<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended MARCH 31, 1999 Commission File No. 0-18734
AVANIR PHARMACEUTICALS
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0314804
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No).
9393 TOWNE CENTRE DRIVE, SUITE 200
SAN DIEGO, CALIFORNIA 92121
(Address of principal executive office) (Zip Code)
(619) 558-0364
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
The number of shares of Common Stock of the Registrant issued and outstanding as
of May 14, 1999:
<TABLE>
<S> <C>
Class A Common stock, no par value 40,941,292
Class B Common stock, no par value 65,000
</TABLE>
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<PAGE> 2
AVANIR PHARMACEUTICALS
FORM 10-Q
For the quarter ended March 31, 1999
Index
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at September 30, 1998 and March 31, 1999 ........... 3
Statements of Operations for the three and six month periods
ended March 31, 1998 and 1999 and for the period
from August 31, 1988 (inception) to March 31, 1999 ................ 4
Statements of Cash Flows for the six month periods
ended March 31, 1998 and 1999 and for the period
from August 31, 1988 (inception) to March 31, 1999 ................ 5
Notes to Financial Statements ..................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk ........ 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 26
Item 4. Submission of Matters to a Vote of Security Holders ............... 27
Item 6. Exhibits and Reports on Form 8-K .................................. 27
SIGNATURES ................................................................... 30
</TABLE>
2
<PAGE> 3
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS (UNAUDITED)
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<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
ASSETS 1998 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,508,341 $ 4,056,050
Stock subscription receivable 200,000
Interest receivable 93,763 26,090
Inventory 111,901
Prepaid and other 282,211 182,490
------------ ------------
Total current assets 6,884,315 4,576,531
PROPERTY - at cost (less accumulated depreciation of
$400,719 and $440,524) 251,486 239,841
PATENT COSTS (less accumulated amortization of
$74,813 and $87,560) 450,038 501,910
DEFERRED COSTS 37,577 253,830
OTHER ASSETS 30,384 186,929
------------ ------------
TOTAL $ 7,653,800 $ 5,759,041
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Convertible notes payable $ 1,000,000
Accounts payable 528,471 $ 828,489
Accrued expenses and other liabilities 325,594 401,820
Accrued compensation and payroll taxes 210,420 229,866
------------ ------------
Total current liabilities 2,064,485 1,460,175
STOCKHOLDERS' EQUITY:
Preferred stock - no par value, 10,000,000
shares authorized:
Series C Junior Participating - no
shares issued or outstanding
Series D - 200 shares issued and outstanding 1,888,868
Common stock - no par value:
Class A - 99,490,000 and 99,288,000 shares
authorized; 39,814,017 and 40,941,292
issued and outstanding 59,179,721 60,234,512
Class B - 510,000 and 712,000 shares
authorized; 49,000 and 65,000 shares
issued and outstanding (convertible
into Class A Common Stock) 25,582 33,582
Deficit accumulated during development stage (53,615,988) (57,858,096)
------------ ------------
Total stockholders' equity 5,589,315 4,298,866
------------ ------------
TOTAL $ 7,653,800 $ 5,759,041
============ ============
</TABLE>
See notes to the financial statements.
3
<PAGE> 4
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED AUGUST 31, 1988
MARCH 31, MARCH 31 (INCEPTION) TO
--------------------------- --------------------------- MARCH 31,
1998 1999 1998 1999 1999
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
REVENUES:
License fees/contract
services $ 4,507,625
Federal research grants 940,646
Interest and other $ 132,372 $ 37,547 $ 352,132 $ 109,389 4,800,416
------------ ------------ ------------ ------------ -------------
Total revenues 132,372 37,547 352,132 109,389 10,248,687
------------ ------------ ------------ ------------ -------------
EXPENSES:
Research and
development 751,764 985,794 1,635,325 1,580,464 36,812,569
General and
administrative 1,426,907 1,211,579 2,068,913 2,003,697 23,273,911
Sales and marketing 75,632 763,212 1,433,909
Litigation settlement 783,899
Interest 29,688 1,508 64,927 4,124 5,269,225
Cost of contract services 533,270
------------ ------------ ------------ ------------ -------------
Total expenses 2,208,359 2,274,513 3,769,165 4,351,497 68,106,783
------------ ------------ ------------ ------------ -------------
NET LOSS $ (2,075,987) $ (2,236,966) $ (3,417,033) $ (4,242,108) $ (57,858,096)
============ ============ ============ ============ =============
NET LOSS PER SHARE $ (0.05) $ (0.05) $ (0.09) $ (0.10)
============ ============ ============ ============
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES
OUTSTANDING 39,458,510 40,991,359 39,175,597 40,882,698
============ ============ ============ ============
</TABLE>
See notes to the financial statements.
4
<PAGE> 5
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
SIX MONTHS ENDED AUGUST 31, 1988
MARCH 31, (INCEPTION) TO
-------------------------------- MARCH 31,
1998 1999 1999
----------- ----------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES: $(3,417,033) $(4,242,108) $(57,858,096)
Net loss
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 121,454 69,247 1,013,896
Non-cash interest expense 17,620 4,294,307
Technology license fee 3,545,713
Compensation paid with common stock and stock options 27,226 677,828
Compensation forgiven by stockholder 66,923
Imputed interest on technology license fee 82,613
Changes in assets and liabilities:
Interest receivable 12,246 67,673 (26,090)
Stock subscription receivable (200,000) (200,000)
Inventory (111,901) (111,901)
Prepaid and other (103,774) (56,824) (369,419)
Organizational costs (20,242)
Deferred costs (253,830) (253,830)
Accounts payable (294,833) 300,018 828,489
Accrued expenses and other liabilities 76,226 401,820
Accrued compensation and payroll taxes (28,922) 19,446 229,866
----------- ----------- ------------
Net cash used for operating activities: (3,710,862) (4,287,207) (47,698,123)
INVESTING ACTIVITIES:
Patent and licensing costs 975 (64,619) (589,470)
Capital expenditures (102,176) (44,855) (793,643)
----------- ----------- ------------
Net cash used for investing activities (101,201) (109,474) (1,383,113)
FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock 33,913 2,055,518 41,307,795
Proceeds from issuance of convertible notes payable 19,500,000
Debt issue costs (1,067,410)
Repayment of convertible notes payable (2,673,217)
Stock issue costs (111,128) (3,024,831)
Advances for purchase of common stock 125,000
Collection of notes receivable for common stock 14,525
Proceeds from stockholders 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 33,913 1,944,390 53,137,286
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (3,778,150) (2,452,291) 4,056,050
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 14,428,834 6,508,341
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $10,650,684 $ 4,056,050 $ 4,056,050
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Interest paid $ 79,016 $ 4,124 $ 1,111,616
=========== =========== ============
</TABLE>
See notes to the financial statements.
5
<PAGE> 6
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. BASIS OF PRESENTATION
The unaudited financial statements presented in this quarterly report
have been prepared in accordance with the instructions to Form 10-Q under
Section 13 or 15(d) of the Securities Exchange Act of 1934. These statements
should be read with AVANIR Pharmaceuticals (the "Company") audited financial
statements and the accompanying notes included in the Company's Annual Report on
Form 10-K/A for the fiscal year ended September 30, 1998. In management's
opinion, the financial statements include all adjustments, consisting only of
normal recurring accruals that are necessary to summarize fairly the Company's
financial position as of March 31, 1999, and the results of operations for the
six months ended March 31, 1999 and from August 31, 1988 (Inception) to March
31, 1999. The results of operations for the six months ended March 31, 1999, may
not be indicative of the results that may be expected for the year ending
September 30, 1999.
2. GOING CONCERN
The report from the Company's auditors for the fiscal year ended
September 30, 1998 contains an explanatory paragraph relating to the status of
the Company's ability to continue as a going concern. The Company has incurred
net losses since inception and has not yet received product approval from the
U.S. Food and Drug Administration ("FDA") on its New Drug Application ("NDA")
for docosanol cream. These factors and the lack of financing at September 30,
1998 raised substantial doubt about the ability of the Company to continue as a
going concern.
FINANCING ARRANGEMENT. As part of management's plan to secure sufficient
funds to support research and development activities and operations in the
current year, the Company has entered into two financing arrangements for
potentially up to $18 million in financing over the next two years subject to
various conditions. On January 22, 1999, the Company entered into a two-year
investment agreement for a $10 million equity line. The investor may invest up
to an additional 30% or $3 million at the investor's option over the two-year
period. On March 22, 1999, the Company entered into an agreement to obtain up to
$5 million in financing through the sale of up to 500 shares of Series D
Convertible Preferred Stock. See Notes 8 and 9 for further descriptions of these
financings and the related conditions.
On March 31, 1999 and April 1, 1999, the Company received cash proceeds
in the amount of $1.8 million and $200,000, respectively, from sale of 200
shares of Series D Convertible Preferred Shares. See Note 5. Additionally, the
Company is in the process of seeking other financial arrangements to secure
sufficient funding to meet its needs for the upcoming year.
STATUS OF DISCUSSIONS WITH THE FDA. On December 22, 1998, the Company
delayed product launch plans for docosanol cream, a topical treatment for
oral-facial herpes (cold sores and fever blisters), when it received a "not
approvable" letter from the FDA following the FDA's review of the initial
information that the Company submitted with its NDA. The letter indicated that
the FDA had completed its review of docosanol cream and stated that additional
evidence was needed to substantiate the efficacy findings of studies that the
Company submitted with the NDA. In March 1999, the Company responded to the
FDA's letter by providing additional evidence of the effectiveness of docosanol
cream and held a meeting with the FDA to discuss the additional evidence and
other issues. In late March, the Company formally amended its NDA to include the
additional evidence and answers to
6
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AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
================================================================================
other questions. The FDA is currently evaluating the additional evidence and the
Company expects a decision within the next few months and no later than
September 15, 1999.
If the decision by the FDA is unfavorable, then the Company intends to
pursue an alternative product formulation that contains one or more active
ingredients pre-approved by the FDA for marketing an over-the-counter ("OTC")
product for cold sores. The implementation of the product commercialization plan
will require the Company to build a marketing and sales infrastructure that
would include a marketing staff, market research capacity, a sales force and
sales management structure, internal sales support, manufacturing experience,
and distribution capacity.
The commercial success of docosanol cream will depend substantially on
the Company's ability to make consumers aware of a new treatment for cold sores
and fever blisters. The Company is creating the product message, packaging,
advertising images, and ancillary promotional materials to appeal to consumers
either as a prescription or OTC product.
3. 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.
4. RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been
reclassified to conform to current period presentation.
5. STOCK SUBSCRIPTION RECEIVABLE
On March 31, 1999, the Company recorded a stock subscription receivable
in the amount of $200,000. This represents the balance of a payment due for
Series D Convertible Preferred Stock purchased under a Securities Purchase
Agreement dated as of March 22, 1999. See Note 8. The stock subscription
receivable is shown as a current asset because the cash was received prior to
the issuance of the financial statements for the period ended March 31, 1999.
6. INVENTORY
In November 1998, the Company purchased the active ingredient in
docosanol cream at a cost of $223,800. The Company has estimated 50% of the raw
materials purchased as a current asset as it intends to manufacture and sell
this portion of the raw materials within the next year. The remaining 50% of the
raw materials inventory is classified on the Company's balance sheet as part of
other assets. The inventories are carried at the lower of cost (first-in,
first-out) or market.
7
<PAGE> 8
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
================================================================================
7. DEFERRED COSTS
At March 31, 1999, deferred costs of $253,830 represent fees and
expenses related to the Series D Convertible Preferred Stock Financing and
Equity Line Agreement as discussed in Notes 8 and 9. The amounts classified as
other assets will be offset against the proceeds from the remaining shares of
Series D Convertible Preferred Stock and stock sold under the equity line as
appropriate.
8. STOCKHOLDERS' EQUITY
Preferred Stock - The Company currently has two classes of preferred
stock authorized, Series C Junior Participating Preferred Stock and Series D
Convertible Preferred Stock, as described below.
- - Series C Junior Participating Preferred - On March 2, 1999, the Board of
Directors of the Company approved a shareholder rights plan (the "Plan").
The Plan features a dividend distribution of one Preferred Share Purchase
Right (the "Right") on each outstanding share of the Company's common stock,
payable to shareholders of record on March 25, 1999. Subject to limited
exceptions, the Rights will be exercisable if a person or group acquires 15%
or more of the Company's common stock or announces a tender offer for 15% or
more of the common stock (a "Trigger Event").
Under certain circumstances, each Right will entitle shareholders to buy
one one-hundredth of a share of newly created Series C Junior Participating
Preferred Stock of the Company at an exercise price of $10.00 per share. The
Company's Board of Directors will be entitled to redeem the Rights at $0.01
per Right at any time before a person has acquired 15% or more of the
outstanding common stock. The Rights will expire on March 25, 2009. The
Rights distribution is not taxable to shareholders.
If a Trigger Event occurs, each Right will entitle its owner, who is not
an acquiring person, to purchase at the Right's then current exercise price,
a number of shares of the Company's Class A Common Stock having a market
value at the time of twice the Rights exercise price. Right's held by the
acquiring person would become void and not be exercisable to purchase shares
at the bargain purchase price. An acquiring person is defined as a person
who acquires 15% or more of the outstanding shares of common stock of the
Company.
- - Series D Convertible Preferred Stock and Class J Stock Purchase Warrants -
On March 22, 1999, the Company entered into an agreement with certain
accredited investors to obtain up to $5 million in financing through the
issuance and sale of up to 500 shares of Series D Convertible Preferred
Stock ("Series D Shares") and a corresponding number of Class J Stock
Purchase Warrants ("Class J Warrants"). The agreement requires that the
Company issue one Class J Warrant with each Series D Share for an aggregate
purchase price per unit of $10,000. Each Class J Warrant is exercisable into
500 shares of Class A Common Stock, representing a maximum of 250,000 shares
purchasable if all Class J Warrants are issued. The Class J Warrants expire
five years from the of date of issuance.
