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This filing is made pursuant
to Rule 424 (b)(3) under
the Securities Act of 1933
in connection with
Registration No. 333-77925
PROSPECTUS
930,000 SHARES
AVANIR PHARMACEUTICALS
CLASS A COMMON STOCK, NO PAR VALUE
-------------------------
We are registering for resale 930,000 shares of our Class A Common Stock, no par
value, on behalf of the following selling shareholders: JMBL LLC, a Delaware
limited liability company, Redington, Inc., a Connecticut corporation, and
Cline, Davis & Mann, Inc., a New York corporation.
We will not receive any proceeds from the selling shareholders' sale of their
shares of Class A Common Stock.
Our Class A Common Stock trades on the Nasdaq National Market under the symbol
"AVNR." On July 14, 1999, the closing sale price of our Class A Common Stock as
quoted on the Nasdaq National Market was $0.844 per share.
INVESTING IN OUR CLASS A COMMON STOCK INVOLVES SEVERAL RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------------
August 11, 1999
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AVANIR PHARMACEUTICALS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Summary..................................................... 3
The Company................................................. 3
Risk Factors................................................ 5
Forward Looking Statements.................................. 12
Description of Securities................................... 12
Use of Proceeds............................................. 13
Selling Shareholders........................................ 13
Plan of Distribution........................................ 14
Legal Matters............................................... 16
Experts..................................................... 16
Available Information....................................... 16
Incorporation of Certain Information by Reference........... 17
</TABLE>
You should rely only on the information contained or incorporated by
reference in the prospectus and in any prospectus supplement. No one has been
authorized to provide you with different information.
The shares of our Class A Common Stock are not being offered in any
jurisdiction where the offer is not permitted.
You should not assume that the information in this prospectus or any
prospectus supplement is accurate as of any date other than the date provided on
the front page of the documents.
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SUMMARY
On behalf of our selling shareholders we are registering for resale 930,000
shares of our Class A Common Stock, which consists of:
- 500,000 shares of Class A Common Stock that are issuable upon the
exercise of the Class I Stock Purchase Warrant that we issued to JMBL
LLC;
- 375,000 shares of Class A Common Stock that are issuable upon the
exercise of the Class K Stock Purchase Warrant that we issued to
Redington, Inc.; and
- 55,000 shares of Class A Common Stock that are issuable upon the exercise
of the Class L Stock Purchase Warrant that we issued to Cline Davis &
Mann, Inc.
You should read the following information about our company, together with
the more detailed information about the securities underlying this offering,
contained elsewhere in this prospectus. In particular, you should read the
section entitled "Risk Factors," which explains that your investment in shares
of our Class A Common Stock involves a high degree of risk. Our financial
statements and related notes are not included in this prospectus, but are
incorporated by reference in the exhibits located at the end of this prospectus.
THE COMPANY
We are a development stage company organized to discover, develop and
market novel therapeutic products to treat human diseases. Since our inception
in 1988, we have operated in one business segment -- pharmaceutical product
development.
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. In December 1998, we delayed product launch plans for
docosanol cream when we received a "not approvable" letter from the U.S. Food
and Drug Administration following its review of the initial information that we
submitted with our new drug application for docosanol cream. The FDA's letter
stated that it required additional evidence to substantiate the efficacy
findings of studies that we submitted with the new drug application. In March
1999, we amended our new drug application by providing additional evidence of
the effectiveness of docosanol cream and met with the FDA to discuss the
additional evidence and other issues. Since that time, we have been in ongoing
communications with the FDA, including our most recent meeting in early June to
discuss the additional statistical and scientific data provided in our amended
new drug application. We expect the FDA will make a decision on additional
evidence in the very near future.
If we do not receive FDA approval to distribute docosanol cream as a
prescription product or if we determine that the time and cost to obtain
approval is excessive, then we intend to develop and market a modified
formulation of our product to meet the FDA's guidelines for an over-the-counter
product for cold sores.
If we commercialize docosanol cream either as a prescription product or
with a modified formulation as an over-the-counter product, then our company
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
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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.
Other Proposed Products: We also are engaged in much earlier stages of
research and/or development of several other potential therapeutic products,
including potential new drugs for treatment of allergies, asthma and
inflammatory diseases. We have signed a letter of intent with a third party for
the rights to develop and market 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.
Our address is 9393 Towne Centre Drive, Suite 200, San Diego, California
92121. Our telephone number is (619) 558-0364; our e-mail address is
[email protected]; and our home page address is http://www.avanir.com.
RISK FACTORS
WE ARE A DEVELOPMENT STAGE COMPANY WITH A HISTORY OF CONTINUING LOSSES AND
A SMALL AMOUNT OF CAPITAL RESERVES, WHICH CREATES "GOING CONCERN"
UNCERTAINTIES.
