Document:

exv10w26a

 

Exhibit 10.26A

THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY
STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION
STATEMENTS RELATED THERETO, (ii)AN OPINION OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO
THE COMPANY, THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE
APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7
OF THIS WARRANT.

AVALON PHARMACEUTICALS, INC.

WARRANT TO PURCHASE 20,000 SHARES

OF SERIES B CONVERTIBLE PREFERRED STOCK

     THIS CERTIFIES THAT, for value received, GATX VENTURES, INC. and its assignees are entitled to
subscribe for and purchase 20,000 shares of fully paid and nonassessable Series Preferred Stock (as
adjusted pursuant to Section 4 hereof, the “Shares”) of AVALON PHARMACEUTICALS, INC., a Delaware
corporation (the “Company”), at the price per share as is determined pursuant to the next paragraph
hereof (such price and such other price as shall result, from time to time, from the adjustments
specified in Section 4 hereof is herein referred to as the “Warrant Price”), subject to the
provisions and upon the terms and conditions hereinafter set forth. As used herein, (a) the term
“Series Preferred” shall mean the Series B Convertible Preferred Stock of the Company to be
authorized in connection with the Company’s next sale of Preferred Stock to venture capital
investors in a Qualified Financing, as defined below, and any stock into or for which such
Preferred Stock may thereafter be converted or exchanged, and after the automatic conversion of
such Preferred Stock to Common Stock shall mean the Company’s Common Stock, (b) the term “Date of
Grant” shall mean May 14, 2001, and (c) the term “Other Warrants” shall mean any other
warrants issued by the Company in connection with the transaction with respect to which this
Warrant was issued, and any warrant issued upon transfer or partial exercise of or in lieu of this
Warrant. The term “Warrant” as used herein shall be deemed to include Other Warrants unless the
context clearly requires otherwise. A “Qualified Financing” shall mean the sale of a series of
convertible preferred stock of the Company having rights, preferences and priviledges senior or
equivalent to the Company’s existing Series A Preferred Stock to purchasers which include venture
capital investors in an aggregate amount not less than $10,000,000. Notwithstanding the immediately
preceding sentence, no dividends shall automatically accrue on the Series B Preferred Stock.

     The Company covenants with the holder of this Warrant that: (a) as soon as practicable, but in
no event later than the final closing of the Series B Preferred Stock anticipated to be on or about
July 31, 2001, the Company will cause sufficient shares of Series Preferred to be authorized to
permit the full exercise of this Warrant and will notify the holder or holders thereof when such
shares are authorized, and (b) no liquidation, dissolution, merger, consolidation, acquisition or
other liquidation event of the Company will occur until the Company has authorized sufficient
shares of Series Preferred for the full exercise of this Warrant. Should the Company fail to
complete a

 

 

Qualified Financing by September 30, 2001, the holder of this Warrant shall have the option of
exercising this Warrant for shares of the Company’s Common Stock.

     The Warrant Price for Series Preferred shares shall be the lowest price (on a common stock
equivalent basis) at which shares of Series Preferred are sold in the Company’s next Qualified
Financing. The Warrant Price for shares of Common Stock purchased pursuant to holder’s option
described above shall be four dollars ($4.00) per share.

     1. Term. The purchase right represented by this Warrant is exercisable, in whole or in
part, at any time and from time to time from the Date of Grant through the later of (i) ten
(10) years after the Date of Grant or (ii) five (5) years after the closing of the Company’s initial
public offering of its Common Stock (“IPO”) effected
pursuant to a Registration Statement on Form S-1 (or its
successor) filed under the Securities Act of 1933, as amended (the “Act”).

