,000,000 shares -- --
Common stock, $0.01 par value. Authorized 104,000,000 shares;
issued 61,291,849 and 60,159,601 shares; outstanding 613 602
61,169,286 and 60,159,601 shares, respectively
Paid-in capital 267,699 234,294
Treasury stock, at cost; 122,563 shares in 1999 (4,926) --
Retained earnings 402,112 330,540
Accumulated other comprehensive loss (2,567) (1,468)
-----------------------------
Total stockholders' equity 662,931 563,968
-----------------------------
$ 901,873 $ 745,681
=============================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
30
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
(In thousands, except per share data)
Years Ended March 31,
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $ 1,221,863 $ 908,852 $ 673,028
Cost of goods sold 625,547 480,766 328,943
--------------------------------------------
Gross profit 596,316 428,086 344,085
Operating expenses:
Marketing and sales 163,407 128,308 102,072
General and administrative 75,556 57,838 48,489
Research and development 202,080 146,199 130,755
Charge for acquired in-process technology 44,115 1,500 --
Merger costs -- 10,792 --
Amortization of intangibles 5,880 -- --
--------------------------------------------
Total operating expenses 491,038 344,637 281,316
--------------------------------------------
Operating income 105,278 83,449 62,769
Interest and other income, net 13,180 24,811 13,279
--------------------------------------------
Income before provision for income taxes and minority interest 118,458 108,260 76,048
Provision for income taxes 45,414 35,726 26,003
--------------------------------------------
Income before minority interest 73,044 72,534 50,045
Minority interest in consolidated joint venture (172) 28 1,282
--------------------------------------------
Net income $ 72,872 $ 72,562 $ 51,327
============================================
Net income per share:
Basic $ 1.20 $ 1.23 $ 0.89
Diluted $ 1.15 $ 1.19 $ 0.86
Number of shares used in computation:
Basic 60,748 58,867 57,544
Diluted 63,272 60,958 59,557
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
31
<PAGE>
<TABLE>
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Years Ended March 31, 1999, 1998 and 1997
(In thousands)
Accumulated
Other
Common Stock Comprehensive Treasury Stock
-------------------- Paid-In Retained Income ---------------------
Shares Amount Capital Earnings (Loss) Shares Amount Total
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1996 56,747 $567 $158,144 $206,651 $14,189 -- $ -- $379,551
Net income 51,327 51,327
Change in unrealized
appreciation of investments,
net (8,176) (8,176)
Reclassification adjustment for
gains realized in net income,
net (5,497) (5,497)
Translation adjustment 152 152
-----------
Comprehensive income 37,806
Proceeds from sales of shares
through stock plans 1,516 16 20,985 21,001
Tax benefit related to stock
options 9,210 9,210
Repayment of notes receivable 101 101
Amortization of deferred 107 107
compensation
-------------------------------------------------------------------------------------------
Balances at March 31, 1997 58,263 583 188,547 257,978 668 -- -- 447,776
Net income 72,562 72,562
Change in unrealized
appreciation of investments,
net 1,882 1,882
Reclassification adjustment for
gains realized in net income,
net (2,745) (2,745)
Translation adjustment (1,273) (1,273)
-----------
Comprehensive income 70,426
Proceeds from sales of shares
through stock plans 1,897 19 37,729 37,748
Tax benefit related to stock
options 7,931 7,931
Repayment of notes receivable 87 87
-------------------------------------------------------------------------------------------
Balances at March 31, 1998 60,160 602 234,294 330,540 (1,468) -- -- 563,968
Net income 72,872 72,872
Change in unrealized
appreciation of investments,
net 2,533 2,533
Reclassification adjustment for
gains realized in net income,
net (989) (989)
Translation adjustment (2,643) (2,643)
-----------
Comprehensive income 71,773
Proceeds from sales of shares
through stock plans 1,132 11 27,791 (1,300) 100 4,075 30,577
Purchase of treasury stock (223) (9,001) (9,001)
Tax benefit related to stock
options 5,614 5,614
--------------------------------------------------------------------------------------------
Balances at March 31, 1999 61,292 $613 $267,699 $402,112 $(2,567) (123) $(4,926) $662,931
============================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
32
<PAGE>
<TABLE>
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended March 31,
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES: $ 72,872 $ 72,562 $ 51,327
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest in consolidated joint venture 172 (28) (1,282)
Equity in net loss of affiliates 155 1,162 1,566
Gain on sale of affiliate -- (12,625) --
Depreciation and amortization 40,461 26,907 22,986
Loss on sale of fixed assets 729 1,813 164
Loss on disposition of assets related to merger -- 5,607 --
Gain on sale of marketable securities (1,454) (4,098) (8,393)
Provision for doubtful accounts 6,027 4,302 4,840
Charge for acquired in-process technology 44,115 1,500 --
Change in assets and liabilities, net of acquisitions:
Receivables (11,702) (40,432) (28,018)
Inventories 1,282 (1,753) (1,626)
Other assets (24,266) (5,660) 8,142
Accounts payable 1,622 12,783 4,824
Accrued liabilities 32,797 29,217 24,307
Deferred income taxes (12,042) (12,264) 1,165
--------------------------------------------
Net cash provided by operating activities 150,768 78,993 80,002
--------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 8,281 25 171
Proceeds from sales of marketable securities 1,818 7,276 21,152
Purchase of marketable securities -- (2,762) --
Capital expenditures (115,820) (45,238) (39,124)
Investment in affiliates, net (5,478) 16,579 (11,271)
Purchase of held-to-maturity securities -- (1,008) (23,627)
Proceeds from maturity of securities 17,306 13,338 20,598
Change in short-term investments, net 76,755 (34,504) (62,132)
Acquisition of Westwood Studios, Inc. (122,688) -- --
Acquisition of other subsidiaries, net of cash acquired (11,805) (3,225) --
--------------------------------------------
Net cash used in investing activities (151,631) (49,519) (94,233)
--------------------------------------------
FINANCING ACTIVITIES:
Proceeds from sales of shares through stock plans 30,577 37,748 21,001
Purchase of treasury shares (9,001) -- --
Repayment of notes receivable -- 87 101
Tax benefit from exercise of stock options 5,614 7,931 9,210
Proceeds from minority interest investment in consolidated joint venture 2,109 -- --
--------------------------------------------
Net cash provided by financing activities 29,299 45,766 30,312
--------------------------------------------
Translation adjustment (2,191) (1,273) 185
--------------------------------------------
Increase in cash and cash equivalents 26,245 73,967 16,266
Beginning cash and cash equivalents 215,963 141,996 125,730
--------------------------------------------
Ending cash and cash equivalents 242,208 215,963 141,996
Short-term investments 70,614 158,597 126,145
--------------------------------------------
Ending cash, cash equivalents and short-term investments $ 312,822 $ 374,560 $ 268,141
============================================
Supplemental cash flow information:
Cash paid during the year for income taxes $ 43,050 $ 32,888 $ 15,323
============================================
Non-cash investing activities:
Change in unrealized appreciation of investments and marketable securities $ 1,805 $ (1,411) $ (19,562)
============================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
33
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999, 1998 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The accompanying consolidated financial statements include the accounts of
Electronic Arts Inc. and its wholly-owned and majority-owned subsidiaries (the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements of the Company follows:
(a) Fiscal Year
The Company's fiscal year is reported on a 52/53-week period that ends on the
Saturday nearest to March 31 in each year. The results of operations for fiscal
1999, 1998 and 1997 contain 52 weeks. Since the results of an additional week
are not material, and for clarity of presentation herein, all fiscal periods are
treated as ending on a calendar month end.
(b) Revenue Recognition
The Company's revenue recognition policies are in compliance with American
Institute of Certified Public Accountants Statement of Position ("SOP") 97-2,
"Software Revenue Recognition", and SOP 98-4 "Deferral of the Effective Date of
a Provision of SOP 97-2", which provide guidance on generally accepted
accounting principles for recognizing revenue on software transactions. SOP 97-2
requires that revenue recognized from software arrangements be allocated to each
element of the arrangement based on the relative fair values of the elements.
The Company has adopted the provisions of these SOPs as of April 1, 1998. The
adoption has, in certain circumstances, resulted in the deferral of certain
revenues associated with the Company's sales promotions and products with
multiple deliverable elements. Neither the changes in certain business practices
nor the deferral of certain revenues have resulted in a material impact on the
Company's operating results, financial position or cash flows for the period
ended March 31, 1999. Total deferred revenue at March 31, 1999 and 1998 was
$8,206,000, and $2,797,000, respectively.
Product Sales: Revenue is generally recognized when the product is shipped.
Subject to certain limitations, the Company permits customers to obtain
exchanges within certain specified periods and provides price protection on
certain unsold merchandise. Revenue is recognized net of an allowance for
returns and price protection.
Online Subscription Revenues: Monthly online subscription revenues are
recognized over the period in which the services are provided.
Software Licenses: For those agreements which provide the customers the right to
multiple copies in exchange for guaranteed minimum royalty amounts, revenue is
recognized at delivery of the product master or the first copy. Per copy
royalties on sales that exceed the guarantee are recognized as earned.
Revenue from the licensing of software was $17,788,000, $15,431,000, and
$26,749,000 for the fiscal years ended March 31, 1999, 1998 and 1997,
respectively.
(c) Cash and Investments
Cash equivalents consist of highly liquid investments with insignificant rate
risk and with maturities of three months or less at the date of purchase.
Short-term investments include securities with maturities greater than three
months and less than one year, except for certain investments with stated
maturities greater than one year. Long-term investments consist of securities
with maturities greater than one year.
The Company accounts for investments under Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," ("SFAS 115"). The Company's policy is to protect the value of its
investment portfolio and to minimize principal risk by earning returns based on
current interest rates. Management determines the appropriate classification of
its debt and equity securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Securities classified as held-to-maturity are
carried at amortized cost, which is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in interest
income. Debt securities, not classified as held-to-maturity, are classified as
available-for-sale and are stated at fair value. Securities sold is based on
the specific identification method.
(d) Prepaid Royalties
Prepaid royalties consist primarily of prepayments for manufacturing royalties,
original equipment manufacturer (OEM) fees and license fees paid to celebrities
and professional sports organizations for use of their trade name. Also included
in prepaid royalties are prepayments made to independent software developers
under development arrangements that have alternative future uses. Prepaid
royalties are expensed at the contractual royalty rate as cost of
34
<PAGE>
goods sold based on actual net product sales. Management evaluates the future
realization of prepaid royalties quarterly and charges to income any amounts
that management deems unlikely to be realized through product sales. Royalty
advances are classified as current and non-current assets based upon estimated
net product sales for the following year. The current portion of prepaid
royalties, included in other current assets, was $35,057,000 and $20,470,000 at
March 31, 1999 and 1998, respectively. The long-term portion of prepaid
royalties, included in other assets, was $7,602,000 and $2,289,000 at March 31,
1999 and 1998, respectively.
(e) Software Development Costs
Research and development costs, which consist primarily of software development
costs, are expensed as incurred. SFAS No. 86 provides for the capitalization of
certain software development costs incurred after technological feasibility of
the software is established or for development costs that have alternative
future uses. Under the Company's current practice of developing new products,
the technological feasibility of the underlying software is not established
until substantially all product development is complete, which generally
includes the development of a working model. The software development costs that
have been capitalized to date have been insignificant.
(f) Inventories
Inventories are stated at the lower of cost or market. Inventories at March 31,
1999 and 1998 consisted of:
================================================================================
1999 1998
- --------------------------------------------------------------------------------
(in thousands)
Raw materials and work in process $ 2,983 $ 2,392
Finished goods 19,393 17,234
- --------------------------------------------------------------------------------
$22,376 $19,626
- --------------------------------------------------------------------------------
(g) Advertising Costs
The Company generally expenses advertising costs as incurred, except for
production costs associated with media campaigns which are deferred and charged
to expense at the first run of the ad. Cooperative advertising with distributors
and retailers is accrued when revenue is recognized. Cooperative advertising
credits are reimbursed when qualifying claims are submitted. For the fiscal
years ended March 31, 1999, 1998 and 1997, advertising expenses totaled
approximately $72,437,000, $55,090,000 and $36,159,000, respectively.
(h) Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the
accelerated and straight-line methods over the following useful lives:
- --------------------------------------------------------------------------------
Buildings 20 to 25 years
- --------------------------------------------------------------------------------
Computer equipment 3 to 7 years
- --------------------------------------------------------------------------------
Furniture and equipment 3 to 7 years
- --------------------------------------------------------------------------------
Leasehold improvements Lesser of the lease terms or the estimated
useful lives of the improvements
- --------------------------------------------------------------------------------
(i) Intangible Assets
Intangible assets net of amortization at March 31, 1999 and 1998, of
$90,682,000, and $2,148,000, respectively, include goodwill, costs of obtaining
product technology and noncompete covenants which are amortized using the
straight-line method over the lesser of their estimated useful lives or the
agreement terms, typically from two to twelve years. Amortization expense for
fiscal years ended March 31, 1999, 1998 and 1997 was $5,880,000, $692,000, and
$654,000, respectively. The Company assesses the recoverability of goodwill by
determining whether the carried value of the assets may be recovered through
estimated future cash flows.
(j) Income Taxes
Income tax expense is based on reported earnings before income taxes. Deferred
income taxes reflect the impact of temporary differences between assets and
liabilities recognized for financial reporting purposes and such amounts
recognized for tax purposes.
(k) Foreign Currency Translation
For each of the Company's foreign subsidiaries the functional currency is its
local currency. Assets and liabilities of foreign operations are translated into
U.S. dollars using current exchange rates, and revenues and expenses are
translated into U.S. dollars using average exchange rates. The effects of
foreign currency translation adjustments are deferred and included as a
component of accumulated other comprehensive income (loss) in stockholders'
equity.
Foreign currency transaction gains and losses are a result of the effect of
exchange rate changes on transactions denominated in currencies other than the
functional currency. Included in interest and other income in the statements of
income are foreign currency transaction losses of $1,168,000, $517,000 and
$1,024,000, for the fiscal years ended March 31, 1999, 1998 and 1997,
respectively.
(l) Net Income Per Share
The following summarizes the computations of Basic Earnings Per Share ("EPS")
and Diluted EPS. Basic EPS is computed as net earnings divided by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable
through stock-based compensation plans including stock options, restricted stock
awards, warrants and other convertible securities using the treasury stock
method.
35
<PAGE>
(in thousands, except for per share amounts):
================================================================================
Years Ended March 31,
1999 1998 1997
- --------------------------------------------------------------------------------
Net income $72,872 $72,562 $51,327
- --------------------------------------------------------------------------------
Shares used to compute
net income per share:
Weighted-average
common shares 60,748 58,867 57,544
Dilutive stock options 2,524 2,091 2,013
- --------------------------------------------------------------------------------
Dilutive potential common
shares 63,272 60,958 59,557
- --------------------------------------------------------------------------------
Net income per share:
Basic $1.20 $1.23 $ 0.89
Diluted $1.15 $1.19 $ 0.86
Excluded from the above computation of weighted-average shares for diluted EPS
for the fiscal years ended March 31, 1999, 1998 and 1997 were options to
purchase 645,000, 137,000 and 623,000 shares of common stock, respectively, as
the options' exercise price was greater than the average market price of the
common shares. For the fiscal year ended March 31, 1999, the weighted-average
exercise price of the respective options was $47.33.
(m) Employee Benefits
The Company has a 401(k) Plan covering substantially all of its U.S. employees.
The 401(k) Plan permits the Company to make discretionary contributions to
employees' accounts based on the Company's financial performance. The Company
contributed $2,092,000, $902,000 and $925,000 to the Plan in fiscal 1999, fiscal
1998 and fiscal 1997, respectively.
(n) Stock-based Compensation
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25").
(o) Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS 133
is effective as of the beginning of the first quarter of the fiscal year
beginning after June 15, 2000. The Company is determining the effect of SFAS 133
on its financial statements.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". SOP 98-1 requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software. SOP 98-1 is effective for
financial statements issued for fiscal years beginning after December 15, 1998.
The adoption of SOP 98-1 is not expected to have a material impact on the
Company's results of operations.
In December 1998, the Accounting Standards Executive Committee of the AICPA
issued SOP 98-9, "Software Revenue Recognition, with Respect to Certain
Arrangements," which required recognition of revenue using the "residual method"
in a multiple element arrangement when fair value does not exist for one or more
of the undelivered elements in the arrangement. SOP 98-9 is effective for
transactions entered into after March 15, 1999. Under the "residual method", the
total fair value of the undelivered elements is deferred and subsequently
recognized in accordance with SOP 97-2. The Company will adopt SOP 98-9 in
fiscal year 2000 and does not expect a material change to its accounting for
revenues as a result of the provisions of SOP 98-9.
(p) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Such
estimates include provisions for doubtful accounts, sales returns and
allowances, warranty provisions, and estimates regarding the recoverability of
prepaid royalty advances and inventories. Actual results could differ from those
estimates.
(q) Reclassifications
Certain amounts have been reclassified to conform to fiscal 1999 presentation.
(r) Long-Lived Assets
The Company evaluates long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds its fair value.
36
<PAGE>
(2) FINANCIAL INSTRUMENTS
(a) Cash and Investments
================================================================================
March 31,
1999 1998
- --------------------------------------------------------------------------------
(in thousands)
Cash and cash equivalents:
Cash $106,641 $ 88,241
Municipal securities -- 16,272
Money market funds 135,567 111,450
- --------------------------------------------------------------------------------
Cash and cash equivalents 242,208 215,963
- --------------------------------------------------------------------------------
Short-term investments:
Available-for-sale
Commercial paper -- 15,452
Municipal securities 21,700 24,601
Money market preferreds 43,114 101,438
Held-to-maturity
Municipal securities -- 17,106
U.S. Treasury securities 5,800 --
- --------------------------------------------------------------------------------
Short-term investments 70,614 158,597
- --------------------------------------------------------------------------------
Cash, cash equivalents and short-
term investments $312,822 $374,560
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Long-term investments:
U.S. Treasury securities $18,400 $24,200
- --------------------------------------------------------------------------------
Long-term and short-term held-to-maturity investments include commercial notes
with original maturities of five to eight years secured by U.S. Treasury Notes
which enable the Company to take advantage of certain tax incentives from its
Puerto Rico operation. These investments are treated as held-to-maturity for
financial reporting purposes.
The fair value of held-to-maturity securities at March 31, 1999 was $24,353,000
which included gross unrealized gains of $153,000. The fair value of
held-to-maturity securities at March 31, 1998 was $41,326,000 which included
gross unrealized gains of $27,000 and gross unrealized losses of $7,000.
(b) Marketable Securities
Marketable securities are comprised of equity securities. The Company has
accounted for investments in equity securities as "available-for-sale" and has
stated applicable investments at fair value, with net unrealized appreciation
reported as a separate component of accumulated other comprehensive income
(loss) in stockholders' equity. Marketable securities had an aggregate cost of
$585,000 and $1,143,000 at March 31, 1999 and 1998, respectively. At March 31,
1999, marketable securities included gross unrealized gains of $4,299,000. At
March 31, 1998 marketable securities included gross unrealized gains of
$2,771,000 and gross unrealized losses of $193,000.
For the fiscal years ended March 31, 1999 and 1998, the fair value of marketable
securities sold was $1,818,000 and $7,276,000, respectively. The gross realized
gains from these sales totaled $1,454,000 and $4,098,000 for fiscal 1999 and
1998, respectively. The gain on sale of investments is based on the specific
identification method.
(c) Foreign Currency Forward Exchange Contracts
The Company utilizes foreign currency forward exchange contracts to hedge
foreign currency market exposures of underlying assets, liabilities and other
obligations, primarily certain intercompany receivables that are denominated in
foreign currencies. The Company does not use forward exchange contracts for
speculative or trading purposes. The Company's accounting policies for these
instruments are based on the Company's designation of such instruments as
hedging transactions. The criteria the Company uses for designating an
instrument as a hedge include the instrument's effectiveness in risk reduction
and one-to-one matching of forward exchange contracts to underlying
transactions. Gains and losses on currency forward contracts that are designated
and effective as hedges of firm commitments are deferred and recognized in
income in the same period that the underlying transactions are settled. Gains
and losses on currency forward contracts that are designated and effective as
hedges of existing transactions are recognized in income in the same period as
losses and gains on the underlying transactions are recognized and generally
offset. Gains and losses on any instruments not meeting the above criteria would
be recognized in income in the current period. The Company transacts business in
various foreign currencies. At March 31, 1999, the Company had foreign exchange
contracts, all with maturities of less than nine months, to purchase and sell
approximately $178,178,000 in foreign currencies, primarily in British Pounds,
Canadian Dollars, German Deutschmarks, Japanese Yen and other European
currencies.
Fair value represents the difference in value of the contracts at the spot rate
and the forward rate, plus the unamortized premium or discount. At March 31,
1999, fair value of these contracts is not significant. The counterparties to
these contracts are substantial and creditworthy multinational commercial banks.
The risks of counterparty nonperformance associated with these contracts are not
considered to be material.
(3) COMMITMENTS
Lease Obligations
The Company leases certain of its current facilities and certain equipment under
non-cancelable operating lease agreements. The Company is required to pay
property taxes, insurance and normal maintenance costs for certain of its
facilities and will be required to pay any increases over the base year of these
expenses on the remainder of the Company's facilities.
37
<PAGE>
In February 1995, the Company entered into a master operating lease, as
subsequently amended, for land and a building to be constructed in Redwood City,
California. The initial term of the lease is for a period of three years from
November 30, 1998. Monthly lease payments are based upon the London InterBank
Offered Rate. The Company has the option to purchase the property for the
unamortized financed balance at any time after the non-cancelable lease term, or
it may terminate the lease at any time after the non-cancelable term by
arranging a third party sale or by making a termination payment. Should the
Company elect to terminate the lease, it will guarantee a residual value of up
to 85% of the unamortized value of the property. As part of the agreement, the
Company must also comply with certain financial covenants.
Total future minimum lease commitments as of March 31, 1999 are:
- --------------------------------------------------------------------------------
Year Ended March 31: (in thousands)
2000 $18,284
2001 13,758
2002 6,144
2003 4,709
2004 3,770
Thereafter 5,024
- --------------------------------------------------------------------------------
$51,689
- --------------------------------------------------------------------------------
Total rent expense for all operating leases was $19,480,000, $13,842,000 and
$11,430,000, for the fiscal years ended March 31, 1999, 1998 and 1997,
respectively.
(4) CONCENTRATION OF CREDIT RISK
The Company extends credit to various companies in the retail and mass
merchandising industry. Collection of trade receivables may be affected by
changes in economic or other industry conditions and may, accordingly, impact
the Company's overall credit risk. Although the Company generally does not
require collateral, the Company performs ongoing credit evaluations of its
customers and reserves for potential credit losses are maintained.
Short-term investments are placed with high credit-quality financial
institutions or in short-duration high quality securities. The Company limits
the amount of credit exposure in any one institution or type of investment
instrument.
(5) LITIGATION
The Company is subject to pending claims and litigation. Management, after
review and consultation with counsel, considers that any liability from the
disposition of such lawsuits would not have a material adverse effect upon the
consolidated financial condition of the Company.
(6) PREFERRED STOCK
At March 31, 1999 and 1998, the Company had 1,000,000 shares of Preferred Stock
authorized but unissued. The rights, preferences, and restrictions of the
Preferred Stock may be designated by the Board of Directors without further
action by the Company's stockholders.
(7) TREASURY STOCK
In February 1999, the Board of Directors approved a plan to purchase up to two
million shares of the Company's common stock. For the year ended March 31, 1999,
the Company repurchased 222,500 shares for approximately $9,001,000 under this
program. Of these, 99,937 shares were reissued under the Company's Stock Plans
as of March 31, 1999.
When treasury shares are reissued, any excess of the average acquisition cost of
the shares over the proceeds from reissuance is charged to retained earnings.
(8) STOCK PLANS
(a) Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan program whereby eligible
employees may authorize payroll deductions of up to 10% of their compensation to
purchase shares at 85% of the lower of the fair market value of the Common Stock
on the date of commencement of the offering or on the last day of the six-month
purchase period. The program commenced in September 1991. In fiscal 1999,
241,514 shares were purchased by the Company and distributed to employees at
prices ranging from $26.19 to $36.60. In fiscal 1998, 199,680 shares were
purchased by the Company and distributed to employees at prices ranging from
$26.14 to $26.19. In fiscal 1997, 184,596 shares were purchased by the Company
and distributed to employees at prices ranging from $21.25 to $25.18 per share.
The weighted average fair value of the fiscal 1999, fiscal 1998 and fiscal 1997
awards was $18.27, $9.43, and $10.41, respectively. Under the Employee Stock
Purchase Plan 30,928 shares were distributed from reissued treasury stock in
fiscal 1999. No shares were distributed from reissued treasury stock in fiscal
1998 or fiscal 1997. At March 1999, the Company had 237,444 shares of its Common
Stock reserved for future issuance under the Plan.
Prior to the Maxis merger in July 1997, Maxis employees were eligible to
participate in an employee stock purchase plan. In fiscal 1998 and 1997, Maxis
purchased 7,684, and 18,220 shares, respectively, under this plan which were
distributed to participating employees. Shares were purchased at prices ranging
from $27.70 to $27.99 in fiscal 1998, and $28.56 to $46.08 in fiscal 1997.
(b) Stock Option Plans
The Company's 1991 Stock Option Plan, 1993 Stock Option Plan, 1995 Stock Option
Plan and Directors' Plan ("Option Plans") provide stock options for employees,
officers and
38
<PAGE>
independent contractors, and for directors, respectively. Pursuant to these
Option Plans, the Board of Directors may grant non-qualified and incentive stock
options to employees and officers and non-qualified options to celebrities,
employees of certain companies in which the Company has an equity investment,
and directors, at not less than the fair market value on the date of grant.
Under the Company's stock option plans, 69,009 shares were reissued from
treasury stock in fiscal 1999. No shares were distributed from reissued treasury
stock in fiscal 1998 or fiscal 1997.
The options generally expire ten years from the date of grant and are generally
exercisable in monthly increments over 50 months. Certain options assumed in
connection with the Maxis merger in fiscal 1998 expire ten years from the date
of grant, and vest and become exercisable at a rate of 25% on the first
anniversary of the date of grant and 25% of the shares each year thereafter.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS
123"). Accordingly, no compensation expense has been recognized for options
granted under the Company's employee-based stock option plans. Had compensation
expense been determined based on the fair value at the grant dates for awards
under those plans in accordance with the provisions of SFAS 123, the Company's
pro forma net income and net income per share for fiscal 1999, 1998 and 1997
would have been:
(In thousands, except per share data)
================================================================================
1999 1998 1997
- --------------------------------------------------------------------------------
Net Income
As reported $72,872 $72,562 $51,327
Pro forma $45,886 $52,892 $37,343
Earnings per Share
As reported - basic $1.20 $1.23 $0.89
Pro forma - basic $0.77 $0.91 $0.66
As reported - diluted $1.15 $1.19 $0.86
Pro forma - diluted $0.74 $0.88 $0.64
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The following weighted-average assumptions
are used for grants made in 1999, 1998 and 1997 under the stock plans: risk-free
interest rates of 4.39% to 5.55% in 1999, 5.31% to 6.42% in 1998; and 5.48% to
6.36% in 1997; expected volatility of 59% in fiscal 1999 and 58% in both fiscal
1998 and fiscal 1997; expected lives of 2.27 years in fiscal 1999 and 2.25 years
in fiscal 1998 and fiscal 1997 under the Option Plans and one year for the
Employee Stock Purchase Plan. No dividends are assumed in the expected term. The
Company's calculations are based on a multiple option valuation approach and
forfeitures are recognized when they occur. The above disclosures include
options granted under the former Maxis option plans as if they were initially
granted by the Company.
Because SFAS 123 is applicable only to options granted subsequent to March 31,
1995, the impact of non-vested stock options granted prior to this date has been
excluded from the pro forma calculation. Accordingly, pro forma adjustments are
not indicative of future period pro forma adjustments as the pro forma effect
will not be fully reflected until subsequent years.
39
<PAGE>
<TABLE>
Additional information regarding options outstanding as of March 31, 1999 is as
follows:
<CAPTION>
==============================================================================
------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number of Contractual Exercise Number of Exercise
Range of Exercise Prices Shares Life Price Shares Price
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.720 - $13.500 1,226,919 3.32 $ 8.41 1,226,919 $ 8.41
$13.625 - $23.500 1,987,338 5.91 20.46 1,434,963 19.36
$23.750 - $27.500 1,133,743 7.59 25.00 555,025 25.18
$27.625 - $29.875 1,150,460 7.15 29.73 688,097 29.72
$30.000 - $34.875 1,169,984 7.53 33.30 580,610 32.96
$35.000 - $36.750 1,198,743 8.48 35.44 210,790 35.46
$37.000 - $43.125 1,363,386 9.18 40.54 169,835 40.03
$43.625 - $45.063 1,228,737 9.47 43.82 160,660 43.71
$45.500 - $54.250 979,949 9.33 47.53 67,176 47.18
- --------------------------------------------------------------------------------------------------------------
$ 0.720 - $54.250 11,439,259 7.42 $30.65 5,094,075 $22.79
==============================================================================================================
</TABLE>
<TABLE>
The following summarizes the activity under the Company's stock option plans
during the fiscal years ended March 31, 1999, 1998 and 1997:
<CAPTION>
===============================================
Options Outstanding
-----------------------------------------------
Weighted-Average
Shares Exercise Price
-----------------------------------------------
<S> <C> <C>
Balance at March 31, 1996 7,922,159 $17.46
Granted 2,501,965 31.64
Canceled (779,514) 23.57
Exercised (1,321,042) 12.19
-----------------------------------------------
Balance at March 31, 1997 (3,748,864 shares were
exercisable at a weighted average price of $15.20) 8,323,568 21.97
Granted 3,833,539 32.92
Canceled (616,275) 37.96
Exercised (1,688,702) 18.92
-----------------------------------------------
Balance at March 31, 1998 (3,961,559 shares were
exercisable at a weighted average price of $18.83) 9,852,130 25.76
Granted 3,147,216 44.18
Canceled (568,983) 34.74
Exercised (991,104) 22.73
-----------------------------------------------
Balance at March 31, 1999 11,439,259 $30.65
-----------------------------------------------
Options available for grant at March 31, 1999 787,427
</TABLE>
40
<PAGE>
(9) PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1999 and 1998 consisted of:
================================================================================
1999 1998
- --------------------------------------------------------------------------------
(in thousands)
Computer equipment $127,330 $105,183
Buildings 62,413 31,239
Land 50,570 14,885
Office equipment, furniture and fixtures 21,296 18,670
Leasehold improvements 5,749 12,071
Warehouse equipment and other 3,813 4,414
- --------------------------------------------------------------------------------
271,171 186,462
Less accumulated depreciation and
amortization (89,905) (81,367)
- --------------------------------------------------------------------------------
$181,266 $105,095
- --------------------------------------------------------------------------------
Depreciation and amortization expenses associated with property and equipment
amounted to $34,581,000, $26,215,000 and $22,332,000, for the fiscal years ended
March 31, 1999, 1998 and 1997, respectively.
(10) ACCRUED LIABILITIES
Accrued liabilities at March 31, 1999 and 1998 consisted of:
================================================================================
1999 1998
- --------------------------------------------------------------------------------
(in thousands)
Accrued expenses $ 46,595 $ 25,872
Accrued compensation and benefits 46,541 29,318
Accrued royalties 36,429 36,830
Accrued income taxes 23,724 26,095
Deferred revenue 8,206 2,797
Warranty reserve 7,900 3,462
Deferred income taxes 2,933 1,106
- --------------------------------------------------------------------------------
$172,328 $125,480
- --------------------------------------------------------------------------------
(11) BUSINESS COMBINATIONS AND DIVESTITURE
(a) Westwood Studios
In September 1998, the Company completed the acquisition of Westwood Studios,
Inc. and certain assets of the Irvine, California - based Virgin Studio
(collectively "Westwood") for approximately $122,688,000 in cash, including
transaction expenses. The adjusted allocation of the excess purchase price over
the net tangible liabilities assumed was $128,573,000 of which, based on
management's estimates prepared in conjunction with a third party valuation
consultant, $41,836,000 was allocated to purchased in-process research and
development and $86,737,000 was allocated to other intangible assets. Amounts
allocated to other intangibles include franchise trade names of $32,357,000,
existing technology of $6,510,000, workforces of $1,680,000 and other goodwill
of $46,190,000 and are being amortized over lives ranging from two to twelve
years. Purchased in-process research and development includes the value of
products in the development stage that are not considered to have reached
technological feasibility or to have alternative future use. Accordingly, this
non-recurring item was expensed in the Consolidated Statement of Income upon
consummation of the acquisition. The non-recurring charge for in-process
research and development reduced diluted earnings per share by approximately
$0.59 in the fiscal year 1999. The results of the operations of Westwood and the
estimated fair value of assets acquired and liabilities assumed are included in
the Company's financial statements from the date of acquisition.
