--------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission File Number 33-60134
INITIAL ACQUISITION CORP.
-------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3197002
---------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
810 SEVENTH AVENUE
NEW YORK, NEW YORK 10019
------------------------------ -------------------------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 333-2620
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value per share
Class A Common Stock Purchase Warrants
Redeemable Class B Unit Purchase Warrants
Units
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.
YES X NO
--- ---
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant as of January 29, 1997 was $7,296,218.70
As of January 30, 1997, there were 833,250 shares of the Registrant's
Common Stock, $.01 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement for the Registrant's 1997 Annual and Special
Meeting of Stockholders, which has been filed with the Securities and
Exchange Commission, is incorporated by reference into Part III of this
Annual Report on Form 10-K.
--------------------------------------------------------------------------
<PAGE>
PART I
------
ITEM 1. BUSINESS
--------
GENERAL
Initial Acquisition Corp. ("IAC" or the "Company") is a "blank check"
or "blind pool" company, 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").
The Company is seeking to acquire a Target Business primarily located
in the United States, but its efforts will not be limited to a particular
industry. In seeking a Target Business, the Company will consider 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. The Company will not acquire a Target
Business unless the fair market of such business, as determined by the
Company based upon standards generally accepted by the financial community,
including revenues, earnings, cash flow and book value (the "Fair Market
Value"), is at least 80% of the net assets of the Company at the time of
the consummation of a Business Combination (the "Fair Market Value Test").
If the Company determines that the financial statements of a proposed
Target Business do not clearly indicate that the Fair Market Value Test has
been satisfied, the Company will obtain an opinion from an investment
banking firm which is a member of the National Association of Securities
Dealers, Inc. (the "NASD") with respect to the satisfaction of such
criteria. While the Company may, under certain circumstances, seek to
effect Business Combinations with more than one Target Business, in all
likelihood, as a result of its limited resources, the Company will have the
ability to effect only a single Business Combination. To date, the Company
has not entered into any agreements to effect a Business Combination. On
November 1, 1996, the Company entered into an Agreement and Plan of Merger
to effect a Business Combination with Hollis-Eden, Inc., a Portland, Oregon
based biopharmaceutical company. See "-- Proposed Merger with Hollis-Eden,
Inc."
The Company has engaged Gruntal & Co., Incorporated, an investment
banking firm and a member of the New York Stock Exchange, Inc. and the NASD
("Gruntal"), to aid in structuring and negotiating a Business Combination.
On May 23, 1995 (the "Closing 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"; the Class A Warrants and Class B
Warrants are sometimes hereinafter collectively referred to as the
"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, $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 Chase Manhattan Bank, N.A. (the "Proceeds Escrow Agent"),
subject to release upon the earlier of written notification by the Company
to the Proceeds Escrow Agent (i) of the Company's completion of a
transaction or series of transactions in which at least 50% of the gross
proceeds from the Offering are committed to a specific line of business as
2
<PAGE>
a result of a consummation of a Business Combination (including any
redemption payments), or (ii) to distribute the escrowed proceeds, in
connection with a liquidation of the Company, to the holders of Common
Stock purchased as part of the Units sold in the Offering or in the open
market thereafter. The Company will notify the NASD prior to the release
of funds from the escrow account. The escrowed Net Proceeds have been
invested in United States treasury bills and commercial paper.
The Company's executive office is located at 810 Seventh Avenue, 27th
Floor, New York, New York 10019 and its telephone number is (212) 333-2620.
PROPOSED MERGER WITH HOLLIS-EDEN, INC.
