EXHIBIT 10.4
NEITHER THIS SENIOR NOTE (THIS “NOTE”) NOR THE SHARES OF STOCK THAT MAY BE
ISSUABLE UPON REPAYMENT OF ANY PORTION OF THIS NOTE, IF APPLICABLE, HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE HOLDER MAY NOT
TRANSFER THIS NOTE OR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF
ANY PORTION OF THIS NOTE UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION COVERING
THIS NOTE OR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF ANY
PORTION OF THIS NOTE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
APPLICABLE STATE SECURITIES LAWS OR (B) IF REQUESTED BY AVANIR PHARMACEUTICALS,
IT FIRST RECEIVES A LETTER FROM AN ATTORNEY REASONABLY ACCEPTABLE TO IT STATING
THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER ALL
APPLICABLE STATE SECURITIES LAWS.
SENIOR NOTE

$4,000,000.00   May 24, 2006 (the “Execution Date”)
Costa Mesa, California

          For value received Avanir Pharmaceuticals, a California corporation
(“Payor”), promises to pay to Neal R. Cutler (“Holder”) the principal sum of
Four Million dollars ($4,000,000.00) in lawful money of the United States in
immediately available funds, subject to adjustment as provided herein, and to
pay interest on the outstanding principal amount of this Senior Note (this
“Note”) as provided herein, until this Note is repaid in full.
          This Note is issued pursuant to and subject to the terms of the Unit
Purchase Agreement dated as of May 22, 2006 (the “Purchase Agreement”) by and
among Payor, the parties listed on Schedule A to the Purchase Agreement and
Alamo Pharmaceuticals, LLC, a California limited liability company, and is
issued concurrently with that certain Senior Note in the principal sum of
$14,400,000 by and between Payor and Holder (the “Buyer Note 1”) and that
certain Senior Note in the principal sum of $6,675,000 by and between Payor and
Holder (the “Buyer Note 2”, together with Buyer Note 1, the “Additional Notes”).
          For the purposes of this Note, the following terms shall have the
meanings set forth below:
          “Average Price” means the average of the per share Closing Prices of
the Payor Common Stock for the 5 consecutive Trading Days ending on the Trading
Day immediately preceding the date of the applicable calculation, provided that
in calculating the Average Price, each Closing Price during the period
commencing on the first Trading Day of such 5 consecutive Trading Day period and
ending on the date of an event that would require an adjustment of the Threshold
Price pursuant to Section 3 hereof, shall be appropriately adjusted to take into
account the occurrence of the event that would result in an adjustment of the
Threshold Price.

 

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          “Business Day” means any day that is not a Saturday, Sunday or other
day on which banks in the State of California are authorized or required to
close.
          “Closing Price” of the Payor Common Stock on any date means the
closing per share sale price (or, if no closing sale price is reported, the
average of the bid and ask prices or, if more than one in either case, the
average of the average bid and average ask prices) on such date as reported on
the NASDAQ National Market (at such time that the NASDAQ National Market is not
a national securities exchange), or if such bid and ask prices are not reported
by the NASDAQ National Market, in a manner to be determined by the Payor on the
basis of such quotation as the Payor’s Board of Directors considers appropriate
in its reasonable discretion or if the Payor Common Stock is traded on a U.S.
national securities exchange, the closing per share sale price of the Payor
Common Stock as is reported in composite transactions for the principal U.S.
securities exchange on which the Payor Common Stock is so traded.
          “Events of Default” has the meaning set forth in Section 9.1.
          “Financing Prepayment Date” means three Business Days following the
consummation of the applicable Financing Transaction; provided, however that if
any Financing Transaction shall occur before the Pledge Expiration Date, the
Financing Prepayment Date for any such Financing Transaction shall be the 10th
Business Day after the Pledge Expiration Date.
          “Financing Transaction” means each (a) sale by Payor or any of its
subsidiaries of any of its debt, equity or convertible securities when such
securities have been registered for public sale pursuant to the Securities Act
and (b) sale by Payor or any of its subsidiaries to investors of any of its
debt, equity or converstible securities in a transaction exempt from the
registration requirements of the Securities Act (but, in each case, excluding
the issuance of (i) options or stock issued to employees, consultants, advisors,
officers or directors pursuant to a plan or arrangement approved in advance by
Payor’s Board of Directors, (ii) securities issued to lessors in connection with
lease financings and the like, (iii) securities issued on conversion of any
outstanding convertible securities of Payor, (iv) securities issued by a
subsidiary of Payor to Payor or another subsidiary of Payor and (v) and
securities issued as consideration for mergers, acquisitions or to strategic
partners). In no event shall a Financing Transaction include the proceeds of
bank loans or credit facilities or revenues from the licensing or sale of any of
Payor’s products, services or technologies.
          “Initial Threshold Price” means $15.00.
          “Interest Determination Date” has the meaning set forth in
Section 1.1(b).
          “Interest Payment Date” means the last day of each month, or if such
date is not a Business Day, the next succeeding Business Day.
          “Interest Period” means the period from May 24, 2006 to but excluding
the first Interest Payment Date and each successive period from and including
each Interest Payment Date to but excluding the following Interest Payment Date.
          “Interest Rate” has the meaning set forth in Section 1.1(a)