In conjunction with the merger of Westwood, the Company accrued approximately
$1,500,000 related to direct transaction costs and other related accruals. At
March 31, 1999, there were $725,000 in accruals remaining related to these
items.
In connection with the Westwood acquisition, the purchase price has been
allocated to the assets and liabilities assumed based upon the fair values on
the date of acquisition, as follows (in thousands):
================================================================================
Current assets $ 4,500
Property and equipment 3,257
In-process technology 41,836
Other intangible assets 86,737
Current liabilities (13,642)
- --------------------------------------------------------------------------------
Total purchase price $122,688
- --------------------------------------------------------------------------------
The following table reflects unaudited pro forma combined results of operations
of the Company and Westwood on the basis that the acquisition had taken place at
the beginning of the fiscal year for each of the periods presented (in
thousands, except per share data):
================================================================================
1999 1998
- --------------------------------------------------------------------------------
Revenues $1,229,055 $1,011,234
Net income $ 111,308 $ 64,604
Net income per share - basic $1.83 $1.10
Net income per share - diluted $1.76 $1.06
Number of shares used in computation - basic 60,748 58,867
Number of shares used in computation - diluted 63,272 60,958
- --------------------------------------------------------------------------------
41
<PAGE>
In management's opinion, the unaudited pro forma combined results of operations
are not indicative of the actual results that would have occurred had the
acquisition been consummated at the beginning of fiscal 1998 or at the beginning
of fiscal 1999 or of future operations of the combined companies under the
ownership and management of the Company.
(b) ABC Software
In July 1998, the Company acquired ABC Software AG and ABC Software GmbH
(collectively "ABC"), independent distributors of entertainment, edutainment and
application software in Switzerland and Austria, respectively, for approximately
$9,466,000 in cash (net of cash acquired of $5,099,000) and $570,000 in other
consideration. The transaction has been accounted for under the purchase method.
The excess purchase price over the fair value of the net tangible assets
acquired of approximately $7,377,000 was allocated to goodwill and is being
amortized over 7 years.
(c) Square Co., Ltd.
In May 1998, the Company and Square Co., Ltd. ("Square"), a leading developer
and publisher of entertainment software in Japan, completed the formation of two
new joint ventures in North America and Japan. In North America, the companies
formed Square Electronic Arts, LLC ("Square EA"), which has exclusive publishing
rights in North America for future interactive entertainment titles created by
Square. Additionally, the Company has the exclusive right to distribute in North
America products published by this joint venture. The Company contributed
$3,000,000 and owns a 30% minority interest in this joint venture while Square
owns 70%. This joint venture is accounted for under the equity method.
In Japan, the companies established Electronic Arts Square KK ("EA Square KK"),
which will localize and publish in Japan the Company's properties originally
created in North America and Europe, as well as develop and publish original
video games in Japan. The Company contributed cash and has a 70% majority
ownership interest, while Square contributed cash and owns 30%. Accordingly, the
assets, liabilities and results of operations for EA Square KK are included in
the Company's Consolidated Balance Sheets and Results of Operations since June
1, 1998, the date of formation. Square's 30% interest in EA Square KK has been
reflected as "Minority interest in consolidated joint venture" on the Company's
Consolidated Financial Statements.
(d) Maxis, Inc.
On July 25, 1997, the Company competed a merger with Maxis, Inc. ("Maxis"), a
California-based interactive software developer. Under the transaction,
approximately 4.1 million shares of Electronic Arts' stock were exchanged for
all outstanding Maxis common stock. The transaction was accounted for as a
pooling of interests. The accompanying financial statements, notes and analyses
have been restated for all periods presented to reflect this transaction.
In conjunction with the merger of Maxis, the Company recorded costs of
$10,792,000. This charge included direct transaction fees for investment
bankers, attorneys, accountants, and other related costs of approximately
$2,781,000 and costs associated with integrating the operations of the two
companies of approximately $8,011,000. Included in the integration costs were
redundant facility costs, severance payments, equipment abandonment costs and
other asset write downs, contract termination charges and other related
expenses. Of the total merger costs, approximately $5,185,000 related to cash
expenditures while approximately $5,607,000 related to noncash charges. At March
31, 1999, there were no accruals remaining related to these merger related
costs.
Total net revenue and net income (loss) for the individual entities for the
fiscal year ended March 31, 1997 is as follows (in thousands):
================================================================================
Electronic
Arts Maxis Combined
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
Net revenue $624,766 $48,262 $673,028
Net income (loss) 53,002 (1,675) 51,327
- --------------------------------------------------------------------------------
(e) Creative Wonders, LLC
In December 1997, the Company completed the sale of its 50% ownership interest
in Creative Wonders, LLC, a joint venture company formed with the Walt Disney
Company for $16,750,000 in cash. The Company recognized a gain of $12,625,000,
which is included in interest and other income. Prior to the sale, the Company
distributed children's interactive titles published and sold by the joint
venture into the retail channel. The investment was accounted for under the
equity method prior to sale.
(f) Other Business Combinations
Additionally, during the quarter ended June 30, 1998, the Company acquired two
software development companies. In connection with these acquisitions, the
Company incurred a charge of $2,279,000 for acquired in-process technology. The
charge was made after the Company concluded that the in-process technology had
not reached technological feasibility and had no alternative future use after
taking into consideration the potential for usage of the software in different
products and resale of the software.
(12) INCOME TAXES
The Company's pretax income from operations for the fiscal years ended March
31, 1999, 1998 and 1997 consisted of the following components:
42
<PAGE>
================================================================================
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Domestic $ 79,789 $ 51,620 $27,614
Foreign 38,669 56,640 48,434
- --------------------------------------------------------------------------------
Total pretax income $118,458 $108,260 $76,048
- --------------------------------------------------------------------------------
Income tax expense (benefit) for the fiscal years ended March 31, 1999, 1998 and
1997 consisted of:
================================================================================
(in thousands) Current Deferred Total
- --------------------------------------------------------------------------------
1999:
Federal $31,204 $(10,340) $20,864
State 4,401 (2,590) 1,811
Foreign 15,715 1,410 17,125
Charge in lieu of taxes
from employee stock plans
5,614 -- 5,614
- --------------------------------------------------------------------------------
$56,934 $(11,520) $45,414
- --------------------------------------------------------------------------------
1998:
Federal $14,751 $ (7,585) $ 7,166
State 1,361 (727) 634
Foreign 18,561 1,434 19,995
Charge in lieu of taxes
from employee stock plans
7,931 -- 7,931
- --------------------------------------------------------------------------------
$42,604 $ (6,878) $35,726
- --------------------------------------------------------------------------------
1997:
Federal $ 3,145 $ (3,472) $ (327)
State 804 (674) 130
Foreign 16,543 447 16,990
Charge in lieu of taxes
from employee stock plans
9,210 -- 9,210
- --------------------------------------------------------------------------------
$29,702 $ (3,699) $26,003
- --------------------------------------------------------------------------------
The components of the net deferred tax assets as of March 31, 1999 and 1998
consist of:
================================================================================
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
Deferred tax assets:
Accruals, reserves and other expenses $ 76,015 $ 50,096
Maxis Federal and State loss carryforwards -- 2,088
Foreign loss and credit carryforwards -- 11,514
- --------------------------------------------------------------------------------
Total gross deferred tax assets 76,015 63,698
Less: valuation allowance -- (11,514)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 76,015 $ 52,184
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Undistributed earnings of DISC (1,784) (2,081)
Prepaid royalty expenses (43,681) (32,422)
Unrealized gains on marketable
securities (1,395) (848)
Other (949) (147)
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities $(47,809) $(35,498)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 28,206 $ 16,686
- --------------------------------------------------------------------------------
At March 31, 1999, deferred tax assets of $25,406,000 were included in other
current assets.
The differences between the statutory income tax rate and the Company's
effective tax rate, expressed as a percentage of income before provision for
income taxes, for the years ended March 31, 1999, 1998 and 1997 were as follows:
================================================================================
1999 1998 1997
- --------------------------------------------------------------------------------
Statutory Federal tax rate 35.0% 35.0% 35.0%
State taxes, net of Federal benefit 1.5 1.0 0.8
Differences between statutory rate
and foreign effective tax rate (2.5) (2.2) (1.0)
Foreign loss without tax benefit -- -- 1.7
Research and development credits (2.1) (0.6) --
Nondeductible acquisition costs 7.4 -- --
Other (1.0) (0.2) (2.3)
- --------------------------------------------------------------------------------
38.3% 33.0% 34.2%
- --------------------------------------------------------------------------------
The Company provides for U.S. taxes on an insignificant portion of the
undistributed earnings of its foreign subsidiaries and does not provide taxes on
the remainder. At March 31, 1999, the undistributed foreign earnings of the
foreign subsidiaries amounted to approximately $122,000,000. If these earnings
were distributed to the parent company, foreign tax credits available under
current law would substantially eliminate the resulting Federal tax liability.
The Company's U.S. income tax returns for the years 1992 through 1995 have been
examined by the Internal Revenue Service (IRS). In 1998, the Company received a
notice of deficiencies from the IRS. These deficiencies relate primarily to
operations in Puerto Rico, which the Company is contesting in Tax Court. The
Company believes that any additional liabilities, if any, that arise from the
outcome of this examination will not be material to the Company's consolidated
financial statements.
43
<PAGE>
(13) INTEREST AND OTHER INCOME, NET
Interest and other income, net for the years ended March 31, 1999, 1998 and 1997
consisted of:
================================================================================
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Interest income $12,625 $13,649 $ 9,699
Gain on disposition of assets, net 725 14,910 8,229
Foreign currency losses (1,168) (517) (1,024)
Equity in net loss of affiliates (155) (1,162) (1,566)
Other income (expense), net 1,153 (2,069) (2,059)
- --------------------------------------------------------------------------------
$13,180 $24,811 $13,279
- --------------------------------------------------------------------------------
(14) Comprehensive Income
In fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in financial
statements. SFAS 130 requires classification of other comprehensive income in a
financial statement and display of other comprehensive income separately from
retained earnings and additional paid-in capital. Other comprehensive income
includes primarily foreign currency translation adjustments and unrealized gains
(losses) on investments.
The change in the components of accumulated other comprehensive income, net of
taxes, is summarized as follows (in thousands):
================================================================================
Foreign Unrealized Accumu-
currency gains lated other
translation (losses) on comprehen-
adjustments investments sive income
- --------------------------------------------------------------------------------
Balance at
March 31, 1996 $ (2,077) $ 16,266 $ 14,189
Other
comprehensive
income (loss) 152 (13,673) (13,521)
- --------------------------------------------------------------------------------
Balance at
March 31, 1997 (1,925) 2,593 668
Other
comprehensive
income (loss) (1,273) (863) (2,136)
- --------------------------------------------------------------------------------
Balance at
March 31, 1998 (3,198) 1,730 (1,468)
Other
comprehensive
income (loss) (2,643) 1,544 (1,099)
- --------------------------------------------------------------------------------
Balance at
March 31, 1999 $ (5,841) $ 3,274 $ (2,567)
- --------------------------------------------------------------------------------
Change in unrealized gains (losses) on investments, net are shown net of taxes
of $727,000, $(426,000) and $(7,202,000) in fiscal 1999, 1998 and 1997,
respectively.
The currency translation adjustments are not adjusted for income taxes as they
relate to indefinite investments in non-U.S. subsidiaries.
(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash, cash equivalents, short-term investments, receivables, accounts payable
and accrued liabilities - the carrying amount approximates fair value because of
the short maturity of these instruments.
Long-term investments, investments classified as held-to-maturity and marketable
securities - fair value is based on quoted market prices.
44
<PAGE>
(16) SEGMENT INFORMATION
<TABLE>
In 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise". SFAS No. 131 establishes
standards for the reporting by public business enterprises of information about
product lines, geographic areas and major customers. The method for determining
what information to report is based on the way that management organizes the
operating segments within the Company for making operational decisions and
assessments of financial performance. The Company's chief operating decision
maker is considered to be the Company's Chief Executive Officer ("CEO"). The CEO
reviews financial information presented on a consolidated basis accompanied by
disaggregated information about revenues by geographic region and by product
lines for purposes of making operating decisions and assessing financial
performance. The Company has four reportable segments: North America, Europe,
Asia Pacific and Japan, which are organized, managed and analyzed geographically
and operate in one industry segment: the creation, marketing and distribution of
entertainment software. Information about the Company's operations in the North
America and foreign areas for the fiscal years ended March 31, 1999, 1998 and
1997 is presented below:
<CAPTION>
Asia
(in thousands) Pacific
North (excluding
America Europe Japan) Japan Eliminations Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1999:
Net revenues from unaffiliated
customers $704,998 $443,937 $39,560 $ 33,368 $ -- $1,221,863
Intersegment sales 32,216 15,062 2,800 12 (50,090) --
-----------------------------------------------------------------------------------------
Total net revenues $737,214 $458,999 $42,360 $ 33,380 $(50,090) $1,221,863
=========================================================================================
Operating income $ 78,826 $ 21,052 $ 3,208 $ 2,192 $ -- $ 105,278
Interest income $ 9,931 $ 2,551 $ 143 $ -- $ -- $ 12,625
Depreciation and amortization $ 29,272 $ 9,399 $ 506 $ 1,284 $ -- $ 40,461
Identifiable assets $596,357 $268,152 $20,938 $ 16,426 $ -- $ 901,873
Capital expenditures $ 54,029 $ 58,383 $ 418 $ 2,990 $ -- $ 115,820
Fiscal 1998:
Net revenues from unaffiliated
customers $519,423 $325,938 $41,494 $ 21,997 $ -- $ 908,852
Intersegment sales 45,913 21,613 513 133 (68,172) --
-----------------------------------------------------------------------------------------
Total net revenues $565,336 $347,551 $42,007 $ 22,130 $(68,172) $ 908,852
=========================================================================================
Operating income (loss) $ 31,852 $ 51,807 $ 6,995 $(7,205) $ -- $ 83,449
Interest income $ 10,931 $ 2,471 $ 247 $ -- $ -- $ 13,649
Depreciation and amortization $ 20,826 $ 4,541 $ 661 $ 879 $ -- $ 26,907
Identifiable assets $515,728 $201,988 $17,347 $ 10,618 $ -- $ 745,681
Capital expenditures $ 25,423 $ 18,035 $ 669 $ 1,111 $ -- $ 45,238
Fiscal 1997:
Net revenues from unaffiliated
customers $372,616 $233,614 $28,072 $ 38,726 $ -- $ 673,028
Intersegment sales 54,530 6,938 603 122 (62,193) --
-----------------------------------------------------------------------------------------
Total net revenues $427,146 $240,552 $28,675 $ 38,848 $(62,193) $ 673,028
=========================================================================================
Operating income (loss) $ 17,035 $ 43,295 $ 5,652 $(3,213) $ -- $ 62,769
Interest income $ 7,820 $ 1,662 $ 217 $ -- $ -- $ 9,699
Depreciation and amortization $ 17,450 $ 4,609 $ 252 $ 675 $ -- $ 22,986
Identifiable assets $430,055 $121,673 $12,820 $ 19,493 $ -- $ 584,041
Capital expenditures $ 29,627 $ 7,370 $ 399 $ 1,728 $ -- $ 39,124
</TABLE>
45
<PAGE>
For the fiscal year ended March 31, 1999, the Company had sales to one customer
which represented 12% of total net revenues. The Company had no sales to any one
customer in excess of 10% of total net revenues for fiscal years ended March 31,
1998 and 1997.
Information about the Company's net revenues by product line for the fiscal
years ended March 31, 1999, 1998 and 1997 is presented below (in thousands):
================================================================================
1999 1998 1997
- --------------------------------------------------------------------------------
PlayStation $ 519,830 $380,299 $187,531
PC-CD 270,793 231,034 216,338
Affiliated label 248,105 185,865 96,696
N64 152,349 56,677 17,804
Saturn 756 17,543 38,424
License, OEM and Other 30,030 37,434 116,235
- --------------------------------------------------------------------------------
$1,221,863 $908,852 $673,028
- --------------------------------------------------------------------------------
46
<PAGE>
<TABLE>
QUARTERLY FINANCIAL AND MARKET INFORMATION (UNAUDITED)
<CAPTION>
Quarter Ended
------------------------------------------------------- Year
June 30 Sept. 30 Dec. 31 March 31 Ended
- ------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Fiscal 1999
Net revenues $ 178,221 $ 245,763 $ 520,155 $ 277,724 $ 1,221,863
Operating income (loss) 3,050 (29,545) 102,439 29,334 105,278
Net income (loss) 3,700 (25,273) 72,531 21,914 72,872
Net income (loss) per share - basic $ 0.06 $ (0.42) $ 1.19 $ 0.36 $ 1.20
Net income (loss) per share - diluted $ 0.06 $ (0.42) $ 1.15 $ 0.35 $ 1.15
Common stock price per share
High $ 54.81 $ 55.56 $ 56.00 $ 52.19 $ 56.00
Low $ 41.63 $ 38.13 $ 33.88 $ 38.25 $ 33.88
Fiscal 1998
Net revenues $ 123,712 $ 189,828 $ 391,245 $ 204,067 $ 908,852
Operating income (loss) (4,807) (3,080) 70,983 20,353 83,449
Net income (loss) (1,451) 41 58,620 15,352 72,562
Net income (loss) per share - basic $ (0.02) $ -- $ 0.99 $ 0.26 $ 1.23
Net income (loss) per share - diluted $ (0.02) $ -- $ 0.96 $ 0.25 $ 1.19
Common stock price per share
High $ 35.38 $ 37.50 $ 39.56 $ 46.94 $ 46.94
Low $ 20.13 $ 30.75 $ 29.94 $ 34.94 $ 20.13
Fiscal 1997
Net revenues $ 88,735 $ 137,271 $ 290,849 $ 156,173 $ 673,028
Operating income (loss) (9,038) 727 58,641 12,439 62,769
Net income(loss) (1,381) 3,388 38,703 10,617 51,327
Net income (loss) per share - basic $ (0.02) $ 0.06 $ 0.67 $ 0.18 $ 0.89
Net income (loss) per share - diluted $ (0.02) $ 0.06 $ 0.65 $ 0.18 $ 0.86
Common stock price per share
High $ 34.50 $ 39.13 $ 37.63 $ 36.13 $ 39.13
Low $ 25.25 $ 24.75 $ 27.88 $ 26.25 $ 24.75
</TABLE>
The Company's common stock is traded in the over-the-counter market under the
Nasdaq Stock Market symbol ERTS. The closing prices for the common stock in the
table above represent the high and low closing prices as reported on the Nasdaq
National Market.
47
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
48
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors who are nominated for re-election required
by Item 10 is incorporated herein by reference to the information in our
definitive Proxy Statement for the 1999 Annual Meeting of Stockholders (the
"Proxy Statement") under the caption "Proposal No. 1 - Re-Election of
Directors." The information regarding executive officers required by Item 10 is
included in Item 4A hereof.
ITEM 11: EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the
information in the Proxy Statement under the caption "Compensation of Executive
Officers" specifically excluding the "Compensation Committee Report on Executive
Compensation".
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to the
information in the Proxy Statement under the caption "Amount and Nature of
Shares Beneficially Owned."
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to the
information in the Proxy Statement under the caption "Certain Transactions."
49
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Index to Financial Statements. Page(s) in Form 10-K
Independent Auditors' Report 29
Consolidated Balance Sheets as of March 31, 1999
and 1998 30
Consolidated Statements of Income for the Years Ended
March 31, 1999, 1998 and 1997 31
Consolidated Statements of Stockholders' Equity for the
Years Ended March 31, 1999, 1998 and 1997 32
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1999, 1998 and 1997 33
Notes to Consolidated Financial Statements for the Years
Ended March 31, 1999, 1998 and 1997 34-47
2. Financial Statement Schedule.
The following financial statement schedule of Electronic Arts for
the years ended March 31, 1999, 1998 and 1997 is filed as part of
this report and should be read in conjunction with the
Consolidated Financial Statements of Electronic Arts.
Schedule II - Valuation and Qualifying Accounts
Other financial statement schedules are omitted because the
information called for is not required or is shown either in the
Consolidated Financial Statements or the notes thereto.
3. Exhibits.
The following exhibits are filed as part of, or incorporated by
reference into, this report:
Number Exhibit Title
------ -------------
3.01 Registrant's Certificate of Incorporation, as amended to
December 1, 1992. (1)
3.02 Registrant's Certificate of Amendment of Certificate of
Incorporation. (2)
3.03 Registrant's By-Laws, as amended to date. (3)
4.01 Specimen Certificate of Registrant's Common Stock. (4)
10.01 Registrant's 1982 Stock Option Plan, as amended to date, and
related documents. (5) (6)
10.02 Registrant's Directors Stock Option Plan and related
documents. (6) (7)
10.03 Description of Registrant's FY 2000 Executive Bonus Plan. (6)
10.04 Directors and Officers and Company Reimbursement Indemnity
Policy by and between Registrant and certain underwriters at
Lloyd's, London and Continental Insurance Company, dated June
20, 1992. (8)
10.05 Lease by and between Registrant, Electronic Arts Limited and
Allied Dunbar Assurance PLC, dated June 24, 1987, for the
Registrant's U.K. facilities. (9)
50
<PAGE>
Number Exhibit Title
------ -------------
10.06 Lease by and between Registrant and H.G.C. Associates, dated
June 24, 1992, for the Registrant's warehouse and production
facilities. (10)
10.07 Lease Agreement by and between Registrant and 1450 Fashion
Island Boulevard Associates, L.P., dated March 22, 1991. (11)
10.08 Registrants' 1991 Stock Option Plan and related documents as
amended. (6) (12)
10.09 Form of Indemnity Agreement with Directors. (13)
10.10 Registrants' Employee Stock Purchase Plan and related
documents as amended. (6) (14)
10.11 Lease Agreement by and between Registrant and The Canada Life
Assurance Company, dated December 20, 1991, for the
Registrant's Canadian facilities. (15)
10.13 Amendment to Lease Agreement by and between Registrant and
1450 Fashion Island Boulevard Associates, L.P., dated March
22, 1991. (17)
10.14 Agreement between Registrant and Sega Enterprises, Ltd., dated
July 14, 1992. (18) (19)
10.15 Lease Agreement by and between Registrant and Century Centre
II Associates, dated July 27, 1992. (19)
10.16 Amendment to Lease Agreement by and between Registrant and
1450 Fashion Island Boulevard Associates, L.P., dated October
1, 1992. (19)
10.17 Amendment to Lease Agreement by and between Registrant and
Century Centre II Associates, dated February 2, 1993. (19)
10.18 Amendment to Lease Agreement by and between Registrant and
Century Centre II Associates, dated February 22, 1993. (19)
10.19 Directors and Officers and Company Reimbursement Indemnity
Policy by and between Registrant and certain underwriters at
Lloyd's, London and Continental Insurance Company, dated June
20, 1993. (19)
10.20 Lease by and between Registrant and 1450 Fashion Island
Boulevard Associates, L.P., dated August 27, 1992 for
additional space at corporate headquarters. (10)
10.22 Lease by and between Registrant, Electronic Arts Limited and
Heron Slough Limited, dated June 12, 1992, for the
Registrant's U.K. facilities. (20)
10.23 Lease by and between Registrant and the Travelers Insurance
Company, dated April 14, 1993, for the Registrant's production
facilities. (21)
10.24 Amendment to Lease Agreement by and between Registrant and
1450 Fashion Island Boulevard Associates, L.P., dated June 1,
1993. (22)
10.25 Amendment to Lease Agreement by and between Registrant and the
Travelers Insurance Company, dated November 30, 1993. (23)
10.26 Amendment to Lease Agreement by and between Registrant and the
Travelers Insurance Company, dated November 30, 1993. (23)
10.27 Lease Agreement by and between Registrant and Arthur J. Rogers
& Co., dated January 14, 1994. (24)
10.28 Lease Agreement by and between Registrant and the Prudential
Insurance Company of America, dated January 10, 1994. (24)
10.29 Agreement for Lease between Flatirons Funding, LP and
Electronic Arts Redwood, Inc. dated February 14, 1995. (25)
10.30 Guarantee from Electronic Arts Inc. to Flatirons Funding, LP
dated February 14, 1995. (25)
51
<PAGE>
Number Exhibit Title
------ -------------
10.31 Lease Agreement by and between Registrant and Dixie Warehouse
& Cartage Co., dated April 10, 1995. (25)
10.32 Commercial Earnest Money Contract between Novell, Inc. and
ORIGIN Systems, Inc. dated April 13, 1995. (26)
10.33 First Amendment to Commercial Earnest Money Contract between
Novell, Inc. and ORIGIN Systems, Inc. dated June 1, 1995. (27)
10.34 Amendment No. 1 to Agreement between Registrant and Sega
Enterprises, Inc. effective December 31, 1995. (28)
10.35 Lease Agreement by and between Registrant and Don Mattrick
dated October 16, 1996. (29)
10.36 Amended and Restated Guaranty from Electronic Arts Inc. to
Flatirons Funding, LP dated March 7, 1997. (30)
10.37 Amended and Restated Agreement for Lease between Flatirons
Funding, LP and Electronic Arts Redwood Inc. dated March 7,
1997. (30)
10.38 Amendment No. 1 to Lease Agreement between Electronic Arts
Redwood Inc. and Flatirons Funding, LP dated March 7,
1997. (30)
10.39 Employment Agreement by and between the Registrant and John
Riccitiello dated August 29, 1997. (31)
10.40 Lease Agreement by and between Registrant and John Riccitiello
dated August 29, 1997. (31)
10.41 Employment Agreement by and between Registrant and James
"Rusty" Russell Rueff, Jr. dated September 9, 1998.
10.42 Lease Agreement by and between Registrant and Louisville
Commerce Realty Corporation, dated April 1, 1999.
10.43 Option agreement, agreement of purchase and sale, and escrow
instructions for Zones 2 and 4, Electronic Arts Business Park,
Redwood Shores California, dated April 5, 1999.
21.01 Subsidiaries of the Registrant.
23.01 Report on Financial Statement Schedule and Consent of KPMG
LLP, Independent Auditors.
23.02 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
99.01 Report of Ernst & Young LLP, Independent Auditors
----------------
(1) Incorporated by reference to Exhibit 3.01 to Registrant's
Current Report on Form 8-K filed on October 16, 1991.
(2) Incorporated by reference to Exhibit 4.01 to Registrant's
Registration Statement on Form S-8 filed on December 1, 1992
(File No. 33-55212) (the "1992 Form S-8").
(3) Incorporated by reference to Exhibit 3.02 to Registrant's
Current Report on Form 8-K filed on October 16, 1991.
(4) Incorporated by reference to Exhibit 4.01 to Registrant's
Registration Statement on Form S-4 filed on March 3, 1994
(File No. 33-75892).
52
<PAGE>
(5) Incorporated by reference to Exhibit 4.03 to Post-Effective
Amendment No. 2 to Registrant's Registration Statement on Form
S-8 filed on November 6, 1991 (File No. 33-32616) ("S-8
Amendment No. 2").
(6) Management contract or compensatory plan or arrangement.
(7) Incorporated by reference to Exhibit 4.04 to S-8 Amendment No.
2.
(8) Incorporated by reference to Exhibit 10.08 to Registrant's
Annual Report on Form 10-K for the year ended March 31, 1992
(the "1992 Form 10-K").
(9) Incorporated by reference to Exhibit 10.07 to the Registrant's
Registration Statement on Form S-1 filed on September 20,
1989, and all amendments thereto (File No. 33-30346) (the
"Form S-1").
(10) Incorporated by reference to similarly numbered exhibits to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1992.
(11) Incorporated by reference to Exhibit 10.11 to Registrant's
Annual Report on Form 10-K for the year ended March 31, 1991.
(12) Incorporated by reference to Exhibit 4.01 to the Registrant's
Registration Statement on Form S-8 filed on July 29, 1993
(File No. 33-66836) (the "1993 Form S-8").
(13) Incorporated by reference to Exhibit 10.09 to the Form S-1.
(14) Incorporated by reference to Exhibit 4.02 to 1993 Form S-8.
(15) Incorporated by reference to Exhibit 10.16 to the 1992 Form
10-K.
(16) Not Used.
(17) Incorporated by reference to Exhibit 10.18 to the 1992 Form
10-K.
(18) Confidential treatment has been granted with respect to
certain portions of this document.
(19) Incorporated by reference to similarly numbered exhibits to
Registrants Annual Report on Form 10-K for the year ended
March 31, 1993.
(20) Incorporated by reference to Exhibit 19.01 of Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1992.
(21) Incorporated by reference to Exhibit 10.23 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1993.
(22) Incorporated by reference to Exhibit 10.24 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1993.
53
<PAGE>
(23) Incorporated by reference to similarly numbered exhibits to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1993.
(24) Incorporated by reference to similarly numbered exhibits to
Registrant's Annual Report on Form 10-K for the year ended
March 31, 1994 (the "1994 Form 10-K").
(25) Incorporated by reference to similarly numbered exhibits to
Registrant's Annual Report on Form 10-K for the year ended
March 31, 1995 (the "1995 Form 10-K").
(26) Incorporated by reference to Exhibit 10.01 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1995.
(27) Incorporated by reference to Exhibit 10.02 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1995.
(28) Incorporated by reference to similarly numbered exhibits to
Registrant's Annual Report on Form 10-K for the year ended
March 31, 1996 (the "1996 Form 10-K").
(29) Incorporated by reference to Exhibit 10.35 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended December
31, 1996.
(30) Incorporated by reference to similarly numbered exhibits to
Registrant's Annual Report on Form 10-K for the year ended
March 31, 1997 (the "1997 Form 10-K").
(31) Incorporated by reference to similarly numbered exhibits to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1997.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended March 31,
1999.
(c) Exhibits:
The Registrant hereby files as part of this Form 10-K the exhibits
listed in Item 14(a)3, as set forth above.
(d) Financial Statement Schedule:
The Registrant hereby files as part of this Form 10-K the financial
statement schedule listed in Item 14(a)2, as set forth on page 56.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ELECTRONIC ARTS
By: /s/ Lawrence F. Probst III
----------------------------------
(Lawrence F. Probst III, Chairman
of the Board and Chief Executive
Officer)
Date: June 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, on behalf of the
Registrant in the capacities indicated and on the 29th of June 1999.
Name Title
---- -----
/s/ Lawrence F. Probst III Chairman of the Board
- ---------------------------------- and Chief Executive Officer
(Lawrence F. Probst III)
/s/ E. Stanton McKee, Jr. Executive Vice President and Chief
- ---------------------------------- Financial and Administrative Officer
(E. Stanton McKee, Jr.) (Principal Accounting Officer)
/s/ David L. Carbone Vice President, Finance
- ----------------------------------
(David L. Carbone)
Directors:
/s/ M. Richard Asher Director
- ----------------------------------
(M. Richard Asher)
/s/ William J. Byron Director
- ----------------------------------
(William J. Byron)
/s/ Daniel H. Case III Director
- ----------------------------------
(Daniel H. Case III)
/s/ Gary M. Kusin Director
- ----------------------------------
(Gary M. Kusin)
/s/ Timothy J. Mott Director
- ----------------------------------
(Timothy J. Mott)
55
<PAGE>
<TABLE>
ELECTRONIC ARTS INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended March 31, 1999, 1998 and 1997
(in thousands)
<CAPTION>
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts (1) Deductions of Period
- ----------- --------- -------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended March 31, 1999
Allowance for doubtful
accounts and returns $ 51,575 $ 161,297 $ (369) $ 139,653 $ 72,850
========= ========= ========= ========= =========
Year Ended March 31, 1998
Allowance for doubtful
accounts and returns $ 43,268 $ 82,706 $ (3,243) $ 71,156 $ 51,575
========= ========= ========= ========= =========
Year Ended March 31, 1997
Allowance for doubtful
accounts and returns $ 33,176 $ 63,114 $ 2,240 $ 55,262 $ 43,268
========= ========= ========= ========= =========
<FN>
(1) Primarily the translation effect of using the average exchange rate for
expense items and the year-ended exchange rate for the balance sheet item
(allowance account).
</FN>
</TABLE>
56
<PAGE>
ELECTRONIC ARTS INC.
1999 FORM 10-K ANNUAL REPORT
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
10.03 Description of Registrant's FY 2000 Executive Bonus Plan
10.41 Employment Agreement by and between Registrant and James "Rusty"
Russell Rueff, Jr. dated September 9, 1998.
10.42 Lease Agreement by and between Registrant and Louisville Commerce
Realty Corporation, dated April 1, 1999.
10.43 Option agreement, agreement of purchase and sale, and escrow
instructions for Zones 2 and 4, Electronic Arts Business Park, Redwood
Shores California, dated April 5, 1999.
21.01 Subsidiaries of the Registrant.
23.01 Report on Financial Statement Schedule and Consent of KPMG LLP,
Independent Auditors.
