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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 [_]
Check the appropriate box:
[_] 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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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
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(3) Per unit price or other underlying value of transaction computed
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
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HOLLIS-EDEN PHARMACEUTICALS, INC.
9333 GENESEE AVENUE, SUITE 110
SAN DIEGO, CA 92121
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 17, 1999
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 17, 1999 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 two Class II directors to hold office until the 2002 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 reserved for
issuance under such plan by 1,000,000 shares.
3. To ratify the selection of BDO Seidman, LLP as independent auditors of
the Company for its fiscal year ending December 31, 1999.
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 1, 1999, 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, President,
Chief Executive Officer
San Diego, California
April 1, 1999
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.
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HOLLIS-EDEN PHARMACEUTICALS, INC.
9333 GENESEE AVENUE, SUITE 110
SAN DIEGO, CA 92121
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
MAY 17, 1999
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 17, 1999
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 12, 1999, 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 1,
1999 will be entitled to notice of and to vote at the Annual Meeting. At the
close of business on April 1, 1999, the Company had outstanding and entitled
to vote 11,058,344 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
The deadline for submitting a stockholder proposal for inclusion in the
Company's proxy statement and form of proxy for the Company's 2000 Annual
Meeting of Stockholder's pursuant to Rule 14a-8 of the Securities and Exchange
Commission is December 1, 1999. Unless a stockholder who wishes to bring a
matter before the stockholders at the Company's 2000 Annual Meeting of
Stockholders notifies the Company of such matter prior to February 15, 2000,
management will have discretionary authority to vote all shares for which it
has proxies in opposition to such matter.
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 seven members. There are
three directors in the class whose term of office expires in 1999. 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 2002 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 2002 ANNUAL
MEETING
THOMAS CHARLES MERIGAN, JR., M.D.
Dr. Merigan, age 65, 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.). 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, has 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
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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 36, 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 and
for approximately three years prior to that at the law firm of Brobeck,
Phleger & Harrison LLP. 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.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NAMED NOMINEE.
DIRECTORS CONTINUING IN OFFICE UNTIL THE 2000 ANNUAL MEETING
RICHARD B. HOLLIS
Mr. Hollis, age 46, has served as Chairman of the Board and Chief Executive
Officer of the Company since March 1997 (since August 1994 including Hollis-
Eden, Inc.) and as President of the Company since February 1999. 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.
LEONARD MAKOWKA M.D., PH.D., FRCS(C), FACS
Mr. Makowka, age 45, has served as a director of the Company since May 1998.
From 1995 to the present, Dr. Makowka has been Executive Director of the
Comprehensive Liver Disease and Treatment Center and Director of the Liver
Transplant Program at St. Vincent's Medical Center in Los Angeles, CA. Between
1989 and 1995, Dr. Makowka acted as Director of Transplantation Services at
Cedars-Sinai Medical Center in Los Angeles, CA. Beginning in 1985 until
relocating to Los Angeles in 1989, Dr. Makowka trained under Dr. Thomas
Starzl, the pioneer of liver transplantation, and was appointed as Associate
Professor in the Department of Surgery at the University of Pittsburgh. In
1982, Dr. Makowka began his residency at Toronto Western Hospital, where in
his final year he was appointed Chief Resident of Surgery. As one of the
world's leading authorities in his field, Dr. Makowka has performed hundreds
of hepatobiliary and liver transplant procedures. Dr. Makowka received his
M.D. from the University of Toronto Medical School in 1977, and Masters of
Science and Doctorate of Philosophy from the University of Toronto's
Department of Pathology in 1979 and 1982. Dr. Makowka has published over 400
articles and chapters in both clinical and basic scientific research and has
lectured worldwide. He is a member of numerous societies for liver
transplantation and disease.
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DIRECTORS CONTINUING IN OFFICE UNTIL THE 2001 ANNUAL MEETING
SALVATORE J. ZIZZA
Mr. Zizza, age 53, 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 Chairman of
The Bethlehem Corporation. 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 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 56, 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.