On November 1, 1996, the Company entered into an Agreement and Plan
of Merger (the "Merger Agreement") with Hollis-Eden, Inc. ("Hollis-Eden"),
a Portland, Oregon based biopharmaceutical company engaged in developing
therapeutic and 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 Agreement calls for
the merger (the "Proposed Merger") of Hollis-Eden with and into the
Company, with the Company being the surviving corporation to the Proposed
Merger (the "Surviving Corporation"). Upon consummation of the Proposed
Merger, (i) each of the 4,911,004 outstanding shares of Hollis-Eden common
stock, par value $.0001 per share, will cease to be outstanding and shall
be converted into the right to receive one share of Common Stock of the
Company, (ii) each of the 4,679,650 outstanding warrants and options to
acquire shares of Hollis-Eden common stock will cease to be outstanding and
shall be converted into the right to receive comparable warrants and
options to acquire shares of common stock of the Company, (iii) the Company
will change its name to Hollis-Eden, Inc. and (iv) the business of the
Company will be that of Hollis-Eden. The Proposed Merger is subject to
numerous conditions, including without limitation, approval by the
stockholders of each of the Company and Hollis-Eden. See "-- Stockholder
Approval of Business Combination."
SELECTION OF A TARGET BUSINESS AND STRUCTURING OF A BUSINESS COMBINATION
Management of the Company has substantial flexibility in identifying
and selecting a prospective Target Business within the specified
businesses. However, the Company's flexibility is limited to the extent
that it must satisfy the Fair Market Value Test. If the Company determines
that the financial statements of a proposed Target Business do not clearly
indicate that the Fair Market Value Test has been satisfied, the Company
will obtain an opinion from an investment banking firm (which is a member
of the NASD) with respect to the satisfaction of such criteria. In
evaluating a prospective Target Business, management will consider, among
other factors, the following: (i) costs associated with effecting the
Business Combination; (ii) equity interest in and opportunity for control
of the Target Business; (iii) growth potential of the Target Business; (iv)
experience and skill of management and availability of additional personnel
of the Target Business; (v) capital requirements of the Target Business;
(vi) competitive position of the Target Business; (vii) stage of
development of the Target Business; (viii) degree of current or potential
market acceptance of the Target Business; (ix) proprietary features and
degree of intellectual property or other protection of the Target Business;
and (x) the regulatory environment in which the Target Business operates.
The foregoing criteria are not intended to be exhaustive and any
evaluation relating to the merits of a particular Target Business will be
based, to the extent relevant, on the above factors as well as other
considerations deemed relevant by management in connection with effecting a
Business Combination consistent with the Company's business objectives. In
connection with its evaluation of a prospective Target Business,
management, with the assistance of Gruntal, anticipates that it will
conduct a due diligence review which will encompass, among other things,
3
<PAGE>
meeting with incumbent management and inspection of facilities, as well as
a review of financial, legal and other information which will be made
available to the Company.
The time and costs required to select and evaluate a Target Business
(including conducting a due diligence review) and to structure and
consummate the Business Combination (including negotiating relevant
agreements and preparing requisite documents for filing pursuant to
applicable securities laws and state "blue sky" and corporation laws)
cannot presently be ascertained with any degree of certainty. The
Company's current executive officer and its directors intend to devote only
a small portion of their time to the affairs of the Company and,
accordingly, consummation of a Business Combination may require a greater
period of time than if the Company's management devoted their full time to
the Company's affairs. However, each officer and director of the Company
will devote such time as they deem reasonably necessary to carry out the
business and affairs of the Company, including the evaluation of potential
Target Businesses and the negotiation of a Business Combination and, as a
result, the amount of time devoted to the business and affairs of the
Company may vary significantly depending upon, among other things, whether
the Company has identified a Target Business or is engaged in active
negotiation of a Business Combination. Any costs incurred in connection
with the identification and evaluation of a prospective Target Business
with which a Business Combination is not ultimately consummated will result
in a loss to the Company and reduce the amount of capital available to
otherwise complete a Business Combination or for the resulting entity to
utilize.
The Company anticipates that various prospective Target Businesses
will be brought to its attention from various non-affiliated sources,
including securities broker-dealers, investment bankers, venture
capitalists, bankers, other members of the financial community and
affiliated sources, including, possibly, the Company's executive officer,
directors and their affiliates. While the Company has not engaged the
services of professional firms that specialize in finding business
acquisitions on any formal basis (other than Gruntal), the Company may
engage such firms in the future, in which event the Company may pay a
finder's fee or other compensation. In no event, however, will the Company
pay a finder's fee or commission to officers or directors of the Company or
any entity with which they are affiliated for such service. Moreover, in
no event shall the Company issue any of its securities to any officer,
director or promoter of the Company, or any of their respective affiliates
or associates, in connection with activities designed to locate a Target
Business.
