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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 33-60134
HOLLIS-EDEN PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3697002
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9333 GENESEE AVENUE, SUITE 110
SAN DIEGO, CA 92121
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 587-9333
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common stock, $.01 par value per share
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 Act of 1934
during the preceding months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 15, 1999 totaled approximately $162,189,762 based on
the closing stock price as reported by NASDAQ Stock Market.
As of March 15, 1999, there were 10,725,863 shares of the Registrant's
Common Stock, $.01 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1998, are incorporated by reference into Part
II of this report. Registrant's definitive proxy statement to be filed with
the Securities and Exchange Commission, pursuant to regulation 14A in
connection with the 1999 Annual Meeting of Stockholders to be held on May 17,
1999, is incorporated by reference into Part III of this Report.
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HOLLIS-EDEN PHARMACEUTICALS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
INDEX
PAGE
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PART I
Item 1 Business...................................................... 3
Item 2 Properties.................................................... 17
Item 3 Legal Proceedings............................................. 17
Item 4 Submission Of Matters To A Vote Of Security Holders........... 17
PART II
Market For Registrant's Common Stock And Related Stockholder
Item 5 Matters....................................................... 18
Item 6 Selected Financial Data....................................... 18
Item 7 Management's Discussion And Analysis Of Results Of Operations
And Financial Condition...................................... 18
Item 7A Quantitative and Qualitative Disclosures About Market Risk.... 18
Item 8 Financial Statements And Supplementary Data................... 18
Item 9 Changes In And Disagreements With Accountants On Accounting
And Financial Disclosures..................................... 18
PART III
Item 10 Directors And Executive Officers Of The Registrant............ 19
Item 11 Executive Compensation........................................ 19
Security Ownership Of Certain Beneficial Owners And
Item 12 Management.................................................... 19
Item 13 Certain Relationships And Related Transactions................ 19
PART IV
Exhibits, Financial Statements, Schedules And Reports On Form
Item 14 8-K........................................................... 20
Signatures.................................................... 21
2
This Annual Report on Form 10-K contains certain forward-looking statements
that involve risks and uncertainties. The actual future results for Hollis-
Eden Pharmaceuticals, Inc. may differ materially from those discussed here.
Additional information concerning factors that could cause or contribute to
such differences can be found in this Annual Report on Form 10-K in Part I,
Item 1 under the caption "Risk Factors," Part II, Item 7 entitled
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and elsewhere throughout this Annual Report.
PART I
ITEM 1. BUSINESS
GENERAL
Hollis-Eden Pharmaceuticals Inc., a development-stage pharmaceutical
company, is engaged in the discovery, development and commercialization of
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. The Company has three technology platforms,
one based on cellular energy regulation, the second on a unique immune system
modulation technology, and the third on biochemical synthesis regulators. The
Company believes that certain of its drug candidates may provide the first
long-term treatment for HIV without the development of viral strain resistance
to the drugs' effectiveness, significant toxicity or severe side effects. The
Company has not yet generated any operating revenues. The Company has
experienced significant operating losses due to substantial expenses incurred
to acquire and fund development of its drug candidates and, as of December 31,
1998, had an accumulated deficit of approximately $13.3 million. In February
1999, the Company received clearance from the FDA to begin clinical trials in
the United States for HE2000, the Company's lead drug candidate.
When and if any of the Company's drug candidates have been approved for
commercial sale, the Company plans to market them in the United States. For
international markets, the Company intends 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 the Company's drug candidates will be approved for commercial sale or that
any of the foregoing proposed arrangements will be implemented or prove to be
successful.
The Company has been unprofitable since inception and expects to incur
substantial additional operating losses for at least the next few years as it
increases expenditures on research and development and begins to allocate
significant and increasing resources to its clinical testing and other
activities. In addition, during the next few years, the Company will have to
meet the substantial new challenge of developing the capability to market
products. Accordingly, the Company's activities to date are not as broad in
depth or scope as the activities it must undertake in the future, and the
Company's historical operations and financial information are not indicative
of the Company's future operating results or financial condition or its
ability to operate profitably as a commercial enterprise when and if it
succeeds in bringing any drug candidate to market.
During March 1997, Hollis-Eden, Inc. ("Hollis-Eden"), a Delaware
corporation, was merged with and into the Company (then known as Initial
Acquisition Corp. ("IAC")). Upon the consummation of the merger, Hollis-Eden
ceased to exist, and IAC changed its name to Hollis-Eden Pharmaceuticals, Inc.
For accounting and financial reporting purposes, the merger was treated as a
recapitalization of Hollis-Eden. As used herein, unless otherwise indicated,
for periods prior to March 1997, the terms "Company" and "Hollis-Eden
Pharmaceuticals" shall refer to Hollis-Eden, not IAC.
TECHNOLOGY PLATFORMS
The Company's scientific approaches are based on the study of mechanisms
utilized by viruses or pathogenic microorganisms to infect their host. These
technological approaches have led to a novel series of proprietary
pharmaceutical products that will be tested for the treatment and/or
prevention of multiple targeted
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disease states caused by viral, bacterial, parasitic or fungal infections. The
underlying premise of the Company's technology is that the human immune system
inherently possesses the ability, when directed, to respond to a specific
infection or diseases. The Company's fundamental approach has been to identify
these naturally occurring therapeutic agents and to design and produce similar
improved versions. The following platforms represent the Company's innovative
technological opportunities:
I. Antivirals that inhibit the energy producing enzymes that interrupt the
cellular factors the virus depends on for replication. By depriving the
virus of the raw materials and energy to replicate, it is possible to
effectively starve the virus and inhibit its replication.
II. Immune modulators that either down regulate or up regulate the immune
response system, thus enhancing the body's own ability to fight off
infection.
III. Novel enzyme inhibitors generally classified as cytokinins, to inhibit
the synthesis of an organism's RNA and DNA.
These approaches have the advantage of producing fewer side effects and less
toxicity for patients.
TECHNOLOGY PLATFORM I - CELLULAR ENERGY REGULATORS
The Company's first platform focuses on ways to interrupt the human cellular
energy factors needed by viruses to replicate in their host human cells.
The Company recently developed HE2000, a new analog of the Company's lead
drug candidate, which has a unique mechanism of action for antiretroviral
treatment in HIV/AIDS and other infectious diseases. HE2000 has demonstrated a
10-fold increase in antiretroviral potency over an earlier version of HE2000.
In in vitro testing, HE2000 inhibits viral replication against diverse and
multiple drug resistant strains of the HIV virus. Currently approved
antiretroviral therapies are designed to block the action of specific HIV
viral proteins that have critical functions at particular stages of the
replication process. These therapies are subject to HIV mutation, resulting in
drug resistance.
HE2000 appears to work independently of the viral structure by inhibiting
human cellular energy producing enzymes, which are necessary for retroviral
replication. The Company's research affiliates, headed by Dr. Patrick
Prendergast, discovered that HIV deprives the host cell of a natural human
molecule that regulates cellular energy. The result of this action causes the
cell to increase the activity of the known energy producing enzymes necessary
for retroviral (HIV) replication. The Company believes that HE2000 decreases
the activity of the energy producing enzymes the cell requires to replicate
HIV and therefore prohibits viral replication. The Company believes that
HE2000 will inhibit viral replication on a sustained basis and will not
develop drug resistance. The Company intends to advance HE2000 into safety and
efficacy clinical trials this year.
