<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): MARCH 26, 1997
HOLLIS-EDEN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
000-24672 13-3197002
(Commission File No.) (IRS Employer Identification No.)
808 SW THIRD AVENUE, SUITE 540
PORTLAND, OREGON 97204
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (503) 226-1277
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On March 26, 1997, Hollis-Eden, Inc. ("Hollis-Eden"), a Delaware
corporation, was merged with and into Initial Acquisition Corp. ("IAC"), a
Delaware corporation, pursuant to an Agreement and Plan of Merger, dated
November 1, 1996, among IAC, Hollis-Eden, Mr. Salvatore J. Zizza and Mr. Richard
B. Hollis (the "Merger Agreement"). Upon consummation of the merger of
Hollis-Eden with IAC (the "Merger"), Hollis-Eden ceased to exist, and IAC, the
surviving corporation, changed its name to Hollis-Eden Pharmaceuticals, Inc.
Hollis-Eden Pharmaceuticals, Inc. 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. The Merger is intended
to be a tax-free reorganization for federal income tax purposes and is to be
accounted for as a recapitalization of Hollis-Eden by an exchange of Common
Stock of Hollis-Eden, $.0001 par value ("Hollis-Eden Common Stock"), for the net
assets of IAC, consisting primarily of cash.
Under the terms of the Merger Agreement, each share of Hollis-Eden
Common Stock, outstanding immediately prior to the closing of the Merger
converted into one share of Common Stock, $.01 par value, of Hollis-Eden
Pharmaceuticals, Inc. Common Stock ("Surviving Corporation Common Stock"), and
all warrants and options to purchase Hollis-Eden Common Stock outstanding
immediately prior to the Merger converted into the right to receive the same
number of shares of Surviving Corporation Common Stock. At the closing of the
Merger, 4,911,004 shares of Surviving Corporation Common Stock were issued,
which represented approximately 85% of the shares of Surviving Corporation
Common Stock outstanding immediately after consummation of the Merger.
As contemplated by the Merger Agreement, a new Board of Directors
consisting of seven persons was elected by the stockholders of IAC at the
special meeting of stockholders held March 26, 1997 to approve the Merger and
the Merger Agreement. Such persons began their term of office as directors of
Hollis-Eden Pharmaceuticals, Inc. immediately following the effective time of
the Merger. Six of such directors are considered to have been designees of
Hollis-Eden, and one director was the designee of IAC. Consequently, the
Hollis-Eden designees, if they act together, have effective control of the
business and affairs of Hollis-Eden Pharmaceuticals, Inc. Upon the effectiveness
of the Merger, the six Hollis-Eden designees as a group held an aggregate of
4,860,902 shares of Surviving Corporation Common Stock, representing
approximately 82% of the outstanding shares of Surviving Corporation Stock,
including certain warrants and options held by such persons.
2.
<PAGE> 3
Upon consummation of the Merger, Hollis-Eden Pharmaceuticals, Inc.
anticipates incurring $286,974 in transaction costs associated with the Merger
which it will record against equity. This amount is a preliminary estimate and
there can be no assurance that Hollis-Eden Pharmaceuticals, Inc. will not incur
additional charges to reflect costs associated with the Merger.
3.
<PAGE> 4
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Report of Independent Accountants
Balance Sheet--December 31, 1996 and 1995.
Statement of Operations for the years ended December 31, 1996
and 1995 and for the period from inception (August 15,
1994) to December 31, 1994 and 1996.
Statement of Stockholders' Deficit
Statement of Cash Flows for the years ended December 31, 1996
and 1995 and for the period from inception (August 15,
1994) to December 31, 1994 and 1996.
Notes to Financial Statements
(b) PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Combined Balance Sheet as of December 31,
1996. Notes to Unaudited Pro Forma Combined Balance Sheet
(c) EXHIBITS.