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          “LIBOR” means the London interbank offered rates.
          “London Business Day” is a day on which dealings in deposits in U.S.
dollars are transacted in the London interbank market.
          “Market Disruption Event” means the occurrence or existence for more
than one half hour period in the aggregate on any scheduled Trading Day of any
suspension or limitation imposed on trading in the Payor Common Stock or in any
options, contracts or future contracts relating to the Payor Common Stock, and
such suspension or limitation occurs or exists at any time before 1:00 p.m.
(Eastern Time) on such day.
          “Maturity Date” means the earlier of (a) the third anniversary of the
Execution Date, or if such third anniversary is not a Business Day, the next
succeeding Business Day and (b) the date of the consummation of any sale of all
or substantially all of the assets of Payor.
          “Payor Common Stock” means the Class A common stock, no par value, of
Payor, or any successor security into which Class A common stock shall have been
reclassified, exchanged or converted (including as a result of a merger,
reorganization, consolidation, share exchange or similar business combination).
          “Pledge Expiration Date” means the later of (i) the first anniversary
following the Execution Date, or if such first anniversary is not a Business
Day, the next succeeding Business Day, or (ii) if a written notice of a claim
for Damages (as defined in the Purchase Agreement) has been given prior to the
first anniversary following the Execution Date, the earlier of (a) the date that
such claim has been resolved pursuant to Article X of the Purchase Agreement or
(b) the Maturity Date.
          “Prepayment Election Date” means the date for prepayment specified in
the Prepayment Election Notice, which date shall be not greater than three
Trading Days following the date on which the Prepayment Election Notice is
delivered to Payor and shall in all events be prior to the Maturity Date.
          “Prepayment Election Notice” means a written notice delivered by Payor
to Holder stating Payor’s election to prepay all or any portion of the
outstanding principal amount of this Note in shares of Repayment Stock, the
Prepayment Election Date, the number of shares of Repayment Stock to be issued
and the amount of cash to be paid in lieu of any fractional share of Repayment
Stock.
          “Repayment Amount” means, as of any date of determination, the
outstanding principal amount of this Note, plus any accrued and unpaid interest
thereon to such date.
          “Repayment Stock” means a number of shares of Payor Common Stock that
is calculated by dividing (x) the portion of the outstanding principal amount of
and accrued and unpaid interest on this Note specified in the Prepayment
Election Notice to be prepaid in Payor Common Stock, by (y) 95% of the Average
Price calculated as of the date on which the Prepayment Election Notice is
delivered to Holder.

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          “Registration Rights Agreement” means the Registration Rights
Agreement between Payor and Holder, dated as of the Execution Date.
          “Securities Act” means the Securities Act of 1933, as amended.
          “Stock Equivalents” has the meaning set forth in Section 3.1.
          “Threshold Price” means the Initial Threshold Price as the same may be
adjusted pursuant to Section 3 herein.
          “Trading Day” means any day on which (i) there is no Market Disruption
Event and (ii) the NASDAQ National Market (at such time that the NASDAQ National
Market is not a national securities exchange) or the U.S. national securities
exchange on which the Payor Common Stock is listed, admitted for trading or
quoted, is open for trading or, if the Payor Common Stock is not so listed,
admitted for trading or quoted, any Business Day. A “Trading Day” only includes
those days that have a scheduled closing time of 4:00 p.m. (Eastern Time) or the
then standard closing time for regular trading on the relevant trading system.
          “Trigger Event” means if the Closing Price of the Payor Common Stock
is equal to or greater than the Threshold Price for 20 Trading Days during any
30 consecutive Trading Day period prior to the Maturity Date.
     1. Interest; Repayment Prior to Maturity.
          1.1 Interest.
               (a) Interest on this Note shall be calculated on the basis of a
360-day year consisting of twelve 30-day months and shall be payable to Holder,
in cash, by check or by wire transfer at an address or to an account designated
by Holder in advance, on each Interest Payment Date until this Note is either
converted or repaid in full as provided herein.
               (b) The outstanding principal amount of this Note will bear
interest for each Interest Period at a per annum rate equal to LIBOR as
determined on the second London Business Day preceding the commencement of such
Interest Period (the “Interest Determination Date”) plus 1.33% (133 basis
points) (the “Interest Rate”). The Interest Determination Date for this Note for
the first Interest Period is May 22, 2006. Promptly upon determination of the
rate by Payor, Payor will inform Holder of the interest rate for the next
Interest Period. On any Interest Determination Date, LIBOR will be equal to the
offered rate for deposits in U.S. dollars having an index maturity of one month,
in amounts of at least $1.0 million, as such rate appears on Telerate Page 3750
at approximately 11:00 a.m., London time, on such Interest Determination Date.
If Telerate Page 3750 is replaced by another service or ceases to exist, Payor
will use the replacing service or such other service that may be nominated by
the British Bankers’ Association for the purpose of displaying LIBOR for U.S.
dollar deposits. If no offered rate appears on Telerate Page 3750 on an Interest
Determination Date at approximately 11:00 a.m., London time, then Payor will
select four major banks in the London interbank market and shall request each of
their principal London offices to provide a quotation of the rate at which
one-month deposits in U.S. dollars in amounts of at least $1.0 million are
offered by it to prime banks