As a general rule, Federal and state tax laws and regulations have a
significant impact upon the structuring of Business Combinations. The
Company will evaluate the possible tax consequences of any prospective
Business Combination and will endeavor to structure a Business Combination
so as to achieve the most favorable tax treatment to the Company, the
Target Business and their respective stockholders. There can be no
assurance that the Internal Revenue Service or any relevant state tax
authorities will ultimately assent to the Company's tax treatment of a
particular consummated Business Combination. To the extent the Internal
Revenue Service or any relevant state tax authorities ultimately prevail in
recharacterizing the tax treatment of a Business Combination, there may be
adverse tax consequences to the Company, the Target Business and their
respective stockholders. Tax considerations as well as other relevant
factors will be evaluated in determining the precise structure of a
particular Business Combination, which could be effected through various
forms of a merger, consolidation or stock or asset acquisition.
The Company may utilize cash derived from the Net Proceeds of the
Offering, equity securities, debt securities or bank borrowings or a
combination thereof as consideration in effecting a Business Combination.
Although the Company's Board of Directors will have the power to issue any
or all of the authorized but unissued shares of Common Stock following the
consummation of the Offering, the Company has agreed that until May 15,
1997 it will not issue any securities or grant options or warrants to
purchase any securities of the Company without the consent of the
4
<PAGE>
representatives in the Offering, except in connection with effecting a
Business Combination. Other than the Proposed Merger, which is subject to
numerous conditions, the Company has no commitments to date to issue any
shares of Common Stock or options or warrants. To the extent that such
additional shares are issued, dilution to the interests of the Company's
stockholders will occur. Additionally, if a substantial number of shares
of Common Stock are issued in connection with the consummation of the
Proposed Merger or a Business Combination, a change in control of the
Company may occur which may affect, among other things, the Company's
ability to utilize net operating loss carryforwards, if any.
There currently are no limitations on the Company's ability to borrow
funds to effect a Business Combination. However, the Company's limited
resources and lack of operating history may make it difficult to borrow
funds. The amount and nature of any borrowings by the Company will depend
on numerous considerations, including the Company's capital requirements,
potential lenders' evaluation of the Company's ability to meet debt service
on borrowings and the then prevailing conditions in the financial markets,
as well as general economic conditions. The Company does not have any
arrangements with any bank or financial institution to secure additional
financing and there can be no assurance that such arrangements if required
or otherwise sought, would be available on terms commercially acceptable or
otherwise in the best interests of the Company. The inability of the
Company to borrow funds required to effect or facilitate a Business
Combination, or to provide funds for an additional infusion of capital into
a Target Business, may have a material adverse effect on the Company's
financial condition and future prospects, including the ability to effect a
Business Combination. To the extent that debt financing ultimately proves
to be available, any borrowings may subject the Company to various risks
traditionally associated with indebtedness, including the risks of interest
rate fluctuations and insufficiency of cash flow to pay principal and
interest. Furthermore, a Target Business may have already incurred debt
financing and, therefore, all the risks inherent thereto.
STOCKHOLDER APPROVAL OF BUSINESS COMBINATIONS
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 Business Combination is such as would
not ordinarily require stockholder approval under applicable state law. In
connection with such approval, the Company intends to provide stockholders
with complete disclosure documentation, including audited financial
statements, concerning a Target Business. All of the Company's
stockholders immediately prior to the Closing Date of the Offering,
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 voted by the
stockholders (in person or by proxy). In addition, the Delaware General
Corporation Law requires approval of certain mergers and consolidations by
the holders of a majority of the outstanding stock entitled to vote
thereon. Holders of Warrants who otherwise do not own any shares of Common
Stock will not be entitled to vote on any Business Combination.
