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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K

(Mark one)


ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 2, 2002

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from                                      to                                     

Commission file number 0-14678


ROSS STORES, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  94-1390387
(I.R.S. Employer
Identification No.)

8333 Central Avenue, Newark, California
(Address of principal executive offices)

 

94560-3433
(Zip Code)

Registrant's telephone number, including area code (510) 505-4400

        Securities registered pursuant to Section 12(b) of the Act: None

        Securities registered pursuant to Section 12(g) of the Act:

Title of each
  Name of each exchange
class on which registered

Common stock, par value $.01   n/a

        Indicate by check mark whether the registrant has (1) 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 ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

        The aggregate market value of the voting common stock held by non-affiliates of the Registrant as of March 29, 2002 was $2,899,768,652. Shares of voting stock held by each director and executive officer have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

        The number of shares of Common Stock, with $.01 par value, outstanding on March 29, 2002 was 79,102,570.

        Documents incorporated by reference:





PART I

ITEM 1.    BUSINESS

        Ross Stores, Inc. ("Ross" or "the company") operates a chain of off-price retail apparel and home accessories stores, which target value conscious men and women between the ages of 25 and 54 primarily in middle-income households. The decisions of the company, from merchandising, purchasing and pricing, to the location of its stores, are aimed at this customer base. The company offers brand name and designer merchandise at low everyday prices, generally 20% to 60% below regular prices of most department and specialty stores. The company believes it derives a competitive advantage by offering a wide assortment of quality brand-name merchandise within each of its merchandise categories in an attractive easy-to-shop environment.

        Ross' mission is to offer competitive values to its target customer by focusing on the following key strategic objectives:

        The original Ross Stores, Inc. was incorporated in California in 1957. In August 1982, the company was purchased by some of its then current directors and stockholders. The six stores acquired were completely refurbished in the company's off-price format and stocked with new merchandise. In June 1989 the company reincorporated in the state of Delaware.

Merchandising, Purchasing and Pricing

        Ross seeks to provide its customers with a wide assortment of first quality, in-season, name-brand apparel, accessories and footwear for the entire family at everyday savings of 20% to 60% from regular department and specialty store prices, as well as similar savings on fragrances, gift items for the home, bed and bath merchandise and accessories. Although not a fashion leader, the company sells recognizable branded merchandise that is current and fashionable in each category. New merchandise typically is received five times each week at the company's 452 stores. The company's buyers review their merchandise assortments on a weekly basis, enabling them to respond to merchandise trends and purchasing opportunities in the market. The company's merchandising strategy is reflected in its advertising, which emphasizes a strong value message—Ross' customers will find great savings everyday on a broad assortment of name-brand merchandise.

        Merchandising.    The Ross merchandising strategy incorporates a combination of off-price buying techniques to purchase both in-season and past-season merchandise. The company's emphasis on nationally recognized name brands reflects management's conviction that brand-name merchandise sold at compelling discounts will continue to be an important determinant of its success. Ross generally leaves the brand-name label on the merchandise it sells.

        The company has established a merchandise assortment that it believes is attractive to its target customer group. Although Ross offers fewer classifications of merchandise than most department stores, the company generally offers a large selection of brand names within each classification with a wide assortment of vendors, prices, colors, styles and fabrics within each size or item. Over the past several years, the company has diversified its merchandise offerings by adding new product categories

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such as maternity, small furnishings, educational toys and games, luggage, gourmet food and cookware, and fine jewelry in select stores. The respective departments accounted for total sales in fiscal 2001 approximately as follows: Ladies 34%, Men's 19%, Home Accents and Bed and Bath 18%, Fine Jewelry, Accessories, Hosiery, Lingerie and Fragrances 12%, Children's 10% and Shoes 7%.

        Purchasing.    The company continues to expand its network of vendors and manufacturers and believes it has adequate sources of first quality merchandise to meet its requirements. The company purchases the vast majority of its merchandise directly from manufacturers and has not experienced any difficulty in obtaining sufficient inventory.

        The company believes that its ability to effectively execute certain off-price buying strategies is a key factor in its success. Ross buyers use a number of methods that enable the company to offer its customers name-brand merchandise at strong everyday discounts relative to department and specialty stores. By purchasing later in the merchandise buying cycle than department and specialty stores, Ross is able to take advantage of imbalances in manufacturer-projected supplies of merchandise.

        Unlike most department and specialty stores, Ross does not require that manufacturers provide promotional and markdown allowances, return privileges, split shipments, drop shipments to stores or delayed deliveries of merchandise. For most orders, only one delivery is made to one of the company's two distribution centers or a third party processing facility located in the southeast. These flexible requirements further enable the company's buyers to obtain significant discounts on in-season purchases.

        The company has increased its emphasis in recent years on opportunistic purchases created by manufacturer overruns and canceled orders both during and at the end of a season. These buys are referred to as "closeout" or "packaway" purchases. Closeouts can be shipped to stores in season. Closeouts allow the company to get in season goods in its stores at lower prices. Packaway merchandise is purchased with the intent that it will be stored in the company's warehouses until a later date, which may even be the beginning of the next selling season. Packaway purchases are an effective method of increasing the percentage of prestige and national brands at competitive savings within the merchandise assortments. Packaway merchandise is mainly fashion basics and, therefore, not usually affected by shifts in fashion trends.

        Throughout the past decade, Ross gradually increased the amount of packaway inventories. In 2001, the company continued its emphasis on these important resources in response to compelling opportunities available in the marketplace. Packaway accounted for approximately 43% of total inventories as of February 2, 2002, compared to 45% at the end of the prior year. It is management's belief that the stronger discounts the company is able to offer on packaway merchandise are a key driver of Ross' business. In-store inventories at the end of fiscal 2001 were up about 1% from the prior year, and total consolidated inventories were up 11% mainly due to a greater number of stores in operation compared to the prior year.

        The company has been developing and implementing enhanced systems and processes for regionalized merchandise buying and allocation. The goal is to fine tune the merchandise mix and raise gross profit margins and sales productivity, especially in markets that are performing below the company average. These systems also provide the company with the tools to maximize new store productivity in new markets. At the end of 2001, approximately 85% to 90% of all merchandise departments were planned utilizing these new systems. Full rollout of the systems to all merchandise departments is scheduled to be complete by early 2002.

        Ross' buying offices are located in New York City and Los Angeles, the nation's two largest apparel markets. These strategic locations allow buyers to be in the market on a daily basis, sourcing opportunities and negotiating purchases with vendors and manufacturers. These locations also enable

3



the company's buyers to strengthen vendor relationships—a key determinant in the success of its off-price buying strategies.

        The company's buyers have an average of 15 years of experience, including merchandising positions with other retailers such as Bloomingdale's, Burlington Coat Factory, Dayton Hudson, Foot Locker, Lechters, Lord & Taylor, Macy's, Marshalls, Nordstrom, Robinsons/May, Sterns, T.J. Maxx and Value City. In keeping with its strategy, over the past decade the company's merchandising staff has grown almost four-fold. Management believes that this increase enables its merchants to spend even more time in the market which, in turn, should strengthen the company's ability to procure the most desirable brands at competitive discounts.

        This combination of off-price buying strategies enables the company to purchase merchandise at net prices that are lower than prices paid by department and specialty stores.

        Pricing.    The company's policy is to sell brand-name merchandise that can generally be priced at 20% to 60% less than most department and specialty store regular prices. The Ross pricing policy is to affix a ticket displaying the company's selling price as well as the estimated comparable selling price for that item in department and/or specialty stores.

        The Ross pricing strategy differs from that of a department or specialty store. Ross purchases its merchandise at lower prices and marks it up less than a department or specialty store. This strategy enables Ross to offer customers consistently low prices. Specified departments in the store are reviewed weekly for possible markdowns based on the rate of sale and the end of fashion seasons to promote faster turnover of inventory and accelerate the flow of fresh merchandise.

The Ross Store

        As of February 2, 2002, the company operated 452 stores. They are conveniently located in predominantly community and neighborhood strip shopping centers in heavily populated urban and suburban areas. Where the size of the market permits, the company clusters stores to maximize economies of scale in advertising, distribution and field management.

        The company believes a key element of its success is its organized, attractive, easy-to-shop in-store environment, which allows customers to shop at their own pace. The Ross store is designed for customer convenience in its merchandise presentation, dressing rooms, checkout and merchandise return areas. The Ross store's sales area is based on a prototype single floor design with a racetrack aisle layout. A customer can locate desired departments by signs displayed just below the ceiling of each department. Ross encourages its customers to select among sizes and prices through prominent category and sizing markers, promoting a self-service atmosphere. At most stores, shopping carts and/or baskets are available at the entrance for customer convenience. All cash registers are centrally located at store entrances for customer ease and efficient staffing.

        The company minimizes transaction time for the customer at the checkout counter by using electronic systems for scanning each ticket at the point of sale and authorizing credit for personal checks and credit cards in a matter of seconds. Approximately 45% of payments are made with credit cards. Ross provides cash or credit card refunds on all merchandise returned with a receipt within 30 days. Merchandise returns having a receipt older than 30 days are exchanged or credited with a Ross Credit Voucher at the price on the receipt.

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Operating Costs

        Consistent with the other aspects of its business strategy, Ross strives to keep operating costs as low as possible. Among the factors which have enabled the company to operate at low costs are:

Distribution

        The company has two distribution centers—one located in Newark, California (approximately 494,000 square feet) and the second located in Carlisle, Pennsylvania (approximately 424,000 square feet). Having a distribution center on each coast enhances cost efficiencies per unit and decreases turn-around time in getting the merchandise from the vendors to the stores. Shipments are made by contract carriers to the stores about five times a week depending on location. The company believes that its two distribution centers, combined with utilization of third party processors, can provide adequate processing capacity to support store growth until its new southeast distribution center located in South Carolina is on line in July, 2002.

        The company is constructing two new 1.3 million square foot distribution centers, one in South Carolina, which is expected to be complete in July 2002 and one in Southern California, which is expected to be complete in August 2003 (see further discussion in Management Discussion and Analysis).

Control Systems

        During 2001, the company maintained its focus on improving systems, including;

        During 2002 and 2003, the company plans to develop a new core merchandising system to provide better inventory and sales data, which should allow for more accurate product allocation by store, by color and by size. This new system is targeted for completion by the end of 2003 and eventually is expected to support regional pricing and improved markdown capability.

Advertising

        The company relies primarily on television advertising to communicate its value proposition, brand name merchandise at low everyday prices. This strategy reflects the company's belief that television is the most efficient and cost effective medium for communicating everyday savings on a wide selection of brand-name bargains for both the family and home.

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Trademarks

        The trademark for Ross Dress For Less® has been registered with the United States Patent and Trademark Office.

Employees

        On February 2, 2002, the company had approximately 21,000 employees which includes an estimated 10,900 part-time employees. Additionally, the company hires temporary employees—especially during the peak seasons. The company's employees are non-union. Management of the company considers the relationship between the company and its employees to be good.

Competition

        The company believes the principal competitive factors in the off-price retail apparel and home accessories industry are offering large discounts on name-brand merchandise appealing to its target customer and consistently providing a store environment that is convenient and easy to shop. To execute this concept, the company has strengthened its buying organization and developed a merchandise allocation system to distribute product based on regional factors, as well as other systems and procedures to maximize cost efficiencies and leverage expenses in an effort to mitigate competitive pressures on gross margin. The company believes that it is well positioned to compete on the basis of each of these factors.

        Nevertheless, the national apparel retail market is highly fragmented. Ross faces intense competition for business from department stores, specialty stores, discount stores, other off-price retailers and manufacturer-owned outlet stores, many of which are units of large national or regional chains that have substantially greater resources than Ross. The retail apparel business may become even more competitive in the future.


ITEM 2.    PROPERTIES

Stores

        From August 1982 to February 2, 2002, the company expanded from six stores in California to 452 stores in 22 states: Arizona, California, Colorado, Florida, Georgia, Hawaii, Idaho, Maryland, Montana, Nevada, New Jersey, New Mexico, North Carolina, South Carolina, Oklahoma, Oregon, Pennsylvania, Texas, Utah, Virginia, Washington and Wyoming. The company also operates a store in Guam. All stores are leased, with the exception of two locations.

        During fiscal 2001, the company opened 45 new Ross 'Dress For Less' stores and closed two existing locations. The average new Ross store in 2001 was approximately 30,300 square feet, yielding about 25,000 square feet of selling space. As of February 2, 2002, the company's 452 stores generally ranged in size from about 24,000 to 35,000 gross square feet and had an average of 23,000 square feet of selling space.

        During the fiscal year ended February 2, 2002, no one store accounted for more than 1% of the company's sales. The company carries earthquake insurance on its corporate headquarters, both distribution centers and on all of its stores.

        The company's real estate strategy is to open additional stores mainly in existing market areas, to increase its market penetration and reduce overhead and advertising expenses as a percentage of sales in each market. Important considerations in evaluating a new market are the availability of potential sites, demographic characteristics, competition and population density of the market. In fiscal 2001, the company entered new markets in Georgia, North Carolina, South Carolina, Montana and Wyoming,

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while also continuing to open stores in its existing markets. In addition, management continues to consider opportunistic real estate acquisitions.

        Where possible, the company has obtained sites in existing buildings requiring minimal alterations. This has allowed Ross to establish stores in new locations in a relatively short period of time at reasonable costs in a given market. To date, the company has been able to secure leases in suitable locations for its stores. At February 2, 2002, the majority of the company's stores had unexpired original lease terms ranging from three to ten years with three to four renewal options of five years each. The average unexpired original lease term of its leased stores is five years, or 20 years if renewal options are included. (See Note C of Notes to Consolidated Financial Statements.)

        See additional discussion under "The Ross Store" paragraph in Item 1.

Distribution Centers

        In June 1998, the company purchased its Newark, California distribution center (approximately 494,000 square feet) for $24.6 million. The Newark facility is also the company's corporate headquarters. The company also owns its distribution center in Carlisle, Pennsylvania (approximately 424,000 square feet). Having a processing distribution center on each coast enhances cost efficiencies per unit and decreases turn-around time in getting the merchandise from the vendors to the stores. Shipments are made by contract carriers to the stores about five times a week depending on location.

        In September 1997, the company entered into a five-year lease for an approximately 214,500 square foot warehouse in Newark, California. In November 1998, the company entered into a five-year lease for an additional 97,000 square foot warehouse in Newark, California. In November 2001, the company entered into a nine-year lease for an approximately 239,000 square foot warehouse in Carlisle, Pennsylvania. In November 2001, the company leased an additional 246,000 square foot warehouse in Carlisle, Pennsylvania, for a ten-year term. All of these properties store the company's packaway inventory. In August 1999, Ross leased for a 50-month term a 32,000 square foot warehouse on ten acres in Newark, California. This location is primarily used for the storage of certain supplies and equipment.

        The company is constructing a new 1.3 million square foot distribution center in South Carolina, which is expected to be complete in July 2002. In April 2002, the company began construction on another new 1.3 million square foot distribution center in Southern California, which is expected to be complete in August 2003 (see further discussion in Management Discussion and Analysis).


ITEM 3.    LEGAL PROCEEDINGS

        The company is a party to routine litigation incident to its business. Management believes that none of these routine legal proceedings will have a material adverse effect on the company's financial condition or results of operations.

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ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        Not applicable.


EXECUTIVE OFFICERS OF THE REGISTRANT

        The following list sets forth the names and ages of all executive officers of the company, indicating each person's principal occupation or employment during at least the past five years. The term of office is at the pleasure of the Board of Directors.

Name

  Age
  Position

Michael Balmuth

 

51

 

Vice Chairman and Chief Executive Officer

James C. Peters

 

40

 

President and Chief Operating Officer

Mark S. Askanas

 

41

 

General Counsel and Senior Vice President, Human Resources

John G. Call

 

43

 

Senior Vice President, Chief Financial Officer and Corporate Secretary

James S. Fassio

 

47

 

Senior Vice President, Property Development, Construction and Store Design

Barry S. Gluck

 

49

 

Senior Vice President and General Merchandising Manager

Michael Hamilton

 

56

 

Senior Vice President, Store Operations

Irene Jamieson

 

51

 

Senior Vice President and General Merchandising Manager

Megan Jamieson

 

40

 

Senior Vice President, Strategic Planning

Barbara Levy

 

47

 

Senior Vice President and General Merchandising Manager

Barbara Rentler

 

44

 

Senior Vice President and General Merchandising Manager

Richard White

 

44

 

Senior Vice President and Chief Information Officer

Michael L. Wilson

 

48

 

Senior Vice President, Distribution and Transportation

        Mr. Balmuth joined the Board of Directors as Vice Chairman and became Chief Executive Officer in September 1996. Prior to that, he served as the company's Executive Vice President, Merchandising since July 1993 and Senior Vice President and General Merchandising Manager since November 1989. Before joining Ross, he was Senior Vice President and General Merchandising Manager at Bon Marché in Seattle from September 1988 through November 1989. From April 1986 to September 1988, he served as Executive Vice President and General Merchandising Manager for Karen Austin Petites.

        Mr. Peters joined the company as President and Chief Operating Officer and a member of the Board of Directors in August 2000. Prior to joining Ross, Mr. Peters served at Staples as President, U.S. Retail from March 1998 to July 2000 and as Executive Vice President of U.S. Stores from September 1997 to February 1998. Prior to joining Staples, he was employed by Office Depot from August 1994, where he held various operating positions and last served as Vice President of Stores for Office Depot's Western Division.

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        Mr. Askanas joined the company as General Counsel and Senior Vice President, Human Resources, in January 2001. Prior to joining Ross, Mr. Askanas served as a partner since January 1993 in the San Francisco office of Jackson, Lewis, Schnitzler & Kurpman, a national law firm specializing in employment and labor law, employee benefits and related litigation.

        Mr. Call has served as Senior Vice President, Chief Financial Officer and Corporate Secretary since June 1997. From June 1993 until joining Ross in 1997, Mr. Call was Senior Vice President, Chief Financial Officer, Secretary and Treasurer of Friedman's Inc. For five years prior to joining Friedman's in June 1993, Mr. Call held various positions with Ernst & Young LLP, most recently as a Senior Manager in the San Francisco office.

        Mr. Fassio has served as Senior Vice President, Property Development, Construction and Store Design since March 1991. He joined the company in June 1988 as Vice President of Real Estate. Prior to joining Ross, Mr. Fassio was Vice President, Real Estate and Construction at Craftmart and Property Director of Safeway Stores, Inc.

        Mr. Gluck has served as Senior Vice President and General Merchandising Manager since August 1993. He joined the company in February 1989 as Vice President and Divisional Merchandising Manager. Prior to joining Ross, Mr. Gluck served as General Merchandising Manager, Vice President for Today's Man from May 1987 to February 1989. From March 1982 to April 1987, he was Vice President, Divisional Merchandising Manager, Men's, Young Men's, Children's and Luggage at Macy's Atlanta.

        Mr. Hamilton has served as Senior Vice President, Store Operations since March 1999. From October 1996 to March 1999, he was Executive Vice President, Operations for Hill's Department Stores. From April 1993 to October 1996, he served as Executive Vice President, Stores for Venture Stores. Prior to that, he held various executive and managerial positions at Venture Stores.

        Ms. Irene Jamieson has served as Senior Vice President and General Merchandising Manager since January 1995. From December 1992 to January 1995, she served as Vice President and Divisional Merchandising Manager. Prior to joining Ross, Ms. Jamieson served as Vice President and Divisional Merchandising Manager of the Home Store for Lord & Taylor from September 1983 to December 1992.

        Ms. Megan Jamieson has served as Senior Vice President, Strategic Planning since February 1999. From January 1997 to February 1999, she served as Director of Strategy for Sears, Roebuck and Co.'s full-line store division. Prior to Sears, she was a case team leader with the consulting firm Bain & Co.

        Ms. Levy has served as Senior Vice President and General Merchandising Manager since May 1993. Prior to joining Ross, Ms. Levy was with R. H. Macy & Co., Inc., serving as its Senior Vice President and General Merchandising Manager from January 1992 to April 1993, its Regional Director—Stores from May 1989 to January 1992, and from August 1985 to May 1989 as its Divisional Merchandising Manager—Better Sportswear.

        Ms. Rentler has served as Senior Vice President and General Merchandising Manager since March 2001. She joined Ross in February 1986 and most recently served as Vice President and Group Divisional Merchandise Manager from March 1999 to February 2001. Prior to that, she was Vice President and Divisional Merchandise Manager from March 1996 to February 1999. From December 1993 to February 1996 she held the position of Counselor.

        Mr. White has served as Senior Vice President and Chief Information Officer since July 2001. From 1998 until joining Ross Stores, he was President of Matthews, White & Company, which specializes in general management and strategy consulting to start-up companies as well as established enterprises. Mr. White was the founder and Chief Executive Officer of Intrepid Systems from 1991 until 1998, when they were acquired by PeopleSoft, where he served as Vice President of Business

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Development for Retail until 1999. Before founding Intrepid Systems, Mr. White was the Chief Information Officer of Office Club for five years, after spending four years as a consultant for Deloitte & Touche.

        Mr. Wilson has served as Senior Vice President, Distribution and Transportation since May 1999. From July 1996 to May 1999, he was President of Distribution Fulfillment Services, Inc., a division of the Spiegel Group, and from October 1991 to July 1996, he served in various distribution management positions with the Spiegel Group. Prior to joining the Spiegel Group, he held the position of Division Vice President/Merchandise Processing for Rich's Department Stores. Prior to 1991, he held various operating positions within the transportation, third party distribution and retail distribution environment, with companies that included McLean Trucking, Ivey's Department Stores and Distribution Marking Services, Inc.


PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        General Information.    See the information set forth under the caption "Quarterly Financial Data (Unaudited)" under Note I of Notes to Consolidated Financial Statements in Item 8 of this document, which is incorporated herein by reference. The company's stock is traded on the Nasdaq National Market tier of The Nasdaq Stock MarketSM under the symbol ROST. There were 759 stockholders of record as of March 29, 2002 and the closing stock price on that date was $37.83 per share

        Cash Dividends.    In January 2002, a quarterly cash dividend payment of $.0475 per common share was declared by the company's Board of Directors, payable on or about April 1, 2002. The Board of Directors declared quarterly cash dividends of $.0425 per common share in January, May, August and November 2001 and $.0375 per common share in January, May, August and November 2000.

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ITEM 6.    SELECTED FINANCIAL DATA

 
  2001
  2000(1)
  1999
  1998
  1997
 
 
  ($000, except per share data)

 
Operations                                

Sales

 

$

2,986,596

 

$

2,709,039

 

$

2,468,638

 

$

2,182,361

 

$

1,988,692

 
Cost of goods sold and occupancy     2,070,459     1,873,284     1,702,342     1,513,889     1,388,098  
  Percent of sales     69.3 %   69.1 %   69.0 %   69.4 %   69.8 %
General, selling and administrative     608,483     538,726     472,822     415,284     374,119  
  Percent of sales     20.4 %   19.9 %   19.2 %   19.0 %   18.8 %
Depreciation and amortization     49,897     44,377     38,317     33,514     30,951  
Interest (income) expense     3,168     3,466     (322 )   259     (265 )
Provision for litigation expense(2)                 9,000              
Earnings before taxes(2)     254,589     249,186     246,479     219,415     195,789  
  Percent of sales(2)     8.5 %   9.2 %   10.0 %   10.1 %   9.8 %
Provision for taxes on earnings     99,544     97,432     96,373     85,572     78,315  
Net earnings(2)     155,045     151,754     150,106     133,843     117,474  
  Percent of sales(2)     5.2 %   5.6 %   6.1 %   6.1 %   5.9 %
Basic earnings per share(2)(3)   $ 1.94   $ 1.84   $ 1.66   $ 1.42   $ 1.20  
Diluted earnings per share(2)(3)   $ 1.91   $ 1.82   $ 1.64   $ 1.40   $ 1.17  
Cash dividends declared per common share(3)   $ .175   $ .155   $ .135   $ .115   $ .095  

(1)
Fiscal 2000 is a 53-week year; all other fiscal years are 52 weeks.

(2)
Fiscal 1999 includes a non-recurring pre-tax charge of $9.0 million, or $.06 per share, related to litigation. See Note H of Notes to Consolidated Financial Statements.

(3)
All per share information is adjusted to reflect the effect of the two-for-one stock splits effected in the form of 100% stock dividends paid on September 22, 1999 and March 5, 1997.

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  2001
  2000(1)
  1999
  1998
  1997
 
 
  ($000, except per share data)

 
Financial Position                                
Merchandise inventory   $ 623,390   $ 559,565   $ 500,494   $ 466,460   $ 418,825  
Property and equipment, net     331,550     301,665     273,164     248,712     204,721  
Total assets     1,082,725     975,047     947,678     870,306     737,953  
Return on average assets(2)     15 %   16 %   17 %   17 %   17 %
Working capital     225,403     197,004     190,724     170,795     174,678  
Current ratio     1.5:1     1.5:1     1.5:1     1.4:1     1.5:1  
Long-term debt     0     30,000     0     0     0  
Long-term debt as a percent of total capitalization     0 %   6 %   0 %   0 %   0 %
Stockholders' equity     544,455     467,547     473,431     424,703     380,681  
Return on average stockholders' equity(2)     31 %   32 %   33 %   33 %   33 %
Book value per common share outstanding at year-end(3)   $ 6.90   $ 5.81   $ 5.33   $ 4.59   $ 3.97  

Operating Statistics

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Number of stores opened     45     34     34     26     17  
Number of stores closed     2     3     5     2     1  
Number of stores at year-end     452     409     378     349     325  
Comparable store sales increase (52-week basis)     3 %   1 %   6 %   3 %   10 %
Sales per square foot of selling space (52-week basis)(4)   $ 301   $ 298   $ 300   $ 290   $ 285  
Square feet of selling space at year-end (000)     10,484     9,330     8,544     7,817     7,172  
Number of employees at year-end     21,012     19,786     18,401     16,926     14,451  
Number of common stockholders of record at year-end     775     812     827     818     813  

(1)
Fiscal 2000 is a 53-week year; all other fiscal years are 52 weeks.

(2)
Fiscal 1999 includes a non-recurring pre-tax charge of $9.0 million, or $.06 per share, related to litigation. See Note H of Notes to Consolidated Financial Statements.

(3)
All per share information is adjusted to reflect the effect of the two-for-one stock splits effected in the form of 100% stock dividends paid on September 22, 1999 and March 5, 1997.

(4)
Based on average annual selling square footage.

12



ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The fiscal years ended February 2, 2002, February 3, 2001 and January 29, 2000 are referred to as 2001, 2000 and 1999, respectively. Fiscal 2001 and 1999 were 52-week years, and fiscal 2000 was a 53-week year.

Results of Operations

 
  Year Ended
February 2, 2002

  Year Ended
February 3, 2001

  Year Ended
January 29, 2000

 
SALES                    
  Sales (millions)   $ 2,987   $ 2,709   $ 2,469  
  Sales growth     10 %   10 %   13 %
  Comparable store sales growth     3 %   1 %   6 %

COST AND EXPENSES (as a percent of sales)

 

 

 

 

 

 

 

 

 

 
  Cost of goods sold and occupancy     69.3 %   69.1 %   69.0 %
  General, selling and administrative     20.4 %   19.9 %   19.2 %
  Depreciation and amortization     1.7 %   1.6 %   1.6 %
  Interest expense     0.1 %   0.1 %   0 %
  Provision for litigation expense     0 %   0 %   0.4 %
EARNINGS BEFORE TAXES     8.5 %   9.2 %   10.0 %
   
 
 
 
NET EARNINGS     5.2 %   5.6 %   6.1 %
   
 
 
 

        Stores.    Total stores open at the end of 2001, 2000 and 1999 were 452, 409 and 378, respectively.

 
  2001
  2000
  1999
 
Stores at the beginning of the period   409   378   349  
Stores opened in the period   45   34   34  
Stores closed in the period   (2 ) (3 ) (5 )
   
 
 
 
Stores at the end of the period   452   409   378  
   
 
 
 
Selling square footage at the end of the period (000)   10,484   9,330   8,544  

        Sales.    The 10% total sales increase for 2001 reflects a 3% increase in comparable store sales, the opening of 43 net new stores in 2001, and the full year impact of 2000 store openings. The 10% total sales increase in 2000 reflects a 1% increase in comparable store sales, the opening of 31 net new stores, and the full year impact of 1999 store openings. The 13% total sales increase in 1999 reflects a 6% increase in comparable store sales, the opening of 29 net new stores, and the full year impact of 1998 store openings. The company anticipates that the competitive climate for apparel and off-price retailers will continue in 2002. Management expects to address that challenge by pursuing and refining the company's existing strategy and by continuing to strengthen the merchandise organization, diversifying the merchandise mix, and more fully developing the organization and systems to strengthen regional merchandise offerings. Although the company's existing strategies and store expansion program contributed to sales and earnings gains in 2001, 2000 and 1999, there can be no assurance that these strategies will result in a continuation of revenue and profit growth.

        Cost of Goods Sold and Occupancy.    The increase in the cost of goods sold and occupancy ratio in 2001 compared to 2000 resulted mainly from a lower initial mark-up and a lower leverage on occupancy costs in 2001 when compared to the 53 weeks in fiscal 2000, partially offset by lower freight costs as a percentage of sales. The increase in the cost of goods sold and occupancy ratio in 2000

13



compared to 1999 resulted mainly from an increase in freight expense and a higher rate of markdowns, partially offset by a slightly higher initial mark-up. There can be no assurance that the gross profit margins realized in 2001, 2000 and 1999 will continue in future years.

        General, Selling and Administrative Expenses.    During 2001 and 2000, general, selling and administrative expenses as a percentage of sales rose primarily due to higher store payroll and benefit costs and an increase in distribution center expenses.

        The largest component of general, selling and administrative expenses is payroll. The total number of employees, including both full- and part-time, at year-end 2001, 2000 and 1999 was approximately 21,000, 19,800 and 18,400, respectively.

        Depreciation and Amortization.    Depreciation and amortization as a percentage of sales have remained relatively constant over the last three years, due primarily to the consistent level of fixed assets in each store.

        Provision for Litigation Expense.    In 1999 the company recorded a non-recurring pre-tax charge of $9.0 million, without any admission of wrongdoing, related to the settlement of a class action complaint alleging that store managers and assistant managers in California were incorrectly classified as exempt from state overtime laws. The Settlement was paid in 2000. See Note H of Notes to Consolidated Financial Statements.

        Taxes on Earnings.    The company's effective tax rate for 2001, 2000 and 1999 was 39%, which represents the applicable federal and state statutory rates reduced by the federal benefit received for state taxes. During 2002, the company expects its effective tax rate to remain at approximately 39%.

Financial Condition

Liquidity and Capital Resources.

 
  2001
  2000
  1999
 
 
  ($ in 000s)

 
Cash flows from Operating activities   $ 242,889   $ 143,349   $ 183,366  
Cash flows from Investing activities     (86,002 )   (82,114 )   (74,012 )
Cash flows from Financing activities     (153,690 )   (103,410 )   (110,108 )
   
 
 
 
Net increase (decrease)   $ 3,197   $ (42,175 ) $ (754 )
   
 
 
 

        During 2001, the primary uses of cash, other than for operating expenditures, were for merchandise inventory, property and equipment to open 45 new stores, the relocation, remodeling or expansion of 14 stores, the repurchase in the open market of $131 million of the company's common stock, and quarterly cash dividend payments. During 2000, the primary uses of cash, other than for operating expenditures, were for merchandise inventory, property and equipment to open 34 new stores, the relocation, remodeling or expansion of 21 stores, the repurchase in the open market of $169 million of the company's common stock, and quarterly cash dividend payments. During 1999, the primary uses of cash, other than for operating expenditures, were for merchandise inventory, property and equipment to open 34 new stores, the relocation, remodeling or expansion of 14 stores, the repurchase in the open market of $120 million of the company's common stock, and quarterly cash dividend payments. In 2001, 2000 and 1999, the company spent approximately $86 million, $82 million and $74 million, respectively, for capital expenditures, net of leased equipment, that included fixtures and leasehold improvements to open new stores; relocate, remodel or expand existing stores; purchase previously leased equipment; update management information systems; and various other expenditures for existing stores and the central office.

14



        In 2001, cash flows increased primarily due to a higher accounts payable balance as a percent of inventory, lower tax payments due to timing differences, and increased issuance of common stock related to stock option exercises. In 2000, cash flows decreased primarily due to higher repurchases of common stock and a lower accounts payable balance as a percentage of inventory.

        Working capital was $225 million at the end of 2001, compared to $197 million at the end of 2000 and $191 million at the end of 1999. At year-end 2001, 2000 and 1999, the company's current ratios were 1.5:1, 1.5:1 and 1.5:1, respectively.

