Document:

exv10w27

 

Exhibit 10.27

NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR DISPOSITION MAY BE EFFECTED
EXCEPT IN COMPLIANCE WITH RULE 144 UNDER SAID ACT OR WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER, SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE ACT OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES
AND EXCHANGE COMMISSION.

WARRANT TO PURCHASE 14,943 SHARES OF SERIES B PREFERRED STOCK

	 	 	 	 	 
	 	     8/20/2002

 	 

THIS CERTIFIES THAT, for
value received, General Electric Capital Corporation (“Holder”) is
entitled to subscribe for and purchase Fourteen Thousand Nine Hundred Forty Three (14,943) shares
of the fully paid and nonassessable Series B Preferred Stock (the “Shares” or the “Preferred
Stock”) of AVALON PHARMACEUTICALS, INC., a Delaware corporation (the “Company”), at the Warrant
Price (as hereinafter defined), subject to the provisions and upon the terms and conditions
hereinafter set forth. As used herein, the term “Series B Preferred Stock” shall mean the
Company’s presently authorized Series B Preferred Stock and any stock into which such Series B
Preferred Stock may hereafter be converted or exchanged.

1. Warrant Price. The
Warrant Price shall initially be Three and 53/100 dollars ($3.53) per
share, subject to
adjustment as provided in Section 7 below.

2. Conditions to Exercise. The purchase right represented by this Warrant may be exercised
at any time, or from
time to time, in whole or in part during the term commencing on the date hereof and ending at 5:00
P.M. Eastern
time on the seventh anniversary of the date of this Warrant.

3. Method of Exercise;
Payment; Issuance of Shares; Issuance of New Warrant.

(a) Cash Exercise. Subject to Section 2 hereof, me purchase right represented by this
Warrant may be exercised
by the Holder hereof, in whole or in part, by the surrender of this Warrant (with a duly executed
Notice of
Exercise in the form attached hereto) at the principal office of the Company (as set forth in
Section 17 below) and
by payment to the Company, by check, of an amount equal to the then applicable Warrant Price per
share
multiplied by the number of shares then being purchased. In the event of any exercise of the rights
represented by
this Warrant, certificates for the shares of stock so purchased shall be in the name of, and
delivered to, the Holder
hereof, or as such Holder may direct (subject to the terms of transfer contained herein and upon
payment by such
Holder hereof of any applicable transfer taxes). Such delivery shall be made within 30 days after
exercise of the
Warrant and at the Company’s expense and, unless this Warrant has been fully exercised or expired,
a new
Warrant having terms and conditions substantially identical to this Warrant and representing the
portion of the
Shares, if any, with respect to which this Warrant shall not have been exercised, shall also be
issued to the Holder
hereof within 30 days after exercise of the Warrant.

(b) Net Issue Exercise. In lieu of exercising this Warrant pursuant to Section 3(a), Holder
may elect to receive
shares equal to the value of this Warrant (or of any portion thereof
remaining unexercised) by
surrender of this
Warrant at the principal office of the Company together with notice of such election, in which
event the Company
shall issue to Holder the number of shares of the Company’s Preferred Stock computed using the
following
formula:

 

 

X = Y
(A-B)

A
 

Where X = the number of shares of Preferred Stock to be issued to Holder.

Y = the number of shares of Preferred Stock purchasable under this Warrant (at the date of
such
calculation).

A = the Fair Market Value of one share of the Company’s Preferred Stock (at the date of such
calculation).

B = Warrant Price (as adjusted to the date of such
calculation).

(c) Fair Market Value. For purposes of this Section 3, Fair Market Value of one share of
the Company’s Preferred Stock shall mean:

(i) In the event of an exercise in connection with an Initial Public Offering,
the per share Fair Market
Value for the Preferred Stock shall be the Offering Price at which the underwriters
initially sell Common
Stock to the public multiplied by the number of shares of Common Stock into which each share
of
Preferred Stock is then convertible; or

(ii) The average of the closing bid and asked prices of Common Stock quoted in the
Over-The-Counter Market Summary, the last reported sale price quoted on the Nasdaq National
Market
(“NNM”) or on any exchange on which the Common Stock is listed, whichever is applicable, as
published in the Wall Street Journal for the ten (10) trading days prior to the
date of determination of Fair
Market Value, multiplied by the number of shares of Common Stock into which each share of
Preferred
Stock is then convertible; or

(iii) In the event of an exercise in connection with a merger, acquisition or other
consolidation in
which the Company is not the surviving entity, the per share Fair Market Value for the
Preferred Stock
shall be the value to be received per share of Preferred Stock by all holders of the
Preferred Stock in such
transaction as determined by the Board of Directors; or

(iv) In any other instance, the per share Fair Market Value for the Preferred
Stock shall be as
determined in good faith by the Company’s Board of Directors.