2.1 Agreement and Plan of Merger dated November 1, 1996
among Initial Acquisition Corp. Hollis-Eden, Inc.,
Mr. Salvatore J. Zizza and Mr. Richard B. Hollis.(1)
99.1 Press release, dated March 27, 1997.
- -----------
(1) Filed as an exhibit to Registrant's Registration Statement on Form S-4
(No. 333-18725) or an amendment thereto and incorporated herein by
reference.
4.
<PAGE> 5
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HOLLIS-EDEN PHARMACEUTICALS, INC.
Dated: April 9, 1997 By: /s/ Robert W. Weber
--------------------------------
Robert W. Weber
Vice President-Controller
5.
<PAGE> 6
[PRICE WATERHOUSE LLP LETTERHEAD]
Report of Independent Accountants
To the Board of Directors and Shareholders 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, 1996 and 1995, and the results of its operations
and its cash flows for the years ended December 31, 1996 and 1995, the period
from inception (August 15, 1994) to December 31, 1994, and the period from
inception (August 15, 1994) to December 31, 1996, 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, at December 31, 1996, the Company has a stockholders'
deficit of $566,159 and negative working capital of $572,566. 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
Portland, Oregon
February 26, 1997 except as to paragraphs 1 and 3
of Note 10, which are as of March 27, 1997
6.
<PAGE> 7
HOLLIS-EDEN, INC. (A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash $ 17,914 $ --
Prepaid expenses 116,885 --
Deposits 100,000 --
----------- -----------
Total current assets 234,799 --
Property and equipment, net of accumulated depreciation of $594
6,407 --
----------- -----------
Total assets $ 241,206 $ --
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued expenses $ 210,894 $ 92,111
Accrued expenses for clinical trials -- 150,000
Wages payable 96,771 --
Accounts payable to related party -- 73,040
Note payable to related party -- 250,000
License fees payable to related party 499,700 928,000
Accrued interest -- 44,482
----------- -----------
Total liabilities 807,365 1,537,633
----------- -----------
Commitments and contingencies (see Note 6)
Stockholders' deficit (Notes 5 and 8)
Preferred stock, no par value, 10,000,000 shares
authorized; no shares issued or outstanding -- --
Common stock, $.0001 par value, 30,000,000 shares
authorized; 4,911,004 and 4,150,943 shares issued and
outstanding 491 415
Additional paid-in capital 2,074,307 410,689
Deficit accumulated during development stage (2,640,957) (1,948,737)
----------- -----------
Total stockholders' deficit (566,159) (1,537,633)
----------- -----------
Total liabilities and stockholders' deficit $ 241,206 $ --
=========== ===========
</TABLE>
7.
<PAGE> 8
HOLLIS-EDEN, INC. (A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
FOR THE YEAR ENDED (AUGUST 15, 1994) TO
DECEMBER 31, DECEMBER 31,
1996 1995 1994 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating Expenses:
Research and development (Note 2) $ (184,276) $ (463,000) $(1,166,762) $(1,814,038)
General and administrative (510,534) (170,929) (103,564) (785,027)
----------- ----------- ----------- -----------
Total operating expenses (694,810) (633,929) (1,270,326) (2,599,065)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 5,732 -- -- 5,732
Interest expense (3,142) (37,762) (6,720) (47,624)
----------- ----------- ----------- -----------
Total other income (expense) 2,590 (37,762) (6,720) (41,892)
----------- ----------- ----------- -----------
Net loss $ (692,220) $ (671,691) $(1,277,046) $(2,640,957)
=========== =========== =========== ===========
Net loss per share $ (.15) $ (0.17) $ (0.38) $ (0.66)
Weighted average number of common
shares outstanding 4,657,650 3,867,924 3,396,226 3,973,933
</TABLE>
8.
