-----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, APaqbbj+YaYSWWP2p+bUb4US3Etw/o3HKwYiXDCki+UMkfjPLojAJyDs+JvR80je W7tE5ZflRqwj0P3klzI6Sw== 0000318771-96-000003.txt : 19960401 0000318771-96-000003.hdr.sgml : 19960401 ACCESSION NUMBER: 0000318771-96-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENENTECH INC CENTRAL INDEX KEY: 0000318771 STANDARD INDUSTRIAL CLASSIFICATION: MEDICINAL CHEMICALS & BOTANICAL PRODUCTS [2833] IRS NUMBER: 942347624 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09813 FILM NUMBER: 96541263 BUSINESS ADDRESS: STREET 1: 460 POINT SAN BRUNO BLVD CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: 4152251000 MAIL ADDRESS: STREET 1: 460 POINT SAN BRUNO BLVD STREET 2: . CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended: December 31, 1995 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number: 1-9813 GENENTECH, INC. A Delaware Corporation 94-2347624 (I.R.S. employer identification number) 460 Point San Bruno Boulevard (415) 225-1000 South San Francisco, California 94080-4990 (telephone number) Securities registered pursuant to Section 12(b) of the Act: ============================================================================== Title of Each Class Name of Each Exchange on Which Registered - ------------------------------------------------------------------------------ Redeemable Common Stock, New York Stock Exchange $.02 par value Pacific Stock Exchange ============================================================================== 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. The approximate aggregate market value of voting stock held by nonaffiliates of the registrant is $1,965,462,444 as of March 15, 1996. (A) Number of shares of Common Stock outstanding as of March 15, 1996: 76,621,009 Number of shares of Special Common Stock outstanding as of March 15, 1996: 43,496,307 Number of shares of Redeemable Common Stock outstanding as of March 15, 1996: None Documents incorporated by reference: PARTS INCORPORATED DOCUMENT BY REFERENCE (1) Annual Report to stockholders for the year ended II December 31, 1995 (specified portions) (2) Definitive Proxy Statement with respect to the 1996 III Annual Meeting of Stockholders filed by Genentech, Inc. (SEC file No. 1-9813) with the Securities and Exchange Commission (hereinafter referred to as "Proxy Statement") - ----------------------------------------------------------------------------- (A) Excludes 82,768,861 shares of Common Stock and Special Common Stock held by Directors, Officers and stockholders whose ownership exceeds five percent of either the Common Stock or Special Common Stock outstanding at March 15, 1996. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant. PART I ITEM 1. BUSINESS Genentech, Inc. (the Company) is a biotechnology company that discovers, develops, manufactures and markets human pharmaceuticals produced by recombinant DNA technology for significant unmet medical needs. The Company manufactures and markets five products directly in the United States and to F. Hoffmann-La Roche Ltd. (HLR) for sales outside of the United States, and receives royalties from sales of five other products which originated from the Company's technology. Cautionary Statement Identifying Important Factors that Could Cause the Company's Actual Results to Differ from those Projected in Forward Looking Statements In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, Genentech, Inc. is hereby filing a cautionary statement identifying important factors that could cause the Company's actual results to differ materially from those projected in forward looking statements of the Company made by, or on behalf of, the Company. The following factors could affect Genentech's actual future results, including its product sales, royalties, expenses and net income, and could cause them to differ from any forward looking statements made by or on behalf of the Company: - Decisions by HLR to exercise its rights to develop and sell products and potential products of the Company in non-U.S. markets or, alternatively, to not exercise such rights. - Increased competition in the growth hormone market. Three companies received Food and Drug Administration (FDA) approval in 1995 to market their growth hormone products for treatment of growth hormone inadequacy in children, and a fourth company is seeking approval to sell human growth hormone to treat AIDS wasting. The Company expects competition to have an adverse effect on its sales of Protropin, registered trademark, and Nutropin, registered trademark. Other factors that may influence sales of these products include the availability of third party reimbursement for the cost of growth hormone therapy and the outcome of litigation involving the Company's patents for growth hormone and related processes, including that referred to above. - Acceptance of Pulmozyme, registered trademark, as a treatment for cystic fibrosis. Factors that may influence the future sales of Pulmozyme include physician perception of the number and kinds of patients who will benefit from such therapy, the availability of third party reimbursement for the costs of therapy, the timing of the development of alternative therapies for the treatment and care of cystic fibrosis, whether and when additional indications are approved for Pulmozyme, and the cost of Pulmozyme therapy. - Variation of royalty, contract and other revenues. These revenues will continue to fluctuate due to the timing of non-U.S. approvals, if any, for products licensed to HLR, whether and when contract benchmarks are achieved, the initiation of new contractual arrangements, including the exercise of product options by HLR, and the conclusion of existing arrangements with other companies and HLR. - Successful development of products. The Company intends to continue to develop new products. Successful pharmaceutical product development is highly uncertain and is dependent on numerous factors, many of which are beyond the Company's control. Products that appear promising in the early phases of development may fail to reach market for numerous reasons. They may be found to be ineffective or to have harmful side effects in clinical or preclinical testing, may fail to receive necessary regulatory approvals, may turn out to be uneconomical because of manufacturing costs or other factors, or they may be precluded from commercialization by the proprietary rights of others. Success in preclinical and early clinical trials does not ensure that large scale clinical trials will be successful. Clinical results are frequently susceptible to varying interpretations which may delay, limit or prevent regulatory approvals. The length of time necessary to complete clinical trials and from submission of an application for marketing approval to a final decision by a regulatory authority varies significantly and may be difficult to predict. - Uncertainties surrounding proprietary rights. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. Accordingly the breadth of claims allowed in such company's patents cannot be predicted. Patent disputes are frequent and can preclude commercialization of products. The Company has in the past and may in the future be involved in material patent litigation. Such litigation is costly in its own right and could subject the Company to significant liabilities to third parties and, if decided adversely, the Company may need to obtain third party licenses or cease using the technology or product in dispute. As discussed above, the presence of patent or other proprietary rights belonging to other parties may lead to the termination of research and development of a particular product. Agreement with Roche Holdings, Inc. On October 25, 1995, a new agreement (the Agreement) with Roche Holdings, Inc. (Roche) was approved by Genentech's non-Roche stockholders to extend for four years Roche's option to cause Genentech to redeem (call) the outstanding callable putable common stock (special common stock) of the Company at predetermined prices. In conjunction with that Agreement, HLR was granted an option at terms discussed below for ten years for licenses to use and sell certain of Genentech's products in non-U.S. markets. As a general matter, such option for a Genentech product must be exercised at, or prior to if Genentech mutually agrees, the conclusion of phase II clinical trials for each product. In general, for each product for which HLR exercises its option (option product), the Company and HLR will share equally all development expenses, including preclinical, clinical, process development and related expenses, incurred by the Company through that date and prospectively, with respect to the development of the product in the United States. HLR will pay all non-U.S. development expenses. In general, Genentech will supply HLR's clinical requirements of option products at cost and its commercial requirements at cost plus 20%. In general, HLR will pay a royalty of 12.5% until a product reaches $100 million in aggregate sales outside of the United States, at which time the royalty rate increases to 15%. In addition, HLR has exclusive rights to, and pays the Company 20% royalties on, Canadian sales of the Company's existing approved products in Canada, and European sales of Pulmozyme, registered trademark. Consequently, in the fourth quarter of 1995, the Company transferred to HLR the rights to its Canadian product sales, and its European sales of Pulmozyme, and commenced recording royalty revenue from HLR on such sales. The Company supplies its products to HLR, and has agreed to supply products for which HLR exercises its option, for sales outside of the United States at cost plus 20%. In 1995, the Company recorded special charges totaling $25 million, of which $21 million related to expenses associated with the Agreement. Depending on whether HLR does or does not exercise its option to develop and sell each of the Company's future products, future levels of the Company's product sales, royalties and contract revenue, as well as R&D and other expenses, could vary significantly from 1995 levels both on an annual and quarter-to-quarter basis. Products Genentech has developed and currently manufactures and markets five products in the United States: Activase, registered trademark, (Alteplase, recombinant) recombinant tissue plasminogen activator; Protropin, (somatrem for injection) recombinant growth hormone; Nutropin, [somatropin (rDNA origin) for injection] human growth hormone; Pulmozyme, (dornase alfa) inhalation solution; and Actimmune, registered trademark, (Interferon gamma-1b) recombinant interferon gamma. Activase: Tissue plasminogen activator (t-PA) is an enzyme that is produced naturally by the body to dissolve blood clots. However, when a blood clot obstructs blood flow in the coronary artery and causes a heart attack, the body is unable to produce enough t-PA to dissolve the clot rapidly enough to prevent damage to the heart. Through recombinant DNA technology, Genentech produces Activase, a recombinant form of t-PA, in sufficient quantity for therapeutic use. The United States Food and Drug Administration (FDA) approved Activase for marketing in the United States in 1987 for the treatment of acute myocardial infarction (AMI or heart attack) and in 1990 for use in the treatment of acute pulmonary embolism (blood clots in the lungs). Genentech submitted a Product License Application in March 1996, for Activase for treatment of patients suffering from acute ischemic stroke, based on results of a multi-year Phase III clinical study conducted by the National Institute of Neurological Disorders and Stroke (NINDS). Phase II studies are being performed to evaluate a second generation of t-PA which is anticipated to be easier to administer, work faster, cause less unwanted bleeding and require smaller doses than Activase. In exchange for royalty payments, Genentech has licensed marketing rights to recombinant t-PA in Japan to Kyowa Hakko Kogyo, Ltd. (Kyowa) and Mitsubishi Kasei Corporation (Mitsubishi). Kyowa and Mitsubishi are marketing forms of recombinant t-PA under the trademarks Activacin, registered trademark, and GRTPA, registered trademark, respectively. In a number of countries outside of the United States, Canada and Japan, Genentech has licensed t-PA marketing and manufacturing rights to Boehringer Ingelheim International GmbH (Boehringer). Genentech has also licensed certain rights to Boehringer regarding future sales of the second generation of t-PA, which is currently under development. Boehringer markets recombinant t-PA under the trademark Actilyse, registered trademark. Prior to February 1995 t-PA was marketed in Canada by Genentech under the Activase trademark and by Boehringer under the trademark Lysatec. In February 1995, Genentech purchased all t-PA Canadian marketing rights from Boehringer. Pursuant to the Agreement with Roche, Genentech subsequently granted these rights to HLR, which began selling Activase in Canada on December 1, 1995, and Genentech began receiving a royalty on such sales. Protropin: Human growth hormone is a naturally occurring human protein produced in the pituitary gland. It regulates metabolism and is responsible for growth in children. A recombinant growth hormone product developed by Genentech, Protropin was approved by the FDA in 1985 for marketing in the United States for the treatment of growth hormone inadequacy in children. In exchange for royalty payments, Genentech licensed rights to recombinant growth hormone outside the United States and Canada to Pharmacia & Upjohn, which manufactures and markets recombinant growth hormone under the trademarks Somatonorm, registered trademark, and Genotropin, registered trademark. Under the terms of the agreement with Pharmacia & Upjohn, and effective in late 1995, Genentech now has the right to sell growth hormone in certain European countries and Pharmacia & Upjohn have the right to sell their own growth hormone in the United States and Canada. Pursuant to the Agreement with Roche, Genentech granted exclusive rights to sell Protropin in Canada to HLR, which began selling Protropin in Canada on December 1, 1995, and Genentech receives a royalty on such sales. Nutropin: Nutropin is a human growth hormone similar to Protropin; however, it does not have the additional amino acid, methionine, found in the Protropin chemical structure. It was approved by the FDA in March 1994 for marketing for the treatment of growth hormone inadequacy in children. Nutropin was approved in November 1993 and launched in January 1994 for marketing in the United States for the treatment of growth hormone inadequacy in children due to chronic renal insufficiency (CRI). CRI causes irreversible damage to the kidneys and a variety of other medical problems, including growth hormone inadequacy. The condition affects an estimated 3,000 children in the United States. Nutropin has been designated an Orphan Drug for treatment of growth hormone inadequacy in children with CRI in the United States. In December 1995, the Company received regulatory approval to market Nutropin AQ, trademark, [somatropin (rDNA origin) injection], a liquid formulation of Nutropin, aimed at providing improved convenience in administration. In October 1995, Genentech submitted a New Drug Application for approval to market Nutropin human growth hormone for the treatment of growth failure associated with Turner syndrome. Phase II clinical trials are currently underway with Nutropin to treat growth hormone inadequacy in adults. Pursuant to the Agreement with Roche, Genentech granted the right to sell Nutropin in Canada to HLR, and Genentech will receive a royalty on any such sales. Pulmozyme: Pulmozyme is marketed in the United States for the management of cystic fibrosis, for which it has Orphan Drug designation in the United States. There are an estimated 22,000 patients with cystic fibrosis in the U.S., a significant portion of whom are expected to be candidates for treatment. Pursuant to the Agreement with Roche, and effective during the fourth quarter of 1995, the Company granted Roche the exclusive right to sell Pulmozyme in Europe and Canada in return for a royalty on such sales. The Data Safety Monitoring Board for the trial recommended in July 1995 to terminate the Phase III trial of Pulmozyme in patients hospitalized for acute episodes of chronic obstructive pulmonary disease, due to lack of demonstrable benefit shown in the interim analysis of the study. Genentech accepted this recommendation and halted enrollment. Actimmune: Actimmune is approved in the United States for the treatment of chronic granulomatous disease (CGD), a rare, inherited disorder of the immune system which affects an estimated 250 to 400 Americans. Actimmune received designation by the FDA in 1990 as an Orphan Drug for the treatment of CGD in the United States. Phase III clinical trials are ongoing to investigate the use of Actimmune to treat renal cell carcinoma, a cancer of the kidneys. Depending on clinical trial results, the Company hopes to expand the market potential of Actimmune over time by obtaining new approvals for indications with larger populations, but such expansion is not assured. Additionally, the Company receives royalty payments from Boehringer from the sale of interferon gamma in certain countries outside of the United States, Canada and Japan. Licensed Products: In addition to the royalties mentioned above, the Company also receives royalties on the following products: Product Trademark Company ____________________________ ____________ ______________________________ Recombinant human insulin Humulin Eli Lilly and Company (Lilly) Human growth hormone Humatrope Eli Lilly and Company Recombinant interferon alpha Roferon-A Hoffmann-La Roche, Inc. Hepatitis B vaccine Recombivax Merck and Company, Inc. Hepatitis B vaccine Engerix-B Smith-Kline Beecham Pharmaceuticals (SKB) Factor VIII Kogenate Bayer Corporation Bovine growth hormone Posilac Monsanto Corporation In December 1994, the Company and Lilly reached an agreement regarding all patent infringement and contract actions then pending between the two parties. Under the terms of the settlement, Lilly agreed to pay the Company up to $145 million ($25 million in 1994, and 16 quarterly payments of $7.5 million, $30.0 million of which was received and recorded as revenue by Genentech in 1995), subject to possible offsets and contingent upon Humulin continuing to be marketed in the United States, and the Company granted Lilly licenses, options to licenses, or immunities from suit for certain of the Company's patents. Future payments are required from Lilly on sales of these products. Products in Development: As part of Genentech's program of research and development, a number of other products are in various stages of development. Product development efforts cover a wide range of disorders or medical conditions, including cancer, respiratory disorders, cardiovascular diseases, endocrine disorders, inflammatory and immune problems, and neurological disorders. In addition to the new indications for existing products discussed above, below is a summary of products in clinical development:
Product Description - -------------------------------- ------------------------------------------------ Phase III - --------- Anti-HER2 Humanized Monoclonal A humanized monoclonal antibody targeted against Antibody a protein receptor, which may be useful in the treatment of breast cancer. Auriculin (registered trademark) A hormone that occurs naturally in the heart Anaritide which may be useful in treating acute renal failure (being developed under a collaboration between the Company and Scios Nova Inc.). IDEC-C2B8 A monoclonal antibody which may be useful in the treatment of non-Hodgkin's B-cell lymphomas (being developed under a collaboration between the Company and IDEC Pharmaceuticals, Inc.). Phase II - -------- Anti-IgE Humanized Monoclonal A humanized IgE monoclonal antibody designed to Antibody interfere early in the process that leads to symptoms of allergy such as allergic rhinitis and asthma. Nerve Growth Factor A protein that may aid the treatment of peripheral neuropathy. IGF-I A protein that is being studied to determine if it can improve blood glucose control in type I and II diabetics (type I trials are in phase III). Oral IIbIIIa antagonist An inhibitor of platelet aggregation that may be useful in the prevention of unwanted clotting in certain cardiovascular conditions (being developed under a collaboration between the Company and Roche). Phase I - ------- Thrombopoietin (TPO) A protein that is being studied for treatment of thrombocytopenia, a reduction in clot-inducing platelets, in cancer patients treated with chemotherapy.
In conjunction with the Agreement with Roche, HLR was granted an option for ten years for licenses to use and sell certain of Genentech's products in non- U.S. markets. As a general matter, such option for a Genentech product must be exercised at, or prior to if Genentech mutually agrees, the conclusion of phase II clinical trials for each product. In general, for each product for which HLR exercises its option, the Company and HLR will share equally all development expenses, including preclinical, clinical, process development and related expenses, incurred by the Company through that date and prospectively, with respect to the development of the product in the United States. HLR will pay all non-U.S. development expenses. In the past Genentech has licensed the foreign rights to some of its products to major foreign pharmaceutical companies and actively coordinated development and clinical programs with these partners. In some cases Genentech has retained manufacturing rights to the licensed products. The Company has retained United States marketing rights for its products currently under development. In March 1995, Genentech entered into a collaboration with IDEC Pharmaceuticals Corp. (IDEC) to develop IDEC's anti-CD20 monoclonal antibody, IDEC-C2B8, for the treatment of non-Hodgkin's B-cell lymphomas. A Phase III clinical trial has begun. Under the terms of the agreement, Genentech and IDEC have agreed to copromote IDEC-C2B8 in the United States and Canada, with IDEC receiving a share of the profits. Genentech has commercialization rights throughout the rest of the world except Japan. Genentech exercised its option rights regarding Asia (except Japan) during the fourth quarter of 1995. In conjunction with the Agreement with Roche, Genentech has granted an option to HLR to use and sell IDEC-C2B8 in all countries, except the United States, in which Genentech has rights under its agreement with IDEC. HLR exercised that option. IDEC will receive royalties on sales outside the United States and Canada. In connection with the collaboration, Genentech provided $9 million in preferred equity investments and licensing fees, and will provide $17.5 million in additional equity funding prior to U.S. approval ($2.5 million of which was provided in 1995), and up to $30.5 million in milestone and option payments. In February 1996, Genentech expanded its collaboration with IDEC to include IDEC-Y2B8, a complementary radioisotopic version of the drug, for the treatment of more severe forms of B-cell lymphomas. Genentech's equity investment in IDEC at December 31, 1995 has a book value, which equals market value, of $28.8 million. In February 1996, the Company agreed to invest in Genenvax, Inc., a new company created to develop gp120, Genentech's potential vaccine for the prevention of HIV. Genentech will provide an initial equity investment of $1 million and then an additional $1 million along with other private investors. After the close of private financing, Genentech will have the right to maintain a 25% equity investment in Genenvax. Genenvax will receive exclusive rights to gp120. Genentech has a collaboration with Scios Nova Inc. (Scios Nova) for the development of Scios Nova's Auriculin for the treatment of acute renal failure in the United states and Canada. The results of the Phase III trial announced in May 1995 were equivocal in all primary endpoints with the exception of a prospectively defined endpoint relating to Oliguric (low urine output) patients. Scios Nova is pursuing another Phase III trial for acute renal failure in relation to this sub-population of oliguric patients. Under terms of the collaboration, the companies have agreed to copromote Auriculin in the United States and Canada, sharing profits from its commercialization. The Company received exclusive rights to all markets outside the United States and Canada subject to a royalty obligation to Scios Nova. In connection with the collaboration, Genentech purchased Scios Nova non-voting preferred stock for $20 million, which is convertible into shares of Scios Nova common stock. A portion of this preferred stock was subsequently sold. Genentech's equity holding in Scios Nova at December 31, 1995 has a book value, which equals market value, of $7.6 million. The Company established a line of credit for $30 million that Scios Nova may draw down at Scios Nova's discretion through December 31, 1997 directly from the bank with immediate repayment of the funds due to the bank by the Company. Amounts drawn by Scios Nova under the bank letter of credit or directly from the Company are repayable in the form of cash or Scios Nova common stock (at the market price prevailing on the date of repayment) at Scios Nova's option any time through December 30, 2002. Interest on amounts borrowed by Scios Nova accrue to the Company at the prime rate of interest. At December 31, 1995, no amounts were drawn. In addition the Company agreed to pay $50 million in benchmark payments, conditional on achieving certain predetermined commercialization goals. Under the Roche Agreement, HLR has an option with respect to the development and non-U.S. sales of Auriculin. Distribution Genentech has a marketing department and a United States-based pharmaceutical sales and distribution organization for its human pharmaceuticals. Genentech's sales efforts are focused on specialist physicians based at major medical centers in the United States. In general, products are sold to distributors or directly to hospital pharmacies or medical centers. Genentech utilizes common pharmaceutical company marketing techniques, including advertisements, direct mail, and other methods. Genentech's products are available at no charge to qualified patients under Genentech's uninsured patient programs in the United States. Genentech has established the Genentech Endowment for Cystic Fibrosis so qualified cystic fibrosis patients in the United States who need Pulmozyme can gain assistance in obtaining it. During 1995, Genentech provided certain marketing programs relating to Activase. The Activase Stocking Assistance Program provided extended payment terms, up to 195 days, to wholesalers on certain orders, subject to certain restrictions on the timing and quantities of the orders. Additionally, a comprehensive wastage replacement program exists for Activase which, subject to specific conditions, provides customers the right to return Activase to Genentech for replacement related to both patient related product wastage and product expiry. Genentech maintains the right to renew, modify or discontinue the above programs. As discussed in the "Notes to Consolidated Financial Statements" in the Company's 1995 Annual Report to Stockholders (Part II, Item 8 of the Form 10-K), the Company has certain customers who provided over 10% of total revenues. Also discussed in the note are revenues from foreign customers in 1995, 1994 and 1993. Raw Materials Raw materials and supplies required for the production of Genentech's principal products are generally available in quantities adequate to meet the Company's needs. Proprietary Technology - Patents and Trade Secrets Genentech has a policy of seeking patents on inventions arising from its ongoing research and development activities. Patents issued or applied for cover inventions ranging from basic recombinant DNA techniques to processes relating to specific products and to the products themselves. The Company has either been granted patents or has patent applications pending which relate to a number of current and potential products, including products licensed to others. Genentech considers that in the aggregate its patent applications, patents and licenses under patents owned by third parties are of material importance to its operations. Important legal issues remain to be resolved as to the extent and scope of available patent protection for biotechnology products and processes in the United States and other important markets outside of the United States. Genentech expects that litigation will likely be necessary to determine the validity and scope of certain of its proprietary rights. Genentech is currently involved in a number of patent lawsuits, as either a plaintiff or defendant, and administrative proceedings relating to the scope of protection of its patents and those of others. These lawsuits and proceedings may result in a significant commitment of Company resources in the future. There can be no assurance that the patents Genentech obtains or the unpatented proprietary technology it holds will afford Genentech significant commercial protection. In general, Genentech has obtained licenses from various parties which it deems to be necessary or desirable for the manufacture, use or sale of its products. These licenses (both exclusive and non-exclusive) generally require Genentech to pay royalties to the parties on product sales. The Company's trademarks, ACTIVASE, PROTROPIN, NUTROPIN, NUTROPIN AQ, PULMOZYME and ACTIMMUNE in the aggregate are considered to be of material importance and are registered in the United States Patent and Trademark Office and in other countries throughout the world. Royalty income recognized by the Company during 1995, 1994 and 1993 for patent licenses, know-how and other related rights amounted to $190.8 million, $126.0 million and $112.9 million, respectively. In 1995, 1994 and 1993 the Company incurred royalty expenses amounting to $54.8 million, $50.5 million and $41.9 million, respectively, under licenses from others. Competition Genentech faces competition, and believes significant long-term competition can be expected, from large pharmaceutical and chemical companies as well as biotechnology companies. This competition can be expected to become more intense as commercial applications for biotechnology products increase. Some competitors, primarily large pharmaceutical companies, have greater clinical, regulatory and marketing resources and experience than Genentech. Many of these companies have commercial arrangements with other companies in the biotechnology industry to supplement their own research capabilities. The introduction of new products or the development of new processes by competitors or new information about existing products may result in price reductions or product replacements, even for products protected by patents. However, the Company believes its competitive position is enhanced by its commitment to research leading to the discovery and development of new products and manufacturing methods. Other factors which should help the Company meet competition include ancillary services provided to support its products, customer service, and dissemination of technical information to prescribers of its products and to the health care community including payers. Over the longer term, the Company's (and its partners') ability to successfully market current products, expand their usage and bring new products to the marketplace will depend on many factors, including the effectiveness and safety of the products, FDA and foreign regulatory agencies' approvals for new indications, the degree of patent protection afforded to particular products, and the effect of the advent of managed care as an important purchaser of pharmaceutical products. The Company believes it has strong patent protection or the potential for strong patent protection for a number of its products that generate sales and royalty revenue or that it is developing; however, the courts will determine the ultimate strength of patent protection of the Company's products and those on which the Company earns royalties. Activase: In 1990, the Company began co-sponsorship of a major comparative mortality trial in AMI known as GUSTO (Global Utilization of Streptokinase and Activase for Occluded coronary arteries). The GUSTO trial results, as reported in the "New England Journal of Medicine" in 1993, demonstrated that the use of an accelerated administration of Activase with intravenous heparin is a key to saving more lives following a heart attack than the use of streptokinase. The GUSTO trial showed that among patients receiving treatment using an accelerated dose of Activase, combined with the blood thinning agent heparin, administered intravenously, heart attack patient mortality was reduced by as much as 14% over other thrombolytic regimens studied in the trial. The positive results from the GUSTO trial have helped increase Activase's market share in 1995 to 75% in the United States for the treatment of AMI. In April 1995, the FDA approved for marketing the accelerated dosage, allowing revised labeling for Activase incorporating data from the GUSTO study. Factors which may influence future Activase sales include: the increase in market demand for thrombolytic therapies; the continued impact of the GUSTO trial results; physicians' personal experiences in the administration of thrombolytic therapy; and the increased use of angioplasty as an alternative to thrombolytic therapy. Genentech is aware of other companies actively pursuing the development for the United States market of nonrecombinant or recombinant t-PA or derivatives of that substance, and additional companies or combinations of companies pursuing the development of other types of potentially competitive thrombolytic agents. Genentech is conducting Phase II clinical trials on a second generation of t-PA which, subject to the ultimate outcome of the studies, could have a favorable impact on the Company's competitive position. Although Genentech believes it will have a strong patent position with respect to t-PA, its patents may not cover products with similar functions which are not based on t-PA, and competitors have been and may continue to be successful in developing effective thrombolytic agents which are not covered by Genentech's patents. Protropin and Nutropin: Protropin was approved in late 1985 and was designated an Orphan Drug which provided seven years of market exclusivity for its use in the treatment of growth hormone inadequacy in children. In 1987, a product similar to Nutropin, produced by Lilly and marketed under the trademark Humatrope, was approved for treatment of growth hormone inadequacy in children and was designated an Orphan Drug. Protropin was protected from some possible additional competition until March 1994, by virtue of the designation of Lilly's Humatrope as an Orphan Drug. Three other companies - Bio-Technology General, Novo Nordisk and Pharmacia & Upjohn - received FDA approval in 1995 to market their growth hormone products for the treatment of growth hormone inadequacy in children. Pharmacia & Upjohn initiated product launch activities in late 1995. On December 29, 1995, Genentech received clearance from the FDA to market Nutropin AQ, the first and only liquid (aqueous) recombinant human growth hormone product available. Nutropin AQ is approved for the same indications as Nutropin. Based on information currently available, Protropin and Nutropin have approximately a 66% share of the United States market for treatment of children with growth hormone inadequacy. It is expected that new and potential competition in the growth hormone market discussed above will have an adverse effect on the Company's Protropin and Nutropin sales which, depending on the extent and type of competition, could be material to the Company's total growth hormone sales. Other factors that may influence future growth hormone sales include the availability of third party reimbursement for the costs of such therapies, and the outcome of litigation involving the Company's patents for growth hormone and related processes, including actions described above. Pulmozyme: Sales of Pulmozyme for the management of cystic fibrosis in the United States, Canada and some countries in Europe began in early 1994. In accordance with the Agreement with Roche, in the fourth quarter of 1995, HLR obtained exclusive rights to sell Pulmozyme outside of the United States, and Genentech receives a royalty on such sales. Factors which may influence future sales of Pulmozyme for the management of cystic fibrosis include: the number and kinds of patients benefiting from such therapy; physicians' personal experiences in the use and administration of the therapy; the availability of third party reimbursement for the cost of such therapy; the development of alternative therapies for the treatment and cure of cystic fibrosis; the development of additional indications for using Pulmozyme; and the cost of Pulmozyme therapy. Actimmune: Actimmune received designation as an Orphan Drug by the FDA in 1990 for the treatment of CGD. Government Regulation The pharmaceutical industry is subject to stringent regulation with respect to product safety and efficacy by various federal, state and local authorities. Of particular significance are the FDA's requirements covering research and development, testing, manufacturing, quality control, labeling and promotion of drugs for human use. A pharmaceutical product cannot be marketed in the United States until it has been approved by the FDA, and then can only be marketed for the indications and claims approved by the FDA. As a result of these requirements, the length of time, the level of expenditures and the laboratory and clinical information required for approval of an NDA (New Drug Application), a PLA (Product License Application) or an ELA (Establishment License Application) are substantial and can require a number of years, although recently revised regulations are designed to reduce somewhat the time for approval of new products. Although it is difficult to predict the ultimate effect, if any, these matters or any other pending or future legislation, regulations or government actions may have on its business, the Company believes that the development of new and improved products which address unmet medical needs should enable it to compete effectively within this environment. Research and Development A major portion of the Company's operating expenses to date have been related to the research and development of products either on its own behalf or under contracts. During 1995, 1994 and 1993 the Company's research and development expenses were $363.0 million, $314.3 million and $299.4 million, respectively. The Company has sponsored approximately 95%, 98% and 99% of its research and development for the years 1995, 1994 and 1993, respectively. The Company's research efforts have been the primary source of the Company's products. The Company intends to maintain its strong commitment to research as an essential component of its product development effort. In the future, licensed technology developed by outside parties could become an additional source of potential products. Human Resources As of December 31, 1995 Genentech had 2,842 employees in the United States, Europe, Canada and Japan. Environment Genentech seeks to comply with all applicable statutory and administrative requirements concerning environmental quality. The Company has made, and will continue to make, the necessary expenditures for environmental compliance and protection. Expenditures for compliance with environmental laws have not had and are not expected to have a material effect on the Company's capital expenditures, earnings or competitive position. ITEM 2. PROPERTIES Genentech's major facilities are located in a research and industrial park in South San Francisco, California in both leased and owned properties. The Company currently utilizes approximately 1.6 million square feet of its facilities for research and development, manufacturing, marketing and administrative activities. Approximately two-thirds of the square footage is in owned property, a portion of which is subject to a $0.4 million mortgage, and the remainder is leased. The Company has made and continues to make improvements to these properties to accommodate its growth. In addition, the Company owns approximately 16 acres adjacent to its current facilities that may be used for future expansion. In 1995, the Company began development of a new manufacturing facility of approximately 0.4 million square feet in Vacaville, California under a leasing arrangement. Completion of the project is expected in three years. The Company also has leases for certain additional office facilities in several locations in the United States. Genentech believes its facilities are in good operating condition and that the real property owned or leased, combined with the new Vacaville site, are adequate for all present and foreseeable future uses. Genentech believes any additional facilities could be obtained or constructed with the Company's capital resources. ITEM 3. LEGAL PROCEEDINGS The Company is a party to various legal proceedings including patent infringement cases involving human growth hormone products and Activase; a patent infringement and trade secret misappropriation case involving antibodies to IgE; product liability cases; and employment related cases. The Company and its directors are defendants in two suits filed in California challenging their actions in connection with the Company's 1990 merger with a wholly owned subsidiary of Roche Holdings, Inc. (Roche). There has been no activity in these actions since 1990 and no further reference will be made to them in future filings unless they again become active. In addition, the Company, its directors, two former directors and Roche are defendants in a number of suits filed in Delaware, which have been consolidated in a single action, by certain individual stockholders purporting to represent stockholders as a class alleging, in general, breach of their fiduciary duties to the Company in connection with the then proposed extension of Roche's option to cause the Company to redeem the outstanding non-Roche owned redeemable common stock and transactions related thereto. The Company, Roche and the attorneys representing the plaintiff stockholders have entered into a memorandum of understanding settling all claims against the defendants in these actions except the 1990 suits. In connection with the settlement, if approved by the court, Roche would increase the prices at which it could cause Genentech to redeem the non-Roche owned special common stock by $0.50 per share per quarter, to a final price of $82.50 in the quarter ending June 30, 1999, and Genentech would pay the plaintiffs' attorneys up to $3.5 million in attorneys' fees, and in connection with the then proposed merger, Genentech would absorb the termination costs of up to six Europe-based Genentech employees. On June 28, 1995 and August 10, 1995 the U.S. District Court for the Southern District of New York issued preliminary injunctions against Novo Nordisk A/S and certain of its affiliates (Novo) and Bio-technology General Corporation and its affiliate (BTG), respectively, which prohibit each of them, pending the Court's final determination of the action, from importing, making, using and selling their human growth hormone products in the United States. Each of Novo and BTG appealed the Court's decision. On February 26, 1996, the U.S. Court of Appeals for the Federal Circuit overturned the preliminary injunction against Novo, but has not yet ruled on BTG's appeal. Future court decisions will determine whether Novo's and BTG's products will be permanently enjoined from the U.S. market. The Company has received and responded to grand jury document subpoenas from the United States District Court for the Northern District of California for documents relating to Genentech's clinical, sales, and marketing activities associated with human growth hormone. On August 19, 1994 and August 30, 1994 two class action suits were filed in the U.S. District Court for the District of Minnesota against Genentech, one of its executives, Caremark International, Inc. (Caremark), certain of its executives and Dr. David R. Brown alleging, in general, causes of action under the Racketeer Influenced and Corrupt Organizations Act and various state statutory and common law theories. In addition, the suits allege that the defendants made improper payments to Dr. Brown in connection with Dr. Brown's prescription of Protropin for the plaintiffs rather than a competing product, and that the plaintiffs were injured by purchasing Protropin at costs approximately 30% higher than a competing product. A similar suit was filed in the U.S. District Court for the District of South Dakota, Southern Division, on July 13, 1995 against Genentech, Caremark and Dr. Brown, alleging the same causes of action as above as well as intentional infliction of emotional distress but not state and common law claims. The two Minnesota actions and the South Dakota action are in the discovery phase. Based upon the nature of the claims made and the investigations completed to date by the Company and its counsel, the Company believes the outcome of the above actions will not have a material adverse effect on the financial position, results of operations or cash flows of the Company. However, were an unfavorable ruling to occur in any quarterly period, there exists the possibility of a material impact on the net income of that period. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At a Special Meeting of Stockholders on October 25, 1995, one matter was voted upon. The Company's non-Roche stockholders approved the transaction with Roche. A tabulation of the votes is as follows: For: 28,448,215 Against: 449,603 Abstain: 133,568 Broker non-votes: 1,204,212 See also the section "Agreement with Roche Holdings, Inc." under Item 1. "BUSINESS" for a further discussion of the transaction with Roche.
GENENTECH, INC. EXECUTIVE OFFICERS The executive officers of the Company and their respective ages and positions with the Company are as follows: Name Age Position Arthur D. Levinson, Ph.D. 45 President and Chief Executive Officer John P. McLaughlin 44 Executive Vice President and Secretary William D. Young 51 Executive Vice President Louis J. Lavigne, Jr. 47 Senior Vice President and Chief Financial Officer Barry M. Sherman, M.D. 54 Senior Vice President and Chief Medical Officer Gregory Baird 45 Vice President - Corporate Communications R. Jerald Beers 47 Vice President - Marketing David W. Beier 47 Vice President - Government Affairs Robert Garnick, Ph.D. 46 Vice President - Quality Marty Glick 46 Vice President and Treasurer Bradford S. Goodwin 41 Vice President and Controller Dennis J. Henner, Ph.D. 44 Vice President - Research Technology Paul F. Hohenschuh 53 Vice President - Manufacturing Edmon R. Jennings 48 Vice President - Corporate Development Stephen G. Juelsgaard 47 Vice President, General Counsel and Assistant Secretary Cynthia J. Ladd 40 Vice President - Corporate Law M. David MacFarlane, Ph.D. 55 Vice President - Regulatory Affairs Polly Moore, Ph.D. 48 Vice President - Information Resources James P. Panek 42 Vice President - Engineering and Facilities Kim Popovits 37 Vice President - Sales Stephen Raines, Ph.D. 58 Vice President - Intellectual Property and Assistant Secretary Nicholas J. Simon 41 Vice President - Business and Corporate Development David Stump, M.D. 46 Vice President and Genentech Fellow All officers are elected annually by the Board of Directors. There is no family relationship among any of the officers or directors.
Business Experience Dr. Levinson was appointed President and Chief Executive Officer in July 1995. He was elected Senior Vice President in December 1992. Dr. Levinson has held a number of other positions, including Vice President of Research, subsequent to joining the Company in May 1980 as a Senior Scientist. Mr. McLaughlin was appointed Executive Vice President in January 1996. He had served as Senior Vice President and Secretary since July 1994. He was elected Senior Vice President, General Counsel and Secretary in 1993, and elected Vice President, General Counsel and Secretary in 1989. He joined the Company as Vice President of Government Affairs in September 1987 from Royer, Shacknai & Mehle, a Washington, D.C. law firm, where he was a partner. Mr. McLaughlin was Counsel to the House Energy and Commerce Subcommittee on Health and the Environment and earlier served as counsel to the House Subcommittee on Consumer Protection and Finance. Mr. Young was appointed Executive Vice President in January 1996. He was elected Senior Vice President in August 1988. He was Vice President of Manufacturing and Process Science from April 1983 until 1988. Mr. Young joined the Company in September 1980 as Director of Manufacturing from Eli Lilly and Company. Mr. Lavigne was elected Senior Vice President in July 1994. He was elected Chief Financial Officer in August 1988 and elected Vice President in July 1986. Mr. Lavigne joined the Company in July 1982, became Controller in May 1983 and an officer of the Company in February 1984. Dr. Sherman was elected Senior Vice President and Chief Medical Officer in February 1995 and had served as Vice President of Medical Affairs since February 1989. He joined the Company in 1985 as Director of Clinical Research. Prior to joining the Company, he was Professor of Medicine, Associate Chairman of the Department of Internal Medicine and Director of the Clinical Research Center at the University of Iowa. Mr. Baird joined the Company in February 1992 as Vice President of Corporate Communications. Prior to joining Genentech, Mr. Baird was employed by G.D. Searle & Co. for five years as Vice President of Corporate Communications. Mr. Beers was elected Vice President of Marketing in October 1995. He joined the Company in November 1989 as Director of Marketing and New Product Planning. In 1994, he was promoted to General Manager, Genentech Canada, Inc. Prior to joining Genentech, Mr. Beers held various positions in sales, marketing and business development in the pharmaceuticals industry for about twenty years, most recently at Dupont Pharmaceuticals, Inc. Mr. Beier joined the Company in March 1989 as Vice President of Government Affairs. Prior to joining Genentech, Mr. Beier spent 10 years as counsel to the Committee on the Judiciary of the United States House of Representatives where he was responsible for intellectual property and international trade issues. Dr. Garnick was elected Vice President of Quality in April 1994. He was Senior Director of Quality Control from 1990 to 1994 and Director of Quality Control from 1988 to 1990. Dr. Garnick joined the Company in August 1984 from Armour Pharmaceutical. Mr. Glick was elected Vice President in July 1991. He joined the Company in June 1987 as Director of Tax and was elected Treasurer in July 1990. Before joining Genentech, Mr. Glick was employed by Levi Strauss & Co. for seven years, most recently as Director of Tax Planning. Mr. Goodwin was promoted to Controller in June 1989 and elected Vice President in July 1993. Previously he was the Director of Financial Planning and Analysis, the Assistant Controller and the General Auditor. He joined Genentech in April 1987. Dr. Henner was elected Vice President of Research Technology in July 1994. From 1990 to 1994 he was Senior Director of Research Technology. Dr. Henner joined the Company in 1981 as a Scientist in Research. Prior to joining Genentech, Dr. Henner was at Scripps Clinic and Research Foundation. Mr. Hohenschuh was elected Vice President of Manufacturing in September 1989. He was Vice President of Biochemical Manufacturing from July 1986 until 1989 and Senior Director of Biochemical Manufacturing from June 1985 to June 1986. Mr. Hohenschuh joined the Company in October 1982 as Director of Biochemical Manufacturing. Mr. Jennings transferred to Business and Corporate Development as Vice President of Corporate Development in December 1995. He was elected to Vice President of Sales and Marketing in January 1994 and had served as Vice President of Sales since December 1990. He joined the Company in September 1985 as Western Area Sales Manager. Prior to joining Genentech, Mr. Jennings was Western Region Sales Manager of Bristol-Myers' Oncology Division. Mr. Jennings held various sales and management positions during his twelve-year career with Bristol-Myers. Mr. Juelsgaard was elected Vice President, General Counsel and Assistant Secretary in July 1994, and was elected Vice President of Corporate Law in February 1993. He joined the Company in 1985 as Corporate Counsel and subsequently held the positions of Senior Corporate Counsel and Chief Corporate Counsel. Ms. Ladd was appointed Vice President of Corporate Law in February 1996. Previously she was Chief Corporate Counsel. She joined the Company in 1989 as Corporate Counsel. Dr. MacFarlane joined the Company in August 1989 as Vice President of Regulatory Affairs. Dr. MacFarlane was employed by Glaxo, Inc. from 1978 until he joined Genentech. At Glaxo, Dr. MacFarlane had served as Vice President of Regulatory Affairs, Director of Regulatory Affairs, and Director of Research and Professional Services. Dr. Moore was elected Vice President of Information Resources in April 1994. She was Senior Director of Information Resources from July 1992 to 1994 and Director of Computer Resources from November 1987 to June 1992. Dr. Moore joined Genentech in August 1982 as a Senior Systems Analyst in Scientific Computing. Mr. Panek was elected Vice President of Engineering and Facilities in July 1993. He joined the Company in 1982 and held a number of positions in the manufacturing division before becoming Director of Engineering and Facilities in 1988. Prior to joining Genentech, Mr. Panek was employed by Eli Lilly and Company for six years. Ms. Popovits was elected Vice President of Sales in October 1994. She was Director of Field Sales from January 1993 to 1994 and Regional Manager of the Sales Department from October 1989 to December 1992. Ms. Popovits was at Dupont Critical Care for six years prior to joining the Company in November 1987 as Division Manager in the Southeast region. Dr. Raines was elected Vice President of Intellectual Property in March 1989 and Assistant Secretary in April 1989. He joined the Company as Vice President of Patents in May 1988. Dr. Raines was employed by Warner-Lambert Company from 1973 to 1988 holding numerous positions in the Legal Division and ultimately acted as Counsel for the Intellectual Property Department. Mr. Simon was appointed Vice President of Business and Corporate Development in December 1995, and was elected Vice President of Business Development in December 1994. He was Senior Director of Business Development from December 1993 to 1994. Mr. Simon joined Genentech as a Director in Business Development in December 1989 from Xoma Corporation. Dr. Stump was named a Genentech Fellow in January 1996, and was elected Vice President of Clinical Research in 1995. He was Senior Director of Clinical Research from 1991 to 1995, and joined the Company as Director of Clinical Research in 1989. Prior to joining Genentech, Dr. Stump was an Associate Professor of Medicine and Biochemistry at the University of Vermont. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The section labeled "Common Stock, Special Common Stock and Redeemable Common Stock Information", and footnotes labeled "Merger and New Agreement with Roche Holdings, Inc." and "Capital Stock" in the Notes to Consolidated Financial Statements, appearing on pages 66, 56 through 57, and 58 through 60, respectively, of the Company's 1995 Annual Report to Stockholders are incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The section labeled "11-Year Financial Summary" appearing on pages 64 and 65 of the Company's 1995 Annual Report to Stockholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The section labeled "Financial Review" appearing on pages 33 through 39 of the Company's 1995 Annual Report to Stockholders is incorporated herein by reference. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and Notes to Consolidated Financial Statements appearing on pages 41 through 62, the Report of Ernst & Young LLP, Independent Auditors, appearing on page 63 and the section entitled "Quarterly Financial Data (unaudited)" appearing on page 63 of the Company's 1995 Annual Report to Stockholders are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) The sections labeled "Nominees" and "Section 16 Reporting" appearing on pages 3 through 6 and 16 of the Company's Proxy Statement in connection with the 1996 Annual Meeting of Stockholders are incorporated herein by reference. (b) Information concerning the Company's Executive Officers is set forth in Part I of the Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The sections labeled "Executive Compensation", "Compensation of Directors", "Compensation of Executive Officers", "Summary of Compensation", "Stock Option Grants and Exercises", "Employment Agreements", "Loans and Other Compensation" and "Compensation Committee Interlocks and Insider Participation" appearing on pages 16 through 24 and 26 of the Company's Proxy Statement in connection with the 1996 Annual Meeting of Stockholders are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The sections labeled "Merger with Roche Holdings, Inc.", "Principal Stockholders of Genentech" and "Security Ownership of Management" appearing on pages 1 through 3 and 14 through 15 of the Company's Proxy Statement in connection with the 1996 Annual Meeting of Stockholders are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section labeled "Certain Relationships and Related Transactions" appearing on pages 27 through 29 of the Company's Proxy Statement in connection with the 1996 Annual Meeting of Stockholders is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Index to Financial Statements The following Financial Statements and supplementary data are included in the Company's 1995 Annual Report to Stockholders and are incorporated herein by reference pursuant to Item 8 of this Form 10-K. Page(s) in 1995 Annual Report to Stockholders ---------------------- Consolidated Statements of Income for each of the three years in the period ended December 31, 1995 41 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1995 42 Consolidated Balance Sheets at December 31, 1995 and 1994 43 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1995 44 Notes to Consolidated Financial Statements 45-62 Report of Ernst & Young LLP, Independent Auditors 63 Quarterly Financial Data (unaudited) 63 2. Financial Statement Schedule The following schedule is filed as part of this Form 10-K: Schedule II- Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 1995. All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto. 3. Exhibits Exhibit No. Description ----------- ----------- 3.1 Certificate of Incorporation.(2) 3.2 By-laws.(2) 3.3 Amended Certificate of Incorporation.(13) 3.4 Restated By-Laws.(7) 4.1 Indenture, dated March 27, 1987 ("Indenture") for U.S. $150,000,000 5% Convertible Subordinated Debentures due 2002.(3) 4.2 First Supplemental to Indenture, dated August 17, 1990.(7) 4.3 Second Supplemental to Indenture, dated October 18, 1995. (14) 10.1* Agreements dated February 12, 1985 and May 14, 1985 between the Company and G. Kirk Raab.(1) 10.2 Patent License Agreement with Columbia University dated October 12, 1988.(3) 10.3 Amended and Restated Contract for the Sale and Distribution of Protropin dated as of March 1, 1991.(8) 10.4* Agreement dated April 15, 1988 between the Company and G. Kirk Raab.(5) 10.5* Employment Agreement, dated October 25, 1989, between the Company and G. Kirk Raab.(6) 10.6 Agreement and Plan of Merger, dated as of May 23, 1995, as amended and restated, among the Company, Roche Holdings, Inc. and HLR (U.S.) II, Inc. with exhibits.(13) 10.7* Agreements dated June 27, 1989 between the Company and G. Kirk Raab.(6) 10.8* Amended Employment Agreement, dated July 31, 1990, between the Company and G. Kirk Raab.(7) 10.9 Amended Governance Agreement, dated September 7, 1990, between the Company and Roche Holdings, Inc.(13) 10.10 Heads of Agreement, dated as of February 11, 1992, between the Company and F. Hoffmann-LaRoche Ltd.(8) 10.11 Agreement dated June 6, 1991 between the Company and Grandview Drive Joint Venture.(8) 10.12* Agreements dated October 17, 1990 between the Company and G. Kirk Raab.(8) 10.13* Agreement dated March 17, 1992 between the Company and Robert A. Swanson.(8) 10.14* Letter Agreement, dated July 7, 1995, between the Company and G. Kirk Raab.(14) 10.15 Agreement between Genentech and F. Hoffman-La Roche Ltd. regarding commercialization of Genentech's products outside the United States dated as of October 25, 1995.(13) 10.16 Guaranty Agreement between Genentech and Roche Holding, Ltd. dated as of October 25, 1995.(13) 10.17* Agreement between the Company and G. Kirk Raab dated April 14, 1995.(14) 10.18 Amended and Restated Lease Agreement, dated December 8, 1995, between the Company and BNP Leasing Corporation.(14) 10.19 Amended and Restated Purchase Agreement, dated December 8, 1995, between the Company and BNP Leasing Corporation.(14) 13.1 1995 Annual Report to Stockholders.(14) 23.1 Consent of Ernst & Young LLP, Independent Auditors.(14) 27.1 Financial Data Schedule.(14) 28.1 Description of the Company's capital stock.(2) 99.1* 1984 Incentive Stock Option Plan, as amended and restated as of October 25, 1995.(12) 99.2* Restated 1984 Non-Qualified Stock Option Plan, as amended and restated as of October 25, 1995.(12) 99.3* Restated Relocation Loan Program.(8) 99.4* Restated 401(k) Plan.(14) 99.5* 1991 Employee Stock Plan, as amended and restated as of October 25, 1995.(9) 99.6* 1990 Stock Option/Stock Incentive Plan, as amended and restated as of October 25, 1995.(11) 99.7* Supplemental Plan.(8) 99.8* 1994 Stock Option Plan, as amended and restated as of October 25, 1995.(10) 99.9* 1996 Stock Option/Stock Incentive Plan.(14) * As required by Item 14(a)(3) of Form 10-K, the Company identifies this Exhibit as a management contract or compensatory plan or arrangement of the Company. - -------------------- (1) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1985 and incorporated herein by reference. (2) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1986 and incorporated herein by reference. (3) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference. (4) Filed as an exhibit to Form 8-K dated May 3, 1988 and incorporated herein by reference. (5) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1988 and incorporated herein by reference. (6) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1989 and incorporated herein by reference. (7) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. (8) Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. (9) Filed as an exhibit to Form S-8 dated October 25, 1995 (registration statement no. 33-59949-01) and incorporated herein by reference. (10) Filed as an exhibit to Form S-3 dated October 25, 1995 (registration statement no. 33-59949-02) and incorporated herein by reference. (11) Filed as an exhibit to Form S-3 dated October 25, 1995 (registration statement no. 33-59949-03) and incorporated herein by reference. (12) Filed as an exhibit to Form S-3 dated October 25, 1995 (registration statement no. 33-59949-04) and incorporated herein by reference. (13) Filed as an exhibit to Form S-4 dated October 25, 1995 (registration statement no. 33-59949) and incorporated herein by reference. (14) Filed with this document. (b) Reports on Form 8-K There were no reports on Form 8-K filed for the quarter ended December 31, 1995. 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. GENENTECH, INC. Registrant Date: March 29, 1996 By: /S/BRADFORD S. GOODWIN ---------------------------------- Bradford S. Goodwin Vice President and Controller (Principal Accounting Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Louis J. Lavigne, Jr., Senior Vice President and Chief Financial Officer, and Bradford S. Goodwin, Vice President and Controller, his attorney-in-fact, with the full power of substitution, for him in any and all capacities, to sign any amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date --------- ----- ---- Chief Executive Officer: /S/ARTHUR D. LEVINSON President, Chief Executive March 29, 1996 - --------------------------- Officer and Director Arthur D. Levinson Principal Financial Officer: /S/LOUIS J. LAVIGNE, JR. Senior Vice President and March 29, 1996 - --------------------------- Chief Financial Officer Louis J. Lavigne, Jr. Director: /S/HERBERT W. BOYER Director March 29, 1996 - --------------------------- Herbert W. Boyer /S/JURGEN DREWS Director March 29, 1996 - --------------------------- Jurgen Drews /S/FRANZ B. HUMER Director March 29, 1996 - --------------------------- Franz B. Humer /S/LINDA F. LEVINSON Director March 29, 1996 - --------------------------- Linda F. Levinson /S/J. RICHARD MUNRO Director March 29, 1996 - --------------------------- J. Richard Munro /S/DONALD L. MURFIN Director March 29, 1996 - --------------------------- Donald L. Murfin /S/JOHN T. POTTS, JR. Director March 29, 1996 - --------------------------- John T. Potts, Jr. /S/C. THOMAS SMITH, JR. Director March 29, 1996 - --------------------------- C. Thomas Smith, Jr. /S/ROBERT A. SWANSON Director March 29, 1996 - --------------------------- Robert A. Swanson /S/DAVID S. TAPPAN, JR. Director March 29, 1996 - --------------------------- David S. Tappan, Jr. SCHEDULE II GENENTECH, INC. VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1995, 1994 and 1993 (in thousands)
Additions Balance at Charged to Balance at Beginning of Costs and End of Period Expenses Deductions(1) Period ---------- ---------- ---------- ---------- Allowance for doubtful accounts and returns: Year Ended December 31, 1995: $ 4,422 $ 10,972 $ (8,722) $ 6,672 ========== ========== ========== ========== Year Ended December 31, 1994: $ 3,572 $ 5,583 $ (4,733) $ 4,422 ========== ========== ========== ========== Year Ended December 31, 1993: $ 2,220 $ 4,003 $ (2,651) $ 3,572 ========== ========== ========== ========== Inventory reserves: Year Ended December 31, 1995: $ 13,008 $ 3,690 $ (9,789) $ 6,909 ========== ========== ========== ========== Year Ended December 31, 1994: $ 2,606 $ 11,940 $ (1,538) $ 13,008 ========== ========== ========== ========== Year Ended December 31, 1993: $ 3,094 $ 1,194 $ (1,682) $ 2,606 ========== ========== ========== ========== Reserve for non-marketable equity securities: Year Ended December 31, 1995: $ 4,623 $ 468 $ - $ 5,091 ========== ========== ========== ========== Year Ended December 31, 1994: $ 3,875 $ 748 $ - $ 4,623 ========== ========== ========== ========== Year Ended December 31, 1993: $ 3,275 $ 600 $ - $ 3,875 ========== ========== ========== ========== (1) Represents amounts written off or returned against the allowance or reserves.
INDEX OF EXHIBITS FILED WITH FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995
Exhibit No. Description - ----------- ----------- 4.3 Second Supplemental to Indenture, dated October 18, 1995 10.14 Letter Agreement, dated July 7, 1995, between the Company and G. Kirk Raab 10.17 Agreement between the Company and G. Kirk Raab dated April 14, 1995 10.18 Amended and Restated Lease Agreement, dated December 8, 1995, between the Company and BNP Leasing Corporation 10.19 Amended and Restated Purchase Agreement, dated December 8, 1995, between the Company and BNP Leasing Corporation 13.1 1995 Annual Report to Stockholders 23.1 Consent of Ernst & Young LLP, Independent Auditors 27.1 Financial Data Schedule 99.4 Restated 401(k) Plan 99.9 1996 Stock Option/Stock Incentive Plan
2 26 EX-10.14 2 GENENTECH, INC. 460 Point San Bruno Boulevard South San Francisco, CA 94080 As of July 7, 1995 Mr. G. Kirk Raab 2250 Reddington Road Hillsborough, CA Dear Kirk: This Letter Agreement sets forth certain changes to the letter agreement between you and Genentech, Inc. (the "Company") dated October 25, 1989 (the "1989 Letter"), as amended by the letter agreement between you and the Company dated July 31, 1990 (the "1990 Letter") and the letter agreement between you and the Company dated October 17, 1991 (the "1991 letter") (the 1989 Letter, as amended by the 1990 letter and the 1991 Letter, being hereinafter referred to as the "Prior Letter Agreement"). These changes are being made in connection with your resignation, effective as of today, from your employment with the Company and from the Board of Directors of the Company. It is agreed that this resignation will be treated as an Involuntary Termination under the Prior Letter Agreement occurring on the date of this Letter Agreement. 1. The last sentence of Paragraph 3.A.(b) of the Prior Letter Agreement is amended to read in its entirety as follows: Such health and life insurance coverage will continue through the earlier of (i) the date of your death and (ii) any date on which you breach either of the Covenants (as defined below). 2. Paragraph 3.A.(c) of the Prior Letter Agreement (as set forth in the 1991 Letter Agreement) is amended to read in its entirety as follows: Loan Payments. You have currently outstanding from the Company the following loans (the "Loans"): a loan in the principal amount of $1.5 million pursuant to a promissory note dated April 14, 1995 (the "Note") and a loan from the Company in the principal amount of $450,000 pursuant to a memorandum to you from Bob Swanson dated May 14, 1985, as amended February 7, 1995 (the "Amended Memo"). The first sentence of Paragraph 1 of the Note is hereby amended to read in its entirety as follows: "Unless extended by Genentech's Board of Directors, the entire principal amount of this promissory note and any accrued but unpaid interest ("Note") shall be due and payable on the earliest of (i) April 15, 1998, (ii) any date on which the undersigned breaches either of the Covenants (as defined in the Letter Agreement dated July 7, 1995 between Genentech and the undersigned), and (iii) the date Roche Holdings, Inc. or any affiliate thereof causes Genentech to redeem its Special Common Stock ("SCS") or any other security issued in exchange for such SCS." Paragraph 4 of the Amended Memo is hereby deleted and Paragraph 3 of the Amended Memo is hereby amended to read in its entirety as follows: "The loan described in paragraph 2 above shall be repaid on the earliest of: (1) the date Roche Holdings, Inc. or any affiliate thereof causes Genentech to redeem its Special Common Stock ("SCS") or any other security issued in exchange for such SCS, (2) April 15, 1998, and (3) any date on which you breach either of the Covenants (as defined in the Letter Agreement dated July 7, 1995, between Genentech and you)." In consideration of such extension of the terms of the Loans, you agree that with respect to such of your stock options as may vest after the Involuntary Termination of your employment (the "Pledged Options"), (i) you will give the Company a security interest for repayment of the Loans, in a form satisfactory to the Company, in all stock acquired by exercise of the Pledged Options and shall not dispose of such stock unless you simultaneously repay to the Company the lesser of (x) the excess of the then fair market value of such stock over the aggregate exercise price paid by you to acquire such stock (the "Spread") and (y) the then outstanding balance of the Loans (including accrued interest), and (ii) if as of the close of business on the date the Loans become due and payable there is an outstanding balance (including accrued interest) due with respect thereto, the Company shall have the right, at its election, to take immediate possession of any stock then in your possession that you acquired by exercise of the Pledged Options having a fair market value equal to such balance, or cancel any then outstanding Pledged Options (whether then vested or unvested) having a Spread equal to such unpaid balance, or a combination thereof, in satisfaction of such balance. In addition, you further agree that if any payments are made or other consideration given in respect of a cancellation or disposition of any of the Pledged Options, such payments or other consideration shall, if requested by the Company, be applied to the reduction of the Loans. Without limiting the foregoing, the Company shall be entitled to place a legend on the certificates representing shares issued upon exercise of Pledged Options and/or upon the Pledged Options to reflect the foregoing and any such security interest and/or to make arrangements in connection with any disposition of such shares and/or Pledged Options to assure the application of the proceeds thereof as aforesaid. 3. The following additional provisions are added to the Prior Letter Agreement: (a) Following the Involuntary Termination of your employment, the Company shall provide you with outplacement services, consistent with its past practice with other departing executives of the Company, for a period not greater than six months and at a cost to the Company not to exceed $50,000; provided, that such coverage shall cease in any event upon the earliest of (i) the date you obtain new employment, (ii) any date on which you breach either of the Covenants (as defined below) and (iii) the Company's incurring expenses of $50,000 for such purposes as aforesaid. (b) For a period of five years following the Involuntary Termination of your employment, you shall be subject to the following covenants (the "Covenants") in the manner set forth below: (i) you will not in any capacity work for, or knowingly acquire or maintain a financial interest, over which you have investment control, that is in excess of 5% of the outstanding equity in, any business or entity, wherever located, that (1) markets or is developing a product that is or competes with one of the following, or any analogs thereof: human growth hormone; tPA; DNase; and gamma interferon; (2) markets or is developing one of the following that Genentech markets or is developing, or any analogs thereof: inhibitors of the gP IIbIIIa receptor; IGF-1; anti-HER2; ANP; anti-CD2O; nerve growth factor; anti-IgE; gP120 vaccine; TNF; and TNF receptor-IgG; or (3) markets or is developing (including research activities) one of the following that Genentech markets or is developing (including research activities), or any analogs thereof: VEGF; anti-VEGF; lymphotoxin; TNK; anti-CD11a; and thrombopoietin (the "Noncompetition Covenant") (for purposes of the foregoing, an "analog" shall mean: (a) in the instance of nonproteinous molecules, two or more chemical compounds each sharing a core chemical structure that is the same or substantially and functionally similar; and (b) in the instance of proteinous molecules, any compound with either (i) greater than eighty-five (85%) amino acid sequence homology and specificity for the same binding site(s) or (ii) with respect to an antibody to a molecule, the receptor to that molecule and with respect to a receptor to a molecule, the antibody to that molecule); (ii) you will not (1) solicit, attempt to solicit, induce or otherwise cause any person who is at that time an employee of the Company to terminate his or her employment in order to become an employee, consultant, or independent contractor to or for any entity by whom you are employed, with whom you are affiliated, or in whom you or any entity with which you are affiliated, have any financial interest or with whom you or any entity with which you are affiliated are discussing the possibility of taking a financial interest, or (2) use, reproduce, or disclose to any other person or company any confidential or proprietary information belonging to the Company that would enable or assist that person or company to solicit, attempt to solicit, induce or otherwise cause any person who is at the time an employee of the Company to terminate his or her employment with the Company (the "No-Raid Covenant"). From and after any date on which you breach the Non-competition Covenant, the cessation of health and life insurance coverage and outplacement services and the acceleration of your loans set forth above in this Letter Agreement shall occur, but the Company's other obligations to you under the Prior Letter Agreement as amended by this Letter Agreement (including without limitation the obligation to provide you with severance pay and benefits and to permit the continued vesting and exercisability of your options) shall continue in effect. From and after any date on which you breach the No-Raid Covenant, the cessation of health and life insurance coverage and outplacement services and the acceleration of your loans set forth above in this Letter Agreement shall occur, and in addition the Company's other obligations to you under the Prior Letter Agreement as amended by this Letter Agreement (including without limitation the obligation to provide you with severance pay and benefits and to permit the continued vesting and exercisability of your options) shall cease and be of no further force and effect. In addition, you and the Company agree that your breach of either of the Covenants would cause harm to the Company that is not capable of remedy through money damages and accordingly that the Company shall be entitled to injunctive relief from a court of competent jurisdiction against such a breach. Notwithstanding anything else in this Letter Agreement, the Company shall not assert that you have breached either of the Covenants unless its Board of Directors so determines. The Company shall give you oral or written notice either (i) that management is considering recommending to the Board that the Board make such a determination, or (ii) that the Board is considering whether to make such a determination, which notice shall describe the breach or possible breach in question and shall give you at least three business days to provide a response to such notice and/or propose a remedy for such breach or possible breach to the Chief Executive Officer of the Company (in the case of a notice described in clause (i) above) or the Board (in the case of a notice described in clause (ii) above). Notwithstanding the foregoing, in no event shall any failure or alleged failure of the Company to comply with the requirements of the preceding sentence or any aspect thereof preclude the Company from enforcing, or delay the enforcement of, any remedy for such breach to which it may otherwise be entitled, or relieve you of any obligation for any such breach; except that the Company shall not enforce the remedies set forth in the second and third sentences of this paragraph until the expiration of three business days from the date on which it gives you notice pursuant to the preceding sentence. (c) Counsel for the parties in In Re Genentech Shareholder Litigation, C.A. No. 14265 (Cons.) (the "Actions"), have today entered into a Memorandum of Understanding with respect to the settlement of the Actions, which Memorandum of Understanding provides for the entry of judgment and a release of all claims against you and other defendants. The provisions of this paragraph shall not become effective unless and until you are released from the claims asserted in the Actions pursuant to final court approval of the proposed settlement. In consideration of the Company's execution of this Letter Agreement, and except with respect to such obligations as the Company may have (i) pursuant to the Prior Letter Agreement as amended by this Letter Agreement, (ii) your stock option agreements, (iii) the Company's Tax Reduction Investment Plan, (iv) the Company's Supplemental Plan, (v) to indemnify you pursuant to its charter, by-laws or Delaware law, (vi) under any other existing written agreement pursuant to which it may be obligated to pay you any compensation for services and (vii) with respect to Directors and Officers insurance, you hereby waive and release any common law, statutory or other complaints, claims, charges or causes of action, both known and unknown, in law or in equity, which you may now have or ever had against the Company, any directors or officers of the Company, and any of their respective predecessors, successors, parents, subsidiaries, affiliates and agents (including, without limitation, any investment bankers or attorneys) ("Claims"). You and the Company stipulate and agree that you shall be deemed to have, and by operation of the releases contemplated hereby shall have, waived and relinquished, to the fullest extent permitted by law, the provisions, rights, and benefits of section 1542 of the California Civil Code, which provides A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. You shall be deemed to have, and by operation of the releases contemplated hereby shall have, waived any and all provisions, rights and benefits conferred by any law of any state or territory of the United States, or principle of common law, which is similar, comparable or equivalent to section 1542 of the California Civil Code. You acknowledge that you may hereafter discover facts in addition to or different from those which you now know or believe to be true with respect to the subject matter of the releases contemplated hereby, but you shall be deemed to have, and by operation of the releases contemplated hereby shall have, fully, finally, and forever settled and released any and all Claims, known or unknown, suspected or unsuspected, contingent or non-contingent, whether or not concealed or hidden, which now exist, or heretofore have existed upon any theory of law or equity now existing or coming into existence in the future, including, but not limited to, claims arising under the Age Discrimination in Employment Act, conduct which is negligent, intentional, with or without malice, or a breach of any duty, law or rule, without regard to the subsequent discovery or existence of such different or additional facts. You acknowledge that the foregoing waiver was separately bargained for and is an integral element of this Letter Agreement of which this release is a part and that you were represented by counsel in connection with your execution of this Letter Agreement. 4. Any notice by the Company to you pursuant to paragraph 3(b) of this Letter Agreement shall be given orally by telephone or in person, or in writing as set forth below. Any notice by you to the Company or by you to the Company designating a different facsimile number or address shall be given in writing as set forth below. Written notices to either party to this Letter Agreement shall be given: (i) by facsimile to the party's facsimile number set forth below, or such other facsimile number as such party may designate in accordance with this paragraph 4, in which event such notice shall be considered to have been given at the time it is transmitted by the party giving notice; (ii) by U.S. mail to the party's address set forth below, or such other address as such may designate in accordance with this paragraph 4, in which event such notice shall be considered to have been given two business days after it is sent; (iii) by Federal Express or another overnight courier service to the party's address set forth below, or such other address as such party may designate in accordance with this paragraph 4, in which event such notice shall be considered to have been given one business day after it is sent; or (iv) by hand delivery to the party's address at the address set forth below, or such other address as such party may designate in accordance with this paragraph 4, in which event such notice shall be considered to have been given when delivered to such address. Your present address and facsimile number are: Mr. G. Kirk Raab 999 Mountain Home Rd. Woodside, CA 94062 Facsimile number: (415) The Company's present address and facsimile number are: Genentech, Inc. 460 Point San Bruno Boulevard South San Francisco, CA 94080 Facsimile number: (415) 952-9881 Attention: General Counsel 5. Except as modified by this Letter Agreement, the terms and provisions of the Prior Letter Agreement will continue in full force and effect. Please indicate your acceptance of the foregoing by signing and dating the enclosed copy of this Letter Agreement and returning it to the Company at your earliest convenience. Very truly yours, GENENTECH, INC. /S/ JOHN P. MCLAUGHLING _______________________ By: John P. McLaughlin AGREED TO AND ACCEPTED BY: /S/ G. KIRK RAAB __________________ G. Kirk Raab Dated: As of July 7, 1995 - - 6 - EX-13.1 3 FINANCIAL REVIEW (dollars in millions, except per share amounts) MAJOR EVENTS AFFECTING FINANCIAL RESULTS AND POSITION The major events described below affected Genentech's financial results and position in 1995 and have prospective implications as indicated: On October 25, 1995, a new agreement (the Agreement) with Roche Holdings, Inc. (Roche) was approved by Genentech's non-Roche stockholders to extend for four years Roche's option to cause Genentech (the Company) to redeem (call) the outstanding callable putable common stock (special common stock) of the Company at predetermined prices. Should the call be exercised, Roche will concurrently purchase from the Company a like number of common shares, for a price equal to Genentech's cost to redeem the special common stock. The special common stock is subject to redemption at the option of Roche at prices beginning at $62.50 during the quarter ended December 31, 1995, and increasing $1.25 per quarter for six quarters, then increasing $1.50 per quarter for the following eight quarters to $82.00 in the quarter ending June 30, 1999 (with each such redemption price being increased by $0.50, to a final price of $82.50, upon final court settlement of certain stockholder litigation). If Roche does not cause the redemption as of June 30, 1999, Genentech's stockholders will have the option (the put) to cause the Company to redeem none, some, or all of their shares of special common stock at $60.00 per share (and Roche will concurrently provide the necessary redemption funds to the Company by purchasing a like number of shares of common stock at $60.00 per share) within thirty business days commencing July 1, 1999 (such dates subject to acceleration in certain insolvency events). The Company's obligation to redeem these shares is contingent upon the contribution by Roche of the necessary redemption funds for the put. Roche Holding Ltd., a Swiss corporation, has guaranteed Roche's obligation under the put. In 1995, the Company recorded special charges totaling $25 million, of which $21 million related to expenses associated with the Agreement. In conjunction with that Agreement, F. Hoffmann-La Roche Ltd. (HLR) was granted an option at terms discussed below for ten years for licenses to use and sell certain of Genentech's products in non-U.S. markets. As a general matter, such option for a Genentech product must be exercised at, or prior to if Genentech mutually agrees, the conclusion of phase II clinical trials for each product. In general, for each product for which HLR exercises its option (option product), the Company and HLR will share equally all development expenses, including preclinical, clinical, process development and related expenses, incurred by the Company through that date and prospectively, with respect to the development of the product in the United States. HLR will pay all non-U.S. development expenses. In general, Genentech will supply HLR clinical requirements of option products at cost and its commercial requirements at cost plus 20%. In general, HLR will pay a royalty of 12.5% until a product reaches $100 million in aggregate sales outside of the United States, at which time the royalty rate increases to 15%. In addition, HLR has exclusive rights to, and pays the Company 20% royalties on, Canadian sales of the Company's existing approved products in Canada, and European sales of Pulmozyme, registered trademark. Consequently, in the fourth quarter of 1995, the Company transferred to HLR the rights to its Canadian product sales, and its European sales of Pulmozyme, and commenced recording royalty revenue from HLR on such sales. The Company supplies its products to HLR, and has agreed to supply products for which HLR has exercised its option, for sales outside of the United States at cost plus 20%. Depending on whether HLR does or does not exercise its option to develop and sell each of the Company's future products, future levels of the Company's product sales, royalties and contract revenue, as well as R&D and other expenses, could vary significantly from 1995 levels both on an annual and quarter-to-quarter basis. Upon completion of the Agreement with Roche, Genentech has implemented a new strategy focused on building the value of the Company and positioning Genentech for ongoing growth into the 21st century. As part of the implementation of that strategy, the Company expects to increase research and development expenses in 1996 by approximately 20%. The Company previously announced possible impending competition regarding sales of its two human growth hormone products - Protropin, registered trademark and Nutropin, registered trademark. Three companies received FDA approval in 1995 to market their growth hormone products for the treatment of growth hormone inadequacy in children. However, as a result of the assertion of certain Genentech patents, a court temporarily prohibited two of these products from entering the market pending a full trial. The two companies appealed the decision, which was subsequently overruled by the appellate court for one of the companies. Future court decisions will determine whether these two products will be permanently enjoined from the market. The third company initiated product launch activities in late 1995. On December 29, 1995, Genentech received clearance from the Food and Drug Administration (FDA) to market Nutropin AQ, registered trademark [somatropin (rDNA origin) injection], the first and only liquid (aqueous) recombinant human growth hormone product available. Nutropin AQ is approved for the same indications as Nutropin. In December 1994, the Company and Eli Lilly and Company (Lilly) reached an agreement regarding all patent infringement and contract actions between the two parties, which included the Company granting to Lilly licenses, options to license, or immunities from suit for certain of the Company's patents. Payments are required from Lilly on sales of these products. The Company expects to record, and receive in cash, $7.5 million of royalty revenues per quarter through 1998, subject to possible offsets and contingent upon Humulin continuing to be marketed in the United States. Accordingly, $30.0 million of such payments were received and recorded as royalty revenue in 1995. RESULTS OF OPERATIONS (dollars in millions) Annual % Change Revenues 1995 1994 1993 95/94 94/93 ______________________________________________________________________________ Revenues $ 917.8 $ 795.4 $ 649.7 15% 22% The increase in revenues in 1995 resulted primarily from higher royalty income and product sales. The 1994 increase resulted from higher product sales, royalty income and contract revenues. Annual % Change Product Sales 1995 1994 1993 95/94 94/93 ______________________________________________________________________________ Activase $ 301.0 $ 280.9 $ 236.3 7% 19% Protropin and Nutropin 219.4 225.4 216.8 (3) 4 Pulmozyme 111.3 88.3 - 26 - Actimmune 3.6 6.4 4.3 (44) 49 __________________________________________________________ Total product sales $ 635.3 $ 601.0 $ 457.4 6% 31% % of revenues 69% 76% 70% Activase: The continued increase in Activase, registered trademark, sales in 1995 and 1994 is attributable to growth in market share and an increase in the number of patients receiving thrombolytic therapy in the United States. During 1995, Activase market share increased to 75% from approximately 70% and 66% in 1994 and 1993, respectively, in the United States. In April 1995, the FDA approved for marketing an accelerated infusion of Activase, allowing revised labeling for the product incorporating data from the Global Utilization of Activase and Streptokinase in Occluded Coronary Arteries (GUSTO) study. Also during 1995, an analysis of the GUSTO trial, published in the New England Journal of Medicine, determined that Activase is cost-effective relative to other medical treatments. Pursuant to the Agreement with Roche, Genentech transferred the rights to sell Activase in Canada to HLR during the fourth quarter of 1995, and began receiving royalties on such sales. Protropin and Nutropin: Net sales of Protropin and Nutropin decreased in 1995 compared to 1994 due to a slight volume increase in sales being offset by the impact of pricing programs for distribution channels and for the managed care sector. 