In the event of 3(c)(iii) or 3(c)(iv), above, the Company’s Board of Directors shall prepare
a certificate, to
be signed by an authorized officer of the Company, setting forth in reasonable detail
the basis for and
method of determination of the per share Fair Market Value of the Preferred Stock. The Board
will also
certify to the Holder that this per share Fair Market Value will be applicable to all
holders of the
Company’s Preferred Stock. Such certification must be made to Holder at least thirty (30)
business days
prior to the proposed effective date of the merger, consolidation, sale, or other
triggering event as defined
in 3(c)(iii )or 3(c)(iv).

(d) Automatic Exercise. To the extent this Warrant is not previously exercised, it shall
be automatically
exercised in accordance with Sections 3(b) and 3(c) hereof (even if not surrendered) immediately
before its
expiration.

(e) In the event the terms and conditions of a certain Shareholder’s Agreement and Registration
Rights
Agreement executed by all Series B Shareholders at the time of the issuance of the Scries B
Convertible Preferred
Stock Offering (collectively, the “Related Documcnts”)are still in effect, upon exercise of the
warrant, the Holder
agrees to execute accession signature pages to the Related Documents subject to its review by
legal counsel.

4. Representations and Warranties of Holder and Restrictions on Transfer Imposed by the
Securities Act of 1933.

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(a) Representations and Warranties by Holder. The Holder represents and warrants to the
Company with respect to this purchase as follows:

(i) The Holder has substantial experience in evaluating and investing in private placement
transactions of securities of companies similar to the Company so that the Holder is
capable of evaluating the merits and risks of its investment in the Company and has the
capacity to protect its interests.

(ii) The Holder is acquiring the Warrant and the Shares of Preferred Stock issuable upon
exercise of the Warrant (collectively the “Securities”) for investment for its own account
and not with a view to, or for resale in connection with, any distribution thereof. The
Holder understands that the Securities have not been registered under the Securities Act of
1933, as amended (the “Act”) by reason of a specific exemption from the registration
provisions of the Act which depends upon, among other things, the bona fide nature of the
investment intent as expressed herein. In this connection, the Holder understands that, in
the view of the Securities and Exchange Commission (the “SEC”), the statutory basis for
such exemption may be unavailable if mis representation was predicated solely upon a
present intention to hold the Securities for the minimum capital gains period specified
under tax statutes, for a deferred sale, for or until an increase or decrease in the market
price of the Securities or for a period of one year or any other fixed period in the
future.

(iii) The Holder acknowledges that the Securities must be held indefinitely unless
subsequently registered under the Act or an exemption from such registration is available.
The Holder is aware of the provisions of Rule 144 promulgated under the Act (“Rule 144”)
which permits limited resale of securities purchased in a private placement subject to the
satisfaction of certain conditions, including, in case the securities have been held for
more than one but less than two years, the existence of a public market for the shares, the
availability of certain public information about the Company, the resale occurring not less
than one year after a party has purchased and paid for the security to be sold, the sale
being through a “broker’s transaction” or in a transaction directly with a “market maker”
(as provided by Rule 144(f)) and the number of shares or other securities being sold during
any three-month period not exceeding specified limitations.

(iv) The Holder further understands that at the time the Holder wishes to sell the
Securities there may be no public market upon which such a sale may be effected, and that
even if such a public market exists, the Company may not be satisfying the current public
information requirements of Rule 144, and that in such event, the Holder may be precluded
from selling the Securities under Rule 144 unless (a) a one-year minimum holding period
has been satisfied and (b) the Holder was not at the time of the sale nor at any time
during the three-month period prior to such sale an affiliate of the Company.

(v) The Holder has had an opportunity to discuss the Company’s business, management and
financial affairs with its management and an opportunity to review the Company’s
facilities. The Holder understands that such discussions, as well as the written
information issued by the Company, were intended to describe the aspects of the Company’s
business and prospects which it believes to be material but were not necessarily a
thorough or exhaustive description.

(b) Legends. Each certificate representing the Securities shall be endorsed with the
following legend:

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY
NOT BE TRANSFERRED UNLESS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID
ACT, A “NO ACTION” LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT
TO SUCH TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE SECURITIES
AND EXCHANGE COMMISSION, OR (IF REASONABLY REQUIRED BY THE COMPANY) AN

- 3 -

 

OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH
TRANSFER IS EXEMPT FROM SUCH REGISTRATION.

The Company need not enter into its stock records a transfer of Securities unless the conditions
specified in the foregoing legend are satisfied. The Company may also instruct its transfer agent
not to allow the transfer of any of the Shares unless the conditions specified in the foregoing
legend are satisfied.