<PAGE> 9
HOLLIS-EDEN, INC. (A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' DEFICIT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK ACCUMULATED
$.0001 PAR VALUE ADDITIONAL DURING
------------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Contribution by stockholder -- $ -- $ 103,564 $ -- $ 103,564
Common stock issued for cash 2,852,830 285 24,715 -- 25,000
Common stock issued as consideration
for amendments to the license
agreements (Note 6) 543,396 55 4,707 -- 4,762
Net loss -- -- -- (1,277,046) (1,277,046)
--------- ----------- ----------- ----------- -----------
Balance at December 31, 1994 3,396,226 340 132,986 (1,277,046) (1,143,720)
Common stock issued for cash 679,245 68 249,932 -- 250,000
Common stock issued as consideration
for amendments to the license
agreements (Note 6) 75,472 7 27,771 -- 27,778
Net loss -- -- -- (671,691) (671,691)
--------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 4,150,943 415 410,689 (1,948,737) (1,537,633)
Common stock issued in conversion of
debt 164,962 16 371,148 -- 371,164
Common stock issued for cash, net of
issuance costs of $203,622 (Note 7) 580,005 58 1,234,441 -- 1,234,499
Common stock issued as consideration
for termination of a financing
agreement 15,094 2 33,960 -- 33,962
Warrants issued to consultants for
services rendered (Note 9) -- -- 24,069 -- 24,069
Net loss -- -- -- (692,220) (692,220)
--------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 4,911,004 $ 491 $ 2,074,307 $(2,640,957) $ (566,159)
========= =========== =========== =========== ===========
</TABLE>
9.
<PAGE> 10
HOLLIS-EDEN, INC. (A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
FOR THE YEAR ENDED (AUGUST 15, 1994) TO
DECEMBER 31, DECEMBER 31,
1996 1995 1994 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (692,220) $ (671,691) $ (1,277,046) $ (2,640,957)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 594 -- -- 594
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 33,962 -- -- 33,962
Expense related to options issued as
consideration to consultants 6,017 -- -- 6,017
Changes in assets and liabilities:
Prepaid expenses (98,833) -- -- (98,833)
Deposits (100,000) -- -- (100,000)
Accounts payable and accrued expenses 118,783 92,111 -- 210,894
Accrued expenses for clinical trial (150,000) 150,000 -- --
Wages payable 96,771 -- -- 96,771
Accounts payable to related party (73,040) 73,040 -- --
License fees payable to related party (428,300) 1,000 927,000 499,700
Accrued interest (44,482) 37,762 6,720 --
------------ ------------ ------------ ------------
Net cash used in operating
activities (1,330,748) (290,000) (338,564) (1,959,312)
------------ ------------ ------------ ------------
Cash flows provided by investing activities:
Purchase of property and equipment (7,001) -- -- (7,001)
------------ ------------ ------------ ------------
Net cash used in investing
activities (7,001) -- -- (7,001)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Borrowings from related party -- 40,000 210,000 250,000
Payments on note payable to related party (250,000) -- -- (250,000)
Contributions from stockholder -- -- 103,564 103,564
Net proceeds from sale of common stock 1,234,499 250,000 25,000 1,509,499
Proceeds from issuance of debt 371,164 -- -- 371,164
------------ ------------ ------------ ------------
Net cash provided by financing
activities 1,355,663 290,000 338,564 1,984,227
------------ ------------ ------------ ------------
Net increase in cash 17,914 -- -- 17,914
Cash at beginning of period -- -- -- --
------------ ------------ ------------ ------------
Cash at end of period $ 17,914 $ -- $ -- $ 17,914
============ ============ ============ ============
Supplemental disclosure of cash
flow information:
Interest paid $ 44,482 $ -- $ -- $ 44,482
Conversion of debt to equity 371,164 -- -- 371,164
Options issued to consultants in lieu of
cash, three-year vesting 24,069 -- -- 24,069
Options issued in lieu of cash,
commissions on private placement 133,110 -- -- 133,110
</TABLE>
10.
<PAGE> 11
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 stockholders 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, 1996. 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 $20,000 and
$313,000 for the years ended December 31, 1996 and 1995, and $1,479,762
and $1,812,762 for the periods from inception (August 15, 1994) to
December 31, 1994, and 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.
11.
<PAGE> 12
2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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, 1996 and 1995 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.
