Exhibit 10.1
PURCHASE AGREEMENT
          THIS PURCHASE AGREEMENT (“Agreement”) is made as of the 19th day of
January, 2007 by and among Avalon Pharmaceuticals, Inc., a Delaware corporation
(the “Company”), and the Investors set forth on the signature pages affixed
hereto (each an “Investor” and collectively the “Investors”).
Recitals
          A. The Company and the Investors are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by the provisions of Regulation D (“Regulation D”), as promulgated by the U.S.
Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933,
as amended; and
          B. The Investors wish to purchase from the Company, and the Company
wishes to sell and issue to the Investors, upon the terms and conditions stated
in this Agreement, the number of shares (the “Shares”) of the Company’s Common
Stock, par value $0.01 per share (together with any securities into which such
shares may be reclassified, the “Common Stock”), determined in accordance with
the terms of this Agreement at a per share purchase price equal to $3.34 (the
“Per Share Purchase Price”); and
          C. Contemporaneous with the sale of the Common Stock, the parties
hereto will execute and deliver a Registration Rights Agreement, in the form
attached hereto as Exhibit A (the “Registration Rights Agreement”), pursuant to
which the Company will agree to provide certain registration rights under the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder, and applicable state securities laws with respect to the Securities.
          In consideration of the mutual promises made herein and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
     1. Definitions. In addition to those terms defined above and elsewhere in
this Agreement, for the purposes of this Agreement, the following terms shall
have the meanings set forth below:
          “Affiliate” means, with respect to any Person, any other Person which
directly or indirectly through one or more intermediaries Controls, is
controlled by, or is under common control with, such Person.
          “Board” means the board of directors of the Company.

 

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          “Business Day” means a day, other than a Saturday or Sunday, on which
banks in New York City and San Francisco, California are open for the general
transaction of business.
          “Company’s Knowledge” means the actual knowledge of the executive
officers (as defined in Rule 405 under the 1933 Act) of the Company, after due
inquiry.
          “Confidential Information” means trade secrets, confidential
information and know-how (including but not limited to ideas, formulae,
compositions, processes, procedures and techniques, research and development
information, computer program code, performance specifications, support
documentation, drawings, specifications, designs, business and marketing plans,
and customer and supplier lists and related information).
          “Control” (including the terms “controlling”, “controlled by” or
“under common control with”) means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise.
          “Effective Date” means the date on which the initial Registration
Statement is declared effective by the SEC.
          “Intellectual Property” means all of the following: (i) patents,
patent applications, patent disclosures and inventions (whether or not
patentable and whether or not reduced to practice); (ii) trademarks, service
marks, trade dress, trade names, corporate names, logos, slogans and Internet
domain names, together with all goodwill associated with each of the foregoing;
(iii) copyrights and copyrightable works; (iv) registrations, applications and
renewals for any of the foregoing; and (v) proprietary computer software
(including but not limited to data, data bases and documentation).
          “Material Adverse Effect” means a material adverse effect on (i) the
assets, liabilities, results of operations, condition (financial or otherwise),
business, or prospects of the Company, or (ii) the ability of the Company to
perform its obligations under the Transaction Documents.
          “Nasdaq” means The Nasdaq Stock Market, Inc.
          “Person” means an individual, corporation, partnership, limited
liability company, trust, business trust, association, joint stock company,
joint venture, sole proprietorship, unincorporated organization, governmental
authority or any other form of entity not specifically listed herein.
          “Purchase Price” means the aggregate purchase price for the Shares to
be acquired by the Investors in accordance with the terms hereof.
          “Registration Statement” has the meaning set forth in the Registration
Rights Agreement.

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          “SEC Filings” has the meaning set forth in Section 4.6.
          “Securities” means the Shares.
          “Subsidiary” of any Person means another Person, an amount of the
voting securities, other voting ownership or voting partnership interests of
which is sufficient to elect at least a majority of its Board of Directors or
other governing body (or, if there are no such voting interests, 50% or more of
the equity interests of which) is owned directly or indirectly by such first
Person.
          “Transaction Documents” means this Agreement and the Registration
Rights Agreement.
          “1933 Act” means the Securities Act of 1933, as amended, or any
successor statute, and the rules and regulations promulgated thereunder.
          “1934 Act” means the Securities Exchange Act of 1934, as amended, or
any successor statute, and the rules and regulations promulgated thereunder.
     2. Purchase and Sale of the Shares. Subject to the terms and conditions of
this Agreement, on the Closing Date, each of the Investors shall severally, and
not jointly, purchase, and the Company shall sell and issue to the Investors,
the Shares in the respective amounts set forth opposite the Investors’ names on
the signature pages attached hereto in exchange for the Purchase Price, as
specified in Section 3 below.
     3. Closing; Payment of Purchase Price. The closing (the “Closing”) of the
purchase and sale of the Shares shall take place on January 23, 2007 (the
“Closing Date”) at such time as the Company and the Investors shall mutually
agree. Upon confirmation that the other conditions to closing specified herein
have been satisfied or duly waived, on the Closing Date each Investor shall
cause a wire transfer in same day funds to be sent to the account of the Company
as instructed in writing by the Company, in an amount representing such
Investor’s pro rata portion of the Purchase Price as set forth on the signature
pages to this Agreement. Within five (5) Business Days after the Closing Date,
certificates evidencing the Shares shall be delivered by the Company to the
Investors. The Closing of the purchase and sale of the Shares shall take place
at the offices of Hogan & Hartson L.L.P., 111 South Calvert Street, Baltimore,
MD 21202 or at such other location and on such other date as the Company and the
Investors shall mutually agree.
     4. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Investors that, except as set forth in the
schedules delivered herewith (collectively, the “Disclosure Schedules”) or as
disclosed in the Company’s SEC Filings:

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          4. 1 Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business as now conducted and to own its properties. The Company is
duly qualified to do business as a foreign corporation and is in good standing
in each jurisdiction in which the conduct of its business or its ownership or
leasing of property makes such qualification or leasing necessary unless the
failure to so qualify has not had and would not reasonably be expected to have a
Material Adverse Effect. The Company has no Subsidiaries.
          4.2 Authorization. The Company has full power and authority and has
taken all requisite action on the part of the Company, its officers, directors
and stockholders necessary for (i) the authorization, execution and delivery of
the Transaction Documents, (ii) the authorization of the performance of all
obligations of the Company hereunder and under the other Transaction Documents,
and (iii) the authorization, issuance (or reservation for issuance) and delivery
of the Securities. This Agreement constitutes, and the other Transaction
Documents will constitute when executed and delivered, the legal, valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability,
relating to or affecting creditors’ rights generally.
          4.3 Capitalization. Schedule 4.3 sets forth (a) the authorized capital
stock of the Company on the date hereof; (b) the number of shares of capital
stock issued and outstanding; (c) the number of shares of capital stock issuable
pursuant to the Company’s stock plans; and (d) the number of shares of capital
stock issuable and reserved for issuance pursuant to securities (other than the
Shares) exercisable for, or convertible into or exchangeable for any shares of
capital stock of the Company. All of the issued and outstanding shares of the
Company’s capital stock have been duly authorized and validly issued and are
fully paid, nonassessable and free of pre-emptive rights and were issued in full
compliance with applicable state and federal securities law and any rights of
third parties. No Person is entitled to pre-emptive or similar statutory or
contractual rights with respect to any securities of the Company. Except as
described on Schedule 4.3, there are no outstanding warrants, options,
convertible securities or other rights, agreements or arrangements of any
character under which the Company is or may be obligated to issue any equity
securities of any kind, and except as contemplated by this Agreement or in
connection with incentive compensation arrangements entered into by the Company
in the ordinary course of its business, the Company is not currently in
negotiations for the issuance of any equity securities of any kind. Except as
described on Schedule 4.3 and except for the Registration Rights Agreement,
there are no voting agreements, buy-sell agreements, option or right of first
purchase agreements or other agreements of any kind among the Company and any of
the securityholders of the Company relating to the securities of the Company
held by them. Except as described on Schedule 4.3 and except as provided in the
Registration Rights Agreement, no Person has the right to require the Company to
register any securities of the Company under the 1933 Act, whether on a demand
basis or in connection with the registration of securities of the Company for
its own account or for the account of any other Person.