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in the London interbank market, on that date and at that time, that is
representative of single transactions at that time. If at least two quotations
are provided, LIBOR will be the arithmetic average of the quotations provided.
Otherwise, Payor will select three major banks in New York City and shall
request each of them to provide a quotation of the rate offered by them at
approximately 11:00 a.m., New York City time, on the Interest Determination Date
for loans in U.S. dollars to leading European banks having an index maturity of
one month for the applicable Interest Period in an amount of at least
$1.0 million that is representative of single transactions at that time. If
three quotations are provided, LIBOR will be the arithmetic average of the
quotations provided. Otherwise, the rate of LIBOR for the next Interest Period
will be set equal to the rate of LIBOR for the then-current Interest Period.
               (c) If Payor defaults in a payment of interest on the Notes, it
shall pay the defaulted interest plus, to the extent permitted by law, interest
payable on the defaulted interest at a rate equal to 2.76% over the Interest
Rate.
          1.2 Cash Prepayment at Payor’s Option. Payor may, at its option and
without penalty, prepay all or any portion of the outstanding principal amount
of and accrued and unpaid interest on this Note at any time prior to the
Maturity Date by payment to Holder at an address or to an account designated by
Holder in advance by wire transfer of immediately available funds.
          1.3 Stock Prepayment at Payor’s Option.
               (a) Subject to paragraph (c) below, Payor may, at its sole option
and without penalty, elect to prepay all or any portion of the outstanding
principal amount of and accrued and unpaid interest on this Note at any time
prior to the Maturity Date in Repayment Stock in the event that:
                    (i) a Trigger Event has occurred within the preceding 180
calendar days; and
                    (ii) the Average Price exceeds $[THE CLOSING PRICE ON THE
TRADING DAY PRIOR TO THE CLOSING DATE] (subject to adjustment on the same basis
as the Initial Threshold Price shall be adjusted in accordance with Section 3)
per share (calculated as of the date on which the Prepayment Election Notice is
delivered to Holder),
by delivering to Holder, a Prepayment Election Notice pursuant to the notice
provisions set forth in Section 11.05 of the Purchase Agreement.
               (b) Delivery of Prepayment Stock. On the Prepayment Election Date
specified in the applicable Prepayment Election Notice, Payor shall, at its
expense, issue and deliver to Holder at Payor’s principal office, a certificate
or certificates for any shares of the Repayment Stock to which Holder is
entitled (bearing such legends as are required by Section 4 and applicable state
and federal securities laws), together with cash in lieu of any fractional share
(determined by multiplying such fractional share by the Average Price as of the
date on which the Prepayment Election Notice is delivered to Holder). Any
repayment of this Note or any portion thereof in shares of Repayment Stock
pursuant to this Section 1.3 will be deemed to have