        The company's primary source of liquidity is the sale of its merchandise inventory. Management regularly reviews the age and condition of the merchandise and is able to maintain current inventory in its stores through the replenishment processes and liquidation of non-current merchandise through clearance markdowns.

        During 2001, 2000 and 1999, liquidity and capital requirements were provided by cash flows from operations, bank credit facilities and trade credit. The company's store sites, certain warehouses and buying offices are leased and, except for certain leasehold improvements and equipment, do not represent long-term capital investments. The company owns its distribution center and corporate headquarters in Newark, California, and its distribution center in Carlisle, Pennsylvania. Short-term trade credit represents a significant source of financing for investments in merchandise inventory. Trade credit arises from customary payment terms and trade practices with the company's vendors. Management regularly reviews the adequacy of credit available to the company from all sources and has been able to maintain adequate lines to meet the capital and liquidity requirements of the company.

        The table below presents significant contractual payment obligations of the company at year-end 2001.

Contractual Obligations

  Less
than 1
Year

  2 - 3
Years

  4 - 5
Years

  After 5
Years

  Total
 
  ($ in 000's)

Long-term debt                    
Operating leases   $ 145,428   $ 263,489   $ 206,381   $ 376,284   $ 991,582
Synthetic leases     1,512     8,400     7,132         17,044
Other long-term obligations             175,000         175,000
   
 
 
 
 
Total contractual obligations   $ 146,940   $ 271,889   $ 388,513   $ 376,284   $ 1,183,626
   
 
 
 
 

        Long-Term Debt.    At February 2, 2002, the company did not have any long-term debt outstanding.

        Operating Leases.    The company's store sites, certain warehouses and buying offices are leased and except for certain leasehold improvements and equipment, do not represent long-term capital investments. The company owns its distribution center and corporate headquarters in Newark, California, and its distribution center in Carlisle, Pennsylvania.

        Distribution Center Financings.    The company is constructing a new 1.3 million square foot distribution center in South Carolina, which is expected to be complete in July 2002. This center, including equipment and systems, is being financed under a $95 million, five-year operating lease, commonly referred to as a synthetic lease, which expires in March 2006. Upon completion, rent expense on the center will be payable monthly at the current rate of 90 basis points over 30-day LIBOR. At the end of the lease term, the company must refinance the $95 million synthetic lease facility, purchase the distribution center at cost, or arrange a sale of the distribution center to a third party. The company's potential estimated purchase obligation of $95 million is included in Other long-term obligations in the table above.

15



        In April 2002, construction began on another 1.3 million square foot distribution center, which is expected to be complete in August 2003. This new center is located in Perris, California about 70 miles southeast of Los Angeles, a desirable location for both sourcing and shipping of product. Approximately 25% of the company's store base is in the southwest region of the country, and the majority of its west coast merchandise receipts originate in Southern California. The Perris distribution center will feature the same warehouse management systems and technology being installed in the new South Carolina center. The company believes the new Perris center should improve supply chain logistics and efficiencies, and result in higher distribution center productivity and lower freight costs. As a result, the company plans to transfer its primary west coast distribution capabilities from its current 18 year-old Newark distribution center to the new Perris center during the third quarter of 2003, or once the Perris center is fully operational.

        The land and building portion of the new Perris center is being financed under an $80 million, five-year synthetic lease facility, which expires in December 2006. Upon completion, rent expense on this center will be payable monthly at the current rate of approximately 85 basis points over the applicable commercial paper or 30-day LIBOR rate. At the end of the lease term, the company must refinance the $80 million synthetic lease facility, purchase the distribution center at cost, or arrange a sale of the distribution center to a third party. If the distribution center is sold to a third party for less than the amount financed by the lessor, or $80 million, the company has agreed under a residual value guarantee to pay the lessor up to 87% of the amount financed. The company's potential estimated purchase obligation of $80 million is included in Other long-term obligations in the table above. Management expects to finance the equipment and systems for the Perris, California center with a $50 million, five-year unsecured borrowing facility.

        The two synthetic lease facilities described above have covenant restrictions generally consistent with the company's revolving credit agreement. In addition, the credit spread under these agreements may vary depending on certain interest coverage ratio tests that are generally consistent with the company's revolving credit agreement. The company's future obligations under both synthetic leases are included in Synthetic leases in the table above.

        The table below presents significant commercial credit facilities available to the company at year-end 2001.

 
  Amount of Commitment Expiration Per Period
   
Commercial Credit Commitments

  Less than
1 Year

  2 - 3
Years

  4 - 5
Years

  Over 5
Years

  Total
Amount
Committed

 
  ($ in 000's)

Revolving credit facility*   $   $ 350,000   $   $   $ 350,000
Standby letters of credit     28,767                 28,767
   
 
 
 
 
Total commercial commitments   $ 28,767   $ 350,000   $   $   $ 378,767
   
 
 
 
 

*
Contains a $75 million sublimit for issuances of letter of credit.
For additional information relating to these credit facilities, refer to Note B of the Notes to the Consolidated Financial Statements

        Revolving Credit Facility.    In August 2001, the company entered into a new three-year, $350 million revolving credit facility with its banks, which contains a $75 million sublimit for issuances of letters of credit, replacing its prior $160 million bank credit agreement, $30 million letter of credit facility, and $35 million uncommitted bank line arrangement. Interest is LIBOR-based and is payable upon borrowing maturity but no less than quarterly. Borrowing under this credit facility is subject to the company maintaining certain interest rate coverage and leverage ratios. At year-end 2001 the company had no amounts outstanding under the new facility.

16



        Standby Letters of Credit.    The company had $28.8 million and $12.6 million in standby letters of credit outstanding at year-end 2001 and 2000, respectively.

        Trade Letters of Credit.    The company had $9.7 million and $11.8 million in trade letters of credit outstanding at year-end 2001 and 2000, respectively.

        Capital Expenditures.    The company is forecasting approximately $105 million to $120 million in capital expenditures for fiscal 2002 to fund fixtures and leasehold improvements to open about 50 to 55 net new stores, relocate, remodel or expand numerous existing stores, and to make investments in store and merchandising systems, distribution center equipment and systems and various central office expenditures.

        Dividends.    In January 2002, a quarterly cash dividend payment of $.0475 per common share was declared by the company's Board of Directors, payable on or about April 1, 2002. The Board of Directors declared quarterly cash dividends of $.0425 per common share in January, May, August and November 2001 and $.0375 per common share in January, May, August and November 2000.

        Stock Repurchase Program.    In January 2002, the company announced that the Board of Directors authorized a new stock repurchase program of up to $300 million over two years. The company repurchased a total of $131 million and $169 million of common stock during 2001 and 2000, respectively, under a prior program.

        The company estimates that cash flows from operations, existing bank credit lines and trade credit are adequate to meet operating cash needs, fund the aforementioned planned capital investments, repurchase common stock and make quarterly dividend payments for at least the next twelve months.

New Accounting Pronouncements

        SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, requires the company to record all derivatives as either assets or liabilities on the balance sheet and to measure those instruments at fair value, and is effective for all fiscal years beginning after June 15, 2000. The company implemented SFAS No. 133, as amended, on February 4, 2001. Adoption of this statement did not have a material impact on the company's financial position or results of operations.

        In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" (effective July 1, 2001) and SFAS No. 142, "Goodwill and Other Intangible Assets" (effective for the company on February 3, 2002). SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that goodwill and certain intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. The adoption of the new standards is not expected to have a material impact on the company's financial position or results of operations.

        In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. SFAS No. 144 became effective for the company on February 3, 2002. Adoption of this standard is not expected to have a material effect on the company's financial position or results of operations.

Critical Accounting Policies

        The preparation of the company's consolidated financial statements requires the company to make estimates and assumptions that affect the reported amounts. The estimates and assumptions are evaluated on an on-going basis and are based on historical experience and on various other factors that

17



are believed to be reasonable. Estimates and assumptions include, but are not limited to, long-lived assets and the review of their impairment, self-insurance reserves, and sales return reserve.

        The estimate recorded for self-insurance reserves for workers' compensation and general liabilities is the company's most critical estimate and assumption used in the preparation of the consolidated financial statements. The self-insurance liability is determined actuarially, based on claims filed and an estimate of claims incurred but not reported. Should a greater amount of claims occur compared to what is estimated or the costs of the medical profession increase beyond what was anticipated, reserves recorded may not be sufficient and additional costs to the consolidated financial statements could be required.

Forward-Looking Statements and Factors Affecting Future Performance

        This report includes a number of forward-looking statements, which reflect the company's current beliefs and estimates with respect to future events and the company's future financial performance, operations and competitive position. The words "expect," "anticipate," "estimate," "believe," "looking ahead," "forecast," "plan" and similar expressions identify forward-looking statements.

        The company's continued success depends, in part, upon its ability to increase sales at existing locations, to open new stores and to operate stores on a profitable basis. There can be no assurance that the company's existing strategies and store expansion program will result in a continuation of revenue and profit growth. Future economic and industry trends that could potentially impact revenue and profitability remain difficult to predict.

        The forward-looking statements that are contained in this report are subject to risks and uncertainties that could cause the company's actual results to differ materially from historical results or current expectations. These factors include, without limitation, a general deterioration in economic trends, ongoing competitive pressures in the apparel industry, the company's ability to obtain acceptable store locations, the company's ability to continue to purchase attractive name-brand merchandise at desirable discounts, the company's ability to successfully open distribution centers in South Carolina and Southern California in a timely and cost-effective manner, the company's ability to successfully extend its geographic reach into new markets, unseasonable weather trends, changes in the level of consumer spending on or preferences in apparel or home-related merchandise, the company's ability to attract and retain the retail talent necessary to execute its strategies, the company's ability to implement and integrate various new systems and technologies, and greater than planned costs. In addition, the company's corporate headquarters, one of its distribution centers and 37% of its stores are located in California. Therefore, a downturn in the California economy or a major natural disaster there could significantly affect the company's operating results and financial condition.

        In addition to the above factors, the apparel industry is highly seasonal. The combined sales of the company for the third quarter and fourth (holiday) fiscal quarter are historically higher than the combined sales for the first two fiscal quarters. The company has realized a significant portion of its profits in each fiscal year during the fourth quarter. If intensified price competition, lower than anticipated consumer demand or other factors were to occur during the third and fourth quarters, and in particular during the fourth quarter, the company's fiscal year results could be adversely affected.

18



ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The company is exposed to market risks, which primarily includes changes in interest rates. The company does not engage in financial transactions for trading or speculative purposes. Interest that is payable on the company's credit facilities is based on variable interest rates and is, therefore, affected by changes in market interest rates. In addition, lease payments under the company's synthetic lease agreements are determined based on variable interest rates and are, therefore, affected by changes in market interest rates. These lease payments will begin upon completion of construction of each new distribution center. As of February 2, 2002, the company did not have any long-term debt outstanding. The company does not use derivative financial instruments in its investment portfolio.

19



ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

CONSOLIDATED BALANCE SHEETS

 
  February 2,
2002

  February 3,
2001

 
  ($000, except share data)

ASSETS            

CURRENT ASSETS

 

 

 

 

 

 
  Cash and cash equivalents   $ 40,351   $ 37,154
  Accounts receivable     20,540     14,421
  Merchandise inventory     623,390     559,565
  Prepaid expenses and other     30,710     19,929
   
 
      Total Current Assets     714,991     631,069

PROPERTY AND EQUIPMENT

 

 

 

 

 

 
  Land and buildings     54,432     55,315
  Fixtures and equipment     351,288     307,291
  Leasehold improvements     209,086     187,668
  Construction-in-progress     24,109     18,469
   
 
      638,915     568,743
  Less accumulated depreciation and amortization     307,365     267,078
   
 
      331,550     301,665

Deferred income taxes and other long-term assets

 

 

36,184

 

 

42,313
   
 
Total Assets   $ 1,082,725   $ 975,047
   
 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 
  Accounts payable   $ 314,530   $ 260,138
  Accrued expenses and other     92,760     89,587
  Accrued payroll and benefits     70,413     50,340
  Income taxes payable     11,885     0
  Short-term debt     0     34,000
   
 
    Total Current Liabilities     489,588     434,065

Long-term debt

 

 

0

 

 

30,000
Deferred income taxes and other long-term liabilities     48,682     43,435

STOCKHOLDERS' EQUITY

 

 

 

 

 

 
  Common stock, par value $.01 per share Authorized 170,000,000 shares Issued and outstanding 78,960,000 and 80,527,000 shares     790     805
  Additional paid-in capital     289,734     236,124
  Retained earnings     253,931     230,618
   
 
      544,455     467,547
   
 
Total Liabilities and Stockholders' Equity   $ 1,082,725   $ 975,047
   
 

The accompanying notes are an integral part of these consolidated financial statements.

20



CONSOLIDATED STATEMENTS OF EARNINGS

 
  Year Ended
February 2,
2002

  Year Ended
February 3,
2001

  Year Ended
January 29,
2000

 
 
  ($000, except per share data)

 
SALES   $ 2,986,596   $ 2,709,039   $ 2,468,638  

COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

 
  Cost of goods sold and occupancy     2,070,459     1,873,284     1,702,342  
  General, selling and administrative     608,483     538,726     472,822  
  Depreciation and amortization     49,897     44,377     38,317  
  Interest (income) expense     3,168     3,466     (322 )
  Provision for litigation expense             9,000  
   
 
 
 
      2,732,007     2,459,853     2,222,159  
   
 
 
 
Earnings before taxes     254,589     249,186     246,479  
Provision for taxes on earnings     99,544     97,432     96,373  
   
 
 
 
Net earnings   $ 155,045   $ 151,754   $ 150,106  
   
 
 
 
EARNINGS PER SHARE                    
  Basic   $ 1.94   $ 1.84   $ 1.66  
  Diluted   $ 1.91   $ 1.82   $ 1.64  
   
 
 
 
WEIGHTED AVERAGE SHARES OUTSTANDING                    
  Basic     79,886     82,619     90,416  
  Diluted     81,210     83,337     91,671  
   
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

21



CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

 
  Common Stock
   
   
   
 
 
  Additional
Paid-In
Capital

  Retained
Earnings

   
 
 
  Shares
  Amount
  Total
 
 
  ($000)

 
BALANCE AT JANUARY 30, 1999   92,499   $ 925   $ 215,368   $ 208,410   $ 424,703  
Common stock issued under stock plans, including tax benefit   1,711     17     21,638           21,655  
Amortization of stock compensation               9,052           9,052  
Common stock repurchased   (5,436 )   (54 )   (11,423 )   (108,523 )   (120,000 )
Net earnings                     150,106     150,106  
Dividends declared                     (12,085 )   (12,085 )
   
 
 
 
 
 
BALANCE AT JANUARY 29, 2000   88,774   $ 888   $ 234,635   $ 237,908   $ 473,431  
Common stock issued under stock plans, including tax benefit   1,854     18     14,285           14,303  
Amortization of stock compensation               9,894           9,894  
Common stock repurchased   (10,101 )   (101 )   (22,690 )   (146,533 )   (169,324 )
Net earnings                     151,754     151,754  
Dividends declared                     (12,511 )   (12,511 )
   
 
 
 
 
 
BALANCE AT FEBRUARY 3, 2001   80,527   $ 805   $ 236,124   $ 230,618   $ 467,547  
Common stock issued under stock plans, including tax benefit   3,378     34     54,547           54,581  
Amortization of stock compensation               11,881           11,881  
Common stock repurchased   (4,945 )   (49 )   (12,818 )   (117,809 )   (130,676 )
Net earnings                     155,045     155,045  
Dividends declared                     (13,923 )   (13,923 )
   
 
 
 
 
 
BALANCE AT FEBRUARY 2, 2002   78,960   $ 790   $ 289,734   $ 253,931   $ 544,455  

The accompanying notes are an integral part of these consolidated financial statements.

22



CONSOLIDATED STATEMENTS OF CASH FLOWS

 
  Year Ended February 2, 2002
  Year Ended February 3, 2001
  Year Ended January 29, 2000
 
 
  ($000)

 
CASH FLOWS FROM OPERATING ACTIVITIES                    
Net earnings   $ 155,045   $ 151,754   $ 150,106  
Adjustments to reconcile net earnings to net cash provided by operating activities:                    
  Depreciation and amortization of property and equipment     49,896     44,377     38,317  
  Other amortization     12,725     10,686     9,870  
  Deferred income taxes     12,633     10,015     (5,296 )
Change in assets and liabilities:                    
  Merchandise inventory     (63,824 )   (59,071 )   (34,034 )
  Other current assets—net     (16,901 )   (980 )   (5,979 )
  Accounts payable     54,064     5,751     5,867  
  Other current liabilities—net     34,384     (26,836 )   21,609  
  Other     4,867     7,653     2,906  
   
 
 
 
  Net cash provided by operating activities     242,889     143,349     183,366  
   
 
 
 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 
Additions to property and equipment     (86,002 )   (82,114 )   (74,012 )
   
 
 
 
  Net cash used in investing activities     (86,002 )   (82,114 )   (74,012 )
   
 
 
 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 
Borrowings (repayments) under lines of credit     (64,000 )   64,000     0  
Issuance of common stock related to stock plans     54,582     14,332     21,654  
Repurchase of common stock     (130,676 )   (169,324 )   (120,000 )
Dividends paid     (13,596 )   (12,418 )   (11,762 )
   
 
 
 
  Net cash used in financing activities     (153,690 )   (103,410 )   (110,108 )
   
 
 
 
Net increase (decrease) in cash and cash equivalents     3,197     (42,175 )   (754 )
Cash and cash equivalents:                    
  Beginning of year     37,154     79,329     80,083  
   
 
 
 
  End of year   $ 40,351   $ 37,154   $ 79,329  
   
 
 
 

SUPPLEMENTAL CASH FLOW DISCLOSURES

 

 

 

 

 

 

 

 

 

 
Interest paid   $ 3,332   $ 3,352   $ 610  
Income taxes paid   $ 61,433   $ 100,359   $ 94,101  
   
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

23



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

        The fiscal years ended February 2, 2002, February 3, 2001 and January 29, 2000 are referred to as 2001, 2000 and 1999, respectively. Fiscal 2000 is a 53-week year. All other years are 52 weeks.

Note A: Summary of Significant Accounting Policies

        Business.    The company is an off-price retailer of first-quality, branded apparel, shoes and accessories for the entire family, as well as gift items, linens and other home-related merchandise. At February 2, 2002, the company operated 452 stores in 22 states and Guam, supported by two distribution centers. The company's headquarters, one distribution center, three warehouses and 37% of its stores are located in California.

        Basis of Presentation.    The consolidated financial statements include the accounts of the company and its subsidiaries, all of which are wholly owned. Inter-company transactions and accounts have been eliminated. Certain reclassifications have been made in the 2000 and 1999 financial statements to conform to the 2001 presentation.

        Use of Accounting 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, 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. Actual results could differ from those estimates. The company's significant accounting estimates include long-lived assets and the review of their impairment, self insurance reserves, and sales return reserve.

        Cash Equivalents.    Cash equivalents are highly liquid, fixed income instruments purchased with a maturity of three months or less.

        Merchandise Inventory.    Merchandise inventory is stated at the lower of cost (determined using a weighted average basis) or net realizable value.

        Property and Equipment.    Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful life of the asset, typically ranging from five to twelve years for equipment and 20 to 40 years for real property. The cost of leasehold improvements is amortized over the useful life of the asset or the applicable lease term, whichever is less. Computer hardware and software costs are included in fixtures and equipment and are amortized over their estimated useful life of five years. Reviews for impairment are performed whenever events or circumstances indicate the carrying value of an asset may not be recoverable.

        Intangible Assets.    Included in long-term assets are lease rights, consisting of payments made to acquire store leases, which are amortized over the remaining life of the lease. Also included in other long-term assets is the excess of cost over the acquired net assets, which is amortized on a straight-line basis over a period of 40 years.

        Long-Lived Assets.    Long-lived assets and certain identifiable intangibles, including goodwill, held and used by the company, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Based on the company's review as of February 2, 2002 and February 3, 2001, no adjustments were recognized to the carrying value of such assets.

        Store Closures.    The company continually reviews the operating performance of individual stores and records a provision for closing costs at the date management commits to closing a store. Operating costs, including depreciation, of stores to be closed are expensed during the period they remain in use.

24



        Accounts Payable.    Accounts payable represents amounts owed to third parties at the end of the period. The company included outstanding checks in accounts payable of approximately $65.4 million and $77.7 million at year-end 2001 and 2000, respectively.

        Self Insurance.    The company is self insured for workers' compensation, general liability costs and certain health insurance plans. The self-insurance liability is determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported.

        Deferred Rent.    When a lease requires fixed escalations of the minimum lease payments, rental expense is recorded on a straight-line basis and the difference between the average rental amount charged to expense and the amount payable under the lease is recorded as deferred rent. At the end of 2001 and 2000, the balance of deferred rent was $15.3 million and $13.3 million, respectively, and is included in long-term liabilities.

        Estimated Fair Value of Financial Instruments.    The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximates their estimated fair value. The company's long-term debt represents amounts outstanding under the company's $350 million revolving line of credit agreement, which are expected to be outstanding for a twelve month period. The interest rate fluctuates monthly based on the LIBOR rates. Due to the floating interest rates on the debt, the carrying value approximates its estimated fair value.

        Effects of Inflation.    The effects of inflation are not material to the company's financial position and results of operations.

        Stock-Based Compensation.    The company accounts for stock-based awards to employees using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," are set forth in Note F.

        Revenue Recognition.    The company recognizes revenue at the point of sale, net of actual returns, and maintains a provision for estimated future returns.

        Store Pre-Opening.    Store pre-opening costs are expensed in the period incurred.

        Advertising.    Advertising costs are expensed in the period incurred. Advertising expenses for the fiscal years ended 2001, 2000 and 1999 were $33.1 million, $29.6 million and $32.1 million, respectively.

        Taxes on Earnings.    SFAS No. 109, "Accounting for Income Taxes," requires income taxes to be accounted for under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the company's financial statements or tax returns. In estimating future tax consequences, the company generally considers all expected future events other than changes in the tax law or rates.

        Stock Dividend.    All share and per share information has been adjusted to reflect the effect of the company's two-for-one stock split effected in the form of a 100% stock dividend paid on September 22, 1999.

        Earnings Per Share (EPS).    SFAS No. 128, "Earnings Per Share," requires earnings per share to be computed and reported as both basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income by the weighted average number of common shares and dilutive common stock equivalents (stock awards and stock options) outstanding during the period. Dilutive EPS reflects the potential dilution that could occur if options to issue common stock were exercised into common stock. There were no other securities that could potentially dilute basic EPS in the future

25



that were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive in the periods presented.

        The following is a reconciliation of the number of shares (denominator) used in the basic and diluted EPS computations (shares in thousands):

 
  Basic
EPS

  Effect of
Dilutive Stock
Options

  Diluted
EPS

2001                  
  Shares     79,886     1,324     81,210
  Amount   $ 1.94   $ (.03 ) $ 1.91
2000                  
  Shares     82,619     718     83,337
  Amount   $ 1.84   $ (.02 ) $ 1.82
1999                  
  Shares     90,416     1,255     91,671
  Amount   $ 1.66   $ (.02 ) $ 1.64

        Segment Reporting.    The company accounts for its operations as one operating segment. The company's operations include only activities related to off-price retailing in similar stores throughout the United States and, therefore, comprise only one segment.

        Comprehensive income.    Comprehensive income equals net income for all periods presented.

        Derivative Instruments and Hedging Activities.    SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, requires the company to record all derivatives as either assets or liabilities on the balance sheet and to measure those instruments at fair value. The company implemented SFAS No. 133, as amended, on February 4, 2001. Adoption of this statement did not have a material impact on the company's financial position or results of operations.

        New Accounting Pronouncements.    In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" (effective July 1, 2001) and SFAS No. 142, "Goodwill and Other Intangible Assets" (effective for the company on February 3, 2002). SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that goodwill and certain intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. The adoption of the new standards is not expected to have a material impact on the company's financial position or results of operations.

        In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. SFAS No. 144 became effective for the company on February 3, 2002. Adoption of this standard is not expected to have a material effect on the company's financial position or results of operations.

Note B: Long-Term Debt

        The company had no debt outstanding at year-end 2001, and $30.0 million of debt classified as long-term at year-end 2000. The weighted average interest rates on borrowings during 2001 and 2000 were 4.7% and 6.8%, respectively.

26



        Bank Credit Facilities.    In August 2001, the company entered into a new three-year, $350 million revolving credit facility, which contains a $75 million sublimit for issuances of letters of credit, replacing its prior $160 million bank credit agreement, $30 million letter of credit facility, and $35 million uncommitted bank line arrangement. Interest is LIBOR based and is payable upon borrowing maturity but no less than quarterly. Borrowing under this credit facility is subject to the company maintaining certain interest rate coverage and leverage ratios. At year-end 2001 the company had no amounts outstanding under the new facility. In addition, the company had $28.8 million and $12.6 million in standby letters of credit and $9.7 million and $11.8 million in trade letters of credit outstanding at year-end 2001 and 2000, respectively.

Note C: Leases

        The company leases five separate warehouse facilities in Newark, California and Carlisle, Pennsylvania, with operating leases expiring in various years through 2011, with one or two renewal options of up to three years each. These five leased facilities are being used primarily to store packaway merchandise. In addition, the company leases its store sites, selected computer and related equipment, and certain distribution center equipment under operating leases with original, non-cancelable terms that in general range from three to 15 years, expiring through 2015. Store leases typically contain provisions for three to four renewal options of five years each. Most store leases also provide for minimum annual rentals, with provisions for additional rent based on percentage of sales and for payment of certain expenses.

        The company is constructing a new 1.3 million square foot distribution center in South Carolina, which is expected to be complete in July 2002. This center is being financed under a $95 million, five-year operating lease, commonly referred to as a synthetic lease, which expires in March 2006. Upon completion, rent expense on the center will be payable monthly at the current rate of 90 basis points over 30-day LIBOR. At the end of the lease term, the company must refinance the $95 million synthetic lease facility, purchase the distribution center at cost, or arrange a sale of the distribution center to a third party.

        In April 2002, construction began on another 1.3 million square foot distribution center, which is expected to be complete in August 2003. This new center is located in Perris, California about 70 miles southeast of Los Angeles, a desirable location for both sourcing and shipping of product. Approximately 25% of the company's store base is in the southwest region of the country, and the majority of its west coast merchandise receipts originate in Southern California. The Perris distribution center will feature the same warehouse management systems and technology being installed in the new South Carolina center. The company believes the new Perris center should improve supply chain logistics and efficiencies, and result in higher distribution center productivity and lower freight costs. As a result, the company plans to transfer its primary west coast distribution capabilities from its current 18 year-old Newark distribution center to the new Perris center during the third quarter of 2003, or once the Perris center is fully operational.

        The land and building portion of the new Perris center is being financed under an $80 million, five-year synthetic lease facility, which expires in December 2006. Upon completion, rent expense on this center will be payable monthly at the current rate of approximately 85 basis points over the applicable commercial paper or 30-day LIBOR rate. At the end of the lease term, the company must refinance the $80 million synthetic lease facility, purchase the distribution center at cost, or arrange a sale of the distribution center to a third party. If the distribution center is sold to a third party for less than the amount financed by the lessor, or $80 million, the company has agreed under a residual value guarantee to pay the lessor up to 87% of the amount financed. Management expects to finance the equipment and systems for the Perris, California center with a $50 million, five-year unsecured borrowing facility.

27



        The two synthetic lease facilities described above have covenant restrictions generally consistent with the company's revolving credit agreement. In addition, the credit spread under these agreements may vary depending on certain interest coverage ratio tests that are generally consistent with the company's revolving credit agreement.

        The aggregate future minimum annual lease payments under leases in effect at year-end 2001 are as follows:

 
  Operating Leases
  Synthetic Leases
  Total Leases
 
  ($000)

2002   $ 145,428   $ 1,512   $ 146,940
2003     140,488     3,664     144,152
2004     123,001     4,736     127,737
2005     107,589     4,736     112,325
2006     98,792     2,396     101,188
Later years     376,284         376,284
   
 
 
Total   $ 991,582   $ 17,044   $ 1,008,626

        Total rent expense for all operating leases is as follows:

 
  2001
  2000
  1999
 
  ($000)

Minimum rentals   $ 143,896   $ 129,645   $ 118,089

Note D: Taxes on Earnings

        The provision for taxes consists of the following:

 
  2001
  2000
  1999
 
 
  ($000)

 
CURRENT                    
  Federal   $ 74,788   $ 74,880   $ 85,952  
  State     12,123     12,537     15,717  
   
 
 
 
      86,911     87,417     101,669  

DEFERRED

 

 

 

 

 

 

 

 

 

 
  Federal     10,065     8,052     (5,081 )
  State     2,568     1,963     (215 )
   
 
 
 
      12,633     10,015     (5,296 )
   
 
 
 
Total   $ 99,544   $ 97,432   $ 96,373  

        In 2001, 2000 and 1999, the company realized tax benefits of $12.1 million, $4.8 million and $9.2 million, respectively, related to stock options exercised and the vesting of restricted stock that were credited to additional paid-in capital.

28



        The provision for taxes for financial reporting purposes is different from the tax provision computed by applying the statutory federal income tax rate. The differences are reconciled as follows:

 
  2001
  2000
  1999
 
Federal income taxes at the statutory rate   35 % 35 % 35 %

Increased income taxes resulting from state income taxes (net of federal benefit) and other, net

 

4

%

4

%

4

%
   
 
 
 
    39 % 39 % 39 %

        The components of the net deferred tax assets at year-end are as follows:

 
  2001
  2000
 
 
  ($000)

 
Deferred Tax Assets              
Deferred compensation   $ 19,489   $ 19,505  
Non-deductible reserves     2,116     2,532  
Straight-line rent     6,276     5,519  
Employee benefits     3,808     3,552  
California franchise taxes     2,518     2,949  
Reserve for uninsured losses     109     243  
All other     3,621     1,834  
   
 
 
      37,937     36,134  

Deferred Tax Liabilities

 

 

 

 

 

 

 
Depreciation     (33,144 )   (22,974 )
Inventory     (732 )   (4,956 )
Supplies     (2,460 )   (2,174 )
Prepaid expenses     (8,279 )   (474 )
All other     (968 )   (569 )
   
 
 
      (45,583 )   (31,147 )
   
 
 
Net Deferred Tax (Liabilities)Assets   $ (7,646 ) $ 4,987  

Note E: Employee Benefit Plans

        The company has available to certain employees a profit sharing retirement plan. Under the plan, employee and company contributions and accumulated plan earnings qualify for favorable tax treatment under Section 401(k) of the Internal Revenue Code. This plan permits employees to make contributions up to the maximum limits allowable under the Internal Revenue Code. In January 2002, the company increased its matching to 4% of the employee's salary up to the plan limits. Prior to January 2002, the company matched up to 3% of the employee's salary up to plan limits. Company matching contributions to the retirement plan were $3.0 million, $2.7 million and $2.4 million in 2001, 2000 and 1999, respectively. The company has in place an Incentive Compensation Plan, which provides cash awards to key management employees based on the company's and the individual's performance. The company makes available to management a Nonqualified Deferred Compensation Plan which allows management to make payroll contributions on a pre-tax basis in addition to the 401(k) Plan. This plan does not qualify under Section 401(k) of the Internal Revenue Code. Other long-term assets and other long-term liabilities include $23.5 million and $26.8 million in 2001 and 2000, respectively, related to the Nonqualified Deferred Compensation Plan.

29



Note F: Stockholders' Equity

        Preferred Stock.    The company has four million shares of preferred stock authorized, with a par value of $.01 per share. No preferred stock has been issued or outstanding during the past three years.

        Common Stock.    In January 2002, the company's Board of Directors approved a $300 million two-year stock repurchase program. In January 2000, the company's Board of Directors approved a $300 million two-year stock repurchase program, under which $131 million and $169 million of common stock was purchased during 2001 and 2000, respectively. In January 1999, the Board of Directors approved a $120 million stock repurchase program. The January 2000 and 1999 programs were completed. The following table summarizes the company's stock repurchase activity:

Fiscal Year

  Shares Repurchased
(in millions)
  Average Repurchase
Price

  $ Repurchased
(in millions)
2001   4.9   $ 26.43   $ 130,676
2000   10.1   $ 16.76   $ 169,324
1999   5.4   $ 22.07   $ 120,000

        Dividends.    The company's Board of Directors declared dividends of $.0475 per common share in January 2002; $.0425 per common share in January, May, August and November 2001; and $.0375 per common share in January, May, August and November 2000.

        1992 Stock Option Plan and 2000 Equity Incentive Plan.    The company's 1992 Stock Option Plan and 2000 Equity Incentive Plan allow for the granting of nonqualified stock options. Incentive stock options can also be granted under the 1992 Stock Option Plan. Stock options are to be granted at prices not less than the fair market value of the common shares on the date the option is granted, expire ten years from the date of grant and normally vest over a period not exceeding four years from the date of grant. Options granted prior to March 2000 under the plans are exercisable upon grant, subject to the company's conditional right to repurchase unvested shares. Options granted since March 2000 are exercisable only as to vested shares.

