AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 24, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
___________________
INITIAL ACQUISITION CORP.
(Exact name of registrant as specified in its charter)
Delaware 6778 (a blank check company) 13-3197002
(Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation) Classification Code Number) Identification
Number)
810 Seventh Avenue
New York, New York 10019
(212) 333-2620
(Address, including zip code, and telephone
number, including area code, of Registrant's
Principal Executive Offices)
Salvatore J. Zizza, Chairman and President
810 Seventh Avenue
New York, New York 10019
(212) 333-2620
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
___________________
with a copy to:
Leonard Gubar, Esq.
Reid & Priest LLP
40 West 57th Street
New York, New York 10019
(212) 603-2000
___________________
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the Registration Statement becomes effective and
the consummation of the Merger (as defined below).
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance
with Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF EACH AMOUNT TO PROPOSED MAXIMUM
CLASS OF BE MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE OFFERING REGISTRATION
REGISTERED (1) PER SHARE(2) PRICE(2) FEE(2)
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Common Stock,
$.01 par
value per 7,190,654 Not
share shares Applicable $73,272,764 $22,203
==========================================================================
(1) Represents the number of shares of common stock, $.01 par value per
share (the "IAC Common Stock"), (i) issuable by the Registrant upon
consummation of the merger (the "Merger") of Hollis-Eden, Inc. with
and into the Registrant and (ii) underlying certain warrants and
options to be issued by the Registrant in connection with the Merger.
(2) Pursuant to Rules 457(f)(1) and 457(c) of the Securities Act of 1933,
as amended, the registration fee was computed on the basis of the
average of the closing bid and asked prices per share of IAC Common
Stock on December 20, 1996, as reported on the OTC Electronic Bulletin
Board of the National Association of Securities Dealers, Inc.
($10.19).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND
EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
===========================================================================
<PAGE>
CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY
PRELIMINARY COPIES
INITIAL ACQUISITION CORP.
810 SEVENTH AVENUE
NEW YORK, NEW YORK 10019
, 1996
Dear Stockholder:
You are cordially invited to attend a Special Meeting of
Stockholders of Initial Acquisition Corp., a Delaware corporation ("IAC"),
to be held on . , 1997 at 10:00 a.m., local time, at . , New York, New
York . (the "Meeting").
At this important Meeting, you will be asked to consider and vote
upon proposals to:
(1) Approve and adopt a certain Agreement and Plan of Merger (the
"Merger Agreement"), dated as of November 1, 1996, among IAC,
Hollis-Eden, Inc., a Delaware corporation ("Hollis-Eden"), Mr.
Salvatore J. Zizza and Mr. Richard B. Hollis, providing for,
among other things, (i) the merger of Hollis-Eden with and into
IAC, with IAC being the surviving corporation (the "Surviving
Corporation") to the merger (the "Merger") and (ii) the issuance
to the stockholders of Hollis-Eden and to the holders of warrants
and options to acquire Hollis-Eden capital stock as a result of
the Merger of (a) an aggregate of 4,911,004 shares of common
stock, $.01 par value per share, of the Surviving Corporation
(the "Surviving Corporation Common Stock"), subject to possible
adjustment, (b) warrants to purchase an aggregate of 1,501,603
shares of Surviving Corporation Common Stock upon the same terms
as currently outstanding Hollis-Eden warrants and (c) options to
purchase an aggregate of 778,047 shares of Surviving Corporation
Common Stock upon the same terms as currently outstanding Hollis-
Eden options, in exchange for all of the issued and outstanding
capital stock of Hollis-Eden;
(2) Elect six directors to hold office effective upon the
consummation of the Merger; and
(3) Approve and adopt IAC's 1996 Incentive Stock Option Plan.
Upon the consummation of the Merger, the Surviving Corporation
will change its name to Hollis-Eden Pharmaceuticals, Inc. and the business
of the Surviving Corporation will be that of Hollis-Eden immediately prior
to the Merger.
Stockholders have certain redemption and appraisal rights in
connection with the Merger. A detailed description of the Merger and such
rights is set forth in the accompanying Joint Proxy Statement/Prospectus
(the "Joint Proxy Statement/Prospectus"). Please review the Joint Proxy
Statement/Prospectus carefully with respect to your choices.
THE BOARD OF DIRECTORS OF IAC HAS UNANIMOUSLY APPROVED THE MERGER AND
THE OTHER PROPOSALS TO BE VOTED UPON AT THE MEETING AND UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER AND SUCH OTHER
PROPOSALS. THE BOARD OF DIRECTORS OF IAC BELIEVES THAT THE MERGER IS FAIR
TO, AND IN THE BEST INTERESTS OF, IAC AND IAC'S STOCKHOLDERS.
Whether or not you are able to attend the Meeting, please
complete, sign and date the enclosed proxy and return it in the enclosed
envelope as soon as possible. Proxies are revocable, either in writing at
any time prior to the Meeting or at the Meeting prior to voting, or by
voting at the Meeting. Your prompt cooperation is greatly appreciated.
Regardless of the number of shares of IAC Common Stock you own, your vote
is important.
Very truly yours,
Salvatore J. Zizza
Chairman of the Board and President
<PAGE>
INITIAL ACQUISITION CORP. PRELIMINARY COPIES
810 SEVENTH AVENUE
NEW YORK, NEW YORK 10019
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON . , 1997
NOTICE IS HEREBY GIVEN that a Special Meeting of the stockholders of
Initial Acquisition Corp. a Delaware corporation ("IAC"), will be held at
10:00 a.m., local time, on . , 1997 at . , New York, New York . (the
"Meeting") for the following purposes:
(1) To approve and adopt a certain Agreement and Plan of Merger (the
"Merger Agreement"), dated as of November 1, 1996, among IAC,
Hollis-Eden, Inc., a Delaware corporation ("Hollis-Eden"), Mr.
Salvatore J. Zizza and Mr. Richard B. Hollis, providing for,
among other things, (i) the merger of Hollis-Eden with and into
IAC, with IAC being the surviving corporation (the "Surviving
Corporation") to the merger (the "Merger") and (ii) the issuance
to the stockholders of Hollis-Eden and to the holders of warrants
and options to acquire Hollis-Eden capital stock as a result of
the Merger of (a) an aggregate of 4,911,004 shares of common
stock, $.01 par value per share, of the Surviving Corporation
(the "Surviving Corporation Common Stock"), subject to possible
adjustment, (b) warrants to purchase an aggregate of 1,501,603
shares of Surviving Corporation Common Stock upon the same terms
as currently outstanding Hollis-Eden warrants and (c) options to
purchase an aggregate of 778,047 shares of Surviving Corporation
Common Stock upon the same terms as currently outstanding Hollis-
Eden options, in exchange for all of the issued and outstanding
capital stock of Hollis-Eden;
(2) To elect six directors to hold office effective upon the
consummation of the Merger;
(3) To approve and adopt IAC's 1996 Incentive Stock Option Plan; and
(4) To transact such further or other business as may properly come
before the Meeting or any adjournments or postponements thereof.
Upon the consummation of the Merger, the Surviving Corporation
will change its name to Hollis-Eden Pharmaceuticals, Inc. and the business
of the Surviving Corporation will be that of Hollis-Eden immediately prior
to the Merger.
A copy of the Merger Agreement is attached to the accompanying
Joint Proxy Statement/Prospectus as Appendix A and is incorporated herein
by reference. STOCKHOLDER APPROVAL AND ADOPTION OF THE MERGER AGREEMENT
WILL RESULT IN A CHANGE OF BOTH THE MAJORITY EQUITY OWNERSHIP AND
MANAGEMENT OF IAC AS WELL AS THE BUSINESS OF IAC.
Only IAC stockholders of record at the close of business on . ,
1996 (the "Record Date") are entitled to receive notice of and to vote at
the Meeting and any adjournments or postponements thereof. Holders of
shares of IAC common stock, $.01 par value per share (the "IAC Common
Stock"), are entitled to one vote on each matter considered and voted on at
the Meeting for each share of IAC Common Stock held of record as of the
close of business on the Record Date.
The affirmative vote of two-thirds of the outstanding shares of
IAC Common Stock voting at the Meeting, either in person or by proxy, is
necessary to approve and adopt the Merger Agreement and the transactions
contemplated thereby. All holders of IAC Common Stock prior to IAC's
initial public offering (the "IPO") in May 1995 (the "Initial IAC
<PAGE>
Stockholders") are obligated to vote their respective shares of IAC Common
Stock in accordance with the vote of the majority in interest of all shares
voted by all other holders of IAC Common Stock (the "IAC Non-Affiliate
Stockholders") with respect to the Merger Agreement. The affirmative vote
of the holders of a plurality of the outstanding shares of IAC Common Stock
voting is required for the election of each director. The affirmative vote
of a majority of the outstanding shares of IAC Common Stock voting is
required for the approval and adoption of the IAC 1996 Incentive Stock
Option Plan.
IF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY
ARE NOT APPROVED BY THE REQUISITE VOTE, THE MERGER AGREEMENT WILL BE
TERMINATED AND THE MERGER WILL BE ABANDONED. IN SUCH EVENT, THE PROPOSAL
TO ADOPT THE IAC 1996 INCENTIVE STOCK OPTION PLAN WILL NOT BE IMPLEMENTED
EVEN IF SUCH PROPOSAL IS APPROVED BY THE REQUISITE VOTE.
Each of the IAC Non-Affiliate Stockholders (and each Initial IAC
Stockholder who (i) participated in the February 1993 private placement of
IAC securities and (ii) purchased shares of IAC Common Stock in the open
market after the IPO (the "After Acquired Stock"), but only to the extent
of the After Acquired Stock) has the right (the "Redemption Right") to
elect to have any or all of his or her shares of IAC Common Stock redeemed
for $[10,78] per share (the "Redemption Value"), by indicating such
election on his or her proxy card and depositing such proxy card in the
United States mail postmarked within 30 calendar days of the mailing of
this Joint Proxy Statement/Prospectus (such 30 calendar day period being
hereinafter referred to as the "Redemption Period"). The Redemption Value
has been calculated by dividing (a) the amount of the proceeds of IAC held
in the escrow account (including interest thereon) established in
connection with the IPO as of the Record Date by (b) the number of shares
of IAC Common Stock held by the IAC Non-Affiliate Stockholders as of the
Record Date. If IAC Non-Affiliate Stockholders elect to redeem 15% or more
of their shares of IAC Common Stock within the Redemption Period, IAC will
not proceed with the Merger and will not redeem such shares. If IAC Non-
Affiliate Stockholders elect to redeem less than 15% of their shares of IAC
Common Stock within the Redemption Period, and assuming that IAC otherwise
satisfies the required conditions for the Merger, IAC may proceed with the
Merger, but will be required to redeem the shares of IAC Common Stock
requested by the IAC Non-Affiliate Stockholders at their Redemption Value
upon the consummation of the Merger. An IAC Non-Affiliate Stockholder may
exercise his or her Redemption Right only if he or she expressly votes
against the Merger within the Redemption Period. IAC Non-Affiliate
Stockholders may not exercise their Redemption Rights if they are seeking
their appraisal rights. An IAC Non-Affiliate Stockholder who votes against
the Merger after the Redemption Period will not be entitled to have any of
his or her shares redeemed. Any IAC Non-Affiliate Stockholder returning a
proxy card which expressly votes for the Merger or returning an executed
proxy card which fails to indicate how his or her shares should be voted,
shall be deemed to have waived his or her Redemption Right. A proxy card
which indicates that an IAC Non-Affiliate Stockholder expressly abstains
from voting on the proposal to approve the Merger shall not be deemed an
exercise of such IAC Non-Affiliate Stockholder's Redemption Rights. AN IAC
NON-AFFILIATE STOCKHOLDER WHO SELLS ANY OF HIS OR HER SHARES OF IAC COMMON
STOCK AFTER ELECTING TO HAVE SUCH SHARES REDEEMED SHALL FORFEIT THE RIGHT
TO RECEIVE THE REDEMPTION VALUE WITH RESPECT TO SUCH SHARES.
A holder of IAC Common Stock may dissent from the Merger and, if
the Merger is consummated, such holder shall receive payment of the fair
value of his or her shares in cash if the holder files with IAC a written
demand for appraisal prior to the vote with respect to the Merger being
taken at the Meeting and does not vote his or her shares of IAC Common
Stock in favor of the Merger. Holders of IAC Common Stock are also
entitled to certain redemption rights as described in the Joint Proxy
Statement/Prospectus. For further discussion of both appraisal rights and
redemption rights, see "GENERAL INFORMATION - IAC Special Meeting;
Redemption Rights" and " - Appraisal Rights" in the accompanying Joint
Proxy Statement/Prospectus.
A complete list of the stockholders entitled to vote at the
Meeting shall be open to the examination of any stockholder, for any
purpose germane to the Meeting, at the offices of IAC, during ordinary
business hours, for a period of ten days prior to the Meeting.
(ii)
<PAGE>
Whether or not you plan to attend the Meeting, please complete,
date and sign the accompanying proxy card and mail it promptly in the
enclosed pre-addressed envelope, which requires no postage if mailed in the
United States. Any holder of IAC Common Stock who executes and returns a
proxy card may revoke such proxy at any time before it is voted by (i)
notifying in writing the Secretary of IAC at 810 Seventh Avenue, New York,
New York 10019, (ii) granting a subsequent proxy or (iii) appearing in
person and voting at the Meeting. Attendance at the Meeting will not in
and of itself constitute revocation of a proxy.
THE BOARD OF DIRECTORS OF IAC UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" THE ADOPTION OF THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY.
BY ORDER OF THE BOARD OF DIRECTORS
Salvatore J. Zizza
Chairman of the Board and President
New York, New York
. , 1996
(iii)
<PAGE>
HOLLIS-EDEN, INC. PRELIMINARY COPIES
808 SW Third Avenue, Suite 540
Portland, Oregon 97204
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON . , 1997
NOTICE IS HEREBY GIVEN that a Special Meeting of the stockholders of
Hollis-Eden, Inc., a Delaware corporation ("Hollis-Eden"), will be held at
10:00 a.m., local time, on . , 1997 at . , Portland, Oregon . (the
"Meeting") for the following purposes:
(1) To approve and adopt a certain Agreement and Plan of Merger (the
"Merger Agreement"), dated as of November 1, 1996, among Initial
Acquisition Corp., a Delaware corporation ("IAC"), Hollis-Eden,
Mr. Salvatore J. Zizza and Mr. Richard B. Hollis, providing for,
among other things (i) the merger of Hollis-Eden with and into
IAC, with IAC being the surviving corporation (the "Surviving
Corporation") to the merger (the "Merger") and (ii) the issuance
to the stockholders of Hollis-Eden and to the holders of warrants
and options to acquire Hollis-Eden capital stock as a result of
the Merger of (a) an aggregate of 4,911,004 shares of common
stock, $.01 par value per share, of the Surviving Corporation
(the "Surviving Corporation Common Stock"), subject to possible
adjustment, (b) warrants to purchase an aggregate of 1,501,603
shares of Surviving Corporation Common Stock upon the same terms
as currently outstanding Hollis-Eden warrants and (c) options to
purchase an aggregate of 778,047 shares of Surviving Corporation
Common Stock upon the same terms as currently outstanding Hollis-
Eden options, in exchange for all of the issued and outstanding
capital stock of Hollis-Eden; and
(2) To transact such further or other business as may properly come
before the Meeting or any adjournments or postponements thereof.
Upon the consummation of the Merger, the Surviving Corporation
will change its name to Hollis-Eden Pharmaceuticals, Inc. and the business
of the Surviving Corporation will be that of Hollis-Eden immediately prior
to the Merger.
A copy of the Merger Agreement is attached to the accompanying
Joint Proxy Statement/Prospectus as Appendix A and is incorporated herein
by reference.
Only Hollis-Eden stockholders of record at the close of business
on . , 1996 (the "Record Date") are entitled to receive notice of and to
vote at the Meeting and any adjournments or postponements thereof.
Holders of shares of Hollis-Eden common stock, $.0001 par value per share
(the "Hollis-Eden Common Stock"), are entitled to one vote on each matter
considered and voted on at the Meeting for each share of Hollis-Eden Common
Stock held of record as of the close of business on the Record Date.
The affirmative vote of a majority of the outstanding shares of
Hollis-Eden Common Stock voting at the Meeting, either in person or by
proxy, is necessary to approve and adopt the Merger Agreement and the
transactions contemplated thereby.
A holder of Hollis-Eden Common Stock may dissent from the Merger
and, if the Merger is consummated, such holder shall receive payment of the
fair value of his or her shares in cash if the holder files with Hollis-
Eden a written demand for appraisal prior to the vote with respect to the
Merger being taken at the Meeting and does not vote his or her shares of
Hollis-Eden Common Stock in favor of the Merger. For further discussion of
appraisal rights, see "GENERAL INFORMATION Appraisal Rights" in the
accompanying Joint Proxy Statement/Prospectus.
<PAGE>
Whether or not you plan to attend the Meeting, please complete,
date and sign the accompanying proxy card and mail it promptly in the
enclosed pre-addressed envelope, which requires no postage if mailed in the
United States. Any holder of Hollis-Eden Common Stock who executes and
returns a proxy card may revoke such proxy at any time before it is voted
by (i) notifying in writing the Secretary of Hollis-Eden at 808 SW Third
Avenue, Suite 540, Portland, Oregon 97204, (ii) granting a subsequent proxy
or (iii) appearing in person and voting at the Meeting. Attendance at the
Meeting will not in and of itself constitute revocation of a proxy.
THE BOARD OF DIRECTORS OF HOLLIS-EDEN UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" THE ADOPTION OF THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY.
BY ORDER OF THE BOARD OF DIRECTORS
Richard B. Hollis
Chairman of the Board, President and Chief
Executive Officer
Portland, Oregon
. , 1996
(ii)
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 24, 1996
PRELIMINARY COPIES
PROSPECTUS
----------
INITIAL ACQUISITION CORP.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
JOINT PROXY STATEMENT
---------------------
INITIAL ACQUISITION CORP. HOLLIS-EDEN, INC.
Special Meeting of Stockholders Special Meeting of Stockholders
to be Held on . , 1997 to be Held on . , 1997
-------------------------
This Joint Proxy Statement/Prospectus is being furnished to holders
(the "IAC Stockholders") of common stock, par value $.01 per share (the
"IAC Common Stock"), of Initial Acquisition Corp., a Delaware corporation
("IAC"), in connection with the solicitation of proxies by the IAC Board of
Directors for use at the Special Meeting of Stockholders of IAC to be held
at 10:00 a.m., local time, on . , 1997, at . , New York, New York . ,
and at any adjournments or postponements thereof (the "IAC Special
Meeting"). The principal purpose of the IAC Special Meeting is to consider
and vote upon a proposal to approve the Agreement and Plan of Merger, dated
as of November 1, 1996 (the "Merger Agreement"), by and among IAC, Hollis-
Eden, Inc., a Delaware corporation ("Hollis-Eden"), Mr. Salvatore J. Zizza
and Mr. Richard B. Hollis, which provides for, among other things, the
merger of Hollis-Eden with and into IAC, with IAC being the surviving
corporation (the "Surviving Corporation") to the Merger (the "Merger").
Upon the consummation of the Merger, Hollis-Eden will cease to exist as a
separate corporation. At the time the Merger becomes effective, each
outstanding share of Hollis-Eden common stock, $.0001 par value per share
(the "Hollis-Eden Common Stock"), shall cease to be outstanding and shall
be converted into the right to receive one share of IAC Common Stock. In
addition, all outstanding warrants and options to acquire shares of Hollis-
Eden Common Stock (collectively, the "Hollis-Eden Warrants and Options")
shall cease to be outstanding and shall be converted into the right to
receive warrants and options, as the case may be, to acquire the same
number of shares of Surviving Corporation Common Stock (collectively, the
"Merger Warrants and Options") upon the same terms as the corresponding
Hollis-Eden Warrants and Options. Upon the consummation of the Merger, the
Surviving Corporation will change its name to Hollis-Eden Pharmaceuticals,
Inc. and the business of the Surviving Corporation will be that of Hollis-
Eden immediately prior to the Merger. See "SUMMARY," "THE MERGER," and
ANNEX A to this Joint Proxy Statement/Prospectus.
This Joint Proxy Statement/Prospectus is also being furnished to
holders of Hollis-Eden Common Stock (the "Hollis-Eden Stockholders") in
connection with the solicitation of proxies by the Hollis-Eden Board of
Directors for use at the Special Meeting of Stockholders of Hollis-Eden to
be held at 10:00 a.m., local time, on . , 1997, at . , Portland, Oregon,
and at any adjournments or postponements thereof (the "Hollis-Eden Special
Meeting"). The purpose of the Hollis-Eden Special Meeting is to consider
and vote upon a proposal to approve the Merger and the Merger Agreement.
See "SUMMARY," "THE MERGER," and ANNEX A to this Joint Proxy
Statement/Prospectus.
This Joint Proxy Statement/Prospectus also constitutes the prospectus
of IAC relating to IAC's issuance of the 4,911,004 shares of Surviving
Corporation Common Stock to the Hollis-Eden Stockholders upon the
consummation of the Merger (and the 2,279,650 shares of Surviving
Corporation Common Stock underlying the Merger Warrants and Options
issuable in connection with the Merger).
Upon the consummation of the Merger, the Hollis-Eden Stockholders will
collectively acquire approximately 85% of the outstanding Surviving
Corporation Common Stock (without giving effect to the exercise of any
Merger Warrants and Options, outstanding warrants and options to acquire
shares of IAC Common Stock (the "IAC Warrants and Options") or options
granted under IAC's or Hollis-Eden's respective option plans (collectively,
the "Plan Options"), and their designees will comprise five of the six
members of the Surviving Corporation's newly-elected Board of Directors.
Assuming the exercise of all of the outstanding Merger Warrants and Options
and IAC Warrants and Options (but not any Plan Options), the Hollis-Eden
Stockholders would collectively own approximately 74% of the then
outstanding shares of Surviving Corporation Common Stock upon the
consummation of the Merger.
<PAGE>
If the Merger Agreement is approved at each of the IAC and Hollis-Eden
Special Meetings and all of the other conditions to the obligations of the
parties to consummate the Merger are either satisfied or waived,the Merger
will be consummated. A copy of the Merger Agreement is set forth in Annex
A to this Joint Proxy Statement/Prospectus.
It is expected that the Surviving Corporation Common Stock will be
approved for quotation or listing, as the case may be, subject to
consummation of the Merger, on the Nasdaq National Market ("NASDAQ NMS") or
the American Stock Exchange ("AMEX").
ANY HOLDER OF IAC COMMON STOCK OR HOLLIS-EDEN COMMON STOCK WHO: (I)
FILES WITH IAC OR HOLLIS-EDEN, AS THE CASE MAY BE, A WRITTEN DEMAND FOR
APPRAISAL OF HIS OR HER SHARES OF IAC COMMON STOCK OR HOLLIS-EDEN COMMON
STOCK, AS THE CASE MAY BE, PRIOR TO THE VOTE WITH RESPECT TO THE MERGER
AGREEMENT BEING TAKEN AT THE IAC SPECIAL MEETING OR THE HOLLIS-EDEN SPECIAL
MEETING, AS THE CASE MAY BE, AND (II) DOES NOT VOTE FOR THE APPROVAL OF THE
MERGER AGREEMENT, SHALL BE ENTITLED TO THE PAYMENT OF FAIR VALUE OF SUCH
SHARES UNDER THE APPLICABLE PROVISIONS OF THE GENERAL CORPORATION LAW OF
THE STATE OF DELAWARE (THE "DGCL"), AS SET FORTH IN ANNEX E TO THIS JOINT
PROXY STATEMENT/PROSPECTUS. HOLDERS OF IAC COMMON STOCK ARE ALSO ENTITLED
TO CERTAIN REDEMPTION RIGHTS AS DESCRIBED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. FOR FURTHER DISCUSSION OF BOTH APPRAISAL RIGHTS AND
REDEMPTION RIGHTS, SEE "GENERAL INFORMATION - IAC SPECIAL MEETING;
REDEMPTION RIGHTS" AND "-APPRAISAL RIGHTS."
No person is authorized to give any information or to make any
representation other than those contained in this Joint Proxy
Statement/Prospectus, and if given or made, such information or
representation should not be relied upon as having been authorized. This
Joint Proxy Statement/Prospectus does not constitute an offer to sell or a
solicitation of an offer to purchase, the securities offered by this Joint
Proxy Statement/Prospectus, or the solicitation of a proxy, in any
jurisdiction to or from any person to whom or from whom it is unlawful to
make such offer, solicitation of an offer or proxy solicitation in such
jurisdiction. Neither the delivery of this Joint Proxy
Statement/Prospectus nor any distribution of securities pursuant to this
Joint Proxy Statement/Prospectus shall, under any circumstances, create any
implication that there has been no change in the information set forth
herein or in the affairs of IAC or Hollis-Eden since the date of this Joint
Proxy Statement/Prospectus or that the information herein is correct as of
any time subsequent to its date. However, if any material change occurs
during the period that this Joint Proxy Statement/Prospectus is required to
be delivered, this Joint Proxy Statement/Prospectus will be amended or
supplemented as required. All information regarding IAC in this Joint
Proxy Statement/Prospectus has been supplied by IAC, and all information
regarding Hollis-Eden has been supplied by Hollis-Eden.
OWNERSHIP OF SURVIVING CORPORATION COMMON STOCK AND THE BUSINESS TO BE
CONDUCTED BY THE SURVIVING CORPORATION SUBSEQUENT TO THE CONSUMMATION OF
THE MERGER INVOLVE CERTAIN ELEMENTS OF RISK DISCUSSED UNDER "RISK FACTORS"
LOCATED ON PAGE 16 OF THIS JOINT PROXY STATEMENT/PROSPECTUS.
THE SECURITIES TO WHICH THIS JOINT PROXY STATEMENT/PROSPECTUS RELATE HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
BOARD PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------------
The last reported sale price of IAC Common Stock on the OTC Electronic
Bulletin Board of the National Association of Securities Dealers, Inc. (the
"NASD") on December . , 1996 was $ . per share.
The date of this Joint Proxy Statement/Prospectus is . , 1996, and it
is first being mailed or otherwise delivered to IAC Stockholders and
Hollis-Eden Stockholders on or about . , 1996.
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<PAGE>
AVAILABLE INFORMATION
IAC is subject to the reporting and informational requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder (the "Exchange Act"), and, in accordance therewith, files
reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy and
information statements, and other information filed by IAC with the
Commission may be inspected and copied at the principal office of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and should be available at the Commission's
Regional Offices at 7 World Trade Center, New York, New York 10048, and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the Commission
maintains a site on the World Wide Web at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
This Joint Proxy Statement/Prospectus constitutes a part of a
Registration Statement on Form S-4 (together with any amendments thereto,
the "Registration Statement"), which has been filed by IAC with the
Commission under the Securities Act of 1933, as amended, and the rules and
regulations thereunder (the "Securities Act"). This Joint Proxy
Statement/Prospectus omits certain information contained in the
Registration Statement, and reference is hereby made to the Registration
Statement and to the exhibits thereto for further information with respect
to IAC and the securities to which this Joint Proxy Statement/Prospectus
relates. Statements contained in this Joint Proxy Statement/Prospectus
concerning the provisions of certain documents filed as exhibits to the
Registration Statement are necessarily brief descriptions thereof, and are
not necessarily complete, and each such statement is qualified in its
entirety by reference to the full text of such document.
FORWARD LOOKING STATEMENTS
THIS JOINT PROXY STATEMENT/PROSPECTUS CONTAINS AND INCORPORATES BY
REFERENCE CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO THE
RESULTS OF OPERATIONS AND BUSINESS OF IAC, HOLLIS-EDEN AND THE SURVIVING
CORPORATION. THESE FORWARD LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND
UNCERTAINTIES. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE CONTEMPLATED, PROJECTED, FORECAST, ESTIMATED OR BUDGETED IN SUCH
FORWARD LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE FOLLOWING
POSSIBILITIES: (i) FAILURE TO SUCCESSFULLY DEVELOP COMMERCIALLY ACCEPTABLE
PRODUCTS; (ii) INABILITY TO CARRY OUT RESEARCH AND DEVELOPMENT PLANS; (iii)
LOSS OF KEY EXECUTIVES; (iv) HEIGHTENED COMPETITION, INCLUDING
SPECIFICALLY, THE INTENSIFICATION OF PRICE COMPETITION, THE ENTRY OF NEW
COMPETITORS AND THE DEVELOPMENT OF NEW PRODUCTS BY NEW AND EXISTING
COMPETITORS; (v) GENERAL ECONOMIC AND BUSINESS CONDITIONS WHICH ARE LESS
FAVORABLE THAN EXPECTED; AND (vi) UNANTICIPATED CHANGES IN PHARMACEUTICAL
INDUSTRY TRENDS. SEE "RISK FACTORS," "HOLLIS-EDEN'S MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
AND "HOLLIS-EDEN'S BUSINESS."
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<PAGE>
TABLE OF CONTENTS
PAGE
----
AVAILABLE INFORMATION . . . . . . -3-
FORWARD LOOKING STATEMENTS . . . -3-
SUMMARY . . . . . . . . . . . . . -5- ANNEX A
COMPARATIVE PER SHARE DATA . . . -14- Agreement and Plan of Merger
SELECTED HISTORICAL FINANCIAL
INFORMATION . . . . . . . . . . -15-
ANNEX B
SELECTED PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION -16- Form of Certificate of Merger
(which includes the form of
RISK FACTORS . . . . . . . . . . -17- Certificate of Incorporation
of the Surviving Corporation)
GENERAL INFORMATION . . . . . . . -24-
MARKET PRICE OF IAC'S
SECURITIES AND DIVIDEND
INFORMATION . . . . . . . . . . -30- ANNEX C
THE MERGER . . . . . . . . . . . -33- Form of By-Laws of the
Surviving Corporation
IAC SELECTED HISTORICAL ANNEX D
FINANCIAL INFORMATION . . . . . -46-
IAC 1996 Incentive Stock
Option Plan
HOLLIS-EDEN SELECTED
HISTORICAL ANNEX E
FINANCIAL INFORMATION . . . . . -47-
Appraisal Rights Provisions
of the Delaware General
UNAUDITED PRO FORMA FINANCIAL Corporation Law
STATEMENTS OF INITIAL
ACQUISITION CORP. AND
HOLLIS-EDEN . . . . . . . . . . -48-
HOLLIS-EDEN'S MANAGEMENT'S
DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS . . . . . -51-
IAC'S MANAGEMENT'S DISCUSSION
AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . -53-
HOLLIS-EDEN'S BUSINESS . . . . . -54-
IAC'S BUSINESS . . . . . . . . . -64-
MANAGEMENT OF IAC . . . . . . . . -66-
PERFORMANCE GRAPH . . . . . . . . -67-
PROPOSAL TO ELECT
DIRECTORS OF
THE SURVIVING CORPORATION . . . -68-
SECURITY OWNERSHIP OF IAC
PRIOR TO THE MERGER . . . . . . -71-
SECURITY OWNERSHIP OF
THE SURVIVING
CORPORATION AFTER
THE MERGER . . . . . . . . . . -71-
PROPOSED MANAGEMENT OF
THE SURVIVING CORPORATION . . . -73-
PROPOSAL TO APPROVE AND ADOPT
THE 1996 IAC INCENTIVE
STOCK OPTION PLAN . . . . . . . -76-
DESCRIPTION OF IAC'S SECURITIES . -81-
COMPARISON OF STOCKHOLDERS'
RIGHTS . . . . . . . . . . . . -82-
TRANSFER AGENTS AND REGISTRARS . -83-
LEGAL MATTERS . . . . . . . . . . -83-
EXPERTS . . . . . . . . . . . . . -83-
INDEX TO FINANCIAL STATEMENTS . . F-1
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<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere
in this Joint Proxy Statement/Prospectus. This summary is not intended to
be a complete description of the matters covered in this Joint Proxy
Statement/Prospectus and is subject to and qualified in its entirety by
reference to the more detailed information contained elsewhere in this
Joint Proxy Statement/Prospectus, including the Annexes hereto, and in the
documents incorporated by reference in this Joint Proxy
Statement/Prospectus. The Merger Agreement is set forth in ANNEX A to this
Joint Proxy Statement/Prospectus and reference is made thereto for a
complete description of the terms of the Merger. Stockholders are urged to
read carefully the entire Joint Proxy Statement/Prospectus, including the
Annexes.
PARTIES TO THE MERGER
Hollis-Eden. Hollis-Eden is a development stage pharmaceutical
company engaged in developing therapeutic and/or preventative
pharmaceutical agents for the treatment of a number of targeted disease
states caused by viral, bacterial, parasitic or fungal infections,
including HIV and AIDS. Hollis-Eden believes that certain of its products
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.
Hollis-Eden's development efforts are centered around four proprietary
products (the "Products") developed by and licensed from Patrick T.
Prendergast, Ph.D., and are based upon his research in the area of viral-
caused disorders and therapies. Hollis-Eden is the beneficiary of more than
10 years of extensive research and development with respect to the Products
undertaken by Dr. Prendergast and his affiliates prior to the license of
the Products to Hollis-Eden. Hollis-Eden is currently pursuing approval of
two of the Products, INACTIVIN and REVERSIONEX, with the United States Food
and Drug Administration ("FDA"). Each of these drugs has a different
mechanism of action and Hollis-Eden believes that each may be effectively
used alone. Hollis-Eden believes that INACTIVIN and REVERSIONEX may be
combined to increase their effectiveness to inhibit HIV replication,
strengthen and preserve the immune system, and reduce the viral load in the
infected patients.
Hollis-Eden believes that certain of its Products under development
may produce more effective treatments for HIV and AIDS than drugs currently
being used. The principal drugs currently used to treat HIV and AIDS (e.g.,
AZT, ddl, ddc, d4T and 3TC) are nucleoside analog reverse transcriptase
drugs. Additionally, newer drugs being developed and recently being
introduced are protease inhibitors (e.g., Invirase (saquinavir), Crixivan
(indinavir sulfate) and Novir (ritonavir)). Hollis-Eden 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 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. Because INACTIVIN's antiviral effectiveness is not reliant on a
direct structural interaction with the virus itself, Hollis-Eden believes
that INACTIVIN will inhibit replication of the virus regardless of its
mutation rates. By decreasing the syntheses of viral raw materials in the
cell, INACTIVIN effectively slows and eventually stops the virus production
line. Hollis-Eden further expects that INACTIVIN will decrease the energy
supply for viral synthesis regardless of viral type or strain. Another
disadvantage of currently used drugs is that nucleoside analogs and
protease inhibitors are toxic and may cause severe side effects. INACTIVIN
and REVERSIONEX are not nucleoside analog reverse transcriptase or protease
inhibitors, are derived from naturally occurring substances, and have been
shown in preliminary tests to date to be well-tolerated by humans with
minimal side effects. Furthermore, Hollis-Eden believes that INACTIVIN and
REVERSIONEX will have a longer duration of effectiveness, be more
affordable and require smaller doses and fewer pills to be taken than the
drugs and "cocktails" currently being used.
Hollis-Eden believes that its Products may also be effective in the
treatment of (i) other viral-caused disorders such as hepatitis-C, (ii)
auto-immune diseases such as multiple sclerosis, psoriasis and rheumatoid
arthritis and (iii) bacterial and parasitic diseases such as tuberculosis,
malaria, toxoplasmosis and leishmania.
When and if INACTIVIN or any of the other Products have been approved
for commercial sale, Hollis-Eden plans to market them in the United States.
For international markets, Hollis-Eden 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 Products will be approved for commercial sale
or that any of the foregoing proposed arrangements will be implemented or
prove to be successful.
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<PAGE>
Hollis-Eden is a Delaware corporation which was formed in August 1994,
with executive offices located at 808 SW Third Avenue, Suite 540, Portland,
Oregon 97204, and its telephone number is (503) 226-1277. For additional
information regarding Hollis-Eden, see "--Selected Historical Financial
Information; Hollis-Eden" and "HOLLIS-EDEN'S BUSINESS."
IAC. IAC has been formed to serve as a vehicle to effect a
merger, exchange of capital stock, asset acquisition or other business
combination (a "Business Combination") with an operating business (a
"Target Business"). IAC's business objective has been to effect a Business
Combination with a Target Business which IAC believes has significant
growth potential.
In May 1995, IAC consummated an initial public offering of its
equity securities (the "IPO") from which it derived net proceeds of
approximately $6,300,000. Of the net proceeds from the IPO, $6,000,000
(representing the gross proceeds received from the sale in the IPO of Units
(each Unit comprised of one share of IAC Common Stock and one Class A
Warrant to purchase one share of IAC Common Stock)) together with interest
earned thereon, are currently held in an interest-bearing escrow account
(the "Escrowed Funds") and will be released upon the earlier of the
consummation of a Business Combination in which at least 50% of the
Escrowed Funds are committed to a specific line of business as a result of
such consummation of a Business Combination (including any redemption
payments) or the liquidation of IAC. At the Effective Time of the Merger,
the Escrowed Funds will be released to IAC and all voting agreements
previously in effect with respect to the IAC Common Stock (including those
relating to the approval of a Business Combination by IAC Stockholders)
will terminate.
IAC is a Delaware corporation which was formed in November 1992,
with executive offices located at 810 Seventh Avenue, 27th Floor, New York,
New York 10019, and its telephone number is (212) 333-2620. For additional
information regarding IAC, see "AVAILABLE INFORMATION," "--Selected
Historical Financial Information; IAC" and "IAC'S BUSINESS."
THE IAC SPECIAL MEETING; IAC RECORD DATE; VOTE REQUIRED; RECOMMENDATION
The IAC Special Meeting is scheduled to be held at 10:00 a.m.,
local time, on . , 1997, at . , New York, New York . . At the IAC Special
Meeting, IAC Stockholders will be asked to consider and vote upon the
proposal to approve and adopt the Merger Agreement and the transactions
contemplated thereby, to elect a new slate of six directors as of the
Effective Time, and a proposal to approve and adopt the IAC 1996 Incentive
Stock Option Plan. The Board of Directors of IAC (the "IAC Board") has
fixed the close of business on . , 1996 as the record date (the "IAC Record
Date") for the determination of IAC Stockholders entitled to notice of and
to vote at the IAC Special Meeting. As of the close of business on the IAC
Record Date, there were 833,250 shares of IAC Common Stock outstanding and
entitled to be voted at the IAC Special Meeting. IAC Stockholders are
entitled to one vote on each matter considered and voted on at the IAC
Special Meeting for each share of IAC Common Stock held of record as of the
close of business on the IAC Record Date. See "GENERAL INFORMATION-IAC
Special Meeting."
Vote Required. The presence, either in person or by proxy, of
the holders of a majority of the outstanding shares of IAC Common Stock
entitled to vote at the IAC Special Meeting is necessary to constitute a
quorum at the IAC Special Meeting. The affirmative vote of two-thirds of
the outstanding shares of IAC Common Stock voting at the IAC Special
Meeting, either in person or by proxy, is necessary to approve and adopt
the Merger Agreement and the transactions contemplated thereby. The
affirmative vote of the holders of a plurality of the outstanding shares of
IAC Common Stock voting is required for the election of each director. The
affirmative vote of a majority of the outstanding shares of IAC Common
Stock voting is required for the approval and adoption of the IAC 1996
Incentive Stock Option Plan.
All holders of IAC Common Stock prior to IAC's IPO in May 1995
(the "Initial IAC Stockholders"), which include IAC's directors and
executive officer, collectively holding an aggregate of approximately 28%
of the outstanding shares of IAC Common Stock before giving effect to the
Merger (and without giving effect to the exercise of any Merger Warrants
and Options, IAC Warrants and Options or Plan Options), by reason of their
prior agreement with IAC, will vote their respective shares of IAC Common
Stock with respect to the Merger Agreement in accordance with the vote of
the majority in interest of all other holders of IAC Common Stock (the "IAC
Non-Affiliate Stockholders"). Consequently, if a majority of the
outstanding shares of IAC Common Stock held and voted by IAC Non-Affiliate
Stockholders is voted in favor of the Merger Agreement and the transactions
contemplated thereby, the Initial IAC Stockholders will vote their shares
of IAC Common Stock in favor of the Merger Agreement and the transactions
-6-
<PAGE>
contemplated thereby. If the Merger Agreement and the transactions
contemplated thereby are not approved by the requisite vote, the Merger
Agreement will be terminated and the proposed Merger will be abandoned. In
such event, the proposal to approve and adopt the IAC 1996 Incentive Stock
Option Plan will not be implemented, even if such proposal is approved by
the requisite vote. As of the IAC Record Date, Hollis-Eden, its directors
and executive officers, and their affiliates (except as set forth below),
held no shares of IAC Common Stock. Mr. James D. Bowyer, however, an
employee of Laidlaw Equities, Inc. ("Laidlaw Equities"), and one of the
persons who introduced Hollis-Eden to IAC, beneficially owns, to IAC's
knowledge, 58,800 shares of IAC Common Stock. Laidlaw Equities, which
currently owns warrants to purchase up to 134,100 shares of Hollis-Eden
Common Stock and is entitled to receive warrants to purchase up to an
additional 452,830 shares of Surviving Corporation Common Stock upon the
consummation of the Merger, serves as Hollis-Eden's investment banker.
Mr. J. Paul Bagley, one of Hollis-Eden's directors and a proposed director
of the Surviving Corporation following the Merger, was the Chief Executive
Officer of Laidlaw Equities' parent company until November 1996. See "THE
MERGER - Interests of Certain Persons in the Merger."
In addition, if 15% (approximately 90,000 shares) or more of the
shares of IAC Common Stock held by IAC Non-Affiliate Stockholders
(including After Acquired Stock held by Initial IAC Stockholders) are voted
against the Merger and such holders elect, within the applicable redemption
period, to have at least such number of shares redeemed by IAC, IAC will
not proceed with the Merger or redeem such shares. See "GENERAL
INFORMATION - IAC Special Meeting; Redemption Rights."
Recommendation of the IAC Board of Directors. The Board of Directors
of IAC believes that the Merger is in the best interests of IAC and its
stockholders and has unanimously approved the Merger Agreement and the
consummation of the transactions contemplated thereby. The IAC Board of
Directors unanimously recommends that IAC Stockholders vote FOR adoption of
the Merger Agreement and the consummation of the transactions contemplated
thereby, FOR the election of the new slate of directors and FOR the
proposal to approve and adopt the IAC 1996 Incentive Stock Option Plan. In
deciding to approve the Merger Agreement and the consummation of the
transactions contemplated thereby, IAC's Board of Directors considered a
number of factors, including the terms of the Merger, the future prospects
of Hollis-Eden and relevant business, legal and market factors. See "THE -
MERGER - Recommendations of the Boards of Directors and Reasons for the
Merger; IAC."
THE HOLLIS-EDEN SPECIAL MEETING; HOLLIS-EDEN RECORD DATE; VOTE REQUIRED;
RECOMMENDATION
The Hollis-Eden Special Meeting is scheduled to be held at 10:00 a.m.,
local time, on . , 1997, at . , Portland, Oregon . . At the Hollis-Eden
Special Meeting, Hollis-Eden Stockholders will be asked to consider and
vote upon the proposal to approve and adopt the Merger Agreement and the
transactions contemplated thereby. The Board of Directors of Hollis-Eden
(the "Hollis-Eden Board") has fixed the close of business on . , 1996 as
the record date (the "Hollis-Eden Record Date") for the determination of
Hollis-Eden Stockholders entitled to notice of and to vote at the Hollis-
Eden Special Meeting. As of the close of business on the Hollis-Eden
Record Date, there were 4,911,004 shares of Hollis-Eden Common Stock
outstanding and entitled to be voted at the Hollis-Eden Special Meeting.
Hollis-Eden Stockholders are entitled to one vote on each matter considered
and voted on at the Hollis-Eden Special Meeting for each share of Hollis-
Eden Common Stock held of record as of the close of business on the
Hollis-Eden Record Date. See "GENERAL INFORMATION-Hollis-Eden Special
Meeting."
Vote Required. The presence, either in person or by proxy, of the
holders of a majority of the outstanding shares of Hollis-Eden Common Stock
entitled to vote at the Hollis-Eden Special Meeting is necessary to
constitute a quorum at the Hollis-Eden Special Meeting. The affirmative
vote of a majority of the outstanding shares of Hollis-Eden Common Stock
voting at the Hollis-Eden Special Meeting, either in person or by proxy, is
necessary to approve and adopt the Merger Agreement and the transactions
contemplated thereby. As of the Hollis-Eden Record Date, Hollis-Eden's
directors and executive officers and their affiliates held approximately
71% of the outstanding shares of Hollis-Eden Common Stock entitled to vote
at the Hollis-Eden Special Meeting. In addition, Mr. Richard B. Hollis,
Chairman of the Board of Hollis-Eden and the beneficial owner of
approximately 58% of the outstanding shares of Hollis-Eden Common Stock,
has agreed with IAC to vote all shares of Hollis-Eden Common Stock which he
is entitled to vote at the Hollis-Eden Special Meeting in favor of the
Merger Agreement and the transactions contemplated thereby. As of the
Hollis-Eden Record Date, IAC, its directors and executive officer, and
their affiliates, held no shares of Hollis-Eden Common Stock.
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<PAGE>
Recommendation of the Hollis-Eden Board of Directors. The Board of
Directors of Hollis-Eden believes that the Merger is in the best interests
of Hollis-Eden and its stockholders and has unanimously approved the Merger
Agreement and the consummation of the transactions contemplated thereby.
The Hollis-Eden Board of Directors unanimously recommends that Hollis-Eden
Stockholders vote FOR adoption of the Merger Agreement and the consummation
of the transactions contemplated thereby. In deciding to approve the
Merger Agreement and the consummation of the transactions contemplated
thereby, Hollis-Eden's Board of Directors considered a number of factors,
including the terms of the Merger, the financial condition of IAC and
Hollis-Eden, the future prospects and capital requirements of Hollis-Eden
and relevant business, legal and market factors. See "THE
MERGER-Recommendations of the Boards of Directors and Reasons for the
Merger; Hollis-Eden."
THE MERGER
General. The Merger Agreement provides that Hollis-Eden shall merge
with and into IAC, with IAC being the Surviving Corporation to the Merger.
Upon the consummation of the Merger, Hollis-Eden will cease to exist as a
separate corporation. At the time the Merger becomes effective, each
outstanding share of Hollis-Eden Common Stock shall cease to be outstanding
and shall be converted into the right to receive one share of Surviving
Corporation Common Stock. In addition, all outstanding Hollis-Eden
Warrants and Options shall cease to be outstanding and shall be converted
into the right to receive the same number of Merger Warrants and Options
upon the same terms as the corresponding Hollis-Eden Warrants and Options.
As of the Hollis-Eden Record Date, 4,911,004 shares of Hollis-Eden Common
Stock were outstanding and an aggregate of 2,279,650 shares of Hollis-Eden
Common Stock were underlying the Hollis-Eden Warrants and Options.
Consequently, upon the consummation of the Merger, the Surviving
Corporation will issue an aggregate of 4,911,004 shares of Surviving
Corporation Common Stock to the Hollis-Eden Stockholders and Merger
Warrants and Options entitling the holders thereof to acquire an aggregate
of 2,279,650 shares of Surviving Corporation Common Stock. None of the
outstanding shares of IAC Common Stock will be converted or otherwise
modified in the Merger and all of such shares will continue to be
outstanding capital stock of the Surviving Corporation after the Effective
Time.
Upon the consummation of the Merger, the Surviving Corporation will
change its name to Hollis-Eden Pharmaceuticals, Inc. and the business of
the Surviving Corporation will be that of Hollis-Eden immediately prior to
the Merger.
Upon the consummation of the Merger, the Hollis-Eden Stockholders will
collectively acquire approximately 85% of the outstanding Surviving
Corporation Common Stock, without giving effect to the exercise of any
Merger Warrants and Options, IAC Warrants and Options or Plan Options, and
their designees will comprise five of the six members of the Surviving
Corporation's newly-elected Board of Directors. Assuming the exercise of
all of the outstanding Merger Warrants and Options and IAC Warrants and
Options (but not any Plan Options), the Hollis-Eden Stockholders would
collectively own approximately 74% of the then outstanding shares of
Surviving Corporation Common Stock upon the consummation of the Merger.
If the Merger Agreement is approved at each of the IAC and Hollis-Eden
Special Meetings and all of the other conditions to the obligations of the
parties to consummate the Merger are either satisfied or waived, the Merger
will be consummated. A copy of the Merger Agreement is set forth as Annex
A to this Joint Proxy Statement/Prospectus. See "THE MERGER."
Background. Since its IPO in May 1995, IAC has conducted a search for
a Target Company with which it would consummate a Business Combination.
Hollis-Eden was one of two companies extensively evaluated by IAC. Hollis-
Eden was introduced to IAC in March 1996. On November 1, 1996, IAC and
Hollis-Eden entered into the Merger Agreement. See "THE MERGER-Background
of the Merger."
Additional Merger Shares. In connection with the Merger, IAC will
offer all IAC Non-Affiliate Stockholders the opportunity to exchange their
respective Redemption Rights for the right to receive additional shares of
Surviving Corporation Common Stock (the "Additional Merger Shares") if, at
no time during the 24-month period immediately following the Effective Time
(as defined below) of the Merger (the "Holding Period"), the average
closing price per share of Surviving Corporation Common Stock over a period
of 20 consecutive trading days equals or exceeds $20.00 per share (subject
to adjustment). See "THE MERGER-Additional Merger Shares."
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<PAGE>
Effective Time. If the Merger Agreement is approved by the requisite
vote of the holders of IAC and Hollis-Eden Common Stock, and the other
conditions to the obligations of the parties to consummate the Merger are
either satisfied or waived, the Merger will be consummated and will become
effective on the date and at the time that a Certificate of Merger,
reflecting the Merger (the "Certificate of Merger"), is duly filed with the
Secretary of State of the State of Delaware (the "Effective Time"). The
form of Certificate of Merger is attached as Annex B to this Joint Proxy
Statement/Prospectus. Such filing will be made simultaneously with or as
soon as practicable after the closing of the transactions contemplated by
the Merger Agreement. Assuming satisfaction or waiver of all conditions to
consummation, the Merger is expected to become effective during the first
quarter of 1997. See "THE MERGER-Effective Time."
Delivery of Certificates Representing Shares of Surviving Corporation
Common Stock and Merger Warrants and Options. Promptly after the
Effective Time, each holder of record of shares of Hollis-Eden Common Stock
and Hollis-Eden Warrants and Options outstanding at the Effective Time will
be mailed a transmittal letter (with instructions) to use in effecting the
surrender and cancellation of Hollis-Eden Common Stock certificates and
Hollis-Eden Warrants and Options in exchange for certificates representing
shares of Surviving Corporation Common Stock and Merger Warrants and
Options, as the case may be. The Surviving Corporation shall not be
obligated to deliver the consideration to which any former holder of
Hollis-Eden Common Stock or Hollis-Eden Warrants and Options is entitled
until such holder surrenders such holder's certificate or certificates
representing such holder's shares of Hollis-Eden Common Stock or Hollis-
Eden Warrants and Options, as the case may be, for exchange. The
certificate or certificates so surrendered shall be duly endorsed as the
exchange agent may require. See "THE MERGER-Distribution of Merger
Consideration."
IAC STOCKHOLDERS WILL NOT BE REQUIRED TO SURRENDER CERTIFICATES
EVIDENCING SHARES OF IAC COMMON STOCK OR IAC WARRANTS AND OPTIONS FOLLOWING
THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE SUBSEQUENT
CONSUMMATION OF THE MERGER. ALL IAC COMMON STOCK AND IAC WARRANTS AND
OPTIONS CURRENTLY ISSUED AND OUTSTANDING ARE UNAFFECTED BY THE MERGER AND
WILL CONTINUE TO REPRESENT SHARES OF SURVIVING CORPORATION COMMON STOCK AND
WARRANTS AND OPTIONS TO ACQUIRE SHARES OF SURVIVING CORPORATION COMMON
STOCK AFTER THE MERGER.
Certain Federal Income Tax Consequences. The Merger is intended to be
a tax-free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"). Generally, no gain
or loss will be recognized by the Hollis-Eden Stockholders on the exchange
of Hollis-Eden Common Stock solely for Surviving Corporation Common Stock,
except to the extent that Hollis-Eden Stockholders or IAC Stockholders
receive cash for dissenting shares. In addition, neither IAC nor Hollis-
Eden should recognize any gain with respect to the Merger. See "THE
MERGER-Certain Federal Income Tax Consequences."
BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON
THE PARTICULAR CIRCUMSTANCES OF EACH HOLLIS-EDEN STOCKHOLDER AND IAC
STOCKHOLDER, EACH SUCH HOLDER IS URGED TO CONSULT SUCH HOLDER'S OWN TAX
ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE
MERGER (INCLUDING THE APPLICATION AND EFFECT OF FOREIGN, STATE AND LOCAL
INCOME AND OTHER TAX LAWS).
Conditions to Consummation. The obligations of IAC and Hollis-Eden to
consummate the Merger are subject to the satisfaction or waiver of
conditions, including among others: (i) the Merger Agreement and the
transactions contemplated thereby shall have been approved and adopted by
the IAC Stockholders and the Hollis-Eden Stockholders as described in this
Joint Proxy Statement/Prospectus and the IAC Non-Affiliate Stockholders
shall not have elected to have 15% or more of their shares of IAC Common
Stock redeemed at the Redemption Value; (ii) as of the Effective Time, IAC
shall have cash on hand (net of liabilities) of not less than $6.5 million;
(iii) the Registration Statement shall have been declared effective; (iv)
no action or proceeding shall have been instituted or threatened which is
likely to have a material adverse effect on IAC or Hollis-Eden or could
enjoin, restrain or prohibit, or could result in substantial damages in
respect of, any provision of the Merger Agreement or the consummation of
the transactions contemplated thereby; (v) all consents and approvals
required for the consummation of the Merger and the transactions
contemplated thereby shall have been obtained, and all required filings
shall have been made; (vi) IAC and Hollis-Eden each shall have performed
and complied with all covenants, obligations and agreements applicable to
it contained in the Merger Agreement and all representations and warranties
of each of IAC and Hollis-Eden shall be true and correct in all material
respects on and as of the date made and the Effective Time; (vii) the
patent infringement and, if necessary, the patent validity analyses by
IAC's counsel, and, if given in accordance with the terms of the Merger
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Agreement, the final opinion of independent patent counsel, shall not have
resulted in an opinion of a patent infringement which will have an
"unavoidable" material adverse effect upon certain of Hollis-Eden's
Products (a "Patent Infringement"); and (viii) the receipt of written
opinions of counsel to IAC and Hollis-Eden as to certain matters. In
addition to the conditions set forth above, the obligations of IAC and
Hollis-Eden to consummate the Merger are subject to the absence, since the
date of the Merger Agreement, of any material adverse change in the
business, operations, assets, liabilities, results of operations, cash
flows, condition (financial or otherwise) or prospects of IAC and Hollis-
Eden, which is materially adverse to IAC or Hollis-Eden, as the case may
be. See "THE MERGER-Conditions to Consummation."
Termination. The Merger Agreement may be terminated, and the Merger
abandoned, at any time prior to the Effective Time, by mutual consent of
all parties to the Merger Agreement. In addition, the Merger Agreement may
be terminated, and the Merger abandoned, generally, (i) prior to, but not
after, the approval of the Merger Agreement by the stockholders of each of
Hollis-Eden and IAC, by Hollis-Eden or IAC, as the case may be, if the
Merger shall not have become effective by February 15, 1997 (or such later
date as permitted by the Merger Agreement to allow the parties to complete
their patent analyses within the permitted time parameters), provided,
however, that such termination right shall not be available to any party
whose failure to fulfill any obligation under the Merger Agreement has been
the cause of or resulted in the failure of the Merger to become effective
by such date; (ii) by any party to the Merger Agreement if any court of
competent jurisdiction in the United States or other United States
governmental body shall have issued an order, decree or ruling or taken any
other action restraining, enjoining or otherwise prohibiting the Merger or
any of the other transactions contemplated by the Merger Agreement and such
order, decree, ruling or other action shall have become final and non
appealable; (iii) By IAC, if IAC Non-Affiliate Stockholders holding 15% or
more of the shares of IAC Common Stock shall have exercised their
Redemption Rights or (iv) by IAC, if its patent infringement and, if
necessary, patent validity analyses, and, if given in accordance with the
terms of the Merger Agreement, the final opinion of independent patent
counsel, shall have resulted in an opinion of a Patent Infringement which
will have an "unavoidable" material adverse effect upon certain of Hollis-
Eden's Products. See "THE MERGER-Termination."
Expenses and Fees. The Merger Agreement provides that each party
shall bear its own expenses with respect to the transactions contemplated
by the Merger Agreement.
In addition, Hollis-Eden has agreed to pay IAC a fee of $100,000 (the
"Fee"), which has been placed into escrow, in the event Hollis-Eden
terminates the Merger Agreement and abandons the Merger for any reason
other than those reasons permitted under the Merger Agreement. Moreover,
in the event IAC terminates the Merger Agreement and abandons the Merger as
a result of a Patent Infringement, IAC shall be entitled to such portion of
the Fee as may be necessary to reimburse IAC for its costs and expenses in
connection with the Merger Agreement and the proposed Merger. See "THE
MERGER-Expenses and Fees."
Accounting Treatment. For accounting and financial reporting
purposes, the Merger will be treated as a recapitalization of Hollis-Eden
by an exchange of Hollis-Eden Common Stock for the net assets of IAC,
consisting primarily of cash. Since IAC has had no business operations
other than the search for a suitable Target Business, IAC's assets will be
recorded in the balance sheet of the combined company (i.e., the Surviving
Corporation) at book value. The unaudited pro forma financial information
contained in this Joint Proxy Statement/Prospectus has been prepared on
this basis. See "THE MERGER-Accounting Treatment."
Regulatory Approvals. No governmental regulatory approvals are
required with respect to the Merger except for the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware
and the filing with the Commission of the Registration Statement and this
Joint Proxy Statement/Prospectus. See "THE MERGER-Regulatory Approvals."
Interests of Certain Persons in the Merger. In considering the
recommendation of the Hollis-Eden Board of Directors with respect to the
Merger Agreement and the transactions contemplated thereby, Hollis-Eden
Stockholders should be aware that certain members of Hollis-Eden's
management and the Hollis-Eden Board of Directors have certain interests in
the Merger that are in addition to the interests of Hollis-Eden
Stockholders generally. See "THE MERGER-Interests of Certain Persons in
the Merger" and "PROPOSED MANAGEMENT OF THE SURVIVING CORPORATION-
Employment Agreements."
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Conduct of Business Pending the Merger. Each of IAC and Hollis-Eden
has agreed in the Merger Agreement to, among other things, operate its
business only in the ordinary and usual course consistent with past
practice and to use reasonable commercial efforts to preserve intact its
present business organization, preserve its goodwill and advantageous
relationships with employees and other persons material to its operations
and business and not permit any action or omission within its control which
would cause any of its representations or warranties to become inaccurate
in any material respect or any of its covenants to be breached in any
material respect. In addition, each of IAC and Hollis-Eden has agreed not
to take certain actions relating to its operations pending consummation of
the Merger without the prior written consent of the other. See "THE
MERGER-Conduct of Business Pending the Merger and Covenants of the
Parties."
Restriction on Sales of Shares by Hollis-Eden Stockholders. In
connection with the Merger Agreement, Hollis-Eden has agreed to use its
reasonable commercial efforts to obtain signed letters from as many Hollis-
Eden Stockholders as possible, which letters shall acknowledge such Hollis-
Eden Stockholders' agreement not to sell any shares of the Surviving
Corporation Common Stock to be issued, directly or indirectly, to them in,
and as a result of, the Merger, for the nine-month period immediately
following the Effective Time. In addition, Mr. Richard B. Hollis and Dr.
Patrick T. Prendergast, the owners of approximately 71% of the outstanding
Hollis-Eden Common Stock, agreed with Hollis-Eden not to sell more than an
aggregate of 1,000,000 shares of Surviving Corporation Common Stock to be
received by them as a result of the Merger for the two-year period
commencing upon the Effective Time of the Merger. See "THE MERGER-Conduct
of Business Pending The Merger and Covenants of the Parties."
Comparison of Stockholder Rights. The rights of IAC's Stockholders
currently are determined by reference to the DGCL and IAC's Certificate of
Incorporation ("IAC's Charter") and Bylaws ("IAC's Bylaws"). The rights of
Hollis-Eden's Stockholders are currently determined by reference to the
DGCL and Hollis-Eden's Certificate of Incorporation, as amended, and
Bylaws. Following the Effective Time, and pursuant to the terms of the
Merger Agreement, the Hollis-Eden charter and Hollis-Eden Bylaws in effect
immediately prior to the Effective Time will become the charter and bylaws
of the Surviving Corporation, notwithstanding the fact that IAC will be the
Surviving Corporation to the Merger. Copies of the form of Hollis-Eden's
Certificate of Incorporation and Bylaws to be in effect immediately prior
to the Effective Time are attached to this Joint Proxy Statement/Prospectus
as Annexes B and C, respectively. In addition, IAC Non-Affiliate
Stockholders shall no longer have any Redemption Rights or other benefits
or protections described in the IAC Prospectus (as defined below) and,
other than as provided by the DGCL, no right to unilaterally approve
subsequent Business Combinations. See "COMPARISON OF STOCKHOLDER RIGHTS"
for a summary of the material differences between the rights of holders of
IAC Common Stock and Hollis-Eden Common Stock.
IAC STOCKHOLDERS' APPROVAL AND ADOPTION OF THE MERGER AGREEMENT WILL
RESULT IN A CHANGE OF BOTH THE MAJORITY EQUITY OWNERSHIP AND MANAGEMENT OF
IAC AS WELL AS A CHANGE IN THE BUSINESS OF IAC.
RISK FACTORS
Ownership of Surviving Corporation Common Stock and the business to be
conducted by the Surviving Corporation subsequent to the consummation of
the Merger involve certain elements of risk discussed under "Risk Factors"
located on page 16 of this Joint Proxy Statement/Prospectus. These risk
factors include, among others, risks relating to the Surviving
Corporation's failure to successfully develop commercially acceptable
products or carry out its research and development plans, the loss of key
executives, competition, including specifically, the intensification of
price competition, the entry of new competitors and the development of new
products by new and existing competitors, general economic and business
conditions and unanticipated changes in pharmaceutical industry trends.
See "RISK FACTORS."
APPRAISAL RIGHTS
Under the DGCL, holders of IAC and Hollis-Eden Common Stock may
dissent from the Merger and receive payment of the "fair value" of his or
her shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may
be, in cash, if the Merger is consummated by following certain procedures
set forth in Section 262 of the DGCL, the text of which is attached to this
Joint Proxy Statement/Prospectus as Annex E. Any IAC or Hollis-Eden
Stockholder wishing to dissent from the Merger and obtain cash payment of
the fair value of his or her shares of IAC Common Stock or Hollis-Eden
Common Stock, as the case may be, must: (i) deliver to IAC or Hollis-Eden,
as the case may be, before the vote is taken at the IAC or Hollis-Eden
Special Meeting, as the case may be, a written demand for appraisal of his
or her shares; (ii) not vote his or her shares of IAC or Hollis-Eden Common
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Stock, as the case may be, in favor of the Merger; and (iii) follow the
other procedures set forth in the DGCL as more fully described in this
Joint Proxy Statement/Prospectus. See also Annex E to this Joint Proxy
Statement/Prospectus. Failure to follow such procedures may result in a
loss of such appraisal rights. A proxy card which expressly votes in favor
of the Merger or which fails to indicate how the shares should be voted
will constitute a waiver by such IAC Stockholder or Hollis-Eden
Stockholder, as the case may be, of such Stockholder's right to seek
appraisal. Consequently, any IAC or Hollis-Eden Stockholder who desires to
preserve his or her rights of appraisal should either refrain from
returning a proxy card or expressly indicate on such proxy card that such
IAC Stockholder or Hollis-Eden Stockholder, as the case may be, votes
against the Merger or expressly abstains from voting on the approval of the
Merger. For a more complete discussion of the procedures to be followed by
an IAC or Hollis-Eden Stockholder who desires to perfect his or her
appraisal rights, see "GENERAL INFORMATION-Appraisal Rights."
REDEMPTION RIGHTS
Each of the IAC Non-Affiliate Stockholders (and each Initial IAC
Stockholder who (i) participated in the February 1993 private placement of
IAC securities and (ii) purchased shares of IAC Common Stock in the open
market after the IPO (the "After Acquired Stock"), but only to the extent
of the After Acquired Stock)) has the right (the "Redemption Right"),
pursuant to IAC's prospectus dated May 15, 1995 (the "IAC Prospectus"), to
elect to have any or all of his or her shares of IAC Common Stock redeemed
for $ [10.78] per share (the "Redemption Value"), by indicating such
election on his or her proxy card and depositing such proxy card in the
United States mail postmarked within 20 calendar days of the mailing of
this Joint Proxy Statement/Prospectus (such 20 calendar day period being
hereinafter referred to as the "Redemption Period"). The proxy card
containing the exercise of Redemption Rights must be received by IAC prior
to the IAC Special Meeting. The Redemption Value has been calculated by
dividing (a) the amount of the Escrowed Funds as of the IAC Record Date by
(b) the number of shares of IAC Common Stock held by the IAC Non-Affiliate
Stockholders as of the Record Date. If IAC Non-Affiliate Stockholders
elect to redeem 15% or more of their shares of IAC Common Stock within the
Redemption Period, IAC will not proceed with the Merger and will not redeem
such shares. If IAC Non-Affiliate Stockholders elect to redeem less than
15% of their shares of IAC Common Stock within the Redemption Period, and
assuming that IAC otherwise satisfies the required conditions for the
Merger, IAC may proceed with the Merger, but will be required to redeem the
shares of IAC Common Stock requested by the IAC Non-Affiliate Stockholders
at their Redemption Value upon the consummation of the Merger. An IAC Non-
Affiliate Stockholder may exercise his or her Redemption Right only if he
or she expressly votes against the Merger within the Redemption Period.
IAC Non-Affiliate Stockholders may not exercise their Redemption Rights if
they are seeking appraisal rights. An IAC Non-Affiliate Stockholder who
votes against the Merger after the Redemption Period will not be entitled
to have any of his or her shares redeemed. Any IAC Non-Affiliate
Stockholder returning a proxy card which expressly votes for the Merger or
returning an executed proxy card which fails to indicate how his or her
shares should be voted, shall be deemed to have waived his or her
Redemption Right. A proxy card which indicates that an IAC Non-Affiliate
Stockholder expressly abstains from voting on the proposal to approve the
Merger shall not be deemed an exercise of such IAC Non-Affiliate
Stockholder's Redemption Rights. AN IAC NON-AFFILIATE STOCKHOLDER WHO
SELLS ANY OF HIS OR HER SHARES OF IAC COMMON STOCK AFTER ELECTING TO HAVE
SUCH SHARES REDEEMED SHALL FORFEIT THE RIGHT TO RECEIVE THE REDEMPTION
VALUE WITH RESPECT TO SUCH SHARES. IN ADDITION, AN IAC NON-AFFILIATE
STOCKHOLDER WHO EXERCISES HIS OR HER REDEMPTION RIGHTS SHALL FORFEIT THE
RIGHT TO RECEIVE ADDITIONAL MERGER SHARES, IF ANY ARE ISSUED.
IAC NON-AFFILIATE STOCKHOLDERS MAY NOT EXERCISE THEIR REDEMPTION
RIGHTS IF THEY ARE EXERCISING THEIR APPRAISAL RIGHTS AND, CONVERSELY, IAC
NON-AFFILIATE STOCKHOLDERS WHO SEEK REDEMPTION RIGHTS MAY NOT EXERCISE
THEIR APPRAISAL RIGHTS.
MARKET PRICES OF IAC'S SECURITIES
Shares of IAC Common Stock, as well as IAC Class A Common Stock
Purchase Warrants ("Class A Warrants"), IAC Class B Unit Purchase Warrants
("Class B Warrants") and IAC Units are quoted and traded on the OTC
Electronic Bulletin Board of the NASD under the symbols "IACQ," "IACQW,"
"IACQZ" and "IACQU," respectively. Each Class A Warrant entitles the
holder thereof to purchase one share of IAC Common Stock at a price of
$9.00 commencing upon the consummation of a Business Combination and
expiring on May 15, 2000. Each Class B Warrant entitles the holder thereof
to purchase one Unit at a price of $.25 commencing upon the consummation of
a Business Combination and expiring on the first anniversary of the
Business Combination. Each Unit consists of one share of IAC Common Stock
and one Class A Warrant.
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On November 5, 1996 (the last trading day prior to the public
announcement of the execution of the Merger Agreement), the closing bid
prices for the IAC Common Stock, Class A Warrants, Class B Warrants and
Units were $9.250, $0.625, $2.250 and $9.500, respectively.
On . , 1996 (the last day before the printing of this Joint Proxy
Statement/Prospectus), such closing bid prices were $ . , $ . , $ . and
$ . , respectively.
IAC has never paid any cash dividends with respect to its shares of
Common Stock. It is presently intended that all available cash will be
utilized to further the growth of the Surviving Corporation's business
subsequent to the Effective Time and for the foreseeable future thereafter,
including the funding of Hollis-Eden's (and consequently, the Surviving
Corporation's) working capital and capital expenditure requirements. The
payment of any cash dividends will be in the discretion of the Surviving
Corporation's Board of Directors and will be dependent upon the Surviving
Corporation's results of operations, financial condition and other factors
deemed relevant by the Surviving Corporation's Board of Directors.
It is expected that the IAC Common Stock will be approved for listing,
subject to the consummation of the Merger, on either the NASDAQ NMS or the
AMEX. See "MARKET PRICES OF IAC'S SECURITIES AND DIVIDEND INFORMATION" and
"DESCRIPTION OF IAC'S SECURITIES."
OPERATIONS AFTER THE MERGER
As a result of the Merger, Hollis-Eden will be merged with and into
IAC, with IAC being the Surviving Corporation to the Merger. Upon the
consummation of the Merger, Hollis-Eden will cease to exist as a separate
corporation and the Surviving Corporation will change its name to Hollis-
Eden Pharmaceuticals, Inc. The business of the Surviving Corporation will
be that of Hollis-Eden immediately prior to the Merger.
In accordance with the Merger Agreement, at the Effective Time, and
subject to their election by the IAC Stockholders, the Board of Directors
of the Surviving Corporation will consist of six directors, five of whom
shall be Hollis-Eden's designees. In addition, all of the current officers
of IAC will resign effective at the Effective Time, to be replaced by the
current officers of Hollis-Eden designated by the Surviving Corporation's
Board of Directors as detailed in the Merger Agreement. See "THE MERGER-
Operations After the Merger."
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COMPARATIVE PER SHARE DATA
The following table set forth (i) net income (loss) per share of IAC
Common Stock and Hollis-Eden Common Stock for the year ended December 31,
1995 and the nine months ended September 30, 1996 on a historical basis
and (ii) book value per common share of IAC Common Stock and Hollis-Eden
Common Stock as of December 31, 1995 and September 30, 1996 on a historical
basis. The information presented in this tabulation should be read in
conjunction with the pro forma combined condensed financial information and
the separate financial statements and information of the respective
companies and notes thereto appearing elsewhere herein.
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
HISTORICAL - IAC
Net income per common share. . $0.16 $0.12
Book value per common share
at period end . . . . . . . . . $ 7.72 $7.84
HISTORICAL - HOLLIS-EDEN
Net loss per common share . . . $(0.17) $(0.10)
Book value per common share
at period end . . . . . . . . . $(0.37) $(0.07)
COMBINED PRO FORMA
Net loss per share . . . . . $(1.22) $(0.07)
Book value per common
share at period end . . . . N/A $ 0.77
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SELECTED HISTORICAL FINANCIAL INFORMATION
IAC
The following data, insofar as it relates to each of the fiscal years
1995, 1994 and 1993, has been derived from audited financial statements,
including the balance sheets at December 31, 1995, 1994 and 1993 and the
statements of operations of stockholders' equity and of cash flows for
the years ended December 31, 1995, 1994 and 1993 and notes thereto
appearing elsewhere herein. The data for the nine months ended
September 30, 1996 and 1995 has been derived from unaudited financial
statements also appearing herein and which, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results for unaudited interim
periods. No cash dividends have ever been declared or paid on IAC Common
Stock.
YEAR ENDED DECEMBER 31,
--------------------------
STATEMENT OF 1995 1994 1993
OPERATIONS DATA: ---- ---- ----
Interest income . . $ 224,305 $ -0- $ -0-
General and
administrative
expenses . . . . . $ 71,782 $ 7,000 $ 7,186
Net income (loss) . $ 100,523 $ (7,000) $ (7,186)
Net income (loss)
per common share . $ 0.16 $ (.03) $ (.03)
Weighted average
shares outstanding 608,250 233,250 233,250
BALANCE SHEET DATA:
Total assets . . . $6,518,759 $ 74,139 $ 81,139
Redeemable common
stock . . . . . . . $ 932,316 $ -0- $ -0-
Stockholders'
equity. . . . . . . $5,496,803 $ 68,139 $ 75,139
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
STATEMENT OF 1996 1995
OPERATIONS DATA: ---- ----
Interest income . . $ 264,986 $ 123,228
General and
administrative
expenses . . . . . $ 132,152 $ 15,405
Net income (loss) . $ 100,684 $ 107,823
Net income (loss)
per common share . $ 0.12 $ 0.20
Weighted average
shares outstanding 833,250 533,250
BALANCE SHEET DATA:
Total assets . . . $6,692,264 $6,438,919
Redeemable common
stock . . . . . . . $ 969,703 $ -0-
Stockholders'
equity. . . . . . . $5,560,100 $6,436,419
HOLLIS-EDEN
The following data, insofar as it relates to each of the periods 1995
and 1994, has been derived from audited financial statements, including the
balance sheet at December 31, 1995 and 1994 and the related statements of
operations, of stockholders' equity and of cash flows for the year ended
December 31, 1995 and the periods from inception (August 15, 1994) to
December 31, 1994 and September 30, 1996 and notes thereto appearing
elsewhere herein. The data for the nine months ended September 30, 1996
and 1995 has been derived from unaudited financial statements also
appearing herein and which, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the results for the unaudited interim periods.
The interim results of operations are not necessarily indicative of
results which may occur for the full fiscal year. No cash dividends
have ever been declared or paid on Hollis-Eden Common Stock.
PERIOD FROM
INCEPTION PERIOD FROM
(AUGUST 15, INCEPTION (AUGUST
YEAR ENDED 1994) TO 15, 1994) TO
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
------------ ------------ -----------------
STATEMENT OF 1995 1994 1996
OPERATIONS DATA: ---- ---- ----
Research and
development . . . . . $ 463,000 $ 1,166,762 $ 1,753,855
General and
administrative
expenses . . . . . . $ 170,929 $ 103,564 $ 620,722
Total operating
expenses . . . . . . $ 633,929 $ 1,270,326 $ 2,374,577
Other income
(expense), net . . . $ (37,762) $ (6,720) $ (44,416)
Net loss . . . . . . $ (671,691) $(1,277,046) $(2,418,993)
Net loss per share . $ (0.17) $ (0.38) $ (0.61)
Weighted average
number of
common shares
outstanding . . . . . 3,867,924 3,396,226 3,945,783
BALANCE SHEET DATA:
Total assets . . . . $ -0- $ -0- $ 344,191
Notes and accounts
payable and accrued
interest to related
party . . . . . . . . $ 367,522 $ 216,720 $ -0-
License fees
payable . . . . . . . $ 928,000 $ 927,000 $ 600,000
Stockholders'
deficit . . . . . . . $(1,537,633) $(1,143,720) $ (368,264)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
STATEMENT OF 1996 1995
OPERATIONS DATA: ---- ----
Research and
development . . . . . $ 124,093 $ 463,000
General and
administrative
expenses . . . . . . $ 346,229 $ 138,429
Total operating
expenses . . . . . . $ 470,322 $ 601,429
Other income
(expense), net . . . $ 66 $ (28,322)
Net loss . . . . . . $(470,256) $ (629,751)
Net loss per share . $ (0.10) $ (0.17)
Weighted average
number of
common shares
outstanding . . . . . 4,573,199 3,773,585
BALANCE SHEET DATA:
Total assets . . . . $ 344,191 $ -0-
Notes and accounts
payable and accrued
interest to related
party . . . . . . . . $ -0- $ 335,582
License fees
payable . . . . . . . $ 600,000 $ 943,000
Stockholders'
deficit . . . . . . . $(368,264) $(1,495,693)
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SELECTED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The selected pro forma combined condensed balance sheet as of
September 30, 1996 gives effect to (i) the Merger and the assumed use of
$1,973,500 in IAC net cash (assuming no payments are required in connection
with the exercise of Redemption Rights), less expenses of IAC and Hollis-
Eden incurred in connection with the Merger, with the balance to be used
for Surviving Corporation working capital purposes. The selected pro forma
adjustments are described in the "Notes to Unaudited Pro Forma Combined
Balance Sheet". Stockholders are urged to read such Notes carefully. The
Unaudited Pro Forma Combined Balance Sheet is not necessarily indicative
of the financial position that would have occurred had the events referred
to above been consummated on the dates for which the consummation of such
events is being given effect, nor is it necessarily indicative of the
future financial position. See "UNAUADITED PRO FORMA COMBINED
BALANCE SHEET".
Year Ended
SEPTEMBER 30, 1996
------------------
BALANCE SHEET INFORMATION:
Total assets . . . . . . . . $5,041,856
Total liabilities . . . . . . $ 551,416
Stockholders' equity . . . . $4,490,440
Book value per share . . . . $ 0.77
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RISK FACTORS
The following risk factors, together with the other information set
forth in this Joint Proxy Statement/Prospectus, should be considered
carefully by Stockholders in evaluating whether to approve the transactions
contemplated by the Merger. This Joint Proxy Statement/Prospectus contains
forward-looking statements that involve risks and uncertainties. The
Surviving Corporation's actual results could differ materially from those
discussed in these forward-looking statements. Factors that could cause or
contribute to such differences, include, but are not limited to, those
discussed in the following section and in "Hollis-Eden's Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Hollis-Eden's Business."
DEPENDENCE ON NEW PRODUCTS AND FDA APPROVAL
Hollis-Eden's principal development efforts are currently centered
around two of four new Products licensed by Hollis-Eden which Hollis-Eden
management believes show promise for the treatment and prevention of
HIV/AIDS. Neither INACTIVIN nor any other of the Products has been approved
for commercial sale and no assurance can be given that approvals will be
obtained. Hollis-Eden's current primary focus is on INACTIVIN, which has a
current and open Investigational New Drug (IND) file open with the FDA and
which has completed Phase I of its approval process. While limited
clinical trials of INACTIVIN have to date produced favorable results,
significant additional trials are required, and no assurance can be given
that the drug will ultimately be demonstrated to be safe or efficacious.
Hollis-Eden has never commercially introduced a product, and no assurance
can be given that commercialization of any of the Products in any country
in which any of them may be approved will be financially successful. See
"HOLLIS-EDEN'S BUSINESS."
EARLY STAGE OF PRODUCT DEVELOPMENT; SUBSTANTIAL OPERATING LOSSES; MERGER
Hollis-Eden has not yet generated any operating revenues. Hollis-Eden
cannot predict when marketing approvals for any of its Products will be
obtained, if ever. Even if such approvals are obtained, there can be no
assurance that the Products will be successfully commercialized. Hollis-
Eden has experienced significant operating losses due to substantial
expenses incurred to acquire and fund development of the Products, and, as
of September 30, 1996, had an accumulated deficit of $2,418,993. Hollis-
Eden expects its operating expenses to increase over the next several years
as it funds development, clinical testing and other expenses of seeking FDA
approval. Hollis-Eden's (and consequently, the Surviving Corporation's)
ability to achieve a profitable level of operations is dependent in large
part on obtaining regulatory approvals for its Products, entering into
agreements for product development and commercialization, and expanding
from development into successful marketing, all of which will require
significant amounts of capital. There can be no assurance that Hollis-Eden
(or the Surviving Corporation) will ever achieve a profitable level of
operations. Concurrently with the Merger, the Surviving Corporation will
incur significant non-recurring charges to operations that will be
recorded and evidenced in its first Quarterly Report to be filed with the
Commission subsequent to the Effective Time of the Merger. In particular,
there will be (i) a $1,500,000 payment for research and development fees,
and (ii) a $500,000 charge relating to the issuants of warrants to a
certain officer. See "HOLLIS-EDEN'S BUSINESS" and "HOLLIS-EDEN'S
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
PATENTS AND PROPRIETARY RIGHTS
Although certain of the Products are patented, patents are not a
guarantee of protection from competitors, especially in an area
characterized by rapid advances, and 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 will not be challenged, invalidated, infringed
upon, or designed around by others or that the claims contained in such
patents will not infringe the patent claims of others. Furthermore, there
can be no assurance that others will not independently develop similar
products. Hollis-Eden's (and consequently, the Surviving Corporation's)
business may be adversely affected by competitors who develop substantially
equivalent technology. Patent litigation can be extremely expensive, and
Hollis-Eden (and the Surviving Corporation) may find that it is unable to
fund litigation necessary to defend its rights. See "HOLLIS-EDEN'S
BUSINESS-Patents."
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GOVERNMENT REGULATION AND PRODUCT APPROVALS
The research, preclinical development, clinical trial, manufacturing,
marketing and sale of pharmaceuticals are subject to extensive regulation
by governmental authorities. Products developed by Hollis-Eden cannot be
marketed commercially in any jurisdiction in which they have not been
approved. The process of obtaining regulatory approvals is lengthy and
extremely expensive. Approval by United States authorities does not
guarantee, nor at times even facilitate or expedite, approval in other
countries. Further, government regulations are subject to change and it is
possible that additional criteria may be established or imposed which could
prevent or delay regulatory approval of any Products. Additionally, the
facilities that manufacture the Products will need to adhere to regulatory
guidelines. There can be no assurance that Hollis-Eden (or the Surviving
Corporation) will not be required to incur significant costs to comply with
laws and regulations in the future or that laws and regulations will not
have a material adverse effect on Hollis-Eden's (or the Surviving
Corporation's) business, financial condition or results of operations. See
"HOLLIS-EDEN'S BUSINESS.
POSSIBLE INABILITY TO MEET CASH OBLIGATIONS
Hollis-Eden (and consequently, the Surviving Corporation) is likely to
experience cash flow difficulties due to its substantial capital needs.
For the foreseeable future following the expenditure of the cash to be
infused into the Surviving Corporation as a result of the Merger, the
Surviving Corporation's ability to meet its cash obligations as they become
due and payable will substantially depend on its ability to sell its
securities and borrow funds. There can be no assurance that the Surviving
Corporation will be able to raise capital when needed to sustain or expand
its operations. See "-Substantial Capital Needs" and "HOLLIS-EDEN'S
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
SUBSTANTIAL CAPITAL NEEDS
Hollis-Eden's operations to date have consumed substantial capital
without generating any revenues, and Hollis-Eden (and consequently, the
Surviving Corporation) will continue to require substantial and increasing
amounts of funds to conduct necessary research and development and
preclinical and clinical testing of its Products, and to market any
Products that receive regulatory approval. Hollis-Eden (and consequently,
the Surviving Corporation) does not expect to generate revenue from
operations for the foreseeable future, and Hollis-Eden's (and consequently,
the Surviving Corporation's) ability to meet its cash obligations as they
become due and payable is expected to depend for at least the next several
years on its ability to sell securities, borrow funds or some combination
thereof. Based upon its current plans, Hollis-Eden management believes
that the cash to be infused into the Surviving Corporation as a result of
the Merger, together with interest thereon, will be sufficient to meet the
Surviving Corporation's operating expenses and capital requirements through
at least the end of 1997. There can be no assurance, however, that changes
in the Surviving Corporation's research and development plans or other
events affecting the Surviving Corporation's operating expenses will not
result in the expenditure of such cash before that time. No assurance can
be given that the Surviving Corporation will be successful in raising
necessary funds. The Surviving Corporation's future capital requirements
will depend upon many factors, including progress with preclinical testing
and clinical trials, the time and costs involved in obtaining regulatory
approvals, competing technological and market developments, the ability of
the Surviving Corporation to establish collaborative arrangements and
effective commercialization and marketing activities and other
arrangements. In any event, Hollis-Eden (and consequently, the Surviving
Corporation) will continue to incur increasing negative cash flows and net
losses for the foreseeable future. See "HOLLIS-EDEN'S MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
TECHNOLOGICAL CHANGE AND COMPETITION
The pharmaceutical industry is characterized by intense competition
and is subject to rapid and significant technological change. Rapid
technological development may cause the Products to become obsolete before
Hollis-Eden (and consequently, the Surviving Corporation) recoups all or
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any portion of the related expenses. Hollis-Eden's (and consequently, the
Surviving Corporation's) competitors include major pharmaceutical
companies, biotechnology firms and universities and other research
institutions, both in the United States and abroad, which are actively
engaged in research and development of products in the therapeutic areas
being pursued by Hollis-Eden. Most of Hollis-Eden's (and consequently, the
Surviving Corporation's) competitors have substantially greater financial,
technical, manufacturing, marketing, distribution and human resource
capabilities than Hollis-Eden (or the Surviving Corporation). Recently,
Hoffman-LaRoche and Abbot Laboratories announced a new family of antiviral
AIDS drugs that block the production of protease, an enzyme critical to the
virus' survival. In addition, many of Hollis-Eden's (and consequently, the
Surviving Corporation's) competitors have significantly greater experience
in testing new or improved therapeutic products and obtaining regulatory
approvals of products. Accordingly, Hollis-Eden's (and consequently, the
Surviving Corporation's) competitors may succeed in obtaining regulatory
approval for products more rapidly than Hollis-Eden (or the Surviving
Corporation). If Hollis-Eden (or the Surviving Corporation) commences
significant commercial sales of its products, it will also be competing
with respect to manufacturing efficiencies and marketing and distribution
capabilities, areas in which it has little experience. See "HOLLIS-EDEN'S
BUSINESS-Manufacturing."
