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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
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[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Hollis-Eden Pharmaceuticals, Inc.
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(Name of Registrant as Specified In Its Charter)
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HOLLIS-EDEN PHARMACEUTICALS, INC.
9333 GENESEE AVENUE, SUITE 110
SAN DIEGO, CA 92121
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 18, 1998
TO THE STOCKHOLDERS OF HOLLIS-EDEN PHARMACEUTICALS, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
HOLLIS-EDEN PHARMACEUTICALS, INC., a Delaware corporation (the "Company"), will
be held on Monday, May 18, 1998 at 2:00 p.m. local time at The Hyatt Regency La
Jolla, 3777 La Jolla Village Drive, San Diego, California 92122 for the
following purposes:
1. To elect three Class I directors to hold office until the 2001 Annual
Meeting of Stockholders.
2. To approve the Company's 1997 Incentive Stock Option Plan, as amended,
to increase the aggregate number of shares of Common Stock for issuance
under such plan by 250,000 shares.
3. To ratify the selection of BDO Seidman, LLP as independent auditors of
the Company for its fiscal year ending December 31, 1998.
4. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the
Proxy Statement accompanying this Notice.
The Board of Directors has fixed the close of business on April 8,
1998, as the record date for the determination of stockholders entitled to
notice of and to vote at this Annual Meeting and at any adjournment or
postponement thereof.
By Order of the Board of Directors
/s/ RICHARD B. HOLLIS
RICHARD B. HOLLIS
Chairman of the Board and
Chief Executive Officer
San Diego, California
April 15, 1998
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER
OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN
THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR
REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF
MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE
GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE
NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER
NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD
HOLDER A PROXY ISSUED IN YOUR NAME.
<PAGE> 3
HOLLIS-EDEN PHARMACEUTICALS, INC.
9333 GENESEE AVENUE, SUITE 110
SAN DIEGO, CA 92121
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
MAY 18, 1998
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors
of Hollis-Eden Pharmaceuticals, Inc., a Delaware corporation (the "Company"),
for use at the Annual Meeting of Stockholders to be held on Monday, May 18, 1998
at 2:00 p.m. local time (the "Annual Meeting"), or at any adjournment or
postponement thereof, for the purposes set forth herein and in the accompanying
Notice of Annual Meeting. The Annual Meeting will be held at The Hyatt Regency
La Jolla, 3777 La Jolla Village Drive, San Diego, California 92122. The Company
intends to mail this proxy statement and accompanying proxy card on or about
April 15, 1998, to all stockholders entitled to vote at the Annual Meeting.
SOLICITATION
The Company will bear the entire cost of solicitation of proxies,
including preparation, assembly, printing and mailing of this proxy statement,
the proxy and any additional information furnished to stockholders. Copies of
solicitation materials will be furnished to banks, brokerage houses, fiduciaries
and custodians holding in their names shares of Common Stock beneficially owned
by others to forward to such beneficial owners. The Company may reimburse
persons representing beneficial owners of Common Stock for their costs of
forwarding solicitation materials to such beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone, telegram or
personal solicitation by directors, officers or other regular employees of the
Company. No additional compensation will be paid to directors, officers or other
regular employees for such services.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Common Stock at the close of business on
April 8, 1998 will be entitled to notice of and to vote at the Annual Meeting.
At the close of business on April 8, 1998, the Company had outstanding and
entitled to vote 6,801,315 shares of Common Stock. Each holder of record of
Common Stock on such date will be entitled to one vote for each share held on
all matters to be voted upon at the Annual Meeting.
All votes will be tabulated by the inspector of election appointed
for the meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions will be counted towards the
tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative votes. Broker non-votes are counted towards a
quorum, but are not counted for any purpose in determining whether a matter has
been approved.
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the
power to revoke it at any time before it is voted. It may be revoked by filing
with the Secretary of the Company at the Company's principal executive office,
9333 Genesee Avenue, Suite 110, San Diego, California 92121, a written notice of
revocation or a duly executed proxy bearing a later date, or it may be revoked
by attending the meeting and voting in person. Attendance at the meeting will
not, by itself, revoke a proxy.
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STOCKHOLDER PROPOSALS
Proposals of stockholders that are intended to be presented at the
Company's 1999 Annual Meeting of Stockholders must be received by the Company
not later than December 17, 1998 in order to be included in the proxy statement
and proxy relating to that Annual Meeting.
PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Restated Certificate of Incorporation and Bylaws
provide that the Board of Directors shall be divided into three classes, each
class consisting, as nearly as possible, of one-third of the total number of
directors, with each class having a three-year term. Vacancies on the Board may
be filled only by persons elected by a majority of the remaining directors. A
director elected by the Board to fill a vacancy (including a vacancy created by
an increase in the size of the Board of Directors) shall serve for the remainder
of the full term of the class of directors in which the vacancy occurred and
until such director's successor is elected and qualified.
The Board of Directors is presently composed of six members. There
are three directors in the class whose term of office expires in 1998. Each of
the nominees for election to this class is currently a director of the Company
who was previously elected by the stockholders concurrent with the acquisition
of Hollis-Eden, Inc. by Initial Acquisition Corporation ("IAC"), the predecessor
of the Company. If elected at the Annual Meeting, each of the nominees would
serve until the 2001 Annual Meeting and until his successor is elected and has
qualified, or until such director's earlier death, resignation or removal.
Directors are elected by a plurality of the votes present in person
or represented by proxy and entitled to vote at the meeting.
Set forth below is biographical information for each person
nominated and each person whose term of office as a director will continue after
the Annual Meeting.
NOMINEES FOR ELECTION FOR A THREE-YEAR TERM EXPIRING AT THE 2001 ANNUAL MEETING
TERREN S. PEIZER
Mr. Peizer, age 38, has served as President and a director of the
Company since March 1997 (since February 1997 including Hollis-Eden, Inc.).
Since 1993, Mr. Peizer has served as Chairman and Chief Executive Officer of
Beachwood Financial Company, Inc., an investment holding company with
significant biotechnology equity holdings. From 1990 to 1993, Mr. Peizer served
as Chairman and Chief Executive Officer of Financial Group Holdings, Inc., an
investment holding company. From 1985 to 1990, Mr. Peizer served as a senior
member of the investment banking firm of Drexel Burnham Lambert, Inc.'s High
Yield Bond Department. Mr. Peizer held investment banking positions from 1981 to
1985 at Goldman, Sachs & Co.'s Risk and International Arbitrage Division as well
as the First Boston Corp.'s High Yield Securities Department. Mr. Peizer
received his B.S.E. in Finance from The Wharton School of Finance and Commerce
in 1981.
