-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UmdjYKZ+JDP+z5R8XJKba+r3DT3jerv0VkFDt+5T1O3ifQ8mrWiJ+Fd9AuR+0Rbc DTzXY1TWDl90pdult+UFaw== 0000950144-99-004643.txt : 19990420 0000950144-99-004643.hdr.sgml : 19990420 ACCESSION NUMBER: 0000950144-99-004643 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990419 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOME DEPOT INC CENTRAL INDEX KEY: 0000354950 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-LUMBER & OTHER BUILDING MATERIALS DEALERS [5211] IRS NUMBER: 953261426 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08207 FILM NUMBER: 99596451 BUSINESS ADDRESS: STREET 1: 2455 PACES FERRY ROAD CITY: ATLANTA STATE: GA ZIP: 30339-4024 BUSINESS PHONE: 770-433-8211 MAIL ADDRESS: STREET 1: 2455 PACES FERRY ROAD CITY: ATLANTA STATE: GA ZIP: 30339-4024 10-K405 1 THE HOME DEPOT,INC 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-8207 THE HOME DEPOT, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE (State or Other Jurisdiction of Incorporation or Organization) IRS NO. 95-3261426 (I.R.S. Employer Identification No.) 2455 PACES FERRY ROAD, ATLANTA, GEORGIA (Address of Principal Executive Offices) 30339-4024 (Zip Code) Registrant's telephone number, including area code: (770) 433-8211 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- Common Stock, $.05 Par Value New York Stock Exchange 3 1/4% Convertible Subordinated Notes New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X - The aggregate market value of the Common Stock of the Registrant held by nonaffiliates of the Registrant on March 29, 1999, was $89,324,866,932. The aggregate market value was computed by reference to the closing price of the Common Stock on the New York Stock Exchange on such date. For the purposes of this response, executive officers and directors are deemed to be the affiliates of the Registrant and the holdings by nonaffiliates was computed at 1,392,980,381 shares. The number of shares outstanding of the Registrant's Common Stock as of March 29, 1999 was 1,478,633,371 shares. 2 INCORPORATION BY REFERENCE Filings made by companies with the Securities and Exchange Commission sometimes "incorporate information by reference." This means that the company is referring you to information that was previously filed with the SEC, and this information is considered to be part of the filing you are reading. The following materials are incorporated by reference into this Form 10-K: - Information contained in our Proxy Statement for the 1999 Annual Meeting of Stockholders is incorporated by reference in response to Items 10 through 13 of Part III. - Information contained on pages 22 through 35 of our 1998 Annual Report to Stockholders is incorporated by reference in response to Items 6 and 8 of Part II. FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE Certain statements we make in this report, and other written and oral statements made by us or our authorized executive officers on our behalf may constitute "forward-looking statements" within the meaning of the federal securities laws. Words or phrases such as "should result," "are expected to," "we anticipate," "we estimate," "we project" or similar expressions are intended to identify forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company's historical experience and its present expectations or projections. These risks and uncertainties include, but are not limited to: - - conditions affecting the availability, acquisition, development and ownership of real estate; - - unanticipated weather conditions; - - stability of costs and availability of sourcing channels; - - our ability to attract, train and retain highly-qualified associates; - - year 2000 problems; - - general economic conditions; - - the impact of competition; and - - regulatory and litigation matters. You should not place undue reliance on forward-looking statements, since such statements speak only as of the date they are made. Additional information concerning the risks and uncertainties listed above and other factors you may wish to consider are provided on page 24 under "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition - Forward-Looking Statements May Prove Inaccurate." 3 PART I ITEM 1. BUSINESS The Home Depot, Inc. is the leading retailer in the home improvement industry and ranked among the ten largest retailers in the United States based on net sales volume for fiscal 1998. At the end of our fiscal year, we were operating 761 retail stores, which includes 753 Home Depot(R) stores and eight EXPO Design Center(SM) stores. A description of these two types of stores is as follows: - HOME DEPOT STORES: Home Depot stores sell a wide assortment of building materials and home improvement and lawn and garden products. Home Depot stores average approximately 107,000 square feet of enclosed space, with an additional approximately 24,000 square feet in the outside garden area. At fiscal year end, we had Home Depot stores located throughout the United States and Canada, as well as in Puerto Rico and Chile. - EXPO DESIGN CENTER STORES: EXPO Design Center stores sell products and services primarily for design and renovation projects. Unlike Home Depot stores, EXPO Design Center stores do not sell building materials and lumber. Rather, EXPO Design Center stores offer high-end interior design products, such as kitchen and bath cabinetry, tiles, flooring and lighting fixtures. The prototypical EXPO Design Center is approximately 92,000 square feet. At fiscal year end, EXPO Design Center stores were operating in California, Florida, Georgia, New York and Texas. We also offer products through direct marketing. Our Maintenance Warehouse(R) subsidiary is a leading direct mail marketer of maintenance, repair and operations products serving primarily the multi-family housing and lodging facilities management market. Our National Blinds & Wallpaper(SM) subsidiary is a telephone mail order service for wallpaper and custom window treatments. Our Store Support Center (corporate office) is located at 2455 Paces Ferry Road, Atlanta, Georgia 30339-4024. The telephone number is (770) 433-8211. RETAIL BUSINESSES HOME DEPOT STORES OPERATING STRATEGY. The operating strategy for Home Depot stores is to offer a broad assortment of high-quality merchandise at competitive prices using highly knowledgeable, service-oriented personnel and aggressive advertising. We believe that our associates' knowledge of products and home improvement techniques and applications are very important in our marketing approach and our ability to maintain customer satisfaction. We regularly check our competitors' prices to ensure that our low "day-in day-out" warehouse prices are competitive within each market. 4 CUSTOMERS. Home Depot stores serve three primary customer groups: - D-I-Y (DO-IT-YOURSELF) CUSTOMERS: These customers are typically homeowners who purchase products and complete their own projects and installations. To complement the in-store expertise of our associates, Home Depot stores offer many D-I-Y "how-to" clinics taught by associates and merchandise vendors. - B-I-Y (BUY-IT-YOURSELF) CUSTOMERS: These customers are typically homeowners who purchase materials themselves and hire third parties to complete the project and/or installation. We offer B-I-Y customers installation services for a variety of products through third party contractors. - PROFESSIONAL CUSTOMERS: These customers are professional remodelers and commercial users. To increase sales to professional customers, we are testing a variety of programs, including expanded commercial credit programs, delivery services and incremental, dedicated staff. PRODUCTS. A typical Home Depot store stocks approximately 40,000 to 50,000 product items, including variations in color and size. Each store carries a wide selection of high-quality and nationally advertised brand name merchandise. The following table shows the percentage of sales of each major product group for each of the last three fiscal years:
Percentage of Sales for Fiscal Year Ended -------------------------------- Jan. 31, Feb. 1, Feb. 2, 1999 1998 1997 -------- ------- ------- Product Group Building materials, lumber, floor and wall coverings.......... 34.1% 34.2% 34.0% Plumbing, heating, lighting and electrical supplies........... 26.8 27.1 27.4 Seasonal and specialty items.................................. 15.0 14.8 14.7 Hardware and tools............................................ 13.6 13.5 13.4 Paint and other............................................... 10.5 10.4 10.5 ----- ----- ----- Total.................................................... 100.0% 100.0% 100.0% ===== ===== =====
We buy our store merchandise from vendors located throughout the world. No single vendor accounts for as much as five percent of our total purchases, and we are not dependent on any single vendor. Most of our merchandise is purchased directly from manufacturers, which eliminates "middleman" costs. We believe that competitive sources of supply are readily available for substantially all of the products we sell in Home Depot stores. We maintain an import merchandise program to find high-quality products to import from overseas to give our customers a broader selection of products and better values and to enhance our sales margins. Our product development managers travel internationally to identify 2 5 opportunities to purchase items directly for our stores. This enables us to import products not currently available to our customers, to offer at a lower price products that would otherwise be purchased from third party importers and to improve product quality. To complement the full range of established national brand name products we offer, we have formed strategic alliances with vendor partners to market products under brand names that are only offered through The Home Depot. At the end of fiscal year 1998, we offered products under more than 40 proprietary brands, including RIDGID(R) power tools; Scotts(R) mowers; GE SmartWater(TM) water heaters manufactured by Rheem(R); Husky(R) mechanics' tools; and Hampton Bay(TM) fans, lighting and accessories. In the future, we may strategically consider additional opportunities to align with other vendors to offer products under proprietary brand names. Additionally, we will continue to assess opportunities to expand the range of products available under existing proprietary brands. INSTALLED SALES SERVICES. Home Depot stores offer a variety of installed sales programs. These programs include the installation of flooring, kitchen cabinets, solid surface countertops, millwork, garage doors, window treatments and water heaters. This service targets the B-I-Y customer who will select and purchase materials for a project but lacks either the desire or the ability to undertake the installation. We implement our installed sales programs through approximately 4,500 independent licensed contractors in the U.S. and Canada. IN-STORE INITIATIVES. We continually assess our business to find opportunities to increase sales. Accordingly, we implemented or expanded a number of in-store initiatives in Home Depot stores during fiscal 1998, including: - Professional Business Customer Test. We are committed to having Home Depot stores be the supplier of choice to a variety of professional customers, including remodelers, carpenters, plumbers, electricians, building maintenance professionals and designers. During fiscal 1997 and 1998, in stores in the Austin, Texas and Las Vegas, Nevada markets, we began testing the impact of adding additional products and service-related programs designed to increase sales to professional customers. These stores added associates dedicated to providing more personalized service to professional customers, including associates to manage accounts and to take and fill orders for pick-up or same-day delivery. Additionally, during the hours when professionals typically shop, they added sales associates in certain departments to assist these customers. We also added new product lines to our inventory and increased quantities of existing products purchased by professionals in bulk quantities to better serve our professional customers. We anticipate that during fiscal 1999 the test will be expanded into, and customized for, additional markets. Through this test, we have identified best practices in serving our professional customers that are being implemented in many of our stores without material additional costs. - Tool Rental. As part of our efforts to satisfy a broad range of the needs of our professional customers, as well as our D-I-Y customers, we have begun offering a 3 6 tool rental service in some of our stores. Under this program, we rent approximately 200 commercial-quality tools in ten categories, including saws, floor sanders, generators, gas powered lawn equipment and plumbing tools. Customers can lease the tools on an hourly, daily, weekly or monthly basis. Our associates who work in the tool rental area receive special training concerning the use and maintenance of the tools. In fiscal 1998, we opened tool rental facilities in selected major markets in each of our divisions, and, as of our fiscal year end, we offered the service in 46 stores. During fiscal 1999, we anticipate expanding tool rental services into additional stores. We believe that offering this service increases the sales of related merchandise without reducing the sales of equipment similar to that available for rental. - Load 'N Go(R). The Load 'N Go program, which is known as Home Express(R) in our Canadian stores, offers pickup truck rentals at low hourly rates to those customers who are unable to transport their purchases in their own vehicles and who choose to forego the regular delivery service offered by the stores. The program gives our customers the ability to buy and transport large items or large quantities of items at the time of purchase. We believe that this service increases our sales while reducing delivery expenses and making our delivery trucks available for deliveries to our professional customers. By the end of fiscal 1998, Load 'N Go was available in approximately 560 Home Depot stores, an increase from the approximately 300 stores in which the service was available at the end of fiscal 1997. We anticipate expanding this service to approximately 130 additional stores during fiscal 1999. - Special Order Center Test. We are currently testing the special order center, or SOC, in approximately 35 Home Depot stores in Michigan and Minnesota. The SOC supports special order sales of blinds and wallpaper, which are time intensive due to the precise measurements that are required. Customers are initially helped in selecting merchandise by in-store associates, but when they are ready to place an order, they use telephones placed in the store to speak to an associate at the SOC. The SOC associate can also assist with scheduling the installation of the product. We believe that because of the special expertise offered by the SOC, it increases the accuracy of orders, while decreasing the time required to place a special order and enabling in-store associates to help more customers. We anticipate expanding the SOC test during fiscal 1999 and researching how the SOC may support other Home Depot special order processes. - Customer Education Programs. We offer several programs to enhance the skills and confidence of our D-I-Y customers. Our associates and vendors teach "how-to" clinics, which focus on D-I-Y projects, such as installing garbage disposals, laying patio pavers or building a deck. In addition to the clinics, we have initiated Home Depot University(SM), which was available in approximately 90 stores at the end of fiscal 1998. Home Depot University presents four-week modules allowing our customers to learn about several facets of a home improvement topic. For example, a 4 7 room enhancement module may provide instruction on paint, wallpaper and window treatments. We anticipate that Home Depot University will be expanded to additional stores during fiscal year 1999. Through The Home Depot Kids Workshop(SM) program, children are instructed in tool safety and complete a small project, such as building a birdhouse or tool box. We believe that these types of educational programs increase our sales by encouraging our customers to undertake more projects, differentiating us from our competition and reinforcing our position as experts in home improvement. U.S. STORE GROWTH. At the end of fiscal 1998, we were operating 707 Home Depot stores in the United States. During fiscal 1998, in the United States we opened 121 new Home Depot stores, relocated four existing Home Depot stores and closed one store, which will be reopened in the same location during fiscal 1999. Although these new store openings occurred primarily in existing markets, we continued our geographic expansion by opening stores in a number of new markets. In existing markets, we believe a number of Home Depot stores are operating at or above their optimum capacity. To enhance long-term market penetration, we often open new stores near the edge of the market areas served by existing stores. While these openings may initially have a negative impact on comparable store-for-store sales, we believe this "cannibalization" strategy increases customer satisfaction and overall market share by reducing delays in shopping, increasing utilization by existing customers and attracting new customers to more convenient locations. We currently anticipate opening approximately 167 new stores in fiscal 1999. This plan is consistent with our policy of opening stores at a consistent rate of 21-22% per year for the forseeable future. Overall, our current plan anticipates having over 1,600 stores by the end of fiscal 2002, the substantial majority of which will be Home Depot stores located in the United States. INTERNATIONAL MARKETS. At the end of fiscal 1998, Home Depot stores were operating in the following international markets: Canada. At the end of fiscal 1998, we were operating 43 Home Depot stores in five Canadian provinces. Of these stores, eleven were opened during fiscal 1998. We currently anticipate opening eleven new Home Depot stores in Canada in fiscal 1999. During the first quarter of fiscal 1998, we purchased for $261 million the remaining 25% partnership interest in The Home Depot Canada partnership previously owned by The Molson Companies. Our Canadian stores are now operated through Home Depot of Canada, Inc., a wholly owned subsidiary of The Home Depot. Latin America. During fiscal 1998, we opened our first two Home Depot stores in Latin America in Santiago, Chile. We expect to open two additional Home Depot stores in Chile during fiscal 1999. We operate our Chilean Home Depot stores through a joint venture with S.A.C.I. Falabella, a leading department store retailer in Chile. Our controlling share of the 5 8 joint venture is 66.67%. We believe our alliance with Falabella enhances our presence in the Chilean market by offering attractive real estate opportunities and providing assistance with, among other things, information systems, credit marketing and distribution logistics. We have offices in Chile from which the day-to-day management of the operation is handled by a management team comprised of both Chilean nationals and seasoned Home Depot managers. We expect to open our first Home Depot store in Buenos Aires, Argentina during fiscal 2000. We anticipate opening offices in Argentina to manage the operation of the business. Puerto Rico. We opened our first Home Depot store in San Juan, Puerto Rico in September 1998. We expect to open an additional store in Puerto Rico in fiscal 1999. EXPO DESIGN CENTER STORES OPERATING STRATEGY. The operating strategy for our EXPO Design Center stores is to offer complete interior design services and high-quality, competitively priced products to assist our customers in their home decor and remodeling projects. Each EXPO Design Center store features up to eight different showrooms, each with complete, full-size displays to help customers visualize the end result of possible projects. To assist our customers, we employ associates who have expertise in planning and completing projects and who provide exceptional customer service. CUSTOMERS. Typically, customers at EXPO Design Center stores are middle to upper income B-I-Y customers, who purchase merchandise for installation by others. Accordingly, we offer installation services for most of the products we sell. PRODUCTS. EXPO Design Center stores offer interior design products and installation services in the following core product categories: - Kitchens - Baths - Decor - Lighting - Flooring - Appliances - Patio EXPO Design Center stores offer a broad range of merchandise in an effort to meet all the needs of shoppers whose interior design preferences may go beyond the items available in a Home Depot store. While there is some overlap between the products offered in Home Depot stores and EXPO Design Center stores, those available at EXPO Design Center stores are typically higher-end or more unusual items. In addition to nationally advertised brand name products, we also offer items that must be special ordered or that are typically offered through showrooms open only to design professionals. 6 9 STORE GROWTH. At the end of fiscal 1998, we were operating eight EXPO Design Center stores in San Diego, California; Boynton Beach, Davie and Miami, Florida; Atlanta, Georgia; Westbury, New York; and Dallas (two stores), Texas. We opened three of these stores during fiscal 1998. We currently anticipate opening seven additional stores in fiscal 1999, including stores in Houston, Texas, Fairfax, Virginia and Huntington Beach, California, and we expect to be operating approximately 200 stores in the next five to seven years. These new stores are expected to average approximately 92,000 square feet and will incorporate lowered ceilings and muted lighting, rather than a warehouse environment. IN-STORE SERVICES. We have associates at our EXPO Design Center stores to assist with every phase of a project. Certified kitchen and bath designers are on staff. We also have design professionals to help our customers design lighting, tile and flooring, custom upholstery and bedding, and custom closets and window treatments. Installation services are available for most products at EXPO Design Center stores, including kitchens, baths, flooring, wallpaper, tile, lighting fixtures and window treatments. Our project managers ensure that the products are available and then schedule licensed third party contractors to complete the work. We warrant the workmanship of each installation for as long as the customer owns the home. VILLAGER'S HARDWARE(SM) STORES During fiscal 1999, we plan to test and develop the Villager's Hardware store concept by opening the first of four stores in New Jersey. These stores will stock approximately 35,000 to 40,000 items, including variations in color and size, including hardware, fasteners, tools, plumbing, electrical and seasonal, as well as a broad selection of home enhancement products, including paint and wallpaper, window treatments, lighting, storage, housewares and giftware. We believe that the primary focus for these stores will be home enhancement and small projects. Each Villager's Hardware store is expected to have approximately 30,000 to 40,000 square feet of selling space in a retail environment, emphasizing customer service and education. DIRECT MARKETING SALES We have two subsidiaries that sell merchandise through direct marketing: - MAINTENANCE WAREHOUSE. Our Maintenance Warehouse subsidiary is a leading provider of maintenance, repair and operations products to the multi-family housing and lodging facilities management market. Through its catalog, which is published semi-annually, Maintenance Warehouse offers approximately 11,750 items, including variations in color and size. Maintenance Warehouse emphasizes accurate order taking and delivery and personalized service, and the company employs approximately 600 people. Orders are typically placed over the telephone, filled through one of Maintenance Warehouses' 13 distribution centers and shipped for next-day delivery. 7 10 - NATIONAL BLINDS & WALLPAPER, INC. National Blinds and Wallpaper, Inc. sells decor products through telephone sales. The company, which is one of the leaders in its industry, markets primarily through magazine advertising aimed at customers seeking the lowest prices. The company maintains no inventory, but rather acts as a broker to fill special order sales. STORE SUPPORT SERVICES INFORMATION SYSTEMS. Each Home Depot and EXPO Design Center store is equipped with a computerized point of sale system, electronic bar code scanning system and a UNIX server. Store information is communicated to the Store Support Center's computers via a land-based frame relay network. These computers provide corporate, financial, merchandising and other back office function support. We believe our systems provide efficient customer check-out (with a greater than 90% rate of scannable products), store-based inventory management, rapid order replenishment, labor planning support and item movement information. Fast registers, credit authorizations and check approvals expedite transactions in our stores at a pace that we believe sets the standard for our industry. For example, to better serve the increasing number of customers applying for credit, the charge card approval process time has been reduced to less than 30 seconds. We have implemented a mobile ordering system in our Home Depot stores using portable carts with computers to assist our associates in placing accurate orders for inventory. Through the system, an associate on the sales floor can see the supply the store has for a given item, review the suggested re-order quantities based on the store's historical experience and place an order with the vendor. We believe the system increases the efficiency and productivity of our associates because it requires less time and fewer people to assess and order inventory. We are continuously assessing and upgrading our information systems to support growth, reduce and control costs and enable our associates to make better decisions. We continue to realize greater efficiency as a result of our electronic data interchange program. Currently, most of our high volume vendors are participating in the EDI program, which represents more than 75% of our total volume. EDI is a paperless system, which processes orders from buying offices to vendors, alerts the stores when the merchandise is to arrive and transmits invoice data from the vendors and freight carriers to the Store Support Center. ASSOCIATE DEVELOPMENT. As of January 31, 1999, we employed approximately 157,000 associates, of whom approximately 9,420 were salaried, with the remainder compensated on an hourly basis. Approximately 75% of our associates are employed on a full-time basis. To attract and retain qualified personnel, we seek to maintain salary and wage levels above those of our competitors in each market area. Store managers have access to information regarding competitive salary rates in their respective markets. In fiscal 1998, we enhanced our training programs in a continuing effort to service the needs of our associates. These programs are designed to increase associates' knowledge of merchandising departments and products, including mandatory product knowledge training classes, and to educate, 8 11 develop and test the skills of those associates who are interested in being promoted. Because our policy is to promote or relocate current associates to serve as store managers and assistant managers for new stores, training and assessment of our associates is essential to our growth. Our district managers and store managers typically meet with our human resource associates concerning their assistant managers and certain department heads to discuss their development and consider possible candidates for promotion. Also during fiscal 1998, we implemented programs to ensure that we hire and promote the best qualified associates in a non-discriminatory way. These programs integrate validated computerized tests for all applicants, as well as specialized tests for certain positions. If an applicant passes the computer test, he or she may be selected for a structured interview in which questions selected by the computer as a result of the answers given on the test will be asked. We also maintain a list of qualified associates who are interested in a new assignment and applicants that can be reviewed when positions become available. We have never experienced a strike or any work stoppage, and we believe that our employee relations are good. There are no collective bargaining agreements covering any of our associates. MARKETING. We are one of the nation's largest retail advertisers utilizing all forms of mass media and selected forms of highly targeted media. We also incorporate major sponsorships into our marketing plan, such as NASCAR(R), the Olympics, home and garden shows and sports teams. We extend our reach and educate our customers through proprietary publications, such as Home Improvement 1-2-3(TM), of which over one million copies have been sold. These books are sold not only in our stores, but also through traditional and Internet book sellers. We execute our marketing campaigns on both a national and regional basis. Because our stores are located throughout the United States and Canada, we can achieve greater efficiencies than smaller retailers by using national advertising. At the same time, we tailor a significant portion of our advertising regionally to respond to market differences, both in terms of products and the competitive environment. INTELLECTUAL PROPERTY. Through our subsidiary, Homer TLC, Inc., we have registered or applied for registration of a variety of trade names, service marks or trademarks for use in our business, including The Home Depot(R), the "Homer"(R) character, Villager's Hardware(SM) and EXPO Design Center(SM) stores. We regard our intellectual property as having significant value and as being an important factor in the marketing of the Company and our stores and direct marketing efforts. We are not aware of any facts that could be expected to negatively impact our continuing use of any of our intellectual property. QUALITY ASSURANCE PROGRAM. As part of our import merchandise program, we have implemented a quality assurance program. Through this program, we develop and document specifications for the products we import. Additionally, before we begin importing goods from a vendor, we typically retain independent certified assessors to conduct an inspection of the vendor's factory, based on standards that we have developed. Through these inspections, 9 12 we ensure that the factories can manufacture the products to our specifications and also try to ensure that they are not using forced or child labor. After a vendor's factory passes this initial inspection, our independent certified assessors typically inspect every shipment for product quality. LOGISTICS. We use several mechanisms to lower distribution costs and increase our efficiencies. The vast majority of our products are shipped from the manufacturer directly to the stores. Certain import products require the use of distribution centers. Accordingly, we have four distribution centers, located in Savannah, Georgia (approximately 1.4 million square feet); Cranbury, New Jersey (approximately 812,000 square feet); Ontario, California (approximately 317,000 square feet); and Ontario, Canada (approximately 135,000 square feet). Additionally, at the end of fiscal 1998, we had 23 lumber distribution facilities located throughout the United States and Canada to support the lumber demands of our stores. We also opened a transit facility in Philadelphia during fiscal 1998. At this facility, we receive merchandise from manufacturers and immediately load it onto trucks for delivery to our stores. COMPETITION. Our business is highly competitive, based in part on price, store location, customer service and depth of merchandise. In each of the markets we serve, there are a number of other chains of electrical, plumbing and building materials supply houses, lumber yards and home improvement stores. With respect to some products, we also compete with discount stores, local, regional and national hardware stores, mail order firms, warehouse clubs, independent building supply stores and, to a lesser extent, other retailers. In addition to these entities, our EXPO Design Center stores also compete with specialty design stores or showrooms, some of which are only open to interior design professionals. Due to the variety of competition we face, we are unable to precisely measure our market share in existing market areas. We believe that we are an effective and significant competitor in our markets. Based on U.S. Census data estimates, internal estimates and data provided by the Home Improvement Research Institute, we believe that our market share in the U.S. and Canada, currently defined as including the Do-It-Yourself/Buy-It-Yourself, Tradesmen, Builders/General Contractors, Heavy Industrial, Repair and Remodeling and Property Maintenance markets, is approximately 8%. 10 13 EXECUTIVE OFFICERS The following provides information as of January 31, 1999 concerning our executive officers: BERNARD MARCUS, age 69, is a co-founder of The Home Depot and serves as Chairman of the Board. From inception of the Company in 1978 until 1997, he served as Chairman of the Board and Chief Executive Officer, at which time the title of CEO was passed on to Mr. Arthur M. Blank. Mr. Marcus serves as a director on the boards of National Service Industries, Inc., The New York Stock Exchange, Inc., Westfield Corporation, Inc. and DBT Online, Inc. ARTHUR M. BLANK, age 56, has been the President, Chief Operating Officer and a director of The Home Depot since its inception in 1978 and was named CEO in 1997. He is, together with Mr. Bernard Marcus and Mr. Kenneth G. Langone, a co-founder of the Company. Mr. Blank is a member of the Board of Directors of Cox Enterprises, Inc. and Post Properties, Inc. RONALD M. BRILL, age 55, has been Executive Vice President and Chief Administrative Officer of the Company since 1995. Mr. Brill joined The Home Depot as Controller in 1978, was elected Treasurer in 1980, Vice President-Finance in 1981, Senior Vice President and Chief Financial Officer in 1984, Executive Vice President and CFO in 1993 and was elected as a director in 1987. MARK R. BAKER, age 41, has been President of the Midwest Division since 1997. Mr. Baker joined the Company in 1996 as Vice President-Merchandising for the Midwest Division. Prior to joining The Home Depot, from 1992 until 1996, Mr. Baker was an Executive Vice President - Merchandising for HomeBase in Fullerton, California. BRUCE W. BERG, age 50, had been President of the Southeast Division since 1991. Mr. Berg joined the Company in 1984 as Vice President-Merchandising (East Coast) and was promoted to Senior Vice President (East Coast) in 1988. Mr. Berg retired from the Company in February 1999. DENNIS J. CAREY, age 52, has been Executive Vice President and Chief Financial Officer since May 1998. From 1994 to 1998, Mr. Carey was employed by AT&T Corp., most recently as Vice President and General Manager - Corporate Productivity and Mergers and Acquisitions. Prior to joining AT&T, Mr. Carey held a number of positions during his 25 year tenure with General Electric Company, including Vice President and General Manager of International Operations. JEFFREY W. COHEN, age 40, has been Group President - Direct Marketing Businesses since May 1998. From January 1997 until he joined The Home Depot, Mr. Cohen was President of Cohen & Associates Management Consultants. From 1995 through 1997, he was Executive Vice President of Harte-Hanks Direct Marketing and prior thereto he was a Senior Vice President - General Manager at GE Capital Corp. 11 14 MARSHALL L. DAY, age 55, has been Senior Vice President-Finance and Accounting since 1998. Mr. Day previously served as Senior Vice President - Chief Financial Officer from 1995 to 1998 and as Senior Vice President - Finance from 1993 to 1995. BILL HAMLIN, age 46, has been Group President since 1998 and has been Executive Vice President - Merchandising since 1994. Mr. Hamlin served as President of the Western Division from 1990 until 1994. VERNON JOSLYN, age 47, has been President of the Northeast Division since 1996. Mr. Joslyn previously served as Vice President-Operations for the Northeast Division from 1993 until his promotion to his current position. LYNN MARTINEAU, age 42, has been President of the Western Division since 1996. Mr. Martineau most recently served as Vice President-Merchandising for the Southeast Division from 1989 until his promotion to his current position. W. ANDREW McKENNA, age 53, has been Senior Vice President-Strategic Business Development since December 1997. Mr. McKenna joined The Home Depot as Senior Vice President-Corporate Information Systems in 1990. In 1994, he was named President of the Midwest Division, a position he held until he assumed the duties of his current position. LARRY M. MERCER, age 52, has been Group President since 1998 and has been Executive Vice President-Operations since 1996. Mr. Mercer previously served as President of the Northeast Division from 1991 until his promotion in 1996. STEPHEN R. MESSANA, age 54, has been Senior Vice President - Human Resources since 1993. BARRY L. SILVERMAN, age 40, has been President of the Southwest Division since July 1997. Mr. Silverman previously served as Vice President-Merchandising of the Northeast Division from 1991 until his promotion to his current position. LAWRENCE A. SMITH, age 51, has been Senior Vice President - Legal since February 1998. Mr. Smith has been employed by the Company since 1983 and served as Vice President - Legal prior to his promotion to his current position. Mr. Smith is the nephew of Mr. Marcus. DAVID SULITEANU, age 46, has served as Group President - Diversified Businesses since April 1998. Mr. Suliteanu previously served as Vice Chairman and Director of Stores for Macy's East, a position he held from 1993 until he joined The Home Depot. ANNETTE M. VERSCHUREN, age 42, has been President of The Home Depot Canada since 1996. In 1992, Ms. Verschuren formed Verschuren Ventures Inc. and remained there until joining Michaels of Canada Inc. in 1993, where she served as President until joining The Home Depot. 12 15 M. FAYE WILSON, age 61, has served as Senior Vice President - Value Initiatives since 1998 and as a director since 1992. From 1992 until joining The Home Depot, she was an Executive Vice President of Bank of America NT&SA. Ms. Wilson serves as a director of Farmers Insurance Group. 13 16 Item 2. PROPERTIES The following tables show the number of Home Depot store locations by state in the United States and internationally as of January 31, 1999:
Number of Stores State in State - --------------------------------------------------- Alabama 6 Alaska 1 Arizona 21 Arkansas 3 California 106 Colorado 13 Connecticut 13 Delaware 3 Florida 72 Georgia 39 Idaho 2 Illinois 26 Indiana 3 Iowa 2 Kansas 3 Kentucky 5 Louisiana 12 Maine 2 Maryland 17 Massachusetts 21 Michigan 26 Minnesota 10 Mississippi 4 Missouri 9 Montana 1 Nevada 6 New Hampshire 5 New Jersey 27 New Mexico 3 New York 38 North Carolina 18 Ohio 17 Oklahoma 6 Oregon 8 Pennsylvania 23 Rhode Island 1 South Carolina 10 Tennessee 19 Texas 63 Utah 6 Vermont 1 Virginia 18 Washington 15 Wisconsin 3 --- Subtotal 707 ---
14 17
Number of Stores International Location in Location ----------------------------------------------- Canadian Provinces Alberta 6 British Columbia 8 Manitoba 2 Ontario 26 Saskatchewan 1 Latin America Chile 2 Puerto Rico 1 --- Subtotal 46 --- TOTAL HOME DEPOT STORES 753 ===
The following table shows the number of EXPO Design Center store locations by state as of January 31, 1999:
Number of Stores State In State --------------------------------------------------------- California 1 Florida 3 Georgia 1 New York 1 Texas 2 - TOTAL EXPO DESIGN CENTER STORES 8 =
Of our 761 Home Depot stores and EXPO Design Center stores at January 31, 1999, approximately 75% were owned (including those owned subject to a ground lease) consisting of approximately 60,734,000 square feet and approximately 25% were leased consisting of approximately 20,793,000 square feet. In recent years, we have increased the relative percentage of new stores that are owned. Although we take advantage of lease financing opportunities, we generally prefer to own stores because of greater operating control and flexibility, generally lower occupancy costs and certain other economic advantages. Our executive, corporate staff and accounting offices occupy approximately 1,308,000 square feet of leased and owned space in Atlanta, Georgia. We are currently building an additional approximately 632,000 square feet of office space in Atlanta. In addition, as of January 31, 1999, we occupied an aggregate of approximately 997,000 square feet, of which approximately 236,000 square feet is owned and approximately 761,000 square feet is leased, for divisional store support centers and subsidiary customer support centers. These support centers are located in Fullerton and San Diego, California; Tampa, Florida; Atlanta, Georgia; Arlington, Illinois; Southfield, Michigan; South Plainfield, New Jersey; Dallas, Texas; Tukwila, Washington; Scarborough, Ontario, Canada; and Santiago, Chile. 15 18 At January 31, 1999, we utilized approximately 5,816,000 square feet of warehousing and distribution space, of which approximately 709,000 is owned and approximately 5,107,000 is leased. We believe that at the end of existing lease terms, our current leased space can be either relet or replaced by alternate space for lease or purchase that is readily available. Item 3. LEGAL PROCEEDINGS We have litigation arising from the normal course of business. In our opinion, this litigation will not materially affect our consolidated financial position or the results of operations. In fiscal 1997, we settled, without admitting wrongdoing, a class action lawsuit and three other lawsuits seeking class action status, each of which involved claims of gender discrimination. In connection with these settlements, we expedited the implementation of certain programs and practices to ensure that we are hiring, assigning, promoting and paying our associates in a non-discriminatory manner. These programs and practices include using minimum objective and job-related criteria for filling certain positions, implementing training for managers and supervisors and developing a system to allow qualified applicants and associates to register their interest in certain positions. Additionally, we are monitoring and reporting to plaintiffs' counsel the progress of the implementation of these programs and practices. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of fiscal 1998. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Since April 19, 1984, our common stock has been listed on the New York Stock Exchange under the symbol "HD." The table below sets forth the low and high sales prices of our common stock on the New York Stock Exchange Composite Tape as reported in The Wall Street Journal and the quarterly cash dividends declared per share of common stock during the periods indicated. 16 19
PRICE RANGE* CASH ----------------- DIVIDENDS LOW HIGH DECLARED* --- ---- --------- FISCAL YEAR 1997 First Quarter ended May 4, 1997 $16.50 $19.54 $.020 Second Quarter ended August 3, 1997 19.13 25.00 .025 Third Quarter ended November 2, 1997 23.53 28.32 .025 Fourth Quarter ended February 1, 1998 26.47 30.82 .025 FISCAL YEAR 1998 First Quarter ended May 3, 1998 $30.63 $36.34 $.025 Second Quarter ended August 2, 1998 33.84 49.00 .030 Third Quarter ended November 1, 1998 31.63 45.94 .030 Fourth Quarter ended January 31, 1999 43.13 62.00 .030 FISCAL YEAR 1999 First Quarter (through April 16, 1999) $53.81 $67.94 --
- --------------------------- *On July 2, 1998, there was a two-for-one stock split on all shares of stock owned by stockholders as of June 11, 1998. On July 3, 1997, there was a three-for-two stock split on all shares of stock owned by stockholders as of June 12, 1997. The prices and dividends in the table set forth above have been adjusted to reflect these splits. The Company paid its first cash dividend on June 22, 1987, and has paid dividends, during each subsequent quarter. Future dividend payments will depend on the Company's earnings, capital requirements, financial condition and other factors considered relevant by the Board of Directors. The number of record holders of The Home Depot's Common Stock as of April 15, 1999 was 151,178 (excluding individual participants in nominee security position listings). Item 6. SELECTED FINANCIAL DATA We refer you to "Ten Year Summary of Financial and Operating Results" contained in our Annual Report to Stockholders for the fiscal year ended January 31, 1999 for information on fiscal years 1994-1998. 17 20 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The data below reflect selected sales data, the percentage relationship between sales and major categories in the Consolidated Statements of Earnings and the percentage change in the dollar amounts of each of the items.
PERCENTAGE INCREASE (DECREASE) IN DOLLAR AMOUNTS FISCAL YEAR(1) --------------------- SELECTED CONSOLIDATED ------------------------------------------- 1998 1997 STATEMENTS OF EARNINGS DATA 1998 1997 1996 vs. 1997 vs. 1996 - --------------------------- ---- ---- ---- -------- -------- NET SALES ........................................... 100.0% 100.0% 100.0% 25.1% 23.7% GROSS PROFIT ........................................ 28.5 28.1 27.8 26.9 24.8 OPERATING EXPENSES: Selling and Store Operating(2) .................. 17.7 17.8 18.0 24.1 21.9 Pre-Opening ..................................... 0.3 0.3 0.3 34.1 19.7 General and Administrative ...................... 1.7 1.7 1.7 24.9 27.2 Non-Recurring Charge ............................ -- 0.4 -- NM(3) NM(3) --------- --------- --------- ----- ----- Total Operating Expenses ..................... 19.7 20.2 20.0 21.7 25.0 --------- --------- --------- ----- ----- OPERATING INCOME ............................. 8.8 7.9 7.8 40.4 24.3 INTEREST INCOME (EXPENSE): Interest and Investment Income .................. 0.1 0.2 0.1 (32.1) 73.8 Interest Expenses ............................... (0.1) (0.2) -- (11.0) 160.8 --------- --------- --------- ----- ----- Interest, net ................................ -- -- 0.1 (386.2) (73.7) --------- --------- --------- ----- ----- Earning Before Income Taxes .................. 8.8 7.9 7.9 39.8 23.7 Income Taxes ........................................ 3.5 3.1 3.1 40.9 23.7 --------- --------- --------- ----- ----- NET EARNINGS ................................. 5.3% 4.8% 4.8% 39.1% 23.7% --------- --------- --------- ----- ----- SELECTED CONSOLIDATED SALES DATA Number of Transactions (000s) ....................... 665,125 550,226 464,089 20.9% 18.6% Average Sale per Transaction ........................ $ 45.05 $ 43.63 $ 42.09 3.3 3.7 Weighted Average Weekly Sales Per Operating Store ... $ 844,000 $ 829,000 $ 803,000 1.8 3.2 Weighted Average Sales per Square Foot .............. $ 409.79 $ 405.56 $ 398.29(4) 1.0 1.8
- ---------------------- (1) Fiscal years 1998, 1997 and 1996 refer to the fiscal years ended January 31, 1999; February 1, 1998; and February 2, 1997, respectively. (2) Minority interest has been reclassified to selling and store operating expenses. (3) Not meaningful. (4) Adjusted to reflect the first 52 weeks of the 53-week fiscal year in 1996. 18 21 RESULTS OF OPERATIONS For an understanding of the significant factors that influenced the Company's performance during the past three fiscal years, the following discussion should be read in conjunction with the consolidated financial statements presented in our Annual Report to Stockholders for the fiscal year ended January 31, 1999. FISCAL YEAR ENDED JANUARY 31, 1999 COMPARED TO FEBRUARY 1, 1998 Net sales for fiscal 1998 increased 25.1% to $30.2 billion from $24.2 billion in fiscal 1997. This increase was attributable to, among other things, full year sales from the 112 new stores opened during fiscal 1997, a 7% comparable store-for-store sales increase, and 138 new store openings and 4 store relocations during fiscal 1998. One store opened during fiscal 1998 was subsequently closed during the year and is planned to reopen during fiscal 1999. Gross profit as a percent of sales was 28.5% for fiscal 1998 compared to 28.1% for fiscal 1997. The rate increase was primarily attributable to a lower cost of merchandise resulting from product line reviews and other merchandising initiatives begun in fiscal 1996 and continued through fiscal 1997 and 1998. In addition, sales mix changes, better inventory shrink results, and benefits from import strategies contributed to the overall gross profit improvement. Operating expenses as a percent of sales were 19.7% for fiscal 1998 compared to 20.2% for fiscal 1997. Operating expenses for fiscal 1997 included a $104 million non-recurring charge related to the settlements of a class action gender discrimination lawsuit and three other gender discrimination lawsuits. Excluding the non-recurring charge, operating expenses as a percent of sales were 19.8% for fiscal 1997. Selling and store operating expenses as a percent of sales decreased to 17.7% in fiscal 1998 from 17.8% in fiscal 1997. The decrease was primarily attributable to lower net advertising expenses resulting from higher cooperative advertising participation by vendors, increased use of national advertising and leverage achieved from opening stores in existing markets. In addition, improved claims management and focus on safety programs resulted in lower workers' compensation and general liability claims experience as a percent of sales. Also, minority interest decreased from fiscal 1997, mainly due to the purchase of the remaining 25% of The Home Depot Canada partnership from The Molson Companies during the first quarter of fiscal 1998. Partially offsetting these decreases were higher medical costs from increased family enrollment in the Company's medical plans and higher store selling payroll expenses as a percent of sales. The increase in store selling payroll expenses was primarily due to increased sales penetrations in higher margin decor categories, which require more hours and higher average pay rates to support. Overall productivity, in terms of sales per labor hour, increased from fiscal 1997. Pre-opening expenses as a percent of sales were 0.3% for both fiscal 1998 and 1997. The Company opened 138 new stores and relocated 4 stores in fiscal 1998, and opened 112 new 19 22 stores and relocated 5 stores in fiscal 1997. Pre-opening expenses averaged $618,000 per store in fiscal 1998 compared to $559,000 per store in fiscal 1997. The higher average expense resulted primarily from the Company's initial entry into markets such as Chile, Puerto Rico and Alaska, which involve longer pre-opening periods and higher travel and relocation costs. General and administrative expenses as a percent of sales were 1.7% for both fiscal 1998 and 1997. Incremental expenses related to long-term growth and business planning initiatives incurred in fiscal 1998 were offset by efficiencies realized from increased sales. Interest and investment income as a percent of sales decreased to 0.1% in fiscal 1998 from 0.2% in fiscal 1997 due to lower investment balances and lower interest rates. Interest expense as a percent of sales was 0.1% in fiscal 1998 compared to 0.2% in fiscal 1997. The decrease from fiscal 1997 was primarily attributable to economies realized from a 25.1% increase in sales for fiscal 1998 and higher capitalized interest resulting from a higher percentage of owned stores under construction. The Company's combined federal and state effective income tax rate was 39.2% for fiscal 1998 compared to 38.9% for fiscal 1997. The increase was due to a reduction in tax-exempt interest income as investment balances declined during the year and to higher effective state tax rates. Net earnings as a percent of sales were 5.3% for fiscal 1998 compared to 4.8% for fiscal 1997, reflecting a higher gross profit rate, lower selling and store operating expenses as a percent of sales and the non-recurring charge recorded in fiscal 1997. Diluted earnings per share were $1.06 for fiscal 1998 compared to $0.78 for fiscal 1997. Excluding the non-recurring charge, diluted earnings per share were $0.82 for fiscal 1997. FISCAL YEAR ENDED FEBRUARY 1, 1998 COMPARED TO FEBRUARY 2, 1997 Fiscal 1997 consisted of 52 weeks compared to 53 weeks in fiscal 1996. Net sales for fiscal 1997 increased 23.7% to $24.2 billion from $19.5 billion in fiscal 1996. The increase was attributable to, among other things, full year sales from the 89 new stores opened during fiscal 1996, a 7% comparable 52-week store-for-store sales increase, and 112 new store openings and 5 store relocations during fiscal 1997. The percentage increase in sales was negatively impacted by one less week of sales in fiscal 1997 versus fiscal 1996. Gross profit as a percent of sales was 28.1% for fiscal 1997 compared to 27.8% for fiscal 1996. The rate increase was primarily attributable to a lower cost of merchandise resulting from product line reviews and other merchandising initiatives begun in fiscal 1996 and continued through fiscal 1997. In addition, lower and more stable lumber costs, sales mix changes, and better inventory shrink results contributed to the gross profit improvement. Operating expenses as a percent of sales were 20.2% for fiscal 1997 compared to 20.0% for fiscal 1996. Operating expenses for fiscal 1997 included a $104 million non-recurring charge related to the settlements of a class action gender 20 23 discrimination lawsuit and three other gender discrimination lawsuits. The non-recurring charge included $65 million for the plaintiff class members, $22.5 million for the plaintiffs' attorneys and approximately $17 million for other related internal costs, including implementation or enhancement of certain human resources programs, as well as the settlement terms of the three other lawsuits. Excluding the non-recurring charge, operating expenses as a percent of sales were 19.8% for fiscal 1997. Selling and store operating expenses as a percent of sales decreased to 17.8% in fiscal 1997 from 18.0% in fiscal 1996. The decrease was primarily attributable to lower net advertising expenses resulting from higher cooperative advertising participation by vendors and increased use of national advertising, as well as lower medical insurance costs primarily due to a higher percentage of the Company's associates using in-network providers. Partially offsetting these decreases were higher store payroll expenses as a percent of sales, mainly due to increased focus on certain higher margin merchandising categories that require more labor hours to support, such as flooring and other decor areas. Pre-opening expenses as a percent of sales were 0.3% for both fiscal 1997 and 1996. The Company opened 112 new stores and relocated 5 stores in fiscal 1997, and opened 89 new stores and relocated 7 stores in fiscal 1996. Pre-opening expenses averaged $559,000 per store in fiscal 1997 compared to $570,000 per store in fiscal 1996. General and administrative expenses as a percent of sales were 1.7% for both fiscal 1997 and 1996. Incremental expenses related to long-term growth and business planning initiatives incurred in fiscal 1997 were partially offset by efficiencies realized from increased sales. Interest and investment income as a percent of sales increased to 0.2% in fiscal 1997 from 0.1% in fiscal 1996 due to a full year of investment income earned in fiscal 1997 from the proceeds of the issuance of $1.1 billion of the Company's 3 1/4% Convertible Subordinated Notes ("3 1/4% Notes") in October 1996 (see "--Liquidity and Capital Resources"). Interest expense as a percent of sales was 0.2% in fiscal 1997 compared to 0% in fiscal 1996. The increase from the prior year was primarily attributable to a full year of interest expense on the 3 1/4% Notes in fiscal 1997, compared to a partial year of interest expense on the 3 1/4% Notes and lower levels of long-term debt prior to issuance of the 3 1/4% Notes in fiscal 1996. The Company's combined federal and state effective income tax rate was 38.9% for both fiscal 1997 and 1996. Net earnings as a percent of sales were 4.8% for both fiscal 1997 and 1996, reflecting a higher gross profit percentage and lower selling and store operating expenses as a percent of sales, offset by the non-recurring charge recorded during fiscal 1997, as described above. Diluted earnings per share were $0.78 for fiscal 1997 compared to $0.65 for fiscal 1996. Excluding the non-recurring charge, diluted earnings per share were $0.82 for fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES Cash flow generated from store operations provides the Company with a significant source of 21 24 liquidity. Additionally, a significant portion of the Company's inventory is financed under vendor credit terms. The Company plans to open approximately 167 new stores and relocate 8 existing stores during fiscal 1999. It is anticipated that approximately 84% of these locations will be owned, and the remainder will be leased. The Company also plans to open approximately 200 stores, including relocations, in fiscal 2000. During the last three fiscal years, the Company entered into two operating lease agreements totaling $882 million for the purpose of financing construction costs of certain new stores. Under the operating lease agreements, the lessor purchases the properties, pays for the construction costs and subsequently leases the facilities to the Company. The leases provide for substantial residual value guarantees and include purchase options at original cost on each property. The Company financed a portion of its new stores in fiscal 1997 and 1998 under the operating lease agreements and anticipates utilizing these facilities to finance selected new stores in fiscal 1999 and 2000 and an office building in fiscal 1999. In addition, some locations for fiscal 1999 will be leased individually. The cost of new stores to be constructed and owned by the Company varies widely, principally due to land costs, and is currently estimated to average approximately $12.9 million per location. The cost to remodel and/or fixture stores to be leased is expected to average approximately $3.2 million per store. In addition, each new store will require approximately $3.1 million to finance inventories, net of vendor financing. During fiscal 1996, the Company issued, through a public offering, $1.1 billion of 3 1/4% Convertible Subordinated Notes due October 1, 2001. The 3 1/4% Notes were issued at par and are convertible into shares of the Company's common stock at any time prior to maturity, unless previously redeemed by the Company, at a conversion price of $23.0417 per share, subject to adjustment under certain conditions. The 3 1/4% Notes may be redeemed by the Company at any time on or after October 2, 1999, in whole or in part, at a redemption price of 100.813% of the principal amount and after October 1, 2000, at 100% of the principal amount. The Company used the net proceeds from the offering to repay outstanding commercial paper obligations, to finance a portion of the Company's capital expenditure program, including store expansions and renovations, and for general corporate purposes. The Company has a commercial paper program that allows borrowings up to a maximum of $800 million. As of January 31, 1999, there was $246 million outstanding under the program. In connection with the program, the Company has a back-up credit facility with a consortium of banks for up to $800 million. The credit facility, which expires in December 2000, contains various restrictive covenants, none of which is expected to impact the Company's liquidity or capital resources. As of January 31, 1999, the Company had $62 million in cash and cash equivalents. Management believes that its current cash position, internally generated funds, funds available from its $800 million commercial paper program, funds available from the operating lease 22 25 agreements, and the ability to obtain alternate sources of financing should enable the Company to complete its capital expenditure programs, including store openings and renovations, through the next several fiscal years. YEAR 2000 The Company is currently addressing a universal situation commonly referred to as the "Year 2000 Problem." The Year 2000 Problem relates to the inability of certain computer software programs to properly recognize and process date-sensitive information relative to the year 2000 and beyond. During fiscal 1997, the Company developed a plan to devote the necessary resources to identify and modify internal systems impacted by the Year 2000 Problem, or implement new systems to become year 2000 compliant in a timely manner. This compliance plan consists of four major areas of focus: systems, desktops, facilities and supplier management. The total cost of executing this plan is estimated at $13 million, and as of January 31, 1999, the Company had expended approximately $8.75 million to effect the plan. The Company has completed the initial phases of the systems portion of the compliance plan. The initial phases included completing an inventory of all software programs operating on Company systems and identifying year 2000 problems. The next phase involved creating an appropriate testing environment, and as of January 31,1999, this phase was substantially complete. Subsequent phases of the systems portion of the compliance plan involve testing and installing year 2000 compliant software in the production environment, which were approximately 95% and 80% complete, respectively, at the end of fiscal 1998. The Company anticipates substantially completing the systems portion of its compliance plan by the end of the first quarter of fiscal 1999. All desktop applications critical to the Company's overall business have been inventoried and evaluated under the method described above, and as of January 31, 1999, this process was complete. Desktop infrastructure is also being tested and is expected to be substantially complete during the first quarter of fiscal 1999. Substantially all critical facilities systems, including, but not limited to, security systems, energy management, material handling, copiers and faxes, have been inventoried and are being tested. As of January 31, 1999, this process was approximately 60% complete. The Company anticipates completing the facilities systems portion of its compliance plan before the end of the second quarter of fiscal 1999. The Company is assessing the year 2000 compliance status of its suppliers, many of which participate in electronic data interchange ("EDI") or similar programs with the Company. The Company anticipates conducting substantial testing with EDI merchandise suppliers during 1999. In addition, the Company plans to communicate with all its transportation carriers and to conduct similar testing. With respect to merchandise suppliers participating in EDI programs with the Company, the Company anticipates conducting point-to-point testing of these EDI systems for year 2000 compliance. 23 26 The Company's risks involved with not solving the Year 2000 Problem include, but are not limited to, the following: loss of local or regional electrical power, loss of telecommunication services, delays or cancellations of merchandise shipments, manufacturing shutdowns, delays in processing customer transactions, bank errors and computer errors by suppliers. Because the Company's year 2000 compliance is dependent upon certain third parties (including infrastructure providers) also being year 2000 compliant on a timely basis, there can be no assurance that the Company's efforts will prevent a material adverse impact on its results of operations, financial condition or business. The Company is modifying its existing disaster recovery plans to include year 2000 contingency planning. Also, the Company is identifying critical activities that would normally be conducted during the first two weeks of January 2000, which may be completed instead in December 1999. The Company expects its year 2000 contingency planning to be substantially complete by the end of the second quarter of fiscal 1999, and to test and modify contingency plans throughout the remainder of 1999. IMPACT OF INFLATION AND CHANGING PRICES Although the Company cannot accurately determine the precise effect of inflation on its operations, it does not believe inflation has had a material effect on sales or results of operations. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," effective for all fiscal quarters of fiscal years beginning after June 15, 1999. SFAS 133 requires all derivatives to be carried on the balance sheet at fair value. Changes in the fair value of derivatives must be recognized in the Company's Consolidated Statements of Earnings when they occur; however, there is an exception for derivatives that qualify as hedges as defined by SFAS 133. If a derivative qualifies as a hedge, a company can elect to use "hedge accounting" to eliminate or reduce the income statement volatility that would arise from reporting changes in a derivative's fair value. Adoption of SFAS 133 is not expected to materially impact the Company's reported financial results. FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE Certain statements we make in this report, and other written or oral statements made by or on behalf of the Company, may constitute "forward-looking statements" within the meaning of the federal securities laws. Words or phrases such as "should result," "are expected to," "we estimate," "we project," or similar expressions are intended to identify forward-looking statements. Examples of such statements in this report include descriptions of our plans with respect to new store openings and relocations, our plans to enter new markets and expectations relating to our 24 27 continuing growth. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company's historical experience and its present expectations or projections. Management believes that these forward-looking statements are reasonable; however, you should not place undue reliance on such statements. Such statements speak only as of the date they are made and we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise. The following are some of the factors that could cause the Company's actual results to differ materially from the expected results described in the Company's forward-looking statements: - - Conditions affecting the availability, acquisition, development and ownership of real estate, including local zoning and land use issues, environmental regulations and general conditions in the commercial real estate market. - - Adverse or unanticipated weather conditions, which may affect the Company's overall level of sales and sales of particular lines of products, such as building materials, lumber and lawn and garden supplies. - - Instability of costs and availability of sourcing channels, which may affect the prices that the Company pays for certain commodity products, such as lumber and plywood, as well as the Company's ability to improve its mix of merchandise. Our cost of sales is affected by our ability to maintain favorable arrangements and relationships with our suppliers. Our sources of supply may be affected by trade restrictions, tariffs, currency exchange rates, transport costs and capacity, and other factors affecting domestic and international markets. - - Our ability to attract, train and retain highly qualified associates to staff both existing and new stores. - - Our ability to replace, modify or upgrade computer programs and other systems in order to adequately address the Year 2000 Problem, and the ability of our suppliers, other business partners and other entities to address this issue. - - The impact of competition, including competition for customers, locations and products and in other important aspects of our business. Our primary competitors include chains of electrical, plumbing and building materials supply houses, lumber yards, home improvement stores and other local, regional or national hardware stores, as well as discount department stores and any other channel of distribution that offers products that we sell. Our business is highly competitive, and we may face new types of competitors as we enter new markets or lines of business. - - General economic conditions, which affect consumer confidence and home improvement and home-building spending, including interest rates, the overall level of economic activity, the availability of consumer credit and mortgage financing and unemployment rates. 25 28 - - Changes in laws and regulations, including changes in accounting standards, tax statutes or regulations and environmental and land use regulations, and uncertainties of litigation. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have not entered into any transactions using derivative financial instruments or derivative commodity instruments and believe that our exposure to market risk associated with other financial instruments (such as investments) are not material. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA We refer you to the "Consolidated Statements of Earnings," "Consolidated Balance Sheets," "Consolidated Statements of Stockholders' Equity and Comprehensive Income," "Consolidated Statements of Cash Flows," "Notes to Consolidated Financial Statements" and "Independent Auditors' Report" contained in our Annual Report to Stockholders for the fiscal year ended January 31, 1999. 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 We refer you to our Proxy Statement for the 1999 Annual Meeting of Stockholders and the heading "Election of Directors and Nominee Biographies," "Standing Director Biographies" and "Board of Directors Information." Biographical information on our executive officers is contained in Item I of this Annual Report on Form 10-K. Item 11. EXECUTIVE COMPENSATION We refer you to the information in our Proxy Statement for the 1999 Annual Meeting of Stockholders under the heading "Executive Compensation." Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT We refer you to the information in our Proxy Statement for the 1999 Annual Meeting of Stockholders under the heading "Stock Ownership." 26 29 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We refer you to the information in our Proxy Statement for the 1999 Annual Meeting of Stockholders under the heading "Insider Transactions." PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following financial statements are incorporated by reference from pages 22 through 33 of our Annual Report to Stockholders for the fiscal year ended January 31, 1999, as provided in Item 8 hereof: - Consolidated Statements of Earnings for the fiscal years ended January 31, 1999; February 1, 1998 and February 2, 1997. - Consolidated Balance Sheets as of January 31, 1999 and February 1, 1998. - Consolidated Statements of Stockholders' Equity and Comprehensive Income for the fiscal years ended January 31, 1999, February 1, 1998 and February 2, 1997. - Consolidated Statements of Cash Flows for the fiscal years ended January 31, 1999, February 1, 1998 and February 1, 1997. - Notes to Consolidated Financial Statements. - Independent Auditors' Report. 2. Financial Statement Schedules All schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. (b) Reports on Form 8-K There were no Current Reports on Form 8-K filed during the fourth quarter of fiscal 1998. (c) Exhibits Exhibits marked with an asterisk (*) are incorporated by reference to exhibits or appendices previously filed with the SEC, as indicated by the references in brackets. 27 30 *3.l Restated Certificate of Incorporation of The Home Depot, Inc., as amended. [FORM 10-Q FOR THE FISCAL QUARTER ENDED AUGUST 2, 1998, EXHIBIT 3.1] *3.2 By-laws, as amended. [FORM 10-Q FOR THE FISCAL QUARTER END AUGUST 2, 1998, EXHIBIT 3.2] *4.1 Indenture dated as of October 1, 1996, between The Home Depot, Inc., as issuer and The First National Bank of Chicago, as trustee for $1,104,000,000 aggregate principal amount of 3 1/4% Convertible Subordinated Notes due 2001. [FORM S-3 REGISTRATION STATEMENT NO. 333-12575, EXHIBIT 4.2] *10.1 Investment Banking Consulting Contract dated April 17, 1985, between Invemed Associates, Inc. and the Registrant. [FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1998, EXHIBIT 10.1] *10.2 +Corporate Office Management Bonus Plan of the Registrant dated March 1, 1991. [FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1998, EXHIBIT 10.2] *10.3 +Employee Stock Purchase Plan, as amended. [APPENDIX A TO REGISTRANT'S PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS HELD MAY 31, 1995] *10.4 +Senior Officers' Bonus Pool Plan, as amended. [APPENDIX A TO REGISTRANT'S PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 26, 1999] *10.5 +Executive Officers' Bonus Plan. [APPENDIX B TO REGISTRANT'S PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS HELD MAY 27, 1998] *10.6 +The Home Depot, Inc. 1997 Omnibus Stock Incentive Plan. [FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1998, EXHIBIT 10.5] 10.7 +Executive Medical Reimbursement Plan, effective January 1, 1992. *10.8 +The Home Depot ESOP Restoration Plan. [FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 29, 1995, EXHIBIT 10.8] *10.9 $800,000,000 Credit Agreement dated as of December 20, 1995 among The Home Depot, Inc., the Banks Listed Therein and Wachovia Bank of Georgia, N.A., as Agent (without exhibits). [FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 28, 1996, EXHIBIT 4.1] 10.10 Participation Agreement dated as of October 22, 1998 among The Home Depot, Inc. as Guarantor; Home Depot U.S.A., Inc. as Lessee; HD Real Estate Funding Corp. II as Facility Lender; Credit Suisse Leasing 92A L.P. as Lessor; The Bank of New
28 31 York as Indenture Trustee; and Credit Suisse First Boston Corporation and Invemed Associates, Inc. as Initial Purchasers. 10.11 Participation Agreement dated as of June 25, 1996 among The Home Depot, Inc. as Guarantor; Home Depot U.S.A., Inc. as Lessee and Construction Agent; HD Real Estate Funding Corp. as Facility Lender; the lenders named on the Schedule thereto as Lenders; Credit Suisse First Boston Corporation as Agent Bank and Lender; and Credit Suisse Leasing 92A L.P. as Lessor. 10.12 First Amendment and Supplement to the Participation Agreement dated as of May 8, 1997 among The Home Depot, Inc. as Guarantor; Home Depot U.S.A., Inc. as Lessee and Construction Agent; HD Real Estate Funding Corp. as Facility Lender; the lenders named on the Schedule thereto as Lenders; Credit Suisse First Boston Corporation as Agent Bank and Lender; and Credit Suisse Leasing 92A L.P. as Lessor. 10.13 Master Modification Agreement dated as of April 20, 1998 among The Home Depot, Inc. as Guarantor; Home Depot U.S.A., Inc., as Lessee and Construction Agent; HD Real Estate Funding Corp., as Facility Lender; Credit Suisse Leasing 92A L.P. as Lessor; the lenders named on the Schedule thereto as Lenders; and Credit Suisse First Boston Corporation as Agent Bank. 10.14 +Supplemental Executive Choice Program, effective January 1, 1999. *11 Computation of Earnings Per Common and Common Equivalent Share. [ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED JANUARY 31, 1999, FILED HEREWITH AS EXHIBIT 13, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, NOTE 7] 13 The Registrant's Annual Report to Stockholders for the fiscal year ended January 31, 1999. Only those portions of said report which are specifically designated in this Form 10-K as being incorporated by reference are being electronically filed pursuant to the Securities Exchange Act of 1934. *21 List of Subsidiaries of the Registrant. [FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1998, EXHIBIT 21] 23 Consent of Independent Auditors. 24 Special Powers of Attorney authorizing execution of this Form 10-K Annual Report have been granted and are filed herewith as follows: Power of Attorney from Frank Borman. Power of Attorney from John L. Clendenin. Power of Attorney from Berry R. Cox. Power of Attorney from Milledge A. Hart, III.
