-----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, FcWwresArhgtyZzJAs+F0GmTjwDMpIqsq/OYAcZLCQv4ZM1LutnTXrxg57zVvXNp N3r0vDmqdpZt8M5NSZBzHg== 0000950133-02-001308.txt : 20020415 0000950133-02-001308.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950133-02-001308 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUMAN GENOME SCIENCES INC CENTRAL INDEX KEY: 0000901219 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 223178468 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14169 FILM NUMBER: 02596359 BUSINESS ADDRESS: STREET 1: 9410 KEY W AVE CITY: ROCKVILLE STATE: MD ZIP: 20850-3338 BUSINESS PHONE: 3013098504 MAIL ADDRESS: STREET 1: 9410 KEY WEST AVE CITY: ROCKVILLE STATE: MD ZIP: 20850 10-K 1 w58882e10-k.txt ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ---------- For the fiscal year ended December 31, 2001 Commission File Number 0-22962 HUMAN GENOME SCIENCES, INC. (Exact name of registrant) Delaware 22-3178468 (State of organization) (I.R.S. employer identification number) 9410 Key West Avenue, Rockville, Md. 20850-3338 (address of principal executive offices and zip code ) (301) 309-8504 (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: NONE Securities pursuant to Section 12(g) of the Act: Common stock, par value $0.01 per share 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 the 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 number of shares of the registrant's common stock outstanding on January 31, 2002 was 128,328,142. As of January 31, 2002, the aggregate market value of the common stock held by non-affiliates of the registrant based on the closing price reported on the National Association of Securities Dealers Automated Quotations System was approximately $2,395,123,843.* DOCUMENTS INCORPORATED BY REFERENCE Portions of Human Genome Sciences, Inc.'s Notice of Annual Stockholder's Meeting and Proxy Statement, to be filed within 120 days after the end of the registrant's fiscal year, are incorporated by reference into Part III of this Annual Report. *Excludes 43,183,320 shares of common stock deemed to be held by officers and directors and stockholders whose ownership exceeds five percent of the shares outstanding at January 31, 2002. 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. 1 PART I ITEM 1. BUSINESS This Annual Report on Form 10-K contains, in addition to historical information, forward-looking statements that involve risks and uncertainty. Our actual results could differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed in "Factors That May Affect Our Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as those discussed elsewhere in this Annual Report on Form 10-K. OVERVIEW We are a leading genomics and biopharmaceutical company focused on therapeutic product development and functional analysis of genes using our proprietary technology platform. We discover, develop and intend to commercialize novel compounds for treating and diagnosing human disease based on the identification and study of genes. We focus our internal product development efforts on therapeutic proteins, antibodies, peptides and fusion proteins and we use collaborations for the development of gene therapy products and small molecule drugs. We have discovered a large number of genes through our genomics capabilities and have developed a rapidly evolving product pipeline based on our discoveries. We have seven products, including three therapeutic proteins, one antibody and three albumin fusion products that we have advanced into human clinical trials; two products are awaiting approval from FDA to enter human clinical trials; a tenth product, a gene therapy product based on a gene we discovered, has been licensed to Vascular Genetics, Inc. (VGI) and is in human clinical trials being conducted by VGI; an eleventh product, an enzyme that lowers levels of lipoprotein-associated phospholipase A2 (Lp-PLA2), was discovered by GlaxoSmithKline (GSK) as part of our collaboration with GSK and is also in human clinical trials being conducted by GSK. We have a number of additional products in preclinical development. We have extensive capabilities in gene discovery, intellectual property protection and preclinical and clinical development and have established a manufacturing capability for the preparation of our proteins and other products for human studies. We intend to add sales and marketing when appropriate and are currently adding additional manufacturing capabilities. We have established strategic partnerships with a number of leading pharmaceutical and biotechnology companies to leverage our capabilities and gain access to complementary technologies and sales and marketing infrastructure. Some of these partnerships provide us with research funding and milestone payments, along with royalty payments as products are developed and commercialized. We are also entitled to certain co-promotion, co-development, revenue sharing and other product rights. We have a growing intellectual property portfolio protecting our genomic discoveries and product pipeline. STRATEGY Our goal is to be an independent, global and fully-integrated biopharmaceutical company through the discovery, development, manufacture and commercialization of new gene-based products. As part of our strategy, we intend to continue to: - Discover medically useful genes based on our proprietary technology platform; - Develop, manufacture and commercialize our gene-based products on our own and with our strategic partners; - Establish and enhance strategic alliances to provide access to the product development, clinical development and marketing expertise of our partners; - Expand our technology platform to accelerate our product development activities; - Pursue strategic acquisitions to augment our capabilities and provide access to complementary technologies; and - Capitalize on and expand our intellectual property portfolio. 2 PRODUCTS We have discovered a large number of medically useful genes which we are developing on our own. Currently, seven drugs from our technology are in human clinical trials including three therapeutic proteins, one antibody and three albumin fusion proteins. Our therapeutic proteins are: Mirostipen (MPIF-1), a protein designed to protect cells which develop into white blood cells, red blood cells and platelets from the toxic effects of chemotherapy, is in Phase II human clinical trials. Repifermin (KGF-2), a protein designed to speed the repair of damage to skin and other cells, is in Phase II human clinical trials for the treatment of venous ulcers and mucositis. BLyS(TM), an immune stimulant, is in Phase I human clinical trials for the treatment of common variable immunodeficiency and IgA deficiency. Our antibody is LymphoStat-B(TM) and is in Phase I human clinical trials in patients with autoimmune disease. We have three albumin fusion proteins that have been advanced to Phase I human clinical trials. These are: Albuferon(TM)-(alpha) for the treatment of chronic hepatitis C and chronic myelogenous leukemia (CML), Albutropin(TM) for the treatment of adult growth hormone deficiency and Albuleukin(TM) for the treatment of cancer. We have two products awaiting approval from FDA to enter human clinical trials. One of these is LymphoRad(131)(TM) is a radioiodinated form of BLyS and is awaiting FDA clearance to begin Phase I human clinical trials in patients with multiple myeloma. Currently, there are two products being developed by partners that are in human clinical trials. We licensed VEGF-2 to Vascular Genetics, Inc. (VGI) for gene therapy. These clinical trials were on clinical hold until October 2001, but VGI expects to resume the trials during 2002. GlaxoSmithKline is evaluating an enzyme that lowers levels of lipoprotein-associated phospholipase A2 (Lp-PLA2) in Phase I human clinical trials. We also have a rapidly evolving pipeline of additional products in preclinical development to treat diseases such as cancer, HIV, hepatitis, diabetes / metabolism, bone remodeling / osteoporosis, systemic lupus erythematosus, rheumatoid arthritis and vascular disease. INDUSTRY BACKGROUND Every living organism has a unique "genome," a master blueprint of all the cellular structures and activities required to build and support life. A genome is a map of the organism's DNA, which is in part comprised of segments called "genes." Genes contain the specific sequences of information responsible for particular physiological traits and processes. Each gene is comprised of a sequence of nucleotides which provide precise genetic instructions to create, or "express" a protein. Proteins are the primary building blocks of an organism's physiological characteristics. A typical human cell contains thousands of different proteins essential to its structure, growth and function. If even one gene is expressed abnormally, it can severely alter the cell's function and result in a disease condition. Throughout the past decade, researchers have focused on discovering genes and sequencing the human genome to determine the order of nucleotides in a specific gene, permitting identification of the gene and the protein it produces using a variety of techniques. For example, scientists have used cDNA libraries, which contain copies of DNA with only the expressed portion of the gene, in conjunction with computer software to discern locations of genes within the genome. Recent advances have made these technologies operate in a high-throughput manner, causing the discovery of genes to become drastically more efficient and allowing researchers to focus on the functional aspects of genes. Understanding the functional aspects of genes allows for the correlation of those genes to medically relevant conditions. Armed with these data, researchers can more efficiently develop treatments for conditions of interest. Gene research facilitates and greatly accelerates the development of a variety of therapeutic, diagnostic and other products and services. Development efforts can become more targeted as researchers develop compounds that affect the specific activity of an expressed gene product. Most therapeutic drugs act on proteins which cause or contribute to an illness or disorder. As a result, the identification of proteins through gene research can play an important role in the development of drugs and drug screens. Proteins themselves can also be used as drugs. Insulin, which regulates sugar metabolism, is a good example of a widely known protein drug. The identification of genes that code for proteins that may be missing or defective can enable the development of therapeutics for genetic diseases. In addition, identification of genes that may predispose a person to a particular disease may enable the development of diagnostic tests for the disease that will permit early diagnosis and more successful treatment. Genomic research has the potential to make the drug discovery process dramatically more time and cost efficient, as well as to enable the development of more targeted drugs. 3 OUR STRATEGY Our goal is to become an independent, global and fully-integrated biopharmaceutical company through the discovery, development, manufacture and commercialization of new gene-based products. Our strategy consists of the following key elements: - Discover medically useful genes. We intend to continue to discover medically useful genes using the strengths of our technology platform. We undertake discovery efforts based on our capabilities in gene sequencing, transcriptional profiling, creation of gene libraries and bioinformatics. We study our extensive genomic database for potentially medically useful genes and focus on discovering their functions. - Develop, manufacture and commercialize our products. We seek to develop clinically the medically useful genes we discover. This may include using the protein product itself as a drug, using the protein as a target for a small molecule drug or creating antibodies targeted at the protein. We also intend to pursue drugs using proprietary protein fusion technology. This technology may provide longer acting forms of many important proteins, which may allow us to develop safer, more effective and more convenient versions of both existing and new products. We intend to manufacture proteins and commercialize the drugs we develop on our own or in conjunction with our partners. - Establish and enhance strategic alliances. We intend to continue to establish alliances with leading pharmaceutical and biotechnology companies. These alliances will provide us with access to the expertise of our partners in areas such as product development, clinical development and sales and marketing, while allowing our partners to develop therapeutics based on our technologies. In addition, these alliances may generate research funding, milestone and royalty payments that will enable us to continually enhance our technology platform and to discover and develop new gene-based products. We may also seek to retain certain co-promotion, co-development, revenue sharing and other product rights. - Expand our technology platform. We will continue to invest considerable resources to expand and enhance our proprietary technology platform. This will allow us to accelerate our discovery and product development activities and facilitate the formation of additional alliances with major biotechnology and pharmaceutical companies. We also intend to continue to establish collaborations with leading biotechnology companies to gain access to complementary technologies for our product development efforts. - Pursue strategic acquisitions. We intend to continually evaluate potential acquisitions and joint ventures that would allow us to augment our technology, product development and commercialization capabilities, as well as provide access to complementary technological expertise. - Capitalize on and expand our intellectual property portfolio. We vigorously pursue patents to protect our intellectual property and have developed a strong intellectual property portfolio. We intend to capitalize on and expand our portfolio as we make further discoveries. As of March 1, 2002, we had 205 U.S. patents covering human genes and proteins and had filed U.S. patent applications covering many more human genes and the proteins they encode. 4 PRODUCTS IN DEVELOPMENT We have discovered a large number of medically useful genes which we are developing on our own or with our partners. A number of our and our partners' products have advanced to various stages of human clinical testing. Moreover, we have a rapidly evolving pipeline of products in preclinical development.
- ----------------------------------------------------------------------------------------------------------------------- PRODUCT INDICATION STATUS CURRENT HGS RIGHTS - ----------------------------------------------------------------------------------------------------------------------- CLINICAL PROGRAMS THERAPEUTIC PROTEINS: Repifermin (KGF-2) Venous ulcers Phase IIb Worldwide, co-development and co-marketing with GlaxoSmithKline (GSK) Mucositis Phase II Worldwide, co-development and co-marketing with GSK Ulcerative colitis Phase II Worldwide, co-development and co-marketing with GSK Mirostipen (MPIF-1) Adjunct to chemotherapy Phase II Worldwide except Japan (Takeda) BLyS Common variable immunodeficiency Phase I Worldwide Immunoglobulin-A (IgA) deficiency Phase I Worldwide LymphoRad(131) Cancer IND Filed Worldwide ANTIBODIES: LymphoStat-B Autoimmune disease Phase I Worldwide ALBUMIN FUSION PROTEINS: Albuferon-(alpha) Hepatitis C Phase I Worldwide (Albumin-Interferon-alpha) Chronic myelogenous leukemia (CML) Phase I Worldwide Albutropin Growth hormone deficiency Phase I Worldwide Albuleukin Cancer Phase I Worldwide GENE THERAPIES: VEGF-2 (1)(2) Coronary artery disease Phase II(2) Licensed to Vascular Genetics Critical limb ischemia Phase II Licensed to Vascular Genetics SMALL MOLECULE DRUGS: Lp-PLA2 (SB480848) (1) Atherosclerosis Phase I Under development by GSK
5
- ------------------------------------------------------------------------------------------------------------------------- PRODUCT INDICATION STATUS CURRENT HGS RIGHTS - ------------------------------------------------------------------------------------------------------------------------- PRECLINICAL AND OTHER PROGRAMS THERAPEUTIC PROTEINS: FasTR(TM) Hepatitis, autoimmune disease Preclinical Worldwide A novel interferon (1) Multiple sclerosis, hepatitis, Preclinical Licensed to Schering-Plough cancer Osteostat Bone remodeling / Osteoporosis Preclinical Worldwide GMAD-1 Diabetes / Metabolism Preclinical Worldwide DP-18 Diabetes / Metabolism Preclinical Worldwide ANTIBODIES AND PEPTIDES: CCR5-mAB HIV / AIDS Preclinical Worldwide LymphoStat-B Rheumatoid arthritis Preclinical Worldwide TRAIL R1 Receptor Antibody Cancer Preclinical Worldwide TRAIL R2 Receptor Antibody Cancer Preclinical Worldwide VEGF-2 Antibody Cancer, vascular disease Preclinical Worldwide GMAD-2 Diabetes / Metabolism Preclinical Worldwide FUSION PROTEINS: Albuferon-(beta) Multiple sclerosis Preclinical Worldwide Albupoietin(TM) Cancer Preclinical Worldwide Albugranin(TM) Cancer Preclinical Worldwide Albulin Diabetes / Metabolism Preclinical Worldwide Albugon Diabetes / Metabolism Preclinical Worldwide HGS-B 14 Bone remodeling / Osteoporosis Preclinical Worldwide Albuthyrin Bone remodeling / Osteoporosis Preclinical Worldwide Albutonin Bone remodeling / Osteoporosis Preclinical Worldwide GENE THERAPY: CTGF-2 (1) Vascular disease Preclinical Licensed to Transgene TIMP-4 (1) Restenosis Preclinical Licensed to Transgene VACCINES: Streptococcus pneumniae (1) Bacterial pneumonia, meningitis and Preclinical Licensed to MedImmune and GSK otis media - -------------------------------------------------------------------------------------------------------------------------
(1) Drug development costs for these drugs are the sole responsibility of the licensee. (2) VEGF-2 trials were released from clinical hold in October 2001 by the Food and Drug Administration (FDA). See "Risk Factors." 6 CLINICAL PROGRAMS Repifermin (Keratinocyte Growth Factor-2, KGF-2) We have shown in animal studies that repifermin speeds the repair of damage to the cells lining the mouth, throat, gastrointestinal tract and related tissues and heals serious chronic wounds to the skin. Repifermin may also be useful in treating a number of other conditions involving injury to skin cells, including skin ulcers, burns and surgical and other wounds. In addition, repifermin may be useful in the treatment of mucositis, an injury to the lining of the mouth and intestinal tract which can be caused by some cancer treatments. GlaxoSmithKline exercised its co-right option to jointly develop and commercialize repifermin. We expect to share equally in clinical development costs for Phase III trials and beyond. We will co-promote repifermin upon achieving regulatory approvals. Three Phase I studies to evaluate the safety of repifermin in healthy volunteers have been completed. In 2000, we completed a Phase II human study of repifermin for the treatment of chronic venous ulcers, in which repifermin was shown to be well tolerated and capable of accelerating wound healing by a number of partial healing parameters. A large Phase II study to determine the safety and efficacy of repifermin for complete healing of chronic venous ulcers began in early 2001. Two different Phase II studies were also initiated to evaluate repifermin in the treatment of mucositis in patients undergoing bone-marrow transplantation. The results from a mucositis trial relating to repifermin administration following transplantation were announced in 2001 and indicated that while repifermin was safe and well tolerated in patients, no evidence was shown that repifermin was active in reducing the incidence or severity of mucositis. The mucositis trial relating to repifermin administration prior to and following transplantation is ongoing. A third Phase II study was also initiated to evaluate repifermin in the treatment of ulcerative colitis, an inflammatory bowel disease. The results from the ulcerative colitis trials showed that repifermin was safe and well-tolerated, but not shown to be effective. We are continuing to analyze these final results to determine how to proceed with this indication. The trials are being conducted at leading research centers in the U.S. Mirostipen (Myeloid Progenitor Inhibitory Factor-1, MPIF-1) Myeloid progenitor cells, which develop into white blood cells, red blood cells and platelets, are destroyed by many forms of cancer chemotherapy, resulting in a decrease in these cells. We have shown in laboratory and animal studies that MPIF-1 inhibits the differentiation and growth of certain bone marrow cells, including myeloid progenitor cells. By preventing the growth of myeloid progenitor cells during aggressive chemotherapy, it may be possible to reduce the destruction of these cells and allow the more rapid repopulation of red and white blood cells in circulation. This, in turn, may reduce the incidence of serious infection, anemia and coagulation disorders associated with chemotherapy. A Phase I study to evaluate MPIF-1 safety in healthy volunteers was completed in 1998. Two Phase II studies are being conducted to evaluate MPIF-1 in shielding myeloid progenitor cells from the harmful effects of chemotherapy. These studies tested various doses of MPIF-1 in cancer patients undergoing chemotherapy treatment for various cancers. Trials are being conducted at leading cancer research centers in the U.S. and completed enrollment in 2001. We expect results from the trials to be available in mid-2002. BLyS (B Lymphocyte Stimulator) BLyS is a novel immune stimulant. We have shown in laboratory studies that BLyS stimulates B lymphocytes to produce high levels of antibodies. BLyS has the potential to improve treatments for certain immune deficiency syndromes. In addition, BLyS could boost immune systems depleted by organ transplantation, chemotherapy and bone-marrow transplantation. BLyS could also enhance the performance of traditional vaccines. We are currently testing BLyS in patients with common variable immunodeficiency, a disorder that leaves individuals susceptible to infection. In February 2001, BLyS received "orphan" drug designation from the FDA for the treatment of common variable immunodeficiency. A Phase I study with increasing doses of BLyS is ongoing. For this trial, BLyS had been produced in an insect cell culture. A Phase I study has also been initiated to evaluate BLyS in the treatment of Immunoglobulin-A (IgA) deficiency, an immune disorder. In this trial, we received approval from the FDA to begin manufacturing BLyS in E. coli, which will allow us to increase production scale to support the needs of the clinical program, and ultimately, to supply commercial needs. 7 LymphoRad(131) LymphoRad(131) is a radioiodinated form of B-Lymphocyte Stimulator (BLyS). We have found in preclinical studies that LymphoRad(131) binds to receptors found on B cells and B-cell tumors, delivering low doses of radiation that cause cell death. Such studies also showed that treatment with LymphoRad(131) resulted in inhibition of tumor growth and prolonged survival. In January 2002, we filed an Investigational New Drug (IND) application for this drug. Upon receiving clearance from the FDA, we plan to initiate Phase I clinical trials in patients with multiple myeloma. LymphoStat-B LymphoStat-B is the first antibody drug to emerge from our human antibody drug discovery program. The drug inactivates the B-Lymphocyte Stimulator protein (BLyS). We have found in laboratory studies that LymphoStat-B can reverse the immune stimulatory effects of BLyS. Many patients that suffer from systemic lupus erythematosus and rheumatoid arthritis have elevated levels of BLyS in their blood or joint fluid. In November 2001, we received approval from the FDA to proceed with a Phase I clinical trial in patients with systemic lupus erythematosus and have begun enrollment in this trial. Fusion Proteins Using our proprietary recombinant protein fusion technology, we are genetically fusing proteins to albumin, a very abundant, natural and long-lived protein in the blood. We have begun Phase I human clinical studies of several albumin fusion proteins. These include Albuferon-alpha (hepatitis C and chronic myelogenous leukemia - CML), Albutropin (growth hormone deficiency) and Albuleukin (cancer). Albuferon-alpha is created by fusing the gene for a human protein, interferon alpha, an approved drug, to the human protein, albumin. Based on preclinical studies, Albuferon-alpha should provide patients infected with Hepatitis C with longer acting therapeutic activity and may offer an improved side-effect profile. In March 2001, we received approval from the FDA to proceed with a Phase I clinical trial in patients with hepatitis C. We have begun enrolling patients in this trial. We are in the process of initiating a second trial in patients with chronic myelogenous leukemia (CML). Albutropin is created by fusing the gene for a human protein, human growth hormone, an approved drug, to the human protein, albumin. Based on preclinical studies, Albutropin may offer sustained therapeutic activity, which is accomplished by using recombinant human albumin as a carrier molecule. Preclinical data suggest that Albutropin is eliminated from the body fifty times more slowly than regular growth hormone and is detectable in the blood for at least a week after dosing. Therefore, Albutropin may offer patients a more convenient administration schedule when compared to the existing short-acting therapies. In June 2001, we received approval from the FDA to proceed with a Phase I clinical trial in adult patients with growth hormone deficiency. We have begun enrolling patients in this trial. Albuleukin is created by fusing interleukin-2, a drug approved for cancer treatment, to the human protein, albumin. Albuleukin is expected to activate a type of immune cell called a T cell. T cells have the potential to identify and kill cancer cells. Based on preclinical studies, Albuleukin is longer-acting and is better tolerated, as compared with interleukin-2 itself. In January 2002, we received approval from the FDA to proceed with a Phase I clinical trial in patients with certain types of cancer. We have begun screening patients in this trial. VEGF-2 (Vascular Endothelial Growth Factor-2) Laboratory studies have shown that VEGF-2 promotes the growth of certain subsets of vascular endothelial cells, which form the lining and surface of blood vessels. Thus, it may have potential as a treatment for coronary artery disease and peripheral arterial disease. We have licensed the gene that encodes VEGF-2 to Vascular Genetics, Inc., a company in which we have approximately a 27% equity position. Vascular Genetics initiated clinical trials on the use of the VEGF-2 gene in the treatment of critical limb ischemia and refractory coronary artery disease. In February 2000, these studies were halted in response to questions raised by the FDA. Three Phase II studies of VEGF-2 were completed prior to the halt. Results from one trial are available 8 and were presented at the American College of Cardiology in March 2000. In October 2001, the FDA removed these studies from clinical hold. VGI expects to resume human clinical trials in 2002. Small Molecule Inhibitor of lipoprotein-associated phospholipase A2 (Lp-PLA2). In February 2001, GlaxoSmithKline announced the results of human testing of a small-molecule inhibitor of a gene we discovered, lipoprotein-associated phospholipase A2 (Lp-PLA2), as a treatment for cardiovascular disease. In September 2001, we received a $1.0 million payment from GSK in connection with a development milestone met by GSK during 2001. PRECLINICAL AND OTHER PROGRAMS In addition to the products in clinical development, our research and development efforts have generated numerous other product possibilities, many of which are in preclinical development. We and our partners are focused on developing potential products in the following areas: - Therapeutic Proteins. Therapeutic proteins are human proteins that, in natural or modified form, have medically useful physiologic or pharmacologic effects. Therapeutic proteins may be useful for the treatment of a variety of diseases, including autoimmune, neurodegenerative and cardio-pulmonary diseases. Therapeutic proteins currently in broad clinical use include interferon, insulin and human growth hormone. We have conducted development studies on a number of potential therapeutic proteins, including MPIF-1, KGF-2 and BLyS. We have also identified thousands of what we believe to be new secreted proteins. We are expressing and evaluating these proteins and assessing their activity using laboratory and animal studies. Current therapeutic proteins in preclinical development include FasTR, a novel interferon licensed to Schering-Plough, GMAD-1, DP-18, and Osteostat. - Antibodies and Peptides. Antibodies and peptides are proteins that bind in a highly specific manner to molecules, including other proteins, and distinct sites on cell surfaces called receptors. By attaching to them, antibodies and peptides can be used to neutralize specific proteins and block specific receptors. We are undertaking the development of antibodies and peptides that act on many of our newly discovered proteins. We have entered into collaborations with Abgenix, Cambridge Antibody Technology, Dyax and Medarex to enhance our antibody and peptide development efforts. Antibody-based drugs currently in broad clinical use include Herceptin, Rituxan and ReoPro. The antibodies and peptides we are currently developing may be useful in the treatment of diseases such as systemic lupus erythematosus, rheumatoid arthritis, cancer and certain viral infections. Current antibodies in preclinical development include CCR5-mAB, LymphoStat-B for rheumatoid arthritis, TRAIL R1 Receptor Antibody, TRAIL R2 Receptor Antibody, VEGF-2 Antibody and GMAD-2. - Fusion Proteins. We are using our recombinant protein fusion technology to provide longer acting forms of many important proteins used in the treatment of disease. This technology genetically fuses a protein to albumin, a very abundant, natural and long-lived protein in the blood. When albumin is fused to a therapeutic protein, the active protein is expected to have the longer circulating life of albumin. Prolonging the activity of the therapeutic protein in this manner may offer a reduced dosing frequency and could lead to reduced side effects in patients. Using this technology, we expect to develop safer, more effective and more convenient protein therapeutics and biopharmaceuticals for certain diseases, as well as develop longer-acting forms of many existing proteins. Current fusion proteins in preclinical development include Albuferon-(beta), Albupoietin, Albugranin, Albulin, Albugon, HGS-B 14, Albuthyrin and Albutonin. - Gene Therapy. We believe that our gene discovery technology may identify genes that can be introduced into the body through the use of gene therapy. Many diseases are caused by overproduction, underproduction or defective production of specific proteins. Gene therapy is an approach to the treatment of disease in which scientists insert genes into a patient's cells for the purpose of inducing these cells to produce therapeutic proteins or to replace defective or missing genes. In other applications, we believe that gene therapy may induce cells to secrete proteins that enhance the immune system's ability to recognize and attack a specific disease. Gene therapy might also allow localized delivery of proteins that cannot reach the appropriate site through conventional methods of administration. There are currently no gene therapy products on the market although several are undergoing clinical trials. We have entered into agreements with Schering-Plough, Vascular Genetics, Transgene and Vical granting them the right to use our technologies for gene therapy. Vascular 9 Genetics has conducted gene therapy clinical studies of VEGF-2. These studies were placed on hold by the FDA in February 2000 and were released from clinical hold in October 2001. In July 2000, Transgene selected two genes from our database, CTGF-2 and TIMP-4, as its first two exclusive gene therapy products, both as a potential treatment for severe cardiovascular conditions. - Small Molecule Drugs. We believe that more complete knowledge of genes and the proteins they express will enable traditional pharmaceutical companies to design and screen pharmaceutical products in a more efficient fashion by providing specific targets for drug discovery. The discovery of new drugs often involves screening a large family of synthetic and natural products to determine their impact on proteins expressed by genes. Increasingly, automated biochemical tests that assess the ability of chemical compounds to bind to and modify the activity of purified proteins are used to test the efficacy and selectivity of new drugs. A drug's selectivity is its ability to affect only the desired protein targets and not other proteins expressed in the human body. The undesired binding of a drug to other proteins not detected by a screening test can result in toxicity or other undesirable side effects. We believe that the genes we discover may contribute to screening tests by permitting more complete sets of target proteins to be assembled for a test. GlaxoSmithKline and our other collaboration partners are currently using proteins expressed by genes identified by us in a number of screening tests. We may pursue small molecule drug development on our own or continue to leverage the expertise of our partners in this area. - Other. We believe that our genetic data could be applied also to the development of diagnostic tests and antimicrobial agents and vaccines. For the development of antimicrobial agents and vaccines, analysis of the total genome of a microorganism should provide a complete picture of all genes encoded by the microorganism. With this information, we believe it may be possible to choose protein candidates that may be useful as vaccine components or antigens required for the development of products to enhance the immune system. We also believe that a high-throughput approach of gene identification may identify new genes capable of producing antibiotics and other useful secondary metabolites. In the future we may pursue these developments on our own or through strategic alliances. RESEARCH AND DEVELOPMENT CAPABILITIES Our product development efforts are supported by our extensive research and development capabilities and are substantially augmented by those of our partners. We exploit the power of modern computers, automated laboratory instruments and advances in biology to discover the structure and function of new genes and to understand their potential medical applications. As part of this process we cover all stages of development, from the discovery of new human genes to human clinical trials of the new drugs. We continually seek to upgrade our technologies and integrate new and more efficient technologies into our development efforts. We believe this discovery process is responsible for our success in translating genomic information into new drug candidates. Our technology platform is based on various methods that we integrate in a high-throughput fashion to enable the rapid progression from gene discovery to clinical trials. - Gene Isolation is the process of deciphering the sequence of a gene. We believe we have isolated the messenger RNA from more than 95% of all human genes. Of these, we believe that between 75% and 80% are fully functional, as they contain all the instructions necessary to produce an active protein. - Secreted Protein Identification refers to the elucidation of secreted proteins which are often involved in disease processes. We believe we have identified several thousand human genes that encode signaling proteins. We believe that this collection represents the majority of human signaling proteins. - Expression Profiling and Mapping refers to the comparison of messenger RNA levels in diseased and healthy tissues. Our scientists use gene chips and proprietary methods to analyze gene expression profiles in a wide variety of tissues and cells. They also use a variety of techniques to map chromosome location, which generally allow our scientists to map any gene within two or three weeks. - Proteomics is the analysis of proteins correlated with a particular disease. In this step we map out the physical properties of each signaling protein. We attempt to determine the molecular weight, amino acid composition and amino acid sequence of the majority of the newly discovered signaling proteins. 10 - Use of Antibodies. Antibodies are proteins that bind in a highly specific manner to molecules. Antibodies are used to block the effects of proteins and to determine the location of a protein in tissues. We are working to produce antibodies to many of our discovered secreted proteins. - High-Throughput Biological Screening. We have developed a reliable high-speed robotic cloning method to produce each newly discovered signaling protein for biological studies. To date, we have cloned many proteins. - Biological Activity and Specificity. Our scientists can simultaneously monitor changes in the expression of about 100 representative genes through the use of an automated, high-throughput biological screening system. We analyze the activity of the proteins on a wide variety of different types of cells to assess their specificity of action, or the range of circumstances in which they act, and the number of characteristics they can influence. Only proteins that are highly specific in their activity are selected for further development. - Animal Models refer to producing animals with the human disease equivalent. We test proteins that are highly specific in their activity with animal models of human disease. Where possible, we compare the results for each tested protein to the best existing therapy. Proteins which prove to be active in these models are selected for extensive laboratory studies. - Preclinical Studies and Manufacturing. In this step we develop protocols for human testing based on extensive laboratory toxicology and pharmacokinetic studies. A toxicological study tests whether and how the therapy could be harmful to humans. Pharmacokinetic studies analyze how the drug will be absorbed, metabolized and stored by, distributed throughout and excreted from the body. We are developing techniques for measuring blood and tissue levels of each protein to enable measurements within human subjects. We need to develop manufacturing methods for large-scale production of each protein. We lease a 127,000 square foot process development and manufacturing facility to support Phase I, II and III human clinical studies and the North American launch of novel protein and gene products. We are currently designing a 405,000 square foot manufacturing facility adjacent to our current manufacturing facility. We expect this new leased facility to be ready for occupancy in 2004. - Clinical Development is the process of conducting human clinical trials and gaining the necessary approval from regulatory agencies. The goal of clinical development is to establish the safety and efficacy of our drugs for the treatment of human disease. Multiple products discovered by us have advanced to clinical trials for multiple indications. - Bioinformatics refers to the use of computers to process, analyze, store and retrieve biological information. Our high capacity computer system has been designed for ease of use by research scientists, who readily access the system through desktop computers. We believe that our proprietary bioinformatics system is an important asset for the identification and creation of gene-based product opportunities. 11 COLLABORATIVE ARRANGEMENTS Forming strategic alliances with leading pharmaceutical and biotechnology companies is a key element of our strategy. We currently have three major types of collaborations: - Drug Discovery. These are collaborations in which we provide our drug discovery capabilities in exchange for access to our partners' drug development and commercialization expertise as well as research funding and long-term value creation through potential milestone and royalty payments. We are also entitled to certain co- promotion, co-development, revenue sharing and other product rights. Between 1993 and 1997, we entered into major collaborations with GlaxoSmithKline, Takeda, Schering-Plough, Merck KGaA and Sanofi-Synthelabo. These collaborations ended in June 2001, a period described as the initial research term, although certain aspects of these arrangements continue. - Technology. These are collaborations in which we gain access to our partners' technology to complement our own drug discovery and development capabilities in exchange for license fees, potential milestone and royalty payments as well as equity investments. - Microbial. These are collaborations in which we provide access to gene sequence data for specific microbial organisms to biopharmaceutical companies in exchange for license fees and royalty payments. A summary of our most important collaborations is provided below:
- -------------------------------------------------------------------------------------------------------------------------- YEAR ESTABLISHED PARTNER FOCUS ---------------- ------- ----- DRUG DISCOVERY COLLABORATIONS 1993-97 GlaxoSmithKline Therapeutic proteins, small molecule drugs, gene therapy vaccines and diagnostics 1995 Takeda Therapeutic proteins and small molecule drugs 1996 Schering-Plough Therapeutic proteins, small molecule drugs and gene therapy 1996 Merck KGaA Therapeutic proteins and small molecule drugs 1996 Sanofi-Synthelabo Therapeutic proteins and small molecule drugs TECHNOLOGY COLLABORATIONS 1997 Vascular Genetics Gene therapy 1998 Affymetrix Bacterial Gene Arrays 1998 Transgene Gene therapy 1999 Abgenix Antibodies 2000 Cambridge Antibody Technology Antibodies 2000 Dyax Antibodies and peptides 2000 Vical Gene therapy 2000 Praecis Small molecule drugs, including peptides 2000 Aventis Behring Albumin fusion technology 2000 Dow Chemical Chelator technology 2001 Medarex Antibodies and diagnostics 2001 MDS Nordion Radiolabeling technology MICROBIAL COLLABORATIONS 1995-97 MedImmune Infectious agents 1996 Pharmacia Staphylococcus aureus and other
DRUG DISCOVERY COLLABORATIONS General. We entered into collaboration agreements with GlaxoSmithKline in May 1993, which we amended in June 1996 and July 1997. The initial term of these agreements continued through June 2001, which was the conclusion of the initial research term. Under these agreements, we granted GlaxoSmithKline rights to develop and commercialize therapeutic and diagnostic products based on human genes discovered by us in GlaxoSmithKline's field, which is the field of human and animal health care, including gene therapy vaccines but excluding other gene 12 therapy products, antisense products and the use of genes for synthesizing drugs that were known in May 1993. Pursuant to the collaboration agreements GlaxoSmithKline initially paid us an aggregate of $125.0 million, of which $55.0 million was allocated to the purchase of shares of our common stock. We and GlaxoSmithKline jointly entered into collaboration agreements with four additional pharmaceutical companies: Takeda, Schering-Plough, Merck KGaA and Sanofi-Synthelabo. Post-Initial Research Term. The initial research term under our collaboration agreements with GlaxoSmithKline and the other four collaboration partners expired on June 30, 2001. At that time, our partners were pursuing approximately 430 research programs involving approximately 280 different genes for the creation of small molecule and antibody drugs. They also were developing approximately 30 therapeutic protein drugs. We cannot assure you that any of these programs will be continued or result in any approved drugs. GlaxoSmithKline. We share equally with GlaxoSmithKline any license fees and product-development milestone payments made under the four additional collaboration agreements, but we receive all royalty and research support payments under those agreements. GlaxoSmithKline has granted us royalty payments, based on net sales of products developed from any of our patents or technologies that fall within GlaxoSmithKline's field, for any sales made by GlaxoSmithKline or its licensees. We are also entitled to milestone payments in connection with the development of these products. In 2001, we received a $1.0 million payment from GlaxoSmithKline for Lp-PLA2 in connection with a development milestone met by GlaxoSmithKline. We hold an option to co-promote any products sold by GlaxoSmithKline in the U.S., Canada, Mexico and Europe, subject to the rights granted to Takeda and other collaborators. If we develop and market or license to a third party any product in GlaxoSmithKline's field pursuant to our rights under these agreements, GlaxoSmithKline will usually be entitled to royalty payments from, or to share in milestone payments and license fees we receive with respect to, those products. Our collaboration agreements with GlaxoSmithKline include an option for GlaxoSmithKline to co-develop and co-commercialize products in GlaxoSmithKline's field to which we have exclusive development and commercialization rights under our collaboration agreements with GlaxoSmithKline and for which Schering-Plough has not exercised its option. In 2000, GlaxoSmithKline exercised its option to jointly develop and commercialize repifermin. GlaxoSmithKline is also entitled to royalty payments on and an option to co-promote products outside GlaxoSmithKline's field sold by us which are based on or incorporate patents or information developed by GlaxoSmithKline using our human gene technology. Takeda. GlaxoSmithKline and Takeda entered into a license agreement relating to the development and sale of products in GlaxoSmithKline's field based upon rights licensed from us. We are entitled to all royalty payments and one-half of the milestone payments due from Takeda to GlaxoSmithKline under this license agreement on sales of products developed by Takeda. We entered into an option and license agreement with Takeda pursuant to which we granted Takeda an exclusive option to license rights under our patents and technology in the field of human health care, other than gene therapy, antisense and diagnostics, in order to make and sell up to three products in Japan. In consideration of the grant of the option, Takeda paid us $5.0 million and agreed to pay to us milestone payments and royalties based on the sale of Takeda products covered by the option and license agreement. The option period terminates on June 30, 2004. Takeda has exercised one of its options with the selection of MPIF-1. In 2001, Takeda selected approximately 100 targets for use in small molecule and antibody discovery. Schering-Plough. In June 1996, we entered into a collaboration agreement with Schering-Plough. Under this agreement, Schering-Plough has the right to use our human gene technology and biological information developed by us and GlaxoSmithKline to discover, develop and commercialize products. Schering-Plough was also granted an option to co-develop and co-commercialize up to two of our therapeutic protein products to which we have exclusive development and commercialization rights under our agreements with GlaxoSmithKline. This option can also be exercised with respect to proteins we elect to license to third parties. In 2000, Schering-Plough exercised one of its two options with the selection of a novel interferon discovered by us. We will receive milestones and royalty payments for any product developed from this protein. Schering-Plough is obligated to pay license fees, research payments and milestone payments in connection with the development of products. Schering-Plough has paid us $32.5 million under this agreement. We also have a collaboration with Schering-Plough related to gene therapy by which Schering-Plough was granted a non-exclusive license to use our human gene technology to conduct research and an option to obtain an exclusive license to specific genes in the field of gene therapy. Schering-Plough has paid us $5.0 million under this second collaboration agreement. 13 Merck KGaA. In July 1996, we entered into a collaboration agreement with Merck KGaA. Under this agreement, Merck KGaA has the right to use our human gene technology and biological information developed by us and GlaxoSmithKline to discover, develop and commercialize products. Merck KGaA is obligated to pay license fees, research payments, and milestone payments in connection with the development of products. Merck KGaA has paid us an aggregate of $32.5 million under this agreement. Sanofi-Synthelabo. In July 1996, we entered into a collaboration agreement with Sanofi-Synthelabo. Under this agreement, Sanofi-Synthelabo has the right to use our human gene technology and biological information developed by us and GlaxoSmithKline to discover, develop and commercialize products. Sanofi-Synthelabo is obligated to pay license fees, research payments and milestone payments in connection with the development of products. Sanofi-Synthelabo has paid us an aggregate of $22.5 million under this agreement. TECHNOLOGY COLLABORATIONS Antibodies and Peptides Abgenix. In November 1999, we entered into a collaboration and license agreement with Abgenix relating to the field of fully human antibody drug candidates, which was amended in 2001. Pursuant to this agreement, as amended, we licensed technology from Abgenix that we will use to generate fully human antibody drug candidates. We will independently develop and seek to commercialize antibody-based drugs from this collaboration. Abgenix also has an option to develop and commercialize products derived from our antigens. We and Abgenix will pay reciprocal milestone and royalty payments for products developed and commercialized. Cambridge Antibody Technology (CAT). In August 1999, we entered into an antibody license agreement with CAT for the development of fully human antibody therapeutics for up to three of our target human proteins. Pursuant to this agreement, we have entered into an exclusive license agreement to an anti-BLyS antibody discovered in collaboration with CAT. Under this 1999 agreement, we have paid CAT $0.8 million towards the achievement of the first contractual milestone through the end of 2001. In February 2000, we entered into a broader agreement with CAT that provides us with the right to use their technology to develop and sell an unlimited number of fully human antibodies for therapeutic and diagnostic purposes. Under this 2000 agreement, we paid CAT $12.0 million for ten years of committed research support. We also plan to combine our resources to develop and sell a significant number of therapeutic antibody products. CAT has the right to select up to twenty-four of our proprietary antigens for preclinical development. We have the option to share clinical development costs and to share the profits equally with them on up to eighteen such products. CAT has rights to develop six such products on their own. We are entitled to clinical development milestone and royalty payments on those six products. Under the 2000 agreement, we paid CAT $1.0 million in December 2001 to exercise our option with respect to TRAIL Receptor 1, an antibody product. We also invested approximately $54.7 million for ordinary shares of CAT. In November 2000, we sold a portion of our CAT holdings at a gain of approximately $5.9 million. Dyax. In February 2000, we entered into a license agreement with Dyax relating to Dyax' phage display and peptide technology, which was amended in 2001. Under the agreement, as amended, we have the right to use Dyax' phage display technology to develop an unlimited number of therapeutic and diagnostic products that we may sell or outlicense. In 2000, we paid Dyax $6.0 million for the technology license. Through 2001, we have paid $4.7 million for research support. Over the next year, we will pay Dyax approximately $1.3 million for committed research support. We will provide milestone and royalty payments to Dyax on products we develop and sell or will share revenue we receive from outlicensees. The licensed technologies include Dyax' phage display technology to create peptide drugs, human monoclonal antibody drugs and in vitro diagnostic products. In addition, we have the right to require that Dyax perform research in the fields of protein separation and high-throughput screening technology. We also have rights to improvements in Dyax' phage display technology. Praecis. In February 2000, we entered into a collaboration agreement with Praecis relating to the field of small molecule drugs, including peptides. Under the agreement, Praecis will screen two of our targets to identify novel small molecule drugs to combat metabolic disorders and infectious diseases. Medarex. In July 2001, we entered into a collaboration agreement with Medarex relating to the creation of fully human antibodies. Under the agreement, Medarex plans to use its technology to create antibody leads that are specific for target proteins that we discovered. We have the option to exclusively license therapeutic and diagnostic 14 antibody products and Medarex is entitled to receive license fees, milestone payments and royalties on any commercial sales of products resulting from the collaboration. Gene Therapy Transgene. In February 1998, we entered into an agreement with Transgene relating to the field of human gene therapy, including gene therapy vaccines to the extent it will not conflict with our other collaboration agreements. Under this agreement, we granted Transgene the right to license exclusively up to 10 genes. We obtained a 10% equity interest in Transgene and certain co-development and co-marketing rights. Transgene selected two genes from our database, CTGF-2 and TIMP-4, as its first two exclusive gene therapy products. CTGF-2 stimulates the formation of blood vessels and could be an effective tool in the control of coronary artery disease. TIMP-4 prevents restenosis, which is the growth of blood-vessel obstruction following an angioplasty. Our collaboration with Transgene will end in 2008. Vical. In February 2000, we entered into a license agreement with Vical relating to the field of gene therapy. Under this agreement, we licensed technology from Vical and granted Vical the right to license up to three genes. The agreement provides for reciprocal royalty payments. Our collaboration with Vical will end in 2004. Vascular Genetics. In November 1997, we entered into an agreement with Vascular Genetics whereby we granted Vascular Genetics an exclusive license in the field of gene therapy for our VEGF-2 gene. As of December 31, 2001, we held an approximately 27% equity interest in Vascular Genetics. We are also entitled to receive up to 10% royalties on net sales. Fusion Technology Aventis Behring. In October 2000, we entered into a joint development and commercialization agreement with Aventis Behring to co-develop and jointly market an Aventis Behring plasma protein product. Other Dow Chemical. In October 2000, we entered into an agreement with Dow Chemical Company to develop a drug for the treatment of B-cell malignancies. This agreement combines one of Dow's patented technologies, bifunctional chelation agents (BFCA) with BLyS, one of our protein discoveries. Dow's BFCA technology is capable of attaching a variety of radioactive metals to BLyS, resulting in a "radiolabeled" version of the protein. MDS Nordion. In October 2001, we entered into an agreement with MDS Nordion, a unit of MDS Inc., whereby MDS Nordion will manufacture LymphoRad(131) at a GMP manufacturing suite under construction at its Ottawa, Canada facility. We will supply MDS Nordion with the targeting protein, B Lymphocyte Stimulator (BLyS) and MDS Nordion will use a process it developed for us that covalently binds the radioactive isotope iodine(131) to the BLyS protein. MICROBIAL COLLABORATIONS MedImmune. We entered into a collaboration and license agreement with MedImmune in July 1995, which we amended in March and December 1997. This agreement is related to the development of drugs based upon certain infectious agents sequenced by us or The Institute For Genomic Research (TIGR) or as to which we hold licenses. Programs under this agreement include the creation of vaccines and immunotherapeutics for non-encapsulated Haemophilus influenzae, Streptococcus pneumoniae, Escherichia coli, Helicobacter pylori and Borrelia burgdorferi. MedImmune sub-licensed the Streptococcus pneumoniae vaccine technology to GlaxoSmithKline. We are entitled to a portion of the payments received by MedImmune under its sub-license. In 2000, we received $1.0 million from MedImmune. Pharmacia. In October 1996, we entered into an agreement with Pharmacia in which we granted to Pharmacia a nonexclusive license to conduct research and to make, use and sell products based on genes of Staphylococcus aureus and the pathogenicity islands of Escherichia coli sequenced by us. 15 PATENTS AND PROPRIETARY RIGHTS Our commercial success depends in large part on our ability to obtain patent or other intellectual property protection for genes we discover. The patent protection available to biotechnology firms is highly uncertain and involves complex legal and factual questions that will determine who has the right to develop a particular product. There have been, and continue to be, intensive discussions on the scope of patent protection for both partial gene sequences and full-length genes. The Patent and Trademark Office issued new guidelines for patents in 2001 which clarify certain requirements for obtaining a patent on a gene sequence. The biotechnology patent situation outside the U.S. is even more uncertain and is currently undergoing review and revision in many countries. Changes in, or different interpretations of, patent laws in the U.S. and other countries may result in patent laws that allow others to use our discoveries or develop and commercialize our products. As of March 1, 2002, we had filed U.S. patent applications with respect to many human genes and their corresponding proteins. We have also filed U.S. patent applications with respect to all or portions of the genomes of eight infectious microorganisms and one non-infectious microorganism. As of March 1, 2002, we had 205 U.S. patents covering human genes and proteins. The remaining applications covering full-length genes and their corresponding proteins may not result in the issuance of any patents. Our applications may not be sufficient to meet the statutory requirements for patentability in all cases. In certain instances, we will be dependent upon our collaborators to file and prosecute patent applications. Washington University has identified genes through partial sequencing funded by Merck & Co. and has deposited those partial sequences in a public database. In January 1997, TIGR, in collaboration with the National Center for Biological Information, disclosed full-length DNA sequences which are reportedly in excess of 35,000 sequences that were assembled from partial gene sequences available in publicly accessible databases or sequenced at TIGR. In addition, the Human Genome Project and Celera Genomics Corporation have completed an initial sequencing of the human genome, and have published papers on this sequencing in February 2001. All of this public disclosure might limit the scope of our claims or make unpatentable subsequent patent applications on full-length genes we file. Other companies or institutions have filed, and may file patent applications in the future, which attempt to patent genes similar to those covered in our patent applications, including applications based on our potential products. The Patent and Trademark Office would decide which applications merit a patent and the priority of competing patent claims. Any patent application filed by a third party may prevail over patent applications we filed, in which event the third party may require us to stop pursuing a potential product or to negotiate a royalty arrangement to pursue the potential product. Other parties may claim that our potential products infringe their patents. This risk will increase as the biotechnology industry expands and as other companies obtain more patents and attempt to discover genes through the use of high-speed sequencers. Other persons could bring legal actions against us to claim damages or to stop our manufacturing and marketing of the affected products. If any of these actions is successful, in addition to demanding monetary damages, these persons may require us to obtain a license in order to continue to manufacture or market the affected products. We believe that there will continue to be significant litigation in our industry regarding patent and other intellectual property rights. If we become involved in litigation, it could consume a substantial portion of our resources. Issued patents may not provide commercially meaningful protection against competitors. Any issued patent may not provide us with competitive advantages. Others may challenge our patents or independently develop similar products that could result in an interference proceeding in the Patent and Trademark Office. Others may be able to design around our issued patents or develop products providing effects similar to our products. In addition, others may discover uses for genes or proteins other than those uses covered in our patents, and these other uses may be separately patentable. The holder of a patent covering the use of an invention which we have a patent claim could exclude us from selling a product for a use covered by its patent. We rely on trade secret protection to protect our confidential and proprietary information. We believe we have developed proprietary procedures for making libraries of DNA sequences and genes. We have not sought patent protection for these procedures. We have developed a substantial database concerning genes we have identified. We have taken security measures to protect our data and continue to explore ways to further enhance the security for our 16 data. However, we may not be able to meaningfully protect our trade secrets. While we have entered into confidentiality agreements with employees and academic collaborators, we may not be able to prevent their disclosure of these data or materials. Others may independently develop substantially equivalent information and techniques. COMPETITION We are in a race to identify, establish uses for and patent as many genes as possible and to commercialize the products we develop. Many of our potential competitors have substantially greater research and product development capabilities and financial, scientific, marketing and human resources. The Human Genome Project and Celera Genomics Corporation have claimed to have mapped the complete human genome, and have made their findings available to the public. We face competition from other entities using high-speed gene sequencers to discover genes, such as Incyte Genomics, Inc. and Celera Genomics Corporation. We also face competition from entities using more traditional methods to discover genes related to particular diseases, such as Amgen, Inc., Genentech, Inc., Millennium Pharmaceuticals, Inc. and other large biotechnology and pharmaceutical companies. We expect that competition in our field will continue to be intense. Research to identify genes is also being conducted by various institutes and U.S. and foreign government-financed entities, including British, French, German and Japanese efforts, as well as numerous smaller laboratories associated with universities or other not-for-profit entities. In addition, a number of pharmaceutical and biotechnology companies and government-financed programs are engaged or have announced the intention to engage in areas of human genome research similar to or competitive with our focus on gene discovery, and other companies are likely to enter the field. We face significant competition in our product development and commercialization efforts. Although we believe that there are significant product development opportunities for both us and our collaborators based on our gene databases, competition exists among us and our collaborators to develop and commercialize products. In addition, our competitors may succeed in developing products before we do, obtaining approvals from the FDA or other regulatory agencies for such products more rapidly than we do, or developing products that are more effective than those proposed to be developed by us. Similarly, while we will share any success of our collaborators in identifying and commercializing products through royalties and co-payment arrangements, our collaborators face similar competition from other competitors who may succeed in developing products more quickly, or developing products that are more effective, than those developed by our collaborators. Certain of these competitors may be further advanced than us in developing potential products. Research and development by others may render the products that we or our collaborators may seek to develop obsolete or uneconomical or result in treatments, cures or diagnostic tests superior to any therapy or diagnostic test developed by us or our collaborators. In addition, therapies or diagnostic tests developed by us or our collaborators may not be preferred to any existing or newly developed technologies. GOVERNMENT REGULATION Regulation of Pharmaceutical Products. New drugs and biologics are subject to regulation under the Federal Food, Drug, and Cosmetic Act. In addition to being subject to certain provisions of that Act, biologics are also regulated under the Public Health Service Act. We believe that the pharmaceutical products developed by us or our collaborators will be regulated either as biological products or as new drugs. Both statutes and their corresponding regulations govern, among other things, the testing, manufacturing, distribution, safety, efficacy, labeling, storage, record keeping, advertising and other promotional practices involving biologics or new drugs. FDA approval or other clearances must be obtained before clinical testing, and before manufacturing and marketing, of biologics and drugs. In addition, any gene therapy products developed by us will require regulatory approvals prior to human trials and additional regulatory approvals prior to commercialization. New human gene therapy products are subject to extensive regulation by the FDA and the Center for Biological Evaluation and Research and comparable agencies in other countries. Currently, each human-study protocol is reviewed by the FDA and, in some instances, the National Institutes of Health, on a case-by-case basis. The FDA and the National Institutes of Health have published guidance documents with respect to the development and submission of gene therapy protocols. 17 Obtaining FDA approval has historically been a costly and time-consuming process. We may not obtain FDA approvals in a timely manner, or at all. We and our collaborators may encounter significant delays or excessive costs in our efforts to secure necessary approvals or licenses. Generally, in order to gain FDA pre-market approval, a developer first must conduct laboratory studies and animal-model studies to gain preliminary information on an agent's efficacy and to identify any safety problems. The results of these studies are submitted as a part of an investigational new drug application, which the FDA must review before human trials of an investigational drug can start. The investigational new drug application includes a detailed description of the initial animal studies and human investigation to be undertaken. Laboratory studies can take several years to complete, and there is no assurance that an investigational new drug application based on such studies will ever become effective so as to permit human testing to begin. A 30-day waiting period after the receipt of each investigational new drug application is required by the FDA prior to the commencement of human testing. If the FDA has not commented on or questioned the investigational new drug application within this 30-day period, human studies may begin. If the FDA has comments or questions, it places the studies on clinical hold and the questions must be answered to the satisfaction of the FDA before human testing may begin. In order to commercialize pharmaceutical products, we or one of our collaborators must sponsor and file an investigational new drug application and be responsible for initiating and overseeing the human studies to demonstrate the safety and efficacy and, for a biologic product, the potency, which are necessary to obtain FDA approval of any such products. For our or our collaborator-sponsored investigational new drug applications, we or our collaborator will be required to select qualified investigators (usually physicians within medical institutions) to supervise the administration of the products, and ensure that the investigations are conducted and monitored in accordance with FDA regulations and the general investigational plan and protocols contained in the investigational new drug application. Human trials are normally done in three phases, although the phases may overlap. Phase I trials are concerned primarily with the safety and pharmacology of the drug, involve fewer than 100 subjects and may take from six months to over a year to complete. Phase II exploratory trials normally involve a few hundred patients, but in some cases may involve fewer. Phase II trials are designed primarily to demonstrate safety and preliminary effectiveness in treating or diagnosing the disease or condition for which the drug is intended. Phase III trials are expanded trials with larger numbers of patients which are intended to gather the additional information for proper dosage and labeling of the drug and demonstrate its overall safety and effectiveness. All three phases generally take three to five years, but may take longer, to complete. Regulations promulgated by the FDA may shorten the time periods and reduce the number of patients required to be tested in the case of certain life-threatening diseases which lack available alternative treatments. The FDA receives reports on the progress of each phase of testing, and it may require the modification, suspension, or termination of trials if an unwarranted risk is presented to patients. If the FDA imposes a clinical hold, trials may not recommence without FDA authorization and then only under terms authorized by the FDA. The investigational new drug application process can thus result in substantial delay and expense. Human gene therapy products (which is one of the areas in which we are seeking to develop products) are a new category of therapeutics. Because this is a relatively new and expanding area of novel therapeutic interventions, there can be no assurance as to the length of the trial period, the number of patients the FDA will require to be enrolled in the trials in order to establish the safety, efficacy and potency of human gene therapy products, or that the data generated in these studies will be acceptable to the FDA to support marketing approval. After completion of trials of a new drug or biologic product, FDA marketing approval must be obtained. If the product is regulated as a biologic, the Center for Biological Evaluation and Research will require the submission and approval, depending on the type of biologic, of either a biologic license application or, in some cases, a product license application and an establishment license application before commercial marketing of the biologic. If the product is classified as a new drug, we must file a new drug application with the Center for Drug Evaluation and Research and receive approval before commercial marketing of the drug. The new drug application or biologic license applications must include results of product development, laboratory, animal and human studies, and manufacturing information. The testing and approval processes require substantial time and effort and there can be no assurance that the FDA will accept the new drug application or biologic license applications for filing and, even if filed, that any approval will be granted on a timely basis, if at all. In the past, new drug applications and biologic license applications submitted to the FDA have taken, on average, one to two years to receive approval after submission of all test data. If questions arise during the FDA review process, approval can take more than two years. 18 Notwithstanding the submission of relevant data, the FDA may ultimately decide that the new drug application or biologic license application does not satisfy its regulatory criteria for approval and require additional studies. In addition, the FDA may condition marketing approval on the conduct or specific post-marketing studies to further evaluate safety and effectiveness. Rigorous and extensive FDA regulation of pharmaceutical products continues after approval, particularly with respect to compliance with current good manufacturing practices, or cGMPs, reporting of adverse effects, advertising, promotion and marketing. Discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. If a developer obtains designation by the FDA of a biologic or drug as an "orphan" drug for a particular use, the developer may request small grants from the federal government to help defray the costs of qualified testing expenses in connection with the development of such drug. Orphan drug designation may be granted to drugs for rare diseases, typically defined as a disease or condition that affects populations of fewer than 200,000 individuals in the United States, and includes many genetic diseases. The first applicant who has obtained designation of a drug for a particular use as an orphan drug and then obtains approval of a marketing application for such drug for the particular use is entitled to marketing exclusivity for a period of seven years, subject to certain limitations. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory approval process. Although obtaining FDA approval to market a product with an orphan drug designation can be advantageous, there can be no assurance that the scope of protection or the level of marketing exclusivity that is currently afforded by orphan drug designation will remain in effect in the future. In February 2001, BLyS received "orphan" drug designation from the FDA for the treatment of common variable immunodeficiency. Moreover, several areas in which we or our collaborators may develop products involve relatively new technology and have not been the subject of extensive product testing in humans. The regulatory requirements governing these products and related testing procedures remain uncertain. In addition, these products may be subject to substantial review by foreign governmental regulatory authorities that could prevent or delay approval in those countries. Regulatory requirements ultimately imposed on our products could limit our ability to test, manufacture and, ultimately, commercialize our products. Other. Ethical, social and legal concerns about gene therapy, genetic testing and genetic research could result in additional regulations restricting or prohibiting the processes we or our suppliers may use. Federal and state agencies, congressional committees and foreign governments have expressed interest in further regulating biotechnology. More restrictive regulations or claims that our products are unsafe or pose a hazard could prevent us from commercializing any products. In addition to the foregoing, state and federal laws regarding environmental protection and hazardous substances, including the Occupational Safety and Health Act, the Resource Conservation and Recovery Act and the Toxic Substances Control Act, affect our business. These and other laws govern our use, handling and disposal of various biological, chemical and radioactive substances used in, and wastes generated by, our operations. If our operations result in contamination of the environment or expose individuals to hazardous substances, we could be liable for damages and governmental fines. We believe that we are in material compliance with applicable environmental laws and that our continued compliance therewith will not have a material adverse effect on our business. We cannot predict, however, how changes in these laws may affect our future operations. SOURCES OF SUPPLY We currently are able to obtain our chemicals and equipment from various sources, and therefore, have no dependence upon a single supplier. We are currently dependent upon one manufacturer, MDS Nordion of Ottawa, Canada, for the radiolabeling of LymphoRad(131), a product for which we have filed an Investigation New Drug application with the FDA. If we are unable to secure an adequate supply of this product at commercially reasonable rates, our ability to continue with the intended human clinical trials would be adversely affected. MANUFACTURING We have developed in-house capabilities for the production and purification of laboratory-produced proteins for use in our research activities, but do not have any manufacturing facilities licensed to supply materials suitable for 19 commercial sale, or any experience in manufacturing materials suitable for commercial sale. From time to time, we may depend on third parties for manufacturing. If we need others to manufacture our products, we will depend on those third parties to comply with cGMPs, and other regulatory requirements and to deliver materials on a timely basis. These third parties may not perform adequately. Any failures by these third parties may delay our development of products or the submission of these products for regulatory approval. During 1997 and 1998, we designed and the Maryland Economic Development Corporation (MEDCO) constructed an 84,000 square foot process development and manufacturing facility for the preparation of our proteins for human studies. The facility now comprises approximately 127,000 square feet, including a 43,000 square foot expansion completed in 2000, and is located in the Johns Hopkins Belward Research Campus near our offices and research laboratories. The original facility was completed in 1999. We designed the facility to allow for the production and purification of multiple laboratory-produced proteins. We are using the facility for production of laboratory and human study supplies of our therapeutic proteins under cGMP requirements and for process development and scale-up. The FDA must inspect and license this facility to determine compliance with cGMP requirements for commercial production. A delay in licensing of the facility could delay or increase the cost of regulatory approval. We have entered into long-term lease arrangements with MEDCO for the facility and the expansion. Under these lease agreements, which we have accounted for as operating leases, we have the option to purchase the properties, during and at the end of the lease term. Our option to purchase these facilities is at declining, pre-determined amounts during the lease term and is approximately $19.4 million at the end of the lease term. Alternatively, we can vacate the facilities. We are not contingently liable for any residual value guarantee associated with these properties. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for additional discussion. Our long-range plan is to establish additional manufacturing capabilities to allow us to meet our full commercial manufacturing requirements. We are currently designing a large-scale manufacturing facility to allow for the production of proteins and antibodies to be used for both clinical and commercial use. This 405,000 square foot facility will be located adjacent to the existing process development and manufacturing facility and is expected to be available for occupancy in 2004. The FDA must inspect and license this facility to determine compliance with cGMP requirements for commercial production. A delay in licensing of the facility could delay or increase the cost of regulatory approval. During 2001, we entered into a seven-year lease agreement relating to this facility. As part of this agreement, we are required to maintain collateral with the lending institutions in amounts equal to 100% of the financed project cost of approximately $226.0 million for the duration of the lease. Under this lease agreement, which we have accounted for as an operating lease, we have the option to purchase the property, during and at the end of the lease term, for approximately $226.0 million. Alternatively, we can cause the property to be sold to third parties. We are contingently liable for the residual value guarantee associated with the property in the event the net sale proceeds are less than the original financed costs of the facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for additional discussion. While we are expanding our manufacturing capabilities, we may contract with third party manufacturers or may develop products with partners and take advantage of such partner's manufacturing capabilities. We may not be able to successfully establish manufacturing capabilities or manufacture our products economically or in compliance with cGMPs and other regulatory requirements. MARKETING We do not currently have any marketed products. We expect that in the future we will rely at least partially on collaborators or on third parties with whom we may contract to market any products that we may develop. Our collaborators or other third parties may not be successful in marketing our products. To date, we have collaborated with GlaxoSmithKline, Schering-Plough and others. However, we also may co-promote or retain North American rights to certain of our products. If we decide to market products directly, we will incur significant additional expenditures and commit significant additional management resources to develop an external sales force in order to implement our marketing strategy. We may not be able to establish a successful marketing force. EMPLOYEES As of March 1, 2002, we had 1,010 full-time employees, of whom 836 were in research and development, including 153 scientists holding doctoral degrees. We anticipate hiring approximately 150 additional employees 20 during the next six months, including research and development staff, process development and manufacturing personnel, and medical and regulatory affairs and strategic marketing staff. None of our employees is covered by a collective bargaining agreement and we consider relations with our employees to be good. FACTORS THAT MAY AFFECT OUR BUSINESS There are a number of important factors that could cause our actual results to differ materially from those that are indicated by forward-looking statements. Those factors include, without limitation, those listed below and elsewhere herein. BECAUSE OUR BUSINESS STRATEGY IS STILL LARGELY UNTESTED, WE DO NOT KNOW WHETHER WE WILL BE ABLE TO COMMERCIALIZE ANY OF OUR PRODUCTS OR TO WHAT EXTENT WE WILL GENERATE REVENUE. We do not know whether we can implement our business strategy successfully because we are in the early stages of development. We initially set out to find as many genes as possible and are now using that information to develop medical and pharmacological products. We use automated high-speed technology to: - rapidly identify the function of and obtain proprietary rights to a substantial number of genes; and - select genes with the greatest potential for the treatment and diagnosis of human disease. Nobody has tested our strategy. Other companies first target particular diseases and try to find cures for them through gene-based therapies. If our strategy does not result in the development of products that we can sell profitably, we will be unable to generate revenue. IF WE ARE UNABLE TO IDENTIFY GENES WITH POTENTIAL VALUE, WE MAY NOT BE ABLE TO RECOVER OUR INVESTMENT IN OUR GENE DISCOVERY EFFORT. We invested significant time and resources to isolate and study genes and determine their functions. We now devote an ever-increasing portion of our resources to identifying and developing proteins, antibodies and other compounds for the treatment of human disease. We have recently made substantial capital expenditures and hired additional personnel to foster these activities. Before we can commercialize a product, we must rigorously test the product in the laboratory and complete extensive human studies. We cannot assure you that expenses for testing and study will yield profitable products or even products approved for marketing by the FDA. We will incur additional costs to continue these activities. If we are not successful in identifying products which we can develop commercially, we may be unable to recover the large investment we make in research and development. BECAUSE OUR PRODUCT DEVELOPMENT EFFORTS DEPEND ON NEW AND RAPIDLY-EVOLVING TECHNOLOGIES, WE DO NOT KNOW WHETHER OUR EFFORTS WILL BE SUCCESSFUL. To date, companies have developed and commercialized relatively few gene-based products. Our work depends on new, rapidly-evolving technologies and on the marketability and profitability of innovative products. Commercialization involves risks of failure inherent in the development of products based on innovative technologies and the risks associated with drug development generally. These risks include the possibility that: - these technologies or any or all of the products based on these technologies will be ineffective or toxic, or otherwise fail to receive necessary regulatory clearances; - the products, if safe and effective, will be difficult to manufacture on a large scale or uneconomical to market; - proprietary rights of third parties will prevent us or our collaborators from exploiting technologies or marketing products; - third parties will market superior or equivalent products; and - we may not be able to obtain or exploit new and superior technology which could render obsolete the technologies we use. 21 BECAUSE WE ARE AN EARLY STAGE COMPANY, WE DO NOT KNOW WHETHER WE CAN DEVELOP OUR BUSINESS OR ACHIEVE PROFITABILITY. We expect to continue to incur increasing losses and we cannot assure you that we will ever become profitable. We are in the early stages of development, and it will be a number of years, if ever, before we are likely to receive revenue from product sales or royalty payments. We will continue to incur substantial expenses relating to research and development efforts. We anticipate that we will increase these efforts as we focus on the laboratory and human studies that are required before we can sell a product. The development of our products requires significant further research, development, testing and regulatory approvals. We may not be able to develop products that will be commercially successful or that will generate revenue in excess of the cost of development. PRODUCT DEVELOPMENT RISKS BECAUSE WE HAVE LIMITED EXPERIENCE IN DEVELOPING AND COMMERCIALIZING PRODUCTS, WE MAY BE UNSUCCESSFUL IN OUR EFFORTS TO DO SO. Our ability to develop and commercialize products based on proteins, antibodies and other compounds will depend on our ability to: - develop products internally; - complete laboratory testing and human studies; - obtain and maintain necessary intellectual property rights to our products; - obtain and maintain necessary regulatory approvals related to the efficacy and safety of our products; - develop efficient production facilities meeting all regulatory requirements or enter into arrangements with third parties to manufacture our products on our behalf; and - deploy sales and marketing resources effectively or enter into arrangements with third parties to provide these functions. Although we have initiated human studies with respect to eight products, we have limited experience with these activities and may not be successful in developing or commercializing these or other products. BECAUSE CLINICAL TRIALS FOR OUR PRODUCTS WILL BE EXPENSIVE AND PROTRACTED AND THEIR OUTCOME IS UNCERTAIN, WE MUST INVEST SUBSTANTIAL AMOUNTS OF TIME AND MONEY THAT MAY NOT YIELD VIABLE PRODUCTS. Conducting clinical trials is a lengthy, time-consuming and expensive process. Before obtaining regulatory approvals for the commercial sale of any product, we must demonstrate through laboratory, animal and human studies that such product is both effective and safe for use in humans. We will incur substantial expense for and devote a significant amount of time to these studies. The results of preliminary studies do not predict clinical success. A number of potential drugs have shown promising results in early testing but subsequently failed to obtain necessary regulatory approvals. Data obtained from tests are susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. Regulatory authorities may refuse or delay approval as a result of many other factors, including changes in regulatory policy during the period of product development. Completion of clinical trials may take many years. The length of time required varies substantially according to the type, complexity, novelty and intended use of the product candidate. Our rate of commencement and completion of clinical trials may be delayed by many factors, including: - our inability to manufacture sufficient quantities of materials for use in clinical trials; 22 - variability in the number and types of patients available for each study; - difficulty in maintaining contact with patients after treatment, resulting in incomplete data; - unforeseen safety issues or side effects; - poor or unanticipated effectiveness of products during the clinical trials; or - government or regulatory delays. Seven of our products, mirostipen, repifermin, BLyS, LymphoStat-B, Albuferon, Albutropin and Albuleukin have advanced to clinical trials. Two products are awaiting clearance from the FDA to enter human clinical trials. For all of our trials except the repifermin wound healing trial, only a limited number of patients is involved. To date, data obtained from these clinical trials have been insufficient to demonstrate safety and efficacy under applicable FDA guidelines and are not sufficient to support an application for regulatory approval without further studies. In two trials of repifermin, the drug was shown to be safe, but was not shown to be effective. Studies conducted by us or by third parties on our behalf may not demonstrate sufficient effectiveness and safety to obtain the requisite regulatory approvals for these or any other potential products. Regulatory authorities may not permit us to undertake any additional clinical trials. BECAUSE THE CLINICAL TESTING OF VEGF-2 MUST RECEIVE FDA APPROVAL BEFORE VGI CAN RESUME ITS PHASE II TRIALS, THE CLINICAL SUCCESS OF VEGF-2 IS UNCERTAIN. Clinical trials of VEG-2 by Vascular Genetics were placed on clinical hold by the FDA in February 2000. These trials were removed from clinical hold in October 2001. Prior to the hold, four clinical trials of VEGF-2 had been ongoing. Vascular Genetics announced the completion of three of these trials because enrollment and treatment were complete. In the fourth study, a majority of the target patients had been enrolled and treated. During the hold period, Vascular Genetics provided the FDA with results which were being compiled from the clinical trials, in addition to providing measurements of the amount of the VEGF-2 protein in patient blood samples. Vascular Genetics must receive approval from the FDA before it can initiate additional trials. The trials of VEGF-2 are being conducted with patients for whom conventional treatments have been unsuccessful or for whom no conventional treatment exists. During the course of treatment, these patients could die or suffer adverse medical effects for reasons that may not be related to VEGF-2. Deaths in the patient population for the VEGF-2 trial did occur, in both active and placebo groups, and Vascular Genetics has reviewed the relevant data regarding these patients and provided an analysis of the reasons for these deaths to the FDA. These adverse effects may affect the interpretation of the clinical trial results and the success of the trials. Later clinical trials may be extensive, expensive and time-consuming. VEGF-2 may never be approved for use in humans. BECAUSE NEITHER WE NOR ANY OF OUR COLLABORATION PARTNERS HAVE RECEIVED MARKETING APPROVAL FOR ANY PRODUCT RESULTING FROM OUR RESEARCH AND DEVELOPMENT EFFORTS, AND MAY NEVER BE ABLE TO OBTAIN ANY SUCH APPROVAL, WE MAY NOT BE ABLE TO GENERATE ANY PRODUCT REVENUE. We have not completed development of any product based on our genetic research. It is possible that we will not receive FDA marketing approval for any of our products. Although a number of our potential products have entered clinical trials, we cannot assure you that any of these products will receive marketing approval. All the products being developed by our collaboration partners will also require additional research and development, extensive preclinical studies and clinical trials and regulatory approval prior to any commercial sales. In some cases, the length of time that it takes for our collaboration partners to achieve various regulatory approval milestones may affect the payments that we are eligible to receive under our collaboration agreements. We and our collaboration partners may need to successfully address a number of technical challenges in order to complete development of our products. Moreover, these products may not be effective in treating any disease or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use. 23 RISKS FROM OUR COLLABORATION RELATIONSHIPS AND STRATEGIC ACQUISITIONS OUR PLAN TO USE COLLABORATIONS TO LEVERAGE OUR CAPABILITIES AND TO GROW IN PART THROUGH THE STRATEGIC ACQUISITION OF OTHER COMPANIES AND TECHNOLOGIES WILL NOT BE SUCCESSFUL IF WE ARE UNABLE TO INTEGRATE OUR PARTNERS' CAPABILITIES OR THE ACQUIRED COMPANIES WITH OUR OTHER OPERATIONS OR IF THEY DO NOT MEET OUR EXPECTATIONS. As part of our strategy, we intend to continue to evaluate strategic partnership opportunities and consider acquiring complementary technologies and businesses. In order for our future collaboration efforts to be successful, we must first identify partners whose capabilities complement and integrate well with ours. Technologies to which we gain access may prove ineffective or unsafe. Our partners may prove difficult to work with or less skilled than we originally expected. In addition, any past collaborative successes are no indication of potential future success in this area. In order to achieve the anticipated benefits of an acquisition, we must integrate the acquired company's business, technology and employees in an efficient and effective manner. The successful combination of companies in a rapidly changing biotechnology and genomics industry may be more difficult to accomplish than in other industries. The combination of two companies requires, among other things, integration of the companies' respective technologies and research and development efforts. We cannot assure you that this integration will be accomplished smoothly or successfully. The difficulties of integration are increased by the necessity of coordinating geographically separated organizations and addressing possible differences in corporate cultures and management philosophies. The integration of certain operations will require the dedication of management resources which may temporarily distract attention from the day-to-day operations of the combined companies. The business of the combined companies may also be disrupted by employee retention uncertainty and lack of focus during integration. The inability of management to successfully integrate the operations of the two companies, in particular, to integrate and retain key scientific personnel, or the inability to successfully integrate two technology platforms, could have a material adverse effect on our business, results of operations and financial condition. BECAUSE WE DEPEND ON OUR COLLABORATION PARTNERS FOR REVENUE, WE MAY NOT BECOME PROFITABLE IF WE CANNOT INCREASE THE REVENUE FROM OUR COLLABORATION PARTNERS OR OTHER SOURCES. We have received all our revenue from payments made under our collaboration agreements with GlaxoSmithKline and, to a lesser extent, other agreements. The GlaxoSmithKline collaboration agreement and many of our other collaboration agreements expired in 2001. None of these collaboration agreements was renewed. We may not be able to enter into additional collaboration agreements. We are entitled to certain milestone and royalty payments from the existing collaborators, but may not receive payments if our collaborators fail to: - develop marketable products; - obtain regulatory approvals for products; or - successfully market products based on our research. IF ONE OF OUR COLLABORATORS PURSUES A PRODUCT THAT COMPETES WITH OUR PRODUCTS, IT MAY HAVE A CONFLICT OF INTEREST AND WE MAY NOT RECEIVE THE MILESTONE OR ROYALTY PAYMENTS THAT WE EXPECT. Each of our collaborators is developing a variety of products, some with other partners. Our collaborators may pursue existing or alternative technologies instead of products they are developing in collaboration with us. Our collaborators may also develop products that are similar to or compete with products they are developing in collaboration with us. If our collaborators pursue these other products instead of our products, we may not receive milestone or royalty payments. FINANCIAL AND MARKET RISKS BECAUSE OF OUR SUBSTANTIAL INDEBTEDNESS, WE MAY BE UNABLE TO ADJUST OUR STRATEGY TO MEET CHANGING CONDITIONS IN THE FUTURE. As of December 31, 2001, we had long-term obligations of approximately $504.0 million. We also had future guarantee obligations of approximately $459.4 million under certain facility leases. Our substantial debt and future 24 guarantees will have several important consequences for our future operations. For instance: - payments of interest on, and principal of, our indebtedness will be substantial, and may exceed then current revenues; - we may be unable to obtain additional future financing for capital expenditures, acquisitions or general corporate purposes; - we may be unable to withstand changing competitive pressures, economic conditions and governmental regulations; and - we may be unable to make acquisitions or otherwise take advantage of significant business opportunities that may arise. WE HAVE ENTERED INTO TWO FACILITY LEASE ARRANGEMENTS THAT ARE NOT REQUIRED TO BE REFLECTED ON OUR BALANCE SHEET BUT THAT CONSTITUTE SIGNIFICANT FINANCIAL OBLIGATIONS AND POSSIBLE RISKS. In the fourth quarter of 2001, we entered into two facility leases with respect to three facilities that are currently in design or under construction and one previously-constructed facility. We lease these facilities from trusts controlled by third parties established solely for the transactions. Under accounting principles generally accepted in the United States, these leases are treated as operating leases. Economically, we may be responsible for up to $526.0 million of the cost of these facilities because of guarantees we made in connection with the leases in the event we default on our obligations under the leases. These obligations are not required to be reflected as liabilities on our balance sheet, but are described in footnotes to our financial statements. We are required to pledge marketable securities as security for our obligations under the leases and the related documents. As of December 31, 2001, we included approximately $144.9 million of restricted investments on our balance sheet, of which approximately $132.1 million was held as restricted investments providing collateral for our obligations with respect to these facilities. As the facilities are constructed, we will be required to restrict additional cash or investments as collateral for our obligations under these leases in order to reach the full amount of collateralization, which will reduce our working capital. When the facilities are completed, we expect that we will include approximately $526.0 million in restricted investments on our balance sheet. If the value of our pledged investments declines, because of an increase in interest rates or otherwise, we would need to pledge additional investments which would further reduce our working capital. The rent under these leases is based on a floating interest rate, but the trusts at our request can lock in a fixed interest rate at an interest rate premium. To date, the trusts have fixed the interest rate for approximately $56.0 million of the financed project cost. To the extent the trusts do not lock in a fixed interest rate, if interest rates increase, our rent obligations would also increase. These leases have a term of seven years. If we desire to remain in the facilities upon lease expiration, we would need to refinance or buy the facilities at the financed project cost. We cannot assure you that refinancing will be available on comparable terms, if at all. Further, in the event the facilities are sold, we have guarantee obligations which make us responsible to the extent that the value of the facilities is less than the financed project cost and which reach a maximum guarantee obligation of approximately $459.4 million if the value of the facilities declined below approximately 15% of the financed project cost. While we believe that these leases provide a useful financing mechanism for the facilities, adverse public perception of such lease arrangements and the associated risks may cause our stock price to decline. In addition, we understand that the accounting treatment for these leases may be changed by the Financial Accounting Standards Board in 2002 and may require us to include these leased facilities and the related lease obligations on our balance sheet as assets and liabilities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." IF WE DO NOT OBTAIN SUBSTANTIAL ADDITIONAL FUNDING ON ACCEPTABLE TERMS, WE MAY NOT BE ABLE TO CONTINUE TO GROW OUR BUSINESS AND GENERATE ENOUGH REVENUE TO RECOVER OUR INVESTMENT IN OUR PRODUCT DEVELOPMENT EFFORT. Since inception we have expended, and will continue to expend, substantial funds to continue our research and development programs. If we incur unanticipated expenses or delays in receipt of revenue, we may need additional financing beyond that which we have projected to fund our operating expenses and capital requirements. We may not be able to obtain additional financing on acceptable terms. If we raise additional funds by issuing equity securities, the new securities may dilute the interests of our existing stockholders. 25 BECAUSE OUR STOCK PRICE HAS BEEN AND WILL LIKELY CONTINUE TO BE VOLATILE, THE MARKET PRICE OF OUR COMMON STOCK MAY BE LOWER OR MORE VOLATILE THAN YOU EXPECTED. Our stock price, like the stock prices of other emerging and biotechnology companies, has been highly volatile. During 2001, the closing price of our common stock has been as low as $28.00 per share and as high as $75.31 per share. The market price of our common stock could fluctuate widely because of: - future announcements about our company or our competitors, including the results of testing, technological innovations or new commercial products; - regulatory actions and changes in government regulations; - announcements relating to health care reform; - our failure to acquire or maintain proprietary rights to the gene sequences we discover or the products we develop; - litigation; and - public concern as to the safety of our products. The stock market has experienced extreme price and volume fluctuations that have particularly affected the market price for many emerging and biotechnology companies. These fluctuations have often been unrelated to the operating performance of these companies. These broad market fluctuations may cause the market price of our common stock to be lower or more volatile than you expected. INTELLECTUAL PROPERTY RISKS IF PATENT LAWS OR THE INTERPRETATION OF PATENT LAWS CHANGE, OUR COMPETITORS MAY BE ABLE TO DEVELOP AND COMMERCIALIZE OUR DISCOVERIES. The patent protection available to biotechnology firms is highly uncertain and involves complex legal and factual questions that will determine who has the right to develop a particular product. There have been, and continue to be, intensive discussions on the scope of patent protection for both partial gene sequences and full-length genes. The Patent and Trademark Office issued new guidelines for patents in 2001 which clarify certain requirements for obtaining a patent on a gene sequence. The biotechnology patent situation is even more uncertain outside the U.S. and is currently undergoing review and revision in many countries. Changes in, or different interpretations of, patent laws in the U.S. and other countries may result in patent laws which allow others to use our discoveries or develop and commercialize our products. IF OUR PATENT APPLICATIONS DO NOT RESULT IN ISSUED PATENTS, OUR COMPETITORS MAY OBTAIN RIGHTS TO AND COMMERCIALIZE THE DISCOVERIES WE ATTEMPTED TO PATENT. Our pending applications covering full-length genes and their corresponding proteins may not result in the issuance of any patents. As of March 1, 2002, we had filed patent applications for many human genes and their corresponding proteins and all or portions of genomes of eight infectious microorganisms and one non-infectious microorganism. As of that date, we had only 205 U.S. patents covering human genes and proteins. Our applications may not be sufficient to meet the statutory requirements for patentability in all cases. As a result, we may not obtain enforceable patents on genes we may want to commercialize. IF INFORMATION ABOUT THE GENES WE DISCOVER IS PUBLISHED BY OTHERS BEFORE WE APPLY FOR PATENT PROTECTION, WE MAY BE UNABLE TO OBTAIN PATENT PROTECTION, WHICH WOULD ENABLE OTHERS TO DEVELOP AND COMMERCIALIZE OUR DISCOVERIES. Washington University has identified genes through partial sequencing funded by Merck & Co. and has deposited those partial sequences in a public database. In January 1997, The Institute for Genomic Research, or TIGR, in collaboration with the National Center for Biological Information, disclosed full-length DNA sequences 26 which are reportedly in excess of 35,000 sequences that were assembled from partial gene sequences available in publicly accessible databases or sequenced at TIGR. In June 2000, the Human Genome Project and Celera Genomics Corporation completed an initial sequencing of the human genome and published papers on this sequencing in February 2001. These public disclosures might limit the scope of our claims or make unpatentable subsequent patent applications on full-length genes we file. Any publication of sequence information may prevent us from obtaining patent protection for some genes in which we may have a scientific or commercial interest. IF OTHERS FILE PATENT APPLICATIONS OR OBTAIN PATENTS SIMILAR TO OURS, THEN THE PATENT AND TRADEMARK OFFICE MAY DENY OUR PATENT APPLICATIONS, OR OTHERS MAY RESTRICT THE USE OF OUR DISCOVERIES. Other companies or institutions have filed, and may file in the future, patent applications which attempt to patent genes similar to those covered in our patent applications. The Patent and Trademark Office will decide which applications merit a patent and the priority of competing patent claims. Any patent application filed by a third party may prevail over patent applications we filed, in which event the third party may require us to stop pursuing a potential product or to negotiate a royalty arrangement to pursue the potential product. IF OUR POTENTIAL PRODUCTS CONFLICT WITH PATENTS THAT COMPETITORS, UNIVERSITIES OR OTHERS HAVE OBTAINED, THEN WE MAY BE UNABLE TO COMMERCIALIZE THOSE PRODUCTS. Other parties may claim that our products infringe their patents. This risk will increase as the biotechnology industry expands and as other companies obtain more patents and attempt to discover genes through the use of high-speed sequencers. Other persons could bring legal actions against us to claim damages or to stop our manufacturing and marketing of the affected products. If any of these actions are successful, in addition to demanding monetary damages these persons may require us to obtain a license in order to continue to manufacture or market the affected products. We believe that there will continue to be significant litigation in our industry regarding patent and other intellectual property rights. If we become involved in litigation, it could consume a substantial portion of our resources. BECAUSE ISSUED PATENTS MAY NOT FULLY PROTECT OUR DISCOVERIES, OUR COMPETITORS MAY BE ABLE TO COMMERCIALIZE PRODUCTS SIMILAR TO THOSE COVERED BY OUR ISSUED PATENTS. Issued patents may not provide commercially meaningful protection against competitors and may not provide us with competitive advantages. Other parties may challenge our patents or independently develop similar products which could result in an interference proceeding in the Patent and Trademark Office. Others may be able to design around our issued patents or develop products providing effects similar to our products. In addition, others may discover uses for genes or proteins different from uses covered in our patents, and these other uses may be separately patentable. If another party holds a patent on the use of an invention, even if we hold the patent on the invention itself, that other party could prevent us from selling any product that involves the use. WE RELY ON OUR COLLABORATION PARTNERS TO SEEK PATENT PROTECTION FOR THE PRODUCTS THEY DEVELOP BASED ON OUR RESEARCH. Much of our future revenue may be derived from royalty payments from our collaboration partners. These partners face the same patent protection issues that we and other biotechnology firms face. As a result, we cannot assure you that any product developed by our collaboration partners will be patentable, and therefore, we may never receive any royalty payments. We also rely on our collaboration partners to effectively prosecute their patent applications. Their failure to obtain or protect necessary patents could also result in a loss of royalty revenue to us. IF WE ARE UNABLE TO PROTECT OUR TRADE SECRETS, OTHERS MAY BE ABLE TO USE OUR SECRETS TO COMPETE MORE EFFECTIVELY. We may not be able to adequately protect our trade secrets. We rely on trade secret protection to protect our confidential and proprietary information. We believe that we have developed proprietary procedures for making libraries of DNA sequences and genes. We have not sought process patent protection for these procedures. We have also developed a substantial database of genes we have identified. While we have entered into confidentiality agreements with employees and academic collaborators, we may not be able to prevent their disclosure of these data or materials. Others may independently develop substantially equivalent information and techniques. 27 REGULATORY RISKS BECAUSE WE ARE SUBJECT TO EXTENSIVE AND UNCERTAIN GOVERNMENT REGULATORY REQUIREMENTS, WE MAY BE UNABLE TO OBTAIN GOVERNMENT APPROVAL OF OUR PRODUCTS IN A TIMELY MANNER. Our products are subject to the extensive and evolving regulatory approval process of the FDA and comparable agencies in other countries. The regulation of new products is extensive, and the required process of laboratory testing and human studies is lengthy and expensive. We may not obtain FDA approvals in a timely manner, or at all. We and our collaborators may encounter significant delays or excessive costs in our efforts to secure necessary approvals or licenses. Even if we obtain FDA regulatory approvals, the FDA extensively regulates manufacturing, labeling, distributing, marketing, promotion and advertising after product approval. Moreover, several areas in which we or our collaborators may develop products involve relatively new technology and have not been the subject of extensive product testing in humans. The regulatory requirements governing these products and related clinical procedures are still being determined. In addition, these products may be subject to substantial review by foreign governmental regulatory authorities which could prevent or delay approval in those countries. Regulatory requirements imposed on our products could limit our ability to test, manufacture and, ultimately, commercialize our products. NEGATIVE PUBLIC OPINION AND INCREASED REGULATORY SCRUTINY OF GENE THERAPY AND GENETIC RESEARCH MAY LIMIT OUR ABILITY TO CONDUCT OUR BUSINESS. Ethical, social and legal concerns about gene therapy, genetic testing and genetic research could result in additional regulations restricting or prohibiting the processes we or our suppliers may use. In recent years, gene therapy studies, including studies of VEGF-2, have come under increasing scrutiny which has delayed ongoing and may delay future clinical trials and regulatory approvals. Federal and state agencies, congressional committees and foreign governments have expressed interest in further regulating biotechnology. More restrictive regulations or claims that our products are hazardous could prevent us from commercializing any products. BECAUSE WE ARE SUBJECT TO ENVIRONMENTAL, HEALTH AND SAFETY LAWS, WE MAY BE UNABLE TO CONDUCT OUR BUSINESS IN THE MOST ADVANTAGEOUS MANNER. State and federal laws regarding environmental protection, hazardous substances and human health and safety affect our business. The use of hazardous substances in our operations exposes us to the risk of accidental releases. If our operations result in contamination of the environment or expose individuals to hazardous substances, we could be liable for damages and fines. Future changes to environmental, health and safety laws could cause us to incur additional expense or restrict our operations. INDUSTRY RISKS MANY OF OUR COMPETITORS HAVE SUBSTANTIALLY GREATER CAPABILITIES AND RESOURCES AND MAY BE ABLE TO DEVELOP AND COMMERCIALIZE PRODUCTS BEFORE WE DO. We are in a race to establish uses for and patent as many genes as possible and to bring to market the products we develop. Many of our potential competitors have substantially greater research and product development capabilities and financial, scientific, marketing and human resources. The Human Genome Project and Celera Genomics Corporation have claimed to have mapped the complete human genome, and have made their findings available to the public at no cost. We face competition from other entities using high-speed gene sequencers to discover genes, such as Incyte Genomics, Inc. and Celera Genomics Corporation. We also face competition from entities using more traditional methods to discover genes related to particular diseases, such as Amgen, Inc., Genentech, Inc., Millennium Pharmaceuticals, Inc. and other large biotechnology and pharmaceutical companies. We expect that competition in our field will continue to be intense. Our competitors include parties conducting research to identify genes and human genome research similar to or competing with our focus on gene discovery, including: - institutes, such as those sponsored by the U.S. government and the governments of Great Britain, France, Germany and Japan; 28 - small laboratories associated with universities or other not-for-profit organizations; - pharmaceutical and biotechnology companies; and - government-financed programs. These competitors may: - succeed in identifying genes or developing products earlier than we do; - obtain approvals from the FDA or other regulatory agencies for products more rapidly than we do; - develop treatments or cures that are more effective than those we propose to develop; or - acquire similar gene sequencing machines and engage in the automated sequencing of genes. The other risks of competition include the following: - research and development by others may make our products, or the products we and our collaborators may develop, obsolete or uneconomical; - consumers may prefer existing or newly developed technologies to any product we develop; and - other companies use the same gene sequencing machines we use, in some cases for business purposes that compete with our business. IF WE LOSE OR ARE UNABLE TO ATTRACT KEY MANAGEMENT OR OTHER PERSONNEL, WE MAY EXPERIENCE DELAYS IN PRODUCT DEVELOPMENT. We depend on our senior executive officers as well as key scientific and other personnel. Only a few of our key personnel are bound by employment agreements, and those with employment agreements are bound only for a limited period of time. Our employment agreement with Dr. William A. Haseltine, our Chairman of the Board and Chief Executive Officer, expires in February 2003. Although Dr. Haseltine's employment agreement automatically extends for additional one year terms, either party can terminate the agreement four months prior to the end of the applicable term. If Dr. Haseltine decides to terminate his employment with us, this termination could delay the commercialization of our products or prevent us from becoming profitable. Further, we have not purchased key-man life insurance on any of our executive officers or key personnel, and therefore may not have adequate funds to find acceptable replacements for them. Competition for qualified employees is intense among pharmaceutical and biotechnology companies, and the loss of qualified employees, or an inability to attract, retain and motivate additional highly skilled employees required for the expansion of our activities, could hinder our ability to complete human studies successfully and develop marketable products. IF THE HEALTH CARE SYSTEM OR REIMBURSEMENT POLICIES CHANGE, THE PRICES OF OUR POTENTIAL PRODUCTS MAY FALL OR OUR POTENTIAL SALES MAY DECLINE. In recent years, officials have made numerous proposals to change the health care system in the U.S. These proposals included measures that would limit payments for or prohibit certain medical procedures and treatments or subject the pricing of pharmaceuticals to government control. Government and other third-party payors increasingly attempt to contain health care costs by limiting both coverage and the level of reimbursement of newly approved health care products. In some cases, they may also refuse to provide any coverage of uses of approved products for disease indications other than those for which the FDA has granted marketing approval. Governments may adopt future legislative proposals and federal, state or private payors for health care goods and services may take action to limit their payments for goods and services. In certain foreign countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. Any of these events could limit our ability to commercialize our products successfully. 29 OTHER RISKS RELATED TO OUR BUSINESS BECAUSE WE DEPEND ON A SINGLE MANUFACTURER FOR THE RADIOLABELING OF LYMPHORAD(131), WE MAY BE UNABLE TO OBTAIN SUFFICIENT QUANTITIES OF THIS PRODUCT AT COMMERCIALLY ACCEPTABLE RATES. We are currently dependent upon one manufacturer, MDS Nordion, for the radiolabeling of LymphoRad(131), a product for which we have filed an Investigation New Drug application with the FDA. If we are unable to secure an adequate supply of this product at commercially reasonable rates, our ability to continue with the intended human clinical trials would be adversely affected. BECAUSE WE CURRENTLY HAVE NO PROVEN MANUFACTURING CAPACITY CAPABLE OF PRODUCING PRODUCTS FOR SALE, WE MAY HAVE TO RELY ON THIRD PARTIES TO MANUFACTURE OUR PRODUCTS, AND WE MAY BE UNABLE TO OBTAIN REQUIRED QUANTITIES ECONOMICALLY. We currently do not have any manufacturing facilities that have produced materials for commercial sale or any experience in manufacturing materials suitable for commercial sale. If we need others to manufacture our products, we will have to depend on those third parties to comply with current good manufacturing practices, known as cGMPs, and other regulatory requirements and to deliver materials on a timely basis. These third parties may not perform adequately. Any failures by these third parties may delay our development of products or their submission for regulatory approval. During 1997 and 1998, we designed and MEDCO constructed a process-development and manufacturing facility for the preparation of our proteins for human studies. MEDCO completed an expansion of this facility in 2000. In 2001, we began to design a large-scale manufacturing facility adjacent to the existing process development and manufacturing facility. This 405,000 square foot facility is being designed to enable us to produce commercial quantities of our therapeutic proteins and antibodies. This facility will cost approximately $226.0 million to complete and is expected to open in 2004. The FDA must inspect and license these facilities to determine compliance with cGMP requirements before any commercial production can occur. A delay in the licensing of these facilities could delay or increase the cost of regulatory approval. We may not be able to successfully establish manufacturing capabilities and manufacture our products economically or in compliance with cGMPs and other regulatory requirements. BECAUSE WE CURRENTLY HAVE NO MARKETING CAPABILITY, WE MAY BE UNABLE TO COMMERCIALIZE OUR PRODUCTS. We currently do not have any products that are ready to be marketed. We expect that in the future we may rely on collaborators or on third parties to market any products that we may develop. These collaborators or other third parties may not be successful in marketing our products. However, we may also co-promote or retain U.S. marketing rights to our products. If we decide to market products directly, we will incur significant additional expenditures and commit significant additional management resources to develop an external sales force and implement our marketing strategy. We may not be able to establish a successful marketing force. BECAUSE WE MAY DEPEND ON OTHER THIRD PARTIES TO CONDUCT LABORATORY TESTING AND HUMAN STUDIES, WE MAY ENCOUNTER DELAYS IN OR LOSE SOME CONTROL OVER OUR EFFORTS TO DEVELOP PRODUCTS. We may be dependent on third-party research organizations to design and conduct our laboratory testing and human studies. If we are unable to obtain any necessary testing services on acceptable terms, we may not complete our product development efforts in a timely manner. If we rely on third parties for laboratory testing and human studies, we may lose some control over these activities and become too dependent upon these parties. These third parties may not complete testing activities on schedule or when we request. OUR CERTIFICATE OF INCORPORATION, BYLAWS AND RIGHTS PLAN COULD DISCOURAGE ACQUISITION PROPOSALS, DELAY A CHANGE IN CONTROL OR PREVENT TRANSACTIONS THAT ARE IN YOUR BEST INTERESTS. Provisions of our certificate of incorporation and bylaws, as well as Section 203 of the Delaware General Corporation Law, may discourage, delay or prevent a change in control of our company that you as a stockholder may consider favorable and may be against your best interest. We have also adopted a rights plan, or "poison pill," that may discourage, delay or prevent a change in control. Our certificate of incorporation and bylaws contain 30 provisions that: - authorize the issuance of up to 20,000,000 shares of "blank check" preferred stock that could be issued by our board to increase the number of outstanding shares and discourage a takeover attempt; - classify the directors of our board with staggered, three-year terms, which may lengthen the time required to gain control of our board of directors; - limit who may call special meetings of stockholders; and - establish advance notice requirements for nomination of candidates for election to the board or for proposing matters that can be acted upon by stockholders at stockholder meetings. 31 ITEM 2. PROPERTIES We currently lease and occupy approximately 677,000 square feet of laboratory and office space in ten buildings in Rockville, Maryland. Our leased space includes approximately 415,000 square feet of laboratory space, approximately 203,000 of manufacturing space secured through long-term leases and approximately 59,000 square feet of administrative office space. In addition, several construction projects are underway that will significantly increase our square footage under lease as follows:
APPROXIMATE SIZE ANTICIPATED PROJECT (SQUARE FEET) OCCUPANCY DATE ------- ----------- -------------- Research building 73,000 2003 Laboratory and office campus 624,000 2003 Large-scale manufacturing facility 405,000 2004
For additional discussion of the financing of these three facilities, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources". We anticipate that the construction of the laboratory and office campus will enable us to continue to expand our operations in close proximity to one another. We believe that our properties are generally in good condition, well maintained, suitable and adequate to carry on our business. ITEM 3. LEGAL PROCEEDINGS We are not party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At our Annual Meeting of Shareholders, held on May 23, 2001, the following proposals were approved.
Affirmative Votes Votes Withheld ---------------- ----------------- TERMS EXPIRING IN 2004 Jurgen Drews, M.D. 101,999,504 10,435,534 James B. Wyngaarden, M.D. 111,637,197 797,841
The following proposals were approved at our Annual Meeting of Shareholders:
Affirmative Negative Votes Votes Abstentions ----------- ------------ ------------- 1. Amendment to the Company's Restated Certificate of Incorporation (Fifth) to increase the Company's authorized common stock from 250,000,000 to 400,000,000 shares. 110,654,968 1,654,693 125,377 2. Amendment of the 2000 Stock Incentive Plan. 63,646,004 26,338,481 130,138 Ratification of the selection of Ernst & Young, LLP as independent auditors for the 3. fiscal year ending December 31, 2001. 112,248,096 131,299 55,642
32 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER'S MATTERS Our common stock has been traded on the NASDAQ National Market System under the symbol HGSI since December 2, 1993. The following table presents the quarterly high and low closing prices as quoted by NASDAQ, restated to reflect two two-for-one stock splits, paid in the form of stock dividends on January 28, 2000 and October 5, 2000.
2000 HIGH LOW First Quarter $112.63 $34.56 Second Quarter $ 75.93 $27.63 Third Quarter $ 89.91 $60.41 Fourth Quarter $100.94 $58.50 2001 HIGH LOW First Quarter $ 67.81 $40.38 Second Quarter $ 75.31 $39.19 Third Quarter $ 58.80 $28.00 Fourth Quarter $ 47.28 $30.88
As of January 31, 2002, there were approximately 774 holders of record of our common stock. We have never declared or paid any cash dividends. We do not anticipate declaring or paying cash dividends for the foreseeable future, in part because existing contractual agreements prohibit such dividends. Instead, we will retain our earnings, if any, for the future operation and expansion of our business. 33 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA We present below our selected consolidated financial data for the years ended December 31, 2001, 2000 and 1999, and as of December 31, 2001 and 2000 which have been derived from the audited consolidated financial statements included elsewhere herein and should be read in conjunction with such consolidated financial statements and the accompanying notes. We present below our selected financial data for the years ended December 31, 1998 and 1997, and as of December 31, 1999, 1998 and 1997 which have been derived from audited financial statements not included herein. The results of operations of prior periods are not necessarily indicative of results that may be expected for any other period. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 1. Business." Per share data has been restated to reflect two two-for-one stock splits, paid in the form of stock dividends on January 28, 2000 and on October 5, 2000.
YEARS ENDED DECEMBER 31, ------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA) STATEMENT OF OPERATIONS DATA: Revenue-research and development collaborative contracts: Third parties............... $ 10,250 $ 19,500 $20,280 $27,030 $25,605 Related parties............. 2,568 2,568 4,244 2,568 - ------- ------- ------ ------ ------ Total revenue.................... 12,818 22,068 24,524 29,598 25,605 ------- ------- ------ ------ ------ Costs and expenses: Research and development: Direct expenditures.......... 146,276 91,456 60,607 47,006 39,893 Purchased in-process research and development... - 134,050 - - - Payments under research services agreement......... - - - - 6,247 ------- ------- ------ ------ ------ Total research and development................ 146,276 225,506 60,607 47,006 46,140 General and administrative...... 38,714 27,083 14,838 14,370 11,113 ------- ------- ------ ------ ------ Total costs and expenses.......... 184,990 252,589 75,445 61,376 57,253 ------- ------- ------ ------ ------ Income (loss) from operations.. (172,172) (230,521) (50,921) (31,778) (31,648) Net interest income............... 81,228 40,147 8,977 11,047 10,500 Charge for impaired investment.... (22,314) - - - - Debt conversion expenses.......... (3,894) (50,818) - - - Other income...................... - 5,861 - - - Equity in income (loss) in joint venture......................... - - - (2,226) - ------- ------- ------ ------ ------ Income (loss) before taxes and cumulative effect of change in accounting principle (1)......... (117,152) (235,331) (41,944) (22,957) (21,148) Provision for income taxes....... - 225 225 225 245 ------- ------- ------ ------ ------ Net income (loss) before cumulative effect of change in accounting principle (1) ......... (117,152) (235,556) (42,169) (23,182) (21,393) Cumulative effect of change in accounting principle (2).......... - (8,250) - - - ------- ------- ------ ------ ------ Net income (loss) (1) ............ $(117,152) $(243,806) $(42,169) $(23,182) $(21,393) ======= ======= ====== ====== ======
34 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA, CONTINUED
YEARS ENDED DECEMBER 31, ------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA) STATEMENT OF OPERATIONS DATA: Net income (loss) per share before cumulative effect of change in accounting principle, basic and diluted (1) (3)...... $ (0.92) $ (2.12) $ (0.46) $ (0.26) $ (0.25) (4) Cumulative effect of change in accounting principle........... - (0.08) - - - -------- -------- ------- -------- -------- Net income (loss) per share, basic and diluted (1) (3)...... $ (0.92) $ (2.20) $ (0.46) $ (0.26) $ (0.25) (4) ======== ======== ======= ======== ======== Pro forma amounts assuming the accounting change is applied retroactively: Net income (loss) .............. N/A (5) $(235,556) $(42,169) $ (24,182) $ (20,393) ======== ======= ======== ======== Net income (loss) per share, basic and diluted............... N/A (5) $ (2.12) $ (0.46) $ (0.27) $ (0.24) ======== ======= ======== ======== OTHER DATA: Ratio of earnings to fixed charges ............. - - - - - Coverage deficiency (1)......... $ (117,152) $(235,331) $(41,944) $ (22,957) $ (21,148) ======== ======== ======= ======== ========
AS OF DECEMBER 31, ------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents, short-term and restricted investments (6)................ $1,689,311 $1,774,640 $466,192 $188,516 $211,794 Total assets (7) ............... 1,865,004 1,948,525 527,725 244,247 236,232 Total debt and capital lease, less current portion ......... 503,970 (7) 533,146 326,336 1,780 2,224 Retained deficit................ (481,831) (364,679) (120,873) (78,704) (55,522) Total stockholders' equity...... 1,304,463 1,362,955 169,068 208,848 223,254
- ------------------------------------------------------------------------------ (1) For 2001, amounts include non-recurring charges aggregating $26,208 arising from a charge for impaired investment and debt conversion expenses of $22,314, or $0.18 per share, and $3,894, or $0.03 per share, respectively. For 2000, amounts include non-recurring charges aggregating $184,868 arising from purchased in-process research and development and debt conversion expenses of $134,050, or $1.21 per share, and $50,818, or $0.46 per share, respectively. (2) The cumulative effect of change in accounting principle is a one-time, non-cash charge relating to our implementation of Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 was issued by the Securities and Exchange Commission (SEC) in December 1999. SAB 101 provides guidance related to revenue recognition policies based on interpretations and practices followed by the SEC. The impact of our implementation of SAB 101 was to defer revenue recognition for certain portions of the revenue we previously recognized under our collaborative agreements into future accounting periods. For further discussion, see Note B of the notes to our consolidated financial statements included herein. (3) Restated to reflect two two-for-one stock splits paid in the form of a stock dividend on January 28, 2000 and on October 5, 2000. (4) The net loss per share amounts prior to fiscal 1998 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, Earnings Per Share. For further discussion of net loss per share, see Note B of the notes to our consolidated financial statements included herein. 35 (5) Pro forma presentation of the accounting change is not applicable for fiscal year 2001 as the change was implemented in 2000, retroactive to January 1, 2000. (6) "Cash, cash equivalents, short-term and restricted investments" for 2001, 2000, 1999, 1998 and 1997 includes $144,901, $12,332, $11,637, $6,749 and $6,582, respectively of restricted investments relating to certain operating leases. (7) "Total assets" for 2001, 2000, 1999, 1998 and 1997 includes $144,901, $12,332, $11,637, $6,749 and $6,582, respectively, of restricted investments relating to certain operating leases. "Total debt and capital lease, less current portion" for 2001 does not include any operating lease obligations under various facility and equipment lease arrangements. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for additional discussion. 36 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are a leading genomics and biopharmaceutical company focused on therapeutic product development and functional analysis of genes using our proprietary technology platform. We discover, develop and intend to commercialize novel compounds for treating and diagnosing human disease based on the identification and study of genes. We focus our internal product development efforts on therapeutic proteins, antibodies, peptides and fusion proteins and we use collaborations for the development of gene therapy products and small molecule drugs. We have discovered a large number of genes through our genomics capabilities and have developed a rapidly evolving product pipeline based on our discoveries. We have seven products, including three therapeutic proteins, one antibody and three albumin fusion products that we have advanced into human clinical trials; two products are awaiting approval from FDA to enter human clinical trials; a tenth product, a gene therapy product based on a gene we discovered, has been licensed to Vascular Genetics, Inc. (VGI) and is in human clinical trials being conducted by VGI; an eleventh product, an enzyme that lowers levels of lipoprotein-associated phospholipase A2 (Lp-PLA2), was discovered by GlaxoSmithKline (GSK) as part of our collaboration with GSK and is also in human clinical trials being conducted by GSK. We have a number of additional products in preclinical development. We have extensive capabilities in gene discovery, intellectual property protection and preclinical and clinical development and have established a manufacturing capability for the preparation of our proteins, antibodies and fusion proteins for human studies. We intend to add sales and marketing as appropriate and are currently adding additional manufacturing capabilities. We have established strategic partnerships with a number of leading pharmaceutical and biotechnology companies to leverage our capabilities and gain access to complementary technologies and sales and marketing infrastructure. Some of these partnerships provide us with research funding and milestone payments, along with royalty payments as products are developed and commercialized. We are also entitled to certain co-promotion, co-development, revenue sharing and other product rights. We have not received any product sales revenue or royalties from product sales and do not anticipate revenues from product sales or from royalties on product sales in the next several years. From inception through December 31, 2001, we have received (1) $70.0 million in revenue, $55.0 million in equity payments and $1.0 million in a milestone payment pursuant to our collaboration agreements with GlaxoSmithKline, (2) payments of $87.5 million from additional collaboration partners and (3) an aggregate of $60.8 million from other collaborators, including common stock from Transgene S.A. valued at $25.7 million, $16.0 million from Pioneer Hi-Bred International, Inc., $9.0 million from Pharmacia & Upjohn Company, $5.0 million from Schering-Plough (in addition to certain payments received from Schering-Plough pursuant to our additional collaboration partner agreements), $3.0 million from F. Hoffmann-La Roche, $1.1 million from OraVax Merieux Co. and Merieux OraVax S.N.C., and $1.0 million from MedImmune. To date, we have received all of our revenue from payments made under our collaboration agreements with GlaxoSmithKline and, to a lesser extent, other agreements. The GlaxoSmithKline collaboration agreement and many of our other collaboration agreements expired in 2001 and will only generate additional milestone and royalty payments if our collaborators successfully develop drugs based on our technology. We may not receive any of these payments and may not be able to enter into additional collaboration agreements. We expect that our revenue sources for at least the next several years may be limited to interest income, payments under various collaboration agreements to the extent milestones are met, payments from the sale of product rights and other payments from other collaborators and licensees under existing or future arrangements, to the extent that we enter into any future arrangements. We expect to continue to incur substantial expenses relating to our research and development efforts, which are expected to increase relative to historical levels as we focus on preclinical and clinical trials required for the development of therapeutic protein, antibody and fusion protein product candidates. As a result, we expect to incur continued and increasing losses over the next several years unless we are able to realize additional revenues under existing or new collaboration agreements. The timing and amounts of such revenues, if any, cannot be predicted with certainty and will likely fluctuate sharply. Results of operations for any period may be unrelated to the results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results. 37 CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ materially from those estimates. The items in our financial statements requiring significant estimates and judgments are as follows: We carry our cash, cash equivalents, investments, other assets, accounts payable and accrued expenses and other accrued expenses at their respective fair values. Our other assets include deferred financing costs relating to our convertible subordinated notes. We are amortizing these costs over the life of the notes and, in the event the notes are converted to equity, we would reclassify the unamortized deferred financing costs to equity. We periodically monitor these fair values to determine if impairment write-downs are required. We lease various real properties under operating leases that generally require us to pay taxes, insurance and maintenance. Two of our operating leases are commonly referred to as "synthetic leases". A synthetic lease is a form of off-balance sheet financing under which an unrelated third party funds 100% of the costs for the acquisition and/or construction of the property and leases the asset to the lessee, and at least 3% of the third party funds represent risk equity. Our synthetic leases are treated as operating leases for accounting purposes and financing leases for tax purposes. While we recently entered into these synthetic leases, we will periodically review the fair values of the properties being leased or constructed in order to determine potential accounting ramifications. Changes in the equity participation of the third parties could affect the classification of this lease from operating to financing. In that event, we would include both the cost and debt associated with the properties on our consolidated balance sheet. Additionally, under these leases we also provide a residual value guarantee which guarantees the lessor that the residual value of the leased assets will be at least equal to a specified amount at lease termination. Revenue from non-refundable upfront license fees where we continue involvement through an obligation to provide access to our technology is recognized ratably over the period of obligation. Deferred revenues related to these obligations are recognized on a straight-line basis over the life of the obligation. Revenue associated with performance milestones is recognized based on the achievement of the milestones, as defined in the respective agreements. Research and development expenses include related salaries, contractor fees and allocated facility costs. Such costs are charged to research and development expense as incurred. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2001 AND 2000 Revenues. We had revenues of $12.8 million and $22.1 million for the years ended December 31, 2001 and December 31, 2000, respectively. The 2001 revenue consisted of the recognition of $9.2 million in license fees and additional payments from collaborations with Schering-Plough, Sanofi-Synthelabo, and Merck KGaA, the recognition of $2.6 million from the collaboration with Transgene, S.A. and $1.0 million in a milestone payment from GlaxoSmithKline. The 2000 revenue consisted of $18.5 million in license fees and additional payments from collaborations with Schering-Plough, Sanofi-Synthelabo, and Merck KGaA, the recognition of $2.6 million from the collaboration with Transgene, S.A., and $1.0 million in license revenue from MedImmune. In 2000, the Company implemented Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 impacts the Company's revenues pertaining to its collaborative agreements with Schering-Plough, Sanofi-Synthelabo, and Merck KGaA for both 2000 and 2001. See Note B of the Notes to Consolidated Financial Statements for additional discussion. Expenses. Research and development expenses increased to $146.3 million for the year ended December 31, 2001 from $91.5 million for the year ended December 31, 2000, excluding the $134.1 million charge for Purchased in-process research and development in 2000. We expect to continue to incur substantial expenses relating to our research and development efforts, which expenses are expected to increase relative to historical levels as we focus on preclinical and clinical trials required for the development of our protein, antibody and fusion product candidates. 38 RESULTS OF OPERATIONS (CONTINUED) YEARS ENDED DECEMBER 31, 2001 AND 2000 (CONTINUED) We track our research and development expenditures by type of cost incurred - preclinical, clinical and manufacturing costs. Our preclinical costs increased to $79.3 million for the year ended December 31, 2001 from $58.3 million for the year ended December 31, 2000. This increase is due primarily to expanded activities, including toxicology studies, needed to support our investigational new drug filings that were made or will be made in the future, along with expanded activities in the area of antibody development, including increased outside collaboration costs and milestone payments. Our clinical costs increased to $27.8 million for the year ended December 31, 2001 from $11.1 million for the year ended December 31, 2000. This increase is due primarily to the cost of continuing ongoing trials from 2000 along with the cost of filing, initiating and sustaining new trials that began in 2001. We had seven drugs in eleven human clinical trials ongoing as of December 31, 2001 compared to four drugs in six human clinical trials ongoing as of December 31, 2000. Our manufacturing costs increased to $39.2 million for the year ended December 31, 2001 from $22.1 million for the year ended December 31, 2000. This increase is due to the increased production activities within our process development and manufacturing facilities needed to support our increased clinical activities. Purchased in-process research and development expense of $134.1 million for the year ended December 31, 2000 relates to the acquisition of Principia Pharmaceutical Corporation on September 8, 2000. This amount represents that portion of the $135.1 million purchase price allocated to in-process research and development. See Note C of the Notes to Consolidated Financial Statements for additional discussion. General and administrative expenses increased to $38.7 million for the year ended December 31, 2001 from $27.1 million for the year ended December 31, 2000 to support the increase in our activities. The increase also resulted from increased market research costs in connection with our expanding clinical activities and higher legal expenses associated with filing and prosecuting a larger number of patent applications relating to genes and proteins we discovered. Patent expenses will continue to increase as additional applications are filed and existing applications are prosecuted in the United States and internationally. Interest income was $105.9 million for the year ended December 31, 2001 compared to $62.2 million for the year ended December 31, 2000 due to higher average cash and short-term investment balances. While we had higher average cash balances, the yield on our investments was 6.1% for the year ended December 31, 2001 as compared to 6.7% for the year ended December 31, 2000. Our average cash balance decreased during 2001 as a result of our net loss and capital expenditures in 2001, partially offset by proceeds from the issuance of stock pursuant to our stock option and employee stock purchase plans. Interest expense increased for the year ended December 31, 2001 in comparison to the year ended December 31, 2000 due primarily to a full year of interest expense in 2001 relating to the issuance of $525.0 million of convertible subordinated notes during the first quarter of fiscal 2000 partially offset by a reduction in interest expense associated with previously-issued convertible subordinated notes that were converted to equity during the first quarter of fiscal 2000. Charge for impaired investment of $22.3 million for the year ended December 31, 2001 relates to the reduction made to the carrying value in our equity investment in Transgene, S.A. We reduced the carrying value of this investment to $3.4 million from $25.7 million due to an impairment that we deemed to be other-than-temporary. See Note D of the Notes to Consolidated Financial Statements for additional discussion. Debt conversion expenses decreased to $3.9 million for the year ended December 31, 2001 from $50.8 million for the year ended December 31, 2000. The debt conversion expenses of $3.9 million relate primarily to the second quarter of 2001 conversion of $25.0 million aggregate principal of 5% convertible subordinated notes due 2007 into equity. The debt conversion expenses of $50.8 million relate to the first quarter of 2000 conversion costs of $318.3 million aggregate principal amount of convertible subordinated notes into equity. We converted $118.3 39 RESULTS OF OPERATIONS (CONTINUED) YEARS ENDED DECEMBER 31, 2001 AND 2000 (CONTINUED) million of our $125.0 million aggregate principal amount of 5 1/2% notes due 2006 into common stock at a cost of $20.8 million, substantially all of which was paid in the form of common stock. In addition, we converted all of our $200.0 million aggregate principal amount of 5% notes due 2006 into common stock at a cost of $30.0 million, all of which was paid in cash. See Note I of the Notes to Consolidated Financial Statements for additional discussion. Other income of $5.9 million for the year ended December 31, 2000 relates to the gain realized on the sale of 290,000 ordinary shares of our investment in Cambridge Antibody Technology. See Note D of the Notes to Consolidated Financial Statements for additional discussion. Cumulative effect of a change in accounting principle of $8.3 million for the year ended December 31, 2000 relates to our implementation of SAB 101. Net Income (Loss). We recorded a net loss of $117.2 million, or $0.92 per share, for the year ended December 31, 2001 compared to a net loss of $243.8 million, or $2.20 per share, for the year ended December 31, 2000. The decreased loss for 2001 compared to 2000 reflects the absence of Purchased in-process research and development expense of $134.1 million, or $1.21 per share, reduction of debt conversion expenses, an increase in net interest income and the affect of the cumulative effect of a change in accounting principle recognized in 2000, partially offset by the charge for impaired investment, decreased revenue and the increase in manufacturing operations, increased investment in the development of preclinical and clinical drug candidates, and increased general and administrative activities. Excluding the charge for impaired investment incurred in 2001, the charges for debt conversion expenses for both 2001 and 2000, the Purchased in-process research and development and the cumulative effect of a change in accounting principle incurred in 2000, our net loss would have been $90.9 million, or $0.72 per share for the year ended December 31, 2001, compared to $50.7 million, or $0.46 per share for the year ended December 31, 2000. YEARS ENDED DECEMBER 31, 2000 AND 1999 Revenues. We had revenues of $22.1 million and $24.5 million for the years ended December 31, 2000 and December 31, 1999, respectively. The 2000 revenue consisted of $18.5 million in license fees and additional payments from collaborations with Schering-Plough, Sanofi-Synthelabo, and Merck KGaA, the recognition of $2.6 million from the collaboration with Transgene, S.A., and $1.0 million in license revenue from MedImmune. The 1999 revenue consisted of $18.5 million in license fees and additional payments from collaborations with Schering-Plough, Sanofi-Synthelabo, and Merck KGaA, the recognition of $4.2 million from the collaborations with Transgene, S.A. and Pharmacia, and $1.8 million in other revenue. SAB 101 impacted the Company's revenues pertaining to its collaborative agreements with Schering-Plough, Sanofi-Synthelabo, and Merck KGaA for 2000. See Note B of the Notes to Consolidated Financial Statements for additional discussion. Expenses. Research and development expenses increased to $91.5 million for the year ended December 31, 2000 from $60.6 million for the year ended December 31, 1999, excluding the $134.1 million charge for Purchased in-process research and development in 2000. We track our research and development expenditures by type of cost incurred - preclinical, clinical and manufacturing costs. Our preclinical costs increased to $58.3 million for the year ended December 31, 2000 from $41.2 million for the year ended December 31, 1999. This increase is due primarily to expanded activities, including toxicology studies, needed to support our investigational new drug filings that were made or will be made in the future, along with expanded activities in the area of antibody development, including increased outside collaboration costs. Our clinical costs increased to $11.1 million for the year ended December 31, 2000 from $5.4 million for the year ended December 31, 1999. This increase is due primarily to the cost of expanding our clinical trials in 2000 compared to the prior year. We had four drugs in six human clinical trials ongoing as of December 31, 2000 compared to two drugs in four human clinical trials ongoing as of December 31, 1999. Our manufacturing costs increased to $22.1 million for the year ended December 31, 2000 from $14.0 million for the year ended December 31, 1999. This increase is due to a full year of operations for our process 40 RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2000 AND 1999 development and manufacturing facility in 2000, compared to 1999, when the facility commenced operations in the second quarter of 1999. Purchased in-process research and development expense of $134.1 million for the year ended December 31, 2000 relates to the acquisition of Principia Pharmaceutical Corporation on September 8, 2000. General and administrative expenses increased to $27.1 million for the year ended December 31, 2000 from $14.8 million for the year ended December 31, 1999 to support the increase in our activities. The increase also resulted from higher legal expenses associated with filing and prosecuting a larger number of patent applications relating to genes and proteins we discovered. Interest income was higher for the year ended December 31, 2000 compared to the year ended December 31, 1999 due to higher average cash balances. In addition, the yield on our investments was 6.7% for the year ended December 31, 2000 as compared to 5.3% for the year ended December 31, 1999. Our average cash balance increased during 2000 as a result of the placement of two convertible subordinated note offerings during 2000, totaling $525.0 million and a public offering of common stock which raised net proceeds of $912.7 million. Interest expense increased for the year ended December 31, 2000 in comparison to the year ended December 31, 1999 due primarily to the issuance of $525.0 million of convertible subordinated notes during the first quarter of fiscal 2000. We had debt conversion expenses of $50.8 million for the year ended December 31, 2000 but no debt conversion expenses in 1999. Other income of $5.9 million for the year ended December 31, 2000 relates to the gain realized on the sale of 290,000 ordinary shares of our investment in Cambridge Antibody Technology. See Note D of the Notes to Consolidated Financial Statements for additional discussion. Cumulative effect of a change in accounting principle of $8.3 million for the year ended December 31, 2000 relates to our implementation of SAB 101. As a result of the implementation of SAB 101, the Company recorded a charge of $8.3 million as a cumulative effect of a change in accounting principle, retroactive to January 1, 2000. See Note B of the Notes to Consolidated Financial Statements for additional discussion. Net Income (Loss). We recorded a net loss of $243.8 million, or $2.20 per share, for the year ended December 31, 2000 compared to a net loss of $42.2 million, or $0.46 per share, for the year ended December 31, 1999. The difference in results for the years ended December 31, 2000 and 1999 is primarily due to the $134.1 million, or $1.21 per share, charge for purchased in-process research and development, the $50.8 million, or $0.46 per share, of debt conversion expenses, the $8.3 million, or $0.08 per share, charge for the cumulative effect of a change in accounting principle, higher operating expenses, and reduced collaboration partner revenues, offset by higher net interest income. Excluding the impact of the charge for purchased in-process research and development, debt conversion expenses, and the cumulative effect of a change in accounting principle, our net loss would have been $50.7 million, or $0.46 per share, compared to a net loss of $42.2 million, or $0.46 per share, for the year ended December 31, 1999. LIQUIDITY AND CAPITAL RESOURCES We had working capital of $1.5 billion at December 31, 2001 as compared to $1.7 billion at December 31, 2000. The decrease in working capital is due to our net loss and capital expenditures, along with an increase in our restricted investments, partially offset by proceeds from the issuance of common stock. Our restricted investments totaled approximately $144.9 million and $12.3 million at December 31, 2001 and 2000, respectively. Our restricted investments will increase to approximately $541.0 million by 2004 assuming the full amount of $450.0 million of lease financing is used for construction activities and our other collateral obligations remain in place. We will be required to maintain this collateral in the form of restricted investments until 2008, at which time all or a portion of the collateral may be used to satisfy our residual value guarantees under the leases or to exercise our options to acquire the related properties. As a result, this increase in restricted investments will reduce our working capital. 41 LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) We expect to continue to incur substantial expenses relating to our research and development efforts, which expenses are expected to increase relative to historical levels as we focus on preclinical and clinical trials required for the development of an increasing number of therapeutic protein, antibody and fusion protein product candidates. At December 31, 2001, we had outstanding commitments for construction and equipment purchases totaling approximately $16.3 million. The amounts of expenditures that will be needed to carry out our business plans are subject to numerous uncertainties, which may adversely affect our liquidity and capital resources. We are proceeding with numerous clinical trials, including one multi-year repifermin trial involving over 500 patients. We have several Phase I and Phase II trials underway and expect to initiate additional trials each year. Completion of these trials may extend several years or more, but the length of time generally varies considerably according to the type, complexity, novelty and intended use of the drug candidate. We estimate that the completion periods for our Phase I, Phase II and Phase III trials could span one year, one to two years and two to four years, respectively. The duration and cost of our clinical trials are a function of numerous factors such as the number of patients to be enrolled in the trial, the amount of time it takes to enroll them and the number of clinical sites to be engaged in the trial. We identify our potential drug candidates by conducting numerous preclinical studies. We may conduct multiple clinical trials to cover a variety of indications for each drug candidate. Based upon the results from our trials, we may elect to discontinue clinical trials for certain indications or certain drugs in order to concentrate our resources on more promising drug candidates. For example, in 2001, we announced that the results from our ulcerative colitis trials showed that our drug candidate, repifermin was safe and well-tolerated, but not shown to be effective. We are continuing to analyze the results to determine how to proceed with this indication. We are advancing many drug candidates, including therapeutic proteins, antibodies and fusion proteins, in part, to diversify the risks associated with our research and development spending. In addition, our manufacturing plants have been designed to enable multi-product manufacturing capability. Accordingly, we believe our future financial commitments, including preclinical, clinical or manufacturing, are not substantially dependent on any single drug candidate. Should we be unable to sustain a multi-product drug pipeline, our dependence on the success of one or a few drug candidates would increase. We must receive FDA approval to advance each of our products through each phase of clinical testing. Moreover, we must receive FDA regulatory approval to commercially launch any of our products. In order to receive such approval, the FDA must conclude that our clinical data establish safety and efficacy. We cannot be certain that we will establish sufficient safety and efficacy data to receive regulatory approval for any of our drugs. In addition, part of our business plan includes collaborating with others. For example, GlaxoSmithKline ("GSK") is conducting human clinical trials of an enzyme discovered by GSK as part of our collaboration with GSK, that lowers levels of lipoprotein-associated phospholipase A2 (Lp-PLA2), as a treatment for cardiovascular disease. We have no control over the progress or completion of these trials. While we received a $1.0 million payment from GSK in connection with a development milestone met by GSK during 2001, we cannot forecast with any degree of certainty the likelihood of receiving future milestone or royalty payments. We also cannot forecast with any degree of certainty whether any of our current or future collaborations will affect our drug development efforts and therefore, our capital and liquidity requirements. Because of the uncertainties discussed above, the costs to advance our research and development projects are difficult to estimate and may vary significantly. We expect that our existing funds and interest income will be sufficient to fund our operations for the next several years. Our future capital requirements and the adequacy of our available funds will depend on many factors, including scientific progress in our research and development programs (including our preclinical and clinical product development activities), the magnitude of those programs, the ability to establish collaborative and licensing arrangements, the cost involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and competing technological and market developments. There can be no assurance that any additional financing required in the future will be available on acceptable terms, if at all. 42 LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) Our future liquidity and capital resources will be affected by our contractual obligations. These obligations are summarized below:
Payments Due by Period (dollars in thousands) --------------------------------------------------------------- One year Two to three Four to five After five CONTRACTUAL OBLIGATIONS Total or less years years years --------------------------------------------------------------- Long-term debt.................. $503,912 $444 $448 $3,120 $499,900 Capital lease obligation....... 743 241 502 - - Operating leases (1) (2)....... 191,647 16,057 37,365 41,692 96,533 Unconditional purchase obligations (3)... 19,850 19,600 250 - - Long-term collaboration obligations (4).. - - - - - --------------------------------------------------------------- Total contractual cash obligations (5).. $716,152 $36,342 $38,565 $44,812 $596,433 ===============================================================
(1) Certain of our current or future lease payments are based upon currently applicable interest rates. See additional discussion of these facility leases below. (2) Certain of our operating leases contain residual value guarantees relating to two facility leases described below. (3) Our unconditional purchase obligations relate primarily to commitments for capital expenditures, consisting primarily of laboratory space build-out and equipment. (4) Because we cannot forecast with any degree of certainty whether any of our current collaborations will require us to make future milestone or royalty payments, we have excluded these amounts from the above table. (5) For additional discussion of our debt obligations and lease commitments, see Notes I and J of the Notes to the Consolidated Financial Statements. During 2001, we entered into two seven-year lease agreements (the "October 2001 lease" and the "November 2001 lease") relating to research, manufacturing, and administrative space either acquired or under construction by two trusts controlled by third parties established solely for that purpose. As part of these agreements, we are required to maintain collateral, in the form of restricted investments, in amounts equal to 100% of the financed project cost for the duration of the leases. Under these lease agreements, which we have accounted for as operating leases, we have the option to purchase the properties, during and at the end of the lease terms, at an aggregate amount of approximately $526.0 million. Alternatively, we can cause the properties to be sold to third parties. We are contingently liable for the residual value guarantee associated with each property in the event the net sale proceeds are less than the original financed costs of the facilities. The residual value guarantee for the October 2001 lease and the November 2001 lease is approximately $64.6 million and $394.8 million, respectively, assuming the full amount of the financings is used for construction activities. The October 2001 lease relates to a research and development complex adjacent to our current corporate campus. We are leasing this property for seven years from a trust established solely for this purpose by Allfirst Bank. The trust is leasing the property from the Maryland Economic Development Corporation ("MEDCO"), which is the owner of the property. The cost of the existing property along with a building currently under construction is approximately $76.0 million. We are required to maintain collateral in the form of marketable securities equal to 100% of the financed project cost with the lending institution for the duration of the lease. The rent under this lease is currently based on a floating interest rate, but the trust can lock in a fixed interest rate at any time at our request. To the extent the trust does not lock in a fixed interest rate, if interest rates increase, our rent obligations would also increase. If interest rates decrease, our rent obligations would decrease. As of December 31, 2001, the trust had fixed the interest rate on $56.0 million at approximately 4.5%. The remaining $20.0 million is floating based primarily on the seven-day LIBOR rate, which was approximately 1.98%, as of December 31, 2001. We have a residual value guarantee of 85% of the total financed cost at lease termination. In the event of our default, we are responsible for 100% of the total financed cost of the project. Although the trust is responsible for servicing and repaying the debt and equity financings to various parties, we have made the residual value guarantee to the trust. This trust was established solely for this one lease. In the event the trust defaults to the lender 43 LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) or in the event the trust is terminated, we have the right to cure the default or exercise our option to acquire the property. At any time during the lease term, we have the option to purchase legal and/or beneficial interest in the project for 100% of the lease balance plus any unpaid indemnity amounts. The November 2001 lease relates to the construction of our research and development and administrative main campus and a large-scale manufacturing facility. We will lease these properties for approximately five years, following an estimated two-year construction period, from a trust established solely for this purpose by BancBoston Leasing Investment, Inc. and First Union National Bank. The trust has entered into agreements with BancBoston and First Union to provide financing for construction of the properties in the aggregate amount of $450.0 million. We are required to maintain collateral in the form of marketable securities equal to 100% of the financed project cost with the lending institutions for the duration of the lease. The rent under these leases is currently based on a floating interest rate, but the trust can lock in a fixed interest rate at any time at our request. To the extent the trust does not lock in a fixed interest rate, if interest rates increase, our rent obligations would also increase. If interest rates decrease, our rent obligations would decrease. At December 31, 2001, the floating interest rate based primarily on short-term commercial paper was approximately 1.86%. We have retained ownership of the land for the main campus component of this project. We have entered into a ground lease with the trust for the land at fair market value rates. Thereafter, rent will be reduced to a nominal amount. We will record these lease payments on our balance sheet as deferred rental income over the two-year construction period and then amortize this deferral over the remaining term (approximately five years). We have a residual value guarantee of 87.74% of the total financed cost at lease termination. In the event of default, we are responsible for 100% of the total financed cost of the project. During the construction period, we have a residual value guarantee of 89.9% of the financed cost incurred. Although the trust is responsible for servicing and repaying the debt and equity financings to various parties, we have made the residual value guarantee to the trust. This trust was established solely for this one lease. In the event the trust defaults to the lender or in the event the trust is terminated, we have the right to cure the default or exercise our option to acquire the property. At any time during the lease term, we have the option to purchase legal and/or beneficial interest in the project for 100% of the lease balance plus any unpaid indemnity amounts. We understand that the accounting treatment for these leases may be changed by the Financial Accounting Standards Board in 2002. In that event, we may be required to include these leased facilities and the related lease obligations on our balance sheet as assets and liabilities. Our commitments, and their expiration dates are as follows:
Amount of Commitment Expiration per Period Other Commercial Commitments (dollars in thousands) ------------------------------------------------------------------- Total Amounts One year or Two to Four to After five Committed less three years five years years ------------------------------------------------------------------- Lines of credit.......................... $ - $ - $ - $ - $ - Standby letters of credit................ - - - - - Guarantee - October 2001 lease (1)....... 47,600 - - - 47,600 Guarantee - November 2001 lease (2)...... 15,013 - - - 15,013 Standby repurchase obligations........... - - - - - Other commercial commitments............. - - - - - ------------------------------------------------------------------- Total commercial commitments............. $62,613 $ - $ - $ - $62,613 ===================================================================
(1) The guarantee of 85.0% included above is based upon the loaned amount of $56.0 million as of December 31, 2001. Our guarantee will increase to approximately $64.6 million when we reach the full $76.0 million financed cost of the project at the end of the construction period. (2) The construction-period guarantee of 89.9% included above is based upon a financed cost incurred of approximately $16.7 million as of December 31, 2001. Our post-construction guarantee will be 87.74% of financed project costs and will increase to approximately $394.8 million when we reach the full $450.0 million financed cost of the project at the end of the construction period. 44 LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) As of December 31, 2001, we had net operating loss carryforwards for federal income tax purposes of approximately $477.6 million, which expire, if unused, by the year 2021. We also have available research and development tax credit and other tax credit carryforwards of approximately $25.0 million, the majority of which will expire, if unused, by the year 2021. Our funds may be invested in U.S. Treasuries, government agency obligations, high grade debt securities and various money market instruments rated "A" or better. Such investments reflect our policy regarding the investment of liquid assets, which is to seek a reasonable rate of return consistent with an emphasis on safety, liquidity and preservation of capital. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements contained in "Item 1. Business" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are based on our current intent, belief and expectations. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict. Actual results may differ materially from these forward-looking statements because of our unproven business model, dependence on new technologies, uncertainty and timing of clinical trials, ability to develop and commercialize products, dependence on collaborators for services and revenue, substantial indebtedness, intense competition, uncertainty of patent and intellectual property protection, dependence on key management, uncertainty of regulation of products, dependence on key suppliers, the impact of future alliances or transactions and other risks that may be described in this filing and our other filings with the Securities and Exchange Commission. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date. We undertake no obligation to update or revise the information contained in this announcement whether as a result of new information, future events or circumstances or otherwise. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not have operations subject to risks of foreign currency fluctuations, nor do we use derivative financial instruments in our operations or investment portfolio. Our investment portfolio can be comprised of low-risk U.S. Treasuries, government agency obligations, high-grade debt having a rating of at least an "A" rating and various money market instruments. The short-term nature of these securities, which currently have an average term of approximately eighteen months, significantly decreases the risk of a material loss caused by a market change. We believe that a hypothetical 100 basis point adverse move (increase) in interest rates along the entire interest rate yield curve would adversely affect the fair value of our cash, cash equivalents and short-term and restricted investments by approximately $25.3 million, or approximately 1.5% of the aggregate fair value of $1.69 billion, at December 31, 2001. For these reasons, and because these securities are almost always held to maturity, we believe we do not have significant exposure to market risks associated with changes in interest rates related to our debt securities held as of December 31, 2001. We believe that any market change related to our investment securities held as of December 31, 2001 is not material to our consolidated financial statements. However, given the short-term nature of these securities, a general decline in interest rates would adversely affect the interest income from our portfolio as securities mature and are replaced with securities having a lower interest rate. The facility leases we entered into during the fourth quarter of 2001 require us to maintain minimum levels of restricted investments as collateral for these facilities. By 2004, we expect our restricted investments for these leases to be approximately $526.0 million. We are also required to maintain approximately $15.0 million in restricted investments with respect to our process development and manufacturing facility leases. Although the market value for these investments may rise or fall as a result of changes in interest rates, we will be required to maintain this level of restricted investments in both a rising or declining interest rate environment. The rent under certain of these facility leases is based on a floating interest rate. We can direct MEDCO or the trusts which own certain of the facilities and lease them to us to lock in a fixed interest rate. As of December 31, 2001, such a fixed rate for seven years would be approximately 5.46% compared to the floating rate as of December 31, 2001 of approximately 2.0%. If interest rates increase, our rent obligations would also increase, which would adversely affect our operating expenses. 45 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED) As of December 31, 2001, the carrying values of our equity investments in Transgene, Cambridge Antibody Technology (CAT) and Ciphergen were approximately $3.4 million, $38.7 million and $1.7 million, respectively. Our investments in Transgene and Ciphergen are subject to equity market risk. Our investment in CAT is denominated in pounds sterling and is subject to both foreign currency risk as well as equity market risk. In 2001, we reduced the carrying value of our equity investment in Transgene to $3.4 million from $25.7 million due to an impairment of the value of the investment that we deemed to be other-than-temporary. See Note D of the Notes to Consolidated Financial Statements for additional discussion. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is set forth on pages F-1 - F-31. ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT We incorporate herein by reference the information concerning directors and executive officers in our Notice of Annual Stockholders' Meeting and Proxy Statement to be filed within 120 days after the end of our fiscal year (the "2002 Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION We incorporate herein by reference the information concerning executive compensation to be contained in the 2002 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT We incorporate herein by reference the information concerning security ownership of certain beneficial owners and management to be contained in the 2002 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We incorporate herein by reference the information concerning certain relationships and related transactions to be contained in the 2002 Proxy Statement. 46 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Annual Report: (1) Index to Consolidated Financial Statements
PAGE NUMBER ------ Report of Ernst & Young LLP, Independent Auditors........... F-2 Consolidated Balance Sheets at December 31, 2001 and 2000... F-3 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999............................ F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999................ F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999............................ F-6 Notes to Consolidated Financial Statements.................. F-8
(2) Financial Statement Schedules Financial statement schedules are omitted because they are not required. (3) Exhibits
Exhibit No. - ----------- 3.1* Certificate of Incorporation of the Registrant (Filed as Exhibit 3.1 to the Registrant's Form 10-K for the fiscal year ended December 31, 1993, Exhibit 3.3 to the Form 10-K for the fiscal year ended December 31, 1997, Exhibit 3.1 to the Form 8-K filed December 16, 1999 and Exhibit 3.1 to the Form 10-Q filed July 31, 2001). 3.2* By-laws of the Registrant (Filed as Exhibit 3.2 to the Registrant's Form 10-Q filed August 3, 2000). 4.1* Form of Common Stock certificate. (Filed as Exhibit 4.1 to the Registrant's Form S-3 Registration Statement, as amended (Commission File No. 333-45272), filed September 6, 2000). 4.2* Rights Agreement between the Registrant and American Stock Transfer & Trust Company, as Rights Agent, dated as of May 20, 1998 (Filed as Exhibit 4 to the Registrant's Form 8-K filed May 28, 1998.) 4.3* Indenture dated as of June 25, 1999 between the Registrant and The Bank of New York, as trustee, including the form of 5 1/2% Convertible Subordinated Notes due 2006 (Filed as Exhibit 4.1 to the Registrant's Form 8-K filed June 28, 1999). 4.4* Indenture dated as of February 1, 2000 between the Registrant and The Bank of New York, as trustee, including the form of 5% Convertible Subordinated Notes due 2007 (Filed as Exhibit 4.1 to the Registrant's Form 8-K filed February 2, 2000).