On March 31, 1999, the investors made their initial investment in the
Company by purchasing 200 Series D Shares and the related Class J Warrants
for $2.0 million. The investors also will be required to purchase an
additional 100 Series D Shares and related Class J Warrants for an
investment of $1.0 million if the Company satisfies certain conditions
before May 31, 1999, including obtaining shareholder approval for the
potential issuance of over 20% of the currently
8
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AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
================================================================================
outstanding shares of Class A Common Stock, registering the underlying
shares of Class A Common Stock for re-sale and maintaining the listing of
the Company's Class A Common Stock on the Nasdaq National Market. The
investors will have the option to purchase up to 200 additional Series D
Shares and related Class J Warrants under similar terms for an additional
investment of $2.0 million.
Each Series D Share will bear an annual dividend of $500 that is payable
on a quarterly basis in cash or, at the Company's option, in stock at the
applicable conversion rate. The investors have the option to convert the
Series D Shares into shares of Class A Common Stock at a conversion rate
equal to $10,000 divided by a conversion price equal to the lesser of:
- the Fixed Conversion Price - an amount equal to (a) $1.05 per share
of Class A Common Stock during the first 120 calendar days following
March 31, 1999 and (b) thereafter, 120% of the five-day average of
the closing bid prices per share of the Class A Common Stock during
the five trading days immediately preceding July 29, 1999 (subject
to adjustment if the Company does not secure a line of credit of at
least $2.0 million with a nationally recognized financial
institution before July 19, 1999); or
- the Variable Conversion Price - an amount equal to (x) 100% of the
market price (as defined in the Certificate of Determination that
the Company filed with the California Secretary of State on March
26, 1999) during the first 75 calendar days following March 31, 1999
for shares of Class A Common Stock and (y) thereafter, 86% of the
market price at the time when the Series D Shares are converted.
On the date of issuance, the exercise price of the Class J Warrants
issued in connection with the initial $2.0 million in financing is equal to
$1.05 per share of Class A Common Stock. The Company has estimated the value
of the beneficial conversion feature at the time of issuance to be
immaterial, and therefore, has not allocated any portion of the proceeds
from the sale of the Series D Convertible Preferred Stock to the 200 Class J
Stock Purchase Warrants.
Each of the selling shareholders and its affiliates may not convert the
Series D Shares and/or exercise the Class J Warrants if its beneficial
ownership would exceed 4.99% of the total outstanding shares of Class A
Common Stock following such conversion or exercise.
The Company is seeking approval by its shareholders for the potential
issuance of more than 20% of its outstanding shares of Class A Common Stock in
connection with the Series D Shares and the shares underlying the Equity Line
discussed in Note 9. At a Special Meeting of the Company's Shareholders held May
11, 1999, the Company had not received the sufficient number of votes needed for
a quorum and adjourned the meeting until May 21, 1999. At this time, the Company
anticipates that it will have the requisite number of shares voted to constitute
a quorum to hold the meeting.
Class I Stock Purchase Warrant - On March 4, 1999, the Company engaged
the services of a consultant to provide advice and counsel to the Company in
preparing various materials for submission to regulatory approval agencies and
in monitoring the progress of such submissions. The contract for consulting
services is for a period of 18 months. In connection with the consulting
services, the
9
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AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
================================================================================
Company issued a Class I Stock Purchase Warrant for the purchase of up to
500,000 shares of the Company's Class A Common Stock at an exercise price of
$.78125 per share. The warrant vested fully upon issuance. The Class I Stock
Purchase Warrant expires on March 3, 2004.
The Company has calculated the expense related to the services to be
performed under the Class I Stock Purchase Warrant as $225,900 using the
Black-Scholes pricing model. As the consultant's exercise of any such warrant is
subject to the consultant continuing to render consulting services during such
period, the Company will recognize the expense pro-rata over the 18-month period
of the consulting agreement.
Class K Stock Purchase Warrant - On April 1, 1999, the Company engaged
the services of a consultant to provide investor relations services for the
period of one year. In connection with the consulting services, the Company
issued a Class K Stock Purchase Warrant for the purchase of up to 375,000 shares
of Class A Common Stock at an exercise price of $1.125 per share. The vesting
schedule of the warrant requires the consultant to achieve certain performance
milestones during the one-year consulting period, with the exception of the
right to purchase 62,500 shares of Class A Common Stock which vested on April 1,
1999. The Class K Stock Purchase Warrant expires on March 31, 2004. The Company
will record expense related to the valuation of the Class K Stock Purchase
Warrant and such expense will be valued and recorded as the milestones are met
under the warrant agreement. The expense related to the initial vesting of
62,500 warrants in the amount of $37,612 will be recorded by the Company in the
third quarter of fiscal year 1999.
9. INVESTMENT AGREEMENT
On January 22, 1999, the Company entered into a Class A Common Stock
Investment Agreement (together with an amendment dated as of March 22, 1999, the
"Equity Line Agreement") with an investment fund (the "Equity Line Investor").
Pursuant to the Equity Line Agreement and under certain circumstances, the
Company may cause the Equity Line Investor to purchase up to $10,000,000 of the
Company's Class A Common Stock. The Company will sell the shares at the higher
of (i) a six percent (6%) discount from the market price of the shares of Class
A Common Stock or (ii) subject to certain stock price and trading volume
conditions, a designated fixed price set by the Company. To access the equity
line while the Series D Convertible Preferred Stock is outstanding, the Company
must satisfy certain conditions including the approval by the Company's
shareholders of the issuance of more than 20% of the outstanding shares of the
Company's Class A Common Stock: (see Note 8). The Equity Line Agreement also
gives to the Equity Line Investor the option to purchase up to an additional
$3,000,000 in shares of Class A Common Stock by purchasing these shares in
amounts equal to 30% of the respective dollar amounts that the Company sets
forth in its "put" notices to the Equity Line Investor.
10. LITIGATION
On April 30, 1998, Dr. David Katz (former president and chief executive
officer and a former director of the Company) filed a Complaint for Declaratory
Relief (the "Katz Complaint") against the Company. The Katz Complaint seeks to
overturn certain actions of the Company and seeks a declaration of the court
that the action of the Board of Directors to terminate his employment as
president is null and void. The Katz Complaint also seeks a declaration that the
election of Gerald Yakatan, Ph.D. as a director and as the president is void;
that our Proxy Settlement Agreement
10
<PAGE> 11
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
================================================================================
with HealthMed, Inc. ("HealthMed") likewise is void; and that unspecified
actions by the Board of Directors of the Company be set aside. The Katz
Complaint further seeks an injunction to preserve Dr. Katz's stock options and a
declaration that certain shares of common stock (returned to Dr. Katz incident
to a rescission of his personal transactions with HealthMed) are restored to
shares of Class B Common Stock with Class B Voting Rights. 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 that he allegedly advanced to
the Company, and an award of unspecified money damages for emotional distress
and defamation.
The first amendment to the Katz Complaint was filed on December 21,
1998, adding 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. Lee Katz, a former employee
of the Company, alleges that we breached her grant of options to acquire Class B
Common Stock. She also has joined with Dr. Katz in seeking a 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 we breached an
agreement to reimburse him for certain personal attorney fees. The second
amendment was filed on January 21, 1999, adding claims for defamation and
invasion of privacy. This second amendment adds a claim that Dr. Gerald Yakatan
willfully and intentionally disregarded the rights of Dr. Katz by presenting
materials alleged to be created and published by Dr. Katz without credit or
recognition given to him. A third amendment was filed on March 29, 1999,
claiming that we intentionally interfered with Dr. Katz's contract of employment
as chief executive officer of the Medical Biology Institute ("MBI")and certain
promissory notes between MBI and Dr. Katz. This third amendment seeks
unspecified general and punitive damages allegedly caused by our tortious
interference with his contractual relations or his prospective economic
advantage.
On May 3, 1999, Dr. Katz formally requested that the court dismiss
without prejudice three claims of action: (i) Quiet title to certain IgE
technology, (ii) invasion of privacy, and (iii) plagiarism and misappropriation
of professional material and ideas against all defendants. He has also withdrawn
his claim that sought to overturn the elections of Dr.
Yakatan as a director and as chief executive officer.
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's 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 we intend to defend the claims
from, and pursue its claims against, Dr. Katz vigorously. The Company has filed
a Motion for Summary Adjudication of Dr. Katz's claims in its favor, but a
ruling on that motion is not expected until shortly before trial, which is
scheduled to begin on June 18, 1999. Discovery is now complete, and the parties
currently are engaged in trial preparation.
11
<PAGE> 12
AVANIR PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
================================================================================
11. RELATED PARTY
IriSys Research and Development, LLC - On February 5, 1999, the Company
entered into a letter of intent, subject to approval of a definitive agreement,
with IriSys Research and Development, LLC ("IriSys") to license the worldwide
rights to a new drug to treat a condition associated with Amyotrophic Lateral
Sclerosis (ALS). The terms of the agreement, if approved, would require the
Company to make milestone payments in cash or stock to IriSys for successful
filings of an NDA and subsequent marketing approvals by the FDA.
Dr. Gerald Yakatan, the Company's president and chief executive officer,
is the founder of IriSys and is its current chairman and a majority shareholder
of IriSys. Based in San Diego, IriSys is a privately held company formed by Dr.
Yakatan in 1996 that engages in contract formulation development.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report contains forward-looking statements concerning future events
or performance of AVANIR. You should not rely excessively on these
forward-looking statements, because they are only predictions based on our
current expectations and assumptions. Forward-looking statements often contain
such words like "estimate," "anticipate," "believe" or "expect." Many known and
unknown risks and uncertainties could cause our actual results to differ
materially from those indicated in these forward-looking statements. You should
review carefully the risks and uncertainties identified in this report,
including those explained below and in our other filings with the Securities and
Exchange Commission. We have no obligation to update or announce revisions to
any forward-looking statements to reflect actual events or developments.
OVERVIEW
AVANIR Pharmaceuticals ("AVANIR" or "we") is a development stage company
organized to market novel therapeutic products to treat human diseases. Since
inception in August 1988, AVANIR has operated in one business segment -
pharmaceutical product development. For the period from inception to March 31,
1999, AVANIR had incurred a cumulative net loss of $57.9 million.
Docosanol Cream - Our primary product under development is docosanol
cream, a topical treatment for oral-facial herpes, more commonly known as cold
sores and fever blisters. Docosanol cream is a therapeutic compound developed by
our 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. In December 1998, we had appropriately delayed
product launch plans for docosanol cream when we received a "not approvable"
letter from the Food and Drug Administration following its review of the initial
information that we submitted with our New Drug Application for docosanol cream.
The letter indicated that the FDA had completed its review and stated that
additional evidence was needed to substantiate the efficacy findings of studies
that we submitted with the New Drug Application. In early March 1999, we
responded to the FDA's letter by providing additional evidence of the
effectiveness of docosanol cream and met with the FDA on March 15, 1999 to
discuss the additional evidence and other issues. In late March 1999, we
formally amended our New Drug Application to include the additional evidence and
answers to other questions raised by the FDA. The FDA currently is evaluating
the additional evidence and a decision is expected before September 15, 1999.
If we do not receive FDA approval to distribute docosanol cream as a
prescription product, we intend to pursue an alternative product formulation
that contains one or more active ingredients pre-approved by the FDA for
marketing as an over-the-counter product for cold sores. See "Risk Factors."
If we commercialize docosanol cream either as a prescription product or
with a modified formulation as an over-the-counter product, then we will need
to, among other things, build a marketing and sales infrastructure that includes
marketing staff, market research capacity, a sales force, sales management
structure and internal sales support. Although our sales and marketing plans for
docosanol cream have been on hold since late December 1998, we intend to remain
prepared to produce advertising and promotional materials in the event of a
possible future product launch. However, the timing of these potential marketing
efforts currently is uncertain in light of the uncertain timing of a decision by
the FDA. Furthermore, we cannot assure you that:
- - we ultimately will develop effective advertising or increase awareness of
oral facial herpes so that patients will seek medical treatment or select
our product;
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- - we will hire and train a sufficient sales force in a timely fashion, as
competition for competent sales staff is intense;
- - we will secure co-promotion or additional license agreements on favorable
terms; or
- - we will raise sufficient additional financing necessary to both market
docosanol cream and continue our other drug discovery and development
programs currently underway.
If we fail to implement an effective sales organization in a timely
manner, then our business and financial condition will be materially adversely
affected. Because we cannot predict whether the marketplace will accept our
docosanol cream product as a topical treatment for oral-facial herpes, we might
not achieve a level of sales sufficient to sustain our operations.
Other Research and Development- We also are engaged in much earlier
stages of research and/or development of several other potential therapeutic
products, including potential new drugs for the treatment of allergies, asthma
and inflammatory diseases and a treatment for symptoms associated with
Amyotrophic Lateral Sclerosis (ALS, or Lou Gehrig's disease). These additional
products will not be available for sale to the market for several years, if at
all.
RESULTS OF OPERATIONS
NET LOSSES
Net losses for the quarter ended March 31, 1999 were $2.2 million or
$0.05 per share compared to $2.1 million or $0.05 per share for the same period
in 1998. Net losses for the six months ended March 31, 1999 increased to $4.2
million or $0.10 per share compared to $3.4 million or $0.09 per share for the
same period in 1998.
REVENUES
Revenues decreased to $38,000 in the second quarter of fiscal year 1999
from $132,000 in the same period in 1998. Revenues for the six months ended
March 31, 1999 decreased to $109,000 from $352,000 in the same period in 1998.
The decrease in revenues during fiscal year 1999 was due to a decrease in
interest earned on our cash and cash equivalents available for investment during
the periods.
EXPENSES
Operating Expenses - Total operating expenses increased to $2.3 million
in the second quarter of fiscal year 1999 compared to $2.2 million in the same
period in 1998. For the six months ended March 31, 1998, total operating
expenses increased to $4.4 million compared to $3.8 million in the same period
in 1998. The net increase in operating expenses in the 1999 periods is described
below in the discussions of research and development, general and
administrative, sales and marketing and interest expenses.
Research and Development Expenses - During the second quarter of fiscal
year 1999, research and development expenses increased to $986,000 compared to
$752,000 in the same period in 1998. The increased expenses in the second
quarter of 1999 related to AVANIR's efforts to respond to the FDA's request for
additional evidence of the efficacy of docosanol cream. Research and development
expenses for the six months ended March 31, 1999 remained relatively constant
compared to the same period in 1998.