TECHNOLOGY PLATFORM II - IMMUNE SYSTEM REGULATORS
The Company's second technology platform focuses on ways to up regulate and
down regulate the immune system of the body to treat various disorders.
HE317, the Company's drug candidate for up regulation of the immune system,
is intended to be tested in immune suppressed patients suffering from HIV/AIDS
either as monotherapy or adjunctive therapy with HE2000 or other
antiretroviral HIV/AIDS drugs. IDPS, the Company's drug candidate for down
regulating the immune system, will be tested in accepted animal models to
treat organ transplant rejection. In addition to working on products for organ
transplant rejection, the Company is exploring agents using IDPS technology to
treat other immune system disorders such as lupus, multiple sclerosis,
psoriasis, rheumatoid arthritis and scleroderma.
TECHNOLOGY PLATFORM III - SYNTHESIS REGULATORS
The Company's third platform is based on the regulation of biochemical
synthesis in the cell.
4
The Company has discovered, developed and patented a range of modified
nucleosides, which are generally classified as cytokinins, and used as
antibacterial, antiparasitic, antifungal and antiviral agents to treat
diseases such as cytomegalovirus, tuberculosis, malaria, toxoplasmosis and
leishmania. The Company's drug candidates are directly involved with the
control of protein RNA and DNA synthesis and have demonstrated the ability to
selectively inhibit RNA synthesis and protein synthesis of a variety of intra-
cellular infective organisms.
The Company's drug candidates interact with a very important high-energy
signal molecule called cyclic nucleotide adenosine monophosphate (cAMP), and
because of its unique multi-targeted approach it may be universally effective
at inhibiting a wide array of infectious organisms and viruses in very small
concentrations. Furthermore, the Company has demonstrated in vitro and in vivo
that, with very low levels of these drug candidates, it may be possible to
inhibit both RNA and DNA viruses. This approach has been shown to be non-toxic
to normal body cells.
MARKET OPPORTUNITIES
The number of people suffering from diseases caused by microorganisms, such
as viruses, bacteria, fungi and parasites, is growing at an alarming rate
worldwide. At the same time, medical conditions involving immune system
disorders are being reported constantly in clinical journals, and new diseases
for which there are no known cures or treatments are becoming more prevalent.
Today, AIDS is the number one killer of Americans between the ages of 25 and
44. It is estimated by the Centers for Disease Control that approximately 1.1
million Americans are infected with HIV. Globally, the World Health
Organization ("WHO") and the Joint United Nations Programme on HIV/AIDS
reported as of December 1998 that approximately 33.4 million adults and
children are living with HIV/AIDS, a 10% increase from 1997. It is also
estimated that there were 5.8 million newly infected people and 2.5 million
deaths related to HIV/AIDS in 1998. That equates to 11 newly infected people
per minute and 16,000 per day in 1998.
WHO reports, that of the 170 million chronic carriers of hepatitis C in the
world, 20% are at risk of developing cirrhosis of the liver and 1% to 5% may
develop liver cancer. Today, the disease often is treated with Interferon,
which is only 20% effective, has significant side effects and is relatively
expensive to use.
According to the United Network of Organ Sharing, each year approximately
20,000 organ transplants are performed in the U.S., while more than 60,000
people remain on waiting lists and more than 6% of those die waiting.
According to Frost and Sullivan, this has created a $1.2 billion U.S. market
for drugs that suppress the body's immune system so as not to reject the
implanted organs. Hollis-Eden Pharmaceuticals, Inc., is conducting research
with drug candidates that may down regulate the immune system, potentially
allowing the body to better tolerate a mismatched transplanted organ or
tissue. The Company believes this new drug development discovery could
dramatically increase the number of transplants each year and result in rapid
market expansion in the U.S. and throughout the world.
Hollis-Eden Pharmaceutical's technology platforms enable the Company to
target multiple diseases and disorders. These technology platforms have
already identified molecules for drug candidates and have been tested both in
vitro and in vivo. According to the Pharmaceutical Manufacturers Association,
3,995 of every 4,000 compounds screened in preclinical animal testing never
make it to human clinicals. Earlier versions of HE2000 and HE317 have been
used in human clinical tests and appear to be well tolerated with no
significant side effects. Furthermore, the product significantly showed
efficacy by reducing the viral load in infected HIV/AIDS patients. Such safety
and efficacy results, coupled with the drugs' non-pathogenic mechanism of
action, indicate that they can also be used in several other diseases and
disorders. Another advantage of the Company's products is the fact that
extensive research has been completed, thereby reducing the time required for
final development and commercialization. Additionally, the Company is
strategically pursuing its initial indications in terminal or fatal diseases,
such as HIV/AIDS, where the Company's FDA approval process may be dramatically
shorter if the Company's products qualify for the FDA accelerated drug
approval program. See "FDA Overview--Accelerated Drug Approval."
5
COMPETITION
Hollis-Eden Pharmaceuticals believes that its scientific approaches to
infectious diseases, which have led to multiple platform technologies, enable
the Company to develop products for multiple disease states. The Company
believes that certain of its initial products under development that are
focused on HIV/AIDS may realize more effective treatments than drugs currently
being used or developed by the competition. The principal drugs currently used
to treat HIV and AIDS (e.g., AZT, ddI, ddc, d4T and 3TC) are nucleoside analog
reverse transcriptase drugs. Additionally, most newer drugs being developed
and recently being introduced are protease inhibitors; e.g., Invirase
(Saquinavir), Crixivan (Indinavir sulfate), Viracept (Nelfinavir) and Novir
(Ritonavir). Hollis-Eden Pharmaceuticals believes that the effectiveness of
these types of drugs may prove to be short-lived since HIV rapidly mutates and
develops resistance to the effectiveness of these drugs. Development of drug
resistance occurs when the virus can mutate its coat protein or enzyme
structure so that its interaction with the drug is altered. Another
disadvantage of currently used treatments is that nucleoside analogues and
protease inhibitors are toxic and can cause severe and intolerable side
effects. HE2000 and HE317 are not reverse transcriptase or protease
inhibitors, but are derived from naturally occurring substances and are
expected to be well-tolerated by humans with minimal side effects.
Furthermore, Hollis-Eden Pharmaceuticals believes that its drug candidates
will have a longer duration of effectiveness, be more affordable and require
smaller doses and fewer pills to be taken than the drugs and combinations
currently being used.
Because HE2000's antiviral effectiveness is not reliant on a direct
structural interaction with the virus itself, Hollis-Eden Pharmaceuticals
believes that HE2000 will inhibit replication of the virus regardless of its
mutation rates. By decreasing the synthesis of the viral raw materials in the
cell, HE2000 effectively slows and may eventually stop the virus' production
line. The Company further expects that HE2000 will decrease the energy supply
for viral synthesis regardless of the viral type or strain.