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          The issuance and sale of the Securities hereunder will not obligate
the Company to issue shares of Common Stock or other securities to any other
Person (other than the Investors) and will not result in the adjustment of the
exercise, conversion, exchange or reset price of any outstanding security.
          The Company does not have outstanding stockholder purchase rights or
“poison pill” or any similar arrangement in effect giving any Person the right
to purchase any equity interest in the Company upon the occurrence of certain
events.
          4.4 Valid Issuance. The Shares have been duly and validly authorized
and, when issued and paid for pursuant to this Agreement, will be validly
issued, fully paid and nonassessable, and shall be free and clear of all
encumbrances and restrictions (other than those created by the Investors),
except for restrictions on transfer set forth in the Transaction Documents or
imposed by applicable securities laws.
          4.5 Consents. Except as described on Schedule 4.5, the execution,
delivery and performance by the Company of the Transaction Documents and the
offer, issuance and sale of the Securities require no consent of, action by or
in respect of, or filing with, any Person, governmental body, agency, official
or stockholders of the Company other than filings that have been made pursuant
to applicable state securities laws and post-sale filings pursuant to applicable
state and federal securities laws which the Company undertakes to file within
the applicable time periods. Subject to the accuracy of the representations and
warranties of each Investor set forth in Section 5 hereof, the Company has taken
all action necessary to exempt (i) the issuance and sale of the Securities, and
(ii) the other transactions contemplated by the Transaction Documents from the
provisions of any stockholder rights plan or other “poison pill” arrangement,
any anti-takeover, business combination or control share law or statute binding
on the Company or to which the Company or any of its assets and properties may
be subject and any provision of the Company’s Certificate of Incorporation or
Bylaws that is or would reasonably be expected to become applicable to the
Investors as a result of the transactions contemplated hereby, including without
limitation, the issuance of the Securities and the ownership, disposition or
voting of the Securities by the Investors or the exercise of any right granted
to the Investors pursuant to this Agreement or the other Transaction Documents.
          4.6 Delivery of SEC Filings; Business. The Company has made available
to the Investors through the EDGAR system, true and complete copies of the
Company’s most recent Quarterly Report on Form 10-Q for the quarter ended
September 30, 2006 (the “10-Q”), Registration Statement on Form 8-A dated as of
September 26, 2005 (“Form 8-A”), Form 10-K for the year ended December 31, 2005
(“Form10-K”), and all other reports, registration statements and prospectuses
filed by the Company under the 1933 Act and the 1934 Act after the filing of the
Form 10-K and prior to the date hereof (collectively, the “SEC Filings”). The
SEC Filings are the only filings required of the Company pursuant to the 1933
Act and 1934 Act for such period. The Company is engaged in all material
respects only in the business described in the SEC Filings and the SEC Filings
contain a complete and accurate description in all material respects of the
business of the Company.
          4.7 Use of Proceeds. The net proceeds of the sale of the Shares
hereunder shall be used by the Company for general corporate purposes.

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          4.8 No Material Adverse Change. Since September 30, 2006, except as
identified and described in the SEC Filings or as described on Schedule 4.8,
there has not been:
               (i) any change in the consolidated assets, liabilities, financial
condition or operating results of the Company from that reflected in the
financial statements included in the Company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2006, except for changes in the ordinary course
of business which have not had and would not reasonably be expected to have a
Material Adverse Effect, individually or in the aggregate;
               (ii) any declaration or payment of any dividend, or any
authorization or payment of any distribution, on any of the capital stock of the
Company, or any redemption or repurchase of any securities of the Company;
               (iii) any damage, destruction or loss, whether or not covered by
insurance to any assets or properties of the Company, in each case in excess of
$25,000 individually or $50,000 in the aggregate;
               (iv) any waiver, not in the ordinary course of business, by the
Company of a material right or of a material debt owed to it;
               (v) any satisfaction or discharge of any lien, claim or
encumbrance by the Company, except in the ordinary course of business and which
is not material to the assets, properties, financial condition, operating
results or business of the Company (as such business is presently conducted);
               (vi) (A) any change or amendment to the Company’s Certificate of
Incorporation or Bylaws, or (B) any material change to any material contract or
arrangement that requires the payment by any Person party thereto of at least
$50,000 in the aggregate in any fiscal year by which the Company is bound or to
which any of their respective assets or properties is subject, other than, in
the case of clause (B) above, any such change made in the ordinary course of
business;
               (vii) any material labor difficulties or labor union organizing
activities with respect to employees of the Company;
               (viii) any material transaction entered into by the Company other
than in the ordinary course of business;
               (ix) the loss of the services, termination or change of status of
any key employee, or material change in the composition or duties of the senior
management of the Company;
               (x) the loss of any customer which has had or would reasonably be
expected to have a Material Adverse Effect; or

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               (xi) any other event or condition of any character that has had
or would reasonably be expected to have a Material Adverse Effect.
          4.9 SEC Filings; S-3 Eligibility.
               (a) At the time of filing thereof, the SEC Filings filed by the
Company pursuant to the 1934 Act complied as to form in all material respects
with the requirements of the 1934 Act and did not contain any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading.
               (b) Each registration statement and any amendment thereto filed
by the Company since January 1, 2006 pursuant to the 1933 Act and the rules and
regulations thereunder, as of the date such statement or amendment became
effective, complied as to form in all material respects with the 1933 Act and
did not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements made therein not misleading; and each prospectus filed pursuant to
Rule 424(b) under the 1933 Act, as of its issue date and as of the closing of
any sale of securities pursuant thereto did not contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.
               (c) The Company is currently eligible to use Form S-3 to register
the Registrable Securities (as such term is defined in the Registration Rights
Agreement) for resale by the Investors as contemplated by the Registration
Rights Agreement.
          4.10 No Conflict, Breach, Violation or Default. The execution,
delivery and performance of the Transaction Documents by the Company and the
issuance and sale of the Securities will not conflict with or result in a breach
or violation of any of the terms and provisions of, or constitute a default
under (i) the Company’s Certificate of Incorporation or the Company’s Bylaws,
both as in effect on the date hereof (true and complete copies of which have
been made available to the Investors through the EDGAR system), or (ii)(a) any
statute, rule, regulation or order of any governmental agency or body or any
court, domestic or foreign, having jurisdiction over the Company or any of its
assets or properties, or (b) any agreement or instrument to which the Company is
a party or by which the Company is bound or to which any of its assets or
properties is subject, except, in the case of clause (ii) above, for any
conflict, breach, violation or default that has not had or would not reasonably
be expected to have a Material Adverse Effect.

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          4.11 Tax Matters. The Company has timely prepared and filed all tax
returns required to have been filed by the Company with all appropriate
governmental agencies and timely paid all taxes shown thereon or otherwise owed
by it, except where the failure to make such payment or filing has not had or
would not reasonably be expected to have a Material Adverse Effect. The charges,
accruals and reserves on the books of the Company in respect of taxes for all
fiscal periods are adequate in all material respects, and there are no material
unpaid assessments against the Company for the assessment of any additional
taxes, penalties or interest for any fiscal period or audits by any federal,
state or local taxing authority except for any assessment which is not material
to the Company. All taxes and other assessments and levies that the Company is
required to withhold or to collect for payment have been duly withheld and
collected and paid to the proper governmental entity or third party when due,
except for any withholding, collection and payment that has not had or would not
reasonably be expected to have a Material Adverse Effect. There are no tax liens
or claims pending or, to the Company’s Knowledge, threatened against the Company
or any of its assets or property. There are no outstanding tax sharing
agreements or other such arrangements between the Company and any other
corporation or entity.
          4.12 Title to Properties. Except as disclosed in the SEC Filings, the
Company has good and marketable title to all real properties and all other
properties and assets owned by it, in each case free from liens, encumbrances
and defects that would materially affect the value thereof or materially
interfere with the use made thereof by them; and except as disclosed in the SEC
Filings, the Company holds any leased real or personal property under valid and
enforceable leases with no exceptions that would materially interfere with the
use made thereof by them.
          4.13 Certificates, Authorities and Permits. The Company possess
adequate certificates, authorities or permits issued by appropriate governmental
agencies or bodies necessary to conduct the business now operated by it, except
where the failure to so possess has not had or would not reasonably be expected
to have a Material Adverse Effect, individually or in the aggregate, and the
Company has not received any written notice of proceedings relating to the
revocation or modification of any such certificate, authority or permit that, if
determined adversely to the Company, would reasonably be expected to have a
Material Adverse Effect, individually or in the aggregate.
          4.14 Labor Matters.
          (a) The Company is not a party to or bound by any collective
bargaining agreements or other agreements with labor organizations. The Company
has not violated in any material respect any laws, regulations, orders or
contract terms, affecting the collective bargaining rights of employees, labor
organizations or any laws, regulations or orders affecting employment
discrimination, equal opportunity employment, or employees’ health, safety,
welfare, wages and hours.
          (b) (i) There are no labor disputes existing, or to the Company’s
Knowledge, threatened, involving strikes, slow-downs, work stoppages, job
actions, disputes, lockouts or any other disruptions of or by the Company’s
employees, (ii) there are no unfair labor practices or petitions for election
pending or, to the Company’s Knowledge, threatened before the National Labor
Relations Board or any other federal, state or local labor commission relating
to the Company’s employees, (iii) no demand for recognition or certification
heretofore made by any labor organization or group of employees is pending with
respect to the Company and (iv) to the Company’s Knowledge, the Company enjoys
good labor and employee relations with its employees and labor organizations.