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been made on the applicable Prepayment Election Date and such shares of
Repayment Stock shall be dated as of the applicable Prepayment Election Date.
               (c) Registration. Payor shall not be permitted to prepay this
Note with Repayment Stock pursuant to this Section 1.3, unless, at the time of
such prepayment (i) the Securities Exchange Commission shall have declared
effective a shelf registration statement under the Securities Act covering the
resale of the Repayment Stock or (ii) the Repayment Stock shall no longer be
Registerable Securities (as defined in the Registration Rights Agreement), each
in accordance with the Registration Rights Agreement.
          1.4 Financing Prepayments.
               (a) Upon the consummation of a Financing Transaction that results
in net proceeds to Payor and/or any of its subsidiaries of $100,000,000 or more
from such Financing Transaction prior to the termination of this Note upon
payment in full, Payor shall pay to Holder the Repayment Amount as of the
Financing Prepayment Date at an address or to an account designated by Holder in
advance by wire transfer of immediately available funds on or before the
Financing Prepayment Date.
               (b) Upon the consummation of any Financing Transaction that
results in net proceeds to Payor and/or any of its subsidiaries of less than
$100,000,000 from such Financing Transaction prior to the termination of this
Note upon payment in full, Payor shall pay, on the applicable Financing
Prepayment Date, the outstanding principal amount of and accrued and unpaid
interest on this Note in an aggregate amount equal to the lesser of (x) the
Repayment Amount and (y) 20% of the net proceeds of such Financing Transaction,
which prepayment shall be made at an address or to an account designated by
Holder in advance by wire transfer of immediately available funds on or prior to
such Financing Prepayment Date; provided, however that no payment on this Note
shall be made pursuant to this Section 1.4(b) until the outstanding principal
amount of and accrued and unpaid interest on the Buyer Note 1 has been paid in
full.
     2. Repayment at Maturity.
          2.1 Repayment. The Repayment Amount shall be due and payable by Payor
on the Maturity Date by wire transfer of immediately available funds to an
account designated by Holder prior to the second Business Day preceding the
Maturity Date.
          2.2 Delivery of Note. Upon repayment of this Note to Holder in full by
payment of cash and/or delivery of certificates representing the Repayment Stock
in accordance with the terms of this Note (a) this Note shall become fully paid
and satisfied, (b) all rights with respect to this Note shall immediately cease
and terminate, except only the right to receive such repayment and/or shares of
Repayment Stock in exchange therefor, and (c) Holder shall surrender this Note,
duly endorsed for cancellation, to Payor.

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     3. Threshold Price Adjustments.
          3.1 Stock Splits, Dividends, Etc. In the event Payor should at any
time or from time to time after the Execution Date effectuate a split or
subdivision of the outstanding shares of Payor Common Stock or fix a record date
for the determination of holders of Payor Common Stock entitled to receive a
dividend or other distribution payable in additional shares of Payor Common
Stock or other securities or rights convertible into, or entitling the holder
thereof to receive directly or indirectly, additional shares of Payor Common
Stock (hereinafter referred to as “Stock Equivalents”) without payment of any
consideration by such holder for the additional shares of Payor Common Stock or
the Stock Equivalents, then, as of such record date (or the date of such
dividend distribution, split or subdivision if no record date is fixed), the
Threshold Price then in effect shall be reduced to the number obtained by
multiplying the Threshold Price in effect at such date by a fraction, the
numerator of which is the number of shares of Payor Common Stock outstanding
immediately prior to such action, and the denominator of which shall be the
number of shares of Payor Common Stock outstanding immediately following such
action assuming the full conversion or exercise, as applicable, of such Stock
Equivalents.
          3.2 Reverse Stock Split, Combination. If the number of shares of Payor
Common Stock outstanding at any time after the Execution Date is decreased by a
reverse stock split or combination of the outstanding shares of Payor Common
Stock, then, following the effective date of such combination, the Threshold
Price then in effect shall be increased to the number obtained by multiplying
the Threshold Price in effect at such date by a fraction, the numerator of which
is the number of shares of Payor Common Stock outstanding immediately prior to
such action, and the denominator of which shall be the number of shares of Payor
Common Stock outstanding immediately following such action.
          3.3 Successive Adjustments. Successive adjustments in the Threshold
Price shall be made, without duplication, whenever any event specified in
Section 3.1 or 3.2 shall occur.
          3.4 Minimal Adjustments. All calculations under this Section 3 shall
be made to the nearest cent. No adjustment in the Threshold Price need be made
if such adjustment would result in a change in the Threshold Price of less than
$0.01. Any adjustment of less than $0.01 that is not made shall be carried
forward and shall be made at the time of and together with any subsequent
adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or
more in the Threshold Price.
          3.5 Adjustment Notice. In the event the Threshold Price is adjusted
pursuant to Section 3.1 or 3.2, Payor will promptly mail to Holder a statement
setting forth in reasonable detail the event requiring the adjustment, the
amount of the adjustment, and the method by which such adjustment was
calculated, and the date on which such adjustment became effective.
     4. Transfer, Legend and Stop Transfer Orders.
          4.1 Holder acknowledges that this Note and the Repayment Stock have
not been registered under the Securities Act and agrees not to sell, pledge,
distribute, offer for sale, transfer or otherwise dispose of this Note or any
Repayment Stock unless (a) there is an effective