FDA OVERVIEW
GENERAL
The manufacturing and marketing of Hollis-Eden Pharmaceuticals' proposed
products and its research and development activities are and will continue to
be subject to regulation by federal, state and local governmental authorities
in the United States and other countries. In the United States,
pharmaceuticals are subject to rigorous regulation by the FDA's Center for
Drug Evaluation and Research, which reviews and approves marketing of drugs.
The Federal Food, Drug and Cosmetic Act, the regulations promulgated
thereunder, and other federal and state statutes and regulations govern, among
other things, the testing, manufacturing, labeling, storage, record keeping,
advertising and promotion of Hollis-Eden Pharmaceuticals' potential products.
APPROVAL PROCESS
The process of obtaining FDA approval for a new drug may take several years
and generally involves the expenditure of substantial resources. Hollis-Eden
Pharmaceuticals will try to accelerate the drug approval process because of
the priority status of HIV/AIDS drugs. See "Accelerated Drug Approval." The
steps required before a new drug can be produced and marketed for human use
include clinical trials and the approval of a New Drug Application.
Preclinical Testing. The promising compound is subjected to extensive
laboratory and animal testing to determine if the compound is biologically
active and safe.
Investigational New Drug (IND). Before human tests can start, the drug
sponsor must file an IND application with the FDA, showing how the drug is
made and the results of animal testing. If the FDA does not reject the
application within 30 days, IND status allows initiation of clinical
investigation.
Human Testing (Clinical). The human clinical testing program usually
involves three phases which generally are conducted sequentially, but which,
particularly in the case of anti-cancer and other life saving
6
drugs, may overlap or be combined. Clinical trials are conducted in accordance
with protocols that detail the objectives of the study, the parameters to be
used to monitor safety and the efficacy criteria to be evaluated. Each
protocol is submitted to the FDA as part of the IND filing. Each clinical
study is conducted under the auspices of an independent Institutional Review
Board ("IRB") for each institution at which the study will be conducted. The
IRB will consider, among other things, all existing pharmacology and
toxicology information on the product, ethical factors, the risk to human
subjects and the potential benefits of therapy relative to risk.
In Phase I clinical trials, studies usually are conducted on healthy
volunteers but, in the case of certain terminal illnesses such as AIDS, are
conducted on patients with disease that usually has failed to respond to other
treatment to determine the maximum tolerated dose, side effects and
pharmacokinetics of a product. Phase II studies are conducted on a small
number of patients having a specific disease to determine initial efficacy in
humans for that specific disease, the most effective doses and schedules of
administration, and possible adverse effects and safety risks. Phase II/III
differs from Phase II in that the trials involved may include more patients
and, at the sole discretion of the FDA, be considered the pivotal trial or
trials for FDA approval (see below). Phase III normally involves the pivotal
trials of a drug, consisting of wide-scale studies on patients with the same
disease, in order to evaluate the overall benefits and risks of the drug for
the treated disease compared with other available therapies. The FDA
continually reviews the clinical trial plans and results and may suggest
design changes or may discontinue the trials at any time if significant safety
or other issues arise.
New Drug Application (NDA). Upon completion of Phase III, the drug sponsor
must file an NDA containing all information that has been gathered. The
information must include the chemical composition of the drug, scientific
rationale, purpose, animal and laboratory studies, results of human tests,
formation and production details, and proposed labeling.
Approval. Once an NDA is approved, the drug sponsor is required to submit
reports periodically to the FDA containing adverse reactions, production,
quality control and distribution records. The FDA may also require post-
marketing testing to support the conclusion of efficacy and safety of the
product, which can involve significant expense. After FDA approval is obtained
for initial indications, further clinical trials may be necessary to gain
approval for the use of the product for additional indications.
The testing and approval process is likely to require substantial time and
effort, and there can be no assurance that any FDA approval will be granted on
a timely basis, if at all. The approval process is affected by a number of
factors, primarily the side effects of the drug (safety) and its therapeutic
benefits (efficacy). Additional preclinical or clinical trials may be required
during the FDA review period and may delay marketing approval. The FDA may
also deny an NDA if applicable regulatory criteria are not met.
Outside the United States, Hollis-Eden Pharmaceuticals will be subject to
foreign regulatory requirements governing human clinical trials and marketing
approval for its products. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursements vary widely from country
to country.
ACCELERATED DRUG APPROVAL
In December 1992, the FDA formalized procedures for accelerating the
approval of drugs to be marketed for the treatment of certain serious
diseases. To be eligible for this program, the products must treat serious or
life-threatening illnesses and provide meaningful therapeutic benefits beyond
existing treatments. Under these regulations, a significant new therapy could
be approved for marketing at the earliest possible point at which safety and
effectiveness are reasonably established under existing law. For example, the
approval of a drug could be accelerated by demonstrating a favorable effect on
a well-documented surrogate endpoint to predict clinical benefit, instead of
requiring that the drug demonstrate actual clinical benefit.
An important and unique element of these regulations is that approval would
be granted only if the sponsor agrees to conduct additional post-marketing
studies to confirm the product's effectiveness and/or agrees to restrict
distribution of the product. In addition, if the further clinical trials do
not bear out the product's effectiveness or if restricted distribution is
inadequate to assure safe use, approval of the product would be withdrawn.
7
MANUFACTURING
Hollis-Eden Pharmaceuticals does not have, and does not intend to establish,
manufacturing facilities to produce its products. Hollis-Eden Pharmaceuticals
plans to control its initial capital expenditures by using contract
manufacturers to make its products. Hollis-Eden Pharmaceuticals believes that
there are a sufficient number of high quality FDA approved contract
manufacturers available, and management has had discussions and established
relationships with several of them, to fulfill its near-term production needs
for both clinical and commercial use.
The manufacture of Hollis-Eden Pharmaceuticals' products, whether done by
outside contractors (as planned) or Hollis-Eden Pharmaceuticals, will be
subject to rigorous regulations, including the need to comply with the FDA's
current Good Manufacturing Practice standards. As part of obtaining FDA
approval for each product, each of the manufacturing facilities must be
inspected, approved by and registered with the FDA. In addition to obtaining
FDA approval of the prospective manufacturer's quality control and
manufacturing procedures, domestic and foreign manufacturing facilities are
subject to periodic inspection by the FDA and/or foreign regulatory
authorities.
PATENTS
Hollis-Eden Pharmaceuticals considers the protection of its products,
whether owned or licensed, to the exclusion of use by others, to be vital to
its business. While the Company intends to focus primarily on patented or
patentable technology, it may also rely on trade secrets, unpatented property,
know-how, regulatory exclusivity, patent extensions and continuing
technological innovation to develop its competitive position. In the United
States and certain foreign countries, the exclusivity period provided by
patents covering pharmaceutical products may be extended by a portion of the
time required to obtain regulatory approval for a product.