47 4.5* Indenture dated as of March 10, 2000 between the Registrant and The Bank of New York, as trustee, including the form of 3 3/4% Convertible Subordinated Notes due 2007 (filed as Exhibit 4.1 to the Registrant's Form 8-K filed March 13, 2000). 10.1* Stock Purchase and Restriction Agreement, dated December 31, 1992, between the Registrant and William A. Haseltine, Ph.D. (Filed as Exhibit 10.15 to the Registrant's Form S-1 Registration Statement, as amended (Commission File No. 33-69850), originally filed October 1, 1993). 10.2* Employment Agreement, dated February 25, 1997, with William A. Haseltine, Ph.D. (Filed as Exhibit 10.44 to the Registrant's Form 10-K for the fiscal year ended December 31, 1996). 10.3* Restricted Stock Purchase Agreement, dated May 18, 1993, between the Registrant and William A. Haseltine, Ph.D. (Filed as Exhibit 10.24 to the Registrant's Form S-1 Registration Statement, as amended (Commission File No. 33-69850), originally filed October 1, 1993). 10.4* Promissory Note, dated March 4, 1994, given by William A. Haseltine, Ph.D. to the Registrant (Filed as Exhibit 10.58 to the Registrant's Form 10-K for the fiscal year ended December 31, 1993). 10.5* First Allonge to Promissory Note, dated December 16, 1994, given by William A. Haseltine, Ph.D. to the Registrant (Filed as Exhibit 10.65 to the Registrant's Form 10-K for the fiscal year ended December 31, 1994). 10.6* Pledge Agreement, dated March 4, 1994, between William A. Haseltine, Ph.D. and Registrant (Filed as Exhibit 10.59 to the Registrant's Form 10-K for the fiscal year ended December 31, 1993). 10.7* First Amendment to Pledge Agreement, dated December 16, 1994, between William A. Haseltine, Ph.D. and Registrant (Filed as Exhibit 10.67 to the Registrant's Form 10-K for the fiscal year ended December 31, 1994). 10.8* Employment Agreement, dated October 1992, with Craig A. Rosen, Ph.D. (Filed as Exhibit 10.17 to the Registrant's Form S-1 Registration Statement, as amended (Commission File No. 33-69850), originally filed October 1, 1993).
48 10.9* Restricted Stock Purchase Agreement, dated April 21, 1993, between the Registrant and Craig A. Rosen, Ph.D. (Filed as Exhibit 10.22 to the Registrant's Form S-1 Registration Statement, as amended (Commission File No. 33-69850), originally filed October 1, 1993). 10.10* 2000 Stock Incentive Plan (Filed as Exhibit A to the Registrant's Definitive Proxy Statement on Schedule 14A filed April 18, 2001). 10.11* Principia Pharmaceutical Corporation 1999 Equity Compensation Plan (Filed as Exhibit 4.6 to the Registrant's Registration Statement on Form S-8, File No. 333-46298, filed September 21, 2000). 10.12* 2000 Employee Stock Purchase Plan (Filed as Exhibit B to the Registrant's Definitive Proxy Statement on Schedule 14A filed April 24, 2000). 10.13* $4,000,000 Maryland Industrial Development Financing Authority Taxable Variable Rate Demand Economic Development Revenue Bonds dated December 21, 1994 (Filed as Exhibit 10.90 to the Registrant's Form 10-K for the fiscal year ended December 31, 1994). 10.14* Lease Agreement between Maryland Economic Development Corporation and Human Genome Sciences, Inc., dated December 1, 1997 (Filed as Exhibit 10.67 to the Registrant's Form 10-K for the fiscal year ended December 31, 1997). 10.15* Lease Agreement between Maryland Economic Development Corporation and Human Genome Sciences, Inc. dated December 1, 1999 (Filed as Exhibit 10.43 to the Registrant's Form 10-K for the fiscal year ended December 31, 1999).
49 10.16 Participation Agreement between Human Genome Sciences, Inc., Genome Statutory Trust 2001A, Wells Fargo Bank Northwest, N.A., BancBoston Leasing Investments Inc., First Union National Bank and the other parties named therein dated November 7, 2001. 10.17 Appendix A to Participation Agreement dated November 7, 2001. 10.18 Lease Agreement between Genome Statutory Trust 2001A and Human Genome Sciences, Inc. dated November 7, 2001. 10.19 Construction Agency Agreement between Genome Statutory Trust 2001A and Human Genome Sciences, Inc. dated November 7, 2001. 10.20 Security Agreement between EagleFunding Capital Corporation, Fleet Securities, Inc., Fleet National Bank, First Union National Bank, BancBoston Leasing Investments Inc., Genome Statutory Trust 2001A and Human Genome Sciences, Inc. dated November 7, 2001. 10.21 Fleet National Bank Liquid Collateral Agreement between Human Genome Sciences, Inc., Genome Statutory Trust 2001A, Fleet National Bank and the other parties identified therein. An identical Liquid Collateral Agreement was entered into between First Union National Bank, Human Genome Sciences, Inc., Genome Statutory Trust 2001A and the other parties identified therein. 10.22 Lease Agreement between Wells Fargo Bank Northwest, National Association as Trustee under Trust Agreement and Human Genome Sciences, Inc. dated October 25, 2001. 10.23 Cash Collateral Pledge Agreement between Human Genome Sciences, Inc., Allfirst Bank and Allfirst Trust Company National Association dated October 25, 2001. 10.24 Guarantee by Human Genome Sciences, Inc. as Guarantor in favor of Allfirst Bank, as Agent dated October 25, 2001. 10.25 Amendment No. 1 dated March 29, 2002 to Lease Agreement between Wells Fargo Bank Northwest, National Association as Trustee under Trust Agreement and Human Genome Sciences, Inc. dated October 25, 2001. 10.26 Amendment No. 1 dated March 29, 2002 to Guarantee by Human Genome Sciences, Inc. as Guarantor in favor of Allfirst Bank, as Agent dated October 25, 2001.
50 12.1 Ratio of Earnings to Fixed Charges. 21.1 Subsidiaries. 23.1 Consent of Ernst & Young LLP, Independent Auditors.
- ------------------------------------------------------------------------------- * Incorporated by reference. (b) Reports on Form 8-K We filed a Current Report on Form 8-K on July 6, 2001 announcing the expiration of the initial research term of our human gene therapeutic consortium. 51 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. HUMAN GENOME SCIENCES, INC. BY: /S/ William A. Haseltine, Ph.D. -------------------------------- William A. Haseltine, Ph.D. Chairman and Chief Executive Officer Dated: April 1, 2002 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 the dates indicated:
Signature Title Date --------- ----- ---- /S/William A. Haseltine, Ph.D. Chairman of the Board and April 1, 2002 - ------------------------------ Chief Executive Officer William A. Haseltine, Ph.D. (principal executive officer) /S/Craig A. Rosen, Ph.D. Executive Vice President, April 1, 2002 - ------------------------ Research and Development and Craig A. Rosen, Ph.D. Director /S/Steven C. Mayer Senior Vice President and April 1, 2002 - ------------------ Chief Financial Officer Steven C. Mayer (principal financial and accounting officer) /S/ Richard J. Danzig Director April 1, 2002 - --------------------- Richard J. Danzig /S/ Jurgen Drews, M.D. Director April 1, 2002 - ---------------------- Jurgen Drews, M.D. /S/ Richard C. Holbrooke Director April 1, 2002 - ------------------------ Richard C. Holbrooke /S/ Robert Hormats Director April 1, 2002 - ------------------ Robert Hormats /S/ Max Link, Ph.D. Director April 1, 2002 - ------------------- Max Link, Ph.D.
52 /S/ Alan G. Spoon Director April 1, 2002 - ----------------- Alan G. Spoon /S/Laura D'Andrea Tyson, Ph.D. Director April 1, 2002 - ------------------------------ Laura D'Andrea Tyson, Ph.D. /S/ James Barnes Wyngaarden, M.D. Director April 1, 2002 - --------------------------------- James Barnes Wyngaarden, M.D.
53 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number ------ Report of Ernst & Young LLP, Independent Auditors ........................................................ F-2 Consolidated Balance Sheets at December 31, 2001 and 2000 ................................................ F-3 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 ............... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 ..... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 ............... F-6 Notes to Consolidated Financial Statements ............................................................... F-8
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Stockholders Human Genome Sciences, Inc. Rockville, Maryland We have audited the accompanying consolidated balance sheets of Human Genome Sciences, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 Human Genome Sciences, Inc. at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. As discussed in Note B of Notes to Consolidated Financial Statements, in 2000 the Company changed its method of accounting for revenue recognition in accordance with guidance provided in Securities and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". /s/ Ernst & Young LLP McLean, Virginia February 12, 2002 F-2 HUMAN GENOME SCIENCES, INC. CONSOLIDATED BALANCE SHEETS
December 31, ---------------------------------- 2001 2000 --------------- ---------------- ASSETS (dollars in thousands, except for share and per share amounts) Current assets: Cash and cash equivalents ..................................................... $ 88,319 $ 493,867 Short-term investments ........................................................ 1,456,091 1,268,441 Prepaid expenses and other current assets ..................................... 3,988 9,290 ----------- ----------- Total current assets ...................................................... 1,548,398 1,771,598 Long-term investments .............................................................. 43,824 93,337 Property, plant and equipment (net of accumulated depreciation and amortization) ... 101,282 38,567 Restricted investments ............................................................. 144,901 12,332 Other assets ....................................................................... 26,599 32,691 ----------- ----------- TOTAL ASSETS .............................................................. $ 1,865,004 $ 1,948,525 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt ............................................. $ 444 $ 729 Current portion of capital lease obligation ................................... 241 -- Accounts payable and accrued expenses ......................................... 32,915 18,317 Accrued payroll and related taxes ............................................. 5,600 3,820 Deferred revenues ............................................................. 2,568 11,818 ----------- ----------- Total current liabilities ................................................. 41,768 34,684 Long-term debt, net of current portion ............................................. 503,468 533,146 Capital lease obligation, net of current portion ................................... 502 -- Deferred revenues .................................................................. 12,839 15,407 Other liabilities .................................................................. 1,964 2,333 ----------- ----------- Total liabilities ......................................................... 560,541 585,570 ----------- ----------- Stockholders' Equity: Preferred stock - $0.01 par value; shares authorized - 20,000,000 at December 31, 2001 and 2000; no shares issued ......................................... -- -- Common stock - $0.01 par value; shares authorized - 400,000,000 and 250,000,000 at December 31, 2001 and 2000, respectively; shares issued 128,278,407 and 125,192,544 at December 31, 2001 and 2000, respectively ................................................................ 1,283 1,252 Additional paid-in capital .................................................... 1,753,235 1,698,384 Unearned portion of compensatory stock options ................................ (294) (192) Accumulated other comprehensive income (loss) ................................. 32,070 28,190 Retained deficit .............................................................. (481,831) (364,679) ----------- ----------- Total stockholders' equity ................................................ 1,304,463 1,362,955 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................ $ 1,865,004 $ 1,948,525 =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part hereof. F-3 HUMAN GENOME SCIENCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, ------------------------------------------------------- 2001 2000 1999 ------------- ------------- ------------- (dollars in thousands, except for share and per share amounts) Revenue - research and development collaborative contracts: Third parties ......................................... $ 10,250 $ 19,500 $ 20,280 Related parties ....................................... 2,568 2,568 4,244 ------------- ------------- ------------- Total revenue .................................... 12,818 22,068 24,524 ------------- ------------- ------------- Costs and expenses: Research and development: Direct expenditures .............................. 146,276 91,456 60,607 Purchased in-process research and development .... -- 134,050 -- ------------- ------------- ------------- Total research and development ................... 146,276 225,506 60,607 General and administrative .............................. 38,714 27,083 14,838 ------------- ------------- ------------- Total costs and expenses ............................ 184,990 252,589 75,445 ------------- ------------- ------------- Income (loss) from operations ................................ (172,172) (230,521) (50,921) Interest income .............................................. 105,866 62,235 13,307 Interest expense ............................................. (24,638) (22,088) (4,330) Charge for impaired investment ............................... (22,314) -- -- Debt conversion expenses ..................................... (3,894) (50,818) -- Other income ................................................. -- 5,861 -- ------------- ------------- ------------- Income (loss) before taxes and cumulative effect of change in accounting principle ...................................... (117,152) (235,331) (41,944) Provision for income taxes ................................... -- 225 225 ------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle ................................................. (117,152) (235,556) (42,169) Cumulative effect of change in accounting principle .......... -- (8,250) -- ------------- ------------- ------------- Net income (loss) ............................................ $ (117,152) $ (243,806) $ (42,169) ============= ============= ============= Basic and diluted net income (loss) per share: Before cumulative effect of change in accounting principle ... $ (0.92) $ (2.12) $ (0.46) Cumulative effect of change in accounting principle .......... -- (0.08) -- ------------- ------------- ------------- Basic and diluted net income (loss) per share ................ $ (0.92) $ (2.20) $ (0.46) ============= ============= ============= Weighted average shares outstanding, basic and diluted ....... 126,990,788 110,929,292 92,051,988 ============= ============= ============= Pro forma amounts assuming the accounting change is applied retroactively: Net income (loss)........................................ $ (235,556) $ (42,169) ============= ============= Net income (loss) per share, basic and diluted........... $ (2.12) $ (0.46) ============= =============
The accompanying Notes to Consolidated Financial Statements are an integral part hereof. F-4 HUMAN GENOME SCIENCES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT FOR SHARES)
Unearned Portion of Accumulated Common Stock Additional Compensatory Other Retained ---------------------- Paid-In Stock Comprehensive Earnings Shares Amount Capital Options Income (Loss) (Deficit) Total ------------ ------- ------------ ------------ ------------- ------------ ---------- Balance - December 31, 1998 90,988,752 $ 910 $ 284,853 $ (110) $ 1,899 $ (78,704) $ 208,848 Comprehensive income (loss): Net loss -- -- -- -- -- (42,169) (42,169) Unrealized loss on investments -- -- -- -- (11,880) -- (11,880) ------------ Comprehensive income (loss) (54,049) Exercises relating to employee stock option plan 2,291,604 23 14,073 -- -- -- 14,096 Warrants exercised 29,900 -- -- -- -- -- -- Compensatory stock options issued 4,000 -- 398 (398) -- -- -- Compensatory stock options earned -- -- -- 173 -- -- 173 ------------ ------- ------------ ------- ------------ ------------ ------------ Balance - December 31, 1999 93,314,256 933 299,324 (335) (9,981) (120,873) 169,068 Comprehensive income (loss): Net loss -- -- -- -- -- (243,806) (243,806) Unrealized gain on investments -- -- -- -- 38,171 -- 38,171 ------------ Comprehensive income (loss) (205,635) Issuance of common stock pursuant to the public offering (net of expenses) 12,650,000 127 912,531 -- -- -- 912,658 Issuance of common stock pursuant to conversion of convertible subordinated notes 15,158,568 151 328,197 -- -- -- 328,348 Issuance of common stock pursuant to acquisition of Principia Pharmaceutical Corporation 1,582,204 16 134,752 -- -- -- 134,768 Exercises relating to employee stock option plan 2,480,240 25 23,506 -- -- -- 23,531 Warrants exercised 7,276 -- 1 -- -- -- 1 Compensatory stock options issued -- -- 73 (73) -- -- -- Compensatory stock options earned -- -- -- 216 -- -- 216 ------------ ------- ------------ ------- ------------ ------------ ------------ Balance - December 31, 2000 125,192,544 1,252 1,698,384 (192) 28,190 (364,679) 1,362,955 Comprehensive income (loss): Net loss -- -- -- -- -- (117,152) (117,152) Unrealized gain on investments -- -- -- -- 3,880 -- 3,880 ------------ Comprehensive income (loss) (113,272) Issuance of common stock pursuant to conversion of convertible subordinated notes 782,167 8 32,153 -- -- -- 32,161 Exercises of 2,284,752 and 18,944 options relating to employee stock option and stock purchase plans, respectively 2,303,696 23 22,371 -- -- -- 22,394 Compensatory stock options issued -- -- 327 (327) -- -- -- Compensatory stock options earned -- -- -- 225 -- -- 225 ------------ ------- ------------ ------- ------------ ------------ ------------ Balance - December 31, 2001 128,278,407 $ 1,283 $ 1,753,235 $ (294) $ 32,070 $ (481,831) $ 1,304,463 ============ ======= ============ ======= ============ ============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part hereof. F-5 HUMAN GENOME SCIENCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, --------------------------------------- 2001 2000 1999 ----------- ----------- ----------- (dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ...................................................... $ (117,152) $ (243,806) $ (42,169) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Accrued interest on short-term and restricted investments .......... 1,016 (17,562) (795) Depreciation and amortization ...................................... 13,237 10,400 7,102 Charge for impaired investment ..................................... 22,314 -- -- Purchased in-process research and development ...................... -- 134,050 -- Inducement costs paid in the form of common stock .................. 3,875 19,433 -- Cumulative effect of change in accounting principle ................ -- 8,250 -- Gain on sale of long-term investment ............................... -- (5,861) -- Loss due to disposal and write-down of property, plant and equipment.................................................... 382 35 45 Compensation expense related to stock options ...................... 225 216 173 Changes in operating assets and liabilities: Prepaid expenses and other current assets ....................... 4,450 (4,146) 1,105 Other assets .................................................... 3,034 (14,638) (2,059) Accounts payable and accrued expenses ........................... 5,866 8,513 1,926 Accrued payroll and related taxes ............................... 1,780 1,356 (20) Deferred revenues ............................................... (11,818) (2,568) (4,265) Other liabilities ............................................... (369) 1,879 118 ----------- ----------- ----------- Net cash provided by (used in) operating activities ................ (73,160) (104,449) (38,839) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures - property, plant and equipment ................... (64,110) (18,539) (10,796) Purchase of short-term investments and marketable securities ........... (1,315,776) (1,196,064) (210,646) Proceeds from sale and maturities of short-term investments and marketable securities .......................................... 1,155,866 226,905 100,967 Purchase of long-term investments ...................................... -- (54,744) -- Proceeds from sale of long-term investment ............................. -- 15,368 -- Acquisition, net of acquired cash ...................................... -- 875 -- ----------- ----------- ----------- Net cash provided by (used in) investing activities ................ (224,020) (1,026,199) (120,475) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt, (net of expenses) ............ -- 508,701 315,250 Repayment of long-term debt ............................................ (1,368) (520) (444) Restricted investments ................................................. (129,394) (695) (4,888) Proceeds from issuance of common stock (net of expenses) ............... 22,394 936,190 14,096 ----------- ----------- ----------- Net cash provided by (used in) financing activities ................ (108,368) 1,443,676 324,014 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................... (405,548) 313,028 164,700 Cash and cash equivalents - beginning of year .............................. 493,867 180,839 16,139 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS - END OF YEAR .................................... $ 88,319 $ 493,867 $ 180,839 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest ........................................................... $ 22,795 $ 41,736 $ 3,780 Income taxes ....................................................... $ 75 $ 200 $ 250
F-6 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES (DOLLARS IN THOUSANDS): In December 2001, the Company entered into a capital lease for computer equipment with an aggregate value of $763, with thirty-six monthly payments of $23 of principal and interest. No lease payments were made in 2001. In June 2001, the Company converted $25,000 of 5% Convertible Subordinated Notes Due 2007 into common stock and incurred $3,875 in inducement costs paid in the form of common stock as an inducement to convert. In addition, the Company reclassified $673 of unamortized debt financing costs associated with these notes to stockholders' equity as part of the conversion. During 2001, the Company converted an aggregate of $3,595 of 5 1/2% Convertible Subordinated Notes Due 2006 into common stock and incurred $19 in inducement costs paid in the form of cash as an inducement to convert. In addition, the Company reclassified $78 of unamortized debt financing costs associated with these notes to stockholders' equity as part of the conversion. In January 2000, the Company converted $118,285 of 5 1/2% Convertible Subordinated Notes Due 2006 into common stock and incurred $19,433 in inducement costs paid in the form of common stock as an inducement to convert. In addition, the Company reclassified $3,470 of unamortized debt financing costs associated with these notes to stockholders' equity as part of the conversion. In March 2000, the Company converted $200,000 of 5% Convertible Subordinated Notes Due 2006 into common stock. In connection with this conversion, the Company made a $30,000 cash "make-whole" payment. In addition, the Company reclassified $6,000 of unamortized debt financing costs associated with these notes to stockholders' equity as part of the conversion. The accompanying Notes to Consolidated Financial Statements are an integral part hereof. F-7 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE A) - THE COMPANY Human Genome Sciences, Inc. (the "Company") was incorporated and commenced operations on June 26, 1992. The Company is a leader in the genomics and biopharmaceutical industry focused on therapeutic product development and functional analysis of genes using its proprietary technology platform. The Company discovers, develops and intends to commercialize novel compounds for treating and diagnosing human disease based on the identification and study of genes. The Company focuses its internal product development efforts on therapeutic proteins, antibodies, peptides and fusion proteins and uses collaborations for the development of gene therapy products and small molecule drugs. The Company has discovered a large number of genes through its genomics capabilities and has developed a rapidly evolving product pipeline based on its discoveries. The Company's revenues are currently derived from license fees and research payments under collaboration agreements. The Company does not yet generate any revenues from product sales. (NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements include the accounts of Human Genome Sciences, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Cash Equivalents and Short-Term Investments The Company considers all highly liquid investment instruments purchased with a maturity of three months or less to be cash equivalents. The Company classifies its short-term investments into the categories: "held-to-maturity" and "available-for-sale," each of which has different accounting treatment. Investments in securities that are classified as available-for-sale and have readily determinable fair values are measured at fair market value in the balance sheets, and unrealized holding gains and losses for these investments are reported as a separate component of stockholders' equity until realized. Debt securities classified as held-to-maturity securities are carried at amortized cost. See Note D, Investments, for additional information. Investment Risk The Company has invested its cash in obligations of the U.S. Government and in high-grade corporate debt securities and various money market instruments. The Company's investment policy limits investments to certain types of instruments issued by institutions with credit ratings of "A" or better, and places restrictions on maturities and concentration by type and issuer. Investments Investments in which the Company has the ability to exercise significant influence over the investee, but less than a controlling voting interest, are accounted for under the equity method of accounting. Under the equity method of accounting, the Company's share of the investee's earnings or losses are included in operations, to the extent the F-8 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Investments (continued) Company has an investment or receivable from the investee company recorded as an asset plus the amount of any continuing commitment to fund the investee. The Company's investment in Ciphergen Biosystems, Inc. ("Ciphergen") was accounted for under the cost method during the year ended December 31, 1999 and for the three months ended March 31, 2000 and June 30, 2000 because the Company owned a less than a 20% equity interest, did not have significant influence and the market value of the investees' common stock was not readily determinable (i.e., a privately held company). On September 29, 2000, Ciphergen successfully completed an initial public offering of its common stock. As of that date, the Company has accounted for its investment in Ciphergen as an available-for-sale security. Depreciation and Amortization Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets as follows: Laboratory equipment....................... 3 - 10 years Computers and EDP equipment................ 3 years Furniture and office equipment............. 3 - 5 years Leasehold improvements..................... lesser of the lease term or the useful life Impairment of Long-Lived Assets Periodically, management determines whether any property and equipment or any other assets have been impaired based on the criteria established in Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of ("SFAS No. 121"). Fair Value of Financial Instruments The carrying amounts for the Company's cash and cash equivalents, investments, other assets, accounts payable and accrued expenses and other accrued expenses reflected in the consolidated balance sheet at December 31, 2001 approximate their respective fair values. Stock-Based Compensation The Company accounts for its stock-based compensation in accordance with the provisions of APB No. 25, Accounting for Stock Issued to Employees ("APB No. 25") and has provided the pro forma disclosures of net loss and net loss per share in accordance with SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123") using the fair value method. Under APB No. 25, compensation expense is based on the difference, if any, on the date of the grant between the fair value of the Company's stock and the exercise price of the option and is recognized ratably over the vesting period of the option. The Company accounts for equity instruments issued to nonemployees in accordance with SFAS No. 123 and EITF 96-18, Accounting for Equity Instruments that are issued to other than employees for acquiring, or in conjunction with selling goods or services. See Note K, Stockholders' Equity, for further information. Revenue Recognition Collaborative research and development agreements provide for periodic license fees, research payments, additional payments and milestone payments. License fees, research payments, and additional payments are recognized ratably F-9 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenue Recognition (continued) over the term of the agreement or as milestones are achieved. Payments received in advance of work performed are recorded as deferred revenue. The Company previously recognized nonrefundable fees for certain arrangements entered into during 1996 as revenue when payments became due and when all significant contractual obligations of the Company relating to the fees had been fulfilled. Effective January 1, 2000, the Company changed its method of accounting for nonrefundable fees related to these certain arrangements to recognize such fees monthly over the term of the related research collaboration agreement. The Company believes the change in accounting principle is required based on interpretations provided in Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"). See Change in Accounting Principle within Note B for additional discussion. Research and Development Research and development costs are charged to expense as incurred. Financing Costs Related to Long-term Debt Costs associated with obtaining long-term debt are deferred and amortized over the term of the related debt. Patent Application Costs Patent application costs are charged to expense as incurred. Net Income (Loss) Per Share The Company follows the provisions of SFAS No. 128, Earnings Per Share, which requires the Company to present basic and fully diluted earnings per share. The Company's basic and fully diluted loss per share are calculated by dividing the net loss by the weighted average number of shares of common stock outstanding during all periods presented. Comprehensive Income (Loss) SFAS No. 130, Reporting Comprehensive Income, requires unrealized gains or losses on the Company's available-for-sale short-term securities, and on the Company's long-term investments in Transgene S.A., Cambridge Antibody Technology and Ciphergen Biosystems to be included in other comprehensive income. Comprehensive income (loss) included unrealized gains (losses) on the following:
Unrealized Gain (Loss) Year Ended December 31, ----------------------------------------------- 2001 2000 1999 ---- ---- ---- Available-for-sale short-term investments.. $ 27,904 $ 8,781 $ (2,361) Transgene ................................. (9,032) (5,313) (9,519) Cambridge Antibody Technology ............. (39,352) 32,854 -- Ciphergen Biosystems ...................... (1,129) 1,849 -- Available-for-sale restricted investments.. 3,175 -- -- -------- -------- -------- Subtotal .............................. (18,434) 38,171 (11,880) Impairment loss relating to investment in Transgene ............................. 22,314 -- -- -------- -------- -------- Total unrealized gain (loss) .......... $ 3,880 $ 38,171 $(11,880) ======== ======== ========
F-10 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Comprehensive Income (Loss) (continued) During the fourth quarter of 2001, the Company recorded an impairment charge relating to its investment in Transgene in the amount of $22,314 and reversed the previously-recorded unrealized loss relating to this investment. As a result, the Company had an adjusted cost of $3,365 as determined by the market value of Transgene's publicly-traded common stock as of December 31, 2001 and no unrealized loss as of this same date. See Note D, Investments, for additional discussion. Change in Accounting Principle During the fourth quarter of 2000, the Company implemented SAB 101. SAB 101 provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. SAB 101 requires revenues to be recognized ratably over the life of a contract period whereas previously, the Company generally recognized revenue as non-refundable cash payments were made assuming no significant obligations remained. It requires companies to report any changes in revenue recognition as a cumulative effect of a change in accounting principle at the time of implementation in accordance with APB No. 20, Accounting Changes. Historically, the Company has recognized non-refundable license fees, research payments, additional payments and milestone payments in connection with collaboration agreements when the revenue is earned in accordance with the applicable performance requirements and/or contractual terms. This revenue recognition policy was applicable to certain multi-year agreements the Company entered into with Schering-Plough, Sanofi-Synthelabo and Merck KGaA during 1996 (the "1996 Agreements"). The Company recognized revenue under these agreements when it had performed all significant obligations and the customer was obligated to pay. The Company generally considered any remaining performance obligation, such as maintaining access to its genomic databases, as insignificant. However, SAB 101 provides guidance that indicates revenue recognition over the collaboration term is generally the required treatment for all fees, regardless of the significance of remaining performance obligations. As a result of the implementation of SAB 101, the Company recorded a charge of $8,250, or $0.08 per share, as a cumulative effect of a change in accounting principle, retroactive to January 1, 2000. This amount represents that portion of revenue recognized in 1999 for which the contract periods of the 1996 Agreements extended into 2000. The implementation of SAB 101 had no effect on the Company's revenue for the year ended December 31, 2000. Had the change in accounting been adopted as of January 1, 1999, the Company's loss for the year ended December 31, 1999 would have increased by $8,250, or $0.09 per share. As a result of the implementation of SAB 101, the Company had additional deferred revenue as of December 31, 2000 in the amount of $8,250. The Company recorded this amount as revenue ratably over the first two quarters of 2001. Pro forma financial information presented in the Consolidated Statements of Operations was calculated assuming the accounting change was applied retroactively to the periods presented. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations ("SFAS No. 141") and No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"), effective for the fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with these pronouncements. Other intangible assets will continue to be amortized over their useful lives. The Company does not expect adoption of SFAS No. 141 or 142 to have a material effect on its financial condition, results of operations or liquidity. F-11 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Recent Accounting Pronouncements (continued) In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS No. 121 and APB No. 30, Reporting the Results of Operations. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company does not expect adoption of SFAS No. 144 to have a material effect on its financial condition, results of operations or liquidity. Sources of Supply The Company is currently able to obtain its chemicals and equipment from various sources, and therefore, has no dependence upon a single supplier. The Company is currently dependent upon one manufacturer, MDS Nordion of Ottawa, Canada, for the radiolabeling of LymphoRad(131), a product for which the Company has filed an Investigation New Drug application with the FDA. No assurance can be given that the Company will be able to continue to obtain commercial quantities of this product at costs that are not economically prohibitive. Reclassifications Certain balances have been reclassified to conform to 2001 presentation. (NOTE C) - ACQUISITION OF PRINCIPIA PHARMACEUTICAL CORPORATION On September 8, 2000, the Company acquired all of the outstanding shares of capital stock of Principia Pharmaceutical Corporation ("Principia") from its stockholders. The cost of the acquisition was $135,071, including fees and expenses. The purchase price was paid with 1,582,204 shares of the Company's Common Stock. The Company valued the shares of the Company's common stock at $82.23 per share, which the Company estimates as the fair market value of its common stock on the acquisition date. The consolidated financial statements include the results of operations of Principia since the date of acquisition. In addition, the Company issued 49,364 incentive stock options at a weighted-average exercise price of $0.91 to replace the Principia options that were outstanding as of the date of the acquisition. The options were valued at approximately $4,000 using the Black-Scholes option-pricing model. The acquisition has been accounted for as a purchase and, accordingly, the purchase price has been allocated to the assets and liabilities acquired at their estimated fair values as of the date of acquisition. Of the purchase price, $521 was allocated to Principia's net assets, and the remainder was allocated as follows: Purchased In-Process Research & Development................. $ 134,050 Assembled Workforce......................................... $ 500
The charge of $134,050 for Purchased In-Process Research & Development was recorded as an expense in the Company's results of operations for the year ended December 31, 2000. The Purchased In-Process Research & Development was analyzed through an independent third-party valuation using the expected cash flow approach to valuation. The Company's unaudited pro forma consolidated condensed statements of operations information for the year ended December 31, 2000 and 1999, assuming the acquisition of Principia was effected at the beginning of each period, and including the one-time write-off of the Purchased In-Process Research and Development, are summarized as follows: F-12 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE C) - ACQUISITION OF PRINCIPIA PHARMACEUTICAL CORPORATION (CONTINUED)
Year Ended December 31, --------------------------------------- 2000 1999 ------------------ ----------------- Revenue ....................................... $22,068 $24,524 Net loss ...................................... $(247,068) $(44,587) Weighted average shares outstanding, basic and diluted.......................... 112,378,738 93,634,192 Net income (loss) per share, basic and diluted ......................... $(2.20) $ (0.48)
This pro forma information does not purport to be indicative of the results which may have been obtained had the acquisition been consummated at the date assumed. During the first quarter of 2001, the Company announced its decision to relocate Principia's operations from Norristown, Pennsylvania to the Company's Rockville, Maryland location. As a result, the Company recorded a one-time charge of approximately $1,950 in unit closure costs in the first quarter of 2001. Because most of the Principia employees chose not to relocate, this one-time charge included a write-off of $427, representing the remaining book value of the Assembled Workforce. During 2001, the Company incurred approximately $341 in personnel relocation costs which were charged to the consolidated statement of operations. As of December 31, 2001, the unit closure reserve had a balance of approximately $1,250. (NOTE D) - INVESTMENTS Investments, including accrued interest, at December 31, 2001 and 2000 were as follows:
December 31, 2001 ----------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Available for Sale Cost Gains Losses Value ------------------ ---------- ---------- ---------- ---------- U.S. Treasury and agencies ............ $ 246,338 $ 6,629 $ (234) $ 252,733 Corporate debt securities ............. 1,175,080 28,967 (689) 1,203,358 ---------- ---------- ---------- ---------- Subtotal - Short-term investments.. 1,421,418 35,596 (923) 1,456,091 ---------- ---------- ---------- ---------- Investment in Transgene, S.A. ......... 3,365 -- -- 3,365 Investment in Cambridge Antibody Technology ........................ 45,237 -- (6,498) 38,739 Investment in Ciphergen Biosystems .... 1,000 720 -- 1,720 ---------- ---------- ---------- ---------- Subtotal - Long-term investments... 49,602 720 (6,498) 43,824 ---------- ---------- ---------- ---------- Cash and cash equivalents ............ 29,081 -- -- 29,081 U.S. Treasury and agencies ............ 20,692 827 (15) 21,504 Corporate debt securities ............. 91,953 2,418 (55) 94,316 ---------- ---------- ---------- ---------- Subtotal - Restricted investments.. 141,726 3,245 (70) 144,901 ---------- ---------- ---------- ---------- Total ............................. $1,612,746 $ 39,561 $ (7,491) $1,644,816 ========== ========== ========== ==========
F-13 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE D) - INVESTMENTS (CONTINUED)
December 31, 2000 -------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Available for Sale Cost Gains Losses Value ------------------ ---------- ---------- ---------- ---------- U.S. Treasury and agencies ............ $ 157,688 $ 1,200 $ (18) $ 158,870 Corporate debt securities ............. 1,103,984 7,775 (2,188) 1,109,571 ---------- ---------- ---------- ---------- Subtotal - Short-term investments.. 1,261,672 8,975 (2,206) 1,268,441 ---------- ---------- ---------- ---------- Investment in Transgene, S.A. ......... 25,679 -- (13,282) 12,397 Investment in Cambridge Antibody Technology ........................ 45,237 32,854 -- 78,091 Investment in Ciphergen Biosystems .... 1,000 1,849 -- 2,849 ---------- ---------- ---------- ---------- Subtotal - Long-term investments... 71,916 34,703 (13,282) 93,337 ---------- ---------- ---------- ---------- Restricted investments - cash and cash equivalents ................. 12,332 -- -- 12,332 ---------- ---------- ---------- ---------- Total ............................. $1,345,920 $ 43,678 $ (15,488) $1,374,110 ========== ========== ========== ==========
During the fourth quarter of 2001, the Company determined that its investment in Transgene, S.A. had incurred an other-than-temporary impairment, and accordingly, made an adjustment to the carrying value of this asset. As a result, the amortized cost for this investment has been reduced by $22,314 from $25,679 to $3,365, which was the fair market value of the investment as of December 31, 2001. The adjustment of $22,314 has been recorded as a charge in the consolidated statement of operations. During 2001, the Company entered into two seven-year lease agreements (the "October 2001 lease" and the "November 2001 lease") relating to research, manufacturing, and administrative space either acquired or under construction by two trusts established solely for that purpose. The total financed cost of the facilities covered under the October 2001 lease and the November 2001 lease is approximately $76,000 and $450,000, respectively. By the conclusion of the construction period, the Company will be required to restrict investments equal to the full amount of the financed project costs, approximately $526,000 as collateral for the duration of the leases, assuming the full amount of the leases is used for construction purposes. In addition, the Company's restricted investments as collateral for the existing process development and manufacturing facility are $12,787 as of December 31, 2001 and with accrued interest, increase to $15,000, bringing the total collateral requirements of the Company to $541,000. At December 31, 2001, the Company had pledged $144,901 in connection with these leases, which is classified as restricted investments on the consolidated balance sheet. The following table summarizes maturities of our investment securities at December 31, 2001:
Short-term Investments Restricted Investments ------------------------- ------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ---------- ---------- ---------- ---------- Less than one year ..... $ 175,499 $ 177,978 $ 51,667 $ 52,000 Due in one to two years. 521,822 536,085 46,825 48,644 Due in three to five years ............... 712,125 729,969 40,517 41,484 Due after five years ... 11,972 12,059 2,717 2,773 ---------- ---------- ---------- ---------- Total ............... $1,421,418 $1,456,091 $ 141,726 $ 144,901 ========== ========== ========== ==========
F-14 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE D) - INVESTMENTS (CONTINUED) The Company's short-term investments include mortgage-backed securities with an aggregate cost of $174,610 and an aggregate fair value of $177,679 at December 31, 2001. The Company's restricted investments include mortgage-backed securities with an aggregate cost of $13,464 and an aggregate fair value of $13,796 at December 31, 2001. These securities have no single maturity date and accordingly, have been allocated on a pro rata basis to each maturity range based on each maturity range's percentage of the total value. The Company's gross proceeds, realized gains and realized losses from its investments are as follows:
Year Ended December 31, ------------------------------------ 2001 2000 1999 ---- ---- ---- Gross proceeds.......... $ 709,975 $ 15,368 -- Realized gains.......... $ 6,622 $ 5,861 -- Realized losses......... $ (146) -- --
In 2001, the realized gains and losses relate to the Company's short-term investments and are included in interest income in the consolidated statement of operations. In 2000, the realized gain relates to the Company's sale of 290,000 ordinary shares of Cambridge Antibody Technology in November 2000 and is included in other income in the consolidated statement of operations. These ordinary shares were included in the Company's April 2000 purchase of 1,670,000 ordinary shares of CAT for the sterling equivalent of approximately $54,744, which gave the Company an equity stake of approximately six percent in CAT. In November 2000, the Company sold 290,000 ordinary shares for approximately $15,368, realizing a gain of approximately $5,861. As of December 31, 2001, the Company adjusted the investment of the remaining 1,380,000 ordinary shares to the current market value of $38,739 with an offsetting debit of $6,498 to accumulated other comprehensive income within the Company's stockholders' equity section of the balance sheet. Gross proceeds and realized gains and losses on all other sales of investments for 2000 and 1999 were immaterial. The cost of securities sold is based on the specific identification method. (NOTE E) - COLLABORATION AGREEMENTS Agreements with SmithKline Beecham Corporation (now GlaxoSmithKline Corporation) In May 1993, the Company entered into a collaboration agreement as amended ("SB Collaboration Agreement"), providing SmithKline Beecham Corporation ("SB"), now GlaxoSmithKline Corporation ("GSK"), a first right to develop and market products in human and animal healthcare ("SB Products"), based upon human genes identified by the Company. In return, GSK has paid $126,000 to the Company since 1993. Approximately $55,000 was allocated to the purchase price of 5,406,952 shares of common stock with the balance of $71,000 recognized from license fees, option rights and milestone payments. In addition, the Company is entitled to (1) royalties on the net sales of SB Products, (2) product development progress payments and (3) the option to co-promote up to 20% of any product developed by SB under the collaboration agreement. In June 1996, the SB Collaboration Agreements were substantially amended (the "SB Amendment") to allow the Company and SB together to enter into collaboration agreements with additional pharmaceutical companies ("Collaboration Partners") in certain pre-specified areas ("the SB Field"). The SB Amendment restricted the Company from entering into further collaborations in the SB Field during the initial research term, which expired in June 2001. The SB Amendment provides that GSK and the Company share equally in any license fee payments paid by the Collaboration Partners and that the Company will receive all royalties and research payments paid by the Collaboration Partners. F-15 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE E) - COLLABORATION AGREEMENTS (CONTINUED) Agreements with SmithKline Beecham Corporation (now GlaxoSmithKline Corporation) (continued) In 2001, the Company received a $1,000 payment from GSK in connection with a development milestone met by GSK during the year. Other Collaboration Agreements in the SB Field In June 1995, the Company entered into an Option and License Agreement with Takeda Chemical Industries, Ltd. ("Takeda") pursuant to which Takeda was granted an exclusive option to license rights under the Company's patents and technology in the field of human healthcare (other than gene therapy, antisense and diagnostics) to make and sell a limited number (equal to the number of collaboration partners other than SB and Takeda with which the Company enters into collaboration agreements in the SB Field) of products in Japan. In consideration of the grant of the option, Takeda paid the Company $5,000, which was recognized as revenue by the Company in 1995, and agreed to pay to the Company royalties based on the sale of Takeda products covered by the Option and License Agreement and certain milestone payments. In June 1996, the Company and SB entered into collaboration agreements ("Additional Collaboration Partner Agreements") with Schering Corporation and Schering-Plough Ltd. ("Schering-Plough"), Sanofi-Synthelabo S.A., and Merck KGaA ("Merck"), (collectively "Additional Collaboration Partners"). The Additional Collaboration Partner Agreements provide the Additional Collaboration Partners the rights and licenses to access the Company's human gene technology, as well as biological information developed by the Company and SB prior to, and in the case of the Company, after the effective date of such Agreement, to discover, develop and commercialize products based upon or derived from such Company technology in the SB Field (other than diagnostics and animal healthcare). The Additional Collaboration Partners are obligated to pay license fees, research payments, milestone payments and royalties in connection with the agreements. The initial research term expired in June 2001. The Company received aggregate license fees and research payments due under the Additional Collaboration Partner Agreements in the amount of $87,500, paid in equal installments over a five-year period, beginning in 1996. The Company has recognized revenue of $9,250, $17,500 and $17,500 in license fees and additional payments during 2001, 2000 and 1999, respectively, related to the Additional Collaboration Partner Agreements. In 2000, the Company implemented SAB 101. SAB 101 impacted the Company's revenues pertaining to these agreements for 2001 and 2000. See Note B, Summary of Significant Accounting Policies, for additional discussion. Post-Initial Research Term The initial research term under the collaboration agreements with GlaxoSmithKline and the other four collaboration partners expired on June 30, 2001. As of June 30, 2001, the Company's partners were pursuing approximately 430 research programs involving approximately 280 different genes for the creation of small molecule and antibody drugs. They also were developing approximately 30 therapeutic protein drugs. The Company cannot provide any assurance that any of these programs will be continued or result in any approved drugs. Collaborative Agreements Outside of the SB Field During 1996, the Company entered into several collaborative agreements with an initial aggregate research value of $33,000. These collaboration partners included Pioneer Hi-Bred International, Inc., Pharmacia & Upjohn Company, Schering-Plough Ltd. and F. Hoffman-La Roche, Ltd. The Company received no payments and did not recognize any revenues in 2001 pursuant to these agreements. For fiscal years 2000 and 1999, respectively, the Company received payments of $1,000 from these collaborators in each year and recognized revenue of $1,000 and $2,600 pursuant to these agreements. In addition, the Company received $1,000 in revenue in 2000 from MedImmune, Inc. pursuant to a 1995 license and royalty agreement. F-16 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE E) - COLLABORATION AGREEMENTS (CONTINUED) Collaborative Agreements Outside of the SB Field (continued) In March 1998, the Company entered into a gene therapy collaboration agreement with Transgene, S.A. ("Transgene"), of Strasbourg, France. Under this agreement, the Company received a 10% equity interest in Transgene valued at $25,679 based on Transgene's initial public offering ("IPO") share price in exchange for giving Transgene the right to develop and co-market gene therapy products from 10 genes selected by Transgene from the Company's database. The Company initially recorded its investment in Transgene at the IPO price with an offsetting entry to deferred revenue. The Company is recognizing the $25,679 of revenue from this transaction over the shorter of the ten-year term of the agreement or prorated upon the selection of genes by Transgene. The Company recognized $2,568 as revenue in fiscal years 2001, 2000 and 1999. In August 1999, the Company entered into a collaborative agreement with Cambridge Antibody Technology Ltd. ("CAT") of Melbourn, United Kingdom to jointly pursue the development of fully human monoclonal antibody therapeutics. Under the agreement, CAT will conduct research to identify fully human, monoclonal antibodies specific for the Company's proprietary proteins. CAT will receive milestone payments from the Company in connection with the development of any such antibodies as well as royalty payments on the Company's net sales of such licensed product following regulatory approval. During 2000 and 1999, the Company paid CAT a total of $62 and $313, respectively, towards the achievement of the first contractual milestone. In addition, during 2000, the Company paid $375 based on the achievement of the first milestone pursuant to this agreement. The agreement provides for additional payments to CAT for each product relating to the achievement of milestones corresponding to the regulatory approval process. In the event of the achievement of other milestones or successful product launch, the Company would be obligated to pay CAT additional compensation and royalties. Subject to early termination under certain circumstances, this agreement will expire on the later of the expiration date of certain CAT patents or ten years after the date of first commercial sale of a product licensed by the Company. In December 1999, the Company entered into a collaborative agreement, which was amended in 2001, with Abgenix, Inc. ("ABX"), of Fremont, California to exchange technology to identify novel human antibody drug candidates for development and commercialization. The Company has the right to use ABX's proprietary technology to generate fully human antibody drug candidates. In addition, ABX has a future option to develop and commercialize products derived from the Company's pool of novel human antibody drug candidates. Under this reciprocal agreement, depending upon which party's product moves through the regulatory approval process, the Company or ABX would be obligated to the other for milestone payments for each therapeutic product or each diagnostic product along with royalties in the event of a successful product launch. Subject to early termination under certain circumstances, this agreement will expire on the last of each party's royalty obligations. In February 2000, the Company entered into a second agreement with Cambridge Antibody Technology. The ten-year agreement provides the Company with rights to use CAT technology to develop and sell an unlimited number of fully human antibodies for therapeutic and diagnostic purposes. The Company also has rights to use CAT antibody technology for the use and sale of research tools, for which the Company will pay CAT a share of revenues received. The Company will also pay CAT clinical development milestones and royalties based on product sales. The Company and CAT also plan to combine resources to develop and sell therapeutic antibody products. CAT has the right to select up to twenty-four of the Company's proprietary antigens for laboratory development. The Company has the option to share clinical development costs and to share the profits equally with CAT on up to eighteen such products. CAT has rights to develop six such products on its own. The Company is entitled to clinical development milestones and royalty payments on the products developed by CAT. In December 2001, the Company exercised an option to enter into an exclusive development partnership with CAT relating to a fully human monoclonal antibody and paid $1,000 to CAT in accordance with the terms of this agreement. In March 2000, the Company paid $12,000 in licensing fees to CAT, which includes research support at CAT for ten years to help CAT develop the Company's human antibody products. The Company has capitalized this cost and is F-17 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE E) - COLLABORATION AGREEMENTS (CONTINUED) Collaborative Agreements Outside of the SB Field (continued) amortizing it on a straight-line basis of ten years. The unamortized amount of this research support was $9,800 and $11,000 as of December 31, 2001 and 2000, respectively. In March 2000, the Company entered into a multi-year agreement with Dyax Corporation ("Dyax"), which was amended in July 2001. The agreement, as amended, provides the Company with rights to use Dyax's technology for ten years to develop an unlimited number of therapeutic and diagnostic products which the Company may elect to market itself or to out-license. The amended agreement also modifies the existing collaborative terms and now requires the Company to make minimum quarterly payments of $250 to Dyax in exchange for research services to be provided to the Company through the first quarter of 2003. The Company will also pay Dyax clinical development milestones and royalties based on product sales. In 2000, the Company paid $6,000 to Dyax for the technology license, which the Company has capitalized and is amortizing on a straight-line basis over five years, which is the term of the collaboration agreement. The unamortized amount of this license fee was $3,900 and $5,100 as of December 31, 2001 and 2000, respectively. The Company paid $2,623 and $2,075 in support payments during 2001 and 2000, respectively. The Company's other ongoing technology collaborations as of December 31, 2001 are as follows:
Collaborator Area Year Initiated ------------ ---- -------------- Vical Incorporated Gene Therapy 2000 Praecis Pharmaceuticals Metabolic Disorders and Infectious 2000 Diseases Aventis-Behring, L.L.C. Plasma Proteins 2000 Dow Chemical Chelator technology 2000 Medarex, Inc. Human Antibody Therapeutics and 2001 Diagnostics MDS Nordion Clinical Manufacture of 2001 Radioiodinated Drug
During 2001, the Company paid an aggregate of $942 in research services to certain of the above collaborators. No payments for research services were paid to these collaborators in 2000 or 1999. While future license or royalty payments may occur in the future in connection with these collaborations, no license or royalty payments were made or received during 2001, 2000 or 1999. F-18 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE F) - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost and are summarized as follows:
December 31, ----------------------- 2001 2000 ---- ---- Laboratory equipment ................................ $ 38,593 $ 31,075 Computers and EDP equipment ......................... 14,293 10,502 Furniture, transportation and office equipment....... 3,224 921 Leasehold improvements .............................. 27,413 20,958 Construction in progress ............................ 56,671 7,294 -------- -------- 140,194 70,750 Less: accumulated depreciation and amortization ..... 38,912 32,183 -------- -------- $101,282 $ 38,567 ======== ========
The Company entered into a capital lease for computer equipment in 2001. The capital lease is included in the Computer and EDP equipment amount above, at a cost of $763 and accumulated amortization of $21 as of December 31, 2001. Amortization expense for this equipment is included in depreciation and amortization within the consolidated statements of cash flows. (NOTE G) - OTHER ASSETS Other assets are comprised of the following:
December 31, ---------------------- 2001 2000 ---- ---- Deferred financing costs, net of accumulated amortization of $4,175 and $2,081, as of December 31, 2001 and 2000, respectively... $11,404 $14,437 Prepaid research services ................... 10,300 11,000 License fee ................................. 3,900 5,100 Note receivable from Officer ................ 891 891 Assembled Workforce, Principia, net of accumulated amortization of $42 as of December 31, 2000 ........................ -- 458 All other assets ............................ 104 805 ------- ------- $26,599 $32,691 ======= =======
Deferred financing costs were incurred in connection with the Company's four convertible subordinated debt offerings during fiscal 2000 and 1999. During the first quarter of 2000, the Company completed the private placement of $225,000 of 5% Convertible Subordinated Notes due 2007 and $300,000 of 3 3/4% Convertible Subordinated Notes due 2007. Debt issuance costs for the total $525,000 of Notes amounted to approximately $16,305, representing primarily underwriting fees of approximately 3% of the gross amount of notes, and are being amortized on a straight-line basis which approximates an effective interest method over the life of the Notes. F-19 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE G) - OTHER ASSETS (CONTINUED) During 1999, in connection with the private placement of $125,000 of 5 1/2% Convertible Subordinated Notes due 2006 and $200,000 of 5% Convertible Subordinated Notes due 2006, the Company incurred financing costs of approximately $10,174, representing primarily underwriting fees of 3% of the gross amount of notes issued. These costs were being amortized on a straight-line basis over the life of the Notes. However, in January 2000, the Company completed a tender offer to substantially all of the holders of the 5 1/2% Convertible Subordinated Notes due 2006, which resulted in a reclassification of $3,470 of unamortized deferred financing costs associated with these Notes to stockholders' equity. In March 2000, the Company announced and completed the call of its $200,000 5% Convertible Subordinated Notes due 2006. As a result, the Company reclassified $6,000 of remaining unamortized debt financing costs to stockholders' equity as part of the conversion. During 2001, the Company converted an aggregate of $28,595 of convertible subordinated notes to common stock. In addition, the Company reclassified $751 of unamortized debt financing costs associated with these notes to stockholders' equity as part of the conversion. See Note I, Long-Term Debt, for additional discussion. See Note E, Collaboration Agreements, for discussion of prepaid research services and license fees relating to Cambridge Antibody Technology and Dyax Corporation, respectively. Prepaid research services also includes $500 paid to MDS Nordion that will be amortized over an eighteen-month period beginning in 2002 in connection with future services to be provided to the Company. The Company holds a note receivable from an officer of $891 that is due on demand and does not bear interest. The note is collateralized by shares of the Company's common stock owned by the officer that have a market value of at least 200% of the outstanding balance of the note. See Note C, Acquisition of Principia Pharmaceutical Corporation, for discussion of Principia Assembled Workforce and the write-off of this asset in 2001. (NOTE H) - ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses are comprised of the following:
December 31, ---------------------- 2001 2000 --------- -------- Accrued interest ............... $ 7,531 $ 8,151 Fixed asset purchases........... 11,747 2,733 Professional fees .............. 7,546 4,142 Other accrued expenses.......... 6,091 3,291 ------- ------- $32,915 $18,317 ======= =======
F-20 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE I) - LONG-TERM DEBT The components of long-term debt are as follows:
December 31, December 31, ----------------------- Debt 2001 Interest Rates Maturities 2001 2000 ---- ------------------- ---------- ---- ---- MIDFA 1.84% December 2003 $ 892 $ 1,336 5.5% Convertible Subordinated Notes 5.50% June 2006 3,120 6,715 5.0% Convertible Subordinated Notes 5.00% February 2007 199,900 224,900 3.75% Convertible Subordinated Notes 3.75% March 2007 300,000 300,000 GE Capital Corporation 12.60% Repaid June 2001 -- 924 -------- -------- 503,912 533,875 Less current portion 444 729 -------- -------- $503,468 $533,146 ======== ========
Annual maturities of all long term debt are as follows: 2002 $ 444 2003 448 2004 -- 2005 -- 2006 3,120 2007 and thereafter 499,900 -------- $503,912 ======== In December 1994, the Company entered into a loan agreement with Maryland Industrial Development Financing Authority ("MIDFA"). Major leasehold improvements were financed with the proceeds of a $4,000 taxable variable rate bond issue (the "Bonds") from MIDFA. The Company is required to make annual payments of $444 commencing December 1995 plus interest at a variable rate of interest (1.84% at December 31, 2001 and 6.57% at December 31, 2000), to the trustee on behalf of the bondholders which is equal to the interest and principal requirements on the bonds. The variable rate is equal to 50 basis points plus the higher of the yield equivalent of the average 30-day or 90-day commercial paper rate. Under certain circumstances, the rate may be adjusted either upward or downward but in no event in excess of 10 basis points above or below the rate determined above. MIDFA has entered into an indenture with the Trustee whereby the Trustee has obtained an irrevocable letter of credit on behalf of the bondholders. Required monthly principal payments of $37 plus interest are deposited into a bond fund. The interest is disbursed monthly to the bondholders. Principal is repaid to the bondholders at the rate of $444 annually with a final payment of $448 on December 1, 2003. The Company deposited $502, $559 and $561 of principal and interest into the bond fund during the years ended December 31, 2001, 2000 and 1999, respectively. In connection with the loan agreement, the Company entered into an irrevocable Letter of Credit Agreement with a bank for the account of the Company and in favor of the trustee in the initial amount of $4,067, which expires on December 15, 2003. Concurrently, the Company entered into a Collateral Pledge Agreement with the bank. The Company is required to maintain 43% of the outstanding principal amount of the Bonds (50% is required under certain circumstances) with the bank as Collateral for the Letter of Credit. Pursuant to the Collateral Pledge Agreement at December 31, 2001 and 2000, the Company had $1,164 and $1,123, respectively, on deposit with the bank, which is included in Restricted Investments in the consolidated balance sheets. The pledge collateral will be released upon the payment and performance in full of the Company's Letter of Credit obligations. The agreement F-21 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE I) - LONG-TERM DEBT (CONTINUED) contains covenants with respect to tangible net worth, cash and cash equivalents and investment securities, as well as other covenants, and prohibits the payment of cash dividends. During the second quarter of 1999, the Company completed the private placement of $125,000 of 5 1/2% Convertible Subordinated Notes due June 2006 convertible into common stock at $13.05 per share. In January 2000, the Company concluded an offer to the holders of its $125,000 aggregate principal amount of 5 1/2% Notes to convert their notes into common stock. As an inducement to convert, the Company offered its 5 1/2% Note holders an additional one hundred and eighty dollars per thousand dollars of principal amount of the 5 1/2% Notes, payable in the Company's common stock. This inducement was in addition to the 76.6284 shares issuable for each thousand dollars of principal amount of 5 1/2% Notes convertible at $13.05 per share. As a result of the conversions, the Company converted $118,285 of 5 1/2% Notes to common stock and issued a total of 9,572,208 shares of common stock, including a total of 508,244 shares of common stock issued as an inducement to convert. In the first quarter of fiscal 2000, the Company recorded a one-time charge of $20,818, including $19,433 in inducement costs associated with this conversion. In addition, the Company reclassified $3,470 of unamortized debt financing costs to stockholders' equity as part of the conversion. During 2001, holders of $3,595 of these 5 1/2% Notes voluntarily converted their Notes into 275,477 shares of common stock. In addition, the Company reclassified $78 of unamortized debt financing costs to stockholders' equity as part of the conversions. Total remaining debt issuance costs were approximately $111 and $213, of which $40 and $46 had been amortized as of December 31, 2001 and 2000, respectively. During the fourth quarter of 1999, the Company completed the private placement $200,000 of 5% Convertible Subordinated Notes due December 2006, convertible into common stock at $35.8125 per share. In March 2000, the Company announced and completed the call of its $200,000 aggregate principal amount of 5% Convertible Subordinated Notes due 2006. All of the holders of the notes converted their notes into common stock at a price of $35.8125 per share, which is equivalent to 27.9232 shares of common stock per one thousand dollars of principal amount of notes. As a result of the conversion, the Company issued 5,584,584 shares of common stock to the holders of these Notes. In addition, the Company made a "make-whole" payment of one hundred and fifty dollars per one thousand dollars of principal amount of notes, which resulted in a one-time charge to earnings of $30,000. In addition, the Company reclassified $6,000 of unamortized debt financing costs to stockholders' equity as part of the conversion. During the first quarter of 2000, the Company completed the private placement of $225,000 of 5% Convertible Subordinated Notes due 2007 ("5% Notes") and $300,000 of 3 3/4% Convertible Subordinated Notes due 2007 ("3 3/4% Notes"). The 5% Notes and the 3 3/4% Notes are convertible into common stock at $56.25 and $109.50 per share, respectively. Debt issuance costs for the total $525,000 of Notes amounted to approximately $16,305, including accrued expenses, of which $2,035 had been amortized as of December 31, 2000. During 2000, holders of $100 of these 5% Notes voluntarily converted their Notes into 1,776 shares of common stock. During 2001, holders of $25,000 of these 5% Notes voluntarily converted their Notes into 506,690 shares of common stock. In addition, the Company reclassified $673 of unamortized debt financing costs to stockholders' equity as part of the conversions. Total remaining debt issuance costs were approximately $15,468 and $16,299, of which $4,135 and $2,035 had been amortized as of December 31, 2001 and 2000, respectively In connection with the Company's acquisition of Principia Pharmaceutical Corporation ("Principia") in the third quarter of 2000, the Company acquired equipment debt to GE Capital Corporation. As of the date of Principia's acquisition, the unpaid debt was approximately $1,000. Because this debt carried an interest rate of 12.6%, the Company repaid the remaining amount of this debt during 2001. F-22 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE J) - COMMITMENTS AND OTHER MATTERS Leases The Company leases office and laboratory premises and equipment pursuant to operating leases expiring at various dates through 2021. The leases contain various renewal options. Minimum annual rentals are as follows: Operating Capital Year Ending December 31, Leases Lease ---------------------------------- --------------- --------- 2002 $ 16,057 $ 241 2003 15,730 255 2004 21,635 247 2005 21,297 - 2006 20,395 - 2007 and thereafter 96,533 - ------ ----- $ 191,647 743 ======= Current portion under capital lease 241 ----- Long-term obligation under capital lease $ 502 ===== During 1997 and 1999, the Company entered into two long-term leases expiring January 1, 2019 for a process development and manufacturing facility aggregating 127,000 square feet and built to the Company's specifications. Annual base rent under the leases is $3,765. Pursuant to the terms of these leases, the Company had security deposits of $12,787 and $12,332 as of December 31, 2001 and 2000, respectively, on deposit with the financing bank which is included in Restricted Investments in the consolidated balance sheets. The security deposit will accrue interest up to a total security deposit of $15,000. Any amounts over $15,000 will be released to the Company. The security deposit will be released at the end of the lease term. The lease agreements contain covenants with respect to tangible net worth, cash and cash equivalents and investment securities, as well as other covenants. The leases require additional security deposit if the Company does not meet its covenants. The Company has an option, but not an obligation, to purchase these facilities during the lease term at various prices or at the end of the lease term for an aggregate price of approximately $19,400. During 2001, the Company entered into two seven-year lease agreements (the "October 2001 lease" and the "November 2001 lease") relating to research, manufacturing, and administrative space the Company either acquired or has under construction by two trusts established solely for that purpose. The total financed cost of the facilities anticipated to be covered under the October 2001 lease and the November 2001 lease is approximately $76,000 and $450,000, respectively. Rent obligations for the October 2001 lease began in 2001, while rent obligations for the November 2001 lease do not begin until the end of the construction period, which is currently anticipated as 2004. The Company's rent obligations will approximate the lessor's debt service costs. With respect to the Company's rent for October 2001 lease, as of December 31, 2001, the trust had fixed the interest rate on $56,000 at approximately 4.5%. The remaining $20,000 is floating based primarily on the seven-day LIBOR rate, which was approximately 1.98%, as of December 31, 2001. The Company's operating lease commitments include minimum annual rentals for these leases and have been computed using either the locked-in interest rate or the applicable floating interest rate as of December 31, 2001. Over the life of these leases, an aggregate rent obligation of approximately $65,816 has been included in the Company's total operating lease commitment. F-23 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE J) - COMMITMENTS AND OTHER MATTERS (CONTINUED) Leases (continued) With respect to the November 2001 lease, the Company has retained ownership of the land for the main campus component of this project. The Company has entered into a ground lease with the trust for the land at fair market value rates. Thereafter, rent will be reduced to a nominal amount. The Company will record these lease payments on its balance sheet as deferred rental income over the two-year construction period and then amortize this deferral over the remaining term (approximately five years). Under these lease agreements, which the Company has accounted for as operating leases, the Company has the option to purchase the properties, during or at the end of the lease terms, at an aggregate amount of approximately $526,000. Alternatively, the Company can cause the properties to be sold to third parties. The Company is contingently liable for the residual value guarantee associated with each property up to an aggregate amount of $459,430, assuming the full amount of the leases is used for construction activities. With respect to the October 2001 lease, the Company has a residual value guarantee of 85% of the total financed cost at lease termination. In the event of the Company's default, the Company is responsible for 100% of the total financed cost of the project. Although the trust is responsible for servicing and repaying the debt and equity financings to various parties, the Company has made the residual value guarantee to the trust. In the event the trust defaults to the lender or in the event the trust is terminated, the Company has the right to cure the default or exercise its option to acquire the property. At any time during the lease term, the Company has the option to purchase legal and/or beneficial interest in the project for 100% of the lease balance plus any unpaid indemnity amounts. With respect to the November 2001 lease, the Company has a residual value guarantee of 87.74% of the total financed cost at lease termination. In the event of default, the Company is responsible for 100% of the total financed cost of the project. During the construction period, the Company has a residual value guarantee of 89.9% of the financed cost incurred. Although the trust is responsible for servicing and repaying the debt and equity financings to various parties, the Company has made the residual value guarantee to the trust. In the event the trust defaults to the lender or in the event the trust is terminated, the Company has the right to cure the default or exercise its option to acquire the property. At any time during the lease term, the Company has the option to purchase legal and/or beneficial interest in the project for 100% of the lease balance plus any unpaid indemnity amounts. In connection with the October 2001 lease, the Company must maintain minimum levels of unrestricted cash, cash equivalents and marketable securities. In connection with the November 2001 lease, the Company must maintain minimum levels of unrestricted cash, cash equivalents and marketable securities and certain debt ratios. The Company has entered into leases for office and laboratory space which provide for certain rent abatement and rent escalations on each anniversary of the lease commencement date. For financial reporting purposes, rent expense is charged to operations on a straight-line basis over the term of the lease, resulting in a liability for deferred rent of $2,439 and $2,705 at December 31, 2001 and 2000, respectively. Certain other leases provide for escalation for increases in real estate taxes and certain operating expenses, as well as various renewal terms. Rent expense aggregated $14,713, $8,352 and $7,210 for the years ended December 31, 2001, 2000 and 1999, respectively. Capital Expenditures At December 31, 2001 and 2000, the Company had commitments for capital expenditures, consisting primarily of laboratory space and equipment, of approximately $16,300 and $3,637, respectively. F-24 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE J) - COMMITMENTS AND OTHER MATTERS (CONTINUED) 401(k) Plan The Company has adopted a 401(k) pension plan available to eligible full-time employees. The Company made contributions of $857, $600 and $446 to the plan for the years ended December 31, 2001, 2000 and 1999, respectively. (NOTE K) - STOCKHOLDERS' EQUITY Common Stock and Preferred Stock On May 23, 2001, the Company's stockholders approved an amendment to the Company's Restated Certificate of Incorporation (Fifth) which increased the Company's authorized common stock to 400,000,000 from 250,000,000 shares. In addition, the Company's stockholders approved an amendment to the 2000 Stock Incentive Plan which established a limit on the number of shares of common stock that may be issued with respect to awards granted each year. For 2001, 2002 and 2003, this limit will be equal to five percent of the outstanding common stock as of the end of the preceding fiscal year. Shares that are available for a given year but not subject to awards granted in that year will be carried forward ("Carryover Shares") to the following year. After 2003, only the carried forward shares and the shares that are returned to the pool of available shares due to award forfeitures, will be available for issuance. Following stockholder approval on May 23, 2001, five percent of the outstanding common stock as of December 31, 2000, or 6,259,627 shares, were reserved for issuance under the 2000 Plan. On January 5, 2000, the Company's Board of Directors approved a two-for-one stock split to be effected in the form of a stock dividend payable to stockholders of record as of January 14, 2000. On January 28, 2000, the Company effected the two-for-one stock split. On September 12, 2000, the Company's Board of Directors approved a two-for-one stock split to be effected in the form of a stock dividend payable to stockholders of record as of September 28, 2000. On October 5, 2000, the Company effected the two-for-one stock split. On November 1, 2000, the Company completed a public offering of its common stock by issuing 12,650,000 shares at an aggregate value of $948,750, or $75.00 per share. Stock issuance costs for the offering amounted to approximately $36,092. The Company received net proceeds of $912,658. All share, per share and common stock amounts presented in the financial statements and related footnotes for all periods presented have been restated to reflect the two two-for-one stock splits effected during 2000. Stock Option Plans The Company has stock option plans under which options to purchase shares of the Company's common stock may be granted to employees, consultants and directors at a price no less that the fair market value on the date of grant. At December 31, 2001, the total authorized number of shares under all plans was 40,372,299. The vesting period of the options is determined by the Board of Directors and is generally four years. All options expire after ten years from the date of grant. The Company issued 10,000, 2,600 and 48,000 options to non-employees during the years ended December 31, 2001, 2000 and 1999, respectively. The fair value of these options is being amortized to expense over the service period. F-25 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE K) - STOCKHOLDERS' EQUITY (CONTINUED) Common Stock and Preferred Stock (continued) Option transactions during 2001, 2000 and 1999 are summarized as follows:
Year Ended December 31, --------------------------------------------------------------------------- 2001 2000 1999 ----------------------- ------------------------ ------------------------ Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------- ----------- ----------- ----------- ----------- ---------- Outstanding at beginning of year 21,503,182 $31.49 17,234,972 $14.10 14,325,352 $ 8.46 Options granted 6,751,719 44.06 7,070,139 65.99 5,568,472 24.94 Options exercised (2,284,752) 9.50 (2,480,240) 9.49 (2,291,604) 6.15 Options canceled or expired (1,269,382) 56.81 (321,689) 27.42 (367,248) 7.95 ---------- -------- -------- Outstanding at end of year 24,700,767 35.63 21,503,182 31.49 17,234,972 14.10 ========== ========== ========== Options exercisable at end of year 9,223,400 24.67 6,583,926 12.96 5,379,516 10.32 ========= ========= =========
The following table summarizes information about stock options outstanding at December 31, 2001:
Options Outstanding Options Exercisable ------------------------------------------- ------------------------ Weighted- Average Remaining Weighted- Weighted- Contractual Average Average Number Life (In Exercise Number Exercise Range of Exercise Price Outstanding Years) Price Exercisable Price - ----------------------- ----------- --------------- ---------- ----------- ---------- $ 0.05 to $ 5.50 195,155 2.6 $ 3.81 195,155 $ 3.81 $ 5.51 to $ 8.63 5,759,910 6.1 7.40 3,949,614 7.33 $ 8.64 to $ 17.50 709,135 7.1 10.20 330,768 10.09 $17.51 to $ 32.74 5,563,028 6.8 26.32 2,901,952 25.71 $32.75 to $ 41.25 4,336,072 9.7 38.46 134,679 37.50 $41.26 to $ 64.48 2,189,567 9.3 49.70 195,891 49.70 $64.49 to $ 75.00 4,941,521 8.9 66.19 1,152,576 66.15 $75.01 to $110.00 1,006,379 8.0 79.80 362,765 79.49 --------- --------- 24,700,767 7.8 35.63 9,223,400 24.67 ========== =========
Employee Stock Purchase Plan During 2000, the Company's stockholders approved the establishment of an Employee Stock Purchase Plan that qualifies under Section 423 of the Internal Revenue Code and permits substantially all employees to purchase shares of common stock. Participating employees may purchase common stock through payroll deductions at the end of each participation period at a purchase price equal to 85% of the lower of the fair market value of the common stock at the beginning or the end of the participation period. Common stock reserved for future employee purchases under the plan aggregated 481,056 and 500,000 shares as of December 31, 2001 and 2000, respectively. Common stock F-26 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE K) - STOCKHOLDERS' EQUITY (CONTINUED) Stock Option Plans (continued) issued under this plan totaled 18,944 in 2001. Under the plan, eligible employees may purchase shares of common stock on certain dates and at certain prices as set forth in the plan. The Company applies APB No. 25 in accounting for its stock option plans and, accordingly, recognizes compensation expense for the difference between the fair value of the underlying common stock and the grant price of the option at the date of grant. Had compensation cost for the Company's stock option plans been determined based upon the fair value at the grant date for awards under the plans consistent with the methodology prescribed under SFAS No. 123, the Company's net loss in 2001, 2000 and 1999 would have been approximately $242,615, $300,569 and $78,202, respectively, or $1.91, $2.71 and $0.85 per share, respectively. The weighted-average fair value of the stock options granted during 2001, 2000 and 1999 is estimated as $31.26, $57.08 and $15.65 per share, respectively. The weighted-average fair value of the employee stock purchase plan rights granted during 2001 is estimated as $23.71 per share. These weighted average fair values were determined based on the Black-Scholes option-pricing model with the following assumptions:
Year Ended December 31, 2001 2000 1999 ---- ---- ---- Expected life: Stock options 6.0 years 6.0 years 6.0 years Employee stock purchase plan 1.0 year - - Interest rate 4.49% 5.21% 6.71% Volatility 79% 111% 62% Dividend yield 0% 0% 0%
The effect of applying SFAS No. 123 on 2001, 2000 and 1999 pro forma net loss and net loss per share as stated above is not necessarily representative of the effects on reported net loss for future years due to, among other things, (1) the vesting period of the stock options and the (2) fair value of additional stock options in future years. Options available for future grant were 4,691,650 at December 31, 2001. (NOTE L) - PREFERRED SHARE PURCHASE RIGHTS On May 20, 1998, the Company adopted a Shareholder Rights Plan which provided for the issuance of rights to purchase shares of Junior Participating Preferred Stock, par value $0.01 per share (the "Preferred Shares"), of the Company. Under the Shareholder Rights Plan, the Company distributed one preferred share purchase right (a "Right") for each outstanding share of common stock, par value $0.01 (the "Common Shares"), of the Company. The Rights were distributed on June 26, 1998 to stockholders of record on May 27, 1998. Each Right entitles the holder to purchase from the Company one four-thousandth of a Preferred Share at a price of $250 per one four-thousandth of a Preferred Share, subject to adjustment. The rights become exercisable ten business days after any party acquires or announces an offer to acquire beneficial ownership of 15% or more of the Company's Common Shares. In the event that any party acquires 15% or more of the Company's Common Stock, the Company enters into a merger or other business combination, or if a substantial amount of the Company's assets are sold after the time that the Rights become exercisable, the Rights provide that the holder will receive, upon exercise, shares of the common stock of the surviving or acquiring company, as applicable, having a market value of twice the exercise price of the Right. F-27 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE L) - PREFERRED SHARE PURCHASE RIGHTS (CONTINUED) The Rights expire May 20, 2008, and are redeemable by the Company at a price of $0.00025 per Right at any time prior to the time that any party acquires 15% or more of the Company's Common Shares. Until the earlier of the time that the Rights become exercisable, are redeemed or expire, the Company will issue one Right with each new Common Share issued. (NOTE M) - INCOME TAXES The Company provides for income taxes using the liability method. The difference between the tax provision and the amount that would be computed by applying the statutory Federal income tax rate to income before taxes is attributable to the following:
Year Ended December 31, ------------------------------------------ 2001 2000 1999 ---- ---- ---- Federal income tax provision at 34%......... $(39,832) $(82,818) $(14,261) Debt conversion expenses for which no tax benefit is available.................... 1,504 19,626 - Stock option deduction for which no book benefit is available...................... (32,794) (47,539) (2,900) Purchased in-process R&D for which no tax benefit is available.................... - 51,770 - Net operating loss adjustment............... - (6,347) 2,969 State taxes, net of federal tax benefit..... (5,412) (12,211) (2,001) Foreign taxes............................... - 149 1,344 Tax credits, principally for research and development............................... (6,552) (8,900) (3,274) Other....................................... 100 (1,141) 96 Increase in valuation allowance on deferred 82,986 87,636 18,252 tax asset............................... ------ ------ ------ $ - $ 225 $ 225 ========= ======== ========
Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities are as follows:
CURRENT LONG-TERM ASSET/(LIABILITY ASSET/(LIABILITY) ---------------- ----------------- December 31, 2001 Net operating loss carryforward......................... $ - $ 184,445 Research and development and other tax credit carryforwards........................................... - 24,968 Deferred revenue........................................ 991 3,967 Depreciation............................................ - 1,523 Reserves and accruals................................... 1,585 3,408 Loss on impaired investment............................. - 8,618 Other................................................... 196 1,132 --------- ---------- 2,772 228,061 Less valuation allowance................................ (2,772) (228,061) --------- ---------- $ - $ - ========= ==========
F-28 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE M) - INCOME TAXES (CONTINUED)
CURRENT LONG-TERM ASSET/(LIABILITY ASSET/(LIABILITY) ---------------- ---------------- December 31, 2000 Net operating loss carryforward......................... $ - $ 112,143 Research and development and other tax credit carryforwards......................................... - 18,417 Deferred revenue........................................ 4,901 5,950 Depreciation............................................ - 2,564 Reserves................................................ - 860 Other................................................... 960 2,061 ---------- ---------- 5,861 141,995 Less valuation allowance................................ (5,861) (141,995) ---------- ---------- $ - $ - ========== ==========
The Company recognized a valuation allowance to the full extent of its deferred tax assets since the likelihood of realization of the benefit cannot be determined. Not included in the above schedule of deferred tax assets and liabilities is a deferred tax liability associated with unrealized gains on investments of $12,385 and $10,887 at December 31, 2001 and 2000, respectively. This liability is currently shown as a component in the consolidated statements of stockholders' equity. Provision for income taxes is comprised of the following:
Year Ended December 31, ------------------------------------- 2001 2000 1999 ---- ---- ---- Current: Federal.................................... $ - $ - $ - State...................................... - - - Foreign taxes.............................. - 225 225 Deferred...................................... - - - ------- ------- ------- $ - $225 $225 ======= ==== ====
The Company has available tax credit carryforwards of approximately $25,000, which expire, if unused, from the year 2008 through the year 2021. The Company has net operating loss carryforwards for federal income tax purposes of approximately $477,600 which expire, if unused, from the year 2010 through the year 2021. The Company's ability to utilize these NOLs may be limited under Internal Revenue Code Section 382. The tax benefit of approximately $232,500 of net operating losses related to stock options will be credited to equity when the benefit is realized through utilization of the net operating loss carryforwards. (NOTE N) - INVESTMENT IN VASCULAR GENETICS, INC. In November 1997, the Company entered into an agreement with three other parties to form Vascular Genetics, Inc. ("VGI"), to pursue the development and commercialization of gene therapy products for the treatment of vascular diseases. As a result of the November 1997 agreement and other transactions since that time, as of December 31, 2001, the Company holds a significant minority equity interest in VGI of 27%. The Company also holds certain preemptive rights that will permit retention of the Company's ownership position under some circumstances in the event of a future financing by VGI. In addition, the Company has the option to purchase 100% of VGI's common stock at fair market value upon receiving the approval of two-thirds of the shareholders. The Company will earn F-29 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE N) - INVESTMENT IN VASCULAR GENETICS INC. (CONTINUED) royalties on net sales from products developed and commercialized by VGI or by a party granted a sublicense by VGI. Royalty rates are competitive and increase as specified sales targets are reached. In 1998, the Company loaned $600 to VGI of which the Company forgave $100 in 1998. The Company has appointed two directors to the Board of Directors of VGI. During 1999, the Company provided manufacturing services and product to VGI in connection with a manufacturing agreement. At December 31, 2000, the Company's receivable balance due from VGI was $1,532. Based upon VGI's uncertain financial condition, the Company decided to fully reserve the receivable balance from VGI as of December 31, 2000. During 2001, the Company provided no manufacturing or research services to VGI nor did the Company receive any payments from VGI. The Company has no carrying value for its investment in VGI at December 31, 2001. (NOTE O) - NET LOSS PER SHARE The following table sets forth the computation of basic and diluted net loss per share:
Year Ended December 31, ------------------------------------------------ 2001 2000 1999 ---- ---- ---- Numerator: Net loss before cumulative effect of change in accounting principle................. $ (117,152) $ (235,556) $ (42,169) Cumulative effect of change in accounting principle........................... - (8,250) - ---------- ----------- ----------- Net loss........................................ $ (117,152) $ (243,806) $ (42,169) =========== =========== =========== Denominator: Denominator for basic and diluted earnings per share - weighted-average shares.... 126,990,788 110,929,292 92,051,988 =========== =========== =========== Net loss per share, basic and diluted: Net loss per share before cumulative effect of change in accounting principle........ $ (0.92) $ (2.12) $ (0.46) Cumulative effect of change in accounting principle............................ - (0.08) - ---------- ----------- ----------- Net loss per share............................... $ (0.92) $ (2.20) $ (0.46) =========== =========== ===========
F-30 HUMAN GENOME SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) (NOTE P) - QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarterly financial information for fiscal 2001 and 2000 is presented in the following tables:
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ------- ------- ------- ------- 2001 Revenue........................................... $ 5,267 $ 5,267 $ 1,642 $ 642 Income (loss) from operations..................... (35,112) (40,896) (44,977) (51,187) Net income (loss) (1)............................. (13,007) (24,024) (24,879) (55,242) Net income (loss) per share, basic and diluted.... (0.10) (0.19) (0.19) (0.43) 2000 Revenue........................................... $ 5,267 $ 5,267 $ 6,267 $ 5,267 Income (loss) from operations..................... (20,263) (22,960) (157,528) (29,770) Net income (loss) before cumulative effect of change in accounting principle (2).............. (64,273) (16,368) (148,909) (6,006) Cumulative effect of change in accounting principle....................................... (8,250) - - ------ ------ ------ ------ Net income (loss) (2)............................. (72,523) (16,368) (148,909) (6,006) ======== ======== ========= ======= Basic and diluted net income per share before cumulative effect of change in accounting principle (2)................................... $ (0.62) $ (0.15) $ (1.35) $ (0.05) Cumulative effect of change in the accounting principle....................................... (0.08) - - - ------ ------ ------ ------ Net income (loss) per share, basic and diluted (2) $ (0.70) $ (0.15) $ (1.35) $ (0.05) ====== ====== ====== ======
(1) The Company's results for the fourth quarter of 2001 include a non-recurring charge of $22,314, or $0.17 per share, relating to an impairment charge recognized in connection with the Company's investment in Transgene, S.A. (2) The Company's results for the first and third quarters of 2000 include non-recurring charges relating to debt conversion expenses of $50,818, or $0.49 per share, and purchased in-process research and development of $134,050, or $1.21 per share, respectively. F-31 EX-10.16 3 w58882ex10-16.txt PARTICIPATION AGREEMENT EXECUTION COPY Exhibit 10.16 PARTICIPATION AGREEMENT dated as of November 7, 2001 among HUMAN GENOME SCIENCES, INC., as Lessee and Construction Agent, TRAVILLE LLC, as Ground Lessor, GENOME STATUTORY TRUST 2001A, as Ground Lessee and Lessor, WELLS FARGO BANK NORTHWEST, N.A., not in its individual capacity except as specifically set forth herein, but solely as Trustee, BANCBOSTON LEASING INVESTMENTS INC. and FIRST UNION NATIONAL BANK, as Investors, EAGLEFUNDING CAPITAL CORPORATION, as a Lender, FLEET SECURITIES, INC., as Administrator of EagleFunding Capital Corporation, FLEET NATIONAL BANK and FIRST UNION NATIONAL BANK, as Liquidity Providers, FLEET NATIONAL BANK, as Fleet National Bank Collateral Agent, FIRST UNION NATIONAL BANK, as First Union Collateral Agent and FLEET NATIONAL BANK, as Administrative Agent and Liquidity Agent PARTICIPATION AGREEMENT TABLE OF CONTENTS
PAGE ARTICLE I DEFINITIONS; INTERPRETATION................................................................3 ARTICLE II CLOSING; FUNDING OF ADVANCES...............................................................3 SECTION 2.1. Documentation Date and Initial Advance Date..................................3 SECTION 2.2. Advances.....................................................................3 SECTION 2.2.1. Lessor Commitment....................................................4 SECTION 2.2.2. Investors' Commitments...............................................4 SECTION 2.2.3. Conduit's Fundings...................................................5 SECTION 2.2.4. Liquidity Providers' Commitments to Make Facility Loans..............5 SECTION 2.2.5. Procedures for Advances..............................................5 SECTION 2.2.6. Use of Advances......................................................6 SECTION 2.2.7. Investor Amounts and Yield...........................................7 SECTION 2.2.8. Loans and Interest...................................................7 SECTION 2.2.9. Construction Period Accrued Interest, Construction Period Accrued Yield and Construction Period Fees...........................7 SECTION 2.2.10. Final Completion Advance.............................................8 SECTION 2.3. Computations and Notice of Rates.............................................8 SECTION 2.4. Overdue Payments.............................................................9 SECTION 2.5. Confirmation of Participants and the Other Parties..........................10 ARTICLE III INTENTIONS OF THE PARTIES.................................................................10 SECTION 3.1. Nature of Transaction.......................................................10 SECTION 3.2. Amounts Due Under Lease.....................................................10 ARTICLE IV CONDITIONS PRECEDENT......................................................................11 SECTION 4.1. Conditions to Documentation Date............................................11 SECTION 4.2. Conditions to Initial Advance Date..........................................16 SECTION 4.3. Conditions Precedent to the Manufacturing Facility Site Purchase Date and the Manufacturing Facility Site Purchase Advance........................16 SECTION 4.4. Conditions Precedent to each Advance........................................19 SECTION 4.5. Lease Commencement Upon Substantial Completion..............................20
-i- PARTICIPATION AGREEMENT TABLE OF CONTENTS (continued)
PAGE ARTICLE V REPRESENTATIONS AND WARRANTIES............................................................20 SECTION 5.1. Representations and Warranties of Lessee....................................20 SECTION 5.2. Representations and Warranties of Ground Lessor.............................26 SECTION 5.3. Representations and Warranties of Trustee, the Trust and the Trust Company.....................................................................27 SECTION 5.4. Representations of the Investors............................................29 SECTION 5.5. Representations of Liquidity Providers......................................29 SECTION 5.6. Representations of Agents...................................................30 ARTICLE VI COVENANTS AND AGREEMENTS..................................................................30 SECTION 6.1. Covenants of Lessee and Construction Agent..................................30 SECTION 6.2. Covenants of the Trust, Trustee and Trust Company...........................37 SECTION 6.3. Covenants of the Investors..................................................39 SECTION 6.4. No Proceedings..............................................................39 SECTION 6.5. Quiet Enjoyment.............................................................39 SECTION 6.6. Discharge of Lessor Liens...................................................40 SECTION 6.7. Confidentiality.............................................................40 SECTION 6.8. Performance of Operative Documents; Waiver of Set-off and Other Rights......41 SECTION 6.9. Easements...................................................................41 SECTION 6.10. Certain Notices.............................................................42 SECTION 6.11. Refinancing.................................................................42 SECTION 6.12. Lessor Hedging Agreements...................................................43 ARTICLE VII PAYMENT OF CERTAIN EXPENSES...............................................................44 SECTION 7.1. Payment of Transaction Costs and Other Costs................................44 SECTION 7.2. Brokers' Fees...............................................................44 SECTION 7.3. Limitations During Construction Period......................................44 ARTICLE VIII TRANSFERS OF PARTICIPANTS' INTERESTS......................................................44 SECTION 8.1.1. Transfers by Investors..............................................44 SECTION 8.1.2. Transfers by Conduit................................................45 SECTION 8.2. Transfers by Liquidity Providers............................................46
-ii- PARTICIPATION AGREEMENT TABLE OF CONTENTS (continued)
PAGE SECTION 8.3. Replacement of Conduit, an Investor or a Liquidity Provider.................46 SECTION 8.4. Transfers by HGSI...........................................................46 SECTION 8.5. Renewal of Lease Term Expiration Date and Maturity Dates....................46 ARTICLE IX INDEMNIFICATION...........................................................................48 SECTION 9.1. General Indemnification.....................................................48 SECTION 9.1.1. General Indemnification.............................................48 SECTION 9.1.2. Exceptions to Indemnifications......................................50 SECTION 9.1.3. Construction Period Indemnification.................................51 SECTION 9.2. General Tax Indemnity.......................................................52 SECTION 9.3. Withholding Tax.............................................................57 SECTION 9.4. Calculation of General Tax Indemnity Payments...............................58 SECTION 9.5. Environmental Indemnity.....................................................59 SECTION 9.6. Proceedings in Respect of Claims............................................60 SECTION 9.7. Additional Costs; Capital Adequacy..........................................62 SECTION 9.8. Illegality..................................................................62 SECTION 9.9. Compensation................................................................63 SECTION 9.10. Obligations of Lessee to Pay Certain Amounts................................63 SECTION 9.11. Indemnity Payments in Addition to Lease Obligations.........................64 SECTION 9.12. Right to Convert............................................................64 SECTION 9.13. Mitigation..................................................................64 SECTION 9.14. Liquid Collateral...........................................................64 ARTICLE X DISTRIBUTIONS OF PAYMENTS AND GROSS PROCEEDS..............................................64 SECTION 10.1. Agreement of Agents and Participants........................................64 SECTION 10.2. Base Rent...................................................................65 SECTION 10.3. Purchase Payments by Lessee.................................................65 SECTION 10.4. Recourse Amounts; Construction Period Maximum Guaranty Amount and Residual Value Guaranty Amount..............................................67 SECTION 10.5. Gross Sale Proceeds.........................................................70
-iii- PARTICIPATION AGREEMENT TABLE OF CONTENTS (continued)
PAGE SECTION 10.6. Supplemental Rent...........................................................74 SECTION 10.7. Excluded Amounts............................................................74 SECTION 10.8. Distribution of Payments After Construction Agency Event of Default or Lease Event of Default...................................................74 SECTION 10.9. Other Payments..............................................................80 SECTION 10.10. Order of Application........................................................81 SECTION 10.11. Remaining Funds.............................................................81 SECTION 10.12. Time of Payment.............................................................81 ARTICLE XI LESSEE DIRECTIONS; RECOURSE DURING CONSTRUCTION PERIOD....................................82 SECTION 11.1. Lessee Directions...........................................................82 SECTION 11.2. Recourse on Liability During Construction Period............................82 SECTION 11.3. Notice to Administrative Agent..............................................82 ARTICLE XII MISCELLANEOUS.............................................................................83 SECTION 12.1. Survival of Agreements......................................................83 SECTION 12.2. Brokers.....................................................................83 SECTION 12.3. Notices.....................................................................84 SECTION 12.4. Counterparts................................................................84 SECTION 12.5. Amendments, Waivers and Instructions........................................84 SECTION 12.6. Headings, etc...............................................................86 SECTION 12.7. Parties in Property.........................................................86 SECTION 12.8. Applicable Law..............................................................86 SECTION 12.9. Severability................................................................86 SECTION 12.10. Limitation of Liability.....................................................86 SECTION 12.11. Further Assurances..........................................................87 SECTION 12.12. Reproduction of Documents...................................................88 SECTION 12.13. Submission to Jurisdiction..................................................88 SECTION 12.14. Jury Trial..................................................................89 SECTION 12.15. Appointment of Administrative Agent.........................................89 SECTION 12.16. Resignation by Administrative Agent.........................................91
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PAGE SECTION 12.17. Appointment of the Fleet National Bank Collateral Agent.....................92 SECTION 12.18. Resignation by the Fleet National Bank Collateral Agent.....................94 SECTION 12.19. Appointment of the First Union Collateral Agent.............................95 SECTION 12.20. Resignation by the First Union Collateral Agent.............................97 SECTION 12.21. Binding Effect..............................................................98 SECTION 12.22. Non-Petition................................................................98 SECTION 12.23. Limitations on Recourse to Conduit..........................................98 SECTION 12.24. Limitations on Recourse to the Trust Company................................98 SECTION 12.25. Consent to Certain Actions..................................................99 SECTION 12.26. Notice to Administrative Agent..............................................99 SECTION 12.27. Estoppel Certificates.......................................................99 SECTION 12.28. Expenses During the Construction Period.....................................99 SECTION 12.29. Release and Exchange of Liquid Collateral..................................100 Exhibit A Form of Advance Request Exhibit B Form of Monthly Certification Exhibit C Form of Assignment and Acceptance Exhibit D Form of Lessee Rent Notice Exhibit E Form of Compliance Certificate Schedule I Material Construction Documents Schedule II Addresses for Payment and Other Communications Schedule III Filings and Recordings Schedule IV Appraisal Information Schedule V Account and Wiring Information Schedule VI Non-Capitalizable Transaction Costs Schedule VII Equipment List Schedule VIII Adjacent Site Description Schedule IX Synthetic Lease Obligations Schedule 5.1(a)(v) Legal Proceedings Appendix A Definitions and Interpretation
-v- PARTICIPATION AGREEMENT (HGSI) THIS PARTICIPATION AGREEMENT dated as of November 7, 2001 (as amended, supplemented or otherwise modified from time to time, this "Participation Agreement"), is entered into by and among HUMAN GENOME SCIENCES, INC., a Delaware corporation ("HGSI"), as Lessee and Construction Agent; TRAVILLE LLC, a Maryland limited liability company whose sole member is HGSI, as Ground Lessor; GENOME STATUTORY TRUST 2001A, a Connecticut statutory business trust (the "Trust"), as Ground Lessee and Lessor; WELLS FARGO BANK NORTHWEST, N.A., not in its individual capacity except as specifically set forth herein, but solely as Trustee; BANCBOSTON LEASING INVESTMENTS INC., a Delaware corporation ("Fleet Investor") and FIRST UNION NATIONAL BANK, a national banking association, ("First Union Investor"), as Investors; EAGLEFUNDING CAPITAL CORPORATION, a Delaware corporation ("Eagle"), as a Lender; FLEET SECURITIES, INC., a Delaware corporation, as Administrator of Eagle; FLEET NATIONAL BANK, a national banking association ("Fleet Liquidity Provider") and FIRST UNION NATIONAL BANK ("First Union Liquidity Provider"), as Liquidity Providers; FLEET NATIONAL BANK, as Fleet National Bank Collateral Agent; FIRST UNION NATIONAL BANK, as First Union Collateral Agent as provided herein; and FLEET NATIONAL BANK, as Administrative Agent and Liquidity Agent. W I T N E S S E T H: WHEREAS, Ground Lessor is the owner of the fee simple interest in the Traville Site; WHEREAS, the Investors have entered into the Trust Agreement with the Trust Company, pursuant to which the Trust Company will serve as Trustee of the Trust; WHEREAS, pursuant to the terms of the Ground Lease, Ground Lessor has leased to the Trust and the Trust, as Ground Lessee, has leased from Ground Lessor, the Traville Site; WHEREAS, pursuant to the terms of the Lease, Lessor has subleased to Lessee, and Lessee has subleased from Lessor, the Traville Site; WHEREAS, pursuant to the terms of the Lease, Lessor has leased to Lessee, and Lessee has leased from Lessor, the Manufacturing Facility Site; WHEREAS, Lessor wishes to finance the development of certain Improvements on the Land to be used by Lessee and certain Soft Costs in connection therewith; WHEREAS, using the proceeds of Investor Contributions from the Investors, Conduit Loans from Conduit and Facility Loans from the Liquidity Providers, Lessor is willing to make Advances to Construction Agent; WHEREAS, using Advances from Lessor, Construction Agent, will construct certain Improvements that will be the property of Lessor and will become part of the Properties subject to the terms of the Lease; WHEREAS, the Investors are willing to provide their respective Investor Contributions as the equity portion of the funding of Property Costs, each ratably in accordance with its PARTICIPATION AGREEMENT respective Percentage Share, but not to exceed in the aggregate their respective Commitment Amount; WHEREAS, Conduit is willing, in its sole discretion, to provide Conduit Loans consisting of proceeds from either (a) the issuance of Commercial Paper Notes or (b) the making of Borrowings from the Liquidity Providers pursuant to the Liquidity Agreement, in each case to finance Property Costs not to exceed in the aggregate its Commitment Amount; WHEREAS, if, for any reason, Conduit elects not to issue Commercial Paper Notes or request Borrowings and lend such proceeds, the Liquidity Providers are willing to make Facility Loans to finance a Property Costs not to exceed in each case a Liquidity Provider's respective Commitment Amount; WHEREAS, to secure such financing, (i) Lessor, pursuant to the Lease, the Lessee Deed of Trust, the Security Agreement and the Liquid Collateral Agreements will have the benefit of a lien from Lessee on all of Lessee's right, title and interest in and to both Properties and the Liquid Collateral, (ii) Administrative Agent (for the benefit of the Investors, the Agents, the Liquidity Providers and Conduit) pursuant to the Lessor Deed of Trust and the other Security Documents will have the benefit of a Lien from Lessor on all of Lessor's right, title and interest in and to the Properties and on all of Lessor's rights against Lessee under the Lease and the Lessee Deed of Trust, against Ground Lessor under the Ground Lease, against Construction Agent under the Construction Agency Agreement, which liens are more fully described in the Security Agreement, the Lessor Deed of Trust and the Lessee Deed of Trust, (iii) the Fleet National Bank Collateral Agent (for the benefit of Eagle, the Liquidity Providers and the Investors) will have the benefit of a Lien from Lessor on all of Lessor's right, title and interest in and to the Fleet National Bank Liquid Collateral which lien is more fully described in the Fleet National Bank Liquid Collateral Agreement, and (iv) the First Union Collateral Agent (for the benefit of the Conduit, the Liquidity Providers and the Investors) will have the benefit of a Lien from Lessor on all of Lessor's right, title and interest in and to the First Union Liquid Collateral which lien is more fully described in the First Union Liquid Collateral Agreement; WHEREAS, Eagle is entering into the Loan Agreement and the Liquidity Agreement with the Liquidity Providers, pursuant to which the Liquidity Providers may make Facility Loans from time to time. NOW, THEREFORE, in consideration of the mutual agreements contained in this Participation Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: 2 PARTICIPATION AGREEMENT ARTICLE I DEFINITIONS; INTERPRETATION Capitalized terms used and not defined herein shall have the meanings assigned thereto in Appendix A hereto for all purposes hereof; and the rules of interpretation set forth in Appendix A hereto shall apply to this Participation Agreement. ARTICLE II CLOSING; FUNDING OF ADVANCES SECTION 2.1. Documentation Date and Initial Advance Date (a) Documentation Date. The documentation date (the "Documentation Date") shall occur on the earliest date on which all of the conditions precedent set forth in Section 4.1 have been satisfied or waived by the applicable parties. (b) Initial Advance Date. The initial Advance Date (the "Initial Advance Date") shall occur on the earliest date on or before November 30, 2001 on which all the conditions precedent thereto set forth in Section 4.2 have been satisfied or waived by the applicable parties as set forth therein; provided, however, that if the Initial Advance Date does not occur on or prior to December 28, 2001, then this Participation Agreement shall automatically terminate (except as provided in Section 12.1), Lessee shall pay in full all Transaction Costs not theretofore paid by it, and each other Operative Document then executed shall terminate. (c) Proposed Initial Advance Date. The proposed Initial Advance Date is November 13, 2001. (d) Manufacturing Facility Site Purchase Date. The date on which Lessor shall make the Manufacturing Facility Site Purchase Advance for the purpose of purchasing the Manufacturing Facility Site (the "Manufacturing Facility Site Purchase Date") is expected to occur on the Documentation Date; provided, however, that if the Manufacturing Facility Site Purchase Date does not occur on or prior to December 21, 2001, then all agreements, covenants and obligations contained herein or in any other Operative Document with respect to the Manufacturing Facility Site shall automatically terminate (except as provided in Section 12.1 or with respect to any covenants, agreements or obligations of the Construction Agent in respect of funded Soft Costs relating to the Manufacturing Facility). (e) Closing. All documents and instruments required to be delivered on the Documentation Date and the Initial Advance Date pursuant to this Participation Agreement shall be delivered at such location in New York City as the parties may mutually agree. SECTION 2.2. Advances Subject to the terms and conditions hereof including Sections 2.2.1, 2.2.2, 2.2.3, 2.2.4 and 2.2.5 as applicable, and of the other Operative Documents, all Advances by the Participants shall be funded in accordance with this Section 2.2. 3 PARTICIPATION AGREEMENT (a) Expenditures. Each Participant shall make available (subject to the other limitations contained in any Operative Document on such Participant's obligation to make available any Investor Contribution or Loan, as the case may be) on a pro rata basis its respective share of each Advance payable on the related Advance Date (including Construction Period Accrued Interest to the extent allocable to such items). Such portion of the Advance shall be contributed or advanced, as applicable (i) by each Investor in an amount equal to the product of such Advance multiplied by the product of such Investor's Percentage Share times the Equity Percentage, and (ii) by Conduit in an amount equal to the product of such Advance multiplied by the Loan Percentage (or if Conduit elects not to fund, by the Liquidity Providers in an amount equal to the product of such Advance multiplied by the Loan Percentage). (b) Lack of Available Commitments. Notwithstanding any other provision hereof, (i) the failure of any of the conditions precedent set forth in Section 4.4 or (ii) the lack of any Available Commitments shall not relieve Lessee from its obligation to pay any accrued interest or Yield as Supplemental Rent under Section 3.2 of the Lease. SECTION 2.2.1. Lessor Commitment. Subject to Section 2.2.5 and Article IV, Lessor shall take the following actions at the written request of Lessee from time to time during the Commitment Period: (a) the making of Advances (out of (i) funds provided by the Investors to Lessor and (ii) funds provided by Conduit and the Liquidity Providers to Lessor pursuant to Sections 2.2.2 and 2.2.3) for the purpose of financing the purchase price of the Manufacturing Facility Site and Property Costs, only as approved by Construction Agent and previously incurred (and for which Advances have not previously been made); and (b) the subleasing of the Traville Site and the leasing of the Manufacturing Facility Site and the leasing of the Improvements by Lessor to Lessee under the Lease. Notwithstanding any other provision of this Section 2.2.1 through 2.2.5, (i) neither Lessor nor any Participant shall be obligated to fund (A) any Property Costs whenever a Construction Agency Event of Default has occurred and is continuing or there exists a Bankruptcy Default, (B) any Property Costs (other than Soft Costs up to an aggregate of $100,000.) with respect to any Manufacturing Facility Improvements prior to the Manufacturing Facility Site Purchase Date and the acceptance of an Approved Manufacturing Construction Budget, an Approved Manufacturing Construction Schedule and an Approved Manufacturing Plans and Specifications, or (c) any Property Costs (other than Soft Costs up to an aggregate of $100,000.) with respect to the Traville Facility prior to the acceptance of an Approved Traville Construction Budget, an Approved Traville Construction Schedule and an Approved Traville Plans and Specifications, and (ii) Lessor shall not be obligated to make any Advance, and no Investor and no Lender shall be required to make available any Investor Contribution or any Loan, respectively, if (A) the Commitment Period has terminated or (B) after giving effect thereto, the aggregate principal amounts of all Loans and Investor Amounts would exceed the Aggregate Commitments. SECTION 2.2.2. Investors' Commitments. At the request of Lessee from time to time during the Commitment Period with respect to any Advance Date, each Investor shall, in the form of equity contributions to Lessor, make available to Administrative Agent on behalf of 4 PARTICIPATION AGREEMENT Lessor on such Advance Date in immediately available funds an amount (each, an "Investor Contribution") equal to such Investor's Percentage Share of the Equity Percentage of the amount of the Advance being funded on such Advance Date (which shall include Advances in respect of Construction Period Accrued Interest and Construction Period Accrued Yield being funded on such Advance Date), subject, however, to Section 2.2. Investors shall fund Investor Contributions to Lessor by means of the Investors funding Investor Contributions directly to Administrative Agent. No Investor shall be obligated to make available any Investor Contribution to the extent that, after giving effect to the proposed Investor Contribution, the outstanding aggregate amount of all Investor Contributions attributable to such Investor would exceed such Investor's Commitment Amount. SECTION 2.2.3. Conduit's Fundings. At the request of Lessee from time to time during the Commitment Period with respect to any Advance Date, Conduit may, in its sole discretion, (a) elect to (i) issue, if necessary, Commercial Paper Notes, and/or (ii) make Borrowings from the Liquidity Providers under the Liquidity Agreement, and (b) with the proceeds thereof, make Conduit Loans on such Advance Date to Lessor (which shall be contributed directly to Administrative Agent on behalf of Lessor and the amount so funded shall be deemed a contribution to Lessor), in the case of clauses (a) and (b) in an amount equal to the Loan Percentage of the amount of the Advance being funded on such Advance Date. SECTION 2.2.4. Liquidity Providers' Commitments to Make Facility Loans. From time to time during the Commitment Period with respect to any Advance Date on which Conduit elects not to or otherwise does not make a Conduit Loan, the Liquidity Providers shall make Facility Loans by funding the same to Administrative Agent for the account of Lessor (which shall be funded directly to Administrative Agent on behalf of Lessor and the amount so funded shall be deemed a Facility Loan) on such Advance Date in immediately available funds in an amount equal to such Liquidity Provider's Pro Rata Portion of the Loan Percentage of the amount of the Advance being funded on such Advance Date. No Liquidity Provider shall be obligated to make any Facility Loan to the extent that, after giving effect to the proposed Facility Loan, the outstanding aggregate principal amount of all Loans held by such Liquidity Provider, plus the outstanding principal amount of all fundings under the Liquidity Agreement, would exceed such Liquidity Provider's Commitment Amount. SECTION 2.2.5. Procedures for Advances. (a) Advance Requests. With respect to each funding of an Advance, Lessee shall give Lessor, the Investors, the Administrator and the Agents prior written notice not later than 12:00 noon (New York City time), three Business Days prior to the proposed Advance Date, pursuant to an Advance Request substantially in the form of Exhibit A (an "Advance Request"), specifying the proposed Advance Date (except for the Initial Advance Date, which is set forth in Section 2.1(c)) and the amount of Advance requested. (b) Advance Dates; Minimum Amounts. Each Advance Date other than the Initial Advance Date and the Manufacturing Facility Site Purchase Date (which shall be a Business Day) shall be a Scheduled Payment Date, and there shall be no more than one Advance during any calendar month unless the Participants otherwise agree. Each Advance (excluding any Advance made solely to pay Construction Period Fees, Construction Period Accrued Interest or 5 PARTICIPATION AGREEMENT Construction Period Accrued Yield and the purchase price of the Manufacturing Facility) shall be in a minimum amount equal to $5,000,000; provided, that so long as an Advance is for the full amount of the Aggregate Available Commitments, is the final Advance or is for Noneligible Accrued Amounts, such Advance need not be in such amount. All remittances made by Investors and Lenders for the funding of any Advance shall be made in immediately available federal funds by wire transfer to Administrative Agent prior to 1:00 p.m. (New York City time) on the Advance Date specified in the relevant Advance Request. Promptly, but in no event later than 3:00 p.m. (New York City time) if all such funds are received on or before 2:00 p.m. (New York City time), upon Administrative Agent's receipt of all such funds from the Participants, subject to the conditions herein, Administrative Agent shall wire such funds in the amounts, and to Construction Agent (or its designee) or such other Persons, so designated in the Advance Request. (c) A Loans and B Loans. Each Conduit Loan and each Facility Loan made hereunder shall consist of an A Loan in an amount equal to 87.5% of such Conduit Loan or Facility Loan, and a B Loan in an amount equal to 12.5% of such Conduit Loan or Facility Loan. SECTION 2.2.6. Use of Advances (a) With respect to the Traville Facility, Advances shall only be used to fund the following items to the extent they (i) are available under the Approved Traville Construction Budget, (ii) are appropriately allocated to the Traville Facility on Schedule 1 to the Advance Request applicable to such Advance and (iii) were actually incurred prior to the applicable Advance Date: (A) Eligible Accrued Project Costs, (B) Noneligible Accrued Amounts, (C) Transaction Costs, (D) without duplication of the foregoing, fees and expenses payable pursuant to Section 9.10 and (E) during the Construction Period, any other costs that are to be expressly funded through Advances pursuant to any provision of the Operative Documents and are not otherwise provided for in this Section 2.2.6(a). Advances may be applied to any of the foregoing, regardless of whether such costs, fees or expenses were incurred prior to, as of or after the Documentation Date. (b) With respect to the Manufacturing Facility, (i) prior to the Manufacturing Facility Site Purchase Date, Advances shall only be used to fund Soft Costs up to an aggregate of $100,000., and (ii) upon the occurrence of the Manufacturing Facility Site Purchase Date, Advances shall only be used to fund the following items to the extent they (A) are available under the Approved Manufacturing Construction Budget, (B) are appropriately allocated to the Manufacturing Facility on Schedule 1 to the Advance Request applicable to such Advance and (C) with the exception of the Land Costs which shall be incurred on the date of the Manufacturing Facility Site Purchase Date, were actually incurred prior to the applicable Advance Date: (1) Eligible Accrued Project Costs, (2) Noneligible Accrued Amounts, (3) Transaction Costs, (4) without duplication of the foregoing, fees and expenses payable pursuant to Section 9.10 and (5) during the Construction Period, any other costs that are to be expressly funded through Advances pursuant to any provision of the Operative Documents and are not otherwise provided for in this Section 2.2.6(b). Advances may be applied to any of the foregoing, regardless of whether such costs, fees or expenses were incurred prior to, as of or after the Documentation Date. 6 PARTICIPATION AGREEMENT (c) On any date of determination, the aggregate General Cost Balance shall be allocated between the Traville Lease Balance and the Manufacturing Lease Balance in the same proportion as the aggregate of all amounts allocated to the Traville Lease Balance and the Manufacturing Lease Balance, respectively, in each case on all Advance Requests prior to such date of determination relate to the total aggregate amount allocated to both Properties. SECTION 2.2.7. Investor Amounts and Yield. (a) Investor Amounts outstanding from time to time shall accrue Yield at the Yield Rate, calculated in accordance with Section 2.3. If all or any portion of the Investor Amounts, any Yield payable thereon or any other amount payable hereunder shall not be paid when due (whether at stated maturity, acceleration thereof or otherwise), such overdue amount shall bear interest at a rate per annum which is equal to the Overdue Rate. (b) Subject to the provisions of the Operative Documents, Investor Amounts together with all accrued and unpaid Yield on the Investor Contributions shall be repaid on the Investor Maturity Date. (c) Pursuant to the Assignment of Lease given by Lessor, Lessor shall direct (and Lessor hereby directs) Lessee to pay to Administrative Agent for the account of the Investors the Investor Base Rent and all other amounts due with respect to the Investor Amounts payable by Lessee under the Lease (other than Excluded Amounts) from time to time, and Administrative Agent shall distribute such amounts to the Investors in accordance with Article X. (d) Construction Period Accrued Yield on each Investor's outstanding Investor Amounts shall be paid in accordance with Section 2.2.9. SECTION 2.2.8. Loans and Interest. (a) Each Conduit Loan and each Facility Loan shall accrue interest computed and payable in accordance with the terms of the Loan Agreement. (b) The principal of each A Loan, together with all accrued and unpaid interest thereon, shall be repaid in full on the A Loan Maturity Date. The principal of each B Loan, together with all accrued and unpaid interest thereon, shall be repaid in full on the B Loan Maturity Date. (c) Pursuant to the Liquid Collateral Agreements, the Security Agreement and the Assignment of Lease, Lessor shall direct (and Lessor hereby directs) Lessee to pay to Administrative Agent for the account of the Participants, Rent payable under the Lease (other than Excluded Amounts) from time to time, and Administrative Agent shall distribute such amounts to the Participants in accordance with Article X. (d) Construction Period Accrued Interest shall be paid in accordance with Section 2.2.9. SECTION 2.2.9. Construction Period Accrued Interest, Construction Period Accrued Yield and Construction Period Fees. 7 PARTICIPATION AGREEMENT (a) Advances to be Requested. In accordance with and subject to Section 2.2.5, during the Construction Period Lessee shall request an Advance in an amount equal to Construction Period Unused Fees, Construction Period Accrued Interest and Construction Period Accrued Yield and Construction Period Fees accrued on or with respect to the Loans and Investor Amounts, in the amounts calculated, determined and delivered to Lessee pursuant to Section 2.3. (b) Certain Payments. Construction Period Accrued Interest in respect of Loans and Construction Period Accrued Yield due any Investor shall be paid in cash on each Scheduled Payment Date occurring prior to the end of the Construction Period from proceeds of the Loans and Investor Contributions. Administrative Agent shall pay in cash to the Participants, to the extent of the Advances for such items, on each Scheduled Payment Date all Construction Period Accrued Interest and Construction Period Accrued Yield due on each such Scheduled Payment Date from the proceeds of such Advance. SECTION 2.2.10. Final Completion Advance. On the last Advance Date occurring on or before the day on which Substantial Completion occurs with respect to a Property, Lessee may request, and the Participants shall fund, an Advance pursuant to Section 2.2.5 in an amount equal to the lesser of (x) the remaining Aggregate Available Commitments and (y) the amount allocated to punch-list items and other final completion work as determined by Construction Agent in accordance with the Construction Budget for such Property; provided, however, that no such Advance shall be requested or made if a Bankruptcy Default, a Construction Agency Event of Default or a Lease Event of Default has occurred and is continuing. SECTION 2.3. Computations and Notice of Rates. (a) Determination of the Rates. All computations of Construction Period Unused Fees, Yield and other accrued amounts in respect of the Investor Contributions shall be made by the related Collateral Agent on the basis of the actual number of days (including the first day but excluding the last day) occurring during the period for which such amount is payable over a year comprised of 360 days (or, in the case of amounts accruing interest or Yield by reference to the ABR, 365 days or, if appropriate, 366 days). Computations of interest and other amounts payable in respect of Conduit Loans and Facility Loans shall be made by the Administrator in accordance with the Loan Agreement. (b) Notice of Interest and Yield. No later than the seventh (7th) day of each calendar month (or, if such day is not a Business Day, then the next succeeding Business Day), (i) Administrative Agent shall deliver to Lessee and each Investor notice of monthly rental in the form of Exhibit D (with appropriate insertions) setting forth a calculation of the amount of Yield due and payable on the Scheduled Payment Date for the Interest Period ending on the next succeeding Scheduled Payment Date, and (ii) the Administrator shall deliver to Administrative Agent and Lessee in the form of Exhibit D (with appropriate insertions) a calculation of the amount of accrued interest due and payable on all outstanding Conduit Loans and Facility Loans under the Loan Agreement on the next Scheduled Payment Date and other accrued amounts payable to Eagle under the Operative Documents; provided that in each case the failure of any such Agent to provide such notice shall not relieve Lessee from any liability that it may have under the Operative Documents to pay any such amount; provided further that any such Agent's 8 PARTICIPATION AGREEMENT failure to give such notice shall result in no liability to it. If HGSI has not received notice from the Administrative Agent in respect of Yield or from the Administrator in respect of accrued interest, HGSI shall immediately notify in writing the Administrative Agent and/or the Administrator, as applicable, to request such information. If either or both the Administrative Agent or the Administrator fail to notify in writing HGSI of the amounts due for the next succeeding Scheduled Payment Date, HGSI shall pay to Lessor, subject to the next sentence, in the manner set forth in Section 3 of the Lease, in lieu of the amount required under Section 3.1 of the Lease for the next succeeding Scheduled Payment Date, (x) in the case no written notice of the amount of Yield has been delivered, 110% of the amount of Yield due and payable for the Scheduled Payment Date closest to the Scheduled Payment Date in question for which a written notice had been delivered in accordance with Section 2.3(b), and (y) in the case no written notice of the accrued interest has been delivered, 110% of the accrued interest due and payable for the Scheduled Payment Date closest to the Scheduled Payment Date in question for which a written notice had been delivered in accordance with Section 2.3(b). If after payment of an amount pursuant to the next preceding sentence, HGSI receives a notice of the amount due for the Scheduled Payment Date in question, an adjustment shall be made such that, where HGSI actually paid an amount greater than the component of Base Rent due and payable for such date (assuming the notice had been timely delivered), such difference shall be remitted by the party receiving the excess to HGSI, and where HGSI actually paid an amount less than the component of Base Rent due and payable (assuming the notice had been timely delivered) HGSI shall pay to Lessor the shortfall no later than the fifth (5th) Business Day next succeeding delivery of such written notice. For purposes of Section 18.1 of the Lease both the preliminary payment by HGSI above and any payment it is required to make in adjustment thereof shall be considered Base Rent. (c) Conclusive Determinations. Each determination by the Administrative Agent of any rate or fee, or any other amount due, pursuant to Section 2.3(a) or (b) or 9.10 hereof shall be conclusive and binding on all parties hereto, absent manifest error. (d) Computations of Yield and Determination of Yield Rate. Each of the Investors and Lessor hereby appoints Administrative Agent as its agent for purposes of computing Yield in respect of the Investor Amounts and determining the Yield Rate. SECTION 2.4. Overdue Payments. Lessor, the Lenders and the Investors acknowledge that Lessee shall have no liability with respect to overdue payments of Loans and Investor Amounts or any other amount due and owing by Lessee under the Operative Documents so long as Lessee has timely paid Rent in accordance with Article III of the Lease, or such amounts are otherwise accounted for pursuant to Section 2.2.7 or 2.2.8; provided, however, that such Loans and Investor Amounts shall be reinstated and remain outstanding and Lessee shall remain liable for such Rent, if at any time any payment (in whole or in part) of any Rent is invalidated, declared to be fraudulent or preferential, set aside, rescinded or must otherwise be restored by Lessor, any Participant or Administrative Agent, upon the insolvency, bankruptcy, reorganization (or similar event) of Lessee, all as though such payment of Rent had not been made. Subject to the foregoing provisions of this Section 2.4, Lessee acknowledges its obligation to pay as Supplemental Rent any interest contemplated at the Overdue Rate with respect to Investor Amounts and the Loans. 9 PARTICIPATION AGREEMENT SECTION 2.5. Confirmation of Participants and the Other Parties. Each Participant and each other party to any of the Operative Documents agrees that the release of its signature pages to Mayer, Brown & Platt upon its instruction shall constitute notice, without further act, of its confirmation that all conditions to the Documentation Date and the Initial Advance Date set forth in Section 4.1 or 4.2, as applicable, were met to the satisfaction of such Participant or other party. ARTICLE III INTENTIONS OF THE PARTIES SECTION 3.1. Nature of Transaction. The parties hereto intend that (i) for financial accounting purposes with respect to Lessee, (A) Lessor will be treated as the sublessor of the Traville Site under the Lease and the owner and the lessor of the Improvements and the Manufacturing Facility Site and Lessee will be treated as the lessee of the Manufacturing Facility Site and the sublessee of the Traville Site under the Lease and the lessee of the Improvements, and (B) the Investors will be deemed to have an equity investment in Lessor, and (ii) for all federal and all state and local income tax purposes and bankruptcy and commercial law purposes, (A) the Lease will be treated as a financing arrangement, (B) Lessor, the Investors and the Lenders will be deemed lenders making loans to Lessee in an amount equal to the sum of the Investor Amounts and the outstanding principal amount of the Loans, which loans are secured by the Liquid Collateral to the extent of the Lessor's interest therein and the Properties, (C) Lessee will be treated as the owner of the Properties for tax purposes and will be entitled to all tax benefits ordinarily available to an owner of property like the Properties for such tax purposes and (D) the obligations of Lessee to pay the Base Rent and any part of the Lease Balance shall be treated as payments of interest and principal, respectively, for Federal and state income tax and bankruptcy and commercial law purposes. Nevertheless, each party acknowledges and agrees that no other party has made any representations or warranties to any other party concerning the tax, accounting or legal characteristics of the Operative Documents and that each party has obtained and relied upon such tax, accounting and legal advice concerning the Operative Documents as it deems appropriate. Lessor shall have a valid and binding security interest in and Lien on the Liquid Collateral and the Properties, free and clear of all Liens other than Permitted Liens, as security for the obligations of Lessee under the Operative Documents. Except as otherwise provided by law or in connection with a settlement, compromise or adjudication made under the provisions of Section 9.2(b), each of the parties to this Participation Agreement agrees that it will not, nor will it permit any Affiliate to at any time, directly or indirectly take any action or fail to take any action with respect to the preparation or filing of any income tax or other tax return, including an amended income tax or other tax return, to the extent that such action or such failure to take action would be inconsistent with the intention of the parties expressed in this Section 3.1. SECTION 3.2. Amounts Due Under Lease. Notwithstanding anything to the contrary contained in the Operative Documents, it is the intention of HGSI, Lessee, Lessor, each Investor, Conduit and the Liquidity Providers that the amount and timing of installments of Base Rent due and payable from time to time from Lessee under the Lease shall be equal to the aggregate payments due and payable after the Lease 10 PARTICIPATION AGREEMENT Commencement Date on each Scheduled Payment Date with respect to interest on the Loans and Yield on the Investor Amounts then due. ARTICLE IV CONDITIONS PRECEDENT SECTION 4.1. Conditions to Documentation Date. The occurrence of the Documentation Date and the obligation of each of Lessee, Lessor, each Investor, Administrative Agent, each Collateral Agent, Conduit, the Administrator and each Liquidity Provider to perform its respective obligations on the Documentation Date (if any), shall be subject to the fulfillment to the reasonable satisfaction of (including, with respect to writings, such writings being in form and substance reasonably satisfactory to the addressee or beneficiary thereof), or the waiver by, Lessee, Lessor, each Investor, Administrative Agent, each Collateral Agent, Conduit, the Administrator and each Liquidity Provider, as applicable, of the following conditions precedent set forth in this Section 4.1 on or before the Documentation Date: (a) Insurance. Lessor and each Agent shall have received and approved a report issued by the Independent Insurance Consultant with respect to Lessee's compliance with its obligation to maintain insurance with respect to the Traville Facility in accordance with Section 2.7(f) of the Construction Agency Agreement, which report shall be satisfactory to Lessor and Administrative Agent in all respects. (b) Certain Documents. Lessor, Lessee and each of the Participants (or respective counsel for each such party) shall have received a fully executed counterpart of each of the following agreements to which the applicable entity is a party: (i) this Participation Agreement; (ii) the Ground Lease and Memorandum of Ground Lease; (iii) the Lease and Memorandum of Lease; (iv) the Security Agreement; (v) the Deeds of Trust; (vi) the Assignment of Lease; (vii) the Construction Agency Agreement; (viii) the Connecticut Certificate of Trust; (ix) the Trust Agreement; (x) the Loan Agreement; (xi) the Conduit Note; 11 PARTICIPATION AGREEMENT (xii) the Facility Notes; (xiii) the Liquidity Agreement; (xiv) the Financing Statements; (xv) the Liquid Collateral Agreements; and (xvi) the Custody Agreements. Each of the aforementioned Operative Documents, to the extent the same constitutes an agreement or undertaking, shall have been duly authorized, executed and delivered by each of the parties thereto and shall be in full force and effect. (c) Filings and Recordation. All filings and recordings enumerated and described in Part A, Part B and Part C of Schedule III, as well as all other filings and recordings necessary or advisable, including precautionary financing statements, in the opinion of Lessor, Administrative Agent, either Collateral Agent or any Participant, to perfect the right, title and interest of Lessor, Administrative Agent, the Collateral Agents, the Participants and the Lessor Hedging Agreement Counterparties intended to be created by the Operative Documents shall have been made, or shall have been arranged to be made promptly thereafter, in the appropriate places or offices, including any recordings and filings necessary to create, preserve and protect such Persons' valid and binding security interests in and Liens on the Collateral, subject in each case to Permitted Liens and the rights of Lessee under the Lease. All recording and filing fees and Taxes with respect to any recordings or filings made pursuant to this Section 4.1(c) or otherwise payable in respect of any Operative Document shall have been paid in full by Lessee, and satisfactory evidence thereof shall have been delivered to Lessor and the Agents, or arrangements for such payment shall have been made to the satisfaction of Lessor and the Agents or evidence satisfactory to Lessor and the Agents of exemption from such filing fees or taxes shall have been delivered to Lessor and the Agents. (d) Consents and Approvals. All approvals and consents required to be taken, given or obtained, as the case may be, by or from any Authority or other Person, or by or from any trustee or holder of any indebtedness or obligation of HGSI, that are necessary or, in the reasonable opinion of the Participants, advisable in connection with the execution, delivery and performance of the Operative Documents by all parties hereto, shall have been taken, given or obtained as the case may be, shall be in full force and effect and the time for appeal with respect thereto shall have expired (or, if an appeal shall have been taken, the same shall have been dismissed) and shall not be subject to any pending proceedings or appeals (administrative, judicial or otherwise). (e) Opinions of Counsel. Lessor, the Investors, Conduit, the Agents and each Liquidity Provider shall have received the following legal opinions (and by such Person's execution of the Operative Documents to which each is respectively a party, each expressly instructs its respective counsel to execute and deliver the opinions referred to in this Section 4.1(e)): 12 PARTICIPATION AGREEMENT (i) the opinion of Paley Rothman Goldstein Rosenberg & Cooper, Chartered, special counsel to HGSI, Ground Lessor and Lessee; (ii) the opinion of Day, Berry & Howard, special Connecticut counsel to Lessor and special counsel to the Trust Company, the Trust and Trustee; and (iii) the opinion of Lerch, Early & Brewer, CHTD., special counsel to Lessee at Closing and another opinion at the Completion Date, in each case covering such matters as the addressees thereof shall request. (f) Corporate Status and Proceedings of HGSI and Ground Lessor. Lessor, the Investors, Conduit, each Agent and each Liquidity Provider shall have received copies of: (i) certificates of existence and good standing, or authority to transact business as a foreign corporation, (y) with respect to HGSI, from the Secretary of State of the States of Delaware and Maryland, and (z) with respect to Ground Lessor, from the Secretary of State of Maryland, in each case dated as of a recent date; (ii) a certificate of the Secretary or an Assistant Secretary of HGSI, in each case attaching and certifying as to (w) the resolutions of its Board of Directors or similar body and/or other authorized persons duly authorizing the execution, delivery and performance by it of each Operative Document to which it is or will be a party, (x) its certificate of formation or articles of incorporation, as the case may be, certified as of a recent date by the Secretary of State of the State of Delaware, (y) its by-laws and (z) the incumbency and signature of persons authorized to execute and deliver on its behalf the Operative Documents to which it is a party; (iii) a certificate of the Secretary or an Assistant Secretary of HGSI, in each case attaching and certifying as to (w) the resolutions of HGSI, as the sole member of Ground Lessor, and/or other authorized persons duly authorizing the execution, delivery and performance by Ground Lessor of each Operative Document to which it is or will be a party, (x) the certificate of formation or articles of incorporation, as the case may be, of Ground Lessor certified as of a recent date by the Secretary of State of the State of Maryland, (y) the by-laws of Ground Lessor and (z) the incumbency and signature of persons authorized to execute and deliver on behalf of Ground Lessor the Operative Documents to which it is a party; (iv) a certificate of an authorized officer of HGSI, in each case confirming the accuracy of the representations made by Ground Lessor in the Operative Documents. (g) Corporate Status and Proceedings of Trustee. HGSI, Lessee, Conduit, each Agent and each Liquidity Provider shall have received a certificate of the Secretary or an Assistant Secretary of Trustee attaching and certifying as to (i) the resolutions of the Board of Directors duly authorizing the execution, delivery and performance by Trustee of each Operative Document to which it is or will be a party and by the Trust Company of the Trust Agreement, (ii) its articles of association, certified as of a recent date by an appropriate officer of the Trust Company, (iii) its by-laws, (iv) the filed Connecticut Certificate of Trust, and (iv) the 13 PARTICIPATION AGREEMENT incumbency and signature of persons authorized to execute and deliver on its behalf the Operative Documents to which it is a party. (h) Environmental Audit. Each Agent shall have received an updated Environmental Audit, dated no earlier than one (1) month prior to the Documentation Date, for the Traville Facility in form and substance acceptable to Administrative Agent, in its sole discretion, together with a reliance letter from the firm conducting such Environmental Audit. (i) Survey and Title Insurance. Lessee shall have delivered to each Agent an ALTA/1992 (Urban) Survey of the Traville Facility prepared by a licensed surveyor and meeting the Minimum Standard Detail Requirements for ALTA/ASCM Land Title Surveys as adopted by the American Land Title Association/American Society and American Congress on Surveying and Mapping in 1992 certified to each Investor and each Agent and the title company, and in form and substance acceptable to Administrative Agent, in its sole discretion, and a leasehold or loan policy in favor of Lessor, such policy to be dated as of the Initial Advance Date and in an amount not less than $450,000,000 and to be satisfactory to Administrative Agent, in its sole discretion, with comprehensive, survey, variable rate, access and such other endorsements requested by the Participants to the extent available in the State of Maryland. (j) Recordation. Administrative Agent shall have received evidence reasonably satisfactory to it that each of the Ground Lease or a memorandum thereof, the Lease or a memorandum thereof, the Deeds of Trust and the Assignment of Lease shall have been or are being recorded with the appropriate Authorities in the order in which such documents are listed in this clause, and the Financing Statements with respect to each Property shall have been or are being filed with the appropriate Authorities. (k) Evidence of Property Insurance. Lessor and each Agent shall have received evidence of insurance with respect to the Traville Facility required to be maintained pursuant to the Construction Agency Agreement, setting forth the respective coverages, limits of liability, carrier, policy number and period of coverage. (l) Payment of Taxes. All Taxes payable on or before the Documentation Date, for which Lessee is responsible and which are in connection with the execution, delivery, recording or filing of any of the Operative Documents or other documents, and the consummation of any other transactions contemplated hereby or by any of the other Operative Documents, shall have been paid in full by Lessee, or arrangements for such payment shall have been made to the satisfaction of each Investor and each Agent (subject to Lessee's right to contest certain Taxes pursuant to Section 9.2(b)). (m) Representations and Warranties. Each representation and warranty of each of the parties hereto contained herein or in any other Operative Document shall be true and correct in all material respects as though made on and as of the Documentation Date, except that any such representation or warranty which is expressly made only as of a specified date need be true only as of such date. (n) Litigation. No action or proceeding shall have been instituted or threatened nor shall any government action be instituted or threatened before any Authority, nor shall any order, 14 PARTICIPATION AGREEMENT judgment or decree have been issued or proposed to be issued by any Authority, to set aside, restrain, enjoin or prevent the performance of this Participation Agreement, any other Operative Document or any transaction contemplated hereby or by any other Operative Document or which would have a Material Adverse Effect. (o) No Event of Loss. No casualty or loss shall have occurred in respect of the Traville Facility. No action shall be pending or threatened by an Authority to initiate a Condemnation or a taking by such Authority in respect of Traville Facility. (p) Legality, etc. In the opinion of Lessor, the Investors and each Agent, the transactions contemplated by the Operative Documents shall not violate any Applicable Laws and do not and will not subject Lessor to any materially adverse regulatory prohibitions or constraints, and no change of Applicable Laws has occurred or been proposed that would make it uneconomic or illegal for any party to any Operative Document to participate in any of the transactions contemplated by the Operative Documents or otherwise would prohibit the consummation of any transaction contemplated by the Operative Documents or materially expand the duties, obligations or risks of Lessor, the Investors, Conduit, any Agent or the Liquidity Providers. (q) Proceedings Satisfactory, etc. All proceedings taken in connection with the Documentation Date, and all documents relating thereto shall be reasonably satisfactory to Lessor, the Investors, Conduit, each Agent and their respective counsel, and each such Person shall have received copies of such documents as they may reasonably request in connection therewith, all in form and substance reasonably satisfactory to each such Person. (r) Traville Construction Materials. True and correct copies of the Traville Construction Materials shall have been made available to Lessor, Investors and each Agent. (s) Appraisal. Each Investor and Liquidity Provider shall have received a FIRREA qualified Appraisal of the Traville Facility, which Appraisal shall show (a) the Fair Market Value of the Traville Facility as of the Documentation Date and (b) the Fair Market Value of Lessor's interest in the Traville Site and the Traville Improvements (free and clear of the Lien of the Deeds of Trust and other Operative Documents) to be constructed thereon in accordance with the Approved Traville Plans and Specifications (i) as of the Lease Commencement Date with respect to the Traville Facility (the "Traville As-Built Appraisal") and (ii) as of the fifth and the seventh anniversary of the Lease Commencement Date with respect to the Traville Facility, and the economic useful life of the Traville Improvements. (t) Prescribed Forms. Each non-U.S. Person shall have delivered to Lessee, Lessor and Conduit the Prescribed Forms. (u) [Intentionally omitted.] (v) Investment Policy. The Administrative Agent, each Collateral Agent, each Investor, each Liquidity Provider and Conduit shall have received from HGSI a copy of its current investment policy which has been approved by their board, together with an officer's certificate certifying that the investment policy is true, correct and complete. 