SALVATORE J. ZIZZA
Mr. Zizza, age 52, has served as a director of the Company since its
inception in November 1992 and served as Chairman of the Board, President and
Treasurer of the Company until March 1997. Mr. Zizza is presently Executive Vice
President of the First Medical Group, Inc. (FMDG), a public company that is an
owner/manager and provider of management and consulting services to physicians,
hospitals and other healthcare delivery organizations and facilities. Mr. Zizza
was President and Chief Financial Officer of NICO Construction Company, Inc.
until 1985 when NICO merged with The LVI Group, Inc. Prior to joining The LVI
Group, Inc., Mr. Zizza was an independent financial consultant and had been a
lending officer of Chemical Bank. Mr. Zizza's current and former directorships
include: The First Medical Group, The Bethlehem Corporation (ASE), The Gabelli
Equity Trust (NYSE), The Gabelli Asset Fund, The Gabelli
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Growth Fund, The Gabelli Convertible Securities Fund and The Gabelli Global
Multimedia Trust (NYSE). Mr. Zizza received a B.A. in Political Science and an
M.B.A. from St. John's University.
J. PAUL BAGLEY
Mr. Bagley, age 55, has served as a director of the Company since
March 1997 (since March 1996 including Hollis-Eden, Inc.). Mr. Bagley is a
founding principal of Stone Pine Capital L.L.C., a group that provides mezzanine
capital to fund acquisitions, buyouts, growth and recapitalizations and is also
associated with Stone Pine Asset Management L.L.C., and Stone Pine Investment
Banking L.L.C. Mr. Bagley was Chief Executive Officer of Laidlaw Holdings, Inc.,
an investment services company, from January 1995 until November 1996. For more
than twenty years prior to October 1988, Mr. Bagley was engaged in investment
banking activities with Shearson Lehman Hutton Inc. and its predecessor, E.F.
Hutton & Company, Inc. Mr. Bagley served in various capacities with Shearson and
E.F. Hutton, including Executive Vice President and Director, Managing Director,
Head of Direct Investment Origination and Manager of Corporate Finance. Mr.
Bagley controls a United States registered investment advisor, Fiduciary Capital
Management, which provides advisory services to two United States business
development companies. Mr. Bagley serves as Chairman of the Board of Directors
of Silver Screen Management, Inc. and International Film Investors, Inc., which
manage film portfolios. Mr. Bagley is also a director of Logan Machinery
Corporation, a privately held manufacturer of all-terrain vehicles, Consolidated
Capital of North America, a privately held NASDAQ bulletin board listed company,
and Hamilton Lane Private Equity Partners L.L.C., a Irish Stock Exchange listed
investment partnership. Mr. Bagley graduated from the University of California
at Berkeley in 1965 with a B.Sc. in Business and Economics and from Harvard
Business School in 1968 with an M.B.A. in Finance.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NAMED NOMINEE.
DIRECTORS CONTINUING IN OFFICE UNTIL THE 1999 ANNUAL MEETING
THOMAS CHARLES MERIGAN, JR., M.D.
Dr. Merigan, age 64, has served as a director and as Chairman of the
Scientific Advisory Board of the Company since March 1997 (since March 1996
including Hollis-Eden, Inc.). He also serves as Medical Director, Infectious
Diseases, for the Company. Dr. Merigan has been George E. and Lucy Becker
Professor of Medicine at Stanford University School of Medicine from 1980 to the
present. Dr. Merigan has also been the Principal Investigator, NIAID Sponsored
AIDS Clinical Trials Unit, from 1986 to the present and has been Director of
Stanford University's Center For AIDS Research from 1988 to the present. Dr.
Merigan is a member of various medical and honorary societies, has lectured
extensively within and outside the United States, and authored numerous books
and articles and has chaired and edited symposia relating to viruses, infectious
diseases, anti-viral agents, HIV and other retroviruses and AIDS. From 1990 to
the present, Dr. Merigan has been Chairman, Editorial Board of "HIV: Advances in
Research and Therapy". He is also a member of the editorial boards of "Aids
Research and Human Retroviruses" (since 1983), "International Journal of
Anti-Microbial Agents" (since 1990), and "The Aids Reader" (since 1991), among
others. He is a co-recipient of eight patents which, among other things, relate
to synthetic polynucleotides, modification of hepatitis B virus infection,
treatment of HIV infection, purified cytomegalovirus protein and composition and
treatment for herpes simplex. Dr. Merigan has been Chair, Immunology Advisory
Board, Bristol Myers Squibb Corporation (1989 - 1995) and Chair, Scientific
Advisory Board, Sequel Corp. (1993 - 1996). In 1994, Stanford University School
of Medicine honored him with the establishment of the Annual Thomas C. Merigan
Jr. Endowed Lectureship in Infectious Diseases, and, in 1996, Dr. Merigan was
elected Fellow, American Association for the Advancement of Science. From 1966
to 1992, Dr. Merigan was Head, Division of Infectious Diseases, at Stanford
School of Medicine. Dr. Merigan received his B.A. (with honors) from the
University of California at Berkeley in 1954 and his M.D. from the University of
California at San Francisco in 1958.
BRENDAN R. McDONNELL
Mr. McDonnell, age 35, has served as a director of the Company since
March 1997 (since August 1996 including Hollis-Eden, Inc.). Mr. McDonnell is of
counsel at Tonkon Torp, LLP, an Oregon law firm. Mr. McDonnell specializes in
representing both private and public emerging growth companies, with focus on
the high technology industry. Mr. McDonnell joined Tonkon Torp after working
approximately seven years at the law firm of Lane Powell Spears Lubersky
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and for approximately three years prior to that at the law firm of Brobeck,
Phleger & Harrison. Mr. McDonnell holds a B.S. in accounting from Loyola
Marymount University and a J.D. from the University of California at Davis. He
is a member of the California and Oregon State Bar Associations.
DIRECTORS CONTINUING IN OFFICE UNTIL THE 2000 ANNUAL MEETING
RICHARD B. HOLLIS
Mr. Hollis, age 45, has served as Chairman of the Board and Chief
Executive Officer of the Company since March 1997 (since August 1994 including
Hollis-Eden, Inc.). Mr. Hollis was the founder of Hollis-Eden, Inc. and also
served as Hollis-Eden, Inc.'s President from August 1994 to February 1997. Mr.