REDEMPTION RIGHTS
At the time the Company seeks stockholder approval of any potential
Business Combination, the Company will offer (the "Redemption Offer") each
of the non-affiliated public stockholders of the Company the right, for a
specified period of time of not less than 20 calendar days, to redeem his
shares of Common Stock at a price equal to the Liquidation Value (as
defined below) of such shares as of the record date established for
determining the stockholders entitled to vote with respect to the approval
of a Business Combination (the "Record Date"). The Redemption Offer will
5
<PAGE>
be described in the disclosure documentation relating to the proposed
Business Combination. The "Liquidation Value" for each share of Common
Stock will be determined as of the Record Date by dividing (A) the greater
of (i) the Company's net worth as reflected in the Company's then current
financial statements as audited by the Company's independent accountants,
or (ii) the amount of the proceeds of the Company in the escrow account
(including interest earned thereon) by (B) the number of shares held by
non-affiliated public stockholders. In connection with the Redemption
Offer, if non-affiliated public stockholders holding less than 15% of the
shares of 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 at their Liquidation
Value as of the Record Date. 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. Purchasers of 30,000 shares
of Common Stock in a private placement by the Company in February 1993 (the
"Placement Shares") and holders of Warrants will only be allowed to
participate in a Redemption Offer if they otherwise own shares of Common
Stock and, in that instance, only with respect to those shares of Common
Stock.
ESCROW OF OUTSTANDING SHARES
Pursuant to the terms of the Offering, all of the shares of Common
Stock of the Company outstanding immediately prior to the Closing Date of
the Offering were placed in escrow with the Proceeds Escrow Agent, until
the earlier of (i) the occurrence of the consummation of the first Business
Combination, (ii) November 15, 1996, or (iii) May 15, 1997 if, prior to
November 15, 1996, the Company has become a party to a letter of intent or
a definitive agreement to effect a Business Combination (the "Extension
Criteria"). The Merger Agreement to effectuate the Proposed Merger was
entered into on November 1, 1996, and, as such, the Extension Criteria has
been satisfied. 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 the exceptions described below),
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 non-affiliated public stockholders with respect to a
consummation of a Business Combination or liquidation proposal, but
excluding the right to request the redemption of escrowed shares pursuant
to a Redemption Offer. Subject to compliance with applicable securities
laws, any such holder may transfer his or her Common Stock held in escrow
to a family member (with the consent of the Representative which will not
be unreasonably withheld) or in the event of the holder's death by will or
operation of law, provided that any such transferee must agree as a
condition to such transfer to be bound by the restrictions on transfer
applicable to the original holder and, in the case of present stockholders
other than the holders of the Placement Shares, that the transferor (except
in the case of death) will continue to be deemed the beneficial owner (as
defined in Regulation 13d-3 promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) of such transferred shares.
Each of the executive officer and the other directors of the Company
has agreed to surrender his shares to the Company at the purchase price at
which such shares were acquired ($.10 per share) if he resigns prior to the
occurrence of the consummation of the first Business Combination.
POSSIBLE LIQUIDATION OF THE COMPANY IF NO BUSINESS COMBINATION
If the Company does not effect a Business Combination by May 15, 1997,
the Company will submit for stockholder consideration a proposal to
liquidate the Company and distribute to the then holders of Common Stock
acquired as part of the Units sold in the Offering or in the open market
thereafter, the amounts in the interest bearing escrow account maintained
by the Proceeds Escrow Agent. Thereafter, all remaining assets available
6
<PAGE>
for distribution will be distributed to all holders of the Company's Common
Stock after payment of liabilities and after appropriate provision has been
made for the payment of liquidating distributions upon each class of stock,
if any, having preference over the Common Stock. Since the proceeds to the
Company from the sale of the Class B Warrants in the Offering were, and
will continue to be used to cover all the expenses incurred by the Company
in the Offering, including the underwriters' discounts and the
representatives' non-accountable expense allowance, and to fund the
Company's operating expenses, including investment banking fees and the
costs of business, legal and accounting due diligence on prospective Target
Businesses, until the consummation of a Business Combination, the amount
per share remaining for distribution, in the event of a liquidation of the
Company, to the holders of Common Stock acquired as part of the Units sold
in the Offering or in the open market thereafter, and exclusive of any
income earned on the proceeds held in the escrow account maintained by the
Proceeds Escrow Agent, will be approximately equal to the $10.00 initial
public offering price per Unit in the Offering (assuming no value is
attributed to the Warrants included in the Units offered thereby). All of
the Company's stockholders immediately prior to the Closing Date of the
Offering, including the Company's executive officer and other directors,
will be required to vote their shares of Common Stock in accordance with
the vote of the majority of all non-affiliated public stockholders of the
Company with respect to any liquidation proposal. Holders of Warrants,
however, will only be entitled to vote on any liquidation proposal, and
allowed to participate in any liquidation distribution, if they purchased
shares of Common Stock in the Offering or on the open market thereafter,
but only as to any shares of Common Stock so purchased. In addition,
stockholders of the Company immediately prior to the Closing Date of the
Offering, including officers and directors, will not participate in any
liquidation distribution with respect to the shares of Common Stock owned
by them immediately prior to the Closing Date of the Offering.