15 PARTICIPATION AGREEMENT (w) Execution by Lessee, Ground Lessor, Ground Lessee and Administrative Agent of a Mortgage Affidavit (the "Mortgage Affidavit") substantially in the form attached hereto as Exhibit A-1 and presentment of the Mortgage Affidavit to the Office of the General Counsel ("General Counsel") of the Maryland-National Capital Park and Planning Commission and acceptance of the Mortgage Affidavit by the General Counsel. (x) A certificate from a licensed, independent architect in a form reasonably satisfactory to Lessor that the Approved Plans and Specifications with respect to the Traville Facility has been approved by the applicable governmental entity(ies) and filed with such entity(ies). SECTION 4.2. Conditions to Initial Advance Date. The occurrence of the Initial Advance Date and the obligation of each of Lessor, each Investor, Administrative Agent, the Collateral Agents, Conduit, the Administrator and each Liquidity Provider to perform its respective obligations, if any, on the Initial Advance Date, including funding the Investor Contributions in the case of each Investor, funding the Conduit Loans and issuing Commercial Paper Notes in the case of Conduit, and providing Commitments, in the case of the Liquidity Providers, shall be subject to the fulfillment to the reasonable satisfaction (including, with respect to writings, such writings being in form and substance reasonably satisfactory to the addressee or beneficiary thereof), or the waiver by Lessor, each Investor, Conduit, the Administrator, Administrative Agent and each Liquidity Provider, of the following conditions precedent set forth in this Section 4.2 on or before the Initial Advance Date: (a) Documentation Date. The Documentation Date shall have become effective in accordance with Section 4.1. (b) Transaction Costs. To the extent invoiced, all Transaction Costs (including all fees payable to any party hereto on the Initial Advance Date) then due and payable will be paid in full by Lessee or its designee in accordance with such Advance Request solely from the proceeds of the Advances, provided, that Lessee has received the proceeds of Advances for such purposes. Payments of Transaction Costs to be paid on the Initial Advance Date shall be made by wire transfer of immediately available funds by Administrative Agent as designee of the Lessee to the accounts specified by the parties receiving such payments. Lessee shall include in any Advance Request an amount for Transaction Costs equal to the aggregate amount of invoices for Transaction Costs received by Administrative Agent and Lessee at least two (2) Business Days prior to the issuance of an Advance Request. Lessee shall deliver to Administrative Agent a copy of all invoices for Transactions Costs promptly after receipt thereof. (c) Initial Advance Date Notice. Lessee shall have delivered an Advance Request conforming with the requirements of Section 2.2.5(a). (d) Conduit Approval. If required pursuant to Conduit's commercial paper program, the Administrator shall have received rating letters from Moody's and S&P that, after giving effect to the transactions contemplated by the Operative Documents, the Commercial Paper Notes of Conduit shall be rated P-1 and A-1, respectively. 16 PARTICIPATION AGREEMENT SECTION 4.3. Conditions Precedent to the Manufacturing Facility Site Purchase Date and the Manufacturing Facility Site Purchase Advance. The occurrence of the Manufacturing Facility Site Purchase Date, the Manufacturing Facility Site Purchase Advance and the obligation of each of Lessor, each Investor, Administrative Agent, the Collateral Agents, Conduit, the Administrator and each Liquidity Provider to perform its respective obligations, if any, on the Manufacturing Facility Site Purchase Date, including the purchase of the Manufacturing Facility Site with respect to Lessor, the funding of the Investor Contributions with respect to the Manufacturing Facility in the case of each Investor, funding the Conduit Loans and issuing Commercial Paper Notes with respect to the Manufacturing Facility in the case of Conduit, and providing Commitments with respect to the Manufacturing Facility in the case of the Liquidity Providers, shall be subject to the fulfillment to the reasonable satisfaction (including, with respect to writings, such writings being in form and substance reasonably satisfactory to the addressee or beneficiary thereof), or the waiver by Lessor, each Investor, Conduit, the Administrator, Administrative Agent and each Liquidity Provider, of the following conditions precedent set forth in this Section 4.3 on or before the Manufacturing Facility Site Purchase Date: (a) Documentation Date. The Documentation Date shall have become effective in accordance with Section 4.1. (b) Initial Advance Date. The Initial Advance Date shall have become effective in accordance with Section 4.2. (c) Advance Request. Lessee shall have delivered an Advance Request conforming with the requirements of Section 2.2.5(a). (d) Insurance. Lessor and each Agent shall have received and approved a report issued by the Independent Insurance Consultant with respect to Lessee's compliance with its obligation to maintain insurance with respect to the Manufacturing Facility in accordance with Section 2.7(f) of the Construction Agency Agreement, which report shall be satisfactory to Lessor and the Agents in all respects. (e) Deeds of Trust Amendment. Lessor and each of the Participants (or respective counsel for each such party) shall have received a fully executed counterpart of the Deeds of Trust Amendment and the Deeds of Trust Amendment, to the extent the same constitutes an agreement or undertaking, shall have been duly authorized, executed and delivered by each of the parties thereto and shall be in full force and effect. (f) Consents and Approvals. All approvals and consents required to be taken, given or obtained, as the case may be, by or from any Authority or other Person, or by or from any trustee or holder of any indebtedness or obligation of HGSI, that are necessary or, in the reasonable opinion of the Participants, advisable in connection with the execution, delivery and performance of the Deeds of Trust Amendment by all parties hereto, shall have been taken, given or obtained as the case may be, shall be in full force and effect and the time for appeal with respect thereto shall have expired (or, if an appeal shall have been taken, the same shall have been dismissed) and shall not be subject to any pending proceedings or appeals (administrative, judicial or otherwise). 17 PARTICIPATION AGREEMENT (g) Environmental Audit. Each Agent shall have received an Environmental Audit, dated no earlier than six (6) months prior to the Manufacturing Facility Site Purchase Date, for the Manufacturing Facility in form and substance acceptable to Administrative Agent, in its sole discretion, together with a reliance letter from the firm conducting such Environmental Audit. (h) Survey and Title Insurance. Lessee shall have delivered to each Agent an ALTA/1992 (Urban) Survey of the Manufacturing Facility prepared by a licensed surveyor and meeting the Minimum Standard Detail Requirements for ALTA/ASCM Land Title Surveys as adopted by the American Land Title Association/American Society and American Congress on Surveying and Mapping in 1992 certified to each Investor and each Agent and the title company, and in form and substance acceptable to Administrative Agent, in its sole discretion, and a leasehold or loan endorsement to such policy in favor of Lessor, such policy to be dated as of the Manufacturing Facility Site Purchase Date and in an amount, when aggregated with the title policy for the Traville Facility, not less than $450,000,000 and to be reasonably satisfactory to the Participants with comprehensive, survey, variable rate, access and such other endorsements requested by the Participants to the extent available in the State of Maryland. (i) Recordation. Administrative Agent shall have received evidence reasonably satisfactory to it that the Deeds of Trust Amendment shall have been or are being recorded with the appropriate Authorities. (j) Evidence of Property Insurance. Lessor and each Agent shall have received evidence of insurance with respect to the Manufacturing Facility required to be maintained pursuant to the Construction Agency Agreement, setting forth the respective coverages, limits of liability, carrier, policy number and period of coverage. (k) Representations and Warranties. Each representation and warranty of each of the parties hereto contained herein or in any other Operative Document shall be true and correct in all material respects as though made on and as of the Manufacturing Facility Site Purchase Date, except that any such representation or warranty which is expressly made only as of a specified date need be true only as of such date. (l) Litigation. No action or proceeding shall have been instituted or threatened nor shall any government action be instituted or threatened before any Authority, nor shall any order, judgment or decree have been issued or proposed to be issued by any Authority, to set aside, restrain, enjoin or prevent the performance of this Participation Agreement, any other Operative Document or any transaction contemplated hereby or by any other Operative Document or which would have a Material Adverse Effect. (m) No Event of Loss. No casualty or loss shall have occurred in respect of the Manufacturing Facility. No action shall be pending or threatened by an Authority to initiate a Condemnation or a taking by such Authority in respect of the Manufacturing Facility. (n) Legality, etc. In the opinion of Lessor, the Investors and each Agent, the transactions contemplated by the Operative Documents shall not violate any Applicable Laws and do not and will not subject Lessor to any materially adverse regulatory prohibitions or constraints, and no change of Applicable Laws has occurred or been proposed that would make it 18 PARTICIPATION AGREEMENT uneconomic or illegal for any party to any Operative Document to participate in any of the transactions contemplated by the Operative Documents or otherwise would prohibit the consummation of any transaction contemplated by the Operative Documents or materially expand the duties, obligations or risks of Lessor, the Investors, Conduit, any Agent or the Liquidity Providers. (o) Proceedings Satisfactory, etc. All proceedings taken in connection with the Manufacturing Facility Site Purchase Date, and all documents relating thereto shall be reasonably satisfactory to Lessor, the Investors, Conduit, each Agent and their respective counsel, and each such Person shall have received copies of such documents as they may reasonably request in connection therewith, all in form and substance reasonably satisfactory to each such Person. (p) Manufacturing Construction Materials. True and correct copies of the Manufacturing Construction Materials shall have been made available to Lessor, Investors and each Agent. (q) Appraisal. Each Investor and Liquidity Provider shall have received a FIRREA qualified Appraisal of the Manufacturing Facility, which Appraisal shall show (a) the Fair Market Value of the Manufacturing Facility as of the Manufacturing Facility Site Purchase Date and (b) the Fair Market Value of Lessor's interest in the Manufacturing Facility Site and the Manufacturing Facility Improvements (free and clear of the Lien of the Deeds of Trust, Deeds of Trust Amendment and other Operative Documents) to be constructed thereon in accordance with the Approved Manufacturing Plans and Specifications (i) as of the Lease Commencement Date with respect to the Manufacturing Facility (the "Manufacturing As-Built Appraisal") and (ii) as of the fifth and the seventh anniversary of the Lease Commencement Date with respect to the Manufacturing Facility, and the economic useful life of the Manufacturing Facility Improvements. (r) Flood Zone Determination. Administrative Agent shall have received a Flood Zone Determination with respect to the Manufacturing Facility Site that states that no portion of the Manufacturing Facility Site is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency. SECTION 4.4. Conditions Precedent to each Advance. The obligations of Lessor to make an Advance on an Advance Date (including the Initial Advance Date and the Manufacturing Facility Site Purchase Date), the obligation of the Investors to make any related Investor Contribution available on such Advance Date and the obligation of each Lender to make any related Loans on such Advance Date, are subject to the conditions that (a) each Investor and Agent shall have received a copy of the applicable Advance Request, the original of which shall be sent to Lessor, executed by Lessee, in accordance with and to the extent required by Section 2.2.5, (b) Lessee shall have delivered Permitted Investments to each Collateral Agent in an aggregate amount such that after each such transfer the Adjusted Market Value or Fair Market Value, whichever is applicable, of all Liquid Collateral in each such Account on such date equals or exceeds the Required Liquid Collateral Amount for each such Account for such date (determined after giving effect to the requested Advance), and the Collateral Agents shall have a first priority perfected security interest therein securing the Lessee Obligations, (c) the 19 PARTICIPATION AGREEMENT representations and warranties contained in each Operative Document are correct in all material respects on and as of such Advance Date, before and after giving effect to such Advance and to the application of the proceeds therefrom, as though made on and as of such date, other than any such representations or warranties that, by their terms, refer to a specific date other than the date of such Advance, in which case of such specific date, and (d) no Default or Event of Default has occurred and is continuing, or would result from such Advance or from the application of the proceeds therefrom. SECTION 4.5. Lease Commencement Upon Substantial Completion. Unless the Construction Agency Agreement has been terminated as a result of a Construction Agency Event of Default, the parties hereto acknowledge and agree that upon the occurrence of Substantial Completion with respect to a Property, such Property shall automatically, without further act or notice by any Person, become subject to, and shall be leased by Lessor to Lessee under, the Lease. ARTICLE V REPRESENTATIONS AND WARRANTIES SECTION 5.1. Representations and Warranties of Lessee. As of the Documentation Date and as of each Advance Date (provided, that any representation or warranty made as of a specific date need only be true as of such date), Lessee (in its capacity as both Lessee and Construction Agent) represents and warrants to each of the other parties hereto that: (a) General Matters. (i) Lessee is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and its failure to qualify to do business in any other jurisdiction where it is not so qualified has not had, and will not have, a Material Adverse Effect; and Lessee has all necessary corporate power to enter into and perform its obligations under each Lessee Operative Document and to lease the Properties under the Lease. (ii) The execution, delivery and performance by Lessee of each Lessee Operative Document have been duly authorized by all necessary corporate action and will not (A) violate any provision of its certificate of incorporation or (B) violate any provision of law applicable to such Lessee or by which it or its property may be bound, or result in the breach of or constitute a default or require any consent under, or result in the creation of any Lien (except as provided under the Operative Documents) upon any property or assets of Lessee pursuant to any indenture, agreement or instrument to which Lessee is a party or by which Lessee or its property may be bound, in any such case set forth in this clause (B) which has had, or would be reasonably likely to have, a Material Adverse Effect. Except with respect to the matters described in Section 5.1(o), neither the execution by Lessee of any Lessee Operative Document nor the performance by Lessee of its obligations under any Lessee Operative Document requires any license, consent or approval of, or notice to, or filing with, any Authority (other than customary building permits obtained in the ordinary course of business which Lessee has no reason 20 PARTICIPATION AGREEMENT to believe will not be forthcoming). This Participation Agreement and each other Lessee Operative Document has been duly executed and delivered by Lessee and, assuming the due authorization, execution and delivery by the other parties hereto, constitutes its legal, valid and binding obligation, enforceable in accordance with its terms, except as the same may be limited by insolvency, bankruptcy, reorganization or other laws relating to or affecting the enforcement of creditors' rights or by general equitable principles. (iii) Neither Lessee nor any of its subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U or X of the Board of Governors of the Federal Reserve System). Neither Lessee nor any of its material subsidiaries is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940. The receipt by Lessee of the proceeds of the Advances, and each use of such proceeds to pay Improvement Costs, shall not be in violation of any Applicable Laws. (iv) The outstanding debt for borrowed money of Lessee does not, and no funding under the Operative Documents when made will cause such debt to, exceed the amount authorized by such Lessee's board of directors to be outstanding. (v) Except as disclosed on Schedule 5.1(a)(v), there is no action, suit or proceeding (including but not limited to environmental matters), and no such proceeding before any arbitrator or by or before any governmental commission, board, bureau or other administrative agency, is pending, or, to the knowledge of Lessee, is threatened against Lessee or any consolidated subsidiary of Lessee which, in the good faith belief of Lessee, has a reasonable possibility of being adversely determined in a manner which would have a Material Adverse Effect. (vi) Neither Lessee nor any of its Affiliates has granted any Lien (other than Permitted Liens) on either Property to any Person other than Lessor, Conduit, the Collateral Agent, the Liquidity Providers, Administrative Agent and each Investor, and no Lien, other than the Lien granted to such Persons hereunder and under the other Operative Documents and Permitted Liens, has attached to either Property, or in any manner has affected adversely the rights and security interest of such Persons therein. (vii) Neither Lessee nor anyone authorized to act on its behalf has, directly or indirectly, in violation of Section 5 of the Securities Act or any state securities laws, offered or sold any interest in either Property, the Lease, the Investor Certificates or the Notes, or in any security or lease the offering of which, for purposes of the Securities Act or any state securities laws, would be deemed to be part of the same offering as the offering of the aforementioned items, or solicited any offer to acquire any of the aforementioned items from any Person other than an "accredited investor" (as such term is defined in the Securities Act). The foregoing shall not be deemed an acknowledgment that any of the Notes or Investor Certificates, or any interest in the Properties or the Lease, constitutes a "security". 21 PARTICIPATION AGREEMENT (viii) The execution and delivery by Lessee of the Operative Documents to which it is a party does not require the consent or approval of, or the giving of notice to or registration with, or the taking of any other action in respect of, any Authority or other body governing its business practices, other than (if Lessee so determines) the filing of a Form 8-K with the SEC. (ix) Lessee has complied with its disclosure and reporting obligations under the Securities Exchange Act of 1934, as amended. (b) Principal Place of Business and Chief Executive Office of Lessee. The principal place of business and chief executive office, as such terms are used in Section 9-103(3) of the UCC, of Lessee are each located at 9410 Key West Avenue, Rockville, MD 20850. The organizational identification number assigned by Delaware to Lessee is 2302223 (Del.). (c) Taxes. All United States Federal income tax returns and all other tax returns which are required to have been filed have been or will be filed by or on behalf of Lessee by the respective due dates, including extensions, and all taxes due with respect to Lessee pursuant to such returns or pursuant to any assessment received by Lessee have been or will be paid. The charges, accruals and reserves on the books of Lessee in respect of such taxes or other governmental charges are, in the opinion of Lessee, adequate. (d) Compliance with ERISA. Each of the matters set forth below in this Section 5.1(e) is subject to the truth of the representations set forth in Sections 5.4(a) and 5.5(b), and the covenants set forth in Section 6.2(e). Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and is in compliance in all respects with the presently applicable provisions of ERISA and the Code with respect to the Plan except when such noncompliance would result in penalties of less than $10,000,000. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Code in respect of any Plan within the preceding five (5) years, (ii) failed to make any contribution or payment to any Plan, or made any amendment to any Plan which has resulted or is likely to result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. No termination of a Plan has occurred and no steps have been taken to institute the termination of any Plan. No member of the ERISA Group has any knowledge of any event that is likely to result in a liability of any such member to the PBGC, whether under a Plan, a Multiemployer Plan, or otherwise, other than a liability to the PBGC for premiums under Section 4007 of ERISA. No lien in favor of the PBGC or a Plan has arisen, and there have not been any nor are there now existing any events or conditions that would permit any Plan to be terminated under circumstances that would cause the lien provided under Section 4068 of ERISA to attach to the material assets of Lessee or its ERISA Affiliates. The value of the Plans' benefits guaranteed under Title IV of ERISA on the date hereof does not exceed the value of such Plans' assets allocable to such benefits as of the date of this Participation Agreement. No "Prohibited Transaction" within the meaning of Section 406 of ERISA will exist with respect to a Benefit Arrangement upon the execution and delivery of this Participation Agreement or any Operative Document. 22 PARTICIPATION AGREEMENT (e) Defaults. No Bankruptcy Default or Construction Agency Event of Default has occurred and is continuing. (f) Insurance Coverage. Lessee maintains insurance coverage for the Sites and the Improvements thereon which meets the requirements of the Construction Agency Agreement and all of such coverage is in full force and effect. (g) Subjection to Government Regulation. (i) Lessee is not subject to regulation under any law which prohibits, or requires consent from any Authority prior to, the incurring by it of indebtedness or the entering into of the transactions described herein. (ii) None of Lessor, any Agent or any Participant will become (A) solely by reason of entering into the Operative Documents or consummation of the transactions contemplated thereby (other than upon exercise of remedies under the Lease or other Operative Document or upon the expiration or termination thereof) subject to ongoing regulation of its operations by any Authority having jurisdiction; or (B) except for regulation the applicability of which depends upon the status of the Participants as banks or other regulated financial institutions or upon the existence of facts in addition to the ownership of, or the holding of any interest in, the Properties or any interest therein upon the exercise of remedies under the Lease or other Operative Document or upon the expiration or termination thereof, subject to ongoing regulation of its operations by any Authority having jurisdiction solely by reason of its business activities contemplated in the Operative Documents or the nature of the Properties. (h) No Liens. Neither Lessee nor any of its Affiliates has created, consented to, incurred or suffered to exist any Lien upon either Property or any portion thereof other than Permitted Liens, subject to Permitted Contests. (i) Properties. Upon Substantial Completion of a Property, such Property as improved in accordance with the applicable Plans and Specifications for such Property and the contemplated use thereof by Lessee and its agents, assignees, employees, lessees, licensees and tenants will comply in all material respects with all Insurance Requirements and Applicable Laws (including all zoning and land use laws and Environmental Laws) other than having obtained certain governmental approvals in respect of the operation and manufacturing processes to be located at the Manufacturing Facility, which approvals Lessee expects to obtain in the ordinary course of its business. (j) Plans and Specifications. With respect to both Properties, upon Substantial Completion of a Property all water, sewer, electric, gas, telephone and drainage facilities and all other utilities required to adequately service the Improvements on such Property for their intended use will be available pursuant to adequate permits (including any that may be required under applicable Environmental Laws). Except as notified to Lessor, no fire or other casualty with respect to either Property has occurred which fire or other casualty is expected to result in replacement or restoration costs in excess of $1,000,000. With respect to both Properties, upon Substantial Completion of a Property, such Property will have available all material services of 23 PARTICIPATION AGREEMENT public facilities and other utilities necessary for use and operation of such Property and the other Improvements on such Property for their primary intended purposes including adequate water, gas and electrical supply, storm and sanitary sewerage facilities, telephone, other required public utilities and means of access between such Improvements and public highways for motor vehicles. With respect to both Properties, all utilities serving a Property, or proposed to serve a Property in accordance with the related Plans and Specifications for such Property, are located in, and vehicular access to the Improvements on such Property is provided by, either public rights-of-way abutting such Property or Appurtenant Rights. With respect to both Properties, all requirements of Applicable Law, easements and rights-of-way, including proof and dedication, required for (x) the use, treatment, storage, transport, disposal or disposition of any Hazardous Material on, at, under or from a Property during the construction of the Improvements thereon, and (y) construction of the Improvements on a Property in accordance with the applicable Plans and Specifications for such Property and the Construction Agency Agreement have either been irrevocably obtained from the appropriate Governmental Authorities having jurisdiction or from private parties, as the case may be, or will be irrevocably obtained from the appropriate Governmental Authorities having jurisdiction or from private parties, as the case may be, prior to commencing any such construction or use and operation, as applicable, or in the course of the Construction in accordance with reasonably prudent construction practice. (k) Title to the Land. (i) Ground Lessor owns title to the Traville Site in fee simple, subject only to Permitted Liens. The Ground Lease is in form and substance sufficient to convey a valid leasehold estate to Lessor, subject only to Permitted Liens. Lessor will at all times during the Construction Period and the Lease Term have good and marketable title to a valid leasehold estate in the Traville Site and in fee simple to all Improvements located on the Traville Site, in each case subject only to Permitted Liens. Ground Lessor will at all times during the Construction Period and the Lease Term have good and marketable title in fee simple to the Traville Site subject only to Permitted Liens. (ii) Upon the occurrence of the Manufacturing Facility Site Purchase Date, Lessor shall own title to the Manufacturing Facility Site in fee simple, subject only to Permitted Liens. Upon the occurrence of the Manufacturing Facility Site Purchase Date, Lessor will at all times during the Construction Period and Lease Term have good and marketable title in fee simple to the Manufacturing Facility Site and Improvements thereon subject only to Permitted Liens. (l) Flood Hazard Areas. (i) Except as otherwise identified on the survey delivered pursuant to Section 4.1(i), no portion of the Traville Facility is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency. If the Traville Facility is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, then flood insurance has been obtained for the Traville Facility in accordance with the Lease and in accordance with the National Flood Insurance Act of 1968, as amended. 24 PARTICIPATION AGREEMENT (ii) Except as otherwise identified on the survey delivered pursuant to Section 4.3(h), no portion of the Manufacturing Facility is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency. If the Manufacturing Facility is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, then flood insurance has been obtained for the Manufacturing Facility in accordance with the Lease and in accordance with the National Flood Insurance Act of 1968, as amended. (m) Lease. Upon Substantial Completion of a Property (i) Lessee will have unconditionally accepted such Property demised under the Lease (provided that nothing contained herein shall be deemed a waiver by Lessee of any right of action against Persons with respect to title to and condition of the Traville Facility on the Initial Advance Date or the Manufacturing Facility on the Manufacturing Facility Site Purchase Date other than Lessor, the Investors and the Lenders) and will have good and marketable title to a valid and subsisting sublease in the Land comprising a portion of such Property and leasehold interest in the Improvements comprising a portion of such Property, subject only to Permitted Liens, (ii) no right of offset will exist with respect to any Rent or other sums payable under the Lease and (iii) except as provided in the Operative Documents, no Rent under the Lease will have been prepaid. (n) Appraisal Data. The information provided by Lessee and its Affiliates to the Appraiser identified in Schedule IV and forming the basis for the conclusions set forth in the Appraisals delivered pursuant to Sections 4.1(s) and 4.3(q), was true and correct in all material respects and did not, when taken as a whole, omit any information requested by the Appraiser actually known and available to Lessee necessary to make the information provided not materially misleading. (o) Filings. Except with respect to the filings identified on Schedule III, no other filings or recordings are necessary to convey validly and effectively to the Secured Parties such interest in the Lease, each Property and all other Collateral as contemplated by the Operative Documents, in each case free of all Liens other than Permitted Liens. (p) Artifacts. No historically significant artifacts, structures, dwellings, remains or antiques exist or are located in or on the surface terrain or sub-terrain estate of either of the Traville Site or the Manufacturing Facility Site, the presence or discovery of which will cause a delay in the completion of the Construction. (q) Intentionally Omitted. (r) Financial Statements. The balance sheet of Lessee as of June 30, 2001 and the related statement of income and cash flows of Lessee and its consolidated subsidiaries, a copy of which has been delivered to each Agent and to each Participant fairly present, in conformity with GAAP, the financial position of Lessee and its consolidated subsidiaries as of such date. All material contingent obligations, contingent liabilities or other obligations have been properly reflected on the balance sheet and notes thereto referred to above in conformance with GAAP. 25 PARTICIPATION AGREEMENT Since December 31, 2000, there have been no changes with respect to Lessee or its consolidated subsidiaries which has had, or will have, a Material Adverse Effect. (s) Disclosure. No representation or warranty contained in any Operative Document, or in any other document or financial statement furnished from time to time in either case by Lessee or its Affiliates pursuant to the terms of any Operative Document, contains or will contain any untrue statement of a material fact or omit or will omit to state any material fact necessary to make the statement herein or therein not misleading in any material respect as of the date made or deemed to be made. There is no fact known to Lessee which is having, or is reasonably expected to have, a Material Adverse Effect. (t) Compliance With Law. Each Property and the current use and operation thereof and thereon do not violate any Applicable Laws, including any thereof relating to occupational safety and health or Environmental Laws, in a manner or to an extent that could reasonably be expected to have a Material Adverse Effect. Except for such matters as could not reasonably be expected to result in a Material Adverse Effect, each Property and the use thereof by it and its agents, assignees, employees, invitees, lessees, licensees and tenants complies with Applicable Laws (including, without limitation, all Environmental Laws) and insurance requirements. (u) Transferability of Traville Site. The Traville Facility will be legally transferable without restrictions as if it were a legally subdivided lot under Maryland Applicable Laws upon execution and filing of the Mortgage Guideline Affidavit with the Maryland National Park and Planning Commission. SECTION 5.2. Representations and Warranties of Ground Lessor. As of the Documentation Date, Ground Lessor represents and warrants to Lessor, each Agent and each Participant that: (a) Due Organization, etc. Ground Lessor is a duly organized and validly existing limited liability company in good standing under the laws of the State of Maryland. (b) Power and Authority; Enforceability. Ground Lessor has the power and authority to execute, deliver and carry out the terms and provisions of the Operative Documents to which it is or will be a party and has taken all necessary action to authorize the execution, delivery and performance of the Operative Documents to which it is a party and has duly executed and delivered each Operative Document required to be executed and delivered by it and, assuming the due authorization, execution and delivery thereof on the part of each other party thereto, each such Operative Document constitutes a legal, valid and binding obligation enforceable against it in accordance with its terms, except as the same may be limited by insolvency, bankruptcy, reorganization or other laws relating to or affecting the enforcement of creditors' rights or by general equitable principles. (c) No Violation. Neither the execution, delivery and performance by Ground Lessor of the Operative Documents to which it is or will be a party nor compliance with the terms and provisions thereof, nor the consummation by Ground Lessor of the transactions contemplated therein (i) will result in a violation by Ground Lessor of any applicable provision of any law, statute, rule, regulation, order, writ, injunction or decree of any court or Authority having 26 PARTICIPATION AGREEMENT jurisdiction over Ground Lessor or the Traville Facility, that would have a Material Adverse Effect, (ii) violate or result in any breach which would constitute a default under, or (other than pursuant to the Operative Documents) result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of Ground Lessor pursuant to the terms of any indenture, loan agreement or other agreement to which Ground Lessor is a party or by which it or any of its property or assets is bound or to which it may be subject (other than Permitted Liens), or (iii) will violate any provision of the certificate of formation or by-laws (or similar organizational documents) of Ground Lessor. (d) No Approvals, etc. The execution and delivery by Ground Lessor of the Operative Documents to which it is a party does not require the consent or approval of, or the giving of notice to or registration with, or the taking of any other action in respect of, any Authority or other body governing its business practices. (e) Disclosure. No representation or warranty contained in any Operative Document, or in any other document or financial statement furnished from time to time in either case by Lessee or its Affiliates pursuant to the terms of any Operative Document, contains or will contain any untrue statement of a material fact or omit or will omit to state any material fact necessary to make the statement herein or therein not misleading in any material respect as of the date made or deemed to be made. There is no fact known to Ground Lessor which is having, or is reasonably expected to have, a Material Adverse Effect. SECTION 5.3. Representations and Warranties of Trustee, the Trust and the Trust Company. Trustee, the Trust and the Trust Company (solely as to paragraphs (a)(i), (b) and (c) only as to the agreements to which the Trust Company is a party, and (d), (e) and (f), only as to the Trust Company) represent and warrant to Lessee and the Participants that: (a) Corporate Status. (i) The Trust Company is a duly organized and validly existing national banking association in good standing under the laws of the United States and (ii) each of Trustee and the Trust is duly qualified, authorized to do business and in good standing in all jurisdictions where the failure to do so might have a material adverse effect on it or its properties. (b) Corporate Power and Authority. Trustee, the Trust and the Trust Company each has the power and authority to execute, deliver and carry out the terms and provisions of the Operative Documents to which it is or will be a party and has taken all necessary corporate action to authorize the execution, delivery and performance of the Operative Documents to which it is a party and has duly executed and delivered each Operative Document required to be executed and delivered by it and, assuming the due authorization, execution and delivery thereof on the part of each other party thereto, each such Operative Document constitutes a legal, valid and binding obligation enforceable against it in accordance with its terms, except as the same may be limited by insolvency, bankruptcy, reorganization or other laws relating to or affecting the enforcement of creditors' rights or by general equitable principles (c) No Violation. Neither the execution, delivery and performance by Trustee, the Trust or the Trust Company of the Operative Documents to which it is or will be a party nor compliance with the terms and provisions thereof, nor the consummation by Trustee, the Trust or the Trust Company of the transactions contemplated therein (i) will result in a violation by 27 PARTICIPATION AGREEMENT Trustee, the Trust or the Trust Company of any applicable provision of any Connecticut or federal law, statute, rule, regulation, order, writ, injunction or decree of any court or governmental instrumentality governing the banking or trust powers of the Trustee, the Trust, the Trust Company or the Properties that would adversely affect (x) the validity or enforceability of the Operative Documents to which Trustee, the Trust or the Trust Company is a party, or the title to, or value or condition of, the Properties, or (y) the consolidated financial position, business, prospects or consolidated results of operations of Trustee, the Trust or the Trust Company or the ability of Trustee, the Trust or the Trust Company to perform its obligations under the Operative Documents, (ii) violate or result in any breach which would constitute a default under, or (other than pursuant to the Operative Documents) result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of Trustee or the Trust or the Trust Company pursuant to the terms of any indenture, loan agreement or other agreement for borrowed money to which Trustee or the Trust or the Trust Company is a party or by which it or any of its property or assets is bound or to which it may be subject (other than Permitted Liens), or (iii) will violate any provision of the Articles of Association or by-laws of Trust Company. (d) No Approvals, etc. The execution and delivery by the Trust Company or (assuming the due authorization, execution and delivery of the Trust Agreement by the Investors) Trustee or the Trust, as the case may be, of the Operative Documents to which it is a party does not require the consent or approval of, or the giving of notice to or registration with, or the taking of any other action in respect of, any Authority or other body governing its banking practices. (e) Litigation. There is no action, proceeding or investigation pending or threatened against the Trust Company or Trustee or the Trust which questions the validity of the Operative Documents, and there is no action, proceeding or investigation pending or threatened which is likely to result, either in any case or in the aggregate, in any material adverse change in the ability of the Trust Company or Trustee or the Trust to perform their respective obligations under the Operative Documents. (f) Lessor Liens. Each Property and the Operative Documents and amounts payable thereunder are free of Lessor Liens attributable to it (other than any liens granted pursuant to the Operative Documents). (g) Securities Act. Neither Lessor nor any Person authorized by Lessor to act on its behalf has offered or sold any interest in the Notes, the Investor Certificates or the Lease, or in any similar security relating to the Properties, or in any security the offering of which for the purposes of the Securities Act would be deemed to be part of the same offering as the offering thereof, or solicited any offer to acquire any of the same from, any Person other than the parties hereto, and neither it nor any Person authorized by it to act on its behalf will take any action which would subject the issuance or sale of any interest in the Notes, the Investor Certificates or the Lease or in any similar security related to the Properties to the provisions of Section 5 of the Securities Act or require the qualification of any Operative Document under the Trust Indenture Act of 1939. The foregoing shall not be deemed an acknowledgment that any of the Notes or Investor Certificates, or any interest in the Properties or the Lease, constitutes a "security". 28 PARTICIPATION AGREEMENT (h) Chief Place of Business. Lessor's chief place of business, chief executive office and office where the documents, accounts and records relating to the transactions contemplated by this Participation Agreement and each other Operative Document are and will be kept is located at c/o 79 South Main Street, Salt Lake City, Utah 84111. (i) No Other Activities. Lessor does not hold any assets, conduct any business nor is it party to any document, agreement or instrument other than its interests under any Operative Documents to which it is a party. SECTION 5.4. Representations of the Investors. As of the Documentation Date and, with respect to Section 5.4(a), as of each Advance Date, each Investor represents and warrants to the other parties to this Participation Agreement that: (a) ERISA. Such Investor is not funding its investment in Lessor, and is not performing its obligations under the Operative Documents, with the assets of an "employee benefit plan" (as defined in Section 3(3) of ERISA) which is subject to Title I of ERISA, or "plan" (as defined in Section 4975(e)(1) of the Code). (b) Power and Authority. Such Investor has the requisite power and authority to enter into and perform under the Operative Documents to which it is a party. (c) Binding Effect. This Participation Agreement and the other Operative Documents to which it is a party constitute the legal, valid and binding obligations of it, enforceable against it in accordance with their respective terms except as such enforceability may be limited by any applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity. It has taken all necessary corporate action to authorize the execution, delivery and performance of this Participation Agreement and each other Operative Document to which it is a party and has duly executed and delivered each Operative Document required to be executed and delivered by it. (d) Investment. Such Investor is making its investment in the Investor Certificate and the transaction contemplated hereby for its own account and not with a view to any distribution thereof; except that the disposition of any interest in such investment shall be at all times within the control of such Investor, subject to the restrictions of Article VIII. (e) Lessor Liens. Each Property is free of Lessor Liens attributable to it. SECTION 5.5. Representations of Liquidity Providers. As of the Documentation Date (or, with respect to any Liquidity Provider becoming party hereto after the Documentation Date, as of the date such Liquidity Provider becomes party hereto) and, with respect to Section 5.5(b), as of each Advance Date, each Liquidity Provider hereby represents and warrants to Lessee, Lessor, each Agent and each of the other Participants that: (a) Facility Loans; Percentage Interests. Such Liquidity Provider is making its Facility Loans and its purchase of Percentage Interests and is entering into the transaction contemplated hereby for its own account and not with a view to any distribution thereof; except that the disposition of any interest in such loans and interests shall be at all times within the control of such Liquidity Provider, subject to the restrictions of Article VIII. 29 PARTICIPATION AGREEMENT (b) ERISA. Such Liquidity Provider is not funding its portion of the Advances, and is not performing its obligations under the Operative Documents, with the assets of an "employee benefit plan" (as defined in Section 3(3) of ERISA) which is subject to Title I of ERISA, or "plan" (as defined in Section 4975(e)(1) of the Code). SECTION 5.6. Representations of Agents. As of the Documentation Date (or, with respect to any Agent becoming party hereto after the Documentation Date, as of the date such Agent becomes party hereto), each Agent hereby represents and warrants to Lessee, HGSI, Lessor, each other Agent and each Participant that: (a) Corporate Existence and Power. It is, respectively, a banking association or corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has all corporate powers and all material governmental licenses, authorizations and approvals required to perform its obligations hereunder and under the other Operative Documents to which it is a party. (b) Binding Effect. This Participation Agreement and the other Operative Documents to which it is a party constitute the legal, valid and binding obligations of it, enforceable against it in accordance with their respective terms except as such enforceability may be limited by any applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity. It has taken all necessary corporate action to authorize the execution, delivery and performance of this Participation Agreement and each other Operative Document to which it is a party and has duly executed and delivered each Operative Document required to be executed and delivered by it. (c) No Violation. Neither the execution, delivery and performance by it of the Operative Documents to which it is or will be a party nor compliance with the terms and provisions thereof, nor the consummation of the transactions contemplated therein, (i) will contravene any Applicable Laws or (ii) will violate any provision of its certificate of incorporation or by-laws. (d) No Approvals, etc. The execution and delivery by it of the Operative Documents to which it is a party does not require the consent or approval of, or the giving of notice to or registration with, or the taking of any other action in respect of, any Authority having jurisdiction over it. ARTICLE VI COVENANTS AND AGREEMENTS SECTION 6.1. Covenants of Lessee and Construction Agent. Except as specifically provided below, during the Construction Period and the Lease Term, if any, HGSI, as Lessee and as Construction Agent, covenants with each of the other parties hereto as follows: (a) Change of Name or Location. Lessee shall furnish to Lessor and each Agent notice on or before the thirtieth (30th) day before any relocation of its chief executive office or principal place of business, or change of its name or identity. 30 PARTICIPATION AGREEMENT (b) Construction Notices. (i) During the Construction Period, Construction Agent from time to time shall deliver to Lessor and each Agent an Officer's Certificate, which Officer's Certificate shall state whether or not there exists a Construction Agency Default or Construction Agency Event of Default and whether or not the Sites are In Balance, and shall attach a monthly report in the form of Exhibit B hereto. Such Officer's Certificate and report shall be delivered together with any Advance Request delivered by Lessee and, if no such Advance Request is delivered by Lessee in any calendar month, then such Officer's Certificate and report shall be delivered on the last Business Day of such calendar month. (ii) Construction Agent shall make available to Administrative Agent and Construction Consultant for inspection and copying no later than the fifth day of each calendar month: (A) copies of all Material Construction Documents entered into in the preceding calendar month; (B) copies of all change orders, changes to either the Traville Construction Materials or Manufacturing Construction Materials, notices, requests for any increase of any contract sum payable, or other communication received under or in connection with any Material Construction Document which either (x) seeks to materially increase the total consideration payable under any Material Construction Document, or (y) asserts that Construction Agent or any other party to any Material Construction Document is in material breach or default, or with notice and lapse of time or both will be in material breach or default under any Material Construction Document; (C) upon reasonable request by Lessor, a list of the names and addresses of the subcontractors with whom written agreements have been made by Construction Agent and (D) such other information as may be reasonably requested (in light of Lessee's and Construction Agent's obligations to provide information or documents contained herein or in the other Operative Documents) by Lessor regarding the status of (and to the extent reasonably available to Construction Agent, the parties to material agreements relating to) the Construction, compliance of the parties to the Construction Documents with the terms thereof, and amounts due and payable under the Construction Documents, including, without limitation, such information as Lessor shall reasonably require to determine that each of the Approved Traville Construction Budget and the Approved Manufacturing Construction Budget is In Balance. (iii) Construction Agent shall make available to Administrative Agent and Construction Consultant for inspection and copying (i) on each anniversary of the Documentation Date (unless an Event of Default has occurred and is continuing in which case as requested) a copy of each of the then current Traville Plans and Specifications and the then current Manufacturing Plans and Specifications, (ii) within 30 days after Substantial Completion of the Traville Facility, a copy of the then current Traville Plans and Specifications, and (iii) within 30 days after Substantial Completion of the Manufacturing Facility, a copy of the then current Manufacturing Plans and Specifications. (c) Casualty Notices. Lessee shall deliver to Lessor, the Lessor Hedging Agreement Counterparties and each Agent promptly upon the occurrence of a Casualty that may result in a 31 PARTICIPATION AGREEMENT claim in excess of $1,000,000 an Officer's Certificate describing in detail those Improvements that have suffered a Casualty (except to the extent such Casualty has been described in a previously delivered Officer's Certificate) or been the subject of a Condemnation and cannot be repaired by the then current end of the Lease Term or have not been replaced in accordance with the Lease. (d) Notice of Certain Defaults. Promptly upon obtaining actual knowledge thereof, Lessee shall notify Lessor, the Agents and the Lessor Hedging Agreement Counterparties in writing of the existence of a Lease Default, Lease Event of Default, Construction Agency Default or Construction Agency Event of Default which notice shall describe the nature of such Lease Default, Lease Event of Default, Construction Agency Default or Construction Agency Event of Default, as applicable. (e) Notice of Proceedings. Promptly upon Lessee's becoming aware of (i) any investigation of it by any Authority, (ii) any court or administrative proceeding involving it, or (iii) any notice, claim or demand from any Authority which alleges that any such Person is in violation of any law or has failed to comply with any order issued pursuant to any Federal, state or local statute regulating its operation and business, which individually or in the aggregate is reasonably likely to result in a liability of $10,000,000 or more or to have a Material Adverse Effect, it shall notify Lessor and the Agents specifying its nature and the action it is taking with respect thereto. (f) Notice of Substantial Completion. Promptly upon occurrence of Substantial Completion of a Property, Lessee shall deliver written notice thereof to Lessor and each Agent, together with true and correct copies of certificates of occupancy issued with respect to such Property. The failure to deliver a notice of Substantial Completion will not prevent the Property from becoming subject to the Lease in accordance with Section 4.5. (g) Inspection. Lessor or any Agent may designate any Person in writing who is its officer, employee or agent to visit and inspect the Properties, and to the extent reasonable under the circumstances, examine Lessee's books of record and accounts pertaining to the Properties all at such reasonable times as Lessor or such Agent, as the case may be, may reasonably request and, upon such request, Lessee shall make such properties and such books of record and accounts pertaining to the Properties available to Lessor or such Agent, as the case may be, for inspection; provided, that Lessor and such Agent shall comply, and cause their respective officers, employees and agents to comply, with the provisions of Section 6.7; and provided, further, that so long as no Lease Event of Default or Construction Agency Event of Default has occurred and is continuing, no more than one such inspection shall occur per each calendar month. Notwithstanding the foregoing provisions of this Section 6.1(g), (i) except in the case of emergency or Lease Event of Default or Construction Agency Event of Default, such visits and inspections Lessor or such Agent shall provide reasonable written notice to Lessee prior to any such visit or inspection and, absent a Lease Event of Default, shall occur not more often than once per annum, (ii) any such visit and inspection shall be at the sole risk and expense of the Person so visiting or inspecting (but without excusing Lessee for any liability for any injuries to the extent resulting from Lessee's negligence or willful misconduct where such Person has complied with clause (iii) hereof) unless a Lease Event of Default or Construction Agency Event of Default has occurred and is continuing, in which case any such visit and inspection shall be at 32 PARTICIPATION AGREEMENT the expense of Lessee (provided that during the Construction Period Lessee shall request an Advance, the proceeds of which shall be used to pay such expenses), (iii) each Person so visiting or inspecting the Properties shall comply with such rules and regulations regarding safety and security as Lessee may reasonably impose, and (iv) no such Person shall be entitled to inspect any areas of the Properties or records that Lessee reasonably characterizes as confidential, proprietary or similarly necessary of protection from disclosure. (h) Liens. Except as otherwise permitted under the Operative Documents with respect to Permitted Contests, Lessee shall not incur or suffer to exist any Liens on either Property or any other Collateral other than Permitted Liens. Further, during the Construction Period, Lessee shall not be required to remove Liens for so long as such Lien is subject to a Permitted Contest. (i) Environmental Matters. Subject to Lessee's rights in respect of Permitted Contests, Lessee shall use and operate the Properties in compliance with all Environmental Laws, except to the extent that failure to comply could not reasonably be expected to have a Material Adverse Effect. Lessee shall, as soon as possible and in any event within ten days after the occurrence of any violation of an Environmental Law that could reasonably be expected to have a Material Adverse Effect, provide Lessor and each Agent with a statement of an authorized officer setting forth the details of such violation and the action which Lessee proposes to take with respect thereto. (j) Securities. Lessee shall not, nor shall it permit anyone authorized to act on its behalf to, take any action which would subject the issuance or sale of any interest in the Lease, the Investor Certificates, the Investor Contributions, the Facility Notes or any security or lease the offering of which, for purposes of the Securities Act or any state securities laws, would be deemed to be part of the same offering as the offering of the aforementioned items, to the registration requirements of Section 5 of the Securities Act or any state securities laws. (k) No Disposition of the Properties. Lessee shall not, nor shall it permit anyone authorized to act on its behalf to, sell, contract to sell, assign, lease, transfer, convey or otherwise dispose of either Property or any part thereof in violation of the Operative Documents. (l) Payment of Taxes, etc. Subject to Lessee's rights to conduct a Permitted Contest in respect of the following, Lessee shall pay (provided that during the Construction Period Lessee shall request an Advance, the proceeds of which shall be used to pay) and discharge before the same shall become delinquent, (i) all taxes, assessments and governmental charges or levies imposed upon it or upon its property, and (ii) all lawful claims that, if unpaid, might by law become a Lien upon its property, other than Permitted Liens. (m) Maintenance of Insurance. During the Construction Period, Construction Agent shall maintain, at the expense of Lessor, insurance coverage covering the Properties which meets in all respects the requirements of Section 2.7(f) of the Construction Agency Agreement. (n) Environmental Audit. During the continuance of any Lease Event of Default, Lessee shall deliver to the Investors and the Agents an Environmental Audit for each Property within twenty days of demand therefor. 33 PARTICIPATION AGREEMENT (o) Appraisal. Upon demand from any Investor or any Agent during the continuance of a Lease Event of Default, Lessee shall deliver to the Investors and the Agents an Appraisal of each Property, prepared by an appraiser satisfactory to the Investors and the Agents and in form and substance reasonably satisfactory to each of them, showing the Fair Market Value of the fee interest in the Land and Lessor's interest in the Improvements, dated within thirty days of the delivery of such Appraisal. (p) Location of Improvements. Lessee will cause each Property to be constructed in its entirety at and on the related Site, and will not approve or allow the construction of any Property or any portion thereof to be constructed at or on any location other than the related Site. (q) Property Costs. Lessee shall not incur, and shall not cause nor permit any Lessee Person to incur, any Property Costs that, when added to the aggregate Property Costs then incurred to date, would exceed the Aggregate Commitments. (r) Lessee's Interest. Lessee shall not assign or transfer its interest in the Lease or any other Operative Document except in accordance with Section 16.1 of the Lease. (s) Maintenance of Required Liquid Collateral Amount. Lessee covenants that each Collateral Agent has and shall continue to have a first priority perfected security interest in its related Account and the Liquid Collateral credited thereto, which Account and Liquid Collateral secures all of the Lessee Obligations. At any time Lessee is required under one or both Liquid Collateral Agreements to provide additional Liquid Collateral to a Collateral Agent, Lessee shall pledge such Liquid Collateral to such Collateral Agent pursuant to the related Liquid Collateral Agreement or such other agreements in form and substance satisfactory to such Collateral Agent providing for a valid and perfected first priority security interests in favor of Lessor and such Collateral Agent in such Liquid Collateral, free and clear of all Liens. Any Liquid Collateral that shall not be in the form of a direct obligation to such Collateral Agent shall be pledged to such Collateral Agent pursuant to a pledge and security agreement and a custody agreement, each in form and substance satisfactory to such Collateral Agent, to secure the Lessee Obligations. Lessee shall maintain such pledged Liquid Collateral free and clear of all Liens other than Liens in favor of Lessor and such Collateral Agent. Any income received (or loss incurred) by such Collateral Agent with respect to the balance from time to time on deposit in such Account, including any interest or capital gains on Permitted Investments made with amounts on deposit in such Account, shall remain, or be deposited, in (or be deducted from) such Account, and such Collateral Agent shall not be required to reimburse any such losses or otherwise have any liability therefor except as otherwise provided in the applicable Account Agreement. All right, title and interest in and to the cash amounts on deposit in the Account together with any Permitted Investments from time to time made pursuant to this Section shall constitute part of the Liquid Collateral and shall be held for the benefit of Lessor and the Participants, as the case may be, and shall not constitute payment of the Lessee Obligations (or any other obligations to which such funds are provided hereunder to be applied) until applied thereto as provided herein. Each Collateral Agent has the right to mark-to-market the Liquid Collateral in its related Account and to require Lessee to transfer additional Liquid Collateral to an Account pursuant to the applicable Liquid Collateral Agreement. 34 PARTICIPATION AGREEMENT (t) Final Completion Work. Lessee shall complete all Final Completion Work in a good and workmenlike manner in accordance with the Construction Materials, but in no event later than the last day of the Lease Term. (u) Financial Reports. Lessee shall furnish to Lessor and each Agent: (i) so long as Lessee is subject to the reporting requirements under Section 13 or 15(d) of the Securities Exchange Act of 1934, (A) within a reasonable amount of time (but not more than 30 days) after the Lessee is required to file the same with the SEC or any successor thereto copies of its Annual Report on Form 10-K, and (B) within 30 days after Lessee is required to file the same with the SEC, copies of its quarterly reports on Form 10-Q and any reports filed on Form 8-K, if any; (ii) at any time when Lessee is not subject to such reporting requirements, (A) as soon as available and in any event within 45 days after each fiscal quarter, the unaudited consolidated statements of consolidated earnings, stockholders' equity and cash flows of Lessee and its consolidated subsidiaries for such fiscal quarter and the related consolidated balance sheet of Lessee and its consolidated subsidiaries as at the end of such fiscal quarter, setting forth in each case in comparative form the corresponding figures for the corresponding periods in the preceding fiscal year (except that, in the case of such balance sheet, such comparison shall be to the last day of the prior fiscal year), accompanied by a certificate of a senior financial officer of Lessee, which certificate shall state that said financial statements fairly present, in all material respects, the consolidated financial condition and results of operations of Lessee in accordance with generally accepted accounting principles, consistently applied, as at the end of, and for, the relevant period (subject to normal year-end audit adjustments) and (B) as soon as available and in any event within 90 days after each fiscal year, the audited statements of consolidated earnings, stockholders' equity and cash flows of Lessee and its consolidated subsidiaries for such fiscal year and the related consolidated balance sheet of Lessee and its consolidated subsidiaries as at the end of such fiscal year, setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, accompanied by an opinion on such financial statements of independent certified public accountants of recognized national standing, which opinion shall state that said financial statements fairly present, in all material respects, the consolidated financial condition and results of operations of Lessee and its consolidated subsidiaries as at the end of, and for, such fiscal year in accordance with generally accepted accounting principles, consistently applied, as at the end of, and for, such fiscal year; (iii) together with each delivery of financial statements pursuant to clauses (i) and (ii) above, an Officer's Certificate, together with a duly executed Compliance Certificate, stating that the signer has made such inquiries as the signer deems necessary and appropriate in the circumstances and that such review has not disclosed the existence during the accounting period covered by such financial statements, and that the signer does not have actual knowledge of the existence as of the date of such certificate, of any condition or event which constitutes a Lease Event of Default or a Construction Agency Event of Default or which, after notice or lapse of time or both, would constitute a Lease Event of Default or a Construction Agency Event of Default or, if any such condition or 35 PARTICIPATION AGREEMENT event existed or exists, specifying the nature and period of the existence thereof and what action Lessee has taken or is taking or proposes to take with respect thereto and including a computation of the financial tests set forth in Section 6.1(v) and (w); (iv) such additional financial information, reports or statements as any Participant or any Agent may from time to time reasonably request. Information required to be delivered pursuant to clause (i) of this Section 6.1(u), if not previously delivered through paper copies, shall be deemed to have been delivered on the date on which Lessee provides notice to the Participants and the Agents that such information has been posted on Lessee's website on the Internet, at sec.gov/edaux/searches.htm or at another website identified in such notice and accessible by the Participants without a charge; provided that (x) such notice may be included in any certificate delivered pursuant to clause (iii) hereof and (y) HGSI shall deliver paper copies of the information referred to in clause (i) of this Section 6.1(u) upon request of any Participant or Agent. (v) Minimum Unrestricted Cash and Marketable Securities. HGSI will not permit its Unrestricted Cash, Cash Equivalents and Marketable Securities to be less than the greater of (a) $100,000,000 as at the end of any Fiscal Quarter and (b) the Cash Burn Amount for the period of four consecutive Fiscal Quarters as at the end of any Fiscal Quarter. (w) "Senior Debt Ratio". HGSI will not permit the Senior Debt Ratio as of the end of any Fiscal Quarter to be less than 1.25:1. (x) No Sale of Ground Lessor. Lessee will not sell, transfer, or otherwise dispose of Ground Lessor, other than to a wholly-owned subsidiary of HGSI. (y) Properly Margined Collateral Coverage. (i) If (A) as of any Cash Collateral Test Date the Unrestricted Cash, Cash Equivalents and Marketable Securities of HGSI and its Subsidiaries on a consolidated basis as of such date is less than the greater of (i) $200,000,000 and (ii) the Cash Burn Amount for the period of four consecutive Fiscal Quarters ended on or most recently prior to such Collateral Cash Collateral Test Date, (B) all or substantially all of the assets of HGSI or control of its outstanding shares of capital stock is acquired by a Non-Public Company, HGSI shall no later than five Business Days after such Cash Collateral Test Date, maintain its Liquid Collateral on the basis of the Properly Margined Collateral Coverage and deliver to each Collateral Agent additional Permitted Investments so that the Adjusted Market Value of the Liquid Collateral held in each Account of each Collateral Agent is not less than the applicable Required Liquid Collateral Amount with respect to such Account and the Concentration Limits are met. (ii) From and after any date on which the Unrestricted Cash, Cash Equivalents and Marketable Securities of HGSI shall be equal to or less than $300,000,000, HGSI shall deliver to Lessor and each Agent on the last Business Day of each calendar month an Officer's Certificate stating the amount of HGSI's Unrestricted Cash and Marketable Securities as of such date. 36 PARTICIPATION AGREEMENT (z) Business Activities. HGSI will not, and will not permit any Subsidiary to, engage in any business activity, except the businesses of discovery, development, manufacture or sale of biotechnology or pharmaceutical products or services and any businesses reasonably ancillary, incidental, comparable or related thereto. (aa) Amount of Advances. HGSI shall not allow the aggregate amount of Advances received by Construction Agent or Lessee, together with all interest, Yield, fees and Transaction Costs incurred or accruing with respect thereto (either prior to Substantial Completion of both Properties or, if a Lease Event of Default or a Construction Agency Event of Default has occurred and is continuing, incurred or accruing at any time, whether before or after the Outside Completion Date), to at any time exceed the Aggregate Commitments. (bb) Traville Facility Requirements. During the Construction Period with respect to the Traville Facility, Construction Agent shall comply with the conditions set forth in the opinion delivered in the Documentation Closing Date pursuant to Section 4.1(e)(iii). (cc) General Contractor. The General Contractor for the Construction of each Property shall be the Gilbane Building Company, Inc. or any contractor acceptable to the Construction Consultant and the Administrative Agent (dd) Upon Substantial Completion of the Traville Facility, HGSI shall deliver to the Lessor, the Investors, Conduit, the Agents and each Liquidity Provider a Certification by an independent architect in form and substance satisfactory to each addressee to the effect that the conditions set forth 6.1(bb) have been met. SECTION 6.2. Covenants of the Trust, Trustee and Trust Company (a) Cooperation with Lessee. Lessor shall, to the extent reasonably requested by Lessee (but without assuming additional liability on account thereof), at Lessee's expense (provided that during the Construction Period Lessee shall request an Advance, the proceeds of which shall be used to pay such expense), cooperate to allow Lessee to (i) perform its covenants contained in Section 6.1, including at any time and from time to time, upon the reasonable request of Lessee, promptly and duly to execute and deliver any and all such further instruments, documents and financing statements (and continuation statements related thereto) as Lessee may reasonably request and as shall be presented to it in final execution form in order to perform such covenants and (ii) further Lessee's interest as lessee, including the filing of any statement with respect to any tax abatements, Permitted Contests or other requirements. (b) Discharge of Liens. Lessor will not create or permit to exist at any time, and will, at its own cost and expense, promptly take such action as may be necessary duly to discharge, or to cause to be discharged, all Lessor Liens attributable to it, and will cause restitution to be made to the Collateral in the amount of any diminution of the value thereof as a result of its failure to comply with its obligations under this Section 6.2(b). Notwithstanding the foregoing, Lessor shall not be required to so discharge any such Lessor Lien while the same is subject to a Permitted Contest. (c) Change of Principal Place of Business. Lessor shall give prompt notice to each Investor, Lessee and the Agents if Lessor's principal place of business or chief executive office, 37 PARTICIPATION AGREEMENT or the office where the records concerning the Properties or the transactions contemplated by the Operative Documents are kept, ceases to be Salt Lake City, Utah, or if it changes its name, identity or structure. (d) Restrictions on and Effect of Transfer. Lessor shall not sell, assign, transfer or otherwise dispose of, or mortgage, pledge or otherwise encumber, all or any portion of its right, title or interest in, to or under any of the Operative Documents other than in accordance with the provisions of the Operative Documents. (e) No Plan Assets. Lessor shall not cause or permit any of its property or other assets to constitute "plan assets" within the meaning of United States Department of Labor Regulation Section 2510.3-101 of any "employee benefit plan" (as defined in Section 3(3) of ERISA) which is subject to Title I of ERISA, or any "plan" (as defined in Section 4975(e)(1) of the Code). (f) Acquisition of Assets. Without the consent of the Liquidity Providers and Conduit, Lessor will not acquire, by long-term or operating lease or otherwise, any property or other assets except pursuant to the terms of the Operative Documents. (g) Investments. Without the consent of the Liquidity Providers and Conduit, Lessor will not make, incur, or suffer to exist any loan, advance, extension of credit or other investment in any Person other than pursuant to the Operative Documents. (h) Securities. Lessor shall not, nor shall it permit anyone authorized to act on its behalf to, take any action which would subject the issuance or sale of any interest in the Lease, the Investor Certificates, the Investor Contributions, the Facility Notes or any security or lease the offering of which, for purposes of the Securities Act or any state securities laws, would be deemed to be part of the same offering as the offering of the aforementioned items, to the registration requirements of Section 5 of the Securities Act or any state securities laws. (i) Other Activities. Neither the Trust nor Trustee (in each case, in its capacity as such) shall conduct, transact or otherwise engage in, or commit to transact, conduct or otherwise engage in, any business or operations other than the entry into, and exercise of rights and performance of obligations in respect of, the Operative Documents and other activities incidental or related to the foregoing. (j) Ownership of Properties; Indebtedness. Neither the Trust nor Trustee (in each case, in its capacity as such) shall conduct, transact or otherwise engage in, or otherwise operate any properties or assets other than in connection with the activities described in clause (i) above, or incur, create, assume or suffer to exist any indebtedness or other consensual liabilities or financial obligations other than as may be incurred, created or assumed or as may exist in connection with the activities described in clause (i) above (including, in the case of the Trust, obligations incurred by the Trust hereunder, and including, in the case of Trustee, obligations under the Investor Certificates and other obligations incurred by Trustee hereunder). (k) Disposition of Assets. Neither the Trust nor Trustee (in each case, in its capacity as such) shall convey, sell, lease, assign, transfer or otherwise dispose of any of its property, business or assets, whether now owned or hereafter acquired, except to the extent expressly 38 PARTICIPATION AGREEMENT contemplated by the Operative Documents or as otherwise directed in writing pursuant to the Operative Documents. (l) Compliance with Operative Documents. Each of the Trust, Trustee and Trust Company shall at all times observe and perform all of the covenants, conditions and obligations required to be performed by it (whether in its capacity as the Trust or Trustee, as the case may be, or in its individual capacity or otherwise) under each Operative Document to which it is a party. (m) Trust Agreement. Without prejudice to any right under the Trust Agreement of Trustee to resign, each of Trustee and Trust Company (a) agrees not to terminate or revoke the trust created by the Trust Agreement, (b) agrees not to amend, supplement, terminate, revoke or otherwise modify any provision of the Trust Agreement in any manner which could reasonably be expected to have an adverse effect on the rights or interests of the Lenders, any Lessor Hedge Counterparty or Lessee hereunder or under the other Operative Documents and (c) agrees to comply with all of the terms of the Trust Agreement. SECTION 6.3. Covenants of the Investors. Except as otherwise set forth below, each of the Investors covenants with each of the other parties hereto as follows: (a) No Amendment. Without the consent of Conduit, each Agent and Lessee, such Investor shall not amend, supplement, terminate or revoke or otherwise modify any Operative Document to which it is a party or any provision of the Trust Agreement before the Lease Term Expiration Date or consent to any of the foregoing. (b) No Violation. Such Investor will not direct Lessor to take any action in violation of, or that would cause Lessor to violate, the Operative Documents. SECTION 6.4. No Proceedings. (a) Lessee, each Investor, Conduit, each Agent, and each Liquidity Provider each hereby covenants and agrees, prior to the date which is one year and one day after the payment in full of the latest maturing Commercial Paper Note, the Facility Loans, the Conduit Loans, the amounts due each Investor and all other obligations of Lessee under any Operative Document to which Lessee is a party, it will not institute against, or join or assist any other Person in instituting against, Lessor any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or other similar proceeding under the laws of the United States or any state of the United States (each a "Proceeding"); and (b) Lessee, each Investor, each Agent and each Liquidity Provider each agrees that, prior to the date which is one year and one day after the payment in full of the latest maturing Commercial Paper Notes of Conduit, it will not institute against, or join or assist any other Person in instituting against, Conduit, any Proceeding; (any such Person instituting or joining any such action described in clause (a) or (b), the "Instituting Party", and any such Person against whom any such proceeding is instituted, the "Petitioned Party"). In the event that any party hereto takes action in violation of this Section 6.4, the Petitioned Party hereby agrees it shall file an answer with the bankruptcy court or otherwise properly contest the filing of such a petition by the applicable Instituting Party against such Petitioned Party or the commencement of such action and raise the defense that the Instituting Party has agreed in writing not to take such action and should be estopped and precluded therefrom and such other defenses, if any, as its counsel advises that it may assert. 39 PARTICIPATION AGREEMENT The provisions of this Section 6.4 shall survive the termination of this Participation Agreement and the other Operative Documents. SECTION 6.5. Quiet Enjoyment. In the absence of an Event of Default, neither Lessor, Conduit, the Agents nor any other Participant shall take, or permit any Person claiming by, through or under it to take, any affirmative action to interfere with the rights of Lessee to full enjoyment of the Properties during the Lease Term in accordance with the Lease. The sole remedy of Lessee for breach of this Section 6.5 shall be to sue for damages for the breach hereof, and/or sue for a declaratory judgment, injunctive relief or other specific performance hereof, and such breach shall not affect the obligations of Lessee to pay all amounts (including Rent) due under the Lease, this Participation Agreement and the other Operative Documents, or the rights of Lessor, Conduit, the Agents and the other Participants to initiate legal action and otherwise enforce the obligations of Lessee under the Lease, this Participation Agreement and the other Operative Documents. The parties recognize that any sale, assignment, transfer or other disposition, or mortgage, pledge or other encumbrance (each a "disposition"), of any part of the Properties or any of Lessor's rights under the Operative Documents is subject to Lessee's rights, if any, under the Operative Documents, except any disposition required or permitted by the Operative Documents following the occurrence and during the continuation of any Lease Event of Default. SECTION 6.6. Discharge of Lessor Liens. Each of the Participants and each Agent hereby severally agrees that it will not create or permit to exist at any time, and will, at its own cost and expense, promptly take such action as may be necessary duly to discharge, or to cause to be discharged, all Lessor Liens on the Properties (or on any interest in or proceeds from any of the Operative Documents) attributable to it. Notwithstanding the foregoing, neither any Agent nor any Participant shall be required to so discharge any such Lessor Lien while the same is subject to a Permitted Contest. SECTION 6.7. Confidentiality. Lessor, each Participant and each Agent shall treat (x) all non-public information which has been identified in writing as such by Lessee and has been obtained pursuant to the transactions contemplated by this Participation Agreement or any other Operative Document and (y) HGSI's and its Affiliates' participation in any of the transactions, and the terms thereof, contemplated hereby and thereby, as confidential and shall make no disclosure of any such information, except to any of their examiners, Affiliates, outside auditors, counsel, rating agencies and other professional advisors (which parties shall include the Agents) in connection with this Participation Agreement or the other Operative Documents, or to any court or other tribunal in connection with any dispute arising out of the Operative Documents, or as reasonably required by any potential transferee, participant or assignee permitted hereunder or as required or requested by any governmental agency or representative thereof or pursuant to legal process; provided, however, that (a) unless specifically prohibited by Applicable Laws or court order, Lessor, each Participant and Agent shall notify Lessee of any request by any governmental agency or representative thereof (other than any such request in connection with an examination of the financial condition of such Person by such governmental agency) for disclosure of any such non-public information prior to disclosure of such information; 40 PARTICIPATION AGREEMENT (b) prior to any such disclosure pursuant to this Section 6.7, the subject party shall require any such potential transferee, participant and assignee receiving a disclosure of non-public information to agree in writing (i) to be bound by this Section 6.7; and (ii) to require such Person to require any other Person to whom such Person discloses such non-public information to be similarly bound by this Section 6.7; and (c) except as may be required by an order of a court of competent jurisdiction and to the extent set forth therein, neither Lessor nor any Participant shall be obligated or required to return any materials furnished by Lessee or any of its subsidiaries or Affiliates. SECTION 6.8. Performance of Operative Documents. Each party hereto hereby agrees to observe and perform in all material respects all of the covenants, conditions and obligations required to be observed or performed by it in each Operative Document to which it is a party. SECTION 6.9. Easements. Construction Agent may, subject to the conditions, restrictions and limitations set forth herein and in the other Operative Documents, at any time prior to the earlier of (i) the Lease Term Commencement Date in respect of a Property, whereupon the Lease shall control with respect to such Property, and (ii) termination of the Construction Agency Agreement, grant easements, licenses, rights-of-way, party wall rights and other rights in the nature of easements, with or without consideration, necessary or appropriate in the reasonable opinion of Construction Agent for the construction or operation of the Properties, without the consent of Lessor, any Participant or any Agent, as long as the following conditions are satisfied unless waived pursuant to Section 12.5 and, as long as the following conditions are satisfied or so waived, Construction Agent may execute such instruments and take such actions in the name of Lessor, any Participant or any Agent, and Lessor shall execute a separate power of attorney evidencing such right from time to time upon the request of Construction Agent: (a) no Event of Default shall have occurred and be continuing; (b) there shall be sufficient sums in the applicable Construction Budget to pay all costs and expenses in connection therewith including any reasonable out-of-pocket costs of Lessor and Administrative Agent in connection therewith, it being agreed that to the extent there shall be insufficient funds in the applicable Construction Budget to pay all costs and expenses in connection with such matter, then Construction Agent shall not proceed or continue nor incur any Improvement Costs, as the case may be, with respect to such matter until after the Lease Term Commencement Date; (c) Construction Agent shall have delivered to Administrative Agent a certificate of a Responsible Officer of Construction Agent stating that: (i) such action will not diminish the Fair Market Value, useful life or residual value of the Properties in any material respect and that there are sufficient sums in the applicable Construction Budget to pay all costs and expenses with respect to such action; 41 PARTICIPATION AGREEMENT (ii) such action will not cause the Land or the Improvement or any portion thereof to fail to comply in any material respect with the provisions of this Participation Agreement, any other Operative Document or Applicable Laws; (iii) the Construction Agency Agreement and Construction Agent's obligations thereunder shall continue in full force and effect, without abatement, suspension, deferment, diminution, reduction, counterclaim, setoff, defense or deduction; and (iv) such action will not impose or create any liability or obligation on Lessor except as otherwise expressly permitted herein or in any of the Operative Documents unless Lessee shall indemnify Lessor therefor or shall have already indemnified Lessor therefor pursuant to this Participation Agreement, the Construction Agency Agreement or any other Operative Document and confirmed (with respect specifically to such action) such indemnification obligation. At the request of Construction Agent, so long as no Construction Agency Event of Default shall have occurred and be continuing, Lessor, each Agent and each Participant, as applicable, shall, from time to time during the Construction Period and upon at least ten (10) Business Days' prior written notice from Construction Agent, consent to and join in any easements, licenses, rights-of-way, party wall rights and other rights in the nature of easements pursuant to this Section 6.9; provided, that each of the conditions set forth in clauses (a) through (c) of this Section 6.9 are satisfied or waived by the Collateral Agent pursuant to the first paragraph of this Section 6.9. At the request of Lessee, so long as no Bankruptcy Default or Lease Event of Default shall have occurred and be continuing, Lessor shall, from time to time during the Lease Term and upon at least ten (10) Business Days' prior written notice from Lessee, consent to and join in any easements, licenses, rights-of-way, party wall rights and other rights in the nature of easements pursuant to Section 8.4 of the Lease; provided, that each of the conditions set forth in Section 8.4 of the Lease are satisfied or waived by the Collateral Agent (at the written direction of the Directing Party). SECTION 6.10. Certain Notices. Construction Agent covenants with each of the other parties hereto that it shall deliver to the Administrator all notices required to be delivered by it to Administrative Agent or Lessor under the Construction Agency Agreement. SECTION 6.11. Refinancing. Lessee shall have the right, by notice to the Agents and the Participants at least 30 days prior to the date specified in such notice for the refinancing, to request a refinancing or refinancings of all, but not less than all, of the A Loans, whereupon BancBoston Leasing Investments Inc. shall proceed in good faith to arrange a refinancing of the A Loans on a basis acceptable to Lessee. Lessee shall not have the right to cause any such refinancing (i) if a Default or Event of Default shall have occurred and be continuing, or (ii) more than twice during the Lease Term. None of the Agents or the Participants shall be obligated to effect any such refinancing unless (A) such refinancing would not have an adverse effect on the interest of any Investor or the holder of any B Loan in the Overall Transaction, (B) the interest rates and program fees applicable to the B Loans and related commitments shall have been reset at levels satisfactory to the Lenders in their sole respective discretion, (C) all out-of- 42 PARTICIPATION AGREEMENT pocket expenses (including reasonable legal fees and expenses and any taxes or duties) incurred by any Agent or Participant in connection with such refinancing (whether or not consummated) will be borne by Lessee, (D) the documentation of such refinancing (including opinions of counsel and other ancillary documents) shall be reasonably satisfactory to the Agents and the Participants, (E) all authorizations, approvals and consents which are necessary for such refinancing shall have been obtained, (F) all amounts due and owing in respect of the A Loans under the Operative Documents shall have been paid in full. SECTION 6.12. Lessor Hedging Agreements. (a) At any time after the Documentation Date, if HGSI has arranged for one or more interest rate swaps in an aggregate notional principal amount of up to the then outstanding Lease Balance in form and substance satisfactory to Administrative Agent and the Collateral Agents and substantially in the form of the ISDA Form (Multicurrency - Cross-Border) (the "Lessor Hedging Agreements") to be entered into by one or more Lessor Hedging Agreement Counterparty, then upon the written request from HGSI, Lessor shall enter into such Lessor Hedging Agreements with a Lessor Hedging Agreement Counterparty; provided that, (i) at the time the Lessor Hedging Agreements are entered into, each of the Lessor Hedging Agreement Counterparties shall be either Fleet National Bank or First Union National Bank, or either or their respective Affiliates, (ii) each of the Lessor Hedging Agreement Counterparties shall have executed acknowledgments to the Operative Documents and shall agree to be bound by the distribution provisions of Article X, (iii) all Lessor Hedging Agreements shall incorporate mutatis mutandis the provisions of Section 12.24. (b) During the Construction Period, Lessee shall include in each Advance Request an Advance to fund all net amounts then owed by Lessor to each Lessor Hedging Agreement Counterparty under the Lessor Hedging Agreements and on each Scheduled Payment Date, Administrative Agent shall pay to the Lessor Hedging Agreement Counterparties, solely to the extent of the Advance for such items, from the proceeds of the applicable Advance, all such net amounts then owed by Lessor to each Lessor Hedging Agreement Counterparty. (c) After the expiration of the Construction Period, Lessee shall pay to Administrative Agent as Supplemental Rent on each Scheduled Payment Date all amounts then owed by Lessor to the Lessor Hedging Agreement Counterparties under the Lessor Hedging Agreements, and such payment shall be distributed by Administrative Agent solely in accordance with Article X. (d) Lessor and each Lessor Hedging Agreement Counterparty agree that in the event Administrative Agent shall not, at any time, have received from Lessee all amounts then due and owed to such Lessor Hedging Agreement Counterparty under any Lessor Hedging Agreement (i) such Lessor Hedging Agreement Counterparty shall not have the right to sue Lessor for such unpaid amount, (ii) Lessor shall assign to such Lessor Hedging Agreement Counterparty its claim against Lessee with respect to such unpaid amount, and (iii) in the event that such Lessor Hedging Agreement Counterparty shall successfully receive any payment with respect to such claim, it shall turn over to Administrative Agent all such payments for distribution in accordance with Article X. 43 PARTICIPATION AGREEMENT (e) In addition, HGSI shall provide to each of the Lessor Hedging Agreement Counterparties a copy of any notice of its election to exercise any Purchase Option or the Renewal Option with respect to one or both of the Properties. ARTICLE VII PAYMENT OF CERTAIN EXPENSES SECTION 7.1. Payment of Transaction Costs and Other Costs. Transaction Costs shall be paid from Advances in accordance with and subject to Section 4.2(b). In addition, in the event that the transactions contemplated hereby are consummated, Lessee shall pay or reimburse each of the other parties to this Participation Agreement other than Lessee and HGSI for all other reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of special counsel) incurred in connection with: (a) any casualty, Event of Loss or termination of this Participation Agreement or any other Operative Document, or any extension, amendment, modification or waiver of or under this Participation Agreement or any other Operative Document whether or not such extension, amendment, modification or waiver is consummated; (b) the negotiation and documentation of any restructuring or "workout", whether or not consummated, of any Operative Document; (c) the enforcement of the rights or remedies under the Operative Documents arising out of (i) any Lease Event of Default or Construction Agency Event of Default or (ii) any Conduit Loan Event of Default; (d) further assurances reasonably requested pursuant to Section 12.11 or any similar provision in other Operative Documents; (e) any transfer by Lessor of any interest in the Properties (or any portion thereof permitted by the Operative Documents) in accordance with the Operative Documents; and (f) the ongoing fees and expenses for which Lessee is obligated under the Operative Documents. Subject to the provisions of Sections 7.3 and 11.2, all fees and expenses referenced in this Section 7.1 payable or incurred before or during the Construction Period shall be paid through Advances. SECTION 7.2. Brokers' Fees. Subject to Section 12.2, Lessee shall pay or cause to be paid (provided that during the Construction Period Lessee shall request an Advance, the proceeds of which shall be used to pay) any brokers' fees (including the any fees of any Lessor Hedging Agreement Counterparty), including any interest and penalties, which are payable in connection with the transactions contemplated by this Participation Agreement and the other Operative Documents. SECTION 7.3. Limitations During Construction Period. If at any time there shall be Property Costs (including any costs resulting from a Force Majeure Event), or other amounts which are required to be paid prior to or during the Construction Period through Advances under this Article VII or Sections 6.12, 9.2, 9.7, 9.8 or 9.9 or under any Operative Document, and (i) such amounts are not included in the applicable Construction Budget (as the same may be adjusted pursuant to the Construction Agency Agreement) or (ii) there are not sufficient Available Commitments remaining to complete the construction of the Improvements pursuant to the Construction Documents (net of all Yield Payment Advances and Interest Payment Loans), and, in either case, there are no Other Available Amounts to pay for such amounts, then at such time a Construction Agency Event of Default shall be deemed to have occurred. 44 PARTICIPATION AGREEMENT ARTICLE VIII TRANSFERS OF PARTICIPANTS' INTERESTS SECTION 8.1.1. Transfers by Investors. (a) The Investors may transfer or assign all or any part of its respective interest in or under this Participation Agreement, the other Operative Documents or the Certificates without the prior written consent of Lessee; provided, that, without the prior written consent of Lessee, no Investor shall transfer any such interest to any Person whose principal business is the discovery, development, manufacture or sale of biotechnology or pharmaceutical products or services. On or prior to such transfer, the assignee (if not already an Investor) shall deliver to Lessee, Lessor, Conduit and Administrative Agent any certificate in respect of withholding taxes required under Section 9.3. Administrative Agent shall notify Lessee of any such transfer or assignment promptly upon the issuance of new Investor Certificates evidencing such transfer or assignment, if applicable. As a condition to any such transfer, the transferor and transferee shall deliver to Lessee, Lessor and each Agent an Assignment and Acceptance, in substantially the form of Exhibit C hereto, executed by the assignee or transferee. (b) In the event that Lessee shall have exercised the Purchase Option in accordance with Section 5.1(a) or (d) of the Lease with respect to both Properties or shall have elected to purchase both Properties pursuant to Section 5.1.2(ii) of the Construction Agency Agreement, Lessee may elect, upon delivery of written notice to each Investor, to purchase from the Investors on the Purchase Date all but not less than all of the outstanding Investor Certificates for a price equal to the aggregate Investor Amounts then outstanding plus all Yield and other additional amounts then owing to the Investors under the Operative Documents (it being understood that any such purchase price shall be paid directly to the Investors and shall be deducted from any amounts payable by Lessee under Section 5.1(a) of the Lease in connection with its exercise of the Purchase Option with respect to both Properties) In the event that Lessee shall elect to purchase the Investor Certificates pursuant to this Section 8.1.1(b), then (i) Lessee shall have the right to designate another Person as the purchaser of the Investor Certificates, provided, that Lessee may not convey the option to purchase the Investor Certificates itself and may not delegate its obligations in respect of the payment of the purchase price therefore, and (ii) each Investor shall convey its Investor Certificates without any representations or warranties, except specifically, a representation and warranty that (A) such Investor has authority to transfer such Investor Certificates and (B) such Investor Certificates are free and clear of all Liens attributable to such Investor. SECTION 8.1.2. Transfers by Conduit. Conduit (a) may transfer or assign any or all of its rights and obligations under this Participation Agreement, the Loan Agreement, the Liquidity Agreement or any other Operative Document (i) in accordance with the Loan Agreement and the Liquidity Agreement to the Liquidity Providers (or an agent on their behalf) and (ii) to any other multiseller commercial paper conduit administered by Administrative Agent or an Affiliate thereof that is rated no less than A-1 by S&P and P-1 by Moody's (provided, that in connection with any such transfer each related Liquidity Provider shall commit to provide liquidity fundings in connection with the new conduit in amounts equal to its Commitment hereunder), and (b) in all other cases, may not transfer or assign any or all of such rights and obligations without the 45 PARTICIPATION AGREEMENT prior written consent of Lessor and Lessee, which consent shall not be unreasonably withheld and which consent, in the case of Lessee shall not be required at any time during which there exists and is continuing a Bankruptcy Default, a Lease Event of Default or a Construction Agency Event of Default, and, in any event, subject to an assumption agreement in substantially the form attached to the Liquidity Agreement. SECTION 8.2. Transfers by Liquidity Providers. Each Liquidity Provider may transfer or assign all or any portion of, or sell any participation in, its Facility Loans on the terms and conditions applicable to such Liquidity Provider's transfer and assignment of, or sale of a participation in, its Commitments (as defined in the Liquidity Agreement) and Percentage Interests under the Liquidity Agreement, mutatis mutandis, and not otherwise. No Liquidity Provider may transfer or assign any portion of, or sell any participation in, any Facility Loan unless it shall also at the same time transfer or assign, or sell a participation, to the assignee of such Facility Loan a proportionate interest in such Liquidity Provider's Commitments (as defined in the Liquidity Agreement) and it's share of Borrowings under the Liquidity Agreement. SECTION 8.3. Replacement of Conduit, an Investor or a Liquidity Provider. If (i) any Investor or any Liquidity Provider defaults in any of its material obligations pursuant to the Operative Documents, (ii) any Conduit Loan Event of Default shall occur which does not result from a Lease Event of Default, (iii) any Participant charges Increased Costs under Section 9.7 or the provisions of Section 9.8 shall be applicable or (iv) payments to a Participant shall become subject to withholding taxes, then Lessee shall be permitted to replace the defaulting party in the case of clause (i) or (ii) above, the Liquidity Provider charging Increased Costs or the Participant as to which Section 9.8 shall be applicable in the case of clause (iii) above, or the Participant to which payments have become subject to withholding taxes in the case of clause (iv) above; provided, however, that Administrative Agent shall have the right to direct Lessee to use commercially reasonable efforts to replace such Participant in any case where clause (iii) or (iv) above may be applicable; provided further, however, that any replacement of any party pursuant to this Section 8.3 shall satisfy the following conditions: (A) such replacement shall not conflict with any Applicable Laws, (B) the replaced party shall have received all amounts owing to it under the Operative Documents, (C) Lessee shall be obligated to pay any reasonable fees and expenses arising in connection therewith (provided, Lessee may exercise and/or shall preserve its rights and remedies as against a defaulting Investor or Liquidity Provider and provided further, during the Construction Period, such fees and expenses shall be funded through Advances), (D) any replacement party shall agree in writing to assume and be subject to all of the terms and conditions of the Operative Documents that were applicable to its predecessor-in-interest and this Participation Agreement, and (E) in the event that Conduit is replaced, unless a Liquidity Provider affirmatively consents to continue to act in the capacity as a Liquidity Provider, Lessee must replace each such non-consenting Liquidity Provider. Each Investor and each Liquidity Provider agree to cooperate with Lessee in its efforts to arrange replacements as contemplated by this Section 8.3. In addition, Lessee shall have the right to effect a replacement of a Liquidity Provider in accordance with Sections 3.6 and 3.7 of the Liquidity Agreement and shall be a third party beneficiary of such provisions and the other provisions thereof. SECTION 8.4. Transfers by HGSI. HGSI shall not assign or transfer any of its rights or obligations under the Operative Documents to which it is a party, the Properties, any 46 PARTICIPATION AGREEMENT Improvement or the Overall Transaction, other than in respect of an assignment or transfer described in Section 12.25 and any purported transfer without the written consent of all Participants shall be void. SECTION 8.5. Renewal of Lease Term Expiration Date and Maturity Dates. (a) Notwithstanding the issuance by either Lessee or Lessor of a cancellation notice pursuant to Article VI of the Lease, Lessee may request in writing (a "Renewal Option Request") to the Participants that the Participants agree that (i) the Lease Term Expiration Date may be renewed for two (2) seven (7) year consecutive renewal terms (each such period, a "Renewal Term"), in the first instance to follow the term that would otherwise expire on the Lease Term Expiration Date, and thereafter, if the first Renewal Option is effected, to follow the immediately preceding Renewal Term, and (ii) the Maturity Dates shall be correspondingly extended to the end of each Renewal Term upon each such exercise by Lessee of its option for a Renewal Term. Each Renewal Option Request must be delivered in writing to each Participant not later than 235 days prior to the then effective Lease Term Expiration Date. Each Participant will notify Administrative Agent in writing of whether or not it has consented to any Renewal Option Request not later than 45 days after receipt of the related Renewal Option Request (the "Renewal Option Response Date"). Any Participant who does not so notify Administrative Agent and Lessee by the Renewal Option Response Date will be deemed to have not consented to such Renewal Option Request. Any Liquidity Provider, Investor or Conduit that has notified Administrative Agent and Lessee that it has not consented to an Renewal Option Request or that is deemed not to have consented, as provided in the preceding sentence, shall be deemed a "Non-Consenting Participant". Each Participant's determination with respect to an Renewal Option Request shall be a new credit determination and within such Participant's sole and absolute discretion. The renewal (each, a "Renewal Option") contemplated by the Renewal Option Request shall become effective as of the first date (the "Renewal Option Effective Date" with respect to such Renewal Option) on or after the Renewal Option Response Date on which all of the Liquidity Providers, Investors and Conduit (other than Non-Consenting Participants who have been replaced by Replacement Participants in accordance with Section 8.5(b)) and Replacement Participants shall have consented to such Renewal Request; provided that on both the date of the Renewal Option Request and the Renewal Option Effective Date, (x) each of the representations and warranties made by Lessee in Article V hereof shall be true and correct in all material respects as if made on and as of each such date (except as expressly provided otherwise in the Renewal Request), (y) no Event of Default shall have occurred and be continuing, and (z) on each of such dates Administrative Agent shall have received a certificate of Lessee as to the matters set forth in clauses (x) and (y) above insofar as such matters pertain to such party; and 47 PARTICIPATION AGREEMENT provided further that in no event shall the Renewal Option Effective Date occur unless each of the Liquidity Providers, Investors and Conduit (other than Non-Consenting Participants who have been replaced) and Replacement Participants in accordance with Section 8.5(b) shall have consented to the Renewal Option Request on or before the Lease Term Expiration Date as in effect before giving effect to the renewal requested in such Renewal Option Request. (b) At any time after the Renewal Option Response Date, Lessee shall be permitted to replace any Non-Consenting Participant with a replacement bank or other financial institution (a "Replacement Participant"); provided that, in addition to the requirements set forth in Section 8.4, (i) such Non-Consenting Participant shall sell (without recourse, other than a representation to the effect that such Non-Consenting Participant is the owner of its respective Facility Loan, Percentage Interest, Conduit Loan and Investor Certificate free and clear of all liens, encumbrances and other interests attributable to it) to the Replacement Participant all Facility Loans, Percentage Interests, Conduit Loans and/or Investor Certificates of such Non-Consenting Participant for an amount equal to, as applicable, (A) the aggregate outstanding principal amount of such Facility Loans, Percentage Interests or Conduit Loans plus accrued interest to (but not including) the date of sale, or (B) the aggregate outstanding Investor Amount related to such Investor Certificates plus accrued Yield to (but not including) the date of sale, (ii) Lessee shall pay (provided that during the Construction Period Lessee shall request an Advance, the proceeds of which shall be used to pay) to such Non-Consenting Participant any amounts arising under Section 9.9 if any Facility Loan or Conduit Loans owing to, and/or Percentage Interests or Investor Certificates held by, such Non-Consenting Participant shall be purchased other than on the last day of the Interest Period or Interest Periods relating thereto, (iii) such replacement shall be made in accordance with the provisions of Section 8.3 (provided that the relevant Replacement Participant or Lessee shall be obligated to pay the reasonable transaction costs arising in connection therewith (provided further that during the Construction Period, unless the Replacement Participant elects to pay such costs, Lessee shall request an Advance, the proceeds of which shall be used to pay such transaction costs)), (iv) the Replacement Participant shall have agreed to be subject to all of the terms and conditions of the Operative Documents (including the extension of the Maturity Date) that were applicable to its predecessor-in-interest, and (v) such replacement must be consummated no later than the original Lease Term Expiration Date (in the case of the first Renewal Option) or the anniversary of the original Lease Term Expiration Date next following the most recent Renewal Option Response Date (in the case of subsequent Renewal Options). A Non-Consenting Participant's rights under the indemnification provisions of the Operative Documents shall survive any sale of its Facility Loans, Percentage Interests, Conduit Loans and/or Investor Certificates to a Replacement Participant. ARTICLE IX INDEMNIFICATION SECTION 9.1. General Indemnification. SECTION 9.1.1. General Indemnification. Whether or not any of the transactions contemplated hereby shall be consummated, Lessee shall pay and assume liability for, and does 48 PARTICIPATION AGREEMENT hereby agree to indemnify, protect, defend, save and keep harmless, on an After-Tax Basis, each Indemnitee from and against any and all Claims that may be imposed on, incurred by or asserted against such Indemnitee (whether because of action or omission by such Indemnitee), whether or not such Claim is covered by any other indemnification under this Article IX or such Indemnitee shall also be indemnified as to any such Claim by any other Person, whenever such Claim arises or accrues, including whether or not such Claim arises or accrues at any time prior to or after the Maturity Date, in any way arising out of or relating to: (a) any of the Operative Documents or any of the transactions contemplated thereby, any investigation, litigation or proceeding in connection therewith, or any amendment, modification or waiver in respect thereof; (b) the Properties, the Land, the Improvements or any part thereof or interest therein; (c) the purchase, mortgaging, design, construction, preparation, installation, inspection, delivery, non-delivery, acceptance, rejection, purchase, ownership, possession, rental, lease, sublease, repossession, maintenance, repair, alteration, modification, addition or substitution, storage, transfer of title, redelivery, use, financing, refinancing, operation, condition, sale (including, without limitation, any sale or other transfer pursuant to the Lease), return or other disposition of all or any part of any interest in any Property, the Land or the imposition of any Lien (or incurring of any liability to refund or pay over any amount as a result of any Lien) thereon, including, without limitation: (i) Claims or penalties arising from any violation of law or in tort (strict liability or otherwise), (ii) any Claim resulting from or related to latent or other defects, whether or not discoverable, (iii) any Claim resulting from or related to the acquisition of any Site or Construction thereon, (iv) any Claim based upon a violation or alleged violation of the terms of any restriction, easement, condition or covenant or other matter affecting title to any Property, (v) the making of any Alterations in violation of any standards imposed by any insurance policies required to be maintained by Lessee pursuant to this Participation Agreement, the Lease or the Construction Agency Agreement which are in effect at any time with respect to any Property or any part thereof, (vi) any Claim for patent, trademark or copyright infringement, (vii) Claims arising from any public improvements with respect to any Site resulting in any change or special assessments being levied against such Site or any plans to widen, modify or realign any street or highway adjacent to such Site, or any Claim for utility "tap-in" fees, or (viii) claims arising from any agreement, arrangement or instrument executed to fulfill, or enhance, develop or facilitate the construction, development or operation of the Properties; (d) the offer, issuance, sale, transfer or delivery of the Investor Certificates by Lessor; (e) the breach by Lessee, including in its role as a Construction Agent, of any covenant, representation or warranty made by it or deemed made by it in any Operative Document or any certificate delivered by it in connection therewith; (f) any contract or agreement entered into by Construction Agent, any of its respective designees or Affiliates or, if so requested, Lessor, pursuant to the terms of the Construction Agency Agreement; 49 PARTICIPATION AGREEMENT (g) the transactions contemplated hereby or by any other Operative Document, in respect of the application of Parts 4 and 5 of Subtitle B of Title I of ERISA and any prohibited transaction described in Section 4975(c) of the Code with respect to a Plan; (h) the retaining or employment of any broker, finder or financial advisor by any Lessee Person to act on its behalf in connection with this Participation Agreement; (i) any other agreement entered into or assumed by any Construction Agency Person in connection with any Property; or any Site or (at the direction or with the consent of Lessee or Construction Agent) by Lessor; or (j) the ownership of the Land underlying, or the development, construction or the construction financing of, any Property; (including, in connection with each of the matters described in this Section 9.1 to which this indemnity shall apply, matters based on or arising from the negligence of any Indemnitee). SECTION 9.1.2. Exceptions to Indemnifications. Notwithstanding the provisions of Section 9.1.1 or 9.1.3, Lessee shall not be obligated to indemnify an Indemnitee (nor any of its Affiliates) under Section 9.1.1 or 9.1.3, and Lessor shall not be required to indemnify a Construction Period Indemnitee under Section 9.1.3, for any Claim to the extent resulting from or arising out of: (i) the fraud, gross negligence (it being understood that Lessee shall be required to indemnify an Indemnitee (subject to the other provisions of this Section 9.1.2 and Section 9.1.3) even if the ordinary (but not gross) negligence of such Indemnitee, or any Affiliate thereof, caused or contributed to such Claim) or willful misconduct of such Indemnitee or any of its Affiliates (other than the fraud, gross negligence or willful misconduct imputed as a matter of law to such Indemnitee solely by reason of entering into the Operative Documents or the consummation of the transactions contemplated thereby); (ii) the breach by such Indemnitee or any of its Affiliates of its respective representations and warranties in this Participation Agreement or any other Operative Document, or the breach by such Indemnitee or any of its Affiliates of its covenants as set forth in this Participation Agreement or in any other Operative Document; (iii) any Claim resulting from the imposition of any Lessor Lien attributable to such Indemnitee or its Affiliates; (iv) any Claim for environmental liability, which liability is addressed in Section 9.5; (v) any Claim to the extent attributable to acts or events which occur after the expiration of the Lease Term or earlier termination of the Lease and the return by Lessee of the Properties in accordance with the terms thereof (except (A) to the extent fairly attributable to acts, events, liabilities or damages occurring or accruing prior thereto; (B) Claims arising following the termination or expiration of the Lease Term so long as Collateral Agent or any Participant continues to exercise remedies against Lessee in respect of the Operative Documents and (C) Claims arising after the expiration of the Lease Term so long as Lessor is remarketing the Properties (or any interest therein) in accordance with Section 7.1 of the Lease); (vi) any Claim for the recovery of Improvement Costs whether or not such Claim arises solely as a result of a Construction Agency Event of Default (which for the avoidance of doubt shall include Construction Breakage Costs and other amounts payable by Construction Agent as Default Completion Costs) or costs incurred in remediating a Construction Agency Event of Default prior to the Lease Commencement Date, other than if such Claim results from the gross negligence or willful or intentional act or omission of any Construction Agency Person as to 50 PARTICIPATION AGREEMENT which Lessee shall fully indemnify each Indemnitee under Section 9.1.1 (without the right to obtain an Advance therefor); (vii) any Claim in respect of Taxes (such claims to be subject to Section 9.2), other than a payment to make payments under Section 9.1 or 9.1.2 on an after-tax basis as provided in Section 9.4; (viii) with respect to any Indemnitee, any expense expressly provided under any of the Operative Documents to be paid or borne by such Indemnitee or its Affiliate; (ix) any Claim to the extent resulting from a voluntary transfer by any Indemnitee or its Affiliate of all or part of its interest in the Lease, the other Operative Documents or the Properties, other than while a Lease Event of Default or a Construction Agency Event of Default has occurred and is continuing or such transfer is required (pursuant to an act or omission of Lessee or otherwise) under the Lease or to any Person consented to by Lessee; or (x) any Claim to the extent resulting from a violation of Applicable Law by such Indemnitee or its Affiliates (other than (A) a violation of Applicable Law imputed as a matter of law to such Indemnitee or such Affiliate solely by reason of entering into the Operative Documents or the consummation of the transactions contemplated thereby and (B) a violation of Applicable Law resulting from the failure of Lessee to perform its obligations under the Operative Documents). It is expressly understood and agreed that the indemnity provided for in Section 9.1.1 or 9.1.3 shall survive the resignation or removal of any Indemnitee, the expiration or termination of, and shall be separate and independent from any remedy under, the Lease, the Construction Agency Agreement or any other Operative Document. SECTION 9.1.3. Construction Period Indemnification. Notwithstanding the foregoing provisions of Section 9.1.1, to the extent any Claim under Section 9.1.1 relates to any act or omission occurring or arising prior to the Lease Commencement Date, (i) Lessee shall be obligated to indemnify only Lessor and no other Person pursuant to Section 9.1.1 for such Claim, including any Claim for which Lessor has an obligation to indemnify any Person pursuant to clause (iii) below, (ii) Lessee's obligations under Section 9.1.1 during such period shall exclude Claims resulting solely from a Nonrelated Construction Event, and (iii) Lessor shall indemnify and keep harmless each Construction Period Indemnitee for such Claims. Lessor's obligation to indemnify and hold harmless any Construction Period Indemnitee under this Section 9.1.3: (a) is not an individual or personal obligation of Lessor, but solely its obligation it its capacity as Lessor, and nothing herein shall be construed as creating any liability on Lessor, individually or personally, to pay, indemnify or hold harmless any Indemnitee under this Article IX; (b) is not an obligation binding on Lessor except to the extent of any payment received by Lessor pursuant to Section 9.1.1; and (c) shall be paid and discharged solely and exclusively from amounts received by Lessor pursuant to Section 9.1.1, and it is expressly agreed by each Construction Period Indemnitee that the sole recourse of each such Person for payment or discharge of the indemnification obligations created under Section 9.1.3(iii) shall be to such amounts paid by Lessor pursuant to this Section 9.1.3, provided that upon request by a Construction Period Indemnitee, Lessor shall demand indemnification from Lessee pursuant to Section 9.1.1; and (d) is the sole and exclusive right of each Construction Period Indemnitee against Lessor, and any right to proceed against Lessor individually or otherwise under common law, 51 PARTICIPATION AGREEMENT federal or state securities laws or otherwise for indemnification or contribution in connection with the matters covered by this Section 9.1.3 is hereby expressly waived by each Indemnitee (other than claims that may be made against Lessor, individually or personally, for fraud, gross negligence or willful misconduct). To the extent that any payments made pursuant to Section 9.1.1 or this Section 9.1.3 are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid by Lessor to a trustee, debtor in possession, receiver or other Person under any bankruptcy law, common law or equitable cause, then to such extent, the Indemnitee who received any such payments from Lessor (or any portion thereof) shall repay any such amounts to Lessor, or as may otherwise be directed by a court of competent jurisdiction. The indemnification obligations of Lessor under this Section 9.1.3 shall survive and be reinstated to the same extent, for the same period and in the same manner as the indemnification obligations of Lessee. The right of any Construction Period Indemnitee to seek indemnification from Lessor under this Section 9.1.3 is subject to and conditioned upon compliance by any such Construction Period Indemnitee with the notice, cooperation, appointment of counsel, contest rights and other provisions in Section 9.6. SECTION 9.2. General Tax Indemnity. (a) Tax Indemnity. Lessee shall pay (provided that during the Construction Period Lessee shall request an Advance, the proceeds of which shall be used to pay), defend and, on written demand, indemnify and hold harmless on an after-tax basis (in accordance with Section 9.4) each Indemnitee from and against any and all Taxes imposed by the United States federal taxing authority or by the State of Maryland or any political subdivision thereof or taxing authority therein, howsoever imposed, on or with respect to any Indemnitee, the Properties or any portion thereof, any Operative Document or Lessee or any sublessee or user of the Properties in connection with (i) the acquisition, mortgaging, design, construction, preparation, installation, inspection, delivery, non-delivery, acceptance, rejection, purchase, ownership, possession, rental, lease, sublease, repossession, maintenance, repair, alteration, modification, addition or substitution, storage, transfer of title, redelivery, use, financing, refinancing, operation, condition, sale (including, without limitation, any sale pursuant to Article V, VII or XIV of the Lease), return or other disposition of all or any part of any interest in the Properties or the imposition of any Lien (or incurrence of any liability to refund or pay over any amount as a result of any Lien) thereon, (ii) Base Rent or Supplemental Rent or the receipts or earnings arising from or received with respect to the Properties or any part thereof, or any interest therein or any applications or dispositions thereof, (iii) any other amount paid or payable pursuant to any Operative Documents, (iv) the Properties or any part thereof or any interest therein, (v) all or any of the Operative Documents, any other documents contemplated thereby and any amendments and supplements thereto (except to the extent not initiated or requested by or consented to by Lessee in writing), (vi) the issuance of the Notes and Investor Certificates, (vii) any contract relating to the construction, acquisition or delivery of the Properties or the Improvements or any interest therein and (viii) otherwise in connection with the transactions contemplated by the Operative Documents; provided, however, that the indemnification obligation of this 52 PARTICIPATION AGREEMENT Section 9.2(a) shall not apply to (A) Taxes which are based upon or measured by the Indemnitee's net receipts or net income, or which are in substitution for, or relieve such Indemnitee from, any actual Tax based upon or measured by such Indemnitee's net receipts or net income (including Taxes that are or are in the nature of minimum Taxes, capital gains, Tax preference items or alternative minimum taxes; and including taxes based on gross income or gross receipts where such Taxes would, in such taxable year, be based on net income or net receipts based solely on the transactions contemplated by the Operative Documents); (B) Taxes characterized under state or local law as franchise, net worth, or shareholder's capital (excluding, however, any value-added, or similar Taxes); (C) if no Construction Agency Event of Default, Lease Default or Lease Event of Default exists, Taxes based upon the voluntary transfer, assignment or disposition by an Indemnitee or any Affiliate thereof or any interest in such Indemnitee, or any interest in any of the Properties or any part thereof or any interest therein (other than transfers pursuant to the Security Documents, transfers pursuant to the exercise of a Purchase Option, or the Remarketing Option or otherwise pursuant to the Lease or at the request of Lessee); (D) Taxes imposed or payable by an Indemnitee to the extent imposed with respect to any period after the later of (x) the termination of the Lease and (y) the return of the Properties; (E) any tax to the extent that such Tax would have been imposed without regard to the transactions contemplated by the Operative Documents; (F) Taxes or liability resulting from any prohibited transaction described in Section 406 or 407 of ERISA or Section 4975(c) of the Code or any successor provisions thereto that may arise in connection with any transaction contemplated by the Operative Documents; (G) Taxes imposed against or payable by an Indemnitee pursuant to Section 3406 of the Code; (H) any interest, penalties or additions to Tax imposed against or payable by an Indemnitee that are the result of the failure of such Indemnitee to file any return properly and timely, unless such failure is caused by the failure of Lessee to forward to such Indemnitee any information such Indemnitee has reasonably requested from Lessee (other than information reasonably obtainable by, or in the possession of, such Indemnitee) or to provide such Indemnitee on a timely basis with any notifications or notices received by Lessee with respect to such return from any applicable taxing authority; (I) except in the case of a holder of a Note, taxes that result directly from such Indemnitee or any of its Affiliates not being "a United States person" as such term is defined in Section 7701(a)(30) of the Code and the applicable regulations thereunder; and (J) except as set forth in Section 9.3, withholding taxes. Notwithstanding the foregoing, (x) Lessee shall not be required to indemnify under this Section 9.2 for (1) as to any Indemnitee, any Claim to the extent resulting from the gross negligence, willful misconduct, bad faith or criminal conduct of such Indemnitee, any representation or warranty by such Indemnitee in any of the Operative Documents being incorrect in any material respect, or the breach by such Indemnitee of any of the provisions of the Operative Documents; and (2) as to any Indemnitee, any Claim such Indemnitee may have resulting from Lessor Liens which such Indemnitee is responsible for discharging under the Operative Documents and (y) Lessee shall be required to indemnify for Taxes imposed by a jurisdiction outside of the United States as a result of (i) the payment by Lessee of any amount pursuant to this Participation Agreement or the other Operative Documents from, or (ii) the booking by Lessee of some or all of the transaction contemplated by the Operative Documents in, such jurisdiction. Notwithstanding the foregoing, the exclusions from Lessee's indemnification obligation of this Section 9.2(a) set forth in sub-clauses (A), (B) and (C) (to the extent that any such Tax is imposed by its express terms in lieu of or in substitution for a Tax set forth in subclauses (A), 53 PARTICIPATION AGREEMENT (B) and (C) above shall not apply (but the other exclusions shall apply) to any Taxes or any increase in Taxes imposed on an Indemnitee net of any decrease in Taxes realized by such Indemnitee, to the extent that the imposition of such Taxes or such Tax increase (or , if applicable, such decrease in Taxes) would not have occurred if on each Advance Date Lessor had advanced funds to Lessee in the form of a loan secured by the Properties in an amount equal to the Advance funded on such Advance Date, with debt service for such loans equal to the Base Rent payable on each Scheduled Payment Date and a principal balance at the maturity of such loan in an amount equal to the Lease Balance at the end of the Lease Term. (b) Contests. Lessee shall pay (provided that during the Construction Period Lessee shall request an Advance, the proceeds of which shall be used to pay) on or before the time or times set forth in Section 9.2(c) all Taxes indemnifiable by Lessee under Section 9.2(a); provided, however, that Lessee shall be under no obligation to pay any such Tax so long as the payment of such Tax is not delinquent or is being contested by a Permitted Contest. If any claim or claims is or are made against any Indemnitee for any Tax which is subject to indemnification as provided in Section 9.2(a), such Indemnitee shall, as soon as practicable, but in no event more than thirty (30) days after receipt of formal written notice of the Tax or proposed Tax, notify Lessee; provided, however, that the failure to give such notice shall not limit Lessee's obligations under Section 9.2(a) except to the extent that such failure effectively precludes the ability to conduct a contest of any indemnifiable Taxes. The Indemnitee shall not take any action with respect to such claim, proceeding or Imposition without the written consent of Lessee (such consent not to be unreasonably withheld or unreasonably delayed) for 30 days after the receipt of such notice by Lessee; provided, however, that in the case of any such claim or proceeding, if such Indemnitee shall be required by law or regulation to take action prior to the end of such 30-day period, such Indemnitee shall in such notice to Lessee, so inform Lessee, and such Indemnitee shall not take any action with respect to such claim, proceeding or Tax without the consent of Lessee (such consent not to be unreasonably withheld or unreasonably delayed) for 10 days after the receipt of such notice by Lessee, unless the Indemnitee shall be required by law or regulation to take action prior to the end of such 10-day period. Lessee shall be entitled for a period of 30 days from receipt of such notice from the Indemnitee (or such shorter period as the Indemnitee has notified Lessee is required by law or regulation for the Indemnitee to commence such contest), to request in writing that such Indemnitee permit Lessee to contest the imposition of such tax, at Lessee's sole cost and expense. If (x) such contest can be pursued in the name of Lessee and independently from any other proceeding involving a liability of such Indemnitee for which Lessee has not agreed to indemnify such Indemnitee, (y) such contest must be pursued in the name of the Indemnitee, but can be pursued independently from any other proceeding involving a Tax liability of such Indemnitee for which Lessee has not agreed to indemnify such Indemnitee or (z) the Indemnitee so requests, then Lessee shall be permitted to control the contest of such claim, provided that in the case of a contest described in any of clause (x), (y) or (z), if such Indemnitee reasonably determines that such contest by Lessee could have an adverse impact on the business or operations of the Indemnitee and Indemnitee provides notice to Lessee of such determination, the Indemnitee may elect to control or reassert control of the contest. In all other claims requested to be contested by Lessee, the Indemnitee shall control the contest of such claim, acting through counsel reasonably acceptable to Lessee. In no event shall Lessee be permitted to contest (or the Indemnitee required to contest) any claim, (A) if such Indemnitee provides Lessee with a legal 54 PARTICIPATION AGREEMENT opinion of independent counsel that such action, suit or proceeding involves a risk of imposition of criminal liability or will involve a meaningful risk of the sale, forfeiture or loss of, or the creation of any Lien (other than a Permitted Lien) on the Property or any part of any thereof, unless Lessee shall have posted and maintained a bond or other security reasonably satisfactory to the relevant Indemnitee in respect to such risk, (B) if an Event of Default or a Lease Event of Default has occurred and is continuing, unless Lessee shall have posted and maintained a bond or other security reasonably satisfactory to the relevant Indemnitee in respect of the Taxes subject to such claim and any and all expenses for which Lessee is responsible hereunder reasonably foreseeable in connection with the contest of such claim, (C) unless Lessee shall have agreed to pay and shall pay (provided that during the Construction Period Lessee shall request an Advance, the proceeds of which shall be used to pay) to such Indemnitee on demand all reasonable out-of-pocket costs, losses and expenses that such Indemnitee may incur in connection with contesting such imposition, including all reasonable legal, accounting and investigatory fees and disbursements as well as the impositions which are the subject of such claim to the extent the contest is unsuccessful, or (D) if such contest shall involve the payment of the Tax prior to the contest, unless Lessee shall provide to the Indemnitee an interest-free advance in an amount equal to the Imposition that the Indemnitee is required to pay (with no additional net after-tax costs (including Taxes) but taking into account any net tax savings associated with such advance to such Indemnitee). In addition, for Indemnitee controlled contests and claims contested in the name of the Indemnitee in a public forum, no contest shall be required: (A) unless the amount of the potential indemnity (taking into account all similar or logically related claims that have been or could be raised in any audit involving such Indemnitee for which Lessee may be liable to pay an indemnity under this Section 9.2) exceeds $100,000 and (B) unless, if requested by the Indemnitee, Lessee shall have provided to the Indemnitee an opinion of independent tax counsel selected by the Indemnitee and reasonably acceptable to Lessee) that a reasonable basis exists to contest such claim. In no event shall an Indemnitee be required to appeal an adverse judicial determination to the United States Supreme Court. The party conducting the contest shall consult in good faith with the other party and its counsel with respect to the contest of such claim for Taxes (or claim for refund) but the decisions regarding what actions to be taken shall be made by the controlling party in its sole judgment, provided, however, that if the Indemnitee is the controlling party and Lessee recommends the acceptance of a settlement offer made by the relevant Authority and such Indemnitee rejects such settlement offer, then the amount for which Lessee will be required to indemnify such Indemnitee with respect to the Taxes subject to such offer shall not exceed the amount which it would have owed if such settlement offer had been accepted. In addition, the controlling party shall keep the non-controlling party reasonably informed as to the progress of the contest, and shall provide the non-controlling party with a copy of (or appropriate excerpts from) any reports or claims issued by the relevant auditing agents or taxing authority to the controlling party thereof, in connection with such claim or the contest thereof. Each Indemnitee shall supply Lessee with such information and documents within such Indemnitee's possession reasonably requested by Lessee as are necessary or advisable for Lessee to participate in any action, suit or proceeding to the extent permitted by this Section 9.2(b), and Lessee shall promptly reimburse such Indemnitee for the reasonable out-of-pocket expenses of supplying such information and documents. 