Document:

exv10w35d

 

Exhibit 10.35D

SECOND MODIFICATION AGREEMENT

     THIS SECOND MODIFICATION
AGREEMENT (“AGREEMENT”) is made to be effective as of the 9th day of
August, 2005, by and between MANUFACTURERS AND TRADERS TRUST COMPANY (“BANK”); MARYLAND INDUSTRIAL
DEVELOPMENT FINANCING AUTHORITY (“ISSUER”); and AVALON PHARMACEUTICALS, INC. (“BORROWER”).

RECITALS

     The ISSUER has issued and sold certain bonds (“BONDS”) in the aggregate amount of Twelve
Million Dollars ($12,000,000) and has lent the proceeds thereof to the BORROWER in accordance with
the terms of a Loan Agreement dated April 1, 2003 (“LOAN AGREEMENT”). In order to enhance the
marketability of the BONDS, the BORROWER has entered into a Letter Of Credit Agreement dated April
1, 2003 (“LC AGREEMENT”) pursuant to which the BANK issued to the Trustee named therein for the
holders of the BONDS the BANK’S irrevocable letter of credit (“LETTER OF CREDIT”). As a condition
to its issuance of the LETTER OF CREDIT, the BANK required the ISSUER to insure a portion of the
BORROWER’S obligations under the LC AGREEMENT in accordance with the terms of the Issuer’s
Insurance Agreement dated April 1, 2003 (“INSURANCE AGREEMENT”).

     As a condition precedent to the issuance of the BONDS and the issuance of the LETTER OF
CREDIT, the BORROWER was required in accordance with the terms of a Collateral Pledge And Security
Agreement And Control Agreement dated April 1, 2003, as amended by an Amendment thereto dated July
6, 2004 (“COLLATERAL/CONTROL AGREEMENT”) to post and maintain cash collateral and/or securities in
Account Number 80366 (“COLLATERAL ACCOUNT”) held by and maintained with Allfirst Trust Company
National Association (“SECURITIES INTERMEDIARY”), which COLLATERAL ACCOUNT and the cash, securities
and properties therein were pledged in accordance with the terms of the COLLATERAL/CONTROL
AGREEMENT to secure to the BANK the BORROWER’S “LETTER OF CREDIT OBLIGATIONS,” as such term is
defined in the LOAN AGREEMENT. The SECURITIES INTERMEDIARY was subsequently merged with the BANK,
with the BANK being the surviving entity. The BANK, the ISSUER, and the BORROWER entered into an
Amended And Restated Modification And Consent Agreement dated to be effective as of February 15,
2005 (“FIRST MODIFICATION”). Hereafter, the BONDS, the LOAN AGREEMENT, the LC AGREEMENT, the
INSURANCE AGREEMENT, the COLLATERAL/CONTROL AGREEMENT, the FIRST MODIFICATION, and all other
documents and agreements which evidence, secure, relate or pertain to the BONDS and the loan of the
proceeds of the BONDS by the ISSUER to the BORROWER, or the issuance of the LETTER OF CREDIT by the
Bank or the BORROWER’S obligations to the Bank in connection therewith are collectively referred to
as the “DOCUMENTS.”

     The BORROWER has requested that the ISSUER and the BANK agree to grant certain waivers of
covenants of the BORROWER set forth in the DOCUMENTS, as provided in Section 2 below, and agree to
certain modifications to various of the DOCUMENTS. The BANK and the ISSUER have entered into this
AGREEMENT to set forth the terms upon which the BANK and the ISSUER will agree to the requests of
the BORROWER.

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

 

 

AGREEMENT

     Section 1.    Acknowledgment Of Obligations. The BORROWER acknowledges that: (a) each of
the DOCUMENTS to which the BORROWER is a signatory constitutes the valid and binding obligation of
the BORROWER; (b) the DOCUMENTS are enforceable against the BORROWER in accordance with all stated
terms; and (c) the BORROWER has no defenses, claims of offset, or counterclaims against the
enforcement of the DOCUMENTS in accordance with all stated terms.

     Section 2.    Waiver Of Financial Covenants. The BANK agrees to waive compliance by the
BORROWER with the financial covenants (“FINANCIAL COVENANTS”) set forth in Sections 10.1(h)(i)
(Minimum Liquidity); 10.1(h)(ii) (Minimum Current Ratio); and 10.1(h)(iii) (Minimum Tangible Net
Worth) for the period commencing on June 30, 2005 and ending on March 31, 2006. Commencing on
April 1, 2006 and continuing thereafter, the BORROWER shall comply with each of the FINANCIAL
COVENANTS, with the first subsequent test date of the FINANCIAL COVENANTS to begin on April 30,
2006.

     Section 3.    Modification Of Collateral/Control Agreement. (a) In consideration for the
execution and delivery of this AGREEMENT by the BANK and the ISSUER, the BORROWER agrees to modify
the COLLATERAL/CONTROL AGREEMENT to provide that the “MINIMUM REQUIRED CASH COLLATERAL AMOUNT,” as
such term is defined in the COLLATERAL/CONTROL AGREEMENT, shall be increased by $500,000 such that
the MINIMUM REQUIRED CASH COLLATERAL AMOUNT to be maintained by the BORROWER as of the date of this
AGREEMENT shall be increased from $5,813,196 to $6,313,196, which shall be the MINIMUM REQUIRED
CASH COLLATERAL AMOUNT until April 1, 2006. Commencing on April 1, 2006 and on the first day of
each April thereafter, the MINIMUM REQUIRED CASH COLLATERAL AMOUNT shall be decreased to the amount
corresponding to such date as set forth in the table below, which, for such dates, replaces and
supersedes the table set forth in Section 2.3(a) of the COLLATERAL/CONTROL AGREEMENT:

	 	 	 	 	 
	 	 	Minimum Required
	Dates	 	Cash Collateral Amount
	 
	 	 	 	 
	April 1, 2006

	 	$	6,019,731	 
	April 1, 2007

	 	$	5,397,838	 
	April 1, 2008

	 	$	4,775,945	 
	April 1, 2009

	 	$	3,922,137	 
	April 1, 2010

	 	$	3,068,329	 
	April 1, 2011

	 	$	2,214,521	 
	April 1, 2012

	 	$	1,360,712	 
	April 1, 2013

	 	$	506,904	 

     The BORROWER agrees immediately to deposit such cash with the BANK as may be necessary to comply
with such increased MINIMUM REQUIRED CASH COLLATERAL AMOUNT requirement.

           (b) If after March 31, 2006 but before April 30, 2006 (i) no event or circumstance shall have
occurred and be continuing which is or, with the giving of notice, the lapse of time, or both,
would be an Event of Default under any of the DOCUMENTS, (ii) the BORROWER shall have been in
compliance with the FINANCIAL COVENANTS as of March 31, 2006 as if the limited waiver set forth in
Section 2 had not been given, and shall have delivered to the BANK, in accordance with the
requirements of the DOCUMENTS, a certificate indicating such compliance as of such date, (iii) the
BORROWER shall have made all payments required to be made under the DOCUMENTS through the later of
(x) the date of delivery of the aforesaid compliance certificate and (y) April 1, 2006 (or, if such
day is not a Business Day, the next Business Day), and

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(iv) the BORROWER shall have delivered to
the BANK a pro forma compliance certificate to the effect that (A) after giving effect to all
payments required to be made by the BORROWER on account of its liabilities through the period
ending April 30, 2006 (including the amounts due to the BANK under the LC AGREEMENT), no event or
circumstance shall have occurred which is or, with the giving of notice, the lapse of time, or
both, would be an Event of Default under the DOCUMENTS, and (B) without limiting clause (A) above,
the BORROWER shall be in full compliance with the FINANCIAL COVENANTS as of April 30, 2006, which
pro forma compliance certificate shall be accompanied by all supporting financial information and
calculations, then, the table in paragraph (a) above setting forth the MINIMUM REQUIRED
CASH COLLATERAL AMOUNTS for the dates occurring on or after April 1, 2006 shall cease to be
effective, and the MINIMUM REQUIRED CASH COLLATERAL AMOUNTS for such dates shall be as set forth in
the table contained in Section 2.3(a) of the COLLATERAL/CONTROL AGREEMENT before giving effect to
paragraph (a) above.

           (c) Nothing contained in this AGREEMENT is intended to limit the right of the BORROWER to
obtain the return to the BORROWER of CASH COLLATERAL to the extent that the amount of the CASH
COLLATERAL which is at any time held in the COLLATERAL ACCOUNT exceeds the MINIMUM REQUIRED CASH
COLLATERAL AMOUNT required by the terms of the COLLATERAL/CONTROL AGREEMENT as modified by the
terms of this AGREEMENT.

     Section 4.    Investment Of Cash Collateral. Pursuant to Section 5.1 of the
COLLATERAL/CONTROL AGREEMENT, the BORROWER may instruct the BANK to invest funds of the BORROWER,
which may include cash proceeds of other properties of the BORROWER presently held in the
COLLATERAL ACCOUNT, in one or more certificates of deposit issued by the BANK or in one or more
other deposit accounts at the BANK (which may include a deposit account designated by the BANK as a
“money market account”) (such certificates of account, accounts, and money market accounts are
collectively referred to as the “PLEDGED DEPOSIT ACCOUNT”, whether or not evidenced by a
certificate). The BORROWER acknowledges and agrees that the funds held in the PLEDGED DEPOSIT
ACCOUNT will in most cases not be federally insured, but shall nevertheless be deemed to be a
“PERMITTED INVESTMENT” (as defined in the COLLATERAL/CONTROL AGREEMENT). The PLEDGED DEPOSIT
ACCOUNT shall have an “ADVANCE RATE TO MAINTAIN PROPERLY MARGINED CASH COLLATERAL” (as such term is
used in Schedule 2 of the COLLATERAL/CONTROL AGREEMENT) of one hundred percent (100%) if the
PLEDGED DEPOSIT ACCOUNT is either a certificate of deposit issued by the BANK or is an investment
in the MTB U.S. Treasury Fund (symbol “AKTXX”). Any other money market funds selected by the
BORROWER shall be subject to the presently stated ADVANCE RATE TO MAINTAIN PROPERLY MARGINED CASH
COLLATERAL of ninety percent (90%). The BORROWER acknowledges that the PLEDGED DEPOSIT ACCOUNT is
intended to be held and maintained by the BANK in the COLLATERAL ACCOUNT in accordance with the
requirements of Section 2.5 of the COLLATERAL/CONTROL AGREEMENT and that the PLEDGED DEPOSIT
ACCOUNT will be maintained solely in the name of the BANK and not in the name of the BORROWER. The
“ADJUSTED MARKET VALUE (ITEM),” as that term is defined in the COLLATERAL/CONTROL AGREEMENT, of the
PLEDGED DEPOSIT ACCOUNT shall be counted toward the “ADJUSTED MARKET VALUE OF THE CASH COLLATERAL”
for purposes of the COLLATERAL/CONTROL AGREEMENT. In order to secure the LETTER OF CREDIT
OBLIGATIONS, the BORROWER hereby grants a security interest to the BANK in and to the COLLATERAL
ACCOUNT and the products and proceeds thereof (and all substitute and replacement accounts) and in
and to the PLEDGED DEPOSIT ACCOUNT (which is likely to be designated as account number
31003913118509 but which may have different numbers from time to time) and in all funds contained
therein and in and to all “CASH COLLATERAL,” as such term is defined in the COLLATERAL/CONTROL
AGREEMENT, and the proceeds thereof and in all replacement or substituted certificates of deposit,
bank accounts, money market accounts, and the contents and proceeds thereof, and all interests of
the BORROWER in any of the foregoing. The BORROWER will also execute and deliver to the BANK such
additional agreements, writings or instruments as the BANK may be require in order to establish,
perfect or set forth the

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terms of the BANK’S security interest in the COLLATERAL ACCOUNT, the CASH
COLLATERAL, the PLEDGED DEPOSIT ACCOUNT, or any part thereof. Nothing contained in this AGREEMENT
is intended to modify, negate or change the rights of the BORROWER set forth in Section 5.1 of the
COLLATERAL/CONTROL AGREEMENT to control and direct the investment and reinvestment of CASH
COLLATERAL in PERMITTED INVESTMENTS, including without limitation funds held in the COLLATERAL
ACCOUNT (including funds held in the PLEDGED DEPOSIT ACCOUNT).

