Filed by Avalon Pharmaceuticals, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
and Deemed Filed pursuant to Rule 14a-12 of
the Securities Exchange Act of 1934
Subject Company: Avalon Pharmaceuticals, Inc
Commission File No.: 001-32629
The following excerpts relating to the pending merger of Avalon Pharmaceuticals, Inc.
(Avalon) with a subsidiary of Clinical Data, Inc., and related transactions, are from
Avalons Annual Report on Form 10-K for the year ended December 31, 2008 (the Annual
Report), filed with the Securities and Exchange Commission on March 31, 2009.
***
From Item 1 of the Annual Report under the sections entitled BusinessPending Acquisition
by Clinical Data, Pending Nasdaq Delisting and Patents, Licenses and Proprietary
RightsClinical Data License:
Pending Acquisition by Clinical Data
On October 27, 2008, we entered into an Agreement and Plan of Merger and Reorganization
with Clinical Data, Inc., a Delaware corporation, or Clinical Data, and API Acquisition Sub
II, LLC, a Delaware limited liability company and an indirect wholly-owned subsidiary of
Clinical Data, or API. The merger agreement provides that API will be merged with and into
Avalon, with Avalon continuing as the surviving corporation and an indirect wholly-owned
subsidiary of Clinical Data. As a condition to Clinical Data and Avalon entering into the
merger agreement and as part of the proposed merger, on October 27, 2008, the parties entered
into a number of other arrangements including a private placement of securities, a license
agreement and a secured loan arrangement.
Merger Agreement.
Pursuant to the terms of the merger agreement, Clinical Data will
acquire all of the outstanding shares of Avalons common stock for consideration consisting
of Clinical Data common stock and certain contingent rights to acquire additional shares of
Clinical Data common stock. Shares of Avalon common stock held by Clinical Data and its
subsidiaries, will be cancelled without consideration at the closing of the merger. Upon the
closing of the merger, each outstanding share of Avalon common stock shall be converted into
a right to receive 0.0470 shares of Clinical Data common stock and a contingent value right,
or CVR, to receive an additional fraction of a share of Clinical Data common stock upon the
achievement of certain milestone payments in accordance with the terms of a Contingent Value
Rights Agreement, or CVR agreement, between Clinical Data and American Stock Transfer and
Trust Co., as rights agent, to be entered into as of the closing.
Under the CVR agreement, the fraction of a share of Clinical Data common stock
represented by each CVR is calculated by taking
1
/
2
of the aggregate milestone
payments received by Avalon or its affiliates (including Clinical Data following the
closing) from October 27, 2008 through and including June 30, 2010, dividing that amount by
$12.49 (which represents the volume weighted average trading price of the Clinical Data
common stock for the 15 prior trading days ended October 27, 2008) and then dividing the
result by 17,037,928 (which represents the number of outstanding shares of Avalon common
stock as of the date of signing of the merger agreement). Milestone payments means the
receipt by Avalon or its affiliates (including Clinical Data following the closing) during
the period commencing on October 27, 2008 through and including June 30, 2010 of a payment
under either Avalons License and Research Collaboration Agreement with Merck & Co., Inc. or
Avalons Amended Pilot Study Agreement with Novartis Institute for Biomedical Research, Inc.,
up to a maximum aggregate amount of $5,000,000.
If the merger agreement is terminated under specified circumstances, Avalon may be
required to pay Clinical Data a termination fee of $300,000 and reimburse Clinical Data up to
$100,000 for its expenses associated with the merger agreement.
Private Placement.
In connection with the execution of the merger agreement and as part
of the proposed merger, we entered into a securities purchase agreement with Clinical Data
for the sale of our common stock and common stock purchase warrants in a private placement
for a total purchase price of $237,338. Pursuant to the securities purchase agreement,
Clinical Data purchased a total of 3,390,547 shares of our common stock at a purchase price
of $0.07 per share. In addition, we issued a common stock purchase warrant exercisable into
1,695,273 shares of our common stock. The exercise price of the warrant is $0.86 per share,
subject to adjustment for dilutive events. The warrant is not exercisable for six months
after issuance and may
not be exercised to the extent that the aggregate number of shares of our common stock held
by Clinical Data following exercise of the warrant (including shares of our common stock
otherwise held by Clinical Data) would exceed 19.9% of our outstanding common stock unless
the issuance of any additional shares is first approved by a vote of our stockholders in
accordance with the rules of the Nasdaq Stock Market.
