<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
Quarterly Report Under Section 13 or 15 (d)
X Of the Securities Exchange Act of 1934
- -----
For Quarterly Period Ended September 30, 1999
Transition Report Pursuant to Section 13 or 15(d)
_____ of the Securities Exchange Act
1934 for the period
from ___ to ___.
HOLLIS-EDEN PHARMACEUTICALS, INC
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
000-24672 13-3697002
(Commission File No.) (I.R.S. Employer Identification No.)
9333 Genesee Ave., Suite 200
SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (858) 587-9333
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
As of October 28, 1999 there were 11,060,344 shares of registrant's Common
Stock, $.01 par value, outstanding.
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
Form 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I Financial Information Page
----
<S> <C>
Item 1 Financial Statements.................................................................... 3
Balance Sheet - December 31, 1998 and September 30, 1999................................ 3
Statements of Operations for the Three-Month and Nine-Month Periods
Ended September 30, 1998 and 1999 and Period from August 15, 1994 to
September 30, 1999...................................................................... 4
Statements of Cash Flows for the Nine-Month Periods Ended September 30,
1998 and 1999 and Period from August 15, 1994 to September 30, 1999..................... 5
Notes to Financial Statements........................................................... 6
Item 2 Management's Discussion and Analysis of Results of Operations and Financial
Condition............................................................................... 7
PART II Other Information
Item 1 Legal Proceedings....................................................................... 10
Item 2 Changes in Securities................................................................... 10
Item 3 Defaults Upon Senior Securities......................................................... 10
Item 4 Submission of Matters to a Vote of Security Holders..................................... 10
Item 5 Other Information....................................................................... 10
Item 6 Exhibits and Reports on Form 8-K........................................................ 10
</TABLE>
2
<PAGE>
Part I. Financial Information
Item I. Financial Statements
Hollis-Eden Pharmaceuticals, Inc.
(A Development Stage Company)
Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
Dec. 31, Sept. 30,
1998 1999
---- ----
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents....................................... $ 24,189,806 $ 49,086,325
Prepaid expenses................................................. 26,250 81,375
Deposits......................................................... 9,163 27,185
Other receivable from related party.............................. 206,663 250,916
-------------- -------------
Total current assets.......................................... 24,431,882 49,445,801
Property and equipment, net of accumulated
depreciation of $28,201 and $72,659............................ 92,343 379,344
-------------- -------------
Total assets................................................ $ 24,524,225 $ 49,825,145
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses............................ $ 221,670 $ 577,890
-------------- -------------
Total liabilities........................................... 221,670 577,890
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value, 10,000,000 shares
authorized; 4,000 and 0 shares outstanding................... 40 -
Common stock, $.01 par value,
30,000,000 shares authorized; 8,592,202 and
11,060,344 shares issued and outstanding..................... 85,922 110,603
Paid-in capital................................................ 38,795,887 74,882,753
Deferred compensation-stock options, net of
accumulated amortization of $590,000 and $641,333............ (1,258,000) -
Deficit accumulated during development stage................... (13,321,294) (25,746,101)
-------------- -------------
Total stockholders' equity................................... 24,302,555 49,247,255
-------------- -------------
Total liabilities and stockholders' equity................... $ 24,524,225 $ 49,825,145
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
Hollis-Eden Pharmaceuticals, Inc.