NO SALES AND MARKETING EXPERIENCE
Hollis-Eden's efforts to date have focused on the development and
evaluation of the Products. As Hollis-Eden continues clinical studies and
prepares for commercialization of the Products, it must build a sales and
marketing infrastructure. Hollis-Eden (and consequently, the Surviving
Corporation) has no experience in the sales and marketing of its Products.
It is possible that Hollis-Eden (and consequently, the Surviving
Corporation) will not be able to attract and retain the skilled personnel
necessary to develop the infrastructure to effectively market the Products.
See "HOLLIS-EDEN'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and "-Dependence on Officers and
Future Employees."
DEPENDENCE ON LICENSE AGREEMENTS
Hollis-Eden licenses the Products from Dr. Patrick T. Prendergast and
from Edenland, Inc. ("Edenland") and Colthurst Limited., two organizations
Dr. Prendergast controls. See "Certain Relationships and Related
Transactions." Hollis-Eden is obligated to make license payments and
provide certain funding, including funding for the development and testing
of the Products, at specified times. There can be no assurance that
Hollis-Eden (and consequently, the Surviving Corporation) will be able to
meet future payment or funding obligations, in which event Hollis-Eden (and
consequently, the Surviving Corporation) could lose all rights to one or
more of the Products, which would have a material adverse effect on Hollis-
Eden (and consequently, the Surviving Corporation). See "HOLLIS-EDEN'S
BUSINESS-License Agreements."
DEPENDENCE ON OFFICERS AND FUTURE EMPLOYEES
Hollis-Eden (and the Surviving Corporation) is (and will be) highly
dependent upon its Chief Executive Officer, Richard B. Hollis, and its
Chief Scientific Officer, Dr. Patrick T. Prendergast, the loss of either of
whose services would adversely affect Hollis-Eden (and the Surviving
Corporation) and impede the achievement of Hollis-Eden's (and consequently,
the Surviving Corporation's) research and development objectives.
Recruiting and retaining additional management personnel, as well as
qualified scientific personnel to perform research and development work in
the future, will also be critical to Hollis-Eden's (and consequently, the
Surviving Corporation's) success. Because competition for experienced
scientific personnel among numerous pharmaceutical and biotechnology
companies and research and academic institutions is intense, there can be
no assurance that Hollis-Eden (or the Surviving Corporation) will be able
to attract and retain such personnel. See "PROPOSED MANAGEMENT OF THE
SURVIVING CORPORATION" and "HOLLIS-EDEN'S BUSINESS."
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TECHNOLOGICAL UNCERTAINTIES
All of Hollis-Eden's product development efforts are based upon
technologies and therapeutic approaches that have not been widely used in
humans for therapeutic purposes. There is, therefore, significant risk that
these approaches will not prove to be successful. While Hollis-Eden
believes that the positive results obtained to date in preclinical and
limited clinical human studies support further research and development,
those positive results are not necessarily indicative of results that will
be obtained in further human clinical testing. See "HOLLIS-EDEN'S
BUSINESS."
PHARMACEUTICAL PRICING; 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. Due to uncertainties as to the ultimate
features of this or any other reform initiatives that may be enacted,
Hollis-Eden cannot predict which, if any, of such reform proposals will be
adopted, when they may be adopted, or what impact they may have on Hollis-
Eden (and consequently, the Surviving Corporation). It is possible that
any legislation that is enacted will include provisions resulting in price
limits, utilization controls or other consequences that may adversely
affect Hollis-Eden (and consequently, the Surviving Corporation).
MANUFACTURING LIMITATIONS AND UNCERTAINTIES
Hollis-Eden currently relies on outside manufacturers for the
production of INACTIVIN and the other Products to supply sufficient
quantities of compounds to conduct clinical trials on the Products. If
Hollis-Eden (or the Surviving Corporation) is unable to contract on
acceptable terms or to obtain a sufficient supply of the Products or such
supplies are delayed or contaminated, Hollis-Eden (and consequently, the
Surviving Corporation) could experience significant delays in bringing
INACTIVIN and the other Products to market as well as delays in human
clinical testing schedules and delays in submissions of the Products for
regulatory approval and initiation of further development progress, any of
which could have a material adverse effect on Hollis-Eden's (and
consequently, the Surviving Corporation's) business and results of
operations. If Hollis-Eden (and consequently, the Surviving Corporation)
should encounter delays or difficulties in establishing relationships with
manufacturers to produce, package and distribute its finished
pharmaceutical products, market introduction and subsequent sales of such
products would be adversely affected. Moreover, contract manufacturers
that Hollis-Eden (or the Surviving Corporation) may use must adhere to
current Good Manufacturing Practices ("GMP") regulations enforced by the
FDA through its facilities inspection program. These facilities must pass
a pre-approval plant inspection before the FDA will issue a pre-market
approval of the Products. If Hollis-Eden (or the Surviving Corporation) is
unable to obtain or retain third party manufacturing on commercially
acceptable terms, it may not be able to commercialize pharmaceutical
products as planned. Hollis-Eden's (and consequently, the Surviving
Corporation's) dependence upon third parties for the manufacture of
pharmaceutical products may adversely affect Hollis-Eden's (and
consequently, the Surviving Corporation's) profit margins and its ability
to develop and deliver pharmaceutical products on a timely and competitive
basis.
Even if Hollis-Eden (and consequently, the Surviving Corporation) is
successful in raising the substantial amounts of capital it requires (as to
which there can be no assurance), Hollis-Eden (and consequently, the
Surviving Corporation) does not intend to manufacture any pharmaceutical
products itself, although it may choose to do so in the future. Hollis-
Eden has no experience in manufacturing pharmaceutical products in clinical
quantities or for commercial purposes. Hollis-Eden believes that its
strategy of outsourcing manufacturing is cost effective since it avoids the
high fixed costs of plant, equipment and large manufacturing staff and
thereby enables Hollis-Eden to conserve its resources. Should Hollis-Eden
(and consequently, the Surviving Corporation) determine to manufacture
products itself, Hollis-Eden (and consequently, the Surviving Corporation)
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would be subject to the regulatory requirements described above, would be
subject to similar risks regarding delays or difficulties encountered in
manufacturing any such pharmaceutical products and would require
substantial additional capital. In addition, there can be no assurance
that Hollis-Eden (or the Surviving Corporation) would be able to
manufacture any such products successfully and in a cost-effective manner.
See "HOLLIS-EDEN'S BUSINESS-Manufacturing."
MANAGEMENT OF GROWTH
Hollis-Eden's (and consequently, the Surviving Corporation's) ability
to manage its growth, if any, will require it to continue to improve and
expand its management, operational and financial systems and controls. If
Hollis-Eden's (and consequently, the Surviving Corporation's) management is
unable to manage growth effectively, Hollis-Eden's (and consequently, the
Surviving Corporation's) business and results of operations will be
adversely affected.
PRODUCT LIABILITY; LACK OF INSURANCE
Hollis-Eden's (and consequently, the Surviving Corporation's) business
will expose it to potential product liability risks which are inherent in
the testing, manufacturing, marketing and sale of pharmaceutical products,
and product liability claims may be asserted against Hollis-Eden (and
consequently, the Surviving Corporation). Product liability insurance for
the pharmaceutical industry generally is expensive to the extent that it is
available at all. Hollis-Eden currently does not have product liability
insurance. There can be no assurance that adequate insurance coverage will
be available at acceptable costs, if at all, or that a product liability
claim would not adversely affect the business or financial condition of
Hollis-Eden (and consequently, the Surviving Corporation).
FEDERAL INCOME TAX CONSEQUENCES TO THE HOLLIS-EDEN STOCKHOLDERS AND TO THE
SURVIVING CORPORATION
The Merger is intended to be a tax-free reorganization within the
meaning of Section 368(a) of the Code. However, neither IAC nor Hollis-
Eden has requested, or will request, a ruling from the Internal Revenue
Service (the "IRS") with regard to the federal income tax consequences of
the Merger. A successful IRS challenge to the reorganization status of the
Merger would result in the Hollis-Eden Stockholders recognizing taxable
gain on the receipt of shares of Surviving Corporation Common Stock as a
result of the Merger and the Surviving Corporation incurring a significant
corporate level tax which could have a material adverse effect on the
Surviving Corporation. See "THE MERGER-Certain Federal Income Tax
Consequences."
POTENTIAL CONFLICTS OF INTEREST
Dr. Patrick T. Prendergast, Chief Scientific Officer, a director and a
principal stockholder of Hollis-Eden, and two organizations controlled by
him, have licensed the rights to the Products to Hollis-Eden. The Products
currently represent all pharmaceutical products owned or licensed by
Hollis-Eden. Dr. Prendergast will continue as a director and Chief
Scientific Officer of the Surviving Corporation following the consummation
of the Merger. See "HOLLIS-EDEN'S BUSINESS-License Agreements,"
"SECURITY OWNERSHIP OF THE SURVIVING CORPORATION" and "PROPOSED MANAGEMENT
OF THE SURVIVING CORPORATION."
AUTHORIZED PREFERRED STOCK
The Surviving Corporation's Board of Directors will be 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
Surviving Corporation Common Stock. The issuance of one or more classes of
preferred stock could materially adversely affect the rights of holders of
Surviving Corporation Common Stock. See "COMPARISON OF STOCKHOLDERS'
RIGHTS."
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INDEMNIFICATION AND LIMITED MONETARY DAMAGES
The Surviving Corporation's Certificate of Incorporation will provide
that the Surviving Corporation's directors shall not be liable for monetary
damages to the Surviving Corporation's stockholders except as required by
law. In addition, the Surviving Corporation's Bylaws will provide
indemnification of the Surviving Corporation's officers and directors to
the fullest extent permitted by the DGCL. To the extent that stockholders
are unable to prevail in actions for monetary damages against the Surviving
Corporation's 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 Surviving
Corporation's officers and directors may obtain indemnification from the
Surviving Corporation, the Surviving Corporation may incur substantial
financial losses.
DIVIDENDS UNLIKELY
Neither IAC nor Hollis-Eden has ever paid dividends on its shares of
Common Stock. The payment of dividends after the Merger, if any, will be
contingent upon the Surviving Corporation's revenues and earnings (i.e.,
Hollis-Eden's revenues and earnings), if any, capital requirements and
general financial condition subsequent to consummation of the Merger. The
payment of any dividends subsequent to the Merger will be within the
discretion of the Surviving Corporation's Board of Directors. IAC, Hollis-
Eden and the Surviving Corporation intend to retain all earnings, if any,
for use in Hollis-Eden's business operations and, accordingly, the boards
of directors for such companies do not anticipate declaring any dividends
in the foreseeable future. See "DESCRIPTION OF IAC'S SECURITIES-
Dividends."
IMMEDIATE SUBSTANTIAL DILUTION
Upon the issuance of shares of Surviving Corporation Common Stock in
the Merger to Hollis-Eden Stockholders, IAC Stockholders will suffer an
immediate and substantial dilution of their ownership interests in IAC.
Upon the exercise, if ever, of the Merger Warrants and Options, the IAC
Stockholders would suffer further dilution of their ownership interests in
IAC and, as a result of the Merger, the Surviving Corporation.
CONCENTRATION OF OWNERSHIP
Following the Merger, Hollis-Eden Stockholders will own approximately
85% of the then outstanding shares of Surviving Corporation Common Stock
(without giving effect to the exercise of any Merger Warrants and Options,
IAC Warrants and Options or Plan Options). Accordingly, the Hollis-Eden
Stockholders will be able to elect the members of the Surviving
Corporation's Board of Directors and control the business, policies and
affairs of the Surviving Corporation. Assuming the exercise of the Merger
Warrants and Options and the IAC Warrants and Options (but not any Plan
Options), the Hollis-Eden Stockholders would collectively own approximately
74% of the then outstanding shares of Surviving Corporation Common Stock,
with Mr. Richard B. Hollis owning approximately 37%.
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON PRICE OF
SURVIVING CORPORATION COMMON STOCK
Future sales of Surviving Corporation Common Stock by current IAC and
Hollis-Eden Stockholders, option holders and warrant holders could
adversely affect the market price of the Surviving Corporation's Common
Stock. All of the shares of Surviving Corporation Common Stock issuable in
the Merger, other than to affiliates (generally including, without
limitation, directors, certain executive officers and beneficial owners of
10% or more of any class of common stock) of Hollis-Eden, will be eligible
for sale under Rules 144 and 145 promulgated under the Securities Act
immediately upon consummation of the Merger. In addition, the shares of
Surviving Corporation Common Stock issuable in the Merger, other than to
affiliates of Hollis-Eden, can be resold pursuant to this Proxy
Statement/Prospectus. However, pursuant to the Merger Agreement, Hollis-
Eden is using its best efforts to secure the agreement of each Hollis-Eden
Stockholder to such Stockholder's not selling any shares of Surviving
Corporation Common Stock issuable in the Merger for the nine-month period
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(and in the case of Mr. Hollis and Dr. Prendergast, no more than an
aggregate of 1,000,000 shares in the two-year period) immediately following
the consummation of the Merger. In addition, all of the Surviving
Corporation Common Stock owned by the Initial IAC Stockholders are
"restricted securities" as that term is defined in Rule 144 promulgated
under the Securities Act. Under such rule, once two years have elapsed
from the date of the acquisition, an affiliate of an issuer may, every
three months, sell in ordinary brokerage transactions or in transactions
directly with a market maker an amount equal to the greater of one percent
of the issuer's outstanding common stock or the average weekly trading
volume during the four calendar weeks prior to the sale. Once three years
have elapsed, a person who has not been an affiliate of an issuer for 90
days immediately prior to the proposed sale may sell his shares without
restriction. As of the date of this Joint Proxy Statement/Prospectus, all
of the shares of Surviving Corporation Common Stock held by IAC
Stockholders are eligible for sale without restriction, except that Mr.
Salvatore J. Zizza, Chairman of the Board of IAC and a proposed member of
the Surviving Corporation's Board of Directors following the Merger
(beneficially owning 220,000 shares), will continue to be restricted
pursuant to Rule 144. See "THE MERGER-Resales of Surviving Corporation
Common Stock."
The shares of Surviving Corporation Common Stock issuable upon
exercise of the Merger Warrants and Options are also being registered
pursuant to the Registration Statement of which this Joint Proxy
Statement/Prospectus forms a part, for permitted resale following their
issuance.
EXERCISE OF REDEMPTION RIGHTS; 15% IAC NON-AFFILIATE STOCKHOLDER REDEMPTION
CAP
In the event that the Merger is approved at the IAC Special Meeting
and IAC Non-Affiliate Stockholders elect to redeem less than 15% of the
shares of IAC Common Stock held by such IAC Non-Affiliate Stockholders, IAC
may proceed with the Merger and redeem such shares at their Redemption
Value upon consummation of the Merger. Payments made to redeem such shares
will reduce the cash available for satisfying outstanding obligations and
planned capital expenditures of Hollis-Eden and, consequently, will reduce
cash available after the Merger for capital spending.
IN ADDITION, IF 15% (APPROXIMATELY 90,000 SHARES) OR MORE OF THE
SHARES OF IAC COMMON STOCK HELD BY IAC NON-AFFILIATE STOCKHOLDERS ARE VOTED
AGAINST THE MERGER, AND SUCH IAC NON-AFFILIATE STOCKHOLDERS ELECT, WITHIN
THE REDEMPTION PERIOD, TO HAVE AT LEAST SUCH NUMBER OF SHARES REDEEMED BY
IAC, IAC WILL NOT PROCEED WITH THE MERGER OR REDEEM SUCH SHARES. See
"GENERAL INFORMATION-IAC Special Meeting; Redemption Rights."
CLASSIFIED BOARD OF DIRECTORS;
POSSIBLE DETERRENT TO TAKEOVERS, CHANGES IN BOARD AND OTHER CHANGES IN
CONTROL
The Surviving Corporation's Board of Directors will be a "classified
board," with only 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 the Surviving
Corporation's stockholders.
POSSIBLE VOLATILITY IN STOCK PRICE
Although it is anticipated that the Surviving Corporation Common Stock
will be accepted for listing or trading, as the case may be, on either the
NASDAQ NMS or the AMEX upon the consummation of the Merger, there is no
assurance that a market for securities of the Surviving Corporation will
continue to exist. The prices at which the Surviving Corporation Common
Stock trades after the Merger will depend on many factors, including
prevailing interest rates, markets for similar securities, industry
conditions, and the performance of, and investor expectations for, Hollis-
Eden's (and consequently, the Surviving Corporation's) prospects.
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GENERAL INFORMATION
IAC SPECIAL MEETING
The IAC Special Meeting will be held at 10:00 a.m., local time, on . ,
1997, at . , New York, New York . . At the IAC Special Meeting, IAC
Stockholders will be asked to consider and vote upon the proposal to
approve and adopt the Merger Agreement and the transactions contemplated
thereby, to elect a new slate of six directors as of the Effective Time,
and a proposal to approve and adopt the IAC 1996 Incentive Stock Option
Plan.
The Board of Directors of IAC has fixed the close of business on . ,
1996 as the IAC Record Date. Only holders of record of IAC Common Stock as
of the IAC Record Date are entitled to notice of and to vote at the IAC
Special Meeting. As of the close of business on the IAC Record Date, there
were 833,250 shares of IAC Common Stock issued and outstanding and held by
38 holders of record. IAC Stockholders are entitled to one vote on each
matter considered and voted on at the IAC Special Meeting for each share of
IAC Common Stock held of record at the close of business on the IAC Record
Date. The presence, in person or by properly executed proxy, of the
holders of a majority of the outstanding shares of IAC Common Stock
entitled to vote at the IAC Special Meeting is necessary to constitute a
quorum of the holders of IAC Common Stock at the IAC Special Meeting.
Abstentions will be counted as shares present for purposes of determining
the presence of a quorum. Abstentions will not be counted as votes cast
for purposes of determining whether a proposal has received sufficient
votes for adoption. Consequently, abstentions will have the effect of a
vote against the adoption of the Merger Agreement and the transactions
contemplated thereby.
Proxies in the form enclosed are solicited by the IAC Board of
Directors. Shares of IAC Common Stock represented by properly executed
proxies, if such proxies are received in time and are not revoked, will be
voted in accordance with the instructions indicated on the proxies. IF NO
INSTRUCTIONS ARE INDICATED, SUCH PROXIES WILL BE VOTED FOR ADOPTION OF THE
MERGER AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED
THEREBY, FOR THE ELECTION OF EACH OF THE SIX NOMINATED DIRECTORS, FOR
ADOPTION OF THE IAC 1996 INCENTIVE STOCK OPTION PLAN, AND AS DETERMINED BY
A MAJORITY OF THE MEMBERS OF THE IAC BOARD OF DIRECTORS AS TO ANY OTHER
MATTER THAT MAY PROPERLY COME BEFORE THE IAC SPECIAL MEETING. ANY HOLDER
OF IAC COMMON STOCK WHO RETURNS A SIGNED PROXY BUT FAILS TO PROVIDE
INSTRUCTIONS AS TO THE MANNER IN WHICH SUCH HOLDER'S SHARES ARE TO BE VOTED
WILL BE DEEMED TO HAVE VOTE FOR THE ADOPTION OF THE MERGER AGREEMENT AND
THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY, FOR THE ELECTION
OF EACH OF THE EIGHT NOMINATED DIRECTORS AND FOR ADOPTION OF THE IAC 1996
INCENTIVE STOCK OPTION PLAN.
An IAC Stockholder who has given a proxy may revoke it at any time
prior to its exercise at the IAC Special Meeting or prior to the receipt by
IAC of proxies of stockholders, by (i) giving written notice of revocation
to the Secretary of IAC, (ii) properly submitting to IAC a duly executed
proxy bearing a later date, or (iii) voting in person at the IAC Special
Meeting. All written notices of revocation and other communications with
respect to revocation of proxies should be addressed to IAC as follows:
Initial Acquisition Corp., 810 Seventh Avenue, New York, New York 10019,
Attention: President. A proxy appointment will not be revoked by death or
supervening incapacity of the stockholder executing the proxy unless,
before the shares are voted, notice of such death or incapacity is filed
with IAC's Secretary or other person responsible for tabulating votes on
behalf of IAC.
The expense of soliciting proxies for the IAC Special Meeting will be
borne by IAC, although Hollis-Eden has paid one-half of the cost of the
filing, printing and mailing fees and expenses of this Joint Proxy
Statement/Prospectus. In addition to the solicitation of stockholders of
record by mail, telephone or personal contact, IAC will be contacting
brokers, dealers, banks or voting trustees or their nominees who can be
identified as record holders of IAC Common Stock. Such holders, after
inquiry by IAC, will provide information concerning quantity of proxy and
other materials needed to supply such materials to beneficial owners, and
IAC will reimburse them for the expense of mailing the proxy materials to
such persons.
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The affirmative vote of two-thirds of the outstanding shares of IAC
Common Stock voting at the IAC Special Meeting, either in person or by
proxy, is necessary to approve and adopt the Merger Agreement and the
transactions contemplated thereby. The affirmative vote of the holders of
a plurality of the outstanding shares of IAC Common Stock voting is
required for the election of each director. The affirmative vote of a
majority of the outstanding shares of IAC Common Stock voting is required
for the approval and adoption of the IAC 1996 Incentive Stock Option Plan.
Mr. Salvatore J. Zizza, Chairman of the Board of IAC and the owner of
approximately 8.4% of the outstanding shares of IAC Common Stock (without
giving effect to the exercise of any IAC Warrants and Options), has agreed
with Hollis-Eden to vote all shares of IAC Common Stock owned by him in
favor of the Merger Agreement. As an Initial IAC Stockholder, however, Mr.
Zizza is required (as set forth in the IAC Prospectus) to vote his shares
with respect to the Merger Agreement in accordance with the vote of the
majority in interest of all IAC Non-Affiliate Stockholders.
The Initial IAC Stockholders, which include IAC's directors and
executive officer, collectively holding an aggregate of approximately 28%
of the outstanding shares of IAC Common Stock before giving effect to the
Merger (and without giving effect to the exercise of any Merger Warrants
and Options or IAC Warrants and Options), by reason of their prior
agreement with IAC, will vote their respective shares of IAC Common Stock
in accordance with the vote of the majority in interest of all IAC Non-
Affiliate Stockholders. Consequently, if a majority of the outstanding
shares of IAC Common Stock held and voted by IAC Non-Affiliate Stockholders
is voted in favor of the Merger Agreement and the transactions contemplated
thereby, the Initial IAC Stockholders will vote their shares of IAC Common
Stock in favor of the Merger Agreement and the transactions contemplated
thereby. If the Merger Agreement and the transactions contemplated thereby
are not approved by the requisite vote, the Merger Agreement will be
terminated and the proposed Merger will be abandoned. In such event, the
proposal to approve and adopt the IAC 1996 Incentive Stock Option Plan will
not be implemented, even if such proposal is approved by the requisite
vote. As of the IAC Record Date, Hollis-Eden, its directors and executive
officers, and their affiliates (except as set forth below), held no shares
of IAC Common Stock. Mr. James D. Bowyer, an employee of Laidlaw Equities
and one of the persons who introduced Hollis-Eden to the Company, however,
to IAC's knowledge, beneficially owns 58,800 shares of IAC Common Stock.
Laidlaw Equities, which currently owns warrants to purchase up to 134,100
shares of Hollis-Eden Common Stock and is entitled to receive warrants to
purchase up to an additional 452,830 shares of Surviving Corporation Common
Stock upon the consummation of the Merger, serves as Hollis-Eden's
investment banker. Mr. J. Paul Bagley, one of Hollis-Eden's directors and
a proposed director of the Surviving Corporation following the Merger, was
the Chief Executive Officer of Laidlaw Equities' parent company until
November 1996.
Redemption Rights. Each of the IAC Non-Affiliate Stockholders (and
each Initial IAC Stockholder who holds After Acquired Stock, but only to
the extent of the After Acquired Stock) has the right, pursuant to IAC's
Prospectus, to elect to have any or all of his or her shares of IAC Common
Stock redeemed for $[10.78] per share (the Redemption Value) by exercise of
such right in accordance with the procedure set forth below within 20
calendar days of the mailing of this Joint Proxy Statement/Prospectus (the
Redemption Period). The Redemption Value has been calculated by dividing
(i) the amount of the Escrowed Funds as of the Record Date by (ii) the
number of shares of IAC Common Stock held by IAC Non-Affiliate Stockholders
as of the IAC Record Date. If IAC Non-Affiliate Stockholders elect to
redeem 15% or more of such shares of IAC Common Stock within the Redemption
Period, IAC will not proceed with the Merger and will not redeem such
shares. If IAC Non-Affiliate Stockholders elect to redeem less than 15% of
such IAC Common Stock within the Redemption Period, assuming that IAC
otherwise satisfies the required conditions of the Merger, IAC may proceed
with the Merger but will be required to redeem such shares at their
Redemption Value upon consummation of the Merger.
Each IAC Non-Affiliate Stockholder that desires to exercise his or her
Redemption Right should, prior to expiration of the Redemption Period, (i)
complete and sign the proxy card (or request that his or her broker, dealer
or other nominee do so on his or her behalf) in accordance with the
instructions set forth therein, (ii) expressly vote "AGAINST" the Merger,
(iii) expressly indicate on the proxy card that such Stockholder is
exercising his or her Redemption Right and specify the number of shares to
be redeemed and (iv) deposit such proxy card in the United States mail
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postmarked on or prior to the last day of the Redemption Period. The proxy
card containing the exercise of Redemption Rights must be received by IAC
prior to the IAC Special Meeting. A proxy card which indicates that an IAC
Non-Affiliate Stockholder expressly abstains from voting on the proposal to
approve the Merger shall not be deemed an exercise of such IAC Non-
Affiliate Stockholder's Redemption Rights. An IAC Non-Affiliate
Stockholder may exercise Redemption Rights only if he or she votes
"AGAINST" the Merger within the Redemption Period. Any IAC Non-Affiliate
Stockholder who returns a signed proxy card which either expressly votes
"FOR" the Merger or fails to indicate how his or her shares should be
voted, shall be deemed to have waived his or her Redemption Right. If a
proxy, which constitutes exercise of the Redemption Rights, is revoked
before it is voted, such revocation shall also constitute an election by
such IAC Non-Affiliate Stockholder to forfeit all Redemption Rights. An
IAC Non-Affiliate Stockholder having shares registered in the name of a
broker, dealer, commercial bank, trust company or other nominee must notify
such person if he or she desires to exercise his or her Redemption Rights.
Redemption Rights shall be forfeited by an IAC Non-Affiliate Stockholder if
not exercised in accordance with the foregoing procedures on or prior to
the last day of the Redemption Period. An IAC Non-Affiliate Stockholder
who sells any of his or her shares of IAC Common Stock after electing to
have such shares redeemed shall forfeit the right to receive the Redemption
Value with respect to such shares. In addition, an IAC Non-Affiliate
Stockholder who exercises his or her Redemption Right shall forfeit the
right to receive Additional Merger Shares, if any are issued.
Upon consummation of the Merger, IAC Non-Affiliate Stockholders who
have exercised their right to redemption within the Redemption Period will
be required to tender to American Stock Transfer & Trust Company, as
transfer agent, certificates for such number of shares of IAC Common Stock
to be redeemed, together with properly executed stock powers and any
required signature guarantees. Upon receipt of such certificates, IAC
shall promptly make payment of the aggregate Redemption Value for such
number of shares of IAC Common Stock as have been properly tendered for
redemption. All questions as to the form of all documents and the validity
and eligibility for redemption under the rules set forth herein of any
exercise of Redemption Rights and tender of IAC Common Stock shall be
determined by IAC, in its sole discretion. IAC will not accept any IAC
Common Stock tendered for redemption until after the IAC Special Meeting.
IAC will use a portion of the Escrowed Funds to pay for the redemption
of all shares of IAC Common Stock which IAC is required to redeem pursuant
to the above-described procedure. Any shares of IAC Common Stock which are
redeemed shall be canceled.
IAC NON-AFFILIATE STOCKHOLDERS MAY NOT EXERCISE THEIR REDEMPTION
RIGHTS IF THEY ARE SEEKING THEIR APPRAISAL RIGHTS AND, CONVERSELY, IAC NON-
AFFILIATE STOCKHOLDERS WHO SEEK REDEMPTION RIGHTS MAY NOT EXERCISE THEIR
APPRAISAL RIGHTS. SEE "-APPRAISAL RIGHTS."
IAC STOCKHOLDERS SHOULD OBTAIN CURRENT PRICE QUOTES FOR IAC COMMON
STOCK TO DETERMINE WHETHER SUCH STOCKHOLDER WOULD OBTAIN A HIGHER PRICE FOR
HIS OR HER SHARES BY SELLING THEM INTO THE PUBLIC MARKET RATHER THAN
ELECTING TO HAVE HIS OR HER SHARES REDEEMED. SEE "MARKET PRICE OF IAC'S
SECURITIES AND DIVIDEND INFORMATION."
THE REDEMPTION VALUE IS $[10.78] PER SHARE.
Recommendation of the IAC Board of Directors. The Board of Directors
of IAC believes that the Merger is in the best interests of IAC and its
stockholders and has unanimously approved the Merger Agreement and the
consummation of the transactions contemplated thereby. The IAC Board of
Directors unanimously recommends that IAC Stockholders vote FOR adoption of
the Merger Agreement and the consummation of the transactions contemplated
thereby, FOR the election of the new slate of six directors and FOR the
proposal to approve and adopt the IAC 1996 Incentive Stock Option Plan. In
deciding to approve the Merger Agreement and the consummation of the
transactions contemplated thereby, IAC's Board of Directors considered a
number of factors, including the terms of the Merger, the future prospects
of Hollis-Eden and relevant business, legal and market factors.
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HOLLIS-EDEN SPECIAL MEETING
The Hollis-Eden Special Meeting will be held at 10:00 a.m., local time
on . , 1997, at . , Portland, Oregon . . At the Hollis-Eden Special
Meeting, Hollis-Eden Stockholders will consider and vote upon the proposal
to approve and adopt the Merger Agreement and the transactions contemplated
thereby.
The Board of Directors of Hollis-Eden has fixed the close of business
on . , 1996, as the Hollis-Eden Record Date. Only holders of record of
Hollis-Eden Common Stock as of the Hollis-Eden Record Date are entitled to
notice of and to vote at the Hollis-Eden Special Meeting. As of the close
of business on the Hollis-Eden Record Date, there were 4,911,004 shares of
Hollis-Eden Common Stock issued and outstanding and held by 53 holders of
record. Holders of Hollis-Eden Common Stock are entitled to one vote on
each matter considered and voted on at the Hollis-Eden Special Meeting for
each share of Hollis-Eden Common Stock held of record at the close of
business on the Hollis-Eden Record Date. The presence, in person or by
properly executed proxy, of the holders of a majority of the outstanding
shares of Hollis-Eden Common Stock entitled to vote at the Hollis-Eden
Special Meeting is necessary to constitute a quorum of the holders of
Hollis-Eden Common Stock at the Hollis-Eden Special Meeting. Abstentions
will be counted as shares present for purposes of determining the presence
of a quorum but will not be counted as votes cast for purposes of
determining whether a proposal has received sufficient votes for adoption.
Consequently, abstentions will have the effect of a vote against the
adoption of the Merger Agreement and the transactions contemplated thereby.
Proxies in the form enclosed are solicited by the Hollis-Eden Board of
Directors. Shares of Hollis-Eden Common Stock represented by properly
executed proxies, if such proxies are received in time and are not revoked,
will be voted in accordance with the instructions indicated on the proxies.
IF NO INSTRUCTIONS ARE INDICATED, SUCH PROXIES WILL BE VOTED FOR ADOPTION
OF THE MERGER AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED THEREBY, AND AS DETERMINED BY A MAJORITY OF THE MEMBERS OF THE
HOLLIS-EDEN BOARD OF DIRECTORS AS TO ANY OTHER MATTER THAT MAY PROPERLY
COME BEFORE THE HOLLIS-EDEN SPECIAL MEETING. ANY HOLDER OF HOLLIS-EDEN
COMMON STOCK WHO RETURNS A SIGNED PROXY BUT FAILS TO PROVIDE INSTRUCTIONS
AS TO THE MANNER IN WHICH SUCH HOLDER'S SHARES ARE TO BE VOTED WILL BE
DEEMED TO HAVE VOTED FOR ADOPTION OF THE MERGER AGREEMENT AND THE
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY.
A Hollis-Eden Stockholder who has given a proxy may revoke it at any
time prior to its exercise at the Hollis-Eden Special Meeting or prior to
the receipt by Hollis-Eden of proxies voting in favor of the Merger
Agreement by all Hollis-Eden Stockholders, by (i) giving written notice of
revocation to the Corporate Secretary of Hollis-Eden, (ii) properly
submitting to Hollis-Eden a duly executed proxy bearing a later date, or
(iii) voting in person at the Hollis-Eden Special Meeting. All written
notices of revocation and other communications with respect to revocation
of proxies should be addressed to Hollis-Eden as follows: Hollis-Eden,
Inc., 808 S.W. Third Avenue, Suite 540, Portland, Oregon 97204, Attention:
Corporate Secretary. A proxy appointment will not be revoked by death or
supervening incapacity of the stockholder executing the proxy unless,
before the shares are voted, notice of death or incapacity is filed with
Hollis-Eden's Corporate Secretary or other person responsible for
tabulating votes on behalf of Hollis-Eden.
The expense of soliciting proxies for the Hollis-Eden Special Meeting
will be paid by Hollis-Eden, although IAC has paid the cost of the filing
and a portion of the cost of the printing and mailing fees and expenses of
this Joint Proxy Statement/Prospectus. In addition to the solicitation of
stockholders of record by mail, telephone or personal contact, Hollis-Eden
will be contacting brokers, dealers, banks or voting trustees or their
nominees who can be identified as record holders of Hollis-Eden Common
Stock. Such holders, after inquiry by Hollis-Eden, will provide
information concerning quantity of proxy and other materials needed to
supply such materials to beneficial owners, and Hollis-Eden will reimburse
them for the expense of mailing the proxy materials to such persons.
The affirmative vote of a majority of the outstanding shares of
Hollis-Eden Common Stock voting at the Hollis-Eden Special Meeting, either
in person or by proxy, is necessary to approve and adopt the Merger
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<PAGE>
Agreement and the transactions contemplated thereby. As of the Hollis-Eden
Record Date, Hollis-Eden's directors and executive officers and their
affiliates held approximately 71% of the outstanding shares of Hollis-Eden
Common Stock entitled to vote at the Hollis-Eden Special Meeting. In
addition, Mr. Richard B. Hollis, Chairman of the Board of Hollis-Eden and
the owner of approximately 58% of the outstanding shares of Hollis-Eden
Common Stock, has agreed with IAC to vote all shares of Hollis-Eden Common
Stock which he is entitled to vote at the Hollis-Eden Special Meeting in
favor of the Merger Agreement and the transactions contemplated thereby.
As of the Hollis-Eden Record Date, IAC, its directors and executive
officer, and their affiliates, held no shares of Hollis-Eden Common Stock.
Recommendation of the Hollis-Eden Board of Directors. The Board of
Directors of Hollis-Eden believes that the Merger is in the best interests
of Hollis-Eden and its stockholders and has unanimously approved the Merger
Agreement and the consummation of the transactions contemplated thereby.
The Hollis-Eden Board of Directors unanimously recommends that Hollis-Eden
Stockholders vote FOR adoption of the Merger Agreement and the consummation
of the transactions contemplated thereby. In deciding to approve the
Merger Agreement and the consummation of the transactions contemplated
thereby, Hollis-Eden's Board of Directors considered a number of factors,
including the terms of the Merger, the financial condition of IAC and
Hollis-Eden, the future prospects and capital requirements of Hollis-Eden
and relevant business, legal and market factors.
HOLDERS OF HOLLIS-EDEN COMMON STOCK OR HOLLIS-EDEN WARRANTS OR OPTIONS
SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A LETTER OF
TRANSMITTAL.
APPRAISAL RIGHTS
Pursuant to the provisions of Section 262 of the DGCL, any holder of
record of IAC or Hollis-Eden Common Stock is entitled to dissent from the
Merger and obtain payment of the "fair value" of his or her shares of IAC
Common Stock or Hollis-Eden Common Stock, as the case may be, in cash if
the Merger is effected by complying with the provisions of Section 262 of
the DGCL. Generally, a stockholder must dissent with respect to all the
shares he or she owns or over which he or she has the power to direct the
vote. The failure of a stockholder to follow the statutory provisions set
forth in Section 262 of the DGCL may result in the termination or waiver of
such stockholder's appraisal rights.
Holders of record of shares of IAC Common Stock or Hollis-Eden Common
Stock, as the case may be, who desire to exercise their appraisal rights
must fully satisfy all of the following conditions. A written demand for
appraisal of the shares of IAC Common Stock or Hollis-Eden Common Stock, as
the case may be, owned by such IAC or Hollis-Eden Stockholder, as the case
may be, must be delivered to the Secretary of IAC or Hollis-Eden, as the
case may be, before the taking of the vote on the approval and adoption of
the Merger Agreement. This written demand for appraisal must be in
addition to and separate from any proxy or vote abstaining from or voting
against the approval and adoption of the Merger Agreement. Neither voting
against, abstaining from voting, nor failing to vote on the proposal to
approve and adopt the Merger Agreement will constitute a demand for
appraisal within the meaning of Section 262 of the DGCL. Any IAC
Stockholder or Hollis-Eden Stockholder, as the case may be, seeking
appraisal rights must hold the shares of IAC Common Stock or Hollis-Eden
Common Stock, as the case may be, for which appraisal is sought on the date
of the making of the demand, continuously through the Effective Time and
otherwise comply with the provisions of Section 262 of the DGCL.
Holders of shares of IAC Common Stock or Hollis-Eden Common Stock, as
the case may be, electing to exercise their appraisal rights under Section
262 of the DGCL must not vote for the approval and adoption of the Merger
Agreement or consent thereto in writing. Voting in favor of the approval
and adoption of the Merger Agreement, or delivering a proxy in connection
with the IAC or Hollis-Eden, as the case may be, Special Meeting or
delivering an executed unmarked proxy (unless the proxy votes against, or
expressly abstains from voting on the approval and adoption of the Merger
Agreement) will constitute a waiver of such stockholder's right of
appraisal and will nullify any written demand for appraisal submitted by
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the stockholder. Consequently, an IAC Stockholder or Hollis-Eden
Stockholder, as the case may be, who desires to exercise his or rights of
appraisal should not vote in favor of approval and adoption of the Merger
Agreement. Any such IAC Stockholder or Hollis-Eden Stockholder, as the
case may be, who desires to preserve his or her rights of appraisal should
either refrain from returning a proxy card or, if such IAC Stockholder or
Hollis-Eden Stockholder, as the case may be, returns a proxy card, such
proxy card should expressly indicate that such IAC Stockholder or Hollis-
Eden Stockholder, as the case may be, votes against or expressly abstains
from voting on such approval and adoption.
A demand for appraisal must be executed by or for the stockholder of
record, fully and correctly, as such stockholder's name appears on the
stock certificates. If shares of IAC Common Stock or Hollis-Eden Common
Stock, as the case may be, are owned of record in a fiduciary capacity,
such as by a trustee or guardian, such demand must be executed by the
fiduciary. If shares of IAC Common Stock or Hollis-Eden Common Stock, as
the case may be, are owned of record by more than one person, as in a joint
tenancy or tenancy in common, such demand must be executed by all joint
owners. An authorized agent, including an agent for two or more joint
owners, may execute the demand for appraisal for a stockholder of record;
however, the agent must identify the record owner and expressly disclose
the fact that, in exercising the demand, he is acting as agent for the
record owner.
A record owner, such as a broker who holds shares of IAC Common Stock
or Hollis-Eden Common Stock, as the case may be, as a nominee for others,
may exercise appraisal rights with respect to such shares held for all or
less than all beneficial owners of shares of IAC Common Stock or Hollis-
Eden Common Stock, as the case may be, as to which the holder is the record
owner. In such case, the written demand must set forth the number of
shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may be,
covered by the demand. Where the number is not expressly stated, the
demand will be presumed to cover all shares of IAC Common Stock or Hollis-
Eden Common Stock, as the case may be, outstanding in the name of such
record owner. Beneficial owners who are not record owners and who intend to
exercise appraisal rights should instruct the record owner to comply
strictly with the statutory requirements with respect to exercise of
appraisal rights before the date of the IAC or Hollis-Eden, as the case may
be, Special Meeting.
IAC Stockholders who elect to exercise appraisal rights must mail or
deliver their written demand to: Secretary, Initial Acquisition Corp., 810
Seventh Avenue, New York, New York 10019. Hollis-Eden Stockholders who
elect to exercise appraisal rights must mail or deliver their written
demand to: Secretary, Hollis-Eden, Inc., 808 S.W. Third Avenue, Suite 540,
Portland, Oregon 97204. The written demand for appraisal should specify
the stockholder's name and mailing address, the number of shares of IAC
Common Stock or Hollis-Eden Common Stock, as the case may be, covered by
the demand and that such stockholder is thereby demanding appraisal of such
shares. Within ten days after the Effective Time, the Surviving Corporation
must provide notice of the Effective Time to all stockholders who have
complied with Section 262 of the DGCL and have not voted for approval and
adoption of the Merger Agreement.
Within ten days after the Effective Time, the Surviving Corporation
will notify each stockholder who has satisfied the foregoing conditions
that the Merger was effective as of a given date. Within 120 days after
the Effective Time, the Surviving Corporation, or any stockholder who has
complied with the required conditions of Section 262 of the DGCL and who is
otherwise entitled to appraisal rights, may file a petition in the Delaware
Court of Chancery demanding a determination of the fair value of the shares
of IAC Common Stock or Hollis-Eden Common Stock, as the case may be, held
by the IAC Stockholders or Hollis-Eden Stockholders, as the case may be,
who have demanded appraisal. If a petition for an appraisal is timely
filed, after a hearing on such petition, the Delaware Court of Chancery
will determine which stockholders are entitled to appraisal rights and
thereafter will appraise the shares of IAC Common Stock or Hollis-Eden
Common Stock, as the case may be, owned by such stockholders, determining
the fair value of such shares, exclusive of any element of value arising
from the accomplishment or expectation of the Merger, together with a fair
rate of interest to be paid, if any, upon the amount determined to be the
fair value. In determining the fair value, the Delaware Court of Chancery
is to take into account all relevant factors.
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The cost of the appraisal proceeding may be determined by the Delaware
Court of Chancery and taxed upon the parties as the Delaware Court of
Chancery deems equitable in the circumstances. Upon application of a
stockholder who has demanded appraisal in accordance with Section 262 of
the DGCL, the Delaware Court of Chancery may order that all or a portion of
the expenses incurred by such stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys' fees and
the fees and expenses of experts, be charged pro rata against the value of
all shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may
be, entitled to appraisal. In the absence of such a determination or
assessment, each party bears its own expenses.
Any IAC or Hollis-Eden Stockholder who has duly demanded appraisal in
compliance with Section 262 of the DGCL will not, after the Effective Time,
be entitled to vote for any purpose the shares of IAC Common Stock or
Hollis-Eden Common Stock, as the case may be, subject to such demand or to
receive payment of dividends or other distributions on such shares, except
for dividends or other distributions payable to stockholders of record at a
date prior to the Effective Time.
At any time after 60 days after the Effective Time, any former holder
of shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may
be, shall have the right to withdraw his or her demand for appraisal and to
accept the terms offered in the Merger. After this period, such holder may
withdraw his or her demand for appraisal only with the consent of the
Surviving Corporation. If no petition for appraisal is filed with the
Delaware Court of Chancery within 120 days after the Effective Time,
stockholders' rights to appraisal shall cease and all stockholders shall
continue to hold their shares of IAC Common Stock or Hollis-Eden Common
Stock, as the case may be, as if they had not made any demand for
appraisal. Inasmuch as the Surviving Corporation has no obligation to file
a petition, and has no present intention to do so, any stockholder who
desires such a petition to be filed is advised to file it on a timely
basis. However, no petition timely filed in the Delaware Court of Chancery
demanding appraisal shall be dismissed as to any stockholder without the
approval of the Delaware Court of Chancery and such approval may be
conditioned upon such terms as the Delaware Court of Chancery deems just.
FAILURE TO TAKE ANY REQUIRED ACTION IN CONNECTION WITH THE EXERCISE OF
APPRAISAL RIGHTS MAY RESULT IN THE TERMINATION OR WAIVER OF SUCH RIGHTS.
IN VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF THE DGCL, IAC AND HOLLIS-
EDEN STOCKHOLDERS WHO ARE CONSIDERING EXERCISING THEIR APPRAISAL RIGHTS
UNDER SECTION 262 OF THE DGCL SHOULD CONSULT THEIR LEGAL ADVISORS.
The foregoing does not purport to be a complete statement of the DGCL
relating to appraisal rights and is qualified in its entirety by reference
to the relevant provision of the statute itself, which is included as Annex
E to this Joint Proxy Statement/Prospectus. Annex E should be reviewed
carefully by any IAC or Hollis-Eden Stockholder who wishes to exercise
statutory appraisal rights or who wishes to preserve the right to do so.
MARKET PRICE OF IAC'S SECURITIES AND DIVIDEND INFORMATION
Since May and June 1995, IAC's Common Stock, Class A Warrants, Class B
Warrants and Units have been quoted and traded on the OTC Electronic
Bulletin Board under the symbols "IACQ", "IACQW", "IACQZ" and "IACQU",
respectively.
The following table sets forth the quarterly high and low bid
quotations on the OTC Electronic Bulletin Board for the securities of IAC
set forth above for the periods indicated below. These quotations
represent prices between dealers and do not include retail mark-up, mark-
down or commissions or necessarily represent actual transactions.
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COMMON STOCK HIGH LOW
------------ ---- ---
1995
----
June 28 through June 30 $8.875 $8.750
July 1 through September 30 9.000 8.500
October 1 through December 31 8.875 8.625
1996
----
January 1 through March 31 $10.125 $8.875
April 1 through June 30 10.625 9.250
July 1 through September 30 9.875 9.250
October 1 through December 10 11.250 8.875
CLASS A WARRANTS HIGH LOW
---------------- ---- ---
1995
----
June 29 through June 30 $0.625 $0.500
July 1 through September 30 0.750 0.500
October 1 through December 31 0.750 0.375
1996
----
January 1 through March 31 $0.750 $0.500
April 1 through June 30 1.125 0.625
July 1 through September 30 1.000 0.625
October 1 through December 10 1.000 0.625
CLASS B WARRANTS HIGH LOW
---------------- ---- ---
1995
----
May 16 through June 30 $5.500 $4.500
July 1 through September 30 5.250 4.500
October 1 through December 31 5.000 1.000
1996
----
January 1 through March 31 $5.250 $3.750
April 1 through June 30 6.000 4.500
July 1 through September 30 6.000 4.250
October 1 through December 10 6.000 3.250
UNITS HIGH LOW
----- ---- ---
1995
----
May 16 through June 30 $10.000 $8.875
July 1 through September 30 10.000 9.500
October 1 through December 31 10.000 9.375
1996
----
January 1 through March 31 $10.000 $9.000
April 1 through June 30 10.000 9.625
July 1 through September 30 10.125 9.625
October 1 through December 10 11.250 9.500
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As of the IAC Record Date, there were . holders of record of IAC
Common Stock, . holders of record of Class A Warrants, . holders of record
of Class B Warrants and . holders of record of Units. Since certain of
the shares of IAC Common Stock and Class A and B Warrants and Units are
held in street name, it is believed that there are substantial additional
beneficial holders of IAC Common Stock, Class A and B Warrants and Units.
IAC believes that after the consummation of the Merger, the Surviving
Corporation will have in excess of beneficial owners of shares of
Surviving Corporation Common Stock.
On . , 1996 (the last day before the printing of this Joint Proxy
Statement/Prospectus), the closing bid quotations for shares of IAC Common
Stock, Class A and B Warrants and Units were $ . , $ . , $ . and $ . ,
respectively.
On November 5, 1996 (the day preceding public announcement of the
Merger), the closing bid quotations for shares of IAC Common Stock, Class A
and B Warrants and Units were $9.250, $0.625, $2.250 and $9.500,
respectively.
IAC has never declared any cash dividends with respect to its shares
of Common Stock and does not anticipate that dividends will be declared in
the foreseeable future as all available cash will be utilized to further
the growth of Hollis-Eden's (and consequently, the Surviving Corporation's)
business subsequent to the Effective Time.
It is anticipated that the shares of Surviving Corporation Common
Stock will be accepted for quotation or listing, as the case may be, on the
NASDAQ NMS or AMEX following the consummation of the Merger.
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THE MERGER
The following information describes certain information pertaining to
the Merger. This description does not purport to be complete and is
qualified in its entirety by reference to the Annexes hereto, including the
Merger Agreement, a copy of which is set forth in ANNEX A to this Joint
Proxy Statement/Prospectus and incorporated herein by reference. All IAC
and Hollis-Eden Stockholders are urged to read the Annexes in their
entirety.
GENERAL
Subject to the terms and conditions of the Merger Agreement, Hollis-
Eden shall merge with and into IAC, with IAC being the Surviving
Corporation to the Merger. Upon the consummation of the Merger, Hollis-
Eden will cease to exist as a separate corporation. At the time the Merger
becomes effective, each outstanding share of Hollis-Eden Common Stock shall
cease to be outstanding and shall be converted into the right to receive
one share of Surviving Corporation Common Stock. In addition, all
outstanding Hollis-Eden Warrants and Options shall cease to be outstanding
and shall be converted into the right to receive the same number of Merger
Warrants and Options upon the same terms as the corresponding Hollis-Eden
Warrants and Options, as the case may be. As of the Hollis-Eden Record
Date, there were 4,911,004 shares of Hollis-Eden Common Stock outstanding
and an aggregate of 2,279,650 shares of Hollis-Eden Common Stock were
underlying the Hollis-Eden Warrants and Options. Consequently, upon the
consummation of the Merger, the Surviving Corporation will issue an
aggregate of 4,911,004 shares of Surviving Corporation Common Stock to the
Hollis-Eden Stockholders and Merger Warrants and Options entitling the
holders thereof to acquire an aggregate of 2,279,650 shares of Surviving
Corporation Common Stock. The foregoing exchange ratios were established
through arms-length negotiations between IAC and Hollis-Eden. None of the
outstanding shares of IAC Common Stock will be converted or otherwise
modified in the Merger and all of such shares will continue to be
outstanding capital stock of the Surviving Corporation after the Effective
Time.
Upon the consummation of the Merger, the Surviving Corporation will
change its name to Hollis-Eden Pharmaceuticals, Inc. and the business of
the Surviving Corporation will be that of Hollis-Eden immediately prior to
the Merger. Upon consummation of the Merger, the Surviving Corporation
will assume all of Hollis-Eden's liabilities and obligations.
Upon the consummation of the Merger, the Hollis-Eden Stockholders will
collectively acquire approximately 85% of the outstanding Surviving
Corporation Common Stock, without giving effect to the exercise of any
Merger Warrants and Options, IAC Warrants and Options or Plan Options, and
their designees will comprise five of the six members of the Surviving
Corporation's newly-elected Board of Directors. Assuming the exercise of
all of the outstanding Merger Warrants and Options and IAC Warrants and
Options (but not any Plan Options), the Hollis-Eden Stockholders would
collectively own approximately 74% of the then outstanding shares of
Surviving Corporation Common Stock upon the consummation of the Merger.
ADDITIONAL MERGER SHARES
In connection with the Merger, IAC will offer each IAC Non-Affiliate
Stockholder the opportunity to exchange his or her Redemption Right for the
right to receive Additional Merger Shares, should any be issued. In order
to perfect the right to receive Additional Merger Shares, if any, an IAC
Non-Affiliate Stockholder must (i) not exercise his or her Redemption Right
in connection with the Merger and (ii) within 60 days following the
Effective Time, take whatever action that may be necessary to cause such
IAC Non-Affiliate Stockholder to become the registered owner of his shares
of Surviving Corporation Common Stock (each, a "Rights Share" and,
collectively, the "Rights Shares"). By not exercising his or her
Redemption Right in connection with the Merger, an IAC Non-Affiliate
Stockholder shall be deemed to have waived his or her Redemption Right and
accepted IAC's offer to receive the right to receive Additional Merger
Shares, if any are issued (provided such IAC Non-Affiliate Stockholder is
not a dissenting stockholder and becomes the registered owner of his or her
shares of Surviving Corporation Common Stock as provided above). As soon
as practicable following the 60th day following the Effective Time, the
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Surviving Corporation will cause to be issued to each IAC Non-Affiliate
Stockholder who shall have perfected his or her right to receive Additional
Merger Shares, if any, certificates evidencing one right (each, a "Right"
and, collectively, the "Rights") for each Rights Share held by such IAC
Non-Affiliate Stockholder (the "Rights Certificates"). The Rights
Certificates shall not be transferable, assignable, subject to pledge or
otherwise alienable, and the registered holder of such Rights Certificates
shall forfeit the number of Rights (the "Forfeited Rights") equal to the
number of shares of Surviving Corporation Common Stock sold or otherwise
transferred by such holder during the period commencing at the Effective
Time and ending on the date that a final determination of whether any
Additional Merger Shares will be issued is made (i.e., the second
anniversary of the Effective Time) (the "Holding Period"). The Forfeited
Rights, at the moment of such sale or transfer, shall be null and void and
have no further force or effect.
Additional Merger Shares, if any, shall be issued to the holders of
Rights Certificates who have not otherwise forfeited their Rights as a
result of their selling or otherwise transferring shares of Surviving
Corporation Common Stock during the Holding Period if, at no time during
the 24-month period immediately following the Effective Time, the average
closing price per share of Surviving Corporation Common Stock over a period
of 20 consecutive trading days equals or exceeds $20.00 per share (subject
to adjustment as set forth below). The Additional Merger Shares shall be
issued in accordance with the records of the Surviving Corporation as
promptly as practicable following the second anniversary of the Effective
Time to those holders of Rights Certificates who have not otherwise
forfeited their Rights. The number of Additional Merger Shares, if any, to
be issued to the holders of the Rights Certificates shall be calculated as
follows: each outstanding Right (i.e., any Right other than a Forfeited
Right) shall entitle the holder thereof to the number of Additional Merger
Shares equal to (a) the difference between (i) $20.00 (subject to
adjustment as set forth below) and (ii) the average of the highest 60
closing prices per share of Surviving Corporation Common Stock during the
one-year period immediately prior to the second anniversary of the
Effective Time (the "Sixty Day Average Price"), divided by (b) the Sixty
----------
Day Average Price. No fractional Additional Merger Shares shall be
issued. In lieu thereof, any fractional shares shall be rounded to the
nearest whole share of Surviving Corporation Common Stock. The amount of
Additional Merger Shares, if any, to be issued shall be computed by the
Surviving Corporation's independent public accountants as soon as
practicable following the second anniversary of the Effective Time. The
determination by such independent public accountants shall be final and
binding on the Surviving Corporation and the holders of the Rights.
Notwithstanding the foregoing, the Sixty Day Average Price shall in no
event be less than $5.00 per share (subject to adjustment as set forth
below).
In the event of a stock dividend, stock split, share combination,
exchange of shares, recapitalization, merger, consolidation, acquisition or
disposition of property or shares, reorganization, liquidation or other
similar change or transaction of or by the Surviving Corporation following
the Effective Time, the closing price per share of Surviving Corporation
Common Stock and the Sixty Day Average Price shall be adjusted as
appropriate to give proper effect to the event.
Notwithstanding the foregoing, the Surviving Corporation shall have
the unilateral right to redeem and cancel all, but not less than all, of
the Rights evidenced by the Rights Certificates, at a redemption price of
$.001 per Right, if the Surviving Corporation, at any time during the
Holding Period, closes an equity offering pursuant to which the Surviving
Corporation (i) issues shares of Surviving Corporation Common Stock at a
per share price of not less than $15.00 per share and (ii) raises net
proceeds to the Surviving Corporation of not less than $10 million.
EFFECTIVE TIME
If the Merger Agreement is approved by the requisite vote of the
holders of IAC and Hollis-Eden Common Stock, and the other conditions to
the obligations of the parties to consummate the Merger are either
satisfied or waived, the Merger will be consummated and will become
effective at the Effective Time, i.e., the time that a Certificate of
Merger, reflecting the Merger, is duly filed with the Secretary of State of
the State of Delaware. Such filing will be made simultaneously with or as
soon as practicable after the closing of the transactions contemplated by
the Merger Agreement. Assuming satisfaction or waiver of all conditions to
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consummation, the Merger is expected to become effective during the first
quarter of 1997. See "-Conditions to Consummation" and "-Termination."
BACKGROUND OF THE MERGER
As discussed under "IAC's Business" elsewhere herein, IAC was formed
to serve as a vehicle to effect a Business Combination with a Target
Business. IAC's business objective has been to seek to effect a Business
Combination with a Target Business which IAC believes has significant
growth potential.
Following the consummation of IAC's IPO of equity securities in May
1995, from which IAC derived net proceeds of approximately $6,300,000,
IAC's executive officer, together with Gruntal & Co., Incorporated, IAC's
investment banker ("Gruntal"), commenced an active search for a prospective
Target Business. Of the net proceeds from the IPO, $6,000,000
(representing the gross proceeds received from the sale in the IPO of
Units), together with interest earned thereon, is currently held in an
interest-bearing escrow account and will be released upon the earlier of
the consummation of a Business Combination in which at least 50% of the
Escrowed Funds are committed to a specific line of business as a result of
such consummation of a Business Combination (including any redemption
payments) or the liquidation of IAC. At the Effective Time of the Merger,
the Escrowed Funds will be released to IAC and all voting agreements
previously in effect with respect to the IAC Common Stock (including those
relating to the approval of a Business Combination by the Initial IAC
Stockholders) will terminate.
During the period from May 1995 through November 1996, IAC's executive
officer and Gruntal reviewed approximately six prospective Target
Businesses and carefully evaluated one other prospective Target Business
(in addition to Hollis-Eden) in the field of kidney dialysis treatment.
In evaluating each prospective Target Business, IAC's executive
officer and Gruntal considered, among other factors, all or a majority of
the following:
. Valuation of business and cost of acquisition
. Management and control of the Target Business
. Market share of the Target Business and barriers to entry into
the industry
. Capital structure and capital needs for the Target Business
. Industry growth and growth characteristics for the Target
Business
. Probability of, and costs associated with, a Business
Combination
. Technological factors in the Target Business's market segment
The factors which were considered most important in IAC's decision to
focus on certain of the prospective Target Businesses included:
(1) consideration of whether the prospective business
demonstrated historical or the potential for future revenue
and profitability;
(2) consideration of growth characteristics of the prospective
business, considering the infusion of IAC's cash; and
(3) consideration of whether the amount of consideration which
the owners of a prospective business requested would result
in an attractive capital structure for IAC after the merger.
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The non-successful candidates were eliminated because they failed to
meet, in IAC's judgment, one or more of the above tests.
The nature of the contacts with the one other prospective Target
Businesses which IAC more carefully evaluated varied from having several
meetings/conferences to having certain financial and due diligence
procedures performed and reviewed. This candidate was not ultimately
pursued because IAC was not satisfied with the results of its due diligence
investigations.
IAC was introduced to Hollis-Eden by Messrs. Christopher A. Marlett
and James D. Bowyer of Laidlaw Equities in March 1996. Laidlaw Equities had
previously been engaged by Hollis-Eden to serve as Hollis-Eden's investment
banker and had recently served as Hollis-Eden's placement agent in
connection with a private financing. In addition, Mr. Bowyer was, at the
time of the introduction, and remains (to IAC's knowledge), the beneficial
owner of 58,800 shares of IAC Common Stock. In response to this
introduction, on March 20, 1996, Mr. Salvatore J. Zizza, Chairman of the
Board of IAC, and Mr. Richard B. Hollis, Chairman of the Board of Hollis-
Eden, first met at IAC's offices to discuss, generally, among other things,
the business and affairs of Hollis-Eden and a possible business combination
involving IAC and Hollis-Eden. At this initial meeting, Mr. Zizza informed
Mr. Hollis that IAC was then in detailed negotiations with another business
combination candidate and close to finalizing an arrangement.
Consequently, Mr. Zizza advised Mr. Hollis that IAC would not then be
interested in pursuing discussions pending the outcome of IAC's
negotiations with the other business combination candidate.
IAC's negotiations with this other business combination candidate
terminated in their entirety during July 1996. At that time, Mr. Zizza
contacted Mr. Hollis inquiring as to whether Hollis-Eden remained
interested in discussing a possible business combination with IAC. Mr.
Hollis responded favorably to Mr. Zizza's inquiry, and in response thereto,
Mr. Zizza, on August 13, 1996, met in California with, among others,
Messrs. Hollis, Marlett and Bowyer, Drs. Patrick T. Prendergast and Charles
Merigan, Jr., directors of Hollis-Eden, and Mr. Robert Weber, Vice
President and Controller of Hollis-Eden, to once again review Hollis-Eden's
business and affairs.
Following this meeting, representatives of IAC and Hollis-Eden
developed a term sheet outlining the basic structure of the Merger which
was agreed upon by all parties during the first week of September 1996.
Thereafter, each of IAC and Hollis-Eden commenced extensive due diligence
investigations of the other and counsel to the companies began drafting the
Merger Agreement.
During the latter half of September and throughout October 1996, there
were numerous telephone conversations among Messrs. Zizza and Hollis and
counsel to IAC and Hollis-Eden. During these conversations, discussions
were held relating to various aspects of the potential Merger, including
in-depth discussions concerning the type and amount of consideration to be
received in the Merger, conditions precedent to the Merger, and the status
of Hollis-Eden's licensed patent rights.
On October 31, 1996, Messrs. Zizza and Hollis, along with IAC's and
Hollis-Eden's respective counsel, held numerous telephone conference calls
to negotiate the final terms of the proposed Merger. After having reached
resolution on all open issues, IAC and Hollis-Eden, on November 1, 1996,
convened Special Meetings of their respective Boards of Directors at which
time the Merger Agreement, the Merger and the other transactions
contemplated thereby were discussed and reviewed. Thereafter, the Board of
Directors of each of IAC and Hollis-Eden unanimously adopted and approved
the Merger Agreement, the Merger and the transactions contemplated
thereby. Later on November 1, 1996, the Merger Agreement was executed and
delivered by each of the parties thereto. On November 6, 1996, IAC and
Hollis-Eden issued a joint press release announcing the execution of the
Merger Agreement.
Neither IAC nor Hollis-Eden nor the respective Boards of Directors of
IAC or Hollis-Eden requested or received, or will receive, an opinion of an
independent investment banker as to whether the Merger is fair, from a
financial point of view, to IAC and its stockholders, on the one hand, or
Hollis-Eden and its stockholders, on the other hand.
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Pursuant to the IAC Prospectus, in the event that IAC had not entered
into a letter of intent or a definitive agreement to effect a Business
Combination by November 15, 1996, IAC would have submitted for
consideration by its stockholders a proposal to liquidate and distribute to
IAC's Non-Affiliate Stockholders all of the assets of IAC available for
distribution after payment of liabilities.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
AND REASONS FOR THE MERGER
IAC. IAC believes that for the several reasons set forth in the
immediately following paragraph, the Merger offers the IAC Stockholders the
opportunity to participate in any future growth and profitability of
Hollis-Eden. Further, IAC has determined that, based upon standards
generally accepted by the financial community and its analysis of Hollis-
Eden's projections and planned operations, the fair market value of Hollis-
Eden as of the date of this Joint Proxy Statement/Prospectus is greater
than 80% of the net assets of IAC. Consequently, the IAC Board of
Directors has determined that the Merger is fair to, and in the best
interests of, IAC and the IAC Stockholders. In addition, the IAC Board of
Directors has unanimously approved and adopted the Merger Agreement and the
transactions contemplated thereby and recommends that IAC Stockholders vote
for approval and adoption of the Merger Agreement and the transactions
contemplated thereby.
In considering the Merger, the IAC Board of Directors took note of the
criteria for evaluating a prospective Target Business set forth under
"Background of the Merger" above. The Board of Directors also took into
account the significant experience of Hollis-Eden's management and Hollis-
Eden's perceived growth and profit potential. See "HOLLIS-EDEN'S
BUSINESS."
Hollis-Eden. The Board of Directors of Hollis-Eden has determined
that the Merger is fair to, and in the best interests of, Hollis-Eden and
the Hollis-Eden Stockholders. In addition, the Hollis-Eden Board of
Directors has unanimously approved and adopted the Merger Agreement and the
transactions contemplated thereby and recommends that Hollis-Eden
Stockholders vote for approval and adoption of the Merger Agreement and the
transactions contemplated thereby.
In considering the Merger, Hollis-Eden's Board of Directors noted that
the combination of Hollis-Eden with IAC, which has a strong capital
position, would enhance Hollis-Eden's capital base for Product development
and commercialization and enable Hollis-Eden (and consequently, the
Surviving Corporation) to satisfy certain upcoming license obligations with
respect to the Products. In this regard, Hollis-Eden's Board of Directors
noted that IAC, at the Effective Time, was expected to have approximately
$6.5 million in working capital. In addition, Hollis-Eden's Board of
Directors noted that IAC's status as a company whose securities are
publicly traded would increase the visibility of the Surviving
Corporation's business, which could be helpful in further developing and
commercializing Hollis-Eden's (and consequently, the Surviving
Corporation's) Products.
DISTRIBUTION OF MERGER CONSIDERATION
Immediately prior to the Effective Time, the Surviving Corporation
shall deposit with American Stock Transfer & Trust Company (the "Exchange
Agent") certificates representing the maximum number of shares of Surviving
Corporation Common Stock and Merger Warrants and Options to be delivered to
holders of Hollis-Eden Common Stock and Hollis-Eden Warrants and Options as
a result of the Merger. Promptly after the Effective Time, the Surviving
Corporation shall cause the Exchange Agent to mail to each holder of record
of a certificate or certificates which represented shares of Hollis-Eden
Common Stock or Hollis-Eden Warrants or Options immediately prior to the
Effective Time (the "Certificates") (i) a form of letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and
title to the Certificates shall pass, only upon proper delivery of such
Certificates to the Exchange Agent) and (ii) instructions for use in
effecting the surrender of Certificates in exchange for certificates
representing shares of Surviving Corporation Common Stock and/or Merger
Warrants and Options.
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HOLLIS-EDEN STOCKHOLDERS AND HOLDERS OF HOLLIS-EDEN WARRANTS AND OPTIONS
SHOULD NOT SURRENDER THEIR CERTIFICATES FOR EXCHANGE UNTIL
THEY RECEIVE SUCH LETTER OF TRANSMITTAL AND INSTRUCTIONS
After the Effective Time, each holder of shares of Hollis-Eden Common
Stock and Hollis-Eden Warrants and Options issued and outstanding at the
Effective Time shall surrender the Certificates to the Exchange Agent and
shall promptly upon surrender thereof receive in exchange therefor shares
of Surviving Corporation Common Stock and/or Merger Warrants and Options,
as the case may be, to which such holder is entitled. The Surviving
Corporation shall not be obligated to deliver the consideration to which
any former holder of Hollis-Eden Common Stock or Hollis-Eden Warrants or
Options is entitled as a result of the Merger until such holder surrenders
such holder's Certificates for exchange as provided in the Merger
Agreement. The Exchange Agent may establish reasonable and customary rules
and procedures in connection with its duties.
Unless otherwise designated by a Hollis-Eden Stockholder on the
transmittal letter, certificates representing shares of Surviving
Corporation Common Stock and Hollis-Eden Warrants and Options issued to
Hollis-Eden Stockholders and holders of Hollis-Eden Warrants and Options in
connection with the Merger will be issued and delivered to the tendering
Hollis-Eden Stockholder and/or warrant or option holder at the address on
record with Hollis-Eden. In the event of a transfer of ownership of shares
of Hollis-Eden Common Stock or Hollis-Eden Warrants or Options represented
by Certificates that are not registered in the transfer records of Hollis-
Eden, the Merger consideration may be issued to a transferee if the
Certificates are delivered to the Exchange Agent, accompanied by all
documents required to evidence such transfer and by evidence satisfactory
to the Exchange Agent that any applicable stock transfer taxes have been
paid. If any Certificate shall have been lost, stolen, mislaid or
destroyed, upon receipt of (i) an affidavit of that fact from the holder
claiming such Certificate to be lost, mislaid or destroyed, (ii) such bond,
security or indemnity as the Surviving Corporation and the Exchange Agent
may reasonably require and (iii) any other documents necessary to evidence
and effect the bona fide exchange thereof, the Exchange Agent shall issue
to such holder the Merger consideration into which the shares (or warrants
or options) represented by such lost, stolen, mislaid or destroyed
Certificate shall have been converted. Any other provision of the Merger
Agreement notwithstanding, neither IAC, Hollis-Eden, the Surviving
Corporation nor the Exchange Agent shall be liable to a holder of Hollis-
Eden Common Stock or Hollis-Eden Warrants or Options for any amounts paid
or property delivered in good faith to a public official pursuant to any
applicable abandoned property law. Adoption of the Merger Agreement by the
Hollis-Eden Stockholders shall constitute ratification of the appointment
of the Exchange Agent.
After the Effective Time, holders of Certificates will have no rights
with respect to the shares of Hollis-Eden Common Stock or Hollis-Eden
Warrants or Options represented thereby other than the right to surrender
such Certificates and receive in exchange therefor the shares of Surviving
Corporation Common Stock or Hollis-Eden Warrants or Options to which such
holders are entitled, as described above.
No dividends or distributions that are declared on shares of Surviving
Corporation Common Stock or Merger Warrants and Options will be paid to
persons entitled to receive certificates representing shares of Surviving
Corporation Common Stock or Merger Warrants and Options until such persons
surrender their Certificates. Upon such surrender, there will be paid to
the person in whose name the certificate representing such shares of
Surviving Corporation Common Stock or Merger Warrants and Options will be
issued, any dividends or distributions with respect to such shares of
Surviving Corporation Common Stock or Merger Warrants and Options which
have a record date on or after the Effective Time and have become payable
between the Effective Time and the time of such surrender. In no event
will the person entitled to receive such dividends or distributions be
entitled to receive interest thereon.
IAC Stockholders will not be required to surrender certificates
evidencing shares of IAC Common Stock or IAC Warrants and Options following
the approval and adoption of the Merger Agreement and the subsequent
consummation of the Merger. All IAC Common Stock and IAC Warrants and
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Options currently issued and outstanding are unaffected by the Merger and
will continue to represent shares of Surviving Corporation Common Stock and
warrants and options to acquire shares of Surviving Corporation Common
Stock after the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Directors and Management. As contemplated by the Merger Agreement, a
new Board of Directors consisting of six persons has been nominated and,
subject to election by the IAC Stockholders at the IAC Special Meeting, the
nominees will begin their term of office as directors of the Surviving
Corporation immediately following the Effective Time. Five of the nominees
are considered to be designees of Hollis-Eden, while one nominee is the
designee of IAC. Consequently, the Hollis-Eden nominees, if they act
together, will have effective control of the business and affairs of the
Surviving Corporation.
Mr. J. Paul Bagley, a current director of Hollis-Eden and one of the
nominees for director of the Surviving Corporation, was the Chief Executive
Officer of Laidlaw Equities' parent company until November 1996. Laidlaw
Equities, which serves as Hollis-Eden's investment banker, currently owns
warrants to purchase up to 134,100 shares of Hollis-Eden Common Stock and
is entitled to receive warrants to purchase additional shares of
Surviving Corporation Common Stock upon the consummation of the Merger, as
set forth below. In addition, Mr. James D. Bowyer, an employee of Laidlaw
Equities and one of the persons who introduced Hollis-Eden to IAC,
currently owns, to IAC's knowledge, 58,800 shares of IAC Common Stock. See
"PROPOSAL TO ELECT DIRECTORS OF THE SURVIVING CORPORATION" and "PROPOSED
MANAGEMENT OF THE SURVIVING CORPORATION."
Stock Options and Warrants. Hollis-Eden's executive officers and
directors hold options and warrants to acquire shares of Hollis-Eden Common
Stock. At the Effective Time, all such options and warrants, whether or
not exercisable, shall be converted into and become rights with respect to
Surviving Corporation Common Stock, and the Surviving Corporation shall
assume each such option and warrant in accordance with its terms and the
stock option or warrant agreement by which it is evidenced. At September
30, 1996, the directors and executive officers and affiliates of Hollis-
Eden collectively held options and warrants, whether or not then
exercisable, to acquire a total of 1,143,774 shares of Hollis-Eden Common
Stock at a weighted average exercise price of $7.04 per share, plus options
to acquire an additional 169,811 shares of Surviving Corporation Common
Stock at the then fair market value when certain products reach $200
million in revenues.
As a fee for financial advisory services rendered to Hollis-Eden in
connection with the Merger, Laidlaw Equities, upon the consummation of the
Merger, will be issued warrants to purchase an aggregate of up to 452,830
additional shares of Surviving Corporation Common Stock at an exercise
price of $2.48 per share.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
consequences of the Merger that are generally applicable to holders of
Hollis-Eden Common Stock. This discussion is based on currently existing
provisions of the Code, existing and proposed Treasury Regulations
thereunder and current administrative rulings and court decisions, all of
which are subject to change. Any such change, which may or may not be
retroactive, could alter the tax consequences to IAC, the IAC Stockholders,
Hollis-Eden or the Hollis-Eden Stockholders, as described herein.
Stockholders should be aware that this discussion does not deal with
all federal income tax considerations that may be relevant to particular
stockholders in light of their particular circumstances, such as
stockholders who are dealers in securities, are subject to the alternative
minimum tax provisions of the Code, are foreign persons, are tax-exempt
entities, taxpayers holding stock as part of a conversion or straddle
transaction, or who acquired their shares in connection with stock option
or stock purchase plans or in other compensatory transactions. In
addition, the following discussion does not address the tax consequences of
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the Merger under foreign, state or local tax laws or the tax consequences
of transactions effectuated prior to, concurrently with or after the Merger
(whether or not such transactions are in connection with the Merger),
including the exchange of Hollis-Eden Warrants and Options and the issuance
to the IAC Stockholders of the Additional Merger Shares. ACCORDINGLY, ALL
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
CONSEQUENCES OF THE MERGER TO THEM, INCLUDING THE APPLICABLE FEDERAL,
STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER IN THEIR PARTICULAR
CIRCUMSTANCES.
Neither IAC nor Hollis-Eden has requested, or will request, a ruling
from the IRS with regard to any of the federal income tax consequences of
the Merger. Cooley Godward LLP, counsel to Hollis-Eden ("Cooley Godward"),
will render an opinion (the "Tax Opinion") to the Hollis-Eden Stockholders,
that the Merger will constitute a tax-free reorganization under Section
368(a)(1)(A) of the Code (a "Reorganization"). The Tax Opinion will be
based on certain assumptions, as well as representations received and to be
received from IAC, Hollis-Eden and certain Hollis-Eden Stockholders and
will be subject to the limitations discussed below. Moreover, the Tax
Opinion will not be binding on the IRS nor preclude the IRS from adopting a
contrary position. The discussion below assumes that the Merger will
qualify as a Reorganization, based upon the Tax Opinion.
Subject to the limitations and qualifications referred to herein and
in the Tax Opinion, and as a result of the Merger's qualifying as a
Reorganization, the following federal income tax consequences should, under
currently applicable law, result:
. No gain or loss will be recognized for federal income tax
purposes by the holders of Hollis-Eden Common Stock upon the
receipt of Surviving Corporation Common Stock solely in exchange
for such Hollis-Eden Common Stock in the Merger (except to the
extent that cash is received in lieu of fractional shares).
. The aggregate tax basis of the Surviving Corporation Common Stock
so received by Hollis-Eden Stockholders in the Merger (including
any fractional shares of Surviving Corporation Common Stock not
actually received) will be the same as the aggregate tax basis of
the Hollis-Eden Common Stock surrendered in exchange therefor.
. The holding period of the Surviving Corporation Common Stock so
received by each Hollis-Eden Stockholder in the Merger will
include the period for which the Hollis-Eden Common Stock
surrendered in exchange therefor was considered to be held,
provided that the Hollis-Eden Common Stock so surrendered is held
as a capital asset at the Effective Date of the Merger.
. Cash payments received by holders of Hollis-Eden Common Stock in
lieu of fractional shares will be treated as if such fractional
shares of Surviving Corporation Common Stock had been issued in
the Merger and then redeemed by IAC. Hollis-Eden Stockholders
receiving such cash will recognize gain or loss upon such
payment, measured by the difference (if any) between the amount
of cash received and the basis in such fractional shares. The
gain or loss should be capital gain or loss, provided that each
such fractional share of Surviving Corporation Common Stock was
held as a capital asset at the Effective Date of the Merger.
. A holder of Hollis-Eden Common Stock or a holder of IAC Common
Stock who exercises appraisal rights with respect to a share of
Hollis-Eden Common Stock or IAC Common Stock and receives a cash
payment for such share generally should recognize capital gain or
loss (if such share was held as a capital asset at the Effective
Date of the Merger) measured by the difference between the
stockholder's basis in such share and the amount of cash
received, provided that such payment is not a dividend equivalent
transaction. A sale of shares pursuant to an exercise of
appraisal rights generally will not be a dividend equivalent
transaction if, as a result of such exercise, the stockholder
exercising appraisal rights owns no shares of capital stock of
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the Surviving Corporation (either actually or constructively
within the meaning of Section 318 of the Code) immediately after
the Merger.
. Neither IAC nor Hollis-Eden will recognize gain solely as a
result of the Merger.
The Tax Opinion will be subject to certain assumptions and
qualifications and will be based on the truth and accuracy of certain
representations of IAC, Hollis-Eden and certain Hollis-Eden Stockholders.
One key assumption is that the "continuity of interest" requirement
will be satisfied in the Merger. In order for this requirement to be met,
stockholders of Hollis-Eden must not, pursuant to a plan or intent existing
at or prior to the Effective Date of the Merger, dispose of so much of (i)
their Hollis-Eden Common Stock in anticipation of the Merger, plus (ii) the
Surviving Corporation Common Stock received in the Merger (collectively,
the "Planned Dispositions") such that the Hollis-Eden Stockholders, as a
group, would no longer have a "significant equity interest" in the Hollis-
Eden business being conducted by the Surviving Corporation after the
Merger. Hollis-Eden Stockholders will generally be regarded as having a
significant equity interest as long as the Surviving Corporation Common
Stock received in the Merger (after taking into account Planned
Dispositions), in the aggregate, represents a "substantial portion" of the
entire consideration received by the Hollis-Eden Stockholders in the
Merger. This requirement is frequently referred to as the "continuity of
interest" requirement. If the continuity of interest requirement is not
satisfied, the Merger would not be treated as a Reorganization. The law is
unclear as to what constitutes a "significant equity interest" or a
"substantial portion." The IRS ruling guidelines require 50% continuity
(although such guidelines do not purport to represent the applicable
substantive law). The continuity of interest certificates obtained from
certain of the Hollis-Eden Stockholders contemplate that the fifty percent
(50%) standard will be applied. No assurance, however, can be made that
the "continuity of interest" requirement will be satisfied, and if such
requirement is not satisfied, the Merger will not be treated as a
Reorganization.
A successful IRS challenge to the Reorganization status of the Merger
would result in significant tax consequences. Hollis-Eden Stockholders
would recognize gain or loss with respect to each share of Hollis-Eden
Common Stock surrendered equal to the difference between the stockholder's
basis in such share and the fair market value, as of the Effective Time, of
the Surviving Corporation Common Stock received in exchange therefor. In
such event, a stockholder's aggregate basis in the Surviving Corporation
Common Stock so received would equal its fair market value and the
stockholder's holding period for such stock would begin the day after the
Merger is consummated. In addition, the transfer of all of Hollis-Eden's
assets to IAC would be treated as a taxable sale of such assets. The
corporate level gain Hollis-Eden would recognize upon such a taxable sale
of its assets would be equal to the difference between Hollis-Eden's
adjusted tax basis in such assets and the fair market value of all of the
merger consideration transferred by IAC as of the Effective Time of the
Merger plus the liabilities of Hollis-Eden assumed by IAC as a result of
the Merger. Hollis-Eden's tax liability associated with such recognized
gain would be assumed by IAC as part of the Merger.
Even if the Merger qualifies as a Reorganization, a recipient of
Surviving Corporation Common Stock would recognize income to the extent
that, for example, any such shares were determined to have been received in
exchange for services to satisfy obligations or in consideration for
anything other that the Hollis-Eden Common Stock surrendered. Generally,
such income is taxable as ordinary income upon receipt. In addition, to
the extent that Hollis-Eden Stockholders were treated as receiving
(directly or indirectly) consideration other than Surviving Corporation
Common Stock in exchange for such stockholder's Common Stock, gain or loss
would have to be recognized.
THIS DISCUSSION SPECIFICALLY DOES NOT ADDRESS THE TAX CONSEQUENCES OF
THE MERGER TO HOLDERS OF THE HOLLIS-EDEN WARRANTS AND OPTIONS, WHO, AS A
RESULT OF THE MERGER, WILL RECEIVE THE MERGER WARRANTS AND OPTIONS, NOR
DOES IT ADDRESS TAX CONSEQUENCES TO THE IAC STOCKHOLDERS OF THE ISSUANCE OF
THE ADDITIONAL MERGER SHARES. HOLDERS OF SUCH SECURITIES SHOULD CONSULT
THEIR TAX ADVISORS WITH RESPECT TO SUCH CONSEQUENCES.
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CONDITIONS TO CONSUMMATION
The obligations of IAC and Hollis-Eden to consummate the Merger are
subject to the satisfaction or waiver of the following conditions: (i) the
Merger Agreement and the transactions contemplated thereby shall have been
approved and adopted by the IAC Stockholders and the Hollis-Eden
Stockholders as described in this Joint Proxy Statement/Prospectus and the
IAC Non-Affiliate Stockholders shall not have elected to have 15% or more
of their shares of IAC Common Stock redeemed at the Redemption Value; (ii)
as of the Effective Time, IAC shall have cash on hand (net of liabilities)
of not less than $6.5 million; (iii) the Registration Statement shall have
been declared effective; (iv) no action or proceeding shall have been
instituted or threatened which is likely to have a material adverse effect
on IAC or Hollis-Eden or could enjoin, restrain or prohibit, or could
result in substantial damages in respect of, any provision of the Merger
Agreement or the consummation of the transactions contemplated thereby; (v)
all consents and approvals required for the consummation of the Merger and
the transactions contemplated thereby shall have been obtained, and all
required filings shall have been made; (vi) IAC and Hollis-Eden each shall
have performed and complied with all covenants, obligations and agreements
applicable to it contained in the Merger Agreement and all representations
and warranties of each of IAC and Hollis-Eden shall be true and correct in
all material respects on and as of the date made and the Effective Time;
(vii) the patent infringement and, if necessary, the patent validity,
analyses by IAC's counsel, and, if given in accordance with the terms of
the Merger Agreement, the final opinion of independent patent counsel,
shall not have resulted in an opinion of a patent infringement which will
have an "unavoidable" material adverse effect upon certain of Hollis-Eden's
Products; (viii) the receipt of written opinions of counsel to IAC and
Hollis-Eden as to certain matters; and (ix) Mr. Salvatore J. Zizza shall
have been elected a director of the Surviving Corporation. In addition to
the conditions set forth above, the obligations of IAC and Hollis-Eden to
consummate the Merger are subject to the absence, since the date of the
Merger Agreement, of any material adverse change in the business,
operations, assets, liabilities, results of operations, cash flows,
condition (financial or otherwise) or prospects of IAC and Hollis-Eden,
which is materially adverse to IAC or Hollis-Eden, as the case may be.