We also entered into a registration rights agreement with Clinical Data
contemporaneously with entering into the securities purchase agreement. Pursuant to the
registration rights agreement, we have agreed to register for resale on a registration
statement under the Securities Act of 1933 the shares of common stock issued in the private
placement and the shares of common stock issuable upon exercise of the warrant. The
registration rights agreement also provides indemnification and contribution remedies to
Clinical Data in connection with the resale of the shares pursuant to such registration
statement. In addition, the registration rights agreement provides that in the event we have
not filed with the Securities and Exchange Commission (the SEC) the registration statement on
or prior to 30 days after the written request of Clinical Data to file the registration
statement, such date known as the filing deadline, Clinical Data shall be entitled to a
liquidated damages payment in the amount of 1.5% of the total purchase price for the shares
issued in the private placement, but excluding any shares issuable upon exercise of the
warrant, for each month after the filing deadline during which such registration statement
remains un-filed with the SEC. Further, the registration rights agreement provides that in
the event such registration statement is not declared effective by the SEC by the earlier of
(i) 90 days after filing date (or 120 days after the filing date in the event the
registration statement is subject to review by the SEC) or (ii) within 5 days following
notice from the SEC that the registration statement is no longer subject to review (such date
known as the effectiveness deadline), Clinical Data shall be entitled to a liquidated damages
payment in the amount of 1.5% of the total purchase price for each month (pro rated for any
lesser period) after the effectiveness deadline during which such registration statement has
not been declared effective by the SEC.
License Agreement.
In connection with the execution of the merger agreement and as
part of the proposed merger, we entered into a license agreement with Clinical Data pursuant
to which we granted Clinical Data a royalty-free, fully-paid, worldwide, perpetual,
irrevocable, sublicensable and exclusive license to AvalonRx®, our proprietary
drug-development platform, in exchange for a one time payment of $1,000,000. The license is
subject to certain exceptions pursuant to which we retained the right to utilize AvalonRx® to
fulfill our obligations under our existing collaboration agreements and to continue
development of AVN944 and certain of our existing development programs.
Secured Loan.
In connection with the execution of the merger agreement and as part of
the proposed merger, we also entered into a note purchase agreement with Clinical Data
pursuant to which Clinical Data made a loan to us of $3,000,000, evidenced by a term note.
On March 30, 2009, Clinical Data made a further loan to us of $1,000,000 under the note
purchase agreement, evidenced by a second term note. The term notes bear interest at a fixed
rate of seven percent per annum and mature on May 31, 2009, unless accelerated pursuant to
their terms. We have the right to prepay the term notes, together with any accrued interest,
at any time without penalty. The maturity of the term notes accelerate if there is a default
under the terms of the note purchase agreement or related documents, including any default,
breach or termination of the license agreement or of the merger agreement (other than a
termination of the merger agreement as a result of a failure to obtain the approval by our
stockholders of the merger). The term notes are secured by collateral consisting of certain
intellectual property rights of Avalon.
Status of Merger Transaction.
Avalon and Clinical Data have filed a joint preliminary
proxy statement/prospectus with the SEC in connection with the proposed merger. Under the
rules of the SEC, audited financial statements for Avalon for the year ended December 31,
2008 are required to be included in the joint proxy statement/prospectus. In addition, as a
result of Clinical Datas previously announced decision to monetize its none-core assets,
including through the sale of its Cogenics business segment, and based on discussions with
the staff of the SEC, Clinical Data and Avalon have determined to include certain pro forma
financial information in the joint proxy statement/prospectus reflecting the intended sale by
Clinical Data of its Cogenics business segment. Consequently, Avalon and Clinical Data
intend to file an amended joint preliminary proxy statement/prospectus with the SEC as soon
as practicable reflecting these updates and other changes. As a result, Avalon currently
expects the closing of the merger to occur in May 2009, subject to completion by the SEC
staff of its review of the joint proxy statement/prospectus, as amended.
Important Information for Investors and Stockholders
As discussed above, Avalon and Clinical Data have filed a joint preliminary proxy
statement/prospectus with the SEC in connection with the proposed merger. Investors and
stockholders are urged to read the joint definitive proxy statement/prospectus when it
becomes available and any other relevant documents filed by either party with the SEC because
they will contain important information.
Investors and stockholders will be able to obtain the joint definitive proxy
statement/prospectus and other documents filed with the SEC free of charge at the website
maintained by the SEC at www.sec.gov. In addition, documents filed with the SEC by Avalon
will be available free of charge on the portion of the Avalon website titled Investors at
www.avalonrx.com. Documents filed with the SEC by Clinical Data will be available free of
charge on the portion of the Clinical Data website titled Investors at www.clda.com.
Clinical Data, Avalon and their directors and executive officers may be deemed to be
participants in the solicitation of proxies from Avalon stockholders. Information regarding
Clinical Datas participants is available in Clinical Datas Annual Report on
Form 10-K
for
the year ended March 31, 2008 and its proxy statement for its 2008 Annual Meeting of
stockholders, which are filed with the SEC. Information regarding Avalons participants is
available elsewhere in this Annual Report on
Form 10-K
. Additional information regarding
interests of such participants will be included in the joint definitive proxy
statement/prospectus that will be filed with the SEC. You can obtain free copies of these
documents from Clinical Data and Avalon as indicated above.