In certain countries, pharmaceuticals are not patentable or only recently
have become patentable, and enforcement of intellectual property rights in
many countries has been limited or non-existent. Future enforcement of patents
and proprietary rights in many countries can be expected to be problematic or
unpredictable. There can be no assurance that any patents issued or licensed
to Hollis-Eden Pharmaceuticals will provide it with competitive advantages or
will not be challenged by others. Furthermore, there can be no assurance that
others will not independently develop similar products or will not design
around patents issued or licensed to Hollis-Eden Pharmaceuticals.
Patent applications in the United States are maintained in secrecy until
patents issue. Publication of discoveries in the scientific or patent
literature, if made, tends to lag behind actual discoveries by several months.
Consequently, the Company cannot be certain that a licensor of its
intellectual property was the first to invent certain technology or compounds
covered by pending patent applications or issued patents or that it was the
first to file patent applications for such inventions. In addition, the patent
positions of pharmaceutical companies, including those of Hollis-Eden
Pharmaceuticals, are generally uncertain, partly because they involve complex
legal and factual questions.
In addition to the considerations discussed above, companies that obtain
patents claiming products, uses or processes that are necessary for or useful
to the development of Hollis-Eden Pharmaceuticals' products could bring legal
actions against the Company claiming infringement. Patent litigation is
typically costly and time-consuming, and if such an action were brought
against Hollis-Eden Pharmaceuticals, it could result in significant cost and
diversion of management time. The Company may be required to obtain licenses
to other patents or proprietary rights, and there can be no assurance that
licenses would be made available on terms acceptable to the Company. If
Hollis-Eden Pharmaceuticals does not obtain such licenses, it could encounter
delays in product market introductions while it attempts to license technology
designed around such patents or could find that the development, manufacture
or sale of products requiring such licenses is foreclosed.
8
Further, there can be no assurance that patents that are issued will not be
challenged, invalidated or infringed upon or designed around by others, or
that the claims contained in such patents will not infringe the patent claims
of others, or provide Hollis-Eden Pharmaceuticals with significant protection
against competitive products, or otherwise be commercially valuable. There can
be no assurance that the Company will not need to acquire licenses under
patents belonging to others for technology potentially useful or necessary to
the Company or, if any such licenses are required, that they will be available
on terms acceptable to the Company, if at all. To the extent that Hollis-Eden
Pharmaceuticals is unable to obtain patent protection for its products or
technology, Hollis-Eden Pharmaceuticals' business may be adversely affected by
competitors who develop substantially equivalent technology.
LICENSE AGREEMENTS
Certain provisions of agreements relating to the products have been
renegotiated and amended from time to time, primarily to defer cash payments
due under the agreements. The amendments have streamlined Hollis-Eden
Pharmaceuticals' commitments and contingencies. The discussion below reflects
the nature of its agreements as in effect at the current time. Although the
Company believes the following summaries to be accurate, such summaries are
qualified in their entirety by reference to their original documents.
COLTHURST LICENSE AGREEMENT
In May 1994, Hollis-Eden Pharmaceuticals entered into a license agreement,
as amended in August 1995 and October 1996, with Colthurst Limited
("Colthurst") and Patrick T. Prendergast, Ph.D., pursuant to which Hollis-Eden
Pharmaceuticals was granted exclusive worldwide rights to all present and
future patent rights, know-how and background technology of Colthurst and Dr.
Prendergast relating to the treatment of retroviral infections for all uses
thereunder to develop and commercialize products based on the licensed rights.
The Company also has the right to sublicense any such rights.
Hollis-Eden Pharmaceuticals paid a license fee of $100,000 to Colthurst upon
execution of the agreement and was required to pay an additional license fee
of $250,000, of which Hollis-Eden Pharmaceuticals paid $125,000 to Colthurst
in March 1995. The remainder of such fee becomes due according to the terms of
the agreement. The Company issued 37,736 shares of Common Stock to Colthurst
and, beginning August 1995, the Company agreed to make monthly payments of
$5,000 to the licensors. Hollis-Eden Pharmaceuticals is also obligated to pay
to Colthurst royalties on revenues from products covered by the licensed
rights and on revenues received by the Company in connection with sublicenses
granted by the Company to third parties. Hollis-Eden Pharmaceuticals must pay
a renewable annual license fee, which fee is deductible from royalty fees due
to Colthurst during a certain period following renewal of the license. There
can be no assurance that the Company will be able to pay such annual fees in
the future, in which event the termination of the agreement and the licensing
of such rights to a third party would have a material adverse effect on the
Company's business.
EDENLAND LICENSE AGREEMENT
In August 1994, Hollis-Eden Pharmaceuticals entered into a license
agreement, as amended in August 1995, with Edenland, Inc. ("Edenland") and Dr.
Prendergast pursuant to which Hollis-Eden Pharmaceuticals was granted
exclusive worldwide rights to all present and future patent rights, know-how
and background technology of Edenland and Dr. Prendergast relating to the
anti-serum/vaccine for all uses thereunder to develop and commercialize
products based on the licensed rights. The Company also has the right to
sublicense any such rights.
Hollis-Eden Pharmaceuticals paid a license fee of $25,000 upon execution of
the agreement and an additional license fee in the aggregate of $100,000 over
a six-month period ending February 28, 1995. The Company issued to Edenland
and Dr. Prendergast an aggregate of 543,396 shares of the Company Common Stock
and agreed that either Dr. Prendergast or his brother, Leo Prendergast, at
Edenland's election, has the right to serve on Hollis-Eden Pharmaceuticals'
Board of Directors for three years. The Company is also obligated to
9
pay Edenland a license fee of $572,000, of which the Company paid $125,000 to
Edenland in March 1995. The remainder of such fee becomes due according to the
terms of the agreement. Hollis-Eden Pharmaceuticals issued to Edenland a
warrant to purchase 37,736 shares of Common Stock at an exercise price of
$15.90 per share, 37,736 shares of Common Stock and registration rights pari
passu with certain other investors of Hollis-Eden Pharmaceuticals. In
addition, beginning August 1995, the Company agreed to make monthly payments
of $5,000 to the licensors. The Company is obligated to pay to Edenland
royalties on revenues from products covered by the licensed rights and on
revenues received by the Company in connection with sublicenses granted by the
Company to third parties. Pursuant to the terms of the agreement, with certain
limitations, Edenland has the option to receive such royalties in the form of
Common Stock. Furthermore, as a condition to the Company's commercialization
rights to any product for which regulatory approval is obtained and a certain
revenue milestone is achieved, the Company is obligated to pay Edenland a
renewable annual license fee for such product for a period of six years. Such
annual fee, however, is deductible from royalty fees due to Edenland,
including royalty payments due to Edenland in connection with sublicenses
granted by Hollis-Eden Pharmaceuticals, during the term of the agreement.
HE317 will cease to be a product covered by the license agreement if Hollis-
Eden Pharmaceuticals has not contributed a certain amount of funding to the
development of HE317 in accordance with the terms and conditions of the
related Research and Development Agreement (described below). There can be no
assurance that the Company will be able to pay such annual fees in the future,
in which event the termination of certain rights and the licensing of such
rights to a third party would have a material adverse effect on the Company's
business.