TERMINATION
The Merger Agreement may be terminated, and the Merger abandoned, at
any time prior to the Effective Time, by mutual consent of all parties to
the Merger Agreement. In addition, the Merger Agreement may be terminated,
and the Merger abandoned, generally, (i) prior to, but not after, the
approval of the Merger Agreement by the stockholders of each of Hollis-Eden
and IAC, by Hollis-Eden or IAC, as the case may be, if the Merger shall not
have become effective by February 15, 1997 (or such later date as permitted
by the Merger Agreement to allow the parties to complete their patent
analyses within the permitted time parameters), provided, however, that
such termination right shall not be available to any party whose failure to
fulfill any obligation under the Merger Agreement has been the cause of or
resulted in the failure of the Merger to become effective by such date;
(ii) by any party to the Merger Agreement if any court of competent
jurisdiction in the United States or other United States governmental body
shall have issued an order, decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the Merger or any of the
other transactions contemplated by the Merger Agreement and such order,
decree, ruling or other action shall have become final and non appealable;
(iii) By IAC, if IAC Non-Affiliate Stockholders holding 15% or more of the
shares of IAC Common Stock shall have exercised their Redemption Rights or
(iv) by IAC, if its Patent Infringement and, if necessary, patent validity
analyses, and, if given in accordance with the terms of the Merger
Agreement, the final opinion of independent patent counsel, shall have
resulted in an opinion of a Patent Infringement which will have an
"unavoidable" material adverse effect upon certain of Hollis-Eden's
Products.
EXPENSES AND FEES
The Merger Agreement provides that each party shall bear its own
expenses with respect to the transactions contemplated by the Merger
Agreement.
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<PAGE>
In addition, Hollis-Eden has agreed to pay IAC the $100,000 Fee, which
Fee has been placed into escrow, in the event Hollis-Eden terminates the
Merger Agreement and abandons the Merger for any reason other than those
reasons permitted under the Merger Agreement. Moreover, in the event IAC
terminates the Merger Agreement and abandons the Merger as a result of a
Patent Infringement, IAC shall be entitled to such portion of the Fee as
may be necessary to reimburse IAC for its costs and expenses in connection
with the Merger Agreement and the proposed Merger.
ACCOUNTING TREATMENT
For accounting and financial reporting purposes, the Merger will be
treated as a recapitalization of Hollis-Eden by an exchange of Hollis-Eden
Common Stock for the net assets of IAC, consisting primarily of cash.
Since IAC has had no business operations other than the search for a
suitable Target Business, IAC's assets will be recorded in the balance
sheet of the combined company (i.e., the Surviving Corporation) at book
value. The unaudited pro forma financial information contained in this
Joint Proxy Statement/Prospectus has been prepared on this basis.
REGULATORY APPROVALS
No governmental regulatory approvals are required with respect to the
Merger except for the filing of the Certificate of Merger with the
Secretary of State for the State of Delaware and the filing with the
Commission of the Registration Statement and this Joint Proxy
Statement/Prospectus.
CONDUCT OF BUSINESS PENDING THE MERGER AND COVENANTS OF THE PARTIES
Each of IAC and Hollis-Eden has agreed in the Merger Agreement to,
among other things, operate its business only in the ordinary and usual
course consistent with past practice and to use reasonable commercial
efforts to preserve intact its present business organization, preserve its
good will and advantageous relationships with employees and other persons
material to its operations and business and not permit any action or
omission within its control which would cause any of its representations or
warranties to become inaccurate in any material respect or any of its
covenants to be breached in any material respect. In addition, each of IAC
and Hollis-Eden has agreed not to take certain actions relating to its
operations pending consummation of the Merger without the prior written
consent of the other. These actions generally include, without limitation,
(i) incurring any obligation or entering into any contract which either (a)
requires a payment by any party in excess of, or a series of payments which
in the aggregate exceed, $10,000, or provides for the delivery of goods or
performance of services, or any combination thereof, having a value in
excess of $10,000, or (b) has a term of, or requires the performance of any
obligations by Hollis-Eden or IAC, as the case may be, over a period in
excess of, six months; (ii) taking any action, or entering into or
authorizing any contract or transaction other than in the ordinary course
of business and consistent with past practice; (iii) selling, transferring,
conveying, assigning or otherwise disposing of any of its assets or
properties, except in the ordinary course of business; (iv) making any new
loans, advances or capital contributions to, or new investments in, any
other person other than to a subsidiary consistent with normal business
practice; (v) waiving, releasing or canceling any claims against third
parties or debts owing to it, or any rights which have any value in an
amount greater than $10,000 other than actions taken consistent with normal
past business practices; (vi) making any changes in its accounting systems,
policies, principles or practices; (vii) authorizing for issuance, issuing,
selling, delivering or agreeing or committing to issue, sell or deliver
(whether through the issuance or granting of options, warrants, convertible
or exchangeable securities, commitments, subscriptions, rights to purchase
or otherwise) any shares of its capital stock or any other securities, or
amending any of the terms of any such securities; (viii) splitting,
combining, or reclassifying any shares of its capital stock, declaring,
setting aside or paying any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock, or redeeming or otherwise acquiring any of its securities;
(ix) making any borrowings, incurring any debt (other than trade payables
in the ordinary course of business or equipment leases entered into in the
ordinary course of business), or assuming, endorsing or otherwise becoming
liable or the guarantor of (whether directly, contingently or otherwise)
the obligations of any other person other than a subsidiary, or making any
unscheduled payment or repayment of principal in respect of any long term
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<PAGE>
debt; (x) entering into, amending or terminating any bonus, compensation,
stock option, employment, severance or other employee benefit agreement or
increasing in any manner the compensation or benefits thereunder; (xi)
leasing or encumbering, generally, any assets which are material to its
operations; (xii) authorizing or making any capital expenditures which
individually or in the aggregate are in excess of $10,000, other than
planned expenditures; (xiii) making any tax election or settling or
compromising any federal, state, local or foreign income tax liability, or
waiving or extending the statute of limitations in respect of any such
taxes; and (xiv) paying or agreeing to pay any amount in settlement or
compromise of any suits or claims of liability against it or its directors,
officers, employees or agents in an amount more than $10,000.
In addition, Mr. Salvatore J. Zizza, Chairman of the Board of IAC and
the owner of approximately 8.4% of the outstanding shares of IAC Common
Stock (without giving effect to the exercise of any IAC Warrants and
Options), has agreed with Hollis-Eden to vote all shares of IAC Common
Stock owned by him in favor of the Merger Agreement and to use his best
efforts to cause the other IAC Stockholders to vote in favor of the Merger
Agreement. As an Initial IAC Stockholder, however, Mr. Zizza is required
to vote his shares with respect to the Merger Agreement in accordance with
the vote of the majority in interest of all IAC Non-Affiliate Stockholders.
Mr. Richard B. Hollis, Chairman of the Board of Hollis-Eden and the
beneficial owner of approximately 58% of the outstanding Hollis-Eden Common
Stock (without giving effect to the exercise of any Hollis-Eden Warrants
and Options), has agreed to vote all shares of Hollis-Eden Common Stock
owned by him in favor of the Merger Agreement and to use his best efforts
to cause the other Hollis-Eden Stockholders to vote in favor of the Merger
Agreement.
Hollis-Eden has also agreed to use its reasonable commercial efforts
to obtain signed letters from as many Hollis-Eden Stockholders as possible,
which letters shall acknowledge such Hollis-Eden Stockholders' agreement
not to sell any shares of Surviving Corporation Common Stock to be issued,
directly or indirectly, to them in, and as a result of, the Merger, for the
nine-month period immediately following the Effective Time. In addition,
Messrs. Hollis and Prendergast, the owners of approximately 71% of the
outstanding Hollis-Eden Common Stock, have agreed with Hollis-Eden not to
sell more than an aggregate of 1,000,000 shares of Surviving Corporation
Common Stock to be received by them as a result of the Merger for the two-
year period commencing upon the Effective Time of the Merger.
The Merger Agreement further provides that until either the Effective
Time or a permitted termination of the Merger Agreement, neither Hollis-
Eden nor any of its affiliates shall solicit, initiate, encourage, continue
or enter into negotiations or discussions of any type, directly or
indirectly, with any other person, with respect to an offer for the sale of
Hollis-Eden, or any substantial portion of Hollis-Eden's assets, or Hollis-
Eden's capital stock, directly by merger, consolidation or any other form
of purchase, provided, however, that Hollis-Eden and its affiliates may
solicit, initiate, encourage, continue or enter into negotiations or
discussions for the limited purpose of raising capital for Hollis-Eden.
RESALES OF SURVIVING CORPORATION COMMON STOCK
Future sales of Surviving Corporation Common Stock by current IAC and
Hollis-Eden Stockholders, option holders and warrant holders could
adversely affect the market price of the Surviving Corporation's Common
Stock. All of the shares of Surviving Corporation Common Stock issuable in
the Merger, other than to affiliates of Hollis-Eden, will be eligible for
sale under Rules 144 and 145 promulgated under the Securities Act
immediately upon consummation of the Merger. In addition, the shares of
Surviving Corporation Common Stock issuable in the Merger, other than to
affiliates of Hollis-Eden, can be resold pursuant to this Proxy
Statement/Prospectus. However, pursuant to the Merger Agreement, Hollis-
Eden is using its best efforts to secure the agreement of each Hollis-Eden
Stockholder to such Stockholder's not selling any shares of Surviving
Corporation Common Stock issuable in the Merger for the nine-month period
(and in the case of Mr. Hollis and Dr. Prendergast, no more than an
aggregate of 1,000,000 shares in the two-year period) immediately following
the consummation of the Merger. In addition, all of the Surviving
Corporation Common Stock owned by the Initial IAC Stockholders are
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"restricted securities" as that term is defined in Rule 144 promulgated
under the Securities Act. Under such rule, once two years have elapsed
from the date of the acquisition, an affiliate of an issuer may, every
three months, sell in ordinary brokerage transactions or in transactions
directly with a market maker an amount equal to the greater of one percent
of the issuer's outstanding common stock or the average weekly trading
volume during the four calendar weeks prior to the sale. Once three years
have elapsed, a person who has not been an affiliate of an issuer for 90
days immediately prior to the proposed sale may sell his shares without
restriction. As of the date of this Joint Proxy Statement/Prospectus, all
of the shares of Surviving Corporation Common Stock held by IAC
Stockholders are eligible for sale without restriction, except that Mr.
Salvatore J. Zizza, Chairman of the Board of IAC and a proposed member of
the Surviving Corporation's Board of Directors following the Merger
(beneficially owning 220,000 shares), will continue to be restricted
pursuant to Rule 144.
The shares of Surviving Corporation Common Stock issuable upon
exercise of the Merger Warrants and Options are also being registered
pursuant to the Registration Statement of which this Joint Proxy
Statement/Prospectus forms a part, for permitted resale following their
issuance.
OPERATIONS AFTER THE MERGER
As a result of the Merger, Hollis-Eden will be merged with and into
IAC, with IAC being the Surviving Corporation to the Merger. Upon the
consummation of the Merger, Hollis-Eden will cease to exist as a separate
corporation and the Surviving Corporation will change its name to Hollis-
Eden Pharmaceuticals, Inc. The business of the Surviving Corporation will
be that of Hollis-Eden immediately prior to the Merger.
In accordance with the Merger Agreement, at the Effective Time, and
subject to their election by the IAC Stockholders, the Board of Directors
of the Surviving Corporation will consist of six directors, five of whom
(Messrs. Hollis, Prendergast, Merigan, Bagley and McDonnell) shall be
Hollis-Eden's designees, and one of whom (Mr. Zizza) shall be IAC's
designee. In addition, all of the current officers of IAC will resign
effective at the Effective Time, to be replaced by the current officers of
Hollis-Eden designated by the Surviving Corporation's Board of Directors as
detailed in the Merger Agreement.
IAC does not presently intend to pay any cash dividends, as all
available cash will be utilized to further the growth of the Surviving
Corporation's business subsequent to the Effective Time for the foreseeable
future thereafter, including the funding of Hollis-Eden's (and
consequently, the Surviving Corporation's) working capital and capital
expenditure requirements. The payment of any cash dividends will be in the
discretion of the Surviving Corporation's Board of Directors and will be
dependent upon the Surviving Corporation's results of operations, financial
conditions and other factors deemed relevant by the Surviving Corporation's
Board of Directors.
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IAC SELECTED HISTORICAL FINANCIAL INFORMATION
The following data, insofar as it relates to each of the fiscal years
1995, 1994 and 1993, has been derived from audited financial statements,
including the balance sheets at December 31, 1995, 1994 and 1993 and the
statements of operations of stockholders' equity and of cash flows for
the years ended December 31, 1995, 1994 and 1993 and notes thereto
appearing elsewhere herein. The data for the nine months ended
September 30, 1996 and 1995 has been derived from unaudited financial
statements also appearing herein and which, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results for unaudited interim
periods. No cash dividends have ever been declared or paid on IAC
Common Stock.
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
STATEMENT OF OPERATIONS DATA: ---- ---- ----
Interest income . . . . . . . . . . . $ 224,305 $ -0- $ -0-
General and administrative
expenses . . . . . . . . . . . . . $ 71,782 $ 7,000 $ 7,186
Net income (loss) . . . . . . . . . . $ 100,523 $(7,000) $(7,186)
Net income (loss) per common
share . . . . . . . . . . . . . . . $ 0.16 $ (.03) $ (.03)
Weighted average shares
outstanding . . . . . . . . . . . . 608,250 233,250 233,250
BALANCE SHEET DATA:
Total assets . . . . . . . . . . . . $6,518,759 $74,139 $81,139
Common stock subject to
possible redemption . . . . . . . . $ 932,316 $ -0- $ -0-
Stockholders' equity . . . . . . . . $5,496,803 $68,139 $75,139
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1996 1995
STATEMENT OF OPERATIONS DATA: ---- ----
Interest income . . . . . . . . . . . $ 264,986 $ 123,228
General and administrative
expenses . . . . . . . . . . . . . $ 132,152 $ 15,405
Net income (loss) . . . . . . . . . . $ 100,684 $ 107,823
Net income (loss) per common
share . . . . . . . . . . . . . . . $ 0.12 $ 0.20
Weighted average shares
outstanding . . . . . . . . . . . . 833,250 533,250
BALANCE SHEET DATA:
Total assets . . . . . . . . . . . . $6,692,264 $6,438,919
Common stock subject to
possible redemption . . . . . . . . $ 969,703 $ -0-
Stockholders' equity . . . . . . . . $5,560,100 $6,436,419
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HOLLIS-EDEN SELECTED HISTORICAL FINANCIAL INFORMATION
The following data, insofar as it relates to each of the periods 1995
and 1994, has been derived from audited financial statements, including the
balance sheet at December 31, 1995 and 1994 and the related statements of
operations, of stockholders' deficit and of cash flows for the year ended
December 31, 1995 and the periods from inception (August 15, 1994) to
December 31, 1994 and September 30, 1996 and notes thereto appearing
elsewhere herein. The data for the nine months ended September 30, 1996
and 1995 has been derived from unaudited financial statements also
appearing herein and which, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the results for the unaudited interim periods.
The interim results of operations are not necessarily indicative of
results which may occur for the full fiscal year. No cash dividends
have ever been declared or paid on Hollis-Eden Common Stock.
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(AUGUST 15, (AUGUST 15,
YEAR ENDED 1994) TO 1994) TO
DECEMBER 31, DECEMBER 31, SEPTEMBER
1995 1994 30, 1996
------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Research and development . . . $ 463,000 $ 1,166,762 $ 1,753,855
General and administrative
expenses . . . . . . . . . . . $ 170,929 $ 103,564 $ 620,722
Total operating expenses . . . $ 633,929 $ 1,270,326 $ 2,374,577
Other income (expense), net . . $ (37,762) $ (6,720) $ (44,416)
Net loss . . . . . . . . . . . $ (671,691) $(1,277,046) $(2,418,993)
Net loss per share . . . . . . $ (0.17) $ (0.38) $ (0.61)
Weighted average number of
common shares outstanding . . . 3,867,924 3,396,226 3,945,783
BALANCE SHEET DATA:
Total assets . . . . . . . . . $ -0- $ -0- $ 344,191
Notes and accounts payable and
accrued interest to related
party . . . . . . . . . . . . . $ 367,522 $ 216,720 $ -0-
License fees payable . . . . . $ 928,000 $ 927,000 $ 600,000
Stockholders' deficit . . . . . $(1,537,633) $(1,143,720) $ (368,264)
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
---- ----
STATEMENT OF OPERATIONS DATA:
Research and development . . . $ 124,093 $ 463,000
General and administrative
expenses . . . . . . . . . . . $ 346,229 $ 138,429
Total operating expenses . . . $ 470,322 $ 601,429
Other income (expense), net . . $ 66 $ (28,322)
Net loss . . . . . . . . . . . $ (470,256) $ (629,751)
Net loss per share . . . . . . $ (0.10) $ (0.17)
Weighted average number of
common shares outstanding . . . 4,573,199 3,773,585
BALANCE SHEET DATA:
Total assets . . . . . . . . . $ 344,191 $ -0-
Notes and accounts payable and
accrued interest to related
party . . . . . . . . . . . . . $ -0- $ 335,582
License fees payable . . . . . $ 600,000 $ 943,000
Stockholders' deficit . . . . . $ (368,264) $(1,495,693)
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UNAUDITED PRO FORMA FINANCIAL STATEMENTS
OF INITIAL ACQUISITION CORP. AND HOLLIS-EDEN
The following Unaudited Pro Forma Combined Balance Sheet is
based upon the financial statements of Initial Acquisition Corp. and
Hollis-Eden, combined and adjusted to give effect to the Merger. The
Merger Agreement provides that all of the outstanding shares of Hollis-Eden
Common Stock will be converted into shares of IAC (Surviving Corporation)
Common Stock. The Unaudited Pro Forma Combined Balance Sheet reflects a
recapitalization of Hollis-Eden for the net assets of IAC consisting
primarily of cash. The Unaudited Pro Forma Combined Balance Sheet was
derived by adjusting the unaudited historical financial statements of IAC
and Hollis-Eden for certain transactions pursuant to the Merger described
in the accompanying notes to the Unaudited Pro Forma Combined Balance
Sheet.
The unaudited pro forma combined balance sheet at September 30, 1996
gives effect to the Merger as if it had occurred on such date. The
Unaudited Pro Forma Combined Balance Sheet is derived from unaudited
historical financial statements of Hollis-Eden and unaudited historical
financial statements of IAC and should be read in conjunction with
Hollis-Eden's and IAC's unaudited historical financial statements
included elsewhere in this Joint Proxy Statement/Prospectus. The
Pro Forma Combined Balance Sheet as of September 30, 1996 has been
prepared on the same basis as the historical information derived from
the audited financial statements included elsehwere in the Joint Proxy
Statement/Prospectus. In the opinion of Hollis-Eden's and IAC's
management, the Unaudited Combined Pro Forma Balance Sheet of
Hollis-Eden and IAC referred to above include all adjustments,
consisting only of normal recurring accruals, necessary for fair
presentation of the financial position as of September 30, 1996
and results for such periods.
As the Merger is recorded as a recapitalization of Hollis-Eden for
the net assets of IAC, a Pro Forma Statement of Operations is not deemed
to be meaningful and, as such, has not been included in this Joint Proxy
Statement/Prospectus.
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UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1996
INITIAL PRO FORMA
ACQUISITION ADJUSTMENTS
HOLLIS-EDEN CORP. DR. CR.
----------------------------------------------------------
ASSETS
------
CURRENT ASSETS
Cash . . . . $ 227,657 $ 202,165 $ 6,469,000(2) $ 1,973,500(3)(4)(8)
Investment in
U.S. Treasury
Bills . . . 0 6,469,000 6,469,000(2)
Other
receivables 90,300 0
Prepaid 19,572 0
expenses . . ----------- ----------
Total
current
assets . 337,529 6,671,165
Net property
and equipment 6,662 0
Deferred
acquisition 0 21,099 21,099(3)
costs . . . ----------- ----------
Total assets 344,191 6,692,264
=========== ==========
LIABILITIES
AND
STOCKHOLDERS'
EQUITY
--------------
CURRENT
LIABILITIES
Accrued
expenses . . 97,119 78,311
Account
payable . . 15,336 0
Income taxes
payable . . 0 84,150
License fees 600,000 0 323,500(4)
payable . . ----------- ----------
Total 712,455 162,461
liabilities ----------- ----------
Common Stock,
subject to
possible
redemption . 0 969,703 969,703(5)
----------- ----------
STOCKHOLDERS EQUITY
(DEFICIT)
Preferred
stock . . . 0 0
Common stock 491 7,434 491(6) 49,110(6)
900(5)
500(9)
Additional
paid-in
capital . . 2,050,238 5,436,065 171,099(3) 968,803(5)
48,619(6) 116,601(7)
3,970,650(9) 500,000(10)
3,970,150(9)
Earnings (deficit)
accumulated
during
development (2,418,993) 116,601 1,500,000(8)
stage . . . ----------- ----------
500,000(10)
116,601(7)
Total
stock-
holders'
equity (368,264) 5,560,100 6,307,460 5,606,064
(deficit) ----------- ----------
Total
liabilities
and
stock-
holders' $ 344,191 $6,692,264 $14,069,663 $14,069,663
equity . . =========== ========== =========== ===========
PRO FORMA
PRO FORMA ASSUMING
ASSUMING MAXIMUM
NO REDEMPTION(1) REDEMPTION(1)
------------------------------
ASSETS
------
CURRENT ASSETS
Cash . . . . . . . . . . . . . . . . $4,925,322 $3,955,619
Investment in U.S. Treasury Bills . . 0 0
Other receivables . . . . . . . . . . 90,300 90,300
Prepaid expenses . . . . . . . . . . 19,572 19,572
---------- ----------
Total current assets . . . . . . . 5,035,194 4,065,491
Net property and equipment . . . . . 6,662 6,662
Deferred acquisition costs . . . . . 0 0
---------- ----------
Total assets . . . . . . . . . . . 5,041,856 4,072,153
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accrued expenses . . . . . . . . . . 175,430 175,430
Account payable . . . . . . . . . . . 15,336 15,336
Income taxes payable . . . . . . . . 84,150 84,150
License fees payable . . . . . . . . 276,500 276,500
---------- ----------
Total liabilities . . . . . . . . 551,416 551,416
---------- ----------
Common Stock, subject to possible
redemption . . . . . . . . . . . . 0 0
---------- ----------
STOCKHOLDERS EQUITY
(DEFICIT)
Preferred stock . . . . . . . . . . . 0 0
Common stock . . . . . . . . . . . . 57,944 57,044
Additional paid-in capital . . . . . 8,851,489 7,882,686
Earnings accumulated (deficit) during (4,418,993) (4,418,993)
development stage . . . . . . . . . ---------- ----------
Total stockholders' equity (deficit) 4,490,440 3,520,737
---------- ----------
Total liabilities and stockholders' $5,041,856 $4,072,153
equity . . . . . . . . . . . . . ========== ==========
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<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
1. The unaudited pro forma combined balance sheet is presented, in the
first instance, assuming that no IAC Stockholder exercises Redemption
Rights (see "GENERAL INFORMATION-IAC Special Meeting; Redemption Rights"
and "-Appraisal Rights") and, in the second instance, assuming that
holders of 89,940 shares of IAC Common Stock exercise redemption rights
(representing the maximum number of shares with respect to which redemption
can be effected pursuant to the IAC Prospectus). Pursuant to the IAC
Prospectus, IAC may not consummate a Business Combination if holders with
respect to 15% or more in interest of the IAC Common Stock vote against the
Business Combination and request redemption of such shares.
There were 4,911,004 shares of Hollis-Eden Common Stock outstanding as
of September 30, 1996. On a pro forma basis after the Merger, assuming no
redemption of shares of IAC Common Stock, 5,794,254 shares of Surviving
Corporation Common Stock will be outstanding, which assumes 833,250 of
previously outstanding shares, 4,911,004 shares issued in exchange for
outstanding shares of Hollis-Eden, and an aggregate of 50,000 shares to
be issued to Gruntal & Co. and Reid & Priest LLP. Where the maximum
redemption of 89,940 shares of IAC Common Stock as permitted by the IAC
Prospectus is assumed, 5,704,314 shares of IAC Common Stock would be
outstanding as of September 30, 1996, on a pro forma basis.
2. Represents relief of restricted cash from the trust as a result of
the Merger.
3. Represents payment of $150,000 and the application of deferred
acquisition costs for total estimated expenses of $171,099 to be incurred
by IAC and Hollis-Eden related to the Merger.
4. Represents the reduction of license fees payable due to cash
acquired in connection with the Merger. Pursuant to the license
agreement, five percent of all net proceeds, as defined in the agreement,
becomes immediately due and payable.
5. Represents the reclassification of IAC Common Stock subject to
possible redemption on the basis of the Unaudited Pro Forma Combined
Balance Sheet assuming that no IAC Stockholder will exercise their
Redemption Rights.
6. Represents the recapitalization of Stockholders' Equity based upon
the issuance of IAC Common Stock in exchange for Hollis-Eden Common Stock.
7. Represents the reclassification of IAC Retained Earnings prior to
the Merger to Additional Paid-In Capital.
8. Represents payment of research and development fees which are
required to be paid upon the successful closure of the Merger pursuant
to the research and development agreement which become due and payable
upon closure.
9. Represents a charge for (i) warrants to purchase an aggregate of
452,830 shares of the surviving company's common stock at an exercise
price of $2.48 to be issued upon the successful closure of the merger
pursuant to an agreement and (ii) 50,000 shares of the surviving
company's common stock to be issued to Gruntal & Co. and Reid & Priest
LLP upon the successful closure of the Merger. An estimate of $10.13 per
share was used to calculate the charges which approximates fair market
value. These charges constitute transaction fees and accordingly have
been recorded as a charge to additional paid in capital.
10. Represents a charge for IAC warrants to be issued to a
certain officer to purchase an aggregate of 50,000 shares of the
surviving company's common stock at an exercise price of $0.10
per share to be issued upon the successful closure of the Merger.
An estimate of $10.10 per share was used to calculate the charges
which approximates fair market value.
NON-RECURRING CHARGES
---------------------
The pro forma adjustments outlined in numbers 8, 9 and 10 (discussed
above) represent non-recurring charges and as such would not be presented
in a pro forma statement of operations.
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<PAGE>
HOLLIS-EDEN'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
contains forward-looking statements that involve risks and uncertainties.
Hollis-Eden's (and consequently, the Surviving Corporation's) actual
results could differ materially from those discussed here. Factors that
could cause or contribute to such differences, include, but are not limited
to, those discussed in "Hollis-Eden's Business" and "Risk Factors," as well
as those discussed elsewhere in this Joint Proxy Statement/Prospectus and
any document incorporated herein by reference. Also see Hollis-Eden's
Financial Statements included herein.
RESULTS OF OPERATIONS
Hollis-Eden is a development stage pharmaceutical company and has not
generated any revenues for the period from August 15, 1994 (inception)
through September 30, 1996. Hollis-Eden has devoted substantially all its
resources to the payment of licensing fees (including research and
development fees) and expenses related to the startup of its business. From
inception until December 31, 1994, Hollis-Eden incurred expenses of
$1,166,762 in research and development fees, $103,564 in general and
administrative expenses and $6,720 in interest resulting in a loss of
$1,277,046 for the period from inception (August 15, 1994) to December 31,
1994. For the year ended December 31, 1995, Hollis-Eden incurred $463,000
in research and development fees, $170,929 in general and administrative
expenses and $37,762 in interest expense, resulting in a loss of $671,691.
For the nine months ended September 30, 1996, Hollis-Eden incurred expenses
of $124,093 in research and development fees, $346,229 in general and
administrative expenses and received $66 in net interest income, resulting
in a loss of $470,256.
Hollis-Eden 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, Hollis-Eden will
have to meet the substantial new challenge of developing the capability to
market products. Accordingly, Hollis-Eden's activities to date are not as
broad in depth or scope as the activities it must undertake in the future,
and Hollis-Eden's historical operations and financial information included
in this Joint Proxy Statement/Prospectus are not indicative of Hollis-
Eden'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 product to market.
LIQUIDITY AND CAPITAL RESOURCES
Hollis-Eden has financed its operations since inception through the sale
of shares of Hollis-Eden Common Stock and with loans from Hollis-Eden's
founder, Richard B. Hollis. At December 31, 1994, amounts borrowed from
Mr. Hollis totaled $210,000 and were evidenced by an unsecured promissory
note bearing interest at the rate of 15% per annum. During the year ended
December 31, 1995, Mr. Hollis advanced Hollis-Eden an additional $40,000
for Hollis-Eden's license fee obligations and also loaned $73,040 to pay
business expenses of Hollis-Eden. As a result of these transactions,
Hollis-Eden, at December 31, 1995, owed Mr. Hollis $323,040 plus accrued
interest of $44,482, or a total of $367,522 (the "Hollis Debt"). In
January 1996, Hollis-Eden borrowed $367,522 from a group of private
investors, including the brother of Mr. Hollis (the "Bridge Lenders").
Hollis-Eden repaid the Hollis Debt from these proceeds.
During the year ended December 31, 1995, Hollis-Eden received cash
proceeds of $250,000 from the sale of its securities. In May 1996, Hollis-
Eden completed a private placement of shares of Hollis-Eden Common Stock,
from which it received aggregate gross proceeds of $1,305,011. Concurrent
with the closing of such private placement, the notes held by the Bridge
Lenders were converted into 164,962 shares of Hollis-Eden Common Stock.
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<PAGE>
Under agreements with Dr. Patrick T. Prendergast, Colthurst Limited and
Edenland, Hollis-Eden is obligated to pay certain minimum license fees to
maintain its rights to the Products. Under these licensing agreements,
Hollis-Eden is obligated to pay $600,000 by April 28, 1998. The $600,000
is a minimum fee payable by way of a five percent payment of the first
$12,000,000 of net proceeds or funds or investments required by or expended
on behalf of Hollis-Eden by way of equity sale, partnership agreement,
loan, or other means. Following payment of the $600,000 fee, Hollis-Eden
is obligated to pay the licensors an aggregate of two and one-half percent
of all such proceeds raised through April 28, 1998. An annual renewal
license fee of $500,000 is due when one of the following events occur:
Hollis-Eden raises a predetermined amount of capital occurring after May
18, 1994; Hollis-Eden sublicenses the technology received under the
Colthurst license agreement; Hollis-Eden generates sales; Hollis-Eden
licenses or funds new technologies not covered under the existing
agreements; or a predetermined date in the future. If the Merger is
effected, an additional license fee of $10,000 per month is payable
beginning November 5, 1996 through the earlier of the Effective Time of the
Merger or May 5, 1997.
Under an existing Research, Development, and Option Agreement with
Edenland and Dr. Patrick T. Prendergast, the agreement commits Hollis-Eden
to pay for the development costs related to the anti-serum up to the amount
of $3,000,000 to be paid from funds realized by way of equity sale,
sublicense, partnership agreements, loans, private placements, and public
offerings. An amount of $1,500,000 is due upon successful closure of the
Merger and the balance is due from future funding events by allocating a
percentage of the funds raised to the Research, Development, and Option
agreement until the $3,000,000 has been paid in full. Under the existing
agreement, Hollis-Eden was obligated to fund $2,000,000 per year for
research. This obligation will not commence until Hollis-Eden raises an
aggregate of $10 million in capital occurring after May 18, 1994. Payments
made towards the $3,000,000 anti-serum development costs are deductible
from the amount due for the $2,000,000 per year of research.
The Surviving Corporation intends to utilize the cash to be infused into
the Surviving Corporation as a result of the Merger to meet its licensing
obligations, pay accrued expenses, fund its research and product
development activities, and for working capital and general corporate
purposes. The amount and timing of expenditures for each purpose will
depend on a number of factors, including progress of the Surviving
Corporation's research and development programs, the number and breadth of
these programs and the progress of the development and commercialization
efforts of the Surviving Corporation, the costs involved in preparing,
filing, prosecuting, maintaining, and enforcing patent claims and other
proprietary rights, progress in the regulatory process, and other factors.
Hollis-Eden (and consequently, the Surviving Corporation) believes that the
cash to be infused into the Surviving Corporation as a result of the
Merger, together with interest thereon, will be sufficient to fund the
Surviving Corporation's capital requirements at least through 1997. See
"HOLLIS-EDEN'S BUSINESS."
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<PAGE>
IAC'S MANAGEMENT S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In reviewing the following discussion, reference is made to IAC's
financial statements included elsewhere herein.
IAC is a development stage company, and to date its efforts have been
limited to organizational activities, consummating its IPO and seeking a
Business Combination. IAC has not yet consummated a Business Combination.
Accordingly, IAC has not, and will not, achieve any operating revenues
(other than investment income) until, at the earliest, the consummation of
a Business Combination.
IAC has used, and will continue to use the net proceeds from the IPO,
together with the income and interest earned thereon, principally in
connection with effecting a Business Combination, including selecting and
evaluating potential Target Businesses and structuring and consummating a
Business Combination (including possible payment of finder's fees or other
compensation to persons or entities which provide assistance or services to
IAC). IAC does not have discretionary access to the income on the monies
in the escrow account and IAC Stockholders will not receive any
distribution of the income (except in connection with a liquidation of IAC)
or have any ability to direct the use or distribution of such income.
Thus, such income will cause the amount in escrow to increase. IAC cannot
use the Escrowed Funds to pay the costs of evaluating potential Business
Combinations and has used the proceeds from the sale of the Class B
Warrants in the IPO to cover all of its expenses to date, to pay the
Escrowed Funds Escrow Agent and to pay the costs of evaluating potential
Business Combinations, including investment banking fees and the costs of
business, legal and accounting due diligence on prospective Target
Businesses. In addition, such funds will be used for the general and
administrative expenses of IAC, including legal and accounting fees and
administrative support expenses in connection with IAC's reporting
obligations to the Commission. IAC does not anticipate such fees and
administrative expenses will exceed $100,000 per year.
IAC also has retained Gruntal, for the 18 month period commencing as of
May 15, 1995 (the "Engagement Period"), to aid in structuring and
negotiating Business Combinations. Gruntal has been and will continue to
be paid an engagement fee of $3,500 per month during the Engagement Period,
with maximum compensation payable thereunder to Gruntal limited to $63,000
for such 18-month period, or $84,000 if certain extension criteria are
satisfied and the agreement with Gruntal is extended for six additional
months. Gruntal was issued 15,000 shares of IAC Common Stock at a price of
$.10 per share as additional compensation for its agreement to act as IAC's
investment banker.
As a result of the IPO, IAC has sufficient available funds, assuming
that a Business Combination is not consummated, to operate until at least
May 15, 1997. To the extent that shares of IAC Common Stock are used as
consideration to effect a Business Combination, the balance of the net
proceeds of the IPO not theretofore expended will be used to finance the
operations of the Target Business. IAC has not incurred any debt in
connection with its organizational activities.
In the event that IAC does not effect a Business Combination by May 15,
1997, IAC will submit for stockholder consideration a proposal to liquidate
IAC and distribute to the IAC Non-Affiliate Stockholders the Escrowed
Funds. Thereafter, all remaining assets available for distribution will be
distributed to all holders of IAC's Common Stock after payment of
liabilities and after appropriate provision has been made for the payment
of liquidation distributions upon each class of stock, if any, having
preference over the IAC Common Stock. To the extent that a Business
Combination is not effected in the time allowed and IAC's Stockholders
determine not to liquidate IAC, IAC believes that income from the escrow
account may be sufficient to defray continuing expenses for a period of
several additional years until IAC consummates a Business Combination.
Since the Initial IAC Stockholders have agreed to waive their respective
rights to participate in a liquidation distribution occurring prior to the
first Business Combination, all of the assets of IAC, including all
Escrowed Funds, which may be distributed upon such liquidation would be
distributed to IAC Non-Affiliate Stockholders.
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<PAGE>
HOLLIS-EDEN'S BUSINESS
OVERVIEW
Hollis-Eden is a development stage pharmaceutical company engaged in
developing therapeutic and/or preventative pharmaceutical agents for the
treatment of a number of targeted disease states caused by viral,
bacterial, parasitic or fungal infections, including HIV and AIDS. Hollis-
Eden believes that certain of its products 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.
Hollis-Eden's development efforts are centered around four proprietary
Products developed by and licensed from Patrick T. Prendergast, Ph.D., and
are based upon his research in the area of viral-caused disorders and
therapies. Hollis-Eden is the beneficiary of more than 10 years of
extensive research and development with respect to the Products undertaken
by Dr. Prendergast and his affiliates prior to the license of the Products
to Hollis-Eden. Hollis-Eden is currently pursuing approval of two of the
Products, INACTIVIN and REVERSIONEX, with the FDA. Each of these drugs has
a different mechanism of action and Hollis-Eden believes that each may be
effectively used alone. Hollis-Eden believes that INACTIVIN and REVERSIONEX
may be combined to increase their effectiveness to inhibit HIV replication,
strengthen and preserve the immune system, and reduce the viral load in the
infected patients.
Hollis-Eden believes that certain of its Products under development may
produce more effective treatments for HIV and AIDS than drugs currently
being used. The principal drugs currently used to treat HIV and AIDS (e.g.,
AZT, ddl, ddc, d4T and 3TC) are nucleoside analog reverse transcriptase
drugs. Additionally, newer drugs being developed and recently being
introduced are protease inhibitors (e.g., Invirase (saquinavir), Crixivan
(indinavir sulfate) and Novir (ritonavir)). Hollis-Eden 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 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. Because INACTIVIN's antiviral effectiveness is not reliant on a
direct structural interaction with the virus itself, Hollis-Eden believes
that INACTIVIN will inhibit replication of the virus regardless of its
mutation rates. By decreasing the syntheses of viral raw materials in the
cell, INACTIVIN effectively slows and eventually stops the virus production
line. Hollis-Eden further expects that INACTIVIN will decrease the energy
supply for viral synthesis regardless of viral type or strain. Another
disadvantage of currently used drugs is that nucleoside analogs and
protease inhibitors are toxic and may cause severe side effects. INACTIVIN
and REVERSIONEX are not nucleoside analog reverse transcriptase or protease
inhibitors, are derived from naturally occurring substances, and have been
shown in preliminary tests to date to be well-tolerated by humans with
minimal side effects. Furthermore, Hollis-Eden believes that INACTIVIN and
REVERSIONEX will have a longer duration of effectiveness, be more
affordable and require smaller doses and fewer pills to be taken than the
drugs and "cocktails" currently being used.
Hollis-Eden believes that its Products may also be effective in the
treatment of (i) other viral-caused disorders such as hepatitis-C, (ii)
auto-immune diseases such as multiple sclerosis, psoriasis and rheumatoid
arthritis and (iii) bacterial and parasitic diseases such as tuberculosis,
malaria, toxoplasmosis and leishmania.
When and if INACTIVIN or any of the other Products have been approved
for commercial sale, Hollis-Eden plans to market them in the United
States. For international markets, Hollis-Eden 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 Products will be approved for
commercial sale or that any of the foregoing proposed arrangements will
be implemented or prove to be successful.
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<PAGE>
THE PRODUCTS
All of Hollis-Eden's product development efforts are based upon
technologies and therapeutic approaches that have not been widely used in
humans for therapeutic purposes. There is, therefore, significant risk that
these approaches will not prove to be successful. While Hollis-Eden
believes that the positive results obtained to date in preclinical and
limited clinical human studies support further research and development,
those positive results are not necessarily indicative of results that will
be obtained in further human clinical testing.
INACTIVIN: ANTI-VIRAL FORMULATION OF DEHYDROEPIANDROSTERONE (DHEA)
Background. In 1987, Colthurst Limited ("Colthurst") originally licensed
DHEA to Elan Pharmaceutical Ltd. ("Elan"). Elan obtained a clinical
Investigational New Drug ("IND") with the FDA and conducted a Phase I
escalation study. The results of this study showed no toxicity and found
that patients tolerated the drug with no side effects. However, Elan chose
to use its own formulation of DHEA instead of the pharmaceutical
preparation advanced by Dr. Prendergast. Subsequently, this Phase I study
did not demonstrate clinical efficacy. In 1992, Colthurst and Elan ended
their five-year agreement. Colthurst continued work on refining DHEA's
pharmaceutical formulation and relicensed the drug in 1994 to Hollis-Eden.
Dr. Prendergast discovered that his formulation of DHEA (INACTIVIN) was
critical to the drug's ability to penetrate into the cytoplasm of the cell
to show its antiviral effectiveness. As described more fully below, the
human clinical pilot study conducted in 1995 in Houston, Texas demonstrated
that INACTIVIN monotherapy clinically and statistically significantly
reduces viral load in plasma of HIV-1 infected patients with CD4 counts
between 50 and 300 cells/mm.
Research Studies. Although the precise functions of DHEA are not known,
its effects on certain enzymes have been established. Due to these
characteristics, Dr. Prendergast began researching DHEA specifically as an
anti-viral treatment for HIV infection in 1985-86 when he documented that
those succumbing to the infection most rapidly were the population groups
with the lowest endogenous levels of DHEA. From 1986 on, his work focused
exclusively on DHEA and HIV. The first approach was to ascertain if DHEA
could inhibit HIV virus production in T-cell and macrophage culture. This
was indeed the result in certain laboratory tests conducted by Dr. Michael
McGrath at San Francisco General Hospital in 1987 at the request of Dr.
Prendergast. Dr. McGrath had unsuccessfully tried AZT and other drugs to
inhibit HIV in macrophages. DHEA was the first drug he had used that was
able to inhibit HIV in both cell lines (macrophage and T-cell). Another
important finding was that there was no toxicity in tissue culture when
using DHEA. After demonstrating in vitro inhibition of HIV in these tests
at San Francisco General Hospital, Dr. Prendergast confirmed the results by
having the experiments repeated at Veterans Hospital in Atlanta, Georgia in
1986 and 1987 by Dr. Raymond Schinazi. These tests produced similar
results.
Dr. Prendergast postulated that DHEA levels in the human body should
decrease as AIDS patients progressed to chronic disease and death. A study
undertaken by Dr. Mark A. Jacobson at San Francisco General Hospital
concluded that the decline of DHEA was a better indicator of disease
progression than the decline of T4 cells, previously recognized as an
indicator. This study demonstrated that DHEA-S was strikingly higher in
serum from high risk HIV-sero-negative men as compared to age-matched
healthy blood donors. It also demonstrated that DHEA levels decrease below
normal values immediately upon sero-conversion as HIV positive patients
progress to AIDS. The conclusion was that DHEA and/or DHEA-S may protect
individuals from infection with HIV in vivo. This was subsequently
demonstrated by another retrospective study carried out by a Dr. Jan W.
Mulder in Holland and published in June 1991.
In June 1993, an additional critical publication evidencing that DHEA
levels were important to enable HIV patients to maintain a competent immune
system was published by Dr. Ted Wisniewski, who conducted studies in New
Orleans in 1991. This report indicates that in all 67 HIV positive patients
tested there was a positive relationship between the immune status and DHEA
levels.
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<PAGE>
Dr. Prendergast also sought approval from the British Hartford
Hospital/Pasteur Institute in Paris, France, for small studies of HIV
positive patents to be conducted there in 1987-1988. Dr. Prendergast
brought 12 patients from San Francisco to Paris to participate in the study
because these AIDS patients were better documented with extensive blood
analysis readings and clinician reports than any similar group of European
HIV patients at that time. The patients treated in Paris in collaboration
with Dr. Wilson ranged in disease progression from full-blown AIDS with
Kaposi Sarcoma lesions to asymptomatic patients whose only evidence of HIV
was inversion of their T4/T8 ratio. The initial finding was that no
toxicity occurred, weight gain was recorded in all patients and, in one
subject, p24 levels (a marker of HIV viral presence) declined.
DHEA's anti-retroviral effectiveness was shown both at San Francisco
General Hospital and at Veterans Hospital in Atlanta in 1991 through
experiments which demonstrated in tissue culture that DHEA inhibited HIV
replication. Although DHEA was effective in these experiments as an
anti-viral agent, the sulphated form, DHEA-S, was not effective. The
important aspect of DHEA's direct anti-viral action was that it did not
produce its effect by interference with the viral enzyme reverse
transcriptase or the protease inhibitor as do other anti-viral drugs
currently used. Due to this fact, Dr. Prendergast believes that HIV will
not develop resistance to DHEA's effectiveness.
In November 1993, in an AIDS research publication, detailed results of
findings by Drs. Yang, Schwartz and Henderson were reported demonstrating
that DHEA could prevent latent reactivation of HIV infected cells and that
no other drugs or therapy available can provide this protection against
this characteristic of HIV. This study suggests that DHEA therapy for HIV
infected patients may prevent secondary infection from activating
additional replication of the HIV virus. The study further suggests that
DHEA may retard the increase in HIV viral loads.
In a clinical study of 12 patients at Houston Immuno Institute in Texas
in 1994 by Dr. Patricia Salvato, the results of which were presented in
July 1994 at the AIDS Conference in Yokohama, Japan, researchers concluded
that the majority of patients on DHEA adjunct therapy experienced an
increase in both CD4 and CD8 cell counts. The greater than 25% increase in
CD4 cell counts over the eight-month study is considered clinically
significant. Certain research findings by Dr. Jay Levy of the University of
San Francisco, and other researchers, have indicated that increasing CD8
cell counts early in the disease progression is directly linked to long
term survival. The Houston researchers concluded that DHEA warranted a
randomized clinical trial.
From August through December 1995, patients were enrolled for treatment
and monitored for up to 30 days in a human clinical pilot study under a
Physician IND conducted in Houston, Texas by Dr. Patricia Salvato. The
pilot study sought to determine the safety and tolerance of INACTIVIN,
which was orally administered to persons with advanced HIV/AIDS as a
monotherapy. The study's objective was to also determine the effect of
INACTIVIN on reducing HIV viral load in patients.
The study included 18 males and 2 females whose CD4 cell count ranged
from 50 to 300. At the study's initiation, 17 subjects reported no history
of prior therapy with other anti-viral drugs. Over a ten-week period of
time, levels of DHEA-S, DHEA, HIV and PCR RNA cultures were monitored. Each
of the patients underwent a 30-day washout period for use of anti-virals
before commencing therapy with INACTIVIN. Subjects were randomly assigned
to one of two treatment programs of 300 mg. twice daily or 600 mg. twice
daily. At the end of 30 days, the analysis revealed significant reductions
in viral load in PCR RNA levels.
This trial demonstrated that INACTIVIN monotherapy clinically and
statistically significantly reduces viral load in plasma of HIV-1 infected
patients with CD4 counts between 50 and 300 cells/mm. This small trial
also showed that treatment with INACTIVIN was safe and well tolerated. No
adverse events were reported during the trial.
The study also concluded that the safety profile and antiretroviral
activity of INACTIVIN support continued efforts to evaluate the drug. The
results of the study suggest that INACTIVIN, due to its mechanism of
action, expected lack of viral resistance and lack of toxicity would have a
long-term effect on viral suppression.
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DHEA and AZT. A currently used HIV therapy, AZT, works by inhibiting HIV
reverse transcriptase, yet also has certain significant toxic side effects.
AZT is useful in HIV therapy at certain dose inhibition ranges between
0.005 to 0.2 Um. However, at certain levels within this range, AZT also
interferes with normal DNA functioning of human cells. A DHEA/AZT synergy
report conducted in 1992 by Advanced Biotechnologies, Inc. demonstrated
that, by combining AZT at its minimal toxicity level of .016 Um with the
non-toxic dose of 37 Um DHEA, the same inhibition of the HIV virus will be
achieved as when the higher, more toxic, doses of AZT are used. This
reduces the level of toxic damage that is inflicted on other enzymes and
may allow for much more comprehensive inhibition of the HIV virus, with
subsequent immune improvement and the maintenance of dormancy.
DHEA Pharmacology. DHEA is a natural hormone secreted by the adrenal
cortex in an amount of approximately 15-30 mg. per day. The exact role of
DHEA under normal conditions has yet to be fully determined. DHEA is an
intermediate substance in the transformation of cholesterol to estrogen in
females and testosterone in males. The predominant type of DHEA present in
the blood is DHEA-S. DHEA-S is the sulphated form of DHEA; DHEA-S is not
known to have any effect on virus inhibition. Hollis-Eden believes its
anti-viral formulation of DHEA is the active compound which inhibits HIV
replication. When the lymph system needs active DHEA, DHEA-S in the plasma
is converted to DHEA. The conversion of DHEA-S to DHEA is facilitated by an
enzyme in the cell membrane called DHEA sulfatase. The conversion of DHEA-S
to DHEA is inhibited by stress factors in the organism, such as viral
infection (ACTH (adrenocorticotropic hormone) and cortisol). This
inhibition leads to the increased levels of DHEA-S which are seen before
HIV-negative patients seroconvert to an HIV-positive status. Increased
DHEA-S also leads to a decreased availability of the essential anti-viral
compound, DHEA, within the cell cytoplasm.
REVERSIONEX: ALPHA-FETOPROTEIN IMMUNOGLOBULIN (AFP)
AFP is a protein synthesized by the liver. During pregnancy, the
function of AFP in the fetus is to suppress the immunological response
of the mother and thereby protect the fetus from rejection by the
maternal immune system.
Research Studies. The observation that initially brought Dr.
Prendergast to consider antibodies to AFP as an anti-viral and
up-regulator of the immune system was AFP's ability to bind to
substrate acid similar to specific HIV coat glycoproteins. This work
was confirmed in 1990 by Professor Agrege Nunez in Paris. Following
this confirmation, Dr. Prendergast tested anti-serum to human AFP,
which showed significant inhibition of HIV in tissue culture against
three standard strains of HIV in T-cell culture and against HIV in
macrophage cells. These results in tissue culture demonstrated no
toxicity.
Subsequently, in 1993, a study of 13 patients was commenced under the
direction of Dr. David Hart in his clinic in Los Angeles. The patients who
were seropositive for HIV were treated with REVERSIONEX . An average of
25% increase in T4 cell number over the initial 120-day period was found.
At 11 months, all 13 patients were at or above their baseline T4 levels.
In addition to the in vitro results, the in vivo data demonstrated that
when AFP-IgG was introduced into the blood stream of HIV patients at
differing stages of infection and immunosuppression, the anti-serum bound
to the HIV infected cells and resulted in their removal from circulation.
Such removal lowered the viral load of the HIV virus and thereby allowed
the patient's immune system to improve.
Minimal Side Effects. General adverse reactions to AFP-IgG are minimal
and include the following relatively minor side effects: flushing of the
face, feelings of tightness in the chest, chills, fever, dizziness, nausea,
diaphoresis and hypotension. The three clinical studies (conducted by Dr.
David Hart in 1995, Dr. Nobuko Ishii in the early 1980's and Dr. Stanley
Orders in 1986) involving the administration of AFP-IgG have indicated the
lack of any overt toxicity with these preparations.
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PROHIVITAC HIV VACCINE
The data generated in the development of REVERSIONEX created for Dr.
Prendergast the opportunity for the development of a vaccine candidate for
HIV based upon the same logic. If certain peptides from the HIV virus have
already been presented to the patient's immune system as a vaccine in such
a manner that it generates an immune recognition of its foreign nature,
then, upon infection the HIV virus will be met with an enhanced
neutralizing antibody response. The antibody response may prevent HIV
tolerance from being established in the thymus or lymph system.
After infection, HIV must replicate rapidly and gain entry to the thymus
and lymph system where it can begin to undermine the immune system by
having itself accepted as a self protein by the immune system. A large
number of research publications have demonstrated that, upon initial
infection, HIV is met with a substantial immune attack and is very rapidly
reduced by the patient's own immune system. However, the viral load is
never reduced to zero levels. Within four weeks after infection, the virus
has gained a substantial hold by infecting the thymus. After this point the
level of antibody production against HIV and immune attack diminishes with
time and disease progression commences.
Therefore, because the proposed vaccine will not utilize individual HIV
proteins, but selected portions of the AFP-like molecule that are
proprietary to Hollis-Eden, it may allow concentration of antibodies
cross-reactive to HIV to be formed in the vaccinated patient and prime T
and B memory cells, so that a vaccinated patient who becomes exposed to HIV
will mount a more rapid, complete and extensive immune response, allowing
for the rapid clearance of the virus early in the course of infection and
preventing the virus from taking hold of the host organism.
TOXONOX
Hollis-Eden has an option to license and to further develop an additional
anti-viral pharmaceutical compound for which Dr. Prendergast was awarded
domestic and foreign patents in 1994. This compound, PP-29, brand name
TOXONOX, has preliminarily shown effectiveness in the treatment of
AIDS-related opportunistic infections such as toxic plasmosis and
leishmania. No FDA application has yet been filed with respect to this
Product and no assurance can be given that Hollis-Eden can or will be able
to license TOXONOX.
FDA OVERVIEW
GENERAL
The manufacturing and marketing of Hollis-Eden's 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, manufacture, labeling, storage, record keeping,
advertising and promotion of Hollis-Eden's 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 will try to accelerate the drug approval process
because of the priority status of HIV/AIDS drugs. See "Proposed 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 the New
Drug Application.
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Pre-clinical 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 experimental therapies to be
distributed to humans with life threatening diseases such as AIDS prior to
FDA marketing approval.
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 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 which 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. At least two such studies demonstrating safety and efficacy are
normally required for FDA approval. 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 structure 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 manufacturer 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. A task force established by the FDA has recently proposed
significant changes in the design, analysis and reporting of clinical
studies conducted under INDs, in response to the results of a Phase III
trial of a drug by another company in which severe complications and death
occurred. The task force recommended increased requirements for reporting
adverse effects and new, more stringent rules that would require clinical
trial investigators to assume that toxicities reported by patients are
drug-related. If these recommendations are implemented, the length of time
and costs associated with obtaining market approval by the FDA are likely
to be significantly increased.
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Outside the United States, Hollis-Eden 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.
PROPOSED ACCELERATED DRUG APPROVAL
The White House Council on Competitiveness, a committee established to
help foster initiatives to increase the competitiveness of industry in the
United States, has made certain proposals to improve the nation's drug
approval process. One of the goals of the proposed reforms is to allow
patients with serious and life-threatening diseases to benefit from earlier
access to important new drugs through an "accelerated drug approval"
program. The FDA published proposed procedures for this program in the
Federal Register in April 15, 1992. To be eligible for this program, the
products must treat serious or life-threatening illnesses and provide
meaningful therapeutic benefits beyond existing treatments. Under this
proposal, 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 proposed 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.
FDA STATUS/PROPOSED RESEARCH AND DEVELOPMENT PLAN
Hollis-Eden believes that the 10-year research and development effort
invested in the Products undertaken by Dr. Prendergast and his affiliated
companies has produced an existing base of data which, in the view of
management, may reduce the time, risk and cost associated with
commercializing the Products. With the FDA's current accelerated drug
approval program, Hollis-Eden believes that the approval process for
INACTIVIN and REVERSIONEX may be accelerated.
INACTIVIN
With the results from two small trials under the Phase I/II IND with
crystalline DHEA in AIDS patients completed in Amsterdam and San Francisco,
both having shown no toxicity, combined with data generated from the
Houston human clinical pilot study, upon the consummation of the Merger,
Hollis-Eden intends to immediately commence clinical trials at Phase II/III
levels, although it is possible that the FDA may ask for additional Phase I
information.
REVERSIONEX
In December 1993, the initial IND package application was submitted to
the FDA, which requested additional data on manufacturing of the anti-serum
to AFP. The proposed manufacturing agreement must be clarified to the FDA's
satisfaction to answer those particular questions that relate to
manufacturing processes. Hollis-Eden is currently in negotiations with
potential contract manufacturers and, upon the consummation of the Merger,
Hollis-Eden expects to select its contract manufacturer in order to
complete its IND filing. The planned route of development will involve
securing a manufacturing source and proceeding with the Phase I study, most
likely at a contract facility.
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PROHIVITAC
If and when Hollis-Eden obtains substantial additional funding,
Hollis-Eden plans to carry out a preliminary vaccine trial in which
selective portions of human AFP molecules will be administered
intra-muscularly to healthy HIV-negative volunteers. Hollis-Eden believes
that this research may demonstrate that PROHIVITAC therapy may be able to
generate an HIV immune reaction in HIV negative patients without exposing
them to any components of the actual HIV virus and therefore offer a
protective vaccine therapy that is safer and effective against all known
strains of HIV.
MANUFACTURING
Hollis-Eden does not have, and does not intend to establish,
manufacturing facilities to produce its Products. Hollis-Eden plans to
control its initial capital expenditures by using contract manufacturers to
make its Products. Hollis-Eden believes that there are a sufficient number
of high quality FDA-approved contract manufacturers available, and
management has had discussions with several of them, to fulfill its near-
term production needs for both clinical and commercial use.
The manufacture of Hollis-Eden's Products, whether done by outside
contractors (as planned) or Hollis-Eden, 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 approved 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 considers the protection of its Products, whether owned or
licensed, to the exclusion of use by others, to be vital to its business.
While Hollis-Eden 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 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.
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, Hollis-Eden cannot be certain that its licensor was
the first to invest 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 firms, including those of Hollis-Eden, 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's products could bring legal
actions against Hollis-Eden claiming infringement. Patent litigation is
typically costly and time-consuming, and if such an action were brought
against Hollis-Eden it could result in significant cost and diversion of
management time. Hollis-Eden may be required to obtain licenses to other
patents or proprietary rights and there can be no assurance that licenses
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would be made available on terms acceptable to Hollis-Eden. If Hollis-Eden
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.
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 with significant protection
against competitive products, or otherwise be commercially valuable. There
can be no assurance that Hollis-Eden will not need to acquire licenses
under patents belonging to others for technology potentially useful or
necessary to Hollis-Eden or, if any such licenses are required, that they
will be available on terms acceptable to Hollis-Eden, if at all. To the
extent that Hollis-Eden is unable to obtain patent protection for its
products or technology, Hollis-Eden's 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's commitments and contingencies. The discussion below reflects the
nature of its agreements as in effect at the current time. Although
Hollis-Eden believes the following summaries to be accurate, such summaries
are qualified in their entirety by reference to their original documents.
DHEA LICENSE AGREEMENT
In May 1994, Hollis-Eden entered into a license agreement, as amended in
August 1995 and October 1996 (the "DHEA License Agreement"), with Colthurst
Limited ("Colthurst") and Patrick T. Prendergast, Ph.D., pursuant to which
Hollis-Eden 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. Hollis-Eden also has the right to sublicense any such rights.
Hollis-Eden 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 paid $125,000 to Colthurst in March 1995.
The remainder of such fee becomes due according to the terms of the DHEA
License Agreement. Upon full payment of such fee, Hollis-Eden will be
granted a first perfected security interest in such patent rights and know-
how. Hollis-Eden issued 37,736 shares of Hollis-Eden Common Stock to
Colthurst and, beginning August 1995, Hollis-Eden agreed to make monthly
payments of $5,000 to the licensors. Hollis-Eden is also obligated to pay
to Colthurst royalties on revenues from products covered by the licensed
rights and on revenues received by Hollis-Eden in connection with
sublicenses granted by Hollis-Eden to third parties. Hollis-Eden 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 Hollis-Eden 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 Hollis-Eden's business.
ANTI-SERUM LICENSE AGREEMENT
In August 1994, Hollis-Eden entered into a license agreement, as amended
in August 1995 (the "Anti-Serum License Agreement"), with Edenland and Dr.
Prendergast pursuant to which Hollis-Eden 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 AFP anti-
serum/vaccine for all uses thereunder to develop and commercialize products
based on the licensed rights. Hollis-Eden also has the right to sublicense
any such rights.
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Hollis-Eden 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. Hollis-Eden issued to Edenland and Dr.
Prendergast an aggregate of 543,396 shares of Hollis-Eden's 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's Board of
Directors for three years. Hollis-Eden is also obligated to pay Edenland a
license fee of $572,000, of which Hollis-Eden paid $125,000 to Edenland in
March 1995. The remainder of such fee becomes due according to the terms
of the Anti-Serum License Agreement. Upon full payment of such fee,
Hollis-Eden will be granted a first perfected security interest in such
patent rights and know-how. Hollis-Eden 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. In addition, beginning August
1995, Hollis-Eden agreed to make monthly payments of $5,000 to the
licensors. Hollis-Eden is obligated to pay to Edenland royalties on
revenues from products covered by the licensed rights and on revenues
received by Hollis-Eden in connection with sublicenses granted by Hollis-
Eden to third parties. Pursuant to the terms of the Anti-Serum License
Agreement, with certain limitations, Edenland has the option to receive
such royalties in the form of Hollis-Eden Common Stock. Furthermore, as a
condition to Hollis-Eden's commercialization rights to any product for
which regulatory approval is obtained and a certain revenue milestone is
achieved. Hollis-Eden 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, during the term of the agreement. The anti-serum will cease
to be a product covered by the license agreement if Hollis-Eden has not
contribute a certain amount of funding to the development of the anti-serum
in accordance with the terms and conditions of the related Research and
Development Agreement (described below). There can be no assurance that
Hollis-Eden 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 Hollis-Eden's
business.
DEVELOPMENT AGREEMENT
In August 1994, Hollis-Eden entered into a research, development and
option agreement, as amended in August 1995 and October 1996 (the "Research
and Development Agreement"), with Edenland and Dr. Prendergast pursuant to
which Edenland agreed to obtain an open IND for the anti-serum from the FDA
and to commence a patient Phase I IND study under the guidelines and
regulations of the FDA. Hollis-Eden is obligated to pay Edenland the
development costs associated with such Phase I study, for which Hollis-Eden
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 has the right to terminate its obligation to pay any further
development costs of the anti-serum.
Edenland granted Hollis-Eden the exclusive option to acquire exclusive
worldwide rights to all new products of Edenland relating to the AFP anti-
serum/vaccine 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, are governed by the terms and conditions of the
Anti-Serum License Agreement. The Research and Development Agreement
terminates concurrently with the termination of the Anti-Serum License
Agreement.
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IAC'S BUSINESS
GENERAL
IAC is a "blank check" or "blind pool" company formed on November 18,
1992 to serve as a vehicle to effect a Business Combination with a Target
Business.
IAC is seeking to acquire a Target Business primarily located in the
United States, but its efforts have not been limited to a particular
industry. In seeking a Target Business, IAC has considered without
limitation, businesses which (i) offer or provide services or develop,
manufacture or distribute goods in the United States or abroad, including,
without limitation, in the following areas: health care and health
products, educational services, environmental services, consumer related
products and services (including amusement and/or recreational services),
personal care services, voice and data information processing and
transmission and related technology development or (ii) are engaged in
wholesale or retail distribution. IAC will not acquire a Target Business
unless the fair market value of such business, as determined by IAC based
upon standards generally accepted by the financial community, including
revenues, earnings, cash flow and book value, is at least 80% of the net
assets of IAC at the time of the consummation of a Business Combination.
On November 1, 1996, IAC entered into the Merger Agreement with Hollis-Eden
and Messrs. Zizza and Hollis.
IAC has engaged Gruntal to aid, if requested, in structuring and
negotiating a Business Combination.
On May 23, 1995, IAC consummated its IPO of (i) 600,000 Units and (ii)
255,000 Class B Warrants in consideration for net proceeds of approximately
$6,300,000 (the "Net Proceeds"), after giving effect to the payment of all
underwriting discounts, the underwriters' non-accountable expense allowance
and offering expenses. Pursuant to the terms of the IPO, $6 million of the
net proceeds, representing an amount equal to the gross proceeds from the
sale of the Units, was placed in escrow with the Escrowed Funds Escrow
Agent, subject to release upon the earlier of written notification by IAC
to the Escrowed Funds Escrow Agent (i) of IAC's completion of a transaction
or series of transactions in which at least 50% of the gross proceeds from
the IPO are committed to a specific line of business as a result of a
consummation of a Business Combination (including any redemption payments),
or (ii) to distribute the Escrowed Funds, in connection with a liquidation
of IAC, to the holders of IAC Common Stock purchased as part of the Units
sold in the IPO or in the open market thereafter. The Escrowed Funds have
been invested in United States treasury bills and commercial paper.
COMPETITION
IAC encounters intense competition from other entities having business
objectives similar to those of IAC. Many of these entities, including
venture capital partnerships and corporations, other blind pool companies,
large industrial and financial institutions, small business investment
companies and wealthy individuals, are well-established and have extensive
experience in connection with identifying and effecting Business
Combinations directly or through affiliates. Many of these competitors
possess greater financial, technical, human and other resources than IAC
and there can be no assurance that IAC will have the ability to compete
successfully. IAC's financial resources will be limited in comparison to
those of many of its competitors. This inherent competitive limitation may
compel IAC to select certain less attractive Business Combination
prospects.
In the event that IAC succeeds in effecting a Business Combination, IAC
will, in all likelihood, become subject to intense competition from
competitors of the Target Business. In particular, certain industries
which experience rapid growth frequently attract an increasingly larger
number of competitors, including competitors with greater financial,
marketing, technical, human and other resources than the initial
competitors in the industry. The degree of competition characterizing the
industry of any prospective Target Business cannot presently be
ascertained. There can be no assurance that, subsequent to a consummation
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of a Business Combination, IAC will have the resources to compete in the
industry of the Target Business effectively, especially to the extent that
the Target Business is in a high-growth industry.
EMPLOYEES
IAC, at December 16, 1996, employed only one person, Mr. Salvatore J.
Zizza, IAC's Chairman, President and Treasurer, on a part-time basis.
PROPERTIES
IAC's principal office is located in New York, New York, where it
occupies the offices of Zizza & Company ("Zizza Corporation"), a
corporation controlled by Mr. Zizza. IAC leases this space pursuant to an
oral agreement. IAC intends to occupy this space until it effects a
Business Combination. IAC pays Zizza Corporation a monthly payment of
$2,500 for rent, office and secretarial services.
IAC believes that this facility is well maintained and adequate to meet
its needs in the foreseeable future pending the consummation of a Business
Combination.
LEGAL PROCEEDINGS
At this time, IAC is not involved in any pending or threatened legal
proceedings involving it or any of its assets.
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MANAGEMENT OF IAC
DIRECTORS AND EXECUTIVE OFFICER
The current directors and sole executive officer of IAC are as
follows (only Salvatore J. Zizza will be a nominee for election as a
director of the Surviving Corporation; IAC's other four directors intend to
resign as directors of IAC effective as of the Effective Time of the
Merger):
NAME AGE POSITION
---- --- --------
Salvatore J. Zizza . . . . 50 Chairman,
President,
Treasurer and
Director
Sidney Dworkin . . . . . . 76 Director
Herbert Paul . . . . . . . 59 Director
Richard Bready . . . . . . 50 Director
Alan P. Donenfeld . . . . . 40 Director
Salvatore J. Zizza has served as Chairman of the Board, President,
Treasurer and a director of IAC since its inception in November 1992. Mr.
Zizza has also been Chairman of the Board of Directors of The Lehigh Group
Inc. (f/k/a The LVI Group Inc.) since 1991 and was President and Chief
Financial Officer of The Lehigh Group Inc. from 1985 to 1991. The Lehigh
Group Inc., a New York Stock Exchange listed company, is engaged, through
its subsidiary, in the distribution of electrical products, and from 1985
until 1991 was one of the largest interior construction and asbestos
abatement firms in the United States. Mr. Zizza was Chief Operating and
Chief Financial Officer of NICO, Inc. from 1978 until its acquisition in
1985 by Lehigh Valley Industries, Inc. (currently The Lehigh Group Inc.).
NICO Inc. was an interior construction firm. Mr. Zizza is a director of
The Gabelli Equity Trust, The Gabelli Asset Fund, The Gabelli Growth Fund
and The Gabelli Convertible Securities Fund. In accordance with the terms
of Mr. Zizza's employment by The Lehigh Group Inc., Mr. Zizza may introduce
potential Target Businesses identified directly by him to IAC, but only
after such potential Target Businesses have been first presented to The
Lehigh Group Inc. and its subsidiaries and determined by them to be
inappropriate. Mr. Zizza's employment agreement with The Lehigh Group Inc.
further provides that Mr. Zizza may consider and approve in the ordinary
course of business of IAC investment and business opportunities introduced
to IAC by Gruntal or others and shall not be under any obligation to
introduce such investment and business opportunities to The Lehigh Group
Inc. and its subsidiaries.
Sidney Dworkin has served as a director of IAC since 1995. Mr. Dworkin
has also been Chairman of Advanced Modular Systems, Inc., a Florida based
seller and lessor of modular buildings since 1988. In addition, since
1993, Mr. Dworkin has been Chairman of Global International Inc., an Ohio
based company engaged in the selling or leasing of modular buildings to
hospitals and radiology groups. Since 1987, Mr. Dworkin has also been
Chairman of Stonegate Trading, Inc., an importer and exporter of health and
beauty products. Mr. Dworkin was a co-founder and former Chairman of the
Board, President and Chief Executive Officer of Revco Discount Drug
Centers. Mr. Dworkin is Chairman of the Board of Comtrex Systems, Inc., a
New Jersey based manufacturer of cash registers, and a director of each of
Northern Technologies International, a manufacturer of anti-corrosives
located in Minnesota, CCA Industries, Inc., a manufacturer of health and
beauty aids located in New Jersey, Interactive Technologies, Inc., a
Florida based manufacturer of dog bones, Viragen Inc., a Florida based
manufacturer of natural interferons, and Paragon Mortgage Corporation, a
Georgia based mortgage broker.
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Herbert M. Paul has served as a director of IAC since November 1992. Mr.
Paul is an attorney and certified public accountant in private practice
specializing in tax and business law. From 1957 until 1982, Mr. Paul was a
partner in the accounting firm of Touche Ross & Co. and served as Associate
National Director of Taxes at that firm.
Richard L. Bready has served as a director of IAC since November 1992.
Mr. Bready also has been Chairman of the Board and Chief Executive Officer
of Nortek, Inc. since 1991, having served as its President since 1979.
Nortek Inc., a New York Stock Exchange listed company, manufactures and
markets residential, commercial and industrial building products.
Mr. Bready is also a director of CCX Corporation, a manufacturer of metal
and fiberglass screening products, and of The Lehigh Group Inc.
Alan P. Donenfeld has served as a director of IAC since 1995. Mr.
Donenfeld also has been President of Bristol Capital Management, Inc. since
1990, which specializes in locating, structuring, and arranging financing
for investments in telecommunications and other industries. From 1987 to
1990, Mr. Donenfeld was a Vice President in the Mergers and Acquisitions
Group at Bear, Stearns & Co. Inc. in New York where he worked on numerous
leveraged buyouts, corporate mergers, valuations, and fairness opinions.
Mr. Donenfeld worked in the Leveraged Buyout and Mergers and Acquisitions
Groups at E.F. Hutton & Company, Inc. from 1985 to 1987. Mr. Donenfeld was
a founder of Quadrex Securities Corporation, where, from 1982 to 1985, he
assisted in raising a leveraged buyout fund which made an equity investment
in a number of companies.
All directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors. Directors receive
no compensation for serving on the Board of Directors other than the
reimbursement of reasonable expenses incurred in attending meetings.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board. The Company has not entered into any employment
agreements or other understandings with its directors or executive officer
concerning compensation. No cash compensation has been paid to any officer
or director of IAC to date.
No family relationships exist among any of the named directors or IAC's
executive officer. No arrangement or understanding exists between any such
director or officer and any other person pursuant to which any director or
officer was elected as a director or officer of IAC.
In connection with any IAC Stockholder vote relating either to approval
of a Business Combination or the liquidation of IAC due to the failure of
IAC to effect a Business Combination within the time allowed, each of IAC's
directors and its executive officer has agreed to vote his respective
shares of IAC Common Stock in accordance with the vote of the majority of
the shares voted by all IAC Non-Affiliate Stockholders with respect to such
Business Combination or liquidation.
EXECUTIVE COMPENSATION
Since IAC's inception in November 1992, Mr. Salvatore J. Zizza, IAC's
Chairman of the Board, President and sole executive officer, has not
received any compensation from IAC, been issued any options or stock
appreciation rights in IAC, nor has Mr. Zizza or any other person entered
into any employment agreement with IAC.
PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative stockholder
return of IAC Common Stock, based on its market price, with the cumulative
total return of companies on the NASDAQ National Market Composite Index.
Because of the nature of IAC's business, IAC has been unable to identify a
peer group of companies in a similar line of business, and instead, has
provided a comparison with companies with a similar market capitalization.
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<PAGE>
Such peer group is comprised of 110 companies, each being a company with a
market capitalization ranging from $6 million to $8 million.
The IAC Common Stock commenced trading on the OTC Electronic Bulletin
Board on June 28, 1995 and the closing bid price on such date was $8.875.
This price has been used as the initial share price. This graph was
prepared by Media General Financial Services.
[Performance Graph Inserted Here]
----------------------------------------------------------
CALENDAR QUARTER ENDING
----------------------------------------------------------
COMPANY 6/28/1995 6/30/1995 9/29/1995 12/29/1995
-----------------------------------------------------------
Initial
Acquisition 100.00 100.00 90.14 100.00
Corp.
----------------------------------------------------------
Peer Group 100.00 100.20 107.01 84.30
----------------------------------------------------------
Broad Market 100.00 100.00 111.42 110.52
----------------------------------------------------------
----------------------------------------------------------
CALENDAR QUARTER ENDING
----------------------------------------------------------
COMPANY 3/29/1996 6/28/1996 9/30/1996 11/29/1996
----------------------------------------------------------
Initial
Acquisition 107.04 104.23 100.00 112.68
Corp.
----------------------------------------------------------
Peer Group 90.69 88.96 74.31 60.52
----------------------------------------------------------
Broad Market 115.63 124.20 127.62 133.99
----------------------------------------------------------
PROPOSAL TO ELECT DIRECTORS OF THE SURVIVING CORPORATION
The Board of Directors of IAC has nominated the five persons named below
and M. Salvatore J. Zizza for election to the Board of Directors of the
Surviving Corporation. One of the nominees (Mr. Zizza) is currently a
director of IAC and the other five nominees are currently directors of
Hollis-Eden. For biographical information on Mr. Zizza, see "MANAGEMENT OF
IAC-Directors and Executive Officer." The Surviving Corporation's Board
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<PAGE>
of Directors will be a "classified board," with only one-third of its
directors coming up for election each year. All of the nominees have
consented to serve as directors.
Messrs. Hollis and Bagley have been nominated to serve as Class I
directors, whose term shall expire at the first annual meeting of
stockholders held after the Effective Time of the Merger. Dr. Prendergast
and Mr. Zizza have been nominated to serve as Class II directors whose term
shall expire at the second annual meeting of stockholders held after the
Effective Time of the Merger and Dr. Merigan and Mr. McDonnell have been
nominated to serve as Class III Directors. The term of the Class III
directors shall expire at the third annual meeting of stockholders held
after the Effective Time of the Merger.
Each proxy received will be voted "FOR" the election of the nominees
named below unless otherwise specified in the proxy. At this time, the
Board of Directors of IAC knows of no reason why any nominee might be
unable to serve. If the Merger is not consummated, the current directors
of IAC will continue to serve.
Richard B. Hollis, age 44, is the founder of Hollis-Eden and has served
as Hollis-Eden's Chairman, President and Chief Executive Officer since
August 1994. Mr. Hollis has over 20 years 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. From 1977 to 1986, Mr. Hollis served as
a division general manager of Imed Corporation, Inc., a manufacturer of
intravenous infusion pumps. Mr. Hollis began his career in the health care
industry with Baxter Travenol from 1974 to 1977. Mr. Hollis devotes full
time to the affairs of Hollis-Eden. Mr. Hollis received his B.A. in
Psychology from San Francisco State University in 1974.
Patrick T. Prendergast, PhD., age 40, Chief Scientific Officer and a
director of Hollis-Eden since August 1994, developed the Products licensed
to Hollis-Eden. Dr. Prendergast's specialty is in anti-viral drug screening
and assessment. 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 Limited and Edenland, Inc., since 1985 and
1987, respectively. These companies investigated and screened human hormone
DHEA and human protein AFP as anti-HIV drugs. Dr. Prendergast filed foreign
patents on the use of these agents for the treatment of HIV/AIDS, and also
has several patents pending on unique and novel composition of matter
pharmaceutical 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.
Thomas Charles Merigan, Jr., M.D., age 62, became Chairman of the
Scientific Advisory Board and a director of Hollis-Eden in March 1996. Dr.
Merigan has been George E. and Lucy Becker Professor of Medicine at
Stanford University School of Medicine from 1980 to the present. Dr.
Merigan has also been the Principal Investigator, NIAID Sponsored AIDS
Clinical Trials Unit, from 1986 to the present and has been Director of
Stanford University's Center For AIDS Research from 1988 to the present.
Dr. Merigan is a member of various medical and honorary societies, has
lectured extensively within and outside the United States, and authored
numerous books and articles and has chaired and edited symposia relating to
viruses, infectious diseases, anti-viral agents, HIV and other retroviruses
and AIDS. From 1990 to the present, Dr. Merigan has been Chairman,
Editorial Board of "HIV: Advances in Research and Therapy" and 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 six patents which, among other things, relate to synthetic
polynucleotides, modification of hepatitus B virus 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
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<PAGE>
(1993 - present). 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
University School of Medicine. Dr. Merigan received his B.A. (with honors)
from the University of California at Berkeley in 1955 and his M.D. from the
University of California at San Francisco in 1958.
J. Paul Bagley III, age 52, became a director of Hollis-Eden in March
1996. Mr. Bagley was Chief Executive Officer of Laidlaw Holdings, Inc., an
investment services company, from January 1995 until November 1996. Mr.
Bagley is a founding principal of Stone Pine Capital Ltd., a group that
provides mezzanine capital to fund acquisitions, buyouts, growth and
recapitalizations and is also associated with Stone Pine China L.L.C.,
Stone Pine Mezzanine L.L.C. and Stone Pine Financial Services L.L.C. For
more than twenty years prior to October 1988, Mr. Bagley was engaged in
investment banking activities with Shearson Lehman Hutton Inc. and its
predecessor, E.F. Hutton & Company, Inc. Mr. Bagley served in various
capacities with Shearson and E.F. Hutton, including Executive Vice
President and Director, Managing Director, Head of Direct Investment
Origination and Manager of Corporate Finance. Mr. Bagley controls a United
States registered investment advisor which provides advisory services to
two United States business development companies. Mr. Bagley serves as
Chairman of the Board of Directors of Silver Screen Management, Inc. and
International Film Investors, Inc., which manage film portfolios with
aggregate assets under management of approximately $1 billion. Mr. Bagley
is also a director of Logan Machinery Corporation, a manufacturer of
all-terrain vehicles, EurekaBank, a federal savings bank and America First
Financial Corporation, a Nasdaq Stock Market listed company. Mr. Bagley
graduated from the University of California at Berkeley in 1965 with a
B.S.c in Business and Economics and from Harvard Business School in 1968
with an M.B.A. in Finance.
Brendan R. McDonnell, age 34, is a partner at Lane Powell Spears
Lubersky, a large Northwest-based law firm, and is Chairman of the
Corporate Securities and Finance Group in the firm's Portland, Oregon
office. Mr. McDonnell specializes in representing both private and public
emerging growth companies, with focus on the high technology industry. Mr.
McDonnell joined Lane Powell Spears Lubersky in 1990 after working for
approximately three years for Brobeck, Phleger & Harrison, another law
firm, in California. Mr. McDonnell holds a B.S. in accounting from Loyola
Marymount University and a J.D. from the University of California at Davis.
All directors will be reimbursed for their expenses of attending Board
meetings and will be eligible to receive options under the 1996 IAC
Incentive Stock Option Plan, if adopted and approved at the IAC Special
Meeting.
All members of the Surviving Corporation's Board of Directors will hold
office until their respective terms expire and the election and
qualification of their successors.
No family relationships exist among Hollis-Eden's directors. Pursuant to
the Anti-Serum License Agreement, Dr. Prendergast or, at the option of
Edenland, Leo Prendergast, the brother of Dr. Prendergast, has the right to
serve as a director of Hollis-Eden until August 25, 1997.
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<PAGE>
SECURITY OWNERSHIP OF IAC PRIOR TO THE MERGER
The following table sets forth information as of December . , 1996, based
on information obtained from the persons named below, with respect to the
beneficial ownership (as defined under the applicable rules of the
Commission) of shares of IAC Common Stock by (i) each person known by IAC
to be the owner of more than 5% of the outstanding shares of IAC Common
Stock, (ii) each director and (iii) all directors and the executive officer
of IAC as a group:
AMOUNT AND PERCENTAGE OF
NATURE OF OUTSTANDING
BENEFICIAL SHARES OF
NAME OR GROUP(1) OWNERSHIP(2)(3) COMMON STOCK
---------------- --------------- -------------
Salvatore J. Zizza(4) . 220,000 22.37%
Richard Bready . . . . 35,000 4.10
Herbert Paul . . . . . 35,000 4.10
Sidney Dworkin . . . . 35,000 4.10
Alan P. Donenfeld . . . 35,000 4.10
Gruntal & Co.,
Incorporated . . . . . 75,000 8.40
James D. Bowyer(5)
1117 Chantilly Road
Los Angeles, California
90077 . . . . . . . . . 58,800 7.06
All executive officers
and directors as
a group
(five persons)(4) . . . 360,000 33.86%
-------------------------------
(1) Each of the persons listed, unless otherwise noted, has an
address in care of IAC.
(2) Unless otherwise noted, IAC believes that all persons named in
the table have sole voting and investment power with respect to
all shares of IAC Common Stock beneficially owned by them.
(3) Includes warrants to purchase units, each unit comprised of one
share of IAC Common Stock and one Class A Warrant to purchase,
upon consummation of a Business Combination, one share of IAC
Common Stock at a price of $9.00, as follows: (i) Salvatore J.
Zizza, 50,000 units; (ii) each of Messrs. Bready, Paul, Dworkin
and Donenfeld, 10,000 units; (iii) Gruntal, 30,000 units and
(iv) all executive officers and directors, as a group, 90,000
units.
(4) Includes 50,000 shares of IAC Common Stock underlying certain
other warrants owned by Mr. Zizza which shall become exercisable
upon the consummation of the Merger.
(5) Based solely on information set forth in Amendment No. 1 to
Schedule 13D, dated January 8, 1996, filed by Mr. Bowyer with the
Commission.
SECURITY OWNERSHIP OF THE SURVIVING CORPORATION AFTER THE MERGER
The following table sets forth, on a pro forma basis as if the Merger had
been consummated, based on ownership of shares of Common Stock in IAC and
Hollis-Eden as of November 30, 1996, the beneficial ownership (as defined
under the applicable rules of the Commission) of (i) each person known by
IAC and Hollis-Eden who will become, as a result of the Merger, the owner
of more than 5% of the outstanding shares of Surviving Corporation Common
Stock , (ii) each proposed director of the Surviving Corporation, and (iii)
all proposed directors and executive officers of the Surviving Corporation
as a group:
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<PAGE>
Amount and
Nature of Percentage of
Beneficial Outstanding Shares
Name or Group(1) Ownership(2) of Common Stock
---------------- ------------ ------------------
Richard B. Hollis (3) 3,328,302 53.51%
Edenland, Inc. (4) . 713,208 12.14
Baybush, Straffan
County Kildare,
Ireland
Dr. Patrick T.
Prendergast (5) . . . 747,170 12.65
Gary McAdam (6) . . . 566,038 9.48
4 West Dry Creek
Circle
Suite 140
Littleton, CO 80120
Thomas C. Merigan (7) 47,222 *
J. Paul Bagley (7) . 25,000 *
Brendan R. McDonnell -0- -0-
Salvatore J. Zizza
(8) . . . . . . . . . 220,000 3.73
Laidlaw Equities,
Inc. (9) . . . . . . 586,930 9.27
100 Park Avenue
New York, NY 10017
All Officers and
Directors as a group
(8 persons) (3)(4)(5)
(7)(8) . . . . . . 4,387,694 66.78%
* Less than one percent
-------------------------
(1) Unless otherwise noted, each of the persons listed has an address
in care of the Surviving Corporation.
(2) Unless otherwise noted, IAC and Hollis-Eden believe that all
persons named in the table will have sole voting and investment
power with respect to all shares of Surviving Corporation Common
Stock to be beneficially owned by them after the Merger.
(3) Includes warrants to purchase up to 475,472 shares of Surviving
Corporation Common Stock at $11.02 per share for a period of
three years following the Effective Time of the Merger.
(4) Of these shares, 584,906 shares represent shares to be owned of
record by Edenland, 37,736 shares represent shares underlying
certain warrants exercisable at $15.90 per share until February
5, 2000 and 90,566 shares represent shares underlying certain
warrants exercisable at $11.02 per share for a period of three
years following the Effective Time of the Merger. Excludes
Edenland's option to purchase up to 169,811 shares of Surviving
Corporation Common Stock if and when revenues from the AFP anti-
serum and/or a vaccine developed therefrom generate revenues of
$200 million, valued at market price, in payment of royalties.
(5) Dr. Prendergast is the president, a director and the controlling
stockholder of Edenland. As such, Dr. Prendergast may be deemed
to beneficially own all securities owned by Edenland.
(6) Includes 226,416 shares underlying certain warrants exercisable
at $11.02 per share, which warrants are owned by Creative
Investment Services, Inc. Pension Plan and Trust, of which Mr.
McAdams is the Trustee.
(7) Represents shares of Surviving Corporation Common Stock
underlying certain outstanding options.
(8) Includes warrants to purchase up to 150,000 shares of Surviving
Corporation Common Stock exercisable upon the Effective Time of
the Merger.