(A Development Stage Company)
Statements of Operations
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
Inception
(Aug. 15, 1994)
to
3 months ended Sept. 30, 9 months ended Sept. 30, Sept. 30,
1998 1999 1998 1999 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating expenses:
Research and development.............. $ 737,543 $ 1,405,710 $ 1,922,076 $ 3,765,982 $ 11,845,838
General and administrative............ 741,855 956,738 2,216,940 10,362,996 16,769,346
----------- ----------- ----------- ------------- -------------
Total operating expenses............... 1,479,398 2,362,448 4,139,016 14,128,978 28,615,184
Other income (expense):
Interest income....................... 327,389 607,982 622,200 1,704,171 2,918,632
Interest expense...................... - - (1,726) - (49,549)
----------- ----------- ----------- ------------- -------------
Total other income..................... 327,389 607,982 620,474 1,704,171 2,869,083
----------- ----------- ----------- ------------- -------------
Net loss............................... $(1,152,009) $(1,754,466) $(3,518,542) $ (12,424,807) $ (25,746,101)
=========== =========== =========== ============= =============
Net loss per share..................... $ (0.14) $ (0.16) $ (0.46) $ (1.15)
Weighted average number of
common shares outstanding............. 8,358,625 11,058,877 7,623,927 10,793,643
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Hollis-Eden Pharmaceuticals, Inc.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
Inception
(Aug. 15, 1994)
to
9 months ended September 30, Sept. 30,
1998 1999 1999
--------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $ (3,518,542) $ (12,424,808) $ (25,746,101)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation............................................ 15,472 44,458 72,659
Common stock issued as consideration
for amendments to license agreements................... - - 32,540
Common stock issued as consideration
for termination of a finance agreement................. - - 33,962
Common stock issued as consideration
for license fees and services.......................... 595,000 - 595,000
Expense related to warrants issued as
consideration to consultants........................... - 2,140,000 2,140,000
Expense related to options issued as
consideration to consultants........................... 312,018 10,029 432,070
Expense related to warrants issued to a
director for successful closure of merger.............. - - 570,000
Expense related to stock options issued................. - 4,900,000 5,140,000
Deferred compensation expense related
to options issued...................................... 231,000 439,424 1,029,424
Changes in assets and liabilities:
Prepaid expenses............................................ (67,850) (55,125) (81,375)
Deposits.................................................... - (18,022) (27,185)
Other receivable - tax refund............................... 105,436 - -
Receivable from related party............................... (215,439) (44,253) (250,916)
Accounts payable and accrued expenses....................... 87,097 346,192 577,889
Disposal of assets.......................................... - 6,834 6,834
R & D fees payable to related party......................... (338,000) - -
----------- ------------- --------------
Net cash used in operating activities................... (2,793,808) (4,655,271) (15,475,199)
Cash flows provided by investing activities:
Purchase of property and equipment.......................... (23,965) (338,294) (458,838)
----------- ------------- --------------
Net cash used in investing activities................... (23,965) (338,294) (458,838)
Cash flows from financing activities:
Borrowings from related party............................... - - 342,000
Payments on note payable to related party................... - - (342,000)
Contributions from stockholder ............................. - - 103,564
Net proceeds from sale of preferred stock................... 4,000,000 - 4,000,000
Net proceeds from sale of common stock...................... 15,889,829 24,772,506 42,171,834
Proceeds from issuance of debt.............................. - - 371,164
Net proceeds from recapitalization.......................... - - 6,270,782
Net proceeds from warrants exercised........................ 663,821 5,117,578 12,103,018
------------ ------------- --------------
Net cash from financing activities...................... 20,553,650 29,890,084 65,020,362
Net increase in cash.......................................... 17,735,877 24,896,519 49,086,325
Cash at beginning of period................................... 7,102,620 24,189,806 -
------------ ------------- --------------
Cash at end of period......................................... $ 24,838,497 $ 49,086,325 $ 49,086,325
============ ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The information at September 30, 1999, and for the three- and nine-month
periods ended September 30, 1998 and 1999, is unaudited. In the opinion of
management, these financial statements include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the results
for the interim periods presented. Interim results are not necessarily
indicative of results for a full year. These financial statements should be read
in conjunction with Hollis-Eden Pharmaceuticals (the "Company") Annual Report on
Form 10-K for the year ended December 31, 1998, which was filed with the United
States Securities and Exchange Commission on March 30, 1999.
2. Acceleration of Options
On March 1, 1999, the Company announced the resignation of its president.
Concurrent therewith, the Company accelerated the vesting of 300,000 stock
options previously granted to the president. This acceleration is considered to
be a new grant of options and as such, the Company expensed a one time non-cash
charge of $4.9 million during the first quarter of 1999.
3. Issuance of Warrants
During March 1999, the Company entered into a three-year agreement with a
financial consulting organization affiliated with a director of the Company. The
Company agreed to issue as compensation for services, warrants to purchase
500,000 shares of Common Stock with an exercise price of $20.50 per share and an
expiration date of March 2002. The warrants are not subject to any vesting
provisions. The warrants were estimated to have a value of approximately $2.1
million, which was expensed as a non-cash charge during the first quarter of
1999.