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registration covering such Note or such shares of Repayment Stock, as the case
may be, under the Securities Act and applicable states securities laws or (b) if
requested by Payor, Payor first receives a letter from an attorney reasonably
acceptable to Payor (it being understood that Milbank, Tweed, Hadley & McCloy
LLP shall be deemed acceptable to Payor), stating that in the opinion of the
attorney the proposed transfer is exempt from registration under the Securities
Act and under all applicable state securities laws. Unless the shares of
Repayment Stock have been registered under the Securities Act, upon the issuance
of any shares of Repayment Stock, Payor shall instruct its transfer agent or
registrar to enter stop transfer orders with respect to such shares, and all
certificates representing shares of Repayment Stock shall bear on the face
thereof substantially the following legend:
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. THE HOLDER MAY NOT TRANSFER THE SECURITIES EVIDENCED
HEREBY UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION COVERING THE SECURITIES
EVIDENCED BY THIS CERTIFICATE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
APPLICABLE STATE SECURITIES LAWS OR (B) IF REQUESTED BY AVANIR PHARMACEUTICALS,
IT FIRST RECEIVES A LETTER FROM AN ATTORNEY REASONABLY ACCEPTABLE TO IT STATING
THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER ALL
APPLICABLE STATE SECURITIES LAWS.
          4.2 Prior to any such proposed transfer, and as a condition thereto,
if such transfer is not made pursuant to an effective registration statement
under the Securities Act, Holder will, if requested by Payor, deliver to Payor a
certificate of the proposed transferee in the form attached to this Note as
Exhibit A.
     5. Security Interest.
          5.1 Holder agrees that pursuant to the terms of the Purchase
Agreement, this Note is subject to the Pledge Agreement of even date herewith by
and between Payor and Holder, which provides for the pledge of this Note by
Holder to Payor as a security for the performance of Holder’s obligations under
Article IX of the Purchase Agreement until the Pledge Expiration Date. Holder
acknowledges that this Note shall be retained by Payor until the Pledge
Expiration Date, although deemed to have been received by Holder at the time of
its issuance pursuant to the Purchase Agreement.
          5.2 Pursuant to Section 9.07 of the Purchase Agreement, in the event
that Holder is obligated to indemnify a Buyer Indemnified Party (as defined in
the Purchase Agreement) under Article IX of the Purchase Agreement, prior to the
Maturity Date, Payor shall first reduce the outstanding principal amount of this
Note, and if the outstanding principal amount of this Note shall have been
reduced to zero, shall then reduce any accrued and unpaid interest, by the
amount that Holder is obligated to pay to such Buyer Indemnified Party in lieu
of

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receiving a cash payment for such amount. Payor shall provide Holder prompt
written notice of any such reduction in the outstanding principal amount of this
Note or interest payable on this Note pursuant to this Section 5.2. Interest
shall accrue only on the outstanding principal amount of this Note after any
such reduction pursuant to this Section 5.2. If prior to the Maturity Date the
aggregate amount that Holder is obligated to pay all Buyer Indemnified Parties
equals or exceed $4,000,000, (a) this Note shall be deemed to have been fully
paid and satisfied and all rights with respect to this Note shall immediately
cease and terminate, except for only the right of Holder to receive any accrued
and unpaid interest, and (b) Holder shall surrender this Note, duly endorsed for
cancellation, to Payor.
     6. Rights of Holder.
          Holder shall not, by virtue hereof, be entitled to any rights of a
stockholder in Payor, either at law or in equity, and the rights of Holder are
limited to those expressed in this Note.
     7. Representation and Warranties.
          7.1 Holder. Holder has delivered to Payor an Accredited Investor
Certificate (as defined in the Purchase Agreement).
          7.2 Payor.
               (a) All shares of Payor Common Stock to be issued to Holder as
Repayment Stock, when issued pursuant to and in accordance with this Note and
the Purchase Agreement, will be duly authorized, validly issued, fully paid and
non-assessable.
               (b) Payor has duly reserved a sufficient number of shares of
Payor Common Stock for the issuance of the Repayment Stock.
     8. Covenants of Payor. For so long as this Note shall remain outstanding,
Payor shall keep a sufficient number of shares of Payor Common Stock reserved
for the issuance of the Repayment Stock.
     9. Events of Default.
          9.1 The following events will be considered “Events of Default” with
respect to this Note:
               (a) Payor defaults in the payment of any part of the Repayment
Amount at the Maturity Date;
               (b) Payor defaults in the payment the amount to be paid pursuant
to Section 1.4 on any Financing Prepayment Date and such default continues for a
period of three Business Days;