(9) Represents shares of Surviving Corporation Common Stock
underlying certain outstanding warrants. Warrants to purchase up
to 452,830 of these shares are issuable upon consummation of the
Merger.
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PROPOSED MANAGEMENT OF THE SURVIVING CORPORATION
Following the Merger, it is contemplated that the following individuals
will serve the Surviving Corporation in the capacities set forth below:
NAME AGE POSITION(S)
---- --- -----------
Richard B. Hollis . . 44 Chairman of the Board, President, Chief
Executive Officer and Director
Patrick T.
Prendergast, Ph.D. . 40 Chief Scientific Officer and Director
Thomas Charles
Merigan, Jr., M.D. . 62 Chairman of the Scientific Advisory
Board and Director
Robert W. Weber . . . 45 Vice President-Controller
Lois Rezler, Ph.D. . 45 Vice President-Regulatory Affairs
J. Paul Bagley III . 52 Director
Salvatore J. Zizza . 50 Director
Brendan R. McDonnell 34 Director
For biographical information on each of the above persons (with
the exception of Mr. Weber and Dr. Rezler, whose biographies appear below),
see "MANAGEMENT OF IAC" and "PROPOSAL TO ELECT DIRECTORS OF THE SURVIVING
CORPORATION." At the Effective Time of the Merger, the Board of Directors
will designate an Audit Committee. Upon the Effective Time, the members of
the Audit Committee will be . , each an independent director. The Audit
Committee will review and evaluate the results and scope of the audit and
other services provided by the Surviving Corporation's independent
accountants, as well as the Surviving Corporation's accounting principles
and system of internal accounting controls.
Robert W. Weber, age 45, has served as Vice President-Controller of
Hollis-Eden since March 1996. From October 1994 to March 1996, Mr. Weber
was Chief Financial Officer and Vice President Finance of Prometheus
Products, a subsidiary of Sierra Semiconductor, a company that designs and
markets computer modems and software. From August 1993 to October 1994, Mr.
Weber was Chief Financial Officer and Vice President Finance of Amercom, a
company that designs, publishes and markets personal computer
telecommunications software for the small office, home office and personal
communications marketplace. Mr. Weber was also Vice President Finance and
Chief Financial Officer of Instromedix from February 1988 to August 1993.
Instromedix is engaged in designing, manufacturing and marketing medical
electronics devices and software. Prior thereto, Mr. Weber held various
financial management positions with Metheus Corporation, a company engaged
in designing, manufacturing and marketing computer graphics hardware and
software, International Paper Company and General Motors Corporation. Mr.
Weber received his B.S. from GMI Institute of Technology in 1975 and his
MBA from Stanford Graduate School of Business in 1977.
Lois Rezler, Ph.D., age 45, became Vice President of Regulatory Affairs
of Hollis-Eden in March 1996. For more than ten years, Dr. Rezler has been
engaged in consulting for various pharmaceutical and biotechnology
corporations including Smith Kline, Smith & Nephew, Cheesborough Ponds,
CIBA, Merck Sharpe Dome, Baxter Travenol and others. Dr. Rezler currently
acts as a regulatory consultant for Westem Center for Clinical Studies
(since January 1996), Inglewood Medical and Mental Health Services (since
November 1995), Santa Clarita Medical Center (since January 1995),
Interactive Medical Technologies (since August 1993), Puretek Corporation
(since November 1993) and Bioremediation Incorporated (since February
1993). From July 1986 to February 1993, Dr. Rezler was sequential quality
assurance (SQA) consultant to Xerox Incorporated. On behalf of her various
clients, Dr. Rezler's duties and responsibilities have included working at
bench level to assist in drug design and development, preparing and
submitting grant applications to various government agencies, consulting in
all aspects of preparing IND and NDA submissions to the FDA, including
biologics devices, new drugs, priority drugs and orphan drugs. Dr. Rezler's
duties also include responsibility for developing time lines and budgets
for each project. Dr. Rezler received her B.A., B.S.c and M.A. from London
University and her Ph.D. in Public Health from Edinburgh University.
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<PAGE>
MEDICAL ADVISORY BOARD
Hollis-Eden, through Dr. Merigan, Hollis-Eden's Chairman of the
Scientific Advisory Board, has established relationships with a group of
scientific advisors with expertise in their respective fields that align
with Hollis-Eden sponsored programs. Dr. Merigan plans to assemble the
Surviving Corporation's Scientific Advisory Board from among these
advisors. The Surviving Corporation intends to hold formal semi-annual
scientific advisory board meetings to review ongoing studies and exchange
ideas. The Surviving Corporation expects that its scientific advisors will
consult with management of the Surviving Corporation regarding the status
of the Surviving Corporation's work in progress and the evaluation of
prospective opportunities for the Surviving Corporation.
The Surviving Corporation intends to pay certain of its
scientific advisors' consulting fees or salaries and expects to provide
reimbursement for expenses incurred in connection with service to the
Surviving Corporation.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Surviving Corporation's Bylaws will provide that the
Surviving Corporation shall indemnify its directors and executive officers
and may indemnify its other officers, employees and other agents to the
fullest extent permitted by Delaware law. The Surviving Corporation will
also be empowered under its Bylaws to enter into indemnification contracts
with its directors and officers and to purchase insurance on behalf of any
person whom it is required or permitted to indemnify. Pursuant to this
provision, the Surviving Corporation intends to enter into indemnity
agreements with each of its directors and officers. In addition, the
Surviving Corporation will be required, subject to certain exceptions, to
advance all expenses incurred by any director or executive officer in
connection with a completed, pending or threatened action, suit or
proceeding upon receipt of an undertaking by such director or executive
officer to repay all amounts advanced by the Surviving Corporation on such
persons behalf if it is ultimately determined that such person is not
entitled to be indemnified under the Bylaws or otherwise.
The Surviving Corporation's Certificate of Incorporation will
also provide that to the fullest extent permitted by Delaware law, the
Surviving Corporation's directors will not be personally liable to the
Surviving Corporation and its stockholders for monetary damages for any
breach of a director's fiduciary duty. The Certificate of Incorporation
will not, however, eliminate the duty of care, and in appropriate
circumstances, equitable remedies such as an injunction or other forms of
non-monetary relief would remain available under Delaware law. Each
director will be subject to liability for breach of the director's duty of
loyalty to the Surviving Corporation, for acts or omissions not in good
faith or involving intentional misconduct or knowing violations of law, for
acts or omissions that the director believes to be contrary to the best
interests of the Surviving Corporation or its stockholders, for any
transaction from which the director derived an improper personal benefit,
for acts or omissions involving a reckless disregard for the director's
duty to the Surviving Corporation or its stockholders when the director was
aware or should have been aware of a risk of serious injury to the
Surviving Corporation or its stockholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the Surviving Corporation or its
stockholders, for improper transactions between the director and the
Surviving Corporation and for improper distributions to stockholders and
loans to directors and officers. This provision also will not affect a
director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
Upon or promptly after the consummation of the Merger, the
Surviving Corporation will seek to acquire and maintain directors' and
officers' liability insurance.
EXECUTIVE COMPENSATION
From Hollis-Eden's inception in August 1994 through December 31,
1995, no officer of Hollis-Eden (including its Chief Executive Officer)
received any salaried compensation for services rendered.
EMPLOYMENT AGREEMENTS
Pursuant to an employment agreement between Hollis-Eden and Mr.
Richard B. Hollis entered into in November 1996 (the "Hollis Employment
Agreement"), Mr. Hollis currently receives from Hollis-Eden an annual base
salary of not less than $195,000 and bonuses and equity compensation as
determined by the Hollis-Eden Board of Directors. Mr. Hollis' annual base
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salary will be increased to not less than $225,000 upon the consummation of
the Merger. If Mr. Hollis' employment is terminated "without cause," "for
insufficient reason" or pursuant to a "change in control" (as such terms
are defined in the Hollis Employment Agreement), Mr. Hollis will receive as
severance (i) an amount equal to five times his then current annual base
salary plus five times the amount of the bonus awarded to him in the prior
calendar year, (ii) immediate vesting of all unvested stock options of
Hollis-Eden (or the Surviving Corporation, if applicable) held by him and
(iii) continued benefits under all employee benefit plans and programs for
a period of three years. All of such payments are to be made in one lump
sum within 30 days of termination. If Mr. Hollis' employment is terminated
with cause or if Mr. Hollis resigns other than for "sufficient reason," Mr.
Hollis' compensation and benefits will cease immediately and Mr. Hollis
will not be entitled to severance benefits. The Hollis Employment
Agreement will continue in effect after the consummation of the Merger,
with the Surviving Corporation being the obligor thereunder.
No other Hollis-Eden employment agreements currently exist and it
is anticipated that, for the forseeable future, the Surviving Corporation
will not enter into any new employment agreements.
EMPLOYEE BENEFIT PLANS
1996 Stock Option Plan. In August 1996, Hollis-Eden adopted a
Stock Option Plan (the "Plan") which provides for the granting to employees
of incentive stock options within the meaning of Section 422 of the Code
and non-statutory stock options which are not intended to qualify as
incentive stock options. The Plan will terminate automatically in August
2006 unless terminated sooner. The Plan allows the Board of Directors of
Hollis-Eden to amend, suspend or terminate the Plan, provided that no such
action may affect any share of Hollis-Eden Common Stock previously issued
and sold or any option previously granted under the Plan. A total of
500,000 shares of Hollis-Eden Common Stock have been reserved for issuance
pursuant to the Plan.
The Plan is administered by the Board of Directors of Hollis-Eden
(the "Administrator"), which Administrator is constituted to comply with
Section 16(b) of the Exchange Act and applicable laws. The Administrator
has the power to determine the terms of the options, including the exercise
price, the number of shares subject to each option and the exercisability
thereof, and the form of consideration payable upon exercise. Options
granted under the Plan are not generally transferable by the optionee, and
each option is exercisable during the lifetime of the optionee only by such
optionee. Options granted under the Plan must be exercised within three
months following the end of the optionee's status as an employee, director
or consultant of Hollis-Eden, or within 12 months after the optionee's
termination as a result of disability or within 18 months of such
optionee's death, but in no event later than the expiration of the option's
10-year term. The exercise price of any incentive stock option granted
under the Plan must be at least equal to the fair market value of the
Hollis-Eden Common Stock on the date of grant. The exercise price of any
nonstatutory stock option granted under the Plan is determined by the
Administrator. With respect to any participant who owns stock possessing
more than 10% of the voting power of all classes of Hollis-Eden's
outstanding capital stock, the exercise price of any incentive stock option
granted must equal at least 110% of the fair market value on the grant date
and the term of such incentive stock option must not exceed five years. The
term of all other options which may be granted under the Plan may not
exceed 10 years.
The Plan provides that in the event of a merger of Hollis-Eden
into another corporation or a sale of all or substantially all of the
assets or like transaction involving Hollis-Eden, each option will be
assumed or an equivalent option substituted by the successor corporation.
If the outstanding options are not assumed or substituted as described in
the preceding sentence, the vesting period for options held by persons then
performing services as employees, directors or consultants shall be
accelerated prior to such event; such options will terminate if not
exercised after such acceleration and at or prior to such event. In
connection with the Merger, all outstanding options granted under the Plan
will be substituted for equivalent options of the Surviving Corporation.
See "PROPOSAL TO APPROVE AND ADOPT THE IAC 1996 INCENTIVE STOCK OPTION
PLAN."
The following tables set forth information concerning individual
grants of stock options, exercises of stock options, and aggregate stock
options held for each of the proposed executive officers and directors of
the Surviving Corporation. Mr. Salvatore J. Zizza does not hold any such
stock options. All of these stock options were granted on March 29, 1996,
at which time the Board of Directors of Hollis-Eden determined that the per
share fair market value for Hollis-Eden Common Stock was $2.25 per share.
None of these stock options has been exercised. Hollis-Eden has not
granted any other stock options, except for an incentive stock option to
purchase 500 shares of Hollis-Eden Common Stock granted in November 1996
under the Plan to an employee of Hollis-Eden.
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OPTION GRANTS IN 1996
INDIVIDUAL GRANTS
----------------------------------------------
NUMBERED PERCENTAGE OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED 1996(4) SHARE DATE
-------------- ---------- ------------ --------- ----------
Richard Hollis 200,000(1) 37.0% $2.25 3/15/06
Patrick Prendergast 50,000(1) 9.3% $2.25 3/15/06
Thomas C. Merigan 125,000(2) 23.1% $2.25 3/15/03
Robert Weber 40,000(1) 7.4% $2.25 3/15/03
25,000(1) 4.6% $2.25 3/15/06
Lois Rezler 50,000(1) 9.3% $2.25 3/15/03
J. Paul Bagley 25,000(3) 4.6% $2.25 3/15/03
Brendan McDonnell 25,000(1) 4.6% $2.25 3/15/06
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PRICE APPRECIATION
FOR OPTION TERM (5)
---------------------
NAME 5% 10%
------------------- ---------------------
Richard Hollis $283,000 $717,400
Patrick Prendergast $ 70,750 $179,350
Thomas C. Merigan $114,500 $266,875
Robert Weber $ 36,640 $ 85,400
$ 35,375 $ 89,675
Lois Rezler $ 45,800 $106,750
J. Paul Bagley $ 22,900 $ 53,375
Brendan McDonnell $ 35,375 $ 89,675
---------------------------
(1) One-third of the shares subject to such option shall vest and become
exercisable on the first anniversary of the date of grant, and the
remaining shares shall vest in 24 equal monthly installments thereafter
based on continued employment and/or service with Hollis-Eden (or its
successor).
(2) Options to purchase 25,000 shares are vested and are currently
exercisable, and the remaining shares subject to this option will vest and
be exercisable in equal monthly installments over a three-year period based
on continued service as a director of Hollis-Eden (or its successor) and
Chairman of the Scientific Advisory Board.
(3) All options are vested and may be exercised immediately.
(4) Based on options to purchase an aggregate of 540,500 shares granted to
employees and directors.
(5) The potential realizable value is calculated based on the term of the
option at its date of grant (7 years and 10 years). It is calculated
assuming that the stock price on the date of grant appreciates at the
indicated annual rate, compounded annually for the entire term of the
option and that the option is exercised and sold on the last day of its
term for the appreciated stock price. These amounts represent certain
assumed rates of appreciation only, in accordance with the rules of the
Commission, and do not reflect Hollis-Eden's estimate or projection of
future stock price performance. Actual gains, if any, are dependent on the
actual future performance of Hollis-Eden's (and consequently, the Surviving
Corporation's) Common Stock and no gain to the optionee is possible unless
the stock price increases over the option term, which will benefit all
Hollis-Eden (and consequently, Surviving Corporation) Stockholders.
PROPOSAL TO APPROVE AND ADOPT
THE 1996 IAC INCENTIVE STOCK OPTION PLAN
GENERAL
The following description of the 1996 IAC Incentive Stock Option Plan
(the "IAC Plan") is a summary and is qualified in its entirety by reference
to the IAC Plan, as proposed to be adopted, which is attached hereto as
Annex D. The IAC Plan will continue as the Incentive Stock Option Plan of
the Surviving Corporation following the consummation of the Merger and, at
the Effective Time, all outstanding options granted under Hollis-Eden's
Plan will be substituted for equivalent options under the IAC Plan.
On November 1, 1996, the IAC Board of Directors adopted the IAC Plan,
subject to approval of the IAC Stockholders at the IAC Special Meeting.
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PURPOSE OF THE GRANT OF OPTIONS
The purpose of the IAC Plan is to encourage selected management, key
employees, directors and certain other persons associated with IAC
(including any successor) to acquire an investment in IAC's business,
thereby strengthening their commitment to remain with, or join, IAC. The
IAC Plan contemplates the grant to such persons of "incentive stock
options" under Section 422 of the Code ("ISOs") and nonqualified stock
options ("NSOs").
The IAC Plan is not subject to any of the requirements of the Employee
Retirement Income Security Act of 1974, as amended, nor is it qualified or
intended to be qualified under Section 401(a) of the Code.
SECURITIES TO BE OFFERED
An aggregate of 1,000,000 shares of IAC Common Stock have been reserved
for issuance upon the exercise of options granted pursuant to the IAC Plan
(subject to adjustment as provided in the IAC Plan upon the occurrence of
certain changes in the capitalization of IAC and certain other corporate
transactions). To date, no options under the IAC Plan have been granted.
ADMINISTRATION
The Incentive Plan is to be administered by the Incentive Stock Option
Committee (the "Option Committee"), consisting of Messrs. . , each a
"disinterested person" within the meaning of Rule 16(b)-3(c)(2)(i) of the
Exchange Act, with respect to the IAC Plan. Following the consummation of
the Merger, it is anticipated that Messrs. . , each a disinterested person,
will comprise the Surviving Corporation's Option Committee. Subject to the
terms of the IAC Plan and such limitations as the IAC Board of Directors
may impose, the Option Committee shall be responsible for the overall
management and administration of the IAC Plan and shall have such authority
as may be necessary or appropriate to carry out its responsibilities,
including, without limitation, the authority to (i) determine the persons
(other than a member of the Option Committee) to whom, and the time or
times at which, grants shall be made as well as the terms of ISOs and NSOs,
(ii) interpret and construe the terms of the IAC Plan and any instrument
thereunder, and (iii) adopt rules and regulations, prescribe forms and take
any other actions not inconsistent with the IAC Plan as it may deem
necessary or appropriate.
PERSONS WHO MAY PARTICIPATE
Officers, key employees and directors of IAC, as well as certain
consultants, advisors and other persons who provide services to IAC (other
than a member of the Option Committee), are eligible to participate in the
IAC Plan without regard to length of employment or service. Any such
person who is not an "employee" of IAC, within the meaning of Section 422
of the Code, is not eligible to receive ISOs.
No options will be granted after November 1, 2006, the date upon which
the IAC Plan will terminate if it is not terminated earlier by the IAC
Board.
DESCRIPTION OF OPTIONS
The exercise price of an option granted under the IAC Plan and the period
during which it may be exercised will be determined by the Option Committee
at the time of grant, subject to the terms and conditions of the IAC Plan.
The exercise price of an ISO, however, shall not be less than the fair
market value of the shares subject to such ISO on the date of grant (or
110% of such fair market value in the case of ISOs granted to an individual
who is a 10% or greater stockholder). No options may be exercised until at
least six months after the date upon which the option was granted.
In no event will options expire later than the expiration of ten years
from the date of grant (or five years from the date of grant in the case of
ISOs granted to an individual who is a 10% or greater stockholder).
Options that are otherwise exercisable may be exercised in whole or in
part.
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In the event of (i) a "change of control," (ii) retirement of a holder
from IAC on or after the holder's 65th birthday, (iii) disability or death
of a holder, or (iv) upon the occurrence of such special circumstances or
events as in the opinion of the Option Committee merits special
consideration, options granted pursuant to the IAC Plan will vest and
become immediately exercisable (but in no event prior to six months after
the date of grant). A change of control will be deemed to occur for these
purposes if either (i) after the Effective Time, any person (within the
meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes,
without the approval of the IAC Board, the beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of securities representing
30% or more of the combined voting power of IAC; (ii) the stockholders of
IAC approve either (a) an agreement to merge or consolidate in a
transaction in which IAC is not the surviving entity, (b) an agreement to
sell or dispose of all or substantially all of IAC's assets, or (c) a plan
to liquidate IAC, unless the IAC Board determines that options will not
vest upon an event described in (a), (b) or (c); or (iii) during any period
of two consecutive years, individuals constituting at least of a majority
of the IAC Board at the beginning of such period cease to constitute a
majority thereof, unless the election or nomination for election by IAC's
Stockholders of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of such period.
If the optionee's employment with IAC terminates or if the optionee's
association with IAC terminates (in the case of a consultant, advisor or
other service provider), options that are exercisable on his termination
date shall remain exercisable until the expiration of three months from
such termination date (extended to 12 months if such termination occurs due
to the optionee's death or disability).
To the extent that the aggregate fair market value (determined at the
time an ISO is granted) of shares of IAC Common Stock subject to ISOs are
exercisable for the first time by an optionee during a calendar year (under
all stock option plans of IAC) exceeds $100,000, such ISOs shall be treated
as NSOs.
PAYMENT FOR SHARES
Payment for shares of IAC Common Stock purchased upon exercise of an
option must be made in full upon exercise, either in cash or check or in
shares of outstanding IAC Common Stock, as determined by the Stock Option
Committee. The proceeds received by IAC from the sale of shares of IAC
Common Stock pursuant to the IAC Plan shall be used for general corporate
purposes.
TRANSFER RESTRICTIONS
Options are not transferable other than by will or the laws of descent
and distribution and, upon the occurrence of any event permitting such a
transfer, the entire option must be transferred to the same person or
entity. An optionee is required to notify IAC if he disposes of shares of
IAC Common Stock acquired pursuant to the exercise of an ISO within two
years of the date the ISO was granted or within one year of the date the
ISO was exercised.
AMENDMENT AND TERMINATION
The IAC Board may amend or terminate the IAC Plan at any time or from
time to time; provided, however, that unless all required approvals have
been received, no amendment will be made that would (i) increase the
maximum number of shares as to which options may be granted, or (ii)
materially modify the requirements as to eligibility for participation. No
amendment is permitted which would adversely affect the rights of any
optionee under an option granted prior to such amendment, unless the
optionee consents thereto. In addition, no amendment will be made that
would result in the disqualification of any ISO as an "incentive stock
option" within the meaning of Section 422 of the Code.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the federal income tax
consequences to an optionee and IAC of the grant and exercise of an option
pursuant to the IAC Plan and the disposition of stock acquired upon
exercise of any option. Because the consequences will vary for any
one of a number of reasons, IAC
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urges each optionee to consult his own tax advisor with respect to the tax
consequences of such transactions. The following summary does not purport
to be complete and does not take into account state or local tax
implications.
General
The grant of an option under the IAC Plan, whether or not an ISO, does
not result in any tax consequences to IAC or the optionee. The tax
consequences of exercising an option or disposing of IAC Common Stock
purchased by an optionee upon exercise of an option ("option stock") depend
upon whether the option is an ISO or an NSO.
Nonqualified Stock Options
An optionee, if he is not a director, officer or beneficial owner of more
than ten percent of the outstanding shares of IAC Common Stock
(hereinafter, a "director, officer or principal stockholder"), will realize
income as compensation, at the time he exercises an NSO, in an amount equal
to the amount by which the then fair market value of the IAC Common Stock
acquired pursuant to the exercise of the NSO exceeds the price paid for
such IAC Common Stock. Section 83 of the Code provides generally that, if
a director, officer or principal stockholder receives shares pursuant to
the exercise of such an option, he will realize ordinary income only when
he can sell such shares at a profit without being subject to liability
under section 16(b) of the Exchange Act, at which time he will be subject
to tax on the difference between the then fair market value of the shares
and the price paid for them. Alternatively, a director, officer or
stockholder who would not otherwise be subject to tax on the value of his
shares as of the date they were acquired can file a written election with
the Internal Revenue Service, no more than 30 days after the shares are
transferred to him, to be taxed as of the date of the transfer. The
optionee then will realize income, as compensation, in a total amount equal
to the amount by which the fair market value of the shares, as of the date
he acquired them, exceeds the price paid for such shares.
Shares of IAC Common Stock issued pursuant to the exercise of an NSO
generally will constitute a capital asset in the hands of an optionee
(including a director, officer or principal stockholder) and will be
eligible for capital gain or loss treatment upon any subsequent
disposition. The holding period of an optionee (including a director,
officer or principal stockholder) will commence upon the date he recognizes
income with respect to the issuance of such shares, as described above.
The optionee's basis in the shares will be equal to the greater of their
fair market value as of that date or the amount paid for such shares.
Incentive Stock Options
If an optionee exercises an ISO, the optionee does not recognize income
upon exercise, provided that the optionee was an employee of IAC at all
times from the date when the option was granted until not less than three
months before exercise. (This three-month period is extended to one year
if the optionee's employment terminates as a result of permanent and total
disability, and is waived in the case of the optionee's death while
employed by IAC). However, the excess of the fair market value of Common
Stock acquired upon exercise of an ISO (determined at the time of such
exercise) over the exercise price generally constitutes an item of
adjustment for purposes of determining the optionee's alternative minimum
tax liability for the taxable year of the exercise.
If an optionee exercises an ISO and fails to satisfy the three-month
(one-year in the case of permanent and total disability) employment period
requirement, the optionee must include in gross income, as compensation for
the taxable year of exercise, an amount equal to the excess of the fair
market value of the option stock at the time of exercise over the exercise
price. If an optionee subsequently disposes of option stock which, when
exercised, did not satisfy the employment period requirement, the optionee
must include in gross income as capital gain (or loss) for the taxable
year, the difference between amount realized by the optionee upon such
disposition and the fair market value of the option stock at the time of
exercise.
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If (i) an optionee satisfied the employment period requirement set forth
above at the time the ISO was exercised, (ii) disposes of option stock that
was acquired by the optionee pursuant to an ISO more than one year prior to
the disposition, (iii) such ISO was granted to the optionee more than two
years prior to the disposition, and (iv) the amount realized in the
disposition exceeds the exercise price, then the optionee must include in
gross income, as capital gain for the taxable year of the disposition an
amount equal to the excess of the amount realized in the disposition over
the exercise price. (If, instead, the exercise price exceeds the amount
realized in the disposition, the optionee is allowed to deduct an amount
equal to such excess as a capital loss for such year.)
If (i) an optionee satisfied the employment period requirement set forth
above, at the time the ISO was exercised, (ii) disposes of option stock
within two years after the related ISO is granted or within one year after
the option stock was acquired by the optionee, and (iii) the amount
realized in the disposition exceeds both the exercise price and the fair
market value of the option stock on the date of exercise, then the optionee
must include in gross income, as compensation for the taxable year of the
disposition, an amount equal to the excess of such fair market value over
the exercise price, and must include in gross income as gain an amount
equal to the excess of the amount realized in the disposition over such
fair market value. Such gain is generally treated as capital gain,
long-term or short-term, depending upon the length of time elapsed between
the time when the option stock was acquired and the time of the
disposition. If, instead, the amount realized in the disposition exceeds
the exercise price, but is less than the fair market value of the option
stock on the date of exercise, the optionee must include in gross income,
as compensation for the taxable year of the disposition, an amount equal to
the excess of the amount realized over the exercise price. If the exercise
price exceeds the amount realized in the disposition, the optionee is
allowed to deduct an amount equal to such excess as a loss for the taxable
year of the disposition. Such loss is generally treated as capital loss,
long-term or short term, depending upon the length of time elapsed between
the time the option stock was acquired and the time of the disposition.
Tax Consequences to IAC
If an optionee includes an amount in gross income as compensation for a
taxable year under the foregoing rules, IAC is generally entitled to a
corresponding deduction for its taxable year that includes the last day of
the affected taxable year of the optionee.
Section 280G of the Code
In addition to the Federal income tax consequences discussed above,
Section 280G of the Code provides that if an officer, stockholder or highly
compensated individual receives a payment which is in the nature of
compensation and which is contingent upon a change in control of the
employer, and such payment equals or exceeds three times his "base salary"
(as hereinafter defined), then any amount received in excess of base salary
shall be considered an "excess parachute payment." An individual's "base
salary" is equal to his average annual compensation over the five-year
period (or period of employment, if shorter) ending with the close of the
individual's taxable year immediately preceding the taxable year in which
the change in control occurs. If the taxpayer establishes, by clear and
convincing evidence, that such payment is reasonable compensation for past
or future services, then all or a portion of such payment may be deemed not
to be a parachute payment. Under certain circumstances, options may give
rise to excess parachute payments. If so, then in addition to any income
tax which would otherwise be owed in connection with such payment, the
optionee will be subject to an excise tax equal to 20% of such excess
payment, and IAC will not be entitled to any tax deduction to which it
would have been entitled with respect to such excess parachute payment.
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REQUIRED VOTE
Under the DGCL and IAC's Charter, the IAC Board of Directors has the
authority to grant stock options to officers, key employees, consultants
and advisors providing goods or services to IAC without stockholder
approval. Under the rules of the Exchange Act, however, stockholder
approval is required with respect to the IAC Plan to be exempt from the
provisions of Section 16(b) of the Exchange Act. Accordingly, the IAC
Board of Directors approved the IAC Plan upon the condition that the IAC
Plan would not be effective unless ratified and approved by the IAC
Stockholders at the IAC Special Meeting. The affirmative vote of a
majority of the outstanding shares of IAC Common Stock voting in person or
by proxy at the IAC Special Meeting is required for ratification and
approval of the IAC Plan.
RECOMMENDATION AND VOTE
THE IAC BOARD OF DIRECTORS RECOMMENDS THAT IAC STOCKHOLDERS VOTE "FOR"
THE PROPOSAL TO APPROVE AND ADOPT THE IAC PLAN.
Each properly executed proxy received will be voted "FOR" the approval
and adoption of the IAC Plan unless otherwise specified in the proxy.
DESCRIPTION OF IAC'S SECURITIES
COMMON STOCK
IAC is authorized to issue 10,000,000 shares of IAC Common Stock. As of
the date of this Joint Proxy Statement/Prospectus, 833,250 shares of IAC
Common Stock were outstanding, held of record by [38] persons. The holders
of Common Stock are entitled to one vote for each share held of record on
all matters to be voted on by stockholders. There is no cumulative voting
with respect to the election of directors, with the result that the holders
of more than 50% of the shares voting for the election of directors can
elect all of the directors. The holders of IAC Common Stock are entitled
to receive dividends when, as and if declared by the Board of Directors of
IAC out of funds legally available therefor. In the event of the
liquidation, dissolution or winding up of IAC, the holders of IAC Common
Stock will be entitled to share ratably in all assets remaining available
for distribution after payment of liabilities and after provision has been
made for each class of stock, if any, having preference over the IAC Common
Stock. The Initial IAC Stockholders have agreed to waive their respective
rights to participate in a liquidation distribution prior to the
consummation of the first Business Combination. Holders of shares of IAC
Common Stock, as such, have no conversion, preemptive or other subscription
rights, and there are no redemption provisions applicable to the IAC Common
Stock. All of the outstanding shares of IAC Common Stock are, and the
shares of Surviving Corporation Common Stock to be issued in connection
with the Merger, when issued, will be validly authorized and issued, fully
paid and nonassessable.
PREFERRED STOCK
IAC's Charter authorizes the issuance of 5,000 shares of "blank check"
preferred stock, par value $.01 per share (the "Preferred Stock"), with
such designations, powers, preferences, rights, qualifications, limitations
and restrictions of such series as the Board of Directors, subject to the
laws of the State of Delaware, may determine from time to time.
Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or
other rights of the holders of IAC Common Stock. Such Preferred Stock
could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of IAC. No shares
of Preferred Stock are currently outstanding.
WARRANTS
Each Class A Warrant entitles the holder thereof to purchase one share of
Surviving Corporation Common Stock at a price of $9.00 per share, subject
to adjustment in certain circumstances. The Class A Warrants will be
initially exercisable upon the consummation of the Merger and expire at
5:00 p.m., New York City time, on May 15, 2000.
Each Class B Warrant entitles the holder thereof to purchase one Unit
(i.e., one share of Surviving Corporation Common Stock and one Class A
Warrant) at a price of $.25 per Unit, subject to adjustment in certain
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circumstances. The Class B Warrants will be initially exercisable upon the
consummation of the Merger and expire at 5:00 p.m., New York City time, on
the first anniversary of the date of the Merger.
The Surviving Corporation may call the Warrants for redemption, each as a
class, in whole and not in part, at the option of the Surviving
Corporation, at a price of $.05 per Warrant at any time after the
consummation of the Merger, upon not less than 30 days' prior written
notice, provided that the last sale price of Surviving Corporation Common
Stock, if Surviving Corporation Common Stock is listed for trading on an
exchange or interdealer quotation system which provides last sale prices,
or, the average of the closing bid and asked quotes, if Surviving
Corporation Common Stock is listed for trading on an interdealer quotation
system which does not provide last sale prices, on all 10 of the trading
days ending on the day immediately prior to the day on which the Surviving
Corporation gives notice of redemption, has been $11.00 or higher. The
warrantholders shall have exercise rights until the close of business on
the date fixed for redemption.
The exercise price and number of shares of Surviving Corporation Common
Stock issuable on exercise of the Class A Warrants are subject to
adjustments under certain circumstances, including in the event of a stock
dividend, recapitalization, reorganization, merger or consolidation of IAC
(or the Surviving Corporation). The Warrants, however, are not subject to
adjustment for issuance of shares of IAC (or Surviving Corporation) Common
Stock at prices below their respective exercise prices.
IAC (and the Surviving Corporation) each has the right, in its sole
discretion, to decrease the exercise price of the Warrants for a period of
not less than 30 days on not less than 30 days' prior written notice to the
warrantholders, subject to compliance with applicable laws. In addition,
IAC (and the Surviving Corporation) has the right, in its sole discretion,
to extend the expiration date of the Warrants on five business days' prior
written notice to the warrantholders.
COMPARISON OF STOCKHOLDERS' RIGHTS
The following is a summary of material differences between the rights of
holders of Hollis-Eden Common Stock and the rights of holders of IAC Common
Stock. As each of Hollis-Eden and IAC is organized under and subject to
the laws of the State of Delaware, these differences arise from various
provisions of Hollis-Eden's and IAC's respective charter and bylaws.
Additionally, after the Effective Time, the Hollis-Eden Charter and Bylaws
will operate as the charter and bylaws of the Surviving Corporation.
NUMBER, ELECTION AND REMOVAL OF DIRECTORS
Subject to the rights of the holders of any series of preferred stock,
the Board of Directors of Hollis-Eden is divided into three classes
designated as Class I, Class II and Class III, with directors assigned to
each class in accordance with resolutions adopted by the Board of
Directors. At the first annual meeting of stockholders following the
Effective Time, the term of office of the Class I directors shall expire
and Class I directors shall be elected for a full term of three years. At
the second annual meeting of stockholders following the Effective Time, the
term of office of the Class II directors shall expire and Class II
directors shall be elected for a full term of three years. At the third
annual meeting of stockholders following the Effective Time, the term of
office of the Class III directors shall expire and Class III directors
shall be elected for a full term of three years. At each succeeding annual
meeting of stockholders, directors shall be elected for a full term of
three years to succeed the directors of the class whose terms expire at
such annual meeting. Also subject to the rights of the holders of any
series of preferred stock, no director shall be removed without cause.
The Board of Directors of IAC is comprised of one class of directors made
of up not more than eight directors, each of whom is elected annually at
the annual meeting of IAC Stockholders. Directors of IAC may be removed
with or without cause.
AMENDMENTS TO THE BYLAWS
The Hollis-Eden Bylaws may be amended by either the majority vote of the
Board of Directors or the affirmative vote of at least 66 2/3% of the
voting power of all of the then outstanding shares of voting stock of
Hollis-Eden.
The IAC Bylaws may be amended by either the majority vote of the Board
Directors or the affirmative vote of the holders of a majority of the
outstanding stock of IAC entitled to vote.
-82-
<PAGE>
WRITTEN ACTION BY STOCKHOLDERS
No action shall be taken by Hollis-Eden Stockholders except at an annual
or special meeting of such stockholders.
IAC Stockholders may take any action required or permitted to be taken at
any annual or special meeting of stockholders without a meeting, without
prior notice and without a vote, if a consent in writing, setting forth the
action so taken, is signed by the holders of all of the outstanding shares
entitled to vote thereon.
SPECIAL MEETINGS OF STOCKHOLDERS
Special meetings of Hollis-Eden Stockholders may be called for any
purpose or purposes by (i) the Chairman of the Board of Directors, (ii) the
Chief Executive Officer or (iii) the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized
directors .
Special meetings of IAC Stockholders may be called for any purpose or
purposes at any time by (i) the President or by the Board of Directors or
(ii) the President or a Vice President or the Secretary whenever IAC
Stockholders holding not less than a majority of all of the outstanding
stock entitled to vote at such meeting shall make a written application
therefor stating the purpose or purposes for such a meeting.
ADVANCE NOTICE REQUIREMENTS IN CONNECTION WITH STOCKHOLDER PROPOSALS AND
DIRECTOR NOMINATIONS AT ANNUAL MEETINGS
For business to be properly brought before an annual meeting by a Hollis-
Eden Stockholder, such stockholder must have given timely notice thereof in
writing to the Secretary of Hollis-Eden. To be timely, such stockholder's
notice must be delivered to or mailed and received at the principal
executive offices of Hollis-Eden not later than the close of business on
the 60th day nor earlier than the close of business on the 90th day prior
to the first anniversary of Hollis-Eden's preceding year's annual meeting.
Such notice shall set forth as to each general matter such stockholder
proposes to bring a brief description of the business desired to be
brought, the reasons for conducting such business at the annual meeting and
all other information relating to such matter as is required to be
disclosed to stockholders under the Exchange Act.
IAC does not have similar advance notice provisions.
TRANSFER AGENTS AND REGISTRARS
The transfer agent and registrar for shares of IAC Common Stock is
American Stock Transfer & Trust Company, 40 Wall Street, 46th Floor, New
York, New York 10005.
LEGAL MATTERS
The validity of the shares of IAC Common Stock being offered by this
Joint Proxy Statement/Prospectus is being passed upon for IAC by Reid &
Priest LLP, 40 West 57th Street, New York, New York 10019.
EXPERTS
The financial statements of IAC as of December 31, 1995 and 1994 and for
each of the years ended December 31, 1995, 1994 and 1993 have been included
herein and in the Registration Statement in reliance upon the report of BDO
Seidman, LLP, independent certified public accountants, appearing elsewhere
herein and upon the authority of said firm as experts in accounting and
auditing.
-83-
<PAGE>
The financial statements of Hollis-Eden as of December 31, 1995 and 1994
and for the year ended December 31, 1995 and the period from inception
(August 15, 1994) to December 31, 1994 included in this Prospectus have
been so included in reliance upon the report (which contains an
explanatory paragraph relating to the Company's ability to continue
as a going concern as described in Note 1 to the financial statements)
of Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
It is expected that representatives of BDO Seidman, LLP, and Price
Waterhouse LLP will be present at the Special Meetings of IAC and Hollis-
Eden, respectively, to respond to questions. They will be given an
opportunity to make a statement should they so desire.
-84-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
IAC Page
--- ----
Report of Independent Certified Public Accountants . . . . . . . . . F-2
Statements of Operations for the years ended December 31, 1995,
1994 and 1993, the nine months ended September 30, 1996 and 1995
and for the period January 1, 1993 to September 30, 1996 . . . . . . F-3
Balance Sheets - December 31, 1995 and 1994 and September 30, 1996. . F-4
Statements of Common Stock, Common Stock Subject to Possible Redemption,
Preferred Stock, Additional Paid-In Capital and Earnings Accumulated
During the Development Stage for the years ended December 31, 1995,
1994 and 1993 and the nine months ended September 30, 1996 . . . . . F-5
Statements of Cash Flows for the years ended December 31, 1995, 1994
and 1993, the nine months ended September 30, 1996 and 1995 and for
the period January 1, 1993 to September 30, 1996 . . . . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . F-7
HOLLIS-EDEN
-----------
Report of Independent Accountants . . . . . . . . . . . . . . . . . . F-12
Balance Sheet - December 31, 1995, 1994 and September 30, 1996 . . . F-13
Statement of Operations for the year ended December 31, 1995, for the
period from inception (August 15, 1994) to December 31, 1994, for the
period from inception (August 15, 1994) to December 31, 1995,
for the nine months ended September 30, 1996 and 1995
and for the period from inception (August 15, 1994) to
September 30, 1996 F-14
Statement of Stockholders' Deficit . . . . . . . . . . . . . . . . . F-15
Statement of Cash Flows for the year ended December 31, 1995, for the
period from inception (August 15, 1994) to December 31, 1994, for the
period from inception (August 15, 1994) to December 31, 1995,
for the nine months ended September 30, 1996 and 1995
and for the period from inception (August 15, 1994)
to September 30, 1996 F-16
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . F-18
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders of
Initial Acquisition Corp.
(a corporation in the development stage)
New York, New York
We have audited the accompanying balance sheets of Initial Acquisition
Corp. (a corporation in the development stage), as of December 31, 1995 and
1994, and the related statements of operations, common stock, common stock
subject to possible redemption, preferred stock, additional paid-in capital
and earnings accumulated during the development stage, and cash flows for
each of the years in the three year period ended December 31, 1995. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of Initial Acquisition Corp. as of
December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the years in the three year period ended December 31,
1995 in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
--------------------------------
BDO Seidman, LLP
New York, New York
February 15, 1996
F-2
<PAGE>
INITIAL ACQUISITION CORP.
(a corporation in the development stage)
STATEMENTS OF OPERATIONS
------------------------
YEAR ENDED
DECEMBER 31,
------------------------- 9 MONTHS
ENDED
9/30/96
1995 1994 1993 -----------
------ ----- ----- (UNAUDITED)
INTEREST INCOME . . . . . . $224,305 $ - $ - $264,986
GENERAL AND ADMINISTRATIVE
EXPENSES . . . . . . . . (71,782) (7,000) (7,186) (132,152)
PROVISION FOR TAXES . . . . (52,000) - - (32,150)
------- ------ -------- --------
NET INCOME (LOSS) . . . . . $100,523 $(7,000) $(7,186) $100,684
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE . $ .16 $ (.03) $ (.03) $ .12
======== ======== ======== ========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING . . . 608,250 233,250 233,250 833,250
======= ======= ======= =======
PERIOD
JANUARY 1,
9 MONTHS 1993 TO
ENDED SEPTEMBER 30,
9/30/95 1996
---------- ------------
(UNAUDITED) (UNAUDITED)
INTEREST INCOME . . . . . . $123,228 $489,291
GENERAL AND ADMINISTRATIVE
EXPENSES . . . . . . . . (15,405) (218,120)
PROVISION FOR TAXES . . . . - (84,150)
-------- --------
NET INCOME (LOSS) . . . . . $107,823 $187,021
======== =========
EARNINGS (LOSS) PER SHARE . $ .20
========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING . . . 533,250
========
See accompanying notes to financial statements.
F-3
<PAGE>
INITIAL ACQUISITION CORP.
(a corporation in the development stage)
BALANCE SHEETS
---------------
DECEMBER 31, SEPTEMBER 30,
ASSETS
------ 1995 1994 1996
----- ----- -----------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents . . $ 305,171 $ 11,096 $ 202,165
Investment in U.S. Treasury
Bills . . . . . . . . . . . . 6,213,588 - 6,469,000
---------- -------- ----------
Total current
assets . . . . . . 6,518,759 11,096 6,671,165
- 63,043 21,099
Deferred registration costs . ---------- ------- ---------
Total . . . . . . $6,518,759 $74,139 $6,692,264
========== ======= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Accrued expenses . . . . . . . $ 37,640 $ - $ 78,311
Income taxes payable . . . . . 52,000 - 84,150
Due to stockholders . . . . . - 6,000
Common stock, subject to
possible redemption,
89,940 shares at conversion
value . . . . . . . . . . . 932,316 - 969,703
Preferred stock, $.01 par value
- shares authorized
5,000; none issued . . . . - -
Common stock, $.01 par value -
shares authorized
10,000,000; issued and
outstanding 833,250
(which includes 89,940
shares subject to
possible conversion) and
233,250, respectively . . . 7,434 2,333 7,434
Additional paid-in capital . . 5,436,065 79,992 5,436,065
Earnings (deficit) accumulated
during development stage . 53,304 (14,186) 116,601
--------- -------- ---------
COMMITMENTS . . . . . . . . . . .
Total . . . . . . $6,518,759 $74,139 $6,692,264
========== ======= ==========
See accompanying notes to financial statements.
F-4
<PAGE>
INITIAL ACQUISITION CORP.
(A CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF COMMON STOCK, COMMON STOCK SUBJECT TO
POSSIBLE REDEMPTION, PREFERRED STOCK,
ADDITIONAL PAID-IN CAPITAL AND EARNINGS ACCUMULATED
DURING THE DEVELOPMENT STAGE
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------------------
COMMON STOCK
SUBJECT TO
COMMON STOCK POSSIBLE REDEMPTION
----------------- -------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------- -------
BALANCE AT JANUARY 1, 1993 . - $ - - $
Issuance of founders shares 188,250 1,883 - -
Sale of common stock . . . 45,000 450 - -
Net loss . . . . . . . . . - - - -
--------- --------- ------- -------
BALANCE AT DECEMBER 31, 1993 233,250 2,333 - -
Net loss . . . . . . . . . - - - -
--------- --------- -------- -------
BALANCE AT DECEMBER 31, 1994 233,250 2,333 - -
Sale of 600,000 shares, net
of underwriting discounts
and offering costs . . . 510,060 5,101 89,940 899,283
Net income . . . . . . . . - - - -
Accretion to redemption
value of common stock . . - - - 33,033
--------- --------- ------- -------
BALANCE AT DECEMBER 31, 1995 743,310 7,434 89,940 932,316
--------- --------- ------- -------
Net Income (unaudited) . . - - - -
Accretion to redemption value
of stock
(Unaudited) . . . . . . . - - - 37,387
--------- --------- ------- -------
BALANCE AT SEPTEMBER 30, 1996
(unaudited) . . . . . . . . . 743,310 $7,434 89,940 $969,703
========= ========= ======= ========
EARNINGS
(DEFICIT)
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN DEVELOPMENT
CAPITAL STAGE
--------- ------------
BALANCE AT JANUARY 1, 1993 . $ $
Issuance of founders shares 16,942 -
Sale of common stock . . . 63,050 -
Net loss . . . . . . . . . - (7,186)
---------- ---------
BALANCE AT DECEMBER 31, 1993 79,992 (7,186)
Net loss . . . . . . . . . - (7,000)
---------- ---------
BALANCE AT DECEMBER 31, 1994 79,992 (14,186)
Sale of 600,000 shares, net
of underwriting discounts
and offering costs . . . 5,356,073 -
Net income . . . . . . . . - 100,523
Accretion to redemption
value of common stock . . - (33,033)
---------- ---------
BALANCE AT DECEMBER 31, 1995 5,436,065 53,304
---------- ---------
Net Income (unaudited) . . - 100,684
Accretion to redemption value
of stock
(Unaudited) . . . . . . . - (37,387)
---------- ---------
BALANCE AT SEPTEMBER 30, 1996
(unaudited) . . . . . . . . . $5,436,065 $116,601
========== =========
See accompanying notes to financial statements.
F-5
<PAGE>
INITIAL ACQUISITION CORP.
(A CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
-------------------------
YEAR ENDED
DECEMBER 31,
------------------------------------
1995 1994 1993
------ ------ -------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) . . . $ 100,523 $ (7,000) $ (7,186)
Adjustments to
reconcile net income
(loss) to net cash
used in operating
activities:
Accrued interest
income . . . . . . . (214,370) - -
Change in assets
and liabilities:
Accrued expenses . 31,640 - 6,000
Income taxes
payable . . . . . 52,000 - -
---------- ---------- -----------
Deferred
acquisition cost
Net cash used in
operating
activities . . (30,207) (7,000) (1,186)
----------- ---------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of U.S.
Treasury
Bills . . . . .
Proceeds from
U.S. Treasury
Bills . . . . . (5,999,218) - -
------------ ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from sale of
common stock . . . . . - - 82,325
Net proceeds from
public offering . . . 6,260,457 - -
Deferred registration
costs . . . . . . . . 63,043 (10,821) (52,222)
--------- ---------- -----------
Net cash provided by
(used in) financing
activities . . . . . . 6,323,500 (10,821) 30,103
--------- ---------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS . . . . . . 294,075 (17,821) 28,917
CASH AND CASH
EQUIVALENTS,
beginning of year . . . 11,096 28,917 -
--------- ---------- -----------
CASH AND CASH
EQUIVALENTS,
end of year . . . . . . $ 305,171 $11,096 $28,917
=========== ========== ===========
See accompanying notes to financial statements.
PERIOD
JANUARY 1,
9 MONTHS 9 MONTHS 1993 TO
ENDED ENDED SEPTEMBER 30,
9/30/96 9/30/95 1996
----------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) . . . $ 100,684 $ 107,823 $187,021
Adjustments to
reconcile net income
(loss) to net cash
used in operating
activities:
Accrued interest
income . . . . . . . (255,412) (117,666) (469,782)
Change in assets
and liabilities:
Accrued expenses . 40,671 2,500 78,311
Income taxes
payable . . . . . 32,150 (6,000) 84,150
Deferred
acquisition cost (21,099) -0- (21,099)
--------- -------- ---------
Net cash used in
operating
activities . . (103,006) (13,343) (141,399)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of U.S.
Treasury Bills (6,412,283) (5,999,218) (12,411,501)
Proceeds from
U.S. Treasury
Bills . . . . . 6,412,283 -0- 6,412,283
----------- ---------- -----------
-0- 5,999,218 (5,999,218)
----------- ---------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from sale of
common stock . . . . . 6,260,457 6,260,457
Net proceeds from
public offering . . . 63,043 82,325
Deferred registration
costs . . . . . . . . - -0- -0-
--------- ---------- -----------
Net cash provided by
(used in) financing
activities . . . . . . - 6,323,500 6,342,782
--------- ---------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS . . . . . . (103,006) 310,939 202,165
CASH AND CASH
EQUIVALENTS,
beginning of year . . . 305,171 11,096 -0-
--------- -------- ---------
CASH AND CASH
EQUIVALENTS,
end of year . . . . . . $ 202,165 $ 322,035 $202,165
========== ========== =========
See accompanying notes to financial statements.
F-6
<PAGE>
INITIAL ACQUISITION CORP.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 1 - ORGANIZATION AND BUSINESS OPERATIONS
---------------------------------------------
Initial Acquisition Corp. (the "Company") is a "blank check" or
"blind pool" company which was formed on November 18, 1992 to serve as a
vehicle to effect a merger, exchange of capital stock, asset acquisition or
other business combination (a "Business Combination") with an operating
business (a "Target Business"). Operations and cash transactions did not
occur until 1993; accordingly, financial statements have been presented
commencing on January 1, 1993. The business objective of the Company is to
effect a Business Combination with a Target Business which the Company
believes has significant growth potential. To date, the Company has not
effected a Business Combination.
On May 23, 1995 (the "Closing Date" or "Effective Date"), the
Company consummated its initial public offering (the "Offering") of (a)
600,000 units (the "Units"), each Unit consisting of (i) one share of
common stock, $.01 par value per share (the "Common Stock"), and (ii) one
Class A Common Stock Purchase Warrant (the "Class A Warrants") entitling
the holder thereof to purchase one share of Common Stock, and (b) 255,000
Redeemable Class B Unit Purchase Warrants (the "Class B Warrants"), each
such Class B Warrant entitling the holder thereof to purchase one Unit. On
the Closing Date, the Registrant received net proceeds of approximately
$6,300,000 (the "Net Proceeds"), after giving effect to the payment of all
underwriting discounts, the underwriters' non-accountable expense allowance
and Offering expenses. Pursuant to the terms of the Offering,
approximately $6 million of Net Proceeds, representing an amount equal to
the gross proceeds from the sale of the Units, was placed in escrow with
The Chase Manhattan Bank, N.A., subject to release in accordance with the
terms of the Offering. These Net Proceeds have been invested in United
States Treasury Bills and Commercial Paper.
The Company, prior to the consummation of any Business
Combination, will submit such transaction to the Company's stockholders for
their approval, even if the nature of the acquisition is such as would not
ordinarily require stockholder approval under applicable state law. All of
the Company's present stockholders, including all directors and the
Company's executive officer, have agreed to vote their respective shares of
common stock in accordance with the vote of the majority of the shares
voted by all other stockholders of the Company ("non-affiliated public
stockholders") with respect to any such Business Combination. A Business
Combination will not be consummated unless approved by a vote of two-thirds
of the shares of common stock owned by non-affiliated public stockholders.
At the time the Company seeks stockholder approval of any
potential Business Combination, the Company will offer ("Redemption Offer")
each of the non-affiliated public stockholders of the Company the right,
for a specified period of time not less than 20 calendar days, to redeem
his shares of common stock. In connection with the Redemption Offer, if
non-affiliated public stockholders holding less than 15% of the common
stock elect to redeem their shares, the Company may, but will not be
required to, proceed with such Business Combination and, if the Company
elects to so proceed, will redeem such shares by dividing (A) the greater
of (i) the Company's net worth as reflected in the Company's financial
statements or (ii) the amount of the proceeds of the Company in the escrow
account by (B) the number of shares held by non-affiliated public
stockholders ("Liquidation Value"). In any case, if non-affiliated public
stockholders holding 15% or more of the common stock elect to redeem their
shares, the Company will not proceed with such potential Business
Combination and will not redeem such shares.
F-7
<PAGE>
INITIAL ACQUISITION CORP.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
-----------------------------
NOTE 1 - ORGANIZATION AND BUSINESS OPERATIONS (continued)
---------------------------------------------------------
Accordingly, Public Stockholders holding 14.99% of the aggregate
number of shares owned by all Public Stockholders may have their shares
converted to cash in the event of a Business Combination. Such Public
Stockholders are entitled to receive their per share interest in the escrow
account computed without regard to shares held by Initial Stockholders.
Accordingly, a portion of the net proceeds from the Offering (14.99% of the
amount held in the escrow account) has been classified as common stock
subject to possible redemption in the accompanying balance sheet at the
redemption value.
All shares of the common stock outstanding immediately prior to
the date of the Offering were placed in escrow until the earlier of (i) the
occurrence of the first Business Combination, (ii) 18 months from the
effective date of the Offering or (iii) 24 months from the effective date
of the Offering if prior to the expiration of such 18 month period the
Company has become a party to a letter of intent or a definitive agreement
to effect a Business Combination, in which case such period shall be
extended six months. During the escrow period, the holders of escrowed
shares of common stock will not be able to sell or otherwise transfer their
respective shares of common stock (with certain exceptions), but will
retain all other rights as stockholders of the Company, including, without
limitation, the right to vote escrowed shares of common stock, subject to
their agreement to vote their shares in accordance with a vote of a
majority of the shares voted by non-affiliated public stockholders with
respect to a Business Combination or liquidation proposal.
If the Company does not effect a Business Combination within 18
months from the effective date or 24 months from the effective date if the
extension criteria have been satisfied, the Company will submit for
stockholder consideration a proposal to liquidate the Company and, if
approved, distribute to the then holders of common stock (issued in the
Offering or acquired in the open market thereafter) all assets remaining
available for distribution after payment of liabilities and after having
made appropriate provision for the payment of liquidating distributions
upon each class of stock, if any, having preference over the common stock.
F-8
<PAGE>
INITIAL ACQUISITION CORP.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
-------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
Supplemental Cash Flow Information
The Company considers all short-term, highly liquid instruments
purchased with an original maturity of three months or less to be cash
equivalents.
The Company's cash and cash equivalents are carried at cost,
which approximates market value, and consist of commercial paper. Cash
equivalents as of December 31, 1995 are $300,000.
Net Earnings (Loss) Per Common Share
Net earnings (loss) per common share for the years ended December
31, 1995 and 1994 are computed by dividing net earnings (loss) by the
weighted average common shares outstanding during the year. The assumed
exercise of common stock equivalents was not utilized since the effect was
anti-dilutive.
Income Taxes
The Company follows the Financial Accounting Standards Board
("FASB") Statement No. 109. This statement requires that deferred income
taxes be recorded following the liability method of accounting and be
adjusted periodically when income tax rates change. Deferred taxes are not
material.
Use of Estimates
In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from these estimates.
NOTE 3 - INVESTMENTS
--------------------
The Company had invested the majority of the proceeds from the
Offering in United States Treasury Bills. These Treasury Bills, which were
purchased at a discount, are presented at their accreted cost, which
approximates market. The Treasury Bills mature in October of 1996.
NOTE 4 - INCOME TAXES
---------------------
Income taxes are provided based on the liability method of
accounting pursuant to Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes". Deferred income taxes are recorded
to reflect the tax consequences on future years' differences between the
tax basis of assets and liabilities and their financial reporting amounts
at each year-end. Valuation allowances are established for those income
tax benefits where reliability is uncertain.
F-9
<PAGE>
INITIAL ACQUISITION CORP.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
-----------------------------
Provision for income taxes consist of the following:
1995 1994 1993
-------- -------- --------
Current:
Federal $40,000 $ - $ -
State $12,000
------- -------- -------
Current tax expense $52,000 $ - $ -
======= ======== =======
In 1995, the Company utilized net operating loss carryforwards
from the prior year in the amount of approximately $7,000.
NOTE 5 - COMMITMENT
-------------------
(a) The Company presently occupies office space provided by a
stockholder. Such stockholder has agreed that, until the acquisition of a
target business by the Company, he will make such office space, as well as
certain office and secretarial service, available to the Company, as may be
required by the Company from time to time at the rate of $500 per month.
Upon completion of the Offering, in May 1995, the monthly payment increased
to $2,500. Such costs reflected in the financial statements amount to
$20,000, $6,000 and $6,000 for the years ended December 31, 1995, 1994 and
1993, respectively.
(b) The Company has retained an investment banker, for the 18-month
period commencing as of May 15, 1995 (the "Engagement Period"), to aid in
structuring and negotiating Business Combinations. The investment banker
has been and will continue to be paid an engagement fee of $3,500 per month
during the Engagement Period, with maximum compensation payable thereunder
limited to $63,000 for such 18-month period, or $84,000 if the extension
criteria are satisfied and the agreement with the investment banker is
extended for the full six months. In addition, in 1993, the Company issued
15,000 shares of common stock at a price $.10 per share for its agreement
to act as the Company's investment banker.
NOTE 6 - WARRANTS
-----------------
In April 1994, the Company issued warrants to purchase 160,000 units
at $10.00 per unit, each unit to be identical to the Units issued in the
Offering, exercisable until the fifth anniversary of the date of the
Prospectus.
In April 1994, the Company issued warrants to purchase up to 50,000
shares of Common Stock, at an exercisable price of $.10 per share, to an
executive of the Company. These warrants are exercisable for the one-year
period following the consummation of a Business Combination. At the time
of a Business Combination, a compensation charge will be incurred for the
difference between the exercise price and the fair market value of the
shares purchased.
F-10
<PAGE>
INITIAL ACQUISITION CORP.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
-----------------------------
NOTE 6 - WARRANTS (continued)
-----------------------------
In connection with the Offering, the Company issued warrants to the
underwriters for 60,000 units at an exercise price of $11.00 per unit and
24,000 Class B warrants at an exercise price of $5.775 per unit. These
warrants are exercisable for a period of four years commencing one year
from the date of the Prospectus.
NOTE 7 - SUBSEQUENT EVENT (UNAUDITED)
On November 1, 1996, the Company entered into a definitive merger
agreement ("Merger Agreement") with Hollis-Eden, Inc. The merger
transaction (the "Merger") is subject to the approval of the stockholders
of IAC. The Merger Agreement provides for, among other things, the Merger
of the Company with and into Hollis-Eden, Inc., with the Company surviving
the Merger. At the effective time of the Merger, the outstanding shares of
common stock of the Company will be converted to 4,911,004 shares of IAC
common stock. The Merger Agreement also encompasses several other
agreements including, but not limited to, employment agreement for a key
employee, stock options granted to certain of the Company's shareholders
and an employee stock option plan.
For accounting and financial reporting purposes, the Merger will be
treated as a reverse acquisition with Hollis-Eden being the acquiror.
F-11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Hollis-Eden, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' deficit, and of cash flows present fairly,
in all material respects, the financial position of Hollis-Eden, Inc. (a
development stage company) at December 31, 1995 and 1994, and the results
of its operations and its cash flows for the year ended December 31, 1995,
the period from inception (August 15, 1994) to December 31, 1994, and the
period from inception (August 15, 1994) to December 31, 1995, in conformity
with generally accepted accounting principles. These financial statements
are the responsibility of Hollis-Eden's management; our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
As discussed in Note 1 to the financial statements, the Company is a
development stage enterprise which has not yet commenced business
operations, has no operating history to date, and is dependent upon
additional debt or equity financing. In addition, the Company has a
stockholders' deficit of $1,537,633 at December 31, 1995. Such factors,
among others, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Portland, Oregon
April 19, 1996
F-12
<PAGE>
HOLLIS-EDEN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1995 1994 1996
----------- ------------ --------------
(UNAUDITED)
ASSETS
Current Assets
Cash $ 0 $ 0 $ 227,657
Other receivables 0 0 90,300
Prepaid expenses 0 0 19,572
---------- ------------ -----------
Total current assets 0 0 337,529
Property and Equipment, net
of accumulated
depreciation of $339 0 0 6,662
----------- ------------ -----------
Total Assets $ 0 $ 0 $ 344,191
=========== ============ ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current Liabilities
Accrued expenses $ 92,111 $ 0 $ 37,641
Accrued expenses for
clinical trials 150,000 0 0
Wages payable 0 0 59,478
Accounts payable 0 0 15,336
Accounts payable to
related party (Note 8) 73,040 0 0
Note payable to related
party (Notes 3 and 8) 250,000 210,000 0
License fees payable to
related party (Note 6) 928,000 927,000 600,000
Accrued interest (Notes 3
and 8) 44,482 6,720 0
--------- --------- --------
Total liabilities 1,537,633 1,143,720 712,455
--------- --------- --------
Commitments and
contingencies (Note 6)
Stockholders' (deficit) (Note 5)
Preferred Stock, no par
value, 10,000,000 shares
authorized; no shares
issued or outstanding 0 0 0
Common Stock, $.0001 par
value, 30,000,000 shares
authorized; 4,150,943 and
3,396,226 and 4,911,004
shares issued and
outstanding 415 340 491
Additional Paid-in capital 410,689 132,986 2,050,238
Deficit accumulated during
development stage (1,948,737) (1,277,046) (2,418,993)
---------- ---------- ----------
Total stockholders'
(deficit) (1,537,633) (1,143,720) (368,264)
---------- ---------- ----------
Total liabilities and
stockholders' equity
(deficit) $ 0 $ 0 $ 344,191
=========== =========== ===========
The accompanying notes are an integral part of this statement.
F-13
<PAGE>
HOLLIS-EDEN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
FOR THE (AUGUST 15, (AUGUST 15,
YEAR ENDED 1994) TO 1994) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1995
-------------- --------------- --------------
Operating expenses:
Research and
development $ 463,000 $ 1,166,762 $1,629,762
General and
administrative 170,929 103,564 274,493
----------- ----------- ----------
Total operating
expenses 633,929 1,270,326 1,904,255
----------- ----------- ----------
Other income (expense):
Interest income 0 0 0
Interest expense (37,762) (6,720) (44,482)
----------- ----------- ----------
Total other income
(expense) (37,762) (6,720) (44,482)
----------- ----------- ----------
Net loss $ (671,691) $ (1,277,046) $(1,948,737)
=========== ============ ===========
Net loss per share $ (0.17) $ (0.38) $(0.54)
Weighted average
number of common
shares outstanding 3,867,924 3,396,228 3,632,075
FOR THE PERIOD FROM
NINE MONTHS ENDED INCEPTION
SEPTEMBER 30, (AUGUST 15, 1994)
----------------------- TO SEPTEMBER 30,
1996 1995 1996
-------- -------- ----------------
(UNAUDITED) (UNAUDITED)
Operating expenses:
Research and development $ 124,093 $ 463,000 $ 1,753,855
General and
administrative 346,229 138,429 620,722
--------- --------- -----------
Total operating
expenses 470,322 601,429 2,374,577
--------- --------- -----------
Other income (expense):
Interest income 3,208 0 3,208
Interest expense (3,142) (28,322) (47,624)
--------- --------- -----------
Total other income
(expense) 66 (28,322) (44,416)
--------- --------- -----------
Net loss $(470,256) $(629,751) $(2,418,993)
========== ========= ===========
Net loss per share $ (0.10) $ (0.17) $ (0.61)
Weighted average
number of common
shares outstanding 4,573,199 3,773,585 3,945,783
The accompanying notes are an integral part of this statement.
F-14
<PAGE>
HOLLIS-EDEN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' DEFICIT
COMMON STOCK
$.0001 PAR VALUE ADDITIONAL
----------------- PAID-IN
SHARES AMOUNT CAPITAL
------ ------ ----------
Contribution by
stockholder . . . . 0 $ 0 $ 103,564
Common stock issued
for cash . . . . . . 2,852,830 285 24,715
Common stock issued as
consideration for
amendments to the
license agreements
(Note 6) . . . . . . 543,396 55 4,707
Net Loss . . . . . . 0 0 0
--------- ----- -------
Balance at Dec. 31,
1994 . . . . . . . . 3,396,226 340 132,986
Common stock issued
for cash . . . . . . 679,245 68 249,932
Common stock issued as
consideration
for amendments to the
license agreements
(Note 6) . . . . . . 75,472 7 27,771
Net Loss . . . . . . 0 0 0
-------- ----- -------
Balance at Dec. 31,
1995 . . . . . . . . 4,150,943 415 $ 410,689
Common stock issued in
conversion of debt
(unaudited) . . . . 164,962 16 371,148
Common stock issued
for cash, net of
issuance costs of
$70,512 (unaudited) 580,005 58 1,234,441
Common stock issued as
consideration for
termination of a
financing agreement
(unaudited) . . . . . 15,094 2 33,960
Net Loss (unaudited) 0 0 0
--------- ----- ---------
Balance at September
30, 1996 (unaudited) 4,911,004 $ 491 $2,050,238
========= ====== ==========
DEFICIT
ACCUMULATED
DURING
DEVELOPMENT
STAGE TOTAL
--------------- --------------------
Contribution by
stockholder . . . . $ 0 $ 103,564
Common stock issued
for cash . . . . . . 0 25,000
Common stock issued as
consideration for
amendments to the
license agreements
(Note 6) . . . . . . 0 4,762
Net Loss . . . . . . (1,277,046) (1,277,046)
---------- ----------
Balance at Dec. 31,
1994 . . . . . . . . (1,277,046) (1,143,720)
Common stock issued
for cash . . . . . . 0 250,000
Common stock issued as
consideration
for amendments to the
license agreements
(Note 6) . . . . . . 0 27,778
Net Loss . . . . . . (671,691) (671,691)
---------- -----------
Balance at Dec. 31,
1995 . . . . . . . . $(1,948,737) $(1,537,633)
Common stock issued in
conversion of debt
(unaudited) . . . . 0 371,164
Common stock issued
for cash, net of
issuance costs of
$70,512 (unaudited) 0 1,234,499
Common stock issued as
consideration for
termination of a
financing agreement
(unaudited) . . . . . 0 33,962
Net Loss (unaudited) (470,256) (470,256)
--------- ---------
Balance at September
30, 1996 (unaudited) $(2,418,993) $ (368,264)
=========== ==========
The accompanying notes are an integral part of this statement.
F-15
<PAGE>
HOLLIS-EDEN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
PERIOD FROM
INCEPTION PERIOD FROM
(AUGUST 15, INCEPTION
FOR THE 1994) (AUGUST 15,
YEAR ENDED TO DECEMBER 1994) TO
DECEMBER 31, 31, DECEMBER 31,
1995 1994 1995
------------ ----------- -----------
Cash flows from operating
activities:
Net Loss . . . . . . . . . $(671,691) $(1,277,046) $(1,948,737)
Adjustments to reconcile net
loss to net cash used in
operating
activities:
Depreciation . . . . . . 0 0 0
Common stock issued as
consideration for
amendments to the
license agreements. . . 27,778 4,762 32,540
Common Stock issued as
consideration for
termination of a
finance agreement . . 0 0 0
Increase in other
receivables . . . . . . 0 0 0
Increase in prepaid
expenses . . . . . . . 0 0 0
Increase (decrease) in
accrued expenses . . . 92,111 0 92,111
Increase (decrease) in
accrued expenses for
clinical trials . . . . 150,000 0 150,000
Increase in wages payable 0 0 0
Increase in accounts
payable . . . . . . . . 0 0 0
Increase (decrease) in
accounts payable to
related party . . . . . 73,040 0 73,040
Increase (decrease) in
license fees payable
to related party. . . . 1,000 927,000 928,000
Increase (decrease) in 37,762 6,720 44,482
accrued interest . . . -------- -------- --------
Net cash used in (290,000) (338,564) (628,564)
operating activities -------- -------- --------
Cash flow provided by
investing activities:
Purchase of property and 0 0 0
equipment . . . . . . . . -------- -------- --------
Net cash used in investing 0 0 0
activities . . . . . -------- -------- --------
Cash flows from financing
activities:
Borrowings from related
party . . . . . . . . 40,000 210,000 250,000
Payments to
related party . . . . 0 0 0
PERIOD FROM
INCEPTION
FOR THE (AUGUST 15,
NINE MONTHS ENDED 1994)
SEPTEMBER 30, TO SEPTEMBER
--------------------- 30,
1996 1995 1996
--------------------- ------------
(UNAUDITED) (UNAUDITED)
Cash flows from operating
activities:
Net Loss . . . . . . . . . . $(470,256) $(629,751) $(2,418,993)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation . . . . . . . 339 0 339
Common stock issued as
consideration for
amendments to the
license agreements . . . 0 27,778 32,540
Common Stock issued as
consideration for
termination of a
finance agreement . . 33,962 0 33,962
Increase in other
receivables . . . . . . . (90,300) 0 (90,300)
Increase in prepaid
expenses . . . . . . . . (19,572) 0 (19,572)
Increase (decrease) in
accrued expenses . . . . (54,470) 67,111 37,641
Increase (decrease) in
accrued expenses for
clinical trials . . . . . (150,000) 150,000 0
Increase in wages payable . 59,478 0 59,478
Increase in accounts
payable to related party . . 15,336 0 15,336
Increase (decrease) in
accounts payable to
related party . . . . . . (73,040) 50,540 0
Increase (decrease) in
license fees payable . . (328,000) 16,000 600,000
Increase (decrease) in (44,482) 28,322 0
accrued interest . . . . --------- ------- ---------
Net cash used in (1,121,005) (290,000) (1,749,569)
operating activities . --------- ------- ---------
Cash flow provided by investing
activities:
Purchase of property and (7,001) 0 (7,001)
equipment . . . . . . . . --------- ------- ---------
Net cash used in investing (7,001) 0 (7,001)
activities . . . . . . --------- ------- ---------
Cash flows from financing
activities:
Borrowings from related
party . . . . . . . . . 0 40,000 250,000
Payments on note payable to
related party . . . . . (250,000) 0 (250,000)
The accompanying notes are an integral part of this statement.
F-16
<PAGE>
HOLLIS-EDEN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
(CONTINUED)
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
FOR THE (AUGUST 15, (AUGUST 15,
YEAR ENDED 1994) 1994) TO
DECEMBER 31, TO DECEMBER 31 DECEMBER 31,
1995 1994 1995
------------ -------------- ------------
Contributions from
stockholder . . . . . $ 0 $103,564 $103,564
Net proceeds from sale of
common stock . . . . . 250,000 25,000 275,000
Proceeds from issuance of
debt . . . . . . . . . 0 0 0
------- ------- -------
Net cash provided by
financing activities . . 290,000 338,564 628,564
------- ------- -------
Net increase in cash . . . . 0 0 0
0 0 0
Cash at beginning of period . ------- ------- -------
$ 0 $ 0 $ 0
Cash at end of period . . . . ======== ======= =======
Supplemental disclosure of
cash flow information:
Interest paid . . . . . $ 0 $ 0 $ 0
Conversion of debt
to equity . . . . . . $ 0 $ 0 $ 0
PERIOD FROM
INCEPTION
FOR THE (AUGUST 15,
NINE MONTHS ENDED 1994)
SEPTEMBER 30, SEPTEMBER
----------------- 30,
1996 1995 1996
---- ---- -----------
(UNAUDITED) (UNAUDITED)
Contributions from
stockholder . . . . . . $ 0 $ 0 $ 103,564
Net proceeds from sale of
common stock . . . . . . 1,234,499 250,000 1,509,499
Proceeds from issuance of
debt . . . . . . . . . . 371,164 0 371,164
--------- ------- ---------
Net cash provided by
financing activities. . 1,355,663 290,000 1,984,227
--------- ------- ---------
Net increase in cash . . . . . 227,657 0 227,657
0 0 0
Cash at beginning of period . . --------- ------- ---------
$ 227,657 $ 0 $ 227,657
Cash at end of period . . . . . ========= ======= =========
Supplemental disclosure of cash
flow information:
Interest paid . . . . . . . $ 44,482 $ 0 $ 44,482
Conversion of debt
to equity . . . . . . . . $ 371,164 $ 0 $ 371,164
The accompanying notes are an integral part of this statement.
F-17
<PAGE>
HOLLIS-EDEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
Hollis-Eden, Inc. (the Company) was formed on August 15, 1994 to engage in
the development and commercialization of therapeutic pharmaceutical agents
for the treatment of immune disorders. The Company's development efforts
are based upon the pioneering research conducted by Dr. Patrick T.
Prendergast through his research and development organization, Edenland,
Inc. The Company has extensive business arrangements with Edenland, Inc.
(See Note 6) and both Edenland, Inc., and Dr. Prendergast are significant
stockholder's of the Company. The Company has adopted a December 31 year
end. The Company is a development stage company that was organized under
the laws of the State of Delaware. Since its inception (August 15, 1994),
the Company's efforts have been directed toward organizing and preparing
for private offerings of shares of its common stock. As a result, the
Company has not developed commercial products or generated sales for the
period August 15, 1994 through December 31, 1995. The Company has a
current and open Investigational New Drug (IND) with the Food and Drug
Administration (FDA) and has completed Phase I of testing for purposes
of obtaining FDA approval. Continued development of these products will
require the Company to renew its licenses with related parties and fund
a development contract with such related parties that are discussed in
Note 6. No liability has been recorded for the renewal and execution of
such executory obligations. Management plans include performing additional
clinical trials and, depending upon the success of those trials, raising
additional funds through private placement offerings and/or an initial
public offering. However, there can be no assurance that the Company
will successfully raise additional funds to sustain operations.
2. SUMMARY OF ACCOUNTING POLICIES
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets (five years) using the straight-line method.
RESEARCH AND DEVELOPMENT
Research and development costs consist of license fee expenses related to
license agreements with related parties as well as clinical trial
expenses. Such amounts paid to related parties aggregated $313,000,
$1,166,762, $1,479,762 and $1,479,762 for the year ended December 31,
1995 and for the periods from inception (August 15, 1994) to December 31,
1994, 1995 and September 30, 1996, respectively. Such expenses are
recognized as research and development, as incurred.
INCOME TAXES
The Company provides for income taxes under the principles of Statement of
Financial Accounting Standards No. 109 (SFAS 109) which requires that
provision be made for taxes currently due and for the expected future tax
effects of temporary differences between book and tax bases of assets and
liabilities.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
payable, accrued expenses, note payable to related party, and license fees
payable. These financial instruments are stated at their respective
carrying values in the December 31, 1995 and 1994 financial statements,
which approximate their fair values.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NET LOSS PER SHARE
Net loss per share is based upon the weighted average number of common
shares. Common stock equivalents have been excluded from the computation
as their effect is anti-dilutive.
F-18
<PAGE>
HOLLIS-EDEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENT
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123).
SFAS 123 allows companies to choose whether to account for stock-based
compensation on a fair value method or to continue to account for stock-
based compensation under the current intrinsic value method as prescribed
by APB Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company plans to adopt the disclosure alternative under SFAS 123 during
1996 and will continue to follow the provisions of APB Opinion No. 25.
Accordingly, management of the Company believes that the impact of adoption
will not have a significant effect on the Company's financial position,
results of operations or liquidity.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The information presented as of September 30, 1996, for the period from
inception (August 15, 1994) to September 30, 1996, and nine months ended
September 30, 1996 and 1995 has not been audited. In the opinion of
management, the unaudited interim financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the Company's financial position as of September 30, 1996
and the results of its operations and cash flows for the period from
inception (August 15, 1994) to September 30, 1996, and nine months ended
September 30, 1996 and 1995. The interim results of operations are not
necessarily indicative of results which may occur for the full fiscal year.
3. NOTE PAYABLE TO RELATED PARTY
At December 31, 1995 and 1994, the Company had an unsecured note payable to
a stockholder/officer in the amount of $250,000 and $210,000, respectively.
This note payable is due on demand, with interest at 15%. This note was
paid in full during April 1996. See further discussion in Note 8.
4. INCOME TAXES
The Company has available a net operating loss carryforward of $150,000 at
December 31, 1995 which may be carried forward as an offset to taxable
income, if any, in future years through its expiration in 2009 to 2010.
The Company has a net deferred tax asset comprised of capitalized start-up
costs of $1,754,255, deferred interest deduction to a related party of
$44,482 and the net operating loss carryforward. The net deferred tax
asset has been fully reserved due to the uncertainty of the Company being
able to generate net operating income under the more likely than not
criteria of SFAS 109.
5. REVERSE STOCK SPLITS
In March 1996, a 1 for 2.65 split of the Company's common stock was
effected. Also, on February 13, 1995 there was a 3 for 5 split of the
Company's common stock. All stock splits have been retroactively restated
for all periods presented.
6. RELATED PARTY LICENSES AND OTHER AGREEMENTS
AND COMMITMENTS AND CONTINGENCIES
The Company entered into two license agreements and one research,
development and option agreement as discussed in the following paragraphs.
Pursuant to a license agreement dated May 18, 1994 (Original License
Agreement) with related parties Patrick T. Prendergast, chief scientific
officer and a significant stockholder, and with Colthurst Limited, a
company controlled by Patrick T. Prendergast, the Company acquired the
exclusive worldwide rights of Patrick T. Prendergast's patent rights,
know-how and background technology relating to the treatment of
human/animal immunodeficiency as disclosed in U.S. patent No. 4,956,355
entitled "Agents for the Arrest and Therapy of Retroviral Infections."
Upon execution of this agreement, the Company paid a license fee of
$100,000 and was contractually obligated to pay $250,000 no later than
November 18, 1994. The payment of this obligation was delinquent at
December 31, 1994 and was included in license fees payable on the
balance sheet
F-19
<PAGE>
HOLLIS-EDEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
-----------------------------
at December 31, 1994. The agreement was amended on August 11, 1995
to change the license fee payment terms as discussed below in paragraph
four. Also, per the Original License Agreement, if the Company obtained
financing of at least $10,000,000 by December 31, 1995, payments of
$15,000 per month for services commencing on June 1, 1994 through the
completion of FDA Phase II would have been payable to Patrick T.
Prendergast ($105,000 was included in license fees payable on the balance
sheet at December 31, 1994 based on a pending financing agreement). These
monthly service fees were eliminated entirely pursuant to an amendment to
the agreement on March 17, 1995 and the previously accrued amount of
$105,000 was restructured as discussed in paragraph 4 below. Per the
amended license agreement, a renewal annual license fee of $500,000
is payable commencing 18 months after the $350,000 license fee, as
discussed below in paragraph four, is paid. (See Note 9). Also,
the Company had agreed to pay royalties of 6% on product revenues.
In the event of a sale of sublicenses or any other third-party
agreements, 25% of any fees are payable to Colthurst Limited.
On August 25, 1994, the Company entered into a license agreement (Original
License Agreement) with a related party, Edenland Inc., a company
controlled by Patrick T. Prendergast for the exclusive worldwide rights of
Patrick T. Prendergast's patent rights, know-how and background technology
related to the anti-serum and to any other pharmaceutical product that
becomes subject to the license agreement under the research, development
and option agreement discussed below. Upon execution of this agreement,
the Company paid a license fee of $25,000. The agreement was amended in
August 1994 and required the Company to pay a license fee of $572,000 as
follows: $150,000 payable no later than February 28, 1995, $300,000 on
February 28, 1995, and $122,000 payable no later than March 31, 1995.
These amounts were included in license fees payable on the balance sheet at
December 31, 1994. The agreement was again amended on August 11, 1995 to
change the license fee payment terms as discussed below in paragraph four.
Per the Original License Agreement, the Company has agreed to pay royalties
of 4% of product revenues. In the event of a sale of sublicenses or any
other third-party agreements, 25% of any fees are payable to Edenland, Inc.
Additionally, the Company granted Edenland, Inc. the option to receive
payment of its royalties under the license agreement in the form of shares
of the Company's stock. The option is limited to a maximum of 5% of the
Company's outstanding shares at August 25, 1994. The option is subject to
the anti-serum and/or vaccine developed therefrom receiving product
approval and generating product revenues to the Company of at least
$200,000,000. The option exercise price per share is the fair market value
on the date when and if such revenue milestone is achieved, and the option
has a term of five years beginning from such date.
Effective August 11, 1995, Edenland, Inc., Colthurst Limited and the
Company entered into amendments concerning the license fee payment terms to
the two agreements described above. Under the August 11, 1995 amendment,
the Company is obligated to pay $350,000 by April 28, 1996 and up to an
additional $600,000 within 24 months of the $350,000 payment. The $600,000
fee will be payable by way of a five percent payment of the first
$12,000,000 of net proceeds or funds or investments acquired by or expended
on behalf of the Company by way of equity sale, partnership agreement, loan
or other means. At the end of the 24 month period, any unpaid portion of
the $600,000 fee is due immediately. If during the 24 month period the net
proceeds exceed $12,000,000, then an additional fee is due by way of two
and one-half percent of all such proceeds. As of December 31, 1995, the
Company has paid $22,000 of the $350,000 fee, and the remaining $328,000
and the $600,000 fee have been included in license fees payable as of
December 31, 1995 on the balance sheet. During April 1996, the $328,000
balance was paid in full. As consideration for entering into certain
amendments, the Company issued 75,472 shares of the Company's common stock
at fair market value to Edenland, Inc. and Colthurst Limited. Such
valuation was determined by the Board of Directors and was changed to
G&A for the year ended December 31, 1995.
In August 1994, the Company entered into a contingent research development
and option agreement, as amended, with Edenland, Inc. and Patrick T.
Prendergast. The agreement provides for the development of the anti-serum
to a stage of development that demonstrates the toxicity and safety profile
and also indicates potential efficacy in Phase II (FDA) patient studies,
and grants the Company the right of first option on new products developed
by Edenland, Inc. The agreement commits the Company to pay for the
development costs related to the anti-serum up to the amount of $3,000,000
contingent uopn the Company's receipt of funds realized by way of equity
sale, sublicense, partnership agreements, loans, private placements and
public offerings which take place following April 28, 1996 but not later
than 24 months from 7 days following a private offering. Additionally,
the Company has agreed to pay a maximum of $250,000 per year to fund
off-budget projects to commence if and on the date the Company obtains
$10,000,000 in financing. Commencing April 28, 1996, the Company has
agreed to commit at least thirty percent of its annual research and
development budget up to a maximum of $50 million during the term of
this agreement, but at least a minimum of $2.0 million
F-20
<PAGE>
HOLLIS-EDEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
-----------------------------
and a maximum of $10 million for any given calendar year to pay
development costs for the anti-serum or any new product developed per
the agreement.
7. COMMON STOCK PURCHASE WARRANTS AND OPTIONS
SERIES A WARRANTS
During April 1996, in accordance with anti-dilution privileges triggered
by the Offering (See Note 8), the Company issued 1,018,867 Series A
Warrants to all stockholders of record as of March, 1995 to purchase
the same number of shares of common stock at a price of $11.02 per
share exercisable for a period of three years following the
registration of the underlying shares.
SERIES B WARRANTS
During February 1995, the Company issued 37,736 Series B Warrants to
Edenland, Inc. in consideration for an amendment to the Anti-Serum License
Agreement. The warrants are exercisable until February 5, 2000, to
purchase the same number of shares of common stock at a price of $15.90 per
share.
CONSULTANT'S OPTIONS
On July 12, 1995, as payment for investor relations counseling and
consulting services provided by Coffin Communications Group for the 12-
month period ending July 1, 1996, Hollis-Eden issued to Coffin
Communications Group an option, exercisable until July 12, 2000, to
purchase 18,868 shares of common stock at a price of $2.65 per share, 9,434
shares at a price of $5.30 per share, and 9,434 shares at a price of $7.95
per share. In addition, the Company agreed to register the shares
underlying the options for public sale as soon as is practicable.
PLACEMENT AGENT WARRANTS
The Company has agreed to issue to the Placement Agent, upon completion of
the Offering in April 1996 (See Note 8), a warrant to purchase an aggregate
of up to 445,000 shares of common stock, at an exercise price of $2.48 per
share. If the Placement Agent is successful in arranging certain
financings on behalf of the Company, additional warrants to purchase an
aggregate of up to 452,830 shares of common stock, at an exercise price of
$2,48 per share will be issued.
8. SUBSEQUENT EVENTS
On January 21, 1996, the Company completed a $367,522 round of debt
financing with a group of private investors (Bridge Finance Offering).
These new notes are due on or before the earlier of (i) January 21, 1997 or
(ii) the closing of a private or public offering of securities. These
notes bear interest at 8% per annum. The Company may at its option repay
these notes with common stock of the Company valued at a price of $2.25 per
share or such price at which shares are sold to investors in the Bridge
Finance Offering. Proceeds from this debt financing were used to repay the
note and accounts payable to related party, and accrued interest totaling
$367,522. During April 1996, these notes, plus accrued interest, were
converted into 164,962 shares of common stock at a price of $2.25 per
share.