     2. Method
of Exercise; Payment; Issuance of New Warrant. Subject to Section 1 hereof,
the purchase right represented by this Warrant may be exercised by the holder hereof, in whole
or in part and from time to time, at the election of the holder hereof, by (a) the surrender of this
Warrant (with the notice of exercise substantially in the form
attached hereto as Exhibit A-1 duly
completed and executed) at the principal office of the Company and by the payment to the Company, by
certified or bank check, or by wire transfer to an account designated by the Company (a “Wire
Transfer”) of an amount equal to the then applicable Warrant Price multiplied by the number of
Shares then being purchased; (b) if in connection with a registered public offering of the
Company’s securities, the surrender of this Warrant (with the notice of exercise form attached hereto as
Exhibit A-2 duly completed and executed) at the principal office of the Company together with
notice of arrangements reasonably satisfactory to the Company for payment to the Company
either by certified or bank check or by Wire Transfer from the proceeds of the sale of shares to be
sold by the holder in such public offering of an amount equal to the then applicable Warrant Price per
share multiplied by the number of Shares then being purchased; or (c) exercise of the “net issuance”
right provided for in Section 10.2 hereof. The person or persons in whose name(s) any certificate(s)
representing shares of Series Preferred shall be issuable upon exercise of this Warrant shall
be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the
record holder(s) of, the shares represented thereby (and such shares shall be deemed to have been
issued)immediately prior to the close of business on the date or dates upon which this Warrant is
exercised. In the event of any exercise of the rights represented by this Warrant, certificates for the
shares of stock so purchased shall be delivered to the holder hereof as soon as possible and in any
event within thirty (30) days after such exercise and, unless this Warrant has been fully exercised or
expired, a new Warrant representing the portion of the Shares, if any, with respect to which this Warrant
shall not then have been exercised shall also be issued to the holder hereof as soon as possible and
in any event within such thirty-day period; provided, however, at such time as the Company is subject
to the reporting requirements of the Securities Exchange Act of 1934, as amended, if requested by
the holder of this Warrant, the Company shall cause its transfer agent to deliver the certificate
representing Shares issued upon exercise of this Warrant to a broker or other person (as
directed by the holder exercising this Warrant) within the time period required to settle any trade made
by the holder after exercise of this Warrant.

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     3. Stock
Fully Paid; Reservation of Shares. All Shares that may be issued upon
the exercise of the rights represented by this Warrant will, upon issuance pursuant to the terms
and conditions herein, be fully paid and nonassessable, and free from all taxes, liens and charges
with respect to the issue thereof. During the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose
of the issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of
shares of its Series Preferred or Common Stock to provide for the exercise of the rights represented
by this Warrant and a sufficient number of shares of its Common Stock to provide for the conversion of
the Series Preferred into Common Stock.

     4. Adjustment
of Warrant Price and Number of Shares. The number and kind of
securities purchasable upon the exercise of this Warrant and the Warrant Price shall be
subject to adjustment from time to time upon the occurrence of certain events, as follows:

          (a)
Reclassification or Merger. In case of any reclassification or change of
securities of the class issuable upon exercise of this Warrant (other than a change in par
value, or from par value to no par value, or from no par value to par value, or as a result of a
subdivision or combination), or in case of any merger of the Company with or into another corporation (other
than a merger with another corporation in which the Company is the acquiring and the surviving
corporation and which does not result in any reclassification or change of outstanding
securities issuable upon exercise of this Warrant), or in case of any sale of all or substantially all of
the assets of the Company, the Company, or such successor or purchasing corporation, as the case may be,
shall duly execute and deliver to the holder of this Warrant a new Warrant (in form and
substance satisfactory to the holder of this Warrant), or the Company shall make appropriate provision
without the issuance of a new Warrant, so that the holder of this Warrant shall have the right to
receive, at a total purchase price not to exceed that payable upon the exercise of the unexercised portion
of this Warrant, and in lieu of the shares of Series Preferred theretofore issuable upon exercise of
this Warrant, (i) the kind and amount of shares of stock, other securities, money and property
receivable upon such reclassification, change, merger or sale by a holder of the number of shares of
Series Preferred then purchasable under this Warrant, or (ii) in the case of such a merger or sale in
which the consideration paid consists all or in part of assets other than securities of the
successor or purchasing corporation, at the option of the Holder of this Warrant, the securities of the
successor or purchasing corporation having a value at the time of the transaction equivalent to the
valuation of the Series Preferred at the time of the transaction. Any new Warrant shall provide for adjustments
that shall be as nearly equivalent as may be practicable to the adjustments provided for in this
Section 4. The provisions of this subparagraph (a) shall
similarly apply to successive reclassifications, changes, mergers and transfers.

          (b)
Subdivision or Combination of Shares. If the Company at any time while this
Warrant remains outstanding and unexpired shall subdivide or combine its outstanding shares of
Series Preferred, the Warrant Price shall be proportionately decreased and the number of
Shares issuable hereunder shall be proportionately increased in the case of a subdivision and the
Warrant Price shall be proportionately increased and the number of Shares issuable hereunder shall be
proportionately decreased in the case of a combination.

