<PAGE> 1
Registration No. 33-49082
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
POST-EFFECTIVE AMENDMENT NO. 8 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
AVANIR PHARMACEUTICALS
(Exact name of registrant as specified in its charter)
---------------------------
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CALIFORNIA 7391 33-0314804
(Jurisdiction of incorporation) (Primary standard industrial (I.R.S. employer I.D. number)
classification code number)
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9393 Towne Centre Drive, Suite 200
San Diego, California 92121
(619) 558-0364
(Address, including zip code, and telephone
number, including area code, of
Registrant's principal executive
offices)
---------------------------
Gerald J. Yakatan, Ph.D.
President and Chief Executive Officer
AVANIR Pharmaceuticals
9393 Towne Centre Drive, Suite 200
San Diego, California 92121
(619) 558-0364
(Names, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------------
Copies to:
John J. Hentrich, Esq.
Baker & McKenzie
101 West Broadway, Suite 1200
San Diego, CA 92101
---------------------------
Approximate date of proposed commencement of
sale to public: As soon as practicable after this
Registration Statement becomes effective.
---------------------------
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [X]
Pursuant to Rule 416, there also are being registered such additional
shares as may become issuable pursuant to anti-dilution provisions of the Class
D Warrants of the Registrant.
---------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
AVANIR PHARMACEUTICALS
Pursuant to Item 501(b) of Regulation S-K
Cross-Reference Sheet
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Item and Caption Location in Prospectus
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1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus ...................................................... Inside Front Cover Pages;
Additional Information; Available
Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges ....................................... Prospectus Summary; Risk Factors
4. Use of Proceeds ................................................. Prospectus Summary; Use of
Proceeds
5. Determination of Offering Price ................................. Outside Front Cover Page; Risk
Factors
6. Dilution ........................................................ Dilution
7. Selling Security Holders ........................................ Selling Securityholders
8. Plan of Distribution ............................................ Outside Front Cover Page;
Prospectus Summary; Plan of
Distribution
9. Description of Securities To Be Registered ...................... Outside Front Cover Page;
Description of Securities
10. Interest of Named Experts and Counsel ........................... Not applicable.
11. Information with Respect to the Registrant ...................... Prospectus Summary; The
Company; Capitalization; Selected
Financial Data; Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Business;
Management; Principal
Shareholders; Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities .................. Not applicable.
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PROSPECTUS
AVANIR PHARMACEUTICALS
2,361,537 Shares of Class A Common Stock(*)
This Prospectus relates to 2,361,537 shares of Class A Common Stock, no
par value (the "Class A Common Stock"), of AVANIR Pharmaceuticals, formerly
known as LIDAK Pharmaceuticals ("AVANIR" or the "Company") reserved for issuance
upon the exercise of 1,387,869 outstanding Class D Warrants of the Company as of
January 14, 1999 (the "Class D Warrants"), and 973,668 shares of outstanding
Class A Common Stock which resulted from the conversion of Series B Preferred
Stock and/or exercise of Class D Warrants and Class E Warrants. The Company
originally issued the Class D Warrants to certain investors in private
placements which occurred in July 1991 and February 1992. The Company originally
issued the Class E Warrants to Whale Securities Co., L.P., and its designees, as
partial consideration for services as placement agent in the private placement
which occurred in February 1992. The holders of the Class D Warrants and the
Class A Common Stock resulting from their exercise are referred to herein as the
"Selling Securityholders." See "Selling Securityholders."
Each of the Class D Warrants is exercisable through June 30, 1999 to
purchase, for $1.50, one share of Class A Common Stock. The exercise price of
the Class D Warrants is subject to adjustment under certain circumstances. The
Class D Warrants are referred to herein collectively as the "Securities." See
"Description of Securities."
The Class A Common Stock issued or issuable upon conversion or exercise
of the Securities may be sold from time-to-time by the Selling Securityholders
or by their transferees. At the date of this Prospectus, no underwriting
arrangements have been entered into by the Selling Securityholders. The
distribution of the Class A Common Stock by the Selling Securityholders may be
effected in one or more transactions that may take place in the over-the-counter
market, or such other market on which the Company's securities may from
time-to-time be trading, including ordinary brokers' transactions or through
sales to one or more dealers for resale of such shares as principals, at market
prices prevailing at the time of sale or at prices determined in privately
negotiated transactions. Usual and customary or specifically negotiated
brokerage fees or commissions may be paid by the Selling Securityholders in
connection with such sales of Class A Common Stock. See "Description of
Securities" and "Plan of Distribution."
The Selling Securityholders and intermediaries through whom such
securities are sold may be deemed "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities offered, and any profits realized or commissions received may be
deemed underwriting compensation. The Company will not receive any of the
proceeds from the sale of Class A Common Stock by the Selling Securityholders.
Cumulative expenses of this offering (this "Offering"), estimated at $217,000,
are payable by the Company. In the event Class D Warrants are exercised, the
Company will receive cash in the amount of the exercise price. See "Description
of Securities" and "Selling Securityholders."
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* These numbers and the numbers of shares and warrants of AVANIR stock
covered in this Post-Effective Amendment represent the number of
originally registered shares and warrants still held by the Selling
Securityholders and subject to registration. The balance of such shares
and warrants have been disposed of by the Selling Securityholders prior
to the date of this Prospectus.
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<PAGE> 4
The date of this Prospectus is January __, 1999.
The Class A Common Stock is included on the National Market System of
the Automated Quotation System of the National Association of Securities
Dealers, Inc. ("NASDAQ") under the symbol AVNR (formerly LDAKA). On January 14,
1999, the closing bid and asked prices of the Class A Common Stock were $0.88
and $0.91 respectively. See "Price Range of Securities."
--------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS."
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
--------------------
The Company will furnish its shareholders and holders of warrants with
annual reports containing audited financial statements and such unaudited
interim reports as it deems appropriate.
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<PAGE> 5
TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY................................................................................................4
THE COMPANY.......................................................................................................6
RISK FACTORS......................................................................................................8
USE OF PROCEEDS..................................................................................................14
DIVIDEND POLICY..................................................................................................14
PRICE RANGE OF SECURITIES........................................................................................15
DILUTION ........................................................................................................16
CAPITALIZATION...................................................................................................17
SELECTED FINANCIAL DATA..........................................................................................18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................................18
BUSINESS ........................................................................................................25
MANAGEMENT.......................................................................................................37
PRINCIPAL SHAREHOLDERS...........................................................................................46
SELLING SECURITYHOLDERS..........................................................................................49
PLAN OF DISTRIBUTION.............................................................................................51
DESCRIPTION OF SECURITIES........................................................................................52
LEGAL MATTERS....................................................................................................54
EXPERTS ........................................................................................................54
AVAILABLE INFORMATION............................................................................................55
INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
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<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus.
THE COMPANY
AVANIR Pharmaceuticals, formerly known as LIDAK Pharmaceuticals
("AVANIR" or the "Company"), is a development stage company organized to
discover, develop, and market novel therapeutic products to treat human
diseases. The Company was incorporated in California in 1988 and, since
inception, has operated in one business segment -- pharmaceutical product
development.
RECENT DEVELOPMENTS
In December 1997 the Company filed a New Drug Application ("NDA") with
the U.S. Food and Drug Administration ("FDA") for its topical drug, n-docosanol
10% cream ("docosanol cream"), for the treatment of oral-facial herpes (cold
sores and fever blisters). On December 22, 1998, the Company received a letter
from the FDA stating that the NDA for docosanol cream is "not-approvable" ("FDA
Decision"). The letter indicates that the FDA has completed its review and
states that additional evidence is needed to substantiate the drug's
effectiveness. The letter also states that one additional clinical trial may be
sufficient to substantiate the efficacy findings of studies that the Company
submitted with the NDA. According to the FDA, the other sections of the NDA,
including the chemistry, manufacturing and controls, the
pharmacology/toxicology, and the evidence for safety of docosanol cream for its
proposed human use, were not the basis for the "not-approvable" action. The
Company has informed the FDA that it intends to respond to the letter. The
Company is currently evaluating the impact of the FDA Decision.
The Company's executive offices are located at 9393 Towne Centre Drive,
Suite 200, San Diego, California 92121; its telephone number is (619) 558-0364;
its e-mail address is [email protected]; and its URL is http://www.avanir.com.
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<PAGE> 7
THE OFFERING
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Securities Offered............................. 2,361,537 shares of Class A Common Stock issuable upon
exercise of 1,387,869 Class D Warrants and 973,668 shares
of outstanding Class A Common Stock which resulted from
the conversion and/or exercise of Series B Preferred Stock,
Class D Warrants and Class E Warrants. Each of the Class
D Warrants entitles the respective holders thereof to purchase
one share of Class A Common Stock at $1.50, through
June 30, 1999. The exercise price and number of shares
issuable upon exercise of the Class D Warrants are subject to
adjustment in certain circumstances. See "Description of
Securities."
Securities Outstanding:(1)
Class A Common Stock :.......................................................................... 40,941,292 shares
Class B Common Stock(2):.............................................................................49,000 shares
Total..............................................................................................40,990,292 shares
Use of Proceeds................................ The Company will not receive any proceeds from the sale of
the Securities by the Selling Securityholders. Net proceeds
received upon exercise of the Class D Warrants will be added
to working capital. See "Use of Proceeds."
Risk Factors ................................. The securities offered hereby involve a high degree of risk.
See "Risk Factors."
NASDAQ Symbol ................................. Class A Common Stock - AVNR
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(1) Represents securities outstanding as of January 14, 1999.
(2) The Class B Common Stock, which is convertible into Class A Common
Stock on a share for share basis, entitles its holders to five votes
per share and has limited transferability but is otherwise identical to
the Class A Common Stock. See "Principal Shareholders" and "Description
of Securities."
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<PAGE> 8
SUMMARY FINANCIAL INFORMATION
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FROM
AUG. 31, 1988
(INCEPTION)
YEARS ENDED SEPTEMBER 30, THROUGH
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1994 1995 1996 1997 1998 SEPT. 30, 1998
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Statement of Operations
Data:
Revenues ............... $ 1,016,719 $ 884,589 $ 4,158,038 $ 1,547,554 $ 590,728 $ 10,139,298
Net loss ............... (4,813,341) (10,173,001) (6,130,241) (11,109,242) (8,210,548) (53,615,988)
Net loss per share(1)... $ (.19) $ (.35) $ (.19) $ (.30) $ (.21)
Weighted average number
of common shares
outstanding(1) ....... 25,166,958 29,338,418 32,072,944 36,779,774 39,519,609
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SEPTEMBER 30,
BALANCE SHEET DATA: 1994 1995 1996 1997 1998
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Cash, cash equivalents and
short-term investments .. $17,402,896 $10,035,727 $20,374,010 $14,428,834 $ 6,508,341
Working capital ........... 16,837,299 8,567,966 13,759,577 11,336,627 4,819,830
Total assets .............. 18,244,299 10,954,043 22,846,879 15,727,495 7,653,800
Convertible notes payable.. 5,721,087 2,415,461 1,000,000
Total liabilities ......... 847,904 1,705,443 7,778,760 3,433,569 2,064,485
Stockholders' equity ...... 17,396,395 9,248,600 15,068,119 12,293,926 5,589,315
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(1) The Escrow Shares outstanding in the fiscal year ended 1994 are
excluded from the computation of net loss per share.
This Registration Statement contains certain statements of a
forward-looking nature relating to future events or the future performance of
the Company. Prospective investors are cautioned that such statements are only
predictions and that actual events or results may differ materially. In
evaluating such statements, prospective investors should specifically consider
various factors identified in this Registration Statement, including the matters
set forth under the caption "Risk Factors" below, which could cause actual
results to differ materially from those indicated by such forward-looking
statements.
THE COMPANY
AVANIR Pharmaceuticals, formerly known as LIDAK Pharmaceuticals
("AVANIR" or the "Company"), is a development stage company organized to
discover, develop, and market novel therapeutic products to treat human
diseases. The Company was incorporated in California in 1988 and since inception
has operated in one business segment -- pharmaceutical product development.
In December 1997 the Company filed a New Drug Application ("NDA") with
the U.S. Food and Drug Administration ("FDA") for its topical drug, n-docosanol
10% cream ("docosanol cream"), for the treatment
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<PAGE> 9
of oral-facial herpes (cold sores and fever blisters). On December 22, 1998, the
Company received a letter from the FDA stating that the NDA for docosanol cream
is "not-approvable" ("FDA Decision"). The letter indicates that the FDA has
completed its review and states that additional evidence is needed to
substantiate the drug's effectiveness. The letter also states that one
additional clinical trial may be sufficient to substantiate the efficacy
findings of studies that the Company submitted with the NDA. According to the
FDA, the other sections of the NDA, including the chemistry, manufacturing and
controls, the pharmacology/toxicology, and the evidence for safety of docosanol
cream for its proposed human use, were not the basis for the "not-approvable"
action. The Company has informed the FDA that it intends to respond to the
letter. The Company is currently evaluating the impact of the FDA Decision.
Pending evaluation of the FDA Decision and possible course of action,
the Company's current commercialization strategy to build an integrated sales
and marketing capacity to support the launch of docosanol cream as a
prescription product has been suspended until there is more definitive
information from the FDA on required additional evidence of the efficacy of
docosanol cream and impact on timing and cost. The Company also plans to seek
additional products through in-licensing and co-promotion. If FDA approval is
obtained at a later date, the Company intends to build its own sales force which
would call on various target physician markets for the sale of docosanol cream.
While marketing plans are currently on hold, the Company intends to remain
prepared to produce advertising and promotional materials in the event of a
possible future product launch. In the event that the Company continues to
pursue docosanol cream and implement this launch strategy, it will be
substantially reliant on its own sales organization, and the failure to
implement an effective sales organization in a timely manner would have a
material adverse effect on the Company and its current business plan. There can
be no assurance that the Company will be able to hire and train sales staff in a
timely fashion, as competition for competent sales staff is intense. Neither can
there be any assurance that the Company will be able to develop effective
advertising or that patients will seek medical treatment or select the Company's
product. Due to the uncertain nature of the market's acceptance of docosanol
cream as a topical treatment for oral-facial herpes, there is no assurance that
the Company will attain a level of sales sufficient to sustain the Company's
operations.
Following further discussion with the FDA, the Company could conclude
that FDA requirements for an oral-facial herpes prescription product would
result in an unacceptable delay and incremental cost before marketing approval
could be achieved. If such a conclusion is reached, then the Company intends to
evaluate an alternative form of product for cold sores and fever blisters that
complies with over-the-counter ("OTC") regulatory requirements, with the
objective of having a product available for sale to the public during the 1999
calendar year. Marketing of such an OTC product would have most of the risks
associated with the sales and marketing of docosanol cream described herein plus
other risks depending on the distribution channels targeted. No assurance can be
given that such a product could be developed successfully or brought to market
in a timely manner, if at all.
The Company currently has three licensing agreements relating to
potential marketing of docosanol cream for certain topical indications. These
agreements are with: (i) Yamanouchi Europe, b.v., of The Netherlands
("Yamanouchi"), for rights in certain European and other countries (November
1991); (ii) CTS Chemical Industries, Ltd. ("CTS"), for rights in Israel (July
1993); and (iii) Boryung Pharmaceuticals Company, Ltd. ("Boryung"), of Seoul,
Korea, for rights in the Republic of Korea (July 1994). Two earlier agreements
between the Company and other pharmaceuticals companies were canceled in Fiscal
1998: (i) Bristol-Myers Squibb Company ("BMS") for rights in the U.S., Canada
and Mexico (signed in February 1996; canceled in December 1997) and (ii) Grelan
Pharmaceutical Co., Ltd. ("Grelan"), of Tokyo, Japan, for rights in Japan
(signed in October 1994; canceled in June 1998). See "Licensing, Marketing and
Sales -- Docosanol Cream" and Note 4 to the Financial Statements.
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<PAGE> 10
The Company also is engaged in much earlier stages of research and/or
development of several other potential therapeutic products, including potential
new drugs for treatment of allergies, asthma, and inflammatory diseases. These
additional products will not be available for sale to the market for several
years, if at all. See "Research and Development." To enhance commercial sales
opportunities, the Company also is seeking acquisitions and in-licensing and
co-promotion agreements with other pharmaceutical companies for late stage
products to add to its drug development pipeline. See "In-Licensing Strategy for
New Product Development".
The Company has experienced significant financial losses since
inception and its business is subject to significant risks. See "Risk Factors".
With the possible exception of docosanol cream, as noted above, the Company does
not believe that any of its other products currently under development could be
available for commercial sale for several years, if at all. Additionally, there
is no assurance that preclinical and clinical testing of the Company's other
potential drugs under development will demonstrate appropriate safety and
efficacy to warrant further development and/or to achieve the requirements of
regulatory marketing approvals in the U.S. or elsewhere.
Regarding marketing and distribution outside the U.S., under current
circumstances, the Company must obtain the support and collaboration of third
parties in foreign countries, of which no assurance can be made, to ensure the
ultimate commercialization of docosanol cream and all of the Company's other
products, even if the Company obtains applicable regulatory marketing approvals
for such products. These third party arrangements could include: (i) additional
licensing or other collaborative agreements with suitable outside parties which
have sufficient financial resources and expertise; and/or (ii) additional
financing to support completion of any remaining nonclinical and clinical
development, regulatory approval filings and, if approved, eventual marketing of
such products.
The Company's executive offices are located at 9393 Towne Centre Drive,
Suite 200, San Diego, California 92121; its telephone number is (619) 558-0364;
its e-mail address is [email protected]; and its URL is http://www.avanir.com.
RISK FACTORS
This Registration Statement contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All
forward-looking statements are inherently uncertain as they are based on current
expectations and assumptions concerning future events or future performance of
the Company. Readers are cautioned not to place undue reliance on these
forward-looking statements, which are only predictions and speak only as of the
date hereof. Forward-looking statements usually contain the words "estimate,"
"anticipate," "believe," "expect," or similar expressions, and are subject to
numerous known and unknown risks and uncertainties. In evaluating such
statements, prospective investors should carefully review various risks and
uncertainties identified in this Report, including the matters set forth below
under the captions "Risk Factors" and in the Company's other SEC filings. These
risks and uncertainties could cause the Company's actual results to differ
materially from those indicated in the forward-looking statements. The Company
undertakes no obligation to update or publicly announce revisions to any
forward-looking statements to reflect future events or developments.
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<PAGE> 11
Development Stage Company and Going Concern Uncertainties; Explanatory
Paragraph in Independent Auditors' Report for the Fiscal Year Ended September
30, 1998; History of Continuing Losses. The Company's independent auditors have
included an explanatory paragraph in their report issued in connection with
their audit of the Company's financial statements as of and for the fiscal year
ended September 30, 1998 that refers to the Company's activities as those of a
development stage enterprise, as well as the Company's ability to continue as a
going concern. Through September 30, 1998 the Company has generated only limited
revenues. Primarily as a result of expenses incurred in organizational and
research and development activities, the Company has incurred net losses
aggregating approximately $53.6 million from its inception through September 30,
1998. Since September 30, 1998, the Company has incurred operating losses, and
anticipates that it will continue to incur substantial operating losses until
such time, if ever, that the Company achieves significant revenue from its
products. There can be no assurance that the Company will be able to implement
successfully its marketing strategy or achieve significant revenues or
profitable operations. Potential investors should be aware of the problems,
delays, expense and difficulties encountered by any company in the development
stage, many of which may be beyond the Company's control. These include, but are
not limited to, unanticipated problems relating to product development and
formulation, clinical testing, regulatory compliance, production and marketing,
additional costs and competition. There can be no assurance that the Company's
proposed products, if fully developed and if required regulatory approvals are
obtained, can be marketed successfully or that the Company will ever achieve
significant revenues or profitable operations. The above factors raise
substantial doubt about the Company's ability to continue as a going concern.
There can be no assurance if the above factors are met that the Company will be
able to continue as a going concern.
Non-Approval on Docosanol Cream; No Assurance of FDA Approval. On
December 22, 1998, the Company received a letter from the FDA stating that the
NDA for docosanol cream is "not-approvable." The letter indicates that the FDA
has completed its review and states that additional evidence is needed to
substantiate the drug's effectiveness. The letter also states that one
additional clinical trial may be sufficient to substantiate the efficacy
findings of studies that the Company submitted with the NDA. According to the
FDA, the other sections of the NDA, including the chemistry, manufacturing and
controls, the pharmacology/toxicology, and the evidence for safety of docosanol
cream for its proposed human use, were not the basis for the "not-approvable"
action. The Company has informed the FDA that it intends to respond to the
letter. The Company is currently evaluating the impact of the FDA decision and
possible course of action. There can be no assurance that the Company's
discussions with the FDA will result in a change in decision or that the FDA
will ultimately grant marketing approval. Failure to receive approval or a
substantial delay in receiving approval from the FDA would have a materially
adverse effect on the Company and its current business plan.
Significant Capital Requirements; Need for Working Capital and
Additional Financing. The commercialization of docosanol cream, if approved by
the FDA, and any of the Company's other products will require capital reserves
substantially greater than those currently on hand at the Company. In
particular, any clinical trials that may be required by the FDA related to
docosanol cream will require substantial additional capital. Accordingly, the
Company will be required to raise additional capital or possibly collaborate
with one or more large pharmaceutical companies to obtain the necessary
financing and expertise to obtain regulatory approvals, complete clinical
development, manufacture and market other indications of docosanol cream and
develop other proposed products. There can be no assurance that the Company will
be able to raise additional capital or to enter into other collaborative
arrangements necessary to further develop or commercialize docosanol cream or
any of the Company's other proposed products on acceptable terms. Failure to
obtain required additional financing, or to enter into additional collaborative
and licensing arrangements for the continued development, manufacturing and
distribution of the Company's products, would materially limit the Company's
ability to finance or undertake its proposed operations. In such event, if the
Company were unable to obtain from alternative sources the substantial financing
necessary on acceptable terms, it would be unable to commercialize docosanol
cream or any other products.
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<PAGE> 12
Early Stage of Research Development; Unproven Products; Possible Loss
of Product Development Costs. There can be no assurance that any of the
Company's research and development programs and potential products will be
developed successfully, will prove to be safe and efficacious in clinical
trials, prove to be more effective than formulated products based on existing or
newly developed technologies, meet applicable regulatory standards, demonstrate
substantial therapeutic benefits in the treatment of any disease, be capable of
being produced in commercial quantities at reasonable costs or be marketed
successfully. There can be no assurance that effectiveness of any of the
Company's technologies in pre-clinical studies performed in vitro or in animal
models will be pertinent to the development of, or indicative of the efficacy
of, a product for human use. The Company's drug development programs are subject
to all the risks inherent in product development based on innovative
technologies, including unanticipated development problems and the possible
insufficiency of funds which could result in the abandonment or substantial
change in the development of a specific product. The development of medical
products is a lengthy and capital intensive process. The risk of failure to
complete development of the Company's proposed products is substantial.
Unsuccessful clinical trial results for proposed products or the inability to
complete development successfully, or a determination by the Company, for
economic or other reasons, not to undertake to complete development of a
particular product, could have a material adverse effect on the Company.
Uncertainty of Sales Channel and Market Acceptance for Docosanol Cream.
Pending evaluation of the FDA Decision, the Company's current commercialization
strategy is to build an integrated sales and marketing capacity to support the
potential launch of docosanol cream as a prescription product, if approved by
the FDA. The Company also plans to seek additional products through in-licensing
and co-promotion. While marketing plans are currently on hold, the Company
intends to remain prepared to engage the services of an advertising agency to
produce advertising and promotional materials in the event of a possible future
product launch. In the event that the Company continues to pursue docosanol
cream and implement this launch strategy, it will be substantially reliant on
its own sales organization and the failure to implement an effective sales
organization in a timely manner will have a material adverse effect on the
Company. There can be no assurance that the Company will be able to hire and
train sales staff in a timely fashion, as competition for competent sales staff
is intense. Neither can there be any assurance that the Company will be able
develop effective advertising or increase awareness of the disease or that
patients will seek medical treatment or select the Company's product. Due to the
uncertain nature of the market's acceptance of docosanol cream as a topical
treatment for oral-facial herpes, there is no assurance that the Company will
attain a level of sales sufficient to sustain Company operations.
Uncertainty of Ability to Acquire In-licensed Technologies. The
Company's ability to acquire and/or in-license new products and technologies to
further develop, market and/or sublicense to others, is central to the Company
attaining its objective to become a licensing and development company with
products at various stages of the drug development pipeline. Competition for
such in-licensed products is intense and there is no assurance that the Company
can locate suitable products to fit the Company's strengths or that the Company
will be able to obtain them on acceptable terms.
Uncertainty of Ability to Meet Listing Requirements; Possible Delisting
by the Nasdaq National Market. The Company's Class A Common Stock trades on the
Nasdaq National Market System. Under the rules of Nasdaq, the minimum bid price
of an issuer's trading security must trade above $1.00 and the issuer must
maintain net tangible assets of $4 million, to be in compliance with the
maintenance standards and to remain listed on the Nasdaq National Market. In the
event the minimum bid price falls below $1.00 for thirty (30) consecutive
business days, an issuer will be notified by Nasdaq that it has ninety (90)
calendar days from the date of such notification to achieve compliance with the
applicable continued inclusion standard. Compliance can be achieved by meeting
the inclusion standard, in this case having a minimum bid price over $1.00 for a
minimum of ten (10) consecutive business days during the 90-day compliance
period. On December 23, 1998, the Company's Class A Common Stock fell below
$1.00,and leading up to the date of
- 10 -
<PAGE> 13
filing of this Registration Statement has continued to trade at prices ranging
from a low of $0.50 reached on December 31, 1998 to a high of $0.91 reached on
January 15, 1999. There can be no an assurance that the Company's Class A Common
Stock will trade at a price that enables the Company to comply with Nasdaq
National Market maintenance standards. Delisting from the Nasdaq National Market
System could have a material adverse effect on the Company's ability to raise
additional capital on favorable terms, if at all, as well as on shareholder
liquidity.
Government Regulation. The development, production, testing,
manufacturing and marketing of pharmaceutical products is subject to significant
regulation by governmental authorities in the U.S., including the FDA, and other
countries. The clinical testing and regulatory approval process can take a
number of years and require the expenditure of substantial resources. There can
be no assurance that regulatory approval will be obtained for any of the
Company's proposed products. A significant portion of the proceeds of the
Company's financings are being used for research and development and clinical
trials necessary for seeking such approvals for the Company's products. There is
no assurance that the Company will be able to enter into additional
collaborative arrangements with pharmaceutical companies to provide the
financing necessary to complete the required testing and regulatory review
processes necessary for the Company's products. Further, the expenditures by the
Company will be made without any assurance that approvals will be obtained and
before it can be ascertained whether the Company's products can be
commercialized. The inability to obtain, or delays in obtaining, such approval
would adversely affect the Company's ability to commence marketing such products
and could have a material adverse effect on the Company. The Company is unable
to predict the extent of adverse governmental regulation which might arise from
future U.S. or foreign legislative or administrative action.
Moreover, the Company cannot predict with accuracy the effect of
unspecified, but possible, future changes in the regulatory approval process and
in the domestic health care system. Possible future changes could affect the
time frame required for regulatory review and the sale prices of the Company's
products, if approved for sale.
Technological Change and Competition. The pharmaceutical industry is
subject to rapid, unpredictable and significant technological change.
Competition from universities, research institutions and pharmaceutical,
chemical and bio-engineering companies may be intense. There can be no assurance
that developments by the Company's competitors or potential competitors will not
render the Company's proposed products obsolete. Most of such competitors have
greater financial resources, research and development facilities and
manufacturing and marketing experience than the Company. If the Company's first
proposed product, docosanol cream, is launched successfully, it will compete
with several prescription products for oral-facial herpes known to the Company
currently on the market in the U.S. and other over-the-counter preparations, as
well as other products or potential products which are or may be under
development or undergoing the FDA regulatory approval process. See
"Competition".
Dependence Upon Key Personnel. The Company is dependent on its
executive management and scientific staff. Reduction in the amount of time key
personnel devote to the Company or the loss of any key person could have a
material adverse effect upon the Company's business. In addition, in order to
carry out its business plan, the Company will be required to retain additional
qualified scientific, technical and administrative personnel. There can be no
assurance the Company will be able to attract or maintain such additional
personnel.
Patents and Proprietary Rights. The Company owns six U.S. and three
European patents and has additional foreign patent applications pending relating
to the topical and systemic uses of docosanol and has been granted rights under
certain U.S. and foreign patents and patent applications relating to docosanol
held by a third party. There can be no assurance that the claims in the pending
patent applications will issue as
- 11 -
<PAGE> 14
patents, that any issued patents will provide the Company with significant
competitive advantages, or that challenges will not be instituted against the
validity or enforceability of any patent owned by the Company or, if instituted,
that such challenges will not be successful. The cost of litigation to uphold
the validity and prevent infringement of the Company's patents could be
substantial. Furthermore, there can be no assurance that others will not
independently develop similar technologies or duplicate the Company's
technologies or design around the patented aspects of the Company's
technologies. There is no assurance that the Company's proposed technologies
will not infringe on patents or other rights owned by others, or licenses to
which may not be available to the Company.
In some cases, the Company may rely on trade secrets and
confidentiality agreements to protect its innovations. There can be no assurance
that trade secrets will be established, that secrecy obligations will be honored
or that others will not independently develop similar or superior technology. To
the extent that consultants, key employees or other third parties apply
technological information independently developed by them or by others to
Company projects, disputes may arise as to the proprietary rights to such
information which may not be resolved in favor of the Company.