From March 19, 1996 through April 19, 1996, the Company privately issued
580,005 shares of the Company's common stock (the Offering) at an offering
price of $2.25 per share. Total proceeds from this offering aggregated
$1,305,011.
Upon the completion of the Offering in April 1996, the Company was
committed to issue 570,000 nonqualified stock options to certain
employees, directors and consultants at an exercise price of $2.25
per share as approved by the Company's Board of Directors. The options
vest at various times over a three-year period. An aggregate of 240,000
stock options will expire on March 15, 2003 and the remaining 330,000
stock options expire on March 15, 2006.
9. ADDITIONAL SUBSEQUENT EVENTS (UNAUDITED)
During 1996, the board of directors approved a stock option plan for
officers, directors, employees, and consultants of the company and
authorized 500,000 shares to be reserved for the plan of which 330,500
shares have been granted to date at fair market value.
F-21
<PAGE>
HOLLIS-EDEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
-----------------------------
The Company has entered into an agreement to merge with Initial Acquisition
Corp. ("IAC"), a blank check company. IAC will be the surviving company
and will provide approximately $6.5 million of cash to the merged entity in
addition to registering the common stock of the merged entity. The merger
is expected to be effective during the first quarter of 1997.
In October 1996, the Company and Colthurst Limited, entered into an
amendment to the existing agreement (see note 6). The amendment changes
the due date of the renewable annual license of $500,000 from October
1997 to the first date that one of the following events occurs: the
Company raises a predetermined amount of capital occurring after May 18,
1994; the Company sublicenses the technology received under the Colthurst
License Agreement; the Company generates sales; the Company licenses or
funds new technologies not covered under the existing agreements; or,
February 10, 1999. The amendment also requires an additional license fee
of $10,000 per month beginning November 5, 1996 through the earlier of the
effective date of the merger or May 5, 1997. This amendment is contingent
upon the successful closure of the merger with Initial Acquisition Corp.
In October 1996, the Company and Edenland, Inc. entered into an amendment
to the existing Research, Development and Option agreement (see note 6).
This amendment accelerates the date that the $3,000,000 payment for
anti-serum development costs is to be made. A payment of $1,500,000 is
payable upon the closure of the merger and the balance is contingent upon
future funding events by allocating 22% of the funds raised to the
Research, Development and Option agreement until the $3,000,000 has been
paid in full. Under the existing agreement, the Company was obligated to
fund $2,000,000 per year for research with the first payment due in April,
1997. This obligation will not commence until the Company raises an
aggregate of $10 million in capital occurring after May 18, 1994.
Payments made toward the $3,000,000 anti-serum development costs are
deductible from the amounts due for the $2,000,000 per year of research.
This amendment is contingent upon the successful closure of the merger
with Initial Acquisition Corp.
F-22
<PAGE>
ANNEX A
Agreement and Plan of Merger
See Exhibit 2
<PAGE>
ANNEX B
Form of Certificate of Merger
(which includes the form of
Certificate of Incorporation
of the Surviving Corporation)
<PAGE>
ANNEX B
CERTIFICATE OF MERGER
OF
HOLLIS-EDEN, INC.
INTO AND WITH
INITIAL ACQUISITION CORP.
The undersigned corporation does hereby certify:
FIRST: That the name and state of incorporation of
each of the constituent corporations of the merger are as
follows:
NAME STATE OF INCORPORATION
---- ----------------------
Hollis-Eden, Inc. Delaware
Initial Acquisition Corp. Delaware
SECOND: That an Agreement and Plan of Merger between
the parties to the merger has been approved, certified, executed,
and acknowledged by each of the constituent corporations in
accordance with the requirements of subsections (b) and (c) of
Section 251 of the General Corporation Law of the State of
Delaware, and that pursuant to such Agreement and Plan of Merger,
Initial Acquisition Corp. is the surviving corporation of the
merger.
THIRD: That the name of the surviving corporation of
the merger is hereby amended to be Hollis-Eden Pharmaceuticals,
Inc.
FOURTH: That the Certificate of Incorporation and
By-Laws of Hollis-Eden, Inc., a Delaware corporation, shall be the
Certificate of Incorporation and By-Laws, respectively, of the
surviving corporation. A copy of the Certificate of Incorporation
of Hollis-Eden, Inc., as in effect on the date hereof is annexed
hereto and made a part hereof as Exhibit A.
---------
FIFTH: That an executed copy of the Agreement and Plan
of Merger is on file at the principal place of business of
Initial Acquisition Corp. located at 810 Seventh Avenue, New
York, New York 10019.
<PAGE>
SIXTH: That a copy of the Agreement and Plan of Merger
will be furnished by Initial Acquisition Corp. on request and
without cost, to any stockholder of Initial Acquisition Corp. and
Hollis-Eden, Inc.
Dated: January ___, 1997
INITIAL ACQUISITION CORP.
By:___________________________
Name:
Title:
HOLLIS-EDEN, INC.
By:___________________________
Name:
Title:
<PAGE>
Exhibit A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HOLLIS-EDEN, INC.
Hollis-Eden, Inc., a corporation organized and existing
under the laws of the State of Delaware, hereby certified as
follows:
FIRST: The name of this corporation is Hollis-Eden, Inc.
SECOND: The date of the filing of the corporation's original
Certificate of Incorporation with the Secretary of State of
Delaware was August 15, 1994 under the name Holmedco
Pharmaceuticals Corporation.
THIRD: The Amended and Restated Certification of Incorporation
was duly adopted by the Board of Directors in accordance with
Sections 242 and 245 of the General Corporation Law of the State
of Delaware.
FOURTH: In lieu of a meeting and vote of the stockholders of
the Corporation, the holders of not less than a majority of the
outstanding Common Stock have given written consent to the
Amended and Restated Certificate of Incorporation in accordance
with the provisions of Section 228 of the General Corporation Law
of the State of Delaware.
FIFTH: Prompt written notice was given pursuant to Section 228
of the General Corporation Law of the State of Delaware to those
stockholders who did not approve the Amended and Restated
Certificate of Incorporation by written consent.
SIXTH: The Certificate of Incorporation of the corporation
shall be amended and restated to read in full as follows:
I.
The name of this corporation is Hollis-Eden, Inc.
II.
The address of the registered office of the corporation in
the State of Delaware is 1209 Orange Street, City of Wilmington,
County of New Castle, and the name of the registered agent of the
corporation in the State of Delaware at such address is The
Corporation Trust Company.
III.
The purpose of this corporation is to engage in any lawful
act or activity for which a corporation may be organized under
the General Corporation Law of the State of Delaware.
IV.
A. This corporation is authorized to issue two classes of
stock to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of shares which the
corporation is authorized to issue is forty million (40,000,000)
shares. Thirty million (30,000,000) shares shall be Common
Stock, each having a par value of one cent ($.01). Ten million
(10,000,000) shares shall be Preferred Stock, each having a par
value of one cent ($.01).
B. The Preferred Stock may be issued, from time to time in
one or more series. The Board of Directors is hereby authorized,
by filing a certificate (a "Preferred Stock Designation")
pursuant to the Delaware General Corporation Law, to fix or alter
from time to time the designation, powers, preferences and rights
of the shares of each such series and the qualifications,
limitations or restrictions of any wholly unissued series of
Preferred Stock, and to establish from time to time the number of
shares constituting any such series or any of them; and to
increase or decrease the number of shares of any series
subsequent to the issuance of shares of that series, but not
below the number of shares of such series then outstanding. In
case the number of shares of any series shall be decreased in
accordance with the foregoing sentence, the shares constituting
such decrease shall resume the status that they had prior to the
adoption of the resolution originally fixing the number of shares
of such series.
V.
For the management of the business and for the conduct of
the affairs of the corporation, and in further definition,
limitation and regulation of the powers of the corporation, of
its directors and of its stockholders or any class thereof, as
the case may be, it is further provided that:
A.
1. The management of the business and the conduct of
the affairs of the corporation shall be vested in its Board of
Directors. The number of Directors which shall constitute the
whole Board of Directors shall be fixed exclusively by one or
more resolutions adopted by the Board of Directors.
2. Subject to the rights of the holders of any series
of Preferred Stock to elect additional directors under specified
circumstances, the directors shall be divided into three classes
designated as Class I, Class II and Class III, respectively.
Directors shall be assigned to each class in accordance with a
resolution or resolutions adopted by the Board of Directors. At
the first annual meeting of stockholders following the adoption
and filing of this Amended and Restated Certificate of
Incorporation, the term of office of the Class I directors shall
expire and Class I directors shall be elected for a full term of
three years. At the second annual meeting of stockholders
following the adoption and filing of this Amended and Restated
Certificate of Incorporation, the term of office of the Class II
directors shall expire and Class II directors shall be elected
for a full term of three years. At the third annual meeting of
stockholders following the adoption and filing of this Amended
and Restated Certificate of Incorporation, the term of office of
the Class III directors shall expire and Class III directors
shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors shall be
elected for a full term of three years to succeed the directors
of the class whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article,
each director shall serve until his successor is duly elected and
qualified or until his death, resignation or removal. No
decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
3. Subject to the rights of the holders of any series
of Preferred Stock, no director shall be removed without cause.
Subject to any limitations imposed by law, the Board of Directors
or any individual director may be removed from office at any time
with cause by the affirmative vote of the holders of a majority
of the voting power of all the then-outstanding shares of voting
stock of the corporation, entitled to vote at an election of
directors (the "Voting Stock").
4. Subject to the rights of the holders of any series
of Preferred Stock, any vacancies on the Board of Directors
resulting from death, resignation, disqualification, removal or
other causes and any newly created directorships resulting from
any increase in the number of directors, shall, unless the Board
of Directors determines by resolution that any such vacancies or
newly created directorships shall be filled by the stockholders,
except as otherwise provided by law, be filled only by the
affirmative vote of a majority of the directors then in office,
even though less than a quorum of the Board of Directors, and not
by the stockholders. Any director elected in accordance with the
preceding sentence shall hold office for the remainder of the
full term of the director for which the vacancy was created or
occurred and until such director's successor shall have been
elected and qualified.
B.
1. Subject to paragraph (h) of Section 43 of the
Bylaws, the Bylaws may be altered or amended or new Bylaws
adopted by the affirmative vote of at least sixty-six and two-
thirds percent (66-2/3%) of the voting power of all of the then-
outstanding shares of the Voting Stock. The Board of Directors
shall also have the power to adopt, amend, or repeal Bylaws.
2. The directors of the corporation need not be
elected by written ballot unless the Bylaws so provide.
3. No action shall be taken by the stockholders of
the corporation except at an annual or special meeting of
stockholders called in accordance with the Bylaws.
4. Special meetings of the stockholders of the
corporation may be called, for any purpose or purposes, by (i)
the Chairman of the Board of Directors, (ii) the Chief Executive
Officer, or (iii) the Board of Directors pursuant to a resolution
adopted by a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is
presented to the Board of Directors for adoption) and shall be
held at such place, on such date, and at such time as the Board
of Directors shall fix.
5. Advance notice of stockholder nominations for the
election of directors and of business to be brought by
stockholders before any meeting of the stockholders of the
corporation shall be given in the manner provided in the Bylaws
of the corporation.
VI.
A. A director of the corporation shall not be personally
liable to the corporation or its stockholders for monetary
damages for any breach of fiduciary duty as a director, except
for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174
of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper personal
benefit. If the Delaware General Corporation Law is amended
after approval by the stockholders of this Article to authorize
corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director shall be
eliminated or limited to the fullest extent permitted by the
Delaware General corporation Law, as so amended.
B. Any repeal or modification of this Article VI shall be
prospective and shall not affect the rights under this Article VI
in effect at the time of the alleged occurrence of any act or
omission to act giving rise to liability or indemnification.
VII.
A. The corporation reserves the right to amend, alter,
change or repeal any provision contained in this Amended and
Restated Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, except as provided in paragraph
B. of this Article VII, and all rights conferred upon the
stockholders herein are granted subject to this reservation.
B. Notwithstanding any other provisions of this Amended
and Restated Certificate of Incorporation or any provision of law
which might otherwise permit a lesser vote or no vote, but in
addition to any affirmative vote of the holders of any particular
class or series of the Voting Stock required by law, this Amended
and Restated Certificate of Incorporation or any Preferred Stock
Designation, the affirmative vote of the holders of at least
sixty-six and two-thirds percent (66-2/3%) of the voting power of
all of the then-outstanding shares of the Voting Stock, voting
together as a single class, shall be required to alter, amend or
repeal Articles V, VI and VII.
IN WITNESS WHEREOF, the Corporation has caused this Amended
and Restaetd Certificate of Incorporation to be signed by Richard
B. Hollis, President, Chief Executive Officer and Secretary of
the Corporation, this -- day of December, 1996.
------------------------------------
Richard B. Hollis
President and Chief Executive
Officer
Attest:
-----------------------------
Richard B. Hollis
Secretary
<PAGE>
ANNEX C
Form of By-Laws of the Surviving Corporation
See Exhibit 4.2
<PAGE>
ANNEX D
IAC 1996 Incentive Stock Option Plan
See Exhibit 10.3
<PAGE>
ANNEX E
Appraisal Rights Provisions of the
Delaware General Corporation Law
<PAGE>
ANNEX E
262 APPRAISAL RIGHTS. (a) Any stockholder of a corporation of
this State who holds shares of stock on the date of the making of
a demand pursuant to subsection (d) of this section with respect
to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to Section 228 of this title shall be
entitled to an appraisal by the Court of Chancery of the fair
value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this
section, the word "stockholder" means a holder of record of stock
in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what
is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and
the words "depository receipt" mean a receipt or other instrument
issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation,
which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any
class or series of stock of a constituent corporation in a merger
or consolidation to be effected pursuant to Sections 251, 252,
254, 257, 258, 263 or 264 of this title:
(1) Provided, however,that no appraisal rights under this
section shall be available for the shares of any class or series
of stock, which stock, or depository receipts in respect thereof,
at the record date fixed to determine the stockholders entitled
to receive notice of and to vote at the meeting of stockholders
to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or
(ii) held of record by more than 2,000 holders; and further
provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a merger
if the merger did not require for its approval the vote of the
holders of the surviving corporation as provided in subsections
(f) or (g) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the
shares of any class or series of stock of a constituent
corporation if the holders thereof are required by the terms of
an agreement of merger or consolidation pursuant to Sections 251,
252, 254, 257, 258, 263 and 264 of this title to accept for such
stock anything except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in
respects thereof:
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock or depository
receipts at the effective date of the merger or consolidation
will be either listed on a national securities exchange or
designated as a national market system security on an interdealer
quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a.
and b. of this paragraph; or
d. Any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a.,
b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under Section 253 of this
title is not owned by the parent corporation immediately prior to
the merger, appraisal rights shall be available for the shares of
the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of
incorporation that appraisal rights under this section shall be
available for the shares of any class or series of its stock as a
result of an amendment to its certificate of incorporation, any
merger or consolidation in which the corporation is a constituent
corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains
such a provision, the procedures of this section,including those
set forth in subsections (d) and (e) of this section,shall apply
as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for
approval at a meeting of stockholders, the corporation, not less
than 20 days prior to the meeting, shall notify each of its
stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent
corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of
his shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for
appraisal of his shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger
or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each
constituent corporation who has complied with this subsection and
has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to
Section 228 or Section 253 of this title, each constituent
corporation, either before the effective date of the merger or
consolidation or within ten days thereafter, shall notify each of
the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval
of the merger or consolidation and that appraisal rights are
available for any or all shares of such class or series of stock
of such constituent corporation, and shall include in such notice
a copy of this section; provided that, if the notice is given on
or after the effective date of the merger or consolidation, such
notice shall be given by the surviving or resulting corporation
to all such holders of any class or series of stock of a
constituent corporation that are entitled to appraisal rights.
Such notice may, and, if given on or after the effective date of
the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within twenty days
after the date of mailing of such notice, demand in writing from
the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders
of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice
before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of
such constituent corporation that are entitled to appraisal
rights of the effective date of the merger or consolidation or
(ii) the surviving or resulting corporation shall send such a
second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice,
such second notice need only be sent to each stockholder who is
entitled to appraisal rights and who has demanded appraisal of
such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either
notice that such a notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. For
purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance,
a record date that shall be not more than 10 days prior to the
date the notice is given; provided that, if the notice is given
on or after the effective date of the merger or consolidation, the
record date shall be such effective date. If no record date is
fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any
stockholder who has complied with subsections (a) and (d) hereof
and who is otherwise entitled to appraisal rights, may file a
petition in the Court of Chancery demanding a determination of
the value of the stock of all such stockholders. Notwithstanding
the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have
the right to withdraw his demand for appraisal and to accept the
terms offered upon the merger or consolidation. Within 120 days
after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections
(a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting
from the consolidation a statement setting forth the aggregate
number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal
have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the
stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation
or within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder,
service of a copy thereof shall be made upon the surviving or
resulting corporation, which shall within 20 days after such
service file in the office of the Register in Chancery in which
the petition was filed a duly verified list containing the names
and addresses of all stockholders who have demanded payment for
their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting
corporation. If the petition shall be filed by the surviving or
resulting corporation, the petition shall be accompanied by such
a duly verified list. The Register in Chancery, if so ordered by
the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the
surviving or resulting corporation and to the stockholders shown
on the list at the addresses therein stated. Such notice shall
also be given by 1 or more publications at least 1 week before
the day of the hearing, in a newspaper of general circulation
published in the City of Wilmington, Delaware or such publication
as the Court deems advisable. The forms of the notices by mail
and by publication shall be approved by the Court, and the costs
thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall
determine the stockholders who have complied with this section
and who have become entitled to appraisal rights. The Court may
require the stockholders who have demanded an appraisal for their
shares and who hold stock represented by certificates to submit
their certificates of stock to the Register in Chancery for
notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction,the
Court may dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an
appraisal, the Court shall appraise the shares, determining their
fair value exclusive of any element of value arising from the
accomplishment or expectation of the merger or consolidation,
together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such
fair value, the Court shall take into account all relevant
factors. In determining the fair rate of interest, the Court may
consider all relevant factors, including the rate of interest
which the surviving or resulting corporation would have had to
pay to borrow money during the pendency of the proceeding. Upon
application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding,
the Court may, in its discretion, permit discovery or other
pretrial proceedings and may proceed to trial upon the appraisal
prior to the final determination of the stockholder entitled to
an appraisal. Any stockholder whose name appears on the list
filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is
finally determined that he is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of
the shares, together with interest, if any, by the surviving or
resulting corporation to the stockholders entitled thereto.
Interest may be simple or compound, as the Court may direct.
Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender
to the corporation of the certificates representing such stock.
The Court's decree may be enforced as other decrees in the Court
of Chancery may be enforced, whether such surviving or resulting
corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the
Court and taxed upon the parties as the Court deems equitable in
the circumstances. Upon application of a stockholder, the Court
may order all or a portion of the expenses incurred by any
stockholder in connection with the appraisal proceeding,
including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the
value of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded his appraisal
rights as provided in subsection (d) of this section shall be
entitled to vote such stock for any purpose or to receive payment
of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of
record at a date which is prior to the effective date of the
merger or consolidation); provided, however, that if no petition
for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall
deliver to the surviving or resulting corporation a written
withdrawal of his demand for an appraisal and an acceptance of
the merger or consolidation, either within 60 days after the
effective date of the merger or consolidations provided in
subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder
to an appraisal shall cease. Notwithstanding the foregoing, no
appraisal proceeding in the Court of Chancery shall be dismissed
as to any stockholder without the approval of the Court, and such
approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to
which the shares of such objecting stockholders would have been
converted had they assented to the merger or consolidation shall
have the status of authorized and unissued shares of the
surviving or resulting corporation.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(i) IAC's Charter includes a provision that eliminates the personal
liability of IAC's directors to IAC's stockholders for monetary damages for
breach of fiduciary duty as a director to the maximum extent permitted by
the DGCL. The DGCL does not permit liability to be eliminated (a) for any
breach of a director's duty of loyalty to IAC or IAC's stockholders, (b)
for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, (c) for unlawful payments of
dividends or unlawful stock repurchases or redemptions, as provided in
Section 174 of the DGCL, or (d) for any transaction for which the director
derived an improper personal benefit.
(ii) Article X of IAC's By-Laws provides generally for indemnification
of all officers and directors to the fullest extent permitted under the
above-referenced Delaware statute. Section 145 of the DGCL provides that a
corporation may indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a director, officer, employee or agent
of the corporation or is or was serving at its request in such capacity in
another corporation or business association, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit
No. Description
------- -----------
2 Agreement and Plan of Merger by and among the
Registrant, Hollis-Eden, Inc., Mr. Salvatore J.
Zizza and Mr. Richard B. Hollis, dated as of
November 1, 1996.
3.1 Certificate of Incorporation of the Registrant
[incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1
(Commission File No. 33-60134) filed on April 13,
1995].
3.2 By-laws of the Registrant [incorporated by reference
to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1 (Commission File No. 33-60134)
filed on April 13, 1995].
4.1 Form of Amended and Restated Certificate of
Incorporation of Hollis-Eden, Inc.(1)
4.2 Form of Bylaws of Hollis-Eden, Inc.(2)
4.3 Form of Common Stock Certificate of the Registrant
[incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-1
(Commission File No. 33-60134) filed on April 13,
1995].
4.4 Warrant Agency Agreement between American Stock
Transfer & Company and the Registrant [incorporated
by reference to Exhibit 4.2 to the Registrant's
Registration Statement on Form S-1 (Commission File
No. 33-60134) filed on April 13, 1995].
4.5 Form of Class A Common Stock Purchase Warrant of the
Registrant [incorporated by reference to Exhibit 4.3
to the Registrant's Registration Statement on Form
S-1 (Commission File No. 33-60134) filed on April
13, 1995].
4.6 Form of Class B Unit Purchase Warrant of the
Registrant [incorporated by reference to Exhibit 4.4
to the Registrant's Registration Statement on Form
S-1 (Commission File No. 33-60134) filed on April
13, 1995].
II-1
<PAGE>
Exhibit
No. Description
------- -----------
4.7 Representative's Warrant of the Registrant
[incorporated by reference to Exhibit 4.5 to the
Registrant's Registration Statement on Form S-1
(Commission File No. 33-60134) filed on April 13,
1995].
4.8 Representative's Warrant Agreement [incorporated by
reference to Exhibit 4.6 to the Registrant's
Registration Statement on Form S-1 (Commission File
No. 33-60134) filed on April 13, 1995].
5* Opinion of Reid and Priest LLP.
8 Tax Opinion of Cooley Godward LLP.
10.1 Form of Escrow Agreement for outstanding Common
Stock of the Registrant [incorporated by reference
to Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1 (Commission File No. 33-60134)
filed on April 13, 1995].
10.2 Engagement Letter, dated March 23, 1993, between
Gruntal & Co. and the Registrant, [incorporated by
reference to Exhibit 10.3 to the Registrant's
Registration Statement on Form S-1 (Commission File
No. 33-60134) filed on April 13, 1995].
10.3 The Registrant's 1996 Incentive Stock Option Plan.
10.4 Hollis-Eden, Inc.'s 1996 Stock Option Plan (the
"Option Plan").
10.5 Forms of Incentive Stock Options and Nonstatutory
Stock Options under the Option Plan.
10.6 Employment Agreement by and between Hollis-Eden,
Inc. and Richard B. Hollis dated November 1,1996.
10.7 License Agreement by and among Hollis-Eden, Inc.,
Colthurst Limited and Patrick T. Prendergast, Ph.D.
dated May 18, 1994, including all amendments
thereto.
10.8 License Agreement by and among Hollis-Eden, Inc.,
Edenland, Inc. and Patrick T. Prendergast, Ph.D.
dated August 25, 1994, including all amendments
thereto.
10.9 Research, Development and Option Agreement by and
among Hollis-Eden, Inc., Edenland, Inc. and Patrick
T. Prendergast, Ph.D. dated August 25, 1994,
including all amendments thereto.
10.10 Warrant Agreement with Laidlow Equities, Inc.
covering 452,830 shares of Common Stock (included
within Placement Agent Agreement dated January 26,
1996 between Laidlaw Equities, Inc. and Hollis-Eden,
Inc.).
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Price Waterhouse LLP.
24.1 Power of Attorney. Reference is made to page II-5.
---------------------------------
* To be filed by amendment.
(1) To be filed by Hollis-Eden and to become the Certificate of
Incorporation of the Surviving Corporation.
(2) To be adopted by the Hollis-Eden and to become the Bylaws of the
Surviving Corporation.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
II-2
<PAGE>
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or
13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of
the Registration Statement through the date of responding to the
request;
(2) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in the
registration statement when it became effective;
(3) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(4) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(5) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering;
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of
New York, on December 19, 1996.
INITIAL ACQUISITION CORP.
By: /s/ Salvatore J. Zizza
----------------------------------------
Salvatore J. Zizza
President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below under the heading "Signatures" constitutes and appoints Salvatore J.
Zizza his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him and in his name, place and stead,
in any and all capacities, to sign any or all amendments (including post-
effective amendments) to this Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-
in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection with
the above premises, as fully for all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorney-
in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
President, Chairman of the
/s/ Salvatore J. Zizza Board of Directors,
------------------------ Treasurer and Director
Salvatore J. Zizza (Principal Executive,
Financial and Accounting December 19, 1996
Officer)
Director December 19, 1996
/s/ Sidney Dworkin
------------------------
Sidney Dworkin
Director December 19, 1996
/s/ Herbert M. Paul
------------------------
Herbert M. Paul
Director December 19, 1996
/s/ Richard L. Bready
------------------------
Richard L. Bready
Director December 19, 1996
/s/ Alan P. Donenfeld
------------------------
Alan P. Donenfeld
II-4
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit
No. Description
------- -----------
2 Agreement and Plan of Merger by and among the
Registrant, Hollis-Eden, Inc., Mr. Salvatore J.
Zizza and Mr. Richard B. Hollis, dated as of
November 1, 1996.
4.1 Form of Amended and Restated Certificate of
Incorporation of Hollis-Eden, Inc.(1)
4.2 Form of Bylaws of Hollis-Eden, Inc.(2)
5* Opinion of Reid and Priest LLP.
8 Tax Opinion of Cooley Godward LLP.
10.3 The Registrant's 1996 Incentive Stock Option Plan.
10.4 Hollis-Eden, Inc.'s 1996 Stock Option Plan (the
"Option Plan").
10.5 Forms of Incentive Stock Options and Nonstatutory
Stock Options under the Option Plan.
10.6 Employment Agreement by and between Hollis-Eden,
Inc. and Richard B. Hollis dated November 1,1996.
10.7 License Agreement by and among Hollis-Eden, Inc.,
Colthurst Limited and Patrick T. Prendergast, Ph.D.
dated May 18, 1994, including all amendments
thereto.
10.8 License Agreement by and among Hollis-Eden, Inc.,
Edenland, Inc. and Patrick T. Prendergast, Ph.D.
dated August 25, 1994, including all amendments
thereto.
10.9 Research, Development and Option Agreement by and
among Hollis-Eden, Inc., Edenland, Inc. and Patrick
T. Prendergast, Ph.D. dated August 25, 1994,
including all amendments thereto.
10.10 Warrant Agreement with Laidlow Equities, Inc.
covering 452,830 shares of Common Stock (included
within Placement Agent Agreement dated January 26,
1996 between Laidlaw Equities, Inc. and Hollis-Eden,
Inc.).
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Price Waterhouse LLP.
24.1 Power of Attorney. Reference is made to page II-5.
---------------------------------
* To be filed by amendment.
(1) To be filed by Hollis-Eden and to become the Certificate of
Incorporation of the Surviving Corporation.
(2) To be adopted by the Hollis-Eden and to become the Bylaws of the
Surviving Corporation.
Exhibit 2
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
INITIAL ACQUISITION CORP.,
A DELAWARE CORPORATION,
HOLLIS-EDEN, INC.,
A DELAWARE CORPORATION,
SALVATORE J. ZIZZA
(FOR PURPOSES OF SECTION 5.6 AND ARTICLE XI ONLY)
AND
RICHARD B. HOLLIS
(FOR PURPOSES OF SECTION 5.6 AND ARTICLE XI ONLY)
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I
ADOPTION OF AGREEMENT AND PLAN OF MERGER . . . . 2
1.1 The Merger . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Effective Date of the Merger . . . . . . . . . . . . . 2
1.3 Surviving Corporation . . . . . . . . . . . . . . . . . 2
1.4 Certificate of Incorporation of the
Surviving Corporation . . . . . . . . . . . . . . . . . 2
1.5 By-laws of the Surviving Corporation . . . . . . . . . 2
1.6 Directors and Officers . . . . . . . . . . . . . . . . 3
1.7 Plan of Merger . . . . . . . . . . . . . . . . . . . . 3
1.8 Exchange and Conversion of Shares of Hollis-Eden
Common Stock and Outstanding Hollis-Eden Warrants and
Hollis-Eden Options . . . . . . . . . . . . . . . . . . 7
ARTICLE II
CLOSING . . . . . . . . . . . . 8
2.1 Closing Date . . . . . . . . . . . . . . . . . . . . . 8
2.2 Execution of Formal Merger Documents . . . . . . . . . 8
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HOLLIS-EDEN . . . 9
3.1 Due Incorporation . . . . . . . . . . . . . . . . . . . 9
3.2 Due Authorization . . . . . . . . . . . . . . . . . . . 9
3.3 Consents and Approvals; Non-Contravention . . . . . . . 10
3.4 Capitalization . . . . . . . . . . . . . . . . . . . . 11
3.5 Financial Statements; Undisclosed Liabilities; Other
Documents . . . . . . . . . . . . . . . . . . . . . . . 11
3.6 No Adverse Effects or Changes . . . . . . . . . . . . . 11
3.7 Title to Properties . . . . . . . . . . . . . . . . . . 12
3.8 Liabilities . . . . . . . . . . . . . . . . . . . . . . 12
3.9 Intellectual Property . . . . . . . . . . . . . . . . . 12
3.10 Contracts . . . . . . . . . . . . . . . . . . . . . . . 13
3.11 Insurance . . . . . . . . . . . . . . . . . . . . . . . 15
3.12 Employee Benefit Plans . . . . . . . . . . . . . . . . 15
3.13 Employees; Labor Matters . . . . . . . . . . . . . . . 15
3.14 Tax Matters . . . . . . . . . . . . . . . . . . . . . . 16
3.15 Environmental Regulations . . . . . . . . . . . . . . . 17
3.16 Litigation . . . . . . . . . . . . . . . . . . . . . . 17
3.17 No Conflict of Interest . . . . . . . . . . . . . . . . 18
3.18 Bank Accounts . . . . . . . . . . . . . . . . . . . . . 18
3.19 Compliance with Laws. . . . . . . . . . . . . . . . . . 18
3.20 Broker's/Finder's Fees . . . . . . . . . . . . . . . . 18
3.21 Board Recommendation . . . . . . . . . . . . . . . . . 18
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF IAC . . . . . 19
4.1 Due Incorporation . . . . . . . . . . . . . . . . . . . 19
4.2 Due Authorization . . . . . . . . . . . . . . . . . . . 19
4.3 Consents and Approvals; Non-Contravention . . . . . . . 19
4.4 Capitalization . . . . . . . . . . . . . . . . . . . . 20
4.5 Financial Statements; Undisclosed Liabilities; Other
Documents . . . . . . . . . . . . . . . . . . . . . . . 20
4.6 No Adverse Effects or Changes . . . . . . . . . . . . . 21
4.7 Title to Properties . . . . . . . . . . . . . . . . . . 21
4.8 Liabilities . . . . . . . . . . . . . . . . . . . . . . 21
4.9 Real Property . . . . . . . . . . . . . . . . . . . . . 21
4.10 Intellectual Property . . . . . . . . . . . . . . . . . 21
4.11 Contracts . . . . . . . . . . . . . . . . . . . . . . . 22
4.12 Employee Benefit Plans . . . . . . . . . . . . . . . . 23
4.13 Tax Matters . . . . . . . . . . . . . . . . . . . . . . 23
4.14 Litigation . . . . . . . . . . . . . . . . . . . . . . 24
4.15 No Conflict of Interest . . . . . . . . . . . . . . . . 24
4.16 Bank Accounts . . . . . . . . . . . . . . . . . . . . . 25
4.17 Compliance with Laws . . . . . . . . . . . . . . . . . 25
4.18 Broker's/Finder's Fees . . . . . . . . . . . . . . . . 25
4.19 Board Recommendation . . . . . . . . . . . . . . . . . 25
4.20 Employee Matters . . . . . . . . . . . . . . . . . . . 25
4.21 SEC Filings . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE V
COVENANTS . . . . . . . . . . . . 26
5.1 Implementing Agreement . . . . . . . . . . . . . . . . 26
5.2 Access to Information and Facilities . . . . . . . . . 26
5.3 Preservation of Business . . . . . . . . . . . . . . . 26
5.4 IAC and Hollis-Eden Stockholders' Meetings . . . . . . 29
5.5 Registration of IAC Common Stock . . . . . . . . . . . 29
5.6 Agreement to Vote . . . . . . . . . . . . . . . . . . . 30
5.7 Blue Sky Compliance . . . . . . . . . . . . . . . . . . 30
5.8 Listing . . . . . . . . . . . . . . . . . . . . . . . . 31
5.9 Consents and Approvals . . . . . . . . . . . . . . . . 31
5.10 Maintenance of Insurance . . . . . . . . . . . . . . . 31
5.11 Supplemental Information . . . . . . . . . . . . . . . 31
5.12 Hollis-Eden Lock-Up Letters . . . . . . . . . . . . . . 31
5.13 Patent Analyses . . . . . . . . . . . . . . . . . . . . 31
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS
OF IAC . . . . . . . . . . . . 33
6.1 Warranties True as of Both Present Date and
Closing Date . . . . . . . . . . . . . . . . . . . . . 33
6.2 Compliance With Agreements and Covenants . . . . . . . 33
6.3 Consents and Approvals . . . . . . . . . . . . . . . . 33
6.4 Documents . . . . . . . . . . . . . . . . . . . . . . . 33
6.5 No Material Adverse Change . . . . . . . . . . . . . . 34
6.6 Actions or Proceedings . . . . . . . . . . . . . . . . 34
6.7 Opinion of Counsel for Hollis-Eden . . . . . . . . . . 34
6.8 Approval of Merger . . . . . . . . . . . . . . . . . . 34
6.9 IAC Redemption Right . . . . . . . . . . . . . . . . . 34
6.10 Patent Infringement and Patent Validity Analyses . . . 34
6.11 Appointment of Zizza as a Director . . . . . . . . . . 34
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF HOLLIS-EDEN . 34
7.1 Warranties True as of Both Present Date and
Closing Date . . . . . . . . . . . . . . . . . . . . . 35
7.2 Compliance with Agreements and Covenants . . . . . . . 35
7.3 Consents and Approvals . . . . . . . . . . . . . . . . 35
7.4 Documents . . . . . . . . . . . . . . . . . . . . . . . 35
7.5 No Material Adverse Change . . . . . . . . . . . . . . 35
7.6 Actions or Proceedings . . . . . . . . . . . . . . . . 35
7.7 Opinion of Counsel for IAC . . . . . . . . . . . . . . 35
7.8 Approval of Merger . . . . . . . . . . . . . . . . . . 35
7.9 Registration Statement Effective . . . . . . . . . . . 35
7.10 IAC Cash Position . . . . . . . . . . . . . . . . . . . 35
ARTICLE VIII
DELIVERIES AT CLOSING . . . . . . . . . 36
8.1 Deliveries by Hollis-Eden . . . . . . . . . . . . . . . 36
8.2 Deliveries by IAC . . . . . . . . . . . . . . . . . . . 36
ARTICLE IX
TERMINATION; TERMINATION FEE . . . . . . . 37
9.1 Termination . . . . . . . . . . . . . . . . . . . . . . 37
9.2 Effect of Termination . . . . . . . . . . . . . . . . . 38
9.3 Termination Fee . . . . . . . . . . . . . . . . . . . . 38
ARTICLE X
EXCLUSIVITY . . . . . . . . . . . 38
ARTICLE XI
INDEMNIFICATION . . . . . . . . . . 38
11.1 Survival . . . . . . . . . . . . . . . . . . . . . . . 38
11.2 Indemnification by Hollis . . . . . . . . . . . . . . . 39
11.3 Indemnification by Zizza . . . . . . . . . . . . . . . 39
11.4 Notice and Right to Defend Third Party Claims . . . . . 40
ARTICLE XII
MISCELLANEOUS . . . . . . . . . . . 41
12.1 Expenses . . . . . . . . . . . . . . . . . . . . . . . 41
12.2 Amendment . . . . . . . . . . . . . . . . . . . . . . . 41
12.3 Confidentiality and Return of Information . . . . . . . 41
12.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . 41
12.5 Waivers . . . . . . . . . . . . . . . . . . . . . . . . 42
12.6 Interpretation . . . . . . . . . . . . . . . . . . . . 42
12.7 Applicable Law . . . . . . . . . . . . . . . . . . . . 42
12.8 Assignment . . . . . . . . . . . . . . . . . . . . . . 42
12.9 No Third Party Beneficiaries . . . . . . . . . . . . . 42
12.10 Further Assurances . . . . . . . . . . . . . . . . . . 43
12.11 Severability . . . . . . . . . . . . . . . . . . . . . 43
12.12 Remedies Cumulative . . . . . . . . . . . . . . . . . . 43
12.13 Entire Understanding . . . . . . . . . . . . . . . . . 43
12.14 Counterparts . . . . . . . . . . . . . . . . . . . . . 43
EXHIBITS
Exhibit A - Form of Certificate of Merger
Exhibit B - Form of Opinion of Counsel for Hollis-Eden
Exhibit C - Form of Opinion of Counsel for IAC
Exhibit D - Form of Escrow Agreement
SCHEDULES
Schedule 3.1 Hollis-Eden Due Incorporation
Schedule 3.2 Hollis-Eden Consents and Approvals
Schedule 3.4 Hollis-Eden Capitalization
Schedule 3.5 Hollis-Eden Undisclosed Liabilities
Schedule 3.6 Hollis-Eden No Adverse Effects or Changes
Schedule 3.7 Hollis-Eden Title to Properties
Schedule 3.8 Hollis-Eden Liabilities
Schedule 3.9 Hollis-Eden Intellectual Property
Schedule 3.10 Hollis-Eden Contracts
Schedule 3.11 Hollis-Eden Insurance
Schedule 3.12 Hollis-Eden Employee Benefit Plans
Schedule 3.13 Hollis-Eden Employees; Labor Matters
Schedule 3.14 Hollis-Eden Tax Matters
Schedule 3.16 Hollis-Eden Litigation
Schedule 3.17 Hollis-Eden Conflicts of Interest
Schedule 3.18 Hollis-Eden Bank Accounts
Schedule 3.19 Hollis-Eden Compliance with Laws
Schedule 3.20 Hollis-Eden Broker's/Finder's Fee
Schedule 5.13 Hollis-Eden Products
Schedule 4.4 IAC Capitalization
Schedule 4.6 IAC No Adverse Effects or Changes
Schedule 4.10 IAC Intellectual Property
Schedule 4.11 IAC Contracts
Schedule 4.15 IAC No Conflict of Interest
Schedule 4.16 IAC Bank Accounts
<PAGE>
AGREEMENT AND PLAN OF MERGER
----------------------------
AGREEMENT AND PLAN OF MERGER dated as of November 1,
1996, by and among INITIAL ACQUISITION CORP., a Delaware
corporation ("IAC"), SALVATORE J. ZIZZA, an individual ("Zizza")
(for purposes of Section 5.6 and Article XI only), HOLLIS-EDEN,
INC., a Delaware corporation ("Hollis-Eden"), and RICHARD B.
HOLLIS, an individual ("Hollis") (for purposes of Section 5.6 and
Article XI only).
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, IAC desires to acquire Hollis-Eden, and
Hollis-Eden desires to be acquired by IAC, through the merger of
Hollis-Eden with and into IAC pursuant to the terms hereinafter
set forth (the "Merger"); and
WHEREAS, IAC and Hollis-Eden each intend, for Federal
income tax purposes, that the Merger contemplated hereby
constitutes a reorganization pursuant to Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the Board of Directors of IAC deems it
advisable and in the best interest of IAC that Hollis-Eden be
merged with and into IAC upon the terms and conditions
hereinafter specified; and
WHEREAS, the Board of Directors of Hollis-Eden deems it
advisable and in the best interest of Hollis-Eden that Hollis-
Eden be merged with and into IAC upon the terms and conditions
hereinafter specified; and
WHEREAS, IAC has an authorized capital stock consisting
of 10,000,000 shares of Common Stock, $.01 par value per share
(the "IAC Common Stock"), of which 833,250 shares are currently
issued and outstanding, and 5,000 shares of Preferred Stock, $.01
par value per share (the "Preferred Stock"), of which no shares
are currently issued or outstanding; and
WHEREAS, Hollis-Eden has an authorized capital stock
consisting of 30,000,000 shares of Common Stock, $.0001 par value
per share (the "Hollis-Eden Common Stock"), of which 4,911,004
shares are currently issued and outstanding; and
WHEREAS, Hollis-Eden currently also has outstanding
Common Stock purchase warrants and options entitling the holders
thereof to purchase an aggregate of up to 2,279,650 shares of
Hollis-Eden Common Stock, all as further described herein
(collectively, the "Hollis-Eden Warrants and Options"); and
WHEREAS, Zizza and Hollis are the principal
stockholders of IAC and Hollis-Eden, respectively.
NOW, THEREFORE, in consideration of the mutual
covenants and agreements hereinafter contained, the parties
hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
ADOPTION OF AGREEMENT AND PLAN OF MERGER
1.1 The Merger. At the Effective Time (as defined in
----------
Section 1.2 herein), in accordance with this Agreement and the
relevant provisions of the Delaware General Corporation Law (the
"DGCL"), Hollis-Eden shall be merged with and into IAC. IAC
shall be the Surviving Corporation to the Merger (the "Surviving
Corporation") and IAC shall continue, and be deemed to continue,
for all purposes after the Merger. The existence of Hollis-Eden
shall cease at the Effective Time as a consequence of the Merger.
Immediately following the Effective Time, the name of IAC shall
be changed to "Hollis-Eden Pharmaceuticals, Inc."
1.2 Effective Date of the Merger. This Agreement shall
-----------------------------
be submitted to the stockholders of each of Hollis-Eden and IAC
as provided in Section 5.4 hereof, for approval as soon as
practicable after the Registration Statement (as defined in
Section 5.4 below) has been declared effective by the Securities
and Exchange Commission (the "SEC"). Subject to the terms and
conditions hereof, including, without limitation, IAC's and
Hollis-Eden's right to terminate this Agreement without liability
in accordance with Article IX hereof, upon the authorization,
approval and adoption of this Agreement by the affirmative vote
of the holders of not less than 66-2/3% of the outstanding shares
of IAC Common Stock and the affirmative vote of the holders of
not less than a majority of the outstanding shares of Hollis-Eden
Common Stock, both as provided by the DGCL and the respective
Certificates of Incorporation of IAC and Hollis-Eden, a
Certificate of Merger, substantially in the form annexed hereto
as Exhibit A (the "Certificate of Merger"), shall be executed in
accordance with Section 103 of the DGCL and delivered to the
Secretary of State of Delaware for filing (the time of such
filing being the "Effective Time" and the date of such filing
being the "Effective Date").
1.3 Surviving Corporation. Following the Merger, IAC
---------------------
shall continue to exist under, and be governed by, the laws of
the State of Delaware. Immediately following the Effective Time,
IAC's name shall be changed to "Hollis-Eden Pharmaceuticals,
Inc."
1.4 Certificate of Incorporation of the Surviving
----------------------------------------------
Corporation. The Certificate of Incorporation of Hollis-Eden, as
-----------
in effect at the Effective Time, shall continue in full force and
effect as the Certificate of Incorporation of the Surviving
Corporation; provided, however, that at the Effective Time, IAC
will include in the Certificate of Merger a statement that IAC
is, immediately following the Effective Time, changing its name
to "Hollis-Eden Pharmaceuticals, Inc."
1.5 By-laws of the Surviving Corporation. The By-laws
------------------------------------
of Hollis-Eden, as in effect at the Effective Time, shall
continue in full force and effect as the By-laws of the Surviving
Corporation.
1.6 Directors and Officers. The directors and officers
----------------------
of the Surviving Corporation immediately following the Merger
shall be as follows:
Name Positions
---- ---------
Richard B. Hollis Chairman, President and Chief
Executive Officer and Director
Patrick T. Prendergast, Ph.D. Chief Scientific Officer,
Director
Thomas Charles Merigan, Jr., M.D. Director, Chairman of the
Scientific Advisory Board
Robert W. Weber Vice President-Controller
Lois Rezler, Ph.D. Vice President-Regulatory
Affairs
J. Paul Bagley III Director
Salvatore J. Zizza Director
Brendan R. McDonnell Director
Such directors and officers shall continue to hold
office until the next annual meetings of the stockholders and
directors of the Surviving Corporation or until their successors
shall have been duly elected and shall have qualified.
1.7 Plan of Merger. The method of effecting the Merger
--------------
and the basis for exchanging and converting the outstanding
Common Stock of Hollis-Eden and the outstanding Hollis-Eden
Warrants and Options into shares of Common Stock of the Surviving
Corporation (the "Surviving Corporation Common Stock"), warrants
to purchase shares of Surviving Corporation Common Stock and
options to purchase shares of Surviving Corporation Common Stock
shall be as follows:
(a)(i) Each issued and outstanding share of
Hollis-Eden Common Stock (other than those shares of Hollis-Eden
Common Stock held by stockholders who shall have perfected their
rights to appraisal pursuant to Section 262 of the DGCL and shall
not have withdrawn or otherwise lost such rights (the "Dissenting
Stockholders")) shall, at the Effective Time, by virtue of the
Merger and without further action, be deemed canceled and cease
to exist and, upon presentation for surrender of a certificate
representing such share by each stockholder of Hollis-Eden
participating in the Merger (collectively, the "Participating
Stockholders"), shall be converted into one share of Surviving
Corporation Common Stock.
(ii) At the Effective Time, each issued and
outstanding Hollis-Eden Warrant shall, by virtue of the Merger
and without further action, be deemed canceled and cease to exist
and, upon presentation for surrender of a certificate
representing such Hollis-Eden Warrant in accordance with Section
1.8 hereof, shall be converted into a warrant to purchase shares
of Surviving Corporation Common Stock, at an exercise price and
for an exercise period which is the same, respectively, as the
exercise price and the exercise period of the particular Hollis-
Eden Warrant (collectively, the "Surviving Corporation
Warrants").
(iii) At the Effective Time, each issued and
outstanding Hollis-Eden Option shall, by virtue of the Merger and
without further action, be deemed to be assumed by the Surviving
Corporation and modified so that, in lieu of having the right to
purchase shares of Hollis-Eden Common Stock upon exercise, the
holder will have the right to purchase shares of Surviving
Corporation Common Stock upon exercise (collectively, the
"Surviving Corporation Options") at an exercise price and for an
exercise period which is the same, respectively, as the exercise
price and exercise period of the particular Hollis-Eden Option.
The Surviving Corporation, at the Effective Time, will assume all
of Hollis-Eden's obligations under any option agreement
evidencing the grant of such Hollis-Eden Options.
(iv) IAC will establish, subject to IAC
stockholder ratification and approval at the meeting of
stockholders of IAC to be held to approve the transactions
contemplated by the Merger (the "IAC Stockholders' Meeting")
prior to the Effective Time, an Employee Stock Option Plan (the
"IAC Employee Stock Option Plan") pursuant to which certain of
the Surviving Corporation Options referenced in clause (iii)
above will be governed. Such IAC Employee Stock Option Plan will
be on similar terms and conditions as the Hollis-Eden Employee
Stock Option Plan pursuant to which certain of the Hollis-Eden
Employee Stock Options were originally granted.
(b)(i) Notwithstanding Section 1.7(a) above,
shares of Hollis-Eden Common Stock which are held by a Dissenting
Stockholder who has properly preserved and perfected dissenters'
rights with respect to such shares pursuant to Section 262 of the
DGCL shall not be converted into the right to receive shares of
Surviving Corporation Common Stock pursuant to Section 1.7(a)(i)
hereof, and instead shall be treated in accordance with those
provisions of the DGCL unless and until the right of such
Dissenting Stockholder under Section 262 of the DGCL to payment
for his shares shall cease.
(ii) If any Dissenting Stockholder shall
effectively withdraw or lose (through failure to perfect or
otherwise) such Dissenting Stockholder's right to payment for any
of such Dissenting Stockholder's shares under Section 262 of the
DGCL, such Dissenting Stockholder's shares shall automatically be
converted into the right to receive shares of Surviving
Corporation Common Stock in accordance with Section 1.7(a)(i)
hereto.
(iii) Each Dissenting Shareholder who becomes
entitled, pursuant to the provisions of Section 262 of the DGCL,
to payment of the fair value of any such Dissenting Stockholder's
shares shall receive payment therefor from the Surviving
Corporation pursuant to Section 262 of the DGCL.
(c)(i) As a condition to the consummation of
the Merger, IAC is required to obtain the consent of its
stockholders to the Merger. The beneficial owners of 600,000
shares of IAC Common Stock currently have the right, in lieu of
approving the Merger, to require IAC to redeem their shares of
IAC Common Stock (the "Redemption Right"). Those IAC
stockholders possessing the Redemption Right (the "Solicited
Stockholders") shall be solicited by IAC and offered the
opportunity to exchange their Redemption Right for the right to
receive additional shares of common stock of the Surviving
Corporation (the "Additional Merger Shares") in accordance with
this Section 1.7(c).
(ii) In order to perfect the right to receive
the Additional Merger Shares, if any, a Solicited Stockholder
must (A) not exercise his Redemption Right in connection with the
Merger and (B) within 60 days following the Effective Time, take
whatever action that may be necessary to cause such Solicited
Stockholder to become the registered owner of his shares of
Surviving Corporation Common Stock (each, a "Rights Share" and,
collectively, the "Rights Shares"). By not exercising his
Redemption Right in connection with the Merger, a Solicited
Stockholder shall be deemed to have waived his Redemption Right
and accepted IAC's offer to receive the right to receive
Additional Merger Shares, if any are issued (provided such
Solicited Stockholder is not a Dissenting Stockholder and becomes
the registered owner of his shares of Surviving Corporation
Common Stock as provided above). As soon as practicable
following the 60th day following the Effective Time, the
Surviving Corporation will cause to be issued to each Solicited
Stockholder who shall have perfected his right to receive
Additional Merger Shares, if any, certificates evidencing one
right (each, a "Right" and, collectively, the "Rights") for each
Rights Share held by such Solicited Stockholder (the "Rights
Certificates"). The Rights Certificates shall not be
transferable, assignable, subject to pledge or otherwise
alienable, and the registered holder of such Rights Certificates
shall forfeit the number of Rights (the "Forfeited Rights") equal
to the number of Shares of Surviving Corporation Common Stock
sold or otherwise transferred by such holder during the period
commencing at the Effective Time and ending on the date that a
final determination of whether any Additional Merger Shares will
be issued is made (i.e., the second anniversary of the Effective
Date) (the "Holding Period"). The Forfeited Rights, at the
moment of such sale or transfer, shall be null and void and have
no further force or effect.
(iii) Additional Merger Shares, if any, shall
be issued to the holders of Rights Certificates who have not
otherwise forfeited their Rights as a result of their selling or
otherwise transferring shares of Surviving Corporation Common
Stock during the Holding Period if, at no time during the 24-
month period immediately following the Effective Date, the
average Closing Price per share of Surviving Corporation Common
Stock over a period of 20 consecutive trading days equals or
exceeds $20.00 per share (subject to adjustment as set forth in
subsection (c)(vi) below). The Additional Merger Shares shall be
issued, in accordance with the records of the Surviving
Corporation, as promptly as practicable following the second
anniversary of the Effective Date to those holders of Rights
Certificates who have not otherwise forfeited their Rights. The
number of Additional Merger Shares, if any, to be issued to the
holders of the Rights Certificates shall be calculated as
follows: each outstanding Right (i.e., any Right other than the
Forfeited Rights) shall entitle the holder thereof to the number
of Additional Merger Shares equal to (A) the difference between
(i) $20.00 (subject to adjustment as set forth in subsection
(c)(vi) below) and (ii) the average of the highest 60 Closing
Prices per share of Surviving Corporation Common Stock during the
one-year period immediately prior to the second anniversary of
the Effective Date (the "Sixty Day Average Price"), divided by
----------
(B) the Sixty Day Average Price. No fractional Additional Merger
Shares shall be issued. In lieu thereof, any fractional shares
shall be rounded to the nearest whole share of Surviving
Corporation Common Stock. The amount of Additional Merger
Shares, if any, to be issued shall be computed by Price
Waterhouse LLP, independent public accountants, as soon as
practicable following the second anniversary of the Effective
Date. The determination by Price Waterhouse LLP shall be final
and binding on the Surviving Corporation and the holders of the
Rights.
(iv) For purposes of this Section 1.7 and
Section 11.2(c), "Closing Price" per share of Surviving
Corporation Common Stock on a Trading Day shall mean the last
reported sale price per share of Surviving Corporation Common
Stock regular way or, in case no such reported sale takes place
on such Trading Day, the average of the closing bid and asked
prices regular way for such Surviving Corporation Common Stock
for such Trading Day, in either case on the principal national
securities exchange on which the Surviving Corporation Common
Stock is listed or admitted to trading, or if the Surviving
Corporation Common Stock is not listed or admitted to trading on
any national securities exchange, but is traded in the over-the-
counter market, the closing sale price per share of such
Surviving Corporation Common Stock or, in case no sale is
publicly reported, the average of the closing bid and asked
quotations for the Surviving Corporation Common Stock, as
reported by the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") or any comparable system
or, if such Surviving Corporation Common Stock is not listed on
NASDAQ or a comparable system, the closing sale price of
Surviving Corporation Common Stock or, in case no sale is
publicly reported, the average of the closing bid and asked
prices per share, as furnished by two members of the National
Association of Securities Dealers, Inc. who make a market in such
Surviving Corporation Common Stock selected from time to time by
the Surviving Corporation for that purpose. In addition, for
purposes of this Section 1.7 and Section 11.2(c), a "Trading Day"
shall mean, if such Surviving Corporation Common Stock is listed
on any national securities exchange, a business day during which
such exchange was open for trading and at least one trade of
Surviving Corporation Common Stock was effected on such exchange
on such business day, or, if such Surviving Corporation Common
Stock is not listed on any national securities exchange but is
traded in the over-the-counter market, a business day during
which the over-the-counter market was open for trading and at
least one "eligible dealer" quoted both a bid and asked price for
Surviving Corporation Common Stock. An "eligible dealer" for any
day shall include any broker-dealer who quoted both a bid and
asked price for such day, but shall not include any broker-dealer
who quoted only a bid or only an asked price for such day.
(v) Notwithstanding the foregoing, the Sixty Day
Average Price shall in no event be less than $5.00 per share
(subject to adjustment as set forth in subsection (c)(vi) below).
(vi) In the event of a stock dividend, stock
split, share combination, exchange of shares, recapitalization,
merger, consolidation, acquisition or disposition of property or
shares, reorganization, liquidation or other similar change or
transaction of or by the Surviving Corporation following the
Effective Time, the Closing Price and the Sixty Day Average Price
shall be adjusted as appropriate to give proper effect to the
event.
(vii) Notwithstanding anything to the contrary
contained herein, the Surviving Corporation shall have the
unilateral right to redeem and cancel all, but not less than all,
of the Rights evidenced by the Rights Certificates, at a
redemption price of $.001 per Right, if the Surviving
Corporation, at any time during the Holding Period, closes an
equity offering pursuant to which the Surviving Corporation (A)
issues shares of Surviving Corporation Common Stock at a per
share price of not less than $15.00 per share and (B) raises net
proceeds to the Surviving Corporation of not less than $10
million.
1.8 Exchange and Conversion of Shares of Hollis-Eden
-------------------------------------------------
Common Stock and Outstanding Hollis-Eden Warrants and Hollis-Eden
-----------------------------------------------------------------
Options. The manner of exchanging and converting shares of Hollis
--------
Eden Common Stock, Hollis-Eden Warrants and Hollis-Eden Options
into shares of Surviving Corporation Common Stock, Surviving
Corporation Warrants and Surviving Corporation Options, as the
case may be, in accordance with Section 1.7 above, shall be as
follows:
(a) From and after the Effective Time, American
Stock Transfer & Trust Company (the "Exchange Agent") shall act
as exchange agent in effecting the exchange of certificates
representing shares of Hollis-Eden Common Stock pursuant to
Section 1.7(a) hereof. As soon as practicable after the
Effective Time, and after surrender to the Exchange Agent by each
Participating Stockholder of certificates which prior to the
Effective Time represented shares of Hollis-Eden Common Stock,
the Surviving Corporation shall cause to be distributed to such
Participating Stockholder in whose name such Common Stock
certificates shall have been registered, or in accordance with
the written instructions transmitted to the Exchange Agent by the
Participating Stockholder, certificates representing shares of
Surviving Corporation Common Stock, all in accordance with the
provisions of Section 1.7(a) hereof. Upon the surrender by
Participating Stockholders of each certificate representing
shares of Hollis-Eden Common Stock, and the issuance and delivery
by the Exchange Agent of certificates representing shares of
Surviving Corporation Common Stock, the certificates which prior
to the Effective Time represented outstanding shares of Hollis-
Eden Common Stock shall forthwith be canceled. Until so
surrendered and exchanged, each such certificate representing
shares of Hollis-Eden Common Stock shall be deemed for all
purposes to evidence only a right to receive shares of Surviving
Corporation Common Stock, and the holders of such certificates
shall no longer be deemed, for any purpose, to be stockholders in
Hollis-Eden.
(b) As soon as practicable after the Effective
Time, the Surviving Corporation shall cause to be distributed to
each holder of Hollis-Eden Warrants or Hollis-Eden Options,
certificates or option agreements, as the case may be,
representing Surviving Corporation Warrants or Surviving
Corporation Options in accordance with Section 1.7(a) hereof.
Upon the surrender by such holders of each certificate or
agreement representing Hollis-Eden Warrants or Hollis-Eden
Options and the delivery by the Surviving Corporation of
certificates or agreements representing Surviving Corporation
Warrants or Surviving Corporation Options, as the case may be,
the certificates and agreements which prior to the Effective Time
represented Hollis-Eden Warrants and/or Hollis-Eden Options shall
be forthwith be canceled. Until so surrendered and exchanged,
each such certificate or agreement representing Hollis-Eden
Warrants and/or Hollis-Eden Options shall be deemed for all
purposes to evidence only a right to receive Surviving
Corporation Warrants or Surviving Corporation Options, as the
case may be.
(c) Participating Stockholders or holders of
Hollis-Eden Warrants or Hollis-Eden Options will, for all
purposes (except for the payment of possible dividends or other
distributions by the Surviving Corporation which will be withheld
until the exchange of certificates discussed above), be deemed to
be stockholders, warrantholders and/or optionholders of the
Surviving Corporation, as the case may be, as of the Effective
Time, irrespective of whether they have received their
certificates representing shares of Surviving Corporation Common
Stock, Surviving Corporation Warrants or Surviving Corporation
Options, as the case may be.
(d) Immediately prior to the Effective Time, the
Surviving Corporation shall provide the Exchange Agent with
certificates representing the maximum number of shares of
Surviving Corporation Common Stock as the Surviving Corporation
may be required to issue in accordance with Section 1.7(a)
hereof.
(e) Promptly after the Effective Time, the
Exchange Agent, on behalf of Hollis-Eden and the Surviving
Corporation, shall mail to each holder of record of certificates
which immediately prior to the Effective Time represented shares
of Hollis-Eden Common Stock, Hollis-Eden Warrants or Hollis-Eden
Options, a form of letter of transmittal and instructions for use
in surrendering such certificates and receiving certificates
representing shares of Surviving Corporation Common Stock,
Surviving Corporation Warrants or Surviving Corporation Options
therefor, as the case may be.
ARTICLE II
CLOSING
2.1 Closing Date. The closing of the Merger (the
------------
"Closing") and the other transactions contemplated by this
Agreement (the "Related Transactions") shall take place at the
offices of Reid & Priest LLP, 40 West 57th Street, New York, New
York 10019 at 10:00 a.m., New York time, on January 15, 1997, or
such other date, time and place as the parties hereto may agree
upon (the "Closing Date").
2.2 Execution of Formal Merger Documents. On the
------------------------------------
Closing Date, Hollis-Eden and IAC shall execute the Certificate
of Merger as provided by the laws of the State of Delaware. The
Certificate of Merger shall be transmitted by the parties to the
appropriate office for filing and/or recording on the Closing
Date, in order that the Merger contemplated by this Agreement
shall become effective at 5:00 p.m., New York time, on the
Closing Date.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HOLLIS-EDEN
In order to induce IAC to enter into this Agreement and
to consummate the transactions, including the Merger,
contemplated hereby, Hollis-Eden represents and warrants to IAC
as of the date of this Agreement and as of the Closing Date (as
if such representations and warranties were remade on the Closing
Date), as follows:
3.1 Due Incorporation. Hollis-Eden is a corporation
-----------------
duly organized, validly existing and in good standing under the
laws of the State of Delaware, with all requisite power and
authority to own, lease and operate its properties and to carry
on its business as they are now being owned, leased, operated and
conducted. Hollis-Eden is qualified or licensed to do business
and is in good standing as a foreign corporation in each
jurisdiction where the nature of the properties owned, leased or
operated by it and the business transacted by it requires such
qualification or licensing, except where the failure to be so
qualified or licensed could not have a Hollis-Eden Material
Adverse Effect (as defined in Section 3.6 hereof). The
jurisdictions in which Hollis-Eden is qualified or licensed to do
business as a foreign corporation are set forth on Schedule 3.1.
-------------
Hollis-Eden has no direct or indirect subsidiaries or affiliates,
either wholly or partially owned, and Hollis-Eden does not hold
any economic, voting or management interest in any corporation,
proprietorship, firm, partnership, limited partnership, trust,
association, individual or other entity (a "Person") or own any
security issued by any Person. True, correct and complete
copies of the Certificate of Incorporation and By-laws, as amended,
and minutes of meetings (or written consents in lieu of meetings)
of the Boards of Directors (and all committees thereof) and
stockholders of Hollis-Eden have been, or prior to the Closing
Date will have been, delivered to IAC.
3.2 Due Authorization. Hollis-Eden has full power and
-----------------
authority to enter into this Agreement and the Certificate of
Merger and to consummate the transactions contemplated hereby and
thereby. The execution, delivery and performance by Hollis-Eden
of this Agreement and the Certificate of Merger have been, or, in
the case of the Certificate of Merger, prior to the Closing Date
will be, duly and validly approved and authorized by the Board of
Directors of Hollis-Eden, and, subject to obtaining the necessary
approval of the Merger by the stockholders of Hollis-Eden, no
other actions or proceedings on the part of Hollis-Eden are
necessary to authorize this Agreement, the Certificate of Merger
and the transactions contemplated hereby and thereby. Hollis-
Eden has duly and validly executed and delivered this Agreement
and will duly and validly execute and deliver the Certificate of
Merger. Subject to obtaining the necessary approval of the
stockholders of Hollis-Eden and the consents set forth on
Schedule 3.3, this Agreement constitutes the legal, valid and
-------------
binding obligation of Hollis-Eden, enforceable in accordance
with its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, fraudulent
transfer, moratorium, reorganization or other laws from time
to time in effect which affect creditors' rights generally
and by general principles of equity (regardless of whether
such enforceability is considered in a proceeding in equity
or at law).
3.3 Consents and Approvals; Non-Contravention.
-----------------------------------------
(a) Except as set forth on Schedule 3.3, and except for
------------
the filing of the Certificate of Merger with the appropriate
authorities pursuant to the DGCL and the filing of the
Registration Statement (as set forth in Section 5.5), no permit,
consent, authorization or approval of, or filing or registration
with, any Governmental Authority or any other Person not a party
to this Agreement is necessary in connection with the execution,
delivery and performance by Hollis-Eden of this Agreement or the
Certificate of Merger, or the consummation of the transactions
contemplated hereby or thereby, or for the lawful continued
operation by the Surviving Corporation following the Effective
Time of the business currently conducted by Hollis-Eden.
"Governmental Authority" shall mean the government of the United
States or any foreign country or any state or political
subdivision thereof or any entity, body or authority exercising
executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
(b) Except as set forth on Schedule 3.3 and except as
------------
would not result in a Hollis-Eden Material Adverse Effect, the
execution, delivery and performance by Hollis-Eden of this
Agreement and the Certificate of Merger do not and will not (A)
violate any Law ("Law" meaning any law, statute, regulation,
ordinance, rule, order, decree, judgment, consent decree,
settlement agreement or governmental requirement enacted,
promulgated, entered into, agreed or imposed by any Governmental
Authority); (B) violate or conflict with, result in a breach or
termination of, constitute a default (or a circumstance which,
with or without notice or lapse of time or both, would constitute
a default) or give any third party any additional right
(including a termination right) under, permit cancellation of, or
result in the creation of any mortgage, lien (except for any lien
for taxes not yet due and payable), charge, restriction, pledge,
security interest, option, lease or sublease, claim, right of any
third party, easement, encroachment or encumbrance (collectively,
a "Lien") upon any of the assets or properties of Hollis-Eden
under any contract to which Hollis-Eden is a party or by which
Hollis-Eden or any of its assets or properties is bound;
(C) permit the acceleration of the maturity of any indebtedness
of Hollis-Eden or indebtedness secured by Hollis-Eden's assets or
properties; or (D) violate or conflict with any provision of the
Certificate of Incorporation or By-laws of Hollis-Eden.
(c) Hollis-Eden has obtained and is in compliance
with all governmental permits, licenses, registrations,
certificates of occupancy, approvals and other authorizations
(collectively, the "Permits") that are required for the complete
operation of the business of Hollis-Eden as currently operated,
except for any Permits the absence of which would not result in a
Hollis-Eden Material Adverse Effect. All of the Permits are
currently valid and in full force and, to Hollis-Eden's
knowledge, no revocation, cancellation or withdrawal thereof has
been threatened. Hollis-Eden has filed such timely and complete
renewal applications as may be required with respect to the
Permits. Except as set forth on Schedule 3.3, to Hollis-Eden's
-------------
knowledge, the Permits, in their current state, will allow
Hollis-Eden to continue to operate its business following
the Effective Time in substantially the same manner as
Hollis-Eden's business is currently operated.
3.4 Capitalization.
--------------
(a) The authorized capital stock of Hollis-Eden
consists of 30,000,000 shares of Hollis-Eden Common Stock. On
the date hereof, there are issued and outstanding 4,911,004
shares of Hollis-Eden Common Stock. All of the issued and
outstanding shares of Hollis-Eden Common Stock are validly
issued, fully paid and nonassessable and the issuance thereof was
not subject to preemptive rights.
(b) Except as set forth on Schedule 3.4, there are no
------------
shares of Hollis-Eden Common Stock or other equity securities
(whether or not such securities have voting rights) of Hollis-
Eden issued or outstanding or any subscriptions, options,
warrants, call rights, convertible securities or other agreements
or commitments of any character obligating Hollis-Eden to issue,
transfer or sell any shares of capital stock or other securities
(whether or not such securities have voting rights) of Hollis-
Eden. Except as set forth on Schedule 3.4, there are no
-------------
outstanding contractual obligations of Hollis-Eden which relate
to the purchase, sale, issuance, repurchase, redemption,
acquisition, transfer, disposition, holding or voting of any
shares of capital stock or other securities of Hollis-Eden.
3.5 Financial Statements; Undisclosed Liabilities;
-----------------------------------------------
Other Documents. For purposes of this Agreement, "Hollis-Eden
---------------
Financial Statements" shall mean the audited financial statements
of Hollis-Eden as of December 31, 1995 and December 31, 1994 and
the unaudited financial statements of Hollis-Eden as of June 30,
1996 (including all notes thereto) which have been previously
delivered to IAC, consisting of the balance sheets at such dates
and, with respect to the audited Hollis-Eden Financial
Statements, the related statements of income and cash flow for
each of the twelve-month periods ended December 31, 1995 and
December 31, 1994, and with respect to the unaudited Hollis-Eden
Financial Statements, the related statements of income and cash
flow for the nine-month period ended September 30, 1996. The
Hollis-Eden Financial Statements have been prepared in accordance
with generally accepted accounting principles ("GAAP")
consistently applied and present fairly the financial position,
assets and liabilities of Hollis-Eden as at the dates thereof and
the revenues, expenses, results of operations and cash flows of
Hollis-Eden for the periods covered then ended (subject, in the
case of the unaudited interim Hollis-Eden Financial Statements,
to normal year-end audit adjustments consistent with past
practice and the absence of notes). The Hollis-Eden Financial
Statements are in accordance with the books and records of
Hollis-Eden, do not reflect any transactions which are not bona
fide transactions and do not contain any untrue statement of a
material fact or omit to state any material fact necessary to
make the statements contained therein, in light of the
circumstances in which they were made, not misleading. The
Hollis-Eden Financial Statements make full and adequate
disclosure of, and provision for, all obligations and liabilities
of Hollis-Eden as of the date thereof.
3.6 No Adverse Effects or Changes. Except as listed on
-----------------------------
Schedule 3.6, or as disclosed in or reflected in the Hollis-Eden
------------
Financial Statements, or as contemplated by this Agreement or the
Certificate of Merger, since September 30, 1996, Hollis-Eden has
not (i) taken any of the actions set forth in Section 5.3, (ii)
suffered any Hollis-Eden Material Adverse Effect, (iii) suffered
any damage, destruction or Loss to any of its assets or
properties (whether or not covered by insurance), or (iv)
increased the compensation of any executive officer of Hollis-
Eden. "Loss" shall mean liabilities, losses, costs, claims,
damages (including consequential damages), penalties and expenses
(including attorneys' fees and expenses and costs of
investigation and litigation). For purposes of this Agreement,
"Hollis-Eden Material Adverse Effect" shall mean an effect on the
business, operations, assets, liabilities, results of operations,
cash flows, condition (financial or otherwise) or prospects of
Hollis-Eden which is materially adverse to Hollis-Eden.
3.7 Title to Properties. Except as disclosed on
-------------------
Schedule 3.7, Hollis-Eden (i) has good and marketable title to, and
------------
is the lawful owner of, all of the material tangible and
intangible assets, properties, including real property, and
rights reflected as being owned by Hollis-Eden in the Hollis-Eden
Financial Statements (other than assets disposed of in the
ordinary course of business since the date of the Hollis-Eden
Financial Statements), and (ii) at the Effective Time, will have
good and marketable title to, and will be the lawful owner of,
all of such tangible and intangible assets, properties, including
real property, and rights, in any case free and clear of any
Lien, except for (x) any Lien for current taxes not yet due and
payable, and (y) minor Liens that have arisen in the ordinary
course of business and that do not (in any case or in the
aggregate) materially detract from the value of the assets
subject thereto or materially impair the operations of Hollis-
Eden.
3.8 Liabilities. Except to the extent reflected or
-----------
reserved against on the balance sheets of Hollis-Eden
constituting a part of the Hollis-Eden Financial Statements,
Hollis-Eden has no debts, liabilities or obligations of any
nature other than (i) non-material liabilities incurred
subsequent to the date of such balance sheets in the ordinary
course of Hollis-Eden's business and (ii) as set forth on
Schedule 3.8.
-------------
3.9 Intellectual Property.
---------------------
(a) Schedule 3.9 is a true and complete list of all of
------------
the material patents, patents pending, patent applications,
trademarks, tradenames, service marks and rights (collectively,
the "Intellectual Property") used by Hollis-Eden in the conduct
of its business. Except as disclosed on Schedule 3.9:
------------
(i) all of the Intellectual Property is licensed by
Hollis-Eden;
(ii) none of the Intellectual Property is the subject
of any pending or, to Hollis-Eden's knowledge,
threatened litigation or claim of infringement;
(iii) no license or royalty agreement to which Hollis-
Eden is a party is in breach or default by
Hollis-Eden or, to Hollis-Eden's knowledge, any
other party thereto or the subject of any notice
of termination given or threatened;
(iv) the services provided by Hollis-Eden do not, to
Hollis-Eden's knowledge, infringe any trademark,
service mark, trade name, copyright, trade
secret, patent or confidential or proprietary
rights of another, and Hollis-Eden has not
received any notice contesting its right to use
any Intellectual Property;
(v) Hollis-Eden has not granted any license or agreed
to pay or receive any royalty in respect of any
Intellectual Property; and
(vi) Hollis-Eden possesses adequate rights as licensee
in and to all Intellectual Property necessary to
conduct its business as presently conducted.
(b) Hollis-Eden has obtained from each inventor of
the Patent Applications and Patents that such inventor(s) have
disclosed to counsel who prepared each of the Patent Applications
and the applications underlying the Patents all prior art of
which said inventor(s) are aware.
(c) Hollis-Eden has no knowledge which, directly or
indirectly, indicates an infirmity in any claim of the Patents or
Patent Applications or any basis for invalidity or
unenforceability of any claim of the Patents or Patent
Applications.
(d) Hollis-Eden has no knowledge which, directly or
indirectly, indicates that the licensor in each license agreement
under which Hollis-Eden has been granted rights owns the entire
unencumbered right, title and interest in and to the inventions
and patent applications which are the subject of the license.
(e) Hollis-Eden has used its reasonable commercial
efforts to receive from each inventor named in each Patent
Application and Patent all prior art, written or otherwise
available from such inventor, relating to the subject matter
claimed in any of them, and the names of each contributor toward
the invention(s) claimed in each.
(f) Hollis-Eden has delivered to IAC for inspection
and copying a true copy of each document in Hollis-Eden's
possession relating directly or indirectly to each Patent
Application, Patent and license agreement relating to the
technology of Hollis-Eden's present and intended business
activities and has disclosed to IAC each and all facts, test
results and other information known to Hollis-Eden which has, or
to its knowledge may have, any negative impact upon the efficacy
of the technology of the Patent Applications and Patents.
3.10 Contracts. "Contract" shall mean any material
---------
contract, lease, commitment or understanding, sales order,
purchase order, agreement, indenture, mortgage, note, bond,
instrument or license, whether written or verbal, which is
intended or purports to be binding and enforceable and, in the
case of a Person which is a corporation, general partnership or
limited partnership, such Person's certificate or articles of
incorporation and by-laws or partnership agreement, as the case
may be. Schedule 3.10 lists all the material Contracts and
--------------
arrangements of the following types to which Hollis-Eden is a
party or by which it is bound, or to which any of its assets
or properties is subject:
(a) any collective bargaining agreement;
(b) any Contract or arrangement of any kind with any
employee, consultant, medical advisor, officer or director of
Hollis-Eden;
(c) any Contract or arrangement with a sales
representative, manufacturer's representative, distributor,
dealer, broker, sales agency, advertising agency or other Person
engaged in sales, distributing or promotional activities, or any
Contract to act as one of the foregoing, on behalf of any Person;
(d) any Contract or arrangement of any nature which
involves the payment or receipt of cash or other property, an
unperformed commitment, or goods or services, having a value in
excess of $10,000;
(e) any Contract or arrangement pursuant to which
Hollis-Eden has made or will make loans or advances, or has or
will have incurred debts or become a guarantor or surety or
pledged its credit on or otherwise become responsible with
respect to any undertaking of another (except for the negotiation
or collection of negotiable instruments in transactions in the
ordinary course of business);
(f) any indenture, credit agreement, loan agreement,
note, mortgage, security agreement, lease of real property or
personal property or agreement for financing;
(g) any Contract or arrangement involving a
partnership, joint venture or other cooperative undertaking;
(h) any Contract or arrangement involving any
restrictions with respect to the geographical area of operations
or scope or type of business of Hollis-Eden;
(i) any power of attorney or agency agreement or
arrangement with any Person pursuant to which such Person is
granted the authority to act for or on behalf of Hollis-Eden, or
Hollis-Eden is granted the authority to act for or on behalf of
any Person;
(j) any Contract for which the full performance
thereof may extend beyond 60 days from the date of this
Agreement;
(k) any Contract not made in the ordinary course of
business which is to be performed at or after the date of this
Agreement;
(l) any Contract relating to any acquisition or
disposition of Hollis-Eden, or any acquisition or disposition of
any subsidiary, division, line of business, or Real Property,
during the five years prior to the date of this Agreement; and
(m) any Contract not specified above that is material
to Hollis-Eden.
Hollis-Eden has made available to IAC true and complete copies of
each document listed on Schedule 3.10, and a written description
of -------------
each oral arrangement so listed. Except as disclosed on Schedule
--------
3.10, the cancellation of any such Contracts at any time by the
----
other party, would not have a Hollis-Eden Material Adverse
Effect.
3.11 Insurance. Schedule 3.11 contains an accurate and
--------- -------------
complete list of all policies of fire, liability, workers'
compensation, product liability, professional malpractice, title
and other forms of insurance owned or held by Hollis-Eden, and
Hollis-Eden has heretofore delivered to IAC a true and complete
copy of all such policies. All such policies are in full force
and effect, all premiums with respect thereto covering all
periods up to and including the Closing Date have been, or prior
to the Closing Date, will be, paid, and no notice of cancellation
or termination has been received with respect to any such policy.
Except as set forth in Schedule 3.11, Hollis-Eden has not been
-------------
refused any insurance with respect to its assets or operations,
and its coverage has not been limited by any insurance carrier to
which it has applied for any such insurance or with which it has
carried insurance, during the last two years. Such insurance
policies provide types and amounts of insurance customarily
obtained by businesses similar to the business of Hollis-Eden.
3.12 Employee Benefit Plans. Neither Hollis-Eden nor
----------------------
any other member of the Controlled Group (i) has at any time
maintained, contributed to or participated in, (ii) has or had at
any time any obligation to maintain, contribute to or participate
in, or (iii) has any liability or contingent liability, direct or
indirect, with respect to: any employee benefit plan (within the
meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")), oral or written
retirement or deferred compensation plan, incentive compensation
plan, stock plan, consulting agreement, unemployment compensation
plan, vacation pay plan, severance plan, bonus plan, stock
compensation plan or any other type or form of employee-related
(or independent contractor-related) arrangement, program, policy,
plan or agreement. For purposes of this Agreement, the term
"Controlled Group" shall refer to Hollis-Eden and each other
corporation or other entity under common control with Hollis-Eden
(pursuant to the provisions of Sections 414(b), (c), (m) or (o)
of the Code) at any time during the 60-month period ending on the
Closing Date.
3.13 Employees; Labor Matters. (a) Hollis-Eden has
------------------------
conducted and currently is conducting its business in material
compliance with all Laws relating to employment and employment
practices, terms and conditions of employment, wages and hours
and nondiscrimination in employment. In the opinion of
management, the relationship of Hollis-Eden with its employees is
good and there is, and during the past two years there has been,
no labor strike, dispute, slow-down, work stoppage or other labor
difficulty pending or, to Hollis-Eden's knowledge, threatened
against or involving Hollis-Eden. None of the employees of
Hollis-Eden is covered by any collective bargaining agreement, no
collective bargaining agreement is currently being negotiated and
no attempt is currently being made, or during the past two years
has been made, to organize any employees of Hollis-Eden to form
or enter a labor union or similar organization.
(b) Except as disclosed on balance sheets of Hollis-
Eden forming a part of the Financial Statements or on Schedule
---------
3.13, Hollis-Eden has no material liability for any vacation time,
----
vacation pay, retirement benefits, disability or other insurance
benefits or severance pay attributable to services rendered prior
to the date of each such balance sheet.
3.14 Tax Matters.
-----------
(a) "Taxes", as used in this Agreement, means any
-----
Federal, state, county, local or foreign taxes, charges, fees,
levies, or other assessments, including all net income, gross
income, sales and use, ad valorem, transfer, gains, profits,
excise, franchise, real and personal property, gross receipt,
capital stock, production, business and occupation, disability,
employment, payroll, license, estimated, stamp, custom duties,
severance or withholding taxes or charges imposed by any
Governmental Authority, and includes any interest and penalties
(civil or criminal) on or additions to any such taxes and any
expenses incurred in connection with the determination, settlement
or litigation of any tax liability. "Tax Return", as used in this
----------
Agreement, means a report, return or other information required
to be supplied to a Governmental Authority with respect to Taxes
including, where permitted or required, combined or consolidated
returns for any group of entities that includes Hollis-Eden on
the one hand, or IAC on the other hand.
(b) Hollis-Eden has duly filed all Tax Returns
required to be filed by it under applicable law or filed
appropriate extensions which have not yet expired and will file
all Tax Returns required to be filed by it at or prior to the
Effective Time under applicable law. All Tax Returns were in all
material respects (and, as to Tax Returns not filed as of the
date hereof, will be) true, complete and correct and filed on a
timely basis, or extended as permitted by law.
(c) Hollis-Eden has, within the time and in the
manner prescribed by law, paid (and until the Effective Time will
pay within the time and in the manner prescribed by law) all
Taxes that are currently due and payable except for those
contested in good faith and for which adequate reserves have been
taken.
(d) There are no material Tax liens upon the assets
of Hollis-Eden except liens for Taxes not yet due.
(e) Hollis-Eden has complied (and until the Effective
Time will comply) in all material respects with the provisions of
the Code relating to the payment and withholding of Taxes and
has, within the time and in the manner prescribed by Law,
withheld from employee wages and paid over to the proper
Governmental Authorities all amounts required.
(f) Except as disclosed on Schedule 3.14, no audits or
-------------
other administrative proceedings or court proceedings are
presently pending with regard to any Taxes or Tax Returns of
Hollis-Eden.
(g) Except as disclosed on Schedule 3.14, Hollis-Eden
-------------
has not received any Tax Rulings (as defined below) or entered
into any Closing Agreements (as defined below) with any taxing
authority that would have a continuing adverse effect after the
Effective Time. "Tax Ruling", as used in this Agreement, shall mean
----------
a written ruling of a taxing authority relating to Taxes. "Closing
--------
Agreement", as used in this Agreement, shall mean a written and
---------
legally binding agreement with a taxing authority relating to
Taxes.
(h) Schedule 3.14 contains a list of states,
-------------
territories and jurisdictions (whether foreign or domestic) to
which any Tax is properly payable by Hollis-Eden.
3.15 Environmental Regulations. Hollis-Eden is in
-------------------------
compliance in all material respects with all applicable federal,
state and local laws and regulations governing the environment,
public health and safety and employee health and safety
(including all provisions of the Occupational Safety and Health
Act ("OSHA")) and no charge, complaint, action, suit, proceeding,
hearing, investigation, claim, demand or notice has been filed or
commenced against Hollis-Eden and, to the knowledge of Hollis-
Eden, no such charge, complaint, action, suit, proceeding,
hearing, investigation, claim, demand or notice is pending or
threatened.
3.16 Litigation.
----------
(a) Except as disclosed in Schedule 3.16, there are no
-------------
actions, suits, arbitrations, regulatory proceedings or other
litigation, proceedings or governmental investigations pending
or, to Hollis-Eden's knowledge, threatened against Hollis-Eden or
any of Hollis-Eden's officers or directors in their capacity as
such, or any of their respective properties or businesses, and
Hollis-Eden is not aware of any facts or circumstances which may
reasonably be likely to give rise to any of the foregoing.
Except as set forth on Schedule 3.16, all of the proceedings
-------------
pending against Hollis-Eden are covered and being defended by
insurers (subject to such deductibles as are set forth in such
Schedule). Except as disclosed on Schedule 3.16, Hollis-Eden is not
-------------
subject to any order, judgment, decree, injunction, stipulation or
consent order of or with any court or other Governmental Authority.
Since January 1, 1993, Hollis-Eden has not entered into any
agreement to settle or compromise any proceeding pending or
threatened against it which has involved any obligation for which
Hollis-Eden has any continuing obligation.
(b) There are no claims, actions, suits, proceedings,
or investigations pending or, to Hollis-Eden's knowledge,
threatened by or against Hollis-Eden with respect to this
Agreement or the Certificate of Merger, or in connection with the
transactions contemplated hereby or thereby, and Hollis-Eden has
no reason to believe there is a valid basis for any such claim,
action, suit, proceeding or investigation.
3.17 No Conflict of Interest. Except as disclosed on
-----------------------
Schedule 3.17, to Hollis-Eden's knowledge, none of the stockholders
-------------
of Hollis-Eden has or claims to have any direct or indirect
interest in any tangible or intangible property used in the
business of Hollis-Eden, except as a holder of shares of Hollis-
Eden Common Stock. Except as disclosed on Schedule 3.17, to
-------------
Hollis-Eden's knowledge, none of the stockholders of Hollis-Eden
has any direct or indirect interest in any other Person which
conducts a business similar to, has any Contract or arrangement
with, or does business or is involved in any way with, Hollis-
Eden except for the ownership of less than 1% of the outstanding
stock of any publicly held corporation.