Hollis has over 20 years of experience in the health care industry in positions
ranging from sales to Chief Executive Officer. Mr. Hollis served as Chief
Operating Officer of Bioject Medical from 1991 to 1994 and as Vice President,
Marketing and Sales/General Manager for Instromedix from 1989 to 1991. From 1986
to 1989, Mr. Hollis served as a general manager of the Western business unit of
Genentech, Inc., a manufacturer of biopharmaceuticals. Prior to joining
Genentech, Inc., Mr. Hollis served as a divisional manager of Imed Corporation,
Inc., a manufacturer of drug delivery systems: intravenous infusion pumps and
controllers. Mr. Hollis began his career in the health care industry with Baxter
Travenol from 1974 to 1977. Mr. Hollis received his B.A. in Psychology from San
Francisco State University in 1974.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended December 1997, the Board of Directors
held five (5) meetings. The Board has an Audit Committee and a Compensation
Committee.
The Audit Committee meets with the Company's independent auditors at
least annually to review the results of the annual audit and discuss the
financial statements; recommend to the Board the independent auditors to be
retained; and receive and consider the accountants' comments as to controls,
adequacy of staff and management performance and procedures in connection with
audit and financial controls. The Audit Committee is composed of two
non-employee directors: Messrs. Zizza and McDonnell. The Audit Committee did not
meet in 1997.
The Compensation Committee makes recommendations to the Board
concerning executive salaries and incentive compensation, administers the
Company's 1997 Incentive Stock Option Plan and otherwise determines compensation
levels and policies and performs such other functions regarding compensation as
the board may delegate. The Compensation Committee is composed of two
non-employee directors: Mr. McDonnell and Dr. Merigan. The Compensation
Committee did not meet in 1997.
During the fiscal year ended December 31, 1997, each Board member
attended 75% or more of the aggregate of the meetings of the Board and of the
committees on which he served, held during the period for which he was a
director or committee member, respectively.
PROPOSAL 2
APPROVAL OF 1997 INCENTIVE STOCK OPTION PLAN, AS AMENDED
In February 1997, the Board of Directors adopted, and the
stockholders subsequently approved, the Company's 1997 Plan and reserved an
aggregate of 1,000,000 shares of the Company's Common Stock for issuance
thereunder to the Company's employees. The Board adopted the 1997 Plan so that
the Company could grant stock options and other stock awards to employees,
directors and consultants at levels determined appropriate by the Board and the
Compensation Committee, and to allow the Company more flexibility in attracting
and retaining qualified employees (including officers) and promoting the success
of the Company's business.
At January 31, 1998, options (net of canceled or expired options)
covering an aggregate of 518,166 shares of the Company's Common Stock had been
granted under the 1997 Plan, and 481,834 shares (plus any shares that might in
the
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future be returned to the plans as a result of cancellations or expiration of
options) remained available for future grant under the 1997 Plan. During the
last fiscal year, under the 1997 Plan, the Company granted options to purchase
337,500 shares at exercise prices of $6.75 to $8.70 to all current officers as a
group and options to purchase 2,166 shares at an exercise price of $2.25 to
$6.75 per share to all employees (excluding executive officers) as a group.
Options to purchase 75,000 shares at an exercise price of $6.75 were granted to
directors (excluding executive officers) as a group. In February 1998, the Board
approved an amendment to the 1997 Plan to increase the number of shares
authorized for issuance under the 1997 Plan from a total of 1,000,000 shares to
1,250,000 shares. The Board adopted this amendment to ensure that the Company
can continue to grant stock options to employees at levels determined
appropriate by the Board and the Compensation Committee.
Stockholders are requested in this Proposal 2 to approve the 1997
Plan, as amended. The affirmative vote of the holders of a majority of the
shares present in person or represented by proxy and entitled to vote at the
meeting will be required to approve the 1997 Plan, as amended. Abstentions will
be counted toward the tabulation of votes cast on proposals presented to the
stockholders and will have the same effect as negative votes. Broker non-votes
are counted towards a quorum, but are not counted for any purpose in determining
whether this matter has been approved.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 2.
The essential features of the 1997 Plan are described below.
GENERAL
The following description of the 1997 Plan is a summary and is
qualified in its entirety by reference to the 1997 Plan. On February 5, 1997,
the Company's Board of Directors adopted the 1997 Plan, which was subsequently
approved by the Company's stockholders on March 26, 1997.
PURPOSE
The purpose of the 1997 Plan is to encourage selected management,
key employees, directors and certain other persons associated with the Company
(including any successor) to acquire an investment in the Company's business,
thereby strengthening their commitment to remain with, or join, the Company. The
1997 Plan contemplates the grant to such persons of "incentive stock options"
under Section 422 of the Code ("ISO's") and nonqualified stock options
("NSO's").
The 1997 Plan is not subject to any of the requirements of the
Employee Retirement Income Security Act of 1974, as amended, nor is it qualified
or intended to be qualified under Section 401(a) of the Code.
ADMINISTRATION
The 1997 Plan is to be administered by the Compensation Committee,
consisting of Mr. McDonnell and Dr. Merigan, each a "disinterested person"
within the meaning of Rule 16(b)-3(c)(2)(i) of the Exchange Act, with respect to
the 1997 Plan. Subject to the terms of the 1997 Plan and such limitations as the
Board of Directors may impose, the Compensation Committee shall be responsible
for the overall management and administration of the 1997 Plan and shall have
such authority as may be necessary or appropriate to carry out its
responsibilities, including, without limitation, the authority to (i) determine
the persons to whom, and the time or times at which, grants shall be made as
well as the terms of ISO's and NSO's, (ii) interpret and construe the terms of
the 1997 Plan and any instrument thereunder, and (iii) adopt rules and
regulations, prescribe forms and take any other actions not inconsistent with
the 1997 Plan as it may deem necessary or appropriate.
ELIGIBILITY
Officers, key employees and directors of the Company, as well as
certain consultants, advisors and other persons who provide services to the
Company, are eligible to participate in the 1997 Plan without regard to length
of employment or service. Any such person who is not an "employee" of the
Company, within the meaning of Section 422 of the Code, is not eligible to
receive ISO's.
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No options will be granted after February 4, 2007, the date upon
which the 1997 Plan will terminate if it is not terminated earlier by the Board.
DESCRIPTION OF OPTIONS
The exercise price of an option granted under the 1997 Plan and the
period during which it may be exercised will be determined by the Compensation
Committee at the time of grant, subject to the terms and conditions of the 1997
Plan. The exercise price of an ISO, however, shall not be less than the fair
market value of the shares subject to such ISO on the date of grant (or 110% of
such fair market value in the case of ISO's granted to an individual who is a
10% or greater stockholder).
In no event will options expire later than the expiration of ten
years from the date of grant (or five years from the date of grant in the case
of ISO's granted to an individual who is a 10% or greater stockholder). Options
that are otherwise exercisable may be exercised in whole or in part.