In the Independent Auditors' Report on our financial statements for the
fiscal year ended September 30, 1998, they indicated that we will need to raise
additional outside capital to continue as a going concern. From our inception
through March 31, 1999, we have generated only limited revenues and have
incurred net losses totaling approximately $57.9 million. Further, we expect to
continue to incur operating losses related to research and development and
marketing activities, 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 we can offer them for sale in the
marketplace. With only $3.1 million in working capital at March 31, 1999, we
will need to successfully complete current financing arrangements as well as
seek additional financing for future operations. Even if we implement
successfully our marketing strategy or achieve significant revenues or
profitable operations, we cannot assure you that we will be able to continue as
a going concern.
IF WE DO NOT COMPLY WITH THE LISTING AND MAINTENANCE REQUIREMENTS OF THE NASDAQ
NATIONAL MARKET SYSTEM OUR CLASS A COMMON STOCK COULD BE DELISTED.
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, one of the Nasdaq rules provides that the minimum bid price of
our Class A Common Stock must trade at or above $1.00 per share. 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.
Nasdaq's minimum compliance standard requires us to achieve a minimum bid price
at or above $1.00 for a minimum of ten (10) consecutive business days during the
ninety-day compliance period.
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On February 8, 1999, we received notice from Nasdaq that the minimum bid
price of our Class A Common Stock had failed to maintain 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 and for fourteen (14) additional
consecutive days ending June 11, 1999. However, as of July 14, 1999 the closing
sales price of our Class A Common Stock was $0.84 per share. Although our stock
price has achieved a closing bid price at or above $1.00 on several occasions
since February 8, 1999, Nasdaq still considers the bid price of our common stock
to be deficient and has never formally deemed us to be back in compliance.
Additionally, the bid price of our Class A Common Stock could fall below
$1.00 due to the resale of shares of Class A Common Stock underlying our other
outstanding securities, warrants and stock options. Specifically, the resale of
the shares underlying our Series D Convertible Preferred Stock and the resale of
shares to potentially be issued under our equity line arrangement could cause
downward pressure on the bid price of our Class A Common Stock. See the risk
factor entitled: "If the Series D Convertible Preferred Stock is converted or we
issue additional shares of equity securities, then the value of existing shares
of Class A Common Stock currently outstanding may be diluted." See also the risk
factor entitled "There will be a dilutive effect on the shares of our Class A
Common Stock from the conversion or exercise of certain other outstanding
securities."
In particular, our Series D Convertible Preferred Stock is a "future-priced
security," given that its conversion price is linked to the future market price
of our Class A Common Stock at the time of conversion. Our Series D Convertible
Preferred Stock will convert into more shares of Class A Common Stock if the
market price of our Class A Common Stock is lower at the time of conversion. The
conversion of the Series D Convertible Preferred Stock could dilute the
ownership of holders of our Class A Common Stock, causing downward pressure on
the market price of our Class A Common Stock. In turn, this lower market price
would allow for still greater conversion of the Series D Convertible Preferred
Stock and cause additional downward pressure on the market price. If the bid
price of our Class A Common Stock is reduced to less than $1.00 per share, then
Nasdaq could delist our Class A Common Stock.
Nasdaq also requires that we maintain net tangible assets of at least $4
million. At March 31, 1999, our net tangible assets were $4.1 million. If we do
not complete all of the terms and conditions necessary to obtain up to $18
million in financing previously arranged with our investors to support
operations, we likely will not sustain Nasdaq's minimum listing requirement for
net tangible assets, which would cause the delisting of our Class A Common
Stock.
We attended an oral hearing with Nasdaq on July 1, 1999 and discussed our
financing plans and other plans for improving the trading price of our Class A
Common Stock to acceptable levels. As of July 14, 1999, we had not received a
report from the panel as to the outcome of the meeting. If Nasdaq delists our
Class A Common Stock, 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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OUR AMENDED NEW DRUG APPLICATION FOR DOCOSANOL CREAM MAY NOT RECEIVE FDA
APPROVAL.
On December 22, 1998, we received a letter from the FDA stating that the
new drug application for docosanol cream was "not-approvable." The letter
indicated that additional evidence was necessary to substantiate the drug's
effectiveness. In March 1999, we amended our new drug application to provide
additional evidence of the efficacy of docosanol cream and since then we have
been in ongoing communication with the FDA. The FDA indicated that it will
continue to evaluate the additional effectiveness data submitted and will
respond to us with its findings. 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. The short-term effect likely would be a drop in the
market price of our Class A Common Stock, which would severely hinder our
ability to raise additional capital, if at all, to support continuing
operations, and would jeopardize our listing on the Nasdaq National Market
System. It also would cause us to delay other product development programs.