***
Pending Nasdaq Delisting
On September 24, 2008, we received a notice from The Nasdaq Stock Market, LLC, or
Nasdaq, indicating that we are not in compliance with the continued listing requirements of
the Nasdaq Global Market under Nasdaq Marketplace Rule 4450(a)(5). We received this notice
because the bid price for our common stock over the previous 30 consecutive business days had
closed below the minimum $1.00 per share requirement for continued listing. Nasdaq has
suspended the enforcement of rules requiring a minimum $1.00 closing bid price through July
20, 2009. However, if our pending merger with Clinical Datas subsidiary, API, does not
close before that time and we continue to fail to meet the minimum $1.00 closing bid price,
Nasdaq could delist our common stock from the Nasdaq Global Market.
In addition, on November 20, 2008, we received a letter from Nasdaq notifying us that
based on our stockholders equity, as reported in our Quarterly Report on Form 10-Q for the
period ended September 30, 2008, we were not in compliance with the minimum stockholders
equity requirement of $10 million for continued listing on the Nasdaq Global Market as set
forth in Nasdaq Marketplace Rule 4450(a)(3). On December 18, 2008, we received a letter from
Nasdaq notifying us that we had until March 5, 2009 to either complete the merger with
Clinical Datas wholly-owned subsidiary, API, or alternatively, demonstrate compliance with
Nasdaq Marketplace Rule 4450(a)(3). On March 12, 2009, we received a determination letter
from Nasdaqs staff stating that Avalon failed to comply with Nasdaq Marketplace Rule
4450(a)(3) and, that as a result, our common stock would be suspended from trading on the
Nasdaq Global Market at the opening of business on March 23, 2009 and removed from listing
and registration on the Nasdaq Global Market unless we appealed the Nasdaq staffs
determination. On March 18, 2009, our management requested a hearing before a Nasdaq Listing
Qualifications Panel to appeal the Nasdaq staffs delisting determination. The appeal
hearing is scheduled for April 30, 2009. We expect that our common stock will remain listed
on the Nasdaq Global Market pending the outcome of a decision by the Nasdaq Listing
Qualifications Panel. However, we cannot provide any assurances that the Nasdaq Listing
Qualifications Panel will grant our request for continued listing on the Nasdaq Global Market
pending the closing of the merger.
***
Clinical Data license
On October 27, 2008, in connection with entering into the merger agreement and as part
of the proposed merger with Clinical Data, we entered into a license agreement with Clinical
Data, pursuant to which Avalon granted Clinical Data a royalty-free, fully-paid, worldwide,
perpetual, irrevocable, sublicensable and exclusive license to AvalonRx
®
in
exchange for a one time payment of $1,000,000. The license is subject to certain exceptions
pursuant to which we retained the right to use AvalonRx
®
to fulfill our
obligations under our existing collaborations and to continue development of AVN944 and
certain of our existing development programs.
***
From Item 1A of the Annual Report under the sections entitled Risk FactorsRisk Related to
the Acquisition by Clinical Data and Risks Related to Our Business:
Risks Related to the Acquisition by Clinical Data
The number of shares and the value of Clinical Data common stock that Avalon stockholders
will receive in connection with the merger will fluctuate.
The precise value of the merger consideration to be received by Avalon stockholders at
the effective time of the merger cannot be determined at the present time. Upon the terms of
the merger agreement, Clinical Data would issue 0.0470 of a share of Clinical Data common
stock for each share of Avalon common stock outstanding immediately prior to the effective
time of the merger and CVRs that will provide Avalon stockholders with the opportunity to
acquire additional shares of common stock.
The price of Clinical Data common stock at the closing of the merger may vary from its
price on the date the merger agreement was executed. Stock price changes may result from a
variety of factors beyond Clinical Datas control, including general economic and market
conditions. In addition, there will be a period of time between completion of the merger and
the time at which former Avalon stockholders actually receive stock certificates evidencing
the Clinical Data common stock. Until stock certificates are received, former Avalon
stockholders may not be able to sell their Clinical Data shares in the open market and,
therefore, may not be able to avoid losses from any decrease in the trading price of Clinical
Data common stock during that period.
The issuance of Clinical Data common stock under the CVRs is subject to a number of
uncertainties; because of the delay in time before any shares of Clinical Data common stock
could be issuable under the CVRs, the value of such stock will fluctuate.
Pursuant to the terms of the merger agreement and the CVR agreement, the CVRs provide
former Avalon stockholders and warrantholders (to the extent they timely exercise their
warrants) with the right to receive additional shares of Clinical Data common stock if Avalon
or its affiliates (including Clinical Data following the merger) receive any milestone
payments from certain strategic partners prior to June 30, 2010. In particular, the CVRs
provide that additional shares of Clinical Data common stock will only be issued if Avalon or
its affiliates (including Clinical Data following the closing of the merger) receives a
payment under either Avalons collaboration agreement with Merck (the Merck Agreement) or
under Avalons collaboration agreement with Novartis (the Novartis Agreement) at any time
during the period commencing on October 27, 2008 through and including June 30, 2010 (up to a
maximum aggregate amount of $5 million).