(c) Removal of Legend and Transfer Restrictions. The legend relating to the Act endorsed
on a certificate pursuant to paragraph 4(b) of this Warrant shall be removed and the Company shall
issue a certificate without such legend to the Holder of the Securities if (i) the Securities are
registered under the Act and a prospectus meeting the requirements of Section 10 of the Act is
available or (ii) the Holder provides to the Company an opinion of counsel for the Holder
reasonably satisfactory to the Company, a no-action letter or interpretive opinion of the staff of
the SEC reasonably satisfactory to the Company, or other evidence reasonably satisfactory to the
Company, to the effect that public sale, transfer or assignment of the Securities may be made
without registration and without compliance with any restriction such as Rule 144.

5. Condition of Transfer or Exercise of Warrant. It shall be a condition to any transfer
or exercise of this Warrant that at the time of such transfer or exercise, the Holder shall
provide the Company with a representation in writing that the Holder or transferee is acquiring
this Warrant and the shares of Preferred Stock to be issued upon exercise for investment purposes
only and not with a view to any sale or distribution, or will provide the Company with a statement
of pertinent facts covering any proposed distribution. As a further condition to any transfer of
this Warrant or any or all of the shares of Preferred Stock issuable upon exercise of this
Warrant, other than a transfer registered under the Act, the Company may request a legal opinion,
in form and substance satisfactory to the Company and its counsel, reciting the pertinent
circumstances surrounding the proposed transfer and stating that such transfer is exempt from the
registration and prospectus delivery requirements of the Act. Each certificate evidencing the shares issued upon exercise of the Warrant or upon any transfer of the shares (other than a
transfer registered under the Act or any subsequent transfer of shares so registered) shall, at
the Company’s option, if the Shares are not freely saleable under Rule 144(k) under the Act,
contain a legend in form and substance satisfactory to the Company and its counsel, restricting
the transfer of the shares to sales or other dispositions exempt from
me requirements of the Act.

As further condition to each transfer, at the request of the Company, the Holder shall surrender
this Warrant to the Company and the transferee shall receive and accept a Warrant, of like tenor
and date, executed by the Company.

6. Stock Fully Paid; Reservation of Shares. All Shares which may be issued upon the
exercise of foe rights represented by this Warrant will, upon issuance, 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 issuance upon exercise of the
purchase rights evidenced by this Warrant, a sufficient number of shares of its Preferred Stock to
provide for the exercise of the rights represented by this Warrant.

7. Adjustment for Certain Events. 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

- 4 -

 

Company, the Company, or such successor or purchasing corporation, as the case may be, shall duly
execute and deliver to the Holder 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 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 Preferred Stock theretofore issuable upon exercise of this Warrant, 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 Preferred Stock
then purchasable under this Warrant, or 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, the securities of the successor or
purchasing corporation having a value at the time of the transaction equivalent to the value of
the Preferred Stock purchasable upon exercise of this Warrant 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 7. 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 Preferred
Stock, 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.

     (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 Preferred Stock payable in
Preferred Stock,
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 Preferred Stock outstanding immediately prior to such dividend or distribution,
and (B) the
denominator of which shall be the total number of shares of Preferred Stock outstanding
immediately after such
dividend or distribution; or (ii) make any other distribution with respect to Preferred Stock
(except any
distribution specifically provided for in Sections 7(a) and 7(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 Preferred Stock
(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
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) Charter to Control. In the event a conflict arises between the terms and
conditions of the Company’s
Preferred Stock as set forth in the Company’s Certificate of Incorporation, as amended from
time to time,
and the terms of this Sections 7, the terms and conditions of the Company’s Certificate of
Incorporation,
as amended, shall prevail.

8. Notice of Adjustments. Whenever any Warrant Price or the kind or number of securities
issuable under this Warrant shall be adjusted pursuant to Section 7 hereof, the Company shall
prepare a certificate signed by an officer of the Company 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 number or kind of shares issuable upon exercise of the
Warrant after giving effect to such adjustment, and shall cause copies of such

- 5 -

 

certificate to be mailed (by certified or registered mail, return receipt required, postage
prepaid) within thirty (30) days of such adjustment to the Holder of this Warrant as set forth in
Section 17 hereof.

9. Transferability of Warrant. This Warrant is transferable on the books of the Company at
its principal office by the registered Holder hereof upon surrender of this Warrant properly
endorsed, subject to compliance with Section 5 and applicable federal and state securities laws.
The Company shall issue and deliver to the transferee a new Warrant representing the Warrant so
transferred. Upon any partial transfer, the Company will issue and deliver to Holder a new Warrant
with respect to the Warrant not so transferred. Holder shall not have any right to transfer any
portion of this Warrant to any direct competitor of the Company.

10. No Fractional Shares. No fractional share of Preferred Stock will be issued in
connection with any exercise
hereunder, but in lieu of such fractional share the Company shall make a cash payment therefor upon
the basis of
the Warrant Price then in effect,

11. Charges, Taxes and Expenses. Issuance of certificates for shares of Preferred Stock
upon the exercise of this
Warrant shall be made without charge to the Holder for any United States or state of the United
States
documentary stamp tax or other incidental expense with respect to the issuance of such certificate,
all of which
taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name
of the Holder.