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          (c) The Company is in compliance in all material respects with all
applicable laws respecting employment (including laws relating to classification
of employees and independent contractors) and employment practices, terms and
conditions of employment, wages and hours, and immigration and naturalization.
There are no claims pending against the Company before the Equal Employment
Opportunity Commission or any other administrative body or in any court
asserting any violation of Title VII of the Civil Rights Act of 1964, the Age
Discrimination Act of 1967, 42 U.S.C. §§ 1981 or 1983 or any other federal,
state or local Law, statute or ordinance barring discrimination in employment.
          (d) Except as disclosed in the SEC Filings or as described on
Schedule 4.14, the Company is not a party to, or bound by, any employment or
other contract or agreement that contains any severance, termination pay or
change of control liability or obligation, including, without limitation, any
“excess parachute payment,” as defined in Section 2806(b) of the Internal
Revenue Code.
          (e) Except as specified in Schedule 4.14, to the Company’s Knowledge,
each of the Company’s employees is a Person who is either a United States
citizen or a permanent resident entitled to work in the United States. To the
Company’s Knowledge, the Company has no liability for the improper
classification by the Company of such employees as independent contractors or
leased employees prior to the Closing.
          4.15 Intellectual Property. Except as described in Schedule 4.15:
               (a) All Intellectual Property of the Company (whether owned by
the Company or licensed) and necessary for the conduct of its business is
currently in compliance with all legal requirements (including timely filings,
proofs and payments of fees) and, to the Company’s Knowledge, are valid and
enforceable, subject, in the case of any patent application, to any modification
or other action that may be taken by the Patent and Trademark Office. No
Intellectual Property of the Company which is necessary for the conduct of the
Company’s business as currently conducted has been or is now involved in any
cancellation or litigation, and, to the Company’s Knowledge, no such action is
threatened. No patent of the Company has been or is now involved in any
interference, reissue, re-examination or opposition proceeding.
               (b) All of the licenses and sublicenses and consent, royalty or
other agreements concerning Intellectual Property which are necessary for the
conduct of the Company’s business as currently conducted to which the Company is
a party or by which any of its assets are bound (other than generally
commercially available, non-custom, off-the-shelf software application programs
having a retail acquisition price of less than $50,000 per license)
(collectively, “License Agreements”) are valid and binding obligations of the
Company and, to the Company’s Knowledge, the other parties thereto, enforceable
in accordance with their terms, except to the extent that enforcement thereof
may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or other similar laws affecting the enforcement of creditors’ rights
generally, and there exists no event or condition which will result in a
material violation or breach of or constitute (with or without due notice or
lapse of time or both) a default by the Company under any such License
Agreement.

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               (c) To the Company’s Knowledge, the Company owns or has the valid
and enforceable right to use all of the Intellectual Property that is necessary
for the conduct of the Company’s business as currently conducted and for the
ownership, maintenance and operation of the Company’s properties and assets,
free and clear of all liens, encumbrances, adverse claims or obligations to
license such owned Intellectual Property and Confidential Information known to
or created by the Company, other than licenses entered into in the ordinary
course of the Company’s business. To the Company’s Knowledge, the Company has a
valid and enforceable right to use all third party Confidential Information used
or held for use by the Company
               (d) To the Company’s Knowledge, the conduct of the business as
currently conducted does not infringe or conflict with (collectively,
“Infringe”) any Intellectual Property rights of any third party, or violate any
confidentiality obligation owed by the Company to a third party. To the
Company’s Knowledge, the Intellectual Property and Confidential Information of
the Company which are necessary for the conduct of the Company’s business as
currently conducted are not being Infringed by any third party. There is no
litigation or order pending or outstanding or, to the Company’s Knowledge,
threatened, that seeks to limit or challenge the ownership, use, validity or
enforceability of any Intellectual Property or Confidential Information of the
Company and the Company’s use of any Intellectual Property or Confidential
Information owned by a third party, and, to the Company’s Knowledge, there is no
valid basis for the same.
               (e) The consummation of the transactions contemplated hereby and
by the other Transaction Documents will not result in the alteration, loss,
impairment of or restriction on the Company’s ownership or right to use any of
the Intellectual Property or Confidential Information which is necessary for the
conduct of the Company’s business as currently conducted.
               (f) The Company has taken reasonable steps to protect the
Company’s rights in its Intellectual Property and Confidential Information. Each
employee, consultant and contractor who has had access to Confidential
Information which is necessary for the conduct of the Company’s business as
currently conducted has executed an agreement to maintain the confidentiality of
such Confidential Information and has executed appropriate agreements that are
substantially consistent with the Company’s standard forms thereof. Except under
confidentiality obligations, there has been no material disclosure of any of the
Company’s Confidential Information to any third party.
          4.16 Environmental Matters. The Company (i) is not in violation of any
statute, rule, regulation, decision or order of any governmental agency or body
or any court, domestic or foreign, relating to the use, disposal or release of
hazardous or toxic substances or relating to the protection or restoration of
the environment or human exposure to hazardous or toxic substances
(collectively, “Environmental Laws”), (ii) does not own or operate any real
property contaminated with any substance that is subject to any Environmental
Laws, (iii) is not liable for any off-site disposal or contamination pursuant to
any Environmental Laws, or (iv) is not subject to any claim relating to any
Environmental Laws, in each case which violation, contamination, liability or
claim has had or would reasonably be expected to have a Material Adverse Effect,
individually or in the aggregate; and there is no pending or, to the Company’s
Knowledge, threatened investigation that might lead to such a claim.

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          4.17 Litigation. There are no pending actions, suits or proceedings
against or affecting the Company or any of its properties that have had or would
reasonably be expected to have a Material Adverse Effect, individually or in the
aggregate; and to the Company’s Knowledge, no such actions, suits or proceedings
are threatened or contemplated.
          4.18 Financial Statements. The financial statements included in each
SEC Filing present fairly, in all material respects, the financial position of
the Company as of the dates shown and its results of operations and cash flows
for the periods shown, and such financial statements have been prepared in
conformity with United States generally accepted accounting principles applied
on a consistent basis (“GAAP”) (except as may be disclosed therein or in the
notes thereto, and, in the case of quarterly financial statements, as permitted
by Form 10-Q under the 1934 Act). Except as set forth in the financial
statements of the Company included in the SEC Filings filed prior to the date
hereof, the Company has not incurred any liabilities, contingent or otherwise,
except those incurred in the ordinary course of business, consistent (as to
amount and nature) with past practices since the date of such financial
statements, none of which, individually or in the aggregate, have had or would
reasonably be expected to have a Material Adverse Effect.
          4.19 Insurance Coverage. The Company maintains in full force and
effect insurance coverage that is customary for comparably situated companies
for the business being conducted and properties owned or leased by the Company,
and the Company reasonably believes such insurance coverage to be adequate
against all liabilities, claims and risks against which it is customary for
comparably situated companies to insure.
          4.20 Compliance with Nasdaq Continued Listing Requirements. The
Company is in compliance with applicable Nasdaq continued listing requirements.
There are no proceedings pending or, to the Company’s Knowledge, threatened
against the Company relating to the continued listing of the Common Stock on
Nasdaq and the Company has not received any notice of, nor to the Company’s
Knowledge is there any basis for, the delisting of the Common Stock from Nasdaq.
          4.21 No Directed Selling Efforts or General Solicitation. Neither the
Company nor any Person acting on its behalf has conducted any general
solicitation or general advertising (as those terms are used in Regulation D) in
connection with the offer or sale of any of the Securities.
          4.22 No Integrated Offering. Neither the Company nor any of its
Affiliates, nor any Person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any Company security or solicited any
offers to buy any security, under circumstances that would adversely affect
reliance by the Company on Section 4(2) for the exemption from registration for
the transactions contemplated hereby or would require registration of the
Securities under the 1933 Act.