Although the CVR agreement provides that any payment received prior to June 30, 2010
under either the Merck Agreement or Novartis Agreement (up to a maximum of $5 million in
payments) constitutes a milestone payment for purposes of calculating whether Avalon
stockholders will be entitled to receive additional shares of Clinical Data common stock in
the merger, Avalons management views the following payments as having the most realistic
possibility of being achieved prior to June 30, 2010 and resulting in the achievement of a
milestone payment under the CVR agreement:
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Under the Merck Agreement, Avalon is entitled to a payment of $4 million upon
the achievement of biological proof of concept of a lead compound as an inhibitor
of the target which is the subject of the collaboration. Avalon also is entitled
to an additional payment of $4 million upon the achievement of preclinical proof
of concept of such compound following achievement of biological proof of concept.
In addition, if Merck terminates the agreement, Avalon is entitled to a
termination fee of up to potentially $7 million, depending on the status of the
collaboration at the time of termination of the agreement. With respect to the
$4 million payment upon achievement of biological proof of concept, although
Avalons management believes that the lead compound that it has identified under
this collaboration has satisfied the criteria for achievement of biological proof
of concept, based on recent discussions with Merck, it appears that Merck may
intend to dispute Avalons achievement of this milestone. We are currently in
discussions with Merck regarding the achievement of this milestone. In addition,
we are in discussions with Merck regarding the termination of the collaboration
by Merck and the payment by Merck to Avalon of a termination fee under the terms
of the agreement, as described above. There is no guarantee that these matters
will be resolved favorably for Avalon, and pending the resolution of these
matters, it is unlikely that further progress will be made with respect to the
preclinical proof of concept milestone or any other milestones under the Merck
Agreement. In the event that the collaboration with Merck is terminated, we may
receive all or part of the termination payment described above, but no further
progress will be made towards the attainment of any other milestone under the
Merck Agreement. Moreover, resolution of these matters could take extensive time
to achieve, which could potentially prevent a payment from Merck that would
otherwise constitute a milestone payment under the terms of the CVR agreement
from being received prior to June 30, 2010, the milestone payment deadline
under the CVR agreement. Consequently, there can be no assurance when, or if,
any payments will be received from Merck, and accordingly, whether
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any milestone payments will be achieved under the CVR agreement based on our
collaboration with Merck.
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Under the Novartis Agreement, Avalon is entitled to receive a $500,000
milestone payment if Novartis identifies a validated hit compound and another
$500,000 milestone payment if Novartis identifies a lead compound under the
collaboration. The determination of whether to pursue a validated hit compound or
lead compound under the collaboration is at the sole discretion of Novartis.
Accordingly, there can be no assurance that Novartis will determine to continue
with the collaboration through the identification of a validated hit compound or
of a lead compound. If Novartis determines not to continue with the collaboration
through these milestone events, no further payments will be due to Avalon under
the Novartis Agreement.
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If such payments under the Merck Agreement or Novartis Agreement are not achieved within
the required timeframe, the CVRs will expire and no payments will be made to CVR holders in
connection with the CVRs. Accordingly, the CVRs may ultimately have no value. Moreover,
following the closing of the merger, Clinical Data will be under no obligation to former
Avalon stockholders to engage in any additional research and development efforts under the
Merck Agreement or Novartis Agreement or to pursue any payments from Merck or Novartis. As a
result of the uncertainty regarding the receipt of any payments from Merck or Novartis
within the required timeframe, Avalon stockholders will not be able to determine the total
value of the consideration that they will receive in the merger prior to voting on the
adoption of the merger agreement since a portion of the merger consideration is contingent
upon the occurrence of future events. In addition, because no payment, if any, will be made
to holders of the CVRs of any additional shares of Clinical Data common stock prior to June
30, 2010 (and then only after surrender by the holder of a CVR to the rights agent under the
CVR agreement of the holders certificate representing such CVR, which could result in
further delay of payment of any additional shares of Clinical Data common stock to a holder
of a CVR past June 30, 2010), the value of any Clinical Data common stock that holders of
CVRs will receive in connection with the merger will fluctuate. Therefore, even if a
milestone payment under the CVR agreement is achieved, the value of the additional
consideration Avalon stockholders may receive under the CVRs may be significantly lower than
the $12.49 per share used to calculate the number of shares payable under the CVRs.