RESEARCH AND DEVELOPMENT AGREEMENT
In August 1994, Hollis-Eden Pharmaceuticals entered into a research,
development and option agreement, as amended in August 1995 and October 1996,
with Edenland and Dr. Prendergast, pursuant to which Edenland agreed to obtain
an open IND for HE317 from the FDA and to commence a patient Phase I IND study
under the guidelines and regulations of the FDA. The Company is obligated to
pay Edenland the development costs associated with such Phase I study, for
which the Company has agreed to commit a certain minimum amount from its
annual research and development budget. After the payment of such development
costs and upon the determination that the new product will not meet regulatory
approval, Hollis-Eden Pharmaceuticals has the right to terminate its
obligation to pay any further development costs of HE317.
Edenland granted Hollis-Eden Pharmaceuticals the exclusive option to acquire
exclusive worldwide rights to all new products of Edenland relating to the
modulating of the immune system and all patent rights, know-how and background
technology from which such new products were derived, which rights, upon
exercise of the option by Hollis-Eden Pharmaceuticals, are governed by the
terms and conditions of the Edenland license agreement. The research and
development agreement terminates concurrently with the termination of the
Edenland license agreement.
RECAPITALIZATION
On March 26, 1997, Hollis-Eden was merged with and into IAC pursuant to an
Agreement and Plan of Merger, dated November 1, 1996, among IAC, Hollis-Eden,
Mr. Salvatore J. Zizza and Mr. Richard B. Hollis (the "Merger Agreement").
Upon consummation of the merger of Hollis-Eden with IAC (the "Merger"),
Hollis-Eden ceased to exist, and IAC changed its name to Hollis-Eden
Pharmaceuticals, Inc. IAC (now called Hollis-Eden Pharmaceuticals, Inc.)
remains the continuing legal entity and registrant for Securities and Exchange
Commission reporting purposes. The Merger was intended to be a tax-free
reorganization for federal income tax purposes and was accounted for as a
recapitalization of Hollis-Eden by an exchange of Common Stock of Hollis-Eden
for the net assets of IAC, consisting primarily of cash. IAC was formed to
serve as a vehicle to effect a merger, exchange of capital stock, asset
acquisition or other business combination with a target business, which IAC
believed has significant growth potential.
Under the terms of the Merger Agreement, each share of Hollis-Eden Common
Stock outstanding immediately prior to the closing of the Merger converted
into one share of Common Stock of Hollis-Eden
10
Pharmaceuticals, Inc. Common Stock ("Company Common Stock"), and all warrants
and options to purchase Hollis-Eden Common Stock outstanding immediately prior
to the Merger converted into the right to receive the same number of shares of
Company Common Stock. At the closing of the Merger, 4,911,004 shares of
Company Common Stock were issued, which represented approximately 85% of the
shares of Company Common Stock outstanding immediately after consummation of
the Merger.
EMPLOYEES
As of March 15, 1999, the Company had 14 full-time employees. The Company
believes that its relations with its employees are good.
FOUNDERS
The Company was founded by Richard B. Hollis (see "Executive Officers") and
Patrick T. Prendergast, Ph.D. Dr. Prendergast, whose specialty is in anti-
viral drug screening and assessment, developed the drug candidates licensed to
Hollis-Eden Pharmaceuticals. His research interests are virology, molecular
immunological and genetic analysis of animal and human lentiviruses, human
herpes virology and immunology, anti-viral agent isolation and retroviral
diagnostics. Dr. Prendergast has been primarily engaged in medical research
and development activities through two research and development companies
controlled by him, Colthurst and Edenland, since 1985 and 1987, respectively.
These companies investigated and screened human hormones and proteins as anti-
HIV drugs. Dr. Prendergast filed foreign patents on the use of these agents
for the treatment of viral caused immune disorders. Dr. Prendergast received
his Ph.D. in microbiology from the University College of Galway, Ireland in
1982.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of March 15, 1999
are as follows:
NAME AGE POSITION
- ---- --- --------
Richard B. Hollis.............. 46 Chairman of the Board, President and Chief Executive Officer
James M. Frincke, Ph.D. ....... 48 Executive Vice President, Research and Development
Robert L. Marsella............. 46 Vice President, Business Development and Marketing
Thomas C. Merigan, Jr., M.D. .. 65 Medical Director, Infectious Diseases
Robert W. Weber................ 48 Vice President - Controller
RICHARD B. 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.
JAMES M. FRINCKE, PH.D. became Executive Vice President, Research and
Development, of the Company in November 1997. During his 17 years in the
industry, Dr. Frincke has managed major programs for research and development
of drugs, biologicals, cellular and gene therapeutics that are aimed at the
treatment of cancer, infectious diseases and tissue transplantation. Since
joining the biotechnology industry, Dr. Frincke has held vice president,
research and development positions, in several biotechnology companies
including Hybritech/Eli Lilly. Most recently, he served as Vice President of
Therapeutics Research and Development at Prolinx, from 1995 to
11
1997, Vice President of Bio-Organic Chemistry and Vice President of Research
and Development for Systemix from 1991 to 1995. In various capacities, he has
been responsible for all aspects of pharmaceutical development, including
early stage research programs, product evaluation, pharmacology,
manufacturing, and the management of the regulatory and clinical matters of
lead product opportunities. Dr. Frincke has authored and co-authored more than
100 scientific articles, abstracts and regulatory filings. Dr. Frincke
received his Ph.D. in chemistry at the University of California, Davis in
1978. In 1981, Dr. Frincke completed his postdoctoral work at the University
of California, San Diego.
ROBERT L. MARSELLA became Vice President, Business Development and
Marketing, of the Company in September 1997. Mr. Marsella has over 18 years of
medical sales, marketing and distribution experience. Since 1994 Mr. Marsella
has been President of RLM Cardiac Products, an exclusive distributor in the
Southwestern United States of various cardiac related hospital products. From
1990 to 1994, Mr. Marsella marketed and distributed implantable pacemakers and
defibrillators for Telectronics Pacing Systems. From 1987 to 1990,
Mr. Marsella served as Regional Manager for Genentech, Inc. and launched
ACTIVASE t-PA(TM) (a Biopharmaceutical drug) in the Western United States.
From 1983 to 1987, Mr. Marsella marketed intravenous infusion pumps for Imed
Corporation. Mr. Marsella began his career in 1980, as a field sales
representative, and was quickly promoted to regional sales manager for U.S.
Surgical Corporation, auto suture division. Mr. Marsella received his B.A.
degree from San Diego State University in 1975.
THOMAS CHARLES MERIGAN, JR., M.D., 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 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.
ROBERT W. WEBER was appointed Vice President - Controller of the Company in
March 1996. Mr. Weber has over twenty years of experience in financial
management and has been employed at executive levels by multiple start-up
companies and contributed to the success of several turnaround situations.