3.18 Bank Accounts. Schedule 3.18 sets forth the names
------------- -------------
and locations of each bank or other financial institution at
which Hollis-Eden has either an account (giving the account
numbers) or safe deposit box and the names of all Persons
authorized to draw thereon or have access thereto, and the names
of all Persons, if any, now holding powers of attorney or
comparable delegation of authority from Hollis-Eden and a summary
statement thereof.
3.19 Compliance with Laws. Except as set forth on
--------------------
Schedule 3.19, Hollis-Eden is not in default under any order of any
-------------
court, Governmental Authority or other agency or arbitration
board or tribunal to which Hollis-Eden is or was subject within
the past two years or in violation of any laws, ordinances,
governmental rules or regulations (including, but not limited to,
those relating to environmental, safety, building, product safety
or health standards or labor or employment matters) to which
Hollis-Eden is or was subject within the past two years, except
to the extent failure to comply would not have a Hollis-Eden
Material Adverse Effect. The business of Hollis-Eden is being,
and at the Closing will be, conducted in compliance with all
applicable laws, ordinances, rules and regulations applicable to
it (including, but not limited to, those relating to
environmental, safety, building, product safety or health
standards or labor or employment matters, except to the extent
failure to comply would not have a Hollis-Eden Material Adverse
Effect).
3.20 Broker's/Finder's Fees. Hollis-Eden retained
----------------------
Laidlaw Equities ("Laidlaw") in connection with the transactions
contemplated by this Agreement and shall issue to Laidlaw
warrants to purchase an aggregate of up to 452,830 shares of
Surviving Corporation Common Stock at an exercise price of $2.48
per share upon the Closing of the Merger as a fee for their
services. IAC does not have, nor shall have, any liability or
otherwise suffer or incur any loss as a result of or in
connection with such fee payable to Laidlaw. Except for Laidlaw,
Hollis-Eden has not used any broker or finder in connection with
the transactions contemplated by this Agreement, and IAC has not
and shall not have any liability or otherwise suffer or incur any
loss as a result of or in connection with any brokerage or
finder's fee or other commission payable as a result of any
actions taken by Hollis-Eden with respect to any broker or finder
in connection with the Merger contemplated by this Agreement.
3.21 Board Recommendation. The Board of Directors of
--------------------
Hollis-Eden, at a special meeting of such Board held on
November 1, 1996, approved this Agreement, the Merger and the
other transactions contemplated hereby on the terms and
conditions set forth herein and has determined to recommend that
the stockholders of Hollis-Eden approve this Agreement and the
Merger.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF IAC
In order to induce Hollis-Eden to enter into this
Agreement and to consummate the transactions, including the
Merger, contemplated hereby, IAC represents and warrants to
Hollis-Eden as of the date of this Agreement and as of the
Closing Date (as if such representations and warranties were
remade on the Closing Date), as follows:
4.1 Due Incorporation. IAC is a corporation duly
-----------------
organized, validly existing and in good standing under the laws
of the State of Delaware with all requisite power and authority
to own, lease and operate its properties and to carry on its
business as they are now being owned, leased, operated and
conducted. IAC, in light of its current operations and
properties, is not required to qualify as a foreign corporation
in any jurisdiction and is not qualified to do business in any
jurisdiction other than its jurisdiction of incorporation. True,
correct and complete copies of the Certificate of Incorporation
and By-laws, as amended, and minutes of meetings (or written
consents in lieu of meetings) of the Board of Directors (and all
committees thereof) and stockholders of IAC have been, or prior
to the Closing Date will have been, delivered to Hollis-Eden.
4.2 Due Authorization. IAC has full power and
-----------------
authority to enter into this Agreement and the Certificate of
Merger and to consummate the transactions contemplated hereby and
thereby. The execution, delivery and performance by IAC of this
Agreement and the Certificate of Merger have been, or, in the
case of the Certificate of Merger, prior to the Closing Date will
be, duly and validly approved and authorized by the Board of
Directors of IAC, and, subject to obtaining the necessary
approval of the Merger by the stockholders of IAC, no other
actions or proceedings on the part of IAC are necessary to
authorize this Agreement, the Certificate of Merger and the
transactions contemplated hereby and thereby. IAC has duly and
validly executed and delivered this Agreement and will duly and
validly execute and deliver the Certificate of Merger. Subject
to obtaining the necessary approval of the stockholders of IAC,
this Agreement constitutes the legal, valid and binding
obligation of IAC, enforceable in accordance with its terms,
except as such enforceability may be limited by applicable
bankruptcy, insolvency, fraudulent transfer, moratorium,
reorganization or other laws from time to time in effect which
affect creditors' rights generally and by general principles of
equity (regardless of whether such enforceability is considered
in a proceeding in equity or at law).
4.3 Consents and Approvals; Non-Contravention.
-----------------------------------------
(a) With the exception of filing the Certificate of
Merger with the appropriate authorities pursuant to the DGCL and
the filing of the Registration Statement (as set forth in Section
5.5), no permit, consent, authorization or approval of, or filing
or registration with, any Governmental Authority or any other
Person not a party to this Agreement is necessary in connection
with the execution, delivery and performance by IAC of this
Agreement or the Certificate of Merger, or the consummation of
the transactions contemplated hereby or thereby.
(b) Except as would not result in an IAC Material
Adverse Effect (as defined in Section 4.6 below), the execution,
delivery and performance by IAC of this Agreement and the
Certificate of Merger do not and will not (A) violate any Law,
(B) violate or conflict with, result in a breach or termination
of, constitute a default (or a circumstance which, with or
without notice or lapse of time or both, would constitute a
default) or give any third party any additional right (including
a termination right) under, permit cancellation of, or result in
the creation of any Lien (except for any Lien for taxes not yet
due and payable) upon any of the assets or properties of IAC
under any contract to which IAC is a party or by which IAC or any
of its assets or properties is bound; (C) permit the acceleration
of the maturity of any indebtedness of IAC or indebtedness
secured by IAC's assets or properties; or (D) violate or conflict
with any provision of the Certificate of Incorporation or By-laws
of IAC.
(c) IAC has obtained and is in compliance with all
Permits that are required for the complete operation of the
business of IAC as currently operated, except for any Permits the
absence of which would not result in an IAC Material Adverse
Effect. All of the Permits are currently valid and in full force
and, to the knowledge of IAC, no revocation, cancellation or
withdrawal thereof has been threatened. IAC has filed such
timely and complete renewal applications as may be required with
respect to the Permits.
4.4 Capitalization.
--------------
(a) The authorized capital stock of IAC consists of
10,000,000 shares of IAC Common Stock and 5,000 shares of
Preferred Stock. On the date hereof, there are issued and
outstanding 833,250 shares of IAC Common Stock and no shares of
Preferred Stock. All of the issued and outstanding shares of IAC
Common Stock are validly issued, fully paid and nonassessable and
the issuance thereof was not subject to preemptive rights.
(b) Except as set forth on Schedule 4.4, there are no
------------
shares of IAC Common Stock or other equity securities (whether or
not such securities have voting rights) of IAC issued or
outstanding or any subscriptions, options, warrants, call rights,
convertible securities or other agreements or commitments of any
character obligating IAC to issue, transfer or sell any shares of
capital stock or other securities (whether or not such securities
have voting rights) of IAC. Except as set forth on Schedule 4.4,
------------
there are no outstanding contractual obligations of IAC which
relate to the purchase, sale, issuance, repurchase, redemption,
acquisition, transfer, disposition, holding or voting of any
shares of capital stock or other securities of IAC. Except as
set forth on Schedule 4.4, all of the warrants listed on Schedule
------------ --------
4.4 redeemable by IAC, subject only to the prior consummation by IAC
---
of a "business combination" (as defined in such warrants) and the
occurrence of certain trading prices of the IAC Common Stock at
the prices and for the periods described in such warrants.
4.5 Financial Statements; Undisclosed Liabilities;
-----------------------------------------------
Other Documents. For purposes of this Agreement, "IAC Financial
---------------
Statements" shall mean the audited financial statements of IAC as
of December 31, 1995 and December 31, 1994 and the unaudited
financial statements of IAC as of June 30, 1996 (including all
notes thereto) which have been previously delivered to Hollis-
Eden, consisting of the balance sheets at such dates and, with
respect to the audited IAC Financial Statements, the related
statements of income and cash flow for each of the twelve-month
periods ended December 31, 1995 and December 31, 1994, and with
respect to the unaudited IAC Financial Statements, the related
statements of income and cash flow for the six-month period ended
June 30, 1996. The IAC Financial Statements have been prepared
in accordance with GAAP consistently applied and present fairly
the financial position, assets and liabilities of IAC as at the
dates thereof and the revenues, expenses, results of operations
and cash flows of IAC for the periods covered then ended
(subject, in the case of the unaudited interim IAC Financial
Statements to normal year-end audit adjustments consistent with
past practice). The IAC Financial Statements are in accordance
with the books and records of IAC, do not reflect any
transactions which are not bona fide transactions and do not
contain any untrue statement of a material fact or omit to state
any material fact necessary to make the statements contained
therein, in light of the circumstances in which they were made,
not misleading. The IAC Financial Statements make full and
adequate disclosure of, and provision for, all obligations and
liabilities of IAC as of the date thereof.
4.6 No Adverse Effects or Changes. Except as disclosed
-----------------------------
in or reflected in the IAC Financial Statements, or as
contemplated by this Agreement or the Certificate of Merger,
since June 30, 1996, IAC has not (i) taken any of the actions set
forth in Section 5.3, (ii) suffered any IAC Material Adverse
Effect, (iii) suffered any damage, destruction or Loss to any of
its assets or properties (whether or not covered by insurance),
or (iv) increased the compensation of any executive officer of
IAC. For purposes of this Agreement, "IAC Material Adverse
Effect" shall mean an effect on the business, operations, assets,
liabilities, results of operations, cash flows, condition
(financial or otherwise) or prospects of IAC which is materially
adverse to IAC.
4.7 Title to Properties. IAC (i) has good and
-------------------
marketable title to, and is the lawful owner of, all of the
tangible and intangible assets, properties and rights reflected
in the IAC Financial Statements and (ii) at the Effective Time
will have good and marketable title to, and will be the lawful
owner of, all of such tangible and intangible assets, properties
and rights, in any case free and clear of any Lien, except for
(x) any Lien for current taxes not yet due and payable, and (y)
minor Liens that have arisen in the ordinary course of business
and that do not (in any case or in the aggregate) materially
detract from the value of the assets subject thereto or
materially impair the operations of IAC.
4.8 Liabilities. Except to the extent reflected or
-----------
reserved against on the balance sheets of IAC constituting a part
of the IAC Financial Statements, IAC has no debts, liabilities or
obligations of any nature other than liabilities incurred
subsequent to the date of such balance sheets in the ordinary
course of IAC's business.
4.9 Real Property. IAC does not have, and at the
-------------
Closing Date will not have, any Real Property.
4.10 Intellectual Property. Schedule 4.10 is a true and
--------------------- -------------
complete list of all Intellectual Property used by IAC in the
conduct of its business. Except as disclosed on Schedule 4.10:
-------------
(a) all of the Intellectual Property is owned by IAC
free and clear of all Liens, and is not subject to any license,
royalty or other agreement;
(b) none of the Intellectual Property has been or is
the subject of any pending or, to the best of knowledge of IAC,
threatened litigation or claim of infringement;
(c) no license or royalty agreement to which IAC is a
party is in breach or default by IAC or, to IAC's knowledge, any
other party thereto or the subject of any notice of termination
given or threatened;
(d) the services provided by IAC and any process,
method, part, design or material it employs, do not, to IAC's
knowledge, infringe any trademark, service mark, trade name,
copyright, trade secret, patent or confidential or proprietary
rights of another, and IAC has not received any notice contesting
its right to use any Intellectual Property;
(e) IAC has not granted any license or agreed to pay
or receive any royalty in respect of any Intellectual Property;
and
(f) IAC owns or possesses adequate rights in
perpetuity in and to all Intellectual Property necessary to
conduct its business as presently conducted.
4.11 Contracts. Schedule 4.11 lists all the material
--------- -------------
Contracts and arrangements of the following types to which IAC is
a party or by which it is bound, or to which any of its assets or
properties is subject:
(a) any collective bargaining agreement;
(b) any Contract or arrangement of any kind with any
employee, consultant, medical advisor, officer or director of
IAC;
(c) any Contract or arrangement with a sales
representative, manufacturer's representative, distributor,
dealer, broker, sales agency, advertising agency or other Person
engaged in sales, distributing or promotional activities, or any
Contract to act as one of the foregoing, on behalf of any Person;
(d) any Contract or arrangement of any nature which
involves the payment or receipt of cash or other property, an
unperformed commitment, or goods or services, having a value in
excess of $10,000;
(e) any Contract or arrangement pursuant to which IAC
has made or will make loans or advances, or has or will have
incurred debts or become a guarantor or surety or pledged its
credit on or otherwise become responsible with respect to any
undertaking of another (except for the negotiation or collection
of negotiable instruments in transactions in the ordinary course
of business);
(f) any indenture, credit agreement, loan agreement,
note, mortgage, security agreement, lease of real property or
personal property or agreement for financing;
(g) any Contract or arrangement involving a
partnership, joint venture or other cooperative undertaking;
(h) any Contract or arrangement involving any
restrictions with respect to the geographical area of operations
or scope or type of business of IAC;
(i) any power of attorney or agency agreement or
arrangement with any Person pursuant to which such Person is
granted the authority to act for or on behalf of IAC, or IAC is
granted the authority to act for or on behalf of any Person;
(j) any Contract for which the full performance
thereof may extend beyond 60 days from the date of this
Agreement;
(k) any Contract not made in the ordinary course of
business which is to be performed at or after the date of this
Agreement;
(l) any Contract relating to any acquisition or
disposition of IAC, or any acquisition or disposition of any
subsidiary, division, line of business, or Real Property, during
the five years prior to the date of this Agreement; and
(m) any Contract not specified above that is material
to IAC.
IAC has made available to Hollis-Eden true and complete copies of
each document listed on Schedule 4.11, and a written description
-------------
of each oral arrangement so listed. The cancellation of any such
Contracts at any time by the other party would not have an IAC
Material Adverse Effect.
4.12 Employee Benefit Plans.
----------------------
IAC has no employee benefit plan other than the
contemplated IAC Employee Stock Option Plan referenced in Section
1.7(a)(iii)(1) above.
4.13 Tax Matters.
-----------
(a) IAC has duly filed all Tax Returns required to be
filed by it under applicable law or filed appropriate extensions
which have not yet expired and will file all Tax Returns required
to be filed by it at or prior to the Effective Time under
applicable law. All Tax Returns were in all material respects
(and, as to Tax Returns not filed as of the date hereof, will be)
true, complete and correct and filed on a timely basis or
extended as permitted by law.
(b) IAC has, within the time and in the manner
prescribed by law, paid (and until the Effective Time will pay
within the time and in the manner prescribed by law) all Taxes
that are currently due and payable except for those contested in
good faith and for which adequate reserves have been taken.
(c) There are no material Tax liens upon the assets
of IAC except liens for Taxes not yet due.
(d) IAC has complied (and until the Effective Time
will comply) in all respects with the provisions of the Code
relating to the payment and withholding of Taxes, including,
without limitation, the withholding and reporting requirements
under Code Sections 1441 through 1464, 3401 through 3606, 6041
and 6049, as well as similar provisions under any other Laws, and
has, within the time and in the manner prescribed by Law,
withheld from employee wages and paid over to the proper
Governmental Authorities all amounts required.
(e) No audits or other administrative proceedings or
court proceedings are presently pending with regard to any Taxes
or Tax Returns of IAC.
(f) IAC has not received any Tax Rulings or entered
into any Closing Agreements with any taxing authority that would
have a continuing adverse effect after the Effective Time.
(g) As soon as practicable after the Closing Date,
IAC will make available to Hollis-Eden complete and accurate
copies of (i) all Tax Returns, and any amendments thereto, filed
by IAC, (ii) all audit reports received from any taxing authority
relating to any Tax Return filed by IAC and (iii) any Closing
Agreements entered into by IAC with any taxing authority.
(h) The United States government (with respect to
United States Federal income taxes) and Delaware (with respect to
Delaware franchise taxes) are the only states, territories and
jurisdictions (whether foreign or domestic) to which any Tax is
properly payable by IAC.
4.14 Litigation.
----------
(a) There are no actions, suits, arbitrations,
regulatory proceedings or other litigation, proceedings or
governmental investigations pending or, to IAC's knowledge,
threatened against IAC or any of the officers or directors of IAC
in their capacity as such, or any of their respective properties
or businesses, and IAC is not aware of any facts or circumstances
which may give rise to any of the foregoing. IAC is not subject
to any order, judgment, decree, injunction, stipulation or
consent order of or with any court or other Governmental
Authority. Since January 1, 1993, IAC has not entered into any
agreement to settle or compromise any proceeding pending or
threatened against it which has involved any obligation for which
IAC has any continuing obligation.
(b) There are no claims, actions, suits, proceedings,
or investigations pending or, to IAC's knowledge, threatened by
or against IAC with respect to this Agreement or the Certificate
of Merger, or in connection with the transactions contemplated
hereby or thereby, and IAC has no reason to believe there is a
valid basis for any such claim, action, suit, proceeding or
investigation.
4.15 No Conflict of Interest. Except as disclosed on
-----------------------
Schedule 4.15, to IAC's knowledge, none of the stockholders of IAC
-------------
has or claims to have any direct or indirect interest in any
tangible or intangible property used in the business of IAC,
except as a holder of shares of IAC Common Stock. Except as
disclosed on Schedule 4.15, to IAC's knowledge, none of the
--------------
stockholders of IAC has any direct or indirect interest in any
other Person which conducts a business similar to, has any Contract
or arrangement with, or does business or is involved in any way with,
IAC except for the ownership of less than 1% of the outstanding stock
of any publicly held corporation.
4.16 Bank Accounts. Schedule 4.16 sets forth the names
------------- -------------
and locations of each bank or other financial institution at
which IAC has either an account (giving the account numbers) or
safe deposit box and the names of all Persons authorized to draw
thereon or have access thereto, and the names of all Persons, if
any, now holding powers of attorney or comparable delegation of
authority from IAC and a summary statement thereof.
4.17 Compliance with Laws. IAC is not in default under
--------------------
any order of any court, Governmental Authority or other agency or
arbitration board or tribunal to which IAC is or was subject
within the past two years or in violation of any laws,
ordinances, governmental rules or regulations (including, but not
limited to, those relating to environmental, safety, building,
product safety or health standards or labor or employment
matters) to which IAC is or was subject within the past two
years, except to the extent failure to comply would not have an
IAC Material Adverse Effect. The business of IAC is being, and
at the Closing will be, conducted in compliance with all
applicable laws, ordinances, rules and regulations applicable to
it (including, but not limited to, those relating to
environmental, safety, building, product safety or health
standards or labor or employment matters), except to the extent
failure to comply would not have an IAC Material Adverse Effect.
4.18 Broker's/Finder's Fees. IAC retained Gruntal &
----------------------
Co., Incorporated ("Gruntal") in connection with the transactions
contemplated by this Agreement and shall pay to Gruntal 50,000
shares of Surviving Corporation Common Stock as a fee for their
services. Hollis-Eden does not have, nor shall have, any
liability or otherwise suffer or incur any loss as a result of or
in connection with such fee payable to Gruntal.
Except for Gruntal, IAC has not used any broker or
finder in connection with the transactions contemplated by this
Agreement, and Hollis-Eden has not and shall not have any
liability or otherwise suffer or incur any loss as a result of or
in connection with any brokerage or finder's or other commission
payable as a result of any actions taken by IAC with respect to
any broker or finder in connection with the Merger contemplated
by this Agreement.
4.19 Board Recommendation. The Board of Directors of
--------------------
IAC, at a special meeting of such Board held on November 1, 1996,
approved this Agreement, the Merger and the other transactions
contemplated hereby on the terms and conditions set forth herein
and has determined to recommend that the stockholders of IAC
approve this Agreement and the Merger (subject to the fiduciary
duty of the Board of Directors under applicable law).
4.20 Employee Matters. With the exception of Salvatore
----------------
J. Zizza, President of IAC, IAC does not presently have any
employees and will not have any employees from the date hereof to
the Effective Time. IAC is not a party to any employment
agreement or consulting or similar agreement for the present or
future provision of services to IAC. IAC has conducted and
currently is conducting its business in material compliance with
all Laws relating to employment and employment practices, terms
and conditions of employment, wages and hours and
nondiscrimination in employment. IAC has no liability for any
vacation pay, vacation time, retirement benefits, health,
disability or other insurance benefits or severance pay.
4.21 SEC Filings. IAC has heretofore delivered to
-----------
Hollis-Eden all registrations statements filed with the
Securities and Exchange Commission ("SEC"), its most recent Form
10-K for the fiscal year ended December 31, 1995 and all
intervening Form 8-K's, Form 10-Q's, proxy statements and other
documents together with all exhibits thereto, as filed with the
SEC (the "SEC Filings"). The SEC Filings were timely filed with
the SEC and do not contain a misstatement of a material fact or
an omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading as of the
time such documents were filed. No other document or report has
been required to be filed by IAC with the SEC which has not been
filed and, with the exception of the consummation of the Merger,
no event or transaction has occurred or is contemplated which
will hereafter be required to be disclosed by the Company in a
Form 10-K, Form 10-Q, Form 8-K or similar filing. IAC shall
cause to be filed all periodic and current reports required to be
filed with the SEC for all periods after execution of the
Agreement through the Closing Date.
ARTICLE V
COVENANTS
5.1 Implementing Agreement. Subject to the terms and
----------------------
conditions hereof, each party hereto shall use its best effort to
take all action required of it to fulfill its obligations under
the terms of this Agreement and the Certificate of Merger and to
facilitate the consummation of the transactions contemplated
hereby and thereby.
5.2 Access to Information and Facilities. (a) From and
------------------------------------
after the date of this Agreement, Hollis-Eden shall allow IAC and
its representatives access during normal business hours to all of
the facilities, properties, books, Contracts, commitments and
records of Hollis-Eden and shall make the officers and employees
of Hollis-Eden available to IAC and its representatives as IAC or
its representatives shall from time to time reasonably request.
IAC and its representatives will be furnished with any and all
information concerning Hollis-Eden which IAC or its
representatives reasonably request.
(b) From and after the date of this Agreement, IAC
shall give Hollis-Eden and its representatives access during
normal business hours to all of the facilities, properties,
books, Contracts, commitments and records of IAC and shall make
the officers and employees of IAC available to Hollis-Eden and
its representatives as Hollis-Eden or its representatives shall
from time to time reasonably request. Hollis-Eden and its
representatives will be furnished with any and all information
concerning IAC which Hollis-Eden or its representatives
reasonably request.
5.3 Preservation of Business. From the date of this
------------------------
Agreement until the Closing Date, each of Hollis-Eden and IAC, as
the case may be, shall operate only in the ordinary and usual
course of business consistent with past practice, and shall use
reasonable commercial efforts to (a) preserve intact the present
business organization of Hollis-Eden and IAC, as the case may be,
(b) preserve the good will and advantageous relationships of
Hollis-Eden and IAC, as the case may be, with employees and other
Persons material to the operation of their respective businesses,
and (c) not permit any action or omission within its control
which would cause any of the representations or warranties of
Hollis-Eden and IAC, as the case may be, contained herein to
become inaccurate in any material respect or any of the covenants
of Hollis-Eden and IAC, as the case may be, to be breached in any
material respect. Without limiting the generality of the
foregoing, except as set forth on Schedule 3.6 with respect to
-------------
Hollis-Eden, and Schedule 4.6 with respect to IAC, prior to the
-------------
Closing, neither Hollis-Eden nor IAC will, without having
obtained the prior written consent of the other:
(i) incur any obligation or enter into any Contract
which either (x) requires a payment by any party
in excess of, or a series of payments which in
the aggregate exceed, $10,000 or provides for the
delivery of goods or performance of services, or
any combination thereof, having a value in excess
of $10,000, or (y) has a term of, or requires the
performance of any obligations by Hollis-Eden or
IAC, as the case may be, over a period in excess
of, six months;
(ii) take any action, or enter into or authorize any
Contract or transaction other than in the
ordinary course of business and consistent with
past practice;
(iii) as applicable, sell, transfer, convey, assign or
otherwise dispose of any of its assets or
properties, except in the ordinary course of
business;
(iv) waive, release or cancel any claims against third
parties or debts owing to it, or any rights which
have any value in an amount greater than $10,000
other than actions taken consistent with normal
past business practices;
(v) make any changes in its accounting systems,
policies, principles or practices;
(vi) authorize for issuance, issue, sell, deliver or
agree or commit to issue, sell or deliver
(whether through the issuance or granting of
options, warrants, convertible or exchangeable
securities, commitments, subscriptions, rights to
purchase or otherwise) any shares of its capital
stock or any other securities, or amend any of
the terms of any such securities;
(vii) split, combine, or reclassify any shares of its
capital stock, declare, set aside or pay any
dividend or other distribution (whether in cash,
stock or property or any combination thereof) in
respect of its capital stock, or redeem or
otherwise acquire any of its securities;
(viii) make any borrowings, incur any debt (other than
trade payables in the ordinary course of business
or equipment leases entered into in the ordinary
course of business), or assume, guarantee,
endorse or otherwise become liable (whether
directly, contingently or otherwise) for the
obligations of any other Person other than a
subsidiary, or make any unscheduled payment or
repayment of principal in respect of any Long
Term Debt. "Long Term Debt" shall mean the
aggregate original principal amount (less any
cash repayments of principal previously made) of,
and any and all accrued interest on, all
indebtedness with respect to borrowed money and
all other obligations (or series of related
obligations) to pay money with respect to
extensions of credit, including capitalized lease
and deferred compensation obligations, except
indebtedness or obligations for which all
installments are payable within six months from
the date of the advancement of funds or extension
of credit. The term "Long Term Debt" shall
include any amount listed or to be listed as a
current liability on financial statements which
reflects the current portion or final
installments of obligations originally reflected
as noncurrent liabilities;
(ix) make any new loans, advances or capital
contributions to, or new investments in, any
other Person other than to a subsidiary
consistent with normal business practices;
(x) except as contemplated by this Agreement, enter
into, adopt, amend or terminate any bonus, profit
sharing, compensation, termination, stock option,
stock appreciation right, restricted stock,
performance unit, pension, retirement, deferred
compensation, employment, severance or other
employee benefit agreements, trusts, plans, funds
or other arrangements for the benefit or welfare
of any director, officer or employee, or increase
in any manner the compensation or fringe benefits
of any director, officer or employee or pay any
benefit not required by any existing plan and
arrangement or enter into any contract,
agreement, commitment or arrangement to do any of
the foregoing other than actions taken in the
ordinary course of business consistent with prior
business practices;
(xi) except for capital expenditures contemplated by
(xii) below, acquire, lease or encumber any
assets outside the ordinary course of business or
any assets which are material to its operations;
(xii) authorize or make any capital expenditures which
individually or in the aggregate are in excess of
$10,000 other than planned expenditures for the
development, establishment or expansion of
clinics and other operations consistent with past
business practices;
(xiii) make any Tax election or settle or compromise any
federal, state, local or foreign income Tax
liability, or waive or extend the statute of
limitations in respect of any such Taxes;
(xiv) pay or agree to pay any amount in settlement or
compromise of any suits or claims of liability
against it or its directors, officers, employees
or agents in an amount more than $10,000; or
(xv) terminate, modify, amend or otherwise alter or
change any of the terms or provisions of any
Contract other than in accordance with ordinary
business practices, or pay any amount not
required by Law or by any Contract in an amount
more than $10,000.
5.4 IAC and Hollis-Eden Stockholders' Meetings.
------------------------------------------
(a) IAC, promptly following the execution of this
Agreement, shall call a meeting of stockholders (the "IAC
Stockholders' Meeting") to be held as promptly as practicable
following the declaration of effectiveness by the SEC of the
Registration Statement (as defined below) at IAC's principal
executive offices, for the purpose, among others, of voting on
the Merger contemplated herein and to approve the creation of the
IAC Employee Stock Option Plan. In connection with the IAC
Stockholders' Meeting, IAC shall promptly prepare and file with
the SEC, as part of IAC's Registration Statement on Form S-4 with
respect to the Merger (the "Registration Statement"), a joint
proxy statement/prospectus (the "Joint Proxy Statement") for
dissemination to each holder of shares of IAC Common Stock. IAC
shall promptly amend or supplement the Registration Statement to
the extent necessary in order to make the statements therein not
misleading. IAC shall use its reasonable, good faith efforts to
have the Registration Statement declared effective by the SEC
under the provisions of the Securities Act of 1933, as amended
(the "Act"). IAC shall provide Hollis-Eden with copies of all
filings made pursuant to this Section 5.4 and shall consult with
Hollis-Eden on responses to any comments made by the staff of the
SEC with respect thereto.
(b) Hollis-Eden, promptly following the execution of
this Agreement, shall call a meeting of stockholders (the
"Hollis-Eden Stockholders' Meeting" and, together with the IAC
Stockholders' Meeting, the "Meetings") to be held as promptly as
practicable following the declaration of effectiveness by the SEC
of the Registration Statement at Hollis-Eden's principal
executive offices, for the purpose, among others, of voting on
the Merger contemplated herein. In connection with the Hollis-
Eden Stockholders' Meeting, Hollis-Eden shall disseminate to each
holder of shares of Hollis-Eden Common Stock for his or its
information a copy of the Joint Proxy Statement. Hollis-Eden
shall cause its representatives to cooperate with IAC and its
representatives in connection with the preparation and filing
with the SEC of the Registration Statement.
5.5 Registration of IAC Common Stock. (a) As soon as
--------------------------------
practicable after the execution of this Agreement, IAC shall file
the Registration Statement with the SEC for the purpose of
registering the shares of Surviving Corporation Common Stock and
Surviving Corporation Warrants for distribution to Hollis-Eden's
stockholders and warrantholders in the Merger.
(b) The information specifically designated as being
supplied by IAC for inclusion in the Registration Statement shall
not, at the time the Registration Statement is declared
effective, at the time the Joint Proxy Statement is first mailed
to Hollis-Eden and IAC stockholders, at the time of the Meetings
and on the Effective Date, contain any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements
therein, not misleading.
(c) The information specifically designated as being
supplied by Hollis-Eden for inclusion in the Registration
Statement shall not, at the time the Registration Statement is
declared effective, at the time the Joint Proxy Statement is
first mailed to Hollis-Eden and IAC stockholders, at the time of
the Meetings and on the Effective Date, contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein, not misleading.
(d) If, at any time prior to the Effective Date, any
event or circumstance relating to IAC or its officers or
directors should be discovered by IAC which should be set forth
in an amendment to the Registration Statement or a supplement to
the Joint Proxy Statement, IAC shall promptly inform Hollis-Eden
and IAC shall promptly file such amendment to the Registration
Statement.
(e) If, at any time prior to the Effective Date, any
event or circumstance relating to Hollis-Eden or its officers or
directors should be discovered by Hollis-Eden which should be set
forth in a supplement to the Joint Proxy Statement, Hollis-Eden
shall promptly inform IAC of the same, and IAC shall promptly
file such supplement to the Joint Proxy Statement.
(f) All documents that IAC is responsible for filing
with the SEC in connection with the transactions contemplated
herein will comply as to form and substance in all material
respects with the applicable requirements of the Act and the
rules and regulations thereunder and the Securities Exchange Act
of 1934, as amended, and the rules and regulations thereunder.
(g) Hollis-Eden shall cooperate and use its best
efforts to supply IAC with all requisite information necessary to
complete the Registration Statement, including, but not limited
to, information relative to proxy solicitation of Hollis-Eden's
stockholders for approval of the Merger contemplated herein.
5.6 Agreement to Vote. (a) Hollis, Chairman of the
-----------------
Board of Hollis-Eden, shall vote all shares of Hollis-Eden Common
Stock owned by him in favor of the Merger contemplated herein and
use his best efforts to cause the other holders of shares of
Hollis-Eden Common Stock to vote their shares in favor of the
Merger.
(b) Zizza, Chairman of the Board of IAC, shall vote
all shares of IAC Common Stock owned by him in favor of the
Merger contemplated herein and use his best efforts to cause the
other holders of shares of IAC Common Stock to vote their shares
in favor of the Merger.
5.7 Blue Sky Compliance. IAC shall use its best efforts
-------------------
to qualify the shares of Surviving Corporation Common Stock to be
issued pursuant to the Merger under the securities or "blue sky"
laws of every jurisdiction of the United States in which a
Hollis-Eden stockholder has an address on the records of Hollis-
Eden on the record date for determining the Hollis-Eden
stockholders entitled to notice of and to vote on the Merger,
except any such jurisdiction with respect to which counsel for
IAC has determined that such qualification is not required under
the securities or "blue sky" laws of such jurisdiction.
5.8 Listing. IAC shall use its best efforts to cause
-------
the shares of Surviving Corporation Common Stock to be issued
pursuant to the Merger to be listed on the Nasdaq National Market
System at the Effective Time, free of restrictions on transfer
other than restrictions pursuant to Rule 144 and Rule 145
promulgated under the Act.
5.9 Consents and Approvals.
----------------------
(a) Hollis-Eden shall use reasonable commercial
efforts to obtain all consents, approvals, certificates and other
documents required in connection with the performance by it of
this Agreement and the consummation of the transactions
contemplated hereby, including all such consents and approvals by
each party to any of the Contracts referred to on Schedule 3.3.
------------
Hollis-Eden shall make all filings, applications, statements and
reports to all Governmental Authorities and other Persons which
are required to be made prior to the Closing Date by or on behalf
of Hollis-Eden pursuant to any applicable Law or Contract in
connection with this Agreement and the transactions contemplated
hereby.
(b) IAC shall use reasonable commercial efforts
to obtain all consents, approvals, certificates and other
documents required in connection with the performance by it of
this Agreement and the consummation of the transactions
contemplated hereby. IAC shall make all filings, applications,
statements and reports to all Governmental Authorities and other
Persons which are required to be made prior to the Closing Date
by or on behalf of IAC pursuant to any applicable Law or Contract
in connection with this Agreement and the transactions
contemplated hereby.
5.10 Maintenance of Insurance. Hollis-Eden shall
------------------------
continue to carry its existing insurance, and shall not allow any
breach, default, termination or cancellation of such insurance
policies or agreements to occur or exist.
5.11 Supplemental Information. From time to time prior
------------------------
to the Closing, Hollis-Eden, on the one hand, and IAC, on the
other hand, will promptly disclose in writing to the other any
matter hereafter arising which, if existing, occurring or known
at the date of this Agreement would have been required to be
disclosed to the other parties hereto or which would render
inaccurate any of the representations, warranties or statements
set forth in Articles III and IV, respectively, hereof.
Disclosure of supplemental information pursuant to this Section
5.11 shall insulate the party disclosing such information from a
claim by the other parties hereto of a breach of representation
with respect to such disclosed information.
5.12 Hollis-Eden Lock-Up Letters. Hollis-Eden shall use
---------------------------
reasonable commercial efforts to obtain signed letters from as
many Hollis-Eden stockholders as possible, which letters shall
acknowledge such Hollis-Eden stockholders' agreement not to sell
any shares of Surviving Corporation Common Stock to be issued to
them in, and as a result of, the Merger, for the nine-month
period immediately following the Effective Time.
5.13 Patent Analyses. (a) Within 45 days hereof, IAC, at
---------------
its option and at its own expense, shall cause to be undertaken
and completed by intellectual property counsel selected by IAC
(or such counsel's representatives) (collectively, "IAC
Counsel"), a patent infringement investigation including a search
and an analysis (the "Patent Infringement Analysis") to determine
whether, under the U.S. and Canadian Patent Laws then in
existence, the manufacture, use, offer for sale or sale of any of
Hollis-Eden's products set forth on Schedule 5.13 infringes one
--------------
or more claims of any unexpired United States or Canadian patent
("Third-Party Patent"). In the event as a result of the Patent
Infringement Analysis it is the opinion of IAC Counsel that one or
more claims of Third-Party Patents are infringed, IAC Counsel shall
within 45 days thereafter cause to be conducted and completed
a patent validity investigation to determine whether in the
opinion of IAC
Counsel each of such infringed Third-Party Patent claims is valid
and enforceable (the "Patent Validity Analysis"). The final
opinion of IAC Counsel after completing said Patent Infringement
Analysis and, if necessary, said Patent Validity Analysis, shall
include an opinion as to whether any finding of patent
infringement by IAC Counsel will have an "unavoidable" Hollis-
Eden Material Adverse Effect upon the products set forth on
Schedule 5.13. In construing the term "unavoidable" as used in
--------------
this Section, the parties understand and agree that, by way of
example, in the event it is the opinion of IAC Counsel that
there is infringement of one or more valid claims of a
Third-Party Patent, but that it is demonstrated to the good
faith reasonable satisfaction of IAC Counsel that either
(i) a license is available to Hollis-Eden under such infringed
Third-Party Patent, or (ii) that a non-infringing commercial
alternative is available to Hollis-Eden to enable it to avoid
liability for patent infringement, the existence of either of
such Hollis-Eden options (i) or (ii) shall be construed as
satisfying the condition under this Section that liability for
such patent infringement can be "avoided" by Hollis-Eden. IAC
shall, reasonably promptly after receipt of the aforesaid
completed Patent Infringement Analysis and, if completed, the
Patent Validity Analysis, provide to Hollis-Eden a copy of same.
Moreover, IAC shall provide to Hollis-Eden copies of all
documents pertinent to IAC Counsel's said analyses as they are
received, including, without limitation, the results of IAC
Counsel's prior art search and analysis, its file history
analysis, and a detailed claim chart for each claim identified by
IAC Counsel as being infringed, together with all related
documents, in order to permit H-E Counsel (as defined below) to
(a) evaluate same prior to the final opinion of IAC Counsel and
(b) to have an opportunity prior to said IAC Counsel final
opinion to either obtain a license under each infringed Third-
Party Patent and/or provide to IAC Counsel for consideration one
or more non-infringing alternatives which will render the patent
infringement "avoidable". IAC Counsel shall within 15 business
days after receipt of same and all supporting documents, evaluate
each such Hollis-Eden proposed non-infringing alternative with a
view toward confirming or revising IAC Counsel's final opinion.
(b) In the event, in the final opinion of IAC Counsel, there
is an "unavoidable" Hollis-Eden Material Adverse Effect upon the
products set forth on Schedule 5.13 as a result of infringement of
-------------
a Third-Party Patent, then within 45 days after receipt of such
IAC Counsel final opinion Hollis-Eden, at its option and at its
own expense, shall cause to be undertaken and completed by
intellectual property counsel selected by Hollis-Eden (or such
counsel's representatives) (collectively "H-E Counsel"), its own
like patent infringement and patent validity investigations, to
determine whether H-E Counsel is in agreement with the opinion of
IAC Counsel. Hollis-Eden shall reasonably promptly after receipt
of the aforesaid completed H-E Counsel analyses provide to IAC a
copy of same, including, without limitation, the results of H-E
Counsel's prior art search and analysis, its file history
analysis, and a detailed claim chart for each claim identified by
IAC Counsel as being infringed, together with all related
documents. Furthermore, Hollis-Eden shall provide to IAC a copy
of documents pertinent to H-E Counsel's said analyses as they are
received, in order to permit IAC Counsel to evaluate same prior
to the final opinion of H-E Counsel.
(c) In the event the final opinions IAC Counsel and H-E
Counsel reach opposite conclusions, the parties shall in good
faith select independent intellectual property counsel with at
least ten years of first chair patent trial experience and from
an intellectual property boutique with an "av" Martindale Hubbell
rating ("Independent Counsel"). Such Independent Counsel shall
be retained by and at the shared (50% each) expense of the
parties for the purpose of providing an independent opinion as to
whether there is a reasonably strong likelihood that, under the
U.S. and Canadian Patent Laws then in existence, the manufacture,
use, offer for sale or sale of any of Hollis-Eden's products set
forth on Schedule 5.13 will infringe one or more claims of a
------------
Third-Party Patent, and whether such infringement will in the
opinion of Independent Counsel have an "unavoidable" Hollis-Eden
Material Adverse Effect upon said products. Independent Counsel,
upon being retained, shall be provided with both (i) a copy of
the final opinions of IAC Counsel and H-E Counsel (together with
supporting documents) and (ii) an opportunity for each of IAC
Counsel and H-E Counsel to be heard. The independent opinion
of Independent Counsel shall be final and shall be binding upon
IAC and Hollis-Eden.
(d) As soon as possible following the execution of this
Agreement, Hollis-Eden shall deliver, or cause to be delivered,
to IAC all documentation in the possession of Hollis-Eden and
Hollis-Eden's attorneys and other representatives regarding
Hollis-Eden's licensed Intellectual Property.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS
OF IAC
The obligations of IAC under this Agreement are subject
to the satisfaction or waiver by IAC of the following conditions
precedent on or before the Closing Date:
6.1 Warranties True as of Both Present Date and Closing
--------------------------------------------------
Date. The representations and warranties of Hollis-Eden contained
----
herein shall be true and correct in all material respects on and
as of the date of this Agreement, and shall also be true and
correct in all material respects on and as of the Closing Date
with the same force and effect as though made on and as of the
Closing Date.
6.2 Compliance With Agreements and Covenants. Hollis-
----------------------------------------
Eden shall have performed and complied with all of its covenants,
obligations and agreements contained in this Agreement to be
performed and complied with by it on or prior to the Closing
Date.
6.3 Consents and Approvals. IAC, on the one hand, and
----------------------
Hollis-Eden, on the other hand, shall have received written
evidence satisfactory to them that all consents and approvals
required for the consummation of the transactions contemplated
hereby have been obtained, and all required filings have been
made, including (without limitation) those set forth on Schedule 3.3
------------
hereto.
6.4 Documents. IAC shall have received all of the
---------
agreements, documents and items specified in Section 8.1 below.
6.5 No Material Adverse Change. Since the date hereof,
--------------------------
no "Material Adverse Change to Hollis-Eden" shall have occurred.
Material Adverse Change to Hollis-Eden shall mean a change in the
business, operations, assets, liabilities, results of operations,
cash flows, condition (financial or otherwise) or prospects of
Hollis-Eden which is materially adverse to Hollis-Eden.
6.6 Actions or Proceedings. No action or proceeding by
----------------------
any Governmental Authority or other Person shall have been
instituted or threatened which (a) is likely to have a Hollis-
Eden Material Adverse Effect, or (b) could enjoin, restrain or
prohibit, or could result in substantial damages in respect of,
any provision of this Agreement or the consummation of the
transactions contemplated hereby.
6.7 Opinion of Counsel for Hollis-Eden. IAC shall have
----------------------------------
received the opinion of Cooley Godward LLP, counsel for Hollis-
Eden, substantially in the form annexed hereto as Exhibit B.
6.8 Approval of Merger. The stockholders of Hollis-Eden
-------------------
and IAC shall have approved this Agreement and the Merger
contemplated hereby in accordance with their respective charters
and by-laws and the DGCL and, with respect to IAC, in the manner
set forth in IAC's Prospectus dated May 15, 1995 (the
"Prospectus").
6.9 IAC Redemption Right. The Solicited Stockholders
--------------------
holding 15% or more of the shares of IAC Common Stock shall not
have exercised their Redemption Rights in accordance with the
Prospectus.
6.10 Patent Infringement and Patent Validity Analyses.
------------------------------------------------
The Patent Infringement Analysis and, if necessary, the Patent
Validity Analysis, contemplated in Section 5.13 above, and, if
given, the final opinion of Independent Counsel (which final
opinion shall be binding upon the parties), shall not have
resulted in an opinion of a patent infringement which will have
an "unavoidable" Hollis-Eden Material Adverse Effect upon the
products set forth on Schedule 5.13.
-------------
6.11 Appointment of Zizza as a Director. Zizza shall
----------------------------------
have been appointed a Director of the Surviving Corporation,
effective at the Effective Time.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF HOLLIS-EDEN
The obligations of Hollis-Eden under this Agreement are
subject to the satisfaction or waiver by Hollis-Eden of the
following conditions precedent on or before the Closing Date:
7.1 Warranties True as of Both Present Date and Closing
--------------------------------------------------
Date. The representations and warranties of IAC contained herein
----
shall be true and correct in all material respects on and as of
the date of this Agreement, and shall also be true and correct in
all material respects on and as of the Closing Date with the same
force and effect as though made by IAC on and as of the Closing
Date.
7.2 Compliance with Agreements and Covenants. IAC shall
----------------------------------------
have performed and complied with all of its covenants,
obligations and agreements contained in this Agreement to be
performed and complied with by it on or prior to the Closing
Date.
7.3 Consents and Approvals. Hollis-Eden, on the one
----------------------
hand, and IAC, on the other hand, shall have received written
evidence satisfactory to them that all consents and approvals
required for the consummation of the transactions contemplated
hereby have been obtained, and all required filings have been
made, including (without limitation) those set forth on Schedule
------------
3.3 hereto.
---
7.4 Documents. Hollis-Eden shall have received all of
---------
the agreements, documents and items specified in Section 8.2.
7.5 No Material Adverse Change. Since the date hereof,
--------------------------
no "Material Adverse Change to IAC" shall have occurred.
Material Adverse Change to IAC shall mean a change in the
business, operations, assets, liabilities, results of operations,
cash flows, condition (financial or otherwise) or prospects of
IAC which is materially adverse to IAC.
7.6 Actions or Proceedings. No action or proceeding by
----------------------
any Governmental Authority or other Person shall have been
instituted or threatened which (a) is likely to have an IAC
Material Adverse Effect, or (b) could enjoin, restrain or
prohibit, or could result in substantial damages in respect of,
any provision of this Agreement or the consummation of the
transactions contemplated hereby.
7.7 Opinion of Counsel for IAC. Hollis-Eden shall have
--------------------------
received the opinion of Reid & Priest LLP, counsel for IAC,
substantially in the form annexed hereto as Exhibit C.
7.8 Approval of Merger. The stockholders of Hollis-Eden
------------------
and IAC shall have approved this Agreement and the Merger
contemplated hereby in accordance with their respective charters
and by-laws and the DGCL and, with respect to IAC, in the manner
set forth in its Prospectus.
7.9 Registration Statement Effective. The Registration
--------------------------------
Statement shall have been declared effective by the SEC in
accordance with the Act and the rules and regulations promulgated
thereunder.
7.10 IAC Cash Position. Hollis-Eden shall be satisfied,
-----------------
in good faith, that IAC, as of the date of this Agreement and as
of the Effective Time, has not less than $6.5 million of cash on
hand, in excess of all liabilities.
ARTICLE VIII
DELIVERIES AT CLOSING
8.1 Deliveries by Hollis-Eden. At the Closing, in
-------------------------
addition to any other documents or agreements required under this
Agreement, Hollis-Eden shall deliver to IAC the following:
(a) Evidence, in form satisfactory to IAC, that all
filings, approvals and other matters set forth on Schedule 3.3
----------
have been obtained;
(b) A certificate, dated the Closing Date, of an
officer of Hollis-Eden, certifying as to the compliance by it
with Sections 6.1 and 6.2 hereof;
(c) A certificate of the secretary or equivalent
Person (a "Secretary") of Hollis-Eden certifying resolutions of
the Board of Directors and stockholders of Hollis-Eden approving
and authorizing the execution, delivery and performance of this
Agreement and the Certificate of Merger and the consummation of
the transactions contemplated hereby and thereby, including the
Merger (together with an incumbency and signature certificate
regarding the officer(s) signing on behalf of Hollis-Eden);
(d) The Certificate of Incorporation of Hollis-Eden,
certified by the Secretary of State of Delaware, and the by-laws
of Hollis-Eden, certified by the Secretary of Hollis-Eden;
(e) Certificates of Good Standing for Hollis-Eden from
the State of Delaware and all the other jurisdictions set forth
on Schedule 3.1 hereof;
------------
(f) The opinion referenced in Section 6.7 above;
(g) Copies of the signed letters received by Hollis-
Eden as contemplated by Section 5.12 above; and
(h) The Certificate of Merger.
8.2 Deliveries by IAC. At the Closing, in addition to
-----------------
any other documents or agreements required under this Agreement,
IAC shall deliver to Hollis-Eden the following:
(a) Evidence, in form satisfactory to Hollis-Eden,
that all filings, approvals and other matters contemplated in
Section 4.3 have been obtained;
(b) A certificate, dated the Closing Date, of an
officer of IAC, certifying as to compliance by IAC with Sections
7.1, 7.2 and 7.10 hereof;
(c) A certificate of the Secretary of IAC certifying
resolutions of the Board of Directors and stockholders of IAC
approving and authorizing the execution, delivery and performance
of this Agreement and the Certificate of Merger and the
consummation of the transactions contemplated hereby and thereby,
including the Merger (together with an incumbency and signature
certificate regarding the officer(s) signing on behalf of IAC);
(d) The Certificate of Incorporation of IAC, certified
by the Secretary of State of Delaware, and the by-laws of IAC,
certified by the Secretary of IAC;
(e) A Certificate of Good Standing for IAC from the
State of Delaware;
(f) The opinion referenced in Section 7.7 above;
(g) The Certificate of Merger; and
(h) Written evidence, in form reasonably satisfactory
to Hollis-Eden, that IAC has delivered to the Exchange Agent
certificates representing the maximum number of shares of
Surviving Corporation Common Stock, Surviving Corporation
Warrants and Surviving Corporation Options that may be issued in
connection with the Merger.
ARTICLE IX
TERMINATION; TERMINATION FEE
9.1 Termination. Anything herein or elsewhere to the
-----------
contrary notwithstanding, this Agreement may be terminated and
the Merger contemplated hereby may be abandoned at any time prior
to the Closing Date, as follows:
(a) With the mutual consent of all parties hereto;
(b) Prior to, but not after, the approval hereof by
the stockholders of each of Hollis-Eden and IAC, by Hollis-Eden
or IAC, as the case may be, if the Closing shall not have taken
place on or before February 15, 1997 (or such later date as
contemplated by Section 5.13 above to permit the parties hereto
to complete their patent analyses within the time parameters set
forth in Section 5.13 above); provided, however, that the right
------------ -----------------
to terminate this Agreement under this Section 9.1(b) shall not be
available to any party whose failure to fulfill any obligation
under this Agreement has been the cause of or resulted in the
failure of the Closing to occur on or before such date;
(c) By either party hereto if any court of competent
jurisdiction in the United States or other United States
governmental body shall have issued an order, decree or ruling or
taken any other action restraining, enjoining or otherwise
prohibiting the Merger or any of the other transactions
contemplated hereby and such order, decree, ruling or other
action shall have become final and non appealable;
(d) By IAC, if Solicited Stockholders holding 15% or
more of the shares of IAC Common Stock shall have exercised their
Redemption Rights in accordance with the Prospectus; or
(e) By IAC, if the condition precedent set forth in
Section 6.10 hereof is not satisfied by the Closing Date.
9.2 Effect of Termination. If this Agreement is
---------------------
terminated pursuant to Section 9.1, all obligations of the
parties hereunder (except with respect to the obligations
enumerated in Sections 9.3 and 12.3 below) shall terminate,
except that no such termination shall relieve any party from
liability for any prior willful breach of this Agreement.
9.3 Termination Fee. IAC and Hollis-Eden each
---------------
acknowledge that upon the execution of this Agreement, Hollis-
Eden placed $100,000 into an escrow account with Reid & Priest
LLP, as escrow agent, pursuant to an Escrow Agreement of even
date herewith (the "Escrow Agreement"), a form of which is
annexed hereto as Exhibit D. Pursuant to the terms of the Escrow
Agreement, in the event that Hollis-Eden terminates this
Agreement and abandons the Merger contemplated hereby for any
reason, other than due to a reason described in Section 9.1
above, the Escrow Agent shall release the $100,000 from escrow
and deliver such sum to IAC as reimbursement for its costs and
expenses in connection with this Agreement and the proposed
Merger. In addition, and notwithstanding anything to the
contrary set forth herein, in the event that IAC terminates this
Agreement and abandons the Merger contemplated hereby in
accordance with Section 9.1(e) above, the Escrow Agent shall
release from escrow and deliver to IAC such sum as may be
necessary to reimburse IAC for its costs and expenses in
connection with this Agreement and the proposed Merger.
ARTICLE X
EXCLUSIVITY
From and after the date of this Agreement and until
either the Effective Time of the Merger or the termination of
this Agreement in accordance with Article IX hereof, neither
Hollis-Eden nor any of its affiliates shall solicit, initiate,
encourage, continue or enter into negotiations or discussions of
any type, directly or indirectly, with any other person, with
respect to an offer for the sale of Hollis-Eden, or any
substantial portion of Hollis-Eden's assets, or Hollis-Eden's
capital stock, directly by merger, consolidation or any other
form of purchase (collectively, an "Offer"); provided, however,
that the foregoing shall not prohibit Hollis-Eden and its
affiliates from soliciting, initiating, encouraging, continuing
or entering into negotiations or discussions for the limited
purpose of raising capital for Hollis-Eden.
ARTICLE XI
INDEMNIFICATION
11.1 Survival. Solely for purposes of indemnification
--------
for the representations listed in Sections 11.2(a) and 11.3(a)
below, the representations, warranties and covenants made herein
and in the Schedules hereto by Hollis-Eden and IAC shall survive
the Closing and continue in full force and effect until and
including the date which is one year after the Closing Date. No
other representation, warranty or covenant made herein shall
survive the Closing Date.
11.2 Indemnification by Hollis.
-------------------------
(a) Subject to Section 11.2(c) below, and in addition
to the indemnification provided for in Section 11.2(b) below,
Hollis hereby agrees to defend, indemnify and hold harmless IAC,
the Surviving Corporation and their respective affiliates,
officers, directors, stockholders, agents and employees (other
than Hollis) (collectively, the "IAC Indemnified Parties"), from
and against any and all loss or liability, accrued, absolute or
otherwise, in respect of losses, suits, proceedings, demands,
judgments, damages, expenses and costs (including reasonable
attorneys' fees and litigation expenses, whether arising out of a
third party claim or relating to recovering indemnifiable damages
from Hollis) (collectively, the "IAC Indemnifiable Damages")
which any of the IAC Indemnified Parties may suffer or incur by
reason of the breach by Hollis-Eden of any of its representations
and warranties set forth in Section 3.3, the third sentence of
Section 3.4(b) (provided, however, that such numbers may vary by
5% without any breach taking place), Section 3.7(i) (provided,
however, that no indemnification shall be made with respect to
title to intangible assets) and Sections 3.8, 3.12, 3.14, 3.16
and 3.19 of this Agreement. Notwithstanding the foregoing,
Hollis' indemnification obligations under this Section 11.2 shall
only be triggered if Hollis knew, at the date of this Agreement
or at the Closing Date, that the representation or warranty in
question was false or misleading when made or given by Hollis-
Eden.
(b) In addition to the indemnification provided for in
Section 11.2(a) above, Hollis shall indemnify and hold harmless
IAC, the Surviving Corporation and Zizza from any and all losses
or liabilities that IAC, Zizza or the Surviving Corporation may
suffer or incur in the event any party other than Laidlaw claims
that a brokerage or finder's fee is payable as a result of
actions taken by Hollis or Hollis-Eden in connection with the
Merger.
(c) Hollis shall not be required to indemnify the IAC
Indemnified Parties pursuant to Section 11.2(a) above (i) except
to the extent that the aggregate amount of IAC Indemnifiable
Damages exceeds $25,000, in which case Hollis shall only be
responsible for such IAC Indemnifiable Damages in excess of
$25,000 in the aggregate or (ii) for any amounts in excess of
$250,000. Hollis may pay such Indemnifiable Damages in cash or
by transfer of his shares of Surviving Corporation Common Stock
pro rata to such IAC Indemnified Parties at the fair market price
of such Surviving Corporation Common Stock calculated by
reference to the average Closing Price per share of the Surviving
Corporation Common Stock over a period of twenty consecutive
Trading Days immediately prior to the date of receipt by Hollis
of a claim for IAC Indemnifiable Damages made by such IAC
Indemnified Party.
11.3 Indemnification by Zizza. (a) Subject to Section
------------------------
11.3(c) below, and in addition to the indemnification provided
for in Section 11.3(b) below, Zizza hereby agrees to defend,
indemnify and hold harmless, Hollis-Eden, the Surviving
Corporation and their respective affiliates, officers, directors,
stockholders, agents and employees (other than Zizza)
(collectively, the "Hollis-Eden Indemnified Parties"), from and
against any and all loss or liability, accrued, absolute or
otherwise, in respect of losses, suits, proceedings, demands,
judgments, damages, expenses and costs (including reasonable
attorneys' fees and litigation expenses, whether arising out of a
third party claim or relating to recovering indemnifiable damages
from Zizza) (collectively, the "Hollis-Eden Indemnifiable
Damages") which any of the Hollis-Eden Indemnified Parties may
suffer or incur by reason of the breach by IAC of any of its
representations or warranties set forth in Sections 4.3, 4.4,
4.7, 4.8, 4.12, 4.13, 4.14 and 4.17. Notwithstanding the
foregoing, Zizza's indemnification obligations under this Section
11.3 shall only be triggered if Zizza knew, at the date of this
Agreement or at the Closing Date, that the representation or
warranty in question was false or misleading when made or given
by IAC.
(b) In addition to the indemnification provided for in
Section 11.3(a) above, Zizza shall indemnify and hold harmless
Hollis-Eden, the Surviving Corporation and Hollis from any and
all losses or liabilities that Hollis-Eden, the Surviving
Corporation or Hollis may suffer or incur in the event any party
other than Gruntal claims that a brokerage or finder's fee is
payable as a result of actions taken by IAC or Zizza in
connection with the Merger.
(c) Zizza shall not be required to indemnify the
Hollis-Eden Indemnified Parties pursuant to Section 11.3(a) above
(i) except to the extent that the aggregate amount of Hollis-Eden
Indemnifiable Damages exceeds $25,000, in which case Zizza shall
only be responsible for such Hollis-Eden Indemnifiable Damages in
excess of $25,000 in the aggregate or (ii) for any amounts in
excess of $250,000. Zizza may pay such Indemnifiable Damages in
cash or by transfer of his shares of Surviving Corporation Common
Stock pro rata to such Hollis-Eden Indemnified Parties at the
fair market price of such Surviving Corporation Common Stock
calculated by reference to the average Closing Price per share of
the Surviving Corporation Common Stock over a period of twenty
consecutive Trading Days immediately prior to the date of receipt
by Zizza of a claim for Hollis-Eden Indemnifiable Damages made by
such Hollis-Eden Indemnified Party.
11.4 Notice and Right to Defend Third Party Claims.
---------------------------------------------
Promptly upon receipt of notice of any third party claim, demand
or assessment or the commencement of any suit, action or
proceeding, or promptly following awareness of all relevant facts
necessary to conclude that a non-third party claim may be made,
in respect of which indemnity may be sought on account of an
indemnity agreement contained in this Article XI, the party(ies)
seeking indemnification (the "Indemnitee") will notify in
writing, within sufficient time to respond to such claim or
answer or otherwise plead in such action, the party(ies) from
whom indemnification is sought (the "Indemnitor"). In case any
claim, demand or assessment is asserted or suit, action or
proceeding is commenced against an Indemnitee, and it notifies
the Indemnitor of the commencement thereof, the Indemnitor will
be entitled to participate therein, and, to the extent that it
may wish, to assume the defense, conduct or settlement thereof,
with counsel reasonably satisfactory to the Indemnitee, whose
consent to the selection of counsel will not unreasonably be
withheld. After notice from the Indemnitor to the Indemnitee of
its election so to assume the defense, conduct or settlement
thereof, the Indemnitor will not be liable to the Indemnitee for
any legal or other expenses subsequently incurred by the
Indemnitee in connection with the defense, conduct or settlement
thereof. The Indemnitee will cooperate with the Indemnitor in
connection with any such claim, make personnel, books and records
relevant to the claim available to the Indemnitor, and grant such
authorization or powers of attorney to the agents,
representatives and counsel of the Indemnitor as the Indemnitor
may reasonably consider desirable in connection with the defense
of any such claim.
ARTICLE XII
MISCELLANEOUS
12.1 Expenses. Each party hereto shall bear its own
--------
expenses with respect to the transactions contemplated hereby.
12.2 Amendment. This Agreement may be amended, modified
---------
or supplemented but only in a writing signed by the parties
hereto.
12.3 Confidentiality and Return of Information.
-----------------------------------------
(a) On and after the date of this Agreement, IAC will
keep secret and confidential (i) all information heretofore or
hereafter acquired by it and deemed to be confidential by Hollis-
Eden and (ii) all other information provided by Hollis-Eden to
IAC relating to the business, operations, employees, customers
and distributors of Hollis-Eden, including, but not limited to,
any customer or distributor lists, documentation regarding
Intellectual Property, marketing arrangements, business plans,
sales plans, promotional sales materials, pricing information,
manuals, correspondence, notes, financial data or employee
information (all such information described in clauses (i) and
(ii) above is hereinafter collectively referred to as
"Confidential Information").
(b) Upon any termination of this Agreement pursuant to
Article IX hereof, IAC shall return to Hollis-Eden all documents
and copies of documents in its possession relating to any
Confidential Information, and no director, officer, employee or
representative of IAC shall make or retain any copy or extract of
any of the foregoing.
12.4 Notices. Any notice, request, instruction or other
-------
document to be given hereunder by a party hereto shall be in
writing and shall be deemed to have been given (a) when received
if given in person, (b) on the date of transmission if sent by
telex, facsimile or other wire transmission or (c) three business
days after being deposited in the U.S. mail, certified or
registered mail, postage prepaid:
(a) If to Hollis-Eden or Hollis:
808 S.W. Third Avenue, Suite 540
Portland, Oregon 97204
Facsimile No.: (503) 226-1489
with a copy to:
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, CA 92121
Attention: Eric J. Loumeau, Esq.
Facsimile No.: (619) 453-3555
(b) If to IAC or Zizza:
810 Seventh Avenue
New York, New York 10019
Facsimile No.: (212) 333-7240
with a copy to:
Reid & Priest LLP
40 West 57th Street
New York, NY 10019
Attention: Leonard Gubar, Esq.
Facsimile No.: (212) 603-2001
or to such other individual or address as a party hereto may
designate for itself by notice given as herein provided.
12.5 Waivers. The failure of a party hereto at any time
-------
or times to require performance of any provision hereof shall in
no manner affect its right at a later time to enforce the same.
No waiver by a party of any condition or of any breach of any
term, covenant, representation or warranty contained in this
Agreement shall be effective unless in writing, and no waiver in
any one or more instances shall be deemed to be a further or
continuing waiver of any such condition or breach in other
instances or a waiver of any other condition or breach of any
other term, covenant, representation or warranty.
12.6 Interpretation. The headings preceding the text of
--------------
Articles and Sections included in this Agreement and the headings
to Schedules attached to this Agreement are for convenience only
and shall not be deemed part of this Agreement or be given any
effect in interpreting this Agreement. The use of the masculine,
feminine or neuter gender herein shall not limit any provision of
this Agreement. The use of the terms "including" or "include"
shall in all cases herein mean "including, without limitation" or
"include, without limitation," respectively.
12.7 Applicable Law. This Agreement shall be governed by
---------------
and construed and enforced in accordance with the internal laws
of the State of Delaware, without giving effect to the principles
of conflicts of law thereof.
12.8 Assignment. This Agreement shall be binding upon
----------
and inure to the benefit of the parties hereto and their
respective successors and assigns; provided, however, that no
assignment of any rights or obligations shall be made by any
party without the prior written consent of all the other parties
hereto.
12.9 No Third Party Beneficiaries. This Agreement is
----------------------------
solely for the benefit of the parties hereto and, to the extent
provided herein, their respective directors, officers, employees,
agents and representatives, and no provision of this Agreement
shall be deemed to confer upon other third parties any remedy,
claim, liability, reimbursement, cause of action or other right.
12.10 Further Assurances. Upon the request of the
------------------
parties hereto, the other parties hereto will, on and after the
Closing Date, execute and deliver such other documents, releases,
assignments and other instruments as may be required to
effectuate completely the transactions contemplated by this
Agreement.
12.11 Severability. If any provision of this Agreement
------------
shall be held invalid, illegal or unenforceable, the validity,
legality or enforceability of the other provisions hereof shall
not be affected thereby, and there shall be deemed substituted
for the provision at issue a valid, legal and enforceable
provision as similar as possible to the provision at issue.
12.12 Remedies Cumulative. The remedies provided in this
-------------------
Agreement shall be cumulative and shall not preclude the
assertion or exercise of any other rights or remedies available
by law, in equity or otherwise.
12.13 Entire Understanding. This Agreement and the
--------------------
Certificate of Merger set forth the entire agreement and
understanding of the parties hereto and supersede all prior
agreements, arrangements and understandings between the parties.
<PAGE>
12.14 Counterparts. This Agreement may be executed in
------------
counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered on the date first above
written.
INITIAL ACQUISITION CORP.
By: /s/ Salvatore J. Zizza
------------------------------------
Name: Salvatore J. Zizza
Title: Chairman and President
HOLLIS-EDEN, INC.
By: /s/ Richard B. Hollis
------------------------------------
Name: Richard B. Hollis
Title: Chairman, President and
Chief Executive Officer
FOR PURPOSES OF SECTION 5.6 AND
ARTICLE XI ONLY:
/s/ Salvatore J. Zizza
---------------------------------
Salvatore J. Zizza
FOR PURPOSES OF SECTION 5.6 AND
ARTICLE XI ONLY:
/s/ Richard B. Hollis
---------------------------------
Richard B. Hollis
Exhibit 4.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HOLLIS-EDEN, INC.
Hollis-Eden, Inc., a corporation organized and existing
under the laws of the State of Delaware, hereby certified as
follows:
FIRST: The name of this corporation is Hollis-Eden, Inc.
SECOND: The date of the filing of the corporation's original
Certificate of Incorporation with the Secretary of State of
Delaware was August 15, 1994 under the name Holmedco
Pharmaceuticals Corporation.
THIRD: The Amended and Restated Certification of Incorporation
was duly adopted by the Board of Directors in accordance with
Sections 242 and 245 of the General Corporation Law of the State
of Delaware.
FOURTH: In lieu of a meeting and vote of the stockholders of
the Corporation, the holders of not less than a majority of the
outstanding Common Stock have given written consent to the
Amended and Restated Certificate of Incorporation in accordance
with the provisions of Section 228 of the General Corporation Law
of the State of Delaware.
FIFTH: Prompt written notice was given pursuant to Section 228
of the General Corporation Law of the State of Delaware to those
stockholders who did not approve the Amended and Restated
Certificate of Incorporation by written consent.
SIXTH: The Certificate of Incorporation of the corporation
shall be amended and restated to read in full as follows:
I.
The name of this corporation is Hollis-Eden, Inc.
II.
The address of the registered office of the corporation in
the State of Delaware is 1209 Orange Street, City of Wilmington,
County of New Castle, and the name of the registered agent of the
corporation in the State of Delaware at such address is The
Corporation Trust Company.
III.
The purpose of this corporation is to engage in any lawful
act or activity for which a corporation may be organized under
the General Corporation Law of the State of Delaware.
IV.
A. This corporation is authorized to issue two classes of
stock to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of shares which the
corporation is authorized to issue is forty million (40,000,000)
shares. Thirty million (30,000,000) shares shall be Common
Stock, each having a par value of one cent ($.01). Ten million
(10,000,000) shares shall be Preferred Stock, each having a par
value of one cent ($.01).
B. The Preferred Stock may be issued, from time to time in
one or more series. The Board of Directors is hereby authorized,
by filing a certificate (a "Preferred Stock Designation")
pursuant to the Delaware General Corporation Law, to fix or alter
from time to time the designation, powers, preferences and rights
of the shares of each such series and the qualifications,
limitations or restrictions of any wholly unissued series of
Preferred Stock, and to establish from time to time the number of
shares constituting any such series or any of them; and to
increase or decrease the number of shares of any series
subsequent to the issuance of shares of that series, but not
below the number of shares of such series then outstanding. In
case the number of shares of any series shall be decreased in
accordance with the foregoing sentence, the shares constituting
such decrease shall resume the status that they had prior to the
adoption of the resolution originally fixing the number of shares
of such series.
V.
For the management of the business and for the conduct of
the affairs of the corporation, and in further definition,
limitation and regulation of the powers of the corporation, of
its directors and of its stockholders or any class thereof, as
the case may be, it is further provided that:
A.
1. The management of the business and the conduct of
the affairs of the corporation shall be vested in its Board of
Directors. The number of Directors which shall constitute the
whole Board of Directors shall be fixed exclusively by one or
more resolutions adopted by the Board of Directors.
2. Subject to the rights of the holders of any series
of Preferred Stock to elect additional directors under specified
circumstances, the directors shall be divided into three classes
designated as Class I, Class II and Class III, respectively.
Directors shall be assigned to each class in accordance with a
resolution or resolutions adopted by the Board of Directors. At
the first annual meeting of stockholders following the adoption
and filing of this Amended and Restated Certificate of
Incorporation, the term of office of the Class I directors shall
expire and Class I directors shall be elected for a full term of
three years. At the second annual meeting of stockholders
following the adoption and filing of this Amended and Restated
Certificate of Incorporation, the term of office of the Class II
directors shall expire and Class II directors shall be elected
for a full term of three years. At the third annual meeting of
stockholders following the adoption and filing of this Amended
and Restated Certificate of Incorporation, the term of office of
the Class III directors shall expire and Class III directors
shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors shall be
elected for a full term of three years to succeed the directors
of the class whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article,
each director shall serve until his successor is duly elected and
qualified or until his death, resignation or removal. No
decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
3. Subject to the rights of the holders of any series
of Preferred Stock, no director shall be removed without cause.
Subject to any limitations imposed by law, the Board of Directors
or any individual director may be removed from office at any time
with cause by the affirmative vote of the holders of a majority
of the voting power of all the then-outstanding shares of voting
stock of the corporation, entitled to vote at an election of
directors (the "Voting Stock").
4. Subject to the rights of the holders of any series
of Preferred Stock, any vacancies on the Board of Directors
resulting from death, resignation, disqualification, removal or
other causes and any newly created directorships resulting from
any increase in the number of directors, shall, unless the Board
of Directors determines by resolution that any such vacancies or
newly created directorships shall be filled by the stockholders,
except as otherwise provided by law, be filled only by the
affirmative vote of a majority of the directors then in office,
even though less than a quorum of the Board of Directors, and not
by the stockholders. Any director elected in accordance with the
preceding sentence shall hold office for the remainder of the
full term of the director for which the vacancy was created or
occurred and until such director's successor shall have been
elected and qualified.
B.
1. Subject to paragraph (h) of Section 43 of the
Bylaws, the Bylaws may be altered or amended or new Bylaws
adopted by the affirmative vote of at least sixty-six and two-
thirds percent (66-2/3%) of the voting power of all of the then-
outstanding shares of the Voting Stock. The Board of Directors
shall also have the power to adopt, amend, or repeal Bylaws.
2. The directors of the corporation need not be
elected by written ballot unless the Bylaws so provide.
3. No action shall be taken by the stockholders of
the corporation except at an annual or special meeting of
stockholders called in accordance with the Bylaws.
4. Special meetings of the stockholders of the
corporation may be called, for any purpose or purposes, by (i)
the Chairman of the Board of Directors, (ii) the Chief Executive
Officer, or (iii) the Board of Directors pursuant to a resolution
adopted by a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is
presented to the Board of Directors for adoption) and shall be
held at such place, on such date, and at such time as the Board
of Directors shall fix.
5. Advance notice of stockholder nominations for the
election of directors and of business to be brought by
stockholders before any meeting of the stockholders of the
corporation shall be given in the manner provided in the Bylaws
of the corporation.
VI.
A. A director of the corporation shall not be personally
liable to the corporation or its stockholders for monetary
damages for any breach of fiduciary duty as a director, except
for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174
of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper personal
benefit. If the Delaware General Corporation Law is amended
after approval by the stockholders of this Article to authorize
corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director shall be
eliminated or limited to the fullest extent permitted by the
Delaware General corporation Law, as so amended.
B. Any repeal or modification of this Article VI shall be
prospective and shall not affect the rights under this Article VI
in effect at the time of the alleged occurrence of any act or
omission to act giving rise to liability or indemnification.
VII.
A. The corporation reserves the right to amend, alter,
change or repeal any provision contained in this Amended and
Restated Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, except as provided in paragraph
B. of this Article VII, and all rights conferred upon the
stockholders herein are granted subject to this reservation.
B. Notwithstanding any other provisions of this Amended
and Restated Certificate of Incorporation or any provision of law
which might otherwise permit a lesser vote or no vote, but in
addition to any affirmative vote of the holders of any particular
class or series of the Voting Stock required by law, this Amended
and Restated Certificate of Incorporation or any Preferred Stock
Designation, the affirmative vote of the holders of at least
sixty-six and two-thirds percent (66-2/3%) of the voting power of
all of the then-outstanding shares of the Voting Stock, voting
together as a single class, shall be required to alter, amend or
repeal Articles V, VI and VII.
IN WITNESS WHEREOF, the Corporation has caused this Amended
and Restaetd Certificate of Incorporation to be signed by Richard
B. Hollis, President, Chief Executive Officer and Secretary of
the Corporation, this -- day of December, 1996.
------------------------------------
Richard B. Hollis
President and Chief Executive
Officer
Attest:
-----------------------------
Richard B. Hollis
Secretary
Exhibit 4.2
BYLAWS
OF
HOLLIS-EDEN, INC.
(A DELAWARE CORPORATION)
<PAGE>
TABLE OF CONTENTS
PAGE
Article I Offices . . . . . . . . . . . . . . . . . . . 1
Section 1. Registered Office . . . . . . . . . . . . 1
Section 2. Other Offices . . . . . . . . . . . . . . 1
Article II Corporate Seal . . . . . . . . . . . . . . . . 1
Section 3. Corporate Seal . . . . . . . . . . . . . 1
Article III Stockholders' Meetings . . . . . . . . . . . . 1
Section 4. Place of Meetings . . . . . . . . . . . . 1
Section 5. Annual Meeting . . . . . . . . . . . . . 1
Section 6. Special Meetings . . . . . . . . . . . . 3
Section 7. Notice of Meetings . . . . . . . . . . . 4
Section 8. Quorum . . . . . . . . . . . . . . . . . 4
Section 9. Adjournment and Notice of Adjourned
Meetings . . . . . . . . . . . . . . . . 5
Section 10. Voting Rights . . . . . . . . . . . . . . 5
Section 11. Joint Owners of Stock . . . . . . . . . . 5
Section 12. List of Stockholders . . . . . . . . . . 6
Section 13. Action Without Meeting . . . . . . . . . 6
Section 14. Organization . . . . . . . . . . . . . . 6
Article IV Directors . . . . . . . . . . . . . . . . . . 7
Section 15. Number and Term of Office . . . . . . . . 7
Section 16. Powers . . . . . . . . . . . . . . . . . 7
Section 17. Classes of Directors . . . . . . . . . . 7
Section 18. Vacancies . . . . . . . . . . . . . . . . 7
Section 19. Resignation . . . . . . . . . . . . . . . 8
Section 20. Removal . . . . . . . . . . . . . . . . . 8
Section 21. Meetings . . . . . . . . . . . . . . . . 8
(a) Annual Meetings . . . . . . . . . . . . . 8
(b) Regular Meetings . . . . . . . . . . . . 8
(c) Special Meetings . . . . . . . . . . . . 9
(d) Telephone Meetings . . . . . . . . . . . 9
(e) Notice of Meetings . . . . . . . . . . . 9
(f) Waiver of Notice . . . . . . . . . . . . 9
Section 22. Quorum and Voting . . . . . . . . . . . . 9
Section 23. Action Without Meeting . . . . . . . . . 10
Section 24. Fees and Compensation . . . . . . . . . . 10
Section 25. Committees . . . . . . . . . . . . . . . 10
(a) Executive Committee . . . . . . . . . . . 10
(b) Other Committees . . . . . . . . . . . . 11
(c) Term . . . . . . . . . . . . . . . . . . 11
(d) Meetings . . . . . . . . . . . . . . . . 11
Section 26. Organization . . . . . . . . . . . . . . 12
Article V Officers . . . . . . . . . . . . . . . . . . . 12
Section 27. Officers Designated . . . . . . . . . . . 12
Section 28. Tenure and Duties of Officers . . . . . . 12
(a) General . . . . . . . . . . . . . . . . . 12
(b) Duties of Chairman of the Board of
Directors . . . . . . . . . . . . . . . . 12
(c) Duties of President . . . . . . . . . . . 12
(d) Duties of Vice Presidents . . . . . . . . 13
(e) Duties of Secretary . . . . . . . . . . . 13
(f) Duties of Chief Financial Officer . . . . 13
Section 29. Delegation of Authority . . . . . . . . . 14
Section 30. Resignations . . . . . . . . . . . . . . 14
Section 31. Removal . . . . . . . . . . . . . . . . . 14
Article VI Execution Of Corporate Instruments And Voting Of
Securities Owned By The Corporation . . . . . 14
Section 32. Execution of Corporate Instruments . . . 14
Section 33. Voting of Securities Owned by the
Corporation . . . . . . . . . . . . . . . 15
Article VII Shares of Stock . . . . . . . . . . . . . . . 15
Section 34. Form and Execution of Certificates . . . 15
Section 35. Lost Certificates . . . . . . . . . . . . 16
Section 36. Transfers . . . . . . . . . . . . . . . . 16
Section 37. Fixing Record Dates . . . . . . . . . . . 16
Section 38. Registered Stockholders . . . . . . . . . 17
Article VIII Other Securities of the Corporation . . . . . 17
Section 39. Execution of Other Securities . . . . . . 17
Article IX Dividends . . . . . . . . . . . . . . . . . . 18
Section 40. Declaration of Dividends . . . . . . . . 18
Section 41. Dividend Reserve . . . . . . . . . . . . 18
Article X Fiscal Year . . . . . . . . . . . . . . . . . 18
Section 42. Fiscal Year . . . . . . . . . . . . . . . 18
Article XI Indemnification . . . . . . . . . . . . . . . 18
Section 43. Indemnification of Directors, Executive
Officers, Other Officers, Employees and
Other Agents . . . . . . . . . . . . . . 18
(a) Directors and Executive Officers . . . . 18
(b) Other Officers, Employees and Other
Agents . . . . . . . . . . . . . . . . . 19
(c) Expenses . . . . . . . . . . . . . . . . 19
(d) Enforcement . . . . . . . . . . . . . . . 19
(e) Non-Exclusivity of Rights . . . . . . . . 20
(f) Survival of Rights . . . . . . . . . . . 20
(g) Insurance . . . . . . . . . . . . . . . . 20
(h) Amendments . . . . . . . . . . . . . . . 20
(i) Saving Clause . . . . . . . . . . . . . . 21
(j) Certain Definitions . . . . . . . . . . . 21
Article XII Notices . . . . . . . . . . . . . . . . . . . 22
Section 44. Notices . . . . . . . . . . . . . . . . . 22
(a) Notice to Stockholders . . . . . . . . . 22
(b) Notice to Directors . . . . . . . . . . . 22
(c) Affidavit of Mailing . . . . . . . . . . 22
(d) Time Notices Deemed Given . . . . . . . . 22
(e) Methods of Notice . . . . . . . . . . . . 22
(f) Failure to Receive Notice . . . . . . . . 22
(g) Notice to Person with Whom Communication
Is Unlawful . . . . . . . . . . . . . . . 23
(h) Notice to Person with Undeliverable
Address . . . . . . . . . . . . . . . . . 23
Article XIII Amendments . . . . . . . . . . . . . . . . . . 23
Section 45. Amendments . . . . . . . . . . . . . . . 23
Article XIV Loans to Officers . . . . . . . . . . . . . . 24
Section 46. Loans to Officers . . . . . . . . . . . . 24
Article XV Miscellaneous . . . . . . . . . . . . . . . . 24
Section 47. Annual Report . . . . . . . . . . . . . . 24
<PAGE>
BYLAWS
OF
HOLLIS-EDEN, INC.
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the
corporation in the State of Delaware shall be in the City of
Wilmington, County of New Castle. (Del. Code Ann., tit. 8,
<SECTION> 131)
SECTION 2. OTHER OFFICES. The corporation shall also have
and maintain an office or principal place of business at such
place as may be fixed by the Board of Directors, and may also
have offices at such other places, both within and without the
State of Delaware as the Board of Directors may from time to time
determine or the business of the corporation may require. (Del.
Code Ann., tit. 8, <SECTION> 122(8))
ARTICLE II
CORPORATE SEAL
SECTION 3. CORPORATE SEAL. The corporate seal shall
consist of a die bearing the name of the corporation and the
inscription, "Corporate Seal-Delaware." Said seal may be used by
causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise. (Del. Code Ann., tit. 8,
<SECTION> 122(3))
ARTICLE III
STOCKHOLDERS' MEETINGS
SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders
of the corporation shall be held at such place, either within or
without the State of Delaware, as may be designated from time to
time by the Board of Directors, or, if not so designated, then at
the office of the corporation required to be maintained pursuant
to Section 2 hereof. (Del. Code Ann., tit. 8, <SECTION> 211(a))
SECTION 5. ANNUAL MEETING.
(a) The annual meeting of the stockholders of the
corporation, for the purpose of election of directors and for
such other business as may lawfully come before it, shall be held
on such date and at such time as may be designated from time to
time by the Board of Directors. (Del. Code Ann., tit. 8,
<SECTION> 211(b))
(b) At an annual meeting of the stockholders, only
such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an
annual meeting, business must be: (A) specified in the notice of
meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (B) otherwise properly brought before
the meeting by or at the direction of the Board of Directors, or
(C) otherwise properly brought before the meeting by a
stockholder. For business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given
timely notice thereof in writing to the Secretary of the
corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive
offices of the corporation not later than the close of business
on the sixtieth (60th) day nor earlier than the close of business
on the ninetieth (90th) day prior to the first anniversary of the
preceding year's annual meeting; PROVIDED, HOWEVER, that in the
event that no annual meeting was held in the previous year or the
date of the annual meeting has been changed by more than thirty
(30) days from the date contemplated at the time of the previous
year's proxy statement, notice by the stockholder to be timely
must be so received not earlier than the close of business on the
ninetieth (90th) day prior to such annual meeting and not later
than the close of business on the later of the sixtieth (60th)
day prior to such annual meeting or, in the event public
announcement of the date of such annual meeting is first made by
the corporation fewer than seventy (70) days prior to the date of
such annual meeting, the close of business on the tenth (10th)
day following the day on which public announcement of the date of
such meeting is first made by the corporation. A stockholder's
notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting: (i) a
brief description of the business desired to be brought before
the annual meeting and the reasons for conducting such business
at the annual meeting, (ii) the name and address, as they appear
on the corporation's books, of the stockholder proposing such
business, (iii) the class and number of shares of the corporation
which are beneficially owned by the stockholder, (iv) any
material interest of the stockholder in such business and (v) any
other information that is required to be provided by the
stockholder pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "1934 Act"), in his
capacity as a proponent to a stockholder proposal.
Notwithstanding the foregoing, in order to include information
with respect to a stockholder proposal in the proxy statement and
form of proxy for a stockholder's meeting, stockholders must
provide notice as required by the regulations promulgated under
the 1934 Act. Notwithstanding anything in these Bylaws to the
contrary, no business shall be conducted at any annual meeting
except in accordance with the procedures set forth in this
paragraph (b). The chairman of the annual meeting shall, if the
facts warrant, determine and declare at the meeting that business
was not properly brought before the meeting and in accordance
with the provisions of this paragraph (b), and, if he should so
determine, he shall so declare at the meeting that any such
business not properly brought before the meeting shall not be
transacted. (Del. Code Ann., tit. 8: <SECTION> 211(b))
(c) Only persons who are nominated in accordance with
the procedures set forth in this paragraph (c) shall be eligible
for election as directors. Nominations of persons for election
to the Board of Directors of the corporation may be made at a
meeting of stockholders by or at the direction of the Board of
Directors or by any stockholder of the corporation entitled to
vote in the election of directors at the meeting who complies
with the notice procedures set forth in this paragraph (c). Such
nominations, other than those made by or at the direction of the
Board of Directors, shall be made pursuant to timely notice in
writing to the Secretary of the corporation in accordance with
the provisions of paragraph (b) of this Section 5. Such
stockholder's notice shall set forth (i) as to each person, if
any, whom the stockholder proposes to nominate for election or
re-election as a director: (A) the name, age, business address
and residence address of such person, (B) the principal
occupation or employment of such person, (C) the class and number
of shares of the corporation which are beneficially owned by such
person, (D) a description of all arrangements or understandings
between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the
nominations are to be made by the stockholder, and (E) any other
information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors,
or is otherwise required, in each case pursuant to Regulation 14A
under the 1934 Act (including without limitation such person's
written consent to being named in the proxy statement, if any, as
a nominee and to serving as a director if elected); and (ii) as
to such stockholder giving notice, the information required to be
provided pursuant to paragraph (b) of this Section 5. At the
request of the Board of Directors, any person nominated by a
stockholder for election as a director shall furnish to the
Secretary of the corporation that information required to be set
forth in the stockholder's notice of nomination which pertains to
the nominee. No person shall be eligible for election as a
director of the corporation unless nominated in accordance with
the procedures set forth in this paragraph (c). The chairman of
the meeting shall, if the facts warrant, determine and declare at
the meeting that a nomination was not made in accordance with the
procedures prescribed by these Bylaws, and if he should so
determine, he shall so declare at the meeting, and the defective
nomination shall be disregarded. (Del. Code Ann., tit. 8,
<SECTION><SECTION> 212, 214).