IF WE DO NOT RECEIVE FDA APPROVAL AS A PRESCRIPTION PRODUCT, WE WILL FACE
SEVERAL RISKS TO LAUNCH 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 ("OTC") 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 the following risks:
- identification of suitable ingredients to be used in the reformulation;
- long term stability of the revised formulation;
- timely compliance with FDA regulations for marketing an OTC product;
- timely execution of a professional marketing and sales communications
program for docosanol cream as an OTC product;
- the difficulty in building product awareness of a new OTC product among
customers or retail store decision makers;
- reduction in ability to price the product at a significant premium to
competing products in the market;
- that consumers may not perceive docosanol cream as superior to the
existing and proposed OTC products for oral herpes; and
- that docosanol cream will gain widespread acceptance in the OTC consumer
market.
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THE MARKET ACCEPTANCE OF DOCOSANOL CREAM IS UNCERTAIN BECAUSE OF THE NEWNESS OF
THE PRODUCT AND CHALLENGES OF BUILDING A NEW MARKETING AND SALES STAFF.
If we continue to develop and eventually launch docosanol cream, then we
will rely substantially on our own marketing and sales organization. We have not
yet hired a marketing and sales force and we expect to face difficulties in
hiring and training marketing and sales staff in a timely fashion, because of
intense competition for competent personnel. Our failure to implement an
effective marketing and sales organization in a timely manner would affect
materially and adversely our business and financial condition. Additionally,
many people do not seek medical treatment for oral herpes, cold sores or fever
blisters. Although we have engaged an advertising agency for advertising and
promotional materials to prepare for a possible product launch of docosanol
cream, we might not develop effective advertising or increase awareness of
treatments. Further, we might not attain a level of sales or profitability
sufficient to sustain our operations.
DOCOSANOL CREAM, IF ULTIMATELY MARKETED, WILL FACE INTENSE COMPETITION
FROM A NUMBER OF EXISTING AND WELL ESTABLISHED PRODUCTS.
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. We will face intense competition from 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).
Most of our competitors have greater financial resources, research and
development facilities and manufacturing and marketing experience than we do.
Our proposed products may not achieve commercial success in this intense
competitive environment.
DUE TO THE SMALL SIZE OF OUR COMPANY, WE WILL DEPEND ON THIRD-PARTY ARRANGEMENTS
TO MANUFACTURE AND 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
commercialize docosanol cream, we have entered into collaborative arrangements
with manufacturing and distribution companies. Such collaborative arrangements
likely will cause higher costs or the sharing of profits with third parties.
Additionally, 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
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manufacturing and/or marketing capabilities, at least for certain proposed
products, which likely would require substantial additional funds and personnel.
AS A SMALL EMERGING BIO-PHARMACEUTICAL COMPANY, WE HAVE LIMITED RESOURCES TO
EFFECTIVELY MITIGATE POTENTIAL RISKS RELATING TO THE FOREIGN SALES OF DOCOSANOL
CREAM AND OTHER POTENTIAL PRODUCTS.
We are subject to various foreign trade risks relating to the continued
development of docosanol cream by foreign licensees. We also may arrange for
contracts in the future for the manufacture, marketing and distribution of
docosanol cream overseas by foreign licensees, which will be substantially out
of our control. Certain risks that could impact significantly our ability to
deliver products will 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;
- 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.
AS A BIO-PHARMACEUTICAL COMPANY, WE NEED TO COMPLY WITH GOVERNMENT REGULATIONS
TO DEVELOP, PRODUCE, TEST, MANUFACTURE AND MARKET DOCOSANOL CREAM AND OUR OTHER
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. While development of docosanol as a
prescription product has been completed and is awaiting FDA approval, we may not
obtain regulatory approval for it or any of our other proposed products. We
expect to use a significant portion of our financial resources for research and
development and the clinical trials necessary to obtain such approvals 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 for which we develop our products. Future changes could
affect the time frame required for regulatory review and the sale prices of our
proposed products, if approved for sale.
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OUR RESEARCH AND DEVELOPMENT PROGRAMS FOR PROPOSED NEW PRODUCTS ARE IN THE EARLY
STAGE OF DEVELOPMENT, ARE UNPROVEN, AND MAY NEVER BE FULLY DEVELOPED.
The development process for medical products is lengthy and capital
intensive. Our drug development programs are subject to all of the risks
inherent in product development based on innovative technologies, including
unanticipated development problems and the possible lack of funding that could
result in the abandonment or substantial change in the development of a specific
product. For example, we face substantial risks of failing to complete the
development of our early-stage research and development programs in allergy and
asthma and other areas. The effectiveness of our pre-clinical allergy and asthma
research 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.