23.02 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
99.01 Report of Ernst & Young LLP, Independent Auditors
57
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.03
<SEQUENCE>2
<DESCRIPTION>DESCRIPTION OF REGISTRANT'S PLAN
<TEXT>
EXHIBIT 10.03
ELECTRONIC ARTS INC. AND SUBSIDIARIES
DESCRIPTION OF REGISTRANT'S FISCAL YEAR 2000
EXECUTIVE BONUS PLAN
Target annual bonuses are set for each executive based upon a percentage of base
salary. Bonuses are generally paid in two parts, one of which relates only to
the Company's earnings results, and the second part is discretionary and is
measured against each individual executive's contributions. Some executives may
have a third part which relates to a specific business unit's or product's
financial performance achievement. Bonuses are paid after the end of the fiscal
year. If profits in any period are less than 85% of plan, no bonus based on the
Company's performance is paid for that period. If profits exceed plan during a
period, the bonus rate is accelerated for the incremental profits above plan,
with a maximum of 200% payout of the bonus target.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.41
<SEQUENCE>3
<DESCRIPTION>EMPLOYMENT AGREEMENT
<TEXT>
ELECTRONIC ARTS
1450 FASHION ISLAND BLVD.
SAN MATEO, CA 94404
TEL 415 571 7171
[LOGO]
September 9, 1998
Rusty Rueff
181-12 Turn of River Road
Stamford, CT 06905
Dear Rusty:
I am pleased to offer you a regular full-time position as Senior Vice President
Human Resources reporting to me. Your annual base salary will be $240,000 with a
50% target bonus. The bonus will be guaranteed at 100% of target in the fiscal
year ending March 31, 1999, and 75% of target in the fiscal year ending March
31, 2000.
I will recommend to the Board of Directors that you be granted a Non-qualified
Option to purchase 70,000 shares of Electronic Arts common stock in accordance
with our Stock Option Plan. This grant will vest at a rate of 2% per month over
a 50 month period commencing with your hire date. Your unvested equity position
will be reviewed on an annual basis in conjunction with the EA executive stock
option program.
Electronic Arts will provide you with a $2,500 per month (net of taxes) housing
allowance for a three-year period. We agree to pay the difference between your
acquisition cost and the sale price on your property at 181-12 Turn of River
Road if the selling price is less than the initial purchase price of $612,500.
In addition, Electonic Arts will be responsible for all normal and reasonable
relocation costs associated with moving to Northern California.
Your employment with Electronic Arts is for an indefinite term. In other words,
the employment relationship is "at will" and you have the right to terminate
that employment relationship at any time. Also, although I hope that you will
remain with us and be successful here, Electronic Arts must, and does retain the
right to terminate the employment relationship at any time. Should you be
terminated without cause prior to March 31, 2000, you will receive one year's
salary plus bonus as severence.
This offer assumes that you have the legal right to work in the United States
and can submit appropriate proof. If you accept the offer, please so indicate by
signing this letter where indicated and returning it to my attention.
Electronic Arts' mission is to make fun software for consumers and to help
interactive entertainment become a part of everyday life. To play a leading role
in this new industry, EA needs a dedicated team of pioneers with vision, a
passion for quality, a willingness to innovate and a desire to achieve great
things while vigilantly maintaining our integrity. I would be delighted to have
you join us.
Sincerely,
/s/ Larry Probst
Larry Probst
Chaiman & CEO
Electronic Arts
Accepted: /s/ Rusty Rueff
--------------------
Date: 9/18/98
-------------------------
<PAGE>
September 17, 1998
Rusty Rueff
181-12 Turn of River Road
Stamford, CT 06905
Dear Rusty:
This will confirm our discussion on Tuesday, September 15. EA will provide you
with a one-time $50,000 (gross) signing bonus to help offset the expected loss
on improvements made to your current residence, and the temporary loss of income
you will experience in conjunction with Patti's resignation from Pepsi.
We also agree to extend vesting on your stock option grant for a period of six
months if you are terminated without cause prior to March 31, 2000.
EA agrees to provide a relocation program similar to the Frito-Lay plan with the
exception that we will not be responsible for any loan points nor will we
provide one month's salary in conjunction with your move to Northern California.
I am thrilled that you have decided to join Electronic Arts, and very much look
forward to working with you. Would you please acknowledge acceptance of the
offer by signing in the space below and returning to my attention at your
earliest convenience. Thank you.
Sincerely,
/s/ Larry Probst
Larry Probst
Chairman & CEO
Accepted: ___________________________________________
Date: _______________________________________________
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.42
<SEQUENCE>4
<DESCRIPTION>LEASE
<TEXT>
Exhibit 10.42
LEASE
THIS LEASE, (hereinafter referred to as "Lease"), is made as of this
1st day of April, 1999, by and between LOUISVILLE COMMERCE REALTY CORPORATION, a
Delaware corporation, or assigns (hereinafter referred to as "Landlord") and
ELECTRONIC ARTS, INC., a Delaware corporation (hereinafter referred to as
"Tenant").
W I T N E S S E T H:
WHEREAS, Landlord and Tenant desire to create a leasehold estate in
favor of Tenant in the Premises (as hereinafter defined).
NOW, THEREFORE, in consideration of the premises, and of the covenants
and agreements herein contained, the parties hereto agree as follows:
1. PREMISES. Effective as of the Commencement Date, Landlord shall
lease unto Tenant and Tenant shall lease from Landlord approximately 250,000
rentable square feet as outlined in Exhibit A ("Premises"), on the east side of
a building of approximately 400,000 square feet ("Building"), which Building is
located on a parcel of land ("Property") as shown on Exhibit A, and that
machinery and equipment installed in and upon the Premises by Landlord, together
with all additions and accessions thereto, substitutions therefor and
replacements thereof permitted by this Lease (collectively, the "Equipment").
The exact square footage of the Premises shall be determined by the Landlord's
architect.
Landlord shall be responsible for constructing, at its expense, the
"Building Shell" as described in Exhibit B hereto, and Tenant shall, at Tenant's
sole expense (subject to Paragraph 8(b) below), and upon the terms set forth
herein, make improvements to the Premises (the "Tenant Improvements") specified
by Tenant as generally depicted in a preliminary space plan (the "Preliminary
Space Plan") to be submitted to Landlord.
2. COMMENCEMENT DATE AND LEASE TERM. The initial term of this Lease
shall be for a period of five (5) years (hereafter referred to as "Term"),
commencing on the "Commencement Date." The Commencement Date shall be the
earlier of (i) June 15, 1999, or (ii) the date Tenant commences beneficial use
of the Premises, determined as set forth hereinbelow. Any use of the Premises by
Tenant prior to the Commencement Date shall be subject to the terms and
conditions of this Lease (except the payment of Rent). Tenant shall be deemed to
have commenced beneficial use of the Premises when Tenant begins to move
furniture, furnishings, or inventory into the Premises or any portion thereof.
In no event shall Landlord be liable for Tenant's failure to complete
construction by June 15, 1999. Tenant shall use reasonable efforts to keep
Landlord informed of the progress of construction. The initial twelve (12) month
period after the Commencement Date and each successive twelve (12) month period
thereafter during the initial Term and any renewal periods shall be hereinafter
referred to as a "Lease Year." If the Commencement Date is not the first day of
a month, then the Term shall be the period set forth above plus the partial
month in which the Commencement Date occurs.
3. RENT. As rent for the Premises (all of which is hereinafter referred
to collectively as "Rent"), Tenant shall pay to Landlord all of the following:
(a) Base Rent. Tenant shall pay, without offset, demand or
counterclaim, as base rent (hereafter referred to as the "Base Rent") for each
Lease Year the sums identified on the attached Exhibit C, Rent Schedule. The
monthly installments shall be payable in advance on the first day of each and
every month during the said term at the office of Landlord c/o J.P. Morgan
Investment Management, Inc., 522 Fifth Avenue at 44th Street, New York, New York
10036, or at such other place as Landlord may hereafter designate in writing.
Rent checks are to be made payable to Landlord, or such other person, firm or
corporation as Landlord may hereafter designate in writing, except that the
first such installment, in the amount of Twenty-Seven Thousand Dollars ($27,000)
shall be due contemporaneously with the execution of this Lease.
(b) Intentionally Omitted.
(c) Intentionally Omitted.
(d) Intentionally Omitted.
(e) Tax on Lease. Tenant's pro rata share (based on the
Premises) of any federal, state or local tax (including gross receipts tax)
assessment, levy or other charge (other than any income tax or real property
tax) (hereinafter collectively referred to as "Tax") if now or hereafter
directly or indirectly upon (a) Landlord with respect to this Lease or the value
thereof, (b) Tenant's use or occupancy of the Premises, or (c) the Base Rent or
any other sum payable under this Lease, shall be paid by Tenant as Additional
Rent.
<PAGE>
Landlord shall annually notify Tenant of the amount
which Landlord estimates will be the Tax for each tax year, and Tenant shall pay
such amount in equal monthly installments in advance on or before the first day
of each of the twelve (12) months after the date of such notice. Landlord shall
annually submit to Tenant a statement showing Tenant's pro rata share of the
actual Tax for the current tax year, the amount thereof theretofore paid by
Tenant, and the amount of the resulting balance due thereon or overpayment
thereof. Such balance due shall be paid by Tenant, without interest, within
thirty (30) days after the date of such statement. Official tax bills rendered
by the taxing authority shall be presumptive evidence of the actual amount of
Tax. Tenant shall have the right to audit Landlord's records pertaining to such
Tax in accordance with Paragraph 11 below.
(f) Acceptance. Tenant does hereby take and hold the Premises
at the Rent hereinabove specifically reserved and payable as aforesaid, and upon
and subject to the terms and conditions herein contained.
(g) Late Payment. If Tenant fails to pay any installment of
Rent on or before the fifth (5th) day of the calendar month when such
installment becomes due and payable, Tenant shall pay to Landlord a late charge
of five per cent (5%) of the amount of such installment, and, in addition, any
unpaid installment shall bear interest at that rate per annum which is two per
cent (2%) greater than the "prime rate" then in effect at Morgan Guaranty Trust
Company of New York, New York, New York, from the date such installment became
due and payable to the date of payment by Tenant; provided, however, that
nothing herein contained shall be construed or implemented in such a manner as
to allow Landlord to charge or receive interest in excess of the maximum legal
rate than allowed by law. Such late charge and interest shall constitute
Additional Rent hereunder and shall be due and payable with the next monthly
installment of Rent. Nothing in this paragraph shall be deemed to be in
derogation of Landlord's rights under Paragraph 17.
(h) Additional Rent. With respect to this Lease, Additional
Rent shall mean any and all monetary obligations for which Tenant is responsible
under the terms, covenants and conditions of this Lease, including but not
limited to, Base Rent, Tax, late fees, interest payments and Operating Costs.
(i) Tenant's Proportionate Share. Landlord and Tenant agree
that Tenant's "pro rata share" for purposes of Paragraphs 3(e) and 11 shall be
sixty-two and one-half percent (62.5%), the approximate and agreed upon ratio
that the area of the Premises bears to the total rentable area of the Building.
4. OPTION TO EXTEND TERM.
(a) Renewal Period. Provided that (i) Tenant is in occupancy
of the Premises and conducting operations therein; (ii) this Lease is in full
force and effect, (iii) no material adverse change in Tenant's financial
condition has occurred, and (iv) Tenant shall not have been in default during
the term of the Lease, and (v) shall not then be in default and shall not
default in the performance of any of its obligations under this Lease at any
time between the date of issuance of the notice contemplated by Paragraph 4(b)
below and the expiration of the then current lease term, Tenant shall have the
option to renew this Lease for one (1) additional two (2) year term, with the
annual base rent in such renewal period, being equal to One Million Dollars
($1,000,000) payable in equal monthly installments of Eighty-Three Thousand
Three Hundred Thirty-Three Dollars and Thirty-Three Cents ($83,333.33) each.
(b) Notice Required. Tenant shall give Landlord written notice
of its intent to exercise its option to extend the Lease Term at least One
Hundred Eighty (180) days, but no more than Three Hundred Sixty (360) days,
prior to the end of the initial term, time being of the essence. Should Tenant
fail to notify Landlord of its intent to exercise such renewal option within the
aforementioned notice period, time being of the essence, then Tenant's renewal
option shall expire without action by either party and Landlord shall not need
to advise Tenant in writing of Tenant's neglect in reference to the notice
period.
5. USE OF PREMISES.
(a) Tenant may occupy and use the Premises for general office
and warehousing purposes and for no other purpose without the consent of
Landlord, subject, however, to the terms and provisions of any covenants,
easements, conditions or restrictions which affect the use of the Premises.
Tenant shall not permit any unlawful occupation, business or trade to be
conducted on any of the Premises or any use to be made thereof contrary to
applicable laws or regulations. Tenant shall not use or occupy or permit any of
the Premises to be used or occupied, nor do or permit anything to be done in or
on any of the Premises, in a manner which would (i) violate any certificate of
occupancy affecting any of the Premises, (ii) make void or voidable any
insurance then in force with respect to any of the Premises, (iii) make it
difficult or impossible to obtain fire or other insurance which is required
hereunder, or cause the cost of maintaining such insurance to increase [unless
Tenant pays such increase in full], (iv) cause structural damage to the
Building, or (v) constitute a public or private nuisance or waste. In no event
shall Tenant conduct any retail sales in the Premises.
2
<PAGE>
(b) As part of its obligation to comply with laws and other
requirements under Paragraph 5(a) of this Lease, Tenant shall not (either with
or without negligence) generate, use, store, or cause or permit the escape,
disposal or release of any Hazardous Materials in or about the Building or the
Property or the Premises. Hazardous Materials shall mean (a) "hazardous wastes",
as defined by the Resource Conservation and Recovery Act of 1976, as amended
from time to time, (b)"hazardous substances", as defined by the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended from
time to time, (c)"toxic substances", as defined by the Toxic Substances Control
Act, as amended from time to time, (d) "hazardous materials", as defined by the
Hazardous Materials Transportation Act, as amended from time to time, (e) any
applicable state or local laws and the regulations adopted under these acts, as
amended from time to time, (f) oil or other petroleum products whether refined
or unrefined, (g) any highly combustible substance and (h) any substance whose
presence in Landlord's reasonable judgment could be detrimental to the Building
or the Property or the Premises or hazardous to health or the environment. If
any lender or governmental agency shall ever require testing to ascertain
whether or not there has been any release of Hazardous Materials, then the
reasonable costs thereof shall be reimbursed by Tenant to Landlord upon demand
as additional charges if such requirement applies to the Premises; provided
however, the foregoing shall not include any Phase I environmental reports
customarily required by lenders and shall be applicable only if Tenant, its
agents, employees, contractors, subtenants or licensees is suspected of having
directly or indirectly caused a release of Hazardous Materials in or about the
Premises which gives rise to the testing. In addition, Tenant shall execute
affidavits, representations and the like from time to time at Landlord's request
concerning Tenant's best knowledge and belief regarding the presence of
Hazardous Materials in the Premises. In all events, Tenant shall indemnify and
hold Landlord harmless of and from any and all costs and expenses of any nature
arising from the release of Hazardous Materials in the Premises occurring while
Tenant is in possession, or elsewhere on the Property and any adjacent real
estate owned by Landlord, if caused by Tenant or persons acting under Tenant.
The within covenants shall survive the expiration or earlier termination of the
Lease.
(c) If Tenant fails to comply with any applicable law or
regulation or if Landlord reasonably believes the violation of any law or
regulation is threatened, Landlord shall have the right (but not the obligation)
following thirty (30) days notice to Tenant unless Tenant commences to act
during or prior to such period, and diligently pursues the cure of such failure
to comply (unless such failure or threatened failure causes imminent threat to
life or property in which case no notice is required), to act in place of Tenant
and to take such action as it may deem necessary or desirable to ensure
compliance or to mitigate, abate or correct the violation or threatened
violation. All costs of any kind whatsoever incurred by Landlord in connection
therewith, including consultants' and reasonable attorneys' fees, shall be
payable on demand, shall bear interest at the default rate until paid, and shall
constitute additional rent.
(d) Tenant shall indemnify, defend and hold Landlord harmless
from and against any and all claims, losses, damages, liabilities, cost and
expenses, including attorneys' fees, arising from Tenant's failure to comply
with all applicable laws and regulations. The foregoing provisions shall survive
the expiration or earlier termination of this Lease.
6. [INTENTIONALLY DELETED]
7. CONSTRUCTION OF PREMISES.
Tenant warrants that the Premises shall be improved in a good
and workmanlike manner in conformance with all applicable federal, state and
local codes and regulations in effect at that time, including but not limited to
the Americans With Disabilities Act, as amended.
8. TENANT IMPROVEMENTS.
(a) Tenant shall construct, at Tenant's sole cost (subject to
the Tenant Work Allowance as provided in Paragraph 8(b) below), improvements to
the Premises (the "Tenant Improvements") substantially in accordance with the
Space Plan approved by Landlord prior to commencement of construction. Tenant
shall, in consultation with Landlord, coordinate the design of the Tenant
Improvements, and the budgeting of the costs thereof. Tenant shall arrange for
the preparation of "Construction Drawings and Specifications," consisting of
construction working drawings, the mechanical, electrical and other technical
specifications, and the finishing details, including wall finishes and colors
and technical and mechanical equipment installation, if any, all of which
details the installation of the Tenant Improvements in the Premises. The
architects and engineers who prepare such Construction Drawings and
Specifications shall be selected by Tenant subject to Landlord's approval which
shall not be unreasonably withheld. Within ten (10) business days of its receipt
of any of (i) proposed Construction Drawings and Specifications and any
amendments thereto, (ii) the estimated budget for the Tenant Work and any
amendments thereto, (iii) proposed change orders, Landlord shall provide to
Tenant notice of any refusal to approve any aspect of any such item, which
notice shall state with particularity those elements thereof as to which
Landlord does not approve, and the detailed reasons therefor. Should Landlord
fail to provide such notice to Tenant within such period, such item shall
conclusively be deemed to have been approved. Following approval by Landlord of
Construction Drawings and Specifications, and the estimated budget therefor,
which approval shall be reflected by Landlord's initialing as approved such
Construction Drawings and Specifications, and the budget therefor, Tenant will
solicit bids from one or more general contractors for the construction of the
Tenant Improvements, and Tenant shall, following
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consultation with Landlord, contract for the construction of the Tenant
Improvements with a contractor reasonably acceptable to Landlord, and Tenant
shall thereafter coordinate and supervise such construction and consult with
Landlord regarding such construction.
(b) Tenant shall receive an amount equal to the lesser of the
actual cost of Tenant Work or Six Hundred Eighty-Seven Thousand Five Hundred
Dollars ($687,500) (the "Tenant Work Allowance") to be applied against the costs
associated with the design and construction of the Tenant Improvements (such
design and construction being referred to herein as the "Tenant Work"). The
costs of the Tenant Work shall include all costs to be expended in connection
with the design and construction of the Tenant Improvements, including but not
limited to the (i) architectural and engineering fees and expenses incurred in
connection with the Tenant Work, including the preparation of the Space Plan and
the Construction Drawings and Specifications; (ii) governmental agency plan
check, building and other permits and other fees (including any code compliance
changes required by any governmental entity or authority having jurisdiction
thereof); (iii) sales and use taxes, if any; (iv) insurance fees associated with
the construction of the Tenant Work; (v) testing and inspecting costs; (vi) the
actual costs and charges for material and labor, contractor's profit and
contractor's general overhead incurred in constructing the Tenant Work,
including the cost of any change orders; (vii) the cost of constructing the
demising walls; and (viii) utility hook-up and tap-in fees. The parties
anticipate that the cost of the Tenant Work will exceed the Tenant Work
Allowance. Landlord shall pay to Tenant the Tenant Work Allowance on the last of
the following to occur: (a) completion of the Tenant Improvements, or (b) ten
(10) days after Landlord's receipt of Tenant's payment of rent for the second
month of the Term; and (c) thirty (30) days following Tenant's presentation of
all final and unconditional lien waivers, a certificate of occupancy and
Tenant's written acceptance of the Tenant Improvements in form and substance
satisfactory to Landlord.
(c) Tenant designates Pam Samson, whose address is 209 Redwood
Shores, Redwood CA 94065-1175 or such other person as Tenant may designate in
writing to Landlord ("Tenant's Authorized Representative") as the person
authorized to (i) initial as approved all Construction Drawings and
Specifications, budgets, change orders, and approvals pursuant to this Paragraph
8 and (ii) communicate with Landlord regarding the decisions, elections and
requests of Tenant. Landlord shall not be obligated to respond to or act upon
any such item until such item has been initialed by Tenant's Authorized
Representative.
9. LANDLORD'S LIABILITY.
(a) Landlord's Indemnity. Subject to the provisions of this
Paragraph 9, Landlord agrees to protect, indemnify, hold harmless and defend
Tenant and its respective members, directors, officers, agents, employees,
successors and assigns, where herein permitted, from and against any and all
loss, cost, damage, liability or expense as incurred (including but not limited
to actual attorneys' fees and legal costs) arising out of or related to any
claim, suit or judgment brought by or in favor of any person or persons for
damage, loss or expense due to, but not limited to, bodily injury, including
death, or property damage sustained by such person or persons which arises out
of, is occasioned by or is in any way attributable to the use or occupancy of
any common areas of the Building, except that caused by the negligence or
willful misconduct of Tenant, its successors or assigns, and their respective
agents, employees and invitees.
(b) Limitation of Liability. Notwithstanding anything to the
contrary contained in this Lease, it is expressly understood and agreed by and
between the parties hereto that: (i) the recourse of Tenant or its successors or
assigns against Landlord with respect to the alleged breach by or on the part of
Landlord of any representation, warranty, covenant, undertaking or agreement
contained in the Lease or otherwise arising out of Tenant's use of the Premises
or the Property (collectively, "Landlord's Lease Undertakings") shall extend
only to Landlord's interest in the real estate of which the Premises demised
under the Lease are a part ("Landlord's Real Estate") and not to any other
assets of Landlord or its owners; and (ii) except to the extent of Landlord's
interest in Landlord's Real Estate, no personal liability or personal
responsibility of any sort with respect to any of Landlord's Lease Undertakings
or any alleged breach thereof is assumed by, or shall at any time be asserted or
enforceable against, Landlord, J.P. Morgan Investment Management Inc.,
Landlord's property manager, or against any of their respective directors,
officers, employees, agents, constituent parties, beneficiaries, trustees,
shareholders or representatives.
(c) Transfer of Landlord's Interest. In the event of any
transfer of Landlord's interest in the Property, Landlord shall be automatically
freed and relieved from all applicable liability accruing thereafter with
respect to performance of any covenant or obligation on the part of Landlord
provided any deposits or advance rents held by Landlord are turned over to the
grantee and said grantee expressly assumes, subject to the limitations of this
Paragraph 9, all of the terms, covenants and conditions of this Lease to be
performed on the part of Landlord, it being intended hereby that the covenants
and obligations contained in this Lease on the part of Landlord shall, subject
to all the provisions of this Paragraph 9, be binding on Landlord, its
successors and assigns, only during their respective periods of ownership.
10. GUARANTY. [Intentionally Deleted]
11. OPERATING COSTS. Tenant shall pay as Additional Rent its pro rata
share of Operating Costs of the Building and Property. This amount shall be
adjusted on an annual basis in accordance with the procedures outlined below.
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(a) Definition. As used herein, the term "Operating Costs"
means (except as specifically excluded below) the actual costs incurred in
owning, operating and maintaining the Building and Property during each year of
the Lease Term. Such operation and maintenance costs shall include, by way of
example rather than of limitation, (i) real property, county, and other similar
taxes or assessments, including but not limited to any special assessments,
levied against any or all of the Building and Property; (ii) charges or fees
for, and taxes on, the furnishing of water, sewer service, gas, fuel,
electricity, drainage or other utility services to the Premises and common areas
of the Building and Property; (iii) costs of providing trash removal service,
landscaping service, snow removal service, and of maintaining grounds, common
areas of the Property, access easements, parking areas, and mechanical systems
of the Building; (iv) all other reasonable costs of maintaining, repairing or
replacing any or all of the Building or Property, except (a) costs for repairs,
maintenance and replacements required due to defective materials, installations
or workmanship at the time of initial construction of the Building and Property
and expenses incurred in connection with the enforcement of any warranty rights
in connection therewith, or (b) costs to repair the roof, foundation, interior
load bearing partitions, exterior walls and window systems, except to the extent
any such structural repair is required due to Tenant's negligence or willful
misconduct; (v) charges or fees for any necessary governmental permits; (vi)
management fees (not to exceed three percent of annual base rentals from the
Property) under a management agreement, and related overhead and expenses; (vii)
premiums for hazard, liability, workmen's compensation or similar insurance upon
any or all of the Building and Property as maintained by Landlord under
Paragraph 20; (viii) costs arising under service contracts with independent
contractors for servicing, maintenance and repair of Building equipment and
systems; (ix) any assessments or charges imposed on Landlord or the Property
pursuant to the Declaration of Covenants, Conditions and Restrictions dated as
of April 30, 1998 of record in Deed Book 7033, Page 714 in the Office of the
Clerk of Jefferson County, Kentucky as amended from time to time provided such
assessments or charges are not included in any of the other costs described in
this subparagraph (a); and (x) the cost of any other items which, under
generally accepted accounting principles consistently applied from year to year
with respect to the Building and Property, constitute operating or maintenance
costs attributable to any or all of the Premises. Landlord and its agents
reserve the right to enter onto the Premises at reasonable times upon reasonable
notice from Landlord or its agent and accompanied by a representative of Tenant,
excepting emergency, for the specific purpose of managing and maintaining the
Premises. Landlord agrees that it shall make no profit from its collection of
Operating Costs.
(b) Notwithstanding anything to the contrary herein, Operating
Costs shall not include (i) any costs (including payments of principal and
interest under any mortgage and any ground rental payments) associated with the
initial construction of the Building, (ii) costs of development of the Property
or the Premises, (iii) costs of painting or decorating areas of the Building
other than common and public areas, and exterior elements (iv) brokerage
commissions, legal fees, construction costs and concessions or inducements to
any tenant in connection with leasing premises in the Building, and advertising
expenses in connection with the leasing of the Building, (v) legal fees relating
to tenant leases, financings of the Building, and zoning and land-use issues and
violations by Landlord under tenant leases, (vi) salaries and other compensation
paid to officers or executives of Landlord or any partner, principal or owner of
the entity comprising Landlord, (vii) fees or charges paid to any party
affiliated with Landlord on account of the provision by such entity of goods or
services constituting Operating Costs of the Building to the extent such fees or
charges exceed the fees or charges that would have been incurred to an
independent entity in an arm's length transaction, (viii) any expenses
reimbursable by any tenant of the Building, insurance company or condemning
authority, or actually reimbursed by any other source, (ix) charges for heating
and air conditioning service furnished to other tenants of the Building during
other than normal business hours as determined by Landlord, (x) advertising and
marketing costs, (xi) Landlord's income taxes, (xii) repairs or other work
occasioned by fire or other casualty of an insurable nature, but only to the
extent of any recovery actually received by Landlord, and (xiii) costs arising
from Landlord's civic activities or charitable or political contributions, all
of which costs are the responsibility of the Landlord except where agreed to
otherwise by the parties in writing.
(c) In order to provide for current payments, a statement of
Landlord's estimate of expenses as initially set forth in Paragraph 11 (a)
above, together with the amount of Tenant's Additional Rent resulting therefrom,
shall be submitted by Landlord to Tenant prior to the beginning of each calendar
year or part thereof during the Term. Tenant shall pay monthly, one-twelfth
(1/12th) of Tenant's pro rata share of Landlord's estimate of Operating Costs.
Further, from time to time during any calendar year, Landlord may submit to
Tenant a revised statement of Landlord's estimate of Tenant's pro rata share of
any Operating Costs and within thirty (30) days after delivery of such statement
(including any statement delivered after the expiration or termination of this
Lease), Tenant shall pay monthly to Landlord, as Additional Rent an amount equal
to one-twelfth (1/12th) of the revised amount so estimated. After the end of
each fiscal year, Landlord will, as soon as practical, submit to Tenant a
statement of the actual expenses, incurred for Operating Costs for the preceding
fiscal year. Such statement shall also indicate the amount of Tenant's excess
payment or underpayment based on the Landlord's estimate.
If Additional Rent paid by Tenant during the
preceding calendar year shall be in excess of, or less than its share of the
actual expenses incurred by Landlord for Operating Costs for that year, Landlord
and Tenant agree to make the appropriate adjustment following the submission of
Landlord's statement by Tenant paying any Additional Rent due with the
installment of rent due for the month following submission of Landlord's
statement, or Tenant deducting its excess payment from the installment of rent
for such month.
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During the final year of the Lease Term if Tenant
overpays its portion of Operating Costs, said over payment amount shall be
returned by Landlord within thirty (30) days of termination provided no event of
default has occurred or is occurring.
Within thirty (30) days after the receipt of
Landlord's statement showing actual figures for the year, Tenant shall have the
right to request copies of a statement of "Operating Costs of the Building"
prepared by the Landlord which shall be supplied to the Tenant within a
reasonable time after Tenant's written request, but no such request shall extend
the time for payment as set forth in Paragraph 11(c). Unless Tenant asserts
specific error(s) within fifteen (15) days after Landlord has complied with
Tenant's request, the statement submitted by Landlord shall be deemed to be
correct. Provided Tenant timely asserts such specific errors, and is current in
its obligations to Landlord for the payment of all sums due to Landlord as Rent
under this Lease, and is not otherwise in default in its obligations under this
Lease, Tenant shall have the right, exercisable no more than once per Lease
Year, to cause Landlord's books and records showing Tax and Operating Costs for
the prior Lease Year to be examined by a Certified Public Accountant engaged by
Tenant upon no less than thirty (30) days prior written notice and during normal
business hours at any time within one hundred and eighty (180) days following
the expiration of the prior Lease Year. No such Certified Public Accountant may
be engaged on a contingent fee basis. Such examination shall, at Landlord's
option, occur at the offices of the Landlord's management agent, and shall not
take more than thirty (30) days to complete. Any information obtained by Tenant
from such examination will be treated as confidential unless and until such
information has been publicly disclosed by Landlord; provided, however, that
nothing herein contained shall limit or impair the right or obligation of Tenant
to disclose such information when required to do so by law or to appropriate
regulatory authorities having jurisdiction over its affairs, or to use the same
in connection with the enforcement of the terms and conditions of the Lease. As
a condition of such examination, Landlord may require any party reviewing or
having access to Landlord's records to execute and deliver to Landlord a
confidentiality agreement substantially in the form attached hereto as Exhibit
E. In the event that Operating Costs or Tax for any Lease Year have been
overstated by seven percent (7%) or more, Landlord shall promptly reimburse or
credit Tenant for the reasonable costs of such audit, in addition to refunding
all overpayments previously made by Tenant. In the event that Operating Costs or
Tax for any Lease Year have been overstated by less than seven percent (7%),
Tenant shall bear the costs of the audit but Landlord shall promptly refund or
credit all overpayments previously made by Tenant.
In addition to the Rent and Additional Rent provided
elsewhere herein, Tenant shall be responsible for making direct payment of all
costs incurred in operating the Premises to the parties providing service to the
Premises, including without limitation, all utility costs, trash removal and
janitorial services. Tenant shall at all times maintain the Premises in a neat
and clean manner, and shall place all trash in its dumpster.
12. ASSIGNMENT AND SUBLETTING.
(a) Tenant shall not mortgage, pledge or encumber this Lease
without Landlord's prior written consent, which consent shall not be
unreasonably withheld or delayed.
(b) Tenant shall have the right to assign this Lease or sublet
all or any portion of the Premises throughout the Term, subject to Landlord's
prior written consent and approval, which consent shall not be unreasonably
withheld or delayed, provided, that Tenant remains fully liable for the
performance of all terms and conditions of this Lease including but not limited
to the payment of Base Rent and Additional Rent and that the assignee or
subtenant agrees to be bound by all terms, conditions, and provisions of this
Lease. If Tenant wants to assign, sublet or otherwise transfer all or part of
the Premises or this Lease, then Tenant shall give Landlord written notice
("Tenant's Request Notice") of the identity of the proposed assignee or
subtenant and its business, all terms of the proposed assignment or subletting,
the commencement date of the proposed assignment or subletting (the "Proposed
Sublease Commencement Date"), the area proposed to be assigned or sublet (the
"Proposed Sublet Space") and such other information as Landlord may reasonably
request. Tenant shall also transmit therewith the most recent financial
statement or other evidence of financial responsibility of such assignee or
subtenant and a certification executed by Tenant and such proposed assignee or
subtenant stating whether any premium or other consideration is being paid for
the proposed assignment or sublease. Any sublease, assignment or other transfer
shall be effective on forms approved by Landlord and Tenant. Tenant assigns to
Landlord any sum due to Tenant from any assignee, subtenant or occupancy of
Tenant as security for Tenant's performance of its obligations pursuant to this
Lease, provided, however, that Tenant shall have the license to collect such
rents provided prior to the occurrence of an Event of Default. Following an
Event of Default, Tenant authorizes each such assignee, subtenant or occupant to
pay such sum directly to Landlord if such assignee, subtenant or occupant
receives written notice from Landlord specifying that such rent shall be paid
directly to Landlord. Landlord's collection of such rent shall not be construed
as an acceptance of such assignee, subtenant or occupant as a tenant nor a
waiver of any default hereunder by Tenant. Notwithstanding anything in this
Paragraph 12 to the contrary, provided no Event of Default exists under this
Lease, or would exist but for the pendency of any cure periods provided for
under Paragraph 17, Tenant may, without Landlord's consent, but after providing
written notice to Landlord, assign this Lease or sublet all or any portion of
the Premises to any Related Entity (as hereinafter defined) provided that (i) in
the event of an assignment, such Related Entity assumes in full all of Tenant's
obligations under this Lease; (ii) Landlord is provided with a counterpart of
the fully executed agreement of assignment or sublease, which shall be in a form
reasonably satisfactory to Landlord; (iii) to the extent Tenant
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remains in existence Tenant remains liable under the terms of this Lease; (iv)
such Related Entity is not a governmental entity or agency; (v) such Related
Entity's use requirement does not differ from the Permitted Use described in
Paragraph 5 hereof; and (vi) such Related Entity does not require additional
services other than those agreed to be provided by Landlord under the terms of
this Lease. "Related Entity" shall be defined as (i)any parent company,
subsidiary, or affiliate of Tenant, which controls, is controlled by, or is
under common control with Tenant, and/or (ii) any entity into which Tenant shall
be merged or consolidated, or which purchases substantially all of the assets of
Tenant and assumes the liabilities of Tenant under this Lease and continues in
the same business as that of Tenant.