        Outside Directors Stock Option Plan.    The company's Outside Directors Stock Option Plan provides for the automatic grant of stock options at pre-established times and for fixed numbers of shares to each non-employee director. Stock options are to be granted at exercise prices equal to the fair market value of the common shares on the date the option is granted, expire ten years from the date of grant and vest over a period not exceeding three years from the date of the grant.

30



        A summary of the activity under the company's three option plans for 2001, 2000 and 1999 is presented below:

 
  Number of
Shares
(000)

  Weighted
Average
Exercise
Price

Outstanding at January 30, 1999   6,256   $ 12.46
  Granted   1,574   $ 21.80
  Exercised   (1,162 ) $ 8.43
  Forfeited   (259 ) $ 16.59
   
 

Outstanding at January 29, 2000

 

6,409

 

$

15.32
  Granted   2,214   $ 19.27
  Exercised   (911 ) $ 7.44
  Forfeited   (405 ) $ 20.77
   
 

Outstanding at February 3, 2001

 

7,307

 

$

17.19
  Granted   1,660   $ 21.59
  Exercised   (2,598 ) $ 15.23
  Forfeited   (249 ) $ 20.81
   
 

Outstanding at February 2, 2002

 

6,120

 

$

19.07

        At year-end 2001, 2000 and 1999, there were 5.2 million, 6.6 million and 4.4 million shares, respectively, available for future issuance under these plans.

31



        The following table summarizes information about the weighted average remaining contractual life (in years) and the weighted average exercise prices for stock options both outstanding and exercisable as of February 2, 2002 (options in thousands):

Options Outstanding
  Options Exercisable
Exercise Price
Range

  Number
of Shares

  Remaining Life
  Exercise Price
  Number
of Shares

  Exercise
Price

$  2.75 to $16.84   1,953   6.66   $ 13.70   880   $ 10.10
$16.94 to $19.75   1,253   8.85   $ 19.53   160   $ 18.86
$19.81 to $21.66   1,390   6.76   $ 21.29   1,033   $ 21.26
$21.68 to $25.06   1,298   8.24   $ 22.49   403   $ 22.48
$25.07 to $35.60   226   9.43   $ 29.48   21   $ 25.90
   
 
 
 
 
Totals   6,120   7.57   $ 19.07   2,497   $ 17.41
   
 
 
 
 

        Employee Stock Purchase Plan.    Under the Employee Stock Purchase Plan, eligible full-time employees can choose to have up to 10% of their annual base earnings withheld to purchase the company's common stock. The purchase price of the stock is 85% of the lower of the beginning of the offering period or end of the offering period market price. During 2001, 2000 and 1999, employees purchased approximately 194,000, 195,000 and 171,000 shares, respectively, of the company's common stock under the plan at weighted average per-share prices of $14.44, $14.35 and $15.25, respectively. Through February 2, 2002, approximately 3,755,000 shares had been issued under this plan and 1,245,000 shares remained available for future issuance.

        Restricted Stock Plan.    The company's Restricted Stock Plan provides for stock awards to officers and certain key employees. All awards under the plan entitle the participant to full dividend and voting rights. Unvested shares are restricted as to disposition and subject to forfeiture under certain circumstances. The market value of these shares at date of grant is amortized to expense ratably over the vesting period of generally two to five years. At year-end 2001, 2000 and 1999, the unamortized compensation expense was $18.4 million, $18.4 million and $14.4 million, respectively. A summary of restricted stock award activity follows:

Restricted Stock Plan

  2001
  2000
  1999
 
 
  (000)

 
Shares available for grant beginning of year     3,182     3,930     4,297  
Restricted shares granted     (629 )   (778 )   (403 )
Restricted shares forfeited     43     30     36  
   
 
 
 
Shares available for grant end of year     2,596     3,182     3,930  
   
 
 
 
Weighted average market value per share on grant date   $ 20.02   $ 21.06   $ 21.34  
   
 
 
 

Additional Stock Plan Information

        At February 2, 2002, the company had five stock-based compensation plans, which are described above. Statement of Financial Accounting Standards No. 123, (SFAS No. 123),"Accounting for Stock-Based Compensation," establishes a fair value method of accounting for stock options and other equity instruments. SFAS No. 123 requires the disclosure of pro forma net income and earnings per share as if the company had adopted the fair value method. For determining pro forma earnings per share, the

32



fair value of the stock options and employees' purchase rights were estimated using the Black-Scholes option pricing model using the following assumptions:

Stock Options

  2001
  2000
  1999
 
Expected life from grant date (years)   3.3   3.4   3.2  
Expected volatility   53.9 % 56.0 % 46.1 %
Risk-free interest rate   4.3 % 6.3 % 5.9 %
Dividends yield   0.5 % 0.8 % 0.7 %

Employee Stock Purchase Plan


 

2001


 

2000


 

1999


 
Expected life from grant date (years)   1.0   1.0   1.0  
Expected volatility   45.3 % 69.8 % 44.7 %
Risk-free interest rate   3.0 % 6.1 % 5.6 %
Dividends yield   0.7 % 0.9 % 0.6 %

        The weighted average fair values per share of stock options granted during 2001, 2000 and 1999 were $8.62, $8.19 and $7.85, respectively. The weighted average fair values of the 2001, 2000 and 1999 employee stock purchase awards were $5.59, $7.48 and $6.06 per share, respectively.

        The company's calculations are based on a multiple option approach, and forfeitures are recognized as they occur. The impact of outstanding non-vested stock options granted prior to 1995 has been excluded from the pro forma calculation; accordingly, the 2001, 2000 and 1999 pro forma adjustments are not indicative of future period pro forma adjustments, when the calculation will apply to all applicable stock options. Had compensation cost for these stock option and stock purchase plans been determined based on the fair value at the grant dates for awards under those plans consistent with the methods of SFAS No. 123, the company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:

 
   
  2001
  2000
  1999
 
   
  ($000, except per share data)

Net income   As reported
Pro forma
  $
$
155,045
149,030
  $
$
151,754
143,399
  $
$
150,106
142,800
Basic earnings per share   As reported
Pro forma
  $
$
1.94
1.87
  $
$
1.84
1.74
  $
$
1.66
1.58
Diluted earnings per share   As reported
Pro forma
  $
$
1.91
1.84
  $
$
1.82
1.74
  $
$
1.64
1.57

Note G: Related Party Transactions

        In 2000 the company made an interest-free relocation loan of $2.5 million to an executive officer, secured by a deed of trust on his principal residence. All outstanding principal under the loan is due and payable on the earliest to occur of (i) July 31, 2008, (ii) 120 days following any termination of employment with the company, or (iii) any sale, transfer or hypothecation of all or any part of the property referenced in the deed of trust.

        The company maintains consulting and benefits agreements with its Chairman of the Board under which an annual consulting fee of $1.1 million is paid in monthly installments and health and other benefits are provided for the individual and his dependents.

        The company also maintains a consulting agreement with its Chairman Emeritus under which it pays an annual consulting fee of $80,000 and provides administrative support and health benefits for the individual and his spouse. The company also pays the premiums on a split-dollar life insurance policy for this individual.

33



        The Chairman Emeritus is also Chairman of The Gymboree Corporation, from which the company purchased $1.1 million of children's apparel at fair market value in 2001. No purchases were made in 2000 and 1999.

Note H: Provision for Litigation Expense and Other Legal Proceedings

        During 2000, the company finalized a settlement agreement, with no admission of wrongdoing, to resolve a class action complaint alleging store managers and assistant managers in California were incorrectly classified as exempt from state overtime laws. The company recorded a non-recurring pre-tax charge of $9.0 million in 1999 when a preliminary settlement was reached in this matter.

        The company is party to various other legal proceedings arising from normal business activities. In the opinion of management, resolution of these matters will not have a material adverse effect on the company's financial condition or results of operations.

Note I: Quarterly Financial Data (Unaudited)

 
  13 Weeks
Ended
May 5,
2001

  13 Weeks
Ended
August 4,
2001

  13 Weeks
Ended
November 3,
2001

  13 Weeks
Ended
February 2,
2002

  52 Weeks
Ended
February 2,
2002

 
  ($000, except per share data)

Sales   $ 674,359   $ 724,591   $ 739,272   $ 848,374   $ 2,986,596
Net earnings     34,676     35,372     35,027     49,970     155,045
Net earnings per diluted share     .43     .44     .43     .62     1.91
Dividends declared per share on common stock         .0425     .0425     .0900 (2)   .1750
Closing stock price(4)                              
  High   $ 23.88   $ 25.20   $ 32.15   $ 36.33   $ 36.33
  Low   $ 18.08   $ 21.11   $ 23.41   $ 27.65   $ 18.08

 

 

13 Weeks
Ended
April 29,
2000


 

13 Weeks
Ended
July 29,
2000


 

13 Weeks
Ended
October 28,
2000


 

14 Weeks(1)
Ended
February 3,
2001


 

53 Weeks(1)
Ended
February 3,
2001

 
  ($000, except per share data)

Sales   $ 633,428   $ 657,035   $ 639,469   $ 779,107   $ 2,709,039
Net earnings     40,848     35,922     29,738     45,247     151,754
Net earnings per diluted share     .47     .43     .36     .56     1.82
Dividends declared per share on common stock         .0375     .0375     .0800 (3)   .1550
Closing stock price(4)                              
  High   $ 24.06   $ 22.94   $ 16.84   $ 22.88   $ 24.06
  Low   $ 12.56   $ 14.81   $ 13.00   $ 13.06   $ 12.56

(1)
Fiscal 2000 is a 53-week year.

(2)
Includes $.0425 per share dividend declared November 2001 and $.0475 per share dividend declared in January 2002.

(3)
Includes $.0375 per share dividend declared November 2000 and $.0425 per share dividend declared in January 2001.

(4)
Ross Stores, Inc. common stock trades on the Nasdaq National Market tier of The Nasdaq Stock MarketSM under the symbol ROST.

34


INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Ross Stores, Inc.
Newark, California

        We have audited the accompanying consolidated balance sheets of Ross Stores, Inc. and subsidiaries as of February 2, 2002 and February 3, 2001, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended February 2, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Ross Stores, Inc. and subsidiaries as of February 2, 2002 and February 3, 2001, and the results of their operations and their cash flows for each of the three years in the period ended February 2, 2002 in conformity with accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP
San Francisco, California

March 12, 2002

35



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                AND FINANCIAL DISCLOSURE

        None.


PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        Information required by this item is incorporated herein by reference to the sections entitled (i) "Executive Officers of the Registrant" at the end of Part I of this report; (ii) "Information Regarding Nominees and Incumbent Directors" of the Ross Stores, Inc. Proxy Statement for the Annual Meeting of Stockholders to be held on Thursday, May 23, 2002 (the "Proxy Statement"); and (iii) "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

        The information required by this item is incorporated herein by reference to the sections of the Proxy Statement entitled (i) "Compensation Committee Interlocks and Insider Participation"; (ii) "Compensation of Directors"; (iii) "Employment Contracts, Termination of Employment and Change in Control Arrangements"; and (iv) the following tables, and their footnotes: "Summary Compensation," "Option Grants in Last Fiscal Year" and "Aggregated Option Exercises and Year-End Option Value."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by this item is incorporated herein by reference to the section of the Proxy Statement entitled "Stock Ownership of Certain Beneficial Owners and Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this item is incorporated herein by reference to the sections of the Proxy Statement entitled (i) "Compensation of Directors" and (ii) "Certain Transactions."

36



PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)
The following financial statements, schedules and exhibits are filed as part of this report or are incorporated herein as indicated:

1.
List of Financial Statements.
(b)
Reports on Form 8-K.

37



SIGNATURES

        Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

    ROSS STORES, INC.
(Registrant)

Date: April 25, 2002

 

By:

 

/s/  
MICHAEL BALMUTH      
Michael Balmuth
Vice Chairman and Chief Executive Officer

        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 and in the capacities and on the dates indicated.

Signature
  Title
  Date

 

 

 

 

 
/s/  MICHAEL BALMUTH      
Michael Balmuth
  Vice Chairman and Chief Executive Officer   April 25, 2002

/s/  
J. CALL      
John G. Call

 

Senior Vice President, Chief Financial Officer, Principal Accounting Officer and Corporate Secretary

 

April 25, 2002

/s/  
NORMAN A. FERBER      
Norman A. Ferber

 

Chairman of the Board

 

April 25, 2002

/s/  
MICHAEL J. BUSH      
Michael J. Bush

 

Director

 

April 25, 2002

/s/  
SHARON GARRETT      
Sharon Garrett

 

Director

 

April 25, 2002

/s/  
LAWRENCE M. HIGBY      
Lawrence M. Higby

 

Director

 

April 25, 2002

/s/  
STUART G. MOLDAW      
Stuart G. Moldaw

 

Chairman Emeritus and Director

 

April 25, 2002

/s/  
G. ORBAN      
George P. Orban

 

Director

 

April 25, 2002

/s/  
JAMES C. PETERS      
James C. Peters

 

Director, President and Chief Operating Officer

 

April 25, 2002

/s/  
DONALD H. SEILER      
Donald H. Seiler

 

Director

 

April 25, 2002

38



INDEX TO EXHIBITS

Exhibit
Number

  Exhibit
  3.1   Corrected First Restated Certificate of Incorporation of Ross Stores, Inc. ("Ross Stores"), dated and filed with the Delaware Secretary of State on March 17, 1999, incorporated by reference to Exhibit 3.1 to the Form 10-K filed by Ross Stores for the year ended January 30, 1999.

  3.2

 

Amended By-laws, dated August 25, 1994, incorporated by reference to Exhibit 3.2 to the Form 10-Q filed by Ross Stores for its quarter ended July 30, 1994.

10.1

 

Lease of Certain Property located in Fort Mill, South Carolina, incorporated by reference to the Form 10-Q filed by Ross Stores for its quarter ended August 4, 2001.

10.2

 

Lease of Certain Property located in Perris, California.

 

 

MANAGEMENT CONTRACTS AND COMPENSATORY PLANS (EXHIBITS 10.3-10.28)

10.3

 

Third Amended and Restated Ross Stores, Inc. 1992 Stock Option Plan, incorporated by reference to Exhibit 10.5 to the Form 10-K filed by Ross Stores for its fiscal year ended January 29, 2000.

10.4

 

Amendment to the Third Amended and Restated Ross Stores, Inc. 1992 Stock Option Plan, incorporated by reference to Exhibit 10.4 to the Form 10-Q filed by Ross Stores for its quarter ended August 4, 2001.

10.5

 

Ross Stores, Inc. 2000 Equity Incentive Plan, incorporated by reference to Exhibit 10.7 to the Form 10-K filed by Ross Stores for its fiscal year ended January 29, 2000.

10.6

 

Fourth Amended and Restated Employee Stock Purchase Plan, incorporated by reference to Exhibit 10.3 to the Form 10-Q filed by Ross Stores for the quarter ended July 29, 2000.

10.7

 

Fourth Amended and Restated Ross Stores, Inc. 1988 Restricted Stock Plan, incorporated by reference to Exhibit 10.9 to the Form 10-K filed by Ross Stores for its fiscal year ended January 29, 2000.

10.8

 

Amended and Restated 1991 Outside Directors Stock Option Plan effective March 16, 2000, incorporated by reference to Exhibit 10.11 to the Form 10-K filed by Ross Stores for its fiscal year ended January 29, 2000.

10.9

 

Ross Stores Executive Medical Plan, incorporated by reference to Exhibit 10.9 to the Form 10-K filed by Ross Stores for its year ended January 30, 1999.

10.10

 

Ross Stores Executive Dental Plan, incorporated by reference to Exhibit 10.10 to the Form 10-K filed by Ross Stores for its year ended January 30, 1999.

10.11

 

Third Amended and Restated Ross Stores Executive Supplemental Retirement Plan, incorporated by reference to Exhibit 10.14 to the Form 10-K filed by Ross Stores for the fiscal year ended January 29, 1994.

10.12

 

Ross Stores Second Amended and Restated Non-Qualified Deferred Compensation Plan, incorporated by reference to Exhibit 10.12 to the Form 10-K filed by Ross Stores for its year ended January 30, 1999.

10.13

 

Amended and Restated Ross Stores, Inc. Incentive Compensation Plan, incorporated by reference to Exhibit 10.18 to the Form 10-K filed by Ross Stores for its year ended January 29, 2000.

10.14

 

Independent Contractor Consultancy Agreement effective February 1, 2000 between Norman A. Ferber and Ross Stores, Inc., incorporated by reference to Exhibit 10.41 to the Form 10-Q filed by Ross Stores for its quarter ended April 29, 2000.

 

 

 

39



10.15

 

Amendment to Independent Contractor Consultancy Agreement dated January 10, 2001 between Norman A. Ferber and Ross Stores, Inc., incorporated by reference to Exhibit 10.16 to the Form 10-K filed by Ross Stores for the year ended February 3, 2001.

10.16

 

Amendment #2 to the Independent Contractor Consultancy Agreement dated January 7, 2002 between Norman A. Ferber and Ross Stores, Inc.

10.17

 

Retirement Benefit Package Agreement effective February 1, 2000 between Norman A. Ferber and Ross Stores, incorporated by reference to Exhibit 10.42 to the Form 10-Q filed by Ross Stores for its quarter ended April 29, 2000.

10.18

 

Fifth Amendment to Employment Agreement by and between Ross Stores and Melvin A. Wilmore, entered into June 29, 1998, incorporated by reference to Exhibit 10.2 to the Form 10-Q filed by Ross Stores for its quarter ended August 1, 1998.

10.19

 

Letter of Agreement between Ross Stores and Melvin A. Wilmore, signed by both parties on January 27, 2000, amending the Employment Agreement as amended between Ross Stores and Melvin A. Wilmore, Incorporated by reference to Exhibit 10.32 to the Form 10-K filed by Ross Stores for its fiscal year ended January 29, 2000.

10.20

 

Employment Agreement between Ross Stores and Michael Balmuth, effective as of February 3, 1999, incorporated by reference to Exhibit 10.26 to the Form 10-K filed by Ross Stores for its fiscal year ended January 30, 1999.

10.21

 

Amendment dated March 20, 2000 to Employment Agreement between Ross Stores and Michael Balmuth effective as of February 3, 1999, incorporated by reference to Exhibit 10.27 to the Form 10-K filed by Ross Stores for its fiscal year ended February 3, 2001.

10.22

 

Employment Agreement effective May 31, 2001 between Michael Balmuth and Ross Stores, Inc., incorporated by reference to Exhibit 10.3 to the Form 10-Q filed by Ross Stores for its quarter ended August 4, 2001.

10.23

 

Employment Agreement effective August 14, 2000 between James C. Peters and Ross Stores, Inc., incorporated by reference to Exhibit 10.3 to the Form 10-Q filed by Ross Stores for its quarter ended October 28, 2000.

10.24

 

First Amendment to the Employment Agreement effective November 1, 2001 between James C. Peters and Ross Stores, Inc. incorporated by reference to Exhibit 10.3 to the Form 10-Q filed by Ross Stores for its quarter ended November 3, 2001.

10.25

 

Executive Relocation Loan Agreement between James C. Peters and Ross Stores, Inc., incorporated by reference to Exhibit 10.4 to the Form 10-Q filed by Ross Stores for its quarter ended October 28, 2000.

10.26

 

Form of Employment Agreement between Ross Stores, Inc. and Senior Vice Presidents, incorporated by reference to Exhibit 10.5 to the Form 10-Q filed by Ross Stores for its quarter ended October 28, 2000.

10.27

 

Form of Indemnification Agreement between Ross Stores, Inc. and Executive Officers.

10.28

 

Consulting Agreement between Ross Stores and Stuart G. Moldaw, effective as of April 1, 1999 through March 31, 2002, incorporated by reference to Exhibit 10.36 to the Form 10-Q filed by Ross Stores for its quarter ended May 1, 1999.

23

 

Independent Auditors' Consent.

40




QuickLinks

PART I
EXECUTIVE OFFICERS OF THE REGISTRANT
PART II
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF EARNINGS
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART III
PART IV
SIGNATURES
INDEX TO EXHIBITS

QuickLinks -- Click here to rapidly navigate through this document


EXHIBIT 10.2

AMENDMENT NO. 1 TO PARTICIPATION AGREEMENT,
LEASE AGREEMENT AND CONSTRUCTION AGENCY AGREEMENT

Dated as of April 15, 2002

among

ROSS DISTRIBUTION, INC.
as Lessee and ROSS STORES, INC.,
as the Construction Agent,

ROSS STATUTORY TRUST 2001A,
as Lessor,

WELLS FARGO BANK
NORTHWEST, N.A.,
not in its individual capacity except as
specifically set forth herein, but solely as Trustee,

BANCBOSTON LEASING INVESTMENTS INC. and
WACHOVIA BANK, NATIONAL ASSOCIATION,
as the Investors,

BREEDS HILL CAPITAL COMPANY, LLC,
as the Conduit Loan Lender,

FLEET NATIONAL BANK and
WACHOVIA BANK, NATIONAL ASSOCIATION,
as the Liquidity Providers

WACHOVIA BANK, NATIONAL ASSOCIATION,
as the B Lender,

and

FLEET NATIONAL BANK,
as Administrative Agent, Collateral Agent and Liquidity Agent



Lease (Ross)


[EXECUTION COPY]

        AMENDMENT NO. 1 TO PARTICIPATION AGREEMENT, LEASE AGREEMENT
AND CONSTRUCTION AGENCY AGREEMENT

        THIS AMENDMENT NO. 1 TO PARTICIPATION AGREEMENT, LEASE AGREEMENT AND CONSTRUCTION AGENCY AGREEMENT is dated as of April 15, 2002 (this "Amendment"), among ROSS DISTRIBUTION, INC., a California corporation (the "Lessee"), ROSS STORES INC., a Delaware corporation, in its capacity as the construction agent (the "Construction Agent"); ROSS STATUTORY TRUST 2001A, a Connecticut statutory business trust (the "Trust"), as Lessor; WELLS FARGO BANK NORTHWEST, N.A. (the "Trust Company"), not in its individual capacity except as specifically set forth herein, but solely as Trustee; BANCBOSTON LEASING INVESTMENTS INC., a Delaware corporation ("BLII") and WACHOVIA BANK, NATIONAL ASSOCIATION, a national banking association ("Wachovia"; together with BLII, individually referred to as an "Investor", and collectively referred to as the "Investors"); BREEDS HILL CAPITAL COMPANY, LLC, a Delaware limited liability company (the "Conduit Loan Lender"); FLEET NATIONAL BANK, a national banking association ("FNB") and WACHOVIA, as Liquidity Providers (the "Liquidity Providers"), WACHOVIA as a B Lender (the "B Lender"); and FNB, as Administrative Agent, Collateral Agent and Liquidity Agent.

W I T N E S S E T H:

        WHEREAS, the Lessee, the Construction Agent, the Lessor, the Trustee, the Administrative Agent, the Collateral Agent, the Liquidity Agent and the Participants have heretofore entered into a certain Participation Agreement, dated as of December 17, 2001 (as amended, amended and restated, supplemented or otherwise modified prior to the date hereof, the "Existing Participation Agreement" and as modified hereby, the "Participation Agreement");

        WHEREAS, the Lessor and the Lessee have heretofore entered into a certain Lease Agreement, dated as of December 17, 2001 (as amended, amended and restated, supplemented or otherwise modified prior to the date hereof, the "Existing Lease" and as modified hereby, the "Lease");

        WHEREAS, the Lessor and the Construction Agent have heretofore entered into a certain Construction Agency Agreement, dated as of December 17, 2001 (as amended, amended and restated, supplemented or otherwise modified prior to the date hereof, the "Existing CAA" and as modified hereby, the "CAA");

        WHEREAS, the Lessee, the Construction Agent and the Participants had contemplated having an A1 Lender become a party to the Participation Agreement and execute an A1 Loan Agreement to make Loans to the Lessor who would advance funds to the Construction Agent to purchase Equipment;

        WHEREAS, the Lessee and the Construction Agent have decided to obtain an unsecured line of credit outside the Operative Documents in order to fund the purchase of Equipment;

        WHEREAS, the Lessor and the Participants have agreed to modify the Operative Documents so that the Lessee and the Construction Agent can obtain such unsecured line of credit outside the Operative Documents;

        WHEREAS, it is the intent of the Construction Agent and the Lessee that the Lessor and the Participants will have a security interest in the Equipment following the purchase thereof by the Construction Agent or the Lessee and that the Equipment will secure the Obligations;



        NOW, THEREFORE, in consideration of the mutual terms and conditions herein contained, the parties hereto agree as follows:

PART I
DEFINITIONS

        SUBPART 1.1.    Use of Defined Terms; Rules of Usage.    Capitalized terms used but not otherwise defined in this Amendment shall have the meanings provided in Appendix A to the Participation Agreement, and the rules of interpretation set forth therein shall apply to this Amendment.

PART II
AMENDMENTS TO THE EXISTING PARTICIPATION AGREEMENT

        Effective on (and subject to the occurrence of) the Effective Date, the Existing Participation Agreement is hereby amended in accordance with this Part II.

        SUBPART 2.1.    Global Amendments to the Existing Participation Agreement.    The Existing Participation Agreement and Appendix A thereto containing the defined terms used therein are hereby amended mutatis mutandis to the extent necessary to eliminate all references to the A1 Lender and the A1 Loans and their prospective usage for the purchase of Equipment, including by deleting:

        SUBPART 2.2.    Amendments to Article II of the Existing Participation Agreement.    

        SUBPART 2.2.1 Sections 2.2.2 and 2.2.3, and clause (a) and (c) of Section 2.2.4 of the Existing Participation Agreement are each hereby amended by deleting the words "each Category of Property Costs" each time they appear therein and replacing them with "the Advance Request Amount".

        SUBPART 2.2.2 Section 2.2.2 of the Existing Participation Agreement is hereby amended by inserting the words "(less Yield to be paid to such Investor with the proceeds of such Advance if such Investor has made a Book-Entry Election)" after the words "being funded on such Advance Date."

2



        SUBPART 2.2.3 Section 2.2.3 of the Existing Participation Agreement is hereby amended by inserting the words "(less interest to be paid to the Conduit Loan Lender with the proceeds of such Advance if the Conduit Loan Lender has made a Book-Entry Election)" after the words "being funded on such Advance Date."

        SUBPART 2.2.4 Clause (a) of Section 2.2.4 of the Existing Participation Agreement is hereby amended by inserting the words "(less interest to be paid to such Liquidity Provider with the proceeds of such Advance if such Liquidity Provider has made a Book-Entry Election)" after the words "being funded on such Advance Date."

        SUBPART 2.2.5 Clause (c) of Section 2.2.4 of the Existing Participation Agreement is hereby amended by inserting the words "(less interest to be paid to such B Lender with the proceeds of such Advance if such B Lender has made a Book-Entry Election)" after the words "being funded on such Advance Date."

        SUBPART 2.2.6 Clause (a) of Section 2.2.5 of the Existing Participation Agreement is hereby amended by inserting "; provided, further, however that in the event that an amount required to be funded on such Advance Date by a Participant who has made a Book-Entry Election is less than the amount of Construction Period Amounts due and payable to such Participant on such Advance Date, the Construction Agent may pay such amounts with the proceeds of Advances made on such Advance Date or request that the Administrative Agent pay such amounts directly to the appropriate Participant with the proceeds of Advances made on such Advance Date" prior to the period at the end of such clause.

        SUBPART 2.3.    Amendment to Section 3.1 of the Existing Participation Agreement.    

        SUBPART 2.3.1 Clause (ii)(B) of Section 3.1 of the Existing Participation Agreement is hereby amended by inserting the words "and the Equipment" following the word "Facility".

        SUBPART 2.3.2 The next to last sentence of Section 3.1 of the Existing Participation Agreement is hereby deleted and replaced with "The Lessor shall have a valid and binding security interest in and Lien on the Facility and the Equipment, free and clear of all Liens other than Permitted Liens, as security for the obligations of the Lessee and the Construction Agent under the Operative Documents".

        SUBPART 2.4.    Amendments to Article V of the Existing Participation Agreement.    

        SUBPART 2.4.1 Sections 5.1(a)(vi) and 5.6(a)(ii) of the Existing Participation Agreement are hereby amended by inserting the words "and the Equipment" after the word "Facility" each time it appears therein.

        SUBPART 2.4.2 Section 5.1(c) of the Existing Participation Agreement is hereby amended by inserting the words "and the Equipment" after the word "Facility" each time it appears therein.

        SUBPART 2.5.    Amendments to Article VI of the Existing Participation Agreement.    Sections 6.5 and 6.6 of the Existing Participation Agreement are hereby amended by inserting the words "and the Equipment" after the word "Facility" each time it appears therein.

        SUBPART 2.6.    Amendments to Article X of the Existing Participation Agreement.    Clauses second of Section 10.5 of the Existing Participation Agreement is hereby amended and restated as follows:

3


        SUBPART 2.7.    Amendments to Appendix A to Existing Participation Agreement.    

        SUBPART 2.7.1 Appendix A to the Existing Participation Agreement ("Existing Appendix A") is hereby amended by adding the following definitions in the appropriate alphabetical order

        SUBPART 2.7.2 Existing Appendix A is hereby amended by amending and restating the following definitions in their entirety:

4


        SUBPART 2.7.3 The definition of "Appraisal Procedure" in Existing Appendix A is hereby amended by deleting the parenthetical "(and the Equipment)".

        SUBPART 2.7.4 The definitions of "Construction Agent Collateral", "Lessee Collateral" and "Lessor Liens" are each hereby amended by inserting the words "and the Equipment" after the words "the Facility" each time they appear therein.

PART III
AMENDMENTS TO EXISTING LEASE

        Effective on (and subject to the occurrence of) the Effective Date, the Existing Lease is hereby amended in accordance with this Part III.

        SUBPART 3.1.    Amendments to Section 2.2 of the Existing Lease.    

        SUBPART 3.1.1 Section 2.2 of the Existing Lease is hereby amended by:

        SUBPART 3.1.2 The last sentence of Section 2.2 of the Existing Lease Agreement is hereby deleted and replaced with "The Lessor shall have a valid and binding security interest in and Lien on the Facility and the Equipment, free and clear of all Liens other than Permitted Liens, as security for the obligations of the Lessee under the Operative Documents".

        SUBPART 3.2.    Amendment to Article XII of the Existing Lease.    The following sentences are added to the end of Section 12.1 of the Existing Lease: "Upon a return of the Facility as described above, the Lessee hereby agrees that, upon the request of the Lessor, it will not remove the Equipment and will promptly assign any and all assignable rights, warranties, licenses and permits relating to the Equipment to the Lessor, without representation, warranty or recourse of any sort whatsoever. The Lessee and the Lessor agree that the Lessee will be entitled to the proceeds of the Equipment upon the sale of the Facility and the Equipment by the Lessor, determined by the Appraisal Procedure; provided, however, that for the purposes of this Section, the appraiser shall be chosen solely by the Lessor. In accordance with the Appraisal Procedure, the appraiser shall determine a relative percentage value of the Equipment and the Facility to the overall value of the Equipment and the Facility and, following a sale of the Equipment and the Facility, the net proceeds of such sale shall be divided

5



between the Lessor, who shall receive the relative percentage value of the Facility and the Lessee who shall receive the relative percentage value of the Equipment.

        SUBPART 3.3.    Amendment to Article XVIII of the Existing Lease.    

        SUBPART 3.3.1 Clause (f) of Section 18.1 of the Existing Lease is hereby amended by inserting the words "or the Equipment" following the word "Facility".

        SUBPART 3.3.2 Clause (a) of Section 18.4 of the Existing Lease is hereby amended by inserting the words "and the Equipment" following the word "Facility" each time they appear therein.

        SUBPART 3.4.    Amendment to Article XX of the Existing Lease.    Clauses (a) and (c) of Section 20.2 of the Existing Lease are hereby amended by inserting the words "and the Equipment" following the word "Facility" each time they appear therein.

        SUBPART 3.5.    Amendment to Article XXIII of the Existing Lease.    

        SUBPART 3.5.1 The first sentence of Section 23.17 of the Existing Lease is hereby amended by inserting the words "and the Equipment" following the word "Facility".

        SUBPART 3.5.2 Clause (c) of Section 23.17 of the Existing Lease is hereby amended by inserting the words "or use of the Equipment" following the word "Facility".

        SUBPART 3.6.    Amendment to Schedule 11.1 of the Existing Lease.    Part B, Builder's Risk Insurance of Schedule 11.1 is amended and restated to read in its entirety as follows:

6


PART IV
AMENDMENTS TO EXISTING CAA

        Effective on (and subject to the occurrence of) the Effective Date, the Existing Lease is hereby amended in accordance with this Part IV.