1994 sales increased compared to 1993 due primarily to the introduction of Nutropin for the treatment of chronic renal insufficiency and to more growth hormone inadequate patients starting treatment. The Company faces new competition in the growth hormone market from one new competitor which entered the market in late 1995, and potential competition from three other companies, and expects that such competition will have an adverse effect on its sales of Protropin and Nutropin which, depending on the extent and type of competition, could be material to the Company's total growth hormone sales. Pursuant to the Agreement with Roche, Genentech transferred the rights to sell its growth hormone in Canada to HLR during the fourth quarter of 1995, and began receiving royalties on such sales. Other factors that may influence future Protropin and Nutropin sales include: the availability of third party reimbursement for the costs of such therapies and the outcome of litigation involving the Company's patents for growth hormone and related processes. Pulmozyme: The increase in the sales of Pulmozyme (launched in 1994) in 1995 is attributable to market launches in additional European countries and continued adoption of the product by physicians to treat cystic fibrosis patients. Pursuant to the Agreement with Roche, Genentech transferred rights to sell Pulmozyme in Europe and Canada to HLR during the fourth quarter of 1995 and, instead of recording sales of Pulmozyme, began receiving royalties on such sales. Additional factors that may influence future sales of Pulmozyme for the management of cystic fibrosis include: the number and kinds of patients benefiting from such therapy; the availability of third party reimbursement for the costs of such therapies; physicians' personal experiences in the use and results of the therapy; the development of alternate therapies for the treatment and cure of cystic fibrosis; the development of additional indications for using Pulmozyme; and the cost of Pulmozyme therapy. Royalties, Contract and Other, and Interest Income Annual % Change 1995 1994 1993 95/94 94/93 _______________________________________________________________________________ Royalties $ 190.8 $ 126.0 $ 112.9 51% 12% Contract and other 31.2 25.6 37.9 22 (32) Interest income 60.5 42.7 41.5 42 3 The Company receives royalty payments from the sales of various health care products. These payments have increased in each of the past three years primarily due to increases in product sales by the Company's licensees and new royalty arrangements. In 1995, the largest dollar increase was attributable to the receipt and recognition of $30.0 million of royalty revenue relating to the December 1994 settlement with Lilly regarding certain of the Company's patents. In 1994, the largest dollar increase was attributable to royalties earned from the sales of recombinant human insulin. As discussed above, HLR has been granted options for licenses to use and sell certain of Genentech's products in non-U.S. markets. As a result of this arrangement, the Company expects such royalty revenue to increase in future years, although it is not certain for which products HLR will exercise its option. Cash flows from royalty income include non-dollar denominated revenues. The Company currently purchases simple foreign currency put options (options) and enters into foreign currency forward exchange contracts (forward contracts) to hedge these cash flows. All options expire within the next two years. All forward contracts are less than 90 days in duration, and there are no outstanding balances at the end of any quarter. In 1996, the Company has entered into forward contracts with various durations that will expire by the end of the year. In addition, the Company plans to enter into new simple purchased put options that will expire within the next five years to hedge non-U.S. dollar denominated royalties during this period. Contract and other revenues increased in 1995 primarily due to $6.4 million of gains recorded from sales of biotechnology equity securities. 1994 revenue decreased compared to 1993 because 1993 included $18.2 million related to fixed license fees receivable through 1996 from Schering Corporation and its affiliates for a world-wide license to certain patented technology and processes used to produce recombinant interferon alpha. Contract and other revenues will continue to fluctuate due to variations in the timing of contract benchmark achievements; the initiation of new contractual arrangements, including the potential exercise of product options by HLR; and the conclusion of existing arrangements. Interest income was higher in 1995 due to a larger investment portfolio in 1995 and a higher average portfolio yield. In 1994, the increase was due to a larger investment portfolio in 1994 compared to 1993, which more than offset the decline in the average portfolio yield. The Company enters into interest rate swaps as part of its overall strategy of managing the duration of its investment portfolio. See the "Financial Instruments" footnote in the "Notes to Consolidated Financial Statements" for further information. Annual % Change Costs and Expenses 1995 1994 1993 95/94 94/93 ______________________________________________________________________________ Cost of sales $ 97.9 $ 95.8 $ 70.5 2% 36% Research and development 363.0 314.3 299.4 15 5 Marketing, general and administrative 251.7 248.6 214.4 1 16 Special charge 25.0 - - - - Interest expense 8.0 7.1 6.5 13 9 _________________________________________________________ Total costs and expenses $ 745.6 $ 665.8 $ 590.8 12% 13% % of revenues 81% 84% 91% Cost of sales as % of product sales 15% 16% 15% R&D as % of revenues 40 40 46 MG&A as % of revenues 27 31 33 Cost of sales: Cost of sales in 1995 increased over 1994 due to higher product sales. This increase was partly offset by a decrease in inventory reserves provided, from $11.9 million in 1994 to $3.7 million in 1995. The 1995 reserves were primarily for expected product expiration of certain Nutropin and Activase inventories. The reserves recorded in 1994 were primarily for the likely expiration of Pulmozyme and Nutropin product prior to sale. These products were launched in the beginning of 1994 and did not meet the Company's initial expectations for sales that year. The increase in cost of sales in 1994 compared to 1993 was primarily due to increased product sales and the $11.9 million addition to reserves discussed above. Research and Development: The increase in R&D expenses in 1995 and 1994 reflects the Company's continued commitment to developing new products and new indications for existing products. Overall increases resulted from the higher level of activity and associated costs of products in the later stages of clinical trials and the manufacture of products for clinical trials. Expenses as a percentage of revenues were unchanged at 40% from 1994 to 1995. The percentage declined in 1994 compared to 1993 due to increasing revenues combined with the Company's disciplined approach to managing its research and development investment. To gain additional access to potential new products and technologies, the Company has established research collaborations, including equity investments, with companies developing technologies that fall outside the Company's research focus and with companies having the potential to generate new products through technology exchanges and investments. The Company has also entered into product-specific collaborations to acquire development and marketing rights for products. In March 1995, Genentech entered into a collaboration with IDEC Pharmaceuticals Corp. (IDEC) to develop IDEC's CD20 monoclonal antibody for the treatment of non-Hodgkin's B-cell lymphomas. A phase III clinical trial has begun. In January 1996, HLR exercised its option, pursuant to the terms of the Agreement, to IDEC-C2B8. In February 1996, Genentech expanded its collaboration with IDEC to include IDEC-Y2B8, for the treatment of the more severe forms of B-cell lymphomas. In February 1996, the Company agreed to invest in Genenvax, Inc., a new company created to develop gp120, Genentech's potential vaccine for the prevention of HIV. Genenvax will receive exclusive rights to gp120. See the "Research and Development" footnote in the "Notes to Consolidated Financial Statements" for a further description of these collaborations. Marketing, General and Administrative: Marketing, general and administrative expenses in 1995 were comparable to the 1994 level of expenses. The increase in 1994 compared to 1993 was primarily due to additional Activase marketing expenses, Pulmozyme marketing costs in preparation for the anticipated U.S. and European product launches in 1994, and increased growth hormone marketing expenses in anticipation of future competition. Special Charge: The Company recorded a special charge of $25.0 million in 1995, which includes $21.0 million related to the new merger Agreement with Roche and $4.0 million associated with the resignation of the Company's former President and Chief Executive Officer. The merger expenses include investment banking fees, legal expenses, filing fees and other costs related to the Agreement, as well as charges associated with the proposed settlement of stockholder lawsuits filed after the transaction was announced. Interest Expense: Interest expense in 1995, 1994, and 1993, net of amounts capitalized, relates primarily to interest on the Company's 5% convertible subordinated debentures. In 1995, it also includes interest on a $25.0 million borrowing arrangement which commenced in February 1995 and was paid in December. Income Before Taxes and Income Taxes 1995 1994 1993 _____________________________________________________________________________ Income before taxes $ 172.3 $ 129.6 $ 58.9 Income tax provision 25.8 5.2 - Effective tax rate 15% 4% - Deferred tax assets less deferred tax liabilities $ 130.8 $ 118.6 $ 123.0 Valuation allowance (74.0) (84.4) (123.0) ________________________________ Total net deferred taxes $ 56.8 $ 34.2 $ - ================================ Approximately $30 million of the valuation allowance at December 31, 1995, relates to the tax benefits of stock option deductions which will be credited to additional paid-in capital when realized. Realization of the net deferred taxes, future effective tax rates, and future reversals of the valuation allowance (that is, recognition of deferred tax assets) depend on future earnings from existing and new products and new indications for existing products. The timing and amount of future earnings will depend on continued success in marketing and sales of the Company's current products, as well as scientific success, results of clinical trials and regulatory approval of products under development. The net increase in the effective tax rate from 1994 to 1995 was primarily related to limitations on the utilization of existing carryforwards related to the U.S. alternative minimum tax. Future effective tax rates are expected to increase following the recognition of the balance of the Company's credit carryforwards. Annual % Change Net Income 1995 1994 1993 95/94 94/93 _______________________________________________________________________________ Net income $ 146.4 $124.4 $ 58.9 18% 111% Net income per share $ 1.21 $ 1.04 $ 0.50 LIQUIDITY AND CAPITAL RESOURCES 1995 1994 1993 _______________________________________________________________________________ Cash, cash equivalents, short-term investments and long-term marketable debt and equity securities $1,096.8 $ 920.9 $ 719.8 Working capital 812.0 776.6 694.6 Cash provided by (used in): Operating activities 133.9 200.4 114.5 Investing activities (117.7) (322.3) (121.3) Financing activities 54.1 71.2 49.9 Capital expenditures (included in investing activities above) (70.2) (82.8) (87.5) Current ratio 4.5:1 4.5:1 4.6:1 The Company believes that its cash, cash equivalents, and short-term and long- term investments, together with funds provided by operations and leasing arrangements, will be sufficient to meet its operating cash requirements, including capital expenditures and the development of existing and new products through internal research and development activities, selective product in- licensing, research collaborations and equity investments. Cash generated from operations, the maturity of investments and stock issuances was used to purchase marketable securities and make capital additions in 1995. Capital expenditures in 1995 primarily include costs incurred for additional office buildings and enhancements to existing manufacturing facilities. Capital expenditures decreased in 1995 compared to 1994 primarily due to the completion in 1994 of a central process utility plant and additional manufacturing facilities. In 1995, the Company entered into an arrangement with a lessor for a new manufacturing facility which will be subject to an operating lease and is expected to become operational in three years. ADDITIONAL PROSPECTIVE INFORMATION Market Potential/Risk: Over the longer term, the Company's (and its partners') ability to successfully market current products, expand their usage, and bring new products to the marketplace will depend on many factors, including the effectiveness and safety of the products, FDA and foreign regulatory agencies' approvals for new products and new indications, and the degree of patent protection afforded to particular products. The Company believes it has strong patent protection or the potential for strong patent protection for a number of its products that generate sales and royalty revenue or that the Company is developing; however, the courts will determine the ultimate strength of patent protection of the Company's products and those on which the Company earns royalties. Roche Holdings, Inc.: At December 31, 1995, Roche held approximately 64% of the Company's outstanding equity securities. The Company expects to continue to have material transactions with Roche, including royalty income, contract development revenues, product sales and joint product development. Foreign Exchange: The Company receives revenues from countries throughout the world. As a result, risk exists that revenues may be impacted by changes in the exchange rates between the U.S. dollar and foreign currencies. To mitigate this risk, the Company hedges certain of these anticipated revenues as discussed in the "Financial Instruments" footnote in the "Notes to Consolidated Financial Statements." Legal Proceedings: The Company is a party to various legal proceedings including a stockholder suit involving the new Agreement with Roche and the 1990 merger with Roche; patent infringement cases; and various cases involving product liability and other matters. See the "Legal Proceedings" footnote in the "Notes to Consolidated Financial Statements" for further information. Future Accounting Changes: In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires the Company to review for impairment long- lived assets, certain identifiable intangibles, and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In certain situations, an impairment loss would be recognized. FAS 121 is effective for the Company's 1996 fiscal year. The Company is evaluating the impact of the new standard on its financial position, results of operations, and cash flows and expects the effect to be immaterial. In October 1995, the FASB issued FAS 123 "Accounting for Stock-Based Compensation" which also will be effective for the Company's 1996 fiscal year. FAS 123 allows companies which have stock-based compensation arrangements with employees to adopt a new fair-value basis of accounting for stock options and other equity instruments, or to continue to apply the existing accounting rules under APB Opinion 25 "Accounting for Stock Issued to Employees" but with additional financial statement disclosure. The Company expects to continue to account for stock-based compensation arrangements under APB Opinion 25, therefore does not expect FAS 123 to have a material impact on its financial position, results of operations, and cash flows. REPORT OF MANAGEMENT Genentech, Inc. is responsible for the preparation, integrity and fair presentation of its published financial statements. The Company has prepared the financial statements, presented on pages 41 to 62, in accordance with generally accepted accounting principles. As such, the statements include amounts based on judgments and estimates made by management. The Company also prepared the other information included in the annual report and is responsible for its accuracy and consistency with the financial statements. The financial statements have been audited by the independent auditing firm, Ernst & Young LLP, which was given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the Board of Directors and committees of the Board. The Company believes that all representations made to the independent auditors during their audit were valid and appropriate. Ernst & Young LLP's audit report appears on page 63. Systems of internal accounting controls, applied by operating and financial management, are designed to provide reasonable assurance as to the integrity and reliability of the financial statements and reasonable, but not absolute, assurance that assets are safeguarded from unauthorized use or disposition, and that transactions are recorded according to management's policies and procedures. The Company continually reviews and modifies these systems, where appropriate, to maintain such assurance. Through the Company's general audit activities, the adequacy and effectiveness of the systems and controls are reviewed and the resultant findings are communicated to management and the Audit Committee of the Board of Directors. The selection of Ernst & Young LLP as the Company's independent auditors has been approved by the Company's Board of Directors and ratified by the stockholders. An Audit Committee of the Board of Directors, composed of four non-management directors, meets regularly with, and reviews the activities of, corporate financial management, the general audit function and the independent auditors to ascertain that each is properly discharging its responsibilities. The independent auditors separately meet with the Audit Committee, with and without management present, to discuss the results of their work, the adequacy of internal accounting controls and the quality of financial reporting. Arthur D. Levinson, Ph.D. Louis J. Lavigne, Jr. Bradford S. Goodwin President and Senior Vice President and Vice President and Chief Executive Officer Chief Financial Officer Controller CONSOLIDATED STATEMENTS OF INCOME (thousands, except per share amounts)
YEAR ENDED DECEMBER 31 1995 1994 1993 __________________________________________________________________________________ Revenues Product sales $ 635,263 $ 601,064 $ 457,360 Royalties (including amounts from related parties: 1995-$12,492; 1994-$8,454; 1993-$5,488) 190,811 126,022 112,872 Contract and other (including amounts from related parties: 1995-$13,448; 1994-$17,106; 1993-$8,869) 31,209 25,556 37,957 Interest 60,562 42,748 41,560 _____________________________________ Total revenues 917,845 795,390 649,749 Costs and expenses Cost of sales 97,930 95,829 70,514 Research and development (including contract related: 1995-$17,124; 1994-$7,584; 1993-$4,235) 363,049 314,322 299,396 Marketing, general and administrative 251,653 248,604 214,410 Special charge (primarily merger related) 25,000 -- -- Interest 7,940 7,058 6,527 ____________________________________ Total costs and expenses 745,572 665,813 590,847 Income before taxes 172,273 129,577 58,902 Income tax provision 25,841 5,183 -- ____________________________________ Net income $146,432 $124,394 $ 58,902 ==================================== Net income per share $ 1.21 $ 1.04 $ .50 ==================================== Weighted average number of shares used in computing per share amounts 121,220 119,465 117,106 ==================================== See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands)
Increase (Decrease) in Cash and Cash Equivalents YEAR ENDED DECEMBER 31 1995 1994 1993 ____________________________________________________________________________________________ Cash flows from operating activities: Net income $ 146,432 $ 124,394 $ 58,902 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 58,421 53,452 44,003 Writedown of securities available-for-sale 6,609 12,590 - Gain on sales of securities available-for-sale (7,432) - - Deferred income taxes (22,655) (34,193) - Loss on fixed asset dispositions (including merger related in 1995) 1,032 5,510 1,652 Writedown of non-marketable equity securities 469 748 600 Gain on sale of a non-marketable equity security (703) - - Changes in assets and liabilities: Net cash flow from trading securities (50,014) (4,634) - Receivables and other current assets (28,446) (11,937) (20,212) Inventories 9,552 (18,475) (19,410) Accounts payable, other current liabilities and other long-term liabilities 20,682 72,901 48,995 ___________________________________ Net cash provided by operating activities 133,947 200,356 114,530 Cash flows from investing activities: Purchases of securities held-to-maturity (682,396) (1,088,737) (564,855) Proceeds from maturities of securities held-to-maturity 924,345 877,139 535,089 Purchases of securities available-for-sale (353,118) (22,644) (8,222) Proceeds from sales of securities available- for-sale 101,591 - - Purchases of non-marketable equity securities - (4,000) - Proceeds from sale of a non-marketable equity security 703 - - Capital expenditures (70,166) (82,837) (87,461) Proceeds from sale of fixed assets - - 26,316 Change in other assets (38,651) (1,198) (22,181) ____________________________________ Net cash used in investing activities (117,692) (322,277) (121,314) Cash flows from financing activities: Stock issuances 54,946 71,955 50,582 Reduction in long-term debt, including current portion (871) (794) (721) ____________________________________ Net cash provided by financing activities 54,075 71,161 49,861 ____________________________________ Increase (decrease) in cash and cash equivalents 70,330 (50,760) 43,077 Cash and cash equivalents at beginning of year 66,713 117,473 74,396 ____________________________________ Cash and cash equivalents at end of year $137,043 $ 66,713 $ 117,473 ==================================== Supplemental cash flow data: Cash paid during the year for: Interest, net of portion capitalized $ 7,917 $ 7,058 $ 6,527 Income taxes 44,699 4,099 2,194 Non-cash activity: Income tax benefits of $7,204 in 1995 and $26,038 in 1994 realized from employee stock option exercises were recorded as an increase in stockholders' equity. See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS (dollars in thousands) DECEMBER 31 1995 1994 ________________________________________________________________________________ Assets: Current assets: Cash and cash equivalents $ 137,043 $ 66,713 Short-term investments 603,296 652,461 Accounts receivable (including amounts from related parties: 1995-$19,281;1994-$13,184; less allowances of: 1995-$6,672;1994-$4,422) 172,160 146,267 Inventories 93,648 103,200 Prepaid expenses and other current assets 39,267 28,475 ______________________________ Total current assets 1,045,414 997,116 Long-term marketable securities 356,475 201,726 Property, plant and equipment, at cost: Land 57,313 55,998 Buildings 258,717 245,871 Equipment 383,387 331,392 Leasehold improvements 12,508 11,988 Construction in progress 60,480 55,299 ______________________________ 772,405 700,548 Less: accumulated depreciation 268,751 215,255 ______________________________ Net property, plant and equipment 503,654 485,293 Other assets 105,452 60,989 ______________________________ Total assets $ 2,010,995 $ 1,745,124 ============================== Liabilities and stockholders' equity: Current liabilities: Accounts payable $ 37,101 $ 30,963 Accrued compensation 36,945 36,939 Accrued royalties 23,159 25,864 Accrued marketing and promotion costs 18,863 27,463 Accrued clinical and other studies (including amounts due to related parties: 1995-$6,331;1994-$0) 33,621 36,277 Income taxes payable 14,329 17,839 Other accrued liabilities (including amounts due to related parties: 1995-$2,414; 1994-$2,280) 69,068 44,283 Current portion of long-term debt 358 871 _____________________________ Total current liabilities 233,444 220,499 Long-term debt 150,000 150,358 Other long-term liabilities 25,504 25,483 _____________________________ Total liabilities 408,948 396,340 Commitments and contingencies Stockholders' equity: Preferred stock, $.02 par value; authorized 100,000,000 shares, none issued - - Special common stock, $.02 par value; authorized 100,000,000 shares, outstanding: 1995 - 42,646,958; No shares authorized or outstanding in 1994 853 - Redeemable common stock, $.02 par value; no shares authorized or outstanding in 1995; 1994-50,105,925 shares outstanding - 1,002 Common stock, $.02 par value; authorized 200,000,000 shares, outstanding: 1995-76,621,009; 1994-67,133,409 1,532 1,343 Additional paid-in capital 1,281,640 1,207,720 Retained earnings (since October 1, 1987 quasi-reorganization in which a deficit of $329,457 was eliminated) 263,749 129,127 Net unrealized gain on securities available-for-sale 54,273 9,592 _______________________________ Total stockholders' equity 1,602,047 1,348,784 _______________________________ Total liabilities and stockholders' equity $ 2,010,995 $ 1,745,124 =============================== See notes to consolidated financial statements. Consolidated STATEMENT OF STOCKHOLDERS' EQUITY (thousands)
1995 1994 1993 ___________________ ___________________ ___________________ Shares Amount Shares Amount Shares Amount ________ ________ ________ ________ ________ ________ Special common stock Beginning balance - - - - - - Issuance of stock upon exercise of options and warrants 298 $ 6 - - - - Conversion of common stock to special stock 42,349 847 - - - - _______________________________________________________________ Ending balance 42,647 853 - - - - _______________________________________________________________ Redeemable common stock Beginning balance 50,106 1,002 47,690 $ 954 45,744 $ 915 Issuance of stock upon exercise of options and warrants 679 14 1,905 38 1,385 28 Issuance of stock under employee stock plan 322 6 511 10 561 11 Conversion of redeemable common stock to common stock (51,107) (1,022) - - - - _______________________________________________________________ Ending balance - - 50,106 1,002 47,690 954 _______________________________________________________________ Common stock Beginning balance 67,133 1,343 67,133 1,343 67,133 1,343 Issuance of stock upon exercise of options and warrants 512 10 - - - - Issuance of stock under employee stock plan 218 4 - - - - Conversion of redeemable common stock to common stock 51,107 1,022 - - - - Conversion of common stock to special common stock (42,349) (847) - - - - _______________________________________________________________ Ending balance 76,621 1,532 67,133 1,343 67,133 1,343 _______________________________________________________________ Additional paid-in capital Beginning balance 1,207,720 1,070,121 998,962 Issuance of stock upon exercise of options and warrants 37,087 56,133 37,125 Issuance of stock under employee stock plan 17,819 15,774 13,418 Income tax benefits realized from employee stock option exercises 7,204 26,038 - Tax benefits arising prior to quasi-reorganization 11,810 39,654 20,616 __________ __________ ___________ Ending balance 1,281,640 1,207,720 1,070,121 __________ __________ ___________ Retained earnings Beginning balance 129,127 44,387 6,101 Net income 146,432 124,394 58,902 Tax benefits arising prior to quasi-reorganization (11,810) (39,654) (20,616) __________ __________ ___________ Ending balance 263,749 129,127 44,387 __________ __________ ___________ Net unrealized gain on securities Beginning balance 9,592 - - Net unrealized gain on securities available-for-sale 44,681 9,592 - __________ __________ __________ Ending balance 54,273 9,592 - __________ __________ __________ Total stockholders' equity $1,602,047 $1,348,784 $1,116,805 ========== ========== ========== See note to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Description of Business: Genentech, Inc. (the Company) is a biotechnology company that discovers, develops, manufactures and markets human pharmaceuticals produced by recombinant DNA technology for significant unmet medical needs. The Company manufactures and markets five products directly in the United States and to F. Hoffmann-La Roche Ltd. (HLR) for sales outside of the United States, and receives royalties from sales of five other products which originated from the Company's technology. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and all significant subsidiaries and collaborations. Material intercompany balances and transactions are eliminated. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents: The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Short-term Investments and Long-term Marketable Securities: The Company invests its excess cash balances in short-term and long-term marketable securities. These investments primarily include corporate notes, certificates of deposit and treasury notes. On January 1, 1994, the Company adopted Statement of Financial Accounting Standards (FAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The effect of adopting this new standard was not material to net income. FAS 115 requires that all investment securities be classified into one of three categories: held-to-maturity, available-for-sale, or trading. Securities are considered held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. These securities are recorded as either short-term investments or long-term marketable securities on the balance sheet depending upon their contractual maturity date. Held-to- maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts. Securities are considered trading when bought principally for the purpose of selling in the near term. These securities are recorded as short-term investments and are carried at market value. Unrealized holding gains and losses on trading securities are included in interest income. Securities not classified as held-to-maturity or as trading are considered available-for-sale. These securities are recorded as long-term marketable securities and are carried at market value with unrealized gains and losses included in stockholders' equity. If a decline in fair value below cost is considered other than temporary, such securities are written down to estimated fair value with a charge to marketing, general and administrative expenses. Prior to adopting FAS 115, marketable debt securities were carried at amortized cost that approximated fair value. Marketable equity securities were carried at the lower of cost or market. The cost of all securities sold is based on the specific identification method. Property, Plant and Equipment: The costs of buildings and equipment are depreciated using the straight-line method over the following estimated useful lives of the assets: buildings - 25 years; certain manufacturing equipment - 15 years; other equipment - 4 or 8 years; leasehold improvements - length of applicable lease. Expenditures for maintenance and repairs are expensed as incurred. Interest on construction-in-progress of $1.5 million in 1995, $0.6 million in 1994, and $1.3 million in 1993 has been capitalized and is included in property, plant and equipment. Patents: As a result of its research and development (R&D) programs, the Company owns or is in the process of applying for patents in the United States and other countries which relate to products and processes of significant importance to the Company. Costs of patents and patent applications are capitalized and amortized for financial reporting purposes on a straight-line basis over their estimated useful lives of approximately 12 years. Other Intangible Assets: In 1995, the Company repurchased from a licensee for approximately $25 million the right to sell Activase in Canada. The asset is being amortized on a straight-line basis over ten years, and is expected to be recovered through royalties received from HLR on their product sales in Canada. Contract Revenue: Contract revenue for R&D is recorded as earned based on the performance requirements of the contract. In return for contract payments, contract partners may receive certain marketing and manufacturing rights, products for clinical use and testing, or R&D services. Royalty Expenses: Royalty expenses directly related to product sales are classified in cost of sales. Other royalty expenses, relating to royalty revenue, totaled $30.2 million, $26.5 million and $22.6 million in 1995, 1994 and 1993, respectively, and are classified in marketing, general and administrative expenses. Advertising Expenses: The Company expenses the costs of advertising as incurred. Advertising expenses for the years ended December 31, 1995, 1994 and 1993 were $29.2 million, $44.2 million and $45.7 million, respectively. Income Taxes: The Company accounts for income taxes in accordance with FAS 109, "Accounting for Income Taxes," which requires the asset and liability approach for the financial accounting and reporting for income taxes. Accounting for operating loss and tax credit carryforwards arising prior to the date of the Company's quasi-reorganization in 1987 is more fully described in the "Quasi-Reorganization" footnote. Net Income Per Share: Net income per share is computed based on the weighted average number of shares of the Company's special common stock, redeemable common stock, common stock and common stock equivalents, if dilutive. Financial Instruments: Certain of the Company's revenues are earned outside of the United States. Because the Company's foreign currency denominated revenues exceed its foreign currency denominated expenses, risk exists that net income may be impacted by changes in the exchange rates between the U.S. dollar and foreign currencies. To mitigate this risk, the Company purchases simple foreign currency put options (options) with expiration dates and amounts of currency that are the same as a portion of probable revenues so that the adverse impact of movements in currency exchange rates on the non-dollar denominated revenues will be largely offset by an associated increase in the value of the options. At the time the options are purchased they have little or no intrinsic value. Realized and unrealized gains related to the options are deferred until the designated hedged revenues are recorded. The associated costs, which are deferred and classified as other current assets, are amortized over the term of the options and recorded as a reduction of the hedged revenues. The Company also enters into foreign currency forward contracts as hedging instruments. All forward contracts are less than 90 days in duration, and there are no outstanding balances at the end of any quarter. These contracts are recorded at fair value, and any gains and losses from these contracts are recorded in the income statement with the related hedged revenues. Financial instruments, such as forward contracts, not qualifying as hedges of firm commitments, if any, are marked to market with gains or losses recorded in income as they occur. Interest income is subject to fluctuations as U.S. interest rates change. To manage this risk, the Company periodically establishes duration targets for its investment portfolio that reflect its anticipated use of cash and fluctuations in market rates of interest. Interest rate swaps have been used and may be used in the future to adjust the duration of the investment portfolio in order to meet these duration targets. Interest rate swaps are contracts in which two parties agree to swap future streams of payments over a specified period. By designating a swap with a pool of short-term securities equal in size to the notional amount of the swap, an instrument with an effective interest rate and maturity equal to the term of the swap is created. The characteristics of the instrument (including interest rate, maturity and fair value) are similar to the characteristics of a high grade corporate security which could be purchased at the same time the instrument is created. LIBOR payments received on swaps are highly correlated to interest collection on short-term investments. Increases (decreases) in swap variable payments caused by rising (falling) interest rates will be essentially offset by increased (reduced) interest income on the related short-term investments, while the fixed rate payments received from the swap counterparty establishes the Company's interest income. Net payments made or received on swaps are included in interest income as adjustments to the interest received on invested cash. Amounts deferred on terminated swaps are classified as other assets and are amortized to interest income over the original contractual term of the swaps by a method that approximates the level yield method. 401(k) Plan: The Company's 401(k) Plan covers substantially all its U.S. employees. Under the 401(k) Plan, eligible employees may contribute up to 15% of their eligible compensation, subject to certain Internal Revenue Service restrictions. The Company matches a portion of employee contributions, up to a maximum of 4% of each employee's eligible compensation. The match is effective December 31 of each year and is fully vested when made. During 1995, 1994, and 1993, the Company provided $5.6 million, $5.2 million, and $4.4 million, respectively, for the Company match under the 401(k) Plan. Future Accounting Changes: In March 1995, the Financial Accounting Standards Board (FASB) issued FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires the Company to review for impairment long-lived assets, certain identifiable intangibles, and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In certain situations, an impairment loss would be recognized. FAS 121 is effective for the Company's 1996 fiscal year. The Company is evaluating the impact of the new standard on its financial position, results of operations, and cash flows, and expects the effect to be immaterial. In October 1995, the FASB issued FAS 123 "Accounting for Stock-Based Compensation" which also will be effective for the Company's 1996 fiscal year. FAS 123 allows companies which have stock-based compensation arrangements with employees to adopt a new fair-value basis of accounting for stock options and other equity instruments, or to continue to apply the existing accounting rules under APB Opinion 25 "Accounting for Stock Issued to Employees" but with additional financial statement disclosure. The Company expects to continue to account for stock-based compensation arrangements under APB Opinion 25, therefore does not expect FAS 123 to have a material impact on its financial position, results of operations and cash flows. SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION One major customer in 1995, 1994 and 1993 contributed 10% or more of the Company's total revenues. The portions of revenues attributable to this customer were 18% in 1995, 21% in 1994 and 26% in 1993. This customer distributes Protropin, Nutropin, Pulmozyme and Actimmune through its extensive branch network, and is then reimbursed through a variety of sources. A second customer, a wholesale distributor of all of the Company's products, contributed 11% of revenues in both 1995 and 1994. Approximate foreign sources of revenues were as follows (millions): 1995 1994 1993 _____________________________________________________ Europe $112.0 $81.8 $41.0 Asia 23.6 19.5 22.2 Canada 25.0 9.7 12.2 The Company currently sells primarily to distributors and hospitals throughout the United States, performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral. In 1995, 1994 and 1993 the Company did not record any material additions to, or losses against, its provision for doubtful accounts. RESEARCH AND DEVELOPMENT ARRANGEMENTS To gain access to potential new products and technologies, the Company has established research collaborations, including the acquisition of both marketable and non-marketable equity investments, with companies developing technologies that fall outside the Company's research focus and with companies having the potential to generate new products through technology exchanges and investments. Potential future payments may be due to selective collaborative partners if the partners achieve certain benchmarks as defined in the collaborative agreements. The Company has also entered into product-specific collaborations to acquire development and marketing rights for products. In addition to the collaboration with HLR discussed in the "Related Parties" footnote, in March 1995 the Company entered into a collaboration with IDEC Pharmaceuticals Corp. (IDEC) to develop IDEC's anti-CD20 monoclonal antibody, IDEC-C2B8, for the treatment of non-Hodgkin's B-cell lymphomas. A phase III clinical trial has begun. Under the terms of the agreement, Genentech and IDEC have agreed to copromote IDEC-C2B8 in the United States and Canada, with IDEC receiving a share of the profits. Genentech has commercialization rights throughout the rest of the world except Japan. Genentech exercised its option rights regarding Asia (except Japan) during the fourth quarter of 1995. In conjunction with the Agreement with Roche, Genentech has granted an option to HLR to use and sell IDEC-C2B8 in all countries, except the United States, in which Genentech has rights under its agreement with IDEC. HLR exercised that option in January 1996. IDEC will receive royalties on sales outside the United States and Canada. In connection with the collaboration, Genentech provided $9 million in preferred equity investments and licensing fees, and will provide $17.5 million in additional equity funding prior to U.S. approval ($2.5 million of which was provided in 1995), and up to $30.5 million in milestone and option payments. In February 1996, Genentech expanded its collaboration with IDEC to include IDEC-Y2B8, a complementary radioisotopic version of the drug, for the treatment of more severe forms of B-cell lymphomas. In February 1996, the Company agreed to invest in Genenvax, Inc., a new company created to develop gp120, Genentech's potential vaccine for the prevention of HIV. Genentech will provide an initial equity investment of $1 million and then an additional $1 million along with other private investors. After the close of private financing, Genentech will have the right to maintain a 25% equity investment in Genenvax. Genenvax will receive exclusive rights to gp120. SPECIAL CHARGE The $25.0 million special charge in 1995 includes $21.0 million related to the merger agreement with Roche Holdings, Inc. (Roche) discussed in the footnote "Merger and New Agreement with Roche Holdings, Inc.," and $4.0 million of charges associated with the resignation of the Company's former President and Chief Executive Officer. The merger expenses include legal expenses, investment banking fees, filing fees and other costs related to the Agreement, as well as charges associated with the proposed settlement of stockholder lawsuits filed after the transaction was announced. INCOME TAXES The income tax provision consists of the following amounts (thousands): 1995 1994 1993 _________________________________________________________________ Current: Federal $ 43,997 $ 38,331 $ - State 4,467 1,016 - Foreign 32 29 - _____________________________________ Total current 48,496 39,376 - _____________________________________ Deferred: Federal (12,319) (34,193) - State (10,336) - - _____________________________________ Total deferred (22,655) (34,193) - _____________________________________ Total $ 25,841 $ 5,183 $ - ===================================== Actual current tax liabilities are lower than reflected above by $7.2 million in 1995 and $26.0 million in 1994 due to employee stock option related tax benefits which were credited to stockholders' equity. A reconciliation between the Company's effective tax rate and the U.S. statutory rate follows: 1995 Amount Tax Rate (thousands) 1995 1994 1993 ______________________________________________________________________________ Tax at U.S. statutory rate $ 60,296 35.0% 35.0% 35.0% Operating losses utilized - - (45.6) (35.0) Research and development credits realized (27,312) (15.9) - - Alternative minimum tax liability - - 24.6 - Adjustment of deferred tax assets valuation allowance (22,655) (13.1) (26.4) - Foreign losses not benefited 4,842 2.8 15.0 - State taxes 4,467 2.6 0.8 - Other 6,203 3.6 0.6 - ________________________________________________ Income tax provision $ 25,841 15.0% 4.0% - ================================================ The components of deferred taxes consist of the following at December 31 (thousands): 1995 1994 _______________________________________________________________________________ Deferred tax liabilities: Depreciation $ 50,010 $ 42,109 Other 3,109 19,928 __________________________ Total deferred tax liabilities 53,119 62,037 Deferred tax assets: Federal net operating loss (NOL) carryforward - 43,027 Federal credit carryforward 107,350 86,804 Reserves not currently deductible 39,433 31,688 State credit carryforward 32,147 11,324 Other 5,058 7,839 __________________________ Total deferred tax assets 183,988 180,682 Valuation allowance (74,021) (84,452) __________________________ Total net deferred tax assets 109,967 96,230 __________________________ Total net deferred taxes $ 56,848 $ 34,193 ========================== Total tax credit carryforwards of $139 million expire in the years 1996 through 2010, except for $37 million of alternative minimum tax credits which have no expiration date. Approximately $30 million of the valuation allowance at December 31, 1995 reflected above relates to the tax benefits of stock option deductions which will be credited to additional paid-in capital when realized. The valuation allowance decreased by $10.4 million in 1995 and $38.5 million in 1994. Realization of net deferred taxes, as well as future reversals of the valuation allowance (that is, recognition of deferred tax assets), depend on future earnings from existing and new products and new indications for existing products. The timing and amount of future earnings will depend on continued success in marketing and sales of the Company's current products, as well as the scientific success, results of clinical trials and regulatory approval of products under development. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using a weighted-average approach which approximates the first-in, first-out method. Inventories at December 31, 1995 and 1994 are summarized below (thousands): 1995 1994 __________________________________________________________________ Raw materials and supplies $ 12,808 $ 13,145 Work in process 67,239 76,974 Finished goods 13,601 13,081 ______________________ Total $ 93,648 $103,200 ====================== The decrease in inventories in 1995 compared to 1994 is primarily attributable to a decrease in the inventories of Pulmozyme. INVESTMENT SECURITIES Securities classified as trading, available-for-sale and held-to-maturity at December 31, 1995 are summarized below. Estimated fair value is based on quoted market prices for these or similar investments. Gross Gross Estimated Amortized Unrealized Unrealized Fair December 31, 1995 Cost Gains Losses Value ______________________________________________________________________________ (thousands) TOTAL TRADING SECURITIES (carried at estimated fair value) $135,325 $ 1,314 $ (1,328) $135,311 ============================================== SECURITIES AVAILABLE-FOR-SALE (carried at estimated fair value): Equity securities $ 22,423 $ 45,894 $ (350) $ 67,967 U.S. Treasury securities and obligations of other U.S. government agencies maturing within: 1 year 7,503 17 - 7,520 1-5 years 162,322 7,103 - 169,425 5-10 years 83,188 437 - 83,625 Other debt securities maturing within 1-5 years 29,868 1,172 - 31,040 ---------------------------------------------- TOTAL AVAILABLE-FOR-SALE $305,304 $ 54,623 $ (350) $359,577 ============================================== SECURITIES HELD-TO-MATURITY* (carried at amortized cost) maturing within 1 year: U.S. Treasury securities and obligations of other U.S. government agencies $219,267 $ 318 $ (53) $219,532 Other debt securities 236,870 95 (297) 236,668 ______________________________________________ TOTAL HELD-TO-MATURITY $456,137 $ 413 $ (350) $456,200 ============================================== * Interest rate swap arrangements are used to modify the duration of certain held-to-maturity securities. See "Financial Instruments" footnote for further information. The carrying value of all investment securities held at December 31, 1995 and 1994 is summarized below (thousands): Security 1995 1994 _______________________________________________________________________________ Trading securities $135,311 $ 85,297 Securities available-for-sale maturing within one year 7,520 - Securities held-to-maturity maturing within one year 456,137 559,916 Accrued interest 4,328 7,248 -------- -------- Total short-term investments $603,296 $652,461 ======== ======== Securities available-for-sale maturing within 1-10 years $352,057 $ 35,660 Securities held-to-maturity maturing within 1-3 years - 164,429 Accrued interest 4,418 1,637 -------- -------- Total long-term marketable securities $356,475 $201,726 ======== ======== In 1995, proceeds from sales of available-for-sale securities totaled $101.6 million; gross realized gains totaled $7.6 million and gross realized losses totaled $0.2 million. During 1994, no available-for-sale securities were sold. The Company recorded charges in 1995 and 1994 of $6.6 million and $12.6 million, respectively, to write-down certain available-for-sale biotechnology equity securities for which the decline in fair value below cost was other than temporary. During the year ended December 31, 1995, the unrealized holding losses on trading securities included in net income were not material. Marketable debt securities held by the Company are issued by a diversified selection of institutions with strong credit ratings. The Company's investment policy limits the amount of credit exposure with any one institution. These debt securities are generally not collateralized. The Company has not experienced any material losses due to credit impairment on its investments in marketable debt securities in the years 1995, 1994 and 1993. FINANCIAL INSTRUMENTS Foreign Currency Instruments: As discussed above, to hedge anticipated non- dollar denominated net revenues, the Company currently purchases simple foreign currency put options (options) and enters into foreign currency forward exchange contracts (forward contracts). All forward contracts are less than 90 days in duration, and there are no outstanding balances at the end of any quarter. At December 31, 1995 and 1994, the Company had hedged approximately 80% and 85%, respectively, of net foreign revenues anticipated within 12 months and 50% and 35%, respectively, of net foreign revenues anticipated in the following 12 months. At December 31, 1995 and 1994, the notional amount of the options totaled $72.8 million and $78.3 million, respectively, and consisted of the following currencies: Australian dollars, Canadian dollars, German marks, Spanish pesetas, French francs, British pounds, Italian lira, Japanese yen, and Swedish krona. All option contracts mature within the next two years. The fair value of the options, which is based on exchange rates and market conditions at December 31, 1995 and 1994, totaled $6.3 million and $1.6 million, respectively. Forward contracts open at December 31, 1994 were closed out by entering into offsetting contracts with the counterparty, so that the net notional amount denominated in foreign currencies was zero. At December 31, 1994, the U.S. dollar equivalent of the notional amount of the forward sell contracts totaled $28.3 million; the forward buy contracts totaled $29.8 million. The difference, an unrealized loss of $1.5 million, was recorded as a reduction of net income in 1994 as a charge to marketing, general and administrative expenses. At December 31, 1995, the U.S. dollar equivalent of the notional amount of the remaining forward sell contracts was $6.0 million, and the remaining forward buy contracts totaled $6.2 million. Credit exposure is limited to the unrealized gains on these contracts. All agreements are with a diversified selection of institutions with strong credit ratings which minimizes risk of loss due to nonpayment from the counterparty. The Company has not experienced any material losses due to credit impairment of its foreign currency instruments. Interest Rate Swaps: The Company enters into interest rate swaps (swaps) as part of its overall strategy of managing the duration of its cash portfolio. For each swap, the Company receives interest based on fixed rates and pays interest to counterparties based on floating rates (three or six month LIBOR) on a notional principal amount. By designating a swap with a pool of short- term securities equal in size to the notional amount of the swap, an instrument with an effective interest rate and maturity equal to the term of the swap is created. LIBOR payments received on swaps are highly correlated to interest collections on short-term investments. The use of swaps in this manner generates net interest income on the swap and associated pool of short-term securities equivalent to interest income that would be earned from a high grade corporate security of the same maturity as the swap, while reducing credit risk (there is no principal invested in a swap). The Company's credit exposure on swaps is limited to the value of the interest rate swaps that have become favorable to the Company and any net interest earned but not yet received. The Company's swap counterparties have strong credit ratings which minimize the risk of non-performance on the swaps. The Company has not experienced any material losses due to credit impairment. The Company's credit exposure on swaps as of December 31, 1995 and 1994 was $24.1 million and $19.9 million, respectively. The carrying amount of the swaps, which reflects the net interest accrued for such swaps, totaled $7.2 million and $6.2 million at December 31, 1995 and 1994, respectively, and is included in accounts receivable. The Company targets the average maturity of its investment portfolio (including swaps) based on its anticipated use of cash and fluctuations in the market rates of interest. The maturity of the investment portfolio (including swaps) ranges from overnight funds used for near-term working capital purposes to investments maturing within the next one to ten years for future working capital, capital expenditures, strategic investments and debt repayment. The Company gradually increased the average effective maturity of its investment portfolio (including swaps) from 1.9 years at December 31, 1994, to 2.7 years at December 31, 1995, to better match the duration of the portfolio to expected cash needs. The notional amount of each swap is equal to the amount of designated high quality short-term investments which either mature or reprice within the next six months. The investments include U.S. Treasury securities, U.S. government agency securities, commercial paper and corporate debt obligations. Swaps are used to extend the maturity of the investment portfolio; no speculative activity occurs. For the years ended December 31, 1995 and 1994, the weighted average rate received on swaps was 7.29% and 6.30%, respectively, and the weighted average rate paid on swaps was 6.56% and 4.81%, respectively. Net interest income (loss) from swaps, including amortization of net losses on terminated swaps, totaled ($0.7) million in 1995 and $4.3 million in 1994. During 1995 and 1994, to reduce the average effective maturity of its portfolio, the Company terminated certain swap agreements prior to maturity and is amortizing the realized gains and losses over the original contractual term of the swaps as a reduction of interest income. At December 31, 1995, net losses of $2.4 million remained unamortized; $1.7 million will be recognized in 1996 and $0.7 million will be recognized during the following two years. The tables below outline specific information for the swaps outstanding at December 31, 1995 and 1994. The fair value is based on market prices of similar agreements. Dollars are in millions.
Interest Rate Swaps Short-term Investments ___________________________ _______________________________ Fixed Average Rates Variable Effective Notional To Be Rates To Carrying Average Interest December 31, 1995: Amounts Received Be Paid* Value Maturity** Rate _____________________________________________________________________________________ Swaps matched to investments to meet maturity target comparable to outstanding debt 3 or 6 [Maturing on: 7.68%- month 1/2/02] $150 7.71% LIBOR $150 118 days 5.52% Swaps matched to other investments to meet specific maturity targets 3 or 6 [Ending dates: 6.09%- month 8/12/97 - 9/20/99] 80 7.20% LIBOR 80 93 days 5.85% Other short-term investments - 373 ________ ________ Total $230 $603 ======== ======== December 31, 1994: ____________________ Swaps matched to investments to meet maturity target comparable to outstanding debt 3 or 6 [Maturing on: 7.68%- month 1/2/02] $150 7.92% LIBOR $150 84 days 5.45% Swaps matched to other investments to meet specific maturity targets 3 or 6 [Ending dates: 4.08%- month 12/29/95 - 9/20/99] 180 7.20% LIBOR 180 35 days 5.34% Other short-term investments - 322 ________ ________ Total $330 $652 ======== ======== * 3 and 6-month LIBOR rates are reset every 3 or 6 months. At December 31, 1995, the 3-month LIBOR rate was 5.6% and the 6-month LIBOR rate was 5.5%. At December 31, 1994, the 3-month LIBOR rate was 6.5% and the 6-month LIBOR rate was 7.0%. ** Average maturity reflects either the maturity date or, for a floating investment, the next reset date.
Financial Instruments Held for Trading Purposes: As part of its overall investment strategy, in 1994 the Company contracted with two external money managers to manage part of its investment portfolio. One portfolio, which had a carrying value of $34.9 million at December 31, 1995 and $31.0 million at December 31, 1994, consisted of both U.S. dollar and non-dollar denominated investments. To hedge the non-dollar denominated investments, the money manager enters into forward contracts. The fair value at December 31, 1995 and 1994, of the forward contracts totaled $0.1 million and ($0.5) million, respectively. The average fair value during 1995 and 1994 totaled $0.1 million and ($0.5) million, respectively. Net realized and unrealized trading gains on the portfolio totaled approximately $3.8 million in 1995 and $0.4 million in 1994, and are included in interest income. Counterparties have strong credit ratings which minimizes the risk of non-performance from the counterparties. Summary of Fair Values: The table below summarizes the carrying value and fair value at December 31, 1995 and 1994, of the Company's financial instruments. The fair value of the long-term debt was estimated based on the quoted market price at year end. 1995 1994 ___________________ __________________ Carrying Fair Carrying Fair Financial Instrument Value Value Value Value _____________________________________________________________________________ (thousands) Assets: Investment securities (including accrued interest and traded forward contracts) $959,771 $959,834 $854,187 $855,060 Options 2,345 6,300 1,646 1,600 Outstanding swaps 7,194 23,940 6,165 (2,044) Liabilities: Short-term and long-term debt 150,358 147,750 151,229 125,250 Forward contracts 237 237 1,500 1,500 LONG-TERM DEBT Long-term debt consists of the following (thousands): 1995 1994 _______________________________________________________________________________ Convertible subordinated debentures, interest at 5%, due in 2002 $ 150,000 $ 150,000 Mortgage note payable on buildings and land, interest at 9.5%, due 1996 358 1,229 ______________________ 150,358 151,229 Less current maturities 358 871 ______________________ Total long-term debt $ 150,000 $ 150,358 ====================== Convertible subordinated debentures are convertible at the option of the holder into shares of the Company's special common stock at a conversion price of $74 in principal amount of the debenture. Upon conversion, the holder receives, for each $74 in principal amount of the debenture converted, one-half share of special common stock and $18 in cash. The $18 in cash is reimbursed by Roche to the Company. Generally, the Company may redeem the debentures until maturity. LEASES, COMMITMENTS AND CONTINGENCIES Future minimum lease payments under operating leases at December 31, 1995 are as follows (thousands): ______________________________________________________________________ 1996 $ 6,028 1997 2,374 1998 1,829 1999 2,000 2000 2,000 Thereafter 5,833 _________ Total minimum lease payments $20,064 ========= The Company leases various real property under operating leases that generally require the Company to pay taxes, insurance and maintenance. Rent expense was approximately $9.5 million, $6.5 million and $5.1 million for the years 1995, 1994 and 1993 respectively. Sublease income was not material in each year presented. Under three of the lease agreements, the Company has an option to purchase the properties at an amount that does not constitute a bargain. Alternatively, the Company can cause the property to be sold to a third party. The Company is contingently liable, under residual value guarantees, for approximately $119 million. The Company also is required to maintain certain financial ratios and is limited to the amount of additional debt it can assume. Securities with a carrying amount of $74 million have been pledged as collateral with regards to one of the three leases. Pursuant to its research and development collaboration agreement with Scios Nova, Inc. (Scios Nova), the Company established a line of credit for $30 million that Scios Nova may draw down at Scios Nova's discretion through 2002. This commitment is supported through December 31, 1997, by a bank letter of credit under which Scios Nova may draw up to $30 million directly from the bank, with immediate repayment of the funds due to the bank by the Company. Amounts drawn by Scios Nova under the bank letter of credit or directly from the Company are repayable in the form of cash or Scios Nova common stock (at the average market price over the thirty day period before the date of repayment) at Scios Nova's option any time through December 30, 2002. Interest on amounts borrowed by Scios Nova accrue to the Company at the prime rate of interest. At December 31, 1995, no amounts were drawn. MERGER AND NEW AGREEMENT WITH ROCHE HOLDINGS, INC. The Company's merger (Merger) with a wholly owned subsidiary of Roche Holdings, Inc. (Roche) was consummated on September 7, 1990. The Company's stockholders of record on that date received, for each share of common stock that they owned, $18 in cash from Roche and one-half share of newly issued redeemable common stock from the Company. In the Merger, Roche acquired one half of the Company's outstanding common stock for $1,537.2 million. The redeemable common stock was substantially identical to the common stock previously held by stockholders, except that it was redeemable by the Company at the election of Roche. Roche had the right to require the Company to exercise its redemption right, providing it did so for all shares of outstanding redeemable common stock. The redemption right was not exercised and expired on June 30, 1995. After the close of business on that date, each share of redeemable common stock automatically converted to one share of Genentech common stock. On October 25, 1995, the Company's non-Roche stockholders approved a new agreement (the Agreement) with Roche. Each share of the Company's common stock not held by Roche or its affiliates on that date automatically converted to one share of callable putable common stock (special common stock). The Agreement extends for four years Roche's option to cause Genentech to redeem (call) the outstanding special common stock of the Company at predetermined prices. Should the call be exercised, Roche will concurrently purchase from the Company a like number of common shares, for a price equal to Genentech's cost to redeem the special common stock. During the quarter beginning January 1, 1996, the option price is $63.75 per share, and it increases by $1.25 per share each quarter through June 30, 1997, thereafter escalating at $1.50 per share each quarter, to $82.00 per share at the end of the option period on June 30, 1999. As part of an agreement in principle to settle stockholder lawsuits, as more fully discussed in the "Legal Proceedings" footnote, the call price at which Roche may cause Genentech to redeem the special common stock will be increased, upon approval of the settlement agreement by the Delaware Chancery Court, by $0.50 per share each quarter with a final redemption price of $82.50. The put price will remain unchanged at $60.00 per share. If Roche does not cause the redemption as of June 30, 1999, Genentech's stockholders will have the option (the put) to cause the Company to redeem none, some, or all of their shares of special common stock at $60.00 per share (and Roche will concurrently provide the necessary redemption funds to the Company by purchasing a like number of shares of common stock at $60.00 per share) within thirty business days commencing July 1, 1999 (such dates subject to acceleration in certain insolvency events). The Company's obligation to redeem these shares is contingent upon the contribution by Roche of the necessary redemption funds for the put. Roche Holding Ltd., a Swiss corporation, has guaranteed Roche's obligation under the put. In conjunction with the Agreement, HLR was granted an option at terms discussed below for ten years for licenses to use and sell certain of Genentech's products in non-U.S. markets. As a general matter, such option for a Genentech product must be exercised at, or prior to if Genentech mutually agrees, the conclusion of phase II clinical trials for each product. In general, for each product for which HLR exercises its option, the Company and HLR will share equally all development expenses, including preclinical, clinical, process development and related expenses, incurred by the Company through that date and prospectively, with respect to the development of the product in the United States. HLR will pay all non-U.S. development expenses. In general, HLR will pay a royalty of 12.5% until a product reaches $100 million in aggregate sales outside of the United States, at which time the royalty rate increases to 15%. In addition, HLR has exclusive rights to, and pays the Company 20% royalties on, Canadian sales of the Company's existing products and European sales of Pulmozyme. Consequently, in the fourth quarter of 1995, the Company transferred to HLR the rights to its Canadian product sales and European sales of Pulmozyme, and commenced recording royalty revenue from HLR on such sales. The Company supplies its products to HLR, and has agreed to supply products for which HLR has exercised its option, for sales outside of the United States at cost plus 20%. Under the Agreement, independent of its right to cause the Company to redeem the special common stock, Roche may increase its ownership of the Company up to 79.9% by making purchases on the open market. Roche holds approximately 64% of the outstanding common equity of the Company as of December 31, 1995. RELATED PARTY TRANSACTIONS The Company has transactions with Roche and its affiliates in the ordinary course of business. Pursuant to contracts, principally regarding R&D projects and product licensing agreements as described below, the Company recorded revenue of approximately $27.7 million in 1995, $25.6 million in 1994 and $14.4 million in 1993 from HLR (a wholly owned subsidiary of Roche; two officers of HLR serve on the Company's Board of Directors). The Company has also developed a mammalian cell line for HLR. During 1995, 1994 and 1993, the Company has collaborated with HLR on four projects, including oral antagonists to platelet gpIIb/IIIa, IL-8, LFA/ICAM and ras farnesyltransferase. CAPITAL STOCK Common Stock, Special Common Stock and Redeemable Common Stock After the close of business on June 30, 1995, each share of the Company's redeemable common stock automatically converted to one share of Genentech common stock. The conversion was in accordance with the terms of the redeemable common stock put in place at the time of its issuance in 1990 and as described in Genentech's Certificate of Incorporation. On October 25, 1995, the Company's non-Roche stockholders approved a new Agreement with Roche. Pursuant to the Agreement, each share of the Company's common stock not held by Roche or its affiliates automatically converted to one share of callable putable common stock (special common stock). See the footnote "Merger and New Agreement with Roche Holding, Inc." for a complete discussion of these transactions. Stock Option Plans 1984 PLANS: The 1984 Plans are the 1984 Incentive Stock Option Plan and the 1984 Non-Qualified Stock Option Plan (1984 Plans). Options granted under the 1984 Incentive Stock Option Plan and the 1984 Non-Qualified Stock Option Plan have a maximum term of ten and 20 years, respectively, from the date of grant. The options generally become exercisable in increments over a period of four years from the date of grant, with the first increment vesting after one year. As of December 31, 1995, there are no shares remaining for further grants under the 1984 Plans. 1990 PLAN: The 1990 Stock Option/Stock Incentive Plan (1990 Plan) permits the granting of options intended to qualify as incentive stock options and the granting of options that do not so qualify. The Company may only grant incentive options to employees (including officers and employee-directors). The Company may only grant the non-qualified options and other non-option stock incentives under the 1990 Plan to employees (including officers and employee- directors) and consultants of the Company. All non-qualified options have a maximum term of 20 years and all incentive options have a maximum term of ten years. The options generally become exercisable in increments over a period of four years from the date of grant, with the first increment vesting after one year. The Company may grant options with different vesting terms from time to time. The 1990 Plan includes an Automatic Grant Program whereby each individual who was a non-employee member of the Board on July 18, 1990, and/or on April 30, 1992, was automatically granted, on each of those dates, a non-statutory option to purchase 15,000 shares of redeemable common stock. These options have a term of ten years from the date of grant and vest in equal increments over a three-year period from the date of grant. Each non-employee member of the Board who was elected to that position after April 30, 1992 but before April 30, 1995, was automatically granted such an option as was any employee member of the Board who became a non-employee member of the Board, immediately upon the change in status from employee to non-employee. In addition, the 1990 Plan permits the Company to grant stock appreciation rights in connection with non-qualified options or incentive options and issue shares of special common stock, either fully vested at the time of issuance or vesting according to a pre-determined schedule. The Company may grant three types of stock appreciation rights under the 1990 Plan: tandem stock appreciation rights, concurrent stock appreciation rights and limited stock appreciation rights. At December 31, 1995, no stock appreciation rights for special common stock have been granted under the 1990 Plan. 1994 PLAN: The 1994 Stock Option Plan (1994 Plan) permits the granting of options intended to qualify as incentive stock options and the granting of options that do not so qualify. Incentive options may only be granted to employees (including officers and employee-directors). The non-qualified options may only be granted under the 1994 Plan to employees (including officers and employee-directors) and consultants of the Company. All non- qualified options have a maximum term of 20 years and all incentive options have a maximum term of ten years. Options have been granted with varying vesting schedules, becoming exercisable in increments over periods of up to six years from the date of grant, with the first increment vesting after periods of up to two years. Options may be granted with different vesting terms from time to time. The 1994 Plan includes an Automatic Grant Program whereby each individual who was a non-employee member of the Board on April 30, 1995, was granted a non-statutory option to purchase 15,000 shares of redeemable common stock. These options have a term of ten years from the date of grant and vest in equal increments over a three-year period from the date of grant. Each non- employee member of the Board who is elected to that position after April 30, 1995 will be automatically granted such an option as will any employee member of the Board who becomes a non-employee member of the Board, immediately upon the change in status from employee to non-employee. Beginning on April 30, 1995, non-employee members of the Board no longer receive automatic option grants under the 1990 Plan. Transactions for the stock option plans for the year ended December 31, 1995, were as follows: Price Shares Per Share ________________________________________________________________________________ Options outstanding - beginning of year 15,980,807 $14.08-50.75 Grants 1,303,800 48.13-51.63 Exercises (1,472,759) 14.08-50.75 Cancellations (602,774) 15.63-50.75 _______________________________ Options outstanding - end of year 15,209,074 14.08-51.63 Options available for future grant 1,508,820 at December 31 _____________ Total shares reserved under the Plans at December 31 16,717,894 ============= Shares reserved under options exercisable at December 31 7,265,254 $14.08-51.63 =============================== Employee Stock Plans The Company adopted the 1991 Employee Stock Plan (1991 Plan) on December 4, 1990, and amended it during 1993 and 1995. All full-time employees of the Company are eligible to participate in the 1991 Plan. Of the 3,800,000 shares of special common stock reserved for issuance under the 1991 Plan, 2,444,491 shares have been issued as of December 31, 1995. During 1995, 2,534 of the eligible employees participated in the 1991 Plan. Warrants In consideration of the grant to the Company by certain limited partners of Genentech Clinical Partners IV (GCP IV) of an option to purchase all of such limited partners' interests in GCP IV, the Company issued warrants with each partnership interest to purchase an aggregate of 2,639,250 shares of common stock (subsequently converted to 1,319,625 shares of redeemable common stock under the terms of the 1990 Merger, and to special common stock pursuant to the 1995 Agreement). All previously unexercisable warrants held by non-defaulted limited partners became exercisable upon termination of GCP IV's research program in September 1992. The warrants are exercisable through July 31, 1996. Special common stock activity during 1995 related to the warrants is reflected in the following table: Shares Price Per Share _______________________________________________________________________________ Shares subject to exercisable warrants - beginning of year 138,915 $ 27.57-28.26 Shares issued upon exercise of warrants (17,470) 27.57-28.26 __________________________________________ Shares subject to exercisable warrants - end of year 121,445 $ 27.57-28.26 Shares reserved for issuance =========== =============== under warrant agreements 121,445 =========== LEGAL PROCEEDINGS The Company is a party to various legal proceedings including patent infringement cases involving human growth hormone products and Activase; a patent infringement and trade secret misappropriation case involving antibodies to IgE; product liability cases involving Activase and Protropin; and employment related cases. The Company and its directors are defendants in two suits filed in California challenging their actions in connection with the Company's 1990 merger with a wholly owned subsidiary of Roche. There has been no activity in these actions since 1990 and no further reference will be made to them in the future unless they again become active. In addition, the Company, its directors, two former directors and Roche are defendants in a number of suits filed in Delaware, which have been consolidated in a single action, by certain individual stockholders purporting to represent stockholders as a class alleging, in general, breach of their fiduciary duties to the Company in connection with the then proposed extension of Roche's option to cause the Company to redeem the outstanding non-Roche owned redeemable common stock and transactions related thereto. The Company, Roche and the attorneys representing the plaintiff stockholders have entered into a memorandum of understanding settling all claims against the defendants in these actions except the 1990 suits. In connection with the settlement, if approved by the court, Roche would increase the prices at which it could cause Genentech to redeem the non-Roche owned special common stock by $0.50 per share per quarter, to a final price of $82.50 in the quarter ending June 30, 1999, and Genentech would pay the plaintiffs' attorneys up to $3.5 million in attorneys' fees, and in connection with the then proposed merger, Genentech would absorb the termination costs of up to six Europe-based Genentech employees. On June 28, 1995 and August 10, 1995, the U.S. District Court for the Southern District of New York issued preliminary injunctions against Novo Nordisk A/S and certain of its affiliates (Novo) and Bio-technology General Corporation and its affiliate (BTG), respectively, which prohibited each of them, pending the Court's final determination of the action, from importing, making, using and selling their human growth hormone products in the United States. Each of Novo and BTG appealed the Court's decision. On February 26, 1996, the U.S. Court of Appeals for the Federal Circuit overruled the preliminary injunction against Novo, but has not yet ruled on BTG's appeal. Future court decisions will determine whether Novo's and BTG's products will be permanently enjoined from the U.S. market. The Company has received and responded to grand jury document subpoenas from the United States District Court for the Northern District of California for documents relating to Genentech's clinical, sales and marketing activities associated with human growth hormone. On August 19, 1994 and August 30, 1994, two class action suits were filed in the U.S. District Court for the District of Minnesota against Genentech, one of Genentech's executives, Caremark International, Inc. (Caremark), certain of Caremark's executives and Dr. David R. Brown alleging, in general, causes of action under the Racketeer Influenced and Corrupt Organizations Act and various state statutory and common law theories. In addition, the suits allege that the defendants made improper payments to Dr. Brown in connection with Dr. Brown's prescription of Protropin for the plaintiffs rather than a competing product, and that the plaintiffs were injured by purchasing Protropin at costs approximately 30% higher than a competing product. A similar suit was filed in the U.S. District Court for the District of South Dakota, Southern Division, on July 13, 1995, against Genentech, Caremark and Dr. Brown, alleging the same causes of action as above as well as intentional infliction of emotional distress but not state and common law claims. The two Minnesota actions and the South Dakota action are in the discovery phase. Based upon the nature of the claims made and the investigations completed to date by the Company and its counsel, the Company believes the outcome of the above actions will not have a material adverse effect on the financial position, results of operations or cash flows of the Company. However, were an unfavorable ruling to occur in any quarterly period, there exists the possibility of a material impact on the net income of that period. QUASI-REORGANIZATION On February 18, 1988, the Company's Board of Directors approved the elimination of the Company's accumulated deficit through an accounting reorganization of its stockholders' equity accounts (a quasi-reorganization) effective October 1, 1987, that did not involve any revaluation of assets or liabilities. The Company eliminated the accumulated deficit of $329.5 million by a transfer from additional paid-in capital in an amount equal to the accumulated deficit. The Company has been reporting in income the recognition of operating loss and tax credit carryforward items arising prior to the quasi-reorganization due to the Company's adoption of its quasi-reorganization in the context of the accounting and quasi-reorganization literature existing at the date the quasi- reorganization was effected. If the provisions of the subsequently issued Staff Accounting Bulletin 86 (SAB 86) had been applied, net income for the year ended December 31, 1995, would have been reduced by $11.8 million or $.10 per share (1994 net income would have been reduced by $39.7 million or $.33 per share; 1993 net income would have been reduced by $20.6 million or $.18 per share), because SAB 86 would require that the tax benefits of prior operating loss and tax credit carryforwards be reported as a direct addition to additional paid-in capital rather than being recorded in the income statement. The Securities and Exchange Commission staff has indicated that it would not object to the Company's accounting for such tax benefits. REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders of Genentech, Inc. We have audited the accompanying consolidated balance sheets of Genentech, Inc. as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Genentech, Inc. at December 31, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Ernst & Young LLP San Jose, California January 17, 199 QUARTERLY FINANCIAL DATA (UNAUDITED) (thousands, except per share amounts)
1995 Quarter Ended _______________________________________________ December 31 September 30 June 30 March 31 ________________________________________________________________________________ Total revenues $ 221,914 $223,911 $233,053 $238,967 Product sales 153,482 158,478 161,236 162,067 Gross margin from product sales 130,983 134,109 136,924 135,317 Net income 25,636 40,229 37,163 43,404 Net income per share .21 .33 .31 .36
1994 Quarter Ended _______________________________________________ December 31 September 30 June 30 March 31 ________________________________________________________________________________ Total revenues $ 207,760 $ 193,838 $ 194,922 $ 198,870 Product sales 158,137 142,555 152,574 147,798 Gross margin from product sales 133,464 118,095 128,009 125,667 Net income 18,566 33,586 33,387 38,855 Net income per share .15 .28 .28 .33
11-YEAR FINANCIAL SUMMARY (UNAUDITED) (millions, except per share and employee data) 1995 1994 1993 1992 _______________________________________________________________________________________ Total revenues $ 917.8 $ 795.4 $ 649.7 $ 544.3 Product sales 635.3 601.0 457.4 391.0 Royalties 190.8 126.0 112.9 91.7 Contract & other 31.2 25.6 37.9 16.7 Interest 60.5 42.7 41.5 44.9 ______________________________________________ Total costs and expenses $ 745.6 $ 665.8 $ 590.8 $ 522.3 Cost of sales 97.9 95.8 70.5 66.8 Research & development 363.0 314.3 299.4 278.6 Marketing, general & administrative 251.7 248.6 214.4 172.5 Special charge 25.0(1) - - - Interest 8.0 7.1 6.5 4.4 _____________________________________________ Income data Income (loss) before taxes $ 172.3 $ 129.6 $ 58.9 $ 21.9 Income tax provision 25.8 5.2 - 1.1 Net income (loss) 146.4 124.4 58.9 20.8 Net income (loss) per share 1.21 1.04 0.50 0.18 _____________________________________________ Selected balance sheet data Cash & marketable securities $1,096.8 $ 920.9 $ 719.8 $ 646.9 Accounts receivable 172.2 146.3 130.5 93.9 Inventories 93.6 103.2 84.7 65.3 Property, plant & equipment, net 503.7 485.3 456.7 432.5 Other long-term assets 105.5 61.0 64.1 37.1 Total assets 2,011.0 1,745.1 1,468.8 1,305.1 Total current liabilities 233.4 220.5 190.7 133.5 Long-term debt 150.0 150.4 151.2 152.0 Total liabilities 408.9 396.3 352.0 297.8 Total stockholders' equity 1,602.0 1,348.8 1,116.8 1,007.3 _____________________________________________ Other data Depreciation and amortization expense $ 58.4 $ 53.5 $ 44.0 $ 52.2 Capital expenditures 70.2 82.8 87.5 126.0 _____________________________________________ Share information Shares used to compute EPS 121.2 119.5 117.1 114.0 Actual year-end 119.3 117.2 114.8 112.9 _____________________________________________ Per share data Market price: High $ 53.00 $ 53.50 $ 50.50 $ 39.50 Low $ 44.50 $ 41.75 $ 31.25 $ 25.88 Book value $ 13.43 $ 11.50 $ 9.73 $ 8.92 _____________________________________________ Number of employees 2,842 2,738 2,510 2,331 _____________________________________________ The Company has paid no dividends. The Financial Summary above reflects adoption of FAS 115 in 1994, FAS 109 in 1992 and FAS 96 in 1988. All share and per share amounts reflect two-for-one split in 1986, two-for-one split in 1987. *Redeemable common stock began trading September 10, 1990; prior to that date all shares were common stock. Pursuant to the Merger agreement with Roche, all shareholders as of effective date September 7, 1990, received for each common share owned, $18 in cash from Roche and one-half share of newly issued redeemable common stock from the Company. (1) Charges related to 1995 merger and new Agreement with Roche ($21 million) and resignation of the Company's former CEO ($4 million). (2) Charges primarily related to 1990 Roche merger. (3) Primarily inventory-related charge. (4) Charge for purchase of in-process R&D.