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          (c)
Stock Dividends and Other Distributions. If the Company at any time while
this Warrant is outstanding and unexpired shall (i) pay a dividend with respect to Series
Preferred payable in Series Preferred, then the Warrant Price shall be adjusted, from and after the
date of determination of shareholders entitled to receive such dividend or distribution, to that
price determined by multiplying the Warrant Price in effect immediately prior to such date of
determination by a fraction (A) the numerator of which shall be the total number of
shares of Series Preferred outstanding immediately prior to such dividend or distribution, and (B) the
denominator of which shall be the total number of shares of Series Preferred outstanding immediately
after such dividend or distribution; or (ii) make any other distribution with respect to Series
Preferred (except any distribution specifically provided for in Sections 4(a) and 4(b)), then, in each such
case, provision shall be made by the Company such that the holder of this Warrant shall receive
upon exercise of this Warrant a proportionate share of any such dividend or distribution as
though it were the holder of the Series Preferred (or Common Stock issuable upon conversion thereof) as
of the record date fixed for the determination of the shareholders of the Company entitled to
receive such dividend or distribution.

          (d)
Adjustment of Number of Shares. Upon each adjustment in the Warrant
Price, the number of Shares of Series Preferred purchasable hereunder shall be adjusted,
to the nearest whole share, to the product obtained by multiplying the number of Shares
purchasable immediately prior to such adjustment in the Warrant Price by a fraction, the numerator of
which shall be the Warrant Price immediately prior to such adjustment and the denominator of
which shall be the Warrant Price immediately thereafter.

          (e)
Antidilution Rights. The Shares of Series Preferred purchasable hereunder,
when authorized by the Company, shall have additional antidilution rights equivalent or
superior to any and all antidilution rights applicable to the Company’s Series A Preferred Stock as
set forth in the Company’s Certificate of Incorporation, as amended through the Date of Grant, a true
and complete copy of which is attached hereto as Exhibit B (the “Charter”). Notwithstanding
the immediately preceding sentence, no dividends shall automatically accrue on the Series B
Preferred Stock. The antidilution rights of the Series Preferred shall be set forth in the Charter
as amended by the Company in connection with the consumation of the Qualified Financing. Such
antidilution rights shall not be restated, amended, modified or waived in any manner that is adverse
to the holder hereof without such holder’s prior written consent. The Company shall promptly provide
the holder hereof with any restatement, amendment, modification or waiver of the Charter promptly
after the same has been made.

          (f)
Charter to Control. In the event a conflict arises between the terms and
conditions of the Charter, as amended from time to time, and the terms of this Section 4,
the terms and conditions of the Charter shall prevail.

     5. Notice
of Adjustments. Whenever the Warrant Price or the number of
Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof, the Company
shall make a certificate signed by its chief financial officer setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated, and the Warrant Price and the number of
Shares purchasable hereunder after giving effect to such

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adjustment, and shall cause copies of such certificate to be mailed (without
regard to Section 13 hereof, by first class mail, postage prepaid) to the holder
of this Warrant. In addition, whenever the conversion price or conversion ratio
of the Series Preferred shall be adjusted, the Company shall make a certificate
signed by its chief financial officer setting forth, in reasonable detail, the
event requiring the adjustment, the amount of the adjustment, the method by
which such adjustment was calculated, and the conversion price or ratio of the
Series Preferred after giving effect to such adjustment, and shall cause copies
of such certificate to be mailed (without regard to Section 13 hereof, by first
class mail, postage prepaid) to the holder of this Warrant.

     6. Fractional Shares. No fractional shares of Series Preferred or Common Stock
will be issued in connection with any exercise hereunder, but in lieu of such
fractional shares the Company shall make a cash payment therefor based on the
fair market value of the Series Preferred or Common Stock, as applicable, on the
date of exercise as reasonably determined in good faith by the Company’s Board
of Directors.

     7. Compliance
with Act; Disposition of Warrant or Shares of Series Preferred.

          (a) Compliance with Act. The holder of this Warrant, by acceptance hereof,
agrees that this Warrant, and the shares of Series Preferred or Common Stock to
be issued upon exercise hereof and any Common Stock issued upon conversion
thereof are being acquired for investment and that such holder will not offer,
sell or otherwise dispose of this Warrant, or any shares of Series Preferred or
Common Stock to be issued upon exercise hereof or any Common Stock issued upon
conversion thereof except under circumstances which will not result in a
violation of the Act or any applicable state securities laws. Upon exercise of
this Warrant, unless the Shares being acquired are registered under the Act and
any applicable state securities laws or an exemption from such registration is
available, the holder hereof shall confirm in writing that the shares of Series
Preferred or Common Stock so purchased (and any shares of Common Stock issued
upon conversion thereof) are being acquired for investment and not with a view
toward distribution or resale in violation of the Act and shall confirm such
other matters related thereto as may be reasonably requested by the Company.
This Warrant and all shares of Series Preferred or Common Stock issued upon
exercise of this Warrant and all shares of Common Stock issued upon conversion
thereof (unless registered under the Act and any applicable state securities
laws) shall be stamped or imprinted with a legend in substantially the following
form:

“THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION
MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO,
(ii) AN OPINION OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE
COMPANY, THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION
LETTERS FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE
COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE
SECURITIES WERE ISSUED, DIRECTLY OR INDIRECTLY.”