        SUBPART 4.1.    Amendment to Article II to the Existing CAA.    

        SUBPART 4.1.1 The last sentence of Section 2.3 of the Existing CAA is hereby amended by deleting the words "One Hundred Thirty Million Dollars" and replacing them with "the Total Project Cost".

        SUBPART 4.1.2 Clause (h) of Section 2.6 of the Existing CAA is hereby amended by inserting the words "or the installation of the Equipment" following the words "Construction of the Facility".

        SUBPART 4.1.3 Clause (i) of Section 2.6 of the Existing CAA is hereby amended by inserting the words "and the Equipment" following the word "Facility".

        SUBPART 4.2.    Amendment to Article V to the Existing CAA.    Clause (g) of Section 5.1.1 of the Existing CAA is hereby amended by inserting the words "or the Equipment" following the word "Facility".

        SUBPART 4.3.    Amendment to Schedule 2.6(f) of the Construction Agency Agreement.    Part B, Builder's Risk Insurance of Schedule 2.6(f) is amended and restated to read in its entirety as follows:

PART V
CONDITIONS PRECEDENT

        SUBPART 5.1.    Conditions to Effectiveness.    This Amendment shall become effective as of the date hereof (the "Effective Date") when (a) each of the conditions precedent set forth in this Part V shall have been satisfied or waived in writing by the Lessor and the Participants and (b) the Administrative Agent shall have received counterparts hereof executed on behalf of the Lessee, the Construction Agent, the Lessor, the Investors, the Conduit Loan Lender, the Liquidity Providers and the B Lender.

        SUBPART 5.2.    Compliance with Warranties.    The representations and warranties set forth in Part VI hereof shall be true and correct.

        SUBPART 5.3.    Transaction Costs; Fees.    All fees, costs and expenses due and payable pursuant to Section 12.26 of the Participation Agreement shall have been paid in full.

        SUBPART 5.4.    Construction Materials.    True and correct copies of the Construction Materials shall have been delivered to the Lessor, the Investors, the Lenders and each Agent.

7



        SUBPART 5.5.    Software Licenses.    The Collateral Agent shall have received an assignment of all licenses of the Construction Agent and the Lessee to all proprietary software necessary or available to operate the Facility as-built.

        SUBPART 5.6.    Satisfactory Legal Form.    All documents executed or submitted pursuant hereto by or on behalf of the Lessee shall be satisfactory in form and substance to the Lessor and its counsel; and the Lessor and its counsel shall have received all information, approvals, documents or instruments relating to this Amendment as the Lessor or its counsel may have reasonably requested.

PART VI
REPRESENTATIONS AND WARRANTIES

        In order to induce the Lessor and each Participant to enter into this Amendment, the Construction Agent and the Lessee hereby represent and warrant unto the Lessor and each Participant on and as of the date hereof.

        SUBPART 6.1.    Corporate and Governmental Authorization; Non-Contravention; Due Execution, etc.    The execution, delivery and performance by the Construction Agent and the Lessee of this Amendment are within the corporate powers of the Construction Agent and the Lessee, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any Governmental Authority (other than customary building permits obtained in the ordinary course of business which the Lessee has no reason to believe will not be forthcoming) and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of the Construction Agent and the Lessee or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Construction Agent and the Lessee (including the Operative Documents) or result in the creation or imposition of any Lien (other than Permitted Liens) on any asset of the Construction Agent and the Lessee, in each case, which would result in a material adverse effect on the Construction Agent's and the Lessee's ability to fulfill its obligations under the Operative Documents to which it is a party. This Amendment has been duly executed and delivered by the Construction Agent and the Lessee.

        SUBPART 6.2.    Binding Effect.    This Amendment constitutes a valid and binding agreement of the Construction Agent and the Lessee, enforceable against the Construction Agent and the Lessee in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the enforcement of creditors' rights generally and by general equitable principles.

        SUBPART 6.3.    Representations and Warranties True; Absence of Defaults, etc.    The representations and warranties of the Construction Agent and the Lessee contained in the Participation Agreement are true and correct on and as of the Effective Date except to the extent such representations and warranties relate to a specific date, in which case such representations and warranties are true and correct on and as of such specified date; the Construction Agent and the Lessee have performed all agreements on their part required to be performed under the Lease and the other Operative Documents on or prior to the Effective Date; and on and as of the Effective Date there exists no Lease Default or Lease Event of Default.

PART VII
MISCELLANEOUS PROVISIONS

        SUBPART 7.1.    Ratification of and References to the Existing Participation Agreement.    This Amendment is an amendment to the Existing Participation Agreement, Existing Appendix A, Existing Lease and Existing CAA (the "Existing Operative Documents") and the Participation Agreement, Appendix A thereto, the Lease and the CAA as amended hereby, are hereby ratified, approved and confirmed in each and every respect. All references to the Existing Operative Documents in any

8


Operative Document or any other document, instrument, agreement or writing shall hereafter be deemed to refer to the applicable Operative Documents as amended hereby.

        SUBPART 7.2.    Limited Amendment of the Existing Operative Documents.    Except as specifically amended or modified herein, the Existing Operative Documents and the other Operative Documents shall continue in full force and effect in accordance with the provisions thereof and except as expressly set forth herein the provisions hereof shall not operate as a waiver or amendment of any right, power or privilege of the Lessor, Investors or the Lenders nor shall the entering into of this Amendment preclude the Lessor, Investors or the Lenders from refusing to enter into any further or future amendments.

        SUBPART 7.3.    Counterparts.    This Amendment may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument.

        SUBPART 7.4.    Captions.    Section captions used in this Amendment are inserted for convenience of reference only and shall not affect the construction of this Amendment or any provisions hereof.

        SUBPART 7.5.    Governing Law; Entire Agreement.    THIS AMENDMENT SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (INCLUDING, WITHOUT LIMITATION, SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW), BUT EXCLUDING, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ALL OTHER CHOICE OF LAW AND CONFLICT OF LAW RULES. This Amendment constitutes the entire understanding among the parties hereto with respect to the subject matter hereof and supersede any prior agreements, written or oral, with respect thereto.

        SUBPART 7.6.    Acknowledgement.    In connection with this Amendment, the parties hereto hereby acknowledge and agree that the security interests granted by the Construction Agent, the Lessee and the Lessor pursuant to any Operative Document extend to and include a security interest in such parties' respective interest in the Equipment to secure all Secured Lessee Obligations, Secured Construction Agent Obligations and Secured Lessor Obligations.

PART VIII
INSTRUCTIONS TO TRUSTEE

        SUBPART 8.1.    Instructions.    The Investors hereby authorize and direct the Trustee to enter into, execute and deliver this Amendment and perform all of the obligations of the Trust thereunder.

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        IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the day and year first above written.

    ROSS STORES, INC., as the Construction Agent

 

 

By:

 

/s/  
J. CALL      
        Name:   John G. Call
        Title:   Senior Vice President, CFO

 

 

ROSS DISTRIBUTION, INC., as the Lessee

 

 

By:

 

/s/  
J. CALL      
        Name:   John G. Call
        Title:   Senior Vice President, CFO

 

 

ROSS STATUTORY TRUST 2001A,
as the Lessor
    By: Wells Fargo Bank Northwest, N.A., not in its individual capacity except as specifically set forth herein, but solely as Trustee

 

 

By:

 

/s/  
ROBERT L. REYNOLDS      
        Name:   Robert L. Reynolds
        Title:   Vice President

 

 

BANCBOSTON LEASING INVESTMENTS INC., as an Investor

 

 

By:

 

/s/  
STEVEN S. CRISCIONE      
        Name:   Steven S. Criscione
        Title:   Vice President

 

 

BREEDS HILL CAPITAL COMPANY, LLC, as the Conduit Loan Lender

 

 

By:

 

/s/  
THOMAS J. IRVIN      
        Name:   Thomas J. Irvin
        Title:   Manager

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WACHOVIA BANK, NATIONAL ASSOCIATION, as a B Lender, as a Liquidity Provider and as an Investor

 

 

By:

 

/s/  
MARK S. SUPPLE      
        Name:   Mark S. Supple
        Title:   Vice President

 

 

FLEET NATIONAL BANK, as a Liquidity Provider, as Collateral Agent and as Administrative Agent

 

 

By:

 

/s/  
PETER L. GRISWOLD      
        Name:   Peter L. Griswold
        Title:   Managing Director

11


LEASE AGREEMENT

dated as of December 17, 2001

between

ROSS STATUTORY TRUST 2001A,
as the Lessor,

and

ROSS DISTRIBUTION, INC.,
as the Lessee

Distribution Center
Perris, California

THE LESSOR'S INTEREST UNDER THIS LEASE HAS BEEN ASSIGNED TO, AND IS SUBJECT TO A SECURITY INTEREST IN FAVOR OF, FLEET NATIONAL BANK, AS COLLATERAL AGENT, PURSUANT TO AN ASSIGNMENT OF LEASE DATED AS OF THE DATE HEREOF BETWEEN THE LESSOR AND SAID COLLATERAL AGENT. INFORMATION CONCERNING SUCH SECURITY INTEREST MAY BE OBTAINED FROM SAID COLLATERAL AGENT.

12


 
   
  Page
ARTICLE I   DEFINITIONS    

ARTICLE II

 

LEASE OF PROPERTY

 

 
  SECTION 2.1   Demise and Lease   1
  SECTION 2.2   Nature of Lease   1

ARTICLE II

 

RENT

 

 
  SECTION 3.1   Base Rent   2
  SECTION 3.2   Supplemental Rent   2
  SECTION 3.3   Method, Time of Payment   2
  SECTION 3.4   Late Payment   2

ARTICLE IV

 

NET LEASE; THE LESSEE'S ACCEPTANCE OF PROPERTY

 

 
  SECTION 4.1   Net Lease; No Setoff; Etc   2
  SECTION 4.2   Condition of Facility   3

ARTICLE V

 

THE LESSEE'S PURCHASE OPTION

 

 
  SECTION 5.1   Purchase Option   4

ARTICLE VI

 

EXTENSION OF LEASE

 

 
  SECTION 6.1   Lease Extension   5

ARTICLE VII

 

THE LESSEE'S DISPOSITION OF THE LESSOR'S INTERESTS AT LEASE EXPIRATION

 

 
  SECTION 7.1   Disposition of the Lessor's Interests and Distribution of Sale Proceeds   5
  SECTION 7.2   Conditions to the Lessee's Exercise of the Remarketing Option   6

ARTICLE VIII

 

LIENS

 

 
  SECTION 8.1   The Lessee's Obligation to Discharge Liens   7
  SECTION 8.2   The Lessor's Notice to Potential Lienors   7
  SECTION 8.3   The Lessee's Right to Encumber the Lessee's Property   7
  SECTION 8.4   Granting of Easements   7

ARTICLE IX

 

MAINTENANCE; ALTERATIONS; TAXES; LEGAL COMPLIANCE

 

 
  SECTION 9.1   Maintenance and Repair; Utility Charges   8
  SECTION 9.2   Alterations   8
  SECTION 9.3   Title to Alterations   9
  SECTION 9.4   Location   9
  SECTION 9.5   Permitted Contests   9
  SECTION 9.6   Environmental Compliance   10
  SECTION 9.7   Compliance with Applicable Laws   10
  SECTION 9.8   Land Agreements Compliance   11
  SECTION 9.9   The Lessee's Right to Enforce Warranties   11
  SECTION 9.10   Real Estate Taxes   11

ARTICLE X

 

USE AND NAMING OF PROPERTY

 

 
  SECTION 10.1   Use   11
  SECTION 10.2   Naming of the Facility   11

ARTICLE XI

 

INSURANCE

 

 
  SECTION 11.1   Insurance   11
  SECTION 11.2   Risk of Loss   12

ARTICLE XII

 

RETURN OF LEASED PROPERTY TO THE LESSOR

 

 
  SECTION 12.1   Nature of Return   12

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  SECTION 12.2   Site Assessment   12

ARTICLE XIII

 

RELEASE

 

 
  SECTION 13.1   Facility Release   12

ARTICLE XIV

 

LOSS DESTRUCTION, CONDEMNATION OR DAMAGE

 

 
  SECTION 14.1   Event of Loss, Casualty or Condemnation   13
  SECTION 14.2   Application of Net Proceeds When Lease Continues; Repair and Restoration   13
  SECTION 14.3   Application of Proceeds   14
  SECTION 14.4   Application of Proceeds from a Temporary Taking   14
  SECTION 14.5   Other Dispositions   14
  SECTION 14.6   Negotiations   14

ARTICLE XV

 

CONVEYANCE OF THE PROPERTY TO THE LESSEE

 

 
  SECTION 15.1   Terms of Conveyance   14
  SECTION 15.2   Right of the Lessee to Name Designee   14
  SECTION 15.3   Costs of Conveyance   14
  SECTION 15.4   Preference Legal Opinion   15

ARTICLE XVI

 

SUBLEASE

 

 
  SECTION 16.1   Subleasing Permitted; the Lessee Remains Obligated   15

ARTICLE XVII

 

INSPECTION

 

 
  SECTION 17.1   Inspection   15

ARTICLE XVIII

 

LEASE EVENTS OF DEFAULT

 

 
  SECTION 18.1   Defined   15
  SECTION 18.2   Remedies   17
  SECTION 18.3   Proceeds of Sale; Deficiency   19
  SECTION 18.4   Grant and Foreclosure on the Lessee's Estate   19
  SECTION 18.5   Receipt of a Sufficient Discharge to Purchaser   20
  SECTION 18.6   Sale a Bar Against the Lessee   20
  SECTION 18.7   Liabilities to Become Due on Sale   20
  SECTION 18.8   Provisions Subject to Applicable Law   20
  SECTION 18.9   Survival of the Lessee's Obligations   21
  SECTION 18.10   Remedies Cumulative; No Waiver; Consents   21
  SECTION 18.11   Right to Perform the Lessee's Obligations   21

ARTICLE XI

 

HOLDING OVER

 

 
  SECTION 19.1   Holding Over   21

ARTICLE XX

 

GRANT OF SECURITY INTEREST

 

 
  SECTION 20.1   Grant of Lien   22
  SECTION 20.2   Assignment of Leases and Rents   22

ARTICLE XXI

 

COVENANTS OF THE LESSEE

 

 
  SECTION 21.1   Assumption Upon Merger, Etc   23

ARTICLE XXII

 

COVENANTS OF THE LESSOR

 

 
  SECTION 22.1   Quiet Enjoyment   23

ARTICLE XXIII

 

MISCELLANEOUS

 

 
  SECTION 23.1   Binding Effect; Successors and Assigns   23
  SECTION 23.2   Notices   23

ii


  SECTION 23.3   Severability   23
  SECTION 23.4   Amendments   23
  SECTION 23.5   Headings, etc   24
  SECTION 23.6   Counterparts; Notice   24
  SECTION 23.7   Governing Law   24
  SECTION 23.8   Apportionments   24
  SECTION 23.9   Priority   24
  SECTION 23.10   No Joint Venture   24
  SECTION 23.11   No Accord and Satisfaction   24
  SECTION 23.12   No Merger   24
  SECTION 23.13   Lessor Bankruptcy   25
  SECTION 23.14   Abandonment   25
  SECTION 23.15   Investments   25
  SECTION 23.16   Further Assurances   25
  SECTION 23.17   Non-recourse   25
Schedule 11.1: Insurance Requirements    

iii



LEASE AGREEMENT

        LEASE AGREEMENT, dated as of December 17, 2001 (this "Lease") between ROSS STATUTORY TRUST 2001A, a Connecticut statutory trust (the "Lessor"), and ROSS DISTRIBUTION, INC., a California corporation, (the "Lessee").

        In consideration of the mutual agreements herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:


ARTICLE I
DEFINITIONS

        Capitalized terms used herein and not otherwise defined shall have the meanings assigned thereto in Appendix A of the Participation Agreement, dated as of December 17, 2001, (as amended, supplemented, amended and restated or otherwise modified from time to time, the "Participation Agreement") among the Lessee, Ross Stores, Inc., a Delaware corporation (the "Construction Agent"), as the Construction Agent, Ross Statutory Trust 2001A, a Connecticut statutory business trust, as Lessor, Wells Fargo Bank Northwest, N.A., solely as Trustee, BancBoston Leasing Investments Inc. and First Union National Bank, as the Investors, Breeds Hill Capital Company, LLC, as the Conduit Loan Lender, Fleet National Bank and First Union National Bank as Liquidity Providers, First Union National Bank as the B Lender and Fleet National Bank, as Administrative Agent, Collateral Agent and Liquidity Agent. The rules of construction set forth in said Appendix A shall also be applicable to this Lease.


ARTICLE II
LEASE OF PROPERTY

        SECTION 2.1    Demise and Lease.    The Lessee hereby agrees (a) with respect to the Site, to lease the Site from the Lessor for the period commencing on and including the Initial Advance Date and ending on the Lease Term Expiration Date, and (b) with respect to the Improvements, to lease the Improvements from the Lessor for the Lease Term commencing on the Lease Commencement Date and ending on the Lease Term Expiration Date. The demise and lease of the Facility pursuant to this Article II shall include any additional right, title or interest in the Facility which may at any time be acquired by the Lessor, the intent being that all right, title and interest of the Lessor in and to the Facility during the Lease Term shall be demised and leased hereunder.

        SECTION 2.2    Nature of Lease.    The parties hereto intend that (i) for financial accounting purposes with respect to the Lessee, (A) the Lessor will be treated as the owner and lessor of the Facility and the Lessee will be treated as the lessee of the Facility under this Lease, and (B) the Investors will be deemed to have an equity investment in the Lessor and (ii) for all federal and all state and local income tax purposes and bankruptcy and commercial law purposes, (A) the Lease will be treated as a financing arrangement, (B) the Lessor, the Investors and the Lenders will be deemed lenders making loans to the Lessee in an amount equal to the sum of the Investor Amounts and the outstanding principal amount of the Loans, which loans are secured by the Facility, (C) the Lessee will be treated as the owner of the Facility for tax purposes and will be entitled to all tax benefits ordinarily available to an owner of property such as the Facility for such tax purposes and (D) the obligations of the Lessee to pay the Base Rent and any part of the Lease Balance shall be treated as payments of interest and principal, respectively, for federal and state income tax and bankruptcy and commercial law purposes. Nevertheless, each party acknowledges and agrees that no other party has made any representations or warranties to any other party concerning the tax, accounting or legal characteristics of the Operative Documents and that each party has obtained and relied upon such tax, accounting and legal advice concerning the Operative Documents as it deems appropriate. The Lessor shall have a valid and binding security interest in and Lien on the Facility, free and clear of all Liens other than Permitted Liens, as security for the obligations of the Lessee under the Operative Documents.




ARTICLE III
RENT

        SECTION 3.1    Base Rent.    Commencing on the Lease Commencement Date and on each Scheduled Payment Date thereafter during the Lease Term, the Lessee shall pay to the Lessor base rent ("Base Rent") in an amount equal to the sum of (a) Loan Base Rent and (b) Investor Base Rent.

        SECTION 3.2    Supplemental Rent.    Commencing on the Lease Commencement Date, the Lessee shall pay to the Lessor, or to such other Person as shall be entitled thereto in the manner contemplated herein, any and all Supplemental Rent as the same shall become due and payable. In the event of the Lessee's failure to pay any Supplemental Rent, the Lessor shall have all rights, powers and remedies provided for herein or by law or in equity or otherwise in the case of nonpayment of Base Rent.

        SECTION 3.3    Method, Time of Payment.    Base Rent and any Supplemental Rent payable to the Lessor shall be paid to the Administrative Agent as designee for the Lessor and its permitted assignees at such place and in such amount in the contiguous continental United States as is specified in the Security Agreement or as the Administrative Agent (as such designee) shall specify in writing to the Lessee at least ten Business Days prior to the due date therefor. Each such payment of Rent shall be made by the Lessee in Dollars which shall be immediately available at the place of payment not later than 10:00 a.m. (New York time) on the date such payment is due hereunder, and the Administrative Agent shall pay such funds on such date to each Person entitled thereto in accordance with Article X of the Participation Agreement. Payments received following such time shall be deemed received on the next Business Day unless the Administrative Agent applies such funds on such date in accordance with Article X of the Participation Agreement. Concurrently with each payment of Base Rent and Supplemental Rent, the Lessee shall provide notice to Administrative Agent as set forth in Section 11.3(a) of the Participation Agreement.

        SECTION 3.4    Late Payment.    If any portion of the Rent due to the Lessor or any Participant shall not be paid by the Lessee on or before the date such payment was due hereunder, the Lessee shall pay interest thereon from (and including) the date such payment was due hereunder to (but excluding the date of the Lessor's receipt thereof) at a rate per annum equal to the Overdue Rate.


ARTICLE IV
NET LEASE; THE LESSEE'S ACCEPTANCE OF PROPERTY

        SECTION 4.1    Net Lease; No Setoff; Etc.    This Lease is a "triple net" lease. Except to the extent otherwise expressly specified in this Lease, it is agreed and intended that Base Rent, Supplemental Rent and any other amounts payable hereunder by the Lessee shall be paid without notice, demand, counterclaim, setoff, deduction or defense and without abatement, suspension, deferment, diminution or reduction, free from any charges, assessments, impositions, withholdings, expenses or reductions, and that the Lessee's obligation to pay all such amounts, throughout the Lease Term is absolute and unconditional. All costs, expenses and obligations of every kind and nature whatsoever relating to the Facility and the appurtenances thereto and the use and occupancy thereof which may arise or become due and payable with respect to the period which ends on the Lease Term Expiration Date (whether or not the same shall become payable during the Lease Term or thereafter) shall be paid by the Lessee except as otherwise expressly provided herein or in another Operative Document. The Lessee assumes the sole responsibility for the condition, use, operation, maintenance, underletting and management of the Facility, and no Indemnitee shall have any responsibility in respect thereof or any liability for damage to the property of the Lessee, any subtenant of the Lessee or any other occupant of the Facility on any account or for any reason whatsoever other than by reason of, in the case of any particular Indemnitee, such Indemnitee's willful misconduct or gross negligence. Except to the extent

2



otherwise expressly specified in this Lease, the obligations and liabilities of the Lessee hereunder shall in no way be released, discharged or otherwise affected for any reason, including: (a) any defect in the condition, merchantability, design, quality or fitness for use of the Facility or any part thereof, or the failure of the Facility to comply with all Applicable Laws, including any inability to occupy or use the Facility by reason of such noncompliance; (b) any damage to, removal, abandonment, salvage, loss, scrapping or destruction of or any requisition or taking of the Facility or any part thereof; (c) any restriction, prevention or curtailment of or interference with any use of the Facility or any part thereof including eviction; (d) any defect in title to or rights to the Facility or any Lien on such title or rights or on the Facility; (e) any change, waiver, extension, indulgence or other action or omission or breach in respect of any obligation or liability of or by any Person; (f) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceedings relating to the Lessee, the Lessor or any other Person, or any action taken with respect to this Lease by any trustee or receiver of the Lessee, the Lessor or any other Person, or by any court, in any such proceeding; (g) any claim, set off, defense or right that the Lessee has or might have against any Person, including the Lessor, the Administrative Agent (including in its individual capacity) or any vendor, manufacturer or contractor of or for the Facility; (h) any failure on the part of the Lessor or any other Person to perform or comply with any of the terms of this Lease, any other Operative Document or of any other agreement, whether or not related to the transactions contemplated by the Operative Documents; (i) any invalidity, unenforceability, illegality or disaffirmance of this Lease against or by the Lessee or any provision hereof or any of the other Operative Documents or any provision of any thereof; (j) the impossibility or illegality of performance by the Lessee or the Lessor, or both; (k) any action by any court, administrative agency or other Governmental Authority; (1) any change in or violation of Applicable Laws; (m) any restriction, prevention or curtailment of or interference with the construction on or use of the Facility or any part thereof; or (n) any other occurrence whatsoever, whether similar or dissimilar to the foregoing, whether or not the Lessee shall have notice or knowledge of any of the foregoing. Except as specifically set forth in this Lease, this Lease shall not be cancelable by the Lessee for any reason whatsoever and, except as expressly provided in this Lease, the Lessee, to the extent now or hereafter permitted by Applicable Laws, waives all rights now or hereafter conferred by statute or otherwise to quit, terminate or surrender this Lease.

        SECTION 4.2    Condition of Facility.    The Facility is demised and let by the Lessor "AS IS" in its present condition, subject to (a) the rights of any parties in possession thereof, (b) the state of the title thereto existing at the time the Lessor acquired its title to the Facility, (c) any state of facts which an accurate survey or physical inspection might show, (d) all Applicable Laws and (e) any violations of Applicable Laws which may exist at the commencement of the Lease Term. The Lessee has examined the Facility and the Lessor's title thereto and has found the same to be satisfactory. THE LESSOR HAS NOT MADE AND SHALL NOT BE DEEMED TO HAVE MADE ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, OR BE DEEMED TO HAVE ANY LIABILITY WHATSOEVER, AS TO THE VALUE, HABITABILITY, COMPLIANCE WITH ANY APPLICABLE PLANS AND SPECIFICATIONS FOR THE PROPERTY CONDITION, LOCATION, USE, DESCRIPTION, MERCHANTABILITY, DESIGN, OPERATION, OR FITNESS FOR USE OF THE PROPERTY (OR ANY PART THEREOF), OR AS TO THE LESSOR'S TITLE THERETO OR OWNERSHIP THEREOF OR ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE PROPERTY (OR ANY PART THEREOF) AND THE LESSOR SHALL NOT BE LIABLE FOR ANY LATENT, HIDDEN OR PATENT DEFECT THEREIN, FOR ANY DEFECT IN OR EXCEPTION TO TITLE THERETO, OR FOR THE FAILURE OF THE IMPROVEMENTS TO BE CONSTRUCTED IN ACCORDANCE WITH THE APPLICABLE PLANS AND SPECIFICATIONS THEREFOR, THE COMPLIANCE OF SUCH PLANS AND SPECIFICATIONS WITH APPLICABLE LAWS OR THE FAILURE OF THE FACILITY, OR ANY PART THEREOF, TO OTHERWISE COMPLY WITH

3



ANY APPLICABLE LAWS. It is agreed that the Lessee has been afforded full opportunity to inspect the Facility, is satisfied with the results of its inspections of the Facility and is entering into this Lease solely on the basis of the results of its own inspections and all risks incident to the matters discussed in the preceding sentence. The provisions of this Section 4.2 have been negotiated, and the foregoing provisions are intended to be a complete exclusion and negation of any representations or warranties by the Lessor, express or implied, with respect to the Facility, that may arise pursuant to the UCC (including the UCC as in effect in the State of California) or any other law now or hereafter in effect, or otherwise.


ARTICLE V
THE LESSEE'S PURCHASE OPTION

        SECTION 5.1    Purchase Option.    

4



ARTICLE VI
EXTENSION OF LEASE

        SECTION 6.1    Lease Extension.    The Lease Term Expiration Date shall be extended on satisfaction of the terms and conditions set forth in Section 8.5 of the Participation Agreement.


ARTICLE VII
THE LESSEE'S DISPOSITION OF THE LESSOR'S INTERESTS AT LEASE EXPIRATION

        SECTION 7.1    Disposition of the Lessor's Interests and Distribution of Sale Proceeds.    Subject to Section 7.2, the Lessee, on written notice to the Lessor (and concurrent notice to Administrative Agent as set forth in Section 11.3(d) of the Participation Agreement) given not less than 180 days nor more than 360 days prior to the Lease Term Expiration Date (or the A Loan Maturity Date pursuant to Section 5.1(b)), shall have the option (the "Remarketing Option") to cause a sale of the Facility in accordance with the following terms:

5


        SECTION 7.2    Conditions to the Lessee's Exercise of the Remarketing Option.    The Lessee's right to exercise the Remarketing Option and the consummation of the sale of the Facility on the Sale Date, as applicable, shall be subject to the following conditions:

        If, after the Lessee shall have given a notice of its exercise of the Remarketing Option in accordance with Section 7.1, any of the foregoing conditions (a) through (h) is not satisfied on or prior to the Sale Date, then a Lease Event of Default shall have occurred hereunder and the Lessee shall purchase the Facility for the Purchase Price.

6




ARTICLE VIII
LIENS

        SECTION 8.1    The Lessee's Obligation to Discharge Liens.    The Lessee shall not directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to the Facility, title thereto or any interest therein, which arises for any reason, including all Liens which arise out of the possession, use, occupancy, construction, repair or rebuilding of the Facility or by reason of labor or materials furnished or claimed to have been furnished with respect to the Facility, except Permitted Liens. The Lessee shall promptly, at its own expense, take such action as may be necessary to discharge or eliminate any such Lien (other than Permitted Liens).

        SECTION 8.2    The Lessor's Notice to Potential Lienors.    Nothing contained in this Lease shall be construed as constituting the consent or request of the Lessor, express or implied, to or for the performance by any contractor, laborer, materialman, or vendor of any labor or services or for the furnishing of any materials for any construction, alteration, addition, repair or demolition of or to the Facility or any part thereof, which would result in any liability of the Lessor for payment therefor. Notice is hereby given that none of the Lessor, the Investors nor the Lenders will be liable for any labor, services or materials furnished or to be furnished to the Lessee, or to anyone holding an interest in the Facility or any part thereof through or under the Lessee, and that no mechanics or other Liens for any such labor, services or materials shall attach to or affect the interest of the Lessor, the Investors or the Lenders in and to the Facility.

        SECTION 8.3    The Lessee's Right to Encumber the Lessee's Property.    The Lessee may from time to time own, hold under lease from Persons other than the Lessor and encumber, grant security interests in and otherwise hypothecate in favor of Persons other than the Lessor inventory, furnishings, furniture, trade fixtures, leasehold improvements, equipment and other personal property located on or about the Site (and not constituting fixtures or purchased from Advances) (the "Lessee's Property"), which shall not be subject to this Lease or to any Lien in favor of the Lessor (including any such Lien as may arise by operation of Applicable Laws). The Lessor shall from time to time, upon the reasonable request of the Lessee, promptly acknowledge in writing to the Lessee and other Persons that the Lessor does not own or have, and waives, any lien or other right or interest in or to any of the Lessee's Property.

        SECTION 8.4    Granting of Easements.    Provided that no Lease Event of Default is continuing, the Lessor will join with the Lessee from time to time at the request of the Lessee (and at the Lessee's sole cost and expense) to (i) subject to the terms of Section 15.3, sell, assign, convey or otherwise transfer an interest in the Facility to any Person legally empowered to take such interest under the power of eminent domain, (ii) grant easements, licenses, rights of way and other rights and privileges in the nature of easements, (iii) release existing easements and appurtenances which benefit the Facility, (iv) subject to the terms of Section 15.3, dedicate or transfer unimproved portions of the Facility for road, highway or other public purposes, (v) execute petitions to have the Facility annexed to any municipal corporation or utility district, (vi) execute any amendment, termination or supplement of or to any Land Agreement, or a new Land Agreement and (vii) execute and deliver any instrument necessary or appropriate to make or confirm such grants, releases or other actions described above in this Section 8.4 to any Person; provided that in each case other than transfers pursuant to clause (i), the Lessor shall not be required to take any such action, and the Lessee shall not effect any such action or grant, release, dedication, transfer or amendment, unless the Lessor shall have received a certificate of an authorized officer of the Lessee stating that such grant or release, or such dedication, transfer or amendment, as the case may be, shall not adversely affect the utility, economic useful life or residual value of the Facility or reduce the fair market value of the Facility below the Lease Balance and the Facility shall comply with all Applicable Laws after such grant or release, or such dedication, transfer or amendment, as the case may be.

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ARTICLE IX
MAINTENANCE; ALTERATIONS; TAXES; LEGAL COMPLIANCE

        SECTION 9.1    Maintenance and Repair; Utility Charges.    

        SECTION 9.2    Alterations.    

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        SECTION 9.3    Title to Alterations.    Title to Alterations shall immediately and without further act vest in the Lessor and shall be deemed to constitute a part of the Facility and be subject to this Lease in any of the following cases:

The Lessee shall, at the Lessor's request, execute and deliver any deeds or assignments reasonably necessary to evidence the vesting of title in and to such Alterations in the Lessor. If an Alteration is not within any of the categories set forth in clauses (a) through (d) of this Section 9.3, then title to such Alteration, as well as any item for which substitution or replacement is made as contemplated in Section 9.3(a), shall vest in the Lessee. So long as removal thereof shall not result in the violation of any Applicable Laws or this Lease, all Alterations to which title shall vest in the Lessee as aforesaid may be removed at any time by the Lessee, provided that the Lessee shall, at its expense, repair any material damage to the Facility caused by the removal of such Alteration and shall restore in all material respects the affected portion of the Facility in accordance with Section 9.1(a) .