Dependence Upon a Limited Number of Proposed Products. The Company's
principal efforts to date have been devoted to the development of docosanol
cream for the treatment of oral-facial herpes, and it is the product which the
Company believes is most likely to be first available for commercial
distribution. However, even with approval by the FDA, the Company does not
expect docosanol cream to be available for commercial sale or use in the U.S.
before the end of the first calendar quarter of 1999, if at all,and likely could
take years before being available in many foreign countries or not available at
all in certain foreign countries. The Company anticipates that it will be
several years until any of its other current products are available for
commercial sale in any significant amount, if at all. The failure of these
products to achieve commercial viability would have a material adverse effect
upon the business and financial condition of the Company.
Dependence Upon Third-Party Arrangements. The Company does not have and
does not expect to have in the foreseeable future the resources to manufacture
or directly market on a large commercial scale docosanol cream or any other
products which it may develop. To successfully commercialize docosanol cream or
any other products, the Company will need to enter into collaborative
arrangements with pharmaceutical or biotechnology companies to assist in funding
various aspects of commercialization costs, which may include costs of
development, clinical testing necessary to obtain regulatory approvals, and
costs of manufacturing and marketing. The Company believes that such
arrangements will be more effective in many, but not all, instances in promoting
and distributing its products in view of the Company's limited resources and the
extensive marketing networks and large promotional and advertising budgets of
established pharmaceutical companies. The Company has entered into several
licensing agreements to cover the clinical development, manufacturing and
marketing of docosanol cream in both the U.S. and in foreign markets. There can
be no assurance, however, that the Company will be able to finalize any
licensing or distributorship arrangements for territories not covered by
existing agreements on favorable terms or at all. The Company may ultimately
determine to establish its own manufacturing and/or marketing capability, at
least for certain products, in which case it will require substantial additional
funds and personnel.
Risks Related to Foreign Sales. The Company is subject to various risks
inherent in foreign trade in connection with the continued development of
docosanol cream by foreign licensees, and the manufacture, marketing and
distribution of docosanol cream overseas by foreign licensees, if ever. Such
risks could include economic or political instability, shipping delays,
fluctuations in foreign currency exchange rates, customs duties and export
quotas and other trade restrictions, all of which could have a significant
impact on the Company's ability to deliver its products.
- 12 -
<PAGE> 15
Possible Volatility of Stock Price. Recent history relating to the
market prices of the shares of biotechnology companies in general, and the
historical fluctuations in the market price of the Company's Class A Common
Stock, indicates the market price of the Company's Class A Common Stock may be
highly volatile. Factors such as fluctuations in the Company's operating
results, developments relating to the progress of clinical trials for the
Company's products and the Company's relationships with present and potential
licensees and distributors, announcements of technological innovations or new
products by the Company or its competitors, and changes in market conditions and
in the economy generally, may have a significant impact in the market price of
the Company's Class A Common Stock. Further, the market prices for securities of
many biotechnology companies have experienced wide fluctuations which were not
necessarily related to the operating performance of such companies.
Product Liability; Limited Insurance Coverage. The testing, marketing
and sale of pharmaceutical products entails a risk of product liability claims
by consumers and others. Claims may be asserted against the Company by end users
of any of the Company's proposed products which may be developed. The Company
has maintained product liability insurance coverage for its clinical trials in
the amount of $2,000,000 per incident, and in the aggregate. There is no
assurance that such insurance will be sufficient to cover all possible
liabilities. In the event of a successful suit against the Company, lack or
insufficiency of insurance coverage could have a material adverse effect on the
Company. Further, certain distributors of pharmaceutical products require
minimum product liability insurance coverage as a condition precedent to
purchasing or accepting products for distribution. Failure to satisfy such
insurance requirements could impede the ability of the Company to achieve broad
distribution of its proposed products, which would have a material adverse
effect upon the business and financial condition of the Company.
Future Sales of Common Stock. All of the Company's shares of Class B
Common Stock currently outstanding are "restricted securities" as the term is
defined in Rule 144 ("Rule 144") promulgated under the Securities Act of 1933,
as amended (the "Act"), and under certain circumstances may be sold without
registration pursuant to Rule 144. The outstanding shares of Class B Common
Stock, which will convert into Class A Common Stock upon certain sales or
transfers, are eligible for sale under Rule 144. The Company is unable to
predict the effect that sales made under Rule 144, or otherwise, may have on the
then prevailing market price of the Class A Common Stock although any
substantial sale of restricted securities pursuant to Rule 144 may have an
adverse effect. See "Management's Discussion and Analysis of Financial Condition
and Results of Operation -- Liquidity and Capital Resources".
Effect of Outstanding Convertible Stock, Options, and Warrants: As of
January 14, 1999, there were outstanding stock options to purchase an aggregate
of 5,832,948 shares of Class A Common Stock, which have exercise prices ranging
between $0.9375 to $6.4375 per share, and 419,000 shares of Class B Common
Stock, which have exercise prices ranging between $0.0125 to $0.50 per share. In
addition, the Company had outstanding 49,000 shares of Class B Common Stock at
that date, each share of which is convertible into one share of Class A Common
Stock. In addition, the Company had outstanding at January 14, 1999, Class D
Warrants with an exercise price of $1.50 per share, which, if exercised, would
result in the issuance of 1,387,689 shares of Class A Common Stock, Class G
Stock Purchase Warrants with an exercise price of $2.97 per share, which, if
exercised, would result in the issuance of 2,030,455 shares of Class A Common
Stock and Class H Stock Purchase Warrants with an exercise price of $2.40 per
share, which, if exercised, would result in the issuance of 100,000 shares of
Class A Common Stock.
To the extent that these outstanding securities are exercised or
converted, dilution of the percentage of ownership of the Company's shareholders
will occur. Sales in the public market of the Class A Common Stock, underlying
options and warrants may adversely affect prevailing market prices for the Class
A Common
- 13 -
<PAGE> 16
Stock. This, in turn, might adversely affect the terms upon which the Company
will be able to obtain additional equity capital.
Dividends Unlikely. The Company does not intend to declare or pay cash
dividends in the foreseeable future. Earnings, if and when achieved, are
expected to be retained to finance its business.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Securities by the Selling Securityholders. The Company will receive, however,
gross proceeds of $2,081,804 in the event of the exercise of all Class D
Warrants held by the Selling Securityholders. There can be no assurance that all
or any portion of such securities will be exercised at any particular time, if
ever. It is likely that the Selling Securityholders will not exercise their
securities unless and until the market price of the Class A Common Stock is
significantly greater than the exercise price of their securities for an
extended period of time. See "Selling Securityholders" and "Description of
Securities."
The use to which the Company would put proceeds received upon the
exercise of the Class D Warrants offered by this Prospectus after the payment of
expenses, will depend upon the amount of proceeds received at any given time,
the then current cash balance of the Company and the then current funding
priorities of the Company. As of the date of this Prospectus, if all of such
securities were exercised concurrently the Company expects that, after the
payment of expenses, it would apply all of the net proceeds to working capital.
DIVIDEND POLICY
The Company has never paid a cash dividend and does not anticipate the
payment of cash dividends in the foreseeable future as earnings, if any, are
expected to be retained to finance the Company's operations. Declaration of
dividends in the future will remain within the discretion of the Board, which
may review its dividend policy from time to time.
- 14 -
<PAGE> 17
PRICE RANGE OF SECURITIES
On November 30, 1998, the Company's shares of Class A Common Stock
began trading on the NASDAQ National Market System under the symbol AVNR. Prior
to November 30, 1998, the Company's shares traded under the symbol LDAKA. The
prices set forth below represent quotes between dealers and do not include
commissions, mark-ups or mark-downs, and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
Class A
Common Stock
High Low
------------- ----------
<S> <C> <C>
FISCAL 1997
First Quarter $1.94 $1.37
Second Quarter $3.13 $1.75
Third Quarter $2.31 $1.75
Fourth Quarter $3.03 $1.94
FISCAL 1998
First Quarter $2.94 $1.66
Second Quarter $2.19 $1.56
Third Quarter $1.81 $1.16
Fourth Quarter $1.47 $0.87
FISCAL 1999
First Quarter $3.00 $0.50
Second Quarter $0.88 $0.65
(through 1/14/99)
</TABLE>
On January 14, 1999, the closing bid and ask prices of Class A Common
Stock were $0.88 and $0.91, respectively.
As of January 14, 1999, there were approximately 970 holders of record
and in excess of 16,000 beneficial owners of the Company's Class A Common Stock.
The Company has not paid any dividends since its inception and does not
contemplate payment of dividends in the foreseeable future.
- 15 -
<PAGE> 18
DILUTION
As of September 30, 1998, the pro forma net tangible book value of the
Company's common stock was approximately $7,183,504 or $0.17 per share of common
stock. Pro forma net tangible book value per share represents the amount of
total tangible assets of the Company adjusted to give effect to the proceeds
that would be received in the event of exercise of the Class D Warrants
registered herein, reduced by the total liabilities and divided by the number of
shares of common stock outstanding after giving effect to the exercise of the
Class D Warrants, subject to this registration, for shares of Class A Common
Stock. No additional shares of common stock will be issued, nor will any
proceeds be received by the Company, as a result of the sale by the Selling
Securityholders of the Securities offered by this Prospectus. See "Use of
Proceeds" and "Selling Securityholders." Therefore, the pro forma net tangible
book value at September 30, 1998, after the distribution of all shares of Class
A Common Stock offered hereby, will remain $0.17 per share of common stock.
Assuming a price to the public of $0.94 per share (based upon the last reported
sales price of the Class A Common Stock on NASDAQ at January 14, 1999), there
will be an immediate dilution per share of $.77 to new investors purchasing the
shares of Class A Common Stock offered hereby. The dilution to be experienced by
new investors will be the same regardless of the number of Securities sold
because the Company would receive no consideration for the sale.
The following table illustrates the dilution per share as described
above:
<TABLE>
<S> <C> <C>
Assumed price to public per share ....................................... $0.94
-----
Pro forma net tangible book value per share at
September 30, 1998, before giving effect to this
Offering .............................................. 0.17
----
Increase attributable to purchase of Class A
Common Stock by new investors ..................... 0.00
----
Pro forma net tangible book value per share of common
stock at September 30, 1998, after giving effect
to this Offering ...................................... $0.17
-----
Dilution to new investors ............................................... $0.77
=====
</TABLE>
At September 30, 1998, the Company also had outstanding options to
purchase an aggregate of 5,859,910 shares of Class A Common Stock at exercise
prices ranging between $0.9375 and $6.4375 per share, and 419,000 shares of
Class B Common Stock, at exercise prices ranging between $0.0125 and $0.50 per
share. To the extent such options are exercised and shares of Class B Common
Stock are converted, there will be further dilution to the purchasers of the
Class A Common Stock offered hereby from the public offering price.
- 16 -
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998.
<TABLE>
<S> <C>
Long-Term Debt $ ---
Stockholders' Equity
Common Stock--no par value:
Class A -- 99,490,000 shares authorized,
40,905,230 issued and
outstanding(1)(2) 60,159,769
Class B -- 510,000 shares authorized,
49,000 shares issued and
outstanding (convertible to
Class A Common Stock) 25,582
Deficit accumulated during the development stage (53,615,988)
-----------
Total shareholders' equity 6,569,363
-----------
Total capitalization $6,569,363
============
</TABLE>
- ------------
(1) Includes conversion of the $1,000,000 in principal amount, (net of
interest of $17,620 and issue costs of $37,571), of the Convertible
Note (the "1997 Note") that was outstanding at September 30, 1998. The
balance of the 1997 Note was converted into common stock by the holder
between October 1, 1998 and October 30, 1998. Upon conversion of the
remaining principal balance of the 1997 Note, the Company issued an
aggregate of 1,091,213 shares of Class A Common Stock. The Company has
no further obligation under the 1997 Note. See Note 3 to the Financial
Statements.
(2) Does not include (a) 49,000 shares of Class A Common Stock issuable
upon conversion of the Company's outstanding shares of Class B Common
Stock, (b) an aggregate of 36,062 shares of Class A Common Stock issued
between October 1, 1998 and January 14, 1999 from the exercise of
certain options and warrants , (c) an aggregate of 6,251,948 shares of
Class A Common Stock and Class B Common Stock reserved for issuance
pursuant to outstanding options at January 14, 1999, (d) 1,387,869
shares of Class A Common Stock issuable upon exercise of outstanding
Class D Warrants, (e) 2,030,455 shares of Class A Common Stock issuable
upon exercise of outstanding Class G Stock Purchase Warrants, and (f)
100,000 shares of Class A Common Stock issuable upon exercise of
outstanding Class H Stock Purchase Warrants. See "Plan of
Distribution," "Management's Discussion and Analysis - Liquidity and
Capital Resources" and "Description of Securities."
SELECTED FINANCIAL DATA
The selected financial data presented below at September 30, 1997 and
1998, for the years ended September 30, 1996, 1997, and 1998 and the period from
August 31, 1988 (inception) through September 30, 1998 are derived from, and are
qualified by reference to, the audited financial statements of the Company
- 17 -
<PAGE> 20
included elsewhere herein and should be read in conjunction with those financial
statements and notes thereto and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected financial data
presented below at September 30, 1994, 1995 and 1996, and for the years ended
September 30, 1994 and 1995, are derived from audited financial statements not
included herein.
<TABLE>
<CAPTION>
FROM
YEARS ENDED SEPTEMBER 30, AUG. 31, 1988
------------------------------------------------------------------------ (INCEPTION) TO
1994 1995 1996 1997 1998 SEPT. 30, 1998
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues .......................... $ 1,016,719 $ 884,589 $ 4,158,038 $ 1,547,554 $ 590,728 $ 10,139,298
Net loss .......................... (4,813,341) (10,173,001) (6,130,241) (11,109,242) (8,210,548) (53,615,988)
Net loss per share(1) ............. $ (0.19) $ (0.35) $ (0.19) $ (0.30) $ (0.21)
Weighted average number of shares
of common stock outstanding(1).. 25,166,958 29,338,418 32,072,944 36,779,774 39,519,609
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
BALANCE SHEET DATA: 1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments .... $17,402,896 $10,035,727 $20,374,010 $14,428,834 $ 6,508,341
Working capital ............. 16,837,299 8,567,966 13,759,577 11,336,627 4,819,830
Total assets ................ 18,244,299 10,954,043 22,846,879 15,727,495 7,653,800
Convertible notes payable.... 5,721,087 2,415,461 1,000,000
Total liabilities ........... 847,904 1,705,443 7,778,760 3,433,569 2,064,485
Stockholders' equity ........ 17,396,395 9,248,600 15,068,119 12,293,926 5,589,315
</TABLE>
- -----------
(1) The Escrow Shares outstanding in the fiscal year ended 1994 are
excluded from the computation of net loss per share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Registration Statement contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All
forward-looking statements are inherently uncertain as they are based on current
expectations and assumptions concerning future events or future performance of
the Company. Readers are cautioned not to place undue reliance on these
forward-looking statements, which are only predictions and speak only as of the
date hereof. Forward-looking statements usually contain the words "estimate",
"anticipate", "believe", "expect", or similar expressions, and are subject to
numerous known and unknown risks and uncertainties. In evaluating such
statements, prospective investors should carefully review various risks and
uncertainties identified in this Registration Statement, including the matters
set forth above under the caption "Risk Factors" and in the Company's other SEC
filings. These risks and uncertainties could cause the Company's actual results
to differ materially from those indicated in the forward-looking statements. The
Company undertakes
- 18 -
<PAGE> 21
no obligation to update or publicly announce revisions to any forward-looking
statements to reflect future events or developments.
OVERVIEW
The Company is a development stage company. Since inception in August
1988, the Company was organized to discover, develop and market novel
therapeutic products to treat human diseases, and has operated in one business
segment -- pharmaceutical product development. The Company has moved closest to
the commercialization endpoint with n-docosanol 10% cream (docosanol cream) as a
topical treatment for oral-facial herpes (cold sores or fever blisters).
Docosanol cream is a therapeutic compound, developed by Company scientists,
which has demonstrated a broad spectrum of anti-viral activities and other
therapeutic properties in promoting wound healing and in reducing acute
inflammatory reactions. On December 22, 1998, the Company received a letter from
the FDA stating that the NDA for docosanol cream is "not-approvable" ("FDA
Decision"). The letter indicates that the FDA has completed its review and
states that additional evidence is needed to substantiate the drug's
effectiveness. The letter also states that one additional clinical trial may be
sufficient to substantiate the efficacy findings of studies that the Company
submitted with the NDA. According to the FDA, the other sections of the NDA,
including the chemistry, manufacturing and controls, the
pharmacology/toxicology, and the evidence for safety of docosanol cream for its
proposed human use, were not the basis for the "not-approvable" action. The
Company has informed the FDA that it intends to respond to the letter. The
Company is currently evaluating the impact of the FDA Decision. Failure to
receive or substantial delay in receiving approval from the FDA would have a
materially adverse effect on the Company and its current business plan.
In addition to development of docosanol cream, the Company is engaged
in earlier stages of research and/or development of several other potential
therapeutic products. These include potential new drugs for the treatment of
allergies, asthma and inflammatory diseases. The Company has not generated any
significant product revenues and has not been profitable since inception in
August 1988. For the period from inception to September 30, 1998, the Company
incurred a cumulative net loss of $53.6 million. Although the Company is
currently preparing for the launch of its first product, the Company's sales &
marketing, research and product development, and general and administrative
expenses will continue to be substantial and the Company expects to continue to
incur operating losses during the next several years.
The Company's business is subject to significant risks including, but
not limited to, (i) uncertainties associated with regulatory approval and
ultimate market acceptance of docosanol cream, if approved, (ii) liquidity
risks, (iii) risks associated with the potential establishment of a sales
organization, uncertainties associated with research and development efforts,
with the Company's ability to obtain and enforce patents important to the
Company's business, with lengthy and expensive regulatory approval processes,
with competition from pharmaceutical and biotechnology companies, with
increasing pressure on pharmaceutical pricing from payors, patients, and
government agencies and with limitations on the availability of capital. Even if
the Company's products appear promising at an early stage of development, they
may not reach the market for a number of reasons. Such reasons include, but are
not limited to, the possibilities that the potential products will be found
ineffective or toxic during clinical trials, failure to receive the necessary
regulatory approvals, difficult to manufacture on a large scale, be uneconomical
to market, or be precluded from commercialization by proprietary rights of third
parties, or that the Company may not have sufficient financial resources.
Additional expenses, delays and losses of opportunities that may arise out of
these and other risks could have a material adverse effect on the Company's
financial condition and results of operations.
- 19 -
<PAGE> 22
RESULTS OF OPERATIONS
Comparison of Fiscal 1998 and 1997
NET LOSSES -- 1998 VS. 1997
During the fiscal year ended September 30, 1998, ("Fiscal 1998") the
Company incurred a net loss of $8.2 million compared to a net loss of $11.1
million in the fiscal year ended September 30, 1997 ("Fiscal 1997"). Factors
contributing to the lower loss in Fiscal 1998 compared with Fiscal 1997 are
discussed below.
REVENUES -- 1998 VS. 1997
Revenues totaled $591,000 for Fiscal 1998 compared to $1.5 million for
Fiscal 1997. Revenues for Fiscal 1998 consisted of interest and other income.
The decrease in revenues during Fiscal 1998 compared to Fiscal 1997 was
attributable to license fees and federal research grant revenue earned in the
1997 period, and lower interest income as a result of a lower average cash
balance during the 1998 period.
EXPENSES -- 1998 VS. 1997
Research and development expenses ("R&D") decreased by $4.4 million to
$3.2 million during Fiscal 1998 as compared to Fiscal 1997. The decrease in R&D
expenses during Fiscal 1998 was primarily attributable to the completion of U.S.
Phase 3 clinical trials in the 1997 period totaling $7.6 million. The Company's
research and development expense during Fiscal 1998 consisted of costs of
preparation and filing the Company's NDA for docosanol cream in the first fiscal
quarter of 1998 and costs related to the Company's other research and
development activities. See "Business -- Research and Development."
General and administrative expenses increased by $1.0 million to $4.0
million during Fiscal 1998 from $3.0 million during Fiscal 1997. The increase in
expenses during Fiscal 1998 is due primarily to higher legal expenses related to
the following: (i) evaluation of January 1998 financing proposal presented by
HealthMed, (ii) settlement with Medical Biology Institute as discussed below,
and (iii) matters of litigation and potential litigation between the Company and
Dr. David H. Katz, the Company's former president and chief executive officer
(see "Business -- Legal Proceedings" and Note 6 to the Financial Statements).
Also contributing to the increased expenses during Fiscal 1998 were increased
costs of legal and other expenses incurred in connection with the preparation
and distribution of the proxy information to the Company's shareholders related
to the Annual Meetings held in June 1998, increased investor relations
activities due to engaging outside public and investor relations firms and
increased fees and travel for the Board due to an expanded Board and a higher
number of meetings held during the fiscal year.
Partially offsetting the overall increased general and administrative
expenses for Fiscal 1998 were lower expenses associated with license fees that
were paid in Fiscal 1997 due to the Company reacquiring the marketing rights to
docosanol cream from Bristol-Myers Squibb Company. See "Comparison of 1997 and
1996".
Sales and marketing expenses incurred in the amount of $671,000 are due
primarily to the Company's preparation of its product launch of docosanol cream
anticipated to be in early 1999.
- 20 -
<PAGE> 23
Litigation settlement costs totaling $784,000 relate primarily to costs
of the settlement agreement with Medical Biology Institute. See "Business --
Settlement Agreement with MBI" and Note 5 to the Financial Statements.
Interest Expense decreased by $2.0 million to $95,000 during Fiscal
1998. This decrease was due to lower interest expense associated with the
decrease in convertible debt outstanding in the period.
COMPARISON OF FISCAL 1997 AND 1996
NET LOSSES -- 1997 VS. 1996
During Fiscal 1997 the Company incurred a net loss of $11.1 million
compared to a net loss of $6.1 million in the fiscal year ended September 30,
1996 ("Fiscal 1996").
REVENUES -- 1997 VS. 1996
Revenues totaled $1.5 million for Fiscal 1997 compared to $4.2 million
for Fiscal 1996. Revenues for Fiscal 1997 consisted of license fee/contract
research income of $525,000, interest and other income of $881,000 and federal
research grant income of $142,000.
The decrease in revenues during Fiscal 1997 was attributable to higher
license fees earned in the 1996 period in connection with certain license
agreements and lower interest income as a result of a lower average cash balance
during the 1997 period. Partially offsetting the overall decrease in revenues in
the 1997 period were increased revenues from federal research grants.
EXPENSES -- 1997 VS. 1996
Research and development expenses increased by $3.1 million to $7.6
million during Fiscal 1997 as compared to Fiscal 1996. The increase in expenses
during Fiscal 1997 was primarily attributable to the U.S. Phase 3 clinical
trials of docosanol cream which took place during Fiscal 1997. See "Business --
Research and Development -- Docosanol Cream". During Fiscal 1997, the Company's
clinical trial expense for docosanol cream increased by $2.5 million compared to
Fiscal 1996. Also contributing to the overall increased research and development
expenses during Fiscal 1997 were increased costs related to the Company's other
research and development activities, partially offset by decreased costs related
to Large Multivalent Immunogen ("LMI").
General and administrative expenses increased to $3.0 million during
Fiscal 1997 from $2.7 million during Fiscal 1996. The increase in expenses was
attributable primarily to non-recurring expenses incurred in the 1997 period
related to reacquiring from Bristol-Myers Squibb Company the rights to market
docosanol cream in all territories except the U.S., Canada and Mexico. Also
contributing to the increased expenses in the 1997 period were higher costs of
rent due to the expansion of administrative office space during the year.
Further contributing to the increased expenses in the 1997 period were increased
non-cash expenses in connection with the recording of compensation expense
related to the issuance of stock options to non-employees and increased non-cash
expenses related to depreciation of the Company's fixed assets.
Partially offsetting the increased general and administrative expenses
in the 1997 period were lower costs of legal fees, lower costs of investor
relations activities, lower salaries and wage expense, and a decrease in non-
recurring taxes paid in the 1996 period associated with license fees earned in
that period. Also, partially offsetting the overall increased expenses in the
1997 period were lower non-cash expenses in the amount of $151,000 from the
amortization of deferred debt issue costs.
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During Fiscal 1997, interest expense decreased to $2.1 million from
$3.0 million during Fiscal 1996. The decrease in interest expense during the
1997 period was due primarily to lower non-cash expenses associated with the
amortization of the discount on the convertible notes and lower interest expense
due to a lower convertible notes payable balance in the 1997 period. Of the $2.1
million in interest expense, $1.4 million represented non-cash interest expense
associated primarily with the Convertible Note issued February 26, 1997. See
"Liquidity and Capital Resources" and Note 3 to the Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily
through the sale of equity and debt securities and shareholder loans. Net cash
provided from financing activities through September 30, 1998 was $51.2 million.
At September 30, 1998, the Company had cash, cash equivalents and
short-term investments totaling $6.5 million and working capital of $4.8
million, as compared to $14.4 million and $11.3 million, respectively, at
September 30, 1997. The decreases in cash, cash equivalents, short-term
investments and working capital during Fiscal 1998 are primarily due to net cash
used to fund operating activities as discussed in "Results of Operations".
During Fiscal 1998, the Company received $43,000 from the exercise of certain
stock options and warrants. Cash utilized by the Company to fund operating
activities for Fiscal 1998 and from August 31, 1988 (inception) to September 30,
1998, was $7.8 million and $43.9 million, respectively, as a result of net
losses incurred during these periods. In addition, $156,000 and $749,000 of cash
was utilized for capital expenditures during Fiscal 1998 and from August 31,
1988 (inception) to September 30, 1998, respectively.
On December 22, 1998, the Company received a letter from the FDA
stating that the NDA for docosanol cream is "not-approvable". The Company is
currently evaluating the impact of the FDA decision. There can be no assurance
that the Company's discussions with the FDA will result in a change in decision.
Furthermore, there can be no assurance that the Company will be able to finance
the additional clinical trials that may be required by the FDA with respect to
docosanol cream, or that the FDA will ultimately grant marketing approval.
On February 26, 1997, the Company issued a Convertible Note Payable in
the amount of $6.0 million as part of a private placement to an institutional
investor, (the "1997 Note"). Between October 1, 1998 and October 30, 1998, the
Company issued 1,091,213 shares of Class A Common Stock and 545,607 Class G
Stock Purchase Warrants from the conversion of the $1.0 Million remaining
principal balance of the 1997 Note at September 30, 1998. The Company has no
further obligations under the 1997 Note. See Note 3 to the Financial Statements.
At January 14, 1999 the Company had exercisable warrants and options
outstanding which, if fully exercised, would result in the aggregate issuance of
approximately 9.8 million shares of the Company's Class A Common Stock and would
result in approximate gross proceeds to the Company of $23.3 million. Included
in such warrants and options are Class D Warrants, exercisable on or before June
30, 1999 into approximately 1.4 million shares of the Company's Class A Common
Stock at an exercise price of $1.50 per share. Such warrants are redeemable by
the Company, at a price of $.05 per warrant, upon 30 days notice if the average
closing bid price of the Company's Class A Common Stock for the 30 days prior to
the notice exceeds $3.45 per share. In the event the Company does call the Class
D Warrants for redemption, there can be no assurance regarding the number of
warrants which would be exercised or the amount of proceeds which the Company
would receive. Also included in such warrants and options are Class G Stock
Purchase Warrants exercisable into approximately 2.0 million shares of the
Company's Class A Common Stock at an exercise price of $2.97 per share. Such
warrants expire on various dates through 2003 and are not redeemable by the
Company. The remaining exercisable options and warrants are not redeemable by
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the Company and can be exercised by the holders at various times through 2008.
The average exercise price of the remaining exercisable options and warrants is
approximately $2.38 per share which is higher than the market price of the
Company's Class A Common Stock on January 14, 1999. There can be no assurance
that voluntary option and warrant exercises will continue to occur in the
future.
Since inception, the Company has experienced negative cash flows from
operations, and the Company believes that negative cash flows from operations
will continue for the foreseeable future, and that outside sources of funding
will continue to be required. Whether or not the Company receives marketing
approval of docosanol cream from the FDA, the Company anticipates that its cash
requirements will be substantial for the fiscal year ending September 30, 1999
("Fiscal 1999"). The Company had available cash, cash equivalents and short term
investments of approximately $4.5 million at December 31, 1998. The Company's
available funds will not be sufficient to permit the Company to potentially
conduct an additional clinical trial as may be required by the FDA, to implement
its marketing plan for docosanol cream, if ultimately approved, or to
successfully complete development or commercialize any of its other proposed
products or to in-license technologies for further development. Accordingly, the
Company needs to raise funds to provide the Company the necessary funding to
continue its development programs. The Company is evaluating alternatives for
financing operating activities through the sale of the Company's Class A Common
Stock or instruments convertible into Class A Common Stock. There can be no
assurance that the Company can come to favorable terms, enter into final
agreements with the investors, or that the conditions of obtaining the financing
will be satisfied. Such financing could result in significant dilution to
shareholders. The Company may also have to enter into collaborative arrangements
with one or more other pharmaceutical or biotechnology companies to
commercialize its other products. There can be no assurance that the Company can
successfully obtain such additional capital or enter into the collaborative
arrangements necessary to fully develop or commercialize any of its proposed
products on acceptable terms. On January 22, 1999, the Company entered into an
investment agreement for an equity line with a private investment firm. The
equity line allows the Company to sell up to $10 million of Class A Common Stock
over a two-year period. The investor's purchase commitment during any purchase
period is limited to the lesser of $1,000,000 or 12% of the aggregate dollar
volume of shares traded in qualifying trading days during the investor's
purchase period, which is approximately one month. The Company must meet certain
conditions to draw on the equity line, including, but not limited to: (i) a
minimum trading price of the Company's Class A Common Stock of $1.00 per share
equitably adjusted for stock splits, stock dividends, combinations, and similar
transactions, and (ii) the Class A Common Stock shall have been designated on
the NASDAQ National Market and shall be qualified to trade. See Note 11
(unaudited) to the Financial Statements.