General and Administrative Expenses - During the second quarter of
fiscal year 1999, general and administrative expenses decreased to $1.2 million
compared to $1.4 million in the same period in
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1998. The decrease in general and administrative expenses during the second
quarter is related primarily to legal fees and other expenses incurred in the
1998 quarter concerning the evaluation of a financing proposal presented by
HealthMed in January 1998. For the six months ended March 31, 1999, general and
administrative expenses decreased to $2.0 million compared to $2.1 million in
the same period of 1998. The decreased expenses for the six months ended March
31, 1999 reflect the decreased expenses relative to evaluating the financing
proposal from HealthMed, and decreased facilities rent and related expenses due
to the relocation of our headquarters to a smaller and lower cost facility.
Partially offsetting the decreased expenses in the second quarter of
fiscal year 1999 and the six months ended March 31, 1999, are increased legal
expenses associated with our defense of claims asserted by Dr. David H. Katz,
our former president, chief executive and director. (see "Legal Proceedings").
Sales and Marketing Expenses - During the second quarter of fiscal year
1999 and the six months ended March 31, 1999, sales and marketing expenses were
$76,000 and $763,000, respectively. AVANIR did not have sales and marketing
staff nor any sales and marketing expenses in the prior fiscal year. These
expenses were related to formation of a sales and marketing staff and
preparation for the launch of docosanol cream. As discussed above, we have
delayed product launch until the FDA makes a decision as to the marketing
approval of docosanol cream.
Interest Expense - Interest expense decreased to $1,500 in the second
quarter of fiscal year 1999 compared to $30,000 for the same period in 1998.
Interest expense for the six months ended March 31, 1999 decreased to $4,100
compared to $65,000 for the same period in 1998. The decrease in interest
expense in fiscal year 1999 was due to the conversion of the balance of the
convertible note payable in October 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, AVANIR has financed operations primarily through the
sale of equity and convertible debt securities and stockholder loans. Net cash
provided by financing activities from inception through March 31, 1999 was $53.1
million.
At March 31, 1999, AVANIR had available cash, cash equivalents and
short-term investments of $4.1 million and working capital of $3.1 million, as
compared to $6.5 million and $4.8 million, respectively, at September 30, 1998.
Included in cash, cash equivalents and short-term investments, and working
capital balances at March 31, 1999, is $1.8 million received from the sale of
200 shares of Series D Convertible Preferred Stock. See Notes 5 and 8 to the
Financial Statements. The decreases in cash, cash equivalents and short-term
investments and working capital were due to operating expenses incurred by
AVANIR in its operating activities in excess of amounts financed as discussed
above in "Results of Operations."
Net cash used to fund operating activities during the six months ended
March 31, 1999 increased to $4.3 million from $3.7 million during the same
period in 1998. The increase is related primarily to higher net losses in the
1999 period as discussed in "Results of Operations," funds used for the purchase
of raw materials inventory (see Note 6 to the Financial Statements), and
deferred costs related to recent financing arrangements (see Notes 8 and 9 to
the Financial Statements). Capital expenditures during the 1999 six month period
totaled $45,000, compared with $102,000 during the same period in 1998.
Since inception, AVANIR has experienced negative cash flows from
operations. Further, we believe that negative cash flows from operations will
continue for the foreseeable future. Therefore, outside sources of funding will
continue to be required. Whether or not AVANIR receives marketing
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approval of docosanol cream from the FDA, we expect our cash requirements will
be substantial for the fiscal year ending September 30, 1999. At March 31, 1999,
AVANIR had available cash, cash equivalents and short term investments of $4.1
million. Our available funds may not be sufficient to implement our marketing
plan for docosanol cream, if ultimately approved. Additionally, we will need to
raise funds to commercialize other products and technologies to fill our
development pipeline.
As part of management's plan to secure sufficient funds to support
research and development activities and operations in the current year, we have
entered into two financing arrangements for potentially up to $18 million in
financing over the next two years subject to various conditions.
- On January 22, 1999, we entered into an investment agreement for an
equity line with a private investment firm. The equity line allows
us to sell up to $10 million of Class A Common Stock over a two-year
period. See Note 9 to the Financial Statements.
- On March 22, 1999, we entered into an agreement with certain
accredited investors to obtain up to $5 million in financing through
the issuance and sale of up to 500 shares of Series D Convertible
Preferred Stock and a corresponding number of Class J Stock Purchase
Warrants. See Note 8 to the Financial Statements.
AVANIR's continued existence is dependent upon receiving additional
financing from time-to-time until we begin to generate positive cash flows from
operations. There can be no assurance that we can negotiate or obtain favorable
terms, enter into other financing agreements with the investors, or that the
conditions of obtaining the financing will be satisfied. See "Risk Factors."
Such financing activities could result in significant dilution to stockholders.
We may also have to enter into collaborative arrangements with one or more other
pharmaceutical or biotechnology companies to commercialize our other products.
There can be no assurance that we can obtain successfully such additional
capital or enter into the collaborative arrangements necessary to fully develop
or commercialize any of our drugs on acceptable terms. Failure to raise
additional capital or enter into such arrangements in a timely manner, could
materially and adversely affect our business, financial condition and results of
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
new standard will become effective for AVANIR for the year ending September 30,
2000. Interim reporting of this standard will be required. We have not yet
assessed the effect of this standard on our current reporting and disclosures.
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IMPACT OF THE YEAR 2000 ISSUE
AVANIR'S YEAR 2000 PROGRAM
Historically, most computer systems were designed with date data using
two digits of the year. Most computer programs and computer hardware were
programmed to assume that all two digit dates were preceded with "19", causing
"00" to be interpreted as the year 1900. This formerly common practice could now
result in a computer system that fails to recognize properly a year that begins
with "20" rather than "19." This date recognition problem could result in
computer system miscalulations or failures, and is generally referred to as the
"year 2000 issue." In September 1998, we established a Year 2000 program ("Y2K
Program") to analyze our internal systems and systems of third parties essential
to our operations. The evaluation of our internal systems includes four phases:
1. implementation of our Y2K Program,
2. assessment (including prioritization and pre-testing),
3. remediation (including modification, upgrading and replacement), and
4. testing for year 2000 compliance
Our evaluation of third-parties will attempt to determine the extent to
which we are vulnerable to any failure by such third parties to remediate their
respective year 2000 problems, and to seek alternative sources of vendor
services if such third-parties fail to give us the assurances that their year
2000 problems have been resolved.
INTERNAL BUSINESS SYSTEMS
State of Readiness - We have reviewed our internal business systems for
both hardware and software issues to determine if they are year 2000 compliant.
During the assessment phase of the evaluation, no material issues arose
concerning the hardware within the systems. However, we have determined that it
is necessary to upgrade certain of the software utilized in our operations. As
of the date of this report, we have completed 50% of the remediation and testing
phase of the software applications. The critical software we utilize for our
system network and accounting systems are year 2000 compliant. Additionally, the
software utilized for payroll and the interface with third party payroll vendor
are also year 2000 compliant. We are on schedule to have all four phases of the
Y2K Program concerning our internal business systems completed by June 30, 1999.
Costs - As of the date of this report, we have incurred minimal expenses
related to the evaluation and remediation of our internal business systems. We
incurred the costs of the upgrade of our accounting software in the prior fiscal
year. We estimate that the total cost of the Y2K Program, including system
upgrades, will be approximately $25,000. This amount is included in the fiscal
year 1999 budget.
INTERFACES WITH THIRD PARTIES
State of Readiness - Relationships with third parties are very important
to our business. We have initiated formal communications with our corporate
partners, vendors and service providers, including contract research
organizations that are critical to our research and development efforts. This
communication, in written form, requests a written assurance that the third
party is year 2000 compliant. Although these efforts are at an early stage, we
are not aware of a material problem concerning the risks of year 2000 with third
parties, nor are we able to determine the extent to which we are vulnerable to
those third parties' failure to solve their year 2000 problems. In addition to
the potential risks we may face with third party vendors necessary for our
day-to-day operations, we may face year 2000 risks
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with our stock transfer agent, banks, and the Nasdaq Stock Market. Although we
have received informal communications from these parties that they are year 2000
compliant, we intend to obtain formal assurances from them. We plan to have
completed the assessment of the year 2000 risks of our third parties by July 31,
1999.
Costs - We do not anticipate the cost of communications with third
parties to be material, and have included such costs in the total projected cost
of our Y2K Program ($25,000), as noted above.
Future risks with regard to third parties - As we move forward with a
potential launch of docosanol cream, we will face circumstances that may involve
significant year 2000 issues that we can not anticipate at this time. These
risks include potential year 2000 problems with the manufacturing, warehousing,
distribution, and marketing of docosanol cream. Currently, we have established
relationships for the manufacture of docosanol cream, and the warehousing and
distribution of the manufactured product. Additionally, we will establish
relationships with other parties in the marketing of docosanol cream. However,
we cannot determine at this time the extent to which we will be vulnerable to
year 2000 problems that these parties may present. As we initiate communications
with these parties, we intend to acquire assurances from them that their systems
are year 2000 compliant.
CONTINGENCY PLANS
We are in the initial stages of developing a business contingency plan
to address both unavoided and unavoidable year 2000 risks. The plan currently
provides that we have retained and will continue to retain hard copy and tape
back-up for our accounting and payroll systems. Although we have confidence in
the assurances provided by software companies that the upgrades to our systems
are year 2000 compliant, we are developing a "worst case" scenario in the event
of internal and external system failures. Additionally, we have purchased
approximately a two-year supply of the active ingredient in docosanol cream.
This raw materials inventory is a key to the success of the manufacturing and
marketing efforts of docosanol cream. We anticipate having a well-developed
contingency plan by July 31, 1999; however, the contingency plan will be
enhanced and revised as additional information is available and as we move
forward with the marketing plans for docosanol cream.
CONCLUSION
The above statements are based on our best estimates at the
present time, which are derived utilizing numerous assumptions of future events
and conditions. We can give no assurance that these assumptions will be accurate
and that these estimates will be achieved. Our evaluation and assessment is
ongoing and we expect that new or different information may become available as
our assessments and evaluations continue.
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RISK FACTORS
We are a development stage company with a history of continuing losses
and have "going concern" uncertainties as explained in the explanatory paragraph
of the Independent Auditors' Report for the fiscal year ended September 30,
1998. In their report on our financial statements for the fiscal year ended
September 30, 1998, our independent auditors refer to our activities as those of
a development stage enterprise and indicate that we will need to raise
additional outside capital to continue as a going concern. Development stage
companies face various problems, delays, expenses and difficulties, many of
which are difficult to control. We likely will encounter many unanticipated
problems or challenges, including those relating to product development and
formulation, clinical testing, regulatory compliance, production and marketing,
additional costs and competition. From our inception through March 31, 1999, we
have generated only limited revenues and have incurred net losses totaling
approximately $57.9 million. These losses have resulted primarily from expenses
relating to our organizational and research and development activities. We
expect to continue to incur operating losses until such time that we can
generate significant revenues from our proposed products. These proposed
products are not fully developed and still require regulatory approvals. Even if
we implement successfully our marketing strategy or achieve significant revenues
or profitable operations, we cannot assure you that we can continue as a going
concern.
We require significant capital reserves and additional financing to
commercialize docosanol cream and our other products. We will require additional
capital substantially greater than currently on hand to commercialize docosanol
cream and any other proposed products. Accordingly, we must raise additional
capital or possibly collaborate with one or more pharmaceutical companies to
obtain the necessary financing and expertise to obtain regulatory approvals, to
complete clinical development, and to manufacture and market other proposed
products. We might not raise additional capital (or sufficient capital) or enter
into other collaborative and licensing arrangements on acceptable terms
necessary to further develop or commercialize docosanol cream or any other
proposed products. Our ability to carry out our proposed operations will be
limited significantly if we fail to obtain required additional financing or to
enter into additional collaborative and licensing arrangements for the continued
development, manufacturing and distribution of our proposed products.
We received a not-approvable letter from the FDA on docosanol cream and
have no assurance of FDA approval. On December 22, 1998, we received a letter
from the FDA stating that the new drug application for docosanol cream is
"not-approvable." The letter indicated that: o the FDA has completed its review
of the new drug application for docosanol cream;
- we must submit additional evidence to substantiate the drug's
effectiveness;
- one additional clinical trial may be sufficient to substantiate the
efficacy findings of the studies that we have already submitted; and
- according to the FDA, the other sections of the new drug application
were not the basis for the "not-approvable" action. These sections
include chemistry, manufacturing and controls,
pharmacology/toxicology and evidence for safety of docosanol cream
for its proposed human use.
In our meeting with the FDA in mid-March 1999, the FDA indicated that it will
continue to evaluate the additional effectiveness data submitted and will
respond to us with its findings. The FDA indicated that this process would
require at least one additional meeting between the FDA and us. We can give no
assurance as to the possible outcome of our future discussions with the FDA.
Failure to receive FDA approval or a substantial delay in receiving FDA approval
for docosanol cream would affect materially and adversely our current business
plan for docosanol cream as a prescription product.
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We may face certain risks if we modify our product formulation of
docosanol cream as an over-the-counter product. We have determined that, with a
few minor changes made to the existing formulation of docosanol cream, we could
meet the FDA's regulations for marketing an over-the-counter fever blister/cold
sore product. We will pursue this strategy only if we determine that the cost
and timing of obtaining FDA marketing approval of a prescription product are too
onerous. If we pursue commercialization of an OTC product for cold sores/fever
blisters, then we will face various risks in reformulating the product,
including:
- identification of suitable ingredients to be used in the
reformulation;
- long term stability of the revised formulation; and
- timely compliance with FDA regulations for marketing an OTC product.
We cannot assure you that we will successfully reformulate docosanol cream to
meet the OTC standards of the FDA.
In addition, marketing a topical cream as an OTC product involves similar risks
associated with its sale and marketing as a prescription product, including our
ability to:
- execute a professional communications program;
- build product awareness among customers or retail store decision
makers;
- entice major retail customers to buy, stock and recommend our
product;
- enforce docosanol patents and maintain exclusivity in the OTC
market; and
- price the product at a significant premium to competing products in
the market.