29 32 Power of Attorney from Donald R. Keough. Power of Attorney from Kenneth G. Langone. Power of Attorney from M. Faye Wilson. 27 Financial Data Schedule. [FILED ELECTRONICALLY WITH SEC ONLY.]
- --------------- +Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. 30 33 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. THE HOME DEPOT, INC. By: /s/ Arthur M. Blank --------------------------------------- (Arthur M. Blank, President & CEO) Date: April 16, 1999 ------------------------------------ Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant, The Home Depot, Inc., and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Bernard Marcus Chairman of the Board April 16, 1999 - ---------------------------- (Bernard Marcus) /s/Arthur M. Blank President & CEO April 16, 1999 - ---------------------------- and Director (Arthur M. Blank) (Principal Executive Officer) /s/ Ronald M. Brill Executive Vice President, - ---------------------------- Chief Administrative Officer, Assistant April 16, 1999 (Ronald M. Brill) Secretary and Director * Director - ---------------------------- (Frank Borman) /s/ Dennis Carey Executive Vice President and April 16, 1999 - ---------------------------- Chief Financial Officer (Principal Financial (Dennis Carey) Officer)
31 34
Signature Title Date - --------- ----- ---- /s/ Marshall Day Senior Vice President-Finance April 16, 1999 - ---------------------------- and Accounting (Marshall Day) * Director - ---------------------------- (John L. Clendenin) * Director - ---------------------------- (Berry R. Cox) * Director - ---------------------------- (Milledge A. Hart, III) * Director - ---------------------------- (Donald R. Keough) * Director - ---------------------------- (Kenneth G. Langone) * Director - ---------------------------- (M. Faye Wilson)
* The undersigned, by signing his name hereto, does hereby sign this report on behalf of each of the above-indicated directors of the Registrant pursuant to powers of attorney, executed on behalf of each such director. By: /s/ Arthur M. Blank ------------------------------------------ (Arthur M. Blank, Attorney-in-fact) 32 35
EXHIBIT INDEX - ------------- 10.7 +Executive Medical Reimbursement Plan, effective January 1, 1992. 10.10 Participation Agreement dated as of October 22, 1998 among The Home Depot, Inc. as Guarantor; Home Depot U.S.A., Inc. as Lessee; HD Real Estate Funding Corp. II as Facility Lender; Credit Suisse Leasing 92A L.P. as Lessor; The Bank of New York as Indenture Trustee; and Credit Suisse First Boston Corporation and Invemed Associates, Inc. as Initial Purchasers. 10.11 Participation Agreement dated as of June 25, 1996 among The Home Depot, Inc. as Guarantor; Home Depot U.S.A., Inc. as Lessee and Construction Agent; HD Real Estate Funding Corp. as Facility Lender; the lenders named on the Schedule thereto as Lenders; Credit Suisse First Boston Corporation as Agent Bank and Lender; and Credit Suisse Leasing 92A L.P. as Lessor. 10.12 First Amendment and Supplement to the Participation Agreement dated as of May 8, 1997 among The Home Depot, Inc. as Guarantor; Home Depot U.S.A., Inc. as Lessee and Construction Agent; HD Real Estate Funding Corp. as Facility Lender; the lenders named on the Schedule thereto as Lenders; Credit Suisse First Boston Corporation as Agent Bank and Lender; and Credit Suisse Leasing 92A L.P. as Lessor. 10.13 Master Modification Agreement dated as of April 20, 1998 among The Home Depot, Inc. as Guarantor; Home Depot U.S.S., Inc. As Lessee and Construction Agent; HD Real Estate Funding Corp., as Facility Lender; Credit Suisse Leasing 92A L.P. as Lessor; the Lenders named on the Schedule thereto as Lenders; and Credit Suisse First Boston Corporation as Agent Bank. 10.14 +Supplemental Executive Choice Program, effective January 1, 1992. 13 The Registrant's Annual Report to Stockholders for the fiscal year ended January 31, 1999. Only those portions of said report which are specifically designated in this Form 10-K as being incorporated by reference are being electronically filed pursuant to the Securities Exchange Act of 1934. 23 Consent of Independent Auditors. 24 Special Powers of Attorney authorizing execution of this Form 10-K Annual Report have been granted and are filed herewith as follows: Power of Attorney from Frank Borman. Power of Attorney from John L. Clendenin. Power of Attorney from Berry R. Cox. Power of Attorney from Milledge A. Hart, III. Power of Attorney from Donald R. Keough. Power of Attorney from Kenneth G. Langone. Power of Attorney from M. Faye Wilson.
36 27 Financial Data Schedule. [FILED ELECTRONICALLY WITH SEC ONLY.] - ----------------- +Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. EX-10.7 2 EXECUTIVE MEDICAL REIMBURSEMENT PLAN 1 EXECUTIVE MEDICAL REIMBURSEMENT PLAN THE HOME DEPOT(R) EFFECTIVE JANUARY 1, 1992 ELIGIBILITY To be eligible for EMRP, an employee must be an officer of the Company. The employee must elect coverage for himself/herself land any eligible dependents under the Company's Group Health Plan. ENROLLMENT Upon becoming eligible for the EMRP, an employee will automatically be enrolled in the plan provided he/she is currently enrolled in the Group Health Plan. COVERAGE Coverage will be extended by the plan for any medical expense which would be a deductible medical expense under Federal Income Tax regulations. This can include expenses not reimbursed by the Group Health Plan due to deductibles, co-insurance, plan exclusions, eyeglasses, orthodontics, or medically necessary additions and alterations to a home. These and other expenses would be covered by EMRP if they qualify under applicable IRS regulations. BENEFITS EMRP does not require satisfaction of a deductible. Eligible medical expenses will be reimbursed at 100%. CLAIM FILING Bills for medical expenses should be submitted to the Claims Administrator in the special MRP envelopes provided. The administrator will first pay benefits under the Group Health Plan. Reimbursement for expenses not fully covered (or not covered at all) by the Group Health Plan will then be paid for the EMRP. MAXIMUM ANNUAL BENEFIT The maximum EMRP benefits payable during a calendar year for a covered employee and family is $10,000. TAXES Unlike benefit received from the Group Health Plan (which are not taxable income) payments under EMRP are regular income. They are subject to both Federal and State income tax, and FICA if the employee's pay falls below the FICA salary limit. 2 ADDITIONAL REIMBURSEMENT In March of each year while the EMRP remains in effect, the Company will make an additional payment to each employee who received benefits under the plan during the previous year. The amount paid will be a percentage of the EMRP benefits, calculated to cover the taxes generated by such benefit payments. That percentage may be changed from time to time in order to reflect changes in applicable tax rates. The additional reimbursement is also taxable income, and will be included in the employee's W-2 for the year in which the additional reimbursement was paid. TERMINATION OF COVERAGE Coverage will terminate on the earliest of the following dates: 1. An employee terminates employment with Home Depot. 2. Coverage under the Company's Group Health Plan terminates, either due to voluntary action on the part of the employee, or because the Company has cancelled the Group Health Plan. 3. At the end of an approved leave of absence, unless the employee returns to full-time employment with the Company. 4. The employee is no longer an officer of the Company. 5. The Company elects to discontinue the Executive Medical Reimbursement Plan. ERISA EMRP is a cash bonus plan, not insurance. It is not funded, nor does it come under provisions of the Federal Employee Retirement Income Security Act. EX-10.10 3 PARTICIPATION AGREEMENT DATED 10/22/1998 1 EXECUTION COPY - -------------------------------------------------------------------------------- PARTICIPATION AGREEMENT dated as of October 22, 1998 among THE HOME DEPOT, INC., as Guarantor, HOME DEPOT U.S.A., INC., as Lessee, HD REAL ESTATE FUNDING CORP. II, as Facility Lender, CREDIT SUISSE LEASING 92A, L.P., as Lessor, THE BANK OF NEW YORK, as Indenture Trustee and CREDIT SUISSE FIRST BOSTON CORPORATION and INVEMED ASSOCIATES, INC., as Initial Purchasers - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Page SECTION 1. DEFINITIONS; INTERPRETATION.....................................................................2 SECTION 2. CLOSING DATE....................................................................................2 SECTION 3. LEASE OF LAND AND FACILITIES; FINANCING ARRANGEMENTS............................................2 SECTION 3.1. Lessor's Agreement to Refinance and Lease. ...........................................2 SECTION 3.2. Facility Lender's Agreements...........................................................3 SECTION 3.3. Issuance of Fixed Rate Notes...........................................................3 SECTION 3.4. Allocation of Lessor Investment Amount and Loan........................................3 SECTION 4. CERTIFICATE EARNINGS; INTEREST; COMMITMENT FEES.................................................4 SECTION 4.1. Certificate Earnings...................................................................4 SECTION 4.2. Interest on Loan.......................................................................4 SECTION 5. DISTRIBUTIONS OF PAYMENTS AND COLLATERAL PROCEEDS...............................................4 SECTION 5.1. Agreement of Indenture Trustee and Participants........................................4 SECTION 5.2. Basic Rent.............................................................................5 SECTION 5.3. Purchase Payments by Lessee............................................................6 SECTION 5.4. Residual Value Guaranty................................................................7 SECTION 5.5. Sales Proceeds of Remarketing of Properties............................................7 SECTION 5.6. Supplemental Rent......................................................................8 SECTION 5.7. Excepted Payments......................................................................8 SECTION 5.8. Distribution of Payments after Lease Event of Default or Loan Agreement Event of Default....................................8 SECTION 5.9. Other Payments.........................................................................9 SECTION 5.10. Casualty and Condemnation Amounts.....................................................10 SECTION 5.11. Order of Application..................................................................10 SECTION 5.12. Remaining Funds.......................................................................10 SECTION 5.13. Time of Payment.......................................................................10 SECTION 6. CERTAIN INTENTIONS OF THE PARTIES..............................................................10 SECTION 7. CONDITIONS PRECEDENT TO CLOSING DATE...........................................................11 SECTION 7.1. Conditions Precedent -- Documentation.................................................11 SECTION 7.2. Conditions Precedent -- Properties....................................................14 SECTION 7.3. INTENTIONALLY OMITTED.................................................................16 SECTION 7.4. Conditions Precedent to Substitution of Properties....................................16 SECTION 8. REPRESENTATIONS................................................................................18 SECTION 8.1. Representations of the Lessor.........................................................18 SECTION 8.2. Representations of the Guarantor and the Lessee.......................................20 SECTION 8.3. Representations of Guarantor and Lessee as to Properties..............................23
3 SECTION 8.4. Representations of Facility Lender....................................................23 SECTION 8.5. Representations and Warranties of the Indenture Trustee...............................24 SECTION 9. PAYMENT OF CERTAIN EXPENSES....................................................................25 SECTION 9.1. Transaction Expenses..................................................................25 SECTION 9.2. Brokers' Fees and Stamp Taxes. ......................................................25 SECTION 9.3. Certain Fees and Expenses. ..........................................................25 SECTION 10. OTHER COVENANTS AND AGREEMENTS.................................................................26 SECTION 10.1. Covenants of Guarantor and Lessee.....................................................26 SECTION 10.2. Cooperation with the Lessee...........................................................32 SECTION 10.3. Release of Properties.................................................................32 SECTION 10.4. Discharge of Liens....................................................................32 SECTION 10.5. Notice of Credit Rating...............................................................33 SECTION 10.6. Covenants of the Facility Lender and the Lessor.......................................33 SECTION 10.7. No Bankruptcy Proceedings.............................................................34 SECTION 10.8. Notice of Claims Against Lessor.......................................................35 SECTION 11. LESSEE DIRECTIONS..............................................................................35 SECTION 11.1. Lessee Directions. ..................................................................35 SECTION 12. TRANSFER OF INTEREST...........................................................................36 SECTION 12.1. Restrictions on and Effect of Transfer................................................36 SECTION 12.2. Replacement of Lessor or Facility Lender..............................................36 SECTION 13. INDEMNIFICATION................................................................................37 SECTION 13.1. General Indemnification...............................................................37 SECTION 13.2. Environmental Indemnity...............................................................39 SECTION 13.3. Proceedings in Respect of Claims......................................................41 SECTION 13.4. End of Term Indemnity.................................................................42 SECTION 13.5. General Tax Indemnity.................................................................43 SECTION 14. MISCELLANEOUS..................................................................................47 SECTION 14.1. Survival of Agreements................................................................47 SECTION 14.2. No Broker; etc........................................................................47 SECTION 14.3. Notices 47 SECTION 14.4. Counterparts..........................................................................50 SECTION 14.5. Amendments............................................................................50 SECTION 14.6. Usury 51 SECTION 14.7. Confidentiality.......................................................................51 SECTION 14.8. Headings; etc. ......................................................................52 SECTION 14.9. Parties in Interest...................................................................52 SECTION 14.10. GOVERNING LAW.........................................................................52 SECTION 14.11. Severability..........................................................................52
4 SECTION 14.12. Further Assurances....................................................................52 SECTION 14.13. WAIVER OF JURY TRIAL..................................................................53 SECTION 14.14. Limitations on Recourse Against Lessor................................................53 SECTION 14.15. Limitation on Recourse Against Facility Lender........................................53 APPENDICES APPENDIX 1 Definitions and Interpretation APPENDIX 2 Property Costs APPENDIX 3 Pricing Provisions for Lessor Investment Amount EXHIBITS EXHIBIT A Opinion of Counsel to Lessee EXHIBIT B Opinion of Counsel to Facility Lender EXHIBIT C Opinion of Counsel to Lessor EXHIBIT D Assignment of Lease and Consent to Assignment EXHIBIT E Master Assignment and Consent to Master Assignment EXHIBIT F Form of Lease EXHIBIT G Form of Opinion of Counsel to Lessee Required for Substitution of Properties EXHIBIT H Form of Compliance Certificate
5 PARTICIPATION AGREEMENT THIS PARTICIPATION AGREEMENT, dated as of October 22, 1998 (this "Agreement" or "Participation Agreement"), is entered into by and among THE HOME DEPOT, INC., a Delaware corporation, as Guarantor (the "Guarantor"), HOME DEPOT U.S.A., INC. a Delaware corporation, as Lessee ("Lessee"), HD REAL ESTATE FUNDING CORP. II, a Delaware corporation ("Facility Lender"), CREDIT SUISSE LEASING 92A, L.P., a Delaware limited partnership, as lessor ("Lessor"), THE BANK OF NEW YORK, a banking corporation organized and existing under the laws of the State of New York, as Indenture Trustee for the Noteholders (in such capacity, the "Indenture Trustee") and CREDIT SUISSE FIRST BOSTON CORPORATION and INVEMED ASSOCIATES, INC. (collectively, the "Initial Purchasers"). PRELIMINARY STATEMENT In accordance with the terms of this Participation Agreement, the Lease, the Loan Agreement, the Indenture of Trust and the other Operative Documents, A. the Lessor is the owner of certain parcels of Land on which certain Improvements have been constructed for the use of Lessee; B. the Lessor wishes to refinance approximately 97% of the total cost of the acquisition of such Land and the construction of such Improvements; C. the Facility Lender has agreed to issue Fixed Rate Notes at par to the Initial Purchasers pursuant to the Indenture of Trust in an aggregate principal amount equal to the Maximum Debt Amount, with the gross proceeds of the sale of the Fixed Rate Notes to be lent to the Lessor pursuant to the Loan Agreement for the refinancing of the existing indebtedness secured by Liens on the Properties; D. the Lessee wishes to lease the Properties from the Lessor under the Lease and the Guarantor is willing to guarantee the Lessee's obligations under the Operative Documents; E. the Lessee, in consideration of the obligations of the Facility Lender pursuant to the Operative Documents, is willing to pay all costs and fees of the Participants incurred in connection with the transactions contemplated hereby, subject to the limitations contained herein; F. to secure its obligations to the Facility Lender pursuant to the Loan Agreement, the Lessor is granting a lien to the Facility Lender, pursuant to the Mortgages and the other Security Documents, on all of the Lessor's right, title and interest in the Properties and substantially all of the Lessor's rights under the Lease with respect to the Properties; and 6 G. to secure its obligations to the Indenture Trustee and the Noteholders under the Indenture of Trust, the Facility Lender is pledging to the Indenture Trustee, for the benefit of the Noteholders, pursuant to the Master Assignment, substantially all of its right, title and interest in and to the Loan Agreement, the Note and Security Documents received from the Lessor. In consideration of the mutual agreements contained in this Participation Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS; INTERPRETATION Unless the context shall otherwise require, capitalized terms used and not defined herein shall have the meanings assigned thereto in Appendix 1 attached hereto and made a part hereof by this reference for all purposes hereof; and the rules of interpretation set forth in Appendix 1 hereto shall apply to this Participation Agreement. SECTION 2. CLOSING DATE The Closing Date shall occur on the earliest date (on or before October 30, 1998) on which all the conditions precedent thereto set forth in this Agreement shall have been satisfied or waived by the applicable parties as set forth therein (such date referred to herein as the "Closing Date"). SECTION 3. LEASE OF LAND AND FACILITIES; FINANCING ARRANGEMENTS SECTION 3.1. Lessor's Agreement to Refinance and Lease. Subject to the conditions and terms of this Participation Agreement and the other Operative Documents, the Lessor agrees to take the following actions on the Closing Date: (a) to refinance the existing indebtedness secured by the Properties listed on Appendix 2 hereto in the amount of $273,278,000 with the proceeds of the Loan from the Facility Lender; 7 (b) to have invested its own funds in the Properties in an amount of not less than the Minimum Equity Amount; and (c) to lease the Properties listed on Appendix 2 to the Lessee under the Lease. Notwithstanding any other provision hereof, after giving effect to the transactions contemplated hereby, the following statements shall be true (i) the Lessor shall have invested the Lessor Investment Amount in the Properties in the amount shown on Appendix 2, (ii) the aggregate Property Costs with respect to the Properties shall not exceed the Maximum Property Cost, (iii) the aggregate Property Costs with respect to the Properties listed on Appendix 2 shall not exceed 100% of the aggregate As Built Value of such Properties; and (iv) each of the Properties shall be a Facility located in the continental United States. SECTION 3.2. Facility Lender's Agreements. Subject to the conditions and terms of this Participation Agreement and the other Operative Documents, the Facility Lender agrees to make the Loan to the Lessor on the Closing Date pursuant to the Loan Agreement in an aggregate principal amount equal to the Maximum Debt Amount for the Lessor to refinance the existing indebtedness secured by the Properties. Notwithstanding any other provision hereof, the Facility Lender shall not be obligated to make the Loan if the Facility Lender is unable to issue Fixed Rate Notes in an amount sufficient to fund such Loan pursuant to Section 3.3. SECTION 3.3. Issuance of Fixed Rate Notes. Subject to the terms and conditions of this Participation Agreement, the Purchase Agreement and the other Operative Documents, in order to fund its obligation to make the Loan to the Lessor pursuant to the Loan Agreement, the Facility Lender shall on the Closing Date, issue the Fixed Rate Notes pursuant to the Indenture of Trust to the Initial Purchasers at par in an aggregate principal amount equal to the Maximum Debt Amount. SECTION 3.4. Allocation of Lessor Investment Amount and Loan. Notwithstanding any provision of this Participation Agreement to the contrary, the outstanding Facility Lender Property Balance and Lessor Property Balance with respect to each Property shall equal the amount set forth for each Property on Appendix 2, or in the event of any Property substituted therefor after the Closing Date, in the applicable Lease Supplement, as such amounts may be reduced from time to time pursuant to the terms of the Operative Documents. SECTION 3.5. Use of Proceeds. The proceeds of the Loan shall be used to refinance the existing indebtedness in the principal amount of $273,278,000 secured by the Properties (the "Existing Indebtedness"). 3 8 SECTION 4. CERTIFICATE EARNINGS; INTEREST; COMMITMENT FEES SECTION 4.1. Certificate Earnings. (a) The amount of the Lessor Investment Amount outstanding from time to time shall accrue earnings ("Certificate Earnings") at the Certificate Earnings Rate. If all or any portion of the Lessor Investment Amount, any Certificate Earnings payable thereon or any other amount payable by Guarantor or Lessee hereunder shall not be paid within thirty (30) days of the date when due (whether at stated maturity, the acceleration or otherwise), such overdue amount shall bear interest at a rate per annum which is equal to the Overdue Rate which, in the event such amount is not paid within such thirty (30) day period, shall be deemed to have begun to accrue on the due date thereof. (b) Lessor shall select the applicable Certificate Earnings Rate in accordance with the terms and conditions set forth on Appendix 3 attached hereto and incorporated herein by this reference. (c) On each Payment Date, the Lessor shall, subject to the provisions of Section 5, receive the Lessor Basic Rent (determined on the basis of accrued Certificate Earnings) received from payments of Basic Rent made by the Lessee under the Lease from time to time as provided in Section 5. SECTION 4.2. Interest on Loan. (a) The Loan shall accrue interest computed and payable in accordance with the terms of the Loan Agreement. (b) The interest on the Loan shall be paid through the payment of the Lender Basic Rent (determined on the basis of interest on the Loan) received from payments of Basic Rent made by the Lessee under the Lease from time to time as provided in Section 5. SECTION 5. DISTRIBUTIONS OF PAYMENTS AND COLLATERAL PROCEEDS In order to provide for the priority and allocation of payments received from the Lessee and Guarantor and the proceeds of the exercise of remedies by any of the Participants pursuant to the Security Documents, the parties hereto agree as follows: SECTION 5.1. Agreement of Indenture Trustee and Participants. Pursuant to the Master Assignment, all of the payments (other than the Excepted Payments) under the Lease, the Mortgages, the Note, the Participation Agreement and the Loan Agreement have been assigned to the Indenture Trustee for the benefit of the Noteholders. The Indenture Trustee hereby agrees to deposit all such payments, receipts and other consideration of any kind whatsoever (other than the Excepted Payments) received by the Indenture Trustee pursuant to the Master Assignment and any other Security Document in the form received into a segregated cash collateral account 4 9 maintained by the Indenture Trustee for such purpose, which account shall be an Eligible Account (as defined in the Indenture of Trust) (the "Cash Collateral Account"); provided however, each of the Participants expressly agrees that unless the Lessee has received notice that a Loan Agreement Default or Loan Agreement Event of Default has occurred and is continuing, the Lessee may make any payments of Basic Rent constituting Certificate Earnings directly to the Lessor on each Payment Date. Each Participant hereby agrees that any payment received pursuant to the Guaranty shall immediately be delivered in the form received to the Indenture Trustee for deposit in the Cash Collateral Account and application as set forth herein. The Indenture Trustee shall make distributions from the Cash Collateral Account pursuant to the requirements of this Section 5 to each Participant or other Person entitled thereto as promptly as possible (it being understood that any such payment received on a timely basis in accordance with the provisions of the Lease, this Participation Agreement and the other Operative Documents shall be distributed by the Indenture Trustee on the same Business Day to the extent practicable). SECTION 5.2. Basic Rent. Subject to Section 5.8, each payment of Basic Rent (and any payment of interest on overdue installments of Basic Rent) shall be made by Lessee to the Indenture Trustee (subject to the proviso set forth in Section 5.1 hereof) and shall be distributed by the Indenture Trustee as follows (in the following order of priority): first, an amount equal to the Lender Basic Rent shall be distributed to the Noteholders for application to pay in full all accrued but unpaid interest owing to the Noteholders pursuant to the terms of the Indenture of Trust and the Fixed Rate Notes, with a corresponding reduction of accrued interest on the Loan, and second, subject to the last paragraph of this Section 5.2, to the extent received by the Indenture Trustee, an amount equal to the Lessor Basic Rent shall be distributed to the Lessor for application to pay in full all accrued but unpaid Certificate Earnings (together with any overdue interest thereon). Notwithstanding any provision of this Section 5.2 to the contrary, in the event that a Loan Agreement Default under Section 5(a) or (e) of the Loan Agreement or a Loan Agreement Event of Default shall have occurred and be continuing, any such payments which would otherwise be paid to the Lessor pursuant to clause second of this Section 5.2 shall be instead held in the Cash Collateral Account until the earliest to occur of (i) the first date thereafter on which all such Loan Agreement Defaults and Loan Agreement Events of Default shall have been cured (in which case such payment under clause second shall then be made), (ii) the date of any acceleration of the Loan (in which case such payment shall then be applied in the manner contemplated by Section 5.8), or (iii) the 180th day after the occurrence of such Loan Agreement Default or Loan Agreement Event of Default (in which case such payment under clause second shall then be made); provided, however, that notwithstanding the disposition of any prior installment of Lessor Basic Rent under this Section 5.2, each time an installment of Lessor Basic Rent is received by the Indenture Trustee, distribution of such funds shall be made pursuant to clause second, subject to 5 10 the terms of this paragraph. SECTION 5.3. Purchase Payments by Lessee. Subject to Section 5.8, any payment made by the Lessee pursuant to the Lease as a result of: (a) the purchase of the Properties in connection with Lessee's exercise of its Lease Termination Date Purchase Option pursuant to Section 22.2 of the Lease, or (b) the Lessee's purchase of a Property or Properties pursuant to Section 15.4, 16.2 or 17.6 of the Lease, or (c) payment of the Property Balance in accordance with Section 15.4, Section 16.2(b), Section 20.1, or Section 22.3(b) of the Lease, shall be distributed by the Indenture Trustee in the following order of priority: first, an amount equal to the Facility Lender Property Balance with respect to such Property and all accrued and unpaid interest thereon shall be distributed to the Noteholders, with a corresponding reduction in the principal and interest due on the Loan, such amount to be paid pro rata to the Noteholders in accordance with the terms of the Indenture of Trust, and second, an amount equal to the Lessor Property Balance with respect to such Property and all accrued and unpaid Certificate Earnings thereon shall be distributed to the Lessor, and the Lessor Investment Amount and accrued and unpaid Certificate Earnings thereunder shall be reduced by such amount, provided, however, that if a Loan Agreement Default under Section 5(a) or (e) of the Loan Agreement or a Loan Agreement Event of Default shall have occurred and be continuing, any such payments which would otherwise be paid to the Lessor pursuant to clause second of this Section 5.3 shall be instead held in the Cash Collateral Account until the earliest to occur of (i) the first date thereafter on which all such Loan Agreement Defaults and Loan Agreement Events of Default shall have been cured (in which case such payment under clause second shall then be made), (ii) the date of any acceleration of the Loan (in which case such payment shall then be applied in the manner contemplated by Section 5.8), or (iii) the 180th day after the occurrence of such Loan Agreement Default or Loan Agreement Event of Default (in which case such payment under clause second shall then be made); provided, further, that notwithstanding the disposition of any prior installment of Lessor Basic Rent under this clause second, each time an installment of Lessor Basic Rent is received by the Indenture Trustee, distribution of such funds shall be made pursuant to this clause second, subject to the terms of the immediately preceding proviso. SECTION 5.4. Residual Value Guaranty. Subject to Section 5.8, the Residual Value 6 11 Guaranty paid by Lessee pursuant to Article XXII of the Lease shall be distributed by the Indenture Trustee on the Lease Termination Date to the Noteholders in accordance with the terms of the Indenture of Trust, with a corresponding reduction in the Loan. No amount of the Residual Value Guaranty shall be applied pursuant to this Section 5.4 to reduce any portion of the Lessor Investor Amount. SECTION 5.5. Sales Proceeds of Remarketing of Properties. Subject to Section 5.8, any payments received by the Indenture Trustee as Gross Proceeds from the sale of the Properties sold pursuant to Lessee's exercise of the Remarketing Option pursuant to Article XXII of the Lease or otherwise sold by Indenture Trustee, or following the repayment in full of all of the Fixed Rate Notes and the termination of the Master Assignment, the Facility Lender or Lessor, together with any payment made by Lessee as a result of an indemnity payment pursuant to Section 13.4, shall be distributed by Indenture Trustee, Facility Lender or Lessor, as the case may be, on the Lease Termination Date (or following the Lease Termination Date, upon receipt), in the following order of priority: first, to the Noteholders in an amount sufficient to repay the outstanding Fixed Rate Notes in full, including all accrued interest and Premium thereon, if any, (with a corresponding reduction in the Loan) such amount to be paid pro rata to the Noteholders in accordance with the Indenture of Trust, second, the balance, if any, to be distributed to the Lessor to be applied to payment of Certificate Earnings and overdue interest and to repay the Lessor Investment Amount, and third, the balance, if any, shall be distributed to the Lessee to the extent permitted by Section 5.12; provided, however, that if a Loan Agreement Default under Section 5(a) or (e) of the Loan Agreement or a Loan Agreement Event of Default shall have occurred and be continuing, any such payments which would otherwise be paid to the Lessor pursuant to clause second of this Section 5.6 shall be instead held in the Cash Collateral Account until the earliest to occur of (i) the first date thereafter on which all such Loan Agreement Defaults and Loan Agreement Events of Default shall have been cured (in which case such payment under clause second shall then be made), (ii) the date of any acceleration of the Loan (in which case such payment shall then be applied in the manner contemplated by Section 5.8), or (iii) the 180th day after the occurrence of such Loan Agreement Default or Loan Agreement Event of Default (in which case such payment under clause second shall then be made); provided, further, that notwithstanding the disposition of any prior installment of Lessor Basic Rent under clause second, each time an installment of Lessor Basic Rent is received by the Indenture Trustee, distribution of such funds shall be made pursuant to clause second, subject to the terms of the immediately preceding proviso. 7 12 To the extent that any amounts received pursuant to this Section 5.5 relate to a specific Property, the Property Balance relating to such Property shall be deemed to be reduced by the amounts applied pursuant hereto, with a corresponding reduction in the principal amount of the Note and Lessor Investment Amount. SECTION 5.6. Supplemental Rent. Subject to Section 5.7, all payments of Supplemental Rent received by the Indenture Trustee (excluding any amounts payable pursuant to the preceding provisions of this Section 5) shall be distributed promptly by the Indenture Trustee upon receipt thereof to the Persons entitled thereto pursuant to the Operative Documents. SECTION 5.7. Excepted Payments. Notwithstanding any other provision of this Participation Agreement or the Operative Documents, any Excepted Payment received at any time by the Indenture Trustee or any Participant shall, subject to the penultimate sentence of Section 5.1, be distributed promptly to the Person entitled to receive such Excepted Payment. SECTION 5.8. Distribution of Payments after Lease Event of Default or Loan Agreement Event of Default. (a) Subject to Section 5.6, all payments (other than Excepted Payments) received and amounts realized or held by the Indenture Trustee, Facility Lender or Lessor after a Lease Event of Default has occurred and is continuing, including proceeds from the sale of any of the Properties or other collateral, proceeds of any amounts from any insurer or any Governmental Authority in connection with any Casualty or Condemnation, from the Lessee as payment in accordance with the Lease, including any payment received from the Lessee pursuant to Section 17 of the Lease (but excluding Section 17.6 of the Lease), or from the Guarantor pursuant to the Guaranty shall, be paid to the Indenture Trustee as promptly as possible and shall be distributed by Indenture Trustee in the following order of priority: first, so much of such payment or amount as shall be required to reimburse the Indenture Trustee or the Noteholders for any tax, expense or other loss incurred by the Indenture Trustee or the Noteholders in connection with the collection of such amounts (to the extent not previously reimbursed) shall be distributed to the Indenture Trustee or the Noteholders, as applicable (to be divided amongst such parties pro rata to the extent insufficient to satisfy all claims); second, so much of such amount as shall be required to pay in full the outstanding principal amount, and all accrued interest and premium, if any, on the Fixed Rate Notes shall be distributed on a pro rata basis to the Noteholders in accordance with the terms of the Indenture of Trust with a corresponding reduction of amounts due with respect to the Loan; third, so much of such amount as shall be required to reimburse the Facility Lender 8 13 or the Lessor for any tax, expense or other loss incurred by the Facility Lender or the Lessor in connection with the collection of such amounts (to the extent not previously reimbursed) shall be distributed to the Facility Lender or the Lessor, as applicable (to be divided amongst such parties pro rata to the extent insufficient to satisfy all claims); fourth, so much of such amount or amounts as shall be required to pay in full the Participant Balance of Lessor shall be distributed to the Lessor; and fifth, the balance, if any, of such payment or amounts remaining thereafter shall be promptly distributed to, or as directed by, the Lessor, pursuant to the Operative Documents. (b) During the occurrence and continuance of a Loan Agreement Event of Default if the Loan has been accelerated, all amounts (other than Excepted Payments) received or realized by any Participant and otherwise distributable pursuant to Sections 5.2 and 5.3 shall be distributed as provided for in Section 5.8 (a) above except that if such Loan Agreement Default does not arise out of, or is not attributable to a Lease Event of Default, clause fifth shall, subject to Section 5.12, be directed by the Lessee. SECTION 5.9. Other Payments. (a) Except as otherwise provided in this Section 5 and paragraph (b) below, (i) any payment received by Indenture Trustee for which no provision as to the application thereof is made in the Operative Documents or elsewhere in this Section 5, and (ii) all payments received and amounts realized by any Participant under the Lease or otherwise with respect to the Properties to the extent received or realized at any time after payment in full of the Participant Balances of all of the Participants and any other amounts due and owing to the Lessor, Facility Lender, Noteholders or the Indenture Trustee, shall be distributed forthwith by the Indenture Trustee in the order of priority set forth in Section 5.3 (in the case of any payment described in clause (i) above) or in Section 5.8 hereof (in the case of any payment described in clause (ii) above). (b) Except as otherwise provided in this Section 5 hereof and except after a Lease Event of Default has occurred and is continuing, any payment received by the Indenture Trustee for which provision as to the application thereof is made in an Operative Document but not elsewhere in this Section 5 shall be distributed forthwith by the Indenture Trustee to the Person and for the purpose for which such payment was made in accordance with the terms of such Operative Document. 9 14 SECTION 5.10. Casualty and Condemnation Amounts. Any amounts payable to the Indenture Trustee, Lessor or Facility Lender as a result of a Casualty or Condemnation pursuant to Section 15.1 of the Lease (but excluding any amounts payable pursuant to Section 16.2 of the Lease) shall, if no Lease Event of Default exists, be paid over to the Lessee to reimburse Lessee for any amounts expended by Lessee for the rebuilding or restoration of the Property to which such Casualty or Condemnation applied, and any excess proceeds shall be paid in accordance with the Lease. If a Lease Event of Default exists, then during the continuance of such Lease Event of Default, all such amounts shall be held by the Indenture Trustee in the Cash Collateral Account and upon exercise of the Indenture Trustee's remedies under the Operative Documents shall be distributed pursuant to Section 5.8. SECTION 5.11. Order of Application. To the extent any payment made to any Participant pursuant to Sections 5.2, 5.3, 5.4, 5.5 or 5.8 is insufficient to pay in full (without duplication) the Participant Balance of such Participant, then each such payment shall first be applied to overdue interest, then to accrued interest and premium, if any, and then to principal. SECTION 5.12. Remaining Funds. Upon the payment in full of (i) the Fixed Rate Notes (and the Note), including all interest and premium, if any, owing with respect thereto and the Lessor Investment Amount, including principal and all accrued and unpaid Certificate Earnings, and (ii) all amounts owing by the Lessee or Guarantor to any Person under the Operative Documents, all remaining moneys in the Cash Collateral Account shall be paid to the Lessee. SECTION 5.13. Time of Payment. Each payment due from Lessee or Guarantor under the Operative Documents shall be made prior to 2:00 p.m. (New York time) on the date when due in immediately available funds consisting of lawful currency of the United States of America, unless such date shall not be a Business Day, in which case payment shall be made on the next succeeding Business Day. Payments received after 2:00 p.m. (New York time) shall be deemed received on the next succeeding Business Day. SECTION 6. CERTAIN INTENTIONS OF THE PARTIES Anything else herein, in any other Operative Document, or elsewhere to the contrary notwithstanding, it is the intention of Guarantor, the Lessee, the Lessor, the Facility Lender and the Indenture Trustee (and, assuming enforcement of the Operative Documents in accordance with their terms, it is the representation and warranty of the Guarantor and the Lessee) that: (i) the amount and timing of installments of Basic Rent due and payable from time to time from the Lessee under the Lease shall be equal to the aggregate payments due and payable for interest on the Loan and Certificate Earnings on the Lessor Investment Amount on each Payment Date and 10 15 that such interest amount payable on the Loan shall at all times equal the aggregate accrued interest on the principal amount of the Fixed Rate Notes; (ii) if the Lessee elects the Lease Termination Date Purchase Option or becomes obligated to purchase any Property under the Lease, the Loan, the Lessor Investment Amount, all interest, Certificate Earnings and Premium related to such Property and all other obligations of the Lessee owing to the Lessor, the Facility Lender, the Noteholders and the Indenture Trustee relating thereto shall be paid in full by the Lessee so that the aggregate Property Costs shall at all times equal the sum of (x) the Principal Amount of the Fixed Rate Notes, plus (y) the Lessor Investment Amount not previously prepaid; (iii) if the Lessee properly elects the Remarketing Option with respect to a Property and provided that no Lease Event of Default has occurred and is continuing, Lessee shall only be required to pay to the Lessor the Gross Proceeds of the sale of such Property, the Residual Value Guaranty for such Property, any amounts payable pursuant to Section 13 of this Participation Agreement and any Rent with respect to such Property (which aggregate amounts may be less than the Property Balance under the Lease with respect to such Property); and (iv) upon a Lease Event of Default, the amounts then due and payable by the Lessee under the Lease shall include the Lease Balance which shall be sufficient to repay the Fixed Rate Notes and Lessor Investment Amount in full. SECTION 7. CONDITIONS PRECEDENT TO CLOSING DATE SECTION 7.1. Conditions Precedent -- Documentation. The obligations of the Lessor and Facility Lender on the Closing Date are subject to satisfaction of the following conditions precedent and to the conditions precedent set forth in Section 7.2: (a) Operative Documents. Each of the Operative Documents to be entered into on the Closing Date shall have been duly authorized, executed and delivered by the parties thereto, and shall be in full force and effect, including (i) this Participation Agreement, (ii) the Lease, (iii) the Loan Agreement, (iv) the Note, (v) the Indenture of Trust, (vi) the Fixed Rate Notes, (vii) the Assignment of Lease (together with all supplemental assignments, the "Assignment of Lease"), from the Lessor to the Facility Lender, and consented to by Lessee pursuant to that certain Lessee's Consent, dated as of the Closing Date (the "Consent to Assignment") by Lessee, in favor of the Facility Lender, in each case, substantially in the respective forms set forth as Exhibit D to this Agreement, with such modifications thereto as local law or custom may indicate and are agreed to by the participants, (viii) the Guaranty, (ix) the Master Assignment (together with all supplemental assignments, the "Master Assignment") from the Facility Lender to the Indenture Trustee for the benefit of the Noteholders, and consented to by the Lessor and Lessee pursuant to that certain Consent to Master Assignment, dated as of the Closing Date (the "Consent to Master Assignment") by the Lessor and the Lessee in favor of the Indenture Trustee for the benefit of the Noteholders, 11 16 and the Lessor, Lessee, the Indenture Trustee and the Facility Lender shall each have received a fully executed copy of each of the Operative Documents. (b) No Default. No Default or Event of Default shall exist (both before and after giving effect to the transactions contemplated by the Operative Documents). (c) Recordation of Documents. The Operative Documents (or memoranda thereof), any supplements thereto and any financing statements in connection therewith required under the Uniform Commercial Code shall have been recorded, registered and filed, if necessary, in such manner as to enable Lessee's counsel to render its opinion referred to in clause (e) below and local counsel to render the opinions required by Section 7.2(f). (d) Taxes. All taxes, fees and other charges in connection with the execution, delivery, recording, filing and registration of the Operative Documents shall have been paid or provisions for such payment shall have been made to the satisfaction of the Lessor, Facility Lender and the Initial Purchasers. (e) Opinion of Counsel. King & Spalding, counsel to Guarantor and Lessee, shall have issued to the Lessor, the Indenture Trustee, the Noteholders and the Facility Lender its opinion to the effect and in the form set forth on Exhibit A attached to this Agreement. (f) Governmental Approvals. All necessary (or, in the reasonable opinion of the Lessor or the Indenture Trustee or any of their respective counsel advisable) Governmental Actions, in each case required by any Requirement of Law, shall have been obtained or made and be in full force and effect. (g) Litigation. No action or proceeding shall have been instituted, nor shall any action or proceeding be threatened, before any Governmental Authority, nor shall any order, judgment or decree have been issued or proposed to be issued by any Governmental Authority (i) to set aside, restrain, enjoin or prevent the full performance of this Participation Agreement, any other Operative Document or any transaction contemplated hereby or thereby or (ii) which could have a Material Adverse Effect. (h) Requirements of Law. The transactions contemplated by the Operative Documents do not and will not violate any applicable Requirement of Law and do not and will not subject the Lessor, the Facility Lender, the Indenture Trustee or any Noteholder to any adverse regulatory prohibitions or constraints. (i) Officer's Certificate of Guarantor and Lessee. The Lessor, the Facility Lender and the Indenture Trustee shall each have received an Officer's Certificate, dated as of the Closing Date, of each of Guarantor and Lessee stating that (i) each and every representation and warranty of Guarantor or Lessee, as the case may be, contained in the Operative Documents to which it is a 12 17 party is true and correct on and as of the Closing Date; (ii) no Default or Event of Default has occurred and is continuing under any Operative Document; (iii) each Operative Document to which Guarantor or Lessee, as the case may be, is a party is in full force and effect with respect to it; and (iv) Guarantor or Lessee, as the case may be, has duly performed and complied with all covenants, agreements and conditions contained herein or in any Operative Document required to be performed or complied with by it on or prior to the Closing Date. (j) Guarantor and Lessee's Resolutions and Incumbency Certificate, etc. The Lessor, the Facility Lender and the Indenture Trustee shall each have received (i) a certificate of the Secretary or an Assistant Secretary of each of Guarantor and Lessee attaching and certifying as to (A) the resolutions of the Board of Directors duly authorizing the execution, delivery and performance by Guarantor or Lessee, as the case may be, of each Operative Document to which it is or will be a party, (B) its certificate of incorporation and bylaws, in each case certified as of a recent date by the Secretary of State of Delaware, and (C) the incumbency and signature of persons authorized to execute and deliver on its behalf the Operative Documents to which it is a party, and (ii) a good standing certificate from the appropriate officer of the state in which such Person is incorporated and the state in which such Person's principal place of business is located. (k) Officer's Certificate of Facility Lender. Lessee, Guarantor, the Indenture Trustee and the Lessor shall have received an Officer's Certificate of the Facility Lender, dated as of the Closing Date, stating that (i) each and every representation and warranty of the Facility Lender contained in the Operative Documents to which it is a party is true and correct on and as of the Closing Date, (ii) each Operative Document to which the Facility Lender is a party is in full force and effect with respect to it, and (iii) the Facility Lender has duly performed and complied with all covenants, agreements and conditions contained herein or in any Operative Document required to be performed or complied with by it on or prior to the Closing Date. (l) Facility Lender's Resolutions and Incumbency Certificate. etc. Lessee, Guarantor, the Indenture Trustee and the Lessor shall have received a certificate of the Secretary or an Assistant Secretary of the Facility Lender attaching and certifying as to (A) the resolutions of the Board of Directors duly authorizing the execution, delivery and performance by the Facility Lender of each Operative Document to which it is or will be a party, (B) its articles of incorporation, certified as of a recent date by the Secretary of State of the State of its incorporation, (C) its by-laws and (D) the incumbency and signature of persons authorized to execute and deliver on its behalf the Operative Documents to which it is a party. (m) Opinions of Counsel to Facility Lender. Ropes & Gray, counsel to the Facility Lender and Hunton & Williams, special counsel to the Facility Lender, shall have issued to Lessee, Guarantor, Lessor and the Indenture Trustee their opinion to the effect and in the form set forth on Exhibit B attached to this Agreement. (n) Officer's Certificate of Lessor. Lessee, Guarantor, the Indenture Trustee and the 13 18 Facility Lender shall have received an Officer's Certificate of the Lessor, dated as of the Closing Date, stating that (i) each and every representation and warranty of the Lessor contained in the Operative Documents to which it is a party is true and correct on and as of the Closing Date, (ii) each Operative Document to which the Lessor is a party is in full force and effect with respect to it, and (iii) the Lessor has duly performed and complied with all covenants, agreements and conditions contained herein or in any Operative Document required to be performed or complied with by it on or prior to the Closing Date. (o) Lessor's Partnership Certificate, etc. Lessee, Guarantor, the Indenture Trustee and the Facility Lender shall have received a certificate of the Secretary or an Assistant Secretary of the Lessor attaching and certifying as to (A) the resolutions of the Board of Directors of its general partner and other evidence of partner approval duly authorizing the execution, delivery and performance by the Lessor of each Operative Document to which it is or will be a party, (B) its certificate of limited partnership, certified as of a recent date by the Secretary of State of the State of its organization, (C) its partnership agreement and (D) the incumbency and signature of persons authorized to execute and deliver on its behalf the Operative Documents to which it is a party. (p) Opinion of Counsel to Lessor. Hunton & Williams, counsel to the Lessor, shall have issued to Lessee, the Guarantor, the Facility Lender and the Indenture Trustee their opinion to the effect and in the form set forth on Exhibit C attached to this Agreement and made a part hereof by this reference. (q) Rating of Fixed Rate Notes. Moody's and/or S&P shall have issued a rating of the Fixed Rate Notes as of the Closing Date satisfactory to satisfy the requirements of the Indenture of Trust and all conditions precedent to the issuance of the Fixed Rate Notes under the Indenture of Trust shall have been satisfied or waived. (r) Pay-Off of Existing Indebtedness; Release of Liens. Existing Indebtedness shall have been repaid in full, all mortgages, deeds of trust and other Liens against the Properties securing the Existing Indebtedness shall have been released or removed and all of the existing leases on the Properties executed in connection with the Existing Indebtedness shall have been terminated. (s) Note Purchase Agreement. The satisfaction or waiver by the Initial Purchasers of all conditions to the closing of the transactions contemplated by the Purchase Agreement. SECTION 7.2. Conditions Precedent -- Properties. The obligation of the Lessor and Facility Lender on the Closing Date are subject to satisfaction of the following conditions precedent with respect to each Property listed on Appendix 2 hereto and to the conditions precedent set forth in Section 7.1: (a) Environmental Audits. An Environmental Audit for each Property shall have been delivered to and shall be reasonably satisfactory in form and substance to the Initial 14 19 Purchasers and the Lessor. (b) Appraisals. An Appraisal of each Property shall have been delivered to and shall be reasonably satisfactory to the Initial Purchasers and the Lessor. (c) Memoranda of Lease. The Lessee and the Lessor shall have delivered an original counterpart of the Lease Supplement and a Memorandum of Lease (in form suitable for recording in the state in which such Property is located) executed by the Lessee and the Lessor with respect to each Property listed on Appendix 2 hereto to the Indenture Trustee, with a copy to the Facility Lender. (d) Mortgages. The Lessor shall have delivered to the Indenture Trustee a Mortgage executed by the Lessor with respect to such Property, together with accompanying UCC fixture filings (in form suitable for recording in the state in which such Property is located). (e) Assignment of Lease. The Lessor shall have delivered to the Indenture Trustee a supplement to Assignment of Lease and the Assignment of Lease executed by the Lessor with respect to the Properties, together with a consent to the Assignment of Lease and Supplement of Assignment of Lease executed by the Lessee with respect to each Property. (f) Opinion of Local Counsel. The Indenture Trustee, the Lessor and the Facility Lender shall have received an opinion of counsel, which counsel and whose opinion shall be reasonably satisfactory to the Initial Purchasers and the Lessor and which shall be qualified with respect to the laws of the jurisdiction in which such Property is located. (g) Survey. The Lessee shall have delivered a survey of each of the Properties, to the Lessor and the Initial Purchasers in form and substance reasonably satisfaction to them. (h) Title Insurance Policy. The Lessee shall deliver, or cause to be delivered, to the Indenture Trustee, the Facility Lender, and the Lessor an ALTA extended leaseholder's (with respect to Lessee) and lender's (with respect to the Facility Lender and the Indenture Trustee) title insurance commitment covering such Property in favor of the Indenture Trustee, the Facility Lender, and the Lessee reasonably satisfactory in form and substance to the Initial Purchasers, Facility Lender and Lessor, with customary coverage over the general exceptions to such policy and customary endorsements issued by the title company and evidencing the first priority status of the Mortgage, subject only to the exceptions noted therein. 15 20 (i) Evidence of Completion. Completion shall have been reached with respect to each Property and each Property shall be ready for occupancy and operation and shall be free and clear of all Liens except for Permitted Liens. (j) Representations and Warranties. On such date the representations and warranties of Guarantor and Lessee contained herein and in each of the other Operative Documents shall be true and correct in all material respects as though made on and as of such date, except to the extent such representations and warranties relate solely to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects as of such earlier date. (k) Performance by Other Parties. The other parties hereto shall have performed their respective agreements contained herein and in the other Operative Documents to be performed by them on or prior to such date. (l) No Default. There shall not have occurred and be continuing any Default or Event of Default and not Default or Event of Default will have occurred after giving effect to the transactions contemplated hereby. SECTION 7.3. INTENTIONALLY OMITTED. SECTION 7.4. Conditions Precedent to Substitution of Properties. In addition to Section 16.3 and Article XV of the Lease and the other requirements of the Operative Documents in connection with the substitution of any Replacement Property pursuant to the terms of the Lease, the Lessee's right to substitute a Replacement Property is subject to the following requirements on the part of the Lessee to be completed as of the date of such substitution: (a) Environmental Audits. An Environmental Audit for such Replacement Property shall have been delivered to and shall be reasonably satisfactory in form and substance to the Lessor and prepared in a manner consistent with the customary and usual practices that Lessee and the Guarantor utilize with respect to all other real properties owned or leased by Lessee and the Guarantor. (b) Appraisals. An Appraisal of such Property shall have been delivered to and shall be reasonably satisfactory to the Lessor and prepared in a manner consistent with the customary and usual practices that Lessee and the Guarantor utilizes with respect to all other real properties owned or leased by Lessee and the Guarantor. (c) Lease Supplement and Memoranda of Lease. The Lessee and the Lessor shall have delivered an original counterpart of a Lease Supplement and a Memorandum of Lease (in form suitable for recording in the state in which such Property is located) executed by the Lessee and the Lessor with respect to such Replacement Property 16 21 to the Indenture Trustee, with a copy to the Facility Lender. (d) Supplement to Assignment of Lease and Master Assignment. The Lessor and the Facility Lender shall have executed and delivered to the Indenture Trustee a Supplement to Assignment of Lease and a Supplement to Master Assignment in form suitable for recording in the state where such Replacement Property is located, together with a consent of Lessee and the Facility Lender with respect thereto. (e) Mortgages. The Lessor shall have delivered to the Indenture Trustee a Mortgage executed by the Lessor with respect to such Replacement Property, together with accompanying UCC fixture filings (in form suitable for recording in the state in which such Property is located). (f) Opinion of Local Counsel. The Indenture Trustee, the Lessor and the Facility Lender shall have received an opinion of counsel, which counsel and whose opinion shall be reasonably satisfactory to the Lessor and qualified with respect to the laws of the jurisdiction in which such Replacement Property is located. (g) Survey. The Lessee shall have delivered a survey of such Replacement Property to the Lessor in form and substance reasonably satisfaction to Lessor and prepared in a manner consistent with the customary and usual practices that Lessee and the Guarantor utilizes with respect to all other real properties owned or leased by Lessee and the Guarantor. (h) Title Insurance Policy. The Lessee shall deliver, or cause to be delivered, to the Indenture Trustee, the Facility Lender and the Lessor an ALTA extended leasehold owner's (with respect to Lessee) and lender's (with respect to the Facility Lender and the Indenture Trustee) title insurance commitment covering such Replacement Property in favor of the Indenture Trustee, the Facility Lender and the Lessee reasonably satisfactory in form and substance to the Facility Lender and Lessor, with customary coverage over the general exceptions to such policy and customary endorsements issued by the title company and evidencing the first priority status of the Mortgage, subject only to the exceptions noted therein. (i) Evidence of Completion. Completion shall have been reached with respect to such Replacement Property and such Property shall be ready for occupancy and operation and shall be free and clear of all Liens except for Permitted Liens. (j) Opinion of Counsel. The Lessee shall deliver an opinion of counsel to Lessor substantially in the form and to the effect set forth on Exhibit H to this Agreement. (k) Limit on Substitution. The Replacement Property shall be a warehouse-style retail 17 22 home improvement center which (1) is located in a substantially similar locale, based on a current market analysis, and in the same region of the United States to the Property to be released, and (2) has a substantially similar appraised value as determined by an Appraiser based on projected net cash flow (after reserves) at stabilized occupancy (assuming the Lease has been terminated and the Lessee is not available as a tenant of the Replacement Property or the Property to be released) as the Property to be released and any substitution pursuant to the Lease shall be permitted only where the aggregate Property Costs of the Properties remaining subject to the Lease after giving effect to the proposed substitution (exclusive of any Replacement Properties that previously became subject to the Lease pursuant to Section 16.3 or Article XV thereof) is not less than the Permitted Amount. SECTION 8. REPRESENTATIONS SECTION 8.1. Representations of the Lessor. Lessor represents and warrants to each of the other parties hereto as follows: (a) Due Organization; etc. It is a limited partnership duly organized and validly existing and in good standing under the laws of the State of Delaware and has the power and authority to enter into and perform its obligations under the Operative Documents to which it is or will be a party and each other agreement, instrument and document to be executed and delivered by it in connection with or as contemplated by each such Operative Document to which it is or will be a party. It is duly qualified to transact business in every jurisdiction where the failure to qualify would have a material adverse effect on its ability to perform its obligations under the Operative Documents as contemplated on the Closing Date. (b) Authorization; No Conflict. The execution, delivery and performance of each Operative Document to which it is or will be a party, has been duly authorized by all necessary action on its part and on the part of its general partner and neither the execution and delivery thereof, nor the consummation of the transactions contemplated thereby, nor compliance by it with any of the terms and provisions thereof (i) does or will require any approval or consent of any trustee or holders of any of its indebtedness or obligations or those of its general partner, (ii) does or will contravene any current law, governmental rule or regulation relating to it or its general partner, (iii) does or will contravene or result in any breach of or constitute any default under, or result in the creation of any Lien upon any of it or its general partner's property under its partnership agreement or any Contractual Obligation of the Lessor or its general partner, or (iv) does or will require any Governmental Action by any Governmental Authority. 