The continued existence of the Company is dependent upon receiving
additional financing from time-to-time until it begins to generate positive
cash flows from operations. No assurance can be given that the Company will be
successful in obtaining additional debt and/or equity financing or locating new
strategic partners, or that it will be able to generate positive cash flows from
operations. Failure to raise additional capital, or to enter into such
arrangements in a timely manner would materially and adversely effect the
Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes requirements for disclosure of
comprehensive income and becomes effective for the Company for the year ending
September 30, 1999. The Company does not expect this pronouncement to materially
impact the Company's current reporting and disclosures.
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In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This statement supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." The new standard becomes effective for the
Company for the year ending September 30, 1999, and requires that comparative
information from earlier years be restated to conform to the requirements of
this standard. Interim reporting of this standard is not required. The Company
does not expect this pronouncement to materially change the Company's current
reporting and disclosures.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures
about Pensions and other Postretirement Benefits". SFAS No. 132 revises
employer's disclosure and pension and other postretirement benefit plans, but
does not change the measurement or recognition of those plans. The new standard
becomes effective for the Company for the year ending September 30, 1999. The
Company has determined that the adoption of SFAS No. 132 will not have a
material effect on the financial statements or disclosures of the Company.
IMPACT OF THE YEAR 2000 ISSUE
Background
Many computer systems in use today were designed and developed using
two digits, rather than four, to specify the year. As a result such systems will
recognize the Year 2000 as "00." This could cause many computer applications to
fail completely or to create erroneous results unless corrective measures are
taken.
AVANIR's Year 2000 Program
The Company is aware of issues associated with the programming code in
existing computer systems as the Year 2000 approaches. The Company has
implemented a Year 2000 program ("Y2K Program") for its internal systems which
is in four phases: 1) implementation, 2) assessment (including prioritization
and pre-testing); 3) remediation (including modification, upgrading and
replacement); and 4) testing. The Company is also reviewing the Year 2000
readiness of third parties essential to the Company's operations. In addition,
the Company is revising existing business interruption contingency plans to
address issues relating to the Year 2000 problem. As discussed below, the
Company is currently in its assessment phase and will complete remediation and
testing upon completion of its assessment of the Year 2000 risks. The Company
anticipates it will have completed all four phases of its Y2K Program by June
30, 1999. The Company's management receives regular updates on the status of the
Company's Y2K Program.
Internal Business Systems
The Company is currently in the assessment phase of the Y2K Program.
Based on its preliminary review of the status of the assessment of its internal
computer, software and applications (approximately 75% complete), the Company
does not believe that it has material exposure with respect to the Year 2000
issue concerning its computer software, applications and equipment.
Interfaces with Third Parties
The Company is in the process of assessing and initiating formal
communications with its current partners and other third parties essential to
the future marketing, distribution and manufacturing of docosanol cream. See
"Business -- Licensing, Marketing and Sales -- Docosanol Cream" and
"Manufacturing, Warehousing and Distribution-Docosanol Cream". Also, the Company
is communicating with other third parties with whom it has material
relationships to assess their risks with respect to Year 2000 issues. The
Company intends to 1) determine the extent to which the Company is vulnerable to
any failure by such third parties to remediate their respective Year 2000
problems; and 2) resolve such problems to the extent practicable. The Company is
not aware, at this time, of any material Year 2000 issues with respect to
dealings with third parties, however, the assessment of the risks of such third
parties is in the early stage of review.
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Estimated Year 2000 Costs
The Company estimates that the total cost of achieving Year 2000
readiness for its internal systems and equipment will not be material due to its
preliminary review of the systems. The internal software packages crucial to the
daily operations of the Company are Year 2000 compliant. The Company has
budgeted funds for the upcoming fiscal year to devote to its Y2K Program.
Contingency Plans
In the event that Year 2000 issues were to disrupt the Company and its
operations, such disruption may have a material impact on the Company and its
results of operations. Since no significant issues have arisen based on the
Company's preliminary assessments, the Company does not have a contingency plan
to address any material Year 2000 issues. Such contingency plan, if required,
will be developed immediately upon completion of the Company's assessment. The
Company will continue to assess the Year 2000 compliance issue on an on-going
basis, including monitoring and testing any new vendors products and conducting
surveys within the Company and with third parties to ensure Year 2000 issues are
resolved in a timely manner.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposures are related to its cash and cash
equivalents. The Company invests its excess cash in highly liquid short-term
investments with maturities of less than one-year, which the Company does not
feel is a significant market risk.
BUSINESS
GENERAL
AVANIR Pharmaceuticals, formerly known as LIDAK Pharmaceuticals
("AVANIR" or the "Company"), is a development stage company organized to
discover, develop, and market novel therapeutic products to treat human
diseases. The Company was incorporated in California in 1988 and since inception
has operated in one business segment -- pharmaceutical product development.
In December 1997 the Company filed a New Drug Application ("NDA") with
the Food and Drug Administration ("FDA") for its topical drug, n-docosanol 10%
cream ("docosanol cream"), for the treatment of oral-facial herpes (cold sores
and fever blisters). On December 22, 1998, the Company received a letter from
the FDA stating that the NDA for docosanol cream is "not-approvable" ("FDA
Decision"). The letter indicates that the FDA has completed its review and
states that additional evidence is needed to substantiate the drug's
effectiveness. The letter also states that one additional clinical trial may be
sufficient to substantiate the efficacy findings of studies the Company
submitted with the NDA. According to the FDA, the other sections of the NDA,
including the chemistry, manufacturing and controls, the
pharmacology/toxicology, and the evidence for safety of docosanol cream for its
proposed human use, were not the basis for the "not-approvable" action. The
Company has informed the FDA that it intends to respond to the letter. The
Company is currently evaluating the impact of the FDA Decision.
Pending evaluation of the FDA Decision and possible course of action,
the Company's current commercialization strategy to build an integrated sales
and marketing capacity to support the launch of docosanol cream as a
prescription product has been suspended until there is more definitive
information from the FDA on required additional evidence of the efficacy of
docosanol cream and impact on timing and cost. The Company also plans to seek
additional products through in-licensing and co-promotion. If FDA approval is
obtained at a later date, the Company intends to build its own sales force which
would call on various target physician markets for the sale of docosanol cream.
While marketing plans are currently on hold, the Company
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intends to remain prepared to produce advertising and promotional materials in
the event of a possible future product launch. Should the Company continue to
pursue docosanol cream and implement this launch strategy, it will be
substantially reliant on its own sales organization, and the failure to
implement an effective sales organization in a timely manner will have a
material adverse effect on the Company. There can be no assurance that the
Company will be able to hire and train sales staff in a timely fashion, as
competition for competent sales staff is intense. Neither can there be any
assurance that the Company will be able to develop effective advertising or that
patients will seek medical treatment or select the Company's product. Due to the
uncertain nature of the market's acceptance of docosanol cream as a topical
treatment for oral-facial herpes, there is no assurance that the Company will
attain a level of sales sufficient to sustain Company operations.
Following further discussion with the FDA, the Company could conclude
that FDA requirements for an oral-facial herpes prescription product would
result in an unacceptable delay and incremental cost before marketing approval
could be achieved. If such a conclusion is reached, the Company intends to
evaluate an alternative form of product for cold sores and fever blisters that
complies with over-the-counter ("OTC") regulatory requirements, with the
objective of having a product available for sale to the public in the 1999
calendar year. Marketing of such an OTC product would have most of the risks
associated with the sales and marketing of docosanol cream described herein plus
other risks depending on the distribution channels targeted. No assurance can be
given that such a product could be successfully developed or brought to market
on a timely manner, if at all.
The Company currently has three licensing agreements relating to
potential marketing of docosanol cream for certain topical indications. These
agreements are with: (i) Yamanouchi Europe, b.v., of The Netherlands
("Yamanouchi"), for rights in certain European and other countries (November
1991); (ii) CTS Chemical Industries, Ltd. ("CTS"), for rights in Israel (July
1993); and (iii) Boryung Pharmaceuticals Company, Ltd. ("Boryung"), of Seoul,
Korea, for rights in the Republic of Korea (July 1994). Two earlier agreements
between the Company and other pharmaceuticals companies were canceled in Fiscal
1998: (i) Bristol-Myers Squibb Company ("BMS") for rights in the U.S., Canada
and Mexico (signed in February 1996; canceled in December 1997) and (ii) Grelan
Pharmaceutical Co., Ltd. ("Grelan"), of Tokyo, Japan, for rights in Japan
(signed in October 1994; canceled in June 1998). See "Licensing, Marketing and
Sales -- Docosanol Cream" and Note 4 to the Financial Statements.
The Company is also engaged in much earlier stages of research and/or
development of several other potential therapeutic products. These include
potential new drugs for treatment of allergies, asthma, and inflammatory
diseases. These additional products will not be available for sale to the market
for several years, if at all. See "Research and Development." To enhance
commercial sales opportunities the Company is also seeking acquisitions and
in-licensing and co-promotion agreements with other pharmaceutical companies for
late stage products to add to its drug development pipeline. See "In-Licensing
Strategy for New Product Development".
The Company has experienced significant financial losses since
inception and its business is subject to significant risks. See "Risk Factors".
With the possible exception of docosanol cream, as noted above, the Company does
not believe that any of its other products currently under development could be
available for commercial sale for several years, if at all. Additionally, there
is no assurance that preclinical and clinical testing of the Company's other
potential drugs under development will demonstrate appropriate safety and
efficacy to warrant further development and/or to achieve the requirements of
regulatory marketing approvals in the U.S. or elsewhere.
Regarding marketing and distribution outside the U.S., under current
circumstances, the Company must obtain the support and collaboration of third
parties in foreign countries, of which no assurance can be
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made, to ensure the ultimate commercialization of docosanol cream and all of the
Company's other products, even if the Company obtains applicable regulatory
marketing approvals for such products. These third party arrangements could
include: (i) additional licensing or other collaborative agreements with
suitable outside parties which have sufficient financial resources and expertise
and/or (ii) additional financing to support completion of any remaining
nonclinical and clinical development, regulatory approval filings and, if
approved, eventual marketing of such products.
RESEARCH AND DEVELOPMENT
Docosanol Cream
Company scientists have developed a therapeutic product, docosanol
cream as a topical treatment for recurrent oral-facial herpes, commonly called
cold sores or fever blisters. On December 22, 1998, the Company received a
letter from the FDA stating that the NDA for docosanol cream is
"not-approvable". The letter indicates that the FDA has completed its review and
states that additional evidence is needed to substantiate the drug's
effectiveness. The letter also states that one additional clinical trial may be
sufficient to substantiate the efficacy findings of studies the Company
submitted with the NDA. According to the FDA, the other sections of the NDA,
including the chemistry, manufacturing and controls, the
pharmacology/toxicology, and the evidence for safety of docosanol cream for its
proposed human use, were not the basis for the "not-approvable" action. The
Company has informed the FDA that it intends to respond to the letter. The
Company is currently evaluating the impact of the FDA decision and possible
course of action.
In 1995, the Company's European licensing partner, Yamanouchi Europe
b.v., completed a phase 3 clinical trial of docosanol cream in treatment of
recurrent oral-facial herpes episodes. In this double-blind clinical study,
docosanol cream was compared to acyclovir (Zovirax(R)) 5% cream which is
approved for marketing in Europe as a treatment for recurrent oral-facial
herpes. When this clinical study was analyzed by the same non-parametric
statistical test used in the U.S. clinical studies there was no statistically
significant difference between treatments in the primary efficacy parameter,
time-to-healing, in patients who initiated treatment in stages of their
recurrence prior to and including the papule stage. Results from this trial,
along with results from the U.S. phase 3 placebo-controlled trials, if FDA
approval is obtained, will be used for submission to the appropriate regulatory
agencies for marketing approval in Europe.
In July and September 1996, the Company initiated two phase 3 studies
(96-LID-06 and 96-LID-07) of docosanol cream. In February 1997, the Company
proposed to the FDA that the two identical studies be reported as a single
pooled study. This proposal was accepted by the FDA with the request that the
results of the individual studies also be reported. A total of 743 patients who
initiated treatment in the prodrome/erythema stage of their recurrent episode
were evaluated in these double-blind, placebo-controlled studies. The primary
endpoint of the studies was time-to-healing, with secondary endpoints including
relief of pain and/or burning, itching, or tingling and percentage of aborted
outbreaks. In August 1997, the Company reported that in the primary end-point of
these pivotal trials, treatment of recurrent oral-facial herpes episodes with
docosanol cream resulted in a statistically significant (p=0.0076) reduction in
time-to-healing versus placebo. On December 22, 1997, the Company filed an NDA
for marketing approval for docosanol cream in the United States as a treatment
of recurrent oral-facial herpes. The FDA Decision on December 22, 1998 stated
that additional evidence is needed to substantiate the efficacy findings of the
Company.
Other studies performed by the Company indicate on a preliminary basis
that docosanol cream may have other indications that, if further developed,
could open other avenues for product development, including use as a topical
treatment for Kaposi's sarcoma cutaneous lesions in HIV-positive patients. At
present, however, no further development of the potential uses of docosanol
cream is ongoing. The Company has
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considered the possibility of initiating additional clinical trials for other
topical indications of docosanol cream which may include genital herpes, wound
healing and burns. At present, the Company does not intend to continue
development on its own of these other potential topical indications.
Patents covering medical and veterinary uses of the topical and
systemic formulations of docosanol cream have been issued to the Company in the
U.S. and Europe. The Company has additional foreign patent applications pending
covering topical and systemic uses of docosanol cream and has been granted
rights under certain U.S. and foreign patents and patent applications relating
to docosanol held by a third party. See "Patents and Proprietary Rights."
New Therapies for Allergies and Asthma Through IgE Regulation
Allergy and asthma are respiratory diseases affecting millions of
people worldwide. It has been established, through several decades of research,
that allergies and asthma result from the fact that allergic individuals
commonly produce abnormally high levels of an antibody known as IgE (the
antibody responsible for triggering allergic responses). The reason for the
elevated IgE antibodies is probably due to a combination of environmental and
genetic influences, but the end result is the same for afflicted individuals --
an unpleasant-to-debilitating disease symptom complex.
The Company has developed techniques that are intended to screen for,
and identify, novel small molecule drugs that appear to selectively suppress IgE
antibody production. Using a combination of tissue culture, in-vitro and animal
assays, the Company has screened over 12,000 compounds in the past 24 months. As
a result, the Company has identified several active candidate compounds that are
non-toxic and, more significantly, appear to be specific in their inhibition of
IgE antibody responses to allergens. The Company is attempting to identify
orally-active therapeutic drug candidates for allergic disease therapy. These
novel compounds, are proprietary and the Company has filed an application for
these compounds with the United States Patent Office.
Development of this technology and these small molecule drugs is
currently in the pre-clinical stage and will require many years, and
considerable financial resources, to ultimately, if ever, provide commercial
products for use in the field of allergy and asthma drug therapy. Dr. David H.
Katz, the Company's former president and chief executive officer and a director,
together with his wife, Lee R. Katz, have asserted a competing claim to
ownership of certain IgE technology, and they contend that the Company's pending
patent application constitutes a cloud on their title to that technology. This
matter is a subject of litigation between Dr. and Mrs. Katz and the Company. See
"Legal Proceedings."
Human Immune System -- Reconstituted Scid Mouse Technology
The human immune system-reconstituted SCID mouse technology
("hu-PBL-SCID"), creates a functional human immune system in mice which have a
genetic defect known as Severe Combined ImmunoDeficiency ("SCID") by
reconstituting such mice with human blood cells. Certain aspects of the human
immune system are thereby created to function in laboratory animals. Both U.S.
and foreign patents have been issued for the hu-PBL-SCID technology. The rights
to these patents belong to the Company through the settlement agreement with
Medical Biology Institute. See "Patents and Proprietary Rights" and "Settlement
Agreement with Medical Biology Institute".
To date, the Company has used this model to complete work under twelve
contract research agreements pursuant to which the Company used hu-PBL-SCID mice
infected with HIV to screen compounds developed by other companies for potential
therapeutic efficacy in human AIDS and other virus-induced diseases. The
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Company does not expect that revenues from contract research agreements to test
compounds in hu-PBL-SCID mice will be significant. Therefore, the Company does
not intend to continue to perform this research service for other pharmaceutical
and biotechnology companies.
In August 1996, the Company entered into a five-year license agreement
with Southern Research Institute ("SRI") under which the Company granted SRI a
non-exclusive license to use its hu-PBL-SCID technology in performing certain
contract research testing. The Company does not anticipate significant revenues
under this agreement. The Company will continue to offer non-exclusive licenses
to the research community for the use of this technology.
Company scientists and outside collaborators have also developed a
variation of the hu-PBL-SCID mouse technology which appears capable of
generating fully human monoclonal antibodies of high affinity. Monoclonal
antibodies for therapeutic use in humans have only been approved by regulatory
agencies in the past few years, even though the technology for producing
monoclonal antibodies in mice has been known since 1975. A major reason for the
long delay in translating this basic science discovery into a clinically
effective therapeutic tool was the need to develop techniques to "humanize"
mouse antibodies to avoid natural rejection of the foreign mouse proteins. This
humanization step, which is time and labor intensive, can potentially be
eliminated by application of this new technology to produce entirely human
antibodies. The Company believes this technology may have advantages over other
technologies, including rapid turnaround, production of diverse antibody
specificities with potentially high affinity, and reduced cost. The Company has
applied for joint patent coverage for this technology with IDEC Pharmaceuticals.
The Company is exploring ways to commercialize this technology.
Protein Sequence Analysis Drug Discovery Method
Identifying potential modulators capable of influencing the interaction
among proteins requires knowledge of the proteins' structures. In the past,
scientists have relied on time-intensive three-dimensional techniques such as
X-ray crystallography to determine structures and possible binding sites. Using
a proprietary new drug discovery method based on protein sequence analysis
technology, Company scientists are attempting to discover active sites on a
variety of clinically important proteins. Although research efforts are at an
early stage, Company scientists believe that this technology has the potential
to shorten the drug discovery process for certain types of drugs.
The Company recognizes that financing sources other than its own
current working capital will be required before any additional development of
this technology can be pursued. The Company presently intends to actively pursue
outside partners from industry and/or the government to provide the financial
resources to pursue this area of therapeutic research.
Termination of the Relationship with MBI
During the course of 1998, the Company's license agreement with Medical
Biology Institute ("MBI") was terminated. See "Settlement Agreement with Medical
Biology Institute." Prior to that time, the Company had, from time-to-time,
conducted research and development efforts of certain technologies derived from
MBI under that license agreement.
Conclusion
Despite the promise shown to date by certain technologies which the
Company is developing or investigating, the research and development efforts
relating to many of the Company's technologies are at pre-
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clinical and early stages and all development efforts are, by their nature,
uncertain. There can be no assurance that efforts to develop commercial
applications of the Company's current or future in-licensed technologies will be
successful or continued. In the event that the Company decides to proceed to
develop commercially these technologies, it will likely require additional
financing either from collaborative arrangements with pharmaceutical or
biotechnology companies or from other sources. There can be no assurance that
the Company will be able to raise additional financing, or that the Company will
be able to enter into licensing or other collaborative arrangements on favorable
terms, if at all, or if funded, that the required development and testing will
be successfully completed and result in safe and effective products for human
use.
IN-LICENSING STRATEGY FOR NEW PRODUCT DEVELOPMENT
In addition to its internal research and development programs, the
Company is currently pursuing an aggressive in-licensing strategy to acquire new
products to bring in house to further develop, market or to license to others.
The Company is evaluating products and technologies to add to its research and
development "pipeline". There can be no assurance that any of the products
currently under consideration will meet the Company's expectations, that the
Company can complete negotiations with third parties, or that the Company will
be able to identify any other suitable products to in-license if the products
under consideration are found to be unsuitable for the Company. Further, there
can also be no assurance that, once products are identified, the Company will be
able to raise additional financing, or that the Company will be able to enter
into licensing or other collaborative arrangements on favorable terms, if at
all, or, if funded, that the required development and testing will be
successfully completed and result in safe and effective commercial products for
human use.
LICENSING, MARKETING AND SALES -- DOCOSANOL CREAM
Licensing
The Company has established certain contractual relationships with
respect to the licensing and distribution of docosanol cream assuming it
receives FDA marketing approval. The Company has established and will continue
to seek to establish other relationships because it does not have all the
necessary resources to carry out all aspects of commercialization of docosanol
cream. To successfully commercialize docosanol cream worldwide or to develop
other products, the Company will need to enter into various collaborative and/or
licensing arrangements with pharmaceutical or biotechnology companies. Such
arrangements will likely include assistance in funding the costs of development
and clinical testing necessary to obtain regulatory approvals for new products
and the subsequent costs of manufacturing and marketing, should additional
potential products successfully pass through the various stages of development.
Further, the Company believes that collaborative arrangements will be necessary
in certain market segments in promoting and distributing its products, in view
of the Company's limited resources and the extensive marketing networks and
large advertising budgets of established companies. Such third-party
arrangements, however, will reduce the Company's profit margin on its products.
In November 1991, the Company entered into a licensing agreement with
Yamanouchi for the clinical development, manufacturing, marketing and
distribution of docosanol cream in certain European and other countries. On
December 31, 1998, the agreement will convert from exclusive to non-exclusive
and the Company has a right to select additional partners in the countries
covered by this agreement. At present, Yamanouchi management believes docosanol
cream is more suitable in many of the European countries as an over-the-counter
("OTC") product. Yamanouchi is currently seeking a partner or sublicensee with
OTC experience to continue commercialization efforts for the product.
In July 1993, the Company entered into a licensing agreement with CTS
Chemical Industries, Ltd.
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<PAGE> 33
("CTS"), a subsidiary of CTS Ltd., located in Kiryat Malachi, Israel, for the
promotion of docosanol cream in Israel, including obtaining governmental
approvals for its manufacture and distribution. Separate clinical trials in
Israel are not required for marketing approval, however, the Company expects CTS
will keep its marketing plans on hold until further progress is made by the
Company with the FDA. See "Research and Development -- Docosanol Cream."
In July 1994, the Company entered into a licensing agreement with
Boryung Pharmaceuticals Company, Ltd. located in Seoul, Korea, for the promotion
of docosanol cream in the Republic of Korea, including obtaining governmental
approvals for its manufacture and distribution. In Korea, certain local clinical
trials, in addition to clinical data generated in the U.S., Canada and Europe,
are required in order to apply for marketing approval. Boryung plans to initiate
the local clinical trials following approval in the U.S. See "Research and
Development -- Docosanol Cream."
In October 1994, the Company entered into a licensing agreement with
Grelan Pharmaceutical Company, Ltd. ("Grelan") located in Tokyo, Japan, for the
promotion of docosanol cream in Japan, including obtaining governmental
approvals for its manufacture and distribution. To apply for marketing approval
in Japan, complete Phase 1, 2 and 3 clinical trials, conducted in Japan, are
required. To date local clinical trials have not been initiated. During 1997,
Takeda Chemical Industries acquired a majority interest in Grelan; thereafter,
Grelan restructured its research department and was no longer in a position to
advance the development of the product in a timely manner. On June 30, 1998, the
Company and Grelan mutually agreed to terminate the license agreement. The
Company plans to seek a new licensee in Japan following U.S. approval of
docosanol cream.
In February 1996, the Company entered into an exclusive license and
distribution agreement with Bristol-Myers Squibb Company ("BMS"), under which
BMS received the rights to manufacture, market and distribute docosanol cream as
a topical treatment for oral herpes in the U.S., Canada and all remaining major
territories throughout the world which were not licensed to other parties
including Mexico, China, South and Central America, Australia and India, and
portions of the Far East. In November 1996, the Company reacquired the rights to
market docosanol cream in all territories except the U.S., Canada and Mexico. On
December 29, 1997, the BMS agreement was canceled by BMS.
The Company is currently discussing licensing agreements for docosanol
cream in the territories not covered by the above agreements with other
pharmaceutical companies. In the event docosanol cream is approved by the FDA,
the Company's licensing partners will use the U.S. FDA approval in the
regulatory filings required for marketing and distribution in the specific
territories. The Company anticipates that these regulatory filings will be
prepared timely, however, there is no assurance that marketing approval for
topical docosanol cream by the FDA in the U.S. or by comparable regulatory
agencies elsewhere in the world will result in a level of sales sufficient to
sustain Company operations. See "Risk Factors".
Marketing and Sales -- United States
Pending evaluation of the FDA Decision and possible courses of action,
the Company intends to build an integrated sales and marketing force and/or
enter into co-promotion agreements to market and sell docosanol cream as a
prescription product if approved by the FDA. As of the date of the receipt of
the FDA Decision, the Company had already increased its staff with the addition
of a Vice President of Sales and Marketing in preparation of the potential
product launch. See "Executive Officers".
The Company has engaged the services of an advertising agency to
produce advertising and promotional materials in preparation for possible
product launch. The Company has also engaged a public
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<PAGE> 34
relations firm to help execute a consumer and professional public relations
campaign designed to increase awareness of the disease of oral-facial herpes.
The timing of these potential marketing efforts is uncertain at present in light
of the FDA Decision. Furthermore, there can be no assurance that the Company
will ultimately be able develop effective advertising or increase awareness of
the disease or that patients will seek medical treatment or select the Company's
product. Neither can there be any assurance that the Company will be able to
establish a sufficient sales force, secure co-promotion or additional license
agreements on favorable terms or raise sufficient additional financing necessary
to (i) conduct the additional clinical trials which may be required by the FDA
with respect to docosanol cream or (ii) both market docosanol cream and continue
the Company's other drug discovery and development programs currently underway.
MANUFACTURING, WAREHOUSING AND DISTRIBUTION -- DOCOSANOL CREAM
The Company has established manufacturing, warehousing and distribution
agreements in preparation for approval from the FDA regarding the approval of
its NDA for marketing docosanol cream. On December 22, 1998, the Company
received a letter from the FDA stating that the NDA for docosanol cream was "not
approvable" and that additional evidence is needed to substantiate the drug's
effectiveness. Until further discussions are held with the FDA, all of these
agreements will remain in place to maintain readiness for product launch
assuming the discussion with the FDA are successful. See "Business -- General".
In October 1998, the Company selected CONDEA Chemie GmbH ("CONDEA") as
manufacturer of n-docosanol by placing a purchase order with CONDEA Vista
Company, a U.S. affiliate of CONDEA Chemie GmbH for an initial quantity of
product. CONDEA is the name under which RWE-DEA AG of Hamburg, Germany, conducts
its global chemical activities. It is intended that, CONDEA will manufacture the
active ingredient at their plant in Brunsbettel, Germany.
Also in October 1998, the Company signed a warehousing, distribution
and logistical support agreement with Livingston Healthcare Services Inc.
("LHSI"). Under the agreement, LHSI's Decatur, Georgia facility will warehouse
and distribute the Company's active ingredient n-docosanol and the end product
docosanol cream, when and if it is marketed.
In November 1998, the Company signed a manufacturing agreement to
produce docosanol cream with Bausch and Lomb (Pharmaceutical Division) at its
Tampa Bay, Florida facility. Bausch and Lomb Pharmaceutical Division produces a
variety of prescription drug and over-the-counter products on a contract basis
for many pharmaceutical companies.
COMPETITION
The pharmaceutical industry is characterized by rapidly evolving
technology and intense competition. Many companies of all sizes, including major
pharmaceutical companies and specialized biotechnology companies, are engaged in
activities similar to those of the Company. Many of the Company's competitors
have substantially greater financial and other resources and larger research and
development and regulatory approval staffs. In addition, colleges, universities,
governmental agencies and other public and private research organizations will
continue to conduct research and are becoming more active in seeking patent
protection and licensing arrangements to collect royalties for use of technology
that they have developed, some of which may be directly competitive with that of
the Company. In addition, these institutions compete with commercial firms, such
as the Company, in recruiting highly qualified scientific personnel. The Company
does not have the resources to compete with major pharmaceutical companies on a
wide scale basis in the areas of clinical testing, regulatory approvals,
manufacturing and marketing. See "Licensing, Marketing and Sales -- Docosanol
Cream" and "Government Regulations."
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<PAGE> 35
The Company's first proposed product, docosanol cream, if ultimately
marketed, will compete with acyclovir (Zovirax(R)) and valacyclovir (Valtrex(R))
products marketed by Glaxo-Wellcome Corp., and famciclovir (Famvir(R)) and
penciclovir (Denavir(R)), products marketed by SmithKline Beecham, and
over-the-counter preparations. There can be no assurance that docosanol cream,
when and if marketed, will gain widespread acceptance by the medical community
or consumer market.
The Company's IgE modulation program seeks to identify novel compounds
useful in the treatment of allergy and asthma. There are several competing
research approaches and numerous compounds in development by large
pharmaceutical and biotechnology companies, as well as very successful marketed
compounds such as loratadine (Claritin(R)) from Schering-Plough and astemizole
(Hismanal(R)) from Johnson & Johnson. There is no assurance that the Company's
IgE modulation program will be successful in developing a safe and effective
drug or that the Company can obtain marketing approval by the FDA. Moreover,
there can be no assurance that any resulting drug will be superior to
competitors or gain widespread acceptance in the marketplace.