Unsuccessful clinical trial results for our proposed products could affect
materially and adversely our business operations and financial condition.
WE MAY NOT ACQUIRE IN-LICENSED TECHNOLOGIES THAT WE BELIEVE ARE NECESSARY TO
FILL OUR PRODUCT DEVELOPMENT PIPELINE.
Our business strategy is to in-license 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 from 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. For example, we have signed a letter of intent with IriSys Research and
Development, LLC to license world-wide rights to a product intended for use in a
condition associated with neurodegenerative diseases and pain. We cannot assure
you that we will enter into a final agreement with IriSys Research and
Development, LLC to in-license this product on favorable terms, if at all.
AS A SMALL, EMERGING, BIO-PHARMACEUTICAL COMPANY, WE DEPEND ON KEY MANAGEMENT
AND SCIENTIFIC PERSONNEL.
Our success depends on the performance of a small core staff of key
management and scientific employees. Given our early stage of development, we
depend substantially on our ability to hire, train, retain and motivate high
quality personnel, especially our scientists and management team. If we were to
lose one or more of our key scientists, we would lose a certain amount of
history and knowledge that they have which could substantially delay one or more
of our development programs until adequate replacement personnel could be hired
and trained. Our future success also depends on our continuing ability to
identify, hire, train and retain highly qualified technical, sales, marketing
and customer service personnel. We do not have employment agreements for fixed
terms with any of our employees, except with Dr. Gerald J. Yakatan, our
president and chief executive officer, nor do we have "key person" life
insurance policies. The industry in which we compete has a high level of
employee mobility and aggressive recruiting of skilled personnel, which creates
intense competition for qualified personnel, particularly in product research,
development, sales and marketing.
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OUR PATENTS MAY BE CHALLENGED AND OUR PENDING PATENTS MAY BE DENIED, WHICH WOULD
SERIOUSLY JEOPARDIZE OUR ABILITY TO COMPETE IN THE INTENDED MARKETS FOR OUR
PROPOSED PRODUCTS.
We own or have rights to eleven U.S. and eight 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. Because of the competitive nature of the bio-pharmaceutical industry,
we cannot assure you 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
- challenges will not be instituted against the validity or enforceability
of any patent that we own or, if instituted, that such challenges will
not be successful.
Even if we overcome any patent infringement challenges, we likely could
incur substantial costs of litigation to uphold the validity and prevent
infringement of our patents.
Additionally, the process for the approval of patent applications in
foreign countries may differ significantly from the process in the U.S., which
may delay our plans to market and sell docosanol cream in the international
market place. 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 we must seek
and obtain the patents separately. Our ability to obtain or maintain patent
protections for docosanol cream in foreign markets would hamper severely our
ability to generate international sales from our first proposed product.
We also rely substantially on confidentiality agreements to protect our
innovations. We cannot assure you that secrecy obligations will be honored, or
that others will not develop independently similar or superior technology.
Additionally, if our consultants, key employees or other third parties apply
technological information independently developed by them or by others to our
projects, then disputes may arise as to the proprietary rights to such
information in which we do not receive a favorable resolution.
DEVELOPING NEW PHARMACEUTICAL PRODUCTS FOR HUMAN USE INVOLVES PRODUCT LIABILITY
RISKS, FOR WHICH 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. We have
maintained product liability insurance coverage for our clinical trials in the
amount of $2 million per incident and in the aggregate. However, product
liability claims can be high in the pharmaceutical industry and our insurance
may not sufficiently cover all possible liabilities or the size of the claim. If
a suit against our business or proposed products is successful, then the lack or
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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.
IF THE SERIES D PREFERRED STOCK IS CONVERTED OR WE ISSUE ADDITIONAL SHARES OF
EQUITY SECURITIES, THEN THE VALUE OF EXISTING SHARES OF CLASS A COMMON STOCK
CURRENTLY OUTSTANDING MAY BE DILUTED.