18 23 (c) Enforceability; etc. Each Operative Document to which the Lessor is or will be a party has been, or on or before any Closing Date on which such Operative Document is to be signed will be, duly executed and delivered by the Lessor and each such Operative Document to which the Lessor is a party constitutes, or upon execution and delivery will constitute, assuming the due authorization, execution and delivery hereof and thereof by the other parties hereto and thereto, a legal, valid and binding obligation enforceable against the Lessor in accordance with the terms thereof, except as such enforceability may be limited or denied by (i) applicable bankruptcy, insolvency, reorganization, moratorium or similar laws effecting creditors' rights and the enforcement of debtors' obligations generally, and (ii) general principles of equity, regardless of whether enforcement is pursuant to a proceeding in equity or at law. (d) Litigation. There is no action or proceeding pending or, to Lessor's knowledge, threatened to which it or, to the best of its knowledge, its general partner is or will be a party, before any Governmental Authority that, if adversely determined, could reasonably be expected to have a material adverse effect on the property, operations or financial condition of the Lessor or, to the best of its knowledge, its general partner. (e) Assignment. It has not assigned or transferred any of its right, title or interest in or under the Lease or the Guaranty except in accordance with the Operative Documents. (f) Defaults. No Default or Event of Default under the Operative Documents attributable to it has occurred and is continuing. (g) Securities Act. Neither the Lessor nor any Person authorized by the Lessor to act on its behalf has offered or sold any interest in the Lessor Investment Amount or the Note, or in any similar security relating to a Property, or in any security the offering of which for the purposes of the Securities Act would be deemed to be part of the same offering as the offering of the aforementioned securities to, or solicited any offer to acquire any of the same from, any Person other than the parties hereto and neither the Lessor nor any Person authorized by the Lessor to act on its behalf will take any action which would subject the issuance or sale of any interest in the Lessor Investment Amount or the Note to the provisions of Section 5 of the Securities Act or require the qualification of any Operative Document under the Trust Indenture Act. (h) Chief Place of Business. The Lessor's chief place of business, chief executive office and office where the documents, accounts and records relating to the transactions 19 24 contemplated by this Participation Agreement and each other Operative Document are kept are located at 11 Madison Avenue, 23rd Floor, New York, New York 10010. (i) Federal Reserve Regulations. The Lessor is not engaged principally in, and does not have as one of its important activities, the business of extending credit for the purpose of purchasing or carrying any margin stock (within the meaning of Regulation U of the Federal Reserve Board). (j) Investment Company Act. The Lessor is not an "investment company" or a company controlled by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (k) General Partner. Credit Suisse First Boston is the sole general partner of the Lessor. SECTION 8.2. Representations of the Guarantor and the Lessee. Each of the Guarantor and the Lessee represents and warrants to each of the other parties hereto that: (a) Corporate Existence and Power. Each of the Guarantor and the Lessee is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, is duly qualified to"transact business in every jurisdiction where each Property is located (in the case of Lessee) and where the failure to so qualify would reasonably be expected to have or cause a Material Adverse Effect, and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, except where the failure to possess any such licenses, authorizations, consents, or approvals would not reasonably be expected to have or cause a Material Adverse Effect. (b) Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by each of the Guarantor and the Lessee of this Participation Agreement and the other Operative Documents to which it is a party (i) are within its corporate powers, (ii) have been duly authorized by all necessary corporate action, (iii) require no Governmental Action by or in respect of or filing with, any Governmental Authority, (iv) do not contravene, or constitute a default under, any Applicable Law or of the certificate of incorporation or by-laws of the Guarantor, Lessee, or of any material agreement, judgment, injunction, order, decree or other instrument binding upon the Guarantor or the Lessee, and (v) do not result in the creation or imposition of any Lien on any asset of the Guarantor or the Lessee. 20 25 (c) Binding Effect. This Participation Agreement constitutes a valid and binding agreement of each of the Guarantor and the Lessee enforceable in accordance with its terms, and the other Operative Documents to which it is, or will become a party, when executed and delivered in accordance with this Participation Agreement, will constitute valid and binding obligations of the Guarantor or Lessee enforceable in accordance with their respective terms, provided that the enforceability hereof and thereof is subject in each case to general principles of equity and to bankruptcy, insolvency and similar laws affecting the enforcement of creditors' rights generally. (d) Trust Indenture Act. Assuming that the Initial Purchasers' representations and warranties contained in the Purchase Agreement are true and assuming compliance by the Initial Purchasers with the covenants set forth in Section 4 of the Purchase Agreement, it is not necessary in connection with the offer, sale and delivery of the Fixed Rate Notes in the manner contemplated by the Indenture of Trust to register the Fixed Rate Notes under the Securities Act or to qualify the Indenture or Trust under the United States Trust Indenture Act of 1939 (the "Trust Indenture Act"). (e) Rule 144 A Representations. (i) When the Fixed Rate Notes are issued and delivered pursuant to the Indenture of Trust, such Fixed Rate Notes will not be of the same class (within the meaning of Rule 144A) as securities of the Guarantor which are listed on a national securities exchange registered under Section 6 of the Exchange Act or quoted in a U.S. automated inter-dealer quotation system; (ii) the Guarantor is not subject to Section 13 or 15(d) of the Exchange Act; (iii) the Guarantor is not an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the United States Investment Company Act of 1940 (the "Investment Company Act"); (iv) neither the Guarantor nor any affiliate (as defined in Rule 501 (b) under the Securities Act) of the Guarantor has, directly or through any agent, sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Securities Act) which is or will be integrated with the sale of the Fixed Rate Notes in a manner that would require the registration of the Fixed Rate Notes under the Securities Act; and (v) neither the Guarantor nor any person acting on its behalf (other than the Initial Purchasers, as to which the Guarantor makes no representation) has engaged or will engage, in connection with the offering of the Fixed Rate Notes, in any form of general solicitation or general advertising within the meaning of Rue 502(c) under the Securities Act, or with respect to Fixed Rate Notes sold in reliance on Rule 903 ("Rule 903") under the Securities Act, in any directed selling efforts within the meaning of Rule 903 with respect to the Fixed Rate Notes and each of them has complied and will comply with the offering restrictions requirement of Regulation S. (f) No Default. Neither the Guarantor nor any of its Subsidiaries is in default under or 21 26 with respect to any agreement, instrument or undertaking to which it is a party or by which it or any of its property is bound which could reasonably be expected to have or cause a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. (g) Environmental Matters. (i) Neither the Guarantor nor any Subsidiary is subject to any claim under the Environmental Laws with respect to the Properties which could have or cause a Material Adverse Effect and neither the Guarantor nor any Subsidiary has been designated as a potentially responsible party under CERCLA or under any state statute similar to CERCLA. None of the Properties has been identified on any current or proposed (x) National Priorities List under 40 C.F.R. ss. 300, (y) CERCLIS list or (z) any list arising from a state statute similar to CERCLA. (ii) No Hazardous Substances have been or are being used, produced, manufactured, processed, treated, recycled, generated, stored, disposed of, managed or otherwise handled at, or shipped or transported to or from the Properties or are otherwise present at, on, in or under the Properties, or, to the best of the knowledge of the Guarantor and Lessee, at or from any adjacent site or facility, except for Hazardous Substances, such as cleaning solvents, pesticides and other materials used, produced, manufactured, processed, treated, recycled, generated, stored, disposed of, managed, or otherwise handled in minimal amounts in the ordinary course of business in compliance with all applicable Environmental Laws. (iii) Each of the Guarantor and each of its Subsidiaries and Affiliates, (x) has procured all permits and authorizations required under the Environmental Laws necessary for the conduct of its business on the Properties, and (y) is in compliance with all Environmental Laws in connection with the operation of the Properties and the Guarantor's and each of its Subsidiary's and Affiliate's, respective businesses, in each case set forth in either of clause (x) or (y) where the failure to procure or non-compliance with which would reasonably be expected to have or cause a Material Adverse Effect. (h) Facility Lender. The representations and warranties of the Facility Lender, set forth in the Operative Documents (including the representations and warranties set forth in Sections 8.4) are true and correct in all material respects and the Facility Lender is in compliance with its obligations under the Operative Documents. (i) Disclosure. All written information heretofore furnished by the Guarantor or the Lessee to the Facility Lender, Indenture Trustee, Initial Purchasers or Lessor for purposes of or in connection with this Participation Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the 22 27 Guarantor or the Lessee to the Facility Lender, Indenture Trustee, any Noteholder or Lessor will be, true and correct in all material respects or based on what the Guarantor or the Lessee in good faith believes to be reasonable estimates on the date as of which such information is stated or certified. (j) No Litigation. There is no action, suit or proceeding pending, or to the knowledge of the Guarantor or Lessee, threatened, against or affecting the Guarantor, Lessee or any of their Subsidiaries, before any court or arbitrator or any Governmental Authority which would reasonably be expected to have or cause a Material Adverse Effect. SECTION 8.3. Representations of Guarantor and Lessee as to Properties. Each of the Guarantor and the Lessee hereby represents and warrants as of the Closing Date with respect to each Property, as follows: (a) Property. Each Property consists of Land on which a Facility has been constructed. Such Property is located in the continental United States. (b) Insurance. Lessee has obtained insurance coverage covering such Property or is self-insured in a manner which meets the requirements of Article XIV of the Lease, and such coverage is in full force and effect. (c) Lease. Upon the execution and delivery of a Lease Supplement to the Lease and Memorandum of Lease, (i) Lessee will have unconditionally accepted the Land and existing Improvements subject to such Lease Supplement and will have good and marketable title to a valid and subsisting leasehold interest in the Land and existing Improvements, subject only to Permitted Exceptions, (ii) no offset will exist with respect to any Rent or other sums payable under the Lease and (iii) no Rent under the Lease will have been prepaid. (d) Protection of Interests. Upon recordation, each Mortgage and each Supplement to Assignment of Lease delivered on the Closing Date will constitute a valid and perfected first Lien on the Property that is subject to such Mortgage and Supplement to Assignment of Lease and all of the Lessor's right, title and interest in and to the Improvements located thereon, subject only to Permitted Exceptions. (e) Flood Hazards. No portion of any Property is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, or if any such Property is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, then flood insurance has been obtained for such Property in accordance with Section XI of the Lease and in accordance with the National Flood 23 28 Insurance Act of 1968, as amended. SECTION 8.4. Representations of Facility Lender. Facility Lender represents and warrants to each of the other parties hereto that: (a) Corporate Status. It (i) is a duly organized and validly existing corporation in good standing under the laws of the state of its incorporation and has the corporate power and authority to own its property and assets and to transact the business in which it is engaged and (ii) has duly qualified and is authorized to do business and is in good standing in all jurisdictions where it is required to be so qualified and where the failure to be so qualified could have a material adverse effect on the property, operations or financial condition of Facility Lender. (b) Corporate Power and Authority. It has the corporate power and authority to execute, deliver and carry out the terms and provisions of the Operative Documents to which it is or will be a party, has taken all necessary corporate action to authorize the execution, delivery and performance of the Operative Documents to which it is or will be a party, has duly executed and, assuming the due authorization, execution and delivery hereof and thereof by the other parties hereto and thereto, delivered each Operative Document required to be executed and delivered by it and each such Operative Document constitutes a legal, valid and binding obligation enforceable against it in accordance with its terms, except as such enforceability may be limited or denied by (i) applicable bankruptcy, insolvency, reorganization, moratorium or similar laws effecting creditors' rights and the enforcement of debtors' obligations generally, and (ii) general principles of equity, regardless of whether enforcement is pursuant to a proceeding in equity or at law. (c) No Violation. Neither the execution, delivery and performance by it of the Operative Documents to which it is or will be a party nor compliance with the terms and provisions thereof, nor the consummation of the transactions contemplated therein (i) will contravene any Applicable Law, or (iii) will violate any provision of its certificate of incorporation or by-laws. (d) No Other Activities. It does not hold any assets, conduct any business nor is it party to any Contractual Obligation except as expressly contemplated by the Operative Documents. (e) Indenture of Trust. Each of the representations and warranties of the Facility Lender set forth in the Indenture of Trust are true and correct in all material respects and the Facility Lender is in compliance with its obligations under the Operative Documents. 24 29 (f) No Litigation. There is no action, suit or proceeding pending, or to the knowledge of the Facility Lender, threatened, against or affecting the Facility Lender, before any court or arbitrator or any Governmental Authority which would reasonably be expected to have or cause a Material Adverse Effect. SECTION 8.5. Representations and Warranties of the Indenture Trustee. The Indenture Trustee hereby represents and warrants to each of the other Participants that: (a) Corporate Existence and Power. It is, respectively, a banking association or corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has all corporate powers and all material governmental licenses, authorizations and approvals required to perform its obligations hereunder. (b) Binding Effect. This Participation Agreement and each other Operative Document to which the Indenture Trustee is a party constitutes a valid and binding agreement of it enforceable against it in accordance with its terms, provided that the enforceability hereof is subject in each case to general principles of equity and to bankruptcy, insolvency and similar laws affecting the enforcement of creditors' rights generally. SECTION 9. PAYMENT OF CERTAIN EXPENSES Guarantor and Lessee agree, jointly and severally, for the benefit of the Lessor, the Facility Lender, the Indenture Trustee and the Noteholders, to: SECTION 9.1. Transaction Expenses. On the Closing Date (if statements are received in satisfactory form within a reasonable time prior to such date and in any event within thirty (30) days after receipt thereof), pay, or cause to be paid, all reasonable fees, expenses and disbursements of the respective counsel (including local counsel) for each of the Lessor, the Facility Lender and the Indenture Trustee in connection with the transactions contemplated by the Operative Documents and incurred in connection with the Closing Date (subject to any negotiated fee arrangements which shall survive the execution and delivery of this Agreement), including all other Transaction Expenses (in connection with the Closing Date) and all other expenses in connection with the Closing Date, including, without limitation, all expenses relating to Environmental Audits, Appraisals, title insurance, surveys and all fees, taxes and expenses for the recording, registration and filing of documents. SECTION 9.2. Brokers' Fees and Stamp Taxes. Pay, or cause to be paid, any brokers' 25 30 fees and any and all stamp, transfer and other similar taxes, fees and excises, if any, including any interest and penalties, which are payable in connection with the transactions contemplated by this Participation Agreement and the other Operative Documents. SECTION 9.3. Certain Fees and Expenses. Pay or cause to be paid (i) any and all Transaction Expenses of the Facility Lender (or any successor to the Facility Lender), the Lessor and the Indenture Trustee (subject to any negotiated fee arrangements which shall survive the execution and delivery of this Agreement), (ii) all Transaction Expenses incurred by the Facility Lender, the Indenture Trustee or the Lessor in entering into any future amendments or supplements with respect to any of the Operative Documents, whether or not such amendments or supplements are ultimately entered into, or giving or withholding of waivers of consents hereto or thereto, which have been requested by Lessee or Guarantor, (iii) all Transaction Expenses incurred by Lessor, the Indenture Trustee or the Facility Lender in connection with a transfer made pursuant to Section 12.2 of this Participation Agreement or any substitution of a Property pursuant to Section 7.4, and (iv) all Transaction Expenses incurred by the Lessor, the Facility Lender or the Indenture Trustee in connection with any purchase or substitution of any Property by the Lessee or other Person pursuant to Articles XVI, XVII, XX or XXII of the Lease. SECTION 10. OTHER COVENANTS AND AGREEMENTS SECTION 10.1. Covenants of Guarantor and Lessee. Guarantor and Lessee hereby agree that so long as this Participation Agreement is in effect: (a) Information. To the extent not already provided, the Guarantor will deliver to the Lessor, S&P and Moody's. (i) as soon as available and in any event within ninety (90) days after the end of each Fiscal Year, a consolidated balance sheet of the Guarantor and its Subsidiaries as of the end of such Fiscal Year and the related consolidated statements of income, stockholders' equity and cash flows for such Fiscal Year, setting forth in each case in comparative form the figures for the previous Fiscal Year, all certified by KPMG Peat Marwick, LLP or other independent public accountants of nationally recognized standing; (ii) as soon as available and in any event within forty-five (45) days after the end of each of the first three (3) Fiscal Quarters of each Fiscal Year, a consolidated balance sheet of the Guarantor and its Consolidated Subsidiaries as of the end of such Fiscal Quarter and the related statement of income and statement of cash flows for such Fiscal Quarter and for the 26 31 portion of the Fiscal Year ended at the end of such Fiscal Quarter, setting forth in each case in comparative form the figures for the corresponding Fiscal Quarter (Fiscal Year only in the case of balance sheets) and the corresponding portion of the previous Fiscal Year; (iii) promptly upon the mailing thereof to the stockholders of the Guarantor generally, copies of all financial statements, reports and proxy statements so mailed; and (iv) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and annual, quarterly, monthly or other periodic reports (including reports on Form 8-K) which the Guarantor shall have filed with the Securities and Exchange Commission. (v) simultaneously with the delivery of each set of financial statements referred to in paragraphs (i) and (ii) above, a certificate, substantially in the form of Exhibit H (a "Compliance Certificate"), of the chief financial officer or the chief accounting officer of the Guarantor stating whether any Event of Default exists on the date of such certificate and, if any Event of Default then exists, setting forth the details thereof and the action which the Guarantor or Lessee is taking or proposes to take with respect thereto; (vi) within five (5) Business Days after any of the chief executive, chief financial, chief operating, chief legal or chief accounting officer of the Guarantor or Lessee becomes aware of the occurrence of any Event of Default, a certificate of the chief financial officer or the chief accounting officer of the Guarantor or Lessee setting forth the details thereof and the action which the Guarantor or Lessee is taking or proposes to take with respect thereto; (vii) from time to time such additional information regarding the financial position or business of the Guarantor or any of its Subsidiaries or any of the Properties, as the Facility Lender, the Lessor, the Indenture Trustee (at the request of a Noteholder) or a Rating Agency may reasonably request, including without limitation, information regarding the Property Balance and the related amount of the Loan and Lessor Investment Amounts allocated to each Property. (b) Inspection of Property, Books and Records. The Guarantor will (i) keep, and cause each domestic Subsidiary to keep, proper books of record and account in which full, true and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to its business and activities; and (ii) permit, and cause each 27 32 Subsidiary to permit, representatives of the Facility Lender, the Lessor, the Indenture Trustee (acting at the request of a Noteholder) or a Rating Agency, at such person's expense prior to the occurrence of a Default and at the Guarantor's expense after the occurrence of a Default, to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants. The Guarantor and the Lessee agree to cooperate and assist in such visits and inspections, in each case at such reasonable times and as often as may reasonably be requested. (c) Payment of Obligations. The Guarantor and the Lessee each covenants and agrees for the benefit of each Participant and the Noteholders that it will duly and punctually pay its respective obligations under the Operative Documents in accordance with the terms thereof. (d) Corporate Existence. Subject to Section 10.1(g) below, the Guarantor will do, or cause to be done, all things necessary to preserve and keep in full force and effect its corporate existence and the corporate existence of the Lessee. (e) Limitations on Liens. (i) The Guarantor will not, and will not permit any Subsidiary to, issue, assume or guarantee any notes, bonds, debentures or other similar evidences of indebtedness for money borrowed (herein referred to as "indebtedness") secured by any mortgage, security interest, pledge or lien (herein referred to as "mortgage") of or upon any Principal Property, or upon shares of capital stock or evidences of indebtedness for borrowed money issued by any Subsidiary that owns Principal Property and owned by the Guarantor or any Subsidiary, whether owned at the date of this Agreement or thereafter acquired, without making effective provision, and the Guarantor in each case will make or cause to be made effective provision, whereby the obligations of the Guarantor pursuant to the Guaranty shall be secured equally and ratably with (or at the option of the Guarantor, prior to) any and all other indebtedness thereby secured, so long as such indebtedness shall be so secured; provided, however, that this subsection (e) shall not apply to indebtedness secured by any of the following: (1) mortgages for taxes or other governmental charges either not yet delinquent or the nonpayment of which is being contested in good faith by appropriate proceedings, provided enforcement of any lien has been stayed; mortgages comprising landlord's liens or liens of carriers, warehousemen, mechanics or materialmen incurred in the ordinary course of business for sums not yet due and payable or which are being contested in good faith by appropriate proceedings; and any other mortgages incurred or created in the ordinary course of business not arising in connection with indebtedness that do not in the aggregate materially 28 33 impair the use or value of the properties or assets of the Guarantor and its Subsidiaries, taken as a whole; (2) mortgages existing on the date hereof; (3) mortgages on any property existing at the time of acquisition thereof; (4) mortgages on property of a corporation existing at the time such corporation is merged into or consolidated with the Guarantor or a Subsidiary or at the time of a sale, lease or other disposition of the properties of such corporation (or a division thereof) as an entirety or substantially as an entirety to the Guarantor or a Subsidiary, provided that such mortgage as a result of such merger, consolidation, sale, lease or other disposition is not extended to property owned by the Guarantor or such Subsidiary immediately prior thereto; (5) mortgages on property of a corporation, shares of capital stock or debt of any corporation existing at the time such corporation becomes a Subsidiary; (6) mortgages securing indebtedness of a Subsidiary to the Guarantor or to another Subsidiary; (7) mortgages on property to secure all or part of the cost of acquiring, substantially repairing or altering, constructing, developing or substantially improving such property, or to secure indebtedness incurred to provide funds for any such purpose or for reimbursement of funds previously expended for any such purpose, provided the commitment of the creditor to extend the credit secured by any such mortgage shall have been obtained not later than twelve months after the later of (a) the completion of the acquisition, substantial repair or alteration, construction, development or substantial improvement of such property or (b) the placing in operation of such property or of such property as so substantially repaired or altered, constructed, developed or substantially improved; (8) mortgages securing indebtedness payable on demand or not more than one year after the date as of which the determination is made (excluding any indebtedness renewable or extendable at the option of the debtor for a period or periods ending more than one year after the date as of which such determination is made), which indebtedness in accordance with generally accepted accounting practices would be included among current liabilities; (9) any extension, renewal or replacement (or successive extensions, renewals or replacements), in whole or in part, of any mortgage referred to in the foregoing clauses (1) to (8) inclusive; provided, however, that the principal amount 29 34 of indebtedness secured thereby and not otherwise authorized by said clauses (1) to (8) inclusive shall not exceed the principal amount of indebtedness, plus any premium or fee payable in connection with any such extension, renewal or replacement, so secured at the time of such extension, renewal or replacement; (10) mortgages in favor of the United States of America or any State thereof, or any department, agency or instrumentality or political subdivision of the United States of America or any State thereof, to secure partial progress, advance or other payments pursuant to any contract or statute or to secure any indebtedness incurred for the purpose of financing all or any part of the purchase price or the cost of constructing or improving the property subject to such mortgages; (11) mortgages arising out of any final judgment for the payment of money aggregating not in excess of $10,000,000 or mortgages created by or relating to any legal proceeding or final judgment which at the time is being contested in good faith by appropriate proceedings, provided enforcement of any lien has been stayed; or (12) easements or similar encumbrances, the existence of which do not materially impair the use of the property subject thereto for the purposes for which it is held or was acquired. (ii) Notwithstanding the provisions of subsection (e)(i), the Guarantor or any Subsidiary may issue, assume or guarantee indebtedness secured by mortgages which would otherwise be subject to the restrictions of subsection (e)(i) in an aggregate amount which, together with all Attributable Debt outstanding pursuant to subsection (f)(ii) and all indebtedness outstanding pursuant to this subsection (e), does not at the time exceed 15% of Consolidated Capitalization. (f) Limitations on Sale and Lease-Back Transactions. (i) The Guarantor will not, nor will it permit any Subsidiary to, enter into any Sale and Lease-Back Transaction with respect to any Principal Property (except for a transaction providing for a lease for a term, including any renewal thereof, of not more than three years and except for a transaction between the Guarantor and a Subsidiary or between Subsidiaries), unless either (x) the Guarantor or such Subsidiary would be entitled pursuant to subsection (e)(i) to issue, assume or guarantee indebtedness secured by a mortgage on such Principal Property in an amount at least equal to the Attributable Debt in respect of such Sale and Lease-Back Transaction without being required by subsection (e)(i) to equally and ratably secure the obligations of the Guarantor pursuant to the Guaranty or (y) the Guarantor shall apply or cause to be applied, in the case of a sale or transfer for cash, an amount equal to the net proceeds thereof (but not in excess of the net book value of such Principal Property at the date of such sale or transfer) and, in the case of a sale or transfer otherwise than for cash, an amount equal to the fair value (as determined by the Board of Directors) of the Principal Property so leased to the retirement, within 180 days after the effective 30 35 date of such Sale and Lease-Back Transaction, of Senior Funded Indebtedness of the Guarantor or a Subsidiary; provided, however, that the amount to be applied to such retirement of Senior Funded Indebtedness shall be reduced by an amount equal to the principal amount, plus any premium or fee paid in connection with any redemption in accordance with the terms, of Senior Funded Indebtedness voluntarily retired by the Guarantor within 180 days after the effective date of such Sale and Lease-Back Transaction, excluding retirements pursuant to mandatory sinking fund or prepayment provisions and payments at maturity. (ii) Notwithstanding the provisions of subsection (f)(i), the Guarantor or any Subsidiary may enter into a Sale and Lease-Back Transaction which would otherwise be subject to the restrictions of subsection (f)(i) so as to create an aggregate amount of Attributable Debt which, together with all indebtedness outstanding pursuant to subsection (e)(ii) and all Attributable Debt outstanding pursuant to this subsection (f)(ii), does not exceed 15% of Consolidated Capitalization. (g) Consolidations, Mergers, Conveyance or Transfer. Neither the Guarantor nor Lessee shall consolidate with or merge into any other Person or convey or transfer its properties and assets substantially as an entirety to any Person, unless: (1) the Person formed by such consolidation or into which the Guarantor or the Lessee is merged or the Person which acquires by conveyance or transfer the properties and assets of the Guarantor or the Lessee, as applicable, substantially as an entirety shall be a Person organized and existing under the laws of the United States of America or any State or the District of Columbia, and shall expressly assume, by an assumption agreement executed and delivered to the Lessor, the Facility Lender and the Indenture Trustee, all obligations of the Guarantor or the Lessee, as applicable, pursuant to the Operative Documents and the performance or observance of every covenant of this Agreement on the part of the Guarantor or the Lessee, as applicable, to be performed or observed; (2) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time, or both, would become an Event of Default, shall have happened and be continuing; and (3) the Guarantor or the Lessee, as applicable, has delivered to the Lessor, the Facility Lender and the Indenture Trustee an Officers' Certificate and an Opinion of Counsel each stating that such consolidation, merger, conveyance or transfer and, if an assumption agreement is required in connection with such transaction, such assumption agreement comply with this Section 10.1(g) and that all conditions precedent herein provided for relating to such transaction have been complied with. Upon any consolidation or merger, or any conveyance or transfer of the properties and 31 36 assets of the Guarantor or the Lessee, as applicable, substantially as an entirety in accordance with this subsection, the successor Person formed by such consolidation or into which the Guarantor or the Lessee, as applicable, is merged or to which such conveyance or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Guarantor or the Lessee, as applicable, under the Operative Documents with the same effect as if such successor corporation had been named as the Guarantor or the Lessee, as applicable, herein and thereafter the predecessor corporation shall be released from all obligations and covenants under this Agreement and the other Operative Documents. In the event of any such conveyance or transfer, the Guarantor or the Lessee, as applicable, as the predecessor corporation may be dissolved, wound up and liquidated at any time thereafter. (h) Actions Under Indenture of Trust. The Guarantor shall fulfill all obligations of the Facility Lender pursuant to Sections 9.01 and 9.02 of the Indenture of Trust. SECTION 10.2. Cooperation with the Lessee. The Lessor, the Facility Lender and the Indenture Trustee shall, to the extent reasonably requested by Lessee (but without assuming additional liabilities on account thereof), at Lessee's expense, cooperate with Lessee in connection with its covenants contained herein including, without limitation, at any time and from time to time, upon the request of Lessee, to promptly and duly execute and deliver any and all such further instruments, documents and financing statements and continuation statements related thereto) as Lessee may reasonably request in order to perform such covenants. Each of the Lessor, the Facility Lender and the Indenture Trustee agrees that, to the extent it shall obtain actual knowledge of the occurrence of an Event of Default, a Loan Agreement Event of Default or an Indenture Event of Default under the Operative Documents, it shall promptly notify Lessee describing the same in reasonable detail. SECTION 10.3. Release of Properties. If the Lessee shall at any time purchase any Property pursuant to the terms of the Lease, or if all of the Properties shall be sold in accordance with, and the Lessee otherwise satisfies each of the obligations and conditions set forth in the Lease for the release or substitution of a Property therefrom, then, upon application of the proceeds of any such sale pursuant to Section 5 (except in the case of a substitution) and all accrued interest and any other payments due and owing from Lessee to the Indenture Trustee, the Noteholders, the Facility Lender or Lessor on such date, including without limitation pursuant to Section 13 of this Agreement, such Property shall be released from the Liens created by the Security Documents and the Indenture Trustee, Lessor and the Facility Lender shall, at the expense of the Lessee, execute and deliver such instruments as are legally required in order to effectuate such release. In addition, upon the payment in full of all other amounts owing by the Lessee hereunder or under any other Operative Document, the Properties shall be released from the Liens created by the Security Documents. Upon request of the Lessee or Lessor following any such release, the Indenture Trustee and Facility Lender shall, at the sole cost and expense of the Lessee or Lessor execute and deliver to the Lessor or the Lessee such documents as the Lessee or Lessor shall reasonably request 32 37 to evidence such release. SECTION 10.4. Discharge of Liens. (a) Each of the Facility Lender and the Lessor 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 Properties (and its rights under the Operative Documents) attributable to it; provided, however, that such Participants shall not be required to so discharge any such Lessor Lien prior to any sale of the Properties while the same is being contested in good faith by appropriate proceedings. (b) The Indenture Trustee 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 Trustee's Liens on the Properties attributable to it; provided, however, that the Indenture Trustee shall not be required to so discharge any such Trustee's Lien prior to any sale of the Properties while the same is being contested in good faith by appropriate proceedings. SECTION 10.5. Notice of Credit Rating. The Lessor agrees that it shall immediately notify the Guarantor and the Lessee in writing in the event that its general partner's long or short term debt rating is downgraded, withdrawn, or qualified by any Rating Agency or if Lessor (or its general partner) is placed on credit watch with negative implications by any Rating Agency. SECTION 10.6. Covenants of the Facility Lender and the Lessor. Each of the Facility Lender and the Lessor hereby agrees, severally and not jointly, that so long as this Participation Agreement is in effect: (a) Maintenance of Existence. It shall maintain its corporate or partnership existence and qualification as a foreign corporation or foreign limited partnership in each state in which a Property is located and in which the failure to maintain such existence or qualification would have a materially adverse effect on its ability to perform its obligations under the Operative Documents as contemplated on the Closing Date. (b) Certificate of Incorporation. Facility Lender shall not allow an amendment to its certificates of incorporation or other governing documents without the consent of the Lessee, Indenture Trustee and Lessor. (c) Prepayment. Other than as provided in Section 5, the Facility Lender will not prepay, redeem or refinance any of the Fixed Rate Notes. Except as permitted by the Operative Documents, the Lessor shall not prepay the Loan in whole or in part; provided, however, that subject to Section 5, Lessor may prepay or cause to be prepaid all or any portion of the Note at any time following an Event of Default where the Participants are exercising remedies. 33 38 (d) Indebtedness; Other Business. The Facility Lender shall not contract for, create, incur or assume any Indebtedness, or enter into any business or other activity, other than pursuant to, under or as contemplated by the Operative Documents. (e) Change of Chief Place of Business. Each of the Lessor and the Facility Lender, with respect to itself only, shall give prompt notice to Lessee and the Indenture Trustee if the Lessor's or the Facility Lender's chief place of business or chief executive office, or the office where the records concerning the accounts or contract rights relating to a Property are kept, shall cease to be located at the address set forth in Section 14.3 or if it shall change its name, identity or corporate structure. (f) Subordination of Liens. During the Term, the Liens created by the Security Documents related to each Property shall be expressly made subject and subordinate to the Lease related to such Property. (g) No Voluntary Bankruptcy. Neither the Lessor (unless the Lessee shall give its prior written consent) nor the Facility Lender shall (A) commence any case, proceeding or other action under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, arrangement, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seek appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial benefit of its creditors; and neither the Lessor nor the Facility Lender shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in this paragraph. (h) No Sale of Properties. Neither the Lessor nor the Facility Lender shall transfer any of their respective interests in the Properties except as provided in the Operative Documents. (i) No Powers of Attorney. The Facility Lender shall not grant any powers of attorney to any Person for any purposes except (i) for the purpose of permitting any Person to perform any ministerial or administrative functions on behalf of the Facility Lender which are not inconsistent with the terms of the Operative Documents, (ii) to the Indenture Trustee for the purposes of the Security Documents, or (iii) where provided for or permitted by the Operative Documents. (j) Same Business. Unless the Lessee otherwise consents in writing, Lessor shall stay engaged in substantially the same business (including engaging in the business of leasing personal and real property as lessor, or acting as agent, broker or advisor in leasing such property and making, acquiring or servicing loans or other investments or extensions of credit in connection therewith or incidental thereto) as conducted 34 39 on the Closing Date. SECTION 10.7. No Bankruptcy Proceedings. The Guarantor, Lessee and each Participant hereby agrees that it will not institute against, or join any other Person in instituting against, the Facility Lender or the Lessor any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding, or other proceeding under any Federal or state bankruptcy or similar law, for one year and a day after the Fixed Rate Notes are paid. Nothing in this Section 10.7 shall preclude, or be deemed to estop, the Guarantor, Lessee or any Participant (i) from taking or omitting to take any action prior to such date in (A) any case or proceeding voluntarily filed or commenced by or on behalf of the Facility Lender under or pursuant to any such law or (B) any involuntary case or proceeding pertaining to the Facility Lender which is filed or commenced by or on behalf of a Person other than the Guarantor, Lessee or any Participant under or pursuant to any such law, or (ii) from commencing or prosecuting any legal action which is not an involuntary case or proceeding under or pursuant to any such law against the Participant or any of its properties or otherwise exercising its remedies under the Operative Documents. SECTION 10.8. Notice of Claims Against Lessor. Lessor shall promptly notify the Lessee and the Guarantor in writing in the event that Lessor defaults in any obligation or any Claim is asserted against Lessor (including any Environmental Claim) which, exceeds $5,000,000 in any one instance or $10,000,000 in the aggregate (other than defaults or Claims arising in connection with the Operative Documents and the transactions contemplated thereby). Upon receipt of such notice the Lessee may either: (i) Replace the Lessor pursuant to Section 12.2; or (ii) Require that the Lessor promptly execute, deliver and record mortgages in form satisfactory to Lessee granting to Lessee a Lien on the Properties to secure the performance of all obligations of Lessor pursuant to the Lease and the other Operative Documents, which Lien shall be second in priority to the Mortgages. Each of the Participants hereby acknowledges and agrees that any such Liens granted to the Lessee hereunder shall constitute "Permitted Liens" pursuant to clause (i) of such definition. SECTION 11. LESSEE DIRECTIONS SECTION 11.1. Lessee Directions. The Lessor, the Guarantor, the Indenture Trustee and the Facility Lender agree that, so long as no Default or Event of Default exists: (a) Lessee shall have the right to give all notices pursuant to the Indenture of Trust with respect to the redemption, defeasance, prepayment or other matters relating to the 35 40 Fixed Rate Notes and to direct the Facility Lender and Lessor to take all actions necessary to accomplish such directions; provided, however, that any such directions shall not conflict with any provision of any of the Operative Documents; (b) [INTENTIONALLY OMITTED]; (c) Lessee shall have the right to approve any successor "Indenture Trustee" to the extent permitted pursuant to Section 8.11 of the Indenture of Trust; (d) without limiting the foregoing clauses (a) through (c) and in addition thereto, Lessee shall have the right to exercise any other right of the Lessor under the Loan Documents and the Facility Lender under the Indenture of Trust upon not less than three (3) Business Days' prior written notice from Lessee to the Lessor, Indenture Trustee, and the Facility Lender, unless such party objects to such exercise within three (3) Business Days of receipt of such notice; and (e) Lessee shall have the right to give notices pursuant to Appendix 3 of this Participation Agreement. SECTION 12. TRANSFER OF INTEREST SECTION 12.1. Restrictions on and Effect of Transfer. Except for the transactions contemplated hereby, no Participant shall assign, convey or otherwise transfer (including pursuant to a participation) all or any portion of its right, title or interest in, to or under any of the Operative Documents, except (x) with respect to the Noteholders, as provided in Article 2.08 of the Indenture of Trust, and (y) with respect to the Facility Lender and the Lessor, with the prior written consent of the Indenture Trustee and Lessee, which consent, in the case of the Indenture Trustee, shall not be unreasonably withheld, and (z) with respect to the Lessor, with the prior written consent of the Lessee and only if the Lessor shall have provided written confirmation from each of Moody's and S&P that immediately after giving effect to such transfer the Fixed Rate Notes shall not be rated lower than the Fixed Rate Notes are rated immediately prior to such transfer and such transfer shall not result in a downgrade, withdrawal or qualification of the ratings assigned to the Fixed Rate Notes by Moody's and S&P; provided that, in the event that an Event of Default has occurred and is continuing pursuant to which the Participants have begun to exercise remedies against the Lessee or Guarantor, the consent of the Lessee shall not be required for any such transfer by the Lessor. Any transfer made pursuant to the Operative Documents shall be subject to the Security Documents and any transferee or assignee shall expressly agree in writing to be bound by the terms of this Participation Agreement. 36 41 SECTION 12.2. Replacement of Lessor or Facility Lender. (A) If the Lessor or Facility Lender (i) defaults in any of its material obligations pursuant to the Operative Documents or, with respect to Facility Lender, any Indenture Event of Default shall occur, or with respect to Lessor, any Loan Agreement Event of Default shall occur (which in either case, does not arise out of, or is not attributable to, an Event of Default), or (ii) in the case of the Lessor, (x) the Lessor or its general partner suffer a downgrade, qualification or withdrawal or, in the reasonable judgment of the Lessee, potential downgrade, qualification or withdrawal, of its long or short term credit rating by any Rating Agency or (y) Credit Suisse First Boston ceases to be the sole general partner of Lessor, the Lessee shall be permitted to replace the Lessor at any time, or (B) if the Lessor or its general partner suffers a downgrade, withdrawal or qualification of its credit rating to the extent that such downgrade, withdrawal or qualification results or would result in the credit rating assigned to the Fixed Rate Notes by either of the Rating Agencies being lower than the credit rating then assigned by the Rating Agencies to the Guarantor, the Lessee shall be required to replace the Lessor; provided that in any instance described in clause (a) or (b) above (i) such replacement does not conflict with any Requirement of Law, (ii) any replacement Lessor shall purchase, at par, the Lessor Investment Amount, all accrued and unpaid Certificate Earnings thereon and other amounts owing to Lessor under the Operative Documents on or prior to the date of replacement, (iii) the replacement Lessor or Facility Lender shall be reasonably satisfactory to the Indenture Trustee, (iv) the Guarantor and Lessee shall be obligated to pay any Transaction Expenses arising in connection therewith, (v) the replacement Lessor or Facility Lender shall agree in writing to be subject to all of the terms and conditions of the Operative Documents and this Participation Agreement and (vi) as a condition precedent to such replacement, the Guarantor or Lessee shall have provided written confirmation from each of Moody's and S&P that immediately after having given effect to such replacement, the Fixed Rate Notes shall not be rated lower than the Fixed Rate Notes are rated immediately prior to such replacement and such replacement shall not result in a downgrade, withdrawal or qualification of the rating assigned to the Fixed Rate Notes by Moody's or S&P. The Lessor and the Facility Lender agree to cooperate with the Lessee in its efforts to arrange replacements as contemplated by this Section 12.2. SECTION 13. INDEMNIFICATION SECTION 13.1. General Indemnification. The Guarantor and Lessee, jointly and severally, whether or not any of the transactions contemplated hereby shall be consummated, hereby assume liability for, and indemnify, protect, defend, save and keep harmless each Indemnitee, on an After Tax Basis, from and against any and all Claims that may be imposed on, incurred by or asserted against such Indemnitee in any way relating to or arising out of: (a) any of the Operative Documents or any of the transactions contemplated thereby, and any amendment, modification or waiver in respect thereof; or 37 42 (b) the Properties or any part thereof or interest therein; (c) the purchase, design, construction, preparation, installation, inspection, delivery, non-delivery, acceptance, rejection, ownership, management, possession, operation, rental, lease, sublease, repossession (whether by summary proceedings or otherwise), maintenance, repair, alteration, modification, addition, substitution, storage, transfer of title, redelivery, use, financing, refinancing, disposition, operation, condition, sale (including, without limitation, any sale pursuant to the Lease), return or other disposition of all or any part of any interest in the Properties or the imposition of any Lien (or incurring of any liability to refund or pay over any amount as a result of any Lien) thereon, including, without limitation: (l) personal injury, death or property damage, including Claims or penalties arising from any violation of law or in tort (strict liability or otherwise), (2) latent or other defects, whether or not discoverable, (3) any Claim based upon a violation or alleged violation of the terms of any Applicable Law or any restriction, easement, condition or covenant or other matter affecting title to the Properties or any part thereof, (4) the making of any Modifications in violation of any Insurance Requirements, (5) any Claim for patent, trademark or copyright infringement, and (6) Claims arising from any public improvements with respect to the Properties resulting in any change or special assessments being levied against the Properties or any Claim for utility "tap-in" fees; (d) the offer, issuance, sale or delivery of the Fixed Rate Notes or the Note; (e) the breach or alleged breach by the Guarantor or the Lessee of any representation or warranty made by it or deemed made by it in any Operative Document or any certificate required to be delivered by any Operative Document or the breach or alleged breach by the Guarantor or the Lessee of any covenant or obligation made by it in any Operative Document; (f) the retaining or employment of any broker, finder or financial advisor by the Guarantor or Lessee to act on its behalf in connection with the Operative Documents, or the authorization of any broker or financial adviser retained or employed by the Guarantor or the Lessee so to act, or the incurring of any fees or commissions by the Lessee or the Guarantor to which the Indemnitees might be subjected by virtue of their entering into the transactions contemplated by the Operative Documents; (g) the existence of any Lien on or with respect to the Properties, any Basic Rent or Supplemental Rent, title thereto, or any interest therein, including any Liens which arise out of the possession, use, occupancy, construction, repair or rebuilding of any 38 43 of the Properties or by reason of labor or materials furnished or claimed to have been furnished to the Lessee, or any of its contractors or agents or by reason of the financing of any personalty or equipment purchased or leased by the Lessee or Modifications constructed by the Lessee, except in all cases Permitted Liens; (h) any breach of any requirement, condition, restriction or limitation in any other Operative Document on the part of Lessee or Guarantor to be performed; or (i) any easement, license, right-of-way, covenant, restriction or other document or agreement entered into by Lessor at the request of Lessee; provided, however, neither the Guarantor nor the Lessee shall be required to indemnify any Indemnitee under this Section 13.1 for any of the following: (1) any Claim to the extent that such Claim resulted from the willful misconduct or gross negligence of such Indemnitee, (2) any Claim to the extent resulting from Lessor Liens which the Indemnitee is responsible for discharging under the Operative Documents, (3) any Claim to the extent directly resulting from a breach of an Operative Document or Applicable Law by such Indemnitee (except for a breach by the Facility Lender that is arising out of or attributable to a breach by the Lessee or Guarantor of any of its obligations under any of the Operative Documents), and (4) any Claim related to the Properties to the extent attributable to acts or events occurring after the Lease Termination Date unless an Event of Default has occurred and is continuing and the Participants are exercising remedies against the Lessee or the Properties in respect of the Operative Documents (in which event all of the foregoing provisions of this Section 13.1 shall remain in full force and effect). It is expressly understood and agreed that the indemnity provided for herein shall survive the expiration or termination of the Lease and the other Operative Documents and the payment by Lessee and Guarantor of all amounts due thereunder for a period of three (3) years (but shall continue in full force and effect following such date with respect to any Claim asserted prior to such date), and shall be separate and independent from any remedy under the Lease or any other Operative Document; provided that, to the extent that any Claim arises after such three (3) year period which was not asserted during such three (3) year period due to a failure to discover such Claim or for any other reason, the indemnity provided for in this Section 13.1 shall be revived upon the assertion of such Claim solely with respect to such Claim. SECTION 13.2. Environmental Indemnity. In addition to, and not in derogation of, the indemnities contained in Section 13.1 and 13.4 the Guarantor and the Lessee, jointly and severally, hereby indemnify, hold harmless and defend each Indemnitee from and against any and all Claims, including, but not limited to, all costs incurred in connection with any investigation or monitoring of site conditions or any clean-up, remediation, removal or restoration work by or at the direction of any Governmental Authority, related to the Properties or the Lessee's use of the Properties, arising directly or indirectly, in whole or in part, out of (i) the presence on or under any Property of any Hazardous Substances, or 39 44 any releases or discharges of any Hazardous Substances on, under, from or onto any Property or any other Hazardous Condition with respect to any Property, (ii) any Hazardous Activity, including, without limitation, construction, carried on or undertaken on or off any Property, and whether by the Lessee, or any predecessor in title or any employees, Indenture Trustee, contractors or subcontractors of the Lessee, or any predecessor in title, or any other Persons, in connection with the handling, treatment, removal, storage, decontamination, clean-up, transport or disposal of any Hazardous Substances that at any time are located or present on or under any Property or that at any time migrate, flow, percolate, diffuse or in any way move onto or under any Property, (iii) loss of or damage to any property or the environment (including, without limitation, clean-up costs, response costs, remediation and removal costs, cost of corrective action, costs of financial assurance, fines and penalties and natural resource damages), or death or injury to any Person, and all expenses associated with the protection of wildlife, aquatic species, vegetation, flora and fauna, and any mitigative action required by or under Environmental Laws, (iv) any Claim concerning lack of compliance with Environmental Laws with respect to the Properties, or any act or omission causing an environmental condition