Former Avalon warrantholders will not receive CVRs until they exercise their warrants to
purchase shares of Clinical Data common stock. Pursuant to its terms, the CVR agreement
terminates six months following the June 30, 2010 milestone date. To ensure their receipt of
the CVRs, each former Avalon warrantholder should exercise their warrant prior to the
termination of the CVR agreement.
Additionally, the CVRs are not transferable other than in certain limited circumstances
and accordingly Avalon stockholders may not sell them prior to their termination.
Uncertainty regarding the merger and the effects of the merger could cause our
licensors, collaborators, suppliers or other strategic partners to delay or defer decisions,
which could increase costs of the on-going business for us.
Our strategy for developing and commercializing many of our potential products includes
entering into agreements with licensors, collaborators, suppliers and other strategic
partners. These partners, in response to the announcement of the merger, may delay or defer
decisions regarding their business relationships with us, which could increase costs for our
business and delay, interrupt or terminate the collaborate research, development and
commercialization of certain potential products, regardless of whether the merger is
ultimately completed. Under specified circumstances, these partners may also terminate their
agreements with us. Any such delay, interruption or termination of our relationship with any
of these partners could materially harm its business and financial condition, and frustrate
any commercialization efforts for our product candidates.
The merger is subject to closing conditions that could result in the completion of the
merger being delayed or not consummated, which could negatively impact our stock price and
future business and operations.
Completion of the merger is conditioned upon Clinical Data and Avalon satisfying closing
conditions, including adoption of the merger agreement by Avalons stockholders, all as set
forth in the merger agreement. The required conditions to closing may not be satisfied in a
timely manner, if at all, or, if permissible, waived, and the merger may not be consummated.
Failure to consummate the merger could negatively impact our stock price, future business and
operations, and financial condition. Any delay in the consummation of the merger or any
uncertainty about the consummation of the merger may adversely affect our future business,
growth, revenue and results of operations.
Failure to complete the merger could negatively impact the market price of our common
stock and the future business and financial results of Avalon, and the merger agreement
limits our ability to pursue alternatives to the merger.
If the merger is not completed for any reason, our on-going business may be adversely
affected and will be subject to a number of risks, including:
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We may be required, under some circumstances, to pay Clinical Data a
termination fee of $300,000 and reimburse Clinical Data for up to $100,000 of
merger-related expenses;
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We may be required to repay to Clinical Data the outstanding principal
and accrued interest under the terms of a note purchase agreement between
the parties and related term notes;
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The diversion of managements attention, the reduction in capital
spending and acquisitions, the suspension of planned hiring and other
affirmative and negative covenants in the merger agreement restricting the
companies businesses;
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Failure to pursue other beneficial opportunities as a result of the
focus of management on the merger, without realizing any of the anticipated
benefits of the merger;
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the market price of our common stock may decline to the extent that the
current market price reflects a market assumption that the merger will be
completed;
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We may experience negative reactions to the termination of the merger
from licensors, collaborators, suppliers, or other strategic partners;
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Our costs incurred related to the merger, such as legal and accounting
fees, must be paid even if the merger are not completed;
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Our common stock may be subject to delisting from the Nasdaq Global
Market; and
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Clinical Datas royalty-free, fully-paid, worldwide, perpetual,
irrevocable, sublicensable and exclusive license to
AvalonRx
®
, our proprietary drug-development platform, will
not terminate, thereby restricting our operations and potentially
negatively impacting the value of Avalons common stock.
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If the merger agreement is terminated and our board of directors seeks another merger or
business combination, our stockholders cannot be certain that we will be able to find a party
willing to pay a price equivalent to or more attractive than the price Clinical Data has
agreed to pay in the merger. Further, Clinical Data owns approximately 16.6% of our common
stock and we owe Clinical Data $4 million of principal plus accrued but unpaid interest under
the terms of a note purchase agreement entered into at the time of execution of the merger
agreement (as subsequently amended), and related term notes. Such ownership, the amount owed
and the license granted to Clinical Data may deter third parties from proposing or pursuing
alternative business combinations that might result in greater value to Avalon stockholders
than the merger.
In addition, the merger agreement contains no shop provisions that, subject to limited
exceptions, preclude Avalon, whether directly or indirectly through its subsidiaries,
officers, directors, agents or other representatives, from (i) soliciting, initiating,
knowingly facilitating, encouraging or inducing, any inquiry with respect to, or the making,
submission or announcement of, any acquisition proposal, (ii) participating in any
discussions or negotiations, or furnishing any nonpublic information with respect to any
acquisition proposal, (iii) taking any other action to facilitate any inquiries or proposal
that would be reasonably expected to result in an acquisition proposal, (iv) approving,
endorsing or recommending any acquisition proposal, or (v) entering into any agreement
contemplating or otherwise relating to any acquisition proposal. Under certain circumstances,
the merger agreement also provides that Avalon will be required to reimburse Clinical Data
for up to $100,000 of merger-related expenses or pay a termination fee of $300,000 to
Clinical Data upon termination of the merger agreement.