If we raise additional capital by issuing equity securities at a price or a
value per share less than the then current price per share of Class A Common
Stock, then the value of the shares of Class A Common Stock then outstanding
will be diluted or reduced. At present we have the following two arrangements to
issue additional equity securities that could result in dilution to the present
holders of Class A Common Stock:
- Our Series D Preferred Stock is convertible into shares of Class A Common
Stock upon conversion by the selling shareholders. On March 31, 1999, we
sold 200 shares of Series D Preferred Stock in exchange for a $2 million
investment. Between June 16, 1999 and July 7, 1999, 144.10 shares of
Series D Convertible Preferred Stock were converted into Class A Common
Stock, leaving a balance of 55.9 shares of Series D Convertible Preferred
Stock that were issued and outstanding as of July 7, 1999. The applicable
conversion price for these shares as of July 7, 1999 would require us to
issue 849,050 shares of Class A Common Stock at a price per share that is
approximately $0.18 per share less than the last sale price of the Class
A Common Stock on that date. We may issue an additional 300 shares of
Series D Preferred Stock for an additional $3 million in financing upon
meeting certain conditions, thereby creating a similar dilutive
situation. In expectation of the additional financing and assuming price
fluctuations, either of which could reduce the conversion price, we have
registered for resale up to 8,137,388 shares of Class A Common Stock. To
date, from the conversion of 144.10 shares of Series D Convertible
Preferred Stock, we have issued 2,213,847 shares of Class A Common Stock.
The number of shares issuable upon conversion could be more or less than
the shares currently registered, depending on market conditions.
- We potentially may issue shares of our Class A Common Stock under a
two-year, $13 million equity line agreement. We anticipate registering up
to 8,137,388 shares of Class A Common Stock for resale in connection with
this arrangement. Depending on the price per share of our Class A Common
Stock during the next two years, we may need to register additional
shares for resale to access the full amount of financing available.
THERE WILL BE A DILUTIVE EFFECT ON THE SHARES OF OUR CLASS A COMMON STOCK FROM
THE CONVERSION OR EXERCISE OF CERTAIN OTHER OUTSTANDING SECURITIES.
As of the date of this prospectus, the following securities exercisable or
convertible into shares of Class A Common Stock were outstanding:
- stock options to purchase an aggregate of 7,142,074 shares of Class A
Common Stock (at exercise prices ranging from $0.72 to $6.4375 per share)
and 28,000 shares of Class B Common Stock (at an exercise price of $0.50
per share);
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- 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 K Stock Purchase Warrant exercisable into 375,000 shares of Class A
Common Stock (at an exercise price of $1.125 per share);
- Class L Stock Purchase Warrant exercisable into 55,000 shares of Class A
Common Stock (at an exercise price of $1.1875 per share); and
- 440,000 shares of Class B Common Stock (each convertible into one share
of Class A Common Stock).
To the extent that our other outstanding 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
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.
OUR COMPUTER SYSTEMS AND SYSTEMS OF THIRD-PARTIES IMPORTANT TO OUR BUSINESS
COULD FAIL WHEN THE YEAR CHANGES TO 2000.
Many computer systems may not recognize properly date-sensitive information
when the year changes to 2000. Computers which refer to years in terms of their
final two digits only may interpret the year 2000 to mean the year 1900. If our
internal business systems or software licensed from third parties do not
properly recognize such information, our systems could fail. We have established
a year 2000 program to evaluate our internal business systems and the systems of
third parties essential to our operations. We have completed the review,
implementation and remediation phases of our internal business systems for both
hardware and software issues, and believe that the critical software used in our
business is year 2000 compliant. We are working with our external suppliers and
third parties important to our business to obtain assurances that their systems
are year 2000 compliant. We are in the preliminary stage of this assessment and
estimate completion on or about July 31, 1999.
As we move forward with a potential product launch of docosanol cream, we
will face circumstances that may involve significant year 2000 issues that we
cannot anticipate at this time. These risks include potential year 2000 problems
with manufacturing, warehousing, distribution and marketing of the product.
Although we have established contracts for the manufacture, and the warehousing
and distribution of docosanol cream, we cannot determine at this time the extent
to which we will be vulnerable to year 2000 problems that these parties may
encounter.
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Our evaluation and assessment of our year 2000 issues is on-going and we
expect that new or different information may become available as our assessments
and evaluations continue.
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements concerning future
events or performance of our company. 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
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 prospectus,
including those explained above and in our other SEC filings such as our Form
10-K/A for the fiscal year ended September 30, 1998. We have no obligation to
update or announce revisions to any forward-looking statements to reflect actual
events or developments.
DESCRIPTION OF SECURITIES
We are registering for resale shares of our Class A Common Stock to be
issued upon exercise of the following three stock purchase warrants that we
issued to consultants in exchange for their services:
CLASS I STOCK PURCHASE WARRANT
On March 4, 1999, we engaged the services of JMBL LLC to provide advice and
counsel in preparing various materials for submission to regulatory approval
agencies and in monitoring the progress of these submissions. The contract for
consulting services has a term of 18 months. In connection with these consulting
services, we issued to JMBL LLC the Class I Stock Purchase Warrant, which gives
JMBL LLC the right to purchase 500,000 shares of Class A Common Stock at an
exercise price of $0.78125 per share. The warrant vested fully upon issuance.