WILLIAM H. TILLEY
Mr. Tilley, age 59, has served as a director of the Company since March
1999. Mr. Tilley has served as a financial advisor to both Presidents Richard
Nixon and Ronald Reagan during their political campaigns. Mr. Tilley has
taught courses and lectured on finance-related topics at a wide range of
prestigious universities, including the University of Stanford, Harvard and
UCLA. He is currently serving as Chairman and Chief Executive Officer of
Jacmar Companies, a holding company that has operations in equity investments,
real estate management and restaurant and wholesale food service. Previously,
Mr. Tilley was a senior partner at Tilley and Roth, Certified Public
Accountants, which merged with KPMG Peat Marwick. Mr. Tilley holds a Master's
Degree in Business Administration and a Bachelor of Arts from the University
of Southern California.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended December 31, 1998, the Board of Directors held
six (6) 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 had one meeting in
1998.
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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 had one
meeting in 1998.
During the fiscal year ended December 31, 1998, with the exception of
Salvatore J. Zizza, who attended four out of the six meetings, 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 Incentive Option Stock Plan (the
"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. In
March 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.
At January 31, 1999, options (net of canceled or expired options) covering
an aggregate of 758,800 shares of the Company's Common Stock had been granted
under the 1997 Plan, and 491,034 shares (plus any shares that might in the
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
an aggregate of 140,000 shares at exercise price of $13.25 to the Company's
current officers and options to purchase an aggregate of 80,800 shares at
exercise prices ranging from $13.25 to $16.75 per share to all other Company
employees. Options to purchase an aggregate of 60,000 shares at an exercise
price of $14.63 were granted to the Company's consultants. Options to purchase
an aggregate of 60,000 shares at exercise prices ranging from $13.25 to $16.75
were granted to directors (excluding executive officers).
In February 1999, 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 1,250,000 shares to 2,250,000 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 the proposals and will have the
same effect as negative votes. Broker non-votes will be counted towards a
quorum, but will not be counted in determining whether this matter has been
approved.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 2.
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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. The 1997 Plan was amended by the
Board on March 2, 1998, which amendment was subsequently approved by the
Company's stockholders on May 18, 1998.
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 equity interest in the Company's
business, thereby strengthening their commitment to remain with, or to join,
the Company. The 1997 Plan contemplates the grant to such persons of
"incentive stock options" ("ISO's") under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code") 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.
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).
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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
(1) 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 Securities Exchange Act of 1934 (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 the optionee's 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
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.
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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 stockholder 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
8
<PAGE>
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.
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.
9
<PAGE>
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, 1999 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 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.
10
<PAGE>
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 March 1, 1999 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)
--------------------
NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES TOTAL
---------------- --------- ----------
<S> <C> <C>
Richard B. Hollis (2).................................. 3,316,591 29.3%
Hollis-Eden Pharmaceuticals, Inc.
9333 Genesee Avenue, Suite 110
San Diego, CA 92121
Terren S. Peizer (3)................................... 1,200,000 10.1%
723 Palisades Beach Rd. # 322
Santa Monica, CA 90402
Patrick T. Prendergast (4)............................. 798,560 7.3%
Baybush, Straffan
County Kildare
Ireland
Robert E. Petersen & Margaret M. Petersen.............. 648,649 6.0%
as Trustees for the R. E. & M. Petersen Living Trust
Dated 1/17/83.
10 Hanover Square, 12th Floor
New York, NY 10005
Kane & Co / Chase Manhattan Bank....................... 555,556 5.2%
4 New York Plaza, 11th Floor
New York, NY 10004
Salvatore J. Zizza (5)................................. 234,583 2.2%
J. Paul Bagley (6)..................................... 202,632 1.9%
Thomas Charles Merigan (7)............................. 173,265 1.6%
Robert W. Weber (8).................................... 101,527 *
James M. Frincke (9)................................... 79,098 *
Brendan R. McDonnell (10).............................. 25,000 *
All executive officers and directors as a group (11
persons) (11)......................................... 5,438,112 41.3%
</TABLE>
- --------
* Less than one percent.
(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 10,725,863 shares outstanding on February 28, 1999, adjusted as
required by rules promulgated by the SEC.