     Said legend shall be removed by the Company, upon the request of a holder, at
such time as the restrictions on the transfer of the applicable security shall
have terminated. In addition, in

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connection with the issuance of this Warrant, the holder specifically represents
to the Company by acceptance of this Warrant as follows:

               (1) The holder is aware of the Company’s business affairs and financial
condition, and has acquired information about the Company sufficient to reach an
informed and knowledgeable decision to acquire this Warrant. The holder is
acquiring this Warrant for its own account for investment purposes only and not
with a view to, or for the resale in connection with, any “distribution” thereof
in violation of the Act.

               (2) The holder understands that this Warrant has not been registered under the
Act in reliance upon a specific exemption therefrom, which exemption depends
upon, among other things, the bona fide nature of the holder’s investment intent
as expressed herein.

               (3) The holder further understands that this Warrant must be held indefinitely
unless subsequently registered under the Act and qualified under any applicable
state securities laws, or unless exemptions from registration and qualification
are otherwise available. The holder is aware of the provisions of Rule 144
promulgated under the Act.

               (4) The holder is an “accredited investor” as such term is defined in Rule 501
of Regulation D promulgated under the Act.

          (b) Disposition of Warrant or Shares. With respect to any offer, sale or other
disposition of this Warrant or any shares of Series Preferred or Common Stock acquired pursuant to
the exercise of this Warrant prior to registration of such Warrant or shares, the holder hereof
agrees to give written notice to the Company prior thereto, describing briefly the manner thereof,
together with a written opinion of such holder’s counsel, or other evidence, if reasonably
satisfactory to the Company, to the effect that such offer, sale or other disposition may be
effected without registration or qualification (under the Act as then in effect or any federal or
state securities law then in effect) of this Warrant or such shares of Series Preferred or Common
Stock and indicating whether or not under the Act certificates for this Warrant or such shares of
Series Preferred to be sold or otherwise disposed of require any restrictive legend as to
applicable restrictions on transferability in order to ensure compliance with such law. Upon
receiving such written notice and reasonably satisfactory opinion or other evidence, the Company,
as promptly as practicable but no later than fifteen (15) days after receipt of the written notice,
shall notify such holder that such holder may sell or otherwise dispose of this Warrant or such
shares of Series Preferred or Common Stock, all in accordance with the terms of the notice
delivered to the Company. If a determination has been made pursuant to this Section 7(b) that the
opinion of counsel for the holder or other evidence is not reasonably satisfactory to the Company,
the Company shall so notify the holder promptly with details thereof after such determination has
been made. Notwithstanding the foregoing, this Warrant or such shares of Series Preferred or Common
Stock may, as to such federal laws, be offered, sold or otherwise disposed of in accordance with
Rule 144 or 144A under the Act, provided that the Company shall have been furnished with such
information as the Company may reasonably request to provide a reasonable assurance that the
provisions of Rule 144 or 144A have been satisfied. Each certificate representing this Warrant or
the shares of Series Preferred thus transferred (except a transfer pursuant to Rule 144 or 144A)
shall bear a legend as to the applicable restrictions on transferabilitv in order to ensure
compliance with such laws, unless in the aforesaid opinion of

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counsel for the holder, such legend is not required in order to ensure compliance with such
laws. The Company may issue stop transfer instructions to its transfer agent in connection
with such restrictions.

          (c)
Applicability of Restrictions. Neither any restrictions of any legend
described in this Warrant nor the requirements of Section 7(b) above shall apply to any transfer
of, or grant of a security interest in, this Warrant (or the Series Preferred or Common Stock
obtainable upon exercise thereof) or any part hereof (i) to a partner of the holder if the holder
is a partnership or to a member of the holder if the holder is a limited liability company, (ii) to
a partnership of which the holder is a partner or to a limited liability company of which the
holder is a member, or (iii) to any affiliate of the holder if the holder is a corporation;
provided, however, in any such transfer, if applicable, the transferee shall on the
Company’s request agree in writing to be bound by the terms of this Warrant as if an original
holder hereof.