The exercise of any unexercised portion of the warrant is subject, however, to
JMBL LLC continuing to render consulting services during the entire 18-month
term. The Class I Stock Purchase Warrant expires on March 3, 2004.
CLASS K STOCK PURCHASE WARRANT
On April 1, 1999, we engaged the services of Redington, Inc. to provide
investor relations services for a period of one year. In connection with the
investor relations services, we issued Redington, Inc. the Class K Stock
Purchase Warrant, which gives Redington, Inc. the right to purchase 375,000
shares of Class A Common Stock at an exercise price of $1.125 per share. The
vesting schedule for the warrant requires that Redington, Inc. achieve certain
performance milestones during the one-year consulting period, with the exception
of 62,500 shares of Class A Common Stock that vested on April 1, 1999. The Class
K Stock Purchase Warrant expires on March 31, 2004.
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CLASS L STOCK PURCHASE WARRANT
On June 8, 1999, we engaged the services of Cline, Davis, & Mann, Inc. to
provide advertising agency services for the proposed launch of docosanol cream
for a period of one year. In connection with these services, we issued Cline,
Davis, & Mann, Inc. the Class L Stock Purchase Warrant, which gives to Cline,
Davis & Mann, Inc. the right to purchase 55,000 shares of Class A Common Stock
at an exercise price of $1.1875 per share. The Class L Stock Purchase Warrant
vests and becomes exercisable either the later of December 8, 1999 or the first
commercial sale of our docosanol cream product. The Class L Stock Purchase
Warrant expires on June 7, 2002.
REGISTRATION OF UNDERLYING SHARES OF CLASS A COMMON STOCK
Under each of the Class I, K and L Stock Purchase Warrants, we agreed to
register the underlying shares of Class A Common Stock for resale by the selling
shareholders from time to time in the market or in privately-negotiated
transactions. We will prepare and file such amendments and supplements to this
registration statement as may be necessary in accordance with the rules and
regulations of the Securities Act of 1933, to keep it effective until the
earlier of the date on which the selling shareholders have sold all of the
shares covered by this registration statement or the expiration of the warrant
terms for each of the Class I, K and L Stock Purchase Warrants. We have agreed
to bear certain expenses (other than broker discounts and commissions) in
connection with this registration statement.
USE OF PROCEEDS
We will receive cash consideration if any of the selling shareholders
exercises their warrant. We intend to use any cash proceeds that we receive from
exercise of the warrants for working capital purposes. Otherwise, we will not
receive any proceeds from the resale of any of the shares registered under this
prospectus. We will pay all of the costs of the registration of the shares of
Class A Common Stock registered under this prospectus. See "Selling
Shareholders" for additional information.
SELLING SHAREHOLDERS
The table below lists the selling shareholders and other information
regarding the beneficial ownership of shares of Class A Common Stock. Except as
otherwise disclosed in this prospectus, the selling shareholders neither have
nor within the past three years had any position, office or other material
relationship with our company or any of its predecessors or affiliates. Because
the selling shareholders may offer all or a portion of the shares of Class A
Common Stock registered by this prospectus, we cannot estimate the number of
shares that will be held by the selling shareholders after any sales.
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Beneficial ownership is determined in accordance with SEC rules and
generally includes voting or investment power with respect to securities. The
Shares of our Class A Common Stock to be issued upon the exercise of the Class
I, K and L Stock Purchase Warrants, to the extent exercisable within 60 days of
July 7, 1999, are treated as outstanding for computing each selling
shareholder's percentage ownership of shares of our Class A Common Stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF NUMBER OF SHARES OF
CLASS A COMMON MAXIMUM NUMBER OF CLASS A COMMON
STOCK BENEFICIALLY SHARES OF CLASS A STOCK BENEFICIALLY
OWNED COMMON STOCK OWNED
NAME OF SELLING SHAREHOLDER PRIOR TO OFFERING BEING OFFERED AFTER OFFERING(1)
- --------------------------- ------------------- ----------------- -------------------
<S> <C> <C> <C>
JMBL LLC(2)............... 500,000 500,000 0
Redington, Inc.(3)........ 62,500 375,000(4) 0
Cline Davis & Mann,
Inc.(5)................. 0(6) 55,000 0
------- ------- -------------------
Total..................... 562,500 930,000 0
======= ======= ===================
</TABLE>
- -------------------------
(1) This column assumes the sale of all of the shares offered by each of the
selling shareholders.
(2) JMBL LLC is a limited liability company in the State of Delaware. Mr.
Jeffrey M. Busch, President of JMBL LLC and Sonya M. Levine are considered
to be the beneficial owners of any shares deemed to be beneficially owned by
JMBL LLC.