with respect to the Properties that requires remediation or would allow any governmental agency to record a lien or encumbrance on the land records with respect to the Properties, (v) any residual contamination on or under any Property, including any such contamination affecting any natural resources, and to any such contamination of any property or natural resources arising in connection with the generation, use, handling, storage, transport or disposal of any Hazardous Substances associated with such Property and related to the residual contamination, the obligation existing, irrespective of whether any of such activities were or will be undertaken in accordance with applicable laws, regulations, codes and ordinances, (vi) in any case with respect to the matters described in the foregoing clauses (i) through (v) that arise or occur (w) during the Term, (x) at any time during which the Lessee or any Affiliate thereof owns any interest in or otherwise occupies, controls or possesses the relevant Property or any portion thereof, or 40 45 (y) during any period after and during the continuance of any Event of Default, or (vii) a breach of the representations and warranties of the Guarantor and the Lessee provided herein; provided, however, that neither the Guarantor nor the Lessee shall be required to indemnify any Indemnitee under this Section 13.2 for any of the following: (1) any Claim to the extent that such Claim resulted from the willful misconduct or gross negligence of such Indemnitee, (2) any Claim to the extent proximately caused by any action on the part of such Indemnitee or, to the extent such Claim relates to or is attributable to, events occurring after the Term where such Indemnitee is in control of the Property or Properties, inaction on the part of such Indemnitee, and (3) any Claim related to the Properties to the extent attributable to acts or events occurring before or after the Term unless, in the case of Claims attributable to acts or events occurring after the Lease Termination Date, an Event of Default has occurred and is continuing and the Participants are exercising remedies against the Lessee or the Properties under the Operative Documents (in which event all of the foregoing provisions of this Section 13.2 shall remain in full force and effect), or the Claim arises out of a breach of the representations and warranties of the Guarantor or Lessee contained herein. It is expressly understood and agreed that the indemnity provided for herein shall survive the expiration or termination of the Lease and the other Operative Documents and the payment by Lessee and Guarantor of all amounts due thereunder for a period of three (3) years (but shall continue in full force and effect following such date with respect to any Claim asserted prior to such date) and shall be separate and independent from any remedy under the Lease or any other Operative Document; provided that, to the extent that any Claim arises after such three (3) year period which was not asserted during such three (3) period due to a failure to discover such Claim or for any other reason, the indemnity provided for in this Section 13.2 shall be revived upon the assertion of such Claim solely with respect to such Claim. SECTION 13.3. Proceedings in Respect of Claims. With respect to any amount that the Guarantor or the Lessee is requested by an Indemnitee to pay by reason of Section 13.1 or 13.2, such Indemnitee shall, if so requested by the Guarantor or the Lessee and prior to any payment, submit such additional information to the Guarantor or the Lessee as the Guarantor or the Lessee may reasonably request and which is in the possession of such Indemnitee to substantiate properly the requested payment. In case any action, suit or proceeding shall be brought against any Indemnitee, such Indemnitee shall notify the Guarantor or the Lessee of the commencement thereof, and the Guarantor or the Lessee shall be entitled, at its expense, to participate in, and, to the extent that the Guarantor or the Lessee desires to, assume and control the defense thereof; provided, however, that the Guarantor or the Lessee shall have acknowledged in writing its obligation to fully indemnify such Indemnitee in respect of such action, suit or proceeding and the Guarantor or 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 Guarantor or the Lessee shall not be entitled to assume and control the defense of any such action, suit or proceeding if and to the extent that, (A) in the reasonable opinion of such Indemnitee, (x) such action, suit or proceeding involves any possibility of imposition of criminal liability or any material risk of material civil liability on such Indemnitee or will involve a material risk of the sale, forfeiture or loss of, or the creation of any Lien (other than a Permitted Lien) on the Properties or any part thereof unless the 41 46 Guarantor or the Lessee shall have posted a bond or other security satisfactory to the relevant Indemnitees in respect to such risk or (y) the control of such action, suit or proceeding would involve an actual or potential conflict of interest (in which case each Indemnitee may retain separate counsel at the expense of Lessee and Guarantor), (B) such proceeding involves Claims not fully indemnified by the Guarantor or the Lessee which the Guarantor or the Lessee and the Indemnitee have been unable to sever from the indemnified claim(s), or (C) an Event of Default has occurred and is continuing. The Indemnitee may participate in a reasonable manner at its own expense and with its own counsel in any proceeding conducted by the Guarantor or the Lessee in accordance with the foregoing. Neither the Guarantor nor the Lessee shall enter into any settlement or other compromise with respect to any Claim which is entitled to be indemnified under Section 13.1 or 13.2 without the prior written consent of the related Indemnitee, which consent shall not be unreasonably withheld. No Indemnitee shall enter into any settlement or other compromise with respect to any Claim which is entitled to be indemnified under Section 13.1 or 13.2 without the prior written consent of the Lessee, which consent shall not be unreasonably withheld, unless such Indemnitee waives its right to be indemnified under Section 13.1 or 13.2 with respect to such Claim. Upon payment in full of any Claim by the Guarantor or the Lessee pursuant to Section 14.1 or 13.2 to or on behalf of an Indemnitee, the Guarantor or the Lessee, as the case may be, 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) to the extent of such payment, and such Indemnitee shall execute such instruments of assignment and conveyance, evidence of claims and payment and such other documents, instruments and agreements as may be reasonably necessary to preserve any such claims and otherwise cooperate with the Guarantor and the Lessee and give such further assurances as are reasonably necessary or advisable to enable the Guarantor or the Lessee vigorously to pursue such claims. Any amount payable to an Indemnitee pursuant to Section 13.1 or 13.2 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. SECTION 13.4. End of Term Indemnity. In addition to the indemnities provided in Sections 13.1 and 13.2, if the Lessee elects the Remarketing Option set forth at Section 22.1 of the Lease with respect to the Properties subject to the Lease and there is a Shortfall Amount with 42 47 respect to such Properties, then prior to the Lease Termination Date and as a condition to Lessee's right to complete the remarketing of such Property pursuant to Section 22.1 of the Lease, Lessee shall cause to be delivered to Lessor no later than the Lease Termination Date, at Lessee's sole cost and expense, a report from an Appraiser in form and substance reasonably satisfactory to the Indenture Trustee and the Lessor (the "End of the Term Report") to establish the reason for any impairment to the value of any of such Property which was sold for an amount less than the Property Balance for such Property or not sold. On the Lease Termination Date, the Lessee shall pay to Lessor an amount equal to the Shortfall Amount that the End of the Term Report demonstrates was the result of an impairment to the value in such Property due to: (a) extraordinary use, failure to maintain, to repair, to restore, to rebuild or to replace, failure to comply with all Requirements of Law, failure to use quality workmanship, method of installation or removal or maintenance, repair, rebuilding or replacement, (excepting in each case ordinary wear and tear), or (b) the existence of any Hazardous Activity, Hazardous Substance or Environmental Violations occurring or discovered after the Closing Date for such Property (regardless of the Person so discovering any of the foregoing), or (c) any restoration or rebuilding carried out by the Lessee or any failure to complete any Modification, restoration or rebuilding, in either case, by the Lease Termination Date, (d) any grant, release, dedication, transfer, annexation or amendment made pursuant to Section 12.2 of the Lease or any release of a portion of the Property made pursuant to Section 12.3 of the Lease; or (e) the failure of the Lessor to have good and marketable title to such Property free and clear of all Liens (including Permitted Liens (other than Lessor Liens and Trustee's Liens)) and exceptions to title. SECTION 13.5. General Tax Indemnity. (a) Indemnification. Guarantor and Lessee, jointly and severally, shall pay and assume liability for, and do hereby agree to indemnify, protect and defend each Property and all Tax Indemnitees, and hold them harmless against, all Impositions on an After Tax Basis. (b) Contests. If any claim shall be made against any Tax Indemnitee or if any proceeding shall be commenced against any Tax Indemnitee (including a written notice of such proceeding) for any Imposition as to which the Lessee may have an indemnity obligation pursuant to Section 13.5(a), or if any Tax Indemnitee shall determine that any Imposition as to which the Lessee may have an indemnity obligation pursuant to Section 13.5(a) may be payable, such Tax Indemnitee shall promptly notify Lessee in writing and shall not take any action with respect to 43 48 such claim, proceeding or Imposition without the written consent of Lessee (such consent not to be unreasonably withheld or unreasonably delayed) for thirty (30) days after the receipt of such notice by Lessee; provided, however, that in the case of any such claim or proceeding, if such Tax Indemnitee shall be required by law or regulation to take action prior to the end of such thirty (30) day period, such Tax Indemnitee shall in such notice to Lessee, so inform Lessee, and such Tax Indemnitee shall not take any action with respect to such claim, proceeding or Imposition without the consent of Lessee (such consent not to be unreasonably withheld or unreasonably delayed) for ten (10) days after the receipt of such notice by Lessee unless the Tax Indemnitee shall be required by law or regulation to take action prior to the end of such ten (10)-day period. Lessee shall be entitled for a period of thirty (30) days from receipt of such notice from the Tax Indemnitee (or such shorter period as the Tax Indemnitee has notified Lessee is required by law or regulation for the Tax Indemnitee to commence such contest) to request in writing that such Tax Indemnitee contest the imposition of such Tax, at Guarantor's and Lessee's joint and several expense and the Tax Indemnitee shall, at the joint and several expense of Guarantor and Lessee, in good faith conduct and control such contest (including, without limitation, by pursuit of appeals) related to the validity, applicability or amount of such Impositions (provided, however, that (A) if such contest involves a tax other than a tax on net income and can be pursued independently from any other proceeding involving a tax liability of such Tax Indemnitee, the Tax Indemnitee, at Lessee's request, shall allow Guarantor or Lessee to conduct and control such contest and (B) in the case of any contest, the Tax Indemnitee may request Guarantor or Lessee to conduct and control such contest) by, in the sole discretion of the Person conducting and controlling such contest, (l) resisting payment thereof, (2) not paying the same except under protest, if protest is necessary and proper, (3) if the payment be made, using reasonable efforts to obtain a refund thereof in appropriate administrative and judicial proceedings, or (4) taking such other action as is reasonably requested by Guarantor or Lessee from time to time. The party controlling any contest shall consult in good faith with the non-controlling party and shall keep the noncontrolling party reasonably informed as to the conduct of such contest; provided that, all decisions ultimately shall be made in the sole discretion of the controlling party. The parties agree that a Tax Indemnitee may at any time decline to take further action with respect to the contest of any Imposition and may settle such contest if such Tax Indemnitee shall waive its rights to any indemnity from Lessee that otherwise would be payable in respect of such claim (and any future claim by any taxing authority, the contest of which is precluded by reason of such resolution of such claim) and shall pay to Lessee any amount previously paid or advanced by Lessee pursuant to this Section 13.5 by way of indemnification or advance for the payment of an Imposition other than expenses of such contest. Notwithstanding the foregoing provisions of this Section 13.5, a Tax Indemnitee shall not be required to take any action and neither Guarantor nor Lessee shall be permitted to contest any Impositions in its own name or that of the Tax Indemnitee unless (A) Lessee shall have agreed to pay and shall pay to such Tax Indemnitee on demand and on an After Tax Basis all reasonable 44 49 costs, losses and expenses that such Tax Indemnitee actually incurs in connection with contesting such Impositions, including, without limitation, all reasonable legal, accounting and investigatory fees and disbursements, (B) Tax Indemnitee shall have reasonably determined that the action to be taken will not result in any material danger of sale, forfeiture or loss of any Property, or any part thereof or interest therein, will not interfere with the payment of Rent, and will not result in risk of criminal liability, (C) if such contest shall involve the payment of the Imposition prior to the contest, Lessee shall provide to the Tax Indemnitee an interest-free advance in an amount equal to the Imposition that the Tax Indemnitee is required to pay (with no additional net after-tax cost to such Tax Indemnitee), (D) in the case of a claim that must be pursued in the name of a Tax Indemnitee (or an Affiliate thereof), Lessee shall have provided to such Tax Indemnitee an opinion of independent tax counsel selected by the Lessee and reasonably satisfactory to Tax Indemnitee stating that a reasonable basis exists to contest such claim (or, in the case of an appeal of an adverse determination, an opinion of such counsel to the effect that the position asserted in such appeal will more likely than not prevail) and (E) no Event of Default hereunder shall have occurred and be continuing. Each Tax Indemnitee shall at Lessee's expense supply Lessee with such information and documents reasonably requested by Lessee as are in such Tax Indemnitee's possession and as are necessary or advisable for Lessee to participate in any action, suit or proceeding to the extent permitted by this Section 13.5(b); provided that, such Tax Indemnitee shall not be required to disclose its tax return to Lessee to the extent that the information deemed necessary or desirable by Lessee contained therein is otherwise made available to the Lessee in a form which will not hinder Lessee's contest of such action, suit or proceeding. Notwithstanding anything contained herein to the contrary, a Tax Indemnitee will not be required to contest a claim with respect to the imposition of any Tax if such Tax Indemnitee shall waive its right to indemnification under this Section 13.5 with respect to such claim and any related claim with respect to other taxable years the contest of which is precluded or otherwise materially adversely affected as a result of such waiver. (c) Reimbursement for Tax Savings. If (x) a Tax Indemnitee shall obtain a credit or refund of any Taxes paid by Lessee pursuant to this Section 13.5 or (y) by reason of the incurrence or imposition of any Tax for which a Tax Indemnitee is indemnified hereunder or any payment made to or for the account of such Tax Indemnitee by Lessee pursuant to this Section 13.5 or any payment made by a Tax Indemnitee to Lessee by reason of this Section 13.5(c), such Tax Indemnitee at any time actually realizes a reduction in any Taxes for which Lessee is not required to indemnify such Tax Indemnitee pursuant to this Section 13.5 which reduction in Taxes was not taken into account in computing such payment by Lessee to or for the account of such Tax Indemnitee or by the Tax Indemnitee to Lessee, then such Tax Indemnitee shall promptly pay to Lessee on an After Tax Basis (xx) the amount of such credit or refund, together with the amount of any interest received by such Tax Indemnitee on account of such credit or refund or (yy) an amount equal to such reduction in Taxes, as the case may be; provided that no such payment shall be made 45 50 so long as an Event of Default shall have occurred and be continuing but shall be paid promptly after cure of such Event of Default. Each Tax Indemnitee agrees to take such actions as Lessee may reasonably request (provided in the good faith judgment of the Tax Indemnitee, such actions would not result in any adverse effect on the Tax Indemnitee for which the Tax Indemnitee is not entitled to indemnification from Lessee) and to otherwise act in good faith to claim such refunds and other available Tax benefits, and take such other actions as may be reasonable to minimize any payment due from Lessee pursuant to this Section 13.5. The disallowance or reduction of any credit, refund or other tax savings with respect to which a Tax Indemnitee has made a payment to Lessee under this Section 13.5(c) shall be treated as a Tax for which Lessee is obligated to indemnify such Tax Indemnitee hereunder without regard to the exclusions set forth in the definition of Impositions. (d) Payments. Any Imposition indemnifiable under this Section 13.5 shall be paid directly when due to the applicable taxing authority if direct payment is practicable and permitted. If direct payment to the applicable taxing authority is not permitted or is otherwise not made, any amount payable to a Tax Indemnitee pursuant to this Section 13.5 shall be paid within thirty (30) days after receipt of a written demand therefor from such Tax Indemnitee accompanied by a written statement describing in reasonable detail the amount so payable, but not before two (2) Business Days prior to the date that the relevant Taxes are due. Any payments made pursuant to Section 13.5 shall be made in immediately available funds at such bank or to such account as specified by the payee in written directions to the payor, or, if no such direction shall have been given, by check of the payor payable to the order of the payee by certified mail, postage prepaid at its address as set forth in this Participation Agreement. Upon the request of any Tax Indemnitee with respect to a Tax that Lessee is required to pay, Lessee shall furnish to such Tax Indemnitee the original or a certified copy of a receipt for Lessee's payment of such Tax or such other evidence of payment as is reasonably acceptable to such Tax Indemnitee. (e) Reports. In the case of any report, return or statement required to be filed with respect to any Taxes that are subject to indemnification under this Section 13.5, Lessee shall promptly notify the Tax Indemnitee of such requirement and, at Lessee's expense (i) if Lessee is permitted (unless otherwise requested by the Tax Indemnitee) by Applicable Law, timely file such report, return or statement in its own name or (ii) if such report, return or statement is required to be in the name of or filed by such Tax Indemnitee or the Tax Indemnitee otherwise requests that such report, return or statement be prepared for filing by such Tax Indemnitee, prepare such report, return or statement in such manner as shall be satisfactory to such Tax Indemnitee and send the same to the Tax Indemnitee for filing no later than fifteen (15) days prior to the due date therefor. In any case in which the Tax Indemnitee will file any such report, return or statement, Lessee shall, upon written request of such Tax Indemnitee, provide such Tax Indemnitee with such information as is reasonably necessary to allow the Tax Indemnitee to file such report, return or statement. (f) Verification. At Lessee's request, the amount of any indemnity payment by Lessee or any payment by a Tax Indemnitee to Lessee pursuant to this Section 13.5 shall be verified 46 51 and certified by an independent public accounting firm mutually acceptable to Lessee and the Tax Indemnitee. The costs of such verification shall be borne by Lessee unless such verification shall result in an adjustment in Lessee's favor of ten percent (10%) of the payment as computed by the Tax Indemnitee, in which case such fee shall be paid by the Tax Indemnitee. In no event shall Lessee have the right to review the Tax Indemnitee's tax returns or receive any other confidential information from the Tax Indemnitee in connection with such verification. Any information provided to such accountants by any Person shall be and remain the exclusive property of such Person and shall be deemed by the parties to be (and the accountants will confirm in writing that they will treat such information as) the private, proprietary and confidential property of such Person, and no Person other than such Person and the accountants shall be entitled thereto and all such materials shall be returned to such Person. Such accounting firm shall be requested to make its determination within thirty (30) days of Lessee's request for verifications and the computations of the accounting firm shall be final, binding and conclusive upon Lessee and the Tax Indemnitee. The parties agree that the sole responsibility of the independent public accounting firm shall be to verify the amount of a payment pursuant to this Participation Agreement and that matters of interpretation of this Participation Agreement are not within the scope of the independent accounting firm's responsibilities. SECTION 14. MISCELLANEOUS SECTION 14.1. Survival of Agreements. The representations, warranties, covenants, indemnities and agreements of the parties provided for in the Operative Documents, and the parties' obligations under any and all thereof, shall survive the execution and delivery of this Participation Agreement, the transfer of any Property to the Lessor, any disposition of any interest of the Lessor in any Property or any Improvements, the payment of the Note and any disposition thereof shall be and continue in effect notwithstanding any investigation made by any party and the fact that any party may waive compliance with any of the other terms, provisions or conditions of any of the Operative Documents. Except as expressly provided herein, it is expressly understood and agreed that each of the indemnities provided for herein shall survive the expiration or termination of the Lease and the other Operative Documents and the payment by Lessee and Guarantor of all amounts due thereunder for a period of three (3) years (but shall continue in full force and effect following such date with respect to any Claim asserted prior to such date) and shall be separate and independent from any remedy under the Lease or any other Operative Document; provided that, to the extent that any Claim arises after such three (3) year period which was not asserted during such three (3) period due to a failure to discover such Claim or for any other reason, such indemnity shall be revived upon the assertion of such Claim solely with respect to such Claim. SECTION 14.2. No Broker; etc. Each of the parties hereto represents to the others 47 52 that it has not retained or employed any broker, finder or financial adviser, other than Credit Suisse First Boston Corporation and Invemed Associates, Inc., to act on its behalf in connection with this Participation Agreement or the transactions contemplated herein, nor has it authorized any broker, finder or financial adviser retained or employed by any other Person so to act. Any party who is in breach of this representation shall indemnify and hold the other parties harmless from and against any liability arising out of such breach of this representation. SECTION 14.3. Notices. Unless otherwise specifically provided herein, all notices, consents, directions, approvals, instructions, requests and other communications required or permitted by the terms hereof to be given to any Person shall be given in writing by United States mail, by nationally recognized courier service, by hand or by facsimile communication and any such notice shall become effective five (5) Business Days after being deposited in the mails, certified or registered with appropriate postage prepaid or one (1) Business Day after delivery to a nationally recognized courier service specifying overnight delivery or, if delivered by hand, when received, or, if sent by facsimile communication, when confirmed by electronic or other means during business hours on a Business Day (or, if confirmed after business hours or on a non-Business Day, on the next Business Day) and shall be directed to the address of such Person as indicated: If to Guarantor, to it at: The Home Depot, Inc. 2455 Paces Ferry Road Atlanta, Georgia 30339 Attn: Treasurer Telephone No.: (770) 384-5735 Telecopy No.: (770) 384-4522 with a copy to: L.A. Smith Senior Vice President/Legal 2455 Paces Ferry Road Atlanta, Georgia 30339 Telephone No.: (770) 384-2737 Telecopy No.: (770) 384-2752 If to Lessee, to it at: Home Depot U.S.A., Inc. 2455 Paces Ferry Road Atlanta, Georgia 30339 Attn: Treasurer Telephone No.: (770) 384-5735 Telecopy No.: (770) 384-4522 48 53 with a copy to: L.A. Smith Senior Vice President/Legal 2455 Paces Ferry Road Atlanta, Georgia 30339 Telephone No.: (770) 384-2737 Telecopy No.: (770) 384-2752 If to the Lessor, to it at: 11 Madison Avenue, 23rd Floor New York, New York 10010 Attn: Director Telecopy No.: (212) 325-8094 Telephone No.: (212) 325-9138 If to the Indenture Trustee, to it at: The Bank of New York 101 Barclay Street, 21st Floor Corporate Trust Administration New York, New York 10286 Telephone No.: (212) 815-5092 Telecopy No.: (212) 815-5915 If to Facility Lender, to it at: HD Real Estate Funding Corp. II c/o JH Management Corporation Room 520 One International Place Boston, Massachusetts 02110 Attn: R. Douglas Donaldson Telecopy No.: (617) 951-7050 Telephone No.: (617) 951-7690 49 54 If to Moody's, to it at: Moody's Investors Service 99 Church Street New York, New York 10007 Telecopier No.: (212) 553-1350 Telephone No.: (212) 553-4595 If to S&P, to it at: Standard & Poors 25 Broadway New York, New York 10004 Telecopier No.: (212) 325-8094 Telephone No.: (212) 325-9138 From time to time any party may designate a new address for purposes of notice hereunder by notice to each of the other parties hereto. The Lessee shall receive a copy of each notice delivered pursuant to the Operative Documents and Lessee hereby agrees to notify promptly Moody's and S&P of any termination of the Lease. SECTION 14.4. Counterparts. This Participation Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same agreement. SECTION 14.5. Amendments. No Operative Document nor any of the terms thereof may be terminated, amended, supplemented, waived or modified with respect to Guarantor, Lessee, the Lessor, the Facility Lender or the Indenture Trustee, except (a) in the case of a termination, amendment, supplement, waiver or modification to be binding on Guarantor, Lessee, the Lessor, the Facility Lender or the Indenture Trustee, with the written agreement or consent of such party, and (b) in the case of a termination, amendment, supplement, waiver or modification to the Indenture of Trust, in accordance with the terms thereof; provided, however, that (1) no such termination, amendment, supplement, waiver or modification shall without written agreement or consent of each Participant (other than Facility Lender): 50 55 (x)(i) modify any of the provisions of this Section 14.5; (ii) reduce, modify, amend or waive any fees or indemnities in favor of any Participant, including without limitation amounts payable pursuant to Section 13 (except that any Person (other than the Facility Lender) may consent to any reduction, modification, amendment or waiver of any indemnity payable to it); (iii) modify, postpone, reduce or forgive, in whole or in part, any payment of Rent (other than pursuant to the terms of any Operative Document), any Loan or Lessor Investment Amount, the Lease Balance, Residual Value Guaranty, amounts due pursuant to Section 22.2 of the Lease, interest or Certificate Earnings or, subject to clause (ii) above, any other amount payable under any Lease or this Participation Agreement, or modify the definition or method of calculation of Rent (other than pursuant to the terms of any Operative Document), any Loan or Lessor Investment Amount, Lease Balance, Shortfall Amount, Residual Value Guaranty, Maximum Property Costs, or any other definition which would affect the amounts to be advanced or which are payable under the Operative Documents or any of the other matters set forth above; or (y) consent to any assignment of the Lease or the Guaranty, releasing Lessee from its obligations in respect of the payments of Rent and the Lease Balance or changing the absolute and unconditional character of such obligation or releasing the Guarantor from its obligations in respect of the payments under the Guaranty or changing the absolute and unconditional character of such obligation; (2) no other termination, amendment, supplement, waiver or modification shall, without the written agreement or consent of the Lessor and the Indenture Trustee, be made to Sections 5 or 7 of this Participation Agreement or the definition of "Lease Event of Default". Notwithstanding the foregoing, any termination, amendment, supplement, waiver or modification to any provision of any of the Operative Documents (other than an amendment, supplement, waiver or modification made to cure any ambiguity, to correct or supplement any provision in such Operative Document which may be defective or inconsistent with any other provision in such Operative Document or any related Operative Document shall not be effective unless, as a condition precedent thereto, each of Moody's and S&P shall have provided written confirmation that immediately after giving effect to such modification, supplement, amendment, waiver or termination, the Fixed Rate Notes shall not be rated lower than such Fixed Rate Notes are rated immediately prior to giving effect thereto and such supplement, amendment, modification, waiver or termination shall not result in a downgrade, withdrawal or qualification of the rating assigned to the Fixed Rate Notes by Moody's and S&P. SECTION 14.6. Usury. It is the intent of the parties hereto not to violate any federal or state law, rule or regulation pertaining either to usury or to the contracting for or charging or collecting of interest, and each of the parties hereto agree that, should any provision of this Participation Agreement or of any of the Operative Documents, or any act performed hereunder or 51 56 thereunder, violate any such law, rule or regulation, then the excess of interest contracted for or charged or collected over the maximum lawful rate of interest shall be applied to the outstanding principal indebtedness due to the Participants under the applicable Operative Document. SECTION 14.7. Confidentiality. Each Participant agrees to exercise commercially reasonable efforts to keep any information delivered or made available by the Guarantor or Lessee to it which is clearly indicated or stated to be confidential information (or when the circumstances under which such information is delivered or when the content thereof would cause a reasonable person to believe that such information is confidential), confidential from anyone other than persons employed or retained by such Participant who are or are expected to become engaged in evaluating, approving, structuring or administering any of the Operative Documents (such Persons to likewise be under similar obligations of confidentiality with respect to such information); provided, however that nothing herein shall prevent any Participant from disclosing such information (i) to any other Participant, (ii) upon the order of any court or administrative agency, (iii) upon the request or demand of any regulatory agency or authority having jurisdiction over such Participant, (iv) which has been publicly disclosed, (v) to the extent reasonably required in connection with any litigation to which any Participant or its Affiliates may be a party, (vi) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Operative Document, (vii) to such Participant's legal counsel, independent auditors and to such Participant's Affiliates, (viii) to any actual or proposed Participant, assignee or other transferee of all or part of its rights hereunder which has agreed in writing to be bound by the provisions of this Section 14.7, and (ix) to the Rating Agencies; provided, that, should disclosure of any such confidential information be required by virtue of clause (ii) or (v) of the immediately preceding provisos, any relevant Participant shall notify Lessee and Guarantor of the same so as to allow the Lessee or Guarantor, at Lessee's or Guarantor's sole cost and expense, to seek a protective order or to take any other appropriate action; provided, further, that, no Participant shall be required to delay compliance with any directive to disclose beyond the last date such delay is legally permissible any such information so as to allow the Lessee or Guarantor to effect any such action. SECTION 14.8. 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 14.9. Parties in Interest. Except as expressly provided herein, none of the provisions of this Participation Agreement are intended for the benefit of any Person except the parties hereto. SECTION 14.10. GOVERNING LAW. THIS PARTICIPATION AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE (INCLUDING SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW, BUT EXCLUDING ALL OTHER CHOICE OF LAW AND 52 57 CONFLICTS OF LAW RULES). SECTION 14.11. Severability. Any provision of this Participation Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 14.12. Further Assurances. The parties hereto shall promptly cause to be taken, executed, acknowledged or delivered, at the sole, joint and several expense of Guarantor and Lessee, all such further acts, conveyances, documents and assurances as the other parties may from time to time reasonably request in order to carry out and effectuate the intent and purposes of this Participation Agreement, the other Operative Documents, and the transactions contemplated hereby and thereby (including, without limitation, the preparation, execution and filing of any and all Uniform Commercial Code financing statements and other filings or registrations which the parties hereto may from time to time request to be filed or effected). Lessee will, at its own expense and without need of any prior request from any other party, take such action as may be necessary (including any action specified in the preceding sentence), or (if the Lessor or Indenture Trustee shall so request) as so requested, in order to maintain and protect all security interests provided for hereunder or under any other Operative Document. SECTION 14.13. WAIVER OF JURY TRIAL. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THE OPERATIVE DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 14.14. Limitations on Recourse Against Lessor. Notwithstanding anything contained in this Participation Agreement or any other Operative Documents to the contrary, each of the parties hereto agrees to look solely to Lessor's (or to any partner thereof's) estate and interest in the Properties and the Improvements thereon and rights under the Operative Documents for the collection of any judgment requiring the payment of money by Lessor in the event of liability by Lessor, and no other property or assets of Lessor or any shareholder, owner or partner (direct or indirect) in or of Lessor, or any director, officer, employee, beneficiary, Affiliate of any of the foregoing shall be subject to levy, execution or other enforcement procedure for the satisfaction of the remedies of any party hereto against Lessor under or with respect to the Operative Documents, the relationship of Lessor and any other party hereto hereunder or any other liability of Lessor to any other party hereto under the Operative Documents; provided that, nothing herein shall limit recourse against the Lessor or its partners for the gross negligence or willful misconduct of such Persons or claims proximately caused by Lessor's breach of its obligations pursuant to Sections 9.1, 10.2 (solely with respect to the first sentence thereof), 10.3, 10.4, 10.6(a), (g), (h) or 10.7 of this Participation Agreement; provided further, that the foregoing proviso is intended to allow a claim 53 58 for damages against Lessor but shall not be construed as creating a full recourse obligation on the part of Lessor (or any partner thereof) to repay the Loan in whole or in part or any amounts relating to the Loan arising under the Loan Agreement and the Note. SECTION 14.15. Limitation on Recourse Against Facility Lender. The provisions of Section 2.14 of the Indenture of Trust are hereby incorporated herein by this reference and made a part hereof and of each of the Operative Documents and each party hereto agrees to be bound by the limitations set forth therein. [SIGNATURE PAGES BEGIN ON THE FOLLOWING PAGE] 54 59 IN WITNESS WHEREOF, the parties hereto have caused this Participation Agreement to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. THE HOME DEPOT, INC., as Guarantor By: /s/ Lawrence A. Smith ------------------------------------------ Name: Lawrence A. Smith Title: Senior Vice President - Legal Attest: /s/ Larry B. Appel -------------------------------------- Name: Larry B. Appel Title: Assistant Secretary [CORPORATE SEAL] 55 60 HOME DEPOT U.S.A., INC., as Lessee By: /s/ Carol B. Tome ------------------------------------------ Name: Carol B. Tome Title: Vice President and Treasurer Attest: /s/ Mary Beth Lamoree -------------------------------------- Name: Mary Beth Lamoree Title: Assistant Secretary [CORPORATE SEAL] 56 61 HD REAL ESTATE FUNDING CORPORATION II, as Facility Lender By: /s/ R. Douglas Donaldson ------------------------------------------ Name: R. Douglas Donaldson Title: Treasurer CREDIT SUISSE LEASING 92A, L.P., a Delaware limited partnership, as Lessor BY: CREDIT SUISSE FIRST BOSTON, its general partner By: /s/Carl Weatherley-White ------------------------------------------ Name: Carl Weatherley-White Title: Associate By: /s/ Darcy Sledge ------------------------------------------ Name: Darcy Sledge Title: Vice President 57 62 THE BANK OF NEW YORK, as Indenture Trustee By: /s/ Marie E. Trimboli ------------------------------------------ Name: Marie E. Trimboli Title: Assistant Treasurer CREDIT SUISSE FIRST BOSTON CORPORATION, as Initial Purchaser By: /s/ Andrew R. Taussig ------------------------------------------ Name: Andrew R. Taussig Title: Managing Director INVEMED ASSOCIATES, INC., as Initial Purchaser By: /s/ Cristina H. Kepner ------------------------------------------ Name: Cristina H. Kepner Title: Executive Vice President 58 EX-10.11 4 PARTICIPATION AGREEMENT DATED 6/25/1996 1 - -------------------------------------------------------------------------------- PARTICIPATION AGREEMENT dated as of June 25, 1996 among THE HOME DEPOT, INC., as Guarantor, HOME DEPOT U.S.A., INC., as Lessee and Construction Agent, HD REAL ESTATE FUNDING CORP., as Facility Lender, CREDIT SUISSE LEASING 92A, L.P., as Lessor, OTHER FINANCIAL INSTITUTIONS LISTED ON THE SIGNATURE PAGES HEREOF OR THAT MAY HEREAFTER BECOME PARTY HERETO, as Lenders, and CREDIT SUISSE, as Agent Bank and Lender - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Page SECTION 1. DEFINITIONS; INTERPRETATION......................................................................2 SECTION 2. INITIAL CLOSING DATE.............................................................................2 SECTION 3. ACQUISITIONS OF LAND AND FACILITIES; FUNDINGS OF ADVANCES........................................3 SECTION 3.1. Agreement to Acquire and Lease................................................3 SECTION 3.2. Lessor's Commitment...........................................................3 SECTION 3.3. Facility Lender Commitments...................................................4 SECTION 3.4. Issuance of Commercial Paper..................................................4 SECTION 3.5. Procedures for Acquisitions of Land...........................................4 SECTION 3.6. Guarantor's and Lessee's Deemed Representation for Each Acquisition...........5 SECTION 3.7. Procedures for Advances.......................................................5 SECTION 3.8. Guarantor's and Lessee's Deemed Representation for Each Advance......................................................6 SECTION 3.9. Allocation of Advances........................................................6 SECTION 3.10. Use of Proceeds...............................................................7 SECTION 3.11. Return of Advances............................................................7 SECTION 4. CERTIFICATE EARNINGS; INTEREST; COMMITMENT FEES..................................................7 SECTION 4.1. Certificate Earnings..........................................................7 SECTION 4.2. Interest on Loans.............................................................8 SECTION 4.3. Commitment Fees...............................................................8 SECTION 5. DISTRIBUTIONS OF PAYMENTS AND COLLATERAL PROCEEDS................................................8 SECTION 5.1. Agreement of Agent Bank and Participants......................................8 SECTION 5.2. Basic Rent....................................................................9 SECTION 5.3. Purchase Payments by Lessee..................................................10 SECTION 5.4. Residual Value Guarantee.....................................................11 SECTION 5.5. Sales Proceeds of Remarketing of Properties..................................12 SECTION 5.6. Supplemental Rent............................................................13 SECTION 5.7. Excepted Payments............................................................13 SECTION 5.8. Distribution of Payments after Lease Event of Default or Loan Agreement Event of Default...........................................................13 SECTION 5.9. Other Payments...............................................................14 SECTION 5.10. Casualty and Condemnation Amounts............................................15 SECTION 5.11. Reduction of Commitment......................................................15 SECTION 5.12. Order of Application.........................................................15
3 SECTION 5.13. Remaining Funds..............................................................16 SECTION 5.14. Time of Payment..............................................................16 SECTION 6. CERTAIN INTENTIONS OF THE PARTIES...............................................................16 SECTION 7. CONDITIONS PRECEDENT TO ACQUISITIONS AND ADVANCES...............................................17 SECTION 7.1. Conditions Precedent -- Documentation........................................17 SECTION 7.2. Further Conditions Precedent.................................................19 SECTION 8. COMPLETION DATE CONDITIONS......................................................................20 SECTION 9. REPRESENTATIONS.................................................................................22 SECTION 9.1. Representations of the Lessor................................................22 SECTION 9.2. Representations of the Guarantor and the Lessee..............................24 SECTION 9.3. Representations of Guarantor and Lessee on Property Closing Date.............28 SECTION 9.4. Additional Representations of Guarantor and Lessee...........................30 SECTION 9.5. Representations of Facility Lender...........................................31 SECTION 9.6. Representations and Warranties of the Agent Bank and the Lenders.............31 SECTION 10.PAYMENT OF CERTAIN EXPENSES.....................................................................32 SECTION 10.1. Transaction Expenses.........................................................32 SECTION 10.2. Brokers' Fees and Stamp Taxes................................................33 SECTION 10.3. Certain Fees and Expenses....................................................33 SECTION 11.OTHER COVENANTS AND AGREEMENTS..................................................................33 SECTION 11.1. Covenants of Guarantor and Lessee............................................33 SECTION 11.2. Cooperation with the Lessee..................................................39 SECTION 11.3. Release of Properties........................................................40 SECTION 11.4. Discharge of Liens...........................................................40 SECTION 11.5. Notice of Credit Rating......................................................40 SECTION 11.6. Covenants of the Facility Lender and the Lessor..............................41 SECTION 11.7. No Bankruptcy Proceedings....................................................42 SECTION 11.8. Notice of Claims Against Lessor..............................................43 SECTION 12.LESSEE DIRECTIONS...............................................................................43 SECTION 12.1. Lessee Directions............................................................43
4 SECTION 13.TRANSFER OF INTEREST............................................................................44 SECTION 13.1. Restrictions on and Effect of Transfer.......................................44 SECTION 13.2. Replacement of Lessor or Facility Lender. ..................................45 SECTION 14.INDEMNIFICATION.................................................................................45 SECTION 14.1. General Indemnification......................................................45 SECTION 14.2. Environmental Indemnity......................................................47 SECTION 14.3. Proceedings in Respect of Claims.............................................49 SECTION 14.4. End of Term Indemnity........................................................50 SECTION 14.5. General Tax Indemnity........................................................51 SECTION 14.6. Completion Guaranty..........................................................55 SECTION 15.MISCELLANEOUS..................................................................................55 SECTION 15.1. Survival of Agreements.......................................................55 SECTION 15.2. No Broker; etc...............................................................56 SECTION 15.3. Notices..................................................................... 56 SECTION 15.4. Counterparts.................................................................58 SECTION 15.5. Amendments...................................................................58 SECTION 15.6 Usury........................................................................60 SECTION 15.7 Confidentiality..............................................................60 SECTION 15.8. Headings; etc................................................................61 SECTION 15.9. Parties in Interest..........................................................61 SECTION 15.10. GOVERNING LAW................................................................61 SECTION 15.11. Severability.................................................................61 SECTION 15.12. Further Assurances...........................................................61 SECTION 15.13. WAIVER OF JURY TRIAL.........................................................61 SECTION 15.14 Limitations on Recourse Against Lessor.......................................62 SECTION 15.15 Limitations on Recourse Against Facility Lender..............................62 SCHEDULES SCHEDULE I Lenders and Their Addresses APPENDICES APPENDIX 1 Definitions and Interpretation APPENDIX 2 Initial Closing Date Conditions Precedent APPENDIX 3 Pricing Provisions for Lessor Investment Amounts
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EXHIBITS EXHIBIT A Acquisition Request EXHIBIT B Funding Request EXHIBIT C Opinion of Counsel to Lessee EXHIBIT D Supplement to the Assignment of Leases EXHIBIT E Local Counsel Opinion EXHIBIT F Property Closing Certificate EXHIBIT G Opinion of Counsel to Facility Lender EXHIBIT H Completion Date Certificate EXHIBIT I Opinion of Counsel to Lessor EXHIBIT J Assignment of Lease and Consent to Assignment EXHIBIT K Construction Agency Agreement Assignment and Consent to Construction Agency Agreement Assignment EXHIBIT L Master Assignment and Consent to Master Assignment EXHIBIT M Form of Security Agreement EXHIBIT N-1 Form of Mortgage and Security Agreement EXHIBIT N-2 Form of Deed of Trust and Security Agreement EXHIBIT N-3 Form of Deed to Secure Debt and Security Agreement EXHIBIT O Form of Lease EXHIBIT P Form of Compliance Certificate
6 PARTICIPATION AGREEMENT THIS PARTICIPATION AGREEMENT, dated as of June 25, 1996 (this "Agreement" or "Participation Agreement"), is entered into by and among THE HOME DEPOT, INC., a Delaware corporation, as Guarantor (the "Guarantor"); HOME DEPOT U.S.A., INC. a Delaware corporation, as Lessee and Construction Agent ("Lessee" or "Construction Agent"), HD REAL ESTATE FUNDING CORP., a Delaware corporation ("Facility Lender"), CREDIT SUISSE LEASING 92A, L.P., a Delaware limited partnership, as lessor ("Lessor"), the financial institutions listed on the signature pages hereto or that may hereafter become parties hereto, (each, a "Lender" and collectively, the "Lenders") and CREDIT SUISSE, a Swiss bank operating through its New York branch, as Agent Bank for the Lenders (in such capacity, the "Agent Bank") PRELIMINARY STATEMENT In accordance with the terms of this Participation Agreement, the Lease, the Loan Agreement, the Liquidity Agreement and the other Operative Documents, A. the Lessor contemplates acquiring undeveloped parcels of Land from time to time during the Commitment Period, by purchasing Land from third party sellers; B. using Advances from the Lessor, Lessee contemplates building, or causing to be built, as Construction Agent, Improvements on such undeveloped parcels of Land for the Lessor; C. the Lessor wishes to arrange financing for up to 97% of the total cost of the acquisition of such Land and the construction of such Improvements; D. the Facility Lender has agreed to issue Commercial Paper Notes during the Commitment Period in an aggregate amount not to exceed the Facility Lender Commitments, with the proceeds of the sale of the Commercial Paper Notes to be lent to the Lessor pursuant to the Loan Agreement for the acquisition of such Land by the Lessor and the construction of such Improvements by the Construction Agent, as agent for the Lessor; E. the Agent Bank and the Lenders are willing to provide the Liquidity Facility to the Facility Lender to ensure the Facility Lender's ability to pay the Principal Component and the Interest Component of such Commercial Paper Notes and to make Loans to the Lessor as needed for the acquisition and improvement of the Properties; F. the Lessee wishes to lease the Properties from the Lessor under the Lease and the Guarantor is willing to guarantee the Lessee's obligations under the Operative Documents; 7 G. to secure its obligations to the Facility Lender pursuant to the Loan Agreement, the Lessor is granting a lien to the Facility Lender, pursuant to the Mortgages and the other Security Documents, on all of the Lessor's right, title and interest in the Properties and substantially all of the Lessor's rights under the Lease with respect to the Properties; and H. to secure its obligations to the Agent Bank and the Lenders under the Liquidity Agreement, the Facility Lender is pledging to the Agent Bank, for the benefit of the Lenders, pursuant to the Master Assignment and the Security Agreement, substantially all of its right, title and interest in and to the Loan Agreement, the Notes and Security Documents received from the Lessor. In consideration of the mutual agreements contained in this Participation Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS; INTERPRETATION Unless the context shall otherwise require, capitalized terms used and not defined herein shall have the meanings assigned thereto in Appendix 1 attached hereto and made a part hereof by this reference for all purposes hereof; and the rules of interpretation set forth in Appendix 1 hereto shall apply to this Participation Agreement. SECTION 2. INITIAL CLOSING DATE The initial Closing Date shall occur on the earliest date (on or before June 30, 1996) on which all the conditions precedent thereto set forth in Appendix 2 attached hereto and made a part hereof by this reference shall have been satisfied or waived by the applicable parties as set forth therein (such date referred to herein as the "Initial Closing Date"). 8 SECTION 3. ACQUISITIONS OF LAND AND FACILITIES; FUNDINGS OF ADVANCES SECTION 3.1. Agreement to Acquire and Lease. Subject to the conditions and terms of this Participation Agreement and the other Operative Documents, the Lessor agrees to take the following actions at the request of Lessee from time to time during the Commitment Period: (a) purchase Land (through Advances funded by the Lessor and the Facility Lender as provided herein); (b) concurrently with each Property Closing Date, lease the applicable Land and the existing Improvements thereon to the Lessee under the Lease; (c) cause the Improvements to be built by its agent, the Construction Agent, pursuant to the Construction Agency Agreement (utilizing funds provided by the Lessor and the Facility Lender as provided herein); and (d) as of the applicable Completion Date, lease the completed Improvements to the Lessee under the Lease. Notwithstanding any other provision hereof, the Lessor shall not be obligated to make any Advance if (i) the amount of such Advance would exceed the Available Commitments, (ii) if after giving effect to such Advance, the aggregate Property Costs with respect to the Properties would exceed the Maximum Property Costs, (iii) if after giving effect to such Advance, the Property Costs with respect to any Property would exceed 100% of the As Built Value of such Property; or (iv) if such Advance is for the purchase or improvement of a Support Facility and the total amount of Advances expended for such purposes would (after giving effect to such Advance) exceed twenty percent (20%) of the Total Commitments. SECTION 3.2. Lessor's Commitment. Subject to the terms and conditions of this Participation Agreement and the other Operative Documents, the Lessor, at the request of the Lessee, agrees to make investments of its own funds in the Properties from time to time during the Commitment Period on a Funding Date in amounts (each a "Lessor Investment Amount") equal to the amount of the applicable Advance requested in the applicable Funding Request to be funded by a Lessor Investment Amount; provided that, the aggregate amount of the Lessor Investment Amounts funded shall at all times equal or exceed the Lessor's Commitment Percentage of the total outstanding Advances. Notwithstanding any other provision hereof, the Lessor shall not be obligated to make available any Lessor Investment Amount if, after giving effect to the requested Lessor Investment Amount, the aggregate amount of Lessor Investment Amounts funded would exceed the Lessor's Commitment. SECTION 3.3. Facility Lender Commitments. Subject to the conditions and terms of this Participation Agreement and the other Operative Documents, the Facility Lender, at the request of the Lessor or its agent, the Construction Agent, agrees to make Loans to the Lessor 9 pursuant to the Loan Agreement, and the Lessor hereby agrees to make the proceeds of such Loans available to the Lessee or the Construction Agent pursuant to Section 3.1, from time to time during the Commitment Period on each Funding Date in an amount in immediately available funds equal to the amount of the Advance requested to be funded by Loan proceeds in the applicable Funding Request; provided that, the aggregate principal amount of the Loans shall at all times be less than or equal to the Facility Lender Commitment Percentage of the aggregate outstanding Advances. Notwithstanding any other provision hereof, the Facility Lender shall not be obligated to make any Loan if, (i) after giving effect to the proposed Loan, the aggregate outstanding amount of the Loans would exceed the Facility Lender Commitments, or (ii) the Facility Lender is unable to issue Commercial Paper Notes in an amount sufficient to fund such Loan pursuant to Section 3.4 or to borrow the necessary amount from the Lenders as Direct Funding Loans pursuant to the Liquidity Facility. SECTION 3.4. Issuance of Commercial Paper. Provided that the Liquidity Agreement is in full force and effect and subject to the terms and conditions of this Participation Agreement and the other Operative Documents, in order to fund its obligation to make the Loans to the Lessor pursuant to the Loan Agreement: (a) the Facility Lender shall (i) issue Commercial Paper Notes, the net proceeds of which are sufficient to make Loans in a principal amount equal to the amount of the Advance requested by the Lessee to be funded with Loan proceeds on each Funding Date, or (ii) request a Direct Funding Loan pursuant to the Liquidity Agreement in such principal amount; and (b) The Facility Lender shall cause (i) the Issuing and Paying Agent Bank to deliver the net proceeds of the Commercial Paper Notes issued on such Funding Date, or (ii) the Agent to deliver the proceeds of any Direct Funding Loans made pursuant to the Liquidity Agreement on such Funding Date, to the Construction Agent or such other Person as may be directed by the Construction Agent; provided however, that in no event shall (i) the sum of (x) the Interest Component and Principal Component of all outstanding Commercial Paper Notes, plus (y) the aggregate outstanding principal amount of the Facility Loans, minus (z) Deposited Funds at any time exceed the Commitment then in effect, or (ii) the Facility Lender issue any Commercial Paper Notes with a maturity date later than five (5) Business Days' prior to the Maturity Date then in effect. SECTION 3.5. Procedures for Acquisitions of Land. With respect to each acquisition of Land, (a) Lessee and/or Construction Agent shall provide to Lessor and Agent Bank with respect to the proposed acquisition, the Environment Audit, Appraisal, survey and title insurance commitment required to be delivered pursuant to Section 7.1 for such Property and the Lessor and Agent Bank shall notify the Lessee of any deficiencies in, or comments on, such items as soon as possible (and in any event within ten (10) Business Days); (b) Lessor and Agent Bank shall receive the form of opinion of counsel 10 required pursuant to Section 7.1(j) (with the understanding that Lessor and Agent Bank shall respond to any draft of such opinion within five (5) Business Days); (c) Upon satisfaction of the foregoing conditions and receipt of the form of Deed, Lessor shall execute and deliver a limited power of attorney to Lessee (or a representative thereof) in recordable form and satisfactory to Lessor and Agent Bank sufficient to allow Lessee, upon satisfaction of the remaining conditions precedent set forth in Sections 7.1 and 7.2, to execute and record such documents necessary or advisable in connection with the acquisition of such Land on the Property Closing Date; (d) Lessor, Facility Lender and Agent Bank shall execute and deliver such other documents as may be required to be executed by them in order to fulfill or to confirm whether the conditions precedent set forth in Section 7.1 have been fulfilled or waived within three (3) Business Days' following request; and (e) Lessee shall give the Lessor, the Facility Lender, and the Agent Bank an irrevocable prior written notice not later than 1:00 p.m., New York time, on the Business Day of the proposed Property Closing Date, pursuant, in each case, to an Acquisition Request in the form of Exhibit A attached hereto and made a part hereof by this reference (an "Acquisition Request"), specifying with respect to such Land: (i) the Property Closing Date, (ii) the Land to be acquired, (iii) the identity of the seller and the Property Acquisition Cost, and (iv) the Estimated Completion Date for such Property. SECTION 3.6. Guarantor's and Lessee's Deemed Representation for Each Acquisition. Each Acquisition Request by Lessee shall be deemed a representation and warranty by Guarantor and the Lessee to the Lessor, the Facility Lender, each Lender and the Agent Bank that on the proposed Property Closing Date, (i) no Default or Event of Default exists, (ii) the representations of Guarantor and Lessee set forth in Section 9 are true and correct in all material respects as though made on and as of such Property Closing Date except to the extent such representations or warranties relate solely to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects on and as of such earlier date, and (iii) the conditions precedent to the acquisition of such Land by the Lessor on such Property Closing Date set forth in Section 7 have been satisfied. SECTION 3.7. Procedures for Advances. With respect to each funding of an Advance, Construction Agent shall give the Lessor, the Facility Lender, and the Agent Bank an irrevocable prior written notice not later than 1:00 p.m., New York time, on the Business Day of the proposed Funding Date, pursuant, in each case, to a Funding Request in the form of Exhibit B attached hereto and made a part hereof by this reference (a "Funding Request"), specifying (i) the proposed Funding Date, (ii) the amount of the Advance requested, (iii) the relative percentages of such Advance to be funded by Lessor Investment Amounts and Loan proceeds, and (iv) to which Properties such Advance is being allocated and the allocation of such Advance to the respective Property Acquisition Costs and Property Improvements Costs of such Properties. All requests for Advances shall be in a minimum amount of $250,000; provided that, to the extent any Advances are to be funded using the proceeds of Direct Funding Loans (other than Interest Payment Loans), 11 the portion of the Advance to be funded by Direct Funding Loans shall be in a minimum amount of $5,000,000 and in integral multiples of $250,000. All remittances made by the Lessor and the Facility Lender for the funding of any Advance shall be made in immediately available funds by wire transfer to the Construction Agent, with receipt by the Construction Agent not later than 3:00 p.m., New York time, on the applicable Funding Date. Upon (i) the Construction Agent's receipt of the funds provided by the Lessor and the Facility Lender with respect to an Advance and (ii) satisfaction or waiver of the conditions precedent to such Advance set forth in Section 7, the Construction Agent shall pay to Lessee or the Person designated by Lessee for payment or reimbursement of the Property Acquisition Costs of such Land or Property or Property Improvements Costs, as the case may be, the funds provided by the Lessor and the Facility Lender for such Advance. SECTION 3.8. Guarantor's and Lessee's Deemed Representation for Each Advance. Each Funding Request by Lessee shall be deemed a representation and warranty by Guarantor and the Lessee to the Lessor, the Facility Lender, each Lender and the Agent Bank that on the proposed Funding Date, (i) the amount of Advance requested represents amounts owing in respect of the purchase price of Land, or amounts owed or paid by Lessee to third parties in respect of Property Costs for which Lessee has not previously been reimbursed by an Advance, (ii) the Advance will not cause the aggregate Advances allocated to the Properties on such Funding Date and any prior Funding Dates to exceed the Maximum Property Costs, (iii) the Advance will not cause the aggregate Advances allocated to reimburse or to pay Soft Costs incurred in connection with the Properties to exceed ten percent (10%) of the Total Commitments, (iv) no Default or Event of Default exists, (v) the representations of the Guarantor and the Lessee set forth in Section 9 are true and correct in all material respects as though made on and as of such Funding Date, except to the extent such representations or warranties relate solely to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects on and as of such earlier date, and (vi) the conditions precedent to such Advance and the related Lessor Investment Amount and Loans set forth in Section 7 have been satisfied. SECTION 3.9. Allocation of Advances. The amount of each Advance shall be allocated to the Property Acquisition Costs and/or Property Improvement Costs of the Properties specified in the applicable Funding Request as provided in Section 3.7. Notwithstanding any provision of this Participation Agreement to the contrary however, the outstanding Lessor Investment Amounts and the outstanding Loans shall be deemed to be allocated among the respective Property Acquisition Costs and/or Property Improvement Costs (as applicable) of each Property pro rata based upon the percentage of the aggregate outstanding Lessor Investment Amounts or Loans, as the case may be, to the aggregate amount of Advances regardless of the actual application of the proceeds thereof to any particular Property. SECTION 3.10. Use of Proceeds. The proceeds of all Advances made pursuant to the Operative Documents shall be used solely for the acquisition of Land located in the United States or Canada and the construction of Improvements thereon pursuant to the Construction Agency Agreement which shall be leased (upon completion, in the case of Improvements constructed thereon by the Construction Agent) by the Lessor to the Lessee pursuant to the Lease, which 12 Improvements shall be constructed as a Facility on such Land; provided that the total amount of Advances expended for the acquisition and construction of Properties to be used as Support Facilities shall not exceed twenty percent (20%) of the Total Commitments. SECTION 3.11. Return of Advances. In the event that the Facility Lender is required to return the proceeds of any Facility Loan to the Agent Bank pursuant to Section 3.03(b) of the Liquidity Agreement, the Lessor, the Lessee and the Construction Agent agree (without duplication) to return any such proceeds advanced to any of them pursuant to the Operative Documents. SECTION 4. CERTIFICATE EARNINGS; INTEREST; COMMITMENT FEES SECTION 4.1. Certificate Earnings. (a) The amount of the Lessor Investment Amounts outstanding from time to time shall accrue earnings ("Certificate Earnings") at the Certificate Earnings Rate. If all or any portion of the Lessor Investment Amounts, any Certificate Earnings payable thereon or any other amount payable by Guarantor or a Lessee hereunder shall not be paid within five (5) Business Days of the date when due (whether at stated maturity, the acceleration or otherwise), such overdue amount shall bear interest at a rate per annum which is equal to the Overdue Rate which, in the event such amount is not paid within such five (5) Business Day period, shall be deemed to have begun to accrue on the due date thereof). (b) Lessor shall select the applicable Certificate Earnings Rate in accordance with the terms and conditions set forth on Appendix 3 attached hereto and incorporated herein by this reference. (c) On each Payment Date, the Lessor shall, subject to the provisions of Section 5, receive from the Basic Rent paid by the Lessee, the Lessor Basic Rent (determined on the basis of accrued Certificate Earnings) received from the Lessee under the Lease from time to time as provided in Section 5. (d) The Lessor shall be deemed to have requested that, prior to the Completion Date, the aggregate amount of accrued Certificate Earnings due and payable on such date with respect to the Lessor Investment Amounts allocated to the Property Acquisition Costs and Property Improvements Cost, as applicable of the Construction Period Properties be capitalized. Such capitalization shall be deemed to occur on the relevant Scheduled Payment Date. On each such Scheduled Payment Date, the Lessor Investment Amounts and the Property Acquisition Costs and Property Improvements Cost, as applicable of each Construction Period Property shall be increased by the amount so capitalized. SECTION 4.2. Interest on Loans. (a) Each Loan shall accrue interest computed and payable in accordance with the terms of the Loan Agreement. 