(2) Includes 200,000 shares subject to options and 393,250 shares subject to
warrants exercisable within 60 days of February 28, 1999
11
<PAGE>
(3) Includes 1,200,000 shares subject to options exercisable within 60 days
of February 28, 1999.
(4) The securities are held in the name of various entities affiliated with
and controlled by Dr. Prendergast, and include 68,333 shares subject to
options and 168,302 shares subject to warrants exercisable by
Dr. Prendergast within 60 days of February 28, 1999.
(5) Includes 4,583 shares subject to options and 100,000 shares subject to
warrants exercisable within 60 days of February 28, 1999.
(6) Includes 4,583 shares subject to options and 68,849 shares subject to
warrants exercisable within 60 days of February 28, 1999, held of record
by LHIP Acquisition Company L.L.C., of which Mr. Bagley is the manager.
(7) Includes 173,265 shares subject to options exercisable within 60 days of
February 28, 1999.
(8) Includes 4,000 shares held by Mr. Weber as custodian for his minor
children and 81,527 shares subject to options exercisable within 60 days
of February 28, 1999.
(9) Includes 79,098 shares subject to options exercisable within 60 days of
February 28, 1999.
(10) Includes 25,000 shares subject to options exercisable within 60 days of
February 28, 1999.
(11) Includes 1,873,472 shares subject to options and 562,099 shares subject
to warrants exercisable within 60 days of February 28, 1999.
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, 1998, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with.
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.
In 1998, Dr. Merigan entered into a consulting arrangement with the Company.
Pursuant to the arrangement, Dr. Merigan received $45,000 in consulting fees
for services performed for the Company in 1998.
12
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY OF COMPENSATION
The following table shows for the fiscal years ended December 31, 1998 and
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, 1998, 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.. 1998 250,000 100,000 120,414 (2) 80,000
Chairman of the Board, 1997 199,212 -0- 31,921 (2) -0-
President, and Chief
Executive Officer
Mr. Terren S.
Peizer (7)............ 1998 250,000 -0- -0- -0-
Former President 1997 172,212 -0- -0- -0- (3)
Mr. James M. Frincke... 1998 165,000 -0- -0- 25,000
Executive Vice
President of 1997 27,500 (4) -0- 3,233 (5) 167,500
Research and
Development
Mr. Robert W. Weber ... 1998 120,000 20,000 33,174 (6) 15,000
Vice President -
Controller 1997 92,523 -0- 18,005 (6) 35,000
</TABLE>
- --------
(1) Compensation for such Named Executive Officers is not shown for fiscal
years ended December 31, 1996, as they were not officers of the Company
during such years.
(2) Includes tax gross up amount of $48,212 and $6,906 and moving expenses of
$72,202 and $25,105 for 1998 and 1997, respectively.
(3) Does not include options to purchase 2,400,000 shares of the Company's
Common Stock granted to Mr. 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) Mr. Frincke's employment began in November 1997.
(5) Included moving expenses of $3,233 in 1997.
(6) Includes tax gross up amount of $14,037 and $4,325 and moving expenses of
$19,137 and $13,680 for 1998 and 1997, respectively.
(7) Mr. Peizer resigned from the Company in February 1999.
13
<PAGE>
STOCK OPTION GRANTS AND EXERCISES
The Company may grant options to its executive officers under its 1997 Plan.
As of March 1, 1999, options to purchase a total of 758,800 shares were
outstanding under the 1997 Plan and options to purchase 491,200 shares
remained available for grant thereunder.
The following tables show for the fiscal year ended December 31, 1998,
certain information regarding options granted to, exercised by, and held at
year end by, the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
% OF TOTAL STOCK PRICE APPRECIATION
SHARES UNDERLYING OPTIONS GRANTED FOR OPTION TERM ($) (2)
OPTIONS TO EMPLOYEES IN EXERCISE EXPIRATION ---------------------------
NAME GRANTED (#) (1) FISCAL YEAR (%) PRICE ($/SH) DATE 5% 10%
- ---- ----------------- --------------- ------------ ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Richard B. Hollis....... 80,000 38.0% $13.25 09/27/08 $ 666,740 $ 1,689,640
James M. Frincke........ 25,000 11.9% $13.25 09/27/08 $ 208,356 $ 528,013
Robert W. Weber......... 15,000 7.1% $13.25 09/27/08 $ 125,014 $ 316,808
</TABLE>
- --------
(1) 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 thereafter.