12. No Shareholder Rights
Until Exercise. No holder of the this Warrant, as such, shall be
entitled to vote or
receive dividends or be deemed the holder of Preferred Stock 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 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.

13. Registry of Warrant. The Company shall maintain a registry showing the name and
address of the registered
Holder of this Warrant. This Warrant may be surrendered for exchange or exercise, in accordance
with its terms,
at such office or agency of the Company, and the Company and Holder shall be entitled to rely in
all respects,
prior to written notice to the contrary, upon such registry.

14. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the Company of
evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and, in the case
of loss, theft, or
destruction, of indemnity reasonably satisfactory to it, and, if mutilated, upon surrender and
cancellation of this
Warrant, the Company will execute and deliver a new Warrant, having terms and conditions substantially
identical to this Warrant, in lieu hereof.

15. Miscellaneous.

(a) Issue Date. The provisions of this Warrant shall be construed and shall be
given effect in all respect
as if it had been issued and delivered by the Company on the date hereof.

(b) Successors. This Warrant shall be binding upon any successors or assigns of the
Company.

(c) Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the
State of Delaware.

- 6 -

 

(d) Headings. The headings used in this Warrant are used for convenience only and
are not to be
considered in construing or interpreting this Warrant.

(e)
Saturdays, Sundays, Holidays. If the last or appointed day for the taking of
any action or the
expiration of any right required or granted herein shall be a Saturday or a Sunday or shall
be a legal
holiday in the State of Connecticut, then such action may be taken or such right may be
exercised on the
next succeeding day not a legal holiday.

16. No Impairment. The Company will not, by amendment of its Certificate of Incorporation or any other
voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this
Warrant, but
will at alt 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 hereof against impairment.

17. Addresses. Any notice required or permitted hereunder shall be in writing and shall be
mailed by overnight
courier, registered or certified mail, return receipt required, and postage prepaid, or otherwise
delivered by hand
or by messenger, addressed as set forth below, or at such other address as the Company or the
Holder hereof shall
have furnished to the other party.

	 	 	 	 	 	 	 	 	 
	 	 	If to the Company:	 	AVALON
PHARMACEUTICALS, INC.	 	 
	 	 	 	 	l9 Firstfield Road	 	 
	 	 	 	 	Gaithersburg, MD 20878	 	 
	

	 	 	 	Attn:
	  Thomas David	 	 
	

	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	If to the Holder:	 	General Electric
Capital Corporation	 	 
	 	 	 	 	401 Merritt 7, Suite 23	 	 
	 	 	 	 	Norwalk, CT 06856	 	 
	 	 	 	 	Attn: Thomas Annino	 	 

IN WITNESS WHEREOF, AVALON
PHARMACEUTICALS, INC. has caused this Warrant to be executed by its
officers thereunto duly authorized.

Dated as of  August 20, 2002.

	 	 	 	 	 
	

	 	By:
	 	/s/ Gary Lessing
	

	 	 	 	 
	

	 	Name:
	 	Gary Lessing
	

	 	 	 	 
	

	 	Title:
	 	 Chief Financial Officer
	

	 	 	 	 

- 7 -

 

NOTICE OF EXERCISE 

TO:

	1.  	The undersigned Warrantholder (“Holder”) elects to acquire shares of the Series ______
Preferred Stock (the “Preferred Stock”) of _____________________, (the
“Company”), pursuant to the terms of the Stock Purchase
Warrant dated ____________, ___ (the “Warrant”).
	 
	2.  	The Holder exercises its rights under the Warrant as set forth below:

	 	(     )  	 The Holder elects to purchase
____________ shares of Preferred
Stock as provided in Section 3(a) and tenders herewith a check in
the amount of $
____________ as payment of the purchase price.
	 
	 	(     )   	 The Holder elects to convert the purchase
rights into shares of Preferred Stock as provided in Section 3(b) of the
Warrant.

	3.  	The Holder surrenders the Warrant with this Notice of Exercise.

The Holder represents that it is acquiring the aforesaid shares of Preferred Stock for
investment and not with a view to or for resale in connection with distribution and that the
Holder has no present intention of distributing or reselling the shares.

Please issue a certificate
representing the shares of the Preferred Stock in the name of the
Holder or in such other name as is specified below:

Name:

Address:

Taxpayer I.D.:

	 	 	 	 	 
	 	 	 
	

	 	(Holder)	 	 
	 
	 	 	 	 
	 	 	By: AVALON PHARMACEUTICALS, INC.
	 