Upon (i) the merger or consolidation of the Company with or into
another corporation (pursuant to which the Company's stockholders immediately
prior to such merger or consolidation will not, as of the date of such merger or
consolidation, own a beneficial interest in shares of voting securities of the
corporation surviving such merger or consolidation having at least a majority of
the combined voting power of such corporation's then outstanding securities), if
the agreement of merger or consolidation does not provide for (a) the
continuance of the options granted under the 1997 Plan or (2) the substitution
of new options for options granted under the 1997 Plan, or for the assumption of
such options by the surviving corporation, (ii) the dissolution, liquidation, or
sale of all or substantially all the assets of the Company to a person unrelated
to the Company or to a direct or indirect owner of a majority of the voting
power of the Company's then outstanding voting securities (such sale of assets
being referred to as an "Asset Sale") or (iii) the "change in control" of the
Company, the holder of any such option theretofore granted and still outstanding
(and not otherwise expired) shall have the right immediately prior to the
effective date of such merger, consolidation, dissolution, liquidation, Asset
Sale or change in control of the Company to exercise such option(s) in whole or
in part without regard to any installment provision that may have been made part
of the terms and conditions of such option(s); provided that any conditions
precedent to the exercise of such option(s), other than the passage of time,
have occurred.
As used herein, a "change in control of the Company" shall be deemed
to have occurred if any person (including any individual, firm, partnership or
other entity) together with all affiliates and associates (as defined under Rule
12b-2 promulgated under the Exchange Act) of such person (but excluding (i) a
trustee or other fiduciary holding securities under an employee benefit plan of
the Company or any subsidiary of the Company, (ii) a corporation owned, directly
or indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of the Company, (iii) the Company or any
subsidiary of the Company or (iv) a participant together with all affiliates and
associates of such participant) is or becomes the beneficial owner (as defined
in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of
securities of the Company representing 40% or more of the combined voting power
of the Company's then outstanding securities.
If the optionee's employment with the Company terminates or if the
optionee's association with the Company terminates (in the case of a consultant,
advisor or other service provider), options that are exercisable on his
termination date shall remain exercisable until the expiration of three months
from such termination date (extended to 12 months if such termination occurs due
to the optionee's death or disability), provided however, that if such
employment or association is terminated by the Company for "good cause" as
defined in the 1997 Plan, or by the optionee voluntarily (other than for
disability) without the written consent of the Compensation Committee, such
optionee shall forfeit the right to exercise all outstanding options previously
granted to such optionee.
To the extent that the aggregate of (i) the fair market value
(determined at the time an ISO is granted) of the shares of the Company's Common
Stock subject to an ISO and (ii) the fair market value (determined as of the
date(s) of grant of the options(s) of all other shares of Common Stock subject
to ISO's granted to an optionee which are exercisable for the first time by an
optionee during a calendar year (under all stock option plans of the Company)
exceeds $100,000, such ISO's shall be treated as NSO's.
PAYMENT FOR SHARES
Payment for shares of the Company's Common Stock purchased upon
exercise of an option must be made in full upon exercise, either in cash or
check or in shares of outstanding Common Stock of the Company, as determined by
the
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Compensation Committee. The proceeds received by the Company from the sale of
shares of its Common Stock pursuant to the 1997 Plan shall be used for general
corporate purposes.
TRANSFER RESTRICTIONS
Options are not transferable other than by will or the laws of
descent and distribution or pursuant to a domestic relations order. An optionee
is required to notify the Company if he disposes of shares of the Company's
Common Stock acquired pursuant to the exercise of an ISO within two years of the
date the ISO was granted or within one year of the date the ISO was exercised.
AMENDMENT AND TERMINATION
The Board may amend or terminate the 1997 Plan at any time or from
time to time; provided, however, that unless all required approvals have been
received, no amendment will be made that would (i) increase the maximum number
of shares as to which options may be granted, or (ii) materially modify the
requirements as to eligibility for participation. No amendment is permitted
which would adversely affect the rights of any optionee under an option granted
prior to such amendment, unless the optionee consents thereto. In addition, no
amendment will be made that would result in the disqualification of any ISO as
an "incentive stock option" within the meaning of Section 422 of the Code.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the federal income tax
consequences to an optionee and the Company of the grant and exercise of an
option pursuant to the 1997 Plan and the disposition of stock acquired upon
exercise of any option. Because the consequences will vary for any one of a
number of reasons, the Company urges each optionee to consult his own tax
advisor with respect to the tax consequences of such transactions. The following
summary does not purport to be complete and does not take into account state or
local tax implications.
GENERAL
The grant of an option under the 1997 Plan, whether or
not an ISO, does not result in any tax consequences to the Company
or the optionee. The tax consequences of exercising an option or
disposing of the Company's Common Stock purchased by an optionee
upon exercise of an option ("option stock") depend upon whether the
option is an ISO or an NSO.
NONQUALIFIED STOCK OPTIONS
An optionee, if he is not a director, officer or
beneficial owner of more than ten percent of the outstanding shares
of the Company's Common Stock (hereinafter, a "director, officer or
principal stockholder"), will realize income as compensation, at the
time he exercises an NSO, in an amount equal to the amount by which
the then fair market value of the Company's Common Stock acquired
pursuant to the exercise of the NSO exceeds the price paid for such
Common Stock. Section 83 of the Code provides generally that, if a
director, officer or principal stockholder receives shares pursuant
to the exercise of such an option, he will realize ordinary income
only when he can sell such shares at a profit without being subject
to liability under section 16(b) of the Exchange Act, at which time
he will be subject to tax on the difference between the then fair
market value of the shares and the price paid for them.
Alternatively, a director, officer or stockholder who would not
otherwise be subject to tax on the value of his shares as of the
date they were acquired can file a written election with the
Internal Revenue Service, no more than 30 days after the shares are
transferred to him, to be taxed as of the date of the transfer. The
optionee then will realize income, as compensation, in a total
amount equal to the amount by which the fair market value of the
shares, as of the date he acquired them, exceeds the price paid for
such shares.
Shares of the Company's Common Stock issued pursuant to
the exercise of an NSO generally will constitute a capital asset in
the hands of an optionee (including a director, officer or principal
stockholder) and will be eligible for capital gain or loss treatment
upon any subsequent disposition. The holding period of an optionee
(including a director, officer or principal stockholder) will
commence upon the date he recognizes income with respect to the
issuance of such shares, as described above. The optionee's basis in
the shares will be equal to the greater of their fair market value
as of that date or the amount paid for such shares.