4. Preferred Stock Converted to Common Stock
During January 1999, the Company issued 346,217 shares of common stock in
connection with the conversion of the Series A convertible preferred stock and
additional shares relating to the adjustable common stock. The adjustable common
stock was issued during the private placement of May 1998 and was subject to
adjustment based on the future average stock price of the Company's Common
Stock.
5. Private Placements of Common Stock
During January 1999, the company completed two private placements of an
aggregate of 1,367,868 shares of Common Stock at prices ranging from $18.00 to
$18.50 per share. In connection with the private placements, the Company issued
warrants to purchase an aggregate of 90,000 shares of the Company's Common
Stock, with an exercise price of $18.25 per share, as a finder's fee. The
Company raised net proceeds of approximately $24.8 million in these private
placements.
6. Termination of Additional Merger Share Rights
During January 1999, the Company terminated the additional merger share
rights as a result of the above mentioned private placements and the Company's
average closing stock price. The additional merger
6
<PAGE>
share rights were granted to non-affiliated stockholders of Initial Acquisition
Corp. at the time of the merger between Hollis-Eden and Initial Acquisition
Corp.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The forward-looking comments contained in the following discussion involve
risks and uncertainties. The Company's actual results may differ materially from
those discussed here. Factors that could cause or contribute to such differences
can be found in the following discussion, as well as in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
While management believes that the discussion and analysis in this report
is adequate for a fair presentation of the information, management recommends
that this discussion and analysis be read in conjunction with Management's
Discussion and Analysis of Results of Operations and Financial Condition
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998, which was filed with the United States Securities and Exchange
Commission on March 30, 1999.
General
Hollis-Eden is a pharmaceutical company in the development stage. We intend
to discover, develop and commercialize products for the treatment of a number of
targeted disease states caused by viral, bacterial, parasitic or fungal
infections, including HIV/AIDS, hepatitis B and C, and malaria. We have three
technology platforms, the first based on cellular energy regulation, the second
on a unique immune system modulation technology, and the third on the inhibiting
of protein RNA and DNA synthesis. We believe that certain of our drug candidates
may provide the first long-term treatment of HIV without the development of
viral strain resistance to the drugs' effectiveness, significant toxicity or
severe side effects. This is a new technology, therefore no assurances can be
given in relation to it's success. Additionally, the biotech industry has
historically proven to be a high-risk industry. Hollis-Eden has not yet
generated any operating revenues. We have experienced significant operating
losses due to substantial expenses incurred to acquire and fund development of
our drug candidates and, as of September 30, 1999, had an accumulated deficit of
$25.7 million.
When and if any of Hollis-Eden's drug candidates have been approved for
commercial sale, we plan to market them in the United States. For international
markets, we intend to develop strategic alliances with major pharmaceutical
companies that have foreign regulatory expertise and established distribution
channels, and will also consider corporate strategic partnerships and
co-marketing agreements. No assurances can be given that any of our drug
candidates will be approved for commercial sale or that any of the foregoing
proposed arrangements will be implemented or prove to be successful.
Hollis-Eden has been unprofitable since inception and expects to incur
substantial additional operating losses for at least the next several years as
it increases expenditures on research and development and allocates significant
and increasing resources to its clinical testing and other activities. In
addition, during the next few years, we will have to meet the substantial new
challenge of developing the capability to market products. Accordingly, our
activities to date are not as broad in depth or scope as the activities we must
undertake in the future, and our historical operations and financial information
are not indicative of our future operating results or financial condition or our
ability to operate profitably as a commercial enterprise when and if we succeed
in bringing any drug candidate to market.
Results of Operations
Hollis-Eden has not generated any revenues for the period from the
founding, on August 15, 1994, through September 30, 1999. We have devoted
substantially all of our resources to the payment of licensing fees and research
and development expenses plus expenses related to the startup of our business.
From the founding
7
<PAGE>
until September 30, 1999, we have incurred expenses of approximately $11.8
million in research and development, $16.8 million in general and
administrative expenses, which has been partially offset by $2.9 million in net
interest income resulting in a loss of $25.7 million for the period.