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          4.23 Private Placement. The offer and sale of the Securities to the
Investors as contemplated hereby is exempt from the registration requirements of
the 1933 Act.
          4.24 Questionable Payments. Neither the Company nor, to the Company’s
Knowledge, any of its respective current or former stockholders, directors,
officers, employees, agents or other Persons acting on behalf of the Company,
has on behalf of the Company or in connection with its business: (a) used any
corporate funds for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity; (b) made any direct or
indirect unlawful payments to any governmental officials or employees from
corporate funds; (c) established or maintained any unlawful or unrecorded fund
of corporate monies or other assets; (d) made any false or fictitious entries on
the books and records of the Company; or (e) made any unlawful bribe, rebate,
payoff, influence payment, kickback or other unlawful payment of any nature.
          4.25 Transactions with Affiliates. Except as disclosed in the SEC
Filings or as disclosed on Schedule 4.25, none of the officers or directors of
the Company and, to the Company’s Knowledge, none of the employees of the
Company is presently a party to any transaction with the Company (other than as
holders of stock options and/or warrants, and for services as employees,
officers and directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real
or personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the Company’s Knowledge, any entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.
          4.26 Internal Controls. The Company is in material compliance with the
provisions of the Sarbanes-Oxley Act of 2002 currently applicable to the
Company. The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management’s general or specific authorizations,
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain asset accountability,
(iii) access to assets is permitted only in accordance with management’s general
or specific authorization, and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences. The Company has established disclosure
controls and procedures (as defined in 1934 Act Rules 13a-14 and 15d-14) for the
Company and designed such disclosure controls and procedures to ensure that
material information relating to the Company is made known to the certifying
officers by others within the Company, particularly during the period in which
the Company’s most recently filed period report under the 1934 Act, as the case
may be, is being prepared. The Company’s certifying officers have evaluated the
effectiveness of the Company’s controls and procedures as of the end of the
period covered by the most recently filed periodic report under the 1934 Act
(such date, the “Evaluation Date”). The Company presented in its most recently
filed periodic report under the 1934 Act the conclusions of the certifying
officers about the effectiveness of the disclosure controls and procedures based
on their evaluations as of the Evaluation Date. Since the Evaluation Date, there
have been no significant changes in the Company’s internal controls (as such
term is defined in Item 308 of Regulation S-K) or, to the Company’s Knowledge,
in other factors that could significantly affect the Company’s internal
controls. The Company maintains and will continue to maintain a standard system
of accounting established and administered in accordance with GAAP and the
applicable requirements of the 1934 Act.

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          4.27 Disclosures.
          (a) Neither the Company nor any Person acting on its behalf has
provided the Investors or their agents or counsel with any information that
constitutes material, non-public information, other than the existence of this
Agreement and the other Transaction Documents and the transactions contemplated
hereby and thereby.
          (b) No representation or warranty of the Company contained in this
Section 4, as qualified by the Disclosure Schedules, contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained herein not misleading in light of the
circumstances under which they were made.
     5. Representations and Warranties of the Investors. Each of the Investors
hereby severally, and not jointly, represents and warrants to the Company that:
          5.1 Organization and Existence. Such Investor is a validly existing
corporation, limited partnership or limited liability company and has all
requisite corporate, partnership or limited liability company power and
authority to invest in the Securities pursuant to this Agreement.
          5.2 Authorization. The execution, delivery and performance by such
Investor of the Transaction Documents to which such Investor is a party have
been duly authorized, and this Agreement constitutes, and the other Transaction
Documents will constitute when executed and delivered, the valid and legally
binding obligations of such Investor, enforceable against such Investor in
accordance with their respective terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability, relating to or affecting creditors’ rights generally.
          5.3 Purchase Entirely for Own Account. The Securities to be received
by such Investor hereunder will be acquired for such Investor’s own account, not
as nominee or agent, and not with a view to the resale or distribution of any
part thereof in violation of the 1933 Act, and such Investor has no present
intention of selling, granting any participation in, or otherwise distributing
the same in violation of the 1933 Act without prejudice, however, to such
Investor’s right at all times to sell or otherwise dispose of all or any part of
such Securities in compliance with applicable federal and state securities laws.
Nothing contained herein shall be deemed a representation or warranty by such
Investor to hold the Securities for any period of time. Such Investor is not a
broker-dealer registered with the SEC under the 1934 Act or an entity engaged in
a business that would require it to be so registered.
          5.4 Investment Experience. Such Investor acknowledges that it can bear
the economic risk and complete loss of its investment in the Securities and has
such knowledge and experience in financial or business matters that it is
capable of evaluating the merits and risks of the investment contemplated
hereby.

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          5.5 Disclosure of Information. Such Investor has had an opportunity to
receive all information related to the Company requested by it and to ask
questions of and receive answers from the Company regarding the Company, its
business and the terms and conditions of the offering of the Securities. Such
Investor acknowledges receipt of copies of the SEC Filings. Neither such
inquiries nor any other due diligence investigation conducted by such Investor
shall modify, amend or affect such Investor’s right to rely on the Company’s
representations and warranties contained in this Agreement.
          5.6 Restricted Securities. Such Investor understands that the
Securities are characterized as “restricted securities” under the U.S. federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the 1933 Act only in certain limited circumstances.
          5.7 Legends. It is understood that, except as provided below,
certificates evidencing the Securities may bear the following or any similar
legend:
               (a) “The securities represented hereby may not be transferred
unless (i) such securities have been registered for sale pursuant to the
Securities Act of 1933, as amended, (ii) such securities may be sold pursuant to
Rule 144(k), or (iii) the Company has received an opinion of counsel reasonably
satisfactory to it that such transfer may lawfully be made without registration
under the Securities Act of 1933 or qualification under applicable state
securities laws.”
               (b) If required by the authorities of any state in connection
with the issuance of sale of the Securities, the legend required by such state
authority.
          5.8 Accredited Investor. Such Investor is an accredited investor as
defined in Rule 501(a) of Regulation D, as amended, under the 1933 Act.
          5.9 No General Solicitation. Such Investor did not learn of the
investment in the Securities as a result of any public advertising or general
solicitation.
          5.10 Investor’s Brokers and Finders. No Person will have, as a result
of the transactions contemplated by the Transaction Documents, any valid right,
interest or claim against or upon the Company or an Investor for any commission,
fee or other compensation pursuant to any agreement, arrangement or
understanding entered into by or on behalf of such Investor.