7
<PAGE> 10
INCENTIVE STOCK OPTIONS
If an optionee exercises an ISO, the optionee does not
recognize income upon exercise, provided that the optionee was an
employee of the Company at all times from the date when the option
was granted until not less than three months before exercise. (This
three-month period is extended to one year if the optionee's
employment terminates as a result of permanent and total disability,
and is waived in the case of the optionee's death while employed by
the Company). However, the excess of the fair market value of Common
Stock acquired upon exercise of an ISO (determined at the time of
such exercise) over the exercise price generally constitutes an item
of adjustment for purposes of determining the optionee's alternative
minimum tax liability for the taxable year of the exercise.
If an optionee exercises an ISO and fails to satisfy the
three-month (one-year in the case of permanent and total disability)
employment period requirement, the optionee must include in gross
income, as compensation for the taxable year of exercise, an amount
equal to the excess of the fair market value of the option stock at
the time of exercise over the exercise price. If an optionee
subsequently disposes of option stock which, when exercised, did not
satisfy the employment period requirement, the optionee must include
in gross income as capital gain (or loss) for the taxable year, the
difference between amount realized by the optionee upon such
disposition and the fair market value of the option stock at the
time of exercise.
If (i) an optionee satisfied the employment period
requirement set forth above at the time the ISO was exercised, (ii)
disposes of option stock that was acquired by the optionee pursuant
to an ISO more than one year prior to the disposition, (iii) such
ISO was granted to the optionee more than two years prior to the
disposition, and (iv) the amount realized in the disposition exceeds
the exercise price, then the optionee must include in gross income,
as capital gain for the taxable year of the disposition an amount
equal to the excess of the amount realized in the disposition over
the exercise price. (If, instead, the exercise price exceeds the
amount realized in the disposition, the optionee is allowed to
deduct an amount equal to such excess as a capital loss for such
year.)
If (i) an optionee satisfied the employment period
requirement set forth above, at the time the ISO was exercised, (ii)
disposes of option stock within two years after the related ISO is
granted or within one year after the option stock was acquired by
the optionee, and (iii) the amount realized in the disposition
exceeds both the exercise price and the fair market value of the
option stock on the date of exercise, then the optionee must include
in gross income, as compensation for the taxable year of the
disposition, an amount equal to the excess of such fair market value
over the exercise price, and must include in gross income as gain an
amount equal to the excess of the amount realized in the disposition
over such fair market value. Such gain is generally treated as
capital gain, long-term or short-term, depending upon the length of
time elapsed between the time when the option stock was acquired and
the time of the disposition. If, instead, the amount realized in the
disposition exceeds the exercise price, but is less than the fair
market value of the option stock on the date of exercise, the
optionee must include in gross income, as compensation for the
taxable year of the disposition, an amount equal to the excess of
the amount realized over the exercise price. If the exercise price
exceeds the amount realized in the disposition, the optionee is
allowed to deduct an amount equal to such excess as a loss for the
taxable year of the disposition. Such loss is generally treated as
capital loss, long-term or short term, depending upon the length of
time elapsed between the time the option stock was acquired and the
time of the disposition.
PROPOSAL 3
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors has selected BDO Seidman, LLP as the
Company's independent auditors for the fiscal year ending December 31, 1998 and
has further directed that management submit the selection of independent
auditors for ratification by the stockholders at the Annual Meeting. BDO
Seidman, LLP has audited the Company's financial statements since its inception
in 1993. Representatives of BDO Seidman, LLP are expected to be present at the
Annual Meeting, will have an opportunity to make a statement if they so desire
and will be available to respond to appropriate questions.
Stockholder ratification of the selection of BDO Seidman, LLP as the
Company's independent auditors is not required by the Company's Bylaws or
otherwise. However, the Board is submitting the selection of BDO Seidman, LLP to
the stockholders for ratification as a matter of good corporate practice. If the
stockholders fail to ratify the selection, the
8
<PAGE> 11
Audit Committee and the Board will reconsider whether or not to retain that
firm. Even if the selection is ratified, the Audit Committee and the Board in
their discretion may direct the appointment of different independent auditors at
any time during the year if they determine that such a change would be in the
best interests of the Company and its stockholders.
The affirmative vote of the holders of a majority of the shares
present in person or represented by proxy and entitled to vote at the Annual
Meeting will be required to ratify the selection of BDO Seidman, LLP.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 3.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of the Company's Common Stock as of [JANUARY 31, 1998] by: (i) each
director and nominee for director; (ii) each of the executive officers named in
the Summary Compensation Table; (iii) all executive officers and directors of
the Company as a group; and (iv) all those known by the Company to be beneficial
owners of more than five percent of its Common Stock.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP (1)
BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF TOTAL
---------------- ---------------- ----------------
<S> <C> <C>
Richard B. Hollis (2) 3,249,924 44.4%
Hollis-Eden Pharmaceuticals, Inc.
9333 Genesee Avenue, Suite 110
San Diego, CA 92121
Patrick T. Prendergast (3) 780,503 11.2%
Baybush, Straffan
County Kildare
Ireland
Growth Ventures Inc. Pension Plan and Trust (4) 502,891 7.2%
14 Red Tail Drive
Highlands Ranch, CO 90126
Terren S. Peizer (5) 400,000 5.6%
100 Wilshire Boulevard, Suite 1620
Santa Monica, CA 90401
Strome Susskind Investment Management, L.P. 356,578 5.3%
100 Wilshire Boulevard, 15th Floor
Santa Monica, CA 90401
J. Paul Bagley (6) 289,549 4.1%
Salvatore J. Zizza (7) 245,000 3.6%
Thomas Charles Merigan (8) 91,667 1.3%
Robert W. Weber (9) 63,333 *
Brendan R. McDonnell (10) 16,666 *
All executive officers and directors as a group (9 persons) (11) 4,382,806 52.9%
</TABLE>
- ----------
* Less than one percent.
9
<PAGE> 12
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13G filed with the Securities and
Exchange Commission (the "SEC"). Unless otherwise indicated in the
footnotes to this table and subject to community property laws where
applicable, the Company believes that each of the stockholders named in
this table has sole voting and investment power with respect to the
shares indicated as beneficially owned. Applicable percentages are based
on 6,791,881 shares outstanding on January 31, 1998, adjusted as
required by rules promulgated by the SEC.
(2) Includes 133,333 shares subject to options and 393,250 shares subject to
warrants exercisable within 60 days of January 31, 1998.
(3) The securities are held in the name of various entities affiliated with
and controlled by Dr. Prendergast, and include 128,302 shares subject to
warrants exercisable within 60 days of January 31, 1998 and 33,333
shares subject to options exercisable by Dr. Prendergast within 60 days
of January 31, 1998.
(4) Includes 189,938 shares subject to warrants exercisable within 60 days
of January 31, 1998. Gary J. McAdam is the Trustee of the Trust.
(5) Includes 400,000 shares subject to options exercisable within 60 days of
January 31, 1998.