     Section 5.  Acknowledgments Of Issuer. The ISSUER acknowledges that: (a) the INSURANCE
AGREEMENT is in full force and effect and to the best of the ISSUER’S knowledge, the BORROWER and
the BANK are each in compliance with all of their respective obligations thereunder; and (b) the
ISSUER has received delivery of a “collaborative agreement” from the BORROWER and that pursuant to
Section 3.1.D of the INSURANCE AGREEMENT the amount of the ISSUER’S insurance will not be
reduced to twenty-five percent (25%), but rather shall remain at thirty percent (30%). In
furtherance of the foregoing provisions of this Section, the first sentence of the definition of
“INSURED PORTION OF THE DEBT” set forth in Section 1.1 of the INSURANCE AGREEMENT is hereby deleted
and the following inserted in lieu thereof: “INSURED PORTION OF THE DEBT” means thirty percent
(30%) of the Debt.”

     Section 6.    Release Of Certain Equipment. The BORROWER may request that it be
permitted to sell or otherwise dispose of items of equipment which has become obsolete, by
providing the BANK and the ISSUER with a detailed description of such equipment and, with respect
to each item, the manner of the BORROWER’S proposed disposition thereof (e.g., sale) and
the amount of any net proceeds to be received in connection with such sale or disposition. The
BANK in its sole discretion, and the ISSUER, to the extent the ISSUER’S approval of any such sale
or other disposition is required pursuant to the DOCUMENTS, may grant or withhold approval of such
sale or other disposition. If approval of any such sale or other disposition of any such item of
equipment is granted, the security interest under the DOCUMENTS in such item shall be released upon
the sale or disposition of such item, subject however, to the payment to the BANK, for deposit into
the COLLATERAL ACCOUNT, of an amount equal to the proceeds of such sale or disposition, net of the
reasonable costs of such sale or disposition (provided that the amount of such net proceeds
actually received is not less than the amount thereof approved by the BANK and, if applicable, the
ISSUER).

     Section 7.    Permitted SUBORDINATED OBLIGATIONS. The parties hereto agree that
notwithstanding any provisions to the contrary in the DOCUMENTS, the BORROWER shall have the right,
upon ten (10) days prior written notice to the BANK, to enter into “SUBORDINATED OBLIGATIONS” (as
defined below) with any of the BORROWER’S shareholders (the “SHAREHOLDER PAYEES” defined below) so
long as such SUBORDINATED OBLIGATIONS expressly contain and set forth and are subject to the
following provisions:

	 	(a)	 	All obligations of the Company to pay the principal of and interest on
and all other amounts and liabilities in connection with any indebtedness to
its Shareholders Payees, whether such indebtedness, obligations and liabilities
are now existing or hereafter arising (collectively, the “Subordinated
Obligations”) are hereby expressly subordinated to and in favor of the
indefeasible and full payment in cash of all of the Senior Indebtedness, as
hereinafter defined, to the extent and in the manner hereinafter set forth.	 

	 	(b)	 	As used herein, the term Senior Indebtedness shall mean indebtedness,
liabilities and obligations of the Company to Manufacturers and Traders Trust
Company (“Bank”) of every kind and nature whatsoever, whether now existing or
hereafter arising or created any time, including without limitation, all
indebtedness, liabilities and obligations of the Company to the Bank which are
direct, indirect, contingent, primary, secondary, alone, jointly with others,
due, to become due, unsecured, secured, or future advances and including,	 

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	 	 	 	 without limitation, all liabilities, indebtedness and obligations of the
Company to the Bank.	 

	 	(c)	 	Until the Senior Indebtedness has been fully and indefeasibly paid in
cash, the Shareholder Payees shall not, without prior written consent of the
Bank, ask for, demand, accelerate, declare a default under, sue for, set off,
accept or receive any payment of all or any part of the Subordinated
Obligations except that the Payee may receive securities that are subordinate
to the Senior Indebtedness to at least the same extent as the Subordinated
Indebtedness.	 

	 	(d)	 	The Shareholder Payees and the Company shall agree, represent and
warrant that the Subordinated Obligations are not secured in any way, directly
or indirectly, including, without limitation, by security agreement, pledge
agreement, guaranty agreement, mortgage, deed of trust, or any other document,
lien, encumbrance or otherwise.	 

	 	(e)	 	In the event of any distribution, division or application, partial or
complete, voluntary or involuntary, by operation of law or otherwise, of all or
any part of the assets of the Company or the proceeds thereof to creditors of
the Company or to any indebtedness, liabilities and obligations of the Company,
by reason of the liquidation, dissolution or other winding up of the Company or
the Company’s business, or in the event of any sale, receivership, insolvency
or bankruptcy proceeding, or assignment for the benefit of creditors, or any
proceeding by or against the Company for any relief under any bankruptcy or
insolvency law, then any payment or distributions of any kind or character,
either in cash, securities or other property, which shall be payable or
deliverable upon or with respect to all or any part of the Subordinated
Obligations shall be paid or delivered directly to the Bank for application to
the Senior Indebtedness (whether due or not due and in such order and manner as
the Bank may elect; and including, without limitation, any interest accruing
subsequent to the commencement of any such event or proceeding) until the
Senior Indebtedness shall have been fully paid and satisfied. The Shareholder
Payees hereby irrevocably authorize and empower the Bank, and irrevocably
appoints the Bank the Attorneys-in fact for the Shareholder Payees to demand,
sue for, collect and receive every such payment or distribution and give
acquittance therefor and to file claims and take such other proceedings in the
name of the Bank or in the names of the Shareholder Payees or otherwise, as the
Bank may deem necessary or advisable to carry out the provisions hereof.	 

	 	(f)	 	The Company and the Shareholder Payees agree that the Bank is a
third-party beneficiary of the subordination provisions of any Subordinated
Obligations and shall be entitled to enforce such provisions by proceedings at
law or in equity or otherwise. If any of the Senior Indebtedness should be
transferred or assigned by the Bank, the provisions of any Note evidencing any
Subordinated Obligations will inure to the benefit of the transferee and
assignee to the extent of such transfer or assignment, provided that the Bank
shall continue to have the unimpaired right to enforce the provisions of said
Note as to any of the Senior Indebtedness not so transferred or assigned. The
subordinate provisions of any Subordinated Obligations shall be binding upon
the Shareholder Payees and the Company and their respective successors and
assigns. None of the subordinate provisions of any 	 

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	 	 	 	 Subordinated Obligations
may be waived, modified or amended without the prior written consent of the
Bank, or if any of the Senior Indebtedness has then been transferred or
assigned, by the then holders or obliges of all of the Senior Indebtedness.	 

	 	(g)	 	The Company shall provide written notice to the Shareholder Payees as
to any additional Senior Indebtedness incurred by or agreed to by the Company
after the date hereof and during such time that any amounts are outstanding
under any Subordinated Obligations.	 

     Section 8.     Expenses. The BORROWER agrees to reimburse the BANK and the ISSUER upon
demand for the costs and expenses incurred by the BANK and the ISSUER in connection with the
preparation of this AGREEMENT, including reasonable attorneys’ fees. The BORROWER further agrees
to reimburse the BANK for costs incurred for an asset appraisal that was obtained in accordance
with the terms of the MODIFICATION AGREEMENT between the parties. The execution and delivery by
the BORROWER of this AGREEMENT to the BANK shall authorize the BANK to debit and charge the
BORROWER’S deposit account #970184752 for the costs and expenses incurred by the BANK and the
ISSUER, including reasonable attorneys’ fees, in connection with the preparation of this AGREEMENT,
and for the above-stated asset appraisal costs.

     Section 9.     No Novation. It is the intent of the BORROWER, the ISSUER, and the BANK
that nothing contained in this AGREEMENT shall be deemed to effect or accomplish or otherwise
constitute a novation of any of the DOCUMENTS or of any of the obligations owed by the BORROWER in
accordance with any of the DOCUMENTS.

     Section 10.   Enforceability. This AGREEMENT shall inure to the benefit of and be
enforceable against the parties hereto and their respective successors and assigns.

     Section 11.   Choice Of Law; Consent To Jurisdiction; Agreement As To Venue. This
AGREEMENT shall be construed, performed and enforced and its validity and enforceability determined
in accordance with the laws of the State of Maryland (excluding, however, conflict of laws
principles). The BORROWER consents to the jurisdiction of the courts of the State of Maryland and
the jurisdiction of the United States District Court for the District of Maryland, if a basis for
federal jurisdiction exists. The BORROWER waives any right to object to the maintenance of a suit
in any of the state or federal courts of the State of Maryland on the basis of improper venue or
inconvenience of forum.

     Section 12.   Waiver Of Jury Trial. Each of the parties agrees that any suit, action,
or proceeding, whether claim or counterclaim, brought or instituted by any of the parties, or any
successor or assign of any of the parties , on or with respect to this AGREEMENT or any of the
DOCUMENTS or which in any way relates, directly or indirectly, to the obligations of the BORROWER
under the DOCUMENTS or this AGREEMENT or the dealings of the parties with respect thereto, shall be
tried by a court and not by a jury. THE PARTIES HEREBY EXPRESSLY WAIVE ANY RIGHT TO A TRIAL BY
JURY IN ANY SUCH SUIT, ACTION, OR PROCEEDING.

     Section 13.   RELEASE. IN ORDER TO INDUCE THE BANK AND THE ISSUER TO ENTER INTO THIS
AGREEMENT, THE BORROWER FOREVER RELEASES AND DISCHARGES THE BANK AND THE ISSUER AND THE OFFICERS,
DIRECTORS, EMPLOYEES, ATTORNEYS, AGENTS, SUCCESSORS, AND ASSIGNS OF THE BANK AND THE ISSUER
(COLLECTIVELY, THE “RELEASED PARTIES”) FROM ANY AND ALL CLAIMS, CAUSES OF ACTION, SUITS AND DAMAGES
(INCLUDING CLAIMS FOR ATTORNEYS’ FEES AND COSTS) WHICH THE BORROWER EVER HAD OR MAY NOW HAVE
AGAINST ANY OF THE

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RELEASED PARTIES, WHETHER KNOWN OR UNKNOWN, INCLUDING BUT NOT LIMITED TO ANY AND
ALL CLAIMS BASED UPON OR RELYING ON ANY ALLEGATIONS OR ASSERTIONS OF DURESS, ILLEGALITY,
UNCONSCIONABILITY, BAD FAITH, BREACH OF CONTRACT, REGULATORY VIOLATIONS, NEGLIGENCE, MISCONDUCT, OR
ANY OTHER TORT, CONTRACT OR REGULATORY CLAIM OF ANY KIND OR NATURE. THIS RELEASE IS INTENDED TO BE
FINAL AND IRREVOCABLE AND IS NOT SUBJECT TO THE SATISFACTION OF ANY CONDITIONS OF ANY KIND.