	 	 	 	 
	

	 	Title:	 	 
	

	 	 	 	 
	 
	 	 	 	 
	

	 	Date:exv10w28

 

Exhibit 10.28

NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR DISPOSITION MAY BE EFFECTED
EXCEPT IN COMPLIANCE WITH RULE 144 UNDER SAID ACT OR WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER, SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE ACT OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES
AND EXCHANGE COMMISSION.

WARRANT TO PURCHASE 10,095 SHARES OF SERIES B PREFERRED STOCK

12/23/2002

THIS CERTIFIES THAT, for
value received, General Electric Capital Corporation (“Holder”) is
entitled to subscribe for and purchase Ten Thousand Ninety Five (10,095) shares of the fully paid
and nonassessable Series B Preferred Stock (the
“Shares” or the “Preferred Stock”) of AVALON
PHARMACEUTICALS, INC., a Delaware corporation (the “Company”), at the Warrant Price (as
hereinafter defined), subject to the provisions and upon the term and conditions hereinafter set
forth. As used herein, the term “Series B Preferred Stock” shall mean the Company’s presently
authorized Series B Preferred Stock and any stock into which such Series B Preferred Stock may
hereafter be converted or exchanged.

1. Warrant Price. The Warrant Price shall initially be Three and 53/100 dollars ($3.53)
per share, subject to
adjustment as provided in Section 7 below.

2. Conditions to Exercise. The purchase right represented by this Warrant may be exercised
at any time, or from
time to time, in whole or in part during the term commencing on the date hereof and ending at 5:00
P.M. Eastern
time on the seventh anniversary of the date of this Warrant.

3. Method of Exercise;
Payment; Issuance of Shares; Issuance of New Warrant.

(a) Cash Exercise. Subject to Section 2 hereof, the purchase right represented by this
Warrant may be exercised by the Holder hereof, in whole or in part, by the surrender of this
Warrant (with a duly executed Notice of Exercise in the form attached hereto) at the principal
office of the Company (as set form in Section 17 below) and by payment to the Company, by check,
of an amount equal to the then applicable Warrant Price per share multiplied by the number of shares then being purchased. In the event of any exercise of the rights represented by this
Warrant, certificates for the shares of stock so purchased shall be in the name of, and delivered
to, the Holder hereof, or as such Holder may direct (subject to the terms of transfer contained
herein and upon payment by such Holder hereof of any applicable transfer taxes). Such delivery
shall be made within 30 days after exercise of the Warrant and at the Company’s expense and,
unless this Warrant has been fully exercised or expired, a new Warrant having terms and
conditions substantially identical to this Warrant and representing the portion of the Shares, if
any, with respect to which this Warrant shall not have been exercised, shall also be issued to
the Holder hereof within 30 days after exercise of the Warrant.

(b) Net Issue Exercise. In lieu of exercising this Warrant pursuant to Section 3(a),
Holder may elect to receive shares equal to the value of this Warrant (or of any portion thereof
remaining unexercised) by surrender of this Warrant at the principal
office of the Company together
with notice of such election, in which event the Company shall issue to Holder the number of shares of the Company’s Preferred Stock computed using the following formula;

 

 

X = Y (A-B)

           A

Where X = the number of shares of Preferred Stock to be issued to Holder.

Y = the number of shares of Preferred Stock purchasable under this Warrant (at the date of
such
calculation).

A = the Fair Market Value of one share of the Company’s Preferred Stock (at the date of
such
calculation).

B = Warrant Price (as adjusted to the date of such
calculation).

(c) Fair Market Value. For purposes of this Section 3, Fair Market Value of one share of
the Company’s Preferred Stock shall mean:

(i) In the event of an exercise in connection with an Initial Public Offering, the
per share Fair Market
Value for the Preferred Stock shall be the Offering Price at which the underwriters
initially sell Common
Stock to the public multiplied by the number of shares of Common Stock into which each share
of
Preferred Stock is then convertible; or

(ii) The average of the closing bid and asked prices of Common Stock quoted in the
Over-The-Counter Market Summary, the last reported sale price quoted on the Nasdaq National
Market
(“NNM”) or on any exchange on which the Common Stock is listed, whichever is applicable, as
published in the Wall Street Journal for the ten (10) trading days prior to the date
of determination of Fair
Market Value, multiplied by the number of shares of Common Stock into which each share of
Preferred
Stock is then convertible; or

(iii) In the event of an exercise in connection with a merger, acquisition or other
consolidation in
which the Company is not the surviving entity, the per share Pair Market Value for the
Preferred Stock
shall be the value to be received per share of Preferred Stock by all holders of the
Preferred Stock in such
transaction as determined by the Board of Directors; or

(iv) In any other instance, the per share Fair Market Value for the Preferred Stock
shall be as
determined in good faith by the Company’s Board of Directors.