(6) Includes 25,000 shares subject to options exercisable within 60 days of
January 31, 1998 and 264,549 shares subject to warrants exercisable
within 60 days of January 31, 1998, held of record by LHIP Acquisition
Company L.L.C., of which Mr. Bagley is the manager.
(7) Includes 100,000 shares subject to warrants exercisable within 60 days
of January 31, 1998.
(8) Includes 91,667 shares subject to options exercisable within 60 days of
January 31, 1998.
(9) Includes 2,000 shares held by Mr. Weber as custodian for his minor
children and 43,333 shares subject to options exercisable within 60 days
of January 31, 1998.
(10) Includes 16,666 shares subject to options exercisable within 60 days of
January 31, 1998.
(11) Includes 736,666 shares subject to options exercisable within 60 days of
January 31, 1998 and 757,799 shares subject to warrants exercisable
within 60 days of January 31, 1998.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "1934
Act") requires the Company's directors and executive officers, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file with the SEC initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than ten percent stockholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledge, based solely on a review of the copies
of such reports furnished to the Company and written representations that no
other reports were required, during the fiscal year ended December 31, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with, other than the
inadvertent omission from Mr. Bagley's initial report of ownership on Form 3 of
certain indirect derivative securities of which he may be deemed a beneficial
owner. This omission was corrected by filing an amended Form 3 report.
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
The members of the Board of Directors are not compensated for
attendance at Board and Committee meetings. They are, however, eligible for
reimbursement for their expenses incurred in connection with such attendance in
accordance with Company policy.
10
<PAGE> 13
In 1997, Dr. Merigan entered into a consulting arrangement with the
Company. Pursuant to the arrangement, Dr. Merigan received $55,000 in consulting
fees for services performed for the Company in 1997.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY OF COMPENSATION
The following table shows for the fiscal year ended December 31,
1997, compensation awarded or paid to, or earned by, the Company's Chief
Executive Officer and its other three most highly compensated executive officers
at December 31, 1997, who earned in excess of $100,000 in salary and bonus
during the last year (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
---------------------------------------------------------------------------------------
Securities
Other Underlying
Name and Principal Salary Bonus Annual Options/
Position Year(1) ($) ($) Compensation($) SARs(#)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mr. Richard B. Hollis 1997 199,212 -0- 31,921(2) -0-
Chairman of the Board and Chief
Executive Officer
Mr. Terren S. Peizer 1997 172,212 -0- -0- -0-(3)
President
Ms. Lois Rezler(4) 1997 105,000 15,000 -0- 100,000
Vice President of Regulatory
Affairs
Mr. Robert W. Weber 1997 92,523 -0- 18,005(5) 35,000
Vice President - Controller
</TABLE>
- ----------
(1) Compensation for such Named Executive Officers is not shown for fiscal
years ended December 31, 1995 and 1996, as they were not officers of the
Company during such years.
(2) Includes tax gross up amount of $6,906 and moving expenses of $25,105.
(3) Does not include options to purchase 2,400,000 shares of the Company's
Common Stock granted to Terren Peizer by Hollis-Eden, Inc. prior to the
Merger, which options were assumed by the Company in accordance with the
terms of the Merger Agreement. See "Certain Transactions."
(4) Ms. Rezler's employment with the Company ceased in February 1998.
(5) Includes tax gross up amount of $4,325 and moving expenses of $13,680.
STOCK OPTION GRANTS AND EXERCISES
The Company may grant options to its executive officers under its
1997 Plan. As of January 31, 1998, options to purchase a total of 518,166 shares
were outstanding under the 1997 Plan and options to purchase 481,834 shares
remained available for grant thereunder.
11
<PAGE> 14
The following tables show for the fiscal year ended December 31,
1997, certain information regarding options granted to, exercised by, and held
at year end by, the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
Potential Realizable Value
Shares % of Total At Assumed Annual Rates of
Underlying Options Granted Stock Price Appreciation
Options to Employees in Exercise Expiration For Option Term ($)(3)
Name Granted(#)(2) Fiscal Year(%) Price($/sh) Date 5% 10%
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert W. Weber 35,000 8.0% $ 6.75 11/23/07 $ 148,601 $ 376,583
Lois Rezler 100,000 22.7% $ 8.70 5/19/07 $ 547,230 $1,386,780
</TABLE>
- ----------
(1) Does not include options to purchase 2,400,000 shares of the Company's
Common Stock granted to Terren Peizer by Hollis-Eden, Inc. prior to the
Merger, which options were assumed by the Company in accordance with the
terms of the Merger Agreement. See "Certain Transactions."
(2) Such options vest according to the following schedule: 1/3 of the shares
subject to the option vest one year from the date of grant and the
remainder vest in 24 equal monthly installments.
(3) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). It is calculated assuming that
the stock price on the date of grant appreciates at the indicated annual
rate, compounded annually for the entire term of the option, and that
the option is exercised and sold on the last day of its term for the
appreciated stock price. These amounts represent certain assumed rates
of appreciation only, in accordance with the rules of the SEC, and do
not reflect the Company's estimate or projection of future stock price
performance. Actual gains, if any, are dependent on the actual future
performance of the Company's Common Stock and no gain to the optionee is
possible unless the stock price increases over the option term which
will benefit all stockholders.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities Underlying in-the-Money Options as of
Options as of FY-End(#)(1) FY End($)(2)
---------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Hollis 116,666 83,334 466,664 333,336
Terren S. Peizer -0- 2,400,000 -0- 3,000,000
Lois Rezler -0- 150,000 -0- 200,000
Robert W. Weber 37,916 62,084 151,664 108,336
</TABLE>
- ----------
(1) Includes both in-the-money and out-of-the-money options.
(2) The fair market value of the underlying shares on the last day of the
fiscal year ($6.25) less the exercise or base price. Excludes
out-of-the-money options.
12
<PAGE> 15
EMPLOYMENT AGREEMENTS
The Company has entered an employment agreement with Mr. Hollis
providing that if Mr. Hollis' employment is terminated without cause, Mr. Hollis
shall be entitled to the following: (i) base salary through the date of
termination, (ii) annual base salary in effect at the time of termination times
five, (iii) an amount equal to the prior calendar year's bonus awarded to Mr.