     IN WITNESS WHEREOF, the parties have executed this AGREEMENT with the specific intention of
creating a document under seal to be effective as of the date first above written. This AGREEMENT
may be executed and delivered in counterparts.

	 	 	 	 	 	 	 	 	 
	WITNESS/ATTEST:	 	AVALON PHARMACEUTICALS, INC.
	 
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 

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

	 	 	 	 
	 	 
	 

	 	 	 	Name:	 	Kenneth C. Carter Ph. D.	 	 
	 

	 	 	 	 	 	 	 	 
	 

	 	 	 	Title:	 	President and CEO	 	 
	 

	 	 	 	 	 	 	 	 

[SIGNATURES CONTINUED ON THE FOLLOWING PAGE]

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Signature Page to Modification And Consent Agreement– Continued:

	 	 	 	 	 	 	 	 	 
	WITNESS/ATTEST:	 	MARYLAND INDUSTRIAL DEVELOPMENT

FINANCING AUTHORITY
	 
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	/s/ D. Gregory Cole	 	(SEAL)
	 

	 	 	 	 
	 	 
	 

	 	 	 	Name:	 	D. Gregory Cole	 	 
	 

	 	 	 	 	 	 	 	 
	 

	 	 	 	Title:	 	Executive Director	 	 
	 

	 	 	 	 	 	 	 	 

[SIGNATURES CONTINUED ON THE FOLLOWING PAGE]

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Signature Page to Modification And Consent Agreement – Continued:

	 	 	 	 	 	 	 	 	 
	 	 	MANUFACTURERS AND TRADERS TRUST

COMPANY
	 
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	/s/ Stephen D. Gattiff	 	(SEAL)
	 

	 	 	 	 
	 	 
	 

	 	 	 	Name:	 	Stephen D. Gattiff	 	 
	 

	 	 	 	 	 	 	 	 
	 

	 	 	 	Title:	 	Vice President	 	 
	 

	 	 	 	 	 	 	 	 

9exv10w43

 

Exhibit 10.43

 

 

AVALON PHARMACEUTICALS INC.

2005 OMNIBUS LONG-TERM INCENTIVE PLAN

 

 

 

TABLE OF CONTENTS

	 	 	 	 	 	 	 
	 	 	 	 	 	Page

	1.	 	PURPOSE	 	1
	2.	 	DEFINITIONS	 	1
	3.	 	ADMINISTRATION OF THE PLAN	 	5
	 
	 	3.1.	 	Board 	 	5
	 
	 	3.2.	 	Committee	 	5
	 
	 	3.3.	 	Terms of Awards	 	6
	 
	 	3.4.	 	Deferral Arrangement	 	7
	 
	 	3.5.	 	No Liability	 	7
	 
	 	3.6.	 	Book Entry 	 	7
	4.	 	STOCK SUBJECT TO THE PLAN	 	7
	5.	 	EFFECTIVE DATE, DURATION AND AMENDMENTS	 	9
	 
	 	5.1.	 	Effective Date	 	9
	 
	 	5.2.	 	Term	 	9
	 
	 	5.3.	 	Amendment and Termination of the Plan 	 	9
	6.	 	AWARD ELIGIBILITY AND LIMITATIONS	 	9
	 
	 	6.1.	 	Service Providers and Other Persons 	 	9
	 
	 	6.2.	 	Successive Awards and Substitute Awards	 	9
	 
	 	6.3.	 	Limitation on Shares of Stock Subject to Awards and Cash Awards.	 	10
	7.	 	AWARD AGREEMENT	 	10
	8.	 	TERMS AND CONDITIONS OF OPTIONS	 	10
	 
	 	8.1.	 	Option Price 	 	10
	 
	 	8.2.	 	Vesting	 	11
	 
	 	8.3.	 	Term	 	11
	 
	 	8.4.	 	Termination of Service	 	11
	 
	 	8.5.	 	Limitations on Exercise of Option	 	11
	 
	 	8.6.	 	Method of Exercise	 	11
	 
	 	8.7.	 	Rights of Holders of Options 	 	12
	 
	 	8.8.	 	Delivery of Stock Certificates	 	12
	 
	 	8.9.	 	Transferability of Options 	 	12
	 
	 	8.10.	 	Family Transfers	 	12
	 
	 	8.11.	 	Limitations on Incentive Stock Options	 	12
	9.	 	TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS	 	13
	 
	 	9.1.	 	Right to Payment and Grant Price	 	13
	 
	 	9.2.	 	Other Terms	 	13
	10.	 	TERMS AND CONDITIONS OF RESTRICTED STOCK AND STOCK UNITS13	 	 
	 
	 	10.1.	 	Grant of Restricted Stock or Stock Units	 	13
	 
	 	10.2.	 	Restrictions	 	13
	 
	 	10.3.	 	Restricted Stock Certificates	 	14
	 
	 	10.4.	 	Rights of Holders of Restricted Stock	 	14

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	 	10.5.	 	Rights of Holders of Stock Units	 	14
	 
	 	 	 	10.5.1.Voting and Dividend Rights	 	14
	 
	 	 	 	10.5.2.Creditor’s Rights	 	14
	 
	 	10.6.	 	Termination of Service	 	15
	 
	 	10.7.	 	Purchase of Restricted Stock	 	15
	 
	 	10.8.	 	Delivery of Stock	 	15
	11.	 	TERMS AND CONDITIONS OF UNRESTRICTED STOCK AWARDS	 	15
	12.	 	FORM OF PAYMENT FOR OPTIONS AND RESTRICTED STOCK	 	15
	 
	 	12.1.	 	General Rule	 	15
	 
	 	12.2.	 	Surrender of Stock	 	16
	 
	 	12.3.	 	Cashless Exercise	 	16
	 
	 	12.4.	 	Other Forms of Payment	 	16
	13.	 	TERMS AND CONDITIONS OF DIVIDEND EQUIVALENT RIGHTS	 	16
	 
	 	13.1.	 	Dividend Equivalent Rights	 	16
	 
	 	13.2.	 	Termination of Service	 	17
	14.	 	TERMS AND CONDITIONS OF PERFORMANCE AND ANNUAL INCENTIVE AWARDS	 	17
	 
	 	14.1.	 	Performance Conditions 	 	17
	 
	 	14.2.	 	Performance or Annual Incentive Awards Granted to Designated Covered Employees	 	17
	 
	 	 	 	14.2.1.Performance Goals Generally	 	17
	 
	 	 	 	14.2.2.Business Criteria	 	18
	 
	 	 	 	14.2.3.Timing For Establishing Performance Goals	 	18
	 
	 	 	 	14.2.4.Settlement of Performance or Annual Incentive	 	 
	 
	 	 	 	Awards; Other Terms.
	 	18
	 
	 	14.3.	 	Written Determinations	 	18
	 
	 	14.4.	 	Status of Section 14.2 Awards Under Code Section 162(m) 	 	19
	15.	 	PARACHUTE LIMITATIONS	 	19
	16.	 	REQUIREMENTS OF LAW	 	20
	 
	 	16.1.	 	General	 	20
	 
	 	16.2.	 	Rule 16b-3	 	20
	17.	 	EFFECT OF CHANGES IN CAPITALIZATION	 	21
	 
	 	17.1.	 	Changes in Stock	 	21
	 
	 	17.2.	 	Reorganization in Which the Company Is the Surviving Entity Which does not Constitute	 	 
	 
	 	 	 	a Corporate Transaction.
	 	21
	 
	 	17.3.	 	Corporate Transaction	 	22
	 
	 	17.4.	 	Adjustments	 	23
	 
	 	17.5.	 	No Limitations on Company	 	23
	18.	 	GENERAL PROVISIONS	 	23
	 
	 	18.1.	 	Disclaimer of Rights 	 	23
	 
	 	18.2.	 	Nonexclusivity of the Plan 	 	24
	 
	 	18.3.	 	Withholding Taxes 	 	24

- ii -

 

	 	 	 	 	 	 	 
	 
	 	18.4.	 	Captions 	 	24
	 
	 	18.5.	 	Other Provisions 	 	24
	 
	 	18.6.	 	Number and Gender 	 	24
	 
	 	18.7.	 	Severability 	 	24
	 
	 	18.8.	 	Governing Law 	 	25
	 
	 	18.9.	 	Section 409A of the Code 	 	25

- iii -

 

AVALON PHARMACEUTICALS INC.

2005 OMNIBUS LONG-TERM INCENTIVE PLAN

     Avalon Pharmaceuticals Inc., a Delaware corporation (the “Company”), sets forth herein the
terms of its 2005 Omnibus Long-Term Incentive Plan (the “Plan”), as follows:

1. PURPOSE

     The Plan is intended to enhance the Company’s and its Affiliates’ (as defined herein) ability
to attract and retain highly qualified officers, directors, key employees, and other persons, and
to motivate persons to serve the Company and its Affiliates and to expend maximum effort to improve
the business results and earnings of the Company, by providing to such persons an opportunity to
acquire or increase a direct proprietary interest in the operations and future success of the
Company. To this end, the Plan provides for the grant of stock options, stock appreciation rights,
restricted stock, stock units, unrestricted stock, dividend equivalent rights and cash awards. Any
of these awards may, but need not, be made as performance incentives to reward attainment of annual
or long-term performance goals in accordance with the terms hereof. Stock options granted under
the Plan may be non-qualified stock options or incentive stock options, as provided herein.

2. DEFINITIONS

     For purposes of interpreting the Plan and related documents (including Award Agreements), the
following definitions shall apply:

     2.1 “Affiliate” means, with respect to the Company, any company or other trade or business
that controls, is controlled by or is under common control with the Company within the meaning of
Rule 405 of Regulation C under the Securities Act, including, without limitation, any Subsidiary.

     2.2 “Annual Incentive Award” means an Award made subject to attainment of performance goals
(as described in Section 14) over a performance period of up to one year (the fiscal year, unless
otherwise specified by the Committee).

     2.3 “Award” means a grant of an Option, Stock Appreciation Right, Restricted Stock,
Unrestricted Stock, Stock Unit, Dividend Equivalent Rights, or cash award under the Plan.

     2.4 “Award Agreement” means the written agreement between the Company and a Grantee that
evidences and sets out the terms and conditions of an Award.

     2.5 “Benefit Arrangement” shall have the meaning set forth in Section 15 hereof.

     2.6 “Board” means the Board of Directors of the Company.