In the event of 3(c)(iii) or 3(c)(iv), above, the Company’s Board of Directors shall
prepare a certificate, to
be signed by an authorized officer of the Company, setting forth in reasonable detail the
basis for and
method of determination of the per share Fair Market Value of the Preferred Stock. The
Board will also
certify to the Holder that this per share Fair Market Value will be applicable to all
holders of the
Company’s Preferred Stock. Such certification must be made to Holder at least thirty (30)
business days
prior to the proposed effective date of the merger, consolidation, sale, or other
triggering event as defined
in 3(c)(iii) or 3(c)(iv).

(d) Automatic Exercise. To the extent this Warrant is not previously exercised,
it shall be automatically exercised in accordance with Sections 3(b) and 3(c) hereof (even if
not surrendered) immediately before its expiration.

(e) In the event the terms and conditions of a certain Shareholder’s Agreement and
Registration Rights Agreement executed by all Series B Shareholders at the time of the issuance
of the Series B Convertible Preferred Stock Offering (collectively, the “Related Documents”)are
still in effect, upon exercise of the warrant, the Holder agrees to execute accession signature
pages to the Related Documents subject to its review by legal counsel.

4. Representations and Warranties of Holder and Restrictions on Transfer Imposed by the
Securities Act of 1933.

 - 2 -

 

(a) Representations and Warranties by Holder. The Holder represents and warrants to the
Company with respect to this purchase as follows:

(i) The Holder has substantial experience in evaluating and investing in private
placement transactions of securities of companies similar to the Company so that the
Holder is capable of evaluating the merits and risks of its investment in the Company and
has the capacity to protect its interests.

(ii) The Holder is acquiring the Warrant and the Shares of Preferred Stock issuable upon
exercise of the Warrant (collectively the “Securities”) for investment for its own
account and not with a view to, or for resale in connection with, any distribution
thereof. The Holder understands that the Securities have not been registered under the
Securities Act of 1933, as amended (the “Act”) by reason of a specific exemption from the
registration provisions of the Act which depends upon, among other things, the bona fide
nature of the investment intent as expressed herein. In this connection, the Holder
understands that, in the view of the Securities and Exchange Commission (the “SEC”), the
statutory basis for such exemption may be unavailable if this representation was
predicated solely upon a present intention to hold the Securities for the minimum capital
gains period specified under tax statutes, for a deferred sale, for or until an increase
or decrease in the market price of the Securities or for a period of one year or any
other fixed period in the future.

(iii) The Holder acknowledges that the Securities must be held indefinitely unless
subsequently registered under the Act or an exemption from such registration is
available. The Holder is aware of the provisions of Rule 144 promulgated under the Act
(“Rule 144”) which permits limited resale of securities purchased in a private placement
subject to the satisfaction of certain conditions, including, in case the securities have
been held for more than one but less than two years, the existence of a public market for
the shares, the availability of certain public information about the Company, the resale
occurring not less than one year after a party has purchased and paid for the security to
be sold, the sale being through a “broker’s transaction” or in a transaction directly
with a “market maker” (as provided by Rule 144(f)) and the number of shares or other
securities being sold during any three-month period not exceeding specified limitations.

(iv) The
Holder further understands that at the time the Holder wishes to sell
the
Securities there may be no public market upon which such a sale may be effected, and that
even if such a public market exists, the Company may not be satisfying the current public
information requirements of Rule 144, and that in such event, the Holder may be precluded
from selling the Securities under Rule 144 unless (a) a one-year minimum holding period
has been satisfied and (b) the Holder was not at the time of the sale nor at any time
during the three-month period prior to such sale an affiliate of the Company.

(v) The Holder has had an opportunity to discuss the Company’s business, management and
financial affairs with its management and an opportunity to review the Company’s
facilities. The Holder understands that such discussions, as well as the written
information issued by the Company, were intended to describe the aspects of the Company’s
business and prospects which it believes to be material but were not necessarily a
thorough or exhaustive description.

(b) Legends. Each certificate representing the Securities shall be endorsed with the
following legend:

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY
NOT BE TRANSFERRED UNLESS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID
ACT, A “NO ACTION” LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT
TO SUCH TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE SECURITIES
AND EXCHANGE COMMISSION, OR (IF REASONABLY REQUIRED BY THE COMPANY) AN

 - 3 -

 

OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH
TRANSFER IS EXEMPT FROM SUCH REGISTRATION.

The Company need not enter into its stock records a transfer of Securities unless the
conditions specified in the foregoing legend are satisfied. The Company may also instruct its
transfer agent not to allow the transfer of any of the Shares unless the conditions specified
in the foregoing legend are satisfied.