Hollis times five, (iv) immediate vesting of all unvested stock options of the
Company held by Mr. Hollis, and the continuation of the exercise period of all
stock options held by Mr. Hollis until the final expiration of the original
terms of such stock options, and (v) continued receipt for three years of all
employee benefit plans and programs in which Mr. Hollis and his family were
entitled to participate immediately prior to the date of termination. The
employment agreement further provides that if Mr. Hollis' employment is
terminated within one year of the occurrence of a change in control of the
Company, upon execution by Mr. Hollis of a waiver and release of claims, (i) the
new company shall pay Mr. Hollis' base salary through the date of termination,
(ii) the new company shall pay Mr. Hollis his annual base salary in effect
immediately prior to the event or events resulting in a change in control times
five, (iii) the new company shall pay Mr. Hollis an amount equal to five times
the bonus awarded to Mr. Hollis in the calendar year immediately preceding the
calendar year in which the event or events resulting in a change of control
occurred, (iv) all unvested stock options of the new company held by Mr. Hollis
shall immediately vest, and the period for exercise of all stock options of the
new company held by Mr. Hollis until the final expiration of the original term
of such stock option, and (v) Mr. Hollis shall continue to receive for three
years all employee benefit plans and programs in which Mr. Hollis and his family
were entitled to participate immediately prior to the date of termination.
The Company has also entered into an employment agreement with Mr.
Peizer providing that if Mr. Peizer's employment is terminated without cause,
upon execution by Mr. Peizer of a waiver and release of claims, he shall be
entitled to (i) continuation of his base salary for one year from the date of
termination and (ii) immediate vesting of all unvested stock options granted to
him.
Mr. Weber's employment arrangement with the Company provides that if
Mr. Weber is terminated without cause, he will receive one year's severance pay,
at his highest salary level, and an amount equal to his prior year's bonus, plus
benefits. In addition, all unvested stock held by Mr. Weber would immediately
vest and the exercise period for such stock options would continue until the
final expiration of the original terms of such stock options.
Mr. Frincke's employment arrangement with the Company provides that
if Mr. Frincke is terminated without cause within the first twelve months of his
employment, he will receive severance pay equal to his remaining unpaid salary
for such twelve month period, plus an additional three months. In addition, his
stock options shall continue to vest for the remainder of such twelve month
period.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION
The following is a report of the Compensation Committee of the
Company describing the compensation policies and rationale applicable to the
Company's executive officers with respect to the compensation paid to such
executive officers for the year ended December 31, 1997. The information
contained in this report shall not be deemed to be "soliciting material" or to
be "filed" with the Securities and Exchange Commission nor shall such
information be incorporated by reference into any future filing under the
Securities Act or the Exchange Act, except to the extent that the Company
specifically incorporates it by reference into any such filing.
The Compensation Committee (the "Committee") of the Board of
Directors reviews and recommends to the Board of Directors for approval the
Company's executive compensation policies. The Committee is responsible for
reviewing the salary and benefits structure of the Company at least annually to
insure its competitiveness within the Company's industry. The following is the
report of the Committee describing the compensation policies and rationales
applicable to the Company's executive officers with respect to the compensation
paid to such executive officers for the fiscal year ended December 31, 1997.
During 1997, the Committee was composed of two outside directors, Mr. McDonnell
and Dr. Merigan.
COMPENSATION PHILOSOPHY
The Company's philosophy in establishing its compensation policy for
executive officers and other employees is to create a structure designed to
attract and retain highly skilled individuals by establishing salaries,
benefits, and incentive
13
<PAGE> 16
compensation which compare favorably with those for similar positions in other
pharmaceutical and biotechnology companies. Compensation for the Company's
executive officers consists of a base salary and potential incentive cash
bonuses, as well as incentive compensation through stock options.
BASE SALARY
The base salary component of compensation is designed to compensate
executive officers competitively at levels necessary to attract and retain
qualified executives in the pharmaceutical and biotechnology industry. In order
to evaluate the Company's competitive position in the industry, the Committee
reviewed and analyzed the compensation packages, including base salary levels,
offered by other biotechnology and pharmaceutical companies. The competitive
information was obtained from a survey prepared by a consulting company (e.g.,
the 1997 Report on Executive Compensation in the Biopharmaceutical Industry). As
a general matter, the base salary for each executive officer is initially
established through negotiation at the time the officer is hired taking into
account such officer's qualifications, experience, prior salary, and competitive
salary information. Year-to-year adjustments to each executive officer's base
salary are based upon personal performance for the year, changes in the general
level of base salaries of persons in comparable positions within the industry,
and the average merit salary increase for such year for all employees of the
Company, as well as other factors the Compensation Committee judges to be
pertinent during an assessment period. In making base salary decisions, the
Committee exercises its judgment to determine the appropriate weight to be given
to each of these factors. The Committee believes that its process for
determining and adjusting the base salary of executive officers is consistent
with sound personnel practices.
BONUS PAYMENTS
Cash bonus payments are discretionary unless otherwise required
pursuant to an employment agreement. Bonus payments, if any, to executive
officers, including the CEO, or payments above the required annual minimum, are
based on two principal factors: corporate performance as compared to the
Company's goals and objectives and individual performance relative to corporate
performance and individual goals and objectives.
Bonus payment recommendations for executive officers other than the
CEO are initiated by the CEO and submitted to the Committee for review and
subsequent submission to the Board. Bonus payment recommendations for the CEO
are initiated by the Committee and submitted to the Board.
LONG-TERM INCENTIVES
To conserve its cash resources, the Company places special emphasis
on equity-based incentives to attract, retain and motivate executive officers as
well as other employees. The Committee provides the Company's executive officers
with long-term incentive compensation through grants of stock options generally
under the 1997 Plan. The Board believes that stock options provide the Company's
executive officers with the opportunity to purchase and maintain an equity
interest in the Company and to share in the appreciation of the value of the
Company's Common Stock. The Board believes that stock options directly motivate
an executive to maximize long-term stockholder value. The options also utilize
vesting periods (generally three years) that encourage key executives to
continue in the employ of the Company. The Board considers the grant of each
option subjectively, considering factors such as the individual performance of
the executive officer and the anticipated contribution of the executive officer
to the attainment of the Company's long-term strategic performance goals.
Long-term incentives granted in prior years are also taken into consideration.
Grants are made to all employees when hired based on salary level and position.
All employees, including executive officers, are eligible for subsequent,
discretionary grants which are generally based on either individual or corporate
performance. The compensatory and administrative features of the 1997 Plan
conform in all material respects to the design of standard comparable plans in
the industry and are, in the Committee" estimation, fair and reasonable.
CHIEF EXECUTIVE OFFICER COMPENSATION
The compensation of the Chief Executive Officer is reviewed annually
on the same basis as discussed above for all executive officers. Mr. Hollis'
base salary for 1997 was $195,000 and increased to $225,000 on March 26, 1997.
Mr. Hollis' salary and potential bonus were determined on the basis of
negotiation between the Board of Directors and Mr. Hollis during 1996 as part of
his employment agreement, with due regard for his qualifications, experience,
prior salary, and competitive salary information. Mr. Hollis' base salary was
established in part by comparing the base salaries of chief executive officers
at other biotechnology and pharmaceutical companies of similar size. Mr. Hollis
elected not to take a bonus in 1997.