 

 

     2.7 “Cause” means, as determined by the Board and unless otherwise provided in an applicable
agreement with the Company or an Affiliate, (i) gross negligence or willful misconduct in
connection with the performance of duties; (ii) conviction of a criminal offense (other than minor
traffic offenses); or (iii) material breach of any term of any employment, consulting or other
services, confidentiality, intellectual property or non-competition agreements, if any, between the
Service Provider and the Company or an Affiliate.

     2.8 “Code” means the Internal Revenue Code of 1986, as now in effect or as hereafter amended.

     2.9 “Committee” means a committee of, and designated from time to time by resolution of, the
Board, which shall be constituted as provided in Section 3.2.

     2.10 “Company” means Avalon Pharmaceuticals Inc..

     2.11 “Corporate Transaction” means (i) the dissolution or liquidation of the Company or a
merger, consolidation, or reorganization of the Company with one or more other entities in which
the Company is not the surviving entity, (ii) a sale of substantially all of the assets of the
Company to another person or entity, or (iii) any transaction (including without limitation a
merger or reorganization in which the Company is the surviving entity) which results in any person
or entity (other than persons who are stockholders or Affiliates immediately prior to the
transaction) owning 50% or more of the combined voting power of all classes of stock of the
Company.

     2.12 “Covered Employee” means a Grantee who is a Covered Employee within the meaning of
Section 162(m)(3) of the Code.

     2.13 “Disability” means the Grantee is unable to perform each of the essential duties of such
Grantee’s position by reason of a medically determinable physical or mental impairment which is
potentially permanent in character or which can be expected to last for a continuous period of not
less than 12 months; provided, however, that, with respect to rules regarding expiration of an
Incentive Stock Option following termination of the Grantee’s Service, Disability shall mean the
Grantee is unable to engage in any substantial gainful activity by reason of a medically
determinable physical or mental impairment which can be expected to result in death or which has
lasted or can be expected to last for a continuous period of not less than 12 months.

     2.14 “Dividend Equivalent Right” means a right, granted to a Grantee under Section 13 hereof,
to receive cash, Stock, other Awards or other property equal in value to dividends paid with
respect to a specified number of shares of Stock, or other periodic payments.

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     2.15 “Effective Date” means the date of the closing of the IPO.

     2.16 “Exchange Act” means the Securities Exchange Act of 1934, as now in effect or as
hereafter amended.

     2.17 “Fair Market Value” means the value of a share of Stock, determined as follows: if on
the Grant Date or other determination date the Stock is listed on an established national or
regional stock exchange, is admitted to quotation on The Nasdaq Stock Market, Inc. or is publicly
traded on an established securities market, the Fair Market Value of a share of Stock shall be the
closing price of the Stock on such exchange or in such market (if there is more than one such
exchange or market the Board shall determine the appropriate exchange or market) on the Grant Date
or such other determination date (or if there is no such reported closing price, the Fair Market
Value shall be the mean between the highest bid and lowest asked prices or between the high and low
sale prices on such trading day) or, if no sale of Stock is reported for such trading day, on the
next preceding day on which any sale shall have been reported. If the Stock is not listed on such
an exchange, quoted on such system or traded on such a market, Fair Market Value shall be the value
of the Stock as determined by the Board in good faith.

     2.18 “Family Member” means a person who is a spouse, former spouse, child, stepchild,
grandchild, parent, stepparent, grandparent, niece, nephew, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother, sister, brother-in-law, or sister-in-law, including adoptive
relationships, of the Grantee, any person sharing the Grantee’s household (other than a tenant or
employee), a trust in which any one or more of these persons have more than fifty percent of the
beneficial interest, a foundation in which any one or more of these persons (or the Grantee)
control the management of assets, and any other entity in which one or more of these persons (or
the Grantee) own more than fifty percent of the voting interests.

     2.19 “Grant Date” means, as determined by the Board, the latest to occur of (i) the date as of
which the Board approves an Award, (ii) the date on which the recipient of an Award first becomes
eligible to receive an Award under Section 6 hereof, or (iii) such other date as may be specified
by the Board.

     2.20 “Grantee” means a person who receives or holds an Award under the Plan.

     2.21 “Incentive Stock Option” means an “incentive stock option” within the meaning of Section
422 of the Code, or the corresponding provision of any subsequently enacted tax statute, as amended
from time to time.

     2.22 “IPO” means the Company’s first underwritten offering of its Stock to the public pursuant
to an effective registration statement under the Securities Act.

     2.23 “Non-qualified Stock Option” means an Option that is not an Incentive Stock Option.

     2.24 “Option” means an option to purchase one or more shares of Stock pursuant to the Plan.

- 3 -

 

     2.25 “Option Price” means the exercise price for each share of Stock subject to an Option.

     2.26 “Other Agreement” shall have the meaning set forth in Section 15 hereof.

     2.27 “Outside Director” means a member of the Board who is not an officer or employee of the
Company.

     2.28 “Performance Award” means an Award made subject to the attainment of performance goals
(as described in Section 14) over a performance period of up to ten (10) years.

     2.29 “Plan” means this Avalon Pharmaceuticals Inc. 2005 Omnibus Long-Term Incentive Plan.

     2.30 “Purchase Price” means the purchase price for each share of Stock pursuant to a grant of
Restricted Stock or Unrestricted Stock.

     2.31 “Reporting Person” means a person who is required to file reports under Section 16(a) of
the Exchange Act.

     2.32 “Restricted Stock” means shares of Stock, awarded to a Grantee pursuant to Section 10
hereof.

     2.33 “SAR Exercise Price” means the per share exercise price of an SAR granted to a Grantee
under Section 9 hereof.

     2.34 “Securities Act” means the Securities Act of 1933, as now in effect or as hereafter
amended.

     2.35 “Service” means service as a Service Provider to the Company or an Affiliate. Unless
otherwise stated in the applicable Award Agreement, a Grantee’s change in position or duties shall
not result in interrupted or terminated Service, so long as such Grantee continues to be a Service
Provider to the Company or an Affiliate. Subject to the preceding sentence, whether a termination
of Service shall have occurred for purposes of the Plan shall be determined by the Board, which
determination shall be final, binding and conclusive.

     2.36 “Service Provider” means an employee, officer or director of the Company or an Affiliate,
or a consultant or adviser currently providing services to the Company or an Affiliate.

     2.37 “Stock” means the common stock, par value $.01 per share, of the Company.

- 4 -

 

     2.38 “Stock Appreciation Right” or “SAR” means a right granted to a Grantee under Section 9
hereof.

     2.39 “Stock Unit” means a bookkeeping entry representing the equivalent of one or more shares
of Stock (as indicated in the Award Agreement) awarded to a Grantee pursuant to Section 10 hereof.

     2.40 “Subsidiary” means any “subsidiary corporation” of the Company within the meaning of
Section 424(f) of the Code.

     2.41 “Substitute Awards” means Awards granted upon assumption of, or in substitution for,
outstanding awards previously granted by a company or other entity acquired by the Company or any
Affiliate or with which the Company or any Affiliate combines.

     2.42 “Termination Date” means the date upon which an Option shall terminate or expire, as set
forth in Section 8.3 hereof.

     2.43 “Ten Percent Stockholder” means an individual who owns more than ten percent (10%) of the
total combined voting power of all classes of outstanding stock of the Company, its parent or any
of its Subsidiaries. In determining stock ownership, the attribution rules of Section 424(d) of
the Code shall be applied.

     2.44 “Unrestricted Stock” means an Award pursuant to Section 11 hereof.

3. ADMINISTRATION OF THE PLAN

     3.1. Board

     The Board shall have such powers and authorities related to the administration of the Plan as
are consistent with the Company’s certificate of incorporation and by-laws and applicable law. The
Board shall have full power and authority to take all actions and to make all determinations
required or provided for under the Plan, any Award or any Award Agreement, and shall have full
power and authority to take all such other actions and make all such other determinations not
inconsistent with the specific terms and provisions of the Plan that the Board deems to be
necessary or appropriate to the administration of the Plan, any Award or any Award Agreement. All
such actions and determinations shall be by the affirmative vote of a majority of the members of
the Board present at a meeting or by unanimous consent of the Board executed in writing in
accordance with the Company’s certificate of incorporation and by-laws and applicable law. The
interpretation and construction by the Board of any provision of the Plan, any Award or any Award
Agreement shall be final, binding and conclusive.

     3.2. Committee.

     The Board from time to time may delegate to the Committee such powers and authorities related
to the administration and implementation of the Plan, as set forth in

- 5 -

 

Section 3.1 above and other applicable provisions, as the Board shall determine, consistent with
the certificate of incorporation and by-laws of the Company and applicable law.

     (i) Except as provided in Subsection (ii) and except as the Board may otherwise
determine, the Committee, if any, appointed by the Board to administer the Plan shall be the
Compensation Committee.

     (ii) The Board may also appoint one or more separate committees of the Board, each
composed of one or more directors of the Company who need not be Outside Directors, who may
administer the Plan with respect to employees or other Service Providers who are not
officers or directors of the Company, may grant Awards under the Plan to such employees or
other Service Providers, and may determine all terms of such Awards.

     In the event that the Plan, any Award or any Award Agreement entered into hereunder provides for
any action to be taken by or determination to be made by the Board, such action may be taken or
such determination may be made by the Committee if the power and authority to do so has been
delegated to the Committee by the Board as provided for in this Section. Unless otherwise
expressly determined by the Board, any such action or determination by the Committee shall be
final, binding and conclusive. To the extent permitted by law, the Committee may delegate its
authority under the Plan to a member of the Board.

     3.3. Terms of Awards.

     Subject to the other terms and conditions of the Plan, the Board shall have full and final
authority to:

     (i) designate Grantees,

     (ii) determine the type or types of Awards to be made to a Grantee,

     (iii) determine the number of shares of Stock to be subject to an Award,

     (iv) establish the terms and conditions of each Award (including, but not limited to, the
exercise price of any Option, the nature and duration of any restriction or condition (or provision
for lapse thereof) relating to the vesting, exercise, transfer, or forfeiture of an Award or the
shares of Stock subject thereto, and any terms or conditions that may be necessary to qualify
Options as Incentive Stock Options),

     (v) prescribe the form of each Award Agreement evidencing an Award, and

     (vi) amend, modify, or supplement the terms of any outstanding Award. Such authority
specifically includes the authority, in order to effectuate the purposes of the Plan but without
amending the Plan, to modify Awards to eligible individuals who are foreign nationals or are
individuals who are employed outside the United States to recognize differences in local law, tax
policy, or custom. Notwithstanding the foregoing, no amendment, modification or supplement of any
Award shall, without the consent of the Grantee, impair the Grantee’s rights under such Award.

- 6 -

 

     The Company may retain the right in an Award Agreement to cause a forfeiture of the gain
realized by a Grantee on account of actions taken by the Grantee in violation or breach of or in
conflict with any employment agreement, non-competition agreement, any agreement prohibiting
solicitation of employees or clients of the Company or any Affiliate thereof or any confidentiality
obligation with respect to the Company or any Affiliate thereof or otherwise in competition with
the Company or any Affiliate thereof, to the extent specified in such Award Agreement applicable to
the Grantee. Furthermore, the Company may annul an Award if the Grantee is an employee of the
Company or an Affiliate thereof and is terminated for Cause as defined in the applicable Award
Agreement or the Plan, as applicable. Notwithstanding the foregoing, no amendment or modification
may be made to an outstanding Option or SAR which reduces the Option Price or SAR Exercise Price,
either by lowering the Option Price or SAR Exercise Price or by canceling the outstanding Option or
SAR and granting a replacement Option or SAR with a lower exercise price without the approval of
the stockholders of the Company, provided, that, appropriate adjustments may be made to outstanding
Options and SARs pursuant to Section 17. The grant of any Award shall be contingent upon the
Grantee executing the appropriate Award Agreement.