(3) Redington, Inc. is a Connecticut corporation. Mr. Thomas Redington is
President and is considered beneficial owner of any shares deemed to be
beneficially owned by Redington, Inc.
(4) The remaining 312,500 shares of Class A Common Stock underlying the Class K
Stock Purchase Warrant will vest in five increments of 62,500 shares should
the closing sales price of the Class A Common Stock attain certain levels
for periods of ten consecutive trading days before April 1, 2000.
(5) Cline Davis & Mann, Inc. is a New York corporation. The corporation of Cline
Davis & Mann, Inc. is the considered beneficial owner of any shares deemed
to be beneficially owned by Cline Davis & Mann, Inc.
(6) The Class L Stock Purchase Warrant issued to Cline Davis & Mann, Inc. vests
on the later of December 8, 1999 or the first commercial sale of our
docosanol cream product.
PLAN OF DISTRIBUTION
The selling shareholders have advised us that they may offer the shares of
Class A Common Stock registered under this prospectus to purchasers from time to
time:
- in transactions in the Nasdaq National Market System, in negotiated
transactions, or by a combination of these methods;
- at fixed prices that may be changed; at market prices prevailing at the
time of the resale;
- at prices related to such market prices; or
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- at negotiated prices.
At the date of this prospectus, the selling shareholders have not entered
into any underwriting arrangements. The selling shareholders may sell the shares
registered under this prospectus to or through:
- ordinary brokers' transactions;
- transactions involving cross or block trades or otherwise on the Nasdaq
National Market;
- purchases by brokers, dealers or underwriters who may receive
compensation in the form of discounts or commissions from the selling
shareholders or the purchasers of these shares, for whom the
broker-dealers may act as agent or principal, or both;
- "at the market" to or through market makers or into an existing market
for our Class A Common Stock;
- in other ways not involving market makers or established trading markets,
including direct sales to purchasers or sales effected by agents;
- through transactions in options, swaps or other derivatives (whether
exchange-listed or otherwise);
- in privately negotiated transactions;
- to cover short sales; or
- any combination of the foregoing.
From time to time, one or more of the selling shareholders may pledge,
hypothecate or grant a security interest in some or all of the shares of Class A
Common Stock registered under this prospectus owned by them, and the pledgees,
secured parties or persons to whom such shares have been hypothecated shall,
upon foreclosure in the event of default, be deemed to be selling shareholders
under this prospectus. The number of shares of Class A Common Stock registered
under this prospectus and beneficially owned by those selling shareholders who
so transfer, pledge, donate or assign those shares will decrease as and when
they take such actions. The plan of distribution for shares sold under this
prospectus will otherwise remain unchanged, except that the transferees,
pledgees, donees or other successors will be selling shareholders under this
prospectus. In addition, a selling shareholder may, from time to time, sell
short shares of Class A Common Stock. In such instances, this prospectus may be
delivered in connection with such short sales and the shares of Class A Common
Stock offered hereby may be used to cover such short sales.
A selling shareholder may enter into hedging transactions with
broker-dealers and the broker-dealers may engage in short sales of the Class A
Common Stock in the course of hedging the positions they assume with that
selling shareholder, including, without limitation, in connection with
distributions of the Class A Common Stock by the broker-dealers. A selling
shareholder also may enter into option or other transactions with broker-
dealers that involve the delivery of the shares of Class A Common Stock
registered under this prospectus to the broker-dealers, who then may resell or
otherwise transfer these shares. A selling shareholder also may loan or pledge
the shares of Class A Common Stock registered under this prospectus to a
broker-dealer and the broker-dealer may sell the shares so loaned or upon a
default may sell or otherwise transfer the pledged shares.
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<PAGE> 17
Broker, dealers, underwriters or agents participating in the distribution
of the shares of Class A Common Stock registered under this prospectus as agents
may receive compensation in the form of commissions, discounts or concessions
from the selling shareholders and/or purchasers of the Class A Common Stock for
whom the broker-dealers may act as agent, or to whom they may sell as principal,
or both (which compensation as to a particular broker-dealer may be less than or
in excess of customary commissions). The selling shareholders and any
broker-dealers who act in connection with the sale of the shares of Class A
Common Stock under this prospectus may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933, and any commissions they receive and
proceeds of any sale of the shares of Class A Common Stock may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933. Neither
we nor any of the selling shareholders can presently estimate the amount of this
compensation. We know of no existing arrangements between any of the selling
shareholders, any other shareholder, broker, dealer, underwriter or agent
relating to the sale or distribution of the shares of Class A Common Stock
registered under this prospectus.