55 PARTICIPATION AGREEMENT Notwithstanding anything contained herein to the contrary, an Indemnitee will not be required to contest (and Lessee shall not be permitted to contest) a claim with respect to the imposition of any Tax if (i) such Indemnitee shall waive its right to indemnification under this Section 9.2 with respect to such claim and shall pay to Lessee any amount previously paid or advanced by Lessee pursuant to this Section 9.2 or (ii) such Tax is the sole result of a claim of a continuing and consistent nature, which claim has previously been resolved against the relevant Indemnitee (unless a change in law or facts has occurred since such prior adverse resolution and Lessee provides, at Lessee's expense, an opinion of independent tax counsel reasonably acceptable to such Indemnitee to the effect that it is more likely than not that such change in law or facts will result in a favorable resolution of the claim at issue). (c) Payments. Subject to Section 9.2(b), any Tax indemnifiable under Section 9.2(a) shall be paid directly when due to the applicable taxing authority if direct payment is practicable and permitted. If direct payment to the applicable taxing authority is not permitted or is otherwise not made, any amount payable to an Indemnitee pursuant to Section 9.2(a) shall be paid within thirty (30) days after receipt of a written demand therefor from such Indemnitee accompanied by a written statement describing in reasonable detail the amount so payable. Any payments made pursuant to Section 9.2(a) directly to the Indemnitee entitled thereto or Lessee, as the case may be, shall be made in immediately available funds at such bank or to such account as specified by the payee in written directions to the payor, or, if no such direction shall have been given, by check of the payor payable to the order of the payee by certified mail, postage prepaid at its address as set forth in Schedule II. Subject to Section 9.2(b), upon the request of any Indemnitee with respect to a Tax that Lessee is required to pay, Lessee shall furnish to such Indemnitee the original or a certified copy of a receipt for its payment of such Tax or such other evidence of payment as is reasonably acceptable to such Indemnitee. If the Indemnitee has actual knowledge of Lessee's failure to pay any Tax required to be paid by Lessee hereunder, such Indemnitee shall notify Lessee of such failure within 30 days of such Indemnitee's obtaining such actual knowledge. Upon receipt by an Indemnitee of a refund or credit of all or part of any Taxes paid or indemnified against by Lessee, which refund or credit was not previously taken into account in determining the amount of Lessee's payment to such Indemnitee, such Indemnitee shall pay to Lessee, on a grossed-up basis as set forth in Section 9.4(b), an amount equal to the amount of such refund, plus any interest received by or credited to such Indemnitee with respect to such refund; provided, however, that as long as an Event of Default is continuing any such amounts may be applied against any amounts due and owing by Lessee under the Lease or the other Operative Documents; provided, further, however, that no Indemnitee shall be required to pay to Lessee any refund or credit to the extent such refund or credit is greater than the amount of Taxes in respect of which payment or indemnification was made by Lessee, reduced by all prior payments by such Indemnitee under this Section 9.2(c) in respect of such amount. If such repaid refund or credit is thereafter lost, the additional Tax payable shall be treated as a Tax indemnifiable hereunder without regard to the exclusions from indemnified Taxes set forth in Section 9.2(a). (d) Reports. If any report, return or statement is required to be filed with respect to any Taxes that are subject to indemnification under Section 9.2(a) Lessee shall, if Lessee is permitted by Applicable Laws, timely prepare and file such report, return or statement; provided, 56 PARTICIPATION AGREEMENT however, that if Lessee is not permitted by Applicable Laws to file any such report Lessee will promptly so notify the appropriate Indemnitee, in which case the Indemnitee will file any such report after preparation thereof by Lessee, provided, that in each case such Indemnitee shall have furnished Lessee with such information not within the control of (or otherwise reasonably available to) Lessee, as is in such Indemnitee's control or is reasonably available to such Indemnitee and necessary to file such filing. Lessee will deliver any such return, together with immediately available funds for payment of any Tax due, to such Indemnitee at least twenty (20) days in advance of the date such return or payment is due. Lessee agrees that, with respect to Taxes pertaining to the Properties, Lessee shall be solely responsible for the accuracy, except to the extent of any information provided by the Indemnitee, and completeness of all required forms for execution by the appropriate Person, and Indemnitee's sole responsibility shall be to execute all such forms, to the extent required by Applicable Laws, at the reasonable direction of Lessee. If the Indemnitee has actual knowledge of Lessee's failure to file any report required to be filed by Lessee hereunder, such Indemnitee shall notify Lessee of such failure within 30 days of obtaining such actual knowledge. (e) Tax Ownership. Each of Lessor, Liquidity Providers and Investors (and the respective successors, assigns and transferees of each of the foregoing) covenants, represents and warrants that it will not claim ownership for United States Tax purposes of (or any tax benefits, including depreciation, with respect to ownership of) the Properties prior to the termination of the Lease, it being understood that Lessee is and will remain the owner of the Properties for such income tax or other tax purposes during the term of the Lease. Nothing in this Section 9.2 shall require any Participant to disclose any tax returns to Lessee. SECTION 9.3. Withholding Tax. (a) On the Initial Advance Date, or in the case of a Person that actually becomes a Participant after the Initial Advance Date at least ten (10) Business Days prior to the first date on which any payment is due hereunder to such Participant, each Participant that is a Non-U.S. Person shall deliver to each of Lessee, Lessor and Conduit (if such Participant is a Liquidity Provider) the Prescribed Forms. If any Participant that is a Non-U.S. Person is unable to so deliver the Prescribed Forms, Lessee, Lessor or any other appropriate party shall be entitled to withhold from any payments to such Participant under this Participation Agreement, and Conduit shall be entitled to withhold from any payments to such Participant under the Liquidity Agreement, such amounts of Tax as may be required by law to be so withheld, after taking into account any reduction in the rate of applicable withholding Tax to which such Participant may establish its eligibility by duly filing an IRS Form W-8BEN or W-8ECI (or successor form) with Lessee and Lessor, and Lessee and Lessor shall have no obligation to pay such Participant for any Taxes so withheld, except as provided in Section 9.3(b). If any change occurs after a Non-U.S. Person becomes a Participant which renders the Prescribed Forms previously delivered by such Participant inapplicable or, in the case of any Prescribed Form that is not, by its terms, effective for the Lease Term, which would prevent such Person from duly completing and delivering any renewal, extension or continuation of a Prescribed Form previously filed by such Person, such Participant shall promptly (after obtaining actual knowledge of such change) advise Lessee, Lessor and Conduit (if such Participant is a Liquidity Provider) that it is no longer capable of receiving payments without the withholding of United 57 PARTICIPATION AGREEMENT States Tax and that Lessee, Lessor and Conduit (if such Participant is a Liquidity Provider) are obligated to withhold United States Tax from payments by them to such Participant. If any such change involves a change in a treaty, law or regulation (or a published change in the interpretation or application thereof), Lessee shall be obligated to pay (provided that during the Construction Period Lessee shall request an Advance, the proceeds of which shall be used to pay) such Participant, on an After-Tax Basis, for any United States Tax which must be withheld from payments made to such Participant under this Participation Agreement after such Participant notifies Lessee and Lessor of such change, but only if and to the extent that the obligation to withhold such United States Tax arises solely by reason of a change in treaty, law, or regulation which takes effect after the date on which such Participant became a Participant. (b) If and to the extent Lessor (or its agent) has in good faith attempted to comply with its obligation to withhold Taxes and a claim is made against it or another Indemnitee, as between Lessee and Lessor (or its agent), Lessee shall be responsible for, and Lessee shall indemnify and hold harmless Lessor (or its agent) (without any duplication of indemnification otherwise required under this Participation Agreement) on an After-Tax Basis against, such claim to the extent Lessor (or its agent) has paid funds to any Authority with respect to such withholding taxes or has received a demand therefor (provided that during the Construction Period Lessee shall request an Advance, the proceeds of which shall be used to pay such funds). (c) Should a Participant ever receive any refund, credit or deduction from any taxing authority to which such Participant would not be entitled but for the payment by Lessee of any United States federal, state or local Tax, pursuant to Section 9.3(b), such Participant thereupon shall repay to Lessee an amount with respect to such refund, credit or deduction equal to any net reduction in Taxes actually obtained by such Participant which is attributable to such refund, credit or deduction (but not in excess of the amount of the related payment paid by Lessee to, or for, the Participant pursuant to Section 9.3(b)). (d) Notwithstanding anything herein to the contrary, Lessee shall indemnify any Indemnitee against any Taxes imposed by way of withholding by a jurisdiction outside of the United States solely as a result of (i) the payment by Lessee of any amount pursuant to this Participation Agreement or the other Operative Documents from, or (ii) the booking by Lessee of some or all of the transactions contemplated by the Operative Documents in, such jurisdiction. SECTION 9.4. Calculation of General Tax Indemnity Payments. (a) Any payment or indemnity to or for the benefit of any Indemnitee with respect to a Tax which is subject to indemnification under Section 9.2(a) shall (A) (other than payment of Taxes to applicable Governmental Authorities) reflect the actual current net savings available to such Indemnitee or any Affiliate thereof resulting from the current deduction of such indemnified Tax or the event or circumstance giving rise thereto (such current net savings to be determined on an incremental basis after taking into account all other available deductions of the Indemnitee) and (B) include, after taking into account the savings described in clause (A), the amount necessary to hold such Indemnitee harmless on an After-Tax Basis; provided that, at the request of Lessee, an Indemnitee will certify to Lessee the extent, if any, to which such Indemnitee was able to use currently such deduction on its tax return. If, by reason of any payment made to or for the account of an Indemnitee by Lessee pursuant to Section 9.2, or the 58 PARTICIPATION AGREEMENT event or circumstance giving rise to such payment, such Indemnitee or an Affiliate actually realizes a net tax benefit, savings, deduction or credit not taken into account in computing such payment, such Indemnitee shall promptly pay to Lessee an amount equal to the sum of (x) the actual net reduction in Taxes, if any, realized by such Indemnitee or any Affiliate thereof attributable to such net tax benefits, savings, deduction or credits and (y) the actual net reduction in any Taxes realized by such Indemnitee or an Affiliate as the result of any payment made by such Indemnitee pursuant to this sentence; provided that, no Indemnitee shall be obligated to make any payment pursuant to clause (x) of this Section 9.4(a) to the extent that the amount of such payment would exceed (1) the amount of all prior payments of Tax or payments under Section 9.2(c) paid by Lessee to or on behalf of such Indemnitee pursuant to this Section 9.4 less (2) the amount of all prior payments pursuant to this Section 9.4(a) and described in clause (x) by such Indemnitee to Lessee; but any such excess shall reduce pro tanto any amount of Taxes under Section 9.2 that Lessee is subsequently obligated to pay directly to such Indemnitee (as opposed to directly to any taxing authority pursuant to the first sentence of Section 9.2(c)) pursuant to this Section 9.4. (b) After-Tax Basis. If an Indemnitee shall not be entitled to a corresponding and equal deduction or deductions for United States Tax purposes with respect to any payment or Tax which Lessee is required to pay or reimburse under any other provision of this Article IX (each such payment or reimbursement an "original payment"), in the same taxable year of such Indemnitee as the year of inclusion in its taxable income of such "original payment", then Lessee shall pay (provided that during the Construction Period Lessee shall request an Advance, the proceeds of which shall be used to pay) to such Indemnitee on demand the amount of such "original payment" on a grossed-up basis such that after subtracting all United States Taxes imposed on such Indemnitee with respect to such "original payment" (determined for this purpose based on the actual Federal, state and local marginal rates applicable to the Indemnitee for the year in which such income is taxable as determined in good faith by such Indemnitee), such payments shall be equal to the "original payment" (net of any credits, deductions or other tax benefits then actually recognized that arise from the payment or deemed payment by such Indemnitee of any amount, including taxes, for which the payment received or deemed received is made). If an Indemnitee is subsequently entitled to a corresponding and equal deduction in the same taxable year as the year of inclusion in its taxable income, such Indemnitee shall pay to Lessee an amount equal to the amount paid as a gross-up with respect to such original payment. SECTION 9.5. Environmental Indemnity. Without limitation of the other provisions of this Article IX, Lessee hereby agrees to indemnify, hold harmless and defend each Indemnitee from and against any and all Claims (including claims for natural resources damages and third party claims for personal injury or real or personal property damage), losses, damages, liabilities, fines, penalties, charges, administrative and judicial proceedings (including informal proceedings) and orders, judgments, remedial action, requirements, enforcement actions of any kind, and all reasonable and documented third party costs and expenses incurred in connection therewith (including, but not limited to, reasonable and documented attorneys', paralegals', experts' and/or consultant's fees and expenses), including, but not limited to, all costs incurred in connection with any investigation or monitoring of site conditions or any clean-up, remedial, removal or restoration work by any federal, state or local government agency, or judicial proceeding, arising in whole or in part, out of 59 PARTICIPATION AGREEMENT (a) the presence on or under either Property of any Hazardous Materials, or any releases or discharges, or threatened releases or discharges of any Hazardous Materials on, under, from or onto either Property, whether from historic or future threatened releases of Hazardous Materials, (b) any activity, including construction, carried on or undertaken on or off either Property, and whether by Lessee or any predecessor in title or any employees, agents, contractors or subcontractors of Lessee or any predecessor in title, or any other Person (including such Indemnitee), in connection with the handling, treatment, removal, storage, decontamination, clean-up, transport or disposal of any Hazardous Materials that at any time are located or present on or under or that at any time migrate, flow, percolate, diffuse or in any way move onto or under either Property, (c) loss of or damage to any property or the environment (including clean-up costs, response costs, remediation and removal costs, cost of corrective action, costs of financial assurance, fines and penalties and natural resource damages), or death or injury to any Person, and all expenses associated with the protection of wildlife, aquatic species, vegetation, flora and fauna, and any mitigative action required by or under Environmental Laws, in each case arising from or in any way related to the Land, any Improvements, Lessee or the Overall Transaction, (d) with respect to the Land or any Improvements, any claim concerning lack of compliance with Environmental Laws, or any act or omission causing an environmental condition that requires remediation or would allow any Governmental Authority to record a Lien on the land records, or (e) any residual contamination on or under the Land, or affecting any natural resources, and to any contamination of any property or natural resources arising in connection with the generation, use, handling, storage, transport or disposal of any Hazardous Materials, and irrespective of whether any of such activities were or will be undertaken in accordance with Applicable Laws; provided, however, Lessee shall not be required to indemnify any Indemnitee under this Section 9.5 for (1) any Claim to the extent resulting from the willful misconduct or gross negligence of such Indemnitee, or any Affiliate of such Indemnitee (it being understood that Lessee shall be required to indemnify an Indemnitee even if the ordinary (but not gross) negligence of such Indemnitee, or any Affiliate of such Indemnitee, caused or contributed to such Claim) or (2) any Claim to the extent attributable to acts or events which occur after the expiration of the Lease Term or earlier termination of the Lease and the return of the Properties by Lessee in accordance with the terms thereof (except (A) to the extent fairly attributable to acts, events, liabilities or damages occurring or accruing prior thereto; (B) Claims arising following the termination or expiration of the Lease Term so long as any Agent or any Participant continues to exercise remedies against Lessee in respect of the Operative Documents and (C) Claims arising after the expiration of the Lease Term so long as Lessor is remarketing the Properties (or any interest therein) in accordance with Section 7.1 of the Lease). It is expressly understood and agreed that the indemnity provided for herein shall survive the expiration or termination of, and shall be separate and independent from any remedy under, the Lease or any other Operative Document. 60 PARTICIPATION AGREEMENT SECTION 9.6. Proceedings in Respect of Claims. With respect to any amount that Lessee is requested by an Indemnitee to pay by reason of Section 9.1 or 9.5, such Indemnitee shall, if so requested by Lessee and prior to any payment, submit such additional information to Lessee as Lessee may reasonably request and which is in the possession of such Indemnitee to substantiate properly the requested payment. In case any action, suit or proceeding shall be brought against any Indemnitee in respect of a Claim covered by Lessee's indemnification obligations, such Indemnitee shall promptly notify Lessee of the commencement thereof, and Lessee shall be entitled, at its expense, to participate in, and, to the extent that Lessee desires to, assume and control the defense thereof; provided, however, that Lessee shall keep such Indemnitee fully apprised of the status of such action, suit or proceeding and shall provide such Indemnitee with all information with respect to such action, suit or proceeding as such Indemnitee shall reasonably request, and provided, further, that Lessee shall not be entitled to assume and control the defense of any such action, suit or proceeding if and to the extent that, (A) in the reasonable opinion of such Indemnitee, (x) such action, suit or proceeding involves any risk of imposition of criminal liability or creates a material risk of the sale, loss or forfeiture of either Property or impairs in any way the payment of Base Rent or Supplemental Rent or the Lien of the Deeds of Trust or gives rise to the creation of any Lien other than a Permitted Lien with respect to the Properties or any portion thereof or (y) the control of such action, suit or proceeding would involve an actual or potential conflict of interest (as set forth in a written legal opinion of independent counsel to such Indemnitee (based on factual determinations set forth in a certificate furnished by such Indemnitee to its counsel, upon which certificate counsel to such Indemnitee may rely), which opinion shall be reasonably satisfactory to Lessee), (B) such proceeding involves material Claims not fully indemnified by Lessee which Lessee and the Indemnitee have been unable to sever from the indemnified claim(s), (C) an Event of Default has occurred and is continuing or (D) Lessee has not acknowledged in writing that such claim is fully indemnified by Lessee hereunder. The Indemnitee may participate in a reasonable manner at its own expense with its own counsel in any proceeding conducted by Lessee in accordance with the foregoing. Lessee may enter into any settlement or other compromise on behalf of the Indemnitee with respect to any Claim which is entitled to be indemnified under Section 9.1 or 9.5, and which Lessee has acknowledged its obligation to indemnify, without the prior written consent of the Indemnitee, except as to any settlement or compromise requiring an admission of wrongdoing or liability of such Indemnitee. Each Indemnitee shall, at the sole expense of Lessee (provided that during the Construction Period Lessee shall request an Advance, the proceeds of which shall be used to pay such expenses), supply to Lessee such information, documents and the identity of witnesses reasonably requested by Lessee as are necessary or advisable for Lessee to participate in any action, suit or proceeding to the extent permitted by this Section 9.6 and which are reasonably available to such Indemnitee. Unless a Lease Event of Default or Construction Agency Event of Default or any other Event of Default caused by a Lease Default or Construction Agency Default has occurred and is continuing, no Indemnitee shall enter into any settlement or other compromise with respect to any Claim which is entitled to be indemnified under Section 9.1 or 9.5 without the prior written consent of Lessee, which consent shall not be unreasonably withheld, unless such Indemnitee waives its right to be indemnified under Section 9.1 or 9.5 with respect to such Claim. 61 PARTICIPATION AGREEMENT Upon payment in full of any Claim by Lessee pursuant to Section 9.1 or 9.5 to or on behalf of an Indemnitee, Lessee, without any further action, shall be subrogated to any and all claims that such Indemnitee may have relating thereto (other than claims in respect of insurance policies maintained by such Indemnitee at its own expense), and such Indemnitee shall execute such instruments of assignment and conveyance, evidence of claims and payment and such other documents, instruments and agreements as may be necessary to preserve any such claims and otherwise cooperate with Lessee and give such further assurances as are necessary or advisable to enable Lessee vigorously to pursue such claims, all at Lessee's expense. Any amount payable to an Indemnitee pursuant to Section 9.1 or 9.5 shall be paid to such Indemnitee promptly upon receipt of a written demand therefor from such Indemnitee, accompanied by a written statement describing in reasonable detail the basis for such indemnity and the computation of the amount so payable. Any Construction Agency Indemnitee shall be deemed an "Indemnitee" for purposes of this Section 9.6. SECTION 9.7. Additional Costs; Capital Adequacy. Lessee shall pay (provided that during the Construction Period Lessee shall request an Advance, the proceeds of which shall be used to pay) the following amounts ("Increased Costs"): (a) Additional Costs. In the event that any change after the date of this Participation Agreement in Applicable Laws or in the interpretation thereof by any governmental authority charged with the administration thereof imposes any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Participant, and the result of any of the foregoing is to increase the cost to such Participant of making or maintaining such Participant's Loans or Investor Amounts or committing to make such Loans or Investor Amounts, or providing a commitment under the Liquidity Agreement, by an amount which such Participant deems to be material, then such Participant may, promptly upon becoming aware of such additional cost, notify Lessee and thereafter Lessee shall pay to such Participant upon its demand the additional amount or amounts necessary to compensate such Participant for such additional cost accruing from and after the date of notice. (b) Capital Adequacy. In the event that any change after the date of this Agreement in Applicable Laws regarding capital adequacy or in the interpretation thereof by any governmental authority charged with the administration thereof does or shall have the effect of reducing the rate of return on a Participant's capital as a consequence of its obligations hereunder or under the Liquidity Agreement to a level below that which such Participant could have achieved but for such change or interpretation (to the extent such change or interpretation has not been reflected in the pricing of such Participant's Loans or Investor Amounts and taking into consideration such Participant's policies with respect to capital adequacy) by an amount deemed by such Participant to be material, then such Participant may, promptly upon becoming aware of such reduced return, notify Lessee thereof and thereafter Lessee shall pay to such Participant upon its demand the additional amount or amounts necessary to compensate such Participant for such reduced return accruing from and after the date of notice. 62 PARTICIPATION AGREEMENT SECTION 9.8. Illegality. If at any time any Participant or its applicable lending office shall have determined in good faith (which determination shall be conclusive) that the making or maintenance of Eurodollar Loans has been made impracticable or unlawful because of compliance by such Participant in good faith with any law or the administration thereof by any official body charged with the interpretation or administration thereof or because U.S. dollar deposits in the amount and maturity of the Eurodollar Loans are not generally available in the London Eurodollar interbank market, then such Participant shall forthwith give Lessee and Administrative Agent notice thereof and the obligation to continue the Eurodollar Loans shall terminate and Lessee shall, at its option, convert the outstanding Eurodollar Loans into ABR Loans or prepay the Eurodollar Loans, such conversion or prepayment to become due, in the case of impracticability, on the last day of the Interest Period in effect at the time notice of impracticability is given and, in the case of illegality, on the last day of the last Interest Period to end prior to the effectiveness of the applicable change in law or such earlier date as may be required by the relevant law or regulation. SECTION 9.9. Compensation. In the event that Lessee funds directly or indirectly a prepayment of any Loan or Investor Amount on a day other than the last day of an Interest Period, or in the event a Loan or Investor Amount is not made on the Advance Date specified therefor (other than as a result of a default by such Participant), or a Loan, Lessee shall pay (provided that during the Construction Period Lessee shall request an Advance, the proceeds of which shall be used to pay) to a Participant upon its demand an amount which will compensate such Participant for any loss or expense incurred as a result of any such event in respect of funds obtained for the purpose of making or maintaining such Loan or Investor Amount (but not for any loss of profit in respect of any such event), provided, that payments under this Section 9.9 shall not be due to any Person entitled to payment by reason of Section 2.2.7. SECTION 9.10. Obligations of Lessee to Pay Certain Amounts. During the Construction Period, Lessee shall request Advances to pay (and Administrative Agent shall pay out of such Advances, as directed below), and during the Lease Term, Lessee shall pay as Supplemental Rent under the Lease, all amounts described in this Section 9.10. (a) Administrative Agent Fees. To Fleet National Bank for its own account, the fees agreed to in Administrative Agent Fee Letter for services rendered as Administrative Agent. (b) Structuring Fees. To Administrative Agent for the benefit of First Union National Bank, the Administrator and the Fleet Investor, the Structuring Fees owed to each on the Documentation Date. (c) [Intentionally omitted.] (d) Management Fees. (i) To Fleet National Bank, for its own account, the fees agreed to in the CapitalFocus Investment Account Agreement, dated as of even date hereof, among Lessee and Fleet National Bank, at times and amounts provided therein, and (ii) to Evergreen Investment Management Company, LLC, for its own account, the fees agreed to in the Institutional Investment Management Agreement, dated as of even date hereof, among Lessee, First Union National Bank and Evergreen Investment Management Company, LLC, at the times and amounts provided therein. 63 PARTICIPATION AGREEMENT (e) Liquidity Fees. To the Administrative Agent for the benefit of EagleFunding Capital Corporation, the Liquidity Fee due and payable to EagleFunding Capital Corporation on each Scheduled Payment Date, commencing on the first Scheduled Payment Date. (f) Unused Fees. To the Administrative Agent for the benefit of each Investor and EagleFunding Capital Corporation the Unused Fee payable to each Investor and EagleFunding Capital Corporation, due and payable on each Scheduled Payment Date, commencing on the first Scheduled Payment Date. (g) Certain Professional Services. To the Construction Consultant or Insurance Consultant (or to reimburse Fleet National Bank for such professional services) for professional services rendered to the Lessor and/or the Participants in connection with the Overall Transaction, payable on the Advance Date next succeeding delivery of an invoice therefor. All fees under this clause (g) shall be reasonable. SECTION 9.11. Indemnity Payments in Addition to Lease Obligations. Lessee acknowledges and agrees that its obligations to make indemnity payments under this Article IX are separate from, in addition to, and do not reduce, its obligation to pay Base Rent or any other payment required hereunder or under any other Operative Document in accordance with the provisions hereof and thereof. SECTION 9.12. Right to Convert. In the event Lessee shall be required to make any payment to any Participant pursuant to Section 9.7, Lessee shall have the right, upon not less than three Business Days' prior notice to such Participant, to cause Lessor to convert the Loans or Investor Amount so affected to loans bearing interest by reference to ABR. SECTION 9.13. Mitigation. Each Participant will use reasonable efforts to avoid or mitigate any increased cost, reduced receivable or obligation to prepay under Section 9.7 or 9.8 (including transferring the Loans or Investor Amounts, as applicable, to another applicable lending office or Affiliate of such Participant) unless, in the sole opinion of such Participant, such efforts could have an adverse effect upon it. SECTION 9.14. Liquid Collateral. In the event that any Participant or Indemnitee has a right to payment under this Article IX, the related Collateral Agent shall demand such payment from Lessee. If Lessee fails to pay such payment in accordance with this Article IX, then, within two (2) Business Day of such failure, the related Collateral Agent may withdraw from Liquid Collateral under its related Account for payment to the asserting Participant or Indemnitee. Upon any such withdrawal, Lessee shall deliver Additional Liquid Collateral to such Collateral Agent pursuant to Section 2.5(a) of the related Liquid Collateral Agreement. ARTICLE X DISTRIBUTIONS OF PAYMENTS AND GROSS PROCEEDS In order to provide for the priority and allocation of payments received from Lessee, Gross Sales Proceeds and the proceeds of the exercise of remedies by Lessor, any Agent or any of the Participants pursuant to the Lease and the Security Documents, the parties hereto agree as follows: 64 PARTICIPATION AGREEMENT SECTION 10.1. Agreement of Agents and Participants. Pursuant to the Security Agreement, the Assignment of Lease and the other Security Documents, all of the payments (other than the Excluded Amounts) payable by Lessee to Lessor under the Lease or the Construction Agency Agreement or payable by Lessor to the Lenders under the Conduit Notes, the Facility Notes, or the Loan Agreement or any payments under this Participation Agreement or any other Operative Documents have been assigned to Administrative Agent for the benefit of the Lenders, Lessor and/or Investors, as applicable. Except as otherwise provided in Section 10.2 or Section 10.8, Administrative Agent hereby agrees to distribute as set forth herein all payments, receipts and other consideration of any kind whatsoever (other than Excluded Amounts) received by Administrative Agent pursuant to the Security Agreement, the Assignment of Lease and any other Security Document, other than any such payments received after the Lease Term Expiration Date which shall be distributed by Administrative Agent, upon receipt, in accordance with this Article X (it being understood that any such payment received on or before 1:00 p.m. (New York City time) in accordance with the provisions of the Lease, this Participation Agreement and the other Operative Documents shall be distributed by Administrative Agent on the same Business Day as received to the extent practicable). SECTION 10.2. Base Rent. Subject to Section 10.8, each payment of Base Rent (and any payment of interest on overdue installments of Base Rent) shall be distributed by Administrative Agent in accordance with Section 3.3 of the Lease as follows: first, an amount equal to Loan Base Rent shall be distributed to the Commercial Paper Account of Conduit and to the Liquidity Providers to pay in full interest then due and owing on the Loans in accordance with the terms of the Loan Agreement and the Liquidity Agreement, and second, an amount equal to the Investor Base Rent shall be distributed to each Investor to pay in full all accrued but unpaid Yield on the Investor Amounts then due and owing on such day (together with any overdue interest thereon). SECTION 10.3. Purchase Payments by Lessee. (a) Any payment on any day (other than payments with respect to Excluded Amounts and Base Rent) made by Lessee pursuant to the Lease, including Supplemental Rent to pay any Break Costs resulting from such termination, in whole or in part, of a Lessor Hedging Agreement, in connection with the purchase of both Properties in connection with Lessee's exercise of its Purchase Option under Section 5.1 of the Lease, an Event of Loss with respect to both Properties under Section 14.1(a)(i) of the Lease or Section 2.5(a)(ix) of the Construction Agency Agreement shall be distributed by Administrative Agent as follows: (i) to the Liquidity Providers to reimburse in full the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the Facility Loans, together without duplication for payments made under Section 10.2, with all accrued and unpaid interest thereon, 65 PARTICIPATION AGREEMENT (ii) to the Commercial Paper Account of Conduit to repay in full the outstanding principal amount of all Conduit Loans, together without duplication for payments made under Section 10.2, with all accrued and unpaid interest thereon, (iii) to each Investor to pay in full the Investor Amounts, together without duplication for amounts paid under Section 10.2, with all accrued and unpaid Yield on the Investor Contributions, and (iv) to each Lessor Hedging Agreement Counterparty to pay in full all amounts then due and payable to such Lessor Hedging Agreement Counterparty, including any Break Costs, under the Lessor Hedging Agreements. (b) Any payment on any day (other than payments with respect to Excluded Amounts and Base Rent) made by Lessee pursuant to the Lease, including Supplemental Rent to pay any Break Costs resulting from such termination, in whole or in part, of a Lessor Hedging Agreement, in connection with the purchase of one but not both Properties in connection with Lessee's exercise of its Purchase Option under Section 5.1 of the Lease, an Event of Loss with respect to one but not both Properties under Section 14.1(a)(i) of the Lease or Section 2.5(a)(ix) of the Construction Agency Agreement shall be distributed by Administrative Agent as follows: first, to the Liquidity Providers to reimburse in full the Allocable Portion of the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the A Loans, together without duplication for payments made under Section 10.2, with all accrued and unpaid interest thereon (provided that to the extent all amounts pursuant to this clause first are insufficient to reimburse the Allocable Portion of the principal, together without duplication for payments made under Section 10.2, with all accrued and unpaid interest thereon, then due and owing with respect to the A Loans on such day to each Liquidity Provider in full, such amounts shall be distributed to each Liquidity Provider in accordance with each such Liquidity Provider's Liquidity Provider Share; provided further that no payment pursuant to the first proviso of this clause first shall be made to a Liquidity Provider in excess of the Allocable Portion of the outstanding principal amount, together without duplication for payments made under Section 10.2, with all accrued and unpaid interest thereon, of the Borrowings made by such Liquidity Provider with respect to the A Loans), second, the balance, if any, to the Liquidity Providers to, without duplication for payments made under clause first, reimburse in full the Allocable Portion of the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the A Loans, together without duplication for payments made under Section 10.2, with all accrued and unpaid interest thereon, third, the balance, if any, to be deposited in the Commercial Paper Account of Conduit to repay in full the Allocable Portion of the outstanding principal amount of A Loans held by Conduit, together without duplication for payments made under Section 10.2, with all accrued and unpaid interest thereon, 66 PARTICIPATION AGREEMENT fourth, the balance, if any, to the Liquidity Providers to reimburse in full the Allocable Portion of the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the B Loans, together without duplication for payments made under Section 10.2, with all accrued and unpaid interest thereon (provided that to the extent all amounts pursuant to this clause fourth are insufficient to reimburse the Allocable Portion of the principal, together without duplication for payments made under Section 10.2, with all accrued and unpaid interest thereon, then due and owing with respect to the B Loans on such day to each Liquidity Provider in full, such amounts shall be distributed to each Liquidity Provider in accordance with each such Liquidity Provider's Liquidity Provider Share; provided further that no payment pursuant to the first proviso of this clause fourth shall be made to a Liquidity Provider in excess of the Allocable Portion of the outstanding principal amount, together without duplication for payments made under Section 10.2, with all accrued and unpaid interest thereon, of the Borrowings made by such Liquidity Provider with respect to the B Loans), fifth, the balance, if any, to the Liquidity Providers to, without duplication for payments made under clause fourth, reimburse in full the Allocable Portion of the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the B Loans, together without duplication for payments made under Section 10.2, with all accrued and unpaid interest thereon, sixth, the balance, if any, to be deposited in the Commercial Paper Account of Conduit to repay in full the Allocable Portion of the outstanding principal amount of B Loans held by Conduit, together without duplication for payments made under Section 10.2, with all accrued and unpaid interest thereon, seventh, the balance, if any, to be distributed to each Investor to pay in full the Allocable Portion of the Investor Amounts together without duplication for payments made under Section 10.2, with all accrued and unpaid Yield thereon (provided that in the event that the amounts distributed pursuant to this clause seventh are insufficient to pay the Allocable Portion of the Investor Amounts, together without duplication for payments made under Section 10.2, with all accrued and unpaid Yield thereon, in full, such amounts shall be distributed to each Investor in accordance with such Investor's Percentage Share), and eighth, the balance, if any, to each Lessor Hedging Agreement Counterparty to pay in full all amounts then due and payable to such Lessor Hedging Agreement Counterparty, including any Break Costs, under the Lessor Hedging Agreements with respect to the Property being purchased (provided that to the extent that the amounts to be distributed to each Lessor Hedging Agreement Counterparty in accordance with this clause eighth are insufficient to pay all amounts then due and payable to such Lessor Hedging Agreement Counterparty, including any Break Costs, under the Lessor Hedging Agreements, such amounts shall be distributed to each Lessor Hedging Agreement Counterparty in accordance with such Lessor Hedging Agreement Counterparty's pro rata share thereof based on the amounts then due and owing to each Lessor Hedging Agreement Counterparty). 67 PARTICIPATION AGREEMENT SECTION 10.4. Recourse Amounts; Construction Period Maximum Guaranty Amount and Residual Value Guaranty Amount. (a) Any payment on any day of either (i) the Construction Period Maximum Guaranty Amount or the Lease Balance pursuant to the Construction Agency Agreement, or (ii) the Residual Value Guaranty Amount or the Lease Balance pursuant to the Lease (other than such payments distributable pursuant to Section 10.3), shall be distributed by Administrative Agent in the following order of priority: first, to the Liquidity Providers to reimburse in full the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the A Loans (provided that to the extent all amounts pursuant to this clause first are insufficient to reimburse all principal then due and owing with respect to the A Loans on such day to each Liquidity Provider in full, such amounts shall be distributed to each Liquidity Provider in accordance with each such Liquidity Provider's Liquidity Provider Share; provided further that no payment pursuant to the first proviso of this clause first shall be made to a Liquidity Provider in excess of the outstanding principal amount of the Borrowings made by such Liquidity Provider with respect to the A Loans), second, the balance, if any, to the Liquidity Providers to, without duplication for payments made under clause first, reimburse in full the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the A Loans, third, the balance, if any, to be deposited in the Commercial Paper Account of Conduit to repay in full the outstanding principal amount of A Loans held by Conduit, fourth, the balance, if any, to the Liquidity Providers to reimburse in full the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the B Loans (provided that to the extent all amounts pursuant to this clause fourth are insufficient to reimburse all principal then due and owing with respect to the B Loans on such day to each Liquidity Provider in full, such amounts shall be distributed to each Liquidity Provider in accordance with each such Liquidity Provider's Liquidity Provider Share; provided further that no payment pursuant to the first proviso of this clause fourth shall be made to a Liquidity Provider in excess of the outstanding principal amount of the Borrowings made by such Liquidity Provider with respect to the B Loans), fifth, the balance, if any, to the Liquidity Providers to, without duplication for payments made under clause fourth, reimburse in full the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the B Loans, sixth, the balance, if any, to be deposited in the Commercial Paper Account of Conduit to repay in full the outstanding principal amount of B Loans held by Conduit, seventh, the balance, if any, to be distributed to each Investor to pay in full the Investor Amounts (provided that in the event that the amounts distributed pursuant to this clause seventh are insufficient to pay the Investor Amounts in full, such amounts shall be distributed to each Investor in accordance with such Investor's Percentage Share), 68 PARTICIPATION AGREEMENT eighth, the balance, if any, to each Lessor Hedging Agreement Counterparty to pay in full all amounts then due and payable to such Lessor Hedging Agreement Counterparty, including any Break Costs, under the Lessor Hedging Agreements (provided that to the extent that the amounts to be distributed to each Lessor Hedging Agreement Counterparty in accordance with this clause eighth are insufficient to pay all amounts then due and payable to such Lessor Hedging Agreement Counterparty, including any Break Costs, under the Lessor Hedging Agreements, such amounts shall be distributed to each Lessor Hedging Agreement Counterparty in accordance with such Lessor Hedging Agreement Counterparty's pro rata share thereof based on the amounts then due and owing to each Lessor Hedging Agreement Counterparty), ninth, the balance, if any, to be distributed to any Person entitled thereto as payment of any outstanding and unpaid obligation of Lessee under the Operative Documents, and tenth, the balance, if any, to be distributed to Lessee. (b) In the event that Section 10.4(a) shall not apply, any payment on any day of either (i) the Traville Construction Period Maximum Guaranty Amount, the Manufacturing Construction Period Maximum Guaranty Amount, the Traville Lease Balance or the Manufacturing Lease Balance pursuant to the Construction Agency Agreement, or (ii) the Traville Residual Value Guaranty Amount, the Manufacturing Residual Value Guaranty Amount, the Traville Lease Balance or the Manufacturing Lease Balance pursuant to the Lease (other than payments distributable pursuant to Section 10.3), shall be distributed by Administrative Agent in the following order of priority: first, to the Liquidity Providers to reimburse in full the Allocable Portion aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the A Loans (provided that to the extent all amounts pursuant to this clause first are insufficient to reimburse the Allocable Portion of the principal then due and owing with respect to the A Loans on such day to each Liquidity Provider in full, such amounts shall be distributed to each Liquidity Provider in accordance with each such Liquidity Provider's Liquidity Provider Share; provided further that no payment pursuant to the first proviso of this clause first shall be made to a Liquidity Provider in excess of the Allocable Portion of the outstanding principal amount of the Borrowings made by such Liquidity Provider with respect to the A Loans), second, the balance, if any, to the Liquidity Providers to, without duplication for payments made under clause first, reimburse in full the Allocable Portion of the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the A Loans, third, the balance, if any, to be deposited in the Commercial Paper Account of Conduit to repay in full the Allocable Portion of the outstanding principal amount of A Loans held by Conduit, 69 PARTICIPATION AGREEMENT fourth, the balance, if any, to the Liquidity Providers to reimburse in full the Allocable Portion of the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the B Loans (provided that to the extent all amounts pursuant to this clause fourth are insufficient to reimburse the Allocable Portion of the principal then due and owing with respect to the B Loans on such day to each Liquidity Provider in full, such amounts shall be distributed to each Liquidity Provider in accordance with each such Liquidity Provider's Liquidity Provider Share; provided further that no payment pursuant to the first proviso of this clause fourth shall be made to a Liquidity Provider in excess of the Allocable Portion of the outstanding principal amount of the Borrowings made by such Liquidity Provider with respect to the B Loans), fifth, the balance, if any, to the Liquidity Providers to, without duplication for payments made under clause fourth, reimburse in full the Allocable Portion of the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the B Loans, sixth, the balance, if any, to be deposited in the Commercial Paper Account of Conduit to repay in full the Allocable Portion of the outstanding principal amount of B Loans held by Conduit, seventh, the balance, if any, to be distributed to each Investor to pay in full the Allocable Portion of the Investor Amounts (provided that in the event that the amounts distributed pursuant to this clause seventh are insufficient to pay the Allocable Portion of the Investor Amounts in full, such amounts shall be distributed to each Investor in accordance with such Investor's Percentage Share), eighth, the balance, if any, to each Lessor Hedging Agreement Counterparty to pay in full all amounts then due and payable to such Lessor Hedging Agreement Counterparty, including any Break Costs, under the Lessor Hedging Agreements with respect to the applicable Property (provided that to the extent that the amounts to be distributed to each Lessor Hedging Agreement Counterparty in accordance with this clause eighth are insufficient to pay all amounts then due and payable to such Lessor Hedging Agreement Counterparty, including any Break Costs, under the Lessor Hedging Agreements, such amounts shall be distributed to each Lessor Hedging Agreement Counterparty in accordance with such Lessor Hedging Agreement Counterparty's pro rata share thereof based on the amounts then due and owing to each Lessor Hedging Agreement Counterparty), ninth, the balance, if any, to be distributed to any Person entitled thereto as payment of any outstanding and unpaid obligation of Lessee under the Operative Documents, and tenth, the balance, if any, to be distributed to Lessee. SECTION 10.5. Gross Sale Proceeds. 70 PARTICIPATION AGREEMENT (a) Any payments received by Administrative Agent as Gross Sale Proceeds from the sale of both of the Properties pursuant to the Remarketing Option shall be distributed by Administrative Agent in the following order of priority: first, so much of such payment or amount as shall be required to reimburse Lessee, Lessor, the Agents, the Administrator and any other Participant for any Remarketing Sale Expenses incurred by such Person in connection with such disposition and approved in advance by the Investors, second, the balance, if any, to the extent actually paid on or prior to the date of such distribution shall be distributed: (i) first, to the Liquidity Providers to reimburse in full the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the B Loans (provided that to the extent all amounts pursuant to this clause second (i) are insufficient to reimburse all principal then due and owing with respect to the B Loans on such day to each Liquidity Provider in full, such amounts shall be distributed to each Liquidity Provider in accordance with each such Liquidity Provider's Liquidity Provider Share; provided further that no payment pursuant to the first proviso of this clause second (i) shall be made to a Liquidity Provider in excess of the outstanding principal amount of the Borrowings made by such Liquidity Provider with respect to the B Loans), (ii) second, to the Liquidity Providers to, without duplication for payments made under clause second (i), reimburse in full the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the B Loans, (iii) third, the balance, if any, to be deposited in the Commercial Paper Account of Conduit to repay in full the outstanding principal amount of all remaining B Loans, (iv) fourth, the balance, if any, to the Liquidity Providers to reimburse in full the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the A Loans (provided that to the extent all amounts pursuant to this clause second (iv) are insufficient to reimburse all principal then due and owing with respect to the A Loans on such day to each Liquidity Provider in full, such amounts shall be distributed to each Liquidity Provider in accordance with each such Liquidity Provider's Liquidity Provider Share; provided further that no payment pursuant to the first proviso of this clause second (iv) shall be made to a Liquidity Provider in excess of the outstanding principal amount of the Borrowings made by such Liquidity Provider with respect to the A Loans), 71 PARTICIPATION AGREEMENT (v) fifth, the balance, if any, to the Liquidity Providers to, without duplication for payments made under clause second (iv), reimburse in full the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the A Loans, (vi) sixth, the balance, if any, to be deposited in the Commercial Paper Account of Conduit to repay in full the outstanding principal amount of all remaining A Loans, (vii) seventh, the balance, if any, to be distributed to each Investor to pay in full the Investor Amounts (provided that in the event that the amounts distributed pursuant to this clause second (vii) are insufficient to pay the Investor Amounts in full, such amounts shall be distributed to each Investor in accordance with such Investor's Percentage Share), (viii) eighth, the balance, if any, to each Lessor Hedging Agreement Counterparty to pay in full all amounts then due and payable to such Lessor Hedging Agreement Counterparty, including any Break Costs, under the Lessor Hedging Agreements (provided that to the extent that the amounts to be distributed to each Lessor Hedging Agreement Counterparty in accordance with this clause second (viii) are insufficient to pay all amounts then due and payable to such Lessor Hedging Agreement Counterparty, including any Break Costs, under the Lessor Hedging Agreements, such amounts shall be distributed to each Lessor Hedging Agreement Counterparty in accordance with such Lessor Hedging Agreement Counterparty's pro rata share thereof based on the amounts then due and owing to each Lessor Hedging Agreement Counterparty), and third, the balance, if any, shall be distributed to Lessee to the extent permitted by Section 10.11. (b) Any payments received by Administrative Agent as Gross Sale Proceeds from the sale of one but not both of the Properties pursuant to the Remarketing Option shall be distributed by Administrative Agent in the following order of priority: first, so much of such payment or amount as shall be required to reimburse Lessee, Lessor, the Agents, the Administrator and any other Participant for any Remarketing Sale Expenses incurred by such Person in connection with such disposition and approved in advance by the Investors, second, the balance, if any, to the extent actually paid on or prior to the date of such distribution shall be distributed: (i) first, to the Liquidity Providers to reimburse in full the Allocable Portion of the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the B Loans (provided that to the extent all amounts pursuant to this clause second (i) are insufficient to 72 PARTICIPATION AGREEMENT reimburse the Allocable Portion of the principal then due and owing with respect to the B Loans on such day to each Liquidity Provider in full, such amounts shall be distributed to each Liquidity Provider in accordance with each such Liquidity Provider's Liquidity Provider Share; provided further that no payment pursuant to the first proviso of this clause second (i) shall be made to a Liquidity Provider in excess of the Allocable Portion of the outstanding principal amount of the Borrowings made by such Liquidity Provider with respect to the B Loans), (ii) second, to the Liquidity Providers to, without duplication for payments made under clause second (i), reimburse in full the Allocable Portion of the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the B Loans, (iii) third, the balance, if any, to be deposited in the Commercial Paper Account of Conduit to repay in full the Allocable Portion of the outstanding principal amount of all remaining B Loans, (iv) fourth, the balance, if any, to the Liquidity Providers to reimburse in full the Allocable Portion of the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the A Loans (provided that to the extent all amounts pursuant to this clause second (iv) are insufficient to reimburse the Allocable Portion of the principal then due and owing with respect to the A Loans on such day to each Liquidity Provider in full, such amounts shall be distributed to each Liquidity Provider in accordance with each such Liquidity Provider's Liquidity Provider Share; provided further that no payment pursuant to the first proviso of this clause second (iv) shall be made to a Liquidity Provider in excess of the Allocable Portion of the outstanding principal amount of the Borrowings made by such Liquidity Provider with respect to the A Loans), (v) fifth, the balance, if any, to the Liquidity Providers to, without duplication for payments made under clause second (iv), reimburse in full the Allocable Portion of the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the A Loans, (vi) sixth, the balance, if any, to be deposited in the Commercial Paper Account of Conduit to repay in full the Allocable Portion of the outstanding principal amount of all remaining A Loans, (vii) seventh, the balance, if any, to be distributed to each Investor to pay in full the Allocable Portion of the Investor Amounts (provided that in the event that the amounts distributed pursuant to this clause second (vii) are insufficient to pay the Allocable Portion of the Investor Amounts in full, such amounts shall be distributed to each Investor in accordance with such Investor's Percentage Share), 73 PARTICIPATION AGREEMENT (viii) eighth, the balance, if any, to each Lessor Hedging Agreement Counterparty to pay in full all amounts then due and payable to such Lessor Hedging Agreement Counterparty, including any Break Costs, under the Lessor Hedging Agreements with respect to the Property being sold (provided that to the extent that the amounts to be distributed to each Lessor Hedging Agreement Counterparty in accordance with this clause second (viii) are insufficient to pay all amounts then due and payable to such Lessor Hedging Agreement Counterparty, including any Break Costs, under the Lessor Hedging Agreements, such amounts shall be distributed to each Lessor Hedging Agreement Counterparty in accordance with such Lessor Hedging Agreement Counterparty's pro rata share thereof based on the amounts then due and owing to each Lessor Hedging Agreement Counterparty), and third, the balance, if any, shall be distributed to Lessee to the extent permitted by Section 10.11. SECTION 10.6. Supplemental Rent. Any payment of Supplemental Rent received by Administrative Agent for which no provision as to the application thereof is made elsewhere in this Article X shall be distributed immediately by Administrative Agent upon receipt thereof to the Persons entitled thereto pursuant to the Operative Documents or Lessor Hedging Agreements. SECTION 10.7. Excluded Amounts. Notwithstanding any other provision of this Participation Agreement or the Operative Documents, any Excluded Amounts received at any time by any Agent or any Participant shall be distributed promptly to the Person entitled to receive such Excluded Amount pursuant to the Operative Documents. SECTION 10.8. Distribution of Payments After Construction Agency Event of Default or Lease Event of Default. Notwithstanding any other provision of this Article X, all payments (other than amounts distributable pursuant to Section 10.6 or 10.7) received and amounts realized by Lessee, a Collateral Agent, Administrative Agent, Conduit, or Lessor after a Construction Agency Event of Default or Lease Event of Default has occurred and is continuing, including Base Rent and Gross Sale Proceeds from the sale of any of the Properties or other collateral, proceeds of any amounts from any insurer or any Authority in connection with any loss, Casualty or Condemnation, shall be immediately paid to Administrative Agent and shall be immediately distributed by Administrative Agent, as follows: (a) Receipt of Lease Balance; Proceeds from Certain Collateral. If, on any date after a Construction Agency Event of Default that is a Full Recourse Event of Default has occurred and is continuing, Lessee makes a payment of (A) all or a portion of the Lease Balance or (B) a payment is made of any other amount, including proceeds from the sale of Collateral (other than Liquid Collateral), then, with respect to amounts described in clause (A), such amount shall be or shall have been distributed in accordance with Section 10.4, and with respect to amounts described in clause (B), then distributions of such amounts shall be in the following order of priority: 74 PARTICIPATION AGREEMENT first, so much of such payment or amount as shall be required to reimburse the Collateral Agents, Administrative Agent, the Trust Company, the Trustee, Investors, Conduit, the Liquidity Providers or Lessor for any taxes, expenses, fees, indemnities or other losses incurred by the Collateral Agents, Administrative Agent, Investors, Conduit, the Liquidity Providers or Lessor under the Operative Documents or in connection with the collection of such amounts (to the extent not previously reimbursed) shall be distributed to the Collateral Agents, Administrative Agent, Investors, Conduit, the Liquidity Providers, or Lessor, as applicable (to be divided among such parties pro rata to the extent insufficient to satisfy all claims), second, the balance, if any, to the extent actually paid on or prior to the date of such distribution shall be distributed: (i) first, to the Liquidity Providers to reimburse in full the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the B Loans (provided that to the extent all amounts pursuant to this clause second (i) are insufficient to reimburse all principal then due and owing with respect to the B Loans on such day to each Liquidity Provider in full, such amounts shall be distributed to each Liquidity Provider in accordance with each such Liquidity Provider's Liquidity Provider Share; provided further that no payment pursuant to the first proviso of this clause second (i) shall be made to a Liquidity Provider in excess of the outstanding principal amount of the Borrowings made by such Liquidity Provider with respect to the B Loans), (ii) second, to the Liquidity Providers to, without duplication for payments made under clause second (i), reimburse in full the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the B Loans, (iii) third, the balance, if any, to be deposited in the Commercial Paper Account of Conduit to repay in full the outstanding principal amount of all remaining B Loans, (iv) fourth, the balance, if any, to the Liquidity Providers to reimburse in full the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the A Loans (provided that to the extent all amounts pursuant to this clause second (iv) are insufficient to reimburse all principal then due and owing with respect to the A Loans on such day to each Liquidity Provider in full, such amounts shall be distributed to each Liquidity Provider in accordance with each such Liquidity Provider's Liquidity Provider Share; provided further that no payment pursuant to the first proviso of this clause second (iv) shall be made to a Liquidity Provider in excess of the outstanding principal amount of the Borrowings made by such Liquidity Provider with respect to the A Loans), 75 PARTICIPATION AGREEMENT (v) fifth, the balance, if any, to the Liquidity Providers to, without duplication for payments made under clause second (iv), reimburse in full the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the A Loans, (vi) sixth, the balance, if any, to be deposited in the Commercial Paper Account of Conduit to repay in full the outstanding principal amount of all remaining A Loans, (vii) seventh, the balance, if any, to be distributed to each Investor to pay in full the Investor Amounts (provided that in the event that the amounts distributed pursuant to this clause second (vii) are insufficient to pay the Investor Amounts in full, such amounts shall be distributed to each Investor in accordance with such Investor's Percentage Share), (viii) eighth, the balance, if any, to each Lessor Hedging Agreement Counterparty to pay in full all amounts then due and payable to such Lessor Hedging Agreement Counterparty, including any Break Costs, under the Lessor Hedging Agreements (provided that to the extent that the amounts to be distributed to each Lessor Hedging Agreement Counterparty in accordance with this clause second (viii) are insufficient to pay all amounts then due and payable to such Lessor Hedging Agreement Counterparty, including any Break Costs, under the Lessor Hedging Agreements, such amounts shall be distributed to each Lessor Hedging Agreement Counterparty in accordance with such Lessor Hedging Agreement Counterparty's pro rata share thereof based on the amounts then due and owing to each Lessor Hedging Agreement Counterparty), and third, the balance, if any, shall be distributed to Lessee to the extent permitted by Section 10.11. (b) Receipt of Construction Period Maximum Guaranty Amount, Proceeds from Certain Collateral. If, on any date after a Construction Agency Event of Default that is not a Full Recourse Event of Default or Lease Event of Default has occurred and is continuing, (A) Lessee makes a payment all or a portion of the Construction Period Maximum Guaranty Amount or (B) any proceeds from the application or sale of Collateral (other than Liquid Collateral), then, with respect to amounts described in clause (A), such amount shall be or shall have been distributed in accordance with Section 10.4, and with respect to amounts described in clause (B), then distributions of such amounts shall be in the following order of priority: first, so much of such payment or amount as shall be required to reimburse the Collateral Agents, Administrative Agent, the Trust Company, the Trustee, Investors, Conduit, the Liquidity Providers, or Lessor for any taxes, expenses, fees, indemnities or other losses incurred by the Collateral Agents, Administrative Agent, Conduit, the Liquidity Providers or Lessor under the Operative Documents or in connection with the collection of such amounts (to the extent not previously reimbursed) shall be distributed 76 PARTICIPATION AGREEMENT to the Collateral Agents, Administrative Agent, Investors, Conduit, the Liquidity Providers or Lessor, as applicable (to be divided among such parties pro rata to the extent insufficient to satisfy all claims), second, the balance, if any, shall be distributed: (i) first, to the Liquidity Providers to reimburse in full the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the B Loans (provided that to the extent all amounts pursuant to this clause second (i) are insufficient to reimburse all principal then due and owing with respect to the B Loans on such day to each Liquidity Provider in full, such amounts shall be distributed to each Liquidity Provider in accordance with each such Liquidity Provider's Liquidity Provider Share; provided further that no payment pursuant to the first proviso of this clause second (i) shall be made to a Liquidity Provider in excess of the outstanding principal amount of the Borrowings made by such Liquidity Provider with respect to the B Loans), (ii) second, to the Liquidity Providers to, without duplication for payments made under clause second (i), reimburse in full the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the B Loans, (iii) third, the balance, if any, to be deposited in the Commercial Paper Account of Conduit to repay in full the outstanding principal amount of all remaining B Loans, (iv) fourth, the balance, if any, to the Liquidity Providers to reimburse in full the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the A Loans (provided that to the extent all amounts pursuant to this clause second (iv) are insufficient to reimburse all principal then due and owing with respect to the A Loans on such day to each Liquidity Provider in full, such amounts shall be distributed to each Liquidity Provider in accordance with each such Liquidity Provider's Liquidity Provider Share; provided further that no payment pursuant to the first proviso of this clause second (iv) shall be made to a Liquidity Provider in excess of the outstanding principal amount of the Borrowings made by such Liquidity Provider with respect to the A Loans), (v) fifth, the balance, if any, to the Liquidity Providers to, without duplication for payments made under clause second (iv), reimburse in full the aggregate outstanding principal amount of the Borrowings made by the Liquidity Providers with respect to the A Loans, 77 PARTICIPATION AGREEMENT (vi) sixth, the balance, if any, to be deposited in the Commercial Paper Account of Conduit to repay in full the outstanding principal amount of all remaining A Loans, (vii) seventh, the balance, if any, to be distributed to each Investor to pay in full the Investor Amounts (provided that in the event that the amounts distributed pursuant to this clause second (vii) are insufficient to pay the Investor Amounts in full, such amounts shall be distributed to each Investor in accordance with such Investor's Percentage Share), (viii) eighth, the balance, if any, to each Lessor Hedging Agreement Counterparty to pay in full all amounts then due and payable to such Lessor Hedging Agreement Counterparty, including any Break Costs, under the Lessor Hedging Agreements (provided that to the extent that the amounts to be distributed to each Lessor Hedging Agreement Counterparty in accordance with this clause second (viii) are insufficient to pay all amounts then due and payable to such Lessor Hedging Agreement Counterparty, including any Break Costs, under the Lessor Hedging Agreements, such amounts shall be distributed to each Lessor Hedging Agreement Counterparty in accordance with such Lessor Hedging Agreement Counterparty's pro rata share thereof based on the amounts then due and owing to each Lessor Hedging Agreement Counterparty), and third, the balance, if any, shall be distributed to Lessee or to such other Person as shall be legally entitled thereto. (c) Receipt of Proceeds of Fleet National Bank Liquid Collateral. If, on any date after a Construction Agency Event of Default or Lease Event of Default has occurred and is continuing, a payment is made from any proceeds from the application or sale of any Fleet National Bank Liquid Collateral, then such amount shall be distributed as follows: first, so much of such payment or amount as shall be required to reimburse the Fleet National Bank Collateral Agent, Fleet, Eagle, the Fleet National Bank Custodian, the Fleet Liquidity Provider or any other Fleet Indemnitee for any taxes, expenses, fees, indemnities or other losses incurred by the Fleet National Bank Collateral Agent, Fleet, Eagle, the Fleet National Bank Custodian, the Fleet Liquidity Provider or any other Fleet Indemnitee under the Operative Documents or in connection with the collection of such amounts (to the extent not previously reimbursed) shall be distributed to the Fleet National Bank Collateral Agent, Fleet, Eagle, the Fleet National Bank Custodian, the Fleet Liquidity Provider or any other Fleet Indemnitee, as applicable (to be divided among such parties pro rata to the extent insufficient to satisfy all claims), 78 PARTICIPATION AGREEMENT second, the balance, if any, shall be distributed: (i) first, to the Fleet Liquidity Provider to reimburse in full the outstanding principal amount of the Borrowings made by the Fleet Liquidity Providers with respect to the A Loans, together with all accrued interest thereon, (ii) second, the balance, if any, to be deposited in the Commercial Paper Account of Eagle to repay in full the Fleet Liquidity Provider's Liquidity Provider Share of the outstanding principal amount of all remaining A Loans of Eagle, together with accrued interest thereon, (iii) third, to the Fleet Liquidity Provider to reimburse in full the outstanding principal amount of the Borrowings made by the Fleet Liquidity Providers with respect to the B Loans, together with all accrued interest thereon, (iv) fourth, the balance, if any, to be deposited in the Commercial Paper Account of Eagle to repay in full the Fleet Liquidity Provider's Liquidity Provider Share of the outstanding principal amount of all remaining B Loans of Eagle, together with accrued interest thereon, (v) fifth, the balance, if any, to be distributed to the Fleet Investor to pay in full the Investor Amounts of the Fleet Investor, together with accrued Yield thereon, third, the balance, if any to be distributed in accordance with clauses first and second of Section 10.8(d), fourth, the balance, if any, to each Lessor Hedging Agreement Counterparty to pay in full all amounts then due and payable to such Lessor Hedging Agreement Counterparty, including any Break Costs, under the Lessor Hedging Agreements (provided that to the extent that the amounts to be distributed to each Lessor Hedging Agreement Counterparty in accordance with this clause fourth are insufficient to pay all amounts then due and payable to such Lessor Hedging Agreement Counterparty, including any Break Costs, under the Lessor Hedging Agreements, such amounts shall be distributed to each Lessor Hedging Agreement Counterparty in accordance with such Lessor Hedging Agreement Counterparty's pro rata share thereof based on the amounts then due and owing to each Lessor Hedging Agreement Counterparty), and fifth, the balance, if any, shall be distributed to Lessee or to such other Person as shall be legally entitled thereto. (d) Receipt of Proceeds of First Union Liquid Collateral. If, on any date after a Construction Agency Event of Default or Lease Event of Default has occurred and is continuing, a payment is made from any proceeds from the application or sale of any First Union Liquid Collateral, then such amount shall be distributed as follows: first, so much of such payment or amount as shall be required to reimburse the First Union Collateral Agent, First Union, the First Union Custodian, the First Union 79 PARTICIPATION AGREEMENT Liquidity Provider or any other First Union Indemnitee for any taxes, expenses, fees, indemnities or other losses incurred by the First Union Collateral Agent, First Union, the First Union Custodian, the First Union Liquidity Provider or any other First Union Indemnitee under the Operative Documents or in connection with the collection of such amounts (to the extent not previously reimbursed) shall be distributed to the First Union Collateral Agent, First Union, the First Union Custodian, the First Union Liquidity Provider or any other First Union Indemnitee, as applicable (to be divided among such parties pro rata to the extent insufficient to satisfy all claims), second, the balance, if any, shall be distributed: (i) first, to the First Union Liquidity Provider to reimburse in full the outstanding principal amount of the Borrowings made by the First Union Liquidity Providers with respect to the A Loans, together with all accrued interest thereon, (ii) second, the balance, if any, to be deposited in the Commercial Paper Account of Eagle to repay in full the First Union Liquidity Provider's Liquidity Provider Share of the outstanding principal amount of all remaining A Loans of Eagle, together with accrued interest thereon, (iii) third, to the First Union Liquidity Provider to reimburse in full the outstanding principal amount of the Borrowings made by the First Union Liquidity Providers with respect to the B Loans, together with all accrued interest thereon, (iv) fourth, the balance, if any, to be deposited in the Commercial Paper Account of Eagle to repay in full the First Union Liquidity Provider's Liquidity Provider Share of the outstanding principal amount of all remaining B Loans of Eagle, together with accrued interest thereon, (v) fifth, the balance, if any, to be distributed to the First Union Investor to pay in full the Investor Amounts of the First Union Investor, together with accrued Yield thereon, third, the balance, if any to be distributed in accordance with clauses first and second of Section 10.8(c), fourth, the balance, if any, to each Lessor Hedging Agreement Counterparty to pay in full all amounts then due and payable to such Lessor Hedging Agreement Counterparty, including any Break Costs, under the Lessor Hedging Agreements (provided that to the extent that the amounts to be distributed to each Lessor Hedging Agreement Counterparty in accordance with this clause fourth are insufficient to pay all amounts then due and payable to such Lessor Hedging Agreement Counterparty, including any Break Costs, under the Lessor Hedging Agreements, such amounts shall be distributed to each Lessor Hedging Agreement Counterparty in accordance with such Lessor Hedging Agreement Counterparty's pro rata share thereof based on the amounts then due and owing to each Lessor Hedging Agreement Counterparty), and 80 PARTICIPATION AGREEMENT fifth, the balance, if any, shall be distributed to Lessee or to such other Person as shall be legally entitled thereto. SECTION 10.9. Other Payments. (a) Except as otherwise provided in Sections 10.2, 10.3, 10.8 and clause (b) or (c) below, (i) any payment received by Administrative Agent for which no provision as to the application thereof is made in the Operative Documents or elsewhere in this Article X, and (ii) all payments and amounts received by the Agents under the Lease or otherwise with respect to the Collateral, shall be distributed forthwith by Administrative Agent in the order of priority set forth in Section 10.3(a) (in the case of any payment described in clause (i) above) or in Section 10.8(b) hereof (in the case of any payment described in clause (ii) above). (b) Except as otherwise provided in Sections 10.2, 10.3 and 10.8 hereof and except after a Lease Event of Default has occurred and is continuing, any payment received by Administrative Agent for which provision as to the application thereof is made in an Operative Document but not elsewhere in this Article X shall be distributed forthwith by the Agents to the Person and for the purpose for which such payment was made in accordance with the terms of such Operative Document. (c) Except as provided in Section 10.8 hereof, any payment received by Administrative Agent representing amounts paid to Lessor pursuant to Section 14.2(b) or 14.4(b) of the Lease shall be distributed forthwith by Administrative Agent in the order of priority set forth in Section 10.4(b) hereof. (d) Any payment received by Administrative Agent in respect of Construction Period Accrued Interest, Construction Period Accrued Yield or Construction Period Fees shall be distributed forthwith by Administrative Agent to the Participant entitled thereto in accordance with Section 2.2.9. SECTION 10.10. Order of Application. To the extent any payment made to any Liquidity Provider or Investor pursuant to Section 10.3 or 10.8 is insufficient to pay in full the Loans or the Investor Amount, as the case may be, of such Person, then each such payment shall first be applied to overdue interest, then to accrued interest or Yield and then to principal or Investor Amount, as applicable. SECTION 10.11. Remaining Funds. Upon the termination or expiration of the Commitments and all Lessor Hedging Agreements and the payment in full of (i) the Conduit Loans, the Facility Loans, the Commercial Paper Notes, the Investor Amounts and all accrued and unpaid interest and Yield, (ii) all amounts, including Break Cost, payable under the Lessor Hedging Agreements and (iii) all other amounts due and owing by Lessee to any Person under the Operative Documents, all remaining moneys held by Administrative Agent shall be paid to 81 PARTICIPATION AGREEMENT Lessee, and Lessee shall not be entitled to receive any amounts from the Accounts until such time, except as expressly provided in this Article X. SECTION 10.12. Time of Payment. Except as otherwise provided in the Operative Documents, each payment due from Lessee under the Operative Documents shall be made in immediately available funds prior to 1:00 p.m. (New York time) on the date when due in immediately available funds consisting of lawful currency of the United States of America, unless such date shall not be a Business Day, in which case payment shall be made on the next following Business Day (unless such next following Business Day is the first Business Day of a calendar month, in which case such payment shall be made on the Business Day next preceding such numerically corresponding day). Except as otherwise provided in the Operative Documents, payments received after 1:00 p.m. (New York time) shall be deemed received on the next succeeding Business Day. ARTICLE XI LESSEE DIRECTIONS; RECOURSE DURING CONSTRUCTION PERIOD SECTION 11.1. Lessee Directions. Notwithstanding anything to the contrary contained in the Operative Documents, Lessor and the Participants agree that, so long as no Event of Default has occurred and is continuing which has caused the acceleration of the maturity of the Loans and the termination of the Commitments: (a) Lessee shall have the right to give all borrowing notices and prepayment notices pursuant to the Loan Agreement; and (b) Lessee shall have the right to replace an Investor or a Liquidity Provider pursuant to Section 8.3 or a Liquidity Provider pursuant to the Liquidity Agreement. SECTION 11.2. Recourse on Liability During Construction Period. Notwithstanding any other provision set forth in this Participation Agreement or any of the other Operative Documents, in the event of the occurrence of a Construction Agency Event of Default, Lessee and Construction Agent shall not be required to pay (either directly or by virtue of the execution of the security interest in the Liquid Collateral) with respect to the Lease Balance more than the Construction Period Maximum Guaranty Amount on a recourse basis with respect to any damages (which shall include Construction Breakage Costs and amounts payable by Construction Agent as Default Completion Costs) which arise from such Construction Agency Event of Default; provided, however, that the foregoing limitation shall not apply to (i) any Full Recourse Event of Default (in which event Construction Agent shall be required to pay the Lease Balance and all other sums then due and payable on a recourse basis), (ii) the rights of parties to seek payment of all amounts (other than the payment of all or any portion of the Lease Balance) due and owing under the Operative Documents, without regard to such limitation, from the proceeds of the Collateral or (iii) any Claim for indemnity covered by Article IX or under any other Operative Document. SECTION 11.3. Notice to Administrative Agent. Lessee shall give notice to Administrative Agent upon the occurrence of any of the following: 82 PARTICIPATION AGREEMENT (a) Lessee shall give written notice to Administrative Agent, concurrently with making a payment of Base Rent or any Supplemental Rent to Administrative Agent. Such notice shall be substantially in the form of Exhibit D hereto and shall specify the amount of the payment that is being made for each of the (a) Conduit Base Rent, (b) Investor Base Rent, and/or (c) Supplemental Rent. (b) If Lessee shall exercise its Purchase Option under Section 2.5(a)(ix) or 5.1.2 of the Construction Agency Agreement, Lessee shall give Administrative Agent written notice concurrent with the notice due to Lessor pursuant to Section 5.1(b) of the Lease. Such notice shall provide the amount of Lease Balance, Traville Lease Balance, or Manufacturing Lease Balance, as applicable, and all other amounts owing in respect of Rent, including Supplemental Rent, separately identifying any amounts representing payments under the Lessor Hedging Agreements accruing through the Purchase Date. (c) If Lessee shall exercise its Purchase Option under Section 5.1.2 of the Construction Agency Agreement, Lessee shall give Administrative Agent written notice concurrent with the notice due to Lessor under the Construction Agency Agreement of such exercise. Such notice shall provide the amount to be paid by Lessee pursuant to Section 5.1.2(ii) or Section 2.5(a)(ix) of the Construction Agency Agreement. (d) Lessee (in its capacity as Construction Agent) shall give Administrative Agent notice concurrently with the payment of any portion of the Construction Period Maximum Guaranty Amount or Lease Balance pursuant to Section 5.1.2 of the Construction Agency Agreement. Any such notice shall contain both the amount and the computation of such Construction Period Maximum Guaranty Amount or Lease Balance. (e) Lessee shall give Administrative Agent notice concurrently with the payment of any portion of Residual Value Guaranty Amount (and all other amounts due and owing in respect to Rent (including Supplemental Rent) pursuant to the Section 7.1(e) of the Lease. Any such notice shall contain both the amount and the computation of such Residual Value Guaranty Amount. (f) If Lessee shall exercise its Remarketing Option under Section 7.1 of the Lease, Lessee shall give Administrative Agent notice concurrent with the notice due to Lessor pursuant to Section 7.1 of the Lease. In addition, Lessee shall give Administrative Agent two (2) Business Days' notice prior to the Sale Date, setting forth the amount to be paid to Administrative Agent pursuant to Section 7.1(c) of the Lease. ARTICLE XII MISCELLANEOUS SECTION 12.1. Survival of Agreements. All representations, warranties, covenants, indemnities and agreements of the parties provided for in the Operative Documents (including, without limitation, the indemnities set forth in Article IX), and the obligations of the parties under any and all thereof, shall survive the execution and delivery and the termination or expiration of the Lease and any of the other Operative Documents, the transfer of the Properties 83 PARTICIPATION AGREEMENT or any portion thereof as provided herein or in any of the other Operative Documents (and shall not be merged into any conveyance or transfer document), and shall be and continue in effect notwithstanding any investigation made by any party hereto or to any of the other Operative Documents and the fact that any such party may waive compliance with any of the other terms, provisions or conditions of any of the Operative Documents. SECTION 12.2. Brokers. Lessee, each Investor, Lessor, Conduit, Administrative Agent and each Collateral Agent each represents to the other that it has not retained or employed any broker, finder or financial advisor other than the retention by Lessee of Scheer Partners, Inc. to act on their behalf in connection with the Overall Transaction, nor has it authorized any other broker, finder or financial adviser retained or employed by any other Person so to act, nor has it incurred any fees or commissions to which Lessee, any Investor, Lessor, Conduit, Administrative Agent or any Collateral Agent might be subjected by virtue of their entering into the transactions contemplated by this Participation Agreement. Any Person who is in breach of this representation shall indemnify and hold the other Persons harmless from and against any liability arising out of such breach of this representation. The provisions of this Section 12.2 shall survive the expiration or termination of this Participation Agreement or any other Operative Document. SECTION 12.3. Notices. Unless otherwise specified herein, all notices, requests, demands or other communications to or upon the respective parties hereto shall be by letter, facsimile (with telephonic confirmation), bank wire or where expressly provided for in the Operative Documents, telephone (with written confirmation promptly thereafter), and shall be deemed to have been given, in the case of notice by letter, the earlier of when delivered to the addressee by hand or courier (including an overnight courier) if delivered on a Business Day and, if not delivered on a Business Day, the first Business Day thereafter or on the third Business Day after depositing the same in the mails, registered or certified mail, postage prepaid, return receipt requested, addressed as provided on Schedule II and, in the case of notice by facsimile, telephone or bank wire, when transmitted during business hours on a Business Day and, if not transmitted during business hours on a Business Day, the first Business Day thereafter, addressed as provided on Schedule II, or to such other address as any of the parties hereto may designate by written notice. Copies of all notices given by facsimile or bank wire shall be contemporaneously sent by overnight courier. Notwithstanding any other provision of this Participation Agreement or the Operative Documents, if Lessee is required to deliver notice to one or more of the parties to the Operative Documents notice to all such parties shall be deemed to have been duly given by Lessee by delivering any such notice to Administrative Agent, who shall in turn promptly deliver such notice to the appropriate party hereto. SECTION 12.4. Counterparts. This Participation Agreement and each of the other Operative Documents may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. SECTION 12.5. Amendments, Waivers and Instructions. (a) No Operative Document nor any of the terms thereof (other than any Lessor Hedging Agreement which, notwithstanding anything to the contrary set forth in this 84 PARTICIPATION AGREEMENT Participation Agreement or any other Operative Document, may be terminated, amended, supplemented, waived or modified in accordance with the terms thereof) may be terminated, amended, supplemented, waived or modified except (i) in the case of an ambiguity, defect or inconsistency in any Operative Document, and such amendment, supplement or waiver would not have an adverse effect on any Participant's rights, with the written agreement or consent of Lessee; (ii) in the case of a termination, amendment, supplement, waiver or modification to be binding on Lessee, Lessor, any Investor or Administrative Agent, either Collateral Agent, or any Lessor Hedge Counterparty, with the written agreement or consent of such party, and in all cases (so long as no Bankruptcy Default, Construction Agency Event of Default or Lease Event of Default shall have occurred and is continuing) the consent of Lessee; and (iii) in the case of a termination, amendment, supplement, waiver or modification to be binding on (A) the Liquidity Providers, with the written agreement or consent of the requisite Liquidity Providers (assuming the requisite Investor consent has been obtained) and (B) the Conduit, with the written agreement or consent of the Conduit (assuming the requisite Liquidity Providers' consent has been obtained) and (so long as no Bankruptcy Default, Construction Agency Event of Default or Lease Event of Default shall have occurred and is continuing) Lessee; provided, however, that: (1) no such termination, amendment, supplement, waiver or modification shall without written agreement or consent of each Participant and each Lessor Hedge Counterparty affected thereby: (x)(i) modify any of the provisions of this Section 12.5, change the definition of "Available Commitments", "Commitment", "Commitment Amount", "In Balance", "Liquid Collateral", "Maturity Date", "Majority Banks", "Non-Properly Margined Liquid Collateral", "Properly Margined Liquid Collateral" "Permitted Investment", or "Required Liquid Collateral" or modify any provision of an Operative Document requiring action by Majority Banks; (ii) amend, modify, waive or supplement any of the provisions of Sections 2.5, 2.6 or 6.1 of the A Loan Agreement, Sections 2.5, 2.6 or 6.1 of the B Loan Agreement, or the representations of such Participant in Article V or the covenants of such Participant in Article VI or the covenants of HGSI in Section 6.1; (iii) reduce or modify any fees or indemnities in favor of any Participant, including amounts payable pursuant to Article IX (except that any Person may consent to any reduction, modification, amendment or waiver of any indemnity payable to it), (iv) modify, postpone, reduce or forgive, in whole or in part, any payment of Rent (other than pursuant to the terms of any Operative Document), any Loan or any portion of any Investor Amount, the Traville Lease Balance, the Manufacturing Lease Balance, the Lease Balance, the Construction Period Maximum Guaranty Amount, the Residual Value Guaranty Amount, Unguaranteed Residual Lease Balance, amounts due pursuant to Article V, VII or XIV of the Lease, interest or Yield or, subject to clause (iii) above, any other amount payable under the Lease or this Participation Agreement, or modify the definition or method of calculation of Rent (other than pursuant to the terms of any Operative Document), any Loan or any Investor Amount, the Traville Lease Balance, the Manufacturing Lease Balance, the Lease Balance, the Construction Period Maximum Guaranty Amount, Residual Value Guaranty Amount, Unguaranteed Residual Lease Balance, or any other definition which would affect the amounts to be advanced 85 PARTICIPATION AGREEMENT or which are payable under the Operative Documents or any of the other matters set forth above; or (iv) extend the Lease Term; or (y) consent to any assignment of the Lease, release Lessee from its obligations in respect of the payments of Rent, the Traville Lease Balance, the Manufacturing Lease Balance and the Lease Balance or change the absolute and unconditional character of such obligation; (2) no termination, amendment, supplement, waiver or modification shall, without the written agreement or consent of each Participant, each Lessor Hedge Counterparty and Lessee, be made to Article X of this Participation Agreement or the definition of "Construction Agency Event of Default" or "Lease Event of Default"; (3) each termination, amendment, supplement, waiver or modification of any Operative Document shall be subject to the consent rights of Conduit and the Majority Banks; and (4) notwithstanding anything to the contrary contained herein or in any other Operative Document, no termination, amendment, supplement, waiver or modification adversely affecting Lessee shall, without the written consent of Lessee, be made to any Operative Document. (b) Administrative Agent and each Collateral Agent shall act in accordance with written instructions from the Directing Party. SECTION 12.6. Headings, etc. The Table of Contents and headings of the various Articles and Sections of this Participation Agreement are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof. SECTION 12.7. Parties in Property. Except as expressly provided herein, none of the provisions of this Participation Agreement or the other Operative Documents are intended for the benefit of any Person except the parties hereto and their permitted successors and assigns; provided, however, that any Lessor Hedging Agreement Counterparty shall be a third party beneficiary of this Participation Agreement. SECTION 12.8. Applicable Law. THIS PARTICIPATION AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW BUT EXCLUDING TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW ALL OTHER CONFLICTS OF LAWS PRINCIPLES AND CHOICE OF LAW RULES OF NEW YORK. SECTION 12.9. Severability. Any provision of this Participation Agreement or any of the Operative Documents that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or thereof, and any such prohibition or 86 PARTICIPATION AGREEMENT unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 12.10. Limitation of Liability. No Participant, Agent or Lessor shall have any obligation to any other Participant, any other Agent or Lessor or party hereto with respect to transactions contemplated by the Operative Documents, except those obligations of such Participant expressly set forth in the Operative Documents or except as set forth in the instruments delivered in connection therewith, and no Participant and no stockholder, employee, officer, director, beneficial owner, member, manager or incorporator thereof shall be liable for performance by any other party hereto of such other party's obligations under the Operative Documents except as otherwise so set forth. Each party hereto and its affiliates hereby waives and releases any claims, rights or causes of action it may have against any other party hereto arising in respect of the Overall Transaction for punitive or consequential damages. SECTION 12.11. Further Assurances. The parties hereto shall promptly cause to be taken, executed, acknowledged or delivered, at the sole expense of Lessee (provided that during the Construction Period Lessee shall request an Advance, the proceeds of which shall be used to pay such expense), all such further acts, conveyances, documents and assurances as the other parties may from time to time reasonably request in order to carry out and effectuate the intent and purposes of this Participation Agreement, the other Operative Documents, and the transactions contemplated hereby and thereby (including to the extent permitted under the Operative Documents, the preparation, execution and filing of any and all UCC financing statements, fixture filings and other filings or registrations which the parties hereto may from time to time request to be filed or effected); provided, however, that Lessee shall not be required to pay expenses pursuant to this Section 12.11 to the extent arising from a breach or alleged breach by Lessor or a Participant of any representation, warranty or agreement entered into in connection with the assignment or participation of any Facility Loan under the Loan Agreement or investment or interest in Lessor unless such breach or alleged breach arose in whole or in part from an act or omission of Lessee. Lessee, at its own expense (provided that during the Construction Period Lessee shall request an Advance, the proceeds of which shall be used to pay such expense) and without need of any prior request from any other party, shall take such actions as may be necessary (including any action specified in the preceding sentence), or (if an Investor shall so request) as so requested, in order to maintain and protect Lessor's interest in the Properties provided for hereunder or under any other Operative Document. Lessor shall from time to time execute and deliver all instruments of further assurance and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of the Assignment of Lease. At any time and from time to time, upon the reasonable written request of Lessor and at the sole expense of Lessee (provided that during the Construction Period Lessee shall request an Advance, the proceeds of which shall be used to pay such expense), Lessee shall promptly and duly execute and deliver such further instruments and documents and take such further actions as Lessor reasonably may request for the purposes of obtaining or preserving the full benefits of the Lessee Deed of Trust and of the rights and powers granted by the Lessee Deed of Trust. 87 PARTICIPATION AGREEMENT At any time and from time to time, upon the reasonable written request of Administrative Agent and at the sole expense of Lessee (provided that during the Construction Period Lessee shall request an Advance, the proceeds of which shall be used to pay such expense), Lessor will promptly and duly execute and deliver such further instruments and documents and take such further actions as Administrative Agent reasonably may request for the purposes of obtaining or preserving the full benefits of the Lessor Deed of Trust and of the rights and powers granted by the Lessor Deed of Trust. Without limiting the foregoing, Lessee agrees that it will, at its own cost and expense (provided that during the Construction Period Lessee shall request an Advance, the proceeds of which shall be used to pay such cost and expense), cause financing statements (including precautionary financing statements and continuation statements), fixture filings and other documents, to be recorded or filed at such places and times in such manner, and will all such other actions or cause such other actions to be taken, as may be necessary or as may be reasonably requested by Lessor, Administrative Agent or either Collateral Agent in accordance with this Participation Agreement or the other Operative Documents in order to establish, continue, perfect and protect the title of Lessor to the Properties and the rights of Lessor, Conduit, Administrative Agent and the Collateral Agents under the Lease and the other Operative Documents. To the extent permitted by Applicable Laws, Lessee hereby authorizes any such financing statement and fixture filings to be filed without the necessity of the signature of Lessee. SECTION 12.12. Reproduction of Documents. This Participation Agreement and all other Operative Documents, all documents constituting Schedules or Exhibits hereto or thereto, and all documents relating hereto or thereto received by any Participant or party hereto, including: (a) consents, waivers and alterations that may hereafter be executed; (b) documents received by such Participant or party in connection with the receipt and/or acquisition of the Properties; and (c) financial statements, certificates, and other information previously or hereafter furnished to such Participant or party may be reproduced by such Participant or party receiving the same by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. Each party agrees and stipulates that, to the extent permitted by law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by such party in the regular course of business) and that, to the extent permitted by law, any enlargement, facsimile, or further reproduction of such reproduction shall likewise be admissible in evidence. SECTION 12.13. Submission to Jurisdiction. Each party to this Participation Agreement irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Participation Agreement or any other Operative Document, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of New York sitting in the County of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof; 88 PARTICIPATION AGREEMENT (b) consents that any such action or proceedings may be brought to such courts, and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to such Person at its address set forth on Schedule II or at such other address of which the other Persons shall have been notified pursuant to Section 12.3; and (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction. In addition, HGSI hereby waives its right to assert any defense, claim or counterclaim against the Trust to the extent such claim, defense, or counterclaim arises out of the Trust's lack of legal capacity to sue for failure of qualifying to do business under Maryland Applicable Law. SECTION 12.14. Jury Trial. EACH PARTY TO THIS PARTICIPATION AGREEMENT WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS PARTICIPATION AGREEMENT OR ANY OTHER OPERATIVE DOCUMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS PARTICIPATION AGREEMENT OR ANY OTHER OPERATIVE DOCUMENT AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. SECTION 12.15. Appointment of Administrative Agent. (a) Each Participant hereby irrevocably appoints Administrative Agent as its agent hereunder and under the other Operative Documents and hereby authorizes Administrative Agent to take such action on its behalf and to exercise such rights, remedies, powers and privileges hereunder or thereunder as are specifically authorized to be exercised by Administrative Agent by the terms hereof or thereof, together with such rights, remedies, powers and privileges as are reasonably incidental thereto. Administrative Agent may execute any of its duties hereunder and under the other Operative Documents by or through agents or employees. The relationship between Administrative Agent and each Participant is that of agent and principal only, and nothing herein shall be deemed to constitute Administrative Agent a trustee for any Participant or impose on Administrative Agent any obligations other than those for which express provision is made herein or in the other Operative Documents. (b) Except as required by the specific terms of the Operative Documents, Administrative Agent shall not have any duty to exercise any right, power, remedy or privilege granted or assigned to it thereby, or to take any affirmative action or exercise any discretion hereunder or thereunder, unless directed to do so by the Directing Party (and shall be fully protected in acting or refraining from acting pursuant to such directions which shall be binding upon the Participants), and shall not, without the prior approval of the Directing Party and except 89 PARTICIPATION AGREEMENT as otherwise provided in Section 12.5, consent to any departure by Lessee, Lessor, the Investors or Conduit from the terms of the Lease or any Operative Document, waive any default on the part of any such party under any such agreement or instrument or amend, modify, supplement, waive or terminate, or agree to any surrender of, any such agreement or instrument; provided, however, that Administrative Agent shall not be required to take any action which exposes Administrative Agent to personal liability or which is contrary to this Participation Agreement, the other Operative Documents or any Applicable Laws. (c) Neither Administrative Agent nor any of its respective directors, officers, agents or employees shall be liable to any Participant, Lessee or Lessor, as the case may be, for any action taken or omitted to be taken by it or them hereunder, under the other Operative Documents, or in connection herewith or therewith, except for its or their own gross negligence, willful misconduct or mishandling of funds, nor shall Administrative Agent be responsible to any Participant for the validity, effectiveness, value, sufficiency or enforceability against Lessee, Lessor, the Investors, Conduit, Administrative Agent or the Collateral Agents, of any Collateral, this Participation Agreement, the other Operative Documents, or any other document furnished pursuant hereto or thereto or in connection herewith or therewith. Without limitation of the generality of the foregoing, Administrative Agent: (i) may consult with legal counsel (including counsel for Lessee, Conduit or Lessor), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (ii) makes no warranty or representation to any Participant and shall not be responsible to any Participant for any statements, warranties or representations made in or in connection with this Participation Agreement, the other Operative Documents, any other document furnished pursuant hereto or thereto or in connection herewith or therewith; (iii) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Participation Agreement or the other Operative Documents, on the part of any party hereto or thereto or to inspect the property (including the books and records) of Lessee, Lessor or Conduit; (iv) shall not be responsible to any Participant for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Participation Agreement, the other Operative Documents or any other instrument or document furnished pursuant hereto or thereto; and (v) shall incur no liability under or in respect of the Operative Documents by acting upon any notice, consent, certificate or other instrument or writing to the extent authorized herein or therein believed by it to be genuine and signed or sent by the proper party or parties. (d) Each Participant hereby severally agrees, in the ratio that the sum of such Participant's Investor Amount, Conduit Loans, Facility Loans, Percentage Interests and Available Commitment bears to the sum of all Investor Amounts, Conduit Loans, Facility Loans, Percentage Interests and Available Commitments, to indemnify and hold harmless Administrative Agent, from and against any and all losses, liabilities (including liabilities for penalties), actions, suits, judgments, demands, damages, costs and expenses of any kind whatsoever (including, without limitation, reasonable fees and expenses of attorneys, accountants and experts) incurred or suffered by Administrative Agent in its capacity as Administrative Agent hereunder and under the Operative Documents as a result of any action taken or omitted to be taken by Administrative Agent in such capacity or otherwise incurred or suffered by, made upon, or assessed against Administrative Agent in such capacity; provided, however, that no Participant shall be liable for any portion of any such losses, liabilities 90 PARTICIPATION AGREEMENT (including liabilities for penalties), actions, suits, judgments, demands, damages, costs or expenses resulting from or attributable to gross negligence or willful misconduct on the part of Administrative Agent; and provided, further, that Conduit shall only be liable to the extent there exist Excess Funds in the Commercial Paper Account not otherwise payable to another Person by Administrative Agent pursuant to the Security Agreement or Article X hereof. Without limiting the generality of the foregoing, each Participant hereby agrees, in the ratio aforesaid, to reimburse Administrative Agent promptly following its demand for any reasonable out-of-pocket expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred by Administrative Agent under the Operative Documents, and not promptly reimbursed to Administrative Agent by Lessee, Lessor or Conduit. Each Participant's obligations under this paragraph shall survive the termination of the Operative Documents and the discharge of Lessee's, Lessor's and Conduit's obligations thereunder. This indemnity shall survive the removal or resignation of Administrative Agent. In no event shall Administrative Agent be liable for special, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profits) under the Operative Documents, even if Administrative Agent has been advised of the likelihood of such loss or damage and regardless of the form of action. (e) The Participants agree that, with respect to their obligation to fund under the Operative Documents and the Investor Contributions or Loans made by them, any Participant acting as Administrative Agent shall have the same rights and powers hereunder as any other Participant and may exercise the same as though it were not performing the duties specified herein; and the terms "Participants," "Directing Party," or any similar terms shall, unless the context clearly otherwise indicates, include Administrative Agent and Administrative Agent may accept deposits from, lend money to, and generally engage in any kind of banking, trust or other business with Lessee, Lessor, Conduit or any of their respective affiliates as if it were not performing the duties specified herein, and may accept fees and other consideration from Lessee, Lessor, Conduit or any of their respective affiliates for services in connection with the Operative Documents and otherwise without having to account for the same to any Participant. (f) Each Participant hereby acknowledges that it has, independent of and without reliance upon Administrative Agent or any materials provided by Administrative Agent or any other Participant and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into the Operative Documents to which it is a party. Administrative Agent shall in no event be liable to any Participant on account of any materials prepared or provided by it. SECTION 12.16. Resignation by Administrative Agent. (a) Administrative Agent may resign as such at any time upon at least thirty (30) days' prior written notice to Lessee, Lessor, the other Agents and, the Participants. (b) In the event of such resignation, the Directing Party shall as promptly as practicable appoint a successor agent to replace Administrative Agent, subject to the prior written consent of Lessee (provided that such consent shall not (x) be required during the continuance of a Lease of Default or Construction Agency Event of Default or any other Event of Default caused by a Lease Default or Construction Agency Event of Default and (y) in any event, be unreasonably withheld). If no successor Administrative Agent shall have been so 91 PARTICIPATION AGREEMENT appointed by the Directing Party, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's giving of notice of resignation, then the retiring Administrative Agent may petition a court of competent jurisdiction to appoint a successor Administrative Agent. Any successor Administrative Agent shall (1) be a commercial bank organized under the laws of the United States of America or of any State thereof having a combined capital and surplus of at least $200,000,000 and (2) have commercial paper ratings of A-1 from S&P and P-1 from Moody's. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, discretion, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. Notwithstanding the resignation of Administrative Agent or any Administrative Agent hereunder, the provisions of Section 12.15 shall continue to inure to the benefit of Administrative Agent in respect of any action taken or omitted to be taken by Administrative Agent in its capacity as such while it was such under the Operative Documents. SECTION 12.17. Appointment of the Fleet National Bank Collateral Agent. (a) Each Participant and the Lessor hereby irrevocably appoints the Fleet National Bank Collateral Agent as its agent hereunder and under the other Operative Documents and hereby authorizes the Fleet National Bank Collateral Agent to take such action on its behalf and to exercise such rights, remedies, powers and privileges hereunder or thereunder as are specifically authorized to be exercised by the Fleet National Bank Collateral Agent by the terms hereof or thereof, together with such rights, remedies, powers and privileges as are reasonably incidental thereto. The Fleet National Bank Collateral Agent may execute any of its duties hereunder and under the other Operative Documents by or through agents or employees. The relationship between the Fleet National Bank Collateral Agent and each Participant and the Lessor is that of agent and principal only, and nothing herein shall be deemed to constitute the Fleet National Bank Collateral Agent a trustee for any Participant or Lessor or impose on the Fleet National Bank Collateral Agent any obligations other than those for which express provision is made herein or in the other Operative Documents. (b) Except as required by the specific terms of the Operative Documents, the Fleet National Bank Collateral Agent shall not have any duty to exercise any right, power, remedy or privilege granted or assigned to it thereby, or to take any affirmative action or exercise any discretion hereunder or thereunder, unless directed to do so by the Directing Party (and shall be fully protected in acting or refraining from acting pursuant to such directions which shall be binding upon the Participants and the Lessor), and shall not, without the prior approval of the Directing Party and except as otherwise provided in Section 12.5, consent to any departure by Lessee, Lessor, the Investors or Conduit from the terms of the Lease or any Operative Document, waive any default on the part of any such party under any such agreement or instrument or amend, modify, supplement, waive or terminate, or agree to any surrender of, any such agreement or instrument; provided, however, that the Fleet National Bank Collateral Agent shall not be required to take any action which exposes the Fleet National Bank Collateral Agent to personal liability or which is contrary to this Participation Agreement, the other Operative Documents or any Applicable Laws. 92 PARTICIPATION AGREEMENT (c) Neither the Fleet National Bank Collateral Agent nor any of its respective directors, officers, agents or employees shall be liable to any Participant, Lessee or Lessor, as the case may be, for any action taken or omitted to be taken by it or them hereunder, under the other Operative Documents, or in connection herewith or therewith, except for its or their own gross negligence, willful misconduct or mishandling of funds, nor shall the Fleet National Bank Collateral Agent be responsible to any Participant or Lessor for the validity, effectiveness, value, sufficiency or enforceability against Lessee, Lessor, the Investors, Conduit, Administrative Agent or the Collateral Agents, of any Collateral, this Participation Agreement, the other Operative Documents, or any other document furnished pursuant hereto or thereto or in connection herewith or therewith. Without limitation of the generality of the foregoing, the Fleet National Bank Collateral Agent: (i) may consult with legal counsel (including counsel for Lessee, Conduit or Lessor), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (ii) makes no warranty or representation to any Participant or Lessor and shall not be responsible to any Participant for any statements, warranties or representations made in or in connection with this Participation Agreement, the other Operative Documents, any other document furnished pursuant hereto or thereto or in connection herewith or therewith; (iii) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Participation Agreement or the other Operative Documents, on the part of any party hereto or thereto or to inspect the property (including the books and records) of Lessee, Lessor or Conduit; (iv) shall not be responsible to any Participant or Lessor for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Participation Agreement, the other Operative Documents or any other instrument or document furnished pursuant hereto or thereto; and (v) shall incur no liability under or in respect of the Operative Documents by acting upon any notice, consent, certificate or other instrument or writing to the extent authorized herein or therein believed by it to be genuine and signed or sent by the proper party or parties. (d) Each Participant hereby severally agrees, in the ratio that the sum of such Participant's Investor Amount, Conduit Loans, Facility Loans, Percentage Interests and Available Commitment bears to the sum of all Investor Amounts, Conduit Loans, Facility Loans, Percentage Interests and Available Commitments of all Participants, to indemnify and hold harmless the Fleet National Bank Collateral Agent, from and against any and all losses, liabilities (including liabilities for penalties), actions, suits, judgments, demands, damages, costs and expenses of any kind whatsoever (including, without limitation, reasonable fees and expenses of attorneys, accountants and experts) incurred or suffered by the Fleet National Bank Collateral Agent in its capacity as the Fleet National Bank Collateral Agent hereunder and under the Operative Documents as a result of any action taken or omitted to be taken by the Fleet National Bank Collateral Agent in such capacity or otherwise incurred or suffered by, made upon, or assessed against the Fleet National Bank Collateral Agent in such capacity; provided, however, that no Participant shall be liable for any portion of any such losses, liabilities (including liabilities for penalties), actions, suits, judgments, demands, damages, costs or expenses resulting from or attributable to gross negligence or willful misconduct on the part of the Fleet National Bank Collateral Agent; and provided, further, that Eagle shall only be liable to the extent there exist Excess Funds in the Commercial Paper Account not otherwise payable to another Person by the Fleet National Bank Collateral Agent pursuant to the Liquid Collateral Agreement or Article X hereof. Without limiting the generality of the foregoing, each Participant hereby agrees, in the 93 PARTICIPATION AGREEMENT ratio aforesaid, to reimburse the Fleet National Bank Collateral Agent promptly following its demand for any reasonable out-of-pocket expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred by the Fleet National Bank Collateral Agent under the Operative Documents, and not promptly reimbursed to the Fleet National Bank Collateral Agent by Lessee, Lessor or Conduit. Each Participant's obligations under this paragraph shall survive the termination of the Operative Documents and the discharge of Lessee's, Lessor's and Conduit's obligations thereunder. This indemnity shall survive the removal or resignation of the Fleet National Bank Collateral Agent. In no event shall the Fleet National Bank Collateral Agent be liable for special, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profits) under the Operative Documents, even if the Fleet National Bank Collateral Agent has been advised of the likelihood of such loss or damage and regardless of the form of action. (e) The Participants agree that, with respect to their obligation to fund under the Operative Documents and the Investor Contributions or Loans made by them, any Participant acting as the Fleet National Bank Collateral Agent shall have the same rights and powers hereunder as any other Participant and may exercise the same as though it were not performing the duties specified herein; and the terms "Participants," "Directing Party," or any similar terms shall, unless the context clearly otherwise indicates, include the Fleet National Bank Collateral Agent and the Fleet National Bank Collateral Agent may accept deposits from, lend money to, and generally engage in any kind of banking, trust or other business with Lessee, Lessor, Conduit or any of their respective affiliates as if it were not performing the duties specified herein, and may accept fees and other consideration from Lessee, Lessor, Conduit or any of their respective affiliates for services in connection with the Operative Documents and otherwise without having to account for the same to any Participant. (f) Each Participant hereby acknowledges that it has, independent of and without reliance upon the Fleet National Bank Collateral Agent or any materials provided by the Fleet National Bank Collateral Agent or any other Participant and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into the Operative Documents to which it is a party. The Fleet National Bank Collateral Agent shall in no event be liable to any Participant on account of any materials prepared or provided by it. (g) The Fleet National Bank Collateral Agent covenants and agrees that it shall give prompt notice to each Participant upon exercising any of its remedies with respect to its related Account. SECTION 12.18. Resignation by the Fleet National Bank Collateral Agent (a) The Fleet National Bank Collateral Agent may resign as such at any time upon at least thirty (30) days' prior written notice to Lessee, Lessor, the other Agents and, the Participants. In the event of such resignation, Fleet National Bank shall as promptly as practicable appoint a successor agent to replace the Fleet National Bank Collateral Agent, subject to the prior written consent of Lessee (provided that such consent shall not (x) be required during the continuance of a Lease of Default or Construction Agency Event of Default or any other Event of Default caused by a Lease Default or Construction Agency Event of Default and the exercise of remedies under the Operative Documents as a result thereof and (y) in any event, be 94 PARTICIPATION AGREEMENT unreasonably withheld). If no successor Fleet National Bank Collateral Agent shall have been so appointed by Fleet National Bank, and shall have accepted such appointment, within 30 days after the retiring Fleet National Bank Collateral Agent's giving of notice of resignation, then the retiring Fleet National Bank Collateral Agent may petition a court of competent jurisdiction to appoint a successor Fleet National Bank Collateral Agent. Any successor Fleet National Bank Collateral Agent shall (1) be a commercial bank organized under the laws of the United States of America or of any State thereof having a combined capital and surplus of at least $200,000,000, and (2) have commercial paper ratings of A-1 from S&P and P-1 from Moody's. Upon the acceptance of any appointment as Fleet National Bank Collateral Agent hereunder by a successor Fleet National Bank Collateral Agent, such successor Fleet National Bank Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, discretion, privileges and duties of the retiring Fleet National Bank Collateral Agent, and the retiring Fleet National Bank Collateral Agent shall be discharged from its duties and obligations hereunder. Notwithstanding the resignation of the Fleet National Bank Collateral Agent or any Fleet National Bank Collateral Agent hereunder, the provisions of Section 12.17 shall continue to inure to the benefit of the Fleet National Bank Collateral Agent in respect of any action taken or omitted to be taken by the Fleet National Bank Collateral Agent in its capacity as such while it was such under the Operative Documents. SECTION 12.19. Appointment of the First Union Collateral Agent. (a) Each Participant and Lessor hereby irrevocably appoints the First Union Collateral Agent as its agent hereunder and under the other Operative Documents and hereby authorizes the First Union Collateral Agent to take such action on its behalf and to exercise such rights, remedies, powers and privileges hereunder or thereunder as are specifically authorized to be exercised by the First Union Collateral Agent by the terms hereof or thereof, together with such rights, remedies, powers and privileges as are reasonably incidental thereto. The First Union Collateral Agent may execute any of its duties hereunder and under the other Operative Documents by or through agents or employees. The relationship between the First Union Collateral Agent and each Participant and Lessor is that of agent and principal only, and nothing herein shall be deemed to constitute the First Union Collateral Agent a trustee for any Participant or impose on the First Union Collateral Agent any obligations other than those for which express provision is made herein or in the other Operative Documents. (b) Except as required by the specific terms of the Operative Documents, the First Union Collateral Agent shall not have any duty to exercise any right, power, remedy or privilege granted or assigned to it thereby, or to take any affirmative action or exercise any discretion hereunder or thereunder, unless directed to do so by the Directing Party (and shall be fully protected in acting or refraining from acting pursuant to such directions which shall be binding upon the Participants and Lessor), and shall not, without the prior approval of the Directing Party and except as otherwise provided in Section 12.5, consent to any departure by Lessee, Lessor, the Investors or Conduit from the terms of the Lease or any Operative Document, waive any default on the part of any such party under any such agreement or instrument or amend, modify, supplement, waive or terminate, or agree to any surrender of, any such agreement or instrument; provided, however, that the First Union Collateral Agent shall not be required to take any action which exposes the First Union Collateral Agent to personal liability or which is contrary to this Participation Agreement, the other Operative Documents or any Applicable Laws. 95 PARTICIPATION AGREEMENT (c) Neither the First Union Collateral Agent nor any of its respective directors, officers, agents or employees shall be liable to any Participant, Lessee or Lessor, as the case may be, for any action taken or omitted to be taken by it or them hereunder, under the other Operative Documents, or in connection herewith or therewith, except for its or their own gross negligence, willful misconduct or mishandling of funds nor shall the First Union Collateral Agent be responsible to any Participant or Lessor for the validity, effectiveness, value, sufficiency or enforceability against Lessee, Lessor, the Investors, Conduit, Administrative Agent or the Collateral Agents, of any Collateral, this Participation Agreement, the other Operative Documents, or any other document furnished pursuant hereto or thereto or in connection herewith or therewith. Without limitation of the generality of the foregoing, the First Union Collateral Agent: (i) may consult with legal counsel (including counsel for Lessee, Conduit or Lessor), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (ii) makes no warranty or representation to any Participant or Lessor and shall not be responsible to any Participant for any statements, warranties or representations made in or in connection with this Participation Agreement, the other Operative Documents, any other document furnished pursuant hereto or thereto or in connection herewith or therewith; (iii) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Participation Agreement or the other Operative Documents, on the part of any party hereto or thereto or to inspect the property (including the books and records) of Lessee, Lessor or Conduit; (iv) shall not be responsible to any Participant or Lessor for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Participation Agreement, the other Operative Documents or any other instrument or document furnished pursuant hereto or thereto; and (v) shall incur no liability under or in respect of the Operative Documents by acting upon any notice, consent, certificate or other instrument or writing to the extent authorized herein or therein believed by it to be genuine and signed or sent by the proper party or parties. (d) Each Participant hereby severally agrees, in the ratio that the sum of such First Union Participant's Investor Amount, Conduit Loans, Facility Loans, Percentage Interests and Available Commitment bears to the sum of all Investor Amounts, Conduit Loans, Facility Loans, Percentage Interests and Available Commitments of all Participants, to indemnify and hold harmless the First Union Collateral Agent, from and against any and all losses, liabilities (including liabilities for penalties), actions, suits, judgments, demands, damages, costs and expenses of any kind whatsoever (including, without limitation, reasonable fees and expenses of attorneys, accountants and experts) incurred or suffered by the First Union Collateral Agent in its capacity as the First Union Collateral Agent hereunder and under the Operative Documents as a result of any action taken or omitted to be taken by the First Union Collateral Agent in such capacity or otherwise incurred or suffered by, made upon, or assessed against the First Union Collateral Agent in such capacity; provided, however, that no Participant shall be liable for any portion of any such losses, liabilities (including liabilities for penalties), actions, suits, judgments, demands, damages, costs or expenses resulting from or attributable to gross negligence or willful misconduct on the part of the First Union Collateral Agent; and provided, further, that Eagle shall only be liable to the extent there exist Excess Funds in the Commercial Paper Account not otherwise payable to another Person by the Fleet National Bank Collateral Agent pursuant to the Liquid Collateral Agreement or Article X hereof. Without limiting the generality of the foregoing, each Participant hereby agrees, in the ratio aforesaid, to reimburse 96 PARTICIPATION AGREEMENT the First Union Collateral Agent promptly following its demand for any reasonable out-of-pocket expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred by the First Union Collateral Agent under the Operative Documents, and not promptly reimbursed to the First Union Collateral Agent by Lessee, Lessor or Conduit. Each First Union Participant's obligations under this paragraph shall survive the termination of the Operative Documents and the discharge of Lessee's, Lessor's and Conduit's obligations thereunder. This indemnity shall survive the removal or resignation of the First Union Collateral Agent. In no event shall the First Union Collateral Agent be liable for special, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profits) under the Operative Documents, even if the First Union Collateral Agent has been advised of the likelihood of such loss or damage and regardless of the form of action. (e) The Participants agree that, with respect to their obligation to fund under the Operative Documents and the Investor Contributions or Loans made by them, any Participant acting as the First Union Collateral Agent shall have the same rights and powers hereunder as any other Participant and may exercise the same as though it were not performing the duties specified herein; and the terms "Participants," "Directing Party," or any similar terms shall, unless the context clearly otherwise indicates, include the First Union Collateral Agent and the First Union Collateral Agent may accept deposits from, lend money to, and generally engage in any kind of banking, trust or other business with Lessee, Lessor, Conduit or any of their respective affiliates as if it were not performing the duties specified herein, and may accept fees and other consideration from Lessee, Lessor, Conduit or any of their respective affiliates for services in connection with the Operative Documents and otherwise without having to account for the same to any Participant. (f) Each Participant hereby acknowledges that it has, independent of and without reliance upon the First Union Collateral Agent or any materials provided by the First Union Collateral Agent or any other Participant and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into the Operative Documents to which it is a party. The First Union Collateral Agent shall in no event be liable to any Participant on account of any materials prepared or provided by it. (g) The First Union Collateral Agent covenants and agrees that it shall give prompt notice to each Participant upon exercising any of its remedies with respect to its related Account. SECTION 12.20. Resignation by the First Union Collateral Agent. (a) The First Union Collateral Agent may resign as such at any time upon at least thirty (30) days' prior written notice to Lessee, Lessor, the other Agents and the Participants. In the event of such resignation, First Union National Bank shall as promptly as practicable appoint a successor agent to replace the First Union Collateral Agent, subject to the prior written consent of Lessee (provided that such consent shall not (x) be required during the continuance of a Lease of Default or Construction Agency Event of Default or any other Event of Default caused by a Lease Default or Construction Agency Event of Default and the exercise of remedies under the Operative Documents as a result thereof and (y) in any event, be unreasonably withheld). If no successor First Union Collateral Agent shall have been so appointed by First 97 PARTICIPATION AGREEMENT Union National Bank, and shall have accepted such appointment, within 30 days after the retiring First Union Collateral Agent's giving of notice of resignation, then the retiring First Union Collateral Agent may petition a court of competent jurisdiction to appoint a successor First Union Collateral Agent. Any successor First Union Collateral Agent shall (1) be a commercial bank organized under the laws of the United States of America or of any State thereof having a combined capital and surplus of at least $200,000,000, (2) have commercial paper ratings of A-1+ from S&P and P-1 from Moody's, (3) not be a competitor, and (4) have been approved in writing by Lessee (provided that such approval shall not (x) be required during the continuance of an Event of Default and the exercise of remedies under the Operative Documents as a result thereof and (y) in any event, be unreasonably withheld). Upon the acceptance of any appointment as First Union Collateral Agent hereunder by a successor First Union Collateral Agent, such successor First Union Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, discretion, privileges and duties of the retiring First Union Collateral Agent, and the retiring First Union Collateral Agent shall be discharged from its duties and obligations hereunder. Notwithstanding the resignation of the First Union Collateral Agent or any First Union Collateral Agent hereunder, the provisions of Section 12.19 shall continue to inure to the benefit of the First Union Collateral Agent in respect of any action taken or omitted to be taken by the First Union Collateral Agent in its capacity as such while it was such under the Operative Documents. SECTION 12.21. Binding Effect. This Participation Agreement shall be binding upon and inure to the benefit of HGSI and each other party hereto and their respective successors and assigns. SECTION 12.22. Non-Petition. Each party hereto hereby agrees that it shall not institute against, or join or assist any other person in instituting against, Lessor, any Liquidity Provider that is a rated commercial paper issuer or Conduit any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding or other proceedings under any federal or state bankruptcy or similar law, for one year and a day after the latest maturing commercial paper notes issued by Conduit are paid. This Section 12.22 shall survive the termination of this Participation Agreement. SECTION 12.23. Limitations on Recourse to Conduit. Notwithstanding any provision of this Participation Agreement to the contrary, each party hereto agrees that Conduit shall only be required to pay (a) any fees or liabilities that it may incur hereunder only to the extent Conduit has Excess Funds and (b) any expenses, indemnities or other liabilities under any other Operative Document only to the extent Conduit has Excess Funds; provided, however, that if Conduit has insufficient funds to make any payments required by this Participation Agreement to Lessor, Lessee, Collateral Agent, Liquidity Agent or Liquidity Providers, such Persons shall not be excused from the performance of their respective obligations hereunder (but shall have no additional obligations as a result of such insufficient funds). In addition, no amount owing by Conduit hereunder in excess of the liabilities that Conduit is required to pay in accordance with the preceding sentence shall constitute a claim (as defined in Section 101 to Title 11 of the United States Code) against Conduit. No recourse shall be had for the payment of any amount owing hereunder or for the payment of any fee hereunder or any other obligation of or claim against, Conduit arising out of or based upon this Participation Agreement, against any stockholder, employee, officer, director, manager or incorporator of Conduit or Affiliate thereof; 98 PARTICIPATION AGREEMENT provided, however, that the foregoing shall not relieve any such person or entity of any liability they might otherwise have as a result of fraudulent actions or omissions taken by them. Any and all claims against Conduit by any other Person shall be subordinate to the claims of the holders of the commercial paper notes of Conduit. The obligations of each party under this Section 12.23 shall survive the termination of this Participation Agreement. SECTION 12.24. Limitations on Recourse to the Trust Company. It is expressly understood and agreed by the parties hereto that (a) except as specifically provided for in the Operative Documents, each of the Operative Documents executed by Wells Fargo Bank Northwest, N.A. are executed and delivered by Wells Fargo Bank Northwest, N.A. not individually or personally but solely as trustee of the Trust, in the exercise of the powers and authority conferred and vested in it, (b) each of the representations, undertakings and agreements herein made on the part of Lessor, the Trust or Trustee, as the case may be, is made and intended not as personal representations, undertakings and agreements by Wells Fargo Bank Northwest, N.A. but is made and intended for the purpose for binding only the Trust, (c) except as specifically provided for in the Operative Documents nothing herein contained shall be construed as creating any liability on Wells Fargo Bank Northwest, N.A., individually or personally, to perform any covenant either expressed or implied contained herein, all such liability, if any, being expressly waived by the parties hereto and by any Person claiming by, through or under the parties hereto and (d) under no circumstances shall Wells Fargo Bank Northwest, N.A. be personally liable for the payment of any indebtedness or expenses of any party hereto, or be liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaken by it in its capacity as Trustee under the Operative Documents. SECTION 12.25. Consent to Certain Actions. Lessor shall transfer the Properties in accordance with Article 15 of the Lease and each of Lessor and Collateral Agent shall execute such documents and instruments necessary to effect such transfer. Upon satisfaction in full of Lessee's obligations under the Operative Documents, Administrative Agent shall release the Deeds of Trust and Collateral, and, together with Lessor, execute such instruments and agreements as are necessary to effectuate such release. Lessor and Administrative Agent shall enter into nondisturbance agreements. SECTION 12.26. Notice to Administrative Agent. HGSI shall provide to Administrative Agent notice of each Advance Request in accordance with Section 2.2.5(a). HGSI also shall notify Administrative Agent prior to the receipt by Administrative Agent thereof of the nature and amount of each payment of Rent. SECTION 12.27. Estoppel Certificates. Each party hereto agrees that at any time and from time to time, it will promptly, but in no event later than ten (10) Business Days after request by the other party hereto, execute, acknowledge and deliver to such other party or to any prospective purchaser, assignee or mortgagee or third party designated by such other party, a certificate stating, to the best of its knowledge (a) that the Operative Documents are unmodified and in force and effect (or if there have been modifications, that the Operative Documents are in force and effect as modified and identifying the modification agreements); (b) if requested, the amounts of outstanding: Yield, Conduit Loans and/or Facility Loans; (c) the date to which Base Rent has been paid; (d) if requested of Lessor, whether or not there is any existing default by Lessee in the payment of Base Rent or any other sum of money due under the Operative 99 PARTICIPATION AGREEMENT Documents, and whether or not, to the knowledge of Lessor or Administrative Agent, there is any other existing default on the part of Lessee under the Operative Documents and, if so, specifying the nature and extent thereof; (e) if requested of Lessee, whether or not, to the knowledge of Lessee, there is any existing default on the part of Lessor under the Operative Documents and, if so, specifying the nature and extent thereof; and (f) whether or not, to the knowledge of the signer after the due inquiry and investigation, there are any setoffs, defenses or counterclaims against enforcement of the obligations to be performed under the Operative Documents existing in favor of the party executing such certificate. SECTION 12.28. Expenses During the Construction Period. Notwithstanding anything to the contrary set forth in the Operative Documents, all expenses that Lessee or Construction Agent is expressly obliged to pay in the Operative Documents during the Construction Period, shall be payable by Lessor solely from proceeds of Loans and Investor Amounts. Lessee agrees to make an Advance Request to properly fund such expenses. SECTION 12.29. Release and Exchange of Liquid Collateral. A Collateral Agent shall be obligated to release its lien on certain Liquid Collateral for its related account pursuant to paragraphs (a) or (b) below if all of the following conditions are satisfied at the time of the release: (i) no Event of Default shall have occurred and be continuing; (ii) each Account (after giving effect to the release and, in the case of paragraph (b) below, the delivery of additional Permitted Investments) has credited to it Liquid Collateral with a Fair Market Value or Adjusted Market Value, whichever is applicable, equal to or greater than the Required Liquid Collateral amount on such date, (iii) each Account has a first priority perfected security interest in the Liquid Collateral credited to such Account, and (iv) the Fair Market Value or Adjusted Market Value of the Liquid Collateral credited to both Accounts (after giving effect to the requested release of Liquid Collateral and the delivery of additional Permitted Investments in the case of paragraph (b) below) equals or exceeds the aggregate Required Liquid Collateral Amount for both Accounts. (a) Each Collateral Agent shall cause to be released from its related Account its lien on certain Liquid Collateral identified in reasonable detail in a written notice delivered to it by Lessee by no later than the end of business on a Business Day that is five (5) Business Days after receipt of written demand from Lessee, so long as all of the conditions set forth in this Section 12 are met on the date of release. (b) Lessee shall have the right to require either Collateral Agent to release to Lessee any Liquid Collateral held in the related Account upon delivery by Lessee to such Collateral Agent of such additional Permitted Investments as is necessary so that after giving effect to the release of the released Liquid Collateral and the delivery of the additional Liquid Collateral, the Fair Market Value or Adjusted Market Value, whichever is applicable, of the Liquid Collateral held in such Account shall remain equal to or greater than the Required Liquid Collateral Amount for such date applicable to such Account. 100 PARTICIPATION AGREEMENT [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] [SIGNATURE PAGES FOLLOW] 101 PARTICIPATION AGREEMENT IN WITNESS WHEREOF, the parties hereto have caused this PARTICIPATION AGREEMENT to be duly executed by their respective officers thereto duly authorized as of the day and year first above written. HUMAN GENOME SCIENCES, INC., as Lessee and Construction Agent By /s/ STEVEN C. MAYER ----------------------------------- Name: Steven C. Mayer Title: Senior Vice President and CFO S-1 PARTICIPATION AGREEMENT GENOME STATUTORY TRUST 2001A, as Lessor By: Wells Fargo Bank Northwest, N.A., not in its individual capacity except as specifically set forth herein, but solely as Trustee By /s/ C. SCOTT NIELSON ----------------------------------- Name: C. Scott Nielson Title: Vice President S-2 PARTICIPATION AGREEMENT WELLS FARGO BANK NORTHWEST, N.A., not in its individual capacity except as specifically set forth herein, but solely as Trustee and Trust Company By /s/ C. SCOTT NIELSON ----------------------------------- Name: C. Scott Nielson Title: Vice President S-3 PARTICIPATION AGREEMENT BANCBOSTON LEASING INVESTMENTS INC., as an Investor By /s/ STEVEN CRISCIONE ----------------------------------- Name: Steven Criscione Title: Vice President S-4 PARTICIPATION AGREEMENT FIRST UNION NATIONAL BANK, as an Investor By /s/ BARBARA K. ANGEL ----------------------------------- Name: Barbara Kaufmann Angel Title: Vice President S-5 PARTICIPATION AGREEMENT EAGLEFUNDING CAPITAL CORPORATION, as a Lender By /s/ THOMAS M. CALHOUN ----------------------------------- Name: Thomas M. Calhoun Title: Director, its attorney-in-fact S-6 PARTICIPATION AGREEMENT FLEET SECURITIES, INC., as Administrator of EagleFunding Capital Corporation By /s/ THOMAS M. CALHOUN ----------------------------------- Name: Thomas M. Calhoun Title: Director S-7 PARTICIPATION AGREEMENT FLEET NATIONAL BANK, as Fleet Liquidity Provider By /s/ STEVEN CRISCIONE ----------------------------------- Name: Steven Criscione Title: Vice President S-8 PARTICIPATION AGREEMENT FLEET NATIONAL BANK, as Fleet National Bank Collateral Agent By /s/ STEVEN CRISCIONE ----------------------------------- Name: Steven Criscione Title: Vice President S-9 PARTICIPATION AGREEMENT FIRST UNION NATIONAL BANK, as First Union Liquidity Provider By /s/ BARBARA K. ANGEL ----------------------------------- Name: Barbara Kaufmann Angel Title: Vice President S-10 PARTICIPATION AGREEMENT FIRST UNION NATIONAL BANK, as First Union Collateral Agent By /s/ BARBARA K. ANGEL ----------------------------------- Name: Barbara Kaufmann Angel Title: Vice President S-11 PARTICIPATION AGREEMENT FLEET NATIONAL BANK, as Administrative Agent and Liquidity Agent By /s/ STEVEN CRISCIONE ----------------------------------- Name: Steven Criscione Title: Vice President S-12 PARTICIPATION AGREEMENT TRAVILLE LLC, as Ground Lessor By /s/ STEVEN C. MAYER ----------------------------------- Name: Steven C. Mayer Title: Senior Vice President and CFO S-13 EX-10.17 4 w58882ex10-17.txt APPENDIX A TO PARTICIPATION AGREEMENT Exhibit 10.17 APPENDIX A TO PARTICIPATION AGREEMENT I. Interpretation. In each Operative Document, unless a clear contrary intention appears: (a) any term defined below by reference to another instrument or document shall continue to have the meaning ascribed thereto whether or not such other instrument or document remains in effect; (b) words importing the singular, where appropriate, include the plural and vice versa; (c) words importing a gender include any gender; (d) a reference in any Operative Document to a part, clause, section, exhibit or schedule without further description is a reference to a part, clause and section of, and exhibit and schedule to, such Operative Document; (e) a reference to any statute, regulation, proclamation, ordinance or law includes all statutes, regulations, proclamations, ordinances or laws amending, supplementing, supplanting, varying, consolidating or replacing it, and a reference to a statute includes all regulations, proclamations and ordinances issued or otherwise applicable under that statute; (f) a reference to a document includes, unless the context thereof otherwise requires, any amendment or supplement to, or replacement or novation of, that document; (g) a reference to a party to a document includes that party's successors and permitted assigns; (h) a reference to "including" means including without limiting the generality of any description preceding such term and for purposes hereof a general statement followed by or referable to an enumeration of specific matters shall not be limited to matters similar to those specifically mentioned; and (i) the word "until," when used in the context of a date for payment, means until (but excluding) such date for payment. II. Legal Representation of the Parties. The Operative Documents were negotiated by the parties with the benefit of legal representation and any rule of construction or interpretation otherwise requiring the Operative Documents to be construed or interpreted against any party shall not apply to any construction or interpretation hereof or thereof. III. Accounting Terms. All accounting terms not specifically defined otherwise herein shall have the meaning customarily given in accordance with GAAP, and all financial APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) computations hereunder shall be computed, unless specifically provided otherwise herein, in accordance with GAAP. IV. Defined Terms. Terms defined herein have the respective meanings indicated below when used in each Operative Document. "A Loan" means a Loan made by a Lender as part of an Advance, comprising of such Lender's Conduit Share of the A Percentage of such Advance. "A Loan Agreement" means the A Loan Agreement, dated as of the Documentation Date, among Lessor, Eagle, the Administrator and the Liquidity Providers. "A Loan Maturity Date" means November 7, 2006 or such earlier date on which the A Loans become due pursuant to the A Loan Agreement. "A Notes" is defined in Section 2.3 of the A Loan Agreement. "A Notes Margin" means (a) 0.45% per annum whenever the Liquid Collateral has Properly Margined Collateral Coverage, and (b) 0.55% per annum otherwise. "A Percentage" means 84.0%. "A Loan Termination Date" is defined in Section 2.1(b) of the Loan Agreement. "ABR" means, for any period, for any day, a rate per annum (rounded upwards, if necessary, to the next 1/100th of 1%) equal to the lesser of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect one day prior to such day plus 1/2 of 1%. For purposes hereof: "Prime Rate" means the rate of interest per annum publicly announced from time to time by Fleet National Bank as its prime rate in effect at its principal office at 100 Federal Street, Boston, Massachusetts 02110 (the Prime Rate not being intended to be the lowest rate of interest charged by Fleet National Bank in connection with extensions of credit to debtors); and "Federal Funds Effective Rate" means, for any day, 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 on such day or, if such day is not a Business Day, on the next preceding Business Day, by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms thereof, the ABR shall be determined without regard to clause (b) of the first sentence of this definition, as appropriate, until the circumstances giving rise to such inability no longer exist. Any change in the ABR due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective day of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. 2 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "ABR Investor Contribution" means an Investor Contribution accruing held at a rate determined by reference to the ABR. "ABR Loan" means a Loan which is bearing interest at a rate of interest determined by reference to the ABR. "Account" means the Account (Fleet National Bank) or the Account (First Union) or both. "Account Agreements" means with respect to the Account (Fleet National Bank), the Capital Focus Investment Account Agreement, dated November 7, 2001 between Fleet National Bank and HGSI, and with respect to the Account (First Union), the Institutional Investment Management Agreement, dated November 7, 2001 between HGSI and First Union. "Account (First Union)" means the special purpose, segregated account (Account No. 8025494048, ABA No. 053000219) established by First Union and maintained by the First Union Collateral Agent for the benefit of First Union, and the Participants; the operation of the Account (First Union) shall be governed by the First Union Liquid Collateral Agreement and the Account Agreement. "Account (Fleet National Bank)"means the special purpose, segregated account (Account No. 0006529470, ABA No.011500010) established by Fleet National Bank and maintained by the Fleet National Bank Collateral Agent for the benefit of Fleet National Bank, and the Participants; the operation of the Account (Fleet National Bank) shall be governed by the Fleet National Bank Liquid Collateral Agreement. "Additional Collateral Delivery Date" is defined in Section 2.1 of the Liquid Collateral Agreements. "Address" means, subject to the right of the party in question to change its Address in accordance with the terms of the Operative Documents: (a) with respect to Lessor Wells Fargo Bank Northwest, N.A., with a copy to Mayer, Brown & Platt, 1675 Broadway, New York, New York 10019, Attention: Barry K. Gassman, Esq. (b) with respect to Lessee, Steven C. Mayer, Senior Vice President and CFO, HGSI, 9410 Key West Avenue, Rockville, MD 20850, with copy to James H. Davis, Esq., Senior Vice President and General Counsel, HGSI. with respect to the Agents, the address provided by the applicable Agent to the other parties to any Operative Document as its address for notices. "Adjacent Site" means the land described on Schedule VIII to the Participation Agreement. "Adjusted Market Value (Item)" means with respect to each Permitted Investment that constitutes Liquid Collateral on any date that the securities in an Account are marked-to-market, 3 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) the product of the Fair Market Value of the Permitted Investment on such date multiplied by the percentage in the table below under the column marked "Advance Rate to Maintain Properly Margined Liquid Collateral" opposite the type of investment into which such Permitted Investment falls.