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          5.11 Prohibited Transactions. During the last thirty (30) days prior
to the date hereof, neither such Investor nor any Affiliate of such Investor
which (x) had knowledge of the transactions contemplated hereby, (y) has or
shares discretion relating to such Investor’s investments or trading or
information concerning such Investor’s investments, including in respect of the
Securities, or (z) is subject to such Investor’s review or input concerning such
Affiliate’s investments or trading (collectively, “Trading Affiliates”) has,
directly or indirectly, effected or agreed to effect any short sale, whether or
not against the box, established any “put equivalent position” (as defined in
Rule 16a-1(h) under the 1934 Act) with respect to the Common Stock, borrowed or
pre-borrowed any shares of Common Stock, granted any other right (including,
without limitation, any put or call option) with respect to the Common Stock or
with respect to any security that includes, relates to or derived any
significant part of its value from the Common Stock or otherwise sought to hedge
its position in the Securities (each, a “Prohibited Transaction”). Prior to the
earliest to occur of (i) the termination of this Agreement, or (ii) the
Effective Date, such Investor shall not, and shall cause its Trading Affiliates
not to, (A) engage, directly or indirectly, in a Prohibited Transaction, or
(B) effect any sale, assignment, pledge, hypothecation, put, call, transfer or
other disposition of any Securities.
          5.12 Ownership. Such Investor, together with its Affiliates and any
other party acting in concert therewith, will not, following its investment in
the Securities, beneficially own more than 19.9% of the currently outstanding
shares of Common Stock of the Company.
          5.13 Independence. Each Investor acknowledges and agrees that it has
acted independently from all other Investors (other than those under common
ownership and control) and that each such Investor has conducted its own due
diligence and reviewed (or had the opportunity to review) the Transaction
Documents with its own independent counsel. Each Investor has independently
determined the merits and risks associated with an investment on the basis set
forth in the Transaction Documents and without any agreements, understandings or
arrangements other than those expressly set forth in the Transaction Documents.
     6. Conditions to Closing.
          6.1 Conditions to the Investors’ Obligations. The obligation of each
Investor to purchase the Shares at the Closing is subject to the fulfillment to
such Investor’s satisfaction, on or prior to the Closing Date, of the following
conditions, any of which may be waived by such Investor (as to itself only):
               (a) The representations and warranties made by the Company in
Section 4 hereof qualified as to materiality shall be true and correct at all
times prior to and on the Closing Date, except to the extent any such
representation or warranty expressly speaks as of an earlier date, in which case
such representation or warranty shall be true and correct as of such earlier
date, and, the representations and warranties made by the Company in Section 4
hereof not qualified as to materiality shall be true and correct in all material
respects at all times prior to and on the Closing Date, except to the extent any
such representation or warranty expressly speaks as of an earlier date, in which
case such representation or warranty shall be true and correct in all material
respects as of such earlier date. The Company shall have performed in all
material respects all obligations and covenants herein required to be performed
by it on or prior to the Closing Date.

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               (b) The Company shall have obtained any and all consents,
permits, approvals, registrations and waivers (including, without limitation,
approval in accordance with applicable law and the applicable requirements of
any stock exchange or market on which the Common Stock is traded or quoted)
necessary for consummation of the purchase and sale of the Securities and the
consummation of the other transactions contemplated by the Transaction
Documents, all of which shall be in full force and effect; provided, however,
that it shall not be a condition to each Investor’s obligation to purchase the
Shares at the Closing that the Company obtain the waiver of any “piggyback”
registration rights held by the Company’s securityholders under written
agreements entered into by the Company prior to the date hereof.
               (c) The Company shall have executed and delivered the
Registration Rights Agreement.
               (d) The Company shall have taken all action necessary to effect
the listing of the Shares on the Nasdaq Global Market upon official notice of
issuance.
               (e) No judgment, writ, order, injunction, award or decree of or
by any court, or judge, justice or magistrate, including any bankruptcy court or
judge, or any order of or by any governmental authority, shall have been issued,
and no action or proceeding shall have been instituted by any governmental
authority, enjoining or preventing the consummation of the transactions
contemplated hereby or in the other Transaction Documents.
               (f) The Company shall have delivered a Certificate, executed on
behalf of the Company by its Chief Executive Officer, dated as of the Closing
Date, certifying to the fulfillment of the conditions specified in subsections
(a), (b), (d), (e) (which subsection (e) shall be qualified to the Company’s
Knowledge) and (i) of this Section 6.1.
               (g) The Company shall have delivered a Certificate, executed on
behalf of the Company by its Secretary, dated as of the Closing Date, certifying
the resolutions adopted by the Board approving the transactions contemplated by
this Agreement and the other Transaction Documents and the issuance of the
Securities, certifying the current versions of the Certificate of Incorporation
and Bylaws of the Company and certifying as to the signatures and authority of
persons signing the Transaction Documents and related documents on behalf of the
Company.
               (h) The Investors shall have received an opinion from Hogan &
Hartson L.L.P., the Company’s outside counsel, dated as of the Closing Date, in
form and substance reasonably acceptable to the Investors and addressing such
legal matters as set forth on Exhibit B attached hereto.
               (i) No stop order or suspension of trading shall have been
imposed by Nasdaq, the SEC or any other governmental or regulatory body with
respect to public trading in the Common Stock.
               6.2 Conditions to Obligations of the Company. The Company’s
obligation to sell and issue the Shares at the Closing is subject to the
fulfillment to the satisfaction of the Company on or prior to the Closing Date
of the following conditions, any of which may be waived by the Company:

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               (a) The representations and warranties made by the Investors in
Section 5 hereof, other than the representations and warranties contained in
Sections 5.3, 5.4, 5.5, 5.6, 5.7, 5.8, 5.9 and 5.12 (the “Investment
Representations”), shall be true and correct in all material respects when made,
and shall be true and correct in all material respects as of the Closing Date
with the same force and effect as if they had been made on and as of said date.
The Investment Representations shall be true and correct in all respects when
made, and shall be true and correct in all respects on the Closing Date with the
same force and effect as if they had been made on and as of said date. The
Investors shall have performed in all material respects all obligations and
covenants herein required to be performed by them on or prior to the Closing
Date.
               (b) The Investors shall have executed and delivered the
Registration Rights Agreement.
               (c) The Investors shall have delivered the Purchase Price to the
Company in the manner contemplated by Section 3.
               (d) The Company shall have obtained any and all consents,
permits, approvals, registrations and waivers (including, without limitation,
approval in accordance with applicable law and the applicable requirements of
any stock exchange or market on which the Common Stock is traded or quoted)
necessary or appropriate for consummation of the purchase and sale of the
Securities and the consummation of the other transactions contemplated by the
Transaction Documents, all of which shall be in full force and effect; provided,
however, that it shall not be a condition to the Company’s obligation to sell
and issue the Shares that the Company obtain the waiver of any “piggyback”
registration rights held by the Company’s securityholders under written
agreements entered into by the Company prior to the date hereof.
               (e) No judgment, writ, order, injunction, award or decree of or
by any court, or judge, justice or magistrate, including any bankruptcy court or
judge, or any order of or by any governmental authority, shall have been issued,
and no action or proceeding shall have been instituted by any governmental
authority, enjoining or preventing the consummation of the transactions
contemplated hereby or in the other Transaction Documents.
               (f) The Company shall have received gross proceeds from the sale
of the Shares as contemplated hereby of at least $10 million.
          6.3 Termination of Obligations to Effect Closing; Effects.
               (a) The obligations of the Company, on the one hand, and the
Investors, on the other hand, to effect the Closing may be terminated as
follows:
                    (i) Upon the mutual written consent of the Company and the
Investors;

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                    (ii) By the Company if any of the conditions set forth in
Section 6.2 shall have become incapable of fulfillment, and shall not have been
waived by the Company;
                    (iii) By an Investor (with respect to itself only) if any of
the conditions set forth in Section 6.1 shall have become incapable of
fulfillment, and shall not have been waived by the Investor; or
                    (iv) By either the Company or any Investor (with respect to
itself only) if the Closing has not occurred on or prior to March 31, 2007;
provided, however, that, except in the case of clause (i) above, the party
seeking to terminate its obligation to effect the Closing shall not then be in
breach of any of its representations, warranties, covenants or agreements
contained in this Agreement or the other Transaction Documents if such breach
has resulted in the circumstances giving rise to such party’s seeking to
terminate its obligation to effect the Closing.
          (b) In the event of termination by any Investor of its obligations to
effect the Closing pursuant to this Section 6.3 (such Investor, a “Terminating
Investor”), written notice thereof shall forthwith be given to the other
Investors, and each other Investor shall have the right (but not the obligation)
to purchase at a price per Share equal to the Per Share Purchase Price a pro
rata portion of the Terminating Investor’s allocated portion of the total number
of Shares to be acquired by all Investors under this Agreement (or such greater
portion of the Terminated Investor’s allocated portion of the Shares as
otherwise agreed to among each of the other Investors electing to purchase a
portion of the Terminated Investor’s allocated portion of the Shares). Nothing
in this Section 6.3 shall be deemed to release any party from any liability for
any breach by such party of the terms and provisions of this Agreement or the
other Transaction Documents or to impair the right of any party to compel
specific performance by any other party of its obligations under this Agreement
or the other Transaction Documents.
     7. Covenants and Agreements of the Company and the Investors.
          7.1 Authorized Common Stock. The Company has a sufficient number of
authorized and unissued shares of Common Stock (after taking into account shares
reserved for issuance under stock plans and for other purposes) to permit the
issuance of the Shares hereunder.
          7.2 No Conflicting Agreements. The Company will not take any action,
enter into any agreement or make any commitment that would conflict or interfere
in any material respect with the Company’s obligations to the Investors under
the Transaction Documents.
          7.3 Compliance with Laws. The Company will comply in all material
respects with all applicable laws, rules, regulations, orders and decrees of all
governmental authorities.