(c) Removal of Legend and Transfer Restrictions. The legend relating to the Act endorsed
on a certificate pursuant to paragraph 4(b) of this Warrant shall be removed and the Company
shall issue a certificate without such legend to the Holder of the Securities if (i) the
Securities are registered under the Act and a prospectus meeting the requirements of Section 10
of the Act is available or (ii) the Holder provides to the Company an opinion of counsel for the
Holder reasonably satisfactory to the Company, a no-action letter or interpretive opinion of the
staff of the
SEC reasonably satisfactory to the Company, or other evidence reasonably
satisfactory to the Company, to the effect that public sale, transfer or assignment of the
Securities may be made without registration and without compliance with any restriction such as
Rule 144.

5. Condition of Transfer or Exercise of Warrant. It shall be a condition to any
transfer or exercise of this Warrant that at the time of such transfer or exercise, the Holder
shall provide the Company with a representation in writing that the Holder or transferee is
acquiring this Warrant and the shares of Preferred Stock to be issued upon exercise for investment
purposes only and not with a view to any sale or distribution, or will provide the Company with a
statement of pertinent facts covering any proposed distribution. As a further condition to any
transfer of this Warrant or any or all of the shares of Preferred Stock issuable upon exercise of
this Warrant, other than a transfer registered under the Act, the Company may request a legal
opinion, in form and substance satisfactory to the Company and its counsel, reciting the pertinent
circumstances surrounding the proposed transfer and stating that such transfer is exempt from the
registration and prospectus delivery requirements of the Act. Each certificate evidencing the shares issued upon exercise of the Warrant or upon any transfer of the shares (other than a
transfer registered under the Act or any subsequent transfer of shares so registered) shall, at
the Company’s option, if the Shares are not freely saleable under Rule 144(k) under the Act,
contain a legend in form and substance satisfactory to the Company and its counsel, restricting
the transfer of the shares to sales or other dispositions exempt from the requirements of the Act.

As further condition to each transfer, at the request of the Company, the Holder shall
surrender this Warrant to the Company and the transferee shall receive and accept a Warrant, of
like tenor and date, executed by the Company.

6. Stock Fully Paid;
Reservation of Shares. All Shares which may be issued upon the
exercise of the rights
represented by this Warrant will, upon issuance, 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
issuance upon exercise
of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Preferred
Stock to provide
for the exercise of the rights represented by this Warrant.

7. Adjustment for Certain Events. 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 rectification 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

 - 4 -

 

Company, the Company, or such successor or purchasing corporation, as the case may be, shall duly
execute and deliver to the Holder 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 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 Preferred Stock theretofore issuable upon exercise of this Warrant, 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 Preferred Stock
then purchasable under this Warrant, or 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, the securities of the successor or purchasing
corporation having a value at the time of the transaction equivalent to the value of the Preferred
Stock purchasable upon exercise of this Warrant 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 7. 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 Preferred
Stock, 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.

     (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 Preferred Stock payable in
Preferred Stock,
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 Preferred Stock outstanding immediately prior to such dividend or distribution,
and (B)the
denominator of which shall be the total number of shares of Preferred Stock outstanding
immediately after such
dividend or distribution; or (ii) make any other distribution with respect to Preferred Stock
(except any
distribution specifically provided for in Sections 7(a) and 7(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 Preferred
Stock (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 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) Charter
to Control. In the event a conflict arises between the terms and conditions
of the Company’s Preferred Stock as set forth in the Company’s Certificate of
Incorporation, as amended from time to time, and the terms of this Sections 7, the terms
and conditions of the Company’s Certificate of Incorporation, as
amended, shall prevail.

8. Notice of
Adjustments. Whenever any Warrant Price or the kind or number of securities
issuable under this Warrant shall be adjusted pursuant to Section 7 hereof, the Company shall
prepare a certificate signed by an officer of the Company 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 number or kind of shares issuable upon
exercise of the Warrant after giving effect to such adjustment, and shall cause copies of such

 - 5 -

 

certificate to be mailed (by certified or registered mail, return receipt required,
postage prepaid) within thirty (30) days of such adjustment to the Holder of this Warrant as
set forth in Section 17 hereof.

9. Transferabilitv of
Warrant. This Warrant is transferable on the books of the
Company at its principal office
by the registered Holder hereof upon surrender of this Warrant properly endorsed, subject to
compliance with
Section 5 and applicable federal and state securities laws. The Company shall issue and deliver to
the transferee a
new Warrant representing the Warrant so transferred. Upon any partial transfer, the Company will
issue and
deliver to Holder a new Warrant with respect to the Warrant not so transferred. Holder shall not
have any right to
transfer any portion of this Warrant to any direct competitor of the Company.

10. No Fractional
Shares. No fractional share of Preferred Stock will be issued in
connection with any exercise
hereunder, but in lieu of such fractional share the Company shall make a cash payment therefor upon
the basis of
the Warrant Price then in effect.

11. Charges, Taxes and Expenses. Issuance of certificates for shares of Preferred Stock
upon the exercise of this
Warrant shall be made without charge to the Holder for any United States or state of the United
States
documentary stamp tax or other incidental expense with respect to the issuance of such certificate,
all of which
taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name
of the Holder.