We cannot assure you that docosanol cream, if marketed and distributed as an OTC
product, will be superior to existing and proposed OTC products for oral herpes,
or will gain widespread acceptance in the OTC consumer market.
Market acceptance for docosanol cream is uncertain and its sales
channels are not yet established. Pending our evaluation of the recent FDA
decision, we currently intend to build an integrated sales and marketing
capacity to support the potential launch of docosanol cream as a prescription
product. Although our marketing plans currently are on hold, we have engaged an
advertising agency for advertising and promotional materials to prepare for a
possible product launch of docosanol cream. However, we might not develop
effective advertising or increase the awareness of treatments for oral herpes,
cold sores or fever blisters, so that patients will seek medical treatment or
select our product. In addition, if we continue to develop and eventually launch
docosanol cream, then we will rely substantially on our sales organization. We
will face difficulties in hiring and training sales staff in a timely fashion,
because there is intense competition for competent sales staff. Our failure to
implement an effective sales organization in a timely manner would affect
materially and adversely our business and financial condition. Market acceptance
for docosanol cream as a topical treatment for oral-facial herpes is uncertain.
We might not attain a level of sales sufficient to sustain our operations.
We are in the early stages of research and development for our products,
and our unproven products may result in the possible loss of product development
costs. We might not develop successfully any of our research and development
programs and potential products. In addition, we might not develop our potential
products to:
- be safe and efficacious in clinical trials;
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- 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.
Furthermore, the effectiveness of any of our technologies in
pre-clinical studies performed in vitro or in animal models may not be relevant
to the development of, or indicate the efficacy of, a proposed product for human
use. Our drug development programs are subject to all the risks inherent in
product development based on innovative technologies, including unanticipated
development problems and the possible lack of funds that could result in the
abandonment or substantial change in the development of a specific product. The
development process for medical products is lengthy and capital intensive. We
face substantial risks of failing to complete the development of our proposed
products. Any of the foregoing or following factors could affect materially and
adversely our business operations and financial condition:
- unsuccessful clinical trial results for proposed products;
- failure to complete product development successfully; or
- our decision, for economic or other reasons, not to complete the
development of a particular product.
We may not acquire in-licensed technologies. We intend to become a
licensing and development company with products at various stages in the drug
development pipeline. We plan to seek additional products through in-licensing
and co-promotion arrangements. To achieve this objective, we must acquire and/or
in-license new products and technologies to further develop, market and/or
sublicense them to others. We will face intense competition for these
in-licensed products and technologies and we might not locate suitable products
and technologies to fit our strengths or obtain them on acceptable terms.
We need to comply with government regulations to develop, produce, test,
manufacture and market our products. Governmental authorities in the U.S.
(including the FDA) and other countries regulate significantly the development,
production, testing, manufacturing and marketing of pharmaceutical products. The
clinical testing and regulatory approval process can take a number of years and
require the expenditure of substantial resources. Accordingly, we may not obtain
regulatory approval for any of our proposed products. We are using a significant
portion of our financial resources for research and development and the clinical
trials necessary to obtain such approvals for our proposed products. Although we
intend to do so, we may not identify and enter into additional collaborative
arrangements with pharmaceutical companies to provide the financing necessary to
complete the required testing and regulatory review processes necessary for our
proposed products. We will continue to incur costs of development without any
assurance that we will obtain regulatory approvals. Failure to obtain (or delays
in obtaining) such approvals will affect adversely our business operations,
including our ability to commence marketing of any proposed products. In
addition, we cannot predict the extent to which adverse governmental regulation
might arise from future U.S. or foreign legislative or administrative action.
Moreover, we cannot predict with accuracy the effect of unspecified, but
possible, future changes in the regulatory approval process and in the domestic
health care system. Future
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changes could affect the time frame required for regulatory review and the sale
prices of our proposed products, if approved for sale.
Our business is subject to rapid technological change and competition.
The pharmaceutical industry is subject to rapid, unpredictable and significant
technological change. We face intense competition from universities, research
institutions and pharmaceutical, chemical and bio-engineering companies.
Docosanol cream, if ultimately marketed, will compete with, among others, the
following products:
- Zovirax(R) (acyclovir) and Valtrex(R) (valacyclovir) products
marketed by Glaxo-Wellcome Corp;
- Famvir(R) (famciclovir) and Denavir(R) (penciclovir) products
marketed by SmithKline Beecham; and
- over-the-counter preparations, including well known products like
Blistex(R) and Carmex(R).
Developments by our competitors or potential competitors could render our
proposed products obsolete. Most of our competitors have greater financial
resources, research and development facilities and manufacturing and marketing
experience than we do. If we launch successfully our first proposed product,
docosanol cream, then it will compete with several prescription products for
oral-facial herpes currently on the market in the U.S., as well as other
products or potential products that are or may be under development or
undergoing the FDA regulatory approval process. Our proposed products may not
achieve commercial success in this intense competitive environment.
We depend on key personnel. Our success depends on the performance of
our officers and key employees, especially our chief executive officer, Dr.
Gerald J. Yakatan. We do not have "key person" life insurance policies on any of
our employees. Furthermore, we only have "at-will" employment agreements for our
officers and key employees with whom we have agreements. Given our early stage
of development, we depend on our ability to retain and motivate high quality
personnel, especially our management. Our future success also depends on our
continuing ability to identify, hire, train and retain highly qualified
scientific, technical, sales, marketing and customer service personnel.
Moreover, the industry in which we compete has a high level of employee mobility
and aggressive recruiting of skilled personnel. We face intense competition for
qualified personnel, particularly in product research, development, sales and
marketing.
Our patents and proprietary rights may be challenged. We own or have
rights to eleven (11) U.S. and eight (8) foreign patents on our products or
technologies. We also have pending U.S. and foreign patent applications. These
patents and patent applications cover medical uses of docosanol and related
compounds, hu-PBL-SCID technologies and IgE regulating compounds. We cannot
assure you, however, that:
- the claims in the pending patent applications will be issued as
patents;
- present and future competitors will not develop similar or superior
technologies independently, duplicate our technologies or design
around the patented aspects of our technologies;
- our proposed technologies will not infringe other patents or rights
owned by others, including licenses which may not be available to
us;
- any issued patents will provide us with significant competitive
advantages; or
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- third parties will not challenge the validity or enforceability of
any patent that we own or, if instituted, that these challenges will
not be successful. In particular, Dr. David Katz (our former
president and chief executive officer) is seeking a court
declaration that he and his wife, Lee R. Katz, have rights to
certain IgE technology that Dr. Katz asserts are superior to
AVANIR's rights.
The cost of litigation to uphold the validity and prevent infringement
of our patents could be substantial. In addition, the National Institutes of
Health's regulations provide that, if federally-funded institutions do not
timely pursue patent applications for patentable inventions, then the government
can exercise its right to own such inventions.
In addition, 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, we may rely on trade secrets and confidentiality
agreements to protect our innovations. We cannot assure you that our trade
secrets will be established, or that secrecy obligations will be honored, or
that others will not develop independently 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 the
projects of AVANIR, disputes may arise as to the proprietary rights to such
information in which we do not receive a favorable resolution.
We will depend upon third-party arrangements to manufacture or market
docosanol cream and our other products. We do not have and do not expect to have
in the foreseeable future the resources to manufacture or market directly on a
large commercial scale docosanol cream or any other proposed products that we
may develop. To successfully commercialize docosanol cream or any other proposed
products, we will need to enter into collaborative arrangements with
pharmaceutical or biotechnology companies to assist in funding various aspects
of commercialization costs, including development costs, clinical testing
necessary to obtain regulatory approvals and manufacturing and marketing costs.
Such collaborative arrangements likely will cause higher costs or the sharing of
profits with third parties.
In addition, we have entered into several licensing agreements to cover
the clinical development, manufacturing and marketing of docosanol cream in
foreign markets. We might not finalize any licensing or distributorship
arrangements for territories not covered by existing agreements on favorable
terms, if at all. We ultimately may establish our own manufacturing and/or
marketing capabilities, at least for certain proposed products, that would
likely require substantial additional funds and personnel.
We are exposed to risks relating to the foreign sales of docosanol cream
and other products. We are subject to various foreign trade risks relating to
the continued development of docosanol cream by foreign licensees, and, possibly
in the future, to the manufacture, marketing and distribution of docosanol cream
overseas by foreign licensees. Certain risks that could impact significantly our
ability to deliver products include:
- changes in the regulatory and competitive environments in foreign
countries;
- changes in a specific country's or region's political or economic
conditions;
- shipping delays;
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<PAGE> 24
- difficulties in managing operations across disparate geographic
areas;
- fluctuations in foreign currency exchange rates;
- difficulties associated with enforcing agreements through foreign
legal systems; and
- trade protection measures such as customs duties and export quotas.
The market price of our Class A Common Stock is volatile. The market
price of our Class A Common Stock is volatile, as evidenced by the recent and
historical fluctuations in the market price of our Class A Common Stock. Many
factors have impacted or likely will continue to impact significantly the market
price of our Class A Common Stock, including:
- fluctuations in our operating results;
- developments relating to the progress of clinical trials for our
proposed products;
- our relationships with present and potential licensees and
distributors;
- announcements of technological innovations or new products by us or
our competitors; and
- changes in market conditions and the economy in general.
Furthermore, the market prices for securities of many biotechnology
companies have fluctuated widely, but not necessarily in relation to the
operating performance of such companies.
Uncertainty of Ability to Meet Listing Requirements: Possible Delisting
by the Nasdaq National Market System. Our Class A Common Stock trades on the
Nasdaq National Market System. To comply with the listing and maintenance
requirements of the Nasdaq National Market System, the Nasdaq rules provide
that:
(i) the minimum bid price of our Class A Common Stock must trade
at or above $1.00; and
(ii) We must maintain net tangible assets of $4 million.
If the minimum bid price falls below $1.00 for thirty (30) consecutive
business days, then Nasdaq will notify us that we have ninety (90) calendar days
from the date of notification to comply with the applicable continued inclusion
standard. In this case, we could comply by having a minimum bid price at or
above $1.00 for a minimum of ten (10) consecutive business days during the
ninety-day compliance period.
On February 8, 1999, we received notice from Nasdaq that the minimum bid
price of our Class A Common Stock had failed to maintain the maintenance
standard of a closing bid price of greater than or equal to $1.00 during the
previous thirty (30) consecutive business days. The letter indicated that the
90-day period to regain compliance had begun. Our Class A Common Stock traded at
or above $1.00 for thirteen (13) consecutive trading days ended April 5, 1999.
However, since April 5, 1999, and up to the date of this filing, our Class A
Common Stock has traded below $1.00. Although our stock price maintained a
closing bid price at or above $1.00 for thirteen (13) consecutive days within
the 90-day compliance period, we have been advised by Nasdaq that they consider
our current bid price to be deficient. We have requested an oral hearing with
Nasdaq to discuss our plans for improving the Class A Common Stock trading price
to acceptable levels. If Nasdaq delists our Class A Common Stock from the Nasdaq
National Market System, then we may face significant difficulties in raising
additional capital on favorable terms, if at all. Delisting also will negatively
affect shareholder liquidity.
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<PAGE> 25
The testing, marketing and sale of our products involve product
liability risks, and we currently have limited insurance coverage. The testing,
marketing and sale of pharmaceutical products involve the risk of product
liability claims by consumers and other third parties. For example, the eventual
end-users of our proposed products, if any, could assert claims against us. We
have maintained product liability insurance coverage for our clinical trials in
the amount of $2,000,000 per incident and in the aggregate. Such insurance may
not cover sufficiently all possible liabilities. In the event of a successful
suit against our business or proposed products, the lack or insufficiency of
insurance coverage could affect materially and adversely our business and
financial condition. Furthermore, certain distributors of pharmaceutical
products require minimum product liability insurance coverage prior to their
purchase or acceptance of products for distribution. Failure to satisfy such
insurance requirements could impede our ability to achieve broad distribution of
our proposed products, which could affect materially and adversely our business
and financial condition.
The conversion or exercise of certain outstanding securities will have a
dilutive effect on the shares of our Class A Common Stock. As of the date of
this report, the following securities exercisable or convertible into shares of
Class A Common Stock were outstanding:
- 200 shares of Series D Convertible Preferred Stock convertible into
2,602,134 shares of Class A Common Stock (assuming a conversion
price of $0.7686 per share as of May 4, 1999);
- stock options to purchase an aggregate of 7,220,442 shares of Class
A Common Stock (at exercise prices ranging from $0.72 to $6.4375 per
share) and 403,000 shares of Class B Common Stock (at exercise
prices ranging from $0.0125 to $0.50 per share);
- Class D Warrants exercisable into 1,387,689 shares of Class A Common
Stock (at an exercise price of $1.50 per share);
- Class G Stock Purchase Warrants exercisable into 2,030,455 shares of
Class A Common Stock (at an exercise price of $2.97 per share);
- Class H Stock Purchase Warrants exercisable into 100,000 shares of
Class A Common Stock (at an exercise price of $2.40 per share);
- Class I Stock Purchase Warrant exercisable into 500,000 shares of
Class A Common Stock (at an exercise price of $0.78125 per share);
- Class J Stock Purchase Warrants exercisable into 100,000 shares of
Class A Common Stock (assuming an exercise price of $1.05 per
share);
- Class K Stock Purchase Warrant exercisable into 375,000 shares of
Class A Common Stock (at an exercise price of $1.125 per share); and
- 65,000 shares of Class B Common Stock (each convertible into one
share of Class A Common Stock).
In addition, we intend to issue up to 300 additional shares of Series D
Convertible Preferred Stock and related Class J Stock Purchase Warrants, which
are convertible or exercisable into shares of Class A Common Stock. To the
extent that our outstanding or other securities are exercised or converted, our
shareholders will experience dilution of their ownership percentages. Sales in
the public market of shares of Class A Common Stock that underlie stock options
and warrants may affect adversely the prevailing market prices for shares of
Class A Common Stock. Accordingly, negative price movements
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<PAGE> 26
in the shares of Class A Common Stock likely would have adverse effects on our
ability to obtain additional equity capital on favorable terms, if at all.