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          7.4 Listing of Underlying Shares and Related Matters. The Company has
taken all necessary action to cause the Shares to be listed on the Nasdaq Global
Market no later than the Closing Date. Further, if the Company applies to have
its Common Stock or other securities traded on any other principal stock
exchange or market, it shall include in such application the Shares and will
take such other action as is necessary to cause such Common Stock to be so
listed. The Company will use commercially reasonable efforts to continue the
listing and trading of its Common Stock on Nasdaq and, in accordance, therewith,
will use commercially reasonable efforts to comply in all respects with the
Company’s reporting, filing and other obligations under the bylaws or rules of
such market or exchange, as applicable.
          7.5 Termination of Covenants. The provisions of Sections 7.2 through
7.4 shall terminate and be of no further force and effect on the date on which
the Company’s obligations under the Registration Rights Agreement to register or
maintain the effectiveness of any registration covering the Registrable
Securities (as such term is defined in the Registration Rights Agreement) shall
terminate.
          7.6 Removal of Legends. Upon the earlier of (i) the sale of any Shares
under a registration statement, (ii) Rule 144(k) becoming available with respect
to the Shares, (iii) any sale pursuant to Rule 144 (assuming the transferor is
not an Affiliate of the Company) or (iv) such time as a legend is no longer
required under applicable requirements of the 1933 Act (including controlling
judicial interpretations and pronouncements issued by the SEC), the Company
shall (A) deliver to the transfer agent for the Common Stock (the “Transfer
Agent”) irrevocable instructions that the Transfer Agent shall reissue a
certificate representing shares of Common Stock without legends upon receipt by
such Transfer Agent of the legended certificates for such shares, together with
either (1) a customary representation by the Investor that all conditions
permitting the removal of the legends have been met, including that Rule 144(k)
applies to the shares of Common Stock represented thereby or that the shares
have been sold pursuant to Rule 144 or (2) in connection with any sale of Common
Stock by any Investor pursuant to the registration contemplated by the
Registration Rights Agreement, a statement by such Investor that it has sold the
shares of Common Stock represented thereby in accordance with the Plan of
Distribution contained in the Registration Statement, and (B) cause its counsel
to deliver to the Transfer Agent one or more blanket opinions to the effect that
the removal of such legends in such circumstances may be effected under the 1933
Act. From and after the earlier of such dates, upon an Investor’s written
request, the Company shall promptly cause certificates evidencing the Investor’s
Securities to be replaced with certificates which do not bear such restrictive
legends.
     8. Survival and Indemnification.
          8.1 Survival. The representations, warranties, covenants and
agreements contained in this Agreement shall survive the Closing of the
transactions contemplated by this Agreement; provided, however, that any claim
for Losses as a result of a breach of a representation or warranty contained
herein must be must be made, if at all, within twenty-four (24) months of the
Closing.

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          8.2 Indemnification. The Company agrees to indemnify and hold harmless
each Investor and its Affiliates and their respective directors, officers,
employees, attorneys and agents from and against, without duplication, (a) any
and all losses, claims, damages, liabilities and expenses (including without
limitation reasonable attorneys fees and disbursements and other expenses
incurred in connection with investigating, preparing or defending any action,
claim or proceeding, pending or threatened and the costs of enforcement thereof)
(collectively, “Losses”) to which such Person may become subject as a result of
any breach of representation, warranty, covenant or agreement made by or to be
performed on the part of the Company under the Transaction Documents.
          8.3 Conduct of Indemnification Proceedings. Promptly after receipt by
any Person (the “Indemnified Person”) of notice of any demand, claim or
circumstances which would or might give rise to a claim or the commencement of
any action, proceeding or investigation in respect of which indemnity may be
sought pursuant to Section 8.2, such Indemnified Person shall promptly notify
the Company in writing and the Company shall assume the defense thereof,
including the employment of counsel reasonably satisfactory to such Indemnified
Person, and shall assume the payment of all fees and expenses; provided,
however, that the failure of any Indemnified Person so to notify the Company
shall not relieve the Company of its obligations hereunder except to the extent
that the Company is materially prejudiced by such failure to notify. In any such
proceeding, any Indemnified Person shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Person unless: (i) the Company and the Indemnified Person shall
have mutually agreed to the retention of such counsel; or (ii) in the reasonable
judgment of counsel to such Indemnified Person representation of both parties by
the same counsel would be inappropriate due to actual or potential differing
interests between them. The Company shall not be liable for any settlement of
any proceeding effected without its written consent, which consent shall not be
unreasonably withheld, but if settled with such consent, or if there be a final
judgment for the plaintiff, the Company shall indemnify and hold harmless such
Indemnified Person from and against any loss or liability (to the extent stated
above) by reason of such settlement or judgment. Without the prior written
consent of the Indemnified Person, which consent shall not be unreasonably
withheld, the Company shall not effect any settlement of any pending or
threatened proceeding in respect of which any Indemnified Person is or could
have been a party and indemnity could have been sought hereunder by such
Indemnified Party, unless such settlement includes an unconditional release of
such Indemnified Person from all liability arising out of such proceeding.
     9. Miscellaneous.
          9.1 Successors and Assigns. This Agreement may not be assigned by a
party hereto without the prior written consent of the Company or the Investors,
as applicable, provided, however, that an Investor may assign its rights and
delegate its duties hereunder in whole or in part to an Affiliate or to a third
party acquiring some or all of its Securities in a private transaction without
the prior written consent of the Company or the other Investors, after notice
duly given by such Investor to the Company provided, that no such assignment or
obligation shall affect the obligations of such Investor hereunder. The
provisions of this Agreement shall inure to the benefit of and be binding upon
the respective permitted successors and assigns of the parties. Nothing in this
Agreement, express or implied, is intended to confer upon any party other than
the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement (including in Section 9.6).

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          9.2 Counterparts; Faxes. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. This Agreement may also
be executed via facsimile, which shall be deemed an original.
          9.3 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
          9.4 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given as hereinafter described (i) if given by personal delivery,
then such notice shall be deemed given upon such delivery, (ii) if given by
telex or telecopier, then such notice shall be deemed given upon receipt of
confirmation of complete transmittal, (iii) if given by mail, then such notice
shall be deemed given upon the earlier of (A) receipt of such notice by the
recipient or (B) three days after such notice is deposited in first class mail,
postage prepaid, and (iv) if given by an internationally recognized overnight
air courier, then such notice shall be deemed given one Business Day after
delivery to such carrier. All notices shall be addressed to the party to be
notified at the address as follows, or at such other address as such party may
designate by ten days’ advance written notice to the other party:
If to the Company:
Avalon Pharmaceuticals, Inc.
20358 Seneca Meadows Parkway
Germantown, Maryland 20876
Attention: Kenneth C. Carter, Ph.D. President and CEO
Telephone: (301) 556-9900
With a copy to:
Hogan & Hartson L.L.P.
111 South Calvert Street, Suite 1600
Baltimore, Maryland 21202
Attention: John H. Booher, Esq.
Telephone: (410) 659-2790
If to any Investor:
to such Investor’s address(es) set forth on the signature pages hereto.

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          9.5 Expenses. The parties hereto shall pay their own costs and
expenses in connection herewith. In the event that legal proceedings are
commenced by any party to this Agreement against another party to this Agreement
in connection with this Agreement or the other Transaction Documents, the party
or parties which do not prevail in such proceedings shall severally, but not
jointly, pay their pro rata share of the reasonable attorneys’ fees and other
reasonable and documented out-of-pocket costs and expenses incurred by the
prevailing party in such proceedings.
          9.6 Amendments and Waivers. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), only
with the written consent of the Company and the Investors. Any amendment or
waiver effected in accordance with this paragraph shall be binding upon each
holder of any Securities purchased under this Agreement at the time outstanding,
each future holder of all such Securities, and the Company.
          9.7 Publicity. Except as set forth below, no public release or
announcement concerning the transactions contemplated hereby shall be issued by
the Company or the Investors without the prior consent of the Company (in the
case of a release or announcement by the Investors) or the Investors (in the
case of a release or announcement by the Company) (which consents shall not be
unreasonably withheld), except as such release or announcement may be required
by law or the applicable rules or regulations of any securities exchange or
securities market, in which case the Company or the Investors, as the case may
be, shall allow the Investors or the Company, as applicable, to the extent
reasonably practicable in the circumstances, reasonable time to comment on such
release or announcement in advance of such issuance. On the trading day
immediately following the date hereof, the Company shall issue a press release
disclosing the execution and delivery of this Agreement. No later than the
fourth Business Day following the date hereof, the Company will file a Current
Report on Form 8-K disclosing such matters relating to the transactions
contemplated hereby as are required to be disclosed by such date. On the trading
day immediately following the Closing Date, the Company shall issue a press
release disclosing the consummation of the transactions contemplated by this
Agreement. In addition, the Company will make such other filings and notices in
the manner and time required by the SEC or Nasdaq. Notwithstanding the
foregoing, the Company shall not publicly disclose the name of any Investor, or
include the name of any Investor in any filing with the SEC (other than such
Forms 8-K, the Registration Statement and any exhibits to filings made in
respect of this transaction in accordance with periodic filing requirements
under the 1934 Act) or any regulatory agency or Nasdaq, without the prior
written consent of such Investor, except to the extent such disclosure is
required by law or trading market regulations.
          9.8 Severability. Any provision of this Agreement that is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof but shall be interpreted as if it
were written so as to be enforceable to the maximum extent permitted by
applicable law, and any such prohibition or unenforceability in any jurisdiction
shall not invalidate or render unenforceable such provision in any other
jurisdiction. To the extent permitted by applicable law, the parties hereby
waive any provision of law which renders any provision hereof prohibited or
unenforceable in any respect.

-22-

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          9.9 Entire Agreement. This Agreement, including the Exhibits and the
Disclosure Schedules, and the other Transaction Documents constitute the entire
agreement among the parties hereof with respect to the subject matter hereof and
thereof and supersede all prior agreements and understandings, both oral and
written, between the parties with respect to the subject matter hereof and
thereof.
          9.10 Further Assurances. The parties shall execute and deliver all
such further instruments and documents and take all such other actions as may
reasonably be required to carry out the transactions contemplated hereby and to
evidence the fulfillment of the agreements herein contained.
          9.11 Governing Law; Consent to Jurisdiction; Waiver of Jury Trial.
This Agreement shall be governed by, and construed in accordance with, the
internal laws of the State of New York without regard to the choice of law
principles thereof. Each of the parties hereto irrevocably submits to the
exclusive jurisdiction of the courts of the State of New York located in New
York County and the United States District Court for the Southern District of
New York for the purpose of any suit, action, proceeding or judgment relating to
or arising out of this Agreement and the transactions contemplated hereby.
Service of process in connection with any such suit, action or proceeding may be
served on each party hereto anywhere in the world by the same methods as are
specified for the giving of notices under this Agreement. Each of the parties
hereto irrevocably consents to the jurisdiction of any such court in any such
suit, action or proceeding and to the laying of venue in such court. Each party
hereto irrevocably waives any objection to the laying of venue of any such suit,
action or proceeding brought in such courts and irrevocably waives any claim
that any such suit, action or proceeding brought in any such court has been
brought in an inconvenient forum. EACH OF THE PARTIES HERETO WAIVES ANY RIGHT TO
REQUEST A TRIAL BY JURY IN ANY LITIGATION WITH RESPECT TO THIS AGREEMENT AND
REPRESENTS THAT COUNSEL HAS BEEN CONSULTED SPECIFICALLY AS TO THIS WAIVER.

-23-

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          9.12 Independent Nature of Investors’ Obligations and Rights. The
obligations of each Investor under any Transaction Document are several and not
joint with the obligations of any other Investor, and no Investor shall be
responsible in any way for the performance of the obligations of any other
Investor under any Transaction Document. The decision of each Investor to
purchase Securities pursuant to the Transaction Documents has been made by such
Investor independently of any other Investor. Nothing contained herein or in any
Transaction Document, and no action taken by any Investor pursuant thereto,
shall be deemed to constitute the Investors as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Investors are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Documents. Each
Investor acknowledges that no other Investor has acted as agent for such
Investor in connection with making its investment hereunder and that no Investor
will be acting as agent of such Investor in connection with monitoring its
investment in the Securities or enforcing its rights under the Transaction
Documents. Each Investor shall be entitled to independently protect and enforce
its rights, including, without limitation, the rights arising out of this
Agreement or out of the other Transaction Documents, and it shall not be
necessary for any other Investor to be joined as an additional party in any
proceeding for such purpose. The Company acknowledges that each of the Investors
has been provided with the same Transaction Documents for the purpose of closing
a transaction with multiple Investors and not because it was required or
requested to do so by any Investor.
[Signature pages follow]

-24-

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          IN WITNESS WHEREOF, the parties have executed this Agreement or caused
their duly authorized officers to execute this Agreement as of the date first
above written.

              The Company:   AVALON PHARMACEUTICALS, INC.    
 
           
 
  By:
Name:   /s/ Kenneth C. Carter, Ph.D.
 
Kenneth C. Carter, Ph.D.    
 
  Title:   President and Chief Executive Officer    

Signature Page to Purchase Agreement

 

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              Investor:   MERLIN NEXUS II, L.P.    
 
           
 
  By:
Name:   /s/ Norman Schleifer
 
Norman Schleifer    
 
  Title:   Chief Financial Officer    
 
            Aggregate Purchase Price: $1,903,800        
Number of Shares: 570,000
           
 
            Address for Notice:   230 Park Ave., Suite 928         New York, NY
10169    
 
                with a copy to:    
 
                Dominique Semon         c/o Merlin Nexus II, LLC         230
Park Ave., Suite 928         New York, NY 10169    
 
                Facsimile: 646-227-5201    

Signature Page to Purchase Agreement

 

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              Investor:   SEDNA PARTNERS LP    
 
           
 
  By:
Name:   /s/ Paul Yook
 
Paul Yook         Title:   Managing Member, Sedna Capital Management LLC
 
            Aggregate Purchase Price: $736,019.10        
Number of Shares: 220,365
           
 
            Address for Notice:   Sedna Capital Management LLC         200 Park
Avenue, 33rd Floor         New York, NY 11106    

Signature Page to Purchase Agreement

 

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              Investor:   SEDNA PARTNERS (QP) LP    
 
           
 
  By:
Name:   /s/ Paul Yook
 
Paul Yook         Title:   Managing Member, Sedna Capital Management LLC
 
           
Aggregate Purchase Price: $451,651.50
           
Number of Shares: 135,225
           
 
            Address for Notice:   Sedna Capital Management LLC         200 Park
Avenue, 33rd Floor         New York, NY 11106    

Signature Page to Purchase Agreement

 

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              Investor:   SEDNA OFFSHORE, LTD.    
 