13 (b) The interest on the Loans shall be paid through the payment of the Lender Basic Rent (determined on the basis of interest on the Loans) received from the Lessee under the Lease from time to time as provided in Section 5. (c) To the extent that any Interest Payment Loans are made pursuant to the Loan Agreement to capitalize interest on the Loans allocated to the Property Acquisition Costs and the Property Improvements Cost, as applicable of the Construction Period Properties, such Interest Payment Loan shall be deemed to have been made on the relevant Scheduled Payment Date. On each such Scheduled Payment Date, the Loans and the Property Acquisition Costs and the Property Improvements Cost, as applicable of each Construction Period Property shall be increased by the amount so capitalized. SECTION 4.3. Commitment Fees. Lessor shall receive commitment fees on the Lessor's Commitment as set forth on Appendix 3. SECTION 5. DISTRIBUTIONS OF PAYMENTS AND COLLATERAL PROCEEDS In order to provide for the priority and allocation of payments received from the Lessee and Guarantor and the proceeds of the exercise of remedies by any of the Participants pursuant to the Security Documents, the parties hereto agree as follows: SECTION 5.1. Agreement of Agent Bank and Participants. Pursuant to the Master Assignment and the Security Agreement, all of the payments (other than the Excepted Payments) under the Lease, the Construction Agency Agreement, the Mortgages, the Notes, the Participation Agreement and the Loan Agreement have been assigned to the Agent Bank for the benefit of the Lenders. The Agent Bank hereby agrees to deposit all such payments, receipts and other consideration of any kind whatsoever (other than Excepted Payments) received by the Agent Bank pursuant to the Master Assignment, the Security Agreement and any other Security Document in the form received into the Cash Collateral Account. Each Participant hereby agrees that any payment received pursuant to the Guaranty (other than payments received by the Facility Lender pursuant to Section 5.6 which shall be deposited in the Commercial Paper Account) shall immediately be delivered in the form received to the Agent Bank for deposit in the Cash Collateral Account and application as set forth herein. Agent Bank shall make distributions from the Cash Collateral Account pursuant to the requirements of this Section 5 to each Participant or other Person entitled thereto as promptly as possible (it being understood that any such payment received on a timely basis in accordance with the provisions of the Lease, this Participation Agreement and the other Operative Documents shall be distributed by the Agent Bank on the same Business Day to the extent practicable). SECTION 5.2. Basic Rent. Subject to Section 5.8, each payment of Basic Rent (and any payment of interest on overdue installments of Basic Rent) shall be made by Lessee to the Agent Bank and shall be distributed by the Agent Bank as follows: 14 first, an amount equal to the Lender Basic Rent shall be distributed to the Lenders for application to pay in full all accrued but unpaid interest owing to the Lenders pursuant to the terms of the Liquidity Agreement and the Liquidity Notes and the remainder of such amount shall be deposited in the Commercial Paper Account to pay in full the Interest Component of all Commercial Paper Notes in order of maturity (subject to the last paragraph of this Section 5.2), and second, an amount equal to the Lessor Basic Rent shall be distributed to the Lessor for application to pay in full all accrued but unpaid Certificate Earnings not required to be capitalized pursuant to Section 4.1(d) (together with any overdue interest thereon). Notwithstanding any provision of this Section 5.2 to the contrary, in the event that the Facility Lender is required pursuant to the terms of the Operative Documents to make Interest Payment Loans to capitalize interest on the Notes, subject to the terms and conditions of the Operative Documents, Commercial Paper Notes shall be issued with a greater aggregate Principal Component (or, if the Facility Lender is not able or permitted to do so, Facility Loans shall be made pursuant to the Liquidity Agreement) to pay accrued but unpaid interest on the Facility Loans or the Interest Component of maturing Commercial Paper Notes such that the outstanding principal amount of the Loans shall at all times equal the sum of (x) the outstanding principal amount of the Facility Loans, plus (y) Principal Component of the outstanding Commercial Paper Notes, minus (z) the Deposited Funds; provided, however, that if a Loan Agreement Default under Section 5(a) or (e) of the Loan Agreement or a Loan Agreement Event of Default shall have occurred and be continuing, any such payments which would otherwise be paid to the Lessor pursuant to clause second of this Section 5.2 shall be instead held in the Cash Collateral Account until the earliest to occur of (i) the first date thereafter on which all such Loan Agreement Defaults and Loan Agreement Events of Default shall have been cured (in which case such payment under clause second shall then be made), (ii) the date of any acceleration of the Loans (in which case such payment shall then be applied in the manner contemplated by Section 5.8), or (iii) the 180th day after the occurrence of such Loan Agreement Default or Loan Agreement Event of Default (in which case such payment under clause second shall then be made). SECTION 5.3. Purchase Payments by Lessee. Subject to Section 5.8, any payment made by the Lessee pursuant to the Lease or by the Construction Agent pursuant to the Construction Agency Agreement as a result of: (a) the purchase of any of the Properties in connection with Lessee's exercise of its Purchase Option under Section 20.1 of the Lease or the Expiration Date Purchase Option pursuant to Section 22.2 of the Lease (and any related purchase by the Construction Agent pursuant to the Construction Agency Agreement), or (b) the Lessee's purchase of a Property or Properties pursuant to Section 17.6 of the Lease (and any related purchase by the Construction Agent pursuant to the Construction Agency Agreement) or the Construction Agent's purchase pursuant 15 to Section 5.3 of the Construction Agency Agreement, or (c) payment of the Property Balance in accordance with Section 15.4, Section 16.2(b) Section 22.3(b) of the Lease (and any related purchase by the Construction Agent pursuant to the Construction Agency Agreement), shall except as otherwise provided in Section 5.11, be distributed by the Agent Bank in the following order of priority: first, an amount equal to the Facility Lender Property Balance with respect to such Property shall be distributed to the Lenders in an amount sufficient to repay the outstanding Facility Loans in full, such amount to be paid pro rata to the Lenders in accordance with the terms of the Liquidity Agreement, with the remainder of such amount to be deposited in the Commercial Paper Account to be applied to repay in full the Commercial Paper Notes in order of maturity (and the outstanding principal amount of the Notes shall be proportionately reduced by such repayments), and second, an amount equal to the Lessor Property Balance with respect to such Property shall be distributed to the Lessor, and the Lessor Investment Amounts shall be reduced by such amount, provided, however, that if a Loan Agreement Default under Section 5(a) or (e) of the Loan Agreement or a Loan Agreement Event of Default shall have occurred and be continuing, any such payments which would otherwise be paid to the Lessor pursuant to clause second of this Section 5.3 shall be instead held in the Cash Collateral Account until the earliest to occur of (i) the first date thereafter on which all such Loan Agreement Defaults and Loan Agreement Events of Default shall have been cured (in which case such payment under clause second shall then be made), (ii) the date of any acceleration of the Loans (in which case such payment shall then be applied in the manner contemplated by Section 5.8), or (iii) the 180th day after the occurrence of such Loan Agreement Default or Loan Agreement Event of Default (in which case such payment under clause second shall then be made). SECTION 5.4. Residual Value Guarantee. (a) Subject to Section 5.8, in the event that upon the Expiration Date, following the election by the Lessee of the Remarketing Option in accordance with Article XXII of the Lease, the outstanding principal amount of Loans divided by the outstanding principal amount of all Advances pursuant to the Total Commitment (expressed as a percentage) equals the Facility Lender Commitment Percentage, the Residual Value Guarantee paid by Lessee pursuant to Article XXII of the Lease (which shall equal the Tranche A Balance) shall be distributed by the Agent Bank on the Expiration Date in the following order of priority (with the principal amount of Tranche A Note to be deemed to have been paid in full by such distribution): first, to the Lenders to repay all outstanding Tranche A Facility Loans in full, second, the balance, if any, to be deposited in the Commercial Paper Account to be applied to pay in full the Commercial Paper Notes in order of maturity (with any remaining 16 amount of the Commercial Paper Notes to be paid in full with Gross Proceeds or Residual Loans). No amount of the Residual Value Guarantee shall be applied pursuant to this Section 5.4(a) to reduce the Tranche B Balance or any portion of the Lessor Investor Amounts. (b) In the event that upon the Expiration Date, following the election by the Lessee of the Remarketing Option in accordance with Article XXII of the Lease, the outstanding principal amount of the Loans divided by the aggregate amount of all Advances outstanding pursuant to the Total Commitments (expressed as a percentage) is less than the Facility Lender Commitment Percentage, the Residual Value Guarantee shall be distributed by the Agent Bank in the following order of priority (with the principal amount of the Notes to be reduced by the amounts distributed pursuant to the first and second priority categories): first, to the Lenders in an amount sufficient to pay the outstanding Tranche A Facility Loans in full, second, the balance, if any, to be deposited in the Commercial Paper Account to repay in full the Commercial Paper Notes in order of maturity in an amount sufficient to repay the outstanding Commercial Paper Notes in full (with any remaining amount of the outstanding Commercial Paper Notes to be repaid in full with Gross Proceeds or Residual Loans), provided that the amount deposited in the Commercial Paper Account pursuant to this clause second, together with the amount applied under clause first above, shall not exceed an amount equal to 86.6% of the principal amount of the Loans outstanding on the Expiration Date prior to any application of funds pursuant to Sections 5.3 or 5.5, third, the balance, if any, to be distributed to the Lessor to be applied to Certificate Earnings, any overdue interest and to repay Lessor Investment Amounts. SECTION 5.5. Sales Proceeds of Remarketing of Properties. Subject to Section 5.8, any payments received by Agent Bank as Gross Proceeds from the sale of the Properties sold pursuant to Lessee's exercise of the Remarketing Option pursuant to Article XXII of the Lease or otherwise sold by Agent Bank, or following the repayment in full of all of the Facility Loans and the termination of the Master Assignment, the Facility Lender or Lessor, together with any payment made by Lessee as a result of an indemnity payment pursuant to Section 14.4, shall be distributed by Agent Bank, Facility Lender or Lessor, as the case may be, on the Expiration Date (or following the Expiration Date, upon receipt), in the following order of priority: first, to the Lenders for application to repay the Tranche B Facility Loans in full (with a corresponding reduction in the Tranche B Note), second, the balance, if any, to be deposited in the Commercial Paper Account for payment in full of the Commercial Paper Notes in order of maturity (with any remaining amount of the outstanding Commercial Paper Notes to be repaid with Residual Loans), provided that the amount deposited in the Commercial Paper Account pursuant to this clause second, together with the amount applied under clause first above, shall not exceed 17 an amount equal to 13.4% of the principal amount of the Loans outstanding on the Expiration Date prior to any application of funds pursuant to Sections 5.3 or 5.4, third, the balance, if any, to be distributed to the Lessor to be applied to payment of Certificate Earnings and overdue interest and to repay the Lessor Investment Amounts, fourth, the balance, if any, shall be distributed to the Lessee to the extent permitted by Section 5.13; provided, however, that if a Loan Agreement Default under Section 5(a) or (e) of the Loan Agreement or a Loan Agreement Event of Default shall have occurred and be continuing, any such payments which would otherwise be paid to the Lessor pursuant to clause third of Section 5.5 shall be instead held in the Cash Collateral Account until the earliest to occur of (i) the first date thereafter on which all such Loan Agreement Defaults and Loan Agreement Events of Default shall have been cured (in which case such payment under clause third shall then be made), (ii) the date of any acceleration of the Loans (in which case such payment shall then be applied in the manner contemplated by Section 5.8), or (iii) the 180th day after the occurrence of such Loan Agreement Default or Loan Agreement Event of Default (in which case such payment under clause third shall then be made). To the extent that any amounts received pursuant to this Section 5.5 relate to a specific Property, the Property Balance relating to such Property shall be deemed to be reduced by the amounts applied pursuant hereto, with a corresponding reduction in the principal amount of the Notes. SECTION 5.6. Supplemental Rent. Subject to Section 5.7, all payments of Supplemental Rent received by any Agent Bank (excluding any amounts payable pursuant to the preceding provisions of this Section 5) shall be distributed promptly by Agent Bank upon receipt thereof to the Persons entitled thereto pursuant to the Operative Documents. In the event that a Lease Event of Default has occurred and is continuing, relieving the Lenders of their obligation to make Liquidity Loans or (in the case of a Material Lease Event of Default) Residual Loans pursuant to the Liquidity Agreement, unless, upon electing not to make such Loans, the Agent Bank has immediately demanded payment of the Lease Balance from the Lessee pursuant to the Lease and, in the event such amount is not immediately repaid, immediately demanded payment of such amount from the Guarantor pursuant to the Guaranty, the Facility Lender, acting through the Issuing and Payment Agent, shall be entitled to receive and to apply to the Commercial Paper Notes in order of maturity, an amount equal to the sum of (i) the mandatory prepayment of the Notes required by Section 2.4 of Loan Agreement, such amount to be funded by a payment of Supplemental Rent pursuant to the Lease, and (upon payment of such amount by Lessee or the Guarantor) the Lease Balance shall be reduced by the amount of any such payment, plus any Basic Rent owed by the Lessee with respect to the Interest Component of the maturing Commercial Paper Notes giving rise to such mandatory prepayment. In the event that the Lessee does not fund such amount, the Facility Lender, acting through the Administrative Agent, shall be entitled to make an immediate demand therefor in accordance with the terms of Section 7 of the Guaranty. In addition, in the event of any voluntary prepayment of the principal amount of the 18 Loans pursuant to Section 2.4 of the Loan Agreement, which amounts are applied to repay the principal of Liquidity Loans or Commercial Paper Notes, the Lease Balance shall be reduced by the amount of such payment to the extent funded by the payment of Supplemental Rent. SECTION 5.7. Excepted Payments. Notwithstanding any other provision of this Participation Agreement or the Operative Documents, any Excepted Payment received at any time by the Agent Bank or any Participant shall, subject to the penultimate sentence of Section 5.1, be distributed promptly to the Person entitled to receive such Excepted Payment. SECTION 5.8. Distribution of Payments after Lease Event of Default or Loan Agreement Event of Default. (a) Subject to Section 5.6, all payments (other than Excepted Payments) received and amounts realized by Agent Bank, Facility Lender or Lessor after a Lease Event of Default has occurred and is continuing, including proceeds from the sale of any of the Properties or other collateral, proceeds of any amounts from any insurer or any Governmental Authority in connection with any Casualty or Condemnation, from the Lessee as payment in accordance with the Lease, including any payment received from the Lessee pursuant to Section 17 of the Lease (but excluding Section 17.6 of the Lease), or subject to subsection (c) below from the Guarantor pursuant to the Guaranty shall, be paid to the Agent Bank as promptly as possible and shall be distributed by Agent Bank in the following order of priority: first, so much of such payment or amount as shall be required to reimburse Agent Bank, Facility Lender, the Lenders or Lessor for any tax, expense or other loss incurred by Agent Bank, Facility Lender, the Lenders or Lessor incurred in connection with the collection of such amounts (to the extent not previously reimbursed) shall be distributed to Agent Bank, Facility Lender, the Lenders or Lessor, as applicable (to be divided amongst the Participants pro rata to the extent insufficient to satisfy all claims); second, subject to clause (c) below, so much of such amount as shall be required to pay in full each Lender's Participant Balance, and in the case that the amount so to be distributed shall be insufficient to pay in full as aforesaid, then, pro rata among the Lenders without priority of one Lender over the other in the proportion that each Lender's Participant Balance bears to the aggregate Participant Balances of all of the Lenders, shall be distributed to the Lenders; third, subject to clause (c) below, the balance, if any, shall be deposited in the Commercial Paper Account to repay in full the Interest Component and Principal Component of all outstanding Commercial Paper Notes; fourth, so much of such amount or amounts as shall be required to pay in full the Participant Balance of Lessor shall be distributed to the Lessor; and fifth, the balance, if any, of such payment or amounts remaining thereafter shall be promptly distributed to, or as directed by, the Lessor, pursuant to the Operative Documents. 19 (b) During the occurrence and continuance of a Loan Agreement Event of Default if the Loans have been accelerated, all amounts (other than Excepted Payments) received or realized by any Participant and otherwise distributable pursuant to Sections 5.2 and 5.3 shall be distributed as provided for in Section 5.8 (a) above except that if such Loan Agreement Default does not arise out of, or is not attributable to a Lease Event of Default, clause fifth shall, subject to Section 5.13, be directed by the Lessee. (c) Notwithstanding the foregoing, any payments received pursuant to the Guaranty upon the occurrence and during the continuance of a Lease Event of Default (except as provided in Section 5.6), shall be divided amongst clause second and clause third of subsection (a) above pro rata, without priority one over another. SECTION 5.9. Other Payments. (a) Except as otherwise provided in Sections 5.2, 5.3, 5.8 and paragraph (b) below, (i) any payment received by Agent Bank for which no provision as to the application thereof is made in the Operative Documents or elsewhere in this Section 5, and (ii) all payments received and amounts realized by any Participant under the Lease or otherwise with respect to the Properties to the extent received or realized at any time after payment in full of the Participant Balances of all of the Participants and any other amounts due and owing to the Lessor, Facility Lender, Lenders or the Agent Bank, shall be distributed forthwith by the Agent Bank in the order of priority set forth in Section 5.3 (in the case of any payment described in clause (i) above) or in Section 5.8 hereof (in the case of any payment described in clause (ii) above). (b) Except as otherwise provided in Sections 5.2, 5.3 and 5.8 hereof and except after a Lease Event of Default has occurred and is continuing, any payment received by Agent Bank for which provision as to the application thereof is made in an Operative Document but not elsewhere in this Section 5 shall be distributed forthwith by Agent Bank to the Person and for the purpose for which such payment was made in accordance with the terms of such Operative Document. SECTION 5.10. Casualty and Condemnation Amounts. Any amounts payable to Agent Bank, Lessor or Facility Lender as a result of a Casualty or Condemnation pursuant to Section 15.1 of the Lease (but excluding any amounts payable pursuant to Section 16.2 of the Lease) shall, if no Lease Event of Default exists, be paid over to the Lessee to reimburse Lessee for any amounts expended by Lessee for the rebuilding or restoration of the Property to which such Casualty or Condemnation applied, and any excess proceeds shall be paid in accordance with the Lease. If a Lease Event of Default exists, then during the continuance of such Lease Event of Default, all such amounts shall be held by Agent Bank in the Cash Collateral Account and upon exercise of Agent Bank's remedies under the Operative Documents shall be distributed pursuant to Section 5.8. 20 SECTION 5.11. Reduction of Commitment. In the event of reduction of the Commitment pursuant to the terms of Sections 4.02 or 4.04 of the Liquidity Agreement (with an automatic and corresponding reduction of the Facility Lender's Commitments) to an amount which is less than the sum of the Lease Balance plus the aggregate Property Improvement Costs expended pursuant to the Construction Agency Agreement for Properties which have not yet reached Completion Date (the "Invested Amount"), the Lessee and the Construction Agent shall, to the extent permitted by Section 20 of Lease (and to extent that the Agent Bank consents to any required decrease of the Permitted Amount) purchase Properties in accordance with the terms of the Lease to reduce the Invested Amount to the amount of the Commitment. The Purchase Option Price paid by Lessee in such event shall be distributed to the Non-Consenting Lenders in accordance with Section 5.02(b)(ii) of the Liquidity Agreement. SECTION 5.12. Order of Application. To the extent any payment made to any Participant pursuant to Sections 5.2, 5.3, 5.4, 5.5 or 5.8 is insufficient to pay in full the Participant Balance of such Participant, then each such payment shall first be applied to overdue interest, then to accrued interest and then to principal. SECTION 5.13. Remaining Funds. Upon the termination of the Total Commitments and the Commitments and the payment in full of (i) the Loans, the Facility Loans, the Commercial Paper Notes, the Lessor Investment Amounts and all accrued and unpaid Certificate Earnings, and (ii) all amounts owing by the Lessee or Guarantor to any Person under the Operative Documents, all remaining moneys in the Cash Collateral Account shall be paid to the Lessee. SECTION 5.14. Time of Payment. Each payment due from Lessee or Guarantor under the Operative Documents shall be made in immediately available funds prior to 2:00 p.m. New York time on the date when due in immediately available funds consisting of lawful currency of the United States of America, unless such date shall not be a Business Day, in which case payment shall be made on the next succeeding Business Day. Payments received after 2:00 p.m. New York time shall be deemed received on the next succeeding Business Day. SECTION 6. CERTAIN INTENTIONS OF THE PARTIES Anything else herein, in any other Operative Document, or elsewhere to the contrary notwithstanding, it is the intention of Guarantor, the Lessee, the Lessor, the Facility Lender, the Lenders and the Agent Bank (and, assuming enforcement of the Operative Documents in accordance with their terms, it is the representation and warranty of the Guarantor and the Lessee) that: (i) the amount and timing of installments of Basic Rent due and payable from time to time from the Lessee under the Lease shall be equal to the aggregate payments due and payable for interest on the Loans and Certificate Earnings on the Lessor Investment Amounts on each Payment Date (to the extent such interest and Certificate Earnings are not Property Costs with respect to Construction Period Properties permitted to be funded by Interest Payment Loans or increases to Lessor Investment Amounts by capitalization thereof during a Construction Period) 21 and that such interest amount payable on the Loans shall at all times equal the aggregate accrued interest on the principal amount of Facility Loans and the Interest Component of maturing Commercial Paper Notes (with the express understanding that any interest on the Facility Loans or Interest Component of maturing Commercial Paper Notes not paid with Lender Basic Rent payments due to such capitalization of the interest on the Loans will be paid by the proceeds of new Commercial Paper Notes or Facility Loans); (ii) the amount and timing of Supplemental Rent payable by the Lessee shall include amounts equal to the mandatory prepayments of the Loans required pursuant to Section 2.4 of the Loan Agreement which shall equal the amount of maturing Commercial Paper Notes not repaid by the issuance of new Commercial Paper Notes or Liquidity Loans to the extent set forth in Section 5.6; (iii) if the Lessee elects the Purchase Option or becomes obligated to purchase any Property under the Lease, the Loans, the Lessor Investment Amounts, all interest, Certificate Earnings and Facility Fees related to such Property and all other obligations of the Lessee owing to the Lessor, the Facility Lender, the Lenders and the Agent Bank relating thereto shall be paid in full by the Lessee so that the aggregate Property Costs (including amounts owing by the Construction Agent pursuant to the Construction Agency Agreement with respect to Construction Period Properties) shall at all times equal the sum of (x) the Facility Loans, plus (y) the Interest Component and Principal Component of outstanding Commercial Paper Notes (less any Deposited Funds) plus (z) the Lessor Investment Amounts not previously prepaid; (iv) if the Lessee properly elects the Remarketing Option with respect to a Property and provided that no Lease Event of Default has occurred and is continuing, Lessee shall only be required to pay to the Lessor the Gross Proceeds of the sale of such Property, the Residual Value Guarantee for such Property, any amounts payable pursuant to Section 14 and any Rent with respect to such Property (which aggregate amounts may be less than the Property Balance under the Lease with respect to such Property) with the express understanding that any remaining amount of the Commercial Paper Notes shall be repaid with the proceeds of Facility Loans; (v) upon a Lease Event of Default, the amounts then due and payable by the Lessee under the Lease shall include the Lease Balance which shall be sufficient to repay the Commercial Paper Notes, Liquidity Loans and Lessor Investment Amounts in full; and (vi) the amount of interest accruing on the Loans for any period shall equal the sum of the interest accruing on the Liquidity Notes and the Interest Component of the Commercial Paper Notes outstanding during such period. SECTION 7. CONDITIONS PRECEDENT TO ACQUISITIONS AND ADVANCES SECTION 7.1. Conditions Precedent -- Documentation. The obligation of the Lessor to acquire a Property on a Property Closing Date, to make the initial Advance in respect of such Property on the initial Funding Date with respect to such Property, and to make any related Lessor Investment Amount available on such Funding Date, the right and obligation of the Facility Lender to make any Loans to Lessor on such Funding Date to fund such Advances and the obligation of the Lenders to make Direct Funding Loans under the Liquidity Agreement, are subject to satisfaction of the following conditions precedent and to the conditions precedent set 22 forth in Section 7.2: (a) the Agent Bank, the Lessor, and the Facility Lender shall have received a fully executed counterpart of the Acquisition Request, appropriately completed by Lessee, in accordance with Section 3.5, and a fully executed counterpart of the Funding Request, appropriately completed by Lessee, in accordance with Section 3.7; (b) the Environmental Audit for such Property shall have been delivered to and shall be satisfactory in form and substance to the Agent Bank and the Lessor; (c) on or prior to the Property Closing Date for the related Property, the Agent Bank, the Lessor and the Facility Lender shall have received an Appraisal of each Property being acquired on such Property Closing Date reasonably satisfactory to the Agent Bank and the Lessor; (d) on or prior to the Property Closing Date for the related Property, the Lessor shall have received a deed (a "Deed") (in form and substance appropriate for recording with the applicable Governmental Authorities, with respect to such Property (and all Improvements located thereon) being purchased on such Property Closing Date, conveying fee simple title to such Property to the Lessor, subject only to Permitted Exceptions; (e) on or prior to the Property Closing Date for the related Property, Lessee and the Lessor shall have delivered to the Agent Bank and the Facility Lender a Construction Agency Agreement Supplement with respect to such Property fully executed by Construction Agent and the Lessor; (f) on or prior to the Property Closing Date for the related Property, the Lessee and the Lessor shall have delivered the original counterpart of the Lease Supplement and Memorandum of Lease executed by the Lessee and the Lessor with respect to such Property to the Agent Bank, with a copy to the Facility Lender; (g) on or prior to the Property Closing Date for the related Property, the Lessor shall have delivered to the Agent Bank a Mortgage executed by the Lessor with respect to such Property; (h) on or prior to the Property Closing Date for the related Property, the Lessor shall have delivered to the Agent Bank a Supplement to the Assignment of Leases executed by the Lessor with respect to such Property; (i) on or prior to the Property Closing Date for the related Property, the Lessee shall have delivered to the Agent Bank a consent to the Supplement to the Assignment of Leases executed by the Lessee with respect to such Property; 23 (j) on or prior to the Property Closing Date for the Property, the Agent Bank, the Lessor and the Facility Lender shall have received an opinion of counsel, which counsel and whose opinion shall be reasonably satisfactory to the Agent Bank and the Lessor and qualified with respect to the laws of the jurisdiction in which such Property is located as to the matters set forth in Exhibit E attached hereto and made a part hereof by this reference; (k) on or prior to the Property Closing Date for the related Property, the Facility Lender shall have delivered to the Agent Bank a Supplement to the Master Assignment assigning to Agent Bank, for the benefit of the Lenders, substantially all of the rights of Lessor to the documents described in subparagraphs (e) through (i) and a consent of the Lessee and Lessor to such assignment; (l) on or prior to the Property Closing Date for the related Property, the Lessee shall deliver, or cause to be delivered, to the Agent Bank and the Lessor an ALTA extended owner's (with respect to Lessor) and lender's (with respect to Agent Bank) title insurance commitment covering such Property in favor of the Agent Bank, the Facility Lender and the Lessor reasonably satisfactory in form and substance to the Agent Bank and Lessor, with customary coverage over the general exceptions to such policy and customary endorsements issued by the title company and evidencing the first priority status of the Mortgage, subject only to the exceptions noted therein; (m) on or prior to the Property Closing Date for the related Property, the Agent Bank shall have received evidence satisfactory to it that each of the Deed, the Memorandum of Lease, the Supplement to the Assignment of Leases, the Consent to the Assignment, the Mortgage, the Supplement to Master Assignment and the consent to Master Assignment delivered on any Property Closing Date shall have been or are being recorded with the appropriate Governmental Authorities in the order in which such documents are listed in this clause, and the UCC Financing Statements with respect to the Property being acquired shall have been or are being filed with the appropriate Governmental Authorities, and that all of the recording fees, filing fees, transfer taxes and recording taxes with respect to the foregoing have been paid; and (n) Lessee shall have delivered to the Agent Bank, the Lessor and the Facility Lender its duly completed Property Closing Certificate substantially in the form of Exhibit F attached hereto and made a part hereof by this reference, as to the satisfaction of the conditions precedent set forth in Section 7.2. SECTION 7.2. Further Conditions Precedent. The obligation of the Lessor to acquire a Property on a Property Closing Date, to make an Advance on a Funding Date, to make available any related Lessor Investment Amount on such Funding Date, the right and obligation of Facility Lender to make any related Loans on such Funding Date to fund such Advances and the Lenders' obligation to make Direct Funding Loans under the Liquidity Agreement, are subject to satisfaction of the following conditions precedent and to satisfaction on or before the related Property Closing 24 Date of the conditions precedent set forth in Section 7.1: (a) on such date the representations and warranties of Guarantor, Lessee, contained herein and in each of the other Operative Documents shall be true and correct in all material respects as though made on and as of such date, except to the extent such representations and warranties relate solely to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects as of such earlier date; (b) the other parties hereto shall have performed their respective agreements contained herein and in the other Operative Documents to be performed by them on or prior to such date; (c) there shall not have occurred and be continuing any Facility Agreement Default or Facility Agreement Event of Default and no Facility Agreement Default or Facility Agreement Event of Default will have occurred after giving effect to the acquisition of Land requested by such Acquisition Request and/or the making of the Advance requested by such Funding Request, as the case may be; (d) the Available Commitments, in the reasonable judgment of the Construction Agent will be sufficient to complete the Improvements on the Construction Period Properties and the Advances being made and which have been made with respect to the Construction Period Properties will not exceed the Maximum Property Costs for the Properties; and (e) the Estimated Completion Date of such Property shall not be after the last day of the Commitment Period or beyond the Outside Completion Date. Notwithstanding the foregoing, as more specifically set forth in the Liquidity Agreement, the Facility Lender may, in compliance with the Liquidity Agreement, continue to issue Commercial Paper Notes in an amount sufficient to repay the Principal Component of maturing Commercial Paper Notes and Facility Loans unless a Material Lease Event of Default shall have occurred and be continuing. SECTION 8. COMPLETION DATE CONDITIONS The occurrence of the Completion Date with respect to any Property shall be subject to the fulfillment to the reasonable satisfaction of, or waiver by, the Agent Bank and the Lessor of the following conditions precedent: (a) Construction Completion. The construction of the Improvements shall have been completed substantially in accordance with the Plans and Specifications for such Property and all applicable Requirements of Law, and such 25 Property shall be ready for occupancy and operation. Substantially all fixtures, furniture, furnishings, equipment and other property contemplated under such Plans and Specifications to be incorporated into or installed in such Property shall have been incorporated or installed, free and clear of all Liens except for Permitted Liens. (b) Lessee Certification. Lessee shall have furnished the Lessor, the Facility Lender and the Agent Bank with a certification of Lessee (substantially in the form of Exhibit H attached hereto and made a part hereof by this reference) to the effect that: (i) all amounts owing to third parties for the construction of the Improvements have been paid in full (or are being contested in good faith or held until completion of certain punch list items and the amount being contested or held back does not exceed ten percent (10%) of the related Property Cost), and no litigation or proceedings are pending, or to the best of Lessee's knowledge, are threatened, against such Property or Lessee which could have a Material Adverse Effect; (ii) a certificate of occupancy (temporary or permanent) and all other material Governmental Action required for the construction and operation of such Property have been obtained and are in full force and effect; (iii) such Property has available all services of public facilities and other utilities necessary for use and operation of the Facility and the other Improvements for their intended purposes, including (as applicable), without limitation, adequate water, gas and electrical supply, storm and sanitary sewerage facilities, telephone, other required public utilities and means of access between the Facility and public highways for pedestrians and motor vehicles; (iv) all material agreements, easements and other rights, public or private, which are necessary to permit the lawful use and operation of such Property as the Lessee intends to use such Property under the Lease and which are necessary to permit the lawful intended use and operation of all then intended utilities, driveways, roads and other means of egress and ingress to and from the same have been obtained and are in full force and effect and Lessee has no actual knowledge of any pending modification or cancellation of any of the same; and the use of such Property substantially as intended does not depend on any variance, special exception or other municipal approval, permit or consent that has not been obtained and is in full force and effect for its continuing legal use; (v) all of the requirements and conditions set forth in Section 8(a) hereof have been completed and fulfilled; (vi) no changes or modifications were made to the related Plans and 26 Specifications after the related Property Closing Date that have had a material adverse effect on the current value, residual value, operation, use or useful life of such Property; and (vii) upon the execution and delivery of a Lease Supplement with respect to the Improvements, Lessee will have unconditionally accepted such Improvements subject to such Lease Supplement and will have good and marketable title to a valid and subsisting leasehold interest in the Property, subject only to Permitted Exceptions. (c) Lease Supplement. Lessee and Lessor shall have executed and delivered to the Agent Bank a Lease Supplement with respect to such Improvements. SECTION 9. REPRESENTATIONS SECTION 9.1. Representations of the Lessor. Lessor represents and warrants to each of the other parties hereto as follows: (a) Due Organization; etc. It is a limited partnership duly organized and validly existing and in good standing under the laws of the State of Delaware and has the power and authority to enter into and perform its obligations under the Operative Documents to which it is or will be a party and each other agreement, instrument and document to be executed and delivered by it in connection with or as contemplated by each such Operative Document to which it is or will be a party. It is duly qualified to transact business in every jurisdiction where the failure to qualify would have a material adverse effect on its ability to perform its obligations under the Operative Documents as contemplated on the Initial Closing Date. (b) Authorization; No Conflict. The execution, delivery and performance of each Operative Document to which it is or will be a party, has been duly authorized by all necessary action on its part and on the part of its general partner and neither the execution and delivery thereof, nor the consummation of the transactions contemplated thereby, nor compliance by it with any of the terms and provisions thereof (i) does or will require any approval or consent of any trustee or holders of any of its indebtedness or obligations or those of its general partner, (ii) does or will contravene any current law, governmental rule or regulation relating to it or its general partner, (iii) does or will contravene or result in any breach of or constitute any default under, or result in the creation of any Lien upon any of it or its general partner's property under its partnership agreement or any Contractual Obligation of the Lessor or its general partner, or (iv) does or will require any Governmental Action by any Governmental Authority. 27 (c) Enforceability; etc. Each Operative Document to which the Lessor is or will be a party has been, or on or before any Closing Date on which such Operative Document is to be signed will be, duly executed and delivered by the Lessor and each such Operative Document to which the Lessor is a party constitutes, or upon execution and delivery will constitute, assuming the due authorization, execution and delivery hereof and thereof by the other parties hereto and thereto, a legal, valid and binding obligation enforceable against the Lessor in accordance with the terms thereof, except as such enforceability may be limited or denied by (i) applicable bankruptcy, insolvency, reorganization, moratorium or similar laws effecting creditors' rights and the enforcement of debtors' obligations generally, and (ii) general principles of equity, regardless of whether enforcement is pursuant to a proceeding in equity or at law. (d) Litigation. There is no action or proceeding pending or, to Lessor's knowledge, threatened to which it or, to the best of its knowledge, its general partner is or will be a party, before any Governmental Authority that, if adversely determined, could reasonably be expected to have a material adverse effect on the property, operations or financial condition of the Lessor or, to the best of its knowledge, its general partner. (e) Assignment. It has not assigned or transferred any of its right, title or interest in or under the Lease, the Guaranty or the Construction Agency Agreement except in accordance with the Operative Documents. (f) Defaults. No Default or Event of Default under the Operative Documents attributable to it has occurred and is continuing. (g) Securities Act. Neither the Lessor nor any Person authorized by the Lessor to act on its behalf has offered or sold any interest in the Lessor Investment Amounts or the Notes, or in any similar security relating to a Property, or in any security the offering of which for the purposes of the Securities Act would be deemed to be part of the same offering as the offering of the aforementioned securities to, or solicited any offer to acquire any of the same from, any Person other than the parties hereto and neither the Lessor nor any Person authorized by the Lessor to act on its behalf will take any action which would subject the issuance or sale of any interest in the Lessor Investment Amounts or the Notes to the provisions of Section 5 of the Securities Act or require the qualification of any Operative Document under the Trust Indenture Act of 1939, as amended. (h) Chief Place of Business. The Lessor's chief place of business, chief executive office and office where the documents, accounts and records relating to the transactions contemplated by this Participation Agreement and each other Operative Document are kept are located at 12 East 49th Street, New York, New York 10017. (i) Federal Reserve Regulations. The Lessor is not engaged principally in, and does not 28 have as one of its important activities, the business of extending credit for the purpose of purchasing or carrying any margin stock (within the meaning of Regulation U of the Board). (j) Investment Company Act. The Lessor is not an "investment company" or a company controlled by an "investment company" within the meaning of the Investment Company Act. (k) General Partner. Credit Suisse is the sole general partner of the Lessor. SECTION 9.2. Representations of the Guarantor and the Lessee. Each of the Guarantor and the Lessee represents and warrants to each of the other parties hereto that: (a) Corporate Existence and Power. Each of the Guarantor and the Lessee is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, is duly qualified to"transact business in every jurisdiction where each Property is located (in the case of Lessee) and where the failure to so qualify would reasonably be expected to have or cause a Material Adverse Effect, and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, except where the failure to possess any such licenses, authorizations, consents, or approvals would not reasonably be expected to have or cause a Material Adverse Effect. (b) Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by each of the Guarantor and the Lessee of this Participation Agreement and the other Operative Documents to which it is a party (i) are within its corporate powers, (ii) have been duly authorized by all necessary corporate action, (iii) require no Governmental Action by or in respect of or filing with, any Governmental Authority, (iv) do not contravene, or constitute a default under, any Applicable Law or of the certificate of incorporation or by-laws of the Guarantor, Lessee, or of any material agreement, judgment, injunction, order, decree or other instrument binding upon the Guarantor, the Lessee or any of the Guarantor's other Significant Subsidiaries, and (v) do not result in the creation or imposition of any Lien on any asset of the Guarantor, Lessee or any of the Guarantor's other Significant Subsidiaries. (c) Binding Effect. This Participation Agreement constitutes a valid and binding agreement of each of the Guarantor and the Lessee enforceable in accordance with its terms, and the other Operative Documents to which it is, or will become a party, when executed and delivered in accordance with this Participation Agreement, will constitute valid and binding obligations of the Guarantor or Lessee enforceable in accordance with their respective terms, provided that the enforceability hereof and thereof is subject in each case to general principles of equity and to bankruptcy, insolvency and similar laws affecting the enforcement of creditors' rights generally. 29 (d) Financial Information. The consolidated balance sheet of the Guarantor and its Consolidated Subsidiaries as of January 28, 1996 and the related consolidated statements of income, stockholders' equity and cash flows for the Fiscal Year then ended, reported on by KPMG Peat Marwick, LLP, copies of which have been delivered to each of the Lenders and the Lessor fairly present, in conformity with GAAP, the consolidated financial position of the Guarantor and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such period. (e) No Litigation. There is no action, suit or proceeding pending, or to the knowledge of the Guarantor or Lessee, threatened, against or affecting the Guarantor, Lessee or any of their other Subsidiaries, before any court or arbitrator or any Governmental Authority which would reasonably be expected to have or cause a Material Adverse Effect. (f) Compliance with ERISA. (i) The Guarantor and each member of the Controlled Group have fulfilled their obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and are in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and have not incurred any liability to the PBGC or a Plan under Title IV of ERISA. (ii) Neither the Guarantor nor to the best of Guarantor's knowledge and belief any member of the Controlled Group is or ever has been obligated to contribute to any Multiemployer Plan. (g) Compliance with Laws; Payment of Taxes. The Guarantor, the Lessee and each of their other Subsidiaries are in compliance with all applicable Requirements of Law, except where (i) such compliance is being contested in good faith through appropriate proceedings or (ii) the failure to be in compliance would not reasonably be expected to have or cause a Material Adverse Effect. There have been filed on behalf of the Guarantor and its Subsidiaries all Federal, state and local income, excise, property and other tax returns which are required to be filed by them and all taxes shown due and owing by such returns have been paid. The charges, accruals and reserves on the books of the Guarantor and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Guarantor, adequate. United States federal income tax returns of the Guarantor and its Subsidiaries have been examined and closed through the fiscal year ended February 3, 1991. (h) Significant Subsidiaries. Each of the Guarantor's Significant Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, is duly qualified to transact business in every jurisdiction where the failure to qualify would reasonably be expected to have or cause a Material Adverse Effect, and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business 30 substantially as now conducted, except where the failure to possess any such licenses, authorizations, consents or approvals would not reasonably be expected to have or cause a Material Adverse Effect. (i) Investment Company Act. Neither the Guarantor, the Lessee nor any of the other Subsidiaries is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (j) Public Utility Holding Company Act. Neither the Guarantor, the Lessee nor any of the other Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. (k) Ownership of Property; Liens. Each of the Guarantor and its Significant Subsidiaries has title to its properties sufficient for the conduct of its business, and none of such property is subject to any Lien except Liens permitted by the Operative Documents. (l) No Default. Neither the Guarantor nor any of its Consolidated Subsidiaries is in default under or with respect to any agreement, instrument or undertaking to which it is a party or by which it or any of its property is bound which could reasonably be expected to have or cause a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. (m) Full Disclosure. All written information heretofore furnished by the Guarantor or the Lessee to the Agent Bank, the Placement Agent, the Issuing and Paying Agent, any Lender or Lessor for purposes of or in connection with this Participation Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Guarantor or the Lessee to the Agent Bank, or any Lender or Lessor will be, true and correct in all material respects or based on what the Guarantor or the Lessee in good faith believes to be reasonable estimates on the date as of which such information is stated or certified. (n) Environmental Matters. (i) Neither the Guarantor nor any Subsidiary is subject to any claim under the Environmental Laws which could have or cause a Material Adverse Effect and neither the Guarantor nor any Subsidiary has been designated as a potentially responsible party under CERCLA or under any state statute similar to CERCLA. None of the Properties has been identified on any current or proposed (x) National Priorities List under 40 C.F.R. ss. 300, (y) CERCLIS list or (z) any list arising from a state statute similar to CERCLA. (ii) No Hazardous Substances have been or are being used, produced, manufactured, processed, treated, recycled, generated, stored, disposed of, managed or otherwise handled at, or shipped or transported to or from the Properties or are 31 otherwise present at, on, in or under the Properties, or, to the best of the knowledge of the Guarantor and Lessee, at or from any adjacent site or facility, except for Hazardous Substances, such as cleaning solvents, pesticides and other materials used, produced, manufactured, processed, treated, recycled, generated, stored, disposed of, managed, or otherwise handled in minimal amounts in the ordinary course of business in compliance with all applicable Environmental Laws. (iii) Each of the Guarantor and each of its Subsidiaries and Affiliates, (x) has procured all permits and authorizations required under the Environmental Laws necessary for the conduct of its business, and (y) is in compliance with all Environmental Laws in connection with the operation of the Properties and the Guarantor's and each of its Subsidiary's and Affiliate's, respective businesses, in each case set forth in either of clause (x) or (y) where the failure to procure or non-compliance with which would reasonably be expected to have or cause a Material Adverse Effect. (o) Capital Stock. All Capital Stock, debentures, bonds, notes and all other securities of the Guarantor and its Subsidiaries presently issued and outstanding are validly and properly issued in accordance with all Applicable Laws, including, but not limited to, the "Blue Sky" laws of all applicable states and the federal securities laws, except where the failure to have complied with such laws would not reasonably be expected to have or cause a Material Adverse Effect. The issued shares of Capital Stock of the Lessee are owned by the Guarantor free and clear of any Lien or adverse claim. At least a majority of the issued shares of capital stock of each of the Guarantor's other Significant Subsidiaries is owned by the Guarantor free and clear of any Lien or adverse claim. (p) Margin Stock. Neither the Guarantor nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of purchasing or carrying any Margin Stock, and no part of the proceeds of any Advance will be used for any purpose, including, without limitation, to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock, which violates, or which is inconsistent with, the provisions of Regulation G, Regulation T, Regulation U or Regulation X. (q) Insolvency. After giving effect to the execution and delivery of the Operative Documents, the Guarantor will not be "insolvent," within the meaning of such term as used in O.C.G.A. ss. 18-2-22 or as defined in ss. 101 of Title 11 of the United States Code or Section 2 of the Uniform Fraudulent Transfer Act, or any other applicable state law pertaining to fraudulent transfers, as each may be amended from time to time, or be unable to pay its debts generally as such debts become due, or have an unreasonably small capital to engage in any business or transaction, whether current or contemplated. (r) Securities Act. Neither the Guarantor, the Lessee nor any Person authorized by 32 either of the Guarantor or Lessee to act on its behalf has offered or sold any interest in the Notes, the Commercial Paper Notes or in any similar security relating to a Property, or in any security the offering of which for the purposes of the Securities Act would be deemed to be part of the same offering as the offering of the aforementioned securities to, or solicited any offer to acquire any of the same from, any Person other than an "Accredited Investor" (as such term is defined in the Securities Act). (s) Commercial Paper Notes. All Commercial Paper Notes shall constitute exempt securities under Section 4(2) of the Securities Act, no registration of the Commercial Paper Notes under the Securities Act, nor qualification of an indenture with respect to the Commercial Paper Documents under the Trust Indenture Act of 1939, as amended, will be required in connection with the offer, issuance or sale of the Commercial Paper Notes. SECTION 9.3. Representations of Guarantor and Lessee on Property Closing Date. Each of the Guarantor and the Lessee hereby represents and warrants as of each Property Closing Date, as follows: (a) Representations. The representations and warranties of the Guarantor, Lessee and the Construction Agent and, to the knowledge of Guarantor and Lessee, the Facility Lender, set forth in the Operative Documents are true and correct in all material respects. The Guarantor, Lessee and the Construction Agent, and, to the knowledge of the Guarantor and the Lessee, the Facility Lender are in compliance with their respective obligations under the Operative Documents and there exists no Default or Event of Default under any of the Operative Documents. No Default or Event of Default will occur under any of the Operative Documents as a result of, or after giving effect to, the Advance requested by the Funding Request on such Property Closing Date. (b) Property. The Property then being acquired consists of (i) Land on which Facilities will be constructed pursuant to the Construction Agency Agreement, and (ii) existing Improvements on such Land. Such Property is located in the continental United States or Canada. (c) Title. Upon the acquisition by purchase of such Property on such Property Closing Date, the Lessor will have good and marketable title to such Property in fee simple, subject only to Permitted Exceptions. The Lessor will at all times have good and marketable title to all Improvements located on such Property, subject only to Permitted Liens. (d) Insurance. Lessee has obtained insurance coverage covering such Property or is self-insured in a manner which meets the requirements of the Construction Agency Agreement and Article XIV of the Lease, and such coverage is in full force and effect. 