        SECTION 9.4    Location.    The Lessee shall not remove, or permit to be removed, the Improvements comprising the Facility or any part thereof without the prior written consent of the Lessor, except that the Lessee or any other Person may remove (a) any Alteration with respect to which title has passed to or remained with the Lessee in accordance with the provisions of Section 9.3, (b) any part of the Facility constructed on a temporary basis for the purpose of repair or maintenance thereof, (c) any part of the Facility which has been replaced by another part which has become subject to this Lease and the Lien of the Lessee Mortgage and (d) any part of the Facility which in the Lessee's good faith judgment has become obsolete, whereupon upon written notice to the Lessor and the Administrative Agent such obsolete part shall cease to be subject to this Lease and the Lien of the Lessee Mortgage; provided that the Lessee shall repair any material damage to the Facility caused by such removal.

        SECTION 9.5    Permitted Contests.    Provided no Lease Event of Default or Bankruptcy Default is continuing, the Lessee shall not be required to comply with any Applicable Law so long as it is engaged in a Permitted Contest with respect thereto. At the Lessee's expense, the Lessor shall cooperate fully with the Lessee in connection with any such test, challenge, appeal or proceeding and, at the Lessee's request, will join in the proceedings or permit the proceedings to be brought in the Lessor's name. The terms of this Section 9.5 shall qualify each provision of this Lease that imposes a

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compliance obligation on the Lessee (other than an obligation to any Indemnitee), regardless of whether such provision shall expressly make reference to this Section 9.5.

        SECTION 9.6    Environmental Compliance.    

        SECTION 9.7    Compliance with Applicable Laws.    During the Lease Term, at the Lessee's expense, the Lessee shall cause the Facility to comply with all Applicable Laws, whether or not such Applicable Laws shall necessitate structural changes and/or improvements and/or interfere with the use

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and enjoyment of such Facility, subject to Section 9.5. The Lessee shall also procure, pay for and maintain all permits, licenses, approvals, certificates and other authorizations necessary for the operation of its business at the Facility from time to time and its lawful use and occupancy of the Facility in connection therewith, subject to Section 9.5.

        SECTION 9.8    Land Agreements Compliance.    Subject to Section 9.5, the Lessee shall comply with, and shall fully and promptly, at its own cost and expense, perform all obligations of the Lessor under any restrictive covenant, deed restriction or easement of record, as well as any environmental land use restriction recorded against the Site, to the extent relating to the Facility (collectively, "Land Agreements"), including the payment of all amounts owed by the Lessor thereunder. For so long as no Lease Event of Default shall have occurred and be continuing, the Lessee may exercise all rights, privileges and remedies available to the Lessor under the Land Agreements.

        SECTION 9.9    The Lessee's Right to Enforce Warranties.    Provided no Lease Event of Default shall have occurred and be continuing, the Lessee (including through its designees), at the Lessee's expense, shall have the right to assert all of the Lessor's rights (if any) under any applicable warranty and any other claim that the Lessee or the Lessor may have under any agreements pertaining to the construction and/or modification of the Facility, as well as any other rights and claims that may exist by operation of law. The Lessor agrees to cooperate with the Lessee, at the Lessee's expense, in asserting such rights.

        SECTION 9.10    Real Estate Taxes.    Subject to Section 9.5, the Lessee shall pay all real estate ad valorem and personal property taxes owed in respect of the Facility or any portion thereof, as well as any payments due under any agreement described in clause (f) of the definition of Permitted Liens.


ARTICLE X
USE AND NAMING OF PROPERTY

        SECTION 10.1    Use.    The Facility may be used only for the purposes for which it was designed. The Lessee shall not use or permit the use of the Facility or any part thereof for any purpose or in any manner in violation of any Applicable Laws, subject to the terms of Section 9.5.

        SECTION 10.2    Naming of the Facility.    The Lessee shall have the sole and exclusive right during the Lease Term, at any time and from time to time, to select the name or names of the Facility or any part thereof, as well as the sole and exclusive right to determine not to use any name in connection with one or more portions of the Facility, as well as all rights in respect of signage for or in connection with the Facility. The Lessor shall not have or acquire any right or interest with respect to any such name or names used at any time by the Lessee.


ARTICLE XI
INSURANCE

        SECTION 11.1    Insurance.    During the Lease Term, the Lessee shall maintain, for the benefit of the Lessor, at the Lessee's sole cost and expense, the insurance described in Schedule 11.1 hereto. In addition, the Lessee shall from time to time, but in intervals of not less than twelve months nor more than fifteen months, (i) undertake all actions and due diligence as reasonably necessary to determine whether the insurance coverage required to be maintained hereunder is in compliance with the requirements thereunder, including any increases in coverage required as a result of any change in any Applicable Laws and payment of fees incurred by the Insurance Consultant in connection with any such review, and (ii) if the Lessee determines that such insurance coverage does not meet such requirements, promptly take all actions and steps necessary to cause such coverage to comply with such requirements and shall notify the Lessor and the Administrative Agent of the steps being taken by the Lessee or on its behalf. The Lessee shall furnish the Lessor and the Administrative Agent certificates

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showing the insurance required under this Section 11.1 to be in effect and naming the Lessor (and its beneficial owners), the Investors, the Lenders and Administrative Agent as additional insureds and the property insurance required hereunder shall contain a standard form mortgage endorsement in favor of the Administrative Agent and shall name the Administrative Agent as sole loss payee.

        SECTION 11.2    Risk of Loss.    During the Lease Term, the Lessee shall bear all risk of loss (including any Casualty or Condemnation) with respect to the Facility or any portion thereof.


ARTICLE XII
RETURN OF LEASED PROPERTY TO THE LESSOR

        SECTION 12.1    Nature of Return.    Unless the Facility is then being transferred to the Lessee or its designee pursuant to the Purchase Option or the Site Purchase Option or to a third party upon remarketing, the Lessee shall, on the Lease Term Expiration Date, and at its own expense, return the Facility to the Lessor by surrendering the same to the possession of the Lessor: (a) free and clear of all Liens, except that the Lessee shall have no responsibility or liability in respect of: (i) the Lessor Liens, (ii) Liens described in clause (a) of the definition of Permitted Liens (other than rights and interests of the Lessee under the Operative Documents) and (iii) Liens described in clause (f) of the definition of "Permitted Liens"; (b) the Final Completion Work and all Alterations shall have been completed; and (c) in the condition required by Section 9.1(a), 9.1(c), 9.6, 9.7 and 9.10. All Alterations the title to which has not been vested in the Lessor hereunder that is not removed by the Lessee at or prior to the expiration or earlier termination of this Lease shall be deemed abandoned in place by the Lessee and shall become the property of the Lessor. The Lessee shall have no obligation and shall not be permitted to remove any Alterations (i) required (at the time of installation of the Facility or at the end of the Lease Term) by Applicable Laws or insurance requirements or (ii) included in such Facility at the Lease Commencement Date. Except as required under Section 9.2(d) and as permitted under Section 10.1, the Lessee may not remove any Nonseverable Alterations. The Lessee shall assign to the Lessor any and all assignable warranties, licenses and permits relating to the property surrendered to the Lessor which extend beyond the expiration or earlier termination of this Lease, such assignment to be without representation, warranty or recourse of any sort whatsoever.

        SECTION 12.2    Site Assessment.    Not earlier than 270 days and not later than one 180 days prior to the Lease Term Expiration Date, the Lessee shall, at the Lessee's expense, deliver to the Lessor an environmental site investigation and assessment (the "Site Assessment") substantially conforming to the requirements of ASTM 1527-E Phase I or any then successor thereto and the Lessee shall cause to be performed by the Lease Term Expiration Date such additional testing, reporting and remediation as is reasonably and specifically recommended by such report (such report, together with such additional report, if any, shall be collectively referred to as the "Environmental Report"); provided that the Lessee shall have no obligation to conduct a Site Assessment or cause an Environmental Report to be prepared if the Lessee shall have exercised the Purchase Option.


ARTICLE XIII
RELEASE

        SECTION 13.1    Facility Release.    Provided that no Lease Event of Default or Bankruptcy Default shall have occurred and be continuing, the Lessee may make a written request (a "Release Request") of the Lessor, to enter into a supplement or amendment to this Lease, changing the description of the Facility to exclude any unimproved portion of the Site (a "Release Portion"), and transferring such Release Portion to the Lessee (or the Lessee's designee) by special or limited warranty deed (or like instrument), and the Lessor will not unreasonably withhold its consent to such Release Request, provided that such Release Request (i) does not (x) materially impair the remaining useful life, operation, utility or residual value of the Site (or the Improvements located or to be constructed

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thereon), or (y) relate to a transfer the fair market value of which, when aggregated with the fair market value of all transfers previously made pursuant to Release Requests previously delivered hereunder, exceeds $500,000, (ii) arises out of an arms-length sale to a non-affiliated party and (iii) the Lessor has reasonable egress and ingress to the remaining Facility or has been granted appropriate easements ensuring access to the remaining Facility.


ARTICLE XIV
LOSS DESTRUCTION, CONDEMNATION OR DAMAGE

        SECTION 14.1    Event of Loss, Casualty or Condemnation.    

        SECTION 14.2    Application of Net Proceeds When Lease Continues; Repair and Restoration.    Payments (except for payments under insurance policies maintained by the Lessor) received at any time by the Lessor or the Lessee from any Governmental Authority, any insurer or any other Person with respect to a Condemnation or Casualty shall be paid to the Collateral Agent and Collateral Agent shall apply such proceeds as follows:

        After a Casualty or Condemnation, this Lease shall continue in full force and effect and the Lessee shall, at the Lessee's own cost and expense (including any Net Proceeds) and in accordance with the applicable provisions of Article IX, proceed with reasonable diligence and promptness to carry out any necessary demolition and to restore, repair, replace and/or rebuild the Facility in order to restore the same, to the extent it is reasonably practicable, to the condition, utility and value of the Facility immediately prior to such Casualty or Condemnation (assuming the Facility is maintained as required hereunder). All such repair and restoration shall be effected by the Lessee in compliance with the requirements of Section 9.1.

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        SECTION 14.3    Application of Proceeds.    In case of a Condemnation or Casualty, this Lease shall remain in full force and effect, without any abatement or reduction of Base Rent.

        SECTION 14.4    Application of Proceeds from a Temporary Taking.    All Net Condemnation Proceeds from a temporary taking shall, to the extent resulting from the taking of use during the Lease Term, be paid to the Lessee, and to the extent awarded with respect to use of the Facility for any time period after the expiration or termination of the Lease Term shall be paid as follows: (a) if the Lessee has elected to purchase the Facility, to the Lessee or its designee or (b) if the Lessee has not elected to purchase the Facility, to the Lessor to be applied in accordance with Article X of the Participation Agreement, and thereafter to the Lessee.

        SECTION 14.5    Other Dispositions.    Notwithstanding the foregoing provisions of this Article XIV, so long as a Bankruptcy Default or Lease Event of Default shall be continuing, any amount that would otherwise be payable to or for the account of, or that would otherwise be retained by, the Lessee pursuant to this Article XIV or Section 7.2 shall be paid to the Collateral Agent (or to the Lessor when the Loans shall not be outstanding as security for the obligations of the Lessee under this Lease) and, at such time thereafter as the Lease Event of Default shall have been waived in writing or no longer be continuing, such amount shall be paid promptly in accordance with this Article XIV.

        SECTION 14.6    Negotiations.    In the event any part of the Facility becomes subject to Condemnation, Casualty or Event of Loss, the Lessee shall control (and have the right to settle and compromise) the negotiations with the relevant Governmental Authority or insurance carriers unless a Lease Event of Default or Bankruptcy Default shall be continuing, in which case the Lessor (or if the Loans are outstanding, the Administrative Agent) may elect to control such negotiations.


ARTICLE XV
CONVEYANCE OF THE PROPERTY TO THE LESSEE

        SECTION 15.1    Terms of Conveyance.    Upon the purchase of the Facility or the Site, as applicable, by the Lessee, including pursuant to Article V or Article XIV:

        SECTION 15.2    Right of the Lessee to Name Designee.    In any instance in which this Lease provides that the Lessee may purchase the Facility, or the Site, as applicable, including pursuant to Article V, then the Lessee shall have the right at any time and from time to time to designate another Person as the purchaser of the Facility provided that the Lessee may not convey the Purchase Option or the Site Purchase Option itself and may not delegate its obligations in respect of the payment of the Purchase Price or the Site Purchase Price, as applicable.

        SECTION 15.3    Costs of Conveyance.    The Lessee shall pay (or cause its designee to pay) all transfer taxes, title insurance premiums, and other costs, fees and expenses incurred in connection with

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any purchase in accordance with Article V or Article XIV, including the recordation and filing charges for the satisfaction of the Mortgage. The Lessee shall pay the reasonable out-of-pocket costs and expenses of the Lessor and Lenders in connection with such purchase (including reasonable attorneys' fees and expenses).

        SECTION 15.4    Preference Legal Opinion.    If, as of the date on which the Lessee purchases the Lessor's Interest, there is a Lease Event of Default or Bankruptcy Default then, as a condition to the closing on the Purchase Option or the Site Purchase Option, as applicable, unless waived by the Participants, the Lessee shall deliver to the Lessor an opinion of outside counsel that the closing on the Purchase Option or the Site Purchase Option, as applicable, would not constitute a preference under the Bankruptcy Code.


ARTICLE XVI
SUBLEASE

        SECTION 16.1    Subleasing Permitted; the Lessee Remains Obligated.    Provided no Lease Event of Default or Bankruptcy Default shall exist at the time a sublease is entered into, the Lessee may sublease the Facility or any portion or portions thereof with any Person (each a "Sublease") (provided, that the Lessee hereby covenants and agrees that it shall not sublease the Facility or any portion or portions thereof to any Person that is not generally meeting its obligations as they become due or is subject to a proceeding under applicable bankruptcy, solvency or reorganization laws on the date of such Sublease) in each case upon written notice to the Lessor and the Agents; provided that each of the following conditions is satisfied: (A) the obligations of the Lessee under the Lease and in the other Operative Documents shall continue in full force and effect notwithstanding such Sublease, (B) no Sublease extends beyond the Lease Term, (C) each Sublease shall expressly provide for the surrender of the Facility after termination of the Lease, (D) each Sublease is expressly subject and subordinate to this Lease. The Lessee acknowledges and agrees that Lessor's interest in this Lease has been assigned as described on the cover page hereof and (E) no Sublease (individually or in the aggregate) shall adversely affect the utility, economic useful life or residual value of the Facility or reduce the fair market value of the Facility below the Lease Balance.


ARTICLE XVII
INSPECTION

        SECTION 17.1    Inspection.    The Lessor shall have the inspection rights as set forth in the Participation Agreement.


ARTICLE XVIII
LEASE EVENTS OF DEFAULT

        SECTION 18.1    Defined.    The following events shall constitute "Lease Events of Default" (whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any Governmental Authority):

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        SECTION 18.2    Remedies.    Upon the occurrence of any Lease Event of Default and at any time thereafter so long as the same shall be continuing, the Lessor may (subject to Section 18.2(g) below), at its option, by notice to the Lessee declare this Lease to be in default (and, if such Lease Event of Default is described in Section 18.1(c), then this Lease shall automatically be in default and no such declaration shall be required and the terms of Section 18.2(g) shall be applicable) and do one or more of the following as the Lessor in its sole discretion shall determine:

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        SECTION 18.3    Proceeds of Sale; Deficiency.    All payments received and amounts held or realized by the Lessor at any time when a Lease Event of Default shall have occurred and be continuing and after the Lease Balance or the Purchase Price shall have been accelerated pursuant to this Lease, as well as all payments or amounts then held or thereafter received by the Lessor, shall be distributed forthwith upon receipt by the Administrative Agent in accordance with Article X of the Participation Agreement.

        SECTION 18.4    Grant and Foreclosure on the Lessee's Estate.    Without limiting any other remedies set forth in this Lease, the following shall apply:

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        SECTION 18.5    Receipt of a Sufficient Discharge to Purchaser.    Upon any sale of the Lessee Collateral, or any part thereof or interest therein, whether pursuant to power of sale, foreclosure or otherwise, the receipt of the Lessor or the officer making the sale under judicial proceedings shall be a sufficient discharge to the purchaser for the purchase money, and such purchaser shall not be obliged to see to the application thereof.

        SECTION 18.6    Sale a Bar Against the Lessee.    Any sale of the Lessee Collateral, or any part thereof or interest therein, under or by virtue of this instrument, whether pursuant to a power of sale, foreclosure or otherwise, shall forever be a bar against the Lessee.

        SECTION 18.7    Liabilities to Become Due on Sale.    Upon any sale of the Lessee Collateral, or any portion thereof or interest therein, by reason of the Lessor's exercise of any remedy under or by virtue of this Lease or any other Operative Document, whether pursuant to power of sale, foreclosure or other remedy available at law or in equity or by statute or otherwise, at the option of the Lessor, if the Lease Balance shall not have been previously declared due and payable, the Purchase Price shall immediately become due and payable.

        SECTION 18.8    Provisions Subject to Applicable Law.    All rights, powers and remedies provided in this instrument may be exercised only to the extent that such exercise does not violate any

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Applicable Law, and are intended to be limited to the extent necessary in order not to render this instrument invalid, unenforceable or not entitled to be recorded, registered or filed under the provisions of any Applicable Law. If any term of this instrument or any application thereof shall be invalid or unenforceable, the remainder of this instrument and any other application of such term shall not be affected thereby.

        SECTION 18.9    Survival of the Lessee's Obligations.    No repossession of the Facility or exercise of any remedy under Section 18.2, including termination of this Lease, shall, except as specifically provided therein, relieve the Lessee of any of its liabilities and obligations hereunder, including the obligation to pay Base Rent. In addition, except as specifically provided therein, the Lessee shall be liable, except as otherwise provided above, for any and all unpaid Rent due hereunder before, after or during the exercise of any of the foregoing remedies, including all reasonable legal fees and other costs and expenses incurred by the Lessor and the Administrative Agent by reason of the occurrence of any Lease Event of Default or the exercise of the Lessor's remedies with respect thereto, and including all costs and expenses (excluding internal in-house costs of the Participants' counsel) incurred in connection with the return of the Facility in the manner and condition required by, and otherwise in accordance with the provisions of, Article XII as if the Facility were being returned at the end of the Lease Term. At any sale of the Facility or any part thereof or any other rights pursuant to Section 18.2, the Lessor or the Administrative Agent may bid for and purchase such property.

        SECTION 18.10    Remedies Cumulative; No Waiver; Consents.    To the extent permitted by, and subject to the mandatory requirements of, Applicable Laws, each and every right, power and remedy herein specifically given to the Lessor or otherwise in this Lease shall be cumulative and shall be in addition to every other right, power and remedy herein specifically given or now or hereafter existing at law, in equity or by statute, and each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time and as often and in such order as may be deemed expedient by the Lessor, and the exercise or the beginning of the exercise of any power or remedy shall not be construed to be a waiver of the right to exercise at the same time or thereafter any other right, power or remedy. No delay or omission by the Lessor in the exercise of any right, power or remedy or in the pursuit of any remedy shall impair any such right, power or remedy or be construed to be a waiver of any default on the part of the Lessee or to be an acquiescence therein. The Lessor's consent to any request made by the Lessee shall not be deemed to constitute or preclude the necessity for obtaining the Lessor's consent, in the future, to all similar requests. No express or implied waiver by the Lessor of any Lease Event of Default shall in any way be, or be construed to be, a waiver of any future or subsequent Lease Event of Default.

        SECTION 18.11    Right to Perform the Lessee's Obligations.    If a Lease Event of Default shall have occurred and be continuing, the Lessor may perform or comply with such agreement, and the Lessor shall not thereby be deemed to have waived any default caused by such failure, and the amount of payment required to be made by the Lessee hereunder and made by the Lessor on behalf of the Lessee, and the reasonable out-of-pocket costs and expenses of the Lessor (including reasonable attorneys' fees and expenses) incurred in connection with the performance of or compliance with such agreement, as the case may be, together with interest thereon at the Overdue Rate, shall be deemed Supplemental Rent, payable by the Lessee to the Lessor upon demand.


ARTICLE XIX
HOLDING OVER

        SECTION 19.1    Holding Over.    If the Lessee shall for any reason remain in possession of the Facility after the expiration or earlier termination of this Lease (unless such Facility is conveyed to the Lessee), such possession shall be as a tenancy at sufferance during which time the Lessee shall continue to pay Supplemental Rent that would be payable by the Lessee hereunder were the Lease then in full force and effect with respect to such Facility and the Lessee shall continue to pay Base

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Rent in an amount equal to 150% of the Base Rent that would have been payable had the Lease not terminated or expired for each month or portion thereof after expiration of the Lease. Such Base Rent shall be payable from time to time upon demand by the Lessor. During any period of tenancy at sufferance, the Lessee shall, subject to the second preceding sentence, be obligated to perform and observe all of the terms, covenants and conditions of this Lease, but shall have no rights hereunder other than the right, to the extent given by law to tenants at sufferance, to continue its occupancy and use of such Facility. Nothing contained in this Article XIX shall constitute the consent, express or implied, of the Lessor to the holding over of the Lessee after the expiration or earlier termination of this Lease as to the Facility (unless such Facility is conveyed to the Lessee) and nothing contained herein shall be read or construed as preventing the Lessor from maintaining a suit for possession of such Facility or exercising any other remedy available to the Lessor at law or in equity.


ARTICLE XX
GRANT OF SECURITY INTEREST

        SECTION 20.1    Grant of Lien.    Title to the Facility shall remain in the Lessor, as security for the obligations of the Lessee under this Lease and the other Operative Documents, and the Lessee hereby assigns, grants, pledges, mortgages and warrants to the Lessor, as secured party, for the benefit of the Lessor and its permitted transferees and assignees a Lien in the Lessee Collateral to secure the payment and performance of all obligations of the Lessee now or hereafter existing under this Lease or any other Operative Document, until such time as the Lessee shall have fulfilled all of its obligations under the Operative Documents. Upon the Lessee's request, the Lessor shall at such time as all of the obligations (other than any contingent obligations) of the Lessee under this Lease and the other Operative Documents have been paid or performed in full, execute and deliver termination statements and other appropriate documentation presented to it in final execution form and reasonably requested by the Lessee, all at the Lessee's expense, to evidence the Lessor's release of its Lien. The Lessee, at its expense, shall execute, acknowledge and deliver all such instruments and take all such actions as the Lessor may request from time to time in order to further effectuate the terms of this Lease, to carry out the terms hereof, or to better assure and confirm the rights, powers and remedies of the Lessor hereunder.

        SECTION 20.2    Assignment of Leases and Rents.    The assignment and grant of the Lien contained in Section 20.1 above shall constitute an absolute, present and irrevocable assignment and grant of the subleases, rents, income, proceeds and benefits of the Facility; provided that so long as no Lease Event of Default has occurred and is continuing, the Lessor hereby grants permission to the Lessee to collect, receive and apply such rents, income, proceeds and benefits as they become due and payable, but not in advance thereof, and in accordance with all of the other terms, conditions and provisions hereof and of the leases, contracts, agreements and other instruments with respect to which such payments are made or such other benefits are conferred. Upon the occurrence of a Lease Event of Default, such permission shall terminate immediately and automatically, without notice to the Lessee or any other Person. Such assignment shall be fully effective without any further action on the part of the Lessee or the Lessor and, upon the occurrence and during the continuance of a Lease Event of Default hereunder, at the Lessor's option, the Lessor shall be entitled to collect, receive and apply all rents, income, proceeds and benefits from the Lessor's Interest, including all right, title and interest of the Lessee in any escrowed sums or deposits or any portion thereof or interest therein, whether or not the Lessor takes possession of the Lessee Collateral or any part thereof. The Lessee further grants to the Lessor the right, at the Lessor's option, upon the occurrence and during the continuance of a Lease Event of Default hereunder:

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ARTICLE XXI
COVENANTS OF THE LESSEE

        SECTION 21.1    Assumption Upon Merger, Etc.    If the Lessee shall consolidate with or merge into any other Person or sell, convey, transfer or lease all or substantially all its assets, then the Person (if other than the Lessee) formed by such consolidation or into which the Lessee shall be merged or the Person that shall acquire by sale, conveyance, transfer or lease all or substantially all the assets of the Lessee shall assume in writing all of the obligations of the Lessee under the Operative Documents to which the Lessee is a party. No such consolidation, merger or transfer of assets shall occur unless permitted by Section 6.1(u) of the Participation Agreement and the Lessor, the Administrative Agent and the Participants have received a legal opinion of independent counsel to the surviving entity in respect of the assumption agreement in form and substance reasonably satisfactory to the Lessor and the Administrative Agent. Upon any such consolidation or merger, or any sale, conveyance, transfer or lease of substantially all the assets of the Lessee in accordance with this Article XXI, the successor Person formed by such consolidation or into which the Lessee shall be merged or to which such sale, conveyance, transfer or lease shall be made shall succeed to, and be substituted for, and may exercise every right and power of, the Lessee under this Lease and the other Operative Documents to which the Lessee is a party.


ARTICLE XXII
COVENANTS OF THE LESSOR

        SECTION 22.1    Quiet Enjoyment.    The Lessor covenants that it will not interfere in the Lessee's right to peaceably and quietly hold, possess and use the Facility hereunder during the Lease Term, so long as no Lease Event of Default has occurred and is continuing.


ARTICLE XXIII
MISCELLANEOUS

        SECTION 23.1    Binding Effect; Successors and Assigns.    The terms and provisions of this Lease, and the respective rights and obligations hereunder of the Lessor and the Lessee, shall be binding upon their respective successors, legal representatives and assigns (including, in the case of the Lessor, any Person to whom the Lessor may transfer the Lessor's Interests or any interest therein) and inure to the benefit of their respective permitted successors and assigns.

        SECTION 23.2    Notices.    All notices, consents, directions, approvals, instructions, requests, demands or other communications to or upon the respective parties hereto shall be given in writing in the manner provided in, shall be sent to the respective addresses set forth in, and the effectiveness thereof shall be governed by the provisions of Section 12.3 of the Participation Agreement.

        SECTION 23.3    Severability.    Any provision of this Lease that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

        SECTION 23.4    Amendments.    Neither this Lease nor any of the terms hereof may be terminated, amended, supplemented, waived or modified except in accordance with Section 12.5 of the

23



Participation Agreement. This Lease and the other Operative Documents are intended by the parties as a final expression of their agreement and as a complete and exclusive statement of the terms thereof, all negotiations, considerations and representations between the parties having been incorporated herein. No representations, undertakings, or agreements have been made or relied upon in the making of this Lease other than those specifically set forth in this Lease and in the other Operative Documents.

        SECTION 23.5    Headings, etc.    The table of contents and headings of the various Articles and Sections of this Lease are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof.

        SECTION 23.6    Counterparts; Notice.    This Lease may be executed on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. This Lease will be simultaneously executed in multiple counterparts, each of which, when so executed and delivered, shall constitute original, fully enforceable counterparts for all purposes except that only the counterpart stamped or marked "COUNTERPART NUMBER ONE" shall constitute to the extent applcabable, if any, "chattel paper" or other "collateral" within the meaning of the Uniform Commercial code in effect in any jurisdiction. The Administrative agent or (if no Loans are outstanding) the Lessor shall be the sole authorized holder of COUNTERPART NUMBER ONE. The Lessee and the Lessor agree that a memorandum of this Lease shall be executed and recorded in the Official Records of Riverside County, California.

        SECTION 23.7    Governing Law.    This Lease shall in all respects be governed by, and construed in accordance with, the laws of the State of California applicable to agreements made and to be performed entirely within such State, including all matters of construction, validity and performance.

        SECTION 23.8    Apportionments.    Upon any termination of this Lease (other than a termination resulting in delivery of the Lessor's Interests then subject to this Lease to the Lessee), except as otherwise set forth herein, there shall be apportioned, as of the date of such termination, all rents (including water or sewer rents), real estate taxes, municipal assessments, or other charges payable with respect to the Facility.

        SECTION 23.9    Priority.    If a Lease Event of Default shall occur, this Lease shall be subject and subordinate to the Mortgage.

        SECTION 23.10    No Joint Venture.    Any intention to create a joint venture or partnership relation between the Lessor and the Lessee is hereby expressly disclaimed.

        SECTION 23.11    No Accord and Satisfaction.    The acceptance by the Lessor of any sums from the Lessee (whether as Base Rent or otherwise) in amounts which are less than the amounts due and payable by the Lessee hereunder is not intended, nor shall it be construed, to constitute an accord and satisfaction of any dispute between such parties regarding sums due and payable by the Lessee hereunder, unless the Lessor specifically acknowledges it as such in writing.

        SECTION 23.12    No Merger.    There shall be no merger of this Lease or of the estate hereby with the fee or any other estate or interest or ownership interest in the Facility or any part thereof by reason of the fact that the same Person may acquire or own or hold, directly or indirectly, (a) this Lease or any estate created hereby or any interest in this Lease or in any such estate, (b) the fee estate or other estate or interest or ownership interest in the Facility or any part thereof, except as may expressly be stated in a written instrument duly executed and delivered by the appropriate Person or (c) a beneficial interest in the Lessor.

24



        SECTION 23.13    Lessor Bankruptcy.    The parties hereto agree that if the Lessee elects to remain in possession of the Facility after the rejection of the Lease by the Lessor under Section 365(h) of the Bankruptcy Code all of the terms and provisions of this Lease shall be effective during such period of possession by the Lessee, including the Lessee's Purchase Option and Site Purchase Option, even if the Lessor becomes subject to a case or proceeding under the Bankruptcy Code prior to the exercise by the Lessee of such purchase rights.

        SECTION 23.14    Abandonment.    The Lessee shall not abandon the Facility during the Lease Term.

        SECTION 23.15    Investments.    Any funds held by the Lessor as security for the Lessee's performance of its obligations hereunder shall, until paid to the Lessee or otherwise applied in accordance herewith, be invested by the Lessor in Cash Equivalents as selected by the Lessee. Any gain (including interest received) realized as a result of any such investment (net of any fees, commissions, Taxes and other expenses, if any, incurred in connection with such investment) shall be retained with, and distributed and re-invested in the same manner, as the original security amount. Provided the Lessor invests such funds in accordance with the preceding sentence, the Lessor shall have no liability for any losses arising from any such investments or reinvestments.

        SECTION 23.16    Further Assurances.    The Lessor and the Lessee, at the cost and expense of the requesting party, will cause to be promptly and duly taken, executed, acknowledged and delivered all such further acts, documents and assurances as any of the others reasonably may request from time to time in order to carry out more effectively the intent and purposes of this Lease. The Lessee, at its own cost and expense, will cause all financing statements, fixture filings and other documents to be recorded or filed at such places and times and in such manner, and will take all such other actions or cause such actions to be taken, as may be necessary or as may be reasonably requested by the Lessor in order to preserve and protect the title of the Lessor to the Facility and the Lessor's rights under this Lease.

        SECTION 23.17    Non-recourse.    The Lessee shall look only to the Lessor's Interests and other rights, if any, in the Facility for the satisfaction of the Lessee's remedies if there is a default by the Lessor hereunder, and no other property or assets of the Lessor or its partners, owners or principals, disclosed or undisclosed, shall be subject to levy, execution or other enforcement procedure for the satisfaction of the Lessee's remedies under or with respect to (a) this Lease, (b) the relationship of the Lessor and the Lessee hereunder or under Applicable Laws, (c) the Lessee's use or occupancy of the Facility or (d) any other liability of the Lessor to the Lessee. Nothing in the immediately preceding sentence shall in any way affect, impair or detract from (i) the Lessee's "net lease" obligations hereunder as provided in Section 4.1 or (ii) the duties and obligations under the Participation Agreement and other Operative Documents of the Participants and other parties to the Operative Documents.

[SIGNATURES APPEAR ON THE FOLLOWING PAGE]

25


        IN WITNESS WHEREOF, the Lessor and the Lessee have duly authorized, executed and delivered this Lease as of the date first hereinabove set forth.