3. NOTE PAYABLE TO RELATED PARTY
At December 31, 1995, the Company had an unsecured note payable to a
stockholder/officer in the amount of $250,000. 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 $260,000
at December 31, 1996 which may be carried forward as an offset to
taxable income, if any, in future years through its expiration in 2009
to 2011. The Company has a net deferred tax asset comprised of
capitalized start-up costs of $2,373,000 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. If certain
substantial changes in the Company's ownership should occur, there
would potentially be an annual limitation on the amount of the
carryforwards which could be utilized in a tax year.
12.
<PAGE> 13
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
LICENSING AGREEMENTS
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 shareholder, and 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 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 five,
is paid.
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
13.
<PAGE> 14
6. RELATED PARTY LICENSES AND OTHER AGREEMENTS AND COMMITMENTS AND
CONTINGENCIES (CONTINUED)
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 charged
to G&A for the year ended December 31, 1995. During 1996, the Company
advanced license fees of $100,300 related to the $600,000 owed to Eden
upon obtaining additional funding.
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 upon the Company's receipt of
funds realized by way of equity sale,
14.
<PAGE> 15
6. RELATED PARTY LICENSES AND OTHER AGREEMENTS AND COMMITMENTS AND
CONTINGENCIES (CONTINUED)
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 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.
In October 1996, the Company and Colthurst Limited, entered into an
amendment to the existing agreement. 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, 1.996 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.
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.
During 1996, the Company entered into a twelve month lease agreement
for office space. The lease runs from June 1996 through May 1997 and
requires monthly rent payments of approximately $2,450.
15.
<PAGE> 16
7. COMMON STOCK PURCHASE WARRANTS
SERIES A WARRANTS
During April 1996, in accordance with anti-dilution privileges
triggered by an offering in March 1995, 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
twelve-month period ended 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
During May 1996, the Company issued to the Placement Agent, for the
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. The
fair value of the 445,000 options is deducted from the net proceeds of
the private placement as a cost of raising capital and totaled
approximately $133,000.
8. STOCKHOLDERS' EQUITY
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 bore interest at 8% per annum. The Company had the option
to 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, the debt
financing, plus accrued interest, was converted into 164,962 shares of
common stock at a price of $2.25 per share.
16.
<PAGE> 17
8. STOCKHOLDERS' EQUITY (CONTINUED)
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 $1,234,499.
9. STOCK OPTION PLAN
The Board of Directors adopted a Stock Option Plan ("the Plan") in
1996. The Company is authorized to issue 500,000 shares of common stock
to employees, officers, directors, and consultants of the Company and
provides for the grant of incentive and nonstatutory stock options.
Terms of the stock option agreements, including vesting requirements,
are determined by the Board of Directors. The exercise price of
incentive stock options must equal at least the fair market value on
the date of grant and the maximum term of options granted is ten years.
Activity under the Plan through December 31, 1996 is as follows:
<TABLE>
<CAPTION>
OPTION OUTSTANDING
-------------------------------
OPTION
NUMBER OF PRICE RANGE
SHARES PER SHARE
-------------- --------------
<S> <C> <C>
Outstanding, January 1, 1996 - -
Granted 330,500 $ 2.25
Exercised - -
Canceled - -
Outstanding, December 31, 1996 330,500 $ 2.25
</TABLE>
As of December 31, 1996, 6,042 options were vested.
The Company entered into stock option agreements not pursuant to the
Plan with certain directors, officers, and consultants. These options
become exercisable according to a schedule of vesting as determined by
the Board of Directors. The options become exercisable immediately or
over a period of years (Note 7). The Company recognized a prepaid
expense related to the options issued to consultants. The Company will
recognize the expense of approximately $24,000 related to these options
ratably over the three-year vesting period.
17.