- ---------------------------------------------------------------------------------- Types of Permitted Investments Advance Rate to Maintain Properly Margined Liquid Collateral - ---------------------------------------------------------------------------------- U.S. Treasury Obligations 90% - ---------------------------------------------------------------------------------- Money Market Funds 90% - ---------------------------------------------------------------------------------- Repurchase Obligations 90% - ---------------------------------------------------------------------------------- Mortgage Backed Securities 80% - ---------------------------------------------------------------------------------- Asset Backed Securities 80% - ---------------------------------------------------------------------------------- Negotiable Certificates of Deposit 80% - ---------------------------------------------------------------------------------- Commercial Paper rated A-1, P-1 or better 80% - ---------------------------------------------------------------------------------- U.S. Agency Obligations 80% - ---------------------------------------------------------------------------------- Taxable Municipal Bonds (Moody's Aaa down through A3; S & P AAA down through A-) 80% - ---------------------------------------------------------------------------------- Bonds (Moody's Aaa down through A3; S & P AAA down through A-) 70% - ---------------------------------------------------------------------------------- Bank Obligations 80% - ----------------------------------------------------------------------------------
"Adjusted Market Value" means, with respect to Properly Margined Liquid Collateral, the sum of the Adjusted Market Value (Item) of each Permitted Investment constituting Properly Margined Liquid Collateral in respect of an Account on each date such Liquid Collateral is marked-to-market in accordance with the Participation Agreement. "Administrative Agent" means Fleet National Bank, in its capacity as administrative agent under the Operative Documents. "Administrative Agent Fee Letter" means the fee letter dated the Documentation Date between HGSI and the Administrative Agent. "Administrator" means Fleet Securities, Inc., in its capacity as administrator of Eagle. "Advance" means (i) an advance of funds by the Lenders and the Investors to Lessor pursuant to Section 2.2 of the Participation Agreement, and (ii) an advance of funds by Lessor to Construction Agent pursuant to Section 2.2 of the Participation Agreement, as applicable. "Advance Date" means the date on which any Advance is made. 4 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Advance Request" means any request for an Advance made by Lessee as Construction Agent for Lessor to the Investors and the Lenders, substantially in the form of Exhibit A to the Participation Agreement. "Affiliate" of any Person means any other Person directly or indirectly controlling, controlled by or under common control with, such Person. For purposes of this definition, the term "control" (including the correlative meanings of the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of such Person, whether through the ownership of voting securities or by contract or otherwise, provided (but without limiting the foregoing) that no pledge of voting securities of any Person without the current right to exercise voting rights with respect thereto shall by itself be deemed to constitute control over such Person. "Agent" means any of the Administrative Agent, the Administrator, the Liquidity Agent, and the Collateral Agents, and "Agents" means, collectively, the Administrative Agent, the Administrator, the Liquidity Agent and the Collateral Agents. "Aggregate Available Commitments" means, as of any date of determination, the sum of (i) without duplication, the Available Commitments of the Liquidity Providers under the Loan Agreement, and (ii) the Available Commitments of the Investors. "Aggregate Commitments" means the sum of (i) without duplication, the Commitment Amounts of the Liquidity Providers under the Loan Agreement, and (ii) the Commitment Amount of the Investors. "Allocable Portion" means, with respect to the calculation of the amounts distributable by Administrative Agent pursuant to: (a) Section 10.3(b) of the Participation Agreement, a fraction (i) the numerator of which equals (A) in the event that Lessee exercises its Purchase Option with respect to only the Traville Facility, the Traville Lease Balance, or (B) in the event that Lessee exercises its Purchase Option with respect to only the Manufacturing Facility, the Manufacturing Lease Balance, and (ii) the denominator of which equals the Lease Balance; (b) Section 10.4(b) of the Participation Agreement, a fraction (i) the numerator of which equals (A) in the event that either the Traville Construction Period Maximum Guaranty Amount, the Traville Residual Value Guaranty Amount or the Traville Lease Balance is being distributed pursuant thereto, the Traville Lease Balance, or (B) in the event that either the Manufacturing Construction Period Maximum Guaranty Amount, the Manufacturing Residual Value Guaranty Amount or the Manufacturing Lease Balance is being distributed pursuant thereto, the Manufacturing Lease Balance, and (ii) the denominator of which equals the Lease Balance; or (c) Section 10.5(b) of the Participation Agreement, a fraction (i) the numerator of which equals (A) in the event that only the Traville Facility is sold under Section 7.1 of the Lease, the Traville Lease Balance, or (B) in the event that only the Manufacturing 5 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) Facility is sold under Section 7.1 of the Lease, the Manufacturing Lease Balance, and (ii) the denominator of which equals the Lease Balance. "Alterations" means, with respect to the Properties, alterations, additions, improvements, modifications and additions to the Properties. "Applicable Laws" means all existing and future applicable laws, rules, regulations, statutes, treaties, codes, ordinances, permits, certificates, orders and licenses of and interpretations by, any Governmental Authority, and applicable judgments, decrees, injunctions, writs, orders or like action of any court, arbitrator or other administrative, judicial or quasi-judicial tribunal or agency of competent jurisdiction (including Environmental Laws and other laws pertaining to health, safety or the environment and those pertaining to the construction, use or occupancy of the Properties) and any restrictive covenant or deed restriction or easement of record affecting the Properties, and any requirements of applicable insurance companies or insurance regulatory agencies. To the extent Lessee or any other party obtains an exemption, variance or similar exception to any Applicable Laws for or in connection with the Properties, including any zoning or building ordinances or regulations, then Applicable Laws shall be construed to mean Applicable Laws as so applicable to the Properties. "Appraisal" means an appraisals, prepared by the Appraiser, of the Land and Improvements on an as-built basis, to be delivered pursuant to Section 4.1(s) and 4.3(q) of the Participation Agreement. "Appraised Value" is defined in Section 23(b) of the Ground Lease. "Appraiser" means Integra Realty Resources, Inc. or such other Person as may be selected by Lessor and is reasonably acceptable to Lessee. "Approved Construction Budget" means, as applicable, the Approved Manufacturing Construction Budget and/or the Approved Traville Construction Budget. "Approved Manufacturing Construction Budget" is defined in Section 2.4(a)(i) of the Construction Agency Agreement. "Approved Manufacturing Construction Schedule" is defined in Section 2.4(a)(i) of the Construction Agency Agreement. "Approved Manufacturing Plans and Specifications" is defined in Section 2.4(a)(i) of the Construction Agency Agreement. "Approved Traville Construction Budget" is defined in Section 2.4(b)(i) of the Construction Agency Agreement. "Approved Traville Construction Schedule" is defined in Section 2.4(b)(i) of the Construction Agency Agreement. "Approved Traville Plans and Specifications" is defined in Section 2.4(b)(i) of the Construction Agency Agreement. 6 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Appurtenant Rights" means (i) all agreements, easements, rights of way or use, rights of ingress or egress, privileges, appurtenances, tenements, hereditaments and other rights and benefits at any time belonging or pertaining to the Land or the Improvements, including the use of any streets, ways, alleys, vaults or strips of land adjoining, abutting, adjacent or contiguous to the Land and (ii) all permits, licenses and rights, whether or not of record, appurtenant to the Land. "Arranger" means BancBoston Leasing Investments Inc. "As-Built Appraisal" means, as applicable, the Traville As-Built Appraisal and/or the Manufacturing As-Built Appraisal. "Asset Backed Securities" means asset backed securities rated AAA by S&P and Aaa by Moody's. "Assignee Bank" has the meaning assigned to such term in each Liquidity Agreement. "Assignment and Acceptance" means any assignment and acceptance delivered pursuant to Section 8.1.1(a) of the Participation Agreement. "Assignment of Lease" means the Lessor Assignment of Lease. "Authority" means any applicable foreign, federal, state, county, municipal or other government, quasi-government or regulatory authority, agency, board, body, commission, instrumentality, court or tribunal, or any political subdivision of any thereof, or arbitrator or panel of arbitrators. "Authorized Officer" means with respect to HGSI in any capacity, any of HGSI's Chief Executive Officer, Chief Financial Officer or General Counsel. "Available Commitment" means (a) as to each Liquidity Provider, such Liquidity Provider's daily average Liquidity Commitment (as defined in the Liquidity Agreement) reduced by the sum of the amount of (i) the aggregate daily average principal amount of all outstanding Facility Loans made by such Liquidity Provider and (ii) the daily average aggregate principal amount of all outstanding Conduit Loans, and (b) as to each Investor, such Investor's daily average Commitment Amount reduced by its then daily average Investor Amount. "B Loan" means a Loan made by a Lender as part of an Advance, comprising such Lender's Conduit Share of the B Percentage of such Advance. "B Loan Agreement" means the B Loan Agreement, dated as of the Documentation Date, among Lessor, Eagle, the Administrator and the Liquidity Providers. "B Loan Maturity Date" means November 7, 2008 or such earlier date on which the B Loans becomes due pursuant to the B Loan Agreement. "B Notes" is defined in Section 2.3 of the B Loan Agreement. 7 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "B Notes Margin" means (a) 0.45% per annum whenever the Liquid Collateral has Properly Margined Collateral Coverage, and (b) 0.55% per annum otherwise. "B Loan Termination Date" is defined in Section 2.1(b) of the Loan Agreement. "B Percentage" means 12%. "Balancing Deposit" is defined in Section 5.6(c) of the Construction Agency Agreement. "Bank Obligations" means bank notes and banker's acceptances the obligor of which has an unsecured long-term debt rating of at least A by S&P and A2 by Moody's and has a commercial paper rating of at least A-1 by S&P and P-1 by Moody's. "Bankruptcy Code" means the Bankruptcy Reform Act of 1978. "Bankruptcy Default" means, with respect to Lessee, an Insolvency Event without regard to the cure or grace periods provided therein. "Base Rent" means the rent payable pursuant to Section 3.1 of the Lease. "Beneficial Owner" means the Trust, as beneficial owner of the Ground Lessee. "Benefit Arrangement" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "Board of Directors" means, with respect to a corporation, either the board of directors or any duly authorized committee of that board of directors which, pursuant to the by-laws of such corporation, has the same authority as that board of directors as to the matter at issue. "Borrower" means, with respect to each Loan Agreement, Lessor. "Borrowing" is defined in the Liquidity Agreement. "Break Costs" means an amount equal to the amount, if any, required to compensate any Lessor Hedging Agreement Counterparty for any additional losses (including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or funds acquired by such Lessor Hedging Agreement Counterparty to fund its obligations under the Lessor Hedging Agreements) it may reasonably incur under a Lessor Hedging Agreement or any other interest rate swap, cap, collar or lock agreement or similar agreement to which Lessor and such Lessor Hedging Agreement Counterparty is a party; such amount shall include any amounts payable in connection with an "Early Termination Date" (as defined in the ISDA Form multi-currency cross-border) under any Lessor Hedging Agreement. A statement as to the amount of such loss, cost or expense, prepared in good faith and in reasonable detail and submitted by such Lessor Hedging Agreement Counterparty, as the case may be, to the Lessee, shall be presumed correct and binding on Lessee absent demonstrable error. 8 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Business Day" means (a) any day other than a Saturday, Sunday or other day on which commercial banks in Boston, Massachusetts, Charlotte, North Carolina, New York, New York or Baltimore, Maryland are authorized or required by law to close, and (b) in the case of a Eurodollar Loan, any day on which dealings in U.S. dollar deposits are carried on in the interbank Eurodollar market and on which commercial banks are open for domestic and international business in Boston, Massachusetts, Charlotte, North Carolina and London. "Capitalizable Transaction Costs" means all Transaction Costs other than Non-Capitalizable Transaction Costs. "Capitalized Lease Obligation" means, with respect to any Person, at the time any determination thereof is to be made, the amount of the liability in respect of a lease that would at such time be so required to be capitalized on the balance sheet of such Person as lessee thereof in accordance with GAAP. "Cash Burn Amount" means for any period, the amount by which the sum (without duplication) for HGSI and its Subsidiaries on a consolidated basis of the following amounts is less than $0: (i) Consolidated Net Income for such period; plus (ii) the amount which, in the determination of Consolidated Net Income for such period, has been deducted for depreciation and amortization (including, without limitation, amortization of goodwill and other intangibles); plus (iii) the non-cash charges which, in the determination of Consolidated Net Income for such period, have been deducted in calculating "purchased in-process research and development expenses"; plus (iv) the non-cash charges which, in the determination of Consolidated Net Income for such period, has been deducted as debt conversion expense or other similar non-cash charges; plus (v) other similar non-cash charges described in clauses (iii) and (iv) all as determined in accordance with GAAP. "Cash Collateral Test Date" means the last day of each Fiscal Quarter; provided, however, that if at the end of any Fiscal Quarter the aggregate amount of all Unrestricted Cash and Marketable Securities of HGSI and its Subsidiaries on a consolidated basis is less than three hundred million dollars ($300,000,000) for the period of four consecutive Fiscal Quarters then ended, then at all times thereafter, "Cash Collateral Test Date" shall mean the last day of each calendar month. "Cash Equivalents" means (a) Government Obligations having maturities of not more than one year from the date of acquisition, (b) certificates of deposit of any commercial bank 9 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) incorporated under the laws of the United States, or any state, territory or commonwealth thereof, of recognized standing having capital and unimpaired surplus in excess of $500,000,000 and whose short-term commercial paper rating at the time of acquisition is at least A-1 or the equivalent by Standard & Poor's Corporation or at least P-1 or the equivalent by Moody's Investors Services, Inc. (any such bank, an "Approved Bank"), which certificates of deposit have maturities of not more than one year from the date of acquisition, (c) repurchase obligations with a term of not more than 31 days for underlying securities of the types described in clauses (a), (b) and (d) of this definition entered into with any Approved Bank which (i) is secured by a fully perfected security interest in any obligation of the type described in any of clauses (a), (b) and (d), and (ii) has a market value at the time such repurchase agreement is entered into of not less than 100% of the repurchase obligation of such Lender (or other commercial banking institution) thereunder, (d) commercial paper or financial company paper issued by any person incorporated under the laws of the United States, or any state thereof, and rated at least A-1 or the equivalent by Standard & Poor's Corporation or at least P-1 or the equivalent by Moody's Investors Services, Inc., and in each case maturing not more than 9 months from the date of acquisition and not issued by HGSI or any Affiliate, and (e) investments in money market funds that are registered under the Investment Company Act of 1940, which have assets of at least $100,000,000 and at least 95% of whose assets consist of investments or other obligations of the type described in clauses (a) through (d) above and as to which withdrawals are permitted at least every 30 days. "Casualty" means an event of damage or casualty relating to all or part of the Properties that does not constitute an Event of Loss. "Claims" means liabilities, obligations, damages, losses, demands, penalties, interest, fines, claims, actions, suits, judgments, settlements, utility charges, costs, fees, expenses and disbursements (including, without limitation, reasonable, actually-incurred legal fees and expenses and costs of investigation) of any kind and nature whatsoever. "Code" means the Internal Revenue Code of 1986. "Collateral" is defined in the Granting Clause Second of the Security Agreement. "Collateral Agent" means the Fleet National Bank Collateral Agent and the First Union Collateral Agent. "Commercial Paper Account" means the special purpose segregated trust account established at the corporate trust office of Eagle, and which at all times shall be maintained in Eagle's corporate trust department and which shall never be considered a general deposit account and as such shall not be available for set-off or garnishment by the creditors of Eagle; such account entitled "EagleFunding Corporation Commercial Paper Account." "Commercial Paper Documents" means, collectively, the commercial paper notes issued by Eagle and the agreements entered into by Eagle in connection with its commercial paper program. 10 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Commercial Paper Notes" means the short-term promissory notes issued by the Conduit as the source of funding for the funding and maintenance by the Conduit of the Loans made under the Loan Agreement. "Commitment" means (a) with respect to each Liquidity Provider its obligation (i) to make loans under the Liquidity Agreement to Eagle or (ii) to make Facility Loans under the Loan Agreement to the Lessor, and (b) with respect to each Investor, its obligation to make Investor Contributions to the Lessor under Section 2.2.2 of the Participation Agreement. "Commitment Amount" means (a) with respect to each Liquidity Provider's Commitment to make advances under the related Liquidity Agreement, the amount such Liquidity Provider is committed to fund under the Liquidity Agreement; (b) with respect to each Liquidity Provider's Commitment to make Facility Loans under the Loan Agreement, the amount set forth opposite such Liquidity Provider's name on Schedule II to the Participation Agreement; and (c) with respect to each Investor, the amount set forth opposite its name on Schedule II to the Participation Agreement. "Commitment Period" means the period from and including the Documentation Date to the date immediately preceding the Construction Period Termination Date or such earlier date on which the Commitments of all Participants shall terminate as provided in the Operative Documents. "Completion Date" means, with respect to a Property, the date Substantial Completion occurs for such Property. "Compliance Certificate" means a certificate executed by an authorized officer of HGSI substantially in the form of Exhibit E to the Participation Agreement. "Concentration Limits" means (a) there are no limits as to U.S. Treasury Obligations or U.S. Agency Obligations. (b) no Permitted Investment may be transferred to an Account if at the time of transfer and at all times thereafter the aggregate amount of Liquid Collateral issued by the same issuer or Issuer Group exceeds or would exceed, after such transfer, 5% of the Adjusted Fair Market Value or Fair Market Value, as applicable, of the Liquid Collateral (including the Permitted Investments to be transferred) in respect of an Account, excepting U.S. Government Obligations that may constitute Liquid Collateral. (c) no securities issued by a United States bank, other United States regulated depository institution and United States insurance company may be transferred to an Account if at the time of transfer and at all times thereafter the aggregate amount of bank and insurance company securities, including, for example, negotiable certificates of deposit, commercial paper, bankers acceptances or medium or long-term securities, exceeds or would exceed, after such transfer, 80% of the Adjusted Market Value or Fair Market Value of the Liquid Collateral (including the Permitted Investments to be 11 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) transferred) in respect of an Account at the time the additional Liquid Collateral is to be transferred thereto and at all times thereafter; provided that with respect to each Account, the respective Collateral Agent and HGSI may agree in writing to other or no "Concentration Limits" "Condemnation" means any condemnation, requisition or other taking or sale of the use, occupancy or title to the Properties or any part thereof in, by or on account of any eminent domain proceeding or other action by any Governmental Authority or other Person under the power of eminent domain or otherwise or any transfer in lieu of or in anticipation thereof, that does not constitute an Event of Loss. "Conduit" means Eagle. "Conduit A Loan" is defined in Section 2.1(a) of the A Loan Agreement. "Conduit A Note" is defined in Section 2.3(a) of the A Loan Agreement. "Conduit B Loan" is defined in Section 2.1(a) of the B Loan Agreement. "Conduit B Note" is defined in Section 2.3(a) of the B Loan Agreement. "Conduit Fee Letter" means the letter dated the Documentation Date between Administrative Agent and the Conduit. "Conduit Loan" means a Conduit A Loan and/or a Conduit B Loan, as applicable. "Conduit Loan Documents" means, collectively, the Loan Agreement, the Notes and the Security Documents. "Conduit Loan Event of Default" is defined in Section 6.1 of the Loan Agreement. "Conduit to Liquidity Provider Fee Letter" means the letter dated the Documentation Date between the Conduit and the Liquidity Provider(s). "Connecticut Statutory Trust Act" means the Connecticut Statutory Trust Act, Conn. Gen. Stat Sections 34-500 to 34-547 (2001). "Connecticut Certificate of Trust" means the certificate of trust with respect to the Trust, filed with the Office of the Secretary of State of Connecticut in accordance with Section 34-503(a) of the Connecticut Statutory Trust Act. "Consolidated Net Income" means with respect to any specified Person for any period, the aggregate of the Net Income of such specified Person and its Subsidiaries for such period on a consolidated basis, determined in accordance with GAAP. "Net Income" of any Person shall mean the net income (loss) of such Person, determined in accordance with GAAP. "Construction" means the construction and installation of all Improvements contemplated by the Plans and Specifications. 12 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Construction Agency Agreement" means the Construction Agency Agreement, dated as of the Documentation Date, between Lessor and Construction Agent. "Construction Agency Default" means any condition, event or act which, with notice or lapse of time or both, would become a Construction Agency Event of Default. "Construction Agency Event of Default" is defined in Section 5.1.1 of the Construction Agency Agreement. "Construction Agency Person" means Lessee, Construction Agent, the Prime Contractor, the Architect, the General Contractor, any other contractor or subcontractor or other Person directly or indirectly performing work or providing services or materials on the Property, or relating to the Construction or the Properties, through and including the period ending on the Completion Date (regardless of when such Person commenced performing such work or providing such services or materials, including any period prior to the Documentation Date), and all of their respective officers, directors, shareholders, partners, employees, agents, consultants (on the Properties), service-providers (on the Properties), successors and assigns, and any Person controlled by any of the foregoing. "Construction Agent" means Lessee, as construction agent under the Construction Agency Agreement. "Construction Breakage Costs" means any costs or expenses incurred by Lessor, the Administrator, the Administrative Agent or any Participant in connection with the termination of any of the Construction Documents following the occurrence of a Construction Agency Agreement Event of Default. "Construction Budget" means, as applicable, the Approved Traville Construction Budget and/or the Approved Manufacturing Construction Budget, as each may be amended from time to time in accordance with the Construction Agency Agreement. "Construction Consultant" means Inspection And Valuation International, Inc. appointed by the lessor or such other Person as may be selected by Lessor and reasonably acceptable to Lessee. "Construction Documents" is defined in Section 2.4(c) of the Construction Agency Agreement. "Construction Materials" means, as applicable, the Traville Construction Materials and/or the Manufacturing Construction Materials, as each may be amended from time to time in accordance with the Construction Agency Agreement. "Construction Period" means, with respect to a Property, the period commencing on the Initial Advance Date and ending on the Construction Period Termination Date applicable to such Property. "Construction Period Accrued Interest" means all interest, including any interest at the Overdue Rate, accrued but unpaid under the Loan Agreement prior to the last day of the 13 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) Construction Period; provided that interest accruing with respect to any portion of the Lease Balance attributable to a Property that has become subject to the Lease before termination of the Construction Period shall not constitute "Construction Period Accrued Interest". Construction Period Accrued Interest is not overdue to the extent that there exist Available Commitments of the Liquidity Providers. "Construction Period Accrued Yield" means, with respect to the Investor Amount, all Yield accruing on such Investor Amount during and for any Interest Period ending prior to the last day of the Construction Period; provided that Yield accruing with respect to any portion of the Lease Balance attributable to a Property that has become subject to the Lease before termination of the Construction Period shall not constitute "Construction Period Accrued Yield". "Construction Period Fees" means any Fees payable out of proceeds of Advances prior to the Lease Commencement Date. "Construction Period Indemnitee" means each Agent in its capacity as agent under the Operative Documents, each Participant, the Trustee, the Administrator, each Program Support Provider, the Arranger and each of their respective employees, officers, directors, agents, successors, and assigns; provided, however, that in no event shall any Lessee Person be a Construction Period Indemnitee. "Construction Period Maximum Guaranty Amount" means, at any date of determination, the sum of (i) 89.9% of the then Eligible Accrued Project Costs, plus (ii) 100% of all Land Costs minus (iii) the Present Value, as of such date of determination, of any unconditional obligations of Construction Agent payable during the Construction Period that are not reimbursable by Lessor under the Operative Documents. "Construction Period Termination Date" means (a) with respect to the Traville Facility, the earlier of (i) the Lease Commencement Date applicable to such Property and (ii) December 31, 2003; and (b) with respect to the Manufacturing Facility, the earlier of (i) the Lease Commencement Date applicable to such Property and (ii) March 30, 2004. "Construction Schedule" means, as applicable the Approved Traville Construction Schedule and/or the Approved Manufacturing Construction Schedule, as each may be amended from time to time in accordance with the Construction Agency Agreement. "Contingent Liability" means any agreement, undertaking or arrangement by which any Person guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the indebtedness, obligation or any other liability of any other Person (other than by endorsements of instruments in the course of collection), or guarantees the payment of dividends or other distributions upon the shares of any other Person. The amount of any Person's obligation under any Contingent Liability shall (subject to any limitation set forth therein) be deemed to be the outstanding principal amount of the debt, obligation or other liability guaranteed thereby. "Contract Rents" is defined in Section 2(c) of the Assignment of Lease and Rents. 14 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Contractor" means Gilbane Building Company. "Contracts" is defined in Section 2(c) of the Assignment of Lease and Rents. "Control" means (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any Person, the possession directly or indirectly, of the power to direct or cause the direction of the management policies of such Person, whether through the ownership of voting securities or by contract or otherwise, provided (but without limiting the foregoing) that no pledge of voting securities of any Person without the current right to exercise voting rights with respect thereto shall by itself be deemed to constitute control over such Person. "Corporate Trust Department" is defined in Section 2.5 of the Trust Agreement. "Covered Amount" means all costs, expenses or other losses incurred by Lessor in connection with Lessor's obligation to indemnify each Construction Period Indemnitee under Section 9.1.3 of the Participation Agreement without regard to amounts not paid pursuant to the agreement of each Construction Period Indemnitee to limit the recourse of each such Person for payment or discharge of the indemnification obligations created under Section 9.1.3(iii) of the Participation Agreement, such Covered Amounts to be paid by Lessee pursuant to its indemnification obligations. "Covered Assets" means the Eagle Covered Assets. "CP Rate" for any Interest Period for any Conduit Loans means, to the extent such Conduit funds such Conduit Loans for such Interest Period by issuing Commercial Paper Notes, the per annum rate equivalent to the "weighted average cost" (as defined below) related to the issuances of Commercial Paper Notes that are allocated, in whole or in part, by Conduit or the Administrator to fund or maintain such Conduit Loans (and which may also be allocated in part to the funding of other Conduit Loans hereunder or of other assets of the Conduit); provided, however, that if any component of such rate is a discount rate, in calculating the "CP Rate" for such Conduit Loans for such Interest Period, such Conduit shall for such component use the rate resulting from converting such discount rate to an interest bearing equivalent rate per annum. As used in this definition, Conduit's "weighted average cost" shall consist of (w) the actual interest rate (or discount) paid to purchasers of Conduit's Commercial Paper Notes, together with the Dealer Fee, to the extent allocated, in whole or in part, to Conduit's Commercial Paper Notes by Conduit or Administrator, (x) certain documentation and transaction costs associated with the issuance of such Commercial Paper Notes in an amount not to exceed 0.005% per annum, (y) any incremental carrying costs incurred with respect to Commercial Paper Notes maturing on dates other than those on which corresponding funds are received by the Conduit and (z) other borrowings by the Conduit, including borrowings to fund small or odd dollar amounts that are not easily accommodated in the commercial paper market. "Curable Defaults" is defined in Section 16(B) of the Ground Lease. "Custodian" is defined in the Preamble to the Custody Agreement. 15 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Custody Agreements" means, collectively, the Fleet National Bank Custody Agreement and the First Union Custody Agreement. "Dealer Fee" means with respect to Eagle, the dealer or placement agent fees or commissions incurred by Eagle in connection with its issuance of Commercial Paper Notes. "Deeds of Trust" means, collectively, the Lessee Deed of Trust and Lessor Deed of Trust. "Deeds of Trust Amendment" means the amendment to the Deeds of Trust necessary to included the Manufacturing Facility Site in the Deeds of Trust. "Deed of Trust Property" is defined in the Granting Clause of each Deed of Trust. "Default Completion Costs" means any and all costs of any kind or description incurred by any Participant or Lessor in completing the construction of the Improvements following a Construction Agency Event of Default in excess of those set forth in the applicable Approved Construction Budget, including, without limitation, costs of removal and restoration of defective work, shut down and startup costs for any party under any of the Construction Documents, redesign, rebidding, repermitting and other costs incurred in connection with any revision of the Approved Plans and Specifications, construction supervision costs, carry during any period of delay in the completion of the Improvements beyond the Outside Completion Date, legal fees incurred in connection with the negotiation, enforcement, termination or any other action or proceeding in connection with any of the Construction Documents or any of the foregoing. "Default Notice" is defined in Section 15 of the Ground Lease. "Determination Date" is defined in Section 3 of the Ground Lease. "Directing Party" means in connection with (i) the declaration of an Event of Default, and acceleration or termination of either the Construction Agency Agreement, Loan Agreement or the Lease, as applicable, any Liquidity Provider or any Investor or combination of any of the foregoing acting separately or jointly (it being understood that no Participant or Participants may rescind an instruction to declare an Event of Default and accelerate or terminate either the Construction Agency Agreement, Loan Agreement or the Lease); (ii) each Collateral Agent may independently exercise remedies with respect to its related Liquid Collateral, regardless of a contrary determination by the other Collateral Agent; (iii) the exercise of all other remedies under either the Construction Agency Agreement, Loan Agreement, the Lease, or any Security Document, the affirmative vote of the Majority Banks; (iv) the amendment or modification of any Operative Document, the Majority Banks, except any amendment or modification that only affects Fleet National Bank or First Union and each of their respective Affiliates, Fleet National Bank, with respect to matters affecting Fleet National Bank and its Affiliates only, and First Union, with respect to matters affecting First Union and its Affiliates only; and (v) all other matters requiring the consent, approval or decision of Lessor or the Participants, in accordance with Section 12.5 of the Participation Agreement. "Documentation Date" is defined in Section 2.1(a) of the Participation Agreement. "Dollars" and "$" means dollars in lawful currency of the United States of America. 16 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Drawn Rate" means the Eurodollar Rate plus if the Lessee Obligations are secured on a Properly Margined Collateral Coverage basis, 45 basis points per annum, and in all other circumstances, 55 basis points per annum. "DTC" means The Depository Trust Company. "Eagle" means EagleFunding Capital Corporation, a Delaware corporation. "Eagle Covered Assets" is defined in Schedule 1 to the Liquidity Agreement. "Eligible Accrued Project Costs" means, as of any date of determination, the aggregate amount of Improvement Costs accrued, including Construction Period Accrued Interest and following a Construction Agency Event of Default and any net periodic payments payable or paid under a Lessor Hedging Agreement; any Default Completion Costs which may become payable, or which are incurred, at any time prior to the Completion Date, as well as costs incurred subsequent thereto for Final Completion Work, whether or not paid, but excluding (i) all Yield which is capitalized during the Commitment Period pursuant to the Operative Documents and (ii) Non-Capitalizable Transaction Costs. "Eligible Assignee" means a bank or other financial institution or other entity with a combined capital, surplus and undivided profits of at least $100,000,000 and whose commercial paper is rated A-1 by S&P and P-1 by Moody's. "Environmental Audit" means a Phase One Environmental Site Assessment (the scope and performance of which meets or exceeds ASTM Standard Practice E1527-93 Standard Practice for Environmental Site Assessments: Phase One Environmental Site Assessment Process (or the most recent version thereof)) of the Properties. "Environmental Damages" has the meaning specified in Section 9.6(d) of the Lease. "Environmental Laws" means and include the Resource Conservation and Recovery Act of 1976, (RCRA) 42 U.S.C. Sections 6901-6987, as amended by the Hazardous and Solid Waste Amendments of 1984, the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. Sections 9601- 9657, (CERCLA), the Hazardous Materials Transportation Act of 1975, 49 U.S.C. Sections 1801-1812, the Toxic Substances Control Act, 15 U.S.C. Sections 2601-2671, the Clean Air Act, 42 U.S.C. Sections 7401 et seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Sections 136 et seq. and all similar federal, state and local environmental laws, ordinances, rules, orders, statutes, decrees, judgments, injunctions, codes and regulations or sources of legal liabilities, and any other federal, state or local laws, ordinances, rules, codes and regulations or sources of legal liabilities relating to the environment, the impact or affect of Hazardous Materials on natural resources or the regulation or control of or imposing liability or standards of conduct concerning Hazardous Materials or the investigation, clean-up or other remediation of the Properties (including any requirements imposed by common law), or regulating or restricting the transfer of real property because of the presence of Hazardous Materials, as any of the foregoing are from time to time amended, supplemented or supplanted. "Environmental Report" is defined in Section 12.2 of the Lease. 17 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Environmental Requirements" means all Environmental Laws that are applicable to the Site, the Construction and any Person connected therewith. "Equipment" means the equipment listed on Schedule VII to the Participation Agreement. "Equity Percentage" means 4.0%. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time or any successor Federal statute. "ERISA Affiliates" means any trade or business (whether or not incorporated) under common control with HGSI within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). "ERISA Group" means HGSI, and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with HGSI, are treated as a single employer under Section 414 of the Code. "Eurodollar Investor Contribution" means an Investor Contribution accruing yield, at all times during an Interest Period applicable to such Investor Contribution, at a fixed rate determined by reference to the Eurodollar Rate. "Eurodollar Loan" means a Loan bearing interest, at all times during an Interest Period applicable to such Loan, at a fixed rate of interest determined by reference to the Eurodollar Rate or an Investor Amount bearing Yield, at all times during the Interest Period applicable thereto, by reference to the Eurodollar Rate. "Eurodollar Rate" means, for any Interest Period, the rate per annum equal to (a) the London interbank offered rate (rounded upwards, if necessary, to the next higher 1/100th of 1%) which appears on the Dow Jones & Company, Inc. Telerate Page 3750, British Bankers Association Interest Settlement Rates as of 11:00 a.m. (London time) for deposits in Dollars on the day two (2) Business Days prior to the first day of such Interest Period in an amount approximately equal to the principal amount of the Loan or Investor Amount, as applicable, to which such Interest Period is to apply and for a period corresponding as nearly as possible to such Interest Period, (b) if no such rate appears on Telerate Page 3750, the rate per annum equal to the arithmetic mean (rounded upwards, if necessary, to the next higher 1/32nd of 1%) of the London interbank offered rates which appears on the Reuters screen LIBO page on such day for deposits in Dollars in an amount approximately equal to the principal amount of the Loan or Investor Amount, as applicable, to which such Interest Period is to apply and for a period corresponding as nearly as possible to such Interest Period, (c) if neither clause (a) or clause (b) above is applicable, the rate per annum as agreed to by the parties to the Loan, or (d) if such rate is not agreed to by the parties pursuant to clause (c) two (2) Business Days prior to the first day of such Interest Period, the average rate per annum then being paid by Fleet National Bank and First Union in the London interbank market for deposits in Dollars in an amount approximately equal to the principal amount of the Loan or Investor Amount, as applicable. 18 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Event of Default" means (a) a Lease Event of Default under the Lease, (b) a Conduit Loan Event of Default or (c) a Construction Agency Agreement Event of Default. "Event of Loss" means with respect to a Property (x) the actual or constructive loss of all or substantially all of either or both of the Traville Facility and the Manufacturing Facility or damage thereto which is uneconomical or impractical to repair, (y) the taking by condemnation of title to all or substantially all of either or both of the Traville Facility and the Manufacturing Facility, or such portion thereof that makes use of the balance uneconomic or impractical for Lessee, or (z) the taking by condemnation of the use of all or substantially all of either or both the Traville Facility and the Manufacturing Facility, or such portion thereof that makes use of the balance uneconomic or impractical for Lessee, for a continuous period equal to or in excess of one (1) year or the remaining Lease Term (if the remaining Lease Term is less than one year). "Excepted Rights" means, as to any Participant, the exclusive right of such Participant to (i) retain all Excluded Amounts owing to it and (ii) to demand, collect or commence any action in equity or at law to obtain such payments and to enforce any judgment with respect thereto. "Excess Funds" means with respect to Eagle, (i) prior to an Event of Default, all funds not required after giving effect to all amounts on deposit in the Commercial Paper Account, to pay or provide for the payment of all Commercial Paper Notes of such Conduit maturing on the date of such determination or that have previously matured but remain unpaid and (ii) after the occurrence of an Event of Default, means all funds not required to pay or provide for the payment of all outstanding Commercial Paper Notes of Eagle or Commercial Paper Notes of Eagle that have previously matured but remain unpaid. "Excluded Amounts" means: (a) all indemnity payments and expenses to which any Indemnitee is entitled pursuant to the Operative Documents; (b) any amounts payable under any Operative Document to reimburse Lessor, any Agent or any other Participant (including the reasonable expenses of any such Person incurred in connection with any such payment) for performing any of the obligations of Lessee under and as permitted by any Operative Document; (c) any insurance proceeds (or payments with respect to risks self-insured or policy deductibles) under liability policies payable to Lessor, any Agent or any other Participant (or any such Person's successors, assigns, agents, trustees, officers, directors or employees); (d) any insurance proceeds under policies maintained by Lessor, any Agent or any other Participant and not required to be maintained by Lessee under the Lease; (e) any amount payable by Lessee pursuant to Section 4.2(b) of the Participation Agreement, whether or not such amounts are or can be characterized as a Supplemental Rent; 19 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) (f) any right, title or interest of Lessor as counterparty under any Lessor Hedging Agreement; and (g) any payments of interest or Yield on payments referred to in clauses (a) through (e) above. "Facility A Loan" is defined in Section 2.1(b) of the A Loan Agreement. "Facility A Note" is defined in Section 2.3(b) of the A Loan Agreement. "Facility B Loan" is defined in Section 2.1(b) of the B Loan Agreement. "Facility B Note" is defined in Section 2.3(b) of the B Loan Agreement. "Facility Loan" means a Facility A Loan and/or a Facility B Loan. "Fair Market Rent" is defined in Section 3 of the Ground Lease. "Fair Market Value" means, (a) with respect to any Property, the amount, which in any event shall not be less than zero, that would be paid in cash in an arm's-length transaction between an informed and willing purchaser and an informed and willing seller, neither of whom is under any compulsion to purchase or sell, respectively, for the ownership of such Property, as set forth in an applicable Appraisal and (b) with respect to any Liquid Collateral, the closing bid price of each item of Liquid Collateral on the day the Liquid Collateral is marked-to-market, plus in the case of Liquid Collateral issued on a coupon basis, accrued and unpaid interest and yield thereon until such date, except that with respect to items of Liquid Collateral that will mature within 90 days of the determination date, the amortized amount of such item on such date. The Fair Market Value of any Property shall be determined based on the assumption that, except for purposes of Sections 7.1, 14.1(b) and 18.2(h) of the Lease or otherwise expressly set forth in the Operative Documents, such Property is in the condition and state of repair required under Section 9 of the Lease and Lessee is in compliance with the other requirements of the Operative Documents applicable to such Property and that the Property is free and clear of all Liens. "Fee Letters" means collectively, the Administrative Agent Fee Letter, the Conduit Fee Letter, the First Union Fee Letter and the Conduit to Liquidity Provider Fee Letter. "Fees" means any amounts payable to any Agent or Eagle pursuant to Section 9.10 of the Participation Agreement. "Final Completion Work" means any work that, subsequent to Substantial Completion of a Property, needs to be performed to achieve completion of the Improvements on such Property in accordance with the applicable Plans and Specifications. "Final Payment Date" is defined in Section 18.2(e) of the Lease. "Financing Statements" means, collectively, the Ground Lessor Financing Statements, the Lessee Financing Statements, the Lessor Financing Statements and the Ground Lessee Financing Statements. 20 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "First Union" means First Union National Bank. "First Union Collateral Agent" means First Union National Bank. "First Union Custodian" is defined in the preamble of the First Union Custody Agreement. "First Union Custody Agreement" means the First Union Custody Agreement, dated as of the Documentation Date, among Lessee, Lessor, the First Union Collateral Agent, the First Union Custodian and the Beneficiaries listed on Schedule I thereto. "First Union Fee Letter" means a letter dated the Documentation Date between Administrative Agent and First Union. "First Union Investor" is defined in the preamble of the Participation Agreement. "First Union Liquid Collateral" is defined in Section 2.1(a)(i) of the First Union Liquid Collateral Agreement. "First Union Liquid Collateral Agreement" means the First Union Liquid Collateral Agreement, dated as of the Documentation Date, among Lessee, Lessor and the First Union Collateral Agent. "First Union Liquidity Provider" is defined in the preamble of the Participation Agreement. "Fiscal Quarter" means each of Lessee's four fiscal reporting periods ending, respectively, on March 31, June 30, September 30 and December 31 of each year or such other fiscal quarters as then correspond to HGSI's fiscal year. "Fixtures" is defined in the Granting Clause of each Deed of Trust. "Fleet Investor" is defined in the preamble of the Participation Agreement. "Fleet Liquidity Provider" is defined in the preamble of the Participation Agreement. "Fleet National Bank Collateral Agent" means Fleet National Bank. "Fleet National Bank Custodian" is defined in the preamble of the Fleet National Bank Custody Agreement. "Fleet National Bank Custody Agreement" means the Fleet National Bank Custody Agreement, dated as of the Documentation Date, among Lessee, Lessor, the Fleet National Bank Collateral Agent, the Fleet National Bank Custodian and the Beneficiaries listed on Schedule I thereto. "Fleet National Bank Liquid Collateral" is defined in Section 2.1(a)(i) of the Fleet National Bank Liquid Collateral Agreement. 21 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Fleet National Bank Liquid Collateral Agreement" means the Fleet National Bank Liquid Collateral Agreement, dated as of the Documentation Date, among Lessee, Lessor and the Fleet National Bank Collateral Agent. "Fleet National Bank Security Documents" means the Fleet National Bank Liquid Collateral Agreement and the Security Documents. "Force Majeure Event" means, with respect to Construction, any event (the existence of which at the construction commencement date was not known, or would not reasonably have been expected to be discovered through the exercise of commercially reasonable due diligence, by Lessee or Construction Agent, as applicable, taking into account the contemplated use of the Land and the Construction) beyond the control of any such Person, including, but not limited to, general strikes (but not any strike or other job action involving employees of Construction Agent or any Construction Agency Person or Lessee), acts of God, government activities directly interfering with the work of construction of the Improvements, any general inability to obtain labor or materials, civil commotion and enemy action; but excluding in all cases any event, cause or condition that results from a breach by Lessee, Construction Agent or any Construction Agency Person of its obligations, representations or warranties under the Operative Documents or any other agreements to which it is a party, from any Construction Agency Person's financial condition or failure to pay or any event, cause or condition which could have been avoided or which could be remedied or mitigated through the exercise of commercially reasonable efforts or the commercially reasonable expenditure of funds (which expenditure of funds, in the case of such an event, cause or condition arising on or after the Initial Advance Date, would have been covered by funds available under the applicable Construction Budget or Other Available Amounts) or other commercially reasonable action, election or arrangement which would correct or resolve the impact of such event on the Construction. "Full Recourse Event of Default" means any of the following: (i) a Construction Agency Event of Default arising in whole or in part as a consequence of any fraudulent act or omission of any Construction Agency Person in connection with the negotiation, execution, delivery, consummation and/or performance of any Operative Document or the Construction Documents; (ii) a Construction Agency Event of Default arising in whole or in part as a consequence of the misapplication of any Advance or any portion thereof or any other funds made available to, or on behalf of, Construction Agent or any other Construction Agency Person under any Operative Document; (iii) a Construction Agency Event of Default arising as a consequence of an Insolvency Event with respect to Construction Agent; or (iv) any Construction Agency Person shall willfully breach any of its respective obligations, covenants, representations or warranties under any Operative Document, the Construction Documents or any other contractual agreement or Governmental Approval relating to any Site or the Construction thereon. 22 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "GAAP" means United States generally accepted accounting principles in effect from time to time consistently applied. "General Contractor" means a general contractor, developer or construction manager engaged by Construction Agent for the construction of Improvements. "General Cost Balance" means, as of any time of determination, the aggregate of all amounts advanced to Lessee on or before such time of determination pursuant to Section 2.2 of the Participation Agreement which (i) were allocated under the heading "General Costs" on Schedule 1 to the applicable Advance Requests and (ii) as of such time of determination, have not yet been repaid by Lessee in accordance with the terms of the Operative Documents. "General Counsel" is defined in section 4.1(w) of the Participation Agreement. "Government Obligations" means readily marketable direct full faith and credit obligations of the United States of America or obligations unconditionally guaranteed by the full faith and credit of the United States of America. "Governmental Action" means all permits, authorizations, registrations, consents, approvals, waivers, exceptions, variances, orders, judgments, decrees, licenses, exemptions, publications, filings, notices to and declarations of or with, or required by, any Governmental Authority, or required by any Applicable Laws, and shall include, without limitation, all citings, environmental and operating permits and licenses that are required for the use, occupancy, zoning and operation of the Properties. "Governmental Authority" means any federal, state, county, municipal or other governmental or regulatory authority, agency, board, body, commission, instrumentality, court or quasi-governmental authority. "Gross Sales Proceeds" means Net Sales Proceeds plus all Remarketing Sale Expenses. "Ground Lease" means that certain Ground Lease, dated as of the Documentation Date, between HGSI, as Landlord, and the Trust, as Tenant, in respect of the Land, as the same may be amended in accordance with the terms thereof. "Ground Lease Event of Default" is defined in Section 15(a) of the Ground Lease. "Ground Lease Purchase Option" is defined in Section 23(b) of the Ground Lease. "Ground Lease Rent" is defined in Section 3 of the Ground Lease. "Ground Lessee" means the Trust. "Ground Lessor" means Traville LLC as the Landlord under the Ground Lease. "Ground Lessor Financing Statements" means UCC-1 financing statements made by Ground Lessor, as debtor, in favor of Lessor, as secured party, appropriately completed and 23 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) executed for filing with the offices listed in Part D of Schedule III to the Participation Agreement in order to protect Lessor's interest under the Security Agreement. "Hazardous Condition" means any condition that violates or threatens to violate, or that results in or threatens noncompliance with, any Environmental Law. "Hazardous Material" means any substance, waste or material which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous, including petroleum, its derivatives, by-products and other hydrocarbons and friable asbestos and is or becomes regulated by any Governmental Authority, including any agency, department, commission, board or instrumentality of the United States, the State of Maryland or any political subdivision thereof. "Hedging Obligations" means, with respect to any Person, all liabilities of such Person under interest rate or currency swap agreements, interest or exchange rate cap agreements and interest or exchange rate collar agreements, and all other agreements or arrangements designed to protect such Person against fluctuations in interest rates, currency exchange rates or commodity prices. "HGSI" means Human Genome Sciences, Inc., a Delaware corporation. "Improvement Costs" means the costs incurred in the construction and development of the Improvements including Soft Costs. "Improvements" means the Traville Improvements, the Manufacturing Facility Improvements, the Traville Land Improvements and the Manufacturing Facility Land Improvements. "In Balance" means, with respect to any Site at any time of determination thereof: (1) the undisbursed portions of the applicable Approved Construction Budget with respect to such Property, together with Other Available Amounts related to such Property, shall be sufficient to complete construction of the Improvements in accordance with the terms and conditions of the Construction Agency Agreement prior to the applicable Outside Completion Date, and (2) the undisbursed portion of each item described in the applicable Approved Construction Budget, as such amounts may be adjusted pursuant to the Construction Agency Agreement (including the contingency reserve in the applicable Approved Construction Budget, to the extent such contingency funds have not theretofore been set aside by Construction Agent for the payment of overruns in other cost categories and Other Available Amounts) shall be sufficient to complete the Construction of each such item in accordance with the terms and conditions of the Construction Agency Agreement prior to the Outside Completion Date. "Increased Costs" is defined in Section 9.7 of the Participation Agreement. "Indebtedness" of any Person means, without duplication: (a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; 24 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) (b) all obligations, contingent or otherwise, relative to the face amount of all letters of credit, whether or not drawn, and banker's acceptances issued for the account of such Person other than letters of credit or banker's acceptances that support obligations of such Person in respect of accounts payable, trade payments and other short-term trade related obligations; (c) all obligations of such Person as lessee under leases which have been or should be, in accordance with GAAP, recorded as Capitalized Lease Obligations; and (d) all Contingent Liabilities of such Person recorded in the financial statements (including the notes thereto) of such person and its consolidated subsidiaries in respect of any of the foregoing. For all purposes of this Agreement, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture characterized as a partnership for commercial law purposes in which such Person is a general partner or a joint venturer. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability of any such Contingent Liabilities at such date. "Indemnitee" means Lessor, each Investor, Eagle, each Liquidity Provider, each Agent, Securities Intermediary, the Administrator, each Program Support Provider, Arranger, each Lessor Hedging Agreement Counterparty and the respective successors, permitted assigns, permitted transferees, invitees, trustees, contractors, servants, employees, officers, directors, shareholders, partners, participants, representatives and agents of the foregoing Persons; provided, however, that in no event shall Lessee or any Affiliate of Lessee be an Indemnitee. "Initial Advance Date" is defined in Section 2.1(b) of the Participation Agreement. "Insolvency Event" means, with respect to any Person, any event pursuant to which such Person makes an assignment of or for the benefit of creditors, files a case or petition in bankruptcy, petitions or applies to any tribunal for the appointment of a custodian, receiver, liquidator, assignee, trustee or sequestrator (or other similar official) for it or for a substantial part of its property, commences any case or proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, consents or acquiesces in the filing of any such petition, application, proceeding or appointment of or taking possession by the custodian, receiver, liquidator, assignee, trustee or sequestrator (or other similar official) of such Person or any substantial part of its property, or admits its inability to pay its debts generally as they become due, or authorizes any of the foregoing to be done or taken on behalf of such Person, or any case or petition in bankruptcy or under any other insolvency law is commenced against such Person and results in an order for relief or is not dismissed within 90 days after such commencement. "Instituting Party" is defined in Section 6.4 of the Participation Agreement. "Insurance Consultant" means Robert M. Currey & Associates or such other Person as may be selected by Lessor and reasonably acceptable to Lessee. 25 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Insurance Requirements" means all terms and conditions of any insurance policy either required by the Lease to be maintained by Lessee or required by the Construction Agency Agreement to be maintained by Construction Agent, and all requirements of the issuer of any such policy. "Interest Period" means, (a) with respect to any Loan or any Investor Amount bearing interest or Yield by reference to either the Eurodollar Rate or the ABR, all or any portion of the period from and including the Initial Advance Date to but excluding the next succeeding Scheduled Payment Date and thereafter from and including a Scheduled Payment Date to but excluding the next succeeding Scheduled Payment Date during which such Loan or Investor Amount bears interest by reference to such rate; and (b) with respect to any Loan bearing interest at the CP Rate, all or a portion of the period from and including the Initial Advance Date to but excluding the 1st day of the next succeeding calendar month and thereafter from and including the 1st day of each calendar month to but excluding the 1st day of the next succeeding calendar month, provided that with respect to the final Scheduled Payment Date, the Interest Period for Loans bearing interest at the CP Rate shall commence on the first day of the Interest Period for which interest has not been paid and end on, but exclude the final Scheduled Payment Date. "Inventory" is defined in the Granting Clause Second of the Security Agreement. "Investment Company Act" means the Investment Company Act of 1940, as amended, together with the rules and regulations promulgated thereunder. "Investment Grade" means a rating of "BBB-" (or higher) by S&P and a rating of "Baa3" (or higher) by Moody's. "Investor Amount" means at any time the amount of the Investor Contributions owed to an Investor as evidenced by an Investor Certificate, less any repayments thereon. "Investor Base Rent" means, for each Scheduled Payment Date, an amount equal to the Yield accrued on the Investor Amount at the Yield Rate during the Interest Period ending on such date. "Investor Certificate" means, for each Investor, a certificate substantially in the form of Exhibit A to the Trust Agreement, evidencing the equity interest of such Investor in the Trust. "Investor Certificate Participant" is defined in Section 3.8(g) of the Trust Agreement. "Investor Certificate Register" is defined in Section 3.8(a) of the Trust Agreement. "Investor Contribution" is defined in Section 2.2.2 of the Participation Agreement. "Investor Maturity Date" means November 7, 2008. "Investors" means, collectively, the Persons named as Investors in the Participation Agreement and each other assignee or successor thereof. "Issuer" means Eagle. 26 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Issuer Group" means any member of the same affiliated group for purposes of GAAP. "Land" means, collectively, each of the Sites. "Land Agreement" is defined in Section 9.8 of the Lease. "Land Costs" means all costs of acquisition of the Manufacturing Facility Site. "Land Improvement Costs" means the aggregate amounts advanced by Lessor to fund the costs of the Manufacturing Facility Land Improvements. "Land Improvements" means, as applicable the Traville Land Improvements and/or the Manufacturing Facility Land Improvements. "Landlord" means Traville LLC, as Ground Lessor under the Ground Lease. "Lease" means the Lease Agreement, dated as of the Documentation Date, between Lessor, as lessor, and Lessee, as lessee, in respect of the Properties. "Lease Balance" means, at any time of determination, the sum of (a) the Traville Lease Balance plus (b) the Manufacturing Lease Balance. For the avoidance of doubt the Lease Balance shall at all times equal the sum of (a) the then outstanding principal balance of all Notes plus (b) the then outstanding total Investor Amounts. "Lease Commencement Date" means, with respect to a Property, the date on which Substantial Completion has occurred as to such Property. "Lease Default" means any condition, event or act which, with notice or lapse of time or both, would become a Lease Event of Default. "Lease Event of Default" has the meaning specified in Section 18.1 of the Lease. "Lease Term" means, with respect to each Property, the period commencing on and including the Lease Commencement Date and ending on the Lease Term Expiration Date. "Lease Term Expiration Date" means the fifth (5th) anniversary of the last Lease Commencement Date with respect to the Properties, but not to extend beyond seven (7) years from the Documentation Date, or such earlier date if the Lease is so terminated pursuant thereto. "Leasehold Deed of Trust" is defined in Section 16 of the Ground Lease. "Leasehold Deed of Trust" is defined in Section 16 of the Ground Lease. "Lease Rents" is defined in Section 2(a) of the Assignment of Lease and Rents. "Legal Requirements" means all Federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting the Property or any portion thereof or the use or alteration thereof, whether now or hereafter enacted and in force, including any that require repairs, modifications or 27 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) alterations in or to the Property or any portion thereof or in any way limit the use and enjoyment thereof and any that may relate to Environmental Laws, and all permits, certificates of occupancy, licenses, authorizations and regulations relating thereto, and all covenants, agreements, restrictions and encumbrances contained in any instruments which are either of record or known to Lessee affecting the Property or any portion thereof. "Lender" means Eagle or any Liquidity Provider and "Lenders" refers to all of the foregoing persons. "Lessee" means HGSI. "Lessee Assignment of Lease" means the Assignment of Lease, dated the Documentation Date, from Lessee, as assignor, to Lessor, as assignee. "Lessee Collateral" means all of Lessee's right, title and interest in and to each of the following, however arising and whether now existing or hereafter acquired or arising: (a) Pledged Liquid Collateral; (b) the Properties and Related Equipment; and (c) all products (other than products produced in the Improvement), excess successions, subleases, rents, issues, profits, returns, income and proceeds of and from any or all of such Lessee Collateral (including proceeds which constitute property of the type described in clause (a) above, and to the extent not otherwise included, all payments under insurance (whether or not Lessor is the loss payee hereof) or any indemnity, warranty or guarantee payable by reason of loss or damage to or otherwise with respect to any of the foregoing. "Lessee Deed of Trust" means the Deed of Trust and Security Agreement, dated the Documentation Date, made by Lessee as mortgagor, in favor of Lessor, as mortgagee. "Lessee Financing Statements" means UCC-1 financing statements made by Lessee, as debtor, in favor of Lessor, as secured party, appropriately completed and executed for filing with the offices listed in Part A of Schedule III to the Participation Agreement in order to protect Lessor's interest under the Security Agreement. "Lessee Obligations" means all obligations of the Lessee under the Operative Documents. "Lessee Operative Document" means the Participation Agreement and each other Operative Document to which HGSI in any capacity is a party. "Lessee Person" means Lessee or any affiliate in its capacity as owner, Construction Agent, or any Affiliate or successors and assigns of the foregoing, and all of their respective officers, directors, shareholders, partners, employees, agents, consultants (on the Property), service-providers (on the Property), and any other Person under the supervision of any of the foregoing pursuant to a written contract or otherwise. 28 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Lessee's Incremental Borrowing Rate" means the rate used by Lessee in calculating the 90% cost recovery test under FASB 13. "Lessee's Property" has the meaning given such term in Section 8.3 of the Lease. "Lessor" means the Trust. "Lessor Assignment of Lease" means the Assignment of Lease, dated the Documentation Date, from Lessor, as assignor, to the Administrative Agent, as assignee. "Lessor Deed of Trust" means the Deed of Trust and Security Agreement, dated the Documentation Date, made by Lessor as mortgagor, in favor of Administrative Agent, as mortgagee. "Lessor Financing Statements" means UCC-1 financing statements made by Lessor, as debtor, in favor of the Administrative Agent, as secured party, appropriately completed and executed for filing with the offices listed in Part B of Schedule III to the Participation Agreement in order to protect the Ground Lessee's interest under the Security Agreement. "Lessor Hedging Agreement" is defined in Section 6.12 of the Participation Agreement. "Lessor Hedging Agreement Counterparty" means the counterparty (other than Lessor) under any Lessor Hedging Agreement. "Lessor Insurance Consultant" means RM Currey & Associates. "Lessor Liens" means Liens on or against the Properties or the Lease or any payment of Rent (a) which result from any act of, or any Claim against, Lessor, any owner of a direct or indirect interest in Lessor, unrelated to its interest in the Properties or the transaction, or which result from any violation by Lessor of any of the terms of the Operative Documents or (b) which result from Liens in favor of any taxing authority by reason of any Tax owed by Lessor, any owner of a direct or indirect interest in Lessor, except that Lessor Liens shall not include any Lien resulting from any Tax for which Lessee is obligated to indemnify Lessor. "Lessor's Interests" means all of the rights and interests in and to the Properties including the estate demised to Ground Lessee pursuant to or under the Ground Lease. "Lien" means any Deed of Trust, deed of trust, pledge, security interest, encumbrance, lien, easement, servitude or charge of any kind, including any irrevocable license, conditional sale or other title retention agreement, any lease in the nature thereof, or any other right of or arrangement with any creditor to have its claim satisfied out of any specified property or asset with the proceeds therefrom prior to the satisfaction of the claims of the general creditors of the owner thereof, whether or not filed or recorded, or the filing of, or agreement to execute as "debtor", any financing or continuation statement under the UCC of any jurisdiction or any federal, state or local lien imposed pursuant to any Environmental Law. "Liquid Collateral" means Permitted Investments with a scheduled maturity date of not more than seven (7) years from the date of purchase, except for corporate bonds rated lower than 29 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) A by S&P or A2 by Moody's which must have a scheduled maturity date not to exceed five (5) years from the date of purchase. "Liquid Collateral Agreements" means the Fleet National Bank Liquid Collateral Agreement and the First Union Liquid Collateral Agreement. "Liquidity Agent" means Fleet National Bank. "Liquidity Agreement" means the Liquidity Agreement, dated as of the Documentation Date, among Eagle, the Liquidity Providers, Fleet National Bank, as Liquidity Agent, and the Liquidity Agreement Collateral Agent. "Liquidity Agreement Collateral Agent" means Bankers Trust Company. "Liquidity Fee" means a fully earned fee when and as paid, payable in arrears on each Scheduled Payment Date on or prior to the Termination Date (as defined in the Liquidity Agreement) in an amount equal to either (a) 0.20% per annum of the excess of (i) the sum of the daily average outstanding principal balance of each of the Conduit Loans over (ii) the sum of the daily average outstanding principal balance of the fundings made by each of the Liquidity Providers to the Conduit in the event that and so long as the Liquid Collateral in such Liquidity Provider's related Account constitutes Properly Margined Liquid Collateral, or (b) 0.25% per annum of the excess of (i) the sum of the daily average outstanding principal balance of each of the Conduit Loans over (ii) the sum of the daily average outstanding principal balance of the fundings made by each of the Liquidity Providers to the Conduit in the event that and so long as the Liquid Collateral in such Liquidity Provider's related Account constitutes Non-Properly Margined Liquid Collateral. "Liquidity Provider" means each financial institution party to the Liquidity Agreement as a Liquidity Provider; the initial Liquidity Providers are Fleet National Bank and First Union. "Liquidity Provider Share" means with respect to Fleet National Bank, 55.787%, and with respect to First Union, 44.213%. In the event that any Liquidity Provider transfers any of its interests in the Facility Loans, such Liquidity Provider's Liquidity Provider Share shall be reduced by the same percentage as the percentage of such Liquidity Provider's interest transferred thereby, and the transfee's Liquidity Provider Share shall be increased by the same percent. "Loan Agreement" means, collectively, the A Loan Agreement and the B Loan Agreement. "Loan Base Rent" means on each Scheduled Payment Date, an amount equal to the aggregate interest due and payable on such date on Loans pursuant to the Loan Agreement. "Loan Documents" means the Loan Agreement, the Notes and the Security Documents. "Loan Percentage" means 96.0%. "Loans" means the Conduit Loans and/or the Facility Loans, as applicable. 30 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Majority Banks" means one or more Liquidity Providers and Investors whose aggregate Commitment(s) comprise at least 66-2/3% of the Total Commitment, or, if the Commitments of the Liquidity Providers and Investors are terminated, of the outstanding Facility Loans and Investor Amounts. "Manufacturing As-Built Appraisal" is defined in Section 4.3(q) of the Participation Agreement. "Manufacturing Construction Materials" is defined in the Recital D of the Construction Agency Agreement. "Manufacturing Construction Period Maximum Guaranty Amount" means an amount equal to the product of (a) a fraction (i) the numerator of which equals the Manufacturing Lease Balance, and (ii) the denominator of which equals the Lease Balance, and (b) the Construction Period Maximum Guaranty Amount. "Manufacturing Facility" means the Manufacturing Facility Improvements and the Manufacturing Facility Site. "Manufacturing Facility Improvements" means the buildings, structures, improvements and fixtures and Related Equipment now or hereafter situated or located on the Manufacturing Facility Site, including the roads, parking lots and structures, electrical equipment, power plants, storage tanks, air conditioning systems, emergency systems, access ways, sidewalks, recreational areas, vehicle control facilities, landscaping, and utility and service systems used or procured for use in connection with the operation and maintenance of such buildings and structures, but excluding Lessee's Property. "Manufacturing Facility Land Improvements" means all work necessary in connection with the development of the Manufacturing Facility Site, including excavation; roads and roadways; curbs; gutters; storm drains; flood control ditches and causeways; sidewalks; joint trenches for power, gas, sewer, domestic water and irrigation; sanitary tie-ins; reparcelization and subdivisions; traffic mitigation improvements; grading (including obtaining any necessary slope easement rights from adjacent land owners and installation and proper compaction, reinforcement, and seeding of such slopes); and other land improvements, in each case to the extent the costs of construction of which are allocable to the Manufacturing Facility Site under generally accepted accounting principles, consistently applied by Lessee. "Manufacturing Facility Site" means the land described in Exhibit A-2 to the Lease, and all Appurtenant Rights relating to the foregoing. "Manufacturing Facility Site Purchase Advance" means the Advance to fund the Land Costs. "Manufacturing Facility Site Purchase Date" is defined in Section 2.1(d) of the Participation Agreement. "Manufacturing Facility Supplement" is defined in Section 2.3 of the Construction Agency Agreement. 31 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Manufacturing Lease Balance" means, at any time of determination, the aggregate of all amounts advanced to Lessee prior to such time of determination pursuant to Section 2.2 of the Participation Agreement which (i) are appropriately allocable to the Manufacturing Facility in accordance with Section 2.2.6(b) and (c) of the Participation Agreement and (ii) as of such time of determination, have not yet been repaid by Lessee in accordance with the terms of the Operative Documents. "Manufacturing Residual Value Guaranty Amount" means 87.743% of the then outstanding Manufacturing Lease Balance. "Marketable Securities" means all securities regularly traded on a national securities exchange that are reflected on the balance sheet of HGSI and its consolidated subsidiaries in accordance with GAAP. "Material Adverse Effect" means any change or changes, effect or effects or condition or conditions that individually or in the aggregate are materially adverse to (i) the ability of Lessee or Construction Agent to perform its obligations under the Operative Documents to which it is a party or to lease the Properties under the Lease, (ii) the validity or enforceability of any of the Operative Documents or any rights or remedies under any thereof, (iii) the status, priority or perfection of the Administrative Agent's or any Collateral Agent's Lien on any collateral or (iv) the value or condition of any Property. "Material Construction Documents" means the contracts identified on Schedule I to the Participation Agreement. "Material Lease Default" means any Lease Default described in Section 18.1(d) of the Lease. "Maturity Date" means, if the Construction Agency Agreement is terminated pursuant to Article V thereof, the day of termination of the Construction Agency Agreement; otherwise, the last day of the Lease Term. "Mediation Cost" is defined in Section 9.2(d) of the Lease. "Memorandum of Ground Lease" means the Memorandum of Ground Lease, dated the Documentation Date, between the Ground Lessee and Lessor. "Memorandum of Lease" means the Memorandum of Lease dated the Documentation Date between Lessor and Lessee. "Money Market Funds" means any regulated investment company of recognized standing shares of which are marketable with more than one billion dollars in assets that has had a historically constant dollar net asset value and has been in business more than five years, and whose performance is easily tracked. "Monthly Report" means the Monthly Report delivered pursuant to Section 6.1(b)(i) of the Participation Agreement. 32 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Moody's" means Moody's Investors Service, Inc., or any successor thereto. "Mortgage Affidavit" is defined in section 4.1(w) of the Participation Agreement. "Mortgage Backed Securities" means any sequential, targeted or planned amortization mortgage-backed U.S. Agency Obligation rated at the time when pledged to the applicable Account and at all times thereafter Aaa by Moody's and AAA by S&P. "Multiemployer Plan" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "Negotiable Certificates of Deposit" means negotiable certificates of deposit traded on the secondary market of any commercial bank incorporated under the laws of the United States, or any state thereof, of recognized standing whose short-term commercial paper rating at the time the securities are pledged to the applicable Account and at all times thereafter is at least A-1 by S&P and at least P-1 by Moody's and whose long-term unsecured debt rating at the time the negotiable certificates of deposit are pledged to the Account and at all times thereafter is at least A by S&P and A2 by Moody's. "Net Casualty Proceeds" means the compensation and/or insurance payments net of the expenses of collecting such amounts received by Administrative Agent, Lessor or Lessee in respect of the Properties by reason of and on account of an Event of Loss described in clause (x) of the definition thereof or a Casualty. "Net Condemnation Proceeds" means any award or compensation net of the expenses of collecting such amounts received by Administrative Agent, Lessor or Lessee in respect of the Properties by reason of and on account of an Event of Loss described in clause (y) or (z) of the definition thereof or a Condemnation. "Net Proceeds" means Net Casualty Proceeds and Net Condemnation Proceeds. "Net Sales Proceeds" means Gross Sale Proceeds less costs and expenses to be paid pursuant to Section 10.5, clause first of the Participation Agreement. "Non-Capitalizable Transaction Costs" means the Transaction Costs listed on Schedule VI of the Participation Agreement. "Non-Consenting Liquidity Provider" is defined in Section 8.5 of the Participation Agreement. "Non-Consenting Participant" is defined in Section 8.5(a) of the Participation Agreement. "Non-Curable Defaults" is defined in Section 16(B) of the Ground Lease. 33 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Noneligible Accrued Amounts" means the Yield, Fees and Transaction Costs which, are payable directly to any Participant if such Participant or an Affiliate of such Participant is also an Investor; provided, however, that in no event shall "Noneligible Accrued Amounts" include (x) Transaction Costs payable to any agent, representative or outside counsel of any Participant if such Person is not considered an Affiliate of an Investor, (y) any Program Fees or (z) premiums or proceeds from residual value insurance. "Non-Properly Margined Liquid Collateral" means Liquid Collateral credited to an Account that (i) satisfies the Concentration Limits but (ii) is not otherwise Properly Margined Liquid Collateral. "Non-Public Company" means a Person that at the time of determination is not obligated to register any class of securities pursuant to Section 12 or Section 15 of the Securities and Exchange Act of 1934, as amended. "Nonrelated Construction Event" means any act or omission occurring prior to the Lease Commencement Date (i) to the extent such act or omission is attributable to a Person who is not a Construction Agency Person, or (ii) that would not constitute a breach by Lessee or Construction Agent, of any of their respective obligations under any of the Operative Documents and for which Construction Agent does not otherwise have responsibility under the Construction Agency Agreement. "Nonseverable" shall describe an Alteration or part of an Alteration which cannot be readily removed from a Property without causing damage (other than that of a de minimis nature) to the Property. "Non-U.S. Person" means any Person which is, or under United States tax law is treated as, other than (i) a citizen or resident of the United States or (ii) a corporation, partnership or limited liability company created or organized in the United States or under the law of the United States or of any state in the United States or the District of Columbia. "Notes" means A Notes and the B Notes. "Notice of Alteration" is defined in Section 9.2(d) of the Lease. "Notice of Objection" is defined in Section 9.2(d) of the Lease. "Obligor" means Lessee or any of its respective Affiliates. "Officer's Certificate" (i) of a Person (other than Lessee) means a certificate signed by the Chairman of the Board of Directors or the President or any Executive Vice President or any Senior Vice President or any other Vice President of such Person signing with the Treasurer or any Assistant Treasurer or the Controller or any Assistant Controller, Cashier, Assistant Cashier or the Secretary or any Assistant Secretary (or in the case of the Trustee, any Financial Services Officer) of such Person, or by any Vice President who is also Controller, Treasurer or Cashier signing alone and (ii) in respect of Lessee means a certificate signed by any officer of Lessee or HGSI. 34 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Operative Documents" means, collectively, the following: (a) the Participation Agreement, (b) the Construction Agency Agreement, (c) the Lease, (d) the Ground Lease, (e) the Memorandum of Lease, (f) the Memorandum of Ground Lease, (g) the Loan Agreement, (h) the Notes, (i) the Investor Certificates, (j) the Security Documents, (k) the Trust Agreement, and (l) the Fee Letters, (m) the Liquidity Agreement, (n) the Account Agreements and (o) any Lessor Hedging Agreements. "Original Payment" is defined in Section 9.4(b) of the Participation Agreement. "Other Available Amounts" means any insurance proceeds available under related insurance policies maintained by or on behalf of Lessee, Lessor or Construction Agent, letter of credit proceeds, proceeds under surety bonds, and similar proceeds consisting of available cash which are payable to Lessee, Lessor or Construction Agent in settlement of a Claim or for use in the Construction of the Improvements. "Other Lease Rents" is defined in Section 2(b) of the Assignment of Lease and Rents. "Other Leases" is defined in Section 2(b) of the Assignment of Lease and Rents. "Outside Completion Date" means in respect to the Traville Facility December 31, 2003 and in respect to the Manufacturing Facility March 31, 2004. "Overall Transaction" means the transactions contemplated by the Operative Documents. "Overdue Rate" means, with respect to any Loan or Investor Amount then outstanding, the lesser of (a) the highest interest rate permitted by Applicable Law and (b) the sum of (i) 2% plus (ii) the interest rate applicable to such Loan or the Yield Rate applicable to such Investor Contribution, as the case may be. "Participant Collateral" is defined in Granting Clause Second of the Security Agreement. "Participants" means collectively, the Liquidity Providers, the Investors and Eagle. "Participation Agreement" means the Participation Agreement dated as of the Documentation Date, among the Trust, the Trustee, Human Genome Sciences, Inc. as Lessee and Construction Agent, Traville LLC, as Ground Lessor, BancBoston Leasing Investments Inc. and First Union as Investors, Eagle, the Administrator, Fleet National Bank and First Union as Liquidity Providers, Fleet National Bank and First Union as Collateral Agents, the Administrative Agent and the Liquidity Agent. "Payment Office" means the offices of the Administrative Agent as set forth on Schedule II to the Participation Agreement or such other office as the Administrative Agent may designate in writing to Lessee, Lessor, the other Agents, the Conduit and the Liquidity Providers. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. 35 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Percentage Share" or "Investor's Percentage Share" for each Investor means (a) prior to the second Lease Commencement Date, the Commitment of any Investor as a percentage of the aggregate Commitments of all the Investors; and (b) on or after the second Lease Commencement Date, the Investor Contribution of an Investor as a percentage of the aggregate Investor Contributions of all the Investors. "Permitted Contest" means actions taken by a Person to test, challenge, contest, appeal or request of a proceeding for review in good faith, by appropriate proceedings timely initiated and diligently prosecuted, the legality, validity or applicability to the Property or any interest therein of any Person of: (a) any Applicable Law; (b) any provision of a Land Agreement; (c) any term or condition of, or any revocation or amendment of, or other proceeding relating to, any authorization or other consent, approval or other action by any Governmental Authority; or (d) any Lien or Tax; provided that the initiation and prosecution of such contest would not result in (i) an imminent risk of sale, forfeiture or loss of the Lien created by the Operative Documents or the right, title or interest of Lessor in or to the Property or any portion thereof or interruption of all or any portion of the Rent, Lease Balance, or any other amount payable under the Operative Documents by reason of attachment or other Lien, (ii) a risk of criminal liability being imposed upon any Participant, (iii) the enjoinment of or interference with the use, possession or disposition of the Properties in a material respect ,or (iv) materially and adversely affect the Fair Market Value, use or remaining useful life of the Property or any portion thereof or the continued economic operation thereof; and provided, further, that in any event adequate reserves in accordance with GAAP are maintained by such Person against any adverse determination of such contest. "Permitted Investments" means, the following investments, in each case payable in Dollars and payable in the United States of America: (a) U.S. Treasury Obligations and U.S. Agency Obligations, (b) commercial paper notes with a rating of P-1 or higher by Moody's and a rating of A-1 or higher by S&P, (c) notes or debentures issued or guaranteed by a state or political subdivision of a state rated at the time when pledged to the applicable Account and at all times thereafter at least A3 or higher by Moody's and A- or higher by S&P (separately or collectively, "Municipal Bonds"), (d) any unsecured long-term debt obligations (other than Municipal Bonds) rated at the time when pledged to the applicable Account and at all times thereafter at least A3 or higher by Moody's and A- or higher by S&P (separately or collectively, "Bonds"), (e) any asset-backed securities rated at the time when pledged to the applicable Account and at all times thereafter Aaa by Moody's and AAA by S&P, (separately or collectively, "Asset Backed Securities") (f) Money Market Funds, (g) Repurchase Obligations, (h) Mortgage Backed Securities, (i) Negotiable Certificates of Deposit, and (j) Bank Obligations. Permitted Investments shall include those investments for which the Collateral Agent or an Affiliate of the Collateral Agent provides services, provided that such investments meet the criteria of any of (a)-(j) above. If a Permitted Investment is rated only by S&P or Moody's, such single rating shall be applicable. "Permitted Liens" means: 36 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) (a) Liens created pursuant to the Operative Documents and the respective rights and interests of Lessee, Lessor, the Ground Lessor and any Participant and their respective permitted transferees and assignees, as provided in the Operative Documents, (b) Lessor Liens, (c) Liens for Taxes either not yet due or being contested in compliance with Section 9.5 of the Lease, (d) materialmen's, mechanics', workers', repairmen's, employees' or other like Liens on Lessee's interest in the Properties for amounts either not yet due or being contested in compliance with Section 9.5 of the Lease, (e) Liens arising out of judgments or awards with respect to which at the time an appeal or proceeding for review is being prosecuted in good faith and either which have been bonded or for the payment of which adequate reserves shall have been provided as required by GAAP or other appropriate provisions have been made, so long as such proceedings have the effect of staying the execution of such judgments or awards and are being contested pursuant to Section 9.5 of the Lease, (f) easements, rights of way, reservations, servitudes and rights of others against the Properties which (x) are listed on Schedule B to the Title Policy or (y) are granted pursuant to Section 8.4 of the Lease, and (g) the rights of any assignee, lessee, or sublessee under assignments, leases and subleases expressly permitted by the Lease. "Person" means an individual, corporation, partnership, joint venture, limited liability company, limited liability partnership, association, joint-stock company, trust (including any beneficial owner thereof), unincorporated organization, Authority or other legal entity. "Personality" is defined in Section 4 of the Ground Lease. "Petitioned Party" is defined in Section 6.4 of the Participation Agreement. "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "Plans and Specifications" means, as applicable, the Approved Traville Plans and Specifications and/or the Approved Manufacturing Plans and Specifications, as each may be amended from time to time in accordance with the Construction Agency Agreement. 37 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Pledged Liquid Collateral" means collectively the First Union Liquid Collateral and the Fleet National Bank Liquid Collateral. "Prescribed Forms" means duly executed and filed form(s) or statement(s), and in such number of copies, which may, from time to time, be prescribed by law and which, pursuant to applicable provisions of (a) an income tax treaty between the United States and the country of residence of the Participant providing the form(s) or statement(s), (b) the Code, or (c) any applicable rule or regulation under the Code, permit Lessee to make payments under any Operative Document free of deduction or withholding of United States Tax. "Present Value" means the value at the date of determination of a specified amount payable in the future discounted at Lessee's Incremental Borrowing Rate. "Prime Contractor" means one or more Persons who shall, with the prior written consent of Lessor, have been designated by Lessee to act as a prime contractor for purposes of the Construction. "Principal Component" means with respect to any Commercial Paper Note (a) in the case of a Commercial Paper Note issued on a discount basis, the amount of proceeds received by the Conduit upon the sale thereof prior to the payment of any dealer fee or other fees or expenses paid with respect thereto and (b) in the case of a Commercial Paper Note issued on an interest-bearing basis, the principal amount thereof. "Pro Rata Portion" with respect to any Liquidity Provider means the ratio, expressed as a percentage, of (i) such Liquidity Provider's Commitment Amount divided by (ii) the aggregate Commitment Amounts of all of the Liquidity Providers related to the same Conduit. "Proceeding" is defined in Section 6.4 of the Participation Agreement. "Program Fee" means 15 basis points per annum. "Program Support Provider" with respect to any Conduit means each Person providing liquidity or credit enhancement to such Conduit (including the Liquidity Providers), whether in the form of a liquidity asset purchase agreement, loan agreement, letter of credit, surety bond, cash collateral deposit or otherwise, and each administrator, servicing agent, collateral agent or sub-administrator for such Conduit. "Properly Margined Collateral Coverage" means Liquid Collateral the Fair Market Value of which is adjusted in accordance with the definition of Adjusted Market Value (Item), and maintained in accordance with the Concentration Limits and other terms set forth in the Operative Documents. "Properly Margined Liquid Collateral" means Liquid Collateral the amount of which is determined on the basis of Properly Margined Collateral Coverage. "Property" means either the Traville Facility or the Manufacturing Facility, and "Properties" means the Traville Facility and the Manufacturing Facility, collectively. 38 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Property Costs" means Land Costs (excluding the cost of acquiring the Traville Site), Land Improvement Costs, Improvement Costs, Transaction Costs and all other fees and expenses during the Construction Period which the Trust expressly agrees to pay under the Operative Documents. "Purchase Date" is defined in Section 5.1(a) of the Lease. "Purchase Option" is defined in Section 5.1(a) of the Lease. "Purchase Period" is defined in Section 23(b) of the Ground Lease. "Rating Agencies" means S&P and/or Moody's. "Receivables" is defined in the Granting Clause Second of the Security Agreement. "Related Contracts" is defined in the Granting Clause Second of the Security Agreement. "Related Equipment" is defined in the Granting Clause of the Deed of Trust. "Release" means the release, deposit, disposal or leak of any Hazardous Material into or upon or under any land or water or air, or otherwise into the environment, including by means of burial, disposal, discharge, emission, injection, spillage, leakage, seepage, leaching, dumping, pumping, pouring, escaping, emptying, placement and the like. "Release Portion" is defined in Section 13.1 of the Lease. "Release Request" is defined in Section 13.1 of the Lease. "Remarketing Option" is defined in Section 7.1 of the Lease. "Remarketing Sales Expense" means all charges, costs and expenses of Lessor, Lessee and the Participants in connection with each sale pursuant to the Remarketing Option. "Remedial Work" is defined in Section 9.6(b) of the Lease. "Renewal Date" is defined in Schedule 2 of each Liquidity Agreement. "Renewal Option" is defined in Section 8.5(a) of the Participation Agreement. "Renewal Option Effective Date" is defined in Section 8.5(a) of the Participation Agreement. "Renewal Option Request" is defined in Section 8.5(a) of the Participation Agreement. "Renewal Option Response Date" is defined in Section 8.5(a) of the Participation Agreement. "Renewal Term" is defined in Section 8.5 (a)(i) of the Participation Agreement. 39 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Rent" means Base Rent and Supplemental Rent, collectively. "Replacement Participant" is defined in Section 8.5(b) of the Participation Agreement. "Repurchase Obligations" means repurchase obligations with a term of not more than 31 days for underlying debt securities that are rated AAA by S&P and Aaa by Moody's, and/or that are U.S. Treasury Obligations and/or U.S. Agency Obligations which in each case are secured by a fully perfected security interest in 102% of such underlying securities. "Required Liquid Collateral Amount" means, on any determination date with respect to the Fleet National Bank Liquid Collateral or the First Union Liquid Collateral, an amount equal to the sum of (a) the product of (i) one hundred two percent (102%) and (ii) the product of (A) the applicable Liquidity Provider Share determined as of the Documentation Date, (B) the Loan Percentage and (C) the Lease Balance, including without duplication, capitalized interest and Yield and (b) the product of (i) the applicable Investor's Percentage Share determined as of the Documentation Date, (ii) the Equity Percentage and (iii) the Lease Balance, including without duplication, capitalized interest and Yield. "Residual Value Guaranty Amount" means the aggregate of Traville Residual Value Guaranty Amount and the Manufacturing Residual Value Guaranty Amount. "Responsible Officer" means, with respect to the subject matter of any covenant, agreement or obligation of any party contained in any Operative Agreement, the President, or any Vice President, Assistant Vice President, Trust Officer or other officer, who in the normal performance of his or her operational responsibility would have knowledge of such matters and the requirements with respect thereto. "S&P" means Standard & Poor's, a division of The McGraw-Hill Companies, Inc., or any successor thereto. "Sale Date" is defined in Section 7.1(b) of the Lease. "Scheduled Payment Date" means, as to any Loan or Investor Amount, the twenty-first (21st) day of each month or if such twenty-first day is not a Business Day, the immediately succeeding Business Day and the Maturity Date and the Lease Term Expiration Date. "SEC" means the United States Securities and Exchange Commission. "Secured Lessee Obligations" is defined in Granting Clause First of the Security Agreement. "Secured Lessor Obligations" is defined in Granting Clause Second of the Security Agreement. "Secured Parties" means each party to the Security Agreement other than Lessee. 40 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Secured Parties (Eagle)" means each Eagle Liquidity Provider, the holders from time to time of the Commercial Paper Notes of Eagle, the Liquidity Agreement Collateral Agent, the Administrator and each Program Support Provider for Eagle. "Securities Act" means the Securities Act of 1933. "Securities Exchange Act" means the Securities Exchange Act of 1934. "Security Agreement" means that certain Security Agreement, dated as of the Documentation Date, pursuant to which Eagle assigns to the Liquidity Agreement Collateral Agent for the benefit of the Liquidity Providers all of Eagle's interest in the Operative Documents. "Security Agreement (Eagle)" means the Security Agreement, dated as of the Documentation Date, among Lessee, Lessor, the Participants and the Administrative Agent, pursuant to which (a) Lessee assigns to the Administrative Agent for the benefit of Lessor, the Lessee Collateral and (b) Lessor assigns to the Administrative Agent for the benefit of the Participants, the Participant Collateral. "Security Documents" means, collectively, the Deeds of Trust, the Assignment of Lease, the Security Agreement and the Financing Statements, the Liquid Collateral Agreements, and all other security documents hereafter delivered to the Administrative Agent granting a Lien on any asset or assets of any Person (i) to secure the obligations and liabilities of Lessee under the Lease and other Operative Documents or (ii) to secure the obligations and liabilities of Lessor under the Loan Agreement and/or under any of the other Operative Documents. "Sell Date" is defined in Section 23(a) of the Ground Lease. "Senior Debt" means of any Person and its consolidated Subsidiaries as of the determination date the outstanding principal amount of Indebtedness less Indebtedness that is expressly subordinated in right of payment. "Senior Debt Ratio" means, at the end of any Fiscal Quarter, subject to Article III of Appendix A, the ratio of (a) the aggregate amount of cash, Cash Equivalents and Marketable Securities of HGSI and its Subsidiaries on a consolidated basis at such time; to (b) the sum of total Senior Debt and Synthetic Lease Obligations of HGSI and its Subsidiaries on a consolidated basis outstanding at such time. "Significant Condemnation" is defined in Section 14 of the Ground Lease. "Site" means either the Traville Site or the Manufacturing Facility Site, as the context may require. 41 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Site Assessment" is defined in Section 12.2 of the Lease. "Soft Costs" means all costs of whatever kind or nature, of performing the Improvements (other than the purchase price for the Land and Lessee's costs in connection with the acquisition of the Land, such as the cost of title insurance), Capitalizable Transaction Costs, engineering costs for Improvements, costs of architects, engineers and other consultants and experts with respect to the Construction and fees and expenses incurred in obtaining Governmental Actions, and sums expended by Lessee prior to the date hereof properly allocated to or otherwise included in the foregoing. "Structuring Fee" means a fully-earned and non-refundable fee paid in consideration of structuring the transactions contemplated in the Participation Agreement, as follows: (a) with respect to the Fleet Investor and the Fleet Liquidity Provider, as set forth in the Administrative Agent Fee Letter, and (b) with respect to First Union National Bank, as set forth in the First Union Fee Letter. "Sublease" is defined in Section 16.1 of the Lease. "Subsidiary" means of any specified Person, (i) a corporation, a majority of whose Capital Stock with voting power, under ordinary circumstances, to elect directors is, directly or indirectly, at the date of determination thereof owned by such Person or by such Person and a Subsidiary or Subsidiaries of such Person or by a Subsidiary or Subsidiaries of such Person or (ii) any other Person (other than a corporation) in which such Person or such Person and a Subsidiary or Subsidiaries of such Person has, directly or indirectly, at the date of determination thereof, at least majority ownership interest. "Substantial Completion" means, with respect to the Improvements to be constructed on the Traville Site and the Manufacturing Facility Site, as the context may require substantial completion of the Traville Facility Improvements or the Manufacturing Facility Improvements, as applicable, in accordance with the applicable Plans and Specifications and the issuance by the appropriate Governmental Authority of a certificate of occupancy. "Supplemental Rent" means all legal, accounting, administrative and other operating expenses and taxes incurred by Lessor or Ground Lessee (other than Base Rent), any and all amounts, liabilities and obligations other than Base Rent which Lessee assumes or agrees or is otherwise obligated to pay under the Lease or any other Operative Document or any Lessor Hedging Agreement (whether or not designated as Supplemental Rent) to, or for the benefit of, Lessor, the Administrative Agent, any Lessor Hedging Agreement Counterparty or any other party, including, without limitation, rent, including interest measured by the Overdue Rate, and all other amounts payable under the Ground Lease, the Lease Balance, Fees, Break Costs and indemnities and damages for breach of any covenants, representations, warranties or agreements, and all other costs associated with the condition, use or operation, maintenance, management and utilities relating to the Properties. "Synthetic Lease Obligation" means, with respect to any Person that is a lessee under a lease of the type referred to as a synthetic lease that is characterized as an operating lease in accordance with GAAP, the outstanding "lease balance" or other similar amount; i.e., the 42 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) outstanding principal amount of any notes of the lessor outstanding with respect to the property under lease plus the equity investment made with respect to such lease, plus, without duplication, the "lease balance", subject to the limitations set fort in Schedule IX of the Participation Agreement, with respect to the synthetic leases described in Schedule IX to the Participation Agreement. "Taxes" means any and all present or future liabilities, losses, expenses and costs of any kind whatsoever that are fees (including without limitation, license fees, documentation fees and registration fees), taxes (including without limitation, property, ad valorem, real estate, income, gross or net income, gross or net receipts, sales, use, value added, franchise, business, transfer, capital property (tangible and intangible), municipal assessments, excise and stamp taxes and sewer and water rents), levies, imposts, duties, charges, assessments or withholdings, together with any penalties, fines or interest thereon or addition thereto (any of the foregoing being referred to herein individually as a "Tax"). "Tax Indemnitee" means each of Lessor, any Agent, any Participant, employees, officers, directors, shareholders, members, partners, participants, and agents of the foregoing Persons and each of their respective successors, transferees and assigns permitted under the terms of the Operative Documents. "Tenant" means the Trust as Ground Lessee under the Ground Lease. "Title Policy" means the title insurance commitment issued by Commonwealth Land Title Insurance Company in respect of the Properties within the five (5) Business Day period prior to the Documentation Date. "Total Commitment" means, at any time, the aggregate amount of the Commitments of all Liquidity Providers under the Liquidity Agreement at such time and of all Investors under the Participation Agreement at such time. "Transaction Costs" means (a) the fees and expenses of the Appraiser; (b) the reasonable fees and expenses of (i) Mayer, Brown & Platt, (ii) Moore & Van Allen and (iii) Day, Berry & Howard, special Connecticut counsel to the Trust and the Trust Company, incurred in connection with the negotiation, documentation and consummation of the Overall Transaction; (c) the upfront fees and expenses of the Trust Company; (d) any and all Taxes and fees incurred in recording, registering or filing any Operative Document or any other transaction document, any deed, declaration, Deed of Trust, security agreement, notice or financing statement with any public office, registry or governmental agency in connection with the transactions contemplated by the Operative Documents, unless the Operative Documents expressly provide that such Taxes or fees are required to be paid by a Person other than Lessee; 43 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) (e) any title fees, premiums and escrow costs and other expenses relating to title insurance incurred in connection with the closings contemplated by the Operative Documents, and any expenses incurred by any Agent for analysis of the Improvement Costs and inspection of the Property in connection with the Advances; (f) all expenses relating to all Environmental Audits and appraisals prepared from time to time under the Operative Documents; (g) all fees relating to the Lessor Insurance Consultant and the Construction Consultant; (h) the fees and expenses of Administrative Agent described in Section 9.10(a) of the Participation Agreement; (i) [intentionally omitted]; (j) all lien search fees, recording taxes, charges or other expenses incurred in connection with the perfection of Liens and the consummation of each of the filings and recordings described in Section 4.1(c) of the Participation Agreement; (k) the Structuring Fee described in Section 9.10(b) of the Participation Agreement; and (l) the fees and expenses payable to the Arranger and First Union National Bank in accordance with the Administrative Agent Fee Letter, and the First Union Fee Letter. "Traville As-Built Appraisal" is defined in Section 4.1(s) of the Participation Agreement. "Traville Construction Materials" is defined in the Recital C of the Construction Agency Agreement. "Traville Construction Period Maximum Guaranty Amount" means an amount equal to the product of (a) a fraction (i) the numerator of which equals the Traville Lease Balance, and (ii) the denominator of which equals the Lease Balance, and (b) the Construction Period Maximum Guaranty Amount. "Traville Facility" means the Traville Improvements and the Traville Site. "Traville Improvements" means the buildings, structures, improvements and fixtures now or hereafter situated or located on the Traville Site, including the roads, parking lots and structures, electrical equipment, power plants, storage tanks, air conditioning systems, emergency systems, access ways, sidewalks, recreational areas, vehicle control facilities, landscaping, and utility and service systems used or procured for use in connection with the operation and maintenance of such buildings and structures, but excluding Lessee's Property. "Traville Land Improvements" means all work necessary in connection with the development of the Traville Site, including excavation; roads and roadways; curbs; gutters; 44 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) storm drains; flood control ditches and causeways; sidewalks; joint trenches for power, gas, sewer, domestic water and irrigation; sanitary tie-ins; reparcelization and subdivisions; traffic mitigation improvements; grading (including obtaining any necessary slope easement rights from adjacent land owners and installation and proper compaction, reinforcement, and seeding of such slopes); and other land improvements, in each case to the extent the costs of construction of which are allocable to the Traville Site under generally accepted accounting principles, consistently applied by Lessee. "Traville Lease Balance" means, at any time of determination, the aggregate of all amounts advanced to Lessee prior to such time of determination pursuant to Section 2.2 of the Participation Agreement which (i) are appropriately allocable to the Traville Facility in accordance with Section 2.2.6(a) and (c) of the Participation Agreement and (ii) as of such time of determination, have not yet been repaid by Lessee in accordance with the terms of the Operative Documents, plus, without duplication, in the event that as of such time of determination, Lessor shall not hold title to the Manufacturing Facility Site (other than if Lessor shall not hold title to the Manufacturing Facility Site as a result of Lessee's exercise of the Purchase Option or Remarketing Option with respect to the Manufacturing Facility in accordance with the terms of the Operative Documents), the Manufacturing Lease Balance. "Traville Residual Value Guaranty Amount" means 87.743% of the then outstanding Traville Lease Balance. "Traville Site" means the land described in Exhibit A-1 to the Lease, and all of the appurtenances, easements, restrictions, and rights of way relating to the foregoing. "Trust" means Genome Statutory Trust 2001A, the Trust created by the Trust Agreement. "Trust Agreement" means the Trust Agreement, dated as of the Documentation Date between the Investors and Wells Fargo Bank Northwest, N.A., as the Trustee. "Trust Company" means Wells Fargo Bank Northwest, N.A., a national banking association, in its individual capacity. "Trust Company Fee Letter" means the fee letter dated the Documentation Date, between Trust Company and Lessee. "Trust Estate" means all estate, right, title and interest of the Trust in, to and under the Trust Agreement and all of the other Operative Documents to which it is a party, including any or all payments or proceeds received by the Trust under Article X of the Participation Agreement, together with any other moneys, proceeds or property at any time received by the Trust under or in connection with the Operative Documents. "Trustee" means Wells Fargo Bank Northwest, N.A., not in its individual capacity but solely in its trust capacity under the Trust Agreement, and any co-trustee or successor appointed pursuant to the Trust Agreement. "UCC" means the Uniform Commercial Code of New York or any other applicable jurisdiction. 45 APPENDIX A TO THE PARTICIPATION AGREEMENT (HGSI) "Unguaranteed Residual Lease Balance" means at the date of determination, the excess of the Lease Balance over the Residual Value Guaranty Amount. "Unrestricted Cash, Cash Equivalents and Marketable Securities" means of any Person, as of the date of determination, all cash, Cash Equivalents and Marketable Securities of such Person and its consolidated Subsidiaries as of such date which are not encumbered by any Lien or subject to any defeasance, sinking fund, escrow or similar deposit arrangement pursuant to which such funds are not subject to voluntary withdrawal by such Person and its consolidated Subsidiaries or are set aside for a purpose other than use in such Person's or its consolidated Subsidiary's current operation and which are not otherwise required to be designated as restricted funds on such Person's consolidated balance sheet in accordance with GAAP. "Unused Fee" means, with respect to each Investor and Conduit for the benefit of the Liquidity Providers, a fully earned and non-refundable fee payable in arrears on each Scheduled Payment Date on or prior to the Construction Period Termination Dates for both Properties at a rate of 0.15% per annum on the sum of the average daily amount of (x) with respect to each Investor, each Investor's Available Commitment, and (y) with respect to the Conduit, the aggregate Available Commitments of the Liquidity Providers. "U.S. Agency Obligations" means bonds, notes, debentures, obligations or other evidence of indebtedness issued and/or guaranteed by Federal National Deed of Trust Association, Federal Home Loan Deed of Trust Corporation, Government National Deed of Trust Association or any other agency or instrumentality of the U.S. of America, in each case supported by the direct or indirect full faith and credit of the U.S. Government, as well as mortgaged backed securities issued by any of the foregoing agencies. "U.S. Treasury Obligations" means securities issued or guaranteed by the U.S. Government, including U.S. Treasury obligations and any other obligations the timely payment of principal and interest of which are guaranteed by the U.S. Government. "Yield" means, for each Interest Period, the amount accrued on the Investor Amount outstanding from time to time at the Yield Rate. "Yield Rate" means for each Interest Period, the rate per annum equal to the Eurodollar Rate for such Interest Period plus a margin of two hundred basis points (2%) per annum; provided, however, that in the event (and for so long as) Base Rent is determined by reference to the ABR as required pursuant to Section 9.8 of the Participation Agreement, then the Yield Rate shall be equal to the ABR from time to time. 46 EX-10.18 5 w58882ex10-18.txt LEASE AGREEMENT Counterpart No. _____ EXECUTION COPY Exhibit 10.18 LEASE AGREEMENT Dated as of November 7, 2001 between GENOME STATUTORY TRUST 2001A, as Lessor, and HUMAN GENOME SCIENCES, INC., as Lessee Manufacturing Property Office Research and Development Property Rockville, Maryland Counterpart No. ___ LESSOR'S INTEREST UNDER THIS LEASE HAS BEEN ASSIGNED TO, AND IS SUBJECT TO A SECURITY INTEREST IN FAVOR OF, FLEET NATIONAL BANK, AS ADMINISTRATIVE AGENT, PURSUANT TO AN ASSIGNMENT OF LEASE, DATED AS OF THE DATE HEREOF, BETWEEN LESSOR AND SAID ADMINISTRATIVE AGENT. INFORMATION CONCERNING SUCH SECURITY INTEREST MAY BE OBTAINED FROM SAID ADMINISTRATIVE AGENT. THIS LEASE HAS BEEN EXECUTED IN EIGHT COUNTERPARTS, OF WHICH THIS IS COUNTERPART NUMBER _____. SEE SECTION 23.16 HEREIN FOR INFORMATION CONCERNING THE RIGHTS OF THE HOLDERS OF THE VARIOUS COUNTERPARTS HEREOF. ARTICLE I. DEFINITIONS ARTICLE II. LEASE OF PROPERTY SECTION 2.1 Demise and Lease...............................................................1 SECTION 2.2 Nature of Lease................................................................1 ARTICLE III. RENT SECTION 3.1 Base Rent......................................................................2 SECTION 3.2 Supplemental Rent..............................................................2 SECTION 3.3 Method, Time of Payment........................................................2 SECTION 3.4 Late Payment...................................................................2 ARTICLE IV. NET LEASE; LESSEE'S ACCEPTANCE OF PROPERTY SECTION 4.1 Net Lease; No Setoff; Etc......................................................3 SECTION 4.2 Waivers........................................................................4 ARTICLE V. LESSEE'S PURCHASE OPTION SECTION 5.1 Purchase Option................................................................4 ARTICLE VI. TERMINATION [Intentionally omitted.] ARTICLE VII. LESSEE'S DISPOSITION OF LESSOR'S INTERESTS AT LEASE EXPIRATION SECTION 7.1 Disposition of Lessor's Interests and Distribution of Sale Proceeds............6 SECTION 7.2 Conditions to Lessee's Exercise of the Remarketing Option......................7 ARTICLE VIII. LIENS SECTION 8.1 Lessee Obligation to Discharge Liens...........................................8 SECTION 8.2 Lessor's Notice to Potential Lienors...........................................8 SECTION 8.3 Lessee's Right to Encumber Lessee's Property...................................8 SECTION 8.4 Granting of Easements..........................................................9
-i- ARTICLE IX. MAINTENANCE; ALTERATIONS; TAXES; LEGAL COMPLIANCE SECTION 9.1 Maintenance and Repair; Utility Charges........................................9 SECTION 9.2 Alterations...................................................................10 SECTION 9.3 Title to Alterations..........................................................11 SECTION 9.4 Location......................................................................11 SECTION 9.5 Permitted Contests............................................................11 SECTION 9.6 Environmental Compliance......................................................12 SECTION 9.7 Compliance with Applicable Laws...............................................13 SECTION 9.8 Ground Sublease and Land Agreements Compliance................................13 SECTION 9.9 Lessee's Right to Enforce Warranties..........................................13 SECTION 9.10 Real Estate Taxes.............................................................13 ARTICLE X. USE AND NAMING OF PROPERTY SECTION 10.1 Use...........................................................................13 SECTION 10.2 Naming of the Properties......................................................13 ARTICLE XI. INSURANCE SECTION 11.1 Insurance.....................................................................14 SECTION 11.2 Risk of Loss..................................................................14 ARTICLE XII. RETURN OF LEASED PROPERTY TO LESSOR SECTION 12.1 Nature of Return..............................................................14 SECTION 12.2 Site Assessment...............................................................15 ARTICLE XIII. LAND RELEASE SECTION 13.1 Land Release..................................................................15 ARTICLE XIV. LOSS DESTRUCTION, CONDEMNATION OR DAMAGE SECTION 14.1 Event of Loss.................................................................15 SECTION 14.2 Application of Net Proceeds When Lease Continues; Repair and Restoration......16 SECTION 14.3 Application of Proceeds.......................................................17 SECTION 14.4 Application of Proceeds from a Temporary Taking...............................17 SECTION 14.5 Other Dispositions............................................................17 SECTION 14.6 Negotiations..................................................................17
-ii- ARTICLE XV. CONVEYANCE OF A PROPERTY TO LESSEE SECTION 15.1 Terms of Conveyance...........................................................17 SECTION 15.2 Right of Lessee to Name Designee..............................................18 SECTION 15.3 Costs of Conveyance...........................................................18 SECTION 15.4 Preference Legal Opinion......................................................18 ARTICLE XVI. SUBLEASE SECTION 16.1 Subleasing Permitted; Lessee Remains Obligated................................18 ARTICLE XVII. INSPECTION SECTION 17.1 Inspection....................................................................19 ARTICLE XVIII. LEASE EVENTS OF DEFAULT SECTION 18.1 Defined.......................................................................19 SECTION 18.2 Remedies......................................................................21 SECTION 18.3 Proceeds of Sale; Deficiency..................................................23 SECTION 18.4 Grant and Foreclosure on Lessee's Estate......................................24 SECTION 18.5 Receipt of a Sufficient Discharge to Purchaser................................25 SECTION 18.6 Sale a Bar Against Lessee.....................................................25 SECTION 18.7 Liabilities to Become Due on Sale.............................................25 SECTION 18.8 Provisions Subject to Applicable Law..........................................26 SECTION 18.9 Survival of Lessee's Obligations..............................................26 SECTION 18.10 Remedies Cumulative; No Waiver; Consents......................................26 SECTION 18.11 Right to Perform Lessee's Obligations.........................................26 ARTICLE XIX. HOLDING OVER SECTION 19.1 Holding Over..................................................................27 ARTICLE XX. GRANT OF SECURITY INTEREST SECTION 20.1 Grant of Lien.................................................................27 SECTION 20.2 Assignment of Lease and Rents.................................................27 ARTICLE XXI. COVENANTS OF LESSEE SECTION 21.1 Assumption Upon Merger, Etc...................................................28
-iii- ARTICLE XXII. COVENANTS OF LESSOR SECTION 22.1 Quiet Enjoyment...............................................................29 ARTICLE XXIII. MISCELLANEOUS SECTION 23.1 Binding Effect; Successors and Assigns........................................29 SECTION 23.2 Notices.......................................................................29 SECTION 23.3 Severability..................................................................29 SECTION 23.4 Amendment; Complete Agreements................................................30 SECTION 23.5 Headings......................................................................30 SECTION 23.6 Counterparts..................................................................30 SECTION 23.7 Governing Law.................................................................30 SECTION 23.8 Apportionments................................................................30 SECTION 23.9 Priority......................................................................30 SECTION 23.10 No Joint Venture..............................................................30 SECTION 23.11 No Accord and Satisfaction....................................................30 SECTION 23.12 No Merger.....................................................................30 SECTION 23.13 Lessor Bankruptcy.............................................................31 SECTION 23.14 Abandonment...................................................................31 SECTION 23.15 Investments...................................................................31 SECTION 23.16 Counterparts; Deed of Trust; Notice...........................................31 SECTION 23.17 Further Assurances............................................................31 SECTION 23.18 No Merger of Title............................................................31 SECTION 23.19 Non-recourse..................................................................32
Exhibit A-1 Description of Traville Site Exhibit A-2 Description of Manufacturing Facility Site -iv- LEASE AGREEMENT (HGSI) LEASE AGREEMENT, dated as of November 7, 2001, between GENOME STATUTORY TRUST 2001A, a Connecticut statutory business trust as lessor, and HUMAN GENOME SCIENCES, INC., a Delaware corporation as lessee. In consideration of the mutual agreements herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: ARTICLE I. DEFINITIONS The capitalized terms used herein and not otherwise defined shall have the meanings assigned thereto in Appendix A of the Participation Agreement, dated as of the date hereof, among the parties hereto and, inter alia, Traville LLC, as Ground Lessor, Wells Fargo Bank Northwest, N.A., as Trustee, BancBoston Leasing Investments Inc. and First Union National Bank, as Investors, EagleFunding Capital Corporation, as Lender, Fleet Securities, Inc. as Administrator, Fleet National bank and First Union National Bank, as Liquidity Providers, Fleet National Bank, as Fleet National Bank Collateral Agent, First Union National Bank, as First Union Collateral Agent and Fleet National Bank, as Administrative Agent and Liquidity Agent. In addition, the rules of construction set forth in said Appendix A shall also be applicable to this Lease. ARTICLE II. LEASE OF PROPERTY SECTION 2.1 Demise and Lease. On the Lease Commencement Date for a Property, Lessor hereby agrees to accept delivery of such Property and, as a precondition for such acceptance, to simultaneously lease to Lessee for the Lease Term, such Property and, in the case of the Traville Site, sublease such Site for the Lease Term. Lessee hereby agrees to lease from Lessor for the Lease Term, commencing on the related Lease Commencement Date, such Property and, in the case of the Traville Site, sublease such Site for the Lease Term. The demise and lease of each Property pursuant to this Article II shall include any additional right, title or interest in each Property of Lessor which may at any time be acquired by Lessor, the intent being that all right, title and interest of Lessor in and to each Property during the Lease Term shall be demised and leased hereunder. SECTION 2.2 Nature of Lease. The parties hereto intend that (i) for financial accounting purposes with respect to Lessee, (A) Lessor will be treated as the sublessor of the Traville Site under the Lease and the owner and the lessor of the Improvements and the Manufacturing Facility Site and Lessee will be treated as the lessee of the Manufacturing Facility Site and the sublessee of the Traville Site under the Lease and the lessee of the Improvements, and (B) the Investors will be deemed to have an equity investment in Lessor, and (ii) for all federal and all state and local income tax purposes and bankruptcy and commercial law purposes, (A) the Lease will be treated as a financing arrangement, (B) Lessor, the Investors and the Lenders will be deemed lenders making loans to Lessee in an amount equal to the sum of the Investor Amounts and the outstanding principal amount of the Loans, which loans are secured by the Liquid Collateral to the extent of the Lessor's interest therein and each Property, (C) Lessee LEASE AGREEMENT (HGSI) will be treated as the owner of the Properties for tax purposes and will be entitled to all tax benefits ordinarily available to an owner of property like the Properties for such tax purposes and (D) the obligations of Lessee to pay the Base Rent and any part of the Lease Balance shall be treated as payments of interest and principal, respectively, for Federal and state income tax and bankruptcy and commercial law purposes. Nevertheless, each party acknowledges and agrees that no other party has made any representations or warranties to any other party concerning the tax, accounting or legal characteristics of the Operative Documents and that each party has obtained and relied upon such tax, accounting and legal advice concerning the Operative Documents as it deems appropriate. Lessor shall have a valid and binding security interest in and Lien on the Liquid Collateral and each Property, free and clear of all Liens other than Permitted Liens, as security for the obligations of Lessee under the Operative Documents. ARTICLE III. RENT SECTION 3.1 Base Rent. Commencing on each Lease Commencement Date with respect to each Property and on each Scheduled Payment Date, throughout the Lease Term, Lessee shall pay to Lessor base rent ("Base Rent") in an amount equal to the sum of (a) Loan Base Rent and (b) Investor Base Rent. SECTION 3.2 Supplemental Rent. Commencing on each Lease Commencement Date, Lessee shall pay to Lessor, or to such other Person as shall be entitled thereto in the manner contemplated herein, any and all Supplemental Rent as the same shall become due and payable. In the event of Lessee's failure to pay any Supplemental Rent, Lessor shall have all rights, powers and remedies provided for herein or by law or in equity or otherwise in the case of nonpayment of Base Rent. SECTION 3.3 Method, Time of Payment. Base Rent, and any Supplemental Rent payable to Lessor shall be paid to the Administrative Agent as designee for Lessor and its permitted assignees at such place and in such amount in the contiguous continental United States as is specified in the Security Agreement or as Administrative Agent (as such designee) shall specify in writing to Lessee at least ten (10) Business Days prior to the due date therefor. Each such payment of Rent shall be made by Lessee in funds consisting of lawful currency of the United States of America which shall be immediately available at the place of payment not later than 1:00 p.m. (New York time) on the date such payment is due hereunder, and the Administrative Agent shall pay such funds on the same date to the Person entitled thereto in accordance with Article X of the Participation Agreement. Payments received following such time shall be deemed received on the next succeeding Business Day unless Administrative Agent applies such funds on such date in accordance with Article X of the Participation Agreement. SECTION 3.4 Late Payment. If any portion of the Rent due to Lessor or any Participant shall not be paid by Lessee on or before the date such payment was due hereunder, Lessee shall pay interest thereon from (and including) the date such payment was due hereunder to (but excluding) the date of Lessor's receipt thereof at a rate per annum equal to the Overdue Rate. -2- LEASE AGREEMENT (HGSI) ARTICLE IV. NET LEASE; LESSEE'S ACCEPTANCE OF PROPERTY SECTION 4.1 Net Lease; No Setoff; Etc. This Lease is a "triple" net lease and, except to the extent otherwise expressly specified in this Lease, it is agreed and intended that Base Rent, Supplemental Rent and any other amounts payable hereunder by Lessee shall be paid without notice, demand, counterclaim, setoff, deduction or defense and without abatement, suspension, deferment, diminution or reduction, free from any charges, assessments, impositions, withholdings, expenses or reductions, and that Lessee's obligation to pay all such amounts, throughout the Term is absolute and unconditional. All costs, expenses and obligations of every kind and nature whatsoever relating to the Properties and the appurtenances thereto and the use and occupancy thereof which may arise or become due and payable with respect to the period which ends on the expiration or earlier termination of the Lease Term in accordance with the provisions hereof (whether or not the same shall become payable during the Lease Term or thereafter) shall be paid by Lessee except as otherwise expressly provided herein or in another Operative Document. Lessee assumes the sole responsibility for the condition, use, operation, maintenance, underletting and management of each Property, and no Indemnitee shall have any responsibility in respect thereof or any liability for damage to the property of Lessee, any subtenant of Lessee or any other occupant of either Property on any account or for any reason whatsoever other than by reason of, in the case of any particular Indemnitee, such Indemnitee's willful misconduct or gross negligence. Except to the extent otherwise expressly specified in this Lease, the obligations and liabilities of Lessee hereunder shall in no way be released, discharged or otherwise affected for any reason, including without limitation: (a) any defect in the condition, merchantability, design, quality or fitness for use of either Property or any part thereof, or the failure of either Property to comply with all Applicable Laws, including any inability to occupy or use either Property by reason of such noncompliance; (b) any damage to, removal, abandonment, salvage, loss, scrapping or destruction of or any requisition or taking of either Property or any part thereof; (c) any restriction, prevention or curtailment of or interference with any use of either Property or any part thereof including eviction; (d) any defect in title to or rights to either Property or any Lien on such title or rights or on either Property; (e) any change, waiver, extension, indulgence or other action or omission or breach in respect of any obligation or liability of or by any Person; (f) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceedings relating to Lessee. Lessor or any other Person, or any action taken with respect to this Lease by any trustee or receiver of Lessee or any other Person, or by any court, in any such proceeding; (g) any claim, set off, defense or right that Lessee has or might have against any Person, including without limitation Lessor, the Administrative Agent (including in its individual capacity) or any vendor, manufacturer, contractor of or for either Property; (h) any failure on the part of Lessor or any other Person to perform or comply with any of the terms of this Lease, any other Operative Document or of any other agreement, whether or not related to the transactions contemplated by the Operative Documents; (i) any invalidity, unenforceability, illegality or disaffirmance of this Lease against or by Lessee or any provision hereof or any of the other Operative Documents or any provision of any thereof; (j) the impossibility or illegality of performance by Lessee or Lessor, or both; (k) any action by any court, administrative agency or other Governmental Authority; (1) any change in or violation of Applicable Laws; (m) any restriction, prevention or curtailment of or interference with the construction on or use of either Property or any part thereof; or (n) any other occurrence whatsoever, whether similar or dissimilar to the foregoing, -3- LEASE AGREEMENT (HGSI) whether or not Lessee shall have notice or knowledge of any of the foregoing. Except as specifically set forth in this Lease, this Lease shall not be cancelable by Lessee for any reason whatsoever and, except as expressly provided in this Lease, Lessee, to the extent now or hereafter permitted by Applicable Laws, waives all rights now or hereafter conferred by statute or otherwise to quit, terminate or surrender this Lease. SECTION 4.2 Waivers. Each Property is demised and let by Lessor "AS IS" in its present condition, subject to (a) the rights of any parties in possession thereof, (b) the state of the title thereto existing at the time Lessor acquired title to such Property, (c) any state of facts which an accurate survey or physical inspection might show, (d) all Applicable Laws and (e) any violations of Applicable Laws which may exist at the commencement of the Lease Term. Lessee has examined each Property and Lessor's title thereto and has found the same to be satisfactory. LESSOR HAS NOT MADE AND SHALL NOT BE DEEMED TO HAVE MADE ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, OR BE DEEMED TO HAVE ANY LIABILITY WHATSOEVER, AS TO THE VALUE, HABITABILITY, COMPLIANCE WITH ANY APPLICABLE PLANS AND SPECIFICATIONS FOR EITHER PROPERTY CONDITION, LOCATION, USE, DESCRIPTION, MERCHANTABILITY, DESIGN, OPERATION, OR FITNESS FOR USE OF EITHER PROPERTY (OR ANY PART THEREOF), OR AS TO LESSOR'S TITLE THERETO OR OWNERSHIP THEREOF OR ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO EITHER PROPERTY (OR ANY PART THEREOF) AND LESSOR SHALL NOT BE LIABLE FOR ANY LATENT, HIDDEN, OR PATENT DEFECT THEREIN, FOR ANY DEFECT IN OR EXCEPTION TO TITLE THERETO, OR FOR THE FAILURE OF EITHER PROPERTY TO BE CONSTRUCTED IN ACCORDANCE WITH THE APPLICABLE PLANS AND SPECIFICATIONS THEREFOR, THE COMPLIANCE OF SUCH PLANS AND SPECIFICATIONS WITH APPLICABLE LAWS OR THE FAILURE OF EITHER PROPERTY, OR ANY PART THEREOF, TO OTHERWISE COMPLY WITH ANY APPLICABLE LAWS. It is agreed that Lessee has been afforded full opportunity to inspect each Property, is satisfied with the results of its inspections of each Property and is entering into this Lease solely on the basis of the results of its own inspections and all risks incident to the matters discussed in the preceding sentence. The provisions of this Section 4.2 have been negotiated, and the foregoing provisions are intended to be a complete exclusion and negation of any representations or warranties by Lessor, express or implied, with respect to each Property, that may arise pursuant to the UCC or any other law now or hereafter in effect, or otherwise. ARTICLE V. LESSEE'S PURCHASE OPTION SECTION 5.1 Purchase Option. (a) Subject to Section 5.1(e), Lessor hereby grants to Lessee the exclusive and irrevocable option (the "Purchase Option") to purchase either or both Properties and, with respect to the Traville Facility, Lessor's interest in the Ground Lease, as of any date (the "Purchase Date") for (i) in the event that Lessee exercises the Purchase Option with respect to only the Traville Facility, the Traville Lease Balance, plus, without duplication, any other amounts then due and owing under the Operative Documents, (ii) in the event that Lessee exercises the Purchase Option with respect to only the Manufacturing Facility, the -4- LEASE AGREEMENT (HGSI) Manufacturing Lease Balance, plus, without duplication, any other amounts then due and owing under the Operative Documents, or (iii) in the event that Lessee exercises the Purchase Option with respect to both Properties, the Lease Balance, plus, without duplication, any other amounts then due and owing under the Operative Documents (less any amounts actually paid by Lessee under Section 8.1(b) of the Participation Agreement). Such purchase and sale shall be effected in accordance with Article XV. (b) The Purchase Option shall be exercisable by notice to Lessor given not later than one hundred eighty (180) days prior to the Purchase Date and in any event, unless Lessee shall have exercised the Remarketing Option with respect to a Property on or before one hundred eighty (180) days prior to the Lease Term Expiration Date, the Purchase Option shall be deemed exercised with respect to such Property (in which event the Purchase Date shall be the Lease Term Expiration Date); provided, however, in the event that Lessee shall not have refinanced the A Loans in accordance with Section 6.11 of the Participation Agreement on or before one hundred eighty (180) days prior to the A Loan Maturity Date, Lessee shall have the same options with respect to the Properties under this Section 5 and Section 7 as it would have had assuming the A Loan Maturity Date is also the Lease Term Expiration Date and the Lease shall expire on the A Loan Maturity Date. (c) On the Purchase Date, Lessee shall pay to Lessor the amounts set forth in clause (i), (ii) or (iii) of Section 5.1(a), as applicable, as the purchase price for the purchased Property or Properties, as applicable (plus all other applicable amounts owing in respect of Rent. (d) Notwithstanding anything to the contrary set forth herein, Lessee shall have the right to exercise the Purchase Option with respect to all of the Properties (but not less than all) within five (5) Business Days following the occurrence of any Lease Event of Default. Notwithstanding the notice provisions of Section 5.1(b), in the event that Lessee elects to exercise the Purchase Option within such five Business Day period following the occurrence of a Lease Event of Default, Lessee's payment to Lessor of the applicable amounts required pursuant to Section 5.1(a)(iii) on or prior to the fifth Business Day following the occurrence of a Lease Event of Default shall constitute sufficient notice. In the event that Lessee shall not pay to Lessor the applicable amounts required pursuant to Section 5.1(a)(iii) on or prior to the fifth Business Day following the occurrence of a Lease Event of Default or in the event that Lessee provides Lessor with written notice of its intention not to exercise the Purchase Option during such five day period, Lessee's ability to exercise the Purchase Option shall terminate. (e) Notwithstanding anything to the contrary set forth herein, in the event that the Lease Commencement Date shall have not yet occurred with respect to both Properties, Lessee may not exercise its Purchase Option with respect to the Property covered by the Lease unless it concurrently exercises its purchase option under Section 2.6(ix) of the Construction Agency Agreement with respect to the other Property or the other Property previously had been purchased by Construction Agent pursuant to Section 2.6(ix) of the Construction Agency Agreement. -5- LEASE AGREEMENT (HGSI) ARTICLE VI TERMINATION [Intentionally omitted.] ARTICLE VII. LESSEE'S DISPOSITION OF LESSOR'S INTERESTS AT LEASE EXPIRATION SECTION 7.1 Disposition of Lessor's Interests and Distribution of Sale Proceeds. Subject to Section 7.2, Lessee, on written notice to Lessor given not later than one hundred eighty (180) days prior to the Lease Term Expiration Date, shall have the option (the "Remarketing Option") to cause a sale of one or both of the Properties in accordance with the following terms: (a) Lessee shall act as non-exclusive agent (and may appoint qualified independent sales agents to work on its behalf) in connection with such sale and, in such capacity, shall use all commercially reasonable best efforts to solicit bids from bona fide third parties unrelated to Lessee, and its Affiliates or any Person with whom Lessee or any of its Affiliates has an understanding or arrangement pursuant to which Lessee or any of its Affiliates would use, possess or own all or a portion of either Property. (b) Lessee shall attempt to sell such Property or Properties, as applicable, to the Person submitting an all cash bid that will result in the highest Net Sale Proceeds, such sale to be effected on the third day immediately preceding the Lease Term Expiration Date or as soon as reasonably practicable thereafter (the date of sale being the "Sale Date"); provided that: (i) Lessee shall be required to obtain Lessor's approval of the sale of any Property pursuant to any such bid if a sale of such Property pursuant thereto would result in the Investors and Lenders not being fully reimbursed pursuant to Article X of the Participation Agreement for their Investor Contributions and the outstanding principal amount of the Loans; (ii) With respect to a proposed sale that Lessee wishes to consummate, Lessee shall provide Lessor with reasonable advance notice of the identity of the prospective purchaser, its relationship to any of the Participants and a copy of purchase agreement (including all exhibits and schedules thereto) for the proposed sale of such Property; and (iii) Lessee and its Affiliates shall have no right to submit bids for such Property, but a Participant or an Affiliate of one or more Participants may bid on such Property. (c) On the Sale Date, Lessee shall pay (i) the Traville Residual Value Guaranty Amount in the event that only the Traville Facility is sold on the Sale Date, together with any amounts, including Break Costs, payable under any Lessor Hedging Agreement with respect to the Traville Facility, plus Supplemental Rent due and payable, (ii) the Manufacturing Residual Value Guaranty Amount in the event that only the -6- LEASE AGREEMENT (HGSI) Manufacturing Facility is sold on the Sale Date, together with any amounts, including Break Costs, payable under any Lessor Hedging Agreement with respect to the Manufacturing Facility, plus Supplemental Rent due and payable, or (iii) the aggregate Residual Value Guaranty Amount in the event that both Properties are sold on the Sale Date, together with any amounts, including Break Costs, payable under any Lessor Hedging Agreement, plus Supplemental Rent due and payable to the Administrative Agent and such amount, together with the proceeds of the sale of such Property or Properties, as applicable, shall be distributed in accordance with Article X of the Participation Agreement. (d) Omitted. (e) If either or both Properties are sold on or after the Lease Term Expiration Date, then (i) on or before such date, Lessee shall vacate such Property or Properties; (ii) on the Lease Term Expiration Date, Lessee shall pay to Lessor (A) the Traville Residual Value Guaranty Amount in the event that only the Traville Facility is sold pursuant to the Remarketing Option and all other amounts due and owing in respect of Rent (including Supplemental Rent) with respect to such Property, (B) the Manufacturing Residual Value Guaranty Amount in the event that only the Manufacturing Facility is sold pursuant to the Remarketing Option and all other amounts due and owing in respect of Rent (including Supplemental Rent) with respect to such Property, or (C) the full Residual Value Guaranty Amount in the event that both Properties are sold pursuant to the Remarketing Option and all other amounts due and owing in respect of Rent (including Supplemental Rent) with respect to both Properties; (iii) Lessor shall have the right to enter into leases for such Property or Properties, sell such Property or Properties or otherwise dispose of such Property or Properties and (iv) Lessee shall continue to act as non-exclusive sale agent for the marketing of such Property or Properties so long as such Property or Properties are not otherwise disposed of. Upon the sale of such Property or Properties, the Gross Sale Proceeds will be applied in accordance with Article X of the Participation Agreement. (f) Concurrently with the payments contemplated in Section 7.1 (c), after payments of all other amounts due and owing in respect of Rent, including Supplemental Rent through the payment date, this Lease shall terminate with respect to the Property or Properties, as applicable, sold pursuant to the Remarketing Option, and Lessor and Lessee shall (except as otherwise herein provided) have no further rights or obligations with respect to such Property or Properties, as applicable, under this Lease. SECTION 7.2 Conditions to Lessee's Exercise of the Remarketing Option. Lessee's right to exercise the Remarketing Option and the consummation of the sale of any Property on the Sale Date, as applicable, shall be subject to the following conditions: (a) on the Sale Date, such Property must be delivered by Lessee in the condition required under Article XII; (b) at least 60 days before the Sale Date, Lessee shall have delivered the report required under Section 12.2; -7- LEASE AGREEMENT (HGSI) (c) as of the exercise of the Remarketing Option, the Final Completion Work with respect to such Property and the restoration work required to be performed under Section 9.2(d) (if any) shall have been completed; (d) as of the exercise of the Remarketing Option, if there remains to be performed hereunder any restoration work as a result of a Event of Loss with respect to such Property, Lessee will be able, with the exercise of reasonable diligence, to complete such work as of the Sale Date; and as of the Sale Date, such work shall have been completed; (e) as of the exercise of the Remarketing Option and the Sale Date, there shall be no Lease Event of Default or Bankruptcy Default continuing; (f) as of the exercise of the Remarketing Option, there shall be no default described in Section 18.1(c) or Section 18.1(e) that has continued beyond 180 days after the giving of notice to Lessee by any Participant or the Administrative Agent; and (g) as of the Sale Date, Lessee shall have paid all amounts, including Break Costs, payable under any Lessor Hedging Agreement and the other Operative Documents. If, after Lessee shall have given notice of its exercise of the Remarketing Option in accordance with Section 7.1, any of the foregoing conditions (a) through (g) is not satisfied on or prior to the Sale Date, then a Lease Event of Default shall have occurred hereunder. ARTICLE VIII. LIENS SECTION 8.1 Lessee Obligation to Discharge Liens. Lessee shall not directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to either Property, the Alterations, the Rent, title thereto or any interest therein, which arises for any reason, including all Liens which arise out of the possession, use, occupancy, construction, repair or rebuilding of either Property or by reason of labor or materials furnished or claimed to have been furnished with respect to either Property, except Permitted Liens. Lessee shall promptly, at its own expense, take such action as may be necessary to discharge or eliminate any such Lien (other than Permitted Liens). SECTION 8.2 Lessor's Notice to Potential Lienors. Nothing contained in this Lease shall be construed as constituting the consent or request of Lessor, express or implied, to or for the performance by any contractor, laborer, materialman, or vendor of any labor or services or for the furnishing of any materials for any construction, alteration, addition, repair or demolition of or to either Property or any part thereof, which would result in any liability of Lessor for payment therefor. Notice is hereby given that none of Lessor, the Investors nor the Lenders will be liable for any labor, services or materials furnished or to be furnished to Lessee, or to anyone holding an interest in either Property or any part thereof through or under Lessee, and that no mechanics or other Liens for any such labor, services or materials shall attach to or affect the interest of Lessor, the Investors or the Lenders in and to either Property. SECTION 8.3 Lessee's Right to Encumber Lessee's Property. Lessee may from time to time own, hold under lease from Persons other than Lessor and encumber, grant security -8- LEASE AGREEMENT (HGSI) interests in and otherwise hypothecate in favor of Persons other than Lessor inventory, furnishings, furniture, trade fixtures, leasehold improvements, equipment and other personal property located on or about either Property (and not purchased from Advances) ("Lessee's Property"), which shall not be subject to this Lease or to any Lien in favor of Lessor (including any such Lien as may arise by operation of Applicable Laws). Lessor shall from time to time, upon the reasonable request of Lessee, promptly acknowledge in writing to Lessee and other Persons that Lessor does not own or have, and waives, any lien or other right or interest in or to any of Lessee's Property. SECTION 8.4 Granting of Easements. Provided that no Lease Event of Default or Bankruptcy Default is continuing, Lessor will join with Lessee from time to time at the request of Lessee (and at Lessee's sole cost and expense) to (i) subject to the terms of Article XIV, sell, assign, convey or otherwise transfer an interest in either Property to any Person legally empowered to take such interest under the power of eminent domain, (ii) grant easements, licenses, rights of way and other rights and privileges in the nature of easements, (iii) release existing easements and appurtenances which benefit either Property, (iv) subject to the terms of Article XIV, dedicate or transfer unimproved portions of either Property for road, highway or other public purposes, (v) execute petitions to have either Property annexed to any municipal corporation or utility district, (vi) execute any amendment, termination or supplement of or to any Land Agreement, or a new Land Agreement, and (vii) execute and deliver any instrument necessary or appropriate to make or confirm such grants, releases or other actions described above in this Section 8.4 to any Person; provided that Lessor shall not be required to take any such action, and Lessee shall not effect any such action or grant, release, dedication, transfer or amendment, unless Lessor shall have received a certificate of an authorized officer of Lessee stating that such grant or release, or such dedication, transfer or amendment, as the case may be, shall not adversely affect the utility, economic useful life or residual value of the affected Property or reduce the fair market value of the Traville Facility or Manufacturing Facility below the Traville Lease Balance or Manufacturing Lease Balance, respectively, and each Property shall comply with all Applicable Laws after such grant or release, or such dedication, transfer or amendment, as the case may be. ARTICLE IX. MAINTENANCE; ALTERATIONS; TAXES; LEGAL COMPLIANCE SECTION 9.1 Maintenance and Repair; Utility Charges. (a) Lessee shall at all times, (i) maintain each Property and all components thereof in good order, repair and condition, subject to ordinary wear and tear and, as to the Traville Property, in the same manner as other "Class A" office and/or laboratory buildings in the locale of the Traville Property, (ii) except to the extent Section 9.5 shall apply, maintain each Property in accordance with and otherwise comply with all Applicable Laws, and (iii) make any and all repairs of each Property necessary or appropriate to keep the same in the condition required by the preceding clauses (i) and (ii), whether interior or exterior, structural or nonstructural, ordinary or extraordinary, foreseen or unforeseen and regardless of whether the repair was caused by a Casualty, breach of warranty, wear and tear or otherwise. -9- LEASE AGREEMENT (HGSI) (b) Lessor shall not be required to maintain, repair, replace, alter, remove or rebuild all or any part of either Property, and Lessee waives any right that it may now have or hereafter acquire to (i) require Lessor to maintain, repair, replace, alter, remove or rebuild all or any part of either Property or (ii) make repairs (whether or not at the expense of Lessor) pursuant to any Applicable Laws, insurance requirements, contract, agreement or covenant in effect at any time during the Lease Term. (c) Lessee shall pay or cause to be paid all charges for electricity, power, gas, oil, water, telephone, sanitary sewer and all other rents and utilities used in or on either Property during the Lease Term. Lessee shall be entitled to receive any credit or refund with respect to any utility charge paid by Lessee and received by Lessor on account thereof, net of the costs and expenses reasonably incurred by Lessor in obtaining such credit or refund, and, upon receipt by Lessor thereof, such credit or refund shall be promptly paid over to Lessee. SECTION 9.2 Alterations. (a) Lessee may, without the consent of Lessor, at Lessee's sole cost and expense, make Alterations to a Property, so long as, subject to Section 9.2(d), such Alterations do not adversely effect the fair market value, economic life, utility or residual value of such Property. Subject to the terms of the foregoing proviso, Lessee shall have the right to change and/or seek variances, exceptions and other exemptions in respect of the Applicable Laws (including building and/or zoning laws, regulations and agreements) relating to a Property or any portion thereof. (b) Lessee shall make all Alterations to each Property required so as to cause the same to comply with Applicable Laws, and the limitations on Lessee's right to make Alterations contained in Section 9.2(a) and Section 9.2(d) shall not be applicable to such Alterations, regardless of their effect on the fair market value, economic life, utility or residual value thereof. (c) Lessee shall cause any Alterations to be done and completed in a good and workmanlike manner, free from faults and defects, and in compliance with all Applicable Laws. Lessee shall be responsible for the acts and omissions of all of its employees and all other Persons performing any of the Alterations. (d) Upon Lessee's request (such request, a "Notice of Alteration"), Lessor shall notify Lessee whether, in Lessor's judgment, an Alteration proposed by Lessee would adversely effect the fair market value, economic life, utility or residual value of the applicable Property. Each Notice of Alteration shall be accompanied with reasonably detailed plans and specifications. If Lessor in good faith determines that such Alterations would adversely effect the fair market value, economic life, utility or residual value of the applicable Property, Lessor shall give notice of its objection (a "Notice of Objection") within fifteen (15) Business Days after Lessor's receipt of a Notice of Alterations. If Lessor and Lessee cannot agree whether or not such Alterations would adversely effect the fair market value, economic life, utility or residual value of the applicable Property within fifteen (15) Business Days after Lessee's receipt of a Notice of Objection, an Appraiser reasonably acceptable to Lessor and Lessee shall resolve the dispute by appraising the applicable property both with and without such Alterations. Lessee -10- LEASE AGREEMENT (HGSI) shall pay any and all reasonable out-of-pocket costs, including reasonable attorneys' fees (collectively "Mediation Costs") incurred by Lessor or Lessee in connection with any such dispute between the parties. If Lessor shall prevail in any such dispute, Lessee shall not proceed to make such Alterations, without the prior written consent of Lessor. SECTION 9.3 Title to Alterations. Title to Alterations shall immediately and without further act vest in Lessor and shall be deemed to constitute a part of the applicable Property and be subject to this Lease in any of the following cases: (a) such Alteration shall be in replacement of or in substitution for a portion of the applicable Property; (b) such Alteration shall be required to be made pursuant to the terms of Section 9.1(a) or Section 9.2(b); (c) such Alteration shall be Nonseverable; and (d) such Alteration shall be severable and paid for (i.e., with debt and/or equity) by Lessor. Lessee shall, at Lessor's request, execute and deliver any deeds or assignments reasonably necessary to evidence the vesting of title in and to such Alterations in Lessor. If an Alteration is not within any of the categories set forth in clauses (a) through (d) of this Section 9.3, then title to such Alteration, as well as any item for which substitution or replacement is made as contemplated in Section 9.3(a), shall vest in Lessee. So long as removal thereof shall not result in the violation of any Applicable Laws or this Lease, all Alterations to which title shall vest in Lessee as aforesaid may be removed at any time by Lessee, provided that Lessee shall, at its expense, repair any material damage to either Property caused by the removal of such Alteration and shall restore in all material respects the affected portion of such Property in