    ROSS STATUTORY TRUST 2001A,
    as the Lessor

 

 

By:  

WELLS FARGO BANK NORTHWEST, N.A.,
not in its individual capacity, but solely as trustee
  

 

 

By:  

/s/  
ROBERT L. REYNOLDS      
Name:  Robert L. Reynolds
Title:  
Vice President
  

 

 

ROSS DISTRIBUTION, INC., as the Lessee,
  

 

 

By:  

/s/  
J. CALL      
Name:  John G. Call
Title:  
Chief Financial Officer

26



Schedule 11.1


Insurance

Part A

A.    Insurance By the Lessee and Construction Agent:    During the Construction Period and Lease Term, the Lessee or Construction Agent, as applicable, shall maintain insurance as follows:

I.
General Liability Insurance or Third Party Personal Injury, Bodily Injury, and Property Damage Liability written on an occurrence basis against claims filed anywhere in the world and occurring in the United States and arising out of the Lessee's, the Construction Agent's, General Contractor's, sub-contractor's of any tier, and all vendors and agents of the Lessee. Such insurance shall also provide coverage for products-completed operations (which coverage shall remain in effect for a period of at least 3 years following the Construction Period Termination Date). Coverage must also include Premises Operations (including X/C/U coverage); Independent Contractors' coverage; Contractual Liability coverage including provision for the Contractor's obligation under the Construction Agreement. Limits shall be no less than the following: General Aggregate, $1,000,000, per location; Products/Completed Ops, $1,000,000; Personal/Advertising Aggregate, $1,000,000; Each Occurrence Limit $1,000,000;

II.
Workers Compensation: Providing statutory coverage required by the Workers Compensation laws of the state of California, with Employers Liability limits per insured of $100,000 Bodily Injury each accident; $100,000 Bodily Injury by disease, each employee; $500,000 Bodily Injury by Disease policy limit. Policies shall include Stop Gap and Voluntary Coverage.

III.
Automobile Liability Insurance: For the Lessee's, Construction Agent's, General Contractors' and subcontractors' liability arising out of claims for bodily injury and property damage covering all owned (if any), leased (if any), non-owned and hired vehicles used in the performance of the Construction Agent's obligations under Construction Agreement with a $1,000,000 combined single limit per accident for bodily injury and property damage and containing appropriate no-fault insurance provisions wherever applicable. A maximum deductible or self-insured retention of $10,000 per occurrence shall be allowed.

V.
Umbrella or Excess Liability Insurance: Umbrella or excess liability insurance on an occurrence basis covering claims in excess of the underlying insurance described in the foregoing subsections (1) and (2), with a $50,000,000 minimum limit per occurrence, such insurance shall contain a provision that it will not be more restrictive that the primary insurance.

        The amounts of insurance required in the foregoing sections may be satisfied by the Construction Agent purchasing coverage in the amounts specified or by any combination of primary and excess insurance, so long as the total amount of insurance meets the requirements specified above.

PART B

        During the Construction Period the Construction Agent shall maintain insurance as follows:

        Construction Agent will maintain and require all contractors and subcontractors working on the project to maintain insurance as specified in PART A, I, II, III, and IV, unless otherwise indicated below, which coverage may be placed under an Owner or Contractor Controlled Insurance Policy (OCIP or CCIP), or through policies carried by the individual contractors. The insurance required by this Schedule 2.6(f) shall be written for not less than the limits specified, or greater if required by law provided, however, that in no event shall limits and terms of insurance be less than those listed without the express consent of the Administrative Agent.

        Coverage must be written on an occurrence basis and maintained without interruption from date of commencement of the Construction until termination of the Construction Agency Agreement except for completed operations coverage which must be maintained for 3 years after Substantial Completion.



        The insurance required of contractors and subcontractors under this section shall be maintained with an insurance company or companies with an A.M. Best Rating of A- X or better and authorized to transact business in the State of California. Each policy shall be endorsed to indicate that it is primary as respects the Lessor, Owner Trustee, and Administrative Agent and Participants, with no right of contribution with any other insurance available to them, and shall not be subject to reduction of coverage as to the Lessor, Owner Trustee or Administrative Agent or the Participants by reason of any claim asserted against the Contractor or Subcontractor.

        Deductibles under such programs may not exceed $250,000 under an OCIP or CCIP, or $10,000 for traditionally placed insurance per occurrence. In the event that an OCIP is placed, the maximum deductible established under the program shall be pre-funded by the Construction Agent through additional premium payments.

        Builder's Risk Property Insurance    

        Builder's Risk Insurance on an "all risk" basis in the amount no less than the higher of the full replacement value (exclusive of land) at completion or Lease Balance, with endorsements for contingent liability from operation of building laws, increased cost of construction and demolition due to the operation of building laws, with no co-insurance provisions, and with no right of contribution from any insurance policies carried by the Lessor or any of the financing parties. Insured perils must include but are not limited to vandalism, malicious mischief, sprinkler leakage, terrorism, earth movement (including but not limited to earthquake, landslide, subsidence and volcanic eruption), wind, flood, boiler and machinery accidents, and other perils normally included within the definition of extended coverage.

        Property Covered:    The builder's risk insurance shall provide coverage for (i) the buildings, all fixtures, materials, supplies, (ii) new underground works, sidewalks, paving, site works and excavation works and landscaping, (iii) the Improvements, (iv) property of others in the care, custody or control of the Construction Agent or of General Contractor, (v) all preliminary works and temporary works, (vi) foundations and other property below the surface of the ground, and (vii) electronic equipment and media. Also, all materials and supplies at other locations awaiting installation or in transit to the project site;

        Prohibited Exclusions:    The builder's risk policy shall not contain any (i) coinsurance provisions or (ii) exclusion for loss or damage resulting from freezing or mechanical breakdown.

        Sum Insured:    The builder's risk policy shall (i) be on a completed value form, with no periodic reporting requirements, (ii) insure the higher of 100% of the full replacement value of the Facility, (ii) Lease Balance, and, (iii) value losses at replacement cost, without deduction for physical depreciation or obsolescence including custom duties, taxes and fees (if rebuilt or repaired).

        Deductible:    The builder's risk insurance shall have no deductible greater than $50,000 per occurrence for all coverage, so long as the maximum deductible shall be pre-funded by the Construction Agent through additional premium payments or $10,000 per occurrence in all other circumstances.

        Delayed Startup Insurance, other Costs:    Delayed startup coverage for attorney's fees, engineering, architectural and other consulting costs, loss of rental income, Construction Period Interest, Construction Period Yield, Construction Period Fees and other fixed expenses of the Construction Agent arising out of a delay in completion of the Outside Completion Date due to a peril insured by the builder's risk policy required above, in an amount acceptable to Lessor.



PART C

        During the Lease Term, Lessee shall maintain insurance as follows:

        Property Insurance:    

        Such insurance and Builder's Risk Insurance shall (a) have an indemnity period not less than 12 months, (b) include an interim payments (or partial payment) clause allowing for the monthly payment of a claim pending final determination of the full claim amount, (c) cover loss sustained when access to the Site is prevented due to an insured peril at premises in the vicinity of the Site, (d) cover loss sustained due to the action of a public authority preventing access to the Site due to imminent or actual loss or destruction arising from an insured peril at premises in the vicinity of the Site, (e) insure loss caused by damage to finished equipment or machinery while awaiting shipment at a supplier's premises, (f) insure loss caused by damage or mechanical breakdown to construction plant and equipment at the Site not already insured, (g) not contain any form of a coinsurance provision or include a waiver of such provision and (h) cover loss sustained due to the accidental interruption or failure of supplies of electricity, gas, sewers, water or telecommunication up to the terminal point of the utility supplier with the Site.

PART D

CONDITIONS

        All policies of liability insurance required to be maintained by the Lessee and Construction Agent under the Operative Documents shall be endorsed as follows:


        Miscellaneous Policy Provisions:    All policies of insurance required to be maintained pursuant to Part B and Part C, shall (i) not include any annual or term aggregate limits of liability except as regards the insurance applicable to the perils of flood and earth movement and pollutant clean up of land and water at the Site, (ii) shall include the Lessor and the Participants as additional insureds and the Administrative Agent as sole loss payee, and (iii) include a clause requiring the insurer to make final payment on any claim within 30 days after the submission of proof of loss and its acceptance by the insurer.

        Separation of Interests:    All policies (other than in respect to liability or workers compensation insurance) shall insure the interests of the Lessor and the Administrative Agent regardless of any breach or violation by the Construction Agent or any other party of warranties, declarations or conditions contained in such policies, any action or inaction of the Construction Agent or others.

        Acceptable Policy Terms and Conditions:    All policies of insurance required to be maintained pursuant to this Agreement shall contain terms and conditions acceptable to the Lessor.

        Waiver of Subrogation:    All policies of insurance to be maintained by the provisions of this Agreement shall provide for waivers of subrogation in favor of the Lessor.

        Evidence of Insurance:    On the Initial Advancement Date and at least 10 days prior to each policy anniversary, the Construction Agent shall furnish the Lessor with (1) certificates of insurance or binders, in a form reasonably acceptable to the Administrative Agent, evidencing all of the insurance required by the provisions of this Agreement and (2) a schedule of the insurance policies held by or for the benefit of the Construction Agent and required to be in force by the provisions of this Agreement. Such certificates of insurance/binders shall be executed by each insurer or by an authorized representative of each insurer where it is not practical for such insurer to execute the certificate itself. Such certificates of insurance/binders shall identify underwriters, the type of insurance, the insurance limits and the policy term and shall specifically list the special provisions enumerated for such insurance required by this Agreement. Upon request, the Construction Agent will promptly furnish the Lessor with copies of all insurance policies, binders and cover notes or other evidence of such



insurance relating to the insurance required to be maintained by the Construction Agent. The schedule of insurance shall include the name of the insurance company, policy number, type of insurance, major limits of liability and expiration date of the insurance policies.

        Reports:    Concurrently with the furnishing of the certification referred to in the paragraph above, the Construction Agent shall furnish the Lessor with a report of an independent broker, signed by an officer of the broker, stating that in the opinion of such broker, the insurance then carried or to be renewed is in accordance with the terms of this Schedule and attaching an updated copy of the schedule of insurance required by part (2) of the preceding paragraph. In addition the Construction Agent will advise the Lessor in writing promptly of any default in the payment of any premium and of any other act or omission on the part of the Construction Agent which may invalidate or render unenforceable, in whole or in part, any insurance being maintained by the Construction Agent pursuant to this Agreement.

        No Duty of Agent to Verify or Review:    No provision of this Agreement shall impose on the Lessor or the Administrative Agent any duty or obligation to verify the existence or adequacy of the insurance coverage maintained by the Construction Agent, nor shall the Lessor or the Administrative Agent be responsible for any representations or warranties made by or on behalf of the Construction Agent to any insurance company or underwriter. Any failure on the part of the Lessor or the Administrative Agent to pursue or obtain the evidence of insurance required by this Agreement from the Construction Agent and/or failure of the Lessor or the Administrative Agent to point out any non-compliance of such evidence of insurance shall not constitute a waiver of any of the insurance requirements in this Agreement.

PART E

        Notwithstanding the foregoing, prior to the commencement of Construction on the Site, the Construction Agent will only be required to maintain insurance that complies with Part A, I and II.



PARTICIPATION AGREEMENT

dated as of December 17, 2001

among

ROSS DISTRIBUTION, INC.
as Lessee and ROSS STORES, INC.,
as the Construction Agent,

ROSS STATUTORY TRUST 2001A,
as Lessor,

WELLS FARGO BANK
NORTHWEST, N.A.
not in its individual capacity except as
specifically set forth herein, but solely as Trustee,

BANCBOSTON LEASING INVESTMENTS INC. and
FIRST UNION NATIONAL BANK,
as the Investors,

BREEDS HILL CAPITAL COMPANY, LLC
as the Conduit Loan Lender,

FLEET NATIONAL BANK and
FIRST UNION NATIONAL BANK,
as the Liquidity Providers

FIRST UNION NATIONAL BANK,
as the B Lender,

and

FLEET NATIONAL BANK,
as Administrative Agent, Collateral Agent and Liquidity Agent

FLEET NATIONAL BANK and FIRST UNION NATIONAL BANK

as Co-Lead Arrangers



TABLE OF CONTENTS

ARTICLE I   DEFINITIONS; INTERPRETATION   2

ARTICLE II

 

CLOSING; FUNDING OF ADVANCES

 

2
  SECTION 2.1.   DOCUMENTATION DATE AND INITIAL ADVANCE DATE   2
  SECTION 2.2.   ADVANCES   2
    SECTION 2.2.1.   Lessor Commitment   3
    SECTION 2.2.2.   Investors Commitments   3
    SECTION 2.2.3.   Conduit Loan Lender's Fundings   3
    SECTION 2.2.4.   Lenders Commitments to Make Loans   4
    SECTION 2.2.5.   Procedures for Advances   4
    SECTION 2.2.6.   Use of Advances   5
    SECTION 2.2.7.   Investor Amounts and Yield   5
    SECTION 2.2.8.   Loans and Interest   6
    SECTION 2.2.9.   Construction Period Accrued Interest, Construction Period Accrued Yield, Construction Period Unused Fees and Construction Period Fees   6
    SECTION 2.2.10.   Final Completion Advance   7
  SECTION 2.3.   COMPUTATIONS AND NOTICE OF RATES   7
  SECTION 2.4.   OVERDUE PAYMENTS   8
  SECTION 2.5.   CONFIRMATION OF PARTICIPANTS AND THE OTHER PARTIES   8

ARTICLE III

 

INTENTIONS OF THE PARTIES

 

8
  SECTION 3.1.   NATURE OF TRANSACTION   8
  SECTION 3.2.   AMOUNTS DUE UNDER LEASE   8

ARTICLE IV

 

CONDITIONS PRECEDENT

 

9
  SECTION 4.1.   CONDITIONS TO INITIAL ADVANCE DATE   9
  SECTION 4.2.   CONDITIONS PRECEDENT TO THE INITIAL ADVANCE TO FUND CERTAIN COSTS   13
  SECTION 4.3.   CONDITIONS PRECEDENT TO EACH ADVANCE   13
  SECTION 4.4.   LEASE COMMENCEMENT UPON SUBSTANTIAL COMPLETION   13

ARTICLE V

 

REPRESENTATIONS AND WARRANTIES

 

14
  SECTION 5.1.   REPRESENTATIONS AND WARRANTIES OF THE LESSEE   14
  SECTION 5.2.   REPRESENTATIONS AND WARRANTIES OF THE TRUSTEE, THE TRUST AND THE TRUST COMPANY   17
  SECTION 5.3.   REPRESENTATIONS OF THE INVESTORS   19
  SECTION 5.4.   REPRESENTATIONS OF THE LENDERS   19
  SECTION 5.5.   REPRESENTATIONS OF THE AGENTS   20
  SECTION 5.6.   REPRESENTATIONS AND WARRANTIES OF THE CONSTRUCTION AGENT   20

ARTICLE VI

 

COVENANTS AND AGREEMENTS

 

23
  SECTION 6.1.   COVENANTS OF THE LESSEE AND THE CONSTRUCTION AGENT   23
  SECTION 6.2.   COVENANTS OF THE TRUST, THE TRUSTEE AND TRUST COMPANY   27
  SECTION 6.3.   COVENANTS OF THE INVESTORS   29
  SECTION 6.4.   NO PROCEEDINGS   29

i


  SECTION 6.5.   QUIET ENJOYMENT   30
  SECTION 6.6.   DISCHARGE OF LESSOR LIENS   30
  SECTION 6.7.   PERFORMANCE OF OPERATIVE DOCUMENTS   30
  SECTION 6.8.   EASEMENTS   30

ARTICLE VII

 

PAYMENT OF CERTAIN EXPENSES

 

31
  SECTION 7.1.   PAYMENT OF TRANSACTION COSTS AND OTHER COSTS   31
  SECTION 7.2.   BROKERS' FEES   32
  SECTION 7.3.   LIMITATIONS DURING CONSTRUCTION PERIOD   32

ARTICLE VIII

 

TRANSFERS OF PARTICIPANTS' INTERESTS

 

32
    SECTION 8.1.1.   Transfers by Investors   32
    SECTION 8.1.2.   Transfers by the Conduit Loan Lender   32
  SECTION 8.2.   TRANSFERS BY LENDERS   33
  SECTION 8.3.   REPLACEMENT OF THE CONDUIT LOAN LENDER, AN INVESTOR OR A LENDER   33
  SECTION 8.4.   TRANSFERS BY THE LESSEE, ETC   34
  SECTION 8.5.   EXTENSION OF LEASE TERM EXPIRATION DATE AND MATURITY DATES   34

ARTICLE IX

 

INDEMNIFICATION

 

36
  SECTION 9.1.   GENERAL INDEMNIFICATION   36
    SECTION 9.1.1.   General Indemnification   36
    SECTION 9.1.2.   Exceptions to Indemnifications   37
    SECTION 9.1.3.   Construction Period Indemnification   38
  SECTION 9.2.   GENERAL TAX INDEMNITY   39
  SECTION 9.3.   WITHHOLDING TAX   44
  SECTION 9.4.   CALCULATION OF GENERAL TAX INDEMNITY PAYMENTS   45
  SECTION 9.5.   ENVIRONMENTAL INDEMNITY   46
  SECTION 9.6.   PROCEEDINGS IN RESPECT OF CLAIMS   48
  SECTION 9.7.   ADDITIONAL COSTS; CAPITAL ADEQUACY   49
  SECTION 9.8.   ILLEGALITY   49
  SECTION 9.9.   COMPENSATION   50
  SECTION 9.10.   OBLIGATIONS OF THE LESSEE TO PAY CERTAIN AMOUNTS   50
  SECTION 9.11.   INDEMNITY PAYMENTS IN ADDITION TO LEASE OBLIGATIONS   51
  SECTION 9.12.   RIGHT TO CONVERT   51
  SECTION 9.13.   MITIGATION   51

ARTICLE X

 

DISTRIBUTIONS OF PAYMENTS AND GROSS PROCEEDS

 

51
  SECTION 10.1.   AGREEMENT OF AGENTS AND PARTICIPANTS   51
  SECTION 10.2.   BASE RENT   51
  SECTION 10.3.   PURCHASE PAYMENTS BY THE LESSEE   52
  SECTION 10.4.   RECOURSE AMOUNTS: CONSTRUCTION PERIOD MAXIMUM GUARANTY AMOUNT AND RESIDUAL VALUE GUARANTY AMOUNT   52
  SECTION 10.5.   GROSS SALE PROCEEDS   53
  SECTION 10.6.   SUPPLEMENTAL RENT   54
  SECTION 10.7.   EXCLUDED AMOUNTS   54
  SECTION 10.8.   DISTRIBUTION OF PAYMENTS AFTER CONSTRUCTION AGENCY EVENT OF DEFAULT OR LEASE EVENT OF DEFAULT   54
  SECTION 10.9.   OTHER PAYMENTS   56

ii


  SECTION 10.10.   ORDER OF APPLICATION   56
  SECTION 10.11.   REMAINING FUNDS   56
  SECTION 10.12.   TIME OF PAYMENT   56

ARTICLE XI

 

LESSEE, CONSTRUCTION AGENT DIRECTIONS; RECOURSE DURING CONSTRUCTION PERIOD

 

57
  SECTION 11.1.   LESSEE DIRECTIONS   57
  SECTION 11.2.   LIMITATION ON RECOURSE LIABILITY DURING CONSTRUCTION PERIOD   57
  SECTION 11.3.   NOTICE TO THE ADMINISTRATIVE AGENT   57

ARTICLE XII

 

MISCELLANEOUS

 

58
  SECTION 12.1.   SURVIVAL OF AGREEMENTS   58
  SECTION 12.2.   BROKERS   58
  SECTION 12.3.   NOTICES   58
  SECTION 12.4.   COUNTERPARTS   59
  SECTION 12.5.   AMENDMENTS, WAIVERS AND INSTRUCTIONS   59
  SECTION 12.6.   HEADINGS, ETC   60
  SECTION 12.7.   THIRD PARTY BENEFICIARIES   60
  SECTION 12.8.   APPLICABLE LAW   60
  SECTION 12.9.   SEVERABILITY   60
  SECTION 12.10.   LIMITATION OF LIABILITY   60
  SECTION 12.11.   FURTHER ASSURANCES   60
  SECTION 12.12.   REPRODUCTION OF DOCUMENTS   61
  SECTION 12.13.   SUBMISSION TO JURISDICTION   62
  SECTION 12.14.   JURY TRIAL   62
  SECTION 12.15.   APPOINTMENT OF ADMINISTRATIVE AGENT   62
  SECTION 12.16.   RESIGNATION BY THE ADMINISTRATIVE AGENT   64
  SECTION 12.17.   APPOINTMENT OF THE COLLATERAL AGENT   65
  SECTION 12.18.   RESIGNATION BY THE COLLATERAL AGENT   67
  SECTION 12.19.   BINDING EFFECT   67
  SECTION 12.20.   [RESERVED]   67
  SECTION 12.21.   LIMITATIONS ON RECOURSE TO THE CONDUIT LOAN LENDER   67
  SECTION 12.22.   LIMITATIONS ON RECOURSE TO THE TRUST COMPANY   68
  SECTION 12.23.   CONSENT TO CERTAIN ACTIONS   69
  SECTION 12.24.   [RESERVED]   69
  SECTION 12.25.   ESTOPPEL CERTIFICATES   69
  SECTION 12.26.   EXPENSES DURING THE CONSTRUCTION PERIOD   69
     
Exhibit A

 

Form of Advance Request

 

 
      Exhibit B   [RESERVED]    
      Exhibit C   Form of Assignment and Acceptance    
      Schedule I   Material Construction Documents    
      Schedule II   Addresses for Payment and Other Communications    
      Schedule III   Filings and Recordings    
      Schedule IV   Description of Equipment    
      Schedule V   [RESERVED]    
      Schedule VI   Non-Capitalizable Transaction Costs    
     
Appendix A

 

Definitions and Interpretation

 

 

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        THIS PARTICIPATION AGREEMENT is dated as of December 17, 2001 (as amended, supplemented, amended and restated or otherwise modified from time to time, this "Participation Agreement"), and is among: ROSS DISTRIBUTION, INC., a California corporation (the "Lessee"), ROSS STORES INC., a Delaware corporation, in its capacity as the construction agent (the "Construction Agent"); ROSS STATUTORY TRUST 2001A, a Connecticut statutory business trust (the "Trust"), as Lessor; WELLS FARGO BANK NORTHWEST, N.A. (the "Trust Company"), not in its individual capacity except as specifically set forth herein, but solely as Trustee; BANCBOSTON LEASING INVESTMENTS INC., a Delaware corporation ("BLII") and FIRST UNION NATIONAL BANK, a national banking association ("FUI"; together with BLII, individually referred to as an "Investor", and collectively referred to as the "Investors"); BREEDS HILL CAPITAL COMPANY, LLC, a Delaware limited liability company (the "Conduit Loan Lender"); FLEET NATIONAL BANK, a national banking association ("FNB") and FIRST UNION NATIONAL BANK ("First Union"), as Liquidity Providers (the "Liquidity Providers"), First Union as a B Lender (the "B Lender"); and FNB, as Administrative Agent, Collateral Agent and Liquidity Agent.


W I T N E S S E T H:

        WHEREAS, the Investors have entered into the Trust Agreement with the Trust Company, pursuant to which the Trust Company will serve as Trustee of the Trust;

        WHEREAS, the Trust will become the owner of the fee simple interest in the Site;

        WHEREAS, pursuant to the terms of the Lease, the Trust, as Lessor, will lease the Site to the Lessee;

        WHEREAS, the Lessor wishes to finance the Land Costs, the Land Improvement Costs and the Facility Improvement Costs on the Site to be used by the Lessee, and also to finance certain Transaction Costs in connection therewith;

        WHEREAS, the Lessor wishes to acquire certain Equipment and lease it to the Lessee;

        WHEREAS, the Conduit Loan Lender may, in its sole discretion, provide Conduit Loans to finance certain costs, fees and interest, which Conduit Loans will consist of proceeds from the issuance of Allocable Commercial Paper Notes;

        WHEREAS, if, for any reason, the Conduit Loan Lender elects not to make Conduit Loans from the issuance of Allocable Commercial Paper Notes, the Liquidity Providers are willing to make Facility Loans to the Lessor under the A2/B Loan Agreement to finance certain costs, fees and interest, not to exceed in each case each Liquidity Provider's respective Commitment Amount;

        WHEREAS, the parties intend to join hereto an A1 Lender who is willing to make A1 Loans to the Lessor to finance, among other things, the applicable A1 Percentage of the Equipment Costs and certain Transaction Costs, in an aggregate amount not to exceed its Commitment Amount;

        WHEREAS, the B Lender is willing to make B Loans to the Lessor to finance certain costs, fees and interest, in an aggregate amount not to exceed its Commitment Amount;

        WHEREAS, the Investors are willing to provide Investor Contributions in the Lessor as the equity portion of the funding of certain costs, fees and Yield, in an aggregate amount not to exceed their respective Commitment Amounts;

        WHEREAS, using the proceeds of Investor Contributions from the Investors, Conduit Loans from the Conduit Loan Lender, Facility Loans from the Liquidity Providers, A1 Loans from the A1 Lender (following the joinder of an A1 Lender hereto) and B Loans from the B Lender, the Lessor is willing to make Advances to the Construction Agent;

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        WHEREAS, using Advances from the Lessor, the Construction Agent (on behalf of the Lessor) will purchase the Site and construct certain Facility Improvements that will be the property of the Lessor and will become the property subject to the terms of the Lease; and

        WHEREAS, to secure such financing,

        NOW, THEREFORE, in consideration of the mutual agreements contained in this Participation Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows:


ARTICLE I

DEFINITIONS; INTERPRETATION

        Capitalized terms used and not defined herein shall have the meanings assigned thereto in Appendix A hereto for all purposes hereof; and the rules of interpretation set forth in Appendix A hereto shall apply to this Participation Agreement.


ARTICLE II

CLOSING; FUNDING OF ADVANCES

        SECTION 2.1.    Documentation Date and Initial Advance Date.    

        SECTION 2.2.    Advances.    Advances shall be made as follows:

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        SECTION 2.2.1.    Lessor Commitment.    Subject to Section 2.2.5 and Article IV, the Lessor shall take the following actions at the written request of the Construction Agent from time to time during the Commitment Period:

Notwithstanding any other provision of this Section 2.2.1 through Section 2.2.5, (i) neither the Lessor nor any Participant shall be obligated to fund (A) any Property Costs whenever a Construction Agency Event of Default has occurred and is continuing or there exists a Bankruptcy Default or (B) any Property Costs (other than (x) Land Costs, Land Improvement Costs (to the extent capitalizable with respect to the Site) and (y) Transaction Costs payable on the Initial Advance Date) with respect to any Facility Improvements until the conditions set forth in Section 4.2 have been met and (ii) the Lessor shall not be obligated to make any Advance, and no Investor and no Lender shall be required to make available any Investor Contribution or any Loan, respectively, if (A) the Commitment Period has terminated or (B) after giving effect thereto, the aggregate principal amounts of all Loans and Investor Amounts would exceed the Aggregate Commitments.

        SECTION 2.2.2.    Investors Commitments.    At the request of the Construction Agent from time to time during the Commitment Period with respect to any Advance Date, each Investor shall, in the form of Investor Contributions to the Lessor, make available to the Administrative Agent on behalf of the Lessor on such Advance Date an amount (each, an "Investor Contribution") equal to such Investor's Percentage Share of the applicable Equity Percentage of each Category of Property Costs being funded on such Advance Date, subject, however, to Section 2.2.1. Investors shall fund Investor Contributions to the Lessor by means of the Investors funding Investor Contributions directly to the Administrative Agent. No Investor shall be obligated to make available any Investor Contribution to the extent that, after giving effect to the proposed Investor Contribution, the outstanding aggregate amount of all Investor Contributions of, or attributable to, such Investor would exceed such Investor's Commitment Amount.

        SECTION 2.2.3.    Conduit Loan Lender's Fundings.    At the request of the Construction Agent from time to time during the Commitment Period with respect to any Advance Date, the Conduit Loan Lender may, in its sole discretion, (a) elect to issue Allocable Commercial Paper Notes, and (b) with the proceeds thereof, make Conduit Loans on such Advance Date to the Lessor (which shall be funded directly to Administrative Agent on behalf of the Lessor and the amount so funded shall be deemed a Conduit Loan to the Lessor), in the case of clauses (a) and (b) in an amount equal to the applicable Facility Percentage of each Category of Property Costs being funded on such Advance Date.

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        SECTION 2.2.4.    Lenders' Commitments to Make Loans.    

        SECTION 2.2.5.    Procedures for Advances.    

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        SECTION 2.2.6.    Use of Advances.    Advances shall only be used to fund the following items and only to the extent that they (i) are budgeted in the Approved Construction Budget (except in the case of Section 2.2.6(ii)(F) and Accrued Construction Period Accrued Interest, Construction Period Accrued Yield, Construction Period Fees and Construction Period Unused Fees), and (ii) were actually incurred prior to the applicable Advance Date: (A) Eligible Accrued Project Costs, (B) Noneligible Accrued Amounts, (C) Transaction Costs, (D) without duplication of the foregoing, fees and expenses payable pursuant to Section 9.10, (E) during the Construction Period, any other costs that are to be funded through Advances pursuant to the express provision of any Operative Documents and are not otherwise provided for in this Section 2.2.6 and (F) the Land Costs. Advances may be applied to any of the foregoing, regardless of whether such costs, fees or expenses were incurred prior to, as of or after the Initial Advance Date.

        SECTION 2.2.7.    Investor Amounts and Yield.    

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        SECTION 2.2.8.    Loans and Interest.    

        SECTION 2.2.9.    Construction Period Accrued Interest, Construction Period Accrued Yield, Construction Period Unused Fees and Construction Period Fees.    

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        SECTION 2.2.10.    Final Completion Advance.    On the last Advance Date occurring on or before the day on which Substantial Completion occurs, the Construction Agent may request, and the Participants (other than the Conduit Loan Lender) shall, and the Conduit Loan Lender may in its sole discretion, fund, an Advance pursuant to Section 2.2.5 in an amount equal to the lesser of (x) the remaining Aggregate Available Commitments and (y) the amount allocated to punch-list items and other Final Completion Work as determined by Construction Agent in accordance with the Approved Construction Budget; provided, however, that no such Advance shall be requested or made if a Bankruptcy Default, a Construction Agency Event of Default or a Lease Event of Default has occurred and is continuing.

        SECTION 2.3.    Computations and Notice of Rates.    

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        SECTION 2.4.    Overdue Payments.    The Lessor, the Lenders and the Investors acknowledge that the Lessee shall have no liability with respect to overdue payments of Loans and Investor Amounts or any other amount due and owing by the Lessee under the Operative Documents so long as the Lessee has timely paid Rent in accordance with Article III of the Lease, or such amounts are otherwise accounted for pursuant to Section 2.2.7 or 2.2.8; provided, however, that such Loans and Investor Amounts shall be reinstated and remain outstanding, and the Lessee shall remain liable for such Rent, if at any time any payment (in whole or in part) of any Rent is invalidated, declared to be fraudulent or preferential, set aside, rescinded or must otherwise be restored by the Lessor, any Participant or the Administrative Agent, upon the insolvency, bankruptcy, reorganization (or similar event) of the Lessee, all as though such payment of Rent had not been made. Subject to the foregoing provisions of this Section 2.4, the Lessee acknowledges its obligation to pay as Supplemental Rent any interest computed at the Overdue Rate with respect to Investor Amounts and the Loans.

        SECTION 2.5.    Confirmation of Participants and the Other Parties.    Each Participant and each other party to any of the Operative Documents agrees that the release of its signature pages to Mayer, Brown & Platt upon its instruction shall constitute notice, without further act, of its confirmation that all conditions to the Initial Advance Date set forth in Section 4.1 were met to the satisfaction of such Participant or other party.


ARTICLE III

INTENTIONS OF THE PARTIES

        SECTION 3.1.    Nature of Transaction.    The parties hereto intend that (i) for financial accounting purposes with respect to the Lessee, (A) the Lessor will be treated as the owner and lessor of the Facility and the Lessee will be treated as the lessee of the Facility under the Lease, and (B) the Investors will be deemed to have an equity investment in the Lessor, and (ii) for all federal and all state and local income tax purposes and bankruptcy and commercial law purposes, (A) the Lease will be treated as a financing arrangement, (B) the Lessor, the Investors and the Lenders will be deemed lenders making loans to the Lessee in an amount equal to the sum of the Investor Amounts and the outstanding principal amount of the Loans, which deemed loans are secured by the Facility, (C) the Lessee will be treated as the owner of the Facility for tax purposes and will be entitled to all tax benefits ordinarily available to an owner of property such as the Facility for such tax purposes and (D) the obligations of the Lessee to pay the Base Rent and any part of the Lease Balance shall be treated as payments of interest and principal, respectively, for federal and state income tax and bankruptcy and commercial law purposes. Nevertheless, each party acknowledges and agrees that no other party has made any representations or warranties to any other party concerning the tax, accounting or legal characteristics of the Operative Documents and that each party has obtained and relied upon such tax, accounting and legal advice concerning the Operative Documents as it deems appropriate. The Lessor shall have a valid and binding security interest in and Lien on the Facility, free and clear of all Liens other than Permitted Liens, as security for the obligations of the Lessee under the Operative Documents. Except as otherwise provided by law or in connection with a settlement, compromise or adjudication made under the provisions of Section 9.2(b), each of the parties to this Participation Agreement agrees that it will not, nor will it permit any Affiliate to at any time, directly or indirectly take any action or fail to take any action with respect to the preparation or filing of any income tax or other tax return, including an amended income tax or other tax return, to the extent that such action or such failure to take action would be inconsistent with the intention of the parties expressed in this Section 3.1.