33 (e) Lease. Upon the execution and delivery of a Lease Supplement to the Lease and Memorandum of Lease, (i) Lessee will have unconditionally accepted the Land and existing Improvements subject to such Lease Supplement and will have good and marketable title to a valid and subsisting leasehold interest in the Land and existing Improvements, subject only to Permitted Exceptions, (ii) no offset will exist with respect to any Rent or other sums payable under the Lease and (iii) no Rent under the Lease will have been prepaid. (f) Protection of Interests. Upon recordation, each Mortgage and each Supplement to the Assignment of Leases delivered on such Property Closing Date will constitute a valid and perfected first Lien on such Property and all of the Lessor's right, title and interest in and to the Improvements located thereon or to be constructed thereon following the Property Closing Date subject only to Permitted Exceptions. (g) Property as Improved. The Property as improved in accordance with the Plans and Specifications will comply in all material respects with all Requirements of Law (including, without limitation, all zoning and land use laws and Environmental Laws) and Insurance Requirements. The Plans and Specifications have been or will be prepared in all material respects in accordance with applicable Requirements of Law (including, without limitation, all applicable Environmental Laws and building, planning, zoning and fire codes) and upon completion of the related Facility in accordance with the Plans and Specifications, such Facility and the other Improvements on the Property will not encroach in any manner onto any adjoining land (except as permitted by express written easements) and such Facility and other Improvements and the use thereof by Lessee and its agents, assignees, employees, invitees, lessees, licensees and tenants will comply in all respects with all applicable material Requirements of Law (including, without limitation, all applicable Environmental Laws and building, planning, zoning and fire codes). (h) Flood Hazards. No portion of any Property being acquired by the Lessor on such Property Closing Date is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, or if any such Property is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, then flood insurance has been obtained for such Property in accordance with Section XI of the Lease and in accordance with the National Flood Insurance Act of 1968, as amended. (i) Environmental Matters. The Property is in compliance with all Environmental Laws and there neither exists nor has existed any Hazardous Condition, Hazardous Activity, Release, threatened Release or violation of Environmental Law which could give rise to an Environmental Claim against Lessee or any Indemnitee with respect to such Property. 34 (j) Conditions Precedent. All conditions precedent to be performed and delivered by Lessee contained in this Participation Agreement and in the other Operative Documents relating to the acquisition of such Property by the Lessor have been satisfied in full. SECTION 9.4. Additional Representations of Guarantor and Lessee. Each of Guarantor and the Lessee hereby represents and warrants as of each Funding Date on which an Advance is made as follows: (a) Representations. The representations and warranties of the Guarantor, Lessee and Construction Agent and, to the knowledge of Guarantor and Lessee, the Facility Lender, set forth in the Operative Documents (including the representations and warranties set forth in Sections 9.2 and 9.3) are true and correct in all material respects on and as of such Funding Date. The Guarantor, Lessee and Construction Agent and, to the knowledge of Guarantor and Lessee, the Facility Lender, are in compliance with their respective obligations under the Operative Documents and there exists no Default or Event of Default under any of the Operative Documents. No Default or Event of Default will occur under any of the Operative Documents as a result of, or after giving effect to, the Advance requested by the Funding Request on such date. (b) Improvements. Construction of the Improvements to date has been performed in a good and workmanlike manner, substantially in accordance with the Plans and Specifications and in compliance in all material respects with all Insurance Requirements and Requirements of Law. SECTION 9.5. Representations of Facility Lender. Facility Lender represents and warrants to each of the other parties hereto that: (a) Corporate Status. It (i) is a duly organized and validly existing corporation in good standing under the laws of the state of its incorporation and has the corporate power and authority to own its property and assets and to transact the business in which it is engaged and (ii) has duly qualified and is authorized to do business and is in good standing in all jurisdictions where it is required to be so qualified and where the failure to be so qualified could have a material adverse effect on the property, operations or financial condition of Facility Lender. (b) Corporate Power and Authority. It has the corporate power and authority to execute, deliver and carry out the terms and provisions of the Operative Documents to which it is or will be a party, has taken all necessary corporate action to authorize the execution, delivery and performance of the Operative Documents to which it is or will be a party, has duly executed and, assuming the due authorization, execution and delivery hereof and thereof by the other parties hereto and thereto, delivered each Operative Document required to be executed and delivered' by it and each such Operative Document constitutes a legal, valid and binding obligation enforceable 35 against it in accordance with its terms, except as such enforceability may be limited or denied by (i) applicable bankruptcy, insolvency, reorganization, moratorium or similar laws effecting creditors' rights and the enforcement of debtors' obligations generally, and (ii) general principles of equity, regardless of whether enforcement is pursuant to a proceeding in equity or at law. (c) No Violation. Neither the execution, delivery and performance by it of the Operative Documents to which it is or will be a party nor compliance with the terms and provisions thereof, nor the consummation of the transactions contemplated therein (i) will contravene any Applicable Law, or (iii) will violate any provision of its certificate of incorporation or by-laws. (d) No Other Activities. It does not hold any assets, conduct any business nor is it party to any Contractual Obligation except as expressly contemplated by the Operative Documents. (e) Commercial Paper Documents. Each of the representations and warranties of the Facility Lender set forth in the Commercial Paper Documents are true and correct in all material respects. SECTION 9.6. Representations and Warranties of the Agent Bank and the Lenders. Each of the Agent Bank and the Lenders hereby represents and warrants to each of the other Participants that: (a) Corporate Existence and Power. It is, respectively, a banking association or corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has all corporate powers and all material governmental licenses, authorizations and approvals required to perform its obligations hereunder. (b) Binding Effect. This Participation Agreement and each other Operative Document to which the Agent Bank or any Lender is a party constitutes a valid and binding agreement of it enforceable against it in accordance with its terms, provided that the enforceability hereof is subject in each case to general principles of equity and to bankruptcy, insolvency and similar laws affecting the enforcement of creditors' rights generally. SECTION 10. PAYMENT OF CERTAIN EXPENSES Guarantor and Lessee agree, jointly and severally, for the benefit of the Lessor, the Facility Lender, the Agent Bank, the Issuing and Paying Agent, the Placement Agent and the Lenders, to: 36 SECTION 10.1. Transaction Expenses. (a) On the Initial Closing Date (if statements are received in satisfactory form within a reasonable time prior to such date and in any event within thirty (30) day+s after receipt thereof), pay, or cause to be paid, all reasonable fees, expenses and disbursements of the respective counsel (including local counsel) for each of the Lessor, the Facility Lender, the Issuing and Paying Agent, the Placement Agent and the Agent Bank in connection with the transactions contemplated by the Operative Documents and incurred in connection with such Initial Closing Date, including all Transaction Expenses (arising from the Initial Closing Date), and all other expenses in connection with such Initial Closing Date, including, without limitation, all expenses relating to title insurance and all fees, taxes and expenses for the recording, registration and filing of documents; and (b) On each Property Closing Date and Funding Date (if statements are received in satisfactory form within a reasonable time prior to such date and in any event within thirty (30) days after receipt thereof), pay, or cause to be paid, all reasonable fees, expenses and disbursements of the respective counsel (including local counsel) for each of the Lessor, the Facility Lender, the Issuing and Paying Agent, the Placement Agent and the Agent Bank in connection with the transactions contemplated by the Operative Documents and incurred in connection with such Property Closing Date or Funding Date, including all Transaction Expenses (arising from such Property Closing Date or Funding Date), and all other expenses in connection with such Property Closing Date or Funding Date, including, without limitation, all expenses relating to all Environmental Audits, each Appraisal, title insurance policies, and all fees, taxes and expenses for the recording, registration and filing of documents. SECTION 10.2. Brokers' Fees and Stamp Taxes. Pay, or cause to be paid, any brokers' fees and any and all stamp, transfer and other similar taxes, fees and excises, if any, including any interest and penalties, which are payable in connection with the transactions contemplated by this Participation Agreement and the other Operative Documents. SECTION 10.3. Certain Fees and Expenses. Pay or cause to be paid (i) any and all Transaction Expenses of the Facility Lender (or any successor (including, without limitation, Transaction Expenses by or due to Agent Bank, Facility Lender or Lenders pursuant to Sections 3.07, 3.09 and 4.01 of the Liquidity Agreement) to the Facility Lender), the Lessor, the Lenders, the Issuing and Paying Agent, the Placement Agent and the Agent Bank, (ii) all Transaction Expenses incurred by the Facility Lender, the Agent Bank, the Lenders or the Lessor in entering into any future amendments or supplements with respect to any of the Operative Documents, whether or not such amendments or supplements are ultimately entered into, or giving or withholding of waivers of consents hereto or thereto, which have been requested by Lessee or Guarantor, (iii) all Transaction Expenses incurred by Lessor, the Agent Bank, the Facility Lender or any Lender in connection with a transfer made pursuant to Section 13.2 of this Participation Agreement, and (iv) all Transaction Expenses incurred by the Lessor, the Facility Lender, the Lenders or the Agent Bank in connection with any Property Closing Date, Completion Date or any purchase of any Property by the Lessee or other Person pursuant to Articles XVI, XVII, XX or XXII of the Lease and any accompanying purchase by the Construction Agent of any incompleted Improvements thereon pursuant to the Construction Agency Agreement. 37 SECTION 11. OTHER COVENANTS AND AGREEMENTS SECTION 11.1. Covenants of Guarantor and Lessee. Guarantor and Lessee hereby agree that so long as this Participation Agreement is in effect: (a) Information. The Guarantor will deliver to the Agent Bank (in sufficient copies for each of the Lenders with respect to deliveries pursuant to clauses (i), (ii), (iii), (v) and (vi) below) and Lessor: (i) as soon as available and in any event within ninety (90) days after the end of each Fiscal Year, a consolidated balance sheet of the Guarantor and its Subsidiaries as of the end of such Fiscal Year and the related consolidated statements of income, stockholders' equity and cash flows for such Fiscal Year, setting forth in each case in comparative form the figures for the previous Fiscal Year, all certified by KPMG Peat Marwick, LLP or other independent public accountants of nationally recognized standing, with such certification to be free of material exceptions and qualifications not reasonably acceptable to the Required Lenders; (ii) as soon as available and in any event within forty-five (45) days after the end of each of the first three (3) Fiscal Quarters of each Fiscal Year, a consolidated balance sheet of the Guarantor and its Consolidated Subsidiaries as of the end of such Fiscal Quarter and the related statement of income and statement of cash flows for such Fiscal Quarter and for the portion of the Fiscal Year ended at the end of such Fiscal Quarter, setting forth in each case in comparative form the figures for the corresponding Fiscal Quarter (Fiscal Year only in the case of balance sheets) and the corresponding portion of the previous Fiscal Year, all certified (subject to the absence of footnotes and to normal year-end audit adjustments) as to fairness of presentation, GAAP and consistency by the chief financial officer or the chief accounting officer of the Guarantor; (iii) simultaneously with the delivery of each set of financial statements referred to in paragraphs (i) and (ii) above, a certificate, substantially in the form of Exhibit P (a "Compliance Certificate"), of the chief financial officer or the chief accounting officer of the Guarantor (x) setting forth in reasonable detail the calculations required to establish whether the Guarantor was in compliance with the requirements of paragraphs (c) and (k) on the date of such financial statements and (y) stating whether any Event of Default exists on the date of such certificate and, if any Event of Default then exists, setting forth the details thereof and the action which the Guarantor or Lessee is taking or proposes to take with respect thereto; 38 (iv) within five (5) Business Days after any of the chief executive, chief financial, chief operating, chief legal or chief accounting officer of the Guarantor or Lessee becomes aware of the occurrence of any Event of Default, a certificate of the chief financial officer or the chief accounting officer of the Guarantor or Lessee setting forth the details thereof and the action which the Guarantor or Lessee is taking or proposes to take with respect thereto; (v) promptly upon the mailing thereof to the stockholders of the Guarantor generally, copies of all financial statements, reports and proxy statements so mailed; (vi) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and annual, quarterly or monthly reports which the Guarantor shall have filed with the Securities and Exchange Commission; (vii) if and when any member of the Controlled Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA, a copy of such notice; or (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer any Plan, a copy of such notice; and (viii) from time to time such additional information regarding the financial position or business of the Guarantor or any of its Subsidiaries or any of the Properties, as the Agent Bank, at the request of any Lender, or Lessor may reasonably request, including without limitation, information regarding the Property Balance, Property Acquisition Costs, Property Improvement Costs and the related amount of the Loans and Lessor Investment Amounts allocated to each Property . (b) Inspection of Property, Books and Records. The Guarantor will (i) keep, and cause each Subsidiary to keep, proper books of record and account in which full, true and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to its business and activities; and (ii) permit, and cause each Subsidiary to permit, representatives of the Agent Bank at the Lenders' expense prior to the occurrence of a Default and at the Guarantor's expense after the occurrence of a Default to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to 39 discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants. The Guarantor and the Lessee agree to cooperate and assist in such visits and inspections, in each case at such reasonable times and as often as may reasonably be requested. (c) Ratio of Consolidated Funded Debt to Consolidated Total Tangible Capital. The ratio of Consolidated Funded Debt to Consolidated Total Tangible Capital will not exceed 0.60 to 1.00, calculated at the end of each Fiscal Quarter. (d) Negative Pledge. Neither the Guarantor nor any Consolidated Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (i) Liens existing on the date of this Participation Agreement securing Indebtedness outstanding on the date of this Participation Agreement in an aggregate principal amount with respect to Indebtedness for borrowed money and capital leases not exceeding $99,036,000; (ii) any Lien existing on any asset of any (i) corporation or partnership at the time such corporation or such partnership becomes a Consolidated Subsidiary, or (ii) Subsidiary at the time it becomes a Significant Subsidiary, and in either case not created in contemplation of such event; (iii) any Lien on any asset securing Indebtedness incurred or assumed for the purpose of financing all or any part of the cost of acquiring or constructing such asset, that such Lien attaches to such asset concurrently with or within eighteen (18) months after the acquisition or completion of construction thereof; (iv) any Lien on any asset of any corporation existing at the time such corporation is merged or consolidated with or into the Guarantor or a Consolidated Subsidiary and not created in contemplation of such event; (v) any Lien existing on any asset prior to the acquisition thereof by the Guarantor or a Consolidated Subsidiary and not created in contemplation of such acquisition; (vi) Liens securing Indebtedness owing by any Subsidiary to the Guarantor; (vii) any Lien arising out of the refinancing, extension, renewal or refunding of any Indebtedness secured by any Lien permitted by any of the foregoing paragraphs of this Section, provided that (x) such Indebtedness is not secured by any additional assets, and (y) the amount of such Indebtedness secured by any such Lien is not increased; 40 (viii) Liens incidental to the conduct of its business or the ownership of its assets which (x) do not secure Indebtedness (other than Indebtedness arising from operating leases which become capital leases as required by GAAP) and (y) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (ix) any Lien on Margin Stock; and (x) Liens not otherwise permitted by the foregoing paragraphs of this Section securing Indebtedness in an aggregate principal amount at any time outstanding not to exceed twenty percent (20%) of Consolidated Tangible Net Worth. provided Liens permitted by the foregoing paragraphs (i) through (x) shall at no time secure Indebtedness in an aggregate amount greater than twenty-five (25%) of Consolidated Tangible Net Worth. (e) Maintenance of Existence. The Guarantor shall, and shall cause each Subsidiary to, maintain its corporate existence and carry on its business in substantially the same manner and in substantially the same fields as such business is now carried on and maintained, except as permitted by clause (g) below; provided, however, that (i) any Subsidiary may be reincorporated under the laws of another state, and (ii) so long as no Event of Default shall be in existence or be caused thereby, nothing in this Participation Agreement shall prevent the abandonment or termination of the existence, rights and franchises, or the change in the business of any Subsidiary which is not a Significant Subsidiary, if, in the opinion"of the Board of" Directors of the Guarantor, such abandonment, termination or change is in the best interest of the Guarantor and not disadvantageous in any material respect to the Lenders. (f) Dissolution. Neither the Guarantor nor any of its Significant Subsidiaries shall suffer or permit dissolution or liquidation either in whole or"in part (except as permitted by clause (e) above) or redeem or retire any shares of its own stock or that of any Significant Subsidiary, except through corporate reorganization to the extent permitted by clause (g) below. (g) Consolidations, Mergers and Sales of Assets. The Guarantor will not, nor will it permit any Significant Subsidiary to, consolidate with or merge into, or sell, lease or otherwise transfer all or any substantial part of its assets to, any other Person; provided that (i) the Guarantor or the Lessee may consolidate with or merge into another Person if (A) such Person is a solvent corporation organized under the laws of the United States of America or one of its states, (B) the Guarantor or the Lessee is the corporation surviving such merger or consolidation and (C) immediately after giving effect to such merger or consolidation, no Event of Default shall have occurred and be continuing, (ii) Subsidiaries may consolidate with or merge into one another or into any other Person if, in the case of a merger or consolidation 41 involving a Significant Subsidiary, (A) such other Person is a solvent corporation organized under the laws of the United States of America or one of its states, (B) the Person surviving such merger or consolidation is a wholly owned Subsidiary and (C) immediately after giving effect to such merger or consolidation no Event of Default shall have occurred and be continuing, (iii) the Guarantor and its Subsidiaries may sell, lease or otherwise transfer assets among themselves, and (iv) the foregoing limitation on the sale, lease or other transfer of assets shall not prohibit, during any fiscal quarter, a transfer of assets (in a single transaction or in a series of related transactions) unless the aggregate assets to be so transferred, when combined with all other assets transferred during such Fiscal Quarter and the immediately preceding three (3) Fiscal Quarters, either (A) constituted more than ten percent (10%) of Consolidated Total Assets at the end of such Fiscal Quarter or (B) contributed more than ten percent (10%) of Consolidated Operating Profits during such Fiscal Quarter and the three (3) Fiscal Quarters immediately preceding such Fiscal Quarter. (h) Compliance with Laws; Payment of Taxes. The Guarantor will, and will cause each of its Subsidiaries and each member of the Controlled Group to, comply with applicable laws (including but not limited to ERISA), regulations and similar requirements of governmental authorities (including but not limited to PBGC), except where the necessity of such compliance is being contested in good faith through appropriate proceedings or where the failure to so comply would not reasonably be expected to have or cause a Material Adverse Effect. The Guarantor will, and will cause each of its Subsidiaries to, pay promptly when due all taxes, assessments, governmental charges, claims for labor, supplies, rent and other obligations which, if unpaid, would become a lien against the property of the Guarantor or any Subsidiary, except (i) liabilities being contested in good faith and against which, if requested by the Agent Bank, the Guarantor will set up reserves in accordance with GAAP or (ii) where the failure to so pay would not reasonably be expected to have or cause a Material Adverse Effect. (i) Environmental Matters. The Guarantor and its Subsidiaries will not use, produce, manufacture, process, treat, recycle, generate, store, dispose of, manage at, any of its properties, or otherwise handle, or ship or transport to or from any of its properties any Hazardous Substances except for Hazardous Substances used, produced, manufactured, processed, treated, recycled, generated, stored, disposed, managed, or otherwise handled in the ordinary course of business in compliance in all material respects with applicable Environmental Laws, and will take commercially reasonable steps to prohibit any other Person from doing any of the acts prohibited by the foregoing. (j) Environmental Release. The Guarantor and the Lessee each agree that upon obtaining knowledge of the occurrence of a Release at or on any of its properties, it will act promptly to investigate the extent of, and to take appropriate remedial action to eliminate, such Release, whether or not ordered or otherwise directed to 42 do so by any Governmental Authority. (k) Debt of Subsidiaries. The Guarantor shall not permit any Subsidiary to incur any Indebtedness except for (i) Indebtedness owing to the Guarantor or another Subsidiary and (ii) other Indebtedness which shall not exceed in the aggregate for all Subsidiaries an amount in excess of twenty percent (20%) of Consolidated Net Worth. (l) With respect to all properties (other than the Properties subject to the Lease): (i) Insurance. The Guarantor will maintain, and will cause each of its Subsidiaries to maintain (either in the name of the Guarantor or in such Subsidiary's own name), with financially sound and reputable insurance companies, insurance on all its property in substantially such amounts and against substantially such risks as are usually insured against in the same general area by companies of established repute and of similar size and financial strength engaged in the same or similar business; (ii) Maintenance of Property. The Guarantor shall, and shall cause each Significant Subsidiary to, maintain to the extent commercially reasonable, all of its properties and assets in good condition, repair and working order, ordinary wear and tear excepted; and (iii) Environmental Notices. The Guarantor shall furnish to the Agent Bank and the Lessor prompt written notice of all Environmental claims or proceedings, pending, threatened or anticipated notices of Environmental Violations, and Releases at, on, in, under or in any way affecting all real property owned or leased or otherwise used or occupied by Guarantor or any Subsidiary or any adjacent property, and all facts, events, or conditions that could lead to any of the foregoing; provided, that, no such notification will be required, unless any of the foregoing facts, events or conditions would reasonably be expected to have or cause a Material Adverse Effect. (m) Further Assurances. Guarantor and Lessee shall promptly cause to be taken, executed acknowledged or delivered, at the sole joint and several expense of Guarantor and Lessee, all such further acts, conveyances, documents and assurances as the other parties may from time to time reasonably request in order to carry out and effectuate the intent and purposes of this Participation Agreement, the other Operative Documents, and the transactions contemplated hereby and thereby (including without limitation, the preparation, execution and filing of all Uniform Commercial Code financing statements and all other instruments necessary or advisable to maintain and protect all Liens provided for hereunder or under any other Operative Document). SECTION 11.2. Cooperation with the Lessee. The Lessor, the Facility Lender, the Agent 43 Bank and Lenders shall, to the extent reasonably requested by Lessee (but without assuming additional liabilities on account thereof), at Lessee's expense, cooperate with Lessee in connection with its covenants contained herein including, without limitation, at any time and from time to time, upon the request of Lessee, to promptly and duly execute and deliver any and all such further instruments, documents and financing statements and continuation statements related thereto) as Lessee may reasonably request in order to perform such covenants. Each of the Lessor, the Facility Lender, the Agent Bank and Lenders agrees that, to the extent it shall obtain actual knowledge of the occurrence of an Event of Default, a Loan Agreement Event of Default or a Facility Agreement Event of Default under the Operative Documents, it shall promptly notify Lessee describing the same in reasonable detail. SECTION 11.3. Release of Properties. If the Lessee shall at any time purchase any Property pursuant to Section 16.2 of the Lease or exercise its Purchase Option with respect to any Property under the Lease, or if all of the Properties shall be sold in accordance with, and the Lessee otherwise satisfies each of the obligations and conditions set forth in the Lease for the release of a Property therefrom, then, upon application of the proceeds of any such sale pursuant to Section 5 and all accrued interest and any other payments due and owing from Lessee to the Agent Bank, the Lenders, the Facility Lender or Lessor on such date, including without limitation pursuant to Section 14 of this Agreement, such Property shall be released from the Liens created by the Security Documents and the Agent Bank, Lessor and the Facility Lender shall, at the expense of the Lessee, execute and deliver such instruments as are legally required in order to effectuate such release. In addition, upon the termination of the Facility Lender Commitments and the payment in full of all other amounts owing by the hereunder or under any other Operative Document, the Properties shall be released from the Liens created by the Security Documents. Upon request of the Lessee or Lessor following any such release, the Agent Bank and Facility Lender shall, at the sole cost and expense of the Lessee or Lessor execute and deliver to the Lessor or the Lessee such documents as the Lessee or Lessor shall reasonably request to evidence such release. SECTION 11.4. Discharge of Liens. (a) Each of the Facility Lender and the Lessor 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 Properties (and its rights under the Operative Documents) attributable to it; provided, however, that such Participants shall not be required to so discharge any such Lessor Lien prior to any sale of the Properties while the same is being contested in good faith by appropriate proceedings. (b) The Agent Bank 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 Agent's Liens on the Properties attributable to it; provided, however, that the Agent Bank shall not be required to so discharge any such Agent's Lien prior to any sale of the Properties while the same is being contested in good faith by appropriate proceedings. SECTION 11.5. Notice of Credit Rating. Each of the Agent Bank, the Lenders and the Lessor severally agrees that it shall immediately notify the Guarantor and the Lessee in writing in 44 the event that its (or in the case of the Lessor, its general partner's) long or short term debt rating is downgraded or withdrawn by any Rating Agency or if such entity (or in the case of the Lessor, its general partner) is placed on credit watch with negative implications by any Rating Agency. SECTION 11.6. Covenants of the Facility Lender and the Lessor. Each of the Facility Lender and the Lessor hereby agrees, severally and not jointly, that so long as this Participation Agreement is in effect: (a) Maintenance of Existence. It shall maintain its corporate or partnership existence and qualification as a foreign corporation or foreign limited partnership in each state in which a Property is located. (b) Certificate of Incorporation. Facility Lender shall not allow an amendment to its Certificate of Incorporation or other governing documents without the consent of the Lessee, Agent Bank and Lessor. (c) Prepayment. Other than issuing new Commercial Paper Notes at maturity or with the proceeds of Facility Loans or Residual Loans under the Liquidity Agreement and other than as provided in Section 5, the Facility Lender will not prepay, redeem or refinance any Commercial Paper Notes. Except as expressly required by the Operative Documents or in connection with the issuance of Commercial Paper Notes in accordance with the terms of the Commercial Paper Documents, the Facility Lender shall not voluntarily prepay the Liquidity Notes, or any part thereof, without the written consent of Lessee; provided, however, that subject to Section 5, Facility Lender may prepay, or cause to be prepaid, all or any portion of the Liquidity Notes at any time following an Event of Default where any or all of the Participants are exercising remedies. Except as permitted by the Operative Documents, the Lessor shall not prepay any Loans; provided, however, that subject to Section 5, Lessor may prepay or cause to be prepaid all or any portion of the Notes at any time following an Event of Default where the Participants are exercising remedies. (d) Indebtedness; Other Business. The Facility Lender shall not contract for, create, incur or assume any Indebtedness, or enter into any business or other activity, other than pursuant to, under or as contemplated by the Operative Documents. (e) Change of Chief Place of Business. Each of the Lessor and the Facility Lender, with respect to itself only, shall give prompt notice to Lessee and the Agent Bank if the Lessor's or the Facility Lender's chief place of business or chief executive office, or the office where the records concerning the accounts or contract rights relating to a Property are kept, shall cease to be located at the address set forth in Section 15.3 or if it shall change its name, identity or corporate structure. (f) Subordination of Liens. During the Term, the Liens created by the Security Documents related to each Property shall be expressly made subject and subordinate 45 to the Lease related to such Property. (g) No Voluntary Bankruptcy. Neither the Lessor (unless the Lessee shall give its prior written consent) nor the Facility Lender shall (A) commence any case, proceeding or other action under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, arrangement, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seek appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial benefit of its creditors; and neither the Lessor nor the Facility Lender shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in this paragraph. (h) No Sale of Properties. Neither the Lessor nor the Facility Lender shall transfer any of their respective interests in the Properties except as provided in the Operative Documents. (i) Rollover of Commercial Paper Documents. Except as provided in Section 5 or in the Commercial Paper Documents or as otherwise directed by Lessee, during the Term, upon the maturity of the Commercial Paper Notes, the Facility Lender shall, to the extent permitted under the Operative Documents and otherwise commercially feasible, issue new Commercial Paper Notes in accordance with the terms of the Commercial Paper Documents. (j) No Powers of Attorney. The Facility Lender shall not grant any powers of attorney to any Person for any purposes except (i) for the purpose of permitting any Person to perform any ministerial or administrative functions on behalf of the Facility Lender which are not inconsistent with the terms of the Operative Documents, (ii) to the Agent Bank for the purposes of the Security Documents, or (iii) where provided for or permitted by the Operative Documents. (k) Same Business. Unless the Lessee otherwise consents in writing, Lessor shall stay engaged in substantially the same business (including engaging in the business of leasing personal and real property as lessor, or acting as agent, broker or advisor in leasing such property and making, acquiring or servicing loans or other investments or extensions of credit in connection therewith or incidental thereto) as conducted on the Initial Closing Date. SECTION 11.7. No Bankruptcy Proceedings. The Guarantor, Lessee, Construction Agent and each Participant hereby agrees that it will not institute against, or join any other Person in instituting against, the Facility Lender any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding, or other proceeding under any Federal or state bankruptcy or similar law, for one year and a day after the latest maturing Commercial Paper Note is paid. Nothing in this Section 11.7 shall preclude, or be deemed to estop, the Guarantor, Lessee, Construction Agent or any Participant (i) from taking or omitting to take any action prior to such date in (A) any case or proceeding voluntarily filed or commenced by or on behalf of the Facility Lender under or pursuant 46 to any such law or (B) any involuntary case or proceeding pertaining to the Facility Lender which is filed or commenced by or on behalf of a Person other than the Guarantor, Lessee, Construction Agent or any Participant under or pursuant to any such law, or (ii) from commencing or prosecuting any legal action which is not an involuntary case or proceeding under or pursuant to any such law against the Participant or any of its properties or otherwise exercising its remedies under the Operative Documents. SECTION 11.8. Notice of Claims Against Lessor. Lessor shall promptly notify the Lessee and the Guarantor in writing in the event that Lessor defaults in any obligation or any Claim is asserted against Lessor (including any Environmental Claim) which, exceeds $5,000,000 in any one instance or $10,000,000 in the aggregate (other than defaults or Claims arising in connection with the Operative Documents and the transactions contemplated thereby). Upon receipt of such notice the Lessee may either: (i) Replace the Lessor pursuant to Section 13.2; or (ii) Require that the Lessor promptly execute, deliver and record mortgages in form satisfactory to Lessee granting to Lessee a Lien on the Properties to secure the performance of all obligations of Lessor pursuant to the Lease and the other Operative Documents, which Lien shall be second in priority to the Mortgages. Each of the Participants hereby acknowledges and agrees that any such Liens granted to the Lessee hereunder shall constitute "Permitted Liens" pursuant to clause (i) of such definition. SECTION 12. LESSEE DIRECTIONS SECTION 12.1. Lessee Directions. The Lenders, the Lessor, the Guarantor, the Agent Bank, the Facility Lender agree that, so long as no Default or Event of Default exists: (a) Lessee shall have the right to give all borrowing notices pursuant to the Loan Agreement and the Liquidity Agreement and all notices relating to the issuance of the Commercial Paper Notes pursuant to the Commercial Paper Documents; (b) Lessee shall have the right to terminate or reduce the Commitment pursuant to Section 4.02 of the Liquidity Agreement and the Facility Lender Commitments pursuant to Section 2.5 of the Loan Agreement (which commitments shall be reduced proportionately and simultaneously); provided that, following such reduction, the remaining amount of the Available Commitments shall be sufficient, in the reasonable judgment of the Construction Agent, to complete construction of the Improvements with respect to each Construction Period Property and Lessee shall have the right to direct the Lessor to prepay the Loans pursuant to Section 2.4 of the Loan Agreement to the extent that Lessee makes a payment of Supplemental Rent in the amount of such prepayment on the date of such prepayment; 47 (c) Lessee shall have the right to give Extension Notices and Extension Requests pursuant to Section 4.04 of the Liquidity Agreement; (d) Lessee shall have the right to replace a Non-Consenting Lender pursuant to Section 4.05 of the Liquidity Agreement; (e) Lessee shall have the right to give "Notices of Conversion" and "Notices of Continuation" pursuant to Section 3.05 of the Liquidity Agreement; (f) Lessee shall have the right to approve any successor "Agent Bank" to the extent permitted pursuant to Section 10.12 of the Liquidity Agreement; (g) without limiting the foregoing clauses (a) through (f) and in addition thereto, Lessee shall have the right to exercise any other right of the Lessor under the Loan Documents and the Facility Lender under the Liquidity Agreement and Commercial Paper Documents upon not less than three (3) Business Days' prior written notice from Lessee to the Lessor, Agent Bank, and the Facility Lender, unless such party objects to such exercise within three (3) Business Days of receipt of such notice; and (h) Lessee shall have the right to give notices pursuant to Appendix C of this Participation Agreement. SECTION 13. TRANSFER OF INTEREST SECTION 13.1. Restrictions on and Effect of Transfer. No Participant shall assign, convey or otherwise transfer (including pursuant to a participation) all or any portion of its right, title or interest in, to or under any of the Operative Documents, any Note or Liquidity Note, except (x) with respect to the Lenders, as provided in Section 10.04 of the Liquidity Agreement, and (y) with respect to the Facility Lender and the Lessor, with the prior written consent of the Agent Bank, the Lenders (to the extent required by Section 10.04 of the Liquidity Agreement) and Lessee, which consent, in the case of the Agent Bank, shall not be unreasonably withheld; provided that, in the event that an Event of Default has occurred and is continuing pursuant to which the Participants have begun to exercise remedies against the Lessee or Guarantor, the consent of the Lessee shall not be required for any such transfer by the Lessor. Any transfer made pursuant to the Operative Documents shall be subject to the Security Documents and any transferee or assignee shall expressly agree in writing to be bound by the terms of this Participation Agreement. SECTION 13.2. Replacement of Lessor or Facility Lender. If the Lessor or Facility Lender (i) fails to approve a renewal of the Lease pursuant to Article XXI of the Lease, (ii) defaults in any of its material obligations pursuant to the Operative Documents or, with respect to Facility Lender, any Facility Agreement Event of Default shall occur, or with respect to Lessor, any Loan 48 Agreement Event of Default shall occur (which in either case, does not arise out of, or is not attributable to, an Event of Default), or (iii) in the case of the Lessor, (x) the Lessor or its general partner suffer a downgrade or withdrawal or, in the reasonable judgment of the Lessee, potential downgrade or withdrawal, of its long or short term credit rating by any Rating Agency or (y) Credit Suisse ceases to be the sole general partner of Lessor, the Lessee shall be permitted to replace such Person at any time; provided that (i) such replacement does not conflict with any Requirement of Law, (ii) any replacement Lessor shall purchase, at par, all Lessor Investment Amounts, all accrued and unpaid Certificate Earnings thereon and other amounts owing to Lessor under the Operative Documents on or prior to the date of replacement, (iii) the replacement Lessor or Facility Lender shall be reasonably satisfactory to the Required Lenders, (iv) the Guarantor and Lessee shall be obligated to pay any Transaction Expenses arising in connection therewith, (v) the replacement Lessor or Facility Lender shall agree in writing to be subject to all of the terms and conditions of the Operative Documents (including the renewal of the Lease contemplated by any relevant Renewal Request) and this Participation Agreement and (vi) as a condition precedent to such replacement, the Guarantor or Lessee shall have provided written confirmation from each of Moody's and S&P that immediately after having given effect to such replacement, the Commercial Paper Notes shall not be rated lower than the Commercial Paper Notes are rated immediately prior to such replacement and such replacement shall not result in a downgrade, withdrawal or qualification of the rating assigned to the Commercial Paper Notes by Moody's or S&P. The Lessor and the Facility Lender agree to cooperate with the Lessee in its efforts to arrange replacements as contemplated by this Section 13.2. SECTION 14. INDEMNIFICATION SECTION 14.1. General Indemnification. The Guarantor and Lessee, jointly and severally, whether or not any of the transactions contemplated hereby shall be consummated, hereby assume liability for, and indemnify, protect, defend, save and keep harmless each Indemnitee, on an After Tax Basis, from and against any and all Claims that may be imposed on, incurred by or asserted against such Indemnitee in any way relating to or arising out of: (a) any of the Operative Documents or any of the transactions contemplated thereby, and any amendment, modification or waiver in respect thereof; or (b) the Properties or any part thereof or interest therein; (c) the purchase, design, construction, preparation, installation, inspection, delivery, non-delivery, acceptance, rejection, ownership, management, possession, operation, rental, lease, sublease, repossession (whether by summary proceedings or otherwise), maintenance, repair, alteration, modification, addition, substitution, storage, transfer of title, redelivery, use, financing, refinancing, disposition, operation, condition, sale (including, without limitation, any sale pursuant to the Lease), return or other disposition of all or any part of any interest in the Properties 49 or the imposition of any Lien (or incurring of any liability to refund or pay over any amount as a result of any Lien) thereon, including, without limitation: (l) personal injury, death or property damage, including Claims or penalties arising from any violation of law or in tort (strict liability or otherwise), (2) latent or other defects, whether or not discoverable, (3) any Claim based upon a violation or alleged violation of the terms of any Applicable Law or any restriction, easement, condition or covenant or other matter affecting title to the Properties or any part thereof, (4) the making of any Modifications in violation of any Insurance Requirements, (5) any Claim for patent, trademark or copyright infringement, and (6) Claims arising from any public improvements with respect to the Properties resulting in any change or special assessments being levied against the Properties or any Claim for utility "tap-in" fees; (d) the offer, issuance, sale or delivery of the Commercial Paper Notes, the Liquidity Notes or the Notes; (e) the breach or alleged breach by the Guarantor or the Lessee of any representation or warranty made by it or deemed made by it in any Operative Document or any certificate required to be delivered by any Operative Document or the breach or alleged breach by the Guarantor or the Lessee of any covenant or obligation made by it in any Operative Document; (f) the retaining or employment of any broker, finder or financial advisor by the Guarantor or Lessee to act on its behalf in connection with the Operative Documents, or the authorization of any broker or financial adviser retained or employed by the Guarantor or the Lessee so to act, or the incurring of any fees or commissions by the Lessee or the Guarantor to which the Indemnitees might be subjected by virtue of their entering into the transactions contemplated by the Operative Documents; (g) the existence of any Lien on or with respect to the Properties, any Basic Rent or Supplemental Rent, title thereto, or any interest therein, including any Liens which arise out of the possession, use, occupancy, construction, repair or rebuilding of any of the Properties or by reason of labor or materials furnished or claimed to have been furnished to the Lessee, or any of its contractors or agents or by reason of the financing of any personalty or equipment purchased or leased by the Lessee or Modifications constructed by the Lessee, except in all cases Permitted Liens; (h) any act or omission by the Construction Agent under the Construction Agency Agreement, and any breach of any requirement, condition, restriction or limitation in any Deed or other Operative Document; or (i) any easement, license, right-of-way, covenant, restriction or other document or agreement entered into by Issuer at the request of Lessee; 50 provided, however, neither the Guarantor nor the Lessee shall be required to indemnify any Indemnitee under this Section 14.1 for any of the following: (1) any Claim to the extent that such Claim resulted from the willful misconduct or gross negligence of such Indemnitee, (2) any Claim to the extent resulting from Lessor Liens which the Indemnitee is responsible for discharging under the Operative Documents, (3) any Claim to the extent directly resulting from a breach of an Operative Document or Applicable Law by such Indemnitee (except for a breach by the Facility Lender that is arising out of or attributable to a breach by the Lessee or Guarantor of any of its obligations under any of the Operative Documents), and (4) any Claim related to the Properties to the extent attributable to acts or events occurring after the Expiration Date unless an Event of Default has occurred and is continuing and the Participants are exercising remedies against the Lessee or the Properties in respect of the Operative Documents (in which event all of the foregoing provisions of this Section 14.1 shall remain in full force and effect). It is expressly understood and agreed that the indemnity provided for herein shall survive the expiration or termination of the Lease and the other Operative Documents and the payment by Lessee and Guarantor of all amounts due thereunder for a period of three (3) years (but shall continue in full force and effect following such date with respect to any Claim asserted prior to such date), and shall be separate and independent from any remedy under the Lease or any other Operative Document; provided that, to the extent that any Claim arises after such three (3) year period which was not asserted during such three (3) year period due to a failure to discover such Claim or for any other reason, the indemnity provided for in this Section 14.1 shall be revived upon the assertion of such Claim solely with respect to such Claim. SECTION 14.2. Environmental Indemnity. In addition to, and not in derogation of, the indemnities contained in Section 14.1 and 14.4 the Guarantor and the Lessee, jointly and severally, hereby indemnify, hold harmless and defend each Indemnitee from and against any and all Claims, 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 or at the direction of any Governmental Authority, related to the Properties or the Lessee's use of the Properties, arising directly or indirectly, in whole or in part, out of (i) the presence on or under any Property of any Hazardous Substances, or any releases or discharges of any Hazardous Substances on, under, from or onto any Property or any other Hazardous Condition with respect to any Property, (ii) any Hazardous Activity, including, without limitation, construction, carried on or undertaken on or off any Property, and whether by the Lessee, or any predecessor in title or any employees, Agent Bank, contractors or subcontractors of the Lessee, or any predecessor in title, or any other Persons, in connection with the handling, treatment, removal, storage, decontamination, clean-up, transport or disposal of any Hazardous Substances that at any time are located or present on or under any Property or that at any time migrate, flow, percolate, diffuse or in any way move onto or under any Property, (iii) loss of or damage to any property or the environment (including, without limitation, clean-up costs, response costs, remediation and removal costs, cost of 51 corrective action, costs of financial assurance, fines and penalties and natural resource damages), or death or injury to any Person, and all expenses associated with the protection of wildlife, aquatic species, vegetation, flora and fauna, and any mitigative action required by or under Environmental Laws, (iv) any Claim concerning lack of compliance with Environmental Laws with respect to the Properties, or any act or omission causing an environmental condition with respect to the Properties that requires remediation or would allow any governmental agency to record a lien or encumbrance on the land records with respect to the Properties, (v) any residual contamination on or under any Property, including any such contamination affecting any natural resources, and to any such contamination of any property or natural resources arising in connection with the generation, use, handling, storage, transport or disposal of any Hazardous Substances associated with such Property and related to the residual contamination, the obligation existing, irrespective of whether any of such activities were or will be undertaken in accordance with applicable laws, regulations, codes and ordinances, (vi) in any case with respect to the matters described in the foregoing clauses (i) through (v) that arise or occur (w) during the Term, (x) at any time during which the Lessee or any Affiliate thereof owns any interest in or otherwise occupies, controls or possesses the relevant Property or any portion thereof, or (y) during any period after and during the continuance of any Event of Default, or (vii) a breach of the representations and warranties of the Guarantor and the Lessee provided herein; provided, however, that neither the Guarantor nor the Lessee shall be required to indemnify any Indemnitee under this Section 14.2 for any of the following: (1) any Claim to the extent that such Claim resulted from the willful misconduct or gross negligence of such Indemnitee, (2) any Claim to the extent proximately caused by any action on the part of such Indemnitee or, to the extent such Claim relates to or is attributable to, events occurring after the Term where such Indemnitee is in control of the Property or Properties, inaction on the part of such Indemnitee, and (3) any Claim related to the Properties to the extent attributable to acts or events occurring before or after the Term unless, in the case of Claims attributable to acts or events occurring after the Term, an Event of Default has occurred and is continuing and the Participants are exercising remedies against the Lessee or the Properties under the Operative Documents (in which event all of the foregoing provisions of this Section 14.2 shall remain in full force and effect), or the Claim arises out of a 52 breach of the representations and warranties of the Guarantor or Lessee contained herein. It is expressly understood and agreed that the indemnity provided for herein shall survive the expiration or termination of the Lease and the other Operative Documents and the payment by Lessee and Guarantor of all amounts due thereunder for a period of three (3) years (but shall continue in full force and effect following such date with respect to any Claim asserted prior to such date) and shall be separate and independent from any remedy under the Lease or any other Operative Document; provided that, to the extent that any Claim arises after such three (3) year period which was not asserted during such three (3) period due to a failure to discover such Claim or for any other reason, the indemnity provided for in this Section 14.2 shall be revived upon the assertion of such Claim solely with respect to such Claim. SECTION 14.3. Proceedings in Respect of Claims. With respect to any amount that the Guarantor or the Lessee is requested by an Indemnitee to pay by reason of Section 14.1 or 14.2, such Indemnitee shall, if so requested by the Guarantor or the Lessee and prior to any payment, submit such additional information to the Guarantor or the Lessee as the Guarantor or the Lessee may reasonably request and which is in the possession of such Indemnitee to substantiate properly the requested payment. In case any action, suit or proceeding shall be brought against any Indemnitee, such Indemnitee shall notify the Guarantor or the Lessee of the commencement thereof, and the Guarantor or the Lessee shall be entitled, at its expense, to participate in, and, to the extent that the Guarantor or the Lessee desires to, assume and control the defense thereof; provided, however, that the Guarantor or the Lessee shall have acknowledged in writing its obligation to fully indemnify such Indemnitee in respect of such action, suit or proceeding and the Guarantor or 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 Guarantor or the Lessee shall not be entitled to assume and control the defense of any such action, suit or proceeding if and to the extent that, (A) in the reasonable opinion of such Indemnitee, (x) such action, suit or proceeding involves any possibility of imposition of criminal liability or any material risk of material civil liability on such Indemnitee or will involve a material risk of the sale, forfeiture or loss of, or the creation of any Lien (other than a Permitted Lien) on the Properties or any part thereof unless the Guarantor or the Lessee shall have posted a bond or other security satisfactory to the relevant Indemnitees in respect to such risk or (y) the control of such action, suit or proceeding would involve an actual or potential conflict of interest (in which case each Indemnitee may retain separate counsel at the expense of Lessee and Guarantor), (B) such proceeding involves Claims not fully indemnified by the Guarantor or the Lessee which the Guarantor or the Lessee and the Indemnitee have been unable to sever from the indemnified claim(s), or (C) an Event of Default has occurred and is continuing. The Indemnitee may participate in a reasonable manner at its own expense and with its own counsel in any proceeding conducted by the Guarantor or the Lessee in accordance with the foregoing. Neither the Guarantor nor the Lessee shall enter into any settlement or other compromise with respect to any Claim which is entitled to be indemnified under Section 14.1 or 14.2 without the prior written consent of the related Indemnitee, which consent shall not be unreasonably withheld. No Indemnitee shall enter into any settlement or other compromise with respect to any Claim which is entitled to be indemnified under Section 14.1 or 14.2 without the prior written 53 consent of the Lessee, which consent shall not be unreasonably withheld, unless such Indemnitee waives its right to be indemnified under Section 14.1 or 14.2 with respect to such Claim. Upon payment in full of any Claim by the Guarantor or the Lessee pursuant to Section 14.1 or 14.2 to or on behalf of an Indemnitee, the Guarantor or the Lessee, as the case may be, 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) to the extent of such payment, and such Indemnitee shall execute such instruments of assignment and conveyance, evidence of claims and payment and such other documents, instruments and agreements as may be reasonably necessary to preserve any such claims and otherwise cooperate with the Guarantor and