(c) Intentionally Omitted.
(d) If Tenant proposes to assign this Lease other than to a
Related Entity, Landlord may, at its option, upon written notice to Tenant given
within ten (10) business days after its receipt of Tenant's Request Notice,
together with all other necessary information, elect to recapture the Premises
and terminate this Lease. If Tenant proposes to sublease all or part of the
Premises for the remainder of the Term, Landlord may, at its option upon written
notice to Tenant given within ten (10) business days after its receipt of
Tenant's Request Notice, together with all other necessary information, elect to
recapture such portion of the Premises as Tenant proposes to sublease and upon
such election by Landlord, this Lease shall terminate as to the portion of the
Premises recaptured. If a portion of the Premises is recaptured, the Rent
payable under this Lease shall be proportionately reduced based on the square
footage of the Rentable Square Feet retained by Tenant and the square footage of
the Rentable Square Feet leased by Tenant immediately prior to such recapture
and termination, and Landlord and Tenant shall thereupon execute an amendment to
this Lease in accordance therewith. Landlord may thereafter, without limitation,
lease the recaptured portion of the Premises to the proposed assignee or
subtenant without further liability to Tenant. Upon any such termination,
Landlord and Tenant shall have no further obligations or liabilities to each
other under this Lease with respect to the recaptured portion of the Premises,
except with respect to obligations or liabilities which accrue or have accrued
hereunder as of the date of such termination (in the same manner as if the date
of such termination were the date originally fixed for the expiration of the
term hereof).
(e) If any sublease, assignment or other transfer (whether by
operation of law or otherwise) provides that the subtenant, assignee or other
transferee (or any affiliate thereof) is to pay any amount in excess of the rent
and other charges due under this Lease, then, whether such excess be in the form
of an increased rental, lump sum payment, payment for the sale or lease of
fixtures or other leasehold improvements or any other form (and if the
applicable space does not constitute the entire Premises, the amount and
existence of such excess shall be determined on a prorata basis), Tenant shall
pay to Landlord fifty percent (50%) of any such excess within ten (10) days.
Tenant shall in all events diligently pursue the collection of all amounts owed
by any subtenant, assignee or other transferee. Landlord shall have the right to
inspect and audit Tenant's books and records relating to any sublease,
assignment or other transfer.
13. CASUALTY DAMAGE. In the event of damage or destruction of the
Premises by fire or any other casualty, this Lease shall not be terminated, but
the Premises shall be promptly and fully repaired or restored, as the case may
be, by Landlord at its own cost and expense in an amount not to exceed the
amount of insurance proceeds available. Due allowance, however, shall be given
for reasonable time required for adjustment and settlement of insurance claims,
and for such other delays as may result from government restrictions, and
controls on construction, if any, and for strikes, national emergencies and
other conditions beyond the control of Landlord. It is agreed that in any of the
aforesaid events, this Lease shall continue in full force and effect, but if the
condition is such so as to make the entire Premises untenantable for practical
use for Tenant's purposes, then the Rent which Tenant is obligated to pay
hereunder shall abate as of the date of the occurrence until the Premises have
been fully and completely restored by Landlord. Any unpaid or prepaid Rent for
the month in which said condition occurs shall be prorated. If the Premises are
partially damaged or destroyed but the Tenant can still make practical use of
the balance of the Premises; then during the period that Tenant is deprived of
the use of the damaged portion of said Premises, Tenant shall be required to pay
Rent covering only that part of the Premises that it is able to occupy, based on
that portion of total rent which the amount of square foot area remaining that
can be occupied bears to the total square foot area of all the Premises covered
by this Lease. In the event that twenty five percent (25%) or more of the
Premises are damaged or destroyed by fire or other casualty so as to be
untenantable for practical use for Tenant's purposes and it shall require more
than one hundred eighty (180) days for Landlord to substantially complete
restoration of same as reasonably concurred on by Tenant, then either party
hereto upon written notice delivered within thirty (30) days of the fire or
other casualty to the other party may terminate this Lease, in which case the
Rent shall be apportioned and paid to the date of said fire or other casualty.
Subject to the foregoing, no compensation, or claim, or diminution of Rent will
be allowed or paid, by Landlord, by reason of consequential damages,
inconvenience, annoyance, or injury to business, arising from the necessity of
repairing the Premises or any portion of the Building of which they are a part,
however the necessity may occur.
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14. MAINTENANCE AND REPAIRS.
(a) Subject to Tenant's responsibilities set forth in
Paragraph 14 (d), Landlord shall keep the Building and all machinery, equipment
and fixtures attached to, or used in connection with the operation of the
Building, including all electrical, heating, mechanical, sanitary, sprinkler,
utility, power, plumbing, cleaning, refrigeration, ventilating, air conditioning
and elevator systems and equipment (excluding, however, lines, improvements,
systems and machinery for water, gas, steam and electricity owned and maintained
by any public utility company or governmental agency or body and excluding also
any of Tenant's property or plate glass) in good order and repair. Landlord
reserves the right of access to the Premises for the purposes of such operation,
cleaning, maintenance, safety, security and repairs, and agrees that it shall
use reasonable efforts (except in the case of emergency) to provide reasonable
advance notice to Tenant of its intent to enter the Premises for such purposes.
The cost for maintaining the Building and Premises in good order and repair as
contemplated by this Paragraph 14 (a) shall be an Operating Cost for purposes of
Paragraph 11 hereof. There shall be no abatement in rents due and payable
hereunder and no liability on the part of Landlord by reason of any
inconvenience, annoyance or disruption arising from Landlord's making reasonable
repairs, additions or improvements to the Building or Premises in accordance
with its obligations hereunder provided Landlord is diligently pursuing same.
Tenant will not do or permit anything to be done in the Premises or the Building
of which they form a part or bring or keep anything therein which shall in any
way increase the rate of fire or other insurance for said Building, or on the
property kept therein, or obstruct, or interfere with the rights of other
tenants, or in any way injure or annoy them, or those having business with them,
or conflict with them or conflict with the fire laws or regulations, or with any
insurance policy upon said Building or any part thereof, or with any statutes,
rules or regulations enacted or established by the appropriate governmental
authority. If any increase in the rate of fire insurance or other insurance is
stated by any insurance company or by any insurance rate bureau due to any
activity or equipment of Tenant, such statement shall be conclusive evidence
that the increase in such rate is caused by such activity or equipment, and
Tenant shall be liable for such increase and shall reimburse Landlord therefor
upon demand, and any such sum shall be considered Additional Rent payable
hereunder.
In the event Landlord elects to make substantial
improvements or additions to the Building, Property or Premises, such
improvements or additions shall not adversely affect Tenant's use of or access
to the Premises unless Landlord has obtained the prior written consent of
Tenant, which consent shall not be unreasonably withheld, to make such
improvements or additions which affect Tenant's Premises in an adverse manner.
Landlord shall be free to make improvements or additions to the Building,
Property or Premises which do not have an adverse effect on Tenant's use of or
access to the Premises.
(b) After substantial completion of Building or Premises,
except as hereinafter expressly set forth Tenant will not make any alterations,
installments, changes, replacements, additions or improvements, collectively
"Alterations", in or to the Premises or any part thereof, without the prior
written consent of Landlord, not to be unreasonably withheld or delayed. In the
event Landlord elects to have the Alterations remain upon the Premises, said
written consent shall include Landlord's election. It is expressly understood
that all Alterations shall be performed in a good and workmanlike manner and
shall conform to all rules and regulations established from time to time by any
applicable underwriter's association and conform to all requirements of local,
state and federal governments. All Alterations shall be made at Tenant's sole
expense, by contractors, or subcontractors reasonably approved by Landlord, and
only after (i) Tenant has obtained all necessary permits from governmental
authorities and (ii) Tenant has submitted complete plans and specifications to
Landlord with respect to the Alterations and Landlord has approved them. If any
mechanic's lien is filed against the Premises or the Building for work or
materials furnished to Tenant, the lien shall be discharged or bonded off by
Tenant, solely at Tenant's expense, within thirty (30) days after Tenant
receives notice thereof. Tenant shall indemnify and hold harmless Landlord from
any and all expenses (including attorney's fees), liens and claims or damage to
persons, property, or the Building which may arise from the making of any
Alterations. Tenant will deliver to Landlord an architect's certification that
the Alterations were constructed in accordance with the plans and specifications
previously approved by Landlord.
It is also expressly understood that all Alterations
upon the Premises (whether with or without Landlord's consent), shall at the
election of Landlord, as provided in the written consent required herein above,
remain upon the Premises and be surrendered with the Premises at the expiration
of this Lease without disturbance, molestation or injury. Notwithstanding the
foregoing, provided (i) this Lease is in full force and effect, (ii) no material
adverse change in Tenant's financial condition has occurred, and (iii) that
Tenant shall not have been in default more than twice during the term of this
Lease and shall not then be in default in the performance of any obligation
under this Lease, Tenant shall have the right to remove, prior to the expiration
or termination of this Lease, all movable furniture, fixtures or equipment
installed in the Premises solely at Tenant's expense. Should Landlord elect that
alterations, installments, changes, replacements, additions to or improvements
made by Tenant are not to remain on the Premises, Tenant hereby agrees that
within five (5) days following the expiration of the Term of this Lease,
Landlord shall have the right to cause same to be removed at Tenant's sole cost
and expense. Tenant hereby agrees to reimburse Landlord for the reasonable cost
of such removal together with the cost of restoring the Premises to its original
condition.
(c) Tenant shall not install any other equipment of any kind
or nature whatsoever which will or may necessitate any changes, replacements or
additions to or require the use of the water system, air conditioning system or
the electrical system of the Premises without the prior written consent of the
Landlord, which consent shall not be unreasonably withheld or
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delayed. In the event that Tenant wishes to install machinery or mechanical
equipment which may cause noise or vibration to be transmitted to the structure
of the Building or any space therein, such machinery shall be installed and
maintained by Tenant, at Tenant's expense, on vibration eliminators or other
devices sufficient to eliminate such noise and vibration. Tenant may, at its
expense, install and remove additional equipment and machinery used or useful in
Tenant's business, which equipment and machinery shall remain the property of
Tenant and shall not become part of the real estate, provided that such
installation shall not reduce the value of the Premises or its usefulness. Any
equipment of Tenant not removed by Tenant within ten (10) days after the
expiration or earlier termination of this Lease shall be considered abandoned by
Tenant and may be appropriated, sold, destroyed or otherwise disposed of by
Landlord without first giving notice thereof and without obligation to account
therefor. Notwithstanding any other provision of this Lease, Tenant may not
install any equipment which emits electromagnetic, microwave, ultrasonic, laser,
or other radiation which Landlord determines causes a risk to persons or
property, or interferes with telecommunications transmissions or computer use.
(d) Subject to Landlord's obligations to maintain and repair
the Premises in accordance with this Paragraph 14, Tenant agrees that it will
take good care of the Premises and the fixtures and plate glass therein and
will, at the expiration or other termination of the Term hereof, surrender and
deliver up the same in like good order and conditions as the same now is or
shall be at the commencement of the Term hereof, ordinary wear and tear excepted
and shall repair any damage caused by its removal of trade fixtures. Without
limiting the generality of the foregoing, Tenant shall promptly make all repairs
to the Premises or to any part of the Building, to the extent such repairs are
not covered by insurance and if such repairs are necessitated by any act or
omission of Tenant, any subtenant, assignee or concessionaire of Tenant, any of
its respective agents or employees, or by the failure of Tenant to perform any
of its obligations under this Lease.
15. PARKING AND LOADING AREAS.
(a) During the Term of this Lease, and any renewal thereof,
Tenant shall have, without charge, the right to utilize two hundred (200)
vehicle parking spaces in the Building's parking facilities on a nonexclusive
basis with other tenants of the Building, upon such non-financial terms and
conditions as may from time to time be established by Landlord. Landlord
reserves the right in its absolute discretion to determine whether the parking
facilities are becoming crowded and to allocate and assign parking spaces among
Tenant and the other tenants. It is understood and agreed that Landlord assumes
no responsibility, and shall not be held liable, unless caused by Landlord's
negligence, for any damage or loss to any automobiles parked in the parking
facilities or to any personal property located therein, or for any injury
sustained by any person in or about the parking facilities.
(b) During the Term of this Lease, and any renewal thereof,
Tenant shall have, without charge, the right to utilize the paved areas adjacent
to the Premises which have been designed and constructed for use as loading
docks to serve the Premises and to provide access to the drive-in door in the
Premises. Landlord shall not be liable to Tenant as a result of any inability of
Tenant to access such docks or drive-in door due to the parking of vehicles in
the vicinity of such loading docks and drive-in area, or otherwise.
16. SIGNAGE. Tenant shall be entitled to install, at its sole expense,
one (1) building mounted exterior sign and one (1) monument sign providing
identification of Tenant, at Tenant's expense, subject to Landlord's reasonable
approval as to location, design, color, lighting, and specifications, and to
applicable Jefferson County regulations and restrictions of record.
17. EVENT OF DEFAULT.
(a) Definition. As used in the provisions of this Lease, each
of the following events shall constitute, and is hereinafter referred to as, an
"Event of Default":
(i) If Tenant (1) fails to pay Rent, Additional Rent
or any other sum which Tenant is obligated to pay by any provision of this
Lease, when and as it is due and payable hereunder and without demand therefor,
or (2) in any material respect violates any of the terms, conditions or
covenants set forth in the provisions of this Lease; or
(ii) If Tenant (1) applies for or consents to the
appointment of a receiver, trustee or liquidator of Tenant or of all or a
substantial part of its assets, (2) files a voluntary petition in bankruptcy or
admits in writing its inability to pay its debts as they come due, (3) makes an
assignment for the benefit of its creditors, (4) files a petition or an answer
seeking a reorganization or an arrangement with creditors, or seeks to take
advantage of any insolvency law, (5) performs any other act of bankruptcy, or
(6) files an answer admitting the material allegations of a reorganization
insolvency proceeding.
(iii) If an order of relief or other order, judgement
or decree is entered by any court of competent jurisdiction adjudicating Tenant
as insolvent, or otherwise entitled to the protection of or subject to any
bankruptcy statute, approving a petition seeking such a reorganization, or
appointing a receiver, trustee or liquidator of Tenant or otherwise commence
with respect to Tenant or any of its assets any proceeding under any bankruptcy,
reorganization, arrangement, insolvency, readjustment,
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receivership or similar law, and if such order, judgement, decree or proceeding
continues unstayed for more than sixty (60) consecutive days after the
expiration of any stay thereof.
(b) Notice to Tenant, Grace Period. Anything contained in the
provisions of this Paragraph to the contrary notwithstanding, upon the
occurrence of an Event of Default Tenant shall not be deemed to be in default,
and Landlord shall not exercise any right or remedy which it holds under any
provision of this Lease or under applicable law unless and until;
(i) Landlord has given written notice thereof to
Tenant, and
(ii) Tenant has failed, (1) if such Event of Default
consists of the failure to pay money, within three (3) calendar days after the
date Landlord presents notice, to pay all of such money, together with interest
thereon and any late payment charge which may be due hereunder of five percent
(5%) levied on all monies due to Landlord as of the Notice of Default in
accordance with Paragraph 3(g), or (2) if such Event of Default consists of
something other than the failure to pay money, within fifteen (15) business days
thereafter to commence actively, diligently and in good faith to proceed to cure
such Event of Default and to continue to do so until it is fully cured; provided
however, if Tenant commences to cure such default during such fifteen (15)
business day period, and such default cannot be cured within such period despite
diligent effort, Tenant shall be afforded such additional time as may reasonably
required to effect a cure provided that Tenant continues to diligently pursue
such cure.
(iii) No such notice shall be required, and Tenant
shall be entitled to no such grace period, (1) more than twice with respect to
monetary default during each twelve (12) month period of the Term, or (2) if
Tenant has substantially terminated or is in the process of substantially
terminating its continuous occupancy and use of the Premises for the purpose set
forth in the provisions of Paragraph 5, or (3) if any Event of Default
enumerated in the provisions of Paragraphs 17(a)(ii), 17(a)(iii) or 17(b)(ii)
has occurred.
(c) Landlord's Rights upon Event of Default. Upon the
occurrence of an Event of Default, Landlord, at its option, may terminate this
Lease, and with our without terminating this Lease, may pursue any and all other
remedies available to it under the laws of the Commonwealth of Kentucky,
including, by way of example rather than of limitation, the rights to:
(i) re-enter and repossess the Premises, with lawful
force, and any and all improvements thereon and additions thereto;
(ii) at Landlord's option, immediately recover an
amount equal to the present value (as of the date of Tenant's default) of the
Base Rent and Additional Rent which would have become due through the date on
which the Lease Term would have expired but for Tenant's default, which damages
shall be payable to Landlord in a lump sum on demand. For purposes of this
Section, present value shall be computed by discounting at a rate equal to one
(1) whole percent point above the "prime rate" then in effect at Morgan Guaranty
Trust Company of New York, and collect such balance in any manner not
inconsistent with applicable law; and/or
(iii) relet any or all of the Premises for Tenant's
account for any or all of the remainder of the Lease Term, or pay to Landlord,
any deficiency in the Rent and any other sum which Tenant is obligated to pay
resulting, with respect to such remainder, from such reletting, as well as the
out-of-pocket cost to Landlord of any reasonable fees relating to reletting of
the Premises including but not limited to construction costs, brokerage fees,
reasonable attorney's fees or of any repairs or other action (including those
taken in exercising Landlord's rights under any provision of this Lease) taken
by Landlord on account of such Event of Default.
Landlord's rights and remedies set forth in this Lease are cumulative and in
addition to Landlord's other rights and remedies at law or in equity, including
those available as a result of any anticipatory breach of this Lease. Landlord's
exercise of any such right or remedy shall not prevent the concurrent or
subsequent exercise of any other right or remedy. Landlord's delay or failure to
exercise or enforce any of Landlord's rights or remedies or Tenant's obligations
shall not constitute a waiver of any such rights, remedies or obligations.
Landlord shall not be deemed to have waived any default unless such waiver
expressly set forth in an instrument signed by Landlord. Any such waiver shall
not be construed as a waiver of any covenant or condition except as to the
specific circumstances described in such waiver. Neither Tenant's payment of an
amount less than a sum due nor Tenant's endorsement or statement on any check or
letter accompanying such payment shall be deemed an accord and satisfaction.
Notwithstanding any request or designation by Tenant, Landlord may apply any
payment received from Tenant to any payment then due. Landlord may accept the
same without prejudice to Landlord's right to recover the balance of such sum or
to pursue other remedies. Re-entry and acceptance of keys shall not be
considered an acceptance of a surrender of this Lease.
(d) Right of Landlord to Cure Tenant's Default. If Tenant
defaults in the performance of any of its obligations under this Lease, then
Landlord shall have the right (but not the duty) to perform such obligation, and
Tenant shall reimburse Landlord for any costs and expenses thereby incurred,
together with interest thereon at that rate per annum which is two
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percent (2%) greater than the "prime rate" then in effect at Morgan Guaranty
Trust Company of New York, from the date such costs and expenses are incurred by
Landlord to the date of payment thereof by Tenant; provided, however, that
nothing herein contained shall be construed or implemented in such a manner as
to allow Landlord to charge or receive interest in excess of the maximum legal
rate then allowed by law. Such payment and interest shall constitute Additional
Rent hereunder, which shall be due and payable with the next monthly installment
of Rent; but the making of such payment or the taking of such action by Landlord
shall not operate to cure such default or to stop Landlord from the pursuit of
any remedy to which Landlord would otherwise be entitled.
(e) Lien on Personal Property. Pursuant to KRS 383.070,
Landlord shall have a lien on all of Tenant's tangible and intangible personal
property now or hereafter located upon the Premises to secure the payment of
four (4) months' rent. Landlord's rights and remedies provided in this section
shall be in addition to, and not in lieu of, any other rights and remedies
available to Landlord pursuant to the terms of this Lease or pursuant to
applicable law.
(f) No Waiver. If Landlord institutes legal proceedings
against Tenant as to any matter under this Lease and a compromise or settlement
is made, Landlord shall not be deemed to have waived any rights under this Lease
except as explicitly set forth in a written agreement signed by Landlord
evidencing such compromise or settlement. No waiver by Landlord of any breach of
any covenant, condition, or agreement in this Lease shall operate as a waiver of
such covenant or condition itself or of any subsequent breach thereof. No
payment by Tenant or receipt by Landlord of a lesser amount than the monthly
installments of Rent herein stipulated shall be deemed to be other than a
payment on account, nor shall any endorsement or statement on any check or
letter accompanying a check for payment of Rent be deemed an accord and
satisfaction, and Landlord may accept such check prepayment without prejudice to
Landlord's right to recover the balance of such Rent or to pursue any other
remedy provided in the Lease. No re-entry by Landlord, and no acceptance by
Landlord of keys from Tenant, shall be considered an acceptance of a surrender
of the Lease.
18. HOLDING OVER. Tenant acknowledges that it is extremely important
that Landlord have substantial advance notice of the date on which Tenant will
vacate the Premises, because Landlord will (a) require an extensive period to
locate a replacement tenant, and (b) plan its entire leasing and renovation
program for the Building in reliance on its lease expiration dates. Tenant also
acknowledges that if Tenant fails to surrender the Premises at the expiration or
earlier termination of the Lease Term, then it will be conclusively presumed
that the value to Tenant of remaining in possession, and the loss that will be
suffered by Landlord as a result thereof, far exceed the Base Rent and
Additional Rent that would have been payable had the Lease Term continued during
such holdover period. Therefore, if Tenant (or anyone claiming through Tenant)
does not immediately surrender the Premises or any portion thereof upon the
expiration or earlier termination of the Lease Term, then the rent shall be
increased to equal the greater of (1) the fair market rent for the Premises, or
two hundred percent (200%) of the Base Rent, Additional Rent and other sums that
would have been payable pursuant to the provisions of this Lease if the Lease
Term had continued during such holdover period. Such rent shall be computed by
Landlord on a monthly basis and shall be payable on the first day of such
holdover period and the first day of each calendar month thereafter during such
holdover period until the Premises have been vacated. Notwithstanding any other
provision of this Lease, Landlord's acceptance of such rent shall not in any
manner adversely affect Landlord's other rights and remedies, including
Landlord's right to evict Tenant and to recover all damages. Any holdover shall
be deemed to be a tenancy-at-sufferance and not a tenancy-at-will or tenancy
from month-to-month; provided, however, that Landlord may, in addition to its
other remedies, elect, in its sole discretion, to treat such holdover as the
creation of a month-to-month tenancy with Tenant. In no event shall any holdover
be deemed a permitted extension or renewal of the Lease Term, and nothing
contained herein shall be construed to constitute Landlord's consent to any
holdover or to give Tenant any right with respect thereto. Except as otherwise
specifically provided in this Article, all terms of this Lease shall remain in
full force and effect during the holdover period.
19. LANDLORD'S RIGHT OF ENTRY. Landlord and its agents shall be
entitled to enter the Premises at any reasonable time, with reasonable prior
notice except in emergency,
(a) To inspect the Premises;
(b) To exhibit the Premises to any existing or prospective
purchaser or mortgagee thereof or, during the last nine (9) months of the Term,
any prospective tenant thereof;
(c) To make any reasonable and necessary alteration,
improvement or repair to the Premises; or
(d) For any other reasonable purpose relating to the operation
or maintenance of the Premises; provided, that Landlord shall (i) give Tenant
reasonable prior notice of its intention to enter the Premises, except in the
case of emergency, and (ii) use reasonable efforts to avoid thereby interfering
any more than is reasonably necessary with Tenant's use and enjoyment thereof.
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20. LIABILITY, TENANT'S INDEMNITY, INSURANCE.
(a) Landlord shall not be liable for, and Tenant shall
indemnify and hold Landlord harmless from and against, any injury, loss or
damage of whatever nature to any persons or property arising within the Premises
unless caused by the willful act or gross negligence of Landlord, its agents,
employees or contractors. Commencing with the date on which the Premises are
made available to Tenant and continuing thereafter throughout the Lease Term,
Tenant shall maintain, at its sole expense, (i) general comprehensive public
liability insurance, including bodily injury, property damage or other loss,
insuring Tenant, Landlord, Landlord's Lender, and Landlord's appointed agent
with respect to the Premises and their appurtenances, in a company or companies
reasonably satisfactory to Landlord, in an amount not less than Three Million
Dollars ($3,000,000), (ii) all-risk property and casualty insurance, including
theft, written at replacement cost value and with replacement cost endorsement,
covering all of Tenant's personal property in the Premises, and (iii) if, and to
the extent required by law, worker's compensation or similar insurance offering
statutory coverage and containing statutory limits. All such insurance shall:
(1) be issued by a company that is licensed to do business in the jurisdiction
in which the Building is located, that has been approved in advance by Landlord
and that has a rating equal to or exceeding A:XI from Best's Insurance Guide;
(2) name Landlord, its managing agent (or its successor) and the holder of any
Mortgage as additional insureds and/or loss payees as applicable (as their
interests may appear), except that the liability insurance shall not name
Landlord's Mortgage holder as an additional insured; (3) contain an endorsement
that such insurance shall remain in full force and effect notwithstanding that
the insured may have waived its right of action against any person or entity
prior to the occurrence of a loss (Tenant hereby waiving its right of action and
recovery against and releasing Landlord and its employees, affiliates, partners
and agents from any and all liabilities, claims and losses for which they may
otherwise be liable to the extent Tenant is covered by insurance carried or
required to be carried under this Lease); (4) provide that the insurer waives
all right of recovery by way of subrogation against Landlord, its partners,
affiliates, agents and employees, (5) be acceptable in form and content to
Landlord; (6) be primary and non-contributory; and (7) contain an endorsement
prohibiting cancellation, failure to renew, reduction in amount of insurance or
change of coverage (A) as to the interests of Landlord or the holder of the
Mortgage by reason of any act or omission of Tenant, and (B) without the
insurer's giving Landlord thirty (30) days' prior written notice of such action.
No such policy shall contain any deductible provision except as otherwise
approved in writing by Landlord, which approval shall not be unreasonably
withheld. Landlord reserves the right from time to time to require Tenant to
obtain higher minimum amounts or different types of insurance. Tenant shall
deliver a certificate of all such insurance and receipts evidencing payment of
the premium for such insurance (and, upon request, copies of all required
insurance policies, including endorsements and declarations) to Landlord
concurrently with Tenant's execution of this Lease and at least annually
thereafter.
In addition, Tenant shall require any contractor
retained by it to perform any Alteration to carry and maintain at Tenant's or
such contractor's expense (and furnish the policy, policies or certificates
thereof to Landlord and Landlord's Lender) during such times as contractor is
working in the Premises, (i) comprehensive general liability insurance policy,
including, but not limited to, contractor's liability coverage, contractual
liability coverage, complete operations coverage, broad form property damage
endorsement and contractor's protective liability coverage, to afford protection
with limits per person and for each occurrence, of not less than One Million
Dollars ($1,000,000), combined single limit, with respect to personal injury and
death and property damage, such insurance to provide for no deductible, to name
Landlord and Landlord's Lender as additional insureds and (ii) worker's
compensation insurance or similar insurance in form and amounts as required by
law.
Landlord shall maintain insurance coverage for the
Building, the cost of such insurance shall be an Operating Cost for purposes of
Paragraph 11 hereof, in such amounts and with such carriers as shall be
reasonable and necessary from time to time including (a) fire insurance, with
standard extended coverage endorsement including demolition costs, increased
costs of construction, and contingent liability from changes in building codes
on the Premises, in an amount not less than the full replacement value from time
to time of the Premises; (b) flood insurance in an amount Landlord may from time
to time reasonably require, if the Premises are located in an area designated as
"flood prone" pursuant to the national Flood Insurance Act of 1968 and the Flood
Disaster Protection Act; (c) difference-in-conditions coverage (including flood
and earthquake to the extent available) to the extent not covered under (a) and
(b) above, in an amount Landlord from time to time may reasonably require; (d)
rental value insurance in an amount equal to one (1) year gross rent; (e) steam
boiler and machinery breakdown direct damage insurance and third-party liability
coverage (if applicable and if not covered under the comprehensive general
liability policy), with full comprehensive coverage on a repair and replacement
cost basis, for all boilers and machinery which form a part of the Premises,
including business interruption insurance in connection therewith in accordance
with (d) above; and (f) such other insurance as Landlord may require against
such other insurable hazards which at the time are customary and prudent under
the circumstances.
(b) All damages to the Premises or the Building of which they
are a part, caused by Tenant, or the agents, servants, employees and invitees of
Tenant, will be repaired by Landlord at the expense of Tenant, to the extent not
covered by insurance proceeds, with the right on the part of Landlord to elect
in its discretion to regard the same as Additional Rent, in which event such
cost or charge shall become Additional Rent payable with the installment of Rent
next becoming due or thereafter falling due under the terms of this Lease. This
provision shall be construed as an additional remedy granted to Landlord and not
in limitation of any other rights and remedies which Landlord has or may have in
said circumstances.
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(c) All personal property of Tenant in the Premises or in the
Building of which the Premises is a part shall be at the sole risk of Tenant.
Landlord shall not be liable for any accident to or damage to the property of
Tenant resulting from the use or operation of the heating, cooling, electrical
or plumbing apparatus or any other cause whatsoever. Landlord shall not be
liable in damages, nor shall this Lease be affected, for conditions arising or
resulting, and which may affect the Building of which the Premises is a part,
due to construction on contiguous premises unless such construction renders the
Premises untenantable or of no practical use for Tenant's purposes.
(d) Landlord assumes no liability or responsibility whatsoever
in the conduct and operations of the business to be conducted in the Premises.
Landlord shall not be liable for any accident to or injury to any person or
persons or property in or about the Premises which are caused by the conduct and
operation of said business or by virtue of equipment or property of Tenant in
said Premises.
(e) Except to the extent caused by the willful misconduct or
gross negligence of Landlord, its agents or employees, Landlord shall have no
liability to Tenant, its employees, agents, invitees, licensees, customers,
clients, family members or guests for any damage, compensation or claim arising
from the repair by Landlord of any portion of the Premises or the Building, any
interruption in the use of the Premises, accident or damage resulting from the
use or operation (by Landlord, Tenant or any other person) of heating, cooling,
electrical or plumbing equipment or apparatus, or from untenantability of the
Premises resulting from fire or other casualty subject to Paragraph 13, or from
any robbery, theft, mysterious disappearance and/or any other casualty, or from
any leakage in any part or portion of the Premises or the Building, or from
water, rain or snow that may leak into or flow from any part of the Premises, or
from drains, pipes or plumbing work in the Building, or from any other cause
whatsoever. Any goods, property or personal effects, stored or placed by Tenant
in or about the Premises shall be at the risk of Tenant, and Landlord shall not
in any manner be held responsible therefor. The employees of Landlord are
prohibited from receiving any packages or other articles delivered to the
Premises for Tenant, and if any such employee receives any such package or
article, at the request of Tenant, such employee shall be the agent of Tenant
for such purposes and not of Landlord.
21. WAIVER OF SUBROGATION. If either party hereto is paid or
indemnified by any proceeds under any policy of insurance naming such party as
an insured (or would have been paid or indemnified by such proceeds if it had
maintained all of the insurance coverages it is required under this Lease to
maintain), on account of any loss, damage or liability, then such party hereby
releases the other party hereto from any and all liability for such loss, damage
or liability, notwithstanding that such loss, damage or liability, may arise out
of the negligent act or omission of the other party, its agents or employees.