1991 1990 1989 1988 1987 1986 1985 ______________________________________________________________________________ $ 515.9 $ 476.1 $ 400.5 $ 334.8 $ 230.5 $ 134.0 $ 89.6 383.3 367.2 319.1 262.5 141.4 43.6 5.2 63.4 47.6 36.7 26.7 20.1 12.9 5.3 20.4 31.9 27.5 33.5 57.1 70.9 71.1 48.8 29.4 17.2 12.1 11.9 6.6 8.0 ______________________________________________________________________________ $ 469.8 $ 572.7 $ 352.9 $ 311.7 $ 186.6 $ 484.6 $ 83.0 68.4 68.3 60.6 46.9 23.8 10.8 1.7 221.3 173.1 156.9 132.7 96.5 79.8 64.9 175.3 158.1 127.9 101.9 59.5 27.3 16.4 - 167.7(2) - 23.3(3) - 366.7(4) - 4.8 5.5 7.5 6.9 6.8 - - ______________________________________________________________________________ $ 46.2 $ (96.6) $ 47.5 $ 23.1 $ 43.9 $ (350.6) $ 6.6 1.8 1.5 3.6 2.5 1.7 2.4 0.5 44.3 (98.0) 44.0 20.6 42.2 (353.0) 6.1 0.39 (1.05) 0.51 0.24 0.50 (5.10) 0.10 ______________________________________________________________________________ $ 711.4 $ 691.3 $ 205.0 $ 152.5 $ 158.3 $ 84.3 $ 99.8 69.0 58.8 66.8 63.9 92.2 24.5 26.2 56.2 39.6 49.3 63.4 58.0 14.7 4.6 342.5 300.2 299.1 289.4 195.7 133.1 87.9 42.7 61.7 85.0 89.7 108.7 114.9 16.6 1,231.4 1,157.7 711.2 662.9 619.0 376.0 238.6 118.6 101.4 75.9 95.4 82.8 37.8 27.2 152.9 153.5 154.4 155.3 168.1 31.6 6.0 281.7 264.5 242.2 263.6 263.6 83.3 35.7 949.7 893.2 469.0 399.3 355.4 292.6 202.9 ______________________________________________________________________________ $ 46.9 $ 47.6 $ 44.6 $ 38.3 $ 23.5 $ 8.1 $ 5.7 71.3 36.0 37.2 110.9 65.3 46.3 20.2 ______________________________________________________________________________ 112.5 93.0 86.0 84.5 84.4 69.3 64.0 111.3 110.6 84.3 82.9 78.7 67.0 65.6 ______________________________________________________________________________ $ 36.25 $ 30.88 $ 23.38 $ 47.50 $ 64.75 $ 49.38 $ 18.81 $ 27.50* $ 20.75 $ 20.13 $ 16.00 $ 14.38 $ 28.00 $ 16.44 $ 8.56 $ 21.75* $ 8.53 $ 8.08 $ 5.56 $ 4.82 $ 4.52 $ 4.37 $ 3.09 ______________________________________________________________________________ 2,202 1,923 1,790 1,744 1,465 1,168 893 ______________________________________________________________________________ COMMON STOCK, SPECIAL COMMON STOCK AND REDEEMABLE COMMON STOCK INFORMATION Stock Trading Symbol GNE Stock Exchange Listings The Company's callable putable common stock (special common stock) has traded on the New York Stock Exchange and the Pacific Stock Exchange under the symbol GNE since October 26, 1995. On October 25, 1995, the Company's non-Roche stockholders approved a new agreement with Roche Holdings, Inc. (Roche). Pursuant to the agreement, each share of the Company's common stock not held by Roche or its affiliates automatically converted to one share of special common stock. From July 3, 1995 through October 25, the Company's common stock was traded under the symbol GNE. After the close of business on June 30, 1995, each share of the Company's redeemable common stock automatically converted to one share of Genentech common stock. The conversion was in accordance with the terms of the redeemable common stock put in place at the time of its issuance on September 7, 1990, when the Company's merger with a wholly owned subsidiary of Roche was consummated. The Company's stockholders of record on September 7, 1990, received, for each share of common stock owned, $18 in cash from Roche and one-half share of newly issued redeemable common stock from the Company. The redeemable common stock of the Company traded under the symbol GNE from September 10, 1990 to June 30, 1995. The Company's common stock was traded on the New York Stock Exchange under the symbol GNE from March 2, 1988, until September 7, 1990, and on the Pacific Stock Exchange under the symbol GNE from April 12, 1988, until September 7, 1990. The Company's common stock was previously traded in the NASDAQ National Market System under the symbol GENE. No dividends have been paid on the common stock, special common stock or redeemable common stock. See the footnotes to the consolidated financial statements for a further description of the 1995 agreement with Roche and the 1990 merger transaction. Special Common Stockholders As of December 31, 1995, there were approximately 19,021 stockholders of record of the Company's special common stock. Stock Prices Special Common/Redeemable Common/Common Stock 1995 1994 __________________________________________________________________________ High Low High Low _________________________________________________ 4th Quarter $ 53 $ 47 7/8 $ 53 1/2 $ 42 1/8 3rd Quarter 49 1/4 46 5/8 52 1/2 48 1/8 2nd Quarter 52 46 3/8 51 5/8 43 1/4 1st Quarter 51 44 1/2 51 3/8 41 3/4 35 EX-27.1 4
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED STATEMENTS OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO. 1,000 YEAR DEC-31-1995 DEC-31-1995 137,043 959,771 178,832 6,672 93,648 1,045,414 772,405 268,751 2,010,995 233,444 150,000 0 0 2,385 1,599,662 2,010,995 635,263 917,845 97,930 97,930 363,049 10,972 7,940 172,273 25,841 146,432 0 0 0 146,432 1.21 0
EX-10.18 5 $330,000,000.00 AMENDED AND RESTATED LEASE AGREEMENT BETWEEN BNP LEASING CORPORATION, AS LANDLORD AND GENENTECH, INC., AS TENANT EFFECTIVE AS OF DECEMBER 8, 1995 (Vacaville Biopharmaceutical Manufacturing Facility) This Agreement is being facilitated by the following banks: Banque Nationale de Paris Credit Suisse Mellon Bank, N.A. Union Bank of Switzerland Swiss Bank Corporation TABLE OF CONTENTS Page 1 Definitions . . . . . . . . . . . . . . . . . . . . . 2 (a) Active Negligence . . . . . . . . . . . . . . 2 (b) Additional Rent . . . . . . . . . . . . . . . 2 (c) Advance Date . . . . . . . . . . . . . . . . 3 (d) Affiliate . . . . . . . . . . . . . . . . . . 3 (e) Agency Fees . . . . . . . . . . . . . . . . . 3 (f) Applicable Laws . . . . . . . . . . . . . . . 3 (g) Applicable Purchaser . . . . . . . . . . . . . 3 (h) Appraised Value . . . . . . . . . . . . . . . 3 (I) Attorneys' Fees . . . . . . . . . . . . . . . 3 (j) Base Rent . . . . . . . . . . . . . . . . . . 3 (k) Base Rental Commencement Date . . . . . . . . 3 (l) Base Rental Date . . . . . . . . . . . . . . 4 (m) Base Rental Period . . . . . . . . . . . . . . 4 (n) Business Day . . . . . . . . . . . . . . . . . 4 (o) Capital Adequacy Charges . . . . . . . . . . . 4 (p) Capital Lease . . . . . . . . . . . . . . . . 4 (q) Carrying Costs . . . . . . . . .. . . . . . . 4 (r) Code . . . . . . . . . . . . . . . .. . . . . 4 (s) Commitment Fee . . . . . . . . . . .. . . . . 4 (t) Consolidated Current Liabilities . . . . . . . 4 (u) Consolidated Quick Assets . . .. . . . . . . . 4 (v) Consolidated Subsidiary . . . . . .. . . . . . 4 (w) Consolidated Tangible Net Worth . . . . . . . 4 (x) Consolidated Total Assets . . . . .. . . . . . 5 (y) Consolidated Total Liabilities . .. . . . . . 5 (z) Current Liabilities . . . . . . . .. . . . . . 5 (aa) Construction Advances . . . . . .. . . . . . 5 (ab) Construction Allowance . . . .. . . . . . . . 5 (ac) Construction Documents . . . .. . . . . . . . 5 (ad) Construction Period . . . . . . . . . . . . 5 (ae) Construction Project . . . . . . . . . . . . 5 (af) Debt . . . . . . . . . . . . . . . . .. . . . 6 (ag) Default . . . . . . . . . . . . . .. . . . . 6 (ah) Default Rate . . . . . . . . . . . . . . . . 6 (ai) Designated Payment Date . . . . . . . . . . . 6 (aj) Development Contracts . . . . . . . . . . . . 6 (ak) Effective Rate . . . . . . . . . . . . . . . . 6 (al) Environmental Cutoff Date . . . . . . . . . . 7 (am) Environmental Indemnity Agreement . . . . . . 7 (an) Environmental Laws . . . . . . . . . . . . . . 7 (ao) Environmental Losses . . . . . . . . . . . . . 7 (ap) Environmental Report . . . . . . . . . . . . . 7 (aq) ERISA . . . . . . . . . . . . . . . . . . . . 7 (ar) ERISA Affiliate . . . . . . . . . . . . . . . 7 (as) Escrowed Proceeds . . . . . . . . . . . . . . 8 (at) Eurocurrency Liabilities . . . . . . . . . . . 8 (au) Eurodollar Rate Reserve Percentage . . . . . . 8 (av) Event of Default . . . . . . . . . . . . . . . 8 (aw) Excluded Taxes . . . . . . . . . . . . . . . . 8 (ax) Fed Funds Rate . . . . . . . . . . . . . . . . 9 (ay) Funding Advances . . . . . . . . . . . . . . . 9 (az) GAAP . . . . . . . . . . . . . . . . . . . . . 9 (ba) Hazardous Substance . . . . . . . . . . . . . 9 (bb) Hazardous Substance Activity . . . . . . . . . 9 (bc) Hazardous Substance Claims . . . . . . . . . . 9 (bd) Impositions. . . . . . . . . . . . . . . . . . 9 (be) Improvements . . . . . . . . . . . . . . . . . 10 (bf) Indemnified Party . . . . . . . . . . . . . . 10 (bg) Initial Funding Advances . . . . . . . . . . . 10 (bh) Intangible Assets . . . . . . . . . . . . . . 10 (bi) Landlord's Parent . . . . . . . . . . . . . . 11 (bj) LIBOR . . . . . . . . . . . . . . . . . . . . 11 (bk) Lien . . . . . . . . . . . . . . . . . . . . . 11 (bl) Losses . . . . . . . . . . . . . . . . . . . . 11 (bm) Maximum Construction Allowance . . . . . . . . 11 (bn) Multiemployer Plan . . . . . . . . . . . . . . 12 (bo) Outstanding Construction Allowance . . . . . . 12 (bp) Participant . . . . . . . . . . . . . . . . . 12 (bq) PBGC . . . . . . . . . . . . . . . . . . . . . 12 (br) Permitted Encumbrances . . . . . . . . . . . . 12 (bs) Permitted Hazardous Substance Use . . . . . . 12 (bt) Permitted Hazardous Substances . . . . . . . . 13 (bu) Permitted Transfer . . . . . . . . . . . . . . 13 (bv) Person . . . . . . . . . . . . . . . . . . . . 13 (bw) Plan . . . . . . . . . . . . . . . . . . . . . 13 (bx) Potential Lien Claimants . . . . . . . . . . . 13 (by) Prime Rate . . . . . . . . . . . . . . . . . . 13 (bz) Purchase Agreement . . . . . . . . . . . . . . 14 (ca) Qualified Affiliate . . . . . . . . . . . . . 14 (cb) Qualified Payments . . . . . . . . . . . . . . 14 (cc) Quick Assets . . . . . . . . . . . . . . . . . 14 (cd) Remaining Proceeds . . . . . . . . . . . . . . 15 (ce) Rent . . . . . . . . . . . . . . . . . . . . . 15 (cf) Scope Change . . . . . . . . . . . . . . . . . 15 (cg) Special Participation Fees . . . . . . . . . . 15 (ch) Spread . . . . . . . . . . . . . . . . . . . . 15 (ci) Stipulated Loss Value . . . . . . . . . . . . 16 (cj) Subsidiary . . . . . . . . . . . . . . . . . . 16 (ck) Tenant's Agents . . . . . . . . . . . . . . . 16 (cl) Term . . . . . . . . . . . . . . . . . . . . . 16 (cm) Term Sheet . . . . . . . . . . . . . . . . . . 16 (cn) Transaction Expenses . . . . . . . . . . . . . 16 (co) Unfunded Benefit Liabilities . . . . . . . . . 16 (cp) Upfront Fee . . . . . . . . . . . . . . . . . 16 (cq) Other Terms and References . . . . . . . . . . 16 2 Term. . . . . . . . . . . . . . . . . . . . . . . . . 17 (a) Scheduled Term . . . . . . . . . . . . . . . . 17 (b) Early Termination By Tenant . . . . . . . . . 17 3 Rental. . . . . . . . . . . . . . . . . . . . . . . . 17 (a) Base Rent . . . . . . . . . . . . . . . . . . 17 (b) Upfront Fee . . . . . . . . . . . . . . . . . 18 (c) Agency Fee . . . . . . . . . . . . . . . . . . 18 (d) Special Participation Fee . . . . . . . . . . 18 (e) Commitment Fees . . . . . . . . . . . . . . . 18 (f) Additional Rent . . . . . . . . . . . . . . . 18 (g) Interest and Order of Application . . . . . . 18 (h) Net Lease . . . . . . . . . . . . . . . . . . 18 (I) No Demand or Setoff . . . . . . . . . . . . . 19 4 Application of Insurance, Condemnation and Other Proceeds; Waiver of Insured Claims; Determination of Appraised Value . . . . . . . . . . 19 5 No Lease Termination. . . . . . . . . . . . . . . . . 22 (a) Status of Lease . . . . . . . . . . . . . . . 22 (b) Waiver By Tenant . . . . . . . . . . . . . . . 23 6 Construction Allowance . . . . . . . . . . . . . . . 23 (a) Advances; Outstanding Construction Allowance . 23 (b) Construction Projects . . . . . . . . . . . . 24 (i) Preconstruction Approvals. . . . . . . 24 (ii) Scope Changes . . . . . . . . . . . . 24 (iii) Responsibility for Construction. . . . 24 (iv) Value Added. . . . . . . . . . . . . . 25 (v) Estoppel Letters Required. . . . . . . 25 (vi) Advances Not a Waiver. . . . . . . . . 26 (c) Conditions to Construction Advances . . . . . 26 (i) Prior Notice . . . . . . . . . . . . . 26 (ii) Amount of the Advances . . . . . . . . 26 (iii) Insurance. . . . . . . . . . . . . . . 26 a) Title Insurance . . . . . . . . . 26 b)Builder's Risk Insurance. . . . . . 26 (iv) Progress of Construction . . . . . . . 27 (v) Evidence of Costs and Expenses to be Reimbursed. . . . . . . . . . . 27 (vi) No Event of Default. . . . . . . . . . 27 (vii) No Sale of Landlord's Interest . . . . 27 (viii) Certificate of No Default and Other Matters . . . . . . . . . . . 27 (ix) Payments by Participants . . . . . . . 27 (x) Execution of Participation Agreements With Participants . . . . . . . . . 29 7 Purchase Agreement and Environmental Indemnity Agreement . . . . . . . . . . . . . . . . . . . . . 29 8 Use and Condition of Leased Property . . . . . . . . 29 (a) Use . . . . . . . . . . . . . . . . . . . . . 29 (b) Condition . . . . . . . . . . . . . . . . . . 29 (c) Consideration for and Scope of Waiver . . . . 30 9 Other Representations, Warranties and Covenants of Tenant . . . . . . . . . . . . . . 30 (a) Financial Matters . . . . . . . . . . . . . . 30 (b) The Contract and Other Development Contracts . 30 (c) No Default or Violation . . . . . . . . . . . 31 (d) Compliance with Covenants and Laws . . . . . . 31 (e) Environmental Representations . . . . . . . . 31 (f) No Suits . . . . . . . . . . . . . . . . . . . 31 (g) Condition of Property . . . . . . . . . . . . 32 (h) Organization . . . . . . . . . . . . . . . . . 32 (I) Enforceability . . . . . . . . . . . . . . . . 32 (j) Not a Foreign Person . . . . . . . . . . . . . 32 (k) Omissions . . . . . . . . . . . . . . . . . . 32 (l) Existence . . . . . . . . . . . . . . . . . . 32 (m) Tenant Taxes . . . . . . . . . . . . . . . . . 32 (n) Operation of Property . . . . . . . . . . . . 33 (o) Debts for Construction . . . . . . . . . . . . 34 (p) Impositions . . . . . . . . . . . . . . . . . 34 (q) Repair, Maintenance, Alterations and Additions . . . . . . . . . . . . . . . 35 (r) Insurance and Casualty . . . . . . . . . . . . 35 (s) Condemnation . . . . . . . . . . . . . . . . . 36 (t) Protection and Defense of Title Against Liens and Other Encumbrances or Defects . . .. . . 36 (u) Books and Records . . . . . . . . . . . . . . 37 (v) Financial Statements; Required Notices; Certificates . . . . . . . . . . . . . . . . 37 (w) Further Assurances . . . . . . . . . . . . . . 38 (x) Fees and Expenses; Indemnification; Increased Costs; and Capital Adequacy Charges . . .. . 39 (y) Liability Insurance . . . . . . . . . . . . . 40 (z) Permitted Encumbrances . . . . . . . . . . . . 41 (aa) Environmental Covenants . . . . . . . . . . . 41 (ab) Affirmative Financial Covenants . . . . . . . 42 (i) Minimum Tangible Net Worth . . . . . . 42 (ii) Leverage Ratio . . . . . . . . . . . . 42 (iii) Quick Ratio . . . . . . . . . . . . . . 42 (ac) Negative Covenants . . . . . . . . . . . . . . 42 (i) Liens . . . . . . . . . . . . . . . . . 42 (ii) Transactions with Affiliates . . . . . 44 (ad) ERISA . . . . . . . . . . . . . . . . . . . . 44 (ae) Assignment of Certain Rights . . . . . . . . . 44 10 Other Representations and Covenants of Landlord . . 45 (a) Title Claims By, Through or Under Landlord . . 45 (b) Actions Required of the Title Holder . . . . . 45 (c) Actions Permitted by Tenant Without Landlord's Consent . . . . . . . . . . . . . 47 (d) No Default or Violation . . . . . . . . . . . 47 (e) No Suits . . . . . . . . . . . . . . . . . . . 48 (f) Organization . . . . . . . . . . . . . . . . . 48 (g) Enforceability . . . . . . . . . . . . . . . . 48 (h) Existence . . . . . . . . . . . . . . . . . . 48 (i) Not a Foreign Person . . . . . . . . . . . . . 48 (j) Responding to Requests for Information . . . . 48 11 Assignment and Subletting . . . . . . . . . . . . . 48 (a) Consent Required . . . . . . . . . . . . . . . 48 (b) Standard for Landlord's Consent to Assignments and Certain Other Matters . . . . . . . . . 49 (c) Consent Not a Waiver . . . . . . . . . . . . . 49 (d) Landlord's Assignment . . . . . . . . . . . . 49 12 Environmental Indemnification . . . . . . . . . . . 49 (a) Indemnity . . . . . . . . . . . . . . . . . . 49 (b) Assumption of Defense . . . . . . . . . . . . 49 (c) Notice of Environmental Losses . . . . . . . . 50 (d) Rights Cumulative . . . . . . . . . . . . . . 50 (e) Survival of the Indemnity . . . . . . . . . . 50 13 Inspections and Right of Landlord to Perform, Generally . . . . . . . . . . . . . . . . . . . . 50 14 Events of Default . . . . . . . . . . . . . . . . . 51 (a) Definition . . . . . . . . . . . . . . . . . . 51 (b) Remedies . . . . . . . . . . . . . . . . . . . 53 (c) Enforceability . . . . . . . . . . . . . . . . 54 (d) Remedies Cumulative . . . . . . . . . . . . . 54 15 No Implied Waiver . . . . . . . . . . . . . . . . . 55 16 Default by Landlord . . . . . . . . . . . . . . . . 55 17 Quiet Enjoyment . . . . . . . . . . . . . . . . . . 55 18 Surrender Upon Termination . . . . . . . . . . . . . 55 19 Holding Over by Tenant . . . . . . . . . . . . . . . 55 20 Miscellaneous . . . . . . . . . . . . . . . . . . . 56 (a) Notices . . . . . . . . . . . . . . . . . . . 56 (b) Severability . . . . . . . . . . . . . . . . . 57 (c) No Merger . . . . . . . . . . . . . . . . . . 58 (d) NO IMPLIED REPRESENTATIONS BY LANDLORD . . . . 58 (e) Entire Agreement . . . . . . . . . . . . . . . 58 (f) Binding Effect . . . . . . . . . . . . . . . . 58 (g) Time is of the Essence . . . . . . . . . . . . 58 (h) Governing Law . . . . . . . . . . . . . . . . 58 (i) Attorneys' Fees . . . . . . . . . . . . . . . 58 21 Waiver of Jury Trial . . . . . . . . . . . . . . . . 58 22 Tax Reporting . . . . . . . . . . . . . . . . . . . 59 23 Proprietary Information, Confidentiality and Security . . . . . . . . . . . . . . . . . . . 59 Exhibits and Schedules Exhibit A . . . . . . . . . . . . . . . . . . . . Legal Description Exhibit B . . . . . . . . . . . . . . . . . . . . .Encumbrance List Exhibit C . . . . . . . . . . . . . Estoppel Letter from Contractor Exhibit D . . . . . . . . . . . . . .Estoppel Letter from Architect Exhibit E . . . . . . . . . . . . . . . . . . . .Draw Request Forms Exhibit F . . . . . . . . . . . . . . . . . . . Officer Certificate Schedule 1. . . . . . . . . . . . . . . . . . .List of Participants Schedule 2. . . . . . Documents Conveying Rights Assigned to Tenant Schedule 3. . . . . Description of the initial Construction Projec AMENDED AND RESTATED LEASE AGREEMENT This AMENDED AND RESTATED LEASE AGREEMENT (as extended, supplemented, amended, restated or otherwise modified from time to time, hereinafter called this "Lease"), made to be effective as of December 8, 1995 (all references herein to the "date hereof" or words of like effect shall mean such effective date), by and between BNP LEASING CORPORATION, a Delaware corporation (hereinafter called "Landlord"), and GENENTECH, INC., a Delaware corporation (hereinafter called "Tenant"); W I T N E S E T H T H A T: WHEREAS, pursuant to a Property Sale Agreement dated as of May 24, 1995, as amended by Amendment No. 1 dated as of June 30, 1995, as amended by Amendment No. 2 dated as of July 31, 1995, as amended by Amendment No. 3 dated as of July 31, 1995, as amended by Amendment No. 4 dated as of July 31, 1995 and as amended by Amendment No. 5 dated as of September 5, 1995 (hereinafter called the "Contract") covering the land described in Exhibit A attached hereto (hereinafter called the "Land"), Landlord acquired the Land and any existing improvements on the Land from Chevron Land and Development Company, a Delaware corporation (hereinafter called "Seller"); WHEREAS, contemporaneously with the closing of Landlord's purchase of the Land, Landlord and Tenant entered into a Lease Agreement dated to be effective as of August 1, 1995, as modified by First Amendment to Lease Agreement dated as of September 7, 1995 (hereinafter called the "Prior Lease"), a Purchase Agreement dated to be effective as of August 1, 1995 (hereinafter called the "Prior Purchase Agreement") and an Environmental Indemnity Agreement dated to be effective as of August 1, 1995 (hereinafter called the "Environmental Indemnity Agreement"); WHEREAS, in anticipation of Tenant's construction of new improvements on the Land and purchase of equipment and other personal property for use in such improvements, Landlord and Tenant desire by this Lease to evidence their agreement as to the terms and conditions upon which Landlord is willing to provide funds for such construction and purchase and upon which Tenant will continue to lease the Land and improvements thereon and the equipment and other personal property purchased with funds provided by Landlord; and WHEREAS, Landlord and Tenant desire by this Lease to amend, restate, replace and supersede the Prior Lease in its entirety, effective as of the date hereof; NOW, THEREFORE, in consideration of the rent to be paid and the covenants and agreements to be performed by Tenant, as hereinafter set forth, Landlord does hereby LEASE, DEMISE and LET unto Tenant for the term hereinafter set forth the Land, together with: (i) Landlord's interest in any and all buildings and other real property improvements on the Land from time to time, including improvements hereafter erected on the Land by Tenant, and including, but not limited to, mechanical, electrical, HVAC and other building systems attached to future buildings and improvements constructed on the Land by Tenant (hereinafter called the "Improvements"); (ii) all easements and rights-of-way now owned or hereafter acquired by Landlord for use in connection with the Land or Improvements or as a means of access thereto; (iii) all right, title and interest of Landlord, now owned or hereafter acquired, in and to (A) any land lying within the right-of-way of any street, open or proposed, adjoining the Land, (B) any and all sidewalks and alleys adjacent to the Land and (C) any strips and gores between the Land and abutting land (except strips and gores, if any, between the Land and abutting land owned by Landlord, with respect to which this Lease shall cover only the portion thereof to the center line between the Land and the abutting land owned by Landlord). The Land and all of the property described in items (i) through (iii) above are hereinafter referred to collectively as the "Real Property". In addition to conveying a leasehold in the Real Property as described above, Landlord hereby grants, assigns and leases to Tenant for the term of this Lease the right to use and enjoy (and, to the extent the following consist of contract rights, to enforce) any interests or rights of Landlord in, to or under the following, to the extent, but only to the extent, that such interests or rights are assignable and have been or will be transferred to Landlord by Seller under the Contract, transferred to Landlord because of Tenant's purchase thereof with funds advanced by Landlord as described in subparagraph 9(ae) below, assigned to Landlord by Tenant pursuant to subparagraph 9(af) of the Prior Lease or pursuant to subparagraph 9(ae) below or otherwise transferred to Landlord by reason of Landlord's status as the owner of the Real Property: (a) any goods, equipment, furnishings, furniture, chattels and tangible personal property of whatever nature that are located on the Real Property and all renewals or replacements of or substitutions for any of the foregoing; (b) the rights of Landlord, now existing or hereafter arising, under Permitted Encumbrances (including the Development Contracts, as defined below), and (c) any other general intangibles, permits, licenses, franchises, certificates, and other rights and privileges related to the Real Property that Tenant (rather than Landlord) would have acquired if Tenant had itself acquired the Real Property as the purchaser under the Contract. All of the property, rights and privileges described above in this paragraph whether now existing or hereafter arising, are hereinafter collectively called the "Personal Property". The Real Property and the Personal Property are hereinafter sometimes collectively called the "Leased Property." Provided, however, the leasehold estate conveyed hereby and Tenant's rights hereunder are expressly made subject and subordinate to the Permitted Encumbrances (as hereinafter defined) and to any other claims or encumbrances not asserted by Landlord itself or by third parties lawfully claiming through or under Landlord. The Leased Property is leased by Landlord to Tenant and is accepted and is to be used and possessed by Tenant upon and subject to the following terms, provisions, covenants, agreements and conditions: 1 Definitions. As used herein, the terms "Landlord," "Tenant," "Contract," "Seller," "Land," "Prior Lease," "Prior Purchase Agreement," "Environmental Indemnity Agreement," "Improvements," "Real Property," "Personal Property" and "Leased Property" shall have the meanings indicated above and the terms listed immediately below shall have the following meanings: (a) Active Negligence. "Active Negligence" of an Indemnified Party means, and is limited to, the negligent conduct of activities actually on or about the Leased Property by the Indemnified Party or its employees, agents or representatives in a manner that proximately causes actual bodily injury or property damage to be incurred. "Active Negligence" shall not include (1) any negligent failure of Landlord to act when the duty to act would not have been imposed but for Landlord's status as owner of the Leased Property or as a party to the transactions described in this Lease, (2) any negligent failure of any other Indemnified Party to act when the duty to act would not have been imposed but for such party's contractual or other relationship to Landlord or participation or facilitation in any manner, directly or indirectly, of the transactions described in this Lease, or (3) the exercise in a lawful manner by Landlord (or any party claiming through or under Landlord) of any remedy provided herein or in the Purchase Agreement. (b) Additional Rent. "Additional Rent" shall have the meaning assigned to it in subparagraph 3(f) below. (c) Advance Date. "Advance Date" means, regardless of whether any Construction Advance shall actually be made thereon, the first Business Day of every calendar month, beginning with January 2, 1996 and continuing regularly thereafter to and including the first Business Day of the first calendar month upon which the then Outstanding Construction Allowance (including any Construction Advance and Carrying Costs added to the Outstanding Construction Advance on that Business Day) shall equal or exceed the Maximum Construction Allowance available under this Lease; provided, that if Landlord sells its interest in the Leased Property pursuant to the Purchase Agreement before the Base Rental Commencement Date, the last Advance Date shall be the Designated Payment Date. An Advance Date under this definition may also be the Base Rental Commencement Date or a Base Rental Date under the definitions below. (d) Affiliate. "Affiliate" of any Person (including Tenant) means any other Person controlling, controlled by or under common control with such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the direct or indirect ownership of fifty percent (50%) or more of any class of voting stock of a Person, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing. (e) Agency Fees. "Agency Fees" shall have the meaning assigned to it in subparagraph 3(c) below. (f) Applicable Laws. "Applicable Laws" shall have the meaning assigned to it in subparagraph 9(d) below. (g) Applicable Purchaser. "Applicable Purchaser" means any third party designated by Tenant to purchase the Landlord's interest in the Leased Property and in any Escrowed Proceeds as provided in the Purchase Agreement. (h) Appraised Value. "Appraised Value" shall have the meaning assigned to it in Paragraph 4 below. (i) Attorneys' Fees. "Attorneys' Fees" means the reasonable expenses and fees of counsel to the parties incurring the same, which may include fairly allocated costs of in-house counsel, printing, photostating, duplicating and other expenses, air freight charges, and fees billed for law clerks, paralegals, librarians and others not admitted to the bar but performing services under the supervision of an attorney. Such terms shall also include, without limitation, all such reasonable expenses and fees incurred with respect to appeals, arbitrations and bankruptcy proceedings, and whether or not any manner or proceeding is brought with respect to the matter for which the expenses and fees were incurred. (j) Base Rent. "Base Rent" means the rent payable by Tenant pursuant to subparagraph 3(a) below. (k) Base Rental Commencement Date. "Base Rental Commencement Date" means the earlier of the first Business Day in June, 1998 or the first Business Day of the first calendar month upon which any of the following shall have occurred: (1) Tenant shall have substantially completed the initial Construction Project described in subparagraph 6(b)(i), or (2) the then Outstanding Construction Allowance (including any Construction Advance and Carrying Costs added to the Outstanding Construction Advance on that Business Day) shall not be less than the Maximum Construction Allowance available under this Lease. For example, if on the first Business Day of April, 1998 construction of the initial Construction Project is continuing, the Outstanding Construction Allowance is $314,799,999 (before adding any Carrying Costs for the preceding month) and the Maximum Construction Allowance is $314,800,000 (assuming the Initial Funding Advances are $15,200,000), and if Carrying Costs of $1,500,000 would be added to the Outstanding Construction Allowance on such day if the Construction Allowance were not limited to the Maximum Construction Allowance, then such day shall be the Base Rental Commencement Date and on such day $1 will be added to the Outstanding Construction Allowance as Carrying Cost and $1,499,999 will be payable as Base Rent pursuant to Paragraph 3(a). (l) Base Rental Date. "Base Rental Date" means the first Business Day of each calendar month, beginning with first Business Day of the first calendar month after the Base Rental Commencement Date and continuing regularly thereafter to and including the Designated Payment Date. (m) Base Rental Period. "Base Rental Period" means each successive period of approximately one (1) month, with the first Base Rental Period beginning on and including the Base Rental Commencement Date and ending on but not including the first Base Rental Date. Each successive Base Rental Period after the first Base Rental Period shall begin on and include the day on which the preceding Base Rental Period ends and shall end on but not include the next following Base Rental Date. A Base Rental Period under this definition may also be a Construction Period under the definition of Construction Period below. (n) Business Day. "Business Day" means any day that is (1) not a Saturday, Sunday or day on which commercial banks are generally closed or required to be closed in New York City, New York or San Francisco, California, and (2) a day on which dealings in deposits of dollars are transacted in the London interbank market; provided that if such dealings are suspended indefinitely for any reason, "Business Day" shall mean any day described in clause (1). (o) Capital Adequacy Charges. "Capital Adequacy Charges" means any additional amounts Landlord's Parent or any Participant requires Landlord to pay as compensation for an increase in required capital as provided in subparagraph 9(x)(iv). (p) Capital Lease. "Capital Lease" means any lease which has been or should be capitalized on the books of the lessee in accordance with GAAP or for federal income tax purposes. (q) Carrying Costs. "Carrying Costs" means the charges (accruing at the Effective Rate) and other fees added to and made a part of the Outstanding Construction Allowance from time to time on or before the Base Rental Commencement Date pursuant to and as more particularly described in subparagraph 6(a)(ii) below. (r) Code. "Code" means the Internal Revenue Code of 1986, as amended from time to time. (s) Commitment Fee. "Commitment Fee" shall have the meaning assigned to it in subparagraph 3(e) below. (t) Consolidated Current Liabilities. "Consolidated Current Liabilities" means Current Liabilities of Tenant and its Consolidated Subsidiaries, as determined on a consolidated basis in accordance with GAAP. (u) Consolidated Quick Assets. "Consolidated Quick Assets" means Quick Assets of Tenant and its Consolidated Subsidiaries, as determined on a consolidated basis in accordance with GAAP (except as otherwise provided in the definition of "Quick Assets" set forth in subparagraph 1(cc) below). (v) Consolidated Subsidiary. "Consolidated Subsidiary" means any Subsidiary of Tenant whose accounts are or are required to be consolidated with the accounts of Tenant in accordance with GAAP. (w) Consolidated Tangible Net Worth. "Consolidated Tangible Net Worth" means, at any date of determination thereof, the excess of Consolidated Total Assets on such date over Consolidated Total Liabilities on such date; provided, however, that Intangible Assets on such date shall be excluded from any determination of Consolidated Total Assets on such date, but any after-tax charges previously taken in connection with the acquisition of technology or distribution rights shall be included in any determination of Consolidated Total Assets on such date. (x) Consolidated Total Assets. "Consolidated Total Assets" means, as of the date of any determination thereof, the total assets of Tenant and its Consolidated Subsidiaries, as determined on a consolidated basis in accordance with GAAP. (y) Consolidated Total Liabilities. "Consolidated Total Liabilities" means, as of the date of any determination thereof, the total liabilities of Tenant and its Consolidated Subsidiaries, as determined on a consolidated basis in accordance with GAAP, and any and all amounts guaranteed by Tenant not otherwise recorded in the financial statements of Tenant and its Consolidated Subsidiaries as liabilities. (z) Current Liabilities. "Current Liabilities" means, with respect to any Person, all liabilities of such Person treated as current liabilities in accordance with GAAP, including without limitation (a) all obligations payable on demand or within one year after the date in which the determination is made and (b) installment and sinking fund payments required to be made within one year after the date on which determination is made, but excluding all such liabilities or obligations which are renewable or extendable at the option of such Person to a date more than one year from the date of determination. (aa) Construction Advances. "Construction Advances" means actual advances of funds made by or on behalf of Landlord to Tenant pursuant to Paragraph 6 below for Construction Projects. (ab) Construction Allowance. "Construction Allowance" means the allowance which is to be provided by Landlord for Construction Projects as more particularly described in Paragraph 6 below. (ac) Construction Documents. "Construction Documents" means all construction contracts, architectural contracts, engineering contracts, drawings, plans, specifications, change orders, budgets, surveys, soils reports, environmental impact studies and other documents executed by or prepared for Tenant with respect to the Construction Projects. (ad) Construction Period. "Construction Period" means each successive period of approximately one (1) month, except that the first Construction Period shall be a shorter period beginning on and including the effective date hereof and ending on but not including the first Advance Date. Each successive Construction Period after the first Construction Period shall begin on and include the day on which the preceding Construction Period ends and shall end on but not include the next following Advance Date. (ae) Construction Project. Construction Projects include (1) the "initial Construction Project" which means the construction of the improvements described in Schedule 3 and contemplated by any plans, renderings and budgets referenced therein (including site work done on or about the Land by Tenant to prepare the Land for future construction), the purchase of equipment and other personal property for use in such improvements, and the provision of or payment for potable and non-potable water, sewer and other infrastructure and utility improvements related thereto, whether on-site or off-site, all consistent with the uses permitted by this Lease, and (2) "subsequent Construction Projects" which means any other project to be undertaken by Tenant during the term of this Lease for the construction of new Improvements or for the alteration of then existing Improvements. A subsequent Construction Project may involve demolition of then existing Improvements which are no longer needed or which must be removed to accommodate new Improvements, subject to the requirements of Paragraph 6(b) below. All construction work planned or done contemporaneously shall constitute a single Construction Project for purposes of this Lease, notwithstanding that such work may be done in stages or performed by more than one general contractor. However, it is understood that any number of distinct Construction Projects may be undertaken by Tenant during the term of (and in accordance with the provisions of) this Lease. (af) Debt. "Debt" means, with respect to any Person, (a) indebtedness of such Person for borrowed money; (b) indebtedness of such Person for the deferred purchase price of property or services (except trade payables and accrued expenses constituting current liabilities in the ordinary course of business); (c) the face amount of any outstanding letters of credit issued for the account of such Person; (d) obligations of such Person arising under acceptance facilities; (e) guaranties, endorsements (other than for collection in the ordinary course of business) and other contingent obligations of such Person to purchase, to provide funds for payment, to provide funds to invest in any Person, or otherwise to assure a creditor against loss; (f) obligations of others secured by any Lien on property of such Person; and (g) obligations of such Person as lessee under Capital Leases. (ag) Default. "Default" means any event which, with the passage of time or the giving of notice or both, would constitute an Event of Default. (ah) Default Rate. "Default Rate" means a floating per annum rate equal to five percent (5%) above the Prime Rate in effect from time to time. However, for purposes of computing interest on any past due reimbursement which is payable by Tenant upon demand under this Lease, the "Default Rate" for the first ten (10) Business Days after a demand for such reimbursement is made upon Tenant shall (1) equal zero, if the reimbursement required is $10,000 or less, and (2) if the required reimbursement is more than $10,000, not exceed the Prime Rate in effect on the date demand for such reimbursement is first made. Further, in no event will the "Default Rate" charged on any past due amount exceed the maximum interest rate permitted by law. (ai) Designated Payment Date. "Designated Payment Date" shall have the meaning assigned to it in the Purchase Agreement. (aj) Development Contracts. "Development Contracts" means the documents described in Schedule 2 attached hereto, as such documents may be modified from time to time with the consent of Landlord pursuant to subparagraph 10(b) below, and any applications, permits, contracts or documents concerning the use or development of the Leased Property or other Development Contracts that Landlord may hereafter execute or to which Landlord may consent at the request of Tenant pursuant to subparagraph 10(b) below. (ak) Effective Rate. "Effective Rate" means, for each Construction Period and Base Rental Period, the rate which equals the Spread plus the rate per annum determined by dividing (A) LIBOR for such Construction Period or Base Rental Period, as the case may be, by (B) 100% minus the Eurodollar Rate Reserve Percentage for such Construction Period or Base Rental Period. If LIBOR or the Eurodollar Rate Reserve Percentage changes from period to period, then the Effective Rate shall be automatically increased or decreased as of the date of such change, as the case may be. After the Base Rental Commencement Date, however, Landlord will provide notice of any such change (as required by Paragraph 3(a)) after the same shall take effect and at least five (5) Business Days prior to the next following Base Rental Date. If for any reason Landlord determines in good faith that it is impossible or impractical to determine the Effective Rate with respect to a given Construction Period or Base Rental Period in accordance with the preceding sentences, then the "Effective Rate" for that Construction Period or Base Rental Period shall equal the Spread plus any published index or per annum interest rate determined in good faith by Landlord's Parent to be comparable to LIBOR at the beginning of the first day of that period. A comparable interest rate might be, for example, the then existing yield on short term United States Treasury obligations (as compiled by and published in the then most recently published United States Federal Reserve Statistical Release H.15(519) or its successor publication), plus or minus a fixed adjustment based on Landlord's Parent's comparison of past eurodollar market rates to past yields on such Treasury obligations. Any determination by Landlord of the Effective Rate hereunder shall, in the absence of clear and demonstrable error, be conclusive and binding. (al) Environmental Cutoff Date. "Environmental Cutoff Date" means the later of the dates upon which (i) this Lease terminates, or (ii) Tenant surrenders possession and control of the Leased Property. (am) Environmental Indemnity Agreement. "Environmental Indemnity Agreement" means Environmental Indemnity Agreement dated as of August 1, 1995 executed by Tenant in favor of Landlord. (an) Environmental Laws. "Environmental Laws" means any and all existing and future Applicable Laws pertaining to safety, health or the environment, or to Hazardous Substances or Hazardous Substance Activities, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 (as amended, hereinafter called "CERCLA"), and the Resource Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste Disposal Act Amendments of 1980, and the Hazardous and Solid Waste Amendments of 1984 (as amended, hereinafter called "RCRA"). (ao) Environmental Losses. "Environmental Losses" means Losses suffered or incurred by any Indemnified Party, directly or indirectly, relating to or arising out of, based on or as a result of any of the following: (i) any Hazardous Substance Activity on or prior to the Environmental Cutoff Date; (ii) any violation on or prior to the Environmental Cutoff Date of any applicable Environmental Laws relating to the Leased Property or to the ownership, use, occupancy or operation thereof; (iii) any investigation, inquiry, order, hearing, action, or other proceeding by or before any governmental or quasi-governmental agency or authority in connection with any Hazardous Substance Activity that occurs or is alleged to have occurred on or prior to the Environmental Cutoff Date; or (iv) any claim, demand, cause of action or investigation, or any action or other proceeding, whether meritorious or not, brought or asserted against any Indemnified Party which directly or indirectly relates to, arises from, is based on, or results from any of the matters described in clauses (i), (ii), or (iii) of this subparagraph 1(ao) or any allegation of any such matters. For purposes of determining whether Losses constitute "Environmental Losses," as the term is used in this Lease, any actual or alleged Hazardous Substance Activity or violation of Environmental Laws relating to the Leased Property will be presumed to have occurred prior to the Environmental Cutoff Date unless Tenant establishes by clear and convincing evidence to the contrary that the relevant Hazardous Substance Activity or violation of Environmental Laws did not occur or commence prior to the Environmental Cutoff Date. Environmental Losses incurred by or asserted against a particular Indemnified Party shall include Losses relating to or arising out of or as a result of any matters listed above even when such matters are caused by the negligence of that particular Indemnified Party or any other Indemnified Party. However, Losses incurred by or asserted against a particular Indemnified Party and proximately caused by (and attributed by any applicable principles of comparative fault to) the wilful misconduct, Active Negligence or gross negligence of that Indemnified Party or its Affiliates, agents or employees will not constitute Environmental Losses of such Indemnified Party for purposes of this Lease. (ap) Environmental Report. "Environmental Report" means collectively the following reports: the Phase I Environmental Site Assessment Report, Vaca Valley Business Park, Genentech, Inc., Vacaville, California, dated June 16, 1995, prepared by SECOR International Incorporated; and the Subsurface Soil and Ground Water Investigation Letter Report, Proposed Genentech Parcel, Vaca Valley Parkway and Akerly Drive, Vacaville California, dated July 21, 1995, prepared by Tetra Tech, Inc. (aq) ERISA. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, including any rules and regulations promulgated thereunder. (ar) ERISA Affiliate. "ERISA Affiliate" means any corporation or trade or business which is a member of any group of organizations (i) described in Section 414(b) or (c) of the Code of which Tenant is a member, or (ii) solely for purposes of potential liability under Section 302(c) (11) of ERISA and Section 412(c) (11) of the Code and the lien created under Section 302(f) of ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the Code of which Tenant is a member. (as) Escrowed Proceeds. "Escrowed Proceeds" shall mean any proceeds that are received by Landlord from time to time during the Term (and any interest earned thereon), which Landlord is holding for the purposes specified in the next sentence, from any party (1) under any casualty insurance policy as a result of damage to the Leased Property, (2) as compensation for any sale of a Parcel pursuant to subparagraph 10(b) or for any restriction placed upon the use or development of the Leased Property or for the condemnation of the Leased Property or any portion thereof, (3) because of any judgment, decree or award for injury or damage to the Leased Property or (4) under any title insurance policy or otherwise as a result of any title defect or claimed title defect with respect to the Leased Property; provided, however, in determining "Escrowed Proceeds" there shall be deducted all expenses and costs of every type, kind and nature (including Attorneys' Fees) incurred by Landlord to collect such proceeds; and provided, further, "Escrowed Proceeds" shall not include any payment to Landlord by a Participant or an Affiliate of Landlord that is made to compensate Landlord for the Participant's or Affiliate's share of any Losses Landlord may incur as a result of any of the events described in the preceding clauses (1) through (4). "Escrowed Proceeds" shall include only such proceeds as are held by Landlord (A) pursuant to Paragraph 4 for the payment to Tenant for the restoration or repair of the Leased Property or (B) for application (generally, on the next following Advance Date or Base Rental Date which is at least three (3) Business Days following Landlord's receipt of such proceeds) as a Qualified Payment or as reimbursement of costs incurred in connection with a Qualified Payment. "Escrowed Proceeds" shall not include any proceeds that have been applied as a Qualified Payment or to pay any costs incurred in connection with a Qualified Payment. Until Escrowed Proceeds are paid to Tenant pursuant to Paragraph below or applied as a Qualified Payment or as reimbursement for costs incurred in connection with a Qualified Payment, Landlord shall keep the same deposited in an interest bearing account, and all interest earned on such account shall be added to and made a part of Escrowed Proceeds. (at) Eurocurrency Liabilities. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. (au) Eurodollar Rate Reserve Percentage. "Eurodollar Rate Reserve Percentage" means, for purposes of determining the Effective Rate for any Construction Period or Base Rental Period, the reserve percentage applicable two (2) Business Days before the first day of such Construction Period or Base Rental Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, but not limited to, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City with deposits exceeding One Billion Dollars with respect to liabilities or deposits consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities by reference to which LIBOR is determined) having a term comparable to such Construction Period or Base Rental Period. (av) Event of Default. "Event of Default" shall have the meaning assigned to it in subparagraph 14(a) below. (aw) Excluded Taxes. "Excluded Taxes" shall mean all federal, state and local income taxes (whether designated as income taxes or franchise taxes) upon Base Rent, the Upfront Fee, Agency Fees, Special Participation Fees, Commitment Fees and any interest paid to Landlord pursuant to subparagraph 3(g). Further, "Excluded Taxes" will include any transfer or change of ownership taxes assessed because of Landlord's transfer or conveyance to any third party of any rights or interest in this Lease, the Purchase Agreement or the Leased Property, but excluding any such taxes assessed because of any Permitted Transfer under clauses (1), (4) or (5) of subparagraph 1(bu) below. (ax) Fed Funds Rate. "Fed Funds Rate" means, for any period, a fluctuating interest rate (expressed as a per annum rate and rounded upwards, if necessary, to the next 1/16 of 1%) equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rates are not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Landlord's Parent from three Federal funds brokers of recognized standing selected by Landlord's Parent. All determinations of the Fed Funds Rate by Landlord's Parent shall, in the absence of clear and demonstrable error, be binding and conclusive upon Landlord and Tenant. (ay) Funding Advances. "Funding Advances" means (1) the Initial Funding Advances and (2) all future advances (which, together with Initial Funding Advances, are expected to total but in no event exceed $330,000,000) made by Landlord's Parent or any Participant to or on behalf of Landlord to allow Landlord to provide the Construction Allowance hereunder. (az) GAAP. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time, applied on a basis consistent with those used in the preparation of the financial statements referred to in subparagraph 9(v) (except for changes concurred in by Tenant's independent public accountants). (ba) Hazardous Substance. "Hazardous Substance" means (i) any chemical, compound, material, mixture or substance that is now or hereafter defined or listed in, regulated under, or otherwise classified pursuant to, any Environmental Laws as a "hazardous substance," "hazardous material," "hazardous waste," "extremely hazardous waste," "infectious waste," "toxic substance," "toxic pollutant," or any other formulation intended to define, list or classify substances by reason of deleterious properties, including, without limitation, ignitability, corrosiveness, reactivity, carcinogenicity, toxicity or reproductive toxicity; (ii) petroleum, any fraction of petroleum, natural gas, natural gas liquids, liquified natural gas, synthetic gas usable for fuel (or mixtures of natural gas and such synthetic gas), and ash produced by a resource recovery facility utilizing a municipal solid waste stream, and drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas or geothermal resources; (iii) asbestos and any asbestos containing material; (iv) "waste" as defined in section 13050(d) of the California Water Code; and (v) any other material that, because of its quantity, concentration or physical or chemical characteristics, poses a significant present or potential hazard to human health or safety or to the environment if released into the workplace or the environment. (bb) Hazardous Substance Activity. "Hazardous Substance Activity" means any use, storage, holding, existence, location, release (including, without limitation, any spilling, leaking, leaching, pumping, pouring, emitting, emptying, dumping, disposing into the environment, and the continuing migration into or through soil, surface water, groundwater or any body of water), discharge, deposit, placement, generation, processing, construction, treatment, abatement, removal, disposal, disposition, handling or transportation of any Hazardous Substance from, under, in, into or on the Leased Property, including, without limitation, the movement or migration of any Hazardous Substance from surrounding property, surface water, groundwater or any body of water under, in, into or onto the Leased Property and any residual Hazardous Substance contamination in, on or under the Leased Property. (bc) Hazardous Substance Claims. "Hazardous Substance Claims" shall have the meaning assigned to it in subparagraph 9(aa) below. (bd) Impositions. "Impositions" shall have the meaning assigned to it in subparagraph 9(p) below. (be) Improvements. "Improvements," as defined in the recitals at the beginning of this Lease, shall include not only existing improvements to the Land as of the date hereof, if any, but also new improvements or changes to existing improvements made by Tenant or Tenant's Agents during the Term. Accordingly, all new improvements made to the Leased Property by Tenant using the Construction Allowance as contemplated in this Lease shall constitute "Improvements" as that term is used herein. (bf) Indemnified Party. "Indemnified Party" means each of (1) Landlord and any of Landlord's successors and permitted assigns as to all or any portion of the Leased Property or any interest therein, (2) Landlord's Parent and each Participant, and (3) any Affiliate, officer, agent, director, employee or servant of any of the parties described in clause (1) or (2) preceding. (bg) Initial Funding Advances. "Initial Funding Advances" means the advances made by Landlord's Parent or Participants described in the following subparagraphs: (1) Landlord's Parent advanced $15,000,000 to or on behalf of Landlord on or prior to the delivery of the executed Prior Lease to pay the cost of Landlord's acquisition of the Leased Property pursuant to the Contract, to provide the funds which Landlord advanced to Tenant for purposes listed below and to pay Transaction Expenses incurred by Landlord on or before the date the Prior Lease was delivered by Landlord and Tenant. The portion of such advance from Landlord's Parent not used by Landlord for the acquisition of the Leased Property pursuant to the Contract or to pay Transaction Expenses incurred by Landlord was paid by Landlord to Tenant contemporaneously with the delivery of the Prior Lease, with the understanding (which continues under this Lease) that Tenant would use the same for the following purposes: (A) to pay certain fees and to provide certain reimbursements to Tenant as described in the Prior Lease, (B) to pay Transaction Expenses incurred by Tenant on or before the date the Prior Lease was delivered by Landlord and Tenant, (C) as reimbursement to Tenant in the amount of $750,000 for an initial deposit and additional deposit paid by Tenant to Seller in connection with the Contract, plus accrued interest credited on funds so deposited, and (D) as reimbursement to Tenant (or to pay directly) for all actual costs and expenses (including soft costs and hard costs and, in the case of Tenant only, Tenant's internal labor costs) of Tenant or Tenant's Agents in connection with anticipated Improvements, including subdivision, demolition and grading activities, as appropriate, the planning, design, engineering and permitting of the Improvements, and the maintenance of the Leased Property. (2) Landlord's Parent or Participants are advancing to Landlord the sum of $12,027,080 contemporaneously with the execution of this Lease to provide the funds which Landlord is advancing to Tenant for purposes listed below and to pay additional Transaction Expenses incurred by Landlord on or before the date this Lease is signed by Landlord and Tenant. Any portion of the such advance not used by Landlord to pay Transaction Expenses incurred by Landlord is being paid by Landlord to Tenant contemporaneously with the execution of this Lease, with the understanding that Tenant shall use the same for the following purposes: (A) to pay the Upfront Fee, the first Agency Fee and the Special Participation Fees and to provide reimbursement to Tenant of the deposit required of Tenant by the Term Sheet, (B) to pay Transaction Expenses incurred by Tenant on or before the date this Lease is executed by Landlord and Tenant, (C) as reimbursement to Tenant (or to pay directly) for actual costs and expenses (including soft costs and hard costs and, in the case of Tenant only, Tenant's internal labor costs) of Tenant or Tenant's Agents in connection with anticipated Improvements, including subdivision, demolition and grading activities, as appropriate, the planning, design, engineering and permitting of the Improvements, and the maintenance of the Leased Property, and (D) to pay any unpaid rent or other charges which, at the time this Lease is executed, Landlord and Tenant have identified as amounts due or scheduled to become due under the Prior Lease on or before the effective date hereof. (bh) Intangible Assets. "Intangible Assets" means, as of the date of any determination thereof, the total amount of all assets of Tenant and its Consolidated Subsidiaries that are properly classified as "intangible assets" in accordance with GAAP and, in any event, shall include, without limitation, goodwill, patents, trade names, trademarks, copyrights, franchises, experimental expense, organization expense, unamortized debt discount and expense, and deferred charges other than prepaid insurance and prepaid taxes and current deferred taxes which are classified on the balance sheet of Tenant and its Consolidated Subsidiaries as a current asset in accordance with GAAP. (bi) Landlord's Parent. "Landlord's Parent" means Banque Nationale de Paris, a bank organized and existing under the laws of France, together with any Affiliates of such bank that directly or indirectly provided or hereafter during the Term provide or maintain any part of the Funding Advances, and any successors of such bank and such Affiliates. (bj) LIBOR. "LIBOR" means, for purposes of determining the Effective Rate for each Construction Period and Base Rental Period, the rate determined by Landlord's Parent to be the average rate of interest per annum (rounded upwards, if necessary, to the next 1/16 of 1%) of the rates at which deposits of dollars are offered or available to Landlord's Parent in the London interbank market at approximately 11:00 a.m. (London time) on the second Business Day preceding the first day of such Construction Period or Base Rental Period. Landlord shall instruct Landlord's Parent to consider deposits, for purposes of making the determination described in the preceding sentence, that are offered: (i) for delivery on the first day of such Construction Period or Base Rental Period, (ii) in an amount equal or comparable to the total (projected on the applicable date of determination by Landlord's Parent) Stipulated Loss Value on the first day of such Construction Period or Base Rental Period, and (iii) for a period of time equal or comparable to the length of such Construction Period Base Rental Period. If Landlord's Parent so chooses, it may determine LIBOR for any period by reference to the rate reported by the British Banker's Association on Page 3750 of the Telerate Service at approximately 11:00 a.m. (London time) on the second Business Day preceding the first day of such period. If for any reason Landlord's Parent in good faith determines that it is impossible or impractical to determine LIBOR with respect to a given Construction Period or Base Rental Period in accordance with the preceding sentences, or if Landlord's Parent shall determine that it is unlawful (or any central bank or governmental authority shall assert that it is unlawful) for Landlord, Landlord's Parent or any Participant to maintain Funding Advances hereunder during any Construction Period or Base Rental Period for which Carrying Costs or Base Rent is computed by reference to LIBOR, then "LIBOR" for that Construction Period or Base Rental Period shall equal the rate which is fifty basis points (50/100 of 1%) above the Fed Funds Rate for that period. All determinations of LIBOR by Landlord's Parent shall, in the absence of clear and demonstrable error, be binding and conclusive upon Landlord and Tenant. (bk) Lien. "Lien" means any lien (statutory, constitutional, contractual or otherwise), security interest, mortgage, deed of trust, priority, pledge, charge, hypothecation, conditional sale, title retention agreement, financing lease or other encumbrance or similar right of others, or any agreement to give any of the foregoing. In addition, for purposes of subparagraph 9(ad)(i)(8) below, "Lien" includes any Liens under ERISA relating to Unfunded Benefit Liabilities of which Tenant is required to notify Landlord under subparagraph 9(ae)(i) below (which shall be included hereunder irrespective of whether Tenant actually notifies Landlord as required thereunder). (bl) Losses. "Losses" means any and all losses, liabilities, damages (whether actual, consequential, punitive or otherwise denominated), demands, claims, actions, judgments, causes of action, assessments, fines, penalties, costs, and out-of-pocket expenses (including, without limitation, Attorneys' Fees, accountants' fees and the reasonable fees of environmental consultants), of any and every kind or character, foreseeable and unforeseeable, liquidated and contingent, proximate and remote, known and unknown. (bm) Maximum Construction Allowance. "Maximum Construction Allowance" means an amount equal to the lesser of (i) $330,000,000, less the Initial Funding Advances and less Qualified Payments, if any, deducted in determining the Outstanding Construction Allowance, or (ii) such amount (not less than the then Outstanding Construction Allowance) as may be designated by Tenant to Landlord in a notice delivered subsequent to substantial completion of the initial Construction Project. (bn) Multiemployer Plan. "Multiemployer Plan" means a multiemployer plan as defined in Section 3(37) of ERISA to which contributions have been made by Tenant or any ERISA Affiliate during the preceding six years and which is covered by Title IV of ERISA. (bo) Outstanding Construction Allowance. "Outstanding Construction Allowance" shall have the meaning assigned to it in subparagraph 6(a)(i). (bp) Participant. "Participant" means (1) the Persons listed in Schedule 1 attached hereto, each of which is executing a participation agreement dated as of the effective date hereof, wherein each such Person is agreeing with Landlord to participate in all or some of the risks and rewards to Landlord of this Lease and the Purchase Agreement, and (2) the successors and permitted assigns of each such Person under the applicable participation agreement. (bq) PBGC. "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. (br) Permitted Encumbrances. "Permitted Encumbrances" means the following and any future modifications of any of the following which Landlord may execute or to which Landlord may give consent pursuant to subparagraph 10(b): (i) the encumbrances and other matters affecting the Leased Property that are set forth in Exhibit B attached hereto and made a part hereof, (ii) the obligations imposed upon the buyer under the Contract, if any, that survived the closing thereunder, (iii) any easement agreement or other document affecting title to the Leased Property that Landlord may execute, accept an assignment of or give its consent to pursuant to the Contract or pursuant to a document executed in accordance with the Contract or at the request of or with the consent of Tenant (including any such easement agreement or other document executed by Landlord or to which Landlord may give consent pursuant to subparagraph 10(b)), (iv) Development Contracts, if any, in addition to those included in the preceding clauses, (v) any Liens securing the payment of Impositions which are not delinquent or claimed to be delinquent or which are being contested in accordance with subparagraph 9(p) of this Lease; (vi) the Assessment District Lien (as defined in the Contract); (vii) mechanics' and materialmen's liens for amounts not past due or claimed to be past due or which are being contested in accordance with subparagraph 9(o) of this Lease; and (viii) easements, rights-of- way, restrictions and similar encumbrances which, in the aggregate, do not significantly interfere with the occupation, use or enjoyment of or ability to develop the Real Property in accordance with and for uses permitted by Applicable Laws or impose any significant monetary obligations on the Landlord or otherwise materially and adversely decrease the fair market value of the Leased Property. Nothing in this definition is intended to impair Tenant's rights under subparagraph 10(c) which may be exercised without notice to or the consent of Landlord as provided therein. (bs) Permitted Hazardous Substance Use. "Permitted Hazardous Substance Use" means the use, storage and offsite disposal of Permitted Hazardous Substances in strict accordance with applicable Environmental Laws and with due care given the nature of the Hazardous Substances involved; provided, the scope and nature of such use, storage and disposal shall not include the use of underground storage tanks for any purpose other than the storage of water for fire control, nor shall such scope and nature: (1) exceed that reasonably required for the construction and operation of the Leased Property for the purposes permitted under subparagraph 8(a); or (2) include any disposal, discharge or other release of Hazardous Substances in any manner that might allow such substances to reach the surface water or groundwater, except (i) through a lawful and properly authorized discharge (A) to a publicly owned treatment works or (B) with rainwater or storm water runoff in accordance with Applicable Laws and any permits obtained by Tenant that govern such runoff; or (ii) any such disposal, discharge or other release of Hazardous Substances for which no permits are required and which are not otherwise regulated under applicable Environmental Laws. Further, notwithstanding anything to the contrary herein contained, Permitted Hazardous Substance Use shall not include any use of the Leased Property as a treatment, storage or disposal facility (as defined by federal Environmental Laws), including but not limited to a landfill, incinerator or other waste disposal facility. (bt) Permitted Hazardous Substances. "Permitted Hazardous Substances" means Hazardous Substances used and reasonably required for Tenant's operation of the Leased Property for the purposes permitted under subparagraph 8(a) in strict compliance with all Environmental Laws and with due care given the nature of the Hazardous Substances involved. (bu) Permitted Transfer. "Permitted Transfer" means any one or more of the following: (1) the creation or conveyance by Landlord of rights and interests in favor of any Participant pursuant to the original participation agreements they are entering into with Landlord contemporaneously with this Lease; (2) the creation or conveyance of rights and interests in favor of or to Banque Nationale de Paris (through its San Francisco Branch or otherwise), as Landlord's Parent, provided that Landlord must notify Tenant before any such conveyance to Banque Nationale de Paris of (A) any interest in the Leased Property or any portion thereof by an assignment or other document which will be recorded in the real property records of Solano County, California or (B) Landlord's entire interest in the Leased Property; (3) the creation or conveyance of rights and interests in favor of or to Qualified Affiliates of Landlord (other than Banque Nationale de Paris) with Tenant's prior written consent, which consent shall not be unreasonably withheld; (4) any assignment or conveyance by Landlord requested by Tenant or required by any Permitted Encumbrance, by the Purchase Agreement, by the Contract, by any other Development Contract or by Applicable Laws; or (5) any assignment or conveyance after a Designated Payment Date on which Tenant shall not have purchased or caused an Applicable Purchaser to purchase Landlord's interest in the Leased Property and, if applicable, after the expiration of the thirty (30) day cure period specified in Paragraph 2(c) of the Purchase Agreement. (bv) Person. "Person" means an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature, and shall include, but not be limited to, Tenant and any Affiliates thereof, Landlord and any Affiliates thereof, Landlord's Parent and any Affiliates thereof, and each Participant and any Affiliates thereof. (bw) Plan. "Plan" means any employee benefit or other plan established or maintained, or to which contributions have been made, by Tenant or any ERISA Affiliate of Tenant during the preceding six years and which is covered by Title IV of ERISA, other than a Multiemployer Plan. (bx) Potential Lien Claimants. "Potential Lien Claimants" shall have the meaning assigned to it in Paragraph 6(c)(viii). (by) Prime Rate. "Prime Rate" means the higher of (1) the prime interest rate or equivalent charged by Landlord's Parent in the United States as announced or published by Landlord's Parent from time to time, which need not be the lowest interest rate charged by Landlord's Parent, or (2) the rate quoted by Landlord's Parent at approximately 11:00 a.m. New York City time to dealers in the New York Federal Funds Market for the overnight offering of dollars by Landlord's Parent, for deposit, plus one-quarter of one percent (1/4%). If for any reason Landlord's Parent does not announce or publish a prime rate or equivalent, the prime rate or equivalent announced or published by either Citibank, N.A. or Credit Commercial de France as selected by Landlord shall be used to compute the rate describe in clause (1) of the preceding sentence. The prime rate or equivalent announced or published by such bank need not be the lowest rate charged by it. The Prime Rate may change from time to time after the date hereof without notice to Tenant as of the effective time of each change in rates described in this definition. (bz) Purchase Agreement. "Purchase Agreement" means the Purchase Agreement dated as of the date hereof between Landlord and Tenant pursuant to which Tenant has agreed to purchase or to arrange for the purchase by a third party of the Leased Property, as such Purchase Agreement may be extended, supplemented, amended, restated or otherwise modified from time to time. (ca) Qualified Affiliate. "Qualified Affiliate" means any Person that is one hundred percent (100%) owned, directly or indirectly, by Banque Nationale de Paris or any successor of such bank, provided that Landlord and such Person can (and each does in writing) represent to Tenant as follows: (1) all parties to whom such Person has any material obligations are (and are expected to be) Affiliates of Banque Nationale de Paris or any successor of such bank, except for participants with such Person in other leasing deals or loans made by such Person and except for tenants or borrowers in such other leasing deals or loans; (2) no material legal actions are pending or expected against such Person and no material legal actions are pending by such Person; (3) such Person is solvent; (4) such Person has substantial assets in addition to the Leased Property, thereby making it inappropriate to characterize such Person as a "special purpose entity" created to accommodate only the transactions contemplated in this Lease and the Purchase Agreement; and (5) such Person will notify Tenant immediately in writing if any of the foregoing changes before the Designated Payment Date. (cb) Qualified Payments. "Qualified Payments" means all payments received by Landlord from time to time during the Term from any party (1) under any casualty insurance policy as a result of damage to the Leased Property, (2) as compensation for any sale of a Parcel pursuant to subparagraph 10(b) or for any restriction placed upon the use or development of the Leased Property or for the condemnation of the Leased Property or any portion thereof, (3) because of any judgment, decree or award for injury or damage to the Leased Property or (4) under any title insurance policy or otherwise as a result of any title defect or claimed title defect with respect to the Leased Property; provided, however, that (x) in determining "Qualified Payments", there shall be deducted all expenses and costs of every kind, type and nature (including taxes and Attorneys' Fees) incurred by Landlord with respect to the collection of such payments, (y) "Qualified Payments" shall not include any payment to Landlord by a Participant or an Affiliate of Landlord that is made to compensate Landlord for the Participant's or Affiliate's share of any Losses Landlord may incur as a result of any of the events described in the preceding clauses (1) through (4) and (z) "Qualified Payments" shall not include any payments received by Landlord that Landlord has paid to Tenant for the restoration or repair of the Leased Property or that Landlord is holding as Escrowed Proceeds. For purposes of computing the total Qualified Payments (and other amounts dependent upon Qualified Payments, such as Stipulated Loss Value) paid to or received by Landlord as of any date, payments described in the preceding clauses (1) through (4) will be considered as Escrowed Proceeds, not Qualified Payments, until they are actually applied as Qualified Payments by Landlord, which Landlord will do upon the first Advance Date or Base Rental Date which is at least three (3) Business Days after Landlord's receipt of the same unless postponement of such application is required by other provisions of this Lease or consented to by Tenant in writing. Thus, for example, condemnation proceeds actually received by Landlord in the middle of a Base Rental Period will not be considered as having been received by Landlord for purposes of computing the total Qualified Payments unless and until actually applied by Landlord as a Qualified Payment on a subsequent Advance Date or Base Rental Date in accordance with Paragraph 4 below. (cc) Quick Assets. "Quick Assets" means the sum of the following to the extent not encumbered by any Lien: (1) cash on hand or on deposit in banks; (2) readily marketable securities: (A) issued by the United States of America or any agency thereof and fully guaranteed by the United States Government and reported for purposes of this Lease (i) as reported by Tenant on its books and records in accordance with GAAP (regardless of whether GAAP requires reporting at cost or at market value) if maturing no later than three years after the applicable determination of Quick Assets, or (ii) at not greater than fair market value if maturing more than three years after the applicable determination of Quick Assets, regardless of whether GAAP would permit reporting at a higher cost; or (B) maturing within three years after the applicable determination of Quick Assets and rated at least (i) A (in the case of securities with an original maturity greater than one year) or A-2 (in the case of securities with an original maturity of one year or less) or the equivalent thereof by Standard and Poor's Corporation, or (ii) A-2 (in the case of securities with an original maturity greater than one year) or P-2 (in the case of securities with an original maturity of one year or less) or the equivalent thereof by Moody's Investor Service, Inc.; (3) certificates of deposit or banker's acceptances maturing within three years and issued by commercial banks operating in the United States of America having capital and surplus in excess of $500,000,000; and (4) accounts receivable of Tenant and its Consolidated Subsidiaries (determined on a consolidated basis net of reserves for uncollectible amounts in accordance with GAAP). (cd) Remaining Proceeds. "Remaining Proceeds" shall have the meaning assigned to it in Paragraph 4. (ce) Rent. "Rent" means the Base Rent and all Additional Rent. (cf) Scope Change. "Scope Change" means a change to a Construction Project that, if implemented, will make the quality, function or capacity of the Improvements affected by such Construction Project "materially different" (as defined below in this paragraph) than as described or inferred by plans or other items submitted to Landlord by Tenant as described in subparagraph 6(b)(i). Notwithstanding the foregoing, "Scope Change" shall not include refinement, correction and detailing of plans or other items submitted to Landlord by Tenant. As used in this definition, a "material difference" means a difference that (a) could (after completion of the applicable Construction Project and the funding of any Construction Advances required in connection therewith) significantly reduce any excess of the fair market value of the Leased Property over Stipulated Loss Value or significantly increase any excess of Stipulated Loss Value over the fair market value of the Leased Property, or (b) will change the general character of the Improvements from that needed to accommodate the uses permitted by subparagraph 8(a). (cg) Special Participation Fees. "Special Participation Fees" shall have the meaning assigned to it in subparagraph 3(d) below. (ch) Spread. "Spread" means thirty-two and one-half basis points (32.5/100 of 1%), for purposes of calculating the Effective Rate for any period ending on or before the end of the thirtieth (30th) full calendar month after the date hereof, and it means twenty-eight and one-half basis points (28.5/100 of 1%) for purposes of calculating the Effective Rate for any period beginning thereafter. (ci) Stipulated Loss Value. "Stipulated Loss Value" as of any date means an amount equal to the sum of the Initial Funding Advances, plus the sum of all Construction Advances and Carrying Costs added to the Outstanding Construction Allowance on or prior to such date, minus all funds received by Landlord and applied as Qualified Payments on or prior to such date. Under no circumstances will any payment of Base Rent, the Upfront Fee, Agency Fees, Special Participation Fees or Commitment Fees reduce Stipulated Loss Value. (cj) Subsidiary. "Subsidiary" means, with respect to any Person, any Affiliate of which at least a majority of the securities or other ownership interests having ordinary voting power then exercisable for the election of directors or other persons performing similar functions are at the time owned directly or indirectly by such Person. (ck) Tenant's Agents. "Tenant's Agents" shall mean collectively any contractors, subcontractors and other agents that Tenant (or Tenant's contractors, subcontractors or other agents) may hire from time to time to perform construction or services related to any Construction Project. (cl) Term. "Term" shall have the meaning assigned to it in Paragraph 2(a) below. (cm) Term Sheet. "Term Sheet" means the letter dated October 4, 1995 from Landlord to Tenant, signed by Tenant on October 5, 1995, as amended by a second letter dated October 16, 1995 from Landlord to Tenant, signed by Tenant on October 17, 1995, and as amended by a third letter dated November 17, 1995 from Landlord to Tenant, signed by Tenant on November 21, 1995. (cn) Transaction Expenses. "Transaction Expenses" means (a) the sums actually paid by or for Landlord for costs and expenses incurred on or before the date this Lease is signed by Landlord and Tenant in connection with the preparation, negotiation and execution of the Prior Lease, the Prior Purchase Agreement, the Environmental Indemnity Agreement, this Lease, the Purchase Agreement or any related documents, the acquisition of the Land and the obtaining of entitlements for the initial Construction Project and (b) costs and expenses incurred by Tenant in connection with the preparation, negotiation and execution of the Prior Lease, the Prior Purchase Agreement, the Environmental Indemnity Agreement, this Lease, the Purchase Agreement, the Contract, the Development Contracts or any related documents, the acquisition of the Land and the obtaining of entitlements for the initial Construction Project. (co) Unfunded Benefit Liabilities. "Unfunded Benefit Liabilities" means, with respect to any Plan, the amount (if any) by which the present value of all benefit liabilities (within the meaning of Section 4001(a)(16) of ERISA) under the Plan exceeds the fair market value of all Plan assets allocable to such benefit liabilities, as determined on the most recent valuation date of the Plan and in accordance with the provisions of ERISA for calculating the potential liability of Tenant or any ERISA Affiliate of Tenant under Title IV of ERISA. (cp) Upfront Fee. "Upfront Fee" shall have the meaning assigned to it in subparagraph 3(b) below. (cq) Other Terms and References. Words of any gender used in this Lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural and vice versa, unless the context otherwise requires. References herein to Paragraphs, subparagraphs or other subdivisions shall refer to the corresponding Paragraphs, subparagraphs or subdivisions of this Lease, unless specific reference is made to another document or instrument. References herein to any Schedule or Exhibit shall refer to the corresponding Schedule or Exhibit attached hereto, which shall be made a part hereof by such reference. All capitalized terms used in this Lease which refer to other documents shall be deemed to refer to such other documents as they may be renewed, extended, supplemented, amended or otherwise modified from time to time, provided such documents are not renewed, extended or modified in breach of any provision contained herein or therein or, in the case of any other document to which Landlord is a party or of which Landlord is an intended beneficiary, without the consent of Landlord. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. The words "this Lease", "herein", "hereof", "hereby", "hereunder" and words of similar import refer to this Lease as a whole and not to any particular subdivision unless expressly so limited. The phrases "this Paragraph" and "this subparagraph" and similar phrases refer only to the Paragraphs or subparagraphs hereof in which the phrase occurs. The word "or" is not exclusive. Other capitalized terms are defined in the provisions that follow. 2 Term. (a) Scheduled Term. The term of this Lease (herein called the "Term") shall commence on and include the effective date hereof, and end at 8:00 A.M. on December 1, 2003 (or the next following Business Day if December 1, 2003 is not a Business Day), unless sooner terminated as herein provided. (b) Early Termination By Tenant. Provided that Tenant is still in possession of the Leased Property and has not breached its obligation to make or have made any payment required by Paragraph 2 of the Purchase Agreement on any prior Designated Payment Date, Tenant may elect to terminate this Lease, effective as of midnight of any Advance Date or Base Rental Date, by giving Landlord (and Participants) an irrevocable notice of such election at least ninety (90) days prior to the effective date of the termination. If Tenant elects to so terminate this Lease, then on the Advance Date or Base Rental Date on which this Lease is to be terminated, not only must Tenant pay all unpaid Rent, Tenant must also satisfy its obligations under the Purchase Agreement. The payment of any unpaid Rent and satisfaction of Tenant's obligations under the Purchase Agreement shall be a condition precedent to the effectiveness of any early termination of this Lease by Tenant. 3 Rental. (a) Base Rent. Tenant shall pay Landlord rent (herein called "Base Rent") in arrears, in currency that at the time of payment is legal tender for public and private debts in the United States of America, in monthly installments on the Base Rental Commencement Date and on each Base Rental Date through the end of the Term. Each payment of Base Rent must be received by Landlord no later than 10:00 a.m. (San Francisco time) on the date it becomes due; if received after 10:00 a.m. (San Francisco time) it will be considered for purposes of this Lease as received on the next following Business Day. Each installment of Base Rent shall represent rent allocable to the Construction Period or Base Rental Period ending on the date on which the installment is due. Landlord shall notify Tenant in writing of the Base Rent due for the Construction Period ending on the Base Rental Commencement Date (if any) and of the Base Rent due for each Base Rental Period at least five (5) Business Days prior to the Base Rental Commencement Date or Base Rental Date on which such period ends, but any failure by Landlord to so notify Tenant shall not constitute a waiver of Landlord's right to payment. If Tenant or any Applicable Purchaser purchases Landlord's interest in the Leased Property pursuant to the Purchase Agreement, any Base Rent for the month ending on the date of purchase and all outstanding Additional Rent shall be due on the Designated Payment Date in addition to the purchase price and other sums due Landlord under the Purchase Agreement. The Base Rent payable on the Base Rental Commencement Date shall equal the difference (if any) between (a) total Carrying Costs that would have been added to the Outstanding Construction Allowance on such date if the Construction Allowance available hereunder were not limited to the Maximum Construction Allowance, and (b) the Carrying Costs actually added on such date to the Outstanding Construction Allowance. The Base Rent for each Base Rental Period shall equal (A) Stipulated Loss Value on the first day of such Base Rental Period, times (B) the Effective Rate with respect to such Base Rental Period, times (C) the number of days in such Base Rental Period, divided by (D) three hundred sixty (360). Assume, only for the purpose of illustration: that a hypothetical Base Rental Period contains exactly thirty (30) days; that on the first day of such Base Rental Period Stipulated Loss Value is $300,000,000; and that the Effective Rate computed with respect to the applicable Base Rental Period is six percent (6%). Under such assumptions, the Base Rent for the hypothetical Base Rental Period will equal: $300,000,000 x 6% x 30/360, or $1,500,000. (b) Upfront Fee. As provided in the Term Sheet, upon execution and delivery of this Lease by Landlord, Tenant shall pay Landlord an upfront fee (herein called the "Upfront Fee") (less the deposit already paid by Tenant pursuant to the Term Sheet). The Upfront Fee shall represent Additional Rent for the first Construction Period. (c) Agency Fees. Upon execution and delivery of this Lease by Landlord, and on December 1 of 1996 and each calendar year thereafter during the Term, Tenant shall pay Landlord an administrative fee (herein called "Agency Fees") as provided in the Term Sheet; provided that if December 1 of any calendar year during the Term does not fall on a Business Day, the payment of Agency Fees otherwise then due shall become due on the next following Business Day. Each payment of the Agency Fee shall represent Additional Rent for the Construction Period or Base Rental Period during which it is paid. (d) Special Participation Fee. Upon execution and delivery of this Lease by Landlord, Tenant shall also pay Landlord a fee (herein called a "Special Participation Fee"), for the account of each Participant who has committed by the terms of its participation agreement with Landlord to provide or maintain Funding Advances of $70,000,000 or more, assuming that the entire Maximum Construction Allowance is used by Tenant. Such fee shall equal four basis points (4/100 of 1%) times such Funding Advances which the Participant has committed to provide or maintain. The Special Participation Fees shall also represent Additional Rent for the first Construction Period. (e) Commitment Fees. For each Construction Period during the Term Tenant shall pay Landlord a fee (herein called a "Commitment Fee") equal to (1) twelve basis points (12/100 of 1%), times (2) the difference at the end of the first day of such Construction Period between (A) the Maximum Construction Allowance and (B) the Outstanding Construction Allowance, times (3) the number of days in such Construction Period, divided by (4) three hundred sixty (360). Tenant shall pay Commitment Fees in arrears on January 2, April 1, July 1 and October 1 of each calendar year, beginning with January 2, 1996 and continuing regularly throughout the Term so long as Commitment Fees accrue because of a difference between the Maximum Construction Allowance and the Outstanding Construction Allowance; provided that if any of such dates does not fall on a Business Day, the payment of Commitment Fees otherwise then due shall become due on the next following Business Day; provided, further, if any Commitment Fees shall have accrued and remain unpaid on the Designated Payment Date, such accrued unpaid Commitment Fees shall be due on the Designated Payment Date; and provided, further, that the first such Commitment Fee due on January 2, 1996 shall be prorated to reflect a period commencing on the effective date of this Lease and ending on December 31, 1995. (f) Additional Rent. All amounts which Tenant is required to pay to or on behalf of Landlord pursuant to this Lease, together with every charge, premium, interest and cost set forth herein which may be added for nonpayment or late payment thereof, shall constitute rent (all such amounts, other than Base Rent, are herein called "Additional Rent"). (g) Interest and Order of Application. The Base Rent and all Additional Rent shall bear interest, if not paid when first due, at the Default Rate in effect from time to time from the date due until paid; provided, that nothing herein contained will be construed as permitting the charging or collection of interest at a rate exceeding the maximum rate permitted under Applicable Laws. Landlord shall be entitled to apply any amounts paid by or on behalf of Tenant hereunder against any Rent then past due in the order the same became due or in such other order as Landlord may elect. (h) Net Lease. It is the intention of Landlord and Tenant that the Base Rent and all other payments herein specified shall be absolutely net to Landlord. Subject only to the other express provisions of this Lease (including, without limitation, the express limitations on the indemnification obligations set forth in subparagraph 9(x) below) Tenant shall pay all costs, expenses and obligations of every kind relating to the Leased Property or this Lease which may arise or become due, including, without limitation: (i) Impositions, including any taxes payable by virtue of Landlord's receipt of amounts paid to or on behalf of Landlord in accordance with this subparagraph 3(h), but not including any Excluded Taxes; (ii) any Capital Adequacy Charges; (iii) any amount for which Landlord is or becomes liable with respect to the Permitted Encumbrances; and (iv) any costs incurred by Landlord (including Attorneys' Fees) because of Landlord's acquisition or ownership of the Leased Property or because of this Lease or the transactions contemplated herein. (i) No Demand or Setoff. The Base Rent and all Additional Rent shall be paid without notice or demand and without abatement, counterclaim, deduction, setoff or defense, except as expressly provided herein. 4 Application of Insurance, Condemnation and Other Proceeds; Waiver of Insured Claims; Determination of Appraised Value. (a) This Paragraph 4 shall govern the application of proceeds received by Landlord or Tenant during the Term from any third party (1) under any casualty insurance policy as a result of damage to the Leased Property, (2) as compensation for any restriction placed upon the use or development of the Leased Property or for the condemnation of the Leased Property or any portion thereof, or (3) because of any judgment, decree or award for injury or damage to the Leased Property; excluding, however, any funds paid to Landlord by Landlord's Parent or an Affiliate of Landlord or any Participant that is made to compensate Landlord for any losses Landlord may incur in connection with this Lease or the Leased Property. Landlord and Tenant shall apply all insurance, condemnation and other proceeds described in the preceding sentence (including proceeds payable under any insurance policy covering the Leased Property which is maintained by Tenant) as follows: (i) First, any such proceeds shall be used to reimburse Landlord for any costs and expenses, including Attorneys' Fees, incurred in connection with the collection of such proceeds. (ii) Second, unless otherwise required by this Paragraph 4, such proceeds remaining after application in accordance with clause (a)(i) above (hereinafter, the "Remaining Proceeds") will be applied by Landlord as Qualified Payments. However, pending a determination of whether Remaining Proceeds must be applied by Landlord to reimburse Tenant for the cost of repairs or restoration of the Leased Property pursuant to the following provisions, Landlord shall be entitled to hold any Remaining Proceeds as Escrowed Proceeds. Until Remaining Proceeds are paid to Tenant as reimbursement for repairs to or restoration of the Lease Premises pursuant to this Paragraph 4 or applied as a Qualified Payment or as reimbursement to Landlord for costs incurred in connection with a Qualified Payment, Landlord shall keep the same as Escrowed Proceeds deposited in an interest bearing account, and all interest earned on such account shall be added to and made a part of such Escrowed Proceeds. (iii) Subject to the next clause (iv), after any taking by condemnation of all or any portion of the Leased Property or any casualty resulting in the diminution, destruction, demolition or damage to all or any portion of the Leased Property, either Landlord or Tenant may require a determination of whether Appraised Value immediately after such condemnation or casualty event is less than, equal to or greater than thirty percent (30%) of Stipulated Loss Value immediately after such condemnation or casualty event, and: (1) If Appraised Value is greater than or equal to thirty percent (30%) of Stipulated Loss Value, then Landlord shall hold Remaining Proceeds as Escrowed Proceeds and apply them to reimburse Tenant for the actual cost of the repairs or restoration of the Leased Property. Repairs or restoration for which Tenant shall be entitled to reimbursement pursuant to the preceding sentence shall include any repairs or restoration Tenant deems appropriate so long as the repairs or restoration return the Leased Property to a safe and secure condition and do not reduce its Appraised Value below thirty percent (30%) of Stipulated Loss Value. Any Remaining Proceeds not used for such repairs or restoration shall, after Tenant notifies Landlord that they are not needed for repairs or restoration, be applied by Landlord as Qualified Payments. (2) If Appraised Value is less than thirty percent (30%) of Stipulated Loss Value, then, either: (A) Tenant must no later than the next Advance Date or Base Rental Date after such condemnation or casualty event (1) cause Stipulated Loss Value to be reduced to an amount no greater than three and one-third (3.33) times Appraised Value by authorizing Landlord's application of Remaining Proceeds as Qualified Payments and, if necessary to so reduce Stipulated Loss Value, by making additional payments to Landlord as Qualified Payments, and (2) do whatever is necessary to make the Leased Property safe and secure without further reducing its Appraised Value; or (B) Tenant must elect no later than the next Advance Date or Base Rental Date after such condemnation or casualty event to terminate this Lease in accordance with Paragraph 2(b), and then Tenant or an Applicable Purchaser must purchase (and Landlord must sell) Landlord's interest in the Leased Property (even if Landlord can claim no interest of any value because of a total taking by eminent domain) in accordance with the Purchase Agreement, but for a net price to Landlord (when taken together with any additional payments made by Tenant pursuant to Paragraph 2(a)(ii) of the Purchase Agreement, in the case of a purchase by an Applicable Purchaser) of not less than Stipulated Loss Value, computed after the application of all Remaining Proceeds as Qualified Payments (and pending such purchase Tenant must do whatever is necessary to keep the Leased Property safe and secure); or (C) Tenant must promptly restore the Leased Property or the remainder thereof as necessary to raise its Appraised Value to no less than thirty percent (30%) of Stipulated Loss Value as of the date such restoration is complete and as necessary to make the Leased Property safe and secure. Tenant's (and Landlord's) obligations under this clause (iii) with respect to any casualty or condemnation during the Term shall survive the expiration of the Term. (iv) If any taking by condemnation of any portion of the Leased Property or any casualty resulting in the diminution, destruction, demolition or damage to any portion of the Leased Property shall reduce Appraised Value by less than $1,000,000 and shall result in Remaining Proceeds of less than $1,000,000, then so long as no Event of Default shall have occurred and be continuing Tenant shall be entitled to collect the Remaining Proceeds resulting therefrom. Tenant shall apply any such Remaining Proceeds to the repair or restoration of the Leased Property to a safe and secure condition and to an Appraised Value of no less than thirty percent (30%) of Stipulated Loss Value in such manner as Tenant shall reasonably deem appropriate. (v) As used herein, "Appraised Value" shall mean an amount not less than the fair market value of the Leased Property (or any applicable portion thereof) on the date in question as determined by Landlord and Tenant, or if Landlord and Tenant cannot agree, determined in accordance with the following procedure: (A) Landlord and Tenant shall each, within ten (10) days after written notice from either to the other, select an appraiser. If either Landlord or Tenant fails to select an appraiser within the required period, then the appraiser who has been timely selected shall conclusively determine the fair market value of the Leased Property (or applicable portion thereof) in accordance with this clause (v) within forty-five (45) days after his or her selection. (B) Upon the selection of the two appraisers as provided above, such appraisers shall proceed to determine the fair market value of the Leased Property (or applicable portion thereof) in accordance with this clause (v). Such appraisals shall be submitted in writing no later than forty-five (45) days after selection of the second appraiser. If the fair market value as determined by such appraisers is identical, such sum shall be Appraised Value. In the event the lower appraisal is not lower than five percent (5%) below the higher appraisal, then Appraised Value shall be the sum of the two appraisal figures divided by two (2). If either appraiser fails to timely submit his or her appraisal, the timely submitted appraisal shall be determinative of Appraised Value. (C) In the event the lower appraisal is lower than five percent (5%) below the higher appraisal figure, then the two appraisers previously selected shall select a third appraiser. The name of such appraiser shall be submitted at the same time the written appraisals are due. Such third appraiser shall then review the previously submitted appraisals and select the one that, in his professional opinion, more closely reflects the fair market value of the Leased Property (or applicable portion thereof), such selection to be submitted in writing no later than ten (10) days after selection of the third appraiser. Such selection shall be determinative of Appraised Value. (D) In making any such determination of fair market value, the appraisers shall assume that any improvements then located on the Leased Property (or applicable portion thereof) or under construction constitute the highest and best use, that Tenant will promptly complete all construction which this Lease obligates Tenant to complete and that neither this Lease nor the Purchase Agreement add any value to the Leased Property. Each appraiser selected hereunder shall be an independent MAI-designated appraiser with not less than ten (10) years' experience in industrial real estate appraisal in Solano County, California and surrounding areas. (vi) Notwithstanding the foregoing, following any Event of Default, Landlord shall be entitled to receive and collect any Remaining Proceeds and either, at the discretion of Landlord, hold such Remaining Proceeds as Escrowed Proceeds to be applied to the repair, restoration or replacement of the Leased Property in accordance with clause (b) below, or retain such Remaining Proceeds (net of collection costs, as set forth in clause (a)(i) above, and other appropriate deductions) as Qualified Payments. Further, nothing contained in this Paragraph 4 shall excuse Tenant from Tenant's obligation for completing all Construction Projects in accordance with the requirements of Paragraph 6(b). (b) If, in accordance with any provision of this Paragraph 4, Remaining Proceeds are to be held by Landlord for reimbursement to Tenant of the cost of repair or restoration of the Leased Property: (a) Landlord will hold such Remaining Proceeds as Escrowed Proceeds in an interest bearing account as provided above and shall pay the same to Tenant upon completion of the applicable repair or restoration of the Leased Property and upon compliance by Tenant with such terms, conditions and requirements as may be reasonably imposed by Landlord, but in no such event shall Landlord be required to pay any Remaining Proceeds to Tenant in excess of the actual cost to Tenant of the applicable repair or restoration, it being understood that Landlord may retain any such excess as a Qualified Payment; and (b) Tenant, in accordance with the foregoing, will perform or cause to be performed the actual repair or restoration of the Leased Property to a safe and secure condition leaving the Leased Property with an Appraised Value of no less than thirty percent (30%) of Stipulated Loss Value upon completion of such repair or restoration. In any event, Tenant will not be entitled to any abatement or reduction of the Base Rent or any other amount due hereunder except to the extent that such insurance or condemnation proceeds result in Qualified Payments which reduce Stipulated Loss Value as provided in the definitions set out above. (c) Nothing herein contained shall be construed to prevent Tenant from obtaining a separate award from any condemning authority for a taking of Tenant's personal property or for moving expenses or business interruption, provided, such award is not combined with and does not reduce the award for any taking of the Leased Property, including Tenant's leasehold estate and any other interest therein. (d) Landlord and Tenant each waive any right of recovery against the other, and the other's agents, officers, or employees, for any damage to the Leased Property or to the personal property situated from time to time in or on the Leased Property resulting from fire or other casualty covered by a valid and collectible insurance policy; provided, however, that the waiver set forth in this subparagraph shall be effective insofar, but only insofar, as compensation for such damage or loss is actually recovered by the waiving party (net of costs of collection) under the policy notwithstanding the waivers set out in this paragraph. Tenant shall cause the insurance policies required of Tenant by this Lease to be properly endorsed, if necessary, to prevent any loss of coverage because of the waivers set forth in this paragraph. If such endorsements are not available, the waivers set forth in this paragraph shall be ineffective to the extent that such waivers would cause required insurance with respect to the Leased Property to be impaired. 