We will pay substantially all of the expenses relating to the registration,
offer and sale of the shares of Class A Common Stock registered under this
prospectus to the public other than commissions or discounts of underwriters,
broker-dealers or agents. We also have agreed to indemnify the selling
shareholders and certain related persons against any losses, claims, damages or
liabilities under the Securities Act of 1933 or otherwise that arise out of, or
are based upon, any untrue or alleged untrue statement of a material fact or the
omission or alleged omission instating a material fact under this registration
statement or prospectus.
To the extent that indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to our directors, officers and
controlling persons, we have been advised that, in the opinion of the SEC, this
indemnification is against public policy as expressed in the Securities Act of
1933 and is therefore unenforceable.
LEGAL MATTERS
The validity of the securities offered hereby have been passed upon for our
company by Baker & McKenzie, San Diego, California.
EXPERTS
The financial statements incorporated in this prospectus by reference from
the Company's Annual Report on Form 10-K/A for the year ended September 30, 1998
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report, which is incorporated herein by reference (which report expresses
an unqualified opinion and includes explanatory paragraphs relating to the
status of the Company as a development stage enterprise, the Company's ability
to continue as a going concern, and the Company as a defendant in certain
lawsuits), and have been so incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
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WHERE YOU CAN OBTAIN MORE INFORMATION
AVAILABLE INFORMATION
We are required to follow the reporting requirements of the Securities
Exchange Act of 1934. To comply with these requirements, we file a number of
reports, including annual and quarterly reports, proxy statements, information
statements and other information with the SEC. You may inspect and copy any of
this information that we have filed with the SEC at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the SEC's regional offices located at 7 World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 W.
Madison Street, Suite 1400, Chicago, IL 60661-2511. You may obtain information
on the operation of the public reference room by calling the Commission at
1-800-SEC-0330. You also may obtain copies of such material at prescribed rates
from the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. You also may inspect such reports, proxy
statements, information statements and other information concerning us at the
offices of The Nasdaq Stock Market, Inc. at 1735 K Street, N.W., Washington,
D.C. 20006. You also may access the materials that we file electronically with
the SEC at the SEC's website (http://www.sec.gov), which contains the reports,
proxy statements, information statements and other information that we file
electronically with the SEC.
We have filed with the SEC a Registration Statement on Form S-3 under the
Securities Act of 1933, with respect to the shares covered by this prospectus.
This prospectus does not contain all of the information set forth in the
registration statement, because certain parts are omitted in accordance with the
rules and regulations of the SEC. Statements made in this prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete and, with respect to each such contract, agreement or other
document filed as an exhibit to the registration statement, we refer you to such
exhibit for a more complete description of the matter involved. Each such
statement is deemed qualified in its entirety by such reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
We incorporate by reference in this prospectus and encourage you to read
the following documents that we have filed with the SEC pursuant to the
requirements of the Securities Exchange Act of 1934:
1. Our Amended Annual Report on Form 10-K/A for the fiscal year ended
September 30, 1998 filed with the SEC on February 2, 1999;
2. Our Definitive Proxy Statement filed with the SEC on January 4, 1999;
3. Our Quarterly Report on Form 10-Q for the quarter ended December 31,
1998 filed with the SEC on February 16, 1999;
4. Our Current Reports on Form 8-K filed with the SEC on January 25, 1999,
March 11, 1999, April 1, 1999 and April 20, 1999;
5. Our Definitive Proxy Statement filed with the SEC on April 13, 1999;
6. Our Quarterly Report on Form 10-Q for the quarter ended March 31, 1999
filed with the SEC on May 17, 1999; and
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7. The description of our Class A Common Stock contained in our
Registration Statement on Form 8-A filed with the SEC on July 31, 1990,
including any amendments or reports filed for the purpose of updating
the description.
We also incorporate by reference as part of this prospectus and encourage
you to read all reports and other documents that we have filed (or will file)
with the SEC under the Securities Exchange Act of 1934, that are after the date
of this prospectus and before the termination of the offering of the shares
registered under this prospectus. You should understand that, if any statement
contained in a report or document that is incorporated
by reference in this prospectus is modified or superseded, then the later filed
report or document will modify or supersede the statements contained in this
prospectus.
We will provide without charge to each person, including any beneficial
owner, to whom a copy of this prospectus is delivered, upon the written or oral
request of that person, a copy of any and all documents incorporated by
reference in this prospectus (not including, however, the exhibits to those
documents unless those exhibits are specifically incorporated by reference in
such documents). Requests should be sent to the attention of the Secretary of
our company, at 9393 Towne Centre Drive, Suite 200, San Diego, California 92121
or you may call and ask for the Secretary of our company at (619) 558-0364.
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