PATENTS AND PROPRIETARY RIGHTS
The Company owns six U.S. and three European patents and has additional
U.S. and foreign patent applications pending relating to the topical and
systemic uses of docosanol and has been granted rights under certain U.S. and
foreign patents and patent applications relating to docosanol held by third
parties. In addition, pursuant to the Settlement Agreement with Medical Biology
Institute (the "MBI Settlement Agreement") discussed below, the Company has been
granted rights to certain U.S. and foreign patents and patent applications
related to hu-PBL-SCID technologies. The MBI Settlement Agreement requires the
Company to pay the costs of pursuing and obtaining patents on the licensed
technology and any improvements thereto. The MBI Settlement Agreement requires
MBI to release all claims to docosanol and IgE. See "Research and Development"
and "Settlement Agreement with Medical Biology Institute." U.S. and foreign
patent applications have been, or will be, filed related to IgE.
There can be no assurance that the claims in the pending patent
applications will issue as patents, that any issued patents will provide the
Company with significant competitive advantages, or that challenges will not be
instituted against the validity or enforceability of any patent owned by the
Company or, if instituted, that such challenges will not be successful. The cost
of litigation to uphold the validity and prevent infringement of the Company's
patents could be substantial. Furthermore, there can be no assurance that others
will not independently develop similar technologies or duplicate the Company's
technologies or design around the patented aspects of the Company's
technologies. There is no assurance that the Company's proposed technologies
will not infringe patents or other rights owned by others, licenses to which may
not be available to the Company. Finally, the National Institutes of Health
(NIH) regulations provide that if federally-funded institutions do not timely
pursue patent applications for patentable inventions, the government can
exercise its right to own such inventions.
The process for the approval of patent applications in foreign
countries may differ significantly from the process in the U.S. Approval in one
country does not necessarily indicate that approval can be obtained in other
countries. The patent authorities in each country administer that country's laws
and regulations relating to patents independently of the laws and regulations of
any other country and the patents must be sought and obtained separately.
In some cases, the Company may rely on trade secrets and
confidentiality agreements to protect its innovations. There can be no assurance
that trade secrets will be established, or that secrecy obligations will
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<PAGE> 36
be honored, or that others will not independently develop similar or superior
technology. To the extent that consultants, key employees or other third parties
apply technological information independently developed by them or by others to
Company projects, disputes may arise as to the proprietary rights to such
information which may not be resolved in favor of the Company.
PRODUCT LIABILITY
The testing, marketing and sale of pharmaceutical products entails a
risk of product liability claims by consumers and others. Claims may be asserted
against the Company by end users of any of the Company's proposed products which
may be developed. The Company has obtained product liability insurance coverage
in the amount of $2,000,000 per incident and in aggregate for its clinical
trials and, although the Company will attempt to obtain additional product
liability insurance prior to marketing any of its proposed products, there is no
assurance that the Company will be able to obtain such insurance or, if
obtained, that such insurance can be acquired at a reasonable cost or will be
sufficient to cover all possible liabilities. In the event of a successful suit
against the Company, lack or insufficiency of insurance coverage could have a
material adverse effect on the Company. Further, certain distributors of
pharmaceutical products require minimum product liability insurance coverage as
a condition precedent to purchasing or accepting products for distribution.
Failure to satisfy such insurance requirements could impede the ability of the
Company to achieve broad distribution of its proposed products, which would have
a material adverse effect upon the business and financial condition of the
Company.
GOVERNMENT REGULATIONS
The manufacture and sale of pharmaceutical products under development
by the Company are subject to extensive regulation by the FDA in the U.S. and by
comparable regulatory agencies in certain foreign countries. The FDA has
established guidelines and safety standards which are applicable to the
preclinical evaluation and clinical investigation of therapeutic products and
stringent regulations which govern the manufacture and sale of such products.
The process of obtaining FDA approval for a new therapeutic product,
such as docosanol cream, usually takes a significant amount of time and
substantial resources. The steps typically required before such a product can be
produced and marketed for human use include nonclinical evaluation in vitro and
in animal models including extensive toxicology. Preclinical studies are
conducted in order to obtain preliminary information on the safety and efficacy
of a drug. The results of such preclinical studies may be submitted to the FDA
as part of an Investigational New Drug (IND) application. The sponsor of an IND
may not commence human testing of the compound until being notified by the FDA
(usually within 30 days of submission of the application) that the FDA has
activated the IND.
The human clinical testing program for a drug may involve three phases.
Phase 1 investigations are conducted on either normal volunteers or on
volunteers with a terminal disease (such as cancer) to determine the maximum
tolerated doses and any side effects of the product. Phase 2 studies are
conducted on limited numbers of patients with the disease or condition to be
treated and are aimed at determining (i) the most effective doses and schedule
of administration, and (ii) whether the product demonstrates therapeutic
effectiveness against the disease. Phase 3 studies involve wide-scale,
well-controlled investigations on diseased patients and are aimed at verifying
the safety and effectiveness of the drug in a rigorously controlled trial. Data
from phase 1, phase 2, and phase 3 trials, as well as all nonclinical studies
and evidence of cGMP manufacturing processes are submitted to the FDA in an NDA.
The FDA's Center for Drug Evaluation and Research (CDER) or Center for Biologics
Evaluation and Research (CBER) must approve an NDA or Biologics License
Application for a drug before the drug may be marketed in the U.S.
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<PAGE> 37
At such time, if ever, that the Company begins marketing its products
for commercial sale in the U.S., any manufacturing operations which may be
established within or outside the U.S. will be subject to rigorous regulation,
including the need to comply with current Good Manufacturing Practices. See
"Manufacturing, Warehousing, and Distribution -- Docosanol Cream". The Company
may also be subject to regulation under the Occupational Safety and Health Act,
the Environmental Protection Act, the Toxic Substance Control Act, Export
Control Act and other present and future laws of general application.
Additionally, the handling, care and use of laboratory mice, such as the
hu-PBL-SCID mice, and rats is subject to the Guidelines for the Humane Use and
Care of Laboratory Animals published by the NIH.
The Company currently intends to seek approval to market its products
in foreign countries, which may have regulatory processes that materially differ
from that of the FDA. The Company anticipates that it will rely upon the
pharmaceutical or biotechnology companies to which it has licensed or may
license its products, or independent consultants, to seek approvals to market
its products in foreign countries. There can be no assurance that approvals to
market any of the Company's products can be obtained in any country. Approval to
market a product in any one foreign country does not necessarily indicate that
approval can be obtained in other countries.
SETTLEMENT AGREEMENT WITH MEDICAL BIOLOGY INSTITUTE ("MBI")
In October 1988, the Company entered into an exclusive license
agreement (the "MBI License Agreement") with Medical Biology Institute, a
non-profit research organization incorporated in California in 1981 to conduct
interdisciplinary basic research in biological sciences. MBI was founded by the
former Chief Executive Officer of the Company, David H. Katz, M.D., who served
as president, Chief Executive Officer and a director of MBI until May 14, 1998.
Since inception of the MBI License Agreement, several technologies
developed at MBI were transferred to AVANIR for further development and
potential commercialization. These included: (i) the SCID mouse model for
creating reconstituted human immune systems, (ii) the IgE program for creating
therapies for allergies and asthma, and (iii) the protein sequence analysis drug
discovery method. See "Research and Development".
In 1998, disputes over rights to docosanol cream and other matters
ensued between MBI and the Company, resulting in a Settlement Agreement and
Mutual General Release on August 27, 1998 ("the MBI Settlement Agreement"),
which provides for the Company to retain all rights to its lead therapeutic
product, docosanol cream, other applications of the product, and other
technologies. In return for obtaining full control of the Company's technologies
and avoidance of potential future royalty payments, the Company loaned $500,000
to MBI and returned other technologies that no longer fit the Company's
long-term strategic plans. The loan will be forgiven by the Company, subject to
certain loan covenants to be maintained by MBI over a 180-day period ending
February 23, 1999. See "Notes to the Financial Statements".
HUMAN RESOURCES
At January 14, 1999, the Company employed 31 persons, of whom 18 were
engaged in research and development activities, clinical and regulatory affairs,
and business development activities and 13 in finance, sales and marketing and
administrative functions. The Company's staff includes 9 employees with Ph.D.
degrees.
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<PAGE> 38
PROPERTIES
The Company currently subleases approximately 12,000 square feet of
laboratory and office space at 9393 Towne Centre Drive in San Diego, California
for a base annual rent of approximately $270,000.
LEGAL PROCEEDINGS
On April 30, 1998, Dr. David Katz filed a Complaint for Declaratory
Relief (the "Katz Complaint") against the Company seeking to overturn certain
actions of the Company. Dr. Katz seeks a declaration of the court that the
action of the Board to terminate his employment as president is null and void.
His Complaint also seeks a declaration that the election of Gerald Yakatan,
Ph.D. as a director and as the president and chief executive officer is void;
that the Company's Proxy Settlement Agreement with HealthMed, Inc. ("HealthMed")
likewise is void; that unspecified Board actions be set aside. The Katz
Complaint further seeks an injunction to preserve his stock options and a
declaration that Class B Common Stock (returned to Dr. Katz incident to a
rescission of his personal transactions with HealthMed) is restored to Class B
Voting Rights. See Note 2 to the Financial Statements. Additionally, the Katz
Complaint seeks a determination that the termination of his employment was not
"for cause," which would entitle him to certain severance benefits. Finally, Dr.
Katz seeks an accounting for personal funds he allegedly advanced to the
Company, and he asks for an award of unspecified money damages for emotional
distress and defamation.
On December 21, 1998, Dr. Katz amended his complaint and added a claim
for specific performance of an alleged option right to acquire certain shares of
Class B Common Stock. In this amended pleading, Dr. Katz's wife, Lee R. Katz was
added as a plaintiff. Mrs. Katz formerly was employed by the Company, and she
alleges the Company breached her grant of options to acquire Class B Common
Stock. She also has joined with Dr. Katz in seeking declaration of the court
that they have rights to certain IgE technology, and those rights are superior
to the rights of the Company. Dr. Katz also alleges that the Company breached an
agreement to reimburse him for certain personal attorney fees.
On October 30, 1998, the Company filed a cross-complaint against Dr.
Katz seeking recovery of compensatory and punitive damages for his breach of
fiduciary duties as a director and officer of the Company. Acting pursuant to
Dr. Katz' agreements with the Company, the cross-complaint also asks that the
Court order Dr. and Mrs. Katz to assign any interest they may possess in a
pending patent application pertaining to the Company's proprietary IgE
down-regulation technology.
Neither the Company nor its counsel is able to express an opinion on
the likely outcome of the lawsuits with Dr. Katz, but the Company intends to
defend the claims from, and pursue its claims against, Dr. Katz' vigorously. The
Court has scheduled a trial in this matter to begin on June 18, 1999, and the
parties currently are engaged in discovery and trial preparation.
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<PAGE> 39
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages at
January 14, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gerald J. Yakatan, Ph.D(1) 56 President and Chief Executive Officer
Gregory P. Hanson 52 Vice President, Finance and Chief Financial Officer
and Secretary (Principal Financial and Accounting
Officer)
J. David Hansen 48 Vice President, Sales and Marketing
Timothy R. Russell 56 Vice President, Business Development and Licensing
James E. Berg 47 Vice President, Clinical and Regulatory Affairs
George P. Rutland (1*)(2)(4*) 66 Chairman of the Board
Dennis J. Carlo, Ph.D.(3*)(4) 55 Director
Michael W. George(2) 50 Director
Edward L. Hennessy, Jr.(3) 70 Director
David H. Katz, M.D. 55 Director
Kenneth E. Olson(1)(2*)(3)(4) 62 Director
Stuart A. Samuels(1) 57 Director
Joseph E. Smith (1)(3) 59 Director
</TABLE>
- --------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Executive Compensation and Stock Option Committee.
(4) Member of the Nominating Committee.
(*) Committee Chairman
Dr. Gerald J. Yakatan has served the Company as President and Chief
Executive Officer and a Director since March 1998. Prior to that, Dr. Yakatan
served on a half-time basis as Vice President of Drug Development since July
1995. Dr. Yakatan also serves as Chairman of IriSys Research & Development, LLC,
a company he founded in 1996 specializing in contract drug formulation
development services. From 1990 until 1995, Dr. Yakatan served as President and
Chief Executive Officer of San Diego based Tanabe Research Laboratories, USA,
Inc., an inflammation drug discovery research and development company. From 1987
until 1990, Dr. Yakatan was Executive Vice President for Research and
Development, and Vice President of Pharmaceutical Development at Immunetech
Pharmaceuticals, the predecessor company to Tanabe Research. From 1980 to 1987,
Dr. Yakatan held various positions at Warner-Lambert Co., initially joining the
Warner-Lambert/ Parke-Davis Pharmaceutical Research Division as Director,
Pharmacokinetics/Drug Metabolism and later serving as Vice President of Product
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<PAGE> 40
Development for the Pharmaceutical Research Division. From 1972 to 1980, Dr.
Yakatan was on the faculty of the University of Texas at Austin and Assistant
Director of the Drug Dynamics Institute at the College of Pharmacy. Dr. Yakatan
has over 60 scientific and professional publications in the areas of
pharmacokinetics, biopharmaceutics, analysis of drugs in biological fluids and
drug stability. He is a Fellow of the American Association of Pharmaceutical
Scientists and the American College of Clinical Pharmacology. Dr. Yakatan
received his B.S. in Pharmacy in 1963 and M.S. in Pharmaceutical Chemistry in
1965 from Temple University. In 1971, Dr. Yakatan received his Ph.D. in
Pharmaceutical Sciences from the University of Florida.
Mr. Gregory P. Hanson has served as Vice President, Finance and
Chief Financial Officer (CFO) and Secretary of the Company since July 1998. From
September 1995 to July 1998 Mr. Hanson served as CFO of XXsys Technologies Inc.,
a composite materials technology company. From May 1993 to September 1995, Mr.
Hanson held a number of financial positions within The Titan Corporation, a
diversified telecommunications and information technology company, including
acting CFO and acting Controller for its subsidiary, Titan Information Systems.
From January 1992 to May 1993, Mr. Hanson served as CFO of Onsite Energy, a
contract energy services company. From February 1990 to December 1991, Mr.
Hanson was CFO for Catrel USA, a waste resource recovery company. Prior to 1989
he held management positions with Ford Motor Company and Solar Turbines
Incorporated (a Caterpillar subsidiary). Mr. Hanson has a B.S. degree in
Mechanical Engineering from Kansas State University and an M.B.A. degree from
the University of Michigan. He is a Certified Management Accountant and has
passed the examination for Certified Public Accountants.
Mr. J. David Hansen has served as Vice President, Sales and Marketing
since September 1998. From December 1989 to September 1998, Mr. Hansen held
various management positions at Dura Pharmaceuticals, San Diego, California,
including Senior Director, Strategic Sales Systems; National Sales Director,
Director of Business Development and Director of Marketing. From April 1988 to
November 1989, Mr. Hansen was Marketing Manager for Immunetech Pharmaceuticals,
San Diego. From April 1981 to March 1988, he held various managerial positions
in sales in Schering/Key Pharmaceuticals, Kennilworth, New Jersey. From February
1976 to March 1981 he was a territory representative for E.R. Squibb & Sons,
Princeton, New York. Mr. Hansen graduated with honors from the University of
Oregon, with a B.S. degree in Chemistry in June 1974.
Mr. Timothy R. Russell has served as Vice President, Business
Development and Licensing since September 1992. Mr. Russell also serves as
President of Carlsson-Rensselaer Corporation, a licensing and development
consulting company which he founded in 1990. Mr. Russell currently devotes less
than 5% of his time to the Carlsson-Rensselaer Corporation. Prior to 1990, Mr.
Russell held various positions in McNeil Pharmaceuticals, a subsidiary of
Johnson & Johnson, including serving as a board member (1983- 1990), Vice
President of Corporate Relations (1986-1990), Vice President of Business
Development (1983-1986) and other business development and planning functions
(1975-1983). Mr. Russell has served as a director of Barton & Pittinos, an
advertising agency, and Scandipharm, Inc., a pharmaceutical company. He is a
member of the Licensing Executives Society, American Association for the
Advancement of Science, and the Reserve Officers Association. Mr. Russell
received a B.S. degree in Engineering in 1964 from Rensselaer-Polytechnic
Institute and a M.B.A. in 1987 from the Wharton School of the University of
Pennsylvania.
Mr. James E. Berg has served as Vice President, Clinical and Regulatory
Affairs since March 1997. From August 1992 to March 1997, Mr. Berg was Director
of Clinical Affairs and Product Development. Prior to joining the Company, Mr.
Berg was employed by QUIDEL Corporation from April 1984 until August 1992, where
he held positions as Product Development Manager, Director of Materials;
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<PAGE> 41
National Accounts Manager for Allergy and IgE Products and Regional Manager,
Autoimmune Products. From March 1979 to April 1984, Mr. Berg was the Sales
Manager, Eastern U.S. and Canada, at Krupp Bilstein Corporation of America, Inc.
Mr. Berg received his B.A. degree from the University of Wisconsin in 1973.
Mr. George P. Rutland has served as Chairman of the Board and a
Director of the Company since June 1998. Mr. Rutland is Chairman, Chief
Executive Officer and a Director of Taipan Corporation since 1995, a management
consulting and investing company, and is also a director of Hemet Federal Bank.
Mr. Rutland served as Chairman, President and Chief Executive Officer of
Northeast Federal Corporation and Northeast Savings Bank in Hartford,
Connecticut from 1988 until 1994. From 1993 to 1994, was Chairman and Chief
Executive Officer and a Director of American Custody Corporation. Mr. Rutland
also served as President and Chief Executive Officer and a Director of CalFed,
Inc. (from 1982 to 1988), and Vice Chairman and a Director of California Federal
Bank (from 1982 to 1988);as Senior Executive Vice President of Crocker National
Bank (from 1975 to 1982) and as Senior Vice President of Citibank (from 1954 to
1975)..
Dr. Dennis J. Carlo has served as a Director of the Company since June
1998. Dr. Carlo is a Co-founder and a Director of Immune Response Corporation
since 1987 and its President and Chief Executive Officer since 1994. From 1987
to 1994, Dr. Carlo served as its Chief Scientific Officer, Chief Operating
Officer and Executive Vice President. From 1982 to 1987, Dr. Carlo served as
Vice President of Research and Development and Therapeutic Manufacturing at
Hybritech, Inc., a biotechnology company acquired in 1986 by Eli Lilly & Co.,
and currently serves as a Director of Vyrex Corporation. From 1971 to 1981, Dr.
Carlo held various positions at Merck & Co., Inc.
Mr. Michael W. George has served as a Director of the Company since
June 1998. Mr. George is the President and Chief Operating Officer and a member
of the Board at UroCor, Inc. since August 1998. From August 1989 to August 1998,
Mr. George served in positions at Dupont Merck as the Executive Vice President,
Administration, Member of the Operating Group and Senior Vice President,
Cardiovasculars, at Dupont (June 1997 to August 1998), President, International
& Europe (January 1994 to December 1996), President, North America (January 1992
to December 1993), Vice President, Sales and Marketing (January 1991 to December
1991) and Director, Worldwide Marketing (August 1989 to December 1990). Prior to
August 1989, Mr. George held positions as a Product Manager at Bristol-Myers
Squibb and Sandoz Pharmaceuticals.
Mr. Edward L. Hennessy, Jr. has served as a Director of the Company
since June 1998. Mr. Hennessy is the former Chairman and Chief Executive Officer
of Allied-Signal, Inc. from 1979 to 1991, and currently serves as a Director of
The Wackenhut Corporation and NAI Technologies.
Dr. David H. Katz has served as a Director of the Company since its
inception (August 1988). Dr. Katz served as the Company's Chief Executive
Officer and as its President from inception until October 1989 and from March
1992 to March 4, 1998. Dr. Katz was the founder of Medical Biology Institute, a
non-profit research organization, serving as its President and Chief Executive
Officer from its inception in 1981 and a director from April 1990 to May 1998.
Dr. Katz was founder of Quidel Corporation, a San Diego based biotechnology
company serving as its Chairman of the Board and Chief Executive Officer from
inception in 1981 through March 1985, and as its Chairman of the Board and Chief
Scientific Officer through March 1998. From 1976 to 1981, Dr. Katz was Chairman
of the Department of Cellular and Developmental Immunology at Scripps Clinic and
Research Foundation.
Mr. Kenneth E. Olson has served as a Director of the Company since
August 1988. Since July 1984, Mr. Olson has been Chairman of the Board of
Proxima Corporation, a supplier of display projection
- 39 -
<PAGE> 42
systems for professional desktop computers. Mr. Olson also serves as Chief
Executive Officer of Proxima Corporation (December 1990 to February 1996 and
March 1997 to present).
Mr. Stuart A. Samuels has served as a Director of the Company since
April 1992. Mr. Samuels has been a pharmaceutical industry consultant since
1990. Mr. Samuels was affiliated with the Rorer Group from 1986 to 1990 where he
held positions of Senior Vice President, Rorer Pharmaceutical Corporation, and
General Manager of Rorer Pharmaceuticals, and President of Dermik Laboratories,
both divisions of Rorer Pharmaceuticals Corporation.
Mr. Joseph E. Smith has served as a Director of the Company since June
1998. Mr. Smith served in various capacities at Warner-Lambert (including
President of Pharmaceutical (Parke-Davis) from March 1989 to September 1997 and
President of Shaving Products (Schick and Wilkinson Sword), retiring in
September 1997 as Corporate Vice-President at Warner-Lambert, and was a member
of the Office of the Chairman and the firm's Management Committee). Mr. Smith
currently serves as a Director of Boren, LePore, and Associates, Inc.,Vivus,
Inc. and Roberts Pharmaceutical Corporation.
Dr. Katz may be deemed a "founder" of the Company within the meaning of
the Securities Act and the rules and regulations promulgated thereunder.
Three (the "Class I Directors") of the Company's nine directors are to
be elected at the Annual Meeting to be held on February 19, 1999. The Board has
nominated Messrs. Michael W. George, James B. Glavin, and Dr. Gerald J. Yakatan
to serve as Class I Directors of the Company to hold office until the 2002
Annual Meeting of Shareholders. The remaining six directors, the Class II and
Class III Directors, hold office until the 2000, and 2001 Annual Meetings,
respectively. The current Class II Directors are Dr. Dennis J. Carlo, and
Messrs. Edward L. Hennessy, Jr., and Stuart A. Samuels. The current Class III
Directors are Messrs. George P. Rutland (Chairman of the Board), Kenneth E.
Olson and Joseph E. Smith. Officers serve at the discretion of the Board subject
to rights, if any, under contracts of employment.
The California General Corporation Law permits a corporation through
its Articles of Incorporation to eliminate the personal liability of its
directors to the corporation or its shareholders for monetary damages for breach
of fiduciary duty of loyalty and care as a director, with certain exceptions.
The exceptions include a breach of the director's duty of loyalty, acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of law, improper declarations of dividends, and transactions from
which the directors derived an improper personal benefit. The Company's Articles
of Incorporation exonerates its directors from monetary liability to the fullest
extent permitted by this statutory provision. The Company has also purchased and
maintained directors and officers insurance coverage in the aggregate amount of
$7,500,000 since August 1992. The insurance policies indemnify the Company's
officers and directors against certain liabilities and expenses which they may
incur in their capacities as officers and directors of the Company.
The Company has been advised that it is the position of the Securities
and Exchange Commission that insofar as the foregoing provision may be invoked
to disclaim liability for damages arising under the Securities Act, that
provision is against public policy as expressed in the Securities Act and is
therefore unenforceable.
- 40 -
<PAGE> 43
COMPENSATION OF OFFICERS
SUMMARY OF COMPENSATION
The following executive compensation disclosures reflect all
compensation awarded to, earned by or paid to the named executive officers of
the Company for the fiscal years ended September 30, 1998, 1997 and 1996. The
named executive officers (the "Named Executive Officers") are the Company's
Chief Executive Officer, regardless of compensation level, and the other
executive officers of the Company who received in excess of $100,000 in total
annual salary and bonus for Fiscal 1998. Gerald J. Yakatan was appointed
President and Chief Executive Officer of the Company on March 4, 1998, following
the termination of David H. Katz as the Company's President and Chief Executive
Officer.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
------------------------------------------
Annual Compensation Awards Payouts
---------------------------------- -------------------------- -------------
Restricted
Other Annual Stock Securities All Other
Salary Bonus Compensation Awards Underlying Compensation
Name and Principal ------- ----- ------------ ------- Options/ LTIP ------------
Position Year ($)(2) ($) ($) ($)(3) SARs(#)(4) Payouts($)(5) ($)
- ----------------------- ------ ------- ----- --- ------- -------- -------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gerald J. Yakatan(1) .. 1998 222,461 -- -- -- 300,000 -- --
President and Chief 1997 111,693 -- -- -- 15,000 -- --
Executive Officer 1996 104,723 -- -- -- 25,000 -- --
Timothy R. Russell ..... 1998 180,116 -- -- -- 10,000 -- --
Vice President of 1997 177,031 -- -- -- 15,000 -- --
Business Development 1996 168,046 -- -- -- 25,000 -- --
and Licensing
James E. Berg .......... 1998 117,673 -- -- -- 25,000 -- --
Vice President of 1997 110,792 -- -- -- 25,000 -- --
Clinical and 1996 99,705 -- -- -- 3,000 -- --
Regulatory Affairs
David H. Katz, M.D.(6).. 1998 130,154 -- -- -- -- -- --
Former President and 1997 232,200 -- -- -- 30,000 -- --
Chief Executive 1996 228,000 -- -- -- -- -- --
Officer
Jeffery B. Weinress(7).. 1998 110,640 -- -- -- 100,000 -- --
Former Vice President 1997 -- -- -- -- -- -- --
and Chief Financial 1996 -- -- -- -- -- -- --
Officer
</TABLE>
(1) Dr. Yakatan's salary for 1996, 1997 and until March 1998 was based on
allocating 50% of his time to the Company and 50% of his time to other
endeavors while he was employed as the Company's Vice President of Drug
Development. Commencing with his employment as President and Chief
Executive Officer on March 4, 1998, Dr. Yakatan's salary was raised to
$300,000 for full-time service.
(2) Amounts shown include compensation earned and received by Named
Executive Officers. No amounts were earned but deferred at the election
of those officers.
(3) The Company has not made any Restricted Stock Awards.
(4) The Company has not made any grants of SARs.
(5) The Company has not made any Long Term Incentive Plan ("LTIP") Payouts.
- 41 -
<PAGE> 44
(6) Dr. Katz's employment with the Company terminated on March 4, 1998. For
the periods listed, his salary was based on allocating 75% of his time
to the Company. See "Employment Contracts, Retention Agreements and
Termination of Employment Agreements".
(7) Mr. Weinress served as Vice President, Chief Financial Officer from
November 3, 1997 to July 10, 1998.
STOCK OPTION GRANTS
The following table shows all individual grants of stock options
to the Named Executive Officers during Fiscal 1998.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Percent of
Total Potential Realizable Value at
Options/SARs Exercise Assumed Annual Rates of
Granted to or Base Appreciation For
Options/SARs Employees in Price Expiration Option Terms(3)
Name Granted (#)(1) Fiscal Year ($/SH)(2) Date 5% 10%
- ---- -------------- ------------ ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Gerald J. Yakatan 300,000 44% $1.81 3/13/08 $341,961 $866,597
Timothy R. Russell 10,000 1% $1.28 7/10/08 $ 8,050 $ 20,400
James E. Berg 25,000 4% $1.28 7/10/08 $ 20,125 $ 51,000
David H. Katz(4) -- -- -- -- --
Jeffery B. Weinress(5) 100,000 15% $2.28 5/31/99 $143,482 $363,612
</TABLE>
(1) These options vest over three years, with one-third vesting on the
first anniversary of the date of grant, and the remaining two-thirds
vesting during the next two years on a daily basis. Vesting may be
accelerated and the options may be repriced at the discretion of the
Board. In the event of a specified corporate transaction such as a
dissolution, merger or other reorganization of the Company in which
more than 50% of the Company's stock is exchanged, vesting on such
options shall be accelerated unless the surviving corporation assumes
the options outstanding, substitutes similar rights for outstanding
options, or the options shall continue.
(2) Market price on date of grant.
(3) The potential realizable value is calculated by assuming that the stock
price on the date of grant appreciates at the indicated rate,
compounded annually, for the entire term of the option and that the
option is exercised and sold on the last day of its term at this
appreciated stock price.
(4) Dr. Katz's employment with the Company terminated on March 4, 1998.
During Fiscal 1998, Dr. Katz was granted stock options as a director.
See "Executive Compensation" above.
(5) Mr. Weinress served as Vice President, Chief Financial Officer from
November 3, 1997 to July 10, 1998. Of the 100,000 options noted above,
20,000 options had vested as of the date of termination. Such options
are exercisable through May 31, 1999. The calculation above is based on
the 100,000 options granted in Fiscal 1998.