5 No Lease Termination. (a) Status of Lease. Except as expressly provided herein, this Lease shall not terminate, nor shall Tenant have any right to terminate this Lease, nor shall Tenant be entitled to any abatement of the Rent, nor shall the obligations of Tenant under this Lease be excused, for any reason whatsoever, including without limitation any of the following: (i) any damage to or the destruction of all or any part of the Leased Property from whatever cause, (ii) the taking of the Leased Property or any portion thereof by eminent domain or otherwise for any reason, (iii) the prohibition, limitation or restriction of Tenant's use of all or any portion of the Leased Property or any interference with such use by governmental action or otherwise, (iv) any eviction of Tenant or of anyone claiming through or under Tenant by paramount title or otherwise (provided, if Tenant is wrongfully evicted by Landlord or by any third party lawfully claiming through or under Landlord, other than Tenant or a third party claiming through or under Tenant, then Tenant will have the remedies described in Paragraph 16 below), (v) any default on the part of Landlord under this Lease or under any other agreement to which Landlord and Tenant are parties, (vi) the inadequacy in any way whatsoever of the design or construction of any improvements included in the Leased Property, it being understood that Landlord has not made and will not make any representation express or implied as to the adequacy thereof, or (vii) any other cause whether similar or dissimilar to the foregoing, any existing or future law to the contrary notwithstanding. It is the intention of the parties hereto that the obligations of Tenant hereunder shall be separate and independent of the covenants and agreements of Landlord, that the Base Rent and all other sums payable by Tenant hereunder shall continue to be payable in all events and that the obligations of Tenant hereunder shall continue unaffected, unless the requirement to pay or perform the same shall have been terminated or limited pursuant to an express provision of this Lease. However, nothing in this Paragraph shall be construed as a waiver by Tenant of any right Tenant may have at law or in equity to (i) recover monetary damages for any default under this Lease by Landlord that Landlord fails to cure within the period provided in Paragraph 16, (ii) injunctive relief in case of the violation, or attempted or threatened violation, by Landlord of any of the express covenants, agreements, conditions or provisions of this Lease (including the confidentiality provisions set forth in Paragraph 23 below), or (iii) a decree compelling performance of any of the express covenants, agreements, conditions or provisions of this Lease. (b) Waiver By Tenant. Without limiting the foregoing, Tenant waives to the extent permitted by Applicable Laws, except as otherwise expressly provided herein, all rights to which Tenant may now or hereafter be entitled by law (including any such rights arising because of any implied "warranty of suitability" or other warranty under Applicable Laws) (i) to quit, terminate or surrender this Lease or the Leased Property or any part thereof or (ii) to any abatement, suspension, deferment or reduction of the Base Rent or any other sums payable under this Lease. 6 Construction Allowance. (a) Advances; Outstanding Construction Allowance. (i) Subject to the conditions set forth below, Landlord shall make advances (herein called "Construction Advances") on Advance Dates from time to time as requested by Tenant to reimburse Tenant for the cost of Construction Projects or to pay Commitment Fees or Agency Fees then due. As used herein, references to the "Outstanding Construction Allowance" shall mean the difference on the date in question (but not less than zero) of (A) the total Construction Advances made by Landlord on or prior to the date in question, less (B) any Qualified Payments received on or prior to the date in question; provided, that Landlord will not be under any obligation to readvance any portion of the Construction Allowance repaid by Qualified Payments. Notwithstanding the foregoing, if for any reason Stipulated Loss Value (and thus the Outstanding Construction Allowance included as a component thereof) must be determined under this Lease as of any date between Advance Dates, the Outstanding Construction Allowance determined on such date shall equal the Outstanding Construction Allowance on the immediately preceding Advance Date computed in accordance with the preceding sentence, plus Carrying Costs (if any) accruing on and after such preceding Advance Date to but not including the date in question. (ii) Charges accruing at the Effective Rate (herein collectively called "Carrying Costs") for each Construction Period ending on or prior to the Base Rental Commencement Date will be added to (and thereafter be included in) the Outstanding Construction Allowance on the last day of each such Construction Period (i.e., on the Advance Date upon which such Construction Period ends). The amount of Carrying Costs for each such Construction Period shall be equal to (A) Stipulated Loss Value (including Carrying Costs added with respect to every previous Construction Period, if any) as of the first day of such Construction Period, times (B) the Effective Rate with respect to such Construction Period, times (C) the number of days in such Construction Period, divided by (D) 360; provided, however, that because the Construction Allowance available under this Lease is limited to the Maximum Construction Allowance, Carrying Costs added to the Outstanding Construction Allowance on the Base Rental Commencement Date shall not exceed the amount that can be added without causing the Outstanding Construction Allowance to exceed the Maximum Construction Allowance. (iii) For purposes of determining the Effective Rate to be used in the calculation of Carrying Costs which will accrue during the first short Construction Period ending on January 2, 1996, the "comparable period" referred to in clause (iii) of the definition of LIBOR above shall be thirty days. If, however, any Breakage Costs (as defined below) are incurred in connection with the use of such an Effective Rate for the first Construction Period, the Breakage Costs will be included in Carrying Costs added to the Outstanding Construction Allowance at the end of the first Construction Period. "Breakage Costs" means losses, if any, incurred or sustained by Landlord's Parent and Participants with respect to prior Funding Advances that they would not have incurred or sustained but for a decline on the first Advance Date, before the end of the LIBOR period used to compute LIBOR for the first short Construction Period, in the LIBOR component of the Effective Rate. Any determination by Landlord's Parent of Breakage Costs shall, in the absence of clear and demonstrable error, be conclusive and binding upon Landlord and Tenant. (b) Construction Projects. (i) Preconstruction Approvals. Prior to the execution of this Lease, Tenant submitted and obtained Landlord's approval of plans or renderings for, a construction budget for, and descriptions of the initial Construction Project which Tenant expects to construct with the Construction Allowance. Except as provided below in this subparagraph, Tenant shall submit and obtain Landlord's written approval of plans or renderings for any subsequent Construction Project prior to commencement of the subsequent Construction Project. Landlord may disapprove of such plans or other items if, but only if, Landlord believes in good faith that the Construction Project proposed by Tenant will (1) fail to satisfy the requirements set forth in subparagraph 6(b)(iv), (2) change the general character of the Leased Property from that needed to accommodate the uses permitted by subparagraph 8(a) or (3) cause Tenant or the Leased Property to violate some other express provision of this Lease; but no approval given by Landlord in connection with any Construction Project, prior to or after the date hereof, shall constitute a waiver of subparagraph 6(b)(iv) or of any other provision of this Lease. Any items hereafter submitted by Tenant to satisfy this subparagraph shall be sufficiently detailed to allow Landlord to make a reasonable determination of whether the applicable Construction Project will satisfy subparagraph 6(b)(iv), but need not include all detailed construction specifications and drawings of the work to be included in the Construction Project. All Construction Projects commenced by Tenant, including the initial Construction Project which is described in Schedule 3, and all Construction Documents executed or adopted by Tenant in connection therewith, must be substantially consistent with the plans or other items heretofore or hereafter submitted to and approved by Landlord as described above in this subparagraph, except to the extent otherwise provided by any Scope Changes approved as described below. Before commencing any Construction Project subsequent to the initial Construction Project, Tenant shall notify Landlord if Tenant believes that, upon completion of such subsequent Construction Project, there will be a substantial likelihood that the Leased Property will have an Appraised Value of less than 30% of Stipulated Loss Value. (ii) Scope Changes. Before making a Scope Change to any Construction Project, Tenant shall provide to Landlord a reasonably detailed written description of the Scope Change, a revised construction budget (only if such Scope Change will require an increase in the existing construction budget) and a copy of any changes to the drawings, plans and specifications for the Improvements required in connection therewith, all of which must be approved in writing by Landlord (or by any construction representative appointed by Landlord from time to time) before the Scope Change is implemented. Landlord may disapprove of any Scope Change if, but only if, Landlord believes in good faith that the Construction Project proposed by Tenant, as modified by the Scope Change, will (1) fail to satisfy the requirements set forth in subparagraph 6(b)(iv), (2) change the general character of the Leased Property from that needed to accommodate the uses permitted by subparagraph 8(a) or (3) cause Tenant or the Leased Property to violate some other express provision of this Lease; but Landlord's approval shall not constitute a waiver of subparagraph 6(b)(iv) or of any other provision of this Lease. (iii) Responsibility for Construction. Tenant shall have sole responsibility for contracting for and administering all Construction Projects, it being understood that Landlord's obligation with respect to Construction Projects shall be limited to the making of advances under and subject to the conditions set forth in this Paragraph 6. No contractor or other third party shall be entitled to require Landlord to make advances as a third party beneficiary of this Lease or otherwise. Notwithstanding delays beyond Tenant's control, and even if the Construction Allowance is not sufficient to pay for completion of any Construction Project, Tenant warrants that on the Designated Payment Date under the Purchase Agreement it shall have caused the initial Construction Project and any subsequent Construction Projects which are commenced during the Term to be completed in a good and workmanlike manner, substantially in accordance with Applicable Laws, and otherwise in compliance with the provisions of this Lease, unless Tenant or an Applicable Purchaser has purchased the Leased Property pursuant to the Purchase Agreement for a net price to Landlord (when taken together with any additional payments made by Tenant pursuant to Paragraph 2(a)(ii) of the Purchase Agreement, in the case of a purchase by an Applicable Purchaser) of not less than Stipulated Loss Value. (iv) Value Added. Each Construction Project, upon completion and taken as a whole, must enhance the value of the Leased Property by an amount commensurate with the Construction Advances made for such Construction Project, and no Construction Project may significantly reduce the fair market value of the Property; however: (1) this subparagraph 6(b)(iv) will not preclude Tenant from obtaining Construction Advances for soft costs (such as architectural fees and design and permitting costs), Tenant's internal labor costs, demolition costs or other costs that do not, individually, add value to the Leased Property but that are incurred in connection with a Construction Project which will in the aggregate satisfy this subparagraph 6(b)(iv); (2) to address any concerns Landlord may express about Tenant's ability to satisfy this subparagraph 6(b)(iv) for a Construction Project, Tenant may by a written notice to Landlord stipulate a maximum amount of Construction Advances that Landlord will be required to make for such Construction Project, in which case Landlord shall not be required to make Construction Advances for such project in excess of the amount so stipulated; (3) if Landlord invokes this subparagraph 6(b)(iv) as justification for disapproving of a Construction Project (or Scope Change) or for declining to provide Construction Advances for a Construction Project, then Tenant may satisfy this subparagraph 6(b)(iv) by (A) stipulating a maximum amount of Construction Advances that Landlord will be required to make for such Construction Project, and (B) establishing that Appraised Value of the Leased Property (determined in accordance with the procedures outlined in Paragraph 4) will be no less than 30% of Stipulated Loss Value upon completion of the Construction Project and after Landlord provides Construction Advances equal to the maximum so stipulated; (4) further, if Tenant ever does satisfy this subparagraph 6(b)(iv) for a particular Construction Project by establishing an Appraised Value of no less than 30% of Stipulated Loss Value as described in the preceding clause (3), Landlord shall have no further right, absent a subsequent Scope Change to such Construction Project, to invoke this subparagraph 6(b)(iv) as justification for disapproving of such Construction Project or for withholding Construction Advances requested within the limit of the maximum Construction Advances stipulated by Tenant. (v) Estoppel Letters Required. Upon the execution of each general construction contract for the initial Construction Project and for any subsequent Construction Project expected to cost in excess of $10,000,000, Tenant shall cause the contractor thereunder to execute and deliver to Landlord an estoppel letter in the form of Exhibit C attached hereto. Tenant shall also cause the architect and engineer under any material architectural or engineering contract for such a Construction Project to execute and deliver to Landlord an estoppel letter in the form of Exhibit D attached hereto. Landlord shall consider in good faith any changes to the estoppel letter forms attached hereto that Tenant may reasonably request for a particular Construction Project, provided the requested changes do not impair Landlord's rights or create or increase any liability Landlord may have in connection with the Construction Project. (vi) Advances Not a Waiver. No funding of Construction Advances and no failure of Landlord to object to any Construction Project proposed or constructed by Tenant shall constitute a waiver by Landlord of the requirements contained in this subparagraph 6(b). (c) Conditions to Construction Advances. Landlord's obligation to make Construction Advances from time to time under this Paragraph 6 shall be subject to the following terms and conditions, all of which are intended for the sole benefit of Landlord: (i) Prior Notice. Tenant must make a request in substantially the form attached to this Lease as Exhibit E for any Construction Advance at least ten (10) Business Days prior to the Advance Date upon which the advance is to be paid. Landlord shall consider in good faith any changes to the Construction Advance request forms attached hereto that Tenant may reasonably request for a particular Construction Project, provided the requested changes do not impair Landlord's rights or create or increase any liability Landlord may have in connection with the Construction Project. (ii) Amount of the Advances. No Construction Advance shall exceed the lesser of: a) the Maximum Construction Allowance, less the then Outstanding Construction Allowance (computed after adding any Carrying Costs accrued for the month ending on the Advance Date upon which such Construction Advance is to be made); or b) (1) the actual costs and expenses previously incurred or paid by Tenant for the preparation, negotiation and execution of this Lease (other than expenses already included in Transaction Expenses), for Construction Projects (including "soft costs"), for Agency Fees not included in Transaction Expenses or for Commitment Fees, less (2) the sum of the portion of the Initial Funding Advances provided for construction of Improvements (or site work on the Land) as described in the definition of Initial Funding Advances, plus all Construction Advances made under this Paragraph 6 to Tenant as reimbursement for such costs and expenses. No Construction Advance (other than the final Construction Advance) shall be requested for an amount less than the lesser of (A) the maximum advance that may be required of Landlord under the preceding sentence, and (B) $500,000. (iii) Insurance. Tenant shall have obtained and provided certificates (or, in the case of clause a) below, title policies or binders) reasonably satisfactory to Landlord evidencing insurance covering the Leased Property as follows (in addition to the liability insurance required under subparagraph 9(y) below): a) Title Insurance. An owner's title insurance policy (or binder committing the applicable title insurer to issue an owner's title insurance policy, without the payment of further premiums) in the amount of $125,000,000, in form and substance reasonably satisfactory to Landlord, written by Chicago Title Insurance Company or one or more other title insurance companies reasonably satisfactory to Landlord and insuring Landlord's ownership of fee title to the Leased Property, including any new Improvements constructed by Tenant; and b) Builder's Risk Insurance. Builder's Completed Value Risk and such other hazard insurance as Landlord may require against all risks of physical loss (including collapse and transit coverage, but not including earthquake coverage) with deductibles not to exceed $1,000,000, such insurance to be in amounts sufficient to cover the total value of all Improvements under construction and to be maintained in full force and effect at all times until completion of the initial Construction Project or any subsequent Construction Projects. (iv) Progress of Construction. Each Construction Project which has commenced but not yet been completed shall be progressing without any significant continuing interruption in a good and workmanlike manner and substantially in accordance with Applicable Laws and the requirements of this Lease, and Tenant shall have corrected or be diligently pursuing the correction of any significant defect in the construction thereof. (v) Evidence of Costs and Expenses to be Reimbursed. To the extent contemplated by the Construction Advance request forms attached as Exhibit E and described in subparagraph 6(c)(i), or otherwise reasonably required by Landlord at the time a Construction Advance is to be made, Tenant shall have submitted invoices, requests for payment from contractors and other evidence that all costs and expenses for which Tenant requests reimbursement constitute actual costs and expenses incurred by Tenant for a Construction Project. (vi) No Event of Default. No Event of Default shall have occurred and be continuing under this Lease. (vii) No Sale of Landlord's Interest. No sale of Landlord's interest in the Leased Property shall have occurred pursuant to the Purchase Agreement. (viii) Certificate of No Default and Other Matters. Landlord shall have received, together with the notice requesting the Construction Advance described in clause (i) above, a current certificate of an officer of Tenant in the form included in Exhibit F (a) certifying that no Event of Default has occurred and is continuing, (b) certifying that the representations and warranties contained herein are true and correct in all material respects on and as of the date of such certificate as though made on and as of such date, subject only to such exceptions as may be disclosed therein and as are acceptable to Landlord, (c) certifying that each Construction Project which has commenced but not yet been completed is progressing without any significant continuing interruption in a good and workmanlike manner and substantially in accordance with the requirements of this Lease and all Applicable Laws and that Tenant has corrected or is diligently pursuing the correction of any significant defect in the construction thereof, (d) certifying that all costs and expenses for which Tenant is requesting reimbursement by the Construction Advance constitute actual costs and expenses incurred by Tenant for a Construction Project, and (e) certifying that, to the knowledge of Tenant, any liens then being asserted against the Leased Property by general contractors or other parties who have filed a statutory Preliminary Notice to preserve their right to a mechanic's or materialman's lien against the Leased Property (collectively, "Potential Lien Claimants") do not in the aggregate secure or allegedly secure more that $5,000,000 of claims. (As used in this subparagraph a lien will be considered as "being asserted" if a claim of lien relating thereto shall have been recorded and not discharged by payment or settlement.) Further, a copy of the certificate required by this clause shall have been furnished by Tenant to each of the Participants, and the certificate shall be true and correct. Without limiting the foregoing, Landlord may decline to advance any amount when liens are being asserted against any part of or interest in the Leased Property that in the aggregate secure or allegedly secure more that $5,000,000 of claims by Potential Lien Claimants, regardless whether any such liens have caused an Event of Default to occur hereunder or are being contested by Tenant as permitted by subparagraph 9(o). (ix) Payments by Participants. None of the Participants or their successors under their participation agreements with Landlord shall have failed to advance to Landlord their pro rata shares of the Construction Advance being requested. However, any such failure shall excuse Landlord's obligation to provide the Construction Advance requested only to the extent of the funds that the applicable Participant or Participants should have advanced (but did not advance) to Landlord, and in the event of any such failure: a) Landlord will immediately notify Tenant if any Participant refuses or fails to advance its pro rata share of any Construction Advance, but Landlord will not in any event be liable to Tenant for Landlord's failure to do so. b) Landlord will, to the extent possible, postpone reductions of Construction Advances because of the failure by any one or more Participants ("Nonfunding Participants") to make required advances under their participation agreements with Landlord (a "Participant Default") by adjusting (and readjusting from time to time, as required) the funding "Percentages" of other Participants, and by requesting the other Participants to make advances to Landlord on the basis of such adjusted Percentages, in each case as provided in the participation agreements between the Participants and Landlord; however, so long as a Participant Default continues, no Construction Advance shall be required that would cause the Outstanding Construction Allowance to exceed (a) the Maximum Construction Allowance available under this Lease, less (b) all amounts that should have been, but because of a continuing Participant Default have not been, advanced by any one or more of the Participants to Landlord under their participation agreements with Landlord with respect to Construction Advances. c) Further, after a Participant Default, and so long as no Event of Default has occurred and is continuing, Landlord shall do the following as reasonably requested by Tenant, provided that nothing in this provision shall require Landlord to take any action that would violate Applicable Laws, that would constitute a breach of Landlord's obligations under the participation agreements with the Participants, or that would require Landlord to waive any rights or remedies it has under this Lease, the Purchase Agreement or Landlord's other agreements with Tenant concerning the Leased Property: (1) Landlord shall promptly make a written demand upon the Nonfunding Participants for the cure of the Participant Default. (2) Landlord shall, to the extent Landlord has the right to do so under Landlord's participation agreements with the Participants, decline to allow the Nonfunding Participants to exercise voting, consent or notification rights under the participation agreements. (3) Landlord shall not unreasonably withhold its approval for the substitution of any new participant proposed by Tenant for Nonfunding Participants, if (A) the proposed substitution does not require Landlord to waive rights against the Nonfunding Participants, (B) the new participant will agree (by executing a participation agreement that is consistent with and substantially similar to the participation agreements that Landlord has entered into with the Participants and that is otherwise in form reasonably satisfactory to Landlord and Tenant) to provide funds to replace the payments that would otherwise be required of the Nonfunding Participants with respect to future Construction Advances, (C) the new participant (or Tenant) provides the funds (if any) needed to terminate the Nonfunding Participants' rights to receive payments of "Net Cash Flow" (as defined in the participation agreements between with Landlord and the Participants) that Landlord will be required to pay the new participant under the terms of the substitution reasonably proposed by Tenant, (D) the new participant (or Tenant) provides and agrees in writing to provide funds needed to reimburse Landlord for any and all Losses incurred by Landlord in connection with or because of the substitution of the new participant for the Nonfunding Participants, including the cost of preparing, negotiating and executing a new participation agreement between Landlord and the new participant and including any cost of defending and paying any claim asserted by Nonfunding Participants because of the substitution (but not including any liability of Landlord to the Nonfunding Participants for damages caused by Landlord's bad faith or gross negligence in the performance of Landlord's obligations to the Nonfunding Participants), (E) the obligations of Landlord to the new participant per dollar of the new participant's "investment" (it being understood that such investment will be computed in a manner consistent with the examples set forth in Exhibit A of the participation agreements between Landlord and the Participants, but net of reimbursements to Landlord under clause (D) preceding) shall not exceed the obligations per dollar of investment by the Nonfunding Participants that Landlord would have had to the Nonfunding Participants if there had been no Participant Default, and (F) the new participant shall be a reputable financial institution having a net worth of no less than seven and one half percent (7.5%) of total assets and total assets of no less than $10,000,000,000.00 (all according to then recent audited financial statements). (x) Execution of Participation Agreements With Participants. All of the Persons listed in Schedule 1 shall have entered into participation agreements with Landlord which shall cause them to qualify as Participants hereunder. Any such participation agreement executed after this Lease is executed shall be subject to Tenant's prior approval, and Landlord shall promptly furnish Tenant with a copy of any such agreement. 7 Purchase Agreement and Environmental Indemnity Agreement. Tenant acknowledges and agrees that nothing contained in this Lease shall limit, modify or otherwise affect any of Tenant's obligations under the Purchase Agreement or the Environmental Indemnity Agreement, which obligations, to the maximum extent possible, shall be deemed to be separate, independent and in addition to, and not in lieu of, the obligations set forth herein. In the event of any inconsistency between the terms and provisions of the Purchase Agreement or the Environmental Indemnity Agreement and the terms and provisions of this Lease, the terms and provisions of the Purchase Agreement or Environmental Indemnity Agreement shall control. 8 Use and Condition of Leased Property. (a) Use. Subject to the Permitted Encumbrances and the terms hereof, Tenant may use, occupy and operate the Leased Property during the Term so long as no Event of Default occurs hereunder, but only for the following purposes and other lawful purposes incidental thereto: (i) construction, development, testing and validation of Construction Projects; (ii) biotechnology/pharmaceutical manufacturing; (iii) support functions for such manufacturing uses, including processing, research, laboratory, development, distribution, warehousing or similar uses; (iv) administrative and office space; and (v) cafeteria, library and facilities that Tenant may provide to its employees. (b) Condition. Tenant accepts the Leased Property (and will accept the same upon any purchase of the Landlord's interest therein) in its present state, AS IS, and without any representation or warranty, express or implied, as to the condition of such property or as to the use which may be made thereof. Tenant also accepts the Leased Property without any representation or warranty, express or implied, by Landlord regarding the title thereto or the rights of any parties in possession of any part thereof, except as set forth in subparagraph 10(a). Landlord shall not be responsible for any latent or other defect or change of condition in the Land, Improvements, fixtures and personal property forming a part of the Leased Property, and the Rent hereunder shall in no case be withheld or diminished because of any latent or other defect in such property, any change in the condition thereof or the existence with respect thereto of any violations of Applicable Laws. Further, though Tenant may obtain from third parties any facilities or services to which Tenant is entitled by reason of the assignment and lease of Personal Property set forth on page 2 of this Lease, Landlord shall not itself be required to furnish to Tenant any facilities or service of any kind, such as, but not limited to, water, steam, heat, gas, hot water, electricity, light or power. (c) Consideration for and Scope of Waiver. The provisions of subparagraph 8(b) above have been negotiated by the Landlord and Tenant after due consideration for the Rent payable hereunder and are intended to be a complete exclusion and negation of any representations or warranties of the Landlord, express or implied, with respect to the Leased Property that may arise pursuant to any law now or hereafter in effect, or otherwise. However, such exclusion of representations and warranties by Landlord is not intended to impair any representations or warranties made by other parties, including Seller, the benefit of which may pass to Tenant during the Term because of the definition of Personal Property and Leased Property above. 9 Other Representations, Warranties and Covenants of Tenant. Tenant represents, warrants and covenants as follows: (a) Financial Matters. Tenant is solvent and has no outstanding liens, suits, garnishments or court actions which could render Tenant insolvent. There has not been filed by or, to Tenant's knowledge, against Tenant a petition in bankruptcy or a petition or answer seeking an assignment for the benefit of creditors, the appointment of a receiver, trustee, custodian or liquidator with respect to Tenant or any significant portion of Tenant's property, reorganization, arrangement, rearrangement, composition, extension, liquidation or dissolution or similar relief under the federal Bankruptcy Code or any state law. (As used in this Lease, "Tenant's knowledge" means the present actual knowledge (with due investigation) of Daniel Spiegelman and Marty Glick and, as to matters concerning the Leased Property only, James Panek and George Mackey, all current employees of Tenant. However, to the extent Tenant's knowledge after the date hereof may become relevant hereunder or under any certificate or other notice provided by Tenant to Landlord in connection with this Lease, "Tenant's knowledge" shall include the then actual knowledge of other employees of Tenant (if any) that have assumed responsibilities of the current employees listed in the preceding sentence or that have replaced such current employees. None of the employees of Tenant whose knowledge is now or may hereafter be relevant shall be personally liable for the representations or warranties of Tenant made herein.) The financial statements and all financial data heretofore delivered to Landlord relating to Tenant are true, correct and complete in all material respects. No material adverse change has occurred in the financial position of Tenant as reflected in Tenant's financial statements covering the fiscal period ended September 30, 1995. (b) The Contract and Other Development Contracts. Except to the extent required of Landlord under subparagraph 10(b), Tenant shall satisfy the surviving obligations, if any, of the "Buyer" (as the term "Buyer" is used in the Contract) under the Contract and under all other documents to which Landlord has become bound or subject because of Landlord's acceptance of the assignment of the Contract or ownership of the Leased Property, including without limitation the Development Contracts listed in Schedule 2 attached hereto. Tenant agrees to indemnify, defend and hold Landlord harmless from and against any and all Losses imposed on or asserted against or incurred by Landlord at any time and from time to time by reason of, in connection with or arising out of any obligations imposed by the Contract or the other Development Contracts. The indemnity set out in this subparagraph shall apply even if the subject of the indemnification is caused by or arises out of the negligence of Landlord; provided, such indemnity shall not apply to Losses proximately caused by (and attributed by any applicable principles of comparative fault to) the Active Negligence, gross negligence or willful misconduct of Landlord, its Affiliates, agents or employees. Because Tenant hereby assumes and agrees to satisfy all surviving obligations of the Buyer under the Contract and any other obligations imposed upon Landlord by reason of the Contract or the other Development Contracts, no failure by Landlord to take any action required by the Contract or the other Development Contracts (save and except any actions required of Landlord under subparagraph 10(b) below) shall, for the purposes of this indemnity, be deemed to be caused by the Active Negligence, gross negligence or willful misconduct of Landlord, its Affiliates, agents or employees. The foregoing indemnity is in addition to the other indemnities set out herein and shall not terminate upon the closing of any sale of Landlord's interest in the Leased Property pursuant to the provisions of the Purchase Agreement or the termination of this Lease. (c) No Default or Violation. The execution, delivery and performance by Tenant of this Lease and the Purchase Agreement do not and will not constitute a breach or default under any other material agreement or contract to which Tenant is a party or by which Tenant is bound or which affects the Leased Property or which affects Tenant's use, occupancy or operation of the Leased Property or any part thereof and do not, to the knowledge of Tenant, violate or contravene any law, order, decree, rule or regulation to which Tenant is subject. Further, such execution, delivery and performance by Tenant will not result in the creation or imposition of (or the obligation to create or impose) any lien, charge or encumbrance on, or security interest in, Tenant's property pursuant to the provisions of any of the foregoing in any respect which would have a material adverse effect upon the properties, assets, operations or businesses of Tenant and its Subsidiaries, taken as a whole. (d) Compliance with Covenants and Laws. To Tenant's knowledge, the intended use of the Leased Property by Tenant complies, or will comply after Tenant obtains readily available permits, in all material respects with all applicable restrictive covenants, zoning ordinances and building codes, flood disaster laws, applicable health, safety and environmental laws and regulations, the Americans with Disabilities Act and other laws pertaining to disabled persons, and all other applicable laws, statutes, ordinances, rules, permits, regulations, orders, determinations and court decisions (all of the foregoing are herein sometimes collectively called "Applicable Laws"). Tenant has obtained or will during the Term obtain on a timely basis all utility, building, health and operating permits as may be required for Tenant's use of the Leased Property during the Term by any governmental authority or municipality having jurisdiction over the Leased Property. (e) Environmental Representations. To Tenant's knowledge and except as otherwise disclosed in the Environmental Report, as of the date hereof: (i) no Hazardous Substances Activity (other than Permitted Hazardous Substance Use by Tenant) has occurred prior to the date of this Lease; (ii) neither Tenant nor any prior owner or operator of the Leased Property has reported or been required to report any release of any Hazardous Substances on or from the Leased Property pursuant to any Environmental Law; (iii) neither Tenant nor any prior owner or operator of the Leased Property has received any warning, citation, notice of violation or other communication regarding a suspected or known material release or discharge of Hazardous Substances on or from the Leased Property or regarding any significant continuing or allegedly continuing violation of Environmental Laws concerning the Leased Property from any federal, state or local agency; and (iv) none of the following are located on the Leased Property: asbestos; urea formaldehyde foam insulation; transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty (50) parts per million; any other Hazardous Substances other than Permitted Hazardous Substances; or any underground storage tank or tanks. Further, Tenant represents that to the best of its knowledge the Environmental Report is not misleading or inaccurate in any material respect. (f) No Suits. Other than as previously disclosed in Tenant's most recent 10-K filings with the Securities and Exchange Commission (copies of which have been delivered to Landlord), there are no judicial or administrative actions, suits, proceedings or investigations pending or, to Tenant's knowledge, threatened that are reasonably likely to affect Tenant's intended use of the Leased Property or the validity, enforceability or priority of this Lease, or Tenant's use, occupancy and operation of the Leased Property or any part thereof, and Tenant is not in default with respect to any order, writ, injunction, decree or demand of any court or other governmental or regulatory authority that could materially and adversely affect the business or assets of Tenant and its Subsidiaries taken as a whole or Tenant's use, occupancy or operation of the Leased Property. No condemnation or other like proceedings are pending or, to Tenant's knowledge, threatened against the Leased Property. (g) Condition of Property. Adequate provisions have been made, or during the Term adequate provision will be made by Tenant or Tenant's Agents (pursuant to, without limitation, the Development Contracts), for any existing or planned Improvements (other than grading or other site work) to be served by electric, gas, storm and sanitary sewers, sanitary water supply, telephone and other utilities and by streets, alleys and easements necessary to serve such Improvements. Upon completion of the initial Construction Project, the Leased Property will be in a condition satisfactory for its use and occupancy as intended under this Lease. No part of the Real Property is within an area identified by the Secretary of Housing and Urban Development as an area having special flood hazards. (h) Organization. Tenant is duly incorporated and legally existing under the laws of the State of Delaware and is duly qualified to do business in the State of California. Tenant has all requisite power and has procured or will procure on a timely basis all governmental certificates of authority, licenses, permits, qualifications and other documentation required to lease and operate the Leased Property. Tenant has the corporate power and adequate authority, rights and franchises to own Tenant's property and to carry on Tenant's business as now conducted and is duly qualified and in good standing in each state in which the character of Tenant's business makes such qualification necessary (including, without limitation, the State of California) or, if it is not so qualified in a state other than California, such failure does not have a material adverse effect on the properties, assets, operations or businesses of Tenant and its Subsidiaries, taken as a whole. (i) Enforceability. The execution, delivery and performance of this Lease and the Purchase Agreement by Tenant are duly authorized, are not in contravention of or conflict with any term or provision of Tenant's articles of incorporation or bylaws and do not, to Tenant's knowledge, conflict with any Applicable Laws or require the consent or approval of any governmental body or other regulatory authority that has not heretofore been obtained; provided, some consents or approvals which are readily obtainable and which are required for Tenant's performance hereunder (for example, building permits required for construction of the initial Construction Project) may not have been heretofore obtained, but Tenant shall obtain such consents or approvals as required in connection with its performance of this Lease. This Lease and the Purchase Agreement are valid, binding and legally enforceable obligations of Tenant except as such enforcement is affected by bankruptcy, insolvency and similar laws affecting the rights of creditors, generally, and equitable principles of general application. (j) Not a Foreign Person. Tenant is not a "foreign person" within the meaning of Sections 1445 and 7701 of the Code (i.e., Tenant is not a non-resident alien, foreign corporation, foreign partnership, foreign trust or foreign estate as those terms are defined in the Code and regulations promulgated thereunder). (k) Omissions. None of Tenant's representations or warranties contained in this Lease or in any other agreement between Tenant and Landlord relating to the Leased Property or in any Tenant certificate furnished to Landlord by or on behalf of Tenant in connection with the Leased Property contains any untrue statement of a material fact or omits a material fact necessary in order to make the statements contained herein or therein (when taken in their entireties) not misleading. (l) Existence. During the Term, Tenant shall continuously maintain its existence and its qualification to do business in the State of California, and Tenant will not make any significant change in the nature of the business of Tenant and its Subsidiaries, taken as a whole, as presently conducted. (m) Tenant Taxes. During the Term, Tenant shall comply with all applicable tax laws and pay before the same become delinquent all taxes imposed upon it or upon its property where the failure to so comply or so pay would have a material adverse effect on the financial condition or operations of Tenant and its Subsidiaries on a consolidated basis; except that Tenant may in good faith by appropriate proceedings contest the validity, applicability or amount of any such taxes and pending such contest Tenant shall not be deemed in default under this subparagraph if (1) Tenant diligently prosecutes such contest to completion in an appropriate manner, and (2) Tenant promptly causes to be paid any tax adjudged by a court of competent jurisdiction to be due, with all costs, penalties, and interest thereon, promptly after such judgment becomes final; provided, however, in any event such contest shall be concluded and the tax, penalties, interest and costs shall be paid prior to the date any writ or order is issued under which any of Tenant's property that is material to the business of Tenant and its Subsidiaries taken as a whole may be seized or sold because of the nonpayment thereof. (n) Operation of Property. During the Term, Tenant shall operate the Leased Property in a good and workmanlike manner and substantially in compliance with all Applicable Laws and will pay or cause to be paid all fees or charges of any kind in connection therewith. (If Tenant does not promptly correct any failure of the Leased Property to comply with Applicable Laws that is the subject of a written notice given to Tenant or Landlord by any governmental authority, then for purposes of the preceding sentence, Tenant shall be considered not to have maintained the Leased Property "substantially in accordance with Applicable Laws" whether or not the noncompliance would be substantial in the absence of the notice.) During the Term, Tenant shall not use or occupy, or allow the use or occupancy of, the Leased Property in any manner which violates any Applicable Law or which constitutes a public or private nuisance or which makes void, voidable or cancelable any insurance then in force with respect thereto. During the Term, to the extent that any of the following would, individually or in the aggregate, materially and adversely affect the value of the Leased Property or Tenant's use, occupancy or operations on the Leased Property, Tenant shall not, without Landlord's prior consent: (i) initiate or permit any zoning reclassification of the Leased Property; (ii) seek any variance under existing zoning ordinances applicable to the Leased Property; (iii) use or permit the use of the Leased Property in a manner that would result in such use becoming a nonconforming use under applicable zoning ordinances or similar laws, rules or regulations; (iv) subject to Paragraph 10(b) below, execute or file any subdivision plat affecting the Leased Property; or (v) consent to the annexation of the Leased Property to any municipality. During the Term, if (A) a change in the zoning or other Applicable Laws affecting the permitted use or development of the Leased Property shall occur that reduces Appraised Value, or (B) conditions or circumstances on or about the Leased Property are discovered (such as the presence of an endangered species) which substantially impede development and thereby reduce Appraised Value, and if after any such reduction under clause (A) or (B) above Appraised Value of the Leased Property is less than thirty percent (30%) of Stipulated Loss Value, then Tenant shall pay Landlord upon request the amount by which Appraised Value is less than thirty percent (30%) of Stipulated Loss Value, for application as a Qualified Payment. For purposes of determining Appraised Value under the preceding sentence, the provisions of subparagraph 4(a)(v) shall apply. During the Term, Tenant shall not cause or permit any drilling or exploration for, or extraction, removal or production of, minerals from the surface or subsurface of the Leased Property, and Tenant shall not do any act whereby the market value of the Leased Property may reasonably be expected to be materially lessened. Subject to Paragraph 23, during the Term, Tenant shall allow Landlord or its authorized representative to enter the Leased Property at any reasonable time to inspect the Leased Property and, after reasonable notice, to inspect Tenant's books and records pertaining thereto, and Tenant shall assist Landlord or Landlord's representative in whatever way reasonably necessary to make such inspections. During the Term, if Tenant receives a written notice or claim from any federal, state or other governmental entity that the Leased Property is not in compliance in any material respect with any Applicable Law, or that any action may be taken against the owner of the Leased Property because the Leased Property does not comply with Applicable Law, Tenant shall promptly furnish a copy of such notice or claim to Landlord. Notwithstanding the foregoing, Tenant may in good faith by appropriate proceedings contest the validity and applicability of any Applicable Law with respect to the Leased Property, and pending such contest Tenant shall not be deemed in default hereunder because of a violation of such Applicable Law, if Tenant diligently prosecutes such contest to completion in a manner reasonably satisfactory to Landlord, and if Tenant promptly causes the Leased Property to comply with any such Applicable Law upon a final determination by a court of competent jurisdiction that the same is valid and applicable to the Leased Property; provided, that in any event such contest shall be concluded and the violation of such Applicable Law must be corrected (in a manner that will not materially impede future development of the Leased Property) and any claims asserted against Landlord or the Leased Property because of such violation must be paid by Tenant, all prior to (i) any Designated Payment Date on which neither Tenant nor any Applicable Purchaser purchases the Leased Property pursuant to the Purchase Agreement for a net price to Landlord (when taken together with any additional payments made by Tenant pursuant to Paragraph 2(a)(ii) of the Purchase Agreement, in the case of a purchase by an Applicable Purchaser) of not less than Stipulated Loss Value, (ii) the date any criminal charges may be brought against Landlord or any of its directors, officers or employees because of such violation or (iii) the date any action may be taken by any governmental authority against Landlord or any property owned by Landlord (including the Leased Property) because of such violation. (o) Debts for Construction. During the Term, Tenant shall cause all debts and liabilities incurred in the construction, maintenance, operation and development of the Leased Property, including without limitation all debts and liabilities for labor, material and equipment and all debts and charges for utilities servicing the Leased Property, to be promptly paid. Notwithstanding the foregoing, Tenant may in good faith by appropriate proceedings contest the validity, applicability or amount of any asserted mechanic's or materialmen's lien and pending such contest Tenant shall not be deemed in default under this subparagraph (or subparagraph 9(t)) because of the contested lien if (1) within sixty (60) days after being asked to do so by Landlord, Tenant bonds over to Landlord's satisfaction any contested liens alleged to secure an amount in excess of $1,000,000 (individually or in the aggregate) (2) Tenant diligently prosecutes such contest to completion in a manner reasonably satisfactory to Landlord, and (3) Tenant promptly causes to be paid any amount adjudged by a court of competent jurisdiction to be due, with all costs and interest thereon, promptly after such judgment becomes final; provided, however, that in any event each such contest shall be concluded and the lien, interest and costs shall be paid prior to (i) any Designated Payment Date on which neither Tenant nor any Applicable Purchaser purchases the Leased Property pursuant to the Purchase Agreement for a net price to Landlord (when taken together with any additional payments made by Tenant pursuant to Paragraph 2(a)(ii) of the Purchase Agreement, in the case of a purchase by an Applicable Purchaser) of not less than Stipulated Loss Value, (ii) the date any criminal action may be instituted against Landlord or its directors, officers or employees because of the nonpayment thereof or (iii) any writ or order is issued under which any property owned by Landlord (including the Leased Property) may be seized or sold or any other action may be taken against Landlord or any property owned by Landlord because of the nonpayment thereof. (p) Impositions. Tenant shall reimburse Landlord for (or, if requested by Landlord, will pay or cause to be paid prior to delinquency) all sales, excise, ad valorem, gross receipts, business, transfer, stamp, occupancy, rental and other taxes, levies, fees, charges, surcharges, assessments or penalties which arise out of or are attributable to this Lease or which are imposed upon Landlord or the Leased Property because of the ownership, leasing, occupancy, sale, development or operation of the Leased Property, or any part thereof, during the Term or which relate to or are required to be paid during the Term by the terms of any of the Permitted Encumbrances (collectively, herein called the "Impositions"), excluding only (and in every case) Excluded Taxes. If Landlord requires Tenant to pay any Impositions directly to the applicable taxing authority or other party entitled to collect the same, Tenant shall furnish Landlord with receipts showing payment of such Impositions and other amounts prior to delinquency; except that Tenant may in good faith by appropriate proceedings contest the validity, applicability or amount of any asserted Imposition, and pending such contest Tenant shall not be deemed in default of this subparagraph 9(p) (or subparagraph 9(t)) because of the contested Imposition if (1) within sixty (60) days after being asked to do so by Landlord, Tenant bonds over to the satisfaction of Landlord any lien asserted against the Leased Property and alleged to secure an amount in excess of $1,000,000 because of the contested Imposition (2) Tenant diligently prosecutes such contest to completion in a manner reasonably satisfactory to Landlord, and (3) Tenant promptly causes to be paid any amount adjudged by a court of competent jurisdiction to be due, with all costs, penalties and interest thereon, promptly after such judgment becomes final; provided, however, that in any event each such contest shall be concluded and the Impositions, penalties, interest and costs shall be paid prior to (i) any Designated Payment Date on which neither Tenant nor any Applicable Purchaser purchases the Leased Property pursuant to the Purchase Agreement for a net price to Landlord (when taken together with any additional payments made by Tenant pursuant to Paragraph 2(a)(ii) of the Purchase Agreement, in the case of a purchase by an Applicable Purchaser) of not less than Stipulated Loss Value, (ii) the date any criminal action may be instituted against Landlord or its directors, officers or employees because of the nonpayment thereof or (iii) the date any writ or order is issued under which any property owned by Landlord (including the Leased Property) may be seized or sold or any other action may be taken against Landlord or any property owned by Landlord because of the nonpayment thereof. As used herein, "Impositions" shall include real estate taxes imposed because of a change of use or ownership of the Leased Property, including, to the extent attributable to the term of this Lease or any prior period, any such real estate taxes imposed because of a change in use or ownership after the term of this Lease expires or is terminated. (q) Repair, Maintenance, Alterations and Additions. During the Term, Tenant shall keep the Leased Property in good order, repair, operating condition and appearance (subject to reasonable deviations required to accommodate Construction Projects permitted by this Lease and ordinary wear and tear) and shall cause all necessary repairs, renewals, replacements, additions and improvements to the Leased Property to be promptly made. Tenant shall not allow the Leased Property to be materially misused, abused or wasted or to deteriorate (subject to reasonable deviations required to accommodate Construction Projects permitted by this Lease and ordinary wear and tear), and Tenant shall promptly replace any worn-out fixtures and Personal Property with fixtures and Personal Property comparable to the replaced items when new. Tenant shall not, without the prior written consent of Landlord, (i) remove from the Leased Property any fixture or Personal Property having significant value except such as are replaced by Tenant by fixtures or Personal Property of equal suitability and value, free and clear of any lien or security interest (and for purposes of this clause "significant value" will mean any fixture or Personal Property that has a value of more than $100,000 or that, when considered together with all other fixtures and Personal Property removed and not replaced by Tenant by items of equal suitability and value, has an aggregate value of $1,000,000 or more) or (ii) make or alter Improvements except as part of Construction Projects meeting the requirements of Paragraph 6(b). At any time requested by Landlord, Tenant shall deliver to Landlord an inventory describing and showing the make, model, serial number and location of each item of Personal Property having a significant value with a certification by Tenant that such inventory is true and complete and that all items specified in the inventory are free and clear of any lien or security interest other than the Permitted Encumbrances described in Exhibit B. (r) Insurance and Casualty. Throughout the Term, Tenant shall keep all Improvements (other than Improvements consisting only of grading and other site work) and tangible Personal Property covered by insurance against damage or destruction by fire or other casualty in the amount of one hundred percent (100%) of the replacement value. The policy or policies under which such insurance is maintained shall include endorsements for contingent liability from operation of building laws and increased cost of construction and demolition costs which may be necessary to comply with building laws. Such insurance shall, except to the extent provided under a builder's risk policy maintained as required by subparagraph 6(c)(iii)b) above during the construction of any Construction Project, be provided under an all-risk property insurance policy (not excluding from coverage perils normally included within the definitions of extended coverage, vandalism and malicious mischief and flood, but not including earthquake coverage). Tenant will be responsible for determining the amount of property insurance to be maintained, but such coverage will be on an agreed value basis to eliminate the effects of coinsurance. Such insurance shall be issued by an insurance company or companies rated by the A.M. Best Company of Oldwick, New Jersey as having a policyholder's rating of A or better and a reported financial information rating of X or better. Any deductible applicable to such insurance shall not exceed $1,000,000. Such insurance shall cover not only the value of Tenant's interest in the applicable Improvements and tangible Personal Property, but also the interest of Landlord, and such insurance shall include provisions that Landlord must be notified at least ten (10) days prior to any cancellation or reduction of insurance coverage. With this Lease Tenant shall deliver to Landlord a certificate from the applicable insurer or its authorized agent evidencing the insurance required by this subparagraph and any additional insurance which shall be taken out upon any part of the Leased Property. Thereafter during the Term, Tenant shall deliver to Landlord certificates from the applicable insurer or its authorized agent in form reasonably satisfactory to Landlord evidencing renewals or replacements of all such policies of insurance at least fifteen (15) days before any such insurance shall expire. Tenant further agrees that all such policies shall provide that proceeds thereunder will be payable to Landlord as Landlord's interest may appear, without reduction because of any negligence or other acts or omissions of Tenant (including any use of the Leased Property by Tenant for a purpose more hazardous than that permitted by the terms of the applicable insurance policy). If Tenant fails to obtain any insurance required by this Lease or to provide confirmation of any such insurance as required by this Lease, Landlord shall be entitled (but not required) to obtain the insurance that Tenant has failed to obtain or for which Tenant has not provided the required confirmation and, without limiting Landlord's other remedies under the circumstances, Landlord may require Tenant to reimburse Landlord for the cost of such insurance and to pay interest thereon computed at the Default Rate from the date such cost was paid by Landlord until the date of reimbursement by Tenant. In the event any of the Leased Property is destroyed or damaged by fire, explosion, windstorm, hail or by any other casualty against which insurance shall have been required hereunder, (i) Landlord may, but shall not be obligated to, make proof of loss if not made promptly by Tenant, (ii) each insurance company concerned is hereby authorized and directed to make payment for such loss directly to Landlord for application as required by Paragraph 4, and (iii) Landlord may settle, adjust or compromise any and all claims for loss, damage or destruction under any policy or policies of insurance (provided, that if any such claim is for less than $10,000,000 and no Event of Default shall have occurred and be continuing, Tenant shall have the right to settle, adjust or compromise the claim as Tenant deems appropriate; and, provided further, that so long as no Event of Default shall have occurred and be continuing, Landlord must provide Tenant with at least forty-five (45) days notice of Landlord's intention to settle any such claim before settling it unless Tenant shall already have approved of the settlement by Landlord). If any casualty shall result in damage to or loss or destruction of the Leased Property in excess of $1,000,000, Tenant shall give immediate notice thereof to Landlord and Paragraph 4 shall apply. In the event that insurance proceeds totaling not more than $1,000,000 are collected as a result of a fire or other casualty involving the Leased Property, Tenant may directly receive such proceeds so long as no Event of Default shall have occurred and be continuing and so long as Tenant applies such proceeds towards the restoration, replacement and repair of the Leased Property as provided under subparagraph 4(a)(iv). (s) Condemnation. During the Term, immediately upon obtaining knowledge of the institution of any proceedings for the condemnation of the Leased Property or any portion thereof, or any other similar governmental or quasi-governmental proceedings arising out of injury or damage to the Leased Property or any portion thereof, Tenant shall notify Landlord of the pendency of such proceedings. Tenant shall, at its expense, diligently prosecute any such proceedings and shall consult with Landlord, its attorneys and experts and cooperate with them as reasonably requested in the carrying on or defense of any such proceedings. All proceeds of condemnation awards or proceeds of sale in lieu of condemnation with respect to the Leased Property and all judgments, decrees and awards for injury or damage to the Leased Property shall be paid to Landlord and applied as provided in Paragraph 4 above. Landlord is hereby authorized, in the name of Tenant, to execute and deliver valid acquittances for, and to appeal from, any such judgment, decree or award concerning condemnation of any of the Leased Property. Landlord shall not be, in any event or circumstances, liable or responsible for failure to collect, or to exercise diligence in the collection of, any such proceeds, judgments, decrees or awards. (t) Protection and Defense of Title Against Liens and Other Encumbrances or Defects. If any encumbrance or title defect whatsoever affecting the fee interest in the Leased Property is claimed or discovered (including Liens against any part of or interest in the Leased Property, whether or not expressly subordinate to this Lease or Landlord's interest in the Leased Property, but excluding Permitted Encumbrances, this Lease and any other encumbrance which is claimed by Landlord or lawfully claimed through or under Landlord and which is not claimed by, through or under Tenant) or if any legal proceedings are instituted with respect to title to the Leased Property, Tenant shall give prompt written notice thereof to Landlord and at Tenant's own cost and expense will promptly cause the removal of any such encumbrance and cure any such defect and will take all necessary and proper steps for the defense of any such legal proceedings, including but not limited to the employment of counsel, the prosecution or defense of litigation and the release or discharge of all adverse claims. If Tenant fails to promptly remove any such encumbrance or title defect, Landlord (whether or not named as a party to legal proceedings with respect thereto) shall be entitled to take such additional steps as in its judgment may be necessary or proper to remove such encumbrance or cure such defect or for the defense of any such attack or legal proceedings or the protection of Landlord's fee interest in the Leased Property, including but not limited to the employment of counsel, the prosecution or defense of litigation, the compromise or discharge of any adverse claims made with respect to the Leased Property, the removal of prior liens or security interests, and all expenses (including Attorneys' Fees) so incurred of every kind and character shall be a demand obligation owing by Tenant. For purposes of this subparagraph 9(t), Tenant shall be deemed to be acting promptly to remove any encumbrance or to cure any title defect, other than a Lien which Tenant has itself granted or authorized, so long as Tenant is in good faith by appropriate proceedings contesting the validity and applicability of the encumbrance or defect, and pending such contest Tenant shall not be deemed in default under this subparagraph because of the encumbrance or defect; provided, with respect to a contest of any encumbrance or title defect which is the subject of subparagraphs 9(o) or 9(p), Tenant must satisfy the conditions and requirements for a permitted contest set forth in those subparagraphs, and with respect to a contest of any other encumbrance or title defect, Tenant must satisfy the following conditions and requirements: (1) Tenant must diligently prosecute the contest to completion in a manner reasonably satisfactory to Landlord. (2) Tenant must immediately remove the encumbrance or cure the defect upon a final determination by a court of competent jurisdiction that it is valid and applicable to the Leased Property. (3) Tenant must in any event conclude the contest and remove the encumbrance or cure the defect and pay any claims asserted against Landlord or the Leased Property because of such encumbrance or defect, all prior to (i) any Designated Payment Date on which neither Tenant nor any Applicable Purchaser purchases the Leased Property pursuant to the Purchase Agreement for a net price to Landlord (when taken together with any additional payments made by Tenant pursuant to Paragraph 2(a)(ii) of the Purchase Agreement, in the case of a purchase by an Applicable Purchaser) of not less than Stipulated Loss Value, (ii) the date any criminal charges may be brought against Landlord or any of its directors, officers or employees because of such encumbrance or defect or (iii) the date any action may be taken against Landlord or any property owned by Landlord (including the Leased Property) by any governmental authority or any other Person who has or claims rights superior to Landlord because of the encumbrance or defect. (u) Books and Records. During the Term Tenant shall keep books and records that are accurate and complete in all material respects for the operations affecting the Leased Property and shall, subject to Paragraph 23, permit all such books and records (including without limitation records which evidence the testing and validation of the Leased Property required for the use thereof as described in subparagraph 8(a), as well as all contracts, statements, invoices, bills and claims for labor, materials and services supplied for the construction and operation of Improvements) to be inspected and copied by Landlord and its duly accredited representatives at all times during reasonable business hours after five (5) Business Days advance written notice and no more than twice in any twelve (12) month period (except when an Event of Default has occurred and is continuing). This subparagraph shall not be construed as requiring Tenant to regularly maintain separate books and records relating exclusively to the Leased Property; provided, however, that upon request, Tenant shall construct or abstract from its regularly maintained books and records information required by this subparagraph relating to the Leased Property. (v) Financial Statements; Required Notices; Certificates. During the Term, Tenant shall deliver to Landlord and to each Participant: (i) as soon as available and in any event within one hundred twenty (120) days after the end of each fiscal year of Tenant, a consolidated balance sheet of Tenant and its Consolidated Subsidiaries as of the end of such fiscal year and a consolidated income statement and statement of cash flows of Tenant and its Consolidated Subsidiaries for such fiscal year, all in reasonable detail and all prepared in accordance with GAAP and accompanied by a report and opinion of accountants of national standing selected by Tenant, which report and opinion shall be prepared in accordance with generally accepted auditing standards and shall not be subject to any qualifications or exceptions as to the scope of the audit nor to any qualification or exception which Landlord determines, in Landlord's reasonable discretion, is unacceptable; (ii) as soon as available and in any event within sixty (60) days after the end of each of the first three quarters of each fiscal year of Tenant, the consolidated balance sheet of Tenant and its Consolidated Subsidiaries as of the end of such quarter and the consolidated income statement and the consolidated statement of cash flows of Tenant and its Consolidated Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, all in reasonable detail and all prepared in accordance with GAAP and certified by the chief financial officer or controller of Tenant (subject to year-end adjustments); (iii) together with the financial statements furnished in accordance with subparagraph 9(v)(ii) and 9(v)(i), a certificate of the chief financial officer or controller of Tenant in substantially the form attached hereto as Exhibit F: (i) certifying that to the knowledge of Tenant no Default or Event of Default under this Lease has occurred and is continuing or, if a Default or Event of Default has occurred and is continuing, a brief statement as to the nature thereof and the action which is proposed to be taken with respect thereto, (ii) certifying that the representations of Tenant set forth in Paragraph 9 of this Lease are true and correct in all material respects as of the date thereof as though made on and as of the date thereof or, if not then true and correct, a brief statement as to why such representations are no longer true and correct, and (iii) with computations demonstrating compliance with the financial covenants contained in subparagraph 9(ab); (iv) promptly after the sending or filing thereof, copies of all proxy statements, financial statements and reports which Tenant sends to Tenant's stockholders, and copies of all regular, periodic and special reports, and all registration statements (other than registration statements on Form S-8 or any form substituted therefor) which Tenant files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or with any national securities exchange; (v) upon request by Landlord, a statement in writing certifying that this Lease is unmodified and in full effect (or, if there have been modifications, that this Lease is in full effect as modified, and setting forth such modifications) and the dates to which the Base Rent has been paid and either stating that to the knowledge of Tenant no Default or Event of Default under this Lease has occurred and is continuing or, if a Default or Event of Default under this Lease has occurred and is continuing, a brief statement as to the nature thereof; it being intended that any such statement by Tenant may be relied upon by any prospective purchaser or mortgagee of the Leased Property and by the Participants; and (vi) subject to Paragraph 23, such other information respecting the condition or operations, financial or otherwise, of Tenant, of any of its Subsidiaries or of the Leased Property as Landlord or any Participant through Landlord may from time to time reasonably request. Landlord is hereby authorized to deliver a copy of any information or certificate delivered to it pursuant to this subparagraph 9(v) to Landlord's Parent, to the Participants and to any regulatory body having jurisdiction over Landlord or Landlord's Parent or any Participant that requires or requests it, but in connection therewith Landlord will, if practicable, request confidential treatment of any information described in clauses (iii) and (vi). (w) Further Assurances. During the Term Tenant shall, on request of Landlord, (i) promptly correct any defect or error which may be discovered in the contents of this Lease or in any other instrument executed in connection herewith or in the execution or acknowledgment thereof as may be necessary, desirable or proper to carry out more effectively the purposes of this Lease or such other document; (ii) execute, acknowledge, deliver and record or file such further instruments and do such further acts as may be necessary, desirable or proper to carry out more effectively the purposes of this Lease and to subject to this Lease any property intended by the terms hereof to be covered hereby including specifically, but without limitation, any renewals, additions, substitutions, replacements or appurtenances to the Leased Property; (iii) execute, acknowledge, deliver, procure and record or file any document or instrument deemed advisable by Landlord to protect its rights in and to the Leased Property against the rights or interests of third persons; and (iv) provide such certificates, documents, reports, information, affidavits and other instruments and do such further acts as may be necessary, desirable or proper in the reasonable determination of Landlord to enable Landlord, Landlord's Parent and Participants to comply with the requirements or requests of any agency or authority having jurisdiction over them. (x) Fees and Expenses; Indemnification; Increased Costs; and Capital Adequacy Charges. (i) Except for any costs and expenses paid by Landlord with the proceeds of the Initial Funding Advances as part of the Transaction Expenses, Tenant shall pay (and shall indemnify and hold harmless Landlord, Landlord's Parent and any Person claiming through Landlord by reason of a Permitted Transfer from and against) all Losses incurred by Landlord or Landlord's Parent or any Person claiming through Landlord through a Permitted Transfer in connection with or because of (A) the ownership of any interest in or operation of the Leased Property, (B) the negotiation or administration of this Lease or the Purchase Agreement or the participation agreements concerning this Lease between Landlord and Participants (excluding, however, any costs or expenses incurred by Participants for the review, negotiation or administration (absent an Event of Default) of this Lease, the Purchase Agreement or such participation agreements and any costs or expenses incurred by Landlord or any transferee to accomplish any Permitted Transfers described in clauses (2), (3) or (5) of subparagraph 1(bu)), or (C) Construction Projects, whether such Losses are incurred at the time of execution of this Lease or at any time during the Term. Costs and expenses included in such Losses may include, without limitation, all appraisal fees, filing and recording fees, inspection fees, survey fees, taxes (other than Excluded Taxes), brokerage fees and commissions, abstract fees, title policy fees, Uniform Commercial Code search fees, escrow fees, Attorneys' Fees and reasonable environmental consulting fees incurred by Landlord with respect to the Leased Property. If Landlord pays or reimburses Landlord's Parent for any such Losses, Tenant shall reimburse Landlord for the same notwithstanding that Landlord may have already received any payment from any Participant on account of such Losses, it being understood that the Participant may expect repayment from Landlord when Landlord does collect the required reimbursement from Tenant. Tenant shall be entitled to pay any of the foregoing Losses for which Tenant is responsible hereunder out of Construction Advances, subject to all of the conditions to Construction Advances set forth in Paragraph 6 hereof. (ii) Tenant shall also pay (and indemnify and hold harmless Landlord, Landlord's Parent and any Person claiming through Landlord by reason of a Permitted Transfer from and against) all Losses, including Attorneys' Fees, incurred or expended by Landlord or Landlord's Parent or any Person claiming through Landlord through a Permitted Transfer in connection with (A) the breach by Tenant of any covenant of Tenant herein or in any other instrument executed in connection herewith or (B) Landlord's exercise of any of Landlord's rights and remedies hereunder or under Applicable Law or Landlord's protection of the Leased Property and Landlord's interest therein as permitted hereunder or under Applicable Law. (However, the indemnity in the preceding sentence shall not be construed to make Tenant liable to both Landlord and any Participant or other party claiming through Landlord for the same damages. For example, so long as Landlord remains entitled to recover any past due Base Rent from Tenant, no Participant shall be entitled to collect a percentage of the same Base Rent from Tenant.) Tenant shall further indemnify and hold harmless Landlord and all other Indemnified Parties against, and reimburse them for, all Losses which may be imposed upon, asserted against or incurred or paid by them by reason of, on account of or in connection with any bodily injury or death or damage to the property of third parties occurring in or upon or in the vicinity of the Leased Property through any cause whatsoever. The foregoing indemnity for injury, death or property damage shall apply even when injury, death or property damage in, on or in the vicinity of the Leased Property results in whole or in part from the negligence of an Indemnified Party; provided, such indemnity shall not apply to Losses suffered by an Indemnified Party that were proximately caused by (and attributed by any applicable principles of comparative fault to) the Active Negligence, gross negligence or wilful misconduct of such Indemnified Party or its Affiliates, agents or employees. (iii) If, after the date hereof, due to either (A) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements included in the Eurodollar Rate Reserve Percentage) in or in the interpretation of any law or regulation or (B) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to Landlord's Parent or any Participant of agreeing to make or making, funding or maintaining advances to Landlord in connection with the Leased Property, then Tenant shall from time to time, upon demand by Landlord pay to Landlord for the account of Landlord's Parent or such Participant, as the case may be, additional amounts sufficient to compensate Landlord's Parent or the Participant for such increased cost. However, the aggregate of such additional amounts payable for the account of any original Participant listed in Schedule 1 and all Persons who may qualify as Participants through permitted assignments from such original Participant shall not exceed the additional amounts that would have been payable to such original Participant absent any assignments by it of its rights under its participation agreement with Landlord. A certificate as to the amount of such increased cost, submitted to Landlord and Tenant by Landlord's Parent or the Participant, shall be conclusive and binding for all purposes, absent clear and demonstrable error. (iv) If Landlord's Parent or any Participant determines that any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects the amount of capital to be maintained by it and that the amount of such capital is increased by or based upon the existence of advances made or to be made to Landlord to permit Landlord to maintain Landlord's investment in the Leased Property, then to the extent that Landlord's Parent or the Participant reasonably determines that the increase in required capital is allocable to such advances, Tenant shall pay Landlord additional amounts (herein called "Capital Adequacy Charges") for the account of Landlord's Parent or the Participant, as the case may be, as Landlord's Parent or the Participant may specify as sufficient to compensate it in light of such circumstances. (v) Any amount to be paid to Landlord, Landlord's Parent or any Indemnified Party under this subparagraph 9(x) shall be a demand obligation owing by Tenant. Tenant's indemnities and obligations under this subparagraph 9(x) shall survive the termination or expiration of this Lease with respect to any circumstance or event existing or occurring prior to such termination or expiration. (y) Liability Insurance. During the Term, Tenant shall maintain commercial general liability insurance against claims for bodily injury or death and property damage occurring or resulting from any occurrence in or upon the Leased Property, in standard form and with an insurance company or companies rated by the A.M. Best Company of Oldwick, New Jersey as having a policyholder's rating of A or better and a reported financial information rating of X or better, such insurance to afford immediate protection, to the limit of not less than $10,000,000 combined single limit for bodily injury and property damage in respect of any one accident or occurrence, with not more than $1,000,000 self-insured retention. Such commercial general liability insurance shall include blanket contractual liability coverage which insures contractual liability under the indemnifications set forth in this Lease (other than the indemnifications set forth in Paragraph 12 concerning environmental matters), but such coverage or the amount thereof shall in no way limit such indemnifications. The policy evidencing such insurance shall name as additional insureds Landlord, Landlord's Parent and the Participants. Tenant shall maintain with respect to each policy or agreement evidencing such commercial general liability insurance such endorsements as may be reasonably required by Landlord and shall at all times deliver and maintain with Landlord written certificates with respect to such insurance from the applicable insurer or its authorized agent in form satisfactory to Landlord, which certificates must provide that insurance coverage will not be canceled or reduced without at least thirty (30) days notice to Landlord. Not less than fifteen (15) days prior to the expiration date of each policy of insurance required of Tenant pursuant to this subparagraph, Tenant shall deliver to Landlord a certificate evidencing a paid renewal policy or policies. (z) Permitted Encumbrances. Except to the extent expressly required of Landlord by subparagraph 10(b), Tenant shall during the Term comply with and will cause to be performed all of the covenants, agreements and obligations imposed upon the owner of the Leased Property in the Permitted Encumbrances in accordance with their respective terms and provisions. Tenant shall not modify or permit any modification of any Permitted Encumbrance in any manner that could be binding upon Landlord or any future owner of the Leased Property (other than Tenant or an Applicable Purchaser or the successors or assigns of Tenant or an Applicable Purchaser) without first requesting and obtaining the prior written consent of Landlord. Whether Landlord must give or may withhold any such consent will be governed by subparagraph 10(b). (aa) Environmental Covenants. During the Term, Tenant shall not cause or permit the Leased Property to be in violation of, or do anything or permit anything to be done which will subject the Leased Property to any remedial obligations under, any Environmental Laws, including without limitation CERCLA and RCRA, assuming disclosure to the applicable governmental authorities of all relevant facts, conditions and circumstances pertaining to the Leased Property, and Tenant shall promptly notify Landlord in writing of any existing, pending or, to the knowledge of Tenant, threatened investigation or inquiry by any governmental authority in connection with any suspected violation of the Leased Property under any Environmental Laws. During the Term, Tenant shall not conduct or permit Hazardous Substance Activities, except Permitted Hazardous Substance Use. During the Term, Tenant shall keep the Leased Property free of all Hazardous Substances (other than Permitted Hazardous Substances) and will remove the same (or if removal is prohibited by law, will take whatever action is required by law) promptly upon Tenant's discovery at Tenant's sole expense. During the Term, in the event Tenant fails to comply with or perform any of the foregoing obligations concerning Hazardous Substance Activities and Hazardous Substances, Landlord may, in addition to any other remedies available to it, after notifying Tenant in writing in advance of the remediation efforts Landlord believes are needed, cause the Leased Property to be freed from all Hazardous Substances as provided above (or if removal is prohibited by law, may take whatever action is required by law) and take such other action as is necessary to cause the foregoing obligations to be met, and the cost of the removal and any such other action shall be a demand obligation owing by Tenant to Landlord. For such removal and other action, Tenant grants to Landlord and Landlord's agents and employees access to the Leased Property and the license to remove Hazardous Substances as provided above (or if removal is prohibited by law or otherwise deemed inadvisable by Landlord, to take whatever action is required by law or otherwise deemed advisable by Landlord) and take such other action as is necessary to cause the foregoing obligations to be met, subject to Paragraph 23. Further, subject to the provisions of subparagraph 12(c) below, Tenant agrees to indemnify Landlord against all Losses incurred by or asserted or proven against Landlord in connection therewith in accordance with Paragraph 12. During the Term, Tenant agrees to submit from time to time, if requested by Landlord, a certificate of an officer of Tenant, certifying that, except for Permitted Hazardous Substance Use, the Leased Property is not being used for, nor to Tenant's knowledge (except as may be described in the Environmental Report) has the Leased Property been used in the past for, any Hazardous Substances Activities. Landlord reserves the right to retain an independent professional consultant to review any report prepared by Tenant or to conduct Landlord's own investigation to confirm whether Hazardous Substances Activities or the discharge of anything into groundwater or surface water has occurred, but Landlord's right to reimbursement for the fees of such consultant shall be limited to the following circumstances: (1) an Event of Default shall have occurred and be continuing; (2) Landlord shall have retained the consultant to establish the condition of the Leased Property just prior to any conveyance thereof pursuant to the Purchase Agreement or just prior to the expiration of this Lease; (3) Landlord shall have retained the consultant to satisfy any regulatory requirements applicable to Landlord or its Affiliates; or (4) Landlord shall have retained the consultant because Landlord has been notified of a violation of Environmental Laws concerning the Leased Property or Landlord otherwise reasonably believes that Tenant has not complied with this subparagraph. Subject to Paragraph 23, Tenant grants to Landlord and to Landlord's agents, employees, consultants and contractors the right during reasonable business hours and after reasonable advance written notice to enter upon the Leased Property to inspect the Leased Property and to perform such tests as are reasonably necessary or appropriate to conduct a review or investigation of Hazardous Substances on, or discharged into groundwater or surface water from, the Leased Property. Tenant further agrees that Landlord will have the same right, power and authority to enter and inspect the Leased Property as is granted to a secured lender under Section 2929.5 of the California Civil Code. Tenant shall promptly reimburse Landlord for the cost of any such inspections and tests, but only when the inspections and tests are: (1) ordered by Landlord after an Event of Default has occurred and is continuing; (2) ordered by Landlord to establish the condition of the Leased Property just prior to any conveyance thereof pursuant to the Purchase Agreement or just prior to the expiration of this Lease; (3) ordered by Landlord to satisfy any regulatory requirements applicable to Landlord or its Affiliates; or (4) ordered because Landlord has been notified of a violation of Environmental Laws concerning the Leased Property or Landlord otherwise reasonably believes that Tenant has not complied with this subparagraph. During the Term, Tenant shall immediately advise Landlord of (i) Tenant's discovery of any event or circumstance which would render any of the representations contained in subparagraph 9(e) inaccurate in any material respect if made at the time of such discovery, (ii) any remedial action taken by Tenant in response to any (A) Hazardous Substances other than Permitted Hazardous Substances on, under or about the Leased Property or (B) any claim for damages resulting from Hazardous Substance Activities (herein called "Hazardous Substance Claims"), and (iii) Tenant's discovery of any occurrence or condition on any real property adjoining or in the vicinity of the Leased Property which creates a material risk of causing the Leased Property or any part thereof to be subject to significant ownership, occupancy, transferability or use restrictions under Environmental Laws or that could give rise to Hazardous Substance Claims. In such event, Tenant shall deliver to Landlord within thirty (30) days after Landlord's request, a preliminary written environmental plan setting forth a general description of the action that Tenant proposes to take with respect thereto to bring the Leased Property into compliance with Environmental Laws (herein called a "Clean Up"), including, without limitation, any proposed corrective work, the estimated cost and time of completion, the name of the contractor and a copy of the construction contract, if any, and such additional data, instruments, documents, agreements or other materials or information as Landlord may reasonably request. Tenant shall thereafter diligently and continuously pursue the Clean Up of the Leased Property in strict compliance with all Environmental Laws and shall inform Landlord monthly as to the status of the Clean Up. (ab) Affirmative Financial Covenants. During the Term: (i) Minimum Tangible Net Worth. On the last day of each fiscal quarter of Tenant, Consolidated Tangible Net Worth shall not be less than the sum of $1,000,000,000.00. (ii) Leverage Ratio. On the last day of each fiscal quarter of Tenant the ratio of Consolidated Total Liabilities to Consolidated Tangible Net Worth shall not be greater than 1.0 to 1.0. (iii) Quick Ratio. On the last day of each fiscal quarter of Tenant, the ratio of Consolidated Quick Assets to Consolidated Current Liabilities shall not be less than 3.75 to 1.0. (ac) Negative Covenants. During the Term, Tenant shall not, without the prior written consent of Landlord in each case: (i) Liens. Create, incur, assume or suffer to exist, or permit any of its Consolidated Subsidiaries to create, incur, assume or suffer to exist, any Lien, upon or with respect to any of its properties, now owned or hereafter acquired, provided that the following shall be permitted except to the extent that they would encumber any interest in the Leased Property in violation of other provisions of this Lease: (1) Liens for taxes or assessments or other government charges or levies if not yet due and payable or if they are being contested in good faith by appropriate proceedings (including contests expressly permitted by other provisions of this Lease) and for which appropriate reserves are maintained; (2) Liens imposed by law, such as mechanic's, materialmen's, landlord's, warehousemen's and carrier's Liens, and other similar Liens, securing obligations incurred in the ordinary course of business which are not past due for more than thirty (30) days, or which are being contested in good faith by appropriate proceedings (including contests expressly permitted under other provisions of this Lease) and for which appropriate reserves have been established; (3) Liens under workmen's compensation, unemployment insurance, social security or similar laws (other than ERISA); (4) Liens, deposits or pledges to secure the performance of bids, tenders, contracts (other than contracts for the payment of money), leases, public or statutory obligations, surety, stay, appeal, indemnity, performance or other similar bonds, or other similar obligations arising in the ordinary course of business; (5) judgment and other similar Liens against assets other than the Leased Property or any part thereof in an aggregate amount not in excess of $10,000,000 arising in connection with court proceedings; provided that the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are being actively contested in good faith by appropriate proceedings (including contests permitted under other provisions of this Lease) ; (6) easements, rights-of-way, restrictions and other similar encumbrances which, in the aggregate, do not materially interfere with the occupation, use and enjoyment by Tenant or any such Consolidated Subsidiary of the property or assets encumbered thereby in the normal course of its business or materially impair the value of the property subject thereto; (7) Liens securing obligations of such a Consolidated Subsidiary to Tenant or to another such Consolidated Subsidiary; (8) Liens not otherwise permitted by this subsection 9(ac)(i) (and not encumbering the Leased Property) incurred in connection with the incurrence of additional Debt or asserted to secure Unfunded Benefit Liabilities, provided that the sum of the aggregate principal amount of all outstanding Debt and any Unfunded Benefit Liabilities secured by Liens incurred pursuant to this clause (8) shall not at any time exceed thirty percent (30%) of Consolidated Tangible Net Worth at such time; and (9) Liens incurred in connection with any renewals, extensions or refundings of any Debt secured by Liens described in the preceding clauses of this subsection 9(ac)(i), provided that there is no increase in the aggregate principal amount of Debt secured thereby from that which was outstanding as of the date of such renewal, extension or refunding and no additional property is encumbered. For purposes of this subparagraph 9(ac)(i), the following shall be deemed not to constitute Liens: this Lease, the Purchase Agreement and other documents being executed or accepted by Landlord in connection with this Lease; and other lease agreements, purchase agreements and similar documents executed or accepted by Landlord to evidence agreements between Landlord and Tenant concerning properties owned by Landlord and leased to Tenant, including but not limited to the existing Lease Agreements and Purchase Agreements between Landlord and Tenant dated November 19, 1993 and May 2, 1994, which concern properties leased by Landlord to Tenant in Tenant's South San Francisco campus known as Building 7 and Buildings 1 and 4, as the same may be renewed, increased, reduced, amended and/or restated from time to time. (ii) Transactions with Affiliates. Enter into or permit any Consolidated Subsidiary of Tenant to enter into any material transactions (including, without limitation, the purchase, sale or exchange of property or the rendering of any service) with any Affiliates of Tenant which would cause or result in a Default by Tenant under the financial covenants set forth in subparagraph 9(ab). (ad) ERISA. (i) Each Plan, and, to the knowledge of Tenant, any Multiemployer Plan, is in compliance with, and has been administered in compliance with, the applicable provisions of ERISA, the Code and any other applicable Federal or state law in all respects, the failure to comply with which would have a material adverse effect upon the properties, assets, operations or businesses of Tenant and its Subsidiaries taken as a whole, and as of the date hereof no event or condition is occurring or exists which would require a notice from Tenant under clause 9(ad)(ii). (ii) Tenant shall provide a notice to Landlord as soon as possible after, and in any event within ten (10) days after Tenant becomes aware that, any of the following has occurred, with respect to which the potential aggregate liability to Tenant relating thereto is $10,000,000 or more, and such notice shall include a statement signed by a senior financial officer of Tenant setting forth details of the following and the response, if any, which Tenant or its ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice required to be filed with or given to PBGC by Tenant or an ERISA Affiliate with respect to any of the following or the events or conditions leading up to the following): (A) the assertion, to secure any Unfunded Benefit Liabilities, of any Lien against the assets of Tenant, against the assets of any Plan of Tenant or any ERISA Affiliate of Tenant or against any interest of Landlord or Tenant in the Leased Property, or (B) the taking of any action by the PBGC or any other governmental authority against Tenant to terminate any Plan of Tenant or any ERISA Affiliate of Tenant or to cause the appointment of a trustee or receiver to administer any such Plan. (ae) Assignment of Certain Rights; Ownership of the Personal Property Purchased With Funds Provided by Landlord. Subject in each case to the assignment and lease back as set forth on page 2 of this Lease and to subparagraph 10(c), and without limiting the obligations of Landlord under subparagraph 10(b): (i) Tenant hereby assigns to Landlord all of Tenant's right, title and interest, whether now existing or hereafter arising during the Term of this Lease, in and to (1) the Real Property itself, including any legal or equitable interest therein, but not including any interest created or arising under this Lease, the Purchase Agreement or the Environmental Indemnity Agreement; (2) the Contract (including without limitation, (A) the right upon valid tender to Seller to purchase the Real Property pursuant to the Contract at the purchase price set forth therein and the right to take title to the Real Property and be named the purchaser in the deed to be delivered by Seller; (B) all claims for damages in respect of the Contract, including, without limitation, all warranty and indemnity provisions in the Contract; (C) any and all rights of Tenant to compel performance of the terms of the Contract; and (D) without limiting the foregoing, any and all rights and benefits, including pursuant to representations, warranties, indemnities and covenants, arising under the Contract); and (3) each of the other Development Contracts, to the extent rights or interests under such Development Contracts can be assigned by Tenant to Landlord and then assigned and leased back hereunder as part of the Personal Property. To the extent, if any, rights and interests of Tenant under any Development Contract cannot be assigned by Tenant to Landlord and then assigned and leased back as part of the Personal Property, Tenant will retain such rights and interests and agrees to enforce and maintain such rights and interests as Tenant would if it were the owner of the Leased Property. Thus, without limiting the foregoing, Landlord acknowledges and agrees that Tenant has not and cannot assign the "Financial Commitments" under and as defined in the Development Agreement described in Schedule 2. (ii) All goods, equipment, furnishings, furniture, chattels, general intangibles, permits (to the extent assignable), licenses (to the extent assignable), franchises, certificates and other personal property of whatever nature and all renewals or replacements of or substitutions for any of the foregoing shall have been purchased for Landlord, be owned by Landlord and constitute Personal Property covered by this Lease, to the extent heretofore or hereafter purchased by Tenant, in whole or in part, with any portion of the Initial Funding Advances provided to Tenant or with any Construction Advances or with other funds for which Tenant has received or hereafter receives reimbursement from the Initial Funding Advances or Construction Advances. 