During the pendency of the merger, we may not be able to enter into certain business
arrangements with other parties because of restrictions in the merger agreement.
Covenants in the merger agreement impede our ability to make certain acquisitions or
complete other transactions that are not, among other things, in the ordinary course of
business pending completion of the merger. As a result, if the merger is not completed, we
may be at a disadvantage to its competitors.
***
Our common stock may be delisted from the Nasdaq Global Market prior to the
closing of the merger, which could reduce the value of your investment and make your
shares of our stock more difficult to sell.
On September 24, 2008, we received a notice from The Nasdaq Stock Market, LLC, or
Nasdaq, indicating that we are not in compliance with the continued listing requirements of
the Nasdaq Global Market under Nasdaq Marketplace Rule 4450(a)(5). We received this notice
because the bid price for our common stock over the previous 30 consecutive business days had
closed below the minimum $1.00 per share requirement for continued listing. Nasdaq has
suspended the enforcement of rules requiring a minimum $1.00 closing bid price through July
20, 2009. However, if our pending merger with Clinical Datas subsidiary, API, does not
close before that time and we continue to fail to meet the minimum $1.00 closing bid price,
Nasdaq could delist our common stock from the Nasdaq Global Market.
In addition, on November 20, 2008, we received a letter from Nasdaq notifying us that
based on our stockholders equity, as reported in our Quarterly Report on Form 10-Q for the
period ended September 30, 2008, we were not in compliance with the minimum stockholders
equity requirement of $10 million for continued listing on the Nasdaq Global Market as set
forth in Nasdaq Marketplace Rule 4450(a)(3). On December 18, 2008, we received a letter from
Nasdaq notifying us that we had until March 5, 2009 to either complete the merger with
Clinical Datas wholly-owned subsidiary, API, or alternatively, demonstrate compliance with
Nasdaq Marketplace Rule 4450(a)(3). On March 12, 2009, we received a determination letter
from Nasdaqs staff stating that Avalon failed to comply with Nasdaq Marketplace Rule
4450(a)(3) and, that as a result, our common stock would be suspended from trading on the
Nasdaq Global Market at the opening of business on March 23, 2009 and removed from listing
and registration on the Nasdaq Global Market unless we appealed the Nasdaq staffs
determination. On March 18, 2009, our management requested a hearing before a Nasdaq Listing
Qualifications Panel to appeal the Nasdaq staffs delisting determination. The appeal
hearing is scheduled for April 30, 2009. We expect that our common stock will remain listed
on the Nasdaq Global Market pending the outcome of a decision by the Nasdaq Listing
Qualifications Panel. However, we cannot provide any assurances that the Nasdaq Listing
Qualifications Panel will grant our request for continued listing on the Nasdaq Global Market
pending the closing of the merger.
In the event our common stock is delisted from the Nasdaq Global Market prior to the
closing of the merger, Nasdaq may permit us to transfer our common stock to the Nasdaq
Capital Market if we satisfy the requirements for continued listing on that market. If we
fail to satisfy the requirements for continued listing on the Nasdaq Capital Market, trading,
if any, would be conducted in the over-the-counter market either in the so-called pink
sheets or on the OTC Bulletin Board, provided a market maker determines to provide
quotations for our common stock and complies with the rules and regulations of the SEC and
the Financial Industry Regulatory Authority for the quotation of our common stock. There can
be no assurance that we would satisfy the requirements for continued listing on the Nasdaq
Capital Market or that any market maker would determine to provide quotations for our common
stock. As a result, delisting of our common stock from the Nasdaq Global Market could hinder
your ability to sell your shares of Avalon common stock. In addition, our common stock could
become subject to the SECs penny stock rules. These rules would impose additional
requirements on broker-dealers who effect trades in our stock. If any of these events were
to take place, you may not be able to sell as many shares of our common stock as you desire,
or any at all, and any trading of our common stock may be at a lower market price than it
otherwise would be if our common stock were to continue to be listed on the Nasdaq Global
Market.
***
From Item 7 of the Annual Report under the sections entitled Managements Discussion and
Analysis of Financial Condition and Results of OperationsOverview, Pending Acquisition
by Clinical Data, Recent Developments, Liquidity and Capital ResourcesOverview and
"Liquidity and Capital ResourcesSources and Uses of Cash:
As of December 31, 2008, we had cash, cash equivalents and marketable securities of
approximately $5.8 million. We currently estimate that our existing capital resources will
not be sufficient to fund our current operations significantly beyond the end of May 2009, by
which time our pending merger with a subsidiary of Clinical Data is expected to close. If
our proposed merger does not close soon after the end of May 2009, we would need to raise
additional funds to continue operations and to repay our secured loan from Clinical Data. See
Pending Acquisition by Clinical Data below. In light of the proposed merger, we do not
expect to seek to raise additional capital. Should the merger not close or if the closing is
delayed beyond May 2009, there is no assurance that we would be able to raise capital
sufficient to enable us to continue our operations significantly beyond the end of May 2009.