- 42 -
<PAGE> 45
OPTION EXERCISES IN FISCAL 1998
Set forth below is information with respect to exercises of stock
options by the Named Executive Officers during Fiscal 98 and the fiscal year-end
value of all unexercised stock options held by such persons.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED,
OPTIONS HELD AT FISCAL IN-THE-MONEY OPTIONS
YEAR-END(#) AT FISCAL YEAR-END($)(1)
---------------------------- --------------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gerald J. Yakatan --- --- 326,996 113,004 -- --
Timothy R. Russell --- --- 198,909 21,091 -- --
James E. Berg --- --- 102,565 21,435 $ 1,500 --
David H. Katz --- --- 2,202,000 10,000 $417,188 --
Jeffery B. Weinress --- --- 20,000 --- --- --
</TABLE>
(1) Based upon the closing bid price of the Company's Common Stock of
$1.125 quoted on the NASDAQ National Market System on September 30,
1998.
EMPLOYMENT CONTRACTS, RETENTION AGREEMENTS, AND
TERMINATION OF EMPLOYMENT ARRANGEMENTS
In March 1998, the Company entered into an employment agreement with
Dr. Gerald J. Yakatan, the Company's President and Chief Executive Officer. Dr.
Yakatan's employment agreement provides that Dr. Yakatan's employment with the
Company is "at-will," subject to the discretion of the Board, Dr. Yakatan's
annual base salary is $300,000, and he is eligible for a discretionary incentive
bonus. Dr. Yakatan received a grant of 300,000 stock options pursuant to the
1994 Option Plan, at an exercise price equal to $1.8125 (the fair market value
of the Company's Class A Common Stock on the date of the grant), of which
103,389 consisted of non-qualified stock options and 196,611 consisted of
incentive stock options. Stock options exercisable into 100,000 shares of Class
A Common Stock vest immediately, with the remainder of the stock options vesting
in four equal annual increments of 50,000 per year on the anniversary date of
Dr. Yakatan's employment, commencing on March 4, 1999.
In the event of a Change of Control Termination (as defined below) in
the first three years of Dr. Yakatan's employment, or in the event Dr. Yakatan
is otherwise terminated without cause as defined in the agreement, Dr. Yakatan
is eligible for severance in an amount equal to twelve (12) months of base
salary paid over a twelve (12) month period in exchange for his execution of a
release of all claims effective as of the termination date. In the event of a
termination without cause of the employment relationship or in the event of a
Change of Control Termination which occurs after the first year of employment,
vesting of the unvested options described above will be accelerated to include
options that would otherwise have vested had Dr. Yakatan remained an employee of
the Company for an additional twelve (12) months. In the event of a "Change of
Control Termination" of the employment relationship in the first year of
employment, vesting of the options described above will be accelerated to
include options that would otherwise have
- 43 -
<PAGE> 46
vested had Dr. Yakatan remained an employee of the Company for an additional
twenty four (24) months. In the event of a Change of Control Termination within
Dr. Yakatan's first year of employment, upon Dr. Yakatan's request, he will have
up to twelve (12) months following the date of termination to exercise any
vested options. In the event of any other termination of Dr. Yakatan's
employment, Dr Yakatan's vested options will be exercisable in all respects in
accordance with the terms of the 1994 Option Plan.
In April 1993, the Company entered into an employment agreement with
David H. Katz, M.D. (the "1993 Employment Agreement"), which replaced the prior
employment agreement between Dr. Katz and the Company dated September 9, 1988,
as amended on September 19, 1989 and October 8, 1989, respectively (the "1988
Employment Agreement"). On March 4, 1998, David H. Katz, M.D. was terminated for
cause as President and Chief Executive Officer of the Company. The 1993
Employment Agreement provided that Dr. Katz's employment with the Company was on
an "at will" basis, subject to the discretion of the Board, for an annual base
salary of $207,692. Dr. Katz's salary was based on allocating 75% of his time to
the Company and 25% to the Medical Biology Institute. Dr. Katz's salary was
reviewed by the Compensation Committee of the Board of the Company from time to
time to determine, within the Board's discretion, whether an increase was
appropriate. In March 1994 and June 1997, the board increased Dr. Katz's annual
base salary to $228,000 and $240,000, respectively. Dr. Katz was also entitled
to all benefits generally available to the Company's employees. Under the 1993
Employment Agreement, in the event that Dr. Katz had been terminated for any
reason other than cause, Dr. Katz would have been entitled to receive a
severance payment in the amount of his annual base salary, payable over twelve
months. Dr. Katz has filed a lawsuit seeking a determination that his
termination was not "for cause." See "Certain Relationships and Transactions."
In April 1998, the Company entered into Retention Agreements (the
"Retention Agreements") with certain of its vice presidents and certain director
level employees, including Messrs. Berg and Russell. In the event of a
termination of the employee's employment within one (1) year of execution of the
agreement related to a "Change of Control Termination," as defined below, (1)
the employee is eligible for severance in an amount equal to twelve (12) months
of base salary, plus cost of health insurance, paid over a twelve (12) month
period in exchange for his execution of a release of all claims effective as of
the termination date.
For purposes of both Dr. Yakatan's employment agreement and the
Retention Agreements, "Change of Control Termination" of the employment
relationship occurs where the employee is (i) terminated without "Cause" or (ii)
"Resigns for Good Reason," within twelve (12) months following a "Change of
Control." "Change of Control" is defined to have occurred if, and only if,
during the applicable period: (1) any individual, partnership, firm,
corporation, association, trust, unincorporated organization or other entity or
person, or any syndicate or group deemed to be a person under Section 14(d)(2)
of the Exchange Act is or becomes the "Beneficial Owner" (as defined in Rule
13d-3 of the General Rules and Regulations under the Exchange Act), directly or
indirectly, of securities of the Company representing 50% or more of the
combined voting power of the Company's then outstanding securities entitled to
vote in the election of directors of the Company; (2) the following persons
cease to constitute a majority of the Board: (a) individuals who constituted the
Board at the beginning of the Term (the "Incumbent Directors"); (b) individuals
(the "New Directors") who were elected by, or whose nomination for election by
the Company's shareholders was approved by a majority of the Incumbent
Directors; and (c) individuals who were elected by, or whose nomination for
election by the Company's shareholders was approved by, a majority of the
Incumbent Directors and the New Directors still serving as
- 44 -
<PAGE> 47
Board Members at the time of such election; (3) there occurs a reorganization,
merger, consolidation or other corporate transaction involving the Company
("Transaction"), in each case, with respect to which the shareholders of the
Company immediately prior to such Transaction do not, immediately after the
Transaction, own more than fifty percent (50%) of the combined voting power of
the Company or other corporation resulting from such Transaction; or (4) all or
substantially all of the assets of the Company are sold, liquidated or
distributed. "Resignation for Good Reason" is defined as resignation based on
(1) a meaningful and detrimental alteration in the employee's position or the
nature or status of the employee's responsibilities and reporting relationship
from those in effect upon execution of the agreement; (2) the assignment to the
employee of any duties inconsistent with his status as an executive officer of
Company; (3) a reduction by the Company in the employee's base salary by greater
than five percent (5%), except to the extent the base salaries of other
executive officers of the Company are accordingly reduced; (4) a relocation of
the employee's or the Company's principal executive offices t a location outside
San Diego County, if the employee's principal office is at such offices, without
reimbursement of relocation costs; and (5) any other conduct which satisfies the
requirements for "constructive termination" as that term is defined under
California law.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
David H. Katz, who served as President and Chief Executive Officer
until March 4, 1998 and currently serves as a director of the Company, was also
President and Chief Executive Officer of MBI until May 14, 1998. (see
"Employment Contracts, Retention Agreements and Termination of Employment
Arrangements", above). On April 30, 1998, Dr. Katz filed a Complaint for
Declaratory Relief (the "Katz Complaint") against the Company seeking to
overturn certain actions of the Company. The Katz Complaint seeks various relief
including (i) a declaration of the court that the action taken by the Board to
terminate his employment as President is null and void; (ii) a declaration that
the election of Gerald J. Yakatan, Ph.D., as a Director and as the President and
Chief Executive Officer is void; (iii) a declaration that 234,000 shares of
Class A Common Stock (returned to Dr. Katz incident to a rescission of his
personal transactions with HealthMed) is restored to Class B Voting Rights, (see
Footnote 4 to "Principal Shareholders"); (iv) a determination that the
termination of his employment was not "for cause," which would entitle him to
certain severance benefits, and (v) an accounting of personal funds he allegedly
advanced to the Company, and an award of unspecified money damages for emotional
distress and defamation.
On October 30, 1998, the Company filed a cross-complaint against Dr.
Katz seeking recovery of, among other things, compensatory and punitive damages
for his breach of fiduciary duties as a director and officer of the Company.
On August 27, 1998, the Company reached a Settlement Agreement and
Mutual General Release with Medical Biology Institute (the "MBI Settlement
Agreement") to settle all outstanding disputes between the two companies,
specifically including the disputed ownership to the Company's proprietary
therapeutic compound, docosanol cream as well as other technologies. The MBI
Settlement Agreement provides for the Company to retain all rights to docosanol
cream and certain other technologies. In return for obtaining full control of
the Company's technologies and avoidance of potential future royalty payments,
the Company loaned $500,000 to MBI and returned other technologies that no
longer fit the Company's long-term strategic plans. The loan will be forgiven by
the Company, subject to certain loan covenants to be maintained by MBI over a
180-day period.
- 45 -
<PAGE> 48
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership (as defined by Rule 13d-3 under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) of the Company's voting shares (Class
A Shares and Class B Shares) as of January 14, 1999 by: (i) each director,
nominee and named executive officer of the Company; (ii) all current executive
officers and directors of the Company as a group; and (iii) each person or
"group" of persons (as defined under Section 13(d)(3) of the Exchange Act) known
by the Company to own beneficially 5% or more of the outstanding shares or
voting power of the Company's voting securities. The table is based upon
information supplied by directors, officers and principal shareholders. Unless
otherwise indicated, each of the listed persons has sole voting and sole
investment power with respect to the Shares beneficially owned, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
Amount and Percent of
Nature of Total
Name and Address of Beneficial Beneficial Percent of Voting
Title of Class Owner or Identity of Group(1) Ownership(2) Class(2) Power(3)
-------------------------- ----------------------------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Class A Common Stock David H. Katz(4)(5) 3,441,193 7.97% 11.73%
Class B Common Stock 375,000 88.44%
Class A Common Stock George P. Rutland(6) 232,500 * *
Class B Common Stock -- -0-
Class A Common Stock Edward L. Hennessy, Jr.(7) 60,000 * *
Class B Common Stock -- -0-
Class A Common Stock Kenneth E. Olson(8)(9) 242,733 * *
Class B Common Stock 16,000 24.62%
Class A Common Stock Stuart A. Samuels(10) 48,333 * *
Class B Common Stock -- -0-
Class A Common Stock 322,470 *
Class B Common Stock Gerald J. Yakatan(11) -- -0- *
Class A Common Stock Dennis J. Carlo(12) 10,000 * *
Class B Common Stock -- -0-
Class A Common Stock Michael W. George(13) 10,000 * *
Class B Common Stock -- -0-
Joseph E. Smith(14) *
Class A Common Stock 10,000 *
Class B Common Stock -- -0-
Class A Common Stock Timothy R. Russell(15) 229,970 * *
Class B Common Stock -- -0-
Class A Common Stock James E. Berg(16) 106,807 * *
Class B Common Stock -- -0-
Class A Common Stock J. David Hansen(17) 5,000 * *
Class B Common Stock -- -0-
Class A Common Stock Gregory P. Hanson(18) 4,000 * *
Class B Common Stock -- -0-
Class A Common Stock All officers and directors as 4,723,006 10.71%
Class B Common Stock a group (ten persons)(19)(20)) 391,000 88.86% 14.43%
</TABLE>
- 46 -
<PAGE> 49
* Percentage of shares beneficially owned does not exceed 1%.
(1) The address for all persons shown, except Dr. Katz, is c/o AVANIR
Pharmaceuticals, 9393 Towne Centre Drive, Suite 200, San Diego,
California 92121. The address for Dr. Katz is 1775 La Jolla Rancho
Road, La Jolla, California 92037.
(2) Based upon 40,941,292 shares of Class A Common Stock and 49,000 shares
of Class B Common Stock outstanding as of January 14, 1999. The
percentage ownership and voting power for each shareholder (or all
directors and executive officers as a group), is calculated by assuming
the exercise or conversion of all warrants, options and convertible
securities exercisable or convertible within 60 days of January 14,
1999 held by such shareholder and the nonexercise and nonconversion of
all other outstanding warrants, options and convertible securities. See
Footnote 5, below.
(3) Percentage of total voting power is based upon total cumulative voting
power of Class A Common Stock and Class B Common Stock combined as of
January 14, 1999 Each share of Class A Common Stock entitles the holder
to one vote per share on matters to be voted on by shareholders; each
share of Class B Common Stock entitles the holder to five votes per
share on matters to be voted on by shareholders. The percentage
ownership and voting power for each shareholder (or all directors and
executive officers as a group), is calculated by assuming the exercise
or conversion of all warrants, options and convertible securities
exercisable or convertible within 60 days of January 14, 1999 held by
such shareholder and the nonexercise and nonconversion of all other
outstanding warrants, options and convertible securities.
(4) Includes 1,196,003 shares of Class A Common Stock held by Dr. Katz and
2,000 shares held by his wife, options to purchase 1,827,000 shares of
Class A Common Stock and 386,190 shares of Class A Common Stock
issuable upon the exercise of Class D Warrants and options to purchase
30,000 shares of Class A Common Stock held by his wife. Does not
include options to purchase 10,000 shares of Class A Common Stock which
are not exercisable within 60 days of January 14, 1999.
In Amendment No. 2 to Schedule 13D dated September 3, 1998 (the
"Schedule 13D Amendment No. 2"), filed by Dr. Katz with the Securities
and Exchange Commission (the "SEC"), Dr. Katz stated that he and his
wife (collectively, the "Katz Parties") entered into a Settlement and
Rescission Agreement to settle certain litigation with Mitchell J.
Stein, HealthMed, Inc. ("HealthMed"), National Trust Properties and the
Trammel Trust (collectively, the "HealthMed Parties") relating to the
Stock Purchase Agreement, the Purchase Rights Agreement, the Voting
Trust Agreement, each dated January 12, 1998, between Dr. Katz and
HealthMed, and the Promissory Note entered into between Dr. Katz and
HealthMed on January 12, 1998 (collectively the "Katz Agreements") as
described in Amendment No. 1 to Schedule 13D filed by Dr. Katz, dated
March 27, 1998. Pursuant to the terms of the Settlement and Rescission
Agreement ("Settlement Agreement") and related court order, the Katz
Agreements have been rescinded in their entirety as between the
parties. Dr. Katz has taken the position that one effect of the
Settlement Agreement is that 234,000 shares of Common Stock (which had
converted into Class A Common Stock at the date the Katz Agreements
were executed by operation of the Company's Articles of Incorporation
which require such conversion upon transfer of Class B Shares into
trust) should be reinstated to Class B Shares. The Company has informed
Dr. Katz that it disagrees with his claim that these Class A Shares
should be reclassified to Class B Shares based on its interpretation of
its Articles of Incorporation. (These shares are referred to below as
the "Disputed Class A Shares.") Dr Katz is seeking a judicial
determination of his rights to Class B Shares (in lieu of the Disputed
Class A Shares) under the Company's Articles of Incorporation. If Dr.
Katz obtains a determination in his favor in advance of the Annual
Meeting, the Company intends to provide to Dr. Katz the voting rights
he would have enjoyed had he held these Class B Shares on the Record
Date of the Annual Meeting. The effect of such a determination could
increase Dr. Katz's voting rights by as much as 936,000 votes and his
beneficial ownership to as high as 14%. Dr. Katz has further stated in
his Amendment No. 3 to Schedule 13D dated September 18, 1998 ("Schedule
13D Amendment No. 3") that he is the beneficial owner of 3,264,096
Class A Shares and 619,000 Class B Shares. Of that total, he states
that he has the sole power to vote and dispose of 3,215,193 Class A
Shares and 609,000 Class B Shares, and that his wife has the sole power
to
- 47 -
<PAGE> 50
vote and dispose of 46,903 Class A Shares and 10,000 Class B Shares.
The Schedule 13D Amendment No. 3 reports the 234,000 Disputed Class A
Shares as Class B Shares in the number of Class B Shares Dr. Katz
reports as beneficially owned. As discussed above, the Company treats
these shares as outstanding shares of Class A Common Stock.
Additionally, Dr. Katz's filing appears to include canceled options to
purchase 40,000 and 14,952 shares of Class A Common Stock issued to Dr.
Katz and his wife, respectively, and 10,000 canceled options to
exercise Class B Common Stock issued to his wife. It is the Company's
position that such options have been canceled because the options were
not exercised within the defined exercise period specified by the stock
option plans following the termination dates of employment.
(5) Includes options to purchase 375,000 Class B Shares granted under Dr.
Katz's employment agreement. On June 1, 1998, Dr. Katz gave notice to
the Company of his intent to exercise these options. However, Dr. Katz
previously signed a commitment letter to the Company in June 1996 in
which he agreed not to exercise these options until an adequate number
of Class B Shares were available. Dr. Katz maintains, however, that
this letter agreement was signed with the understanding that the
Company would obtain authorization for the requisite additional shares
needed at the next (1997) annual shareholders meeting, which was not
done. On November 20, 1998, the Board approved Proposal Four as
described above, to amend the Company's Articles of Incorporation to
reapportion the allocation of the authorized number of shares of common
stock to allow for a sufficient number of shares of Class B Common
Stock underlying all Class B stock options. See Proposal Four.
(6) Includes 222,500 shares of Class A Common Stock over which Mr. Rutland
exercises sole voting and investment power, and options to purchase
10,000 shares of Class A Common Stock. Does not include options to
purchase 25,000 shares of Class A Common Stock which are not
exercisable within 60 days of January 14, 1999.
(7) Includes 50,000 shares of Class A Common Stock and options to purchase
10,000 shares of Class A Common Stock. Does not include options to
purchase 25,000 shares of Class A Common Stock which are not
exercisable within 60 days of January 14, 1999.
(8) Includes 36,400 shares of Class A Common Stock and options to purchase
206,333 shares of Class A Common Stock. Does not include options to
purchase 16,667 shares of Class A Common Stock which are not
exercisable within 60 days of January 14, 1999.
(9) Includes 16,000 options to purchase shares of Class B Common Stock.
(10) Includes options to purchase 48,333 shares of Class A Common Stock.
Does not include options to purchase 16,667 shares of Class A Common
Stock which are not exercisable within 60 days of January 14, 1999.
(11) Includes 37,500 shares of Class A Common Stock and options to purchase
284,970 shares of Class A Common Stock. Does not include options to
purchase 155,030 shares of Class A Common Stock which are not
exercisable within 60 days of January 14, 1999.
(12) Includes options to purchase 10,000 shares of Class A Common Stock.
Does not include options to purchase 25,000 shares of Class A Common
Stock which are not exercisable within 60 days of January 14, 1999.
(13) Includes options to purchase 10,000 shares of Class A Common Stock.
Does not include options to purchase 25,000 shares of Class A Common
Stock which are not exercisable within 60 days of January 14, 1999.
- 48 -
<PAGE> 51
(14) Includes options to purchase 10,000 shares of Class A Common Stock.
Does not include options to purchase 25,000 shares of Class A Common
Stock which are not exercisable within 60 days of January 14, 1999.
(15) Includes 25,000 shares of Class A Common Stock and options to purchase
204,970 shares of Class A Common Stock. Does not include options to
purchase 15,030 shares of Class A Common Stock which are not
exercisable within 60 days of January 14, 1999.
(16) Includes options to purchase 106,807 shares of Class A Common Stock.
Does not include options to purchase 32,193 shares of Class A Common
Stock which are not exercisable within 60 days of January 14, 1999
(17) Includes 5,000 shares of Class A Common Stock. Does not include options
to purchase 100,000 shares of Class A Common Stock which are not
exercisable within 60 days of January 14, 1999.
(18) Includes 4,000 shares of Class A Common Stock. Does not include options
to purchase 100,000 shares of Class A Common Stock which are not
exercisable within 60 days of January 14, 1999.
(19) Includes 1,578,403 shares of Class A Common Stock, options to purchase
2,758,413 shares of Class A Common Stock and 386,190 shares issuable
upon the exercise of Class D Warrants. Does not include 570,587 options
to purchase Class A Common Stock not exercisable within 60 days of
January 14, 1999.
(20) Includes options to purchase 391,000 shares of Class B Common Stock.
SELLING SECURITYHOLDERS
The following table sets forth the names of Selling Securityholders who
are known as of the date of this Prospectus to be eligible to resell the common
stock reserved for issuance upon conversion or exercise of the Securities. The
following table also sets forth the number of shares of Class A Common Stock
issuable upon conversion or exercise of the Securities held by the Selling
Securityholders as of the date of this Prospectus. Moreover, the amounts of
common stock listed below assume that all such shares currently held in the form
of options are exercised and are subsequently sold, regardless of whether any
such individuals have a present intent to sell.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF CLASS A
COMMON STOCK ISSUABLE UPON
CONVERSION OR EXERCISE OF THE
NAME SECURITIES
- ----------------------- -----------------------------
<S> <C>
Jeffrey S. Aaron 40,000
Joseph Arsenault 73,333
Virginia Bahler 13,333
Don Baker 13,333
Oscar Boonshoft 13,333
Harold R. Cunningham 66,667
</TABLE>
- 49 -
<PAGE> 52
<TABLE>
<CAPTION>
NUMBER OF SHARES OF CLASS A
COMMON STOCK ISSUABLE UPON
CONVERSION OR EXERCISE OF THE
NAME SECURITIES
- ----------------------- -----------------------------
<S> <C>
Christian Fiechter 13,333
Gregory Gomes 80,001
Robert B. Grindley 26,667
Robert P. Hauptfuhrer 26,667
Peter W. Janssen 28,334
Irwin D. Kaplan 5,000
David H. Katz(1) 1,281,193
James R. Kelleher 13,333
Allan R. Koretz 26,667
Irwin H. Markowitz, Trustee Irwin H. Markowitz
DDS Retirement Fund 26,667
John W. Marriott III 26,667
Richard U. Mascera 13,333
Ernest E. Miller 80,001
Alfred B. Muirhead, Jr. 13,333
James T. O'Hara 26,667
Prudential Securities 13,333
Wallace O. Raubenheimer 106,668
William Richmond 40,000
Thomas C. Rowan, Trustee for the benefit of
Thomas C. Rowan and Gail D. Rowan 133,335
Michael I. Ruxin 13,333
Victor Shamieh 6,999
Samir Shamieh 6,666
Donna K. Vito 13,333
J. Edward Willard 80,001
Porter J. Womeldorff 13,333
Robert A. Woods 13,333
</TABLE>
- 50 -
<PAGE> 53
<TABLE>
<CAPTION>
NUMBER OF SHARES OF CLASS A
COMMON STOCK ISSUABLE UPON
CONVERSION OR EXERCISE OF THE
NAME SECURITIES
- ----------------------- -----------------------------
<S> <C>
Richard F. & Barbara A. Zaccagni 13,333
TOTAL 2,361,537
</TABLE>
- -------------
(1) Dr. Katz is a director and former President and Chief Executive Officer
of the Company. The amount listed does not include options to purchase
1,837,000 shares of Class A Common Stock and 375,000 shares of Class B
Common Stock; nor does the amount include options to purchase 30,000
shares of Class A Common Stock held by a member of his family. See
"Principal Shareholders."
To the Company's knowledge, except for David H. Katz, none of the
foregoing persons, after the sale of all shares of Class A Common Stock offered
hereby, would own more than 1% of the aggregate of the Company's outstanding
shares of Class A Common Stock and Class B Common Stock at January 14, 1999, as
adjusted to include the 1,387,869 shares of Class A Common Stock to be issued
upon the conversion and exercise of the Securities. Specifically, Dr. Katz
beneficially owned 3,816,193 shares of Common Stock prior to this Offering
(8.75% of the aggregate outstanding common stock), and will own 2,468,000 shares
of common stock after this Offering (5.71% of the aggregate outstanding common
stock).
PLAN OF DISTRIBUTION
The Class A Common Stock issuable to the Selling Securityholders upon
conversion or exercise of the Securities may be offered and sold from time to
time as market conditions permit in the over-the-counter market, or otherwise,
at prices and terms then prevailing or at prices related to the then current
market price, or in privately negotiated transactions. At the date of this
Prospectus, no underwriting arrangements have been entered into by the Selling
Securityholders. The shares offered hereby may be sold by one or more of the
following methods, without limitation: (a) a block trade in which a broker or
dealer so engaged will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (b)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (c) ordinary brokerage transactions
and transactions in which the broker solicits purchasers; and (d) face-to-face
transactions between sellers and purchasers without a broker-dealer. In
effecting sales, brokers or dealers engaged by the Selling Securityholders may
arrange for other brokers or dealers to participate. Such brokers or dealers may
receive commissions or discounts from Selling Securityholders in amounts to be
negotiated. Such brokers and dealers, any other participating brokers or
dealers, and the Selling Securityholders, may be deemed to be "underwriters"
within the meaning of the Securities Act in connection with such sales and any
profits realized or commissions received may be deemed underwriting
compensation.
The Company will pay certain expenses incident to this Offering and
sale of the securities offered hereby to the public by the Selling
Securityholders. The Company will not pay for, among other expenses, commissions
and discounts of underwriters, dealers or agents or the fees and expenses of
counsel for the Selling Securityholders, if any.
- 51 -
<PAGE> 54
DESCRIPTION OF SECURITIES
COMMON STOCK
General. The Company is authorized to issue 99,490,000 shares of Class
A Common Stock, no par value, 40,941,292 of which were issued and outstanding at
January 14, 1999, and 510,000 shares of Class B Common Stock, no par value,
49,000 of which were issued and outstanding at January 14, 1999. There is
currently a dispute between the Company and Dr. Katz regarding the number of
shares of Class B Common Stock he holds. (See Footnote 4 to "Principal
Shareholders"). In the event it is ultimately decided that the 234,000 shares
Dr. Katz claims to be Class B Common Stock are so, the outstanding shares of
Class A Common Stock and Class B Common Stock would be adjusted to 40,707,292
and 283,000, respectively.
Holders of Class A Common Stock and Class B Common Stock have equal
rights to receive dividends when, as and if declared by the Board out of funds
legally available therefor.
Holders of Class A Common Stock have one vote for each share held of
record and holders of Class B Common Stock have five votes for each share held
of record on all matters to be voted on by the shareholders. The Class A Common
Stock and Class B Common Stock vote as one class on all matters requiring
shareholder approval except that under California law the affirmative vote of a
majority of the outstanding shares of Class A Common Stock and a majority of the
outstanding shares of Class B Common Stock, each voting separately as a class,
is required for any amendment to the Company's Articles of Incorporation which
would alter or change the powers, preferences or special rights of, or increase
or decrease the number of shares of, or create a new class or series of shares
having rights, preferences or privileges prior to, each respective class of the
Company's common stock.
Holders of both classes of common stock are entitled upon liquidation
of the Company to share ratably in the net assets available for distribution
subject to the rights, if any, of holders of any preferred stock then
outstanding. Shares of both classes of common stock are not redeemable and have
no preemptive or similar rights. The Class B Common Stock may be converted into
Class A Common Stock on a share for share basis at any time at the election of
the holder and will automatically convert into Class A Common Stock upon sale or
transfer other than to another holder of Class B Common Stock.
Dividend Policy. The Company does not anticipate paying cash dividends
on its common stock in the foreseeable future.
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of preferred
stock containing such rights, preferences, privileges and restrictions as the
Board may determine. As of January 14, 1999, there were no shares of preferred
stock outstanding.
CONVERTIBLE NOTE DUE 2000
On February 26, 1997, the Company issued a Convertible Note Payable in
the amount of $6.0 million as part of a private placement to an institutional
investor (the "1997 Note"). Between October 1, 1998 and October 30, 1998, the
Company issued 1,091,213 shares of Class A Common Stock and 545,607 Class G
Stock Purchase Warrants from the conversion of the $1.0 million remaining
principal balance of
- 52 -
<PAGE> 55
the 1997 Note at September 30, 1998. The Company has no further obligations
under the 1997 Note. See Note 3 to the financial statements.
WARRANTS
Class D Warrants. Each of the Class D Warrants entitles the respective
holders thereof to purchase one share of Class A Common Stock at an exercise
price of $1.50 from the date of issuance until 5:00 p.m., New York City Time,
through June 30, 1999. The Class D Warrants are redeemable by the Company on 30
days' written notice at a redemption price of $0.05 per Class D Warrant, if the
closing price of the Class A Common Stock for any 30 consecutive trading days
ending within 15 days of the notice of redemption averages in excess of $3.45
per share. All Class D Warrants must be redeemed if any are redeemed. As of
January 14, 1999, 1,387,869 Class D Warrants were outstanding.
General. The Class D Warrants were issued pursuant to warrant
agreements under which American Stock Transfer & Trust Company, New York, New
York serves as warrant agent. The warrants are evidenced by warrant certificates
in registered form. The warrants provide for adjustment of the exercise price
and for a change in the number of shares issuable upon exercise or market price
to protect holders against dilution in the event of a stock dividend, stock
split, combination or reclassification of the common stock or upon issuance of
shares of common stock at prices lower than the warrant exercise price then in
effect other than issuances upon exercise of options granted to employees,
directors and consultants to the Company, or options to be granted under the
Company's stock option plan.
The exercise prices of all outstanding warrants were determined by
negotiation between the Company and its previous underwriters, and should not be
construed to be predictive of or to imply that any price increases in the
Company's securities will occur or be sustained.
A warrant may be exercised upon surrender of the warrant certificate on
or prior to its expiration date (or earlier redemption date) at the offices of
American Stock Transfer & Trust Company, New York, New York, with the form of
"Election to Purchase" on the reverse side of the warrant certificate completed
and executed as indicated, accompanied by payment of the full exercise price (by
certified or bank check payable to the order of the Company) for the number of
shares with respect to which the warrant is being exercised. Shares issued upon
exercise of warrants and payment in accordance with the terms of the warrants
will be fully paid and nonassessable.
The Company has agreed not to solicit exercises of the Class D Warrants
other than through Whale Securities Co., L.P. ("Whale"). Upon exercise of the
Class D Warrants, the Company will pay Whale a fee of 5% of the aggregate
exercise price, if (i) the market price of the Company's Class A Common Stock on
the date the warrant is exercised is greater than the then exercise price of the
warrant; (ii) the exercise of the warrant was solicited by a member of the
National Association of Securities Dealers, Inc.; (iii) the warrant is not held
in a discretionary account; (iv) disclosure of compensation arrangements was
made both at the time of the offering and at the time of exercise of the warrant
and (v) the solicitation of exercise of the warrant was not in violation of Rule
10b-6 promulgated under the Securities Exchange Act of 1934, as amended.
No warrants confer upon any warrantholder any voting or other rights of
a shareholder of the Company. Upon notice to the warrantholders, the Company has
the right to reduce the exercise price or extend the expiration date of the
warrants.
- 53 -
<PAGE> 56
Class G Stock Purchase Warrants. The Company has reserved for issuance
3,628,733 shares of Class A Common Stock in connection with the issuance of
Class G Stock Purchase Warrants upon conversion of the 1997 Note. Each Class G
Stock Purchase Warrant entitles the holder thereof to purchase one share of
Class A Common Stock at an exercise price of $2.97 per share. The Class G Stock
Purchase Warrants expire five years from the date of issuance. As of January 14,
1999, there were 2,030,455 Class G Stock Purchase Warrants outstanding. The
Company has no further obligation under the 1997 Note and accordingly, no
additional Class G Stock Purchase Warrants will be issued.
Class H Stock Purchase Warrants. Each Class H Stock Purchase Warrant
entitles the holder hereof to purchase one share of Class A Common Stock at an
exercise price of $2.40. Such warrants expire on February 26, 2002. As of
January 14, 1999, there were 100,000 Class H Stock Purchase Warrants
outstanding.
TRANSFER AGENT AND WARRANT AGENT
American Stock Transfer & Trust Company, New York, New York currently
serves as transfer agent for the Common Stock and warrant agent for the Class D
Warrants.
REGISTRATION RIGHTS
The Company has registered under the Securities Act the shares of Class
A Common Stock underlying the Class D Warrants pursuant to registration rights
previously granted. The Company has agreed to use its best efforts to keep such
registration effective until all of such shares of Class A Common Stock are sold
pursuant to such registration, or an opinion of counsel satisfactory to the
Company is received that the shares may be sold under the provisions of Rule
144(k) under the Securities Act.
In March 1994, the Company also registered under the Securities Act the
Class A Common Stock underlying certain options granted in July 1993 ("July 1993
Options") on a Form S-3 Registration Statement. The Company has agreed to keep
such registration statement effective during the ten year term of the exercise
of the July 1993 Options.
In April 1997, the Company also registered 10,986,200 shares of Class A
Common Stock consisting of (i) 7,257,467 shares of Class A Common Stock to be
issued in connection with the conversion of the 1997 Note, (ii) 3,628,733 shares
of Class A Common Stock to be issued in connection with the exercise of Class G
Purchase Warrants, and (iii) 100,000 shares of Class A Common Stock to be issued
in connection with the exercise of Class H Stock Purchase Warrants.
LEGAL MATTERS
The validity of the securities offered hereby have been passed upon for
the Company by Musick, Peeler & Garrett, San Diego, California.
EXPERTS
The financial statements of the Company as of September 30, 1997 and
1998 and for each of the three years in the period ended September 30, 1998 and
for the period from August 31, 1988 (inception) to September 30, 1998, included
in the Prospectus have been audited by Deloitte & Touche LLP, independent
- 54 -
<PAGE> 57
auditors, as stated in their report appearing herein (which report expresses an
unqualified opinion and includes explanatory paragraphs relating to the status
of the Company as a development stage enterprise, the Company's ability to
continue as a going concern, and the Company as a defendant in certain
lawsuits), and have been so included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange
Act, and in accordance therewith files reports and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and other information filed by the Company with the Commission in accordance
with the Exchange Act may be inspected and copied at the public reference
facilities of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: 7 World Trade Center, Suite 1300, New York, New York 10048 and at
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661.
Copies of such material can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
In addition, such material concerning the Company can be inspected at the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on
Form S-1 under the Securities Act, with respect to the Common Stock offered
hereby. As permitted by the rules and regulations of the Commission, this
Prospectus, which is part of the Registration Statement, omits certain
information, exhibits, schedules and undertakings set forth in the Registration
Statement. For further information pertaining to the Company and the Common
Stock, reference is made to such Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents or
provisions of any documents referred to herein are not necessarily complete, and
in each instance, reference is made to the copy of the document filed as an
exhibit to the Registration Statement. The Registration Statement may be
inspected without charge at the office of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of the Registration Statement may be
obtained from the Commission at prescribed rates from the Public Reference
Section of the Commission at such address, and at the Commission's regional
offices located at 7 World Trade Center, Suite 1300, New York, New York 10048,
and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661.
In addition, registration statements and certain other filings made
with the Commission through its Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") system are publicly available through the Commission's site
on the Internet's World Wide Web, located at http://www.sec.gov. The
Registration Statement, including all exhibits thereto and amendments thereof,
has been filed with the Commission through EDGAR.
- 55 -
<PAGE> 58
AVANIR PHARMACEUTICALS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT................................ F-2
FINANCIAL STATEMENTS
Balance Sheets at September 30, 1997 and 1998............... F-3
Statements of Operations for the years ended September 30,
1996, 1997 and 1998, and the period August 31, 1988
(inception) to September 30, 1998......................... F-4
Statements of Stockholders' Equity (Deficit) for the period
August 31, 1988 (inception) to September 30, 1998......... F-5
Statements of Cash Flows for the years ended September 30,
1996, 1997 and 1998, and the period August 31, 1988
(inception) to September 30, 1998......................... F-12
Notes to Financial Statements............................... F-13
</TABLE>
F-1
<PAGE> 59
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
AVANIR Pharmaceuticals:
We have audited the accompanying balance sheets of AVANIR Pharmaceuticals,
formerly LIDAK Pharmaceuticals, (a development stage enterprise) (the "Company")
as of September 30, 1997 and 1998, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended September 30, 1998 and for the period August 31, 1988 (inception)
to September 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of AVANIR Pharmaceuticals at September 30, 1997
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 1998 and the period August 31,
1988 (inception) to September 30, 1998 in conformity with generally accepted
accounting principles.
As discussed in Note 6 to the financial statements, the Company is a
defendant in certain lawsuits.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is a development stage
enterprise as of September 30, 1998. As discussed in Note 1 to the financial
statements, the Company has incurred net losses since inception and has not yet
received regulatory approval for its product. These factors and the lack of
financing at September 30, 1998 raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
San Diego, California
December 24, 1998
F-2
<PAGE> 60
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1998
ASSETS
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 14,428,834 $ 6,508,341
Interest receivable....................................... 109,528 93,763
Prepaid and other......................................... 231,834 282,211
------------ ------------
Total current assets.............................. 14,770,196 6,884,315
PROPERTY -- at cost (less accumulated depreciation of
$372,951 and $400,719).................................... 219,748 251,486
PATENT COSTS (less accumulated amortization of $68,028 and
$74,813).................................................. 607,841 450,038
DEBT ISSUE COSTS............................................ 93,758 37,577
OTHER ASSETS................................................ 35,952 30,384
------------ ------------
TOTAL............................................. $ 15,727,495 $ 7,653,800
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Convertible notes payable................................. $ 2,415,461 $ 1,000,000
Accounts payable.......................................... 373,360 528,471
Accrued expenses and other liabilities.................... 392,557 325,594
Accrued compensation and payroll taxes.................... 225,493 210,420
Due to MBI................................................ 26,698
------------ ------------
Total current liabilities......................... 3,433,569 2,064,485
------------ ------------
COMMITMENTS -- (Notes 2,3,4, and 8)
STOCKHOLDERS' EQUITY:
Common stock -- no par value:
Class A -- 99,490,000 shares authorized; 38,589,399 and
39,814,017 shares issued and outstanding............. 57,551,618 59,179,721
Class B -- 510,000 shares authorized; 283,000 and
49,000 shares issued and outstanding (convertible to
Class A Common Stock)................................ 147,748 25,582
Deficit accumulated during the development stage.......... (45,405,440) (53,615,988)
------------ ------------
Total stockholders' equity........................ 12,293,926 5,589,315
------------ ------------
TOTAL............................................. $ 15,727,495 $ 7,653,800
============ ============
</TABLE>
See notes to financial statements.
F-3
<PAGE> 61
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998, AND THE PERIOD
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
AUGUST 31, 1988
YEARS ENDED SEPTEMBER 30, (INCEPTION) TO
------------------------------------------ SEPTEMBER 30,
1996 1997 1998 1998
----------- ------------ ----------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
License fees/contract services.... $ 3,016,800 $ 525,000 $ 4,507,625
Federal research grants........... 58,000 141,869 940,646
Interest and other................ 1,083,238 880,685 $ 590,728 4,691,027
----------- ------------ ----------- ------------
Total revenues............ 4,158,038 1,547,554 590,728 10,139,298
----------- ------------ ----------- ------------
EXPENSES:
Research and development.......... 4,576,426 7,627,129 3,216,167 35,232,105
General and administrative........ 2,745,166 2,958,535 4,035,337 21,270,214
Sales and marketing............... 670,697 670,697
Litigation settlement............. 783,899 783,899
Interest.......................... 2,966,687 2,071,132 95,176 5,265,101
Cost of contract services......... 533,270
----------- ------------ ----------- ------------
Total expenses............ 10,288,279 12,656,796 8,801,276 63,755,286
----------- ------------ ----------- ------------
NET LOSS............................ $(6,130,241) $(11,109,242) $(8,210,548) $(53,615,988)
=========== ============ =========== ============
NET LOSS PER SHARE.................. $ (0.19) $ (0.30) $ (0.21)
=========== ============ ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING................ 32,072,944 36,779,774 39,519,609
=========== ============ ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 62
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
---------------------------------------------- ------------------------
SERIES A SERIES B CLASS A
------------------- ------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, AUGUST 31, 1988 (INCEPTION)
Issuance of common stock for notes
receivable and cash in September
1988 at $.0125 per share..........
Issuance of preferred stock in
October 1988 for license and other
rights............................ 2,000,000 $ 1
Issuance of common stock for cash in
October 1988 at $.05 per share....
Issuance of common stock for cash in
January 1989 at $.05 per share....
Issuance of stock options effective
in August 1989 to purchase 600,000
shares of Class B common stock at
$.0125 per share (with an
estimated fair market value of
$.05 per share)...................
Issuance of common stock for cash in
September 1989 at $.0125 per share
(with an estimated fair market
value of $.05 per share)..........
Collection on notes receivable......
Net loss............................
---------- --- ---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1989......... 2,000,000 1
Conversion of advances to common
stock in October 1989 at $.50 per
share.............................
Issuance of common stock for cash in
May 1990 at $1.00 per share (net
of stock issue costs totaling
$1,033,280)....................... 5,000,000 $ 3,966,820
Issuance of common stock for cash in
June 1990 at $1.00 per share (net
of stock issue costs totaling
$97,500).......................... 750,000 652,500
Exercise of stock options in July
and August 1990 at $.50 per
share.............................
Forgiveness of compensation
obligation........................
Collection on notes receivable......
Net loss............................
---------- --- ---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1990......... 2,000,000 1 5,750,000 4,619,320
<CAPTION>
COMMON STOCK DEFICIT
---------------------- ACCUMULATED NOTES
CLASS B DURING THE RECEIVABLE
---------------------- DEVELOPMENT FROM
SHARES AMOUNT STAGE STOCKHOLDERS TOTAL
---------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE, AUGUST 31, 1988 (INCEPTION)
Issuance of common stock for notes
receivable and cash in September
1988 at $.0125 per share.......... 4,235,000 $ 52,937 $(14,525) $ 38,412
Issuance of preferred stock in
October 1988 for license and other
rights............................ 1
Issuance of common stock for cash in
October 1988 at $.05 per share.... 80,000 4,000 4,000
Issuance of common stock for cash in
January 1989 at $.05 per share.... 80,000 4,000 4,000
Issuance of stock options effective
in August 1989 to purchase 600,000
shares of Class B common stock at
$.0125 per share (with an
estimated fair market value of
$.05 per share)................... 22,500 22,500
Issuance of common stock for cash in
September 1989 at $.0125 per share
(with an estimated fair market
value of $.05 per share).......... 400,000 20,000 20,000
Collection on notes receivable...... 1,635 1,635
Net loss............................ $ (409,718) (409,718)
---------- --------- ------------ -------- -----------
BALANCE, SEPTEMBER 30, 1989......... 4,795,000 103,437 (409,718) (12,890) (319,170)
Conversion of advances to common
stock in October 1989 at $.50 per
share............................. 250,000 125,000 125,000
Issuance of common stock for cash in
May 1990 at $1.00 per share (net
of stock issue costs totaling
$1,033,280)....................... 3,966,820
Issuance of common stock for cash in
June 1990 at $1.00 per share (net
of stock issue costs totaling
$97,500).......................... 652,500
Exercise of stock options in July
and August 1990 at $.50 per
share............................. 21,500 10,750 10,750
Forgiveness of compensation
obligation........................ 66,923 66,923
Collection on notes receivable...... 12,890 12,890
Net loss............................ (2,319,231) (2,319,231)
---------- --------- ------------ -------- -----------
BALANCE, SEPTEMBER 30, 1990......... 5,066,500 306,110 (2,728,949) -- 2,196,482
</TABLE>
F-5
<PAGE> 63
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
---------------------------------------------- ------------------------
SERIES A SERIES B CLASS A
------------------- ------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Exercise of stock options in
November 1990 at $.50 per share...
Issuance of preferred stock in July
1991 for cash (net of stock issue
costs totaling $130,339).......... 960,003 $ 769,670
Conversion of common stock.......... 115,000 $ 5,750
Net loss............................
---------- --- ---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1991......... 2,000,000 $ 1 960,003 769,670 5,865,000 4,625,070
Issuance of preferred stock in
February 1992 for cash (net of
stock issue costs totaling
$428,605)......................... 4,266,680 3,571,395
Exercise of stock options in March
1992 at $.50 per share............
Exercise of Class A Warrants in May
1992 at $1.50 per share for cash
(net of stock issue costs totaling
$317,930)......................... 5,650,200 8,157,370
Conversion of common stock.......... 395,000 6,250
Net loss............................
---------- --- ---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1992......... 2,000,000 1 5,226,683 4,341,065 11,910,200 12,788,690
Exercise of Unit Purchase Options
between October 1992 and September
1993 for cash..................... 793,645 600,010
Exercise of Class A Warrants between
October 1992 and September 1993 at
$.9450 per share for cash......... 793,645 749,995
Exercise of Class B Warrants between
October 1992 and September 1993 at
$2.25 per share for cash (net of
stock issue costs totaling
$8,720)........................... 96,897 209,298
Exercise of Class C Warrants between
October 1992 and September 1993 at
$1.00 per share for cash (net of
stock issue costs totaling
$4,122)........................... 103,050 98,928
<CAPTION>
COMMON STOCK DEFICIT
---------------------- ACCUMULATED NOTES
CLASS B DURING THE RECEIVABLE
---------------------- DEVELOPMENT FROM
SHARES AMOUNT STAGE STOCKHOLDERS TOTAL
---------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Exercise of stock options in
November 1990 at $.50 per share... 2,000 $ 1,000 $ 1,000
Issuance of preferred stock in July
1991 for cash (net of stock issue
costs totaling $130,339).......... 769,670
Conversion of common stock.......... (115,000) (5,750)
Net loss............................ $ (1,949,588) (1,949,588)
---------- --------- ------------ -------- -----------
BALANCE, SEPTEMBER 30, 1991......... 4,953,500 301,360 (4,678,537) -- 1,017,564
Issuance of preferred stock in
February 1992 for cash (net of
stock issue costs totaling
$428,605)......................... 3,571,395
Exercise of stock options in March
1992 at $.50 per share............ 119,000 59,500 59,500
Exercise of Class A Warrants in May
1992 at $1.50 per share for cash
(net of stock issue costs totaling
$317,930)......................... 8,157,370
Conversion of common stock.......... (395,000) (6,250)
Net loss............................ (2,361,855) (2,361,855)
---------- --------- ------------ -------- -----------
BALANCE, SEPTEMBER 30, 1992......... 4,677,500 354,610 (7,040,392) -- 10,443,974
Exercise of Unit Purchase Options
between October 1992 and September
1993 for cash..................... 600,010
Exercise of Class A Warrants between
October 1992 and September 1993 at
$.9450 per share for cash......... 749,995
Exercise of Class B Warrants between
October 1992 and September 1993 at
$2.25 per share for cash (net of
stock issue costs totaling
$8,720)........................... 209,298
Exercise of Class C Warrants between
October 1992 and September 1993 at
$1.00 per share for cash (net of
stock issue costs totaling
$4,122)........................... 98,928
</TABLE>
F-6
<PAGE> 64
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
---------------------------------------------- ------------------------
SERIES A SERIES B CLASS A
------------------- ------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Exercise of Class D Warrants between
October 1992 and September 1993 at
$1.50 per share for cash (net of
stock issue costs totaling
$42,125).......................... 836,335 $ 1,212,376
Exercise of Class E Warrants between
October 1992 and September 1993 at
$.20 per share for cash........... 315,000 63,000
Exercise of Class F Warrants between
October 1992 and September 1993 at
$100,000 per warrant for cash..... 320,000 $ 300,000
Exercise of Preferred Stock Units
between October 1992 and September
1993 for cash..................... 96,000 90,000
Exercise of stock options in August
1993 and September 1993 at
exercise prices ranging from $0.81
to $1.53 per
share............................. 27,480 37,480
Compensation expense related to
stock options granted at an
exercise price below fair market
value............................. 163,333
Cancellation of Series A Preferred
and Class B Common Stock in July
1993.............................. (1,500,000) 28,003
Issuance of Class A Common Stock in
July 1993 in connection with
amendment to a license
agreement......................... 1,500,000 2,670,000
Conversion of preferred and common
stock............................. (100,000) (5,642,653) (4,731,065) 6,040,653 4,790,121
Cancellation of partial shares...... (30)
Net loss............................
---------- --- ---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1993......... 400,000 $ 1 -- -- 22,416,905 23,411,234
Exercise of non-redeemable Class B
Warrants in April 1994 at $1.4175
per share for cash................ 17,202 24,384
Exercise of redeemable Class B
Warrants between October 1993 and
June 1994 at $2.25 per share for
cash (net of stock issue costs
totaling $541,340)................ 4,312,060 9,160,795
<CAPTION>
COMMON STOCK DEFICIT
---------------------- ACCUMULATED NOTES
CLASS B DURING THE RECEIVABLE
---------------------- DEVELOPMENT FROM
SHARES AMOUNT STAGE STOCKHOLDERS TOTAL
---------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Exercise of Class D Warrants between
October 1992 and September 1993 at
$1.50 per share for cash (net of
stock issue costs totaling
$42,125).......................... $ 1,212,376
Exercise of Class E Warrants between
October 1992 and September 1993 at
$.20 per share for cash........... 63,000
Exercise of Class F Warrants between
October 1992 and September 1993 at
$100,000 per warrant for cash..... 300,000
Exercise of Preferred Stock Units
between October 1992 and September
1993 for cash..................... 90,000
Exercise of stock options in August
1993 and September 1993 at
exercise prices ranging from $0.81
to $1.53 per
share............................. 37,480
Compensation expense related to
stock options granted at an
exercise price below fair market
value............................. 163,333
Cancellation of Series A Preferred
and Class B Common Stock in July
1993.............................. (2,240,250) $ (28,003)
Issuance of Class A Common Stock in
July 1993 in connection with
amendment to a license
agreement......................... 2,670,000
Conversion of preferred and common
stock............................. (298,000) (59,056)
Cancellation of partial shares......
Net loss............................ $ (6,139,223) (6,139,223)
---------- --------- ------------ -------- -----------
BALANCE, SEPTEMBER 30, 1993......... 2,139,250 267,551 (13,179,615) -- 10,499,171
Exercise of non-redeemable Class B
Warrants in April 1994 at $1.4175
per share for cash................ 24,384
Exercise of redeemable Class B
Warrants between October 1993 and
June 1994 at $2.25 per share for
cash (net of stock issue costs
totaling $541,340)................ 9,160,795
</TABLE>
F-7
<PAGE> 65
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
---------------------------------------------- ------------------------
SERIES A SERIES B CLASS A
------------------- ------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Exercise of Class C Warrants between
October 1993 and September 1994 at
$1.00 per share for cash (net of
commissions totaling $4,414)...... 106,340 $ 101,926
Exercise of Class D Warrants between
October 1993 and September 1994 at
$1.50 per share for cash (net of
commissions totaling $2,875)...... 78,335 114,627
Exercise of Class F Warrants between
October 1993 and November 1993 at
$100,000 per warrant for cash..... 106,666 $ 100,000
Exercise of stock options between
October 1993 and September 1994 at
exercise prices ranging from $0.50
to $2.4375 per share.............. 113,267 156,048
Compensation expense related to
stock options granted at an
exercise price below fair market
value............................. 245,000
Issuance of Class A Common Stock in
connection with Stock Purchase
Agreement in September 1994 (net
of issue costs of $192,215)....... 522,449 1,807,785
Conversion of preferred and common
stock............................. (400,000) $(1) (106,666) (100,000) 653,416 113,911
Cancellation of Class A Common and
Class B Common Stock between
January 1994 and May 1994......... (70,000) 20,794
Cancellation of partial shares...... (3)
Net loss............................
---------- --- ---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1994......... -- -- -- -- 28,149,971 35,156,504
Exercise of non-redeemable Class B
Warrants in January and February,
1995 at $1.4175 per share for
cash.............................. 97,202 137,783
Exercise of Class C Warrants between
October, 1994 and June, 1995 at
$1.00 per share for cash (net of
commissions totaling $26,743)..... 415,600 388,857
<CAPTION>
COMMON STOCK DEFICIT
---------------------- ACCUMULATED NOTES
CLASS B DURING THE RECEIVABLE
---------------------- DEVELOPMENT FROM
SHARES AMOUNT STAGE STOCKHOLDERS TOTAL
---------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Exercise of Class C Warrants between
October 1993 and September 1994 at
$1.00 per share for cash (net of
commissions totaling $4,414)...... $ 101,926
Exercise of Class D Warrants between
October 1993 and September 1994 at
$1.50 per share for cash (net of
commissions totaling $2,875)...... 114,627
Exercise of Class F Warrants between
October 1993 and November 1993 at
$100,000 per warrant for cash..... 100,000
Exercise of stock options between
October 1993 and September 1994 at
exercise prices ranging from $0.50
to $2.4375 per share.............. 156,048
Compensation expense related to
stock options granted at an
exercise price below fair market
value............................. 245,000
Issuance of Class A Common Stock in
connection with Stock Purchase
Agreement in September 1994 (net
of issue costs of $192,215)....... 1,807,785
Conversion of preferred and common
stock............................. (146,750) $ (13,910)
Cancellation of Class A Common and
Class B Common Stock between
January 1994 and May 1994......... (1,546,500) (20,794)
Cancellation of partial shares......
Net loss............................ $ (4,813,341) (4,813,341)
---------- --------- ------------ -------- -----------
BALANCE, SEPTEMBER 30, 1994......... 446,000 232,847 (17,992,956) -- 17,396,395
Exercise of non-redeemable Class B
Warrants in January and February,
1995 at $1.4175 per share for
cash.............................. 137,783
Exercise of Class C Warrants between
October, 1994 and June, 1995 at
$1.00 per share for cash (net of
commissions totaling $26,743)..... 388,857
</TABLE>
F-8
<PAGE> 66
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
---------------------------------------------- ------------------------
SERIES A SERIES B CLASS A
------------------- ------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Exercise of Class D Warrants
between April, 1995 and
September, 1995 at $1.50 per
share for cash................... 153,335 $ 230,003
Exercise of Class E Warrants in
April and August, 1995 at $0.20
per share for cash............... 85,000 17,000
Exercise of stock options between
October, 1994 and September, 1995
at exercise prices ranging from
$0.50 per share to $3.56 per
share............................ 842,956 1,121,771
Compensation expense related to
stock options granted at an
exercise price below fair market
value............................ 129,792
Conversion of common stock......... 103,000 53,774
Net loss...........................
---------- --- ---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1995........ -- -- -- -- 29,847,064 37,235,484
Exercise of Class D Warrants
between October, 1995 and
September, 1996 at $1.50 per
share for cash................... 78,334 117,500
Exercise of Class E Warrants in
March, 1996 at $0.20 per share
for cash......................... 25,000 5,000
Issuance of Class A Common Stock in
connection with Stock Purchase
Agreement in November 1995 (net
of issue costs of $83,495)....... 481,651 1,416,505
Conversion of Convertible Notes to
Class A Common Stock between
February and September, 1996
(including interest and discount
applied of $2,263,276 and net of
issue costs of $402,268)......... 3,419,166 10,147,676
<CAPTION>
COMMON STOCK DEFICIT
---------------------- ACCUMULATED NOTES
CLASS B DURING THE RECEIVABLE
---------------------- DEVELOPMENT FROM
SHARES AMOUNT STAGE STOCKHOLDERS TOTAL
---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Exercise of Class D Warrants
between April, 1995 and
September, 1995 at $1.50 per
share for cash................... $ 230,003
Exercise of Class E Warrants in
April and August, 1995 at $0.20
per share for cash............... 17,000
Exercise of stock options between
October, 1994 and September, 1995
at exercise prices ranging from
$0.50 per share to $3.56 per
share............................ 1,121,771
Compensation expense related to
stock options granted at an
exercise price below fair market
value............................ 129,792
Conversion of common stock......... (103,000) $ (53,774)
Net loss........................... $(10,173,001) (10,173,001)
---------- --------- ------------ -------- ------------
BALANCE, SEPTEMBER 30, 1995........ 343,000 179,073 (28,165,957) -- 9,248,600
Exercise of Class D Warrants
between October, 1995 and
September, 1996 at $1.50 per
share for cash................... 117,500
Exercise of Class E Warrants in
March, 1996 at $0.20 per share
for cash......................... 5,000
Issuance of Class A Common Stock in
connection with Stock Purchase
Agreement in November 1995 (net
of issue costs of $83,495)....... 1,416,505
Conversion of Convertible Notes to
Class A Common Stock between
February and September, 1996
(including interest and discount
applied of $2,263,276 and net of
issue costs of $402,268)......... 10,147,676
</TABLE>
F-9
<PAGE> 67
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
---------------------------------------------- ------------------------
SERIES A SERIES B CLASS A
------------------- ------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Exercise of stock options between
October, 1995 and September, 1996
at exercise prices ranging from
$0.50 per share to $3.56 per
share............................. 142,807 $ 263,079
Conversion of common stock.......... 60,000 31,325
Net loss............................
---------- --- ---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1996......... -- -- -- -- 34,054,022 49,216,569
Exercise of Class D Warrants between
January and September, 1997 at
$1.50 per share for cash.......... 321,085 481,628
Exercise of Class E Warrants in
October, 1996 at $0.20 per share
for cash.......................... 75,000 15,000
Conversion of Convertible Notes to
Class A Common Stock between
October, 1996 and January, 1997
(including interest and discount
applied of $684,383 and net of
issue costs of $79,922)........... 2,093,852 3,144,577
Exercise of stock options between
October, 1996 and September, 1997
at exercise prices ranging from
$0.9375 per share to $1.0625 per
share............................. 33,800 34,564
Compensation expense related to
valuation of stock options granted
to non-employees for services
rendered.......................... 86,167
Discount on Convertible Notes issued
in February, 1997................. 1,058,823
Conversion of Convertible Note to
Class A Common Stock between June,
1997 and September, 1997
(including interest of $86,345 and
net of issue costs of $156,593)... 2,011,640 3,514,290
Net loss............................