10 Other Representations and Covenants of Landlord. Landlord represents and covenants as follows: (a) Title Claims By, Through or Under Landlord. Except by a Permitted Transfer, Landlord shall not assign, transfer, mortgage, pledge, encumber or hypothecate this Lease or any interest of Landlord in and to the Leased Property during the Term without the prior written consent of Tenant. Landlord further agrees that if any encumbrance or title defect affecting the Leased Property is lawfully claimed through or under Landlord, including any judgment lien lawfully filed against Landlord, Landlord will at its own cost and expense promptly remove any such encumbrance and cure any such defect; provided, however, Landlord shall not be responsible for (i) any Permitted Encumbrances (regardless of whether claimed through or under Landlord) or any other encumbrances not lawfully claimed through or under Landlord, (ii) any encumbrances or title defects claimed by, through or under Tenant, or (iii) any encumbrance or title defect arising because of Landlord's compliance with subparagraph 10(b) or any request made by Tenant. (b) Actions Required of the Title Holder. So long as no Event of Default shall have occurred and be continuing, Landlord shall take any and all action required of Landlord by the Permitted Encumbrances or otherwise required of Landlord by Applicable Laws or reasonably requested by Tenant; provided, that (i) actions which Tenant may require of Landlord under this subparagraph shall be limited to actions that can only be taken by Landlord as the owner of the Leased Property, as opposed to any action that can be taken by Tenant or any third party (and the payment of any monetary obligation shall not be an action required of Landlord under this subparagraph unless Landlord shall first have received funds from Tenant, in excess of any other amounts due from Tenant hereunder, sufficient to pay such monetary obligations), (ii) Tenant requests the action to be taken by Landlord (which request must be specific and in writing, if required by Landlord at the time the request is made) and (iii) the action to be taken will not constitute a violation of any Applicable Laws or compromise or constitute a waiver of Landlord's rights hereunder or under the Environmental Indemnity Agreement or the Purchase Agreement or otherwise be reasonably objectionable to Landlord. The actions Landlord shall perform if reasonably requested by Tenant will include, without limitation, but subject to the conditions set forth in the proviso of the preceding sentence, executing or consenting to, or exercising or assisting Tenant to exercise rights under any (I) grant of easements, licenses, rights of way, and other rights in the nature of easements encumbering the Real Property, (II) release or termination of easements, licenses, rights of way or other rights in the nature of easements which are for the benefit of the Real Property or any portion thereof, (III) dedication or transfer of portions of the Real Property not improved with a building, for road, highway or other public purposes, (IV) agreements for the use and maintenance of common areas, for reciprocal rights of parking, ingress and egress and amendments to any covenants and restrictions affecting the Real Property or any portion thereof, (V) documents required to create or administer a governmental special benefit district or assessment district for public improvements and collection of special assessments, (VI) instruments necessary or desirable for the exercise or enforcement of rights or performance of obligations of the buyer under the Contract or the exercise of rights or performance of obligations under any Permitted Encumbrance or any contract, permit, license, franchise or other right included within the term "Leased Property" (including, without limitation, under the Development Contracts), (VII) modifications of Permitted Encumbrances (including any Development Contracts), (VIII) permit applications or other documents required to accommodate Construction Projects permitted by this Lease, (IX) confirmations of Tenant's rights under any particular provisions of this Lease which Tenant may wish to provide to a third party or (X) execution or filing of a tract or parcel map subdividing the Real Property into lots or parcels. However, the determination of whether any such action is reasonably requested or reasonably objectionable to Landlord may depend in whole or in part upon the extent to which the requested action shall result in a lien to secure payment or performance obligations against Landlord's interest in the Leased Property, shall cause a decrease in the value of the Leased Property to less than thirty percent (30%) of Stipulated Loss Value after any Qualified Payments that may result from such action are taken into account, or shall impose upon Landlord any present or future obligations greater than the obligations Landlord is willing to accept in reliance on the indemnifications provided by Tenant hereunder. So long as no Event of Default shall have occurred and be continuing, Tenant shall have the option from time to time during the Term to purchase or to designate one or more assignees to purchase one or more undeveloped portions of the Real Property consisting of one or more tracts or lots of the Land which can be sold under Applicable Laws separate and apart from the rest of the Land (each, a "Parcel"), for an amount equal to the Appraised Value thereof (such amount with respect to each Parcel being referred to herein as the "Parcel Release Price"). Tenant may exercise such option by delivering to Landlord not less than ninety (90) days prior written notice, which written notice shall describe the Parcel or Parcels to be purchased, the date such Parcels are to be conveyed by Landlord and whether the conveyance will be to Tenant or an assignee designated in such notice. In each case Landlord's obligation to convey such Parcels to Tenant or Tenant's assignee shall be subject to Tenant's and/or such assignee's satisfaction of each of the following conditions: a) Landlord, Tenant and, if applicable, such assignee shall have agreed upon, entered into and recorded such reciprocal easements relating to the Land and the Parcel to be so sold as they shall deem necessary or reasonably required to preserve usefulness of the Parcels and the remaining Land after the conveyance; b) It shall have been established that, following such conveyance and the application of the Partial Release Price as a Qualified Payment, Appraised Value of the Leased Property retained by Landlord will be no less than thirty percent (30%) of Stipulated Loss Value. c) Tenant or such assignee shall have paid to Landlord the Parcel Release Price for such Parcels; and d) In addition to the Partial Release Price, Tenant or such assignee shall have paid all costs and expenses necessary to consummate the sale, including all legal fees of Landlord. Upon Tenant's or such assignee's satisfaction of each of the foregoing conditions, Landlord shall convey such Parcel or Parcels to Tenant or such assignee pursuant to a quitclaim transfer of all of Landlord's right, title and interest therein on as "as is, where is, with all faults" basis free and clear of this Lease, the Purchase Agreement and all encumbrances claimed by Landlord or lawfully claimed through or under Landlord and which are not claimed by, through or under Tenant, but otherwise without recourse, representation or warranty of any kind. In any event, all claims, demands, liabilities, losses, damages, judgments, penalties, costs and expenses incurred by Landlord because of any action taken pursuant to this subparagraph shall be covered by the indemnifications set forth in subparagraph 9(x). Further, for purposes of such indemnification, any action taken by Landlord will be deemed to have been made at the request of Tenant if made pursuant to any request of Tenant's counsel or of any officer of Tenant (or with their knowledge, and without their objection) in connection with the execution of, closing under or enforcement of the Contract. (c) Actions Permitted by Tenant Without Landlord's Consent. No refusal by Landlord to execute or join in the execution of any agreement, application or other document requested by Tenant pursuant to the preceding subparagraph 10(b) shall preclude Tenant from itself executing such agreement, application or other document; provided, that in doing so Tenant is not purporting to act for Landlord and does not thereby create any encumbrance or cloud on Landlord's title to the Leased Property (other than any Permitted Encumbrance to which Landlord shall have already given its written approval or consent). Further, subject to the other terms and conditions of this Lease (including subparagraph 9(z), which sets forth certain performance obligations of Tenant with respect to the Permitted Encumbrances), Tenant shall be entitled, because of the assignment and lease of Personal Property set forth on page 2 of this Lease, to do any of the following in Tenant's own name and to the exclusion of Landlord during the Term without any notice to or consent of Landlord so long as no Event of Default has occurred and is outstanding and so long as Tenant is not purporting to act for Landlord and does not thereby create any encumbrance or cloud on Landlord's title to the Leased Property (other than any Permitted Encumbrance to which Landlord shall have already given its written approval or consent): (A) to perform obligations arising under and to exercise and enforce the rights of the buyer under the Contract; (B) to perform obligations arising under and to exercise and enforce the rights of Tenant or the owner of the Real Property under the Development Contracts and other Permitted Encumbrances (including, without limitation, the exercise of all consent rights and voting rights of said owner as a member of the Vaca Valley Business Park Association under the Declaration of Covenants, Conditions and Restrictions for the Vaca Valley Business Park described in Schedule 2 and any applicable by- laws, articles of incorporation or similar documents of such Association); (C) to perform obligations arising under and to exercise and enforce the rights of Tenant or the owner of the Real Property with respect to the creation and operation of and obtaining of financing by the Assessment District (as defined in the Contract); (D) to perform obligations arising under and to exercise and enforce the rights of Tenant or the owner of the Real Property with respect to any other contracts or documents (such as plans and specifications) included within the Personal Property; and (E) to recover and retain any monetary damages or other benefit inuring to Tenant or the owner of the Real Property through the enforcement of any rights, contracts or other documents included within the Personal Property (including without limitation the Contract, the Development Contracts and other Permitted Encumbrances and any agreements, ordinances, regulations and laws concerning any Assessment District as defined in the Contract); provided, that to the extent any such monetary damages may become payable as compensation for an adverse impact on value of the Leased Property, the rights of Landlord and Tenant hereunder with respect to the collection and application of such monetary damages shall be the same as for condemnation proceeds payable because of a taking of all or any part of the Leased Property. (d) No Default or Violation. The execution, delivery and performance by Landlord of this Lease and the Purchase Agreement do not and will not constitute a breach or default under any material contract or agreement to which Landlord is a party or by which Landlord is bound or which affects the Leased Property and do not, to the knowledge of Landlord, violate or contravene any law, order, decree, rule or regulation to which Landlord is subject. (As used in this Paragraph 10, "Landlord's knowledge" means the present actual knowledge of Lloyd Cox, the current officer of Landlord having responsibility for the negotiation of this Lease, with due investigation and after consultation with Landlord's Parent's representative, Jennifer Cho; but neither Lloyd Cox nor Jennifer Cho shall be personally liable for the representations or warranties of Landlord made herein.) (e) No Suits. There are no judicial or administrative actions, suits, proceedings or investigations pending or, to Landlord's knowledge, threatened that are reasonably likely to affect Landlord's ownership of the Leased Property or the validity, enforceability or priority of this Lease, and Landlord is not in default with respect to any order, writ, injunction, decree or demand of any court or other governmental or regulatory authority that could materially and adversely affect the business or assets of Landlord or its ownership of the Leased Property. To Landlord's knowledge, no condemnation proceedings are pending or threatened against the Leased Property. (f) Organization. Landlord is duly incorporated and legally existing under the laws of Delaware and is duly qualified to do business in the State of California. Landlord has or will obtain on a timely basis, at Tenant's expense pursuant to the other provisions of this Lease, all requisite power and all governmental certificates of authority, licenses, permits, qualifications and other documentation necessary to own and lease the Leased Property and to perform its obligations under this Lease. (g) Enforceability. The execution, delivery and performance of this Lease and the Purchase Agreement by Landlord are duly authorized, are not in contravention of or conflict with any term or provision of Landlord's articles of incorporation or bylaws and do not, to Landlord's knowledge, require the consent or approval of any governmental body or other regulatory authority that has not heretofore been obtained or conflict with any Applicable Laws. This Lease and the Purchase Agreement are valid, binding and legally enforceable obligations of Landlord except as such enforcement is affected by bankruptcy, insolvency and similar laws affecting the rights of creditors, generally, and equitable principles of general application; provided, Landlord makes no representation or warranty that conditions imposed by any state or local Applicable Laws to the purchase, ownership, lease or operation of the Leased Property have been satisfied. (h) Existence. During the Term, Landlord will continuously maintain its existence and, after qualifying to do business in the State of California if Landlord has not already done so, Landlord will continuously maintain its right to do business in that state to the extent necessary for the performance of Landlord's obligations hereunder. (i) Not a Foreign Person. Landlord is not a "foreign person" within the meaning of Sections 1445 and 7701 of the Code (i.e., Landlord is not a non-resident alien, foreign corporation, foreign partnership, foreign trust or foreign estate as those terms are defined in the Code and regulations promulgated thereunder). (j) Responding to Requests for Information. Tenant shall have the right ask Landlord questions from time to time concerning Landlord's financial condition or Landlord's ability to perform under this Lease or the Purchase Agreement, to which questions Landlord shall promptly respond. (Such response, however, may be limited to a statement that Landlord will not provide requested information.) Landlord shall notify Tenant in writing if, at any time during the Term, Landlord ceases to be 100% owned, directly or indirectly, by Banque Nationale de Paris. 11 Assignment and Subletting. (a) Consent Required. During the Term, without the prior written consent of Landlord first had and received, Tenant shall not assign, transfer, mortgage, pledge or hypothecate this Lease or any interest of Tenant hereunder and shall not sublet all or any part of the Leased Property, by operation of law or otherwise; provided, that subject to subparagraph 11(c) below: (1) Tenant shall be entitled to sublet less than twenty percent (20%) (computed on the basis of square footage) of the useable space in then existing and completed building Improvements, if any, so long as (i) any sublease by Tenant is made expressly subject and subordinate to the terms hereof, and (ii) such sublease has a term equal to or less than the remainder of the then effective Term of this Lease; and (2) Tenant shall be entitled to assign or transfer this Lease or any interest of Tenant hereunder to an Affiliate of Tenant if both Tenant and its Affiliate confirm their joint and several liability hereunder by written notice given to Landlord. (b) Standard for Landlord's Consent to Assignments and Certain Other Matters. Consents and approvals of Landlord which are required by the preceding subparagraph will not be unreasonably withheld, but Tenant acknowledges, without limiting the reasons why Landlord might reasonably withhold such consents or approvals, that Landlord's withholding of such consent or approval shall be reasonable if Landlord determines in good faith that giving the consent or approval may significantly increase Landlord's risk of liability for any existing or future environmental problem relating to the Leased Property. Further, Tenant acknowledges that Landlord's withholding of such consent or approval shall be reasonable if Landlord determines in good faith that giving the consent or approval would negate Tenant's representations in this Lease regarding ERISA or cause this Lease, the Purchase Agreement or other documents described herein or therein (or any exercise of Landlord's rights hereunder or thereunder) to constitute a violation of any provision of ERISA or of any applicable state statute regulating a Plan or Multiemployer Plan. (c) Consent Not a Waiver. No consent by Landlord to a sale, assignment, transfer, mortgage, pledge or hypothecation of this Lease or Tenant's interest hereunder, and no assignment or subletting of the Leased Property or any part thereof in accordance with this Lease or otherwise with Landlord's consent, shall release Tenant from liability hereunder; and any such consent shall apply only to the specific transaction thereby authorized and shall not relieve Tenant from any requirement of obtaining the prior written consent of Landlord to any further sale, assignment, transfer, mortgage, pledge or hypothecation of this Lease or any interest of Tenant hereunder. (d) Landlord's Assignment. Unless Tenant or an Applicable Purchaser has failed to purchase the Leased Property in accordance with the Purchase Agreement and Tenant is thereby in default under the terms of the Purchase Agreement, Landlord shall have no right to transfer, assign or convey, in whole or in part, the Leased Property or any of its rights thereto or under this Lease except by a Permitted Transfer. Further, notwithstanding anything to the contrary herein contained, if withholding taxes are imposed on the rents and other amounts payable to Landlord hereunder because of Landlord's assignment of this Lease to any citizen of, or any corporation or other entity formed under the laws of, a country other than the United States, Tenant shall not be required to compensate Landlord or any such assignee for the withholding tax. 12 Environmental Indemnification. (a) Indemnity. Tenant hereby agrees to assume liability for and to pay, indemnify, defend, and hold harmless each and every Indemnified Party from and against any and all Environmental Losses, subject only to the provisions of subparagraph 12(c) below. (b) Assumption of Defense. (i) If an Indemnified Party notifies Tenant of any claim, demand, action, administrative or legal proceeding, investigation or allegation as to which the indemnity provided for in this Paragraph 12 applies, Tenant shall assume on behalf of the Indemnified Party and conduct with due diligence and in good faith the investigation and defense thereof and the response thereto with counsel selected by Tenant but reasonably satisfactory to the Indemnified Party; provided, that the Indemnified Party shall have the right to be represented by advisory counsel of its own selection and at its own expense; and provided further, that if any such claim, demand, action, proceeding, investigation or allegation involves both Tenant and the Indemnified Party and the Indemnified Party shall have been advised in writing by counsel that there may be legal defenses available to it which are inconsistent with or in addition to those available to Tenant, then the Indemnified Party shall have the right to select separate counsel to participate in the investigation and defense of and response to such claim, demand, action, proceeding, investigation or allegation on its own behalf, and Tenant shall pay or reimburse the Indemnified Party for all Attorney's Fees incurred by the Indemnified Party because of the selection of such separate counsel. (ii) If any claim, demand, action, proceeding, investigation or allegation arises as to which the indemnity provided for in this Paragraph 12 applies, and Tenant fails to assume promptly (and in any event within fifteen (15) days after being notified of the claim, demand, action, proceeding, investigation or allegation) the defense of the Indemnified Party, then the Indemnified Party may contest (or settle, with the prior written consent of Tenant, which consent will not be unreasonably withheld) the claim, demand, action, proceeding, investigation or allegation at Tenant's expense using counsel selected by the Indemnified Party; provided, that after any such failure by Tenant which continues for forty-five (45) days or more no such contest need be made by the Indemnified Party and settlement or full payment of any claim may be made by the Indemnified Party without Tenant's consent and without releasing Tenant from any obligations to the Indemnified Party under this Paragraph 12 if, in the written opinion of reputable counsel to the Indemnified Party, the settlement or payment in full is clearly advisable. (c) Notice of Environmental Losses. If Landlord receives a written notice of Environmental Losses that Landlord believes are covered by this Paragraph 12, then Landlord shall promptly furnish a copy of such notice to Tenant. The failure to so provide a copy of the notice to Tenant shall not excuse Tenant from its obligations under this Paragraph 12; provided, that if none of the officers of Tenant and none of the employees of Tenant in Tenant's Environmental Health & Safety group or in Tenant's Facilities Engineering group (and, in the future, no employees taking over responsibilities that such groups now have) are aware of the matters described in the notice and such failure by Landlord renders unavailable defenses that Tenant might otherwise assert, or precludes actions that Tenant might otherwise take, to minimize its obligations hereunder, then Tenant shall be excused from its obligation to indemnify the Indemnified Parties against assessments, fines, costs and expenses, if any, which would not have been incurred but for such failure. For example, if Landlord fails to provide Tenant with a copy of a notice of an obligation covered by the indemnity set out in subparagraph 12(a) and Tenant is not otherwise already aware of such obligation, and if as a result of such failure Landlord becomes liable for penalties and interest covered by the indemnity in excess of the penalties and interest that would have accrued if Tenant had been promptly provided with a copy of the notice, then Tenant will be excused from any obligation to Landlord to pay the excess. (d) Rights Cumulative. The rights of each Indemnified Party under this Paragraph 12 shall be in addition to any other rights and remedies of such Indemnified Party against Tenant under the other provisions of this Lease or under any other document or instrument now or hereafter executed by Tenant, or under any Applicable Law or in equity (including, without limitation, any right of reimbursement or contribution pursuant to CERCLA). (e) Survival of the Indemnity. Tenant's obligations under this Paragraph 12 shall survive the termination or expiration of this Lease. All obligations of Tenant under this Paragraph 12 shall be payable upon written demand, and any amount due upon demand to any Indemnified Party by Tenant which is not paid shall bear interest from the date of such written demand at a floating interest rate equal to the Default Rate, but in no event in excess of the maximum rate permitted by law. 13 Inspections and Right of Landlord to Perform, Generally. (a) During the Term, Landlord and Landlord's representatives may (subject to Paragraph 23) enter the Leased Property at any reasonable time after five (5) Business Days advance written notice to Tenant for the purpose of making inspections or performing any work Landlord is authorized to undertake by the next subparagraph. (b) If Tenant fails to perform any act or to take any action which hereunder Tenant is required to perform or take, or to pay any money which hereunder Tenant is required to pay, and if such failure or action constitutes an Event of Default or renders Landlord or any director, officer, employee or Affiliate of Landlord at risk of criminal prosecution or renders Landlord's interest in the Leased Property or any part thereof at risk of forfeiture by forced sale or otherwise, then in addition to any other remedies specified herein or otherwise available, Landlord may, in Tenant's name or in Landlord's own name, perform or cause to be performed such act or take such action or pay such money. Any expenses so incurred by Landlord, and any money so paid by Landlord, shall be a demand obligation owing by Tenant to Landlord. Further, Landlord, upon making such payment, shall be subrogated to all of the rights of the person, corporation or body politic receiving such payment. But nothing herein shall imply any duty upon the part of Landlord to do any work which under any provision of this Lease Tenant may be required to perform, and the performance thereof by Landlord shall not constitute a waiver of Tenant's default. Landlord may during the progress of any such work permitted by Landlord hereunder on or in the Leased Property keep and store upon the Leased Property all necessary materials, tools, and equipment. Landlord shall not in any event be liable for inconvenience, annoyance, disturbance, loss of business, or other damage to Tenant or the subtenants of Tenant by reason of making such repairs or the performance of any such work on or in the Leased Property, or on account of bringing materials, supplies and equipment into or through the Leased Property during the course of such work (except for liability in connection with death or injury or damage to the property of third parties caused by the Active Negligence, gross negligence or wilful misconduct of Landlord or its officers, employees, or agents in connection therewith), and the obligations of Tenant under this Lease shall not thereby be affected in any manner. 14 Events of Default. (a) Definition. Each of the following events shall be deemed to be an "Event of Default" by Tenant under this Lease: (i) Tenant shall fail to pay when due any installment of Rent due hereunder and such failure shall continue for three (3) Business Days after Tenant is notified in writing thereof. (ii) Tenant shall fail to cause any representation or warranty of Tenant contained herein that is false or misleading in any material respect when made to be made true and not misleading (other than as described in the other clauses of this subparagraph 14(a)), or Tenant shall fail to comply with any term, provision or covenant of this Lease (other than as described in the other clauses of this subparagraph 14(a)), and in either case shall not cure such failure prior to the earlier of (A) thirty (30) days after written notice thereof is sent to Tenant or (B) the date any writ or order is issued for the levy or sale of any property owned by Landlord (including the Leased Property) or any criminal action is instituted against Landlord or any of its directors, officers or employees because of such failure; provided, however, that so long as no such writ or order is issued and no such criminal action is instituted, if such failure is susceptible of cure but cannot with reasonable diligence be cured within such thirty day period, and if Tenant shall promptly have commenced to cure the same and shall thereafter prosecute the curing thereof with reasonable diligence, the period within which such failure may be cured shall be extended for such further period (not to exceed an additional sixty (60) days) as shall be necessary for the curing thereof with reasonable diligence. (iii) Tenant shall fail to comply with any term, provision or condition of the Purchase Agreement after the expiration of applicable notice and cure periods set forth in the Purchase Agreement. (iv) Tenant shall abandon any significant portion of the Leased Property. (v) Tenant shall fail to make any payment or payments of principal, premium or interest, of Debt of Tenant described in the next sentence when due (taking into consideration the time Tenant may have to cure such failure, if any, under the documents governing such Debt). As used in this clause 14(a)(v), "Debt" shall include only Debts of Tenant now existing or arising in the future (a) payable to Landlord or any Affiliate of Landlord, or (B) payable to any other Person and with respect to which $10,000,000 or more is actually due and payable because of acceleration or otherwise. (vi) Tenant: (a) shall generally not, or be unable to, or shall admit in writing its inability to, pay its debts as such debts become due; or (b) shall make an assignment for the benefit of creditors, petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or a substantial part of its assets; or (c) shall file any petition or application to commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or (d) shall have had any such petition or application filed against it; or (e) by any act or omission shall indicate its consent to, approval of or acquiescence in any such petition, application or proceeding or order for relief or the appointment of a custodian, receiver or trustee for all or any substantial part of its property; or (f) shall suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of sixty (60) days or more. (vii) One or more final non-appealable judgments, decrees or orders for the payment of money in excess of $10,000,000 in the aggregate shall be rendered against Tenant and such judgments, decrees or orders shall continue unsatisfied and in effect for a period of thirty (30) consecutive days without Tenant's having obtained an agreement (or after the expiration or termination of an agreement) of the Persons entitled to enforce such judgment, decrees or orders not to enforce the same pending negotiations with Tenant concerning the satisfaction or other discharge of the same. (viii) Tenant shall fail to comply with the covenants set forth in subparagraph 9(ab) or subparagraph 9(ac). (ix) Tenant shall merge into or consolidate with any other entity or permit any other entity to merge into or consolidate with Tenant, or Tenant shall directly or indirectly sell, lease, transfer, abandon or otherwise dispose of in one or more transactions all or substantially all of Tenant's properties other than the Leased Property; except that the following shall not constitute an Event of Default: (a) any corporation shall merge into or with Tenant and the continuing or surviving corporation shall immediately after such event be in compliance with the financial covenants set forth in subparagraph 9(ab), shall be an Affiliate of F. Hoffmann La-Roche, Ltd., a Swiss corporation ("Roche"), or any successor of Roche and shall unconditionally assume in writing Tenant's obligations under this Lease, the Environmental Indemnity Agreement and the Purchase Agreement; and (b) the Tenant shall sell, lease or otherwise transfer all or substantially all of Tenant's properties other than the Leased Property to another party and the party acquiring such properties shall immediately after such event be in compliance with the financial covenants set forth in subparagraph 9(ab), shall be an Affiliate of Roche or any successor of Roche and shall unconditionally assume in writing Tenant's obligations under this Lease, the Environmental Indemnity Agreement and the Purchase Agreement. (x) as of the effective date of this Lease, any of the representations or warranties of Tenant contained in subparagraph 9(a), in subparagraph 9(c), in subparagraph 9(h), in subparagraph 9(i), in subparagraph 9(l) or in subparagraph 9(ad)(i) is false or misleading in any material respect. (xi) Tenant shall fail to comply with any term, provision or condition of any Vacaville Pledge Documents (as defined in the Purchase Agreement) after the expiration of applicable notice and cure periods set forth in such Vacaville Pledge Documents. Notwithstanding the foregoing, any Default that could become an Event of Default under clause 14(a)(ii) may be cured within the earlier of the periods described in clauses (A) and (B) thereof by Tenant's delivery to Landlord of a written notice irrevocably exercising Tenant's option under the Purchase Agreement to purchase or have an Applicable Purchaser purchase Landlord's interest in the Leased Property and designating as the Designated Payment Date the next following date which is a Advance Date or Base Rental Date and which is at least ten (10) days after the date of such notice hereunder; provided, however, Tenant must, as a condition to the effectiveness of its cure, on the date so designated as the Designated Payment Date tender or have the Applicable Purchaser tender to Landlord the full Purchase Price (as defined in the Purchase Agreement) and all Rent and all other amounts then due or accrued and unpaid hereunder on such Designated Payment Date (including reimbursement for any costs incurred by Landlord in connection with the applicable Default hereunder, regardless of whether Landlord shall have been reimbursed for such costs in whole or in part by Participants or any Affiliate of Landlord) and Tenant must also furnish written confirmation to Landlord that all indemnities set forth herein (including specifically, but without limitation, the indemnities set forth in subparagraph 9(x) and the environmental indemnity set forth in Paragraph 12 shall survive the payment of such amounts by Tenant to Landlord and the conveyance of Landlord's interest in the Leased Property to Tenant. (b) Remedies. When any Event of Default has occurred and is continuing, at Landlord's option and without limiting Landlord in the exercise of any other right or remedy Landlord may have, and without any further demand or notice except as expressly described in this subparagraph 14(b), Landlord may institute any remedies available to Landlord, which remedies will include the following: (i) By written notice to Tenant, Landlord may terminate Tenant's right to possession of the Leased Property. A notice given in connection with unlawful detainer proceedings specifying a time within which to cure an Event of Default shall terminate Tenant's right to possession if Tenant fails to cure the Event of Default within the time specified in the notice. (ii) Upon termination of Tenant's right to possession and without further demand or notice, Landlord may re-enter the Leased Property and take possession of all improvements, additions, alterations, equipment and fixtures thereon and remove any persons in possession thereof. Any property in the Leased Property may be removed and stored in a warehouse or elsewhere at the expense and risk of and for the account of Tenant. (iii) Upon termination of Tenant's right to possession, this Lease shall terminate and Landlord may recover from Tenant: a) The worth at the time of award of the unpaid Rent which had been earned at the time of termination; b) The worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; c) The worth at the time of award of the amount by which the unpaid Rent through the balance of the scheduled Term (or if sooner, through the date a sale is consummated or required under the Purchase Agreement) after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; and d) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, the costs and expenses (including Attorneys' Fees, advertising costs and brokers' commissions) of recovering possession of the Leased Property, removing persons or property therefrom, placing the Leased Property in good order, condition, and repair, preparing and altering the Leased Property for reletting, all other costs and expenses of reletting, and any loss incurred by Landlord as a result of Tenant's failure to perform Tenant's obligations under the Purchase Agreement. The "worth at the time of award" of the amounts referred to in subparagraph 14(b)(iii)a) and subparagraph 14(b)(iii)b) shall be computed by allowing interest at ten percent (10%) per annum or such other rate as may be the maximum interest rate then permitted to be charged under California law at the time of computation. The "worth at the time of award" of the amount referred to in subparagraph 14(b)(iii)c) shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). e) Such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable California law. (iv) The Landlord shall have the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in force even after lessee's breach and abandonment and recover rent as it becomes due, if lessee has right to sublet or assign, subject only to reasonable limitations). Accordingly, even though Tenant has breached this Lease and abandoned the Leased Property, this Lease shall continue in effect for so long as Landlord does not terminate Tenant's right to possession, and Landlord may enforce all of Landlord's rights and remedies under this Lease, including the right to recover the Rent as it becomes due under this Lease. Tenant's right to possession shall not be deemed to have been terminated by Landlord except pursuant to subparagraph 14(b)(i) hereof. The following shall not constitute a termination of Tenant's right to possession: a) Acts of maintenance or preservation or efforts to relet the Leased Property; b) The appointment of a receiver upon the initiative of Landlord to protect Landlord's interest under this Lease; or c) Reasonable withholding of consent to an assignment or subletting, or terminating a subletting or assignment by Tenant. (c) Enforceability. This Paragraph shall be enforceable to the maximum extent not prohibited by Applicable Law, and the unenforceability of any provision in this Paragraph shall not render any other provision unenforceable. (d) Remedies Cumulative. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing under Applicable Law or in equity. In addition to other remedies provided in this Lease, Landlord shall be entitled, to the extent permitted by Applicable Law, to injunctive relief in case of the violation, or attempted or threatened violation, of any of the covenants, agreements, conditions or provisions of this Lease to be performed by Tenant, or to a decree compelling performance of any of the other covenants, agreements, conditions or provisions of this Lease to be performed by Tenant, or to any other remedy allowed to Landlord under Applicable Law or in equity. Nothing contained in this Lease shall limit or prejudice the right of Landlord to prove for and obtain in proceedings for bankruptcy or insolvency of Tenant by reason of the termination of this Lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, the damages are to be proved, whether or not the amount be greater, equal to, or less than the amount of the loss or damages referred to above. Without limiting the generality of the foregoing, nothing contained herein shall modify, limit or impair any of the rights and remedies of Landlord under the Environmental Indemnity Agreement or the Purchase Agreement. 15 No Implied Waiver. The failure of Landlord or Tenant to insist at any time upon the strict performance of any covenant or agreement or to exercise any option, right, power or remedy contained in this Lease shall not be construed as a waiver or a relinquishment thereof for the future. The waiver of or redress for any violation by Landlord or Tenant of any term, covenant, agreement or condition contained in this Lease shall not prevent a similar subsequent act from constituting a violation. Any express waiver shall affect only the term or condition specified in such waiver and only for the time and in the manner specifically stated therein. A receipt by Landlord of any Base Rent or other payment hereunder with knowledge of the breach of any covenant or agreement of Tenant contained in this Lease shall not be deemed a waiver of such breach, and no waiver by either party of any provision of this Lease shall be deemed to have been made unless expressed in writing and signed by that party. 16 Default by Landlord. If Landlord should default in the performance of any of its obligations, covenants, agreements, conditions, representations or warranties under this Lease, Landlord shall have the time reasonably required, but in no event less than thirty (30) days, to cure such default after receipt of written notice from Tenant specifying such default and specifying what action Tenant believes is necessary to cure the default. If Tenant prevails in any litigation brought against Landlord because of Landlord's failure to cure a default within the time required by the preceding sentence, then Tenant shall be entitled to an award against Landlord for the damages proximately caused to Tenant by such default. 17 Quiet Enjoyment. Provided Tenant pays the Base Rent and all Additional Rent payable hereunder as and when due and payable and keeps and fulfills all of the terms, covenants, agreements and conditions to be performed by Tenant hereunder, neither Landlord nor any one claiming through Landlord (excluding Tenant or anyone claiming through Tenant) shall during the Term disturb Tenant's peaceable and quiet enjoyment of the Leased Property; however, such enjoyment shall be subject to the terms, provisions, covenants, agreements and conditions of this Lease and the Permitted Encumbrances and any other claims or encumbrances not lawfully asserted through or under Landlord, to which this Lease is subject and subordinate as hereinabove set forth. Any breach by Landlord of the foregoing covenant of quiet enjoyment shall, subject to the other provisions of this Lease, render Landlord liable to Tenant for any monetary damages proximately caused thereby, but as more specifically provided in Paragraph 5 above, no such breach shall entitle Tenant to terminate this Lease or excuse Tenant from its obligation to pay Base Rent and other amounts hereunder. 18 Surrender Upon Termination. Unless Tenant or an Applicable Purchaser purchases Landlord's entire interest in the Leased Property pursuant to the terms of the Purchase Agreement, Tenant shall, upon the termination of Tenant's right to occupancy, surrender to Landlord the Leased Property, including any buildings, alterations, improvements, fixtures, replacements or additions constructed or purchased by Tenant with funds advanced by Landlord, but not including movable personal property not covered by this Lease, free of all Hazardous Substances (including Permitted Hazardous Substances) and tenancies and, to the extent required by Landlord, with all Improvements and tangible Personal Property in good repair and condition, excepting only (i) ordinary wear and tear (provided that the Leased Property shall have been maintained as required by the other provisions hereof) and (ii) demolition, alterations and additions which are expressly permitted by the terms of this Lease and which have been completed by Tenant in a good and workmanlike manner in accordance with all Applicable Laws. Any movable furniture or movable personal property belonging to Tenant or any party claiming under Tenant, if not removed at the time of such termination and if Landlord shall so elect, shall be deemed abandoned and become the property of Landlord without any payment or offset therefor. If Landlord shall not so elect, Landlord may remove such property from the Leased Property and store it at Tenant's risk and expense. Tenant shall bear the expense of repairing any damage to the Leased Property caused by such removal by Landlord or Tenant. 19 Holding Over by Tenant. Should Tenant not purchase Landlord's right, title and interest in the Leased Property as provided in the Purchase Agreement, but nonetheless continue to hold the Leased Property after the termination of this Lease without Landlord's written consent, whether such termination occurs by lapse of time or otherwise, such holding over shall constitute and be construed as a tenancy from day to day only, at a daily Base Rent equal to: (i) Stipulated Loss Value on the day in question, times (ii) the Default Rate for such day; divided by (iii) three hundred sixty (360); subject, however, to all of the terms, provisions, covenants and agreements on the part of Tenant hereunder. No payments of money by Tenant to Landlord after the termination of this Lease shall reinstate, continue or extend the Term of this Lease and no extension of this Lease after the termination thereof shall be valid unless and until the same shall be reduced to writing and signed by both Landlord and Tenant. 20 Miscellaneous. (a) Notices. Each provision of this Lease, or of any Applicable Laws with reference to the sending, mailing or delivery of any notice or with reference to the making of any payment by Tenant to Landlord, shall be deemed to be complied with when and if the following steps are taken: (i) All Rent required to be paid by Tenant to Landlord hereunder shall be paid to Landlord in immediately available funds by wire transfer to: Federal Reserve Bank of San Francisco Account: Banque Nationale de Paris ABA #: 121027234 Reference: Genentech-Vacaville Facility. or at such other place and in such other manner as Landlord may designate in a notice to Tenant. Time is of the essence as to all payments and other obligations of Tenant under this Lease. (ii) All advances paid to Tenant by Landlord hereunder or in connection herewith shall be paid to Tenant in immediately available funds by wire transfer to: Citibank, N.A. Account Name: Genentech, Inc. Account Number: 4052-7763 ABA #: 021-000-089 Reference: Genentech-Vacaville Facility. or at such other place and in such other manner as Tenant may designate in a notice signed by Tenant's Treasurer or Chief Financial Officer to Landlord. Time is of the essence as to the payment of all Construction Advances required of Landlord under this Lease. (iii) All notices, demands and other communications to be made hereunder to the parties hereto shall be in writing (at the addresses set forth below, or in the case of communications to Participants, at the addresses set forth in Schedule 1) and shall be given by any of the following means: (A) personal service; (B) electronic communication, whether by telex, telegram or telecopying (if confirmed in writing sent by United States first class mail, return receipt requested); or (C) registered or certified first class mail, return receipt requested. Such addresses may be changed by notice to the other parties given in the same manner as provided above. Any notice or other communication sent pursuant to clause (A) or (B) hereof shall be deemed received upon such personal service or upon dispatch by electronic means, and, if sent pursuant to clause (C) shall be deemed received five (5) days following deposit in the mail. Address of Landlord: BNP Leasing Corporation 717 North Harwood Street Suite 2630 Dallas, Texas 75201 Attention: Lloyd Cox Telecopy: (214) 969-0060 With a copy to: Banque Nationale de Paris, San Francisco 180 Montgomery Street San Francisco, California 94104 Attention: Jennifer Cho Telecopy: (415) 296-8954 And with a copy to: Clint Shouse Thompson & Knight, P.C. 1700 Pacific Avenue Suite 3300 Dallas, Texas 75201 Telecopy: (214) 969-1550 Address of Tenant: Genentech, Inc. Attn: Corporate Secretary 460 Point San Bruno Boulevard South San Francisco, CA 94080 Telecopy: (415) 952-9881 With a copy to: Morrison & Foerster 555 West Fifth Street Los Angeles, CA 90013-1024 Attention: Tom Fileti Telecopy: (213) 892-5454 (b) Severability. If any term or provision of this Lease or the application thereof shall to any extent be held by a court of competent jurisdiction to be invalid and unenforceable, the remainder of this Lease, or the application of such term or provision other than to the extent to which it is invalid or unenforceable, shall not be affected thereby. (c) No Merger. There shall be no merger of this Lease or of the leasehold estate hereby created with the fee estate in the Leased Property or any part thereof by reason of the fact that the same person may acquire or hold, directly or indirectly, this Lease or the leasehold estate hereby created or any interest in this Lease or in such leasehold estate as well as the fee estate in the Leased Property or any interest in such fee estate, unless all Persons with an interest in the Leased Property that would be adversely affected by any such merger specifically agree in writing that such a merger shall occur. (d) NO IMPLIED REPRESENTATIONS BY LANDLORD. LANDLORD AND LANDLORD'S AGENTS HAVE MADE NO REPRESENTATIONS OR PROMISES WITH RESPECT TO THE LEASED PROPERTY EXCEPT AS EXPRESSLY SET FORTH HEREIN, AND NO RIGHTS, EASEMENTS OR LICENSES ARE ACQUIRED BY TENANT BY IMPLICATION OR OTHERWISE EXCEPT AS EXPRESSLY SET FORTH IN THE PROVISIONS OF THIS LEASE AND THE PURCHASE AGREEMENT. (e) Entire Agreement. This Lease and the instruments referred to herein supersede any prior negotiations and agreements between the parties concerning the Leased Property, including the Prior Lease and the Prior Purchase Agreement, but not including the Environmental Indemnity Agreement, and no amendment or modification of this Lease shall be binding or valid unless expressed in a writing executed by both parties hereto. Tenant ratifies and confirms the Environmental Indemnity Agreement as a separate and independent continuing agreement. (f) Binding Effect. All of the covenants, agreements, terms and conditions to be observed and performed by the parties hereto shall be applicable to and binding upon their respective successors and, to the extent assignment is permitted hereunder, their respective assigns. (g) Time is of the Essence. Time is of the essence as to all obligations of Tenant and Landlord and all notices required of Tenant and Landlord under this Lease. (h) Governing Law. This Lease shall be governed by and construed in accordance with the laws of the State of California without regard to conflict or choice of laws. (i) Attorneys' Fees. If either party to this Lease commences any legal action or other proceeding to enforce any of the terms of this Lease or the documents or agreements referred to herein, or because of any breach of the other party or dispute hereunder or thereunder, the successful or prevailing party shall be entitled to recover from the nonprevailing party all Attorneys' Fees incurred in connection therewith, whether or not such controversy, claim or dispute is prosecuted to a final judgment. Any such Attorneys' Fees incurred by either party in enforcing a judgment in its favor under this Lease shall be recoverable separately from such judgment, and the obligation for such Attorneys' Fees is intended to be severable from other provisions of this Lease and not to be merged into any such judgment. 21 Waiver of Jury Trial. LANDLORD AND TENANT EACH HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS LEASE OR ANY OTHER DOCUMENT OR DEALINGS BETWEEN THEM RELATING TO THIS LEASE OR THE LEASED PROPERTY. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including, without limitation, contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Tenant and Landlord each acknowledge that this waiver is a material inducement to enter into a business relationship, that each has already relied on the waiver in entering into this Lease and the other documents referred to herein, and that each will continue to rely on the waiver in their related future dealings. Tenant and Landlord each further warrants and represents that it has reviewed this waiver with its legal counsel, and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS LEASE OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS LEASE OR THE LEASED PROPERTY. In the event of litigation, this Lease may be filed as a written consent to a trial by the court. 22 Tax Reporting. Landlord and Tenant shall report this Lease and the Purchase Agreement for federal income tax purposes as a conditional sale unless prohibited from doing so by the Internal Revenue Service. Similarly, Tenant shall report all interest earned on Escrowed Proceeds as Tenant's income for federal and state income tax purposes. If the Internal Revenue Service shall challenge Landlord's characterization of this Lease and the Purchase Agreement as a conditional sale for federal income tax reporting purposes, Landlord shall notify Tenant in writing of such challenge and consider in good faith any reasonable suggestions by Tenant about an appropriate response. In any event, Tenant shall (subject only to the limitations set forth in this Paragraph) indemnify, defend and hold harmless Landlord from and against all liabilities, costs, additional taxes and other expenses, but in any case not any Excluded Taxes, that may become due or be asserted because of such challenge or because of any resulting recharacterization required by the Internal Revenue Service, including any additional taxes that may become due upon any sale under the Purchase Agreement to the extent (if any) that such additional taxes are not offset by tax savings resulting from additional depreciation deductions or other tax benefits to Landlord of the recharacterization. If Landlord receives a written notice of any challenge by the Internal Revenue Service that Landlord believes will be covered by this Paragraph, then Landlord shall promptly furnish a copy of such notice to Tenant. The failure to so provide a copy of the notice to Tenant shall not excuse Tenant from its obligations under this Paragraph; provided, that if none of the officers of Tenant and none of the employees of Tenant responsible for tax matters are aware of the challenge described in the notice and such failure by Landlord renders unavailable defenses that Tenant might otherwise assert, or precludes actions that Tenant might otherwise take, to minimize its obligations hereunder, then Tenant shall be excused from its obligation to indemnify Landlord against liabilities, costs, additional taxes and other expenses, if any, which would not have been incurred but for such failure. For example, if Landlord fails to provide Tenant with a copy of a notice of a challenge by the Internal Revenue Service covered by the indemnity set out in this Paragraph and Tenant is not otherwise already aware of such challenge, and if as a result of such failure Landlord becomes liable for penalties and interest covered by the indemnity in excess of the penalties and interest that would have accrued if Tenant had been promptly provided with a copy of the notice, then Tenant will be excused from any obligation to Landlord to pay the excess. 23 Proprietary Information, Confidentiality and Security. (a) Tenant shall have no obligation to provide proprietary information (as defined in the next sentence) to Landlord, except and to the extent that (1) Landlord reasonably determines that Landlord cannot accomplish the purposes of Landlord's inspection of the Leased Property pursuant to the various provisions hereof without evaluating such information, and (2) before conducting any inspections of the Leased Property permitted hereunder Landlord shall, if requested by Tenant, confirm and ratify the confidentiality agreements covering such proprietary information set forth in the next subparagraph. For purposes of this Lease "proprietary information" includes Tenant's intellectual property, trade secrets and other confidential information of value to Tenant about, among other things, Tenant's manufacturing processes, products, marketing and corporate strategies, but in no event will "proprietary information" include any disclosure of substances and materials (and their chemical composition) which are or previously have been present in, on or under the Leased Property at the time of any inspections by Landlord, nor will "proprietary information" include any additional disclosures reasonably required to permit Landlord to determine whether the presence of such substances and materials has constituted a violation of Environmental Laws. In addition, under no circumstances shall Tenant have any obligation to disclose to Landlord or any other party any proprietary information of Tenant (including, without limitation, any pending applications for patents or trademarks, any research and design and any trade secrets) except if and to the limited extent reasonably necessary to comply with the express provisions of this Lease. (b) Landlord agrees to use reasonable precautions to keep confidential any proprietary information that Landlord may receive from Tenant or otherwise discover with respect to Tenant or Tenant's business pursuant to this Lease or any investigation by Landlord hereunder, except for disclosures: (i) specifically and previously authorized in writing by Tenant; (ii) to any assignee of Landlord as to any interest in the Leased Property so long as such assignee has agreed in writing to use its reasonable efforts to keep such information confidential in accordance with the terms of this paragraph; (iii) to legal counsel, accountants, auditors, environmental consultants and other professional advisors to Landlord so long as Landlord shall inform such persons in writing (if practicable) of the confidential nature of such information and shall direct them to treat such information confidentially; (iv) to regulatory officials having jurisdiction over Landlord or Landlord's Parent (provided that the disclosing party shall request confidential treatment of the disclosed information, if practicable); (v) as required by legal process (provided that the disclosing party shall request confidential treatment of the disclosed information, if practicable); (vi) of information which has previously become publicly available through the actions or inactions of a person other than Landlord not, to Landlord's knowledge, in breach of an obligation of confidentiality to Tenant; and (vii) to any Participant so long as the Participant is bound by and has not repudiated the confidentiality provision concerning Tenant's proprietary information set forth in the participation agreement between Landlord and such Participant. (c) So long as Tenant remains in possession of the Leased Property, Landlord or Landlord's representative will, before making any inspection or performing any work on the Leased Property authorized by this Lease, if then requested to do so by Tenant to maintain Tenant's security: (i) sign in at Tenant's security or information desk if Tenant has such a desk on the premises, (ii) wear a visitor's badge or other reasonable identification, (iii) permit an employee of Tenant to observe such inspection or work, and (iv) comply with other similar reasonable nondiscriminatory security requirements of Tenant that do not, individually or in the aggregate, significantly interfere with inspections or work of Landlord authorized by this Lease. [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, this Lease is hereby executed in multiple originals as of the effective date above set forth. "Landlord" BNP LEASING CORPORATION a Delaware corporation By: /S/LLOYD G. COX Name: Lloyd G. Cox Title: Vice President "Tenant" GENENTECH, INC. a Delaware corporation By: /S/MARTY GLICK Name: Marty Glick Title: Vice President and Tresure Exhibit A PROPERTY DESCRIPTION ALL THAT REAL PROPERTY SITUATED IN THE CITY OF VACAVILLE, COUNTY OF SOLANO, STATE OF CALIFORNIA, DESCRIBED AS FOLLOWS: PARCEL ONE: PARCEL "4D", AS SHOWN ON THAT CERTAIN MAP ENTITLED: "PARCEL MAP, BEING A RESUBDIVISION OF PARCEL 4, AS SHOWN IN BOOK 38 OF PARCEL MAPS, PAGE 35, PARCELS 14-22, PORTIONS OF AKERLY DRIVE AND BARCAR DRIVE AS SHOWN IN BOOK 39 OF MAPS, PAGE 74, AND PORTIONS OF LANDS DESCRIBED IN DEED RECORDED MAY 13, 1982, PAGE 29409, AS INSTRUMENT NO. 17086 IN THE OFFICE OF THE COUNTY RECORDER OF SOLANO COUNTY, STATE OF CALIFORNIA," FILED JULY 31, 1995 IN THE OFFICE OF THE COUNTY RECORDER OF SOLANO COUNTY, IN BOOK 39 OF PARCEL MAPS, PAGE 37. EXCEPTING THEREFROM AN UNDIVIDED ONE-HALF (1/2) INTEREST IN ALL MINERALS, MINERAL DEPOSITS, OIL, GAS AND OTHER HYDROCARBON SUBSTANCES OF EVERY KIND AND CHARACTER BELOW 500 FEET FROM THE SURFACE OF SAID LAND, BUT WITHOUT, HOWEVER, THE RIGHT OF SURFACE ENTRY, AS EXCEPTED AND RESERVED IN DEED FROM MARGARET JOSEPHINE SHELLHAMMER TO GERTRUDE M. EAMES, DATED JUNE 8, 1956, RECORDED JUNE 12, 1956 IN BOOK 833 OF OFFICIAL RECORDS, PAGE 480 AND IN DEED FROM MARGARET JOSEPHINE SHELLHAMMER TO BARBARA C. SANTOS DATED DECEMBER 28, 1962, RECORDED JANUARY 4, 1963 IN BOOK 1178 OF OFFICIAL RECORDS, PAGE 520, AND IN DEED FROM MARGARET JOSEPHINE SHELLHAMMER TO ROBERTA SANTOS, DATED DECEMBER 28, 1962, RECORDED JANUARY 4, 1963 IN BOOK 1178 OF OFFICIAL RECORDS, PAGE 529, SOLANO COUNTY RECORDS. ALSO EXCEPTING AN UNDIVIDED ONE-HALF (1/2) INTEREST IN ALL OIL, GAS AND OTHER HYDROCARBONS; NON-HYDROCARBON GASSES OR GASEOUS SUBSTANCES; ALL OTHER MINERALS OF WHATSOEVER NATURE, WITHOUT REGARD TO SIMILARITY TO THE ABOVE-MENTIONED SUBSTANCES; AND ALL SUBSTANCES THAT MAY BE PRODUCED THEREWITH FROM SAID REAL PROPERTY AS RESERVED IN THE DEED FROM CHEVRON U.S.A. INC., A CORPORATION, RECORDED APRIL 1, 1987 IN BOOK 1987 PAGE 42125 OFFICIAL RECORDS AS INSTRUMENT NO. 21698. ALSO EXCEPTING AN UNDIVIDED ONE-HALF (1/2) INTEREST IN ALL GEOTHERMAL RESOURCES, EMBRACING: INDIGENOUS STEAM, HOT WATER AND HOT BRINES; STEAM AND OTHER GASSES, HOT WATER AND HOT BRINES RESULTING FROM WATER, GAS OR OTHER FLUIDS ARTIFICIALLY INTRODUCED INTO SUBSURFACE FORMATIONS; HEAT OR OTHER ASSOCIATED ENERGY FOUND BENEATH THE SURFACE OF THE EARTH; AND BYPRODUCTS OF ANY OF THE FOREGOING SUCH AS MINERALS (EXCLUSIVE OF OIL OR HYDROCARBON GAS THAT CAN BE SEPARATELY PRODUCED) WHICH ARE FOUND IN SOLUTION OR ASSOCIATION WITH OR DERIVED FROM ANY OF THE FOREGOING, AS RESERVED IN THE DEED FROM CHEVRON U.S.A. INC., A CORPORATION, RECORDED APRIL 1, 1987 IN BOOK 1987 PAGE 42125 OFFICIAL RECORDS AS INSTRUMENT NO. 21698. ALSO THE SOLE AND EXCLUSIVE RIGHT FROM TIME TO TIME TO BORE OR DRILL AND MAINTAIN WELLS AND OTHER WORKS INTO AND THROUGH SAID REAL PROPERTY AND ADJOINING STREETS, ROADS AND HIGHWAYS BELOW A DEPTH OF FIVE HUNDRED (500') FEET FROM THE SURFACE THEREOF FOR THE PURPOSE OF EXPLORING FOR AND PRODUCING ENERGY RESOURCES; THE RIGHT TO PRODUCE, INJECT, STORE AND REMOVE FROM AND THROUGH SAID BORES, WELLS OR WORKS, OIL, GAS, WATER AND OTHER SUBSTANCES OF WHATEVER NATURE, INCLUDING THE RIGHT TO PERFORM BELOW SAID DEPTH ANY AND ALL OPERATIONS DEEMED BY GRANTOR NECESSARY OR CONVENIENT FOR THE EXERCISE OF SUCH RIGHTS, AS RESERVED IN THE DEED FROM CHEVRON U.S.A. INC., A CORPORATION, RECORDED APRIL 1, 1987 IN BOOK 1987 PAGE 42125 OFFICIAL RECORDS AS INSTRUMENT NO. 21698. ALL RIGHTS EXCEPTED AND RESERVED TO CHEVRON DO NOT INCLUDE AND DO NOT EXCEPT OR RESERVE TO CHEVRON ANY RIGHT OF CHEVRON TO USE THE SURFACE OF SAID PROPERTY OR THE FIRST FIVE HUNDRED (500') FEET BELOW SAID SURFACE OR TO CONDUCT ANY OPERATIONS THEREON OR THEREIN. APN: PORTION 133-080-290 PORTION 133-120-300 133-190-030 THRU 100 133-190-130 PARCEL TWO: THOSE CERTAIN EASEMENTS GRANTED IN ARTICLE 8 OF THE DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS FOR VACA VALLEY BUSINESS PARK, DATED NOVEMBER 10, 1993, EXECUTED BY CHEVRON LAND AND DEVELOPMENT COMPANY, A DELAWARE CORPORATION, RECORDED NOVEMBER 12, 1993 AS INSTRUMENT NO. 1993-00107441 IN THE SOLANO COUNTY RECORDS, AS AMENDED BY A FIRST AMENDMENT THERETO, RECORDED NOVEMBER 12, 1993 AS INSTRUMENT NO. 1993-00107445 IN THE SOLANO COUNTY RECORDS, AS FURTHER AMENDED BY A SECOND AMENDMENT THERETO, RECORDED SEPTEMBER 13, 1995 AS INSTRUMENT NO. 1995-00056033 IN THE SOLANO COUNTY RECORDS AND AS FURTHER AMENDED BY A THIRD AMENDMENT THERETO, RECORDED SEPTEMBER 13, 1995 AS INSTRUMENT NO. 1995-00056034 IN THE SOLANO COUNTY RECORDS Exhibit B PERMITTED ENCUMBRANCES The leasehold and all rights conveyed to Tenant hereby are conveyed subject to the Development Contracts described in Schedule 2 and to other matters described hereinbelow to the extent such other matters are still valid and in force. (i) THE FACT THAT THE REAL PROPERTY IS WITHIN THE SOLANO IRRIGATION DISTRICT AS ESTABLISHED BY THE BOARD OF SUPERVISORS OF SOLANO COUNTY, CALIFORNIA ON MARCH 8, 1948, AND ANY TAXES OR ASSESSMENTS THEREOF WHICH ARE NOT DELINQUENT OR CLAIMED TO BE DELINQUENT OR WHICH ARE BEING CONTESTED IN ACCORDANCE WITH SUBPARAGRAPH 9(p) OF THIS LEASE. (ii) THE FACT THAT THE OWNERSHIP OF SAID LAND DOES NOT INCLUDE ANY RIGHTS OF ACCESS TO THE STATE FREEWAY (INTERSTATE 505), SAID RIGHTS HAVING BEEN RELINQUISHED TOGETHER WITH A WAIVER OF CLAIMS FOR DAMAGES, IN THE DEED FROM : JAMES J. KILKENNY, A WIDOWER TO : STATE OF CALIFORNIA RECORDED : MARCH 21, 1946 IN BOOK : 344 PAGE 162 INSTRUMENT NO.: 7390, OFFICIAL RECORDS (iii) AN EASEMENT FOR THE PURPOSE SHOWN BELOW AND RIGHTS INCIDENTAL THERETO AS SET FORTH IN A DOCUMENT GRANTED TO: CITY OF VACAVILLE PURPOSE: STORM DRAINAGE RECORDED: MARCH 20, 1981 IN BOOK 1981 PAGE 19683 AS INSTRUMENT NO. 11433, OFFICIAL RECORDS AFFECTS: STRIP OF LAND RUNNING THROUGHOUT THE PREMISES LOCATED AS SHOWN ON SURVEY PREPARED BY MOUNTAIN PACIFIC SURVEYS, DATED JULY 31, 1995 (iv) AN EASEMENT FOR THE PURPOSE SHOWN BELOW AND RIGHTS INCIDENTAL THERETO AS SET FORTH IN A DOCUMENT GRANTED TO: UNITED STATES OF AMERICA PURPOSE: PIPELINES RECORDED: OCTOBER 30, 1981 IN BOOK 1981 PAGE 79172 AS INSTRUMENT NO. 45851, OFFICIAL RECORDS AFFECTS: A 20' STRIP OF LAND RUNNING EAST/WEST THROUGH THE MIDDLE PORTION OF THE PROPERTY, LOCATED AS SHOWN ON SURVEY PREPARED BY MOUNTAIN PACIFIC SURVEYS, DATED JULY 31, 1995 (v) AN EASEMENT FOR THE PURPOSE SHOWN BELOW AND RIGHTS INCIDENTAL THERETO AS RESERVED IN A DOCUMENT PURPOSE: WATER PIPELINE RECORDED: APRIL 1, 1982 IN BOOK 1982 PAGE 20129 AS INSTRUMENT NO. 11654, OFFICIAL RECORDS AFFECTS: WESTERLY 20 FEET, LOCATES AS SHOWN ON SURVEY PREPARED BY MOUNTAIN PACIFIC SURVEYS, DATED JULY 31, 1995. (vi) THE FACT THAT SAID LAND IS INCLUDED WITHIN A PROJECT AREA OF THE REDEVELOPMENT AGENCY SHOWN BELOW, AND THAT PROCEEDINGS FOR THE REDEVELOPMENT OF SAID PROJECT HAVE BEEN INSTITUTED UNDER THE REDEVELOPMENT LAW (SUCH REDEVELOPMENT TO PROCEED ONLY AFTER THE ADOPTION OF THE REDEVELOPMENT PLAN) AS DISCLOSED BY A DOCUMENT. REDEVELOPMENT AGENCY: THE REDEVELOPMENT PLAN FOR THE VACAVILLE I-505/80 REDEVELOPMENT PROJECT RECORDED: JULY 15, 1983 IN BOOK 1983 PAGE 55732, INSTRUMENT NO. 29527 OFFICIAL RECORDS (vii) AN EASEMENT FOR THE PURPOSE SHOWN BELOW AND RIGHTS INCIDENTAL THERETO AS SET FORTH IN A DOCUMENT GRANTED TO: COUNTY OF SOLANO PURPOSE: AVIGATION EASEMENT RECORDED: MAY 31, 1989 IN BOOK 1989 AS INSTRUMENT NO. 890035033, OFFICIAL RECORDS AFFECTS: THE HEREIN DESCRIBED PROPERTY (viii) DEFERRED IMPROVEMENT AGREEMENT, UPON THE TERMS AND CONDITIONS CONTAINED THEREIN DATED: MAY 16, 1989 EXECUTED BY: THE CITY OF VACAVILLE AND CHEVRON LAND AND DEVELOPMENT COMPANY, A DELAWARE CORPORATION RECORDED: MAY 31, 1989 BOOK: 1989 INSTRUMENT NO.: 890035035, OFFICIAL RECORDS AN AMENDMENT TO THE ABOVE WAS DATED: OCTOBER 28, 1993 RECORDED: NOVEMBER 12, 1993 IN BOOK: 1993 INSTRUMENT NO.: 1993-00107440 NATURE OF CHANGES: IMPLEMENTATION PROCEDURES NOTE: UPON COMPLETION OF REQUIREMENTS SET FORTH IN THE AGREEMENT SHOWN IN EXCEPTION NO. XV SAID AGREEMENT WILL BE TERMINATED AND REPLACED BY AGREEMENT SHOWN AS EXCEPTION NO. XV. (IX) ASSESSMENT DISTRICT AND MAINTENANCE DISTRICT AGREEMENT, UPON THE TERMS AND CONDITIONS CONTAINED THEREIN DATED: OCTOBER 28, 1993 EXECUTED BY: THE CITY OF VACAVILLE AND CHEVRON LAND AND DEVELOPMENT COMPANY RECORDED: NOVEMBER 12, 1993 BOOK: 1993 INSTRUMENT NO.: 1993-00107439, OFFICIAL RECORDS (x) COVENANTS, CONDITIONS AND RESTRICTIONS (DELETING THEREFROM ANY RESTRICTIONS BASED ON RACE, COLOR, RELIGION, SEX, HANDICAP, FAMILIAL STATUS OR NATIONAL ORIGIN, UNLESS AND ONLY TO THE EXTENT THAT SAID COVENANT (A) IS EXEMPT UNDER CHAPTER 42, SECTION 3607 OF THE UNITED STATES CODE OR (B) RELATES TO HANDICAP BUT DOES NOT DISCRIMINATE AGAINST HANDICAPPED PERSONS) AS SET FORTH IN THE DOCUMENT EXECUTED BY: CHEVRON LAND AND DEVELOPMENT COMPANY, A DELAWARE CORPORATION RECORDED: NOVEMBER 12, 1993 IN BOOK: 1993 INSTRUMENT NO.: 1993-00107441 OFFICIAL RECORDS WHICH PROVIDE THAT A VIOLATION THEREOF SHALL NOT DEFEAT NOR RENDER INVALID THE LIEN OF ANY MORTGAGE OR DEED OF TRUST MADE IN GOOD FAITH AND FOR VALUE. SAID INSTRUMENT DOES NOT PROVIDE FOR REVERSION OF TITLE IN THE EVENT OF A BREACH THEREOF. MODIFICATION(S) OF SAID COVENANTS, CONDITIONS AND RESTRICTIONS EXECUTED BY: CHEVRON LAND AND DEVELOPMENT COMPANY, A DELAWARE CORPORATION RECORDED: NOVEMBER 12, 1993 IN BOOK: 1993 INSTRUMENT NO.: 1993-00107445 OFFICIAL RECORDS SAID COVENANTS, CONDITIONS AND RESTRICTIONS HAVE BEEN MODIFIED BY AN INSTRUMENT EXECUTED BY: CHEVRON LAND AND DEVELOPMENT COMPANY, A DELAWARE CORPORATION RECORDED: SEPTEMBER 13, 1995 BOOK: 1995 INSTRUMENT NO.: 1995-00056033, OFFICIAL RECORDS SAID COVENANTS, CONDITIONS AND RESTRICTIONS HAVE BEEN MODIFIED BY AN INSTRUMENT EXECUTED BY: CHEVRON LAND AND DEVELOPMENT COMPANY, A DELAWARE CORPORATION RECORDED: SEPTEMBER 13, 1995 BOOK: 1995 INSTRUMENT NO.: 1995-00056034, OFFICIAL RECORDS (xi) NOTICE OF ASSESSMENT, CITY OF VACAVILLE, NORTHEAST SECTOR ASSESSMENT DISTRICT, RECORDED JULY 21, 1995 AS INSTRUMENT NO. 1995- 00043084, SOLANO COUNTY RECORDS. (xii) AN EASEMENT FOR THE PURPOSE SHOWN BELOW AND RIGHTS INCIDENTAL THERETO AS SHOWN OR OFFERED FOR DEDICATION ON THE RECORDED MAP SHOWN BELOW. MAP OF: 39 PM 37 RECORDED: JULY 31, 1995 EASEMENT PURPOSE: PUBLIC UTILITIES, LANDSCAPE AND PUBLIC ACCESS EASEMENT AFFECTS: THE NORTHEASTERLY 25 FEET, THE SOUTHEASTERLY 30 FEET AND THE NORTHEASTERLY 30 FEET (ALONG THE MOST EASTERLY PORTION OF THE PROPERTY) AND AS SHOWN ON SURVEY PREPARED BY MOUNTAIN PACIFIC SURVEYS, DATED JULY 31, 1995. (xiii) AN EASEMENT FOR THE PURPOSE SHOWN BELOW AND RIGHTS INCIDENTAL THERETO AS SHOWN OR AS OFFERED FOR DEDICATION ON THE RECORDED MAP SHOWN BELOW. MAP OF: 39 PM 37 RECORDED: JULY 31, 1995 EASEMENT PURPOSE: LANDSCAPE SIGNAGE AND PUBLIC UTILITY EASEMENT AFFECTS: A 100 FT. X 100 FT. STRIP OF LAND IN THE NORTHEASTERLY CORNER AND A STRIP OF LAND IN THE MOST EASTERLY NORTHEASTERLY CORNER AND AS SHOWN ON SURVEY PREPARED BY MOUNTAIN PACIFIC SURVEYS, DATED JULY 31, 1995. (xiv) AN EASEMENT FOR THE PURPOSE SHOWN BELOW AND RIGHTS INCIDENTAL THERETO AS SHOWN OR AS OFFERED FOR DEDICATION ON THE RECORDED MAP SHOWN BELOW. MAP OF: 39 PM 37 RECORDED: JULY 31, 1995 EASEMENT PURPOSE: LANDSCAPING EASEMENT AFFECTS: THE WESTERLY 30 FEET AND AS SHOWN ON SURVEY PREPARED BY MOUNTAIN PACIFIC SURVEYS, DATED JULY 31, 1995. (xv) AS SHOWN ON PARCEL MAP, BK 39 PM PAGE 37, NON-ACCESS ALONG THE NORTHERLY PORTION OF THE PROPERTY (VACA VALLEY PARKWAY). (xvi) DEFERRED IMPROVEMENT AGREEMENT, UPON THE TERMS AND CONDITIONS CONTAINED THEREIN DATED: JUNE 30, 1995 EXECUTED BY: THE CITY OF VACAVILLE AND CHEVRON LAND AND DEVELOPMENT COMPANY, A DELAWARE CORPORATION RECORDED: AUGUST 16, 1995 BOOK: 1995 INSTRUMENT NO.: 1995-00048797, OFFICIAL RECORDS (xvii) AGREEMENT CONTAINING COVENANTS AFFECTING REAL PROPERTY DATED: SEPTEMBER 11, 1995 BY AND BETWEEN: CHEVRON LAND AND DEVELOPMENT COMPANY, A DELAWARE CORPORATION AND MISSION-VACAVILLE, LIMITED PARTNERSHIP, A CALIFORNIA LIMITED PARTNERSHIP RECORDED: SEPTEMBER 13, 1995 BOOK: 1995 INSTRUMENT NO.: 1995-00056036, OFFICIAL RECORDS (xviii) DEVELOPMENT AGREEMENT, UPON THE TERMS AND CONDITIONS CONTAINED THEREIN EXECUTED BY: THE CITY OF VACAVILLE, THE REDEVELOPMENT AGENCY OF THE CITY OF VACAVILLE AND GENENTECH, INC. RECORDED: SEPTEMBER 28, 1995 BOOK: 1995 INSTRUMENT NO.: 1995-00059945, OFFICIAL RECORDS Exhibit C ESTOPPEL FROM CONTRACTORS _________, 199__ BNP Leasing Corporation 717 North Harwood Street Suite 2630 Dallas, Texas 75201 Attention: Lloyd Cox Re: Assignment of Construction Contract Ladies and Gentlemen: The undersigned hereby confirms, warrants and represents to BNP Leasing Corporation, a Delaware corporation ("BNP"), and covenants with BNP as follows: 1. The undersigned has entered into that certain [**Construction Contract] (the "Construction Contract") by and between the undersigned and Genentech, Inc. ("Tenant") dated, 199__ for the construction of the manufacturing complex to be constructed on the Vacaville campus leased by Tenant (the "Improvements") located on the land described in Exhibit A attached hereto and made a part hereof for all purposes (the "Land" and, together with the Improvements and any other improvements now on or constructed in the future on the Land, being collectively herein referred to as the "Project"). 2. The undersigned has been advised that BNP owns the Land. 3. The undersigned has also received a copy of the Amended and Restated Lease Agreement dated as of December 8, 1995 (the "Lease"), pursuant to which BNP is leasing the Project to Tenant, and BNP has agreed, subject to the terms and conditions of the Lease, to provide a construction allowance for Tenant's construction of the Improvements. The Lease also requires Tenant to fulfill all obligations of "Genentech" under the Construction Contract and related documents and to indemnify BNP against any liability arising thereunder, all as more particularly provided in the Lease, reference to which is hereby made for all purposes. 4. A complete and correct copy of the Construction Contract is attached to this letter. The Construction Contract is in full force and effect and has not been modified or amended. 5. The undersigned has not sent or received any notice of default to or from Tenant or any other notice to or from Tenant for the purpose of terminating the Construction Contract, nor is there any existing circumstance or event which, but for the elapse of time or otherwise, would constitute a default by the undersigned or "Genentech" under the Construction Contract. The undersigned acknowledges and agrees that: a) BNP shall not be held liable for, and the undersigned shall not assert, any claims, demands or liabilities against BNP or, except for any statutory stop notice or lien rights, against the Project arising under or in any way relating to the Construction Contract; provided, this paragraph will not prohibit the undersigned from asserting any claims or making demands under the Construction Contract if BNP elects in writing, pursuant to Paragraph b) below, to assume the Construction Contract in the event Tenant's right to possession of the Land is terminated, in which event BNP shall be liable thereunder for (but only for) any acts or omissions on the part of BNP occurring after the date on which BNP notifies the undersigned of BNP's election to assume the Construction Contract. b) Upon any termination of Tenant's right to possession of the Project under the Lease, including but not limited to any eviction of Tenant resulting from an Event of Default (as defined in the Lease), BNP may, by notice to the undersigned and without the necessity of the execution of any other document, assume Tenant's rights and obligations under the Construction Contract, cure any defaults by Tenant thereunder and enforce the Construction Contract and all rights of "Genentech" thereunder. Within ten (10) days of receiving notice from BNP that Tenant's right to possession has been terminated, the undersigned shall send to BNP a written estoppel letter stating: (i) that the undersigned has not performed any act or executed any other instrument which invalidates or modifies the Construction Contract in whole or in part (or, if so, the nature of such modification); (ii) that the Construction Contract is valid and subsisting and in full force and effect; (iii) that there are no defaults or events of default then existing under the Construction Contract and no event has occurred which with the passage of time or the giving of notice, or both, would constitute such a default or event of default under the Construction Contract (or, if there is a default, the nature of such default in detail); (iv) that the construction contemplated by the Construction Contract is proceeding in a satisfactory manner in all material respects (or if not, a detailed description of all significant problems with the progress of construction); (v) a reasonably detailed report of the then critical dates projected by the undersigned for work and deliveries required to complete the Project; (vi) the total amount paid for construction through the date of the letter; (vii) the estimated total cost of completing such construction as of the date of the letter, together with a current draw schedule; and (viii) any other information BNP may request to allow it to decide whether to assume the Construction Contract. BNP shall have thirty (30) days from receipt of such written certificate containing all such requested information to decide whether to assume the Construction Contract, but during such thirty (30) day period Contractor may suspend work as reasonably required to mitigate any further losses it may suffer under the Construction Contract until such time as BNP provides written notice of BNP's election to assume the Construction Contract. If BNP fails to provide written notice to Contractor of BNP's election to assume the Construction Contract within such thirty (30) day period, the undersigned agrees that BNP shall not be liable for (and the undersigned shall not assert or bring any action against BNP or, except for any statutory stop notice or lien rights not waived, against the Land or improvements thereon for) any damages or other amounts resulting from the breach or termination of the Construction Contract or under any other theory of liability of any kind or nature, but rather the undersigned shall look solely to Tenant and any statutory stop notice or lien rights not waived for the recovery of any such damages or other amounts. c) Following the termination of Tenant's right to possession of the Project under the Lease, if BNP notifies the undersigned that BNP shall not assume the Construction Contract pursuant to the preceding paragraph, or if BNP fails to provide written notice of its election to assume the Construction Contract within the thirty (30) days described in the preceding paragraph, the undersigned shall immediately discontinue the work under the Construction Contract and remove its personnel from the Project, and BNP shall be entitled to take exclusive possession of the Project and all or any part of the equipment and materials delivered or en route to the Project. The undersigned shall also, upon request by BNP, deliver and assign to BNP all plans and specifications and other contract documents previously delivered to the undersigned, all other material relating to the work which belongs to BNP or Tenant, and all papers and documents relating to governmental permits, orders placed, bills and invoices, lien releases and financial management under the Construction Contract; provided, that BNP pays or reimburses Contractor for its copying costs and other reasonable out of pocket expenses in complying with such request; and, provided, further, that if Contractor has only one original counterpart of any contract or other document that it needs in connection with any claim, demand, or the exercise of any rights or remedies the undersigned may have against the Tenant, whether provided by law, the Construction Contract or otherwise, then Contractor may retain such original counterpart and deliver only a copy of it to BNP. Notwithstanding the undersigned's receipt of any notice from BNP that BNP declines to assume the Construction Contract, the undersigned shall for a period not to exceed fifteen (15) days after receipt of such notice take such steps, at BNP's expense, as are reasonably necessary to preserve and protect work completed and in progress and to protect materials, equipment and supplies at the site or in transit. d) No action taken by BNP or the undersigned with respect to the Construction Contract shall prejudice any other rights or remedies of BNP or the undersigned provided by law, by the Lease , by the Construction Contract or otherwise against Tenant. e) The undersigned agrees promptly to notify BNP of any aterial default or claimed material default by Tenant under the Construction Contract, describing with particularity the default and the action the undersigned believes is necessary to cure the same. The undersigned will send any such notice to BNP prominently marked "URGENT - NOTICE OF TENANT'S DEFAULT UNDER CONSTRUCTION AGREEMENT WITH _______________ - ___________ CALIFORNIA" at the address specified for notice below (or at such other addresses as BNP shall designate in notice sent to the undersigned), by certified or registered mail, return receipt requested. Following receipt of such notice, the undersigned will permit BNP or its designee to cure any such default within the time period reasonably required for such cure, but in no event less than thirty (30) days. Pending any such cure by BNP, Contractor may, to the extent (if any) permitted by the Construction Contract itself, suspend work under the Construction Contract unless BNP elects to fund the ongoing construction activities of Contractor during the period before the cure is complete. If it is necessary or helpful to take possession of all or any portion of the Project to cure a default by Tenant under the Construction Contract, the time permitted by the undersigned for cure by BNP will include the time necessary to terminate Tenant's right to possession of the Project and evict Tenant, provided that BNP commences the steps required to exercise such right within sixty (60) days after it is entitled to do so under the terms of the Lease and applicable law. If the undersigned incurs additional costs due to an extension of any cure period under the Construction Contract by reason of the foregoing, the undersigned shall be entitled to an equitable adjustment to the price of the Construction Contract for such additional costs. Similarly, to the extent that Contractor's work is actually delayed by the extension of cure periods under the Construction Contract pursuant to the foregoing provisions, Contractor shall be entitled to an equitable extension of deadlines and time schedules established by the Construction Contract. f) Any notice or communication required or permitted hereunder shall be given in writing, sent by (a) personal delivery or (b) expedited delivery service with proof of delivery or (c) United States mail, postage prepaid, registered or certified mail or (d) telegram, telex or telecopy, addressed as follows: To the undersigned: To BNP: BNP Leasing Corporation 717 North Harwood Street Suite 2630 Dallas, Texas 75201 Attn: Lloyd Cox g) The undersigned acknowledges that it has all requisite authority to execute this letter. The undersigned further acknowledges that BNP has requested this letter, and is relying on the truth and accuracy of the representations made herein, in connection with BNP's decision to advance funds for construction under the Lease with Tenant. Very truly yours, _____________________________ By: Name: Title: Tenant joins in the execution of this letter solely for the purpose of evidencing its consent hereto, including its consent to the provisions that would allow, but not require, BNP to assume the Construction Contract in the event Tenant is evicted from the Project in accordance with the Lease. _____________________________ By: Name: Title: Exhibit D ESTOPPEL FROM ARCHITECTS/ENGINEERS _________, 199__ BNP Leasing Corporation 717 North Harwood Street Suite 2630 Dallas, Texas 75201 Attention: Lloyd Cox Re: Assignment of [Architects/Engineers Agreement] Ladies and Gentlemen: The undersigned hereby confirms, warrants and represents to BNP Leasing Corporation, a Delaware corporation ("BNP"), and covenants with BNP as follows: 1. The undersigned has entered into that certain [**Architects/Engineers Agreement] (the "Agreement") by and between the undersigned and Genentech, Inc. ("Tenant") dated, 199__ for the [**design] of the manufacturing complex to be constructed on the Vacaville campus leased by Applied (the "Improvements") located on the land described in Exhibit A attached hereto and made a part hereof for all purposes (the "Land" and, together with the Improvements and any other improvements now on or constructed in the future on the Land, being collectively referred to herein as the "Project"). 2. The undersigned has been advised that BNP owns the Land. 3. The undersigned has also received a copy of the Amended and Restated Lease Agreement dated as of December 8, 1995 (the "Lease"), pursuant to which BNP is leasing the Project to Tenant, and BNP has agreed, subject to the terms and conditions of the Lease, to provide a construction allowance for Tenant's construction of the Improvements. The Lease also requires Tenant to fulfill all obligations of "Genentech" under the Agreement and related documents and to indemnify BNP against any liability arising thereunder, all as more particularly provided in the Lease, reference to which is hereby made for all purposes. 4. complete and correct copy of the Agreement is attached to this letter. The Agreement is in full force and effect and has not been modified or amended. 5. The undersigned has not sent or received any notice of default to or from Tenant or any other notice to or from Tenant for the purpose of terminating the Agreement, nor is there any existing circumstance or event which, but for the elapse of time or otherwise, would constitute a default by the undersigned or "Genentech" under the Agreement. The undersigned acknowledges and agrees that: a) BNP shall not be held liable for, and the undersigned shall not assert, any claims, demands or liabilities against BNP or, except for any statutory stop notice or lien rights, against the Project arising under or in any way relating to the Agreement; provided, this paragraph will not prohibit the undersigned from asserting any claims or making demands under the Agreement if BNP elects in writing, pursuant to Paragraph b) below, to assume the Agreement in the event Tenant's right to possession of the Land is terminated, in which event BNP shall be liable thereunder for (but only for) any acts or omissions on the part of BNP occurring after the date on which BNP notifies the undersigned of BNP's election to assume the Agreement. b) Upon any termination of Tenant's right to possession of the Project under the Lease, including but not limited to any eviction of Tenant resulting from an Event of Default (as defined in the Lease), BNP may, by notice to the undersigned and without the necessity of the execution of any other document, assume Tenant's rights and obligations under the Agreement, cure any defaults by Tenant thereunder and enforce the Agreement and all rights of "Genentech" thereunder. Within ten (10) days of receiving notice from BNP that Tenant's right to possession has been terminated, the undersigned shall send to BNP a written estoppel letter stating: (i) that the undersigned has not performed any act or executed any other instrument which invalidates or modifies the Agreement in whole or in part (or, if so, the nature of such modification); (ii) that the Agreement is valid and subsisting and in full force and effect; (iii) that there are no defaults or events of default then existing under the Agreement and no event has occurred which with the passage of time or the giving of notice, or both, would constitute such a default or event of default under the Agreement (or, if there is a default, the nature of such default in detail); (iv) that the construction contemplated by the Agreement is proceeding in a satisfactory manner in all material respects (or if not, a detailed description of all significant problems with the progress of construction); (v) a reasonably detailed report of the then critical dates projected by the undersigned for work and deliveries required to complete the Project; (vi) the total amount paid for construction through the date of the letter; (vii) the estimated total cost of completing such construction as of the date of the letter, together with a current draw schedule; and (viii) any other information BNP may request to allow it to decide whether to assume the Agreement. BNP shall have thirty (30) days from receipt of such written certificate containing all such requested information to decide whether to assume the Agreement. If BNP fails to assume the Agreement within such time, the undersigned agrees that BNP shall not be liable for (and the undersigned shall not assert or bring any action against BNP or, except for any statutory stop notice or lien rights not waived, against the Land or improvements thereon for) any damages or other amounts resulting from the breach or termination of the Agreement or under any other theory of liability of any kind or nature, but rather the undersigned shall look solely to Tenant and any statutory stop notice or lien rights not waived for the recovery of any such damages or other amounts. c) If BNP notifies the undersigned that BNP shall not assume the Agreement pursuant to the preceding paragraph following the termination of Tenant's right to possession of the Project under the Lease, the undersigned shall immediately discontinue the work under the Agreement and remove its personnel from the Project, and BNP shall be entitled to take exclusive possession of the Project and all or any part of the equipment and materials delivered or en route to the Project. The undersigned shall also, upon request by BNP, deliver and assign to BNP all plans and specifications and other contract documents previously delivered to the undersigned (except that the undersigned may keep an original set of the Agreement and other contract documents executed by Tenant), all other material relating to the work which belongs to BNP or Tenant, and all papers and documents relating to governmental permits, orders placed, bills and invoices, lien releases and financial management under the Agreement. Notwithstanding the undersigned's receipt of any notice from BNP that BNP declines to assume the Agreement, the undersigned shall for a period not to exceed fifteen (15) days after receipt of such notice take such steps, at BNP's expense, as are reasonably necessary to preserve and protect work completed and in progress and to protect materials, equipment and supplies at the site or in transit. d) No action taken by BNP or the undersigned with respect to the Agreement shall prejudice any other rights or remedies of BNP or the undersigned provided by law, by the Lease, by the Agreement or otherwise against Tenant. e) The undersigned agrees promptly to notify BNP of any material default or claimed material default by Tenant under the Agreement, describing with particularity the default and the action the undersigned believes is necessary to cure the same. The undersigned will send any such notice to BNP prominently marked "URGENT - NOTICE OF TENANT'S DEFAULT UNDER AGREEMENT WITH _______________ - ___________ CALIFORNIA" at the address specified for notice below (or at such other addresses as BNP shall designate in notice sent to the undersigned), by certified or registered mail, return receipt requested. Following receipt of such notice, the undersigned will permit BNP or its designee to cure any such default within the time period reasonably required for such cure, but in no event less than thirty (30) days. If it is necessary or helpful to take possession of all or any portion of the Project to cure a default by Tenant under the Agreement, the time permitted by the undersigned for cure by BNP will include the time necessary to terminate Tenant's right to possession of the Project and evict Tenant, provided that BNP commences the steps required to exercise such right within sixty (60) days after it is entitled to do so under the terms of the Lease and applicable law. f) Any notice or communication required or permitted hereunder shall be given in writing, sent by (a) personal delivery or (b) expedited delivery service with proof of delivery or (c) United States mail, postage prepaid, registered or certified mail or (d) telegram, telex or telecopy, addressed as follows: To the undersigned: To BNP: BNP Leasing Corporation 717 North Harwood Street Suite 2630 Dallas, Texas 75201 Attn: Lloyd Cox g) The undersigned acknowledges that it has all requisite authority to execute this letter. The undersigned further acknowledges that BNP has requested this letter, and is relying on the truth and accuracy of the representations made herein, in connection with BNP's decision to advance funds for construction under the Lease with Tenant. Very truly yours, By: Name: Title: Tenant joins in the execution of this letter solely for the purpose of evidencing its consent hereto, including its consent to the provisions that would allow, but not require, BNP to assume the Agreement in the event Tenant is evicted from the Project in accordance with the Lease. _______________________ By: Name: Title: Exhibit E DRAW REQUEST FORMS ________, 199__ BNP Leasing Corporation c/o Banque Nationale de Paris 180 Montgomery Street San Francisco, California 94104 Attention: Ms. Jennifer Cho Re: Construction Advance Request No. __________ by Genentech, Inc. Ladies and Gentlemen: Reference is made to the Amended and Restated Lease Agreement between BNP Leasing Corporation (herein "Landlord") and Genentech, Inc. (herein "Genentech") dated as of December 8, 1995 (herein "the Lease"). Capitalized terms defined in the Lease and used but not defined in this letter are intended to have the meanings assigned to them in the Lease. Genentech hereby makes request for a Construction Advance in the amount of $________________ (herein the "Current Advance"). Included herewith are: 1. An Application and Certificate for Payment based on AIA Form G702 (herein the "Contractor's Application") from Genentech's general contractor or construction manager, attached to which is a schedule of values listing all subcontractors, suppliers and other parties to whom the general contractor or construction manager has or will make payments from the draw requested in the Contractor's Application. The Contractor's Application evidences an obligation incurred by (and previously paid by) Genentech for construction of Improvements and for which Genentech is entitled to reimbursement from the Current Advance. 2. A list of any costs paid by Genentech, other than to the general contractor or construction manager, for which Genentech is entitled to reimbursement from the proceeds of the Current Advance (herein the "Other Costs List"). 3. Invoices and requests for payments from the subcontractors and others entitled to payment from the general contractor or construction manager for construction and related work covered by the Contractor's Application; excluding, however, invoices or requests from some or all subcontractors and others that, according to the Contractor's Application, are to be paid less than $500,000 from the draw requested in Contractor's Application. Such invoices and requests for payments are consistent with the detail shown in the schedule of values attached to the Contractor's Application. 4. Invoices or other evidence of the costs (if any) included in the Other Costs List. 5. A list of any "checks on hold" (i.e., payments withheld from subcontractors or suppliers by Tenant's general contractor or construction manager because of some defect or deficiency in the payee's request for payment or in the work or materials provided by the payee) in excess of $100,000. 6. An up-to-date list of the names and addresses of any subcontractors that have actually filed a claim of lien against the Leased Property, together with, to the extent not already provided with a prior request for a Construction Advance, a copy of the claim of lien filed. 