In the event we are unable to successfully raise additional capital in such circumstances, we
will not have sufficient cash flows and liquidity to finance our business operations as
currently contemplated. Accordingly, in such circumstances we would be compelled to reduce
general and administrative expenses and delay research and development projects and the
purchase of scientific equipment and supplies until we were able to obtain sufficient
financing.
***
Pending Acquisition by Clinical Data
On October 27, 2008, we entered into a merger agreement with Clinical Data and API, an
indirect wholly-owned subsidiary of Clinical Data. The merger agreement provides that, upon
the terms and subject to the conditions set forth in the merger agreement, API will be merged
with and into Avalon, with Avalon continuing as the surviving corporation and a subsidiary of
Clinical Data. In connection with entering into the merger agreement with Clinical Data, we
borrowed $3 million from Clinical Data under a secured loan maturing on April 30, 2009 to
fund our short-term on-going operations, entered into a license agreement with Clinical Data
under which Clinical Data received an exclusive license (subject to certain exceptions) to
AvalonRx
®
in exchange for a one time license fee of $1 million, and engaged in a
private placement with Clinical Data of Avalon common stock and warrants for a cash payment
of $237,338 from Clinical Data. As a result of entering into the merger agreement and
receiving the $3 million secured loan from Clinical Data, we were notified by Manufacturers
and Traders Trust Company (M&T Bank) on October 29, 2008, that we were in default under the
terms of our letter of credit with M&T Bank to the Maryland Industrial Development Financing
Authority (MIDFA). On October 30, 2008, we paid off all amounts due M&T Bank under the letter
of credit and as a result, we have no further obligations under the letter of credit or the
financing arrangement with MIDFA.
***
Recent Developments
On March 30, 2009, in order to fund our continuing operations through the closing of the
merger, we borrowed an additional $1 million from Clinical Data under the terms of our note
purchase agreement with Clinical Data. In addition, on March 30, 2009, Clinical Data
extended the maturity of its prior $3 million secured loan to us from April 30, 2009 to May
31, 2009.
As with our original $3 million loan from Clinical Data, the additional $1 million loan
from Clinical Data is evidenced by a term note that bears interest at a fixed rate of seven
percent per annum and matures on May 31, 2009, unless accelerated pursuant to its terms. We
have the right to prepay the term note, together with any accrued interest, at any time
without penalty. The maturity of the term note accelerates if there is a default under the
terms of the note purchase agreement or related documents, including any default, breach or
termination of our license agreement with Clinical Data or of the merger agreement (other
than a termination of the merger agreement as a result of a failure to obtain the approval by
our stockholders of the merger). The additional $1million loan is secured by collateral
consisting of certain of our intellectual property rights.
***
As of December 31, 2008, we had cash, cash equivalents and marketable securities of
approximately $5.8 million, which is a decrease of $22.7 million from December 31, 2007. Our
funds were invested in investment grade and United States government securities. In
connection with entering into the merger agreement with Clinical Data, on October 27, 2008,
we borrowed $3 million from Clinical Data under a secured loan to fund our short-term
on-going operations, entered into a license agreement with Clinical Data under which Clinical
Data received an exclusive license (subject to certain exceptions) to AvalonRx
®
in
exchange for a one time license fee of $1 million, and engaged in a private placement with
Clinical Data of common stock and warrants for a cash payment of $237,338 from Clinical Data.
As a result of entering into the merger agreement and receiving the $3 million secured loan
from Clinical Data, we were required under the terms of our letter of credit with M&T Bank to
MIDFA to pay off all amounts due under the letter of credit. On October 30, 2008, we paid off
all amounts due M&T Bank under the letter of credit and as a result, we have no further
obligations under the letter of credit or our financing arrangement with MIDFA.
***
Financing Activities.
Net cash used in financing activities was $4.1 million in 2008,
while net cash provided by financing activities was $26.8 million and $4.9 million in 2007
and 2006, respectively. In 2008, net cash used in financing activities included $7.2 million
of principal payments on our bond payable to MIDFA, including $6.0 million to retire this
debt when we entered into the merger agreement with Clinical Data in October 2008. When we
entered into the merger agreement with Clinical Data, we borrowed $3 million from them under
a short-term note.
***
From Item 11 of the Annual Report under the sections entitled Executive
CompensationExecutive Compensation DiscussionCorporate Goals and Objectives,
"Executive Compensation DiscussionElements of Compensation and Executive
CompensationEmployment Agreements:
Throughout 2008, our Chief Executive Officer gave periodic updates to the Committee
and the Board of Directors about the Companys progress toward achieving the foregoing
corporate goals. In October 2008, we entered into a merger agreement with Clinical Data,
Inc. Our merger agreement and related documents restrict our ability to make salary
adjustments and bonus payments to our officers and other employees without consultation
with Clinical Data. After discussion with Clinical Data in December 2008, it was
determined that we would not pay any bonuses to our officers and would pay limited bonuses
to our other employees. The Committee ratified this decision in December 2008.