22. EMINENT DOMAIN.
(a) If any or all of the Premises are taken by the exercise of
any power of eminent domain or are conveyed to or at the direction of any
governmental entity under a threat of any such taking (each of which is
hereinafter referred to as a "Condemnation"), Landlord, subject to subparagraph
(c) below shall be entitled to collect from the condemning authority thereunder
the entire amount of any award made in any such proceeding or as consideration
for such deed, without deduction therefrom for any leasehold or other estate
held by Tenant by virtue of this Lease.
(b) Tenant, subject to subparagraph (c) below, hereby (i)
assigns to Landlord all of Tenant's right, title and interest, if any, in and to
any such award, (ii) waives any right which it may otherwise have in connection
with such Condemnation, against Landlord or such condemning authority, to any
payment for (a) the value of the then unexpired portion of the Term, (b)
leasehold damages (except the unamortized portion of any improvements paid for
by Tenant and title to which is retained by Tenant, provided such amount does
not diminish and/or delay any award or payment which Landlord would otherwise
receive as a result of such condemnation), and (c) any damage to or diminution
of the value of Tenant's leasehold interest hereunder or any portion of the
Premises not covered by such Condemnation; and (iii) agrees to execute any and
all further documents which may be required in order to facilitate the
Landlord's collection of any and all such awards.
(c) Notwithstanding the foregoing provisions of this
Paragraph, Tenant may seek a separate award, so long as such separate award in
no way diminishes and/or delays any award or payment which Landlord would
otherwise receive as a result of such Condemnation.
23. EFFECT OF CONDEMNATION.
(a) If (i) all of the Premises are covered by a Condemnation,
or (ii) if any part of the Premises is covered by a Condemnation and the
remainder thereof is insufficient for the reasonable operation therein of
Tenant's business, or (iii) any of the Building is covered by a Condemnation
and, in Landlord's reasonable opinion, reasonably concurred in by Tenant, it
would be impractical to restore the remainder thereof, then, in any such event,
the Term shall terminate on the date upon which possession of so much of the
Premises as is covered by such Condemnation is taken by the condemning authority
thereunder, and all Rent (including, by way of example rather than of
limitation, any Operating Costs payable pursuant to the provisions of Paragraph
11), Tax, and other charges payable hereunder shall be prorated and paid to such
date.
13
<PAGE>
(b) If there is a Condemnation and the Term does not terminate
pursuant to the foregoing provisions of this Paragraph, the operation and effect
of this Lease shall be unaffected by such Condemnation, except that the Base
Monthly Rent payable under the provisions of Paragraph 3 shall be reduced in
proportion to the square footage, if any, of the Premises covered by such
Condemnation.
(c) If there is a Condemnation, Landlord shall have no
liability to Tenant on account of any (i) interruption of Tenant's business upon
the Premises, (ii) diminution in Tenant's ability to use the Premises, or (iii)
other injury or damage sustained by Tenant as a result of such Condemnation.
(d) Except for any separate award to Tenant under the
provisions of Paragraph 22(c), Landlord shall be entitled to conduct any such
condemnation proceeding and any settlement thereof free of interference from
Tenant, and Tenant hereby waives any right which it might otherwise have to
participate therein.
24. MECHANIC'S AND MATERIALMEN'S LIENS. Tenant shall bond, remove or
have removed any mechanic's, materialmen's or other lien filed or claimed
against any or all of the Premises, by reason of labor or materials provided for
or at the request of Tenant or any of its contractors or subcontractors within
thirty (30) days of notice of filing said lien.
25. QUIET ENJOYMENT. Landlord hereby covenants that Tenant, on paying
the Rent and performing the covenants set forth herein, shall without
interference from Landlord peaceably and quietly hold and enjoy, throughout the
Term, (i) the Premises, and (ii) such rights as Tenant may hold hereunder with
respect to the Premises.
26. SURRENDER.
(a) Upon the expiration or earlier termination of the Term,
Tenant shall surrender the Premises to Landlord in good order, cleanliness and
repair, ordinary wear and tear excepted.
(b) Subject to Paragraph 14(c) hereof, any and all
improvements, repairs, alterations and all other property attached to, used in
connection with or otherwise installed upon the Premises (i) shall, immediately
upon the completion of the installation thereof, be and become Landlord's
property without payment therefor by Landlord, and (ii) shall be surrendered to
Landlord upon the expiration or earlier termination of the Term, except that any
machinery, equipment or fixtures installed by Tenant and used in the conduct of
Tenant's trade or business (rather than to service the Premises) shall remain
Tenant's property and shall be removed by Tenant within five (5) days after the
expiration or earlier termination of the Term, and Tenant shall promptly and
thereafter fully restore any of the Premises or the Building damaged by such
installation or removal thereof.
27. SUBORDINATION. This Lease is subject and subordinate to all ground
or underlying leases and to all mortgages and/or deeds of trust which may now or
hereafter affect such leases or the real property of which the Premises form a
part,(the "Mortgage") and to all renewals, modifications, consolidations,
re-castings, replacements and extensions thereof. The holder of the Mortgage to
which this Lease is subordinate shall have the right at any time to declare this
Lease to be superior to the lien, provisions, operation and effect of such
Mortgage and Tenant shall execute, acknowledge and deliver all confirming
documents required by such holder. In confirmation of the foregoing
subordination, Tenant shall at Landlord's request promptly execute any requisite
or appropriate document. Tenant appoints Landlord as Tenant's attorney-in-fact
to execute any such document for Tenant if Tenant fails to execute same within
ten (10) business days after request therefor. Tenant waives the provisions of
any statute or rule of law now or hereafter in effect which may give or purport
to give Tenant any right to terminate or otherwise adversely affect this Lease
or Tenant's obligations in the event any such foreclosure proceeding is
prosecuted or completed or in the event the Property, the Building or Landlord's
interest therein is sold at a foreclosure sale or by deed in lieu of
foreclosure. If this Lease is not extinguished upon such sale or by the
purchaser following such sale, then, at the request of such purchaser, Tenant
shall attorn to such purchaser and shall recognize such purchaser as the
landlord under this Lease. Upon such attornment such purchaser shall not be (a)
bound by any payment of the Base Rent or Additional Rent more than one (1) month
in advance, (b) bound by any amendment of this Lease made without the consent of
the holder of the Mortgage existing as of the date of such amendment, (c) liable
for damages for any breach, act or omission of any prior landlord, or (d)
subject to any offset or defenses which Tenant might have against any prior
landlord. Within five (5) business days after receipt, Tenant shall execute,
acknowledge and deliver any requisite or appropriate document submitted to
Tenant confirming such attornment.
28. ESTOPPEL CERTIFICATE. Landlord and Tenant agree from time to time,
upon not less than ten (10) business days' prior written notice by the other
party, to execute, acknowledge and deliver to such party or to any existing or
prospective owner or mortgagee of the Building or land upon which such Building
has been built, or any interest in either, a statement in writing (a) certifying
that this Lease is unmodified and in full force and effect (or if there have
been modifications, stating the modifications and that the Lease is in full
force and effect as modified), (b) stating the dates to which the Rent and any
other charges hereunder have been paid by Tenant, (c) stating whether or not, to
the knowledge of such party, the other party is in default in the performance of
any covenant, agreement or condition contained in this Lease, and if so,
specifying each such default of which such
14
<PAGE>
party may have knowledge, (d) stating that Tenant shall give notice to any
mortgagee prior to seeking to terminate the Lease by reason of any act or
omission of Landlord until such mortgagee has had reasonable time, at its
option, to remedy such act or omission, and (e) stating the address to which
notices to Tenant, or Landlord, as the case may be, should be sent. Any such
statement may be relied upon by any existing or prospective owner or mortgagee
of the Building or aforesaid land or any interest in either or any assignee of
any such person.
29. NOTICES. Any notice, demand, consent, approval request or other
communication or document to be provided hereunder to a party hereto, shall be
in writing and shall be deemed to have been provided after being sent by
certified or registered mail, return receipt requested, in the United States
mail or by personal delivery or commercial courier, against receipt. Any and all
notices or other communications to Landlord and Tenant shall be given as
follows:
Landlord: Louisville Commerce Realty Corporation
c/o J.P. Morgan Investment Management, Inc.
522 Fifth Avenue at 44th Street
New York, New York 10036
Copy to: Louisville Commerce Realty Corporation
c/o Burnham Partners, LLC
150 South Wacker Drive, Suite 2410
Chicago, Illinois 60606
Attn: Robert Halpin, President
Copy to: Michael B. Vincenti, Esq.
Wyatt, Tarrant & Combs
2700 Citizens Plaza
500 West Jefferson Street
Louisville, Kentucky 40202
Tenant: Electronic Arts, Inc.
209 Redwood Shores
Redwood, California 94065-1175
Attn: Pamela Samson
Copy to: Electronic Arts, Inc.
209 Redwood Shores
Redwood, California 94065-1175
Attn: General Counsel
Copy to: Cynthia DeReamer Rollins, Esq.
Brown, Todd & Heyburn
400 W. Market Street
32nd Floor
Louisville, Kentucky 40202
Either party may hereafter designate a new address for notice
purposes, by giving notice as provided hereunder.
30. GENERAL.
(a) Complete Understanding. This Lease, including without
limitation all exhibits, represents the complete understanding between the
parties hereto as to the subject matter hereof, and supersedes all prior
negotiations, representations, warranties, statements or agreements, either
written or oral, between the parties hereto as to the same.
(b) Amendment. This Lease may be amended by and only by an
instrument executed and delivered by each party hereto.
(c) Applicable Law. This Lease shall be given effect and
construed by application of the laws of the Commonwealth of Kentucky.
(d) Time of Essence. Time shall be of the essence of this
Lease.
15
<PAGE>
(e) Headings. The headings of the Paragraphs and subparagraphs
hereof are provided herein for and only for convenience or reference, and shall
not be considered in construing their contents.
(f) Exhibits. Each writing or plat referred to herein as being
attached hereto as an exhibit or otherwise designated herein as an exhibit
hereto is hereby made a part hereof.
(g) Severability. No determination by any court, governmental
body or otherwise that any provision of this Lease or any amendment hereof is
invalid or unenforceable in any instance shall affect the validity or
enforceability of (i) any other provision thereof, or (ii) such provision in any
circumstance not controlled by such determination. Each such provision shall be
valid and enforceable to the fullest extent allowed by, and shall be construed
wherever possible as being consistent with, applicable law.
(h) Definition of "Landlord". As used herein, the term
"Landlord" means the entity hereinabove named as such, and its successors and
assigns.
(i) Definition of "Tenant". As used herein, the term "Tenant"
means each person hereinabove named as such and such person's heirs, personal
representatives, successors and assigns, each of whom shall have the same
obligations, liabilities, rights and privileges as it would have possessed had
it originally executed this Lease, that no such right or privilege shall inure
to the benefit of any assignee of Tenant, immediate or remote, unless the
assignment to such assignee is made in accordance with the provisions of
Paragraph 12. Whenever two or more persons constitute Tenant, all such persons
shall be jointly and severally liable for the performance of Tenant's
obligations hereunder.
(j) Successors. It is agreed that all rights, remedies and
liabilities herein given to or imposed upon either of the parties hereto, shall
extend to their respective heirs, executors, administrators, successors and
assigns.
(k) Warranty. Landlord warrants that it is the owner of the
Premises and has the full right and authority to make this Lease. Landlord
hereby releases the Premises to Tenant in accordance with the provision of this
Lease. Tenant hereby accepts this Lease.
(l) Force Majeure. In the event that Landlord or Tenant shall
be delayed, or hindered, or prevented from the performance of any act required
hereunder (except for the payment of monies), by reason of government
restrictions, scarcity of labor or materials, or for other reasons beyond its
reasonable control, the performance of such act shall be excused for the period
of delay and the period for the performance of any such act shall be extended
for a period equivalent to the period of such delay.
(m) Recordation. The parties agree to execute a short form of
this Lease, which may, at Landlord's sole option, be recorded among the land
records of the jurisdiction where the Premises are located. The expense thereof
shall be borne by Landlord.
(n) Tenant's Authority. Tenant hereby warrants and represents
that each individual executing this Lease on behalf of Tenant is duly authorized
to execute and deliver this Lease and that Tenant is a duly organized
corporation under the laws of Delaware, is qualified to do business in the
Commonwealth of Kentucky, and has the power and authority to enter into this
Lease, and that all action requisite to authorize Tenant to enter into this
Lease has been duly taken.
(o) Commission. Landlord and Tenant warrant that they have not
had any dealings with any realtor, broker or agent in connection with the
negotiation of this Lease, except for Capstone Realty, Inc. and CB Richard Ellis
Nicklies ("Brokers") whose commission shall be paid for by Landlord pursuant to
the terms of a separate agreement between Landlord and the Brokers. Should any
claim for a commission be established by any other broker or agent, the parties
hereby expressly agree to hold one another harmless with respect thereto to the
extent that one or the other is shown to have been responsible for the creation
of such claim.
(p) No Representations By Landlord. Tenant acknowledges that
neither Landlord or any broker, agent or employee of Landlord has made any
representations or promises with respect to the Premises or the Building except
as herein expressly set forth, and no rights, privileges, assessments or
licenses are acquired by Tenant except as herein expressly provided.
(q) Authority of Landlord. Landlord hereby represents and
warrants that it is a corporation duly organized and in good standing under the
laws of the State of Delaware, that each individual or entity executing this
Lease on behalf of Landlord is authorized to do so, and that all action
necessary to authorize Landlord to enter into this Lease has been duly taken.
(r) Third-Party Consents. Landlord hereby represents and
warrants that (i) the execution and delivery of this Lease by Landlord, and the
performance of Landlord's obligations hereunder, do not conflict with or result
in any breach under the terms of Landlord's articles of incorporation or any
agreement to which Landlord is a party or by which Landlord or the Premises is
bound and (ii) all consents of any third parties, including without limitation
any ground lessor or mortgagee of the Premises,
16
<PAGE>
required in connection with the execution and delivery of this Lease have been
obtained by Landlord, and Landlord shall furnish evidence of such consents.
(s) Litigation. The prevailing party shall recover all
reasonable attorney's fees and costs incurred by or on behalf of such prevailing
party if (i) either party institutes litigation for a breach of the terms and
conditions of this Lease, (ii) either party institutes litigation for possession
of the Premises, or (iii) either party is made party to litigation instituted by
a third party relating to Premises. Such attorney's fees and costs may be levied
against the party whose conduct necessitated the use of an attorney whether or
not litigation is prosecuted to judgement.
(t) Assignment by Landlord. Landlord may freely assign its
interest hereunder. The term "Landlord" as used herein shall be deemed to be
related only to a person or entity during the time of his or its ownership of
Landlord's interest in this Lease.
(u) Waiver of Jury Trial. LANDLORD AND TENANT WAIVE TRIAL BY
JURY IN ANY ACTION, CLAIM OR COUNTERCLAIM BROUGHT IN CONNECTION WITH
LANDLORD-TENANT RELATIONSHIP, TENANT'S USE OR OCCUPANCY OF THE PREMISES OR ANY
CLAIM OF INJURY OR DAMAGE. Tenant consents to service of process and any
pleading relating to any such action at the Premises; provided, however, that
nothing herein shall be construed as requiring such service at the Premises.
Landlord and Tenant waive any objection to the venue of any action filed in any
court situated in the jurisdiction in which the Building is located and waive
any right under the doctrine of forum non conveniens or otherwise to transfer
any such action filed in any such court to any other court.
(v) Modifications. In the event any lender to Landlord
requires, as a condition to financing, modifications to this Lease, then,
provided such modifications do not materially alter the approved working plans
and do not increase the Rent to be paid hereunder, or increase Tenant's
obligations or liabilities under this Lease or decrease the benefits accruing to
Tenant hereunder, Landlord shall submit to Tenant a written amendment with such
required modifications. Tenant shall have the right to approve such amendment,
which approval shall not be unreasonably withheld. If Tenant unreasonably fails
to execute and return the same within ten (10) business days after the amendment
has been submitted, then Landlord may elect to execute such amendment and may
bring an action for specific performance to require the same.
IN WITNESS WHEREOF, each party hereto has executed this Lease, or has
caused it to be executed on its behalf by its duly authorized representatives,
the day and year first above written.
ATTEST: LANDLORD: LOUISVILLE COMMERCE REALTY
CORPORATION
/s/ Susan Kessel By: /s/ James C. McLoughlin
- ----------------------- ---------------------------------------
Name: James C. McLoughlin
-------------------------------------
Title: Vice President
------------------------------------
ATTEST: TENANT: ELECTRONIC ARTS, INC.
By: /s/ Pamela S. Samson
- ----------------------- ---------------------------------------
Name: Pamela S. Samson
-------------------------------------
Title: V.P. Operations
------------------------------------
EXHIBIT A: Legal Description of Property and Depiction of Premises
EXHIBIT B: Description of Building Shell
EXHIBIT C: Rent Schedule
EXHIBIT D: Guaranty [Intentionally Deleted]
EXHIBIT E: Confidentiality Agreement
17
<PAGE>
EXHIBIT A
DESCRIPTION OF PREMISES AND PROPERTY
BEING TRACT 3, as shown on the Minor Subdivision Plat attached to and made a
part of a Deed dated April 30, 1998, of record in Deed Book 7033, Page 702, in
the Office of the Clerk of Jefferson County, Kentucky, which Minor Subdivision
Plat was approved by the Louisville and Jefferson County Planning Commission on
April 24, 1998, Docket No. 98-123.
Said land being the same as:
BEGINNING at an iron pin at the intersection of the North line of a 70 foot
Public Utility, Sewer, Drainage and Private Access Easement named Interchange
Drive and the East line of a 70 foot Public Utility Sewer, Drainage and Private
Access Easement named Commerce Crossings Drive, as shown on a Minor Subdivision
Plat prepared by Birch, Trautwein and Mims, Inc. and approved by the Louisville
and Jefferson County Planning Commission, Order Number 97-439; thence with said
East easement line, North 28 degrees 00 minutes 00 seconds East, 703.31 feet to
an iron pin; thence leaving said East easement line, South 62 degrees 00 minutes
00 seconds East, 400.00 feet to an iron pin; thence North 28 degrees 00 minutes
00 seconds East, 445.00 feet to an iron pin; thence South 15 degrees 33 minutes
59 seconds East, 396.51 feet to an iron pin; thence South 38 degrees 09 minutes
52 seconds East, 366.88 feet to an iron pin; thence South 56 degrees 02 minutes
37 seconds East, 164.00 feet to an iron pin; thence South 07 degrees 15 minutes
25 seconds West 244.80 feet to an iron pin; thence South 21 degrees 59 minutes
25 seconds East, 86.49 feet to an iron pin; thence South 47 degrees 43 minutes
00 seconds West, 511.26 feet to an iron pin; thence South 47 degrees 43 minutes
00 seconds West, 511.26 feet to an iron pin; thence with a curve to the left
having a radius of 635.00 feet and a chord of North 47 degrees 53 minutes 24
seconds West, 79.73 feet to an iron pin; thence continuing with said curve to
the left having a radius of 635.00 feet and a chord of North 56 degrees 44
minutes 40 seconds West, 116.32 feet to an iron pin; thence North 62 degrees 00
minutes 00 seconds West, 24.67 feet to the aforesaid North easement line of
Interchange Drive; thence continuing North 62 degrees 00 minutes 00 seconds
West, with said North easement line, 894.61 feet to an iron pin a total of
919.28 feet; thence with a curve to the right having a radius of 40.00 feet and
a chord of North 17 degrees 00 minutes 00 seconds West, 56.57 feet to the
beginning.
TOGETHER with non-exclusive easement rights as created and set out in a
Declaration of Covenants, Conditions and Restrictions, dated as of April 30,
1998, of record in Deed Book 7033, Page 714, in the Office of the Clerk of
Jefferson County, Kentucky.
TOGETHER with a non-exclusive access easement for "Commerce Crossings Drive" and
"Interchange Drive", as shown on the Minor Subdivision Plat of record in Deed
Book 7033, Page 702, in the Office aforesaid.
[See Exhibit A-1 for depiction of Premises]
<PAGE>
EXHIBIT A-1
[MAP]
FLOOR PLAN
Commerce Crossings Distribution Center
Louisville, Kentucky
February 11, 1999
<PAGE>
EXHIBIT B
DESCRIPTION OF BUILDING SHELL
The Landlord shall cause the Building Shell to be constructed in substantial
accordance with the construction drawings prepared by Tucker & Booker, Inc.
("Landlord's Architect") dated January 30, 1998 for Commerce Crossings
Distribution Center as more fully described in the following:
INDEX OF DRAWINGS
X-1 Title
CIVIL
1 Cover Sheet
2 Topographic Mapping
3 Site Construction Plan
4 Layout & Utility Plan
5 Grading Plan
6 Drainage & Erosion Control Plan
7 Site Details
8 Article 12 Compliance
9 Landscape Details
STRUCTURAL
S1.1 Overall Foundation Plan
S1.2 Partial Foundation Plan
S1.3 Partial Foundation Plan
S2.1 Overall Roof Framing Plan
S2.2 Partial Roof Framing Plan
S2.3 Partial Roof Framing Plan
S3.1 Foundation Details
S4.1 Framing Details
S5.1 Panels Elevation
S5.2 Panels Elevation
S5.3 Panels Elevation
S5.4 Panels Elevation
S5.5 Panels Elevation
S5.6 Panels Elevation
S5.7 Panels Elevation
S5.8 Panels Elevation
S5.9 Panels Elevation
S5.10 Panels Elevation
S6.1 Specifications
ARCHITECTURAL
A1.1 Floor Plan
A1.2 Enlarged Floor Plans
A2.1 Elevations & Building Sections
A3.1 Wall Sections
A3.2 Wall Sections & Details
A3.3 Wall Sections & Details
AT.1 Tenant Prototype Plan
FIRE PROTECTION
FP-1 Floor Plan-Fire Protections
<PAGE>
PLUMBING
P-1 Floor Plan-Plumbing
P-2 Waste & Vent Riser
ELECTRICAL
E-1 Floor Plan-Electrical
E-2 One Line Diagram & Panel Schedules
<PAGE>
EXHIBIT C
RENT SCHEDULE
COMMERCE DISTRIBUTION CENTER
Dates Annual Base Rent Monthly Base Rent
- ----- ---------------- -----------------
Commencement Date
through June 30, 1999 $324,000 $27,000
July 1, 1999 through
March 31, 2000 $648,000 $54,000
April 1, 2000 through
April 30, 2004 $925,000 $77,083.33
<PAGE>
EXHIBIT E
CONFIDENTIALITY AGREEMENT
(OPERATING COSTS AND TAX AUDIT)
THIS CONFIDENTIALITY AGREEMENT (the "Agreement") is made and entered
into this ____ day of____________, 199___ by and between Louisville Commerce
Realty Corporation, a Delaware corporation ("Landlord"), Electronic Arts, Inc.,
a Delaware corporation ("Tenant") and ________________________ ("Contractor").
Preamble
Pursuant to the provisions of that certain Lease between Landlord and
Tenant, dated as of April ___, 1999, (the "Lease"), Tenant was provided with
certain limited rights to audit the annual Operating Costs and Tax (as those
terms are defined in the Lease). In this regard, Tenant has engaged the services
of Contractor to perform an audit of the Operating Costs and Tax for the ____
Calendar Year ( the "Audit"). In connection with the Audit, Tenant and
Contractor will be given access to various documents, files and other
information relating to the Operating Costs and Tax for their review and
inspection (the "Confidential Information"). The Confidential Information may
include economic, commercial, marketing and financial information that is
confidential and/or proprietary in nature. Therefore, Landlord has determined to
require Tenant and Contractor to execute and deliver this Agreement as a
condition of their review and inspection of the Confidential Information.
In consideration of being granted the opportunity to review and inspect
the Confidential Information, Tenant and Contractor agree as follows:
Agreement
Section 1. Purpose. Tenant and Contractor agree that their review and
inspection of the Confidential Information shall be solely to conduct an audit,
on Tenant's behalf and not as an agent, representative or broker of any
undisclosed party, to verify the accuracy of Operating Costs and Tax for the
_____ Calendar Year which Tenant paid under the Lease.
Section 2. Non-Disclosure and Use of Confidential Information.
(a) Tenant and Contractor agree that, except as set forth below, all
Confidential Information shall be used by Tenant and Contractor solely for the
purposes stated in Section 1 hereof. Tenant and Contractor further agree not to
disclose any of the Confidential Information without the prior written consent
of Landlord to any third party other than to their respective (i) employees,
officers, directors, and (ii) agents and representatives, including attorneys,
accountants and financial advisors (collectively, the "Representatives"), in
each case who (i) have a need to know the Confidential Information for the
limited purpose stated in Section 1 hereof, and (ii) have entered into an
agreement with Tenant and Contractor substantially in the form of this
Agreement.
(b) The term "Confidential Information" shall not include information
which: (a) is already known to Tenant or Contractor from non-Landlord sources
not known by Tenant or Contractor to be subject to any confidentiality
obligations to Landlord; (b) is or becomes generally available to the public
other than as a result of a disclosure by Tenant or Contractor or any of their
Representatives; or (c) is required to be disclosed by law or by regulatory or
judicial process.
(c) In the event Tenant or Contractor or any of their Representatives
fails in any respect to comply with its obligations under this Agreement, Tenant
and Contractor shall be liable to Landlord for breach of this Agreement. In
addition, in the event of any such failure, Landlord may, in its sole
discretion, refuse to allow Tenant the opportunity to perform an audit with
respect to any other Calendar Years.
(d) The rights, powers and remedies provided for in the preceding
subsection (c) shall be in addition to and do not preclude the exercise of any
other right, power or remedy available to Landlord under law or in equity. No
forbearance, failure or delay in exercising any such right, power or remedy
shall operate as a waiver thereof or preclude its further exercise.
Section 3. Review of Confidential Information. The Confidential
Information will be made available for review by appointment only, at a location
determined by Landlord, to Representatives of Tenant and/or Contractor whose
duties include the review and inspection of such information in other similar
transactions or evaluations for Tenant.
Section 4. Duplication. Tenant and Contractor agree to refrain from
making any reproductions, other than handwritten summaries or notes and
self-generated computer records, of any item of Confidential Information without
the prior written consent of Landlord.
Section 5. Limited Access. Tenant and Contractor shall inform each of
their Representatives that receives any of the Confidential Information of the
requirements of this Agreement and shall require each such Representative to
comply with such requirements.
<PAGE>
Section 6. Tenant Contact. Tenant and Contractor agree not to
communicate with any other tenants in the Project known as Commerce Distribution
Center in connection with the Audit without the prior written consent of
Landlord.
Section 7. Entire Agreement. This Agreement represents the entire
agreement between Tenant, Contractor and Landlord relating to the treatment of
Confidential Information heretofore or hereafter reviewed or inspected by Tenant
or Contractor in connection with the Audit. This Agreement supersedes all other
agreements relating to such matters which have previously been executed by
Tenant and/or Contractor in favor of Landlord.
Section 8. Reliance by Landlord's Management Company. Landlord's
property management company and its employees shall be authorized to accept a
copy of this Agreement (as executed by Tenant and Contractor) as a basis for
allowing Tenant or Contractor to review and inspect the Confidential Information
in connection with the Audit.
IN WITNESS WHEREOF, a duly authorized representative for both Tenant
and Contractor have executed this Agreement as of the date set forth below.
TENANT: LANDLORD:
ELECTRONIC ARTS, INC., LOUISVILLE COMMERCE REALTY CORPORATION
a Delaware corporation a Delaware corporation
By:________________________________ By:___________________________________
Name:_____________________________ Name:_________________________________
Title:______________________________ Title:________________________________
Date of Execution:___________________ Date of Execution:____________________
CONTRACTOR:
________________________________
By:_______________________________
Name:_____________________________
Title:____________________________
Date of Execution:________________
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.43
<SEQUENCE>5
<DESCRIPTION>OPTION AGREEMENT, AGREEMENT OF PURCHASE AND SALE
<TEXT>
Exhibit 10.43
OPTION AGREEMENT,
AGREEMENT OF PURCHASE AND SALE
AND
ESCROW INSTRUCTIONS
FOR
ZONES 2 AND 4
ELECTRONIC ARTS BUSINESS PARK
REDWOOD SHORES, CALIFORNIA
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
<S> <C> <C>
ARTICLE 1: DEFINITIONS............................................................................Page 1
ARTICLE 2: OPTION TO PURCHASE.....................................................................Page 6
2.1 Payment of Option Price................................................................Page 6
2.2 Exercise of Option.....................................................................Page 6
2.3 Approval of Title Condition............................................................Page 7
2.3.1 Title Report and Survey.......................................................Page 7
2.3.2 Objectionable Title Matters and Permitted Exceptions..........................Page 7
2.3.3 Cure of Objectionable Title Matters...........................................Page 7
2.3.4 Removal of Liens..............................................................Page 7
2.4 Items to be Delivered Outside of Escrow................................................Page 8
2.4.1 Property Records and Documents................................................Page 8
2.4.2 Buyer's Financial Statements; Financial Condition.............................Page 8
2.4.3 Return of Documents; Copies of Buyer Reports..................................Page 8
2.5 Due Diligence..........................................................................Page 8
2.6 Effect of Exercise of Option...........................................................Page 9
ARTICLE 3: COVENANT OF PURCHASE AND SALE AND
INSTRUCTIONS TO ESCROW AGENT...........................................................Page 9
3.1 Payment of Purchase Price..............................................................Page 9
3.1.1 Deposit.......................................................................Page 9
3.1.1.1 Deposit Amount and Payment ..........................................Page 9
3.1.1.2 Investment of Deposit. ..............................................Page 9
3.1.1.3 Application of Deposit ..............................................Page 9
3.1.1.4 EINs ................................................................Page 9
3.1.2 Down Payment and Other Funds Required for Closing.............................Page 9
3.1.3 Balance of Purchase Price.....................................................Page 10
3.2 Escrow Deposits........................................................................Page 10
3.2.1 Instruments for Conveyance of the Property ...................................Page 10
3.2.2 Other Escrow Deposits by Seller...............................................Page 10
3.2.2 Other Escrow Deposits by Buyer................................................Page 11
3.3 Prorations and Credits.................................................................Page 11
3.3.1 Prorated Items................................................................Page 11
3.3.1.1 Taxes ...............................................................Page 11
3.3.1.2 Association Assessments .............................................Page 11
3.3.1.3 Other Revenue and Expenses ..........................................Page 11
3.3.2 Determination of Prorations and Credits.......................................Page 12
3.3.3 Utility Charges...............................................................Page 12
3.4 Closing Costs..........................................................................Page 12
3.4.1 Allocation of Closing Costs...................................................Page 12
3.4.2 Preliminary Closing Statement.................................................Page 13
3.5 Closing................................................................................Page 13
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3.5.1 Time and Place................................................................Page 13
3.5.2 Closing Instructions..........................................................Page 13
3.6 Cancellation of Escrow Without Closing.................................................Page 14
3.7 Supplemental Escrow Agreement..........................................................Page 15
ARTICLE 4: FURTHER AGREEMENTS BETWEEN BUYER AND SELLER
(OF NO CONCERN TO ESCROW AGENT EXCEPT AS
EXPRESSLY REFERENCED IN ARTICLES 1 OR 3)...............................................Page 15
4.1 Warranties, Representations and Covenants..............................................Page 15
4.1.1 By Seller.....................................................................Page 15
4.1.2 By Buyer......................................................................Page 17
4.1.3 Survival......................................................................Page 18
4.2 Conditions to Buyer's Obligation.......................................................Page 19
4.2.1 Performance of Seller's Obligations...........................................Page 19
4.2.2 Accuracy of Warranties and Representations....................................Page 19
4.2.3 City Approvals................................................................Page 19
4.3 Conditions to Seller's Obligation......................................................Page 19
4.3.1 Performance of Buyer's Obligations............................................Page 19
4.3.2 No Material Change in Financial Condition.....................................Page 19
4.3.3 Satisfactory Title............................................................Page 20
4.3.4 Accuracy of Warranties and Representations....................................Page 20
4.4 Indemnities............................................................................Page 20
4.4.1 Buyer's Activities on the Property............................................Page 20
4.4.2 Survival......................................................................Page 20
4.5 Damage, Destruction or Condemnation....................................................Page 20
4.5.1 Termination Rights............................................................Page 20
4.5.2 If No Termination.............................................................Page 20
4.5.3 Materiality...................................................................Page 21
4.6 Assignment by Buyer....................................................................Page 21
4.7 Rights of Parties Upon Default.........................................................Page 21
4.7.1 Seller's Rights ..............................................................Page 21
4.7.2 Buyer's Rights ...............................................................Page 22
4.8 Termination............................................................................Page 22
4.8.1 By Buyer......................................................................Page 22
4.8.2 By Seller.....................................................................Page 22
4.8.3 Effect of Termination.........................................................Page 22
4.9 Brokerage Commission...................................................................Page 23
4.10 Post-Closing Prorations and Adjustments................................................Page 23
4.10.1 Real Estate Taxes and Assessments.............................................Page 23
4.10.2 Determinations of Post-Closing Prorations and Adjustments.....................Page 23
4.11 Design Review..........................................................................Page 24
4.12 Buyer's Covenants and Agreements.......................................................Page 24
4.12.1 Agreement for Covenants Running With the Land.................................Page 24
4.12.2 Development Agreement.........................................................Page 24
4.12.3 Payment for Improvements......................................................Page 25
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4.12.4 Facility Charges, School Facilities Fees and Proposed
Impact Fees...................................................................Page 26
4.12.5 Surplus Earth Material........................................................Page 27
4.12.6 San Carlos Airport............................................................Page 27
4.12.7 Density; Height of Construction...............................................Page 27
4.12.8 No Construction Area..........................................................Page 28
4.13 Enforcement Costs......................................................................Page 28
4.14 Notices................................................................................Page 29
4.15 Binding Effect.........................................................................Page 30
4.16 Entire Agreement; Modification.........................................................Page 30
4.17 Captions...............................................................................Page 30
4.18 Interpretation.........................................................................Page 30
4.19 Mutual Cooperation; Further Assurances.................................................Page 30
4.20 Exhibits...............................................................................Page 30
4.21 Counterparts...........................................................................Page 31
4.22 Governing Law..........................................................................Page 31
4.23 Recording..............................................................................Page 31
4.24 TIME OF THE ESSENCE....................................................................Page 31
4.25 Confidentiality........................................................................Page 31
4.26 Buyer's Financing Covenants; Remedies..................................................Page 32
4.26.1 Permits and Legal Requirements................................................Page 32
4.26.2 Notices of Change.............................................................Page 32
4.26.3 Insurance.....................................................................Page 32
4.26.4 Financial Covenants and Future Financial Condition............................Page 33
4.26.5 Environmental Compliance......................................................Page 33
4.26.6 Default and Remedies..........................................................Page 33
Exhibit
- -------
A Description of Property
B Form of Grant Deed
C Form of Transferor's Certification of Non-Foreign Status
D Form of Seller's Closing Certificate
E Exceptions to Seller's Representations and Warranties
F Schedule of Property Records
G Form of Assumption and Covenants Agreement
H Terms of Surplus Earth Materials Option
I Form of Assignment of Sewage Treatment Capacity
J Form of Assignment and Assumption of Development Agreement and Permits
K Form of Promissory Note
L Form of Deed of Trust
M Form of Continuing Guaranty
N No Build Zones
O Form of Easement Agreement
P Form of Exercise Notice
</TABLE>
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OPTION AGREEMENT,
AGREEMENT OF PURCHASE AND SALE
AND
ESCROW INSTRUCTIONS
FOR
ZONES 2 AND 4
ELECTRONIC ARTS BUSINESS PARK
REDWOOD SHORES, CALIFORNIA
THIS AGREEMENT AND THESE ESCROW INSTRUCTIONS ("Agreement") are made as
of April 5, 1999, by and between ELECTRONIC ARTS REDWOOD, INC., a Delaware
corporation ("Seller"), and Spieker Properties, L.P., a California limited
partnership ("Buyer").