the Lessee and give such further assurances as are reasonably necessary or advisable to enable the Guarantor or the Lessee vigorously to pursue such claims. Any amount payable to an Indemnitee pursuant to Section 14.1 or 14.2 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. SECTION 14.4. End of Term Indemnity. In addition to the indemnities provided in Sections 14.1 and 14.2, if the Lessee elects the Remarketing Option set forth at Section 22.1 of the Lease with respect to the Properties (which shall, for purposes of this Section 14.4, include all Improvements thereon being constructed pursuant to the Construction Agency Agreement and for which the Completion Date has not occurred) subject to the Lease and there is a Shortfall Amount with respect to such Properties, then prior to the Expiration Date and as a condition to Lessee's right to complete the Remarketing of such Property pursuant to Section 22.1 of the Lease, Lessee shall cause to be delivered to Lessor no later than the Expiration Date, at Lessee's sole cost and expense, a report from an Appraiser in form and substance reasonably satisfactory to the Required Lenders and the Lessor (the "End of the Term Report") to establish the reason for any impairment to the value of any of such Property which was sold for an amount less than the Property Balance for such Property. On the Expiration Date, the Lessee shall pay to Lessor an amount equal to the Shortfall Amount that the End of the Term Report demonstrates was the result of an impairment to the value in such Property due to: (a) extraordinary use, failure to maintain, to repair, to restore, to rebuild or to replace, failure to comply with all Requirements Laws, failure to use quality workmanship, method of installation or removal or maintenance, repair, rebuilding or replacement, (excepting in each case ordinary wear and tear), or (b) the existence of any Hazardous Activity, Hazardous Substance or Environmental Violations occurring or discovered after the Property Closing Date for such Property (regardless of the Person so discovering any of the foregoing), or (c) any restoration or rebuilding carried out by the Lessee or any failure to reach Completion Date or to complete any Modification, restoration or rebuilding, in 54 either case, by the Expiration Date, (d) any grant, release, dedication, transfer, annexation or amendment made pursuant to Section 12.2 of the Lease or any release of a portion of the Property made pursuant to Section 12.3 of the Lease; or (e) the failure of the Lessor to have good and marketable title to such Property free and clear of all Liens (including Permitted Liens (other than Lessor Liens and Agent's Liens)) and exceptions to title. SECTION 14.5. General Tax Indemnity. (a) Indemnification. Guarantor and Lessee, jointly and severally, shall pay and assume liability for, and do hereby agree to indemnify, protect and defend each Property and all Tax Indemnitees, and hold them harmless against, all Impositions on an After Tax Basis. (b) Contests. If any claim shall be made against any Tax Indemnitee or if any proceeding shall be commenced against any Tax Indemnitee (including a written notice of such proceeding) for any Imposition as to which the Lessee may have an indemnity obligation pursuant to Section 14.5(a), or if any Tax Indemnitee shall determine that any Imposition as to which the Lessee may have an indemnity obligation pursuant to Section 14.5(a) may be payable, such Tax Indemnitee shall promptly notify Lessee in writing and shall not take any action with respect to such claim, proceeding or Imposition without the written consent of Lessee (such consent not to be unreasonably withheld or unreasonably delayed) for thirty (30) days after the receipt of such notice by Lessee; provided, however, that in the case of any such claim or proceeding, if such Tax Indemnitee shall be required by law or regulation to take action prior to the end of such thirty (30)-day period, such Tax Indemnitee shall in such notice to Lessee, so inform Lessee, and such Tax Indemnitee shall not take any action with respect to such claim, proceeding or Imposition without the consent of Lessee (such consent not to be unreasonably withheld or unreasonably delayed) for ten (10) days after the receipt of such notice by Lessee unless the Tax Indemnitee shall be required by law or regulation to take action prior to the end of such ten (10)-day period. Lessee shall be entitled for a period of thirty (30) days from receipt of such notice from the Tax Indemnitee (or such shorter period as the Tax Indemnitee has notified Lessee is required by law or regulation for the Tax Indemnitee to commence such contest) to request in writing that such Tax Indemnitee contest the imposition of such Tax, at Guarantor's and Lessee's joint and several expense and the Tax Indemnitee shall, at the joint and several expense of Guarantor and Lessee, in good faith conduct and control such contest (including, without limitation, by pursuit of appeals) related to the validity, applicability or amount of such Impositions (provided, however, that (A) if such contest involves a tax other than a tax on net income and can be pursued independently from any other proceeding involving a tax liability of such Tax Indemnitee, the Tax Indemnitee, at Lessee's request, shall allow Guarantor or Lessee to conduct and control such contest and (B) in the case of any contest, the Tax Indemnitee may request Guarantor or Lessee to conduct and control such contest) by, in the sole discretion of the Person conducting and controlling such contest, (l) resisting payment thereof, (2) not paying the same except under protest, if protest is necessary and proper, (3) if the payment be made, using reasonable efforts to obtain a refund 55 thereof in appropriate administrative and judicial proceedings, or (4) taking such other action as is reasonably requested by Guarantor or Lessee from time to time. The party controlling any contest shall consult in good faith with the non-controlling party and shall keep the noncontrolling party reasonably informed as to the conduct of such contest; provided that, all decisions ultimately shall be made in the sole discretion of the controlling party. The parties agree that a Tax Indemnitee may at any time decline to take further action with respect to the contest of any Imposition and may settle such contest if such Tax Indemnitee shall waive its rights to any indemnity from Lessee that otherwise would be payable in respect of such claim (and any future claim by any taxing authority, the contest of which is precluded by reason of such resolution of such claim) and shall pay to Lessee any amount previously paid or advanced by Lessee pursuant to this Section 14.5 by way of indemnification or advance for the payment of an Imposition other than expenses of such contest. Notwithstanding the foregoing provisions of this Section 14.5, a Tax Indemnitee shall not be required to take any action and neither Guarantor nor Lessee shall be permitted to contest any Impositions in its own name or that of the Tax Indemnitee unless (A) Lessee shall have agreed to pay and shall pay to such Tax Indemnitee on demand and on an After Tax Basis all reasonable costs, losses and expenses that such Tax Indemnitee actually incurs in connection with contesting such Impositions, including, without limitation, all reasonable legal, accounting and investigatory fees and disbursements, (B) Tax Indemnitee shall have reasonably determined that the action to be taken will not result in any material danger of sale, forfeiture or loss of any Property, or any part thereof or interest therein, will not interfere with the payment of Rent, and will not result in risk of criminal liability, (C) if such contest shall involve the payment of the Imposition prior to the contest, Lessee shall provide to the Tax Indemnitee an interest-free advance in an amount equal to the Imposition that the Tax Indemnitee is required to pay (with no additional net after-tax cost to such Tax Indemnitee), (D) in the case of a claim that must be pursued in the name of a Tax Indemnitee (or an Affiliate thereof), Lessee shall have provided to such Tax Indemnitee an opinion of independent tax counsel selected by the Lessee and reasonably satisfactory to Tax Indemnitee stating that a reasonable basis exists to contest such claim (or, in the case of an appeal of an adverse determination, an opinion of such counsel to the effect that the position asserted in such appeal will more likely than not prevail) and (E) no Event of Default hereunder shall have occurred and be continuing. Each Tax Indemnitee shall at Lessee's expense supply Lessee with such information and documents reasonably requested by Lessee as are in such Tax Indemnitee's possession and as are necessary or advisable for Lessee to participate in any action, suit or proceeding to the extent permitted by this Section 14.5(b); provided that, such Tax Indemnitee shall not be required to disclose its tax return to Lessee to the extent that the information deemed necessary or desirable by Lessee contained therein is otherwise made available to the Lessee in a form which will not hinder Lessee's contest of such action, suit or proceeding. Notwithstanding anything contained herein to the contrary, a Tax Indemnitee will not be required to contest a claim with respect to the imposition of any Tax if such Tax Indemnitee shall waive its right to indemnification under this Section 14.5 with respect to such claim and any related 56 claim with respect to other taxable years the contest of which is precluded or otherwise materially adversely affected as a result of such waiver. (c) Reimbursement for Tax Savings. If (x) a Tax Indemnitee shall obtain a credit or refund of any Taxes paid by Lessee pursuant to this Section 14.5 or (y) by reason of the incurrence or imposition of any Tax for which a Tax Indemnitee is indemnified hereunder or any payment made to or for the account of such Tax Indemnitee by Lessee pursuant to this Section 14.5 or any payment made by a Tax Indemnitee to Lessee by reason of this Section 14.5(c), such Tax Indemnitee at any time actually realizes a reduction in any Taxes for which Lessee is not required to indemnify such Tax Indemnitee pursuant to this Section 14.5 which reduction in Taxes was not taken into account in computing such payment by Lessee to or for the account of such Tax Indemnitee or by the Tax Indemnitee to Lessee, then such Tax Indemnitee shall promptly pay to Lessee on an After Tax Basis (xx) the amount of such credit or refund, together with the amount of any interest received by such Tax Indemnitee on account of such credit or refund or (yy) an amount equal to such reduction in Taxes, as the case may be; provided that no such payment shall be made so long as an Event of Default shall have occurred and be continuing but shall be paid promptly after cure of such Event of Default. Each Tax Indemnitee agrees to take such actions as Lessee may reasonably request (provided in the good faith judgment of the Tax Indemnitee, such actions would not result in any adverse effect on the Tax Indemnitee for which the Tax Indemnitee is not entitled to indemnification from Lessee) and to otherwise act in good faith to claim such refunds and other available Tax benefits, and take such other actions as may be reasonable to minimize any payment due from Lessee pursuant to this Section 14.5. The disallowance or reduction of any credit, refund or other tax savings with respect to which a Tax Indemnitee has made a payment to Lessee under this Section 14.5(c) shall be treated as a Tax for which Lessee is obligated to indemnify such Tax Indemnitee hereunder without regard to the exclusions set forth in the definition of Impositions. (d) Payments. Any Imposition indemnifiable under this Section 14.5 shall be paid directly when due to the applicable taxing authority if direct payment is practicable and permitted. If direct payment to the applicable taxing authority is not permitted or is otherwise not made, any amount payable to a Tax Indemnitee pursuant to this Section 14.5 shall be paid within thirty (30) days after receipt of a written demand therefor from such Tax Indemnitee accompanied by a written statement describing in reasonable detail the amount so payable, but not before two (2) Business Days prior to the date that the relevant Taxes are due. Any payments made pursuant to Section 14.5 shall be made in immediately available funds at such bank or to such account as specified by the payee in written directions to the payor, or, if no such direction shall have been given, by check of the payor payable to the order of the payee by certified mail, postage prepaid at its address as set forth in this Participation Agreement. Upon the request of any Tax Indemnitee with respect to a Tax that Lessee is required to pay, Lessee shall furnish to such Tax Indemnitee the original or a certified copy of a receipt for Lessee's payment of such Tax or such other evidence of payment as is reasonably acceptable to such Tax Indemnitee. (e) Reports. In the case of any report, return or statement required to be filed with respect to any Taxes that are subject to indemnification under this Section 14.5, Lessee shall promptly notify the Tax Indemnitee of such requirement and, at Lessee's expense (i) if Lessee is 57 permitted (unless otherwise requested by the Tax Indemnitee) by Applicable Law, timely file such report, return or statement in its own name or (ii) if such report, return or statement is required to be in the name of or filed by such Tax Indemnitee or the Tax Indemnitee otherwise requests that such report, return or statement be prepared for filing by such Tax Indemnitee, prepare such report, return or statement in such manner as shall be satisfactory to such Tax Indemnitee and send the same to the Tax Indemnitee for filing no later than fifteen (15) days prior to the due date therefor. In any case in which the Tax Indemnitee will file any such report, return or statement, Lessee shall, upon written request of such Tax Indemnitee, provide such Tax Indemnitee with such information as is reasonably necessary to allow the Tax Indemnitee to file such report, return or statement. (f) Verification. At Lessee's request, the amount of any indemnity payment by Lessee or any payment by a Tax Indemnitee to Lessee pursuant to this Section 14.5 shall be verified and certified by an independent public accounting firm mutually acceptable to Lessee and the Tax Indemnitee. The costs of such verification shall be borne by Lessee unless such verification shall result in an adjustment in Lessee's favor of ten percent (10%) of the payment as computed by the Tax Indemnitee, in which case such fee shall be paid by the Tax Indemnitee. In no event shall Lessee have the right to review the Tax Indemnitee's tax returns or receive any other confidential information from the Tax Indemnitee in connection with such verification. Any information provided to such accountants by any Person shall be and remain the exclusive property of such Person and shall be deemed by the parties to be (and the accountants will confirm in writing that they will treat such information as) the private, proprietary and confidential property of such Person, and no Person other than such Person and the accountants shall be entitled thereto and all such materials shall be returned to such Person. Such accounting firm shall be requested to make its determination within thirty (30) days of Lessee's request for verifications and the computations of the accounting firm shall be final, binding and conclusive upon Lessee and the Tax Indemnitee. The parties agree that the sole responsibility of the independent public accounting firm shall be to verify the amount of a payment pursuant to this Participation Agreement and that matters of interpretation of this Participation Agreement are not within the scope of the independent accounting firm's responsibilities. SECTION 14.6. Completion Guaranty. To the extent that the Advances made pursuant to this Agreement are not sufficient to complete the construction of any Improvements on any Property in accordance with the Plans and Specification therefor, the Guarantor and the Lessee hereby agree, jointly and severally, to pay all costs necessary to complete such Improvements substantially in accordance with such Plans and Specifications, with the Construction Agent to use its commercially reasonable efforts to cause such Improvement to be completed by the Expiration Date. SECTION 15. MISCELLANEOUS SECTION 15.1. Survival of Agreements. The representations, warranties, covenants, indemnities and agreements of the parties provided for in the Operative Documents, and the parties' 58 obligations under any and all thereof, shall survive the execution and delivery of this Participation Agreement, the transfer of any Property to the Lessor, the construction of any Improvements, any disposition of any interest of the Lessor in any Property or any Improvements, the payment of the Notes and any disposition thereof shall be and continue in effect notwithstanding any investigation made by any party and the fact that any party may waive compliance with any of the other terms, provisions or conditions of any of the Operative Documents. Except as expressly provided herein, it is expressly understood and agreed that each of the indemnities provided for herein shall survive the expiration or termination of the Lease and the other Operative Documents and the payment by Lessee and Guarantor of all amounts due thereunder for a period of three (3) years (but shall continue in full force and effect following such date with respect to any Claim asserted prior to such date) and shall be separate and independent from any remedy under the Lease or any other Operative Document; provided that, to the extent that any Claim arises after such three (3) year period which was not asserted during such three (3) period due to a failure to discover such Claim or for any other reason, such indemnity shall be revived upon the assertion of such Claim solely with respect to such Claim. SECTION 15.2. No Broker; etc. Each of the parties hereto represents to the others that it has not retained or employed any broker, finder or financial adviser, other than CS First Boston, to act on its behalf in connection with this Participation Agreement or the transactions contemplated herein, nor has it authorized any broker, finder or financial adviser retained or employed by any other Person so to act. Any party who is in breach of this representation shall indemnify and hold the other parties harmless from and against any liability arising out of such breach of this representation. SECTION 15.3. Notices. Unless otherwise specifically provided herein, all notices, consents, directions, approvals, instructions, requests and other communications required or permitted by the terms hereof to be given to any Person shall be given in writing by United States mail, by nationally recognized courier service, by hand or by facsimile communication and any such notice shall become effective five (5) Business Days after being deposited in the mails, certified or registered with appropriate postage prepaid or one (1) Business Day after delivery to a nationally recognized courier service specifying overnight delivery or, if delivered by hand, when received, or, if sent by facsimile communication, when confirmed by electronic or other means during business hours on a Business Day (or, if confirmed after business hours or on a non-Business Day, on the next Business Day) and shall be directed to the address of such Person as indicated: If to Guarantor, to it at: The Home Depot, Inc. 2455 Paces Ferry Road Atlanta, Georgia 30339 Attn: Treasurer Telephone No.: (770) 384-4522 Telecopy No.: (770) 384-5735 59 with a copy to: L.A. Smith Vice President/Legal Telephone No.: (770) 431-2737 Telecopy No.: (770) 431-2752 If to Lessee, to it at: Home Depot U.S.A., Inc. 2455 Paces Ferry Road Atlanta, Georgia 30339 Attn: Treasurer Telephone No.: (770) 384-4522 Telecopy No.: (770) 384-5735 with a copy to: L.A. Smith Vice President/Legal Telephone No.: (770) 431-2737 Telecopy No.: (770) 431-2752 If to the Lessor, to it at: 12 East 49th Street New York, New York 10017 Attn: Director Telecopy No.: (212) 238-5331 Telephone No.: (212) 238-5323 If to the Agent Bank, to it at: Tower 49 12 East 49th Street New York, New York 10017 Attn: Agency Administration 60 Telecopy No.: (212) 238-2586 Telephone No.: (212) 238-5073 If to a Lender, to it at the address set forth in Schedule 1. If to Facility Lender, to it at: HD Real Estate Funding Corp. c/o JH Management Corporation Room 520 One International Place Boston, Massachusetts 02110 Attn: R. Douglas Donaldson Telecopy No.: (617) 951-7050 Telephone No.: (617) 951-7690 If to Moody's or S&P, to it at the addresses set forth in the Liquidity Agreement. From time to time any party may designate a new address for purposes of notice hereunder by notice to each of the other parties hereto. The Lessee shall receive a copy of each notice delivered pursuant to the Operative Documents and Lessee hereby agrees to notify promptly Moody's and S&P of any termination of the Lease or determination to cease issuing Commercial Paper Notes pursuant to the terms of the Operative Documents. SECTION 15.4. Counterparts. This Participation Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same agreement. SECTION 15.5. Amendments. No Operative Document nor any of the terms thereof may be terminated, amended, supplemented, waived or modified with respect to Guarantor, Lessee, the Lessor, the Facility Lender, the Agent Bank or any Lender, except (a) in the case of a termination, amendment, supplement, waiver or modification to be binding on Guarantor, Lessee, the Lessor, the Facility Lender, or the Agent Bank with the written agreement or consent of such party, and (b) in the case of a termination, amendment, supplement, waiver or modification to be binding on the Lenders, with the written agreement or consent of the Required Lenders; provided, however, that (1) no such termination, amendment, supplement, waiver or modification shall without written agreement or consent of each Participant (other than Facility Lender): (x)(i) modify any of the provisions of this Section 15.5, change the definition of "Required Lenders" or modify any provision of an Operative Document requiring action by 61 the Required Lenders; (ii) amend, modify, waive or supplement any of the provisions of Sections 2.01, 4.06, 10.03 or Article VI of the Liquidity Agreement or the representations of such Participant in Section 9 or the covenants in Section 11 of this Participation Agreement; (iii) reduce, modify, amend or waive any fees or indemnities in favor of any Participant, including without limitation amounts payable pursuant to Section 14 ((except that any Person (other than the Facility Lender) may consent to any reduction, modification, amendment or waiver of any indemnity payable to it)); (iv) modify, postpone, reduce or forgive, in whole or in part, any payment of Rent (other than pursuant to the terms of any Operative Document), any Loan or Lessor Investment Amount, the Lease Balance, Residual Value Guarantee, amounts due pursuant to Section 22.2 of the Lease, interest or Certificate Earnings or, subject to clause (iii) above, any other amount payable under any Lease or this Participation Agreement, or modify the definition or method of calculation of Rent (other than pursuant to the terms of any Operative Document), any Loan or Lessor Investment Amount, Lease Balance, Shortfall Amount, Residual Value Guarantee, Maximum Property Costs, or any other definition which would affect the amounts to be advanced or which are payable under the Operative Documents or any of the other matters set forth above; or (y) consent to any assignment of the Lease or the Guaranty, releasing Lessee from its obligations in respect of the payments of Rent and the Lease Balance or changing the absolute and unconditional character of such obligation or releasing the Guarantor from its obligations in respect of the payments under the Guaranty or changing the absolute and unconditional character of such obligation (with the express understanding that any termination, amendment, supplement, modification or waiver of the Guaranty or any provision thereof is subject to the prior approval and confirmation of Moody's and S&P as set forth therein); and (2) no other termination, amendment, supplement, waiver or modification shall, without the written agreement or consent of the Lessor and the Required Lenders, be made to Sections 5 or 7 of this Participation Agreement or the definition of "Lease Event of Default". Notwithstanding the foregoing, no termination, amendment, supplement, waiver or modification to Sections 5 or 6 of this Participation Agreement, any provision of the Operative Documents described in clause (b)(1)(x)(iv) above (with the express understanding that any amendment, supplement, modification, waiver or termination of any provision of the Operative Documents affecting the sufficiency or timely availability of payments of Rent or other amounts due under the Lease or the Construction Agency Agreement to repay Commercial Paper Notes in full as and when maturing is subject to the confirmation of Moody's and S&P described in this paragraph) or any provision of the Liquidity Agreement, or any provision of the other Operative Documents governing the obligation of the Lenders to fund Residual Loans thereunder shall be effective unless, as a condition precedent thereto, the Guarantor and the Lessee shall have provided written confirmation from each of Moody's and S&P that immediately after giving effect to such modification, waiver or termination, the Commercial Paper Notes shall not be rated lower than such Commercial Paper Notes are rated immediately prior to giving effect thereto and such modification, waiver or termination shall not result in a downgrade, withdrawal or qualification or the rating 62 assigned to the Commercial Paper Notes by Moody's and S&P.l have received notice thereof and shall have agreed that such action shall not result in a downgrade of the rating of the Commercial Paper Notes. SECTION 15.6. Usury. It is the intent of the parties hereto not to violate any federal or state law, rule or regulation pertaining either to usury or to the contracting for or charging or collecting of interest, and each of the parties hereto agree that, should any provision of this Participation Agreement or of any of the Operative Documents, or any act performed hereunder or thereunder, violate any such law, rule or regulation, then the excess of interest contracted for or charged or collected over the maximum lawful rate of interest shall be applied to the outstanding principal indebtedness due to the Participants under the applicable Operative Document. SECTION 15.7. Confidentiality. Each Participant agrees to exercise commercially reasonable efforts to keep any information delivered or made available by the Guarantor or Lessee to it which is clearly indicated or stated to be confidential information (or when the circumstances under which such information is delivered or when the content thereof would cause a reasonable person to believe that such information is confidential), confidential from anyone other than persons employed or retained by such Participant who are or are expected to become engaged in evaluating, approving, structuring or administering any of the Operative Documents (such Persons to likewise be under similar obligations of confidentiality with respect to such information); provided, however that nothing herein shall prevent any Participant from disclosing such information (i) to any other Participant, (ii) upon the order of any court or administrative agency, (iii) upon the request or demand of any regulatory agency or authority having jurisdiction over such Participant, (iv) which has been publicly disclosed, (v) to the extent reasonably required in connection with any litigation to which any Participant or its Affiliates may be a party, (vi) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Operative Document, (vii) to such Participant's legal counsel, independent auditors and to such Participant's Affiliates, and (viii) to any actual or proposed Participant, assignee or other transferee of all or part of its rights hereunder which has agreed in writing to be bound by the provisions of this Section 15.7; provided, that, should disclosure of any such confidential information be required by virtue of clause (ii) or (v) of the immediately preceding provisos, any relevant Participant shall notify Lessee and Guarantor of the same so as to allow the Lessee or Guarantor, at Lessee's or Guarantor's sole cost and expense, to seek a protective order or to take any other appropriate action; provided, further, that, no Participant shall be required to delay compliance with any directive to disclose beyond the last date such delay is legally permissible any such information so as to allow the Lessee or Guarantor to effect any such action. SECTION 15.8. 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 15.9. Parties in Interest. Except as expressly provided herein, none of the provisions of this Participation Agreement are intended for the benefit of any Person except the parties hereto. 63 SECTION 15.10. GOVERNING LAW. THIS PARTICIPATION AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED BY THE LAWS OF THE STATE OF GEORGIA (EXCLUDING ANY OTHER CONFLICT-OF-LAW OR CHOICE-OF-LAW RULES WHICH MIGHT LEAD TO THE APPLICATION OF THE INTERNAL LAWS OF ANY OTHER JURISDICTION) AS TO ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. SECTION 15.11. Severability. Any provision of this Participation Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 15.12. Further Assurances. The parties hereto shall promptly cause to be taken, executed, acknowledged or delivered, at the sole, joint and several expense of Guarantor and the Lessee, all such further acts, conveyances, documents and assurances as the other parties may from time to time reasonably request in order to carry out and effectuate the intent and purposes of this Participation Agreement, the other Operative Documents, and the transactions contemplated hereby and thereby (including, without limitation, the preparation, execution and filing of any and all Uniform Commercial Code financing statements and other filings or registrations which the parties hereto may from time to time request to be filed or effected). Lessee will, at its own expense and without need of any prior request from any other party, to take such action as may be necessary (including any action specified in the preceding sentence), or (if the Lessor or Agent Bank shall so request) as so requested, in order to maintain and protect all security interests provided for hereunder or under any other Operative Document. SECTION 15.13. WAIVER OF JURY TRIAL. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THE OPERATIVE DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 15.14. Limitations on Recourse Against Lessor. Notwithstanding anything contained in this Participation Agreement or any other Operative Documents to the contrary, each of the parties hereto agrees to look solely to Lessor's (or to any partner thereof's) estate and interest in the Properties and the Improvements thereon and rights under the Operative Documents for the collection of any judgment requiring the payment of money by Lessor in the event of liability by Lessor, and no other property or assets of Lessor or any shareholder, owner or partner (direct or indirect) in or of Lessor, or any director, officer, employee, beneficiary, Affiliate of any of the foregoing shall be subject to levy, execution or other enforcement procedure for the satisfaction of the remedies of any party hereto against Lessor under or with respect to the Operative Documents, the relationship of Lessor and any other party hereto hereunder or any other liability of Lessor to any other party hereto under the Operative Documents; provided that, nothing herein shall limit recourse against the Lessor or its partners for the gross negligence or willful misconduct of such Persons or claims proximately caused by Lessor's breach of its obligations pursuant to Sections 9.1, 64 11.2 (solely with respect to the first sentence thereof), 11.3, 11.4, 11.6(a), (g), (h) or 11.7 of this Participation Agreement; provided further, that the foregoing proviso is intended to allow a claim for damages against Lessor but shall not be construed as creating a full recourse obligation on the part of Lessor (or any partner thereof) to repay any of the Loans or any amounts relating to the Loans arising under the Loan Agreement and the Notes. SECTION 15.15. Limitation on Recourse Against Facility Lender. The provisions of Section 3.11 of the Liquidity Agreement are hereby incorporated herein by this reference and made a part hereof and of each of the Operative Documents and each party hereto agrees to be bound by the limitations set forth therein. 65 [PARTICIPATION AGREEMENT] IN WITNESS WHEREOF, the parties hereto have caused this Participation Agreement to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. THE HOME DEPOT, INC., as Guarantor By: /s/ Marshall L. Day -------------------------------- Marshall L. Day Senior Vice President and Chief Financial Officer Attest: /s/ Lawrence A. Smith ---------------------------- Lawrence A. Smith Assistant Secretary [CORPORATE SEAL] 66 HOME DEPOT U.S.A., INC., as Lessee and Construction Agent By: /s/ Marshall L. Day ------------------------------------ Marshall L. Day Senior Vice President and Chief Financial Officer Attest: /s/ Lawrence A. Smith -------------------------------- Lawrence A. Smith Assistant Secretary [CORPORATE SEAL] 67 HD REAL ESTATE FUNDING CORPORATION, as Facility Lender By: /s/ R. Douglas Donaldson ------------------------------------ Name: R. Douglas Donaldson Title: Treasurer CREDIT SUISSE LEASING 92A, L.P., a Delaware limited partnership, as Lessor By: CREDIT SUISSE, its general partner By: /s/ Carl Weatherley-White ----------------------------------- Name: Carl Weatherly-White Title: Associate By: /s/ Conrad A. Meyer ----------------------------------- Name: Conrad A. Meyer Title: Associate CREDIT SUISSE, as Agent Bank By: /s/ Heather Rietenberg ------------------------------------ Name: Heather Rietenberg Title: Member of Senior Management By: /s/ Ira Lubinsky -------------------------------------- Name: Ira Lubinsky Title: Associate 68 CREDIT SUISSE, as Agent Bank By:/s/ Carl Weatherley-White ------------------------------------ Name: Carl Weatherley-White Title: Associate By:/s/ Conrad A. Meyer ------------------------------------ Name: Conrad A. Meyer Title: Associate CREDIT SUISSE, as Lender By:/s/ Carl Weatherley-White ------------------------------------ Name: Carl Weatherley-White Title: Associate By:/s/ Conrad A. Meyer ------------------------------------ Name: Conrad A. Meyer Title: Associate DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCH, as Documentation Agent By:/s/ David H. Kahn ------------------------------------ Name: David H. Kahn Title: Assistant Vice President By: Hans-Josef Thiele ------------------------------------ Name: Hans-Josef Thiele Title: Vice President 69 NATIONSBANK, N.A. (SOUTH) as Lender By: /s/ Shawn B. Welsh ------------------------------------ Name: Shawn B. Welsh Title: Vice President SUNTRUST BANK, ATLANTA, as Lender By: /s/ J. Christopher Debley ------------------------------------ Name: J. Christopher Debley Title: Vice President-Team Leader By:/s/ Dennis H. James, Jr. ---------------------------------- Name: Dennis H. James, Jr. Title: Assistant Vice President TORONTO DOMINION (TEXAS), INC., as Lender By:/s/ David G. Parker ------------------------------------ Name: David G. Parker Title: Vice President UNION BANK OF SWITZERLAND, as Lender By:/s/ Robert W. Casey, Jr. ------------------------------------ Name: Robert W. Casey, Jr. Title: Managing Director By: /s/ Hamilton W. Bullard ------------------------------------ Name: Hamilton W. Bullard Title: Assistant Treasurer 70 BANK OF AMERICA NT&SA, as Lender By: /s/ Michelle W. Kacergis ------------------------------------ Name: Michelle W. Kacergis Title: Vice President THE BANK OF NEW YORK, as Lender By:/s/ Paula M. Diponzio ------------------------------------ Name: Paula M. Diponzio Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO, as Lender By:/s/ Paul E. Rigby ------------------------------------ Name: Paul E. Rigby Title: Managing Director FIRST UNION NATIONAL BANK OF GEORGIA, as Lender By:/s/ Mayla M. Thom ------------------------------------ Name: Mayla M .Thom Title: Vice President MORGAN GUARANTY TRUST CO. OF NEW YORK as Lender By: ------------------------------------ Name: Title: 71 WACHOVIA BANK OF GEORGIA as Lender By: /s/ John T. Seeds ------------------------------------ Name: John T. Seeds Title: Senior Vice President EX-10.12 5 AMENDMENT AND SUPPLEMENT TO AGREEMENT DATED 5/8/97 1 FIRST AMENDMENT AND SUPPLEMENT TO THE PARTICIPATION AGREEMENT FIRST AMENDMENT AND SUPPLEMENT TO THE PARTICIPATION AGREEMENT, dated as of May 8, 1997 (this "Agreement"), among The Home Depot, Inc., as Guarantor (the "Guarantor"), Home Depot U.S.A., Inc., as Lessee and Construction Agent (the "Lessee"), HD Real Estate Funding Corp., as Facility Lender (the "Facility Lender"), the lenders named on Schedule I hereto, as Lenders (the "Lenders"), Credit Suisse First Boston, formerly known as Credit Suisse, as Agent Bank and Lender (the "Agent Bank"), and Credit Suisse Leasing 92A L.P., as Lessor (the "Lessor"). W I T N E S S E T H: WHEREAS, the Guarantor, the Lessee, the Facility Lender, the lenders named therein, the Agent Bank and the Lessor are parties to the Participation Agreement dated as of June 25, 1996 (the "Original Participation Agreement" and as amended hereby, the "Participation Agreement"), among the Guarantor, the Lessee, the Facility Lender, the Agent Bank, the Lessor and the lenders named therein (the "Existing Lenders"); WHEREAS, the Guarantor, the Lessee, the Facility Lender, the Existing Lenders, the Agent Bank and the Lessor have agreed, subject to the terms and conditions contained herein, to amend and supplement the Original Participation Agreement and the lenders named on Schedule A hereto (the "New Lenders') have agreed to become parties thereto and to be bound by the terms thereof: NOW, THEREFORE, in consideration of the premises and the covenants and agreements contained herein, the parties hereto hereby agree as follows: SECTION 1. Definitions and Rules. (a) Capitalized terms used but not otherwise defined in this Amendment have the respective meanings specified in Appendix 1 of the Original Participation Agreement and the rules of interpretation set forth in such Appendix 1 shall apply hereto. (b) Appendix 1 to the Original Participation Agreement is hereby amended by amending and restating the following definitions in their entirety. "Administrative Agent" shall mean Credit Suisse First Boston, as "Administrative Agent" pursuant to the Administration Agreement, and any successor thereto. "Agent Bank" means Credit Suisse First Boston, as "Agent Bank" for the Lenders pursuant to the Liquidity Agreement, or any successor or additional Agent Bank appointed in accordance with the terms of the Liquidity Agreement. 2 "Basic Term Expiration Date" shall mean May 8, 2002. "Commercial Paper Notes" shall mean the Commercial Paper Notes issued by the Facility Lender pursuant to the Commercial Paper Documents in an aggregate face amount not to exceed $582,000,000. "Lessor's Commitment" means the commitment of Lessor to invest Lessor Investment Amounts in the Properties in an aggregate amount not to exceed $18,000,000. "Loan Termination Date" shall mean May 8, 2002, as such date may be extended from time to time pursuant to Section 2.5 of the loan Agreement. "Maximum Property Costs" means the lesser of (x) $600,000,000 and (y) the amount of the Total Commitments then in effect. "Placement Agent" means Credit Suisse First Boston. "Scheduled Commitment Termination Date" shall mean May 8, 2002. "Scheduled Payment Date" means (a) as to any Lessor Basic Rent relating to Lessor Investment Amounts having an Investment Period of three months or less, the last day of such Investment Period, and as to any Lessor Investment Amount having an Investment Period longer than three (3) months, each day which is three (3) months, or a whole multiple thereof, after the first (1st) day of such Investment Period and the last day of such Investment Period, and (b) as to any Lender Basic Rent (x) the date of the maturity of any Commercial Paper Notes, and (y) the date on which any interest is due on any Facility Loans pursuant to the terms of the Liquidity Agreement. (c) Appendix 1 to the Original Participation Agreement is hereby amended by adding the following definition. "Basic Term" shall have the same meaning as "Term." "Investment Period" has the meaning set forth in Appendix 3 to the Participation Agreement. SECTION 2. (a) Amendment to Appendix 3. Appendix 3 to the Original Participation Agreement is amended by deleting such Appendix in its entirety and substituting in lieu thereof Appendix 3 attached hereto. (b) Amendment to Exhibit N-1. Exhibit No-1 to the Original Participation Agreement is amended by deleting such Exhibit in its entirety and substituting in lieu thereof Exhibit N-1 attached hereto. (c) Amendment to Exhibit N-2. Exhibit N-2 to the Original Participation 3 Agreement is amended by deleting such Exhibit in its entirety and substituting in lieu thereof Exhibit N-2 attached hereto. (d) Amendment to Exhibit N-3. Exhibit N-3 to the Original Participation Agreement is amended by deleting such Exhibit in its entirety and substituting in lieu thereof Exhibit N-3 attached hereto. SECTION 3. Additional Lenders. The New Lenders shall become parties to the Participation Agreement as of the date hereof and shall be deemed "Lenders" for all purposes of the Participation Agreement and the other Operative Documents and shall be subject to and shall benefit from all of the rights and obligations of a Lender under the Participation Agreement and the other Operative Documents. Each New Lender hereby agrees that it will perform its obligations as a Lender under the Participation Agreement as required by the terms thereof and hereby represents and warrants that the representations and warranties of the Lenders contained in Section 9.6 of the Participation Agreement are true and correct on and as of the date hereof. SECTION 4. Amendment to Schedule I. Schedule I to the Original Participation Agreement is amended by deleting such Schedule in its entirety and substituting in lieu thereof Schedule I attached hereto. SECTION 5. Amendment to Section 9.1 (a) Amendment to Section 9.1(h). Section 9.1(h) of the Original Participation Agreement shall be amended by deleting the address information for the Lessor and replacing it with: 11 Madison Avenue, New York, NY 10010. (b) Amendment to Section 9.1(k). Section 9.1(k) of the Original Participation Agreement is hereby amended by deleting such Section 9.1(k) in its entirety and substituting in lieu thereof the following: (k) General Partner. Credit Suisse First Boston is the sole general partner of the Lessor. SECTION 6. Amendment to Section 15.3. Section 15.3 of the Original Participation Agreement shall be amended by deleting the address information for the Lessor and the Agent Bank and replacing it with: 11 Madison Avenue, 19th Floor, New York, New York 10010-3629. SECTION 7. Amendment of Documents. Each of the parties hereto hereby consents to the amendments executed as of the date hereof to the Lease, in the form of Exhibit Y hereto and to the Loan Agreement, in the form of Exhibit Z hereto and each other amendment referenced in Appendix 2 hereof. 4 SECTION 8. Section 15.5. Each of the parties hereto hereby agree that the Original Participation Agreement has been amended and supplemented in accordance with Section 15.5 of the Original Participation Agreement and except as expressly amended hereby, that all of the terms and provisions of the Original Participation Agreement are in full force and effect. SECTION 9. References in Operative Documents. Each of the parties hereto hereby agrees that each reference in the Operative Documents to the Participation Agreement, the Lease, the Liquidity Agreement, the Notes and the Liquidity Notes means such documents as amended in connection herewith. SECTION 10. Effectiveness. This Amendment shall become effective on the date which all the conditions precedent set forth in Appendix A attached hereto and made a part hereof by this reference shall have been satisfied or waived by the parties hereto as set forth therein. SECTION 11. Counterparts. This Amendment may be executed in any number of counterparts by the parties hereto, each of which counterparts when so executed shall be an original, but all counterparts shall together constitute one and the same instrument. SECTION 12. Governing Law. THIS AMENDMENT SHALL IN ALL RESPECTS BE GOVERNED BY THE LAWS OF THE STATE OF GEORGIA (EXCLUDING ANY OTHER CONFLICT-OF-LAW OR CHOICE-OF-LAW RULES WHICH MIGHT LEAD TO THE APPLICATION OF THE INTERNAL LAWS OF ANY OTHER JURISDICTION) AS TO ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. SECTION 13. Successors and Assigns. All the terms and provisions of this Amendment shall inure to the benefit of, and be binding upon, the parties hereto and their respective successors and permitted assigns. 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. THE HOME DEPOT, INC., as Guarantor By: /s/Marshall L. Day --------------------------------------- Name: Marshall L. Day Title: Senior Vice President/Chief Financial Officer Attest: /s/ Carol B. Tome ----------------------------------- Name: Carol B. Tome Title: Vice President/Treasurer [Corporate Seal] HOME DEPOT U.S.A., INC., as Lessee and Construction Agent By: /s/ Carol B. Tome --------------------------------------- Name: Carol B. Tome Title: Vice President/Treasurer Attest: /s/Sheryl M. Mouso ----------------------------------- Name: Sheryl M. Mouso Title: Assistant Secretary [Corporate Seal] HD REAL ESTATE FUNDING CORPORATION as Facility Lender By: /s/ Tiffany Percival --------------------------------------- Name: Tiffany Percival Title: Vice President 6 CREDIT SUISSE LEASING 92A, L.P., as Lessor By: CREDIT SUISSE FIRST BOSTON, its general partner By: /s/ Carl Weatherley-White ---------------------------------- Name: Carl Weatherley-White Title: Associate By: /s/ ---------------------------------- Name: Title: CREDIT SUISSE FIRST BOSTON, formerly known as credit Suisse, as Agent Bank By: /s/ Heather Riekenberg ---------------------------------- Name: Heather Riekenberg Title: Vice President By: /s/ Ira Lubinsky ---------------------------------- Name: Ira Lubinsky Title: Associate CREDIT SUISSE FIRST BOSTON, formerly known as Credit Suisse, as Lender By: /s/ Carl Weatherley-White ---------------------------------- Name: Carl Weatherley-White Title: Associate By: /s/ ---------------------------------- Name: Title: 7 DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCH as Documentation Agent By: /s/ Joel Makowsky ----------------------------------- Name: Joel Makowsky Title: Assistant Vice President By: /s/ Elizabeth Hope Tallmadge ----------------------------------- Name: Elizabeth Hope Tallmadge Title: Director NATIONSBANK, N.A. (SOUTH) as Lender By: /s/ Shawn B. Welch ----------------------------------- Name: Shawn B. Welch Title: Vice President By: ----------------------------------- Name: Title: SUNTRUST BANK, ATLANTA, as Lender By: /s/ Christopher Deisley ----------------------------------- Name: Christopher Deisley Title: First Vice President By: /s/ Jeffrey L. Seavey ----------------------------------- Name: Jeffrey L. Seavey Title: Vice President 8 TORONTO DOMINION (TEXAS), INC., as Lender By: /s/ Darlene Riedel ----------------------------------- Name: Darlene Riedel Title: Vice President UNION BANK OF SWITZERLAND, as Lender By: /s/ Daniel R. Strickford ----------------------------------- Name: Daniel R. Strickford Title: Assistant Vice President By: /s/ Samuel Azizo ----------------------------------- Name: Samuel Azizo Title: Vice President BANK OF AMERICA NT&SA, as Lender By: /s/ Robert A. Kilgannon ----------------------------------- Name: Robert A. Kilgannon Title: Senior Vice President THE BANK OF NEW YORK, as Lender By: /s/ Michael Flannery ----------------------------------- Name: Michael Flannery Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO, as Lender By: /s/ Dianne M. Stark ----------------------------------- Name: Dianne M. Stark Title: Vice President 9 FIRST UNION NATIONAL BANK OF GEORGIA as Lender By: /s/ Shelley N. Rogers ----------------------------------- Name: Shelley N. Rogers Title: Assistant Secretary MORGAN GUARANTY TRUST CO. OF NEW YORK, as Lender By: /s/ John M. Mikolay ----------------------------------- Name: John M .Mikolay Title: Vice President WACHOVIA BANK OF GEORGIA, as Lender By: /s/ John T. Seeds ----------------------------------- Name: John T .Seeds Title: Senior Vice President CANADIAN IMPERIAL BANK OF COMMERCE, as Lender By: /s/ Richard W. Crannell, Jr. ----------------------------------- Name: Richard W. Crannell, Jr. Title: As Agent THE CHASE MANHATTAN BANK, as Lender By: /s/ Ellen Geitnor ----------------------------------- Name: Ellen Geitnor Title: Vice President 10 THE BANK OF NOVA SCOTIA, as Lender By: /s/ William E. Zarrett ----------------------------------- Name: William E. Zarrett Title: Senior Relationship Manager ABN AMRO BANK N.V., as Lender By: /s/ Steven L. Hipsman ----------------------------------- Name: Steven L. Hipsman Title: Vice President By: /s/ Larry Kelley ----------------------------------- Name: Larry Kelley Title: Group Vice President NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Lender By: /s/ Ann C. Pifer ----------------------------------- Name: Ann C. Pifer Title: Vice President CRESTAR BANK, as Lender By: /s/ Keith A. Hubbard ----------------------------------- Name: Keith A. Hubbard Title: Senior Vice President 11 BANK BOSTON, N.A., as Lender By: /s/ Peter L. Griswold ----------------------------------- Name: Peter L. Griswold Title: Director EX-10.13 6 MASTER MODIFICATION AGREEMENT DATED 4/20/1998 1 EXECUTION COPY MASTER MODIFICATION AGREEMENT THIS MASTER MODIFICATION AGREEMENT (this "Agreement") dated as of April 20, 1998, by and among THE HOME DEPOT, INC., a Delaware corporation, as Guarantor (the "Guarantor"); HOME DEPOT U.S.A., INC. a Delaware corporation, as Lessee and Construction Agent ("Lessee" or "Construction Agent"), HD REAL ESTATE FUNDING CORP., a Delaware corporation, as Facility Lender ("Facility Lender"), CREDIT SUISSE LEASING 92A, L.P., a Delaware limited partnership, as lessor ("Lessor"), the financial institutions listed on the signature pages hereto (each, a "Lender" and collectively, the "Lenders") and CREDIT SUISSE FIRST BOSTON, a Swiss bank operating through its New York branch, as Agent Bank for the Lenders (in such capacity, the "Agent Bank"); W I T N E S S E T H: WHEREAS, each of the parties described above have entered into that certain Participation Agreement, dated as of June 25, 1996, as amended by that certain First Amendment and Supplement to the Participation Agreement, dated as of May 8, 1997 (as amended, the "Participation Agreement") wherein the Lessor has agreed to acquire and construct certain facilities to be leased to the Lessee, financed by certain debt provided by the Lenders, together with certain equity contributions of the Lessor; WHEREAS, the Lessee has requested, and each of the parties, subject to the terms and conditions hereof, has agreed, to modify the terms of the Participation Agreement and the other Operative Documents (as such term is defined in the Participation Agreement) to allow the Lessee to lease to the Lessor, pursuant to a long-term ground lease in substantial the form attached as Exhibit A hereto (the "Ground Lease"), certain real property located in Atlanta, Georgia, as more fully described on Exhibit A to the Ground Lease (the "Land"), which Lessee desires to lease back from the Lessor in order to construct an office building thereon for use by the Lessee; WHEREAS, the parties hereto wish to enter into this Agreement to evidence their consent to the Lessee's request and to set forth certain modifications to the Operative Documents, all as more particularly set forth below; NOW, THEREFORE, for and in consideration of the mutual premises contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: SECTION I. Definitions; Interpretation. 2 Unless the context shall otherwise require, capitalized terms used and not defined herein shall have the meanings assigned thereto in Appendix 1 to the Participation Agreement and the rules of interpretation set forth in Appendix 1 thereto shall apply to this Agreement. SECTION II. Consent. Notwithstanding any provision of the Operative Documents to the contrary, each of the parties hereto hereby agrees (i) that the Lessee may enter into a Ground Lease with the Lessor with respect to Land which shall constitute a Property pursuant to the terms of the Operative Documents, (ii) that Lessee may, subject to the terms of the Operative Documents, including without limitation, Section 3.10 of the Participation Agreement, build a Support Facility thereon and (iii) any provision of the Operative Documents not expressly amended or modified by the terms of this Agreement shall be deemed modified to the extent necessary to reflect that the Lessor is leasing the Land under the Ground Lease and is not acquiring fee title to the Land. SECTION III. Amendments. A. Participation Agreement. 1. Amendments to Section 3.1 of the Participation Agreement. Section 3.1 of the Participation Agreement is hereby amended by deleting subsection (a) thereof in its entirety and by substituting the following in lieu thereof: "(a) purchase Land (through Advances funded by the Lessor and the Facility Lender as provided herein) or enter into the Ground Lease with Lessee with respect to Land;" 2. Amendment to Section 3.5 of the Participation Agreement. Section 3.5 of the Participation Agreement is hereby amended by deleting the preamble and subsections (c) and (e) thereof and substituting the following in lieu thereof: "SECTION 3.5. Procedures for Acquisitions of Land. With respect to each acquisition of Land or the entering into of the Ground Lease, . . . "(c) Upon satisfaction of the foregoing conditions and receipt of the form of Deed or the Ground Lease, as applicable, Lessor shall execute and deliver a limited power of attorney to Lessee (or a representative thereof) in recordable form and satisfactory to Lessor and Agent Bank sufficient to allow Lessee, upon satisfaction of the remaining conditions precedent set forth in Sections 7.1 and 7.2, to execute and record such documents necessary or advisable in connection with the acquisition or lease, as applicable, of such Land on the Property Closing Date;" 2 3 and "(e) Lessee shall give the Lessor, the Facility Lender, and the Agent Bank an irrevocable prior written notice not later than 1:00 p.m., New York time, on the Business Day of the proposed Property Closing Date, pursuant, in each case, to an Acquisition Request in the form of Exhibit A attached hereto and made a part hereof by this reference (an "Acquisition Request"), specifying with respect to such Land: (i) the Property Closing Date, (ii) the Land to be acquired or leased, (iii) the identity of the seller or lessor and the Property Acquisition Cost (except in the case of the Land subject to the Ground Lease), and (iv) the Estimated Completion Date for such Property." 3. Amendment to Section 3.10 of the Participation Agreement. Section 3.10 of the Participation Agreement is hereby amended by deleting such Section in its entirety and substituting the following in lieu thereof: "SECTION 3.10. Use of Proceeds. The proceeds of all Advances made pursuant to the Operative Documents shall be used solely for the acquisition of Land located in the United States or Canada (or the ground lease thereof) and the construction of Improvements thereon pursuant to the Construction Agency Agreement which shall be leased (upon completion, in the case of Improvements constructed thereon by the Construction Agent) by the Lessor to the Lessee pursuant to the Lease, which Improvements shall be constructed as a Facility on such Land; provided that the total amount of Advances expended for the acquisition (or ground lease) and construction of Properties to be used as Support Facilities shall not exceed twenty percent (20%) of the Total Commitments." 4. Amendment to Section 7.1 of the Participation Agreement. Section 7.1 of the Participation Agreement is hereby amended by deleting the preamble thereof and subsections (d) and (m) thereof and substituting the following in lieu thereof: "SECTION 7.1. Conditions Precedent -- Documentation. The obligation of the Lessor to acquire a Property or to enter into the Ground Lease with respect to a Property on a Property Closing Date, to make the initial Advance in respect of such Property on the initial Funding Date with respect to such Property, and to make any related Lessor Investment Amount available on such Funding Date, the right and obligation of the Facility Lender to make any Loans to Lessor on such Funding Date to fund such Advances and the obligation of the Lenders to make Direct Funding Loans under the Liquidity Agreement, are subject to satisfaction of the following conditions precedent and to the conditions precedent set forth in Section 7.2:" 3 4 and "(d) on or prior to the Property Closing Date for the related Property, the Lessor shall have received (x) a deed (a "Deed") (in form and substance appropriate for recording with the applicable Governmental Authorities), with respect to such Property (and all Improvements located thereon) being purchased, on such Property Closing Date, conveying fee simple title to such Property to the Lessor, subject only to Permitted Exceptions or (y) in the case of the Property subject to the Ground Lease, a copy of the Ground Lease and a Memorandum thereof (in each case, in form and substance satisfactory to the Lessor and the Agent and, in the case of the Memorandum, in form and substance satisfactory for recording), conveying leasehold title to the such Property to the Lessor, in either case, subject only to Permitted Exceptions;" and "(m) on or prior to the Property Closing Date for the related Property, the Agent Bank shall have received evidence satisfactory to it that each of the Deed (or in the case of the Property subject to the Ground Lease, the Memorandum thereof), the Memorandum of Lease, the Supplement to the Assignment of Leases, the Consent to the Assignment, the Mortgage, the Supplement to Master Assignment and the consent to Master Assignment delivered on any Property Closing Date shall have been or are being recorded with the appropriate Governmental Authorities in the order in which such documents are listed in this clause, and the UCC Financing Statements with respect to the Property being acquired or leased shall have been or are being filed with the appropriate Governmental Authorities, and that all of the recording fees, filing fees, transfer taxes and recording taxes with respect to the foregoing have been paid; and" 5. Amendment to Section 9.3 of the Participation Agreement. Section 9.3 of the Participation Agreement is hereby amended by deleting subsections (b) and (c) thereof in their entirety and substituting the following in lieu thereof: "(b) Property. The Property then being acquired or, in the case of the Property subject to the Ground Lease, leased, consists of (i) Land on which Facilities will be constructed pursuant to the Construction Agency Agreement, and (ii) existing Improvements on such Land. Such Property is located in the continental United States or Canada. (c) Title. Upon (x) the acquisition by purchase of such Property on such Property Closing Date, the Lessor will have good and marketable title to such Property in fee simple and (y) in the case of the Property subject to the Ground Lease, upon leasing the Property pursuant to the Ground Lease, the Lessor shall 4 5 have good and marketable leasehold title to such Property, in either case, subject only to Permitted Exceptions. The Lessor will at all times have good and marketable title to all Improvements located on such Property, subject only to Permitted Liens." B. Appendix I to Operative Documents. Appendix I to the Operative Documents is hereby amended as follows: (1) By adding the following definition of Ground Lease in correct alphabetical order: "Ground Lease" shall mean that certain Ground Lease, dated as of April __, 1998, by and among Lessee, as ground lessor, and Lessor, as ground lessee with respect to the Property described therein." (2) By deleting the definitions of "Operative Documents", "Property" and "Property Closing Date" in their entirety and substituting the following in lieu thereof: "Operative Documents" means the following: (a) the Issuing and Paying Agency Agreement; (b) the Participation Agreement; (c) the Loan Agreement; (d) the Notes; (e) the Lease and each Lease Supplement; (f) the Assignment of Leases and each Supplement to the Assignment of Lease; (g) each Consent to Assignment; (h) the Guaranty; (i) the Mortgages; (j) the Financing Statements; (k) the Construction Agency Agreement and each Construction Agency Agreement Supplement; (l) the Construction Agency Agreement Assignment; (m) the Consent to Construction Agency Agreement Assignment; (n) the Funding Requests; (o) the Acquisition Requests; (p) the Liquidity Agreement; (q) the Liquidity Notes; (r) the Commercial Paper Notes; (s) the Master Assignment and each Supplement to Master Assignment; (t) each Consent to Master Assignment;
5 6 (u) the Construction Documents; (v) the Security Agreement; (w) each other Commercial Paper Document; (x) the Ground Lease; and (y) the Fee Letter.