COMPETITION
The Company encounters intense competition from other entities having
business objectives similar to those of the Company. 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 the Company and there can be no assurance that the Company will have
the ability to compete successfully. The Company's financial resources
will be limited in comparison to those of many of its competitors. This
inherent competitive limitation may compel the Company to select certain
less attractive Business Combination prospects.
In the event that the Company succeeds in effecting a Business
Combination, the Company 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 of a Business Combination, the Company 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
The Company, at December 31, 1996, employed only one person, Mr.
Salvatore J. Zizza, the Company's Chairman, President and Treasurer, on a
part-time basis.
7
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTIES
-------------------------
The Company's principal office is located in New York, New York, where
it occupies the offices of Zizza & Company ("Zizza Corporation"), a
corporation controlled by Salvatore J. Zizza, the Company's Chairman of the
Board, President and Treasurer. The Company leases this space pursuant to
an oral agreement. The Company intends to occupy this space until it
effects a Business Combination. The Company pays Zizza Corporation a
monthly payment of $2,500 for rent, office and secretarial services.
The Company believes that this facility is well maintained and
adequate to meet its needs in the foreseeable future pending the
consummation of a Business Combination.
ITEM 3. LEGAL PROCEEDINGS
-----------------
At this time, the Company is not involved in any pending or threatened
legal proceedings involving it or any of its assets.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of the Company's security holders
through the solicitation of proxies or otherwise during the fourth quarter
of fiscal 1996.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-------------------------------------------------------------
MATTERS
-------
Since May and June 1995, the Company'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 the
Company 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.
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
8
<PAGE>
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 31 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 31 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 31 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 31 11.125 9.500
As of January 29, 1997, there were 38 holders of record of the Company's
Common Stock, two holders of record of Class A Warrants and seven holders
of record of Class B Warrants. Since certain of the shares of the
9
<PAGE>
Company's 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 and Class A and B Warrants.
The Company 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
for use in the Company's business.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The selected historical financial information of the Company set forth
below should be read in conjunction with the audited financial statements
of the Company and notes thereto contained elsewhere in this Annual Report
on Form 10-K.
The statement of operations data for the year ended December 31, 1996,
1995 and 1994, and the balance sheet data as of December 31, 1996 and 1995,
are derived from, and are qualified by reference to the audited financial
statements of the Company which are included elsewhere in this Annual
Report on Form 10-K. The statement of operations data for the year ended
December 31, 1993 and the balance sheet data as of December 31, 1994 and
1993 are derived from audited financial statements of the Company not
included herein. No cash dividends have ever been declared or paid on
shares of the Company's Common Stock.
YEAR ENDED DECEMBER 31,
--------------------------------------------------
STATEMENT OF 1996 1995 1994 1993
OPERATIONS DATA: ---- ---- ---- ----
Interest income . . $345,484 $224,305 $ -0- $ -0-
General and
administrative $160,309 $ 71,782 $ 7,000 $ 7,186
expenses . . . .