We will not declare or pay cash dividends in the foreseeable future. We
do not intend to declare or pay cash dividends in the foreseeable future. We
expect to retain any earnings, if and when achieved, to finance our business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
AVANIR's market risk exposures are related to its cash and cash
equivalents. We invest our excess cash in highly liquid short-term investments
with maturities of less than one-year, which we do not believe is a significant
market risk.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 30, 1998, Dr. David Katz (former president and chief executive
officer and a former director of AVANIR) filed a Complaint for Declaratory
Relief (the "Katz Complaint") against AVANIR. The Katz Complaint seeks to
overturn certain actions of AVANIR and seeks a declaration of the court that the
action of the Board of Directors to terminate his employment as president is
null and void. The Katz Complaint also seeks a declaration that the election of
Gerald Yakatan, Ph.D. as a director and as the president is void; that our Proxy
Settlement Agreement with HealthMed, Inc. ("HealthMed") likewise is void; and
that unspecified actions by the Board of Directors of AVANIR be set aside. The
Katz Complaint further seeks an injunction to preserve Dr. Katz's stock options
and a declaration that certain shares of common stock (returned to Dr. Katz
incident to a rescission of his personal transactions with HealthMed) are
restored to shares of Class B Common Stock with Class B Voting Rights.
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 that he
allegedly advanced to AVANIR, and an award of unspecified money damages for
emotional distress and defamation.
The first amendment to the Katz Complaint was filed on December 21,
1998, adding 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. Lee Katz, a former employee
of AVANIR, alleges that we breached her grant of options to acquire Class B
Common Stock. She also has joined with Dr. Katz in seeking a declaration of the
court that they have rights to certain IgE technology, and those rights are
superior to the rights of AVANIR. Dr. Katz also alleges that we breached an
agreement to reimburse him for certain personal attorney fees. The second
amendment was filed on January 21, 1999, adding claims for defamation and
invasion of privacy. This second amendment adds a claim that Dr. Gerald Yakatan
willfully and intentionally disregarded the rights of Dr. Katz by presenting
materials alleged to be created and published by Dr. Katz without credit or
recognition given to him. A third amendment was filed on March 29, 1999,
claiming that we intentionally interfered with Dr. Katz's contract of employment
as chief executive officer of the Medical Biology Institute and certain
promissory notes between the Institute and Dr. Katz. This third amendment seeks
unspecified general and punitive damages allegedly caused by our tortious
interference with his contractual relations or his prospective economic
advantage.
On May 3, 1999, Dr. Katz formally requested that the court dismiss
without prejudice three claims of action: (i) Quiet title to certain IgE
technology, (ii) invasion of privacy, and (iii) plagiarism
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<PAGE> 27
and misappropriation of professional material and ideas against all defendants.
He has also withdrawn his claim that sought to overturn the elections of Dr.
Yakatan as a director and as chief executive officer.
On October 30, 1998, AVANIR 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 AVANIR. Acting pursuant to Dr.
Katz' agreements with AVANIR, 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 AVANIR's proprietary IgE down-regulation technology.
Neither AVANIR nor our counsel is able to express an opinion on the
likely outcome of the lawsuits with Dr. Katz, but we intend to defend the claims
from, and pursue its claims against, Dr. Katz vigorously. AVANIR has filed a
Motion for Summary Adjudication of Dr. Katz's claims in its favor, but a ruling
on that motion is not expected until shortly before trial, which is scheduled to
begin on June 18, 1999. Discovery is now complete, and the parties currently are
engaged in trial preparation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held February 19, 1999, Company's
shareholders approved the following proposals:
1) To elect three directors to hold offices until the 2002 Annual Meeting
of Shareholders. The following directors were elected to the Board of
Directors until the 2002 Annual Meeting of Shareholders: Michael W.
George; James B. Glavin and Gerald J. Yakatan, Ph.D. There were in
excess of 37,188,702 votes cast for each nominee.
2) To approve the 1998 Stock Option Plan pursuant to which an aggregate
1,875,000 shares of Class A Common Stock will be reserved for issuance.
There were cast 33,328,304 votes in favor of this proposal, 4,220,477
votes against this proposal, 534,769 votes abstained and 3,097,116
non-votes.
3) To approve the grant of stock options exercisable into 25,000 shares of
Class A Common Stock to each of five directors elected on June 30, 1998
(for an aggregate of 125,000 options). There were cast 35,407,680 votes
in favor of this proposal, 5,057,213 votes against this proposal,
447,424 votes abstained and 268,349 non-votes.
4) To amend our Articles of Incorporation to reapportion the 100,000,000
authorized number of shares of common stock to decrease the authorized
number of shares of Class A Common Stock from 99,490,000 to 99,288,000
and to increase the authorized number of shares of Class B Common Stock
from 510,000 to 712,000. There were cast 35,407,680 votes in favor of
this proposal, 3,087,752 votes against, 516,189 votes abstained and
2,169,025 non-votes.
5) To ratify the selection of Deloitte & Touche LLP as AVANIR's independent
auditors for the fiscal year ending September 30, 1999. There were cast
38,453,820 votes in favor of this proposal, 301,539 votes against this
proposal, 256,262 votes abstained and 2,169,045 non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Current Reports on Form 8-K
A Current Report on Form 8-K was filed on January 25, 1999, reporting
that AVANIR had entered into an agreement with a New York City based
private investment firm for an equity
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<PAGE> 28
line, which potentially allows AVANIR to access up to $10 million in
financing over a two-year period through the sale of its Class A Common
Stock.
A Current Report on Form 8-K was filed on March 11, 1999, reporting that
AVANIR's board of directors declared a dividend of one preferred share
purchase right (a "Right") for each share of Class A Common Stock and
Class B Common Stock outstanding at the close of business on March 25,
1999. As long as the Rights are attached to the shares of common stock,
the we will issue one Right (subject to adjustment) with each new share
of common stock issued, so that all such shares will have attached
rights. When exercisable, each right will entitle the holder to purchase
from AVANIR one one-hundredth of a share of Series C Junior
Participating Preferred Stock at a price of $10.00 per one one-hundredth
of a preferred share, subject to adjustment. The description and terms
of the Rights are set forth in a Rights Agreement, dated as of March 5,
1999, between AVANIR and American Stock Transfer & Trust Company,
the Rights Agent.
A Current Report on Form 8-K was filed on April 1, 1999, reporting that
we had entered into a letter amendment to the Class A Common Stock
Investment Agreement dated January 22, 1999, previously reported in our
Current Report on Form 8-K filed January 25, 1999 as noted above.
A Current Report on Form 8-K filed on April 1, 1999, reporting that we
had entered into an agreement with several accredited investors to
obtain up to $5 million in financing through the sale of up to 500
shares of Series D Convertible Preferred Stock and related Class J Stock
Purchase Warrants.
A Current Report on Form 8-K was filed on April 20, 1999, reporting that
the we had issued a Class I Stock Purchase Warrant exercisable into
500,000 shares of Class A Common Stock at an exercise price of $0.78125
per share and a Class K Stock Purchase Warrant exercisable into 375,000
shares of Class A Common Stock at an exercise price of $1.125 per share.
Each of these warrants were issued to consultants in exchange for their
services to AVANIR.
(b) Exhibits
<TABLE>
<S> <C> <C>
3.1 - Restated Articles of Incorporation of the Registrant(4)
3.2 - Certificate of Amendment of the Articles of Incorporation of the
Registrant(11)
3.3 - Certificate of Determination with respect to Series D Convertible
Preferred Stock of the registrant(12)
3.4 - Certificate of Determination with respect to Series C Junior Participating
Preferred Stock of the registrant(10)
3.5 - Amended and Restated By-laws of the Registrant(8)
4.1 - Forms of Class A and Class B Common Stock Certificates(2)
4.2 - Class D Warrant Agreement (including form of Class D Warrant Certificate)(3)
4.3 - Convertible Note, dated February 26, 1997, issued to RGC International
Investors LDC(8)
4.4 - Form of Class G Stock Purchase Warrant(6)
4.5 - Rights Agreement dated as of March 5, 1999, between
AVANIR Pharmaceuticals and American Stock Transfer & Trust
Company(10)
4.6 - Form of Rights Certificate with respect to the Rights Agreement dated as
of March 5, 1999(10)
4.7 - Form of Series D Convertible Preferred Stock Certificate(11)
4.8 - Amended and Restated Class I Stock Purchase Warrant dated March 4, 1999(13)
4.9 - Form of Class J Stock Purchase Warrant(11)
4.10 - Class K Stock Purchase Warrant dated April 1, 1999(13)
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C> <C>
10.1 - 1989 Stock Option Plan(2)
10.3 - Licensing Agreement with Yamanouchi Europe b.v. 1
10.4 - 1994 Stock Option Plan(5)
10.5 - Supplemental Agreement with Yamanouchi Europe b.v.(5)
10.6 - Licensing Agreement with Grelan Pharmaceutical Company Limited(6)
10.7 - Employment Agreement with Gerald J. Yakatan(7)
10.8 - Form of Indemnification Agreement with certain Directors and Executive
Officers of the Company(7)
10.9 - Registration Rights Agreement with Promethean Investment Group, LLC(9)
10.10 - Class A Common Stock Investment Agreement the Promethean Investment Group,
L.L.C(9)
10.11 - Amendment to the Class A Common Investment Agreement(12)
10.12 - Securities Purchase Agreement for Series D Convertible Preferred Stock(11)
10.13 - Registration Rights Agreement for Series D Convertible Preferred Stock(11)
10.14 - Form of Employment Retention Agreement dated February 1999 with certain
executive officers and key employees of AVANIR
10.15 - 1998 Stock Option Plan
27.1 - Financial Data Schedule
</TABLE>
1 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, 1991, filed January 11, 1992.
2 Incorporated by reference to the similarly described exhibit 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.
3 Incorporated by reference to the similarly described exhibit 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.
4 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.
5 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.
6 Incorporated by reference to the similarly described exhibit included
with the registrant's Current Report on Form 8-K filed March 10, 1997.
7. Incorporated by reference to the similarly described exhibit included
with the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998.
8. Incorporated by reference to the similarly described exhibit included
with the Registrants Form 8-K filed on October 30, 1998.
9. Incorporated by reference to the similarly described exhibit included
with the Registrant's Form 8-K filed on January 25, 1999.
10. Incorporated by reference to the similarly described exhibit included
with the registrant's Current Report on Form 8-K filed March 11, 1999.
11. Incorporated by reference tot he similarly described exhibit included
with the registrant's Current Report on Form 8-K filed on April 1, 1999.
12. Incorporated by reference to the similarly described exhibit included
with the registrant's Current Report on Form 8-K filed on April 1, 1999.
13. Incorporated by reference to the similarly described exhibit included
with the registrant's Current Report on Form 8-K filed on April 20,
1999.
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<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/Gerald J. Yakatan, Ph.D. President and Chief May 17, 1999
- ----------------------------- Executive Officer
Gerald J. Yakatan, Ph.D. (Principal Executive Officer)
/s/Gregory P. Hanson Vice President, Finance and Chief May 17, 1999
- ----------------------------- Financial Officer
Gregory P. Hanson (Principal Financial and
Accounting Officer)
</TABLE>
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<PAGE> 1
EXHIBIT 10.14
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement"), dated February 22,
1999, is made by and between Avanir Pharmaceuticals, Inc., a California
corporation having its principal offices at 9393 Towne Center Drive, San Diego,
California 92121 (the "Company") and Gregory P. Hanson ("Employee").
AGREEMENT
1. Term. This Agreement is effective from February 19, 1999 through
March 13, 2000 (the "Term").
2. At-will Employment. Employee reaffirms that Employee's employment
relationship with the Company is at-will, terminable at any time and for any
reason by either the Company or Employee. While certain paragraphs of this
Agreement describe events that could occur at a particular time in the future,
nothing in this Agreement may be construed as a guarantee of employment of any
length.
3. Resignation or Termination other than "Change of Control
Termination". If Employee voluntarily resigns his employment at his own
initiative or if Employee is terminated for any reason other than Change of
Control as defined below, the Company will pay Employee accrued and unpaid Base
Salary through the date of termination and any vacation which is accrued but
unused as of the date of termination. "Base Salary" is gross salary as of the
date of Termination or Resignation, less applicable state and federal taxes.
Employee is ineligible for Severance Payments or any continuation of benefits
(other than provided for under the federal Consolidated Omnibus Budget
Reconciliation Act ("COBRA"), or any other such compensation pursuant to this
Agreement or otherwise.
4. Change of Control Termination.
a) Payment upon Change of Control Termination. In the
event of a "Change of Control Termination" during the Term of this Agreement,
i) Employee is eligible for payment of Base Salary and
accrued but unused vacation through the date of termination.
ii) Employee is eligible for severance under this
Agreement in an amount equal to twelve (12) months of Base Salary ("Severance
Payments"), paid on the same dates as Employee would have received salary
payments had Employee continued to be employed by the Company, over a twelve
(12) month period ("Severance Period");
<PAGE> 2
iii) If Employee elects to continue insurance coverage
as afforded to Employee according to COBRA, Company will reimburse Employee the
amount of the premiums incurred by Employee during the Severance period. Nothing
in this Agreement will extend Employee's COBRA period beyond the period allowed
under COBRA, nor is Company assuming any responsibility, which Employee has for
formally, electing to continue coverage.
iv) The benefits set forth in Sections 4(a)(ii) and
(iii) above are in exchange for Employee's execution of a release of all claims
as of the termination date, in substantially the form attached to this Agreement
as Exhibit 1.
b) Defined. A "Change of Control Termination" of the
employment relationship occurs where Employee is (I) terminated without "Cause"
or (ii) "Resigns for Good Reason", during the Term of the Agreement, following a
"Change of Control".
i) "Cause" is defined as (I) Employee's material breach
of this Agreement or the Confidentiality Agreement; (ii) Employee's failure or
refusal to substantially and materially perform according to or to comply with
the reasonable policies and directions established by the Company; (iii) the
appropriation (or attempted appropriation) of a material business opportunity of
Employer, including attempting to secure or securing any personal profit in
connection with any transaction entered into on behalf of Employer; (iv) the
misappropriation (or attempted misappropriation) of any of Employer's funds or
property; (v) the conviction of, or the entering of a guilty plea or plea of no
contest with respect to a felony, the equivalent thereof, or any other crime
with respect to which imprisonment is a possible punishment; (vi) willful
misconduct or incompetence; (vii) physical or mental disability or other
inability to perform the essential functions of his position, with or without
reasonable accommodation; or (viii) death.
ii) "Resignation for Good Reason" is defined as
resignation
based on
(1) a meaningful and detrimental alteration in
Employee's position or the nature or status of
Employee's responsibilities and reporting
relationship from those in effect upon execution
of this Agreement;
(2) the assignment to Employee of any duties
inconsistent with his or her status as an
executive officer/director (as applicable) of
Company;
2
<PAGE> 3
(3) a reduction by the Company in 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 Employee's or the Company's
principal executive offices to a location outside
San Diego County, if Employee's principal office
is at such offices, without reimbursement of
relocation costs.