7. A certification of an officer of Genentech as required by Paragraph 6(c)(viii) of the Lease. We hereby confirm that Landlord will not be responsible for the application of any funds advanced to Genentech or to any other party at our request. Sincerely, Genentech, Inc. By:___________________________ Name:___________________________ Title:___________________________ cc: BNP Leasing Corporation 717 North Harwood Street Suite 2630 Dallas, Texas 75201 Attention: Lloyd Cox Clint Shouse Thompson & Knight, a Professional Corporation 3300 First City Center 1700 Pacific Avenue Dallas, Texas 75201 Tricia Borga Genentech, Inc. 460 Point San Bruno Boulevard South San Francisco, CA 9408 Construction Advance Certificate Pursuant to Section 6(c)(viii) of the Lease dated December 8, 1995 (the "Lease") between Genentech, Inc. ("Genentech") and BNP Leasing Corporation ("Landlord"), Genentech does hereby represent, warrant and certify to Landlord in connection with Genentech's request for Construction Advance No. __________ that: a) no Event of Default has occurred and is continuing, b) the representations and warranties of Genentech contained in the Lease are true and correct in all material respects on and as of the date hereof as though made on and as of the date hereof, subject only to the following exceptions: [LIST EXCEPTIONS HERE, OR IF THERE ARE NO EXCEPTIONS, INSERT "NONE"] c) each Construction Project which has commenced but not yet been completed is progressing without any significant continuing interruption in a good and workmanlike manner and substantially in accordance with the requirements of the Lease and all Applicable Laws and Genentech has corrected or is diligently pursuing the correction of any significant defect in such construction, d) all costs and expenses for which Genentech is requesting reimbursement by the Construction Advance referenced above constitute actual costs and expenses incurred by Genentech for a Construction Project, and e) to the knowledge of Genentech, liens (if any) now being asserted against the Leased Property by Potential Lien Claimants do not in the aggregate secure or allegedly secure more that $5,000,000 of claims. (As used in this certificate a lien will be considered as "being asserted" if a claim of lien relating thereto shall have been recorded and not discharged by payment or settlement.) Capitalized terms used herein which are defined in the Lease but not in this Certificate shall have the meanings assigned to them in the Lease. In witness whereof, this Certificate is executed by an officer of Genentech, Inc. as of ______________, 19___. Genentech, Inc. By:____________________________ Name:____________________________ Title:____________________________ List of Liens For Which a Claim of Lien Has Actually Been Filed (Construction Advance Request No. ________) Liens for which a claim of lien has actually been filed are as follows: 1. 2. 3. Other Costs List (Construction Advance Request No. ________) Costs paid - other than to Genentech's general contractor or construction manager - by Genentech and for which Genentech is entitled to reimbursement from the Current Advance being requested are as follows: 1. 2. 3. Exhibit F FINANCIAL COVENANT COMPLIANCE CERTIFICATE BNP Leasing Corporation c/o Banque Nationale de Paris, San Francisco 180 Montgomery Street San Francisco, California 94104 Attention: Jennifer Cho Re: Genentech Vacaville Facility Gentlemen: I, the undersigned, the chief financial officer or controller of Genentech, Inc., do hereby certify, represent and warrant that: 1. This Certificate is furnished pursuant to subparagraph 9(v)(iii) of that certain Amended and Restated Lease Agreement dated as of December 8, 1995 (the "Lease Agreement," the terms defined therein being used herein as therein defined) between Genentech, Inc. (the "Tenant"), and you. 2. Annex 1 attached hereto sets forth financial data and computations evidencing the Tenant's compliance with certain covenants of the Lease Agreement, all of which data and computations are complete, true and correct. 3. To the knowledge of Tenant no Default or Event of Default under the Lease Agreement has occurred and is continuing. 4. The representations of Tenant set forth in Paragraph 9 of the Lease Agreement are true and correct in all material respects as of the date hereof as though made on and as of the date hereof. Executed this _____ day of ______________, 19___. ______________________________ Name:_________________________ Title:________________________ Annex 1 To Compliance Certificate For the _________________ Ended ________________, 19___ I. PARAGRAPH 9(ab)(i): Minimum Tangible Net Worth A. Reported Consolidated Total Assets: $_____________ B. Intangible assets: $_____________ C. After-tax charges taken upon the acquisition of technology or distribution rights: $_____________ D. Reported Consolidated Total Liabilities: $_____________ E. Amounts guaranteed by Genentech, Inc. or subsidiaries and not included in Reported Consolidated Total Liabilities: $_____________ F. Consolidated Tangible Net Worth (A - B + C - D - E): $_____________ E. Minimum: $1,000,000,000.00 II. PARAGRAPH 9(ab)(ii): Leverage Ratio A. Reported Consolidated Total Liabilities: $_____________ B. Amounts guaranteed by Genentech, Inc. or subsidiaries and not included in Reported Consolidated Total Liabilities: $_____________ C. Consolidated Tangible Net Worth (from calculation above): $_____________ D. Leverage Ratio (Ratio of [A+B] to C: _____ to ____ E. Maximum ratio: 1.0 to 1.0 III. PARAGRAPH 9(ab)(iii): Quick Ratio A. Unencumbered Cash and Cash Equivalents and other "Quick Assets" as defined in clauses (1), (2) and (3) of Paragraph 1(cc) of the Lease: $_____________ B. Unencumbered accounts receivable (net of reserve for uncollectible accounts): $_____________ C. A + B $_____________ D. Current Liabilities (as defined in Subparagraph 1(z)): $_____________ E. Ratio of C to D: __.__ to __.__ F. Minimum ratio: 3.75 to 1. Schedule 1 LIST OF PARTICIPANTS Participant: SWISS BANK CORPORATION, SAN FRANCISCO BRANCH Country Under Whose Laws Participant Exists: Switzerland 1. Amount of Participation: $ 50,000,000.00 2. Percentage Share: 15.15151515% 3. Address for Notices: Swiss Bank Corporation 101 California Street Suite 1700 San Francisco, Ca. 94111-5884 Attention: David L. Parrot Telephone: (415) 774-3425 Facsimile: (415) 989-7570 4. Payment Instructions: Bank: Swiss Bank Corporation, New York Branch New York, New York Account: Swiss Bank Corporation, San Francisco Branch Account No.: WA-119997.000 ABA No.: 0260-0799-3 Reference: BNP Leasing/Genentech/Vacaville 5. Operations Contact: Swiss Bank Corporation 101 California Street Suite 1700 San Francisco, Ca. 94111-5884 Attention: William B. Walzer Telephone: (415) 774-3329 Facsimile: (415) 956-3882 SCHEDULE 1 (cont.) Participant: UNION BANK OF SWITZERLAND Country Under Whose Laws Participant Exists: Switzerland 1. Amount of Participation: $ 70,000,000.00 2. Percentage Share: 21.21212121% 3. Address for Notices: Union Bank of Switzerland, Los Angeles Branch 444 South Flower Street, 45th Floor Los Angeles, Ca. 90071 Attention: Andres T. Brown Telephone: (213) 489-0660 Facsimile: (213) 489-0697 4. Payment Instructions: Bank: Union Bank of Switzerland New York Branch Fed Routing No.: 026008439 Favor of: UBS Los Angeles Account No.: 40064502 Reference: Genentech, Inc. 5. Operations Contact: Union Bank of Switzerland, Los Angeles Branch 444 South Flower Street, 45th Floor Los Angeles, Ca. 90071 Attention: Susan U. Beltran Telephone: (213) 489-0675 Facsimile: (213) 489-0637, -0690 SCHEDULE 1 (cont.) Participant: CREDIT SUISSE Country Under Whose Laws Participant Exists: Switzerland 1. Amount of Participation: $ 70,000,000.00 2. Percentage Share: 21.21212121% 3. Address for Notices: Credit Suisse 50 California Street San Francisco, Ca. 94111 Attention: Thomas Clausen Tel No.: (415) 391-9590 Fax No.: (415) 362-1175 With a copy to: Greenwich Funding Corporation c/o Credit Suisse 12 East 49th New York, NY 10017 Attention:Carin Okita Tel No.: (213) 238-5366 Fax No.: (213) 238-5332 4. Payment Instructions: Bank: Credit Suisse New York ABA #: 026009179 Account #: 339989-01 F/A GFC Reference: Genentech - BNP Leasing Genentech/Vacaville 5. Operations Contact: Greenwich Funding Corporation c/o Credit Suisse 12 East 49th New York, NY 10017 Attention: Carin Okita Tel No.: (213) 238-5366 Fax No.: (213) 238-533 SCHEDULE 1 (cont.) Participant: Mellon Bank, N.A. Country Under Whose Laws Participant Exists: United States 1. Participation Amount: $ 70,000,000.00 2. Percentage Share: 21.21212121% 3. Address for Notices: Mellon Bank, N. A. 300 South Grand Ave., Suite 3800 Los Angeles, Ca. 90071 Attention: R. Jane Westrich Telephone: (213) 680-7353 Facsimile: (213) 626-3745 4. Payment Instructions: Bank: Mellon Bank, N.A. Pittsburgh, Pa. Account: Loan Administration Account No.: 990873800 ABA No.: 043000261 5. Operations Contact: Mellon Bank, N.A. 3 Mellon Bank Center Room 153-2300 Pittsburgh, Pa. 15259 Attention: Loan Administration Telephone: (412) 236-3242 Facsimile: (412) 234-5049 Schedule 2 LIST OF EXISTING DEVELOPMENT CONTRACTS 1. Property Sale Agreement, dated May 24, 1995. 2. Amendment No. 1 to Property Sale Agreement, dated as of June 30, 1995. 3. Amendment No. 2 to Property Sale Agreement, dated as of July 31, 1995. 4. Amendment No. 3 to Property Sale Agreement, dated as of July 31, 1995. 5. Amendment No. 4 to Property Sale Agreement, dated as of July 31, 1995. 6. Amendment No. 5 to Property Sale Agreement, dated as of September 5, 1995. 7. Water Rights Agreement, dated May, 1987, between Chevron Land and Development Co. and the City of Vacaville, California. 8. Wetlands Mitigation and Monitoring Plan for the Vaca Valley Business Park, as approved by the Army Corps of Engineers in its Letter, dated March 31, 1995, and as modified pursuant to the Letter, dated June 7, 1995, from Chevron Land and Development Co. to the Army Corps of Engineers and the Letter, dated June 28, 1995, from the Army Corps of Engineers approving the changes requested in Chevron Land and Development Co.'s June 7 letter. 9. Waiver letter, dated June 5, 1995, from the Regional Water Quality Control Board. 10. Rights with respect to the Northeast Sector Assessment District. 11. Deferred Improvement Agreement between Chevron Land and Development Company and the City of Vacaville, California. 12. Development Agreement among the City of Vacaville, California, the Redevelopment Agency of the City of Vacaville, California and Genentech, Inc. 13. Negative declaration (State Clearinghouse No. 95043004) for the Genentech project. 14. Declaration of Covenants, Conditions and Restrictions for the Vaca Valley Business Park, as amended by the First, Second and Third Amendments thereto. 15. California Department of Fish and Game Section 1603 Permit applicable to the Vaca Valley Business Park. 16. Agreement Containing Covenants Affecting Real Property dated September 11, 1995 between Chevron Land and Development Company and Mission-Vacaville Limited Partnership. 17. Memorandum of Understanding dated as of September 7, 1995 between Chevron Land and Development Company, Mission-Vacaville Limited Partnership and Genentech, Inc. Schedule 3 DESCRIPTION OF INITIAL CONSTRUCTION PROJECT The following description has been provided by Tenant to Landlord: GENERAL DESCRIPTION The "initial Construction Project" will consist of the design, construction, validation, start-up, and operation of a Bulk Manufacturing Facility (hereafter referred to as the Manufacturing Facility) for mammalian cell culture based products substantially in accordance with the site plan attached to and made a part of this Schedule. The Manufacturing Facility is being designed to use large- scale cell culture (12,000 L production fermenters) and purification technologies similar to those used at Genentech's South San Francisco facilities. The facility will initially be licensed for the manufacture of monoclonal antibody-based proteins which are intended for worldwide distribution. The facility design criteria are based on the clinical processes developed for rhuMAb HER2, rhuMAb-E25, TNFR-rigG, and C2B8 with batch sizes in the range of 1 to 9 kg. It is anticipated that the Vacaville facility will be available for production of qualification lots by mid-1998. The site encompasses approximately 100 acres and the planned buildings will occupy approximately 30 acres. The support buildings will include a warehouse, a quality/administration building, a facility services building, and a central processing utility plant. The Vacaville location was chosen primarily because of the reduced risk of earthquake potential, presence of skilled labor resources, adequate space for future growth, and proximity to current Genentech operations. The City of Vacaville has experience in working with biotechnology firms as well as an established infrastructure required to support such an endeavor. Possible future requirements for the new site that have been identified but will not be addressed at this time are: a bacterial manufacturing facility; a second cell culture facility; pharmaceutical filling, labeling, and packaging; and the expansion of the existing warehousing and quality operations. No current provision is made for these future requirements other than the purchase of land and some utility capacity. MANUFACTURING FACILITY The Manufacturing Facility is being designed for the production of multiple products on a campaigned basis. The frozen bulk drug substance will be transferred to Genentech facilities in South San Francisco for further processing. The capacity will be approximately one- to two-fold Genentech's current bulk product production capacity in South San Francisco. The Manufacturing Facility is planned to be approximately 170,000 ft2. The facility will be a three floor building with dedicated manufacturing areas. The utilities will be located in the center of the building spanning the three floors, and will separate the various processing areas. WAREHOUSE The warehouse will be a two-floor building of approximately 45,000 ft2, and will be connected to the Manufacturing Facility on the second floor by an environmentally controlled corridor to facilitate the movement of raw materials and frozen bulk drug substance tanks. In addition to storage of released raw materials the warehouse will include Raw material weigh rooms. QUALITY/ADMINISTRATION BUILDING The quality/administration building will house Quality Assurance, Quality Control laboratories, manufacturing science laboratory support, and offices. The QC laboratories will perform in-process testing, environmental monitoring and water analysis. EX-10.19 6 AMENDED AND RESTATED PURCHASE AGREEMENT This AMENDED AND RESTATED PURCHASE AGREEMENT (this "Agreement") is made as of December 8, 1995, by GENENTECH, INC., a Delaware corporation ("Genentech") and BNP LEASING CORPORATION, a Delaware corporation ("BNP"). R E C I T A L S A. BNP has acquired the land described in Exhibit A attached hereto and any improvements located thereon and is leasing the same to Genentech pursuant to that certain Amended and Restated Lease Agreement (as from time to time supplemented, amended or restated, the "Lease") between Genentech and BNP dated as of the date hereof. (The land described in Exhibit A and any and all other real or personal property from time to time covered by the Lease and included within the "Leased Property" as defined therein are hereinafter collectively referred to as the "Property".) B. The Lease amends, restates, replaces and supersedes a prior Lease Agreement between BNP and Genentech dated as of August 1, 1995, as modified by First Amendment to Lease Agreement dated as of September 7, 1995 (the "Prior Lease"), and as a condition to Landlord's agreement to enter into the Lease, BNP requires the agreements set out herein. This Agreement will amend, restate, replace and supersede a prior Purchase Agreement between BNP and Genentech dated as of August 1, 1995 (the "Prior Purchase Agreement"). NOW, THEREFORE, in consideration of the above recitals and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Definitions. As used herein, the terms "Genentech", "BNP", "Lease", "Property", "Prior Lease", and "Prior Purchase Agreement" shall have the meanings indicated above; terms with initial capitals defined in the Lease and used but not defined herein shall have the meanings assigned to them in the Lease; and the terms listed immediately below shall have the following meanings: (a) Applicable Purchaser. "Applicable Purchaser" means any third party designated by Genentech to purchase the interest of BNP in the Property as provided in Paragraph 2(a) below. (b) Calculation Date. "Calculation Date" means any Advance Date or Base Rental Date under and as defined in the Lease. (c) Deposit Taker. "Deposit Taker" means any of Banque Nationale de Paris or its Affiliates authorized to take deposits and any of the Participants or their Affiliates authorized to take deposits; provided, an Affiliate of any Participant shall not qualify as a Deposit Taker unless such Participant has guaranteed the return of any Restricted Funds (and interest thereon) which BNP may have on deposit with such Affiliate from time to time pursuant to a written guaranty in form and substance approved by Genentech; and, provided further, that any Deposit Taker other than an Affiliate of BNP must agree unconditionally (pursuant to an agreement acceptable to Genentech) to remit all interest earned on Restricted Funds deposited with it to BNP at least once each calendar quarter, so that BNP may itself remit all such interest to Genentech as provided in subparagraph 5(c)(ii) below. (d) Designated Payment Date. "Designated Payment Date" means the earlier of: (1) the last Calculation Date under the Lease (whether the last Calculation Date occurs on the last day of the scheduled Term of the Lease or earlier because of an early termination of the Lease pursuant to Paragraph 2 thereof or otherwise); (2) any Calculation Date after an Event of Default or after a breach by Genentech of any Vacaville Pledge Documents (and the expiration of any cure or notice periods provided therein) has occurred, provided such Calculation Date is designated as such in a written notice given by BNP to Genentech when an Event of Default or such a breach by Genentech is continuing and at least thirty (30) days before such Calculation Date; or (3) December 1, 2003, or if December 1, 2003 is not a Business Day, then the next following Business Day. (e) Fair Market Value. "Fair Market Value" means the fair market value of the Property on or about the Designated Payment Date (calculated under the assumptions, whether or not then accurate, that Genentech has maintained the Property in compliance with all Applicable Laws [including Environmental Laws]; that Genentech has completed all Construction Projects, the construction of which was commenced prior to the Designated Payment Date; that Genentech has repaired and restored the Property after any damage following fire or other casualty; that Genentech has restored the remainder of the Property after any partial taking by eminent domain; that Genentech has completed any contests of and paid any taxes due [other than Excluded Taxes] or other amounts secured by or allegedly secured by a lien against the Property, including any assessment liens, but not including any Prohibited Encumbrances; that no conditions or circumstances on or about the Property [such as the presence of an endangered species] is discovered that will impede development of the Property; that development of the Property will not be hindered or delayed because of the limited availability of utilities or water; that any purchaser paying fair market value for the Property will receive, upon its execution of a Tranferee's Confidentiality Agreement in favor of Genentech, copies of all of Genentech's books and records which are necessary or useful to a future owner's or occupant's use of the Property in the manner permitted by the Lease, including books and records evidencing the testing and validation of the Property for the uses permitted by the Lease; that without undue cost or delay any such purchaser can obtain any necessary permits or licenses needed to use the Property for the purposes permitted by the Lease; and that Genentech has cured any title defects affecting the Property other than Prohibited Encumbrances, all in accordance with the standards and requirements of the Lease as though the Lease were continuing in force) as determined by an independent MAI appraiser selected by BNP, which appraiser must have five (5) years or more experience appraising similar properties in northern California. (f) Genentech's PA Obligations. "Genentech's PA Obligations" means the obligations of Genentech under this Agreement, including, but not limited to, Genentech's obligations for payments required by or in respect of Paragraph 2(a) and for any damages suffered by BNP because of any breach of Paragraph 2. (g) Purchase Price. "Purchase Price" means an amount equal to Stipulated Loss Value outstanding on the Designated Payment Date, plus all costs and expenses (including appraisal costs, withholding taxes (if any) and reasonable Attorneys' Fees, as defined in the Lease) incurred in connection with any sale of the Property by BNP hereunder or in connection with collecting sales proceeds due hereunder. (h) Prohibited Encumbrance. "Prohibited Encumbrance" means any lien or other title defect encumbering the Property that is claimed by BNP itself or lawfully claimed by a third party through or under BNP, including any judgment lien lawfully filed against BNP and including any tax lien assessed because of BNP's failure to pay Excluded Taxes, but excluding the Lease and any lien or other title defect that (i) is a Permitted Encumbrance (as defined in the Lease), regardless of whether claimed by, through or under BNP, (ii) is claimed by, through or under Genentech or any of the original Participants listed in Schedule 1 to the Lease, or (iii) exists because of any breach by Genentech of the Lease, because of anything done or not done by BNP in an effort to satisfy subparagraph 10(b) of the Lease, or because of anything done or not done by BNP at the request of Genentech. (i) Qualified Securities. "Qualified Securities" means unencumbered securities that have an aggregate value of no less than Stipulated Loss Value, that when pledged to secure Genentech's PA Obligations as provided in Paragraph 5 have a maturity of three years or less and that evidence obligations of the United States Government. (j) Remarketing Notice. "Remarketing Notice" shall have the meaning assigned to it in Paragraph 2(b)(1) below. (k) Required Documents. "Required Documents" means the grant deed and other documents that BNP must tender pursuant to Paragraph 3 below. (l) Restricted Funds. "Restricted Funds" shall have the meaning assigned to it in Paragraph 5 below. (m) Shortage Amount. "Shortage Amount" means any amount payable to BNP by Genentech, rather than by the Applicable Purchaser, pursuant to clause 2(a)(ii) below. (n) Transferee's Confidentiality Agreement. "Transferee's Confidentiality Agreement" means a written agreement in such form as Genentech may reasonably require, executed by BNP or a future owner or occupant of the Property, obligating the Person executing it to keep confidential any proprietary information contained in books and records which Genentech delivers to BNP pursuant to Paragraph 2(a)(ii). Although any Transferee's Confidentiality Agreement must be in form reasonably satisfactory to Genentech, it shall not prohibit, or impose a license fee or other charge for, the use by the Person who executes such agreement of any books and records described in Paragraph 2(a)(ii) in connection with such Person's operation of the Property, nor will it prohibit the delivery of such books and records or the disclosure of information set forth therein (1) to any other future owner or occupant of the Property who has itself executed a Transferee's Confidentiality Agreement in favor of Genentech, or (2) required to any governmental authority as a condition to the lawful use of the Property for the purposes permitted in the Lease. As used in this definition, "proprietary information" means Genentech's confidential scientific, technical and/or business information, data or materials of Genentech and its Affiliates (including without limitation Genentech's intellectual property, trade secrets and other confidential information of value to Genentech about, among other things, its manufacturing processes, products, marketing and corporate strategies), but shall not include any information, data or materials which a Person (whether a future owner or occupant of the Property or any other transferee of BNP hereunder) can demonstrate (a) is now or becomes public knowledge other than by acts or omissions of such Person, (b) is lawfully obtained by such Person from source(s) independent of Genentech hereunder (and not to such Person's knowledge in breach of an obligation of confidentiality in favor of Genentech), or (c) was previously known to such Person or is subsequently developed by employees or agents of such Person independently of any confidential information of Genentech delivered pursuant to this Agreement or the Lease. 2. Genentech's Options and Obligations on the Designated Payment Date. (a) Choices. On the Designated Payment Date Genentech shall have the right and the obligation to either: (i) purchase or cause an Applicable Purchaser to purchase BNP's interest in the Property and in Escrowed Proceeds, if any, for a net cash price equal to the Purchase Price; or (ii) cause an Applicable Purchaser who is not an Affiliate of Genentech to purchase BNP's interest in the Property and in Escrowed Proceeds, if any, for a net cash price not less than the lesser of (a) the Fair Market Value of the Property or (b) eighteen percent (18%) of Stipulated Loss Value outstanding immediately prior to the purchase. If, however, the Fair Market Value is less than eighteen percent (18%) of Stipulated Loss Value, BNP may elect to keep the Property and any Escrowed Proceeds rather than sell to the Applicable Purchaser, in which case Genentech shall (1) pay BNP an amount equal to (A) eighty-two percent (82%) of Stipulated Loss Value, less (B) any Escrowed Proceeds then held and to be retained by BNP, and (2) promptly deliver to BNP (upon BNP's execution of a Transferee's Confidentiality Agreement in favor of Genentech) copies of all plans and specifications for the Property prepared in connection with the construction contemplated by the Lease and all other books and records of Genentech which will be necessary or useful to any future owner's or occupant's use of the Property in the manner permitted by the Lease, including books and records evidencing the testing and validation of Property for the uses permitted by the Lease. Unless BNP elects to keep the Property pursuant to the preceding sentence, Genentech must make a supplemental payment to BNP on the Designated Payment Date equal to the excess (if any) of the Purchase Price over the net cash price actually paid to BNP on the Designated Payment Date by the Applicable Purchaser for BNP's interest in the Property and in Escrowed Proceeds, if any. However, provided no Event of Default has occurred and is continuing under the Lease, and provided further that neither Genentech nor any Applicable Purchaser has failed to pay any amount required to be paid by this Agreement on the date such amount first became due, any supplemental payment required by the preceding sentence shall not exceed eighty-two percent (82%) of Stipulated Loss Value on the Designated Payment Date. Any supplemental payment payable to BNP by Genentech, rather than by the Applicable Purchaser, pursuant to this clause (ii) is hereinafter referred to as the "Shortage Amount." If the net cash price actually paid by the Applicable Purchaser to BNP exceeds the Purchase Price and all other sums that are then due from Genentech to BNP, Genentech shall be entitled to such excess. (b) Election by Genentech. Genentech shall have the right to elect whether it will satisfy the obligations set out in clause (i) or (ii) of the preceding Paragraph 2(a); provided, however, that the following conditions are satisfied: (1) To give BNP the opportunity to have the Fair Market Value determined by an appraiser before the Designated Payment Date, Genentech must, unless Genentech agrees that Fair Market Value will not be less than eighteen percent (18%) of Stipulated Loss Value on the Designated Payment Date, provide BNP with a Remarketing Notice. "Remarketing Notice" means a notice given by Genentech to BNP (and to each of the Participants) no earlier than two hundred seventy (270) days before the Designated Payment Date and no later than one hundred and eighty (180) days before the Designated Payment Date, specifying that Genentech does not agree that the Fair Market Value is equal to or greater than eighteen percent (18%) of the Stipulated Loss Value. No Remarketing Notice will be required unless Genentech does not agree that Fair Market Value will equal or exceed eighteen percent (18%) of Stipulated Loss Value on the Designated Payment Date. But if for any reason (including but not limited to any acceleration of the Designated Payment Date pursuant to clause (2) of the definition of Designated Payment Date above) Genentech fails to provide a Remarketing Notice within the time periods specified in the definition of Remarketing Notice above, Fair Market Value shall, for purposes of this Agreement, be deemed to be no less than eighteen percent (18%) of Stipulated Loss Value on the Designated Payment Date. (2) To give BNP the opportunity to prepare the Required Documents before the Designated Payment Date, Genentech must, if it is to satisfy the obligations set forth in Paragraph 2(a) by causing an Applicable Purchaser to purchase Landlord's interest in the Leased Property, irrevocably specify the Applicable Purchaser in notice to BNP given at least seven (7) days prior to the Designated Payment Date. If for any reason Genentech fails to so specify an Applicable Purchaser, Genentech shall be deemed to have irrevocably elected to satisfy the obligations set forth in clause (i) of Paragraph 2(a) by itself purchasing the Landlord's interest in the Leased Property. (c) Termination of Genentech's Option To Purchase. Without limiting BNP's right to require Genentech to satisfy the obligations imposed by Paragraph 2(a), Genentech shall have no further option hereunder to purchase the Property if either: (1) Genentech shall have elected to satisfy its obligations under clause (ii) of Paragraph 2(a) on a Designated Payment Date and BNP shall have elected to keep the Property on such Designated Payment Date in accordance with clause (ii) of Paragraph 2(a); or (2) Genentech shall have failed on a Designated Payment Date to make or cause to be made all payments to BNP required by this Agreement or by the Lease and such failure shall have continued beyond the thirty (30) day period for tender specified in the next sentence. If BNP does not receive all payments due under the Lease and all payments required hereunder on a Designated Payment Date, Genentech may nonetheless tender to BNP the full Purchase Price and all amounts then due under the Lease, together with interest on the total Purchase Price computed at the Default Rate from the Designated Payment Date to the date of tender, and if presented with such a tender within thirty (30) days after the applicable Designated Payment Date, BNP must accept it and promptly thereafter deliver any Escrowed Proceeds and a deed and all other Required Documents listed in Paragraph 3. (d) Payment to BNP. All amounts payable under the preceding Paragraphs 2(a) or 2(c) by Genentech and, if applicable, by the Applicable Purchaser must be paid directly to BNP, and no payment to any other party shall be effective for the purposes of this Agreement. In addition to the payments required under Paragraph 2(a) hereunder, on the Designated Payment Date Genentech must pay all amounts then due to BNP under the Lease. BNP will remit any excess amounts due Genentech pursuant to the last sentence of clause (ii) of Paragraph 2(a) promptly after BNP's receipt of the same. (e) Effect of Options on Subsequent Title Encumbrances. It is the intent of BNP and Genentech that any conveyance of the Property to Genentech or any Applicable Purchaser pursuant to this Agreement shall cut off and terminate any interest in the Property claimed by, through or under BNP, including the Participants (but not any unsatisfied obligations of Genentech to BNP under the Lease, the Environmental Indemnity Agreement or this Agreement), including but not limited to any Prohibited Encumbrances and any leasehold or other interests conveyed by BNP in the ordinary course of BNP's business. Anyone accepting or taking any interest in the Property by or through BNP after the date of this Agreement without the express prior written consent of Genentech and with actual or constructive notice of this Agreement shall acquire such interest subject to the rights and options granted Genentech hereby. Further, Genentech and any Applicable Purchaser shall be entitled to pay any payment required by this Agreement for the purchase of the Property directly to BNP notwithstanding any prior conveyance or assignment by BNP, voluntary or otherwise, of any right or interest in this Agreement or the Property, and neither Genentech nor any Applicable Purchaser shall be responsible for the proper distribution or application of any such payments by BNP. 3. Terms of Conveyance Upon Purchase. Immediately after receipt of all payments to BNP required pursuant to the preceding Paragraph 2, BNP must, unless it is to keep the Property as permitted by Paragraph 2(a)(ii), deliver Escrowed Proceeds, if any, and convey all of its right, title and interest in the Property by grant deed to Genentech or the Applicable Purchaser, as the case may be, subject only to the Permitted Encumbrances (as defined in the Lease) and any other encumbrances that do not constitute Prohibited Encumbrances. However, such conveyance shall not include the right to receive any payment under the Lease then due BNP or that may become due thereafter because of any expense or liability incurred by BNP resulting in whole or in part from events or circumstances occurring before such conveyance. All costs of such purchase and conveyance of every kind whatsoever, both foreseen and unforeseen, shall be the responsibility of the purchaser, and the form of grant deed used to accomplish such conveyance shall be substantially in the form attached as Exhibit B. With such grant deed, BNP shall also tender to Genentech or the Applicable Purchaser, as the case may be, the following, each fully executed and, where appropriate, acknowledged on BNP's behalf by an officer of BNP: (1) a Preliminary Change of Ownership Report in the form attached as Exhibit C, (2) a Bill of Sale and Assignment of Contract Rights and Intangible Assets in the form attached as Exhibit D, (3) an Acknowledgment of Disclaimer of Representations and Warranties, in the form attached as Exhibit E, which Genentech or the Applicable Purchaser must execute and return to BNP, (5) a Documentary Transfer Tax Request in the form attached as Exhibit F, (6) a Secretary's Certificate in the form attached as Exhibit G, (7) a letter to the title insurance company insuring title to the Property in the form attached as Exhibit H, and (8) a certificate concerning tax withholding in the form attached as Exhibit I. 4. Survival of Genentech's Obligations. (a) Status of this Agreement. Except as expressly provided herein, this Agreement shall not terminate, nor shall Genentech have any right to terminate this Agreement, nor shall Genentech be entitled to any reduction of the Purchase Price hereunder, nor shall the obligations of Genentech to BNP under Paragraph 2 be affected by reason of (i) any damage to or the destruction of all or any part of the Property from whatever cause, (ii) the taking of or damage to the Property or any portion thereof under the power of eminent domain or otherwise for any reason, (iii) the prohibition, limitation or restriction of Genentech's use of all or any portion of the Property or any interference with such use by governmental action or otherwise, (iv) any eviction of Genentech or any party claiming under Genentech by paramount title or otherwise, (v) Genentech's prior acquisition or ownership of any interest in the Property, (vi) any default on the part of BNP under this Agreement, the Lease or any other agreement to which BNP is a party, or (vii) any other cause, whether similar or dissimilar to the foregoing, any existing or future law to the contrary notwithstanding. It is the intention of the parties hereto that the obligations of Genentech to make payment to and, if applicable, to cause the Applicable Purchaser to make payment to BNP under Paragraph 2 shall be separate and independent covenants and agreements from BNP's obligation under Paragraph 3 to convey the Property pursuant to this Agreement; provided, however, that nothing in this subparagraph shall excuse BNP from its obligation to tender a grant deed and the other Required Documents in substantially the form attached hereto as exhibits as required by Paragraph 3 upon the tender by Genentech and/or the Applicable Purchaser of such payments and of the other documents to be executed in favor of BNP at the closing of the sale. Accordingly, the Purchase Price and the Shortage Amount, as the case may be under Paragraph 2, shall continue to be payable in all events, and the obligations of Genentech hereunder shall continue unaffected. If for any reason BNP fails to tender the Required Documents as required by Paragraph 3, BNP may cure such refusal at any time before thirty (30) days after receipt of a written demand for such cure from Genentech. (b) Remedies Under the Lease and the Environmental Indemnity Agreement. No repossession of or re-entering upon the Property or exercise of any other remedies available under the Lease or the Environmental Indemnity Agreement shall relieve Genentech of its liabilities and obligations hereunder, all of which shall survive the exercise of remedies under the Lease and Environmental Indemnity Agreement. Genentech acknowledges that the consideration for this Agreement is separate and independent of the consideration for the Lease and the Environmental Indemnity Agreement, and Genentech's obligations hereunder shall not be affected or impaired by any event or circumstance that would excuse Genentech from performance of its obligations under the Lease or the Environmental Indemnity Agreement. 5. Security for Genentech's PA Obligations. (a) Covenant to Provide Security. To secure Genentech's PA Obligations, Genentech must on or before December 1, 2000, unless BNP's interest in the Property shall already have been sold to Genentech or an Applicable Purchaser pursuant to Paragraph 2(a) and Genentech shall have already paid to BNP all amounts required in connection with the sale, or unless BNP and all Participants shall have waived in writing the requirements of this Paragraph 5 (it being understood that any of BNP or the Participants may decline to provide such a waiver in its sole and absolute discretion), either: (1) grant to BNP and thereafter maintain in favor of BNP, as hereinafter provided, a first priority perfected security interest from the date of the pledge thereof in Qualified Securities and the proceeds thereof; or (2) deliver immediately available funds to BNP in an amount equal to Stipulated Loss Value ("Restricted Funds"), which BNP shall be entitled to hold as security and apply as hereinafter provided. (b) Conditions to the Use of Qualified Securities. If Genentech chooses to grant and maintain a first priority perfected security interest in Qualified Securities in lieu of delivering Restricted Funds to BNP or as a replacement for previously provided Restricted Funds, Genentech must satisfy the following conditions: (i) No later than thirty days before the expected date of the pledge of Qualified Securities, Genentech must have delivered a fully executed pledge agreement, financing statements and other documents (the "Vacaville Pledge Documents"), all in form and substance satisfactory to Genentech and to each of BNP and the Participants and their respective counsel, which will create, evidence and perfect BNP's security interest in the Qualified Securities. The Vacaville Pledge Documents may, among other things, establish (and evidence Genentech's pledge to BNP of) one or more custodial accounts, in which the Qualified Securities can be held, and appoint a custodian satisfactory to Genentech, BNP and the Participants to maintain such accounts. The Vacaville Pledge Documents will also provide that all pledged securities shall either be newly acquired by BNP or such a custodian with funds provided by Genentech (and thus not subject to possible prior encumbrances) or be covered by certificates provided to BNP by the custodian or by others satisfactory to BNP which certify facts necessary to establish that the securities are unencumbered except by the pledge to BNP. The Vacaville Pledge Documents will also provide for procedures to allow the liquidation of Qualified Securities immediately prior to the Designated Payment Date at the request of Genentech as needed to provide funds for payments required of Genentech on the Designated Payment Date, provided that such procedures can be established without jeopardizing the perfection or priority of BNP's security interest. The Vacaville Pledge Documents will also provide that Qualified Securities (or proceeds thereof) remaining after Genentech's PA Obligations are satisfied in full shall be promptly returned to Genentech, free from any security interest or lien under the Vacaville Pledge Documents. To facilitate Genentech's satisfaction of this condition, BNP will cause its counsel to prepare and submit drafts of the Vacaville Pledge Documents to Genentech and to the Participants, if Genentech requests such drafts from BNP in a written notice given to BNP no later than ninety days prior to the expected date of the pledge of Qualified Securities, and if Genentech unconditionally confirms in such notice that Genentech will pay BNP's reasonable legal fees and other costs of preparing the drafts and otherwise responding to the request. Such drafts are expected to be substantially similar to the Pledge Agreement, Custodial Agreement and other documents executed by Genentech in favor of BNP to be effective as of November 19, 1993 (the "Building 7 Pledge Documents") in connection with another Purchase Agreement between BNP and Genentech dated the same date; however, many of the Participants have never seen or approved of the Building 7 Pledge Documents, and thus Participants may require substantial changes to the Building 7 Pledge Documents before approving the same as the Vacaville Pledge Documents hereunder. Further, BNP itself may require substantial changes, thereby rendering the Vacaville Pledge Documents less favorable to Genentech than the Building 7 Pledge Documents, because of changes in the laws or regulations governing such documents or the generally accepted interpretations thereof, because of changes in Genentech's financial condition, because of the greater dollar amount of the obligations to be secured under the Vacaville Pledge Documents as compared to obligations secured by the Building 7 Pledge Documents, because of the designation of another custodian thereunder or because of other factors. (ii) No later than five days prior to the expected date of the pledge of Qualified Securities, Genentech must have delivered to BNP or a custodian appointed under the Vacaville Pledge Documents (A) unencumbered funds with which BNP or such custodian can purchase the Qualified Securities to be pledged to BNP, or (B) Qualified Securities to be pledged under the Vacaville Pledge Documents together with such certificates and other documents as are required by the Vacaville Pledge Documents to establish that such securities are subject to no prior encumbrances. (iii) No later than the effective date of the pledge of Qualified Securities, Genentech must have provided, at its expense, one or more written legal opinions, in form and substance approved by BNP and the Participants before then, opining that the Vacaville Pledge Documents are duly and authorized and executed by Genentech and other parties thereto (other than BNP or any custodian who is an Affiliate of BNP, a Participant or an Affiliate of a Participant), that the Vacaville Pledge Documents are enforceable against Genentech, and that pursuant to the Vacaville Pledge Documents BNP has a valid, first priority, perfected security interest in Qualified Securities to secure Genentech's PA Obligations. Such opinion or opinions must also cover such other matters as BNP or any Participant deems to be customary in such opinions, must be addressed to BNP and the Participants and must be issued by one or more law firms reasonably acceptable to BNP and the Participants with nationally recognized expertise in the subject matter thereof. To meet deadlines of Genentech for the execution of this Agreement, and to save legal fees payable by Genentech in connection with the execution of this Agreement, Genentech and BNP are postponing the negotiation and delivery of the Vacaville Pledge Documents and related legal opinions by the foregoing provisions. In doing so they recognize that the pledge of Qualified Securities is not to become effective until years after the date of this Agreement and that the law governing the pledge could change between now and the time the pledge is to become effective. Genentech and BNP do not, however, want to submit themselves to a risk of liability or loss of rights hereunder for being judged unreasonable with respect to the foregoing conditions. Accordingly, both Genentech and BNP hereby disclaim any obligation express or implied to be reasonable in negotiating the Vacaville Pledge Documents or the requirements for related legal opinions, and in lieu of any such obligation to be reasonable they are providing herein for the deposit of Restricted Funds as an alternative to the pledge of Qualified Securities. If for any reason whatsoever (including, but not limited to, the failure of Genentech and BNP to agree upon the Vacaville Pledge Documents or the refusal of any Participant to approve any Vacaville Pledge Documents negotiated by BNP and Genentech) Genentech does not satisfy the conditions listed above in this subparagraph (b) prior to the deadlines specified above, then Genentech shall have the right and the obligation to deliver the Restricted Funds rather than to pledge Qualified Securities. (c) Term and Conditions Relating to Restricted Funds. Any Restricted Funds which Genentech does deliver will be held by BNP in accordance with and governed by the following provisions: (i) The Restricted Funds shall not be considered an advance payment of amounts due under this Agreement or a measure of BNP's damages should a breach of this Agreement by Genentech occur. (ii) So long as Restricted Funds are in BNP's possession, BNP shall keep the Restricted Funds deposited in one or more accounts (as BNP shall from time to time determine to be appropriate in its sole discretion) maintained by a Deposit Taker. Accounts into which Restricted Funds are deposited shall be interest bearing, but BNP does not guarantee a rate of interest or other earnings on such accounts, and BNP shall not be required to place Restricted Funds into any account or other investment in which BNP cannot obtain a perfected, first priority security interest. Further, if Restricted Funds or any interest thereon are lost because of any failure of a Deposit Taker to return the same, whether caused by the insolvency of such Deposit Taker or otherwise, BNP shall be responsible for such loss only if the Deposit Taker is an Affiliate of BNP. However, at the time BNP deposits Restricted Funds into any account maintained by a Deposit Taker that is not an Affiliate of BNP: (1) such Deposit Taker must either be approved by Genentech or be rated no lower than A or the equivalent thereof by Standard and Poor's Corporation or A-2 or the equivalent thereof by Moody's Investor Service, Inc; and (2) Genentech must have been provided with and approved (a) the agreement concerning such Deposit Taker's obligation to periodically remit interest to BNP as described in the definition of Deposit Taker above, and (b) in the case of any Deposit Taker that is an Affiliate of a Participant, the written guaranty of such Participant described in the definition of Deposit Taker above. The interest accruing on the accounts into which BNP deposits Restricted Funds from time to time shall be reported by Genentech as Genentech's income for income tax purposes. All interest earned on the Restricted Funds will be added to and made a part of the Restricted Funds, but prior to any Designated Payment Date, BNP shall remit all such interest to Genentech no less often than once during each calendar quarter, whereupon such interest shall be deemed released from the security interest hereinafter granted. Except for interest remitted to Genentech by BNP pursuant to the preceding sentence, Genentech shall have no right to withdraw or to recover the Restricted Funds or to assign or encumber any interest Genentech may have in the Restricted Funds until all payments to BNP required by this Agreement are received by BNP. (iii) As security for Genentech's PA Obligations Genentech hereby grants to BNP a security interest, a lien and a right of offset, each of which shall be in addition to BNP's rights at common law, in and against all Restricted Funds, all investments made with Restricted Funds, all interest and other earnings thereon (subject to the provisions herein requiring periodic remittance of interest earned on Restricted Funds to Genentech), and all deposit accounts and/or security accounts into which such Restricted Funds, investments, interest and other earnings are held at any time and all proceeds of the foregoing. Genentech hereby authorizes and directs all Deposit Takers to allow BNP to offset the Restricted Funds against any amount past due under this Agreement and to reflect on their books and records the pledge to BNP of all Restricted Funds they may hold on deposit from time to time. These provisions are self-operative. No further instrument is required to effect the security interest, lien and right of offset in and against Restricted Funds as provided above. In confirmation thereof, however, Genentech agrees to execute, acknowledge, and deliver promptly any certificate, financing statement or other document requested by BNP as necessary or helpful to evidence, perfect or preserve the security interest, lien and right of set-off. Genentech also agrees to provide to BNP contemporaneously with the delivery of any Restricted Funds one or more written legal opinions in form and substance approved by BNP and the Participants before then, opining that pursuant to this Agreement (or other documents described in the preceding sentence) BNP has a valid, first priority, perfected security interest in the Restricted Funds to secure Genentech's PA Obligations. Such opinion or opinions must also be addressed to BNP and the Participants and must be issued by one or more law firms reasonably acceptable to BNP and the Participants with nationally recognized expertise in the subject matter thereof. (iv) Any Restricted Funds (including any interest accrued on Restricted Funds that BNP has not yet remitted to Genentech as set forth herein) not applied to satisfy Genentech's PA Obligations shall be promptly returned to Genentech by BNP, free from any security interest or lien granted pursuant to this Agreement, after (but only after) Genentech's PA Obligations (including but not limited to payments of interest on past due amounts owing to BNP which may accrue as provided herein) are satisfied in full; provided, however: (A) this provision shall not excuse BNP from its obligation to remit interest earned on Restricted Funds as provided above; (B) if subsequent to Genentech's delivery of Restricted Funds Genentech and BNP do agree upon Vacaville Pledge Documents and upon other arrangements for Genentech's pledge of Qualified Securities in lieu of the deposit of Restricted Funds, all in form and substance satisfactory to Genentech, BNP and the Participants in their sole and absolute discretion, then the Restricted Funds (including any interest accrued on Restricted Funds that BNP has not yet remitted to Genentech) will be promptly returned to Genentech when such pledge becomes effective (or, if directed by Genentech in any notice delivered to BNP at least 3 days prior to date when such pledge becomes effective, BNP shall on the date the pledge is to become effective withdraw the Restricted Funds from the accounts in which they are deposited and use the same to acquire the Qualified Securities which will be so pledged); and (C) if directed by Genentech to do so in any notice delivered to BNP at least 3 days prior to any Designated Payment Date, BNP shall on the Designated Payment Date withdraw the Restricted Funds from the accounts in which they are deposited and apply the same against payments due to BNP hereunder on such Designated Payment Date. (v) Nothing in this Agreement shall authorize any party holding any Restricted Funds (other than BNP and its permitted assigns under this Agreement) to offset the Restricted Funds against any obligation of Genentech. BNP may require as a condition to placing any Restricted Funds with a Deposit Taker that such Deposit Taker waive any rights it may have to offset the Restricted Funds against any obligation owed to it by Genentech or others, that such Deposit Taker note BNP's rights hereunder on such Deposit Taker's books with respect to the accounts it maintains for the Restricted Funds and that such Deposit Taker agree to such other requirements as BNP then deems appropriate to preserve the Restricted Funds as security for Genentech's PA Obligations. (vi) If by an assignment permitted by this Agreement BNP assigns its interest in the Property prior to any sale thereof pursuant to this Agreement, BNP may also transfer its interest in the Restricted Funds to the assignee and thereafter BNP will have no liability for the return or proper application of the Restricted Funds, it being agreed that Genentech shall look solely to the new owner of the Property for the return or proper application of the same. 6. Remedies Cumulative. No right or remedy herein conferred upon or reserved to BNP is intended to be exclusive of any other right or remedy BNP has with respect to the Property, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity or by statute. In addition to other remedies available under this Agreement, either party shall be entitled, to the extent permitted by applicable law, to a decree compelling performance of any of the other party's agreements hereunder. 7. No Implied Waiver. The failure of either party to this Agreement to insist at any time upon the strict performance of any covenant or agreement of the other party or to exercise any remedy contained in this Agreement shall not be construed as a waiver or a relinquishment thereof for the future. The waiver by either party of or redress for any violation of any term, covenant, agreement or condition contained in this Agreement shall not prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. No express waiver by either party shall affect any condition other than the one specified in such waiver and that one only for the time and in the manner specifically stated. A receipt by BNP of any payment hereunder with knowledge of the breach of this Agreement shall not be deemed a waiver of such breach, and no waiver by either party of any provision of this Agreement shall be deemed to have been made unless expressed in writing and signed by the waiving party. 8. Attorneys' Fees and Legal Expenses. If either party commences any legal action or other proceeding to enforce any of the terms of this Agreement or the documents and agreements referred to herein, or because of any breach by the other party or dispute hereunder or thereunder, the successful or prevailing party, shall be entitled to recover from the nonprevailing party all Attorneys' Fees incurred in connection therewith, whether or not such controversy, claim or dispute is prosecuted to a final judgment. Any such Attorneys' Fees incurred by either party in enforcing a judgment in its favor under this Agreement shall be recoverable separately from such judgment, and the obligation for such Attorneys' Fees is intended to be severable from other provisions of this Agreement and not to be merged into any such judgment. 9. Estoppel Certificate. Genentech will, upon not less than twenty (20) days' prior written request by BNP, execute, acknowledge and deliver to the requesting party a written statement certifying that this Agreement is unmodified and in full effect (or, if there have been modifications, that this Agreement is in full effect as modified, and setting forth such modification) and either stating that no default exists hereunder or specifying each such default of which the signer may have knowledge. Any such statement may be relied upon by any Participant or prospective purchaser or assignee of BNP with respect to the Property. Genentech shall be required to provide such a certificate no more frequently than once in any six month period; provided, however, that if BNP determines that there is a significant business reason for requiring a current certificate, including, without limitation, the need to provide such a certificate to a prospective purchaser or assignee, Genentech shall provide a certificate upon BNP's request whether or not Genentech had provided a certificate within the prior six month period. 10. Notices. Each provision of this Agreement referring to the sending, mailing or delivery of any notice or referring to the making of any payment to BNP, shall be deemed to be complied with when and if the following steps are taken: (a) All payments required to be made by Genentech or the Applicable Purchaser to BNP hereunder shall be paid to BNP in immediately available funds in accordance with the payment instructions set forth in the Lease or as BNP may otherwise direct by written notice sent in accordance herewith. Time is of the essence as to all payments required hereunder and other obligations of Genentech. All payments required to be made by BNP to Genentech pursuant to the last sentence of clause (ii) of Paragraph 2(a) shall be paid to Genentech in immediately available funds at the address of Genentech set forth below or as Genentech may otherwise direct by written notice sent in accordance herewith. (b) All notices and other communications to be made hereunder to the parties hereto shall be in writing (at the addresses set forth below) and shall be given by any of the following means: (1) personal service; (2) electronic communication, whether by telex, telegram or telecopying (if confirmed in writing sent by United States first class mail, return receipt requested); or (3) registered or certified first class mail, return receipt requested. Such addresses may be changed by notice to the other parties given in the same manner as provided above. Any notice or other communication sent pursuant to clause (1) or (2) shall be deemed received upon such personal service or upon dispatch by electronic means except for telecopies, and, if telecopied or sent pursuant to clause (3), shall be deemed received five (5) days following deposit in the mail. Until changed, addresses for notices are as follows: Address of BNP: BNP Leasing Corporation 717 North Harwood Street Suite 2630 Dallas, Texas 75201 Attention: Lloyd Cox Telecopy: (214) 969-0060 With a copy to: Banque Nationale de Paris, San Francisco 180 Montgomery Street San Francisco, California 94104 Attention: Jennifer Cho Telecopy: (415) 296-8954 And with a copy to: Clint Shouse Thompson & Knight, P.C. 1700 Pacific Avenue Suite 3300 Dallas, Texas 75201 Telecopy: (214) 969-1550 Address of Genentech: Genentech, Inc. Attn: Corporate Secretary 460 Point San Bruno Boulevard South San Francisco, California 94080 Telecopy: (415) 952-9881 With a copy to: Morrison & Foerster 555 West Fifth Street Suite 3500 Los Angeles, California 90013-1024 Attention: Tom Fileti Telecopy: (213) 892-5454 11. Severability. Each and every covenant and agreement of Genentech contained in this Agreement is, and shall be construed to be, a separate and independent covenant and agreement. If any term or provision of this Agreement or the application thereof to any person or circumstances shall to any extent be invalid and unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby. Further, the obligations of Genentech hereunder, to the maximum extent possible, shall be deemed to be separate, independent and in addition to, not in lieu of, the obligations of Genentech under the Lease. In the event of any inconsistency between the terms of this Agreement and the terms and provisions of the Lease, the terms and provisions of this Agreement shall control. 12. Entire Agreement. This Agreement and the instruments referred to herein supersede any prior negotiations and agreements between the parties concerning the Property, including the Prior Lease and the Prior Purchase Agreement, but not including the Environmental Indemnity Agreement, and no amendment or modification of this Agreement shall be binding or valid unless expressed in a writing executed by both parties hereto. Genentech ratifies and confirms the Environmental Indemnity Agreement as a separate and independent continuing agreement. 13. Paragraph Headings. The paragraph headings contained in this Agreement are for convenience only and shall in no way enlarge or limit the scope or meaning of the various and several paragraphs hereof. 14. Gender and Number. Within this Agreement, words of any gender shall be held and construed to include any other gender and words in the singular number shall be held and construed to include the plural, unless the context otherwise requires. 15. GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO HAVE BEEN MADE UNDER AND SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO CONFLICTS OR CHOICE OF LAWS. 16. Successors and Assigns. The terms, provisions, covenants and conditions hereof shall be binding upon Genentech and BNP and their respective permitted successors and assigns and shall inure to the benefit of Genentech and BNP and all permitted transferees, mortgagees, successors and assignees of Genentech and BNP with respect to the Property; provided, that the rights of BNP hereunder shall not pass to Genentech or any Applicable Purchaser or any subsequent owner claiming through them. Prior to the Designated Payment Date BNP may transfer, assign and convey, in whole or in part, the Property and any and all of its rights under this Agreement (subject to the terms of this Agreement) by any conveyance that constitutes a Permitted Transfer, but not otherwise. If BNP sells or otherwise transfers the Property and assigns its rights under this Agreement and the Lease pursuant to a Permitted Transfer, and if BNP's successor in interest confirms its liability for the obligations imposed upon BNP by this Agreement and the Lease on and subject to the express terms set out herein and therein, then BNP shall thereby be released from any further obligations under this Agreement and the Lease, and Genentech agrees to look solely to each successor in interest of BNP for performance of such obligations. 17. WAIVER OF JURY TRIAL. BNP AND GENENTECH EACH HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THE LEASE, THIS AGREEMENT OR ANY OTHER DOCUMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION AND THE RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation, contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Genentech and BNP each acknowledge that this waiver is a material inducement to enter into a business relationship, that each has already relied on the waiver in entering into this Agreement and the other documents referred to herein, and that each will continue to rely on the waiver in their related future dealings. Genentech and BNP each further warrant and represent that it has reviewed this waiver with its legal counsel, and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LEASE, THIS AGREEMENT OR THE ENVIRONMENTAL INDEMNITY AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "BNP" BNP LEASING CORPORATION, a Delaware corporation By: Name: Title: "Genentech" GENENTECH, INC., a Delaware corporation By: Name: Title: Exhibit A LEGAL DESCRIPTION ALL THAT REAL PROPERTY SITUATED IN THE CITY OF VACAVILLE, COUNTY OF SOLANO, STATE OF CALIFORNIA, DESCRIBED AS FOLLOWS: PARCEL ONE: PARCEL "4D", AS SHOWN ON THAT CERTAIN MAP ENTITLED: "PARCEL MAP, BEING A RESUBDIVISION OF PARCEL 4, AS SHOWN IN BOOK 38 OF PARCEL MAPS, PAGE 35, PARCELS 14-22, PORTIONS OF AKERLY DRIVE AND BARCAR DRIVE AS SHOWN IN BOOK 39 OF MAPS, PAGE 74, AND PORTIONS OF LANDS DESCRIBED IN DEED RECORDED MAY 13, 1982, PAGE 29409, AS INSTRUMENT NO. 17086 IN THE OFFICE OF THE COUNTY RECORDER OF SOLANO COUNTY, STATE OF CALIFORNIA," FILED JULY 31, 1995 IN THE OFFICE OF THE COUNTY RECORDER OF SOLANO COUNTY, IN BOOK 39 OF PARCEL MAPS, PAGE 37. EXCEPTING THEREFROM AN UNDIVIDED ONE-HALF (1/2) INTEREST IN ALL MINERALS, MINERAL DEPOSITS, OIL, GAS AND OTHER HYDROCARBON SUBSTANCES OF EVERY KIND AND CHARACTER BELOW 500 FEET FROM THE SURFACE OF SAID LAND, BUT WITHOUT, HOWEVER, THE RIGHT OF SURFACE ENTRY, AS EXCEPTED AND RESERVED IN DEED FROM MARGARET JOSEPHINE SHELLHAMMER TO GERTRUDE M. EAMES, DATED JUNE 8, 1956, RECORDED JUNE 12, 1956 IN BOOK 833 OF OFFICIAL RECORDS, PAGE 480 AND IN DEED FROM MARGARET JOSEPHINE SHELLHAMMER TO BARBARA C. SANTOS DATED DECEMBER 28, 1962, RECORDED JANUARY 4, 1963 IN BOOK 1178 OF OFFICIAL RECORDS, PAGE 520, AND IN DEED FROM MARGARET JOSEPHINE SHELLHAMMER TO ROBERTA SANTOS, DATED DECEMBER 28, 1962, RECORDED JANUARY 4, 1963 IN BOOK 1178 OF OFFICIAL RECORDS, PAGE 529, SOLANO COUNTY RECORDS. ALSO EXCEPTING AN UNDIVIDED ONE-HALF (1/2) INTEREST IN ALL OIL, GAS AND OTHER HYDROCARBONS; NON-HYDROCARBON GASSES OR GASEOUS SUBSTANCES; ALL OTHER MINERALS OF WHATSOEVER NATURE, WITHOUT REGARD TO SIMILARITY TO THE ABOVE-MENTIONED SUBSTANCES; AND ALL SUBSTANCES THAT MAY BE PRODUCED THEREWITH FROM SAID REAL PROPERTY AS RESERVED IN THE DEED FROM CHEVRON U.S.A. INC., A CORPORATION, RECORDED APRIL 1, 1987 IN BOOK 1987 PAGE 42125 OFFICIAL RECORDS AS INSTRUMENT NO. 21698. ALSO EXCEPTING AN UNDIVIDED ONE-HALF (1/2) INTEREST IN ALL GEOTHERMAL RESOURCES, EMBRACING: INDIGENOUS STEAM, HOT WATER AND HOT BRINES; STEAM AND OTHER GASSES, HOT WATER AND HOT BRINES RESULTING FROM WATER, GAS OR OTHER FLUIDS ARTIFICIALLY INTRODUCED INTO SUBSURFACE FORMATIONS; HEAT OR OTHER ASSOCIATED ENERGY FOUND BENEATH THE SURFACE OF THE EARTH; AND BYPRODUCTS OF ANY OF THE FOREGOING SUCH AS MINERALS (EXCLUSIVE OF OIL OR HYDROCARBON GAS THAT CAN BE SEPARATELY PRODUCED) WHICH ARE FOUND IN SOLUTION OR ASSOCIATION WITH OR DERIVED FROM ANY OF THE FOREGOING, AS RESERVED IN THE DEED FROM CHEVRON U.S.A. INC., A CORPORATION, RECORDED APRIL 1, 1987 IN BOOK 1987 PAGE 42125 OFFICIAL RECORDS AS INSTRUMENT NO. 21698. ALSO THE SOLE AND EXCLUSIVE RIGHT FROM TIME TO TIME TO BORE OR DRILL AND MAINTAIN WELLS AND OTHER WORKS INTO AND THROUGH SAID REAL PROPERTY AND ADJOINING STREETS, ROADS AND HIGHWAYS BELOW A DEPTH OF FIVE HUNDRED (500') FEET FROM THE SURFACE THEREOF FOR THE PURPOSE OF EXPLORING FOR AND PRODUCING ENERGY RESOURCES; THE RIGHT TO PRODUCE, INJECT, STORE AND REMOVE FROM AND THROUGH SAID BORES, WELLS OR WORKS, OIL, GAS, WATER AND OTHER SUBSTANCES OF WHATEVER NATURE, INCLUDING THE RIGHT TO PERFORM BELOW SAID DEPTH ANY AND ALL OPERATIONS DEEMED BY GRANTOR NECESSARY OR CONVENIENT FOR THE EXERCISE OF SUCH RIGHTS, AS RESERVED IN THE DEED FROM CHEVRON U.S.A. INC., A CORPORATION, RECORDED APRIL 1, 1987 IN BOOK 1987 PAGE 42125 OFFICIAL RECORDS AS INSTRUMENT NO. 21698. ALL RIGHTS EXCEPTED AND RESERVED TO CHEVRON DO NOT INCLUDE AND DO NOT EXCEPT OR RESERVE TO CHEVRON ANY RIGHT OF CHEVRON TO USE THE SURFACE OF SAID PROPERTY OR THE FIRST FIVE HUNDRED (500') FEET BELOW SAID SURFACE OR TO CONDUCT ANY OPERATIONS THEREON OR THEREIN. APN: PORTION 133-080-290 PORTION 133-120-300 133-190-030 THRU 100 133-190-130 PARCEL TWO: THOSE CERTAIN EASEMENTS GRANTED IN ARTICLE 8 OF THE DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS FOR VACA VALLEY BUSINESS PARK, DATED NOVEMBER 10, 1993, EXECUTED BY CHEVRON LAND AND DEVELOPMENT COMPANY, A DELAWARE CORPORATION, RECORDED NOVEMBER 12, 1993 AS INSTRUMENT NO. 1993-00107441 IN THE SOLANO COUNTY RECORDS, AS AMENDED BY A FIRST AMENDMENT THERETO, RECORDED NOVEMBER 12, 1993 AS INSTRUMENT NO. 1993-00107445 IN THE SOLANO COUNTY RECORDS, AS FURTHER AMENDED BY A SECOND AMENDMENT THERETO, RECORDED SEPTEMBER 13, 1995 AS INSTRUMENT NO. 1995-00056033 IN THE SOLANO COUNTY RECORDS AND AS FURTHER AMENDED BY A THIRD AMENDMENT THERETO, RECORDED SEPTEMBER 13, 1995 AS INSTRUMENT NO. 1995-00056034 IN THE SOLANO COUNTY RECORDS Exhibit B CORPORATION GRANT DEED RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: NAME: Genentech, Inc. ADDRESS: 460 Point San Bruno Boulevard ATTN: Corporate Secretary CITY: South San Francisco STATE: California Zip: 94080 MAIL TAX STATEMENTS TO: NAME: Genentech, Inc. ADDRESS: 460 Point San Bruno Boulevard ATTN: Corporate Secretary CITY: South San Francisco STATE: California ZIP: 94080 CORPORATION GRANT DEED FOR A VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, BNP LEASING CORPORATION, a Delaware corporation, hereby grants to GENENTECH, INC., a Delaware corporation, all of the land situated in the County of Solano, State of California, described on Annex A attached hereto and hereby made a part hereof, together with the improvements currently located on such land and any easements, rights-of-way, privileges, appurtenances and other rights pertaining to such land; provided, however, that this grant is subject to the following, as well as the Permitted Encumbrances described on Annex B: 1. Real Estate Taxes not yet due and payable; 2. General Special Assessments payable after the date hereof; 3. Liens, claims, easements, covenants, restrictions, encumbrances and other matters of record; 4. Zoning ordinances and regulations; 5. Public Utility Drainage and Highway easements, whether or not of record; 6. Rights of parties in possession; 7. Encroachments, variations in area or in measurements, boundary line disputes, roadways and other matters not of record which would be disclosed by a survey and inspection of the property conveyed hereby. BNP LEASING CORPORATION Date: As of ____________ By: Its: Vice President Attest: Its: Assistant Secretary (STATE OF TEXAS) SS (COUNTY OF DALLAS) On ___________________ before me, , personally appeared and , personally known to me (or proved to me on the basis of satisfactory evidence) to be the persons whose names are subscribed to the within instrument and acknowledged to me that they executed the same in their authorized capacities, and that by their signatures on the instrument the person, or the entity upon behalf of which the persons acted, executed the instrument. WITNESS my hand and official seal. Signature Annex A LEGAL DESCRIPTION ALL THAT REAL PROPERTY SITUATED IN THE CITY OF VACAVILLE, COUNTY OF SOLANO, STATE OF CALIFORNIA, DESCRIBED AS FOLLOWS: PARCEL ONE: PARCEL "4D", AS SHOWN ON THAT CERTAIN MAP ENTITLED: "PARCEL MAP, BEING A RESUBDIVISION OF PARCEL 4, AS SHOWN IN BOOK 38 OF PARCEL MAPS, PAGE 35, PARCELS 14-22, PORTIONS OF AKERLY DRIVE AND BARCAR DRIVE AS SHOWN IN BOOK 39 OF MAPS, PAGE 74, AND PORTIONS OF LANDS DESCRIBED IN DEED RECORDED MAY 13, 1982, PAGE 29409, AS INSTRUMENT NO. 17086 IN THE OFFICE OF THE COUNTY RECORDER OF SOLANO COUNTY, STATE OF CALIFORNIA," FILED JULY 31, 1995 IN THE OFFICE OF THE COUNTY RECORDER OF SOLANO COUNTY, IN BOOK 39 OF PARCEL MAPS, PAGE 37. EXCEPTING THEREFROM AN UNDIVIDED ONE-HALF (1/2) INTEREST IN ALL MINERALS, MINERAL DEPOSITS, OIL, GAS AND OTHER HYDROCARBON SUBSTANCES OF EVERY KIND AND CHARACTER BELOW 500 FEET FROM THE SURFACE OF SAID LAND, BUT WITHOUT, HOWEVER, THE RIGHT OF SURFACE ENTRY, AS EXCEPTED AND RESERVED IN DEED FROM MARGARET JOSEPHINE SHELLHAMMER TO GERTRUDE M. EAMES, DATED JUNE 8, 1956, RECORDED JUNE 12, 1956 IN BOOK 833 OF OFFICIAL RECORDS, PAGE 480 AND IN DEED FROM MARGARET JOSEPHINE SHELLHAMMER TO BARBARA C. SANTOS DATED DECEMBER 28, 1962, RECORDED JANUARY 4, 1963 IN BOOK 1178 OF OFFICIAL RECORDS, PAGE 520, AND IN DEED FROM MARGARET JOSEPHINE SHELLHAMMER TO ROBERTA SANTOS, DATED DECEMBER 28, 1962, RECORDED JANUARY 4, 1963 IN BOOK 1178 OF OFFICIAL RECORDS, PAGE 529, SOLANO COUNTY RECORDS. ALSO EXCEPTING AN UNDIVIDED ONE-HALF (1/2) INTEREST IN ALL OIL, GAS AND OTHER HYDROCARBONS; NON-HYDROCARBON GASSES OR GASEOUS SUBSTANCES; ALL OTHER MINERALS OF WHATSOEVER NATURE, WITHOUT REGARD TO SIMILARITY TO THE ABOVE-MENTIONED SUBSTANCES; AND ALL SUBSTANCES THAT MAY BE PRODUCED THEREWITH FROM SAID REAL PROPERTY AS RESERVED IN THE DEED FROM CHEVRON U.S.A. INC., A CORPORATION, RECORDED APRIL 1, 1987 IN BOOK 1987 PAGE 42125 OFFICIAL RECORDS AS INSTRUMENT NO. 21698. ALSO EXCEPTING AN UNDIVIDED ONE-HALF (1/2) INTEREST IN ALL GEOTHERMAL RESOURCES, EMBRACING: INDIGENOUS STEAM, HOT WATER AND HOT BRINES; STEAM AND OTHER GASSES, HOT WATER AND HOT BRINES RESULTING FROM WATER, GAS OR OTHER FLUIDS ARTIFICIALLY INTRODUCED INTO SUBSURFACE FORMATIONS; HEAT OR OTHER ASSOCIATED ENERGY FOUND BENEATH THE SURFACE OF THE EARTH; AND BYPRODUCTS OF ANY OF THE FOREGOING SUCH AS MINERALS (EXCLUSIVE OF OIL OR HYDROCARBON GAS THAT CAN BE SEPARATELY PRODUCED) WHICH ARE FOUND IN SOLUTION OR ASSOCIATION WITH OR DERIVED FROM ANY OF THE FOREGOING, AS RESERVED IN THE DEED FROM CHEVRON U.S.A. INC., A CORPORATION, RECORDED APRIL 1, 1987 IN BOOK 1987 PAGE 42125 OFFICIAL RECORDS AS INSTRUMENT NO. 21698. ALSO THE SOLE AND EXCLUSIVE RIGHT FROM TIME TO TIME TO BORE OR DRILL AND MAINTAIN WELLS AND OTHER WORKS INTO AND THROUGH SAID REAL PROPERTY AND ADJOINING STREETS, ROADS AND HIGHWAYS BELOW A DEPTH OF FIVE HUNDRED (500') FEET FROM THE SURFACE THEREOF FOR THE PURPOSE OF EXPLORING FOR AND PRODUCING ENERGY RESOURCES; THE RIGHT TO PRODUCE, INJECT, STORE AND REMOVE FROM AND THROUGH SAID BORES, WELLS OR WORKS, OIL, GAS, WATER AND OTHER SUBSTANCES OF WHATEVER NATURE, INCLUDING THE RIGHT TO PERFORM BELOW SAID DEPTH ANY AND ALL OPERATIONS DEEMED BY GRANTOR NECESSARY OR CONVENIENT FOR THE EXERCISE OF SUCH RIGHTS, AS RESERVED IN THE DEED FROM CHEVRON U.S.A. INC., A CORPORATION, RECORDED APRIL 1, 1987 IN BOOK 1987 PAGE 42125 OFFICIAL RECORDS AS INSTRUMENT NO. 21698. ALL RIGHTS EXCEPTED AND RESERVED TO CHEVRON DO NOT INCLUDE AND DO NOT EXCEPT OR RESERVE TO CHEVRON ANY RIGHT OF CHEVRON TO USE THE SURFACE OF SAID PROPERTY OR THE FIRST FIVE HUNDRED (500') FEET BELOW SAID SURFACE OR TO CONDUCT ANY OPERATIONS THEREON OR THEREIN. APN: PORTION 133-080-290 PORTION 133-120-300 133-190-030 THRU 100 133-190-130 PARCEL TWO: THOSE CERTAIN EASEMENTS GRANTED IN ARTICLE 8 OF THE DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS FOR VACA VALLEY BUSINESS PARK, DATED NOVEMBER 10, 1993, EXECUTED BY CHEVRON LAND AND DEVELOPMENT COMPANY, A DELAWARE CORPORATION, RECORDED NOVEMBER 12, 1993 AS INSTRUMENT NO. 1993-00107441 IN THE SOLANO COUNTY RECORDS, AS AMENDED BY A FIRST AMENDMENT THERETO, RECORDED NOVEMBER 12, 1993 AS INSTRUMENT NO. 1993-00107445 IN THE SOLANO COUNTY RECORDS, AS FURTHER AMENDED BY A SECOND AMENDMENT THERETO, RECORDED SEPTEMBER 13, 1995 AS INSTRUMENT NO. 1995-00056033 IN THE SOLANO COUNTY RECORDS AND AS FURTHER AMENDED BY A THIRD AMENDMENT THERETO, RECORDED SEPTEMBER 13, 1995 AS INSTRUMENT NO. 1995-00056034 IN THE SOLANO COUNTY RECORDS Annex B Permitted Encumbrances This conveyance is subject to the following matters to the extent the same are still valid and in force: [INSERT LIST OF "PERMITTED ENCUMBRANCES" AS DEFINED IN THE LEASE] 1. Amended and Restated Lease Agreement dated as of December 8, 1995 by and between BNP Leasing Corporation, as lessor, and Genentech, Inc., as lessee. [IF THE CONVEYANCE IS TO AN APPLICABLE PURCHASER: 2. Any encumbrances claimed by, through or under Genentech, Inc.] [ADD A LIST OF ANY OTHER KNOWN ENCUMBRANCES FOR WHICH BNP IS NOT RESPONSIBLE UNDER PARAGRAPH 10(A) OF THE LEASE. EXHIBIT C PRELIMINARY CHANGE OF OWNERSHIP REPORT THIS REPORT IS NOT A PUBLIC DOCUMENT (To be completed by transferee (buyer) prior to transfer of the subject property in accordance with Section 480.3 of the Revenue and Taxation Code. THIS SPACE FOR RECORDER'S US SELLER/TRANSFEROR: SELLER RECORDING DATE: DOCUMENT NO. BUYER/TRANSFEREE: ASSESSOR'S IDENTIFICATION NUMBER(S) LA ------ Page Parcel PROPERTY ADDRESS OR LOCATION: No Street City State Zip Code MAIL TAX INFORMATION TO: NAME: ADDRESS: Street No City State Zip Code FOR ASSESSOR'S USE ONLY Cluster OC1 OC2 DT INT RC SP$ DTT $ # Pcl. A Preliminary Change in Ownership Report must be filed with each conveyance in the County Recorder's office for the county where the property is located; this particular form may be used in all 58 counties of California NOTICE: A lien for property taxes applies to your property on March 1 of each year for the taxes owing in the following fiscal year, July 1 through June 30. One-half of those taxes is due November 1 and one-half is due February 1. The first installment becomes delinquent on December 10 and the second installment becomes delinquent on April 10. One tax bill is mailed before November 1 to the owner of record. IF THIS TRANSFER OCCURS AFTER MARCH 1 AND ON OR BEFORE DECEMBER 31, YOU MAY BE RESPONSIBLE FOR THE SECOND INSTALLMENT OF TAXES ON FEBRUARY 1. The property which you acquired may be subject to a supplemental tax assessment in an amount to be determined by the Los Angeles County Assessor. For further information on your supplemental roll obligation, please call the Los Angeles County Assessor at (713) 974-3211 PART I: TRANSFER INFORMATIONPlease answer all questions. YES NO ___ ___ A. Is this transfer solely between husband and wife (Addition of a spouse, death of a spouse, divorce settlement, etc.)? ___ ___ B. Is this transaction only a correction of the name(s) of the person(s) holding title to the property (For example, a name change upon marriage)? ___ ___ C. Is this document recorded to create, terminate, or reconvey a lender's interest in the property? ___ ___ D. Is this transaction recorded only to create, terminate, or reconvey a security interest (e.g., cosigner)? ___ ___ E. Is this document recorded to substitute a trustee under a deed of trust, mortgage, or other similar document? ___ ___ F. Did this transfer result in the creation of a joint tenancy in which the seller (transferor) remains as one of the joint tenants? ___ ___ G. Does this transfer return property to the person who created the joint tenancy (original transferor)? ___ ___ H. Is this transfer of property: 1. to a trust for the benefit of the grantor, or grantor's spouse? 2. to a trust revocable by the transferor? 3. to a trust from which the property reverts to the grantor within 12 years? ___ ___ I. If this property is subject to a lease, is the remaining lease term 35 years or more including written options? ___ ___ J. Is this a transfer from parents to children or from children to parents? ___ ___ K. Is this transaction to replace a principal residence by a person 55 years of age or older? ___ ___ L. Is this transaction to replace a principal residence by a person who is severely disabled as defined by Revenue and Taxation Code Section 69.5? If you checked yes to J, K or L, an applicable claim form must be filed with the County Assessor. Please provide any other information that would help the Assessor to understand the nature of the transfer. IF YOU HAVE ANSWERED "YES" TO ANY OF THE ABOVE QUESTIONS EXCEPT J, K, OR L, PLEASE SIGN AND DATE. OTHERWISE COMPLETE BALANCE OF THE FORM PART II: OTHER TRANSFER INFORMATION A. Date of transfer if other than recording date. B. Type of transfer. Please check appropriate box. __ Purchase __ Foreclosure __ Gift __ Trade or Exchange __Merger, Stock or Partnership Acquisition __ Contract of Sale __ Date of Contract __ Inheritance __ Date of Contract __ Other: Please explain: __ Creation of a lease: __ Assignment of a lease; __ Termination of a lease Date lease began Original term in years (including written options) Remaining term in years (including written options). C. Was only a partial interest in the property transferred? __ Yes __ No If yes, indicate the percentage transferred Please answer, to the best of your knowledge, all applicable questions, sign and date. If a question does not apply, indicate with "N/A". PART III: PURCHASE PRICE & TERMS OF SALE A. CASH DOWN PAYMENT OR Value of Trade or Exchange (excluding closing cost) B. FIRST DEED OF TRUST at % interest for years. Pymts./Mo. = $ (Prin. and Int. only) __ FHA __ Fixed Rate __ New Loan __ Conventional __ Variable Rate __ Assumed Existing Loan Balance __ VA __ All Inclusive D.T. ($ Wrapped) __ Bank or Savings & Loan __ Cal-Vet __ Loan Carried by Seller __ Finance Company Balloon Payment __ Yes __ No Due Date Amount $ C. SECOND DEED OF TRUST @ % interest for years. Pymts./Mo. = $ (Prin. & Int. only) __ Bank or Savings & Loan __ Fixed Rate __ New Loan __ Loan Carried by Seller __ Variable Rate __ Assumed Existing Loan Balance __ Balloon Payment __ Yes __ No Due Date Amount $ D. OTHER FINANCING: Is other financing involved not covered in (b) or (c) above? __ Yes __ No Type @ % interest for years. Pymts./Mo. = $ (Prin. & Int. only) __ Bank or Savings & Loan __ Fixed Rate __ New Loan __ Loan Carried by Seller __ Variable Rate __ Assumed Existing Loan Balance __ Balloon Payment __ Yes __ No Due Date Amount $ E. IMPROVEMENT BOND __ Yes __ No Outstanding Balance Amount $ Amount $ Amount $ Amount $ Amount $ F.TOTAL PURCHASE PRICE: (or acquisition price, if traded or exchanged, include real estate commission if paid.) Total items A through E G.PROPERTY PURCHASED:__ Through a broker;__ Direct form seller;__ Other (Explain) If purchased through a broker, provide broker's name and phone no.: Please explain any special terms or financing and many other information that would help the Assessor understand the purchase price and terms of sale. PART IV: PROPERTY INFORMATION A. IS PERSONAL PROPERTY INCLUDED IN THE PURCHASE PRICE (other than a mobilehome subject to local property tax)? __ Yes __ No If yes, enter the value of the personal property included in the purchase price $ (Attach itemized list of personal property) B. IS THIS PROPERTY INTENDED AS YOUR PRINCIPAL RESIDENCE? __ Yes __ No If yes, enter date of occupancy / /, 19 or intended occupancy / , 19 Month Day Month Day C. TYPE OF PROPERTY TRANSFERRED: __ Single-Family residence __ Agricultural __ Timeshare __ Multiple-Family residence (no. of units: ) __ Coop/Own-your-own __ Mobilehome __ Commercial/Industrial __ Condominium __ Unimproved lot __ Other (Description: ) D. DOES THE PROPERTY PRODUCE INCOME? __ Yes __ No E. IF THE ANSWER TO QUESTION D IS YES, IS THE INCOME FROM: __ Lease/Rent __ Contract __ Mineral rights __ Other - explain F. WHAT WAS THE CONDITION OF THE PROPERTY AT THE TIME OF SALE? __ Good __ Average __ Fair __ Poor Enter here, or on an attached sheet, any other information that would assist the Assessor in determining value of the property such as the physical condition of the property, restrictions, etc. I certify that the foregoing is true, correct and complete to the best of my knowledge and belief. Signed Date New Owner/Corporate Officer) Please Print Name of New Owner/Corporate Officer Phone No. where you are available from 8:00 a.m. - 5:00 p.m. (Note: The Assessor may contact you for further information) If a document evidencing a change of ownership is presented to the recorder for recordation without the concurrent filing of a PRELIMINARY CHANGE OF OWNERSHIP REPORT, the recorder may charge an additional recording fee of twenty dollars ($20) Exhibit D BILL OF SALE, ASSIGNMENT OF CONTRACT RIGHTS AND INTANGIBLE ASSETS Reference is made to: (1) that certain Property Purchase Agreement dated as of May 24, 1995, as amended by the Amendments thereto dated as of June 30, 1995, July 31, 1995 and September 5, 1995 (the "Contract"), between Chevron Land and Development Company, a Delaware corporation, as seller, and BNP LEASING CORPORATION ("Assignor") as the buyer through an assignment from the original buyer named therein, Genentech, Inc; (2) that certain Amended and Restated Purchase Agreement between Assignor and Genentech, Inc., dated as of December 8, 1995 (the "Purchase Agreement"); and (3) that certain Amended and Restated Lease Agreement between Assignor, as landlord, and Genentech, Inc., as tenant, dated as of December 8, 1995 (the "Lease"). As contemplated by the Purchase Agreement, Assignor hereby sells, transfers and assigns unto [GENENTECH OR THE APPLICABLE PURCHASER, AS THE CASE MAY BE], a _____________ ("Assignee"), all of Assignor's right, title and interest in and to the following property, if any, to the extent such property is assignable: (a) any warranties, guaranties, indemnities and claims Assignor may have under the Contract or under any document delivered by the seller thereunder to the extent related to the real property described in Annex A attached hereto (the "Property"), including specifically, without limitation, warranties, guaranties, indemnities and claims for workmanship, materials and performance; (b) any pending or future award made because of any condemnation affecting the Property or because of any conveyance to be made in lieu thereof, and any unpaid award for damage to the Property and any unpaid proceeds of insurance or claim or cause of action for damage, loss or injury to the Property; and (c) all other property included within the definition of "Property" as set forth in the Purchase Agreement, including but not limited to any of the following transferred to Assignor by the seller under the Contract, transferred to Assignor by the tenant pursuant to subparagraph 9(ae) of the Lease or otherwise acquired by Assignor, at the time of the closing under the Contract or thereafter, by reason of Assignor's status as the owner of the Property: (1) any goods, equipment, furnishings, furniture, chattels and tangible personal property of whatever nature that are located on the Property and all renewals or replacements of or substitutions for any of the foregoing; (ii) the rights of Assignor, existing at the time of the closing under the Contract or thereafter arising, under Permitted Encumbrances as defined under the Lease (including the Development Contracts, as defined in the Lease); and (iii) any other general intangibles, permits, licenses, franchises, certificates, and other rights and privileges related to the Property that Assignee would have acquired if Assignee had itself acquired the Property as the purchaser under the Contract. Provided, however, excluded from this conveyance and reserved to Assignor are the any rights or privileges of Assignor under (1) the Environmental Indemnity Agreement, as defined in the Purchase Agreement, (2) the Lease, to the extent rights under the Lease relate to the period ending on the date hereof, whether such rights are presently known or unknown, including rights of the Assignor to be indemnified against claims of third parties as provided in the Lease which may not presently be known, and including rights to recover any accrued unpaid rent under the Lease which may be outstanding as of the date hereof, but not including any of the rights assigned to Assignor pursuant to subparagraph 9(ae) of the Lease (3) agreements between Assignor and "Landlord's Parent" or any "Participant," both as defined in the Lease, or any modification or extension thereof, and (4) any other instrument being delivered to Assignor contemporaneously herewith pursuant to the Purchase Agreement. Assignor does for itself and its heirs, executors and administrators, covenant and agree to warrant and defend the title to the property assigned herein against the just and lawful claims and demands of any person claiming under or through Assignor, but not otherwise; excluding, however, any claim or demand arising by, through or under [GENENTECH]. Assignee hereby assumes and agrees to keep, perform and fulfill Assignor's obligations, if any, relating to any permits or contracts, under which Assignor has rights being assigned herein. Executed: , 199__. ASSIGNOR: BNP LEASING CORPORATION a Delaware corporation By: Its: ASSIGNEE: [GENENTECH, OR THE APPLICABLE PURCHASER], a _________ corporation By: Its: Annex A LEGAL DESCRIPTION ALL THAT REAL PROPERTY SITUATED IN THE CITY OF VACAVILLE, COUNTY OF SOLANO, STATE OF CALIFORNIA, DESCRIBED AS FOLLOWS: PARCEL ONE: PARCEL "4D", AS SHOWN ON THAT CERTAIN MAP ENTITLED: "PARCEL MAP, BEING A RESUBDIVISION OF PARCEL 4, AS SHOWN IN BOOK 38 OF PARCEL MAPS, PAGE 35, PARCELS 14-22, PORTIONS OF AKERLY DRIVE AND BARCAR DRIVE AS SHOWN IN BOOK 39 OF MAPS, PAGE 74, AND PORTIONS OF LANDS DESCRIBED IN DEED RECORDED MAY 13, 1982, PAGE 29409, AS INSTRUMENT NO. 17086 IN THE OFFICE OF THE COUNTY RECORDER OF SOLANO COUNTY, STATE OF CALIFORNIA," FILED JULY 31, 1995 IN THE OFFICE OF THE COUNTY RECORDER OF SOLANO COUNTY, IN BOOK 39 OF PARCEL MAPS, PAGE 37. EXCEPTING THEREFROM AN UNDIVIDED ONE-HALF (1/2) INTEREST IN ALL MINERALS, MINERAL DEPOSITS, OIL, GAS AND OTHER HYDROCARBON SUBSTANCES OF EVERY KIND AND CHARACTER BELOW 500 FEET FROM THE SURFACE OF SAID LAND, BUT WITHOUT, HOWEVER, THE RIGHT OF SURFACE ENTRY, AS EXCEPTED AND RESERVED IN DEED FROM MARGARET JOSEPHINE SHELLHAMMER TO GERTRUDE M. EAMES, DATED JUNE 8, 1956, RECORDED JUNE 12, 1956 IN BOOK 833 OF OFFICIAL RECORDS, PAGE 480 AND IN DEED FROM MARGARET JOSEPHINE SHELLHAMMER TO BARBARA C. SANTOS DATED DECEMBER 28, 1962, RECORDED JANUARY 4, 1963 IN BOOK 1178 OF OFFICIAL RECORDS, PAGE 520, AND IN DEED FROM MARGARET JOSEPHINE SHELLHAMMER TO ROBERTA SANTOS, DATED DECEMBER 28, 1962, RECORDED JANUARY 4, 1963 IN BOOK 1178 OF OFFICIAL RECORDS, PAGE 529, SOLANO COUNTY RECORDS. ALSO EXCEPTING AN UNDIVIDED ONE-HALF (1/2) INTEREST IN ALL OIL, GAS AND OTHER HYDROCARBONS; NON-HYDROCARBON GASSES OR GASEOUS SUBSTANCES; ALL OTHER MINERALS OF WHATSOEVER NATURE, WITHOUT REGARD TO SIMILARITY TO THE ABOVE-MENTIONED SUBSTANCES; AND ALL SUBSTANCES THAT MAY BE PRODUCED THEREWITH FROM SAID REAL PROPERTY AS RESERVED IN THE DEED FROM CHEVRON U.S.A. INC., A CORPORATION, RECORDED APRIL 1, 1987 IN BOOK 1987 PAGE 42125 OFFICIAL RECORDS AS INSTRUMENT NO. 21698. ALSO EXCEPTING AN UNDIVIDED ONE-HALF (1/2) INTEREST IN ALL GEOTHERMAL RESOURCES, EMBRACING: INDIGENOUS STEAM, HOT WATER AND HOT BRINES; STEAM AND OTHER GASSES, HOT WATER AND HOT BRINES RESULTING FROM WATER, GAS OR OTHER FLUIDS ARTIFICIALLY INTRODUCED INTO SUBSURFACE FORMATIONS; HEAT OR OTHER ASSOCIATED ENERGY FOUND BENEATH THE SURFACE OF THE EARTH; AND BYPRODUCTS OF ANY OF THE FOREGOING SUCH AS MINERALS (EXCLUSIVE OF OIL OR HYDROCARBON GAS THAT CAN BE SEPARATELY PRODUCED) WHICH ARE FOUND IN SOLUTION OR ASSOCIATION WITH OR DERIVED FROM ANY OF THE FOREGOING, AS RESERVED IN THE DEED FROM CHEVRON U.S.A. INC., A CORPORATION, RECORDED APRIL 1, 1987 IN BOOK 1987 PAGE 42125 OFFICIAL RECORDS AS INSTRUMENT NO. 21698. ALSO THE SOLE AND EXCLUSIVE RIGHT FROM TIME TO TIME TO BORE OR DRILL AND MAINTAIN WELLS AND OTHER WORKS INTO AND THROUGH SAID REAL PROPERTY AND ADJOINING STREETS, ROADS AND HIGHWAYS BELOW A DEPTH OF FIVE HUNDRED (500') FEET FROM THE SURFACE THEREOF FOR THE PURPOSE OF EXPLORING FOR AND PRODUCING ENERGY RESOURCES; THE RIGHT TO PRODUCE, INJECT, STORE AND REMOVE FROM AND THROUGH SAID BORES, WELLS OR WORKS, OIL, GAS, WATER AND OTHER SUBSTANCES OF WHATEVER NATURE, INCLUDING THE RIGHT TO PERFORM BELOW SAID DEPTH ANY AND ALL OPERATIONS DEEMED BY GRANTOR NECESSARY OR CONVENIENT FOR THE EXERCISE OF SUCH RIGHTS, AS RESERVED IN THE DEED FROM CHEVRON U.S.A. INC., A CORPORATION, RECORDED APRIL 1, 1987 IN BOOK 1987 PAGE 42125 OFFICIAL RECORDS AS INSTRUMENT NO. 21698. ALL RIGHTS EXCEPTED AND RESERVED TO CHEVRON DO NOT INCLUDE AND DO NOT EXCEPT OR RESERVE TO CHEVRON ANY RIGHT OF CHEVRON TO USE THE SURFACE OF SAID PROPERTY OR THE FIRST FIVE HUNDRED (500') FEET BELOW SAID SURFACE OR TO CONDUCT ANY OPERATIONS THEREON OR THEREIN. APN: PORTION 133-080-290 PORTION 133-120-300 133-190-030 THRU 100 133-190-130 PARCEL TWO: THOSE CERTAIN EASEMENTS GRANTED IN ARTICLE 8 OF THE DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS FOR VACA VALLEY BUSINESS PARK, DATED NOVEMBER 10, 1993, EXECUTED BY CHEVRON LAND AND DEVELOPMENT COMPANY, A DELAWARE CORPORATION, RECORDED NOVEMBER 12, 1993 AS INSTRUMENT NO. 1993-00107441 IN THE SOLANO COUNTY RECORDS, AS AMENDED BY A FIRST AMENDMENT THERETO, RECORDED NOVEMBER 12, 1993 AS INSTRUMENT NO. 1993-00107445 IN THE SOLANO COUNTY RECORDS, AS FURTHER AMENDED BY A SECOND AMENDMENT THERETO, RECORDED SEPTEMBER 13, 1995 AS INSTRUMENT NO. 1995-00056033 IN THE SOLANO COUNTY RECORDS AND AS FURTHER AMENDED BY A THIRD AMENDMENT THERETO, RECORDED SEPTEMBER 13, 1995 AS INSTRUMENT NO. 1995-00056034 IN THE SOLANO COUNTY RECORDS Exhibit E ACKNOWLEDGMENT OF DISCLAIMER OF REPRESENTATIONS AND WARRANTIES THIS ACKNOWLEDGMENT OF DISCLAIMER OF REPRESENTATIONS AND WARRANTIES (this "Certificate") is made as of ___________________, 199___, by [Genentech or the Applicable Purchaser, as the case may be], a ___________________ ("Grantee"). Contemporaneously with the execution of this Certificate, BNP Leasing Corporation, a Delaware corporation ("BNP"), is executing and delivering to Grantee (1) a Corporation Grant Deed and (2) a Bill of Sale, Assignment of Contract Rights and Intangible Assets (the foregoing documents and any other documents to be executed in connection therewith are herein called the "Conveyancing Documents" and any of the properties, rights or other matters assigned, transferred or conveyed pursuant thereto are herein collectively called the "Subject Property"). Notwithstanding any provision contained in the Conveyancing Documents to the contrary, Grantee acknowledges that BNP makes no representations or warranties of any nature or kind, whether statutory, express or implied, with respect to environmental matters or the physical condition of the Subject Property, and Grantee, by acceptance of the Conveyancing Documents, accepts the Subject Property "AS IS," "WHERE IS," "WITH ALL FAULTS" and without any such representation or warranty by Grantor as to environmental matters, the physical condition of the Subject Property, compliance with subdivision or platting requirements or construction of any improvements. Without limiting the generality of the foregoing, Grantee hereby further acknowledges and agrees that warranties of merchantability and fitness for a particular purpose are excluded from the transaction contemplated by the Conveyancing Documents, as are any warranties arising from a course of dealing or usage of trade. Grantee hereby assumes all risk and liability (and agrees that BNP shall not be liable for any special, direct, indirect, consequential, or other damages) resulting or arising from or relating to the ownership, use, condition, location, maintenance, repair, or operation of the Subject Property, except for damages proximately caused by (and attributed by any applicable principles of comparative fault to) the wilful misconduct, Active Negligence or gross negligence of BNP, its agents or employees. As used in the preceding sentence, "Active Negligence" of a party means, and is limited to, the negligent conduct of activities actually on or about the Property by that party in a manner that proximately causes actual bodily injury or property damage to be incurred. "Active negligence" shall not include (1) any negligent failure of BNP to act when the duty to act would not have been imposed but for BNP's status as owner of the Subject Property or as a party to the transactions pursuant to which BNP is delivering this instrument (the "Applicable Transactions"), (2) any negligent failure of any other party to act when the duty to act would not have been imposed but for such party's contractual or other relationship to BNP or participation or facilitation in any manner, directly or indirectly, of the Applicable Transactions, or (3) the exercise in a lawful manner by BNP (or any party lawfully claiming through or under BNP) of any remedy provided in connection with the Applicable Transactions. The provisions of this Certificate shall be binding on Grantee, its successors and assigns and any other party claiming through Grantee. Grantee hereby acknowledges that BNP is entitled to rely and is relying on this Certificate. EXECUTED as of ________________, 199___. By: Name: Title: Exhibit F DOCUMENTARY TRANSFER TAX REQUEST ACCOUNTABLE FORM # DATE: To: Solano County Recorder Subject: REQUEST THAT DOCUMENTARY TRANSFER TAX DECLARATION BE MADE IN ACCORDANCE WITH REVENUE CODE 11932. Re: Instrument Title: Corporation Grant Deed Name of Party Conveying Title: BNP Leasing Corporation The Documentary Transfer Tax is declared to be in the amount of $_______________ for the referenced instrument and is: ___ Computed on full value of property conveyed. ___ Computed on full value less liens/encumbrances remaining thereon at time of sale. This separate declaration is made in accordance with _________________________________. It is requested that the amount paid be indicated on the face of the document after the permanent copy has been made. Sincerely, Individual (or his agent) who made, signed or issued instrument PART I RECORDING REFERENCE DATA: Serial # Date Recorded SEPARATE PAPER AFFIXED TO INSTRUMENT: "Tax paid" indicated on the face of instrument and the separate request (DRA 3-A) was affixed for Recorder by: Date Documentary Transfer Tax Collector Witnessed by: Date Mail Clerk (Note: Prepare photo for Recorder file.) PART II ACCOUNTABLE FORM # REFERENCE DATA: Title: Serial: Date: INSTRUCTIONS: 1. This slip must accompany document. 