Net income (loss) . $114,175 $100,523 $(7,000) $ (7,186)
Net income (loss)
per common share. . $ 0.14 $ 0.16 $ (.03) $ (.03)
Weighted average
shares 833,250 608,250 233,250 233,250
outstanding . . .
BALANCE SHEET
DATA:
Total assets . . . $6,830,530 $6,518,759 $74,139 $81,139
Redeemable common $981,349 $932,316 $ -0- $ -0-
stock . . . . . . .
Stockholders' $5,561,945 $5,496,803 $68,139 $75,139
equity . . . . . .
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
----------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The Company is a development stage company, and to date its efforts
have been limited to organizational activities, consummating the Offering
and seeking a Business Combination. The Company has not yet consummated a
Business Combination. Accordingly, the Company will not achieve any
operating revenues (other than investment income) until, at the earliest,
the consummation of a Business Combination.
The Company has used, and will continue to use the Net Proceeds of the
Offering, 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
10
<PAGE>
a Business Combination (including possible payment of finder's fees or
other compensation to persons or entities which provide assistance or
services to the Company). The Company does not have discretionary access
to the income on the monies in the escrow account and stockholders of the
Company will not receive any distribution of the income (except in
connection with a liquidation of the Company) or have any ability to direct
the use or distribution of such income. Thus, such income will cause the
amount in escrow to increase. The Company cannot use the escrowed amounts
to pay the costs of evaluating potential Business Combinations and used and
will continue to use the proceeds from the sale of the Class B Warrants in
the Offering to cover all the expenses incurred by the Company in the
Offering, to pay Proceeds 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 the Company, including legal and accounting fees
and administrative support expenses in connection with the Company's
reporting obligations to the Securities & Exchange Commission. The Company
does not anticipate such fees and administrative expenses will exceed
$100,000 per year.
The Company 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 the Extension
Criteria are satisfied and the agreement with Gruntal is extended for the
full six months. Gruntal was issued 15,000 shares of Common Stock at a
price of $.10 per share as additional compensation for its agreement to act
as the Company's investment banker.
If requested by the Company, and assuming no conflict of interest,
Gruntal also will be retained by the Company to render a fairness opinion
in connection with the consummation of a Business Combination in
consideration of a fee of $50,000, reduced by the monthly retainer fees
previously paid to Gruntal. If Gruntal identifies the Target Business with
which the Company effects a Business Combination and the transaction is
consummated, it will receive additional compensation from the Company, the
amount and form of which will be subject to good faith negotiations between
management of the Company and Gruntal at the time of the introduction of
the Target Business to the Company. Management has not yet determined the
criteria to be used in determining the amount of the additional
compensation to be payable to Gruntal or whether a maximum dollar amount
will be set. The Company will not issue its shares in lieu of cash.
As a result of the Offering, the Company has sufficient available
funds, assuming that a Business Combination is not consummated, to operate
until at least May 15, 1997. To the extent that Common Stock is used as
consideration to effect a Business Combination, the balance of the Net
Proceeds of the Offering not theretofore expended will be used to finance
the operations of the Target Business. The Company has not incurred any
debt in connection with its organizational activities. No cash
compensation will be paid to any officer or director until after the
consummation of the first Business Combination. Since the role of present
management after a Business Combination is uncertain, the Company has no
ability to determine what remuneration, if any, will be paid to such
persons after a Business Combination.
The net proceeds from the sale of the Class B Warrants in the Offering
not immediately required for the purposes set forth above have been
invested in general debt obligations of the United States Government or
other high-quality, short-term interest-bearing investments. The Company
believes that, in the event a Business Combination is not effected in the
time allowed and to the extent that a significant portion of the Net
Proceeds of the Offering is not used in evaluating various prospective
Target Businesses, the interest income derived from investment of such Net
Proceeds during such period may be sufficient to defray continuing general
11
<PAGE>
and administrative expenses, as well as costs relating to compliance with
securities laws and regulations (including associated professional fees).