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               (c) Payor defaults in the delivery of any Repayment Stock as of
the Prepayment Election Date and such default continues for a period of three
Trading Days;
               (d) Payor defaults in the payment of any interest due on the
Note, which default continues for 30 days;
               (e) the occurrence of an event of default under any of the
Additional Notes, and any of the Contingent Note or the Alternate Contingent
Notes (each as defined in the Purchase Agreement) if issued in accordance with
Section 1.04(c) of the Purchase Agreement);
               (f) Payor defaults in the payment of any Contingent Payment, any
Non-US Licensing Earn-Out Payment or any Run Rate Contingent Payment (each as
defined in the Purchase Agreement) that the parties or the Independent
Accounting Firm (as defined in the Purchase Agreement) have determined is due
and payable in accordance with the terms of the Purchase Agreement and such
default continues for three Business Days;
               (g) Payor makes an assignment for the benefit of creditors, or
admits in writing its inability to pay its debts as they become due, or files a
voluntary petition for bankruptcy, or files any petition or answer seeking for
itself any reorganization, arrangement, composition, readjustment, dissolution
or similar relief under any present or future statute, law or regulation, or
files any answer admitting the material allegations of a petition filed against
Payor in any such proceeding, or seeks or consents to, or acquiesces in, the
appointment of any trustee, receiver or liquidator of Payor, or of all or any
substantial part of the properties of Payor, or Payor or its respective
directors or majority shareholders takes any action looking to the dissolution
or liquidation of Payor; or
               (h) Within 30 days after the commencement of any proceeding
against Payor seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future statute, law or regulation, such proceeding has not been dismissed or,
within 30 days after the appointment without the consent or acquiescence of
Payor of any trustee, receiver or liquidator of Payor or of all or any
substantial part of the properties of Payor, such appointment will not have been
vacated.
          9.2 Upon the occurrence of an Event of Default, at the option and upon
the declaration of Holder, the Repayment Amount will, without presentment,
demand, protest or notice of any kind, all of which are hereby expressly waived,
be forthwith due and payable, and Holder may, immediately and without expiration
of any additional period of grace, enforce payment of all amounts due and owing
under this Note and exercise any and all other remedies granted to it at law, in
equity or otherwise. No right or remedy herein conferred upon Holder is intended
to be exclusive of any other right or remedy contained in the Purchase
Agreement, the Registration Rights Agreement, this Note or in any instrument or
document delivered in connection with or pursuant to the Purchase Agreement, the
Registration Rights Agreement or this Note and every such right or remedy
contained herein and therein or now or hereafter existing at law or in equity or
by statute, or otherwise may be exercised separately or in any combination. No
course of dealing between Payor and the Holder or any failure or delay on the

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Holder’s part in exercising any rights or remedies hereunder shall operate as a
waiver or preclude the exercise of any other rights or remedies hereunder.
     10. Governing Law.
          The terms of this Note and disputes arising hereunder will be
construed in accordance with and governed by the laws of the State of
California, as applied to contracts entered into by California residents within
the State of California, which contracts are to be performed entirely within the
State of California, without reference to principles of conflicts of laws.
     11. Waiver.
          A delay in exercising rights any hereunder will not constitute a
waiver of any such rights.
     12. Loss, Theft, Destruction or Mutilation.
          Upon receipt by Payor of evidence and indemnity reasonably
satisfactory to it of the loss, theft, destruction or mutilation of, and upon
surrender and cancellation of this Note, if mutilated, Payor will make and
deliver in lieu of this Note a new note of like tenor and unpaid principal
amount and dated as of the date to which interest, if any, has been paid on the
unpaid principal amount of this Note.
     13. Assignment.
          This Note, and the obligations and rights of Payor hereunder, will be
binding upon and inure to the benefit of Payor, Holder, and their respective
heirs, personal representatives, successors and assigns, except that (a) Holder
may only assign or transfer any of its rights or obligations under this Note in
accordance with Section 4, and (b) Payor may not assign or transfer any of its
rights or obligations under this Note without the prior written consent of
Holder; provided, however that Payor may assign its rights or obligations under
this Note without obtaining such consent to any successor or purchaser in
connection with a merger of Payor; provided, further that Payor shall provide
Holder with written notice of the proposed assignment at least ten Business Days
prior to such merger.
     14. Amendments and Waivers.
          Changes in or amendments or additions to this Note may only be made,
and compliance with any term, covenant, agreement, condition or provision set
forth herein may only be omitted or waived (either generally or in a particular
instance and either retroactively or prospectively), upon written consent of
each of Payor and Holder.
          15. Notices.
          Any and all notices or other communications or deliveries required or
permitted to be provided hereunder shall be in writing and shall be deemed given
and effective on the earliest

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of (i) the date of transmission, if such notice or communication is delivered
via facsimile at the facsimile number specified in this Section prior to 5:00
p.m. (California time) on a Business Day, (ii) the Business Day after the date
of transmission, if such notice or communication is delivered via facsimile at
the facsimile telephone number specified in this Note later than 5:00 p.m.
(California time) on any date and earlier than 11:59 p.m. (California time) on
such date, (iii) the Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon actual receipt by
the party to whom such notice is required to be given. The address for such
notices and communications shall be as follows:

     
If to Payor:
  Avanir Pharmaceuticals
 
  11388 Sorrento Valley Rd.
 
  San Diego, CA 92121
 
  Attention: Michael Puntoriero
 
  Telephone: (858) 622-5200
 
  Fax: (858) 658-7447
 
   
With a copy to:
  Latham & Watkins LLP
 
  650 Town Center Drive, 20th Floor
 
  Costa Mesa, CA 92626
 
  Attention: Cary K. Hyden and Jonn R. Beeson
 
  Telephone: (714) 540-1235
 
  Fax: (714) 755-8290
 
   
If to Cutler:
  Neal R. Cutler
 
  [Address}
 
   
With a copy to:
  Milbank, Tweed, Hadley & McCloy LLP
 
  601 South Figueroa Street, 30th Floor
 
  Los Angeles, California 90017
 
  Attn: Brett Goldblatt
 
  Telephone: (213) 892-4000
 
  Fax: (213) 629-5063
 
   
If to any other Person who is then the Holder:
  To the address of such Holder as it appears in the certificate provided to
Payor in accordance with Section 5.2

or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
[SIGNATURE PAGE FOLLOWS]

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          IN WITNESS WHEREOF, Payor has caused this Note to be duly executed and
delivered as of the date first written above.

         
 
  AVANIR   PHARMACEUTICALS
 
       
 
  By:   /s/ Michael J. Puntoriero
 
       
 
  Name:   Michael J. Puntoriero
 
  Title:   Senior Vice President and Chief Financial Officer

Signature Page to Fourth Amended and Restated Operating Agreement

 

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          IN WITNESS WHEREOF, Holder acknowledges the terms and conditions of
this Note and received delivery of this Note as of the date first written above.

            NEAL R. CUTLER
      By:   /s/ Neal R. Cutler               Neal R. Cutler   

Signature Page to Fourth Amended and Restated Operating Agreement

 

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EXHIBIT A
CERTIFICATE OF PROPOSED TRANSFER

 

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CERTIFICATE OF PROPOSED TRANSFER
          The undersigned holder (the “Holder”) of the senior note of Avanir
Pharmaceuticals, a California Corporation (the “Company”) in the amount of
$4,000,000 dated May 24, 2006 to which this Certificate is attached (the “Note”)
and which may be prepaid in cash or, under certain circumstances as set forth in
the Note, in shares of Class A common stock, no par value of the Company (the
“Common Stock”), proposes to sell, pledge, distribute, offer for sale, transfer
or otherwise dispose of this Note to the transferee identified below (the
“Transferee”):
PLEASE NAME, ADDRESS AND SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF
TRANSFEREE:

     
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   

          The Holder and the Transferee acknowledge that the Holder received the
Note pursuant to that certain Unit Purchase Agreement dated as of May 22, 2006
(the “Purchase Agreement”), between Company, the parties listed on Schedule A to
the Purchase Agreement and Alamo Pharmaceuticals, LLC, a California limited
liability company, and that in issuing the Note to the Holder, the Company
relied upon a certificate executed by the Holder for purposes of demonstrating
that the Holder is an “accredited investor” within the meaning of Rule 501(a) of
Regulation D promulgated under the Securities Act of 1933, as amended (the
“Act”). Pursuant to Section 5 of the Note, the Transferee does hereby certify as
follows:

1.   The Transferee falls within one or more of the following categories (please
initial one or more, as applicable):

                (a) a private business development company as defined in
Section 202(a)(22) of the Investment Advisers Act of 1940;
                (b) an organization described in Section 501(c)(3) of the
Internal Revenue Code of 1986, corporation, or similar business trust, or
partnership, not formed for the specific purpose of acquiring the Note or the
Common Stock, with total assets in excess of $5,000,000;
                (c) a natural person whose individual net worth, or joint net
worth with that person’s spouse, as of the date hereof, exceeds $1,000,000;

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                (d) a natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that person’s
spouse in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year;
                (e) a trust, with total assets in excess of $5,000,000, not
formed for the specific purpose of acquiring the Note or the Common Stock, whose
acquisition is directed by a sophisticated person as described in
Rule 506(b)(2)(ii) of Regulation D; and
                (f) an entity in which all of the equity owners are accredited
The Transferees (as defined in 2(a) – 2(e) above).

2.   The Transferee is a sophisticated investor, knowledgeable, sophisticated
and experienced in business and financial matters. The Transferee is able to
bear the economic risk of holding the Note and the Common Stock for an
indefinite period and is able to afford the complete loss of his investment in
the Note and the Common Stock.