        SECTION 3.2.    Amounts Due Under Lease.    Notwithstanding anything to the contrary contained in the Operative Documents, it is the intention of the Lessee, the Construction Agent, the Lessor, each Investor and the Lenders that the amount and timing of installments of Base Rent due and payable from time to time from the Lessee under the Lease shall be equal to the aggregate payments due and

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payable after the Lease Commencement Date on each Scheduled Payment Date with respect to interest on the Loans and Yield on the Investor Amounts then due.


ARTICLE IV

CONDITIONS PRECEDENT

        SECTION 4.1.    Conditions to Initial Advance Date.    The obligation of each of the Lessee, the Construction Agent, the Lessor, each Investor, each Lender (except the A1 Lender, whose obligation shall commence upon such A1 Lender's joinder hereto), the Administrative Agent and the Collateral Agent to perform its respective obligations on the Initial Advance Date (if any), shall be subject to the fulfillment to the reasonable satisfaction of (including, with respect to writings, such writings being in form and substance reasonably satisfactory to the addressee or beneficiary thereof), or the waiver by, such Persons, as applicable, of the following conditions precedent set forth in this Section 4.1:

        Each of the aforementioned documents and agreements, to the extent the same constitutes an agreement or undertaking, shall have been duly authorized, executed and delivered by each of the parties thereto and shall be in full force and effect.

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in each case covering such matters as the addressees thereof shall reasonably request.

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11


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        SECTION 4.2.    Conditions Precedent to the Initial Advance to Fund Certain Costs.    The obligation of each of the Lessor, each Investor, the Administrative Agent, the Collateral Agent and each Lender to perform its respective obligations, if any, on the date of the initial Advance that is used to fund Project Costs, including funding the Investor Contributions in the case of each Investor and making Loans in the case of Lenders, shall be subject to the fulfillment to the reasonable satisfaction (including, with respect to writings, such writings being in form and substance reasonably satisfactory to the addressee or beneficiary thereof), or the waiver by the Lessor, each Investor, the Conduit Loan Lender (if it is funding any portion of such Advance), the Administrative Agent and each other Lender, of the following conditions precedent set forth in this Section 4.2:

        SECTION 4.3.    Conditions Precedent to each Advance.    The obligations of the Lessor to make an Advance on each Advance Date (including the Initial Advance Date), the obligation of the Investors to make any Investor Contribution available on such Advance Date and the obligation of each Lender to make any Loans on such Advance Date are all subject to the conditions that (a) each Investor and each Agent shall have received a copy of the applicable Advance Request, the original of which shall be sent to the Lessor, executed by the Lessee or the Construction Agent, in accordance with and to the extent required by Section 2.2.5, (b) the representations and warranties contained in each Operative Document shall be correct in all material respects on and as of such Advance Date, before and after giving effect to such Advance and to the application of the proceeds therefrom, as though made on and as of such date, other than any such representations or warranties that, by their terms, refer to a specific date other than the date of such Advance, in which case of such specific date and (c) no Default or Event of Default has occurred and is continuing or would result from such Advance or from the application of the proceeds therefrom.

        SECTION 4.4.    Lease Commencement Upon Substantial Completion.    Unless the Construction Agency Agreement has been terminated as a result of a Construction Agency Event of Default, the

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parties hereto acknowledge and agree that upon the occurrence of Substantial Completion, the Facility shall automatically, without further act or notice by any Person, become subject to, and shall be leased by the Lessor to the Lessee under, the Lease.


ARTICLE V

REPRESENTATIONS AND WARRANTIES

        SECTION 5.1.    Representations and Warranties of the Lessee.    As of the Documentation Date, as of each Advance Date and on the date on which Substantial Completion occurs (if such date is other than an Advance Date) (provided, that any representation or warranty made as of a specific date need only be true as of such date), the Lessee represents and warrants to each of the other parties hereto that:

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15


16


        SECTION 5.2.    Representations and Warranties of the Trustee, the Trust and the Trust Company.    The Trustee, the Trust and the Trust Company (solely as to paragraphs (a)(i), (b) and

17



(c) only as to the agreements to which the Trust Company is a party, and (d), (e) and (f), only as to the Trust Company) represent and warrant to the Lessee, the Construction Agent and the Participants that:

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        SECTION 5.3.    Representations of the Investors.    As of the Documentation Date (or, with respect to any Investor becoming party hereto after the Documentation Date, as of the date such Investor becomes party hereto) and, with respect to Section 5.3(a), as of each Advance Date, each Investor represents and warrants to the other parties to this Participation Agreement that:

        SECTION 5.4.    Representations of the Lenders.    As of the Documentation Date (or, with respect to any Lender becoming party hereto after the Documentation Date, as of the date such Lender becomes party hereto) and, with respect to Section 5.4(b), as of each Advance Date, each Lender

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hereby represents and warrants to the Lessee, the Construction Agent, the Lessor, each Agent and each of the other Participants that:

        SECTION 5.5.    Representations of the Agents.    As of the Documentation Date (or, with respect to any Agent becoming party hereto after the Documentation Date, as of the date such Agent becomes party hereto), each Agent hereby represents and warrants to the Lessor, the Lessee, the Construction Agent, each other Agent and each Participant that:

        SECTION 5.6.    Representations and Warranties of the Construction Agent.    As of the Documentation Date and as of each Advance Date (provided, that any representation or warranty made as of a specific date need only be true as of such date), the Construction Agent represents and warrants to each of the other parties hereto that:

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21


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ARTICLE VI

COVENANTS AND AGREEMENTS

        SECTION 6.1.    Covenants of the Lessee and the Construction Agent.    Except as specifically provided below, the Lessee and the Construction Agent covenant with each of the other parties hereto as follows:

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24


25


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        SECTION 6.2.    Covenants of the Trust, the Trustee and Trust Company.

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        SECTION 6.3.    Covenants of the Investors.    Except as otherwise set forth below, each of the Investors covenants with each of the other parties hereto as follows:

        SECTION 6.4.    No Proceedings.    (a) Each of the Lessee, the Construction Agent, each Investor, each Agent and each Lender hereby covenants and agrees that, prior to the date which is one year and one day after the payment in full of all Allocable Commercial Paper Notes, the Loans, the amounts due each Investor and all other obligations of the Lessee and the Construction Agent under any Operative Document to which the Lessee or the Construction Agent is a party, it will not institute against, or join or assist any other Person in instituting against, the Lessor any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or other similar proceeding under the laws of the United States or any state of the United States (each a "Proceeding"); and (b) each party to this Agreement agrees that, prior to the date which is one year and one day after the payment in full of all indebtedness for borrowed money of the Conduit Loan Lender, it will not institute against, or join or assist any other Person in instituting against, the Conduit Loan Lender, any Proceeding (any such Person instituting or joining any such action described in clause (a) or (b), the "Instituting Party", and any such Person against whom any such proceeding is instituted, the "Petitioned Party"). If any party hereto takes action in violation of this Section 6.4, the Petitioned Party hereby agrees it shall (or, as to the Conduit Loan Lender, it may) file an answer with the bankruptcy court or otherwise properly contest the filing of such a petition by the applicable Instituting Party against such Petitioned Party or the commencement of such action and raise the defense that the Instituting Party has agreed in writing not to take such action and should be estopped and precluded therefrom and such other defenses, if any, as its counsel advises that it may assert. The provisions of this Section 6.4 shall survive the termination of this Participation Agreement and the other Operative Documents.

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        SECTION 6.5.    Quiet Enjoyment.    So long as no Lease Event of Default has occurred and is continuing, neither the Lessor, the Conduit Loan Lender, the Agents nor any other Participant shall take, or permit any Person claiming by, through or under it to take, any affirmative action to interfere with the rights of the Lessee to full enjoyment of the Facility during the Lease Term in accordance with the Lease. The sole remedy of the Lessee for breach of this Section 6.5 shall be to sue for damages for the breach hereof, and/or sue for a declaratory judgment, injunctive relief or other specific performance hereof, and such breach shall not affect the obligations of the Lessee to pay all amounts (including Rent) due under the Lease, this Participation Agreement and the other Operative Documents, or the rights of the Lessor, the Conduit Loan Lender, the Agents and the other Participants to initiate legal action and otherwise enforce the obligations of the Lessee under the Lease, this Participation Agreement and the other Operative Documents. The parties recognize that any sale, assignment, transfer or other disposition, or mortgage, pledge or other encumbrance (each a "disposition"), of any part of the Facility or any of Lessor's rights under the Operative Documents is subject to Lessee's rights, if any, under the Operative Documents, except any disposition required or permitted by the Operative Documents following the occurrence and during the continuation of any Lease Event of Default.

        SECTION 6.6.    Discharge of Lessor Liens.    Each of the Participants and each Agent hereby severally agrees that it will not create or permit to exist at any time, and will, at its own cost and expense, promptly take such action as may be necessary duly to discharge, or to cause to be discharged, all Lessor Liens on the Facility (or on any interest in or proceeds from any of the Operative Documents) attributable to it. Notwithstanding the foregoing, neither any Agent nor any Participant shall be required to so discharge any such Lessor Lien while the same is subject to a Permitted Contest.

        SECTION 6.7.    Performance of Operative Documents.    Each party hereto hereby agrees to observe and perform in all material respects all of the covenants, conditions and obligations required to be observed or performed by it in each Operative Document to which it is a party.

        SECTION 6.8.    Easements.    The Construction Agent may, subject to the conditions, restrictions and limitations set forth herein and in the other Operative Documents, at any time prior to the earlier of (i) the Lease Term Commencement Date, whereupon the Lease shall control and (ii) termination of the Construction Agency Agreement, grant easements, licenses, rights-of-way, party wall rights and other rights in the nature of easements, with or without consideration, necessary or appropriate in the reasonable opinion of the Construction Agent for the construction or operation of the Facility, without the consent of the Lessor, any Participant or any Agent, as long as the following conditions are satisfied unless waived pursuant to Section 12.5 and, as long as the following conditions are satisfied or so waived, the Construction Agent may execute such instruments and take such actions in the name of the Lessor, any Participant or any Agent, and the Lessor shall execute a separate power of attorney evidencing such right from time to time upon the request of Construction Agent:

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        At the request of the Construction Agent, so long as no Construction Agency Event of Default shall have occurred and be continuing, the Lessor, each Agent and each Participant, as applicable, shall, from time to time during the Construction Period and upon at least ten (10) Business Days' prior written notice from the Construction Agent, consent to and join in any easements, licenses, rights-of-way, party wall rights and other rights in the nature of easements pursuant to this Section 6.8; provided, that each of the conditions set forth in clauses (a) through (c) of this Section 6.8 are satisfied or waived by the Collateral Agent pursuant to the first paragraph of this Section 6.8.

        At the request of the Lessee, so long as no Bankruptcy Default or Lease Event of Default shall have occurred and be continuing, the Lessor shall, from time to time during the Lease Term and upon at least ten (10) Business Days' prior written notice from the Lessee, consent to and join in any easements, licenses, rights-of-way, party wall rights and other rights in the nature of easements pursuant to Section 8.4 of the Lease; provided, that each of the conditions set forth in Section 8.4 of the Lease are satisfied or waived by the Collateral Agent (at the written direction of the Directing Party).


ARTICLE VII

PAYMENT OF CERTAIN EXPENSES

        SECTION 7.1.    Payment of Transaction Costs and Other Costs.    Transaction Costs shall be paid from Advances in accordance with and subject to the terms of this Participation Agreement. In addition, the Lessee shall pay or reimburse each of the other parties to this Participation Agreement other than the Lessee and the Construction Agent for all other reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of special counsel) incurred in connection with: (a) any Casualty, Event of Loss or termination of this Participation Agreement or any other Operative Document, or any extension, amendment, modification or waiver of or under this Participation Agreement or any other Operative Document whether or not such extension, amendment, modification or waiver is consummated; (b) the negotiation and documentation of any restructuring or "workout", whether or not consummated, of any Operative Document; (c) the enforcement of the rights or remedies under the Operative Documents arising out of (i) any Lease Event of Default or Construction Agency Event of Default or (ii) any Loan Event of Default; (d) further assurances reasonably requested pursuant to Section 12.11 or any similar provision in other Operative Documents; (e) any transfer by the Lessor to the Lessee or a third-party purchaser under exercise of the Remarketing

31


Option of any interest in the Facility (or any portion thereof permitted by the Operative Documents) in accordance with the Operative Documents, and (f) the ongoing fees and expenses for which the Lessee is obligated under the Operative Documents. Subject to the provisions of Sections 7.3 and 11.2, all fees and expenses referenced in this Section 7.1 payable or incurred before or during the Construction Period shall be paid through Advances.

        SECTION 7.2.    Brokers' Fees.    Subject to Section 12.2, the Lessee shall pay or cause to be paid (provided, that during the Construction Period the Construction Agent shall request an Advance, the proceeds of which shall be used to pay) any brokers' fees, including any interest and penalties, which are payable in connection with the transactions contemplated by this Participation Agreement and the other Operative Documents.

        SECTION 7.3.    Limitations During Construction Period.    If at any time there shall be Property Costs (including any costs resulting from a Force Majeure Event), or other amounts which are required to be paid prior to or during the Construction Period through Advances under this Article VII or Sections 9.2, 9.7, 9.8 or 9.9 or under any Operative Document, and (i) such amounts are not included in the Approved Construction Budget (as the same may be adjusted pursuant to the Construction Agency Agreement) or (ii) there are not sufficient Available Commitments remaining to complete the construction of the Facility Improvements pursuant to the Construction Documents and, in either case, there are no Other Available Amounts (or amounts paid to the Lessee or the Construction Agent under Section 3.1 of the Construction Agency Agreement) to pay for such amounts, then at such time a Construction Agency Event of Default shall be deemed to have occurred.


ARTICLE VIII

TRANSFERS OF PARTICIPANTS' INTERESTS

        SECTION 8.1.1.    Transfers by Investors.    Each Investor may transfer or assign all or any part of its respective interest in or under this Participation Agreement or the other Operative Documents or the Investor Certificates to another financial institution with the prior written consent of the Lessor and the Lessee, which consent shall not be unreasonably withheld and which consent, in the case of the Lessor and the Lessee, shall not be required (a) at any time during which there exists and is continuing a Lease Event of Default or a Construction Agency Event of Default or (b) on or after the Lease Commencement Date, any Investor may, with five Business Days notice, transfer or assign such interests to another financial institution without the consent of Lessor and Lessee so long as such assignee is (A) a corporation, limited liability company, partnership, financial institution, bank, savings institution, finance company, leasing company, trust company or national banking association acting for its own account having a combined capital and surplus (after deduction of the amount of intangible assets) (or, if applicable, consolidated tangible net worth or its equivalent) of not less than $100,000,000 or (2) a Person whose obligations are fully guaranteed by another Person satisfying such criteria or an Affiliate of the Equity Investor with its obligations fully guaranteed by the Equity Investor (or any Equity Investor guarantor, if applicable). On or prior to such transfer, the assignee (if not already an Investor) shall deliver to the Lessee, the Lessor and the Administrative Agent any certificate in respect of withholding taxes required under Section 9.3. The Administrative Agent shall notify the Lessee of any such transfer or assignment promptly upon the issuance of new Investor Certificates evidencing such transfer or assignment, if applicable. As a condition to any such transfer, the transferor and transferee shall deliver to the Lessee, the Lessor and each Agent an Assignment and Acceptance, in substantially the form of Exhibit C hereto, executed by the assignee or transferee.

        SECTION 8.1.2.    Transfers by the Conduit Loan Lender.    The Conduit Loan Lender (a) may transfer or assign any or all of its rights and obligations under this Participation Agreement, the A2/B Loan Agreement, the Liquidity Agreement or any other Operative Document (i) in accordance with the A2/B Loan Agreement and the Liquidity Agreement to the Liquidity Providers (or an agent on

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their behalf) and (ii) to any other multiseller commercial paper conduit administered by The Liberty Hampshire Company, LLC or an Affiliate thereof that is rated no less than the Minimum Required Rating (and each Liquidity Provider hereby confirms that its commitment hereunder will continue in effect notwithstanding any such transfer), and (b) in all other cases, may not transfer or assign any or all of such rights and obligations without the prior written consent of the Lessor and the Lessee, which consent shall not be unreasonably withheld and which consent, in the case of the Lessee, shall not be required at any time during which there exists and is continuing a Lease Event of Default or a Construction Agency Event of Default, and, in any event, subject to an assumption agreement substantially in the form contemplated by the Liquidity Agreement.

        SECTION 8.2.    Transfers by Lenders.    Each Lender (other than the Conduit Loan Lender) may transfer or assign all or any portion of, or sell any participation in, its Commitments and Loans to another financial institution with the prior written consent of the Lessee, not to be unreasonably withheld or delayed (except during the continuance of an Event of Default, in which case the Lessee's consent shall not be required) on the terms and conditions applicable to such Lender's transfer and assignment of, or sale of a participation in, its Commitments and (as applicable), such Lender's A1 Share, B Share or Liquidity Provider Shares under the applicable Loan Agreement, and not otherwise. On or prior to such transfer, the assignee (if not already a Lender) shall deliver to the Lessee, the Lessor, and the Administrative Agent any certificate in respect of withholding taxes required under Section 9.3. Notwithstanding any provisions of the Operative Documents to the contrary, however, no Liquidity Provider, A1 Lender or B Lender may transfer or assign any portion of, or sell any participation in, any Facility Loan, A1 Loan or B Loan (respectively) unless it shall also at the same time transfer or assign, or sell a participation, to the assignee of (i) such Facility Loan a proportionate interest in such Liquidity Provider's Commitments and Liquidity Provider Shares under the Liquidity Agreement, (ii) such A1 Loan a proportionate interest in such A1 Lender's Commitments and A1 Share under the A1 Loan Agreement and (iii) such B Loan a proportionate interest in such B Lender's Commitments and B Share under the A2/B Loan Agreement.

        SECTION 8.3.    Replacement of an Investor or a Lender.    If (i) any Investor or any Lender defaults in any of its material obligations pursuant to the Operative Documents, (ii) any Loan Event of Default shall occur which does not result from a Lease Event of Default, (iii) any Participant charges Increased Costs under Section 9.7 or the provisions of Section 9.8 shall be applicable or (iv) payments to a Lender become subject to withholding taxes, then the Lessee shall be permitted to replace the defaulting party in the case of clause (i) or (ii) above, the Participant charging Increased Costs or the Participant as to which Section 9.8 shall be applicable in the case of clause (iii) above or the Participant to which payments have become subject to withholding taxes in the case of clause (iv) above; provided, however, that Administrative Agent shall have the right to direct the Lessee to use commercially reasonable efforts to replace such Participant in any case where clause (iii) or (iv) above may be applicable; provided further, however, that any replacement of any party pursuant to this Section 8.3 shall satisfy the following conditions: (A) such replacement shall not conflict with any Applicable Laws, (B) the replaced party shall have received all amounts owing to it under the Operative Documents that have accrued on or prior to the effectiveness of such replacement (including any breakage costs resulting from any early prepayment of a Eurodollar Loan), (C) the Lessee shall be obligated to pay any reasonable fees and expenses arising in connection therewith (provided, the Lessee may exercise and/or shall preserve its rights and remedies as against a defaulting Investor or Lender and provided further, during the Construction Period, such fees and expenses shall be funded through Advances), (D) any replacement party shall agree in writing to assume and be subject to all of the terms and conditions of the Operative Documents that were applicable to its predecessor-in-interest and this Participation Agreement, (E) if the Conduit Loan Lender is replaced, unless a Liquidity Provider affirmatively consents to continue to act in the capacity as a Liquidity Provider, the Lessee must replace each such non-consenting Liquidity Provider, and (F) if a Liquidity Provider is replaced, unless the Conduit Loan Lender affirmatively consents to continue as Conduit Loan Lender, then the Lessee must also replace

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the Conduit Loan Lender. Each Investor and each Lender agrees to reasonably cooperate with the Lessee in its efforts to arrange replacements as contemplated by this Section 8.3.

        SECTION 8.4.    Transfers by the Lessee, etc.    Neither the Lessee nor the Construction Agent shall assign or transfer any of its rights or obligations under the Operative Documents to which it is a party, the Facility, any Equipment or the Overall Transaction, other than in respect of an assignment or transfer not prohibited under Section 6.1(u) (with such Section 6.1(u) being hereby deemed to incorporate the sublease, assignment and transfer provisions of the Operative Documents) and any purported transfer not meeting the terms of the pertinent Operative Document(s) shall be void.

        SECTION 8.5.    Extension of Lease Term Expiration Date and Maturity Dates.

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Each Extension Option Request must be delivered in writing to each Participant not later than 180 days prior to the then effective Lease Term Expiration Date. Each Participant (including A1 Lenders and Liquidity Providers that may have previously agreed to extend the A1 Maturity Date or Facility Loan Maturity Date in accordance with Section 8.5(a)) will notify the Administrative Agent in writing of whether or not it has consented to any Extension Option Request not later than 45 days after receipt of the related Extension Option Request (the "Extension Option Response Date"). Any Participant who does not so notify the Administrative Agent and the Lessee by the Extension Option Response Date will be deemed to have not consented to such Extension Option Request. Any Participant that has notified the Administrative Agent and the Lessee that it has not consented to an Extension Option Request or that is deemed not to have consented, as provided in the preceding sentence, shall be deemed a "Non-Consenting Participant". Each Participant's determination with respect to an Extension Option Request shall be a new credit determination and within such Participant's sole and absolute discretion.

        Each Extension Option shall become binding as of the first date (the "Extension Option Effective Date" with respect to such Extension Option) on or after the Extension Option Response Date on which all Participants (other than Non-Consenting Participants who have been replaced by Replacement Participants in accordance with Section 8.5(c)) and Replacement Participants shall have consented to such Extension Request; provided that on both the date of the Extension Option Request and the Extension Option Effective Date, (x) each of the representations and warranties made by the Lessee in Article V hereof shall be true and correct in all material respects as if made on and as of each such date (except as expressly provided otherwise in the Extension Request), (y) no Lease Event of Default shall have occurred and be continuing, and (z) on each of such dates Administrative Agent shall have received a certificate of the Lessee as to the matters set forth in clauses (x) and (y) above; and provided further that in no event shall the Extension Option Effective Date occur unless each of the affected Participants (other than Non-Consenting Participants who have been replaced) and Replacement Participants in accordance with Section 8.5(c) shall have consented to the Extension Option Request on or before the Lease Term Expiration Date (as in effect before giving effect to any extension requested in such Extension Option Request).

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ARTICLE IX

INDEMNIFICATION

        SECTION 9.1.    General Indemnification.

        SECTION 9.1.1.    General Indemnification.    Whether or not any of the transactions contemplated hereby shall be consummated, each of the Construction Agent and the Lessee jointly and severally shall pay and assume liability for, and does hereby agree to indemnify, protect, defend, save and keep harmless, on an After-Tax Basis, each Indemnitee from and against any and all Claims that may be imposed on, incurred by or asserted against such Indemnitee (whether because of action or omission by such Indemnitee), whether or not such Claim is covered by any other indemnification under this Article IX or such Indemnitee shall also be indemnified as to any such Claim by any other Person, whenever such Claim arises or accrues, including whether or not such Claim arises or accrues at any time prior to or after the applicable Maturity Date, in any way arising out of or relating to:

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(including, in connection with each of the matters described in this Section 9.1 to which this indemnity shall apply, matters based on or arising from the negligence of any Indemnitee). The Lessee agrees to pay indemnification amounts owing by it pursuant to this Section (provided, that during the Construction Period and to the extent the Construction Agent is not permitted to pay such amounts under Section 9.1.3, the Construction Agent shall request (to the maximum amount then available) an Advance, the proceeds of which shall be used to pay the amounts owing).

        SECTION 9.1.2.    Exceptions to Indemnifications.    Notwithstanding the provisions of Section 9.1.1 or 9.1.3, neither the Lessee nor the Construction Agent shall be obligated to indemnify any particular Indemnitee (nor any of its Affiliates) under Section 9.1.1 or 9.1.3, and the Lessor shall not be required to indemnify a Construction Period Indemnitee under Section 9.1.3, for any Claim to the extent resulting from or arising out of: (i) such Indemnitee's fraud, gross negligence (it being understood that the Lessee and the Construction Agent shall be required to indemnify such Indemnitee (subject to the other provisions of this Section 9.1.2 and Section 9.1.3) even if the ordinary (but not gross) negligence of such Indemnitee, or any Affiliate thereof, caused or contributed to such Claim) or willful misconduct (other than the fraud, gross negligence or willful misconduct imputed as a matter of law to such Indemnitee solely by reason of entering into the Operative Documents or the consummation of the transactions contemplated thereby); (ii) the breach by such Indemnitee or any of its Affiliates of its respective representations and warranties in this Participation Agreement or any other Operative Document, or the breach by such Indemnitee or any of its Affiliates of its covenants as set forth in this Participation Agreement or in any other Operative Document; (iii) any Claim resulting from the imposition of any Lessor Lien attributable to such Indemnitee or its Affiliates; (iv) any Claim for environmental liability, which liability is addressed in Section 9.5; (v) any Claim to the extent attributable to acts or events which occur after the expiration of the Lease Term or earlier termination of the Lease and the return by the Lessee of the Facility in accordance with the terms thereof (except (A) to the extent fairly attributable to acts, events, liabilities or damages occurring or accruing prior thereto; (B) Claims arising following the termination or expiration of the Lease Term so long as the

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Collateral Agent or any Participant continues to exercise remedies against the Lessee in respect of the Operative Documents and (C) Claims arising after the expiration of the Lease Term so long as the Lessor is remarketing the Facility (or any interest therein) in accordance with Section 7.1 of the Lease; (vi) any Claim for the recovery of Improvement Costs whether or not such Claim arises solely as a result of a Construction Agency Event of Default (which for the avoidance of doubt shall include Construction Breakage Costs and other amounts payable by the Construction Agent as Default Completion Costs) or costs incurred in remediating a Construction Agency Event of Default prior to the Lease Commencement Date, other than if such Claim results from the gross negligence or willful or intentional act or omission of any Construction Agency Person as to which the Lessee shall fully indemnify each Indemnitee under Section 9.1.1 (without the right to obtain an Advance therefor); (vii) any Claim in respect of Taxes (such claims to be subject to Section 9.2), other than a payment to make payments under Section 9.1 or 9.1.2 on an after-tax basis as provided in Section 9.4; (viii) with respect to any Indemnitee, any expense expressly provided under any of the Operative Documents to be paid or borne by such Indemnitee or its Affiliate; (ix) any Claim to the extent resulting from a voluntary transfer by any Indemnitee or its Affiliate of all or part of its interest in the Lease, the other Operative Documents or the Facility, other than while a Lease Event of Default or a Construction Agency Event of Default has occurred and is continuing or such transfer is required (pursuant to an act or omission of the Lessee or otherwise) under the Lease; or (x) any Claim to the extent resulting from a violation of Applicable Law by such Indemnitee or its Affiliates (other than (A) a violation of Applicable Law imputed as a matter of law to such Indemnitee or such Affiliate solely by reason of entering into the Operative Documents or the consummation of the transactions contemplated thereby and (B) a violation of Applicable Law resulting from the failure of the Lessee or the Construction Agent to perform its obligations under the Operative Documents). It is expressly understood and agreed that the indemnity provided for in Section 9.1.1 or 9.1.3 shall survive the resignation or removal of any Indemnitee, the expiration or termination of, and shall be separate and independent from any remedy under, the Lease, the Construction Agency Agreement or any other Operative Document.

        SECTION 9.1.3.    Construction Period Indemnification.    Notwithstanding the foregoing provisions of Section 9.1.1, to the extent any Claim under Section 9.1.1 relates to any act or omission occurring or arising prior to the Lease Commencement Date (other than with respect to Claims indemnifiable under Section 9.5), (i) the Lessee and the Construction Agent shall be obligated to indemnify only the Lessor and no other Person pursuant to Section 9.1.1 for such Claim, including any Claim for which the Lessor has an obligation to indemnify any Person pursuant to clause (iii) below, (ii) the Lessee's and the Construction Agent's obligations under Section 9.1.1 during such period shall exclude Claims resulting solely from a Nonrelated Construction Event, and (iii) the Lessor shall indemnify and keep harmless each Construction Period Indemnitee for such Claims. The Lessor's obligation to indemnify and hold harmless any Construction Period Indemnitee under this Section 9.1.3:

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        To the extent that any payments made pursuant to Section 9.1.1 or this Section 9.1.3 are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid by the Lessor to a trustee, debtor in possession, receiver or other Person under any bankruptcy law, common law or equitable cause, then to such extent, the Indemnitee who received any such payments from the Lessor (or any portion thereof) shall repay any such amounts to the Lessor, or as may otherwise be directed by a court of competent jurisdiction.

        The indemnification obligations of Lessor under this Section 9.1.3 shall survive and be reinstated to the same extent, for the same period and in the same manner as the indemnification obligations of the Lessee.

        The right of any Construction Period Indemnitee to seek indemnification from the Lessor under this Section 9.1.3 is subject to and conditioned upon compliance by any such Construction Period Indemnitee with the notice, cooperation, appointment of counsel, contest rights and other provisions in Section 9.6.

        SECTION 9.2.    General Tax Indemnity.

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        Notwithstanding the foregoing, the exclusions from the Lessee's indemnification obligation of this Section 9.2(a) set forth in sub-clauses (A), (B) and (C) (to the extent that any such Tax is imposed by its express terms in lieu of or in substitution for a Tax set forth in subclauses (A), (B) and (C) above) shall not apply (but the other exclusions shall apply) to any Taxes or any increase in Taxes imposed on a Tax Indemnitee net of any decrease in Taxes realized by such Tax Indemnitee, to the extent that the imposition of such Taxes or such Tax increase (or, if applicable, such decrease in Taxes) would not have occurred if on each Advance Date the Lessor had advanced funds to the Lessee in the form of a loan secured by the Facility in an amount equal to the Advance funded on such Advance Date, with debt service for such loans equal to the Base Rent payable on each Scheduled Payment Date and a principal balance at the maturity of such loan in an amount equal to the Lease Balance at the end of the Lease Term.

        The Lessee shall be entitled for a period of 30 days from receipt of such notice from the Tax Indemnitee (or such shorter period as the Tax Indemnitee has notified the Lessee is required by law or regulation for the Tax Indemnitee to commence such contest), to request in writing that such Tax Indemnitee permit the Lessee to contest the imposition of such Tax, at the Lessee's sole cost and expense. If (x) such contest can be pursued in the name of the Lessee and independently from any other proceeding involving a liability of such Tax Indemnitee for which the Lessee has not agreed to indemnify such Tax Indemnitee, (y) such contest must be pursued in the name of the Tax Indemnitee, but can be pursued independently from any other proceeding involving a Tax liability of such Tax Indemnitee for which the Lessee has not agreed to indemnify such Tax Indemnitee or (z) the Tax Indemnitee so requests, then the Lessee shall be permitted to control the contest of such Claim, provided that in the case of a contest described in any of clause (x), (y) or (z), if such Tax Indemnitee reasonably determines that such contest by the Lessee could have an adverse impact on the business or

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operations of the Tax Indemnitee and Tax Indemnitee provides notice to the Lessee of such determination, the Tax Indemnitee may elect to control or reassert control of the contest. In all other Claims requested to be contested by the Lessee, the Tax Indemnitee shall control the contest of such Claim, acting through counsel reasonably acceptable to the Lessee. In no event shall the Lessee be permitted to contest (or the Tax Indemnitee required to contest) any Claim, (A) if such Tax Indemnitee provides the Lessee with a legal opinion of independent counsel that such action, suit or proceeding involves a risk of imposition of criminal liability or will involve a meaningful risk of the sale, forfeiture or loss of, or the creation of any Lien (other than a Permitted Lien) on the Facility or any part thereof, unless the Lessee shall have posted and maintained a bond or other security reasonably satisfactory to the relevant Tax Indemnitee in respect to such risk, (B) if an Event of Default has occurred and is continuing, unless the Lessee shall have posted and maintained a bond or other security reasonably satisfactory to the relevant Tax Indemnitee in respect of the Taxes subject to such Claim and any and all expenses for which the Lessee is responsible hereunder reasonably foreseeable in connection with the contest of such Claim, (C) unless the Lessee shall have agreed to pay and shall pay (provided that during the Construction Period the Construction Agent shall request an Advance, the proceeds of which shall be used to pay) to such Tax Indemnitee on demand all reasonable out-of-pocket costs, losses and expenses that such Tax Indemnitee may incur in connection with contesting such imposition, including all reasonable legal, accounting and investigatory fees and disbursements as well as the impositions which are the subject of such Claim to the extent the contest is unsuccessful, or (D) if such contest shall involve the payment of the Tax prior to the contest, unless the Lessee shall provide to the Tax Indemnitee an interest-free advance in an amount equal to the Tax that the Tax Indemnitee is required to pay (with no additional net after-Tax costs (including Taxes) but taking into account any net Tax savings associated with such advance to such Tax Indemnitee). In addition, for Tax Indemnitee controlled contests and Claims contested in the name of the Tax Indemnitee in a public forum, no contest shall be required: (A) unless the amount of the potential indemnity (taking into account all similar or logically related Claims that have been or could be raised in any audit involving such Tax Indemnitee for which the Lessee may be liable to pay an indemnity under this Section 9.2) exceeds $100,000 and (B) unless, if requested by the Tax Indemnitee, the Lessee shall have provided to the Tax Indemnitee an opinion of independent Tax counsel selected by the Tax Indemnitee and reasonably acceptable to the Lessee) that there is a "realistic possibility of success" for such contest under Applicable Laws and the standards of ABA Formal Opinion 85-352 or, in the case of an adverse judicial determination, that a substantial likelihood exists for a reversal or substantial modification of such decision on appeal. In no event shall a Tax Indemnitee be required to appeal an adverse judicial determination to the United States Supreme Court.