"Property" means (i) as of the relevant Property Closing Date, a parcel of Land (including all Appurtenant Rights attached thereto) acquired, or the rights in a parcel of land leased, by the Lessor pursuant to the provisions of the Participation Agreement and all of the Improvements then located on or under the related Land, and (ii) as of the Completion Date, the Land and Improvements described in clause (i) together with any Improvements constructed thereon in accordance with the Construction Agency Agreement, or thereafter constructed thereon. "Property Closing Date" means each date on which the Lessor purchases any Property or enters into the Ground Lease with respect to any Property. C. Lease. The Lease is hereby amended as follows: 1. Amendments to Section 2.2 of the Lease. Section 2.2 of the Lease is hereby amended by deleting such Section in its entirety and substituting the following in lieu thereof: "2.2. Acceptance Procedure. Lessor hereby authorizes one or more employees of Lessee, to be designated by Lessor as the authorized representative or representatives of Lessor (such designation to be evidenced by delivery of a power of attorney pursuant to Section 3.5 of the Participation Agreement) to accept delivery of the Deed to each Property to be subject to the hereto on the Property Closing Date for such Property (other than the Property subject to the Ground Lease) and to execute such other agreements, easements and other documents in connection therewith. Lessor and Lessee hereby agree that such acceptance of delivery of such Deed (other than the Property subject to the Ground Lease), and the execution and delivery by Lessee on each Property Closing Date for a Property to be subject hereto of a Lease Supplement in the form of Exhibit A attached hereto and made a part hereof by this reference (appropriately completed) shall, without further act, constitute the irrevocable acceptance by Lessee of that Property which is the subject thereof for all purposes of this Lease and the other Operative Documents on the terms set forth therein and herein, and that such Property, together with any Improvements then existing 6 7 thereon shall be deemed to be included in the leasehold estate of this Lease as of such Property Closing Date and any Improvements constructed thereon pursuant to the Construction Agency Agreement and this Lease shall be deemed to be included in the leasehold estate of this Lease as of the Completion Date at which time Lessee shall execute and deliver to Lessor a Lease Supplement with respect to such Improvements (appropriately completed)." 2. Amendments to Section 3.1 of the Lease. Section 3.1 of the Lease is hereby amended by adding the following subsection after subsection (c): "(d) During the Term, Lessee shall pay to Lessor, as rent for the sublease by Lessor to Lessee of its leasehold interest in the Land under the Ground Lease, an amount equal to the amount payable by Lessor to Lessee as ground rent under Section 3 of the Ground Lease. The amount payable by the Lessee under this Section 3.1(d) shall be due on each date on which ground rent is due from Lessor under Section 3 of the Ground Lease, and shall automatically be offset against the amount due under such Section 3 of the Ground Lease on each date on which such amount is due." SECTION IV. Forms of Documents. Notwithstanding any provision of the Operative Documents to the contrary, the parties hereto hereby agree that, with respect to the Property subject to the Ground Lease, the forms of the following Operative Documents attached hereto as the respective exhibits referenced below shall be executed and delivered by the Lessee and the Participants in satisfaction of the conditions of the Operative Documents: Supplement to Master Assignment - Exhibit B Supplement to Construction Agency Agreement - Exhibit C Supplement to Assignment of Leases - Exhibit D Special Power of Attorney - Exhibit E Lease Supplement - Exhibit F Lessee's Consent - Exhibit G Mortgage - Exhibit H Consent to Master Assignment - Exhibit I Memorandum of Lease - Exhibit J Ground Lease - Exhibit K Memorandum of Ground Lease - Exhibit L Acquisition Request - Exhibit M Property Closing Certificate - Exhibit N SECTION V. Conditions of Effectiveness. This Agreement shall become effective as of the date first above written (the "Effective Date") when this Agreement shall have been executed and delivered by each of the Guarantor, the Lessee, the Facility Lender, the Lessor, the Agent Bank and the Requited Lenders. 7 8 SECTION VI. No Waiver, Etc. Lessee and Guarantor each hereby agrees that nothing herein shall constitute a waiver by the Participants of any Lease Default or Lease Event of Default, whether known or unknown, which may exist under the Lease. Lessee and Guarantor each hereby further agrees that no action, inaction or agreement by the Participants, including without limitation, any indulgence, waiver, consent or agreement altering the provisions of the Operative Documents which may have occurred with respect to the non-payment of any obligation under the terms of the Operative Documents or any portion thereof, or any other matter relating to the Operative Documents, shall require or imply any future indulgence, waiver, or agreement by the Participants. SECTION VII. Ratification of Operative Documents. Except as expressly amended herein, all terms, covenants and conditions of the Participation Agreement and the other Operative Documents shall remain in full force and effect, and the parties hereto do expressly ratify and confirm the Operative Documents as amended herein. All future references to the Operative Documents shall be deemed to refer to the Operative Documents as amended hereby. SECTION VIII. Binding Nature. This Agreement shall be binding upon and inure to the benefit of the parties hereto, their respective heirs, successors, successors-in-title, and assigns. SECTION IX. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Georgia. SECTION X. Entire Understanding. This Agreement sets forth the entire understanding of the parties with respect to the matters set forth herein, and shall supersede any prior negotiations or agreements, whether written or oral, with respect thereto. SECTION XI. Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts and may be delivered by telecopier. Each counterpart so executed and delivered shall be deemed an original and all of which taken together shall constitute but one and the same instrument. [Signatures Set Forth on Next Page] 8 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement through their authorized officers as of the date first above written. HOME DEPOT U.S.A., INC. By: /s/ Carol B. Tome ---------------------------------------- Title: Vice President & Treasurer Attest: /s/ Larry Menter ------------------------------------ Assistant Secretary THE HOME DEPOT, INC. By: /s/ Marshall Day ---------------------------------------- Title: Sr. Vice President & Chief Financial Officer Attest: /s/ Carol B. Tome ------------------------------------ Vice President & Treasurer HD REAL ESTATE FUNDING CORP. By: /s/ Dolores A. Briton ---------------------------------------- Title: Vice President Attest: /s/ Jacey L. Wilson ------------------------------------ Title: Secretary 9 10 CREDIT SUISSE LEASING 92A, L.P., A DELAWARE LIMITED PARTNERSHIP BY: CREDIT SUISSE FIRST BOSTON, ITS GENERAL PARTNER By: /s/ Carl Wheatherley-White --------------------------------------- Title: Associate By: /s/ Richard O'Day --------------------------------------- Title: Associate CREDIT SUISSE FIRST BOSTON, AS AGENT BANK By: /s/ Robert M. Finney --------------------------------------- Title: Managing Director By: /s/ Julie P. Kingsbury --------------------------------------- Title: Assistant Vice President 10 11 CREDIT SUISSE FIRST BOSTON, as Lender By /s/ Robert M. Finney ------------------------------------ Name: Robert M. Finney Title: Managing Director By: /s/ Julia F. Kingsbury ----------------------------------- Name: Julia F. Kingsbury Title: Assistant Vice President DEUTCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCH, as Document Agent By: ----------------------------------- Name: Title: By: ----------------------------------- Name: Title: NATIONSBANK, N.A. (SOUTH), as Lender By: /s/ Kathryn W. Robinson ----------------------------------- Name: Kathryn W. Robinson Title: Senior Vice President By: ----------------------------------- Name: Title: SUNTRUST BANK, ATLANTA, as Lender By: /s/ Christopher Deisley ----------------------------------- Name: Christopher Deisley Title: First Vice President 12 By: /s/ Jeffrey L. Seavey ----------------------------------- Name: Jeffrey L. Seavey Title: Vice President TORONTO DOMINION (TEXAS), INC., as Lender By: /s/ Debbie A. Greene ----------------------------------- Name: Debbie A. Greene Title: Vice President By: /s/ Jimmy Simien ----------------------------------- Name: Jimmy Simien Title: Vice President UNION BANK OF SWITZERLAND, as Lender By: ----------------------------------- Name: Title: By: ----------------------------------- Name: Title: BANK OF AMERICA NT&SA, as Lender By: /s/ Michelle Kacergis ----------------------------------- Name: Michelle Kacergis Title: Managing Director By: ----------------------------------- Name: Title: 13 THE BANK OF NEW YORK, as Lender By: /s/ Paula Regan ----------------------------------- Name: Paula Regan Title: Vice President By: ----------------------------------- Name: Title: THE FIRST NATIONAL BANK OF CHICAGO, as Lender By: /s/ Dianne M. Stark ----------------------------------- Name: Dianne M. Stark Title: Vice President By: ----------------------------------- Name: Title: FIRST UNION NATIONAL BANK OF GEORGIA, as Lender By: /s/ Daniel L. Evans ----------------------------------- Name: Daniel L. Evans Title: Senior Vice President By: /s/ Jim Ulmer ----------------------------------- Name: Jim Ulmer Title: Vice President MORGAN GUARANTY TRUST CO. OF NEW YORK, as Lender By:/s/ John M. Mikolay ----------------------------------- Name: John M. Mikolay Title: Vice President 14 By: ----------------------------------- Name: Title WACHOVIA BANK OF GEORGIA, as Lender By: ----------------------------------- Name: Title: By: ----------------------------------- Name: Title: CANADIAN IMPERIAL BANK OF COMMERCE, as Lender By: /s/ Roger Colden ----------------------------------- Name: Roger Colden Title: Executive Director CIBC Oppenheimer Corp. As AGENT By: ----------------------------------- Name: Title: THE CHASE MANHATTAN BANK, as Lender By: ----------------------------------- Name: Title: By: ----------------------------------- Name: Title: 15 THE BANK OF NOVA SCOTIA, as Lender By: /s/ William E. Zegreti ----------------------------------- Name: William E. Zegreti Title: Senior Relationship Manager By: ----------------------------------- Name: Title: ABN AMRO BANK N.V., as Lender By: /s/ Larry K. Kelley ----------------------------------- Name: Larry K. Kelley Title: Group Vice President By: /s/ Steven B. Farley ----------------------------------- Name: Steven B. Farley Title: Vice President NORTHWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Lender By: /s/ Ann C. Pifer ----------------------------------- Name: Ann C Pifer Title: Vice President By: ----------------------------------- Name: Title: CRESTAR BANK, as Lender By:/s/ Keith A. Hubbard ----------------------------------- Name: Keith A. Hubbard Title: Senior Vice President 16 By: ----------------------------------- Name: Title: BANKBOSTON, N.A., as Lender By: /s/ Peter L. Griswold ----------------------------------- Name: Peter L. Griswold Title: Director By: ----------------------------------- Name: Title EX-10.14 7 SUPPLEMENTAL EXECUTIVE CHOICE PROGRAM 1 SUPPLEMENTAL EXECUTIVE CHOICE PROGRAM THE HOME DEPOT EFFECTIVE JANUARY 1, 1999 SUMMARY Each calendar year every officer receives a supplemental benefit allowance under the Supplemental Executive Choice Program (SECP). This allowance may be used to purchase additional disability or life insurance benefits, or to reimburse themselves for financial services or for health care expenses not covered under Home Depot's standard health care plans. ELIGIBILITY To be eligible for SECP, an employee must be an officer of the Company. The officer must elect coverage from the options available through SECP. ENROLLMENT Choices for enrollment will be available immediately upon eligibility and/or during annual enrollment in the fall of each year. MAXIMUM ANNUAL BENEFIT The maximum benefits payable during a calendar year for all options combined is $15,000 for senior officers and $10,000 for all other officers. OPTIONS AVAILABLE - - SUPPLEMENTAL LONG TERM DISABILITY (LTD) INSURANCE (SDIP) - additional LTD insurance designed to replace a greater percentage of the value of the officers total compensation. - - SUPPLEMENTAL LIFE INSURANCE (SLI) - Variable Universal Life Insurance for up to three times base salary plus bonus minus the $300,000 already provided by The Home Depot, up to a specified maximum. 2 - - FINANCIAL PLANNING & COUNSELING SERVICES - reimbursement for financial planning and counseling services up to a specified amount which varies by year. - - EXECUTIVE MEDICAL REIMBURSEMENT ACCOUNT (EMRA) - reimbursement for most medical and dental expenses not covered under the standard medical and dental plans for self and family up to a maximum of the SECP benefits allowance. Expenses must qualify under applicable IRS regulations. TAXES The dollars one elects to spend for SDIP, SLI, Financial Planning & Counseling Services and EMRA under SECP will be taxable in the year in which the benefits are paid. This amount will be reported on the W-2 for that same year. Applicable taxes include Federal and State income taxes, and FICA if the employee's pay falls below the FICA salary limit. ADDITIONAL REIMBURSEMENT In March of each year, while the SECP remains in effect, the Company will make an additional payment to help cover the taxes incurred for benefits paid in the previous year. This additional payment will be taxable income and will be reported on the W-2 in the year in which it is paid. TERMINATION OF COVERAGE Coverage will terminate on the earliest of the following dates. In some instances, portability of coverage may be applicable. 1. An employee terminates employment with Home Depot. 2. At the end of an approved leave of absence, unless the employee returns to full-time employment with the Company. 3. The employee is no longer an officer of the Company. 4. The Company elects to discontinue the Supplemental Executive Choice Program. 5. Coverage under the EMRA option only will terminate when coverage under the Company's Group Health Plan terminates, either due to voluntary action on the part of the employee, or because the Company cancels the Group Health Plan. 3 6. Coverages under SDIP, SLI and Financial Planning & Counseling Services will terminate when the plan(s) is canceled either individually or collectively due to voluntary action on the part of the employee or at the discretion of the Company. ERISA SECP is a cash bonus plan. It is not funded, nor does it come under provisions of the Federal Employee Retirement Income Security Act (ERISA). EX-13 8 ANNUAL REPORT TO SHAREHOLDERS 1 CONSOLIDATED STATEMENTS OF EARNINGS THE HOME DEPOT, INC. AND SUBSIDIARIES
AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA FISCAL YEAR ENDED ------------------------------------------ JANUARY 31, FEBRUARY 1, FEBRUARY 2, 1999 1998 1997 (52 WEEKS) (52 WEEKS) (53 WEEKS) ----------- ----------- ----------- NET SALES $ 30,219 $ 24,156 $ 19,535 Cost of Merchandise Sold 21,614 17,375 14,101 -------- -------- -------- Gross Profit 8,605 6,781 5,434 OPERATING EXPENSES: Selling and Store Operating 5,341 4,303 3,529 Pre-Opening 88 65 55 General and Administrative 515 413 324 Non-Recurring Charge (note 8) -- 104 -- -------- -------- -------- Total Operating Expenses 5,944 4,885 3,908 -------- -------- -------- OPERATING INCOME 2,661 1,896 1,526 Interest Income (Expense): Interest and Investment Income 30 44 25 -------- -------- -------- Interest Expense (note 2) (37) (42) (16) -------- -------- -------- Interest, net (7) 2 9 -------- -------- -------- Earnings Before Income Taxes 2,654 1,898 1,535 Income Taxes (note 3) 1,040 738 597 -------- -------- -------- NET EARNINGS $ 1,614 $ 1,160 $ 938 ======== ======== ======== BASIC EARNINGS PER SHARE (note 7) $ 1.10 $ 0.80 $ 0.65 Weighted Average Number of Common Shares Outstanding 1,471 1,459 1,438 ======== ======== ======== DILUTED EARNINGS PER SHARE (note 7) $ 1.06 $ 0.78 $ 0.65 Weighted Average Number of Common Shares Outstanding Assuming Dilution 1,547 1,524 1,464 ======== ======== ========
See accompanying notes to consolidated financial statements. 22 2 CONSOLIDATED BALANCE SHEETS THE HOME DEPOT, INC. AND SUBSIDIARIES AMOUNTS IN MILLIONS, EXCEPT SHARE DATA
JANUARY 31, FEBRUARY 1, 1999 1998 ----------- ----------- ASSETS Current Assets: Cash and Cash Equivalents $ 62 $ 172 Short-Term Investments, including current maturities of long-term investments -- 2 Receivables, net 469 556 Merchandise Inventories 4,293 3,602 Other Current Assets 109 128 -------- -------- Total Current Assets 4,933 4,460 -------- -------- Property and Equipment, at cost: Land 2,739 2,194 Buildings 3,757 3,041 Furniture, Fixtures and Equipment 1,761 1,370 Leasehold Improvements 419 383 Construction in Progress 540 336 Capital Leases (notes 2 and 5) 206 163 -------- -------- 9,422 7,487 Less Accumulated Depreciation and Amortization 1,262 978 -------- -------- Net Property and Equipment 8,160 6,509 -------- -------- Long-Term Investments 15 15 Notes Receivable 26 27 Cost in Excess of the Fair Value of Net Assets Acquired, net of accumulated amortization of $24 at January 31, 1999 and $18 at February 1, 1998 268 140 Other 63 78 -------- -------- $ 13,465 $ 11,229 ======== ======== LIABILITIES AND STOCKHOLDERS, EQUITY Current Liabilities: Accounts Payable $ 1,586 $ 1,358 Accrued Salaries and Related Expenses 395 312 Sales Taxes Payable 176 143 Other Accrued Expenses 586 530 Income Taxes Payable 100 105 Current Installments of Long-Term Debt (notes 2 and 5) 14 8 -------- -------- Total Current Liabilities 2,857 2,456 -------- -------- Long-Term Debt, excluding current installments (notes 2 and 5) 1,566 1,303 Other Long-Term Liabilities 208 178 Deferred Income Taxes (note 3) 85 78 Minority Interest (note 10) 9 116 STOCKHOLDERS' EQUITY (notes 2, 4 and 6) Common Stock, par value $0.05. Authorized: 2,500,000,000 shares; issued and outstanding-- 1,475,452,000 shares at January 31, 1999 and 1,464,216,000 shares at February 1, 1998 74 73 Paid-in Capital 2,854 2,626 Retained Earnings 5,876 4,430 Accumulated Other Comprehensive Income (61) (28) -------- -------- 8,743 7,101 Less: Shares Purchased for Compensation Plans (notes 4 and 6) 3 3 -------- -------- Total Stockholders' Equity 8,740 7,098 -------- -------- Commitments and Contingencies (notes 5 and 9) $ 13,465 $ 11,229 ======== ========
See accompanying notes to consolidated financial statements. 23 3 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME THE HOME DEPOT, INC. AND SUBSIDIARIES AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA
COMMON STOCK ACCUMULATED --------------- OTHER TOTAL PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS COMPREHENSIVE SHARES AMOUNT CAPITAL EARNINGS INCOME OTHER EQUITY INCOME(1) ------ ------ ------- -------- ------------- ----- ------------ ------------- BALANCE, JANUARY 28, 1996 1,432 $72 $2,360 $ 2,579 $ (6) $(17) $ 4,988 ===== === ====== ======= ==== ==== ======= Shares Sold Under Employee Stock Purchase and Option Plans, net of retirements (note 4) 10 -- 104 -- -- -- 104 Tax Effect of Sale of Option Shares by Employees -- -- 11 -- -- -- 11 Net Earnings -- -- -- 938 -- -- 938 $ 938 Translation Adjustments -- -- -- -- 8 -- 8 8 Repayments of Notes Receivable from ESOP, net (note 6) -- -- -- -- -- 17 17 Shares Purchased for Compensation Plans (notes 4 and 6) -- -- -- -- -- (1) (1) Cash Dividends ($0.077 per share) -- -- -- (110) -- -- (110) ------- Comprehensive Income for Fiscal 1996 $ 946 ======= ----- --- ------ ------- ---- ---- ------- BALANCE, FEBRUARY 2, 1997 1,442 $72 $2,475 $ 3,407 $ 2 $ (1) $ 5,955 ===== === ====== ======= ==== ==== ======= Shares Sold Under Employee Stock Purchase and Option Plans, net of retirements (note 4) 8 -- 124 -- -- -- 124 Tax Effect of Sale of Option Shares by Employees -- -- 26 -- -- -- 26 Net Earnings -- -- -- 1,160 -- -- 1,160 1,160 Translation Adjustments -- -- -- -- (30) -- (30) (30) Immaterial Pooling of Interests 14 1 1 2 -- -- 4 Shares Purchased for Compensation Plans (notes 4 and 6) -- -- -- -- -- (2) (2) Cash Dividends ($0.095 per share) -- -- -- (139) -- -- (139) ------ Comprehensive Income for Fiscal 1997 $1,130 ====== ----- --- ------ ------- ---- ---- ------- BALANCE, FEBRUARY 1, 1998 1,464 $73 $2,626 $ 4,430 $(28) $ (3) $ 7,098 ===== === ====== ======= ==== ==== ======= Shares Sold Under Employee Stock Purchase and Option Plans, net of retirements (note 4) 11 1 165 -- -- -- 166 Tax Effect of Sale of Option Shares by Employees -- -- 63 -- -- -- 63 Net Earnings -- -- -- 1,614 -- -- 1,614 1,614 Translation Adjustments -- -- -- -- (33) -- (33) (33) Cash Dividends ($0.115 per share) -- -- -- (168) -- -- (168) ------ Comprehensive Income for Fiscal 1998 $1,581 ====== ----- --- ------ ------- ---- ---- ------- BALANCE, JANUARY 31, 1999 1,475 $74 $2,854 $ 5,876 $(61) $ (3) $ 8,740 ===== === ====== ======= ==== ==== =======
(1) Components of comprehensive income are reported net of related taxes. See accompanying notes to consolidated financial statements. 24 4 CONSOLIDATED STATEMENTS OF CASH FLOWS THE HOME DEPOT, INC. AND SUBSIDIARIES
AMOUNTS IN MILLIONS FISCAL YEAR ENDED ---------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 2, 1999 1998 1997 (52 WEEKS) (52 WEEKS) (53 WEEKS) ---------- ---------- ---------- CASH PROVIDED FROM OPERATIONS: Net Earnings $ 1,614 $ 1,160 $ 938 Reconciliation of Net Earnings to Net Cash Provided by Operations: Depreciation and Amortization 373 283 232 Deferred Income Tax Expense (Benefit) 7 (28) 29 Decrease (Increase) in Receivables, net 85 (166) (58) Increase in Merchandise Inventories (698) (885) (525) Increase in Accounts Payable and Accrued Expenses 423 577 434 Increase in Income Taxes Payable 59 83 25 Other 54 5 25 ------- ------- ------- Net Cash Provided by Operations 1,917 1,029 1,100 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures, net of $41, $44 and $54 of non-cash capital expenditures in fiscal 1998, 1997 and 1996, respectively (2,059) (1,481) (1,194) Purchase of Remaining Interest in The Home Depot Canada (261) -- -- Proceeds from Sales of Property and Equipment 45 85 22 Proceeds from Sales of Investments -- -- 41 Purchases of Investments (2) (194) (409) Proceeds from Maturities of Investments 4 599 27 Repayments of Advances Secured by Real Estate, net 2 20 6 ------- ------- ------- Net Cash Used in Investing Activities (2,271) (971) (1,507) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of (Repayments of) Commercial Paper Obligations, net 246 -- (620) Proceeds from Long-Term Borrowings, net -- 15 1,093 Repayments of Notes Receivable from ESOP -- -- 17 Principal Repayments of Long-Term Debt (8) (40) (3) Proceeds from Sale of Common Stock, net 167 122 104 Cash Dividends Paid to Stockholders (168) (139) (110) Minority Interest Contributions to Partnership 11 10 19 ------- ------- ------- Net Cash Provided by (Used in) Financing Activities 248 (32) 500 ------- ------- ------- Effect of Exchange Rate Changes on Cash and Cash Equivalents (4) -- -- (Decrease) Increase in Cash and Cash Equivalents (110) 26 93 Cash and Cash Equivalents at Beginning of Year 172 146 53 ------- ------- ------- Cash and Cash Equivalents at End of Year $ 62 $ 172 $ 146 ======= ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS MADE FOR: Interest, net of interest capitalized $ 36 $ 42 $ 3 Income Taxes $ 940 $ 685 $ 548
See accompanying notes to consolidated financial statements. 25 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE HOME DEPOT, INC. AND SUBSIDIARIES Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Home Depot operates full-service, warehouse-style stores averaging approximately 107,000 square feet in size. The stores stock approximately 40,000 to 50,000 different kinds of building materials, home improvement supplies and lawn and garden products that are sold primarily to do-it-yourselfers, but also to home improvement contractors, tradespeople and building maintenance professionals. In addition, the Company operates EXPO Design Center stores, which offer products and services primarily related to design and renovation projects. At the end of fiscal 1998, the Company was operating 761 stores, including 707 Home Depot stores and 8 EXPO Design Center stores in the United States; 43 Home Depot stores in Canada; 2 Home Depot stores in Chile; and 1 Home Depot store in Puerto Rico. Included in the Company's Consolidated Balance Sheets at January 31, 1999 are $568 million of net assets of the Canadian and Chilean operations. Fiscal Year The Company's fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31. Fiscal years 1998 and 1997, which ended January 31, 1999 and February 1, 1998, respectively, consisted of 52 weeks, while fiscal year 1996, which ended February 2, 1997, consisted of 53 weeks. Basis of Presentation The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and its majority-owned partnership. All significant intercompany transactions have been eliminated in consolidation. Stockholders' equity, share and per share amounts for all periods presented have been adjusted for a two-for-one stock split effected in the form of a stock dividend on July 2, 1998, and a three-for-two stock split effected in the form of a stock dividend on July 3, 1997. Cash Equivalents The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The Company's cash and cash equivalents are primarily cash equivalents carried at fair market value and consist primarily of commercial paper, money market funds, U.S. government agency securities and tax-exempt notes and bonds. Merchandise Inventories Inventories are stated at the lower of cost (first-in, first-out) or market, as determined by the retail inventory method. Income Taxes The Company provides for federal, state and foreign income taxes currently payable, as well as for those deferred because of timing differences between reporting income and expenses for financial statement purposes versus tax purposes. Federal, state and foreign incentive tax credits are recorded as a reduction of income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date. The Company and its eligible subsidiaries file a consolidated U.S. federal income tax return. Non-U.S. subsidiaries, which are consolidated for financial reporting, are not eligible to be included in consolidated U.S. federal income tax returns, and separate provisions for income taxes have been determined for these entities. The Company intends to reinvest the unremitted earnings of its non-U.S. subsidiaries and postpone their remittance indefinitely. Accordingly, no provision for U.S. income taxes for non-U.S. subsidiaries was required for any year presented. Depreciation and Amortization The Company's buildings, furniture, fixtures and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Improvements to leased premises are amortized using the straight-line method over the life of the lease or the useful life of the improvement, whichever is shorter. The Company's property and equipment is depreciated using the following estimated useful lives:
LIFE ----------- Buildings 10-45 years Furniture, fixtures and equipment 5-20 years Leasehold improvements 5-30 years Computer software 3-5 years
Cost in Excess of the Fair Value of Net Assets Acquired Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over 40 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining useful life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. Notes Receivable Notes receivable, which are issued to real estate developers in connection with development and construction of stores and underlying real estate, are recorded at cost less an allowance for impaired notes receivable when necessary. 26 6 Store Pre-Opening Costs Non-capital expenditures associated with opening new stores are expensed as incurred. Impairment of Long-Lived Assets The Company reviews long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable. An impairment is recognized to the extent the sum of undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying value. Accordingly, when the Company commits to relocate or close a store, the estimated unrecoverable costs are charged to expense. Such costs include the estimated loss on the sale of land and buildings, the book value of abandoned fixtures, equipment and leasehold improvements, and a provision for the present value of future lease obligations, less estimated sub-lease income. Stock Compensation The Company has adopted Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123 encourages the use of a fair-value-based method of accounting for stock-based awards under which the fair value of stock options is determined on the date of grant and expensed over the vesting period. Under SFAS 123, companies may, however, measure compensation costs for those plans using the method prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees." Companies that apply APB No. 25 are required to include pro forma disclosures of net earnings and earnings per share as if the fair-value-based method of accounting had been applied. The Company elected to account for such plans under the provisions of APB No. 25. Comprehensive Income Comprehensive income includes net earnings adjusted for certain revenues, expenses, gains and losses that are excluded from net earnings under generally accepted accounting principles. Examples include foreign currency translation adjustments and unrealized gains and losses on investments. Foreign Currency Translation The assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the current rate of exchange on the last day of the reporting period, revenues and expenses are translated at the average monthly exchange rates, and all other equity transactions are translated using the actual rate on the day of the transaction. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. Reclassifications Certain balances in prior fiscal years have been reclassified to conform with the presentation adopted in the current fiscal year. Note 2 LONG-TERM DEBT The Company's long-term debt at the end of fiscal 1998 and 1997 consisted of the following (amounts in millions):
JANUARY 31, FEBRUARY 1, 1999 1998 ----------- ----------- 3 1/4% Convertible Subordinated Notes, due October 1, 2001; convertible into shares of common stock of the Company at a conversion price of $23.0417 per share; redeemable by the Company at a premium, plus accrued interest, beginning October 2, 1999 $1,103 $1,104 Commercial Paper; weighted average interest rate of 4.8% at January 31, 1999 246 -- Capital Lease Obligations; payable in varying installments through January 31, 2019 (see note 5) 180 151 Installment Notes Payable; interest imputed at rates between 6.1% and 10.5%; payable in varying installments through 2018 27 32 Unsecured Bank Loan; floating interest rate averaging 5.9% in fiscal 1998 and 6.05% in fiscal 1997; payable in August 2002 15 15 Variable Rate Industrial Revenue Bonds; secured by letters of credit or land; interest rates averaging 3.8% during fiscal 1998 and 4.2% during fiscal 1997; payable in varying installments through 2010 9 9 ------ ------ Total long-term debt 1,580 1,311 Less current installments 14 8 ------ ------ Long-term debt, excluding current installments $1,566 $1,303 ====== ======
In October 1996, the Company issued, through a public offering, $1.1 billion of 3 1/4% Convertible Subordinated Notes ("3 1/4% Notes") due October 1, 2001. The 3 1/4% Notes were issued at par and are convertible into shares of common stock at any time prior to maturity, unless previously redeemed by the Company, at a conversion price of $23.0417 per share, subject to adjustment under certain conditions. The 3 1/4% Notes may be redeemed by the Company at any time on or after October 2, 1999, in whole or in part, at a redemption price of 100.813% of the principal amount and after October 1, 2000, at 100% of the principal amount. The 3 1/4% Notes are not subject to sinking fund provisions. 27 7 The Company has an $800 million commercial paper program supported by a back-up credit facility with an available commitment amount of $800 million. The back-up credit facility expires in December 2000. Covenants related to the back-up credit facility place limitations on total Company indebtedness, subsidiary indebtedness and liens. As of January 31, 1999, the Company was in compliance with all restrictive covenants. The restrictive covenants related to letter of credit agreements securing the industrial revenue bonds are no more restrictive than those referenced or described above. Interest expense in the accompanying Consolidated Statements of Earnings is net of interest capitalized of $31 million in fiscal 1998, $19 million in fiscal 1997 and $23 million in fiscal 1996. Maturities of long-term debt (excluding the 3 1/4% Notes) are $14 million for fiscal 1999, $250 million for fiscal 2000, $3 million for fiscal 2001, $19 million for fiscal 2002 and $5 million for fiscal 2003. The estimated fair value of the 3 1/4% Notes, which are publicly traded, was approximately $2.9 billion based on the market price at January 31, 1999. The estimated fair value of commercial paper borrowings approximate their carrying value. The estimated fair value of all other long-term borrowings was approximately $382 million compared to the carrying value of $231 million. These fair values were estimated using a discounted cash flow analysis based on the Company's incremental borrowing rate for similar liabilities. Note 3 INCOME TAXES The provision for income taxes consisted of the following (in millions):
FISCAL YEAR ENDED ----------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 2, 1999 1998 1997 ----------- ----------- ----------- Current: U.S. $ 823 $ 653 $ 486 State 150 98 72 Foreign 20 15 10 ------- ------- ------- 993 766 568 ------- ------- ------- Deferred: U.S. 46 (31) 23 State (1) 1 6 Foreign 2 2 -- ------- ------- ------- 47 (28) 29 ------- ------- ------- Total $ 1,040 $ 738 $ 597 ======= ======= =======
The Company's combined federal, state and foreign effective tax rates for fiscal years 1998, 1997 and 1996, net of offsets generated by federal, state and foreign tax incentive credits, were approximately 39.2%, 38.9% and 38.9%, respectively. A reconciliation of income tax expense at the federal statutory rate of 35% to actual tax expense for the applicable fiscal years follows (in millions):
FISCAL YEAR ENDED ------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 2, 1999 1998 1997 ----------- ----------- ----------- Income taxes at U.S. statutory rate $ 929 $ 664 $ 537 State income taxes, net of federal income tax benefit 96 65 51 Foreign rate differences -- 2 2 Other, net 15 7 7 ------ ------ ------ Total $1,040 $ 738 $ 597 ====== ====== ======
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of January 31, 1999 and February 1, 1998 were as follows (in millions):
FISCAL YEAR ENDED ------------------------ JANUARY 31, FEBRUARY 1, 1999 1998 ----------- ----------- Deferred Tax Assets Accrued self-insurance liabilities $ 110 $ 92 Other accrued liabilities 97 104 ----- ----- Total gross deferred tax assets 207 196 ----- ----- Deferred Tax Liabilities Accelerated depreciation (249) (196) Other (43) (38) ----- ----- Total gross deferred tax liabilities (292) (234) ----- ----- Net deferred tax liability $ (85) $ (38) ===== =====
No valuation allowance was recorded against the deferred tax assets at January 31, 1999 or February 1, 1998. Company management believes the existing net deductible temporary differences comprising the total gross deferred tax assets will reverse during periods in which the Company generates net taxable income. 28 8 Note 4 EMPLOYEE STOCK PLANS The 1997 Omnibus Stock Incentive Plan ("1997 Plan"), which is an amendment and restatement of the 1991 Omnibus Stock Option Plan ("1991 Plan"), provides that incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock and deferred shares may be issued to selected associates, officers and directors of the Company. The maximum number of shares of the Company's common stock available for issuance under the 1997 Plan is the lesser of 100 million shares, or the number of shares carried over from prior plans plus one-half percent of the total number of outstanding shares as of the first day of each fiscal year. In addition, restricted shares issued under the 1997 Plan may not exceed 10 million shares. As of January 31, 1999, the maximum shares available for future grants under the 1997 Plan were 85,549,859. Under the 1997 Plan, incentive and non-qualified options for 15,788,234 shares, net of cancellations (of which 17,577 had been exercised), have been granted at prices ranging from $19.17 to $47.88 per share. Incentive stock options vest at the rate of 25% per year commencing on the first anniversary date of the grant and expire on the tenth anniversary date of the grant. The non-qualified options have similar terms; however, vesting does not generally begin until the second anniversary date of the grant. As of January 31, 1999, 108,594 shares of restricted stock were outstanding. The restricted shares vest over varying terms and are generally based on the attainment of certain performance goals. The expected fair value of the restricted shares on the vesting dates will be charged to expense ratably over the vesting periods unless it is determined that the performance goals will not be met. Under the 1991 Plan, which became effective June 1, 1991, options for 52,798,833 shares, net of cancellations (of which 20,881,960 had been exercised), had been granted at prices ranging from $8.17 to $17.79 per share as of January 31, 1999. The 1991 Plan expired on February 28, 1997, and the shares available for grant were carried over to the 1997 Plan. The per share weighted average fair value of stock options granted during fiscal years 1998, 1997 and 1996 was $14.91, $6.30 and $4.62, respectively. These amounts were determined using the Black-Scholes option-pricing model, which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, expected dividend payments, and the risk-free interest rate over the expected life of the option. The dividend yield was calculated by dividing the current annualized dividend by the option price for each grant. Expected volatility was based on stock prices for the fiscal year the grant occurred and the two previous fiscal years. The risk-free interest rate was the rate available on zero coupon U.S. government issues with a term equal to the remaining term for each grant. The expected life of each option was estimated based on the exercise history from previous grants. The assumptions used in the Black-Scholes model were as follows:
STOCK OPTIONS GRANTED IN FISCAL YEAR ----------------------------- 1998 1997 1996 ----------------------------- Risk-free interest rate 5.6% 6.1% 6.1% Expected volatility of common stock 45.7% 30.0% 23.5% Dividend yield 0.4% 0.5% 0.6% Expected option term 5 years 5 years 5 years
The Company applies APB No. 25 in accounting for its stock plans and, accordingly, no compensation costs have been recognized in the Company's financial statements for incentive or non-qualified stock options granted. If, under SFAS 123, the Company determined compensation costs based on the fair value at the grant date for its stock options, net earnings and earnings per share would have been reduced to the pro forma amounts below (in millions, except per share data):
FISCAL YEAR -------------------------- 1998 1997 1996 -------------------------- Net Earnings As reported $1,614 $1,160 $ 938 Pro forma $1,527 $1,118 $ 916 Basic Earnings per Share As reported $ 1.10 $ 0.80 $0.65 Pro forma $ 1.04 $ 0.77 $0.64 Diluted Earnings per Share As reported $ 1.06 $ 0.78 $0.65 Pro forma $ 1.01 $ 0.75 $0.63
The following table summarizes shares outstanding under the various stock option plans at January 31, 1999, February 1, 1998 and February 2, 1997 and changes during the fiscal years ended on these dates (shares in thousands):
NUMBER AVERAGE OF SHARES OPTION PRICE --------- ------------ Outstanding at January 28, 1996 29,970 $ 11.79 Granted 14,438 14.57 Exercised (5,982) 9.74 Cancelled (2,288) 13.12 ------ -------- Outstanding at February 2, 1997 36,138 13.16 Granted 17,238 21.87 Exercised (6,862) 13.23 Cancelled (2,696) 15.28 ------ -------- Outstanding at February 1, 1998 43,818 15.12 Granted 14,027 32.44 Exercised (7,760) 13.61 Cancelled (2,357) 20.84 ------ -------- OUTSTANDING AT JANUARY 31, 1999 47,728 $ 20.17 ====== ======== Exercisable 13,105 $ 13.35 ====== ========
29 9 The average remaining contractual life of the outstanding options as of January 31, 1999 was approximately 7.6 years. In addition, the Company had 7,962,854 shares available for future grants under the Employee Stock Purchase Plan ("ESPP") at January 31, 1999. The ESPP enables the Company to grant substantially all full-time associates options to purchase up to 66,412,500 shares of common stock, of which 58,449,648 shares have been exercised from inception of the plan, at a price equal to the lower of 85% of the stock's fair market value on the first day or the last day of the purchase period. Shares purchased may not exceed the lesser of 20% of the associate's annual compensation, as defined, or $25,000 of common stock at its fair market value (determined at the time such option is granted) for any one calendar year. Associates pay for the shares ratably over a period of one year (the purchase period) through payroll deductions, and cannot exercise their option to purchase any of the shares until the conclusion of the purchase period. In the event an associate elects not to exercise such options, the full amount withheld is refundable. During fiscal 1998, options for 3,669,886 shares were exercised at an average price of $19.27 per share. At January 31, 1999, there were 2,184,525 options outstanding, net of cancellations, at an average price of $31.41 per share. Note 5 LEASES The Company leases certain retail locations, office space, warehouse and distribution space, equipment and vehicles. While the majority of the leases are operating leases, certain retail locations are leased under capital leases. As leases expire, it can be expected that in the normal course of business, leases will be renewed or replaced. In June 1996, the Company entered into a $300 million operating lease agreement for the purpose of financing construction costs for selected new stores. The Company increased its available funding under the operating lease agreement to $600 million in May 1997. In October 1998, through a second operating lease agreement, the Company further increased the available funding by $282 million to $882 million. Under the agreements, the lessor purchases the properties, pays for the construction costs and subsequently leases the facilities to the Company. The initial lease term for the $600 million agreement is five years with five 2-year renewal options. The lease term for the $282 million agreement is 10 years with no renewal options. Both lease agreements provide for substantial residual value guarantees and include purchase options at original cost on each property. The Company financed a portion of its new stores in fiscal 1997 and 1998 under the operating lease agreements and anticipates utilizing these facilities to finance selected new stores in fiscal 1999 and 2000 and an office building in fiscal 1999. During 1995, the Company entered into two operating lease agreements under which the Company leases an import distribution facility, including its related equipment, and an office building for store support functions. The initial lease terms are five and seven years, respectively, with five 5-year renewal options for the import distribution facility and one 5-year renewal option for the office building. Both lease agreements provide for substantial residual value guarantees and include purchase options at the higher of the cost or fair market value of the assets for the import distribution facility and at cost for the office building. The maximum amount of the residual value guarantees relative to the assets under the lease agreements described above is projected to be $855 million. As the leased assets are placed into service, the Company estimates its liability under the residual value guarantees and records additional rent expense on a straight-line basis over the remaining lease terms. Total rent expense, net of minor sublease income for the fiscal years ended January 31, 1999, February 1, 1998 and February 2, 1997 was $321 million, $262 million and $219 million, respectively. Real estate taxes, insurance, maintenance, and operating expenses applicable to the leased property are obligations of the Company under the building leases. Certain of the store leases provide for contingent rentals based on percentages of sales in excess of specified minimums. Contingent rentals for the fiscal years ended January 31,1999, February 1, 1998 and February 2, 1997 were approximately $11 million, $10 million and $10 million, respectively. The approximate future minimum lease payments under capital and operating leases at January 31, 1999 were as follows (in millions):
CAPITAL OPERATING FISCAL YEAR LEASES LEASES ------- --------- 1999 $ 29 $ 358 2000 29 352 2001 29 325 2002 29 299 2003 30 282 Thereafter 396 3,109 ---- ------ 542 $4,725 ====== Less: Imputed interest (362) ---- Net present value of capital lease obligations 180 Less: Current installments (2) ---- Long-term capital lease obligations, excluding current installments $178 ====
Short-term and long-term obligations for capital leases are included in the Company's Consolidated Balance Sheets in Current Installments of Long-Term Debt and Long-Term Debt, respectively. The assets under capital leases recorded in Net Property and Equipment, net of amortization, totaled $180 million and $147 million at January 31, 1999 and February 1, 1998, respectively. 30 10 Note 6 EMPLOYEE BENEFIT PLANS During fiscal 1996, the Company established a defined contribution plan ("401(k)") pursuant to Section 401(k) of the Internal Revenue Code. The 401(k) covers substantially all associates that meet certain service requirements. The Company makes matching cash contributions, on a weekly basis, up to specified percentages of associates' contributions as approved by the Board of Directors. During fiscal 1988, the Company established a leveraged Employee Stock Ownership Plan and Trust ("ESOP") covering substantially all full-time associates. At January 31, 1999, the ESOP held a total of 21,024,649 shares of the Company's common stock in trust for plan participants' accounts. The ESOP purchased the shares in the open market with contributions received from the Company in fiscal 1998 and 1997, and from the proceeds of loans obtained from the Company during fiscal 1992, 1990 and 1989 totaling approximately $81 million. All loans payable to the Company in connection with the purchase of such shares have been paid in full. During February 1999, the Company made its final contribution to the ESOP plan and amended its 401(k) plan. In the amendment, the Company elected to increase its percentage contribution to the 401(k) in lieu of future ESOP contributions. The Company adopted a non-qualified ESOP Restoration Plan in fiscal 1994. The Company also made its final contribution to the ESOP Restoration Plan during February 1999 and established a new 401(k) Restoration Plan. The primary purpose of the new plan is to provide certain associates deferred compensation that they would have received under the 401(k) matching contribution if not for the maximum compensation limits under the Internal Revenue Code of 1986, as amended. The Company has established a "rabbi trust" to fund the benefits under the ESOP Restoration Plan. Compensation expense related to this plan for fiscal years 1998, 1997 and 1996 was not material. Funds provided to the trust are primarily used to purchase shares of the Company's common stock in the open market. The Company's combined contributions to the 401(k) and ESOP were $41 million, $33 million and $25 million for fiscal years 1998, 1997 and 1996, respectively. Note 7 BASIC AND DILUTED EARNINGS PER SHARE The calculations of basic and diluted earnings per share for fiscal years 1998, 1997 and 1996 were as follows (amounts in millions, except per share data):
FISCAL YEAR ENDED ----------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 2, 1999 1998 1997 (52 WEEKS) (52 WEEKS) (53 WEEKS) ----------- ----------- ----------- CALCULATION OF BASIC EARNINGS PER SHARE Net earnings $1,614 $1,160 $ 938 Weighted average number of common shares outstanding 1,471 1,459 1,438 ------ ------ ------ BASIC EARNINGS PER SHARE $ 1.10 $ 0.80 $ 0.65 ====== ====== ====== CALCULATION OF DILUTED EARNINGS PER SHARE Net earnings $1,614 $1,160 $ 938 Tax-effected interest expense attributable to 3 1/4% Notes 23 23 8 ------ ------ ------ Net earnings assuming dilution $1,637 $1,183 $ 946 ------ ------ ------ Weighted average number of common shares outstanding 1,471 1,459 1,438 Effect of potentially dilutive securities: 3 1/4% Notes 48 48 16 Employee stock plans 28 17 10 ------ ------ ------ Weighted average number of common shares outstanding assuming dilution 1,547 1,524 1,464 ------ ------ ------ DILUTED EARNINGS PER SHARE $ 1.06 $ 0.78 $ 0.65 ====== ====== ======
Employee stock plans represent shares granted under the Company's employee stock purchase plan and stock option plans, as well as shares issued for deferred compensation stock plans. For fiscal years 1998, 1997 and 1996, shares issuable upon conversion of the Company's 3 1/4% Notes, issued in October 1996, were included in weighted average shares assuming dilution for purposes of calculating diluted earnings per share. To calculate diluted earnings per share, net earnings are adjusted for tax-effected net interest and issue costs on the 3 1/4% Notes and divided by weighted average shares assuming dilution. 31 11 Note 8 LAWSUIT SETTLEMENTS During fiscal 1997, the Company, without admitting any wrongdoing, entered into a settlement agreement with plaintiffs in the class action lawsuit Butler et. al. v. Home Depot, Inc., in which the plaintiffs had asserted claims of gender discrimination. The Company subsequently reached agreements to settle three other lawsuits seeking class action status, each of which involved claims of gender discrimination. As a result of these agreements, the Company recorded a pre-tax non-recurring charge of $104 million in fiscal 1997 and, in fiscal 1998, made payments to settle these agreements. The payments made in fiscal 1998 included $65 million to the plaintiff class members and $22.5 million to the plaintiffs' attorneys in Butler, and approximately $8 million for other related internal costs, including implementation or enhancement of certain human resources programs, as well as the settlement terms of the three other lawsuits. The Company expects to spend the remaining $9 million for related internal costs over the next two years. Excluding the non-recurring charge, diluted earnings per share for fiscal 1997 were $0.82 compared to $0.78 as reported. Note 9 COMMITMENTS AND CONTINGENCIES At January 31, 1999, the Company was contingently liable for approximately $431 million under outstanding letters of credit issued primarily in connection with purchase commitments. The Company is involved in litigation arising from the normal course of business. In management's opinion, this litigation is not expected to materially impact the Company's consolidated results of operations or financial condition. Note 10 MERGERS AND ACQUISITIONS During the first quarter of fiscal 1998, the Company purchased, for $261 million, the remaining 25% partnership interest held by The Molson Companies in The Home Depot Canada. The excess purchase price over the estimated fair value of net assets of $117 million as of the acquisition date was recorded as goodwill and is being amortized over 40 years. As a result of this transaction, the Company now owns all of The Home Depot's Canadian operations. The Home Depot Canada partnership was formed in 1994 when the Company acquired 75% of Aikenhead's Home Improvement Warehouse for approximately $162 million. The terms of the original partnership agreement provided for a put/call option, which would have resulted in the Company purchasing the remaining 25% of The Home Depot Canada at any time after the sixth anniversary of the original agreement. The companies reached a mutual agreement to complete the purchase transaction at an earlier date. Note 11 QUARTERLY FINANCIAL DATA The following is a summary of the unaudited quarterly results of operations for the fiscal years ended January 31, 1999 and February 1, 1998 (dollars in millions, except per share data):
PERCENT INCREASE BASIC DILUTED IN COMPARABLE GROSS NET EARNINGS EARNINGS NET SALES STORE SALES PROFIT EARNINGS PER SHARE PER SHARE --------- ---------------- ------ -------- --------- --------- Fiscal year ended January 31, 1999: First quarter $ 7,123 7% $1,968 $ 337 $0.23 $0.22 Second quarter 8,139 7% 2,263 467 0.32 0.31 Third quarter 7,699 7% 2,177 392 0.27 0.26 Fourth quarter 7,258 9% 2,197 418 0.28 0.27 ------- -- ------ ------ ----- ----- Fiscal year $30,219 7% $8,605 $1,614 $1.10 $1.06 ======= == ====== ====== ===== ===== Fiscal year ended February 1, 1998: First quarter $ 5,657 11% $1,552 $ 259 $0.18 $0.18 Second quarter 6,550 5% 1,800 358 0.25 0.24 Third quarter 6,217 7% 1,726 236 0.16 0.16 Fourth quarter 5,732 6% 1,703 307 0.21 0.20 ------- -- ------ ------ ----- ----- Fiscal year $24,156 7% $6,781 $1,160 $0.80 $0.78 ======= == ====== ====== ===== =====
32 12 THE HOME DEPOT, INC. AND SUBSIDIARIES MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The financial statements presented in this Annual Report have been prepared with integrity and objectivity and are the responsibility of the management of The Home Depot, Inc. These financial statements have been prepared in conformity with generally accepted accounting principles and properly reflect certain estimates and judgments based upon the best available information. The Company maintains a system of internal accounting controls, which is supported by an internal audit program and is designed to provide reasonable assurance, at an appropriate cost, that the Company's assets are safeguarded and transactions are properly recorded. This system is continually reviewed and modified in response to changing business conditions and operations and as a result of recommendations by the external and internal auditors. In addition, the Company has distributed to associates its policies for conducting business affairs in a lawful and ethical manner. The financial statements of the Company have been audited by KPMG LLP, independent auditors. Their accompanying report is based upon an audit conducted in accordance with generally accepted auditing standards, including the related review of internal accounting controls and financial reporting matters. The Audit Committee of the Board of Directors, consisting solely of outside Directors, meets quarterly with the independent auditors, the internal auditors and representatives of management to discuss auditing and financial reporting matters. The Audit Committee, acting on behalf of the stockholders, maintains an ongoing appraisal of the internal accounting controls, the activities of the outside auditors and internal auditors and the financial condition of the Company. Both the Company's independent auditors and the internal auditors have free access to the Audit Committee. /s/ Dennis Carey /s/ Marshall L. Day Dennis Carey Marshall L. Day Executive Vice President and Senior Vice President- Chief Financial Officer Finance and Accounting INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND STOCKHOLDERS The Home Depot, Inc.: We have audited the accompanying consolidated balance sheets of The Home Depot, Inc. and subsidiaries as of January 31, 1999 and February 1, 1998, and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended January 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Home Depot, Inc. and subsidiaries as of January 31, 1999 and February 1, 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended January 31, 1999 in conformity with generally accepted accounting principles. /s/ KPMG LLP Atlanta, Georgia March 12, 1999 33 13 10-YEAR SUMMARY OF FINANCIAL AND OPERATING RESULTS THE HOME DEPOT, INC. AND SUBSIDIARIES AMOUNTS IN MILLIONS, EXCEPT WHERE NOTED
5-YEAR 10-YEAR COMPOUND ANNUAL COMPOUND ANNUAL GROWTH RATE GROWTH RATE 1998 --------------- --------------- -------- STATEMENT OF EARNINGS DATA Net sales 26.7% 31.2% $ 30,219 Net sales increase (%) -- -- 25.1 Earnings before income taxes(2) 29.2 35.6 2,654 Net earnings(2) 28.7 35.6 1,614 Net earnings increase (%)(2) -- -- 31.9 Diluted earnings per share ($)(2,3,4) 25.9 30.5 1.06 Diluted earnings per share increase (%)(2) -- -- 29.3 Weighted average number of common shares outstanding assuming dilution(3) 1.7 4.1 1,547 Gross margin--% of sales -- -- 28.5 Store selling and operating expense--% of sales -- -- 17.7 Pre-opening expense--% of sales -- -- 0.3 General and administrative expense--% of sales -- -- 1.7 Net interest income (expense)--% of sales -- -- -- Earnings before income taxes--% of sales(2) -- -- 8.8 Net earnings--% of sales(2) -- -- 5.3 ---- ---- -------- BALANCE SHEET DATA AND FINANCIAL RATIOS Total assets 23.4% 34.4% $ 13,465 Working capital 15.9 30.7 2,076 Merchandise inventories 27.1 30.7 4,293 Net property and equipment 28.0 37.7 8,160 Long-term debt 12.4 30.7 1,566 Stockholders' equity 25.4 36.7 8,740 Book value per share ($)(3) 23.2 31.7 5.92 Long-term debt to equity (%) -- -- 17.9 Current ratio -- -- 1.73:1 Inventory turnover -- -- 5.4x Return on invested capital (%)(2) -- -- 19.3 ---- ---- -------- STATEMENT OF CASH FLOWS DATA Depreciation and amortization 32.9% 38.2% $ 373 Capital expenditures 18.4 34.9 2,100 Cash dividends per share ($)(3) 25.2 35.7 0.12 ---- ---- -------- STORE DATA(5) Number of stores 23.6% 23.0% 761 Square footage at year-end 25.3 25.8 81 Increase in square footage (%) -- -- 22.8 Average square footage per store (in thousands) 1.4 2.3 107 ---- ---- -------- STORE SALES AND OTHER DATA(5) Comparable store sales increase (%)(6) -- -- 7 Weighted average weekly sales per operating store (in thousands) 2.0% 6.2% $ 844 Weighted average sales per square foot ($)(6) 0.6 3.8 410 Number of customer transactions 23.0 26.3 665 Average sale per transaction ($) 2.9 3.8 45.05 Number of associates at year-end (actual) 25.4 28.3 156,700 ---- ---- --------
(1) Fiscal years 1996 and 1990 consisted of 53 weeks; all other years reported consisted of 52 weeks. (2) Excludes the effect of a $104 million non-recurring charge in fiscal 1997. (3) All share and per share data have been adjusted for a two-for-one stock split on July 2, 1998. 34 14 THE HOME DEPOT, INC. AND SUBSIDIARIES
1997 1996(1) 1995 1994 1993 1992 1991 1990(1) 1989 - -------- ------- ------- -------- ------- ------- ------- -------- -------- $ 24,156 $19,535 $15,470 $ 12,477 $ 9,239 $ 7,148 $ 5,137 $ 3,815 $ 2,759 23.7 26.3 24.0 35.0 29.2 39.2 34.6 38.3 38.0 2,002 1,535 1,195 980 737 576 396 260 182 1,224 938 732 605 457 363 249 163 112 30.5 28.2 21.0 32.2 26.1 45.6 52.5 46.0 45.9 0.82 0.65 0.51 0.44 0.34 0.28 0.20 0.15 0.10 26.2 27.5 15.9 29.4 21.4 40.0 33.3 50.0 42.9 1,524 1,464 1,434 1,428 1,421 1,397 1,323 1,216 1,147 28.1 27.8 27.7 27.9 27.7 27.6 28.1 27.9 27.8 17.8 18.0 18.0 17.8 17.6 17.4 18.1 18.2 18.3 0.3 0.3 0.4 0.4 0.4 0.4 0.3 0.4 0.3 1.7 1.7 1.7 1.8 2.0 2.1 2.3 2.4 2.5 -- 0.1 0.1 (0.1) 0.3 0.4 0.3 (0.1) (0.1) 8.3 7.9 7.7 7.8 8.0 8.1 7.7 6.8 6.6 5.1 4.8 4.7 4.8 5.0 5.1 4.8 4.3 4.1 - -------- ------- ------- -------- ------- ------- ------- -------- -------- $ 11,229 $ 9,342 $ 7,354 $ 5,778 $ 4,701 $ 3,932 $ 2,510 $ 1,640 $ 1,118 2,004 1,867 1,255 919 994 807 624 301 274 3,602 2,708 2,180 1,749 1,293 940 662 509 381 6,509 5,437 4,461 3,397 2,371 1,608 1,255 879 514 1,303 1,247 720 983 874 844 271 531 303 7,098 5,955 4,988 3,442 2,814 2,304 1,691 683 512 4.85 4.13 3.48 2.53 2.09 1.73 1.34 0.64 0.49 18.4 20.9 14.4 28.6 31.1 36.6 16.0 77.7 59.1 1.82:1 2.01:1 1.89:1 1.76:1 2.02:1 2.07:1 2.17:1 1.73:1 1.94:1 5.4x 5.6x 5.5x 5.7x 5.9x 6.3x 6.1x 6.0x 5.9x 17.0 16.3 16.3 16.5 13.9 17.6 19.8 20.6 23.2 - -------- ------- ------- -------- ------- ------- ------- -------- -------- $ 283 $ 232 $ 181 $ 130 $ 90 $ 70 $ 52 $ 34 $ 21 1,525 1,248 1,308 1,220 900 437 432 400 205 0.10 0.08 0.06 0.05 0.04 0.03 0.02 0.01 0.01 - -------- ------- ------- -------- ------- ------- ------- -------- -------- 624 512 423 340 264 214 174 145 118 66 54 44 35 26 21 16 13 10 23.1 21.6 26.3 33.2 26.3 26.8 24.1 27.4 26.9 106 105 105 103 100 98 95 92 88 - -------- ------- ------- -------- ------- ------- ------- -------- -------- 7 7 3 8 7 15 11 10 13 $ 829 $ 803 $ 787 $ 802 $ 764 $ 724 $ 633 $ 566 $ 515 406 398 390 404 398 387 348 322 303 550 464 370 302 236 189 146 112 84 43.63 42.09 41.78 41.29 39.13 37.72 35.13 33.92 32.65 124,400 98,100 80,800 67,300 50,600 38,900 28,000 21,500 17,500 - -------- ------- ------- -------- ------- ------- ------- -------- --------
(4) Diluted earnings per share for fiscal 1997, including a $104 million non-recurring charge, were $0.78 (see note 8 of the Notes to Consolidated Financial Statements). (5) Excludes Maintenance Warehouse and National Blinds and Wallpaper, Inc. (6) Adjusted to reflect the first 52 weeks of the 53-week fiscal years in 1996 and 1990. 35 EX-23 9 CONSENT OF INDEPENDENT AUDITORS 1 The Board of Directors The Home Depot, Inc.: We consent to incorporation by reference in the registration statements (No.'s 333-61733, 333-56207, 33-46476, 33-22531, 33-22299, 33-58807, 333-16695, 333-01385) on Form S-8 and (No. 333-03497) on Form S-3 of The Home Depot, Inc. of our report dated March 12, 1999, relating to the consolidated balance sheets of The Home Depot, Inc. and subsidiaries as of January 31, 1999 and February 1, 1998, and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended January 31, 1999, which report is incorporated by reference in the January 31, 1999, annual report on Form 10-K of The Home Depot, Inc. /s/ KPMG LLP Atlanta, Georgia April 16, 1999 EX-24 10 SPECIAL POWERS OF ATTORNEY 1 POWER OF ATTORNEY I, Frank Borman, a director of The Home Depot, Inc., a Delaware corporation, do hereby constitute and appoint Arthur M. Blank and Ronald M. Brill, jointly and severally, my true and lawful attorneys-in-fact, each with full power of substitution, for me in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report of the Corporation on Form 10-K for the fiscal year of the Corporation ended January 31, 1999, and to file the same with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, including such as are incorporated therein by reference, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Annual Report, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact deems appropriate, and all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 16th day of April, 1999. /s/ Frank Borman ---------------------- Frank Borman 2 POWER OF ATTORNEY I, John L. Clendenin, a director of The Home Depot, Inc., a Delaware corporation, do hereby constitute and appoint Arthur M. Blank and Ronald M. Brill, jointly and severally, my true and lawful attorneys-in-fact, each with full power of substitution, for me in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report of the Corporation on Form 10-K for the fiscal year of the Corporation ended January 31, 1999, and to file the same with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, including such as are incorporated therein by reference, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Annual Report, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact deems appropriate, and all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 5th day of April, 1999. /s/ John L. Clendenin -------------------------- John L. Clendenin 3 POWER OF ATTORNEY I, Berry Cox, a director of The Home Depot, Inc., a Delaware corporation, do hereby constitute and appoint Arthur M. Blank and Ronald M. Brill, jointly and severally, my true and lawful attorneys-in-fact, each with full power of substitution, for me in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report of the Corporation on Form 10-K for the fiscal year of the Corporation ended January 31, 1999, and to file the same with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, including such as are incorporated therein by reference, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Annual Report, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact deems appropriate, and all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 5th day of April, 1999. /s/ Berry R. Cox -------------------- Berry R. Cox 4 POWER OF ATTORNEY I, Milledge Hart, III, a director of The Home Depot, Inc., a Delaware corporation, do hereby constitute and appoint Arthur M. Blank and Ronald M. Brill, jointly and severally, my true and lawful attorneys-in-fact, each with full power of substitution, for me in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report of the Corporation on Form 10-K for the fiscal year of the Corporation ended January 31, 1999, and to file the same with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, including such as are incorporated therein by reference, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Annual Report, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact deems appropriate, and all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 6th day of April, 1999. /s/ Milledge A. Hart, III ------------------------- Milledge A. Hart, III 5 POWER OF ATTORNEY I, Donald Keough, a director of The Home Depot, Inc., a Delaware corporation, do hereby constitute and appoint Arthur M. Blank and Ronald M. Brill, jointly and severally, my true and lawful attorneys-in-fact, each with full power of substitution, for me in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report of the Corporation on Form 10-K for the fiscal year of the Corporation ended January 31, 1999, and to file the same with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, including such as are incorporated therein by reference, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Annual Report, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact deems appropriate, and all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 7th day of April, 1999. /s/ Kenneth G. Langone ---------------------- Kenneth G. Langone 6 POWER OF ATTORNEY I, Kenneth G. Langone, a director of The Home Depot, Inc., a Delaware corporation, do hereby constitute and appoint Arthur M. Blank and Ronald M. Brill, jointly and severally, my true and lawful attorneys-in-fact, each with full power of substitution, for me in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report of the Corporation on Form 10-K for the fiscal year of the Corporation ended January 31, 1999, and to file the same with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, including such as are incorporated therein by reference, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Annual Report, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact deems appropriate, and all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 6th day of April, 1999. /s/ Donald R. Keough -------------------- Donald R. Keough 7 POWER OF ATTORNEY I, M. Faye Wilson, a director of The Home Depot, Inc., a Delaware corporation, do hereby constitute and appoint Arthur M. Blank and Ronald M. Brill, jointly and severally, my true and lawful attorneys-in-fact, each with full power of substitution, for me in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report of the Corporation on Form 10-K for the fiscal year of the Corporation ended January 31, 1999, and to file the same with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, including such as are incorporated therein by reference, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Annual Report, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact deems appropriate, and all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14th day of April, 1999. /s/ M. Faye Wilson ------------------ M. Faye Wilson EX-27 11 FINANCIAL DATA SCHEDULE
5 1,000,000 YEAR JAN-31-1999 JAN-31-1999 62 0 469 0 4,293 4,933 9,422 1,262 13,465 2,857 1,566 0 0 74 8,666 13,465 30,219 30,219 21,614 21,614 5,944 0 7 2,654 1,040 1,614 0 0 0 1,614 1.10 1.06
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