(d) For purposes of this Section 5, "public
announcement" shall mean disclosure in a press release reported
by the Dow Jones News Service, Associated Press or comparable
national news service or in a document publicly filed by the
corporation with the Securities and Exchange Commission pursuant
to Section 13, 14 or 15(d) of the Exchange Act.
SECTION 6. SPECIAL MEETINGS.
(a) Special meetings of the stockholders of the
corporation may be called, for any purpose or purposes, by
(i) the Chairman of the Board of Directors, (ii) the Chief
Executive Officer, or (iii) the Board of Directors pursuant to a
resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any vacancies in
previously authorized directorships at the time any such
resolution is presented to the Board of Directors for adoption),
and shall be held at such place, on such date, and at such time
as the Board of Directors, shall fix.
(b) If a special meeting is called by any person or
persons other than the Board of Directors, the request shall be
in writing, specifying the general nature of the business
proposed to be transacted, and shall be delivered personally or
sent by registered mail or by telegraphic or other facsimile
transmission to the Chairman of the Board of Directors, the Chief
Executive Officer, or the Secretary of the corporation. No
business may be transacted at such special meeting otherwise than
specified in such notice. The Board of Directors shall determine
the time and place of such special meeting, which shall be held
not less than thirty-five (35) nor more than one hundred twenty
(120) days after the date of the receipt of the request. Upon
determination of the time and place of the meeting, the officer
receiving the request shall cause notice to be given to the
stockholders entitled to vote, in accordance with the provisions
of Section 7 of these Bylaws. If the notice is not given within
sixty (60) days after the receipt of the request, the person or
persons requesting the meeting may set the time and place of the
meeting and give the notice. Nothing contained in this
paragraph (b) shall be construed as limiting, fixing, or
affecting the time when a meeting of stockholders called by
action of the Board of Directors may be held.
SECTION 7. NOTICE OF MEETINGS. Except as otherwise
provided by law or the Certificate of Incorporation, written
notice of each meeting of stockholders shall be given not less
than ten (10) nor more than sixty (60) days before the date of
the meeting to each stockholder entitled to vote at such meeting,
such notice to specify the place, date and hour and purpose or
purposes of the meeting. Notice of the time, place and purpose
of any meeting of stockholders may be waived in writing, signed
by the person entitled to notice thereof, either before or after
such meeting, and will be waived by any stockholder by his
attendance thereat in person or by proxy, except when the
stockholder attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of
any business because the meeting is not lawfully called or
convened. Any stockholder so waiving notice of such meeting
shall be bound by the proceedings of any such meeting in all
respects as if due notice thereof had been given. (Del. Code
Ann., tit. 8, <SECTION><SECTION> 222, 229)
SECTION 8. QUORUM. At all meetings of stockholders, except
where otherwise provided by statute or by the Certificate of
Incorporation, or by these Bylaws, the presence, in person or by
proxy duly authorized, of the holders of a majority of the
outstanding shares of stock entitled to vote shall constitute a
quorum for the transaction of business. In the absence of a
quorum, any meeting of stockholders may be adjourned, from time
to time, either by the chairman of the meeting or by vote of the
holders of a majority of the shares represented thereat, but no
other business shall be transacted at such meeting. The
stockholders present at a duly called or convened meeting, at
which a quorum is present, may continue to transact business
until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum. Except as otherwise
provided by law, the Certificate of Incorporation or these
Bylaws, all action taken by the holders of a majority of the vote
cast, excluding abstentions, at any meeting at which a quorum is
present shall be valid and binding upon the corporation;
PROVIDED, HOWEVER, that directors shall be elected by a plurality
of the votes of the shares present in person or represented by
proxy at the meeting and entitled to vote on the election of
directors. Where a separate vote by a class or classes or series
is required, except where otherwise provided by the statute or by
the Certificate of Incorporation or these Bylaws, a majority of
the outstanding shares of such class or classes or series,
present in person or represented by proxy, shall constitute a
quorum entitled to take action with respect to that vote on that
matter and, except where otherwise provided by the statute or by
the Certificate of Incorporation or these Bylaws, the affirmative
vote of the majority (plurality, in the case of the election of
directors) of the votes cast, including abstentions, by the
holders of shares of such class or classes or series shall be the
act of such class or classes or series. (Del. Code Ann., tit. 8,
<SECTION> 216)
SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS.
Any meeting of stockholders, whether annual or special, may be
adjourned from time to time either by the chairman of the meeting
or by the vote of a majority of the shares casting votes,
excluding abstentions. When a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting
if the time and place thereof are announced at the meeting at
which the adjournment is taken. At the adjourned meeting, the
corporation may transact any business which might have been
transacted at the original meeting. If the adjournment is for
more than thirty (30) days or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting. (Del. Code Ann., tit. 8,
<SECTION> 222(c))
SECTION 10. VOTING RIGHTS. For the purpose of determining
those stockholders entitled to vote at any meeting of the
stockholders, except as otherwise provided by law, only persons
in whose names shares stand on the stock records of the
corporation on the record date, as provided in Section 12 of
these Bylaws, shall be entitled to vote at any meeting of
stockholders. Every person entitled to vote shall have the right
to do so either in person or by an agent or agents authorized by
a proxy granted in accordance with Delaware law. An agent so
appointed need not be a stockholder. No proxy shall be voted
after three (3) years from its date of creation unless the proxy
provides for a longer period. (Del. Code Ann., tit. 8,
<SECTION><SECTION> 211(e), 212(b))
SECTION 11. JOINT OWNERS OF STOCK. If shares or other
securities having voting power stand of record in the names of
two (2) or more persons, whether fiduciaries, members of a
partnership, joint tenants, tenants in common, tenants by the
entirety, or otherwise, or if two (2) or more persons have the
same fiduciary relationship respecting the same shares, unless
the Secretary is given written notice to the contrary and is
furnished with a copy of the instrument or order appointing them
or creating the relationship wherein it is so provided, their
acts with respect to voting shall have the following effect:
(a) if only one (1) votes, his act binds all; (b) if more than
one (1) votes, the act of the majority so voting binds all;
(c) if more than one (1) votes, but the vote is evenly split on
any particular matter, each faction may vote the securities in
question proportionally, or may apply to the Delaware Court of
Chancery for relief as provided in the General Corporation Law of
Delaware, Section 217(b). If the instrument filed with the
Secretary shows that any such tenancy is held in unequal
interests, a majority or even-split for the purpose of
subsection (c) shall be a majority or even-split in interest.
(Del. Code Ann., tit. 8, <SECTION> 217(b))
SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall
prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to
vote at said meeting, arranged in alphabetical order, showing the
address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not specified, at
the place where the meeting is to be held. The list shall be
produced and kept at the time and place of meeting during the
whole time thereof and may be inspected by any stockholder who is
present. (Del. Code Ann., tit. 8, <SECTION> 219(a))
SECTION 13. ACTION WITHOUT MEETING.
(a) No action shall be taken by the stockholders
except at an annual or special meeting of stockholders called in
accordance with these Bylaws, and no action shall be taken by the
stockholders by written consent.
SECTION 14. ORGANIZATION.
(a) At every meeting of stockholders, the Chairman of
the Board of Directors, or, if a Chairman has not been appointed
or is absent, the President, or, if the President is absent, a
chairman of the meeting chosen by a majority in interest of the
stockholders entitled to vote, present in person or by proxy,
shall act as chairman. The Secretary, or, in his absence, an
Assistant Secretary directed to do so by the President, shall act
as secretary of the meeting.
(b) The Board of Directors of the corporation shall be
entitled to make such rules or regulations for the conduct of
meetings of stockholders as it shall deem necessary, appropriate
or convenient. Subject to such rules and regulations of the
Board of Directors, if any, the chairman of the meeting shall
have the right and authority to prescribe such rules, regulations
and procedures and to do all such acts as, in the judgment of
such chairman, are necessary, appropriate or convenient for the
proper conduct of the meeting, including, without limitation,
establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the
safety of those present, limitations on participation in such
meeting to stockholders of record of the corporation and their
duly authorized and constituted proxies and such other persons as
the chairman shall permit, restrictions on entry to the meeting
after the time fixed for the commencement thereof, limitations on
the time allotted to questions or comments by participants and
regulation of the opening and closing of the polls for balloting
on matters which are to be voted on by ballot. Unless and to the
extent determined by the Board of Directors or the chairman of
the meeting, meetings of stockholders shall not be required to be
held in accordance with rules of parliamentary procedure.
ARTICLE IV
DIRECTORS
SECTION 15. NUMBER AND TERM OF OFFICE. The authorized
number of directors of the corporation shall be fixed in
accordance with the Certificate of Incorporation. Directors need
not be stockholders unless so required by the Certificate of
Incorporation. If for any cause, the directors shall not have
been elected at an annual meeting, they may be elected as soon
thereafter as convenient at a special meeting of the stockholders
called for that purpose in the manner provided in these Bylaws.
(Del. Code Ann., tit. 8, <SECTION><SECTION> 141(b), 211(b), (c))
SECTION 16. POWERS. The powers of the corporation shall be
exercised, its business conducted and its property controlled by
the Board of Directors, except as may be otherwise provided by
statute or by the Certificate of Incorporation. (Del. Code Ann.,
tit. 8, <SECTION> 141(a))
SECTION 17. CLASSES OF DIRECTORS. Subject to the rights of
the holders of any series of Preferred Stock to elect additional
directors under specified circumstances, the directors shall be
divided into three classes designated as Class I, Class II and
Class III, respectively. Directors shall be assigned to each
class in accordance with a resolution or resolutions adopted by
the Board of Directors. At the first annual meeting of
stockholders following the adoption and filing of this
Certificate of Incorporation, the term of office of the Class I
directors shall expire and Class I directors shall be elected for
a full term of three years. At the second annual meeting of
stockholders following the adoption and filing of this
Certificate of Incorporation, the term of office of the Class II
directors shall expire and Class II directors shall be elected
for a full term of three years. At the third annual meeting of
stockholders following the adoption and filing of this
Certificate of Incorporation, the term of office of the Class III
directors shall expire and Class III directors shall be elected
for a full term of three years. At each succeeding annual
meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose
terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article,
each director shall serve until his successor is duly elected and
qualified or until his death, resignation or removal. No
decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
SECTION 18. VACANCIES. Unless otherwise provided in the
Certificate of Incorporation, any vacancies on the Board of
Directors resulting from death, resignation, disqualification,
removal or other causes and any newly created directorships
resulting from any increase in the number of directors, shall
unless the Board of Directors determines by resolution that any
such vacancies or newly created directorships shall be filled by
stockholders, be filled only by the affirmative vote of a
majority of the directors then in office, even though less than a
quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence shall hold office for the
remainder of the full term of the director for which the vacancy
was created or occurred and until such director's successor shall
have been elected and qualified. A vacancy in the Board of
Directors shall be deemed to exist under this Bylaw in the case
of the death, removal or resignation of any director. (Del. Code
Ann., tit. 8, <SECTION> 223(a), (b))
SECTION 19. RESIGNATION. Any director may resign at any
time by delivering his written resignation to the Secretary, such
resignation to specify whether it will be effective at a
particular time, upon receipt by the Secretary or at the pleasure
of the Board of Directors. If no such specification is made, it
shall be deemed effective at the pleasure of the Board of
Directors. When one or more directors shall resign from the
Board of Directors, effective at a future date, a majority of the
directors then in office, including those who have so resigned,
shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations
shall become effective, and each Director so chosen shall hold
office for the unexpired portion of the term of the Director
whose place shall be vacated and until his successor shall have
been duly elected and qualified. (Del. Code Ann., tit. 8,
<SECTION><SECTION> 141(b), 223(d))
SECTION 20. REMOVAL. Subject to the rights of the holders
of any series of Preferred Stock, no director shall be removed
without cause. Subject to any limitations imposed by law, the
Board of Directors or any individual director may be removed from
office at any time with cause by the affirmative vote of the
holders of a majority of the voting power of all the then-
outstanding shares of voting stock of the corporation, entitled
to vote at an election of directors (the "Voting Stock").
SECTION 21. MEETINGS.
(a) ANNUAL MEETINGS. The annual meeting of the Board
of Directors shall be held immediately before or after the annual
meeting of stockholders and at the place where such meeting is
held. No notice of an annual meeting of the Board of Directors
shall be necessary and such meeting shall be held for the purpose
of electing officers and transacting such other business as may
lawfully come before it.
(b) REGULAR MEETINGS. Except as hereinafter otherwise
provided, regular meetings of the Board of Directors shall be
held in the office of the corporation required to be maintained
pursuant to Section 2 hereof. Unless otherwise restricted by the
Certificate of Incorporation, regular meetings of the Board of
Directors may also be held at any place within or without the
State of Delaware which has been designated by resolution of the
Board of Directors or the written consent of all directors.
(Del. Code Ann., tit. 8, <SECTION> 141(g))
(c) SPECIAL MEETINGS. Unless otherwise restricted by
the Certificate of Incorporation, special meetings of the Board
of Directors may be held at any time and place within or without
the State of Delaware whenever called by the Chairman of the
Board, the President or any two of the directors (Del. Code
Ann., tit. 8, <SECTION> 141(g))
(d) TELEPHONE MEETINGS. Any member of the Board of
Directors, or of any committee thereof, may participate in a
meeting by means of conference telephone or similar
communications equipment by means of which all persons
participating in the meeting can hear each other, and
participation in a meeting by such means shall constitute
presence in person at such meeting. (Del. Code Ann., tit. 8,
<SECTION> 141(i))
(e) NOTICE OF MEETINGS. Notice of the time and place
of all special meetings of the Board of Directors shall be orally
or in writing, by telephone, facsimile, telegraph or telex,
during normal business hours, at least twenty-four (24) hours
before the date and time of the meeting, or sent in writing to
each director by first class mail, charges prepaid, at least
three (3) days before the date of the meeting. Notice of any
meeting may be waived in writing at any time before or after the
meeting and will be waived by any director by attendance thereat,
except when the director attends the meeting for the express
purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully
called or convened. (Del. Code Ann., tit. 8, <SECTION> 229)
(f) WAIVER OF NOTICE. The transaction of all business
at any meeting of the Board of Directors, or any committee
thereof, however called or noticed, or wherever held, shall be as
valid as though had at a meeting duly held after regular call and
notice, if a quorum be present and if, either before or after the
meeting, each of the directors not present shall sign a written
waiver of notice. All such waivers shall be filed with the
corporate records or made a part of the minutes of the meeting.
(Del. Code Ann., tit. 8, <SECTION> 229)
SECTION 22. QUORUM AND VOTING.
(a) Unless the Certificate of Incorporation requires a
greater number and except with respect to indemnification
questions arising under Section 43 hereof, for which a quorum
shall be one-third of the exact number of directors fixed from
time to time in accordance with the Certificate of Incorporation,
a quorum of the Board of Directors shall consist of a majority of
the exact number of directors fixed from time to time by the
Board of Directors in accordance with the Certificate of
Incorporation; PROVIDED, HOWEVER, at any meeting whether a quorum
be present or otherwise, a majority of the directors present may
adjourn from time to time until the time fixed for the next
regular meeting of the Board of Directors, without notice other
than by announcement at the meeting. (Del. Code Ann., tit. 8,
<SECTION> 141(b))
(b) At each meeting of the Board of Directors at which
a quorum is present, all questions and business shall be
determined by the affirmative vote of a majority of the directors
present, unless a different vote be required by law, the
Certificate of Incorporation or these Bylaws. (Del. Code Ann.,
tit. 8, <SECTION> 141(b))
SECTION 23. ACTION WITHOUT MEETING. Unless otherwise
restricted by the Certificate of Incorporation or these Bylaws,
any action required or permitted to be taken at any meeting of
the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and
such writing or writings are filed with the minutes of
proceedings of the Board of Directors or committee. (Del. Code
Ann., tit. 8, <SECTION> 141(f))
SECTION 24. FEES AND COMPENSATION. Directors shall be
entitled to such compensation for their services as may be
approved by the Board of Directors, including, if so approved, by
resolution of the Board of Directors, a fixed sum and expenses of
attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a
committee of the Board of Directors. Nothing herein contained
shall be construed to preclude any director from serving the
corporation in any other capacity as an officer, agent, employee,
or otherwise and receiving compensation therefor. (Del. Code
Ann., tit. 8, <SECTION> 141(h))
SECTION 25. COMMITTEES.
(a) EXECUTIVE COMMITTEE. The Board of Directors may
by resolution passed by a majority of the whole Board of
Directors appoint an Executive Committee to consist of one (1) or
more members of the Board of Directors. The Executive Committee,
to the extent permitted by law and provided in the resolution of
the Board of Directors shall have and may exercise all the powers
and authority of the Board of Directors in the management of the
business and affairs of the corporation, including without
limitation the power or authority to declare a dividend, to
authorize the issuance of stock and to adopt a certificate of
ownership and merger, and may authorize the seal of the
corporation to be affixed to all papers which may require it; but
no such committee shall have the power or authority in reference
to amending the Certificate of Incorporation (except that a
committee may, to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock adopted
by the Board of Directors fix the designations and any of the
preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the
corporation or the conversion into, or the exchange of such
shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the
corporation or fix the number of shares of any series of stock or
authorize the increase or decrease of the shares of any series),
adopting an agreement of merger or consolidation, recommending to
the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets,
recommending to the stockholders a dissolution of the corporation
or a revocation of a dissolution, or amending the bylaws of the
corporation. (Del. Code Ann., tit. 8, <SECTION> 141(c))
(b) OTHER COMMITTEES. The Board of Directors may, by
resolution passed by a majority of the whole Board of Directors,
from time to time appoint such other committees as may be
permitted by law. Such other committees appointed by the Board
of Directors shall consist of one (1) or more members of the
Board of Directors and shall have such powers and perform such
duties as may be prescribed by the resolution or resolutions
creating such committees, but in no event shall such committee
have the powers denied to the Executive Committee in these
Bylaws. (Del. Code Ann., tit. 8, <SECTION> 141(c))
(c) TERM. Each member of a committee of the Board of
Directors shall serve a term on the committee coexistent with
such member's term on the Board of Directors. The Board of
Directors, subject to the provisions of subsections (a) or (b) of
this Bylaw may at any time increase or decrease the number of
members of a committee or terminate the existence of a committee.
The membership of a committee member shall terminate on the date
of his death or voluntary resignation from the committee or from
the Board of Directors. The Board of Directors may at any time
for any reason remove any individual committee member and the
Board of Directors may fill any committee vacancy created by
death, resignation, removal or increase in the number of members
of the committee. The Board of Directors may designate one or
more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the
committee, and, in addition, in the absence or disqualification
of any member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in
the place of any such absent or disqualified member. (Del. Code
Ann., tit. 8, <SECTION>141(c))
(d) MEETINGS. Unless the Board of Directors shall
otherwise provide, regular meetings of the Executive Committee or
any other committee appointed pursuant to this Section 25 shall
be held at such times and places as are determined by the Board
of Directors, or by any such committee, and when notice thereof
has been given to each member of such committee, no further
notice of such regular meetings need be given thereafter.
Special meetings of any such committee may be held at any place
which has been determined from time to time by such committee,
and may be called by any director who is a member of such
committee, upon written notice to the members of such committee
of the time and place of such special meeting given in the manner
provided for the giving of written notice to members of the Board
of Directors of the time and place of special meetings of the
Board of Directors. Notice of any special meeting of any
committee may be waived in writing at any time before or after
the meeting and will be waived by any director by attendance
thereat, except when the director attends such special meeting
for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting
is not lawfully called or convened. A majority of the authorized
number of members of any such committee shall constitute a quorum
for the transaction of business, and the act of a majority of
those present at any meeting at which a quorum is present shall
be the act of such committee. (Del. Code Ann., tit. 8,
<SECTION><SECTION> 141(c), 229)
SECTION 26. ORGANIZATION. At every meeting of the
directors, the Chairman of the Board of Directors, or, if a
Chairman has not been appointed or is absent, the President, or
if the President is absent, the most senior Vice President, or,
in the absence of any such officer, a chairman of the meeting
chosen by a majority of the directors present, shall preside over
the meeting. The Secretary, or in his absence, an Assistant
Secretary directed to do so by the President, shall act as
secretary of the meeting.
ARTICLE V
OFFICERS
SECTION 27. OFFICERS DESIGNATED. The officers of the
corporation shall include, if and when designated by the Board of
Directors, the Chairman of the Board of Directors, the Chief
Executive Officer, the President, one or more Vice Presidents,
the Secretary, the Chief Financial Officer, the Treasurer, the
Controller, all of whom shall be elected at the annual
organizational meeting of the Board of Directors. The Board of
Directors may also appoint one or more Assistant Secretaries,
Assistant Treasurers, Assistant Controllers and such other
officers and agents with such powers and duties as it shall deem
necessary. The Board of Directors may assign such additional
titles to one or more of the officers as it shall deem
appropriate. Any one person may hold any number of offices of
the corporation at any one time unless specifically prohibited
therefrom by law. The salaries and other compensation of the
officers of the corporation shall be fixed by or in the manner
designated by the Board of Directors. (Del. Code Ann., tit. 8,
<SECTION><SECTION> 122(5), 142(a), (b))
SECTION 28. TENURE AND DUTIES OF OFFICERS.
(a) GENERAL. All officers shall hold office at the
pleasure of the Board of Directors and until their successors
shall have been duly elected and qualified, unless sooner
removed. Any officer elected or appointed by the Board of
Directors may be removed at any time by the Board of Directors.
If the office of any officer becomes vacant for any reason, the
vacancy may be filled by the Board of Directors. (Del. Code
Ann., tit. 8, <SECTION> 141(b), (e))
(b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The
Chairman of the Board of Directors, when present, shall preside
at all meetings of the stockholders and the Board of Directors.
The Chairman of the Board of Directors shall perform other duties
commonly incident to his office and shall also perform such other
duties and have such other powers as the Board of Directors shall
designate from time to time. If there is no President, then the
Chairman of the Board of Directors shall also serve as the Chief
Executive Officer of the corporation and shall have the powers
and duties prescribed in paragraph (c) of this Section 28. (Del.
Code Ann., tit. 8, <SECTION> 142(a))
(c) DUTIES OF PRESIDENT. The President shall preside
at all meetings of the stockholders and at all meetings of the
Board of Directors, unless the Chairman of the Board of Directors
has been appointed and is present. Unless some other officer has
been elected Chief Executive Officer of the corporation, the
President shall be the chief executive officer of the corporation
and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and
officers of the corporation. The President shall perform other
duties commonly incident to his office and shall also perform
such other duties and have such other powers as the Board of
Directors shall designate from time to time. (Del. Code Ann.,
tit. 8, <SECTION> 142(a))
(d) DUTIES OF VICE PRESIDENTS. The Vice Presidents
may assume and perform the duties of the President in the absence
or disability of the President or whenever the office of
President is vacant. The Vice Presidents shall perform other
duties commonly incident to their office and shall also perform
such other duties and have such other powers as the Board of
Directors or the President shall designate from time to time.
(Del. Code Ann., tit. 8, <SECTION> 142(a))
(e) DUTIES OF SECRETARY. The Secretary shall attend
all meetings of the stockholders and of the Board of Directors
and shall record all acts and proceedings thereof in the minute
book of the corporation. The Secretary shall give notice in
conformity with these Bylaws of all meetings of the stockholders
and of all meetings of the Board of Directors and any committee
thereof requiring notice. The Secretary shall perform all other
duties given him in these Bylaws and other duties commonly
incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors shall
designate from time to time. The President may direct any
Assistant Secretary to assume and perform the duties of the
Secretary in the absence or disability of the Secretary, and each
Assistant Secretary shall perform other duties commonly incident
to his office and shall also perform such other duties and have
such other powers as the Board of Directors or the President
shall designate from time to time. (Del. Code Ann., tit. 8,
<SECTION> 142(a))
(f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief
Financial Officer shall keep or cause to be kept the books of
account of the corporation in a thorough and proper manner and
shall render statements of the financial affairs of the
corporation in such form and as often as required by the Board of
Directors or the President. The Chief Financial Officer, subject
to the order of the Board of Directors, shall have the custody of
all funds and securities of the corporation. The Chief Financial
Officer shall perform other duties commonly incident to his
office and shall also perform such other duties and have such
other powers as the Board of Directors or the President shall
designate from time to time. The President may direct the
Treasurer or any Assistant Treasurer, or the Controller or any
Assistant Controller to assume and perform the duties of the
Chief Financial Officer in the absence or disability of the Chief
Financial Officer, and each Treasurer and Assistant Treasurer and
each Controller and Assistant Controller shall perform other
duties commonly incident to his office and shall also perform
such other duties and have such other powers as the Board of
Directors or the President shall designate from time to time.
(Del. Code Ann., tit. 8, <SECTION> 142(a))
SECTION 29. DELEGATION OF AUTHORITY. The Board of
Directors may from time to time delegate the powers or duties of
any officer to any other officer or agent, notwithstanding any
provision hereof.
SECTION 30. RESIGNATIONS. Any officer may resign at any
time by giving written notice to the Board of Directors or to the
President or to the Secretary. Any such resignation shall be
effective when received by the person or persons to whom such
notice is given, unless a later time is specified therein, in
which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance
of any such resignation shall not be necessary to make it
effective. Any resignation shall be without prejudice to the
rights, if any, of the corporation under any contract with the
resigning officer. (Del. Code Ann., tit. 8, <SECTION> 142(b))
SECTION 31. REMOVAL. Any officer may be removed from
office at any time, either with or without cause, by the
affirmative vote of a majority of the directors in office at the
time, or by the unanimous written consent of the directors in
office at the time, or by any committee or superior officers upon
whom such power of removal may have been conferred by the Board
of Directors.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION
SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board
of Directors may, in its discretion, determine the method and
designate the signatory officer or officers, or other person or
persons, to execute on behalf of the corporation any corporate
instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts
on behalf of the corporation, except where otherwise provided by
law or these Bylaws, and such execution or signature shall be
binding upon the corporation. (Del. Code Ann., tit. 8,
<SECTION><SECTION> 103(a), 142(a), 158)
Unless otherwise specifically determined by the Board of
Directors or otherwise required by law, promissory notes, deeds
of trust, mortgages and other evidences of indebtedness of the
corporation, and other corporate instruments or documents
requiring the corporate seal, and certificates of shares of stock
owned by the corporation, shall be executed, signed or endorsed
by the Chairman of the Board of Directors, or the President or
any Vice President, and by the Secretary or Treasurer or any
Assistant Secretary or Assistant Treasurer. All other
instruments and documents requiring the corporate signature, but
not requiring the corporate seal, may be executed as aforesaid or
in such other manner as may be directed by the Board of
Directors. (Del. Code Ann., tit. 8, <SECTION><SECTION> 103(a),
142(a), 158)
All checks and drafts drawn on banks or other depositaries
on funds to the credit of the corporation or in special accounts
of the corporation shall be signed by such person or persons as
the Board of Directors shall authorize so to do.
Unless authorized or ratified by the Board of Directors or
within the agency power of an officer, no officer, agent or
employee shall have any power or authority to bind the
corporation by any contract or engagement or to pledge its credit
or to render it liable for any purpose or for any amount. (Del.
Code Ann., tit. 8, <SECTION><SECTION> 103(a), 142(a), 158).
SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION.
All stock and other securities of other corporations owned or
held by the corporation for itself, or for other parties in any
capacity, shall be voted, and all proxies with respect thereto
shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such
authorization, by the Chairman of the Board of Directors, the
Chief Executive Officer, the President, or any Vice President.
(Del. Code Ann., tit. 8, <SECTION> 123)
ARTICLE VII
SHARES OF STOCK
SECTION 34. FORM AND EXECUTION OF CERTIFICATES.
Certificates for the shares of stock of the corporation shall be
in such form as is consistent with the Certificate of
Incorporation and applicable law. Every holder of stock in the
corporation shall be entitled to have a certificate signed by or
in the name of the corporation by the Chairman of the Board of
Directors, or the President or any Vice President and by the
Treasurer or Assistant Treasurer or the Secretary or Assistant
Secretary, certifying the number of shares owned by him in the
corporation. Any or all of the signatures on the certificate may
be facsimiles. In case any officer, transfer agent, or registrar
who has signed or whose facsimile signature has been placed upon
a certificate shall have ceased to be such officer, transfer
agent, or registrar before such certificate is issued, it may be
issued with the same effect as if he were such officer, transfer
agent, or registrar at the date of issue. Each certificate shall
state upon the face or back thereof, in full or in summary, all
of the powers, designations, preferences, and rights, and the
limitations or restrictions of the shares authorized to be issued
or shall, except as otherwise required by law, set forth on the
face or back a statement that the corporation will furnish
without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional,
or other special rights of each class of stock or series thereof
and the qualifications, limitations or restrictions of such
preferences and/or rights. Within a reasonable time after the
issuance or transfer of uncertificated stock, the corporation
shall send to the registered owner thereof a written notice
containing the information required to be set forth or stated on
certificates pursuant to this section or otherwise required by
law or with respect to this section a statement that the
corporation will furnish without charge to each stockholder who
so requests the powers, designations, preferences and relative
participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Except as
otherwise expressly provided by law, the rights and obligations
of the holders of certificates representing stock of the same
class and series shall be identical. (Del. Code Ann., tit. 8,
<SECTION> 158)
SECTION 35. LOST CERTIFICATES. A new certificate or
certificates shall be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to
have been lost, stolen, or destroyed, upon the making of an
affidavit of that fact by the person claiming the certificate of
stock to be lost, stolen, or destroyed. The corporation may
require, as a condition precedent to the issuance of a new
certificate or certificates, the owner of such lost, stolen, or
destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall
require or to give the corporation a surety bond in such form and
amount as it may direct as indemnity against any claim that may
be made against the corporation with respect to the certificate
alleged to have been lost, stolen, or destroyed. (Del. Code
Ann., tit. 8, <SECTION> 167)
SECTION 36. TRANSFERS.
(a) Transfers of record of shares of stock of the
corporation shall be made only upon its books by the holders
thereof, in person or by attorney duly authorized, and upon the
surrender of a properly endorsed certificate or certificates for
a like number of shares. (Del. Code Ann., tit. 8, <SECTION> 201,
tit. 6, <SECTION> 8- 401(1))
(b) The corporation shall have power to enter into and
perform any agreement with any number of stockholders of any one
or more classes of stock of the corporation to restrict the
transfer of shares of stock of the corporation of any one or more
classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware. (Del. Code Ann.,
tit. 8, <SECTION> 160 (a))
SECTION 37. FIXING RECORD DATES.
(a) In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, the Board of Directors
may fix, in advance, a record date, which record date shall not
precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which record date shall
not be more than sixty (60) nor less than ten (10) days before
the date of such meeting. If no record date is fixed by the
Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders
shall be at the close of business on the day next preceding the
day on which notice is given, or if notice is waived, at the
close of business on the day next preceding the day on which the
meeting is held. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders
shall apply to any adjournment of the meeting; PROVIDED, HOWEVER,
that the Board of Directors may fix a new record date for the
adjourned meeting.
(b) In order that the corporation may determine the
stockholders entitled to receive payment of any dividend or other
distribution or allotment of any rights or the stockholders
entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a
record date, which record date shall not precede the date upon
which the resolution fixing the record date is adopted, and which
record date shall be not more than sixty (60) days prior to such
action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the
close of business on the day on which the Board of Directors
adopts the resolution relating thereto. (Del. Code Ann., tit. 8,
<SECTION> 213)
SECTION 38. REGISTERED STOCKHOLDERS. The corporation
shall be entitled to recognize the exclusive right of a person
registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and shall not be bound to
recognize any equitable or other claim to or interest in such
share or shares on the part of any other person whether or not it
shall have express or other notice thereof, except as otherwise
provided by the laws of Delaware. (Del. Code Ann., tit. 8,
<SECTION><SECTION> 213(a), 219)
ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds,
debentures and other corporate securities of the corporation,
other than stock certificates (covered in Section 34), may be
signed by the Chairman of the Board of Directors, the President
or any Vice President, or such other person as may be authorized
by the Board of Directors, and the corporate seal impressed
thereon or a facsimile of such seal imprinted thereon and
attested by the signature of the Secretary or an Assistant
Secretary, or the Chief Financial Officer or Treasurer or an
Assistant Treasurer; PROVIDED, HOWEVER, that where any such bond,
debenture or other corporate security shall be authenticated by
the manual signature, or where permissible facsimile signature,
of a trustee under an indenture pursuant to which such bond,
debenture or other corporate security shall be issued, the
signatures of the persons signing and attesting the corporate
seal on such bond, debenture or other corporate security may be
the imprinted facsimile of the signatures of such persons.
Interest coupons appertaining to any such bond, debenture or
other corporate security, authenticated by a trustee as
aforesaid, shall be signed by the Treasurer or an Assistant
Treasurer of the corporation or such other person as may be
authorized by the Board of Directors, or bear imprinted thereon
the facsimile signature of such person. In case any officer who
shall have signed or attested any bond, debenture or other
corporate security, or whose facsimile signature shall appear
thereon or on any such interest coupon, shall have ceased to be
such officer before the bond, debenture or other corporate
security so signed or attested shall have been delivered, such
bond, debenture or other corporate security nevertheless may be
adopted by the corporation and issued and delivered as though the
person who signed the same or whose facsimile signature shall
have been used thereon had not ceased to be such officer of the
corporation.
ARTICLE IX
DIVIDENDS
SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the
capital stock of the corporation, subject to the provisions of
the Certificate of Incorporation, if any, may be declared by the
Board of Directors pursuant to law at any regular or special
meeting. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the
Certificate of Incorporation. (Del. Code Ann., tit. 8,
<SECTION><SECTION> 170, 173)
SECTION 41. DIVIDEND RESERVE. Before payment of any
dividend, there may be set aside out of any funds of the
corporation available for dividends such sum or sums as the Board
of Directors from time to time, in their absolute discretion,
think proper as a reserve or reserves to meet contingencies, or
for equalizing dividends, or for repairing or maintaining any
property of the corporation, or for such other purpose as the
Board of Directors shall think conducive to the interests of the
corporation, and the Board of Directors may modify or abolish any
such reserve in the manner in which it was created. (Del. Code
Ann., tit. 8, <SECTION> 171)
ARTICLE X
FISCAL YEAR
SECTION 42. FISCAL YEAR. The fiscal year of the
corporation shall be fixed by resolution of the Board of
Directors.
ARTICLE XI
INDEMNIFICATION
SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE
OFFICERS, OTHER OFFICERS, EMPLOYEES AND OTHER
AGENTS.
(a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation
shall indemnify its directors and executive officers (for the
purposes of this Article XI, "executive officers shall have the
meaning defined in Rule 3b-7 promulgated under the 1934 Act) to
the fullest extent not prohibited by the Delaware General
Corporation Law; PROVIDED, HOWEVER, that the corporation may
modify the extent of such indemnification by individual contracts
with its directors and executive officers; and, PROVIDED,
FURTHER, that the corporation shall not be required to indemnify
any director or executive officer in connection with any
proceeding (or part thereof) initiated by such person unless (i)
such indemnification is expressly required to be made by law,
(ii) the proceeding was authorized by the Board of Directors of
the corporation, (iii) such indemnification is provided by the
corporation, in its sole discretion, pursuant to the powers
vested in the corporation under the Delaware General Corporation
Law or (iv) such indemnification is required to be made under
subsection (d).
(b) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The
corporation shall have power to indemnify its other officers,
employees and other agents as set forth in the Delaware General
Corporation Law.
(c) EXPENSES. The corporation shall advance to any
person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director
or executive officer, of the corporation, or is or was serving at
the request of the corporation as a director or executive officer
of another corporation, partnership, joint venture, trust or
other enterprise, prior to the final disposition of the
proceeding, promptly following request therefor, all expenses
incurred by any director or executive officer in connection with
such proceeding upon receipt of an undertaking by or on behalf of
such person to repay said amounts if it should be determined
ultimately that such person is not entitled to be indemnified
under this Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined
pursuant to paragraph (e) of this Bylaw, no advance shall be made
by the corporation to an executive officer of the corporation
(except by reason of the fact that such executive officer is or
was a director of the corporation in which event this paragraph
shall not apply) in any action, suit or proceeding, whether
civil, criminal, administrative or investigative, if a
determination is reasonably and promptly made (i) by the Board of
Directors by a majority vote of a quorum consisting of directors
who were not parties to the proceeding, or (ii) if such quorum is
not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written
opinion, that the facts known to the decision-making party at the
time such determination is made demonstrate clearly and
convincingly that such person acted in bad faith or in a manner
that such person did not believe to be in or not opposed to the
best interests of the corporation.
(d) ENFORCEMENT. Without the necessity of entering
into an express contract, all rights to indemnification and
advances to directors and executive officers under this Bylaw
shall be deemed to be contractual rights and be effective to the
same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to
indemnification or advances granted by this Bylaw to a director
or executive officer shall be enforceable by or on behalf of the
person holding such right in any court of competent jurisdiction
if (i) the claim for indemnification or advances is denied, in
whole or in part, or (ii) no disposition of such claim is made
within ninety (90) days of request therefor. The claimant in
such enforcement action, if successful in whole or in part, shall
be entitled to be paid also the expense of prosecuting his claim.
In connection with any claim for indemnification, the corporation
shall be entitled to raise as a defense to any such action that
the claimant has not met the standards of conduct that make it
permissible under the Delaware General Corporation Law for the
corporation to indemnify the claimant for the amount claimed. In
connection with any claim by an executive officer of the
corporation (except in any action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of
the fact that such executive officer is or was a director of the
corporation) for advances, the corporation shall be entitled to
raise a defense as to any such action clear and convincing
evidence that such person acted in bad faith or in a manner that
such person did not believe to be in or not opposed to the best
interests of the corporation, or with respect to any criminal
action or proceeding that such person acted without reasonable
cause to believe that his conduct was lawful. Neither the
failure of the corporation (including its Board of Directors,
independent legal counsel or its stockholders) to have made a
determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances
because he has met the applicable standard of conduct set forth
in the Delaware General Corporation Law, nor an actual
determination by the corporation (including its Board of
Directors, independent legal counsel or its stockholders) that
the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that
claimant has not met the applicable standard of conduct. In any
suit brought by a director or executive officer to enforce a
right to indemnification or to an advancement of expenses
hereunder, the burden of proving that the director or executive
officer is not entitled to be indemnified, or to such advancement
of expenses, under this Article XI or otherwise shall be on the
corporation.
(e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred
on any person by this Bylaw shall not be exclusive of any other
right which such person may have or hereafter acquire under any
statute, provision of the Certificate of Incorporation, Bylaws,
agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The corporation
is specifically authorized to enter into individual contracts
with any or all of its directors, officers, employees or agents
respecting indemnification and advances, to the fullest extent
not prohibited by the Delaware General Corporation Law.
(f) SURVIVAL OF RIGHTS. The rights conferred on any
person by this Bylaw shall continue as to a person who has ceased
to be a director, officer, employee or other agent and shall
inure to the benefit of the heirs, executors and administrators
of such a person.
(g) INSURANCE. To the fullest extent permitted by the
Delaware General Corporation Law, the corporation, upon approval
by the Board of Directors, may purchase insurance on behalf of
any person required or permitted to be indemnified pursuant to
this Bylaw.
(h) AMENDMENTS. Any repeal or modification of this
Bylaw shall only be prospective and shall not affect the rights
under this Bylaw in effect at the time of the alleged occurrence
of any action or omission to act that is the cause of any
proceeding against any agent of the corporation.
(i) SAVING CLAUSE. If this Bylaw or any portion
hereof shall be invalidated on any ground by any court of
competent jurisdiction, then the corporation shall nevertheless
indemnify each director and executive officer to the full extent
not prohibited by any applicable portion of this Bylaw that shall
not have been invalidated, or by any other applicable law.
(j) CERTAIN DEFINITIONS. For the purposes of this
Bylaw, the following definitions shall apply:
(i) The term "proceeding" shall be broadly
construed and shall include, without limitation, the
investigation, preparation, prosecution, defense, settlement,
arbitration and appeal of, and the giving of testimony in, any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative.
(ii) The term "expenses" shall be broadly
construed and shall include, without limitation, court costs,
attorneys' fees, witness fees, fines, amounts paid in settlement
or judgment and any other costs and expenses of any nature or
kind incurred in connection with any proceeding.
(iii) The term the "corporation" shall
include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its
separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or
agents, so that any person who is or was a director, officer,
employee or agent of such constituent corporation, or is or was
serving at the request of such constituent corporation as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall
stand in the same position under the provisions of this Bylaw
with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its
separate existence had continued.
(iv) References to a "director," "executive
officer," "officer," "employee," or "agent" of the corporation
shall include, without limitation, situations where such person
is serving at the request of the corporation as, respectively, a
director, executive officer, officer, employee, trustee or agent
of another corporation, partnership, joint venture, trust or
other enterprise.
(v) References to "other enterprises" shall
include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an
employee benefit plan; and references to "serving at the request
of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes
duties on, or involves services by, such director, officer,
employee, or agent with respect to an employee benefit plan, its
participants, or beneficiaries; and a person who acted in good
faith and in a manner he reasonably believed to be in the
interest of the participants and beneficiaries of an employee
benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to
in this Bylaw.
ARTICLE XII
NOTICES
SECTION 44. NOTICES.
(a) NOTICE TO STOCKHOLDERS. Whenever, under any
provisions of these Bylaws, notice is required to be given to any
stockholder, it shall be given in writing, timely and duly
deposited in the United States mail, postage prepaid, and
addressed to his last known post office address as shown by the
stock record of the corporation or its transfer agent. (Del.
Code Ann., tit. 8, <SECTION> 222)
(b) NOTICE TO DIRECTORS. Any notice required to be
given to any director may be given by the method stated in
subsection (a), or by facsimile, telex or telegram, except that
such notice other than one which is delivered personally shall be
sent to such address as such director shall have filed in writing
with the Secretary, or, in the absence of such filing, to the
last known post office address of such director.
(c) AFFIDAVIT OF MAILING. An affidavit of mailing,
executed by a duly authorized and competent employee of the
corporation or its transfer agent appointed with respect to the
class of stock affected, specifying the name and address or the
names and addresses of the stockholder or stockholders, or
director or directors, to whom any such notice or notices was or
were given, and the time and method of giving the same, shall in
the absence of fraud, be prima facie evidence of the facts
therein contained. (Del. Code Ann., tit. 8, <SECTION> 222)
(d) TIME NOTICES DEEMED GIVEN. All notices given by
mail, as above provided, shall be deemed to have been given as at
the time of mailing, and all notices given by facsimile, telex or
telegram shall be deemed to have been given as of the sending
time recorded at time of transmission.
(e) METHODS OF NOTICE. It shall not be necessary that
the same method of giving notice be employed in respect of all
directors, but one permissible method may be employed in respect
of any one or more, and any other permissible method or methods
may be employed in respect of any other or others.
(f) FAILURE TO RECEIVE NOTICE. The period or
limitation of time within which any stockholder may exercise any
option or right, or enjoy any privilege or benefit, or be
required to act, or within which any director may exercise any
power or right, or enjoy any privilege, pursuant to any notice
sent him in the manner above provided, shall not be affected or
extended in any manner by the failure of such stockholder or such
director to receive such notice.
(g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS
UNLAWFUL. Whenever notice is required to be given, under any
provision of law or of the Certificate of Incorporation or Bylaws
of the corporation, to any person with whom communication is
unlawful, the giving of such notice to such person shall not be
required and there shall be no duty to apply to any governmental
authority or agency for a license or permit to give such notice
to such person. Any action or meeting which shall be taken or
held without notice to any such person with whom communication is
unlawful shall have the same force and effect as if such notice
had been duly given. In the event that the action taken by the
corporation is such as to require the filing of a certificate
under any provision of the Delaware General Corporation Law, the
certificate shall state, if such is the fact and if notice is
required, that notice was given to all persons entitled to
receive notice except such persons with whom communication is
unlawful.
(h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS.
Whenever notice is required to be given, under any provision of
law or the Certificate of Incorporation or Bylaws of the
corporation, to any stockholder to whom (i) notice of two
consecutive annual meetings, and all notices of meetings or of
the taking of action by written consent without a meeting to such
person during the period between such two consecutive annual
meetings, or (ii) all, and at least two, payments (if sent by
first class mail) of dividends or interest on securities during a
twelve-month period, have been mailed addressed to such person at
his address as shown on the records of the corporation and have
been returned undeliverable, the giving of such notice to such
person shall not be required. Any action or meeting which shall
be taken or held without notice to such person shall have the
same force and effect as if such notice had been duly given. If
any such person shall deliver to the corporation a written notice
setting forth his then current address, the requirement that
notice be given to such person shall be reinstated. In the event
that the action taken by the corporation is such as to require
the filing of a certificate under any provision of the Delaware
General Corporation Law, the certificate need not state that
notice was not given to persons to whom notice was not required
to be given pursuant to this paragraph. (Del. Code Ann, tit. 8,
<SECTION> 230)
ARTICLE XIII
AMENDMENTS
SECTION 45. AMENDMENTS.
Subject to paragraph (h) of Section 43 of the Bylaws, the
Bylaws may be altered or amended or new Bylaws adopted by the
affirmative vote of at least sixty-six and two-thirds percent
(66-2/3%) of the voting power of all of the then-outstanding
shares of the Voting Stock. The Board of Directors shall also
have the power to adopt, amend, or repeal Bylaws.
ARTICLE XIV
LOANS TO OFFICERS
SECTION 46. LOANS TO OFFICERS. The corporation may lend
money to, or guarantee any obligation of, or otherwise assist any
officer or other employee of the corporation or of its
subsidiaries, including any officer or employee who is a Director
of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may
reasonably be expected to benefit the corporation. The loan,
guarantee or other assistance may be with or without interest and
may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge
of shares of stock of the corporation. Nothing in these Bylaws
shall be deemed to deny, limit or restrict the powers of guaranty
or warranty of the corporation at common law or under any
statute. (Del. Code Ann., tit. 8, <SECTION>143)
ARTICLE XV
MISCELLANEOUS
SECTION 47. ANNUAL REPORT.
(a) Subject to the provisions of paragraph (b) of this
Bylaw, the Board of Directors shall cause an annual report to be
sent to each stockholder of the corporation not later than one
hundred twenty (120) days after the close of the corporation's
fiscal year. Such report shall include a balance sheet as of the
end of such fiscal year and an income statement and statement of
changes in financial position for such fiscal year, accompanied
by any report thereon of independent accounts or, if there is no
such report, the certificate of an authorized officer of the
corporation that such statements were prepared without audit from
the books and records of the corporation. When there are more
than 100 stockholders of record of the corporation's shares, as
determined by Section 605 of the California Corporations Code,
additional information as required by Section 1501(b) of the
California Corporations Code shall also be contained in such
report, provided that if the corporation has a class of
securities registered under Section 12 of the 1934 Act, that Act
shall take precedence. Such report shall be sent to stockholders
at least fifteen (15) days prior to the next annual meeting of
stockholders after the end of the fiscal year to which it
relates.
(b) If and so long as there are fewer than 100 holders
of record of the corporation's shares, the requirement of sending
of an annual report to the stockholders of the corporation is
hereby expressly waived.
Exhibit 8
[COOLEY GODWARD LLP LETTERHEAD]
December 12, 1996
STOCKHOLDERS OF HOLLIS-EDEN, INC.
Dear Sir or Madam:
This opinion is being delivered to you in connection with the
filing of a Registration Statement on Form S-4 with the
Securities and Exchange Commission in connection with the
Agreement and Plan of Merger dated as of November 1, 1996 (the
"Agreement") by and among Initial Acquisition Corp., a Delaware
corporation ("Acquiror"), Hollis-Eden, Inc., a Delaware
corporation ("Target"), and certain stockholders of Target.
Pursuant to the Agreement, Target will merge with and into
Acquiror.
Except as otherwise provided, capitalized terms not defined
herein have the meanings set forth in the Agreement or in letters
delivered to us by Acquiror and Target containing certain
representations of Acquiror and Target, copies of which are
attached as Exhibits hereto. All section references, unless
otherwise indicated, are to the Internal Revenue Code of 1986, as
amended (the "Code").
We have acted as counsel to Target in connection with the Merger.
As such, and for the purpose of rendering this opinion, we have
examined and are relying upon (without any independent
investigation or review thereof) the truth and accuracy, at all
relevant times, of the statements, covenants, representations and
warranties contained in the following documents (including all
exhibits and schedules attached thereto):
(a) the Agreement;
(b) the Registration Statement of Form S-4 filed by
Acquiror with the Securities and Exchange Commission relating to
the Merger (the "Registration Statement");
(c) Continuity of Interest Certificates from certain Target
stockholders (the "Continuity of Interest Certificates");
(d) A tax representation letter dated December 12, 1996
addressed to us signed by an authorized officer of Acquiror and
delivered to us from Acquiror in the form attached hereto as
Exhibit A and incorporated hereby by reference;
<PAGE>
STOCKHOLDERS OF HOLLIS-EDEN, INC.
December 12, 1996
Page 2
(e) A tax representation letter dated December 12, 1996
addressed to us signed by an authorized officer of Target and
delivered to us from Target in the form attached hereto as
Exhibit A and incorporated hereby by reference;
(f) such other instruments and documents related to the
formation, organization and operation of Acquiror and Target and
related to the consummation of the Merger and the transactions
contemplated thereby as we have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed or
obtained representations (and are relying thereon), without any
independent investigation or review thereof that:
1. Original documents (including signatures thereto) are
authentic, documents submitted to us as copies conform to the
original documents, and there has been (or will be by the
Effective Time of the Merger) due execution and delivery of all
documents where due execution and delivery are prerequisites to
effectiveness thereof;
2. All representations, warranties and statements made or
agreed to by Acquiror, Target and the Target stockholders,
including but not limited to, those set forth in the Agreement
(including all exhibits and schedules attached thereto), the tax
representation letters attached hereto and the Continuity of
Interest Certificates, are and will be true and accurate at all
relevant times;
3. All covenants contained in the Agreements (including
all exhibits thereto), the tax representation letters attached
hereto and the Continuity of Interest Certificates will be
performed without waiver or breach of any material provision
thereof; and
4. The continuity of interest requirement as specified in
Treas. Reg Section 1.368-1(b) and as interpreted in certain
Internal Revenue Service rulings and federal judicial decisions
will be satisfied.
Based on the foregoing documents, materials, assumptions and
information, and subject to the qualifications and assumptions
set forth herein, our opinion is that, if the Merger is
consummated in accordance with the provisions of the Agreement
and the exhibits thereto, the Merger of Target with and into
Acquiror, with Acquiror surviving the Merger, will qualify as a
reorganization within the meaning of Section 368(a) of the Code.
Our opinion set forth above is based on the existing provisions
of the Code, Treasury Regulations (including Temporary and
Proposed Treasury Regulations) promulgated under the Code,
published Revenue Rulings, Revenue Procedures and other
announcements of the Internal Revenue Service (the "Service") and
existing court decisions, any of which could be
<PAGE>
STOCKHOLDERS OF HOLLIS-EDEN, INC.
December 12, 1996
Page 3
changed at any time. Any such changes might be retroactive with
respect to transactions entered into prior to the date of such
changes and could significantly modify the opinion set forth
above. Nevertheless, we undertake no responsibility to advise
you of any subsequent developments in the application, operation
or interpretation of the federal income tax laws.
Our opinion concerning certain of the federal tax consequences of
the Merger is limited to the specific federal tax consequence
presented above. No opinion is expressed as to any transaction
other than the Merger, including any transaction undertaken in
connection with the Merger. In addition, this opinion does not
address any estate, gift, state, local or foreign tax
consequences that may result from the Merger. In particular, we
express no opinion regarding: (i) the amount, existence, or
availability after the Merger, of any of the federal income tax
attributes of Target or Acquiror (including, without limitation,
foreign tax credits or net operating loss carryforwards, if any
of Target or Acquiror); (ii) any transaction in which Target
capital stock is acquired or Acquiror common stock is disposed;
(iii) the potential application of the "disqualifying
disposition" rules of Section 421 to dispositions of Target
common stock; (iv) the effects of the Merger and Acquiror's
assumption of outstanding options to acquire Target common stock
on the holders of such options under any Target employee stock
option or stock purchase plan; (v) the effects of the Merger on
any Target stockholder who pursuant to the Merger exchanges
Target stock that was acquired subject to the provision of
Section 83(a) of the Code; (vi) the effects of the Merger on any
payment which is or may be subject to the provisions of Section
280G of the Code; (vii) the application of the collapsible
corporation provisions of Section 341 of the Code to Acquiror or
Target as a result of the Merger; (viii) the effects on any
Target stockholder who exchanges Target Warrants for Merger
Warrants; and (ix) the effects on any Acquiror stockholder who
receives a distribution of Additional Merger Shares.
In addition, we have reviewed the discussion contained in the
Joint Proxy Statement included in the Registration Statement
under "THE MERGER Certain Federal Income Tax Consequences" (the
"Tax Discussion") and we believe that, subject to the
qualifications and limitations in the Tax Discussion, the matters
stated in the Tax Discussion, to the extent they present matters
of law or legal conclusions, are fairly presented.
This opinion is being delivered solely in connection with the
filing of the Registration Statement. It may not be relied upon
or utilized for any other purpose or by any other person or
entity, and may not be made available to any other person or
entity without our prior written consent.
We consent to the reference to our firm under the caption "The
Merger Certain Federal Income Tax Consequences" included in the
Registration Statement and to the filing of this opinion as an
exhibit to the Registration Statement.
<PAGE>
STOCKHOLDERS OF HOLLIS-EDEN, INC.
December 12, 1996
Page 4
Very truly yours,
Cooley Godward LLP
By: /s/ Susan Cooper Philpot
-------------------------------
Susan Cooper Philpot
Attachments:
Exhibit A - A representation letter dated December 12, 1996
addressed to us signed by authorized officers of
Acquiror.
Exhibit B - A representation letter dated December 12, 1996
addressed to us signed by authorized officers of
Target.
Exhibit 10.3
1996 INCENTIVE STOCK OPTION PLAN
OF
INITIAL ACQUISITION CORP.
1. Purpose. The purpose of this Plan is to advance
-------
the interests of the Company by encouraging and enabling the
acquisition of a larger personal proprietary interest in the
Company by key employees and directors of, and consultants to,
the Company and its Subsidiaries, if any, upon whose judgment and
keen interest the Company is largely dependent for the successful
conduct of its operations. It is anticipated that the
acquisition of such proprietary interest in the Company will
stimulate the efforts of such key employees, directors and
consultants on behalf of the Company and its Subsidiaries, if
any, and strengthen their desire to remain with the Company and
its Subsidiaries, if any. It is also expected that the
opportunity to acquire such a proprietary interest will enable
the Company and its Subsidiaries, if any, to attract desirable
personnel and consultants.
2. Definitions. When used in this Plan, unless the
-----------
context otherwise requires:
(a) "Board" shall mean the Board of Directors of
the Company, as constituted at any time.
(b) "Chairman" shall mean the person who at the
time shall be Chairman of the Board.
(c) "Code" shall mean the Internal Revenue Code
of 1986, as amended.
(d) "Committee" shall mean the Committee
hereinafter described in Section 3.
(e) "Company" shall mean Initial Acquisition
Corp., a Delaware Corporation.
(f) "Delaware Act" shall mean the Delaware
General Corporation Law, as from time to time
amended.
(g) "Director" shall mean any person who shall
from time to time serve as a member of the
Board of Directors of the Company.
(h) "Effective Date" shall mean the date of the
consummation of the merger of Hollis-Eden,
Inc., a Delaware corporation, with and into
the Company.
(i) "Exchange Act" shall mean the Securities
Exchange Act of 1934, as from time to time
amended.
(j) "Fair Market Value" on a specified date shall
mean the closing price at which one Share is
traded on the Nasdaq National Market, or, if
the Shares are not listed on the Nasdaq
National Market, the closing price at which
one Share is traded on the stock exchange, if
any, on which Shares are primarily traded,
or, if the Shares are not listed on a stock
exchange, the average of the bid and ask
closing prices at which one Share is traded
on the over-the-counter market, as reported
on the National Association of Security
Dealers Automated Quotation System, but, in
any case, if no Shares were traded on such
date, then on the last previous date on which
a Share was so traded, or, if none of the
above are applicable, the value of a Share as
established by the Committee for such date
using any reasonable method of valuation.
(k) "Independent Director" shall mean any
Director who is not also an employee of the
Company or any Subsidiary.
(l) "Options" shall mean the stock options
granted pursuant to this Plan.
(m) "Participant" shall mean any person to whom
an Option shall have been granted under this
Plan.
(n) "Plan" shall mean this 1996 Incentive Stock
Option Plan of the Company, as adopted by the
Board on November 1, 1996, as such Plan from
time to time may be amended.
(o) "President" shall mean the person who at the
time shall be the President of the Company.
(p) "Securities Act" shall mean the Securities
Act of 1933, as amended.
(q) "Share" shall mean a share of common stock,
par value $.01 per share, of the Company.
(r) "Subsidiary" shall mean any corporation or
partnership 50% or more of whose stock having
general voting power or, in the case of a
partnership, equity securities is owned by
the Company or by another Subsidiary of the
Company.
3. Committee. The Plan shall be administered by a
---------
Committee which shall consist of two or more Independent
Directors each of whom is a "disinterested person" within the
meaning of Rule 16b-3(c)(2)(i) under the Exchange Act (including
the provisions of Rule 16b-3(d)(3) as in effect on April 30,
1991). The members of the Committee shall be selected by the
Board. Any member of the Committee may resign by giving written
notice thereof to the Board, and any member of the Committee may
be removed at any time, with or without cause, by the Board. If,
for any reason, a member of the Committee shall cease to serve,
the vacancy shall be filled by the Board. The Committee shall
establish such rules and procedures as are necessary or advisable
to administer the Plan.
4. Participants. The class of persons who are
------------
potential recipients of Options granted under this Plan consist
of the (i) Independent Directors (other than members of the
Committee), (ii) key employees of the Company or any Subsidiary
and (iii) consultants and advisors to the Company or any
Subsidiary, in each case, as determined by the Committee. The
key employees and consultants to whom Options are granted under
this Plan, and the number of Shares subject to each such Option,
shall be determined by the Committee in its sole discretion,
subject, however, to the terms and conditions of this Plan.
Employees to whom Options may be granted include key employees
who are also Directors. No Independent Director who is a member
of the Committee may be granted an Option while serving as such
or during the one-year period prior to serving as such, other
than in accordance with Section 12.
5. Shares. The Committee may, but shall not be
------
required to, grant, in accordance with this Plan, Options to
purchase an aggregate of up to 1,000,000 Shares, which may be
either Shares held in treasury or authorized but unissued Shares.
At the time an Option is granted, the Committee may, in
its sole discretion, designate whether such Option (a) is to be
considered as an incentive stock option within the meaning of
Section 422 of the Code, or (b) is not to be treated as an
incentive stock option for purposes of this Plan and the Code.
No Option which is intended to qualify as an incentive stock
option shall be granted under this Plan to any individual who, at
the time of such grant, is not an employee of the Company or a
Subsidiary.
Notwithstanding any other provision of this Plan to the
contrary, to the extent that the aggregate Fair Market Value
(determined as of the date an Option is granted) of the Shares
with respect to which Options which are designated as incentive
stock options, and any other incentive stock options, granted to
an employee (under this Plan, or any other incentive stock option
plan maintained by the Company or any Subsidiary that meets the
requirements of Section 422 of the Code) first become exercisable
in any calendar year exceeds $100,000, such Options shall be
treated as Options which are not incentive stock options.
Options with respect to which no designation is made by the
Committee shall be deemed to be incentive stock options to the
extent that the $100,000 limitation described in the preceding
sentence is met. This paragraph shall be applied by taking
options into account in the order in which they are granted.
If any Option shall expire, be canceled or terminate
for any reason without having been exercised in full, the
unpurchased Shares subject thereto may again be made subject to
Options under the Plan.
Nothing herein contained shall be construed to prohibit
the issuance of Options at different times to the same
Participant.
The form of Option shall be determined from time to
time by the Committee. A certificate of Option signed by the
Chairman or the President or any Vice President of the Company,
attested by the Treasurer or an Assistant Treasurer, or Secretary
or an Assistant Secretary of the Company, shall be issued to each
Participant. The certificate of Option for an Option shall be
legended to indicate whether or not the Option is an incentive
stock option.
6. Price. The price per share of the Shares to be
-----
purchased pursuant to the exercise of any Option shall be fixed
by the Committee at the time of grant; provided, however, that
the purchase price per share of the Shares to be purchased
pursuant to the exercise of an incentive stock option shall not
be less than the Fair Market Value of a Share on the day on which
the Option is granted.
7. Duration of Options. The duration of any Option
-------------------
granted under this Plan shall be fixed by the Committee in its
sole discretion; provided, however, that no Option shall remain
in effect for a period of more than ten years from the date upon
which the Option is granted.
8. Ten Percent Stockholders. Notwithstanding any
------------------------
other provision of this Plan to the contrary, no Option which is
intended to qualify as an incentive stock option may be granted
under this Plan to any employee who, at the time the Option is
granted, owns shares possessing more than ten percent (10%) of
the total combined voting power or value of all classes of stock
of the Company or a Subsidiary, unless the exercise price under
------
such Option is at least 110% of the Fair Market Value of a Share
on the date such Option is granted and the duration of such
Option is no more than five years.
9. Consideration for Options. Subject to the
-------------------------
requirements of the Delaware Act, the Company shall obtain such
consideration for the grant of an Option as the Committee in its
discretion may request.
10. Non-transferability of Options. Options and all
------------------------------
rights thereunder shall be non-transferable and non-assignable by
Participants, except to the extent that the estate of a deceased
Participant may be permitted to exercise them. A Participant is
required to notify the Company if he or she disposes of Shares
acquired pursuant to exercise of an incentive stock option within
two years after the date such option was granted or within one
year of the date such option was exercised.
11. Exercise of Options. An Option, after the grant
-------------------
thereof, shall be exercisable by the Participant at such rate and
times as may be fixed by the Committee; provided, however, that
no Option may be exercised in part or in full prior to the
approval of the Plan by the stockholders of the Company as
provided in Section 18, and no Option may be exercised until at
least six months after the date upon which the Option was
granted.
Notwithstanding the foregoing, all or any part of any
remaining unexercised Options granted to any Participant (other
than a member of the Committee) may be exercised in the following
circumstances (but in no event during the six-month period
commencing on the date granted): (a) immediately upon (but prior
to the expiration of the term of the Option) the Participant's
retirement from the Company and all Subsidiaries on or after his
65th birthday, (b) subject to the provisions of Section 13
hereof, upon the disability (to the extent and in a manner as
shall be determined by the Committee in its sole discretion) or
death of the Participant, (c) upon the occurrence of such special
circumstances or events as in the opinion of the Committee merits
special consideration, or (d) if, while the Participant is
employed by, or serving as a Director or consultant of the
Company or a Subsidiary, there occurs a Change in Control. For
purposes of this Plan, a "Change in Control" shall be deemed to
have occurred if either (i) after the Effective Date, any person
(within the meaning of Section 13(d) and 14(d)(2) of the Exchange
Act) becomes, without the approval of the Board, the beneficial
owner (within the meaning of Rule 13d-3 under the Exchange Act)
of securities representing 30% or more of the combined voting
power of the Company; (ii) the stockholders of the Company
approve either (A) an agreement to merge or consolidate in a
transaction in which the Company is not the surviving entity, (B)
an agreement to sell or dispose of all or substantially all of
the Company's assets, or (C) a plan to liquidate the Company,
unless the Board determines that Options will not vest upon an
event described in (A), (B) or (C); or (iii) during any period of
two consecutive years, individuals constituting at least a
majority of the Board at the beginning of such period cease to
constitute a majority thereof, unless the election or nomination
for election by the Company's stockholders of each new Director
was approved by a vote of at least two-thirds of the Directors
then still in office who were Directors at the beginning of such
period.
An Option shall be exercised by the delivery of a
written notice duly signed by the Participant to such effect,
together with the Option certificate and the full purchase price
of the Shares purchased pursuant to the exercise of the Option,
to the Chairman or an officer of the Company appointed by the
Chairman for the purpose of receiving the same. Payment of the
full purchase price shall be made as follows: in cash; by check
payable to the order of the Company; by delivery to the Company
of Shares which shall be valued at their Fair Market Value on the
date of exercise of the Option; or by such other methods as the
Committee may permit from time to time; provided, however, that a
Participant may not use any Shares acquired pursuant to the
exercise of an option granted under this Plan or any other stock
option plan maintained by the Company or any Subsidiary unless
the holder has beneficially owned such Shares for at least six
months. No Option may be granted pursuant to the Plan or
exercised at any time when such Option, or the granting, exercise
or payment thereof, may result in the violation of any law or
governmental order or regulation. The Plan is intended to comply
with Rule 16b-3 under the Exchange Act. Any provision
inconsistent with such Rule shall be inoperative and shall not
affect the validity of the Plan.
Within a reasonable time after the exercise of an
Option, the Company shall cause to be delivered to the
Participant a certificate for the Shares purchased pursuant to
the exercise of the Option. If the Option shall have been
exercised with respect to less than all of the Shares subject to
the Option, the Company shall also cause to be delivered to the
Participant a new Option certificate in replacement of the
certificate surrendered at the time of the exercise of the
Option, indicating the number of Shares with respect to which the
Option remains available for exercise, or the original Option
certificate shall be endorsed to give effect to the partial
exercise thereof.
In the event that the holder of an Option which is an
incentive stock option disposes of any Shares purchased pursuant
to the exercise of such Option in a "disqualifying disposition"
(within the meaning of Section 421 of the Code) within two years
from the date of grant of such Option or one year from the date
of exercise of such Option, such holder shall notify the Company
of such disposition.
12. Grants of Options to Members of the Committee.
---------------------------------------------
Each Director who is a member of the Committee shall be granted
Options (x) upon the effective date of his initial appointment as
a member of the Committee ("Initial Options") and (y) on January
1 of each calendar year ("Annual Options"), which Options shall
be non-incentive stock options; provided, however, that such
-------- -------
Options shall only be granted to such person if he is a member of
the Committee on the date such Option is to be granted and such
Options (or portion thereof) shall not be granted if, in the
opinion of counsel to the Company, the grant of such Options (or
portion thereof) would be improper. Each Initial Option shall
entitle such Director to purchase o Shares at a purchase price
per share equal to the Fair Market Value of a Share on the date
of grant. Each Annual Option shall entitle such Director to
purchase o Shares at a purchase price per share equal to the Fair
Market Value of a Share on the date of grant. Each Initial
Option and Annual Option shall have a duration of ten years from
the date of grant and shall become exercisable six months after
the date upon which the Option was granted. Any Option granted
pursuant to this Section 12, to the extent unexercised, shall
terminate immediately upon the holder's ceasing to serve as a
Director of the Company, except that the holder shall have until
three months following the cessation of such service to exercise
any unexercised Option that he or she could have exercised on the
day on which such service terminated; provided that such exercise
must be accomplished prior to the expiration of the term of such
Option; and provided, further, however, that such three-month
-------- ------- -------
period is extended to one year in the event that the holder's
cessation of service is due to permanent disability (within the
meaning of Section 22(e)(3) of the Code), or to death, in which
case the estate or the heirs of the holder may exercise such
Option. Notwithstanding the preceding, if the service of any
holder of an Option granted pursuant to this Section 12 shall
be terminated because of the holder's (a) fraud or intentional
misrepresentation, or (b) embezzlement, misappropriation or
conversion of assets or opportunities of the Company or any
Subsidiary, then all such unexercised Options of the holder
shall terminate immediately upon such termination of the holder's
service. A Director may elect to decline the grant of any Option
which otherwise would be granted pursuant to this Section 12 by
notifying the Committee prior to the date of the grant of such
Option, in which case the Director shall not receive anything in
lieu of such Option (either at the time of such election or at
any time thereafter).
Upon the exercise of any Option granted pursuant to
this Section 12, payment of the full purchase price shall be made
in cash, by check payable to the order of the Company, or by
delivery to the Company of Shares which shall be valued at their
Fair Market Value on the date of exercise of the Option;
provided, however, that a holder may not use any Shares acquired
pursuant to the exercise of an option granted under this Plan or
any other stock option plan maintained by the Company or any
Subsidiary unless the holder has beneficially owned such Shares
for at least six months.
Notwithstanding any other provision of the Plan to the
contrary, the provisions of this Section 12 shall not be amended
more than once every six months, other than to comport with
changes in the Code, the Employee Retirement Income Security Act
of 1974, as amended, or the rules and regulations promulgated
thereunder.
13. Termination of Employment or Service. All or any
------------------------------------
part of any Option, to the extent unexercised, shall terminate
immediately upon (i) the cessation or termination for any reason
of the Participant's employment by or consulting arrangements
with the Company and all Subsidiaries and (ii) the Participant's
ceasing to serve as a Director of the Company and as a Director
of all Subsidiaries, except that the Participant shall have until
the three months following the cessation of his employment or
consulting arrangement with the Company and Subsidiaries or his
service as a Director, and no longer, to exercise any unexercised
Option that such Participant could have exercised on the day on
which such employment, consulting arrangement or service
terminated; provided that such exercise must be accomplished
prior to the expiration of the term of such Option.
Notwithstanding the foregoing, if the cessation of employment,
consulting arrangement or service is due to disability (to an
extent and in a manner as shall be determined in each case by the
Committee in its sole discretion) or to death, the Option holder
or the representative of the estate or the heirs of a deceased
Participant shall have the privilege of exercising the Options
which are unexercised at the time of such retirement or of such
disability or death; provided, however, that such exercise must
be accomplished prior to the expiration of the term of such
Option and within one year of the Participant's disability or
death, as the case may be. If the employment, consulting
arrangement or service with the Company or a Subsidiary shall be
terminated because of the Participant's violation of the duties
of such employment, consulting arrangement or service with the
Company or a Subsidiary as he or she may from time to time have,
the existence of which violation shall be determined by the
Committee in its sole discretion (which determination by the
Committee shall be conclusive) all unexercised Options of such
Participant shall terminate immediately upon such termination of
such Participant's employment, consulting arrangement or service
with the Company and all Subsidiaries, and a Participant whose
employment, consulting arrangement or service with the Company
and Subsidiaries is so terminated, shall have no right after such
termination to exercise any unexercised Option he or she might
have exercised prior to the termination of his or her employment,
consulting arrangement or service with the Company and
Subsidiaries.
Nothing contained herein or in the Option certificate
shall be construed to confer on any employee, Director (including
an Independent Director), or consultant any right to be continued
in the employ of the Company or any Subsidiary, to continue
serving as a Director of the Company or of a Subsidiary or as a
consultant to the Company or any Subsidiary, as the case may be,
or derogate from any right of the Company or any Subsidiary to
request the resignation of or discharge such employee, Director
or consultant (without or with pay), at any time, with or without
cause.
14. Adjustment of Optioned Shares. If prior to the
-----------------------------
complete exercise of any Option there shall be declared and paid
a distribution payable in Shares upon the Shares of the Company
or if the Shares of the Company shall be split up, converted,
exchanged, reclassified, or in any way substituted for, the
Option, to the extent that it has not been exercised, shall
entitle the holder thereof upon the future exercise of the Option
to such number and kind of securities or other property subject
to the terms of the Option to which such holder should have been
entitled had such holder actually owned the Shares subject to the
unexercised portion of the Option at the time of the occurrence
of such stock dividend, split-up, conversion, exchange,
reclassification or substitution; and the aggregate purchase
price upon the future exercise of the Option shall be the same as
if the originally optioned Shares were being purchased
thereunder. Any fractional shares or securities payable upon the
exercise of the Option as a result of such adjustment shall be
payable in cash based upon the Fair Market Value of such shares
or securities at the time of such exercise. If any such event
should occur, the number of Shares with respect to which Options
remain to be issued, or with respect to which Options may be
reissued, shall be adjusted in a similar manner.
Notwithstanding any other provision of the Plan, in the
event of a recapitalization, merger, consolidation, rights
offering, separation, reorganization or liquidation, or any other
change in the corporate structure or outstanding Shares, the
Committee may make such equitable adjustments to the number of
Shares and the class of shares available hereunder or to any
outstanding Options as it shall deem appropriate to prevent
dilution or enlargement of rights.
15. Issuance of Shares and Compliance with Securities
-------------------------------------------------
Act. The Company may postpone the issuance and delivery of
---
Shares upon any exercise of an Option until (a) the admission of
such Shares to listing on any stock exchange on which Shares of
the Company of the same class are then listed, and (b) the
completion of such registration or other qualification of such
Shares under any State or Federal law, rule or regulation as the
Company shall determine to be necessary or advisable. Any
Participant exercising an Option shall make such representations
and furnish such information as may, in the opinion of counsel of
the Company, be appropriate to permit the Company, in the light
of the then existence or non-existence with respect to such
Shares of an effective registration statement under the
Securities Act, to issue the Shares in compliance with the
provisions of the Securities Act or any comparable act. The
Company shall have the right, in its sole discretion, to legend
any Shares which may be issued pursuant to the exercise of an
Option, or may issue stop transfer orders in respect thereof.
16. Income Tax Withholding. If the Company or a
----------------------
Subsidiary shall be required to withhold any amounts by reason of
any Federal, State or local tax rules or regulations in respect
of the issuance of Shares pursuant to the exercise of such
Option, the Company or the Subsidiary shall be entitled to deduct
and withhold such amounts from any cash payments to be made to
the holder of such Option. In any event, a holder with respect
to whom any such withholding requirement exists shall make
available to the Company or Subsidiary, promptly when requested
by the Company or such Subsidiary, sufficient funds to meet the
requirements of such withholding; and the Company or Subsidiary
shall be entitled to take and authorize such steps as it may deem
advisable in order to have such funds made available to the
Company or Subsidiary out of any funds or property due or to
become due to the holder of such Option.
17. Administration and Amendment of the Plan. Except
----------------------------------------
as hereinafter provided, the Board or the Committee may amend or
terminate the Plan and any Options at any time or from time to
time; provided, however, that any amendment that would (i)
-------- -------
increase the maximum number of Shares as to which Options may be
granted under the Plan, or (ii) materially modify the
requirements as to eligibility for participation in the Plan,
shall be subject to approval by the stockholders of the Company.
No amendment may adversely affect the rights of any Participant
under an Option granted prior to such amendment, unless the
Participant consents thereto. In addition, no amendment may be
made that would result in the disqualification of any incentive
stock option as an "incentive stock option" within the meaning of
Section 422 of the Code.
Determinations of the Committee as to any question
which may arise with respect to the interpretation of the
provisions of the Plan and Options shall be final. The Committee
may authorize and establish such rules, regulations and revisions
thereof not inconsistent with the provisions of the Plan, as it
may deem advisable to make the Plan and Options effective or
provide for their administration, and may take such other action
with regard to the Plan and Options as it shall deem desirable to
effectuate their purpose.
18. Effective Date of the Plan. This Plan is
--------------------------
conditioned upon its approval by the stockholders of the Company
on or before November 1, 1997.
19. Final Issuance Date. No Option shall be granted
-------------------
under the Plan after November 1, 2006.
Exhibit 10.4
HOLLIS-EDEN, INC.
1996 STOCK OPTION PLAN
ADOPTED APRIL 16, 1996
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which
selected Employees and Directors of and Consultants to the
Company, and its Affiliates, may be given an opportunity to
purchase stock of the Company.
(b) The Company, by means of the Plan, seeks to retain the
services of persons who are now Employees or Directors of or
Consultants to the Company or its Affiliates, to secure and
retain the services of new Employees, Directors and Consultants,
and to provide incentives for such persons to exert maximum
efforts for the success of the Company and its Affiliates.
(c) The Company intends that the Options issued under the
Plan shall, in the discretion of the Board or any Committee to
which responsibility for administration of the Plan has been
delegated pursuant to subsection 3(c), be either Incentive Stock
Options or Nonstatutory Stock Options. All Options shall be
separately designated Incentive Stock Options or Nonstatutory
Stock Options at the time of grant, and in such form as issued
pursuant to Section 6, and a separate certificate or certificates
will be issued for shares purchased on exercise of each type of
Option.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary
corporation, whether now or hereafter existing, as those terms
are defined in Sections 424(e) and (f) respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as
amended.
(d) "COMMITTEE" means a Committee appointed by the Board in
accordance with subsection 3(c) of the Plan.
(e) "COMPANY" means Hollis-Eden, Inc., a Delaware
corporation.
(f) "CONSULTANT" means any person, including an advisor,
engaged by the Company or an Affiliate to render consulting
services and who is compensated for such services, provided that
the term "Consultant" shall not include Directors who are paid
only a director's fee by the Company or who are not compensated
by the Company for their services as Directors.
(g) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR
CONSULTANT" means that the service of an individual to the
Company, whether as an Employee, Director or Consultant, is not
interrupted or terminated. The Board, in its sole discretion,
may determine whether Continuous Status as an Employee, Director
or Consultant shall be considered interrupted in the case of:
(i) any leave of absence approved by the Board, including sick
leave, military leave, or any other personal leave; or
(ii) transfers between the Company, Affiliates or their
successors.
(h) "DIRECTOR" means a member of the Board.
(i) "DISINTERESTED PERSON" means a Director who is
considered to be a "disinterested person" in accordance with
Rule 16b-3, or any other applicable rules, regulations or
interpretations of the Securities and Exchange Commission.
(j) "EMPLOYEE" means any person, including Officers and
Directors, employed by the Company or any Affiliate of the
Company. Neither service as a Director nor payment of a
director's fee by the Company shall be sufficient to constitute
"employment" by the Company.
(k) "EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended.
(l) "FAIR MARKET VALUE" means, as of any date, the value of
the common stock of the Company determined as follows:
(1) If the common stock is listed on any established
stock exchange or a national market system, including without
limitation the National Market of The Nasdaq Stock Market, the
Fair Market Value of a share of common stock shall be the closing
sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such system or exchange (or the exchange
with the greatest volume of trading in common stock) on the last
market trading day prior to the day of determination, as reported
in the Wall Street Journal or such other source as the Board
deems reliable;
(2) If the common stock is quoted on The Nasdaq Stock
Market (but not on the National Market thereof) or is regularly
quoted by a recognized securities dealer but selling prices are
not reported, the Fair Market Value of a share of common stock
shall be the mean between the bid and asked prices for the common
stock on the last market trading day prior to the day of
determination, as reported in the Wall Street Journal or such
other source as the Board deems reliable;
(3) In the absence of an established market for the
common stock, the Fair Market Value shall be determined in good
faith by the Board.
(m) "INCENTIVE STOCK OPTION" means an Option intended to
qualify as an incentive stock option within the meaning of
Section 422 of the Code and the regulations promulgated
thereunder.
(n) "NONSTATUTORY STOCK OPTION" means an Option not
intended to qualify as an Incentive Stock Option.
(o) "OFFICER" means a person who is an officer of the
Company within the meaning of Section 16 of the Exchange Act and
the rules and regulations promulgated thereunder.
(p) "OPTION" means a stock option granted pursuant to the
Plan.
(q) "OPTION AGREEMENT" means a written agreement between
the Company and an Optionee evidencing the terms and conditions
of an individual Option grant. Each Option Agreement shall be
subject to the terms and conditions of the Plan.
(r) "OPTIONEE" means a person who holds an outstanding
Option.
(s) "PLAN" means this Hollis-Eden 1996 Stock Option Plan.
(t) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or
any successor to Rule 16b-3, as in effect when discretion is
being exercised with respect to the Plan.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and
until the Board delegates administration to a Committee, as
provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within
the limitations of, the express provisions of the Plan:
(1) To determine from time to time which of the
persons eligible under the Plan shall be granted Options; when
and how each Option shall be granted; whether an Option will be
an Incentive Stock Option or a Nonstatutory Stock Option; the
provisions of each Option granted (which need not be identical),
including the time or times such Option may be exercised in whole
or in part; and the number of shares for which an Option shall be
granted to each such person.
(2) To construe and interpret the Plan and Options
granted under it, and to establish, amend and revoke rules and
regulations for its administration. The Board, in the exercise
of this power, may correct any defect, omission or inconsistency
in the Plan or in any Option Agreement, in a manner and to the
extent it shall deem necessary or expedient to make the Plan
fully effective.
(3) To amend the Plan or an Option as provided in
Section 11.
(4) Generally, to exercise such powers and to perform
such acts as the Board deems necessary or expedient to promote
the best interests of the Company which are not in conflict with
the provisions of the Plan.
(c) The Board may delegate administration of the Plan to a
committee composed of not fewer than two (2) members (the
"Committee"), all of the members of which Committee shall be
Disinterested Persons. If administration is delegated to a
Committee, the Committee shall have, in connection with the
administration of the Plan, the powers theretofore possessed by
the Board (and references in this Plan to the Board shall
thereafter be to the Committee), subject, however, to such
resolutions, not inconsistent with the provisions of the Plan, as
may be adopted from time to time by the Board. The Board may
abolish the Committee at any time and revest in the Board the
administration of the Plan. Additionally, prior to the date of
the first registration of an equity security of the Company under
Section 12 of the Exchange Act, and notwithstanding anything to
the contrary contained herein, the Board may delegate
administration of the Plan to a committee of one or more members
of the Board and the term "Committee" shall apply to any person
or persons to whom such authority has been delegated.
Notwithstanding anything in this Section 3 to the contrary, the
Board or the Committee may delegate to a committee of one or more
members of the Board the authority to grant Options to eligible
persons who are not then subject to Section 16 of the Exchange
Act.
(d) Any requirement that an administrator of the Plan be a
Disinterested Person shall not apply (i) prior to the date of the
first registration of an equity security of the Company under
Section 12 of the Exchange Act, or (ii) if the Board or the
Committee expressly declares that such requirement shall not
apply. Any Disinterested Person shall otherwise comply with the
requirements of Rule 16b-3.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 10 relating to
adjustments upon changes in stock, the stock that may be sold
pursuant to Options shall not exceed in the aggregate five
hundred thousand (500,000) shares of the Company's common stock.
If any Option shall for any reason expire or otherwise terminate,
in whole or in part, without having been exercised in full, the
stock not purchased under such Option shall revert to and again
become available for issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or
reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Incentive Stock Options may be granted only to
Employees. Nonstatutory Stock Options may be granted only to
Employees, Directors or Consultants. No Option shall be granted,
however, if the grant of such Option or the issuance of shares of
the Company s common stock pursuant to such Option does not
qualify for exemption from the securities qualification
requirements of the California Corporations Code.
(b) A Director shall in no event be eligible for the
benefits of the Plan unless at the time discretion is exercised
in the selection of the Director as a person to whom Options may
be granted, or in the determination of the number of shares which
may be covered by Options granted to the Director: (i) the Board
has delegated its discretionary authority over the Plan to a
Committee which consists solely of Disinterested Persons; or
(ii) the Plan otherwise complies with the requirements of Rule
16b-3. The Board shall otherwise comply with the requirements of
Rule 16b-3. This subsection 5(b) shall not apply (i) prior to
the date of the first registration of an equity security of the
Company under Section 12 of the Exchange Act, or (ii) if the
Board or Committee expressly declares that it shall not apply.
(c) No person shall be eligible for the grant of an
Incentive Stock Option if, at the time of grant, such person owns
(or is deemed to own pursuant to Section 424(d) of the Code)
stock possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or
of any of its Affiliates unless the exercise price of such
Incentive Stock Option is at least one hundred ten percent (110%)
of the Fair Market Value of such stock at the date of grant and
the Incentive Stock Option is not exercisable after the
expiration of five (5) years from the date of grant.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such
terms and conditions as the Board shall deem appropriate. The
provisions of separate Options need not be identical, but each
Option shall include (through incorporation of provisions hereof
by reference in the Option or otherwise) the substance of each of
the following provisions:
(a) TERM. No Option shall be exercisable after the
expiration of ten (10) years from the date it was granted.
(b) PRICE. The exercise price of each Incentive Stock
Option shall be not less than one hundred percent (100%) of the
Fair Market Value of the stock subject to the Option on the date
the Option is granted; the exercise price of each Nonstatutory
Stock Option shall be determined by the Board, but not less than
fifty percent (50%) of the Fair Market Value of the stock subject
to the Option on the date the Option is granted. Notwithstanding
the foregoing, an Option (whether an Incentive Stock Option or a
Nonstatutory Stock Option) may be granted with an exercise price
lower than that set forth in the preceding sentence if such
Option is granted pursuant to an assumption or substitution for
another option in a manner satisfying the provisions of Section
424(a) of the Code.