---------- --- ---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1997......... -- -- -- -- 38,589,399 57,551,618
<CAPTION>
COMMON STOCK DEFICIT
---------------------- ACCUMULATED NOTES
CLASS B DURING THE RECEIVABLE
---------------------- DEVELOPMENT FROM
SHARES AMOUNT STAGE STOCKHOLDERS TOTAL
---------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Exercise of stock options between
October, 1995 and September, 1996
at exercise prices ranging from
$0.50 per share to $3.56 per
share............................. $ 263,079
Conversion of common stock.......... (60,000) $ (31,325)
Net loss............................ $ (6,130,241) (6,130,241)
---------- --------- ------------ -------- -----------
BALANCE, SEPTEMBER 30, 1996......... 283,000 147,748 (34,296,198) -- 15,068,119
Exercise of Class D Warrants between
January and September, 1997 at
$1.50 per share for cash.......... 481,628
Exercise of Class E Warrants in
October, 1996 at $0.20 per share
for cash.......................... 15,000
Conversion of Convertible Notes to
Class A Common Stock between
October, 1996 and January, 1997
(including interest and discount
applied of $684,383 and net of
issue costs of $79,922)........... 3,144,577
Exercise of stock options between
October, 1996 and September, 1997
at exercise prices ranging from
$0.9375 per share to $1.0625 per
share............................. 34,564
Compensation expense related to
valuation of stock options granted
to non-employees for services
rendered.......................... 86,167
Discount on Convertible Notes issued
in February, 1997................. 1,058,823
Conversion of Convertible Note to
Class A Common Stock between June,
1997 and September, 1997
(including interest of $86,345 and
net of issue costs of $156,593)... 3,514,290
Net loss............................ (11,109,242) (11,109,242)
---------- --------- ------------ -------- -----------
BALANCE, SEPTEMBER 30, 1997......... 283,000 147,748 (45,405,440) -- 12,293,926
</TABLE>
F-10
<PAGE> 68
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
---------------------------------------------- ------------------------
SERIES A SERIES B CLASS A
------------------- ------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Exercise of stock options between
October, 1997 and September, 1998,
at exercise prices ranging from
$0.9375 per share to $1.4688 per
share............................. 13,167 $ 13,714
Exercise of Class D warrants in
November, 1997 at $1.50 per share
for cash.......................... 19,400 29,100
Conversion of Convertible Note to
Class A Common Stock between
December,1997 to February, 1998
(including interest of $35,223 and
net of issue costs of $200,119)... 958,051 1,250,563
Net compensation expense related to
valuation of stock options and
warrants granted to non-employees
for services rendered............. 212,560
Conversion of common stock.......... 234,000 122,166
Net loss............................
---------- --- ---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1998......... -- -- -- -- 39,814,017 $59,179,721
========== === ========== =========== ========== ===========
<CAPTION>
COMMON STOCK DEFICIT
---------------------- ACCUMULATED NOTES
CLASS B DURING THE RECEIVABLE
---------------------- DEVELOPMENT FROM
SHARES AMOUNT STAGE STOCKHOLDERS TOTAL
---------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Exercise of stock options between
October, 1997 and September, 1998,
at exercise prices ranging from
$0.9375 per share to $1.4688 per
share............................. $ 13,714
Exercise of Class D warrants in
November, 1997 at $1.50 per share
for cash.......................... 29,100
Conversion of Convertible Note to
Class A Common Stock between
December,1997 to February, 1998
(including interest of $35,223 and
net of issue costs of $200,119)... 1,250,563
Net compensation expense related to
valuation of stock options and
warrants granted to non-employees
for services rendered............. 212,560
Conversion of common stock.......... (234,000) $(122,166)
Net loss............................ $ (8,210,548) (8,210,548)
---------- --------- ------------ -------- -----------
BALANCE, SEPTEMBER 30, 1998......... 49,000 $ 25,582 $(53,615,988) -- $ 5,589,315
========== ========= ============ ======== ===========
</TABLE>
See notes to financial statements.
F-11
<PAGE> 69
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998, AND THE PERIOD
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
AUGUST 31, 1988
YEARS ENDED SEPTEMBER 30, (INCEPTION) TO
------------------------------------------ SEPTEMBER 30,
1996 1997 1998 1998
----------- ------------ ----------- ---------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss........................................... $(6,130,241) $(11,109,242) $(8,210,548) $(53,615,988)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization.................... 292,943 136,820 210,946 944,649
Non-cash interest expense........................ 2,771,030 1,470,434 35,223 4,276,687
Technology license fee........................... 3,545,713
Compensation paid with common stock and stock
options........................................ 86,167 (11,190) 650,602
Compensation forgiven by stockholder............. 66,923
Imputed interest on technology license fee....... 82,613
Changes in assets and liabilities:
Interest receivable............................ (283,652) 228,875 15,765 (93,763)
Prepaid and other.............................. (908,513) 823,923 (44,809) (312,595)
Patent costs................................... (163,822) (54,445) 151,018 (524,851)
Organizational costs........................... (20,242)
Accounts payable............................... (387,732) (759,139) 155,111 528,471
Accrued expenses and other liabilities......... 196,919 195,638 (66,963) 325,594
Accrued compensation and payroll taxes......... 37,560 19,048 (15,073) 210,420
Due to MBI..................................... 5,483 4,888 (26,698)
Deferred revenue............................... 500,000 (500,000)
----------- ------------ ----------- ------------
Net cash used for operating activities...... (4,070,025) (9,457,033) (7,807,218) (43,935,767)
----------- ------------ ----------- ------------
INVESTING ACTIVITIES:
Short-term investments............................. (1,235,350) 7,026,502
Capital expenditures............................... (122,425) (50,059) (156,089) (748,788)
----------- ------------ ----------- ------------
Net cash provided by (used for) investing
activities................................ (1,357,775) 6,976,443 (156,089) (748,788)
----------- ------------ ----------- ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred
stock............................................ 1,885,579 531,192 42,814 39,252,277
Proceeds from issuance of convertible notes
payable.......................................... 13,500,000 6,000,000 19,500,000
Debt issue costs................................... (771,351) (296,059) (1,067,410)
Repayment of convertible notes payable............. (2,673,217) (2,673,217)
Stock issue costs.................................. (83,495) (2,913,703)
Advances for purchase of common stock.............. 125,000
Collection of notes receivable for common stock.... 14,525
Proceeds from stockholder loans.................... 322,788
Repayment of stockholder loans..................... (322,788)
Proceeds from issuance of subordinated notes
payable -- net of issue costs.................... 538,750
Repayment of subordinated notes payable............ (625,000)
Payment on technology license fee.................. (958,326)
----------- ------------ ----------- ------------
Net cash provided by financing activities... 14,530,733 3,561,916 42,814 51,192,896
----------- ------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ 9,102,933 1,081,326 (7,920,493) 6,508,341
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD............................. 4,244,575 13,347,508 14,428,834
----------- ------------ ----------- ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD................................... $13,347,508 $ 14,428,834 $ 6,508,341 $ 6,508,341
=========== ============ =========== ============
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Interest paid.................................... $ 77,433 $ 784,224 $ 113,729 $ 1,107,492
=========== ============ =========== ============
</TABLE>
See notes to financial statements.
F-12
<PAGE> 70
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- AVANIR Pharmaceuticals (the "Company") was
incorporated in the state of California on August 31, 1988. The Company is
organized to engage in research, development, and commercialization of
innovative pharmaceutical products. From inception to November 20, 1998, the
Company operated under the name LIDAK Pharmaceuticals.
Basis of Accounting -- The Company has not yet completed product
development, obtained required regulatory approvals or verified the market
acceptance and demand for its products. The Company has completed clinical
trials on its lead product, n-docosanol 10% cream under an Investigational New
Drug ("IND") application filed with the United States Food & Drug Administration
("FDA"). The Company has filed its New Drug Application ("NDA") with the FDA,
and is awaiting approval. The Company is also currently performing research in
connection with other technologies. Accordingly, the Company's activities have
been accounted for as those of a "development stage enterprise" as set forth in
Statement of Financial Accounting Standards ("SFAS") No. 7. Among the
disclosures required by SFAS No. 7 are that the Company's financial statements
be identified as those of a "development stage enterprise" and that the
statements of operations, stockholders' equity (deficit) and cash flows disclose
activities since the date of the Company's inception.
Going Concern -- The accompanying financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company has
incurred net losses since inception and has not yet received product approval
from the FDA on its NDA. As a result, the Company has delayed obtaining adequate
financing. These factors raise substantial doubt about the ability of the
Company to continue as a going concern. The Company is in the process of seeking
financial arrangements to secure sufficient funds to support its research and
development activities in the coming year. See Note 11. Additionally, the
Company intends to determine the additional product approval requirements of the
FDA for commercializing a topical treatment for oral-facial herpes, and, based
on the results, the Company will decide the best course of action. See Note 10.
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents and Short-Term Investments -- Cash equivalents consist of
highly liquid investments purchased with original maturities of three months or
less, or other investments which provide for liquidity within three months.
Short-term investments represent certificates of deposit, U.S. government
securities, commercial paper, and other money market instruments with maturities
of approximately one year or less. Cash equivalents and short-term investments
are carried at cost, which approximates fair value. On October 1, 1995, the
Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". In accordance with SFAS No. 115, the Company's investments
are classified as "held-to-maturity".
Concentration of Credit Risk -- The Company invests its excess cash in
certificates of deposit, U.S. government securities, commercial paper, and other
money market instruments and has established guidelines relative to
diversification and maturities in an effort to maintain safety and liquidity.
These guidelines are periodically reviewed and modified to take advantage of
trends in yields and interest rates. The Company has not experienced any
significant losses on its cash equivalents or short-term investments.
Property -- Property is recorded at cost and represents primarily
scientific equipment. Depreciation is provided over the estimated useful lives
of the property (generally five years) on the straight-line method.
F-13
<PAGE> 71
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Depreciation expense for the years ended September 30, 1996, 1997 and 1998 and
the period from August 31, 1988 (inception) to September 30, 1998 was $87,939,
$106,283, $122,221 and $495,172, respectively.
The Company periodically assesses its ability to recover the carrying value
of its long-lived assets. If management concludes that the carrying value will
not be recovered, an impairment write-down is recorded to reduce the asset to
its estimated fair value. The Company has not incurred any impairment losses on
its long-lived assets.
Patent Costs -- Legal expenses incurred in connection with applications for
patents are capitalized. Amortization of the costs of approved patent
applications is provided over the useful lives of the patents. For patent
applications that are abandoned, accumulated costs are charged to expense.
Debt Issue Costs -- Debt issue costs represent costs related to the
issuance of the Convertible Note on February 26, 1997 (the "1997 Note") and the
Convertible Notes issued in fiscal year 1996 (the "95/96 Notes"). The debt issue
costs are amortized over the life of the notes to the extent that the notes are
not converted or repaid (see Note 3). The Company recorded debt issue costs in
the amount of $519,809 in connection with the 1997 Note. Included in the total
debt issue costs in connection with the 1997 Note is a non-cash amount of
$223,750 which represents the issuance of the Class H Stock Purchase Warrants in
exchange for finders fee services. As of September 30, 1998, $125,521 of debt
issue costs were amortized and $356,712 were reclassified to stock issue costs
in connection with conversion of the 1997 Note. The debt issue costs related to
the 95/96 Notes have been fully amortized or reclassified to stock issue costs
in connection with the conversion of the 95/96 Notes (see Note 3).
Deferred Revenue -- Deferred revenue represents payments received under
licensing agreements that required additional performance by the Company prior
to recognition of such amounts as revenue.
Revenues -- Revenues from license fees are recognized when the performance
requirements of the license agreements are met. Revenues from federal research
grants and contracts are recognized during the period in which the related
expenditures are incurred. Revenues from research contracts are recognized on
the percentage of completion method. Under this method, revenues and costs are
recognized as the work is performed based on the ratio that incurred costs bear
to the estimated total costs. Provisions for anticipated losses on such
contracts would be made in the period in which they first become determinable.
Research and Development -- Research and development costs are expensed as
incurred.
Net Loss Per Share -- In February 1997, the Financial Accounting Standards
Board issued SFAS No. 128, "Earnings per Share" ("EPS"). This Statement requires
the presentation of EPS to reflect both "Basic EPS" as well as "Diluted EPS" on
the face of the statement of operations. In general, Basic EPS excludes dilution
created by common stock equivalents and is a function of the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution from common stock equivalents, as if such equivalents are
converted into common stock and is calculated substantially in the same manner
as fully diluted EPS in accordance with the prior standard, Accounting
Principles Board ("APB") Opinion No. 15, "Earnings Per Share".
In the accompanying statements of operations for the years ended September
30, 1996, 1997 and 1998, the Company has presented its net loss per share under
SFAS No. 128. Net loss per share is computed using the Basic EPS method, as the
inclusion of common stock equivalents in the Diluted EPS calculation would be
anti-dilutive. Based on the Company's continuing net losses, implementing SFAS
No. 128 has not had a material impact on the Company's net loss per share.
Accounting for Stock-Based Compensation -- The Company applies APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for its employee stock option and
F-14
<PAGE> 72
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
purchase plans. The Company has opted under SFAS No. 123, "Accounting for
Stock-Based Compensation" to disclose the impact of its stock-based compensation
rather than recognize it in the financial statements. The pro forma effects of
applying SFAS No. 123 are not necessarily representative of the effects on
reported net income or loss for future years (see Note 2).
Reclassifications -- Certain amounts in the prior years' financial
statements have been reclassified to conform to current period presentation.
2. STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
Common stock consists of Class A Common Stock and Class B Common Stock.
Holders of Class A Common Stock have one vote for each share held of record and
holders of Class B Common Stock have five votes for each share held of record on
all matters to be voted on by the shareholders. The Class A Common Stock and the
Class B Common Stock vote as one class on all matters requiring shareholder
approval except that under California law the affirmative vote of a majority of
the outstanding shares of Class A Common Stock and a majority of the outstanding
shares of Class B Common Stock, each voting separately as a class, is required
for any amendment to the Company's Articles of Incorporation which would alter
or change the powers, preferences or special right of, or increase or decrease
the number of shares of, or create a new class or series of shares having
rights, preferences or privileges prior to, each respective class of the
Company's common stock.
Holders of both classes of common stock are entitled upon liquidation of
the Company to share ratably in the net assets available for distribution
subject to the rights, if any, of holders of any preferred stock then
outstanding. Shares of both classes of common stock are not redeemable and have
no preemptive or similar rights. The Class B Common Stock may be converted into
Class A Common Stock on a share for share basis at any time at the election of
the holder and will automatically convert into Class A Common Stock upon sale or
other transfer to another holder of Class B Common Stock (including, without
limitation, conveyance into a trust or transfer by the operation of any will or
the laws of descent and distribution).
Warrants
Class D Warrants -- Each Class D Warrant entitles the holder to purchase
one share of Class A Common Stock at an exercise price of $1.50 per share. Such
warrants are redeemable by the Company, upon 30 days written notice, at a price
of $.05 per warrant, if the average closing price of the Company's Class A
Common Stock for the 30 days prior to notice exceeds $3.45 per share. If the
Company exercises its redemption right, it is obligated to redeem all
outstanding Class D Warrants. In January 1997, the Company extended the
expiration of its Class D Warrants from February 26, 1997 to December 31, 1997.
In November 1997, the Company further extended the expiration date of its Class
D Warrants from December 31, 1997 to June 30, 1999.
Class E Warrants -- Each Class E Warrant entitled the holder to purchase
one share of Class A Common Stock at an exercise price of $0.20 per share. All
Class E Warrants had been exercised prior to fiscal 1998.
Class G Stock Purchase Warrants -- Each Class G Stock Purchase Warrant
entitles the holder to purchase one share of Class A Common Stock at an exercise
price of $2.97 per share. Such warrants expire five years from the date of
issuance. Class G Stock Purchase Warrants are issued in connection with
conversion of the 1997 Note. See Note 3.
F-15
<PAGE> 73
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Class H Stock Purchase Warrants -- Each Class H Stock Purchase Warrant
entitles the holder to purchase one share of Class A Common Stock at an exercise
price of $2.40 per share. Such warrants expire on February 26, 2002.
The following summarizes all warrant activity for the period October 1,
1995 to September 30, 1998:
<TABLE>
<CAPTION>
CLASS D CLASS E CLASS G CLASS H
WARRANTS WARRANTS WARRANTS WARRANTS
---------- -------- --------- --------
<S> <C> <C> <C> <C>
Balance at October 1, 1995........... 1,806,688 100,000
Exercised............................ (78,334) (25,000)
---------- -------- --------- -------
Outstanding at September 30, 1996.... 1,728,354 75,000
Issued............................... 1,005,822 100,000
Exercised............................ (321,085) (75,000)
---------- -------- --------- -------
Outstanding at September 30, 1997.... 1,407,269 -- 1,005,822 100,000
Issued............................... 479,026
Exercised............................ (19,400)
---------- -------- --------- -------
Outstanding at September 30, 1998.... 1,387,869 -- 1,484,848 100,000
========== ======== ========= =======
Exercise price per share............. $ 1.50 $ -- $ 2.97 $ 2.40
========== ======== ========= =======
</TABLE>
Stock Options
In March 1994, the Company's shareholders approved the adoption of the 1994
Stock Option Plan ("the 1994 Plan") pursuant to which an aggregate of 750,000
shares of Class A Common Stock were reserved for issuance. Such options may be
granted to officers, directors, employees and consultants of the Company. The
options are to be granted at an exercise price of at least fair market value on
the date of grant and generally vest over a three year period. The 1994 Plan
provides for an automatic annual grant of an option to purchase 10,000 shares to
each director who is not also an employee of the Company. The 1994 Plan
terminates on January 14, 2004. In March, 1995, 1996 and 1997 the Company's
shareholders voted to increase the shares reserved for issuance under the plan
to an aggregate of 1,100,000, 1,350,000, and 2,000,000 shares, respectively. At
September 30, 1998, there were 291,529 shares of Class A Common Stock remaining
available for grant under the 1994 Plan.
On November 20, 1998, the Company's Board of Directors authorized the
Company's 1998 Stock Option Plan (the "1998 Plan") pursuant to which an
aggregate of 1,875,000 shares of the Company's Class A Common Stock has been
reserved for issuance. The 1998 Plan is subject to shareholder approval and will
be presented to the shareholders in the Company's Proxy Statement for the 1999
Annual Meeting of Shareholders.
In September 1988, under an employment agreement with David H. Katz, M.D.,
the Company's former president and chief executive officer and a director of the
Company, the Company issued options to purchase 900,000 shares of Class B Common
Stock at an option price of $.0125 per share representing the estimated fair
market value on the date of grant. Effective in August 1990, the employment
agreement was amended to provide for the grant of options to purchase an
additional 600,000 shares of Class B Common Stock at an option price of $.0125
per share in return for the cancelation of certain anti-dilution rights. The
options were fully exercisable when issued and expire on September 9, 2003. In
July 1993 options to purchase 1,125,000 shares were canceled and replaced
pursuant to certain of the July 1993 grants discussed below. A total of 375,000
options to purchase shares of Class B Common Stock were issued and outstanding
at September 30, 1998 in connection with this employment agreement.
F-16
<PAGE> 74
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
On June 1, 1998, Dr. Katz gave notice to the Company of his intent to
exercise his options to purchase 375,000 shares of Class B Common Stock.
However, in June 1996, Dr. Katz signed an agreement not to exercise these
options until an adequate number of shares of Class B Common Stock were
available. Dr. Katz maintains, however, that this letter agreement was signed
with the understanding that the Company would obtain authorization for the
requisite additional shares needed at the next (1997) annual shareholders
meeting, which was not done. On November 20, 1998, the Company's Board of
Directors approved a proposal to be presented to the Company's shareholders for
approval in the Company's Proxy Statement for the 1999 Annual Meeting of
Shareholders, to amend the Company's Articles of Incorporation to reapportion
the allocation of the Company's authorized shares of common stock to allow for a
sufficient number of shares of Class B Common Stock underlying all Class B Stock
Options.
On June 30, 1998, the Company expanded its Board of Directors to nine
directors and five new directors were elected to the Company's board. Upon
election, these new directors were each granted stock options to purchase 25,000
shares of Class A Common Stock at an exercise price of $1.50 per share, the fair
market price on the date of issuance (the "New Director Option Grants"). The New
Director Option Grants vest over two years from the date of grant with 10,000
options vested as of June 30, 1998, 7,500 options vesting on June 30, 1999 and
the final 7,500 options vesting on June 30, 2000. The New Director Option Grants
were made by the prior Board of Directors of the Company in order to attract
what the prior Board of Directors felt were board members of excellent quality
who would make a significant contribution to the Company. The New Director
Option Grants were made subject to obtaining shareholder approval of the grants
pursuant to the rules of The Nasdaq Stock Market which require that the issuance
of options to purchase 25,000 or more shares of stock be so approved. The
Company intends to present this proposal to its shareholders in its Proxy
Statement for its 1999 Annual Meeting of Shareholders. In the event that
shareholder approval is not obtained, the Board of Directors intends to evaluate
and act upon alternate ways of compensating these directors for the services
they have rendered, including, possibly, issuance of options to such directors
pursuant to the 1998 Plan, if approved by the shareholders.
In July 1993 the Company granted options to purchase an aggregate of
3,843,750 shares of Class A Common Stock to certain current employees,
consultants, directors and original investors of the Company at an option price
of $3.56 per share. Recipients of these options waived all of their respective
rights to an aggregate of 3,843,750 shares of Class B Common Stock and options
to purchase Class B Common Stock held in an escrow account. These options were
fully exercisable when issued and expire on July 17, 2003.
In September 1994 the Company reduced the exercise price on options granted
to certain employees, officers and consultants to purchase 3,285,250 shares of
Class A and Class B Common Stock to $2.75 per share.
F-17
<PAGE> 75
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following summarizes all common stock option activity for the period
October 1, 1995 to September 30, 1998:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING STOCK OPTIONS WEIGHTED
------------------------ AVERAGE OPTION
CLASS A CLASS B PRICE PER SHARE
----------- --------- ---------------
<S> <C> <C> <C>
Outstanding at October 1, 1995.................. 5,021,915 445,000 $2.58
Granted....................................... 243,500 $2.58
Exercised..................................... (126,807) (16,000) $1.84
Canceled...................................... (18,586) $4.44
--------- -------
Outstanding at September 30, 1996............... 5,120,022 429,000 $2.59
Granted....................................... 488,500 $1.85
Exercised..................................... (33,800) $1.02
Canceled...................................... (269,279) $3.19
--------- -------
Outstanding at September 30, 1997............... 5,305,443 429,000 $2.51
Granted....................................... 954,000 $1.56
Exercised..................................... (13,167) $1.04
Canceled...................................... (386,366) (10,000) $2.33
--------- -------
Outstanding at September 30, 1998............... 5,859,910 419,000 $2.38
========= ======= =====
Exercisable at September 30, 1998............... 5,012,181 419,000 $2.51
========= ======= =====
</TABLE>
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its employee stock options (see Note 1) and records compensation
expense in the amount equal to the difference between the stock option exercise
price and the fair market value of the Company's Class A Common Stock. Had
compensation expense for the Company's stock option plan been determined based
on the fair value at the grant date for options granted under the option plan
consistent with methodology prescribed under SFAS No. 123, the Company's pro
forma net loss and net loss per share would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------
1996 1997 1998
----------- ------------ -----------
<S> <C> <C> <C>
Net loss
As reported.............................. $(6,130,241) $(11,109,242) $(8,210,548)
Pro forma................................ $(6,204,518) $(11,347,983) $(8,651,374)
Net loss per share
As reported.............................. $ (0.19) $ (0.30) $ (0.21)
Pro forma................................ $ (0.19) $ (0.31) $ (0.22)
</TABLE>
The weighted average fair values per share of the options granted during
fiscal years 1996, 1997 and 1998 are estimated as $2.19, $1.54 and $1.56,
respectively, using the Black-Scholes option-pricing model and the following
assumptions:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Risk free interest rate..................................... 6% 5% 5%
Expected life (years)....................................... 4.0 3.5 3.3
Expected volatility......................................... 184% 161% 144%
Expected dividends.......................................... None None None
</TABLE>
F-18
<PAGE> 76
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options at September 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE PRICE
- --------------- ----------- ------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.01 - $0.50 419,000 4.59 $0.06 419,000 $0.06
$0.94 - $2.31 1,447,326 7.48 $1.53 638,530 $1.55
$2.50 - $2.50 277,495 6.03 $2.50 247,635 $2.50
$2.75 - $2.94 3,598,104 4.81 $2.75 3,598,104 $2.75
$3.00 - $4.00 465,500 5.51 $3.58 456,427 $3.59
$5.75 - $6.44 71,485 4.64 $5.97 71,485 $5.97
--------- ---------
6,278,910 5,431,181
========= =========
</TABLE>
3. CONVERTIBLE NOTES PAYABLE
Note Issued in February 1997 -- On February 26, 1997, the Company issued a
$6,000,000 Convertible Note Payable (the "1997 Note") as part of a private
placement to an institutional investor. The 1997 Note accrued interest at an
annual rate of 7%, beginning August 26, 1997 and was due and payable on February
26, 2000 if and to the extent the 1997 Note was not previously converted
pursuant to its terms. The Company has recognized the stated 7% annual interest
ratably over the term of the 1997 Note. The 1997 Note was convertible (subject
to certain maximum share limitations discussed below) at the option of the
holder into shares of Class A Common Stock at a price equal to 85% of the market
price per share (as defined in the 1997 Note) on the date of conversion.
Pursuant to the terms of the 1997 Note, the holder was entitled to receive (i) a
Class G Stock Purchase Warrant for each two shares of Class A Common Stock
issued to the holder upon conversion of the 1997 Note, and (ii) a certain number
of Class G Stock Purchase Warrants in the event that the Company prepaid the
1997 Note. Each Class G Stock Purchase Warrant is exercisable five years from
the date of issue into one share of Class A Common Stock at an exercise price of
$2.97 per share.
The option to convert the 1997 Note at 85% of the average closing bid price
of the Class A Common Stock effectively resulted in the issuance of the 1997
Note at an 18% discount. This discount, totaling $1,058,823, was recorded by the
Company as equity in connection with the issuance of the 1997 Note. The discount
was amortized as non-cash interest expense over the 90 days from the date of
issuance with a corresponding increase to the principal amount of the 1997 Note.
The $6,000,000 principal amount of the 1997 Note was convertible into an
aggregate maximum of 7,257,465 shares of Class A Common Stock. Through September
30, 1998, 2,969,691 shares of Class A Common Stock and 1,484,848 Class G Stock
Purchase Warrants were issued in connection with the conversion of $5,000,000 in
principal amount of the 1997 Note. Between October 1, 1998 and October 30, 1998,
the holder converted the remaining $1,000,000 principal balance of the 1997 Note
and the Company issued an additional 1,091,213 shares of Class A Common Stock
and 545,607 Class G Stock Purchase Warrants. The Company has no further
obligation under the 1997 Note.
Notes Issued in Fiscal Year 1996 -- Between November 1995 and January 1996,
the Company issued $13.5 million of Convertible Notes Payable (the "95/96
Notes") as part of a private placement to institutional investors. The $13.5
million original principal amount of the 95/96 Notes was convertible into an
aggregate maximum of 5,513,018 shares of Class A Common Stock at the option of
the holders, with each individual note limited to a pro-rata amount of such
number of shares. From October 1, 1996 through January 10, 1997,
F-19
<PAGE> 77
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the Company issued a total of 2,093,852 shares of Class A Common Stock in
connection with the conversion of $2,540,116 of the original principal amount of
the 95/96 Notes resulting in the issuance of the maximum 5,513,018 shares of
Class A Common Stock pursuant to the 95/96 Notes. The Company repaid certain
holders of the 95/96 Notes $1,728,393 on December 19, 1996 and $1,635,810 on
January 10, 1997, representing a total of $2,673,217 of original principal and
$690,986 of premium and accrued interest in accordance with the provisions of
the 95/96 Notes, thus retiring the entire balance of the principal and interest
on the 95/96 Notes. The Company has no further obligation under the 95/96 Notes.
The conversion of the 95/96 Notes at 80% of the average closing bid price
of the Company's Class A Common Stock resulted in the 95/96 Notes being issued
at a 25% discount (the "Conversion Discount"). The Company recognized the
Conversion Discount as non-cash interest expense over the term of the 95/96
Notes with a corresponding increase to the original principal amount of the
95/96 Notes. Any portion of the Conversion Discount not recognized upon
conversion of the 95/96 Notes was recorded as interest expense on that date. In
addition, the stated 7% annual interest was recognized over the term of the
95/96 Notes until the 95/96 Notes were repaid.
4. LICENSE, DISTRIBUTION, AND MARKETING AGREEMENTS
Yamanouchi Europe, b.v. (formerly Brocades Pharma, b.v.) -- In November
1991 the Company entered into a licensing agreement with Yamanouchi Europe, b.v.
of the Netherlands ("Yamanouchi") for clinical development, manufacturing,
marketing and distribution of docosanol cream as a topical anti-herpes compound
in certain European and other countries. Under terms of the agreement,
Yamanouchi will be responsible for obtaining the necessary regulatory approvals
and for the subsequent manufacturing, marketing and distribution of docosanol
cream in certain European and other countries. In the event that Yamanouchi has
not marketed docosanol cream prior to December 31, 1998, the agreement converts
from exclusive to non-exclusive and the Company has a right to select additional
partners in the countries covered by this agreement. Also under the agreement,
the Company may receive payments based on the attainment of certain milestones
and will receive royalties on sales in the subject territories after market
introduction.
CTS -- In July 1993, the Company entered into a license/supply and
distribution agreement with CTS Chemical Industries, Ltd. ("CTS"), for the
manufacturing, marketing and distribution of docosanol cream as a topical
anti-herpes compound in Israel. Under the terms of the agreement, CTS will be
responsible for obtaining the necessary regulatory approvals and for the
subsequent manufacturing, marketing and distribution of docosanol cream in
Israel. The agreement includes a supply provision under which CTS will purchase
its entire requirement of active ingredients for use in the manufacture of
topical docosanol cream from the Company or the Company's designee.
Boryung -- In July 1994, the Company entered into a 12-year exclusive
license and supply agreement with Boryung Pharmaceuticals Company Ltd.