<PAGE> 18
9. STOCK OPTION PLAN (CONTINUED)
Activity for the above grants through December 31, 1996 is as follows:
<TABLE>
<CAPTION>
OPTION OUTSTANDING
-------------------------------
OPTION
NUMBER OF PRICE RANGE
SHARES PER SHARE
-------------- --------------
<S> <C> <C>
Outstanding, January 1, 1995 - $ -
Granted 37,736 2.65 - 7.95
Exercised - -
Canceled - -
Outstanding, December 31, 1995 37,736 2.65 - 7.95
Granted 240,000 $ 2.25
Exercised - -
Canceled - -
Outstanding, December 31, 1996 277,736 $ 2.25 - 7.95
</TABLE>
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 (SFAS 123) During
1995, the Financial Accounting Standards Board issued SFAS 123,
Accounting for Stock-Based Compensation, which defines a
fair-value-based method of accounting for stock compensation and
encourages all entities to adopt that method of accounting for all
employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost related to stock compensation
plans using the method of accounting prescribed by the Accounting
Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued
to Employees. Entities electing to follow APB 25 must make pro forma
disclosures of net income, as if the fair-value-based method of
accounting defined in SFAS 123 had been applied.
The Company has elected to account for its stock-based compensation
plans under APB 25; however, for pro forma disclosure purposes, the
Company has computed the value of all options granted to employees
during 1995 and 1996, using the minimum value pricing model as
prescribed by SFAS 123 and the following weighted average assumptions
for grants:
<TABLE>
<S> <C>
Risk-free interest rate 6.09 %
Expected dividend yield - %
Expected lives 5 years
Expected volatility N/A
</TABLE>
18.
<PAGE> 19
9. STOCK OPTION PLAN (CONTINUED)
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 (SFAS 123)
(CONTINUED) The warrants were assumed to be exercised at maturities of
four and five years, while the stock options were assumed to be
exercised in five to seven years. Adjustments are made for options
forfeited prior to vesting. The total value of warrants and options was
computed to be the following approximate amounts, which would be
amortized on the straight-line basis over the vesting period of the
options:
<TABLE>
<S> <C>
Year ended December 31, 1995 $ -
Year ended December 31, 1996 $ 385,042
</TABLE>
If the Company had accounted for stock options issued in accordance
with SFAS 123, the Company's net loss would have been reported as
follows:
Net loss
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995
--------------- ---------------
<S> <C> <C>
As reported $ 686,203 $ 671,691
Pro forma 797,374 671,691
</TABLE>
10. SUBSEQUENT EVENTS
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 was effective March 26, 1997.
On February 6, 1997, as part of an employment agreement, the Company
granted a non-statutory stock option to a certain officer to purchase
2,400,000 shares of the Company' s common stock at a price of $5.00 per
share, which option vests ratably over a six-year period. The
difference between the fair market value on the date of grant and the
exercise price applied to the option aggregated $12 million and will be
recorded as unearned compensation and amortized over the next six
years.
Subsequent to year end, the Company borrowed $92,000 from a shareholder
and director of the Company. The loaned amount plus accrued interest
was due on the earlier of the effective date of the merger of the
Company with Initial Acquisition Corp. or December 31, 1997. The loan
was fully paid on March 27, 1997.
19.
<PAGE> 20
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
INITIAL PRO FORMA ADJUSTMENTS
ACQUISITION ------------------------------- PRO FORMA
HOLLIS-EDEN CORP. DR. CR. COMBINED
----------- ----- --- --- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash $ 17,914 $ 146,863 $ 6,646,693 (1)(2) $ 1,973,500(3)(4)(8) $4,837,970
Investment in U.S.