     3.4. Deferral Arrangement.

     The Board may permit or require the deferral of any award payment into a deferred compensation
arrangement, subject to such rules and procedures as it may establish, which may include provisions
for the payment or crediting of interest or dividend equivalents, including converting such credits
into deferred Stock equivalents and restricting deferrals to comply with hardship distribution
rules affecting 401(k) plans.

     3.5. No Liability.

     No member of the Board or of the Committee shall be liable for any action or determination
made in good faith with respect to the Plan or any Award or Award Agreement.

     3.6. Book Entry

     Notwithstanding any other provision of this Plan to the contrary, the Company may elect to
satisfy any requirement under this Plan for the delivery of stock certificates through the use of
book-entry.

4. STOCK SUBJECT TO THE PLAN

     Subject to adjustment as provided in Section 17 hereof, the number of shares of Stock
available for issuance under the Plan shall be the sum of: (i) (A) a number of shares of Stock
equal to 15% of the Company’s issued and outstanding shares of Stock immediately following the
closing of the IPO on a fully-diluted, as converted into Stock basis after giving effect to the
exercise, exchange and/or conversion of all outstanding options, warrants and convertible
securities exercisable or exchangeable for, or convertible into Stock or securities exercisable or
exchangeable for, or convertible into, Stock, and assuming the issuance of all options then
available for issuance under the Company’s Amended and Restated 1999 Stock Plan and

- 7 -

 

including shares of Stock issuable under this Plan (other than as a consequence of clause (ii) of
this Section 4) less (B) the number of shares of Stock then outstanding or issuable upon the
exercise of then outstanding equity awards under the Company’s Amended and Restated 1999 Stock
Plan; provided, that, no more than 2,600,000 shares shall be available for issuance pursuant to
this clause (i) and (ii) any shares which become available under the Company’s Amended and Restated
1999 Stock Plan due to forfeitures of outstanding awards under that plan after the Effective Date.
Stock issued or to be issued under the Plan shall be authorized but unissued shares; or, to the
extent permitted by applicable law, issued shares that have been reacquired by the Company. If any
shares covered by an Award are not purchased or are forfeited, or if an Award otherwise terminates
without delivery of any Stock subject thereto, then the number of shares of Stock counted against
the aggregate number of shares available under the Plan with respect to such Award shall, to the
extent of any such forfeiture or termination, again be available for making Awards under the Plan.
If the Option Price of any Option granted under the Plan, or if pursuant to Section 18.3 the
withholding obligation of any Grantee with respect to an Option or other Award, is satisfied by
tendering shares of Stock to the Company (by either actual delivery or by attestation) or by
withholding shares of Stock, the number of shares of Stock issued net of the shares of Stock
tendered or withheld shall be deemed delivered for purposes of determining the maximum number of
shares of Stock available for delivery under the Plan.

     The Board shall have the right to substitute or assume Awards in connection with mergers,
reorganizations, separations, or other transactions to which Section 424(a) of the Code applies.
The number of shares of Stock reserved pursuant to Section 4 may be increased by the corresponding
number of Awards assumed and, in the case of a substitution, by the net increase in the number of
shares of Stock subject to Awards before and after the substitution. The last two sentences of the
first paragraph of this Section 4 shall not apply to the additional shares of Stock reserved for
the subistuted or assumed Awards, unless such increase was approved by the stockholders of the
Company.

5. EFFECTIVE DATE, DURATION AND AMENDMENTS

     5.1. Effective Date.

     The Plan shall be effective as of the Effective Date, subject to approval of the Plan by the
Company’s stockholders within one year before or after the Effective Date. Upon approval of the
Plan by the stockholders of the Company as set forth above, all Awards made under the Plan on or
after the Effective Date shall be fully effective as if the stockholders of the Company had
approved the Plan on the Effective Date. If the stockholders fail to approve the Plan within one
year before or after the Effective Date, any Awards made hereunder shall be null and void and of no
effect.

     5.2. Term.

     The Plan shall terminate automatically ten (10) years after its adoption by the Board and may
be terminated on any earlier date as provided in Section 5.3.

- 8 -

 

     5.3. Amendment and Termination of the Plan

     The Board may, at any time and from time to time, amend, suspend, or terminate the Plan as to
any shares of Stock as to which Awards have not been made. An amendment shall be contingent on
approval of the Company’s stockholders to the extent stated by the Board, required by applicable
law or required by applicable stock exchange listing requirements. No Awards shall be made after
termination of the Plan. No amendment, suspension, or termination of the Plan shall, without the
consent of the Grantee, impair rights or obligations under any Award theretofore awarded under the
Plan.

6. AWARD ELIGIBILITY AND LIMITATIONS

     6.1. Service Providers and Other Persons

     Subject to this Section 6, Awards may be made under the Plan to: (i) any Service Provider to
the Company or of any Affiliate, including any Service Provider who is an officer or director of
the Company, or of any Affiliate, as the Board shall determine and designate from time to time,
(ii) any Outside Director, and (iii) any other individual whose participation in the Plan is
determined to be in the best interests of the Company by the Board.

     6.2. Successive Awards and Substitute Awards.

     An eligible person may receive more than one Award, subject to such restrictions as are
provided herein. Notwithstanding Sections 8.1 and 9.1, the Option Price of an Option or the grant
price of an SAR that is a Substitute Award may be less than 100% of the Fair Market Value of a
share of Common Stock on the original date of grant provided that the Option Price or grant price
in determined in accordance with the principles of Code Section 424 and the regulations thereunder.

     6.3. Limitation on Shares of Stock Subject to Awards and Cash Awards.

     During any time when the Company has a class of equity security registered under Section 12 of
the Exchange Act:

     (i) the maximum number of shares of Stock subject to Options or SARs that can be awarded under
the Plan to any person eligible for an Award under Section 6 hereof is eight hundred twenty-five
thousand shares (825,000) per calendar year;

     (ii) the maximum number of shares that can be awarded under the Plan, other than pursuant to
an Option or SARs, to any person eligible for an Award under Section 6 hereof is eight hundred and
twenty-five thousand (825,000) per calendar year; and

     (iii) the maximum amount that may be earned as an Annual Incentive Award or other cash Award
in any calendar year by any one Grantee shall be $3,000,000 and the maximum amount that may be
earned as a Performance Award or other cash Award in respect of a performance period by any one
Grantee shall be $5,000,000.

     The preceding limitations in this Section 6.3 are subject to adjustment as provided in Section
17 hereof.

- 9 -

 

7. AWARD AGREEMENT

     Each Award granted pursuant to the Plan shall be evidenced by an Award Agreement, in such form
or forms as the Board shall from time to time determine. Award Agreements granted from time to
time or at the same time need not contain similar provisions but shall be consistent with the terms
of the Plan. Each Award Agreement evidencing an Award of Options shall specify whether such
Options are intended to be Non-qualified Stock Options or Incentive Stock Options, and in the
absence of such specification such options shall be deemed Non-qualified Stock Options.

8. TERMS AND CONDITIONS OF OPTIONS

     8.1. Option Price

     The Option Price of each Option shall be fixed by the Board and stated in the Award Agreement
evidencing such Option. The Option Price of each Option shall be at least the Fair Market Value on
the Grant Date of a share of Stock; provided, however, that in the event that a
Grantee is a Ten Percent Stockholder, the Option Price of an Option granted to such Grantee that is
intended to be an Incentive Stock Option shall be not less than 110 percent of the Fair Market
Value of a share of Stock on the Grant Date. In no case shall the Option Price of any Option be
less than the par value of a share of Stock.

     8.2. Vesting.

     Subject to Sections 8.3 and 17.3 hereof, each Option granted under the Plan shall become
exercisable at such times and under such conditions as shall be determined by the Board and stated
in the Award Agreement. For purposes of this Section 8.2, fractional numbers of shares of Stock
subject to an Option shall be rounded down to the next nearest whole number. No Option shall be
exercisable in whole or in part prior to the date the Plan is approved by the Stockholders of the
Company as provided in Section 5.1 hereof.

     8.3. Term.

     Each Option granted under the Plan shall terminate, and all rights to purchase shares of Stock
thereunder shall cease, upon the expiration of ten years from the date such Option is granted, or
under such circumstances and on such date prior thereto as is set forth in the Plan or as may be
fixed by the Board and stated in the Award Agreement relating to such Option (the “Termination
Date”); provided, however, that in the event that the Grantee is a Ten Percent
Stockholder, an Option granted to such Grantee that is intended to be an Incentive Stock Option
shall not be exercisable after the expiration of five years from its Grant Date.

     8.4. Termination of Service.

     Each Award Agreement shall set forth the extent to which the Grantee shall have the right to
exercise the Option following termination of the Grantee’s Service. Such provisions shall be
determined in the sole discretion of the Board, need not be uniform among all Options issued
pursuant to the Plan, and may reflect distinctions based on the reasons for termination of Service.

- 10 -

 

     8.5. Limitations on Exercise of Option.

     Notwithstanding any other provision of the Plan, in no event may any Option be exercised, in
whole or in part, prior to the date the Plan is approved by the stockholders of the Company as
provided herein or after the occurrence of an event referred to in Section 17 hereof which results
in termination of the Option.

     8.6. Method of Exercise.

     An Option that is exercisable may be exercised by the Grantee’s delivery to the Company of
written notice of exercise on any business day, at the Company’s principal office, on the form
specified by the Company. Such notice shall specify the number of shares of Stock with respect to
which the Option is being exercised and shall be accompanied by payment in full of the Option Price
of the shares for which the Option is being exercised plus the amount (if any) of federal and/or
other taxes which the Company may, in its judgment, be required to withhold with respect to an
Award. The minimum number of shares of Stock with respect to which an Option may be exercised, in
whole or in part, at any time shall be the lesser of (i) 100 shares or such lesser number set forth
in the applicable Award Agreement and (ii) the maximum number of shares available for purchase
under the Option at the time of exercise.

     8.7. Rights of Holders of Options

     Unless otherwise stated in the applicable Award Agreement, an individual holding or exercising
an Option shall have none of the rights of a stockholder (for example, the right to receive cash or
dividend payments or distributions attributable to the subject shares of Stock or to direct the
voting of the subject shares of Stock ) until the shares of Stock covered thereby are fully paid
and issued to him. Except as provided in Section 17 hereof, no adjustment shall be made for
dividends, distributions or other rights for which the record date is prior to the date of such
issuance.

     8.8. Delivery of Stock Certificates.

     Promptly after the exercise of an Option by a Grantee and the payment in full of the Option
Price, such Grantee shall be entitled to the issuance of a stock certificate or certificates
evidencing his or her ownership of the shares of Stock subject to the Option.