2. Mail Clerk hand carry document to Tax Collector to indicate the amount of tax paid Exhibit G SECRETARY'S CERTIFICATE The undersigned, Secretary of BNP Leasing Corporation, a Delaware corporation (the "Corporation"), hereby certifies as follows: 1. That he is the duly, elected, qualified and acting Secretary [or Assistant Secretary] of the Corporation and has custody of the corporate records, minutes and corporate seal. 2. That the following named persons have been properly designated, elected and assigned to the office in the Corporation as indicated below; that such persons hold such office at this time and that the specimen signature appearing beside the name of such officer is his or her true and correct signature. [The following blanks must be completed with the names and signatures of the officers who will be signing the deed and other Required Documents on behalf of the Corporation.] Name Title Signature ________________ ______________________ _________________________ ________________ ______________________ _________________________ 3. That the resolutions attached hereto and made a part hereof were duly adopted by the Board of Directors of the Corporation in accordance with the Corporation's Articles of Incorporation and Bylaws, as evidenced by the signatures of all directors of the Corporation affixed thereto. Such resolutions have not been amended, modified or rescinded and remain in full force and effect. IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of the Corporation on this , day of , 199 . [signature] CORPORATE RESOLUTIONS OF BNP LEASING CORPORATION WHEREAS, pursuant to that certain Amended and Restated Purchase Agreement (herein called the "Purchase Agreement") dated as of December 8, 1995, by and between BNP Leasing Corporation (the "Corporation") and [GENENTECH OR THE APPLICABLE PURCHASER AS THE CASE MAY BE] ("Purchaser"), the Corporation agreed to sell and Purchaser agreed to purchase or cause the Applicable Purchaser (as defined in the Purchase Agreement) to purchase the Corporation's interest in the property (the "Property") located in __________, California more particularly described therein. NOW THEREFORE, BE IT RESOLVED, that the Board of Directors of the Corporation, in its best business judgment, deems it in the best interest of the Corporation and its shareholders that the Corporation convey the Property to Purchaser or the Applicable Purchaser pursuant to and in accordance with the terms of the Purchase Agreement. RESOLVED FURTHER, that the proper officers of the Corporation, and each of them, are hereby authorized and directed in the name and on behalf of the Corporation to cause the Corporation to fulfill its obligations under the Purchase Agreement. RESOLVED FURTHER, that the proper officers of the Corporation, and each of them, are hereby authorized and directed to take or cause to be taken any and all actions and to prepare or cause to be prepared and to execute and deliver any and all deeds and other documents, instruments and agreements that shall be necessary, advisable or appropriate, in such officer's sole and absolute discretion, to carry out the intent and to accomplish the purposes of the foregoing resolutions. IN WITNESS WHEREOF, we, being all the directors of the Corporation, have hereunto signed our names as of the dates indicated by our signatures. [signature and date] [signature and date] [signature and date] Exhibit H BNP LEASING CORPORATION 717 N. HARWOOD SUITE 2630 DALLAS, TEXAS 75201 , 199 [Title Insurance Company] _________________ _________________ _________________ Re: Recording of Grant Deed to [Genentech or the Applicable Purchaser] ("Purchaser") Ladies and Gentlemen: BNP Leasing Corporation has executed and delivered to Purchaser a Grant Deed in the form attached to this letter. You are hereby authorized and directed to record the Grant Deed at the request of Purchaser. Sincerely, Exhibit I FIRPTA STATEMENT Section 1445 of the Internal Revenue Code of 1986, as amended, provides that a transferee of a U.S. real property interest must withhold tax if the transferor is a foreign person. Sections 18805, 18815 and 26131 of the California Revenue and Taxation Code, as amended, provide that a transferee of a California real property interest must withhold income tax if the transferor is a nonresident seller. To inform [____________________ or the Applicable Purchaser, as the case may be] (the "Transferee") that withholding of tax is not required upon the disposition of a California real property interest by transferor, BNP Leasing Corporation (the "Seller"), the undersigned hereby certifies the following on behalf of the Seller: 1. The Seller is not a foreign corporation, foreign partnership, foreign trust, or foreign estate (as those terms are defined in the Internal Revenue Code and Income Tax Regulations); 2. The United States employer identification number for the Seller is _____________________; 3. The office address of the Seller is ______________ __________________________________________. [Note: BNP MUST INCLUDE EITHER ONE, BUT ONLY ONE, OF THE FOLLOWING REPRESENTATIONS IN THE FIRPTA STATEMENT, BUT IF THE ONE INCLUDED STATES THAT BNP IS DEEMED EXEMPT FROM CALIFORNIA INCOME AND FRANCHISE TAX, THEN BNP MUST ALSO ATTACH A WITHHOLDING CERTIFICATE FROM THE CALIFORNIA FRANCHISE TAX BOARD EVIDENCING THE SAME: 4. The Seller is qualified to do business in California. OR 4. The Seller is deemed to be exempt from the withholding requirement of California Revenue and Taxation Code Section 26131(e), as evidenced by the withholding certificate from the California Franchise Tax Board which is attached.] The Seller understands that this certification may be disclosed to the Internal Revenue Service and/or to the California Franchise Tax Board by the Transferee and that any false statement contained herein could be punished by fine, imprisonment, or both. The Seller understands that the Transferee is relying on this affidavit in determining whether withholding is required upon said transfer. The Seller hereby agrees to indemnify and hold the Transferee harmless from and against any and all obligations, liabilities, claims, losses, actions, causes of action, demands, rights, damages, costs, and expenses (including but not limited to court costs and attorneys' fees) incurred by the Transferee as a result of any false misleading statement contained herein. Under penalties of perjury I declare that I have examined this certification and to the best of my knowledge and belief it is true, correct and complete, and I further declare that I have authority to sign this document on behalf of the Seller. Dated: ___________, 199___. By: Name: Title: EX-99.9 7 1996 STOCK OPTION/STOCK INCENTIVE PLAN (as approved by the Board of Directors on February 8, 1996) ARTICLE ONE GENERAL PROVISIONS I. PURPOSES OF THE PLAN A. This 1996 Stock Option/Stock Incentive Plan (the "Plan") is intended to promote the interests of Genentech, Inc., a Delaware corporation (the "Company"), by providing a method whereby the Company may retain the services of persons now employed by or serving as consultants or directors to it, secure and retain the services of persons capable of filling such positions and provide incentives for such persons to exert maximum efforts for the success of the Company or its parent or subsidiary corporations. B. For purposes of the Plan, the following definitions shall be in effect: CHANGE IN CONTROL: "Change in Control" shall have the meaning set forth in Article Two, III.C. hereof. CHANGE IN CONTROL PRICE: "Change in Control Price" shall have the meaning set forth in Article Two, II.C.4.b. hereof. CLOSING SELLING PRICE: The Closing Selling Price per share of Special Common Stock on any relevant date under the Plan shall be the closing selling price per share of Special Common Stock, if such Special Common Stock is reported on a national securities exchange or reported on the NASDAQ National Market System (or any successor system), for the trading day immediately preceding the date in question, as such price is published in the Wall Street Journal (or if such publication is not available, a comparable publication selected by the Committee). CONSULTANT: An individual shall be considered to be a Consultant for so long as such individual continues to render personal services to the Company or one or more of its Parent or Subsidiaries as an independent contractor or continues to have an effective and unexpired consulting agreement with the Company. CORPORATE TRANSACTION: "Corporate Transaction" shall have the meaning set forth in Article Two, III.A. hereof. EMPLOYEE: An individual shall be considered to be an Employee for so long as such individual remains in the employ of the Company or one or more of its Parent or Subsidiaries, irrespective of whether employment services are actually provided by the individual. 1 PARENT: A corporation shall be deemed to be a parent of the Company if it is a corporation (other than the Company) in an unbroken chain of corporations ending with the Company, provided each such corporation in the unbroken chain (other than the Company) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. SECTION 16(b) INSIDER: An individual shall be considered to be a Section 16(b) Insider on any relevant date under the Plan if such individual (A) is at the time an officer or director of the Company subject to the short- swing profit restrictions of the regulations promulgated under Section 16 of the Securities Exchange Act of 1934, as amended (the "1934 Act") or (B) unless Section 16 or regulations promulgated thereunder, are amended to provide otherwise, was such an officer or director at any time during the six month period immediately preceding the date in question and made any purchase or sale of Special Common Stock during such six-month period. SERVICE: An individual shall be deemed to be in the Service of the Company for so long as such individual renders service on a periodic basis to the Company or one or more of its Parent or Subsidiaries as an Employee or Consultant. SPECIAL COMMON STOCK: The Special Common Stock issuable under the Plan shall be shares of the Company's Callable Putable Common Stock, par value $0.02 per share. All references to "shares" or "stock", shall be deemed to be references to shares of the Special Common Stock. SUBSIDIARY: A corporation shall be deemed to be a subsidiary of the Company if it is one of the corporations (other than the Company) in an unbroken chain of corporations beginning with the Company, provided each such corporation (other than the last corporation in the unbroken chain) owns, at the time of determination, stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. For purposes of non-statutory option grants under Article Two and stock incentive grants under Article Four and all Corporate Transaction provisions of the Plan, the term "subsidiary" shall also include any partnership, joint venture or other business entity of which the Company owns, directly or indirectly through another subsidiary corporation, more than a fifty percent (50%) interest in voting power, capital or profits. C. Neither stock option grants nor stock bonus issuances made to any individual under the Plan shall in any way affect, limit or restrict such individual's eligibility to participate in any other stock plan or other compensation or benefit plan, arrangement or practice now or hereafter maintained by the Company or any Parent or Subsidiary. Except for the grant of options to be made pursuant to the Automatic Grant Program set forth in Article Three below and Section I of Article Three of the Company's 1994 Stock Option Plan, as amended (the "1994 Plan"), non- Employee Board members shall not be eligible to receive any option grants or stock issuances under this Plan or any other stock plan of the Company or any 2 Parent or Subsidiary. The terms of Section I of Article Three of the 1994 Plan providing for automatic option grants to non-employee members of the Board shall terminate on April 30, 1996. II. ADMINISTRATION OF THE PLAN A. The Plan shall be administered by the Compensation Committee (the "Committee"). The Committee shall be comprised of not less than two (2) Board members ("Disinterested Directors") who: (i) were not during the one year prior to serving on the Committee granted or awarded equity securities under this Plan or any other stock option, stock appreciation, stock bonus or other stock plan of the Company or its Parent or Subsidiaries, except as permitted by Rule 16b-3(c)(2)(i) promulgated under the 1934 Act ("Rule 16b-3(c)(2)(i)") or (ii) are otherwise considered to be "disinterested directors" within Rule 16b-3(c)(2)(i), or any other applicable rules, regulations or interpretations of the Securities and Exchange Commission (the "SEC"). The Board may from time to time appoint members to the Committee in substitution for (or in addition to) members previously appointed, and the Board shall have the authority to fill any and all vacancies on the Committee, however caused. The requirement that the Committee be composed of Disinterested Directors shall not apply during any period in which the Company does not have an equity security registered under Section 12 of the 1934 Act. B. Subject to limitations contained elsewhere herein and to the provisions of Section V., C. and D. of this Article I relating to adjustments upon changes in stock, the aggregate number of shares of stock that may be subject to options and stock appreciation rights granted hereunder to any Employee in a calendar year shall not exceed two hundred fifty thousand (250,000) shares of the Company's Special Common Stock. C. Subject to the express provisions of the Plan, the Committee shall have plenary authority: (i) to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, and to make all other determinations deemed necessary or advisable in administering the Plan; and (ii) to change the terms and conditions of any outstanding discretionary option grant or unvested stock issuance, provided such action does not, without the consent of the holder, adversely affect the rights and obligations such individual may have under the Plan or the outstanding grant or stock issuance. D. Determinations of the Committee on all matters relating to the Plan and any discretionary option grants or stock issuances made hereunder shall be final, binding and conclusive on all persons having any interest in the Plan or any options granted or shares issued under the Plan. III. STRUCTURE OF THE PLAN A. The Plan shall be divided into three separate components: the Regular Option Grant Program specified in Article Two, the Automatic Grant Program specified in Article Three and the Stock 3 Incentive Program specified in Article Four. Under the Regular Option Grant Program, eligible Employees and Consultants may be granted options to purchase shares of Special Common Stock at an exercise price equal to not less than 50% of the Closing Selling Price per share on the grant date. Under the Automatic Grant Program, non-Employee Board members shall automatically be granted options to purchase shares of Special Common Stock on the dates and in the amounts specified in Article Three below at an exercise price of 100% of the Closing Selling Price per share of Special Common Stock on the date of grant. B. Under the Stock Incentive Program, eligible Employees and Consultants may be awarded shares of Special Common Stock as a reward for past services or as an incentive to the performance of future services. Such shares may be issued as fully-vested shares or as shares vesting over time. C. The provisions of Articles One, Five and Six of the Plan shall apply to the Regular Option Grant Program, the Automatic Option Grant Program and the Stock Incentive Program and shall accordingly govern the interests of all individuals in the Plan. IV. ELIGIBILITY FOR OPTION GRANTS AND STOCK ISSUANCES A. The individuals eligible to receive option grants ("Optionees") and/or stock incentives ("Recipients") pursuant to the Plan shall be limited to (i) those Employees and Consultants selected by the Committee and (ii) those non-Employee Board members who are entitled to option grants pursuant to the Automatic Option Grant Program of Article Three. V. STOCK SUBJECT TO THE PLAN A. The Special Common Stock issuable under the Plan shall be made available either from authorized but unissued shares of Special Common Stock or from shares of Special Common Stock reacquired by the Company on the open market. The aggregate number of shares of Special Common Stock issuable over the term of this Plan, whether through exercised options or direct stock issuances shall not exceed 9,000,000 shares (subject to adjustment from time to time in accordance with paragraphs C. and D. below). B. Should an option granted under this Plan expire or terminate for any reason prior to exercise or surrender in full (including options canceled in accordance with the cancellation-regrant provisions of the Regular Option Grant Program), the shares subject to the portion of the option not so exercised or surrendered shall be available for subsequent option grants under this Plan. Shares subject to stock appreciation rights exercised in accordance with the Stock Appreciation Right provisions of Article Two and shares repurchased by the Company pursuant to its repurchase rights under the Plan shall not be available for subsequent issuance, whether through option grants, stock appreciation rights or direct issuances, under this Plan. C. In the event any change is made to the Special Common Stock issuable under the Plan by reason of any stock dividend, stock split, combination of shares, exchange of shares or other change 4 affecting the outstanding Special Common Stock as a class without receipt of consideration, then appropriate adjustments shall be made by the Committee to (i) the aggregate number and/or class of shares issuable under this Plan, the maximum number and/or class of shares purchasable per Employee pursuant to the applicable limitation of Section II.B of this Article One and the number and/or class of shares for which the automatic option grants are to be made pursuant to the provisions of Article Three, to reflect the effect of such change upon the Company's capital structure, (ii) the number and/or class of shares and the exercise price per share of the stock subject to each outstanding option in order to preclude the dilution or enlargement of benefits thereunder and (iii) the number and/or class of shares and the exercise price per share in effect under each outstanding stock appreciation right in order to preclude the dilution or enlargement of benefits thereunder. All adjustments made by the Committee pursuant to this paragraph C. shall be final, binding and conclusive. D. Subject to the special priority provisions of Article Six of the Plan, in the event that (i) the Company is the surviving entity in any Corporate Transaction that does not result in the termination of outstanding options pursuant to the Corporate Transaction provisions of the Plan or (ii) the outstanding options under the Plan are to be assumed in connection with such Corporate Transaction, then each such continuing or assumed option shall, immediately after such Corporate Transaction, be appropriately adjusted to apply and pertain to the number and class of securities which would be issuable, in consummation of such Corporate Transaction, to an actual holder of the same number of shares of Special Common Stock as are subject to such option immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the exercise price payable per share subject to each option, provided that the aggregate exercise price of such option shall remain the same. In addition, the aggregate number and/or class of shares issuable under this Plan shall be appropriately adjusted to reflect the effect of such Corporate Transaction upon the Company's capital structure. ARTICLE TWO REGULAR OPTION GRANT PROGRAM I. TERMS AND CONDITIONS OF OPTIONS A. The Committee shall have plenary authority (subject to the express provisions of the Plan) to determine which Employees and Consultants are to be granted options under this Regular Option Grant Program, the number of shares to be covered by each such option, the status of the granted option as either an incentive stock option ("Incentive Option") which meets the requirements of Section 422 of the Internal Revenue Code of 1986, as amended from time to time (the "Code"), or a non-statutory option not intended to meet such requirements, the time or times at which such option is to become exercisable, the time or times at which such option (or the Shares subject to such option) becomes vested (referred to herein as the "vesting schedule") and the term for which the option is to remain outstanding, up to a maximum term of ten (10) years. B. The granted options shall be evidenced by instruments in such form as the Committee shall from time to time approve; provided, however, that each such instrument shall comply with and 5 incorporate the terms and conditions specified below, except as such terms and conditions must be modified for Incentive Options as set forth below in Section IV of this Article Two. 1. Exercise Price. a. The exercise price per share shall be fixed by the Committee, but in no event shall the exercise price per share be less than fifty percent (50%) of the Closing Selling Price per share of Special Common Stock on the date of the option grant. b. The exercise price shall become immediately due upon exercise of the option and shall, subject to the loan provisions of this Article Two, be payable in one of the alternative forms specified below: (A) full payment in cash or check made payable to the ] Company's order; or (B) full payment in shares of Special Common Stock held by the Optionee for the requisite period necessary to avoid a charge to the Company's reported earnings and valued at the Closing Selling Price on the Exercise Date (as such term is defined below); or (C) full payment in a combination of shares of Special Common Stock held by the Optionee for the requisite period necessary to avoid a charge to the Company's reported earnings and valued at the Closing Selling Price on the Exercise Date and cash or check. c. For purposes of subparagraph b. above, the Exercise Date shall be the first date on which there is delivered to the Company both (i) written notice of the exercise of the option and (ii) payment of the exercise price for the purchased shares. 2. Term and Exercise of Options. a. Each option granted under this Regular Option Grant Program shall be exercisable in one or more installments over the Optionee's period of Service as shall be determined by the Committee and set forth in the instrument evidencing such option; provided, however, that unless no longer required by SEC Rule 16b-3 issued under Section 16b-3 of the 1934 Act, no such option granted to a Section 16(b) Insider shall become exercisable in whole or in part within the first six (6) months after the grant date, except in the event of the Optionee's death or disability. b. Except for options granted to Section 16(b) Insiders, an option may be exercisable by the Optionee or, in the event the Optionee is permanently disabled (as such term is defined in Section 22(e) of the Code), by his or her spouse, and such option may be transferred by the Optionee to a trust for such Optionee's benefit or the benefit of an immediate family member or by will or the laws of descent or distribution. An option granted to a Section 16(b) Insider shall, during the lifetime of such Optionee, be exercisable only by that Optionee and shall not be assignable or transferable by the Optionee otherwise than by will or by the laws of descent and distribution. 6 c. The Committee may, at its discretion, accelerate the vesting schedule of any outstanding option at any time. 3. Termination of Service. a. Should an Optionee cease to continue in Service for any reason (other than termination due to death, permanent disability or retirement from employment by the Company after reaching age sixty-five (65)) while the holder of one or more outstanding options under this Regular Option Grant Program, then such options shall not be exercisable at any time after the earlier of (i) the specified expiration date of the option term or (ii) the expiration of three (3) months after the Optionee's cessation of Service. Each such option shall, during the applicable period following cessation of Service, be exercisable only to the extent of the number of shares (if any) in which the Optionee is vested on the date of such cessation of Service; provided, however, that the Committee shall have the discretion to specify, either at the time the option is granted or at the time that the Optionee ceases Service, that vesting of such option may be extended for a period not to exceed three (3) years from the date of cessation of Service and that the applicable expiration period set forth in clause (ii) may be increased to a period of up to five (5) years. b. Should an Optionee cease to continue in Service due to permanent disability while the holder of one or more outstanding options under this Regular Option Grant Program, then such options shall not be exercisable at any time after the earlier of (i) the specified expiration date of the option term or (ii) the expiration of three (3) months after the Optionee's cessation of Service. Each such option shall, during the applicable period following cessation of Service, be exercisable only to the extent of the number of shares (if any) in which the Optionee is vested on the date of such cessation of Service; provided, however, that the Committee shall have the discretion to specify, either at the time the option is granted or at the time that the Optionee ceases Service, that the vesting of such option may be accelerated or extended from the date of cessation of Service and that the period of exercisability can be increased up to the expiration date of the option term. Should an Optionee cease to continue in Service due to death, or retirement from employment by the Company after reaching age sixty-five (65), while the holder of one or more outstanding options under this Regular Option Grant Program, then all unvested options on such date shall automatically become vested and the expiration date of the option shall automatically be extended to the expiration date of the option term. c. Any option granted to an Optionee under this Regular Option Grant Program and outstanding in whole or in part on the date of the Optionee's death may be subsequently exercised by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution in the case of the Optionee's death, and any option granted to an Optionee under this Regular Option Grant Program which is outstanding in whole or in part on the date of the Optionee's cessation of Service due to permanent disability may be exercised by the Optionee's spouse or designee. Any such exercise must be inaccordance with subparagraph b. 7 d. The Committee shall have complete discretion, exercisable either at the time the option is granted or at the time the Optionee ceases Service, to establish as a provision applicable to the exercise of one or more options granted under this Regular Option Grant Program that during the limited period of exercisability following cessation of Service due to retirement, "plant closing" or "mass layoff" (as such terms are defined at 29 U.S.C. Section 2101) that is subject to the notice requirements of 29 U.S.C. Section 2102, the option will continue to vest according to the vesting schedule that would have applied had the optionee continued in Service. 4. Repurchase Rights. a. Options may provide that notwithstanding any vesting schedule pursuant to subparagraph 2. a. above, they may be exercised prior to such vesting schedule so long as the Optionee enters into a repurchase agreement satisfactory to the Company. The shares of Special Common Stock acquired upon the exercise of one or more options granted under this Regular Option Grant Program may be subject to repurchase by the Company, at the exercise price paid per share, upon the Optionee's cessation of Service prior to vesting in such shares. b. Any such repurchase right shall be exercisable by the Company upon such terms and conditions (including the establishment of the appropriate vesting schedule and other provision for the expiration of such right in one or more installments over the optionee's period of Service) as the Committee may specify in the instrument evidencing such right, which instrument shall include appropriate terms with respect to the legending of stock certificates and the placing of unvested shares into escrow. c. All of the Company's outstanding repurchase rights shall automatically terminate, and all shares purchased under this Regular Option Grant Program shall immediately vest in full, upon the occurrence of any Corporate Transaction or Change in Control; provided, however, that no such termination of repurchase rights or immediate vesting of the purchased shares shall occur if (and to the extent that): (i) the Company's outstanding repurchase rights are to be assigned to the successor corporation (or parent thereof) in connection with the Corporate Transaction or (ii) such termination of repurchase rights and acceleration of vesting are precluded by other limitations imposed by the Committee either at the time the option is granted or at the time the option shares are purchased. 5. Stockholder Rights. An option holder shall have none of the rights of a stockholder with respect to any shares covered by the option until such individual shall have exercised the option, paid the option price and satisfied all other conditions precedent to the issuance of certificates for the purchased shares. II. STOCK APPRECIATION RIGHTS A. The Committee shall have full power and authority, exercisable in its sole discretion, to grant stock appreciation rights to one or more Employees or Consultants eligible for option grants under this 8 Regular Option Grant Program. Each such right shall entitle the holder to a distribution based on the appreciation in the value per share of a designated amount of Special Common Stock. B. Three types of stock appreciation rights shall be authorized for issuance under the Plan: 1. Tandem Stock Appreciation Rights. These rights require the holder to elect between the exercise of the underlying option for shares of Special Common Stock and the surrender of such option for an appreciation distribution equal to the excess of (i) the Closing Selling Price (on the date of option surrender) of the vested shares of Special Common Stock purchasable under the surrendered option over (ii) the aggregate option price payable for such shares. 2. Concurrent Stock Appreciation Rights. Concurrent rights may apply to all or any portion of the shares of Special Common Stock subject to the underlying option and will be exercised automatically at the same time the option is exercised for those shares. The appreciation distribution to which the holder of such concurrent right shall be entitled upon exercise of the underlying option shall be in an amount equal to the excess of (i) the aggregate Closing Selling Price (at date of exercise) of the vested shares purchased under the underlying option with such concurrent rights over (ii) the aggregate option price paid for those shares. 3. Limited Stock Appreciation Rights. These rights will entitle the holder to surrender outstanding options in connection with certain Changes in Control (as defined below) for an appreciation distribution equal in amount to the excess of (i) the Change in Control Price (as defined below) of the number of shares in which the Optionee is at the time vested under the surrendered option over (ii) the aggregate option price payable for such vested shares. C. The terms and conditions applicable to each Tandem Stock Appreciation Right ("Tandem Right"), Concurrent Stock Appreciation Right ("Concurrent Right") and Limited Stock Appreciation Right ("Limited Right") shall be as follows: 1. Tandem Rights. a. Tandem Rights may be tied to either Incentive Options or non-statutory options. Each such right shall, except as specifically set forth below, be subject to the same terms and conditions applicable to the particular stock option grant to which it pertains. b. The Appreciation Distribution payable on the exercised Tandem Right shall be in an amount equal to the excess of (i) the Closing Selling Price (on the date of the option surrender) of the number of shares of Special Common Stock in which the Optionee is vested under the surrendered option over (ii) the aggregate option price payable for such vested shares. c. The Appreciation Distribution may, in the Committee's discretion, be made in cash, in shares of Special Common Stock or in a combination of cash and Special Common Stock. Any shares of Special Common Stock so distributed shall be valued at the Closing Selling Price on the date the 9 option is surrendered, and the shares of Special Common Stock subject to the surrendered option shall not be available for subsequent issuance under this Plan. 2. Concurrent Rights. a. Concurrent Rights may be tied to any or all of the shares of Special Common Stock subject to any Incentive Option or non-statutory option grant made under this Regular Option Grant Program. The Concurrent Right shall, except as specifically set forth below, be subject to the same terms and conditions applicable to the particular stock option grant to which it pertains. b. The Concurrent Right shall be automatically exercised at the same time the underlying option is exercised for the particular shares of Special Common Stock to which the Concurrent Right pertains. c. The Appreciation Distribution payable on the exercised Concurrent Right shall be equal to the excess of (i) the aggregate Closing Selling Price (on the Exercise Date) of the vested shares of Special Common Stock purchased under the underlying option which have Concurrent Rights appurtenant to them over (ii) the aggregate option price paid for such shares. d. The Appreciation Distribution may, in the Committee's discretion, be paid in cash, in shares of Special Common Stock or in a combination of cash and Special Common Stock. Any shares of Special Common Stock so distributed shall be valued at the Closing Selling Price on the date the Concurrent Right is exercised and shall reduce on a one-for-one basis the number of shares of Special Common Stock thereafter issuable under this Plan. 3. Terms Applicable to Both Tandem Rights and Concurrent Rights. a. To exercise any outstanding Tandem or Concurrent Right, the holder must provide written notice of exercise to the Company in compliance with the provisions of the instrument evidencing such right. b. If a Tandem or Concurrent Right is granted to an individual who is at the time a Section 16(b) Insider, then the instrument of grant shall incorporate all the terms and conditions at the time necessary to assure that the subsequent exercise of such right shall qualify for the safe-harbor exemption from short-swing profit liability provided by SEC Rule 16b-3 (or any successor rule or regulation). c. No limitation shall exist on the aggregate amount of cash payments the Company may make under this Article Two Program in connection with the exercise of Tandem or Concurrent Rights. 10 4. Limited Rights. a. Each Section 16(b) Insider shall have the Limited Right, exercisable in the event there should occur a Change in Control (as such term is defined below), to surrender any or all of the options (whether incentive stock options or non-statutory options) held by such individual under this Article Two Program, to the extent such options (i) have been outstanding for at least six (6) months and (ii) are at the time exercisable for vested shares. b. In exchange for each option surrendered in accordance with subparagraph a. above, the Section 16(b) Insider shall receive an Appreciation Distribution in an amount equal to the excess of (i) the Change in Control Price (determined as of the date of surrender) of the number of shares in which the Section 16(b) Insider is at the time vested under the surrendered option over (ii) the aggregate option price payable for such vested shares. For purposes of such Appreciation Distribution, the Change in Control Price per share of the vested Special Common Stock subject to the surrendered option shall be deemed to be equal to the greater of (a) the Closing Selling Price per share on the date of surrender or (b) the highest reported price per share paid in effecting the Change in Control. However, if the option is an Incentive Option, then the Change in Control Price of the vested shares subject to the surrendered option shall not exceed the value per share determined under clause (a) above. c. The Appreciation Distribution shall be made entirely in cash, and the shares of Special Common Stock subject to each surrendered option shall not be available for subsequent issuance under this Plan. III. CORPORATE TRANSACTION/CHANGE IN CONTROL A. In the event of any of the following transactions (a "Corporate Transaction"): (i) a merger or acquisition in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the State of the Company's incorporation, (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company to any entity other than a Subsidiary of the Company, or (iii) any reverse merger in which the Company is the surviving entity but in which fifty percent (50%) or more of the Company's outstanding voting stock held by persons who are not "Subject Persons" as defined in Article Eleventh of the Company's Certificate of Incorporation (as in effect on September 7, 1990) including persons included in such definition by subparagraph (b) thereof is transferred to holders different from those who held the stock immediately prior to such merger, then the exercisability of each option outstanding under this Regular Option Grant Program shall be automatically accelerated so that each such option shall, immediately prior to the specified effective date for the Corporate Transaction, become fully exercisable with respect to the total number of shares of Special Common Stock purchasable under such option and may be exercised for all or any portion 11 of such shares. However, an outstanding option under this Regular Option Grant Program shall not be so accelerated if and to the extent: (i) such option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation or parent thereof or be replaced with a comparable option to purchase shares of the capital stock of the successor corporation or parent thereof, or (ii) such option is to be replaced by a comparable cash incentive program of the successor corporation based on the value of the option at the time of the Corporate Transaction, or (iii) the acceleration of such option is subject to other applicable limitations imposed by the Committee at the time of grant. The determination of comparability under clause (i) or (ii) above shall be made by the Committee, and its determination shall be final, binding and conclusive. B. Upon the consummation of the Corporate Transaction, all outstanding options under this Regular Option Grant Program shall, to the extent not previously exercised or assumed by the successor corporation or its parent company, terminate and cease to be outstanding. C. In the event of any of the following transactions (a "Change in Control"): (i) the acquisition by a person or group of related persons, other than the Company or any person controlling, controlled by or under common control with the Company, of beneficial ownership (as determined pursuant to the provisions of Rule 13d-3 under the 1934 Act) of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities pursuant to a transaction or series of related transactions which the Board does not approve; or (ii) the first date within any period of thirty-six (36) consecutive months or less on which there is effected any change in the composition of the Board such that the majority of the Board (determined by rounding up to the next whole number) ceases to be comprised of individuals who either (I) have been members of the Board continuously since the beginning of such period or (II) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (I) who were still in office at the time such election or nomination was approved by the Board; then the exercisability of each option outstanding under this Regular Option Grant Program shall be automatically accelerated so that each such option shall become exercisable, immediately prior to such Change in Control, for the full number of shares purchasable under such option and may be exercised for all or any portion of such shares. However, an outstanding option under this Regular Option Grant Program shall not be so accelerated if and to the extent one or more limitations imposed by the Committee at the time of grant preclude such acceleration upon a Change in Control. D. The grant of options under this Regular Option Grant Program shall in no way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 12 IV. INCENTIVE OPTIONS A. The terms and conditions specified below shall be applicable to all Incentive Options granted under this Regular Option Grant Program. Options which are specifically designated as "non-statutory" options when issued under this Regular Option Grant Program shall not be subject to such terms and conditions. 1. Option Price. The option price per share of the Special Common Stock subject to an Incentive Option shall in no event be less than one hundred percent (100%) of the Closing Selling Price per share of Special Common Stock on the grant date. 2. 10% Stockholder. If any individual to whom an Incentive Option is to be granted pursuant to the provisions of this Regular Option Grant Program is on the grant date the owner of stock (as determined under Section 424(d) of the Internal Revenue Code) possessing 10% or more of the total combined voting power of all classes of stock of the Company or any one of its Parent or Subsidiaries (such person to be herein referred to as a 10% Stockholder), then (i) the option price per share shall not be less than one hundred and ten percent (110%) of the Closing Selling Price per share of Special Common Stock on the grant date and (ii) the maximum term of the option shall not exceed five (5) years from the grant date. 3. Dollar Limitation. The aggregate fair market value (determined on the basis of the Closing Selling Price in effect on the respective date or dates of grant) of the Special Common Stock for which one or more options granted to any Employee under this Plan (or any other option plan of the Company or its Parent or Subsidiaries) may for the first time become exercisable as incentive stock options under the Federal tax laws during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability thereof as incentive stock options under the Federal tax laws shall be applied on the basis of the order in which such options are granted. 4. Term and Exercise of Options. a. No Incentive Option shall have a term in excess of ten (10) years from the grant date. b. An Incentive Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionee only by the Optionee. 13 5. Termination of Service. A. Notwithstanding any terms in the Plan to the contrary, an Incentive Option must be exercised within the three (3) month period commencing with the date of cessation of Employee status for any reason, except that in the event the Optionee's cessation of Employee status is due to permanent disability, such period shall be one (1) year from the date of such cessation of Employee status. Incentive Options not exercised within the applicable period shall be treated as non-statutory options. B. Except as modified by the preceding provisions of this Incentive Options section, all the provisions of this Regular Option Grant Program shall be applicable to the Incentive Options granted hereunder. If any option originally granted as an Incentive Stock Option is modified so as not to qualify under the Code as an Incentive Stock Option, such modified Incentive Stock Option shall be a non-statutory option. V. CANCELLATION AND RE-GRANT OF OPTIONS The Committee shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under this Regular Option Grant Program and to grant in substitution therefor new options under this Plan covering the same or different numbers of shares of Special Common Stock but having an option price per share not less than fifty percent (50%) of the Closing Selling Price (one hundred percent (100%) of the Closing Selling Price in the case of an Incentive Option or, in the case of a 10% Stockholder, not less than one hundred and ten percent (110%) of the Closing Selling Price) per share of Special Common Stock on the new grant date. VI. LOANS OR GUARANTEE OF LOANS The Committee may assist any Employee (including any officer or director) in the exercise of one or more options under this Regular Option Grant Program by (a) authorizing the extension of a loan to such Employee from the Company, (b) permitting the Employee to pay the option price for the purchased Special Common Stock in installments over a period of years or (c) authorizing a guarantee by the Company of a third-party loan to the Employee. The terms of any loan, installment method of payment or guarantee (including the interest rate and terms of repayment) shall be established by the Committee in its sole discretion. Loans, installment payments and guarantees may be granted without security or collateral, but the maximum credit available to the Optionee shall not exceed the sum of (i) the aggregate exercise price (less the par value) of the purchased shares plus (ii) any Federal and State income and employment tax liability incurred by the Employee in connection with the exercise of the option. 14 ARTICLE THREE AUTOMATIC GRANT PROGRAM I. AUTOMATIC GRANTS On April 30, 1996 each individual who is a non-Employee member of the Board on such date shall automatically be granted a non-statutory option under this Article Three to purchase 20,000 shares of Special Common Stock. Each non-Employee who is first appointed or elected a member of the Board after April 30, 1996 shall automatically be granted, on the date of such individual's election to the Board, a non-statutory option under this Article Three to purchase 20,000 shares of Special Common Stock. Each Employee director who is first elected a member of the Board and who subsequently becomes a non-Employee director after April 30, 1996 shall automatically be granted, on the date of such individual's change from Employee to non-Employee director, a non- statutory option under this Article Three to purchase 20,000 shares of Special Common Stock. II. TERMS AND CONDITIONS OF GRANT Each option granted in accordance with the provisions of this Article Three shall be evidenced by an instrument in such form as the Committee approves from time to time for grants made under Article Two; provided, however, that each such automatic grant shall be subject to the following terms and conditions: A. Exercise Price. The exercise price per share shall be one hundred percent (100%) of the Closing Selling Price per share of Special Common Stock on the grant date. B. Term and Vesting of Options. 1. Except as otherwise specified below, each option shall vest in increments of 5,000 shares on the first, second, third and fourth anniversaries of the grant date and shall thereafter remain exercisable until the expiration or earlier termination of the option term. 2. Each granted option shall have a term of ten (10) years measured from the grant date. C. Exercise of Option. Upon exercise of the option, the option exercise price for the purchased shares shall become immediately due and payable in full in one of the alternative forms specified below: (i) cash or check payable to the Company's order; 15 (ii) shares of Special Common Stock held by the optionee for the requisite period necessary to avoid a charge to the Company's reported earnings and valued at the Closing Selling Price on the date of exercise; or (iii) any combination of the foregoing so long as the total payment equals the aggregate exercise price for the purchased shares. D. Non-Transferability. During the lifetime of the optionee, the option shall be exercisable only by the optionee and shall not be assignable or transferable by the optionee otherwise than by will or by the laws of descent and distribution. E. Effect of Termination of Board Membership. 1. Should an optionee cease to be a member of the Board for any reason (other than death) prior to the expiration date of the automatic grant held by the optionee under this Article Three, then each such grant shall remain exercisable, for any shares of Special Common Stock for which the option is exercisable at the time of such cessation of Board membership, for a period not to exceed the earlier of (i) the expiration of the three (3) month period following the date of such cessation of Board membership or (ii) the specified expiration date of the option term. 2. Should the optionee's membership on the Board cease by reason of death, then each outstanding grant held by the optionee under this Article Three may be subsequently exercised, for any shares of Special Common Stock for which the option is exercisable at the time of the optionee's cessation of Board membership, by the personal representative of the optionee's estate or by the person or persons to whom the option is transferred pursuant to the optionee's will or in accordance with the laws of descent and distribution. Any such exercise must, however, occur prior to the earlier of (i) the expiration of the twelve (12) month period following the date of the optionee's death or (ii) the specified expiration date of the option term. F. Stockholder Rights. An option holder shall have none of the rights of a stockholder with respect to any shares covered by an option granted under this Article Three until such individual shall have exercised the option, paid the option exercise price in full and satisfied all other conditions precedent to the issuance of certificates for the purchased shares. III. CORPORATE TRANSACTION In the event of a Corporate Transaction, options granted under the Automatic Grant Program shall be treated as described in Section III of Article Two, except the provisions of clause (iii) of the penultimate sentence of Section III A.(iii) of Article Two shall not apply. 16 IV. CHANGE IN CONTROL In the event of a Change in Control, options granted under the Automatic Grant Program shall be treated as described in Section III of Article Two, except the last sentence of Section III C.(ii) of Article Two shall not apply. ARTICLE FOUR STOCK INCENTIVE PROGRAM I. TERMS AND CONDITIONS OF STOCK ISSUANCES A. Shares may be issued under this Stock Incentive Program as a reward for past services rendered the Company or one or more of its Parent or Subsidiaries or as an incentive for future service with such entities. Any unvested shares so issued shall be evidenced by a Restricted Stock Issuance Agreement ("Issuance Agreement") which complies with the terms and conditions of this Stock Incentive Program and shall include appropriate terms with respect to legending of certificates and escrow of unvested shares. 1. Vesting Schedule. a. The Recipient's interest in the issued shares of Special Common Stock may, in the absolute discretion of the Committee, be fully and immediately vested upon issuance or may vest in one or more installments. b. The elements of the vesting schedule applicable to any unvested shares issued under this Stock Incentive Program, namely the number of installments in which the shares are to vest, the interval or intervals (if any) which are to lapse between installments and the effect which death, disability or other event designated by the Committee is to have upon the vesting schedule, shall be determined by the Committee and set forth in the Issuance Agreement executed by the Company and the Recipient at the time of the incentive grant. c. Except as may otherwise be provided in the Issuance Agreement, the Recipient may not transfer unvested shares of Special Common Stock. The Recipient, however, shall have all the rights of a stockholder with respect to such unvested shares, including without limitation the right to vote such shares and to receive all dividends paid on such shares. 2. Cancellation of Shares. a. In the event the Recipient should, while his/her interest in the issued Special Common Stock remains unvested, cease to continue in Service for any reason whatsoever, then the Company shall have the right to cancel all such unvested shares, and the Recipient shall thereafter have no further stockholder rights with respect to such shares. 17 b. The Committee may in its discretion waive such cancellation of unvested shares in whole or in part and thereby effect the immediate vesting of the Recipient's interest in the shares of Special Common Stock (or other assets) as to which the waiver applies. 3. Corporate Transaction/Change in Control. All unvested shares under the Stock Incentive Program shall immediately vest in full immediately prior to the occurrence of any Corporate Transaction or Change in Control, except to the extent: (i) the Company's outstanding cancellation rights are to be assigned to the successor corporation (or parent thereof) in connection with the Corporate Transaction, or (ii) one or more limitations imposed by the Committee at the time of stock issuance preclude such accelerated vesting. ARTICLE FIVE MISCELLANEOUS I. TAX WITHHOLDING A. The Company's obligation to deliver shares upon the exercise or surrender of stock options or stock appreciation rights granted under Article Two or Article Three or upon the issuance or vesting of shares under Article Four shall be subject to the satisfaction of all applicable Federal, State and local income and employment tax withholding requirements. B. The Committee may, in its discretion and upon such terms and conditions as it may deem appropriate (including the applicable safe-harbor provisions of SEC Rule 16b-3 or any successor rule or regulation) provide any or all Optionees or Recipients with the election to have the Company withhold, from the shares of Special Common Stock purchased or issued under the Plan, one or more of such shares with an aggregate Closing Selling Price equal to the designated percentage (up to 100% specified by the Optionee or Recipient) of the Federal and State income taxes ("Taxes") incurred in connection with the acquisition of such shares. In lieu of such direct withholding, one or more Optionees or Recipients may also be granted the right to deliver unrestricted shares of Special Common Stock to the Company in satisfaction of such Taxes. The withheld or delivered shares shall be valued at the Closing Selling Price on the applicable determination date for such Taxes. II. AMENDMENT OF THE PLAN A. The Board shall have the complete and exclusive authority to amend or modify the Plan in any or all respects whatsoever; provided, however, that no such amendment or modification shall, without the consent of the holders, adversely affect rights and obligations with respect to any stock options, stock appreciation rights or unvested Special Common Stock at the time outstanding under the Plan. 18 In addition, with a view to making available the benefits provided by Section 422 of the Code and/or SEC Rule 16b-3 as in effect from time to time under the 1934 Act, the Board shall, at the time of each such amendment, determine whether or not to submit such amendment of the Plan to the Company's stockholders for approval. B. No material amendments shall be made to the provisions of the Automatic Grant Program without the approval of the Company's stockholders. C. The provisions of the Automatic Grant Program shall not be amended more than once every six months, as required by SEC Rule 16b-3. III. EFFECTIVE DATE AND TERM OF PLAN A. The Plan shall become effective when adopted by the Board, but no stock option or stock appreciation right granted under the Plan shall become exercisable, and no shares shall be issued, unless and until the Plan shall have been approved by the Company's stockholders. If such stockholder approval is not obtained within twelve (12) months after the date of the Board's adoption of the Plan, then all stock options and stock appreciation rights previously granted under the Plan shall terminate and no further stock options or stock appreciation rights shall be granted. Subject to such limitation, the Committee may grant stock options and stock appreciation rights under the Plan at any time after the effective date and before the date fixed herein for termination of the Plan. B. The Plan shall in all events terminate on the date determined by the Board but in no event shall the Plan terminate later than February 6, 2006. Upon such termination, any stock options, stock appreciation rights and unvested shares at the time outstanding under the Plan shall continue to have force and effect in accordance with the provisions of the instruments evidencing such grants or issuances. C. Options may be granted under this Plan to purchase shares of Special Common Stock in excess of the number of shares then available for issuance under the Plan, provided (i) an amendment to increase the maximum number of shares issuable under the Plan is adopted by the Board prior to the initial grant of any such option and within one year thereafter such amendment is approved by the Company's stockholders, if such stockholder approval is deemed necessary by the Board, and (ii) each option granted is not to become exercisable, in whole or in part, at any time prior to the obtaining of such stockholder approval, and provided further that at any time that the Amended and Restated Governance Agreement dated as of October 25, 1995 between the Company and Roche Holdings, Inc. (the "Amended Governance Agreement") remains in effect, any action by the Board pursuant to the foregoing shall require the approval of a majority of the Independent Directors (as such term is defined in Article Eleventh of the Certificate of Incorporation of the Company). 19 IV. MISCELLANEOUS PROVISIONS A. Any cash proceeds received by the Company from the issuance of shares hereunder shall be used for general corporate purposes. B. The implementation of the Plan, the granting of any stock option or stock appreciation right hereunder, and the issuance of Special Common Stock under the Regular Option Grant, the Automatic Grant Program or Stock Incentive Program shall be subject to the Company's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the stock options and stock appreciation rights granted under it and the Special Common Stock issued pursuant to it. C. Neither the action of the Company in establishing the Plan, nor any action taken by the Board or the Committee hereunder, nor any provision of the Plan itself shall be construed so as to grant any individual the right to remain in the employ or service of the Company or any of its Parent or Subsidiaries for any period of specific duration, and the Company (or any parent or subsidiary retaining the services of such individual) may terminate such individual's employment or service at any time and for any reason, with or without cause. D. Nothing contained in the Plan shall be construed to limit the authority of the Company to exercise its corporate rights and powers, including (without limitation) the right of the Company (a) to grant options for proper corporate purposes otherwise than under this Plan to any Employee or other person, firm or company or association or (b) to grant options to, or assume the option of, any person in connection with the acquisition (by purchase, lease, merger, consolidation or otherwise) of the business and assets (in whole or in part) of any person, firm, company or association. ARTICLE SIX SPECIAL REDEMPTION AND PUT PROVISIONS I. PRIORITY To the extent there is a conflict between any of the provisions of this Article Six and any other provision of the Plan, the specific provisions of this Article Six shall be controlling and shall govern the disposition of all such options outstanding at the time of the Redemption (as defined below), upon the exercise of the Put Rights (as defined below), or when both events may no longer occur. Any rights under Section 1.04 of the Governance Agreement dated as of September 7, 1990 between the Company and Roche Holdings, Inc., ("Roche") and Section 1.04 of the Amended Governance Agreement which a holder of an option, stock appreciation right, or stock issued under the Stock Incentive Program may have are superseded in their entirety by this Article Six. 20 II. EFFECT OF REDEMPTION ON VESTED OPTIONS AND VESTED STOCK APPRECIATION RIGHTS AND VESTED SHARES ISSUED UNDER THE STOCK INCENTIVE PROGRAM A. If the Special Common Stock shall be redeemed by the Company (the "Redemption") at any time as provided in Section (c)(ii) of Article Third of the Certificate of Incorporation of the Company as in effect on October 25, 1995 (the "Certificate") or the put rights are exercisable by the stockholders of the Company (the "Put Rights") at any time as provided in Section (c)(iii) of Article Third of the Certificate, then holders of all outstanding options and stock appreciation rights granted hereunder, to the extent vested immediately prior to the date fixed for the Redemption or to the extent to which the Put Rights were properly exercised by such holder for their outstanding vested options and stock appreciation rights granted hereunder ("Vested Securities"), shall promptly be paid for such Vested Securities an amount equal to the product of (i) the excess of the redemption price or put price per share fixed in Section (c)(ii) or (iii) of Article Third of the Certificate, as applicable (without reduction for the payment of any cash dividends as provided in the fourth sentence of Section (c)(ii)(C) of Article Third of the Certificate), over the exercise price per share, times (ii) the number of shares covered by such Vested Security. If either the Redemption or exercise of the Put Rights occurs as described in the preceding sentence, then holders of all outstanding shares issued under the Stock Incentive Program, to the extent vested immediately prior to the date fixed for the Redemption or to the extent to which the Put Rights were properly exercised by such holder for their outstanding vested shares issued under the Stock Incentive Program ("Vested Shares"), shall promptly be paid for such Vested Shares an amount equal to the product of (i) the redemption price or put price per share fixed in Section (c)(ii) or (iii) of Article Third of the Certificate, as applicable (without reduction for the payment of any cash dividends as provided in the fourth sentence of Section (c)(ii)(C) of Article Third of the Certificate), times (ii) the number of Vested Shares. All payments hereunder shall be reduced by any appropriate tax withholding. III. EFFECT OF REDEMPTION ON UNVESTED OPTIONS AND STOCK APPRECIATION RIGHTS, AND UNVESTED SHARES ISSUED UNDER THE STOCK INCENTIVE PROGRAM A. Upon the Redemption each option and stock appreciation right granted under this Plan, to the extent not vested immediately prior to the date fixed for the Redemption shall be canceled. Upon the Redemption, all unvested shares issued under the Stock Incentive Program shall be canceled. IV. EFFECT OF NO REDEMPTION A. If the Redemption does not occur, each option and stock appreciation right granted and each share awarded under the Stock Incentive Program under this Plan which is outstanding on July 1, 1999 shall remain outstanding on the same terms and conditions (including, without limitation, the exercise price per share (in the case of options and stock appreciation rights), and the number of shares for options, stock appreciation rights and shares issued under the Stock Incentive Program) in effect for such option, stock appreciation right or share issued under the Stock Incentive Program immediately 21 prior to July 1, 1999, except that the shares purchasable under each such option, stock appreciation right or shares issued under the Stock Incentive Program shall continue to be shares of Special Common Stock prior to the Conversion Date (as defined in Section (c)(vi) of Article Third of the Certificate) and shares of Common Stock on and after the Conversion Date. Each such continuing option, stock appreciation right and share issued under the Stock Incentive Program will become exercisable, and shall vest in accordance with the same installment dates such option, stock appreciation right or share issued under the Stock Incentive Program would have become exercisable at the time of grant. Notwithstanding any provision in this Article Six, Section IV, to the contrary, if at any time following July 1, 1999 the shares of Genentech's capital stock are no longer listed for trading on the New York Stock Exchange, the Nasdaq National Market, or any other national exchange for any reason, any unvested options, stock appreciation rights and shares issued under the Stock Incentive Program shall automatically be cancelled as of such date. V. EXAMPLE A. For purposes of this example assume that it is July 1, 1999, the Redemption has not occurred, the Put Rights are exercisable, an individual holds an option for 100 shares of Special Common Stock with an exercise price of $50 per share, 75 of such shares are vested and 25 shares are unvested, the Special Common Stock is trading on the New York Stock Exchange at $62 per share, and the Put Price (as defined in the Certificate) is $60 per share. During the Put Period (as defined in the Certificate) the holder may properly exercise the holder's Put Rights with respect to none, some or all of the 75 vested shares. If, for example, the holder exercised Put Rights for 40 of the 75 shares, that holder would receive (40 shares) x (60 - 50 dollars per share) = $400, reduced by appropriate tax withholding. So long as the Special Common Stock (during the Put Period) or the Common Stock (following the Put Period) are listed for trading on the New York Stock Exchange, the Nasdaq National Market, or any other national exchange, (i) the 35 remaining vested shares for which Put Rights were not exercised shall remain exercisable to acquire shares of Special Common Stock or Common Stock, as appropriate, and (ii) the 25 unvested shares would continue to vest and, to the extent vested, be exercisable to acquire shares of Special Common Stock or Common Stock, as appropriate. If the Special Common Stock or the Common Stock is no longer listed for trading on the New York Stock Exchange, the Nasdaq National Market, or any other national exchange for any reason, any of the 25 shares that are unvested on such date shall automatically be cancelled. VI. OTHER A. On the Conversion Date, all references in the Plan to Special Common Stock shall automatically become references to Common Stock. B. The exercise by Roche Holdings, Inc. or its affiliates of its right to designate nominees to the Board of Directors pursuant to Sections 3.01 and 3.02 of the Amended Governance Agreement shall not constitute a Change in Control. 22 EX-10.17 8 PROMISSORY NOTE $1,500,000 South San Francisco, CA April 14, 1995 FOR VALUE RECEIVED, the undersigned, G. Kirk Raab, promises to pay to the order of GENENTECH, INC., ("Genentech"), One Million Five Hundred Thousand Dollars ($1,500,000), with interest as described below, at the principal offices of Genentech, upon the following terms and conditions: 1. Unless extended by Genentech's Board of Directors, the entire principal amount of this promissory note ("Note") shall be due and payable on the earlier of (i) April 21, 1996, (ii) the date of termination of employment of the undersigned with Genentech for any reason, or (iii) the date Roche Holdings, Inc. or any affiliate thereof causes Genentech to redeem its Redeemable Common Stock ("RCS") or any other security issued in exchange for such RCS. The undersigned promises to pay interest from the date hereof on the outstanding amount of principal at the rate of 6.69% per annum, compounded semi-annually, but not in excess of the maximum interest rate allowed to be paid under applicable law. 2. If any lawsuit, reference or arbitration is commenced which arises out of or relates to this Note, the prevailing party shall be entitled to recover from the other party such sums as the court may adjudge to be reasonable attorney's fees in the action, reference or arbitration, in addition to costs and expenses otherwise allowed by law. 3. The undersigned shall have the right to prepay all or any part of the unpaid principal amount of this Note without premium at any time prior to the maturity hereof. The undersigned will use his best efforts to repay the unpaid principal amount of this Note and any accrued but unpaid interest thereon prior to April 21, 1996. 4. Nothing in this Note shall be interpreted to give the undersigned any right to continue in the employ of Genentech for any particular period of time. 5. This Note is not transferable by the undersigned to any other person or entity. 6. The undersigned expressly waives presentment and demand for payment, notice of dishonor, protest and notice of protest of this Note. 7. This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of California, excluding conflict of laws principles that would cause the application of laws of any other jurisdiction. IN WITNESS WHEREOF, the undersigned has caused this Note to be signed, dated and delivered as of the day and year first above written. /S/G. KIRK RAAB _________________ G. Kirk Raab GENENTECH, INC. APPROVALS /S/LARRY SETREN /S/JOHN P. MCLAUGHLIN /S/BRAD GOODWIN _______________ _____________________ _______________________ Human Resources Management Committee Controller or Treasurer EX-99.4 9 GENENTECH, INC. TAX REDUCTION INVESTMENT PLAN (January 1, 1994 Restatement) PREAMBLE GENENTECH, INC. (the "Company") having established the Genentech, Inc. Tax Reduction Investment Plan (the "Plan") effective as of January 1, 1985, amended and restated the Plan effective (most recently) as of January 1, 1991, and amended the restated Plan on two prior occasions, hereby again amends and restates the Plan in its entirety effective as of January 1, 1994. The Plan is maintained for the benefit of Eligible Employees of the Company and its participating Affiliates, in order (1) to provide Eligible Employees with a means of supplementing their retirement income on a tax- favored basis, (2) to provide Eligible Employees with an incentive to continue and increase their efforts to contribute to the success of the Company, and (3) to enable Eligible Employees to acquire an equity ownership interest in the Company. The Plan is designed to constitute a qualified profit-sharing plan, as described in section 401(a) of the Code, which includes a qualified cash or deferred arrangement, as described in section 401(k) of the Code. The Plan is also designed to qualify as a 404(c) plan (within the meaning of section 404(c) of ERISA). SECTION 1 DEFINITIONS The following capitalized words and phrases shall have the following meanings unless a different meaning is plainly required by the context: 1.1 "Affiliate" shall mean a corporation, trade or business which is, together with any Employer, a member of a controlled group of corporations or an affiliated service group or under common control (within the meaning of section 414(b), (c), (m) or (o) of the Code), but only for the period during which such other entity is so affiliated with any Employer. 1.2 "Alternate Payee" shall mean any spouse, former spouse, child or other dependent (within the meaning of section 152 of the Code) of a Member who is recognized by a QDRO (as defined in Section 8.5) as having a right to receive any immediate or deferred payment from a Member's Account under this Plan. 1.3 "Beneficiary" shall mean the person or persons entitled to receive benefits under the Plan upon the death of a Member in accordance with Section 7.6. 1.4 "Board of Directors" shall mean the Board of Directors of the Company, as from time to time constituted. 1.5 "Code" shall mean the Internal Revenue Code of 1986, as amended. Reference to a specific section of the Code shall include such section, any valid regulation promulgated thereunder, and any comparable provision of any future legislation amending, supplementing or superseding such section. 1.6 "Commingled Funds" shall mean (collectively) the commingled funds described in Section 6.3. 1.7 "Committee" shall mean the administrative committee appointed by the Board of Directors (as provided in Section 9.2) and charged with the general administration of the Plan pursuant to Section 9. 1.8 "Common Stock" shall mean the redeemable common stock of the Company, par value $0.02, while such redeemable common stock is outstanding, and effective October 25, 1995, the callable putable common stock of the Company, par value $0.02, while such callable putable common stock is outstanding, and the common stock of the Company as from time to time constituted. 1.9 "Company" shall mean Genentech, Inc., a Delaware corporation, and any successor by merger, consolidation or otherwise that assumes (in writing) the obligations of the Company under the Plan. 1.10 "Compensation" shall mean all salary, wages, annual cash bonuses and sales commissions paid by any Employer with respect to services performed during any period by an Employee, including Salary Deferrals, but excluding contributions made by any Employer (other than Salary Deferrals) under this Plan or any other employee benefit plan (within the meaning of section 3(3) of ERISA). No portion of the Compensation of any Member for a Plan Year which exceeds $150,000 (as adjusted pursuant to sections 401(a)(17) and 415(d) of the Code) shall be taken into account under the Plan for any Plan Year. In applying that $150,000 limit for a Plan Year, Section 1.17(c) shall apply except that the term "Family Member" shall only include a spouse or a lineal descendant who has not attained age 19 before the close of the Plan Year. 1.11 "Disability" shall mean the mental or physical inability of a Member to perform his or her normal job as evidenced by the certificate of a medical examiner satisfactory to the Committee certifying that the Member is disabled under the standards of the Company's long-term disability plan. 1.12 "Eligible Employee" shall mean every Employee of an Employer except: (a) An Employee who is employed on a temporary basis as defined by an Employer; provided, however, that any such Employee who is credited with at least 1,000 Hours of Service for a 12-month period beginning on his or her date of hire or any anniversary thereof shall become an Eligible Employee as of the Entry Date that next follows the last day of such 12- month period; (b) A part-time Employee who is not normally scheduled to work at least 20 hours per week; provided, however, that any such Employee who is credited with at least 1,000 Hours of Service for a 12-month period beginning on his or her date of hire or any anniversary thereof shall become an Eligible Employee as of the Entry Date that next follows the last day of such 12-month period; (c) An Employee who is a member of a collective bargaining unit and who is covered by a collective bargaining agreement where retirement benefits were the subject of good faith bargaining, unless the agreement specifically provides for coverage of such Employee under this Plan; (d) An individual employed by any corporation or other business entity that is merged or liquidated into, or whose assets are acquired by any Employer, unless any two (2) of the officers identified in Section 11.2 designate (in writing) the employees of that corporation or other business entity as Eligible Employees under the Plan; provided, however, that the exclusion of any individual under this paragraph (c) does not make unavailable an exemption from section 16(a) or (b) of the 1934 Act; (e) An Employee whose Compensation is not paid from any Employer's U.S. payroll; and (f) Leased Employees. For purposes of this Section 1.12, "date of hire" shall mean the date on which an Employee first completes an Hour of Service. 1.13 "Employee" shall mean an individual who is a (a) employed by an Employer or Affiliate as a common-law employee, or (b) a Leased Employee. However, if Leased Employees constitute less than 20% of the nonhighly compensated work force (within the meaning of section 414(n)(5)(C)(ii) of the Code), the term "Employee" shall not include those Leased Employees who are covered by a plan described in section 414(n)(5) of the Code. 1.14 "Employer" shall mean the Company and each Affiliate that adopts this Plan with the approval of the Board of Directors. 1.15 "Entry Date" shall mean the first day of each calendar quarter. 1.16 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. Reference to a specific section of ERISA shall include such section, any valid regulation promulgated thereunder, and any comparable provision of any future legislation amending, supplementing or superseding such section. 1.17 "Highly Compensated Employee" shall mean a Highly Compensated Active Employee or a Highly Compensated Former Employee, as defined below: (a) "Highly Compensated Active Employee" shall mean any Employee who performs services for an Employer or Affiliate during the Determination Year (as defined in Section 1.17(e)(1)) and who: (1) During the Look-Back Year (as defined in Section 1.17(e)(2)) (A) was a 5-percent owner (within the meaning of section 414(q)(3) of the Code) (a "5% Owner"), (B) received Compensation in excess of $75,000 (as adjusted pursuant to sections 414(q)(1) and 415(d) of the Code), (C) received Compensation in excess of $50,000 (as adjusted pursuant to sections 414(q)(1) and 415(d) of the Code) and was a member of the top-paid group (within the meaning of section 414(q)(4) of the Code) for that Look-Back Year, or (D) was an officer of an Employer or Affiliate and received Compensation for that Look-Back Year that is greater than 50% of the dollar limitation then in effect under section 415(b)(1)(A) and (d) of the Code or (if no officer has Compensation in excess of that threshold) was the highest paid officer for that Look-Back Year; (2) (A) Would be described in clause (B), (C) or (D) of paragraph (a)(1) above if the term "Determination Year" were substituted for the term "Look-Back Year" and (B) is one of the 100 Employees who received the most Compensation for the Determination Year; or (3) Is a 5% Owner at any time during the Determination Year. Subject to the satisfaction of such conditions as may be prescribed under section 414(q)(12)(B)(ii) of the Code, the Company may elect for any Plan Year (i) to apply paragraph (a)(1)(B) above by substituting "$50,000" for "$75,000" and (ii) not to apply paragraph (a)(1)(C) above. (b) "Highly Compensated Former Employee" shall mean any Employee who (1) separated (or was deemed to have separated) from service prior to the Determination Year, (2) performed no services for any Employer or Affiliate during the Determination Year, and (3) was a Highly Compensated Active Employee for either the Plan Year in which the separation occurred or any Determination Year ending on or after his or her 55th birthday. (c) If an Employee is, at any time during a Determination Year or Look- Back Year, a spouse, lineal ascendant or descendant, or spouse of a lineal ascendant or descendant (a "Family Member") of either (1) a 5% Owner (as defined in Section 1.17(a)(1)(A)) who is an active or former Employee or (2) a Highly Compensated Employee who is one of the ten most highly compensated employees ranked on the basis of Compensation paid for that Year (in either case, a "Family Employee"), then for that Year the Family Member and the Family Employee shall be aggregated and treated as one Employee receiving Compensation and contributions under the Plan equal to the sum of such Compensation and contributions received by the Family Member and the Family Employee. (d) The determination of who is a Highly Compensated Employee, including the determinations of the number and identity of Employees in the top-paid group, the top 100 Employees and the number of Employees treated as officers, shall be made in accordance with section 414(q) of the Code. (e) For purposes of applying this Section 1.17: (1) "Determination Year" shall mean the Plan Year for which the determination is being made; (2) "Look-Back Year" shall mean the Plan Year preceding the Determination Year, unless the Committee elects to make Look-Back Year calculations based on the Determination Year; and (3) "Compensation" shall mean Testing Compensation (as defined in Section 3.1.6), but without regard to the last three sentences thereof. 1.18 "Hour of Service" means an hour credited to an Employee under this Section 1.18: (a) Paid Hours. An "Hour of Service" includes each hour for which: (1) An Employee is directly or indirectly paid or entitled to payment by an Employer or Affiliate for the performance of duties; (2) An Employee is directly or indirectly paid or entitled to payment by an Employer or Affiliate for periods during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including Disability), layoff, jury duty or Leave of Absence (with pay); and (3) Back pay (irrespective of mitigation damages) has been awarded or agreed to by an Employer or Affiliate. (b) No Duties Performed. Except as otherwise provided in subsection (d) below, no Hours of Service shall be credited for periods during which no duties are performed if payment by an Employer or Affiliate is made or due under a plan maintained solely for the purpose of complying with applicable worker's compensation, unemployment compensation or disability insurance laws, or is made as reimbursement to an Employee for medical or medically related expenses. In no event will more than 501 Hours of Service be credited under this paragraph (b) on account of any single continuous period during which an Employee performs no duties. (c) Crediting Rules. Hours of Service shall be credited under this Section 1.18 in accordance with U.S. Department of Labor Regulation Section 2530.200b-2(b) and (c). (d) Family-Related Absences. In the case of an Employee who is absent from active employment with an Employer or Affiliate for any period, (1) By reason of her pregnancy or the birth of his or her child, (2) By reason of the placement of a child with the Employee in connection with his or her adoption of such child, (3) For purposes of caring for any such child for a period beginning immediately following such birth or placement, or (4) On account of a leave of absence taken pursuant to the Family and Medical Leave Act of 1993 ("FMLA"), "Hour of Service" shall mean any hour that is not credited as an Hour of Service (because the Employee is not paid or entitled to payment therefor) but which would otherwise normally have been credited to the Employee (but for the absence) under paragraphs (a) through (c) above. In any case in which the Committee is unable to determine the number of hours that would otherwise normally have been credited to an Employee (but for the absence) under this paragraph (d), the Employee shall be credited with eight Hours of Service for each day of the absence. Notwithstanding the foregoing, (A) no more than 501 Hours of Service shall be credited under this paragraph (d) to any individual on account of any single pregnancy, birth, placement or other FMLA leave, and (B) the hours described in this paragraph (d) shall be treated as Hours of Service (i) for the Plan Year in which the absence begins, to the extent required to credit the Employee with 1,000 Hours of Service for that Plan Year, and (ii) with respect to the remainder of the 501 Hours of Service maximum, for the next following Plan Year. 1.19 "Investment Manager" shall mean any investment manager appointed by the Committee in accordance with Section 9.6. 1.20 "Leased Employee" shall mean an individual who is a leased employee (within the meaning of section 414(n)(2) of the Code) with respect to an Employer or Affiliate. 1.21 "Leave of Absence" shall mean the period of an Employee's absence from active employment (a) authorized by any Employer in accordance with its established and uniformly administered personnel policies, provided that the Employee returns to active employment after the authorized absence period expires, unless the Employee's failure to return is attributable to his or her retirement or death; or (b) because of military service in the armed forces of the United States, provided that the Employee returns to active employment following discharge within the period during which he or she retains reemployment rights under federal law. 1.22 "Matching Contributions" shall mean as to each Member the amounts contributed under the Plan by the Employers, excluding Salary Deferrals, in accordance with Section 4.1. 1.23 "Member" shall mean an Eligible Employee who has become a Member of the Plan pursuant to Section 2.1 and has not ceased to be a Member pursuant to Section 2.6. (a) For each Plan Year a Member shall be classified as an "Active Member" if (1) he or she has enrolled in the Plan for any portion of the Plan Year by authorizing the required Salary Deferrals in accordance with Sections 2.3, 3.1 and 3.2, or (2) his or her active membership is resumed during the Plan Year after the end of a suspension period in accordance with Section 2.4 or 2.5. (b) A Member who is not an Active Member shall be classified as an "Inactive Member." 1.24 "Member's Account" or "Account" shall mean as to any Member the separate account maintained in order to reflect his or her interest in the Plan. Each Member's Account shall be comprised of up to four separate subaccounts, as follows: 1.24.1 "Loan Account" shall mean the subaccount maintained to record any loans made to the Member from his or her Account pursuant to Section 5.3.3. 1.24.2 "Matching Account" shall mean the subaccount maintained to record Matching Contributions made on behalf of the Member and any adjustments relating thereto. 1.24.3 "Rollover Account" shall mean the subaccount maintained to record any transfers to the Plan made by or on behalf of a Member pursuant to Section 10.5 and any adjustments relating thereto. 1.24.4 "Salary Deferral Account" shall mean the subaccount maintained to record the Salary Deferrals made on behalf of the Member and any adjustments relating thereto. 1.25 "1934 Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. Reference to a specific section of the 1934 Act shall include any section, any valid regulation promulgated thereunder, and any comparable provision of any future legislation amending, supplementing or superseding such section. 1.26 "Normal Retirement Age" shall mean age 55. 1.27 "Plan" shall mean the Genentech, Inc. Tax Reduction Investment Plan, formerly the Genentech, Inc. Tax Incentive Savings Plan, as set forth in this instrument and as heretofore or hereafter amended from time to time in accordance with Section 11.2. 1.28 "Plan Year" shall mean the calendar year. 1.29 "Salary Deferrals" shall mean as to each Member the amounts contributed under the Plan by the Employers in accordance with Section 3.3, pursuant to the salary deferral election made by the Member in accordance with Sections 3.1 and 3.2. 1.30 "Trust Fund" shall mean the trust fund established by and maintained under the Trust Agreement entered into by and between any Employer and the Trustee, as amended from time to time, for the purpose of funding the benefits provided by the Plan, as provided in Section 10. 1.31 "Trustee" shall mean Fidelity Management Trust Company, a Massachusetts trust company, and any additional, successor or substitute trustee or trustees from time to time acting as Trustee of the Trust Fund. 1.32 "Valuation Date" shall mean: (a) For purposes of valuing Plan assets and Members' Accounts for periodic reports and statements, the date as of which such reports or statements are made; and (b) For purposes of determining the amount of assets actually distributed to the Member, his or her Beneficiary or an Alternate Payee (or available for loan or withdrawal), the date on which occur the relevant transactions required to liquidate to cash the assets allocated to the Member's Account, provided that when such transactions occur on more than one date, there shall be several Valuation Dates, as appropriate. In any other case, the Valuation Date shall be the date designated by the Committee (in its discretion) or the date otherwise set out in this Plan. In all cases, the Committee may (in its discretion) change the Valuation Date, on a uniform and nondiscriminatory basis, as is necessary or appropriate. Notwithstanding the foregoing, the Valuation Date shall occur at least annually. SECTION 2 ELIGIBILITY AND MEMBERSHIP 2.1 Initial Eligibility. An Employee shall become a Member of the Plan on the date he or she becomes an Eligible Employee. 2.2 Employer Aggregation. The status of an Employee as an Eligible Employee shall not be adversely affected merely by reason of his or her employment by more than one Employer during any Plan Year. The transfer of a Member from employment with an Employer to employment with an Affiliate which is not an Employer shall not be an event entitling the Member to a distribution under Section 7. 2.3 Membership. Each Member's decision to become an Active Member shall be entirely voluntary. 2.3.1 Active Membership. An Employee who has become a Member under Section 2.1 may elect to become an Active Member, effective as of the first day of the first payroll period beginning on or after any Entry Date, provided that he or she enrolls in the Plan and elects to make Salary Deferrals, on forms provided by the Committee, at least 15 days before the Entry Date. 2.3.2 Inactive Membership. A Member who does not elect to become an Active Member when eligible to do so shall be at all times treated as an Inactive Member until the Entry Date as of which he or she elects to become an Active Member. 2.4 Voluntary Suspension. An Active Member may voluntarily suspend his or her active membership in the Plan, by suspending his or her Salary Deferrals for any number of calendar quarters, as of the first day of any payroll period, by giving at least 15 days' prior written notice to the Committee, provided that any Member who is subject to section 16 of the 1934 Act may suspend his or her Salary Deferrals only as of an Entry Date. 2.4.1 Effect. With respect to the period for which a Member's active membership is suspended, he or she shall not make any Salary Deferrals nor share in the allocation of Matching Contributions, and he or she may not later make the Salary Deferrals that he or she might otherwise have made during the suspension period. No distribution shall be made to a Member solely as the result of any suspension of his or her active membership. 2.4.2 Resumption of Active Membership. A Member whose active membership in the Plan has been suspended may voluntarily resume his or her Salary Deferrals, effective with respect to Compensation paid for the first payroll period beginning on or after any Entry Date, by again electing to become an Active Member in accordance with Section 2.3; provided, however, that with respect to any Member who is subject to section 16 of the 1934 Act and whose active membership has been suspended (whether voluntarily, mandatorily or in any other fashion), such Member shall not resume active membership for a minimum of six (6) months after the Entry Date on which such Member's suspension became effective. 2.5 Mandatory Suspension. If a Member (1) ceases to be an Eligible Employee because he or she ceases to meet the requirements of Section 1.12, (2) is transferred to employment with an Affiliate which is not an Employer, (3) is granted a Leave of Absence without pay, (4) is on long-term disability, or (5) is placed on layoff or furlough status, then: (a) His or her status as an Active Member shall be suspended (in accordance with Section 2.4.1) for each payroll period beginning during the continuation of such ineligible status, and (b) After he or she again becomes an Eligible Employee and the conditions described in clauses (1) through (5) above cease to apply, his or her status as an Active Member may be resumed only in accordance with Section 2.4.2. Notwithstanding any contrary Plan provision, a Member's Compensation which is paid for any portion of a payroll period that includes a period of mandatory suspension shall not be subject to any salary deferral election nor contributed under the Plan as Salary Deferrals. 2.6 Termination of Membership. An Eligible Employee who has become a Member shall remain a Member until his or her employment with all Employers and Affiliates terminates or, if he or she remains alive, until his or her entire Account balance is distributed (whichever is later). SECTION 3 SALARY DEFERRALS 3.1 Salary Deferrals. Each Active Member may elect to defer portions of his or her Compensation payments and to have the amounts of such Salary Deferrals contributed by the Employers to the Trust Fund and credited to his or her Salary Deferral Account under the Plan. An Active Member may elect to defer a portion of each payment of Compensation that would otherwise be made to him or her, after the election becomes and while it remains effective, equal to any whole percentage from 1% to 15% (inclusive) of his or her Compensation. 3.1.1 Section 401(k) Ceiling. Notwithstanding the foregoing, the Committee: (a) May suspend or limit any Member's salary deferral election at any time in order to prevent the cumulative amount of the Salary Deferrals contributed on behalf of the Member for any calendar year from exceeding the Section 401(k) Ceiling; (b) Shall cause any amount allocated to the Plan as an excess deferral (calculated by taking into account only amounts deferred under this and any other cash or deferred arrangement maintained by any Employer or Affiliate and qualified under section 401(k) of the Code), together with any income allocable to that amount for the calendar year to which the excess deferral relates, to be distributed to the Member in accordance with section 402(g)(2)(A) of the Code; and (c) May cause any other amount allocated to the Member's Account and designated by the Member as an excess deferral, together with any income allocable thereto for the calendar year to which the excess deferral relates, to be distributed to the Member in accordance with section 402(g)(2)(A) of the Code. (d) The "Section 401(k) Ceiling" is a dollar amount equal to the dollar limit prescribed in section 402(g)(3) of the Code (as adjusted pursuant to sections 402(g)(5) and 415(d) of the Code). 3.1.2 Limitations on HCE Members. For any Plan Year, the Committee (in its discretion) may limit the period for which, and/or specify a lesser maximum percentage at which, Salary Deferrals may be elected by HCE Members (as defined in Section 3.1.3) in such manner as may be necessary or appropriate in order to assure that the limitation described in Section 3.1.4 will be satisfied. 3.1.3 HCE and Non-HCE Members. All Members who are Eligible Employees at any time during a Plan Year (whether or not they are Active Members), and who are Highly Compensated Employees (as defined in Section 1.17) with respect to the Plan Year, shall be "HCE Members" for the Plan Year. All other Members who are Eligible Employees at any time during the Plan Year shall be "Non-HCE Members" for the Plan Year. 3.1.4 Deferral Percentage Limitation. In no event shall the actual deferral percentage, determined in accordance with Section 3.1.5 (the "ADP"), for the HCE Members for a Plan Year exceed the maximum ADP, as determined by reference to the ADP for the Non-HCE Members, in accordance with the following table: If the ADP for Non-HCE Members Then the Maximum ADP ("NHCEs' ADP") is: for HCE Members is: _________________ ____________________ Less than 2% 2.0 x NHCEs' ADP 2% to 8% NHCEs' ADP + 2% More than 8% 1.25 x NHCEs' ADP 3.1.5 Actual Deferral Percentage. The actual deferral percentage for the HCE or Non-HCE Members for a Plan Year shall be calculated by computing the average of the percentages (calculated separately for each HCE or Non-HCE Member) (the "Deferral Rates") determined by dividing (1) the total of all Salary Deferrals made by the Member and credited to his or her Salary Deferral Account for the Plan Year, by (2) the Member's Testing Compensation (as defined in Section 3.1.6) for the Plan Year. In computing a Member's Deferral Rate, the following special rules shall apply: (a) If any Employer or Affiliate maintains any other cash or deferred arrangement which is aggregated by the Company with this Plan for purposes of applying section 401(a)(4) or 410(b) of the Code, then all such cash or deferred arrangements shall be treated as one plan for purposes of applying Section 3.1.4. (b) If an HCE Member is a participant in any other cash or deferred arrangement maintained by any Employer or Affiliate, the separate Deferral Rates determined for the Member under all such cash or deferred arrangements shall be aggregated with the separate Deferral Rate determined for the Member for purposes of applying Section 3.1.4. (c) If an HCE Member is subject to the family aggregation rules of Section 1.17(c), the Deferral Rate of the family unit shall be the greater of (1) the combined Deferral Rate of all Family Members (as defined in Section 1.17(c)) who are HCE Members without regard to family aggregation, or (2) the combined Deferral Rate of all eligible Family Members. 3.1.6 Testing Compensation. For purposes of applying Sections 3.1, 3.2 and 4.1 and the discrimination tests of sections 401(k) and 401(m) of the Code, "Testing Compensation" shall mean with respect to any Member: (a) The sum of (1) his or her Total Compensation (as defined in Section 5.4.2(d)), (2) Salary Deferrals credited to his or her Salary Deferral Account, and (3) other amounts that are contributed to an employee benefit plan by any Employer pursuant to a salary reduction agreement and are not includible in gross income under section 125, 401(k), 402(e)(3), 402(h), 403(b) or 414(h)(2) of the Code; or (b) The amount of his or her compensation calculated by the Committee in a manner which satisfies applicable requirements of Treas. Reg. section 1.401(k)-1(g)(2)(i). Compensation for periods prior to the time that the individual becomes a Member shall not be taken into account. No amount in excess of $150,000 (as adjusted pursuant to sections 401(a)(17) and 415(d) of the Code) shall be taken into account under this Section 3.1.6 for any Plan Year. In applying that $150,000 limit for a Plan Year, Section 1.17(c) shall apply except that the term "Family Member" shall only include a spouse or lineal descendant who has not attained age 19 before the close of the Plan Year. 3.2 Salary Deferral Election. Each Active Member shall determine the percentage of his or her Compensation that shall be deferred and contributed to the Trust Fund as his or her Salary Deferrals, subject to the limitations of Section 3.1, at the time he or she becomes an Active Member and thereafter may redetermine such percentage from time to time as of any Entry Date. In either event the Active Member shall execute and deliver a salary deferral election with respect to his or her Salary Deferrals, and no Salary Deferrals shall be made by any Active Member except in accordance with his or her salary deferral election and the limitations of Section 3.1. 3.2.1 Amount. The amount of Salary Deferrals that may be made by each Active Member for each payroll period shall be the amount in dollars and cents that is nearest to the amount of Compensation subject to the salary deferral election multiplied by the percentage elected by the Active Member pursuant to Section 3.1. 3.2.2 Changes. An Active Member may change the percentage determined under the first sentence of this Section 3.2, effective with respect to Compensation paid for the first payroll period beginning on or after any Entry Date, or such other date as the Committee (in its discretion) may specify, by giving written notice on such form and within such advance notice period as the Committee shall specify. The salary deferral election made by an Active Member shall remain in effect until his or her active membership in the Plan is terminated, except to the extent that the election is suspended in accordance with Section 2.4, 2.5 or 8.1, changed in accordance with this Section 3.2.2, or reduced pursuant to Section 3.1.1 or 3.1.2. 3.2.3 Potential Excess ADP. In the event that (but for the application of this Section 3.2.3) the Committee determines that the ADP for HCE Members would exceed the maximum permitted under Section 3.1.4 for a Plan Year (the "ADP Maximum"), then the Committee (in its discretion) may reduce, in accordance with Section 3.1.2, the percentage or amount of Salary Deferrals subsequently to be contributed on behalf of the HCE Members by such percentage or amount as, and for as long as, the Committee (in its discretion) may determine is necessary or appropriate in the circumstances then prevailing. If the Committee determines that it is no longer necessary to reduce the Salary Deferrals contributed on behalf of (current or former) HCE Members, the Committee (in its discretion) may permit some or all HCE Members, on a uniform and nondiscriminatory basis, to make new salary deferral elections with respect to their Salary Deferrals and shall establish a policy as to the deferral percentages that shall apply with respect to those HCE Members who do not make new elections. 3.2.4 Actual Excess ADP. In the event that the Committee determines that the ADP for the HCE Members exceeds the ADP Maximum for any Plan Year, then (1) the amount of any excess contributions (within the meaning of section 401(k)(8)(B) of the Code) contributed on behalf of any HCE Member, and (2) any Matching Contributions allocated to the HCE Member's Matching Account by reason of excess contributions distributed pursuant to clause (1), shall be distributed, together with any income allocable to those amounts for the Plan Year to which the excess contributions relate, to the HCE Member before the close of the Plan Year that next follows that Plan Year. (a) Determination of Excess Contributions. The amount of excess contributions for a HCE Member shall be determined in the following manner: (1) The Salary Deferrals of the HCE Member with the highest Deferral Rate shall be reduced to the extent necessary to satisfy the ADP test or cause such Rate to equal the Deferral Rate of the HCE Member with the next highest Deferral Rate. This process shall be repeated until the ADP test is satisfied. (2) The amount of excess contributions for a HCE Member shall be equal to his or her Salary Deferrals (calculated using the Member's original Deferral Rate), minus his or her Deferrals calculated using the Member's Deferral Rate as reduced under paragraph (a)(1) above. (3) The amount of excess contributions, as determined according to the method described in this paragraph (a), shall be reduced by any excess deferrals previously distributed to a Member for the Plan Year under Section 3.1.1. (b) Family Aggregation. In the case of an HCE Member whose Deferral Rate is determined under the family aggregation rules of Section 3.1.5(c), the Deferral Rate shall be reduced in accordance with the "levelling" method described in Treas. Reg. section 1.401(k)-1(f)(2). Excess contributions for the family unit shall be allocated among the Family Members in proportion to the Salary Deferrals of each Family Member that have been combined. (c) Determination of Allocable Income. The income allocable to any excess contributions for the Plan Year, excluding income for the period between the end of the Plan Year and the date of distribution, shall be determined in accordance with section 401(k)(8)(A)(i) of the Code. (d) Incorporation By Reference. The foregoing provisions of this Section 3 are intended to satisfy the requirements of section 401(k)(3) of the Code and, to the extent not otherwise stated above, the provisions of section 401(k)(3) and 401(m)(9) of the Code and Treas. Reg. section 1.401(k)-1(b) and 1.401(m)-2 are incorporated herein by reference. 3.3 Payment of Deferrals. Subject to the provisions of Sections 3.1, 3.2, 10.3 and 11, the Employers shall pay to the Trust Fund the amounts elected by Members to be contributed as Salary Deferrals pursuant to Section 3. Any Salary Deferrals to be contributed for a payroll period in accordance with the preceding sentence shall be paid to the Trust Fund as soon as practicable (and in no event later than 90 days) after the end of such period. SECTION 4 MATCHING CONTRIBUTIONS 4.1 Amount of Matching Contributions. Subject to the provisions of this Section 4.1 and Sections 10.3 and 11, the Employers shall contribute to the Trust Fund as Matching Contributions amounts equal to the Matching Amount (determined pursuant to Section 4.1.1) determined by the Salary Deferrals made for each payroll period by each eligible Active Member (determined pursuant to Section 4.1.3). Only those Salary Deferrals which are made pursuant to such portion of each eligible Active Member's Deferral Rate (determined pursuant to Section 3.1) as does not exceed the Matching Ceiling (determined pursuant to Section 4.1.2) shall be taken into account in calculating the amount of the Matching Contribution (if any) to be made in respect of the Member's Salary Deferrals. 