Most recently he served as Vice President of Finance at Prometheus Products, a
subsidiary of Sierra Semiconductor, and Vice President Finance and Chief
Financial Officer for Amercom. From 1988 to 1993, Mr. Weber served as Vice
President Finance and Chief Financial Officer of Instromedix, which designs,
manufactures and markets medical electronic devices and software. Mr. Weber
received a B.S. from GMI Institute of Technology in 1975 and a MBA from
Stanford Graduate School of Business in 1977.
12
RISK FACTORS
An investment in the shares being offered hereby involves a high degree of
risk. In deciding whether to purchase shares of our common stock, you should
carefully consider the following risk factors, in addition to other
information contained in this Annual Report on Form 10-K.
Dependence on New Products and FDA Approval. Our principal development
efforts are currently centered around two drug candidates licensed to us which
we believe show promise for the treatment and prevention of HIV/AIDS. However,
all of our drug candidates will require FDA and foreign government approvals
before they can be commercialized. Neither HE2000 nor any of our other drug
candidates have been approved for commercial sale. While limited clinical
trials of HE2000 have to date produced favorable results, significant
additional trials are required, and we may not be able to demonstrate that
this drug candidate is safe or effective. We have never commercially
introduced a product, and we cannot guarantee that any of our product
candidates will obtain required governmental approvals or that we can
successfully commercialize any products.
Early Stage of Product Development and Substantial Operating Losses. We have
experienced significant operating losses to date because of the substantial
expenses we have incurred to acquire and fund development of our drug
candidates. We have never had operating revenues. Our accumulated deficit was
approximately $13.3 million through December 31, 1998. We expect to incur
significant additional operating losses over the next several years as we fund
development, clinical testing and other expenses of seeking FDA approval. Many
of our research and development programs are at an early stage. Potential drug
candidates are subject to inherent risks of failure. These risks include the
possibilities that no drug candidate will be found safe or effective, meet
applicable regulatory standards or receive the necessary regulatory
clearances. Even safe and effective drug candidates may never be developed
into commercially successful drugs. There may be delays in receipt of
regulatory approvals. The drugs could be uneconomical to manufacture or
produce on a large scale. The drugs may not achieve customer acceptance. The
proprietary rights of others could stop us from being able to market the
drugs, or third parties could market superior or equivalent drugs. If we were
unable to develop safe, commercially viable drugs, it would have a material
adverse effect on our business, financial condition and results of operations.
Our ability to achieve profitable operations will depend on our ability to
obtain regulatory approvals for our drug candidates, our ability to enter into
collaboration agreements, and our ability to commercialize a drug candidate.
We cannot assure you that we will ever operate profitably.
Patents and Proprietary Rights. Our success will depend in part on our
ability to obtain United States and foreign patent protection for our drug
candidates and processes, preserve our trade secrets and operate without
infringing the proprietary rights of third parties. We place considerable
importance on obtaining patent protection for significant new technologies,
products and processes. Legal standards relating to the validity of patents
covering pharmaceutical and biotechnological inventions and the scope of
claims made under such patents are still developing. Our patent position is
highly uncertain and involves complex legal and factual questions. We cannot
be certain that the applicant or inventors of subject matter covered by patent
applications or patents owned by or licensed to us were the first to invent or
the first to file patent applications for such inventions. We cannot guarantee
that any patents will issue from any of the pending or future patent
applications we own or have licensed. Existing or future patents owned by or
licensed to us may be challenged, infringed upon, invalidated, found to be
unenforceable or circumvented by others. Further, we cannot guarantee that any
rights we may have under any issued patents will provide us with sufficient
protection against competitive products or otherwise cover commercially
valuable products or processes.
If another party claims the same subject matter or subject matter
overlapping with the subject matter that we have claimed in a United States
patent application or patent, we may decide or be required to participate in
interference proceedings in the United States Patent and Trademark Office in
order to determine the priority of invention. Loss of such an interference
proceeding would deprive us of patent protection sought or previously
obtained. Participation in such proceedings could result in substantial costs,
whether or not the eventual outcome is favorable.
13
Government Regulation and Product Approvals. Our drug candidates under
development are subject to regulation by the federal government, including the
FDA, and by state and local governments. If our products are marketed abroad,
they will also need to comply with export requirements and regulation by
foreign governments. The applicable regulatory approval process is lengthy and
expensive and must be completed prior to the commercialization of a product.
We cannot guarantee that we will be able to obtain necessary regulatory
approvals on a timely basis, if at all, for any of our products under
development. Delays in receiving such approvals, failure to receive such
approvals at all or failure to comply with existing or future regulatory
requirements could have a material adverse effect on our business, financial
condition and results of operations.
Product development and approval to meet FDA regulatory requirements takes a
number of years, involves the expenditure of substantial resources and is
uncertain. Many products that initially appear promising ultimately do not
reach the market because they are not found to be safe or effective. In
addition, the current regulatory framework could change and additional
regulations may arise at any stage of product development that may affect
approval, delay the submission or review of an application or require
additional expenditures.
Substantial Capital Needs. We will require substantial additional funds in
order to finance our drug discovery and development programs, fund operating
expenses, pursue regulatory clearances, develop manufacturing, marketing and
sales capabilities, and prosecute and defend our intellectual property rights.
We intend to seek additional funding through public or private financing or
through collaboration arrangements with collaborative partners. If we raise
funds by selling equity securities, sales may dilute your share ownership and
future investors may be granted rights superior to yours. We cannot guarantee,
however, that we will be able to obtain additional financing on acceptable
terms, if at all.
Technological Change and Competition. Biotechnology and related
pharmaceutical technology have undergone rapid and significant change. We
expect that the technologies associated with biotechnology research and
development will continue to develop rapidly. Our future will depend in large
part on our ability to maintain a competitive position with respect to these
technologies. Any compounds, products or processes that we develop may become
obsolete before we recover any expenses we have incurred in connection with
developing these products.
The biotechnology and pharmaceutical industries are intensely competitive.
We have numerous competitors in the United States and elsewhere. Our
competitors include major, multinational pharmaceutical and chemical
companies, specialized biotechnology firms and universities and other research
institutions. Many of these competitors have greater financial and other
resources, larger research and development staffs and more effective marketing
and manufacturing organizations than we do. In addition, academic and
government institutions have become increasingly aware of the commercial value
of their research findings. These institutions are now more likely to enter
into exclusive licensing agreements with commercial enterprises, including our
competitors, to market commercial products.
Our competitors may succeed in developing or licensing technologies and
drugs that are more effective or less costly than any we are developing. Our
competitors may succeed in obtaining FDA or other regulatory approvals for
drug candidates before we do. We cannot guarantee that our drug candidates, if
approved for sale, will be able to compete successfully with our competitors'
existing products under development.
No Sales and Marketing Experience. Our efforts to date have focused on the
development and evaluation of our drug candidates. As we continue clinical
studies and prepare for commercialization of our drug candidates, we need to
build a sales and marketing infrastructure. We have no experience in the sales
and marketing of our drug candidates. We may not be able to attract and retain
the skilled personnel necessary to effectively market our drug candidates.
Dependence on License Agreements. We license our drug candidates from Dr.
Patrick T. Prendergast and from Edenland, Inc. and Colthurst Limited, two
organizations Dr. Prendergast controls. Our license agreements can be
terminated if we materially breach our obligations under the agreements.