     8.9. Transferability of Options

     Except as provided in Section 8.10, during the lifetime of a Grantee, only the Grantee (or, in
the event of legal incapacity or incompetency, the Grantee’s guardian or legal representative) may
exercise an Option. Except as provided in Section 8.10, no Option shall be assignable or
transferable by the Grantee to whom it is granted, other than by will or the laws of descent and
distribution.

     8.10. Family Transfers.

     If authorized in the applicable Award Agreement, a Grantee may transfer, not for value, all or
part of an Option which is not an Incentive Stock Option to any Family Member. For the purpose of
this Section 8.10, a “not for value” transfer is a transfer which

- 11 -

 

is (i) a gift, (ii) a transfer under a domestic relations order in settlement of marital property
rights; or (iii) a transfer to an entity in which more than fifty percent of the voting interests
are owned by Family Members (or the Grantee) in exchange for an interest in that entity. Following
a transfer under this Section 8.10, any such Option shall continue to be subject to the same terms
and conditions as were applicable immediately prior to transfer. Subsequent transfers of
transferred Options are prohibited except to Family Members of the original Grantee in accordance
with this Section 8.10 or by will or the laws of descent and distribution. The events of
termination of Service of Section 8.4 hereof shall continue to be applied with respect to the
original Grantee, following which the Option shall be exercisable by the transferee only to the
extent, and for the periods specified, in Section 8.4.

     8.11. Limitations on Incentive Stock Options.

     An Option shall constitute an Incentive Stock Option only (i) if the Grantee of such Option is
an employee of the Company or any Subsidiary of the Company; (ii) to the extent specifically
provided in the related Award Agreement; and (iii) to the extent that the aggregate Fair Market
Value (determined at the time the Option is granted) of the shares of Stock with respect to which
all Incentive Stock Options held by such Grantee become exercisable for the first time during any
calendar year (under the Plan and all other plans of the Grantee’s employer and its Affiliates)
does not exceed $100,000. This limitation shall be applied by taking Options into account in the
order in which they were granted.

9. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS

     9.1. Right to Payment and Grant Price.

     An SAR shall confer on the Grantee to whom it is granted a right to receive, upon exercise
thereof, the excess of (A) the Fair Market Value of one share of Stock on the date of exercise over
(B) the grant price of the SAR as determined by the Board. The Award Agreement for an SAR shall
specify the grant price of the SAR, which shall be at least the Fair Market Value of a share of
Stock on the date of grant. SARs may be granted in conjunction with all or part of an Option
granted under the Plan or at any subsequent time during the term of such Option, in conjunction
with all or part of any other Award or without regard to any Option or other Award. An SAR granted
in tandem with an outstanding Option following the Grant Date of such Option may have a grant price
that is equal to the Option Price, even if such grant price is less than the Fair Market Value of a
share of Stock on the grant date of the SAR.

     9.2. Other Terms.

     The Board shall determine at the date of grant or thereafter, the time or times at which and
the circumstances under which an SAR may be exercised in whole or in part (including based on
achievement of performance goals and/or future service requirements), the time or times at which
SARs shall cease to be or become exercisable following termination of Service or upon other
conditions, the method of exercise, method of settlement, form of consideration payable in
settlement, method by or forms in which Stock will be delivered or deemed to be delivered to
Grantees, whether or not an SAR shall be in

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tandem or in combination with any other Award, and any other terms and conditions of any SAR.

10. TERMS AND CONDITIONS OF RESTRICTED STOCK AND STOCK UNITS

     10.1. Grant of Restricted Stock or Stock Units.

     Awards of Restricted Stock or Stock Units may be made for no consideration (other than par
value of the shares which is deemed paid by Services already rendered). Stock Units may also be
referred to as performance shares. If so indicated in the Award Agreement at the time of grant, a
Grantee may vest in more than 100% of the number of Stock Units awarded to the Grantee.

     10.2. Restrictions.

     At the time a grant of Restricted Stock or Stock Units is made, the Board may, in its sole
discretion, establish a period of time (a “restricted period”) applicable to such Restricted Stock
or Stock Units. Each Award of Restricted Stock or Stock Units may be subject to a different
restricted period. The Board may, in its sole discretion, at the time a grant of Restricted Stock
or Stock Units is made, prescribe restrictions in addition to or other than the expiration of the
restricted period, including the satisfaction of corporate or individual performance objectives,
which may be applicable to all or any portion of the Restricted Stock or Stock Units in accordance
with Section 14.1 and 14.2. Neither Restricted Stock nor Stock Units may be sold, transferred,
assigned, pledged or otherwise encumbered or disposed of during the restricted period or prior to
the satisfaction of any other restrictions prescribed by the Board with respect to such Restricted
Stock or Stock Units.

     10.3. Restricted Stock Certificates.

     The Company shall issue, in the name of each Grantee to whom Restricted Stock has been
granted, stock certificates representing the total number of shares of Restricted Stock granted to
the Grantee, as soon as reasonably practicable after the Grant Date. The Board may provide in an
Award Agreement that either (i) the Secretary of the Company shall hold such certificates for the
Grantee’s benefit until such time as the Restricted Stock is forfeited to the Company or the
restrictions lapse, or (ii) such certificates shall be delivered to the Grantee, provided,
however, that such certificates shall bear a legend or legends that comply with the
applicable securities laws and regulations and makes appropriate reference to the restrictions
imposed under the Plan and the Award Agreement.

     10.4. Rights of Holders of Restricted Stock.

     Unless the Board otherwise provides in an Award Agreement, holders of Restricted Stock shall
have the right to vote such Stock and the right to receive any dividends declared or paid with
respect to such Stock. The Board may provide that any dividends paid on Restricted Stock must be
reinvested in shares of Stock, which may or may not be subject to the same vesting conditions and
restrictions applicable to such Restricted Stock. All distributions, if any, received by a Grantee
with respect to Restricted Stock as a result of any stock split, stock dividend, combination of
shares, or other similar transaction shall be subject to the restrictions applicable to the
original Grant.

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     10.5. Rights of Holders of Stock Units.

          10.5.1. Voting and Dividend Rights.

     Unless the Board otherwise provides in an Award Agreement, holders of Stock Units shall have
no rights as stockholders of the Company. The Board may provide in an Award Agreement evidencing a
grant of Stock Units that the holder of such Stock Units shall be entitled to receive, upon the
Company’s payment of a cash dividend on its outstanding Stock, a cash payment for each Stock Unit
held equal to the per-share dividend paid on the Stock. Such Award Agreement may also provide that
such cash payment will be deemed reinvested in additional Stock Units at a price per unit equal to
the Fair Market Value of a share of Stock on the date that such dividend is paid.

          10.5.2. Creditor’s Rights.

     A holder of Stock Units shall have no rights other than those of a general creditor of the
Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to the
terms and conditions of the applicable Award Agreement.

     10.6. Termination of Service.

     Unless the Board otherwise provides in an Award Agreement or in writing after the Award
Agreement is issued, upon the termination of a Grantee’s Service, any Restricted Stock or Stock
Units held by such Grantee that have not vested, or with respect to which all applicable
restrictions and conditions have not lapsed, shall immediately be deemed forfeited. Upon
forfeiture of Restricted Stock or Stock Units, the Grantee shall have no further rights with
respect to such Award, including but not limited to any right to vote Restricted Stock or any right
to receive dividends with respect to shares of Restricted Stock or Stock Units.

     10.7. Purchase of Restricted Stock.

     The Grantee shall be required, to the extent required by applicable law, to purchase the
Restricted Stock from the Company at a Purchase Price equal to the greater of (i) the aggregate par
value of the shares of Stock represented by such Restricted Stock or (ii) the Purchase Price, if
any, specified in the Award Agreement relating to such Restricted Stock. The Purchase Price shall
be payable in a form described in Section 12 or, in the discretion of the Board, in consideration
for past Services rendered to the Company or an Affiliate.

     10.8. Delivery of Stock.

     Upon the expiration or termination of any restricted period and the satisfaction of any other
conditions prescribed by the Board, the restrictions applicable to shares of Restricted Stock or
Stock Units settled in Stock shall lapse, and, unless otherwise provided in the Award Agreement, a
stock certificate for such shares shall be delivered, free of all such restrictions, to the Grantee
or the Grantee’s beneficiary or estate, as the case may be.

11. TERMS AND CONDITIONS OF UNRESTRICTED STOCK AWARDS

     The Board may, in its sole discretion, grant (or sell at par value or such other higher
purchase price determined by the Board) an Unrestricted Stock Award to any Grantee

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pursuant to which such Grantee may receive shares of Stock free of any restrictions (“Unrestricted
Stock”) under the Plan. Unrestricted Stock Awards may be granted or sold as described in the
preceding sentence in respect of past services and other valid consideration, or in lieu of, or in
addition to, any cash compensation due to such Grantee.

12. FORM OF PAYMENT FOR OPTIONS AND RESTRICTED STOCK

     12.1. General Rule.

     Payment of the Option Price for the shares purchased pursuant to the exercise of an Option or
the Purchase Price for Restricted Stock shall be made in cash or in cash equivalents acceptable to
the Company.

     12.2. Surrender of Stock.

     To the extent the Award Agreement so provides, payment of the Option Price for shares
purchased pursuant to the exercise of an Option or the Purchase Price for Restricted Stock may be
made all or in part through the tender to the Company of shares of Stock, which shares, if acquired
from the Company and if so required by the Company, shall have been held for at least six months at
the time of tender and which shall be valued, for purposes of determining the extent to which the
Option Price or Purchase Price has been paid thereby, at their Fair Market Value on the date of
exercise or surrender.

     12.3. Cashless Exercise.

     With respect to an Option only (and not with respect to Restricted Stock), to the extent
permitted by law and to the extent the Award Agreement so provides, payment of the Option Price for
shares purchased pursuant to the exercise of an Option may be made all or in part by delivery (on a
form acceptable to the Board) of an irrevocable direction to a licensed securities broker
acceptable to the Company to sell shares of Stock and to deliver all or part of the sales proceeds
to the Company in payment of the Option Price and any withholding taxes described in Section 18.3.

     12.4. Other Forms of Payment.

     To the extent the Award Agreement so provides, payment of the Option Price for shares
purchased pursuant to exercise of an Option or the Purchase Price for Restricted Stock may be made
in any other form that is consistent with applicable laws, regulations and rules.

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13. TERMS AND CONDITIONS OF DIVIDEND EQUIVALENT RIGHTS

     13.1. Dividend Equivalent Rights.

     A Dividend Equivalent Right is an Award entitling the recipient to receive credits based on
cash distributions that would have been paid on the shares of Stock specified in the Dividend
Equivalent Right (or other award to which it relates) if such shares had been issued to and held by
the recipient. A Dividend Equivalent Right may be granted hereunder to any Grantee as a component
of another Award or as a freestanding award. The terms and conditions of Dividend Equivalent
Rights shall be specified in the grant. Dividend equivalents credited to the holder of a Dividend
Equivalent Right may be paid currently or may be deemed to be reinvested in additional shares of
Stock, which may thereafter accrue additional equivalents. Any such reinvestment shall be at Fair
Market Value on the date of reinvestment. Dividend Equivalent Rights may be settled in cash or
Stock or a combination thereof, in a single installment or installments, all determined in the sole
discretion of the Board. A Dividend Equivalent Right granted as a component of another Award may
provide that such Dividend Equivalent Right shall be settled upon exercise, settlement, or payment
of, or lapse of restrictions on, such other award, and that such Dividend Equivalent Right shall
expire or be forfeited or annulled under the same conditions as such other award. A Dividend
Equivalent Right granted as a component of another Award may also contain terms and conditions
different from such other award.