Article 1 of this Agreement consists of definitions used throughout
this Agreement.
Article 2 of this Agreement consists of the Option to Purchase granted
to Buyer, and includes certain instructions to Escrow Agent.
Article 3 of this Agreement constitutes instructions to Escrow Agent
(defined below), as well as agreements between Buyer and Seller.
Article 4 of this Agreement consists of further agreements between
Buyer and Seller, with which Escrow Agent need not be concerned (except as
otherwise directed in Article 3). Escrow Agent may rely entirely on the
instructions contained in Article 3; however, as between Buyer and Seller, the
provisions of Article 4 shall control if there is any inconsistency between
those provisions and the instructions in Article 3.
NOW, in consideration of the mutual covenants and conditions contained
herein, Seller and Buyer hereby agree as follows:
ARTICLE 1: DEFINITIONS
The following terms, wherever used in this Agreement, shall have the respective
meanings set forth below:
1.1 Broker. "Broker" means The Commercial Property Services Company,
1740 Technology Drive, Suite 180, San Jose, California 95110.
1.2 Buyer's Closing Documents. "Buyer's Closing Documents" has the
meaning specified in Section 3.2.3.
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1.3 Buyer's Title Policy. "Buyer's Title Policy" means a standard CLTA
Owner's Policy of Title Insurance in the amount of the Purchase Price, insuring
fee title to the Property in Buyer subject only to Permitted Exceptions,
together with such endorsements as the Title Company commits to issue.
1.4 Closing Date. "Closing Date" means the date upon which Closing
occurs, which shall be two (2) business days after the Parties have secured the
City Approvals required pursuant to Section 4.3.3; provided, however, in the
event title to the Property has not been conveyed to Seller by FFLP on or before
the said Closing Date, the Closing Date shall be delayed up to sixty (60) days
after the Option Date to permit such conveyance.
1.5 Closing. "Closing" means the recordation of the Deed in the
Official Records of San Mateo County, California, concurrently with the delivery
of the Down Payment, the Note, the Deed of Trust, and the Guaranty.
1.6 Contract Assignment. "Contract Assignment" has the meaning
specified in Section 3.2.1.
1.7 Days and Business Days. The term "day" means a calendar day, and
the term "Business Day" means any day on which commercial banks are generally
open for business in the State of California. Any period of time specified in
this Agreement which would otherwise end upon a non-Business Day shall be
extended to, and shall end upon, the next following Business Day.
1.8 Deed. "Deed" means a grant deed in the form attached hereto as
Exhibit B, conveying the Property to Buyer.
1.9 Deed of Trust. "Deed of Trust" means a deed of trust of Buyer
substantially in the form of Exhibit L attached hereto covering the Property and
securing the Note. The Deed of Trust shall be a first priority lien on the
Property.
1.10 Deposit. "Deposit" shall have the meaning ascribed to that term in
Section 3.1.1.
1.11 Development Agreement. "Development Agreement" means that certain
Development Agreement dated as of November 7, 1996, by and between Flatirons
Funding, Limited Partnership, a Delaware limited partnership, and the City of
Redwood City (the "City") and recorded November 8, 1996, as Instrument No.
96-138988, Official Records, San Mateo County, California, as amended by that
First Amendment to Development Agreement dated as of April 15, 1998 and recorded
on April 15, 1998, as Instrument No. 98-054809, Official Records, San Mateo
County, California; that First Amendment to Development Agreement dated as of
April 6, 1998 and recorded on August 25, 1998 (recorded to correct typographical
errors of the First Amendment recorded on April 15, 1998), as Instrument No.
98-135753, Official Records, San Mateo County, California; and that Second
Amendment to Development Agreement dated as of August 31, 1998 and recorded on
September 2, 1998, as Instrument No. 98-141937, Official Records, San Mateo
County, California.
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1.12 District Agreement. "District Agreement" means that certain
Development Agreement GID 1-64, dated June 16, 1982, by and between Redwood
Shores Properties (as assignee of Redwood Shores, Inc.), City, and the Redwood
City General Improvement District No. 1-64, and recorded July 8, 1982, as
Instrument No. 82-057195, Official Records, San Mateo County, California, as
amended.
1.13 Down Payment. "Down Payment" means that amount equal to seventeen
percent (17%) of the Purchase Price.
1.14 Effective Date. "Effective Date" means the date first above
written.
1.15 Environmental Laws. "Environmental Laws" means any federal, state,
local or administrative agency ordinance, law, rule, regulation, order or
requirement relating to environmental conditions or Hazardous Substances.
1.16 Environmental Report. "Environmental Report" means that certain
"Environmental Site Assessment" dated February 7, 1995, prepared by Applied
Geosciences, Inc. together with that certain "Phase II Subsurface Investigation"
dated February 13, 1995, prepared by Applied Geosciences, Inc., covering the
Property.
1.17 Escrow Agent. "Escrow Agent" means the Title Company, acting
through its offices at 1737 North First Street, Suite 100, San Jose, California
95112, Attn: Susan Melton.
1.18 Escrow. "Escrow" means the escrow established by and pursuant to
this Agreement, with Escrow Agent, for purposes of consummating the sale and
purchase of the Property in accordance with this Agreement.
1.19 Exercise Notice. "Exercise Notice" means the notice from Buyer to
Seller whereby Buyer elects to exercise its option to purchase set forth in
Article 2, such notice to be in the form of Exhibit P attached hereto.
1.20 FFLP. "FFLP" means Flatirons Funding, Limited Partnership, a
Delaware limited partnership.
1.21 Gross Building Floor Area. "Gross Building Floor Area" or "GBFA"
means the sum total of all floor areas contained within the exterior walls of
office buildings and special purpose accessory structures, including but not
limited to cafeteria, day care, fitness and conferencing facilities, constructed
on the Property including stairways, elevator shafts, other shafts, mechanical
rooms, vents, and internal support facilities, but excluding those portions of
mechanical or utility structures and storage areas located on the roof to the
extent such structures are not considered by the City as building floor area for
purposes of determining parking requirements, traffic generation, building
density or other similar development limitations under existing development
regulations.
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1.22 Guaranty. "Guaranty" means the corporate guaranty of Spieker
Properties, Inc. substantially in the form of Exhibit M attached hereto provided
by Buyer as additional security for the Note.
1.23 Hazardous Substance. "Hazardous Substance" means any petroleum or
petroleum-related product, any materials containing friable asbestos or any
other hazardous or toxic waste or substance (as such terms are used in
applicable federal and/or state Laws regulating the generation, storage,
transportation, discharge, disposal, release or removal of environmentally
hazardous substances).
1.24 Last Closing Date. "Last Closing Date" means [60 days after Option
Date].
1.25 Laws. "Laws" means any and all:
(i) Constitutions, statutes, ordinances, rules, regulations,
orders, rulings or decrees of the United States, the State of
California, or of the county and any municipality in which the Property
is located or any authority, agency, division, district, court or other
authority thereof; and
(ii) Agreements with or covenants or commitments to any
government agency or other authority which are binding upon Seller or
any of the Property (including, without limitation, any requirements or
conditions for the use or enjoyment of any license, permit, approval,
authorization or consent legally required for the operation of the
Property).
1.26 Note. "Note" means a promissory note in the form of Exhibit K
attached hereto, secured by the Deed of Trust and the Guaranty.
1.27 Option Date. "Option Date" means April 9, 1999.
1.28 Option Price. "Option Price" means $250,000.00 (Two Hundred Fifty
Thousand Dollars).
1.29 Park. "Park" means the Electronic Arts Business Park.
1.30 Park CC&Rs. "Park CC&Rs" shall mean that certain Declaration of
Covenants, Conditions, Easements and Restrictions of the Electronic Arts
Business Park, dated September 3, 1998, and recorded September 18, 1998, as
Instrument No. 98-150182 in the Official Records, San Mateo County, California.
1.31 Parties and Party. "Parties" means Buyer and Seller together and
"Party" may mean either Buyer or Seller, as the case may be.
1.32 Permit. "Permit" means any permit, certificate, license or other
form of authorization or approval issued by a government agency or authority and
legally required for the proper operation and use of the Property (including,
without limitation, any conditional use
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permits and zoning variances) to the extent held and assignable by Seller or
otherwise transferable with the Property.
1.33 Permitted Exceptions. "Permitted Exceptions" means (i) liens for
real property taxes and assessments for the current year, not yet delinquent,
(ii) liens or encumbrances arising out of any activity of Buyer with respect to
the Property, (iii) the Development Agreement; (iv) the District Agreement, (v)
covenants, conditions, easements, and restrictions of record approved by Buyer
pursuant to Section 2.3, (vi) the Park CC&Rs, (vii) standard "printed form"
exceptions and exclusions from coverage customarily included within the form of
the Buyer's Title Policy, and (viii) any other matter deemed to be a Permitted
Exception pursuant to Section 2.3.
1.34 Property. "Property" means (1) that certain parcel described in
Exhibit A hereto, together with (2) all appurtenant rights (including, without
limitation, rights of access to adjoining streets and rights-of-way, water and
riparian rights, and easements).
1.35 Purchase Price. "Purchase Price" means the gross purchase price
being paid by Buyer to Seller for the Property, namely $35,500,000.00 (Thirty
Five Million Five Hundred Thousand Dollars).
1.36 Right of Way Easement. "Right of Way Easement" means that easement
from FFLP to Buyer set forth in Exhibit O.
1.37 RSP. "RSP" means Redwood Shores Properties, a California joint
venture general partnership.
1.38 Seller's Closing Documents. "Seller's Closing Documents" has the
meaning specified in Section 3.2.2.
1.39 Seller's Knowledge. "Seller's Knowledge" means the actual (and not
the constructive) current knowledge of James F. Healey, who is responsible for
asset management of the Property, and does not imply any inspection, examination
or other inquiry undertaken by Seller or said individual to determine the
accuracy of any representation, warranty or other statement made "to Seller's
Knowledge" in this Agreement or in any of Seller's Closing Documents.
1.40 Seller's Title Policy. "Seller's Title Policy" means an ALTA
Lender's Policy of Title Insurance in the amount of the Note, showing title to
the Property vested in Buyer, subject only to the first deed of trust lien of
the Deed of Trust and to the Permitted Exceptions.
1.41 Shores CC&Rs means that certain The Shores Business Center
Declaration of Covenants, Conditions, Restrictions and Charges for Commercial
Development dated January 8, 1981, and recorded February 6, 1981, as Instrument
No. 69666AS, Official Records, San Mateo County, California.
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1.42 Survey. "Survey" means that certain ALTA survey of the Park,
prepared by Bohley/Maley Associates, as job number 97023 and certified as of
March 27, 1998, by Lisa M. Maley, L.S.
1.43 Title Report. "Title Report" means the Preliminary Report prepared
by Title Company pursuant to Section 2.3.1.
1.44 Title Company. "Title Company" means First American Title
Insurance Company.
1.45 Title Policies. "Title Policies" means, collectively, the Buyer's
Title Policy and the Seller's Title Policy.
1.46 Other Definitions. Terms defined in any other part of this
Agreement shall have the defined meanings wherever capitalized herein. As used
in this Agreement, the terms "herein," "hereof" and "hereunder" refer to this
Agreement in its entirety and are not limited to any specific sections; and the
term "person" means any natural person, other legal entity, or combination of
natural persons and/or other legal entities acting as a unit. Wherever
appropriate in this Agreement, the singular shall be deemed to refer to the
plural and the plural to the singular, and pronouns of certain genders shall be
deemed to comprehend either or both of the other genders.
ARTICLE 2: OPTION TO PURCHASE
In accordance with and subject to the terms of this Agreement, Seller grants
Buyer an option to purchase the Property in consideration for Buyer's payment to
Seller of the Option Price. No later than two Business Days after the Effective
Date, Buyer shall open Escrow by delivery of a copy of this Agreement to Escrow
Agent, and Escrow Agent shall promptly notify Seller of such delivery and shall
evidence its agreement to act as Escrow Agent hereunder by countersigning and
delivering to each Party a copy of this Agreement.
2.1 Payment of Option Price. Concurrently with the execution of this
Agreement, Buyer shall pay to Seller the Option Price. The Option Price shall be
deemed fully earned and not refundable except as expressly provided herein, and
Seller may deposit the Option Price in Seller's own accounts without
restrictions. At the Closing, the Option Price shall be applied against the Down
Payment.
2.2 Exercise of Option. At any time on or before 5:00 p.m. Pacific Time
on the Option Date, Buyer may elect to purchase the Property in accordance with
the terms of this Agreement by delivering the Exercise Notice in the form of
Exhibit P to Seller in accordance with the provisions of Section 4.14 hereof,
and by simultaneously depositing the Deposit into Escrow in accordance with the
provisions of Section 3.1.1 hereof. Delivery of the Exercise Notice and Deposit
shall be irrevocable except as specifically provided herein.
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2.3 Approval of Title Condition.
2.3.1 Title Report and Survey. Within two (2) business days
after the Effective Date, Seller shall deliver the Survey to Buyer and
shall cause Title Company to prepare the Title Report and to deliver
the Title Report to Buyer, together with copies of all recorded
documents referenced in the Title Report or on the Survey.
2.3.2 Objectionable Title Matters and Permitted Exceptions.
Buyer shall promptly review the Title Report and shall within ten (10)
days after receipt thereof advise Seller in writing of any exceptions
to or defects in Seller's title to which Buyer objects ("Objectionable
Title Matters"). In case any exceptions to or defects in Seller's title
may be first disclosed to or discovered by Buyer after delivery of the
Title Report, Buyer shall have five (5) days to review and approve or
object to such exceptions, in the latter case such objections also
becoming Objectionable Title Matters. All exceptions and other defects
disclosed by the Title Report or the Survey or as disclosed to or
discovered by Buyer after delivery of the Title Report and which Seller
has not elected to cure in accordance with Section 2.3.3, shall, from
and after the Option Date, be deemed Permitted Exceptions. No
exceptions for a mortgage, deed of trust, or other consensual lien for
repayment of money shall be deemed to be a Permitted Exception.
2.3.3 Cure of Objectionable Title Matters. Seller shall have
no obligation to cure any Objectionable Title Matter. Seller may, at
Seller's option, elect to cure any Objectionable Title Matter by any of
the following, delivered to Buyer prior to the Option Date:
(i) Where such Objectionable Title Matter would
otherwise be within the scope of coverage of Buyer's Title
Policy, written confirmation from the Title Company that such
Objectionable Title Matter will not be scheduled as an
exception in Buyer's Title Policy,
(ii) Written confirmation from the Title Company that
it will affirmatively insure Buyer against loss resulting from
such Objectionable Title Matter, by an endorsement to Buyer's
Title Policy in a form reasonably satisfactory to Buyer,
provided that Buyer shall not be obligated to incur any cost
or liability with respect to an endorsement over an
Objectionable Title Matter, or
(iii) Seller's unconditional written undertaking to
take, at or before Closing, such steps as the Title Company
requires to accomplish either (i) or (ii) above.
2.3.4 Removal of Liens. Notwithstanding any other provision
hereof, Seller shall obtain the full reconveyance, release or other
discharge, of record, at or prior to Closing, or any mortgage, deed of
trust or other consensual lien created by Seller, Seller shall instruct
the Escrow Agent to pay all such liens from funds in Escrow, and Seller
shall convey the Property to Buyer free of any such lien.
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2.4 Items to be Delivered Outside of Escrow.
2.4.1 Property Records and Documents. Within 2 days after the
Effective Date, Seller shall deliver to Buyer, or make available to
Buyer in Seller's office, each of the items specified in the schedule
of Property Records attached hereto as Exhibit F, to the extent such
item is within Seller's possession or control. On receipt of such
items, Buyer shall acknowledge that it has received delivery of the
items indicated to be delivered to it on Exhibit F and that it has
generally had access, at such location, to the other items indicated on
Exhibit F.
2.4.2 Buyer's Financial Statements; Financial Condition. Buyer
shall submit to Seller, for approval by Seller, Buyer's financial
statements for its two most recent fiscal years and a year-to-date
financial statement for the period from the date of the last financial
statement. After review of Buyer's financial statements, Seller may
request, in its sole discretion, additional collateral for Buyer's
obligations under the Note. If Buyer fails or refuses to provide such
additional collateral, Seller may terminate this Agreement without any
further liability to Buyer and Seller shall promptly repay the Option
Price to Buyer. Buyer shall not be entitled to any interest on the
Option Price.
2.4.3 Return of Documents; Copies of Buyer Reports. If this
Agreement terminates without Closing, each party shall promptly return
to the other each item provided pursuant to this Section 2.4, and shall
diligently undertake either to have delivered to such other party or
destroyed every copy, digest or summary made of any such item; and
Buyer shall also furnish Seller with the original or a true and
complete copy of each survey, inspection report and other written study
concerning the Property which Buyer obtained from other sources, but
without any representation or warranty by Buyer.
2.5 Due Diligence. During the period between the Effective Date and the
Option Date, Buyer shall conduct its due diligence, including but not limited
to, the following:
(i) The environmental integrity of the Property;
(ii) All other aspects of the physical condition of the
Property;
(iii) The condition of Seller's title to the Property;
(iv) The condition of the entitlements and permits for the
Property;
(v) The operating history of the Property;
(vi) Acquisition of a commitment from the Title Company to
issue Buyer's Title Policy in accordance with Section
2.7.2.
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2.6 Effect of Exercise of Option. Upon Buyer's delivery of the Exercise
Notice to Seller, Buyer shall be deemed to have waived all its due diligence
requirements and to have accepted the Property in accordance with the terms of
this Agreement with title subject to the Permitted Exceptions as determined
under Section 2.3 hereof.
ARTICLE 3: COVENANT OF PURCHASE AND SALE AND INSTRUCTIONS TO ESCROW AGENT
Upon Buyer's exercise of the Option to purchase granted in Article 2 hereof, in
accordance with and subject to the terms and conditions of this Agreement,
Seller shall sell and convey the Property to Buyer, and Buyer shall purchase and
accept the Property from Seller, for the Purchase Price. In connection with the
administration of Escrow and Closing, Buyer and Seller hereby agree, and advise
and instruct Escrow Agent, as follows:
3.1 Payment of Purchase Price.
3.1.1 Deposit.
3.1.1.1 Deposit Amount and Payment. Concurrently with
delivery of the Exercise Notice, Buyer shall deliver the
Deposit into Escrow. For purposes of this Agreement, the
"Deposit" shall be that amount equal to the difference between
the Down Payment and the Option Price, or the sum of
$5,785,000.00 (Five Million Seven Hundred Eighty Five Thousand
Dollars).
3.1.1.2 Investment of Deposit. The Deposit, while
held in Escrow, shall be held by the Escrow Agent in a
federally-insured, interest-bearing account with a national
banking association. All interest earned on the Deposit while
in Escrow shall be added to, and become part of, the Deposit.
3.1.1.3 Application of Deposit. If Buyer, in breach
of its obligations under this Agreement, fails to purchase the
Property, Seller upon termination of this Agreement shall be
entitled to retain the Deposit as liquidated damages (and not
as a penalty), as provided in Section 4.7 (with which Escrow
Agent need not otherwise be concerned after its delivery of
the Deposit to Seller). At Closing, the Deposit shall be
applied against the Down Payment.
3.1.1.4 EINs. For Escrow Agent's information, Buyer's
Employer Identification Number is 94-3188774 and Seller's
Employer Identification Number is 94-2838567.
3.1.2 Down Payment and Other Funds Required for Closing. Not
later than five (5) Business Days after the Option Date, Buyer shall
deposit in Escrow current funds in an amount equal to Buyer's share of
Closing costs under Section 3.4, plus or minus (as the case may be) the
net amount of prorations and other credits under Section 3.3.
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3.1.3. Balance of Purchase Price. Not later than five (5)
Business Days after the Option Date, Buyer shall deposit in Escrow the
Note and Deed of Trust for the balance of the Purchase Price. The Note
shall bear interest at the rate of seven percent (7%) per annum.
Principal and interest shall be payable in level quarterly payments of
principal and interest, due the twentieth day of March, June,
September, and December of each year, commencing September 20, 1999,
with a final payment of all unpaid principal and accrued and unpaid
interest due on June 20, 2001. Buyer shall have no right to prepay the
Note. Seller shall have the right to call all or any portion of the
outstanding principal upon thirty (30) days written notice.
3.2 Escrow Deposits.
3.2.1 Instruments for Conveyance of the Property. Except as
noted in this Section 3.2.1, not later than five (5) Business Days
after the Option Date, Seller shall deposit or cause to be deposited in
Escrow:
(i) The Deed; provided the Deed may be deposited into
Escrow up to two (2) Business Days after the deed from FFLP
conveying title to the Property to Seller is deposited into
Escrow if such date is later than the date specified above.
(ii) Two counterparts of an assignment and assumption
agreement (the "Contract Assignment"), substantially in the
form attached hereto as Exhibit J, assigning to Buyer the
Development Agreement and the Permits.
(iii) Two counterparts of a covenants agreement (the
"Covenants Agreement") in the form attached hereto as Exhibit
G, in accordance with Section 4.13.1 hereof.
(iv) Right of Way Easement.
3.2.2 Other Escrow Deposits by Seller. In addition to the
deposits required under Section 3.2.1, Seller shall also deposit in
Escrow, at least one Business Day prior to the Closing Date:
(i) A Certificate of Non-Foreign Ownership with
respect to the Property (a "FIRPTA Certificate"),
substantially in the form attached hereto as Exhibit C,
together with the California equivalent thereof.
(ii) A certificate, dated as of Closing,
substantially in the form attached hereto as Exhibit D, that
all of the warranties and representations of Seller contained
in Section 3.2.1 are true and correct in all material respects
as of the Closing Date, except for matters specified in such
certificate ("Seller's Closing Certificate").
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(iii) Such other documents as the Title Company may
reasonably require to effect Closing (but without materially
increasing Seller's obligations, liabilities or expenses
hereunder).
Each of the documents specified in this Section and in Section 3.2.1
("Seller's Closing Documents") shall have been duly executed and, if
appropriate, acknowledged, by Seller.
3.2.3 Other Escrow Deposits by Buyer. In addition to the
deposit of funds under Section 3.1.2 and documents under Section 3.1.3,
Buyer shall deposit in Escrow, not later than five (5) Business Days
after the Option Date:
(i) The Note.
(ii) The Deed of Trust.
(iii) The Guaranty.
(iv) Two counterparts of the Contract Assignment.
(v) Two counterparts of the Covenants Agreement.
(vi) Such other documents as the Title Company may
reasonably require to effect Closing (but without materially
increasing Buyer's obligations, liabilities or expenses
hereunder); provided that for any documents which Title
Company first request after the Option Date, Buyer shall have
five (5) Business Days after such request to deposit such
documents into Escrow.
Each of the documents specified in this Section ("Buyer's Closing
Documents") shall have been duly executed and, if appropriate, acknowledged by
Buyer.
3.3 Prorations and Credits.
3.3.1 Prorated Items. The following items shall be prorated
between Seller and Buyer as of 12:00:01 a.m., local time, on the
Closing Date:
3.3.1.1 Taxes. All real estate taxes and assessments
(including, without limitation, the current year's installment
of any bond assessments) and all personal property taxes with
respect to the Property.
3.3.1.2 Association Assessments. All Assessments due
the Shores Business Center Association or the Electronic Arts
Business Park Association.
3.3.1.3 Other Revenue and Expenses. All other
periodic revenues and periodic charges attributable to the
Property, but excluding insurance premiums.
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(Seller's insurance with respect to the Property shall
terminate as of Closing and shall not be assigned to Buyer.)
3.3.2 Determination of Prorations and Credits. The prorations
and credits provided for in this Section 3.3 shall be effected through
Escrow, based upon:
(i) In the case of real estate taxes and assessments,
the most recent available tax bill for the Property;
(ii) In the case of all other prorations and credits,
a proration statement which Buyer and Seller shall jointly
prepare and deliver to Escrow Agent not later than five (5)
Business Days after the Option Date, to be updated at least
two (2) Business Days prior to the Closing Date.
After taking all such prorations and credits into account, the net
amount owing to Seller or Buyer (as the case may be) shall be added to
or deducted from the proceeds of the Down Payment payable to Seller at
Closing.
3.3.3 Utility Charges. Notwithstanding any other provision
hereof, use charges for any utility serving the Property shall be
prorated only if Seller and Buyer are unable to arrange for a final
billing to Seller through the day preceding Closing, without
interruption of such utility service. The Parties shall cooperate, each
using reasonable efforts, to make such arrangements for each utility
serving the Property.
3.4 Closing Costs.
3.4.1 Allocation of Closing Costs. Closing costs shall be
allocated between Buyer and Seller as follows:
(i) Seller shall pay:
(A) Applicable County transfer taxes; and
(B) Recording charges.
(ii) Buyer shall pay:
(A) All costs associated with the issuance
of the Title Policies, including without limitation,
the charges for any title insurance endorsements
requested by Buyer, and the cost of updating or
replacing the Survey;
(B) Escrow Agent's fees and expenses for
administering Escrow; and
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(C) All fees charges and expenses related to
Buyer's financing for the purchase of the Property
(including, without limitation, any additional
premium for a lender's policy of title insurance).
Any other charges and expenses incurred by Escrow Agent in effecting
Closing shall be allocated between the Parties in accordance with the
custom of the county in which the Property is located. Each of the
parties shall pay the fees of its attorneys, accountants and
consultants.
3.4.2 Preliminary Closing Statement. At least one Business Day
prior to the Closing Date, Escrow Agent shall prepare and submit to
each of Buyer and Seller preliminary Closing statements, showing the
Parties' respective amounts of Closing costs, the Deposit balance
(including interest earned to such date), the net credit due to Seller
or Buyer under Section 3.3 and the net amount of funds required to be
deposited by Buyer in order to effect Closing hereunder.
3.5 Closing.
3.5.1 Time and Place. Closing shall take place at the Escrow
Agent's offices, as soon as the conditions specified in clauses (i)
through (iii) of Section 3.5.2 are satisfied. If Escrow Agent is unable
to close Escrow by the Last Closing Date in compliance with Section
3.5.2, Escrow Agent shall hold Escrow open and effect Closing as soon
as it is able to do so in compliance with such provision, unless Escrow
Agent receives written demand from either Buyer or Seller for
cancellation of Escrow (in which event, Escrow Agent shall proceed in
accordance with Section 3.6).
3.5.2 Closing Instructions. As soon as:
(i) Seller has delivered into Escrow Seller's Closing
Documents and Buyer has approved each of the same as
satisfying the requirements of this Agreement; and
(ii) Buyer has delivered into Escrow the funds
required to effect Closing hereunder and Buyer's Closing
Documents, and Seller has approved Buyer's Closing Documents
as satisfying the requirements of this Agreement; and
(iii) Title Company is prepared (a) to issue to Buyer
the Buyer's Title Policy in the amount of the Purchase Price
subject only to the Permitted Exceptions and (b) to issue to
Seller the Seller's Title Policy in the amount of the Note,
subject only to the first deed of trust lien as to the Deed of
Trust and to the Permitted Exceptions; and
(iv) City has delivered to Escrow the duly signed
resolutions authorizing and approving the Contracts Assignment
in accordance with Section 4.12.2;
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Escrow Agent shall cause the Title Company to record the Deed
and shall then close Escrow by:
(iv) Disbursing the funds in Escrow as follows:
(A) To cover Closing costs and payment of
commissions to Seller's Broker;
(B) To Seller, the amount of the Down
Payment, plus the net credit, if any, to Seller under
Section 3.3 and minus (1) the net credit, if any, to
Buyer under Section 3.3 and (2) Seller's share of
Closing costs; and
(C) To Buyer, any funds remaining in Escrow
after the foregoing disbursement to Seller and
payment of all of the Closing costs;
(v) Delivering to Buyer a copy of the Deed as
recorded, showing the recording data thereon, and the rest of
Seller's Closing Documents; and
(vi) Delivering to Seller Buyer's Closing Documents.
3.6 Cancellation of Escrow Without Closing. After the Last Closing
Date, upon receiving a written demand from either Party for cancellation of
Escrow, Escrow Agent shall promptly deliver a copy of such demand to the other
Party and shall then proceed as follows:
(i) If, by close of business on the fifth Business Day after
Escrow Agent gives the other Party a copy of such demand for
cancellation, Escrow Agent has not received from such other Party
written instructions which conflict in any way with such demand, Escrow
Agent shall cancel Escrow, disburse the Deposit as directed in such
demand (or, if no directions are given in such demand regarding the
Deposit, disburse the Deposit to Seller) and return every other item
deposited in Escrow to the Party which deposited the same; or
(ii) If, by close of business on the fifth Business Day after
Escrow Agent gives the other Party a copy of such demand for
cancellation, Escrow Agent has received conflicting written
instructions from such other Party, Escrow Agent shall take no further
actions with respect to Escrow (other than to continue to invest and
reinvest the Deposit as provided in Section 3.1.1) except (A) in
accordance with joint written instructions of Seller and Buyer or (B),
upon advice of Escrow Agent's legal counsel, in accordance with a
certified copy of the order or judgment of court; provided, however,
that if Seller and Buyer have not provided Escrow Agent with joint
written instructions as to the disposition of Escrow (and all items
deposited therein) within 60 days after Escrow Agent's receipt of such
demand for cancellation, Escrow Agent shall have the right (at any time
thereafter) to commence an action in interpleader against Seller and
Buyer and, in connection therewith, to deposit all funds and other
items held in Escrow with the
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court hearing such action, whereupon Escrow Agent shall be relieved of
all further obligations and duties with respect to Escrow.
Buyer and Seller, jointly and severally, shall hold harmless and indemnify
Escrow Agent from and against any costs and expenses incurred by it in
connection with any interpleader action commenced pursuant to clause (ii) above.
Upon cancellation of Escrow, either pursuant to this Section or other joint
written instructions of the Parties, Buyer and Seller shall each pay one-half of
Escrow Agent's reasonable and customary cancellation fees.
3.7 Supplemental Escrow Agreement. Buyer and Seller shall execute such
supplemental escrow instructions or supplemental escrow agreement as Escrow
Agent may reasonably request, provided the provisions of such instructions or
agreement do not materially conflict with the provisions of this Agreement. In
the event of any conflict between this Agreement and such supplemental
instructions, this Agreement shall control.