Research and development expenses increased to $1.4 million from $738,000
and increased to $3.8 million from $1.9 million for the three- and nine-month
periods ended September 30, 1999, respectively, as compared to the same periods
for the previous year. The research and development expenses relate primarily to
the ongoing development, preclinical testing, and clinical trials for the
Company's first drug candidate, HE2000. The increase in research and development
expenses in 1999 as compared to 1998 was due to increased staffing, preclinical
activity, and the initiation of clinical trials.
General and administrative expenses increased to $957,000 from $742,000 and
increased to $10.4 million from $2.2 million for the three- and nine- month
periods ended September 30, 1999 compared to 1998. The 1999 general and
administrative expenses included (i) $7.0 million during the first quarter for
non-cash charges, due to the acceleration of vesting of stock options for the
Company's former president and the issuance of warrants for services (see notes
2 and 3 above), (ii) increased staffing, and (iii) increased operating expenses
for salaries, benefits, recruiting, legal, and travel.
Net interest income increased to $608,000 from $327,000 and increased to
$1.7 million from $622,000 in the three- and nine-month periods ended September
30, 1999 compared to similar periods in 1998. The interest income increases are
primarily due to higher balances of cash and cash equivalents as a result of the
private placements of May 1998 and January 1999.
Liquidity and Capital Resources
Hollis-Eden has financed its operations since inception through the sale of
shares of stock and with loans from the founder, Richard B. Hollis, which were
repaid in January 1996.
During the year ended December 31, 1995, Hollis-Eden received cash proceeds
of $250,000 from the sale of its securities. In May 1996, we completed a private
placement of shares of Common Stock, from which we received aggregate gross
proceeds of $1.3 million. In March 1997, the Merger of IAC and Hollis-Eden
provided us with $6.5 million in cash and other receivables. During May 1998, we
closed a private placement of shares of Common and Preferred Stock with gross
proceeds totaling $20.6 million. During January 1999, we closed two private
placements of shares of Common Stock with aggregate gross proceeds of
approximately $24.8 million. In addition, during the past two years, we have
received $12.1 million from the exercise of warrants.
Under license agreements with Patrick T. Prendergast, Colthurst and
Edenland, Hollis-Eden is obligated to pay certain minimum license fees to
maintain its rights to certain of its drug candidates. As of September 30, 1999,
we are current on all license fee obligations under these agreements.
Under its Research and Development Agreement with Edenland and Patrick T.
Prendergast, Hollis-Eden committed to pay $3.0 million for the development costs
related to a second platform drug candidate. These development costs were
accrued as an expense during 1997 and paid in full by April 1998.
Hollis-Eden's operations to date have consumed substantial capital without
generating any revenues, and we will continue to require substantial and
increasing amounts of funds to conduct necessary research and development and
preclinical and clinical testing of our drug candidates, and to market any drug
candidates that receive regulatory approval. We do not expect to generate
revenue from operations for the foreseeable future, and our ability to meet our
cash obligations as they become due and payable is expected to depend for at
least the next several years on our ability to sell securities, borrow funds or
some combination thereof. Based upon our current plans, we believe that our
existing capital resources, together with interest thereon, will be sufficient
to meet our operating expenses and capital requirements at least into 2001.
There can be no assurance, however, that changes in our research and development
plans or other events affecting our operating expenses will not
8
<PAGE>
result in the expenditure of such cash before that time. No assurance can be
given that we will be successful in raising necessary funds. Our future capital
requirements will depend upon many factors, including progress with preclinical
testing and clinical trials, the number and breadth of our programs, the time
and costs involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims and other proprietary rights, the time and costs involved in
obtaining regulatory approvals, competing technological and market developments,
and our ability to establish collaborative arrangements, effective
commercialization, marketing activities and other arrangements. In any event, we
expect to continue to incur increasing negative cash flows and net losses for
the foreseeable future.
Year 2000
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish the 21st century dates from 20th century dates. As a result, in less
than three months, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements.
We upgraded our accounting software during 1998 with a version that we
believe is Year 2000 compliant. In addition, we have upgraded all of our
computer operating systems. We recently completed the upgrading of our
communications systems and other non-information technology systems. We
therefore believe that our computer systems, applications and communications
systems are Year 2000 compliant.
We do not expect that the costs associated with achieving Year 2000
compliance will have a material adverse effect on our future results of
operations, liquidity or capital resources. We have spent less than five
thousand dollars in connection with our Year 2000 compliance efforts to date.