12. No Shareholder Rights
Until Exercise. No holder of the this Warrant, as such, shall be
entitled to vote or
receive dividends or be deemed the holder of Preferred Stock 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 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.

13. Registry of
Warrant. The Company shall maintain a registry showing the name and address
of the registered
Holder of this Warrant This Warrant may be surrendered for exchange or exercise, in accordance
with its terms,
at such office or agency of the Company, and the Company and Holder shall be entitled to rely in
all respects,
prior to written notice to the contrary, upon such registry.

14. Loss, Theft,
Destruction or Mutilation of Warrant. Upon receipt by the Company of
evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and, in the case
of loss, theft, or
destruction, of indemnity reasonably satisfactory to it, and, if mutilated, upon surrender and
cancellation of this
Warrant, the Company will execute and deliver a new Warrant, having terms and conditions
substantially
identical to this Warrant, in lieu hereof.

15. Miscellaneous.

(a) Issue
Date. The provisions of this Warrant shall be construed and shall be
given effect in all respect
as if it had been issued and delivered by the Company on the date
hereof.

(b)
Successors. This Warrant shall be binding upon any successors or assigns of
the Company.

(c)
Governing Law. This Warrant shall be governed by and construed in accordance
with the laws of the
State of Delaware.

 - 6 -

 

(d)
Headings. The headings used in this Warrant are used for convenience
only and are not to be considered in construing or interpreting this
Warrant.

(e)
Saturdays, Sundays, Holidays. If the last or appointed day for the taking of any
action or the expiration of any right required or granted herein shall be a Saturday or a
Sunday or shall be a legal holiday in the State of Connecticut, then such action may be
taken or such right may be exercised on the next succeeding day not a legal holiday.

16. No Impairment. The Company will not, by amendment of its Certificate of Incorporation
or any other
voluntary action, 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 hereof against impairment.

17. Addresses. Any notice required or permitted hereunder shall be in writing and shall be
mailed by overnight
courier, registered or certified mail, return receipt required, and postage prepaid, or otherwise
delivered by hand
or by messenger, addressed as set forth below, or at such other address as the Company or the
Holder hereof shall
have furnished to the other party.

	 	 	 	 	 
	

	 	If to the Company:
	 	AVALON PHARMACEUTICALS, INC.
	

	 	 	 	19 Firstfield Road
	

	 	 	 	Gaithersburg, MD 20878
	

	 	 	 	Attn: Thomas G. David
	 
	 	 	 	 
	

	 	If to the Holder:
	 	General Electric Capital Corporation
	

	 	 	 	401 Merritt 7, Suite 23
	

	 	 	 	Norwalk, CT 06856
	

	 	 	 	Attn: Thomas Annino

IN WITNESS WHEREOF, AVALON
PHARMACEUTICALS, INC. has caused this Warrant to be executed by its
officers thereunto duly authorized.

Dated as of December 23,
2002.

	 	 	 	 	 
	

	 	By:
	 	/s/ Kenneth C. Carter
	

	 	 	 	 
	 
	 	 	 	 
	

	 	Name:
	 	Kenneth C. Carter
	 
	 	 	 	 
	

	 	Title:
	 	CEO

 - 7 -

 

NOTICE OF EXERCISE 

TO:

	1.  	The undersigned Warrantholder (“Holder”) elects to acquire shares of the Series                     
Preferred Stock (the “Preferred Stock”) of
                                                            
, (the “Company”), pursuant to the terms of the Stock Purchase Warrant dated                                         
                    ,                      (the “Warrant”).
	 
	2.  	The Holder exercises its rights under the Warrant as set forth below:

	 	 	 	 	 
	

	 	(     )
	 	The Holder elects to purchase                                        shares of Preferred
Stock as provided in Section 3(a) and tenders herewith a check in
the amount of $                                         as payment of the purchase price.
	 
	 	 	 	 
	

	 	(     )
	 	The Holder elects to convert the
purchase rights into shares of Preferred Stock as provided in Section 3(b)
of the Warrant.

3. The Holder surrenders the Warrant with this Notice of Exercise.

The Holder represents that it is acquiring the aforesaid shares of Preferred Stock for
investment and not with a view to or for resale in connection with distribution and that the
Holder has no present intention of distributing or reselling the shares.

	Please issue a certificate representing the shares of the Preferred Stock in the name of the
Holder or in such other name as is specified below:

Name:

Address:

Taxpayer I.D.:

	 	 	 	 	 
	 	 	 
	 	 	(Holder)
	 
	 	 	 	 
	 	 	By: AVALON PHARMACEUTICALS, INC.
	 
	 	 	 	 
	

	 	Title:	 	 
	

	 	 	 	 
	 
	 	 	 	 
	

	 	Date:

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