Termination of our license
14
agreements would cause us to lose our rights to our existing drug candidates.
If we lost our licensed rights to one or more of our drug candidates or if our
rights were materially limited, it would have a material adverse effect on our
business, operating results and financial condition.
Dependence on Officers and Future Employees. Our ability to successfully
implement our business strategy depends highly upon our Chief Executive
Officer, Richard B. Hollis. The loss of Mr. Hollis' services could impede the
achievement of our research and development objectives. We also highly depend
on our ability to hire and retain qualified scientific and technical
personnel. The competition for these employees is intense. We cannot guarantee
that we will continue to be able to hire and retain the qualified personnel
needed for our business. Loss of the services of or the failure to recruit key
scientific and technical personnel could adversely affect our business,
operating results and financial condition.
Technological Uncertainties. Our product development efforts are based upon
technologies and therapeutic approaches that have not been widely used in
humans for therapeutic purposes. There is significant risk that these
approaches will not prove to be successful. Although we believe that the
positive results obtained to date in preclinical and limited clinical human
studies support further research and development, the positive results
obtained to date do not necessarily reflect results that we may obtain in
further human clinical testing.
Pharmaceutical Pricing and Pending Health Care Reforms. Government health
administration authorities, together with private health insurers,
increasingly are attempting to contain health care costs by limiting the price
or reimbursement levels for medical products and services. In certain foreign
markets, pricing or profitability of prescriptive pharmaceuticals is subject
to government control. In the United States, there have been a number of
federal and state proposals to implement similar government controls or
otherwise significantly reform the existing health care system. We cannot
predict if any of these reform proposals will be adopted, when they may be
adopted, or what impact they may have on Hollis-Eden. Any enacted legislation
may include provisions resulting in price limits, utilization controls or
other consequences that may adversely affect our business, operating results
and financial condition.
Manufacturing Limitations and Uncertainties. Outside manufacturers currently
produce our drug candidates and supply us with sufficient quantities to
conduct clinical trials. If we have difficulty in the future obtaining our
required quantity or quality of supply, we could experience significant delays
in our development programs or regulatory approval process. If we have
difficulties establishing relationships with manufacturers to produce and
distribute our finished pharmaceutical products, market introduction and sales
of our products would be adversely affected. Manufacturers producing our
products must also follow current Good Manufacturing Practices regulations
enforced by the FDA through its facilities inspection program. We may not be
able to commercialize pharmaceutical products as planned if we cannot obtain
or retain qualified third party manufacturing on commercially acceptable
terms.
We currently do not intend to manufacture any pharmaceutical products
ourselves. If we determine to manufacture products ourselves in the future, we
would be subject to the regulatory requirements described above and would be
subject to the same risks regarding difficulties encountered in manufacturing
pharmaceutical products. We also would require substantial additional capital.
We have no experience manufacturing pharmaceutical products for commercial
purposes, so we cannot guarantee that we would be able to manufacture any
products successfully or in a cost-effective manner.
Management of Growth. We will need to continue to improve and expand our
management, operational and financial systems and controls to support future
growth. Our business, operating results and financial condition will be
adversely affected if we cannot do so.
Product Liability and Lack of Adequate Insurance. Our business exposes us to
potential product liability risks associated with the testing, manufacturing,
marketing and sale of pharmaceutical products. Therefore, product liability
claims may be asserted against us. Product liability insurance for the
pharmaceutical industry
15
generally is expensive, if it is available at all. Adequate insurance coverage
may not be available at an acceptable cost. A product liability claim could
adversely affect our business, operating results and financial condition.
Authorized Preferred Stock. Our Board of Directors is authorized, without
further action required on the part of stockholders, to issue one or more
classes of preferred stock and to designate the rights, preferences and
privileges of such preferred stock including voting, dividend and liquidation
rights which may be superior to those of the holders of Common Stock. The
issuance of one or more classes of preferred stock could materially adversely
affect the rights of holders of Common Stock.
Indemnification and Limited Monetary Damages. Our Certificate of
Incorporation provides that our directors shall not be liable for monetary
damages to our stockholders except as required by law. In addition, our Bylaws
provide indemnification of its officers and directors to the fullest extent
permitted by Delaware law. To the extent that stockholders are unable to
prevail in actions for monetary damages against our directors, such
stockholders' rights in this regard are limited in comparison to rights of
stockholders of a corporation that has not adopted such provisions. In
addition, to the extent that the officers and directors may obtain
indemnification from us, we, may incur substantial financial losses.
Dividends Unlikely. We have never paid dividends on our shares of Common
Stock. The payment of dividends in the future, if any, will be contingent upon
our revenues and earnings, if any, capital requirements and general financial
condition. The payment of any dividends in the future will be within the
discretion of our Board of Directors. We intend to retain all earnings, if
any, for use in our business operations and, accordingly, the Board of
Directors does not anticipate declaring any dividends in the foreseeable
future.
Concentration of Ownership. As of March 1, 1999, Richard B. Hollis, our
President and Chief Executive Officer, owned approximately 29.3% of the
outstanding shares of Common Stock (without giving effect to the exercise of
any warrants or options). Accordingly, Mr. Hollis will control our business,
policies and affairs, including the election of members of our Board of
Directors. Assuming the exercise of our outstanding warrants and options, Mr.
Hollis would own approximately 15.5% of the then outstanding shares of Common
Stock.
Classified Board of Directors; Possible Deterrent to Takeovers, Changes in
Board and Other Changes in Control. Our Board of Directors is a "classified
board," with approximately one-third of its directors coming up for election
each year. This provision is applicable to every election of directors. As a
result of having a classified board, two annual meetings will be necessary to
change a majority of the directors. The existence of a classified board may,
in certain circumstances, deter or delay mergers, tender offers, other
possible takeover attempts or changes in management of the Board of Directors
which may be favored by some or a majority of our stockholders.
Possible Volatility in Stock Price. There is no assurance that a market for
our common stock will continue to exist. The prices at which Common Stock
trades will depend on many factors, including prevailing interest rates,
markets for similar securities, industry conditions, and the performance of,
and investor expectations for, our prospects.
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 two years, 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 is Year
2000 compliant. In addition, we have upgraded all of our computer operating
systems. We believe that our computer systems and applications are Year 2000
compliant.
16
We recently completed the process of reviewing our communications systems
and other non-information technology systems to ascertain whether they are
Year 2000 compliant. We expect to complete upgrading these systems by the
second quarter of 1999.
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 three
thousand dollars in connection with our Year 2000 compliance efforts to date.
We believe that the costs to be incurred in upgrading our non-information
technology systems will be immaterial.
We have begun contacting our material suppliers and third party service
providers to identify Year 2000 problems and provide solutions to prevent the
disruption of business activities. At present, we have very little information
regarding the extent of Year 2000 compliance by our suppliers and third party
service providers. We expect to complete our review of the compliance efforts
by these parties in during the second quarter of 1999.