We have contacted our material suppliers and third party service providers
to identify their Year 2000 problems and determine solutions to prevent the
disruption of our business activities. We have completed our review of the
compliance efforts with the majority of these parties.
We believe that our greatest risk stems from the potential non-compliance
of our suppliers. We cannot guarantee that the computer systems and applications
of other companies on which we rely upon will be timely converted. Any such
failure by these other companies to become Year 2000 compliant could materially
adversely affect us. Moreover, the following could have a material adverse
effect on our business or financial condition:
[_] failure of suppliers and third-party service providers equipment to
operate or to operate accurately;
[_] failure of clinical trial site medical equipment to perform
properly;
[_] failure of necessary materials or supplies to be available to us
when needed, or
[_] failure of other equipment, software, or systems as a result of Year
2000 problems.
During the balance of this year, we intend to complete the assessment of
the worst case scenarios and to develop one or more contingency plans that may
be necessary, such as securing alternative vendors.
9
<PAGE>
PART II Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
10.10 Employment Agreement by and between Registrant and Daniel
Burgess dated July 9, 1999.
10.11 Employment Agreement by and between Registrant and Eric
Loumeau dated September 15, 1999.
27 Financial Data Schedule (filed electronically only)
10
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HOLLIS-EDEN PHARMACEUTICALS, INC.
Dated: October 29, 1999 By: /s/ Daniel D. Burgess
-------------------------------
Daniel D. Burgess
Chief Operating Officer/
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Robert W. Weber
--------------------------------
Robert W. Weber
Vice President-Controller
Chief Accounting Officer
(Principal Accounting Officer)
INDEX TO EXHIBITS
10.10 Employment Agreement by and between Registrant and Daniel Burgess dated
July 9, 1999.
10.11 Employment Agreement by and between Registrant and Eric Loumeau dated
September 15, 1999.
27 Financial Data Schedule (Filed Electronically Only)
11
<PAGE>
EXHIBIT 10.10
HOLLIS-EDEN PHARMACEUTICALS, INC.
July 9, 1999
Dear Dan:
On behalf of Hollis-Eden Pharmaceuticals, Inc., we are pleased to offer you the
position of Chief Operating Officer/Chief Financial Officer reporting directly
to me. This letter will serve to set forth the terms of your employment. Listed
below are the general responsibilities you will assume and other aspects related
to your employment with the organization. As used herein, the term "Hollis-Eden"
refers to Hollis-Eden Pharmaceuticals, Inc.
1. Position Title: Your initial position with Hollis-Eden will be Chief
Operating Officer/Chief Financial Officer.
2. Duties & Responsibilities: You will be reporting directly to the
Chairman/Chief Executive Officer. You will have overall responsibility for
all areas of finance including treasury, investor and analyst relations,
and financial reporting. You will be responsible for creating the
infrastructure for our stock and its promotion to the investment community.
Additionally, you will establish the global financial objectives, business
development plans, acquisition/divestiture strategies, licensing activities
and increase the company's profile as a development company in the
biotechnology/pharmaceutical field. Finally, as an integral member of the
senior leadership team, you will participate in strategic planning and
development of our resources to assure the achievement of our goals and
objectives.
3. Compensation:
a) Salary: Your semi-monthly base salary will be $9,583.33, which is
equivalent to $230,000 annually.
b) Stock Options: It will be recommended to the Board of Directors that
you be granted stock options for 165,000 shares at an exercise price
equal to the fair market value at the date of the grant under the
standard terms of the Company's 1997 Incentive Stock Option Plan. As
an additional incentive, we will provide immediate vesting for 15,000
shares of this option grant.
c) Bonus: Upon the recommendation of the CEO to the Board of Directors,
you may be eligible for a discretionary performance bonus based upon
merit and achievement of strategic milestone(s).
d) Benefits: You will be entitled to participate in Hollis-Eden's
benefits plans including medical, dental and vision insurance and
other such benefits the company offers its employees.
4. Start Date of Employment: The specific date of employment will commence no
later than 30 days from acceptance.