3.   The Transferee has had the opportunity to consult and has been advised or
has elected to proceed without advise from his legal counsel and tax advisor in
connection with his acquisition of the Note and the Common Stock, and
acknowledges that no representations as to potential profit and tax consequences
of any sort have been made by the Company, any officer or any employee or
representative or affiliate of the Company, and that projections and any other
information, including, without limitation, financial and descriptive
information and documentation, that may have been in any manner submitted to the
Transferee shall not constitute any representation or warranty of any kind or
nature, express or implied.

4.   The Transferee has had access to certain financial and other information,
including without limitation the Company’s most current Form 10-K and proxy
statement and other filings with the Securities and Exchange Commission
available on the Company’s website at www.avanir.com and has been afforded the
opportunity to ask questions of representatives of the Company relating thereto,
and to receive answers to those questions, as the Transferee deemed necessary in
connection with the acquisition of the Note and the Common Stock. The Transferee
has carefully considered potential risks relating to the Company and the
acquisition of the Note and the Common Stock.

5.   The Transferee acknowledges that it will acquire the Note and the Common
Stock in transactions not involving any public offering within the meaning of
the Act and that the Note and the shares of the Common Stock have not been
registered under the Act (unless the sale of the Common Stock shall have been
registered under the Act, pursuant to the terms of that certain Registration
Rights Agreement dated May 24, 2006, by and between the Company and the Holder
(the “Registration Rights Agreement”).

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6.   The Transferee agrees not to offer, sell, transfer or otherwise dispose of
the Note or the Common Stock in the absence of registration under the Act
unless, if requested by the Company, the Transferee delivers to the Company an
opinion of a lawyer experienced in securities law matters and reasonably
acceptable to the Company (it being understood that Milbank, Tweed, Hadley &
McCloy LLP shall be deemed acceptable to Payor) stating that in the opinion of
the attorney the proposed sale, transfer or other disposition is exempt from
registration under the Act and under all applicable state securities or blue sky
laws.

7.   The Transferee acknowledges that the Note will bear a legend to the
following effect:

NEITHER THIS SENIOR NOTE (THIS “NOTE”) NOR THE SHARES OF STOCK THAT MAY BE
ISSUABLE UPON REPAYMENT OF ANY PORTION OF THIS NOTE, IF APPLICABLE, HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE HOLDER MAY NOT
TRANSFER THIS NOTE OR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF
ANY PORTION OF THIS NOTE UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION COVERING
THIS NOTE OR THE SHARES OF STOCK THAT MAY BE ISSUABLE UPON REPAYMENT OF ANY
PORTION OF THIS NOTE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
APPLICABLE STATE SECURITIES LAWS OR (B) IF REQUESTED BY AVANIR PHARMACEUTICALS,
IT FIRST RECEIVES A LETTER FROM AN ATTORNEY REASONABLY ACCEPTABLE TO IT STATING
THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER ALL
APPLICABLE STATE SECURITIES LAWS.

8.   The Transferee acknowledges that the Common Stock will be in the form of
physical certificates and that the certificates will bear a legend to the
following effect (unless the sale of the Common Stock shall have been registered
under the Act pursuant to the terms of the Registration Rights Agreement):

THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. THE HOLDER MAY NOT TRANSFER THE SECURITIES EVIDENCED
HEREBY UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION COVERING THE SECURITIES
EVIDENCED BY THIS CERTIFICATE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
APPLICABLE STATE SECURITIES LAWS OR (B) IF REQUESTED BY AVANIR PHARMACEUTICALS,
IT FIRST RECEIVES A LETTER FROM AN ATTORNEY REASONABLY ACCEPTABLE TO IT STATING
THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER ALL
APPLICABLE STATE SECURITIES LAWS.

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9.   The Transferee acknowledges that the Company may place a stop transfer
order with its transfer agent or registrar to enforce the provisions of
Section 5 of the Note.

10.   The Transferee represents that it will acquire the Note and the Common
Stock solely for his own account for the purpose of investment only and not as a
nominee or agent for any other person and not with a view to, or for offer or
sale in connection with, any distribution or resale thereof, in whole or in
part, in violation of the Act or state securities or “blue sky” laws, without
prejudice, however, to his right to sell or otherwise dispose of all or any part
of the Common Stock pursuant to an effective registration statement under the
Act or under an exemption from registration available under the Act.

11.   The Company is entitled to rely on this Certificate in connection with its
obligations pursuant to the Purchase Agreement and the Note.

[SIGNATURE PAGE FOLLOWS]

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          IN WITNESS WHEREOF, the Holder and the Transferee have executed this
Certificate of Proposed Transfer as of the date first written above.

            Holder
      By:           Neal R. Cutler                Transferee
      By: