Document:

exv10w37

 

Exhibit 10.37

COLLATERAL PLEDGE AND SECURITY AGREEMENT

AND

CONTROL AGREEMENT

Among

AVALON PHARMACEUTICALS, INC.,

as Pledgor,

MANUFACTURERS AND TRADERS TRUST COMPANY,

as Bank

and

ALLFIRST TRUST COMPANY NATIONAL ASSOCIATION

as Securities Intermediary

Dated as of
April 1, 2003

 

 

COLLATERAL PLEDGE AND SECURITY AGREEMENT

AND CONTROL AGREEMENT

     THIS COLLATERAL PLEDGE AND SECURITY AGREEMENT AND CONTROL AGREEMENT (this “Agreement”)
is dated as of April 1, 2003 and is among AVALON PHARMACEUTICALS, INC., a Delaware corporation
qualified to do business in the State of Maryland (the “Pledgor”), MANUFACTURERS AND TRADERS TRUST
COMPANY, a New York banking corporation (the “Bank”), and ALLFIRST TRUST COMPANY NATIONAL
ASSOCIATION (the “Securities Intermediary”).

RECITALS

     WHEREAS, pursuant to and in accordance with the Maryland Industrial Development
Financing Authority Act, Article 83A, Title 5, Subtitle 9 of the Annotated Code of Maryland, and
the Maryland Economic Development Revenue Bond Act, Article 41, §14-101 et seq., of the Annotated
Code of Maryland (collectively, the “Acts”), and pursuant to a certain Trust Indenture, dated as
of even date herewith (the “Indenture”), by and between Maryland Industrial Development Financing
Authority (the “Issuer”) and Allfirst Bank National Association, as Trustee (the “Trustee”), the
Issuer has determined to issue and sell $12,000,000 in the original principal amount of its
Taxable Variable Rate Demand Revenue Bonds (Avalon Pharmaceuticals, Inc. Facility) Series 2003
(the “Bonds”) and to lend the proceeds thereof to the Pledgor under the terms and conditions of a
certain Loan Agreement of even date herewith by and between the Issuer and the Pledgor (the “Loan
Agreement”) to finance a portion of the construction of certain tenant improvements and the
purchase and installation of certain equipment for wet lab space and office space located at 20358
Seneca Meadows Parkway, Germantown, Maryland (collectively, the “Facility”) as more fully
described under that certain Lease, dated as of July 15, 2002, by and between the Pledgor, as
tenant, and Westphalia Center II Limited Partnership, as landlord (“Lease”).

     WHEREAS, in order to enhance the marketability of the Bonds and pursuant to a Letter of
Credit Agreement dated of even date herewith (the “Letter of Credit Agreement”) between
the Pledgor and the Bank, the Bank has agreed to issue to the Trustee its irrevocable transferable
letter of credit in the amount of $12,197,260.00 to provide payment for and secure the payment of
the principal of and interest on, and the purchase price of, the Bonds.

     WHEREAS, as a condition precedent to the consummation of the transactions contemplated by the
Letter of Credit Documents (as defined in the Letter of Credit Agreement), the Bank will require
the Pledgor to post and maintain cash collateral and/or securities in an Account (as defined
hereinafter), which Account shall be pledged to the Bank as security for the Pledgor’s Letter of
Credit Obligations (as defined in the Letter of Credit Agreement) in accordance with the terms of
this Agreement.

     WHEREAS, pursuant to and in accordance with the MIDFA Act, Maryland Industrial Development
Financing Authority, in its capacity as insurer (“MIDFA”), is providing financial assistance by
insuring through its Industrial Development Fund thirty percent (30%) of the outstanding balance of
the Letter of Credit subject to a reduction in the amount insured by MIDFA to twenty-five (25%) of
the outstanding balance of the Letter of Credit if a certain event

 

 

fails to occur as further described in the Insurance Agreement of even date herewith by and
between MIDFA, the Bank and the Pledgor (the “Insurance Agreement”); and

     WHEREAS, in addition, the parties hereto desire to evidence their agreements and
understandings related to the Account.

     NOW, THEREFORE, in consideration of the premises and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

SECTION 1

DEFINED TERMS; RULES OF CONSTRUCTION

     1.1 Defined Terms. All capitalized terms used in this Agreement but not defined
below or elsewhere in this Agreement shall have the same meanings assigned to them in the Letter
of Credit Agreement; provided, however that unless varied by this Agreement, all terms
used herein which are defined by the Uniform Commercial Code shall have the same meanings
hereunder as assigned to them by the Uniform Commercial Code. As used in this Agreement, the
following terms shall have the meanings set forth below:

     “Account” shall have the meaning set forth in Section 2.1 (a).

     “Account Agreement” shall mean the [name of account] dated [date of account]
between the Pledgor and the Securities Intermediary.

     “Acts” shall have the meaning set forth in the recitals hereto.

     “Adjusted Market Value” shall mean, with respect to Properly Margined Cash
Collateral, the sum of the Adjusted Market Value (Item) of each Permitted Investment constituting
Properly Margined Cash Collateral in respect of an Account on each date such Cash Collateral is
marked-to-market in accordance with this Agreement.

     “Adjusted Market Value (Item)” shall mean with respect to each Permitted Investment
that constitutes Cash Collateral on any date that the securities in the Account are marked-to-market, the product of the Fair Market Value of each Permitted Investment on such date multiplied
by the percentage in the table set forth as Schedule 1 attached hereto and made a part
hereof, under the column marked “Advance Rate to Maintain Properly Margined Cash Collateral”
opposite the type of investment category into which such Permitted Investment falls.

     “Agreement” shall have the meaning set forth in the introductory paragraph.

     “Bank” shall have the meaning set forth in the introductory paragraph.

     “Bonds” shall have the meaning set forth in the recitals hereto.

     “Cash Collateral” shall have the meaning set forth in Section 2.1 hereof.

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     “Cash Collateral Test Date” shall mean the last day of each calendar month or such
other date on which the Bank reasonably requests the Pledgor to mark-to-market the Cash
Collateral in the Account.

     “Facility” shall have the meaning set forth in the recitals hereto.

     “Fair Market Value” shall mean, with respect to any Cash Collateral, the closing bid
price of each item of Cash Collateral on the day the Cash Collateral is marked-to-market, plus in
the case of Cash Collateral issued on a coupon basis, accrued and unpaid interest and yield
thereon until such date.

     “Indenture” shall have the meaning set forth in the recitals hereto.

     “Insurance Agreement” shall have the meaning set forth in the recitals hereto.

     “Insurance Step Down” shall have the meaning set forth in Section 2.3(b)(i).

     “Issuer” shall have the meaning set forth in the recitals hereto.

     “Lease” shall have the meaning set forth in the recitals hereto.

     “Letter of Credit Agreement” shall have the meaning set forth in the recitals
hereto.

     “Lien” shall mean any deed of trust, mortgage, 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 applicable law.

     “Loan Agreement” shall have the meaning set forth in the recitals hereto.

     “MIDFA” shall have the meaning set forth in the recitals hereto.

     “Minimum Required Cash Collateral Amount” shall mean Properly Margined Cash
Collateral, with an Adjusted Market Value of no less than $6,700,000 which amount shall be
increased and decreased in accordance with Section 2.3 hereof.

     “Permitted
Investments” shall mean the investments set forth on Exhibit A,
attached hereto and made a part hereof, in each case payable in dollars of the United States of
America and payable in the United States of America.

     “Pledgor” shall have the meaning set forth in the introductory paragraph.

     “Properly Margined Cash Collateral” shall mean Cash Collateral, the amount of which
is determined on the basis of Properly Margined Cash Collateral Coverage.

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     “Properly Margined Cash Collateral Coverage” shall mean Cash 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 terms set forth in this Agreement.

     “Securities Intermediary” shall have the meaning set forth in the introductory
paragraph.

     “Trustee” shall have the meaning set forth in the recitals hereto.

     “Uniform Commercial Code” or “UCC” shall mean the Uniform Commercial Code in effect
in the State of Maryland.

     1.2
Rules of Construction.

     (a) The words “hereof, “herein”, “hereunder”, “hereto”, and other words of similar
import refer to this Agreement in its entirety.

     (b) The terms “agree” and “agreements” contained herein are intended to include and
mean “covenant” and “covenants”.

     (c) References to Articles, Sections, and other subdivisions of this Agreement are to
the designated Articles, Sections, and other subdivisions of this Agreement as originally
executed.

     (d) The headings of this Agreement are for convenience only and shall not define or
limit the provisions hereof.

     (e) All references made (i) in the neuter, masculine or feminine gender shall be deemed
to have been made in all such genders, and (ii) in the singular or plural number shall be
deemed to have been made, respectively, in the plural or singular number as well.

SECTION 2

PLEDGE AND MAINTENANCE OF COLLATERAL

     2.1 Grant of Security Interest in Cash Collateral. In order to secure its obligations
under the Letter of Credit Agreement and the other Letter of Credit Documents, the Pledgor hereby
unconditionally, irrevocably and presently assigns, mortgages, conveys, pledges, hypothecates and
delivers to the Bank a first priority security interest in, all right, title and interest of the
Pledgor in and to:

     (a) Account number 80366 maintained by the Securities Intermediary in the name of
Pledgor or for the benefit of Pledgor, and all successor and replacement accounts,
regardless of the numbers of such accounts or the offices at which such accounts are
maintained (collectively, any or all of the foregoing may be referred to herein as the
“Account”) and all rights of the Pledgor in connection with the Account, and all investment
property, security entitlements, financial assets, certificated securities, uncertificated
securities (including without limitation mutual funds shares), money, deposit accounts,
bonds, instruments, general intangibles and all other investments or

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property of any sort now or hereafter held, maintained or administered in the Account in
the name of or for the benefit of the Pledgor;

     (b) All rollovers, renewals or reinvestments of any of the foregoing property;

     (c) All stock or conversion rights, rights to subscribe, liquidation dividends or
preferences, stock dividends, dividends, rights to interest, interest payments, dividends
paid in stock, rights under hedge or derivative transactions, equity swaps, caps, floors or
collars, new securities or other property which the Pledgor is or may hereafter become
entitled to receive on account of or related to any of the foregoing property;

     (d) All rights, claims and causes of action, if any, that the Pledgor may have against
the Securities Intermediary or any other person in respect of any of the foregoing; and

     (e) The proceeds (including, without limitation, insurance proceeds from the Federal
Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation or the
Securities Investor Protection Corporation or any other governmental or private insurance
company) of any of the foregoing or replacements thereof or substitutions therefor (the
Account and the contents and proceeds thereof and all other items (if any) described in
subsections (a) through (e) being hereinafter referred to collectively as the “Cash
Collateral”);

     provided,
however, that the Bank’s security interest in the Cash Collateral shall not
exceed at any time the Minimum Required Cash Collateral Amount.

     2.2
Maintenance of Minimum Required Cash Collateral Amount.

     (a) The Pledgor shall maintain Cash Collateral in the Account on the basis of the
Properly Margined Cash Collateral Coverage and shall deliver to the Securities
Intermediary, within two (2) Business Days after demand therefor, additional Permitted
Investments so that the Adjusted Market Value of the Cash Collateral held in the Account is
not less than the Minimum Required Cash Collateral Amount.

     (b) The Pledgor covenants that the Bank has and shall at all times continue to have a
perfected first priority security interest in the Account and the Cash Collateral to the
extent provided in Section 2.1 hereof. At any time the Pledgor is required to provide
additional Cash Collateral to the Securities Intermediary as provided in this Agreement, the
Pledgor shall pledge, free and clear of all Liens, additional Cash Collateral to the Bank
and deliver such additional Cash Collateral to the Securities Intermediary to be held in the
Account pursuant to documentation in form and substance satisfactory to the Bank and the
Securities Intermediary providing for a valid and perfected first priority security interest
in favor of the Bank. The Pledgor shall maintain at all times the Cash Collateral free and
clear of all Liens other than Liens in favor of the Bank.

     (c) 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 Agreement
shall constitute part of the Cash Collateral and shall be held for the benefit of

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the Bank to the extent provided in Section 2.1 hereof, and shall not constitute payment of
the Pledgor’s Letter of Credit Obligations (or any other obligations to which such funds
are provided hereunder to be applied) until applied thereto as provided herein.

     (d) Any income received (or loss incurred) 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 to the extent necessary to maintain the Minimum
Required Cash Collateral Amount. The Securities Intermediary shall not be required to
reimburse any such losses or otherwise have any liability therefor except as otherwise
provided in the applicable Account Agreement.

     2.3
Automatic Decreases and Increases in the Minimum Required Cash Collateral Amount.

     (a) Decreases on the First through Tenth Anniversaries of Closing Date.
Subject to subsections (b), (c) and (d) below, the Minimum Required Cash Collateral Amount
shall be automatically decreased to the amounts set forth below on each date indicated
below:

	 	 	 	 	 
	 	 	Minimum Required Cash	 
	Dates	 	Collateral Amount	 
	April 1, 2004
	 	$	6,113,439	 
	April 1, 2005
	 	$	5,813,196	 
	April 1, 2006
	 	$	5,519,731	 
	April 1, 2007
	 	$	4,897,838	 
	April 1, 2008
	 	$	4,275,945	 
	April 1, 2009
	 	$	3,422,137	 
	April 1, 2010
	 	$	2,568,329	 
	April 1, 2011
	 	$	1,714,521	 
	April 1, 2012
	 	$	860,712	 
	April 1, 2013
	 	$	6,904	 

     (b)
Increase Due to Insurance Step Down. If the Insurance Step Down (as
defined below) occurs in accordance with the terms of the Insurance Agreement, the Minimum
Required Cash Collateral Amount shall be automatically decreased in accordance with
subsection (a) above, provided, however, that the Minimum Required Cash Collateral
Amount for each year shall be increased by an amount equal to five percent (5%) of the
Stated Amount.

(i)
“Insurance Step Down” shall mean the reduction of the amount
insured by MIDFA to twenty-five percent (25%) of the Stated Amount of the
Letter of Credit in accordance with the terms of the Insurance Agreement.

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     (c) No Decrease in the Event of Default. Notwithstanding the foregoing, in no
event shall any decrease in the Minimum Required Cash Collateral Amount occur if an Event of
Default (or any circumstance or event with the giving of notice or lapse of time, or both,
would constitute an Event of Default) shall have occurred and be continuing.

     (d) Increase in the Minimum Required Cash Collateral. Notwithstanding the
foregoing, if, at any time or from time to time, the amount of the Authority’s insurance
available under the Insurance Agreement is decreased for any payment made by the Authority
under Section 3.1 of the Insurance Agreement, the Minimum Required Cash Collateral shall be
automatically increased by the amount of such decrease in available
insurance; provided,
however, if the amount available under the Insurance Agreement is subsequently
reinstated by the Authority, the Minimum Required Cash Collateral shall be decreased to the
extent of such reinstatement.

     2.4 Further Assurances by Pledgor. The Pledgor shall execute and deliver to the Bank
concurrently with the execution of this Agreement, and at any time or times hereafter at the
request of the Bank, all control agreements, assignments, conveyances, assignment statements,
financing statements, renewal financing statements, security agreements, affidavits, notices and
all other agreements, instruments and documents that the Bank may reasonably request, and will
execute all necessary endorsements in order to perfect and maintain the security interests and
liens granted herein by the Pledgor and in order to fully consummate all of the transactions
contemplated herein and in the Letter of Credit Agreement. In furtherance of the foregoing, the
Pledgor hereby authorizes the Bank to file such financing statements on its behalf and appoints the
Bank as its attorney-in-fact (with full power of substitution) for the purpose of making any of the
foregoing endorsements, executing and/or filing any such other documents, instruments and
agreements and taking all such actions, including without limitation originating and ensuring the
fulfillment of entitlement orders to the Securities Intermediary with respect to the Cash
Collateral Account, as are necessary to perfect and maintain the security interests granted herein.
The foregoing power of attorney is a power coupled with an interest and shall be irrevocable until
payment and performance in full of the Letter of Credit Obligations.

     2.5 Holding of Account.

     (a) The Pledgor hereby directs that the Securities Intermediary shall hold the Account
and the Cash Collateral on behalf of the Bank as first priority interest secured party and
the parties agree that the Bank shall have with respect to the Cash Collateral the rights
and remedies of a secured party provided in the Uniform Commercial Code.

     (b) As of the effective date of this Agreement, the Pledgor directs that the Cash
Collateral and the Account shall be designated on the records of the Securities
Intermediary as subject to the perfected first priority security interest granted pursuant
to this Agreement in accordance with the provisions of the Uniform Commercial Code. The
Pledgor and the Securities Intermediary hereby agree that all securities or other property
underlying any “financial assets” credited to the Account shall be registered in the name
of the Securities Intermediary, endorsed to the Securities Intermediary or in blank or
credited to another securities account maintained in the name of the Securities
Intermediary and in no case will any financial asset credited to the Account be registered

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in the name of the Pledgor, payable to the order of the Pledgor or specially indorsed to the
Pledgor.

SECTION 3

SECURITIES INTERMEDIARY

     3.1 Covenants, Representations and Warranties.

     (a) The Securities Intermediary hereby agrees that all property delivered to the Securities
Intermediary with respect to the pledge and security intended hereby will be held in or credited to
the Account. All parties agree that all property held by the Securities Intermediary in the
Account will be treated as “financial assets” under Article 8 of the Uniform Commercial Code.
The Securities Intermediary hereby represents and warrants to the Bank that (i) it is a “securities
intermediary” within the meaning of Article 8 of the Uniform Commercial Code, (ii) the Account has
been established in the name of the Pledgor as recited above and bears account number 80366, (iii)
except for the claims and interest of the Bank and the Pledgor in the Account, the Securities
Intermediary does not know of any claim to or interest in the Account.

     (b) The Securities Intermediary will comply with “entitlement orders” (as defined under
Article 8 of the Uniform Commercial Code) originated by the Bank concerning the Account without
consent by the Pledgor, including without limitation any order by the Bank to pay over to the Bank
the entire cash balance and any other financial assets in the Account or any order from the Bank
prohibiting the Securities Intermediary from complying with any further orders from the Pledgor.
The Securities Intermediary shall neither accept nor comply with any entitlement order from the
Pledgor withdrawing any financial assets from the Account, nor deliver any such financial assets to
the Pledgor, nor pay any free credit balance or other amount owing from the Securities Intermediary
to the Pledgor with respect to the Account without the specific prior written consent of the Bank.
Furthermore, the Securities Intermediary agrees to note the Bank’s perfected first priority
security interests in the Account in its books and records.

     (c) The Securities Intermediary hereby acknowledges the perfected first priority security
interests granted to the Bank by the Pledgor in the Account and any financial asset carried in the
Account. The Securities Intermediary hereby waives and releases all liens, encumbrances, claims and
rights of setoff it may have or hereafter acquire against the Account or any financial asset
carried in the Account or any free credit balance in the Account and agrees that it will not assert
any lien, encumbrance, claim or right against the Account or any financial asset carried in the
Account or any credit balance in the Account. Without the prior written consent of the Bank, the
Securities Intermediary will not execute and deliver, or otherwise become bound by, any agreement
(i.e., a control agreement) under which the Securities Intermediary agrees with any third party
that the Securities Intermediary will comply with entitlement orders concerning the Account
originated by such third party.

     (d) The Securities Intermediary will send copies of all statements and
confirmations concerning the Account to the Pledgor and the Bank at their respective

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addresses set forth in Section 7.5 of this Agreement no later than five (5) Business Days
after the end of each calendar month. Upon receipt of written notice of any lien,
encumbrance or adverse claim against the Account or in any financial asset carried therein,
the Securities Intermediary will promptly notify the Bank and the Pledgor thereof in
writing. In addition, the Securities Intermediary shall provide to the Bank Internet or
other on-line access to the Account and such assistance as the Bank may reasonably request
in connection with such access.

     (e) The Securities Intermediary will at all times maintain the Account at its offices
in the State of Maryland.

     (f) All items of income, gain, expense and loss recognized in the Account shall be
reported to the Internal Revenue Service and all state and local taxing authorities under
the name and taxpayer identification number of the Pledgor.

     3.2 Limited Responsibility of Securities Intermediary. The Securities Intermediary
shall have no responsibility or liability, absent negligence or willful misconduct, to the Bank
with respect to the value of the Account or any asset held therein. The Securities Intermediary
shall have no duty to investigate or make any determination as to whether a default or an event of
default exists under any agreement between the Pledgor and the Bank with respect to the Account.
This Agreement does not create any obligation or duty of the Securities Intermediary other than
those expressly set forth herein. Notwithstanding the foregoing, however, nothing herein provided
shall abrogate the-Securities Intermediary’s responsibilities to the Pledgor with respect to any
other accounts managed or held by the Securities Intermediary for or on behalf of the Pledgor.

     3.3 Liability, Duties, and Resignation of Securities Intermediary.

     (a) The Securities Intermediary, 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.

     (b) This Agreement sets forth exclusively the duties of the Securities Intermediary
with respect to any and all matters pertinent hereto and no implied duties or obligations
shall be read into this Agreement against the Securities Intermediary. The Securities
Intermediary may act in reliance upon any instrument or signature believed by it to be
genuine and may assume that any person purporting to give any writing, notice, advice or
direction for or on behalf of the Bank in connection with the provisions hereof has been
duly authorized to do so.

     (c) The Securities Intermediary 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 the Securities Intermediary be released of its obligations hereunder
unless and until a substitute eligible institution has been designated and has assumed in
writing the obligations of the Securities Intermediary hereunder.

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     (d) The Securities Intermediary may be removed by the Bank with the Pledgor’s consent
which consent shall not be unreasonably delayed or withheld.

     (e) In the event the Securities Intermediary resigns or is removed hereunder, then a
successor Securities Intermediary shall be appointed by the Bank, with the consent of the
Pledgor which consent shall not be unreasonably delayed or withheld.

SECTION 4

REPRESENTATIONS, WARRANTIES AND COVENANTS OF PLEDGOR

     4.1 Pledgor’s Representations and Warranties and Covenants. The Pledgor
represents and warrants and covenants that:

     (a) It has received value (as defined in Section 1-201 (44) of the Uniform Commercial
Code),

     (b) It has the right to create the first priority perfected security interest in the
Cash Collateral granted hereunder to the Bank,

     (c) The Cash Collateral is not subject to any Lien or any other interest of any third
person,

     (d) It will defend the Cash Collateral against the claims and demands of all third
parties,

     (e) All statements provided by the Pledgor relating to the Cash Collateral relied upon
by the Bank prior to, contemporaneous with or subsequent to execution of this Agreement are
or will be true, correct, complete, valid and genuine in all material respects,

     (f) It shall take all necessary actions to effect the creation and perfection of the
Bank’s security interest in the Cash Collateral to create a valid and perfected first
priority security interest in the Cash Collateral pursuant to the Uniform Commercial Code,

     (g) It has full power, authority and legal right to enter into this Agreement and to
pledge and grant a lien on the Cash Collateral pursuant to this Agreement, and this
Agreement has been duly authorized, executed and delivered by the Pledgor and constitutes
the legal, valid and binding obligation of the Pledgor, enforceable against the Pledgor in
accordance with its terms,

     (h) 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 (i) the due execution,
delivery or performance by the Pledgor of this Agreement, (ii) the assignment of, and the
grant of a lien on (including priority thereof), the Cash Collateral by the Pledgor in the
manner and for the purpose contemplated by this Agreement, or (iii) the exercise of the
rights and remedies of the Bank created hereby except those that have

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been obtained or made concurrently with the execution hereof, including, without
limitation, filings in the appropriate offices under the Uniform Commercial Code,

     (i) 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, the Pledgor’s certificate of incorporation or
bylaws, each as amended to date, or any other documents regarding the Pledgor’s corporate
governance, any applicable law or regulation, or any order, writ, injunction or decree of
any court or governmental authority binding on the Pledgor, or any agreement or instrument
to which the Pledgor is a party or by which the Pledgor is bound or to which any of the Cash
Collateral is subject, or result in the creation or imposition of any lien upon the
Pledgor’s earnings or assets pursuant to the terms of any such agreement or instrument,

     (j) The pledge of the Cash Collateral to the Bank is not done in contemplation of
insolvency or bankruptcy or with an intent to hinder, delay or defraud any of the Pledgor’s
creditors,

     (k) It is not insolvent immediately before signing this Agreement and is not being
rendered insolvent by the pledge of the Cash Collateral to the Bank, and

     (1) It will not pledge, assign or grant any Lien in the Cash Collateral to any person
other than the Bank or permit any Lien to exist with respect to the Cash Collateral other
than the Liens granted hereunder in favor of the Bank.

SECTION 5

OTHER AGREEMENTS REGARDING ACCOUNT

5.1 Investment and Preservation of Funds in Account.

     (a) Funds held by the Securities Intermediary hereunder shall be invested and
reinvested by the Securities Intermediary upon written order of the Pledgor only in
Permitted Investments as described in Exhibit A. Such investments shall be
registered or endorsed as provided in Section 2.5(b) and held by the Securities Intermediary
for the benefit of the Bank. The Securities Intermediary 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.

     (b) The Pledgor shall be responsible for the preservation of the Cash Collateral in the
Securities Intermediary’s possession and shall take all action necessary to preserve the
rights of the Bank against prior parties to the Cash Collateral. Neither the Bank nor the
Securities Intermediary shall be under any duty (i) to collect any of the Cash Collateral or
any moneys due or to become due thereunder, (ii) to give any notices with respect to the
Cash Collateral, (iii) to preserve or maintain any of the Cash Collateral not in its
possession, or (iv) to preserve rights of the Pledgor against prior parties to the Cash
Collateral. The Bank and the Securities Intermediary shall be deemed to have exercised
reasonable care with respect to any of the Cash Collateral in their possession if the Bank
or the Securities Intermediary takes such action for that purpose as the Pledgor shall

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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, of itself, be deemed a failure
to exercise reasonable care.

     (c) The Pledgor shall mark-to-market the Cash Collateral in the Account on each Cash
Collateral Test Date and provide the Bank with a written certification thereof no later
than one (1) Business Day after said Cash Collateral Test Date. Additionally, within two
(2) Business Days after the Cash Collateral Test Date, the Pledgor shall transfer such
additional Cash Collateral to the Account as is necessary to meet the requirements set
forth in Section 2 hereof and shall promptly provide the Bank with evidence reasonably
satisfactory to the Bank that such transfer of additional Cash Collateral has been made.

     5.2 Substitutions. Provided no Event of Default under this Agreement or any of the
Letter of Credit Documents or the Bond Documents has occurred and is continuing, the Pledgor may at
any time and from time to time substitute cash and marketable securities for the Cash Collateral on
deposit in the Account; provided, however, that the following requirements are fully
satisfied by the Pledgor prior to making any substitutions: (i) the Pledgor shall provide the Bank
with prior written notice of such substitutions, including a description of such substitutions;
(ii) any such substitutions shall constitute Permitted Investments and shall be free and clear of
any Liens, and (iii) the requirements of Section 2 regarding Minimum Required Cash Collateral
Amount are satisfied. The Bank’s Lien on the Cash Collateral being substituted shall not be
released until the Pledgor has marked-to-market such substitutions and provided the Bank with a
written certification of the Adjusted Market Value (Item) of such substitutions which is not less
than the Minimum Required Cash Collateral Amount.

     5.3 Authority Over Account: Limitations on Withdrawals. Except as set forth in Section
5.2 hereof, the Bank shall have sole authority over withdrawals of the Cash Collateral from the
Account and no withdrawal of the Cash Collateral from the Account shall be made except upon the
written instructions of the Bank signed by authorized officers of the
Bank; provided
, however, such withdrawals shall only be permitted when there is an Event of Default pursuant to
this Agreement or any of the Letter of Credit Documents or the Bond Documents and with respect to
any such withdrawals made by the Bank hereunder, the Bank shall have the right to exercise any and
all remedies as provided in Section 6.2 hereof. Any written instructions from the Bank shall
permit withdrawals within two (2) Business Days from the date thereof. In relying upon such
written instructions from the Bank, the Securities Intermediary shall have no liability other than
for its negligence or willful misconduct.

SECTION 6

DEFAULT; REMEDIES

     6.1 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 any of the Letter of Credit Documents or the Bond
Documents after giving effect to any notice and cure periods provided for in the applicable
Letter of Credit Documents or the Bond Documents;

12

 

     (b) the failure of the Pledgor to comply with Section 2.2(a), Section 5.1(c) or Section 5.2
and such failure is not cured within two (2) Business Days after such failure;

     (c) the failure of the Pledgor to make any payments required by this Agreement and such
failure is not cured within two (2) Business Days after the earlier to occur of (i) discovery by
the Pledgor of such failure, or (ii) receipt of written notice from the Bank to the Pledgor; and

     (d) any failure of the Pledgor to perform, observe, or comply with any other term, covenant,
condition or agreement contained in this Agreement, and such failure is not cured within fifteen
(15) days after the earlier to occur of (i) discovery by the Pledgor of such failure, or (ii)
receipt of written notice from the Bank to the Pledgor;
provided  however, that if such
failure cannot be remedied, then such failure shall be deemed to be an Event of Default as of the
date of the occurrence thereof.

     6.2 Remedies.

     (a) Upon an Event of Default under this Agreement, the Letter of Credit Documents or the Bond
Documents that has not been waived by the Bank, and any time thereafter, the Bank may, among its
other rights and remedies (i) cause the Cash Collateral to be transferred to the Bank or to the
name of its nominee or nominees and thereafter exercise as to the Cash Collateral all rights,
powers and remedies of an owner, (ii) collect by legal proceedings or otherwise all dividends,
interest, principal payments, and other sums now or hereafter payable on account of the Cash
Collateral, and hold the same as Cash Collateral, or apply the same to the expenses incurred by the
Bank in such legal proceedings, the manner and distribution of the application to be in the sole
discretion of the Bank, (iii) enter into any extension, subordination, reorganization, deposit,
merger, or consolidation agreement, or any other agreement relating to or affecting the Cash
Collateral and in connection therewith deposit or surrender control of such Cash 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 Uniform Commercial
Code. The Bank shall give written notice to the Pledgor ten (10) days prior to the date of any
public sale of the Cash Collateral or prior to the date after which any private sale of the Cash
Collateral will be made.

     (b) Subject to compliance with federal and state securities laws, full power and authority are
hereby given to the Bank acting through any of its respective officers, upon an Event of Default
hereunder or under any of the Letter of Credit Documents or the Bond Documents that has not been
waived by the Bank, and at any time thereafter, at its election, to sell, assign, transfer and
deliver the whole of the Cash Collateral, or any part thereof or any additions thereto, or
substitutes therefor, in such order as the Bank may elect, in one or more sales, at public or
private sale or at any broker’s board or on any security exchange and at any such price or prices
as the Bank shall, in a commercially reasonable manner, determine.

13

 

     (c) To the extent the Bank 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 Letter of Credit Documents or the Bond Documents, the Bank
covenants and agrees that such monies, after deducting all costs incurred by the Bank in
connection with the collection thereof, shall be credited against the obligations of the
Pledgor under the Letter of Credit Agreement.

     (d) No failure or delay by the Bank to insist upon the strict performance of any term,
condition, covenant, or agreement of this Agreement or any of the Letter of Credit Documents
or the Bond 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 Bank 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, the Letter of Credit Documents or the Bond Documents, the Bank 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.

     (e) Each right, power, and remedy of the Bank as provided for in this Agreement, the
Letter of Credit Documents or the Bond 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, the Letter of Credit
Documents or the Bond 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 Bank of any one or
more of such rights, powers, or remedies shall not preclude the simultaneous or later
exercise by the Bank of any or all such other rights, powers, or remedies.

SECTION 7

MISCELLANEOUS

     7.1
Appointment of Attorney-In-Fact. The Pledgor hereby irrevocably appoints
the Bank, its successors and assigns, which appointment is coupled with an interest, as the
attorney- in-fact of the Pledgor, with full power of substitution, to take any action and to
execute and deliver any instrument which the Bank may reasonably deem necessary or advisable to
obtain or preserve the full benefits of, and the rights and powers granted by, of this Agreement,
which power the Bank may exercise (i) at any time during the existence and continuation of an Event
of Default or, (ii) if no Event of Default exists and is continuing, (1) and if the Pledgor refuses
or fails to execute and deliver any instruments and documents requested by the Bank which the Bank
reasonably deems necessary or advisable to obtain or preserve the full benefits of, and the rights
and powers granted by, of this Agreement within ten (10) days after such request or (2) to the
extent the Bank reasonably determines that the exercise of such power is necessary to protect the
Bank’s interest in the Cash Collateral or its rights hereunder.

     7.2 Costs and Expenses. All reasonable costs and expenses, including reasonable
attorney’s fees and expenses, incurred or paid by the Bank in exercising or enforcing any right,

14

 

power or remedy conferred hereby, and in the endorsements thereof, shall become a part of the
indebtedness or obligations secured hereby.

     7.3 Further Assurances. The Pledgor shall, at its expense, do, make, procure, execute
and deliver all acts, things, writings and assurances as the Bank may at any time request to
protect, assure or enforce its interest, rights and remedies created by, provided in or emanating
from this Agreement.

     7.4 Release, Indulgences, etc. The Pledgor agrees that demands, notice, protest and
all demands and notices of any action taken by the Bank under this Agreement, the Letter of Credit
Documents or the Bond Documents are hereby waived.

     7.5 Notices. All notices, demands, requests, consents, approvals, certificates 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 (3) 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
for the Principal Office of such person designated below:

	 	 	 	 	 
	 

	 	If to the Pledgor at:
	 	Avalon Pharmaceuticals, Inc.
	

	 	 	 	20358 Seneca Meadows Parkway
	

	 	 	 	Germantown, Maryland, 20876
	

	 	 	 	Attention: Chief Financial Officer
	

	 	 	 	Attention: General Counsel
	

	 	 	 	Telephone: 301-556-9900
	

	 	 	 	Telecopier: 301-556-9910

	 	 	 	 	 
	 

	 	with a copy to:
	 	Mark I. Gruhin, Esq.
	

	 	 	 	Schmeltzer, Aptaker & Shepard, P.C.
	

	 	 	 	2600 Virginia Avenue, NW, Suite 1000
	

	 	 	 	Washington, DC 20037-1922
	

	 	 	 	Telephone: 202-342-3444
	

	 	 	 	Telecopier: 202-342-3434

	 	 	 	 	 
	 

	 	If to the Bank at:
	 	Manufacturers and Traders Trust Company
	

	 	 	 	Anstec Building
	

	 	 	 	1410 Spring Hill Road, Suite 125
	

	 	 	 	McLean, Virginia 22102
	

	 	 	 	Attention: Dave DiLuigi
	

	 	 	 	Telephone: 703-748-5502
	

	 	 	 	Telecopier: 703-749-9284

	 	 	 	 	 
	 

	 	with a copy to:
	 	Sonnenschein Nath & Rosenthal
	

	 	 	 	1301 K Street, N.W.

15

 

	 	 	 	 	 
	

	 	 	 	Suite 600, East Tower
	

	 	 	 	Washington, DC 20005
	

	 	 	 	Attention: Fred Levy, Esq.
	

	 	 	 	Telephone: 202-408-6407
	

	 	 	 	Telecopier: 202-408-6399

     If to the Securities Intermediary at:

Allfirst Trust Company National Association

25 South Charles Street

Mail Code: Banc 101-591

Baltimore, Maryland 21201

Attention:

     7.6 Waiver; Modification. 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.

     7.7 Counterparts. This Agreement may be executed in any number of counterparts, each
of which where so executed and delivered shall be an original, but all of which shall constitute
one and the same instrument. It shall not be necessary in making proof of this Agreement to
produce or account for more than one such counterpart.

     7.8 Governing Law. This Agreement shall be governed by the laws of the State of
Maryland.

     7.9 Binding Effect. This Agreement shall be binding upon the successors and permitted
assigns of the Pledgor and shall inure to the benefit of the Bank and its respective successors and
assigns.

     7.10 Termination. This Agreement shall terminate when the Letter of Credit
Agreement terminates and all obligations thereunder and under the other Letter of Credit Documents
and the Bond Documents have been indefeasibly paid and performed in full, and upon the termination
of this Agreement, the Bank shall instruct the Securities Intermediary to reassign to the Pledgor,
without recourse or warranty, express or implied, the then existing rights, title and interest of
the Bank in and to the Cash Collateral, the costs of such reassignment to be borne by the Pledgor.

     7.11 Assignment. Neither the Pledgor nor the Securities Intermediary shall be
permitted to assign any of its rights or obligations hereunder except with the prior written
consent of the Bank.

     7.12 Severability. If any provision of this Agreement is determined to be illegal,
invalid or unenforceable, such provision shall be fully severable and the remaining provisions
hereof shall remain in full force and effect and shall be construed without giving effect to the
illegal, invalid or unenforceable provision.

16

 

     7.13 Time. Time is of the essence to all provisions of this Agreement.

7.14 Waiver of Jury
Trial. THE PLEDGOR HEREBY (A) COVENANTS AND AGREES NOT TO
ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY A JURY, AND (B) WAIVES TRIAL BY JURY IN ANY
ACTION OR PROCEEDING TO WHICH THE BANK AND THE PLEDGOR MAY BE PARTIES, ARISING OUT OF, IN
CONNECTION WITH OR IN ANY WAY PERTAINING TO THIS AGREEMENT, ANY OF THE LETTER OF CREDIT DOCUMENTS
AND/OR THE BOND DOCUMENTS AND ANY TRANSACTIONS, OCCURRENCES, COMMUNICATIONS, OR UNDERSTANDINGS (OR
THE LACK OF ANY OF THE FOREGOING) RELATING IN ANY WAY TO RELATIONSHIP BETWEEN THE PARTIES.

17

 

     WITNESS the signature and seal of the parties as of the date first written above.

	 	 	 	 	 
	WITNESS:	 	AVALON PHARMACEUTICALS,
INC.,

as Pledgor
	 
	 	 	 	 
	/s/ [ILLEGIBLE]

	 	By:
	 	/s/ Kenneth C. Carter
	 

	 	 	 	 
	

	 	 	 	Name: Kenneth C. Carter
	

	 	 	 	Title: CEO
	 
	 	 	 	 
	(SEAL)
	 	 	 	 
	 
	 	 	 	 
	WITNESS:	 	MANUFACTURERS AND
TRADERS TRUST COMPANY,
 as Bank
	 
	 	 	 	 
	/s/
[ILLEGIBLE]

	 	By:
	 	/s/ David M. Diluigi
	 

	 	 	 	 
	

	 	 	 	Name: David M. Diluigi
	

	 	 	 	Title: VP
	 
	 	 	 	 
	(SEAL)
	 	 	 	 
	 
	 	 	 	 
	WITNESS:	 	ALLFIRST TRUST COMPANY
NATIONAL ASSOCIATION,
 as Securities Intermediary
	 
	 	 	 	 
	/s/ [ILLEGIBLE]

	 	By:
	 	/s/ Heather R. Tuason
	 

	 	 	 	 
	

	 	 	 	Name: HEATHER R. TUASON
	

	 	 	 	Title: ASSISTANT VICE PRESIDENT
	 
	 	 	 	 
	(SEAL)
	 	 	 	 

18

 

Schedule 1

to

Collateral Pledge and Security Agreement

and Control Agreement

Advance Rate to Maintain Properly Margined Cash Collateral

	 	 	 	 	 	 
	 
	 	 	 	 	Advance Rate to Maintain Properly	 
	 	 Types of Permitted Investments	 	 	Margined Cash Collateral	 
	 	Listed Stocks	 	 	60%	 
	 	Over the Counter Stocks	 	 	60%	 
	 	Corporate and Municipal Bonds
	 	 	75%	 
	 	U.S. Government or Agency Securities	 	 	90%	 
	 	Manufacturers and Traders Trust Company Deposits and CDs	 	 	100%	 
	 

 

 

Exhibit A

to

Collateral Pledge and Security Agreement

and Control Agreement

Permitted Investments 

SEE ATTACHED INVESTMENT AND LIQUIDITY POLICY

 

 

AVALON PHARMACEUTICALS, INC.

INVESTMENT AND LIQUIDITY POLICY

	1.  	PURPOSE
	 
	   	To establish a policy and guidelines, under the direction of the Board, of Directors, for the
investment of corporate funds not immediately required for business operations and not
otherwise invested.

	2.  	OBJECTIVES
	 
	   	Primary investment objectives in rank order are:

	 	a.  	Safety - the preservation of capital, provided for by investing in high
quality securities with minimal credit risk.
	 
	 	b.  	Liquidity - the availability of funds at the time needed, provided for by
structured maturities and the use of marketable securities.
	 
	 	c.  	Income - maximization of income earned by the portfolio using the parameters
defined herein.

	3.  	AUTHORITY
	 
	   	The Chief Executive Officer, the General Counsel/Vice President of Operations and the
Chief Financial Officer are responsible for the full implementation and adherence to the
policy, criteria, and procedures herein. Any revisions or amendments to this policy or its
parameters are the responsibility of the Chief Executive Officer, the General Counsel/Vice
President of Operations and the Chief Financial Officer and are subject to approval
by the Board of Directors.
	 
	4.  	AUTHORIZED INVESTMENTS
	 
	   	All investments must be U.S. dollar-denominated.
	 
	   	Investment in derivative securities is prohibited wife the exception of floating-rate debt
obligations.
	 
	   	Borrowing for investment purposes is prohibited.
	 
	   	Investment in securities with underlying leverage risk or esoteric structures is prohibited.

 

 

	   	a. U.S. Government and Government-guaranteed Agency securities:

	 	-  	Direct Obligations of the U. S. Government
	 
	 	-  	U.S. Treasury bills, notes and bonds
	 
	 	-  	Government National Mortgage Association (Ginnie Mae)
	 
	 	-  	Includes putable, callable and floating-rate debt obligations
	 
	 	-  	Maximum proportion of all holdings 100%

	   	b. Government-sponsored Agency obligations:

	 	-  	Federal National Mortgage Association (Fannie Mae)
	 
	 	-  	Federal Home Loan Bank
	 
	 	-  	Federal Home Loan Mortgage Corp(Freddie Mac)
	 
	 	-  	Federal Farm Credit Bank
	 
	 	-  	Student Loan Marketing Association (Sallie Mae)
	 
	 	-  	Includes putable, callable and floating-rare debt obligations
	 
	 	-  	Maximum proportion of all holdings 100%
	 
	 	-  	Maximum proportion of all holdings for any single issuer 40%

	   	c. Corporate Debt: Obligations as follows:

	 	-  	Commercial Paper
	 
	 	-  	Medium Term Notes
	 
	 	-  	Corporate Bonds
	 
	 	-  	Includes putable, callable and floating-rate debt obligations
	 
	 	-  	Includes Eurodollar and Yankee debt obligations
	 
	 	-  	Maximum proportion of all holdings 100%

	   	Commercial paper must carry minimum short-term ratings of P-l by Moody’s and A-l by Standard
& Poor’s. Corporate Debt obligations must carry a minimum rating of single- A by Moody’s and
Standard & Poor’s.

	   	d. Bank obligation as follows:

	 	-  	Certificates of Deposit - Domestic, Yankee or Euro
	 
	 	-  	Time Deposits
	 
	 	-  	Bankers Acceptances
	 
	 	-  	Bank Notes
	 
	 	-  	Eurodollar Time Deposits
	 
	 	-  	Includes, putable, callable and floating-rate debt obligations
	 
	 	-  	Maximum proportion of all holdings 100%

2

 

	   	Issuer banks must carry a minimum long-term rating of single-A by Moody’s and
Standard & Poor’s, and/or a minimum short-term rating of P-l by Moody’s and A-l or better
by Standard & Poor’s.
	 
	   	e. Repurchase Agreements
	 
	   	Repurchase agreements must be collateralized at a minimum of 102% by U. S. Government or
Federal Agency securities, and collateral must be segregated and in the physical possession
of its agent or a third party custodian. Maximum proportion of all holdings 100%
	 
	   	f. Money Market Funds

	 	-  	SEC-Registered
	 
	 	-  	Maintain a net asset value of $l.00/share
	 
	 	-  	Consist of a minimum of $1 billion in assets

	5.  	GENERAL PORTFOLIO PARAMETERS
	 
	   	Maturities of each investment are not to exceed 24 months without prior approval of
the Chief Financial Officer. In addition, the weighted average maturity of the portfolio
cannot exceed 12 months. No angle issuer or guarantor may represent more than 15 percent of
the total value of holdings at the time of acquisition. This restriction does not apply to
U. S. government and federal agency securities, SEC-registered money market funds or
repurchase agreements whose concentration limitations arc set forth above.
	 
	   	For securities that have put or reset dates, the put or reset dates will be used, instead of
the final maturity dates, for maturity limit purposes.
	 
	   	In addition to the credit requirements set Forth above, the portfolio must maintain a
weighted average credit rating of A1/A+.
	 
	   	A minimum of two times the amount of expected monthly cash outflow must be liquid
each business day.
	 
	   	If a security falls below the ratings as described in the above authorized investments the
Chief Financial Officer should be notified promptly.
	 
	6.  	REPORTS
	 
	   	The portfolio manager will prepare and publish a monthly report of transactions.

3exv10w38

 

Exhibit 10.38

$12,000,000

MARYLAND INDUSTRIAL DEVELOPMENT FINANCING AUTHORITY

TAXABLE VARIABLE RATE DEMAND REVENUE BONDS

(AVALON PHARMACEUTICALS, INC. FACILITY),

SERIES 2003

INSURANCE AGREEMENT

     THIS INSURANCE AGREEMENT (this “Agreement”) is entered into as of this 1st day of
April, 2003 by and between the MARYLAND INDUSTRIAL DEVELOPMENT FINANCING AUTHORITY, a body
corporate and politic and a public instrumentality of the State of Maryland, in its role as insurer
and not as issuer (the “Authority”), MANUFACTURERS AND TRADERS TRUST COMPANY, a New York banking
corporation (the “Bank”), and AVALON PHARMACEUTICALS, INC., a Delaware corporation (the
“Borrower”).

     The Borrower has applied to the Authority for a loan in the principal amount of $12,000,000
(the “Series 2003 Loan”), to be made by the Authority to the Borrower from the proceeds of the
Authority’s Taxable Variable Rate Demand Revenue Bonds (Avalon Pharmaceuticals, Inc. Facility),
Series 2003 (the “Series 2003 Bonds”), pursuant to a Loan Agreement of even date herewith between
the Authority and the Borrower (the “Loan Agreement”). The Series 2003 Bonds will be issued
pursuant to a Trust Indenture of even date herewith (the “Indenture”) between the Authority and
Allfirst Trust Company National Association, as trustee (the “Trustee”). In order to enhance the
marketability of the Series 2003 Bonds, the Borrower has requested the Bank to issue to the Trustee
the Bank’s irrevocable transferable letter of credit in the amount of $12,197,260 to provide
payment for and secure the payment of principal of and interest on, and the purchase price of, the
Series 2003 Bonds (the “Letter of Credit”). Pursuant to the Letter of Credit Agreement of even date
herewith between the Bank and the Borrower (the “Letter of Credit Agreement”), the Borrower has
agreed, among other things, (a) to reimburse the Bank, with interest, for all drawings made under
the Letter of Credit, (b) to reimburse the Bank for all advances made by the Bank under the Letter
of Credit Agreement, and (c) to pay to the Bank certain charges and fees in connection with the
Bank’s issuance of the Letter of Credit.

     The obligations of the Borrower to the Bank under the Letter of Credit Agreement and the other
Letter of Credit Documents (as defined in the Letter of Credit Agreement) are herein sometimes
collectively called the “Borrower’s Letter of Credit Obligations” which term as used in this
Agreement shall have the same meaning as set forth in the definitions set forth in Section 1.1 of
the Indenture. For purposes of this Agreement, the Borrower’s Letter of Credit Obligations do not
include any of the Borrower’s Swap Obligations.

     As a condition to its issuance of the Letter of Credit, the Bank has required, among other
things, that the Authority insure a portion of the Borrower’s Letter of Credit Obligations pursuant
to the terms and provisions of this Agreement.

 

 

     NOW, THEREFORE, in order to induce the Authority to issue the Series 2003 Bonds and to make
the Series 2003 Loan to the Borrower and to insure a portion of the Borrower’s Letter of Credit
Obligations, and to induce the Bank to issue the Letter of Credit as security for the Series 2003
Bonds, the Authority, the Bank, and the Borrower covenant and agree as follows:

ARTICLE I

DEFINITIONS

     Section 1.1 Defined Terms. Unless the context clearly indicates otherwise, all
terms defined in the foregoing recitals of this Agreement shall have the meanings given such terms
in such recitals, and the terms defined in this Section 1.1 shall have the meanings set forth in
this Section 1.1. Certain other terms used in this Agreement are defined in Article I of the Letter
of Credit Agreement or Article I of the Indenture. When and if used herein, such terms shall have
the meanings given to them in Article I of the Letter of Credit Agreement or Article I of the
Indenture and all terms used herein shall be construed in accordance with the rules of construction
set forth in Article I of the Letter of Credit Agreement or Article I of the Indenture, unless
clearly specified otherwise or unless the context clearly indicates otherwise.

     “Authority” shall have the meaning given to such term in the introductory paragraph
hereof.

     “Authority’s Insurance Premium” means the annual insurance premium payable in advance on the
Closing Date and on the first day of each Insured Bond Year thereafter in the amount of one half of
one percent of the insured portion of the outstanding principal balance of the Borrower’s Letter of
Credit Obligations.

     “Authority’s Obligations” means the obligations of the Authority to the Bank (or any assignee
of the Bank permitted under Section 10.1 hereof) to make payments and otherwise perform all
covenants and agreements to be performed by the Authority under this Agreement.

     “Authority’s Resolution” means the resolution adopted by the Authority on July 25, 2002.

     “Bank” shall have the meaning given to such term in the introductory paragraph hereof.

     “Bank’s Commitment Letter” means the commitment letter from the Bank to the Borrower
dated August 5, 2002, and all amendments thereto.

     “Bond Documents” shall have the meaning given to such term by the Letter of Credit Agreement.

     “Borrower” shall have the meaning given to such term in the introductory paragraph
hereof.

2

 

     “Borrower’s Letter of Credit Obligations” shall have the meaning given to such term in the
Indenture.

     “Cash Collateral” means the collateral held by the Bank pursuant to the Collateral Pledge
Agreement.

     “Certification” means the written certification to be made by the Bank to the Authority in
accordance with Section 7.1 hereof which shall include a statement of the amount of the Deficiency,
and (b) a statement that the Bank has enforced the Letter of Credit Documents and the liquidation
of the security for the Borrower’s Letter of Credit Obligations in accordance with the standard
contained in Section-5.2F of this Agreement.

     “Claim” means any liability, action, claim, demand, lien, loss, expense or cost of any
kind or nature whatsoever.

     “Closing Date” means the date of authentication and delivery of the Series 2003 Bonds.

     “Collateral” shall have the meaning given to such term in the Security Agreement.

     “Collateral Pledge Agreement” means the Collateral Pledge and Security Agreement and Control
Agreement dated as of April 1, 2003 by and among the Borrower, the Bank and Allied Investment
Advisors, Inc., as securities intermediary, together with any and all Supplements from time to time
made in accordance with the terms thereof and of this Agreement.

     “Debt” means the aggregate amount of the monetary portion of the Borrower’s Letter of Credit
Obligations other than the Borrower’s Letter of Credit Obligations not covered by the Authority’s
insurance pursuant to the provisions of Section 3.1(B) of this Agreement.

     “Deficiency” means (a) the Debt, less (b) the Net Proceeds resulting from the
enforcement of the Letter of Credit Documents and the liquidation of the security for the
Borrower’s Letter of Credit Obligations in accordance with the parameters described in Section 5.2H
of this Agreement.

     “Department” means the Department of Business and Economic Development, a principal
department of the State.

     “Documents” means the Bond Documents and the Letter of Credit Documents.

     “Indenture” shall have the meaning given to such terms in the recitals hereof.

     “Industrial Development Fund” means the Industrial Development Fund of the Authority created
pursuant to Section 5-914 of the MIDFA Act. The faith and credit
of the State are not pledged to the Industrial Development Fund.

3

 

     “Insured Bond Year” means each consecutive twelve month period during which this Agreement is
in effect, commencing for the first such year on the Closing Date and ending on the last day of the
twelfth consecutive calendar month thereafter.

     “Insured Portion of the Debt” means (a) thirty percent (30%) of the Debt, and (b) an automatic
reduction to twenty five percent (25%) of the Debt effective as of the third anniversary of the
Closing Date if the Borrower has not delivered to the Authority, no later than thirty (30) days
after the third anniversary of the Closing Date, a copy of a collaborative agreement as may be
qualified by confidentiality agreements within thirty (30) days after the effective date of such
collaborative agreement. In no event shall the Authority’s Obligations under this Agreement at any
time exceed $3,600,000, and the amount of the Authority’s insurance available hereunder shall be
reduced below such limit by the amount of any payment made by the Authority hereunder (including,
without limitation, any payment made by the Authority pursuant to its right to cure Events of
Default, as described in Section 6.2 A hereof); provided, however, that if the Authority makes any
payment to the Bank pursuant to the provisions of this Agreement and is subsequently reimbursed for
such payment by the Borrower or on its behalf, the insurance available under this Agreement shall
be reinstated to the extent of such reimbursement. The Insured Portion of the Debt is calculated on
the principal and interest due prior to application of any proceeds received from enforcement of
the Documents and liquidation of the Security.

     “Letter of Credit” shall have the meaning given to such term in the recitals hereof.

     “Letter of Credit Documents” shall have the meaning given to such term in the Letter of Credit
Agreement.

     “Letter of Credit Agreement” shall have the meaning given to such term in the recitals hereof.

     “Loan Agreement” shall have the meaning given to such term in the recitals hereof.

     “MIDFA Act” means the Maryland Industrial Development Financing Authority Act, set forth in
Sections 5-901, et seq. of Article 83A of the Annotated Code of Maryland, and all
amendments thereto.

     “Net Proceeds” means the amount, if any, by which (a) all those proceeds resulting from the
enforcement or liquidation of the liens and security interests created by the Letter of Credit
Documents in the Security exceed (b) reasonable costs and expenses incurred by the Bank in
connection with the Borrower’s Obligations in enforcing the Letter of Credit Documents or
liquidating the liens and security interests evidenced and secured by the Letter of Credit
Documents.

     “Notice” means a written communication given (i) if delivered by hand, when written
confirmation of delivery is received by the sender, (ii) three (3) 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 such

4

 

communication is to be given, at the following addresses or such other address as the Lender, the
Authority, or the Borrower may specify hereafter:

	 	 	 	 	 
	

	 	Authority:
	 	MARYLAND INDUSTRIAL DEVELOPMENT
	

	 	 	 	     FINANCING AUTHORITY
	

	 	 	 	217 East Redwood Street, 22nd Floor
	

	 	 	 	Baltimore, Maryland 21202
	

	 	 	 	Attention: Executive Director
	 
	 	 	 	 
	

	 	Lender:
	 	MANUFACTURERS AND TRADERS TRUST COMPANY
	

	 	 	 	1410 Spring Hill Road, Suite 125
	

	 	 	 	McLean, Virginia 22102
	

	 	 	 	Attention: David DiLuigi
	 
	 	 	 	 
	

	 	 	 	with a copy to:
	 
	 	 	 	 
	

	 	 	 	Fred Levy, Esquire
	

	 	 	 	Sonnenschein, Nath & Rosenthal
	

	 	 	 	1301 K Street, N.W.
	

	 	 	 	Suite 600, East Tower
	

	 	 	 	Washington, D.C. 20005
	 
	 	 	 	 
	

	 	Borrower:
	 	AVALON PHARMACEUTICALS, INC.
	

	 	 	 	20358 Seneca Meadows Parkway
	

	 	 	 	Germantown, Maryland 20876
	

	 	 	 	Attention: Chief Financial Officer
	 
	 	 	 	 
	

	 	 	 	with a copy to:
	 
	 	 	 	 
	

	 	 	 	Mark I. Gruhin, Esquire
	

	 	 	 	Schmeltzer, Aptaker & Shepard, P.C.
	

	 	 	 	2600 Virginia Avenue, N.W., Suite 1000
	

	 	 	 	Washington, D.C. 20037-1922

Any person listed above may, by notice given hereunder, designate any different addresses to which
subsequent communications shall be sent. Copies of notices furnished in accordance with this
Section are for convenience only and the failure to furnish any such copy shall not affect the
sufficiency of any notice under this Agreement.

     “Notice of Default” means a notice of the occurrence of an Event of Default under the Letter
of Credit Agreement given by the Bank to the Authority (a) in accordance with the procedures for
giving notices or other communications as set forth in this Agreement,
(b) specifying the amount of Debt (if any) with respect to which the Borrower is in default, and
(c) stating the procedures and remedies the Bank proposes to follow, if any, with respect to the
Event of Default.

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     “Security” means the Collateral, the Cash Collateral, and all other security for the Series
2003 Bonds or the Borrower’s Letter of Credit Obligations.

     “Security Agreement” means the Security Agreement dated of even date herewith by and between
the Borrower and the Bank, together with any and all Supplements from time to time made in
accordance with the terms thereof and of this Agreement.

     “Series 2003 Bonds” shall have the meaning given to such term in the recitals hereof.

     “Series 2003
Loan” shall have the meaning given to such term in the recital hereof.

     “State” means the State of Maryland.

     “Supplements” means any and all extensions, renewals, modifications, amendments,
supplements and substitutions.

     “Swap Agreement” shall have the meaning given to such term in the Letter of Credit
Agreement.

     “Swap Obligations” shall have the meaning given to such term in the Letter of Credit
Agreement.

     “Indenture” shall have the meaning given to such term in the recitals hereof.

     Section 1.2 Recitals. The recitals set forth in the Letter of Credit Agreement are
incorporated herein by reference and are hereby deemed to be a part of this Agreement to the same
extent as if such recitals were set forth in their entirety in this Agreement.

ARTICLE II

AUTHORITY TO INSURE

     Section 2.1 Authority to Insure. Section 5-914 of the MIDFA Act creates the
Industrial Development Fund, from which the Authority may (a) insure the payment or repayment of
all or any part of the principal of, redemption or prepayment premiums or penalties on, and
interest on bonds (as defined in the MIDFA Act) and authorized purpose obligations (as defined in
the MIDFA Act), (b) insure the payment or repayment of all or any part of the principal of,
redemption or prepayment premiums or penalties on, and interest on any instrument executed,
obtained or delivered in connection with the issuance and sale of bonds and authorized purpose
obligations, and (c) pay or insure the payment of any fees or premiums necessary to obtain
insurance, guarantees, or other credit support from any person in connection with financial
assistance provided by the Authority under the MIDFA Act. The Series 2003 Bonds are “bonds” within
the meaning of the MIDFA Act.

     The Authority has adopted the Authority’s Resolution pursuant to which the Authority has
approved its insurance of the Insured Portion of the Debt from the Industrial Development Fund
on the terms set forth in this Agreement.

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ARTICLE III

INSURANCE OF INSURED PORTION OF THE DEBT

     Section 3.1 Insurance of Insured Portion of the Debt. Subject to the terms and
conditions hereof, and in the manner provided herein, the Authority agrees to pay to the Bank and
to any assigns of the Bank permitted by Section 10.1 hereof, from the Industrial Development Fund,
the Insured Portion of the Debt. It is understood and agreed that:

          A. Security. It is a requirement for the Authority’s insurance that the
Debt be secured by a first lien on the Collateral and the Cash Collateral in favor of the
Bank.

          B. Obligations Not Insured. The Authority’s insurance under this Agreement
shall cover only the obligations of the Borrower to reimburse the Bank, with interest at the
Reimbursement Rate, for drafts drawn under the Letter of Credit, and shall not cover any of the
following amounts which may constitute the Borrower’s Letter of Credit Obligations:

               (i) any charges or expenses which the Bank may pay or incur relative to the payment of
any draft drawn under, or purported to be drawn under, the Letter of Credit, or in connection with
any amendment or extension of a substitution for or renewal of the Letter of Credit;

               (ii) amounts advanced by the Bank other than pursuant to a drawing under the Letter of
Credit;

               (iii) the Letter of Credit Fee and any fees or charges payable by the Borrower to the Bank
in consideration for its provision of the Letter of Credit;

               (iv) any transfer fees for transfer of the Letter of Credit;

               (v) any interest on the Borrower’s Letter of Credit Obligations payable at penalty rates
(the “Penalty Rate”), and any late charges payable under the Letter of Credit Documents;

               (vi) any additional payments required to be made by the Borrower to the Bank as a result
of increased costs to the Bank;

               (vii) any amounts payable to the Bank pursuant to indemnification provisions of the Letter
of Credit Documents (such as indemnification payments described in Article XII of the Letter of
Credit Agreement);

               (viii) any amounts payable to the Bank pursuant to the Borrower’s Swap Obligations; and

               (ix) interest on any and all of the above amounts.

7

 

          C. Reduction of Insurance. The amount of the Authority’s insurance available
under this Agreement shall be reduced by the amounts of any payments made by the Authority
hereunder (including, without limitation, any payments made by the Authority pursuant to its right
to cure Events of Default, as described in Section 6.2A hereof); provided, however, that if the
Authority makes any payment to the Bank pursuant to the provisions of this Agreement and is
subsequently reimbursed for such payment by the Borrower or on its behalf (including any
reimbursements received by the Authority in accordance with Section 7.2 below), the insurance
available under this Agreement shall be reinstated to the extent of such reimbursement.

          D. Automatic Reduction of Insurance. The Authority’s insurance shall automatically
reduce to twenty five percent (25%) of the Debt effective on the third anniversary of the Closing
Date if the Borrower has failed to deliver to the Authority, no later than thirty (30) days after
the third anniversary of the Closing Date, a copy of a collaborative agreement as may be qualified
by confidentiality agreements within thirty (30) days after the effective date of such
collaborative agreement.

          E. Termination of Insurance. The Authority’s insurance may be automatically
terminated by the Authority as provided in Sections 9.4B and 10.7 of this Agreement, and shall be
automatically terminated (i) if the maturity of the Series 2003 Bonds is accelerated for a reason
other than the occurrence of an Event of Default under the Letter of Credit Agreement and such
acceleration is within the discretion of the Bank, or (ii) the Letter of Credit is terminated or
expires (and no other Credit Facility is substituted therefore) for a reason other than the
occurrence of an Event of Default under the Letter of Credit Agreement.

          F. Termination by Actions of Borrower. It is understood and agreed that the
Authority’s obligations hereunder shall immediately and automatically terminate and this Agreement
shall be of no further force and effect if the Borrower moves its operations either outside of the
State or to a site in the State that is not within a “priority funding area” as defined in Section
5-7B-02 of the State Finance and Procurement Article of the Annotated Code of Maryland with the
result that the Borrower no longer maintains substantial operations within such a “priority funding
area”.

          G. Application of Proceeds. If the maturity of the Series 2003 Bonds is
accelerated and the Bank exercises its remedies under the Bond Documents, the Letter of Credit
Documents and the Swap Agreement, the proceeds of such enforcement remedies shall be applied first
to the Borrower’s Letter of Credit Obligations, second to the Borrower’s Bond Obligations, and
third to the Swap Obligations.

     Section 3.2 Insurance Premium.

          A. Payment Terms. The Borrower agrees to pay the Authority’s Insurance
Premium for the Authority’s insurance being provided under this Agreement. The Authority’s
obligations to the Bank hereunder shall not be altered or diminished as a result of the failure of
the Borrower to pay such insurance premium provided that the Bank pays any premium not paid by the
Borrower within 15 days after written notice from the Authority. The

8

 

Borrower agrees to pay the Authority’s Insurance Premium directly to the Bank on the Closing
Date and within 10 days following the first day of each subsequent Insured Bond Year, if any. The
Insurance Premium shall be calculated by the Authority on the first day of each Insured Bond Year
and the Department shall bill the Borrower for such payment. The Authority’s Insurance Premium
shall be remitted to the following address:

Maryland Industrial Development Financing Authority

c/o Loan Administration Unit

Department of Business and Economic Development

217 East Redwood Street, 22nd Floor

Baltimore, Maryland 21202

          B. Effectiveness of Insurance. The Authority’s insurance shall be effective
upon receipt of the Authority’s Insurance Premium due on the Closing Date. Subject to the Bank’s
and the Borrower’s right to cure under Section A above, the Authority’s insurance shall cease to be
effective if the Authority’s Insurance Premium is not paid each year when due.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES; FINDINGS BY THE AUTHORITY

     Section 4.1 Representations and Warranties of the Authority. The Authority hereby
represents and warrants the following to the Bank:

          A. Organization of the Authority. The Authority is a body corporate and politic
and a public instrumentality of the State.

          B. Authority. Under the provisions of the MIDFA Act, the Authority has the power to
enter into this Agreement and each of the other Letter of Credit Documents entered into by it and
the transactions contemplated hereunder and thereunder and to carry out its obligations hereunder
and thereunder.

          C. Necessary Actions. By proper action, the Authority has (i) approved the issuance
and sale of the Series 2003 Bonds and the making of the Series 2003 Loan to the Borrower, (ii)
approved financial assistance (as defined in the MIDFA Act) with respect to the transaction (as
defined in the MIDFA Act), including without limitation, its insurance of the Insured Portion of
the Debt, and (iii) duly authorized the execution and delivery of this Agreement and each of the
other Letter of Credit Documents executed and delivered by it.

          D. Compliance with Laws. The Authority is not in violation of any laws of the State
which would affect its existence or its ability to enter into this Agreement or any of the other
Letter of Credit Documents entered into by it, or to carry out its obligations hereunder or
thereunder.

          E. Conflicting Agreements. The execution and performance by the Authority of this
Agreement and the other Letter of Credit Documents will not violate, be in conflict with, result
in a breach of or constitute (with due notice and/or lapse of time) a default under, any

9

 

indenture, contract, agreement, mortgage, deed of trust or other instrument to which
the Authority is a party or by which it or the Industrial Development Fund is bound.

          F. Letter of Credit Documents. The Authority has been provided with, and has been
given an opportunity to review the Letter of Credit Agreement and the other Letter of Credit
Documents.

          G. Binding Agreement. This Agreement and the other Letter of Credit Documents to
which the Authority is a party have been duly and properly authorized, executed and delivered by
the Authority, constitute the valid and legally binding obligations of the Authority and are fully
enforceable against the Authority in accordance with their respective terms.

     Section 4.2 Findings and Determinations by the Authority. The Authority
hereby confirms each of the findings and determinations made by the Authority in the
Authority’s Resolution.

ARTICLE V

REPRESENTATIONS AND WARRANTIES; COVENANTS OF THE BANK

     Section 5.1 Representations and Warranties of the Bank. The Bank hereby confirms
each of the representations and warranties made by the Bank in the Bond Documents and the Letter of
Credit Documents (if any) and represents and warrants the following to the Authority:

          A. Authority of Bank. The Bank has full corporate power and authority to enter into,
execute and deliver this Agreement and each of the other Letter of Credit Documents executed and
delivered by it and to enter into the transactions contemplated hereunder and thereunder and to
carry out and perform its obligations hereunder and thereunder.

          B. Execution of Documents. This Agreement and each of the other Letter of Credit
Documents executed and delivered by the Bank have been duly and properly executed by the Bank.

          C. Satisfaction of Conditions Precedent. To the best of the Bank’s
knowledge, all conditions precedent to its obligation to deliver the Letter of Credit as set forth
in the Bank’s Commitment Letter and in the Letter of Credit Agreement have been satisfied or waived
or provisions for the satisfaction thereof have been made pursuant to a post closing agreement
executed by the Borrower.

          D. Authority’s Subrogation Rights. The Bank acknowledges and agrees that the
Authority, to the extent of any payments made by the Authority to the Bank pursuant to this
Agreement, shall be subrogated to all rights of the Bank to receive payment of such amounts from
the Borrower or others under the Letter of Credit Documents; provided, however, that the
Authority’s rights of subrogation shall be subordinate to the rights of the Bank under the Letter
of Credit Documents until such time as the Bank has been repaid in full for all of the Borrower’s
Letter of Credit Obligations.

10

 

     Section 5.2 Covenants of the Bank. Until either (i) this Agreement has been
terminated and is of no further force and effect (regardless of whether or not the Debt has been
repaid to the Bank either in full or in part), or (ii) the Bank has assigned all of its right,
title and interest in and to the Letter of Credit Documents to the Authority pursuant to the
provisions of this Agreement, or to an assignee permitted in accordance with Section 10.1 hereof:

          A. Administration of Letter of Credit Documents. The Bank agrees to service and
administer the Letter of Credit Documents in accordance with the terms and provisions of the Letter
of Credit Documents and this Agreement. In the servicing and administration of the Letter of Credit
Documents, the Bank will:

               (i) collect and receive payments to be made by the Borrower or other persons under the
Letter of Credit Documents and apply such payments in accordance with the provisions of the Letter
of Credit Documents;

               (ii) exercise the same degree and standard of care that it exercises in
the servicing and administration of loans for its own account, similar in nature and amount to the
Debt:

               (iii) act in accordance with generally accepted business and lending practices (including
the monitoring of any covenants under the Letter of Credit Documents);

               (iv) take all reasonable steps to collect all amounts due under the Letter of Credit
Documents, including, without limitation, the enforcement of the Letter of Credit Documents and the
liquidation of all security for the Borrower’s Letter of Credit Obligations;

               (v) forward to the Authority upon written request all information, financial statements
and other materials received from the Borrower pursuant to the Letter of Credit Documents; and

               (vi) not give any consent required by the Letter of Credit Documents or expressly waive in
writing any Event of Default under the Letter of Credit Documents without first obtaining the prior
written consent of the Authority (which consent shall not be unreasonably withheld), unless the
Authority, in writing, waives its right to consent.

          B. Perfection of Liens. The Bank agrees to file all necessary financing statements
and deeds of trust within the time prescribed by law, including the Uniform Commercial
Code-Secured Transactions of the applicable jurisdictions, and take all necessary action to
continue the perfection of the liens in favor of or securing the Bank with regard to the
Borrower’s Letter of Credit Obligations in accordance with the standard contained in Section 5.2F
of this Agreement.

          C. Books and Accounting. The Bank shall maintain customary records as may be required
by its supervisory authorities with respect to all moneys received by it pursuant

11

 

to the Letter of Credit Documents, and make such records available to the Authority at all
reasonable times during the normal business hours of the Bank.

          D. Custody of Documents. The Bank shall retain physical possession of the Letter of
Credit Documents and all policies, certificates or other evidence of insurance, unless the Trustee
is entitled to such possession under the terms of the Bond Documents.

          E. No Assignment or Transfer of Documents. The Bank shall not assign or transfer its
interest in and under the Letter of Credit Documents to any other person without the prior written
consent of the Authority, which consent will not be unreasonably withheld; provided, however, that
nothing contained in this Agreement shall affect the Bank’s right to sell or otherwise transfer a
participation interest in the Borrower’s Letter of Credit Obligations without the Authority’s prior
written consent, so long as the Bank continues to be liable for its obligations under this
Agreement and the participation agreement between the Bank and such purchaser specifically states
that such purchaser is not entitled to any direct rights under this Agreement, but only such
derivative rights as may arise through its participation agreement with the Bank.

          F. Enforcement of Covenants and Agreements. Notwithstanding any other provisions of
this Agreement to the contrary, the Bank shall enforce, with the same degree and standard of care
that it exercises with respect to loans for its own account, similar in nature and amount to the
Debt, all covenants and agreements required to be maintained under the Letter of Credit Documents
unless such covenants or agreements have been waived by the Authority and the Bank, and work
together with and keep the Authority apprised of any enforcement
proceedings.

          G. Enforcement of Remedies. Upon the occurrence of an Event of Default under the
Letter of Credit Agreement which has not been waived by the Bank with the approval of the
Authority, except as provided in Section 5.3 below, the Bank shall use all reasonable efforts to
collect all sums due from the Borrower and any other person so as to minimize the liability of the
Authority. Except as may be provided otherwise in this Agreement or unless the Authority has agreed
otherwise (e.g., pursuant to one of its options set forth in Article VI of this Agreement), the
Bank will, consistent with the standard set forth in Section 5.2F above, enforce and pursue all
remedies which it has against the Borrower and any other person with respect to the Debt. In the
event payments or expenses are incurred by the Authority under this Agreement and such payments or
expenses are thereafter collected by the Bank from any person, the Bank will promptly remit such
sums to the Authority after the Debt has been repaid to the Bank in full.

          H. Duties Upon Acceleration of Maturity. Upon the occurrence of an Event of
Default under the Letter of Credit Agreement and the acceleration of the maturity of the Borrower’s
Letter of Credit Obligations, except as provided in Section 5.3 below, the Bank shall:

               (i) enforce the Letter of Credit Documents and liquidate the security for the
Borrower’s Letter of Credit Obligations and continue until completion such enforcement and
liquidation as deemed appropriate by the Bank in the exercise of its business judgment and
discretion consistent with the standard set forth in Section 5.2F above;

12

 

               (ii) pursue promptly, under the circumstances, and consistent with the standard set
forth in Section 5.2F above, any course of action permitted by the Letter of Credit Documents and
the Bond Documents and approved by the Authority (which approval shall not be unreasonably withheld
or delayed), including, without limitation, the management and preservation of the Security until
and through final liquidation thereof, exercising any of the remedies set forth in the Letter of
Credit Documents and the Bond Documents, and in the case of any foreclosure proceeding, the
prosecution of any claim for a deficiency judgment; and

               (iii) work together and keep the Authority apprised of all such enforcement and
liquidation proceedings.

          I. Application of Proceeds. The Bank agrees to apply any proceeds recovered by
the Bank from any sources in connection with the Security for the Borrower’s Letter of Credit
Obligations, including, but not limited to the following, to the satisfaction of the Borrower’s
Letter of Credit Obligations as set forth below:

               (i) any policy of insurance (unless otherwise applied in accordance with the Bond
Documents);

               (ii) any sale of the Security, or any portion thereof (unless otherwise applied in
accordance with the Bond Documents);

               (iii) any Net Proceeds (unless otherwise applied in accordance with the Bond Documents);
and

               (iv) any sums collected under any agreement of guaranty or indemnification.

     The proceeds recovered by the Bank from the foregoing or any other sources shall be applied as
follows:

          First. to the payment of all sums due and owing to the Bank under the Letter of Credit
Documents (including all sums representing costs incurred by the Bank in managing, preserving,
owning and selling the Security for the Borrower’s Letter of Credit Obligations);

          Second. to the payment to the Authority of all amounts owed to the Authority as
reimbursement (whether by virtue of the Borrower’s contractual obligations to reimburse the
Authority, by virtue of the Authority’s subrogation rights, or otherwise) for amounts paid by the
Authority to the Bank under this Agreement, and to the payment of all other sums due and owing to
the Authority under the Letter of Credit Documents; and

          Lastly. to the payment to the persons entitled thereto of any balance.

13

 

          J. No Waiver of Events of Default. The Bank shall not, without the prior
written consent of the Authority, waive any Event of Default under the Letter of Credit Documents
or the Bond Documents.

          K. Assignment of Documents to the Authority. If the Authority makes any payments
to the Bank required by this Agreement for the full amount of the Insured Portion of the Debt, and
all sums due to the Bank under the Letter of Credit Documents are simultaneously or thereafter paid
in full, the Bank will assign to the Authority, without recourse, within five days after all sums
due under the Letter of Credit Documents are paid in full, all of its right, title and interest in
and to the Bond Documents and the Letter of Credit Documents (other than the Bank’s right to
indemnification pursuant-to Article XII of the Letter of Credit Agreement, which shall survive any
such assignment and remain in full force and effect between the Bank and the Borrower, in
accordance with the terms of the Letter of Credit Agreement). The Bank’s duties and obligations to
the Authority shall cease and terminate immediately upon such assignment.

          L. Need For Insurance. The Bank agrees to notify the Authority immediately at
any time that the Bank determines that the insurance being provided by the Authority under this
Agreement is no longer necessary (e.g., because the Bank has been repaid in full for all of the
Borrower’s Letter of Credit Obligations, because the Letter of Credit Agreement has been
terminated, or otherwise).

          M. Amendment of Documents. The Bank shall not, without the prior written consent of
the Authority, agree to amend or modify any of the Bond Documents or the Letter of Credit
Documents.

          N. Additional Indebtedness and Liens. Notwithstanding any provision to the
contrary in the Documents, the Bank shall not, without the prior written consent of the Authority,
extend additional loans to the Borrower or take additional liens on the Borrower’s property.

     Section 5.3 Extent of Bank’s Obligations. The Authority acknowledges and agrees
that it may not be economically feasible for the Bank to enforce all covenants and agreements or to
exercise all remedies available to it under the Letter of Credit Documents or applicable law.
Accordingly, the Authority agrees that the Bank’s obligation to continue the enforcement of such
rights through final liquidation shall be subject to (a) a determination by the Bank, with the
concurrence of the Authority, that any costs to be incurred in connection with any such course of
action are reasonable, and (b) a determination by the Bank and the Authority that there is a
reasonable likelihood that such course of action will result in the satisfaction of a portion of
the Debt or the preservation of the security therefore.

ARTICLE VI

EVENT OF DEFAULT UNDER THE LETTER OF CREDIT DOCUMENTS

     Section 6.1 Notification Procedures Upon Occurrence of Event of Default. Upon the
occurrence of an Event of Default under the Letter of Credit Documents, the Bank and the Authority
agree as follows:

14

 

          A. Notification by Bank to Authority. The Bank agrees to send the Authority
a Notice of Default:

               (i) as soon as possible, but in any event within 15 days after the Bank has knowledge
that any payment of the Debt has become due under the Letter of Credit Documents and has not been
paid; and

               (ii) within 20 days after the Bank has knowledge of the occurrence of any other Event of
Default under the Letter of Credit Documents.

     The Notice of Default shall specify the amount of any of the Debt then due.

          B. Notification by Authority to the Bank. Within 15 days after receipt of a Notice of
Default from the Bank, the Authority shall send a notice to the Bank stating the Authority’s intent
to proceed in accordance with one of the four options described in Section 6.2 hereof and
specifying the option the Authority has elected to pursue. The Bank shall not exercise any remedy
under the Letter of Credit Documents or the Bond Documents until (i) receipt of such notice from
the Authority, or the expiration of the 15 day notification period in the event the Authority fails
to give such notice, and (ii) if the Authority notifies the Bank that it intends to cure the Event
of Default, the expiration of such additional time period or satisfaction of such other conditions
as may be specified in Section 6.2A below; provided, however, that if the delay by the Bank in the
exercise of any remedies available to it under the Letter of Credit Documents may, in the
reasonable opinion of the Bank, materially impair the security for the Borrower’s Letter of Credit
Obligations, the Bank may proceed to exercise such remedies upon the prior written consent of the
Authority, which consent shall not be unreasonably withheld or delayed.

     Section 6.2 Authority’s Options Upon Occurrence of Event of Default. The
Authority’s four options upon receipt of a Notice of Default are described in the following
Subsections A, B, C and D:

          A. Authority’s Right to Cure. The Authority shall have the right to cure any
Event of Default which can be cured by the Authority. If the Authority elects to cure, it shall,
within 10 days (with respect to a payment default) and within 30 days (with respect to all other
Events of Default) after receipt of a Notice of Default from the Bank, notify the Bank of the
Authority’s intent to, and shall, cure such Event of Default, or if a non-payment Event of Default
cannot be corrected within 30 days, commence and diligently pursue appropriate corrective action to
cure such non-payment Event of Default, and shall cure such Event of Default within 60 days. The
Bank covenants and agrees that following receipt of the Authority’s election to cure any Event of
Default, not to enforce any of the Letter of Credit Documents or liquidate any of the Security for
the Borrower’s Letter of Credit Obligations without specific written authorization from the
Authority, except in accordance with the provisions of this Section 6.2A. Nothing contained in this
Agreement shall obligate the Authority to cure any Event of Default, nor shall the curing of any
Event of Default by the Authority constitute a waiver of any remedy of the Bank or the Authority
under the Bond Documents or the Letter of Credit Documents against the Borrower or any other
person. Any payment by the Authority under this subsection

15

 

shall decrease its obligations under this Agreement; provided, however, that if the Authority
is subsequently reimbursed by the Borrower or on its behalf, the insurance available under this
Agreement shall be reinstated to the extent of such reimbursement.

     Notwithstanding the foregoing provisions of this Section:

               (i) In the event that the Bank sends a notice to the Authority stating that the Bank has
determined that the security for the Borrower’s Letter of Credit Obligations will be materially
impaired by any delay or omission to exercise any remedy described in the Letter of Credit
Documents, the Bank may, with the prior written consent of the Authority, which consent will not be
unreasonably withheld or delayed, exercise any such remedy and the Authority’s obligations under
this Agreement shall remain in full force and effect, and the Authority shall proceed under one of
the remaining three options described in Subsections B, C or D of this Section 6.2.

               (ii) In the event that the Authority receives a Notice of Default, and the Event of
Default described therein cannot be cured by the Authority, the Bank shall request the Authority to
(1) elect one of the remaining three options described in Subsections B, C or D of this Section
6.2, or (2) take no action. If the Bank requests that the Authority take no action, the Authority
may send a notice to the Bank stating that the Authority has determined that the security for the
Borrower’s Letter of Credit Obligations will be materially impaired by any delay or omission to
exercise any option described in this Agreement, and the Authority shall, with the prior written
consent of the Bank, which consent will not be unreasonably withheld or delayed, proceed under any
of the remaining three options described in Subsections B, C or D of this Section 6.2.

               (iii) At any time after the Authority has elected to exercise its right to cure under this
Section 6.2A, upon 15 days notice to the Bank, the Authority may proceed under any of the remaining
three options described in Subsections B, C or D of this Section 6.2.

               (iv) In the event that the Authority notifies the Bank of its intention to cure an Event
of Default and fails to cure such Event of Default within the time period prescribed by this
Section 6.2A, the Bank may exercise any remedies available to it after the expiration of the
applicable cure period set forth in this Section 6.2A.

          B. Acceleration of Maturity. Subject to approval by the Bank, which approval shall not
be unreasonably withheld, the Authority may (i) send a notice to the Bank, directing the Bank to
accelerate the maturity of the Series 2003 Bonds and the Debt and proceed to enforce the Bond
Documents and the Letter of Credit Documents and liquidate the Security for the Borrower’s Letter
of Credit Obligations, and (ii) thereafter make payments in accordance with Section 7.3 hereof.

          C. Purchase of Documents by the Authority. If the principal of and interest on the
Series 2003 Bonds have been paid in full, the Authority may elect to purchase the Bond Documents
and the Letter of Credit Documents, by sending a notice to the Bank of its intent to proceed under
this Subsection C. Within 30 days following such notice, on a date designated by

16

 

the Authority, the Authority shall purchase the Bond Documents and the Letter of Credit Documents
by payment in full of all sums due under the Letter of Credit Documents as of such date of
purchase. Simultaneously with any such purchase, the Bank shall assign to the Authority, without
recourse, all of its right, title and interest in and to the Bond Documents and the Letter of
Credit Documents (other than the Bank’s right to indemnification pursuant to Article XII of the
Letter of Credit Agreement, which shall survive any such purchase and remain in full force and
effect between the Bank and the Borrower) and the Security for the Borrower’s Letter of Credit
Obligations. The Bank’s obligations to the Authority shall terminate immediately upon such
assignment.

          D. Payment of Insured Portion of the Debt. The Authority may elect to pay the
Insured Portion of the Debt, and within 15 days of the last to occur of (i) receipt by the
Authority of a Notice of Default, or (ii) the Authority’s ceasing to cure any Event of Default
pursuant to Section 6.2A hereof, proceed under this Subsection D, by sending the Bank notice of its
intent to pay the Insured Portion of the Debt. Payments shall be made in accordance with the
provisions of Section 7.1 and 7.4 hereof.

ARTICLE VII

PAYMENT BY THE AUTHORITY

     Section 7.1 Payment by the Authority. All payments by the Authority hereunder
shall be in lawful money of the United States and may be made by check of the Maryland State
Treasurer. The Authority shall not be obligated to make any payment unless either (a) the Authority
has notified the Bank of its intention to cure an Event of Default pursuant to the provisions of
Section 6.2A of this Agreement, or (b) the Authority has notified the Bank of its intention to
purchase the Bond Documents and the Letter of Credit Documents pursuant to the provisions of
Section 6.2C of this Agreement, or (c) the Authority has received a Notice of Default (which Notice
of Default shall include a Certification) and is required to make such payment pursuant to the
provisions of this Agreement. Upon payment in full of the Insured Portion of the Debt, the
obligations of the Authority hereunder shall terminate, and the Authority shall be forever
discharged from any and all liability hereunder, provided, however, the Authority’s rights to
subrogation and reimbursement pursuant to the terms and provisions of this Agreement and the other
Letter of Credit Documents shall continue until this Agreement has been terminated in accordance
with its terms and the insurance provided by this Agreement shall be subject to reinstatement as
set forth in Section 3.1C until this Agreement is terminated.

     Section 7.2
Late Payments by the Borrower. In the event that the Authority makes a payment
to the Bank pursuant to its right to cure an Event of Default under Section 6.2A above and the
Borrower (or the Trustee, from amounts received by the Borrower) or another person subsequently
pays the Bank the amount due, the Bank shall advise the Authority of its receipt of payment from
the Borrower or on its behalf and shall remit any excess moneys to the Authority.

     Section 7.3 Payments Upon Acceleration of Maturity. If the Authority elects to
direct the Bank to accelerate the maturity of the Series 2003 Bonds pursuant to the option
described in Section 6.2B hereof, the Authority will pay to the Bank the lesser of (a) the Insured
Portion of the Debt, or (b) the Deficiency.

17

 

     Section 7.4 Payment Upon Election to Pay Insured Portion of the Debt. If the
Authority elects to pay the Insured Portion of the Debt pursuant to the option described in
Section 6.2D hereof, the Authority will pay to the Bank the Insured Portion of the Debt.

ARTICLE VIII

REIMBURSEMENT AND OTHER PAYMENTS BY BORROWER

     Section 8.1 Reimbursement of Authority. The Borrower hereby unconditionally
promises to reimburse the Authority (without the necessity of any demand by or notice from the
Authority) for all amounts paid by the Authority to the Bank under this Agreement (whether in
furtherance of the Authority’s right to cure any Event of Default under the Letter of Credit
Documents, in response to a claim for insurance made by the Bank to the Authority under this
Agreement, as reimbursement for any advance made by the Authority on behalf of the Borrower, or
otherwise), and to pay interest at the Penalty Rate to the Authority on all such amounts. The
Authority acknowledges that its right to receive reimbursement hereunder shall at all times be
subordinate to the rights of the Bank to receive payment under the Letter of Credit Agreement and
the other Letter of Credit Documents.

     Section 8.2 Subrogation of the Authority. The Borrower and the Bank acknowledge
that, to the extent of any payments made by the Authority under this Agreement, the Authority shall
be subrogated to (a) all rights of the Bank to receive payment from the Borrower or others under
the Letter of Credit Documents (including all rights of the Bank to all security for the Borrower’s
Letter of Credit Obligations), and (b) all rights of the Borrower to receive payment or
reimbursement of such amounts from other sources; provided, however, that any and all subrogation
rights of the Authority hereunder shall at all tunes be subordinate to the rights of the Bank to
receive payment under the Letter of Credit Documents.

     Section 8.3 Fees and Costs. All fees, expenses, taxes, costs and charges, whether
now or hereafter incurred, with respect to the Series 2003 Loan, the Borrower’s Letter of Credit
Obligations and the insurance thereof, or in any way connected therewith, including, but not
limited to, those of counsel, taxes, fees and expenses payable in connection with the Bond
Documents and the Letter of Credit Documents, shall be paid by the Borrower. The Borrower agrees to
defend, indemnify and hold the Authority harmless against and from any and all claims (except
claims caused by willful misconduct of the Authority) for any fees, charges, commissions, taxes and
compensation in connection with the Series 2003 Loan, the Borrower’s Letter of Credit Obligations
and the insurance thereof, including the expenses of court costs and reasonable attorneys’ fees.

     Section 8.4 Publicity. The Borrower authorizes the Authority to furnish news
releases to the news media or any other publications selected by the Authority advertising the fact
that financial assistance has been obtained from the Authority and the general facts of such
financial assistance.

18

 

ARTICLE IX

DEFAULTS UNDER THIS AGREEMENT; REMEDIES

     Section 9.1 Default by Bank. It shall constitute a default by the Bank under this
Agreement if the Bank breaches any of the covenants or provisions of this Agreement and fails to
cure such breach or to commence and diligently pursue such cure within 30 days after receipt of a
Notice from the Authority specifying such breach and shall cure such breach within 60 days.

     Section 9.2 Default by Authority. It shall constitute a default by the Authority
under this Agreement if the Authority fails to make any payment or breaches any covenants or
provisions of this Agreement and fails to cure such breach or to commence and diligently pursue
such cure within 30 days after receipt of a Notice from the Bank specifying such breach and shall
cure such breach within 60 days.

     Section 9.3 Default by Borrower. It shall constitute a default by the Borrower under
this Agreement if the Borrower fails to reimburse the Authority pursuant to Section 8.1 hereof for
all advances made by the Authority, together with interest thereon at the Penalty Rate, within 15
days after any payment is made by the Authority to the Bank or if the Borrower fails to pay the
Authority’s Insurance Premium as and when the same becomes due and payable and is not paid by the
Bank to the Authority.

     Section 9.4 Remedies of Authority on Default of Bank. Whenever a default referred
to in Section 9.1 hereof occurs, the Authority may take any one or more of the following remedial
steps:

          A. Notice of Bank Default. The Authority shall send the Bank a Notice of any default
specified in Section 9.1 hereof.

          B. Agreement Null and Void. The Authority, at its option, after the expiration of the
cure period set forth in Section 9.1 of this Agreement, may by Notice to the Bank declare this
Agreement to be null and void and of no further force and effect, if the Authority reasonably
determines that (i) any material provision of the MIDFA Act has not been complied with (other than
noncompliance by the Authority) by virtue of facts or circumstances known to the Bank but not known
to the Authority, or (ii) as a result of the default of the Bank, the security for the Borrower’s
Letter of Credit Obligations has been materially impaired.

          C. Reduction of the Authority’s Obligations. The Authority, at its option, may elect
to reduce its obligation to pay to the Bank the amounts required by Section 3.1 and Article VII
hereof, by the amount by which any default by the Bank has, in the reasonable determination of the
Authority, (i) reduced or impaired the value of any security for the Borrower’s Letter of Credit
Obligations, or (ii) adversely affected the ability of the Bank or the Authority to enforce the
Letter of Credit Documents or the Bond Documents or liquidate the Security for the Borrower’s
Letter of Credit Obligations.

     Section 9.5 Remedies of the Authority on Borrower’s Default. Upon default by the
Borrower under this Agreement, the Authority may instruct the Bank, in accordance with

19

 

applicable provisions of the Bond Documents and the Letter of Credit Documents, to direct the
Trustee to accelerate the maturity of the Series 2003 Bonds, and may take such other enforcement
remedies as may be available to it under law.

     THE BORROWER HEREBY AUTHORIZES AND EMPOWERS ANY CLERK OF ANY COURT OF RECORD IN THE STATE OF
MARYLAND OR ELSEWHERE TO ENTER JUDGMENT BY CONFESSION AGAINST THE BORROWER IN FAVOR OF THE BANK FOR
THE FULL AMOUNT OF THE BORROWER’S LETTER OF CREDIT OBLIGATIONS AND/OR THE BORROWER’S BOND
OBLIGATIONS TOGETHER WITH EXPENSES OF COLLECTION, INCLUDING COSTS OF SUIT AND FURTHER INCLUDING
ATTORNEY’S FEES OF FIFTEEN PERCENT (15%) OF THE UNPAID BALANCE OF THE BORROWER’S LETTER OF CREDIT
OBLIGATIONS AND/OR BORROWER’S BOND OBLIGATIONS, EXPRESSLY WAIVING SUMMONS AND OTHER PROCESS, AND
DOES FURTHER CONSENT TO THE IMMEDIATE EXECUTION OF SAID JUDGMENT. ANY JUDGMENT ENTERED AGAINST THE
BORROWER WHETHER BY CONFESSION OR OTHERWISE, SHALL BEAR INTEREST AT THE PENALTY RATE. THE AUTHORITY
AND POWER TO APPEAR FOR AND ENTER JUDGMENT AGAINST THE BORROWER, SHALL NOT BE EXHAUSTED BY ONE OR
MORE EXERCISES THEREOF, OR BY ANY IMPERFECT EXERCISE THEREOF, AND SHALL NOT BE EXTINGUISHED BY ANY
JUDGMENT ENTERED PURSUANT THERETO; SUCH AUTHORITY AND POWER MAY BE EXERCISED ON ONE OR MORE
OCCASIONS, FROM TIME TO TIME, IN THE SAME OR DIFFERENT JURISDICTIONS AS OFTEN AS THE BANK OR ITS
ASSIGNS SHALL DEEM NECESSARY OR ADVISABLE UNTIL ALL SUMS DUE UNDER THE BORROWER’S LETTER OF CREDIT
OBLIGATIONS AND THE BORROWER’S BOND OBLIGATIONS HAVE BEEN PAID IN FULL.

     Section 9.6 Remedies of Bank on Authority’s Default. Except to the extent provided
in Section 10.2 of this Agreement, upon any default by the Authority under this Agreement, the Bank
shall send the Authority Notice of such default, and if such default is not cured within 30 days
after delivery of such Notice, the Bank may direct the Trustee to accelerate the maturity of the
Series 2003 Bonds without first obtaining the approval of the Authority, and the Bank may proceed
to exercise any other rights or remedies under the Letter of Credit Documents with or without
notice to or approval of the Authority, notwithstanding any other terms or provisions of this
Agreement.

     Section 9.7 No Additional Waiver Implied by One Waiver. In the event any covenant
or provision contained in this Agreement is breached by the Bank or by the Authority or by the
Borrower and such breach is thereafter waived by the Bank or the Authority, such waiver shall be
limited to the particular breach so waived and neither the Authority nor the Bank shall be deemed
to have waived any other breach hereunder.

     Section 9.8 No Remedy Exclusive. No remedy herein conferred on or reserved to the
Authority or the Bank is intended to be exclusive of any other available remedy or remedies but
each and every such remedy shall be cumulative and shall be in addition to every other remedy
given under this Agreement or any of the other Letter of Credit Documents or the Bond Documents or
now or hereafter existing at law or in equity or by statute. No delay or omission to

20

 

exercise any right or power accruing upon any default shall impair any such right or power
or shall be construed to be a waiver thereof, but any such right and power may be exercised from
time to time and as often as may be deemed expedient.

ARTICLE X

MISCELLANEOUS

     Section 10.1Requirements
for Liability to Assignee of Bank. Notwithstanding the
provisions of Section 5.2E hereof, the Authority shall not be liable under the terms and
provisions of this Agreement to any Credit Facility Provider other than the Bank or to any
assignee of the Bank unless, with respect to an assignee only:

          A. Agreement by Assignee. Such assignee, simultaneously with the acquisition of the
Letter of Credit Documents, agrees in writing to be bound by the terms and provisions of this
Agreement and to keep and perform all of the terms, covenants and conditions of this Agreement on
the part of the Bank to be kept and performed (in which case the Bank shall be released of its
obligations under this Agreement); and

          B. Authority Approval. The Authority has approved in writing such assignee, the
assignment or transfer of the Letter of Credit Documents (or the terms and provisions of any other
documents executed and delivered in connection with such assignment or transfer), as amended. Such
approvals shall not be unreasonably withheld.

     Section 10.2 Inability of Authority to Perform its Obligations. Notwithstanding any
other terms or provisions of this Agreement, in the event the Authority is temporarily or
permanently prevented, restricted or delayed in the performance of any or all of the duties and
obligations imposed upon or assumed by it hereunder, by act of the General Assembly of Maryland, by
a court of competent jurisdiction or by administrative delay not due to the fault of the Authority,
its members or agents, the Authority (and its members and agents) shall not be liable directly or
indirectly for any claims caused to or suffered by the Bank or any other person in connection with
or as a result of such prevention, restriction or delay. Upon the termination of a temporary
prevention, restriction or delay in the performance by the Authority of any or all of the duties
and obligations imposed upon or assumed by it hereunder, the Authority shall resume and continue to
perform such duties and obligations to the extent permitted by law. However, it is understood and
agreed that during the period of any such temporary prevention, restriction or delay, the Bank may
pursue any other remedies available to it (other than remedies against the Authority) under the
Letter of Credit Documents or under law in order to minimize any losses it may suffer as a result
of its issuance of the Letter of Credit without obtaining the prior written consent of the
Authority.

     Section 10.3 Conflict of Terms. In the case of any conflict between the terms of
this Agreement and the terms of the Letter of Credit Documents or the Bond Documents (including,
without limitation, the Intercreditor Agreement), this Agreement shall control insofar as the
rights and duties of the Authority are concerned.

21

 

     Section 10.4 Severability. If any provision or remedy set forth in this
Agreement for any reason shall be held invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision or remedy of this
Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable
provision or remedy had never been set forth herein but only to the extent of such invalidity,
illegality or unenforceability.

     Section 10.5 Binding Effect. Subject to the provisions hereof, this Agreement shall
be binding upon and inure to the benefit of the parties hereto, and their respective successors and
permitted assigns of the Bank meeting the requirements of Section 10.1 hereof, and shall be
construed in accordance with the laws of the State of Maryland.

     Section 10.6 Headings. The titles or headings to the various articles, sections and
subsections of this Agreement have been inserted for convenient reference purposes only and shall
not be deemed to affect the meaning or construction of any of the provisions hereof. As used herein
the singular shall include the plural and vice versa.

     Section 10.7 Termination of Agreement. Except as provided in Sections 3.IE and F and
9.4B hereof, this Agreement shall remain in full force and effect until the earliest to occur of
either of the following events:

          (a) the Authority has paid the Insured Portion of the Debt to the Bank pursuant to the
provisions of Section 7.3 or Section 7.4 hereof or has purchased the Bond Documents and the Letter
of Credit Documents pursuant to the provisions of Section 6.2C hereof and the Authority has been
repaid to the fullest extent deemed necessary or desirable by the Authority for all amounts owed to
it under this Agreement and the other Letter of Credit Documents, whether pursuant to its rights to
reimbursement or subrogation under this Agreement and the other Letter of Credit Documents or
otherwise, or

          (b) the Bank has advised the Authority that the insurance being provided under this Agreement
is no longer necessary, and the Authority has been repaid to the fullest extent deemed necessary or
desirable by the Authority for all amounts owed to it (if any) under this Agreement and the other
Letter of Credit Documents, whether pursuant to its rights to reimbursement or subrogation under
this Agreement and the other Letter of Credit Documents or otherwise.

     Section 10.8 Final Agreement. This Agreement contains the final and entire
agreement and understanding of the parties, and any terms and conditions not set forth in this
Agreement are not a part of this Agreement and the understanding of the parties
hereof.

     Section 10.9 Amendment. This Agreement may be amended or altered only in writing
signed by the parties hereto.

     Section 10.10 Effective Date. This Agreement has been dated as of the date first
above written solely for the purpose of convenience of reference and shall become effective upon
its

22

 

execution and delivery, on the Closing Date, by the parties hereto. All representations
and warranties set forth herein shall be deemed to have been made on the Closing Date.

          Section 10.11
Counterparts. This Agreement 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.

ARTICLE XI

LIMITATION ON LIABILITY

          Section 11.1 No Full Faith and Credit. Nothing contained in this Agreement shall be
deemed or construed in any way to act as (a) a pledge of the faith and credit of the Authority, the
Department, or the State, (b) a general obligation of the Authority, the Department, or the State,
or (c) a commitment to utilize the Authority’s, the Department’s, or the State’s borrowing or
taxing powers.

          Section 11.2 No Individual Liability. No covenant or agreement contained in this
Agreement or in any of the other Letter of Credit Documents shall be deemed to be the covenant or
agreement of any agent of the Authority, the Department, or the State executing this Agreement or
any of the other Letter of Credit Documents entered into by the Authority, nor any agent of the
Authority, the Department, or the State shall be liable personally on any of the other Letter of
Credit Documents entered into by the Authority or be subject to any personal liability or
accountability by reason of the issuance, execution or delivery thereof.

[SIGNATURES APPEAR ON FOLLOWING PAGES]

23

 

          IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Insurance Agreement under their respective seals, as of the day and year first
above written.

	 	 	 	 	 	 	 	 	 	 	 
	ATTEST:	 	 	 	MARYLAND INDUSTRIAL DEVELOPMENT
	 	 	 	 	FINANCING AUTHORITY
	 
	 	 	 	 	 	 	 	 	 	 
	/s/ D. Gregory Cole

	 	 	 	By:
	 	 	 	/s/ Bernard Koman
	 	(SEAL)
	 	 	 	 	 	 	 	 	 
	D. Gregory Cole,

	 	 	 	 	 	 	 	Bernard Koman,	 	 
	Executive Director

	 	 	 	 	 	 	 	Chairman	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	WITNESS:	 	 	 	MANUFACTURERS AND TRADERS
	 	 	 	 	TRUST COMPANY
	 
	 	 	 	 	 	 	 	 	 	 
	[ILLEGIBLE]

	 	 	 	By:
	 	/s/
	 	David M. Diluigi	 	(SEAL)
	 	 	 	 	 	 	 	 	 
	 	 	 	 	Name:	David M. Diluigi	 	 
	

	 	 	 	 	 	 	 	 	 	 
	

	 	 	 	Title:
	 	VICE PRESIDENT	 	 
	

	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	WITNESS:	 	 	 	AVALON PHARMACEUTICALS, INC.
	 
	 	 	 	 	 	 	 	 	 	 
	[ILLEGIBLE]

	 	 	 	By:
	 	 /s/
	 	Kenneth C. Carter	 	(SEAL)
	 	 	 	 	 	 	 	 	 
	

	 	 	 	Name:	 	Kenneth C. Carter	 	 
	

	 	 	 	 	 	 	 	 	 	 
	

	 	 	 	Title:
	 	 CEO	 	 
	

	 	 	 	 	 	 	 	 	 	 

24

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