("Boryung"), for the manufacture and sale of docosanol cream in the Republic of
Korea ("Korea"). Under the terms of the agreement, Boryung will be responsible
for obtaining the necessary regulatory approvals and for the subsequent
manufacturing, marketing and distribution of docosanol cream in Korea. The
agreement includes a supply provision under which Boryung will purchase its
entire requirement of active ingredient for use in the manufacture of topical
docosanol cream from the Company or the Company's designee, and after market
introduction the Company will receive royalties on sales in the subject
territory. The Company has the right to terminate the agreement if market
introduction in Korea does not occur by December 31, 1998, and presently does
not intend to exercise this right.
Grelan -- In October 1994 the Company entered into an exclusive license
agreement with Grelan Pharmaceutical Co., Ltd. ("Grelan") for the manufacturing,
marketing and distribution of docosanol cream in Japan. Under the terms of the
agreement, Grelan will be responsible for obtaining the necessary regulatory
F-20
<PAGE> 78
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
approvals and for the subsequent manufacturing, marketing and distribution of
docosanol cream in Japan. Under the agreement, the Company received payments on
the attainment of certain milestones. In 1997, Takeda Chemical Co. acquired a
majority interest in Grelan. Subsequent to the acquisition, Grelan reviewed its
research and development capabilities in light of the financial situation in
Japan. On June 30, 1998, Grelan and the Company agreed to terminate the license,
with all rights returned to the Company.
Bristol-Myers Squibb -- In February 1996, the Company entered into a
license agreement with Bristol-Myers Squibb Company ("BMS") for the manufacture,
marketing and distribution of docosanol cream as a topical treatment for oral
herpes exclusively in the U.S., Canada and all remaining major territories
throughout the world which are not currently licensed to other parties,
including Mexico, China, South and Central America, Australia and India, and
portions of the Far East. In connection with this agreement, the Company
received an initial license fee with a portion recorded as revenue in the year
ended September 30, 1996 and the remainder recorded as deferred revenue at
September 30, 1996. In the fiscal year ended September 30, 1997, the Company
recognized the deferred revenue due to achievement of certain milestones. In
November 1996, the Company reacquired from BMS the rights to market docosanol
cream in all territories covered in the license agreement, except the United
States, Canada and Mexico, and on December 29, 1997, the BMS agreement was
canceled by BMS.
Livingston Healthcare Services -- In October 1998, the Company signed a
warehousing, distribution and logistical support agreement with Livingston
Healthcare Services, Inc. ("LHSI"). Under this agreement, LHSI's Decatur,
Georgia facility will warehouse and distribute the Company's product, docosanol
cream. LHSI will also provide additional support to the Company in the area of
invoicing and inventory management. See Note 10. The fees due under this
agreement are subject to the future sales of docosanol cream.
Bausch & Lomb -- In November 1998, the Company signed a Contract
Manufacturing and Supply Agreement with Bausch & Lomb Pharmaceuticals, Inc.
("Bausch & Lomb"). Under the agreement, Bausch & Lomb will manufacture, package
and supply the predominant share of the Company's product, docosanol cream. See
Note 10. The fees due under this agreement are subject to the future sales of
docosanol cream.
5. LICENSE AGREEMENT AND SETTLEMENT AGREEMENT WITH MBI
On October 10, 1988, the Company and Medical Biology Institute ("MBI"), a
non-profit research organization incorporated in 1981 to conduct
interdisciplinary basic research in biological sciences, entered into a
twenty-year licensing agreement ("the MBI Agreement") which granted the Company
an exclusive, worldwide license to all existing technology of MBI and a right of
first preference to license future technology arising from the research and
development efforts of MBI. MBI was founded by the former president and CEO of
the Company, David H. Katz, M.D., who served as president, CEO and a director of
MBI until May 14, 1998.
As consideration for entering into the initial MBI Agreement, MBI was
granted 2,000,000 shares of the Company's convertible preferred stock, which was
recorded at the nominal value of $1.00. Upon completion by the Company of its
initial capitalization in May 1990, the Company became obligated to MBI for
$900,000 payable in three equal annual installments. The payments were made in
May 1990, 1991 and 1992, respectively. In May 1990, the Company recorded the
present value of the obligation in the amount of $818,000 as a charge to
research and development. Under the initial agreement, certain minimum fees and
royalty payments were required beginning the 1995 calendar year. Under the terms
of the MBI Agreement, MBI received fees and royalties of 10% of all net license
fees and 20% of royalties relating to sub licenses of the licensed technology.
For products manufactured and sold by the Company, MBI received royalties of 6%
and 3% of sales relating to patented (issued or pending) and non patented
licensed technology, respectively. Such amounts paid to MBI over the term of the
MBI Agreement were minimal.
F-21
<PAGE> 79
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In July 1993 the MBI Agreement was amended. Pursuant to the terms of the
amendment, the Company issued 1,500,000 shares of Class A Common Stock to MBI as
consideration for a five-year extension to its exclusive technology rights
(until October 10, 2013) and a five-year postponement (until December 31, 2000)
of the Company's obligation to pay certain minimum royalties to MBI.
Additionally, MBI waived its rights to 1,500,000 shares of the Company's
convertible preferred stock which were being held in escrow. The remaining
500,000 shares of convertible preferred stock held by MBI were converted into
the Company's Class A Common Stock in fiscal 1993 and 1994. In July 1993, the
Company recorded the value of the common stock issued in the amount of
$2,670,000 as a charge to research and development expense.
In November 1993, the Company and MBI entered into a Grant-in-Aid agreement
("Grant-in-Aid") as an addendum to the MBI Agreement. In July 1994, the MBI
Agreement was amended ("July 1994 Amendment") further to provide for future
funding and support for projects not included in the initial MBI Agreement. Both
the Grant-in-Aid and the July 1994 Amendment provided for the transfer of
ownership rights of the specific projects during the time the project was being
funded by the Company.
In August 1998, to settle certain disputes, the Company and MBI entered
into a Settlement Agreement and Mutual General Release (the "MBI Settlement
Agreement") which terminated the MBI Agreement, provided the Company with
exclusive rights to certain technologies, and returned rights to certain other
technologies to MBI. See Note 6. The Company has no further obligations to MBI.
From inception to June 1998, the Company incurred charges relating to
certain administrative and research services and facilities provided by MBI and
the use of certain of MBI's facilities and equipment. Such charges to the
Company were based on the usage of personnel and facilities and totaled
$218,867, $223,262, $118,725 and $1,732,452 for the years ended September 30,
1996, 1997 and 1998 and for the period from August 31, 1988 (inception) to
September 30, 1998, respectively.
6. LITIGATION
Litigation Settlements -- On August 27, 1998, the Company entered into the
MBI Settlement Agreement (see Note 5) to settle all outstanding disputes between
the two companies, specifically including the disputed ownership to the
Company's proprietary therapeutic compound, docosanol cream, as well as other
technologies. The MBI Settlement Agreement provides for the Company to retain
all rights to n-docosanol and certain other technologies. In return for
obtaining full control of the Company's technologies and avoidance of potential
future royalty payments, the Company loaned $500,000 to MBI and returned other
technologies that no longer fit the Company's long-term strategic plans. The
loan will be forgiven by the Company, subject to certain loan covenants to be
maintained by MBI over a 180-day period ending February 23, 1999. In connection
with this settlement, the Company recorded in its balance sheet a receivable,
net of a 100% allowance assuming the covenants of the loan will be met, and also
recorded litigation settlement costs in its statement of operations of $783,899,
which includes the probable write down of the loan to MBI of $500,000 and
certain other costs that were previously capitalized by the Company related to
the cost of patents associated with the technologies which were returned to MBI.
On March 24, 1998, the Company paid HealthMed, Inc. ("HealthMed"), a Nevada
corporation based in Beverly Hills, California, $150,000 in connection with a
settlement reached between the Company and the Shareholders Committee as
described below. In March 1998, HealthMed, and other shareholders of the Company
(together referred to as the "Shareholders Committee"), filed a preliminary
proxy statement with the Securities and Exchange Commission. In its preliminary
proxy statement, the Shareholders Committee indicated that it intended to
solicit proxies from the Company's shareholders to be voted in favor of an
alternate slate of nominees for the 1998 Annual Meeting of Shareholders. On
March 24, 1998, in order to avoid a probable disruption to the Company's
business and the substantial expenses associated with a proxy contest, the
Company's entered into a settlement agreement with the Shareholders Committee,
pursuant to
F-22
<PAGE> 80
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
which the Shareholders Committee and its nominees agreed to withdraw the
preliminary proxy statement and also agreed to certain other covenants and
limitations. Pursuant to the terms of the settlement agreement, the Company
reimbursed HealthMed $150,000 for the third party expenses related to its proxy
contest. This money was paid in March 1998.
Other -- On April 30, 1998, Dr. David H. Katz filed a Complaint for
Declaratory Relief against the Company seeking to overturn various actions of
the Company, including, but not limited to, the status of certain of his stock
options (see Note 2). On October 30, 1998, the Company filed a cross-complaint
against Dr. Katz seeking certain compensatory and punitive damages. On December
21, 1998, Dr. Katz amended his complaint to include among other things, an
alleged option right by his wife, a former employee of the Company, and a
declaration of the Court as to rights to certain IgE technologies.
Neither the Company nor its counsel is able to express an opinion on the
likely outcome of the above matters with Dr. Katz, but the Company intends to
defend the claims from, and pursue its claims against, Dr. Katz vigorously.
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax assets were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
Net operating loss carryforwards........................ $ 15,799,913 $ 18,544,270
Capitalized license fees................................ 1,073,719 1,010,559
Research credit carryforwards........................... 1,960,022 2,570,352
Capitalized research and development costs.............. 794,301 926,955
Other................................................... (183,202) (184,750)
------------ ------------
Net deferred tax assets................................. 19,444,753 22,867,386
Valuation allowance for net deferred tax assets......... (19,444,753) (22,867,386)
------------ ------------
Total................................................... $ -- $ --
============ ============
</TABLE>
The Company has provided a valuation allowance against the net deferred tax
assets recorded as of September 30, 1997 and 1998 due to uncertainties as to
their ultimate realization. The net operating loss and research credit
carryforwards expire through 2013. In the event of certain ownership changes,
the Tax Reform Act of 1986 imposes certain restrictions on the amount of net
operating loss carryforwards which may be used in any year by the Company. As of
September 30, 1998, the Company had $51,686,384 and $13,080,542 of federal and
California net operating loss carryforwards, respectively.
8. COMMITMENTS
Operating Leases -- Prior to June 1998, the Company leased its facilities
from MBI under a month-to-month operating lease. Beginning June 16, 1998, the
Company entered into a facilities lease for two years with another company. Rent
expense for the years ended September 30, 1996, 1997 and 1998 and the period
from August 31, 1988 (inception) to September 30, 1998 was $410,391, $448,251,
$325,781 and $2,750,507, respectively.
F-23
<PAGE> 81
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Future minimum payments under non-cancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
-------------------------
<S> <C>
1999...................................................... $353,652
2000...................................................... 244,262
2001...................................................... 23,318
2002...................................................... 9,277
2003...................................................... 6,185
--------
Total..................................................... $636,694
========
</TABLE>
Raw Materials -- In October, 1998, the Company selected CONDEA ChemieGmbH
as manufacturer of the active ingredient in docosanol cream, n-docosanol 10%
cream. The Company issued a non-cancelable purchase order for approximately
$200,000 to supply sufficient quantities of n-docosanol to meet product launch
requirements. The Company anticipates receipt of the product and accrual of the
liability in the first quarter of fiscal 1999. See Note 10.
9. EMPLOYEE SAVINGS PLAN
The Company has an employee savings plan established pursuant to Section
401(k) of the Internal Revenue Code. The plan allows participating employees to
deposit into tax deferred investment accounts 2% to 15% of their salary, subject
to annual limits. The Company is not required to make matching contributions.
The Company did not make any such contributions in fiscal years 1996, 1997 and
1998, nor has it made any such contributions since inception of the plan.
10. SUBSEQUENT EVENTS
On November 20, 1998, the Company's Board of Directors approved the 1998
Stock Option Plan and a proposal to amend the Company's Articles of
Incorporation to reapportion the number of authorized shares of common stock
between Class A Common Stock and Class B Common Stock, (see Note 2). Each
proposal above is subject to approval by the Company's shareholders and will be
presented to the shareholders in the Company's Proxy Statement for the 1999
Annual Meeting of Shareholders.
On December 22, 1998, the U.S. Food and Drug Administration ("FDA") issued
a letter to the Company stating that the New Drug Application ("NDA") for
docosanol 10% cream for the treatment of oral-facial herpes infections is
"not-approvable". The letter indicates that the FDA has completed its review and
states that additional evidence is needed to substantiate the drug's
effectiveness. The letter also states that one additional clinical trial may be
sufficient to substantiate the efficacy findings of the studies the Company
submitted with the NDA. The Company intends to respond to the FDA's letter and
based on the resulting discussions with the FDA, the Company will determine the
best course of action.
11. EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS' REPORT
Investment Agreement -- On January 22, 1999, the Company entered into an
investment agreement for an equity line with a private investment firm. The
equity line allows the Company to sell up to $10 million of Class A Common Stock
over a two-year period. The investor's purchase commitment during any purchase
period is limited to the lesser of $1,000,000 or 12% of the aggregate dollar
volume of shares traded in qualifying trading days during the investor's
purchase period, which is approximately one month. The Company must meet certain
conditions to draw on the equity line, including, but not limited to: (i) a
minimum trading price of the Company's Class A Common Stock of $1.00 per share
equitably adjusted for stock splits, stock dividends, combinations, and similar
transactions, and (ii) the Class A Common Stock shall have been designated on
the NASDAQ National Market and shall be qualified to trade.
F-24
<PAGE> 82
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of this Offering all of which are to be paid by
the Registrant in connection with the issuance and distribution of the
securities being registered are as follows:
<TABLE>
<S> <C>
SEC Registration Fee $ 3,920(1)
Accounting Fees and Expenses 43,000(2)
Legal Fees and Expenses 127,000(3)
Blue Sky Fees and Expenses 8,500
Transfer Agent's Fees and Expenses 4,000(4)
Miscellaneous Expenses 30,580(5)
--------
Total $217,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 204(a)(10) and (11), 204.5 and 317 of the California General
Corporation Law which covers the indemnification of directors, officers,
employees and agents of a corporation is hereby incorporated herein by
reference. Reference is made to Article 6 of Registrant's Restated Articles of
Incorporation and Section 3.15 of Registrant's By-Laws which provide for
indemnification by the Registrant in the manner and to the full extent permitted
by California law.
Beginning August 10, 1992, the Company has maintained directors' and
officers' liability insurance with policy limits of $7,500,000. The policy
covers 100 percent of losses arising from, among other things, claims of breach
of duty, neglect, error, alleged misstatement, misleading statement or omission
by the directors and officers in their capacity as such. Payment for loss would
be made to or on behalf of the Company where the Company is required or
permitted to indemnify directors or officers for covered losses pursuant to
statutory or common law, the Articles of Incorporation or Bylaws of the Company
or by agreement. The policy provides for retention of $5,000 per director or
officer, subject to a maximum of $10,000 for each loss, except in the case of
payment for loss to or on behalf of the Company, in which case the retention is
$100,000.
- --------
(1) Registration Fee paid upon the initial filing of this Registration
Statement.
(2) Includes $6,000 incurred from this Post-Effective Amendment.
(3) Includes $10,000 incurred from this Post-Effective Amendment.
(4) Includes $500 incurred from this Post-Effective Amendment.
(5) Includes $5,000 incurred from this Post-Effective Amendment.
II - 1
<PAGE> 83
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In September 1994 the Company entered into a stock purchase agreement
with Grelan Pharmaceutical Co. Ltd. of Japan ("Grelan"). Pursuant to the
agreement, Grelan purchased 522,449 shares of the Company's Class A Common Stock
for $2,000,000.
All sales were made in reliance on Section 4(2) of the Securities Act
of 1933, as amended (the "Securities Act"). No general advertisement or
solicitation of offerees was made and all offerees signed and delivered to the
Registrant agreements wherein they represented, among other things, that the
shares would be held for their own account for investment only and not with the
intent to engage in a distribution of such shares. The certificates representing
such shares bear legends restricting transferability in transactions not
registered under the Securities Act, and the share registers of the Registrant
bear stop transfer legends.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<S> <C>
1.1 - Underwriting Agreement(1)
3.1 - Restated Articles of Incorporation of the Registrant(6)
3.2 - Bylaws of the Registrant(4)
3.3 - First and Second Amendment to Bylaws of the Registrant(6)
3.4 - Fourth Amendment to By-Laws(11)
3.5 - Sixth Amendment to By-Laws(13)
4.1 - Forms of Class A and Class B Common Stock Certificates(3)
4.2 - Form of Unit Purchase Option issued to D.H. Blair & Co., Inc. and its designees
regarding Series B Preferred Stock and Class D Warrants(4)
4.3 - Class D Warrant Agreement (including form of Class D Warrant Certificate)(4)
4.4 - Warrant Agreement (including form of Class E Warrant Certificate)(4)
4.5 - Registration Rights Agreement(4)
4.6 - Convertible Note issued to GFL Advantage Fund Limited(8)
4.7 - Convertible Note Issued to Capital Ventures International(9)
4.8 - Convertible Note, dated February 26, 1997, issued to RGC International
Investors, LDC(10)
4.9 - Form of Class G Stock Purchase Warrant(10)
10.1 - 1989 Stock Option Plan(3)
10.2 - License Agreement with Medical Biology Institute(3)
10.3 - Amendment to License Agreement with Medical Biology Institute dated July
1993(5)
10.4 - Employment Agreement with David H. Katz, as amended(3)
10.5 - Amendment to Employment Agreement with David H. Katz dated April 1993(5)
10.6 - Sublease Agreement with Medical Biology Institute(3)
10.7 - First, Second and Third Amendments to Sublease Agreement with Medical
Biology Institute(4)
10.8 - Fourth and Fifth Amendments to the Sublease Agreement with Medical Biology
Institute (7)
10.9 - License Agreement dated November 7, 1991 by and between the Registrant and
Yamanouchi Europe, b.v.(2)
</TABLE>
II - 2
<PAGE> 84
<TABLE>
<S> <C>
10.10 - 1994 Stock Option Plan(7)
10.11 - Supplemental Agreement with Yamanouchi Europe b.v.(7)
10.12 - Licensing Agreement with Grelan Pharmaceutical Company Limited(7)
10.13 - Sixth Amendment to the Sublease Agreement with Medical Biology Institute(8)
10.14 - Subscription Agreement(8)
10.15 - Note Purchase Agreement issued to GFL Advantage Fund Limited(8)
10.16 - Registration Rights Agreement with GFL Advantage Fund Limited(8)
10.17 - License and Development Agreement with Bristol-Myers Squibb Company(9)
10.18 - Registration Rights Agreement issued to Capital Ventures International(9)
10.19 - Note Purchase Agreement issued to Capital Ventures International(9)
10.20 - Note Purchase Agreement, dated February 26, 1997, issued to RGC International
Investors, LDC(10)
10.21 - Registration Rights Agreement, dated February 26, 1997, issued to RGC International
Investors, LDC(10)
10.22 - Seventh Amendment to the Sublease Agreement With Medical Biology Institute(9)
10.23 - Employment Agreement with Gerald J. Yakatan(12)
10.24 - Form of Retention Agreement with certain Executive Officers of the Company(12)
10.25 - Form of Indemnification Agreement with certain Directors and Executive Officers
of the Company(12)
23.1 - Independent Auditors' Consent included on Page II-6
24.1 - Power of Attorney(5)
</TABLE>
- -----------
(1) Incorporated by reference to the exhibits with the same number filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-37166, declared effective by the Commission on November 9,
1990.
(2) Incorporated by reference to Exhibit 28.1 included with the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1991, filed January 11, 1992.
(3) Incorporated by reference to the exhibit with the same number filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-32742, declared effective by the Commission on May 8, 1990.
(4) Incorporated by reference to the exhibits with the same number filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-49082, declared effective by the Commission on October 26,
1992.
(5) Incorporated by reference to the similarly described exhibits included
with the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1993, filed December 29, 1993.
(6) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Amendment No. 4 to the Registration
Statement on Form S-1, File No. 33-32742, declared effective by the
Commission on April 13, 1994.
(7) Incorporated by reference to the similarly described exhibit included
with the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1994, filed December 29, 1994.
II - 3
<PAGE> 85
(8) Incorporated by reference to the similarly described exhibit included
with the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1995, filed December 13, 1995.
(9) Incorporated by reference to the similarly described exhibit included
with the Registrant's Quarterly Report on Form 10-Q for the Quarter
ended March 31,1996, filed May 15, 1996.
(10) Incorporated by reference to the similarly described exhibit included
with the Registrant's Form 8-K filed March 10, 1997.
(11) Incorporated by reference to the similarly described exhibit included
with the Registrant's Form 8- K filed on March 18, 1998.
(12) Incorporated by reference to the similarly described exhibit included
with the Registrants Form 10- Q for the quarter ended June 30, 1998.
(13) Incorporated by reference to the similarly described exhibit included
with the Registrants Form 8-K filed on October 30, 1998.
All other schedules are omitted for the reason that the information is
included in the financial statements or the notes thereto or that they are not
required or are not applicable.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3)
of the Securities Act;
ii. To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement; and
iii. To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
2. That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II - 4
<PAGE> 86
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions of its Restated Articles of Incorporation
and By-Laws of the Registrant, the California General Corporation Law or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the issuer of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II - 5
<PAGE> 87
INDEPENDENT AUDITORS' CONSENT
AVANIR Pharmaceuticals:
We consent to the use in this Post-Effective Amendment No. 8 to Registration
Statement No. 33-49082 of AVANIR Pharmaceuticals, formerly LIDAK
Pharmaceuticals, (a development stage enterprise) on Form S-1 of our report
dated December 24, 1998 (which expresses an unqualified opinion and includes
explanatory paragraphs relating to the status of the Company as a development
stage enterprise, the Company's ability to continue as a going concern, and the
Company as a defendant in certain lawsuits), appearing in the Prospectus, which
is part of such Registration Statement, and to the reference to us under the
heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
San Diego, California
January 29, 1999
II - 6
<PAGE> 88
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in La Jolla, California,
on February 1, 1999.
AVANIR PHARMACEUTICALS
By: /s/Gerald J. Yakatan, Ph.D.
-------------------------------------
Gerald J. Yakatan, Ph.D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on February 1, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Gerald J. Yakatan, Ph.D. President and Chief Executive Officer
- ----------------------------------------- (Principal Executive Officer)
Gerald J. Yakatan, Ph.D.
/s/ Gregory P. Hanson Vice President, Finance and Chief
- ----------------------------------------- Financial Officer (Principal Financial
Gregory P. Hanson and Accounting Officer)
/s/ George P. Rutland Chairman of the Board
- -----------------------------------------
George P. Rutland
/s/ Dennis J. Carlo, Ph.D. Director
- -----------------------------------------
Dennis J. Carlo, Ph.D.
/s/ Michael W. George Director
- -----------------------------------------
Michael W. George
</TABLE>
<PAGE> 89
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Edward L. Hennessy, Jr. Director
- -----------------------------------------
Edward L. Hennessy, Jr.
/s/ David H. Katz, MD. Director
- -----------------------------------------
David H. Katz, M.D.
/s/ Kenneth E. Olson Director
- -----------------------------------------
Kenneth E. Olson
/s/ Stuart A. Samuels Director
- -----------------------------------------
Stuart A. Samuels
/s/ Joseph E. Smith Director
- -----------------------------------------
Joseph E. Smith
</TABLE>
<PAGE> 90
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGES
- ------- ----------- --------------
<S> <C> <C>
1.1 - Underwriting Agreement(1) Incorporated by reference(1)
3.1 - Restated Articles of Incorporation of the Incorporated by reference(6)
Registrant(6)
3.2 - Bylaws of the Registrant(4) Incorporated by reference(4)
3.3 - First and Second Amendment to Bylaws of the Incorporated by reference(6)
Registrant(6)
3.4 - Fourth Amendment to By-Laws(11) Incorporated by reference(11)
3.5 - Sixth Amendment to By-Laws(13) Incorporated by reference(13)
4.1 - Forms of Class A and Class B Common Stock Incorporated by reference(3)
Certificates(3)
4.2 - Form of Unit Purchase Option issued to D.H. Blair Incorporated by reference(4)
& Co., Inc. and its designees regarding Series B
Preferred Stock and Class D Warrants(4)
4.3 - Class D Warrant Agreement (including form of Incorporated by reference(4)
Class D Warrant Certificate)(4)
4.4 - Warrant Agreement (including form of Class E Incorporated by reference(4)
Warrant Certificate)(4)
4.5 - Registration Rights Agreement(4) Incorporated by reference(4)
4.6 - Convertible Note issued to GFL Advantage Fund Incorporated by reference(8)
Limited(8)
4.7 - Convertible Note Issued to Capital Ventures Incorporated by reference(9)
International(9)
4.8 - Convertible Note, dated February 26, 1997, issued Incorporated by reference(10)
to RGC International Investors, LDC(10)
4.9 - Form of Class G Stock Purchase Warrant(10) Incorporated by reference(10)
10.1 - 1989 Stock Option Plan(3) Incorporated by reference(3)
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NUMBER DESCRIPTION NUMBERED PAGES
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<S> <C> <C>
10.2 - License Agreement with Medical Biology Incorporated by reference(3)
Institute(3)
10.3 - Amendment to License Agreement with Medical Incorporated by reference(5)
Biology Institute dated July 1993(5)
10.4 - Employment Agreement with David H. Katz, as Incorporated by reference(3)
amended(3)
10.5 - Amendment to Employment Agreement with David Incorporated by reference(5)
H. Katz dated April 1993(5)
10.6 - Sublease Agreement with Medical Biology Incorporated by reference(3)
Institute(3)
10.7 - First, Second and Third Amendments to Sublease Incorporated by reference(4)
Agreement with Medical Biology Institute(4)
10.8 - Fourth and Fifth Amendments to the Sublease Incorporated by reference(7)
Agreement with Medical Biology Institute(7)
10.9 - License Agreement dated November 7, 1991 by Incorporated by reference(2)
and between the Registrant and Yamanouchi
Europe b.v.(2)
10.1 - 1994 Stock Option Plan(7) Incorporated by reference(7)
10.11 - Supplemental Agreement with Yamanouchi Europe Incorporated by reference(7)
b.v.(7)
10.12 - Licensing Agreement with Grelan Pharmaceutical Incorporated by reference(7)
Company Limited(7)
10.13 - Sixth Amendment to the Sublease Agreement with Incorporated by reference(8)
Medical Biology Institute(8)
10.14 - Subscription Agreement(8) Incorporated by reference(8)
10.15 - Note Purchase Agreement issued to GFL Incorporated by reference(8)
Advantage Fund Limited(8)
10.16 - Registration Rights Agreement with GFL Incorporated by reference(8)
Advantage Fund Limited(8)
10.17 - License and Development Agreement with Bristol- Incorporated by reference(9)
Myers Squibb Company(9)
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EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGES
- ------- ----------- --------------
<S> <C> <C>
10.18 - Registration Rights Agreement issued to Capital Incorporated by reference(9)
Ventures International(9)
10.19 - Note Purchase Agreement issued to Capital Incorporated by reference(9)
Ventures International(9)
10.20 - Note Purchase Agreement, dated February 26, Incorporated by reference(10)
1997, issued to RGC International Investors,
LDC(10)
10.21 - Registration Rights Agreement, dated February 26, Incorporated by reference(10)
1997, issued to RGC International Investors,
LDC(10)
10.22 - Seventh Amendment to the Sublease Agreement Incorporated by reference(9)
With Medical Biology Institute(9)
10.23 - Employment Agreement with Gerald J. Yakatan(12) Incorporated by reference(12)
10.24 - Form of Retention Agreement with certain Incorporated by reference(12)
Executive Officers of the Company(12)
10.25 - Form of Indemnification Agreement with certain Incorporated by reference(12)
Directors and Executive Officers of the Company(12)
23.1 - Independent Auditors' Consent included on
Page II-6 of the Registration Statement
24.1 - Power of Attorney(5) Incorporated by reference(5)
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- ---------------
(1) Incorporated by reference to the exhibits with the same number filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-37166, declared effective by the Commission on November 9,
1990.
(2) Incorporated by reference to Exhibit 28.1 included with the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1991, filed January 11, 1992.
(3) Incorporated by reference to the exhibit with the same number filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-32742, declared effective by the Commission on May 8, 1990.
<PAGE> 93
(4) Incorporated by reference to the exhibits with the same number filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-49082, declared effective by the Commission on October 26,
1992.
(5) Incorporated by reference to exhibit with same number filed in
connection with the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1993, filed December 29, 1993.
(6) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Amendment #4 to the Registration
Statement on Form S-1, File No. 33-32742, declared effective by the
Commission on April 13, 1994.
(7) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1994, filed December 29, 1994.
(8) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1995, filed December 13, 1995.
(9) Incorporated by reference to the similarly described exhibit included
with the Registrant's Quarterly Report on Form 10-Q for the Quarter
ended March 31,1996, filed May 15, 1996.
(10) Incorporated by reference to the similarly described exhibit included
with the Registrant's Form 8-K filed March 10, 1997.
(11) Incorporated by reference to the similarly described exhibit included
with the Registrant's Form 8-K filed on March 18, 1998.
(12) Incorporated by reference to the similarly described exhibit included
with the Registrants Form 10-Q for the quarter ended June 30, 1998.
(13) Incorporated by reference to the similarly described exhibit included
with the Registrants Form 8-K filed on October 30, 1998.