(c) CONSIDERATION. The purchase price of stock acquired
pursuant to an Option shall be paid, to the extent permitted by
applicable statutes and regulations, either (i) in cash at the
time the Option is exercised, or (ii) at the discretion of the
Board or the Committee, at the time of the grant of the Option,
(A) by delivery to the Company of other common stock of the
Company, (B) according to a deferred payment arrangement, except
that payment of the common stock's "par value" (as defined in the
Delaware General Corporation Law) shall not be made by deferred
payment, or other arrangement (which may include, without
limiting the generality of the foregoing, the use of other common
stock of the Company) with the person to whom the Option is
granted or to whom the Option is transferred pursuant to
subsection 6(d), or (C) in any other form of legal consideration
that may be acceptable to the Board.
In the case of any deferred payment arrangement,
interest shall be payable at least annually and shall be charged
at the minimum rate of interest necessary to avoid the treatment
as interest, under any applicable provisions of the Code, of any
amounts other than amounts stated to be interest under the
deferred payment arrangement.
(d) TRANSFERABILITY. An Option shall not be transferable
except by will or by the laws of descent and distribution, and
shall be exercisable during the lifetime of the person to whom
the Option is granted only by such person. The person to whom
the Option is granted may, by delivering written notice to the
Company, in a form satisfactory to the Company, designate a third
party who, in the event of the death of the Optionee, shall
thereafter be entitled to exercise the Option.
(e) VESTING. The total number of shares of stock subject
to an Option may, but need not, be allotted in periodic
installments (which may, but need not, be equal). The Option
Agreement may provide that from time to time during each of such
installment periods, the Option may become exercisable ("vest")
with respect to some or all of the shares allotted to that
period, and may be exercised with respect to some or all of the
shares allotted to such period and/or any prior period as to
which the Option became vested but was not fully exercised. The
Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on
performance or other criteria) as the Board may deem appropriate.
The provisions of this subsection 6(e) are subject to any Option
provisions governing the minimum number of shares as to which an
Option may be exercised.
(f) SECURITIES LAW COMPLIANCE. The Company may require any
Optionee, or any person to whom an Option is transferred under
subsection 6(d), as a condition of exercising any such Option,
(1) to give written assurances satisfactory to the Company as to
the Optionee s knowledge and experience in financial and business
matters and/or to employ a purchaser representative reasonably
satisfactory to the Company who is knowledgeable and experienced
in financial and business matters, and that he or she is capable
of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Option;
and (2) to give written assurances satisfactory to the Company
stating that such person is acquiring the stock subject to the
Option for such person s own account and not with any present
intention of selling or otherwise distributing the stock. The
foregoing requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the
shares upon the exercise of the Option has been registered under
a then currently effective registration statement under the
Securities Act of 1933, as amended (the Securities Act ), or
(ii) as to any particular requirement, a determination is made by
counsel for the Company that such requirement need not be met in
the circumstances under the then applicable securities laws. The
Company may require the Optionee to provide such other
representations, written assurances or information which the
Company shall determine is necessary, desirable or appropriate to
comply with applicable securities and other laws as a condition
of granting an Option to such Optionee or permitting the Optionee
to exercise such Option. The Company may, upon advice of counsel
to the Company, place legends on stock certificates issued under
the Plan as such counsel deems necessary or appropriate in order
to comply with applicable securities laws, including, but not
limited to, legends restricting the transfer of stock.
(g) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR
OR CONSULTANT. In the event an Optionee's Continuous Status as
an Employee, Director or Consultant terminates (other than upon
the Optionee's death or disability), the Optionee may exercise
his or her Option (to the extent that the Optionee was entitled
to exercise it as of the date of termination) but only within
such period of time ending on the earlier of (i) the date three
(3) months after the termination of the Optionee's Continuous
Status as an Employee, Director or Consultant, or such longer or
shorter period specified in the Option Agreement, or (ii) the
expiration of the term of the Option as set forth in the Option
Agreement. If, at the date of termination, the Optionee is not
entitled to exercise his or her entire Option, the shares covered
by the unexercisable portion of the Option shall revert to and
again become available for issuance under the Plan. If, after
termination, the Optionee does not exercise his or her Option
within the time specified in the Option Agreement, the Option
shall terminate, and the shares covered by such Option shall
revert to and again become available for issuance under the Plan.
(h) DISABILITY OF OPTIONEE. In the event an Optionee's
Continuous Status as an Employee, Director or Consultant
terminates as a result of the Optionee's disability, the Optionee
may exercise his or her Option (to the extent that the Optionee
was entitled to exercise it as of the date of termination), but
only within such period of time ending on the earlier of (i) the
date twelve (12) months following such termination (or such
longer or shorter period specified in the Option Agreement), or
(ii) the expiration of the term of the Option as set forth in the
Option Agreement. If, at the date of termination, the Optionee
is not entitled to exercise his or her entire Option, the shares
covered by the unexercisable portion of the Option shall revert
to and again become available for issuance under the Plan. If,
after termination, the Optionee does not exercise his or her
Option within the time specified herein, the Option shall
terminate, and the shares covered by such Option shall revert to
and again become available for issuance under the Plan.
(i) DEATH OF OPTIONEE. In the event of the death of an
Optionee during, or within a period specified in the Option
Agreement after the termination of, the Optionee's Continuous
Status as an Employee, Director or Consultant, the Option may be
exercised (to the extent the Optionee was entitled to exercise
the Option as of the date of death) by the Optionee's estate, by
a person who acquired the right to exercise the Option by bequest
or inheritance or by a person designated to exercise the option
upon the Optionee's death pursuant to subsection 6(d), but only
within the period ending on the earlier of (i) the date eighteen
(18) months following the date of death (or such longer or
shorter period specified in the Option Agreement), or (ii) the
expiration of the term of such Option as set forth in the Option
Agreement. If, at the time of death, the Optionee was not
entitled to exercise his or her entire Option, the shares covered
by the unexercisable portion of the Option shall revert to and
again become available for issuance under the Plan. If, after
death, the Option is not exercised within the time specified
herein, the Option shall terminate, and the shares covered by
such Option shall revert to and again become available for
issuance under the Plan.
(j) EARLY EXERCISE. The Option may, but need not, include
a provision whereby the Optionee may elect at any time while an
Employee, Director or Consultant to exercise the Option as to any
part or all of the shares subject to the Option prior to the full
vesting of the Option. Any unvested shares so purchased may be
subject to a repurchase right in favor of the Company or to any
other restriction the Board determines to be appropriate.
(k) RIGHT OF REPURCHASE. The Option may, but need not,
include a provision whereby the Company may elect, prior to the
date of the first registration of an equity security of the
Company under Section 12 of the Exchange Act, to repurchase all
or any part of the vested shares exercised pursuant to the Option
on such terms as the Board deems appropriate.
(l) RIGHT OF FIRST REFUSAL. The Option may, but need not,
include a provision whereby the Company may elect, prior to the
date of the first registration of an equity security of the
Company under Section 12 of the Exchange Act, to exercise a right
of first refusal following receipt of notice from the Optionee of
the intent to transfer all or any part of the shares exercised
pursuant to the Option.
(m) WITHHOLDING. To the extent provided by the terms of an
Option Agreement, the Optionee may satisfy any federal, state or
local tax withholding obligation relating to the exercise of such
Option by any of the following means or by a combination of such
means: (1) tendering a cash payment; (2) authorizing the Company
to withhold shares from the shares of the common stock otherwise
issuable to the Optionee as a result of the exercise of the
Option; or (3) delivering to the Company owned and unencumbered
shares of the common stock of the Company.
7. COVENANTS OF THE COMPANY.
(a) During the terms of the Options, the Company shall keep
available at all times the number of shares of stock required to
satisfy such Options.
(b) The Company shall seek to obtain from each regulatory
commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell shares of stock
upon exercise of the Options; provided, however, that this
undertaking shall not require the Company to register under the
Securities Act either the Plan, any Option or any stock issued or
issuable pursuant to any such Option. If, after reasonable
efforts, the Company is unable to obtain from any such regulatory
commission or agency the authority which counsel for the Company
deems necessary for the lawful issuance and sale of stock under
the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such Options
unless and until such authority is obtained.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Options shall
constitute general funds of the Company.
9. MISCELLANEOUS.
(a) The Board shall have the power to accelerate the time
at which an Option may first be exercised or the time during
which an Option or any part thereof will vest pursuant to
subsection 6(e), notwithstanding the provisions in the Option
stating the time at which it may first be exercised or the time
during which it will vest.
(b) Neither an Optionee nor any person to whom an Option is
transferred under subsection 6(d) shall be deemed to be the
holder of, or to have any of the rights of a holder with respect
to, any shares subject to such Option unless and until such
person has satisfied all requirements for exercise of the Option
pursuant to its terms.
(c) Throughout the term of any Option, to the extent
required by applicable law, the Company shall deliver to the
holder of such Option, not later than one hundred twenty (120)
days after the close of each of the Company's fiscal years during
the Option term, a balance sheet and an income statement. This
section shall not apply when issuance is limited to key employees
whose duties in connection with the Company assure them access to
equivalent information.
(d) Nothing in the Plan or any instrument executed or
Option granted pursuant thereto shall confer upon any Employee,
Director, Consultant or Optionee any right to continue in the
employ of the Company or any Affiliate (or to continue acting as
a Director or Consultant) or shall affect the right of the
Company or any Affiliate to terminate the employment of any
Employee, with or without cause, to remove any Director as
provided in the Company's By-Laws and the provisions of the
General Corporation Law of the State of Delaware, or to terminate
the relationship of any Consultant in accordance with the terms
of that Consultant's agreement with the Company or Affiliate to
which such Consultant is providing services.
(e) To the extent that the aggregate Fair Market Value
(determined at the time of grant) of stock with respect to which
Incentive Stock Options are exercisable for the first time by any
Optionee during any calendar year under all plans of the Company
and its Affiliates exceeds one hundred thousand dollars
($100,000), the Options or portions thereof which exceed such
limit (according to the order in which they were granted) shall
be treated as Nonstatutory Stock Options.
(f) The Board or the Committee shall have the authority to
effect, at any time and from time to time (i) the repricing of
any outstanding Options under the Plan and/or (ii) with the
consent of the affected holders of Options, the cancellation of
any outstanding Options and the grant in substitution therefor of
new Options under the Plan covering the same or different numbers
of shares of common stock, but having an exercise price per share
not less than fifty percent (50%) of the Fair Market Value (one
hundred percent (100%) of the Fair Market Value in the case of an
Incentive Stock Option or, in the case of an Incentive Stock
Option granted to a ten percent (10%) stockholder (as defined in
subsection 5(c)), not less than one hundred and ten percent
(110%) of the Fair Market Value) per share of common stock on the
new grant date.
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan,
or subject to any Option (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in
property other than cash, stock split, liquidating dividend,
combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of
consideration by the Company), the Plan will be appropriately
adjusted in the class(es) and maximum number of shares subject to
the Plan pursuant to subsection 4(a), and the outstanding Options
will be appropriately adjusted in the class(es) and number of
shares and price per share of stock subject to such outstanding
Options. Such adjustments shall be made by the Board or
Committee, the determination of which shall be final, binding and
conclusive. (The conversion of any convertible securities of the
Company shall not be treated as a "transaction not involving the
receipt of consideration by the Company.")
(b) In the event of: (1) a dissolution, liquidation, or
sale of all or substantially all of the assets of the Company;
(2) a merger or consolidation in which the Company is not the
surviving corporation; (3) a reverse merger in which the Company
is the surviving corporation but the shares of the Company's
common stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property, whether in
the form of securities, cash or otherwise; or (4) the acquisition
by any person, entity or group within the meaning of Section
13(d) or 14(d) of the Exchange Act, or any comparable successor
provisions (excluding any employee benefit plan, or related
trust, sponsored or maintained by the Company or any Affiliate of
the Company) of the beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act, or comparable
successor rule) of securities of the Company representing at
least fifty percent (50%) of the combined voting power entitled
to vote in the election of directors, then to the extent
permitted by applicable law: (i) any surviving or acquiring
corporation shall assume any Options outstanding under the Plan
or shall substitute similar Options (including an option to
acquire the same consideration paid to the stockholders in the
transaction described in this subsection 10(b)) for those
outstanding under the Plan, or (ii) in the event any surviving or
acquiring corporation refuses to assume such Options, or to
substitute similar options for those outstanding under the Plan,
then, with respect to Options held by persons then performing
services as Employees, Directors or Consultants, the time during
which such Option may be exercised shall be accelerated prior to
such event and the Options terminated if not exercised after such
acceleration and at or prior to such event.
11. AMENDMENT OF THE PLAN AND OPTIONS.
(a) The Board at any time, and from time to time, may amend
the Plan. However, except as provided in Section 10 relating to
adjustments upon changes in stock, no amendment shall be
effective unless approved by the stockholders of the Company
within twelve (12) months before or after the adoption of the
amendment, where the amendment will:
(1) Increase the number of shares reserved for Options
under the Plan;
(2) Modify the requirements as to eligibility for
participation in the Plan (to the extent such modification
requires stockholder approval in order for the Plan to satisfy
the requirements of Section 422 of the Code); or
(3) Modify the Plan in any other way if such
modification requires stockholder approval in order for the Plan
to satisfy the requirements of Section 422 of the Code or to
comply with the requirements of Rule 16b-3.
(b) The Board may in its sole discretion submit any other
amendment to the Plan for stockholder approval, including, but
not limited to, amendments to the Plan intended to satisfy the
requirements of Section 162(m) of the Code and the regulations
promulgated thereunder regarding the exclusion of performance-
based compensation from the limit on corporate deductibility of
compensation paid to certain executive officers.
(c) It is expressly contemplated that the Board may amend
the Plan in any respect the Board deems necessary or advisable to
provide Optionees with the maximum benefits provided or to be
provided under the provisions of the Code and the regulations
promulgated thereunder relating to Incentive Stock Options and/or
to bring the Plan and/or Incentive Stock Options granted under it
into compliance therewith.
(d) Rights and obligations under any Option granted before
amendment of the Plan shall not be impaired by any amendment of
the Plan unless (i) the Company requests the consent of the
person to whom the Option was granted and (ii) such person
consents in writing.
(e) The Board at any time, and from time to time, may amend
the terms of any one or more Options; provided, however, that the
rights and obligations under any Option shall not be impaired by
any such amendment unless (i) the Company requests the consent of
the person to whom the Option was granted and (ii) such person
consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any
time. Unless sooner terminated, the Plan shall terminate ten
(10) years from the date the Plan is adopted by the Board or
approved by the stockholders of the Company, whichever is
earlier. No Options may be granted under the Plan while the Plan
is suspended or after it is terminated.
(b) Rights and obligations under any Option granted while
the Plan is in effect shall not be impaired by suspension or
termination of the Plan, except with the written consent of the
person to whom the Option was granted.
13. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board,
but no Options granted under the Plan shall be exercised unless
and until the Plan has been approved by the stockholders of the
Company, which approval shall be within twelve (12) months before
or after the date the Plan is adopted by the Board.
Exhibit 10.5
INCENTIVE STOCK OPTION
_______________________________, Optionee:
Hollis-Eden, Inc. (the "Company"), pursuant to its 1996
Stock Option Plan (the "Plan"), has granted to you, the optionee
named above, an option to purchase shares of the common stock of
the Company ("Common Stock"). This option is intended to qualify
as an "incentive stock option" within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code").
The grant hereunder is in connection with and in furtherance
of the Company's compensatory benefit plan for participation of
the Company's employees (including officers), directors or
consultants and is intended to comply with the provisions of Rule
701 promulgated by the Securities and Exchange Commission under
the Securities Act of 1933, as amended (the "Act"). Defined
terms not explicitly defined in this agreement but defined in the
Plan shall have the same definitions as in the Plan.
The details of your option are as follows:
1. TOTAL NUMBER OF SHARES SUBJECT TO THIS OPTION. The
total number of shares of Common Stock subject to this option is
____________________ (__________).
2. VESTING. The date that vesting begins on this option
is _________________. Subject to the limitations contained
herein, 12/48ths of the shares vest (become exercisable) on the
one-year anniversary of the date vesting begins and 1/48th of the
shares will then vest on each successive one-month anniversary
date thereafter until either (i) you cease to provide services to
the Company for any reason, or (ii) this option becomes fully
vested.
3. EXERCISE PRICE AND METHOD OF PAYMENT.
(a) EXERCISE PRICE. The exercise price of this option
is _________________ ($___________) per share, being not less
than the fair market value of the Common Stock on the date of
grant of this option.
(b) METHOD OF PAYMENT. Payment of the exercise price
per share is due in full upon exercise of all or any part of each
installment which has accrued to you. You may elect, to the
extent permitted by applicable statutes and regulations, to make
payment of the exercise price under one of the following
alternatives:
(i) Payment of the exercise price per share in
cash (including check) at the time of exercise;
(ii) Payment pursuant to a program developed under
Regulation T as promulgated by the Federal Reserve Board which,
prior to the issuance of Common Stock, results in either the
receipt of cash (or check) by the Company or the receipt of
irrevocable instructions to pay the aggregate exercise price to
the Company from the sales proceeds;
(iii) Provided that at the time of exercise
the Company's Common Stock is publicly traded and quoted
regularly in the Wall Street Journal, payment by delivery of
already-owned shares of Common Stock, held for the period
required to avoid a charge to the Company's reported earnings,
and owned free and clear of any liens, claims, encumbrances or
security interests, which Common Stock shall be valued at its
fair market value on the date of exercise; or
(iv) Payment by a combination of the methods of
payment permitted by subparagraph 3(b)(i) through 3(b)(iii)
above.
4. WHOLE SHARES. This option may not be exercised for any
number of shares which would require the issuance of anything
other than whole shares.
5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to
the contrary contained herein, this option may not be exercised
unless the shares issuable upon exercise of this option are then
registered under the Act or, if such shares are not then so
registered, the Company has determined that such exercise and
issuance would be exempt from the registration requirements of
the Act.
6. TERM. The term of this option commences on __________,
19__, the date of grant, and expires on ________________________
(the "Expiration Date," which date shall be no more than ten (10)
years from the date this option is granted), unless this option
expires sooner as set forth below or in the Plan. In no event
may this option be exercised on or after the Expiration Date.
This option shall terminate prior to the Expiration Date as
follows: three (3) months after the termination of your
Continuous Status as an Employee, Director or Consultant with the
Company or an Affiliate of the Company unless one of the
following circumstances exists:
(a) Your termination of Continuous Status as an
Employee, Director or Consultant is due to your disability. This
option will then expire on the earlier of the Expiration Date set
forth above or twelve (12) months following such termination of
Continuous Status as an Employee, Director or Consultant. You
should be aware that if your disability is not considered a
permanent and total disability within the meaning of Section
422(c)(6) of the Code, and you exercise this option more than
three (3) months following the date of your termination of
employment, your exercise will be treated for tax purposes as the
exercise of a "nonstatutory stock option" instead of an
"incentive stock option."
(b) Your termination of Continuous Status as an
Employee, Director or Consultant is due to your death or your
death occurs within three (3) months following your termination
of Continuous Status as an Employee, Director or Consultant for
any other reason. This option will then expire on the earlier of
the Expiration Date set forth above or eighteen (18) months after
your death.
(c) If during any part of such three (3) month period
you may not exercise your option solely because of the condition
set forth in paragraph 5 above, then your option will not expire
until the earlier of the Expiration Date set forth above or until
this option shall have been exercisable for an aggregate period
of three (3) months after your termination of Continuous Status
as an Employee, Director or Consultant.
(d) If your exercise of the option within three (3)
months after termination of your Continuous Status as an
Employee, Director or Consultant with the Company or with an
Affiliate of the Company would result in liability under section
16(b) of the Securities Exchange Act of 1934, then your option
will expire on the earlier of (i) the Expiration Date set forth
above, (ii) the tenth (10th) day after the last date upon which
exercise would result in such liability or (iii) six (6) months
and ten (10) days after the termination of your Continuous Status
as an Employee, Director or Consultant with the Company or an
Affiliate of the Company.
However, this option may be exercised following termination
of Continuous Status as an Employee, Director or Consultant only
as to that number of shares as to which it was exercisable on the
date of termination of Continuous Status as an Employee, Director
or Consultant under the provisions of paragraph 2 of this option.
In order to obtain the federal income tax advantages
associated with an "incentive stock option," the Code requires
that at all times beginning on the date of grant of the option
and ending on the day three (3) months before the date of the
option's exercise, you must be an employee of the Company or an
Affiliate of the Company, except in the event of your death or
permanent and total disability. The Company has provided for
continued vesting or extended exercisability of your option under
certain circumstances for your benefit, but cannot guarantee that
your option will necessarily be treated as an "incentive stock
option" if you provide services to the Company or an Affiliate of
the Company as a consultant or exercise your option more than
three (3) months after the date your employment with the Company
and all Affiliates of the Company terminates.
7. EXERCISE.
(a) This option may be exercised, to the extent
specified above, by delivering a notice of exercise (in a form
designated by the Company) together with the exercise price to
the Secretary of the Company, or to such other person as the
Company may designate, during regular business hours, together
with such additional documents as the Company may then require
pursuant to subsection 6(f) of the Plan.
(b) By exercising this option you agree that:
(i) as a precondition to the completion of any
exercise of this option, the Company may require you to enter an
arrangement providing for the payment by you to the Company of
any tax withholding obligation of the Company arising by reason
of (1) the exercise of this option; (2) the lapse of any
substantial risk of forfeiture to which the shares are subject at
the time of exercise; or (3) the disposition of shares acquired
upon such exercise;
(ii) you will notify the Company in writing within
fifteen (15) days after the date of any disposition of any of the
shares of the Common Stock issued upon exercise of this option
that occurs within two (2) years after the date of this option
grant or within one (1) year after such shares of Common Stock
are transferred upon exercise of this option; and
(iii) the Company (or a representative of the
underwriters) may, in connection with the first underwritten
registration of the offering of any securities of the Company
under the Act, require that you not sell or otherwise transfer or
dispose of any shares of Common Stock or other securities of the
Company during such period (not to exceed one hundred eighty
(180) days) following the effective date (the "Effective Date")
of the registration statement of the Company filed under the Act
as may be requested by the Company or the representative of the
underwriters. You further agree that the Company may impose
stop-transfer instructions with respect to securities subject to
the foregoing restrictions until the end of such period.
8. TRANSFERABILITY. This option is not transferable,
except by will or by the laws of descent and distribution, and is
exercisable during your life only by you. Notwithstanding the
foregoing, by delivering written notice to the Company, in a form
satisfactory to the Company, you may designate a third party who,
in the event of your death, shall thereafter be entitled to
exercise this option.
9. OPTION NOT A SERVICE CONTRACT. This option is not an
employment contract and nothing in this option shall be deemed to
create in any way whatsoever any obligation on your part to
continue in the employ of the Company, or of the Company to
continue your employment with the Company. In addition, nothing
in this option shall obligate the Company or any Affiliate of the
Company, or their respective stockholders, Board of Directors,
officers or employees to continue any relationship which you
might have as a Director or Consultant for the Company or
Affiliate of the Company.
10. NOTICES. Any notices provided for in this option or
the Plan shall be given in writing and shall be deemed
effectively given upon receipt or, in the case of notices
delivered by the Company to you, five (5) days after deposit in
the United States mail, postage prepaid, addressed to you at the
address specified below or at such other address as you hereafter
designate by written notice to the Company.
11. GOVERNING PLAN DOCUMENT. This option is subject to all
the provisions of the Plan, a copy of which is attached hereto
and its provisions are hereby made a part of this option,
including without limitation the provisions of Section 6 of the
Plan relating to option provisions, and is further subject to all
interpretations, amendments, rules and regulations which may from
time to time be promulgated and adopted pursuant to the Plan. In
the event of any conflict between the provisions of this option
and those of the Plan, the provisions of the Plan shall control.
Dated the ____ day of __________________, 19__.
Very truly yours,
Hollis-Eden, Inc.
By
Duly authorized on behalf of
the Board of Directors
ATTACHMENTS:
Hollis-Eden, Inc. 1996 Stock Option Plan
Notice of Exercise
The undersigned:
(a) Acknowledges receipt of the foregoing option and the
attachments referenced therein and understands that all rights
and liabilities with respect to this option are set forth in the
option and the Plan; and
(b) Acknowledges that as of the date of grant of this
option, it sets forth the entire understanding between the
undersigned optionee and the Company and its Affiliates regarding
the acquisition of stock in the Company and supersedes all prior
oral and written agreements on that subject with the exception of
(i) the options previously granted and delivered to the
undersigned under stock option plans of the Company, and (ii) the
following agreements only:
NONE ___________________________________
(Initial)
OTHER __________________________________
__________________________________
__________________________________
____________________________
OPTIONEE
Address:______________________
______________________
<PAGE>
NONSTATUTORY STOCK OPTION
_____________________, Optionee:
Hollis-Eden, Inc. (the "Company"), pursuant to its 1996
Stock Option Plan (the "Plan"), has granted to you, the optionee
named above, an option to purchase shares of the common stock of
the Company ("Common Stock"). This option is not intended to
qualify and will not be treated as an "incentive stock option"
within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code").
The grant hereunder is in connection with and in furtherance
of the Company's compensatory benefit plan for participation of
the Company's employees (including officers), directors or
consultants and is intended to comply with the provisions of Rule
701 promulgated by the Securities and Exchange Commission under
the Securities Act of 1933, as amended (the "Act"). Defined
terms not explicitly defined in this agreement but defined in the
Plan shall have the same definitions as in the Plan.
The details of your option are as follows:
1. TOTAL NUMBER OF SHARES SUBJECT TO THIS OPTION. The
total number of shares of Common Stock subject to this option is
__________________________ (___________).
2. VESTING. The date that vesting begins on this option
is _________________. Subject to the limitations contained
herein, 12/48ths of the shares vest (become exercisable) on the
one-year anniversary of the date vesting begins and 1/48th of the
shares will then vest on each successive one-month anniversary
date thereafter until either (i) you cease to provide services to
the Company for any reason, or (ii) this option becomes fully
vested.
3. EXERCISE PRICE AND METHOD OF PAYMENT.
(a) EXERCISE PRICE. The exercise price of this option
is _________________ ($________) per share, being not less than
85% of the fair market value of the Common Stock on the date of
grant of this option.
(b) METHOD OF PAYMENT. Payment of the exercise price
per share is due in full upon exercise of all or any part of each
installment which has accrued to you. You may elect, to the
extent permitted by applicable statutes and regulations, to make
payment of the exercise price under one of the following
alternatives:
(i) Payment of the exercise price per share in
cash (including check) at the time of exercise;
(ii) Payment pursuant to a program developed under
Regulation T as promulgated by the Federal Reserve Board which,
prior to the issuance of Common Stock, results in either the
receipt of cash (or check) by the Company or the receipt of
irrevocable instructions to pay the aggregate exercise price to
the Company from the sales proceeds;
(iii) Provided that at the time of exercise
the Company's Common Stock is publicly traded and quoted
regularly in the Wall Street Journal, payment by delivery of
already-owned shares of Common Stock, held for the period
required to avoid a charge to the Company's reported earnings,
and owned free and clear of any liens, claims, encumbrances or
security interests, which Common Stock shall be valued at its
fair market value on the date of exercise; or
(iv) Payment by a combination of the methods of
payment permitted by subparagraph 3(b)(i) through 3(b)(iii)
above.
4. WHOLE SHARES. This option may not be exercised for any
number of shares which would require the issuance of anything
other than whole shares.
5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to
the contrary contained herein, this option may not be exercised
unless the shares issuable upon exercise of this option are then
registered under the Act or, if such shares are not then so
registered, the Company has determined that such exercise and
issuance would be exempt from the registration requirements of
the Act.
6. TERM. The term of this option commences on _________,
19__, the date of grant and expires on _____________________ (the
"Expiration Date," which date shall be no more than ten (10)
years from the date this option is granted), unless this option
expires sooner as set forth below or in the Plan. In no event
may this option be exercised on or after the Expiration Date.
This option shall terminate prior to the Expiration Date as
follows: three (3) months after the termination of your
Continuous Status as an Employee, Director or Consultant with the
Company or an Affiliate of the Company for any reason or for no
reason unless:
(a) such termination of Continuous Status as an
Employee, Director or Consultant is due to your disability, in
which event the option shall expire on the earlier of the
Expiration Date set forth above or twelve (12) months following
such termination of Continuous Status as an Employee, Director or
Consultant; or
(b) such termination of Continuous Status as an
Employee, Director or Consultant is due to your death or your
death occurs within three (3) months following your termination
for any other reason, in which event the option shall expire on
the earlier of the Expiration Date set forth above or eighteen
(18) months after your death; or
(c) during any part of such three (3) month period the
option is not exercisable solely because of the condition set
forth in paragraph 5 above, in which event the option shall not
expire until the earlier of the Expiration Date set forth above
or until it shall have been exercisable for an aggregate period
of three (3) months after the termination of Continuous Status as
an Employee, Director or Consultant; or
(d) exercise of the option within three (3) months
after termination of your Continuous Status as an Employee,
Director or Consultant with the Company or with an Affiliate of
the Company would result in liability under section 16(b) of the
Securities Exchange Act of 1934 (the "Exchange Act), in which
case the option will expire on the earlier of (i) the Expiration
Date set forth above, (ii) the tenth (10th) day after the last
date upon which exercise would result in such liability or
(iii) six (6) months and ten (10) days after the termination of
your Continuous Status as an Employee, Director or Consultant
with the Company or an Affiliate of the Company.
However, this option may be exercised following termination
of Continuous Status as an Employee, Director or Consultant only
as to that number of shares as to which it was exercisable on the
date of termination of Continuous Status as an Employee, Director
or Consultant under the provisions of paragraph 2 of this option.
7. EXERCISE.
(a) This option may be exercised, to the extent
specified above, by delivering a notice of exercise (in a form
designated by the Company) together with the exercise price to
the Secretary of the Company, or to such other person as the
Company may designate, during regular business hours, together
with such additional documents as the Company may then require
pursuant to subsection 6(f) of the Plan.
(b) By exercising this option you agree that:
(i) as a precondition to the completion of any
exercise of this option, the Company may require you to enter an
arrangement providing for the cash payment by you to the Company
of any tax withholding obligation of the Company arising by
reason of: (1) the exercise of this option; (2) the lapse of any
substantial risk of forfeiture to which the shares are subject at
the time of exercise; or (3) the disposition of shares acquired
upon such exercise. You also agree that any exercise of this
option has not been completed and that the Company is under no
obligation to issue any Common Stock to you until such an
arrangement is established or the Company's tax withholding
obligations are satisfied, as determined by the Company; and
(ii) the Company (or a representative of the
underwriters) may, in connection with the first underwritten
registration of the offering of any securities of the Company
under the Act, require that you not sell or otherwise transfer or
dispose of any shares of Common Stock or other securities of the
Company during such period (not to exceed one hundred eighty
(180) days) following the effective date (the "Effective Date")
of the registration statement of the Company filed under the Act
as may be requested by the Company or the representative of the
underwriters. You further agree that the Company may impose
stop-transfer instructions with respect to securities subject to
the foregoing restrictions until the end of such period.
8. TRANSFERABILITY. This option is not transferable,
except by will or by the laws of descent and distribution, and is
exercisable during your life only by you. Notwithstanding the
foregoing, by delivering written notice to the Company, in a form
satisfactory to the Company, you may designate a third party who,
in the event of your death, shall thereafter be entitled to
exercise this option.
9. OPTION NOT A SERVICE CONTRACT. This option is not an
employment contract and nothing in this option shall be deemed to
create in any way whatsoever any obligation on your part to
continue in the employ of the Company, or of the Company to
continue your employment with the Company. In addition, nothing
in this option shall obligate the Company or any Affiliate of the
Company, or their respective stockholders, Board of Directors,
officers, or employees to continue any relationship which you
might have as a Director or Consultant for the Company or
Affiliate of the Company.
10. NOTICES. Any notices provided for in this option or
the Plan shall be given in writing and shall be deemed
effectively given upon receipt or, in the case of notices
delivered by the Company to you, five (5) days after deposit in
the United States mail, postage prepaid, addressed to you at the
address specified below or at such other address as you hereafter
designate by written notice to the Company.
11. GOVERNING PLAN DOCUMENT. This option is subject to all
the provisions of the Plan, a copy of which is attached hereto
and its provisions are hereby made a part of this option,
including without limitation the provisions of Section 6 of the
Plan relating to option provisions, and is further subject to all
interpretations, amendments, rules and regulations which may from
time to time be promulgated and adopted pursuant to the Plan.
In the event of any conflict between the provisions of this
option and those of the Plan, the provisions of the Plan shall
control.
Dated the ____ day of __________________, 19__.
Very truly yours,
Hollis-Eden, Inc.
By
Duly authorized on behalf
of the Board of Directors
ATTACHMENTS:
Hollis-Eden, Inc. 1996 Stock Option Plan
Notice of Exercise
<PAGE>
The undersigned:
(a) Acknowledges receipt of the foregoing option and the
attachments referenced therein and understands that all rights
and liabilities with respect to this option are set forth in the
option and the Plan; and
(b) Acknowledges that as of the date of grant of this
option, it sets forth the entire understanding between the
undersigned optionee and the Company and its Affiliates regarding
the acquisition of stock in the Company and supersedes all prior
oral and written agreements on that subject with the exception of
(i) the options previously granted and delivered to the
undersigned under stock option plans of the Company, and (ii) the
following agreements only:
None _____________________________
(Initial)
OTHER _______________________________
_______________________________
_______________________________
_____________________________
OPTIONEE
Address:_____________________
_____________________
Exhibit 10.6
EMPLOYMENT AGREEMENT
BY AND BETWEEN
HOLLIS-EDEN, INC.
AND
RICHARD B. HOLLIS
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("the Agreement") is made and
entered into effective as of November 1, 1996, by and between
Hollis-Eden, Inc., a Delaware corporation (the "Company"), and
Richard B. Hollis ("Executive"). The Company and Executive are
hereinafter collectively referred to as the "Parties," and may
individually be referred to as a "Party."
RECITALS
A. The Executive is presently employed by the Company as
Chairman, President and Chief Executive Officer.
B. As the Executive's contribution to the growth and
success of the Company since its inception has been substantial,
the Board of Directors (the "Board") of the Company desires to
provide for the continued employment of the Executive and to make
certain changes in the Executive's employment arrangements with
the Company which the Board has determined will reinforce and
encourage the continued attention and dedication to the Company
of the Executive as a member of the Company's management.
C. The Executive desires to continue his employment with
the Company, and is willing to accept such continued employment
on the terms and conditions set forth in this Agreement.
AGREEMENT
In consideration of the foregoing premises and the mutual
covenants herein contained, and for other good and valuable
consideration, the Parties, intending to be legally bound, agree
as follows:
1. EMPLOYMENT.
1.1 The Company hereby agrees to continue to employ
Executive, and Executive hereby accepts continued employment by
the Company, upon the terms and conditions set forth in this
Agreement, effective as of the date first set forth above
("Effective Date").
1.2 Executive shall be the Chairman, President and Chief
Executive Officer of the Company, its subsidiaries, and its
successors (if any) and their subsidiaries (collectively, the
"Company Affiliates"), and shall serve in such other capacity or
capacities, with the consent of the Executive, as the Board may
from time to time prescribe.
1.3 Executive shall do and perform all services, acts or
things necessary or advisable to manage and conduct the business
of the Company and which are normally associated with the
positions of Chairman, President and Chief Executive Officer and
are not inconsistent with the provisions of the charter documents
of the Company Affiliates. However, at all times during his
employment Executive shall be subject to the direction and
policies from time to time established by the Board.
Notwithstanding the foregoing, Executive shall have such
corporate power and authority as shall be reasonably required to
enable the Executive to discharge the Executive's duties in any
office that Executive may hold.
1.4 Unless the Parties otherwise agree in writing, prior to
Executive's termination in accordance with this Agreement,
Executive shall perform the services he is required to perform
pursuant to this Agreement at the Company's offices, located at
808 S.W. Third Avenue, Suite 540, Portland, Oregon 97204, or,
with the consent of the Executive, at any other place at which
the Company maintains an office; provided, however, that the
Company may from time to time reasonably require Executive to
travel temporarily to other locations in connection with the
Company's business.
2. LOYAL AND CONSCIENTIOUS PERFORMANCE; NONCOMPETITION.
2.1 During his employment by the Company, Executive shall
devote his full business energies, interest, abilities and
productive time to the proper and efficient performance of his
duties under this Agreement. The foregoing shall not preclude
Executive from engaging in civic, charitable or religious
activities, or from serving on boards of directors of companies
or organizations which will not present any direct conflict of
interest with the Company or affect the performance of
Executive's duties hereunder.
2.2 Prior to the Executive's termination in accordance with
this Agreement, Executive shall not engage in competition with
the Company, either directly or indirectly, in any manner or
capacity, as adviser, principal, agent, partner, officer,
director, employee, member of any association or otherwise, in
any phase of the business of developing, manufacturing and
marketing of products which are in the same field of use or which
otherwise directly compete with the products or proposed products
of the Company.
2.3 Ownership by Executive, as a passive investment, of
less than one percent (1%) of the outstanding shares of capital
stock of any corporation with one or more classes of its capital
stock listed on a national securities exchange or publicly traded
in the over-the-counter market shall not constitute a breach of
this paragraph.
3. COMPENSATION OF EXECUTIVE.
3.1 The Company shall pay Executive a base salary of not
less than $195,000.00 per year, payable in regular periodic
payments in accordance with Company policy but in no event less
frequent than semi-monthly. Executive's base salary shall
increase to not less than $225,000.00 at such time as the Company
obtains financing of an aggregate of at least $5,000,000.00 from
one or more transactions, including but not limited to the
receipt of cash upon the exercise of warrants to purchase Common
Stock of the Company. Such salaries shall be prorated for any
partial year of employment on the basis of a 365-day fiscal year.
3.2 Executive's compensation may be changed from time to
time by mutual agreement of Executive and the Board.
3.3 All of Executive's compensation shall be subject to
customary withholding taxes and any other employment taxes as are
commonly required to be collected or withheld by the Company.
3.4 Executive shall be entitled to at least four weeks of
paid vacation each twelve-month period during Executive's
employment hereunder, which shall continue to accrue during
Executive's employment hereunder, in addition to all national
holidays.
3.5 Executive shall, in the discretion of the Board and in
accordance with Company policy, be entitled to participate in
benefits under any employee benefit plan or arrangement made
available by the Company now or in the future to its executives
and key management employees. Notwithstanding the foregoing,
during Executive's employment hereunder, the Company shall
continuously provide Executive, at the Company's sole cost and
expense, with (i) term life insurance equal to four times
Executive's base salary, (ii) short and long-term disability
insurance, (iii) medical, dental and vision care/insurance for
Executive, Executive's spouse and Executive's children, and (iv)
director and officer liability insurance in amounts customary for
companies similar to the Company.
3.6 Executive's performance shall be reviewed by the Board
on a periodic basis (not less than once each fiscal year) and the
Board may, in its sole discretion, award such bonuses to
Executive as shall be appropriate or desirable based on
Executive's performance. The Company agrees that Executive shall
be reviewed within twelve months of commencing employment
hereunder. The Company agrees to negotiate with Executive an
incentive bonus based upon performance targets mutually agreed to
by the Board and Executive from time to time but at least
annually, in advance of the applicable year. The performance
targets shall be negotiated with the goal of achieving an annual
bonus of 100% of Executive's base salary; provided, however, the
bonus to be earned by Executive upon attaining any such
performance target shall range from not less than 50% of
Executive's base salary to any amount in excess of 100% of
Executive's base salary in the applicable year. Executive and the
Company shall negotiate the other criteria necessary for
Executive's receipt of an annual bonus in excess of 100% of
Executive's base salary.
3.7 Executive shall be entitled to receive prompt
reimbursement of all reasonable expenses incurred by Executive in
performing Company services, including expenses related to
relocation, travel, entertainment, parking, business meetings and
professional dues. Such expenses shall be accounted for in
accordance with the policies and procedures established by the
Company.
4. TERMINATION BY COMPANY. Executive's employment with the
Company may be terminated by the Company under the following
conditions:
4.1 DEATH. Upon Executive's death, in which case
termination shall be effective on the last day of the month in
which Executive's death occurs.
4.2 DISABILITY. If Executive becomes, for six consecutive
months, completely disabled due to physical or mental illness as
defined under Section 4.2.1, or if Executive shall be absent from
duties on a full-time basis due to illness for six consecutive
months, and shall not have returned to the performance of duties
within thirty (30) days after receiving written notice of
termination following such six-month period.
4.2.1 The term "completely disabled" as used in
this Agreement shall mean the inability of Executive to perform
the essential functions of his position under this Agreement by
reason of any incapacity, physical or mental, which the Board,
based upon medical advice or an opinion provided by a licensed
physician acceptable to the Board and approved by the Executive,
which approval shall not be unreasonably withheld, determines to
have incapacitated Executive from satisfactorily performing any
or all essential functions of his position for the Company during
the foreseeable future. Based upon such medical advice or
opinion, the determination of the Board shall be final and
binding and the date such determination is made shall be the date
of such complete disability for purposes of this Agreement.
4.3 FOR CAUSE. The Company may terminate Executive's
employment under this Agreement "for cause" ("For Cause") by (i)
delivery of written notice to Executive specifying the cause or
causes relied upon for such termination; and (ii) giving
Executive, together with his counsel, an opportunity to be heard
before the Board. Any notice of termination given pursuant to
this Section 4.3 shall effect termination as of the date
specified in such notice or, in the event no such date is
specified, on the last day of the month in which such notice is
delivered or deemed delivered as provided in Section 10 below.
If Executive's employment under this Agreement is terminated
by the Company For Cause under this section, Executive shall be
entitled to receive only accrued base salary and other accrued
benefits required by law, prorated to the date of termination.
Executive will not be entitled to severance pay, pay in lieu of
notice or any other such compensation. Grounds for the Company to
terminate this Agreement For Cause shall be limited to the
occurrence of any of the following events without Board consent:
4.3.1 Executive is in material breach of any
provision of this Agreement and, except as otherwise provided in
this Section 4.3, such breach continues for a period of 30 days
after notice of such breach is given to Executive by the Company;
4.3.2 Executive's engaging or in any manner
participating in any activity which is directly competitive with
or intentionally injurious to the Company or which violates any
provision of Section 7 of this Agreement and such violation
continues for a period of ten days after notice of such violation
is given to Executive by the Company;
4.3.3 Executive's commission of any fraud against
the Company;
4.3.4 Intentional improper use or appropriation for
his personal use or benefit of any funds or properties of the
Company not authorized by the Board to be so used or appropriated
and the same has not been remedied within three days after notice
of such violation is given to Executive by the Company; and
4.3.5 Executive's conviction of any crime involving
dishonesty or moral turpitude.
4.4 WITHOUT CAUSE. The Company may terminate the
Executive's employment without cause ("Without Cause") upon
delivery of written notice to the Executive at any time. Any
notice of termination given pursuant to this Section 4.4 shall
effect termination not less than 60 days after the date of such
notice.
5. TERMINATION BY EXECUTIVE. Executive may terminate
Executive's employment with the Company (a) for Sufficient Reason
(as defined below in Section 5.1) within three hundred sixty-five
(365) consecutive days following the occurrence of an event or
events constituting such Sufficient Reason; or (b) without
Sufficient Reason.
5.1 "Sufficient Reason" shall mean any one or more of the
following events:
5.1.1 The occurrence of a Change in Control of the
Company (as defined below in Section 6.5);
5.1.2 The failure by the Company to comply with any
material provision of this Agreement and such failure has
continued for a period of ten days after notice of such failure
has been given by Executive to the Company;
5.1.3 The assignment to Executive of any duties
materially inconsistent with Executive's status as the Chairman,
President and Chief Executive Officer of the Company or the
reduction of Executive's authority as provided hereunder; and
5.1.4 The reduction by the Company in Executive's
base salary or as the same may be increased from time to time
under the terms of this Agreement, except for across-the-board
salary reductions approved by 66-2/3% of the Board similarly
affecting all management personnel of the Company; provided,
however, that in no event shall Executive's base salary be
reduced to an amount equal to less than 75% of the highest base
salary at any time in effect during Executive's employment
hereunder.
6. COMPENSATION UPON TERMINATION.
6.1 DEATH. If Executive's employment shall be terminated
by death, the Company shall pay to Executive's designee(s),
beneficiary(ies), or if there is no such designee or beneficiary,
to Executive's estate, an amount equal to Executive's base salary
and prior year's bonus for one (1) year.
6.2 DISABILITY. If Executive shall become disabled as
provided in Section 4.1, the Company shall continue to pay to
Executive an amount which, when combined with disability or
income-continuance benefits pursuant to a Company plan or
provided under state law and received by Executive, shall equal
but not exceed Executive's base salary, provided that Executive
has submitted claims for any and all such disability benefits to
which he may be entitled. For any waiting period during which
Executive receives no benefits under any disability plan, the
Company shall pay his entire base salary. The Company shall
continue to integrate such salary payments with benefits until
such time as Executive's employment is terminated in accordance
with Section 4.2 hereof. Upon any such termination, the Company
shall pay to Executive an amount equal to Executive's base salary
and prior year's bonus for one (1) year.
6.3 CAUSE, WITHOUT SUFFICIENT REASON. If Executive's
employment shall be terminated by the Company For Cause, or if
Executive terminates employment hereunder without Sufficient
Reason, the Company shall pay Executive his base salary through
the date of termination at the rate in effect at the time of the
notice of termination, and the Company shall thereafter have no
further obligations to Executive under this Agreement.
6.4 WITHOUT CAUSE, SUFFICIENT REASON. If (a) Executive
shall terminate Executive's employment with the Company or the
New Company (as defined in Section 6.5 of this Agreement) for
Sufficient Reason under Section 5.1 of this Agreement; or (b) the
Company shall terminate Executive's employment Without Cause,
then upon Executive's furnishing to the Company (or the New
Company, as the case may be) an executed waiver and release of
claims (a form of which is attached hereto as Exhibit A),
Executive shall be entitled to the following:
6.4.1 Executive's base salary through the date of
termination;
6.4.2 Executive's annual base salary in effect at
the time of termination times five;
6.4.3 An amount equal to the prior calendar year's
bonus awarded to Executive times five;
6.4.4 Immediate vesting of all unvested stock
options of the Company held by Executive, and the continuation of
the period for exercise of all stock options of the Company held
by Executive until the final expiration of the original term of
such stock options; and
6.4.5 Continued receipt for three years of all
employee benefit plans and programs in which the Executive and
Executive's family were entitled to participate immediately prior
to the date of termination, provided that the Executive's
continued participation is possible under the general terms and
provisions of such plans and programs. In the event that the
Executive's participation in any such plan or program is barred,
the Company shall arrange to provide the Executive with benefits
substantially similar to those which the Executive would
otherwise have been entitled to receive under such plans and
programs from which his continued participation is barred.
6.5 CHANGE IN CONTROL.
6.5.1 A "Change in Control" of the Company shall be
deemed to have occurred if and when:
(i) Any person or entity or group of persons
and/or entities acting in concert shall acquire, directly or
indirectly, beneficial ownership of more than twenty percent
(20%) of the outstanding shares of voting stock of the Company or
other securities of the Company convertible (after giving effect
to such conversion) into more than twenty percent (20%) of the
outstanding shares of voting stock of the Company; or
(ii) The Company is a participant in a merger or
consolidation in which the Company does not survive as an
independent company; or
(iii) The business or businesses of the
Company for which Executive's services are principally performed
are disposed of by the Company pursuant to a partial or complete
liquidation of the Company, a sale of assets or otherwise; or
(iv) During any period of two consecutive years
during the term of Executive's employment hereunder, individuals
who at the beginning of such period constitute the Board cease
for any reason to constitute at least a majority thereof, unless
the election of each director who was not a director at the
beginning of such period has been approved in advance by
directors representing at least two-thirds of the directors then
in office who were directors at the beginning of the period.
6.5.2 If any of the above four events occurs, then
for purposes of this Agreement, the Company or the Company's
successor will be considered the "New Company."
6.5.3 If within three hundred sixty-five (365) days
following the occurrence of a Change in Control, Executive's
employment with the New Company is terminated by the New Company
for any reason whatsoever other than as specified in Section 4.3,
upon Executive's furnishing to the New Company an executed waiver
and release of claims (Exhibit A), Executive shall be entitled to
the following:
(i) The New Company shall pay Executive's base
salary through the date of termination;
(ii) The New Company shall pay Executive his
annual base salary in effect immediately prior to the event or
events resulting in a Change in Control, times five;
(iii) The New Company shall pay Executive an
amount equal to five times the bonus awarded to Executive in the
calendar year immediately preceding the calendar year in which
the event or events resulting in a Change in Control occurred;
(iv) All unvested stock options of the New Company
held by Executive shall immediately vest, and the continuation of
the period for exercise of all stock options of the Company held
by Executive until the final expiration of the original term of
such stock options; and
(v) Executive shall continue to receive for three
years all employee benefit plans and programs in which the
Executive and Executive's family were entitled to participate
immediately prior to the date of termination, provided that the
Executive's continued participation is possible under the general
terms and provisions of such plans and programs. In the event
that the Executive's participation in any such plan or program is
barred, the New Company shall arrange to provide the Executive
with benefits substantially similar to those which the Executive
would otherwise have been entitled to receive under such plans
and programs from which his continued participation is barred.
All payments provided for in this Section 6 to be made to
Executive shall be made in one lump sum within thirty (30)
calendar days of Executive's date of termination unless otherwise
directed by Executive.
6.6 Prior to Executive's termination in accordance with
this Agreement, the Company agrees to (i) nominate Executive and
two of the Executive's designees for election to the Board and
the Board of each of the Company Affiliates, (ii) use the
Company's reasonable best efforts to support such nominations and
elections, (iii) take no action, by amendment of the Company's
charter documents or otherwise, to avoid or seek to avoid the
observance or performance of any of the terms to be observed or
performed by the Company hereunder and (iv) at all times in good
faith assist in the carrying out of all of the provisions herein
and in the taking of all such action as may be necessary or
appropriate in order to protect Executive's rights hereunder
against impairment.
7. CONFIDENTIAL INFORMATION; NONSOLICITATION.
7.1 Executive recognizes that his employment with the
Company will involve contact with information of substantial
value to the Company, which is not old and generally known in the
trade, and which gives the Company an advantage over its
competitors who do not know or use it, including but not limited
to, techniques, designs, drawings, processes, inventions,
developments, equipment, prototypes, sales and customer
information, and business and financial information relating to
the business, products, practices and techniques of the Company
(hereinafter referred to as "Confidential Information").
Executive will at all times regard and preserve as confidential
such Confidential Information obtained by Executive from whatever
source and will not, either during his employment with the
Company or thereafter, publish or disclose any part of such
Confidential Information in any manner at any time, or use the
same except on behalf of the Company, without the prior written
consent of the Company. Notwithstanding the foregoing sentence,
disclosure of Confidential Information shall not be precluded if
such information (i) is now, or hereafter becomes, through no act
or failure to act on the part of the Executive, generally known
or available, or (ii) is required to be disclosed by law.
7.2 While employed by the Company and for one (1) year
thereafter, the Executive agrees that, in order to protect the
Company's confidential and proprietary information from
unauthorized use, Executive will not, either directly or through
others, solicit or attempt to solicit (i) any employee,
consultant or independent contractor of the Company to terminate
his or her relationship with the Company in order to become an
employee, consultant or independent contractor to or for any
other person or business entity; or (ii) the business of any
customer, vendor or distributor of the Company which, at the time
of termination or one (1) year immediately prior thereto, was
listed on the Company's customer, vendor or distributor list.
8. SUCCESSORS. The Company shall require any successor
(whether direct or indirect, by purchase, merger, consolidation
or otherwise) to all or substantially all of the business and/or
assets of the Company, by agreement in form and substance
reasonably satisfactory to the Executive, to expressly assume and
agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if
no such succession had taken place. Failure of the Company to
obtain such an agreement prior to the effectiveness of any such
succession shall be a material breach of this Agreement and shall
entitle the Executive to compensation and all other benefits from
the Company in the same amount and on the same terms as he would
be entitled to hereunder if he terminated his employment for
Sufficient Reason hereunder.
9. ASSIGNMENT AND BINDING EFFECT. This Agreement shall be
binding upon and inure to the benefit of Executive and
Executive's heirs, executors, personal representatives, assigns,
administrators and legal representatives. Because of the unique
and personal nature of Executive's duties under this Agreement,
neither this Agreement nor any rights or obligations under this
Agreement shall be assignable by Executive. This Agreement shall
be binding upon and inure to the benefit of the Company and its
successors, assigns and legal representatives.
10. NOTICES. All notices or demands of any kind required or
permitted to be given by the Company or Executive under this
Agreement shall be given in writing and shall be personally
delivered (and receipted for) or mailed by certified mail, return
receipt requested, postage prepaid, addressed as follows:
If to the Company: Hollis-Eden, Inc.
808 S.W. Third Avenue, Suite 540
Portland, Oregon 97204
With a copy to: Eric J. Lourmeau, Esq.
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, California 92121
If to Executive: Richard B. Hollis
3807 N.E. 127th Circle
Vancouver, WA 98686
With a copy to: Martin P. Florman, Esq.
McDermott, Will & Emery
1301 Dove Street, Suite 500
Newport Beach, California 92660
Any such written notice shall be deemed received when personally
delivered or three (3) days after its deposit in the United
States mail as specified above. Either Party may change its
address for notices by giving notice to the other Party in the
manner specified in this section.
11. CHOICE OF LAW. This Agreement shall be construed and
interpreted in accordance with the laws of the State of
California, without regard to the conflict of laws provision
thereof.
12. INTEGRATION. This Agreement contains the complete, final
and exclusive agreement of the Parties relating to the subject
matter of this Agreement, and supersedes all prior oral and
written employment agreements or arrangements between the
Parties.
13. AMENDMENT. This Agreement cannot be amended or modified
except by a written agreement signed by Executive and the
Company.
14. WAIVER. No term, covenant or condition of this Agreement or
any breach thereof shall be deemed waived, except with the
written consent of the Party against whom the waiver in claimed,
and any waiver or any such term, covenant, condition or breach
shall not be deemed to be a waiver of any preceding or succeeding
breach of the same or any other term, covenant, condition or
breach.
15. SEVERABILITY. The finding by a court of competent
jurisdiction of the unenforceability, invalidity or illegality of
any provision of this Agreement shall not render any other
provision of this Agreement unenforceable, invalid or illegal.
Such court shall have the authority to modify or replace the
invalid or unenforceable term or provision with a valid and
enforceable term or provision which most accurately represents
the parties' intention with respect to the invalid or
unenforceable term or provision.
16. INTERPRETATION; CONSTRUCTION. The headings set forth in
this Agreement are for convenience of reference only and shall
not be used in interpreting this Agreement. This Agreement has
been drafted by legal counsel representing the Company, but
Executive has been encouraged, and has consulted with, his own
independent counsel and tax advisors with respect to the terms of
this Agreement. The Parties acknowledge that each Party and its
counsel has reviewed and revised, or had an opportunity to review
and revise, this Agreement, and the normal rule of construction
to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of
this Agreement.
17. REPRESENTATIONS AND WARRANTIES. Executive represents and
warrants that, to the best of Executive's knowledge, he is not
restricted or prohibited, contractually or otherwise, from
entering into and performing each of the terms and covenants
contained in this Agreement, and that his execution and
performance of this Agreement will not violate or breach any
other agreements between Executive and any other person or
entity.
18. COUNTERPARTS. This Agreement may be executed in two
counterparts, each of which shall be deemed an original, all of
which together shall contribute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement
as of the date first above written.
THE COMPANY:
HOLLIS-EDEN, INC.
By: /s/ Robert Weber
----------------------------
ROBERT WEBER
VICE PRESIDENT AND CONTROLLER
EXECUTIVE:
/s/ Richard B. Hollis
-------------------------------
RICHARD B. HOLLIS
<PAGE>
EXHIBIT A
RELEASE AND WAIVER OF CLAIMS
In exchange for payment to me of amounts pursuant to
Sections 6.4 and 6.5 (and for the other benefits provided
therein) of my Employment Agreement (the "Agreement"), to which
this form is attached, I hereby furnish ____________ (the
"Company") with the following release and waiver.
I hereby release, and forever discharge the Company, its
officers, directors, agents, employees, stockholders, successors,
assigns and affiliates, of and from any and all claims,
liabilities, demands, causes of action, costs, expenses,
attorneys' fees, damages, indemnities and obligations of every
kind and nature, in law, equity, or otherwise, known and unknown,
suspected and unsuspected, disclosed and undisclosed, arising at
any time prior to and including my employment termination date
with respect to any claims relating to my employment and the
termination of my employment, including but not limited to,
claims pursuant to any federal, state or local law relating to
employment, including, but not limited to, discrimination claims,
claims under the California Fair Employment and Housing Act, and
the Federal Age Discrimination in Employment Act of 1967, as
amended ("ADEA"), or claims for wrongful termination, breach of
the covenant of good faith, contract claims, tort claims, and
wage or benefit claims, including but not limited to, claims for
salary, bonuses, commissions, stock, stock options, vacation pay,
fringe benefits, severance pay or any form of compensation (other
than the obligations under Sections 6.4 and 6.5 of the
Agreement.)
I also acknowledge that I have read and understand Section
1542 of the California Civil Code which reads as follows: "A
general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially
affected his settlement with the debtor." I hereby expressly
waive and relinquish all rights and benefits under that section
and any law of any jurisdiction of similar effect with respect to
any claims I may have against the Company.
I acknowledge that, among other rights, I am waiving and
releasing any rights I may have under ADEA, that this waiver and
release is knowing and voluntary, and that the consideration
given for this waiver and release is in addition to anything of
value to which I was already entitled as an employee of the
Company. I further acknowledge that I have been advised, as
required by the Older Workers Benefit Protection Act, that: (a)
the waiver and release granted herein does not relate to claims
which may arise after this agreement is executed; (b) I have the
right to consult with an attorney prior to executing this
agreement (although I may choose voluntarily not to do so); (c) I
have twenty-one (21) days from the date I receive this agreement,
in which to consider this agreement (although I may choose
voluntarily to execute this agreement earlier); (d) I have seven
(7) days following the execution of this agreement to revoke my
consent to the agreement; and (e) this agreement shall not be
effective until the seven (7) day revocation period has expired.
Date: By:
------------------- -------------------------
Exhibit 10.7
LICENSE AGREEMENT
THIS LICENSE AGREEMENT ("Agreement") is made as of the 18th day of May
1994, by and between COLTHURST LIMITED, a corporation duly organized and
existing under the laws of Delaware (hereinafter "Colthurst") (Colthurst is
sometimes referred to herein as the "Licensor"), PATRICK T. PRENDERGAST,
Baybush, Straffan, Ireland (hereinafter "Owner"), HOLMEDCO PHARMACEUTICALS
CORPORATION, 3807 NW 127th Circle, Vancouver, WA 98686, U.S.A., a
corporation to be duly formed and organized by Richard B. Hollis and
existing under the laws of Delaware hereinafter ("Holmedco" and/or
"Licensee") (each a "Party" and collectively the "Parties"). Capitalized
terms shall have the meanings given them in Section I of this Agreement.
WHEREAS, Owner is the full owner of Patent Rights and Know-How (each
as defined below) and as of April 19th, 1994 the following patents were
granted to Patrick T. Prendergast:
Country Patent No.
------- ----------
United States of America 4,956,355
Australia 608824
Belgium 1004315
Canada 564,245
Greece 88 01 00248
Israel 86089
Italy 1.227.073
Luxembourg 87.202
New Zealand 224272
Oapi 08729
Philippines 25907
Portugal 87259
South Africa 88/2667
Switzerland 675358
United Kingdom 2 204 237 B
France 8805043
Patent applications are pending (none are under prior art rejection)
in the following countries:
Country Application No.
------- ---------------
Austria A984/88
Denmark 2081/88
Germany P 38 12 595.1
Ireland 997/87
Japan 93293/88
Netherlands 8800926
New Zealand 236303
South Korea 88-4283
Sweden 8801406-3
WHEREAS, Colthurst has been assigned Owner's rights in the Patent
Rights and Know-How relating to the treatment of human/animal
immunodeficiency as disclosed in U.S. Patent No. 4,956,355 entitled "Agents
for the Arrest and Therapy of Retrieval Infections," the said assignment
between Colthurst and Owner allows Colthurst sufficient portion of rights
to grant licenses to make, use, exercise and vend the Products and Licensed
Processes (as defined below); and
WHEREAS, Colthurst has been granted an Investigational New Drug (IND)
status from the U.S. Food and Drug Authority for the use of the technology
outlined in the U.S. Patent No. 4,956,355 in the treatment of HIV
infection, IND No. 31,980; and
WHEREAS, Holmedco desires to obtain a license under the Patent Rights
and Know-How upon the outlined terms and conditions hereinafter set forth.
NOW, THEREFORE, the Parties hereby agree as follows:
1. DEFINITIONS
-----------
1.1 "AFFILIATE" means (a) any company owned or controlled to the
extent of at least fifty percent (50%) of its issued and voting capital
stock by a Party to this Agreement and any other company so owned or
controlled (directly or indirectly) by any such company or the owner of any
such company, or (b) any partnership, joint venture or other entity
directly or indirectly controlled by, controlling, or under common control
of, to the extent fifty percent (50%) or more of voting power (or otherwise
having power to control its general activities), a Party to this Agreement,
but in each case only for so long as such ownership or control shall
continue.
1.2 "BACKGROUND TECHNOLOGY" shall mean all Elements of Technology (as
defined below) that are necessary or useful to commercialize and exploit
the Products and that Colthurst or Owner (or any of their respective
Affiliates) has an ownership interest in or has the right to acquire an
ownership interest, controls in or may conceive, develop or acquire an
ownership interest in (under licenses from others or otherwise) at any time
prior to or during the term of this Agreement.
1.3 "COMBINATION PRODUCT" shall mean any product that is formulated
in part of any Product (or any part thereof) and in part of any Combination
Substances.
1.4 "COMBINATION PRODUCT NET SALES" shall have the meaning given that
term in the definition for "Product Revenues."
1.5 "COMBINATION SUBSTANCES" shall mean the product or substance,
other than a Product, that is sold in combination with a Product.
1.6 "DAMAGES" shall have the meaning given to it in Section 11.1.
1.7 "ELEMENTS OF TECHNOLOGY" shall mean all technical information,
whether tangible or intangible, that relates to any Product or is from
which the Product is based, including any and all data, preclinical and
clinical results, techniques, discoveries, inventions, ideas, processes,
know-how, patents (including any extension, reissue or renewal patents),
patent applications, inventor's certificates, trade secrets and other
proprietary information, licenses and sublicenses and samples of any
physical, biological or chemical material.
1.8 "FDA" means the United States Food and Drug Administration, or
any state governmental agency in the United States that may also have
jurisdiction over the drug approval process in conjunction with the United
States Food and Drug Administration or any governmental agency performing
similar functions in any country within the Territory; provided, if the
governmental agency is outside the United States, it shall only be
considered an "FDA" for purposes of this definition if the approval by such
agency will allow Licensee to exploit and commercialize a sizeable and
profitable market segment.
1.9 "FIELD OF ACTIVITY" shall mean the use (including any use in
connection with research, development, demonstration, testing or
experimentation) of the Products for, or the manufacture, sale or other
disposition of the Products for, human or animal therapeutic or
prophylactic use within the Territory, including without limitation, any
use for arrest and therapy of, or for vaccination against, retroviruses and
bacterial infections.
1.10 "FORCE MAJEURE EVENT" shall have the meaning given it in Section
13.
1.11 "IMPROVEMENTS" shall mean any findings, discoveries, inventions,
additions, modifications, formulations or changes made by licensees during
the term of this Agreement which directly relate to the Products or
Licensed Processes including, without limitation, new or improved methods
of administration, improved side effect profile, new medical indications
and improvements in the manufacturing process.
1.12 "INFRINGEMENT PROCEEDS" shall have the meaning given that term in
Section 8.4.
1.13 "INTELLECTUAL PROPERTY" means any invention, modification,
discovery, design, development, improvement, process, software program,
work of authorship, documentation, formula, data, technique, know-how,
secret or other intellectual property whatsoever or any interest therein
(whether or not patentable or registrable under copyright or similar
statutes or subject to analogous protection) that relates to any Product
being developed by Licensor under this Agreement, BUT EXCLUDING any (i)
-------------
trademarks or (ii) the manuscript currently being completed on the life of
the Owner or any film, documentary or copyright relating to such manuscript
or any future additions of a similar manuscript.
1.14 "KNOW-HOW" shall mean any and all technical information presently
available or generated during the term of this Agreement which directly
relates to the Products, Licensed Processes or Improvements and shall
include, without limitation, (i) the medical, clinical, chemical,
pharmaceutical, pharmacological, topological, toxicological or other
scientific data or information relating to any Product (including without
limitation, pre-clinical and clinical data, notes, reports, models and
samples) and (ii) the manufacturing, production, and purification
procedures and processes, as well as analytical methodology, used in
testing, assaying, analysis, production, and packaging of any Product.
1.15 "LICENSED PROCESSES" shall mean the processes which are used in
any country in the Territory, and which;
(a) is covered in whole or in part by any of the Patent Rights
or Know-How;
(b) is derived from the Patent Rights or Know-How; or
(c) is covered in whole or in part by the Background Technology.
1.16 "NET SALES" with respect to sales for any period and with respect
to any item, shall mean the actual proceeds received by Holmedco, its
Affiliates and/or sublicensees, from third parties, whose dealings shall be
at arms length, for Products and Combination Products sold under this
Agreement, net of trade, quantity and cash discounts, if any, actually
allowed or paid with respect to Products or Combination Products; and less
each and all of the following allowed or paid by Holmedco, its Affiliates
and sublicensees; trade credits, rebates and allowances actually granted on
account of price adjustments, rebate programs, billing errors or the
rejection or return of goods; commissions actually allowed or paid to
independent brokers or agents; export packaging, outbound freight or
transportation charges; and all taxes (except income taxes), tariffs,
duties and other similar governmental charges paid by Holmedco or its
Affiliates or sublicensees, all determined in accordance with the generally
accepted accounting principles applicable in the United States,
consistently applied. In calculating Net Sales, any given unit of a Product
or Combination Product shall be taken into account only once.
1.17 "NDA" shall mean any pending or approved application or any
application to be filed with respect to the Products, including any
Improvements thereof, submitted or to be submitted to the FDA under the
applicable food and drug law in each and any country of the Territory.
1.18 "PATENT RIGHTS" shall mean all of each of the Licensor's and
Owner's rights in the following intellectual property:
(a) the United States and foreign patents and/or patent
applications listed in Recitals.
(b) United States and foreign patents issued from the
applications listed in Recitals and from divisional and continuations of
the applications;
(c) claims of US. and foreign patents issued from the
applications, and of the resulting patents, which are directed to subject
matter specifically described in the U.S. and foreign applications listed
in Recitals.
(d) claims of all foreign patent applications, and of the
resulting patents, which are directed to subject matter specifically
described in the United States patents and/or patent applications described
in (a), (b) or (c) above; and
(e) any reissues or re-examinations of United States patents or
other patents within the Territory described in (a), (b), (c) or (d) above.
1.19 "PRODUCT" shall mean treatment process, pharmaceutical
preparation, compound or biologic agent and any process or product or part
thereof which:
(a) is covered in whole or in part by an issued, unexpired claim
or a pending claim contained in the Patent Rights in any country within the
Territory in which any Product is to be made, used or sold; or
(b) is manufactured by using a process which is covered in whole
or in part by any of the Patent Rights and/or Know-How in any country
within the Territory in which such Licensed Process or part thereof is used
or the country in which Products made through the use of such Licensed
Process are used or sold; or
(c) is derived from the Patent Rights, Know-How or Background
Technology or related thereto.
1.20 "PRODUCT APPROVAL" means final FDA approval to market
commercially the specified product for use by humans or animals.
1.21 "PRODUCT REVENUES" for any period shall mean the sum of (i) the
aggregate amount of Net Sales (excluding Combination Product Net Sales) in
such period in the Field of Activity in respect of any Product and (ii) an
amount equal to: (A) the aggregate amount of Net Sales in such period in
the Field of Activity in respect of any Combination Product (the
"Combination Product Net Sales") multiplied by (B) a fraction the numerator
of which equals the fair market value of the Product (or any part thereof)
included in such Combination Product and the denominator of which equals
the sum of (x) the fair market value of such Product (or part thereof) and
(y) the fair market value of such Combination Substance included in such
Combination Product. For purposes of this definition, "fair market value"
of any Product or product (or part thereof) shall be the list retail price
of such Product or product (or part thereof sold separately or, if such
Product or product (or part thereof) is not ordinarily sold separately, a
value determined in the good faith business judgment of the Licensor and
Holmedco. Product Revenues realized by Holmedco, its Affiliates or
sublicensees within the Territory as a result of sales or trading utilizing
the facilities available pursuant to the Young Initiative (FDA July 1988)
for sales of Products treating terminally ill patients, prior to United
States Product Approval, shall be utilized in calculating royalties due.
1.22 "RULES" shall have the meaning given that term in Section 12.
1.23 "TERRITORY" shall mean the world.
2. LICENSE GRANT
-------------
2.1 LICENSE GRANT. Colthurst and Owner hereby jointly grant to
-------------
Holmedco the exclusive world rights (even as to Colthurst and Owner) to all
present and future Patent Rights, Know-How and the Background Technology
for all uses thereunder with the right to sublicense, to make, have made,
use and sell the Products and Combination Products, and to practice, modify
and improve the Licensed Processes within the Field of Activity, in the
Territory, and to sublicense others to do the same, all as herein provided.
2.2 LICENSE FEES. In consideration of the license granted in Section
------------
2.1 above, Holmedco shall pay the following licensing fees:
(a) Payment to Licensor of a license fee upon signing this
Agreement of $100,000;
(b) Payment to Licensor of $250,000 as provided in Section 3.1.
2.3 PROGRESS REPORTS ON FUNDING. During the first six months of this
---------------------------
Agreement and any extension thereof, Holmedco shall furnish to Colthurst a
written report on its progress towards the securing of the funding on a
monthly basis. If during this period Owner or Licensor employees,
executives or consultants are required to attend presentations or
discussions by Holmedco all reasonable out-of-pocket expenses will be paid
by Holmedco, such expenses to be agreed in advance.
2.4 AGREEMENTS WITH THIRD PARTIES. During the term of this Agreement
-----------------------------
Holmedco shall not enter into any agreement concerning the rights of Owner
without the prior written approval of Owner provided however nothing herein
shall prohibit Holmedco from entering into agreements concerning its own
rights hereunder without Owner's consent including the sublicensing of
Holmedco's rights under this Agreement.
3. LICENSE TERMS
-------------
The terms of the License Agreement, are as set out hereunder:
3.1 $250,000 LICENSE FEE. Licensing fee of US. Two Hundred Fifty
--------------------
Thousand Dollars ($250,000) to be paid not later than 18th, November 1994;
provided, however, that date shall be extended for a reasonable period of
time to permit Holmedco to close its initial financing, if Holmedco
demonstrates that it has used reasonable efforts to secure financing which,
without limitation, can be demonstrated by preliminary letters of intent
from accredited investors. Contemporaneously with payment in full of such
license fee, Colthurst and Owner shall grant Holmedco a first perfected
security interest in the Patent Rights and Know-How to secure Holmedco's
exclusive license hereunder and the obligations of Colthurst and Owner
hereunder and shall execute such documents as are reasonably necessary and
desirable to create and perfect such security interests.
3.2 ROYALTIES. Holmedco shall pay to Colthurst royalties of six (6%)
----------
percent which shall be calculated on the basis of Product Revenues
generated through the use, lease or sale of the Products or Combination
Products by or for Licensee or its sublicensees. Royalties shall not be
payable on Product released by Licensee for clinical trials. Licensee may
deduct from this royalty payment for Product Revenues received from any
country an amount equal to any payments made to Licensor for that country
under Section 3.3 below.
3.3 ROYALTIES ON SUBLICENSES. In the event of the sale of sublicenses
------------------------
or any other third-party agreements twenty-five (25%) percent of any fees
so generated, either by monetary or other means, shall be payable to
Colthurst.
3.4 LIMITATION ON ROYALTIES DUE.
---------------------------
(a) From and after the fifth (5th) anniversary of the Product
Approval for a particular Product and through the tenth (10th) anniversary
thereof, the six percent (6%) royalty due under Section 3.2 shall be
reduced to three percent (3%) for Product Revenues generated in each
country where neither the Product nor the Licensed Process was ever covered
in whole or in part by any issued or pending claim contained in the Patent
Rights in such country; provided, however, upon the written request of
Holmedco, Licensor and Holmedco shall consider in good faith further
reducing such royalties based upon the then current competition in such
country generated by competing pharmaceutical products and its effect on
Holmedco's profitability.
(b) No royalties shall be payable under Section 3.2 or 3.3 on
Product Revenues generated from a Product sold after the tenth (1Oth)
anniversary of the Product Approval for such Product, in each country where
neither the Product nor the Licensed Process was ever covered in whole or
in part by any issued or pending claim contained in the Patent Rights.
(c) No royalties shall be payable under Section 3.2 or 3.3 on
Product Revenues generated from a Product sold in each country where the
Product and the Licensed Process from which such Product is made cease to
be covered in whole or in part by any issued or pending claim contained in
the Patent Rights in each such country.
3.5 CONTINGENT MINIMUM ROYALTY. A renewable annual license fee of
--------------------------
$500,000 shall be payable commencing eighteen (18) months after Holmedco
pays the $250,000 required under Section 2.2. This fee amount is deductible
from royalty payments, due as per Section 3.2, which become payable in the
12-month period following renewal of license. Holmedco may deduct from this
annual fee an amount equal to any payments made under Section 3.3 above.
3.6 ROYALTY REPORTS AND PAYMENTS. Within a period of sixty (60) days
----------------------------
from the end of each quarter commencing from the first quarter after
Product is sold, Holmedco shall submit to Colthurst a detailed report
detailing the amount of all royalties owing to Colthurst during the quarter
to which the report refers, including full details of the sales made by
Holmedco and its sublicensees, and the considerations received by Holmedco
for the granting of sublicenses under Section 3.3 above, including, but
without derogating from the generality of the foregoing, sales according to
countries, itemization of the Product Revenues, the currency of sale, the
date of invoice, and any other detail relevant to enable the determination
of the royalties payable hereunder. Holmedco shall pay at the time of each
of the said reports the amount of the royalties owing to Colthurst pursuant
to the said report for the period of the report, reduced by the amount of
any U.S. (at the federal and state level) and any other country's income
tax withholding which Holmedco may be required to pay under U.S. or such
other country's tax laws in respect of such royalties. Holmedco shall
discuss the most appropriate methods of payment with Colthurst prior to
transmission of funds from countries within the Territory that may result
in the deduction of withholding taxes.
3.7 COLTHURST'S RIGHT TO INSPECT RECORDS. Colthurst or its
------------------------------------
authorized representatives shall have the right from time to time (but not
more than twice each calendar year) during normal business hours to inspect
Holmedco's books of accounts, records and other relevant documentation
insofar as they relate to the manufacture or marketing of the Products, in
order to ascertain or verify the amount of royalties due to Colthurst
hereunder and the accuracy of the information provided to Colthurst in the
aforementioned reports. Holmedco's agreement with any licensees shall grant
Holmedco similar inspection rights and Holmedco shall share any information
received in exercising such rights with Colthurst.
3.8 ROYALTIES IN COUNTRIES PROHIBITING TRANSFER OF CURRENCY ABROAD.
---------------------------------------------------------------
Where royalties are due Colthurst hereunder for sales of Products in a
country where, by reason of currency regulations or taxes of any kind, it
is impossible or illegal for Holmedco, any Affiliate or sublicensee to
transfer royalty payments to Colthurst for Product Revenues in that
country, such royalties shall be deposited in whatever currency is
allowable by the person or entity not able to make the transfer for the
benefit or credit of Colthurst in an accredited bank in that country that
is acceptable to Colthurst.
4. CERTAIN REPRESENTATIONS. WARRANTIES AND COVENANTS OF OWNER AND
--------------------------------------------------------------
LICENSOR.
---------
4.1 PATENT RIGHTS. KNOW-HOW AND BACKGROUND TECHNOLOGY. Colthurst and
-------------------------------------------------
Owner represent that they are the only persons who hold any interest in the
Patent Rights, Know-How and Background Technology, that such information is
not based upon any non-public information obtained from any other person,
that they are the true and first inventors of the invention described in
the Patent Rights, that there are no lawful grounds of objection to the
grant of the Patent Rights, that they have not done or omitted any act to
obtain the Patent Rights which would impair the validity of the Patent
Rights, that there are no encumbrances or liens thereon, that execution of
this License Agreement is duly authorized and does not breach any agreement
with any third person or entity, or any applicable law or regulation.
Neither Colthurst nor Owner will grant any other person any right or
portion thereof in the Patent Rights, Know-How or Background Technology to
any other person or entity. Colthurst and Owner represent that their Patent
Rights are for all uses of their invention for the arrest and therapy of
human retroviral infections and not limited to use for HIV and AIDS.
4.2 COVENANT AGAINST GRANTING INTERESTS TO THIRD PARTIES. During the
----------------------------------------------------
term of this Agreement, neither Colthurst nor Owner will grant interest in
the Patent Rights, Know-How or Background Technology to any other person or
entity.
4.3 COOPERATION WITH DUE DILIGENCE INVESTIGATION. Subject to
--------------------------------------------
Holmedco's payment of all reasonable out-of-pocket expenses in accordance
with Section 2.3 above, Owner and Licensor shall cooperate in all respects
with any due diligence review conducted in connection with any proposed
financing of Holmedco.
5. IMPROVEMENTS
------------
Holmedco and Owner and Licensor shall disclose to each other all
Improvements developed or discovered by any Party, including without
limitation any developmental results generated under this Agreement by
Holmedco during the term of this Agreement, immediately upon the
development or discovery of such Improvements or the generation of such
developmental results. All Owner and Licensor Improvements shall be part of
the rights licensed hereunder with no additional costs to Holmedco.
Holmedco hereby grants and agrees to grant, assign, transfer and convey
irrevocably to Owner all ownership interest in and to all such Improvements
developed or discovered by Holmedco during the term of this Agreement;
provided, that to the extent Owner or Licensor is remunerated by third
parties in respect of such Improvements made by Holmedco or its
sublicensees, Holmedco shall be the Party receiving such remuneration.
Nothing in this Agreement shall in any way affect the full and absolute
ownership of Owner with regard to the Patent Rights, Know-How and
Background Technology of Colthurst and Holmedco acknowledges that Owner has
the full right, title and interest in the ownership of the said Patent
Right, Know-How and Background Technology subject to the assigned portions
granted to Colthurst.
6. DEVELOPMENT AND COMMERCIALIZATION.
---------------------------------
6.1 DEVELOPMENT COSTS. The Parties recognize that Licensor and Owner
-----------------
have performed certain preclinical and clinical development work on the
Products. Holmedco shall, at its own expense, be responsible for the
development of the Products.
6.2 ASSISTANCE BY OWNER. The Licensor and Owner shall be responsible
-------------------
for reasonably assisting Holmedco in the Development of the Products and
securing financing. Holmedco shall pay the reasonable out of pocket
expenses thereof. After Holmedco obtains seed financing of at least
$10,000,000 U.S., Holmedco shall pay Owner for such services at the rate of
$15,000 US per month, such payments to be retroactively paid for services
commencing June 1, 1994 through FDA Phase II approval for marketing.
6.3 CLINICAL AND PRECLINICAL STUDIES. Holmedco shall have the right
--------------------------------
to conduct clinical and preclinical studies at its cost and expense in
support of human anti-viral indications for and formulations of the
Products.
7. REGULATORY AFFAIRS
------------------
7.1 OVERSIGHT OF REGULATION MATTERS. Holmedco shall be responsible
-------------------------------
for regulatory activities necessary for the development of the Products, in
each country in the Territory. Within a reasonable period after Holmedco
obtains financing of at least $10,000,000 U.S., Holmedco and Owner shall
interview prospective FDA consultants and shall engage the top-choice
consultant as soon as possible.
7.2 LICENSOR AND OWNER SUPPORT OF REGULATING ACTIVITIES. Licensor and
---------------------------------------------------
Owner shall support, where it is possible, the regulatory activities of
Holmedco in all relevant countries in the Territory. At all times during
the term of this Agreement, the Licensor and Owner and Holmedco shall each
promptly after learning thereof notify the other in writing of any serious
or unexpected adverse reactions or side effects with respect to the
Products.
7.3 IND APPLICATIONS AND NDA'S. Holmedco shall file all new IND
--------------------------
applications and NDA's in its own name. Upon the termination of this
agreement the ownership of Holmedco's IND applications and grants shall
become the property of Licensor. During and after the term of this
Agreement, the NDA's concerning the Products shall remain the property of
Holmedco. The Parties shall make joint announcements of all IND and NDA
approvals on the Products. Owner and Colthurst will get full credit in all
publications for the invention, and will be kept fully involved in the
development, of any Product.
7.4 REPORTING OF ADVERSE REACTIONS. Holmedco and Licensor shall
-------------------------------
comply in each country of the Territory with a common adverse reaction
reporting system to be agreed between the Parties and, if required, the
more stringent of the adverse reaction reporting requirements of: (a) the
U.S. Food and Drug Administration; or (b) the Food and Drug Law of the
relevant country.
8. INTELLECTUAL PROPERTY
---------------------
8.1 OWNERSHIP. Owner shall have and retain ownership of and title to
---------
all intellectual property rights in all inventions and discoveries (except
for inventions and discoveries which are independently developed by
Holmedco and not derived from or based on the Patent Rights and Know-How or
other intellectual property of Owner or the Licensor) relating to the
Products, Licensed Processes or Improvements, including without limitation
patents and other intellectual property relating to the Products, Licensed
Processes or Improvements, which are made, conceived, reduced to practice
or generated by the Parties or their respective affiliates, including
employees, agents and other representatives or contractors, in the course
of work performed under this Agreement and/or any other agreements between
the Parties relating to the Products or the Licensed Processes; provided,
however, Holmedco shall be the sole owner of all trademarks or service
marks arising from marketing and sale of the Products or any services
related thereto and shall have sole discretion for the naming of any
Products or related services. The Parties acknowledge that Holmedco
reserves certain rights under Section 5 above in the Improvements and under
Section 10.3 below in the Know-How, Background Technology and Improvements
(excluding Patent Rights).
8.2 PATENT PROSECUTION FOR EXISTING PATENT RIGHTS. Subject only to
----------------------------------------------
the assignments between Owner and Colthurst, Owner shall have the exclusive
right and obligation to prepare, file, prosecute and maintain all patent
applications and patents relating to the Products, Licensed Processes,
Know-How, Background Technology or Improvements. New patent applications
(to be paid for by Licensee) shall be filed in such countries as shall be
mutually agreed upon in good faith by Colthurst and Holmedco; Licensor and
Owner shall be free to file patent applications and prosecute patents in
countries not agreed to with Licensee at Licensor's or Owner's sole expense
(it being understood by the Parties that the rights arising therefrom shall
be considered Patent Rights under this Agreement). In determining where and
when new patent applications shall be filed, Colthurst and Holmedco shall
consider (i) the size and profitability to Holmedco of market segments that
will be covered by the Patent Rights in a particular country, (ii) the
degree to which such protection sufficiently precludes Holmedco's
competitors from making, using or selling a product similar to the Product
to be covered by the Patent Rights in such country, (iii) Holmedco's
international plans for marketing and distributing the Product, and (iv)
the general commercial standards in the pharmaceutical industry for
determining in which countries to seek patent protection. Colthurst agrees
to keep Holmedco fully informed at all levels of the patent application
process and, if reasonably requested by Holmedco, to withdraw or cease
prosecuting a patent application in a particular country unless Licensor or
Owner is willing to continue such patent prosecution at its sole expense.
If Licensor has not, within ninety (90) days after the written request of
Holmedco, prepared and filed a patent application in a country where
Colthurst and Holmedco have agreed that an application shall be filed, then
Holmedco shall be entitled to prepare, file, prosecute and maintain such
patent applications and patents and Licensor and Owner shall cooperate
fully with Holmedco in connection therewith and execute all necessary
documents. Holmedco shall provide reasonable assistance to Owner to
facilitate the filing and maintenance of all such patent applications and
patents, and shall execute all documents which Owner deems necessary or
desirable therefore. Without prejudice to the above, all applications for
patents shall be drafted by a patent attorney nominated by Holmedco. Prior
to lodgment all patent applications shall be subject to review by patent
agents nominated by Colthurst. The reasonable expenses of the agents shall
be discharged by the Licensee.
8.3 CERTAIN INTELLECTUAL PROPERTY. Subject to Section 8.1 above,
-----------------------------
Colthurst and Owner and Holmedco shall retain their rights to all
intellectual property rights in its own logos or name and other
intellectual property used in the development of the Products and Licensed
Processes, except as otherwise provided herein.
8.4 THIRD PARTY INFRINGEMENT.
------------------------
(a) Each Party shall promptly report in writing to each other
Party during the term of this Agreement 