5. Termination: Hollis-Eden shall have the right to terminate your employment
at any time, with or without cause, by written notice to you. In the event
that your employment is terminated by Hollis-Eden without cause, you will
receive 12 months salary and stock options will continue to vest throughout
the severance period. Medical and other benefit plans shall also remain in
place throughout the severance period. Should your employment be terminated
for cause or by you, all compensation, benefits, and rights you may have
under this agreement will terminate on the date of termination of
employment, including your right to receive the severance payment described
above.
<PAGE>
For purposes of this agreement "cause" shall mean your death, disability
(the inability to perform services for a period of 120 days in any
consecutive twelve month period), a breach of this agreement or your duty
of loyalty to Hollis-Eden, willful misconduct or negligence in the
performance of duties contemplated hereby and/or your conviction of a
felony, or conduct which brings you or Hollis-Eden into public disrepute,
or which could have a substantial adverse effect on Hollis-Eden or its
business.
As an amendment to these conditions, in the event Mr. Burgess' employment
is terminated for any reason, he will have 90 days beyond the end of the
applicable vesting period in which he may exercise any vested options he
holds the right to exercise. In addition he will have rights to whatever
other benefits are entitled to him by Company plan or legal statute.
Additionally, in the event a Person or Group shall acquire 50% or more of
the voting stock of Hollis-Eden Pharmaceuticals Inc. , or acquire
substantially all of the assets of Hollis-Eden or in the event of a Change
of Control (as now or in the future defined in the Company's Employee Stock
Option Plan), all of Mr. Burgess' then unvested stock options shall
automatically immediately become 100% vested and fully exercisable.
6. Arbitration: Any controversy or dispute arising out of or relating to this
agreement, or the interpretation thereof, shall be settled exclusively by
arbitration conducted in San Diego, California before one or more
arbitrators in accordance with the commercial arbitration rules of American
Arbitration Association then in effect and with discovery permitted by both
parties in accordance with Section 1283.05 of the Code of Civil Procedure
of the State of California or any other successor thereto, subject to such
modification as may be directed by the arbitrator. The award of
arbitrator(s) shall be final and binding, and judgement may be entered on
the arbitrator's award in any court having jurisdiction. In the event of
any such arbitration (or if legal action shall be brought in connection
therewith), the party prevailing in such proceeding shall be entitled to
recover from the other party the reasonable costs thereof, including
reasonable attorney and accounting fees.
Dan, we are looking forward to welcoming you to the Hollis-Eden team and look
forward to the experience and knowledge you will bring to help the Corporation
maximize shareholder value. I personally look forward to working with you and
collaborating with the team in the many challenges ahead.
<TABLE>
<CAPTION>
Warm regards, Agreed and Accepted:
<S> <C> <C> <C>
/s/ Richard B. Hollis July 12, 1999 /s/ Daniel D. Burgess July 12, 1999
- --------------------- ------------- --------------------- -------------
Mr. Richard B. Hollis Date Mr. Dan Burgess Date
Chief Executive Officer
Hollis-Eden Pharmaceuticals, Inc.
</TABLE>
cc: Candice Byrne
Vice President, Human Resources
<PAGE>
EXHIBIT 10.11
HOLLIS-EDEN PHARMACEUTICALS, INC.
September 15, l999
Dear Eric:
On behalf of Hollis-Eden Pharmaceuticals, Inc., we are pleased to offer you the
position of Vice President and Corporate General Counsel reporting directly to
me. This letter will serve to set forth the terms of your employment. Listed
below are the general responsibilities you will assume and other aspects related
to your employment with the organization. As used herein, the term "Hollis-Eden"
refers to Hollis-Eden Pharmaceuticals, Inc.
1. Position Title: Your initial position with Hollis-Eden will be Vice
President and Corporate General Counsel.
2. Duties and Responsibilities: You will be reporting directly to the
Chairman/Chief Executive Officer. You will have overall responsibility for
all areas of corporate law including advising the corporation of its legal
rights, obligations and privileges. This will include the interpretation of
laws, rulings and regulations for the corporation, researching the
corporation concerning transactions of business involving internal affairs,
stockholders, directors, officers and corporate relations with the general
public. Additionally, you will assist in representing the corporation in
litigation and other legal proceedings. Finally, as an integral member of
the senior leadership team, you will participate in strategic planning and
development of our resources to assure the achievement of our goals and
objectives.