Treasury Bills 0 6,546,693 6,546,693(1) 0
Deposit 100,000 0 100,000(2) 0
Prepaid expenses 116,885 0 116,885
--------------------------- ----------
Total current assets 234,799 6,693,556 4,954,855
--------------------------- ----------
Net property and
equipment 6,407 0 6,407
Deferred acquisition
costs 0 136,974 136,974(3) 0
---------------------------
Total assets 241,206 6,830,530 4,961,262
=========================== ----------
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Current Liabilities
Accrued expenses 125,460 164,236 289,696
Accounts payable 85,434 0 85,434
Wages payable 96,771 0 96,771
Income taxes payable 0 123,000 123,000
License fees payable 499,700 0 323,500 (4) 176,200
--------------------------- ----------
Total liabilities 807,365 287,236 771,101
--------------------------- ----------
Common Stock, subject
to possible redemption 0 981,349 981,349 (5) 0
Stockholders Equity (Deficit)
Preferred stock 0 0 0
Common stock 491 7,434 491 (6) 49,110(6) 57,944
900(5)
500(9)
Additional paid-in
capital 2,074,307 5,436,065 286,974 (3) 980,449(5) 8,773,174
48,619 (6) 118,446(7)
3,970,650 (9) 3,970,150(9)
500,000(10)
Earnings (deficit)
accumulated during
development stage (2,640,957) 118,446 1,500,000 (8) (4,640,957)
--------------------------- ----------
500,000(10)
Total stockholders' 118,446 (7)
equity (deficit) (566,159) 6,543,294 4,190,161
--------------------------- ----------
Total liabilities and
stockholders'
equity $ 241,206 $ 6,830,530 $14,376,722 $14,376,722 $4,961,262
=================================================== =========== ==========
</TABLE>
20.
<PAGE> 21
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
1. Represents relief of restricted cash from the trust as a result of the
Merger.
2. Represents relief of cash from escrow as a result of the Merger
3. Represents payment of $150,000 and the application of deferred acquisition
costs for total estimated expenses of $286,974 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 that had been subject to
possible redemption.
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 to Additional
Paid-In Capital.
8. Represents payment of research and development fees which are required to be
paid upon the 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 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 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 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
21.
<PAGE> 22
operations.
22.
<PAGE> 23
INDEX TO EXHIBITS
2.1 Agreement and Plan of Merger dated November 1, 1996 among
Initial Acquisition Corp. Hollis-Eden, Inc., Mr. Salvatore J.
Zizza and Mr. Richard B. Hollis.(1)
99.1 Press release, dated March 27, 1997.
- -----------
(1) Filed as an exhibit to Registrant's Registration Statement on Form S-4
(No. 333-18725) or an amendment thereto and incorporated herein by
reference.
23.
<PAGE> 1
EXHIBIT 99.1
THURSDAY MARCH 27 5:43 PM EDT
INITIAL ACQUISITION CORP. CLOSES MERGER WITH HOLLIS-EDEN, INC.
NEW YORK, March 27/PRN Newswire/ -- Initial Acquisition Corp announced today
that its definitive merger agreement with Hollis-Eden, Inc. has closed. Pursuant
to the merger agreement, which was signed in November 1996, Hollis-Eden has
merged with and into Initial Acquisition Corp. with IAC being the surviving
corporation. Concurrent with the merger, the surviving corporation has changed
its name to Hollis-Eden Pharmaceuticals, Inc.
Pursuant to the merger, the surviving corporation issued one share of its common
stock in exchange for each outstanding share of Hollis-Eden common stock and all
of the outstanding Hollis-Eden warrants and options were converted into warrants
and options of the surviving corporation. Each IAC common stockholder, who
possessed the right to have his or her stock redeemed in lieu of participating
but who did not exercise such right in the merger, may receive additional shares
of Hollis-Eden Pharmaceuticals, Inc. common stock 24 months after the closing of
the merger if the average public trading price for the Company's common stock
does not equal or exceed $20.00 per share for a specific period of time within
such 24-month period.
Hollis-Eden Pharmaceuticals, Inc. also announced today it has sent a Notice of
Redemption to holders of its Class A Common Stock Purchase Warrants, Class B
Unit Purchase Warrants and certain management warrants stating that it would
redeem all of such outstanding warrants on April 28, 1997 (the "Redemption
Date") at a redemption price of $.05. the right to exercise such warrants shall
terminate at 5:00 p.m. (New York time) on April 25, 1997.
For more information, contact Kathy Klein, Hollis-Eden Pharmaceuticals, Inc.,
(310) 260-6096. SOURCE Initial Acquisition Corp.