     8. Rights as Shareholders; Information. No holder of this Warrant, as such,
shall be entitled to vote or receive dividends or be deemed the holder of Series
Preferred or any other securities of the Company which may at any time be
issuable on the exercise hereof for any purpose, nor shall anything contained
herein be construed to confer upon the holder of this Warrant, as such, any of
the rights of a shareholder of the Company or any right to vote for the election
of directors or upon any matter submitted to shareholders at any meeting
thereof, or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until this Warrant shall have been exercised
and the Shares purchasable upon the exercise hereof shall have become
deliverable, as provided herein. Notwithstanding the foregoing, the Company will
transmit to the holder of this Warrant such information, documents and reports
as are generally distributed to the holders of any class or series of the
securities of the Company concurrently with the distribution thereof to the
shareholders.

     9. [Reserved]

     10. Additional
Rights.

     10.1
Acquisition Transactions. The Company shall provide the holder of this Warrant
with at least twenty (20) days’ written notice prior to closing thereof of the terms and
conditions of any of the following transactions (to the extent the Company has notice thereof): (i) the
sale, lease, exchange, conveyance or other disposition of all or substantially all of the Company’s
property or business, or (ii) its merger into or consolidation with any other corporation (other than a
wholly-owned subsidiary of the Company), or any transaction (including a merger or other
reorganization) or series of related transactions, in which more than 50% of the voting power of the Company
is disposed of.

     10.2
Right to Convert Warrant into Stock: Net Issuance.

          (a)
Right to Convert. In addition to and without limiting the rights of the
holder under the terms of this Warrant, the holder shall have the right to convert this Warrant or
any portion thereof (the “Conversion Right”) into shares of Series Preferred or, during the period
of the holder’s option described above, Common Stock as provided in this Section 10.2 at any time
or from time to

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time during the term of this Warrant. Upon exercise of the Conversion Right with respect to
a particular number of shares subject to this Warrant (the “Converted Warrant Shares”), the Company
shall deliver to the holder (without payment by the holder of any exercise price or any cash or
other consideration) that number of shares of fully paid and nonassessable Series Preferred or
Common Stock as is determined according to the following formula:

	 	 	 	 	 	 	 	 	 
	

	 	X
	 	=
	 	B-A	 	 
	

	 	 	 	 	 	 	 	 
	

	 	 	 	 	 	Y	 	 

	 	 	 	 	 	 	 	 	 
	

	 	Where:
	 	X
	 	=
	 	the number of shares of Series Preferred or Common Stock that shall
be issued to holder
	 
	 	 	 	 	 	 	 	 
	

	 	 	 	Y
	 	=
	 	the fair market value of one share of Series Preferred or Common
Stock, as applicable
	 
	 	 	 	 	 	 	 	 
	

	 	 	 	A
	 	=
	 	the aggregate Warrant Price of the specified number of Converted
Warrant Shares immediately prior to the exercise of the Conversion
Right (i.e., the number of Converted Warrant Shares multiplied by the
Warrant Price)
	 
	 	 	 	 	 	 	 	 
	

	 	 	 	B
	 	=
	 	the aggregate fair market value of the specified number of Converted
Warrant Shares (i.e., the number of Converted Warrant Shares
multiplied by the fair market value of one Converted Warrant Share)

     No fractional shares shall be issuable upon exercise of the Conversion Right, and, if the
number of shares to be issued determined in accordance with the foregoing formula is other than a
whole number, the Company shall pay to the holder an amount in cash equal to the fair market value
of the resulting fractional share on the Conversion Date (as hereinafter defined). For purposes of
Section 10 of this Warrant, shares issued pursuant to the Conversion Right shall be treated as if
they were issued upon the exercise of this Warrant.

          (b)
Method of Exercise. The Conversion Right may be exercised by the holder by
the surrender of this Warrant at the principal office of the Company together with a written
statement (which may be in the form of Exhibit A-l or Exhibit A-2 hereto) specifying that the
holder thereby intends to exercise the Conversion Right and indicating the number of shares subject
to this Warrant which are being surrendered (referred to in Section 10.2(a) hereof as the Converted
Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective upon
receipt by the Company of this Warrant together with the aforesaid written statement, or on such
later date as is specified therein (the “Conversion Date”), and, at the election of the holder
hereof, may be made contingent upon the closing of the sale of the Company’s Common Stock to the
public in a public offering pursuant to a Registration Statement under the Act (a “Public
Offering”). Certificates for the shares issuable upon exercise of the Conversion Right and, if
applicable, a new warrant evidencing the balance of the shares remaining subject to this Warrant,
shall be issued as of the Conversion Date and shall be delivered to the holder within thirty (30)
days following the Conversion Date.