(2) 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 IN-THE-MONEY OPTIONS AS
UNDERLYING OPTIONS AS OF OF FISCAL
FISCAL YEAR-END (#) (1) YEAR-END ($) (2)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard B. Hollis........... 188,889 91,111 3,494,447 600,554
Terren S. Peizer............ 400,000 2,000,000 5,400,000 27,000,000
James M. Frincke............ 60,486 132,014 710,711 1,388,665
Robert W. Weber............. 74,028 40,972 1,146,080 400,171
</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 ($18.50) less the exercise or base price. Excludes out-of-the-
money options.
14
<PAGE>
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.
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, 1998. The information contained in
this report shall not be deemed to be "soliciting material" or to be "filed"
with the SEC nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933, as amended (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, 1998. During 1998, the Committee was composed of two outside
directors, Mr. McDonnell and Dr. Merigan.
15
<PAGE>
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 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's estimation, fair and reasonable.
16
<PAGE>
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 1998 was $225,000 and increased to $300,000 on September 1, 1998.
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.
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.
17
<PAGE>
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
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hollis-Eden..... 100.00 90.14 100.00 107.04 104.23 100.00 112.68 123.94 59.15 73.24 70.42 197.18 188.73 143.66 208.45
Peer Group
Index.......... 100.00 124.95 145.66 151.54 147.23 150.61 146.11 138.77 149.81 168.05 150.87 165.84 153.71 145.45 193.12
Broad Market Index.. 100.00 112.05 113.41 118.69 128.38 132.93 139.46 131.89 156.07 182.46 171.09 200.19 205.99 186.48 240.51
</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 Securities Act or the Exchange Act whether made before
or after the date hereof and irrespective of any general incorporation
language in any such filing.
18
<PAGE>
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, President
Chief Executive Officer
April 1, 1999
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, 1998 IS
AVAILABLE WITHOUT CHARGE UPON WRITTEN REQUEST TO: CORPORATE SECRETARY, HOLLIS-
EDEN PHARMACEUTICALS, INC., 93333 GENESEE AVENUE, SUITE 110, SAN DIEGO,
CALIFORNIA 92121.
19
<PAGE>
________________________________________________________________________________
HOLLIS-EDEN PHARMACEUTICALS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 17, 1999
The undersigned hereby appoints Richard B. Hollis 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 17, 1999, 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 AND 3, 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)
________________________________________________________________________________
<PAGE>
Please date, sign and mail your
proxy card back as soon as possible!
Annual Meeting of Stockholders
HOLLIS-EDEN PHARMACEUTICALS, INC.
May 17, 1999
Please Detach and Mail in the Envelope Provided
A [X] Please mark your
votes as in this
example.
<TABLE>
<CAPTION>
<S> <C> <C>
FOR all nominees listed WITHHOLD AUTHORITY MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR LISTED
at right (except as marked to vote for all BELOW AND FOR PROPOSALS 2 AND 3.
to the contrary below) nominees listed at Nominees: Thomas C. Merigan, Jr., M.D.
right Brendan R. McDonnell
[ ] [ ]
</TABLE>
<TABLE>
<S> <C>
Proposal 1. Proposal 2: To approve the Company's
To elect two 1997 Incentive Stock Option Plan, as
Class I directors amended
to hold office FOR AGAINST ABSTAIN
until the 2002 Annual Meeting of Stockholders [ ] [ ] [ ]
and until their successors are elected
Proposal 3: to ratify the selection
of BDO Seidman LLP as independent
To withhold authority to vote for any nominee(s), auditors of the Company for its fiscal
write such nominee(s)' name(s) below: year ending December 31, 1999.
- ------------------------------------------------- FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Please vote, date and promptly return
this proxy in the enclosed envelope
which is postage prepaid if mailed in
the United States.
Signature(s)-------------------------- ------------------------------------------------------------ DATED -----------, 1999
Name of stockholder (if other than individual)
</TABLE>
NOTE: Please sign exactly as your name appears hereon. If 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.