     13.2. Termination of Service.

     Except as may otherwise be provided by the Board either in the Award Agreement or in writing
after the Award Agreement is issued, a Grantee’s rights in all Dividend Equivalent Rights or
interest equivalents shall automatically terminate upon the Grantee’s termination of Service for
any reason.

14. TERMS AND CONDITIONS OF PERFORMANCE AND ANNUAL INCENTIVE AWARDS

     14.1. Performance Conditions

     The right of a Grantee to exercise or receive a grant or settlement of any Award, and the
timing thereof, may be subject to such performance conditions as may be specified by the Board.
The Board may use such business criteria and other measures of performance as it may deem
appropriate in establishing any performance conditions, and may exercise its discretion to reduce
the amounts payable under any Award subject to performance conditions, except as limited under
Sections 14.2 hereof in the case of a Performance Award or Annual Incentive Award intended to
qualify under Code Section 162(m). If and to the extent required under Code Section 162(m), any
power or authority relating to a Performance Award or Annual Incentive Award intended to qualify
under Code Section 162(m), shall be exercised by the Committee and not the Board.

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     14.2. Performance or Annual Incentive Awards Granted to Designated Covered Employees

     If and to the extent that the Committee determines that a Performance or Annual Incentive
Award to be granted to a Grantee who is designated by the Committee as likely to be a Covered
Employee should qualify as “performance-based compensation” for purposes of Code Section 162(m),
the grant, exercise and/or settlement of such Performance or Annual Incentive Award shall be
contingent upon achievement of pre-established performance goals and other terms set forth in this
Section 14.2.

          14.2.1. Performance Goals Generally.

     The performance goals for such Performance or Annual Incentive Awards shall consist of one or
more business criteria and a targeted level or levels of performance with respect to each of such
criteria, as specified by the Committee consistent with this Section 14.2. Performance goals shall
be objective and shall otherwise meet the requirements of Code Section 162(m) and regulations
thereunder including the requirement that the level or levels of performance targeted by the
Committee result in the achievement of performance goals being “substantially uncertain.” The
Committee may determine that such Performance or Annual Incentive Awards shall be granted,
exercised and/or settled upon achievement of any one performance goal or that two or more of the
performance goals must be achieved as a condition to grant, exercise and/or settlement of such
Performance or Annual Incentive Awards. Performance goals may differ for Performance or Annual
Incentive Awards granted to any one Grantee or to different Grantees.

          14.2.2. Business Criteria.

     One or more of the following business criteria for the Company, on a consolidated basis,
and/or specified subsidiaries or business units of the Company (except with respect to the total
stockholder return and earnings per share criteria), shall be used exclusively by the Committee in
establishing performance goals for such Performance or Annual Incentive Awards: (1) total
stockholder return; (2) such total stockholder return as compared to total return (on a comparable
basis) of a publicly available index such as, but not limited to, the Standard & Poor’s 500 Stock
Index; (3) net income; (4) pretax earnings; (5) earnings before interest expense, taxes,
depreciation and amortization; (6) pretax operating earnings after interest expense and before
bonuses, service fees, and extraordinary or special items; (7) operating margin; (8) earnings per
share; (9) return on equity; (10) return on capital; (11) return on investment; (12) operating
earnings; (13) working capital; (14) ratio of debt to stockholders’ equity, (15) revenue, (16)
licensing, partnership or other strategic transactions, and (17) product development milestones.
Business criteria may be measured on an absolute basis or on a relative basis (i.e., performance
relative to peer companies) and on a GAAP or non-GAAP basis.

          14.2.3. Timing For Establishing Performance Goals.

     Performance goals shall be established not later than 90 days after the beginning of any
performance period applicable to such Performance or Annual Incentive Awards, or at such other date
as may be required or permitted for “performance-based compensation” under Code Section 162(m).

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          14.2.4. Settlement of Performance or Annual Incentive Awards; Other Terms.

     Settlement of such Performance or Annual Incentive Awards shall be in cash, Stock, other
Awards or other property, in the discretion of the Committee. The Committee may, in its
discretion, reduce the amount of a settlement otherwise to be made in connection with such
Performance or Annual Incentive Awards. The Committee shall specify the circumstances in which
such Performance or Annual Incentive Awards shall be paid or forfeited in the event of termination
of Service by the Grantee prior to the end of a performance period or settlement of Performance
Awards.

     14.3. Written Determinations.

     All determinations by the Committee as to the establishment of performance goals, the amount
of any Performance Award pool or potential individual Performance Awards and as to the achievement
of performance goals relating to Performance Awards, and the amount of any Annual Incentive Award
pool or potential individual Annual Incentive Awards and the amount of final Annual Incentive
Awards, shall be made in writing in the case of any Award intended to qualify under Code Section
162(m). To the extent required to comply with Code Section 162(m), the Committee may delegate any
responsibility relating to such Performance Awards or Annual Incentive Awards.

     14.4. Status of Section 14.2 Awards Under Code Section 162(m)

     It is the intent of the Company that Performance Awards and Annual Incentive Awards under
Section 14.2 hereof granted to persons who are designated by the Committee as likely to be Covered
Employees within the meaning of Code Section 162(m) and regulations thereunder shall, if so
designated by the Committee, constitute “qualified performance-based compensation” within the
meaning of Code Section 162(m) and regulations thereunder. Accordingly, the terms of Section 14.2,
including the definitions of Covered Employee and other terms used therein, shall be interpreted in
a manner consistent with Code Section 162(m) and regulations thereunder. The foregoing
notwithstanding, because the Committee cannot determine with certainty whether a given Grantee will
be a Covered Employee with respect to a fiscal year that has not yet been completed, the term
Covered Employee as used herein shall mean only a person designated by the Committee, at the time
of grant of Performance Awards or an Annual Incentive Award, as likely to be a Covered Employee
with respect to that fiscal year. If any provision of the Plan or any agreement relating to such
Performance Awards or Annual Incentive Awards does not comply or is inconsistent with the
requirements of Code Section 162(m) or regulations thereunder, such provision shall be construed or
deemed amended to the extent necessary to conform to such requirements.

15. PARACHUTE LIMITATIONS

     Notwithstanding any other provision of this Plan or of any other agreement, contract, or
understanding heretofore or hereafter entered into by a Grantee with the Company or any

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Affiliate, except an agreement, contract, or understanding hereafter entered into that expressly
modifies or excludes application of this paragraph (an “Other Agreement”), and notwithstanding any
formal or informal plan or other arrangement for the direct or indirect provision of compensation
to the Grantee (including groups or classes of Grantees or beneficiaries of which the Grantee is a
member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit
to or for the Grantee (a “Benefit Arrangement”), if the Grantee is a “disqualified individual,” as
defined in Section 280G(c) of the Code, any Option, Restricted Stock or Stock Unit held by that
Grantee and any right to receive any payment or other benefit under this Plan shall not become
exercisable or vested (i) to the extent that such right to exercise, vesting, payment, or benefit,
taking into account all other rights, payments, or benefits to or for the Grantee under this Plan,
all Other Agreements, and all Benefit Arrangements, would cause any payment or benefit to the
Grantee under this Plan to be considered a “parachute payment” within the meaning of Section
280G(b)(2) of the Code as then in effect (a “Parachute Payment”) and (ii) if, as a result
of receiving a Parachute Payment, the aggregate after-tax amounts received by the Grantee from the
Company under this Plan, all Other Agreements, and all Benefit Arrangements would be less than the
maximum after-tax amount that could be received by the Grantee without causing any such payment or
benefit to be considered a Parachute Payment. In the event that the receipt of any such right to
exercise, vesting, payment, or benefit under this Plan, in conjunction with all other rights,
payments, or benefits to or for the Grantee under any Other Agreement or any Benefit Arrangement
would cause the Grantee to be considered to have received a Parachute Payment under this Plan that
would have the effect of decreasing the after-tax amount received by the Grantee as described in
clause (ii) of the preceding sentence, then the Grantee shall have the right, in the Grantee’s sole
discretion, to designate those rights, payments, or benefits under this Plan, any Other Agreements,
and any Benefit Arrangements that should be reduced or eliminated so as to avoid having the payment
or benefit to the Grantee under this Plan be deemed to be a Parachute Payment.

16. REQUIREMENTS OF LAW

     16.1. General.

     The Company shall not be required to sell or issue any shares of Stock under any Award if the
sale or issuance of such shares would constitute a violation by the Grantee, any other individual
exercising an Option, or the Company of any provision of any law or regulation of any governmental
authority, including without limitation any federal or state securities laws or regulations. If at
any time the Company shall determine, in its discretion, that the listing, registration or
qualification of any shares subject to an Award upon any securities exchange or under any
governmental regulatory body is necessary or desirable as a condition of, or in connection with,
the issuance or purchase of shares hereunder, no shares of Stock may be issued or sold to the
Grantee or any other individual exercising an Option pursuant to such Award unless such listing,
registration, qualification, consent or approval shall have been effected or obtained free of any
conditions not acceptable to the Company, and any delay caused thereby shall in no way affect the
date of termination of the Award. Specifically, in connection with the Securities Act, upon the
exercise of any Option or the delivery of any shares of Stock underlying an Award, unless a
registration statement under

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such Act is in effect with respect to the shares of Stock covered by such Award, the Company shall
not be required to sell or issue such shares unless the Board has received evidence satisfactory to
it that the Grantee or any other individual exercising an Option may acquire such shares pursuant
to an exemption from registration under the Securities Act. Any determination in this connection
by the Board shall be final, binding, and conclusive. The Company may, but shall in no event be
obligated to, register any securities covered hereby pursuant to the Securities Act. The Company
shall not be obligated to take any affirmative action in order to cause the exercise of an Option
or the issuance of shares of Stock pursuant to the Plan to comply with any law or regulation of any
governmental authority. As to any jurisdiction that expressly imposes the requirement that an
Option shall not be exercisable until the shares of Stock covered by such Option are registered or
are exempt from registration, the exercise of such Option (under circumstances in which the laws of
such jurisdiction apply) shall be deemed conditioned upon the effectiveness of such registration or
the availability of such an exemption.

     16.2. Rule 16b-3.

     During any time when the Company has a class of equity security registered under Section 12 of
the Exchange Act, it is the intent of the Company that Awards pursuant to the Plan and the exercise
of Options granted hereunder will qualify for the exemption provided by Rule 16b-3 under the
Exchange Act. To the extent that any provision of the Plan or action by the Board does not comply
with the requirements of
Rule 16b-3, it shall be deemed inoperative to the extent permitted by law
and deemed advisable by the Board, and shall not affect the validity of the Plan. In the event
that Rule 16b-3 is revised or replaced, the Board may exercise its discretion to modify this Plan
in any respect necessary to satisfy the requirements of, or to take advantage of any features of,
the revised exemption or its replacement.