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          (c)
Determination of Fair Market Value. For purposes of this Section 10.2, “fair
market value” of a share of Series Preferred or Common Stock as of a particular date (the
“Determination Date”) shall mean:

               (i) If the Conversion Right is exercised in connection with and contingent
upon a Public Offering, and if the Company’s Registration Statement relating to such Public
Offering (“Registration Statement”) has been declared effective by the Securities and Exchange
Commission, then the initial “Price to Public” specified in the final prospectus with respect to
such offering.

               (ii) If the Conversion Right is not exercised in connection with and contingent upon
a Public Offering, then as follows:

          (A) If traded on a securities exchange, the fair market value of the Common Stock
shall be deemed to be the average of the closing prices of the Common Stock on such exchange
over the five trading days immediately prior to the Determination Date, and the fair market value
of the Series Preferred shall be deemed to be such fair market value of the Common Stock multiplied
by the number of shares of Common Stock into which each share of Series Preferred is then
convertible;

          (B) If traded on the Nasdaq Stock Market or other over-the-counter system, the
fair market value of the Common Stock shall be deemed to be the average of the closing bid
prices of the Common Stock over the five trading days immediately prior to the Determination Date,
and the fair market value of the Series Preferred shall be deemed to be such fair market value of
the Common Stock multiplied by the number of shares of Common Stock into which each share of
Series Preferred is then convertible; and

          (C) If there is no public market for the Common Stock, then fair market value
shall be determined by mutual agreement of the holder of this Warrant and the Company.

     10.3
Exercise Prior to Expiration. To the extent this Warrant is not previously
exercised as to all of the Shares subject hereto, and if the fair market value of one share of the
Series Preferred is greater than the Warrant Price then in effect, this Warrant shall be deemed
automatically exercised pursuant to Section 10.2 above (even if not surrendered) immediately before
its expiration. For purposes of such automatic exercise, the fair market value of one share of the
Series Preferred upon such expiration shall be determined pursuant to Section 10.2(c). To the
extent this Warrant or any portion thereof is deemed automatically exercised pursuant to this
Section 10.3, the Company agrees to promptly notify the holder hereof of the number of Shares, if
any, the holder hereof is to receive by reason of such automatic exercise.

     11. Representations
and Warranties. The Company represents and warrants to the
holder of this Warrant as follows:

          (a) This Warrant has been duly authorized and executed by the Company and is a valid and
binding obligation of the Company enforceable in accordance with its terms, subject to laws of
general application relating to bankruptcy, insolvency and the relief of debtors and the rules

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of law or principles at equity governing specific performance, injunctive relief and other
equitable remedies;

          (b) The Shares will be duly authorized and reserved for issuance by the Company
and, when issued in accordance with the terms hereof, will be validly issued, fully paid and
nonassessable;

          (c) The rights, preferences, privileges and restrictions granted to or imposed upon
the Series Preferred and the holders thereof will be set forth in the Charter, and each share
of the Series Preferred represented by this Warrant will initially be convertible into one share of
Common Stock;

          (d) The shares of Common Stock issuable upon exercise of holder’s option under
this Warrant or conversion of the Shares have been duly authorized and reserved for issuance
by the Company and, when issued in accordance with the terms of the Charter will be validly issued,
fully paid and nonassessable;

          (e) The execution and delivery of this Warrant are not, and the issuance of the
Shares or Common Stock upon exercise of this Warrant in accordance with the terms hereof, will
not be inconsistent with the Company’s Charter or by-laws, do not and will not contravene any law,
governmental rule or regulation, judgment or order applicable to the Company, and do not and
will not conflict with or contravene any provision of, or constitute a default under, any
indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound
or require the consent or approval of, the giving of notice to, the registration or filing with
or the taking of any action in respect of or by, any Federal, state or local government authority or agency
or other person, except for the filing of notices pursuant to federal and state securities laws, which
filings will be effected by the time required thereby; and

          (f) There are no actions, suits, audits, investigations or proceedings pending or, to
the knowledge of the Company, threatened against the Company in any court or before any
governmental commission, board or authority which, if adversely determined, will have a
material adverse effect on the ability of the Company to perform its obligations under this Warrant.