ARTICLE 4: FURTHER AGREEMENTS BETWEEN BUYER AND SELLER (OF NO CONCERN TO ESCROW
AGENT EXCEPT AS EXPRESSLY REFERENCED IN ARTICLES 1 OR 3)
4.1 Warranties, Representations and Covenants.
4.1.1 By Seller. Seller hereby warrants, represents and/or
covenants to Buyer that, except as disclosed in Exhibit E attached
hereto:
(i) Title to the Property is held of record by FFLP.
Seller has the contractual right and ability to acquire record
title to the Property at or before the Closing hereunder. In
all other respects, Seller has full right and power to convey
the Property in accordance with this Agreement.
(ii) To Seller's Knowledge, Seller has not received
written notice from any government authority, agency or
officer that the current condition, occupancy or use of the
Property causes a material violation of any applicable Law.
(iii) There are no lawsuits pending or, to Seller's
Knowledge, threatened whose outcome could adversely affect
title to or the use, occupancy or operation of the Property or
Seller's ability to convey any of the Property to Buyer under
this Agreement (including, without limitation, actions for
condemnation).
(iv) Seller is a corporation organized and existing
under the laws of the State of Delaware; is in good standing
and qualified to do business in every other jurisdiction where
such qualification is legally required; has full power to
enter into this Agreement and to fulfill its obligations
hereunder; and has caused this Agreement to be duly executed
and delivered to Buyer.
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(v) No government or third party approvals or
consents are required for Seller's execution and delivery of,
or performance of its obligations under, this Agreement.
Seller's execution and performance of this Agreement do not
and will not violate, and are not restricted by, any other
contractual obligation or any Law to which Seller is a party
or by which Seller or any of the Property is bound.
(vi) With respect to environmental matters affecting
the Property:
(A) To Seller's Knowledge, the Property is
not in violation of any of the Environmental Laws
(hereinafter defined). Neither Seller nor to Seller's
Knowledge any third party has engaged in any
operations or activities upon, or any use or
occupancy of the Property, or any portion thereof,
for the purpose of or in any way involving the
handling, manufacture, treatment, storage, use,
generation, release, discharge, refining, dumping or
disposal of any Hazardous Substance (whether legal or
illegal, accidental or intentional) on, under or in
the Property, or transported any Hazardous Substance
to, from or across the Property.
(B) No Hazardous Substance has been
constructed, deposited, stored, or otherwise located
on, under or in the Property by Seller or to Seller's
Knowledge by any third party.
(C) Seller has not received notice, nor is
Seller aware, that any Hazardous Substance has
migrated from other properties upon or beneath the
Property.
(vii) Except for Broker, Seller has not engaged or
dealt with any broker, finder or similar agent in connection
with the transaction contemplated by this Agreement.
(viii) During the period from the Effective Date to
Closing, Seller shall:
(A) Maintain the Property in its present
condition and state of repair and maintenance
(subject to casualty damage and to normal wear and
tear); and
(B) Take reasonable measures to preserve and
enforce all of its rights and remedies with respect
to the Property and the Development Agreement.
(ix) During the period from the Effective Date to
Closing, Seller shall not do anything else which would impair
its title to any of the Property or materially alter the
operation of the Property.
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(x) During the period from the Effective Date to
Closing, Seller shall provide to Buyer, its agents,
consultants, accountants and counsel upon 24 hours' prior
notice (which may be by telephone or facsimile transmission),
(A) access at all reasonable times to all of Seller's
contracts, books and records and other documents, pertaining
to the period of time commencing February 15, 1995, and
relating to the acquisition, occupancy, operation, maintenance
and repair of the Property by Seller (excluding any
appraisals, internal valuations or attorney-client privileged
materials), with the right to make photocopies thereof, (B)
subject to the foregoing exclusions, access to all such other
information pertaining to the period of time commencing
February 15, 1995 regarding the Property and in Seller's
possession or control (including copies of such contracts,
books and records and other documents) as Buyer may reasonably
request, and (C) access to the Property at all reasonable
times for purposes of conducting (at Buyer's expense and
liability) any examinations, surveys and tests as Buyer may
reasonably require; provided, however, that Buyer shall not
have any right to conduct any drilling, boring or other
intrusive or destructive testing of the Property without
Seller's prior written consent.
4.1.2 By Buyer. Buyer hereby warrants, represents and
covenants to Seller that:
(i) Buyer is a limited partnership duly organized,
validly existing and in good standing under the laws of the
state of California; is in good standing and qualified to do
business in every other jurisdiction where such qualification
is legally required; has full power to enter into this
Agreement and to fulfill its obligations hereunder; and has
caused this Agreement to be duly executed and delivered to
Seller.
(ii) No government or other third-party approvals or
consents are required for Buyer's execution and delivery of or
performance of its obligations under, this Agreement. Buyer's
execution and performance of this Agreement do not and will
not violate, and are not restricted by any other contractual
obligation or applicable Law to which Buyer is a party or by
which Buyer is otherwise bound.
(iii) There are no lawsuits pending or, to Buyer's
knowledge, threatened whose outcome could adversely affect
Buyer's ability to purchase the Property under this Agreement
or to make payments required under the Note.
(iv) Buyer's Financial Statements have been and will
be prepared in accordance with generally accepted accounting
principles and do or will fairly present the financial
condition of the Buyer for the period covered.
(v) Except for Broker, Buyer has not engaged or dealt
with any broker, finder or similar agent in connection with
the transaction contemplated by this Agreement.
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(vi) BUYER'S PURCHASE OF THE PROPERTY HEREUNDER WILL
BE "AS-IS, WHERE IS, WITH ALL FAULTS" AND, EXCEPT FOR THE
WARRANTIES, REPRESENTATIONS AND COVENANTS OF SELLER EXPRESSLY
SET FORTH IN SECTION 4.1.1, BUYER WILL BE CONCLUDING THE
PURCHASE OF THE PROPERTY BASED SOLELY ON ITS INSPECTION AND
INVESTIGATION OF THE PROPERTY AND ON ALL DOCUMENTS RELATED
THERETO. WITHOUT LIMITING THE FOREGOING, BUYER ACKNOWLEDGES
THAT SELLER HAS NOT MADE ANY REPRESENTATIONS AND WARRANTIES,
EXCEPT AS EXPRESSLY SET FORTH IN SECTION 4.1.1, ON WHICH BUYER
IS RELYING AS TO ANY MATTERS CONCERNING THE PROPERTY
(INCLUDING, WITHOUT LIMITATION, THE LAND, IMPROVEMENTS,
DEVELOPMENT RIGHTS, POWER TRANSMISSION LINES, TAXES, BONDS,
PERMISSIBLE USES, WATER OR WATER RIGHTS, TOPOGRAPHY,
UTILITIES, ZONING, SOIL, SUBSOIL, THE PURPOSES FOR WHICH THE
PROPERTY IS TO BE USED, LATENT OR PATENT PHYSICAL, OR
ENVIRONMENTAL CONDITIONS, VALUATION, OPERATING HISTORY OR
PROJECTIONS, DRAINAGE, ENVIRONMENTAL OR BUILDING LAWS, RULES
OR REGULATIONS, ANY WORK TO BE PERFORMED OR SERVICES TO BE
PROVIDED PURSUANT TO THE DEVELOPMENT AGREEMENT, OR ANY OTHER
REPRESENTATIONS OR WARRANTIES). UPON CLOSING, BUYER SHALL
ASSUME THE RISK THAT ADVERSE MATERIAL MATTERS, INCLUDING BUT
NOT LIMITED TO ADVERSE PHYSICAL AND ENVIRONMENTAL CONDITIONS,
MAY EXIST ON THE PROPERTY.
AS A MATERIAL PART OF THE CONSIDERATION TO SELLER FOR THE SALE
OF THE PROPERTY. BUYER HEREBY IRREVOCABLY WAIVES, AND RELEASES
SELLER (AND SELLER'S SHAREHOLDERS, AFFILIATES, DIRECTORS,
OFFICERS, EMPLOYEES AND AGENTS, INCLUDING (WITHOUT
LIMITATION), BROKER, ELECTRONIC ARTS, INC. (AND THEIR
RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AFFILIATES)
FROM, ANY AND ALL CLAIMS (OTHER THAN FOR INTENTIONAL FRAUD)
BASED ON ANY WARRANTY OR REPRESENTATION (INCLUDING, WITHOUT
LIMITATIONS, THOSE IMPLIED BY LAW) NOT EXPRESSLY CONTAINED IN
THIS AGREEMENT; OR ANY MISREPRESENTATION OR FAILURE TO
DISCLOSE INFORMATION RELATING TO THE PROPERTY OTHER THAN A
CLAIM BASED ON A REPRESENTATION OR WARRANTY CONTAINED HEREIN;
OR ANY DEFAULTS, DEFECTS, INADEQUACIES, OR OTHER MATTERS
RELATED EITHER DIRECTLY OR INDIRECTLY TO THE WORK TO BE
PERFORMED OR SERVICES TO BE PROVIDED PURSUANT TO THE
DEVELOPMENT AGREEMENT.
4.1.3 Survival. Except as provided below, the foregoing
warranties, representations and covenants (and the Parties' respective
liability for any breach thereof)
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shall survive Closing and shall not be deemed to merge in the Deed or
any other instrument. Notwithstanding any other provision of this
Agreement or Seller's Closing Documents, any claim based on a breach of
Seller's representations, warranties, and covenants in Section 4.1.1 or
in Seller's Closing Certificate shall be forever barred, and Buyer
shall bring no action thereon, unless (A) Buyer gives Seller written
notice of such claim within one hundred eighty (180) days of the
Closing Date, describing with particularity in such notice each
representation, warranty, or covenant of Seller which Buyer claims to
have been breached and the facts on which such claim is based, and (B)
Buyer commences action on such claim on or before the first anniversary
of the Closing Date.
4.2 Conditions to Buyer's Obligation. Buyer's obligation to close
Escrow shall be subject to timely satisfaction of each of the following
conditions:
4.2.1 Performance of Seller's Obligations. Performance by
Seller of all of Seller's obligations under this Agreement to be
performed at or before Closing.
4.2.2 Accuracy of Warranties and Representations. The accuracy
in all material respects, as of Closing, of each of the warranties and
representations of Seller set forth in Section 4.1.1.
4.2.3 City Approvals. Approval by the City within sixty (60)
days after the Option Date of the Assignment and Assumption of
Development Agreement in accordance with Section 4.12.2, and delivery
by the City of an Estoppel Certificate pursuant to Section 27 of the
Development Agreement substantially in the form of Exhibit Q.
4.2.4 Satisfactory Title. Acquisition of a commitment from the
Title Company to issue Buyer's Title Policy in accordance with Section
3.5.2.
If any of the foregoing conditions is not timely satisfied (or waived by Buyer
in writing), Buyer shall have the right to terminate this Agreement before
Closing by written notice of such termination to Seller and Escrow Agent given
at any time prior to the satisfaction of such condition; but once Closing has
occurred all of the foregoing conditions, to the extent not satisfied at
Closing, shall be deemed to have been irrevocably waived. If this Agreement is
terminated prior to Closing and provided Buyer has cooperated in good faith with
Seller's efforts to secure City approval of the Assignment of the Development
Agreement in accordance with Section 4.12.2, all funds deposited by Buyer with
the Escrow Agent shall promptly be returned to Buyer and Seller shall promptly
repay the Option Price (without interest) to Buyer.
4.3 Conditions to Seller's Obligation. Seller's obligation to close
Escrow shall be subject to the timely satisfaction of each of the follow
conditions:
4.3.1 Performance of Buyer's Obligations. Performance by Buyer
of all of Buyer's obligations under this Agreement to be performed at
or before Closing.
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4.3.2 No Material Change in Financial Condition. No material
adverse change in Buyer's financial condition between the Effective
Date and the Closing Date. Buyer shall provide Seller with a
certificate to that effect at least three (3) business days prior to
the Closing Date, together with a year-to-date financial statement for
the period since the most recent annual financial statement.
4.3.3 Satisfactory Title. Acquisition of a commitment from the
Title Company to issue Seller's Title Policy in accordance with Section
3.5.2.
4.3.4 Accuracy of Warranties and Representations. The accuracy
in all material respects, as of Closing, of each of the warranties and
representations of Buyer set forth in Section 4.1.2.
If any such condition is not timely satisfied (or waived by Seller in writing),
Seller shall have the right to terminate this Agreement before Closing by
written notice of such termination to Buyer and Escrow Agent given at any time
prior to the satisfaction of such condition; but once Closing has occurred all
of the foregoing conditions, to the extent not satisfied at Closing, shall be
deemed to have been irrevocably waived.
4.4 Indemnities.
4.4.1 Buyer's Activities on the Property. Buyer shall hold
harmless, indemnify and defend FFLP and Seller from and against any and
all claims, liability and losses, and expenses related thereto
(including reasonable attorneys' fees), which FFLP or Seller incurs by
reason of any damage to the Property caused by, or any third-person
claim against FFLP or Seller arising or asserted to arise out of, any
activity of Buyer, or any of Buyer's agents, conducted on the Property
prior to Closing. Buyer shall, with reasonable promptness, repair any
damage caused to the Property by any such activity.
4.4.2 Survival. The provisions of, and Buyer's obligations
under, this Section 4.4 shall survive Closing or termination of this
Agreement. The indemnifications contained in this Section 4.4 shall run
to the benefit of FFLP and Seller and their respective constituent
partners, shareholders, directors, officers, employees, agents,
successors and assigns.
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4.5 Damage, Destruction or Condemnation.
4.5.1 Termination Rights. If, prior to Closing, the Property
suffers any material damage, destruction or taking by eminent domain (a
"Casualty"), Buyer shall have the right, at its election, to terminate
this Agreement, by written notice given to the Seller prior to the Last
Closing Date. If a Casualty occurs fewer than ten Business Days before
the Last Closing Date, Seller shall have the right in its sole
discretion to extend the Last Closing Date until the tenth Business Day
after the occurrence of such Casualty in order for Buyer to make the
election permitted by this Section.
4.5.2 If No Termination. In the event that a Casualty occurs
and Buyer either does not have or does not elect to exercise a right to
terminate this Agreement, this Agreement shall continue in force and,
upon Closing, Buyer shall be entitled to all insurance proceeds,
condemnation awards or other amounts which have been paid or may
thereafter be payable to FFLP or Seller by any person in connection
with such Casualty ("Proceeds"), and at Closing Seller shall pay over
to Buyer the amount of any Proceeds already received by FFLP or Seller
and shall assign Buyer all of Seller's or FFLP's rights to Proceeds
which may then be or thereafter become payable.
4.5.3 Materiality. For purposes hereof, a material Casualty is
one in which the extent of the damage, destruction or taking (measured
by the cost of repairing or replacing the damaged, destroyed or taken
portion of the Property) exceeds twenty-five percent (25%) of the
Purchase Price.
4.6 Assignment by Buyer. Because Buyer has been selected by Seller to
purchase this Property through a bid process and the identity of the Buyer is of
the utmost important to Seller, prior to Closing Buyer shall have no right to
assign or transfer its rights under this Agreement except with prior written
consent of Seller, which Seller may in its sole discretion deny; provided,
however, that Seller will not unreasonably withhold its consent if Buyer seeks
to assign its rights under this Agreement to a corporation or partnership which
is at least fifty percent (50%) owned by Buyer. Sale of shares or partnership
interests or other ownership units in Buyer (other than on a nationally
recognized stock exchange or over-the-counter market) shall constitute an
assignment subject to the terms of this Section. Seller shall have no obligation
to respect any assignment in violation of this Section and such an assignment
shall constitute a material breach of this Agreement on the part of Buyer. No
assignment shall relieve or excuse Buyer of its obligations and liability
hereunder. Seller's consent to any one assignment shall not be deemed consent to
any other assignment or a waiver of the requirement for its consent to any other
assignment.
4.7 Rights of Parties Upon Default.
4.7.1 Seller's Rights. IF CLOSING FAILS TO OCCUR UNDER THIS
AGREEMENT DUE TO A DEFAULT ON THE PART OF BUYER, SELLER SHALL BE
ENTITLED, AS ITS SOLE AND EXCLUSIVE REMEDY ON ACCOUNT OF SUCH FAILURE
AND IN CONSIDERATION OF ITS WITHDRAWAL OF THE
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PROPERTY FROM THE MARKET DURING THE TERM OF THIS AGREEMENT, TO RECEIVE
AND RETAIN, AS LIQUIDATED DAMAGES (AND NOT AS A PENALTY), THE DEPOSIT;
AND SELLER SPECIFICALLY WAIVES ANY RIGHT SPECIFICALLY TO ENFORCE
BUYER'S OBLIGATION HEREUNDER TO PURCHASE THE PROPERTY.
BUYER AND SELLER ACKNOWLEDGE THAT SUCH LIQUIDATED DAMAGES ARE
REASONABLE IN AMOUNT CONSIDERING ALL OF THE CIRCUMSTANCES EXISTING ON
THE DATE OF THIS AGREEMENT, INCLUDING THE PARTIES' ESTIMATION OF THE
POSSIBLE RANGE OF DAMAGES TO SELLER IN THE EVENT OF SUCH A BREACH, THE
DIFFICULTY AND IMPRACTICABILITY OF ASCERTAINING OR PROVING WITH ANY
DEGREE OF CERTAINTY THE AMOUNT OF SUCH DAMAGES AND THE DESIRE OF BUYER
TO LIMIT ITS POTENTIAL LIABILITY TO SELLER IN THE EVENT OF SUCH A
BREACH. THE FOREGOING SHALL NOT, HOWEVER, LIMIT SELLER'S RIGHTS AND
REMEDIES TO ENFORCE OBLIGATIONS OF BUYER UNDER SECTIONS 2.4.2, 2.4.3,
4.4.1, and 4.13 (INCLUDING COSTS OF ENFORCING THIS LIQUIDATED DAMAGES
PROVISION) OR, IF CLOSING OCCURS, TO ENFORCE ANY OTHER OBLIGATIONS OF
BUYER HEREUNDER.
/s/ /s/
---------------- -----------------
Buyer's Initials Seller's Initials
4.7.2 Buyer's Rights. IF CLOSING FAILS TO OCCUR UNDER THIS
AGREEMENT DUE TO A DEFAULT ON THE PART OF SELLER, BUYER SHALL BE
ENTITLED, AS ITS SOLE AND EXCLUSIVE REMEDY ON ACCOUNT OF SUCH FAILURE,
TO THE FOLLOWING: (i) REIMBURSEMENT OF BUYER'S ACTUAL OUT-OF-POCKET
COSTS INCURRED IN ITS REVIEW AND INVESTIGATION OF THE PROPERTY, PAYABLE
UPON DELIVERY TO SELLER OF VALID RECEIPTS THEREFOR; (ii) RETURN OF THE
OPTION PRICE (WITHOUT INTEREST THEREON); (iii) RELEASE AND RETURN OF
THE DEPOSIT AND ANY OTHER FUNDS DEPOSITED BY BUYER INTO ESCROW; AND
(iv) SOLELY IF CLOSING FAILS TO OCCUR UNDER THIS AGREEMENT DUE TO
SELLER'S INTENTIONAL FAILURE TO DELIVER DOCUMENTS INTO ESCROW AND TO
CLOSE THE PURCHASE AND SALE HEREUNDER, LIQUIDATED DAMAGES IN THE AMOUNT
OF $1,000,000; AND BUYER SPECIFICALLY WAIVES ANY RIGHT SPECIFICALLY TO
ENFORCE SELLER'S OBLIGATION HEREUNDER TO SELL THE PROPERTY; AND,
FURTHER, BUYER SPECIFICALLY WAIVES ANY RIGHT TO RECORD A LIS PENDENS
AGAINST THE PROPERTY OR ANY PART THEREOF, IN THE OFFICIAL RECORDS OF
SAN MATEO COUNTY.
BUYER AND SELLER ACKNOWLEDGE THAT SUCH THE SPECIFIED LIQUIDATED DAMAGES
ARE NOT BY WAY OF A PENALTY AND ARE REASONABLE IN AMOUNT CONSIDERING
ALL OF THE CIRCUMSTANCES
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EXISTING ON THE DATE OF THIS AGREEMENT, INCLUDING THE PARTIES'
ESTIMATION OF THE POSSIBLE RANGE OF DAMAGES TO BUYER IN THE EVENT OF
SUCH A BREACH, THE DIFFICULTY AND IMPRACTICABILITY OF ASCERTAINING OR
PROVING WITH ANY DEGREE OF CERTAINTY THE AMOUNT OF SUCH DAMAGES AND THE
DESIRE OF SELLER TO LIMIT ITS POTENTIAL LIABILITY TO BUYER IN THE EVENT
OF SUCH A BREACH. THE FOREGOING SHALL NOT, HOWEVER, LIMIT BUYER'S
RIGHTS AND REMEDIES TO ENFORCE OBLIGATIONS OF SELLER UNDER SECTION 4.13
(INCLUDING COSTS OF ENFORCING THIS LIQUIDATED DAMAGES PROVISION).
4.8 Termination.
4.8.1 By Buyer. If Buyer has and timely exercises any right
hereunder to terminate this Agreement, Buyer shall be immediately
entitled to the return of the Deposit and all undisbursed interest
earned thereon while in Escrow and, promptly upon receiving notice of
such termination, Seller shall join with Buyer in a written notice to
Escrow Agent acknowledging the termination of this Agreement and
instructing Escrow Agent to return the Deposit to Buyer and to return
every other item deposited in Escrow to the Party which deposited the
same. In addition, Seller shall promptly repay the Option Price
(without interest) to Buyer.
4.8.2 By Seller. If Seller has and exercises any right
hereunder to terminate this Agreement for a breach by Buyer of its
obligations, warranties or representations hereunder, promptly upon
receiving notice of such termination Buyer shall join with Seller in a
written notice to Escrow Agent acknowledging the termination of this
Agreement and instructing the Title Company to deliver the Deposit to
Seller and to return all other funds and every other item deposited in
Escrow to the Party which deposited the same. If Seller terminates this
Agreement for any other reason, including without limitation, pursuant
to the provisions of Sections 2.4.2, 4.3 (except as a result of Buyer's
breach), and 4.5.1, Seller shall promptly, upon Buyer's written
request, join with Buyer in a written notice to Escrow Agent
acknowledging the termination of this Agreement and instructing Escrow
Agent to return the Deposit to Buyer and to return every other item
deposited in Escrow to the Party which deposited the same and Seller
shall promptly repay the Option Price (without interest) to Buyer.
4.8.3 Effect of Termination. Upon any termination of this
Agreement, neither Party shall have any further obligation or liability
to the other hereunder except (i) any remaining obligation or liability
of Buyer under Section 2.4.3 (for return, destruction and/ or delivery
of documents to Seller) or under Section 4.4.1 (with respect to
activities of Buyer or its agents upon the Property), (ii) any
liability which either Party may have hereunder by reason of the fact
that such termination either (A) was wrongfully made by it or (B)
resulted from a breach of its warranties, covenants or other
obligations hereunder, and (iii) any obligation under Section 4.13.
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4.9 Brokerage Commission. Upon Closing, Seller shall pay any commission
due to Broker, in connection with the sale and purchase of the Property as set
forth in this Agreement, under a separate, written agreement between Seller and
Broker. Nothing contained herein shall be deemed to make Broker a third-party
beneficiary of this Agreement or to create any obligation on the part of either
Party to close the sale and purchase of the Property for Broker's benefit. Each
Party shall hold harmless, indemnify and defend the other from and against any
claim or liability for a commission, fee or other compensation to broker,
salesman, finder or similar intermediary, and for any expenses (including,
without limitation, reasonable attorneys' fees and expenses) related to the
defense of any such claim, which results constitute a breach of such Party's
representation, contained in Section 4.1.1(vii) or Section 4.1.2(iv).
4.10 Post-Closing Prorations and Adjustments. After Closing, the
Parties shall make the following additional prorations and settlements:
4.10.1 Real Estate Taxes and Assessments. If Closing
prorations of real estate taxes and assessments are based on other than
the current year's tax bill, within 30 days after such bill is issued
to Buyer, Buyer shall recompute such proration. If such recomputation
results in a larger proration credit to Seller, Buyer shall pay Seller
the additional amount due Seller within such 30 days. If such
recomputation results in a larger proration credit to Buyer, Seller
shall pay Buyer the additional amount due Buyer within 30 days after
receiving Buyer's written recomputation of such proration, accompanied
by a copy of such tax bill.
4.10.2 Determinations of Post-Closing Prorations and
Adjustments. Except where expressly provided otherwise, Buyer shall
make the required determinations and computations of all post-Closing
prorations and other adjustments under this Section 4.10 (the
"Post-Closing Prorations") and shall provide Seller with a reasonably
detailed written summary of each Post-Closing Proration, concurrently
with or prior to making any payment to or requesting any payment from
Seller under this Section 4.10 with respect thereto. Seller shall have
the right to audit all of Buyer's books and records pertaining to the
Post-Closing Prorations. For this purpose, Buyer shall allow Seller's
designated representatives access to such books and records, at the
Property or Buyer's principal place of business within the United
States, at any time during normal business hours, and Seller shall have
the right to make copies of such books and records (and the right to
use Buyer's photocopying equipment to make such copies, paying Buyer
its actual out-of-pocket cost for such copying). Except to the extent
that Seller, before the second anniversary of the Closing Date, gives
Buyer written notice of objections to Buyer's determinations of the
Post-Closing Prorations, Buyer's determinations and computations of
such prorations and adjustments shall be conclusive, if made in good
faith and with full disclosure to Seller. If Seller does give Buyer
timely written notice of objection to Buyer's determination of any
Post-Closing Proration and the Parties are unable to resolve such
objection by mutual agreement within 30 days thereafter, either Party
shall have the right to submit such dispute to binding arbitration by,
and under the applicable rules of, the American Arbitration
Association, in San Mateo or San Francisco counties, California. The
arbitrator in such arbitration shall, to the extent reasonably
necessary to
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the enforcement of Seller's rights hereunder, order the production to
Seller of any or all of Buyer's books and records pertaining to the
Post-Closing Prorations. The arbitrator shall endeavor to resolve any
such submitted dispute and render a written award within 90 days after
the arbitrator's appointment.
4.11 Design Review. The Property is subject to the Shores CC&Rs, which
provides for design review of any proposed improvements to be constructed by
Buyer. Pursuant to the Shores CC&Rs, the Shores Business Center Association
Architectural Review Committee ("Shores Review Committee") has been formed, and
said Review Committee has promulgated Guidelines. Buyer acknowledges its
receipt, review and acceptance of the Shores CC&Rs and the Guidelines, and
agrees that it shall, at all times, comply with said Shores CC&Rs and the
Guidelines and any existing or future supplements or amendments thereto. Buyer
agrees that it shall inform itself of the procedures of the Review Committee and
shall comply with such procedures, including, without limitation, lead times for
the submission of plans and documents to be reviewed.
4.12 Buyer's Covenants and Agreements. Buyer hereby covenants and
agrees with Seller as follows:
4.12.1 Agreement for Covenants Running With the Land. On or
before Closing, Buyer and FFLP shall execute in recordable form and
deliver into Escrow, for recording at Closing, that certain "Covenants
Agreement" in the form attached hereto as Exhibit G. At Closing, the
Covenants Agreement shall be recorded against the Property immediately
after the Grant Deed and prior to the recording of any other documents,
instruments or conveyances.
4.12.2 Development Agreement. Buyer acknowledges receipt of a
copy of the Development Agreement. Buyer further acknowledges it is
aware of the terms thereof, including in particular, the following
provisions:
Section 3: Term
Section 4: Land Use: Density; and Intensity; including
provisions concerning minimum and maximum
Gross Building Floor Area, minimum, and
maximum height.
Section 5: Project Timing.
Section 6: Project Review and Approval Process.
Section 8: The Facilities and Site Evaluation;
including the obligation to dedicate lands
for right and left turn lanes on Redwood
Shores Parkway, and including the
obligation to comply with engineering
design standards and construction standards
developed by Declarant pursuant to said
Section.
Section 9: Facilities Fees and other Exactions.
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Section 11: On-Site Privately Owned Improvements;
including the obligation of Owner to fund
such Improvements located on Owner's
Parcels.
Section 12: Traffic Assessment District.
Section 17: Construction Requirements
Section 20: Annual Review; including the obligation to
initiate such review and demonstrate good
faith compliance with Owner's Parcel.
Section 24: Events of Default; Remedies; Termination;
Attorneys' Fees.
Promptly upon Buyer's delivery of the Exercise Notice, Seller
shall undertake to obtain the City's approval of the Assignment of the
Development Agreement and Permits in accordance with Section 29 of the
Development Agreement. Buyer shall cooperate fully and in good faith
with Seller in connection with obtaining such approval and shall
promptly deliver any documents or other information required by the
City in its discretion to process the request for approval.
4.12.3 Payment for Improvements. Buyer acknowledges and agrees
that Seller shall not be required to pay any funds, perform any acts,
or dedicate, donate or grant any property (whether real or personal) to
satisfy any condition imposed on development of the Property, whether
such condition is imposed by a governmental authority or entity or by
the terms of any recorded document which constitutes a Permitted
Exception. Buyer acknowledges and agrees that the construction of any
and all improvements and utilities required to be installed within the
perimeter of the Property in order to serve the Property, as developed
by Buyer (collectively, the "On-Site Improvements"), and all costs and
expenses of such On-Site Improvements, shall be the sole and exclusive
responsibility of Buyer, including, without limitation, the following:
(i) the obligation to pay for, construct, furnish or install and
maintain all on-site utility extensions to serve the Property,
including, without limitation, water from the public water lines within
the public streets, sanitary and storm sewers from the public sewer
system within the public streets, electricity and gas from the off-site
facilities designated by Pacific Gas & Electric Company, and
electricity and gas by payment or reimbursement to the electric and gas
utility company in excess of the extension allowance (if any); (ii)
payment for all City, District or utility company connection, extension
or hook-up fees, facilities fees, license fees or charges for water,
sewer, electricity, gas, telephone, garbage or other utility service
for the Property or any part thereof; (iii) addition or removal of any
fill required in order to alter the elevation of the Property, or any
part thereof; and (iv) any grading, piling, excavation, bulkhead or
foundation work required for the Property. Buyer further acknowledges
and agrees that none of Seller's representatives and Seller's
affiliates has made any covenants, representations, warranties, or
undertakings, of any nature whatsoever, concerning or regarding the
availability, quantity or quality of water, gas, sewer, telephone or
electrical services available to or at the Property. Buyer acknowledges
and agrees that it is the responsibility of Buyer to deal directly with
any and all utility companies in order to procure all utility services.
Buyer further
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acknowledges that the costs of extending utilities to the Property may
exceed the utility company's free extension allowance, if any, and that
Buyer shall be solely responsible for all such costs. The parties
acknowledge that Buyer has further improvement obligations relative to
the Property, as such obligations are set forth in the Covenants
Agreement.
4.12.4 Facility Charges, School Facilities Fees and Proposed
Impact Fees. Buyer acknowledges (i) that FFLP and the City have entered
into a Development Agreement which during its term sets the amount of
facilities fees and other exactions which may be charged by the City
for the issuance of building permits for the Property; (ii) that the
City has adopted an ordinance and recorded an agreement requiring
property owners to pay a facilities fee as a condition precedent to
receiving a building permit, and that said ordinance and agreement
applies to the Property; (iii) that an application fee may be required
by the Architectural Review Committees described in Section 4.11; (iv)
that a fire service fee and participation in the cost of a reclaimed
water system program may be imposed upon Buyer and the Property by the
City; (v) that the Belmont School District and the Sequoia Union High
School District have adopted a requirement that the property owners
within said districts pay a school facilities fee as a condition
precedent to receiving a building permit (the "School Facilities Fees")
and that said requirement applies to the Property; (vi) that the
Sequoia Union High School District has formed a landscaping and
lighting maintenance assessment district, and that such assessment
district includes the Property; and (vii) that a multi-jurisdictional
traffic assessment district for improvements to Highway 101 and other
area-wide traffic improvements has been proposed and is being
considered by the City and other nearby cities (including, without
limitation, the City of Belmont and the City of San Carlos), that such
assessment district would include the Property and that in Section 12
of the Development Agreement, FFLP has waived objection, subject to the
limitations in Section 12 of the Development Agreement, on behalf of
itself, its successors and assigns, including Buyer, to the formation
thereof. Buyer acknowledges and agrees that Buyer, and neither Seller
nor FFLP, shall be solely responsible for the payment of the City's
facilities fee and the School Facilities Fees and for all other
charges, taxes, fees or costs, of any nature whatsoever, which are
imposed or incurred after Closing and which are related (whether
directly or indirectly) to the development of the Property, it being
specifically agreed that neither Seller nor FFLP has and shall not have
any responsibility or liability of any nature whatsoever to pay, or
contribute to the payment of, any of the fees, costs, taxes or charges
contemplated in this Agreement and imposed or incurred from and after
the Closing. Buyer acknowledges that pursuant to the Development
Agreement, Seller or FFLP may be required to prepay certain facilities
fees to the City which could be credited against facilities fees and
exactions Buyer would otherwise be required to pay. If such
circumstance occurs, Buyer shall, simultaneously with Buyer's payment
of facilities fees and other exactions to the City, reimburse Seller
the full amount of any such credit Buyer receives. The provisions of
this Section 4.12.4 are solely for the benefit of Seller, Buyer and
FFLP and not for the benefit of any other person or entity (including,
without limitation, the Belmont School District and the Sequoia Union
High School District), and no party other than FFLP and Seller (and
Seller's successors and assigns) shall be entitled to rely on the
provisions of this section or receive any benefit therefrom or enforce
against Buyer any of the provisions of this section.