17. EFFECT OF CHANGES IN CAPITALIZATION

     17.1. Changes in Stock.

     If the number of outstanding shares of Stock is increased or decreased or the shares of Stock
are changed into or exchanged for a different number or kind of shares or other securities of the
Company on account of any recapitalization, reclassification, stock split, reverse split,
combination of shares, exchange of shares, stock dividend or other distribution payable in capital
stock, or other increase or decrease in such shares effected without receipt of consideration by
the Company occurring after the Effective Date, the number and kinds of shares for which grants of
Options and other Awards may be made under the Plan shall be adjusted proportionately and
accordingly by the Company. In addition, the number and kind of shares for which Awards are
outstanding shall be adjusted proportionately and accordingly so that the proportionate interest of
the Grantee immediately following such event shall, to the extent practicable, be the same as
immediately before such event. Any such adjustment in outstanding Options or SARs shall not change
the aggregate Option Price or SAR Exercise Price payable with respect to shares that are subject to
the unexercised portion of an outstanding Option or SAR, as applicable, but shall include a
corresponding proportionate adjustment in the Option Price or SAR Exercise Price per share. The
conversion of any convertible securities of the Company shall not be treated as an increase in
shares effected

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without receipt of consideration. Notwithstanding the foregoing, in the event of any distribution
to the Company’s stockholders of securities of any other entity or other assets (including an
extraordinary cash dividend but excluding a non-extraordinary dividend payable in cash or in stock
of the Company) without receipt of consideration by the Company, the Company may, in such manner as
the Company deems appropriate, adjust (i) the number and kind of shares subject to outstanding
Awards and/or (ii) the exercise price of outstanding Options and Stock Appreciation Rights to
reflect such distribution.

     17.2. Reorganization in Which the Company Is the Surviving Entity Which does not
Constitute a Corporate Transaction.

     Subject to Section 17.3 hereof, if the Company shall be the surviving entity in any
reorganization, merger, or consolidation of the Company with one or more other entities which does
not constitute a Corporate Transaction, any Option or SAR theretofore granted pursuant to the Plan
shall pertain to and apply to the securities to which a holder of the number of shares of Stock
subject to such Option or SAR would have been entitled immediately following such reorganization,
merger, or consolidation, with a corresponding proportionate adjustment of the Option Price or SAR
Exercise Price per share so that the aggregate Option Price or SAR Exercise Price thereafter shall
be the same as the aggregate Option Price or SAR Exercise Price of the shares remaining subject to
the Option or SAR immediately prior to such reorganization, merger, or consolidation. Subject to
any contrary language in an Award Agreement evidencing an Award, any restrictions applicable to
such Award shall apply as well to any replacement shares received by the Grantee as a result of the
reorganization, merger or consolidation. In the event of a transaction described in this Section
17.2, Stock Units shall be adjusted so as to apply to the securities that a holder of the number of
shares of Stock subject to the Stock Units would have been entitled to receive immediately
following such transaction.

     17.3. Corporate Transaction.

     Subject to the exceptions set forth in the last sentence of this Section 17.3 and the last
sentence of Section 17.4:

          (i) upon the occurrence of a Corporate Transaction, all outstanding shares of Restricted Stock
shall be deemed to have vested, and all Stock Units shall be deemed to have vested and the shares
of Stock subject thereto shall be delivered, immediately prior to the occurrence of such Corporate
Transaction, and

          (ii) either of the following two actions shall be taken:

               (A) fifteen days prior to the scheduled consummation of a Corporate Transaction, all Options
and SARs outstanding hereunder shall become immediately exercisable and shall remain exercisable
for a period of fifteen days, or

               (B) the Board may elect, in its sole discretion, to cancel any outstanding Awards of Options,
Restricted Stock, Stock Units, and/or SARs and pay or deliver, or cause to be paid or delivered, to
the holder thereof an amount in cash or securities having a value (as determined by the Board
acting in good faith), in the case of Restricted Stock or Stock Units, equal to the formula or
fixed price per share paid to holders of shares of Stock and, in the

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case of Options or SARs, equal to the product of the number of shares of Stock subject to the
Option or SAR (the “Award Shares”) multiplied by the amount, if any, by which (I) the formula or
fixed price per share paid to holders of shares of Stock pursuant to such transaction exceeds (II)
the Option Price or SAR Exercise Price applicable to such Award Shares.

     With respect to the Company’s establishment of an exercise window, (i) any exercise of an
Option or SAR during such fifteen-day period shall be conditioned upon the consummation of the
event and shall be effective only immediately before the consummation of the event, and (ii) upon
consummation of any Corporate Transaction the Plan, and all outstanding but unexercised Options and
SARs shall terminate. The Board shall send written notice of an event that will result in such a
termination to all individuals who hold Options and SARs not later than the time at which the
Company gives notice thereof to its stockholders. This Section 17.3 shall not apply to any
Corporate Transaction to the extent that provision is made in writing in connection with such
Corporate Transaction for the assumption or continuation of the Options, SARs, Stock Units and
Restricted Stock theretofore granted, or for the substitution for such Options, SARs, Stock Units
and Restricted Stock for new common stock options and stock appreciation rights and new common
stock stock units and restricted stock relating to the stock of a successor entity, or a parent or
subsidiary thereof, with appropriate adjustments as to the number of shares (disregarding any
consideration that is not common stock) and option and stock appreciation right exercise prices, in
which event the Plan, Options, SARs, Stock Units and Restricted Stock theretofore granted shall
continue in the manner and under the terms so provided.

     17.4. Adjustments.

     Adjustments under this Section 17 related to shares of Stock or securities of the Company
shall be made by the Board, whose determination in that respect shall be final, binding and
conclusive. No fractional shares or other securities shall be issued pursuant to any such
adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case
by rounding downward to the nearest whole share. The Board shall determine the effect of a
Corporate Transaction upon Awards other than Options, SARs, Stock Units and Restricted Stock, and
such effect shall be set forth in the appropriate Award Agreement. The Board may provide in the
Award Agreements at the time of grant, or any time thereafter with the consent of the Grantee, for
different provisions to apply to an Award in place of those described in Sections 17.1, 17.2 and
17.3.

     17.5. No Limitations on Company.

     The making of Awards pursuant to the Plan shall not affect or limit in any way the right or
power of the Company to make adjustments, reclassifications, reorganizations, or changes of its
capital or business structure or to merge, consolidate, dissolve, or liquidate, or to sell or
transfer all or any part of its business or assets.

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18. GENERAL PROVISIONS

     18.1. Disclaimer of Rights

     No provision in the Plan or in any Award or Award Agreement shall be construed to confer upon
any individual the right to remain in the employ or service of the Company or any Affiliate, or to
interfere in any way with any contractual or other right or authority of the Company either to
increase or decrease the compensation or other payments to any individual at any time, or to
terminate any employment or other relationship between any individual and the Company. In
addition, notwithstanding anything contained in the Plan to the contrary, unless otherwise stated
in the applicable Award Agreement, no Award granted under the Plan shall be affected by any change
of duties or position of the Grantee, so long as such Grantee continues to be a director, officer,
consultant or employee of the Company or an Affiliate. The obligation of the Company to pay any
benefits pursuant to this Plan shall be interpreted as a contractual obligation to pay only those
amounts described herein, in the manner and under the conditions prescribed herein. The Plan shall
in no way be interpreted to require the Company to transfer any amounts to a third party trustee or
otherwise hold any amounts in trust or escrow for payment to any Grantee or beneficiary under the
terms of the Plan.

     18.2. Nonexclusivity of the Plan

     Neither the adoption of the Plan nor the submission of the Plan to the stockholders of the
Company for approval shall be construed as creating any limitations upon the right and authority of
the Board to adopt such other incentive compensation arrangements (which arrangements may be
applicable either generally to a class or classes of individuals or specifically to a particular
individual or particular individuals) as the Board in its discretion determines desirable,
including, without limitation, the granting of stock options otherwise than under the Plan.

     18.3. Withholding Taxes

     The Company or an Affiliate, as the case may be, shall have the right to deduct from payments
of any kind otherwise due to a Grantee any federal, state, or local taxes of any kind required by
law to be withheld with respect to the vesting of or other lapse of restrictions applicable to an
Award or upon the issuance of any shares of Stock upon the exercise of an Option or pursuant to an
Award. At the time of such vesting, lapse, or exercise, the Grantee shall pay to the Company or
the Affiliate, as the case may be, any amount that the Company or the Affiliate may reasonably
determine to be necessary to satisfy such withholding obligation. Subject to the prior approval of
the Company or the Affiliate, which may be withheld by the Company or the Affiliate, as the case
may be, in its sole discretion, the Grantee may elect to satisfy such obligations, in whole or in
part, (i) by causing the Company or the Affiliate to withhold shares of Stock otherwise issuable to
the Grantee or (ii) by delivering to the Company or the Affiliate shares of Stock already owned by
the Grantee. The shares of Stock so delivered or withheld shall have an aggregate Fair Market
Value equal to such withholding obligations. The Fair Market Value of the shares of Stock used to
satisfy such withholding obligation shall be determined by the Company or the Affiliate as of the
date that the amount of tax to be withheld is to be determined. A Grantee who has made an election
pursuant to this Section 18.3 may satisfy his or her withholding obligation only

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with shares of Stock that are not subject to any repurchase, forfeiture, unfulfilled vesting, or
other similar requirements.

     18.4. Captions

     The use of captions in this Plan or any Award Agreement is for the convenience of reference
only and shall not affect the meaning of any provision of the Plan or such Award Agreement.

     18.5. Other Provisions

     Each Award granted under the Plan may contain such other terms and conditions not inconsistent
with the Plan as may be determined by the Board, in its sole discretion.

     18.6. Number and Gender

     With respect to words used in this Plan, the singular form shall include the plural form, the
masculine gender shall include the feminine gender, etc., as the context requires.

     18.7. Severability

     If any provision of the Plan or any Award Agreement shall be determined to be illegal or
unenforceable by any court of law in any jurisdiction, the remaining provisions hereof and thereof
shall be severable and enforceable in accordance with their terms, and all provisions shall remain
enforceable in any other jurisdiction.

     18.8. Governing Law

     The validity and construction of this Plan and the instruments evidencing the Awards hereunder
shall be governed by the laws of the State of Delaware, other than any conflicts or choice of law
rule or principle that might otherwise refer construction or interpretation of this Plan and the
instruments evidencing the Awards granted hereunder to the substantive laws of any other
jurisdiction.

     18.9. Section 409A of the Code

     To the extent that the Board determines that a Grantee would be subject to the additional 20%
tax imposed on certain deferred compensation arrangements pursuant to Section 409A of the Internal
Revenue Code of 1986, as amended (the “Code”), as a result of any provision of any Award granted
under this Plan, such provision shall be deemed amended to the minimum extent necessary to avoid
application of such additional tax. The nature of any such amendment shall be determined by the
Board.

* * *

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     To
record adoption of the Plan by the Board as of
August 3, 2005, and approval of the
Plan by the stockholders on August 12, 2005, the Company has caused its authorized officer to
execute the Plan.

	 	 	 	 	 	 	 	 	 
	 	 	AVALON PHARMACEUTICALS INC.

	 
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 
	 	By:	 	 	/s/ Kenneth C. Carter	 
	 
	 	 	 	 	 	 
	 
	 	Title:	 	 	President and Chief Executive Officer	 
	 
	 	 	 	 	 	 

- 25 -

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