(5) any other conduct that satisfies the requirements
for "constructive termination" as that term is
defined under California law.
An event described in 4(b)(ii)(1) - (5) will
not constitute Good Reason unless it is communicated by Employee to the Company
in writing and unless it is not corrected by the Company in a manner which is
reasonably satisfactory to Employee within ten (10) days of the Company's
receipt of such written notice.
iii) "Change of Control" is defined to have occurred if,
and only if, during the Term of this Agreement:
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) if those individuals who constituted the Board at
the beginning of the Term (the Incumbent
Directors) cease to constitute a majority of the
Board;
3
<PAGE> 4
3) there occurs a reorganization, merger,
consolidation or other corporate transaction
involving the Company ("Transaction"), in each
case, with respect to which the stockholders of
the Company immediately prior to such Transaction
do not, immediately after the Transaction, own
more than fifty (50) percent 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.
5. Exercise of Vested Options after Change of Control Termination.
In the event of a Change in Control Termination during the Term of this
Agreement, Employee's vested options will be exercisable in all respects in
accordance with the terms of Section 5 of the Company's 1989 Stock Option Plan;
Section 6 of the Company's 1994 Stock Option Plan; and Section 6 of the
Company's 1998 Stock Option Plan (the "Plans"), unless Employee requests, within
ninety (90) days following the termination, an extension of his or her time to
exercise. In the event of such a request, Employee has up to twelve (12) months
following the date of termination to exercise any vested options and Employee's
vested options will immediately convert to non-qualified options. The Company
does not make any warranty or representation with respect to (1) the effect of
the right to extend the date of exercise set forth above or the status of the
stock options previously granted to Employee as incentive, despite the
description of the options as such or (2) the tax consequence of exercise of any
options or consequent sale of any shares purchased. Employee is advised to
consult with his own tax advisor with respect to the tax treatment of all
aspects of exercise of vested options as contained in this Agreement.
6. Dispute Resolution Procedures. Any dispute or claim arising out
of this agreement shall be subject to final and binding arbitration. The
arbitration will be conducted by one arbitrator who is a member of the American
Arbitration Association (AAA) or of the Judicial Arbitration and Mediation
Services (JAMS). The arbitration shall be held in San Diego, California. The
arbitrator shall have all authority to determine the arbitrability of any claim
and enter a final and binding judgment at the conclusion of any proceedings in
respect of the arbitration. Any final judgment only may be appealed on the
grounds of improper bias or improper conduct of the arbitrator. The parties will
be entitled to conduct discovery (i.e. investigation of facts through
depositions and other means) which shall be governed by the Code of Civil
Procedure section 1283.05. The arbitrator shall have all power and authority to
enter orders relating to such discovery as are allowed under the Code. The
arbitrator will apply California substantive law in all respects. The party
prevailing in the resolution of any such claim will be entitled, in addition to
such other relief as may be granted, to an award of all actual attorneys fees
and costs incurred in pursuit of the claim, without regard to any statute,
schedule, or rule of court purported to restrict such award.
4
<PAGE> 5
7. General Provisions.
a) Governing Law. This Agreement will be governed by and
construed in accordance with the laws of the State of California.
b) Assignment. Employee may not assign, pledge or encumber his
interest in this Agreement or any part thereof.
c) No Waiver Of Breach. The failure to enforce any provision
of this Agreement will not be construed as a waiver of any such provision, nor
prevent a party thereafter from enforcing the provision or any other provision
of this Agreement. The rights granted the parties are cumulative, and the
election of one will not constitute a waiver of such party's right to assert all
other legal and equitable remedies available under the circumstances.
d) Severability. The provisions of this Agreement are
severable, and if any provision will be held to be invalid or otherwise
unenforceable, in whole or in part, the remainder of the provisions, or
enforceable parts of this Agreement, will not be affected.
e) Entire Agreement. This Agreement constitutes the entire
agreement of the parties with respect to the subject matter of this Agreement,
and supersedes all prior and contemporaneous negotiations, agreements and
understandings between the parties, oral or written.
f) Modification; Waivers. No modification, termination or
attempted waiver of this Agreement will be valid unless in writing, signed by
the party against whom such modification, termination or waiver is sought to be
enforced.
g) Fees and Expenses. If any proceeding is brought for the
enforcement or interpretation of this Agreement, or because of any alleged
dispute, breach, default or misrepresentation in connection with any provisions
of this Agreement, the successful or prevailing party will be entitled to
recover from the other party reasonable attorneys' fees and other costs incurred
in that proceeding (including, in the case of an arbitration, arbitration fees
and expenses), in addition to any other relief to which such party may be
entitled.
h) Amendment. This Agreement may be amended or supplemented
only by writing signed by both of the parties hereto.
i) Duplicate Counterparts. This Agreement may be executed in
duplicate counterparts; each of, which shall be deemed an original; provided,
however, such counterparts shall together constitute only one instrument.
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j) Interpretation. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
k) Drafting Ambiguities. Each party to this Agreement and its
counsel have reviewed and revised this Agreement. The rule of construction that
any ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Agreement or any of the amendments to
this Agreement.
Dated: February 26, 1999 AVANIR Pharmaceuticals
By: /s/ Gerald J. Yakatan,
-------------------------------------------
Gerald J. Yakatan,
Chief Executive Officer and President
Dated: February 26, 1999
By: /s/ Gregory P. Hanson
-------------------------------------------
Gregory P. Hanson
6
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EXHIBIT 1
GENERAL RELEASE
This General Release ("Release") is entered into effective as of
______________ __, ____, (the "Effective Date") by and between Avanir
Pharmaceuticals, Inc., a California corporation, having its principal offices at
9393 Towne Center Drive, San Diego, California 92121 ("Company") and Gregory P.
Hanson, an individual residing at ______________________________________________
__________________________ ("Employee") with reference to the following facts:
RECITALS
1. The parties hereto entered into a Employment Agreement dated February
19, 1999 ("Agreement") by which the parties agreed that upon termination
resulting from "Change in Control" prior to March 13, 2000, Employee would
become eligible for severance payments for a period of twelve (12) months (the
"Severance Period") from the date of termination of his employment ("Termination
Date") in exchange for Employee's release of the Company from all claims which
Employee may have against the Company as of the Termination Date.
2. The parties desire to dispose of, fully and completely, all claims,
which Employee may have against the Company in, the manner set forth in this
Release.
AGREEMENT
1. Release. Employee, for himself and his heirs, successors and assigns,
each fully releases, and discharges Company, its officers, directors, employees,
shareholders, attorneys, accountants, other professionals, insurers and agents
of the other (collectively "Agents"), and all entities related to each party,
including, but not limited to, heirs, executors, administrators, personal
representatives, assigns, parent, subsidiary and sister corporations,
affiliates, partners and co-venturers (collectively "Related Entities"), from
all rights, claims, demands, actions, causes of action, liabilities and
obligations of every kind, nature and description whatsoever, Employee now has,
owns or holds or has at anytime had, owned or held or may have against the
Company, Agents or Related Entities from any source whatsoever, whether or not
arising from or related to the facts recited in this Release. Employee
specifically releases and waives any and all claims arising under any express or
implied contract, rule, regulation or ordinance, including, without limitation,
Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the
Americans with Disabilities Act, the California Fair Employment and Housing Act,
and the Age Discrimination in Employment Act, as amended ("ADEA").
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2. Section 1542 Waiver. This Release is intended as a full and complete
release and discharge of any and all claims that Employee may have against the
Company, Agents or Related Entities. In making this release, Employee intends to
release the Company, Agents and Related Entities from liability of any nature
whatsoever for any claim of damages or injury or for equitable or declaratory
relief of any kind, whether the claim, or any facts on which such claim might be
based, is known or unknown to him. Employee expressly waives all rights under
Section 1542 of the Civil Code of the State of California, which Employee
understands provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
Employee acknowledges that he may discover facts different from
or in addition to those, which he now believes to be true with respect to this
Release. Employee agrees that this Release shall remain effective
notwithstanding the discovery of any different or additional facts.
3. Waiver of Certain Claims. Employee acknowledges that he has been
advised in writing of his right to consult with an attorney prior to executing
the waivers set out in this Release, and that he has been given a 21-day period
in which to consider entering into the release of ADEA claims, if any. In
addition, Employee acknowledges that he has been informed that he may revoke a
signed waiver of the ADEA claims for up to seven (7) days after executing this
Release.
4. No Undue Influence. This Release is executed voluntarily and without
any duress or undue influence. Employee acknowledges she has read this Release
and executed it with his full and free consent. No provision of this Release
shall be construed against any party by virtue of the fact that such party or
its counsel drafted such provision or the entirety of this Release.
5. Governing Law. This Release is made and entered into in the State of
California and accordingly the rights and obligations of the parties hereunder
shall in all respects be construed, interpreted, enforced and governed in
accordance with the laws of the State of California as applied to contracts
entered into by and between residents of California to be wholly performed
within California.
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6. Severability. If any provision of this Release is held to be invalid,
void or unenforceable, the balance of the provisions of this Release shall,
nevertheless, remain in full force and effect and shall in no way be affected,
impaired or invalidated.
7. Counterparts. This Release may be executed simultaneously in one or
more counterparts, each of, which shall be deemed an original, but all of which
together shall constitute one and the same instrument. This Release may be
executed by facsimile, with originals to follow by overnight courier.
8. Dispute Resolution Procedures. Any dispute or claim arising out of this
Release shall be subject to final and binding arbitration. The arbitration will
be conducted by one arbitrator who is a member of the American Arbitration
Association (AAA) or of the Judicial Arbitration and Mediation Services (JAMS)
and will be governed by the Model Employment Arbitration rules of AAA. The
arbitration shall be held in San Diego, California. The arbitrator shall have
all authority to determine the arbitrability of any claim and enter a final and
binding judgment at the conclusion of any proceedings in respect of the
arbitration. Any final judgment only may be appealed on the grounds of improper
bias or improper conduct of the arbitrator. Notwithstanding any rule of AAA to
the contrary, the parties will be entitled to conduct discovery (i.e.
investigation of facts through depositions and other means) which shall be
governed by the Code of Civil Procedure Section 1283.05. The arbitrator shall
have all power and authority to enter orders relating to such discovery as are
allowed under the Code. The arbitrator will apply California substantive law in
all respects. The party prevailing in the resolution of any such claim will be
entitled, in addition to such other relief as may be granted, to an award of all
actual attorneys fees and costs incurred in pursuit of the claim, without regard
to any statute, schedule, or rule of court purported to restrict such award.
9. Entire Agreement. This Agreement constitutes the entire agreement of
the parties with respect to the subject matter of this Agreement, and supersedes
all prior and contemporaneous negotiations, agreements and understandings
between the parties, oral or written.
10. Modification; Waivers. No modification, termination or attempted
waiver of this Agreement will be valid unless in writing, signed by the party
against whom such modification, termination or waiver is sought to be enforced.
11. Amendment. This Agreement may be amended or supplemented only by
writing signed by Employee and the Company.
Dated:
-------------- ---------------------------------------
Gregory P. Hanson
9
<PAGE> 1
EXHIBIT 10.15
AVANIR PHARMACEUTICALS
1998 STOCK OPTION PLAN
SECTION 1. ESTABLISHMENT AND PURPOSE.
This Plan was established in 1998 to offer selected Employees, directors,
advisors and Consultants an opportunity to acquire a proprietary interest in the
success of AVANIR Pharmaceuticals, a California corporation (the "Company"), or
to increase such interest, by purchasing Shares of the Company's common stock.
This Plan provides for the grant of Options to purchase Shares. Options granted
under this Plan may include Nonstatutory Options as well as ISOs intended to
qualify under Section 422 of the Code. This Plan is intended to comply in all
respects with Rule 16b-3 (or its successor) under the Exchange Act.
SECTION 2. DEFINITIONS.
(a) "Board of Directors" shall mean the Board of Directors of the Company,
as constituted from time to time.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Committee" shall mean a committee of the Board of Directors,
consisting of Nonemployee Directors as appointed by the Board of Directors from
time to time, or, if no such committee is appointed, all members of the Board of
Directors described in Section 3(a) of this Plan.
(d) "Company" shall mean AVANIR Pharmaceuticals, a California corporation.
(e) "Consultant" shall mean any individual who is (i) a member of the
Board of Directors but who is not an Employee, (ii) an affiliate of a member of
the Board of Directors, (iii) a member of the board of directors of a Subsidiary
or (iv) an independent contractor who performs services for the Company or a
Subsidiary.
(f) "Employee" shall include every individual performing Service to the
Company or its Subsidiaries if the relationship between such individual and the
Company or its Subsidiaries is the legal relationship of employer and employee.
This definition of "Employee" is qualified in its entirety and is subject to the
definition set forth in Section 3401(c) of the Code and the applicable
regulations thereunder.
(g) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(h) "Exercise Price" shall mean the amount for which one Share may be
purchased upon exercise of an Option, as specified by the Committee in the
applicable Stock Option Agreement.