3. Compensation:
a) Salary: Your semi-monthly base salary will be $7,291.67, which is
equivalent to $175,000 annually.
b) Stock Options: It will be recommended to the Board of Directors that you
be granted stock options for 65,000 shares at an exercise price equal to
the fair market value at the date of the grant, which date shall be
deemed to be the date this offer is accepted, and, under the standard
terms of the Company's 1997 Incentive Stock Option Plan. As an
additional incentive, we will provide immediate vesting for 10,000
shares of this option grant.
c) Bonus: Upon the recommendation of the CEO to the Board of Directors, you
may be eligible for a discretionary performance bonus based upon merit
and achievement of strategic milestone(s).
d) Benefits: You will be entitled to participate in Hollis-Eden's benefits
plans including medical, dental and vision insurance and other such
benefits the company offers its employees.
4. Start Date of Employment: The specific date of employment will commence
immediately upon acceptance of this offer.
5. Termination: Hollis-Eden shall have the right to terminate your employment
at any time, with or without cause, by written notice to you. In the event
that your employment is terminated by Hollis-Eden without cause within the
first 12 months of your employment, you will receive the remainder of the
12 months salary and stock options will continue to vest through the
severance period, plus severance compensation for a maximum of three (3)
months. Medical and other benefit plans shall also remain in place
throughout the severance period. Should your employment be terminated for
cause or by you, all compensation, benefits, and rights you may have under
this agreement will terminate on the date of termination of employment,
including your right to receive the severance payment described above. For
<PAGE>
purposes of this agreement "cause" shall mean your death, disability (the
inability to perform services for a period of 120 days in any consecutive
twelve month period), a breach of this agreement or your duty of loyalty to
Hollis-Eden, willful misconduct or negligence in the performance of the
duties contemplated hereby. Your conviction of a felony, or conduct by you
which brings you or Hollis-Eden into public disrepute, or which could have
a substantial adverse effect on Hollis-Eden or its business.
Additionally, in the event a Person or Group shall acquire 50% or more of
the voting stock of Hollis-Eden Pharmaceuticals, Inc., or acquire
substantially all of the assets of Hollis-Eden or in the event of a Change
of Control (as now or in the future defined in the Company's Employee Stock
Option Plan), all of your then unvested stock options shall automatically
immediately become 100% vested and fully exercisable.
6. Arbitration: Any controversy or dispute arising out of or relating to this
agreement, or the interpretation thereof, shall be settled exclusively by
arbitration conducted in San Diego, California before one or more
arbitrators in accordance with the commercial arbitration rules of American
Arbitration Association then in effect and with discovery permitted by both
parties in accordance with Section 1283.05 of the Code of Civil Procedure
of the State of California or any other successor thereto, subject to such
modification as may be directed by the arbitrator. The award of
arbitrator(s) shall be final and binding, and judgement may be entered on
the arbitrator's award in any court having jurisdiction. In the event of
any such arbitration (or if legal action shall be brought in connection
therewith), the party prevailing in such proceeding shall be entitled to
recover from the other party the reasonable costs thereof, including
reasonable attorney and accounting fees.
Most importantly Eric, we are looking forward to welcoming you to the
Hollis-Eden team and look forward to the experience and knowledge you will bring
to help the Corporation maximize shareholder value. I personally look forward to
working with you and collaborating with the team in the many challenges ahead.
<TABLE>
<CAPTION>
Warm Regards, Agreed and Accepted:
<S> <C> <C> <C>
/s/ Richard B. Hollis September 15, 1999 /s/ Eric J. Loumeau September 15, 1999
- --------------------- ------------------ ----------------------- ------------------
Richard B. Hollis Date Eric Loumeau Date
Chief Executive Officer
Hollis-Eden Pharmaceuticals, Inc.
</TABLE>
cc: Candice Byrne
Vice President, Human Resources
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 49,086,325
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 49,445,801
<PP&E> 452,003
<DEPRECIATION> 72,659
<TOTAL-ASSETS> 49,825,145
<CURRENT-LIABILITIES> 577,890
<BONDS> 0
0
0
<COMMON> 110,603
<OTHER-SE> 49,714,542
<TOTAL-LIABILITY-AND-EQUITY> 49,825,145
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 14,128,978
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,424,807)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,424,807)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,424,807)
<EPS-BASIC> (1.15)
<EPS-DILUTED> (1.15)
</TABLE>