There can be no assurance, however, that the computer systems and
applications of other companies on which our operations rely, will be timely
converted, or that any such failure to convert by another company will not
have a material adverse effect on us. Moreover, the following could have a
material adverse effect on our business or financial condition: (i) failure of
suppliers and third-party service providers equipment to operate or to operate
accurately, (ii) failure of clinical trial site medical equipment to perform
properly, (iii) failure of necessary materials or supplies to be available to
us when needed, or (iv) failure of other equipment, software, or systems as a
result of Year 2000 problems. At the completion of our review of our material
suppliers and third-party service providers, we intend to assess worst case
scenarios and to develop one or more contingency plans that may be necessary,
such as securing alternative vendors.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located at 9333 Genesee Avenue,
Suites 110 and 200, San Diego, California 92121, where the Company leases
approximately 17,000 square feet. The leases expires in August 2000 and August
2002, respectively. The Company believes that its facilities are adequate for
its current operations.
ITEM 3. LEGAL PROCEEDINGS
The Company currently is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market System
under the symbol HEPH. Prior to September 1997, the Company's common stock was
traded on the OTC Electronic Bulletin Board (the "OTC") under the symbol HEPH
and prior to the merger under the symbols IACQ.
The following table sets forth the quarterly high and low bid quotations
and/or selling prices for the securities of the Company on the OTC Electronic
Bulletin Board and Nasdaq Market since September 1997.
COMMON STOCK HIGH LOW
------------ ------- ------
1997
First Quarter............................................... $12.000 $9.000
Second Quarter.............................................. 11.750 4.125
Third Quarter............................................... 8.440 4.500
Fourth Quarter.............................................. 8.875 5.000
1998
First Quarter............................................... $19.750 $6.125
Second Quarter.............................................. 18.000 14.000
Third Quarter............................................... 16.938 7.875
Fourth Quarter.............................................. 18.500 10.094
On March 15, 1999, the closing price of the Company's common stock as
reported by the Nasdaq National Market System was $21.00 per share. There were
approximately 3,400 shareholders of record plus beneficial stockholders of the
Company's common stock as of such date. The Company has not paid cash
dividends on its common stock and does not intend to do so in the foreseeable
future.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to page
13 of the Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The information required by this item is incorporated by reference to pages
10-13 of the Annual Report to Stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to pages
15-24 of the Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the section entitled "Executive Officers" in Part I, Item 1 hereof for
information regarding executive officers.
The information required by this item with respect to directors is
incorporated by reference from the information under the caption of "Election
of Directors," contained in the Company's definitive Proxy Statement to be
filed with the Commission pursuant to Regulation 14A in connection with the
1999 Annual Meeting (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation," which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management," which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions is
set forth in the Proxy Statement under the heading "Certain Transactions,"
which information is incorporated herein by reference.
19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Annual Report to Stockholders on
Form 10-K:
1. Financial Statements: The financial statements of Hollis-Eden
Pharmaceuticals are included in the Annual Report, Exhibit 13.1
2. Financial Statement Schedules: Financial statement schedules required
under the related instructions are not applicable for the three years
ended December 31, 1998, and have therefore been omitted.
3. Exhibits: The exhibits which are filed with this Report or which are
incorporated herein by reference are set forth in the Exhibit Index on
page E-1.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of fiscal
1998.
20
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 29, 1999.
HOLLIS-EDEN PHARMACEUTICALS, INC.
By:/s/ Richard B. Hollis
----------------------------------
RICHARD B. HOLLIS,
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints RICHARD B. HOLLIS and ROBERT W. WEBER, and each
of them, as his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place, and stead,
in any and all capacities, to sign any and all amendments to this Report, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming that all said attorneys-
in-fact and agents, or any of them or their or his substitute or substituted,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Richard B. Hollis Chairman of the Board of March 29, 1999
____________________________________ Directors, President and
RICHARD B. HOLLIS Chief Executive Officer
/s/ Robert W. Weber Vice President - Controller March 29, 1999
____________________________________ and Secretary (Principal
ROBERT W. WEBER Financial and Accounting
Officer)
/s/ Paul Bagley Director March 5, 1999
____________________________________
PAUL BAGLEY
/s/ Leonard Makowka Director March 11, 1999
____________________________________
LEONARD MAKOWKA
/s/ Brendan R. McDonnell Director March 5, 1999
____________________________________
BRENDAN R. MCDONNELL
/s/ Thomas C. Merigan, Jr. M.D. Chairman of the Scientific March 10, 1999
____________________________________ Advisory Board and Director
THOMAS C. MERIGAN, JR. M.D.
/s/ William H. Tilley Director March 19, 1999
____________________________________
WILLIAM H. TILLEY
/s/ Salvatore J. Zizza Director March 12, 1999
____________________________________
SALVATORE J. ZIZZA
21
APPENDIX E
HOLLIS-EDEN PHARMACEUTICALS, INC.
ANNUAL REPORT ON FORM 10-K
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 4.1 to Registrant's Registration
Statement on Form S-4 (No. 333-18725), as amended (the "Form S-4" )).
3.2 Bylaws of Registrant (incorporated by reference to Exhibit 4.2 to the
Form S-4).
10.1 Registrant's 1997 Incentive Stock Option Plan (the "Option Plan")
(incorporated by reference to Exhibit 10.3 to the Form S-4).
10.2 Forms of Incentive Stock Options and Nonstatutory Stock Options under
the Option Plan (incorporated by reference to Exhibit 10.5 to the Form
S-4).
10.3 Employment Agreement by and between Registrant and Richard B. Hollis
dated November 1, 1996 (incorporated by reference to Exhibit 10.6 to
the Form S-4).
10.4 Employment Agreement by and between Registrant and Terren S. Peizer
dated February 5, 1997 (incorporated by reference to Exhibit 10.11 to
the Form S-4).
10.5 Amendment to Employment Agreement by and between Registrant and Terren
S. Peizer dated April 1, 1997 (incorporated by reference to Exhibit
10.1 to Registrant's Current Report on Form 8-K dated March 26, 1997).
10.6 License Agreement by and among Registrant, Colthurst Limited and
Patrick T. Prendergast, Ph.D. dated May 18, 1994, including all
amendments thereto (incorporated by reference to Exhibit 10.7 to the
Form S-4).
10.7 License Agreement by and among Registrant, Edenland, Inc. and Patrick
T. Prendergast, Ph.D. dated August 25, 1994, including all amendments
thereto (incorporated by reference to Exhibit 10.8 to the Form S-4).
10.8 Research, Development and Option Agreement by and among Registrant,
Edenland, Inc. and Patrick T. Prendergast, Ph.D. dated August 25,
1994, including all amendments thereto (incorporated by reference to
Exhibit 10.9 to the Form S-4).
10.9 Employment Agreement by and between Registrant and Robert W. Weber
dated March 16, 1996.
13.1 The excerpts from the Annual Report to the Stockholders for the fiscal
year ended December 31, 1998.
23.1 Consent of BDO Seidman, LLP.
24.1 Power of Attorney. Reference is made to signature page.
27 Financial Data Schedule (filed electronically only).
E-1