(i) "Fair Market Value" shall mean the market price of Stock, determined
by the Committee as follows:
(1) If Stock was traded over-the-counter on the date in question but
was not classified as a national market issue, then the Fair Market Value shall
be equal to the mean between the last reported representative bid and asked
prices quoted by the NASDAQ system for such date;
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(2) If Stock was traded over-the-counter on the date in question and
was classified as a national market issue, then the Fair Market Value shall be
equal to the last-transaction price quoted by the NASDAQ system for such date;
(3) If Stock was traded on a stock exchange on the date in question,
then the Fair Market Value shall be equal to the closing price reported by the
applicable composite-transaction report for such date; and
(4) If none of the foregoing provisions is applicable, then the Fair
Market Value shall be determined by the Committee in good faith and in
accordance with Section 260.140.50, Title 10 of the California Code of
Regulations, or with respect to the determination of Fair Market Value in
connection with the exercise of any Options granted to Nonemployee Directors
under Section 4(b) of this Plan, by an independent appraiser selected by the
Committee in its sole discretion.
In all cases, the determination of Fair Market Value by the Committee shall be
conclusive and binding on all persons.
(j) "ISO" shall mean an incentive stock option described in Section 422(b)
of the Code.
(k) "Nonemployee Director" shall mean a member of the Board of Directors
who (i) is not currently an officer or Employee of the Company or a parent or
Subsidiary of the Company, (ii) has not received compensation for serving as a
Consultant or in any other non-director capacity or had an interest in any
transaction with the Company or a parent or Subsidiary of the Company that would
exceed the $60,000 threshold for which disclosure would be required under Item
404(a) of Regulation S-K, or (iii) has not been engaged through another party in
a business relationship with the Company which would be disclosable under Item
404(b) of Regulation S-K. If the Board of Directors determines that compliance
with Section 162(m) of the Code is desirable, then the term "Nonemployee
Director" shall also be interpreted to satisfy the definition of "outside
director" under Section 162(m) and applicable regulations issued pursuant
thereto.
(l) "Nonstatutory Option" shall mean a Stock Option not described in
Sections 422(b) or 423(b) of the Code.
(m) "Option" shall mean an ISO or Nonstatutory Option granted under this
Plan and entitling the holder to purchase Shares.
(n) "Optionee" shall mean an individual who holds an Option.
(o) "Plan" shall mean the 1998 Stock Option Plan of the Company, as
amended.
(p) "Service" shall mean service as an Employee or Consultant.
(q) "Share" shall mean one share of Stock, as adjusted in accordance with
Section 8 of this Plan (if applicable).
(r) "Stock" shall mean the Common Stock of the Company.
(s) "Stock Option Agreement" shall mean the agreement between the Company
and an Optionee which contains the terms, conditions and restrictions pertaining
to his or her Option.
(t) "Stock Purchase Agreement" shall mean the Notice of Exercise and Stock
Purchase Agreement to be delivered by an Optionee to the Company upon exercise
of an Option.
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(u) "Subsidiary" shall mean any corporation, if the Company and/or one or
more other Subsidiaries own not less than 50 percent of the total combined
voting power of all classes of outstanding Stock of such corporation. A
corporation that attains the status of a Subsidiary on a date after the adoption
of this Plan shall be considered a Subsidiary commencing as of such date.
(v) "Taxes" shall mean the term defined in Section 6(d)(1) of this Plan.
(w) "Total and Permanent Disability" shall mean that the Optionee is
unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted, or can be expected to last, for a continuous period
of not less than one year.
SECTION 3. ADMINISTRATION.
(a) Committee Membership. This Plan shall be administered by the
Committee. The Committee shall be comprised either (i) solely of Nonemployee
Directors of the Company and shall have at least two members or (ii) of the
entire Board of Directors if no such committee is appointed. The Committee shall
meet such other requirements as may be established from time to time by the
Securities and Exchange Commission for plans intended to qualify for exemption
under Rule 16b-3 (or its successor) under the Exchange Act. The Board of
Directors may appoint a separate committee of the Board of Directors, comprised
of two or more directors of the Company who need not be Nonemployee Directors,
who may administer this Plan with respect to Employees or Consultants who are
not officers or directors of the Company or incoming new directors of the
Company, may grant Options under this Plan to such persons and may determine the
timing, number of Shares subject to such Options and other terms of such grants.
(b) Committee Procedures. The Committee shall designate one of its members
as chairman. The Committee may hold meetings at such times and places as it
shall determine. The acts of a majority of the Committee's members present at
meetings at which a quorum exists, or acts reduced to or approved in writing by
all of the Committee's members, shall be valid acts of the Committee.
(c) Committee Responsibilities. Subject to the provisions of this Plan,
and without further approval of the Board of Directors, the Committee shall have
full authority and discretion to take the following actions:
(1) To interpret this Plan and to apply its provisions;
(2) To adopt, amend or rescind rules, procedures and forms relating
to this Plan;
(3) To authorize any person to execute, on behalf of the Company,
any instrument required to carry out the purposes of this Plan;
(4) To determine when Options are to be granted under this Plan;
(5) To select the Optionees;
(6) To determine the number of Shares to be made subject to each
Option;
(7) To prescribe the terms and conditions of each Option, including,
without limitation, the Exercise Price, to determine whether such Option is to
be classified as an ISO or as a Nonstatutory Option, and to specify the
provisions of the Stock Option Agreement relating to such Option;
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(8) To amend any outstanding Stock Option Agreement, subject to
applicable legal restrictions and to the consent of the Optionee who entered
into such agreement;
(9) To accelerate or defer, with the consent of the Optionee, the
exercise date of any Option;
(10) With the consent of the Optionee, to reprice, cancel and
regrant, or otherwise adjust the Exercise Price of an Option previously granted
by the Committee;
(11) To prescribe the consideration for the grant of each Option or
other right under this Plan and to determine the sufficiency of such
consideration; and
(12) To take any other actions deemed necessary or advisable for the
administration of this Plan.
All decisions, interpretations and other actions of the Committee shall be final
and binding on all Optionees, and all persons deriving their rights from an
Optionee. No member of the Committee shall be liable for any action that he or
she has taken or has failed to take in good faith with respect to this Plan, any
Option, or any other right to acquire Shares under this Plan.
SECTION 4. ELIGIBILITY.
(a) General Rule. Employees and Consultants shall be eligible to receive
Options. However, only Employees shall be eligible for the grant of ISOs.
(b) Ten-Percent Stockholders. An Employee who owns more than 10 percent of
the total combined voting power of all classes of Outstanding Stock of the
Company or any of its Subsidiaries shall not be eligible for the grant of an
Option unless (i) the Exercise Price is at least 110 percent of the Fair Market
Value of the Shares underlying such Option on the date of grant of such Option
and (ii) if such Option is an ISO, such ISO is not exercisable after the
expiration of five years from the date of grant.
(c) Attribution Rules. For purposes of Subsection (b) above, in
determining Stock ownership, an Employee shall be deemed to own the Stock owned,
directly or indirectly, by or for such Employee's brothers, sisters, spouse,
ancestors and lineal descendants. Stock owned, directly or indirectly, by or for
a corporation, partnership, estate or trust shall be deemed to be owned
proportionately by or for its stockholders, partners or beneficiaries. Stock
with respect to which such Employee holds an Option shall be counted in the
determination of Stock ownership for purposes of the above Subsection (b).
(d) Outstanding Stock. For purposes of Subsection (b) above, "Outstanding
Stock" shall include all Stock actually issued and outstanding immediately after
the grant. "Outstanding Stock" shall not include Shares authorized for issuance
under outstanding Options held by the Employee or by any other person.
SECTION 5. STOCK SUBJECT TO THIS PLAN.
(a) Basic Limitation. Shares subject to Options granted under this Plan
shall be authorized but unissued Shares. The aggregate number of Shares which
may be issued under this Plan (upon exercise of Options or other rights to
acquire Shares) shall not exceed 1,875,000 Shares, subject to adjustment
pursuant to Section 8 of this Plan. The number of Shares which is subject to
Options or other rights outstanding at any time under this Plan shall not exceed
the number of Shares which then remain available for
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issuance under this Plan. The Company, during the term of this Plan, shall at
all times reserve and keep available sufficient Shares to satisfy the
requirements of this Plan.
(b) Additional Shares. In the event that any outstanding Option or other
right for any reason expires or is canceled or otherwise terminated, the Shares
allocable to the unexercised portion of such Option or other right shall again
be available for the purpose of this Plan.
(c) Limitation on Grants. The maximum number of Shares as to which Options
shall be granted to any single Optionee shall not exceed 500,000 Shares.
SECTION 6. TERMS AND CONDITIONS OF OPTIONS.
(a) Stock Option Agreement. Each grant of an Option under this Plan shall
be evidenced by a Stock Option Agreement between the Optionee and the Company.
Such Option shall be subject to all applicable terms and conditions of this Plan
and may be subject to any other terms and conditions which are not inconsistent
with this Plan and which the Committee deems appropriate for inclusion in a
Stock Option Agreement. The provisions of the various Stock Option Agreements
entered into under this Plan need not be identical.
(b) Number of Shares. Each Stock Option Agreement shall specify the number
of Shares that are subject to the Option and shall provide for the adjustment of
such number in accordance with Section 8 of this Plan. The Stock Option
Agreement shall also specify whether the Option is an ISO or a Nonstatutory
Option.
(c) Exercise Price. Each Stock Option Agreement shall specify the Exercise
Price. The Exercise Price of an ISO shall not be less than 100 percent of the
Fair Market Value of a Share on the date of grant of the Option, except as
otherwise provided in Section 4(b) of this Plan. The Exercise Price of a
Nonstatutory Option shall not be less than 85 percent of the Fair Market Value
of a Share on the date of grant. Subject to the preceding two sentences, the
Exercise Price under any Option shall be determined by the Committee in its sole
discretion. The Exercise Price shall be payable in a form described in Section 7
of this Plan.
(d) Withholding Taxes. The Company's obligation to deliver Shares or cash
upon the exercise of Options shall be subject to the satisfaction of all
applicable Federal, State and local income tax and employment tax withholding
requirements.
(1) In the event that the Company or a Subsidiary determines that it
is required to withhold federal, state, foreign or local taxes or social
security/insurance amounts in connection with the grant or exercise of an Option
or the disposition of Shares pursuant to the exercise of an Option
(collectively, the "Taxes"), the Optionee or any person succeeding to the rights
of the Optionee, as a condition to such grant, exercise or disposition, may be
required to make arrangements satisfactory to the Company or such Subsidiary to
enable it to satisfy such withholding requirements. Alternatively, at its
discretion, the Company may issue or transfer Shares net of the number of Shares
sufficient to satisfy the withholding requirements, with such Shares valued as
of the date the withholding obligation is incurred.
(2) The Committee may also, in its discretion and applying relevant
law in accordance with the provisions of this Section 6(d) and such supplemental
rules as the Committee may from time to time adopt, require as a condition of
delivery of the Shares upon exercise of Options, that the Optionee remit to the
Company an amount in cash or check sufficient to satisfy the Taxes.
(3) The Committee may, in its discretion and in accordance with the
provisions of this Section 6(d) and such supplemental rules as the Committee may
from time to time adopt, provide any or all
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Optionees holding Nonstatutory Options with the right to use Shares in
satisfaction of all or part of the Federal, State and local income tax and
employment tax liabilities incurred by such Optionees in connection with the
exercise of their Options (the "Taxes"). The Optionee holding a Nonstatutory
Option may be provided with the election to have the Company withhold, from the
Shares otherwise issuable upon the exercise of such Nonstatutory Option, a
portion of such Shares with an aggregate Fair Market Value equal to the
designated percentage (up to 100% as specified by the Optionee) of the
applicable Taxes. Any such withholding election shall be subject to the
following terms and conditions:
(i) The election must be made on or before the date the amount
of the Taxes incurred by the Optionee in connection with the exercise of the
Option is determined (the "Tax Determination Date").
(ii) The election shall be irrevocable.
(iii) The election shall be subject to the approval of the
Committee and none of the Shares for which the Option is exercised shall be
withheld in satisfaction of the Taxes incurred by the Optionee in connection
with such exercise, except to the extent the election is approved by the
Committee.
(iv) The Shares withheld pursuant to the election shall be
valued at Fair Market Value on the Tax Determination Date.
(v) In no event may the number of Shares requested to be
withheld exceed in value the dollar amount of Taxes incurred by the Optionee in
connection with the exercise of the Nonstatutory Option.
(vi) If the withholding election is to be made by an Optionee
who is at the time an officer or director of the Company subject to the
short-swing profit restrictions of Section 16(b) of the Exchange Act, then the
following limitations, in addition to the preceding provisions of this Section
6(d), shall also be applicable:
(A) The election shall not become effective at any
time prior to the expiration of the six month period measured from the later of
the grant date of the Nonstatutory Option to which such election pertains or the
actual grant date of the withholding election, and no Shares shall accordingly
be withheld in connection with any Tax Determination Date which occurs before
the expiration of such six month period.
(B) The election must be effected in accordance
with either of the following guidelines: (1) the election must be made six
months or more prior to the Tax Determination Date, and (2) the exercise of such
election and the exercise of the Nonstatutory Option to which such election
relates must occur concurrently within a quarterly "window" period. Quarterly
window periods shall begin on the third business day following the date of
public release of each quarterly or annual summary statement of the Company's
sales and earning and end on the earlier of the 12th business day following such
release date or the Tax Determination Date.
(C) The six month period specified in clauses (A) and
(B) shall not be applicable in the event of the Optionee's death or disability.