accordance with Section 9.1(a). SECTION 9.4 Location. Lessee shall not remove, or permit to be removed, the improvements and equipment comprising either Property or any part thereof without the prior written consent of Lessor, except that Lessee or any other Person may remove (a) any Alteration with respect to which title has passed to or remained with Lessee in accordance with the provisions of Section 9.3, (b) any part of either Property constructed on a temporary basis for the purpose of repair or maintenance thereof, (c) any part of either Property which has been replaced by another part which has become subject to this Lease and the Lien of the Deed of Trust; and (d) any part of either Property which in Lessee's good faith judgment has become obsolete, whereupon upon written notice to Lessor and the Administrative Agent such obsolete part shall cease to be subject to this Lease and the Lien of the Deed of Trust; provided that Lessee repairs any damage to either Property caused by such removal. SECTION 9.5 Permitted Contests. Provided no Lease Event of Default or Bankruptcy Default is continuing, Lessee shall not be required to comply with any Applicable Law or Land Agreement so long as it is engaged in a Permitted Contest with respect thereto. At Lessee's expense, Lessor shall cooperate fully with Lessee in connection with any such test, challenge, appeal or proceeding and, at Lessee's request, will join in the proceedings or permit -11- LEASE AGREEMENT (HGSI) the proceedings to be brought in Lessor's name. The terms of this Section 9.5 shall qualify each provision of this Lease that impose a compliance obligation on Lessee (other than an obligation to any Indemnitee), regardless of whether such provision shall expressly make reference to this Section 9.5. SECTION 9.6 Environmental Compliance. (a) Lessee shall comply at all times with Environmental Laws with respect to each Property, and no Hazardous Material shall be brought onto, permitted to exist or remain at or upon, or stored, or disposed of from or used, at either Property by Lessee or any of its employees, agents, independent contractors, licensees, subtenants or invitees in violation of any Applicable Laws, or in such manner as would result in any liability under any Applicable Laws (with the exception of materials used or stored in connection with the operation or maintenance of the property and in compliance with all Environmental Laws). Lessee shall hold harmless, indemnify and defend the Indemnitees from and against any Environmental Damages resulting from any breach of the covenants set forth in this Section 9.6 and from all Environmental Damages. Lessee's indemnification obligation hereinabove set forth shall survive the expiration or earlier termination of this Lease. (b) The indemnity contained in Section 9.6(a) shall specifically include the direct obligation of Lessee to promptly perform any investigatory and/or remedial or other activities required, ordered or recommended by any Governmental Authority, or as otherwise necessary to avoid injury or liability to any person or property, to prevent the spread of any Hazardous Materials, or to provide for the continued safe operation of each Property (the "Remedial Work"). Without waiving any of its rights pursuant to the indemnity described in Section 9.6(a), upon failure of Lessee to perform the Remedial Work in a reasonably prompt manner (subject to Lessee's rights under Section 9.5). Lessor may, at its option and in its sole discretion, commence such work itself in compliance with Environmental Laws, and Lessee shall pay all reasonable costs thereby incurred. (c) Without limiting Lessee's obligations under Section 9.6(a) or any other provision of this Lease, Lessee shall be solely and completely responsible for responding to and complying with any administrative notice, order, request or demand, or any third-party claim or demand relating to the potential or actual presence of Hazardous Materials on either Property, except where the contamination was caused solely by Lessor. The responsibility conferred under this Section 9.6(c) includes responding to such orders on behalf of Lessor and defending against any assertion of Lessor's financial responsibility or individual duty to perform under such orders. (d) "Environmental Damages" shall mean all claims, suits, judgments, damages (including punitive damages), losses, penalties, fines, liabilities (including, but not limited to, strict liability), encumbrances and Liens, and any other costs and expenses, of any kind or nature whatsoever, whether direct or indirect, joint or several, resulting from (i) any Hazardous Material existing, released, or threatened to be released, on, in, under, or near either Property, whether known or unknown and whether arising from historic or threatened future releases of Hazardous Materials, or (ii) any violation or alleged violation of any Environmental Law, in either case, including any attorneys' fees, disbursements, consultants' fees and other costs resulting from (A) investigation and defense of any alleged claim or demand by any third -12- LEASE AGREEMENT (HGSI) party, (B) claims or directives, notices or requests of any Governmental Authorities, whether or not the claims or directives, notices or requests are groundless, false or fraudulent or ultimately defeated, (C) any settlements or judgments to which Lessee is a party, and (D) rendering both Properties in compliance with Applicable Laws. SECTION 9.7 Compliance with Applicable Laws. During the Lease Term, at Lessee's expense, Lessee shall cause each Property to comply with all Applicable Laws, whether or not such Applicable Laws shall necessitate structural changes and/or improvements and/or interfere with the use and enjoyment of such Property, subject to Section 9.5. Lessee shall also procure, pay for and maintain all permits, licenses, approvals, certificates and other authorizations necessary for the operation of its business at each Property from time to time and its lawful use and occupancy of such Property in connection therewith, subject to Section 9.5. SECTION 9.8 Ground Sublease and Land Agreements Compliance. Subject to Section 9.5, Lessee shall comply with, and shall fully and promptly, at its own cost and expense, perform all obligations of Lessor under the Ground Lease and any restrictive covenant, deed restriction or easement of record, as well as any environmental land use restriction recorded against the Land, to the extent relating to either Property (collectively, "Land Agreements"), including the payment of all amounts owed by Lessor thereunder. For so long as no Event of Default shall have occurred and be continuing, Lessee may exercise all rights, privileges and remedies available to Lessor under the Land Agreements. SECTION 9.9 Lessee's Right to Enforce Warranties. Provided no Lease Event of Default or Bankruptcy Default shall have occurred and be continuing, Lessee (including through its designees), at Lessee's expense, shall have the right to assert all of Lessor's rights (if any) under any applicable warranty and any other claim that Lessee or Lessor may have under any agreements pertaining to the construction and/or modification of either Property, as well as any other rights and claims that may exist by operation of law. Lessor agrees to cooperate with Lessee, at Lessee's expense, in asserting such rights. SECTION 9.10 Real Estate Taxes. Subject to Lessee's right in respect of Permitted Contests, Lessee shall pay all real estate ad valorem and personal property taxes owed in respect of each Property or any portion thereof, as well as any payments due under any agreement described in clause (f) of the definition of Permitted Liens. ARTICLE X. USE AND NAMING OF PROPERTY SECTION 10.1 Use. Each Property may be used for any lawful purpose; provided, that Lessee shall not use or permit the use of either Property in any manner that adversely effects the fair market value, economic life, utility or residual value of such Property. Lessee shall not use or permit the use of either Property or any part thereof for any purpose or in any manner in violation of any Applicable Laws, subject to the terms of Section 9.5. SECTION 10.2 Naming of the Properties. Lessee shall have the sole and exclusive right during the Lease Term, at any time and from time to time, to select the name or names of each Property or any part thereof, as well as the sole and exclusive right to determine -13- LEASE AGREEMENT (HGSI) not to use any name in connection with one or more portions of either Properties, as well as all rights in respect of signage for or in connection with either Properties. Lessor shall not have or acquire any right or interest with respect to any such name or names used at any time by Lessee. ARTICLE XI. INSURANCE SECTION 11.1 Insurance. On or before the Lease Commencement Date for each Property, Lessee and the Administrative Agent (at the direction of the Majority Banks) shall consult and agree upon insurance coverage (including liability and property insurance) for each such Property. Failing mutual agreement by the Lease Commencement with respect to a Property, Lessee shall provide at the Lessee's expense insurance coverage (including liability and property insurance) with respect to the Properties in amounts at least commensurate with, and on terms no less favorable than, insurance carried by other owners or lessees of similar real estate located on the Mid-Atlantic region of the United States. Lessee shall, in the operation of each Property subject hereto, comply with the applicable workers' compensation laws and protect Lessor against any liability under such laws. Lessee shall furnish Lessor and the Administrative Agent certificates showing the insurance required under this Section 11.1 to be in effect and naming Lessor (and its beneficial owners), the Investors, the Lenders, Administrative Agent and the Lessor Hedging Agreement Counterparties as additional insureds and the property insurance required hereunder shall contain a standard form mortgage endorsement in favor of the Administrative Agent and shall name the Administrative Agent as sole loss payee. SECTION 11.2 Risk of Loss. During the Lease Term for each Property subject hereto, Lessee shall bear all risk of loss (including any Casualty or Condemnation) with respect to such Property or any portion thereof. ARTICLE XII. RETURN OF LEASED PROPERTY TO LESSOR SECTION 12.1 Nature of Return. Unless a Property is then being transferred to Lessee or its designee pursuant to the Purchase Option, Lessee shall, on the expiration or earlier termination of this Lease, and at its own expense, return such Property to Lessor by surrendering the same into the possession of Lessor: (a) free and clear of all Liens, except that Lessee shall have no responsibility or liability in respect of: (i) Lessor Liens, (ii) the Lien of the Deeds of Trust, (iii) Liens described in clause (a) of the definition of Permitted Liens (other than rights and interests of Lessee under the Operative Documents), and (iv) Liens described in clause (f) of the definition of "Permitted Liens"; (b) the Final Completion Work shall have been completed; and (c) in the condition required by this Lease. All Alterations the title to which has not been vested in Lessor hereunder that is not removed by Lessee at or prior to the expiration or earlier termination of this Lease shall be deemed abandoned in place by Lessee and shall become the property of Lessor. Lessee shall have no obligation to remove any Alterations (i) required (at the time of installation in a Property or at the end of the Lease Term) by Applicable Laws or insurance requirements or (ii) included in such Property at the Lease Commencement Date. Except as required under Section 9.2(d) and as permitted under Section 10.1, Lessee may not remove any Nonseverable Alterations. Lessee shall assign to Lessor any and all assignable warranties, licenses and permits relating to the property surrendered to Lessor which extend -14- LEASE AGREEMENT (HGSI) beyond the expiration or earlier termination of this Lease, such assignment to be without representation, warranty or recourse of any sort whatsoever. SECTION 12.2 Site Assessment. Not earlier than two hundred and seventy (270) days and not later than one hundred and eighty (180) days prior to the Lease Term Expiration Date, Lessee shall, at Lessee's expense, deliver to Lessor an environmental site investigation and assessment (the "Site Assessment") substantially conforming to the requirements of ASTM 1527-E Phase I or any then successor thereto and Lessee shall cause to be performed by the Lease Term Expiration Date such additional testing, reporting and remediation as is reasonably and specifically recommended by such report (such report, together with such additional report, if any, shall be collectively referred to as the "Environmental Report"); provided that Lessee shall have no obligation to conduct a Site Assessment or cause an Environmental Report to be prepared if Lessee shall have exercised the Purchase Option. ARTICLE XIII. LAND RELEASE SECTION 13.1 Land Release. Provided that no Lease Event of Default or Bankruptcy Default shall have occurred and be continuing, Lessee may make a written request (a "Release Request") of Lessor, to enter into a supplement or amendment to this Lease, changing the description of any Property to exclude either a Modification which is not structurally integrated with the existing Improvements or any unimproved portion of Land (a "Release Portion"), and transferring such Release Portion to Lessee (or Lessee's designee) by special or limited warranty deed (or like instrument), and Lessor will not unreasonably withhold its consent to such Release Request, provided that such Release Request (i) does not (x) materially impair the remaining useful life, operation, utility or residual value of the applicable Property (or the Improvements located or to be constructed thereon) to which such Release Request relates, or (y) relate to a transfer the fair market value of which, when aggregated with the fair market value of all transfers previously made pursuant to Release Requests previously delivered hereunder, exceeds $5,000,000, (ii) arises out of an arms-length sale to a non-affiliated party, and (iii) Lessor has reasonable egress and ingress to the remaining Land or has been granted appropriate easements ensuring access to such Property. ARTICLE XIV. LOSS DESTRUCTION, CONDEMNATION OR DAMAGE SECTION 14.1 Event of Loss. (a) If an Event of Loss shall occur, Lessee shall give Lessor prompt written notice of such occurrence, and Lessee may elect one of the following options (it being agreed that if Lessee shall fail to notify Lessor of its election as between the following clauses (i) and (ii) within one hundred and eighty (180) days after the occurrence of the Event of Loss, then Lessee shall be deemed to have elected the option set forth in the following clause (i)): (i) Lessee may elect to purchase the affected Property or Properties on a date occurring not less than ten (10) days after the date such election is made, for a purchase price equal to the sum of (A) Traville Lease -15- LEASE AGREEMENT (HGSI) Balance or the Manufacturing Lease Balance, as applicable, in the event that such Event of Loss affected only the Traville Facility or the Manufacturing Facility or the Lease Balance in the event that such Event of Loss affected both Properties, each determined as of such Payment Date, plus, without duplication, (B) all Rent (including, without limitation, all amounts, including Break Costs, payable under any Lessor Hedging Agreement) due and owing as of such Payment Date; or (ii) Lessee may restore and rebuild the affected Property or Properties so as to restore the same to their fair market value, utility, operation, residual value and remaining useful life immediately prior to such Event of Loss. (b) All insurance proceeds or condemnation awards received in respect of either Property shall be paid solely to Administrative Agent as sole loss payee, unless the insurance proceeds are less than $1,000,000 (provided that any insurance proceeds paid to any Person other than Administrative Agent shall be required to be applied in accordance with Sections 9.1(a) and 14.2). Lessee's failure to maintain insurance shall not relieve Lessee of any of Lessee's obligations hereunder to restore the affected Property or Properties following any Casualty or Condemnation. (c) Nothing in this Article XIV shall be construed to prevent Lessee from pursuing and collecting a condemnation award or other compensation or settlement payment in respect of its loss and damages resulting from any condemnation or taking. SECTION 14.2 Application of Net Proceeds When Lease Continues; Repair and Restoration. Payments (except for payments under insurance policies maintained by Lessor) received at any time by Lessor or Lessee from any Governmental Authority, any insurer or any other Person with respect to (x) an Event of Loss in a case in which this Lease will not terminate because Lessee has elected Section 14.1(a)(ii) or (y) a Condemnation or Casualty shall be paid to the Administrative Agent and Administrative Agent shall apply such proceeds as follows: (a) first, to Lessee, as necessary, for the repair or restoration of the affected portions of the affected Property or Properties, (b) second, to Lessor, in reduction of the Traville Lease Balance or the Manufacturing Lease Balance, as applicable, in the event that such Event of Loss, Condemnation or Casualty affected only the Traville Facility or the Manufacturing Facility or the Lease Balance in the event that such Event of Loss, Condemnation or Casualty affected both Properties until the same has been reduced to zero, (c) third, to each Participant, in reduction of all other amounts then due and owing to such Participant under this Lease or any other Operative Document, (d) fourth, to each Lessor Hedging Agreement Counterparty to pay in full all amounts then due and payable to such Lessor Hedging Agreement Counterparty, including any Break Costs, under the Lessor Hedging Agreements with respect to the Property incurring such Event of Loss, Condemnation or Casualty, as applicable, (e) fifth, to Lessee. -16- LEASE AGREEMENT (HGSI) If, after a Casualty or Condemnation, or if, after an Event of Loss, Lessee shall elect the option provided in Section 14.1(a)(ii), then this Lease shall continue in full force and effect and Lessee shall, at Lessee's own cost and expense and in accordance with the applicable provisions of Article IX, proceed with reasonable diligence and promptness to carry out any necessary demolition and to restore, repair, replace and/or rebuild the affected Property or Properties in order to restore the same, to the extent it is reasonably practicable, to the condition, utility and value of such Property or Properties immediately prior to such Casualty or Condemnation or Event of Loss (assuming such Property or Properties is maintained as required hereunder). All such repair and restoration shall be effected by Lessee in compliance with the requirements of Section 9.1. SECTION 14.3 Application of Proceeds. In case of a Condemnation or Casualty or in the case of an Event of Loss that does not result in a termination of this Lease in accordance with the above provisions of this Article XIV, this Lease shall remain in full force and effect, without any abatement or reduction of Base Rent. SECTION 14.4 Application of Proceeds from a Temporary Taking. All Net Condemnation Proceeds from a temporary taking shall, to the extent resulting from the taking of use during the Lease Term, be paid to Lessee, and to the extent awarded with respect to use of a Property for any time period after the expiration or termination of the Lease Term shall be paid as follows: (a) if Lessee has elected to purchase the affected Property, to Lessee or its designee or (b) if Lessee has not elected to purchase such Property, to Lessor to be applied in accordance with Section 14.2(a) through (e). SECTION 14.5 Other Dispositions. Notwithstanding the foregoing provisions of this Article XIV, so long as a Bankruptcy Default or Lease Event of Default shall be continuing, any amount that would otherwise be payable to or for the account of or that would otherwise be retained by, Lessee pursuant to this Article XIV or Section 7.2 shall be paid to the Administrative Agent (or to Lessor when the Indebtedness shall not be outstanding as security for the obligations of Lessee under this Lease) and, at such time thereafter as the Lease Event of Default shall have been waived in writing or no longer be continuing, such amount shall be paid promptly in accordance with this Article XIV. SECTION 14.6 Negotiations. In the event any part of either Property becomes subject to Condemnation, Casualty or Event of Loss, Lessee shall give notice thereof to Lessor promptly after Lessee has knowledge thereof and Lessee shall control (and have the right to settle and compromise) the negotiations with the relevant Governmental Authority or insurance carriers unless a Lease Event of Default or Bankruptcy Default shall be continuing, in which case Lessor (or if the Indebtedness is outstanding, the Administrative Agent) may elect to control such negotiations. ARTICLE XV. CONVEYANCE OF A PROPERTY TO LESSEE SECTION 15.1 Terms of Conveyance. Upon the purchase of Lessor's Interests by Lessee with respect to either or both Properties, including pursuant to Article V or Article XIV: -17- LEASE AGREEMENT (HGSI) i. with respect to the purchased Property or Properties, as applicable, the Lease Term shall end, and the obligations of Lessee hereunder (other than any obligations expressed herein as surviving the termination of this Lease) shall terminate as of the date of such purchase, and ii. Lessor shall convey to Lessee (or its designee) the purchased Property or Properties, as applicable, and all rights, title and interest of Lessor in and to the Net Proceeds (if any) applicable to such purchased Property or Properties, with a warranty against Lessor's own acts and otherwise "as is", except specifically, free and clear of all Lessor Liens attributable to it (and the Lien of the Deed of Trust), but subject to any Liens created pursuant to Section 9.8 or otherwise requested by or expressly consented to by Lessee. SECTION 15.2 Right of Lessee to Name Designee. In any instance in which this Lease provides that Lessee may purchase either or both Properties, including pursuant to Article V, then Lessee shall have the right at any time and from time to time to designate another Person as the purchaser of such Property or Properties provided that Lessee may not convey the Purchase Option itself and may not delegate its obligations in respect of the payment of the Purchase Price. SECTION 15.3 Costs of Conveyance. Lessee shall pay all transfer taxes, title insurance premiums, and other costs, fees and expenses incurred in connection with any purchase in accordance with Article V or Article XIV, including the recordation and filing charges for the satisfaction of the Deed of Trust. Lessee shall pay the reasonable out-of-pocket costs and expenses of Lessor and Lenders in connection with such purchase (including reasonable attorneys' fees and expenses). SECTION 15.4 Preference Legal Opinion. If, as of the date on which Lessee purchases Lessor's Interest with respect to either or both Properties, there is a Lease Event of Default or an event that with the passage of time would mature into a Lease Event of Default described Section 18.1(d), then, as a condition to the closing on the Purchase Option unless waived by the Participants, Lessee shall deliver to Lessor (a) an opinion of outside counsel that the closing on the Purchase Option would not constitute a preference under the Bankruptcy Code, provided that such opinion may assume (without independent investigation) that the value of the Property or Properties purchased is equal to or greater than the price paid to Lessor for such purchase, and (b) if the opinion of counsel referred to in the immediately preceding clause (a) contains the assumption described in the proviso contained in said clause (a), an appraisal of the Property or Properties prepared by an independent appraiser showing a fair market value thereof at least equal to the Traville Lease Balance or the Manufacturing Lease Balance, as applicable, in the event that Lessee exercised the Purchase Option with respect to only the Traville Facility or the Manufacturing Facility or the Lease Balance in the event that Lessee exercised the Purchase Option with respect to both Properties. ARTICLE XVI. SUBLEASE SECTION 16.1 Subleasing Permitted; Lessee Remains Obligated. Provided no Lease Event of Default or Bankruptcy Default shall exist at the time a sublease (a "Sublease") is -18- LEASE AGREEMENT (HGSI) entered into, Lessee may sublease either or both Properties or any portion or portions thereof with any Person (provided, that Lessee hereby covenants and agrees that it shall not sublease the either or both Properties or any portion or portions thereof to any Person that is not generally meeting its obligations as they become due or is subject to a proceeding under applicable bankruptcy, solvency or reorganization laws on the date of such sublease) upon written notice to Lessor and the Agents; provided that each of the following conditions are satisfied: (A) the obligations of Lessee under the Lease and in the other Operative Documents shall continue in full force and effect notwithstanding such sublease, (B) any sublease does not extend beyond the Lease Term, (C) the sublease shall expressly provide for the surrender of the Property after termination upon the occurrence of a Lease Event of Default and (D) the sublease is expressly subject and subordinate to this Lease. Lessee acknowledges and agrees that this Lease has been assigned as described on the cover page hereof. ARTICLE XVII. INSPECTION SECTION 17.1 Inspection. Lessor shall have the inspection rights with respect to the Properties as set forth in the Participation Agreement. ARTICLE XVIII. LEASE EVENTS OF DEFAULT SECTION 18.1 Defined. The following events shall constitute "Lease Events of Default" (whether any such event shall be voluntary or in voluntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any Governmental Authority): (a) Lessee shall fail to make any payment of Base Rent, Traville Lease Balance, Manufacturing Lease Balance, the Lease Balance, Traville Residual Value Guaranty Amount, Manufacturing Residual Value Guaranty Amount or the Residual Value Guaranty Amount when due (Lessor will notify Lessee if such payment is not received when due, but Lessor will have no liability to Lessee if it fails to deliver such notice and the Lessor's failure to provide such notice shall not affect whether the same is a Lease Event of Default hereunder); (b) Lessee shall fail to make payment of any amount required hereunder, other than any amount described in Section 18.1(a), and such failure shall continue for a period of ten (10) days after notice of such failure to Lessee from Lessor or the Administrative Agent; (c) Lessee shall default in the due performance or observance by it of any term, covenant, condition or agreement on its part to be performed or observed under any Operative Document to which it is a party (not otherwise specified in this Section 18.1) and such default shall have continued unremedied for a period of at least thirty (30) days after receipt of notice by Lessee from either Lessor or Administrative Agent; provided, however, that if such default is capable of cure but cannot be cured by payment of money or cannot be cured by diligent efforts within such thirty (30) day period but such diligent efforts shall be properly commenced within the cure period and Lessee is diligently pursuing, and shall continue to pursue diligently, remedy of such failure, the cure period shall be extended for an additional -19- LEASE AGREEMENT (HGSI) period of time as may be necessary to cure, not to exceed an additional one hundred and twenty (120) days and not to extend beyond the Lease Term Expiration Date; (d) the commencement by Lessee of a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or Lessee shall have consented to the entry of an order for relief in an involuntary case under any such law, or the failure of Lessee generally to pay its debts as such debts become due (within the meaning of the Bankruptcy Code), or the appointment of or taking possession by a receiver, liquidator or other similar official for Lessee or a general assignment by Lessee for the benefit of its creditors; or the filing against Lessee of an involuntary petition in bankruptcy which results in an order for relief being entered or, notwithstanding that an order for relief has not been entered, the petition is not dismissed within ninety (90) days of the date of the filing of the petition, or the filing under any law relating to bankruptcy, insolvency or relief of debtors of any petition against Lessee for reorganization, composition, extension or arrangement with creditors which either (i) results in a finding or adjudication of insolvency of Lessee or (ii) is not dismissed within ninety (90) days of the date of the filing of such petition; (e) any representation, warranty or statement made or restated by Lessee in this Lease or in any other Operative Document, or in any statement or certificate delivered or required to be delivered pursuant hereto or thereto, shall prove to be untrue in any material respect on the date as of which made or restated, and (i) the circumstances rendering such representation or warranty or statement incorrect shall not be remediable or, (ii) if such representation or warranty or statement is remediable and Lessee is proceeding diligently so to remedy, shall continue unremedied for thirty (30) days after the earlier of: (x) the date on which written notice is delivered by Lessor or Administrative Agent to Lessee specifying such circumstances and demanding that they be remedied and (y) the date on which any Authorized Officer of Lessee has actual knowledge of such incorrectness; provided, however, that if such default is capable of cure but cannot be cured by payment of money or cannot be cured by diligent efforts within such thirty (30) day period but such diligent efforts shall be properly commenced within the cure period and Lessee is diligently pursuing, and shall continue to pursue diligently, remedy of such failure, the cure period shall be extended for an additional period of time as may be necessary to cure, not to exceed an additional one hundred and twenty (120) days and not to extend beyond the Lease Term Expiration Date. (f) Lessee shall fail to maintain insurance required by Section 11; provided that in the event that Lessee is otherwise in full compliance with its obligations under Section 11, Lessee's failure to timely deliver the certificates of insurance required by Section 11.1 shall not constitute a Lease Event of Default unless such failure shall continue for a period of ten (10) days after notice of such failure to Lessee from Lessor or the Administrative Agent; (g) the Lease Event of Default described in the last sentence of Section 7.2 shall have occurred; (h) the Facility Maturity Date (as defined in the Liquidity Agreement), as the same may be modified or extended from time to time, with respect to any one or more Liquidity Providers shall have occurred; -20- LEASE AGREEMENT (HGSI) (i) the Ground Lease shall terminate or shall cease to be in effect by reason of a default by the Ground Lessor in its obligations thereunder; (j) Lessee shall default in the due performance and observance of any of its obligations under Section 6.1(v), (w), (x), (y) or (aa) of the Participation Agreement or Section 2.5(a)(i) or (ii) of either Liquid Collateral Agreement; (k) one or more judgments or orders for the payment of money in the aggregate amount in excess of $10,000,000 shall be rendered against HGSI or its Affiliates and such judgment or order shall continue unsatisfied or unstayed for a period of sixty (60) days; (l) any Lien granted under any Security Document shall, in whole or in part, terminate, cease to be effective or lose its first priority status, except as expressly contemplated by the Operative Documents or as the result of an act or omission of Lessor or the Administrative Agent; (m) An "event of default" shall occur in the payment when due (subject to any applicable grace period), whether by acceleration or otherwise, of any Indebtedness of HGSI or any of its Subsidiaries having a principal amount, individually or in the aggregate, in excess of $10,000,000, or a default shall occur in the performance or observance of any obligation or condition with respect to such Indebtedness; (n) A Construction Agency Event of Default shall have occurred; (o) Lessor's rights pursuant to either Liquid Collateral Agreement to require Lessee to pledge additional Permitted Investments shall for any reason cease to be a legal, valid and binding agreement with Lessee; or (p) the Lien of either Liquid Collateral Agreement with respect to the Liquid Collateral shall cease to constitute a first priority perfected security interest (except as a result of a voluntary release by Administrative Agent of any Liquid Collateral). SECTION 18.2 Remedies. Upon the occurrence of any Lease Event of Default and at any time thereafter so long as the same shall be continuing, Lessor may (subject to Section 18.2(h) and Section 18.2(i) below), at its option, by notice to Lessee declare this Lease to be in default (and, if such Lease Event of Default is described in Section 18.1(d), then this Lease shall automatically be in default and no such declaration shall be required and the terms of Section 18.2(i) shall be applicable) and do one or more of the following as Lessor in its sole discretion shall determine: (a) Lessor may, by notice to Lessee, rescind or terminate this Lease as of the date specified in such notice; however, (i) no reletting, reentry or taking of possession of either Property by Lessor will be construed as an election on Lessor's part to terminate this Lease unless a written notice of such intention is given to Lessee, (ii) notwithstanding any reletting, reentry or taking of possession, Lessor may at any time thereafter elect to terminate this Lease for a continuing Lease Event of Default, and (iii) no act or thing done by Lessor or any of its agents, representatives or employees and no agreement accepting a surrender of either Property shall be valid unless the same be made in writing and executed by Lessor; -21- LEASE AGREEMENT (HGSI) (b) Lessor may (i) demand that Lessee, and Lessee shall upon the written demand of Lessor, return the Properties promptly to Lessor in the manner and condition required by, and otherwise in accordance with all of the provisions of, Section 12.1 as if the Properties were being returned at the end of the Lease Term, and Lessor shall not be liable for the reimbursement of Lessee for any costs and expenses incurred by Lessee in connection therewith and (ii) without prejudice to any other remedy which Lessor may have for possession of the Properties, enter upon either or both Properties and (to the exclusion of Lessee) take immediate possession of either or both Properties and expel or remove Lessee and any other person who may be occupying either or both Properties (subject to the terms of any nondisturbance agreements with Lessor in favor of any subtenants), by summary proceedings or otherwise, all without liability to Lessee for or by reason of such entry or taking of possession, whether for the restoration of damage to property caused by such taking or otherwise and, in addition to Lessor's other damages, Lessee shall be responsible for the reasonable costs and expenses of reletting, including brokers fees and the costs of any repairs made by Lessor. The provisions of this Section 18.2(b) shall operate as a notice to quit and shall be deemed to satisfy any other requirement or provisions of Applicable Laws which may require Lessor to provide a notice to quit or of Lessor's intention to re-enter either or both Properties and any such requirements or provisions are hereby waived by Lessee; (c) Lessor may sell all or any part of the Lessee Collateral at public or private sale, as Lessor may determine, free and clear of any rights of Lessee and without any duty to account to Lessee with respect to such action or inaction or any proceeds with respect thereto (except to the extent contemplated in clause (ii) of the next succeeding sentence if Lessor shall elect to exercise its rights thereunder), in which event Lessee's obligation to pay Base Rent hereunder for periods commencing after the date of such sale shall be terminated or proportionately reduced, as the case may be (except to the extent that Base Rent is to be included in computations under Section 18.2(e) if Lessor shall elect to exercise its rights thereunder). If Lessor shall have sold all of the Lessee Collateral pursuant to the above terms of this Section 18.2(c), Lessor, in lieu of exercising its rights under Section 18.2(e), may, if it shall so elect, demand that Lessee pay to Lessor, and Lessee shall pay to Lessor, on the date of such sale, as liquidated damages for loss of a bargain and not as a penalty (the parties agreeing that Lessor's actual damages would be difficult to predict, but the liquidated damages described below represent a reasonable approximation of such amount), in lieu of Base Rent due for periods commencing after such date of sale, an amount equal to the excess (if any) of (i) the Lease Balance, computed as of such date of sale, over (ii) the net proceeds of such sale; (d) Lessor may hold, keep idle or lease to others all or any part of either or both Properties as Lessor in its sole discretion may determine, free and clear of any rights of Lessee and without any duty to account to Lessee with respect to such action or inaction or for any proceeds with respect to such action or inaction, except that Lessee's obligation to pay Base Rent from and after the occurrence of a Lease Event of Default shall be reduced by the net proceeds, if any, received by Lessor from leasing either or both Properties to any Person, or allowing any Person (other than Lessee) to use either or both Properties for the same periods or any portion thereof; (e) Lessor may, whether or not Lessor shall have exercised or shall thereafter at any time exercise any of its rights under Section 18.2(b) or 18.2(d), but only if one or both of -22- LEASE AGREEMENT (HGSI) the Properties have not been sold under Section 18.2(c), demand, by written notice to Lessee specifying a date (the "Final Payment Date") not earlier than ten (10) days after the date of such notice, that Lessee pay to Lessor, and Lessee shall pay to Lessor, on the Final Payment Date, as liquidated damages for loss of a bargain and not as a penalty and in consideration of the transfer of the applicable Property or Properties (the parties agreeing that Lessor's actual damages would be difficult to predict, but the aforementioned liquidated damages represent a reasonable approximation of such amount), an amount equal to the sum of the then outstanding Lease Balance (after taking into account any amounts received pursuant to this Section 18.2 that are applied in reduction of the Lease Balance pursuant to the Operative Documents) and all Supplemental Rent including all amounts payable under any Lessor Hedging Agreement including Break Costs, then due and payable; upon payment of such sum, if the Lease Balance has been reduced to zero Lessor shall convey to Lessee the Properties by special warranty deed free and clear of all Lessor's Liens and the Lien of the Deed of Trust and the other Operative Documents; (f) Lessor may retain and apply against Lessor's damages all sums which Lessor would, absent such Lease Event of Default, be required to pay to, or turn over to, Lessee pursuant to the terms of this Lease; or (g) Lessor may exercise any other right or remedy that may be available to it under Applicable Laws or in equity, or proceed by appropriate court action (legal or equitable) to enforce the terms hereof or to recover damages for the breach hereof. Separate suits may be brought to collect any such damages for any period or periods with respect to which rent shall have accrued, and such suits shall not in any manner prejudice Lessor's right to collect any such damages for any subsequent period, or Lessor may defer any such suit until after the expiration of the Lease Term. in which event such suit shall be deemed not to have accrued until the expiration of the Lease Term. (h) [intentionally omitted] (i) Upon the occurrence of the Lease Event of Default described in Section 18.1(d) or 18.1(f), whether or not another Lease Event of Default described in one or more other clauses of Section 18.1 shall have been or thereafter is declared, this Lease shall terminate immediately without notice and Lessee shall immediately pay to Administrative Agent, on behalf of Lessor, as and for liquidated damages, an amount equal to the Lease Balance, together with all Supplemental Rent payable under the Operative Documents, including Break Costs payable under any Lessor Hedging Agreement. (j) Notwithstanding anything to the contrary set forth herein, upon the occurrence of a Lease Event of Default, Lessor shall not reenter, take possession, foreclose, or sell either of the Properties until the Purchase Option shall have terminated in accordance with Section 5.1(d). SECTION 18.3 Proceeds of Sale; Deficiency. All payments received and amounts held or realized by Lessor at any time when an Event of Default shall have occurred and be continuing and after the Lease Balance shall have been accelerated pursuant to this Lease, as well as all payments or amounts then held or thereafter received by Lessor, except for the -23- LEASE AGREEMENT (HGSI) proceeds of sale pursuant to Section 18.2, shall be distributed forthwith upon receipt by Lessor in accordance with Article X of the Participation Agreement. SECTION 18.4 Grant and Foreclosure on Lessee's Estate. Without limiting any other remedies set forth in this Lease, the following shall apply: (a) Lessor and Lessee agree that if a Lease Event of Default shall have occurred and be continuing, Lessor may proceed by a suit or suits in equity or at law or otherwise, whether for a foreclosure hereunder as against all or any part of Lessee's interests in either or both Properties or for the sale of such interest under the judgment or decree of a court of competent jurisdiction, or against Lessee on a recourse basis for the Lease Balance and all other amounts due from Lessee hereunder, or for the specific performance granted, or for the appointment of a receiver pending any foreclosure hereunder or the sale of the Lessee Collateral, or for the enforcement of any other appropriate legal or equitable remedy, and at any sale of Lessee's interest in either or both Properties, as applicable, whether pursuant to power of sale, foreclosure or otherwise, Lessor may become the purchaser of such interest or any part thereof, and in such case for the purpose of making settlement for or payment of the purchase price, shall be entitled to offset any claims for the indebtedness hereunder and under the Operative Documents in order that they may be credited as paid on the purchase price, and Lessor shall be entitled to recover all costs incident to such proceedings, including attorneys' fees and expenses in such amounts as may be fixed by the court. In accordance with Applicable Law and rules of the court, Lessee does hereby assent to the passing and entry of a decree for the sale of all or any portion of either or both Properties. Upon any such purchase, such purchaser shall acquire good title to either or both Properties, as applicable, so purchased, free of the Lien of this Lease and free of all rights of redemption in favor of Lessee; (b) This instrument and the other Operative Documents will be deemed given to secure not only the Lease Balance, accrued Rent and all other sums due hereunder, but also future advances made by Lessor in connection with the transactions contemplated by the Operative Documents, whether such advances are obligatory or to be made at the option of Lessor or otherwise to the same extent as if such future advances were made on the Lease Commencement Date. To the fullest extent permitted by law, the Lien of this instrument shall be valid as to all such sums due hereunder, including all future advances, from the time this instrument is executed. (c) Without in any way limiting or restricting any of Lessor's rights, remedies, powers and authorities under this instrument, and in addition to all of such rights, remedies, powers, and authorities, if a Lease Event of Default shall have occurred and be continuing, Lessor shall also have and may exercise any and all rights, remedies, powers and authorities under Applicable Laws upon default in the payment of the Lease Balance, accrued Rent and all other sums due hereunder, including, without limitation, any right or remedy available to it as a secured party under the UCC. Promptly upon Lessor's request, to the extent any portion of the Lessee Collateral constitutes property subject to the UCC, Lessor at its option, may give Lessee notice of the time and place of any public sale of any such property, or of the date after which any private sale or other -24- LEASE AGREEMENT (HGSI) disposition thereof is to be made, by sending notice by registered or certified first class mail, postage prepaid, to Lessee at least ten (10) days before the time of such sale or other disposition. If any notice of any proposed sale, assignment or transfer by Lessor of any portion of the Lessee Collateral or any interest therein is required by law, Lessee conclusively agrees that fifteen (15) days notice to Lessee of the date, time and place (and, in the case of a private sale, the terms) thereof is reasonable. Without limiting the generality of the foregoing, all expenses incurred by Lessor to the extent reimbursable under the UCC, whether incurred before or after any decree or judgment of foreclosure, and whether or not enumerated in any other provision of this instrument, shall be added to the indebtedness secured by this instrument and by the judgment of foreclosure. (d) Lessee, for itself and on behalf of all Persons now or hereafter interested in the Lessee Collateral, voluntarily and knowingly hereby waives to the fullest extent permitted by applicable law any and all right to reinstatement or redemption and any and all other rights under all present and future appraisement, homestead, moratorium, valuation, exemption, stay, extension, and redemption statutes, laws or equities now or hereafter existing and all rights or marshalling in the event of any sale of the Lessee Collateral or any part hereof or interest therein, and hereby further waives the pleading of any statute of limitations as a defense to any and all indebtedness secured by this instrument, and Lessee agrees that no defense, claim or right based on any thereof will be asserted, or may be enforced, in any action enforcing or relating to this instrument. Without limited the generality of the preceding sentence, Lessee, for itself and on behalf of each and every Person acquiring any interest in or title to the Lessee Collateral subsequent to the date of this instrument, hereby irrevocably waives any and all rights of reinstatement or redemption from sale under any order, judgment or decree of foreclosure of this instrument or under any power contained herein or under any sale pursuant to any statute, order, judgment or decree of foreclosure of any court. SECTION 18.5 Receipt of a Sufficient Discharge to Purchaser. Upon any sale of the Lessee Collateral, or any part thereof or interest therein, whether pursuant to power of sale, foreclosure or otherwise, the receipt of Lessor or the officer making the sale under judicial proceedings shall be a sufficient discharge to the purchaser for the purchase money, and such purchaser shall not be obliged to see to the application thereof. SECTION 18.6 Sale a Bar Against Lessee. Any sale of the Lessee Collateral, or any part thereof or interest therein, under or by virtue of this instrument, whether pursuant to a power of sale, foreclosure or otherwise, shall forever be a bar against Lessee. SECTION 18.7 Liabilities to Become Due on Sale. Upon any sale of the Lessee Collateral, or any portion thereof or interest therein, by reason of Lessor's exercise of any remedy under or by virtue of this Lease or any other Operative Document, whether pursuant to power of sale, foreclosure or other remedy available at law or in equity or by statute or otherwise, at the option of Lessor, if the Lease Balance shall not have been previously declared due and payable, the Lease Balance and all other indebtedness which this agreement secures (other than any obligations evidenced by any Lessor Hedging Agreement except as otherwise provided by the terms thereof) shall immediately become due and payable together with any interest accrued thereon. -25- LEASE AGREEMENT (HGSI) SECTION 18.8 Provisions Subject to Applicable Law. All rights, powers and remedies provided in this instrument may be exercised only to the extent that such exercise does not violate any Applicable Law, and are intended to be limited to the extent necessary in order not to render this instrument invalid, unenforceable or not entitled to be recorded, registered or filed under the provisions of any Applicable Law. If any term of this instrument or any application thereof shall be invalid or unenforceable, the remainder of this instrument and any other application of such term shall not be affected thereby. SECTION 18.9 Survival of Lessee's Obligations. No repossession of either or both Properties or exercise of any remedy under Section 18.2, including termination of this Lease, shall, except as specifically provided therein, relieve Lessee of any of its liabilities and obligations hereunder, including the obligation to pay Base Rent. In addition, except as specifically provided therein, Lessee shall be liable, except as otherwise provided above, for any and all unpaid Rent due hereunder before, after or during the exercise of any of the foregoing remedies, including all reasonable legal fees and other costs and expenses incurred by Lessor and the Administrative Agent by reason of the occurrence of any Lease Event of Default or the exercise of Lessor's remedies with respect thereto, and including all costs and expenses (excluding internal in-house costs of the Participants' counsel) incurred in connection with the return of either or both Properties, as applicable, in the manner and condition required by, and otherwise in accordance with the provisions of, Article XII as if such Property or Properties, as applicable, were being returned at the end of the Lease Term. At any sale of either or both Properties or any part thereof or any other rights pursuant to Section 18.2, Lessor or the Administrative Agent may bid for and purchase such property. SECTION 18.10 Remedies Cumulative; No Waiver; Consents. To the extent permitted by, and subject to the mandatory requirements of, Applicable Laws, each and every right, power and remedy herein specifically given to Lessor or otherwise in this Lease shall be cumulative and shall be in addition to every other right, power and remedy herein specifically given or now or hereafter existing at law, in equity or by statute, and each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time and as often and in such order as may be deemed expedient by Lessor, and the exercise or the beginning of the exercise of any power or remedy shall not be construed to be a waiver of the right to exercise at the same time or thereafter any other right, power or remedy. No delay or omission by Lessor in the exercise of any right, power or remedy or in the pursuit of any remedy shall impair any such right, power or remedy or be construed to be a waiver of any default on the part of Lessee or to be an acquiescence therein. Lessor's consent to any request made by Lessee shall not be deemed to constitute or preclude the necessity for obtaining Lessor's consent, in the future, to all similar requests. No express or implied waiver by Lessor of any Lease Event of Default shall in any way be, or be construed to be, a waiver of any future or subsequent Lease Event of Default. SECTION 18.11 Right to Perform Lessee's Obligations. If a Lease Event of Default shall have occurred and be continuing, Lessor may perform or comply with such agreement, and Lessor shall not thereby be deemed to have waived any default caused by such failure, and the amount of payment required to be made by Lessee hereunder and made by Lessor on behalf of Lessee, and the reasonable out-of-pocket costs and expenses of Lessor (including reasonable attorneys' fees and expenses) incurred in connection with the performance -26- LEASE AGREEMENT (HGSI) of or compliance with such agreement, as the case may be, together with interest thereon at the Overdue Rate, shall be deemed Supplemental Rent, payable by Lessee to Lessor upon demand. ARTICLE XIX. HOLDING OVER SECTION 19.1 Holding Over. If Lessee shall for any reason remain in possession of a Property after the expiration or earlier termination of this Lease as to such Property (unless such Property is conveyed to Lessee), such possession shall be as a tenancy at sufferance during which time Lessee shall continue to pay Supplemental Rent that would be payable by Lessee hereunder were the Lease then in full force and effect with respect to such Property and Lessee shall continue to pay Base Rent in an amount equal to 150% of the Base Rent that would have been payable had the Lease not terminated or expired for each month or portion thereof after expiration of the Lease. Such Base Rent shall be payable from time to time upon demand by Lessor. During any period of tenancy at sufferance, Lessee shall, subject to the second preceding sentence, be obligated to perform and observe all of the terms, covenants and conditions of this Lease, but shall have no rights hereunder other than the right, to the extent given by law to tenants at sufferance, to continue its occupancy and use of such Property. Nothing contained in this Article XIX shall constitute the consent, express or implied, of Lessor to the holding over of Lessee after the expiration or earlier termination of this Lease as to any Property (unless such Property is conveyed to Lessee) and nothing contained herein shall be read or construed as preventing Lessor from maintaining a suit for possession of such Property or exercising any other remedy available to Lessor at law or in equity. ARTICLE XX. GRANT OF SECURITY INTEREST SECTION 20.1 Grant of Lien. Title to each Property shall remain in Lessor, as security for the obligations of Lessee under this Lease and the other Operative Documents, and Lessee hereby assigns, grants, pledges, mortgages and warrants to Lessor, as secured party, for the benefit of Lessor and its permitted transferees and assignees a Lien in the Lessee Collateral to secure the payment and performance of all obligations of Lessee now or hereafter existing under this Lease or any other Operative Document, until such time as Lessee shall have fulfilled all of its obligations under the Operative Documents. Upon Lessee's request, Lessor shall at such time as all of the obligations (other than any contingent obligations) of Lessee under this Lease and the other Operative Documents have been paid or performed in full with respect to either or both Properties, execute and deliver termination statements and other appropriate documentation presented to it in final execution form and reasonably requested by Lessee, all at Lessee's expense, to evidence Lessor's release of its Lien in respect of such Property or Properties, as applicable. Lessee, at its expense, shall execute, acknowledge and deliver all such instruments and take all such actions as Lessor may request from time to time in order to further effectuate the terms of this Lease, to carry out the terms hereof, or to better assure and confirm the rights, powers and remedies of Lessor hereunder. SECTION 20.2 Assignment of Lease and Rents. The assignment and grant of the Lien contained in Section 20.1 above shall constitute an absolute, present and irrevocable assignment and grant of the subleases, rents, income, proceeds and benefits of each Property; -27- LEASE AGREEMENT (HGSI) provided that so long as no Lease Event of Default has occurred and is continuing, Lessor hereby grants permission to Lessee to collect, receive and apply such rents, income, proceeds and benefits as they become due and payable, but not in advance hereof, and in accordance with all of the other terms, conditions and provisions hereof and of the leases, contracts, agreements and other instruments with respect to which such payments are made or such other benefits are conferred. Upon the occurrence of a Lease Event of Default, such permission shall terminate immediately and automatically, without notice to Lessee or any other Person. Such assignment shall be fully effective without any further action on the part of Lessee or Lessor and, upon the occurrence and during the continuance of a Lease Event of Default hereunder, at Lessor's option, Lessor shall be entitled to collect, receive and apply all rents, income, proceeds and benefits from Lessor's Interest, including all right, title and interest of Lessee in any escrowed sums or deposits or any portion thereof or interest therein, whether or not Lessor takes possession of the Lessee Collateral or any part thereof. Lessee further grants to Lessor the right, at Lessor's option, upon the occurrence and during the continuance of a Lease Event of Default hereunder: (i) to enter upon and take possession of either or both Properties for the purpose of collecting said rents, income, proceeds and other benefits; (ii) to dispossess by the customary summary proceedings any tenant, purchaser or other Person; (iii) to let or convey either or both Properties or any portion thereof or any interest therein; (iv) to apply such rents, income, proceeds and other benefits, after the payment of all necessary fees, charges and expenses, on account of the liabilities secured by this instrument in accordance with Section 18.3. ARTICLE XXI. COVENANTS OF LESSEE SECTION 21.1 Assumption Upon Merger, Etc. If Lessee shall consolidate with or merge into any other Person or sell, convey, transfer or lease all or substantially all its assets, then the Person (if other than Lessee) formed by such consolidation or into which Lessee shall be merged or the Person that shall acquire by sale, conveyance, transfer or lease all or substantially all the assets of Lessee shall assume in writing all of the obligations of Lessee under the Operative Documents to which Lessee is a party. No such consolidation, merger or transfer of assets shall occur unless Lessor, the Administrative Agent and the Participants have received a legal opinion of independent counsel to the surviving entity in respect of the assumption agreement in form and substance reasonably satisfactory to Lessor and the Administrative Agent. Upon any such consolidation or merger, or any sale, conveyance, transfer or lease of substantially all the assets of Lessee in accordance with this Article XXI, the successor Person formed by such consolidation or into which Lessee shall be merged or to which such sale, conveyance, transfer or lease shall be made shall succeed to, and be substituted for, and may exercise every right and power of, Lessee under this Lease and the other Operative Documents to which Lessee is a party. -28- LEASE AGREEMENT (HGSI) ARTICLE XXII. COVENANTS OF LESSOR SECTION 22.1 Quiet Enjoyment. Lessor covenants that it will not interfere in Lessee's right to peaceably and quietly hold, possess and use the Properties hereunder during the Lease Term, so long as no Lease Event of Default has occurred and is continuing. ARTICLE XXIII. MISCELLANEOUS SECTION 23.1 Binding Effect; Successors and Assigns. The terms and provisions of this Lease, and the respective rights and obligations hereunder of Lessor and Lessee, shall be binding upon their respective successors, legal representatives and assigns (including, in the case of Lessor, any Person to whom Lessor may transfer Lessor's Interests or any interest therein) and inure to the benefit of their respective permitted successors and assigns. HGSI hereby waives its right to assert any defense, claim or counterclaim against the Lessor to the extent such defense, claim or counterclaim arises out of the Lessor's lack of legal capacity to sue for failure of qualifying to do business under Maryland Applicable Law. SECTION 23.2 Notices. Unless otherwise specified herein, all notices, requests, demands or other communications to or upon the respective parties hereto shall be by letter, facsimile (with telephonic confirmation), bank wire or where expressly provided for herein, telephone (with written confirmation promptly thereafter shall be deemed to have been given, in the case of notice by letter, the earlier of when delivered to the addressee by hand or courier (including an overnight courier) if delivered on a Business Day and, if not delivered on a Business Day, the first Business Day thereafter or on the third Business Day after depositing the same in the mails, registered or certified mail, postage prepaid, return receipt requested, addressed as provided on Schedule II to the Participation Agreement and, in the case of notice by facsimile, telephone or bank wire, when transmitted during business hours on a Business Day and, if not transmitted during business hours on a Business Day, the first Business Day thereafter, addressed as provided on Schedule II to the Participation Agreement, or to such other address as any of the parties hereto may designate by written notice. Copies of all notices given by facsimile or bank wire shall be contemporaneously sent by overnight courier. Notwithstanding any other provision of this Lease or the Operative Documents, if Lessee is required to deliver notice to one or more of the parties to the Operative Documents notice to all such parties shall be deemed to have been duly given by Lessee by delivering any such notice to the Administrative Agent, who shall in turn promptly deliver such notice to the appropriate party hereto. SECTION 23.3 Severability. Any provision of this Lease that shall be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction, and each party hereto shall remain liable to perform its obligations hereunder except to the extent of such unenforceability. To the extent -29- LEASE AGREEMENT (HGSI) permitted by applicable law, Lessee hereby waives any provision of law that renders any provision hereof prohibited or unenforceable in any respect. SECTION 23.4 Amendment; Complete Agreements. This Lease and the terms hereof may be terminated, amended, supplemented, waived or modified only in accordance with Section 12.5 of the Participation Agreement. This Lease and the other Operative Documents are intended by the parties as a final expression of their lease agreement and as a complete and exclusive statement of the terms thereof, all negotiations, considerations and representations between the parties having been incorporated herein. No representations, undertakings, or agreements have been made or relied upon in the making of this Lease other than those specifically set forth in this Lease and in the other Operative Documents. SECTION 23.5 Headings. The Table of Contents and headings of the various Articles and Sections of this Lease are for convenience of reference only and shall not modify, define or limit any of the terms or provisions hereof. SECTION 23.6 Counterparts. This Lease may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. SECTION 23.7 Governing Law. This Lease shall in all respects be governed by, and construed in accordance with, the laws of the State of Maryland applicable to agreements made and to be performed entirely within such State, including all matters of construction, validity and performance. SECTION 23.8 Apportionments. Upon any termination of this Lease (other than a termination resulting in delivery of Lessor's Interests then subject to this Lease to Lessee), except as otherwise set forth herein, there shall be apportioned, as of the date of such termination, all rents (including water or sewer rents), real estate taxes, municipal assessments, or other charges payable with respect to the Properties. SECTION 23.9 Priority. If a Lease Event of Default shall occur, this Lease and the Lease Supplements shall be subject and subordinate to the Deeds of Trust. SECTION 23.10 No Joint Venture. Any intention to create a joint venture or partnership relation between Lessor and Lessee is hereby expressly disclaimed. SECTION 23.11 No Accord and Satisfaction. The acceptance by Lessor of any sums from Lessee (whether as Base Rent or otherwise) in amounts which are less than the amounts due and payable by Lessee hereunder is not intended, nor shall it be construed, to constitute an accord and satisfaction of any dispute between such parties regarding sums due and payable by Lessee hereunder, unless Lessor specifically acknowledges it as such in writing. SECTION 23.12 No Merger. There shall be no merger of this Lease or of the estate hereby with the fee or any other estate or interest or ownership interest in the Properties or any part thereof by reason of the fact that the same Person may acquire or own or hold, directly or indirectly, (a) this Lease or any estate created hereby or any interest in this Lease or in any -30- LEASE AGREEMENT (HGSI) such estate and (b) the fee estate or other estate or interest or ownership interest in the Properties or any part thereof. SECTION 23.13 Lessor Bankruptcy. The parties hereto agree that if Lessee elects to remain in possession of the Properties after the rejection of the Lease by Lessor under Section 365(h) of the Bankruptcy Code all of the terms and provisions of this Lease shall be effective during such period of possession by Lessee, including Lessee's Purchase Option even if Lessor becomes subject to a case or proceeding under the Bankruptcy Code prior to the exercise by Lessee of such purchase rights. SECTION 23.14 Abandonment. Lessee shall not abandon the Properties during the Lease Term. SECTION 23.15 Investments. Any funds held by Lessor as security for Lessee's performance of its obligations hereunder (other than the Liquid Collateral held in either Account) shall, until paid to Lessee or otherwise applied in accordance herewith, be invested by Lessor in Cash Equivalents as selected by Lessee. Any gain (including interest received) realized as a result of any such investment (net of any fees, commissions, Taxes and other expenses, if any, incurred in connection with such investment) shall be retained with, and distributed and re-invested in the same manner, as the original security amount. Provided Lessor invests such funds in accordance with the preceding sentence, Lessor shall have no liability for any losses arising from any such investments or reinvestments. SECTION 23.16 Counterparts; Deed of Trust; Notice. This Lease will be simultaneously executed in multiple counterparts, each of which, when so executed and delivered, shall constitute an original, fully enforceable counterpart for all purposes except that only the counterpart stamped or marked "COUNTERPART NUMBER ONE" shall constitute to the extent applicable, if any, "chattel paper" or other "collateral" within the meaning of the Uniform Commercial Code in effect in any jurisdiction. The Administrative Agent or (if no Loans are outstanding) Lessor shall be the sole authorized holder of COUNTERPART NUMBER ONE. Lessee and Lessor agree that a notice of this Lease shall be executed and recorded in the land records of Maryland. SECTION 23.17 Further Assurances. Lessor and Lessee, at the cost and expense of the requesting party, will cause to be promptly and duly taken, executed, acknowledged and delivered all such further acts, documents and assurances as any of the others reasonably may request from time to time in order to carry out more effectively the intent and purposes of this Lease. Lessee, at its own cost and expense, will cause all financing statements, fixture filings and other documents to be recorded or filed at such places and times and in such manner, and will take all such other actions or cause such actions to be taken, as may be necessary or as may be reasonably requested by Lessor in order to preserve and protect the title of Lessor to the Properties and Lessor's rights under this Lease. SECTION 23.18 No Merger of Title. There shall be no merger of this Lease or of the leasehold estate created hereby by reason of the fact that the same Person may acquire, own or hold, directly or indirectly, in whole or in part, (a) this Lease or the leasehold estate created hereby or any interest in this Lease or such leasehold estate, (b) the free estate in any -31- LEASE AGREEMENT (HGSI) Property, except as may expressly be stated in a written instrument duly executed and delivered by the appropriate Person or (c) a beneficial interest in Lessor. SECTION 23.19 Non-recourse. Lessee shall look only to Lessor's Interests and other rights, if any, in the Properties for the satisfaction of Lessee's remedies if there is a default by Lessor hereunder, and no other property or assets of Lessor or its partners, owners or principals, disclosed or undisclosed, shall be subject to levy, execution or other enforcement procedure for the satisfaction of Lessee's remedies under or with respect to (a) this Lease, (b) the relationship of Lessor and Lessee hereunder or under Applicable Laws, (c) Lessee's use or occupancy of the Properties or (d) any other liability of Lessor to Lessee. Nothing in the immediately preceding sentence shall in any way affect, impair or detract from (i) Lessee's "net lease" obligations hereunder as provided in Section 4.1 or (ii) the duties and obligations under the Participation Agreement and other Operative Documents of the Participants and other parties to the Operative Documents. [SIGNATURES APPEAR ON THE FOLLOWING PAGE] -32- LEASE AGREEMENT (HGSI) IN WITNESS WHEREOF, Lessor and Lessee have duly authorized, executed and delivered this LEASE as of the date first hereinabove set forth. GENOME STATUTORY TRUST 2001A, as Lessor By: /s/ C. SCOTT NIELSON ------------------------------------ Name: C. Scott Nielson Title: Vice President LEASE AGREEMENT (HGSI) HUMAN GENOME SCIENCES, INC., as Lessee By: /s/ STEVEN C. MAYER ------------------------------------ Name: Steven C. Mayer Title: Senior Vice President and CFO LEASE AGREEMENT (HGSI) STATE OF NEW YORK ) ) SS COUNTY OF NEW YORK ) On the 7th day of November in the year 2001 before me, the undersigned, a Notary Public in and for said State, personally appeared C. Scott Nielson, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument. /s/ DIMITRIOS J. ANGELIS ------------------------------------------- (Signature and office of individual taking acknowledgment) Dimitrios J. Angelis Notary Public Notarial Seal STATE OF NEW YORK ) ) SS COUNTY OF NEW YORK ) On the 7th day of November in the year 2001 before me, the undersigned, a Notary Public in and for said State, personally appeared Steven C. Mayer, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument. /s/ COLLEEN FANE ------------------------------------------- (Signature and office of individual taking acknowledgment) Colleen Fane Notary Public Notarial Seal LEASE AGREEMENT (HGSI) EXHIBIT A-1 Description of Traville Site Attached. LEASE AGREEMENT (HGSI) EXHIBIT A-2 Manufacturing Property Attached. EX-10.19 6 w58882ex10-19.txt CONSTRUCTION AGENCY AGREEMENT Exhibit 10.19 ------------------------------------------------------------------------ CONSTRUCTION AGENCY AGREEMENT dated as of November 7, 2001 among GENOME STATUTORY TRUST 2001A as Lessor HUMAN GENOME SCIENCES, INC. as Construction Agent ------------------------------------------------------------------------ CONSTRUCTION AGENCY AGREEMENT (HGSI) CONSTRUCTION AGENCY AGREEMENT Construction Agency Agreement, dated as of November 7, 2001 (this "Agreement"), between Genome Statutory Trust 2001A, (the "Lessor"), and Human Genome Sciences, Inc., a Delaware corporation ("HGSI"), as Construction Agent. W I T N E S S E T H: - - - - - - - - - - A. Lessor and Construction Agent are parties to that certain Participation Agreement (as hereafter defined) pursuant to which Construction Agent, as a Lessee, has agreed to lease from Lessor, and Lessor has agreed to lease to such Lessee, Lessor's interest in the Properties pursuant to the Lease. B. Lessor, such Lessee and Construction Agent are parties to that certain Participation Agreement of even date herewith (as amended, supplemented or otherwise modified, "Participation Agreement"), among HGSI, as Lessee and Construction Agent, Traville LLC, as Ground Lessor, Lessor, Wells Fargo Bank Northwest, N.A., as Trustee, BancBoston Leasing Investments Inc. and First Union National Bank, as Investors, EagleFunding Capital Corporation, as Lender, Fleet Securities, Inc., as Administrator, Fleet National Bank and First Union National Bank, as Liquidity Providers, Fleet National Bank, as Fleet National Bank Collateral Agent, First Union National Bank, as First Union Collateral Agent and Fleet National Bank, as Administrative Agent and Liquidity Agent. C. Subject to the terms and conditions hereof, (i) Lessor desires to appoint Construction Agent as its sole and exclusive agent for the construction of the Traville Improvements on the Traville Site in accordance with the Approved Traville Construction Budget, Approved Traville Construction Schedule and Approved Traville Plans and Specifications (each as described more fully in Exhibit A hereto and as each of the foregoing may be modified from time to time in accordance with this Agreement)(collectively, the "Traville Construction Materials") pursuant to this Agreement, and (ii) Construction Agent desires, for the benefit of Lessor, to cause the Traville Improvements to be constructed in accordance with the Traville Construction Materials and in each case in accordance with the terms set forth herein and in the Participation Agreement. D. Subject to the terms and conditions hereof, the satisfaction or waiver of the conditions set forth in Section 4.3 of the Participation Agreement, and the delivery of the Manufacturing Facility Supplement (i) Lessor desires to appoint Construction Agent as its sole and exclusive agent for the construction of the Manufacturing Facility Improvements on the Manufacturing Facility Site in accordance with the Approved Manufacturing Construction Budget, Approved Manufacturing Construction Schedule and Approved Manufacturing Plans and Specifications (each as will be described more fully in Exhibit A to the Manufacturing Facility Supplement and as each of the foregoing may be modified from time to time in accordance with this Agreement)(collectively, the "Manufacturing Construction Materials") and pursuant to this Agreement, and (ii) Construction Agent desires, for the benefit of Lessor, to cause the Manufacturing Facility Improvements to be constructed in accordance with the Manufacturing Construction Materials and in each case in accordance with the terms set forth herein and in the Lease. 1 CONSTRUCTION AGENCY AGREEMENT (HGSI) NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto covenant and agree as follows: ARTICLE I DEFINITIONS 1.1 Definitions; Interpretation; Amendment and Restatement. Capitalized terms used but not otherwise defined in this Agreement shall have the meanings set forth in Appendix A to the Participation Agreement, and the rules of interpretation set forth therein shall apply to this Agreement. ARTICLE II APPOINTMENT OF CONSTRUCTION AGENT 2.1 Appointment and Acceptance. Pursuant to and subject to the terms and conditions set forth herein and in the Participation Agreement and the other Operative Documents, Lessor hereby irrevocably designates and appoints Construction Agent as its exclusive agent for (i) the purchase of the Manufacturing Facility Site, (ii) the construction of the Traville Improvements on the Traville Site in accordance with the Approved Traville Plans and Specifications, and (iii) subject to the satisfaction or waiver of the conditions set forth in Section 4.3 of the Participation Agreement and the delivery of the Manufacturing Facility Supplement, the construction of the Manufacturing Improvements in accordance with the Approved Manufacturing Plans and Specifications, and Construction Agent by entering into this Agreement accepts such designation and appointment. 2.2 Term. This Agreement shall commence on the Documentation Date and shall terminate with respect to a Property upon the first to occur of: (a) Substantial Completion of such Property and the performance of all other material obligations of Construction Agent hereunder with respect thereto; and (b) payment by Lessee or Lessor's receipt through other provisions of the Operative Documents of the aggregate Lease Balance, or the applicable Lease Balance for such Property, and all other amounts owing under the Operative Documents (including Article V of the Lease, incorporated herein by reference), and termination of the Commitments in accordance with the Participation Agreement; and (c) termination of this Agreement by Lessor pursuant to Article V. 2.3 Supplement to this Agreement. On the Manufacturing Facility Site Purchase Date, Lessor and Construction Agent shall execute and deliver a supplement to this Agreement in the form set forth on Exhibit B hereto (the "Manufacturing Facility Supplement"), appropriately completed, pursuant to which Lessor and Construction Agent shall, among other things, each acknowledge and agree that the construction and development of the Manufacturing Facility on the Manufacturing Facility Site will be governed by the terms of this Agreement. 2 CONSTRUCTION AGENCY AGREEMENT (HGSI) Following the execution and delivery of the Manufacturing Facility Supplement as provided above and the satisfaction or waiver of all of the conditions set forth in Section 4.3 of the Participation Agreement, such Manufacturing Facility Supplement, and Exhibit A to the Manufacturing Facility Supplement attached thereto, shall constitute a part of this Agreement. 2.4 Construction Materials; Construction Documents. (a) Traville Facility (i) Construction Agent shall develop, define, refine and detail proposed budgets, construction schedules and Traville Plans and Specifications for the Traville Facility. Construction Agent shall cause each such proposal to provide for compliance and conformance with generally accepted construction practices, Applicable Law, Insurance Requirements, Environmental Requirements and Section 2.6(a) and shall cause each such proposal to have a reasonable likelihood that it can be completed as intended on time and within budget. In addition, the budget for the Traville Facility shall not exceed Two Hundred and Twenty-Five Million Dollars ($225,000,000), except as otherwise provided in clause (ii) below. Construction Agent shall cause such proposal to be provided to the Construction Consultant for review and approval. Upon the approval of any such proposal by the Construction Consultant of such proposed construction budget, construction schedule or plans and specifications for the Traville Facility, such proposed construction budget, construction schedule or plans and specifications shall become, as applicable, the approved construction budget (as amended or modified from time to time in accordance with the Terms of this Agreement, the "Approved Traville Construction Budget"), the approved construction schedule (as amended or modified from time to time in accordance with the Terms of this Agreement, the "Approved Traville Construction Schedule") and the approved plans and specifications (as amended or modified from time to time in accordance with the terms of this Agreement, the "Approved Traville Plans and Specifications") for the Traville Facility. Failure of the Construction Consultant to respond within sixty (60) days of receipt in writing of any such proposal will be deemed rejection thereof, however, if the Construction Consultant requests additional information or clarifications, such sixty (60) day period will commence from the date when all such requests have been satisfied. If the Construction Consultant shall reject or not expressly approve any such proposal, then Construction Agent shall consult with the Construction Consultant, revise such proposal and resubmit it, repeating such process until all Traville Construction Materials are approved or deemed to be approved. (ii) During the Construction Period, Construction Agent may enter into any changes, supplements, amendments or revisions ("change orders") to the Traville Construction Materials so long as the change order could not reasonably have any adverse effect on the as-built value, utility, residual value at the end of the Lease Term or useful life of the Traville Facility or extend Substantial Completion of the Property beyond the Outside Completion Date (such a change order that results in an adverse affect described above with respect to either 3 CONSTRUCTION AGENCY AGREEMENT (HGSI) Property, a "Material Change Order"), and the costs attributable to such change order, together with the costs of all other change orders in respect of the Traville Facility, do not result in a net increase in the Approved Traville Construction Budget unless and only to the extent that the Approved Manufacturing Construction Budget has been decreased by a like amount. (b) Manufacturing Facility (i) Construction Agent shall develop, define, refine and detail proposed budgets, construction schedules and Manufacturing Plans and Specifications for the Manufacturing Facility. Construction Agent shall cause each such proposal to provide for compliance and conformance with generally accepted construction practices, Applicable Law, Insurance Requirements, Environmental Requirements and Section 2.6(a) and shall cause each such proposal to have a reasonable likelihood that it can be completed as intended on time and within budget. In addition, the budget for the Manufacturing Facility shall not exceed Two Hundred and Twenty-Five Million Dollars ($225,000,000), except as otherwise provided in clause (ii) below. Construction Agent shall cause such proposal to be provided to the Construction Consultant for review and approval. Upon the approval of any such proposal by the Construction Consultant of such proposed construction budget, construction schedule or plans and specifications for the Manufacturing Facility, such proposed construction budget, (as amended or modified from time to time in accordance with the terms of this Agreement, the "Approved Manufacturing Construction Budget"), the approved construction schedule (as amended or modified from time to time in accordance with the Terms of this Agreement, the "Approved Manufacturing Construction Schedule") and the approved plans and specifications (as amended or modified from time to time in accordance with the Terms of this Agreement, the "Approved Manufacturing Plans and Specifications") for the Manufacturing Facility. Failure of the Construction Consultant to respond within sixty (60) days of receipt in writing of any such proposal will be deemed rejection thereof, however, if the Construction Consultant requests additional information or clarifications, such sixty (60) day period will commence from the date when all such requests have been satisfied. If the Construction Consultant shall reject or not expressly approve any such proposal, then Construction Agent shall consult with the Construction Consultant, revise such proposal and resubmit it, repeating such process until all Manufacturing Construction Materials are approved or deemed to be approved. (ii) During the Construction Period, Construction Agent may enter into change orders to the Manufacturing Construction Materials so long as the costs attributable to such change order, together with the costs of all other change orders in respect of the Manufacturing Facility, do not result in a net increase in the Approved Manufacturing Budget unless and only to the extent that the Approved Traville Construction Budget has been decreased by a like amount; provided that Material Change Orders must comply with clause (iii) below. 4 CONSTRUCTION AGENCY AGREEMENT (HGSI) (iii) Prior to making any Material Change Order with respect to either Property, Construction Agent shall submit a proposal outlining any such proposed change order to the Construction Consultant for approval. The approval process for Material Change Orders shall allow the Construction Consultant twenty (20) days to review any submission and to accept or reject such submission (or request additional information in respect thereof) with a failure to respond after twenty (20) days being deemed acceptance thereof. (c) Subject to each of the terms and conditions in this Agreement, Construction Agent may execute any of its duties under this Agreement by or through agents, developers, consultants, advisors, contractors, employees or attorneys-in-fact (other than the Construction Consultant), and Construction Agent with respect to each Property shall enter into such agreements with architects and contractors as Construction Agent deems necessary or desirable for the completion of the Construction pursuant hereto (as such documents may be amended, supplemented or otherwise modified except as prohibited hereby, the "Construction Documents"). (d) Certifications. Any amendment to either the Traville Construction Materials or the Manufacturing Construction Materials for which Construction Agent does not seek the approval of Lessor shall be deemed a certification by Construction Agent that such amendment complies with the foregoing requirement. 2.5 Assignment Under Construction. Construction Agent hereby collaterally assigns all Material Construction Documents and all the proceeds (including liquidated damages, insurance proceeds and warranty payments), if any, payable to Construction Agent or its affiliates under the Construction Documents to Lessor to secure Construction Agent's obligation under this Agreement and the Operative Documents. Construction Agent hereby agrees to file applicable UCC-1 financing statements in respect of the foregoing. 2.6 Scope of Authority. (a) Subject to the terms, conditions, restrictions and limitations set forth in the Operative Documents, Lessor hereby expressly authorizes Construction Agent (or any agent, consultant, advisor, developer, employee, attorney-in-fact or contractor of Construction Agent to which Construction Agent has made a delegation of authority pursuant to the terms of this Agreement), and Construction Agent unconditionally agrees, for the benefit of Lessor, to take all action necessary or (as determined by Construction Agent) desirable for the performance and satisfaction of all of Construction Agent's obligations hereunder with respect to the Properties, including: (i) the identification and the acquisition, in the name of Lessor (by purchasing or ground leasing, as applicable) of each Site in accordance with the terms and conditions of the Participation Agreement; (ii) performing or causing the performance of all design and supervisory functions and all engineering work related to the Construction and the retention and supervision of the General Contractor; 5 CONSTRUCTION AGENCY AGREEMENT (HGSI) (iii) negotiating and entering into, or causing the negotiation and execution and delivery of, all contracts or arrangements to procure the labor, materials, supplies and equipment necessary or (as determined by Construction Agent) desirable to construct the Improvements; (iv) obtaining or causing to be obtained all necessary permits, licenses, consents, approvals and other authorizations, including those required under Applicable Laws (including Environmental Laws), from all Governmental Authorities in connection with the acquisition of the Sites and the Construction of the Improvements thereon; (v) maintaining or causing to be maintained all books and records with respect to the Construction and the operation and management of the Properties; (vi) performing or causing the performance of any other acts necessary or desirable (as reasonably determined by Construction Agent) in connection with the construction and development of the Improvements in accordance in all material respects with the Traville Construction Materials or the Manufacturing Construction Materials, as applicable, any Applicable Laws and all Insurance Requirements; provided, however, that the foregoing shall not limit Construction Agent's right to engage in Permitted Contests; (vii) paying when due or causing to be paid when due (subject to reimbursement as provided for under this Agreement) pursuant to and subject to the Approved Traville Construction Budget or Approved Manufacturing Construction Budget, as applicable, or the Participation Agreement, all Property Costs (including costs associated with Construction Agent's actions as provided in Section 2.6(a)(ix) below, pursuant to and subject to the Approved Traville Construction Budget or Approved Manufacturing Construction Budget, as applicable) provided, however, that the foregoing shall not limit Construction Agent's right to engage in Permitted Contests. Construction Agent acknowledges that any liability resulting to Administrative Agent, any Participant or any other Indemnitee as a result of or arising from any such negotiation, Permitted Contest, or act or omission of Construction Agent or its designees with respect to such Permitted Contest will be a Claim subject to indemnification under Article IX of the Participation Agreement; (viii) enforcing or causing the enforcement in all material respects of performance by each party to each Construction Document of its respective obligations, warranties and other design, construction and other obligations with respect to the design, engineering, construction and completion of the Improvements on the applicable Site or pursuing remedies with respect to the breach of those obligations, in each case, as deemed appropriate by Construction Agent in its discretion; and (ix) using the proceeds of any insurance maintained with respect to the Improvements to complete construction of or rebuild any portion of such 6 CONSTRUCTION AGENCY AGREEMENT (HGSI) Improvements with respect to a Casualty or Condemnation and to fund all Construction Period Accrued Interest accruing during such Construction or rebuild, provided that the foregoing shall not affect Construction Agent's right to purchase the Properties in accordance with Article V of the Lease which shall be applicable during the Construction Period and is hereby incorporated herein by reference, mutatis mutandi. (b) Neither Construction Agent nor any of its Affiliates or agents shall enter into any contract which would impose any liability or obligation on Lessor (other than (i) nonrecourse obligations arising out of the imposition of certain Permitted Liens identified on Schedules 2.6(b)(i) and 2.6(b)(ii) hereto and (ii) Lessor's obligation to Construction Agent to provide Advances in accordance with and subject to the terms and conditions of the Operative Documents). (c) Subject to the terms and conditions of this Agreement and the other Operative Documents, Construction Agent shall have sole management and control over the construction means, methods, sequences and procedures and the hiring, termination and contracting for and supervision of and payment for the labor, personnel and services with respect to the Construction; provided, however, that this subsection (c) shall not give rise to any rights in any Person other than Lessor, the Participants and the other Indemnitees. (d) All fees and expenses of Lessee and Construction Agent under any Operative Document which are included in and which may be paid in accordance with the Approved Traville Construction Budget or the Approved Manufacturing Construction Budget, as applicable, shall be paid or reimbursed through Advances. 2.7 Covenants of Construction Agent. Construction Agent shall with respect to the Land: (a) following the commencement of Construction, cause the Construction to proceed diligently and without material interruption (subject to Force Majeure Events) in accordance in all material respects with the applicable Construction Materials and Insurance Requirements and all Applicable Laws; (b) take or cause to be taken commercially reasonable and practical steps to minimize liabilities of Lessor or any Agent or Participant, delays, increased costs and the disruption of the construction process arising from Force Majeure Events, Casualties and Condemnations; (c) subject to Section 3.2(b), cause Substantial Completion for a Property to occur on or prior to the applicable Outside Completion Date for such Property; (d) cause all Liens (including Liens or claims for materials supplied or labor or services performed in connection with the construction of the Improvements), other than Permitted Liens, to be removed or discharged; provided, however, that the foregoing shall not limit Construction Agent's right to engage in Permitted Contests; 7 CONSTRUCTION AGENCY AGREEMENT (HGSI) (e) at all times during Construction, cause title to all Improvements on or within the Land (including any personal property which Construction Agent acquires with Advances whether or not such personal property so acquired has become a permanent part of such Improvements) to be and remain vested in Lessor free of all Liens, other than Permitted Liens and Lessor Liens, and cause to be on file (including financing statements and fixture filings) with the applicable filing office all necessary documents under Article 9 of the UCC to perfect Lessor's and Administrative Agent's interest in such personalty free of all Liens other than Permitted Liens and Lessor Liens unless and only for such period of time as Construction Agent is prevented from doing the same as the result of the failure of Lessor to sign and return any reasonable documentation prepared by Construction Agent in performance of this Section; (f) with respect to each Property, at all times prior to the Lease Commencement Date for such Property, maintain, for the benefit of Lessor, the insurance described in Schedule 2.7(f) with respect to such Property. In addition, Construction Agent shall from time to time, but in intervals of not less than twelve (12) months nor more than fifteen (15) months, (i) undertake all actions and due diligence as reasonably necessary to determine whether the insurance coverage required to be maintained hereunder is in compliance with the requirements thereunder, including any increases in coverage required as a result of any change in any Applicable Laws, and (ii) if Construction Agent determines that such insurance coverage does not meet such requirements, promptly take all actions and steps necessary to cause such coverage to comply with such requirements and shall notify Lessor and Administrative Agent of the steps being taken by Construction Agent or on their behalf; and (g) Construction Agent shall not incur nor allow the incurrence of any Property Costs, individually or in the aggregate, (A) in excess of the sum of the Aggregate Available Commitments and Other Available Amounts as of the date of determination thereof or (B) that would or could reasonably be expected to cause the applicable Construction Budget not to be In Balance. 2.8 Title to the Improvements. Title to the Improvements (including, all materials or equipment incorporated therein or paid for out of Advances) shall automatically, without further act of Construction Agent, vest in Lessor. ARTICLE III THE IMPROVEMENTS 3.1 Amendments; Modifications. [Intentionally Omitted.] 3.2 Casualty, Condemnation, Liquidated Damages and Force Majeure Events. (a) Subject to Section 3.2(b), if at any time prior to Substantial Completion of a Property there occurs a Casualty, Condemnation or Force Majeure Event or liquidated damages are paid under the Construction Documents, then, in accordance with the procedures for making Advances in the Operative Documents, Lessor shall make (x) so long as no Construction Agency Event of Default or Bankruptcy Default shall have 8 CONSTRUCTION AGENCY AGREEMENT (HGSI) occurred and be continuing, insurance proceeds and/or condemnation awards and/or liquidated damages with respect thereto available for Improvement Costs and (y) Advances for Improvement Costs and Construction Agent shall (i) promptly and diligently complete the Construction in accordance with the Traville Construction Materials and the Manufacturing Construction Materials, as applicable, and with the terms hereof and (ii) cause Substantial Completion for each Property to occur on or prior to the applicable Outside Completion Date for such Property. (b) If Construction Agent reasonably determines that a Force Majeure Event will cause Substantial Completion for either Property to occur later than the applicable Outside Completion Date for such Property, Construction Agent may request that the applicable Outside Completion Date for such Property be extended by Lessor for the period (not to exceed one hundred and twenty (120) days following the original Outside Completion Date for such Property) reasonably necessary to achieve Substantial Completion for such Property in light of such Force Majeure Event. Any such request shall be in writing delivered to Lessor and Administrative Agent and shall contain a certification by Construction Agent (1) describing the facts and circumstances giving rise to such Force Majeure Event, the expected duration of such Force Majeure Event and the date Construction Agent reasonably believes Substantial Completion for the applicable Property will be achieved, (2) that the remaining Aggregate Available Commitments, together with insurance proceeds paid and Other Available Amounts, if any, with respect to such Force Majeure Event which Construction Agent agrees to pay with respect to amounts accruing during the period of such extension, are adequate to achieve Substantial Completion for such Property within such extension period in accordance with the Traville Construction Materials or the Manufacturing Construction Materials, as applicable (excluding all Construction Period Accrued Interest, Construction Period Accrued Yield and Construction Period Fees applicable to such Property accruing during such extension period) and (3) that the occurrence of such Force Majeure Event and the Construction to occur following such date will not materially affect the appraised value set forth in the applicable As-Built Appraisal delivered with respect to such Site pursuant to Section 4.1(s) or 4.3(q), as applicable, of the Participation Agreement. Construction Agent shall also supply to Lessor and Administrative Agent such other information as each such Person may reasonably request. The consent of Lessor under this Section shall not be withheld or delayed if the determination is made that the request meets the requirements set forth herein in all material respects. Notwithstanding the foregoing paragraph, the applicable Outside Completion Date for such Property shall be automatically extended for the period (not to exceed a total of sixty (60) days following the original Outside Completion Date for such Property) necessary to achieve Substantial Completion for such Property in light of such Force Majeure Event, provided, that (A) the length of the extension required in light of such Force Majeure Event is certain (either because the Force Majeure Event has ended or because Construction Agent has entered into a replacement contract with a definite term (unimpeded by such Force Majeure Event) to complete the work originally interrupted by the Force Majeure Event), and (B) Construction Agent delivers to the Administrative Agent certification (without assumptions or, except as set forth therein, qualifications) as to and describing the items supporting each of the matters set forth in 9 CONSTRUCTION AGENCY AGREEMENT (HGSI) clauses (1), (2) and (3) of the foregoing paragraph and stating the length of the required extension as provided in clause (A) of this paragraph. ARTICLE IV PAYMENT OF FUNDS 4.1 Funding of Improvement Costs. (a) During the course of the Construction of Improvements, Construction Agent shall request that Lessor advance funds for the payment or reimbursement of Improvement Costs and Lessor shall comply with such request to the extent provided for under the Participation Agreement. Construction Agent and Lessor acknowledge and agree that Construction Agent's right to request funds and Lessor's obligation to advance funds for the payment of Improvement Costs are subject in all respects to the terms of this Agreement, the Participation Agreement and each of the other Operative Documents. (b) The proceeds of any funds made available to Lessor under the Operative Documents to pay Improvement Costs shall be made available to Construction Agent in accordance with the Advance Request relating thereto. (c) Construction Agent may disburse proceeds from an Advance Request only for payment or its reimbursement of Improvement Costs as set forth on the Advance Request or otherwise permitted by the Operative Documents. (d) Construction Agent and Lessor, each acknowledge that the Administrative Agent or the Investors may direct Lessor to borrow funds from the Lenders and the Investors for the payment or reimbursement of Transaction Costs and other expenditures, all in accordance with the Participation Agreement and the other Operative Documents. ARTICLE V CONSTRUCTION AGENCY EVENTS OF DEFAULT 5.1 Construction Agency Events of Default. 5.1.1 Defined. Any one or more of the following events shall be a "Construction Agency Event of Default": (a) Construction Agent applies any Advance for the purposes other than as set forth in the related Advance Request or Construction Agent otherwise applies any funds paid by Lessor to Construction Agent for purposes not permitted hereby or by any other Operative Document, or there shall exist any other misapplication of funds relating to any Property, including, but not limited to fraud, illegal acts or willful misconduct by Construction Agent or its Affiliates or any Construction Agency Person or any other Person under the direct or indirect supervision of Construction Agent related to or in respect of the transactions contemplated herein or the Operative Documents or with respect to any Property or Site; 10 CONSTRUCTION AGENCY AGREEMENT (HGSI) (b) Construction Agent shall fail to comply with Section 2.7(c). (c) (i) either the Approved Traville Construction Budget or the Approved Manufacturing Construction Budget shall not be In Balance and such failure to be In Balance shall continue after the expiration of the thirty (30) day period discussed in Section 5.6(b), or (ii) Construction Agent shall fail to timely make a Balancing Deposit required under Section 5.6(c); (d) an Insolvency Event with respect to Construction Agent shall have occurred and be continuing; (e) HGSI shall default in the due performance and observance of any of its obligations under Section 6.1(v), (w), (x), (y) or (aa) of the Participation Agreement or Section 2.5(a)(i) or (ii) of either Liquid Collateral Agreement; (f) any representation, warranty or statement made or restated by Construction Agent or Lessee in this Construction Agency Agreement or in any other Operative Document, or in any statement or certificate delivered or required to be delivered pursuant hereto or thereto, shall prove to be untrue in any material respect on the date as of which made or restated, and (i) the circumstances rendering such representation or warranty or statement incorrect shall not be remediable or, (ii) if such representation or warranty or statement is remediable and Construction Agent or Lessee is proceeding diligently so to remedy, shall continue unremedied for thirty (30) days after the earlier of: (x) the date on which written notice is delivered by Lessor or Administrative Agent to Construction Agent or Lessee specifying such circumstances and demanding that they be remedied and (y) the date on which any Authorized Officer of Construction Agent or Lessee has actual knowledge of such incorrectness; provided, however, that if such default is capable of cure but cannot be cured by payment of money or cannot be cured by diligent efforts within such thirty (30) day period but such diligent efforts shall be properly commenced within the cure period and Construction Agent or Lessee is diligently pursuing, and shall continue to pursue diligently, remedy of such failure, the cure period shall be extended for an additional period of time as may be necessary to cure, not to exceed an additional one hundred and twenty (120) days and not to extend beyond the later Outside Completion Date; (g) except as otherwise permitted under the Operative Documents, any Lien granted pursuant to any Operative Document affecting any portion of the Properties shall, in whole or in material part, cease to be a perfected first priority security interest (other than Permitted Liens and Lessor Liens) with respect to any Site for which such Lien is required under the Operative Documents, other than with respect to an immaterial portion of any such Site, unless such cessation shall be the result of the failure of Lessor to sign and return any reasonable documentation prepared by Construction Agent in performance of Section 2.7(e) or willful misconduct or gross negligence of the Administrative Agent or Lessor, provided, however, that with respect to any Lien which fails to be so effective or 11 CONSTRUCTION AGENCY AGREEMENT (HGSI) perfected, Construction Agent shall have thirty (30) days from the earlier of Construction Agent's knowledge of such condition and receipt of notice thereof from Lessor or Administrative Agent to cure such failure; (h) Construction Agent or Lessee shall default in the due performance or observance by it of any term, covenant, condition or agreement on its part to be performed or observed under any Operative Document to which it is a party (not otherwise specified in this Section 18.1) and such default shall have continued unremedied for a period of at least thirty (30) days after receipt of notice by Construction Agent or Lessee from either Lessor or Administrative Agent; provided, however, that if such default is capable of cure but cannot be cured by payment of money or cannot be cured by diligent efforts within such thirty (30) day period but such diligent efforts shall be properly commenced within the cure period and Construction Agent or Lessee is diligently pursuing, and shall continue to pursue diligently, remedy of such failure, the cure period shall be extended for an additional period of time as may be necessary to cure, not to exceed an additional one hundred and twenty (120) days and not to extend beyond the later Outside Completion Date; (i) an event described in Section 7.3 of the Participation Agreement shall have occurred; (j) the Ground Lease shall terminate by reason of default by Ground Lessor in its obligations thereunder; (k) Construction Agent shall fail to maintain insurance required by Section 2.7(f); Construction Agent or shall fail to deliver the certification required by Section 6.1(b)(i) of the Participation Agreement and such failure shall continue for ten (10) days after notice to Construction Agent; (l) the Facility Maturity Date (as defined in the Liquidity Agreement), as the same may be modified or extended from time to time, with respect to any one or more Liquidity Providers shall have occurred; (m) one or more judgments or orders for the payment of money in the aggregate amount in excess of $10,000,000 shall be rendered against HGSI or any of its Affiliates and such judgment or order shall continue unsatisfied or unstayed for a period of sixty (60) days; (n) An "event of default" shall occur in the payment when due (subject to any applicable grace period), whether by acceleration or otherwise, of any Indebtedness of HGSI or any of its Subsidiaries having a principal amount, individually or in the aggregate, in excess of $10,000,000, or a default shall occur in the performance or observance of any obligation or condition with respect to such Indebtedness; 12 CONSTRUCTION AGENCY AGREEMENT (HGSI) (o) Lessor's rights pursuant to either Liquid Collateral Agreement to require Lessee to pledge additional Permitted Investments shall for any reason cease to be a legal, valid and binding agreement with Lessee; or (p) the Lien of either Liquid Collateral Agreement with respect to the Liquid Collateral shall cease to constitute a first priority perfected security interest (except as a result of a voluntary release by Administrative Agent of any Liquid Collateral). 5.1.2 Consequences. Upon the occurrence of a Construction Agency Event of Default, Lessor may, in addition to the other rights and remedies provided for in this Article V or under the Deed of Trust, immediately terminate this Agreement, by giving Construction Agent written notice of such termination, and upon the giving of such notice, this Agreement shall terminate and all rights of Construction Agent and all obligations of Lessor under this Agreement shall cease; provided, however, that this Agreement shall terminate immediately without notice upon the occurrence of an Insolvency Event described in Section 5.1.1(d) or upon the occurrence of the events described in Section 5.1.1(i), whether or not another Construction Agency Event of Default described in one or more other clauses of Section 5.1.1 shall have been or thereafter is declared. Upon any such termination, all rights of Construction Agent and all obligations of Lessor (after the date of termination and payment of the amounts referred to below in this Section 5.1.2), shall cease and: (i) Lessor may require Construction Agent to (or shall require Construction Agent to, if a Construction Agency Event of Default described in Section 5.1.1(d) or 5.1.1(i) has occurred) (subject to Section 5.4 below) immediately pay to Administrative Agent, on behalf of Lessor, as and for liquidated damages, an amount equal to: (a) if a Full Recourse Event of Default has occurred, (A) the Lease Balance in the event that, as of the date of the termination of this Agreement, the Lease Commencement Date shall have not yet occurred with respect to either Property, (B) the Traville Lease Balance in the event that, as of the date of the termination of this Agreement, the Lease Commencement Date shall have already occurred with respect to the Manufacturing Facility but shall have not yet occurred with respect to the Traville Facility, or (C) the Manufacturing Lease Balance in the event that, as of the date of the termination of this Agreement, the Lease Commencement Date shall have already occurred with respect to the Traville Facility but shall have not yet occurred with respect to the Manufacturing Facility; or (b) if a Full Recourse Event of Default has not occurred, (A) the Construction Period Maximum Guaranty Amount in the event that, as of the date of the termination of this Agreement, the Lease Commencement Date shall have not yet occurred with respect to either Property, (B) the Traville Construction Period Maximum Guaranty Amount in the event that, as of the date of the termination of this Agreement, the Lease Commencement Date shall have already occurred with respect to the Manufacturing Facility but shall have not yet 13 CONSTRUCTION AGENCY AGREEMENT (HGSI) occurred with respect to the Traville Facility, or (C) the Manufacturing Construction Period Maximum Guaranty Amount in the event that, as of the date of the termination of this Agreement, the Lease Commencement Date shall have already occurred with respect to the Traville Facility but shall have not yet occurred with respect to the Manufacturing Facility; and (c) in addition to any amounts payable pursuant to Section 5.1.2(i)(a) or (b), Construction Agent shall pay on the payment date all other Supplemental Rent then due and payable. (ii) Construction Agent may at its election, within five (5) Business Days after such termination, exercise the option to purchase (or in lieu thereof, exercise its rights under Section 8.1.1(b) of the Participation Agreement) from Lessor (a) both Properties in the event that, as of the date of the termination of this Agreement, the Lease Commencement Date shall have not yet occurred with respect to either Property, (b) only the Traville Facility in the event that, as of the date of the termination of this Agreement, the Lease Commencement Date shall have already occurred with respect to the Manufacturing Facility but shall have not yet occurred with respect to the Traville Facility, or (c) only the Manufacturing Facility in the event that, as of the date of the termination of this Agreement, the Lease Commencement Date shall have already occurred with respect to the Traville Facility but shall have not yet occurred with respect to the Manufacturing Facility, by paying immediately upon such exercise an amount equal to the excess of (x) (1) in the event that Construction Agent exercises its option to purchase both Properties pursuant to clause (ii)(a) above, the aggregate Lease Balance, plus, without duplication, any other amounts then due and owing under the Operative Documents, as of the date of such payment, (2) in the event that Construction Agent exercises its option to purchase only the Traville Facility pursuant to clause (ii)(b) above, the Traville Lease Balance, plus, without duplication, any other amounts then due and owing with respect to the Traville Facility under the Operative Documents, as of the date of such payment, or (3) in the event that Construction Agent exercises its option to purchase only the Manufacturing Facility pursuant to clause (ii)(c) above, the Manufacturing Lease Balance, plus, without duplication, any other amounts then due and owing with respect to the Manufacturing Facility under the Operative Documents, as of the date of such payment, over (y) amounts paid by Construction Agent under clause (i) above. Unless Construction Agent shall have so exercised the purchase option, Lessor shall cause each Property to be sold in accordance with Section 5.3(a). If Construction Agent shall have so exercised the purchase option (and made all applicable payments in respect thereof), Lessor shall promptly convey title to the Improvements applicable to the Property or Properties so purchased to Lessee or their designee in accordance with Article XV of the Lease assuming for these purposes that said Article of the Lease were then applicable. 5.2 Survival. (a) The termination of this Agreement, in whole or in part, pursuant to Section 5.1 shall in no event relieve Construction Agent of their liability hereunder which accrued prior to such termination, all of which shall survive any such termination. 14 CONSTRUCTION AGENCY AGREEMENT (HGSI) (b) Construction Agent's right to purchase one or both of the Properties within five (5) Business Days following the termination of this Agreement pursuant to Section 5.1.2 shall survive the termination of this Agreement until the termination of such five (5) Business Day period. 5.3 Remedies Cumulative; Waivers. Upon the occurrence and continuance of a Construction Agency Event of Default, at Lessor's option and without limiting Lessor in the exercise of any other right or remedy Lessor may have on account (including, without limitation, any remedies under any other Operative Document or as set forth in Section 5.1.2), and without any further demand or notice, but subject to Section 5.4 below and the proviso of the first sentence of Section 5.1.2 and the second sentence of Section 5.1.2 above, Lessor may cause the following to occur: (a) Lessor shall have all the rights and may pursue any of the remedies hereunder with respect to Construction Period Maximum Guaranty Amount as are provided to it in the Lease with respect to the payment of Residual Value Guaranty Amount as if those provisions were incorporated herein including, Lessor acting as exclusive sales agent for the Properties. Lessor and Administrative Agent may foreclose the lien of the Lessee Deed of Trust on all or any portion of the Properties and other Collateral, including all or any of such Sites and the related Deed of Trust. In addition, Lessor may exercise its remedies under the Security Agreement. (b) Lessor may continue this Agreement in effect for so long as Lessor shall determine, and Lessor may enforce all of Lessor's rights and remedies under this Agreement, and require the completion of the Improvements by Construction Agent as herein described, so long as Lessor satisfies its obligations under Section 4.1 and provides or otherwise obtains the funds therefor and advances such funds to Construction Agent. (c) Lessor may terminate this Agreement at any time, notwithstanding a prior election under Section 5.3(b) to cause the completion of the Improvements with respect thereto directly through Lessor or one or more successor construction agents. (d) Lessor may exercise any other right or remedy that may be available to it under Applicable Laws or in equity, or proceed by appropriate court action (legal or equitable) to enforce the terms or to recover damages for the breach hereof. (e) Subject to the provisions hereof, as a matter of right and with notice to Construction Agent or anyone claiming under Construction Agent, and without regard to the then value of the Collateral or the interest of any Lessee therein, Lessor shall have the right to apply to any court having jurisdiction to appoint a receiver or receivers of the Collateral or any portion thereof at Lessee and Construction Agent's sole cost and expense (subject to Section 5.4 hereof), and Construction Agent hereby irrevocably consents to such appointment and waive notice of any application therefor. Any such receiver or receivers shall have all the usual powers and duties of receivers in like or similar cases and all the powers and duties of Lessor in case of entry as provided in this Agreement and shall continue as such and exercise all such powers until the latest to 15 CONSTRUCTION AGENCY AGREEMENT (HGSI) occur of (i) the date of confirmation of sale of the applicable Collateral; (ii) the disbursement of all proceeds of such Collateral collected by such receiver and the payment of all expenses incurred in connection therewith; or (iii) the termination of such receivership with the consent of Lessor or pursuant to an order by a court of competent jurisdiction. (f) To the extent permitted by, and subject to the mandatory requirements of, any Applicable Law, each and every right, power and remedy herein specifically given to Lessor or otherwise in this Agreement shall be cumulative and, subject to Section 5.4, shall be in addition to every other right, power and remedy herein specifically given or now or hereafter existing at law, in equity or by statute, and each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time and as often and in such order as may be deemed expedient by Lessor, and the exercise or the beginning of the exercise of any power or remedy shall not be construed to be a waiver of the right to exercise at the same time or thereafter any other right, power or remedy. Lessor's consent to any request made by Construction Agent shall not be deemed to constitute or preclude the necessity for obtaining Lessor's consent, in the future, to all similar requests. No express or implied waiver by Lessor of any Construction Agency Event of Default shall in any way be, or be construed to be, a waiver of any future or subsequent Construction Agency Event of Default. To the extent permitted by any Applicable Law, Construction Agent hereby waives any rights now or hereafter conferred by statute or otherwise that may require Lessor to sell, lease or otherwise use the Properties, any Site, the other collateral or any part thereof in mitigation of Lessor's damages upon the occurrence of a Construction Agency Event of Default or that may otherwise limit or modify any of Lessor's rights or remedies under this Article V. (g) No failure to exercise and no delay in exercising, on the part of Lessor, any right, remedy, power or privilege under this Agreement or under the other Operative Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges provided in this Agreement are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. (h) Upon termination of this Agreement as a result of a Construction Agency Event of Default, Construction Agent shall pay on behalf of Lessor to the Administrative Agent, for application in accordance with Article X of the Participation Agreement, in immediately available funds, the Construction Period Maximum Guaranty Amount. 5.4 Limitation on Recourse Liability of Construction Agent. (a) Notwithstanding anything set forth herein to the contrary, the aggregate amount payable by Construction Agent on a recourse basis under this Article V as the result of the occurrence of a Construction Agency Event of Default shall be subject to the limitations on the recourse liability of Construction Agent set forth in Section 11.2 of the Participation Agreement. 16 CONSTRUCTION AGENCY AGREEMENT (HGSI) (b) Lessor's exercise of any remedy provided hereunder or otherwise available at law or equity, including any demand for reimbursements of amounts expended by or on behalf of Lessor to cure any Construction Agency Event of Default shall not impair or otherwise reduce Construction Agent's obligation to pay the Construction Period Maximum Guaranty Amount and the timely application of such amount to the outstanding principal amount and accrued interest thereon under the Loan Agreement in accordance with the Participation Agreement. 5.5 Lessor's Right to Cure Construction Agent's Defaults. Lessor, without waiving or releasing any obligation or Construction Agency Event of Default, may (but shall be under no obligation to) remedy any Construction Agency Event of Default, and in furtherance of such right, Lessor may make Advance Requests, execute Construction Documents and otherwise exercise all rights and perform all duties of Construction Agent hereunder and Lessee under the Participation Agreement with respect to the Construction. All reasonable out of pocket costs and expenses so incurred (including reasonable fees and expenses of counsel), together with interest thereon at the Overdue Rate from the date on which such sums or expenses are paid by Lessor, shall (subject to Section 5.4 above) be funded and paid by Lessor through Advances. 5.6 Determination of Whether Budget is "In Balance". (a) If Administrative Agent determines that either the Approved Traville Construction Budget or the Approved Manufacturing Construction Budget may not be In Balance, Administrative Agent shall give notice to such effect to Construction Agent, together with a reasonably detailed explanation of the basis for Administrative Agent's determination and to the extent available calculations upon which Administrative Agent or the Construction Consultant has based its determination. Within ten (10) days following Construction Agent's receipt of such notice, Construction Agent shall deliver a certification to Administrative Agent that either (i) the Approved Traville Construction Budget or the Approved Manufacturing Construction Budget, as applicable, is not In Balance and describing the steps Construction Agent is taking to remedy such condition, if any, or (ii) the Approved Traville Construction Budget or the Approved Manufacturing Construction Budget, as applicable, is In Balance and stating sufficient detail to describe why Construction Agent believes the Approved Traville Construction Budget or the Approved Manufacturing Construction Budget, as applicable, is In Balance. (b) If after receipt by Administrative Agent of a certification from Construction Agent pursuant to Section 5.6(a)(ii) above that the Approved Traville Construction Budget or the Approved Manufacturing Construction Budget, as applicable, is In Balance, Administrative Agent still disagrees with such certification, Construction Agent and Administrative Agent shall, for a period of thirty (30) days following Administrative Agent's receipt of such certification, consult with each other and use their reasonable efforts to resolve such dispute as to whether the applicable Construction Budget is In Balance. (c) Upon the occurrence of either (i) Construction Agent's delivery of certification pursuant to Section 5.6(a)(i) above that the Approved Traville Construction Budget or the Approved Manufacturing Construction Budget, as applicable, is not In 17 CONSTRUCTION AGENCY AGREEMENT (HGSI) Balance, or (ii) the thirty (30) day consultation period referred to in Section 5.6(b) above shall expire and any Agent shall continue to disagree with Construction Agent's assertion that the Approved Traville Construction Budget or the Approved Manufacturing Construction Budget, as applicable, is In Balance, Lessor shall have the option, exercisable in its sole discretion upon notice to Construction Agent, to require Construction Agent to deposit (a "Balancing Deposit) with Lessor within five (5) Business Days an amount equal to the lesser of (x) the amount which if paid to Construction Agent would, together with any Available Commitments and Other Available Proceeds, be sufficient to make the Approved Traville Construction Budget or the Approved Manufacturing Construction Budget, as applicable, In Balance and (y) the Construction Period Maximum Guaranty Amount. (d) In the event that Construction Agent is required to make a Balancing Deposit pursuant to Section 5.6(c) above, such Balancing Deposit shall evidence a portion of the Construction Period Maximum Guaranty Amount and any amounts withdrawn from the Balancing Deposit to fund Property Costs shall reduce dollar for dollar the Construction Period Maximum Guaranty Amount. 5.7 Limitations on Construction Agent's Liability. In any action or proceeding involving any state law, any federal bankruptcy, insolvency or reorganization law, or any other law affecting the rights of creditors generally, if the obligations of Construction Agent under the Operative Documents would otherwise be held or determined to be voidable, invalid or unenforceable as a fraudulent transfer or otherwise as a result or on account of the amount of its liability under the Operative Documents, then, notwithstanding any other provision hereof to the contrary, the amount of such liability shall, without any further action by Construction Agent or any other Person, be automatically limited and reduced to the highest amount which is valid and enforceable. ARTICLE VI NO CONSTRUCTION AGENCY FEE Construction Agent shall not be entitled to, and Lessor shall have no obligation to pay, any agency fee or other fee or compensation, and no such Person shall not be entitled to, and Lessor shall have no obligation to make or pay, any reimbursement therefor. It being understood that this Agreement is being entered into as consideration for and as an inducement to Lessor and the Participants entering into the Lease and the other Operative Documents. ARTICLE VII MISCELLANEOUS 7.1 Notices. All notices, consents, directions, approvals, instructions, requests, demands and other communications required or permitted by the terms hereof to be given to any Person shall be given in writing in the manner provided in, shall be sent to the respective addresses set forth in, and the effectiveness thereof shall be governed by the provisions of, Section 12.3 of the Participation Agreement. 18 CONSTRUCTION AGENCY AGREEMENT (HGSI) 7.2 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of Lessor, Construction Agent and, to the extent permitted by the Operative Documents, their respective successors and assigns; provided, however, that except as permitted by Sections 2.6 and 2.7 or to an entity owned (directly or indirectly) by Construction Agent (and in either case, Construction Agent shall remain primarily liable), Construction Agent shall not assign any of its rights nor delegate any of its duties or obligations under this Agreement without the prior written consent of the Administrative Agent (at the written directions of the Directing Party) and Lessor. 7.3 GOVERNING LAW. THIS AGREEMENT HAS BEEN DELIVERED IN, AND SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF, THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES TO THE EXTENT PERMITTED BY APPLICABLE LAW (EXCEPT SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW), EXCEPT AS TO MATTERS RELATING TO THE CREATION OF INTERESTS IN REAL PROPERTY OR LIENS AND THE EXERCISE OF REMEDIES WITH RESPECT TO THE PORTIONS OF THE PROPERTIES CONSTITUTING REAL PROPERTY, WHICH SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 7.4 Amendments, etc. In addition to the execution and delivery of the Manufacturing Facility Supplement in accordance with Section 2.3 hereof, Lessor and Construction Agent may, from time to time, enter into written amendments, supplements or modifications hereto, subject to the restrictions set forth in Section 12.5 of the Participation Agreement. 7.5 Counterparts. This Agreement may be executed on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 7.6 Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 7.7 Headings and Table of Contents. The headings and table of contents contained in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 7.8 Exercise of Lessor's Rights. Subject to the Excluded Amounts, Construction Agent hereby acknowledges and agrees that, subject to and in accordance with the terms of the Security Agreement dated concurrently herewith made by Lessor in favor of Administrative Agent, the rights and powers of Lessor under this Agreement have been assigned to and may be exercised by Administrative Agent in accordance with Section 12.5 of the Participation Agreement. 19 CONSTRUCTION AGENCY AGREEMENT (HGSI) 7.9 Limited Liability. Construction Agent agrees that Lessor's obligations and liability under this Agreement are limited pursuant to Section 12.10 of the Participation Agreement. Except for the rights of Lessee to payment pursuant to the express provisions of Article X of the Participation Agreement, any rights of Construction Agent against Lessor shall be fully subordinated to the claims of Lessor against Construction Agent until such claims are indefeasibly paid in full. 7.10 No Third Party Beneficiaries. Except to the extent provided in other Operative Documents, no provision in this Agreement shall give rise to any rights in any Person (except any Person party to an Operative Document), and there shall be no third party beneficiaries of, and no other Persons shall be entitled to rely on this Agreement. Any attempt by any other such Person to so rely shall immediately be void. 7.11 Survival of Agreements. All covenants of Construction Agent provided for in Section 2.7(e) shall survive the termination of this Agreement. [END OF PAGE] [SIGNATURE PAGES FOLLOW] 20 CONSTRUCTION AGENCY AGREEMENT (HGSI) IN WITNESS WHEREOF, the parties hereto have caused this CONSTRUCTION AGENCY AGREEMENT to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. GENOME STATUTORY TRUST 2001A, as Lessor By /s/ C. SCOTT NIELSON ------------------------------------- Name: C. Scott Nielson Title: Vice President CONSTRUCTION AGENCY AGREEMENT (HGSI) HUMAN GENOME SCIENCES, INC. as Construction Agent By /s/ STEVEN C. MAYER ------------------------------------- Name: Steven C. Mayer Title: Senior Vice President and CFO CONSTRUCTION AGENCY AGREEMENT (HGSI) Schedule 2.6(b)(i) Traville Certain Permitted Liens Attached. CONSTRUCTION AGENCY AGREEMENT (HGSI) Schedule 2.6(b)(ii) Manufacturing Facility Certain Permitted Liens Attached. CONSTRUCTION AGENCY AGREEMENT (HGSI) Schedule 2.7(f) Insurance Attached. CONSTRUCTION AGENCY AGREEMENT (HGSI) Exhibit A Traville Construction Materials Attached. CONSTRUCTION AGENCY AGREEMENT (HGSI) Exhibit B Manufacturing Facility Supplement Attached. CONSTRUCTION AGENCY AGREEMENT (HGSI) Exhibit A to Exhibit B Manufacturing Construction Materials Attached. TABLE OF CONTENTS
Section Page - ------- ---- ARTICLE I DEFINITIONS..........................................................................2 1.1 Definitions; Interpretation; Amendment and Restatement..................................2 ARTICLE II APPOINTMENT OF CONSTRUCTION AGENT....................................................2 2.1 Appointment and Acceptance..............................................................2 2.2 Term....................................................................................2 2.3 Supplement to this Agreement............................................................2 2.4 Construction Materials; Construction Documents..........................................3 2.5 Assignment Under Construction...........................................................5 2.6 Scope of Authority......................................................................5 2.7 Covenants of Construction Agent.........................................................7 2.8 Title to the Improvements...............................................................8 ARTICLE III THE IMPROVEMENTS.....................................................................8 3.1 Amendments; Modifications...............................................................8 3.2 Casualty, Condemnation, Liquidated Damages and Force Majeure Events.....................8 ARTICLE IV PAYMENT OF FUNDS....................................................................10 4.1 Funding of Improvement Costs...........................................................10 ARTICLE V CONSTRUCTION AGENCY EVENTS OF DEFAULT...............................................10 5.1 Construction Agency Events of Default..................................................10 5.2 Survival...............................................................................14 5.3 Remedies Cumulative; Waivers...........................................................15 5.4 Limitation on Recourse Liability of Construction Agent.................................16 5.5 Lessor's Right to Cure Construction Agent's Defaults...................................17 5.6 Determination of Whether Budget is "In Balance"........................................17 5.7 Limitations on Construction Agent's Liability..........................................18 ARTICLE VI NO CONSTRUCTION AGENCY FEE..........................................................18 ARTICLE VII MISCELLANEOUS.......................................................................18 7.1 Notices................................................................................18 7.2 Successors and Assigns.................................................................19 7.3 GOVERNING LAW..........................................................................19 7.4 Amendments, etc........................................................................19 7.5 Counterparts...........................................................................19 7.6 Severability...........................................................................19 7.7 Headings and Table of Contents.........................................................19 7.8 Exercise of Lessor's Rights............................................................19 7.9 Limited Liability......................................................................20 7.10 No Third Party Beneficiaries...........................................................20 7.11 Survival of Agreements.................................................................20
-i- TABLE OF CONTENTS (continued) Section Page - ------- ---- Schedule 2.6(b)(i) - Traville Certain Permitted Liens Schedule 2.6(b)(ii) - Manufacturing Facility Certain Permitted Liens Schedule 2.7(f) - Insurance Provisions EXHIBITS EXHIBIT A - Traville Construction Materials: Approved Traville Plans and Specifications Approved Traville Construction Schedules Approved Traville Construction Budget Architect's Certificates EXHIBIT B - Manufacturing Facility Supplement EXHIBIT A to EXHIBIT B - Manufacturing Construction Materials -ii- EX-10.20 7 w58882ex10-20.txt SECURITY AGREEMENT EXECUTION COPY ================================================================================ Exhibit 10.20 SECURITY AGREEMENT dated as of November 7, 2001 among EAGLEFUNDING CAPITAL CORPORATION as Conduit, FLEET SECURITIES, INC. as Administrator of EagleFunding Capital Corporation, FLEET NATIONAL BANK and FIRST UNION NATIONAL BANK, as Liquidity Providers, BANCBOSTON LEASING INVESTMENTS INC. and FIRST UNION NATIONAL BANK, as Investors, FLEET NATIONAL BANK, as Administrative Agent, GENOME STATUTORY TRUST 2001A, as Lessor and HUMAN GENOME SCIENCES, INC., as Lessee ================================================================================ (HGSI) SECURITY AGREEMENT SECURITY AGREEMENT, dated as of November 7, 2001 (this "Security Agreement"), among EAGLEFUNDING CAPITAL CORPORATION, a Delaware corporation (the "Conduit"), FLEET SECURITIES, INC. as Administrator of EagleFunding Capital Corporation, (the "EagleFunding Administrator"), FLEET NATIONAL BANK and FIRST UNION NATIONAL BANK, as Liquidity Providers (the "Liquidity Providers"), BANCBOSTON LEASING INVESTMENTS INC. and FIRST UNION NATIONAL BANK as Investors (the "Investors"), FLEET NATIONAL BANK as administrative agent (the "Administrative Agent"), Lessor Hedging Agreement Counterparties and GENOME STATUTORY TRUST 2001A, a Delaware business trust, as lessor (the "Lessor") and HUMAN GENOME SCIENCES, INC., a Delaware corporation, as lessee and construction agent (the "Lessee"). WHEREAS, the Conduit intends from time to time to issue its Commercial Paper Notes in the United States commercial paper market; WHEREAS, the Conduit, the Administrator, the Liquidity Providers and the Administrative Agent have entered into a Loan Agreement pursuant to which the Conduit may elect to lend a portion of the net proceeds of its issuance of Commercial Paper Notes from time to time to Lessor, failing which the Liquidity Providers have agreed to lend funds to Lessor; WHEREAS, pursuant to the Trust Agreement and the Participation Agreement, the Investors have agreed to make Investor Contributions to the Lessor; WHEREAS, Lessee desires by this Security Agreement and the other Security Documents to which it is a party, among other things, to provide for the assignment, pledge and grant of a security interest by Lessee to the Administrative Agent for the benefit of the Lessor, among other things, in certain of Lessee's right, title and interest in and to the Lessee Collateral (as defined below); WHEREAS, Lessor desires by this Security Agreement and the other Security Documents to which it is a party, among other things, to provide for the assignment, pledge and grant of a security interest by Lessor to the Administrative Agent for the benefit of the Participants and the Lessor Hedging Agreement Counterparties, among other things, in certain of the Lessor's right, title and interest in and to the Participant Collateral (as defined below); NOW THEREFORE, the parties hereto agree as follows: GRANTING CLAUSE FIRST This Security Agreement secures the payment of all obligations of Lessee now or hereafter existing under the Participation Agreement, the Lease and each other Operative Document, whether for principal, interest, costs, fees, expenses or otherwise, and all other obligations of Lessee, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent or now or hereafter existing or due or to become due under the Operative SECURITY AGREEMENT (HGSI) Documents (all such obligations and other obligations of Lessee being the "Secured Lessee Obligations"). To secure payment and performance of the Secured Lessee Obligations, Lessee does hereby grant, bargain, sell, assign, transfer, convey, and confirm, unto the Administrative Agent (on behalf of the Lessor), a security interest in and lien on all right, title and interest of Lessee in, to and under the Lessee Collateral. It is expressly agreed that anything herein contained to the contrary notwithstanding, Lessee shall remain liable under the Operative Documents to which it is party to perform all of the obligations assumed by it thereunder, all in accordance with and pursuant to the terms and provisions thereof, and none of Lessor, the Administrative Agent, the Participants or any Lessor Hedging Agreement Counterparty shall have any obligation or liability under such Operative Documents by reason of or arising out of the assignment hereunder, nor shall Lessor, the Administrative Agent, any Participant or any Lessor Hedging Agreement Counterparty be required or obligated in any manner to perform or fulfill any obligations of Lessee under or pursuant to such Operative Documents or, except as herein expressly provided, to make any payment, or to make any inquiry as to the nature or sufficiency of any payment received by it, or present or file any claim, or take any action to collect or enforce the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. Upon the occurrence and during the continuance of any Construction Agency Event of Default or Lease Event of Default, Lessee does hereby irrevocably constitute the Administrative Agent, on behalf of Lessor, the true and lawful attorney-in-fact of Lessee, with full power (in the name of Lessee or otherwise), (i) to ask for, require, demand, and receive, any and all monies and claims for monies (in each case including insurance and requisition proceeds) due and to become due under or arising out of the property which now or hereafter constitutes part of the Lessee Collateral, (ii) to endorse any checks or other instruments or orders in connection therewith and (iii) to file any claims or to take any action or to institute any proceedings which Lessor or the Administrative Agent may deem to be necessary or advisable with respect to the Lessee Collateral. GRANTING CLAUSE SECOND This Security Agreement secures the payment of all obligations of Lessor now or hereafter existing under the Participation Agreement and each other Operative Document, whether for principal, interest, costs, fees, expenses or otherwise, and all other obligations of Lessor to the Participants, the Conduit and the Lessor Hedging Agreement Counterparties, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent or now or hereafter existing or due or to become due (all such obligations and other obligations of Lessor being the "Secured Lessor Obligations"). To secure payment and performance of the Secured Lessor Obligations, Lessor does hereby grant, bargain, sell, assign, transfer, convey, and confirm, unto the Administrative Agent (on behalf of the Participants and the Lessor Hedging Agreement Counterparties), a security 2 SECURITY AGREEMENT (HGSI) interest in and lien on all right, title and interest of Lessor in, to and under the following described property, rights and privileges, other than Excluded Amounts and Excepted Rights (which collectively, excluding Excluded Amounts and Excepted Rights, are hereinafter called the "Participant Collateral" or the "Collateral"): (1) the Lessee Collateral and all other property pledged to the Lessor, or in which the Lessor has been granted a security interest, whether pursuant to Granting Clause First above or any other Operative Documents or otherwise; (2) all equipment of Lessor, including all parts thereof and all accessions, additions, attachments, improvements, substitutions and replacements thereto and therefor and all accessories related thereto (collectively referred to as the "Equipment"); (3) all inventory in all of its forms of Lessor, including (a) all raw materials and work in process therefor, finished goods thereof, and materials used or consumed in the manufacture or production thereof, (b) all goods in which Lessor has an interest in mass or a joint or other interest or right of any kind (including goods in which Lessor has an interest or right as consignee), and (c) all goods which are returned to or repossessed by Lessor, and all accessions thereto, products thereof and documents therefor (all of the foregoing collectively referred to as the "Inventory"); (4) the Participation Agreement and an original executed counterpart of the Lease to which a chattel paper receipt is attached, including the security interest granted thereunder in favor of Lessor and including all rights to receive payments thereunder (including Rent) other than Excluded Amounts; (5) the Security Documents, the Material Construction Contracts and the other Operative Documents; (6) all accounts, contracts, contract rights, chattel paper, documents, instruments, and general intangibles (including tax refunds) of Lessor, whether or not arising out of or in connection with the sale or lease of goods or the rendering of services, and all rights of Lessor now or hereafter existing in and to all security agreements, guaranties, leases and other contracts securing or otherwise relating to any such accounts, contracts, contract rights, chattel paper, documents, instruments, and general intangibles (all of the foregoing collectively referred to as the "Receivables", and any and all such security agreements, guaranties, leases and other contracts collectively referred to as the "Related Contracts"); (7) all books, records, writings, databases, information and other property relating to, used or useful in connection with, evidencing, embodying, incorporating or referring to, any of the foregoing (to the extent there are no restrictions at law or contract on the assignment contemplated herein); 3 SECURITY AGREEMENT (HGSI) (8) all books, records, writings, databases, information and other property relating to, used or useful in connection with, evidencing, embodying, incorporating or referring to, any of the foregoing (to the extent there are no restrictions at law or contract on the assignment contemplated herein); (9) all rights to exercise remedies under the Lease (other than relating to Excluded Amounts of Excepted Rights); and (10) all products, accessions, rents, issues, profits, returns, income and proceeds of and from any and all of the foregoing Participant Collateral (including proceeds which constitute property of the types described in the foregoing clauses of this Granting Clause Second, proceeds deposited from time to time in any lockboxes of Lessor, and, to the extent not otherwise included, all payments under insurance (whether or not the Administrative Agent is the loss payee thereof), or any indemnity, warranty or guaranty payable by reason of loss or damage to or otherwise with respect to any of the foregoing Participant Collateral). Lessor hereby assigns, transfers and conveys to the Administrative Agent for the benefit of the Participants and the Lessor Hedging Agreement Counterparties all payments (except Excluded Amounts) payable by Lessee under the Lease and all amounts payable to it by Construction Agent under the Construction Agency Agreement. It is expressly agreed that anything herein contained to the contrary notwithstanding, Lessor shall remain liable under the Operative Documents to which it is party to perform all of the obligations assumed by it thereunder, all in accordance with and pursuant to the terms and provisions thereof, and none of the Participants, the Administrative Agent or any Lessor Hedging Agreement Counterparty shall have any obligation or liability under such Operative Documents by reason of or arising out of the assignment hereunder, nor shall the Participants, the Administrative Agent or any Lessor Hedging Agreement Counterparty be required or obligated in any manner to perform or fulfill any obligations of Lessor under or pursuant to such Operative Documents or, except as herein expressly provided, to make any payment, or to make any inquiry as to the nature or sufficiency of any payment received by it, or present or file any claim, or take any action to collect or enforce the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. Lessor does hereby irrevocably constitute the Administrative Agent (on behalf of the Participants and the Lessor Hedging Agreement Counterparties) the true and lawful attorney-in-fact of Lessor, with full power (in the name of Lessor or otherwise), other than with respect to Excepted Rights and Excluded Amounts, (i) to ask for, require, demand, and receive, any and all monies and claims for monies (in each case including insurance and requisition proceeds) due and to become due under or arising out of the Operative Documents to which Lessor is party, and all other property which now or hereafter constitutes part of the Participant Collateral, (ii) to endorse any checks or other instruments or orders in connection therewith and (iii) to file any claims or to take any action or to institute any proceedings which the Participants, the Administrative Agent or any Lessor Hedging Agreement Counterparty may deem to be 4 SECURITY AGREEMENT (HGSI) necessary or advisable. Under the Lease and the Participation Agreement, Lessee is directed to make all payments of Rent (other than Excluded Amounts) and all other amounts which are required to be paid to Lessor pursuant to the Lease (other than Excluded Amounts) directly to the Administrative Agent in accordance with the provisions of Article II, for application as provided in this Security Agreement and the Participation Agreement. Concurrently with the delivery hereof, Lessor is delivering to the Administrative Agent the original executed counterpart of the Lease (to which a chattel paper receipt is attached) which it received from Lessee. Each of Lessee and Lessor agrees that at any time and from time to time, upon the written request of the Administrative Agent, each of Lessee and Lessor will promptly and duly execute and deliver or cause to be duly executed and delivered any and all such further instruments and documents as the Administrative Agent may reasonably deem necessary in obtaining the full benefits of the assignment hereunder and of the rights and powers herein granted. Each of Lessee and Lessor hereby warrants and represents that: (A) it has not assigned or pledged, and hereby covenants that it will not assign or pledge, so long as this Security Agreement shall remain in effect, any of its right, title or interest hereby assigned, to anyone other than (i) in the case of Lessee, to the Lessor and the Administrative Agent on behalf of Lessor, and (ii) in the case of Lessor, to the Participants and the Lessor Hedging Agreement Counterparties, and the Administrative Agent for the benefit of Participants and the Lessor Hedging Agreement Counterparties, and (B) Lessor will not, except as provided in this Security Agreement and any other Operative Documents or except with the consent of the Administrative Agent, (i) accept any payment from Lessee, (ii) enter into any agreement amending or supplementing the Lease, the Participation Agreement or any other Operative Document to which it is party, (iii) execute any waiver or modification of, or consent under, the terms of, or (except with respect to its Excluded Amounts and subject to its Excepted Rights) exercise any rights, power or privileges under, the Lease, the Participation Agreement or any other Operative Document to which it is party, or (iv) settle or compromise any claim arising under the Lease or the Participation Agreement. Lessor hereby ratifies and confirms each Operative Document to which it is party and hereby agrees that it will not take or omit to take any action, the taking or omission of which might result in an alteration or impairment of any such Operative Document or this Security Agreement or of any of the rights created by any such document or the assignment hereunder. IT IS HEREBY COVENANTED AND AGREED by and between the parties hereto as follows: 5 SECURITY AGREEMENT (HGSI) ARTICLE I DEFINITIONS; APPOINTMENT OF ADMINISTRATIVE AGENT, ETC. SECTION 1.01 Definitions. Unless otherwise defined herein, capitalized terms shall have the meaning ascribed to them in Appendix A to the Participation Agreement, dated as of even date herewith, among the Lessor, the Lessee, the Investors, the Administrative Agent, the Liquidity Agent, the Conduit, the Administrator, the Liquidity Providers and Wells Fargo Bank, Northwest, N.A., as trustee for the Lessor and the rules of usage set forth therein shall apply hereto. SECTION 1.02 Appointment of Administrative Agent, etc. (a) Each of the Lessor, and the Participants hereby appoints Fleet National Bank as the Administrative Agent and hereby presently transfers to the Administrative Agent all rights of the Lessor, the Participants and the Lessor Hedging Agreement Counterparties under this Security Agreement, including all right, title and interest of Lessee or Lessor in and to the applicable Collateral (including all payments payable by Lessee under the Lease), except for Excluded Amounts and Excepted Rights. The parties agree that the Administrative Agent is holding the original executed counterpart of the Lease, as bailee pursuant to Section 9-313 of the UCC. The Administrative Agent acknowledges that it has been notified of the security interests granted in this Security Agreement in the original executed counterpart of the Lease. Proceeds of the Collateral shall be distributed by the Administrative Agent in accordance with Article X of the Participation Agreement. (b) Lessee hereby acknowledges such appointment and the transfer of rights of the Lessor to the Administrative Agent under this Security Agreement. Lessor hereby acknowledges such appointment and the transfer of rights of the Participants to the Administrative Agent under this Security Agreement. ARTICLE II RENT PAYMENTS SECTION 2.01 Payment of Rent and Other Amounts. Pursuant to this Security Agreement, all of the payments (other than Excluded Amounts) made by Lessee under the Operative Documents have been assigned to the Administrative Agent. Lessee shall pay or cause to be paid each installment of the Base Rent, Supplemental Rent, and other amounts payable under the Lease and the Operative Documents, (excluding, in each case, Excluded Amounts and subject, in each case, to Excepted Rights) to the Administrative Agent. At the appropriate times, the Conduit and Lessor shall instruct all other Persons who may come to owe to the Participants, the Lessor Hedging Agreement Counterparties or Lessor amounts pursuant to the Lease or any other Operative Document to pay such amounts (excluding, in each case, Excluded Amounts and subject, in each case, to Excepted Rights) and each of the Participants and Lessor shall use reasonable efforts to cause all such Persons to make all such payments to the Administrative Agent. 6 SECURITY AGREEMENT (HGSI) SECTION 2.02 Payments from Collateral Only. Without impairing any of the other rights, powers, privileges, liens or security interests of the Participants, the Lessor Hedging Agreement Counterparties or the Administrative Agent under this Security Agreement or any other Operative Document, each Participant and the Lessor Hedging Agreement Counterparties agree that, except as expressly provided in this Security Agreement, the Trust Agreement, the Loan Agreement, the Participation Agreement, the Liquidity Agreement or any other Operative Document, (i) the obligation of Lessor to make all payments under the Lease, and the performance by Lessor of every obligation or covenant contained in this Security Agreement, the Participation Agreement, or any of the other Operative Documents, shall be payable only from the income and proceeds of Lessor to the extent included in the Participant Collateral or any other collateral pledged by Lessor under the Security Documents and only to the extent that Lessor shall have sufficient income or proceeds to the extent included in the Participant Collateral to enable the Administrative Agent to make such payments in accordance with the terms of Article X of the Participation Agreement, and all of the statements, representations, covenants and agreements made by Lessor contained in this Security Agreement and any agreement referred to herein, unless expressly otherwise stated, are made and intended only for the purpose of binding Lessor and establishing the existence of rights and remedies which can be exercised and enforced against Lessor; therefore, anything contained in this Security Agreement or such other agreements to the contrary notwithstanding, no recourse shall be had with respect to this Security Agreement or such other Operative Documents against Lessor, except to the extent of such Participant Collateral, or against any officer, director, trustee, servant, partner, member or direct or indirect parent or controlling person or persons of Lessor; and (ii) none of Lessor or the Administrative Agent shall have any personal liability for any amounts payable hereunder, under the Participation Agreement or any of the other Operative Documents (except, in the case of Lessor, to the extent of such Participant Collateral); provided, however, that this Section 2.02 shall not be construed to prohibit any action or proceeding against any party hereto for its own willful misconduct, gross negligence, bad faith or criminal conduct for which it would otherwise be liable (but only to the extent of the damages arising by reason thereof). Lessor hereby acknowledges that the Administrative Agent has expressly reserved all its legal rights and remedies against the Participant Collateral granted by Lessor, including, without limitation of the generality of the foregoing, the right, in the event of any payment due and unpaid from Lessor under the Loan Agreement, to foreclose upon this Security Agreement and/or to receive the proceeds from the Participant Collateral and otherwise to enforce any other right under this Security Agreement. ARTICLE III RECEIPT, DISTRIBUTION AND APPLICATION OF INCOME FROM THE COLLATERAL SECTION 3.01 Distribution. Distributions of payments and collateral proceeds shall be distributed in the manner set forth in Article X of the Participation Agreement. 7 SECURITY AGREEMENT (HGSI) ARTICLE IV REMEDIES OF ADMINISTRATIVE AGENT UPON EVENT OF DEFAULT SECTION 4.01 Remedies Upon Default. If any Lease Event of Default or Construction Agency Event of Default shall have occurred and be continuing the Administrative Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party under the UCC (whether or not the UCC applies to the Collateral at issue), and the Administrative Agent may also, without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, or at any of the Administrative Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Administrative Agent may deem commercially reasonable. Lessor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Lessor of the time and place of any public sale or the time after which a private sale is to be made shall constitute reasonable notification. The Administrative Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Administrative Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefore and such sale may, without further notice, be made at the time and place to which it was so adjourned. The Administrative Agent shall be entitled to consult with legal counsel and financial advisors in connection with the sale of the Collateral and shall be protected in any reasonable action or forbearance taken in connection with the advice of such counsel or advisors. SECTION 4.02 Remedies Cumulative. Each and every right, power and remedy given to the Administrative Agent specifically or otherwise in this Security Agreement shall be cumulative and shall be in addition to every other right, power and remedy herein specifically given or now or hereafter existing at law, or under the UCC, or otherwise in equity or by statute, and each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time and as often and in such order as may be deemed expedient by the Administrative Agent, and the exercise or the beginning of the exercise of any power or remedy shall not be construed to be a waiver of the right to exercise at the same time or thereafter any other right, power or remedy. No delay or omission by the Administrative Agent in the exercise of any right, remedy or power or in the pursuance of any remedy shall impair any such right, power or remedy or be construed to be a waiver of any default on the part of Lessor or Lessee or to be an acquiescence therein. SECTION 4.03 Discontinuance of Proceedings. In case the Administrative Agent shall have instituted any proceeding to enforce any right, power or remedy under this Security Agreement by foreclosure, entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Administrative Agent, then and in every such case the Participants, the Lessor Hedging Agreement Counterparties, the Administrative Agent, Lessee and Lessor shall, subject to any determination in such proceedings, be restored to their former positions and rights hereunder with respect to the Collateral, and all rights, remedies and powers of the Administrative Agent shall continue as if no such proceedings had been instituted. 8 SECURITY AGREEMENT (HGSI) ARTICLE V THE PARTICIPANTS AND THE ADMINISTRATIVE AGENT SECTION 5.01 No Representations or Warranties as to Property or Documents. NONE OF THE PARTICIPANTS, THE LESSOR HEDGING AGREEMENT COUNTERPARTIES, OR LESSOR MAKES OR SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE, VALUE, COMPLIANCE WITH SPECIFICATIONS, CONDITION, DESIGN, QUALITY, DURABILITY, OPERATION, MERCHANTABILITY OR FITNESS FOR USE OR PURPOSE OF ANY PROPERTY, OR ANY OTHER REPRESENTATION OR WARRANTY WITH RESPECT TO ANY PROPERTY WHATSOEVER. None of the Participants, the Lessor Hedging Agreement Counterparties, or Lessor makes or shall be deemed to have made any representations or warranty as to the validity, legality or enforceability of this Security Agreement, the Loan Agreements, the Notes, the Participation Agreement, the Lease or any other Operative Document as to the correctness of any statement contained in any thereof, except for the representations and warranties of Lessor made in Section 5.3 of the Participation Agreement. The Administrative Agent makes no representation or warranty hereunder whatsoever. SECTION 5.02 Loss of Principal or Interest. The Administrative Agent shall not be liable for any loss of principal or interest resulting from a Permitted Investment, provided, that any payments received or applied hereunder by the Administrative Agent shall be accounted for by the Administrative Agent so that any portion thereof paid or applied pursuant hereto shall be identifiable as to the source thereof. SECTION 5.03 Reliance; Administrative Agent; Advice of Counsel. The Administrative Agent shall not incur any liability to anyone in acting upon any signature, instrument, notice, resolution, request, consent, order, certificate, report, opinion, bond or other document or paper believed by it to be genuine and believed by it to be signed by the proper party or parties. The Administrative Agent may accept a copy of a resolution of the board of directors or general manager of any party to the Participation Agreement, certified by the Secretary or an Assistant Secretary thereof as duly adopted and in full force and effect, as conclusive evidence that such resolution has been duly adopted and that the same is in full force and effect. As to any fact or matter relating to Lessee or Lessor the manner of ascertainment of which is not specifically described herein, the Participants, the Lessor Hedging Agreement Counterparties, or the Administrative Agent may for all purposes hereof rely on a certificate, signed by a duly authorized officer of Lessee or Lessor, as to such fact or matter, and such certificate shall constitute full protection to the Participants, the Lessor Hedging Agreement Counterparties, or the Administrative Agent for any action taken or omitted to be taken by them in good faith in reliance thereon. 9 SECURITY AGREEMENT (HGSI) ARTICLE VI MISCELLANEOUS SECTION 6.01 Termination of Security Agreement. This Security Agreement shall remain in full force and effect until payment in full of the Lease Balance and all other amounts due and payable by the Lessee under the Operative Documents and the termination of the Commitments of the Participants, provided, however, that this Security Agreement and the security interests created hereby shall earlier terminate and this Security Agreement shall be of no further force or effect upon any sale or other final disposition by the Administrative Agent of all of the property constituting the Collateral and the final distribution by the Administrative Agent of all monies or other property or proceeds constituting the Collateral in accordance with the terms hereof. Upon such termination of this Security Agreement, the Participants shall direct the Administrative Agent to execute and deliver to or as directed in writing by the Lessor, an appropriate instrument terminating this Security Agreement and releasing Collateral from the assignment and pledge thereof hereunder, and the Administrative Agent shall execute and deliver such instrument as aforesaid. Except as aforesaid otherwise provided, this Security Agreement and the security interests created hereby shall continue in full force and effect in accordance with the terms hereof. SECTION 6.02 Sale of Collateral by Administrative Agent Is Binding. Any sale or other conveyance of any Lessee Collateral or the Participant Collateral by the Administrative Agent made pursuant to the terms of this Security Agreement or the Lease shall be effective to transfer or convey all right, title and interest of the Lessee or Lessor, as applicable, in and to such Collateral. No purchaser or other grantee shall be required to inquire as to the authorization, necessity, expediency or regularity of such sale or conveyance or as to the application of any sale or other proceeds with respect thereto by the Administrative Agent. SECTION 6.03 Security Agreement for Benefit of the Lessor, Participants, Lessor Hedging Agreement Counterparties and the Administrative Agent. Except as provided by Applicable Law or otherwise expressly provided in the Operative Documents, nothing in this Security Agreement, whether express or implied, shall be construed to give any legal or equitable right, remedy or claim under or in respect of this Security Agreement to any Person other than Lessor, the Participants, the Administrative Agent and the Lessor Hedging Agreement Counterparties. SECTION 6.04 Notices. All notices, demands, requests, consents, approvals and other instruments under this Security Agreement shall be made in accordance with the notice provisions of the Participation Agreement. SECTION 6.05 Severability. Any provision of this Security Agreement which is prohibited or unenforceable in any jurisdiction, shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10 SECURITY AGREEMENT (HGSI) SECTION 6.06 No Oral Modification or Continuing Waivers. No term or provision of this Security Agreement may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party or other person against whom enforcement of the change, waiver, discharge or termination is sought and then only in accordance with Section 12.5 of the Participation Agreement. SECTION 6.07 Successors and Assigns. All covenants and agreements contained herein shall be binding upon, and inure to the benefit of, each of the parties hereto and the successors and assigns of each, all as herein provided. SECTION 6.08 Headings. The headings of the various Articles and Sections herein and in the table of contents hereto are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. SECTION 6.09 Governing Law; Counterpart Form. This Security Agreement and the rights and obligations of the parties under this Security Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York, including Section 5-1401 of the New York General Obligations Law, but excluding to the maximum extent permitted by Applicable Law all other conflicts of law principles and choice of law rules of New York. This Security Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. SECTION 6.10 Continuing Security Interest. This Security Agreement creates a continuing security interest in the Collateral. [End of Page] [Signature Pages Follow] 11 SECURITY AGREEMENT (HGSI) IN WITNESS WHEREOF, the parties hereto have caused this SECURITY AGREEMENT to be duly executed by their respective officers thereunto duly authorized, as of the day and year first above written. EAGLEFUNDING CAPITAL CORPORATION By: /s/ THOMAS M. CALHOUN ---------------------------------- Name: Thomas M. Calhoun Title: Director, its attorney-in-fact SECURITY AGREEMENT (HGSI) FLEET SECURITIES, INC. By: /s/ THOMAS M. CALHOUN ---------------------------------- Name: Thomas M. Calhoun Title: Director SECURITY AGREEMENT (HGSI) FLEET NATIONAL BANK, as Liquidity Provider By: /s/ THOMAS W. DAVIES ---------------------------------- Name: Thomas W. Davies Title: Managing Director SECURITY AGREEMENT (HGSI) FIRST UNION NATIONAL BANK, as Liquidity Provider By: /s/ BARBARA K. ANGEL ---------------------------------- Name: Barbara Kaufmann Angel Title: Vice President SECURITY AGREEMENT (HGSI) BANCBOSTON LEASING INVESTMENTS INC., as Investor By: /s/ STEVEN CRISCIONE ---------------------------------- Name: Steven Criscione Title: Vice President SECURITY AGREEMENT (HGSI) FIRST UNION NATIONAL BANK, as Investor By: /s/ BARBARA K. ANGEL ---------------------------------- Name: Barbara Kaufmann Angel Title: Vice President SECURITY AGREEMENT (HGSI) FLEET NATIONAL BANK, as Administrative Agent By: /s/ THOMAS W. DAVIES ---------------------------------- Name: Thomas W. Davies Title: Managing Director SECURITY AGREEMENT (HGSI) GENOME STATUTORY TRUST 2001A, as Lessor By: /s/ C. SCOTT NIELSON ---------------------------------- Name: C. Scott Nielson Title: Vice President SECURITY AGREEMENT (HGSI) HUMAN GENOME SCIENCES, INC., as Lessee By: /s/ STEVEN C. MAYER ---------------------------------- Name: Steven C. Mayer Title: Senior Vice President and CFO TABLE OF CONTENTS