          (g) The number of shares of Common Stock of the Company outstanding on the
date hereof, on a fully diluted basis (assuming the conversion of all outstanding convertible
securities and the exercise of all outstanding options and warrants), does not exceed seven
million nine hundred thousand shares.

     12. Modification
and Waiver. This Warrant and any provision hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the party against
which enforcement of the same is sought.

     13. Notices. Any notice, request, communication or other document required or
permitted to be given or delivered to the holder hereof or the Company shall be delivered, or
shall be sent by certified or registered mail, postage prepaid, to each such holder at its address as
shown on

-10-

 

the books of the Company or to the Company at the address indicated therefor on the signature page
of this Warrant.

     14. Binding Effect on Successors. This Warrant shall be binding upon any
corporation succeeding the Company by merger, consolidation or acquisition of
all or substantially all of the Company’s assets, and all of the obligations of
the Company relating to the Series Preferred or Common Stock issuable upon the
exercise or conversion of this Warrant shall survive the exercise, conversion
and termination of this Warrant and all of the covenants and agreements of the
Company shall inure to the benefit of the successors and assigns of the holder
hereof.

     15. Lost Warrants or Stock Certificates. The Company covenants to the holder
hereof that, upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction or mutilation of this Warrant or any stock
certificate and, in the case of any such loss, theft or destruction, upon
receipt of an indemnity reasonably satisfactory to the Company, or in the case
of any such mutilation upon surrender and cancellation of such Warrant or stock
certificate, the Company will make and deliver a new Warrant or stock
certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated
Warrant or stock certificate.

     16. Descriptive Headings. The descriptive headings of the several paragraphs of
this Warrant are inserted for convenience only and do not constitute a part of
this Warrant. The language in this Warrant shall be construed as to its fair
meaning without regard to which party drafted this Warrant.

     17. Governing Law. This Warrant shall be construed and enforced in accordance
with, and the rights of the parties shall be governed by, the laws of the State
of Delaware.

     18. Survival of Representations, Warranties and Agreements. All representations
and warranties of the Company and the holder hereof contained herein shall
survive the Date of Grant, the exercise or conversion of this Warrant (or any
part hereof) or the termination or expiration of rights hereunder. All
agreements of the Company and the holder hereof contained herein shall survive
indefinitely until, by their respective terms, they are no longer operative.

     19. Remedies. In case any one or more of the covenants and agreements contained
in this Warrant shall have been breached, the holders hereof (in the case of a
breach by the Company), or the Company (in the case of a breach by a holder),
may proceed to protect and enforce their or its rights either by suit in equity
and/or by action at law, including, but not limited to, an action for damages as
a result of any such breach and/or an action for specific performance of any
such covenant or agreement contained in this Warrant.

     20. No Impairment of Rights. The Company will not, by amendment of its Charter
or through any other means, avoid or seek to avoid the observance or performance
of any of the terms of this Warrant, but will at all times in good faith assist
in the carrying out of all such terms and in the taking of all such action as
may be necessary or appropriate in order to protect the rights of the holder of
this Warrant against impairment.

-11-

 

     21. Severability. The invalidity or unenforceability of any provision of this
Warrant in any jurisdiction shall not affect the validity or enforceability of
such provision in any other jurisdiction, or affect any other provision of this
Warrant, which shall remain in full force and effect.

     22. Recovery of Litigation Costs. If any legal action or other proceeding is
brought for the enforcement of this Warrant, or because of an alleged dispute,
breach, default, or misrepresentation in connection with any of the provisions
of this Warrant, the successful or prevailing party or parties shall be entitled
to recover reasonable attorneys’ fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it or they may be entitled.

     23. Entire
Agreement; Modification. This Warrant constitutes the entire
agreement between the parties pertaining to the subject matter contained in it
and supersedes all prior and contemporaneous agreements, representations, and
undertakings of the parties, whether oral or written, with respect to such
subject matter.

     The Company has caused this Warrant to be duly executed and delivered as of the
Date of Grant specified above.

	 	 	 	 	 	 	 
	 	 	AVALON PHARMACEUTICALS, INC.
	 
	 	 	 	 	 	 
	

	 	By	 	/s/ Kenneth C. Carter	 	 
	

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	

	 	 	 	Kenneth C. Carter	 	 
	 
	 	 	 	 	 	 
	

	 	Title
	 	 President and CEO	 	 
	

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	Address:
	 
	 	 	 	 	 	 
	

	 	 	 	Avalon Pharmaceuticals, Inc.	 	 
	 