***
Base Salary.
Base salaries are the only non-variable element of total compensation.
They reflect each executives responsibilities, the impact of the job on Avalons
performance, and the contributions each executive is expected to deliver to Avalon. Base
salaries are determined in part by competitive levels in the market (what companies in the
peer group pay), job scope, and, also, by total relevant experience. To gauge market
conditions, the Committee evaluates competitor and market data compiled by the Committees
compensation consultant. The Committee also relies on its experience with recruiting for
executive and senior management positions.
At the end of each calendar year, the Committee reviews the base salary of our
executive officers and makes adjustments to reflect market comparables, if necessary.
Additionally, our Chief Executive Officer conducts an annual performance appraisal of each
executive officer, and, within the range established by the Compensation Committee,
recommends the merit increases for each executive officer. Therefore, increases, if any,
are based on individual performance, market conditions, and internal comparisons of
executive compensation among our executive officers.
No salary adjustments were made for calendar year 2009 pending our merger with a
subsidiary of Clinical Data.
***
Retention Agreements with Clinical Data.
In connection with entering into the merger
agreement with Clinical Data, Drs. Carter and Hamilton and Mr. Winzer entered into employment
letters with Clinical Data. Each of these employment letters will become effective
simultaneously with the closing of the merger and will replace the named executive officers
current employment agreement with Avalon.
Kenneth Carter.
Dr. Carters employment letter with Clinical Data provides that he will
serve in such capacity as is determined by Clinical Data prior to the closing of the merger
with a base salary of $300,000 per year and an annual bonus of up to 50% of his base salary.
In addition, Dr. Carter will receive, on the date of closing of the merger, a grant of 60,000
options to purchase shares of Clinical Data common stock with an exercise price equal to the
fair market value of Clinical Datas common stock on the date of closing. The options will
vest in three equal annual installments. Dr. Carters employment letter also provides for a
severance payment of twelve months of Dr. Carters base salary (or $300,000) plus a pro rata
share of his annual bonus in the event he is terminated without cause (as defined in the
employment letter) or resigns under certain circumstances as set forth in the employment
letter.
J. Michael Hamilton.
Mr. Hamiltons employment letter with Clinical Data provides that
he will serve in such capacity as is determined by Clinical Data prior to the closing of the
merger with a base salary of $250,000 per year and an annual bonus of up to 35% of his base
salary. In addition, Mr. Hamilton will receive, on the date of closing of the merger, a grant
of 30,000 options to purchase shares of Clinical Data common stock with an exercise price
equal to the fair market value of Clinical Datas common stock on the date of closing. The
options will vest in three equal annual installments. Mr. Hamiltons employment agreement
also provides for a severance payment of nine months of Mr. Hamiltons base salary (or
$187,500) plus a continuation of benefits, and reimbursement for certain health insurance
costs, for a period of nine months in the event
he is terminated without cause (as defined in the employment letter) or resigns under
certain circumstances as set forth in the employment letter.
C. Eric Winzer.
Mr. Winzers employment letter with Clinical Data provides for a
severance payment of twelve months of Mr. Winzers base salary (or $285,600) and health
insurance premium reimbursement and other benefits continuation for a period of twelve months
in the event he is terminated without cause (as defined in the employment letter).
***
From Item 13 of the Annual Report under the sections entitled Certain Relationships and
Related Transactions, and Director IndependenceTransactions with Related Persons and
Related Party Transaction Policy and Procedures:
On March 30, 2009, in order to fund our continuing operations through the closing of our
pending merger with a subsidiary of Clinical Data, we borrowed an additional $1 million from
Clinical Data under the terms of our note purchase agreement with Clinical Data. In
addition, on March 30, 2009, Clinical Data extended the maturity of its prior $3 million
secured loan to us from April 30, 2009 to May 31, 2009. As of March 30, 2009, the entire
principal balance of $4 million remained outstanding under our note purchase agreement with
Clinical Data. Clinical Data is a holder of more than 5% of our outstanding common stock as
a result of certain transactions we entered into with Clinical Data in connection with
entering into our merger agreement with Clinical Data and as part of our pending merger with
a subsidiary of Clinical Data.
***
In connection with the approval of our additional $1 million loan from Clinical Data
entered into on March 30, 2009, our full Board of Directors reviewed and approved the
additional loan as part of certain amendments to our merger agreement with Clinical Data and
determined that no member of our Board of Directors had an interest in the transaction
requiring the separate review and approval by our Audit Committee.
***
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