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4.12.5 Surplus Earth Material. Buyer acknowledges that FFLP
has granted RSP, its successors and assigns an exclusive and
irrevocable option to acquire surplus earth material generated from the
development of the Property and that FFLP and RSP executed and recorded
a Memorandum thereof. The terms, provisions, and conditions of the
option, as set forth in Section 11.8 of that certain Agreement of
Purchase and Sale by and between RSP and FFLP predecessor in interest
("Terms") and the Memorandum of Option are set forth as Exhibit H
hereto. Buyer agrees that it is bound, as to the Property, as successor
in interest to FFLP, to the Terms and the Memorandum of Option, and
undertakes to comply with each and every term, provision, and condition
thereof imposed upon FFLP thereby as it applies to the Property.
4.12.6 San Carlos Airport. Buyer acknowledges that (i) the San
Carlos Airport and its flight path are in close proximity to the
Property, and (ii) that the San Mateo County Airport Land Use
Commission has been presented with and is considering an amendment to
the San Mateo County Airport Land Use Plan which would, in part,
require local land owners within the Redwood Shores Project to grant
avigation easements to the County. Buyer acknowledges that such
proximity to the San Carlos Airport, and any proposed amendments to the
San Mateo County Airport Land Use Plan may have an impact or effect on
the Property or Buyer's use of the Property, including, without
limitation, (a) the production of noise, odors, pollution, traffic,
glare and/or other impacts, and (b) requiring that development of the
Property be conditioned on the granting of an avigation easement(s)
and/or other restrictions (collectively, the "Airport Matters"). Buyer
expressly acknowledges and agrees that Seller shall have no
responsibility for any costs, expenses, liabilities or obligations of
any kind or nature whatsoever arising out of or in any way related to
the Airport Matters.
4.12.7 Density; Height of Construction. Buyer acknowledges
that matters of density and height of buildings constructed on the
Property are governed by the terms of the Development Agreement and of
that certain Covenants Agreement by and between RSP and FFLP dated
February 14, 1995, and recorded February 15, 1995, as Instrument No.
95015506, Official Records, San Mateo County, California, as the same
has been amended, and by other factors such as available sewer
capacity. Buyer covenants and agrees to the following restrictions with
respect to the improvements to be constructed on the Property:
Zone 2 Zone 4
Maximum Square Footage of GBFA 200,000 140,000
Minimum Number of Stories per Building 4 4
Maximum Number of Stories per Building 8 8
Maximum Height of Permitted Structures 130 Ft. 130 Ft.
subject to the following conditions:
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(a) The Maximum Square Footage of GBFA
assumes that Buyer secures adequate sewer capacity to permit such
construction. Seller has advised Buyer that FFLP has received an
assignment from RSP of allocation of sewage treatment capacity with the
South Bayside System Authority sufficient to permit FFLP to construct
up to 885,000 square feet of GBFA in the Park, which has been confirmed
in that certain Second Amendment to Development Agreement dated August
31, 1998, by and between the City and FFLP (the "Second Amendment").
Furthermore, the City, pursuant to the Development Agreement, as
amended by the Second Amendment, has agreed to sell to FFLP additional
sanitary sewage treatment capacity up to 25,000 gallons per day ("gpd")
at $2.50 per gpd, as needed to permit construction of the full
1,000,000 square feet of GBFA authorized for office space in the Park
by the Development Agreement. At Closing, Seller shall cause FFLP to
assign to Buyer, by an Assignment in the form of Exhibit I hereto,
sufficient sewage treatment capacity from its rights received from RSP
to construct an aggregate 340,000 square feet of GBFA in Zones 2 and 4.
Buyer acknowledges that the foregoing assignments are the entirety of
what Seller can and will offer to Buyer for sewage treatment capacity
and Seller has no further or greater obligation to Buyer. If additional
sewage treatment capacity is still required, Buyer must purchase,
lease, or otherwise acquire such capacity on the open market at Buyer's
sole expense.
(b) The Maximum Height of Permitted
Structures is calculated as the height to the highest point of the
building and all superstructures above mean sea level.
4.12.8 No Construction Area. Buyer, on behalf of itself, its
successors and assigns, covenants that it shall not construct, nor seek
or accept any authorization to construct, any structure or portion
thereof (excluding landscaping, surface roadways and parking, awnings
or other protrusions over entrance doorways, covered walkways, patio
facilities, related outbuildings not to exceed fifteen (15) feet in
height, and related installations such as light standards) in those
portions of Zone 2 described in Exhibit N attached hereto and
incorporated herein. Buyer shall execute and record at Closing such
documents as Seller shall reasonably request to memorialize this
obligation of record.
4.13. Enforcement Costs. Should either Party institute any action or
proceeding to enforce any provision of this Agreement or for damages by reason
of an alleged breach of any provision hereof (including, without limitation, an
arbitration proceeding under Section 4.10), the prevailing Party shall be
entitled to receive all costs and expenses (including reasonable attorneys'
fees) incurred by such prevailing Party in connection with such action or
proceeding.
A Party entitled to recover costs and expenses under this Section shall
also be entitled to recover all costs and expenses (including reasonable
attorneys' fees) incurred in the enforcement of any judgment or settlement
obtained in such action or proceeding and provision (and in any such judgment
provision shall be made for the recovery of such postjudgment costs and
expenses).
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4.14 Notices. Except in the case (if any) where this Agreement
expressly provides for an alternate form of communication, any notice, consent,
demand or other communication to be delivered to a Party hereunder shall be
deemed delivered and received when made in writing and transmitted to the
applicable Party either by receipted courier service, or by the United States
Postal Service, first class registered or certified mail, postage prepaid,
return receipt requested, or by electronic facsimile transmission ("Fax"), at
the address or addresses indicated for such Party below (and/or to such other
address as such Party may from time to time by written notice designate to the
other):
If to Seller: Electronic Arts Redwood, Inc.
207 Redwood Shores Parkway
Redwood City, California 94065
Fax No. (650) 628-1384
Attn: James F. Healey, President
and a copy to: Electronic Arts, Inc.
207 Redwood Shores Parkway
Redwood City, California 94065
Fax No. (650) 628-1422
Attn: Ruth Kennedy, General Counsel
and a copy to: Nossaman, Guthner, Knox & Elliott, LLP
50 California Street, 34th Floor
San Francisco, CA 94111
Fax No. (415) 398-2438
Attention: David L. Kimport, Esq.
If to Buyer: Spieker Properties, L.P.
1255 Treat Boulevard Ste 150
Walnut Creek, Ca. 94596
Fax No.: 925-935-5619
Attention: Peter H. Schnugg
with a copy to: Spieker Properties, L.P.
2180 Sand Hill Road
Menlo Park, Ca. 94526
Fax No.:
Attention: Sara Steppe, General Counsel
and shall be deemed delivered and received only upon actual delivery or
attempted delivery (as evidenced by receipt) or upon completion of facsimile
transmission (as evidenced by telecopier confirmation sheet) provided that such
facsimile transmission is confirmed within three Business Days by duplicate
notice delivered as otherwise provided herein.
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4.15 Binding Effect. Except as otherwise expressly provided herein,
this Agreement shall bind and inure to the benefit of the Parties and their
respective successors and assigns.
4.16 Entire Agreement; Modification. This Agreement constitutes the
entire agreement between the Parties pertaining to the subject matter hereof and
supersedes all prior agreements, understandings and representations of the
Parties with respect to the subject matter hereof (including, without
limitation, any letter of intent or other such written proposal). This Agreement
may not be modified, amended, supplemented or otherwise changed, except by a
writing executed by both Parties.
4.17 Captions. Article and section headings used herein are for
convenience of reference only and shall not affect the construction of any
provision of this Agreement.
4.18 Interpretation. Each Party acknowledges that it and its legal
counsel have participated substantially in the drafting of this Agreement and
agree that, accordingly, in the interpretation and construction of this
Agreement, no ambiguity, real or apparent, in any provision hereof shall be
construed against either Party by reason of the role of such Party or its
counsel in the drafting of such provision.
4.19 Mutual Cooperation; Further Assurances. The Parties shall
cooperate with each other as reasonably necessary to effect the provisions of
this Agreement, shall use reasonable and good faith efforts to satisfy
conditions to Closing and, at and after Closing, shall each execute and deliver
such additional instruments or other documents as the other may reasonably
request to accomplish the purposes and intent of this Agreement; provided,
however, that nothing in this Section shall be deemed to enlarge the obligations
of the Parties hereunder or to require either Party to incur any material
expense or liability not otherwise required of it hereunder.
4.20 Exhibits. Each of the following Exhibits hereto:
Exhibit Title
------- -----
A Description of Property
B Form of Deed
C Form of Transferor's Certification of
Non-Foreign Status
D Form of Seller's Closing Certificate
E Exceptions to Seller's Warranties and
Representations
F Schedule of Property Records
G Form of Covenants Agreement
H Terms of Surplus Earth Materials Option
I Form of Assignment of Sewage Treatment
Capacity
J Form of Assignment and Assumption of
Development Agreement and Permits
K Form of Note
L Form of Deed of Trust
M Form of Guaranty
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N No Build Zones
O Right of Way Easement
P Exercise Notice
is hereby incorporated herein.
4.21 Counterparts. This Agreement, and any amendment hereto, may be
executed in any number of counterparts and by each Party on separate
counterparts, each of which when so executed and delivered shall be deemed an
original and all of which taken together shall constitute but one and the same
instrument.
4.22 Governing Law. This Agreement shall be deemed to be an agreement
made under the laws of California and for all purposes shall be governed by and
construed in accordance with such laws.
4.23 Recording. Neither this Agreement nor any notice or memorandum
hereof shall be recorded in any public record. A violation of this prohibition
shall constitute a material breach of this Agreement.
4.24 TIME OF THE ESSENCE. TIME IS OF THE ESSENCE OF THIS AGREEMENT, AND
OF EACH COVENANT, AGREEMENT AND CONDITION REPRESENTED HEREOF WHICH PROVIDES FOR
NOTICE TO BE GIVEN OR ACTION TAKEN ON A SPECIFIC DATE OR WITHIN A SPECIFIED
PERIOD OF TIME.
4.25 Confidentiality. Buyer and its representatives shall hold in
strictest confidence the terms of this transaction, the contents of all items
delivered to Buyer pursuant to Section 2.4, and all data and information
obtained with respect to the Property or Seller or its business, whether
obtained before or after the Effective Date, and until after the Option Date,
the existence of this Agreement, and shall not disclose the same to others;
provided, however, that it is understood and agreed that Buyer may disclose such
data and information to employees, consultants, accountants and attorneys of
Buyer provided that such persons agree in writing to treat such data and
information confidentially and not to disclose any such information or data to
others. In the event of a breach or threatened breach by Buyer or its agent or
representatives of this Section 4.25, Seller shall be entitled to an injunction
restraining Buyer from disclosing, in whole or in part, such confidential
information. Nothing herein shall be construed as prohibiting Seller from
pursuing any other available remedy at law or in equity for such breach or
threatened breach. Prior to Closing, Buyer and Seller shall confer and agree on
a press release to be issued jointly by Buyer and Seller disclosing the
transaction and the appropriate time for making such release. Buyer shall not
issue any press releases with respect to the transaction contemplated in this
Agreement without Seller's prior written approval. Notwithstanding the first
sentence in this Section, Buyer shall be permitted to make any disclosures
necessary to comply with SEC rules and regulations, or any other applicable laws
and regulations governing Buyer. Subject to the foregoing, any press release
regarding this transaction shall be subject to the prior written approval of
both parties. The provisions of this Section 4.25 shall survive Closing.
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4.26 Buyer's Financing Covenants; Remedies. Until the Note has been
paid in full, Buyer covenants and agrees with the Seller as follows:
4.26.1 Permits and Legal Requirements. Buyer will comply with
and keep in effect all permits and approvals obtained from any governmental
bodies that relate to Buyer's ownership and operation of the Property and the
development and construction on the Property of one or more buildings
(collectively, the "Buildings"), together with parking, landscaping and common
areas and all infrastructure required of Buyer in connection with the
development and construction of the Buildings (collectively, the
"Improvements"). Buyer will comply with all existing and future laws,
regulations, orders, and requirements of all governmental, judicial, or legal
authorities having jurisdiction over the Property or the Improvements, and with
all recorded restrictions affecting the Property.
4.26.2 Notices of Change. Buyer shall give Seller written
notice of any material adverse change, fact, or circumstance relating to the
business of Buyer or of the interest of Seller under this Agreement, which may
materially affect Buyer's ability to make payments pursuant to the Note, within
five (5) days of such change, fact, or circumstance.
4.26.3 Insurance. Buyer shall purchase and maintain all
insurance required by its construction lender and its permanent lender. Buyer
shall at its own cost, and at all times, provide, maintain, and keep in full
force and effect:
(a) Policies of insurance insuring the Property and
the Improvements against loss or damage by risks embraced in coverage
of the type now known as the broad form of all-risk, extended coverage,
including, without limitation, coverage against loss by fire,
vandalism, and malicious mischief, in an amount not less than the
lesser of (i) the Note; or (ii) the full replacement cost of the
Improvements (exclusive of the cost of excavations, foundations, and
footings below the lowest basement floor, but including any
Improvements hereafter made); subject to reasonable deductibles from
the loss payable for any casualty.
(b) Comprehensive public liability insurance,
including coverage for completed operations for two years after the
construction of such Improvements has been completed, on an "occurrence
basis" against claims for "personal injury," including, without
limitation, bodily injury, death or property damage, occurring on, in
or about the Property and the adjoining streets and sidewalks, or
arising from or connected with the use, conduct or operation of Buyer's
business or interest, in an amount of not less than ONE MILLION DOLLARS
($1,000,000) per occurrence and THREE MILLION DOLLARS ($3,000,000) per
annum, in the aggregate, with respect to personal injury or death of
one or more persons and with respect to damage to property.
(c) Such other insurance against such risks or
hazards, or other risks and hazards, and in such amounts, as may from
time to time be reasonably required by Seller.
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All policies of insurance shall be issued by companies
licensed to do business in California with a financial rating of at least A+
rating in the most recent edition of Best's Insurance Reports, shall contain the
Standard Non-Contributory mortgagee clause and the Standard Lender's Loss
Payable Clause, or their equivalents, in favor of Seller, and shall provide that
the proceeds thereof shall be payable to Seller to the extent of its interest.
In the event of the foreclosure of the Deed of Trust or other transfer of title
to the Property in extinguishment, in whole or in part, of the indebtedness
secured hereby, all right, title and interest of Buyer in and to any policy then
in force shall pass to the purchaser or grantee. Seller shall be furnished with
a certificate of insurance of each policy required to be provided by Buyer
hereunder, which policy shall provide that it shall not be modified or canceled
without thirty (30) days' written notice to Seller.
4.26.4 Financial Covenants and Future Financial Condition.
(a) Buyer shall not, as disclosed in its financial
statements previously presented to and approved by Seller, suffer
material adverse change, and shall not suffer any lien, judgment, writs
or attachment or other obligation which may materially affect Buyer's
ability to make payments pursuant to the Note without immediate
disclosure thereof to Seller in writing.
(b) Buyer shall deliver, or caused to be delivered,
to Seller audited year end financial statements, prepared by a
certified public accounting firm, of Buyer within 90 days of each
fiscal year end.
4.26.5 Environmental Compliance. Except as specifically
disclosed to and permitted by Seller, Buyer shall not use, generate,
manufacture, produce, store, release, discharge, or dispose of any Hazardous
Substance on, under or about the Property (including leasehold interests) or
transport to or from the Property any Hazardous Substance, in each case in
violation of applicable Requirements of Law.
4.26.6 Default and Remedies. In the event:
(a) Buyer fails to make any payment of principal or
interest to Seller under the Note within three (3) Business
Days after receipt of written notice from Seller; or
(b) Buyer fails to comply with any covenant or
obligation contained in this Agreement, the Note, the Deed of
Trust, or the Guaranty, and does not cure that failure within
thirty (30) days, unless such failure is capable of being
cured but is not reasonably capable of being cured within such
thirty (30) day period and Buyer commences action to cure such
failure within such thirty (30) day period and diligently and
continuously prosecutes such action to completion; or
(c) (i) A petition for relief under any present or
future state or federal law regarding bankruptcy,
reorganization or other relief to debtors is filed by or
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<PAGE>
against Buyer (and, if filed against Buyer, is not discharged
within thirty (30) days of the date of such filing); (ii) a
receiver, liquidator, sequestrator, trustee, conservator or
other similar official of any property of Buyer, is appointed;
(iii) Buyer makes a general assignment for the benefit of
creditors, becomes insolvent, or unable to pay its debts
generally as they mature; (iv) an attachment or execution is
levied against any substantial portion of the Property; or (v)
a liquidation or dissolution of Buyer or a filing by or
against Buyer of a petition for liquidation or dissolution of
Buyer; or
(d) An event of default occurs under any lien or deed
of trust having priority over the Deed of Trust,
then Seller may exercise any one or more of the following rights or remedies:
(i) Any right or remedy it has under the Note, the Deed of
Trust, or the Guaranty; or
(ii) Declare the principal of and interest on the obligations
owing under the Note immediately due and payable; or
(iii) Pursue any other action available to Seller at law or in
equity.
All of Seller's rights and remedies will be cumulative. The
exercise of any rights of Seller hereunder shall not in any way constitute a
cure or waiver of a default hereunder or elsewhere, or invalidate any act done
pursuant to any notice of default, or prejudice Seller in the exercise of any of
its other rights hereunder or elsewhere unless, in the exercise of said rights,
Seller realizes all amounts owed to it hereunder. Notwithstanding the foregoing,
whether or not Seller elects to employ any or all of the remedies available to
it upon a default, Seller shall not be liable for the construction or failure to
construct or complete or protect the Improvements or for payment of any expense
incurred in connection with the exercise of any remedy available to Seller or
for the construction or completion of the Improvements or for the performance of
any other obligation of Buyer.
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<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed and delivered by their respective representatives, thereunto duly
authorized, as of the date first above written.
SELLER:
ELECTRONIC ARTS REDWOOD, INC.
a Delaware corporation
By: /s/ E. Stanton McKee
-------------------------------------
Name: E. Stanton McKee
-----------------------------------
Title: Exec Vice President
----------------------------------
BUYER:
Spieker Properties, L.P.,
a California limited Partnership
By: Spieker Properties, Inc.,
a Maryland corporation
By: /s/ Peter H. Schnugg
-------------------------------------
Name: Peter H. Schnugg
-----------------------------------
Title: Senior Vice President
----------------------------------
The undersigned agrees to serve as Escrow
Agent under the foregoing Agreement:
By:
-------------------------------------
Susan Melton, Escrow Officer
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<PAGE>
EXHIBIT A
DESCRIPTION OF PROPERTY
PARCEL I:
Parcel 1, as shown on Parcel Map No. 98-6 filed September 2, 1998, Book 70 of
Parcel Maps, pages 78 and 79, San Mateo County Records.
PARCEL II:
Parcel 2, as shown on Parcel Map No. 98-6 filed September 2, 1998, Book 70 of
Parcel Maps, pages 78 and 79, San Mateo County Records.
PARCEL III:
Non-exclusive easements appurtenant to Parcels I and II above for utilities as
defined in that certain Easement and Covenants Agreement dated March 27, 1997,
by and between Shores Business Center Association and Flatirons Funding, Limited
Partnership, recorded March 27, 1997, Document No. 97034607, San Mateo County
Records, as amended by First Amendment to Easement and Covenants Agreement dated
August 31, 1998, recorded September 2, 1998, Document No. 98-141940, San Mateo
County Records ("First Amendment") over under and across that area described as
"Utility Easement No. l -- Parcel A" in Exhibit D of the First Amendment.
PARCEL IV:
Non-exclusive easements appurtenant to Parcel I above for ingress/egress as
defined in that certain Easement and Covenants Agreement dated March 27, 1997,
by and between Shores Business Center Association and Flatirons Funding, Limited
Partnership, recorded March 27, 1997, Document No. 97034607, San Mateo County
Records, as amended by First Amendment to Easement and Covenants Agreement dated
August 31, 1998, recorded September 2, 1998, Document No. 98-141940, San Mateo
County Records ("First Amendment") over under and across that area described as
"Ingress/Egress Easement No. 2 -- Parcel B" in Exhibit D of the First Amendment.
PARCEL V:
Non-exclusive easements appurtenant to Parcels I and II above for utilities as
defined in that certain Easement and Covenants Agreement dated March 27, 1997,
by and between Shores Business Center Association and Flatirons Funding, Limited
Partnership, recorded March 27, 1997, Document No. 97034607, San Mateo County
Records, as amended by First Amendment to
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<PAGE>
Easement and Covenants Agreement dated August 31, 1998, recorded September 2,
1998, Document No. 98-141940, San Mateo County Records ("First Amendment") over
under and across that area described as "Utility Easement No. 9 -- Parcel B" in
Exhibit D of the First Amendment.
PARCEL VI:
Easements appurtenant to Parcels I and II above for the purposes set forth in
Sections 11.4(a), 11.4(c), 11.5, 11.6 and 11.7 in the Declaration of Covenants,
Conditions, Easements and Restrictions Electronic Arts Business Park recorded
September 18, 1998, Document No. 98-150182, San Mateo County Records.
A.P. No.: 095-221-080 JPN 127 086 000 01 A
095-221-090 127 086 000 02 A
095-221-110
095-233-130
095-233-140
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<PAGE>
EXHIBIT B
RECORDING REQUESTED BY AND x
WHEN RECORDED MAIL TO: x
x
x
x
x
- --------------------------------------------------------------------------------
Above Space for Recorder's Use Only
FORM OF
GRANT DEED
The undersigned Grantor declares that Documentary Transfer Tax is not
part of the public records and is being paid in accordance with a separate
statement:
FOR VALUE RECEIVED, ELECTRONIC ARTS REDWOOD, INC., a Delaware
corporation ("Grantor"), grants to __________________________________, a
_______________________ ("Grantee"), all that certain real property ("Property")
located in the City of Redwood City, County of San Mateo, State of California,
as more particularly described on Exhibit A attached hereto.
RESERVING THEREFROM easements as set forth in Sections 11.4, 11.5, 11.6
and 11.7 in the Declaration of Covenants, Conditions, Easements and Restrictions
Electronic Arts Business Park recorded September 18, 1998, Document No.
98-150182, San Mateo County Records.
AND RESERVING THEREFROM the non-exclusive right to use and enjoy and to
grant and to convey to others on a non-exclusive basis the easements described
as Parcels III, IV, and V in Exhibit A hereof.
This Grant Deed is made by Grantor and accepted by Grantee subject to:
(i) non-delinquent real property taxes and assessments; (ii) all covenants,
conditions, restrictions and easements and all rights of way, encumbrances, and
all other exceptions to title of record; (iii) all matters ascertainable by a
reasonable inspection or survey of the Property; and (iv) all matters affecting
the condition of title to the Property suffered or created by or with the
written consent of Grantee.
[Continued on Next Page]
MAIL TAX STATEMENTS:
- --------------------
- --------------------
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<PAGE>
IN WITNESS WHEREOF, Grantor has executed this Grant Deed this ___ day
of __________, 1999.
GRANTOR:
ELECTRONIC ARTS REDWOOD, INC., a
Delaware corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
---------------------------------
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<PAGE>
SEPARATE STATEMENT OF
DOCUMENTARY TRANSFER TAX
County Recorder
San Mateo County
Dear Sir/Madam:
In accordance with Revenue and Taxation Code Section 11932, it is
requested that this Statement of Documentary Transfer Tax due not be recorded
with the attached deed, but be affixed to the deed after recordation and before
return as directed on the deed.
The deed names the undersigned, as Grantor, and ______________________
__________________________, a __________________________, as Grantee. The real
property being transferred is located in the City of Redwood City, County of San
Mateo, State of California, as more particularly described in the attached deed.
The amount of the documentary transfer tax due on the attached deed is
$______________, computed on the basis of:
(__) computed on the consideration or value of property conveyed; or
(__) computed on the consideration or value less liens or encumbrances
remaining at the time of sale.
Very truly yours,
ELECTRONIC ARTS REDWOOD, INC., a
Delaware corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
---------------------------------
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<PAGE>
EXHIBIT C
FORM OF
TRANSFEROR'S CERTIFICATION OF NON-FOREIGN STATUS
To inform Name, entity, jurisdiction of Buyer or nominees
("Transferee"), that withholding of tax under Section 1445 of the Internal
Revenue Code of 1986, as amended (the "Code"), will not be required upon the
transfer of certain real property to Transferee by ELECTRONIC ARTS REDWOOD,
INC., a Delaware corporation, the undersigned hereby certifies the following on
behalf of Transferor:
1. Transferor is not a foreign corporation, foreign partnership,
foreign trust, or foreign estate (as those terms are defined in the Code and the
Income Tax Regulations promulgated thereunder);
2. Transferor's U.S. employer identification number is 94-2838567; and
3. Transferor's office address is 207 Redwood Shores Parkway, Redwood
City, California 94065.
Transferor understands that this Certification may be disclosed to the
Internal Revenue Service by Transferee and that any false statement contained
herein could be punished by fine, imprisonment, or both.
Under penalty of perjury the undersigned declares that he or she has
examined this Certification and to the best of his/her knowledge and belief it
is true, correct and complete, and the undersigned further declares that he/she
has authority to sign this document on behalf of Transferor.
Dated: ___________________ ELECTRONIC ARTS REDWOOD, INC.,
a Delaware corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
---------------------------------
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<PAGE>
EXHIBIT D
FORM OF
SELLER'S CLOSING CERTIFICATE
ELECTRONIC ARTS REDWOOD, INC. ("Seller"), a Delaware corporation, and
_________________________ ("Buyer"), a __________________________, have entered
into that certain Agreement of Purchase and Sale and Escrow Instructions dated
Insert date of Agreement (the "Purchase Agreement"). Seller hereby certifies to
Buyer that, as of the date of this certificate, the representations and
warranties contained in Section 3.2.1 of the Purchase Agreement, as qualified by
references to Seller's Knowledge, are true in all material respects, except as
otherwise expressly disclosed in the schedule of exceptions attached to this
Certificate.
Dated: ___________________ ELECTRONIC ARTS REDWOOD, INC.,
a Delaware corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
---------------------------------
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<PAGE>
EXHIBIT E
EXCEPTIONS TO SELLER'S REPRESENTATIONS AND WARRANTIES
Nothing in this schedule constitutes an admission of any liability or
obligation of Buyer to any third party, nor an admission to any third party of
Buyer's interests. Documents referenced herein form an integral part of this
disclosure and are incorporated herein by reference for all purposes set forth
herein. Matters reflected in this schedule are not necessarily limited to
matters required by the Agreement to be reflected herein; such additional
matters are included for informational purposes only. Capitalized terms used
herein and not otherwise defined herein shall have the meanings ascribed to them
in the Agreement.
Section 3.2.1(vi)
1. Equipment used for staging materials, storage of hazardous
substances and other construction-related functions have been
operated on the Property and have traversed the property, in a
manner consistent with accepted construction practices.
2. The possible presence of Hazardous Substances in the soil of
the Property, as set forth in the Preliminary Geotechnical
Report issued by Treadwell and Rollo, dated as of February 14,
1995, and the Phase I and Phase II reports issued by Applied
Geosciences.
Section 3.2.1(viii)
1. Prior to Closing, Seller may engage in hydro-seeding of the
Property.
2. Seller may install roads, sidewalks and landscaping, in
accordance with the Landscaping Drawings prepared by the SWA
Group dated February 12, 1997 and the Civil Drawings prepared
by Bohley, Malley Associates dated as of February 12, 1997.
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<PAGE>
EXHIBIT F
SCHEDULE OF PROPERTY RECORDS
1. ALTA survey of the Real Property, prepared by Bohley/Maley Associates,
as job number 97023 and certified as of March 27, 1998, by Lisa M.
Maley, L.S.
2. Applications dated January 6, 1996, for (a) a Vesting Tentative Map and
(b) a Planned Development Permit with schedules and exhibits.
3. Development Agreement dated as of November 7, 1996, by and between
Flatirons Funding, Limited Partnership, a Delaware limited partnership,
and the City of Redwood City and recorded November 8, 1996, as
Instrument No. 96-138988, Official Records, San Mateo County,
California, as amended by First Amendment to Development Agreement
dated April 15, 1998 and recorded April 15, 1998, as Instrument No.
98-054809, Official Records, San Mateo County, California, by First
Amendment to Development Agreement dated April 6, 1998, and recorded
August 25, 1998, as Instrument No. 98-135753 (recorded to correct
typographical errors in document recorded April 15, 1998), and by
Second Amendment dated August 31, 1998 and recorded September 2, 1998,
as Instrument No. 98-141937, Official Records, San Mateo County,
California.
4. Phase I and Phase II Environmental Assessment Reports prepared by
Applied Geosciences, Inc., dated February 7, 1995, and February 13,
1995, respectively.
5. Preliminary Geotechnical Investigation prepared by Treadwell & Rollo,
Inc., dated February 14, 1995.
6. All real estate tax assessments and bills affecting the Property
(including, without limitation, special assessments) for the current
tax year.
7. Covenants, Conditions, Easements and Restrictions of the Electronic
Arts Business Park dated August 31, 1998 and recorded September 18,
1998, as Instrument No. 98-150182, Official Records, San Mateo County,
California.
8. Covenants Agreement by and between Redwood Shores Properties and
Flatirons Funding, Limited Partnership, dated February 14, 1995, and
recorded February 15, 1995, as Instrument No. 95015506, Official
Records, San Mateo County, California, as amended by an Amendment to
Covenants Agreement, dated March 27, 1997.
9. Assignment of Sewage Treatment Capacity dated February 14, 1995, by and
between Redwood Shores Properties and Flatirons Funding, Limited
Partnership.
10. Shores Center Development Handbook.
11. Documents concerning Entitlements.
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<PAGE>
EXHIBIT G
RECORDING REQUESTED BY, AND )
WHEN RECORDED MAIL TO: )
)
Nossaman, Guthner, Knox & Elliott, LLP )
50 California Street, 34th Floor )
San Francisco, California 94111 )
Attention: David L. Kimport, Esq. )
)
- --------------------------------------------------------------------------------
FORM OF
ASSUMPTION AND COVENANTS AGREEMENT
THIS ASSUMPTION AND COVENANTS AGREEMENT ("Covenants Agreement") is made
and entered into as of this ___ day of __________________, 1999, by and between
FLATIRONS FUNDING, LIMITED PARTNERSHIP, a Delaware limited partnership,
("FFLP"), and __________________________, a _______________________________
("Buyer") (FFLP and Buyer are the "Parties" to this Covenants Agreement).
ELECTRONIC ARTS REDWOOD, INC., a Delaware corporation ("EAR") is a party with
respect to Sections 1.3, 6, and 9 only.
RECITALS
A. Concurrent with the recording of this Covenants Agreement, FFLP has
sold and conveyed to EAR and EAR has sold and conveyed to Buyer, and Buyer has
purchased from EAR, approximately 13.85 gross acres of vacant land comprised of
two (2) legal lots in the City of Redwood City, County of San Mateo, California,
as more particularly described in Exhibit A attached hereto (the "Conveyed
Property").
B. FFLP is the owner of four (4) legal lots in the City of Redwood
City, County of San Mateo, California, as more particularly described in Exhibit
B attached hereto (the "Retained Property"). (The term "Property" alone is used
occasionally to refer to either the Retained Property or the Conveyed Property
as the context may require and the term "Properties" is used occasionally to
refer to the Conveyed Property and the Retained Property collectively.)
C. FFLP acquired the Conveyed Property, the Retained Property and
certain other real property in the vicinity of the Conveyed Property
(collectively, the "Project") on February
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<PAGE>
15, 1995. The Project has common or related service needs, infrastructure
components (including landscaping, parks, utilities, sewer, drainage, road,
highway components), and building density limitations.
D. In connection with its acquisition of the Project, FFLP entered into
that certain Covenants Agreement dated February 14, 1995, by and between FFLP
and Redwood Shores Properties, and recorded February 15, 1995, as Instrument No.
95-015506, Official Records, San Mateo County, California, as amended by an
Amendment to Covenants Agreement dated March 27, 1997, and recorded March 27,
1997, as Instrument No. 97-034602, Official Records, San Mateo County,
California ("Redwood Shores Covenants Agreement").
E. As a material inducement and condition to EAR selling the Conveyed
Property to Buyer, and as an integral part of the negotiations between EAR and
Buyer as to the purchase price,