14
<PAGE> 17
SECTION 162(m)
The Board has considered the potential future effects of Section
162(m) of the Internal Revenue Code on the compensation paid to the Company's
executive officers. Section 162(m) disallows a tax deduction for any
publicly-held corporation for individual compensation exceeding $1.0 million in
any taxable year for any of the executive officers named in the proxy statement,
unless compensation is performance-based. The Company has adopted a policy that,
where reasonably practicable, the Company will seek to qualify the variable
compensation paid to its executive officers for an exemption from the
deductibility limitations of Section 162(m).
In approving the amount and form of compensation for the Company's
executive officers, the Committee will continue to consider all elements of the
cost to the Company of providing such compensation, including the potential
impact of Section 162(m).
Respectfully submitted by:
COMPENSATION COMMITTEE
Brendan R. McDonnell, Chairman
Thomas C. Merigan, Jr. M.D.
15
<PAGE> 18
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As noted above, the Company's Compensation Committee consists of Mr.
McDonnell and Dr. Merigan. No member of the Compensation Committee has a
relationship that would constitute an interlocking relationship with executive
officers or directors of another entity.
PERFORMANCE MEASUREMENT COMPARISON(1)
The following graph shows the total stockholder return of an
investment of $100 in cash on June 28, 1995 for (i) the Company's Common Stock,
(ii) the Nasdaq Pharmaceutical Index and (iii) the Nasdaq Index. All values
assume reinvestment of the full amount of all dividends as of December 31 of
each year.
The Company's Common Stock commenced trading on the OTC Electrical
Bulletin Board on June 28, 1995 and the closing price on such date was $8.875.
This price has been used as the initial share price.
COMPARISON OF CUMULATIVE TOTAL RETURN ON INVESTMENT
<TABLE>
<CAPTION>
Hollis-Eden Peer Group Index Broad Market Index
----------- ---------------- ------------------
<S> <C> <C> <C>
6/28/95 100.00 100.00 100.00
6/30/95 100.00 100.00 100.00
9/29/95 90.14 124.95 112.04
12/29/95 100.00 145.70 113.41
3/31/96 107.04 151.59 118.70
6/30/96 104.23 147.25 128.39
9/30/96 100.00 150.62 132.96
12/31/96 112.68 146.13 139.49
3/31/97 123.94 138.77 131.93
6/30/97 59.15 149.81 156.11
9/30/97 73.24 168.06 182.52
12/31/97 70.42 151.00 171.17
</TABLE>
(1) This Section is not "soliciting material," is not deemed "filed"
with the SEC and is not to be incorporated by reference in any filing of the
Company under the 1933 Act or the 1934 Act whether made before or after the date
hereof and irrespective of any general incorporation language in any such
filing.
16
<PAGE> 19
CERTAIN TRANSACTIONS
In February, 1997, Hollis-Eden, Inc. granted a non-statutory stock
option to Mr. Peizer to purchase 2,400,000 shares of Common Stock at an exercise
price of $5.00 per share. Such option vests in six equal annual installments of
400,000 shares, commencing February 6, 1998. Such option was assumed by the
Company pursuant to the Merger.
OTHER MATTERS
The Board of Directors knows of no other matters that will be presented
for consideration at the Annual Meeting. If any other matters are properly
brought before the meeting, it is the intention of the persons named in the
accompanying proxy to vote on such matters in accordance with their best
judgment.
By Order of the Board of Directors
/s/ RICHARD B. HOLLIS
RICHARD B. HOLLIS
Chairman of the Board and
Chief Executive Officer
April 15, 1998
A COPY OF THE COMPANY'S ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 IS AVAILABLE WITHOUT
CHARGE UPON WRITTEN REQUEST TO: CORPORATE SECRETARY, HOLLIS-EDEN
PHARMACEUTICALS, INC., 9333 GENESEE AVENUE, SUITE 110, SAN DIEGO, CALIFORNIA
92121.
17
<PAGE> 20
HOLLIS-EDEN PHARMACEUTICALS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 18, 1998
The undersigned hereby appoints Richard B. Hollis, Terren S. Peizer and
Robert W. Weber, and each of them, as attorneys and proxies of the undersigned,
with full power of substitution, to vote all of the shares of stock of
Hollis-Eden Pharmaceuticals, Inc. (the "Company") which the undersigned may be
entitled to vote at the Annual Meeting of Stockholders of the Company to be held
at the offices of the Company, located at The Hyatt Regency La Jolla, 3777 La
Jolla Village Drive, San Diego, California, 92122, on Monday, May 18, 1998, at
2:00 p.m., local time, and at any and all continuations, adjournments or
postponements thereof, with all powers that the undersigned would possess if
personally present, upon and in respect of the following matters and in
accordance with the following instructions, with discretionary authority as to
any and all other matters that may properly come before the meeting.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR
ALL NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSALS 2, 3 AND 4, AS MORE
SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE
INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
- --------------------------------------------------------------------------------
(Continued on other side)
MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR LISTED
BELOW AND FOR PROPOSALS 2 AND 3.
PROPOSAL 1: To elect Class I directors to hold office until the 2001 Annual
Meeting of Stockholders and until their successors are elected.
[ ] FOR all nominees listed below (except as marked to the
contrary below).
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below.
NOMINEES: J. Paul Bagley, Terren S. Peizer and
Salvatore J. Zizza
TO WITHHOLD AUTHORITY TO VOTE FOR ANY NOMINEE(S), WRITE SUCH NOMINEE(S)'
NAME(S) BELOW:
PROPOSAL 2: To approve the Company's 1997 Incentive Stock Option Plan, as
amended.
<PAGE> 21
[ ] FOR [ ] AGAINST [ ] ABSTAIN
PROPOSAL 3: To ratify the selection of BDO Seidman LLP as independent
auditors of the Company for its fiscal year ending December 31,
1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
PLEASE VOTE, DATE AND PROMPTLY RETURN THIS PROXY
IN THE ENCLOSED RETURN ENVELOPE WHICH IS POSTAGE
PREPAID IF MAILED IN THE UNITED STATES.
DATED _______________, 1998
-----------------------------------
Signature(s)
-----------------------------------
Name of stockholder (if other than
individual)
Please sign exactly as your name appears hereon.
If the stock is registered in the names of two or
more persons, each should sign. Executors,
administrators, trustees, guardians and
attorneys-in-fact should add their titles. If
signer is a corporation, please give full
corporate name and have a duly authorized officer
sign, stating title. If signer is a partnership,
please sign in partnership name by authorized
person.