           
 
  By:
Name:   /s/ Paul Yook
 
Paul Yook         Title:   Managing Member, Sedna Capital Management LLC
 
           
Aggregate Purchase Price: $157,063.50
           
Number of Shares: 47,025
           
 
            Address for Notice:   Sedna Capital Management LLC         200 Park
Avenue, 33rd Floor         New York, NY 11106    

Signature Page to Purchase Agreement

 

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              Investor:   WOODMONT INVESTMENTS LIMITED    
 
           
 
  By:
Name:   /s/ Jay G. Goldman
 
Jay G. Goldman    
 
  Title:   Woodmont Investments, Ltd. Manager    
 
           
Aggregate Purchase Price: $79,134.62
           
Number of Shares: 23,693
           
 
            Address for Notice:   Sedna Capital Management LLC         200 Park
Avenue, 33rd Floor         New York, NY 11106    

Signature Page to Purchase Agreement

 

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                  Investor:   BIOTECHNOLOGY VALUE FUND, L.P.         By:   BVF
Partners, L.P., its general partner    
 
      By:   BVF Inc., its general partner    
 
               
 
      By:
Name:   /s/ Mark N. Lampert
 
Mark N. Lampert    
 
      Title:   President    
 
               
Aggregate Purchase Price: $237,474
               
Number of Shares: 71,100
               
 
                Address for Notice:   One Sansome Street         39th Floor    
    San Francisco, CA 94104    
 
                    with a copy to:    
 
                    Jonathan D. Joseph, Esq.         P.O Box 720037         San
Francisco, CA 94172-0037    
 
                    Facsimile: 415.643.5253    

Signature Page to Purchase Agreement

 

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                  Investor:   BIOTECHNOLOGY VALUE FUND II, L.P.         By:  
BVF Partners, L.P., its general partner    
 
      By:   BVF Inc., its general partner    
 
               
 
      By:
Name:   /s/ Mark N. Lampert
 
Mark N. Lampert    
 
      Title:   President    
 
               
Aggregate Purchase Price: $163,660
               
Number of Shares: 49,000
               
 
                Address for Notice:   One Sansome Street         39th Floor    
    San Francisco, CA 94104    
 
                    with a copy to:    
 
                    Jonathan D. Joseph, Esq.         P.O Box 720037         San
Francisco, CA 94172-0037    
 
                    Facsimile: 415.643.5253    

Signature Page to Purchase Agreement

 

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                  Investor:   INVESTMENT 10, L.L.C.         By:   BVF Partners,
L.P., its attorney-in-fact    
 
      By:   BVF Inc., its general partner    
 
               
 
      By:
Name:   /s/ Mark N. Lampert
 
Mark N. Lampert    
 
      Title:   President    
 
               
Aggregate Purchase Price: $70,140
               
Number of Shares: 21,000
               
 
                Address for Notice:   One Sansome Street         39th Floor    
    San Francisco, CA 94104    
 
                    with a copy to:    
 
                    Jonathan D. Joseph, Esq.         P.O Box 720037         San
Francisco, CA 94172-0037    
 
                    Facsimile: 415.643.5253    

Signature Page to Purchase Agreement

 

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                  Investor:   BVF INVESTMENTS, L.L.C.    
 
                    By:   BVF Partners, L.P., its manager    
 
      By:   BVF Inc., its general partner    
 
               
 
      By:
Name:   /s/ Mark N. Lampert
 
Mark N. Lampert    
 
      Title:   President    
 
               
Aggregate Purchase Price: $530,726
               
Number of Shares: 158,900
               
 
                Address for Notice:   One Sansome Street         39th Floor    
    San Francisco, CA 94104    
 
                    with a copy to:    
 
                    Jonathan D. Joseph, Esq.         P.O Box 720037         San
Francisco, CA 94172-0037    
 
                    Facsimile: 415.643.5253    

Signature Page to Purchase Agreement

 

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              Investor:   CAMBER CAPITAL FUND L.P.         General Partner:
Camber Capital Partners LLC
 
           
 
  By:
Name:   /s/ Stephen R. Du Bois
 
Stephen R. Du Bois    
 
  Title:   Managing Member    
 
           
Aggregate Purchase Price: $300,600
           
Number of Shares: 90,000
           
 
            Address for Notice:   Camber Capital Partners LLC         575
Boylston Street, 4th Floor         Boston, MA 02116    
 
                with a copy to:    
 
                     
 
                     
 
                     
 
                Facsimile: 617-224-1769    

Signature Page to Purchase Agreement

 

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              Investor:   PASSPORT GLOBAL MASTER FUND SPC LTD FOR AND ON BEHALF
OF PORTFOLIO A — GLOBAL STRATEGY
 
           
 
  By:   /s/ Elizabeth Mahon    
 
  Name:  
 
Elizabeth Mahon    
 
  Title:   Controller of Passport Management, LLC, as investment manager    
 
           
Aggregate Purchase Price: $1,903,800
Number of Shares: 570,000
           
 
            Address for Notice:   402 Jackson St.         San Francisco, CA
94111         Attn: Michele Clifford    
 
                with a copy to:    
 
                     
 
                     
 
                     
 
                Facsimile: 415-321-4620    

Signature Page to Purchase Agreement

 

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              Investor:   THE JAY GOLDMAN MASTER L.P.
 
           
 
  By:   /s/ Jay G. Goldman    
 
           
 
  Name:   Jay G. Goldman    
 
  Title:   Member, The Jay Goldman Master L.P.    

Aggregate Purchase Price: $79,131.28
Number of Shares: 23,692

              Address for Notice:   Sedna Capital Management LLC     200 Park
Avenue, 33rd Floor         New York, NY 11106    

Signature Page to Purchase Agreement

 

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              Investor:   XMARK OPPORTUNITY FUND, L.P.
 
           
 
  By:   /s/ Mitchell Kaye    
 
           
 
  Name:   Mitchelle Kaye    
 
  Title:   Chief Executive Officer    
 
      Xmark Opportunity GP LLC, General    
 
      Partner to Xmark Opportunity Fund LP    

Aggregate Purchase Price: $318,218.50
Number of Shares: 95,275

              Address for Notice:   Xmark Opportunity Fund LP     301 Tresser
Blvd.     Suite 1320     Stamford, CT 06901

Signature Page to Purchase Agreement

 

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              Investor:   XMARK OPPORTUNITY FUND, LTD.
 
           
 
  By:   /s/ Mitchell Kaye    
 
           
 
  Name:   Mitchelle Kaye    
 
  Title:   Chief Executive Officer    
 
      Xmark Opportunity Manager LLC,    
 
      Investment Manager to Xmark Opportunity    
 
      Fund Ltd.    

Aggregate Purchase Price: $633,681.50
Number of Shares: 189,725

              Address for Notice:   Xmark Opportunity Fund Ltd.     301 Tresser
Blvd.     Suite 1320     Stamford, CT 06901

Signature Page to Purchase Agreement

 

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              Investor:   XMARK JV INVESTMENT PARTNERS, LLC
 
           
 
  By:   /s/ Mitchell Kaye    
 
           
 
  Name:   Mitchelle Kaye    
 
  Title:   Chief Executive Officer    
 
      Xmark Opportunity Partners LLC,    
 
      Investment Manager to Xmark JV    
 
      Investment Partners    

Aggregate Purchase Price: $951,900
Number of Shares: 285,000

              Address for Notice:   Xmark JV Investment Partners     301 Tresser
Blvd.     Suite 1320     Stamford, CT 06901

Signature Page to Purchase Agreement

 

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              Investor:   FEDERATED KAUFMANN FUND, A     PORTFOLIO OF FEDERATED
EQUITY FUNDS
 
           
 
  By:   /s/ Hans Putsch    
 
           
 
  Name:   Hans Putsch    
 
  Title:   VP, Portfolio Manager    

Aggregate Purchase Price: $1,487,302
Number of Shares: 445,300

              Address for Notice:   140 East 45th St.     New York, NY 10017
 
                with a copy to:
 
                     
 
                     
 
                     
 
                Facsimile: 212-661-0501    

Signature Page to Purchase Agreement

 

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              Investor:   FEDERATED KAUFMANN FUND II, A     PORTFOLIO OF
FEDERATED INSURANCE SERIES
 
           
 
  By:   /s/ Aash M. Shah    
 
           
 
  Name:   Aash M. Shah    
 
  Title:   VP, Portfolio Manager    

Aggregate Purchase Price: $15,698
Number of Shares: 4,700

              Address for Notice:   140 East 45th St.     New York, NY 10017
 
                with a copy to:
 
                     
 
                     
 
                     
 
                Facsimile: 212-661-0501    

Signature Page to Purchase Agreement