(e) Exercisability and Term. Each Stock Option Agreement shall specify the
date when all or any installment of the Option is to become exercisable. The
vesting of any Option shall be determined by the Committee in its sole
discretion; provided, however, that the Optionee's right to exercise the Option
shall be at the rate of at least 20% per year over five years from the date when
the Option is granted. A Stock Option Agreement may provide for accelerated
exercisability in the event of the Optionee's death, Total and
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Permanent Disability or retirement or other events determined from time to time
by the Committee. The Stock Option Agreement shall also specify the term of the
Option, which term shall not exceed ten years from the date of grant. Subject to
the preceding sentence, the Committee in its sole discretion shall determine
when an Option is to expire. An Option shall be deemed exercised when the
Company receives from the Optionee (i) an executed Stock Purchase Agreement in
accordance with the terms of the Option by the person entitled to exercise the
Option and (ii) full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Committee, consist of any
consideration and method of payment allowable under Section 7 of this Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder of the Company shall exist with respect to the
Shares, notwithstanding the exercise of the Option. No adjustment will be made
for a dividend or other right for which the record date is prior to the date
when the stock certificate is issued, except as provided in Section 8 of this
Plan. With respect to any ISOs granted under this Plan, the aggregate Fair
Market Value (determined as of the respective date or dates of grant) of the
Shares for which one or more Options granted to any Employee under this Plan (or
any other option plan of the Company or its parent or Subsidiary corporations)
may for the first time become exercisable as ISOs during any one calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two or more such Options which become exercisable for
the first time in the same calendar year, the foregoing limitation on the
exercisability thereof as ISOs shall be applied on the basis of the order in
which such Options are granted. To the extent such dollar limitation is exceeded
in any one calendar year, the Option shall nevertheless be exercisable for the
excess number of Shares as a Nonstatutory Option.
(f) Nontransferability. During an Optionee's lifetime, such Optionee's
Option(s) shall be exercisable only by him or her and shall not be transferable.
In the event of an Optionee's death, such Optionee's Option(s) shall not be
transferable other than by will or by the laws of descent and distribution.
(g) Termination of Service (Except by Death). If an Optionee's Service
terminates for any reason other than such Optionee's death, then such Optionee's
Option(s) shall expire on the earliest of the following occasions:
(1) The expiration date determined pursuant to Subsection (e) above;
(2) The date which is thirty (30) days after the termination of the
Optionee's Service for any reason other than Total and Permanent Disability; or
(3) The date which is six (6) months after the termination of the
Optionee's Service by reason of Total and Permanent Disability.
(h) The Optionee may exercise all or part of his or her Option(s) at any
time before the expiration of such Option(s) under the preceding sentence, but
only to the extent that such Option(s) had become exercisable before the
Optionee's Service terminated or became exercisable as a result of the
termination. The balance of such Option(s) shall lapse when the Optionee's
Service terminates. In the event that the Optionee dies after the termination of
the Optionee's Service but before the expiration of the Optionee's Option(s),
all or part of such Option(s) may be exercised (prior to expiration) by the
executors or administrators of the Optionee's estate or by any person who has
acquired such Option(s) directly from the Optionee by bequest or inheritance,
but only to the extent that such Option(s) had become exercisable before the
Optionee's Service terminated or became exercisable as a result of the
termination. For purposes of the foregoing provisions of this Subsection 6(g),
the Optionee shall be deemed to be providing Service to the Company for so long
as the Optionee renders Service on a periodic basis to the Company or a
Subsidiary in the capacity of an Employee or Consultant. The Optionee shall be
considered to be an Employee for so long as the Optionee remains in the employ
of the Company or a Subsidiary.
7
<PAGE> 8
(i) Leaves of Absence. For purposes of Subsection (g) above, Service shall
be deemed to continue while the Optionee is on military leave, sick leave or
other bona fide leave of absence (as determined by the Committee). The foregoing
notwithstanding, in the case of an ISO granted under this Plan, Service shall
not be deemed to continue beyond the first 90 days of such leave, unless the
Optionee's reemployment rights are guaranteed by statute or by contract.
(j) Death of Optionee. If an Optionee dies while he or she is providing
Service to the Company, then such Optionee's Option(s) shall expire on the
earlier of the following dates:
(1) The expiration date determined pursuant to Subsection (e) above;
or
(2) The date which is six (6) months after the Optionee's death.
All or part of the Optionee's Option(s) may be exercised at any time before the
expiration of such Option(s) under the preceding sentence by the executors or
administrators of the Optionee's estate or by any person who has acquired such
Option(s) directly from the Optionee by bequest or inheritance, but only to the
extent that such Option(s) had become exercisable before the Optionee's death or
became exercisable as a result of the Optionee's death. The balance of such
Option(s) shall lapse when the Optionee dies.
(k) No Rights as a Stockholder. An Optionee, or a transferee of an
Optionee, shall have no rights as a stockholder with respect to any Shares
covered by his or her Option until the date of the issuance of a stock
certificate for such Shares. No adjustments shall be made, except as provided in
Section 8 of this Plan.
(l) Modification, Extension and Renewal of Options. Within the limitations
of this Plan, the Committee may modify, extend or renew outstanding Options or
may accept the cancellation of outstanding Options (to the extent not previously
exercised) in return for the grant of new Options at the same or a different
Exercise Price. The foregoing notwithstanding, no modification of an Option
shall, without the consent of the Optionee, impair such Optionee's rights or
increase his or her obligations under such Option.
(m) Restrictions on Transfer of Shares. Any Shares issued upon exercise of
an Option shall be subject to such transfer restrictions as the Committee shall
determine so long as such restrictions do not unfairly prejudice the opportunity
of the Optionee to receive the fair value of the applicable Shares under
applicable law, in addition to any general restrictions that may apply to all
holders of Stock. Options may not be transferred or assigned in any manner other
than by will or by the laws of descent or distribution.
(n) Rule 16b-3. Options granted to persons who are subject to Section 16
of the Exchange Act shall comply with the applicable provisions of Rule 16b-3
promulgated thereunder and shall contain such additional conditions or
restrictions as may be required thereunder to qualify for the maximum exemption
from Section 16 of the Exchange Act with respect to this Plan's transactions.
SECTION 7. PAYMENT FOR SHARES.
(a) General Rule. The entire Exercise Price of Shares issued under this
Plan shall be payable in lawful money of the United States of America at the
time when such Shares are purchased, except as follows:
(1) In the case of an ISO granted under this Plan, payment shall be
made only pursuant to the express provisions of the applicable Stock Option
Agreement. However, the Committee (in its sole discretion) may specify in the
Stock Option Agreement that payment may be made pursuant to Subsections (b), (c)
or (d) below; or
8
<PAGE> 9
(2) In the case of a Nonstatutory Option granted under this Plan,
the Committee (in its sole discretion) may accept payment pursuant to
Subsections (b), (c) or (d) below.
(b) Surrender of Stock. To the extent that this Subsection (b) is
applicable, payment may be made all or in part with Shares which have already
been owned by the Optionee or his or her representative for more than 12 months
and which are surrendered to the Company in good form for transfer. Such Shares
shall be valued at their Fair Market Value on the date when the new Shares are
purchased under this Plan.
(c) Exercise/Sale. To the extent that this Subsection (c) is applicable,
payment may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to a securities broker approved by the Company to sell
Shares and to deliver all or part of the sales proceeds to the Company in
payment of all or part of the Exercise Price and any Taxes.
(d) Exercise/Pledge. To the extent that this Subsection (d) is applicable,
payment may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to pledge Shares to a securities broker or lender approved
by the Company, as security for a loan, and to deliver all or part of the loan
proceeds to the Company in payment of all or part of the Exercise Price and any
Taxes.
SECTION 8. ADJUSTMENT OF SHARES.
(a) General. In the event of a subdivision of the outstanding Stock, a
declaration of a dividend payable in Shares, a declaration of a dividend payable
in a form other than Stock in an amount that has a material effect on the value
of Stock, a combination or consolidation of the outstanding Stock (by
reclassification or otherwise) into a lesser number of Shares, a
recapitalization, a spinoff or a similar occurrence, the Committee shall make
appropriate adjustments in one or more of (i) the number of Shares available for
future grants under Section 5 of this Plan, (ii) the number of Shares covered by
each outstanding Option or (iii) the Exercise Price under each outstanding
Option.
(b) Reorganizations. In the event of any of the following transactions (a
"Corporate Transaction"):
(1) a merger or acquisition involving the Company in which the
Company is not the surviving entity, except for a transaction the principal
purpose of which is to change the State of the Company's incorporation,
(2) sale, transfer or other disposition of all or substantially all
of the assets of the Company or
(3) any other corporate reorganization or business combination in
which fifty percent (50%) or more of the Company's outstanding voting stock is
transferred to different holders in a single transaction or a series of related
transactions,
then the exercisability of each Option outstanding under the Plan shall be
automatically accelerated so that each such Option shall immediately prior to
the specified effective date for the Corporate Transaction, become fully
exercisable with respect to the total number of Shares purchasable under such
Option and may be exercised for all or any portion of such Shares. However, an
outstanding Option under the Plan shall not be so accelerated if (i) such Option
is, in connection with the Corporate Transaction, either to be assumed by the
successor corporation or parent thereof or be replaced with a comparable option
to purchase shares of the capital stock of the successor corporation or parent
thereof, or (ii) such Option is to be replaced by a comparable cash incentive
program of the successor corporation based on the value of the option at the
time of the Corporate Transaction, or (iii) the acceleration of such Option is
subject to other applicable limitations
9
<PAGE> 10
imposed by the Committee at the time of the grant. The determination of
comparability under clauses (i) or (ii) above shall be made by the Committee and
its determination shall be final, binding and conclusive. In connection with any
such Corporate Transaction, the exercisability as an incentive stock option
under the federal tax laws of any accelerated Options under the Plan shall
remain subject to any applicable dollar limitation of Section 6(e). Except as
provided below in this Subsection (b), upon the consummation of the Corporate
Transaction, all outstanding Options under the Plan shall, to the extent not
previously exercised or assumed by the successor corporation or its parent
company, terminate and cease to be outstanding. If the Company is the surviving
entity in any Corporate Transaction or the outstanding Options are to be assumed
in connection with such Corporate Transaction, then each Option shall,
immediately after such Corporate Transaction, be appropriately adjusted to apply
and pertain to the number and class of securities which would be issuable to the
Optionee, upon consummation of such Corporate Transaction if the Option were
exercised immediately prior to such Corporate Transaction. Appropriate
adjustments shall also be made to the Exercise Price payable per share, provided
the aggregate Exercise Price payable upon exercise of such Option shall remain
the same. In addition, the class and number of securities available for issuance
under the Plan following the consummation of such Corporate Transaction shall be
appropriately adjusted. The grant of Options under this Plan shall in no way
affect the right of the Company to adjust, reclassify, reorganize or otherwise
change its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
(c) Reservation of Rights. Except as provided in this Section 8, an
Optionee shall have no rights by reason of any subdivision or consolidation of
Shares of Stock of any class, the payment of any dividend or any other increase
or decrease in the number of Shares of Stock of any class. Any issue by the
Company of Shares of Stock of any class, or securities convertible into Shares
of Stock of any class, shall not affect, and no adjustment by reason thereof
shall be made with respect to, the number or Exercise Price of Shares subject to
an Option. The grant of an Option pursuant to this Plan shall not affect in any
way the right or power of the Company to make adjustments, reclassification,
reorganizations or changes of its capital or business structure, to merge or
consolidate or to dissolve, liquidate, sell or transfer all or any part of its
business or assets.
SECTION 9. SECURITIES LAWS.
Shares shall not be issued under this Plan unless the issuance and
delivery of such Shares comply with (or are exempt from) all applicable
requirements of law, including, without limitation, the Securities Act of 1933,
as amended, the rules and regulations promulgated thereunder, state securities
laws and regulations, and the regulations of any stock exchange on which the
Company's securities may then be listed.
SECTION 10. NO EMPLOYMENT RIGHTS.
No provision of this Plan, nor any right or Option granted under this
Plan, shall be construed to give any person any right to become, to be treated
as, or to remain an Employee or Consultant or in any way to amend, modify, waive
or terminate the Company's (or any Subsidiary's) right to terminate any person's
Service at any time and for any reason.
SECTION 11. DURATION AND AMENDMENTS.
(a) Term of this Plan. This Plan, as set forth herein, shall become
effective December 1, 1998, the date when the Board of Directors adopted this
Plan. Notwithstanding the foregoing, no Option granted under this Plan shall
become exercisable unless and until this Plan shall have been approved by the
shareholders of the Company. This Plan shall terminate automatically on the date
which is ten (10) years after its initial adoption by the Board of Directors,
November 20, 2008, and may be terminated on any earlier date pursuant to
Subsection (b) below.
10
<PAGE> 11
(b) Right to Amend or Terminate this Plan. The Board of Directors may
amend, suspend or terminate this Plan at any time and for any reason; provided,
however, that any amendment of this Plan which: (i) materially increases the
number of Shares available for issuance under this Plan (except as provided in
Section 8 of this Plan); (ii) materially changes the class of persons who are
eligible for the grant of ISOs; or (iii) if required by Rule 16b-3 (or any
successor thereto) under the Exchange Act, would materially increase the
benefits accruing to participants under this Plan or would materially modify the
requirements as to eligibility for participation in this Plan, shall be subject
to the approval of the Company's shareholders by the affirmative vote of the
holders of a majority of the securities of the Company present, or represented
and entitled to vote at a duly held shareholders' meeting. Shareholder approval
shall not be required for any other amendment of this Plan.
(c) Effect of Amendment or Termination. No Shares shall be issued or sold
under this Plan after the termination thereof, except upon exercise of an Option
granted prior to such termination. The termination of this Plan, or any
amendment thereof, shall not affect any Share previously issued or any Option
previously granted under this Plan.
SECTION 12. EXECUTION.
To record the adoption of this Plan by the Board of Directors on as of
November 20, 1998, the Company has caused its authorized officer to execute the
same.
AVANIR PHARMACEUTICALS
a California corporation
By: /s/ Gerald J. Yakatan
----------------------------------
Gerald J. Yakatan,
President and CEO
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR HTE SIX MONTH PERIOD ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 4,056,050
<SECURITIES> 0
<RECEIVABLES> 226,090
<ALLOWANCES> 0
<INVENTORY> 111,901
<CURRENT-ASSETS> 4,576,531
<PP&E> 793,843
<DEPRECIATION> 440,524
<TOTAL-ASSETS> 5,759,041
<CURRENT-LIABILITIES> 1,460,175
<BONDS> 0
0
1,888,868
<COMMON> 60,268,094
<OTHER-SE> (57,858,096)
<TOTAL-LIABILITY-AND-EQUITY> 5,759,041
<SALES> 0
<TOTAL-REVENUES> 109,389
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,347,373
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,124
<INCOME-PRETAX> (4,242,108)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,242,108)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,242,108)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
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