PAGE ARTICLE I DEFINITIONS; APPOINTMENT OF ADMINISTRATIVE AGENT, ETC.........................................6 SECTION 1.01 Definitions...........................................................................6 SECTION 1.02 Appointment of Administrative Agent, etc..............................................6 ARTICLE II RENT PAYMENTS.................................................................................6 SECTION 2.01 Payment of Rent and Other Amounts.....................................................6 SECTION 2.02 Payments from Collateral Only.........................................................7 ARTICLE III RECEIPT, DISTRIBUTION AND APPLICATION OF INCOME FROM THE COLLATERAL...........................7 SECTION 3.01 Distribution..........................................................................7 ARTICLE IV REMEDIES OF ADMINISTRATIVE AGENT UPON EVENT OF DEFAULT........................................8 SECTION 4.01 Remedies Upon Default.................................................................8 SECTION 4.02 Remedies Cumulative...................................................................8 SECTION 4.03 Discontinuance of Proceedings.........................................................8 ARTICLE V THE PARTICIPANTS AND THE ADMINISTRATIVE AGENT.................................................9 SECTION 5.01 No Representations or Warranties as to Property or Documents..........................9 SECTION 5.02 Loss of Principal or Interest.........................................................9 SECTION 5.03 Reliance; Administrative Agent; Advice of Counsel.....................................9 ARTICLE VI MISCELLANEOUS................................................................................10 SECTION 6.01 Termination of Security Agreement....................................................10 SECTION 6.02 Sale of Collateral by Administrative Agent Is Binding................................10 SECTION 6.03 Security Agreement for Benefit of the Lessor, Participants, Lessor Hedging Agreement Counterparties and the Administrative Agent.................10 SECTION 6.04 Notices..............................................................................10 SECTION 6.05 Severability.........................................................................10 SECTION 6.06 No Oral Modification or Continuing Waivers...........................................11 SECTION 6.07 Successors and Assigns...............................................................11 SECTION 6.08 Headings.............................................................................11 SECTION 6.09 Governing Law; Counterpart Form......................................................11 SECTION 6.10 Continuing Security Interest.........................................................11
-i- EX-10.21 8 w58882ex10-21.txt LIQUID COLLATERAL AGREEMENT Exhibit 10.21 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT DATED AS OF NOVEMBER 7, 2001 AMONG HUMAN GENOME SCIENCES, INC., AS LESSEE, GENOME STATUTORY TRUST 2001A, AS LESSOR, FLEET NATIONAL BANK, AS FLEET NATIONAL BANK COLLATERAL AGENT, AND THE PERSONS LISTED ON SCHEDULE I HERETO, AS BENEFICIARIES [An identical liquid collateral agreement was also entered into between First Union National Bank as First Union Collateral Agent, Human Genome Sciences, Inc. as lessee, the Genome Statutory Trust 2001A as lessor, and the persons listed on Schedule I of that agreement.] FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT THIS FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT, dated as of November 7, 2001 (this "Agreement"), by and among HUMAN GENOME SCIENCES, INC. ("Lessee"), GENOME STATUTORY TRUST 2001A, a Connecticut statutory trust ("Lessor"), FLEET NATIONAL BANK ("Fleet National Bank Collateral Agent"), as Fleet National Bank Collateral Agent for the benefit of the Beneficiaries, and the Persons listed on Schedule I hereto (the "Beneficiaries"). W I T N E S S E T H: WHEREAS, pursuant to the Participation Agreement, Ground Lessor and Ground Lessee have entered into the Ground Lease pursuant to which Ground Lessee has leased the Traville Site from Ground Lessor; WHEREAS, pursuant to the Lease, Lessor has leased the Properties to Lessee; WHEREAS, in connection with the Participation Agreement, Lessee has opened the Account (Fleet National Bank) with the Fleet National Bank Custodian, in the name of Lessee, subject to a first priority lien and security interest in favor of Lessor, to hold Securities (which initially are the Securities described in Exhibit A hereto); WHEREAS, in connection herewith, Lessee, Lessor, the Fleet National Bank Collateral Agent, the Beneficiaries and the Fleet National Bank Custodian are entering into the Fleet National Bank Custody Agreement dated as of the Documentation Date; WHEREAS, as a material inducement for Lessor to enter into the Participation Agreement and the other Operative Documents to which it is a party, Lessee has agreed to execute and deliver this Agreement for the purpose of securing the Secured Lessee Obligations and for the purpose of subjecting the Fleet National Bank Liquid Collateral to the Lien of this Agreement as security for the payment and performance of the Secured Lessee Obligations; and WHEREAS, as a material inducement for the Beneficiaries to enter into the Participation Agreement and the other Operative Documents to which they are party, Lessor has agreed to execute and deliver this Agreement for the purpose of securing the Secured Lessor Obligations and for the purpose of subjecting to the extent of the Lessor's interest therein the Fleet National Bank Liquid Collateral to the Lien of this Agreement as security for the payment and performance of the Secured Lessor Obligations. IT IS HEREBY COVENANTED AND DECLARED by and between the parties hereto and their respective successors and assigns that the terms upon which the Fleet National Bank Liquid Collateral shall be held and used are as follows: FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT ARTICLE 1 DEFINITIONS, INTERPRETATION 1.1 CERTAIN DEFINITIONS (a) Subject to the following sentence, Appendix A to the Participation Agreement applies (including as to rules of usage) to this Agreement. Except as contained in Section 1.1(b), capitalized terms used herein shall have the respective meanings assigned thereto in Appendix A to the Participation Agreement for all purposes hereof. (b) In this Agreement the following capitalized terms have the following respective meanings: "ACCOUNT (FLEET NATIONAL BANK)" means Securities Account number _____ of Lessee maintained with the Fleet National Bank Custodian (or any successor custodian) subject to the Liens and security interests granted hereunder, together with all subaccounts thereto and any new accounts and subaccounts established and maintained in replacement thereof with the Fleet National Bank Custodian or any successor custodian. "ADDITIONAL COLLATERAL DELIVERY DATE" means, with respect to each Additional Collateral Demand, the day on or before the fifth Business Day following the making of an Additional Collateral Demand or if one or more Additional Collateral Demands are outstanding and the aggregate amount of the Pledged Security required to be transferred to the Account (Fleet National Bank) exceeds $5,000,000, then with respect to all outstanding transfers of Pledged Securities, on the Business Day next following the Business Day when the aggregate amounts required to be transferred to such Account (Fleet National Bank) first exceeds $5,000,000. "ADDITIONAL COLLATERAL DEMAND" has the meaning set forth in Section 2.5(a)(i). "ADDITIONAL COLLATERAL DEMAND DATE" has the meaning set forth in Section 2.5(a)(iii). "ADDITIONAL LIQUID COLLATERAL" has the meaning set forth in Section 2.5(a)(i). "BENEFICIARIES" has the meaning set forth in the first paragraph of this Agreement and shall include the successors and permitted assigns of the Beneficiaries. "ENFORCEMENT EVENT" means a Lease Event of Default or a Construction Agency Event of Default. "ENFORCEMENT NOTICE" means a notice from the Fleet National Bank Collateral Agent to the Fleet National Bank Custodian in substantially the form of Exhibit A hereto. "ENTITLEMENT ORDER" has the meaning set forth in Section 8-102(a)(8) of the Uniform Commercial Code and shall include, without limitation, any Enforcement Notice from the Fleet National Bank Collateral Agent. 2 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT "FINANCIAL ASSET" has the meaning set forth in Section 8-102(a)(9) of the Uniform Commercial Code. "FLEET NATIONAL BANK COLLATERAL AGENT" means Fleet National Bank Collateral Agent and shall include the successors and permitted assigns of Fleet National Bank Collateral Agent. "FLEET NATIONAL BANK CUSTODIAN" means the Fleet National Bank Collateral Agent or any successor custodian appointed pursuant to the Fleet National Bank Custody Agreement. "FLEET NATIONAL BANK CUSTODY AGREEMENT" means the Fleet National Bank Custody Agreement, dated as of November 7, 2001, among Lessee, Lessor, the Fleet National Bank Collateral Agent, the Beneficiaries and the Fleet National Bank Custodian. "FLEET NATIONAL BANK LIQUID COLLATERAL" has the meaning set forth in Section 2.1(a)(i). "INVESTMENT PROPERTY" has the meaning set forth in Section 9-102(a)(49) of the Uniform Commercial Code. "PARTICIPATION AGREEMENT" means the Participation Agreement, dated as of November 7, 2001, among Lessee, as Lessee and Construction Agent, Traville LLC, as Ground Lessor, Lessor, as Ground Lessee and Lessor, BancBoston Leasing Investments Inc. and First Union National Bank, as Investors, EagleFunding Capital Corporation, as Lender, Fleet Securities, Inc., as Administrator, Fleet National Bank and First Union National Bank, as Liquidity Providers, Fleet National Bank, as Fleet National Bank Collateral Agent, First Union National Bank, as First Union Collateral Agent and Fleet National Bank, as Administrative Agent and Liquidity Agent. "PLEDGED SECURITIES" means the Securities credited to the Account (Fleet National Bank) from time to time, less any Pledged Securities released to Lessee in accordance with the Fleet National Bank Liquid Collateral Agreement and the Participation Agreement. "PROCEEDS" of the Fleet National Bank Liquid Collateral has the meaning given in Section 9-102 of the Uniform Commercial Code and shall include cash, securities and other property realized in respect of, and distributions in kind of, the Fleet National Bank Liquid Collateral, as applicable. "SECURED LESSEE OBLIGATIONS" means all obligations of Lessee now or hereafter existing under the Participation Agreement, the Lease and each other Operative Document, whether for principal, interest, costs, fees, expenses or otherwise, and all other obligations of Lessee to Lessor and the Beneficiaries, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent or now or hereafter existing or due or to become due under the Operative Documents. 3 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT "SECURED LESSOR OBLIGATIONS" means all obligations of Lessor now or hereafter existing under the Participation Agreement and each other Operative Document, whether for principal, interest, costs, fees, expenses or otherwise, and all other obligations of Lessor to the Beneficiaries, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent or now or hereafter existing or due or to become due. "SECURITIES" has the meaning given that term in Section 8-102(a)(15) of the Uniform Commercial Code. "SECURITIES ACCOUNT" has the meaning set forth in Section 8-501(a) of the Uniform Commercial Code. "SECURITIES INTERMEDIARY" has the meaning set forth in Section 8-102(a)(14) of the Uniform Commercial Code. "SECURITY ENTITLEMENT" has the meaning set forth in Section 357.2 of the Treasury Regulations and Section 8-102(a)(17) of the Uniform Commercial Code. "SETTLEMENT DATE" has the meaning set forth in Section 2.5(a)(iv). "TREASURY REGULATIONS" means 31 CFR Part 357, as amended by regulations published at 61 Fed. Reg. 43626 (August 23, 1996) and as may be amended from time to time by any subsequent regulations. "UNIFORM COMMERCIAL CODE" and "UCC" means the Uniform Commercial Code, as amended, as in effect in the State of New York from time to time. ARTICLE 2 GRANTING OF SECURITY 2.1 GRANTING OF SECURITY INTERESTS (a) Granting of Security Interest from Lessee to Lessor (i) Lessee has established and shall maintain at all times, so long as there are Secured Lessee Obligations outstanding, the Account (Fleet National Bank) with the Fleet National Bank Custodian, which Account (Fleet National Bank) shall be a Securities Account, shall be in the name of Lessee but subject to the first priority security interest of the Fleet National Bank Collateral Agent for the benefit of the Beneficiaries and itself, and shall have the designation as provided in the Fleet National Bank Custody Agreement. As security for the due, prompt and complete payment and performance of the Secured Lessee Obligations, Lessee hereby unconditionally, irrevocably and presently conveys, mortgages, assigns, transfers, and pledges to Lessor, and hereby grants to Lessor, a first Lien on, and a first priority security interest in, all right, title and interest in, to and under the Pledged Securities; the Account (Fleet National Bank) and all funds, cash and cash equivalents, Financial Assets, Investment Property and any other property from time to time credited or required to be credited thereto including any Additional 4 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT Liquid Collateral transferred to the Account (Fleet National Bank) pursuant to Section 2.5(a) (and all certificates, cash balances and instruments from time to time representing or evidencing the same); all notes, certificates of deposit, deposit amounts, checks and other investments from time to time hereafter delivered to or otherwise possessed by the Fleet National Bank Custodian in substitution for any or all of the foregoing; all rights, claims, and causes of action, if any, that Lessee may have against the Fleet National Bank Custodian or any other person in respect of the foregoing; all interest, dividends, cash, instruments and other property from time to time received, receivable, or distributed in respect of any or all of the foregoing; all Security Entitlements of Lessee in or with respect to any and all of the foregoing including all Security Entitlements credited to or held in the Account (Fleet National Bank); and all Proceeds of any and all of the foregoing, whether now existing or hereafter acquired (collectively, the "Fleet National Bank Liquid Collateral"). (ii) To perfect the security interest granted by Lessee to Lessor in the Fleet National Bank Liquid Collateral hereunder, Lessee hereby gives control over the Fleet National Bank Liquid Collateral to Lessor and shall file financing statements in respect of the Fleet National Bank Liquid Collateral in the manner and at the place or places set forth in the Uniform Commercial Code and make such other filing or take such other measures as may be prescribed by Applicable Law or reasonably requested by Lessor, the Fleet National Bank Collateral Agent or the Beneficiaries. (iii) Lessee will cause to be done, executed, acknowledged and delivered all such further acts, conveyances and assurances as Lessor, the Fleet National Bank Collateral Agent or the Beneficiaries shall reasonably require for accomplishing the purposes of this Agreement, and which are necessary or desirable to continue the perfection and priority of the Liens and security interests granted under this Agreement. (iv) Lessee agrees for the benefit of Lessor and the Beneficiaries, at no expense to Lessor, the Fleet National Bank Collateral Agent or the Beneficiaries, to defend Lessor's and the Fleet National Bank Collateral Agent's security interest in and to the Fleet National Bank Liquid Collateral against the claims of any Person and to ensure that Lessor and the Fleet National Bank Collateral Agent shall have at all times pursuant to this Agreement a first priority perfected Lien on and security interest in the Fleet National Bank Liquid Collateral, subject to no prior or equal Lien whatsoever. (v) All rights of Lessor hereunder, and all obligations of Lessee hereunder, shall be absolute and unconditional irrespective of: (1) any lack of validity or enforceability of this Agreement or any Operative Document; (2) any change in the time, manner or place of payment of, or any other term of, all or any of the Secured Lessee Obligations, or any amendment or waiver of or any consent to any departure from this Agreement or the Operative Documents; 5 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT (3) any taking, exchange, release or non-perfection of any other Fleet National Bank Liquid Collateral or taking, release or amendment or waiver of or consent to departure from any guaranty or indemnity for all or any of the Secured Lessee Obligations; and (4) any manner of application of Fleet National Bank Liquid Collateral, or Proceeds thereof, to all or any of the Secured Lessee Obligations, or any manner of sale or disposition of any Fleet National Bank Liquid Collateral for all or any of the Secured Lessee Obligations or any other assets of Lessee. (vi) Lessee agrees, for the benefit of Lessor, the Fleet National Bank Collateral Agent and the Beneficiaries, that it shall not be entitled to withdraw, liquidate, sell, convey, endorse, negotiate, or in any way dispose of, or create, incur, or permit to exist any pledge, mortgage, Lien, charge, encumbrance or security interest whatsoever, or cause any of the foregoing to occur in or with respect to, any of the Fleet National Bank Liquid Collateral, any interest therein or any cash or other property held and maintained in or credited to the Account (Fleet National Bank). (vii) Except as expressly set forth herein or in the other Operative Documents, Lessee hereby expressly waives diligence, presentment, demand for payment, protest, any requirement that any right or power be exhausted or any action be taken against any Person, all notices (whether non-payment by Lessee or any other Person, dishonor, protest or otherwise) with respect to any of the Secured Lessee Obligations and notice of acceptance of this Agreement. (viii) Subject to Sections 2.1(b)(ii) and 2.1(b)(viii), all cash and cash equivalents deposited in or credited to the Account (Fleet National Bank) from time to time shall be under the sole dominion and control of Lessor and held by the Fleet National Bank Custodian pursuant to the Fleet National Bank Custody Agreement as Lessor's agent and bailee, and Lessor shall have the sole right to make or direct withdrawals of cash or cash equivalents from the Account (Fleet National Bank). (b) Granting of Security Interest from Lessor to the Fleet National Bank Collateral Agent (i) As security for the due, prompt and complete payment and performance of the Secured Lessor Obligations, Lessor hereby unconditionally, irrevocably and presently conveys, mortgages, assigns, transfers, and pledges to the Fleet National Bank Collateral Agent, for the benefit of the Beneficiaries, and hereby grants to the Fleet National Bank Collateral Agent, for the benefit of the Beneficiaries, a first Lien on, and a first priority security interest in, all of Lessor's right, title and interest in, to and under the Fleet National Bank Liquid Collateral, the Pledged Securities; the Account (Fleet National Bank) and all funds, cash and cash equivalents, Financial Assets, Investment Property and any other property from time to time credited or required to be credited thereto including any Additional Liquid Collateral transferred to the Account (Fleet National Bank) pursuant to Section 2.5(a) (and all certificates, cash balances and instruments from time to time representing or evidencing the same); all notes, certificates of deposit, 6 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT deposit amounts, checks and other investments from time to time hereafter delivered to or otherwise possessed by the Fleet National Bank Custodian in substitution for any or all of the foregoing; all rights, claims, and causes of action, if any, that Lessee or Lessor may have against the Fleet National Bank Custodian or any other person in respect of the foregoing; all interest, dividends, cash, instruments and other property from time to time received, receivable, or distributed in respect of any or all of the foregoing; all Security Entitlements of Lessee or Lessor in or with respect to any and all of the foregoing including all Security Entitlements credited to or held in the Account (Fleet National Bank); and all Proceeds of any and all of the foregoing, whether now existing or hereafter acquired. (ii) To perfect the security interest granted by Lessor to the Fleet National Bank Collateral Agent in the Fleet National Bank Liquid Collateral hereunder, Lessor hereby gives control over the Fleet National Bank Liquid Collateral to the Fleet National Bank Collateral Agent and shall file financing statements in respect of the Fleet National Bank Liquid Collateral in the manner and at the place or places set forth in the Uniform Commercial Code and make such other filing or take such other measures as may be prescribed by Applicable Law or reasonably requested by the Fleet National Bank Collateral Agent or the Beneficiaries. (iii) Lessor will cause to be done, executed, acknowledged and delivered all such further acts, conveyances and assurances as the Fleet National Bank Collateral Agent or the Beneficiaries shall reasonably require for accomplishing the purposes of this Agreement, and which are necessary or desirable to continue the perfection and priority of the Liens and security interests granted under this Agreement. (iv) Intentionally Omitted. (v) All rights of the Fleet National Bank Collateral Agent and the Beneficiaries hereunder, and all obligations of Lessor hereunder, shall be absolute and unconditional irrespective of: (1) any lack of validity or enforceability of this Agreement or any Operative Document; (2) any change in the time, manner or place of payment of, or any other term of, all or any of the Secured Lessor Obligations, or any amendment or waiver of or any consent to any departure from this Agreement or the Operative Documents; (3) any taking, exchange, release or non-perfection of any other Fleet National Bank Liquid Collateral or taking, release or amendment or waiver of or consent to departure from any guaranty or indemnity for all or any of the Secured Lessor Obligations; and (4) any manner of application of Fleet National Bank Liquid Collateral, or Proceeds thereof, to all or any of the Secured Lessor Obligations, or any manner of sale or disposition of any Fleet National Bank Liquid Collateral for all or any of the Secured Lessor Obligations or any other assets of Lessor. 7 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT (vi) Lessor agrees, for the benefit of the Beneficiaries, that it shall not be entitled to withdraw, liquidate, sell, convey, endorse, negotiate, or in any way dispose of, or create, incur, or permit to exist any pledge, mortgage, Lien, charge, encumbrance or security interest whatsoever, or cause any of the foregoing to occur in or with respect to, any of the Fleet National Bank Liquid Collateral, any interest therein or any cash or other property held and maintained in or credited to the Account (Fleet National Bank). (vii) Except as expressly set forth herein or in the other Operative Documents, Lessor hereby expressly waives diligence, presentment, demand for payment, protest, any requirement that any right or power be exhausted or any action be taken against any Person, all notices (whether non-payment by Lessor or any other Person, dishonor, protest or otherwise) with respect to any of the Secured Lessor Obligations and notice of acceptance of this Agreement. (viii) Anything to the contrary herein notwithstanding, all cash and cash equivalents deposited in or credited to the Account (Fleet National Bank) from time to time shall be under the sole dominion and control of the Fleet National Bank Collateral Agent and held by the Fleet National Bank Custodian pursuant to the Fleet National Bank Custody Agreement as the Fleet National Bank Collateral Agent's agent and bailee, and the Fleet National Bank Collateral Agent shall have the sole right to make or direct withdrawals of cash or cash equivalents from the Account (Fleet National Bank). 2.2 REMEDIES The Fleet National Bank Collateral Agent may, upon the occurrence and continuance of an Enforcement Event and the delivery of an Enforcement Notice to the Fleet National Bank Custodian by the Fleet National Bank Collateral Agent, and without the consent of Lessee or any other Person, exercise certain remedies with respect to the Fleet National Bank Liquid Collateral as provided herein, including, but not limited to, directing the Fleet National Bank Custodian to sell or cause to be sold an amount of the Fleet National Bank Liquid Collateral and otherwise acting in all respects as the owner of the Fleet National Bank Liquid Collateral. 2.3 PLEDGORS REMAIN LIABLE Anything to the contrary herein notwithstanding, (i) Lessee shall remain liable under Operative Documents to Lessor and Lessor shall remain liable under the Operative Documents to the Beneficiaries, each to the extent set forth therein to perform all of their duties and obligations, if any, thereunder to the same extent as if this Agreement had not been executed and the pledges hereunder had not been made, (ii) the exercise by Lessor or the Fleet National Bank Collateral Agent of any of their rights hereunder shall not release Lessee or Lessor from any of their duties or obligations, if any, under the Operative Documents, except to the extent that such obligations are satisfied by the payment of an amount hereunder or pursuant to the Fleet National Bank Custody Agreement. The execution and delivery of this Agreement shall not in any way diminish the respective rights and obligations of Lessee, Lessor or the Fleet National Bank Collateral Agent (or any other party thereto) under the Operative Documents. 8 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT 2.4 INSTRUCTIONS REGARDING THE ACCOUNT (FLEET NATIONAL BANK) It is hereby acknowledged and agreed that pursuant to the Fleet National Bank Custody Agreement, other than as expressly set forth therein and herein, only the Fleet National Bank Collateral Agent is entitled to give instructions and Entitlement Orders to the Fleet National Bank Custodian with respect to the Account (Fleet National Bank) , any and all Securities credited to the Account (Fleet National Bank) and any other Fleet National Bank Liquid Collateral. 2.5 ADDITIONAL FLEET NATIONAL BANK LIQUID COLLATERAL (a) (i) Pursuant to the Participation Agreement, the Fleet National Bank Collateral Agent shall have the right at any time, and from time to time upon delivery to Lessee of a demand given by telephone or fax (and confirmed in writing) (a "Additional Collateral Demand"), to require Lessee to transfer additional Permitted Investments (the "Additional Liquid Collateral") to the Account (Fleet National Bank) by the Additional Collateral Delivery Date to ensure that the Adjusted Market Value, in the case of Properly Margined Liquid Collateral, and the Fair Market Value, in the case of Non-Properly Margined Liquid Collateral of Fleet National Bank Liquid Collateral in which Lessor and the Fleet National Bank Collateral Agent have a first priority perfected security interest shall be greater than or equal to the applicable Required Liquid Collateral Amount for the Fleet National Bank Liquid Collateral; provided, that after taking into account a transfer of Pledged Securities the Account (Fleet National Bank) shall satisfy and at all times thereafter satisfy the Concentration Limits. (ii) Without limiting Section 2.5(a)(i) above Lessee shall transfer such Additional Liquid Collateral to the Account (Fleet National Bank) by the Additional Collateral Delivery Date to ensure that, the Adjusted Market Value, in the case of Properly Margined Liquid Collateral, and the Fair Market Value, in the case of Non-Properly Margined Liquid Collateral of Fleet National Bank Liquid Collateral in which Lessor and the Fleet National Bank Collateral Agent have a first priority perfected security interest shall be greater than or equal to the applicable Required Liquid Collateral Amount for the Fleet National Bank Liquid Collateral. (b) Pursuant to the account agreements entered into with the Fleet National Bank, Fleet National Bank Custodian shall have the right to direct the reinvestment of any Pledged Securities credited to the Account (Fleet National Bank) upon the maturity of such Pledged Securities or prior thereto. (c) The parties hereto acknowledge and agree that (i) any Permitted Investments transferred to the Account (Fleet National Bank) pursuant to Sections 2.5(a) or 2.5(b) or otherwise shall be deemed Pledged Securities for the purposes of this Agreement, (ii) on any transfer date, the Fleet National Bank Collateral Agent shall instruct Lessee and the Fleet National Bank Custodian to take or cause to be taken, and Lessee and the Fleet National Bank Custodian shall take or cause to be taken, at Lessee's sole cost and expense, such action as is necessary create in Lessor a valid perfected first priority security interest on such date in such Pledged Securities, and (iii) on any transfer date, the Fleet National Bank Collateral Agent shall instruct Lessee, Lessor and the Fleet National Bank Custodian to take or cause to be taken, and 9 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT Lessee, Lessor and the Fleet National Bank Custodian shall take or cause to be taken, at Lessee's sole cost and expense, such action as is necessary create in the Fleet National Bank Collateral Agent a valid perfected first priority security interest on such date in Lessor's right, title and interest in, to and under such Pledged Securities. Without limiting the foregoing, the Fleet National Bank Collateral Agent is hereby authorized to complete Exhibit A hereto upon acquisition of such Pledged Securities. ARTICLE 3 COVENANTS OF LESSEE 3.1 NO SET-OFF (a) Lessee, Lessor, the Fleet National Bank Collateral Agent and the Beneficiaries acknowledge that the Fleet National Bank Custodian may from time to time have other relationships with Lessee, Lessor, the Fleet National Bank Collateral Agent or the Beneficiaries that are not related to the transactions contemplated by this Agreement or the Participation Agreement and not secured hereunder. (b) No set-off, counterclaim, reduction or diminution of any obligation, or any defense of any kind or nature (other than complete performance by Lessee of its obligations hereunder) which Lessee may have to assert against Lessor, the Fleet National Bank Collateral Agent or any Beneficiary shall be available hereunder to, or shall be asserted by, Lessee in any action arising out of the transactions contemplated hereby. (c) Lessee covenants that it shall not terminate the Fleet National Bank Custody Agreement without the Beneficiaries' express prior written consent, other than in accordance with the terms thereof. 3.2 FURTHER TRANSFERS As long as the security interest in and the Lien on the Fleet National Bank Liquid Collateral created hereunder in favor of Lessor and the Fleet National Bank Collateral Agent shall not have been discharged or released, Lessee shall not sell, transfer, convey, assign, grant a Lien on or security interest in, or otherwise dispose of the Fleet National Bank Liquid Collateral, or any part thereof, without the prior written consent of the Fleet National Bank Collateral Agent except as provided herein or in the Fleet National Bank Custody Agreement. ARTICLE 4 COVENANTS OF LESSOR AND LESSEE 4.1 NO SET-OFF (a) No set-off, counterclaim, reduction or diminution of any obligation, or any defense of any kind or nature (other than complete performance by Lessor of its obligations hereunder) which Lessor may have to assert against the Fleet National Bank Collateral Agent or 10 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT any Beneficiary shall be available hereunder to, or shall be asserted by, Lessor in any action arising out of the transactions contemplated hereby. (b) Lessor covenants that it shall not terminate the Fleet National Bank Custody Agreement without the Beneficiaries' express prior written consent, other than in accordance with the terms thereof. 4.2 FURTHER TRANSFERS As long as the security interest in and the Lien on the Fleet National Bank Liquid Collateral created hereunder in favor of the Fleet National Bank Collateral Agent shall not have been discharged or released, Lessor shall not sell, transfer, convey, assign, grant a Lien on or security interest in, or otherwise dispose of the Fleet National Bank Liquid Collateral, or any part thereof, without the prior written consent of the Fleet National Bank Collateral Agent except as provided herein or in the Fleet National Bank Custody Agreement. ARTICLE 5 REMEDIES 5.1 REMEDIES UPON ENFORCEMENT EVENT (a) Lessee and Lessor agree that if any Enforcement Event shall have occurred and be continuing the Fleet National Bank Collateral Agent may exercise in respect of the Fleet National Bank Liquid Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party under the UCC (whether or not the UCC applies to the Fleet National Bank Liquid Collateral at issue), and the Fleet National Bank Collateral Agent may also, without notice except as specified below, sell the Fleet National Bank Liquid Collateral or any part thereof in one or more parcels at public or private sale, or at any of the Fleet National Bank Collateral Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as Collateral Agent may deem commercially reasonable. Lessee and Lessor agrees that, to the extent notice of sale shall be required by law, at least five Business Days' notice to Lessee and Lessor of the time and place of any public sale or the time after which a private sale is to be made shall constitute reasonable notification. The Fleet National Bank Collateral Agent shall not be obligated to make any sale of Fleet National Bank Liquid Collateral regardless of notice of sale having been given. The Fleet National Bank Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefore and such sale may, without further notice, be made at the time and place to which it was so adjourned. The Fleet National Bank Collateral Agent shall be entitled to consult with legal counsel and financial advisors in connection with the sale of the Fleet National Bank Liquid Collateral and shall be protected in any reasonable action or forbearance taken in connection with the advice of such counsel or advisors. (b) Each and every right, power and remedy given to the Fleet National Bank Collateral Agent specifically or otherwise in this Agreement shall be cumulative and shall be in addition to every other right, power and remedy herein specifically given or now or hereafter existing at law, or under the UCC, or otherwise in equity or by statute, and each and every right, 11 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT power and remedy whether specifically herein given or otherwise existing may be exercised from time to time and as often and in such order as may be deemed expedient by the Fleet National Bank Collateral Agent, and the exercise or the beginning of the exercise of any power or remedy shall not be construed to be a waiver of the right to exercise at the same time or thereafter any other right, power or remedy. No delay or omission by the Fleet National Bank Collateral Agent in the exercise of any right, remedy or power or in the pursuance of any remedy shall impair any such right, power or remedy or be construed to be a waiver of any default on the part of the Fleet National Bank Collateral Agent or to be an acquiescence therein. (c) In case the Fleet National Bank Collateral Agent shall have instituted any proceeding to enforce any right, power or remedy under this Agreement by foreclosure, entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Fleet National Bank Collateral Agent, then and in every such case the Fleet National Bank Collateral Agent, Lessee and Lessor shall, subject to any determination in such proceedings, be restored to their former positions and rights hereunder with respect to the Fleet National Bank Liquid Collateral, and all rights, remedies and powers of the Fleet National Bank Collateral Agent shall continue as if no such proceedings had been instituted. (d) Lessee and Lessor agree, to the full extent that it may lawfully so agree, that neither it nor any Person claiming through or under it will set up, claim or seek to take advantage of any appraisement, valuation, stay, extension or redemption law now or hereafter in force, in order to prevent, hinder or delay the enforcement or foreclosure of this Agreement, or the absolute sale of the Fleet National Bank Liquid Collateral or any part thereof, or the final and absolute putting into possession thereof, immediately after such sale, of the purchaser thereof, and each of Lessee and Lessor, for itself and all who may at any time claim through or under it, hereby waives to the full extent that it may be lawful so to do, the benefit of all such laws, and any and all right to have any of the properties or assets comprising the Fleet National Bank Liquid Collateral marshalled upon any such sale, and agrees that, subject to the terms of the Fleet National Bank Custody Agreement, the Fleet National Bank Collateral Agent or any court having jurisdiction to foreclose the Lien hereof may sell the Fleet National Bank Liquid Collateral as an entirety or in such portions as the Fleet National Bank Collateral Agent may determine. (e) The Fleet National Bank Collateral Agent will promptly upon receipt of any proceeds from any sale of any Fleet National Bank Liquid Collateral pursuant to this Section 5.1 deliver such proceeds to the Administrative Agent for distribution in accordance with Article X of the Participation Agreement. 5.2 POWERS OF ATTORNEY (a) Lessee hereby irrevocably appoints the Fleet National Bank Collateral Agent the true and lawful attorney of Lessee (with full power of substitution) in the name, place and stead of, and at the expense of, Lessee (i) for any period for the purpose of signing documents and taking other action to perfect Lessor's and the Fleet National Bank Collateral Agent's security interest in the Fleet National Bank Liquid Collateral and (ii) solely in connection with the enforcement of the rights and remedies provided herein and in the Fleet 12 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT National Bank Custody Agreement upon the occurrence and during the continuation of an Enforcement Event: (i) to give any necessary receipts or acquittances for amounts collected or received thereunder; (ii) to make all necessary transfers of any of the Fleet National Bank Liquid Collateral in connection with any sale or other disposition made pursuant hereto; (iii) to execute and deliver for value all necessary or appropriate bills of sale, assignments and other instruments and agreements in connection with any such sale or other disposition, Lessee hereby ratifying and confirming all that such attorney (or any substitute) shall lawfully do hereunder and pursuant hereto; and (iv) to sign any agreements, orders or other documents in connection with or pursuant to this Agreement (to the extent the same relate to the Fleet National Bank Liquid Collateral). Nevertheless, if so requested by the Fleet National Bank Collateral Agent or a purchaser, Lessee shall ratify and confirm to the extent it has the power to do so, any such sale or other disposition by executing and delivering to the Fleet National Bank Collateral Agent or such purchaser all proper bills of sale, assignments, releases and other instruments as may be designated in any such request. (b) Lessor hereby irrevocably appoints the Fleet National Bank Collateral Agent the true and lawful attorney of Lessor (with full power of substitution) in the name, place and stead of, and at the expense of, Lessor (i) for any period for the purpose of signing documents and taking other action to perfect the Fleet National Bank Collateral Agent's security interest in the Fleet National Bank Liquid Collateral and (ii) solely in connection with the enforcement of the rights and remedies provided herein and in the Fleet National Bank Custody Agreement upon the occurrence and during the continuation of an Enforcement Event: (i) to give any necessary receipts or acquittances for amounts collected or received thereunder; (ii) to make all necessary transfers of any of the Fleet National Bank Liquid Collateral in connection with any sale or other disposition made pursuant hereto; (iii) to execute and deliver for value all necessary or appropriate bills of sale, assignments and other instruments and agreements in connection with any such sale or other disposition, Lessor hereby ratifying and confirming all that such attorney (or any substitute) shall lawfully do hereunder and pursuant hereto; and (iv) to sign any agreements, orders or other documents in connection with or pursuant to this Agreement (to the extent the same relate to the Fleet National Bank Liquid Collateral). 13 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT Nevertheless, if so requested by the Fleet National Bank Collateral Agent or a purchaser, Lessor shall ratify and confirm to the extent it has the power to do so, any such sale or other disposition by executing and delivering to the Fleet National Bank Collateral Agent or such purchaser all proper bills of sale, assignments, releases and other instruments as may be designated in any such request. ARTICLE 6 RELEASE OF SECURITY INTEREST 6.1 This Agreement shall remain in full force and effect until payment in full by the Lessee of the Lease Balance, Supplemental Rent, including Break Costs and all other amounts due and owing by it under the Operative Documents and the termination of the Commitments of the Participants, provided, however, that this Agreement and the security interests created hereby shall earlier terminate and this Agreement shall be of no further force or effect upon any sale or other final disposition by the Fleet National Bank Collateral Agent of all of the property constituting the Fleet National Bank Liquid Collateral and the final distribution by Fleet National Bank Collateral Agent of all monies or other property or proceeds constituting the Fleet National Bank Liquid Collateral in accordance with the terms of the Participation Agreement. 6.2 Upon any termination of this Agreement pursuant to Section 6.1, Lessor and the Fleet National Bank Collateral Agent shall execute and deliver to or as directed in writing by Lessee, an appropriate instrument terminating this Agreement and releasing the Fleet National Bank Liquid Collateral and the Fleet National Bank Collateral Agent shall provide the Fleet National Bank Custodian with written notice informing the Fleet National Bank Custodian that the Secured Lessee Obligations have been fully discharged and instructing the Fleet National Bank Custodian to release all funds on deposit in the Account (Fleet National Bank) from the assignment and pledge. 6.3 Except as otherwise provided in this Article 6, this Agreement and the security interests created hereby shall continue in full force and effect in accordance with the terms hereof. ARTICLE 7 MISCELLANEOUS 7.1 NOTICES Notices and other communications required or permitted to be given or made under the terms of this Agreement shall be given in the manner set forth in the Participation Agreement at the initial addresses (and any successor address for notice may be provided in the manner set forth in the Participation Agreement) set forth on Schedule II to the Participation Agreement. 14 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT 7.2 COUNTERPARTS This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. 7.3 CONTINUING SECURITY (a) Except as provided in Article 6, the security constituted by this Agreement with respect to the Secured Lessee Obligations shall not be considered as satisfied by payment or satisfaction of any part of the Secured Lessee Obligations but shall be a continuing security and extend to cover any and all sums of money or other obligations which shall for the time being constitute Secured Lessee Obligations and shall not be discharged or prejudiced or affected in any way by time being given to Lessee or any other Person or by any other indulgence or concession to Lessee or any other Person granted by Lessor, Fleet National Bank Collateral Agent or any Beneficiary, by the taking, holding, varying, non-enforcement or release by Lessor, the Fleet National Bank Collateral Agent or any Beneficiary of any other security for all or any of the Secured Lessee Obligations, by any other thing done or omitted or neglected to be done by Lessor, Fleet National Bank Collateral Agent or any Beneficiary or by any other dealing or thing including whatsoever that but for this provision might operate to discharge any of the Secured Lessee Obligations or to exonerate or discharge Lessee from its obligations hereunder or otherwise affect the security hereby constituted. (b) Except as provided in Article 6, the security constituted by this Agreement with respect to the Secured Lessor Obligations shall not be considered as satisfied by payment or satisfaction of any part of the Secured Lessor Obligations but shall be a continuing security and extend to cover any and all sums of money or other obligations which shall for the time being constitute Secured Lessor Obligations and shall not be discharged or prejudiced or affected in any way by time being given to Lessor or any other Person or by any other indulgence or concession to Lessor or any other Person granted by the Fleet National Bank Collateral Agent or any Beneficiary, by the taking, holding, varying, non-enforcement or release by the Fleet National Bank Collateral Agent or any Beneficiary of any other security for all or any of the Secured Lessor Obligations, by any other thing done or omitted or neglected to be done by the Fleet National Bank Collateral Agent or any Beneficiary or by any other dealing or thing including whatsoever that but for this provision might operate to discharge any of the Secured Lessor Obligations or to exonerate or discharge Lessor from its obligations hereunder or otherwise affect the security hereby constituted. 7.4 AMENDMENTS This Agreement may be amended only by a consent in writing signed by the parties hereto, and specifically identified as an amendment hereto. 7.5 SEVERABILITY Any provision of this Agreement which is invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without invalidating, prohibiting the observance of or rendering 15 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT unenforceable the remaining provisions hereof, and any such invalidity, illegality or unenforceability in any jurisdiction shall not invalidate, prohibit the observance of or render unenforceable such provision in any other jurisdiction. 7.6 GOVERNING LAW THIS AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW BUT EXCLUDING ALL OTHER CHOICE-OF-LAW AND CONFLICTS-OF-LAWS RULES). THE PARTIES HERETO AGREE THAT THE STATE OF NEW YORK IS THE JURISDICTION OF THE COLLATERAL AGENT FOR PURPOSES OF PART 3 OF ARTICLE 9 OF THE UCC. Any suit, action or proceeding against the parties hereto with respect to this Agreement, or any other Operative Document or any judgment entered by any court in respect thereof may be brought in the Supreme Court of the State of New York, County of New York, or the United States District Court for the Southern District of New York (provided that such jurisdiction shall be non-exclusive). The provisions of Sections 12.13 and 12.14 of the Participation Agreement and related definitions are incorporated herein by reference, mutatis mutandis. 7.7 OWNER Lessee acknowledges its ownership of, and its responsibility (as opposed to Lessor, the Fleet National Bank Collateral Agent or the Beneficiaries) to pay taxes, if any, imposed on it or with respect to, the Fleet National Bank Liquid Collateral. 7.8 ENTIRE AGREEMENT This Agreement, and all instruments and other documents required to be executed and delivered in connection herewith, represents the entire agreement of the parties hereto and supercedes all prior agreements and understandings of the parties with respect to the subject matter covered hereby. ARTICLE 8 PARTIES No Person dealing with the Fleet National Bank Collateral Agent or any Beneficiary is bound to inquire whether an Enforcement Event shall have occurred or whether the power that the Fleet National Bank Collateral Agent or any Beneficiary is purporting to exercise has become exercisable or whether any Secured Lessee Obligations or Secured Lessor Obligations remain unpaid or unperformed or otherwise as to the propriety or regularity of any sale or other dealing by the Fleet National Bank Collateral Agent or any Beneficiary with any Fleet National Bank Liquid Collateral and all the protections to purchasers conferred by Applicable Law shall apply to such Persons dealing with the Fleet National Bank Collateral Agent or any Beneficiary. The receipt by the Fleet National Bank Collateral Agent or any 16 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT Beneficiary of the purchase moneys shall effectively discharge the purchaser who shall not be concerned with the manner of application thereof. ARTICLE 9 ELECTION So long as Section 6.1(y)(i) of the Participation Agreement does not require Lessee to secure its Secured Lessee Obligations on the basis of Properly Margined Liquid Collateral, Lessee shall have the right, upon at least five Business Days written notice to the Fleet National Bank Collateral Agent and each of the Participants, to secure its Secured Lessee Obligations on the basis of either Properly Margined Liquid Collateral or Non-Properly Margined Liquid Collateral, such change to become effective on the next succeeding Scheduled Payment Date following such five day notice period. [Signature Pages Follow] 17 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT IN WITNESS WHEREOF the parties hereto have caused this LIQUID COLLATERAL AGREEMENT to be fully executed as of the day and year first above written. HUMAN GENOME SCIENCES, INC. By: /s/ STEVEN C. MAYER ----------------------------- Name: Steven C. Mayer Title: Senior Vice President and CFO S-1 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT GENOME STATUTORY TRUST 2001A By: Wells Fargo Bank Northwest, N.A., not in its individual capacity but solely as Trustee By: /s/ C. SCOTT NIELSON ----------------------------- Name: C. Scott Nielson Title: Vice President S-2 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT FLEET NATIONAL BANK, as Fleet National Bank Collateral Agent By: /s/ STEVEN CRISCIONE ----------------------------- Name: Steven Criscione Title: Vice President S-3 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT BENEFICIARIES: FLEET NATIONAL BANK, as a Liquidity Provider By: /s/ STEVEN CRISCIONE ----------------------------- Name: Steven Criscione Title: Vice President S-4 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT FIRST UNION NATIONAL BANK, as a Liquidity Provider By: /s/ BARBARA K. ANGEL ----------------------------- Name: Barbara K. Angel Title: Vice President S-5 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT BANCBOSTON LEASING INVESTMENTS INC., as an Investor By: /s/ STEVEN CRISCIONE ----------------------------- Name: Steven Criscione Title: Vice President S-6 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT FIRST UNION NATIONAL BANK, as an Investor By: /s/ BARBARA K. ANGEL ----------------------------- Name: Barbara Kaufmann Angel Title: Vice President S-7 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT EAGLEFUNDING CAPITAL CORPORATION, as Conduit By: /s/ THOMAS M. CALHOUN ----------------------------- Name: Thomas M. Calhoun Title: Director, its attorney-in-fact S-8 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT FLEET NATIONAL BANK, as Fleet National Bank Collateral Agent By: /s/ STEVEN CRISCIONE ----------------------------- Name: Steven Criscione Title: Vice President S-9 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT FIRST UNION NATIONAL BANK, as First Union Collateral Agent By: /s/ BARBARA K. ANGEL ----------------------------- Name: Barbara Kaufmann Angel Title: Vice President S-10 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT FLEET NATIONAL BANK, as Administrative Agent By: /s/ STEVEN CRISCIONE ----------------------------- Name: Steven Criscione Title: Vice President S-11 FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT SCHEDULE I Beneficiaries 1. Fleet National Bank, as a Liquidity Provider 2. First Union National Bank, as a Liquidity Provider 3. BancBoston Leasing Investments, Inc., as an Investor 4. First Union National Bank, as an Investor 5. EagleFunding Capital Corporation, as Conduit 6. Fleet National Bank, as Fleet National Bank Collateral Agent 7. First Union National Bank, as First Union Collateral Agent 8. Fleet National Bank, as Administrative Agent FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT EXHIBIT A TO FLEET NATIONAL BANK LIQUID COLLATERAL SECURITY AGREEMENT Description of Pledged Securities Designation by Name, Series, Amount and Maturity Date
Amount Name Series (At Maturity) Maturity Date - ---- ------ ------------- -------------
Ex.A FLEET NATIONAL BANK LIQUID COLLATERAL AGREEMENT EXHIBIT B Form of Enforcement Notice Name and Address of Administrative Agent and Fleet National Bank Custodian Re: ENFORCEMENT NOTICE Securities Account No. 0006529470 (the "Account (Fleet National Bank)") of HUMAN GENOME SCIENCES, INC., as Pledgor (the "Pledgor"), pledged to and subject to a first priority security interest in favor of FLEET NATIONAL BANK, as Fleet National Bank Collateral Agent (the "Fleet National Bank Collateral Agent"), pursuant to the Fleet National Bank Liquid Collateral Agreement, dated as of November 7, 2001, among Lessee, Lessor, the Fleet National Bank Collateral Agent and the Beneficiaries set forth on Schedule I thereto (the "Agreement") (capitalized terms used but not otherwise defined herein have the respective meanings specified, whether or not by reference, in the Agreement) Ladies and Gentlemen: We hereby demand pursuant to Section 3 of the Custody Agreement that you take the following action with respect to the Fleet National Bank Liquid Collateral: [instructions to be provided by Fleet National Bank Collateral Agent] Very truly yours, FLEET NATIONAL BANK, as Fleet National Bank Collateral Agent By: ----------------------------- Title: Date: Ex.B TABLE OF CONTENTS
PAGE ARTICLE 1 DEFINITIONS, INTERPRETATION 1.1 Certain Definitions............................................................................2 ARTICLE 2 GRANTING OF SECURITY 2.1 Granting of Security Interests.................................................................4 2.2 Remedies.......................................................................................8 2.3 Pledgors Remain Liable.........................................................................9 2.4 Instructions Regarding the Account (Fleet National Bank) ......................................9 2.5 Additional Fleet National Bank Liquid Collateral...............................................9 ARTICLE 3 COVENANTS OF LESSEE 3.1 No Set-off....................................................................................10 3.2 Further Transfers.............................................................................11 ARTICLE 4 COVENANTS OF LESSOR AND LESSEE 4.1 No Set-off....................................................................................11 4.2 Further Transfers.............................................................................11 ARTICLE 5 REMEDIES 5.1 Remedies Upon Enforcement Event ..............................................................12 5.2 Powers of Attorney............................................................................13 ARTICLE 6 RELEASE OF SECURITY INTEREST 6.1 ..............................................................................................15 6.2 ..............................................................................................15 6.3 ..............................................................................................15 ARTICLE 7 MISCELLANEOUS 7.1 Notices.......................................................................................15 7.2 Counterparts..................................................................................15 7.3 Continuing Security...........................................................................16 7.4 Amendments....................................................................................16 7.5 Severability..................................................................................16 7.6 Governing Law.................................................................................17 7.7 Owner.........................................................................................17 7.8 Entire Agreement..............................................................................17 ARTICLE 8 PARTIES ARTICLE 9 ELECTION
-i- TABLE OF CONTENTS (continued) PAGE EXHIBIT A - DESCRIPTION OF SECURITIES EXHIBIT B - FORM OF ENFORCEMENT NOTICE -ii- EX-10.22 9 w58882ex10-22.txt LEASE AGREEMENT EXHIBIT 10.22 LEASE AGREEMENT BETWEEN WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION, not in its individual capacity, but solely as Owner Trustee under that certain Trust Agreement dated as of October 25, 2001, as Lessor AND HUMAN GENOME SCIENCES, INC., as Lessee Dated as of October 25, 2001 TABLE OF CONTENTS
Page 1. Demise of Property...................................................................................1 2. Certain Definitions..................................................................................1 3. Title...............................................................................................12 4. Use of Property.....................................................................................13 5. Term................................................................................................13 6. Rent................................................................................................13 7. Net Lease; Non-Terminability........................................................................15 8. Payment of Impositions; Compliance with Law, Restrictive Covenants and Operative Documents..........16 9. Liens...............................................................................................16 10. [INTENTIONALLY RESERVED]............................................................................17 11. Lessee's Equipment; Building Equipment..............................................................17 12. Alterations.........................................................................................18 13. Construction of Additional Improvements.............................................................19 14. Insurance...........................................................................................22 15. Assignment and Subletting...........................................................................22 16. Permitted Contests..................................................................................24 17. Default Provisions..................................................................................24 18. Additional Rights of Lessor.........................................................................31 19. Sale, Return or Purchase of Property................................................................32 20. Inspection..........................................................................................37 21. Notices, Demands and Other Instruments..............................................................37 22. Estoppel Certificates...............................................................................37 23. No Merger...........................................................................................38 24. Representations and Warranties of Lessee............................................................38 25. Affirmative Covenants of Lessee.....................................................................40 26. Negative Covenants of Lessee........................................................................42 27. [INTENTIONALLY RESERVED.]...........................................................................43 28. Separability........................................................................................43 29. Subordination.......................................................................................43 30. Binding Effect......................................................................................44 31. Headings............................................................................................44 32. Environmental Matters...............................................................................44 33. Quiet Enjoyment.....................................................................................48 34. [INTENTIONALLY RESERVED.]...........................................................................48 35. Nature of Transaction...............................................................................48 36. Grant of Lien and Future Assurances.................................................................49 37. Miscellaneous.......................................................................................53 38. Partial Release of Land.............................................................................54
i LIST OF EXHIBITS EXHIBIT A......... Description of Land EXHIBIT B......... Intentionally Omitted EXHIBIT C......... Schedule of Basic Rent Payments EXHIBIT D......... Notice and Payment Information EXHIBIT E......... Security Agreement and Assignment ii LEASE AGREEMENT THIS LEASE AGREEMENT (this "Lease") is made as of October 25, 2001, by and between WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION, not in its individual capacity, but solely as Owner Trustee under that certain Trust Agreement dated as of October 25, 2001 ("Lessor") and HUMAN GENOME SCIENCES, INC., a Delaware corporation ("Lessee"). RECITALS A. Lessor, pursuant to the Trust Agreement, has appointed Val T. Orton, not in his individual capacity, but solely as Maryland trustee, to serve as Maryland trustee (the "Maryland Trustee") for that portion of the Owner Trust Estate located from time to time in the State of Maryland. B. Lessor, at the request of Lessee, has caused the Maryland Trustee to acquire from Issuer (as hereinafter defined) a leasehold interest in certain real property located in Montgomery County, Maryland, consisting of a parcel of land containing 18.1376 acres and more particularly described on Exhibit A attached hereto and made a part hereof (the "Land") and all the buildings, structures and other improvements located thereon (collectively, the "Improvements"). C. Lessor now desires, acting through the Maryland Trustee, to sublease the Property to Lessee and Lessee desires to sublease the Property from Lessor, acting through the Maryland Trustee, subject to the terms and conditions set forth herein. To evidence the foregoing, the Maryland Trustee and Lessee shall enter into a Lease Supplement with respect to the Property simultaneously with the execution hereof by Lessor and Lessee. AGREEMENTS NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lessor and Lessee hereby covenant and agree as follows: 1. Demise of Property. In consideration of the rents and covenants herein stipulated to be paid and performed, Lessor, acting through the Maryland Trustee, hereby demises and sublets to Lessee, and Lessee hereby demises and sublets from Lessor, acting through the Maryland Trustee, the Property. 2. Certain Definitions. The following terms shall have the definitions provided below. Unless specifically provided otherwise, all accounting terms have the definitions given them in accordance with GAAP (hereinafter defined) as applied to the applicable Person on a consistent basis by its accountants in the preparation of its previous annual financial statements. Act of Bankruptcy means with respect to any Person, the filing of a petition in bankruptcy under the Bankruptcy Code, or the commencement of a proceeding under any other applicable law concerning insolvency, reorganization or bankruptcy, by or against such Person as debtor. Accumulated Funding Deficiency means an "accumulated funding deficiency" as defined in Section 302 of ERISA or Section 412(a) of the Code. Additional Improvements means the approximately 45,000 square foot building to be constructed on the Land in accordance with Plans to be approved by Lessor, Agent and Lessee. Additional Rent means Additional Rent as defined in Paragraph 6(c). Affiliate means: (a) any Person in which Lessee legally or beneficially owns or holds, directly or indirectly, any capital stock or other equity interest; (b) any Person that is a partnership in which Lessee is a partner, or a joint venturer in which Lessee is a joint venturer or a limited liability company of which Lessee is a managing member; (c) any Person that is a director, officer, employee, stockholder (legally or beneficially) or other affiliate of any of the foregoing or of Lessee; and (d) any Person that directly or indirectly controls, is under the control of, or is under common control with, Lessee, including, without limitation, any Person that directly or indirectly has the right or power to direct the management or policies of Lessee and any Person whose management or policies Lessee directly or indirectly has the right or power to direct. Agent means the Bank, acting not in its individual capacity, but solely as agent for the Participants. Alterations means all changes, additions, improvements or repairs to, all alterations, reconstructions, renewals or removals of and all substitutions or replacements for any of the Improvements (including the Additional Improvements following completion of construction thereof), both interior and exterior, structural and non-structural, and ordinary and extraordinary. Appurtenances means (i) all agreements, easements, rights of way or use, rights of ingress or egress, privileges, appurtenances, tenements, hereditaments and other rights and benefits at any time belonging or pertaining to the Land or the Property, including, without limitation, the use of any streets, ways, alleys, vaults, strips of land adjoining, abutting, adjacent or contiguous to the Land and (ii) all permits, licenses and rights, whether or not of record, appurtenant to the Land. Assessment has the meaning set forth in Paragraph 32(e). Bankruptcy Code means Title 11 of the United States Code, as amended, and all rules and regulations promulgated pursuant thereto. Bank means Allfirst Bank, a Maryland banking corporation, its successors and assigns. Basic Rent means Basic Rent as defined in Paragraph 6(a). 2 Beneficiary means the Agent, as Beneficiary under the Deed of Trust. Bond Documents has the meaning given to such term in the Indenture. Bonds means, the $73,000,000.00 Taxable Rate Demand Revenue Bonds (Human Genome Sciences, Inc. Facility), Series 2001A, being issued by Issuer to refinance a portion of the costs of the acquisition of the Property and finance a portion of the costs attributable to the construction of the Additional Improvements. Break Costs means an amount equal to the amount, if any, required to compensate any Certificate Holder or any Credit Facility Provider for any additional losses (including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or funds acquired by any Certificate Holder or any Credit Facility Provider to fund its obligations under the Operative Documents) it may incur as a result of (a) Lessee's payment of Basic Rent other than on a Payment Date or (b) as a result of any conversion of the LIBO Rate other than on the last day of an Interest Period pursuant to and in accordance with the Operative Documents. A statement as to the amount thereof, prepared in good faith and in reasonable detail and submitted by any Certificate Holder or any Credit Facility Provider, as the case may be, to Lessee, shall be presumed correct absent demonstrable error. Building Equipment means all fixtures, furnishings, fittings and all appurtenances and additions thereto and substitutions or replacements thereof (together with, in each case, attachments, components, parts and accessories) affixed or attached to, or to be affixed or attached to, the Property, together with all fixtures, furnishings, fittings, equipment, machinery and other personal property listed on Schedule 1 attached hereto or the acquisition of which is funded with either the proceeds of the Bonds or the MEDCO Note. Business Day means any day other than a day on which either (a) banks located in any of the cities in which the Principal Office of the Trustee, the Credit Facility Providers, the Paying Agent and the Remarketing Agent is located are required or authorized by law or executive order to close for business, or (b) the New York Stock Exchange is closed; provided, however, that relative to any determination of the LIBO Rate, a Business Day shall mean any day which is a Business Day under clause (a) or (b) and is also a day on which commercial banks are open for domestic and international business, including dealings in Dollars. Certificates means those certain certificates issued by Lessor, as Owner Trustee under the Trust Agreement, in favor of the Bank or any subsequent holder thereof in the aggregate principal amount of $3,000,000.00. Certificate Holder means, initially, the Bank and any subsequent holder of the Certificates. Change in Control means the occurrence of any of the following: (a) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation) in one or a series of related transactions, of all or substantially all of the assets of Lessee and its Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act), (b) the adoption of a plan relating to the liquidation or dissolution of Lessee, or (c) the consummation of any transaction (including, without limitation, any merger or 3 consolidation) the result of which is that any "person" (as defined above), becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of more than 51% of the voting stock of Lessee. Code means the Internal Revenue Code of 1986, or any applicable predecessor or successor statutory provision. Each reference to a section of the Code herein shall be deemed to include the final and temporary United States Treasury Regulations in effect from time to time with respect thereto. Collateral has the meaning given to such term in Collateral Pledge Agreement. Collateral Pledge Agreement means the Cash Collateral Pledge Agreement dated as of October 25, 2001, between and among Lessee, as Pledgor; the Agent, as Pledgee; and Trustee, as Collateral Agent, together with all amendments thereto and modifications thereof. Commencement Date means October 25, 2001. Commonly Controlled Entity means any trade or business (whether or not incorporated) which is a member of a "controlled group of corporations" (as such phrase is used and defined in Section 414(b) of the Code) or which is under "common control" (as such phrase is used and defined in Section 414(c) of the Code), and of which Lessee is a part. Construction Agent means the Construction Agent as defined in Paragraph 13(a). Construction Commencement Date means the Construction Commencement Date as defined in Paragraph 13(c). Construction Consultant means the Construction Consultant as defined in Paragraph 13(i). Construction Consultant Report means the Construction Consultant Report as defined in Paragraph 13(i). Construction Documents means the Construction Documents as defined in Paragraph 13(d). Construction Period means the period commencing on the Commencement Date and terminating on the Substantial Completion Date. Credit Facilities has the meaning given to such term in the Indenture. The initial Credit Facility is the Letter of Credit. Credit Facility Agreements has the meaning given to such term in the Indenture. The initial Credit Facility Agreement is the Letter of Credit Agreement. Credit Facility Documents has the meaning given to such term in the Indenture. The initial Credit Facility Documents are the Letter of Credit Documents. 4 Credit Facility Providers has the meaning given to such term in the Indenture. The initial Credit Facility Provider is the Bank. Deed of Trust means the Deed of Trust, Assignment of Leases, Security Agreement and Fixture Filing dated as of October 25, 2001, encumbering all right, title and interest of Issuer, the Lessor, the Maryland Trustee and Lessee in and to the Property, from Issuer, the Lessor, the Maryland Trustee and Lessee to certain individual trustees for the benefit of the Beneficiary, together with all amendments thereto and modifications thereof. Deed of Trust Trustee has the meaning set forth in Paragraph 36(e). Default means any Event of Default or any condition, occurrence or event which, after notice or lapse of time or both, would constitute an Event of Default. Default Rate means the Default Rate as defined in Paragraph 6(d). Dollar means currency of the United States of America. Downgrade has the meaning given to such term in the Letter of Credit Agreement. Encumbrances means any mortgage, pledge, lien, security interest, charge or other encumbrance. Environmental Audit means the Environmental Audit as defined in Paragraph 32(d). ERISA means the Employee Retirement Income Security Act of 1974, as amended, and all Laws promulgated pursuant thereto or in connection therewith. Event of Default means an Event of Default as defined in Paragraph 17. Exchange Act means the Securities Exchange Act of 1934, as amended. Expiration Date means the date which is one day immediately preceding the seventh anniversary of the Commencement Date. Facility Fund has the meaning given to such term in the Indenture. Fair Market Value means with respect to the Property or any portion thereof, as of the date of the determination, the fair market value (which in any event shall not be less than zero) as determined by an independent appraiser chosen by Lessor (with the approval of the Agent) and reasonably acceptable to Lessee that would be obtained in an arm's-length transaction between an informed and willing buyer (other than a buyer currently in possession) and an informed and willing seller, under no compulsion to buy or sell, and neither of which is related to Lessor, the Credit Facility Providers or Lessee or any Affiliate, for the purchase of the Property or such portion thereof, as applicable. Such fair market value shall be calculated assuming that the Property is in the condition and repair required to be maintained by the terms of this Lease. Final Completion Date has the meaning given to such term in Paragraph 13(f). 5 Final Rent Payment Date has the meaning given to such term in Paragraph 17(b). GAAP means generally accepted accounting principles in the United States of America in effect from time to time, consistently applied. In the event of a change in GAAP affecting the covenants contained in Paragraphs 25 or 26 of this Lease or definitions contained in Paragraph 2 of this Lease relating to such covenants, such covenants and definitions shall continue to be applied as though such change in GAAP had not occurred unless and until Lessor, Agent and Lessee shall agree in writing to amend or adjust such covenants or definitions as deemed necessary as a result of such change in GAAP. Governmental Authority means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. Guarantee means that certain Guarantee of even date herewith executed by the Lessee in favor of the Beneficiary, for the benefit of the Participants. Guarantor means Human Genome Sciences, Inc., a Delaware corporation. Head Lease means the Lease Agreement dated as of October 25, 2001, by and between Issuer, as head lessor, and the Maryland Trustee, as head lessee, together with all amendments thereto and modifications thereof, pursuant to which Issuer leased to the Maryland Trustee, and the Maryland Trustee leased from Issuer, the Property. Head Lessor's Fee has the meaning given to such term in the Head Lease. Hedge means any interest rate swap or similar hedge arrangement in existence at any time or from time to time between Issuer and any Hedge Counterparty. Hedge Agreement means any agreement between Issuer and any Hedge Counterparty in existence at any time or from time to time, executed in connection with any Hedge, including (without limitation) the Swap Agreement (as defined in the Letter of Credit Agreement), together with all amendments thereto and modifications thereof. Hedge Counterparty means any Person, in its capacity as counterparty to any Hedge Agreement, with which Issuer has entered into any Hedge or may hereafter at any time or from time to time enter into any Hedge, including (without limitation) the Bank and any other Credit Facility Provider. Hedge Documents means, collectively, any Hedge Agreement and all other documents in existence at any time or from time to time, executed and delivered to evidence, secure, or in connection with, any Hedge. Holder Yield has the meaning given to such term in the Trust Agreement. 6 Impositions means any and all liabilities, losses, expenses, costs, charges and liens of any kind whatsoever for fees, taxes, levies, imposts, duties, charges or assessments or withholdings ("Taxes") including but not limited to (i) real and personal property taxes, including without limitation personal property taxes on any property covered by the Operative Documents that is classified by any Governmental Authority as personal property, and real estate or ad valorem taxes in the nature of property taxes; (ii) sales taxes, use taxes and other similar taxes (including rent taxes and intangibles taxes); (iii) excise taxes; (iv) real estate transfer taxes, conveyance taxes, stamp taxes and documentary recording taxes and fees; (v) taxes that are or are in the nature of franchise, gross or net income, gross or net receipts, value added, privilege and doing business taxes; (vi) assessments on any Property or part thereof, including without limitation all assessments for public improvements or benefits, whether or not such improvements are commenced or completed within the term of the Facility Lease; (viii) water and sewer rents, rates and charges, license, permit, inspection, registration and other authorization fees and other charges or costs of any nature whatsoever and (ix) taxes, liens, assessments or charges asserted, imposed or assessed by the PBGC or any governmental authority succeeding to or performing functions similar to, the PBGC, in each case whether general or special, ordinary or extraordinary, foreseen or unforeseen, of every character (including all interest, additions to tax and penalties thereon), which at any time during or in respect of the term hereof may be levied, assessed, confirmed or imposed by any Governmental Authority upon or with respect to, or be a lien upon (a) any Participant, the Lessee, the Property or any part thereof or interest therein, the Collateral or any portion thereof, or the Lessee or any sublessee or user of the Property or any part thereof or interest therein; (b) the leasing, financing, refinancing, demolition, construction, installation, substitution, subleasing, acquisition, acceptance, inspection, assignment, control, condition, servicing, maintenance, repair, ownership, possession, sale, purchase, rental, lease, activity conducted on or in, delivery, insuring, use, operation, improvement, transfer, return or disposition of the Property or any part thereof or interest therein; (c) the MEDCO Note or other indebtedness with respect to the Property or the Collateral or any part thereof or interest therein or transfer thereof; all rent payable under the Head Lease and/or the Facility Lease or the receipts or earnings arising from or received with respect to the Property or the Collateral or any part thereof or interest therein or any applications or dispositions thereof, (d) any other amount paid or payable pursuant to the MEDCO Note or any of the other Operative Documents, (e) all or any of the Operative Documents, any other documents contemplated thereby, any amendments and supplements thereto, and (f) otherwise with respect to or in connection with the transactions contemplated by the Operative Documents or the performance or enforcement thereof. Improvements means the buildings, structures and other improvements located from time to time on the Land, including the Additional Improvements following completion of construction thereof in accordance with the terms of this Lease. Indenture means the Trust Indenture dated as of October 25, 2001, between Issuer and the Trustee, together with all amendments thereto and modifications thereof. Inspecting Parties has the meaning set forth in Paragraph 20. Insurance Requirements means all terms and conditions of any insurance policy required by the Deed of Trust to be maintained by Lessee and all requirements of the insurers thereunder applicable to Lessor, the Credit Facility Providers, Issuer, Lessee or the Property or to the use, 7 manner of use, occupancy, possession, operation, maintenance, alteration or repair of the Property. Interim Synthetic Lease means that certain letter agreement dated as of May 1, 2001, by and among the Bank, the Issuer, the Lessor and the Lessee and all other documents executed in connection therewith, together with all amendments thereto and modifications thereof. Invitrogen means Invitrogen Corporation, its successors and assigns. Invitrogen Sublease means the Invitrogen Sublease as defined in Paragraph 15(a). Issuer means the Maryland Economic Development Corporation, a body politic and corporate and a public instrumentality of the State of Maryland. Land means that parcel of land described in Exhibit A attached hereto. Law means all applicable laws (including Environmental Laws), rules, regulations (including temporary and final income tax regulations), statutes, treaties, codes, ordinances, permits, certificates, orders and licenses of and interpretations by, any Governmental Authority, and applicable judgments, decrees, injunctions, writs, orders or like action of any court, arbitrator or other administrative, judicial or quasi-judicial tribunal or agency of competent jurisdiction (including those pertaining to health, safety or the environment (including, without limitation, wetlands) and those pertaining to the construction, use or occupancy of the Property and the foreclosure of the Deed of Trust with respect thereto). Lease Balance means, with respect to the Property, as of any date of determination, an amount equal to the aggregate sum of (i) the outstanding principal amount of the Bonds, including all accrued and unpaid interest thereon, (ii) the outstanding principal amount of the Certificates, including all accrued and unpaid Yield thereon, (iii) amounts due to the Hedge Counterparty under the Hedge Documents and the Collateral Pledge Agreement, and (iv) any other amounts due and owing under the Operative Documents, including without limitation, all amounts owed to the Credit Facility Providers under the Credit Facility Documents (provided, however, that if the Lessee exercises its option to purchase the Property on the Expiration Date, all amounts owed under the Credit Facility Documents through and including the expiration of the Credit Facility Documents shall also be included within this calculation). Lease Supplement means that certain Montgomery County, Maryland Lease Supplement, Short Form/ Memorandum of Lease and Remedies dated as of October 25, 2001, between and among the Maryland Trustee, Lessee and Agent, together with all amendments thereto and modifications thereof. Legal Requirements means all laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations, directions, requirements and agreements with all governments, departments, commissions, boards, courts, authorities, agencies, officials and officers, foreseen or unforeseen, ordinary or extraordinary, which now or at any time hereafter may be applicable to the use, occupancy, possession, maintenance, alteration, repair or reconstruction of any of the Property. 8 Lessee Collateral means all of Lessee's right, title and interest in and to (i) the Property, (ii) contracts, contract rights and general intangibles relating to the Property and (iii) proceeds of any of the foregoing. Lessee's Equipment means Lessee's machinery, apparatus, furnishings and other equipment that is (i) not paid for, directly or indirectly, with proceeds from the Bonds or the Certificate, (ii) not included in any requisition or in any disbursement from the Facility Fund or any advance under the Certificate, (iii) not a fixture or otherwise affixed to any part of the Property, and (iv) not in replacement for any of the property described in clauses (I) through (iii) above or for any of the other Building Equipment. Lessor means Wells Fargo Bank Northwest, National Association, not in its individual capacity, but solely as Owner Trustee under that certain Trust Agreement dated as of October 25, 2001. Lessor Liens means any mortgage, pledge, lien, security interest, charge or other encumbrance (a) which results from any act or omission of, or any claim against, Lessor unrelated to the transactions contemplated by the Operative Documents or from Lessor's failure to perform as required under the Operative Documents or (b) which result from any Impositions owed by Lessor, except any Imposition for which Lessee is obligated to indemnify (including, without limitation, in the foregoing exception, any Impositions on the Property or assessed in connection with any construction or development by Lessee or Construction Agent). Letter of Credit means that certain Letter of Credit to be issued by the Bank in the initial stated amount of $74,080,000.00 for the account of Issuer as security for the Bonds, as the same may from time to time be modified, amended, supplemented, renewed or replaced. Letter of Credit Agreement means that certain Letter of Credit Agreement between the Bank and Issuer dated as of October 25, 2001, as the same may from time to time be modified, amended, supplemented, renewed or replaced. Letter of Credit Documents has the meaning given to such term in the Letter of Credit Agreement. LIBO Rate means with respect to any thirty (30) day period, the applicable London interbank offered rate for deposits in U.S. dollars appearing on Telerate Page 3750 as of 11:00 a.m. (London time) two (2) Business Days prior to the first day of such thirty (30) day period, and having a maturity approximately equal to thirty (30) days, or if no London interbank offered rate of such maturity then appears on Telerate Page 3750, then the rate equal to the London interbank offered rate for deposits in U.S. dollars maturing immediately before or immediately after such maturity, whichever is higher, as determined by Allfirst Bank from Telerate Page 3750, or if Telerate Page 3750 is not available, the applicable LIBO Rate for the relevant thirty (30) day period shall be the rate determined by Allfirst Bank from the Reuters Screen LIBO Page or, if such rate is also unavailable on such service, then on any other interest rate reporting service of recognized standing designated in writing by the Allfirst Bank to Lessee and the Certificate Holder, in any such case rounded, if necessary, to the next higher 1/100 of 1.0%, if the rate is not such a multiple. 9 Liquidity Covenant means the covenant described in Paragraph 25(g). Maryland Trustee means Val T. Orton, not in his individual capacity, but solely as Maryland Trustee for that portion of the Owner Trust Estate located in the State of Maryland. MEDCO Note means that certain promissory note dated as of October 25, 2001 in the original principal amount of $3,000,000.00 made by Issuer in favor of Lessor, together with all amendments thereto and modifications thereof. Mortgaged Property has the meaning set forth in Paragraph 36(e). Multiemployer Plan means a multiemployer plan (as defined in Section 4001(a)(3) of ERISA) to which Lessee, or any Commonly Controlled Entity, as appropriate, has or had an obligation to contribute. Operative Documents means this Lease, the Lease Supplement, the Head Lease, the Bond Documents, the Credit Facility Agreements, the Credit Facility Documents, the Collateral Pledge Agreement, the Letter of Credit, the Letter of Credit Agreement, the Letter of Credit Documents, the MEDCO Note, the Certificates, the Hedge Documents, if applicable, the Guarantee and the Deed of Trust. Owner Trust Estate has the meaning given to such term in the Trust Agreement. Owner Trustee means Wells Fargo Bank Northwest, National Association, not in its individual capacity, but solely as Owner Trustee under the Trust Agreement. Participants means the Credit Facility Providers, the Certificate Holders and the Hedge Counterparty. Paying Agent has the meaning given to such term in the Indenture. Payment Date means the first (1st) Business Day of each calendar month during the Term. Permitted Equipment Lien means any encumbrance or other lien upon, or security interest in, or any equipment lease of, any Lessee's Equipment, or interest therein, provided that the beneficiary of any such encumbrance, lien or security interest or the lessor under any equipment lease (i) acknowledges and agrees that its right to remove any of Lessee's Equipment must be exercised immediately upon or prior to the expiration or earlier termination of this Lease (the beneficiary or the lessor, as the case may be, acknowledging and agreeing that any Lessee's Equipment not so removed immediately upon or prior to the expiration or earlier termination of this Lease shall be considered abandoned by Lessee, and may be appropriated, sold, destroyed or otherwise disposed of by Lessor without first giving notice thereof and without obligation to account therefor to either Lessee, beneficiary or lessor as the case may be), (ii) covenants and agrees to repair (and, if necessary, replace), at its sole cost and expense, any damage to the Property caused by the removal of Lessee's Equipment, and (iii) acknowledges and agrees that its encumbrance, lien or security interest or equipment lease shall not create any lien upon, security interest in or encumbrance upon the Property. 10 Permitted Investments has the meaning given to such term in the Collateral Pledge Agreement. Permitted Use means the Permitted Use as defined in Paragraph 4. Person means any natural person, firm, association, corporation, company, trust, partnership, public body or other entity. Personalty has the meaning set forth in Paragraph 36(g). Plan means any pension, profit sharing, savings or stock bonus plan established or maintained by the Lessee or any Commonly Controlled Entity that is intended to satisfy the qualification requirements under Code Section 401 and is subject to the requirements of ERISA, together with any related trusts. Plans means the Plans and Specifications for the Additional Improvements which shall be approved, in writing by Lessor, Agent and Lessee, as the same may be modified or amended in accordance with Paragraph 13(g). Prohibited Transaction means a "prohibited transaction" as defined in Section 406 of ERISA or Section 4975 of the Code. Property means, collectively, the Land, the Improvements, the Appurtenances and the Building Equipment, together with Alterations thereto. Purchase Option has the meaning given to such term in Paragraph 19(a). Release Fee has the meaning given to such term in Paragraph 38. Release Parcel has the meaning given to such term in Paragraph 38. Remarketing Agent has the meaning given to such term in the Indenture. Remarketing Option has the meaning given to such term in Paragraph 19(f). Rent means Basic Rent and Additional Rent. Reportable Event means a "reportable event" as defined in Section 4043 of ERISA or the regulations issued thereunder. Residual Guaranty Amount means, as of any date of determination, the product obtained by multiplying (i) the Lease Balance times (ii) 85%. Restrictive Covenants means the covenants and restrictions set forth in the Amended and Restated Declaration of Covenants and Easements made the 9th day of March, 1990, by and between Montgomery County, Maryland and Redgate III Limited Partnership, and recorded among the Land Records of Montgomery County, Maryland, in Liber 9332 at folio 591. Subject Contracts has the meaning set forth in Paragraph 36(e). 11 Subject Leases has the meaning set forth in Paragraph 36(e). Subsidiary or Subsidiaries means, with respect to any Person (including Lessee), any present or future Person at least a majority of whose outstanding Voting Stock shall at the time be owned by such Person (including Lessee) or by one or more Subsidiaries of such Person, or by such Person (including Lessee) and one or more Subsidiaries of such Person (including Lessee). Substantial Completion means the date on which the Additional Improvements are in such condition that Lessee may commence its final fit out of the Additional Improvements and move in and a Certificate of Occupancy of a tenantable shell either has been issued or would be issued except for work to be performed by Lessee. Substantial Completion Date has the meaning given to such term in Paragraph 13(c). Term means the Term as defined in Paragraph 5. Trust Agreement means that certain Trust Agreement dated as of October 25, 2001, by and between the Owner Trustee and the Bank, together with all amendments thereto and modifications thereof. Trustee means Allfirst Trust Company National Association, not in its individual capacity, but solely as Bond Trustee, its successors and assigns. Voting Stock means the shares of any class of capital stock of a Person having ordinary voting power to elect the directors, managers or trustees thereof (irrespective of whether or not at the time stock of any class or classes of such Person shall have or might have voting power by reason of the happening of any contingencies). 3. Title. (a) The Property is demised and let subject to (i) the Head Lease, (ii) the Deed of Trust and any Encumbrances executed in connection therewith and all of the terms and provisions thereof, including but not limited to the provisions governing disbursement of insurance proceeds and condemnation awards, (iii) the existing state of the title of the Land as of the date hereof and any other exceptions or encumbrances of record as of the date hereof and any other restrictions, exceptions and Encumbrances entered into subsequent to the date hereof with Lessee's knowledge and written consent, which consent shall not be unreasonably withheld or delayed provided Lessee's rights hereunder are not adversely affected in a material manner, (iv) any state of facts which an accurate survey or physical inspection of the Property might show, and (v) the condition of the Property, as of the Commencement Date. So long as no Default or Event of Default exists hereunder, Lessor covenants and agrees not to amend or modify any of the terms and conditions of the Head Lease without the prior written consent of Lessee, which consent shall not be unreasonably withheld, conditioned or delayed. (b) Lessee has made its own investigation as to the existing state of the title of the Land and has obtained its own survey. Lessee has also made its own investigation as to the 12 physical condition of the Property. Based upon the foregoing, Lessee hereby acknowledges its acceptance of the Property and the suitability of the Property for the Permitted Use. (c) LESSEE ACKNOWLEDGES THAT, ALTHOUGH LESSOR WILL OWN AND HOLD TITLE TO OR A LEASEHOLD INTEREST IN THE PROPERTY, LESSOR IS NOT RESPONSIBLE FOR THE CONDITION OF THE PROPERTY OR ANY ALTERATIONS. NEITHER LESSOR, AGENT NOR ANY CREDIT FACILITY PROVIDER HAS MADE OR SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, OR SHALL BE DEEMED TO HAVE ANY LIABILITY WHATSOEVER AS TO THE VALUE, MERCHANTABILITY, TITLE, HABITABILITY, CONDITION, DESIGN, OPERATION, OR FITNESS FOR USE OF THE PROPERTY (OR ANY PART THEREOF), OR ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE PROPERTY (OR ANY PART THEREOF), ALL SUCH WARRANTIES BEING HEREBY DISCLAIMED, AND NEITHER LESSOR, AGENT NOR ANY CREDIT FACILITY PROVIDER SHALL BE LIABLE FOR ANY LATENT, HIDDEN, OR PATENT DEFECT THEREIN OR THE FAILURE OF THE PROPERTY, OR ANY PART THEREOF, TO COMPLY WITH LAW. 4. Use of Property. Lessee shall occupy and use the Property for any lawful use (the "Permitted Use"), subject to the terms and provisions of any covenants, easements, conditions or restrictions of record as of the Commencement Date or hereafter recorded with the written consent of Lessee and Agent, including but not limited to the Deed of Trust and the Restrictive Covenants, and for no other purpose. Lessee shall not abandon the Property. Lessee shall not permit any unlawful occupation, business or trade to be conducted on the Property or any portion thereof or any use to be made thereof contrary to applicable Legal Requirements or Insurance Requirements. Lessee shall not use or occupy or permit the Property or any portion thereof to be used or occupied, nor do or permit anything to be done in or on the Property or any portion thereof, in a manner which would or might (i) constitute a default under the Head Lease or any of the other Operative Documents, (ii) make void or voidable any insurance then in force with respect to any of the Property, (iii) make it impossible to obtain fire or other insurance which Lessee is required to furnish hereunder, (iv) cause structural injury to any of the Improvements, (v) constitute a public or private nuisance or waste or (vi) impair the Fair Market Value, utility or remaining useful life of the Property. 5. Term. Unless earlier terminated pursuant to the terms hereof, the term of this Lease (the "Term") shall commence on the Commencement Date and end on the Expiration Date. 6. Rent. (a) Beginning with and including the first Payment Date occurring after the Commencement Date, Lessee shall pay to the Agent, on behalf of Lessor, by wire transfer of immediately available federal funds using the wiring instructions set forth in Exhibit D attached hereto or by such other method of payment as may be mutually agreed upon by Lessor, Lessee and Agent, basic rent in the amounts set forth in Exhibit C attached hereto, subject to adjustment as set forth in subparagraph (b) below (such basic rent, as so adjusted from time to time, is hereinafter referred to as "Basic Rent"). Basic Rent shall be absolutely net to Lessor, so that this 13 Lease shall yield to Lessor the Basic Rent throughout the Term and shall be paid without demand or offset, as more particularly provided hereinafter. Each installment of Basic Rent received by the Agent shall be disbursed by the Agent in accordance with Article IX of the Deed of Trust. (b) Lessor and Lessee acknowledge and agree that Basic Rent has been determined based upon a number of factors, which include the amount of interest payable on the aggregate sum of the outstanding principal amount of the Bonds from time to time, the yield payable on the aggregate sum of the outstanding principal amount of Certificates from time to time and any other amounts and costs payable pursuant to the Operative Documents. Accordingly, Basic Rent shall be adjusted from time to time by Lessor and Lessee to reflect (i) any increase in the aggregate sum of the outstanding principal amount of the Bonds and/or the Certificates, (ii) any redemption of the Bonds prior to maturity, (iii) any increase or decrease in Basic Rent as a result of the existence of the Hedge Documents, (iv) the expiration of any Hedge or any default by any Hedge Counterparty in the performance of its obligations under any Hedge Documents, and (v) any additional amounts and costs that become due and owing pursuant to the other Operative Documents. (c) Lessee covenants and agrees to pay and discharge, as additional rent (the "Additional Rent"), all amounts, liabilities and obligations (other than Basic Rent) which Lessee assumes or agrees or is otherwise obligated to pay under this Lease or any other Operative Document (whether or not designated as Additional Rent) to Agent or any other Person, including without limitation, the Head Lessor's Fee, any costs otherwise payable by Issuer under the Hedge Documents, Break Costs, the Residual Guaranty Amount and any Lease Balance. Each payment of Additional Rent received by the Agent shall be disbursed by the Agent in accordance with Article IX of the Deed of Trust. Lessor, as promptly as practicable after obtaining knowledge that any Additional Rent will be payable under this Lease, will advise Lessee, by written notice, of the amount of any Additional Rent payable hereunder and the date on which any Additional Rent is due and payable by Lessee in order for Lessor to meet its obligations with respect to payments by Lessor to other Persons, but failure to give such notice shall not relieve Lessee of the obligation to make such payments. Additional Rent shall be paid to Agent or the Person entitled thereto, on the date specified in Lessor's written notice to Lessee, by wire transfer of immediately available federal funds using the wiring instructions set forth in Exhibit D attached hereto. In the event of any failure by Lessee to pay or discharge any Additional Rent, Lessor shall have all rights, powers and remedies provided herein or by Law in the case of non-payment of Basic Rent. (d) In the event that any payment of Basic Rent or Additional Rent is not made within fifteen (15) days after the date on which the same is due and payable, Lessee shall pay to whomever shall be entitled thereto, in each case as Additional Rent, a late charge equal to two percent (2%) of the overdue amount, together with interest, from the date on which the payment was due (without regard to any applicable grace period) until the date such payment is made in full, at the fluctuating rate which is at all times equal to the LIBO Rate plus 2% per annum (the "Default Rate"). In addition, Lessee shall pay all costs of collection, including attorneys' fees, if collection of amounts due to Lessor or any other Person is referred to an attorney after default by Lessee. 14 7. Net Lease; Non-Terminability. (a) This Lease is a net lease, and Basic Rent, Additional Rent and all other sums payable by Lessee shall be paid without notice or demand. Lessee's obligations to pay Basic Rent, Additional Rent and all other such sums payable by Lessee hereunder shall be absolute and unconditional under any and all circumstances (except as specifically provided herein). (b) Any present or future law to the contrary notwithstanding, Lessee shall not be entitled to any set-off, counterclaim, recoupment, abatement, suspension, deferment, diminution, deduction, reduction or defense of or to Basic Rent or Additional Rent or any other sums payable hereunder and the obligations of Lessee under this Lease shall not be affected, for any reason, including the following: (i) any defect in the condition, merchantability, design, construction or quality of all or any part of the Property, (ii) any damage to or the destruction of all or any part of the Property from whatever cause, (iii) any taking of the Property or any portion thereof or interest therein by condemnation, requisition or otherwise for any reason, (iv) any prohibition, limitation or restriction of Lessee's use of all or any part of the Property, or any interference with such use, (v) any title defect or encumbrance, or any eviction from the Property by paramount title or otherwise, (vi) Lessee's acquisition or ownership of any interest in all or any part of the Property otherwise than pursuant to an express provision of this Lease, (vii) any failure on the part of Lessor to observe any provision of this Lease, or any default by Lessor under any other agreement to which Lessor and Lessee may be parties, (viii) any claim which Lessee has or might have against Lessor, (ix) the impossibility or illegality of performance by Lessee or Lessor or both, (x) any action by any court, administrative agency or other Governmental Authority (provided, however, if any court, administrative agency or other Governmental Authority were to take any action which would prohibit the payment by Lessee to Lessor of Basic Rent, Additional Rent or any other sums payable hereunder, Lessor shall, thereafter, continue to make such payments into an escrow account to be established by the Agent for the benefit of Lessor and the Credit Facility Providers until such time as such prohibition on payment by Lessee to Lessor is removed), (xi) the failure of Lessee, Guarantor or any of their Affiliates to achieve any accounting or tax benefits or the characterization of the transaction intended by the parties as set forth in Paragraph 35 hereof, or (xii) any other cause or circumstance whether similar or dissimilar to the foregoing and whether or not Lessee shall have notice or knowledge of any of the foregoing. It is the intention of the parties hereto that the obligations of Lessee hereunder shall be separate and independent covenants and agreements, that Basic Rent, Additional Rent and all other sums payable by Lessee hereunder shall continue to and be payable in all events, and that the obligations of Lessee hereunder shall continue unaffected, unless the requirement to pay or perform the same shall have been terminated pursuant to an express provision of this Lease. (c) Lessee agrees that it will remain obligated under this Lease in accordance with its terms, and that it will not take any action to terminate, rescind or avoid this Lease or abate the Rent payable hereunder, notwithstanding (i) the bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding-up or other proceeding affecting Lessor or any assignee of Lessor in any such proceeding or/and (ii) any other action (including rejection) with respect to this Lease which may be taken by any trustee or receiver of Lessor or of any assignee of Lessor in any such proceeding or by any court in any such proceeding, and, in any such event, so long as Lessee pays and performs its obligations under this Lease and does 15 not take any action to terminate, rescind or avoid this Lease or abate the rent required hereby, Lessee shall be entitled to the benefits of Lessee set forth in this Lease. (d) Except as otherwise provided in this Lease, Lessee waives all rights which may now or hereafter be conferred by law (i) to quit, terminate or surrender this Lease or (ii) to any abatement, suspension, deferment or reduction of Basic Rent, Additional Rent or any other sums payable under this Lease. 8. Payment of Impositions; Compliance with Law, Restrictive Covenants and Operative Documents. (a) Lessee covenants and agrees to pay, as Additional Rent, all taxes, charges, levies and assessments which Lessee agrees or is otherwise obligated to pay under this Lease or any of the other Operative Documents, including without limitation all amounts described in Section 4.4 of the Deed of Trust and all Impositions payable by Lessee pursuant to Section 5.4 thereof. If Lessee is not otherwise obligated to furnish proof of payment of any such amount to Lessor pursuant to other provisions of the Operative Documents, then Lessee agrees to furnish to Lessor, within thirty (30) days after written demand therefor, proof of the payment of such amounts. (b) Lessee shall, at its sole cost and expense, promptly comply with and conform to all Legal Requirements and Insurance Requirements relating to the Property, including the use and operation thereof, whether or not compliance therewith shall require structural or extraordinary changes in the Property or interfere with the use and enjoyment of the Property. Lessee shall also, at its sole cost and expense, procure, maintain and comply with all licenses, permits, orders, approvals, consents and other authorizations required for the use, operation, maintenance, repair and restoration of the Property. (c) Lessee shall, at its sole cost and expense, promptly comply with and conform to all of the Restrictive Covenants. (d) Lessee shall, at its sole cost and expense, perform all obligations of Lessee and of Lessor, Maryland Trustee and Issuer and pay all amounts due and owing from time to time under any of the other Operative Documents as and when such obligations are required to be performed and such amounts are required to be paid, including, without limitation, the Head Lease, the Deed of Trust and the Letter of Credit Agreement, provided Lessee is provided with the same notice and cure period, if any, afforded to the responsible party under the other Operative Documents. 9. Liens. (a) Lessee will not, directly or indirectly, create or permit to remain, and will promptly discharge, at its expense, any mortgage, lien, encumbrance or charge on, pledge of, or conditional sale or other title retention agreement with respect to, the Property or any part thereof or Lessee's interest therein or Basic Rent, Additional Rent or other sums payable by Lessee under this Lease, other than Permitted Equipment Liens. Lessee, at its own expense, will promptly pay, satisfy and otherwise take such actions as may be necessary to keep the Property free and clear of, and duly to discharge, eliminate or bond in a manner reasonably satisfactory to 16 Lessor and Agent any of the foregoing liens, other than Permitted Equipment Liens, if the same shall arise at any time. NOTHING CONTAINED IN THIS LEASE SHALL BE CONSTRUED AS CONSTITUTING THE CONSENT OR REQUEST OF LESSOR, AGENT OR ANY CREDIT FACILITY PROVIDER, EXPRESSED OR IMPLIED, OF ANY CONTRACTOR, SUBCONTRACTOR, LABORER, MATERIALMAN OR VENDOR TO OR FOR THE PERFORMANCE OF ANY LABOR OR SERVICES OR OTHER FURNISHING OF ANY MATERIALS FOR ANY CONSTRUCTION, ALTERATION, ADDITION, REPAIR OR DEMOLITION OF OR TO THE PROPERTY OR ANY PART THEREOF, AND NEITHER LESSOR, AGENT NOR ANY CREDIT FACILITY PROVIDER SHALL BE LIABLE TO LESSEE OR TO ANY CONTRACTORS, SUBCONTRACTORS, LABORERS, MATERIALMEN, SUPPLIERS OR VENDORS FOR SERVICES PERFORMED OR MATERIAL PROVIDED ON OR IN CONNECTION WITH THE PROPERTY OR ANY PART THEREOF. (b) Pursuant to the Operative Documents, including, without limitation, the Deed of Trust, Lessor, acting through the Maryland Trustee, and Lessee shall be required to grant various liens on each of their respective right, title and interest in and to the Property in order to secure each of their respective obligations under the Operative Documents. Lessor and Lessee each hereby consent to the granting of any and all such liens required pursuant to the Operative Documents, including, without limitation, the liens evidenced by the Deed of Trust. 10. [INTENTIONALLY RESERVED]. 11. Lessee's Equipment; Building Equipment. (a) All Lessee's Equipment shall remain the property of the lessor thereof or the property of Lessee, as applicable, notwithstanding its attachment to the Property. At the expiration or earlier termination of the Term, all of Lessee's Equipment shall remain the property of the lessor thereof or the property of the Lessee (as applicable) and shall be removed by Lessee or such lessor in accordance with subparagraph (c) below. (b) [Intentionally Reserved]. (c) Upon the expiration or earlier termination of this Lease, Lessee shall surrender the Property in good condition, reasonable wear and tear excepted, with all Building Equipment in good working condition, and otherwise in the condition required pursuant to the Deed of Trust. Lessee shall have the right to remove any of Lessee's Equipment prior to the expiration or earlier termination of this Lease provided (i) no Default or Event of Default then exists, (ii) Lessee shall repair (and, if necessary, replace), at its sole cost and expense, any damage to the Property caused by the removal of Lessee's Equipment (whether affected by Lessee or Lessee's lessor or any of their agents or employees) and (iii) following the removal of any of Lessee's Equipment and the repair (and, if necessary, the replacement) of any damage to the Property caused by such removal, the Property shall have the same Fair Market Value, remaining useful life, utility and residual value as existed immediately prior to the removal of such Lessee's Equipment. Any Lessee's Equipment not removed by Lessee upon the expiration or earlier termination of this Lease in accordance with the terms of this subparagraph (c) shall be considered abandoned by Lessee, and may be appropriated, sold, destroyed or otherwise 17 disposed of by Lessor without first giving notice thereof and without obligation to account therefor to either Lessee or any lessor of such Lessee's Equipment. Lessor shall not be responsible for any loss or damage to Lessee's Equipment under any circumstances. The provisions of this subparagraph (c) are not applicable in the event that Lessee exercises the Purchase Option and irrevocably pays the purchase price provided for in Paragraph 19 hereof to the Agent. (d) Lessor shall, from time to time upon Lessee's written request, execute appropriate documents for the benefit of Lessee's lenders or equipment lessors confirming the provisions of this Paragraph 11 and containing such further undertakings of Lessor (provided the same are at no cost and expense to Lessor) concerning the right of any such lender or lessor to enter the Property prior to the expiration or earlier termination of this Lease for the purpose of exercising its rights with respect to the collateral of such lender or lessor, including removing the same, provided such documents and further undertakings are on commercially reasonable terms and conditions and require such lender or lessor to fully comply with the terms and conditions of subparagraph (c) above relating to the removal of Lessee's Equipment. 12. Alterations. (a) So long as no Default or Event of Default shall have occurred and be continuing, Lessee may, at its expense, make Alterations, subject to the prior written consent of Lessor, Agent and Issuer and further subject to the terms and conditions of the Head Lease and the Deed of Trust, provided that Lessee must notify Lessor, Agent and Issuer but not obtain the prior consent of Lessor, Agent and Issuer for any non-structural Alterations which do not involve the exterior of any of the Improvements or changes in utilities, electrical, mechanical or other existing systems and which in each separate Alteration do not exceed $1,500,000 in cost. Lessor agrees not to withhold, delay or condition its consent, to the extent required herein, provided that (i) all such Alterations, construction and installations shall be performed in a good and workmanlike manner; (ii) all such Alterations, construction and installations shall be expeditiously completed in compliance with all Legal Requirements; (iii) all work done in connection with any such Alterations, construction or installation shall comply with all Insurance Requirements; (iv) Lessee shall promptly pay all costs and expenses of any such Alteration, construction or installation and shall discharge all liens filed against any of the Property arising out of the same; (v) Lessee shall procure and pay for all permits and licenses required in connection with any such Alteration, construction or installation; (vi) all such Alterations, construction and installations shall be the property of Lessor and shall be subject to this Lease; (vii) the design of any Alterations visible from the exterior of the Property shall comply with the terms of the Restrictive Covenants (including obtaining any consents required thereunder), if applicable; (viii) the contractor performing such alterations shall be reputable, licensed and insured and shall, if required by Lessor or Agent, be required to obtain performance and payment bonds; (ix) such Alterations, when completed, shall not impair the Fair Market Value, utility, remaining useful life or residual value of the Property from the Fair Market Value, utility, remaining useful life or residual value thereof immediately prior to the making thereof; and (x) Lessor shall incur no expense or cost whatsoever in connection with such Alterations, including without limitation, costs for reviewing and approving plans, additional common area maintenance fees, tap fees or other utility fees, and costs incurred by Lessor in obtaining the approval of the Agent and Issuer, if required pursuant to the Head Lease. Lessor may require, as 18 a condition to its consent to any Alterations, reasonable appropriate payments, assurances and undertakings from Lessee to ensure that all such conditions are satisfied. Notwithstanding the foregoing, it shall not be unreasonable for Lessor to withhold its consent, or to condition its consent, if either the Agent or Issuer withholds its consent to any of the foregoing, or requires that certain conditions or requirements be satisfied or observed. (b) In the event that any Alterations shall encroach upon any property, street or right-of-way adjoining or adjacent to the Property, or shall violate the agreements or conditions contained in any restrictive covenant affecting the Property or any part thereof, including without limitation the Restrictive Covenants or shall hinder or obstruct any easement or right-of-way to which the Property are subject or shall impair the rights of others under any such easement or right-of-way, then promptly after written request of Lessor or of any Person affected by any such encroachment, violation, hindrance, obstruction or impairment, Lessee shall, at its expense, either (i) obtain valid and effective waivers or settlements of all claims, liabilities and damages resulting from each such encroachment, violation, hindrance, obstruction or impairment, whether the same shall affect Lessor, Lessee or both, or (ii) take such other action as shall be necessary to remove such encroachments, hindrances or obstructions and to end such violations or impairments. 13. Construction of Additional Improvements. (a) Appointment of Lessee as Construction Agent. Pursuant to and subject to the terms and conditions set forth herein and in the other Operative Documents, Lessor hereby designates and appoints Lessee, during the Construction Period, to serve as construction agent for the construction of the Additional Improvements and acquisition and installation of the related Building Equipment in accordance with the Plans on the Land. Lessee, acting in such capacity, shall be referred to in this Paragraph 13 as "Construction Agent". (b) Acceptance; Construction. Lessee hereby unconditionally accepts the designation and appointment as Construction Agent. Construction Agent shall cause the Additional Improvements to be constructed on the Land and the related Building Equipment to be acquired and installed in accordance with (i) the Plans, (ii) the terms and conditions set forth in this Lease, (iii) the terms and conditions of the other Operative Documents and (iv) all applicable Legal Requirements and Insurance Requirements. (c) Commencement of Construction; Completion Date. Construction Agent hereby agrees, unconditionally and for the benefit of Lessor, to cause construction of the Additional Improvements to commence on the Land as soon as is reasonably practicable, in its reasonable judgment, after the Commencement Date and to cause construction to be substantially completed not later than the date which is eighteen (18) months after the Commencement Date (the "Substantial Completion Date") and to cause all construction to be completed (including all punchlist items) not later than the Final Completion Date. For purposes hereof, construction of the Additional Improvements shall be deemed to commence on the date (the "Construction Commencement Date") on which excavation for the foundation for such Additional Improvements commences. Without limiting the foregoing, no phase of such construction shall be undertaken until all permits for such phase have been issued therefor. 19 (d) Construction Documents. Construction Agent may execute any of its duties and obligations under this Paragraph 13 by or through agents, contractors, employees or attorneys-in-fact, and Construction Agent, as agent for Lessor, shall enter into such agreements with architects, contractors and vendors as Construction Agent deems necessary or desirable for the construction of the Additional Improvements and the acquisition and installation of the related Building Equipment pursuant hereto (collectively, the "Construction Documents"); provided, however, that no such delegation shall limit or reduce in any way Construction Agent's duties and obligations under this Paragraph 13; provided, further, contemporaneously with the execution and delivery of any Construction Document, Construction Agent will execute and deliver to Lessor a Security Agreement and Assignment in the form attached hereto as Exhibit E and incorporated herein by this reference, pursuant to which Construction Agent shall assign to Lessor, among other things, all of Construction Agent's rights under and interests in such Construction Documents. Each construction contract with a general contractor or vendor shall be subject to the approval of Lessor and Agent, shall be with a reputable general contractor or vendor with experience in constructing or equipping projects that are similar in scope and type to the Additional Improvements, shall provide for a fixed price or guaranteed maximum price (unless otherwise specifically agreed to by Agent) and shall provide that the general contractor shall insure the Additional Improvements under a "builders' risks" property insurance policy (unless provided by Construction Agent). Construction Agent shall provide (or cause to be provided) such payment and performance bonds as may be required by Agent. (e) Scope of Authority. (i) Subject to the terms, conditions, restrictions and limitations set forth herein and in the other Operative Documents, Lessor hereby expressly authorizes Construction Agent, or any agent or contractor of Construction Agent, and Construction Agent unconditionally agrees, for the benefit of Lessor, to take all action necessary or desirable for the performance and satisfaction of all of Construction Agent's obligations under this Paragraph 13 with respect to the construction of the Additional Improvements and the acquisition and installation of the related Building Equipment, including, without limitation: (A) overseeing, directing, supervising and monitoring all design and supervisory functions relating to the construction of the Additional Improvements and acquisition and installation of the related Building Equipment and all engineering work related to the construction of the Additional Improvements and acquisition and installation of the related Building Equipment; (B) negotiating and entering into all contracts or arrangements to procure the equipment and services necessary to construct the Additional Improvements and acquisition and installation of the related Building Equipment on such terms and conditions as are customary and reasonable in light of local standards and practices; (C) obtaining all necessary permits, licenses, consents, approvals and other authorizations, including those required under Law (including Environmental Laws), from all Governmental Authorities in connection with the 20 construction of the Additional Improvements on the Land and the acquisition and installation of the related Building Equipment in accordance with the Plans; (D) maintaining all books and records with respect to the construction of the Additional Improvements; and (E) performing any other acts necessary or appropriate in connection with the construction of the Additional Improvements and acquisition and installation of the related Building Equipment in accordance with the Plans. (ii) Neither the Construction Agent nor any of its Affiliates or agents shall enter into any contract which would, directly or indirectly, impose any liability or obligation on Lessor unless such contract expressly contains an acknowledgment by the other party or parties thereto that the obligations of Lessor are non-recourse, and that Lessor shall have no personal liability with respect to such obligations. Subject to the foregoing, Lessor shall execute such documents and take such other actions as Construction Agent shall reasonably request, at Construction Agent's expense, to permit Construction Agent to perform its duties hereunder. (iii) Subject to the terms and conditions of this Lease and the other Operative Documents, Construction Agent shall have sole management and control over the construction means, methods, sequences and procedures with respect to the construction of the Additional Improvements and acquisition and installation of the related Building Equipment. (f) Covenants of Construction Agent. Construction Agent hereby covenants and agrees that it will: (i) following the Construction Commencement Date, cause construction of the Additional Improvements on the Land and acquisition and installation of the related Building Equipment to be prosecuted diligently and without undue interruption substantially in accordance with the Plans and in compliance in all material respects with all Legal Requirements and Insurance Requirements and cause Substantial Completion to occur by the Substantial Completion Date and final completion to occur by the Final Completion Date; (ii) cause all liens (including, without limitation, liens or claims for materials supplied or labor or services performed in connection with the construction of the Additional Improvements and acquisition and installation of the related Building Equipment), other than the Encumbrances and Lessor Liens, to be discharged or bonded off if disputed in good faith by appropriate proceedings by Construction Agent; (iii) cause all outstanding punch list items with respect to the Additional Improvements and the related Building Equipment to be completed within ninety (90) days after the Substantial Completion Date (the "Final Completion Date"); provided, however, the Lessee acknowledges and agrees that the Lessee shall not be permitted to capitalize interest and yield, fees and insurance premiums due under the Operative Documents beyond the Substantial Completion Date; and 21 (iv) at all times during construction of the Additional Improvements and acquisition and installation of the related Building Equipment, cause all title to all personalty financed by Lessor on or within the Property to be and remain vested in Lessor and cause to be on file with the applicable filing office or offices all necessary documents under Article 9 of the Uniform Commercial Code to perfect such title free of all liens other than Encumbrances, it being understood and acknowledged that Lessor's rights, title and interest in and to said personalty have been assigned to Agent pursuant to the Operative Documents. (g) Amendments to Plans and Construction Documents. Construction Agent may not amend or modify the Plans or any of the Construction Documents without the prior written consent of Lessor and Agent, unless such amendment or modification (i) involves a non-structural change to the Additional Improvements, (ii) would not cause Substantial Completion to be delayed beyond the Substantial Completion Date and (iii) would not cause the undisbursed portion of the budget for the construction of the Additional Improvements prepared by Lessee pursuant to the Deed of Trust and delivered to Agent to be insufficient to pay all remaining costs associated with the construction of the Additional Improvements. (h) No Agency Fee. All obligations, duties and requirements imposed upon or allocated to Construction Agent under this Paragraph 13 shall be performed by Construction Agent at Construction Agent's sole cost and expense, and Construction Agent will not be entitled to, and Lessor shall not have any obligation to pay, any agency fee or other fee or compensation, and Construction Agent shall not be entitled to, and Lessor shall not have any obligation to make or pay, any reimbursement therefor, it being understood that the terms and provisions of this Paragraph 13 are being incorporated into this Lease as consideration for and as an inducement to Lessor entering into this Lease and the other Operative Documents. (i) Construction Monitoring. During the Construction Period, the Agent shall have the right, from time to time, at the sole cost and expense of Lessee, to have a third party construction consultant (the "Construction Consultant") inspect the construction of the Additional Improvements on the Property and provide a report to the Agent regarding the status of such construction and Lessee's compliance with the terms and conditions of this Paragraph 13 and the other Operative Documents regarding such construction (the "Construction Consultant Report"). If the Construction Consultant Report reveals any deficiencies in the construction of the Additional Improvements by the Lessee, Lessee shall promptly remedy any such deficiencies and provide evidence thereof reasonably acceptable to the Agent and the Construction Consultant. 14. Insurance. During the Term, Lessee covenants and agrees, at Lessee's cost and expense, to maintain the insurance required to be maintained by Lessee pursuant to the Deed of Trust. 15. Assignment and Subletting. (a) Provided no Default or Event of Default shall have occurred and be continuing, with prior written notice to Lessor and the Agent, Lessee may, provided such use of the Property or the applicable portion thereof is limited to the Permitted Use, sublet all or any 22 portion of the Property to (i) an Affiliate or (ii) Invitrogen (the "Invitrogen Sublease"), provided that the term of the Invitrogen Sublease shall not extend beyond April 30, 2002, or assign this Lease to an Affiliate. Provided no Default or Event of Default or event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default, shall have occurred and be continuing, with the prior written consent of Lessor and the Agent (which consent shall not be unreasonably withheld), Lessee may sublet all or any part of the Property to any Person which is not an Affiliate, or assign this Lease to any Person which is not an Affiliate, provided in each instance such Person shall use the Property solely for the Permitted Use. Notwithstanding the foregoing, it shall not be unreasonable for Lessor to withhold its consent, or to condition its consent, if the Agent or Issuer withholds its consent to any assignment or subletting, or requires that certain conditions or requirements be satisfied or observed. Lessee shall give Lessor at least thirty (30) days' advance written notice of its intention to enter into any transaction governed by this Paragraph 15, together with such information as Lessor and/or the Agent may reasonably request concerning the business and financial background of the proposed sublessee or assignee. Within ten (10) days after the execution and delivery of any assignment or sublease permitted pursuant to this Paragraph 15, Lessee shall deliver a conformed copy thereof to Lessor and the Agent, and within ten (10) days after the execution and delivery of any permitted sublease, Lessee shall give notice to Lessor and the Agent of the existence and term thereof, and of the name and address of the sublessee thereunder. (b) No assignment or sublease permitted hereunder will (i) release Lessee of any obligations hereunder or under any of the other Operative Documents or affect or reduce any of the obligations of Lessee hereunder, and all such obligations shall continue in full effect as obligations of a principal and not as obligations of a guarantor or surety, to the same extent as though no assignment or subletting had been made, (ii) impose any obligations on Lessor beyond those of Lessor under this Lease or otherwise affect any of the rights of Lessor under this Lease or (iii) extend beyond the last day of the Term. Each assignment or sublease permitted hereby shall be made and shall expressly provide that it is subject and subordinate to this Lease and the rights of Lessor hereunder, and shall expressly provide for the surrender of the Property or the applicable portion thereof that is subleased by the applicable sublessee at the election of Lessor after the occurrence and continuance of an Event of Default. Notwithstanding the foregoing, however, Lessor covenants and agrees that, following the occurrence and continuance of a Default or an Event of Default, Invitrogen shall be entitled to remain in possession of that portion of the Property then being subleased by Invitrogen pursuant to the Invitrogen Sublease, provided Invitrogen is not then in default under such sublease and Invitrogen agrees to attorn to Lessor or any subsequent owner of the Property for the remainder of the term of such sublease. The effectiveness of an assignment hereunder shall be conditioned upon the receipt by Lessor and the Agent of a writing executed by the assignee pursuant to which the assignee shall expressly assume all of the obligations of Lessee hereunder. Any assignment or subletting, Lessor's consent thereto, or Lessor's collection or acceptance of rent from any assignee or sublessee shall not be construed either as waiving or releasing Lessee from any of its liabilities or obligations under this Lease, or as relieving Lessee or any assignee or sublessee from the obligation of obtaining Lessor's and the Agent's prior written consent to any subsequent assignment or subletting. (c) Upon the occurrence of an Event of Default under this Lease, Lessor shall have the right to collect and enjoy all rents and other sums of money payable under any sublease 23 of any of the Property, and Lessee hereby irrevocably and unconditionally assigns such rents and money to Lessor, which assignment may be exercised upon and after (but not before) the occurrence of an Event of Default. From and after the date, if any, that such Event of Default is cured, such rents shall again become payable to Lessee and the excess, if any, of the sublease rents collected by Lessor over the amount thereof applied toward Lessee's obligations under this Lease shall be paid to Lessee. (d) All restrictions and obligations imposed pursuant to this Lease on Lessee shall be deemed to extend to any sublessee or assignee, and Lessee shall cause such Person to comply with such restrictions and obligations. (e) Any assignment or sublease not made in accordance with the terms of this Paragraph 15 shall be void. 16. Permitted Contests. Notwithstanding any other provision of this Lease to the contrary, Lessee shall not be required to (i) pay any Imposition, (ii) discharge or remove any lien, encumbrance or charge referred to in Paragraph 9 or 11 or (iii) comply with any Insurance Requirement so long as Lessee shall contest, in good faith and at its expense, the existence, the amount or the validity thereof, the amount of the damages caused thereby, or the extent of its liability therefor, by appropriate proceedings, provided that (a) such contest shall operate at all times during the pendency thereof to prevent (i) the collection of, or other realization upon, the sums payable to satisfy any Imposition or lien, encumbrance or other charge so contested, and (ii) the sale, forfeiture or loss of the Property, or any part thereof, or any interest therein or Basic Rent or any Additional Rent, or any portion thereof, (b) such contest shall not result in any interference or potential interference with the use or occupancy of the Property or any part thereof, (c) there shall be no interference with the payment of Basic Rent or any Additional Rent, or any portion thereof as a result of such contest, (d) there shall be no cancellation or interruption of any fire or other insurance policy as a result of such contest, unless such policy is replaced prior to its cancellation by another policy complying with the provisions of this Lease, and (e) such content shall not result in the Imposition or potential Imposition of any civil or criminal liability upon Lessor. While any such proceedings are pending, Lessor shall not have the right to pay, remove or cause to be discharged the tax, assessment, levy, fee, rent or charge or lien, encumbrance or charge thereby being contested or to take steps necessary to comply with any Insurance Requirements thereby being contested, provided that Lessor shall have the right to require Lessee to establish reasonable reserves for such liabilities being contested if the Lessor reasonably determines such reserves to be necessary. Lessee further agrees to give Lessor prompt notice of Lessee's intention to contest any Imposition or Insurance Requirements and that each such contest shall be promptly prosecuted to a final conclusion. Lessee will pay, and save Lessor and the Agent harmless against, any and all losses, judgments, decrees and costs (including all reasonable attorneys' fees and expenses) in connection with any such contest and will, promptly after the final settlement, compromise or determination of such contest, fully pay and discharge the amounts which shall be levied, assessed, charged or imposed or be determined to be payable therein or in connection therewith, together with all penalties, fines, interests, costs and expenses thereof or in connection therewith, and perform all acts the performance of which shall be ordered or decreed as a result thereof. 17. Default Provisions. 24 (a) Events of Default. Any of the following occurrences or acts shall constitute an Event of Default under this Lease: (i) Lessee shall fail to pay any installment of Rent within five (5) Business Days after notice from Lessor and/or Agent that the same is due or any other amounts required to be paid by Lessee hereunder or under the other Operative Documents, as and when the same become due, unless any notice and cure period is expressly provided for herein or in the other Operative Documents, in which case Lessee shall be afforded such notice and cure period. (ii) Lessee shall fail to pay any amounts payable pursuant to Paragraph 18(a), 18(b), 19(d), 19(f) and 19(g) hereof as and when due. (iii) Lessee shall fail to maintain the insurance required pursuant to Paragraph 14 hereof. (iv) Lessee shall fail to purchase the Property in accordance with Paragraph 19(c) below, or Lessee shall fail to sell all of the Property by the Expiration Date in accordance with the terms of Paragraph 19(f) below following the exercise by Lessee of the Remarketing Option. (v) Lessee shall fail to cure any deficiency in the Collateral (as defined in the Collateral Pledge Agreement) within two (2) Business Days after notice from the Agent and/or the Trustee. (vi) The occurrence of an event of default under the Credit Facility Agreements or the failure to reimburse any drawing under the Letter of Credit in accordance with the Credit Facility Agreements (including, without limitation, any drawing as a result of a default or failure to replace any Letter of Credit), provided Lessee is provided with the same notice and cure period, if any, afforded to the responsible party under the Credit Facility Agreements. (vii) Lessee shall fail to observe or perform any other covenant, condition or agreement contained in this Lease or any other Operative Document (except as expressly provided herein) and such failure shall continue unremedied for a period of thirty (30) days (or such shorter period of time as Lessor and/or the Agent may reasonably determine if such default endangers life or property) after Lessor and/or the Agent shall have delivered to Lessee written notice (except in the case of an emergency) of such failure (provided that, in the case of any default referred to in this clause (vii) which does not endanger life or property and which cannot with diligence be cured within such thirty (30) day period, if Lessee shall proceed promptly to cure the same and thereafter shall prosecute the curing of such default with diligence, then upon receipt by Lessor and the Agent of a certificate from an authorized officer of Lessee stating the reason that such default cannot be cured within thirty (30) days and stating that Lessee is proceeding with diligence to cure such default, the time within which such failure may be cured shall be extended for such additional period as may be necessary to complete the curing of the same with diligence. 25 (viii) An Act of Bankruptcy occurs with respect to Lessee, or Lessee becomes generally unable to pay its debts as they become due; provided, however, if a proceeding with respect to an Act of Bankruptcy is filed or commenced against Lessee, the same shall not constitute an Event of Default if such proceeding is dismissed within ninety (90) days from the date of such Act of Bankruptcy. (ix) Default is made (A) with respect to any evidence of indebtedness or liability for borrowed money of Lessee to any of the Credit Facility Providers, or (B) with respect to any evidence of indebtedness or liability of Lessee to any other Person for borrowed money or pursuant to a lease obligation, if the effect of such default described in clause (A) or (B) above is to accelerate the maturity of such evidence of indebtedness or liability prior to its stated maturity (whether automatically, following an election by the holder or obligee thereof to accelerate, or otherwise) or any such indebtedness is not paid as and when due and payable; provided, however, that it shall not constitute an Event of Default if the outstanding principal balance of such indebtedness or liability of Lessee to any Person other than any of the Credit Facility Providers is not in excess of $10,000,000 or Lessee certifies to the Credit Facility Providers that it is contesting such default in good faith and by appropriate and diligent proceedings. (x) Lessee abandons the Property. (xi) [Intentionally Omitted.] (xii) The interest of Lessee in the Property or any part thereof shall be assigned or subleased in violation of Paragraph 15, or shall be levied upon or attached in any proceeding involving a claim in excess of $2,500,000 and such proceeding is not vacated, discharged or bonded against to the reasonable satisfaction of Lessor and the Agent within thirty (30) days thereafter. (xiii) Any representation or warranty made by Lessee or its representatives in this Lease or any of the other Operative Documents executed and delivered by Lessee or any statement or representation made by Lessee or its representatives in any certificate, report or opinion (including legal opinions) financial statement or other instrument furnished in connection with this Lease or any of the Operative Documents executed and delivered by Lessee proves to have been incorrect, false or misleading in any material respect when made. (xiv) Any judgment against Lessee or any attachment or other levy against the property of Lessee with respect to a claim for an amount in excess of $10,000,000 remains unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period of sixty (60) days. (xv) Lessee fails to comply with any material requirement of any Governmental Authority having jurisdiction over the Property within the time required by such Governmental Authority; or any proceeding is commenced or action taken to enforce any remedy for a violation of any material requirement of a Governmental Authority or any restrictive covenant affecting the Property or any part thereof; provided, 26 however, it shall not constitute an Event of Default during the pendency of any contest if Lessee is contesting the validity or applicability of any such requirement or covenant, at its sole cost and expense, in good faith and by appropriate and diligent proceedings in accordance with the terms of Paragraph 16 hereof. (xvi) If any material provision of this Lease or any of the other Operative Documents at any time for any reason ceases to be valid and binding on Lessee, or is declared to be null and void, or the validity or enforceability thereof is contested by Lessee or any governmental agency or authority, or Lessee denies that it has any further liability or obligation under this Lease or any of the other Operative Documents executed and delivered by Lessee. (xvii) Lessee fails to achieve Substantial Completion of the Additional Improvements for any reason prior to the Substantial Completion Date. (xviii) Lessee fails to achieve final completion of the Additional Improvements for any reason prior to the Final Completion Date. (xix) If, at any time, the undisbursed portion of the budget for the construction of the Additional Improvements prepared by Lessee pursuant to the Deed of Trust and delivered to Agent becomes insufficient to pay all costs associated with the construction of the Additional Improvements. (b) Remedies. During the existence of an Event of Default, at Lessor's option and without limiting Lessor in the exercise of any other right or remedy Lessor may have on account of such Event of Default (including, without limitation, the obligation of Lessee to purchase the Property as set forth below), and without any further demand or notice, Lessor may cause the following to occur: (i) By notice to Lessee, Lessor may terminate Lessee's right to possession of the Property. A notice given in connection with unlawful detainer proceedings specifying a time within which to cure a default shall terminate Lessee's right to possession if Lessee fails to cure the default within the time specified in the notice. (ii) Upon termination of Lessee's right to possession and without further demand or notice, Lessee shall surrender possession and vacate the Property and deliver possession thereof in the condition required by Paragraph 11(c) of this Lease, and Lessor may re-enter the Property and remove any Persons in possession thereof. (iii) Lessor may terminate this Lease with respect to the Property and/or declare the aggregate outstanding Lease Balance to be immediately due and payable, and Lessor shall be entitled to (x) recover from Lessee the following amounts and (y) take the following actions: (A) Lessee shall pay all accrued and unpaid Rent hereunder (including, without limitation, Basic Rent and Additional Rent) for the period 27 commencing on the Commencement Date through the Final Rent Payment Date (as hereinafter defined) with respect to the Property; (B) Lessor may elect either of the following with respect to the Property: (1) Lessor may demand, by written notice to Lessee specifying a payment date (the "Final Rent Payment Date") not earlier than ten (10) days after the date of such notice, that Lessee purchase the Property, and Lessee shall pay to Lessor, on the Final Rent Payment Date (in lieu of Basic Rent due after the Final Rent Payment Date), an amount equal to the sum of (A) the Lease Balance computed for the period commencing on the Commencement Date to and including the Final Rent Payment Date, plus (B) all accrued and unpaid Rent due and unpaid for the period commencing on the Commencement Date to and including the Final Rent Payment Date, and upon payment of such amount, and the amount of all other sums due and payable under this Lease and the other Operative Documents (and interest at the Default Rate on the amounts payable under this clause (B)(1) from the Final Rent Payment Date to the date of actual payment), Lessor shall transfer to Lessee all of Lessor's right, title and interest in and to the Property pursuant to Paragraph 19(e) below; or (2) Lessor may sell its interest in the Property and the other applicable Lessee Collateral, in which event, Lessee shall pay to Lessor an amount equal to the excess, if any, of (x) all amounts due Lessor under clause (B)(1) above over (y) the net sale proceeds received by Lessor from the foregoing sale (provided, that in calculating such net sale proceeds, all expenses and Impositions incurred by Agent, Lessor and any of the Credit Facility Providers in connection with such sale, including, without limitation, legal fees, shall be deducted from such sale proceeds); (C) Any other amount necessary to compensate Lessor for all the damages proximately caused by Lessee's failure to perform Lessee's obligation 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 without limitation, reasonable attorneys' fees, advertising costs and brokers' commissions) of recovering possession of the Property, removing Persons or property therefrom, placing the Property in good order, condition, and repair, preparing and altering the Property for reletting, and all other costs and expenses of reletting; and (D) Such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by Law. (iv) Lessor may enforce the Lien given hereunder pursuant to Paragraph 36 hereof, the UCC or any other Law to recover all amounts due and owning 28 under the Operative Documents, including, without limitation, the Lease Balance, any indemnity obligations of the Lessee under the Operative Documents then due and owing, any amounts due under the Hedge Documents and any amounts due under the Credit Facility Documents. (v) If Lessee has breached this Lease, this Lease shall continue in effect for so long as Lessor does not terminate this Lease, and Lessor may enforce all of Lessor's rights and remedies under this Lease, including the right to recover the Rent hereunder (including, without limitation, Basic Rent (when applicable) and Additional Rent) as it becomes due under this Lease. Lessee's right to possession shall not be deemed to have been terminated by Lessor except pursuant to clause (iii) above. The following do not constitute a termination of this Lease: (A) Acts of maintenance or preservation or efforts to relet the Property; (B) The appointment of a receiver upon the initiative of Lessor to protect Lessor's interest under this Lease; or (C) Withholding of consent to an assignment or subletting, or terminating a subletting or assignment by Lessee. (vi) In the event that Lessor elects to continue this Lease in full force and effect following the termination of Lessee's right of possession, Lessor, to the maximum extent permitted by Law, may enforce all its rights and remedies under this Lease, including, but not limited to, the right to recover Rent hereunder as it becomes due. During the continuance of an Event of Default or following the termination of Lessee's right to possession, Lessor may enter the Property in accordance with Law without terminating this Lease and sublet all or any part of the Property for Lessee's account to any Person, for such term (which may be a period beyond the remaining Term), at such rents and on such other terms and conditions as are commercially reasonable. In the event of any such subletting, rents received by Lessor from such subletting shall be applied (a) first, to the payment of the reasonable costs incurred by Lessor in maintaining, preserving, altering and preparing the Property for subletting and other reasonable costs of subletting, including, but not limited to, brokers' commissions and attorneys' fees; (b) second, to the payment of Rent hereunder then due and payable; (c) third, to the payment of future Rent hereunder as the same may become due and payable hereunder; (d) fourth, to the payment of all other obligations of Lessee hereunder and under the other Operative Documents (including, without limitation, the Lease Balance), and (e) fifth, the balance, if any, shall be paid to Lessee upon (but not before) expiration of the Term. If the rents received by Lessor from such subletting, after application as provided above, are insufficient in any period to pay the Rent due and payable hereunder for such period, Lessee shall pay such deficiency to Lessor upon demand. Notwithstanding any such subletting for Lessee's account without termination, Lessor may at any time thereafter, by written notice to Lessee, elect to terminate this Lease. 29 (vii) Lessor may exercise any other right or remedy that may be available to it under Law, this Lease and the other Operative Documents or in equity, or proceed by appropriate court action (legal or equitable) to enforce the terms or to recover damages for the breach hereof, including those arising from a breach by Lessee of its obligation to purchase the Property pursuant to Paragraph 19(c). Separate suits may be brought to collect any such damages for any Rent installment period(s), and such suits shall not in any manner prejudice Lessor's right to collect any such damages for any subsequent Rent installment period(s), or Lessor may defer any such suit until after the expiration of the Term, in which event such suit shall be deemed not to have accrued until the expiration of the Term. (viii) Lessor may retain and apply against Lessor's damages all sums which Lessor would, absent such Event of Default, be required to pay to, or turn over to, Lessee pursuant to the terms of this Lease. (ix) As a matter of right and without notice to Lessee or anyone claiming under Lessee, and without regard to the then value of the Lessee Collateral or the interest of Lessee therein, Lessor shall have the right to apply to any court having jurisdiction to appoint a receiver or receivers of the Lessee Collateral at Lessee's sole cost and expense, and Lessee hereby irrevocably consents to such appointment and waives notice of any application therefor. Any such receiver or receivers shall have all the usual powers and duties of receivers in like or similar cases and all the powers and duties of Lessor in case of entry as provided in this Lease and shall continue as such and exercise all such powers until the latest to occur of (i) the date of confirmation of sale of the Lessee Collateral; (ii) the disbursement of all proceeds of the Lessee Collateral collected by such receiver and the payment of all expenses incurred in connection therewith; or (iii) the termination of such receivership with the consent of Lessor or pursuant to an order by a court of competent jurisdiction. Lessee acknowledges and agrees that upon the declaration of an Event of Default the amount due and owing by Lessee to Lessor hereunder shall be the Lease Balance and that to the maximum extent permitted by Law, Lessee waives any right to contest the Lease Balance as the liquidated sum due upon acceleration of this Lease. The foregoing waiver shall only be a waiver by Lessee of any right to contest the validity of the Lease Balance as a liquidated sum due upon acceleration of this Lease and shall not be deemed a waiver of Lessee's rights hereunder to contest the amount of the Lease Balance. (c) Proceeds of Sale; Deficiency. All payments received and amounts held or realized by Lessor at any time when an Event of Default shall be continuing and after the Lease Balance shall have been accelerated pursuant to this Paragraph 17 as well as all payments or amounts then held or thereafter received by Lessor (except for rents received by Lessor from subletting pursuant to Paragraph 17(b)(vi), which shall be distributed as set forth therein) and the proceeds of sale pursuant to Paragraph 17(b)(iii)(B)(2) shall be distributed to the Agent upon receipt by Lessor for distribution in accordance with the terms of the Deed of Trust. (d) Waiver of Certain Rights. (a) To the maximum extent permitted by law, Lessee hereby waives the benefit of any appraisement, valuation, stay, extension, reinstatement 30 and redemption laws now or hereafter in force and all rights of marshalling in the event of any sale of the Property or any interest therein, (b) if this Lease shall be terminated pursuant to this Paragraph 17, Lessee waives, to the fullest extent permitted by law, (i) any notice of re-entry or the institution of legal proceedings to obtain re-entry or possession; (ii) any right of redemption, re-entry or repossession; (iii) the benefit of any laws now or hereafter in force exempting property from liability for rent or for debt or limiting Lessor with respect to the election of remedies; and (iv) any other rights which might otherwise limit or modify any of Lessor's rights or remedies under this Paragraph 17. (e) Remedies Cumulative; No Waiver; Consents. To the extent permitted by, and subject to the mandatory requirements of, Law, each and every right, power and remedy herein specifically given to Lessor or otherwise in this Lease shall be cumulative and shall be in addition to every other right, power and remedy herein specifically given or now or hereafter existing at law, in equity or by statute, and each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time and as often and in such order as may be deemed expedient by Lessor, and the exercise or the beginning of the exercise of any power or remedy shall not be construed to be a waiver of the right to exercise at the same time or thereafter any other right, power or remedy. No delay or omission by Lessor in the exercise of any right, power or remedy or in the pursuit of any remedy shall impair any such right, power or remedy or be construed to be a waiver of any default on the part of Lessee or be an acquiescence therein. Lessor's consent to any request made by Lessee shall not be deemed to constitute or preclude the necessity for obtaining Lessor's consent, in the future, to all similar requests. No express or implied waiver by Lessor of any Event of Default shall in any way be, or be construed to be, a waiver of any future or subsequent Event of Default. To the extent permitted by Law and subject to the provisions of this Paragraph 17, Lessee hereby waives any rights now or hereafter conferred by statute or otherwise that may require Lessor to sell, lease or otherwise use the Property, the other Lessee Collateral or any part thereof in mitigation of Lessor's damages upon the occurrence of an Event of Default or that may otherwise limit or modify any of Lessor's rights or remedies under this Paragraph 17. 