4.1.1 Matching Amount. The rate at which the amount of Employer Matching Contributions shall be made for any Plan Year (the "Matching Amount") shall be determined as follows: If the Salary Deferral Contribution Rate for an Then the Matching Amount eligible Active Member is: for the Member shall be: Less than or equal to 2% Equal to the Salary Deferrals Greater than 2% Equal to the first 2% of Salary deferrals plus one-half (1/2) of Salary Deferrals greater than 2% and less than or equal to 6% The "Salary Deferral Contribution Rate" for an Active Member is determined on a Plan Year basis and is (Salary Deferrals) divided by (Compensation), expressed as a percentage. Subject to the limitations of Section 5.4, the Matching Amount may be changed for any Plan Year to such extent (if any) as the Board of Directors (in its discretion) may determine by resolution and without amending the Plan pursuant to Section 11.2; provided, however, that no decrease in the Matching Amount applicable to any Salary Deferral contribution rate shall take effect before the first payroll period that begins after the decrease is announced to eligible Active Members. 4.1.2 Maximum Matched Rate. For any Plan Year for which a different rate is not determined in accordance with the following sentence, the maximum Salary Deferral contribution rate that shall be taken into account in determining the amount of the Matching Contribution (if any) to be made on behalf of any eligible Active Member pursuant to this Section 4.1 (the "Matching Ceiling") shall be 6%, i.e., the amount of Matching Contributions (if any) to be made on behalf of any eligible Active Member shall not exceed 4% of his or her Compensation. Subject to the limitations of Section 5.4, the Board of Directors (in its discretion) may change for any Plan Year the maximum Salary Deferral contribution rate stated in the preceding sentence; provided, however, that no decrease in the Matching Ceiling shall take effect before the first payroll period that begins after the decrease is announced to eligible Members. 4.1.3 Eligible Members. Notwithstanding the foregoing provisions of this Section 4.1, no Matching Contribution shall be made on behalf of an Active Member for a Plan Year unless (a) he or she remains an Eligible Employee on the last Valuation Date of the Plan Year, or (b) his or her employment with all Employers and Affiliates terminated at any time during the Plan Year by reason of death or Disability. 4.1.4 Limitations on HCE Members. For any Plan Year, the Committee (in its discretion) may limit the period for which, and/or specify a lesser Matching Amount and/or Matching Ceiling with respect to the amount of Matching Contributions to be made on behalf of HCE Members (as defined in Section 3.1.3) in such manner as may be necessary or appropriate in order to assure that the limitation described in Section 4.1.5 will be satisfied. 4.1.5 Contribution Percentage Limitation. In no event shall the actual contribution percentage, determined in accordance with Section 4.1.6 (the "ACP"), for the HCE Members for a Plan Year exceed the maximum ACP, as determined by reference to the ACP for the Non-HCE Members, in accordance with the following table: If the ACP for Non-HCE Members Then the Maximum ACP ("NHCEs' ACP") is: for HCE Members is: _________________ ____________________ Less than 2% 2.0 x NHCEs' ACP 2% to 8% NHCEs' ACP + 2% More than 8% 1.25 x NHCEs' ACP 4.1.6 Actual Contribution Percentage. The actual contribution percentage for the HCE or Non-HCE Members for a Plan Year shall be calculated by computing the average of the percentages (calculated separately for each HCE or Non-HCE Member) (the "Contribution Rates") determined by dividing (a) the total of all Matching Contributions made on behalf of the Member and credited to his or her Matching Account for the Plan Year, by (b) the Member's Testing Compensation (as defined in Section 3.1.6) for the Plan Year. The special aggregation rules set forth in Section 3.1.5 with respect to calculation of the Members' ADPs shall also apply to the calculation of their ACPs. 4.1.7 Potential Excess ACP. In the event that (but for the application of this Section 4.1.7) the Committee determines that the ACP for the HCE Members would exceed the maximum permitted under Section 4.1.5 for a Plan Year (the "ACP Maximum"), then the Committee (in its discretion) may reduce, in accordance with Section 4.1.4, the percentage or amount of Matching Contributions subsequently to be made on behalf of the HCE Members by such percentage or amount as, and for as long as, the Committee (in its discretion) may determine is necessary or appropriate in the circumstances then prevailing. 4.1.8 Actual Excess ACP. In the event that the Committee determines that the ACP for the HCE Members exceeds the ACP Maximum for a Plan Year, then the amount of any excess aggregate contributions (within the meaning of section 401(m)(6)(B) of the Code) contributed on behalf of any HCE Member shall be distributed, together with any income allocable to that amount for the Plan Year to which the excess aggregate contributions relate, to the HCE Member before the close of the Plan Year that next follows that Plan Year. (a) Determination of Excess Aggregate Contributions. The amount of excess aggregate contributions for an HCE Member, the income allocable thereto and the application of the family aggregation rules shall be determined in the manner provided in Section 3.2.4 with respect to excess contributions. (b) Prohibition on Multiple Use. Notwithstanding any contrary Plan provision, multiple use of the alternative methods of compliance with sections 401(k) and 401(m) of the Code, as set forth in sections 401(k)(3)(A)(ii)(II) and 401(m)(2)(A)(ii) of the Code, shall not be permitted. In the event that multiple use occurs, it shall be corrected by reducing the ADP and/or ACP for HCE Members (in the discretion of the Committee), and treating such reductions as excess contributions and/or excess aggregate contributions (as appropriate) under Section 3.2.4 or this Section 4.1.8. (c) Incorporation By Reference. The foregoing provisions of this Section 4.1 are intended to satisfy the requirements of section 401(m) of the Code and, to the extent not otherwise stated above, the provisions of section 401(m)(2) and (9) of the Code and Treas. Reg. section 1.401(m)-1(b) and 1.401(m)-2 are incorporated herein by reference. 4.2 Timing. Subject to the provisions of Sections 4.1.4, 10.3 and 11, Matching Contributions shall be paid to the Trust Fund within the time prescribed by law (including extensions) for filing the Company's federal income tax return for its taxable year that ends with or within the Plan Year for which the Matching Contributions are made. 4.3 Periodic Contributions. Subject to the foregoing provisions of this Section 4, any Matching Contributions to be made for a Plan Year may be paid in installments from time to time during or after the Plan Year for which they are made. The Employers shall specify, as to each Matching Contribution payment made to the Trust Fund, the Plan Year to which the payment relates. The Employers intend the Plan to be permanent, but the Employers do not obligate themselves to make any Matching Contributions under the Plan whatsoever. 4.4 Profits Not Required. Each Employer shall make any contributions otherwise required to be made for a Plan Year without regard to its current or accumulated earnings or profits for the taxable year that ends with or within the Plan Year for which the contributions are made. Notwithstanding the foregoing, the Plan is designed to constitute a qualified profit-sharing plan as described in section 401(a) of the Code. 4.5 After-Tax Contributions. In no event shall any Member be permitted to make contributions to the Plan or Trust Fund on an after-tax basis. SECTION 5 ALLOCATIONS AND INVESTMENT 5.1 Salary Deferrals. Except as provided in Section 3.2.4, the Salary Deferrals made on behalf of an Active Member for any period shall be allocated to his or her Salary Deferral Account as of the date on which such Salary Deferrals are received by the Trust Fund. 5.2 Matching Contributions. Except as provided in Section 4.1.8, the Matching Contributions made on behalf of an Active Member for a Plan Year shall be allocated to his or her Matching Account as of the date on which such Matching Contributions are received by the Trust Fund. 5.3 Investment. Each Active Member shall indicate on the salary deferral election made pursuant to Section 3.2, or in such other manner as the Committee may designate, the percentages of all amounts allocated to his or her Account that are to be invested in each of the Commingled Funds. Other Members shall indicate, on such election forms as the Committee may prescribe or in such other manner as the Committee may designate and at such times as the Committee may permit, the percentages of all amounts allocated to their Accounts that are to be invested in each of the Commingled Funds. A Member may specify as to any Commingled Fund any percentage provided that the total of the percentages specified shall not exceed 100%. 5.3.1 Changes. The instructions of a Member, including a Member whose employment has terminated but whose entire Account balance has not yet been distributed, concerning the investment of the amounts allocated to his or her Account may be changed in accordance with such procedures as the Committee shall designate from time to time. The designated procedures at all times shall permit Members to make investment changes in accordance with designated procedures effective at a minimum of four (4) times per each Plan Year, and more frequently if administratively feasible, all in a manner designed to permit the Plan to qualify as a section 404(c) plan (within the meaning of section 404(c) of ERISA). 5.3.2 Failure to Elect. If a Member fails to direct the manner in which the amounts allocated to his or her Account are to be invested, such amounts shall be invested in the Short-Term Fund (as described in Section 6.3.2). 5.3.3 Member Loans. In the event a loan is to be made to a Member in accordance with Section 8.4, the Committee shall direct that an amount, in cash, equal to the amount of the loan be reallocated, as directed by the Committee, from the portion of the Member's Account invested in one or more of the other Commingled Funds to a separate subaccount within the Member's Account (the "Loan Account"), which shall be maintained for the purpose of accounting for any loans made to the Member from his or her Account. Interest and principal payments on loans made to any Member shall be allocated to his or her Loan Account as received by the Trustee and, after appropriate adjustments have been made to the Loan Account to reflect such payments, shall be reallocated to the Commingled Funds in the same percentages as specified by the Member pursuant to the introductory paragraph of this Section 5.3 (or if there is no such designation currently in force, as the Committee shall determine). 5.4 Limitations on Allocations. 5.4.1 Annual Addition Limitation. Notwithstanding any contrary Plan provision, in no event shall the Annual Addition to any Member's Account for any Plan Year exceed the lesser of (a) $30,000 or (if greater) 25% of the dollar limitation in effect under section 415(b)(1)(A) of the Code, or (b) 25% of the Member's Total Compensation for the Plan Year; provided, however, that clause (b) shall not apply to Annual Additions described in clauses (5) and (6) of Section 5.4.2(c). 5.4.2 Definitions. For purposes of this Section 5.4, the following definitions shall apply: (a) "Affiliate" shall mean a corporation, trade or business which is, together with any Employer, a member of a controlled group of corporations or an affiliated service group or under common control (within the meaning of section 414(b), (c), (m) or (o) of the Code, as modified by section 415(h) of the Code), but only for the period during which such other entity is so affiliated with any Employer. (b) "Aggregated Plan" shall mean any defined contribution plan which is aggregated with this Plan pursuant to Section 5.4.3. (c) "Annual Addition" shall mean with respect to each Member the sum for a Plan Year of (1) the Member's Salary Deferrals to be credited to the Member's Salary Deferral Account; (2) any Matching Contributions to be credited to the Member's Matching Account; (3) the share of all contributions made by all Employers and Affiliates (including salary reduction contributions made pursuant to section 401(k) of the Code) and any forfeitures to be credited to the Member's account under any Aggregated Plan; (4) any after-tax employee contributions made by the Member for the Plan Year under any Aggregated Plan; (5) any amount allocated to the Member's individual medical account (within the meaning of section 415(l) of the Code) under a defined benefit plan maintained by an Employer or Affiliate; and (6) any amount attributable to post-retirement medical benefits that is allocated pursuant to section 419A of the Code to the Member's separate account under a welfare benefits fund (within the meaning of section 419(e) of the Code) maintained by an Employer or Affiliate. (d) "Total Compensation" shall mean the amount of an Employee's: (1) Wages (within the meaning of section 3401(a) of the Code) and all other payments of compensation which an Employer or Affiliate is required to report in Box 1 ("wages, tips, other compensation") of IRS Form W-2, but (A) excluding amounts paid or reimbursed by the Employer or Affiliate for moving expenses incurred by the Member, to the extent that at the time of payment it is reasonable to believe that such amounts qualify as a "qualified moving expense reimbursement" (within the meaning of section 132(a)(6) of the Code), and (B) determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the agricultural labor exception); or (2) Compensation calculated by the Committee in a manner which satisfies applicable requirements of Treas. Reg. section 1.415-2(d). 5.4.3 Other Defined Contribution Plans. All defined contribution plans (terminated or not) maintained by any Employer or Affiliate shall be aggregated with this Plan, and all plans so aggregated shall be considered as one plan in applying the limitations of this Section 5.4, provided that the special limitation applicable to employee stock ownership plans under section 415(c)(6) of the Code shall be taken into account with respect to a Member who participates in any such plan. 5.4.4 Defined Benefit Plans. If any Member participates both in this Plan and in one or more defined benefit plans maintained by any Employer or Affiliate for the same Plan Year, then the sum of the amounts in (a) and (b) below shall not exceed 1.0: (a) The ratio of (1) the annual additions actually made to his or her accounts under this Plan and all other defined contribution plans (subject to section 415(e)(4) of the Code) for all of his or her years of service with all Employers and Affiliates (his or her "Total Service") to (2) the sum of the lesser of the following amounts (determined for each Plan Year included in his or her Total Service): (i) An amount equal to the product of (A) 1.4 and (B) the percentage limitation in effect under section 415(c)(1)(B) of the Code for the Plan Year, multiplied by the Member's Total Compensation for the Plan Year, or (ii) An amount equal to the product of 1.25 and the dollar limitation in effect under section 415(c)(1)(A) and (d) of the Code for the Plan Year, when added to: (b) The ratio of (1) the aggregate of his or her projected annual retirement benefits under all such defined benefit plans (determined as of the end of the Plan Year) to (2) the lesser of (A) an amount equal to 140% of the Member's average Total Compensation for the three (3) consecutive years included in his or her Total Service in which he or she had the highest Total Compensation and was an active participant in any such defined benefit plan or (B) the product of 1.25 and the dollar limitation in effect under section 415(b)(1)(A) of the Code (as adjusted in accordance with section 415(d) of the Code) for the Plan Year. 5.4.5 Adjustments. If, as a result of (1) a reasonable error in estimating a Member's Total Compensation, allocating forfeitures under any Aggregated Plan or other circumstances which permit the application of the rules stated in this Section 5.4.5, or (2) a reasonable error in determining the amount of Salary Deferrals that may be made under the limits of this Section 5.4, any of the limitations of this Section 5.4 otherwise would be exceeded with respect to any Member for any Plan Year, then the following actions, but only to the extent necessary to avoid exceeding such limitations, shall be taken in the following order: (a) Any after-tax employee contributions made by the Member under any Aggregated Plan for the Plan Year shall be returned to him or her; (b) In the circumstances described in clause (2) above, Salary Deferrals shall be distributed to the Member to the extent required to reduce the excess annual addition to the Member's Account attributable to that circumstance; (c) The Member's accrued benefit under any defined benefit plan shall be frozen and/or the rate of its future accrual shall be reduced; (d) Any Matching Contributions allocated to the Member's Matching Account under this Plan and/or any employer matching contributions allocated to his or her account under any Aggregated Plan shall be reallocated to a suspense account, and the balance credited to that account shall be applied to reduce the Matching Contributions or other employer matching contributions (of the same class) otherwise to be made for and allocated to all eligible Members or participants in the Aggregated Plan for succeeding Plan Years in order of time; (e) The Member's Salary Deferrals and any salary reduction contributions made at the Member's election pursuant to section 401(k) of the Code under any Aggregated Plan shall be reallocated to a suspense account and applied to reduce such Salary Deferrals or other salary reduction contributions as otherwise are to be made thereafter at his or her election under this or any Aggregated Plan; and (f) Any employer contributions otherwise to be allocated to the Member's account under any Aggregated Plan shall be reallocated to a suspense account, and the balance credited to that account shall be applied to reduce other employer matching contributions (of the same class) otherwise to be made for and allocated to all eligible participants in the Aggregated Plan for succeeding Plan Years in order of time. 5.4.6 Suspense Accounts. If a suspense account is created under Section 5.4.5(d), (e) and/or (f) and exists in a later Plan Year, the amount allocated to the suspense account shall be reallocated to the Member's account before any amount may be contributed to this or any Aggregated Plan on behalf of the Member for that Plan Year. If the Member for whom a suspense account is maintained terminates employment with all Employers and Affiliates before the suspense account balance has been reallocated pursuant to Section 5.4.5, that balance shall be reallocated among the accounts of all Members who remain Employees on the first day of the next following Plan Year, in direct proportion to each such Member's share of the aggregate Total Compensation paid to all such Members for the Plan Year of termination (subject to the limitations of this Section 5.4), before any amount may be contributed to this or any Aggregated Plan for the Plan Year of reallocation. Suspense accounts shall not share in allocations of earnings and gains (or losses) of the Trust Fund. The balances credited to all suspense accounts shall be returned to the Employers upon termination of the Plan. 5.4.7 Limitation Year. For purposes of applying the limitations of section 415 of the Code, the limitation year shall be the Plan Year. SECTION 6 ACCOUNTS AND COMMINGLED FUNDS 6.1 Members' Accounts. At the direction of the Committee, there shall be established and maintained for each Active Member, as appropriate: (a) A Salary Deferral Account, to which shall be credited all Salary Deferrals paid to the Trust Fund at his or her election under Section 3; (b) A Matching Account, to which shall be credited all Matching Contributions paid to the Trust Fund on his or her behalf under Section 4; (c) A Rollover Account, to which shall be credited all transfers made to the Trust Fund by or on behalf of the Member under Section 10.5; and (d) A Loan Account, to which shall be credited (pursuant to Section 5.3.3) any amounts loaned to the Member in accordance with Section 8.4. Each Member's Account shall also reflect the value of its proportionate interest in each of the Commingled Funds as of each Valuation Date. The maintenance of a separate Account for each Member shall not be deemed to segregate for the Member, nor to give the Member any ownership interest in, any specific assets of the Trust Fund. 6.2 Trust Fund Assets. The Trust Fund shall consist of the Members' Salary Deferrals, Matching Contributions, rollovers made pursuant to Section 10.5, all investments and reinvestments made therewith, and all earnings and gains (less any losses) thereon. The Trustee shall hold and administer all assets of the Trust Fund in the Commingled Funds, and each Member and his or her Account shall have only an undivided interest in any of the Commingled Funds. 6.3 Commingled Funds. All assets of the Trust Fund shall be invested in the following Commingled Funds: 6.3.1 Common Stock Fund. Effective as of April 1, 1985, or such later date as the Committee may direct to assure compliance with all applicable federal and state securities laws, the Trustee shall establish or maintain a Common Stock Fund which shall be a commingled fund maintained for the purpose of investing such portions of Members' Accounts as are, pursuant to Members' investment instructions made in accordance with Section 5.3, properly allocable to the Common Stock Fund. (a) The Common Stock Fund shall be invested in Common Stock and may be used to purchase shares of Common Stock in the open market. (b) The Trustee may invest and hold up to 100% of the assets of the Common Stock Fund in Common Stock. The Trustee may also hold such assets in cash or cash equivalents as necessitated by the cash requirements of the Common Stock Fund, as determined by the Committee. 6.3.2 Short-Term Fund. The Trustee shall establish or maintain a Short-Term Fund which shall be a commingled fund maintained for the purpose of investing such portions of Members' Accounts as are, pursuant to Members' investment instructions made in accordance with Section 5.3, properly allocable to the Short-Term fund. The Short-Term Fund shall be invested by the Trustee in units, shares or other interests in one or more common, pooled or other collective short-term investment funds which are either (a) maintained by the Trustee or any other bank (within the meaning of section 581 of the Code), the trustee of or investment advisor to any such fund in which any other Commingled Fund is invested or an affiliate of such trustee or investment advisor, or (b) registered under the Investment Company Act of 1940. 6.3.3 Other Funds. In accordance with directions of the Committee, the Trustee shall establish or maintain one or more other Commingled Funds which shall be maintained for the purpose of investing such portions of Members' Accounts as are, pursuant to Members' investment instructions made in accordance with Section 5.3, properly allocable to each such Fund. Each such other Commingled Fund shall be invested in units, shares or other interests in one or more common, pooled or other collective investment funds which are either (a) maintained by the Trustee, any other person described in section 3(38)(B) of ERISA or an affiliate of such person, or (b) registered under the Investment Company Act of 1940. At least three (3) of the Commingled Funds shall (a) be diversified, (b) have materially different risk and return characteristics, and (c) be structured to satisfy the broad range of investment alternatives requirement, all in manner designed to permit the Plan to qualify as a 404(c) plan (within the meaning of section 404(c) of ERISA). 6.3.4 Designations, Redesignations and Reinvestments. Except to the extent that investment responsibility for one or more of the Commingled Funds (other than the Common Stock Fund) has been transferred to an Investment Manager in accordance with Section 9.6, the Committee shall designate the common, pooled or other collective investment funds in which the Commingled Funds (other than the Common Stock Fund) shall be invested. The Committee may from time to time change the number, identity or composition of the Commingled Funds made available under this Section 6.3 and redesignate the collective investment funds in which any Commingled Fund shall be invested. All interest, dividends or other income realized from the investments of any of the Commingled Funds shall be reinvested in the Commingled Fund that realized such income. Temporary cash balances arising in any of the Commingled Funds shall be invested where feasible in any collective investment fund which would qualify as an investment medium for the Short-Term Fund. 6.4 Valuation of Members' Accounts. The Trustee shall determine the fair market values of the assets of the Commingled Funds, and the Committee shall determine the fair market value of each Member's Account, as of each Valuation Date. In making such determinations and in crediting net earnings and gains (or losses) in the Commingled Funds to the Members' Accounts, the Committee may employ, and may direct the Trustee to employ, such accounting methods as the Committee may deem appropriate in order fairly to reflect the fair market values of the Commingled Funds and each Member's Account. For this purpose the Trustee and the Committee (as appropriate) may rely upon information provided by the Committee, the Trustee or other persons believed by the Trustee or the Committee to be competent. 6.5 Valuation of Shares. For all purposes of the Plan, the Trustee shall determine the fair market value of a share of Common Stock, which, as of any date, shall be (except as set forth below) the closing price of the Common Stock on the New York Stock Exchange on that date, as published in "The Wall Street Journal" or, if no report is available for that date, on the next preceding date for which a report is available, except that in the case of a transaction involving the purchase or sale of share(s) of Common Stock, the fair market value of any share of Common Stock shall be the purchase or sale price of such share on the New York Stock Exchange. 6.6 Statements of Members' Accounts. Each Member shall be furnished with periodic statements of his or her interest in the Plan, at least annually. 6.7 Accounts Nonforfeitable. Each Member shall at all times have a fully (100%) vested and nonforfeitable interest in his or her Account. SECTION 7 DISTRIBUTIONS 7.1 Events Permitting Distribution. Subject to Section 7.3, the balance credited to a Member's Account shall become distributable only in the following circumstances: (a) Upon termination of the Member's employment at or after Normal Retirement Age; (b) Upon termination of the Member's active employment by reason of Disability or death; (c) Upon termination of the Member's employment with all Employers and Affiliates (whether by reason of resignation or dismissal) for any reason other than those specified in paragraph (a) or (b) above; (d) Upon the January 1, and no later than the April 1, that next follows the calendar year in which the Member attains age 70 1/2, if the Member attains age 70 1/2 after December 31, 1987, but no earlier than April 1, 1990, if the Member is not a 5-percent owner (within the meaning of section 416(i)(1) of the Code); (e) Upon the Committee's approval of the Member's application for a withdrawal from his or her Account, to the limited extent provided in Section 8; (f) In accordance with and to the limited extent provided in Section 3.2.4 or 4.1.8; or (g) Upon the creation or recognition of an Alternate Payee's right to all or a portion of a Member's Account under a domestic relations order which the Committee determines is a QDRO (as defined in Section 8.5), but only as to the portion of the Member's Account that the QDRO states is payable to the Alternate Payee. 7.2 Times for Distribution. Subject to the consent requirement of Section 7.3 and except as provided in Section 8.5 (relating to QDROs), distributions from a Member's Account shall occur at the following times: 7.2.1 Disability or Death. Distributions permitted under Section 7.1(b) shall normally be made as soon as practicable after the end of the calendar month in which occurs the event permitting the distribution, but at the written election of the Member or his or her Beneficiary (if applicable) shall be made after the last day of the Plan Year during which such event occurs. 7.2.2 Employment Termination. A distribution permitted under Section 7.1(a) or (c) by reason of the termination of the Member's employment shall normally be made as soon as practicable after the end of the calendar month in which the Member's employment terminates. 7.2.3 Withdrawals. A distribution arising from the Member's exercise of his or her withdrawal rights shall occur at the time set forth in Section 8. 7.2.4 Distribution Deadline. All distributions not made sooner pursuant to one of the foregoing provisions of this Section 7.2 shall be made no later than 60 days after the end of the Plan Year in which a distribution event described in Sections 7.1(a) through (c) occurs or the Member attains Normal Retirement Age (whichever is later); provided, however, that if the amount of the distribution or the location of the Member or his or her Beneficiary (after a reasonable search) cannot be ascertained by that date, distribution shall be made no later than 60 days after the earliest date on which the amount or location (as appropriate) is ascertained; and provided, further, that distributions permitted by reason of the Member's death shall be made within five (5) years after his or her death. Notwithstanding the foregoing, if a Member continues in employment after attaining Normal Retirement Age and his or her Account becomes distributable pursuant to Section 7.1(d), the Account shall be distributed no later than the April 1 specified in Section 7.1(d), and any subsequent allocations to the Account (after the period of suspension described in Section 2.5) shall be distributed by the April 1 that next follows the Plan Year to which those allocations pertain. 7.3 Consent Requirement. If the balance credited to a Member's Account exceeds $3,500 as of the Valuation Date that (a) next precedes the date of the distribution or (b) next preceded the date of any prior distribution or withdrawal from the Account, no portion of the Member's Account shall be distributed to the Member, until he or she attains age 62, except upon receipt of the Member's written consent to an earlier distribution. For purposes of this Section 7.3, the Valuation Date is the end of the calendar month following the event that is the basis for the distribution (e.g., termination of employment). 7.4 Form of Distribution. 7.4.1 Cash. With respect to any portion of a Member's Account as is not invested in the Common Stock Fund, any distribution from such portion of the Account shall be made in the form of a single lump sum payment of cash (or its equivalent) equal to the balance credited to such portion of the Account as of the Valuation Date, except where the distributee elects, in accordance with procedures established by the Committee, to have such portion of the Account distributed in the form of the unliquidated assets credited to such portion of the Account as of the Valuation Date. 7.4.2 Common Stock. Any distribution from such portion of a Member's Account as is invested in the Common Stock Fund shall be made in the form of a single lump sum payment in (a) whole shares of the Common Stock allocable to such portion of the Account as of the Valuation Date, (b) cash equal to the fair market value of such Common Stock as of the Valuation Date, or (c) a combination of both, as elected by the distributee; provided, however, that if fewer than 100 shares of Common Stock are allocable to the Member's Account, the distribution shall be made in cash (or its equivalent) to that extent. 7.4.3 Fractional Shares. If shares of Common Stock are to be distributed, only full shares shall be distributed and cash shall be distributed in lieu of any fractional share. The amount of cash to be distributed in any such case shall be determined pursuant to Section 6.5 as of the Valuation Date. 7.4.4 No Annuities. In no event shall any distribution from a Member's Account be made in the form of a life annuity. 7.4.5 Direct Rollovers. Effective as of January 1, 1993, and notwithstanding any contrary Plan provision: (a) If a Distributee of any Eligible Rollover Distribution (1) elects to have at least $500 of such Distribution paid directly to an individual retirement account ("IRA") or other eligible retirement plan (within the meaning of section 401(a)(31)(D) of the Code), and (2) specifies such IRA or plan and the elected amount in such manner and within such advance notice period as the Committee may specify, such Distribution (or elected portion thereof) shall be made in the form of a direct rollover to such IRA or plan, in accordance with and subject to the conditions and limitations of section 401(a)(31) and related provisions of the Code; and (b) Such Distribution may commence less than 30 days after the notice required under Treas. Reg. section 1.411(a)-11(c) is given to the Distributee, provided that (1) the Distributee is clearly informed that he or she has a right to consider, for a period of at least 30 days after receiving the notice, a decision on whether to elect a distribution (and, if applicable, a particular distribution option), and (2) the Distributee, after receiving the notice, affirmatively elects a distribution. (c) "Distributee" shall mean a Member, a Beneficiary (if the surviving spouse of a Member), or an Alternate Payee (as defined in Section 1.2) (if the surviving spouse of a Member under a QDRO (as defined in Section 8.5)). (d) "Eligible Rollover Distribution" shall mean a distribution of any portion of the balance credited to the Account of a Member which is not one of a series of substantially equal periodic payments made over (1) a specified period of ten years or (2) the life or life expectancy of the Distributee, to the extent that it constitutes an eligible rollover distribution (within the meaning of section 401(a)(31)(C) of the Code). 7.5 Common Stock Restrictions. Any Member or other prospective distributee who is to receive a distribution of Common Stock may be required to execute an appropriate stock transfer agreement, implementing and evidencing such restrictions on transferability as may be imposed by applicable federal and state securities laws, prior to receiving a certificate for the Common Stock. Any shares of Common Stock held or distributed by the Trustee may include such legend restrictions on transferability as the Company may reasonably require in order to assure compliance with applicable federal and state securities laws. 7.6 Beneficiary Designations. Each Member may designate one or more Beneficiaries in a signed writing delivered to the Committee. 7.6.1 Spousal Consent. If a Member designates any a person other than his or her spouse as a primary Beneficiary, the designation shall be ineffective unless the Member's spouse consents to the designation. Any spousal consent required under this Section 7.6 shall be void unless it (a) is set forth in writing, (b) acknowledges the effect of the Member's designation of another person as his or her Beneficiary under the Plan, and (c) is signed by the spouse and witnessed by an authorized agent of the Committee or a notary public. Notwithstanding the foregoing, if the Member establishes to the satisfaction of the Committee that written spousal consent may not be obtained because there is no spouse or the spouse cannot be located, his or her designation shall be effective without spousal consent. Any spousal consent required under this Section 7.6.1 shall be irrevocable and valid only with respect to the spouse who signs the consent. A Member may revoke his or her Beneficiary designation in writing at any time, regardless of his or her spouse's previous consent to the revoked designation, and any such revoked designation shall be void. 7.6.2 Changes and Failed Designations. A Member may designate different Beneficiaries (or may revoke a prior Beneficiary designation) at any time by delivering a new designation (or a signed revocation of a prior designation) in like manner. Any designation shall become effective only upon its receipt by the Committee but shall cease to be effective when a written revocation of that designation by the Member is received by the Committee. The last effective designation received by the Committee shall supersede all prior designations. If a Member dies without having effectively designated a Beneficiary, or if no Beneficiary survives the Member, the Member's Account shall be payable to his or her surviving spouse or, if the Member is not survived by his or her spouse, the Account shall be paid to one or more of the following persons in the following priority order: (a) The Member's surviving Children (whether or not adopted) in equal shares or the trustees of any trust or trusts established for the benefit of the Member's surviving Children; for the purposes of applying this Section, "Children" shall mean the Member's children and the issue of the Member's deceased children, by right of representation; (b) The Member's surviving parents or parent, in equal shares or the trustees of any trust or trusts established for the benefit of the Member's surviving parents or parent; or (c) The executors and/or administrators of his or her estate. 7.7 Payments to Incompetents. If any individual to whom a benefit is payable under the Plan is a minor, or if the Committee determines that any individual to whom a benefit is payable under the Plan is physically or mentally incompetent to receive such payment or to give a valid release therefor, payment shall be made to the guardian, committee or other representative of the estate of such individual which has been duly appointed by a court of competent jurisdiction. If no guardian, committee or other representative has been appointed, payment: (a) May be made to any person as custodian for the minor or incompetent under the California Uniform Transfers to Minors Act (or comparable law of another state), or (b) May be made to or applied to or for the benefit of the minor or incompetent, his or her spouse, children or other dependents, the institution or persons maintaining him or her, or any of them, in such proportions as the Committee from time to time shall determine. The release of the person or institution receiving the payment shall be a valid and complete discharge of any liability of the Plan with respect to any benefit so paid. 7.8 Undistributable Accounts. Each Member and (in the event of death) his or her Beneficiary shall keep the Committee advised of his or her current address. If the Committee is unable to locate the Member or Beneficiary to whom a Member's Account is payable under this Section 7, (a) the Member's Account may be closed after 24 months have passed since the date the Account first became distributable to such Member or Beneficiary, and (b) the balance credited to any Account so closed shall be reallocated among the remaining Members' Accounts as of the next succeeding Valuation Date in the same manner as Trust Fund earnings. If the Member or Beneficiary whose Account was closed under the preceding sentence subsequently files a claim for distribution of his or her Account, and if the Committee determines that such claim is valid, then the balance previously removed upon closure of the Account shall be restored to the Account by means of a special contribution which shall be made to the Trust Fund by the Employers. SECTION 8 WITHDRAWALS, LOANS AND DOMESTIC RELATIONS ORDERS 8.1 General Rules. In accordance with Sections 8.2 and 8.3, a Member who is an Employee may withdraw, in cash, from his or her Account any amount up to 100% of the balance credited to the Account as of the Valuation Date that next precedes the date of the withdrawal. Any application for a withdrawal shall be submitted to the Committee in writing on such form as it may prescribe. No Member shall be permitted to make a withdrawal under this Section 8 more often than once in any period of four (4) consecutive calendar quarters. The active membership of a Member who makes a withdrawal under Section 8.2 or 8.3 shall be suspended, in the manner set forth in Section 2.5, for each payroll period that begins during the period starting on the withdrawal approval date and ending on the last day of the fourth full calendar quarter that begins after that date. Following that suspension period, the Member may again become an Active Member and resume his or her Salary Deferrals, effective with respect to Compensation paid for the first payroll period beginning on or after any Entry Date, only by again electing to become an Active Member in accordance with Section 2.3. 8.2 Hardship Withdrawal. The Committee shall authorize a distribution under this Section 8.2 if the Member provides evidence which is sufficient to enable the Committee to determine that the withdrawal satisfies the conditions of this Section 8.2. 8.2.1 Permissible Financial Obligations. A Member may make a withdrawal under this Section 8.2 only to meet a financial obligation for: (a) Unreimbursed expenses for medical care (as defined in section 213(d) of the Code) incurred by the Member, his or her spouse or any dependent (as defined in section 152 of the Code) of the Member, or necessary to enable any such person to obtain such care; (b) The purchase of the Member's principal residence; (c) Payment of tuition and related educational expenses up to the next 12 months of post-secondary education for the Member, his or her spouse or any dependent (as defined in section 152 of the Code) of the Member; (d) Prevention of the eviction of the Member from his or her principal residence or foreclosure on the mortgage or deed of trust on the Member's principal residence; (e) Such other expenses as may be permitted under published documents of general applicability as provided under Treas. Reg. section 1.401(k)-1(d)(2)(ii)(B). 8.2.2 Withdrawal Necessary to Meet Financial Obligation. No withdrawal shall be made under this Section 8.2 unless the Member has elected to receive all distributions, withdrawals and loans available under this Plan and all other qualified plans maintained by the Employers and Affiliates. 8.2.3 Contribution Limitations. To the extent required by regulations, no withdrawal shall be made under this Section 8.2 unless the Member irrevocably agrees in writing to the following limitations: (a) The Member shall agree to refrain during the period beginning on the withdrawal approval date and ending on the last day of the 12th full month ending thereafter from making contributions to, compensation deferrals under or payments in connection with the exercise of any rights granted under any other qualified plan or any nonqualified stock option, stock purchase, deferred compensation or similar plan (but not any health or welfare plan) maintained by any Employer or Affiliate. (b) If the Member elects to become an Active Member again following the suspension of his or her active membership pursuant to Section 8.1, the total amount of the Member's Salary Deferrals for the calendar year that next follows the withdrawal date shall not exceed an amount equal to (1) the Section 401(k) Ceiling (as defined in Section 3.1) for that calendar year, minus (2) the Member's Salary Deferrals for the calendar year of the withdrawal under this Section 8.2. 8.2.4 Limit on Withdrawal. No withdrawal under this Section 8.2 shall exceed the lesser of: (a) The amount which the Committee determines is necessary (net of income or penalty taxes reasonably anticipated to result from the withdrawal) to satisfy the financial obligations meeting the conditions of Section 8.2.1; (b) The excess of (1) the value of the Member's Accounts as of the Valuation Date that occurs on or next precedes the withdrawal date, over (2) the total amount due (including both principal and interest) under all outstanding loans made pursuant to Section 8.4 by the Member; or (c) To the extent that the withdrawal is made from the Member's Salary Deferral Account, the excess of (1) the sum of all Salary Deferrals allocated to the Member's Salary Deferral Account on or before the date of the withdrawal plus the amount of the earnings credited to that Account as of December 31, 1988, over (2) the sum of all amounts previously withdrawn or distributed from the Member's Salary Deferral Account. 8.2.5 Order of Withdrawal From Accounts. Any amount withdrawn under this Section 8.2 shall be deducted from the Member's Accounts in the following order: the Rollover Account, the Matching Account, the Salary Deferral Account, and any other Accounts. Subject to the preceding sentence, the Member shall designate in writing the order in which amounts invested in the Commingled Funds shall be withdrawn. 8.3 Age 59 1/2 Withdrawal. At any time after a Member attains age 59 1/2, the Member (subject to the provisions of Section 8.1) may withdraw an amount from his or her Account. 8.4 Loans to Members. 8.4.1 General Loan Rules. A Member who is an Employee may, upon written application to the Committee on such form as the Committee shall prescribe, obtain a loan from the portion of the Trust Fund allocated to the Member's Account in accordance with the provisions of this Section 8.4. Loans shall be available to all Members who are Employees, and to parties in interest (within the meaning of section 3(14) of ERISA) with respect to the Plan who are non-Employee Members or Beneficiaries of deceased Members, on a reasonably equivalent basis. (a) Amount. The amount of the loan shall be neither less than $1,000 nor more than the excess of (1) 50% of the Member's Available Balance, determined as of the Valuation Date, over (2) the sum of the outstanding balances (including both principal and accrued interest) on all prior outstanding loans to the Member under this Plan. (b) "Available Balance" shall mean the vested balance credited to the Member's Account as of the applicable date, reduced by amounts allocated pursuant to Section 8.5 to any subaccount of the Member's Account for any Alternate Payee under a QDRO (as defined in Section 8.5). (c) Additional Limits. The amount borrowed under this Section 8.4 shall not cause the sum of (i) the amount of the loan, plus (ii) the aggregate outstanding balance (including both principal and accrued interest) on all prior loans to the Member under this Plan or any other qualified plan maintained by any Employer or Affiliate (an "Other Plan"), to exceed an amount equal to $50,000, reduced by the excess (if any) of (1) the highest aggregate outstanding balance on all loans under this Plan and all Other Plans during the one-year period ending on the day before the date the loan is to be made, over (2) the aggregate outstanding balance on all such loans on the date the loan is made. (d) Number of Loans. No Member shall be permitted to borrow under this Section 8.4 if the borrowing would result in his or her having more than two (2) loans outstanding, and an additional loan may not be made to a Member until at least 12 months after the next earliest loan was made; provided, however, that the Committee (in its discretion) may nevertheless permit a Member to make a second or third loan if the Member provides evidence sufficient to show that the second or third loan is necessary in light of his or her immediate and heavy financial needs. 8.4.2 Minimum Requirements of Each Loan. The terms of any loan made under this Section 8.4 shall be evidenced by a promissory note signed by the Member, and such terms shall satisfy the following minimum requirements: (a) Separate Accounting. Each loan shall be considered as a separate, ear-marked investment of the Member's Loan Account and shall be accounted for as provided in Section 5.3.3. (b) Term. The term of the loan shall not exceed five (5) years. The Member may elect a term of either three (3) or five (5) years for each loan. (c) Interest Rate. Each loan shall bear a reasonable rate of interest, as determined by the Committee, which shall be comparable to the interest rates charged under similar circumstances by persons in the business of lending money. (d) Payment Schedule. A definite payment schedule shall be established for each loan which shall require level and periodic payments of both principal and interest over the agreed term of the loan. The Committee may require on a uniform basis that loans with a term of five (5) years be repaid in 58 equal monthly installments. A Member may prepay at any time the entire amount remaining due under the loan, but no partial prepayments shall be permitted. (e) Withholding Payments. No loan shall be made unless the Member agrees to make principal and interest payments on each loan, together with any and all reasonable charges imposed by the Trustee at the direction of the Committee in connection with the loan: (1) By payroll withholding, in the case of a Member who is receiving periodic wage payments from an Employer or Affiliate; or (2) By an automatic payment method which the Committee (in its discretion) determines will provide security comparable to that of payroll withholding, in the case of a Member who is not receiving periodic wage payments from an Employer or Affiliate. (f) On Payroll. If during the term of the loan, a Member who has been making payments by the automatic payment method described in Section 8.4.2(e)(2) begins receiving periodic wage payments from an Employer or Affiliate, the Member shall authorize in writing payroll withholding for the remaining loan payments. (g) Off Payroll. If during the term of the loan, a Member who has been making loan payments by payroll withholding ceases to receive periodic wage payments from an Employer or Affiliate (and distribution of the Member's Account has not begun), the Member shall authorize in writing an automatic payment method described in Section 8.4.2(e)(2) for the remaining loan payments. (h) Failure to Authorize. If any Member fails to authorize any change in the method of payment required by Section 8.4.2(f) or (g), the outstanding balance (including unpaid principal and interest) on the loan shall become immediately due and payable. (i) Security. Each loan shall be adequately secured by collateral of sufficient value to secure payment of the loan principal and interest. Notwithstanding the provisions of Section 13.2, the Member shall pledge 50% of his or her interest in the Member's Account, and shall provide such other collateral as the Committee may require, to secure his or her loan payment obligations. (j) Spousal Consent. No loan may be made to a Member who is married at the time the loan is to be made unless, no more than 90 days before the date of the loan, the Member's spouse consents in writing to the loan and to the possible reduction of the Member's Account balance in the event the loan is in default. Any spousal consent required under this Section 8.4.2 shall be void unless it (1) is set forth in writing, (2) acknowledges the loan and possible effect of the loan in the Member's Account balance, and (3) is signed by the spouse and witnessed by an authorized agent of the Company or a notary public. Notwithstanding the foregoing, if the Member establishes to the satisfaction of the Committee that written spousal consent may not be obtained because there is no spouse or the spouse cannot be located, his or her designation shall be effective without spousal consent. The same spousal consent requirement shall apply with respect to any renegotiation, renewal or other revision of the loan. 8.4.3 Default. If a Member defaults on his or her loan payment obligations and does not cure the default within 30 days of the date the Committee notifies him or her of the default, the Committee shall take, or direct the Trustee to take, such action as shall be necessary or appropriate in the circumstances prevailing: (a) To realize upon the security interest of the Trust Fund in the collateral pledged to secure the loan, and/or (b) To reduce the balance credited to the Member's Account by the amount required to cure the default. (c) In applying the method of cure provided in paragraph (a) above, if any losses are realized or expenses incurred, they shall be allocated only to the defaulting Account. (d) In applying the method of cure provided in paragraph (b) above, the amount by which the Member's Account is to be reduced shall be credited to a separate suspense account for the Member and shall be increased annually with interest, at the greater of (1) the average rate of interest earned by the Short-Term Fund for each Plan Year, or (2) the interest rate that actually applies to the loan pursuant to Section 8.4.2(c), for the period from the date of the default until the earlier of the date the Member attains age 59 1/2 or the first date on which distributions from the Account can be made under Section 7.1; the balance credited to the Account as of that first date shall be reduced by the amount then credited to the suspense account; and only the remaining balance (if any) shall be available for distribution under Section 7. 8.4.4 Effect of Distributions. If any amount remains outstanding as a loan obligation of a Member when a distribution is made from his or her Account under Section 7 (including, but not limited to, a distribution in connection with termination of employment with all Employers and Affiliates), (a) the outstanding loan balance (including both principal and accrued interest) shall then become immediately due and payable, and (b) the balance credited to the Member's Account shall be reduced to the extent necessary to discharge the obligation. 8.4.5 Transition Rule. The provisions of this Section 8.4 shall apply only with respect to loans made after the effective date of Amendment No. 2 to the Plan (as restated effective January 1, 1991), and prior provisions of the Plan shall apply with respect to loans made on or before that date. 8.5 Qualified Domestic Relations Orders. The Committee shall establish written procedures for determining whether a domestic relations orders purporting to dispose of any portion of a Member's Account is a qualified domestic relations order (within the meaning of section 414(p) of the Code) (a "QDRO"). 8.5.1 No Payment Unless a QDRO. No payment shall be made to any Alternate Payee until the Committee (or a court of competent jurisdiction reversing an initial adverse determination by the Committee) determines that the order is a QDRO. Payment shall be made to any Alternate Payee only as specified in the QDRO. 8.5.2 Immediate Payment Required. Payment shall be made to an Alternate Payee, in accordance with a QDRO, as soon as practicable after the QDRO determination is made, regardless of whether the distribution, if made to a Member at the time specified in the order, would be permitted under the terms of the Plan. 8.5.3 Deferred Payment. If the QDRO does not provide for immediate payment to an Alternate Payee, the Committee shall establish a subaccount to record the Alternate Payee's interest in the Member's Account. All investment decision with respect to amounts credited to the subaccount shall be made by the Alternate Payee in the manner provided in Section 5.3. Payment to the Alternate Payee shall not be deferred beyond the date of distribution to the Member or (in the event of death) his or her Beneficiary is made or commenced. SECTION 9 ADMINISTRATION OF THE PLAN 9.1 Plan Administrator. The Company is hereby designated as the administrator of the Plan (within the meaning of sections 414(g) and 3(16)(A) of the Code and ERISA, respectively). 9.2 Committee. The Plan shall be administered by a Committee consisting of at least three (3) members, appointed by and holding office at the pleasure of the Board of Directors. The Committee shall have the authority to control and manage the operation and administration of the Plan as a named fiduciary under section 402(a)(1) of ERISA. Any member of the Committee who is also an Employee shall serve as such without additional compensation. Any member of the Committee may resign at any time by notice in writing mailed or delivered to the Board of Directors. The Board of Directors may remove any member of the Committee at any time and may fill any vacancy which exists. 9.3 Actions by Committee. Each decision of a majority of the members of the Committee then in office shall constitute the final and binding act of the Committee. The Committee may act with or without a meeting being called or held and shall keep minutes of all meetings held and a record of all actions taken. Except as otherwise specifically or generally directed by the Committee, any action of the Committee may be evidenced by a writing signed by any two (2) members of the Committee. 9.4 Powers of Committee. The Committee shall have all powers necessary to supervise the administration of the Plan and to control its operation in accordance with its terms, including, but not by way of limitation, the following discretionary powers: (a) To interpret the provisions of the Plan and to determine any question arising under, or in connection with the administration or operation of, the Plan; (b) To determine all questions concerning the eligibility of any Employee to become or remain a Member and/or an Active Member of the Plan; (c) To cause one or more separate Accounts to be maintained for each Member; (d) To establish and revise an accounting method or formula for the Plan, as provided in Section 6.4; (e) To determine the manner and form, and to notify the Trustee, of any distribution to be made under the Plan; (f) To grant or deny hardship withdrawal and loan applications under Section 8; (g) To determine the status and rights of Members and their spouses, Beneficiaries or estates; (h) To instruct the Trustee with respect to matters within the jurisdiction of the Committee; (i) To direct the Trustee, in accordance with Section 6.3, as to the establishment of Commingled Funds and the investment of the Plan assets held in the Commingled Funds (other than the Common Stock Fund); (j) To employ such counsel, agents and advisors, and to obtain such legal, clerical and other services, as it may deem necessary or appropriate in carrying out the provisions of the Plan; (k) To prescribe the form and manner in which any member, or his or her spouse or other Beneficiary, shall make any election or designation required under the Plan; (l) To establish rules for the performance of its powers and duties and for the administration of the Plan; (m) To arrange for annual distribution to each Member of a statement of benefits accrued under the Plan; (n) To establish rules and regulations by which requests for Plan information from Members are processed expeditiously and completely; (o) To provide to each terminated Member notice of his or her vested interest under the Plan and the written explanation described in section 402(f) of the Code; (p) To publish a claims and appeal procedure satisfying the minimum standards of section 503 of ERISA pursuant to which Members or their spouses, Beneficiaries or estates may claim Plan benefits and appeal denials of such claims; (q) To determine the liabilities of the Plan, to establish and communicate a funding policy to the Trustee and any Investment Manager appointed pursuant to Section 9.6, and in accordance with such funding policy, to coordinate the Plan's investment policy with the Plan's requirements for funds to pay expenses and benefits as they become due; (r) To act as agent for the Company in keeping all records and assisting with the preparation of all reports and disclosures necessary for purpose of complying with the reporting and disclosure requirements of ERISA and the Code; (s) To arrange for the purchase of any bond required of the Committee members or others under section 412 of ERISA; and (t) To delegate to any one or more of its members or to any other person, severally or jointly, the authority to perform for and on behalf of the Committee one or more of the fiduciary and/or ministerial functions of the Committee under the Plan. 9.5 Fiduciary Responsibilities. To the extent permissible under ERISA, any person may serve in more than one fiduciary capacity with respect to the Plan. Except as required by specific provisions of ERISA, no person who is a fiduciary with respect to the Plan shall be under any obligation to perform any duty or responsibility with respect to the Plan which has been specifically allocated to another fiduciary. 9.6 Investment Responsibilities. The Committee shall direct the Trustee to invest the Commingled Funds (other than the Common Stock Fund) in one or more common, pooled or other collective investment funds. Subject to the provisions of this Section 9.6 and any contrary provision of the Plan or Trust Agreement, exclusive authority and discretion to manage and control the assets of the Trust Fund shall be vested in the Trustee, and the Trustee from time to time shall review the assets and make its determinations as to the investments of the Trust Fund. 9.6.1 Investment Manager Appointment. The Committee in its discretion may appoint, and thereafter may discharge, one or more investment managers (the "Investment Managers") to manage the investment of the one or more of the Commingled Funds and other designated portions of the Trust Fund (other than the Common Stock Fund). In the event of any such appointment, the Trustee shall follow the instructions of the Investment Manager in investing and administering Trust Fund assets managed by the Investment Manager. Alternatively, the Committee may delegate investment authority and responsibility with respect to any Commingled Fund (other than the Common Stock Fund) directly to any Investment Manager which has investment management responsibility for any collective investment fund in which the Commingled Fund is invested. 9.6.2 Eligibility. Any person, firm or corporation appointed as Investment Manager (a) shall be a person described in section 3(38)(B) of ERISA, (b) shall make such representations from time to time as the Committee may require in order to determine its qualifications to be appointed and to continue to serve in such capacity, and (c) shall acknowledge in writing its status as a fiduciary with respect to the Plan upon acceptance of its appointment. 9.7 Voting and Tender Offer Rights in Common Stock. 9.7.1. Pass-Through Issues. All Common Stock held in the Trust Fund shall be voted, tendered or exchanged, with respect to Pass-Through Issues, in accordance with Sections 9.7.3 through 9.7.6. For purposes of this Section 9.7, a "Pass-Through Issue" with respect to Common Stock is an issue which concerns: (a) The voting of shares of Common Stock with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business or any transaction which the Committee determines (in its discretion) to be similar to the foregoing; (b) Any tender or exchange offer for Common Stock; (c) Any proposal by a shareholder pursuant to Rule 14a-8 under the 1934 Act; (d) Any election contest governed by Rule 14a-11 under the 1934 Act; (e) Any proposal with respect to which there is any solicitation in opposition (within the meaning of Rule 14a-6 under the 1934 Act); or (f) Any such other event that the Committee designates a Pass-Through Issue. It is anticipated that generally the Committee will designate all but nonsubstantive issues as Pass-Through Issues. The Committee shall have the authority to determine which issues are nonsubstantive issues. 9.7.2 Voting On Issues Other Than Pass-Through Issues. Except with respect to Pass-Through Issues, all Common Stock held in the Trust Fund shall be voted by the Trustee only in accordance with instructions received from the Committee. However, if with respect to some matter other than a Pass-Through Issue the Committee shall fail to give, or shall notify the Trustee in writing of its decision not to give, timely voting instructions to the Trustee, the Trustee shall exercise the power to vote such Common Stock in its sole discretion. The functions of the Committee and the Trustee with respect to other rights pertaining to such Common Stock on matters other than Pass-Through Issues shall be allocated between them in like manner. 9.7.3 Named Fiduciary Status. For purposes of this Section 9.7, each Member (or, if deceased, his or her Beneficiary) shall be a named fiduciary (within the meaning of, but not limited to, sections 402(a) and 403(a)(1) of ERISA) with respect to Pass-Through Issues for all shares of Common Stock as to which the Member has the right of direction with respect to voting, tender and any other rights appurtenant to such Stock. That named fiduciary status shall apply with respect to Pass-Through Issues for all shares of Common Stock allocable to the Member's Account. 9.7.4 Confidentiality. In implementing this Section 9.7, each appropriate fiduciary shall take all steps necessary or appropriate to ensure that each Member's (or Beneficiary's) instructions shall be kept in strictest confidence and shall not be divulged or released to any person, except as provided in the next sentence, including officers, directors or employees of the Company or any Affiliate. To the extent necessary for the operation of the Plan, however, the instructions may be provided to the Trustee and to a recordkeeper, auditor or other person providing services to the Plan if the person (a) is not the Company or an Affiliate, and (b) agrees not to divulge the instructions to any other person, including officers, directors or employees of the Company or any Affiliate. 9.7.5 Directed Voting and Consents (a) Notwithstanding any contrary Plan provision, whenever any proxies or consents are solicited from the holders of Common Stock with respect to Pass-Through Issues, the Trustee shall exercise voting or other rights solely as directed in written instructions timely received from Members (or if deceased, their Beneficiaries) and in accordance with this Section 9.7. (b) Each Member (or if deceased, his or her Beneficiary) shall have the right, with respect to Pass-Through Issues for shares of Common Stock allocable to his or her Account, to instruct the Trustee in writing as to the manner in which to vote those shares at any stockholders' meeting of the Company, or the manner in which the Trustee shall give or withhold consent with respect to the shares. (1) The Trustee shall pool the results of instructions received from all Members to whose Accounts fractional shares are allocable and shall vote or otherwise act accordingly with respect to those shares on Pass-Through Issues; (2) In the case of a deceased Member who has more than one Beneficiary, the Trustee shall vote or otherwise act on Pass- Through Issues in accordance with the instructions of the Member's Beneficiaries in respect of the shares allocable to the deceased Member's Account in proportion to the Beneficiaries' respective interests in the Member's Account in accordance with rules established by the Committee. (3) If no instructions are received with respect to shares of Common Stock allocable to a Member's Account, those shares shall not be voted nor shall any other actions under this Section 9.7 be taken with respect to the shares on Pass-Through Issues. (c) The Company shall use its best efforts to timely distribute or cause to be distributed to each Member (or Beneficiary) such information concerning Pass-Through Issues as will be distributed to stockholders of the Company in connection with any stockholders' meeting or any solicitation of voting or consents, together with a request for confidential instructions to the Trustee or its designee on how shares of Common Stock shall be voted on each such matter or how consents shall be given or withheld. 9.7.6 Tender or Exchange Offers (a) Notwithstanding any contrary Plan provision, whenever any tender or exchange offer is made for shares of Common Stock, the Trustee shall tender or exchange shares of Common Stock (or refrain from tendering or exchanging) solely as directed in written instructions timely received from Members (or if deceased, their Beneficiaries) and in accordance with this Section 9.7. (b) Each Member (or, if deceased, his or her Beneficiary) shall have the right, with respect to shares of Common Stock allocable to his or her Account, to instruct the Trustee in writing as to the manner in which to respond to a tender or exchange offer with respect to those shares. (1) If, and to the extent that the Trustee shall not have timely received instructions from any Member (or Beneficiary) with a right to instruct, such person shall be deemed to have timely instructed the Trustee not to tender or exchange the relevant shares of Common Stock. (2) The Trustee shall pool the results of instructions received from all Members to whose Accounts fractional shares are allocable and shall respond to the tender or exchange offer accordingly with respect to those shares. (3) In the case of a deceased Member who has more than one Beneficiary, the Trustee shall respond to the tender or exchange offer in accordance with the instructions of the Member's Beneficiaries in respect of the shares allocated to the deceased Member's Account in proportion to the Beneficiaries' respective interests in the Member's Account in accordance with rules established by the Committee. (4) Shares allocated to a Member's Account with respect to which no timely instructions are furnished shall be treated as shares with respect to which instructions not to tender or exchange have been timely furnished. (c) The Company shall use its best efforts to timely distribute or cause to be distributed to each Member (or Beneficiary) such information as will be distributed to stockholders of the Company in connection with any tender or exchange offer, together with a request for confidential instructions to the Trustee or its designee to respond to the tender or exchange offer. 9.8 Decisions of Committee. All decisions of the Committee, and any action taken by it in respect of the Plan and within the powers granted to it under the Plan, and any interpretation of provision of the Plan or the Trust Agreement by the Committee, shall be conclusive and binding on all persons, and shall be given the maximum possible deference allowed by law. 9.9 Administrative Expenses. All reasonable expenses actually incurred in connection with the administration of the Plan by the Employers, the Committee or otherwise, including legal, Trustee's and investment management fees and expenses ("Administrative Expenses"), shall be payable from the Trust Fund, except to the extent paid by the Employers under clause (a) below. Notwithstanding the foregoing, Administrative Expenses shall be paid from the Trust Fund only to the extent that such payments (to the extent prohibited by section 406) are exempt under section 408 of ERISA. The Committee shall determine which Administrative Expenses are not payable from the Trust Fund under the foregoing rules. The Company (in its discretion) may (a) direct the Employers to pay any or all Administrative Expenses, and/or (b) direct the Employers not to pay a greater share, portion or amount of such Expenses which would otherwise be allocable to the Accounts of Members who are no longer employed by any Employer or Affiliate. 9.10 Eligibility to Participate. No member of the Committee, who is also an Eligible Employee and otherwise eligible under Section 2, shall be excluded from membership in the Plan, but he or she, as a member of the Committee, shall not act or pass upon any matters pertaining specifically to his or her own Account under the Plan. 9.11 Indemnification. Each of the Employers shall, and hereby does, indemnify and hold harmless any of its Employees, officers or directors who may be deemed to be a fiduciary of the Plan, and the members of the Committee, from and against any and all losses, claims, damages, expenses and liabilities (including reasonable attorneys' fees and amounts paid, with the approval of the Board of Directors, in settlement of any claim) arising out of or resulting from the implementation of a duty, act or decision with respect to the Plan, so long as such duty, act or decision does not involve gross negligence or willful misconduct on the part of any such individual. SECTION 10 TRUST FUND AND ROLLOVER CONTRIBUTIONS 10.1 Trust Fund. The Company shall establish a Trust Agreement with the Trustee in order to provide for the safekeeping, administration and investment of Salary Deferrals, Matching Contributions and rollover contributions made under the Plan, the maintenance of Members' Accounts, and the payment of benefits as provided in the Plan. The Trustee shall receive and place in the Trust Fund all such contributions and shall hold, invest, reinvest and distribute the Trust Fund in accordance with provisions of the Plan and Trust Agreement. Assets of this Plan may be commingled with the assets of other qualified plans through one or more collective investment funds described in Section 6.3; provided, however, that the assets of this Plan shall not be available to provide any benefits under any other such plan. The benefits provided under the Plan shall be only such as can be provided by the assets of the Trust Fund, and no liability for payment of benefits shall be imposed upon the Employers or any of their shareholders, directors or employees. The Trust Fund shall continue for such time as may be necessary to accomplish the purposes for which it is created. 10.2 No Diversion of Assets. Notwithstanding any contrary Plan provision, at no time shall any assets of the Plan be used for, or diverted to, purposes other than for the exclusive benefit of Eligible Employees, Members, Beneficiaries and other persons receiving or entitled to receive benefits or payments under the Plan. Except to the limited extent permitted by Sections 5.4.6 and 10.3, no assets of the Plan shall ever revert to or become the property of the Employers. 10.3 Continuing Conditions. Any obligation to contribute Salary Deferrals and/or to make Matching Contributions under the Plan after initial qualification is hereby conditioned upon the continued qualification of the Plan under section 401(a) of the Code and the exempt status of the Trust Fund under section 501(a) of the Code and upon the deductibility of such Salary Deferrals and/or Matching Contributions under section 404(a) of the Code. That portion of any Salary Deferral or Matching Contribution which is contributed or made by reason of a good faith mistake of fact, or by reason of a good faith mistake in determining the deductibility of such portion, shall be returned to the Employers as promptly as practicable, but not later than one year after the contribution was made or the deduction was disallowed (as the case may be). The amount returned pursuant to the preceding sentence shall be an amount equal to the excess of the amount actually contributed over the amount that would have been contributed if the mistake had not been made; provided, however, that gains attributable to the returnable portion shall be retained in the Trust Fund; and provided, further, that the returnable portion shall be reduced (a) by any losses attributable thereto and (b) to avoid a reduction in the balance of any Member's Account below the balance that would have resulted if the mistake had not been made. 10.4 Change of Investment Alternatives. The Company reserves the right to change at any time the means through which the Plan is funded, including adding or substituting one or more contracts with an insurance company or companies, and thereupon may make suitable provision for the use of a designated portion of the assets of the Trust Fund to provide for the funding and/or payment of Plan benefits under any such insurance contract. No such change shall constitute a termination of the Plan or result in the diversion to the Employers of any portion of the Trust Fund. Notwithstanding the implementation of any such change of funding medium, all references in the Plan to the Trust Fund shall also refer to the Plan's interest in or the assets held under any other such funding medium. 10.5 Rollover Contributions. Notwithstanding any contrary Plan provision, the Committee may direct the Trustee to accept a transfer of assets to the Trust Fund by a Member of this Plan, but only if the transfer qualifies as a rollover under section 402(c) or 408(d)(3)(A)(ii) of the Code. Any assets transferred to the Trust Fund in accordance with the preceding sentence must be in the form of cash. 10.5.1 Rollover Account. Assets transferred to the Trust Fund pursuant to this Section 10.5 shall be credited to the Member's Rollover Account. A Member's interest in his or her Rollover Account shall be fully (100%) vested and nonforfeitable at all times. The Member shall indicate, on such form or in such manner and within such advance notice period as the Committee shall prescribe, the percentages of the amounts allocated to his or her Rollover Account that are to be invested in each of the Commingled Funds. In all other respects Rollover Account investments shall be subject to Section 5.3. 10.5.2 Nonqualifying Rollovers. If it is later determined that a transfer to the Trust Fund made pursuant to this Section 10.5 did not in fact qualify as a rollover under section 402(c) or 408(d)(3)(A)(ii) of the Code, then the balance credited to the Member's Rollover Account shall immediately be (a) segregated from all other Plan assets, (b) treated as a nonqualified trust established by and for the benefit of the Member, and (c) distributed to the Member. Such a nonqualifying rollover shall be deemed never to have been a part of the Trust Fund. SECTION 11 MODIFICATION OR TERMINATION OF PLAN 11.1 Employers' Obligations Limited. The Plan is voluntary on the part of the Employers, and the Employers shall have no responsibility to satisfy any liabilities under the Plan. Furthermore, the Employers do not guarantee to continue the Plan, and the Company may, by appropriate amendment of the Plan, discontinue Salary Deferrals and/or Matching Contributions for any reason at any time. Complete discontinuance of all Salary Deferral and Employer contributions shall be deemed a termination of the Plan. 11.2 Right to Amend or Terminate. The Company reserves the right to alter, amend or terminate the Plan, or any part thereof, in such manner as it may determine. Amendments which do not add materially to the Company's cost under the Plan and which are either necessary to comply with the Code, ERISA or other applicable law, are technical or intended to ease administration may be adopted if approved in writing by any two (2) of the following officers of the Company: Vice-President, Human Resources Treasurer Chief Financial Officer All other amendments shall be approved by the Board of Directors. Any such alteration, amendment or termination shall take effect upon the date indicated in the document embodying such alteration, amendment or termination; provided, however, that: (a) No such alteration or amendment shall (1) divest any portion of an Account that is then vested under the Plan, or (2) except as may be permitted by regulations or other IRS guidance, eliminate any optional form of benefit (within the meaning of section 411(a)(6)(B)(ii) of the Code) with respect to benefits accrued prior to the adoption of the amendment; and (b) Any alteration, amendment or termination of the Plan or any part thereof, shall be subject to the restrictions in Section 10.2 which prohibit any diversion of the assets of the Plan. 11.3 Effect of Termination. If the Plan is terminated or partially terminated, or if there is a complete discontinuance of all Salary Deferral and Matching Contributions, the interests of all Members affected by such termination or discontinuance in their Accounts shall remain fully (100%) vested and nonforfeitable. Notwithstanding the foregoing, the balances credited to the Salary Deferral Accounts of any Members who are affected by the termination may be distributed prior to the occurrence of a distribution event described in Section 7.1, but only to the extent permitted by section 401(k)(2)(B) of the Code. SECTION 12 TOP-HEAVY PLAN 12.1 Top-Heavy Plan Status. Notwithstanding any contrary Plan provision, the provisions of this Section 12 shall apply with respect to any Plan Year for which the Plan is a top-heavy plan (within the meaning of section 416(g) of the Code) (a "Top-Heavy Plan"). 12.1.1 60% Rule. The Plan shall be a Top-Heavy Plan with respect to any Plan Year if, as of the Determination Date, the value of the aggregate of the Accounts under the Plan for key employees (within the meaning of section 416(i) of the Code) exceeds 60% of the value of the aggregate of the Accounts under the Plan for all Members. For purposes of determining the value of the Accounts, the provisions of section 416(g)(4)(E) of the Code and Treas. Reg. section 1.416-1, (Q&A T-1) are incorporated herein by reference. 12.1.2 Top-Heavy Determinations. The Committee, acting on behalf of the Employers, shall determine as to each Plan Year whether or not the Plan is a Top-Heavy Plan for that Plan Year. For purposes of making that determination as to any Plan Year: (a) "Determination Date" shall mean the last day of the immediately preceding Plan Year; (b) The Plan shall be aggregated with each other qualified plan of any Employer or any Affiliate (1) in which a key employee (within the meaning of section 416(i)(1) and (5) of the Code) participates, and/or (2) which enables the Plan or any plan described in clause (1) above to meet the requirements of section 401(a)(4) or 410(b) of the Code; (c) The Plan may be aggregated with any other qualified plan of any Employer or Affiliate, which plan is not required to be aggregated under paragraph (b)(1) above, if the resulting group of plans would continue to meet the requirements of sections 401(a)(4) and 410(b) of the Code; and (d) In determining which employees are key and non-key employees, an Employee's compensation for the Plan Year shall be his or her Total Compensation (as defined in Section 5.4.2(d)). 12.2 Top-Heavy Plan Provisions. For any Plan Year for which the Plan is a Top-Heavy Plan, the following provisions shall apply: 12.2.1 Minimum Allocation. The Employers shall make an additional contribution to the Account of each Member who is a non-key employee (within the meaning of section 416(i)(2) and (5) of the Code), and who is employed on the last day of the Plan Year, in an amount which equals 3% of his or her Top-Heavy Compensation (as defined in Section 12.2.2) for the Plan Year; provided, however, that if the Key Employee Percentage is less than 3%, then the percentage rate at which that additional Employer contribution shall be made for that Plan Year shall be reduced from 3% to the Key Employee Percentage. (a) "Key Employee Percentage" shall mean the largest percentage computed by dividing (a) the total amount of Salary Deferrals and Matching Contributions allocated for that Plan Year to the Account of each Member who is a key employee (within the meaning of section 416(i)(1) and (5) of the Code), by (b) his or her Top-Heavy Compensation. (b) The additional contribution required under this Section 12.2.1 shall be made without regard to the level of the Member's Top-Heavy Compensation for the Plan Year. (c) Notwithstanding the foregoing, if a Member is also covered under any Other Plan (as defined in Section 8.4.1(c)) and the minimum allocation of benefit requirement applicable to Top-Heavy Plans will be met under such Other Plan or Plans, no additional contribution will be made for the Member under this Plan. 12.2.2 "Top-Heavy Compensation", with respect to any Member for a Plan Year, shall mean the sum of (a) his or her Total Compensation (as defined in Section 5.4.2(d)), (b) Salary Deferrals credited to his or her Salary Deferral Account, and (c) other amounts that are contributed to an employee benefit plan by any Employer pursuant to a salary reduction agreement and are not includible in gross income under section 125, 401(k), 402(e)(3), 402(h), 403(b) or 414(h)(2) of the Code. No amount in excess of $150,000 (as adjusted pursuant to sections 401(a)(17) and 415(d) of the Code) shall be taken into account under this Section 12.2.2 for any Plan Year. In applying that $150,000 limit, Section 1.17(c) shall apply except that the term "Family Member" shall only include a spouse or a lineal descendant who has not attained age 19 before the close of the Plan Year. 12.2.3 Defined Benefit Plan. With respect to each Member who is also a participant in a qualified defined benefit plan maintained by any Employer or Affiliate which is also a top-heavy plan (within the meaning of section 416(g) of the Code), then provided that the aggregation group of which the Plan is a member is not super top-heavy (within the meaning of section 416(h)(2)(B) of the Code), the additional Employer contribution required to be made to the Account of each non-key employee (within the meaning of section 416(i)(2) and (5) of the Code) under Section 12.2.1 shall be in an amount which equals 7.5% of his or her Top-Heavy Compensation. SECTION 13 GENERAL PROVISIONS 13.1 Plan Information. Each Member shall be advised of the general provisions of the Plan and, upon written request addressed to the Committee, shall be furnished with any information requested, to the extent required by applicable law, regarding his or her status, rights and privileges under the Plan. 13.2 Inalienability. Except to the extent otherwise provided in Sections 8.4 and 8.5 or mandated by applicable law, in no event may any Member, former Member or his or her spouse, Beneficiary or estate sell, transfer, anticipate, assign, hypothecate, or otherwise dispose of any right or interest under the Plan; and such rights and interests shall not at any time be subject to the claims of creditors nor be liable to attachment, execution or other legal process. 13.3 Rights and Duties. No person shall have any rights in or to the Trust Fund or other assets of the Plan, or under the Plan, except as, and only to the extent, expressly provided for in the Plan. To the maximum extent permissible under section 410 of ERISA, neither the Employers, the Trustee nor the Committee shall be subject to any liability or duty under the Plan except as expressly provided in the Plan, or for any other action taken, omitted or suffered in good faith. 13.4 No Enlargement of Employment Rights. Neither the establishment or maintenance of the Plan, the making of any contributions nor any action of any Employer, the Trustee or Committee, shall be held or construed to confer upon any individual any right to be continued as an Employee nor, upon dismissal, any right or interest in the Trust Fund or any other assets of the Plan other than as provided in the Plan. Each Employer expressly reserves the right to discharge any Employee at any time. 13.5 Apportionment of Duties. All acts required of the Employers under the Plan may be performed by the Company for itself and its Affiliates. Any costs incurred by the Company for itself or its Affiliates in connection with the Plan and the costs of the Plan, if not paid from the Trust Fund pursuant to Section 9.9, shall be equitably apportioned among the Company and the other Employers, as determined by the Committee (in its discretion). Whenever an Employer is permitted or required under the terms of the Plan to do or perform any act, matter or thing, it shall be done and performed by any officer or employee of the Employer who is thereunto duly authorized by the board of directors of the Employer. 13.6 Merger, Consolidation or Transfer. This Plan shall not be merged or consolidated with any other plan, nor shall there be any transfer of any assets or liabilities from this Plan to any other plan, unless immediately after such merger, consolidation or transfer, each Member's accrued benefit, if such other plan were then to terminate, is at least equal to the accrued benefit to which the Member would have been entitled if this Plan had been terminated immediately before such merger, consolidation or transfer. 13.7 Applicable Law. The provisions of the Plan shall be construed, administered and enforced in accordance with ERISA and, to the extent applicable, the laws of the State of California. 13.8 Severability. If any provision of the Plan is held invalid or unenforceable, its invalidity or unenforceability shall not affect any other provisions of the Plan, and the Plan shall be construed and enforced as if such provision had not been included. 13.9 Captions. The captions contained in and the table of contents prefixed to the Plan are inserted only as a matter of convenience and for reference and in no way define, limit, enlarge or describe the scope or intent of the Plan nor in any way shall affect the construction of any provision of the Plan. EXECUTION IN WITNESS WHEREOF, Genentech, Inc., by its duly authorized officers, has executed this January 1, 1994 Restatement of the Plan on the date indicated below. GENENTECH, INC. By _______________________________ Title: Dated By _______________________________ Title: Dated GENENTECH, INC. TAX REDUCTION INVESTMENT PLAN (January 1, 1994 Restatement) TABLE OF CONTENTS Page PREAMBLE ......................................................... 1 SECTION 1 DEFINITIONS ........................................... 2 SECTION 2 ELIGIBILITY AND MEMBERSHIP ............................ 12 2.1 Initial Eligibility ....................................... 12 2.2 Employer Aggregation ...................................... 12 2.3 Membership ................................................ 12 2.4 Voluntary Suspension ...................................... 13 2.5 Mandatory Suspension ...................................... 14 2.6 Termination of Membership ................................. 14 SECTION 3 SALARY DEFERRALS ...................................... 15 3.1 Salary Deferrals .......................................... 15 3.2 Salary Deferral Election .................................. 18 3.3 Payment of Deferrals ...................................... 21 SECTION 4 MATCHING CONTRIBUTIONS ................................ 21 4.1 Amount of Matching Contributions .......................... 21 4.2 Timing .................................................... 26 4.3 Periodic Contributions .................................... 26 4.4 Profits Not Required ...................................... 26 4.5 After-Tax Contributions ................................... 27 SECTION 5 ALLOCATIONS AND INVESTMENT ............................ 27 5.1 Salary Deferrals .......................................... 27 5.2 Matching Contributions .................................... 27 5.3 Investment ................................................ 27 5.4 Limitations on Allocations ................................ 29 SECTION 6 ACCOUNTS AND COMMINGLED FUNDS ......................... 34 6.1 Members' Accounts ......................................... 34 6.2 Trust Fund Assets ......................................... 34 6.3 Commingled Funds .......................................... 35 6.4 Valuation of Members' Accounts ............................ 37 6.5 Valuation of Shares ....................................... 38 6.6 Statements of Members' Accounts ........................... 38 6.7 Accounts Nonforfeitable ................................... 38 SECTION 7 DISTRIBUTIONS ......................................... 38 7.1 Events Permitting Distribution ............................ 38 7.2 Times for Distribution .................................... 39 7.3 Consent Requirement ....................................... 40 7.4 Form of Distribution ...................................... 41 7.5 Common Stock Restrictions ................................. 43 7.6 Beneficiary Designations .................................. 43 7.7 Payments to Incompetents .................................. 45 7.8 Undistributable Accounts .................................. 46 SECTION 8 WITHDRAWALS, LOANS AND DOMESTIC RELATIONS ORDERS ...... 46 8.1 General Rules ............................................. 46 8.2 Hardship Withdrawal ....................................... 47 8.3 Age 59 1/2 Withdrawal ..................................... 49 8.4 Loans to Members .......................................... 49 8.5 Qualified Domestic Relations Orders ....................... 53 SECTION 9 ADMINISTRATION OF THE PLAN ............................ 55 9.1 Plan Administrator ........................................ 55 9.2 Committee ................................................. 55 9.3 Actions by Committee ...................................... 55 9.4 Powers of Committee ....................................... 56 9.5 Fiduciary Responsibilities ................................ 57 9.6 Investment Responsibilities ............................... 58 9.7 Voting and Tender Offer Rights in Common Stock ............ 59 9.8 Decisions of Committee .................................... 63 9.9 Administrative Expenses ................................... 63 9.10 Eligibility to Participate ................................ 64 9.11 Indemnification ........................................... 64 SECTION 10 TRUST FUND AND ROLLOVER CONTRIBUTIONS ................ 64 10.1 Trust Fund ............................................... 64 10.2 No Diversion of Assets ................................... 65 10.3 Continuing Conditions .................................... 65 10.4 Change of Investment Alternatives ........................ 66 10.5 Rollover Contributions ................................... 67 SECTION 11 MODIFICATION OR TERMINATION OF PLAN .................. 68 11.1 Employers' Obligations Limited ........................... 68 11.2 Right to Amend or Terminate .............................. 68 11.3 Effect of Termination .................................... 69 SECTION 12 TOP-HEAVY PLAN ....................................... 70 12.1 Top-Heavy Plan Status .................................... 70 12.2 Top-Heavy Plan Provisions ................................ 71 SECTION 13 GENERAL PROVISIONS ................................... 73 13.1 Plan Information ......................................... 73 13.2 Inalienability ........................................... 73 13.3 Rights and Duties ........................................ 73 13.4 No Enlargement of Employment Rights ...................... 74 13.5 Apportionment of Duties .................................. 74 13.6 Merger, Consolidation or Transfer ........................ 74 13.7 Applicable Law ........................................... 75 13.8 Severability ............................................. 75 13.9 Captions ................................................. 75 EXECUTION ........................................................ 76 Page SF3-44540.2 Page NY1-53134.1 EX-4.3 10 GENENTECH, INC. AND THE BANK OF NEW YORK as Trustee SECOND SUPPLEMENTAL INDENTURE Dated as of October 18, 1995 To INDENTURE Dated as of March 27, 1987 Between GENENTECH, INC. and THE BANK OF NEW YORK as Trustee U.S. $150,000,000 5% Convertible Subordinated Debentures Due 2002 SECOND SUPPLEMENTAL INDENTURE THIS SECOND SUPPLEMENTAL INDENTURE, dated as of October 18, 1995 (the "Second Supplement"), among Genentech, Inc., a Delaware corporation ("Genentech"), and The Bank of New York, as Trustee (the "Trustee"), under the Indenture, dated as of March 27, 1987 (the "Indenture"), as amended and supplemented by a First Supplemental Indenture dated as of August 17, 1990, pursuant to which the 5% Convertible Subordinated Debentures Due 2002 of Genentech (the Debentures) were issued. RECITALS OF GENENTECH Pursuant to an Agreement and Plan of Merger dated as of May 23, 1995, as amended (the "Merger Agreement"), by and among Genentech, Roche Holdings, Inc. ("Roche") and HLR (U.S.) II, Inc., a wholly-owned subsidiary of Roche ("Merger Sub"), Merger Sub is to be merged with and into Genentech (the "Merger"). Pursuant to the Merger, each outstanding share of Common Stock, par value $.02 per share, of Genentech ("Genentech Common Stock") (other than shares held by Roche and its affiliates) will be converted into the right to receive one share of Callable Puttable Common Stock, par value $.02 per share, of Genentech ("Special Common Stock"). Pursuant to Section 12.11 of the Indenture, Genentech is required to execute and deliver a supplemental indenture in connection with the Merger, relating to the conversion rights of the Holders of the Debentures from and after the effective time of the Merger (the "Effective Time"). All things necessary to continue to make the Debentures issued under the Indenture as hereby supplemented the valid obligations of Genentech, to make the Indenture as hereby supplemented a valid agreement of Genentech and to cause Genentech to continue to comply with its covenants and requirements under the Indenture following the Merger, have been done. NOW, THEREFORE, THIS SECOND SUPPLEMENT WITNESSETH: In order to comply with the requirements of the Indenture, Genentech agrees with the Trustee for the equal and proportionate benefit of the Holders of the Debentures as follows: 1 ARTICLE ONE Section 101. In accordance with Section 12.11 of the Indenture, from and after the Effective Time, the Holder of each Security shall have the right, during the period such Security shall be convertible as specified in Section 12.01 of the Indenture, to convert such Security only into the amount of cash and shares of Special Common Stock receivable pursuant to the Merger by a holder of the number of shares of Common Stock into which such Security might have been converted immediately prior to the Effective Time. Section 102. From and after the Effective Time, the Conversion Price and the consideration into which the Securities are convertible pursuant to Article XII of the Indenture, as modified pursuant to this Second Supplement, shall be subject to adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in Article XII of the Indenture. 2 ARTICLE TWO Section 201. Except as otherwise expressly provided or unless the context otherwise requires, all terms used herein which are defined in the Indenture shall have the meanings assigned to them in the Indenture. Section 203. This Second Supplement shall be effective as of the Effective Time. This Second Supplement shall have no effect in the event that the Merger Agreement is terminated and the Merger is abandoned prior to the Effective Time. Section 204. The recitals contained herein shall be taken as the statements of Genentech and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Second Supplement. Section 205. This Second Supplement shall be governed by and construed in accordance with the laws of the jurisdiction which govern the Indenture and its construction. Section 206. This Second Supplement may be executed in any number of counterparts each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Second Supplement to be duly executed and their respective seals to be affixed hereunto and duly attested all as of the day and year first above written. GENENTECH, INC. [Corporate Seal] By /s/ John P. McLaughlin _______________________ John P. McLaughlin Senior Vice President Attest: /s/ Stephen Juelsgaard THE BANK OF NEW YORK, as Trustee [Corporate Seal] By /s/ Helen M. Cotiaux ____________________ Helen M. Cotiaux Vice President Attest: /s/ Marie E. Trimboli Marie E. Trimboli Assistant Treasurer - -5- EX-23.1 11 Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Genentech, Inc. of our report dated January 17, 1996, included in the 1995 Annual Report to Stockholders of Genentech, Inc. Our audits also included the financial statement schedule of Genentech, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements pertaining to the 1991 Employee Stock Plan, the 1994 Stock Option Plan, the 1990 Stock Option/Stock Incentive Plan, the 1984 Incentive Stock Option Plan and the 1984 Non-Qualified Stock Option Plan, the shares issuable to certain warrant holders, the shares issuable to certain convertible subordinated debenture holders and the Genentech, Inc. Tax Reduction Investment Plan and in the related Prospectuses of our report dated January 17, 1996, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) for the year ended December 31, 1995. Ernst & Young LLP San Jose, California March 29, 1996 -----END PRIVACY-ENHANCED MESSAGE-----