        The party conducting the contest shall consult in good faith with the other party and its counsel with respect to the contest of such Claim for Taxes (or Claim for refund) but the decisions regarding what actions to be taken shall be made by the controlling party in its sole judgment, provided, however, that if the Tax Indemnitee is the controlling party and the Lessee recommends the acceptance of a settlement offer made by the relevant Governmental Authority and such Tax Indemnitee rejects such settlement offer, then the amount for which the Lessee will be required to indemnify such Tax Indemnitee with respect to the Taxes subject to such offer shall not exceed the amount which it would have owed if such settlement offer had been accepted. In addition, the controlling party shall keep the non-controlling party reasonably informed as to the progress of the contest, and shall provide the non-controlling party with a copy of (or appropriate excerpts from) any reports or Claims issued by the relevant auditing agents or Taxing authority to the controlling party thereof, in connection with such Claim or the contest thereof.

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        Each Tax Indemnitee shall supply the Lessee with such information and documents within such Tax Indemnitee's possession reasonably requested by the Lessee as are necessary or advisable for the Lessee to participate in any action, suit or proceeding to the extent permitted by this Section 9.2(b), and the Lessee shall promptly reimburse such Tax Indemnitee for the reasonable out-of-pocket expenses of supplying such information and documents.

        Notwithstanding anything contained herein to the contrary, a Tax Indemnitee will not be required to contest (and the Lessee shall not be permitted to contest) a Claim with respect to the imposition of any Tax if (i) such Tax Indemnitee shall waive its right to indemnification under this Section 9.2 with respect to such Claim and shall pay to the Lessee any amount previously paid or advanced by the Lessee pursuant to this Section 9.2 or (ii) such Tax is the sole result of a Claim of a continuing and consistent nature, which Claim has previously been resolved against the relevant Tax Indemnitee (unless a change in law or facts has occurred since such prior adverse resolution and the Lessee provides, at the Lessee's expense, an opinion of independent Tax counsel reasonably acceptable to such Tax Indemnitee to the effect that it is more likely than not that such change in law or facts will result in a favorable resolution of the Claim at issue).

        Upon receipt by a Tax Indemnitee of a refund or credit of all or part of any Taxes paid or indemnified against by the Lessee, which refund or credit was not previously taken into account in determining the amount of the Lessee's payment to such Tax Indemnitee, such Tax Indemnitee shall pay to the Lessee, on a grossed-up basis as set forth in Section 9.4(b), an amount equal to the amount of such refund, plus any interest received by or credited to such Tax Indemnitee with respect to such refund; provided, however, that as long as an Event of Default is continuing any such amounts may be applied against any amounts due and owing by the Lessee under the Lease or the other Operative Documents; provided, further, however, that no Tax Indemnitee shall be required to pay to the Lessee any refund or credit to the extent such refund or credit is greater than the amount of Taxes in respect of which payment or indemnification was made by the Lessee or is then due from the Lessee, reduced by all prior payments by such Tax Indemnitee under this Section 9.2(c) in respect of such amount. If such repaid refund or credit is thereafter lost, the additional Tax payable shall be treated as a Tax indemnifiable hereunder without regard to the exclusions from indemnified Taxes set forth in Section 9.2(a).

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        SECTION 9.3.    Withholding Tax.    

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        SECTION 9.4.    Calculation of General Tax Indemnity Payments.    (a) Any payment or indemnity to or for the benefit of any Tax Indemnitee with respect to a Tax which is subject to indemnification under Section 9.2(a) shall (A) (other than payment of Taxes to applicable Governmental Authorities) reflect the actual current net savings available to such Tax Indemnitee or any Affiliate thereof resulting from the current deduction of such indemnified Tax or the event or circumstance giving rise thereto (such

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current net savings to be determined on an incremental basis after taking into account all other available deductions of the Tax Indemnitee) and (B) include, after taking into account the savings described in clause (A), the amount necessary to hold such Tax Indemnitee harmless on an After-Tax Basis; provided that, at the request of the Lessee, a Tax Indemnitee will certify to the Lessee the extent, if any, to which such Tax Indemnitee was able to use currently such deduction on its Tax return. If, by reason of any payment made to or for the account of a Tax Indemnitee by Lessee pursuant to Section 9.2, or the event or circumstance giving rise to such payment, such Tax Indemnitee or an Affiliate actually realizes a net Tax benefit, savings, deduction or credit not taken into account in computing such payment, such Tax Indemnitee shall promptly pay to the Lessee an amount equal to the sum of (x) the actual net reduction in Taxes, if any, realized by such Tax Indemnitee or any Affiliate thereof attributable to such net Tax benefits, savings, deduction or credits and (y) the actual net reduction in any Taxes realized by such Tax Indemnitee or an Affiliate as the result of any payment made by such Tax Indemnitee pursuant to this sentence; provided that, no Tax Indemnitee shall be obligated to make any payment pursuant to clause (x) of this Section 9.4(a) to the extent that the amount of such payment would exceed (1) the amount of all prior payments of Tax or payments under Section 9.2(c) paid by the Lessee to or on behalf of such Tax Indemnitee pursuant to this Section 9.4 less (2) the amount of all prior payments pursuant to this Section 9.4(a) and described in clause (x) by such Tax Indemnitee to the Lessee; but any such excess shall reduce pro tanto any amount of Taxes under Section 9.2 that the Lessee is subsequently obligated to pay directly to such Tax Indemnitee (as opposed to directly to any Taxing authority pursuant to the first sentence of Section 9.2(c)) pursuant to this Section 9.4; provided, further, that as long as an Event of Default is continuing any such repayment may be applied against any amounts due and owing by the Lessee under the Lease or other Operative Documents.

        SECTION 9.5.    Environmental Indemnity.    Without limitation of the other provisions of this Article IX, the Lessee hereby agrees to indemnify, hold harmless and defend each Indemnitee from and against any and all Claims (including claims for natural resources damages and third party claims for personal injury or real or personal property damage), losses, damages, liabilities, fines, penalties, charges, administrative and judicial proceedings (including informal proceedings) and orders,

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judgments, remedial action, requirements, enforcement actions of any kind, and all reasonable and documented third party costs and expenses incurred in connection therewith (including, but not limited to, reasonable and documented attorneys', paralegals', experts' and/or consultant's fees and expenses), including, but not limited to, all costs incurred in connection with any investigation or monitoring of site conditions or any clean-up, remedial, removal or restoration work by any federal, state or local government agency, or judicial proceeding, arising in whole or in part, out of:

provided, however, the Lessee and Construction Agent shall not be required to indemnify any Indemnitee under this Section 9.5 for (1) any Claim to the extent resulting from the willful misconduct or gross negligence of an Indemnitee, or any Affiliate of such Indemnitee (it being understood that the Lessee shall be required to indemnify an Indemnitee even if the ordinary (but not gross) negligence of such Indemnitee, or any Affiliate of such Indemnitee, caused or contributed to such Claim) or (2) any Claim to the extent attributable to acts or events which occur after the expiration of the Lease Term or earlier termination of the Lease and the return of the Facility by the Lessee in accordance with the terms thereof (except (A) to the extent fairly attributable to acts, events, liabilities or damages occurring or accruing prior thereto; (B) Claims arising following the termination or expiration of the Lease Term so long as any Agent or any Participant continues to exercise remedies against the Lessee in respect of the Operative Documents and (C) Claims arising after the expiration of the Lease Term so long as the Lessor is remarketing the Facility (or any interest therein) in accordance with Section 7.1 of the Lease). It is expressly understood and agreed that the indemnity provided for herein shall survive the expiration or termination of, and shall be separate and independent from any remedy under, the Lease or any other Operative Document.

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        SECTION 9.6.    Proceedings in Respect of Claims.    With respect to any amount that the Lessee is requested by an Indemnitee to pay by reason of Section 9.1 or 9.5, such Indemnitee shall, if so requested by the Lessee and prior to any payment, submit such additional information to the Lessee as the Lessee may reasonably request and which is in the possession of such Indemnitee to substantiate properly the requested payment.

        In case any action, suit or proceeding shall be brought against any Indemnitee in respect of a Claim covered by the Lessee's indemnification obligations, such Indemnitee shall promptly notify the Lessee of the commencement thereof, and the Lessee shall be entitled, at its expense, to participate in, and, to the extent that the Lessee desires to, assume and control the defense thereof; provided, however, that the Lessee shall keep such Indemnitee fully apprised of the status of such action, suit or proceeding and shall provide such Indemnitee with all information with respect to such action, suit or proceeding as such Indemnitee shall reasonably request, and provided, further, that the Lessee shall not be entitled to assume and control the defense of any such action, suit or proceeding if and to the extent that, (A) in the reasonable opinion of such Indemnitee, (x) such action, suit or proceeding involves any risk of imposition of criminal liability or creates a material risk of the sale, loss or forfeiture of the Facility or impairs in any way the payment of Base Rent or Supplemental Rent or the Lien of the Mortgage or gives rise to the creation of any Lien other than a Permitted Lien with respect to the Facility or any portion thereof or (y) the control of such action, suit or proceeding would involve an actual or potential conflict of interest (as set forth in a written legal opinion of independent counsel to such Indemnitee (based on factual determinations set forth in a certificate furnished by such Indemnitee to its counsel, upon which certificate counsel to such Indemnitee may rely), which opinion shall be reasonably satisfactory to the Lessee), (B) such proceeding involves material Claims not fully indemnified by the Lessee which the Lessee and the Indemnitee have been unable to sever from the indemnified Claim(s), (C) an Event of Default has occurred and is continuing or (D) the Lessee has not acknowledged in writing that such Claim is fully indemnified by the Lessee hereunder. The Indemnitee may participate in a reasonable manner at its own expense with its own counsel in any proceeding conducted by the Lessee in accordance with the foregoing. The Lessee may enter into any settlement or other compromise on behalf of the Indemnitee with respect to any Claim which is entitled to be indemnified under Section 9.1 or 9.5, and which the Lessee has acknowledged its obligation to indemnify, without the prior written consent of the Indemnitee, except as to any settlement or compromise requiring the performance of any obligation by the Indemnitee (unless such obligation can be performed by the Lessor) or an admission of wrongdoing or liability of such Indemnitee.

        Each Indemnitee shall, at the sole expense of the Lessee (provided that during the Construction Period the Construction Agent shall request an Advance, the proceeds of which shall be used to pay such expenses), supply to the Lessee such information, documents and the identity of witnesses reasonably requested by the Lessee as are necessary or advisable for the Lessee to participate in any action, suit or proceeding to the extent permitted by this Section 9.6 and which are reasonably available to such Indemnitee. Unless a Lease Event of Default or Construction Agency Event of Default or any other Event of Default caused by a Lease Default or Construction Agency Default has occurred and is continuing, no Indemnitee shall enter into any settlement or other compromise with respect to any Claim which is entitled to be indemnified under Section 9.1 or 9.5 without the prior written consent of the Lessee, which consent shall not be unreasonably withheld, unless such Indemnitee waives its right to be indemnified under Section 9.1 or 9.5 with respect to such Claim.

        Upon payment in full of any Claim by the Lessee pursuant to Section 9.1 or 9.5 to or on behalf of an Indemnitee, the Lessee, without any further action, shall be subrogated to any and all claims that such Indemnitee may have relating thereto (other than claims in respect of insurance policies maintained by such Indemnitee at its own expense), and such Indemnitee shall execute such instruments of assignment and conveyance, evidence of claims and payment and such other documents,

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instruments and agreements as may be necessary to preserve any such claims and otherwise cooperate with Lessee and give such further assurances as are necessary or advisable to enable Lessee vigorously to pursue such claims, all at the Lessee's expense.

        Any amount payable to an Indemnitee pursuant to Section 9.1 or 9.5 shall be paid to such Indemnitee promptly upon receipt of a written demand therefor from such Indemnitee, accompanied by a written statement describing in reasonable detail the basis for such indemnity and the computation of the amount so payable.

        Any Construction Agency Indemnitee shall be deemed an "Indemnitee" for purposes of this Section 9.6.

        SECTION 9.7.    Additional Costs; Capital Adequacy.    The Lessee shall pay (provided that during the Construction Period the Construction Agent shall request an Advance, the proceeds of which shall be used to pay) the following amounts ("Increased Costs"):

        SECTION 9.8.    Illegality.    If at any time any Participant or its applicable lending office shall have determined in good faith (which determination shall be conclusive) that the making or maintenance of Eurodollar Loans has been made impracticable or unlawful because of compliance by such Participant in good faith with any law or the administration thereof by any official body charged with the interpretation or administration thereof or because U.S. dollar deposits in the amount and maturity of the Eurodollar Loans are not generally available in the London Eurodollar interbank market, then such Participant shall forthwith give the Lessee and Administrative Agent notice thereof and the obligation to continue the Eurodollar Loans shall terminate and the Lessee shall, at its option, convert the outstanding Eurodollar Loans into ABR Loans or prepay the Eurodollar Loans, such conversion or prepayment to become due, in the case of impracticability, on the last day of the Interest Period in effect at the time notice of impracticability is given and, in the case of illegality, on the last day of the

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last Interest Period to end prior to the effectiveness of the applicable change in law or such earlier date as may be required by the relevant law or regulation.

        SECTION 9.9.    Compensation.    (a) If the Lessee funds directly or indirectly a prepayment of any Loan or Investor Amount on a day other than the last day of an Interest Period, or if a Loan or Investor Amount is not made on the Advance Date specified therefor (other than as a result of a default by such Participant), the Lessee shall pay (provided that during the Construction Period the Construction Agent shall request an Advance, the proceeds of which shall be used to pay) to a Participant upon its demand an amount which will compensate such Participant for any loss or expense incurred as a result of any such event in respect of funds obtained for the purpose of making or maintaining such Loan or Investor Amount (but not for any loss of profit in respect of any such event), provided, that payments under this Section 9.9 shall not be due to any Person entitled to payment by reason of Section 2.2.7.

        SECTION 9.10.    Obligations of the Lessee to Pay Certain Amounts.    During the Construction Period, the Construction Agent shall request Advances to pay (and Administrative Agent shall pay out of such Advances, as directed below), and during the Lease Term, the Lessee shall pay as Supplemental Rent under the Lease, all amounts described in this Section 9.10.

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        SECTION 9.11.    Indemnity Payments in Addition to Lease Obligations.    The Lessee acknowledges and agrees that its obligations to make indemnity payments under this Article IX are separate from, in addition to, and do not reduce, its obligation to pay Base Rent or any other payment required hereunder or under any other Operative Document in accordance with the provisions hereof and thereof.

        SECTION 9.12.    Right to Convert.    If the Lessee shall be required to make any payment to any Participant pursuant to Section 9.8, the Lessee shall have the right, upon not less than three Business Days' prior notice to such Participant, to cause the Lessor to convert the Loans or Investor Amount so affected to Loans or Investor Amounts bearing interest by reference to ABR.

        SECTION 9.13.    Mitigation.    Each Participant will use reasonable efforts to avoid or mitigate any increased cost, reduced receivable or obligation to prepay under Section 9.7 or 9.8 (including transferring the Loans or Investor Amounts, as applicable, to another applicable lending office or Affiliate of such Participant) unless, in the sole opinion of such Participant, such efforts could have an adverse effect upon it.


ARTICLE X

DISTRIBUTIONS OF PAYMENTS AND GROSS PROCEEDS

        In order to provide for the priority and allocation of payments received from the Lessee, Gross Sales Proceeds and the proceeds of the exercise of remedies by the Lessor, any Agent or any of the Participants pursuant to the Lease and the other Operative Documents, the parties hereto agree as follows:

        SECTION 10.1.    Agreement of Agents and Participants.    Pursuant to the Security Agreement, the Lessor Assignment of Lease and the other Security Documents, all of the payments (other than the Excluded Amounts) payable by the Lessee or the Construction Agent to the Lessor under the Lease or the Construction Agency Agreement or payable by the Lessor to the Lenders under the Notes, the Loan Agreements or any payments under this Participation Agreement or any other Operative Documents have been assigned to the Administrative Agent for the benefit of the Lenders, the Lessor and/or Investors, as applicable. Except as otherwise provided in Section 10.2 or Section 10.8, the Administrative Agent and the Collateral Agent hereby agree to distribute as set forth herein all payments, receipts and other consideration of any kind whatsoever (other than Excluded Amounts) received by the Administrative Agent and the Collateral Agent pursuant to the Security Agreement, the Lessor Assignment of Lease and any other Security Document, other than any such payments received after the Lease Term Expiration Date which shall be distributed by the Administrative Agent, upon receipt, in accordance with this Article X (it being understood that any such payment received on or before 1:00 p.m. (New York City time) in accordance with the provisions of the Lease, this Participation Agreement and the other Operative Documents shall be distributed by the Administrative Agent on the same Business Day as received to the extent practicable).

        SECTION 10.2.    Base Rent.    Subject to Section 10.8, each payment of Base Rent (and any payment of interest on overdue installments of Base Rent) shall be distributed by the Administrative Agent in accordance with Section 3.3 of the Lease as follows:

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        first, an amount equal to Loan Base Rent shall be distributed to the Breeds Account of the Conduit Loan Lender and to the Lenders to pay in full interest then due and owing on the Loans in accordance with the terms of the Loan Agreements, and

        second, an amount equal to the Investor Base Rent shall be distributed to each Investor to pay in full all accrued but unpaid Yield on the Investor Amounts then due and owing on such day (together with any overdue interest thereon).

        SECTION 10.3.    Purchase Payments by the Lessee.    Subject to Section 10.8, any payment on any day (other than payments with respect to Excluded Amounts and Base Rent) made by the Lessee pursuant to the Lease in connection with the purchase of the Facility or the Site in connection with the Lessee's exercise of its Purchase Option or Site Purchase Option under Section 5.1 of the Lease or an Event of Loss with respect to the Facility under Section 14.1(a)(i) of the Lease shall be distributed by Administrative Agent as follows:

        SECTION 10.4.    Recourse Amounts: Construction Period Maximum Guaranty Amount and Residual Value Guaranty Amount.    Subject to Section 10.8, (a) any payment on any day of the Construction Period Maximum Guaranty Amount pursuant to the Construction Agency Agreement, shall be distributed by the Administrative Agent as follows:

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        first, to the Lenders to repay in full the aggregate outstanding principal amount of the Loans,

        second, the balance to be distributed to each Investor to repay in full the Investor Amounts, and

        third, the balance, if any, to be distributed to the Lessee.

        SECTION 10.5.    Gross Sale Proceeds.    Subject to Section 10.8, any payments received by the Administrative Agent as Gross Sale Proceeds from the sale of the Facility and Equipment pursuant to the Remarketing Option shall be distributed by Administrative Agent in the following order of priority:

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The parties agree that any proposed Remarketing Option sale of the Facility at an amount that is less than the Lease Balance plus all other amounts owing to the Participants under the Operative Documents shall be subject to the prior written consent of all Lenders, all Investors and the Lessor.

        SECTION 10.6.    Supplemental Rent.    Any payment of Supplemental Rent received by the Administrative Agent for which no provision as to the application thereof is made elsewhere in this Article X shall be distributed immediately by Administrative Agent upon receipt thereof to the Persons entitled thereto pursuant to the Operative Documents.

        SECTION 10.7.    Excluded Amounts.    Notwithstanding any other provision of this Participation Agreement or the Operative Documents, any Excluded Amounts received at any time by any Agent or any Participant shall be distributed promptly to the Person entitled to receive such Excluded Amount pursuant to the Operative Documents.

        SECTION 10.8.    Distribution of Payments After Construction Agency Event of Default or Lease Event of Default.    Notwithstanding any other provision of this Article X, all payments (other than amounts distributable pursuant to Section 10.6 or 10.7) received and amounts realized by the Lessee, the Collateral Agent, the Administrative Agent, the Conduit Loan Lender, any other Participant, the Construction Agent or the Lessor after a Construction Agency Event of Default or Lease Event of Default has occurred and is continuing, including Base Rent and Gross Sales Proceeds from the sale of the Facility or any portion thereof or other collateral, proceeds of any amounts from any insurer or any Governmental Authority in connection with any loss, Casualty or Condemnation, shall be immediately paid to the Administrative Agent and shall be immediately distributed by the Administrative Agent, as follows (with the Participants agreeing that the direction and consent of all Lenders and all Investors shall be required prior to the foreclosure on (or other exercise of any remedy resulting in the Disposition of) the Facility or Equipment or any portion thereof):

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        SECTION 10.9.    Other Payments.    

shall be distributed forthwith by Administrative Agent in the order of priority set forth in Section 10.3 (in the case of any payment described in clause (i) above) or in Section 10.8(b) hereof (in the case of any payment described in clause (ii) above).

        SECTION 10.10.    Order of Application.    To the extent any payment made to any Lender or Investor pursuant to Section 10.3 or 10.8 is insufficient to pay in full the Loans or the Investor Amount, as the case may be, of such Person, then each such payment shall first be applied to overdue interest, then to accrued interest or Yield and then to principal or Investor Amount, as applicable.

        SECTION 10.11.    Remaining Funds.    Upon the termination or expiration of the Commitments and the payment in full of (i) the Loans, the Allocable Commercial Paper Notes, the Investor Amounts and all accrued and unpaid interest and Yield and (ii) all amounts due and owing by the Lessee to any Person under the Operative Documents, all remaining moneys held by Administrative Agent shall be paid to the Lessee.

        SECTION 10.12.    Time of Payment.    Except as otherwise provided in the Operative Documents, each payment due from the Lessee under the Operative Documents shall be made in immediately available funds prior to 1:00 p.m. (New York time) on the date when due in Dollars in immediately available funds, unless such date shall not be a Business Day, in which case payment shall be made on

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the next following Business Day (unless such next following Business Day is the first Business Day of a calendar month, in which case such payment shall be made on the Business Day next preceding such numerically corresponding day). Except as otherwise provided in the Operative Documents, payments received after 1:00 p.m. (New York time) shall be deemed received on the next succeeding Business Day.


ARTICLE XI

LESSEE, CONSTRUCTION AGENT DIRECTIONS; RECOURSE DURING CONSTRUCTION PERIOD

        SECTION 11.1.    Lessee Directions.    Notwithstanding anything to the contrary contained in the Operative Documents, the Lessor and the Participants agree that, so long as no Event of Default has occurred and is continuing which has caused the acceleration of the maturity of the Loans and the termination of the Commitments:

        SECTION 11.2.    Limitation on Recourse Liability During Construction Period.    Notwithstanding any other provision set forth in this Participation Agreement or any of the other Operative Documents, in the event of the occurrence of a Construction Agency Event of Default, the Lessee and Construction Agent shall not be required to pay with respect to the Lease Balance more than the Construction Period Maximum Guaranty Amount on a recourse basis with respect to any damages (which shall include Construction Breakage Costs and amounts payable by Construction Agent as Default Completion Costs) which arise from such Construction Agency Event of Default; provided, however, that the foregoing limitation shall not apply to (i) any Full Recourse Event of Default (in which event Construction Agent shall be required to pay the Lease Balance and all other sums then due and payable on a recourse basis), (ii) the rights of parties to seek all damages (excluding consequential and punitive damages), without regard to such limitation, from the proceeds of the Collateral or (iii) any Claim for indemnity covered by Article IX or under any other Operative Document.

        SECTION 11.3.    Notice to the Administrative Agent.    

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ARTICLE XII

MISCELLANEOUS

        SECTION 12.1.    Survival of Agreements.    All representations, warranties, covenants, indemnities and agreements of the parties provided for in the Operative Documents (including, without limitation, the indemnities set forth in Article IX), and the obligations of the parties under any and all thereof, shall survive the execution and delivery and the termination or expiration of the Lease and any of the other Operative Documents, the transfer of the Facility or any portion thereof as provided herein or in any of the other Operative Documents (and shall not be merged into any conveyance or transfer document), and shall be and continue in effect notwithstanding any investigation made by any party hereto or to any of the other Operative Documents and the fact that any such party may waive compliance with any of the other terms, provisions or conditions of any of the Operative Documents.

        SECTION 12.2.    Brokers.    The Lessee, the Construction Agent, the Lessor, each Lender, and each Agent each represents to the other that it has not retained or employed any broker, finder or financial advisor to act on their behalf in connection with the Overall Transaction, nor has it authorized any other broker, finder or financial adviser retained or employed by any other Person so to act, nor has it incurred any fees or commissions to which the Lessee, the Construction Agent, any Investor, the Lessor, any Lender or any Agent might be subjected by virtue of their entering into the transactions contemplated by this Participation Agreement. Any Person who is in breach of this representation shall indemnify and hold the other Persons harmless from and against any liability arising out of such breach of this representation. The provisions of this Section 12.2 shall survive the expiration or termination of this Participation Agreement or any other Operative Document.

        SECTION 12.3.    Notices.    Unless otherwise specified herein, all notices, requests, demands or other communications to or upon the respective parties hereto shall be by letter, facsimile (with telephonic confirmation), bank wire or where expressly provided for in the Operative Documents, telephone (with written confirmation promptly thereafter), and shall be deemed to have been given, in the case of notice by letter, the earlier of when delivered to the addressee by hand or courier (including an overnight courier) if delivered on a Business Day and, if not delivered on a Business Day, the first Business Day thereafter or on the third Business Day after depositing the same in the mails, registered or certified mail, postage prepaid, return receipt requested, addressed as provided on Schedule II and, in the case of notice by facsimile, telephone or bank wire, when transmitted during business hours on a Business Day and, if not transmitted during business hours on a Business Day, the first Business Day thereafter, addressed as provided on Schedule II, or to such other address as any of the parties hereto may designate by written notice. Copies of all notices given by facsimile or bank wire shall be contemporaneously sent by overnight courier. Notwithstanding any other provision of this Participation Agreement or the Operative Documents, if the Lessee or the Construction Agent is required to deliver notice to one or more of the parties to the Operative Documents notice to all such parties shall be deemed to have been duly given by the Lessee or the Construction Agent by delivering

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any such notice to the Administrative Agent, who shall in turn promptly deliver such notice to the appropriate party hereto.

        SECTION 12.4.    Counterparts.    This Participation Agreement and each of the other Operative Documents may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument.

        SECTION 12.5.    Amendments, Waivers and Instructions.    

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        SECTION 12.6.    Headings, etc.    The table of contents and headings of the various Articles and Sections of this Participation Agreement are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof.

        SECTION 12.7.    Third Party Beneficiaries.    Except as expressly provided herein, none of the provisions of this Participation Agreement or the other Operative Documents are intended for the benefit of any Person except the parties hereto and their permitted successors and assigns.

        SECTION 12.8.    Applicable Law.    THIS PARTICIPATION AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW BUT EXCLUDING TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW ALL OTHER CONFLICTS OF LAWS PRINCIPLES AND CHOICE OF LAW RULES OF NEW YORK.

        SECTION 12.9.    Severability.    Any provision of this Participation Agreement or any of the Operative Documents that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or thereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

        SECTION 12.10.    Limitation of Liability.    No Participant, no Agent or the Lessor, the Lessee or the Construction Agent shall have any obligation to any other Participant, any other Agent or the Lessor or other party hereto with respect to transactions contemplated by the Operative Documents, except those obligations of such Person expressly set forth in the Operative Documents or except as set forth in the instruments delivered in connection therewith, and no Person and no stockholder, employee, officer, director, beneficial owner, member, manager or incorporator thereof shall be liable for performance by any other party hereto of such other party's obligations under the Operative Documents except as otherwise so set forth. Each party hereto and its affiliates hereby waives and releases any claims, rights or causes of action it may have against any other party hereto arising in respect of the Overall Transaction for punitive or consequential damages.

        SECTION 12.11.    Further Assurances.    The parties hereto shall promptly cause to be taken, executed, acknowledged or delivered, at the sole expense of the Lessee (provided that during the Construction Period the Construction Agent shall request an Advance, the proceeds of which shall be used to pay such expense), all such further acts, conveyances, documents and assurances as the other

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parties may from time to time reasonably request in order to carry out and effectuate the intent and purposes of this Participation Agreement, the other Operative Documents and the transactions contemplated hereby and thereby (including to the extent permitted under the Operative Documents, the preparation, execution and filing of any and all UCC financing statements, fixture filings and other filings or registrations which the parties hereto may from time to time request to be filed or effected); provided, however, that the Lessee shall not be required to pay expenses pursuant to this Section 12.11 to the extent arising from a breach or alleged breach by the Lessor or a Participant of any representation, warranty or agreement unless such breach or alleged breach arose in whole or in part from an act or omission of the Lessee or the Construction Agent. The Lessee, at its own expense (provided that during the Construction Period the Construction Agent shall request an Advance, the proceeds of which shall be used to pay such expense) and without need of any prior request from any other party, shall take such actions as may be necessary (including any action specified in the preceding sentence), or (if a Participant shall so request) as so requested, in order to maintain and protect the Lessor's interest in the Facility provided for hereunder or under any other Operative Document.

        The Lessor shall from time to time execute and deliver all instruments of further assurance and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of the Lessor Assignment of Lease.

        At any time and from time to time, upon the reasonable written request of the Lessor and at the sole expense of the Lessee (provided that during the Construction Period the Construction Agent shall request an Advance, the proceeds of which shall be used to pay such expense), the Construction Agent shall promptly and duly execute and deliver such further instruments and documents and take such further actions as the Lessor reasonably may request for the purposes of obtaining or preserving the full benefits of the Mortgage and of the rights and powers granted by the Mortgage.

        Without limiting the foregoing, the Lessee agrees that it will, at its own cost and expense (provided that during the Construction Period the Construction Agent shall request an Advance, the proceeds of which shall be used to pay such cost and expense), cause financing statements (including precautionary financing statements and continuation statements), fixture filings and other documents, to be recorded or filed at such places and times in such manner, and will all such other actions or cause such other actions to be taken, as may be necessary or as may be reasonably requested by the Lessor, the Administrative Agent or the Collateral Agent in accordance with this Participation Agreement or the other Operative Documents in order to establish, continue, perfect and protect the title of the Lessor to the Facility and the rights of the Lessor and the Participants under the Lease and the other Operative Documents. To the extent permitted by Applicable Laws, the Lessee hereby authorizes any such financing statement and fixture filings to be filed without the necessity of the signature of the Lessee.

        SECTION 12.12.    Reproduction of Documents.    This Participation Agreement and all other Operative Documents, all documents constituting Schedules or Exhibits hereto or thereto, and all documents relating hereto or thereto received by any Participant or party hereto, including: (a) consents, waivers and alterations that may hereafter be executed; (b) documents received by such Participant or party in connection with the receipt and/or acquisition of the Facility; and (c) financial statements, certificates, and other information previously or hereafter furnished to such Participant or party may be reproduced by such Participant or party receiving the same by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. Each party agrees and stipulates that, to the extent permitted by law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by such party in the regular course of business) and that, to the extent permitted by law, any enlargement, facsimile, or further reproduction of such reproduction shall likewise be admissible in evidence.

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        SECTION 12.13.    Submission to Jurisdiction.    Each party to this Participation Agreement irrevocably and unconditionally:

        SECTION 12.14.    Jury Trial.    EACH PARTY TO THIS PARTICIPATION AGREEMENT WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS PARTICIPATION AGREEMENT OR ANY OTHER OPERATIVE DOCUMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS PARTICIPATION AGREEMENT OR ANY OTHER OPERATIVE DOCUMENT AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

        SECTION 12.15.    Appointment of Administrative Agent.    

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