18. Additional Rights of Lessor. (a) In the event Lessee shall be in default in the performance of any of its obligations under this Lease, and an action shall be brought for the enforcement thereof in which it shall be determined that Lessee was in default, Lessee shall pay to Lessor all the expenses incurred in connection therewith including reasonable attorney's fees. In the event Lessor shall, without fault on its part, be made a party to any litigation commenced against Lessee, and if Lessee, at its expense, shall fail to provide Lessor with counsel reasonably approved by Lessor, Lessee shall pay all costs and reasonable attorney's fees incurred or paid by Lessor in connection with such litigation. (b) If an Event of Default has occurred and is continuing, Lessor may, but shall not be obligated to, make any payment or perform any act required hereunder to be made or performed by Lessee which has not been performed within the time period specified herein for such performance, with the same effect as if made or performed by Lessee, provided that no entry by Lessor upon the Property for such purpose shall create any liability to Lessee on the part of Lessor or shall constitute or shall be deemed to be an eviction of Lessee, and no such entry 31 shall waive or release Lessee from any obligation or default hereunder. All sums so paid by Lessor and all costs and expenses (including reasonable attorney's fees and expenses) incurred by Lessor in connection with the performance of any such act, together with interest at the Default Rate, shall constitute Additional Rent payable by Lessee hereunder. 19. Sale, Return or Purchase of Property. (a) (i) Lessee's Option to Purchase. Subject to the terms, conditions and provisions set forth in this Paragraph 19, the Lessee shall have the option (the "Purchase Option"), on any Payment Date occurring two (2) years after the Commencement Date, to be exercised as set forth below, to purchase from the Lessor, the Lessor's right, title and interest in all (but not less than all) of the Property. Such option must be exercised by written notice to the Lessor not later than sixty (60) days prior to the applicable Payment Date, which notice shall be irrevocable. If the Purchase Option is exercised pursuant to the foregoing, then, upon payment of the purchase price set forth in subparagraph (d) below and subject to the provisions set forth in this Paragraph 19, on the applicable Payment Date, the Lessor shall convey to the Lessee, without recourse or warranty, other than a warranty against the existence of any Lessor Liens, and the Lessee shall purchase from the Lessor, the Lessor's right, title and interest in the Property. Notwithstanding anything contained herein or in the Operative Documents to the contrary, upon receipt by the Trustee of the certificate attached as Exhibit I to the Letter of Credit, the Lessee shall be deemed to have exercised either (i) its option to purchase the Property for the Lease Balance, in which case the Lessee shall pay the Lease Balance to the Agent on or before the expiration or termination of the Letter of Credit and, upon receipt by the Agent of the Lease Balance, the Lessor shall convey to the Lessee the Lessor's right, title and interest in the Property in accordance with this Paragraph 19, or (ii) the option to purchase the beneficial interest in the Owner Trust. (ii) Lessee's Option to Purchase Owner Trust Estate and Replace Credit Facility Provider. In addition to the Purchase Option provided in subparagraph (a)(i) above, the Lessee shall also have the option, (a) on any Payment Date occurring two (2) years after the Commencement Date or (b) at any time following a Downgrade, to purchase the beneficial interest in the Owner Trust Estate and to replace the Credit Facility Providers by paying to the Agent an amount equal to the sum of (A) the aggregate sum of the outstanding principal amount of the Certificates as of such Payment Date, plus all accrued and unpaid Holder Yield thereon as of such Payment Date and (B) all amounts due and owing under the Operative Documents as of such Payment Date, including, without limitation, all sums due and owing under the Hedge Documents and the Credit Facility Documents. The option provided for in clause (a) above must be exercised by written notice to the Lessor not later than sixty (60) days prior to the applicable Payment Date, which notice shall be irrevocable. (b) Conveyance to Lessee. Unless (i) the Lessee shall have properly exercised the Purchase Option and purchased the Lessor's right, title and interest in the Property pursuant to subparagraph (a) above, or (ii) the Lessee shall have properly exercised the Remarketing Option and shall have fulfilled all of the conditions of subparagraph (f) hereof, then, subject to the terms, conditions and provisions set forth in this Paragraph 19, the Lessee shall purchase from the Lessor, and the Lessor shall convey to the Lessee, on the Expiration Date all of the Lessor's right, title or interest in the Property, free and clear of any Lessor Liens for the purchase price set 32 forth in subparagraph (d) below. The Lessee may designate, in a notice given to the Lessor not less than ten (10) Business Days prior to the closing of such purchase, or any purchase pursuant to subparagraph (a) above, (time being of the essence), the transferee to whom the conveyance shall be made (if other than to the Lessee), in which case such conveyance shall (subject to the terms and conditions set forth herein) be made to such designee; provided, however, that such designation of a transferee shall not cause the Lessee to be released, fully or partially, from any of its obligations under this Lease. (c) Acceleration of Purchase Obligation. Notwithstanding any thing contained hereinabove to the contrary, Lessor shall have right, in Lessor's sole and absolute discretion, to require Lessee to purchase the Lessor's right, title and interest in the Property immediately, automatically and without notice upon the occurrence of any Event of Default for the purchase price set forth in subparagraph (d) below. (d) Determination of Purchase Price. Upon the purchase by the Lessee of the Lessor's right, title and interest in the Property upon the exercise of the Purchase Option or pursuant to subparagraphs (b) or (c) above, the aggregate purchase price for the Property shall be an amount equal to the Lease Balance as of the closing date for such purchase. (e) Purchase Procedure. (i) If the Lessee shall purchase the Lessor's right, title and interest in the Property pursuant to any provision of this Lease, (A) the Lessee shall accept from the Lessor, and the Lessor shall convey or cause Issuer to convey, the Property by a duly executed and acknowledged special warranty deed in recordable form, (B) upon the date fixed for any purchase of the Lessor's right, title and interest in the Property hereunder, the Lessee shall pay to the order of the Agent the Lease Balance, by wire transfer of immediately available federal funds, and (C) the Lessor will execute and deliver or cause Issuer to execute and deliver to the Lessee such other documents, including releases, affidavits, termination agreements and termination statements, as may be legally required or as may be reasonably requested by the Lessee in order to effect such conveyance, free and clear of the lien of the Deed of Trust and any Encumbrances created by Lessor. (ii) The Lessee shall, at the Lessee's sole cost and expense, obtain all required governmental and regulatory approvals and consents and, in connection therewith, shall make such filings as required by Law. In the event that the Lessor is required by Law to take any action in connection with such purchase and sale, the Lessee shall pay prior to transfer all costs incurred by the Lessor in connection therewith. Without limiting the foregoing, all costs incident to such conveyance, including, without limitation, the Lessee's attorneys' fees, the Lessor's attorneys' fees, Issuer's attorneys' fees, the fees of the Credit Facility Providers, the fees of the Trustee, the costs incurred in connection with the purchase and sale pursuant to the Operative Documents, commissions, the Lessee's, the Lessor's and Issuer's escrow fees, recording fees, title insurance premiums and all applicable documentary transfer or other transfer taxes and other taxes required to be paid in order to record the transfer documents that might be imposed by reason of such conveyance and the delivery of such deed shall be borne entirely by and paid by the Lessee. 33 (iii) Upon expiration or termination of this Lease resulting in conveyance of the Lessor's right, title and interest in the Property to the Lessee, there shall be no apportionment of rents (including, without limitation, water rents and sewer rents), taxes, insurance, utility charges or other charges payable with respect to the Property, all of such rents, taxes, insurance, utility charges or other charges due and payable with respect to the Property prior to termination being payable by the Lessee hereunder and all due after such time being payable by the Lessee as the then owner of the Property. (f) Option to Remarket. Subject to the fulfillment of each of the conditions set forth in this subparagraph (f), the Lessee shall have the option to market all (but not less than all) of the Property for the Lessor (the "Remarketing Option"). The Lessee's effective exercise and consummation of the Remarketing Option shall be subject to the due and timely fulfillment of each of the following provisions, the failure of any of which, unless waived in writing by the Lessor and the Agent, shall render the Remarketing Option and the Lessee's exercise thereof null and void, in which event, the Lessee shall be obligated to perform its obligations under subparagraph (b) above: (i) Not later than twelve (12) months prior to the Expiration Date, the Lessee shall give to the Lessor and the Agent written notice of the Lessee's exercise of the Remarketing Option. (ii) Not later than ten (10) Business Days prior to the Expiration Date, the Lessee shall deliver to the Lessor and the Agent an environmental assessment of the Property dated not earlier than forty-five (45) days prior to the Expiration Date. Such environmental assessment shall be prepared by an environmental consultant selected by the Agent, shall be in form, detail and substance reasonably satisfactory to the Agent and shall otherwise indicate the environmental condition of the Property to be the same as described in the Environmental Audit. (iii) On the date of the Lessee's notice to the Lessor and the Agent of the Lessee's exercise of the Remarketing Option, no Event of Default shall exist, and thereafter, no Event of Default shall exist under this Lease. (iv) At the time of exercise and as of the date of closing, the Lessee shall have completed all Alterations, restoration and rebuilding of the Property leased by it pursuant to Paragraphs 12 and 13 (as the case may be) and shall have fulfilled all of the conditions and requirements in connection therewith pursuant to such Paragraphs or otherwise as required hereunder or under the Deed of Trust or any of the other Operative Documents, in each case, by the date on which the Lessor and the Agent receive the Lessee's notice of the Lessee's exercise of the Remarketing Option (time being of the essence), regardless of whether the same shall be within the Lessee's control. If any use of the Property has substantially changed the character of the Property (without implying any consent to such use by the Lessor or the Agent), the Lessee shall, if requested by the Lessor or the Agent, restore the Property to its general character as of the Commencement Date, except for Alterations permitted hereunder and normal wear and tear. 34 (v) The Lessee shall promptly provide any maintenance records relating to the Property to the Lessor, the Agent and any potential purchaser upon request and shall otherwise do all things necessary to deliver possession of the Property to the potential purchaser. The Lessee shall allow the Lessor, the Agent and any potential purchaser access to the Property for the purpose of inspecting the same. (vi) On the Expiration Date, the Lessee shall surrender the Property leased by it in accordance with subparagraph (h) below. (vii) In connection with any such sale of the Property, the Lessee will provide to the purchaser all customary "seller's" indemnities requested by the potential purchaser, representations and warranties regarding title, absence of liens and the condition of the Property, including, without limitation, a customary environmental indemnity. The Lessee shall fulfill all of the requirements set forth in clause (ii) of subparagraph (e), and such requirements are incorporated herein by reference. As to the Lessor and Issuer, any such sale shall be made on an "as is, where is, with all faults" basis without representation or warranty by the Lessor or Issuer. (viii) In connection with any such sale of the Property, the Lessee shall pay directly, and not from the sale proceeds, all prorations, credits, costs and expenses of the sale of the Property leased by it, whether incurred by the Lessor, Issuer, any Credit Facility Provider, the Agent or the Lessee, including without limitation, the cost of all title insurance, surveys, environmental reports, appraisals, transfer taxes, the Lessor's, Issuer's, any Credit Facility Provider's and the Agent's attorneys' fees, the Lessee's attorneys' fees, commissions, escrow fees, recording fees and all applicable documentary and other transfer taxes. (ix) The Lessee shall pay to the Agent on the Expiration Date (or to such other Person as the Agent shall notify the Lessee in writing, or in the case of Additional Rent, to the Person entitled thereto) an amount equal to the Residual Guaranty Amount, plus all accrued and unpaid Basic Rent and Additional Rent, and all other amounts hereunder which have accrued prior to or as of such date, by wire transfer of immediately available funds. If the Lessee has exercised the Remarketing Option, the following additional provisions shall apply: During the period commencing on the date twelve (12) months prior to the scheduled expiration of the Term, the Lessee shall, as nonexclusive agent for the Lessor, use commercially reasonable efforts to sell the Lessor's right, title and interest in the Property and will attempt to obtain the highest purchase price therefor. All such marketing of the Property shall be at the Lessee's sole expense. Lessee promptly shall submit all bids to the Lessor and the Agent, and the Lessor and the Agent will have the right to review the same and the right to submit any one or more bids. All bids shall be on an all-cash basis. In no event shall such bidder be the Lessee or any Subsidiary of the Lessee or any affiliate controlled by or under common control with the Lessee or any subsidiary of the Lessee. The written offer must specify the Expiration Date as the closing date. If, and only if, the aggregate selling price (net of closing costs and prorations, as reasonably estimated by the Agent) plus the Residual Guaranty Amount are less than the Lease Balance at such time, then the Lessor or the Agent may, in its sole and 35 absolute discretion, by notice to the Lessee, reject such offer to purchase, in which event the parties will proceed according to the provisions of subparagraph (g) below. If neither the Lessor nor the Agent rejects such purchase offer as provided above, the closing of such purchase of the Property by such purchaser shall occur on the Expiration Date, contemporaneously with the Lessee's surrender of the Property in accordance with subparagraph (h) below, and the gross proceeds of the sale (i.e., without deduction for any marketing, closing or other costs, prorations or commissions) shall be paid directly to the Agent; provided, however, that if the sum of the gross proceeds from such sale plus the Residual Guaranty Amount paid by the Lessee on the Expiration Date pursuant to clause (ix) of subparagraph (f), minus any and all costs and expenses (including broker fees, appraisal costs, legal fees and transfer taxes) incurred by the Agent or the Lessor in connection with the marketing of the Property or the sale thereof exceeds the Lease Balance as of such date, then the excess shall be paid to the Lessee following the Expiration Date. The Lessee shall not have the right, power or authority to bind the Lessor or the Agent in connection with any proposed sale of the Property. (g) Rejection of Sale. Notwithstanding anything contained herein to the contrary, if the Lessor or the Agent rejects the purchase offer for the Property as provided in subparagraph (f) above, then (A) the Lessee shall pay to the Agent the Residual Guaranty Amount pursuant to clause (ix) of subparagraph (f), (B) the Lessor shall retain title to the Property, and (C) in addition to the Lessee's other obligations hereunder, the Lessee will reimburse the Lessor and the Agent, within ten (10) Business Days after written request, for all reasonable costs and expenses incurred by the Lessor or the Agent during the period ending on the first anniversary of the Expiration Date in connection with the marketing, sale, closing or transfer of the Property, which obligation shall survive the Expiration Date and the termination or expiration of this Lease. (h) Return of Property. If the Lessor retains title to the Property pursuant to subparagraph (g) above, then the Lessee shall, on the Expiration Date, and at its own expense, return possession of the Property to the Lessor for retention by the Lessor or, if the Lessee properly exercises the Remarketing Option and fulfills all of the conditions of subparagraph (f) above and neither the Lessor nor the Agent rejects such purchase offer pursuant to subparagraph (f) above, then the Lessee shall, on such Expiration Date, and at its own cost, transfer possession of the Property to the independent purchaser thereof, in each case by surrendering the same into the possession of the Lessor or such purchaser, as the case may be, free and clear of all liens other than the Deed of Trust and other Encumbrances, in as good condition as it was on the Commencement Date (as modified by Alterations permitted by this Lease), ordinary wear and tear excepted, and in compliance with all Laws and all other requirements of this Lease and the Deed of Trust. The Lessee shall, on and within a reasonable time before and after the Expiration Date, cooperate with the Lessor and the independent purchaser of the Property in order to facilitate the ownership and operation by such purchaser of the Property after the Expiration Date, which cooperation shall include the following, all of which the Lessee shall do on or before the Expiration Date: providing all books and records regarding the maintenance and ownership of the Property and all know-how, data and technical information relating thereto, granting or assigning all licenses necessary for the operation and maintenance of the Property and cooperating in seeking and obtaining all necessary governmental approvals. The Lessee shall have also paid the cost of all Alterations commenced prior to the Expiration Date. The 36 obligations of the Lessee under this Paragraph 19 shall survive the expiration or termination of this Lease. (i) Environmental Report. Upon termination of this Lease, unless the Lessee shall have exercised the Purchase Option or shall have exercised the Remarketing Option and complied with subparagraph (f) above, the Lessee shall deliver, at the Lessee's expense, to the Lessor and the Agent an environmental assessment of the Property. Such environmental assessment shall be prepared by an environmental consultant, and shall be in a form, reasonably satisfactory to the Lessor and the Agent. 20. Inspection. Lessee shall permit Lessor, Issuer and the Agent, and each of their respective representatives and agents (collectively, the "Inspecting Parties") to enter the Property, with two (2) Business Days prior notice to Lessee and with an escort provided by Lessee, unless (i) a Default or an Event of Default shall have occurred and be continuing, or (ii) an emergency exists, in either of which cases, no advance notice shall be required, without charge therefor and without diminution of the Rent payable by Lessee, in order to examine and inspect the Property. All examinations and inspections of the Property shall be made at the expense of the Inspecting Parties, except that if a Default or an Event of Default has occurred, Lessee shall reimburse the Inspecting Parties for the reasonable costs of such examinations and inspections. Except in the case of an emergency or the occurrence of a Default or an Event of Default, in connection with any such entry, Lessor, Issuer and the Agent shall endeavor to minimize the disruption to Lessee's normal business operations in the Property. None of the Inspecting Parties shall have any duty to make any such examinations or inspections of the Property. None of the Inspecting Parties shall incur any liability or obligation by reason of making any such examination or inspection unless and to the extent such Inspecting Party causes damage to any Person or to the Property or any property of Lessee or any other Person during the course of such examination or inspection. 21. Notices, Demands and Other Instruments. All notices, demands, requests, consents, approvals, certificates or other communications required under this Lease shall be in writing, and shall be sufficiently given and shall be deemed to have been properly given (i) if delivered by hand, when written confirmation of delivery is received by the sender, (ii) three days after the same is mailed by certified mail, postage prepaid, return receipt requested, or (iii) if sent by overnight courier, 24 hours (plus 24 hours for any intervening day that is not a Business Day) after delivery to such overnight courier addressed to the Person to whom any such notice, demand, request, consent, approval, certificate or other communication is to be given, at the appropriate address designated on Exhibit D attached hereto. Any party listed on Exhibit D shall each have the right from time to time to specify as its address for purposes of this Lease any other address in the United States of America upon giving ten (10) days' prior written notice hereunder. 22. Estoppel Certificates. Lessee shall, at any time and from time to time, upon not less than thirty (30) days' prior written notice from Lessor or Agent, execute, acknowledge and deliver to the requesting party a statement in writing, executed by the President or a Vice President of Lessee certifying (i) 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), (ii) the dates to which Basic Rent, Additional Rent and all other sums payable 37 hereunder have been paid, (iii) that to the knowledge of the signer of such certificate no default by Lessor exists hereunder or specifying each such default of which the signer may have knowledge; and (iv) to the knowledge of the signer of such certificate, there are no proceedings pending or threatened against Lessee before or by any court or administrative agency which, if adversely decided, would materially and adversely affect the financial condition and operations of Lessee or Lessee's ability to perform or fulfill its obligations under this Lease, or if any such proceedings are pending or threatened to said signer's knowledge, specifying and describing the same. It is intended that any such statements may be relied upon by the Credit Facility Providers, Agent, Lessor, Issuer or their assignees or by any prospective purchaser of the Property. 23. No Merger. There shall be no merger of this Lease or of the leasehold estate hereby created by reason of the fact that the same Person may acquire, own or hold, directly or indirectly, in whole or in part, (a) any interest in this Lease or the leasehold estate hereby created, (b) title to or any other interest in the Property or any part thereof or (c) a beneficial interest in Lessor. 24. Representations and Warranties of Lessee. Lessee makes the following representations and warranties to Lessor: (a) Good Standing. Lessee (i) is a corporation duly organized and existing, in good standing, under the laws of the State of Delaware, (ii) has the corporate power and all material governmental licenses, authorizations, consents and approvals required to own its property and to carry on its business as now being conducted, and (iii) is duly qualified to do business and is in good standing in each jurisdiction in which the character of the properties owned by it therein or in which the transaction of its business makes such qualification necessary, including, but not limited to, the State of Maryland. (b) Authority. Lessee has full corporate power and authority to enter into and execute and deliver this Lease and each of the other Operative Documents to which Lessee is a party, and to incur and perform the obligations provided for therein and herein, all of which have been duly authorized by all proper and necessary corporate action by Lessee. No consent or approval of stockholders or of any other Person or public authority or regulatory body is required as a condition to the validity or enforceability of this Lease or any of the other Operative Documents, or if required the same has been duly obtained. (c) Binding Agreements. This Lease and each of the other Operative Documents to which Lessee is a party have been duly and properly executed by Lessee, constitute the valid and legally binding obligations of the Lessee, and are fully enforceable against Lessee in accordance with their respective terms, except to the extent that enforceability may be affected by any bankruptcy or insolvency proceeding filed by or against the Lessee and subject to the exercise of judicial discretion in accordance with general principles of equity. (d) Litigation. There is no litigation or proceeding pending or, to the best of Lessee's knowledge, threatened, before any court or administrative agency which, in the opinion of Lessee, will materially adversely affect the financial condition or operations of Lessee, Lessee's ability to perform and fulfill its obligations under this Lease or any of the other 38 Operative Documents, or the authority of Lessee to enter into, or the validity or enforceability of, this Lease or any of the other Operative Documents. (e) No Conflicting Agreements, Laws, etc. There is (i) no charter, by-law or preference stock provision of Lessee and no provision of any existing mortgage, indenture, contract or agreement binding on Lessee or affecting Lessee's property, and (ii) to the knowledge of Lessee, no provision of Law or order of court binding on Lessee or affecting any of Lessee's property, which would conflict with or in any way prevent the execution, delivery, or performance of the terms of this Lease or any of the other Operative Documents, or which would be in default or violated as a result of such execution, delivery or performance, or for which adequate consents or waivers have not been obtained. (f) Tax Returns. Lessee has either (i) filed all required federal, state and local tax returns and has paid all taxes as shown on such returns as they have become due or (ii) filed for an extension of the filing date for such returns and the date by which any such taxes must be paid. No claims have been assessed and are unpaid with respect to such taxes, and Lessee has established reserves which it believes to be adequate for the payment of any taxes for which an extension has been properly filed and for the payment of additional taxes for years which have not been audited by the respective tax authorities. (g) Place of Business of Lessee. Lessee's principal place of business is located at 9410 Key West Avenue, Rockville, Maryland 20850. (h) Brokers. To the best of Lessee's knowledge, no Person has, or as a result of any action of or by Lessee in connection with the transactions contemplated hereby and by the Lease will have, any right, interest or valid claim against or on Lessor for any commission, fee or other compensation as a broker or finder, or in any similar capacity. Lessee shall indemnify Lessor against any claimed fee, commission or other compensation arising from or in connection with the transactions contemplated hereby or by the other Operative Documents. (i) ERISA. (i) Each Plan satisfies the qualification requirements under Section 401 of the Code, both in form and in operation, and there is no current matter which would materially adversely affect the tax qualified status of any Plan; (ii) neither the Lessee nor any Commonly Controlled Entity has engaged in or is engaging in any Prohibited Transaction, unless such transaction is exempt from the restrictions imposed by Section 406 of ERISA and Section 4975 of the Code; (iii) there is no Accumulated Funding Deficiency, whether or not waived, with respect to any Plan; (iv) no Reportable Events have occurred with respect to any Plan subject to Title IV of ERISA (other than those Reportable Events for which notice has been waived pursuant to regulations issued under Section 4043 of ERISA); (v) neither the Lessee nor any Commonly Controlled Entity has filed an application for a waiver of the minimum funding standard with respect to any Plan; (vi) neither the Lessee nor any Commonly Controlled Entity has incurred any liability under Title IV of ERISA with respect to the termination of any Plan, (vii) neither the Lessee nor any Commonly Controlled Entity has "withdrawn" or "partially withdrawn" from any Multiemployer Plan; and (viii) no Multiemployer Plan is in "reorganization" nor has notice been received from the administrator of any Multiemployer Plan that any such plan will be placed in "reorganization". 39 25. Affirmative Covenants of Lessee. (a) Reporting Requirements. Lessee shall furnish or cause to be furnished to Lessor and the Agent: (i) as soon as available but in no event more than forty-five (45) days after the close of each fiscal quarter of Lessee, a copy of the 10Q Report of Lessee filed with the Securities and Exchange Commission (the "SEC") accompanied by a certificate of the chief financial officer of Lessee stating whether any event has occurred which constitutes a Default or an Event of Default, and, if so, stating the facts with respect thereto; and (ii) as soon as available but in no event more than ninety (90) days after the close of each fiscal year of Lessee, a copy of the 10K Report of Lessee filed with the SEC and a copy of the annual audited financial statements relating to Lessee prepared in accordance with GAAP, which financial statements shall include a balance sheet of Lessee as of the end of such fiscal year and a statement of earnings and changes in stockholder's equity of Lessee for such fiscal year; and (iii) as soon as available but in no event more than ninety (90) days after the close of each fiscal year of Lessee, a certificate of the chief financial officer of Lessee stating whether any event which constitutes a Default or an Event of Default under this Lease has occurred, and, if so, stating the facts with respect thereto; and (iv) promptly upon transmission thereof, copies of any financial statements, proxy statements, reports and the like which Lessee sends to its shareholders and copies of all registration statements (with exhibits); and (v) promptly upon the occurrence thereof, written notice of any Change in Control; and (vi) with reasonable promptness, such budgets, cash flow projections and other additional information, reports or statements as Lessor or the Agent may from time to time reasonably request. (b) Taxes and Claims. Pay and discharge or cause to be paid and discharged all Taxes imposed upon it or its income or properties prior to the due date thereof, and all lawful claims which, if unpaid, might become a lien or charge upon any of its properties. Lessee shall have the right to contest the validity of any such tax, assessment, charge, levy or claim, by timely and appropriate proceedings, provided that Lessee shall (1) give Lessor and the Agent written notice of its intention to contest, (2) diligently prosecute such contest, (3) to the extent such taxes or claims relate to the Property, fully comply with the provisions of Paragraph 16 hereof, and (4) establish adequate reserves for such liabilities in accordance with GAAP. (c) Insurance. In addition to the insurance required by Paragraph 14 of this Lease, maintain insurance with responsible insurance companies on such of its properties, in such amounts and against such risks as is customarily maintained by similar businesses operating in the same vicinity. Lessee shall file with Lessor and the Agent, upon its request, a detailed list 40 of the insurance then in effect covering Lessee and Lessee's properties, stating the names of the insurance companies, the amounts and rates of the insurance, dates of the expiration thereof and the properties and risks covered thereby; and, within thirty (30) days after notice in writing from Lessor and/or the Agent, obtain such additional insurance as Lessor and/or the Agent may reasonably request. (d) Corporate Existence. Maintain its existence in good standing as a Delaware corporation, qualified to transact business in the State of Maryland. (e) Compliance with Laws. Comply with all Legal Requirements, subject to Lessee's right to contest the validity or applicability of any of the foregoing, at its sole cost and expense, in good faith and by appropriate and diligent proceedings, in accordance with Paragraph 16 hereof. (f) Books and Records. Maintain appropriate books and records with respect to the Property and permit access by Lessor and the Agent and each of their respective authorized representatives and employees to the books and records of Lessee at the offices of Lessee during normal business hours. (g) Financial Covenants. Subject to the further terms and conditions set forth in this Paragraph 25(g), maintain, at all times, unrestricted cash and securities constituting Permitted Investments (exclusive of any unrestricted cash or securities maintained by a consolidated subsidiary of Lessee, but inclusive of securities in the approximate principal amount of $11,000,000 previously pledged by Lessee to the Bank) with a market value of at least $75,000,000. (i) The cash and/or marketable securities pledged by Lessee pursuant to the Collateral Pledge Agreement shall not be credited against the foregoing $75,000,000 requirement. (ii) In the event that the market value of such unrestricted cash and securities falls below $75,000,000, Lessee shall, within two (2) Business Days, pledge to the Agent, as security for Lessee's obligations under this Lease and the other Operative Documents, in addition to the pledge described in the Collateral Pledge Agreement, cash and/or marketable securities constituting Permitted Investments with a market value at all times equal to at least $5,000,000. (iii) Any cash and/or marketable securities pledged hereunder shall be held by the Agent in accordance with the same terms and conditions as set forth in the Collateral Pledge Agreement. (iv) Lessee shall, within two (2) Business Days, deposit with the Agent, additional cash and/or marketable securities constituting Permitted Investments whenever the market value of each additional pledge hereunder falls below $5,000,000 to make up the deficiency. (v) Whenever the market value of any cash and/or marketable securities pledged to the Agent pursuant to clause (ii) or clause (iv) above exceeds 41 $5,000,000, the Credit Facility Providers shall, in accordance with the terms of the Collateral Pledge Agreement, release from the pledge cash and/or marketable securities equal to such excess. (vi) Any investment earnings on the cash and/or marketable securities pledged by Lessee pursuant to clause (ii) or clause (iv) above shall be distributed quarterly by the Agent to Lessee. (vii) If Lessee pledges cash and/or marketable securities to the Agent to satisfy the requirements of clause (ii) above and thereafter for a period of two consecutive fiscal quarters Lessee returns to compliance with the requirements which necessitated such pledge, the Agent shall release such cash and/or marketable securities from such pledge. By way of illustration, if the market value of Lessee's unrestricted cash and securities (as calculated pursuant to clause (ii) or clause (iv) above) falls below $75,000,000 and Lessee has pledged $5,000,000 of cash and/or marketable securities to the Agent and thereafter the market value of Lessee's unrestricted cash and securities is greater than $75,000,000 for two consecutive fiscal quarters, the Agent shall release from such pledge $5,000,000 of cash and/or marketable securities. (h) Appraisal. The Agent, on behalf of the Credit Facility Providers, shall have the right, in the Agent's reasonable discretion, to obtain a re-appraisal of the Property upon the occurrence of an Event of Default or if such re-appraisal is mandated by FIRREA or any other banking or similar regulation applicable to the Credit Facility Providers. If any such re-appraisal indicates that the Fair Market Value of the Property has declined below $30,000,000, the Agent shall have the right to require that the Lessee provide additional collateral to the Agent to satisfy the Credit Facility Providers' margin requirements and to otherwise secure the Lessee's obligations under this Lease and the other Operative Documents, such additional collateral to be acceptable to the Agent in its sole and absolute discretion. 26. Negative Covenants of Lessee. Until all of Lessee's obligations under this Lease have been paid and performed in full (other than any indemnities which survive the termination of this Lease), without the prior written consent of Lessor and the Agent, Lessee shall not, directly or indirectly: (a) Declare any dividends (other than dividends payable in capital stock of Lessee) on any shares of any class of its capital stock (other than preferred stock outstanding on the Commencement Date) or apply any of its property or assets to the purchase, redemption or other retirement of, or set apart any sum for the payment of any dividends on, or for the purchase, redemption or other retirement of, or make any other distribution by reduction of capital or otherwise in respect of, any shares of any class of capital stock of Lessee unless (i) there is no Event of Default which has occurred and is continuing, and (ii) the amount of the dividend does not exceed Lessee's accumulated earnings at that time. (b) Fail to notify Lessor and the Agent of any change in the officers (within the meaning of Section 240.16a-1 of the Regulations under the Securities Exchange Act of 1934, as amended) of Lessee. 42 (c) (i) Restate or amend any Plan in a manner designed to jeopardize the tax qualified status of such Plan; (ii) permit any officers of Lessee or any Commonly Controlled Entity to materially adversely affect the tax qualified status of any Plan; (iii) engage in or permit any Commonly Controlled Entity to engage in any Prohibited Transaction, unless such transaction is exempt from the restrictions imposed by Section 406 of ERISA and Section 4975 of the Code; (iv) permit an Accumulated Funding Deficiency, whether or not waived, with respect to any Plan; (v) take or permit any Commonly Controlled Entity to take any action or fail to take any action which causes a termination of any Plan in a manner which could result in the Lessee or any Commonly Controlled Entity incurring liability under Title IV of ERISA; (vi) incur or permit any Commonly Controlled Entity to incur a "complete withdrawal" or "partial withdrawal" (as defined in Title IV of ERISA) from any Multiemployer Plan; or (vii) fail to notify the Agent that notice has been received from the administrator of any Multiemployer Plan to which Lessee or any Commonly Controlled Entity has an obligation to contribute that any such Plan will be placed in "reorganization". (d) Amend or otherwise modify the terms and conditions of the Invitrogen Sublease. 27. [INTENTIONALLY RESERVED.] 28. Separability. Each and every covenant and agreement contained in this Lease is, and shall be construed to be, a separate and independent covenant and agreement, and the breach of any such covenant or agreement by Lessor shall not discharge or relieve Lessee from any of its obligations under this Lease. If any term or provision of this Lease or the application thereof to any Person or circumstances shall to any extent be invalid and unenforceable, the remainder of this Lease, 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, and each term and provision of this Lease shall be valid and shall be enforced to the extent permitted by Law. 29. Subordination (a) This Lease is subject and subordinate to the Head Lease and to the lien, provisions, operation and effect of the Deed of Trust and other Encumbrances now or hereafter encumbering the Property or any interest therein, to all funds and indebtedness intended to be secured thereby, and to all renewals, extensions, modifications, recastings or refinancings thereof. The holder of any Encumbrance to which this Lease is subordinate shall have the right (subject to any required approval of the holders of any superior Encumbrance) at any time to declare this Lease to be superior to the lien, provisions, operation and effect of such Encumbrance, and Lessee shall execute, acknowledge and deliver all documents required by such holder in confirmation thereof. (b) Lessee shall, at Lessor's request, promptly execute any requisite or appropriate document confirming such subordination. Lessee waives the provisions of any Law now or hereinafter in effect which may give or purport to give Lessee any right to terminate or otherwise adversely affect this Lease and Lessee's obligations hereunder in the event any foreclosure proceeding is prosecuted or completed or in the event the Property or Lessor's interest therein is transferred by foreclosure, by deed in lieu of foreclosure or otherwise. At the 43 request of such transferee, Lessee shall attorn to such transferee and shall recognize such transferee as the Lessor under this Lease. Lessee agrees that upon any such attornment, such transferee shall not be (i) bound by any payment of Basic Rent or Additional Rent made more than one month in advance, except prepayments in the nature of security for the performance by Lessee of its obligations under this Lease, but only to the extent such prepayments have been delivered to such transferee, (ii) bound by any amendment of this Lease made without the consent of the holder of each Encumbrance existing as of the date of such amendment, (iii) liable for damages for any breach, act or omission of any prior Lessor, or (iv) subject to any offsets or defenses which Lessee might have against any prior Lessor; provided, however, that after succeeding to Lessor's interest under this Lease, such transferee shall agree to perform in accordance with the terms of this Lease all obligations of Lessor arising after the date of transfer. Within five (5) days after the request of such transferee, Lessee shall execute, acknowledge and deliver any requisite or appropriate document submitted to Lessee confirming such attornment. (c) If any prospective or current holder of an Encumbrance requires that modifications to this Lease be obtained, and provided that such modifications (i) are reasonable, (ii) do not adversely affect in a material manner Lessee's use of the Property for the Permitted Use, (iii) do not increase the rent and other sums to be paid by Lessee, (iv) do not change Lessee's affirmative or negative covenants set forth herein, or (v) affect Lessee's Purchase Option, then Lessor may submit to Lessee an amendment to this Lease incorporating such required modifications, and Lessee shall execute, acknowledge and deliver such amendment to Lessor within five (5) days after Lessee's receipt thereof. 30. Binding Effect. All of the covenants, conditions and obligations contained in this Lease shall be binding upon and inure to the benefit of the respective successors and assigns of Lessor and Lessee to the same extent as if each successor and assign were in each case named as a party to this Lease. This Lease may not be changed, modified or discharged except by a writing signed by Lessor and Lessee and consented to by the Agent. 31. Headings. The headings to the various paragraphs of this Lease have been inserted for convenient reference only and shall not to any extent have the effect of modifying, amending or changing the expressed terms and provisions of this Lease. 32. Environmental Matters. (a) As used in this Paragraph 32, the following items shall have meanings set forth below: (i) "CAA" shall mean the Clean Air Act, codified at 42 U.S.C. Sections 7401, et seq., as amended. (ii) "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act of 1980, codified at 42 U.S.C. Sections 9601, et seq., as amended. (iii) "CWA" shall mean the Clean Water Act, codified at 33 U.S.C. 1251; et seq., as amended. 44 (iv) "Environmental Laws" shall mean CERCLA, HMTA, RCRA, CAA, CWA, TSCA, RHA and the Right-to-Know Act and all other federal, state, local and municipal laws, statutes, ordinances and codes, guidelines and standards relating to health, safety, sanitation, and the protection of the environment or governing the use, storage, treatment, generation, transportation, processing, handling, production or disposal of Hazardous Materials, including, without limitation, laws and regulations regarding the discharge of water or other materials or fluids into waterways, and the rules, regulations, guidelines, decisions, orders and directives of federal, state, local and municipal governmental agencies, authorities and courts with respect thereto presently in effect or hereafter enacted, promulgated or implemented. (v) "Environmental Permits" shall mean all permits, licenses, approvals, authorizations, consents or registrations required by any applicable Environmental Laws, on either an individual or group basis, in connection with the ownership, use or operation of the Property, or the storage, treatment, generation, transportation, processing, handling, production or disposal of Hazardous Materials related to or generated at the Property. (vi) "Hazardous Materials" shall mean, without limitation, flammables, explosives, radioactive materials, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum or petroleum based or related substances, hydrocarbons or like substances and their additives or constituents, and any substances now or hereafter defined as "hazardous substances," "extremely hazardous substances," "hazardous materials," "controlled hazardous substances," "hazardous wastes" or "toxic chemicals" in CERCLA, HMTA, RCRA, CAA, CWA, TSCA, RHA, the Right-To-Know Act, or any so-called "superfund" or "superlien" law or the regulations promulgated pursuant thereto, or any other applicable federal, state or local law, common law, code, rule, regulation, order, or ordinance, presently in effect or hereafter enacted, promulgated or implemented. (vii) "HMTA" shall mean the Hazardous Materials Transportation Act, codified at 49 U.S.C. Sections 1801, et seq., as amended. (viii) "RCRA" shall mean the Resource Conservation and Recovery Act of 1976, codified at 42 U.S.C. Sections 6901, et seq., as amended. (ix) "Release" shall have the same meaning as given to that term in CERCLA, as amended, and the regulations promulgated thereunder. (x) "RHA" shall mean the Rivers and Harbors Appropriation Acts, codified at 33 U.S.C. Sections 401, et seq., as amended. (xi) "Right-To-Know Act" shall mean the Emergency Planning and Community Right-To-Know Act, codified at 42 U.S.C. Sections 11001, et seq., as amended. (xii) "TSCA" shall mean the Toxic Substances Control Act, codified at 15 U.S.C. Sections 2601, et seq., as amended. 45 (b) Lessee shall comply at all times and in all respects with the provisions of all Environmental Laws and Environmental Permits, and shall not commit any actions or omissions that result in the incurrence of any liability under such Environmental Laws or Environmental Permits. Lessee will not allow, cause or permit any Hazardous Materials to be deposited on or under the Property, or otherwise Released or threatened to be Released from or on the Property by any Person whatsoever except as normally and properly used in the operation of the Property in compliance with all Environmental Laws. Lessee shall conduct all of its activities on the Property, including, without limitation, the off-site disposal of any Hazardous Materials originating on or from the Property, in compliance with all Environmental Laws. Lessee shall obtain, whenever necessary and in its own name, appropriate Environmental Permits for its operations and shall comply in all respects with the requirements of such Environmental Permits. (c) Lessee hereby agrees to indemnify, hold harmless and defend Lessor, Issuer, the Agent, the Certificate Holder, and the Credit Facility Providers, and their partners, officers, directors, lenders, agents and employees from and against any and all claims, losses, damages, liabilities, penalties, costs, assessments, expenses, demands, fines or liabilities of whatever kind or nature, including, without limitation, costs, expenses (including expense of posting a bond) and liabilities imposed upon Lessor pursuant to any indenture or other document, in any way relating to or arising out of: (i) The Release or threat of Release of any Hazardous Materials in, on, above, from or under the Property during the Term hereof; (ii) Any activity by any party on, off or within the Property in connection with the use, handling, treatment, monitoring, removal, storage, decontamination, clean up, testing, transportation or disposal of any Hazardous Materials located at any time on, within or under the Property and introduced onto the Property at any time on or after the Commencement Date and prior to the expiration or other termination of this Lease; (iii) The use, handling, treatment, monitoring, removal, storage, decontamination, clean-up, testing, transportation or disposal of any Hazardous Materials on, under or within the Property which were introduced onto, under or within the Property at any time on or after the Commencement Date and prior to the expiration or other termination of this Lease; (iv) The performance by Lessee or any other Person acting on behalf of Lessee during the Term of any inspection, investigation, audit, study, sampling, testing, removal, containment or other remedial action or other clean-up related to Hazardous Materials on, above, within, related to, or affected by, the Property; (v) The Imposition, recording or filing of any lien (including, without limitation, a so-called "superlien") against the Property as a result of the incurrence by any party of any claims, expenses, demands, losses, costs, fines or liabilities of whatever kind or nature with respect to any actual, suspected or threatened Release of Hazardous Materials or environmental condition, on, above, within, related to, or affected by, the 46 Property at any time after the Commencement Date and prior to the expiration or other termination of this Lease; or (vi) The violation by Lessee of any applicable Environmental Laws or Environmental Permits with respect to the Property. The provisions of this subparagraph (c) shall survive the expiration or any other termination of this Lease. (d) Lessee has obtained a "Phase I" environmental report prepared by ManTech Environmental Corporation and dated February 26, 2001, as supplemented by a reliance letter from ManTech Environmental Corporation dated as of April 27, 2001 (the "Environmental Audit") which does not indicate any presence of any Hazardous Materials on, above or below the Property (other than Hazardous Materials used, generated and stored in compliance with applicable Environmental Laws), or of the Release or threat of Release of any Hazardous Materials existing prior to the Commencement Date. (e) Unless Lessee exercises its Purchase Option, no less than nine (9) months prior to the expiration of the Term hereof, Lessee shall cause to be prepared, by an environmental consultant reasonably acceptable to Lessor and the Agent, an environmental assessment of the Land and the Improvements (the "Assessment"), which shall identify the presence or probable presence of any Hazardous Materials on, above or below the Property (other than Hazardous Materials used, generated and stored in compliance with applicable Environmental Laws), or the Release or threat of Release of any Hazardous Materials or any violation of any Environmental Laws with respect to the Property or Lessee's operations thereon or therein. To the extent that the Assessment identifies any such Hazardous Materials, Releases or threatened Releases or violations, Lessee shall take all such measures, including, without limitation, any and all such measures as shall be recommended by such environmental consultant, to remove, remedy and/or cure such condition, so that, by the end of the Term hereof, no Hazardous Materials shall be present on, above, within or under the Property (other than Hazardous Materials used, generated and stored in compliance with applicable Environmental Laws), no Release or threat of Release of Hazardous Materials exists, and no violation of Environmental Laws shall exist with respect to the Property or Lessee's operations thereon or therein. Any such response actions undertaken by Lessee shall comply fully with all applicable Environmental Laws. If Lessee fails to provide the Assessment to Lessor and the Agent by the date that is nine (9) months prior to the expiration of the Term, or fails to take such recommended measures and to remove any Hazardous Materials and comply with all Environmental Laws as aforesaid, Lessor and/or the Agent may, but shall not be obligated to, have such Assessment prepared and such removal and/or remedial measures undertaken at the expense of Lessee, the costs of which shall be considered Additional Rent hereunder. The foregoing provisions of this subparagraph (e) shall survive the expiration or any other termination of this Lease and shall not be construed to relieve Lessee in any way of its continuing obligations throughout the Term to comply with the provisions of subparagraph (b) above. (f) Unless Lessee exercises its Purchase Option, as a condition of any termination of this Lease, Lessee shall cause to be prepared, by an environmental consultant reasonably acceptable to Lessor, an Assessment which shall identify the presence or probable presence of any Hazardous Materials on, above or below the Property (other than Hazardous Materials used, 47 generated and stored in compliance with applicable Environmental Laws), or the Release or threat of Release of any Hazardous Materials or any violation of any Environmental Laws with respect to the Property or Lessee's operations thereon or therein. To the extent that the Assessment identifies any such Hazardous Materials, Releases or threatened Releases or violations, Lessee shall take all such measures, including, without limitation, any and all such measures as shall be recommended by such environmental consultant, to remove, remedy and/or cure such condition and to remove all Hazardous Materials, so that, as soon as practicable after the termination of this Lease, no Hazardous Materials shall be present on, above, within or under the Property, no Release or threat of Release of Hazardous Materials exists, and no violation of Environmental Laws shall exist with respect to the Property or Lessee's operations thereon or therein. Any such response actions undertaken by Lessee shall comply fully with all applicable Environmental Laws. If Lessee fails to engage an environmental consultant to provide the Assessment to Lessor and the Agent within fifteen (15) days of the event which causes or permits termination of this Lease, or fails to take such recommended measures and to remove any Hazardous Materials and comply with all Environmental Laws as aforesaid, Lessor and/or the Agent may, but shall not be obligated to, have such Assessment prepared and such removal and/or remedial measures undertaken at the expense of Lessee, the costs of which shall be considered Additional Rent hereunder. The foregoing provisions of this subparagraph (f) shall survive the expiration or any other termination of this Lease and shall not be construed to relieve Lessee in any way of its continuing obligations throughout the Term to comply with the provisions of subparagraph (b) above. (g) If Lessee fails to comply with the provisions of subparagraph (e) or subparagraph (f) above within the applicable time frames provided for therein, without regard to any cure rights herein or in any other Operative Documents (whether or not Lessor has taken any remedial measures as provided in subparagraph (e) or subparagraph (f)), Lessee shall be deemed to have elected to purchase the Property as provided in Paragraph 19 above. 33. Quiet Enjoyment. So long as no Default or Event of Default exists hereunder, and subject to the terms of this Lease, the other Operative Documents and any matters of record, Lessor covenants that it will not interfere with the quiet enjoyment of the Property by Lessee or any of its permitted sublessees. Such right of quiet enjoyment is independent of, and shall not affect, Lessor's rights otherwise to initiate legal action to enforce the obligations of Lessee under this Lease. 34. [INTENTIONALLY RESERVED.] 35. Nature of Transaction. With respect to the Property, it is the intent of Lessee and the Credit Facility Providers that, (i) for accounting purposes, this Lease and the transactions contemplated by the Operative Documents shall be treated as an operating lease, and (ii) for federal, state and local tax purposes and for bankruptcy, commercial and regulatory law and all other purposes, this Lease and the transactions contemplated by the Operative Documents shall be treated as the repayment and security provisions of a loan by Lessor and the Credit Facility Providers to Lessee, that Lessee shall be treated as the legal and beneficial owner entitled to any and all benefits of ownership of such Property and that all payments of Basic Rent and Lease Balance during the Term shall be treated as payments of interest and, if applicable, principal. Lessee and Lessor agree to file tax returns consistent with such intent. Nevertheless, Lessee 48 acknowledges and agrees that neither Lessor, the Agent nor any Credit Facility Provider or any other Person has made any representations or warranties concerning the tax, financial, accounting or legal characteristics or treatment of the Operative Documents and that Lessee has obtained and relied solely upon the advice of its own tax, accounting and legal advisors concerning the Operative Documents and the accounting, tax, financial and legal consequences of the transactions contemplated therein. 36. Grant of Lien and Future Assurances. (a) Intent of the Parties. It is the intent of the parties hereto that this Lease grants a security interest and deed of trust lien, as the case may be, on the Property and the other Lessee Collateral to and for the benefit of Lessor (for the benefit of Lessor and the Credit Facility Providers) to secure Lessee's performance under and payment of all amounts under this Lease and the other Operative Documents. (b) Transactions to be Regarded as Loans. Specifically, without limiting the generality of Paragraph 35, Lessor and Lessee intend and agree that in the event of any insolvency or receivership proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency laws or statute of the United States of America or any State or Commonwealth thereof affecting Lessee, Lessor, any Credit Facility Providers or any collection actions, the transactions evidenced by the Operative Documents shall be regarded as loans made by the Lessor and the Credit Facility Providers as unrelated third party lenders to or for the benefit of Lessee secured by the Property and the other Lessee Collateral. (c) Mortgage Lien. Specifically, without limiting the generality of Paragraph 35, Lessee has MORTGAGED, GRANTED, BARGAINED, SOLD, CONVEYED and CONFIRMED, and does hereby MORTGAGE, GRANT, BARGAIN, SELL, CONVEY and CONFIRM, a lien on the Property and the other Lessee Collateral to secure to Lessor (for the benefit of the Credit Facility Providers) (i) all amounts advanced by Lessor and the Credit Facility Providers pursuant to the terms of the Operative Documents together with yield or interest, as applicable, thereon, and all other amounts payable under the Operative Documents in connection therewith and (ii) all other obligations of Lessee under the Operative Documents, effective on the date hereof. (d) Security Agreement. Specifically, but without limiting the generality of Paragraph 35, Lessor and Lessee further intend and agree that, for the purpose of securing the payment of the above-described amounts and to further secure all other obligations of Lessee under the Operative Documents, (i) this Lease and the Lease Supplement shall also be deemed to be a security agreement and financing statement within the meaning of Article 9 of the Maryland Uniform Commercial Code (it being understood that Lessee hereby conveys and warrants and grants a security interest in the Property and the other Lessee Collateral to Lessor (for the benefit of Lessor and the Credit Facility Providers) to secure all amounts advanced by Lessor and the Credit Facility Providers pursuant to the terms of the Operative Documents, together with yield or interest thereon, and all other amounts payable under the Operative Documents and all other obligations of Lessee under the Operative Documents); (ii) the possession by Lessor or any of its agents of notes and such other items of property as constitute instruments, money, negotiable documents or chattel paper shall be deemed to be "possession by the secured party" for purposes of perfecting the security interest pursuant to Section 9-313 of the Maryland Uniform 49 Commercial Code; and (iii) notifications to Persons holding such property, and acknowledgments, receipts or confirmations from financial intermediaries, bankers or agents (as applicable) of Lessee shall be deemed to have been given for the purpose of perfecting such security interest under any Law. Lessor and Lessee shall, to the extent consistent with this Lease and the Lease Supplement, take such actions and execute, deliver, file and record such other documents, financing statements and mortgages as may be necessary to ensure that, if the Lease was deemed to create a security interest in the Property and the other Lessee Collateral in accordance with this Paragraph 36, such security interest would be deemed to be a first priority perfected security interest (subject only to the Deed of Trust and Encumbrances) and will be maintained as such throughout the Term. (e) Deed of Trust. Specifically, but without limiting the foregoing or the generality of Paragraph 35, Lessee hereby grants, bargains, sells, warrants, conveys, aliens, remises, releases, assigns, sets over and confirms to Joseph C. LeMense and J. Scott Ensor (collectively, the "Deed of Trust Trustees") all of Lessee's right, title, and interest in and to the following (collectively, the "Mortgaged Property"): (i) the Property and all appurtenances relating thereto and all proceeds, both cash and noncash thereof; (ii) all easements, rights-of-way, strips and gores of land, vaults, streets, ways, alleys, passages, sewer rights, waters, water courses, water rights, minerals, flowers, shrubs, crops, trees, timber and other emblements, and all estates, rights, titles, interests, tenements, hereditaments and appurtenances, reversions and remainders whatsoever, in any way belonging, relating or appertaining to the Property or any part thereof, whether now owned or hereafter acquired by Lessee; (iii) all right, title and interest of Lessee in any and all leases, rental agreements and arrangements of any sort now or hereafter affecting the Property or any portion thereof and providing for or resulting in the payment of money to Lessee for the use of the Property or any portion thereof, whether the user enjoys the Property or any portion thereof as Lessee for years, licensee, Lessee at sufferance or otherwise, and irrespective of whether such leases, rental agreements and arrangements be oral or written, and including any and all extensions, renewals and modifications thereof (the "Subject Leases") and guaranties of the performance or obligations of any Lessees or lessees thereunder, together with all income, rents, issues, profits and revenues from the Subject Leases (including all Lessee security deposits and all other Lessee deposits, whether held by Lessee or in a trust account, and all other deposits and escrow funds relating to any Subject Leases), and all the estate, right, title, interest, property, possession, claim and demand whatsoever at law, as well as in equity, of Lessee of, in and to the same; provided, however, that although this Lease contains (and it is hereby agreed that this Lease contains) a present, current, unconditional and absolute assignment of all of said income, rents, issues, profits and revenues, Lessee shall collect and apply such rental payments and revenues as provided in this Lease and the other Operative Documents; (iv) all right, title and interest of Lessee in, to and under all franchise agreements, management contracts, consents, authorizations, certificates and other rights of every kind and character of any of the Property, to the extent the same are transferable, service contracts, utility contracts, leases of equipment, documents and agreements relating to the construction of the Property (including any and all construction contracts, architectural contracts, engineering contracts, designs, plans, specifications, drawings, surveys, tests, reports, bonds and governmental approvals) and all other contracts, licenses and permits now or hereafter affecting the Property or any part thereof and all guaranties and warranties with respect to any of the foregoing (the "Subject Contracts"); (v) all right, title and interest of Lessee in any insurance policies or binders now or hereafter relating to the Property, including any unearned premiums thereon, as further 50 provided in this Lease; (vi) all right, title and interest of Lessee in any and all awards, payments, proceeds and the right to receive the same, either before or after any foreclosure hereunder, as a result of any temporary or permanent injury or damage to, taking of or decrease in the value of the Property by reason of casualty, condemnation or otherwise as further provided in this Lease; (vii) all right, title and interest of Lessee in all utility, escrow and all other deposits (and all letters of credit, certificates of deposit, negotiable instruments and other rights and evidence of rights to cash) now or hereafter relating to the Property or the purchase, construction or operation thereof; (viii) all claims and causes of action arising from or otherwise related to any of the foregoing, and all rights and judgments related to any legal actions in connection with such claims or causes of action; (ix) all Alterations, extensions, additions, improvements, betterments, renewals and replacements, substitutions, or proceeds of any of the foregoing acquired with proceeds of any of the property described hereinabove; all of which foregoing items are hereby declared and shall be deemed to be a portion of the security for the indebtedness and obligations herein described, a portion of the above described collateral being located upon the Land; and (x) all of the other Lessee Collateral, IN TRUST, HOWEVER, WITH POWER OF SALE, to secure (i) all amounts advanced by Lessor and the Credit Facility Providers pursuant to the terms of the Operative Documents together with Yield or Interest, as applicable, thereon, and all other amounts payable under the Operative Documents in connection therewith and (ii) all other obligations of Lessee under the Operative Documents, effective on the date hereof. (f) Power of Sale Remedies. Without limiting any other remedies set forth herein, in the event that a court of competent jurisdiction rules that this Lease constitutes a deed of trust or other secured financing with respect to the Property as is the intent of the parties pursuant to this Paragraph 36, then Lessor and Lessee agree that, upon the occurrence and during the continuance of any Event of Default, the Deed of Trust Trustees may, and are hereby irrevocably empowered to, with or without entry, and to the extent permitted by applicable law, sell or cause the sale of the Property or any part or parts thereof at one or more public auctions as an entirety or in parcels as Lessor may elect free from any equity of redemption for cash, on credit, or for other property, for immediate or future delivery, and on such terms as the Deed of Trust Trustees shall deem advantageous and proper, such sale or sales to be made in such manner and upon such notice and advertisement as may be required by applicable law, or in the absence of any such requirements, as Lessor may deem appropriate, and to make conveyance to the purchase or purchasers. Notwithstanding the foregoing, upon the occurrence of an Event of Default, Lessor may, at its option, proceed to foreclose on the Property by judicial foreclosure. WAIVER: LESSEE ACKNOWLEDGES AND AGREES THAT IF IT DEFAULTS, A NON-JUDICIAL FORECLOSURE SALE OF THE PROPERTY, IF PERMITTED BY LAW, MAY BE CONDUCTED WITHOUT A HEARING OF ANY KIND AND WITHOUT NOTICE BEYOND THE PUBLICATION AND POSTING OF THE NOTICE OF SALE AS REQUIRED BY LAW. LESSEE HEREBY WAIVES TO THE EXTENT PERMITTED BY LAW ANY RIGHTS IT MAY HAVE TO ANY SUCH HEARING AND NOTICE. (g) UCC Remedies. In addition to any other remedies granted in this Lease to Lessor (including specifically, but not limited to, the right to proceed against the Property in accordance with the rights and remedies in respect to those portions of the Property which are real property pursuant to Section 9-604(a) of the Maryland Uniform Commercial Code), Lessor may proceed under the Maryland Uniform Commercial Code as to all or any part of the personal property (tangible or intangible) and fixtures included with the Property (such portion of the 51 Property being referred to herein as the "Personalty") and shall have and may exercise with respect to the Personalty all the rights, remedies, and powers of a secured party under the Maryland Uniform Commercial Code, including, without limitation, the right and power to sell, at one or more public or private sales, or otherwise dispose of, lease, or utilize the Personalty and any part or parts thereof in any manner authorized or permitted under the Maryland Uniform Commercial Code after default by a debtor, and to apply the proceeds thereof toward payment of any costs and expenses and attorney's fees and legal expenses thereby incurred by Lessor, and toward payment of the indebtedness hereby secured in such order or manner as provided herein. Any requirement of the Maryland Uniform Commercial Code for reasonable notification shall be met by mailing written notice to Lessee at its address set forth in Exhibit D hereto at least ten (10) days prior to the sale or other event for which such notice is required. (h) Judicial Remedies. Lessor may proceed to protect and enforce its rights by a suit or suits in equity or at law, or for the specific performance of any covenant or agreement contained herein or in the Operative Documents, or in aid of the execution of any power herein or therein granted, or for the foreclosure of the mortgage lien created by this Lease, or for the enforcement of any other appropriate legal or equitable remedy and in aid thereof Lessee hereby assents to the passage of a decree by the equity court having jurisdiction. Upon the bringing of any suit to foreclose the mortgage lien created by this Lease or to enforce any other remedy available hereunder, Lessor shall be entitled as a matter of right, without notice and without giving bond to Lessee or anyone claiming under, by or through it, and without regard to the solvency or insolvency of Lessee or the then value of the premises, to have a receiver appointed of all the Property and of the earnings, income, rents, issues, profits and proceeds thereof, with such power as the court making such appointment shall confer, and Lessee does hereby irrevocably consent to such appointment. (i) Acceleration of Certificates and Payments under the Letter of Credit Agreement and Other Operative Documents. In case of any sale of the Property, or of any part thereof, pursuant to any judgment or decree of any court or otherwise in connection with the enforcement of any of the terms of this Lease, the principal of the Certificates and all outstanding amounts due and owing under the Letter of Credit Agreement and the other Operative Documents, if not previously due, and the Yield and interest accrued thereon, if any, shall at once become and be immediately due and payable; also in the case of any such sale, Lessor may bid and become the purchaser, and the purchaser or purchasers, for the purpose of making settlement for or payment of the purchase price, shall be entitled to turn in and use the Certificates and all outstanding amounts due and owing under the Letter of Credit Agreement and the other Operative Documents, and any claims for Yield and interest due and unpaid thereon, in order that there may be credited as paid on the purchase price the sum apportionable and applicable to the Certificates and all outstanding amounts due and owing under the Letter of Credit Agreement and the other Operative Documents, including principal, Yield and interest thereon, out of the net proceeds of such sale after allowing for the proportion of the total purchase price required to be paid in actual cash. If at any foreclosure proceeding the Property shall be sold for a sum less than the total amount of indebtedness for which judgment is therein given, the judgment creditor shall be entitled to the entry of a deficiency decree against Lessee and against the property of Lessee for the amount of such deficiency. 52 (j) Lease Supplement to Control. The provisions of this Paragraph 36 shall not limit in any manner the specific rights and remedies of Lessor under the Lease Supplement. Each right, power and remedy provided for in this Lease or in the Lease Supplement or now or hereafter existing at law or in equity or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise of any one or more of the rights, powers or remedies provided for in this Lease or now or hereafter existing in law or in equity or by statute or otherwise shall not preclude the simultaneous or later exercise of any or all other such rights, powers or remedies. In the event of any conflict or inconsistency between the terms and provisions of this Lease and the terms and provisions of the Lease Supplement with respect to the liens, security interests and remedies available to Lessor, the terms and provisions of the Lease Supplement shall control. (k) Attorney-in-Fact. Lessee hereby irrevocably appoints Lessor as Lessee's attorney-in-fact, with full authority in the place and stead of Lessee and in the name of Lessee or otherwise, from time to time in Lessor's discretion, to execute any instrument which Lessor may deem necessary or advisable to accomplish the purposes of this Lease (subject to any limitations set forth in the Operative Documents), and to take any action (including any action that Lessee is entitled to take), including, without limitation: (i) to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for money due and to become due under or in connection with all or any portion of the Property and the other Lessee Collateral; (ii) to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with the foregoing clause (a); (iii) to file any claim or take any action or institute any proceedings which Lessor may deem to be necessary or advisable for the collection thereof or to enforce compliance with the terms and conditions of this Lease; and (iv) to perform any affirmative obligations of Lessee hereunder, including the execution of mortgages, financing statements and other documents. Lessee hereby acknowledges, consents and agrees that the power of attorney granted pursuant to this subparagraph (k) is irrevocable and coupled with an interest. Notwithstanding anything contained herein to the contrary, the rights and powers presently granted Lessor by this subparagraph (k) may be exercised by Lessor only upon the occurrence and during the continuance of an Event of Default. 37. Miscellaneous. (a) This Lease may be executed in any number of counterparts, each of which shall be an original, but all of which shall together constitute one and the same instrument. (b) References to the masculine shall include the feminine and neuter and the plural shall include the singular, as the context may require. 53 (c) This Lease shall be construed and enforced in accordance with the Law of the State of Maryland. (d) Time is of the essence with respect to each and every provision of this Lease. (e) With respect to any provision of this Lease which requires Lessor to not unreasonably withhold its consent or approval, if in connection therewith Lessor is obligated under the Operative Documents to obtain the consent or approval of Issuer, the Trustee, the Agent, the Credit Facility Providers or any other third party, then Lessor's failure to provide consent or failure to otherwise act in a reasonable manner because of its inability to obtain the consent or approval of Issuer, the Trustee, the Agent, the Credit Facility Providers or other third party shall not be deemed unreasonable, so long as Lessor has made a good faith effort to obtain such consent. (f) Lessor and Lessee hereby agree and consent that any action or proceeding arising out of or brought to enforce the provisions of this Lease may be brought in any appropriate court in Montgomery County, Maryland or Baltimore City, Maryland, and, by the execution of this Lease, Lessor and Lessee irrevocably consent to the jurisdiction of each such court. (g) If for any reason Lessor or Lessee should become not qualified to do business in the State, Lessor and Lessee hereby agree to designate and appoint, without power of revocation, an agent for service of process within the State, as the agent for Lessor or Lessee, as applicable, upon whom may be served all process, pleadings, notice or other papers which may be served upon Lessor or Lessee, as applicable, as a result of any of Lessor's or Lessee's, as applicable, obligations under this Lease. (h) Lessor and Lessee covenant that throughout the Term, if a new agent for service of process within the State is designated pursuant to the terms of subparagraph (g) above, Lessor or Lessee, as applicable, will immediately file with the other party hereto the name and address of such new agent and the date on which such appointment is to become effective. (i) Lessor and Lessee hereby jointly waive trial by jury in any action or proceeding to which Lessor and Lessee may be parties, arising out of or in any way pertaining to this Lease. This waiver is knowingly, willingly and voluntarily made by Lessor and Lessee, each of which hereby represents that no representations of fact or opinion have been made by any individual to induce this waiver of trial by jury or to in any way modify or nullify its effect. Each of Lessor and Lessee further represents that it has been represented in the signing of this Lease and in the making of this waiver by independent legal counsel, selected of its own free will, and that it has had the opportunity to discuss this waiver with counsel. 38. Partial Release of Land. Notwithstanding anything to the contrary contained in this Lease and in the other Operative Documents and subject to the satisfaction of the terms and conditions set forth below, Lessor shall, within thirty (30) days after receipt of a written request from Lessee notifying Lessor of Lessee's intent to construct additional improvements on a portion of the Land for which the Issuer and Credit Facility Providers have refused to provide financing, execute an 54 amendment to this Lease and the other Operative Documents pursuant to which the portion of the Land upon which such additional improvements shall be constructed (the "Release Parcel") shall be released from this Lease and the liens created hereby and in the other Operative Documents. Lessor's obligation to release the Release Parcel from this Lease and the lien created hereby and in the other Operative Documents shall be subject to the following terms and conditions: (i) No Default or Event of Default shall then be existing; (ii) Lessee shall be responsible, at Lessee's sole cost and expense, for preparing an ALTA Survey of the Release Parcel and for obtaining any and all required zoning, subdivision or other approvals from any applicable Governmental Authority having jurisdiction; (iii) Lessee shall be responsible for the costs of preparing and recording the required amendments to this Lease and the other Operative Documents to reflect the release of the Release Parcel from the liens created by this Lease and the other Operative Documents and for all other costs incurred by Lessor, the Agent, the Issuer and/or the Credit Facility Providers in connection with the release of the Release Parcel, including, without limitation, such parties' attorneys' fees; (iv) To the extent deemed necessary by Lessor, Agent or Issuer, Lessor and/or Issuer shall retain or reserve any easements over, upon, across and under the Release Parcel as may be necessary to support the continued use and operation of the Property; (v) Agent shall obtain, at the sole cost and expense of Lessee, an appraisal of the Fair Market Value of the Property, less the Release Parcel; and (vi) Lessee shall pay to Agent, for the benefit of the Credit Facility Providers, a release fee equal to the difference, if any, between the Fair Market Value of the Property as of the Commencement Date and the Fair Market Value of the Property, less the Release Parcel; provided, however, such release fee shall not exceed the Fair Market Value of the Release Parcel (the "Release Fee"), which amount shall be applied to the Lease Balance. REMAINDER OF PAGE INTENTIONALLY LEFT BLANK 55 IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease to be signed on their behalf, under seal, by their respective signatories thereunto duly organized as of the date first above written. LESSOR: WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION, not in its individual capacity, but solely as Owner Trustee By: /s/ VAL T. ORTON --------------------------------------------- Name: Val T. Orton ------------------------------------------- Title: Vice President ------------------------------------------ 56 LESSEE: HUMAN GENOME SCIENCES, INC. By: /s/ STEVEN C. MAYER --------------------------------------------- Name: Steven C. Mayer Title: Senior Vice President and Chief Financial Officer EXHIBIT A DESCRIPTION OF LAND [TO BE ADDED] A-1 EXHIBIT B [INTENTIONALLY OMITTED] B-1 EXHIBIT C BASIC RENT Subject to adjustment as provided in Paragraph 6(b) of this Lease, Basic Rent, on each Payment Date, shall be an amount equal to the sum of (i) the amount of interest payable on the aggregate sum of the outstanding principal amount of the Bonds as of such Payment Date, (ii) the yield payable on the aggregate sum of the outstanding principal amount of the Certificates as of such Payment Date, and (iii) any other amounts and costs payable or reimbursable pursuant to the Operative Documents as of such Payment Date, including, without limitation, any amounts to be paid or reimbursable by the Issuer, and the Lessor under the MEDCO Note, the Letter of Credit Documents and the Head Lease. C-1 EXHIBIT D NOTICE AND PAYMENT INFORMATION If to Lessor: Notices: Wells Fargo Bank Northwest, National Association 79 South Main Street, 3rd Floor Salt Lake City, Utah 84111 Attention: Val T. Orton Vice President Payments: c/o [Allfirst Bank] [ADD WIRING INSTRUCTIONS] If to Lessee: Notices: Human Genome Sciences, Inc. 9410 Key West Avenue Rockville, Maryland 20850 Attention: Steven C. Mayer Senior Vice President and Chief Financial Officer with a copy to: James H. Davis Senior Vice President and General Counsel and Secretary Human Genome Science, Inc. 9410 Key West Avenue Rockville, Maryland 20850 If to Agent: Notices Allfirst Bank 6303 Ivy Lane, Suite 200 Greenbelt, Maryland 20770 Attention: Joseph C. LeMense Senior Vice President D-1 Allfirst Bank International Operations 25 South Charles Street 15th Floor Baltimore, Maryland 21201 Attention: Letter of Credit Department with a copy to: Nancy R. Little, Esq. McGuireWoods LLP One James Center 910 East Cary Street Richmond, Virginia 23219 D-2 EXHIBIT E SECURITY AGREEMENT AND ASSIGNMENT [TO BE ATTACHED] E-1 EX-10.23 10 w58882ex10-23.txt CASH COLLATERAL PLEDGE AGREEMENT EXHIBIT 10.23 CASH COLLATERAL PLEDGE AGREEMENT among HUMAN GENOME SCIENCES, INC., as Pledgor, ALLFIRST BANK, as Agent and Pledgee and ALLFIRST TRUST COMPANY NATIONAL ASSOCIATION as Collateral Agent Dated as of October 25, 2001 ------------------------------------------------ CASH COLLATERAL PLEDGE AGREEMENT THIS CASH COLLATERAL PLEDGE AGREEMENT (this "Agreement") is dated as of October 25, 2001, and is among HUMAN GENOME SCIENCES, INC., a Delaware corporation (the "Pledgor"), ALLFIRST BANK, a Maryland banking corporation, as Agent and Pledgee (the "Agent"), and ALLFIRST TRUST COMPANY NATIONAL ASSOCIATION, as Collateral Agent (the "Collateral Agent"). RECITALS WHEREAS, in accordance with the provisions of Article 83A, Title 5, Subtitle 2 of the Annotated Code of Maryland, as amended, and pursuant to a certain Trust Indenture dated as of October 25, 2001 (the "Indenture") between Maryland Economic Development Corporation (the "Issuer") and Allfirst Trust Company National Association, as Trustee (the "Trustee"), the Issuer has issued $73,000,000 in principal amount of its Taxable Variable Rate Demand Revenue Bonds (Human Genome Sciences, Inc. Facility), Series 2001 A (the "Bonds") to refinance a portion of the acquisition cost of certain improved real property located in Rockville, Maryland (the "Property") and to finance construction relating to such Property; WHEREAS, in order to enhance the marketability of the Bonds and pursuant to a Letter of Credit Agreement dated as of October 25, 2001 (the "Letter of Credit Agreement") between the Issuer and Allfirst Bank (in its capacity as Letter of Credit issuer and Certificate Holder, the "Bank"), the Bank has issued to the Trustee the Bank's irrevocable transferable letter of credit to provide payment for and secure the payment of the principal of and interest on, and the purchase price of, the Bonds; WHEREAS, simultaneously with the issuance of the Bonds and pursuant to a Trust Agreement dated as of October 25, 2001 (the "Trust Agreement") between the Bank, as Holder, and Wells Fargo Bank Northwest, National Association, as Owner Trustee, the Bank has advanced funds for the purchase from the HGSI Trust 2001-B (the "Trust") of $3,000,000 in principal amount of HGSI Trust 2001-B Certificates (the "Certificates"); WHEREAS, the Owner Trustee on behalf of the Trust has loaned the proceeds of the advance from the Bank relating to the purchase of the Certificates to the Issuer to refinance the remaining portion of the acquisition cost of the Property; WHEREAS, pursuant to a Guarantee dated as of October 25, 2001 (the "Guarantee"), the Pledgor has guaranteed the obligations of the Issuer to the Bank under the Letter of Credit Agreement, the obligations of the Owner Trustee under the Certificates (as defined in the Lease Agreement dated as of October 25, 2001 between the Owner Trustee on behalf of the Trust, as Lessor, and the Pledgor, as Lessee (as supplemented, the "Facility Lease")), and certain other obligations under the Operative Documents (as defined in the Facility Lease); WHEREAS, as a condition precedent to the consummation of the transactions contemplated by the Operative Documents, the parties thereto have required the Pledgor to post cash collateral and/or securities with a value of not less than $76,000,000 (the "Minimum Collateral Amount"); NOW, THEREFORE, in order to secure its obligations under the Guarantee, the Pledgor hereby covenants and agrees with the Agent as follows: 1. Defined Terms. All capitalized terms used but not defined herein shall have the same meanings assigned to them in the Facility Lease. 2. Grant of Security Interest; Custody; Perfection. The Pledgor hereby pledges, assigns and grants to the Agent a security interest in the cash and marketable securities on deposit in the account maintained by the Pledgor with the Collateral Agent as described in Exhibit A attached hereto and made a part hereof (the "Account"), the Account, and all interest and other income thereon and all cash and noncash proceeds thereof (all of the foregoing is herein collectively referred to as the "Collateral") pursuant to the provisions of the Maryland Uniform Commercial Code, in order to secure the Pledgor's obligations under the Facility Lease and the other Operative Documents. The Collateral is to be held by the Collateral Agent on behalf of the Agent. The Pledgor hereby agrees that the Agent shall have with respect to the Collateral the rights and remedies of a secured party provided in the Maryland Uniform Commercial Code. The Collateral Agent will at all times maintain the Account at its offices in the State of Maryland. As of the effective date of this Agreement, the Pledgor has pledged, assigned and granted to the Agent a security interest in the Collateral and such Collateral and the Account have been designated on the records of the Collateral Agent as subject to the security interest granted pursuant to this Agreement in accordance with the provisions of the Maryland Uniform Commercial Code. The Pledgor and the Collateral Agent hereby agree that all securities or other property underlying any financial assets credited to the Account shall be registered in the name of the Collateral Agent, endorsed to the Collateral Agent or in blank or credited to another securities account maintained in the name of the Collateral Agent and in no case will any financial asset credited to the Account be registered in the name of the Pledgor, payable to the order of the Pledgor or specially indorsed to the Pledgor. The Collateral Agent hereby agrees that all property delivered to the Collateral Agent with respect to the pledge and security intended hereby will be held in or credited to the Account. The Collateral Agent further agrees that each item of property (including, without limitation, any investment property, financial asset, security, instrument, general intangible or cash) credited to the Account shall be treated as a "financial asset" within the meaning of Section 8-102(a)(9) of the Maryland Uniform Commercial Code. The Pledgor hereby directs the Collateral Agent, and the Collateral Agent hereby agrees, to comply with all entitlement orders of the Agent with respect to the Collateral and the Account without further consent of the Pledgor. 3. Minimum Collateral Value. The Pledgor shall maintain on deposit, in the Account, Collateral with an actual market value of not less than the Minimum Collateral Amount, taking into account any penalties, fees, discounts or other amounts that could result in any reduction in the actual cash value of any of the Collateral upon any liquidation or early termination of any investments prior to the maturity date thereof. 2 4. Investment; Preservation of Collateral. Funds held by the Collateral Agent hereunder shall be invested and reinvested by the Collateral Agent upon written order of the Pledgor only in Permitted Investments as described in Exhibit B attached hereto and made a part hereof. Such investments shall be registered in the name of the Collateral Agent and held by the Collateral Agent for the benefit of the Agent. The Collateral Agent shall not be responsible or liable for any loss suffered in connection with any investment of moneys made by it in accordance with the Pledgor's instruction. The Pledgor shall be responsible for the preservation of the Collateral in the Collateral Agent's possession and shall take all action necessary to preserve the rights of the Agent against prior parties to the Collateral. Neither the Agent nor the Collateral Agent shall be under any duty (a) to collect any of the Collateral or any moneys due or to become due thereunder, (b) to give any notices with respect to the Collateral, (c) to preserve or maintain any of the Collateral not in its possession, or (d) to preserve rights of the Pledgor against prior parties to the Collateral. The Agent and the Collateral Agent shall be deemed to have exercised reasonable care with respect to any of the Collateral in their possession if the Agent or the Collateral Agent takes such action for that purpose as the Pledgor shall reasonably request in writing; provided, however, that no failure to comply with any such request shall, of itself, be deemed a failure to exercise reasonable care, and no failure to do any act not requested by the Pledgor shall be deemed a failure to exercise reasonable care. 5. Pledgor's Representations and Warranties and Covenants. The Pledgor represents and warrants and covenants that: (i) it has received value (as defined in Section 1-201 (44) of the Maryland Uniform Commercial Code), (ii) it has the right to create a security interest in the Collateral, (iii) the Collateral is not subject to the interest of any third person, (iv) the Pledgor will defend the Collateral against the claims and demands of all third parties, (v) all statements provided by Pledgor relating to the Collateral relied upon by the Agent prior to, contemporaneous with or subsequent to execution of this Agreement are or shall be true, correct, complete, valid and genuine in all material respects, (vi) it has taken or caused other persons to take all actions necessary to effect the creation and perfection of the Agent's security interest in the Collateral, and has caused to be filed with the Maryland State Department of Assessments and Taxation, the Secretary of State of the jurisdiction of organization of the Pledgor, and, if the Account is maintained in a different jurisdiction, the Secretary of State of the jurisdiction in which the Account is maintained, UCC-1 financing statements naming the Pledgor as debtor and the Agent as a secured party and evidencing the lien or pledge created by this Agreement, and, together with the book entries described above, such actions taken with respect to the Collateral pursuant to this Agreement create a valid and perfected first priority security interest in the Collateral, pursuant to the Maryland Uniform Commercial Code, 3 (vii) it has full power, authority and legal right to enter into this Agreement and to pledge and grant a lien on the Collateral pursuant to this Agreement, and this Agreement has been duly authorized, executed and delivered by Pledgor and constitutes the legal, valid and binding obligation of Pledgor, enforceable against Pledgor in accordance with its terms, (viii) no authorization, consent, approval, license, qualification or formal exemption from, nor any filing, declaration or registration with, any court, governmental authority, or with any securities exchange is required in connection with (A) the due execution, delivery or performance by Pledgor of this Agreement, (B) the assignment of, and the grant of a lien on (including priority thereof), the Collateral by Pledgor in the manner and for the purpose contemplated by this Agreement, or (C) the exercise of the rights and remedies of Pledgee created hereby except those that have been obtained or made concurrently with the execution hereof, including, without limitation, filings in the appropriate offices under the Maryland Uniform Commercial Code, (ix) Neither the execution and delivery of this Agreement, nor the consummation of the transactions herein contemplated, nor compliance with the terms and provisions hereof will conflict with or result in a breach of, Pledgor's formation agreements, any applicable law or regulation, or any order, writ, injunction or decree of any court or governmental authority binding on Pledgor, or any agreement or instrument to which Pledgor is a party or by which Pledgor is bound or to which any of the Collateral is subject, or result in the creation or imposition of any lien upon Pledgor's earnings or assets pursuant to the terms of any such agreement or instrument, (x) the pledge of the Collateral to the Agent is not done in contemplation of insolvency or bankruptcy or with an intent to hinder, delay or defraud any of Pledgor's creditors, (xi) it is not insolvent immediately before signing this Agreement and is not being rendered insolvent by the pledge of the Collateral to Agent, and (xii) it will not pledge, assign or grant a security interest in the Collateral to any person other than the Pledgee. 6. Partial Release of Collateral. Provided no Event of Default under this Agreement or any of the other Operative Documents has occurred and is continuing, when the cash value of the Collateral (as set forth in Paragraph 3 above) exceeds the Minimum Collateral Amount, the Pledgor shall have the right to request that the Pledgee release from the security interest granted pursuant to this Agreement Collateral in an amount equal to such excess; provided, however, the Pledgor shall not have the right to request such a release more than one time in any quarter. 7. Deposits to Account. If at any time the cash value of the Collateral (as set forth in Paragraph 3 above) is less than the Minimum Collateral Amount, the Pledgor shall within two (2) Business Days deposit to the Account and designate on the records of the Collateral Agent as subject to the security interest granted pursuant to this Agreement cash or marketable securities in an amount equal to the difference, between (a) the Minimum Collateral Amount, and (b) the market value of the Collateral. The Collateral Agent shall notify the Pledgor in writing of the 4 amount to be deposited hereunder and the Pledgor shall promptly provide the Agent with evidence reasonably satisfactory to the Agent that such deposit has been made. Other than with respect to reporting requirements regarding the Collateral, the Collateral Agent shall have no obligations or responsibilities hereunder to any parties hereto with respect to any accounts of the Pledgor other than the Account. Notwithstanding the foregoing, however, nothing herein provided shall abrogate the Collateral Agent's responsibilities to the Pledgor with respect to any other accounts managed or held by the Collateral Agent for or on behalf of the Pledgor. 8. Substitutions. Provided no Event of Default under this Agreement or any of the other Operative Documents has occurred and is continuing, the Pledgor may at any time and from time to time substitute cash and marketable securities for the Collateral on deposit in the Account; provided, however, the cash value of the Collateral (as set forth in Paragraph 3 above) shall at all times be equal to or greater than the Minimum Collateral Amount. 9. Investment Earnings. Provided no Event of Default under this Agreement or any of the other Operative Documents has occurred and is continuing, when the cash value of the Collateral (as set forth in Paragraph 3 above) equals at least Minimum Collateral Amount, investment earnings on the Collateral shall, on the last day of each quarter thereafter, be distributed to the Pledgor. 10. Reporting Requirements. Not more than five (5) Business Days following the end of each calendar month, the Collateral Agent shall furnish to the Agent and the Pledgor a statement of the market value of the Collateral on deposit in the Account. 11. Authority Over Account; Limitations on Withdrawals. The Agent shall have sole authority over withdrawals of the Collateral from the Account and no withdrawal of the Collateral from the Account shall be made except upon the written instructions of the Agent signed by authorized officers of the Agent; provided, however, such withdrawals shall only be permitted when there is an Event of Default pursuant to this Agreement or any of the other Operative Documents or when the Agent is releasing excess funds pursuant to Paragraphs 6, 8 or 9 hereof. Any written instructions from the Agent shall permit withdrawals within two (2) Business Days from the date thereof. In relying upon such written instructions from the Agent, the Collateral Agent shall have no liability other than for its negligence or willful misconduct. 12. Default; Remedies Upon Default. The occurrence of any one or more of the following events shall constitute an Event of Default under this Agreement: (a) an event of default under the Facility Lease or under any of the other Operative Documents after giving effect to any notice and cure periods provided for in the Facility Lease or other Operative Documents; or (b) failure of the Pledgor to perform, observe, or comply with any of the provisions of this Agreement, and such failure shall remain uncured for a period of five (5) days in the event of a monetary default and thirty (30) days in the event of a non-monetary default after the date of written notice from a Pledgee to the Pledgor. The Agent shall give the Collateral Agent and the Pledgor written notice of an Event of Default hereunder and the Collateral Agent shall from receipt of such notice act only upon the instructions of the Agent and the Collateral Agent shall have no liability to the Pledgor in following such instructions. 5 Upon an Event of Default under this Agreement or under any of the other Operative Documents that has not been waived by the Agent, and any time thereafter, the Agent may, among its other rights and remedies (1) cause the Collateral to be transferred to the Bank or to the name of its nominee or nominees and thereafter exercise as to the Collateral all rights, powers and remedies of an owner, (2) collect by legal proceedings or otherwise all dividends, interest, principal payments, and other sums now or hereafter payable on account of the Collateral, and hold the same as Collateral, or apply the same to the expenses incurred by the Agent in such legal proceedings, the manner and distribution of the application to be in the sole discretion of the Agent, (3) enter into any extension, subordination, reorganization, deposit, merger, or consolidation agreement, or any other agreement relating to or affecting the Collateral and in connection therewith deposit or surrender control of such Collateral thereunder, and accept other property in exchange therefor and hold or apply such property or money so received in accordance with the provisions hereof, all of the foregoing specified rights and remedies, however, being subject to the rights of the Pledgor provided in the Maryland Uniform Commercial Code. The Agent shall give written notice to the Pledgor ten (10) days prior to the date of public sale of the Collateral or prior to the date after which private sale of the Collateral will be made. Subject to compliance with federal and state securities laws, full power and authority are hereby given to the Agent acting through any of its respective officers, upon an Event of Default hereunder or under any of the other Operative Documents that has not been waived by the Agent, and at any time thereafter, at its election, to sell, assign, transfer and deliver the whole of the Collateral, or any part thereof or any additions thereto, or substitutes therefor, in such order as the Agent may elect, at public or private sale. To the extent the Agent actually receives any monies as a result of its exercise of any of the remedies provided for hereunder following the occurrence of an Event of Default hereunder or under any of the other Operative Documents, the Agent covenants and agrees that such monies, after deducting all costs incurred by the Agent in connection with the collection thereof, shall be credited against the obligations of the Pledgor under the Facility Lease and the Letter of Credit Agreement, including without limitation, any payment obligation of the Pledgor pursuant to Paragraph 19 of the Facility Lease. No failure or delay by the Agent to insist upon the strict performance of any term, condition, covenant, or agreement of this Agreement or any of the other Operative Documents, or to exercise any right, power, or remedy consequent upon a breach thereof, shall constitute a waiver of any such term, condition, covenant, or amendment or of any such breach, or preclude the Agent from exercising any such right, power, or remedy at any later time or times. By accepting payment after the due date of any of the obligations under this Agreement or of the Facility Lease or any of the other Operative Documents, the Agent shall not be defined to have waived the right either to require prompt payment when due of all other such obligations or to declare a default for failure to effect such payment of any such other obligations. Each right, power, and remedy of the Agent as provided for in this Agreement or in the Facility Lease or any of the other Operative Documents or now or hereafter existing at law or in equity or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power, or remedy provided for in this Agreement or in the Facility or any of 6 the other Operative Documents or now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by the Agent of any one or more of such rights, powers, or remedies shall not preclude the simultaneous or later exercise by the Agent of any or all such other rights, powers, or remedies. 13. Costs and Expenses. All reasonable costs and expenses, including reasonable attorney's fees and expenses, incurred or paid by the Agent in exercising any right, power or remedy conferred hereby, and in the endorsements thereof, shall become a part of the indebtedness or obligations secured hereby. 14. Further Assurances. The Pledgor shall, at its expense, do, make, procure, execute and deliver all acts, things, writings and assurances as any Pledgee may at any time request to protect, assure or enforce its interest, rights and remedies created by, provided in or emanating from this Agreement. 15. Release, Indulgences, etc. The Pledgor agrees that demands, notice, protest and all demands and notices of any action taken by any Pledgee under this Agreement, except those expressly provided for in this Agreement and the Facility Lease, are hereby waived. Without notice to and further consent from the Pledgor, without in any way waiving any of the provisions of this Agreement, and without in any way releasing all or any part of the Pledgor's obligations under this Agreement or in the Collateral, the Pledgor hereby consents: (a) to any renewal, modification, waiver, or release of, any of the obligations of the Agent under any of the Operative Documents; (b) to the addition to, or release of any party or of any other maker, accommodation party, endorser, guarantor, surety, or indemnitor from, any of their respective obligations under any of the Operative Documents; (c) to the addition to, or release of, all or any part of the collateral and security for the Lease or any of the Operative Documents (other than the Collateral); (d) to any indulgence and/or waiver given to any maker, accommodation party, endorser, guarantor, surety, or indemnity of any of the obligations of the Pledgor under the Lease or any of the Operative Documents. 16. Liability, Duties, and Resignation of Collateral Agent. (a) The Collateral Agent shall hold the Collateral as agent for the Agent. The Collateral Agent agrees to send a written confirmation to the Agent that it is holding the Collateral and the Account for the sole and exclusive account of the Agent for the benefit of Agent. (b) The Collateral Agent, its affiliates, directors and officers and its respective successors, assigns, agents and servants, absent negligence or willful misconduct, shall not be held to any personal liability whatsoever, in tort, contract or otherwise, in connection with the execution and delivery of, or performance of its obligations under, this Agreement. (c) This Agreement sets forth exclusively the duties of the Collateral Agent with respect to any and all matters pertinent hereto and no implied duties or obligations shall be read into this Agreement against the Collateral Agent. The Collateral Agent may act in reliance upon any instrument or signature believed by it to be genuine and may assume that any person 7 purporting to give any writing, notice, advice or direction for or on behalf of the Agent in connection with the provisions hereof has been duly authorized to do so. (d) The Collateral Agent may resign from its obligations under this Agreement at any time after thirty (30) days' prior written notice to the other parties hereto, but in no event shall Collateral Agent be released of its obligations hereunder unless and until a substitute eligible institution has been designated and has assumed in writing the obligations of Collateral Agent hereunder. 17. Notices. All notices, demands, requests, consents, approvals, certificate or other communications required under this Agreement to be in writing shall be sufficiently given and shall be deemed to have been properly given (i) if delivered by hand, when written confirmation of delivery is received by the sender, (ii) three days after the same is mailed by certified mail, postage prepaid, return receipt requested, or (iii) if sent by overnight courier, 24 hours after delivery to such overnight courier, addressed to the person to whom any such notice, demand, request, approval, certificate or other communication is to be given, at the appropriate address of such person as designated below: If to the Pledgor at: Human Genome Sciences, Inc. 9410 Key West Avenue Rockville, Maryland 20850 Attention: Steven C. Mayer Senior Vice President and CFO Tel: (301) 340-3444 Fax: (301) 309-0092 and Human Genome Sciences, Inc. 9410 Key West Avenue Rockville, Maryland 20850 Attention: James H. Davis. Esquire Senior Vice President and General Counsel Tel: (301) 251-6039 Fax: (301) 517-8831 If to the Agent at: Allfirst Bank 6303 Ivy Lane, Suite 200 Greenbelt, Maryland 20770 Attention: Joseph C. LeMense Senior Vice President Tel: (301) 397-5057 Fax: (301) 397-5666 8 If to the Collateral Allfirst Trust Company National Association Agent at: 25 South Charles Street Baltimore, Maryland 21201 Attention: Jay Smith Tel: (410) 244-4223 Fax: (410) 244-4256 18. Miscellaneous. Neither this Agreement nor any term, condition, covenant, or agreement hereof may be changed, waived, discharged, or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge, or termination is sought. This Agreement shall be governed by the laws of the State of Maryland and shall be binding upon the successors and assigns of the Pledgor and shall inure to the benefit of the Agent and its respective successors and assigns. As used herein, the singular number shall include the plural, and the use of the masculine, feminine, or neuter gender shall include all genders as the context may require, and the term "person" shall include an individual, a corporation, an association, a partnership, a trust, a limited liability company, an organization, a government or political subdivision thereof, and a governmental agency. Headings and captions used in this Agreement are solely for convenience of reference and shall not affect the meaning of this Agreement. Unless varied by this Agreement, all terms used herein which are defined by the Maryland Uniform Commercial Code shall have the same rneanings hereunder as assigned to them by the Maryland Uniform Commercial Code. This Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute one and the same 19. Termination. This Agreement shall terminate when the Letter of Credit Agreement terminates and all obligations thereunder and under the other Operative Documents have been indefeasibly paid and performed in full, and upon the termination of this Agreement, the Agent shall instruct the Collateral Agent to reassign to the Pledgor, without recourse or warranty, express or implied, the then existing rights, title and interest of the Agent in and to the Collateral, the costs of such reassignment to be borne by the Pledgor. (SIGNATURES APPEAR ON FOLLOWING PAGE) 9 WITNESS the signature and seal of the Parties as of the date first written above. WITNESS: HUMAN GENOME SCIENCES, INC., as Pledgor By: /s/ STEVEN C. MAYER (SEAL) - ------------------------ ------------------------------- Steven C. Mayer Chief Financial Officer WITNESS: ALLFIRST BANK, as Agent By: /s/ JOSEPH C. LEMENSE (SEAL) - ----------------------- ------------------------------- Name: Joseph C. Lemense ----------------------------- Title: Senior Vice President ---------------------------- WITNESS: ALLFIRST TRUST COMPANY NATIONAL ASSOCIATION, as Collateral Agent By: /s/ C.D. PARKER (SEAL) - ----------------------- ------------------------------- Name: C.D. Parker ----------------------------- Title: Vice President ---------------------------- 10 11 Exhibit A to Cash Collateral Pledge Agreement DESCRIPTION OF ACCOUNT
Account Owner Account Name Account Number - ------------- ------------ -------------- Human Genome Human Genome Sciences, Sciences, Inc. Inc. 2001 Collateral Account --------
12 Exhibit B to Cash Collateral Pledge Agreement PERMITTED INVESTMENTS The term "Permitted Investments" as used in this Cash Collateral Pledge Agreement means any of the following: Any investments allowed under the investment guidelines approved by the board of directors of the Pledgor, provided that such investments shall meet the following limitations: Such investments shall be direct obligations of the United States of America or other obligations the timely payment of the principal of and interest on which are fully and unconditionally guaranteed by the United States of America or debt securities rated "A-" or better by Standard & Poor's Ratings Services or "Aa3" or better by Moody's Investors Service, Inc, provided that (i) no more than ten percent (10%) of the Collateral shall be invested at any time in the obligations of any one corporate issuer, (ii) no such obligation shall have a maturity in excess of seven (7) years, and (iii) such obligations shall not have an average duration exceeding seven (7) years. 13 EX-10.24 11 w58882ex10-24.txt GUARANTEE EXHIBIT 10.24 GUARANTEE by HUMAN GENOME SCIENCES, INC., as Guarantor, in favor of ALLFIRST BANK, as Agent Dated as of October 25, 2001 ------------------------------------------------ GUARANTEE THIS GUARANTEE, dated as of October 25, 2001 (this "Guarantee"), is made by HUMAN GENOME SCIENCES, INC., a Delaware corporation (in its capacity as guarantor hereunder, "Guarantor") in favor of ALLFIRST BANK, a Maryland banking corporation (in its capacity as agent hereunder, the "Agent"). W I T N E S S E T H: WHEREAS, in accordance with the provisions of Article 83A, Title 5, Subtitle 2 of the Annotated Code of Maryland, as amended, and pursuant to a certain Trust Indenture dated as of October 25, 2001 (the "Indenture") between Maryland Economic Development Corporation (the "Issuer") and Allfirst Trust Company National Association, as Trustee (the "Trustee"), the Issuer has issued $73,000,000 in principal amount of its Taxable Variable Rate Demand Revenue Bonds (Human Genome Sciences, Inc. Facility), Series 2001 A (the "Bonds") to refinance a portion of the acquisition cost of certain improved real property located at 9800 Medical Center Drive, Rockville, Maryland (the "Property") and to finance a portion of the cost associated with the construction of the Additional Improvements (as defined in the Facility Lease) on the Property; WHEREAS, in order to enhance the marketability of the Bonds and pursuant to a Letter of Credit Agreement dated as of October 25, 2001 (the "Letter of Credit Agreement") between the Issuer and Allfirst Bank (in its capacity as Letter of Credit issuer and Certificate Holder, the "Bank"), the Bank has issued to the Trustee the Bank's irrevocable transferable letter of credit to provide payment for and secure the payment of the principal of and interest on, and the purchase price of, the Bonds; WHEREAS, simultaneously with the issuance of the Bonds and pursuant to a Trust Agreement dated as of October 25, 2001 (the "Trust Agreement") between the Bank, as Holder, and Wells Fargo Bank Northwest, National Association, as Owner Trustee (the "Owner Trustee"), the Bank has advanced funds for the purchase from the HGSI Trust 2001-B of up to $3,000,000 in principal amount of HGSI Trust 2001-B Certificates (the "Certificates"); WHEREAS, the Issuer may enter into from time to time a Hedge Agreement with the Hedge Counterparty (in each case, as defined in the Lease Agreement dated as of October 25, 2001 between the Owner Trustee on behalf of the Trust, as Lessor, and the Guarantor, as Lessee (as supplemented, the "Facility Lease")); WHEREAS, it is a condition precedent to the consummation by the Bank of the transactions to be consummated by the Operative Documents (as defined in the Facility Lease) that Guarantor execute and deliver this Guarantee; WHEREAS, it is in the best interests of Guarantor that the transactions contemplated by the Operative Documents occur; WHEREAS, Guarantor has reviewed and approved the Operative Documents and is fully informed of (a) the extent of the Bank's obligations thereunder and (b) the remedies the Bank, or the Agent on the Bank's behalf, may pursue thereunder, with or without notice to Guarantor; and WHEREAS, this Guarantee, and the execution, delivery and performance hereof, have been duly authorized by all necessary corporate action of Guarantor; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged by Guarantor, Guarantor hereby agrees as follows: Section 1. Guarantee. Guarantor hereby irrevocably and unconditionally guarantees to the Agent, for the benefit of the Bank and the Hedge Counterparty, and their respective successors and permitted assigns (individually a "Beneficiary" and collectively the "Beneficiaries"), the full and prompt payment when due, whether by acceleration or otherwise, and at all times thereafter, and the full and prompt performance of, all of the Liabilities (as hereinafter defined), including interest and yield on any such Liabilities, whether accruing before or after any bankruptcy or insolvency case or proceeding involving Guarantor or any other Person (as defined in the Facility Lease), and, if interest or yield on any portion of such obligations ceases to accrue by operation of law by reason of the commencement of such case or proceeding, including such interest and yield as would have accrued on any such portion of such obligations if such case or proceeding had not commenced, and further agrees to pay all expenses (including attorneys' fees and legal expenses) paid or incurred by any Beneficiary in endeavoring to collect the Liabilities, or any part thereof, and in enforcing this Guarantee. The term "Liabilities", as used herein, shall mean all of the following (without duplication), in each case howsoever created, arising or evidenced, whether direct or indirect, joint or several, absolute or contingent, or now or hereafter existing, or due or to become due: (i) all amounts now or hereafter payable by the Issuer under the Letter of Credit Agreement, (ii) all amounts now or hereafter payable by the Trust under the Trust Agreement, (iii) all amounts now or hereafter payable by the Issuer under the Hedge Agreement and (iv) all amounts now or hereafter payable under the Facility Lease and any of the other Operative Documents (in each case whether or not Guarantor or any other Person shall be relieved or released from any or all liability or obligations under any of the Operative Documents, except on account of the full and indefeasible payment of all the Liabilities and full and strict compliance by Guarantor with its obligations hereunder); provided, however, that notwithstanding anything to the contrary contained herein, Guarantor shall not be obligated under any circumstances to pay under this Guaranty, and the term "liabilities" shall not include, any amounts greater than the Lessee (as defined in the Facility Lease) would have had to pay, under the Facility Lease, the Deed of Trust and the other Operative Documents, assuming that such documents were enforced in accordance with their terms (and without giving effect to any discharge or limitation thereon resulting or arising by reason of the bankruptcy or insolvency of the Lessee), plus all reasonable costs actually incurred in enforcing this Guaranty. In any action or proceeding involving any state corporate law, or any state or federal or any other bankruptcy, insolvency, reorganization or any other law affecting the rights of creditors generally, if the obligations of Guarantor under this Guarantee would otherwise be held -2- or determined to be void, invalid or unenforceable, or subordinated to the claims of any other creditors, on account of the amount of its liability under this Guarantee, then, notwithstanding any other provision hereof to the contrary, the amount of such liability shall, without any further action by Guarantor or any other Person, be automatically limited and reduced to the highest amount which is valid and enforceable as determined in such action or proceeding. This Guarantee shall in all respects constitute an absolute and unconditional guaranty of payment and performance (and not of collection), and shall remain in full force and effect until the full and indefeasible payment and performance of all of the Liabilities and all of the Guarantor's obligations hereunder (notwithstanding, without limitation, the dissolution of Guarantor). The liability of Guarantor hereunder may be enforced without the Beneficiaries being required to resort to any other right, remedy or security. The obligations of Guarantor are independent of any obligations under any of the Operative Documents. Each and every default under any of the Operative Documents shall give rise to a separate claim and cause of action hereunder, and separate claims or suits may be made and brought, as the case may be, hereunder as each such default occurs. Agent, on behalf of itself and the Beneficiaries, and the Beneficiaries each may, from time to time at its discretion and without notice to Guarantor, but subject to the provisions of the Facility Lease, take any or all of the following actions: (a) retain or obtain a lien upon or a security interest in any property to secure any of the Liabilities or any obligation hereunder; (b) retain or obtain the primary or secondary obligation of any obligor or obligors, in addition to Guarantor, with respect to any of the Liabilities; (c) extend or renew for one or more periods (regardless of whether longer than the original period), alter or exchange any of the Liabilities, or release or compromise any obligation of Guarantor hereunder or any obligation of any nature of any other obligor with respect to any of the Liabilities; (d) release or fail to perfect its lien upon or security interest in, or impair, surrender, release or permit any substitution or exchange for, all or any part of any property securing any of the Liabilities or any obligation hereunder, or extend or renew for one or more periods (regardless of whether longer than the original period) or release, compromise, alter or exchange any obligations of any nature of any obligor with respect to any such property; and (e) resort to Guarantor for payment of any of the Liabilities, regardless of whether Agent or any other Person shall have resorted to any other Person or to any property securing any of the Liabilities or any obligation hereunder or shall have proceeded against any other obligor primarily or secondarily obligated with respect to any of the Liabilities (all of the actions referred to in this paragraph being hereby expressly waived by Guarantor). Section 2. Guarantor's Obligations Unconditional. Guarantor's obligations hereunder are independent of the obligations of the Issuer, the Trust or any other Person under the Operative Documents, and each Beneficiary may enforce any of its rights hereunder independently of any other right or remedy that it may at any time hold with respect to the Liabilities or any security or other guaranty therefor. Such obligations shall be absolute and unconditional, shall not be subject to any counterclaim, setoff, deduction, diminution, abatement, recoupment, suspension, deferment, reduction or defense (other than full and indefeasible payment and performance of all of the Liabilities and full and strict compliance by Guarantor with its obligations hereunder), whether based upon any claim that the Issuer, the Trust, -3- Guarantor or any other Person may have against any Beneficiary or any other Person or otherwise, and shall remain in full force and effect without regard to, and shall not be released, discharged or in any way affected by, any circumstance or condition whatsoever (whether or not Guarantor or any other Person shall have any knowledge or notice thereof) including, without limitation: (A) any amendment, modification, addition, deletion, supplement or renewal to or of or other change in the Liabilities or any Operative Document or any of the agreements referred to in any thereof, or any other instrument or agreement applicable to any Operative Document or any of the parties to such agreements, or to the Property, or any assignment, mortgage, encumbrance or transfer thereof or of any interest therein, or any furnishing or acceptance of additional security for, guaranty of or right of offset with respect to, any of the Liabilities; or the failure of any security or the failure of any Beneficiary or any other Person to perfect or insure any interest in any collateral; (B) any failure, impossibility, illegality, omission or delay on the part of the Agent, any Beneficiary or any other Person to conform or comply with any term of any instrument or agreement referred to in clause (A) above; (C) any waiver, consent, extension, indulgence, compromise, release or other action or inaction under or in respect of any instrument, agreement, guaranty, right of offset or security referred to in clause (A) above or any obligation or liability of the Agent, any Beneficiary or any other Person, or any exercise or non-exercise by the Agent, any Beneficiary or any other Person of any right, remedy, power or privilege under or in respect of any such instrument, agreement, guaranty, right of offset or security or any such obligation or liability; (D) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or similar proceeding with respect to the Issuer, the Trust, any Beneficiary or any other Person or any of their respective properties or creditors, or any action taken by any trustee, receiver or court in any such proceeding; (E) any limitation on the liability or obligations of any Person under any Operative Document, the Liabilities, any collateral security for the Liabilities, any other guaranty of the Liabilities or any discharge, termination, cancellation, frustration, irregularity, invalidity or unenforceability, in whole or in part, of any of the foregoing or any other agreement, instrument, guaranty or security referred to in clause (A) above or any term of any thereof; (F) any defect in the title, compliance with specifications, condition, design, operation or fitness for use of, or any damage to or loss or destruction of, or any interruption or cessation in the use of the Property or any portion thereof by Guarantor or any other Person for any reason whatsoever (including, without limitation, any governmental prohibition or restriction, condemnation, requisition, seizure or any other act on the part of any governmental or military authority, or any act of God or of the public enemy) regardless of the duration thereof (even though such duration would -4- otherwise constitute a frustration of a lease), whether or not resulting from accident and whether or not without fault on the part of Guarantor or any other Person; (G) any merger or consolidation of Guarantor into or with any other Person, or any sale, lease or transfer of any of the assets of Guarantor to any other Person; (H) any change in the ownership of any shares of capital stock of Guarantor or any corporate change in Guarantor; (I) any loan to or other transaction between any of the Beneficiaries or any other Person and Guarantor; (J) any recovery of judgment against the Issuer, the Trust, or the Guarantor by any levy of any writ or process of execution under any such judgment; (K) absence of any notice to, or knowledge of, Guarantor of the existence or occurrence of any of the foregoing clauses (A) through (J); or (L) any other occurrence or circumstance whatsoever (other than full and indefeasible payment and performance of all of the Liabilities and all of Guarantor's obligations hereunder), whether similar or dissimilar to the foregoing, and any other circumstance that might otherwise constitute a legal or equitable defense or discharge of the liabilities of a guarantor or surety or that might otherwise limit recourse against Guarantor. The obligations of Guarantor set forth herein constitute the full recourse obligations of Guarantor enforceable against it to the full extent of all its assets and properties, notwithstanding any provision in any Operative Document or any other document or agreement to the contrary. Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Liabilities and notice of or proof of reliance by the Agent, any Beneficiary or any other Person upon this Guarantee or acceptance of this Guarantee, and the Liabilities, and any of them, shall conclusively be deemed to have been created, contracted or incurred in reliance upon this Guarantee. Guarantor unconditionally waives, to the extent permitted by law: (a) acceptance of this Guarantee and proof of reliance by any Beneficiary or any other Person hereon; (b) notice of any of the matters referred to in clauses (A) through (I) above, or any right to consent or assent to any thereof; (c) all notices that may be required by statute, rule of law or otherwise, now or hereafter in effect, to preserve intact any rights against Guarantor, including, without limitation, any demand, presentment, protest, proof or notice of nonpayment under any Operative Document, and notice of default or any failure on the part of and Person to perform and comply with any covenant, agreement, term or condition of any Operative Document; (d) any right to the enforcement, assertion or exercise against the Issuer or the Trust of any right, power, privilege or remedy conferred in any Operative Document or otherwise; (e) any requirement of diligence on the part of any Person; (f) any requirement of any Beneficiary or any other Person to take any action whatsoever, to exhaust any remedies, proceed first against the Issuer or the Trust or to mitigate the damages resulting from a default by any Person under any Operative Document; (g) -5- any notice of any sale, transfer or other disposition by any Person of any right under, title to or interest in any Operative Document or the Property; and (h) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge, release or defense of a guarantor or surety, or that might otherwise limit recourse against Guarantor. Guarantor agrees that this Guarantee shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of itself, the Issuer or the Trust is rescinded or must be otherwise restored by any Beneficiary, whether as a result of any proceedings in bankruptcy or reorganization or otherwise. Guarantor further agrees that, without limiting the generality of this Guarantee, if any default under any Operative Document shall have occurred and be continuing and any Beneficiary is prevented by applicable law from exercising its remedies under the Operative Documents, such Beneficiary shall be entitled to receive hereunder from Guarantor, upon demand therefor, the sums which would have otherwise been due had such remedies been exercised. In addition, Guarantor assumes the responsibility for being and keeping itself informed of the financial condition of the Issuer and the Trust and of all the circumstances bearing upon the risk of nonpayment of the Liabilities that diligent inquiry would reveal, and that absent a request for such information by Guarantor, the Beneficiaries shall have no duty to advise Guarantor of information known to them regarding such condition any such circumstance. Section 3. Waivers. (a) Guarantor hereby irrevocably waives any claim or other rights which it may now or hereafter acquire against the Issuer or the Trust arising from the existence, payment, performance or enforcement of such Guarantor's obligations under this Guarantee or any other Operative Document, including any right of subrogation, reimbursement, contribution, exoneration, or indemnification, any right to participate in any claim or remedy of any Beneficiary against the Issuer or the Trust or any property or assets now or hereafter constituting part of the Owner Trust Estate (as defined in the Trust Agreement), whether or not such claim, remedy or right arises in equity, or under contract, statute or common law. If any amount shall be paid to Guarantor in violation of the preceding sentence and the Liabilities shall not have been indefeasibly paid in cash, such amount shall be deemed to have been paid to Guarantor for the benefit of, and held in trust for, the Beneficiaries, and shall forthwith be paid to the Agent to be credited and applied pursuant to the terms of the Operative Documents. Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by the Operative Documents and that the waiver set forth in this paragraph is knowingly made in contemplation of such benefits. (b) Guarantor hereby absolutely, unconditionally and irrevocably waives and agrees not to assert or take advantage of any defense based upon an election of remedies by Owner Trustee, Agent or any other Beneficiary or other Person. -6- (c) Guarantor hereby waives all rights and defenses that the Guarantor may have because any of the Liabilities is secured by real property. This means, among other things: (i) the Beneficiaries may collect from Guarantor without first foreclosing on any real or personal property collateral pledged by the Issuer or the Trust; (ii) if the Beneficiaries foreclose on any real property collateral pledged with respect to the Liabilities: (A) the amount of the Liabilities may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price; (B) the Beneficiaries may collect from Guarantor even if the Beneficiaries, by foreclosing on the real property collateral, have destroyed any right Guarantor may have to collect from the Issuer or the Trust. This is an unconditional and irrevocable waiver of any rights and defenses Guarantor may have because the Liabilities are secured by real property. (d) Guarantor hereby waives the pleading of any statute of limitation as a defense to its obligations hereunder. Section 4. Reasonableness and Effect of Waivers. Guarantor warrants and agrees that each of the waivers set forth in this Guarantee is made with full knowledge of its significance and consequences and that, under the circumstances, the waivers are reasonable and not contrary to public policy or law. If any of such waivers are determined to be contrary to any applicable law or public policy, such waivers shall be effective only to the maximum extent permitted by law. Section 5. Transfers by Beneficiaries. Each Beneficiary may, from time to time, whether before or after any discontinuance of this Guarantee, at its sole discretion and without notice to Guarantor, assign or transfer any or all of its portion of the Liabilities or any interest therein in accordance with the terms and conditions of the Operative Documents; and, notwithstanding any such assignment or transfer or any subsequent assignment or transfer thereof, such Liabilities shall be and remain Liabilities for the purposes of this Guarantee, and each and every immediate and successive assignee or transferee of any of the Liabilities or of any interest therein shall, to the extent of such assignee's or transferee's interest in the Liabilities, be entitled to the benefits of this Guarantee to the same extent as if such assignee or transferee were such Beneficiary. Section 6. No Waiver by Beneficiaries. No delay in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy; nor shall any modification or waiver of any of the provisions of this Guarantee be binding upon any Beneficiary except as expressly set forth in a writing duly signed and delivered on its behalf. No action permitted hereunder shall in any way affect or impair any Beneficiary's rights or Guarantor's obligations under this Guarantee. For the purposes of this Guarantee, Liabilities shall include all of the obligations described in the definition thereof, notwithstanding any right -7- or power of Guarantor or anyone else to assert any claim or defense as to the invalidity or unenforceability of any such obligation, and no such claim or defense shall affect or impair the obligations of Guarantor hereunder. Guarantor's obligations under this Guarantee shall be absolute and unconditional irrespective of any circumstance whatsoever which might constitute a legal or equitable discharge or defense of Guarantor other than proof of indefeasible satisfaction or indefeasible payment in full of the Liabilities guaranteed hereunder. Guarantor hereby acknowledges that there are no conditions to the effectiveness of this Guarantee. Section 7. Successors and Assigns. This Guarantee shall be binding upon Guarantor and upon Guarantor's successors and assigns; and all references herein to Guarantor shall be deemed to include any successor or successors, whether immediate or remote, to such Person. Section 8. Severability. Wherever possible, each provision of this Guarantee shall be interpreted in such manner as to be effective and valid under all Law (as defined in the Facility Lease), but if any provision of this Guarantee shall be prohibited by or invalid thereunder, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Guarantee. Section 9. Notices. All notices, demands, requests, consents, approvals, certificate or other communications required under this Agreement to be in writing shall be sufficiently given and shall be deemed to have been properly given (i) if delivered by hand, when written confirmation of delivery is received by the sender, (ii) three days after the same is mailed by certified mail, postage prepaid, return receipt requested, or (iii) if sent by overnight courier, 24 hours after delivery to such overnight courier, addressed to the person to whom any such notice, demand, request, approval, certificate or other communication is to be given, at the appropriate address of such person as designated below: If to the Guarantor at: Human Genome Sciences, Inc. 9410 Key West Avenue Rockville, Maryland 20850 Attention: Steven C. Mayer Senior Vice President And CFO Tel: (301) 340-3444 Fax: (301) 309-0092 and Human Genome Sciences, Inc. 9410 Key West Avenue Rockville, Maryland 20850 Attention: James H. Davis. Esquire Senior Vice President and General Counsel Tel: (301) 251-6039 Fax: (301) 517-8831 -8- If to the Agent at: Allfirst Bank 6303 Ivy Lane, Suite 200 Greenbelt, Maryland 20770 Attention: Joseph C. LeMense Senior Vice President Tel: (301) 397-5057 Fax: (301) 397-5666 Section 10. Governing Law. This Guarantee shall be governed by the internal law of the State of Maryland as to all matters of construction, validity and performance, without regard to conflicts of law principles. Section 11. Submission to Jurisdiction. Guarantor hereto irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Guarantee or any other Operative Document, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of any federal or state court sitting in Montgomery County or Baltimore City, Maryland; (b) consents that any such action or proceedings may be brought to such courts, and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to such party at its address set forth above; and (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction. Section 12. Jury Trial. GUARANTOR HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS GUARANTEE OR ANY OTHER OPERATIVE DOCUMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS GUARANTEE OR ANY OTHER OPERATIVE DOCUMENT AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. [SIGNATURE PAGE FOLLOWS] -9- IN WITNESS WHEREOF, Guarantor has caused this Guarantee to be executed and delivered as of the date first above written. WITNESS: HUMAN GENOME SCIENCES, INC., as Pledgor By: /s/ STEVEN C. MAYER (SEAL) - ------------------------ ----------------------------------- Steven C. Mayer Senior Vice President and Chief Financial Officer -10- EX-10.25 12 w58882ex10-25.txt AMENDMENT TO LEASE AGREEMENT Exhibit 10.25 AMENDMENT NO. 1 TO LEASE AGREEMENT THIS AMENDMENT NO. 1 TO LEASE AGREEMENT (this "Amendment") dated as of March 29, 2002, but effective as of October 25, 2001, is made by and between WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION, not in its individual capacity, but solely as Owner Trustee under that certain Trust Agreement dated as of October 25, 2001 ("Lessor") and HUMAN GENOME SCIENCES, INC., a Delaware corporation ("Lessee"), and joined in by VAL T. ORTON, not in his individual capacity, but solely as Maryland Trustee appointed pursuant to that certain Trust Agreement dated as of October 25, 2001 (the "Maryland Trustee") RECITALS A. Lessor and Lessee are parties to that certain Lease Agreement dated as of October 25, 2001 (the "Facility Lease"), pursuant to which Lessor, acting through the Maryland Trustee, subleased the premises more particularly described in Exhibit A to the Facility Lease (the "Property") to Lessee, and Lessee subleased the Property from Lessor, acting through the Maryland Trustee, as evidenced by the execution and recordation of the Lease Supplement. B. Lessor and Lessee have agreed to enter into this Amendment for the sole purpose of confirming and clarifying the intent of the parties as provided herein. AGREEMENTS NOW, THEREFORE, for and in consideration of the terms of this Amendment and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lessor and Lessee agree as follows: 1. Capitalized Terms. Capitalized terms used herein but not otherwise defined herein shall have the meanings assigned thereto in the Facility Lease. 2. Amendments to Paragraph 2 of the Facility Lease. Paragraph 2 of the Facility Lease is hereby amended to add the following definitions thereto: "Claim has the meaning given to such term in the Deed of Trust." "Construction Recourse Amount means, with respect to the Additional Improvements, as of any date of determination, an amount to be determined equal to the sum of (i) 100% of the acquisition cost of the Land (if any) and (ii) 89.9% of accrued Facility Costs, plus (iii) any amounts owed pursuant to Section 5.1 and/or Section 5.5(b) of the Deed of Trust in any way relating to or arising out of a Specified Event and (iv) any amounts owed pursuant to Section 5.2 of the Deed of Trust and (v) indemnities payable pursuant to Section 5.4 of the Deed of Trust in respect of amounts payable pursuant to clauses (iii) and (iv), above." "Facility Costs has the meaning given to such term in clause (i) of the definition of "Facility Costs" in the Indenture." 1 "Indemnitee has the meaning given to such term in the Deed of Trust." "Specified Event means (i) an Event of Default described in clause (viii) of Paragraph 17(a), (ii) fraud, misapplication of funds, illegal acts or willful misconduct on the part of Lessee, any third party (including, without limitation, any subcontractor) for which Lessee has control or supervisory authority or delegated responsibility by contract or otherwise and their respective employees, officers and agents, (iii) any act or failure to act by Lessee, any third party (including, without limitation, any subcontractor) for which Lessee has control or supervisory authority or delegated responsibility by contract or otherwise and their respective employees, officers and agents (other than failure to complete construction of the Additional Improvements or to cause construction of the Additional Improvements to be completed prior to the expiration of the Construction Period) or (iv) any environmental condition existing with respect to the Property or the Land before the Commencement Date." "Subsequent Holder Advances has the meaning given to such term in the Trust Agreement. 3. Amendment to Paragraph 17 of the Facility Lease. Paragraph 17 of the Facility Lease is hereby amended to add the following subparagraph (f): "(f) Limitation of Recourse Liability. Notwithstanding anything set forth in this Paragraph 17 to the contrary, during the Construction Period, upon the occurrence of an Event of Default, unless such Event of Default is, is caused by or results from a Specified Event (in which event the limitations contained in this subparagraph(f) shall not apply), the aggregate amount payable by Lessee on a recourse basis under this Paragraph 17 in respect of the portion of the Lease Balance advanced in connection with the construction of the Additional Improvements (the "Construction Lease Balance") shall be limited to the Construction Recourse Amount. Concurrently with the payment of the Construction Recourse Amount, Lessee shall, immediately upon request by Lessor, relinquish possession of the Property in the condition required by this Lease, subject only to the Head Lease and the Deed of Trust and, immediately upon request by Lessor, convey by deed or other instrument all of Lessee's right, title and interest in and to the Property to Lessor or a party designated by Lessor, subject only to the Head Lease and the Deed of Trust. The foregoing limitation on recourse liability will not apply (i) with respect to any Event of Default caused by or resulting from a Specified Event, (ii) any portion of the Lease Balance other than the Construction Lease Balance (the "Completed Property Lease Balance") or (iii) from and after the Substantial Completion Date. Notwithstanding the foregoing limitation on recourse liability, (x) Lessee shall have full recourse liability for the Completed Property Lease Balance, (y) Lessor shall have the right to proceed against the Property (including, without limitation, the Additional Improvements) and the Land and to exercise any and all rights and remedies hereunder and under the other Operative Documents with respect to the Property and to recover the remaining outstanding Lease Balance and all other amounts due and owing hereunder and under the other Operative Documents from the proceeds of any sale, lease or other disposition thereof, and (z) each Indemnitee shall have the right to seek indemnification from Lessee for any Claim pursuant to Article V of the Deed of Trust." 2 4. Amendment to Exhibit C to the Facility Lease. Exhibit C to the Facility Lease is hereby amended and restated as follows: "BASIC RENT Subject to adjustment as provided in Paragraph 6(b) of this Lease, Basic Rent, on each Payment Date, shall be an amount equal to the sum of (i) the amount of interest payable on the aggregate sum of the outstanding principal amount of the Bonds as of such Payment Date, (ii) the yield payable on the aggregate sum of the outstanding principal amount of the Certificate as of such Payment Date, and (iii) any other amounts and costs payable or reimbursable pursuant to the Operative Documents as of such Payment Date, including, without limitation, any amounts to be paid or reimbursable by the Issuer, and the Lessor under the MEDCO Note, the Letter of Credit Documents and the Head Lease; provided, however, during the Construction Period, (a) the interest payable on that portion of the aggregate sum of the outstanding principal amount of the Bonds used to establish the Facility Fund shall be treated as Facility Costs and paid by the Lessee from the Facility Fund and (b) the yield payable on that portion of the aggregate sum of the outstanding principal amount of the Certificate used to fund Subsequent Holder Advances shall be capitalized and added to the outstanding principal amount of the Certificate in accordance with Section 3.2(c) of the Trust Agreement." 5. No Default or Event of Default. Lessee represents and warrants to Lessor that, as of the date hereof, no Default or Event of Default has occurred and is continuing, or will occur as a result of, or after giving effect to, this Amendment. 6. Ratification of Facility Lease. Except as expressly amended by this Amendment, the Facility Lease is hereby ratified and reaffirmed and shall continue in full force and effect. 7. Applicable Law. This Amendment shall be governed by the laws of the State of Maryland. 8. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original for all purposes, and all counterparts shall together constitute one and the same instrument. 9. Joinder by Maryland Trustee. The Maryland Trustee joins herein for the sole purpose of acknowledging and agreeing to be bound by the terms, conditions and provisions of this Amendment. 3 IN WITNESS WHEREOF, Lessor and Lessee have caused this Amendment to be signed on their behalf, under seal, by their respective signatories thereunto duly organized as of the date first above written. LESSOR: ------ WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION, not in its individual capacity, but solely as Owner Trustee By: /s/ Val T. Orton ------------------------------------ Name: Val T. Orton ------------------------------------ Title: Vice President ------------------------------------ LESSEE: ------ HUMAN GENOME SCIENCES, INC. By: /s/ Steven C. Mayer ------------------------------------ Name: Steven C. Mayer ------------------------------------ Title: Senior Vice President and CFO ------------------------------------ MARYLAND TRUSTEE: -------------------------- /s/ Val T. Orton ------------------------------------------- Val T. Orton, not in his individual capacity, but solely as Maryland Trustee appointed pursuant to that certain Trust Agreement dated as of October 25, 2001 4 ACKNOWLEDGED AND APPROVED BY: MARYLAND ECONOMIC DEVELOPMENT CORPORATION, as Head Lessor and Issuer By: /s/ Hans F. Mayer ------------------------------ Name: Hans F. Mayer ------------------------------ Title: Executive Director ------------------------------ ALLFIRST TRUST COMPANY NATIONAL ASSOCIATION, as Bond Trustee By: /s/ David L. Williams ------------------------------ Name: David L. Williams ------------------------------ Title: Senior Vice President ------------------------------ ALLFIRST BANK, as Credit Facility Provider, Agent and Certificate Holder By: /s/ Joseph C. Lemense ------------------------------ Name: Joseph C. Lemense ------------------------------ Title: Senior Vice President ------------------------------ 5 EX-10.26 13 w58882ex10-26.txt AMENDMENT TO GUARANTEE Exhibit 10.26 AMENDMENT NO. 1 TO GUARANTEE THIS AMENDMENT NO. 1 TO GUARANTEE (this "Amendment") dated as of March 29, 2002, but effective as of October 25, 2001, is made by and between HUMAN GENOME SCIENCES, INC., a Delaware corporation ("Guarantor") and ALLFIRST BANK, a Maryland banking corporation, as agent ("Agent"). RECITALS A. Guarantor executed a certain Guarantee in favor of Agent dated as of October 25, 2001 (the "Guarantee"), pursuant to which Guarantor irrevocably and unconditionally guaranteed to Agent, for the benefit of the Beneficiaries, the full and prompt payment when due, whether by acceleration or otherwise, and at all times thereafter, and the full and prompt performance of, certain Liabilities. B. Guarantor and Agent have agreed to enter into this Amendment for the sole purpose of confirming and clarifying the intent of the parties regarding the Beneficiaries of the Guarantee during the Construction Period (as defined in the Facility Lease). AGREEMENTS NOW, THEREFORE, for and in consideration of the terms of this Amendment and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor and Agent agree as follows: 1. Capitalized Terms. Capitalized terms used herein but not otherwise defined herein shall have the meanings assigned thereto in the Guarantee. 2. Amendment to Section 1 of the Guarantee. The first paragraph of Section 1 of the Guarantee is hereby amended and restated as follows: "Guarantor hereby irrevocably and unconditionally guarantees to the Agent, for the benefit of the Beneficiaries (as hereinafter defined), the full and prompt payment when due, whether by acceleration or otherwise, and at all times thereafter, and the full and prompt performance of, all of the Liabilities (as hereinafter defined), including interest and yield on any such Liabilities, whether accruing before or after any bankruptcy or insolvency case or proceeding involving Guarantor or any other Person (as defined in the Facility Lease), and, if interest or yield on any portion of such obligations ceases to accrue by operation of law by reason of the commencement of such case or proceeding, including such interest and yield as would have accrued on any such portion of such obligations if such case or proceeding had not commenced, and further agrees to pay all expenses (including attorneys' fees and legal expenses) paid or incurred by any Beneficiary in endeavoring to collect the Liabilities, or any part thereof, and in enforcing this Guarantee. The term "Liabilities", as used herein, shall mean all of the following (without duplication), in each case howsoever created, arising or evidenced, whether direct or indirect, joint or several, absolute or contingent, or now or hereafter existing, or due or 1 to become due: (i) all amounts now or hereafter payable by the Issuer under the Letter of Credit Agreement, (ii) all amounts now or hereafter payable by the Trust under the Trust Agreement, (iii) all amounts now or hereafter payable by the Issuer under the Hedge Agreement and (iv) all amounts now or hereafter payable under the Facility Lease and any of the other Operative Documents (in each case whether or not Guarantor or any other Person shall be relieved or released from any or all liability or obligations under any of the Operative Documents, except on account of the full and indefeasible payment of all the Liabilities and full and strict compliance by Guarantor with its obligations hereunder); provided, however, that notwithstanding anything to the contrary contained herein, Guarantor shall not be obligated under any circumstances to pay under this Guaranty, and the term "Liabilities" shall not include, any amounts greater than the Lessee (as defined in the Facility Lease) would have had to pay, under the Facility Lease, the Deed of Trust and the other Operative Documents, assuming that such documents were enforced in accordance with their terms (and without giving effect to any discharge or limitation thereon resulting or arising by reason of the bankruptcy or insolvency of the Lessee), plus all reasonable costs actually incurred in enforcing this Guarantee. The term "Beneficiary" and "Beneficiaries", as used herein, means (individually and collectively) the following: (a) during the Construction Period, the Agent, for the sole benefit of the Lessor (as defined in the Facility Lease), solely with respect to any Liabilities attributable to the construction of the Additional Improvements (as defined in the Facility Lease), and the Agent, for the benefit of the Bank and the Hedge Counterparty, and their respective successors and permitted assigns, with respect to all other Liabilities, and (b) upon completion of construction of the Additional Improvements in accordance with the Facility Lease, the Agent, for the benefit of the Bank and the Hedge Counterparty, and their respective successors and permitted assigns, with respect to all Liabilities." 3. Ratification of Guarantee. Except as expressly amended by this Amendment, the Guarantee is hereby ratified and reaffirmed and shall continue in full force and effect. 4. Applicable Law. This Amendment shall be governed by the laws of the State of Maryland. 5. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original for all purposes, and all counterparts shall together constitute one and the same instrument. 2 IN WITNESS WHEREOF, Guarantor and Agent have caused this Amendment to be signed on their behalf, under seal, by their respective signatories thereunto duly organized as of the date first above written. GUARANTOR: --------- HUMAN GENOME SCIENCES, INC. By: /s/ Steven C. Mayer ----------------------------- Name: Steven C. Mayer ----------------------------- Title: Senior Vice President & CFO ----------------------------- AGENT: ----- ALLFIRST BANK, as Agent By: /s/ Joseph C. Lemense ----------------------------- Name: Joseph C. Lemense ----------------------------- Title: Senior Vice President ----------------------------- 3 ACKNOWLEDGED AND APPROVED BY: ALLFIRST BANK, as Credit Facility Provider and Certificate Holder By: /s/ Joseph C. Lemense ------------------------------ Name: Joseph C. Lemense ------------------------------ Title: Senior Vice President ------------------------------ WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION, not in its individual capacity, but solely as Owner Trustee, as Lessor By: /s/ Val T. Orton ------------------------------ Name: Val T. Orton ------------------------------ Title: Vice President ------------------------------ 4 EX-12.1 14 w58882ex12-1.txt RATIO OF EARNINGS TO FIXED CHARGES EXHBIT 12.1
Ratio of Earnings to Fixed Charges Year Ended December 31, 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Fixed Charges: Interest expense on indebtedness (including amortization of debt expense and discount) $ 22,347 $ 36,082 $ 14,146 $ 191 $ 446 Interest expense on portion of rent expense representative of interest 6,159 3,251 2,951 1,299 1,072 --------- --------- --------- --------- --------- Total Fixed Charges $ 28,506 $ 39,333 $ 17,097 $ 1,490 $ 1,518 ========= ========= ========= ========= ========= Earnings (Loss): Net loss before provision for income taxes and cumulative effect of change in accounting principle $(117,152) $(235,331) $ (41,944) $ (22,957) $ (21,148) Fixed charges per above 28,506 39,333 17,097 1,490 1,518 --------- --------- --------- --------- --------- Total Earnings (Loss) $ (88,646) $(195,998) $ (24,847) $ (21,467) $ (19,630) ========= ========= ========= ========= ========= Ratio of Earnings to Fixed Charges -- -- -- -- -- Coverage deficiency (1)(2) $(117,152) $(235,331) $ (41,944) $ (22,957) $ (21,148) ========= ========= ========= ========= =========
(1) The Company's Coverage deficiency for 2001 includes non-recurring charges aggregating $26,208 arising from the Company's impairment charge relating to its investment in Transgene and debt conversion expenses of $22,314 and $3,894, respectively. (2) The Company's Coverage deficiency for 2000 includes non-recurring charges aggregating $184,868 arising from purchased in-process research and development and debt conversion expenses of $134,050 and $50,818, respectively. EX-21.1 15 w58882ex21-1.txt SUBSIDIARIES EXHBIT 21.1 Subsidiaries
Name Jurisdiction of Incorporation ---- ----------------------------- Principia Pharmaceutical Corporation Delaware Traville LLC Maryland
EX-23.1 16 w58882ex23-1.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference of our report dated February 12, 2002, with respect to the consolidated financial statements of Human Genome Sciences, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2001, in the following Registration Statements: (1) Registration Statement Number 33-79020 on Form S-8 (2) Registration Statement Number 33-79022 on Form S-8 (3) Registration Statement Number 333-85319 on Form S-3 (4) Registration Statement Number 333-96387 on Form S-3 (5) Registration Statement Number 333-33252 on Form S-3 (6) Registration Statement Number 333-36384 on Form S-3 (7) Registration Statement Number 333-44798 on Form S-8 (8) Registration Statement Number 333-45272 on Form S-3 (9) Registration Statement Number 333-46298 on Form S-8 (10) Registration Statement Number 333-47292 on Form S-3 (11) Registration Statement Number 333-66670 on Form S-8 /s/ Ernst & Young LLP McLean, Virginia March 28, 2002 -----END PRIVACY-ENHANCED MESSAGE-----