	 	 	 	 	 	 
	

	 	 	 	19 Firstfield Road	 	 
	 
	 	 	 	 	 	 
	

	 	 	 	Gaithersburg, MD 20878	 	 

-12-

 

EXHIBIT A-1

NOTICE OF EXERCISE

	To:  	AVALON PHARMACEUTICALS, INC. (the “Company”)

       1. The undersigned hereby:

	 	o  	elects to purchase_________shares of [Series Preferred Stock] [Common
Stock] of the Company pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of
such shares in full, or
	 
	 	o  	elects to exercise its net issuance rights pursuant to Section 10.2 of the
attached Warrant with respect to_________Shares of [Series Preferred Stock]
[Common Stock].

       2. Please
issue a certificate or certificates representing_________shares in the name of
the undersigned or in such other name or names as are specified below:

	 	 	 	 	 
	
	 	

	 	 
	
	 	(Name)	 	 
	 	 	 	 	 
	
	 	

	 	 
	 	 	 	 	 
	
	 	

	 	 
	
	 	(Address)	 	 

     3. The undersigned represents that the aforesaid shares are being
acquired for the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has no
present intention of distributing or reselling such shares, all except as in compliance
with applicable securities laws.

	 	 	 	 	 
	

	 	

(Signature)
	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	

	 	 	 	 
	(Date)
	 	 	 	 

 

 

EXHIBIT A-2

NOTICE OF EXERCISE

	To:   	AVALON PHARMACEUTICALS, INC. (the “Company”)

        1. Contingent upon and effective immediately prior to the closing (the “Closing”) of the
Company’s public offering contemplated by the Registration Statement on Form S___,
filed_____________, 200_____________, the undersigned hereby:

        o elects to purchase_________shares of [Series Preferred Stock] [Common Stock] of the
Company (or such lesser number of shares as may be sold on behalf of the undersigned at the Closing)
pursuant to the terms of the attached Warrant, or

        o elects to exercise its net issuance rights pursuant to Section 10.2 of the attached
Warrant with respect to_____________Shares of [Series Preferred Stock] [Common Stock].

        2. Please deliver to the custodian for the selling shareholders a stock certificate
representing such_____________ shares.

        3. The undersigned has instructed the custodian for the selling shareholders to deliver to
the Company $_________or, if less, the net proceeds due the undersigned from the sale of shares in
the aforesaid public offering. If such net proceeds are less than the purchase price for such shares, the
undersigned agrees to deliver the difference to the Company prior to the Closing.

	 	 	 	 	 
	

	 	

(Signature)
	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	

	 	 	 	 
	(Date)exv10w26b

 

Exhibit 10.26B

	 	 	 	 
	 

	 	 	 
	 	 

          19
Firstfield Road v Gaithersburg, MD 20878 v Phone: 301.556.1000 v Fax: 301.556.1100

     October 11, 2001

     Kevin May

     GATX Ventures, Inc.

     3687 Mount Diablo Blvd

     Suite 200

     Lafayette, CA 94549

Re: Warrant Agreement for 20,000 Shares

     Dear Kevin:

This letter agreement hereby amends paragraph 3 of the Warrant Agreement dated May
14, 2001 by and between GATX and Avalon and is restated in its entirety as follows:

     The Company covenants with the holder of this Warrant that: (a) as
soon as practicable, but in no event later than the final closing of
the Series B Preferred Stock anticipated to be on or about July 31,
2001, the Company will cause sufficient shares of Series Preferred to
be authorized to permit the full exercise of this Warrant and will
notify the holder or holders thereof when such shares are authorized,
and (b) no liquidation, dissolution, merger, consolidation, acquisition
or other liquidation event of the Company will occur until the Company
has authorized sufficient shares of Series Preferred for the full
exercise of this Warrant. Should the Company fail to complete a
Qualified Financing by October 31, 2001, the holder of this Warrant
shall have the option of exercising this Warrant for shares of the
Company’s Common Stock.

     Other than the foregoing change the Warrant agreement shall remain in full force and
effect.

	 	 	 	 	 	 	 	 	 	 	 	 	 
	

	 	/s/ Thomas G. David
	 	 	 	 	 	/s/ Patricia W. Leicher	 	 	 	 
	 	 	 	 	 	 	 	 	 
	

	 	Thomas G. David

General Counsel &
	 	Date
10-11-01
	 	 	 	Name: Patricia W. Leicher

Title: SVP
	 	Date     10/12/01	 	 
	

	 	Vice President of Operations
	 	 	 	 	 	GATX Ventures, Inc.	 	 	 	 

www.avalonrx.com

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