In the event that the Company does not effect a Business Combination
by May 15, 1997, the Company will submit for stockholder consideration a
proposal to liquidate the Company and distribute to the then holders of
Common Stock acquired as part of the Units sold in the Offering or in the
open market thereafter, the amount held in the escrow account maintained by
the Proceeds Escrow Agent. Thereafter, all remaining assets available for
distribution will be distributed to all holders of the Company'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 Common Stock. To the extent that a
Business Combination is not effected in the time allowed and the Company's
stockholders determine not to liquidate the Company, the Company believes
that income from the escrow account, together with a small portion of the
net proceeds from the sale of the Class B Warrants in the Offering, may be
sufficient to defray continuing expenses for a period of several additional
years until the Company consummates a Business Combination. Since all
stockholders of the Company immediately prior to the Closing Date of the
Offering 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 the Company, including any income and interest earned
on the proceeds of the Offering, which may be distributed upon such
liquidation would be distributed to the owners of the Common Stock issued
as part of the Units in the Offering or in the open market thereafter.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements and supplementary data listed in Item
14(a)(1) and (2) are included in this report beginning on page F-1.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
----------------------------------------------------
None.
PART III
--------
Incorporated by reference to the Company's definitive proxy statement
for its 1997 Annual and Special Meeting of Stockholders, which definitive
proxy statement has been filed with the Securities and Exchange Commission.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT ON FORM 8-K
---------------------------------------------------------------
(a) The following are filed as a part of this report.
(1) Financial Statements
--------------------
12
<PAGE>
Page
-----
Report of Independent Certified Public Accountants . F-2
Statements of Operations for the years ended December
31, 1996, 1995 and 1994 and for the period January 1,
1993 to December 31, 1996 . . . . . . . . . . . . . F-3
Balance Sheets - December 31, 1996 and 1995 . . . . . 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 period January 1,
1993 to December 31, 1996 . . . . . . . . . . . . . F-5
Statements of Cash Flows for the Years Ended December
31, 1996, 1995 and 1994 and for the period January 1,
1993 to December 31, 1996 . . . . . . . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . F-7
(2) Financial Statement Schedules
-----------------------------
None.
(3) Exhibits
--------
Exhibit
-------
No. Description
----- -----------
2.1 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 [incorporated by reference to
Exhibit 2 to the Registrant's Registration Statement
on Form S-4 (Commission File No. 33-18725) filed on
December 24, 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 Common Stock Certificate of the Registrant
[incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form S-1 (Commission File
No. 33-60134) filed on April 13, 1995].
13
<PAGE>
Exhibit
-------
No. Description
----- -----------
4.2 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].
4.3 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].
4.4 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].
4.5 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].
4.6 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].
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 Employment Agreement between Lehigh Group, Inc. and
Mr. Salvatore Zizza, [incorporated by reference to
Exhibit 10.6 to the Registrant's Registration
Statement on Form S-1 (Commission File No. 33-60134)
filed on April 13, 1995].
(b) Reports on Form 8-K
------------------
None.
14
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants . . . . . . . . F-2
Statements of Operations for the years ended December 31, 1996,
1995 and 1994 and for the period January 1, 1993 to
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Balance Sheets - December 31, 1996 and 1995 . . . . . . . . . . . . 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
period January 1, 1993 to December 31, 1996 . . . . . . . . . . . . F-5
Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994 and for the period January 1, 1993 to
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . F-7
F-1
<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, 1996 and
1995, and the related statements of operations and cash flows for each of
the years in the three year period ended December 31, 1996 and the period
January 1, 1993 (inception) to December 31, 1996, and common stock, common
stock subject to possible redemption, preferred stock, additional paid-in
capital and earnings accumulated during the development stage for the
period January 1, 1993 (inception) to December 31, 1996. 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, 1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three year period ended December 31,
1996 and the period January 1, 1993 (inception) to December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
--------------------------------
BDO Seidman, LLP
New York, New York
January 10, 1997
F-2
<PAGE>
INITIAL ACQUISITION CORP.
(A CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
------------------------
YEAR ENDED PERIOD
DECEMBER 31, JANUARY 1,
---------------------------------- 1993 TO
DECEMBER 31,
1996 1995 1994 1996
--------- --------- ---------- ------------
INTEREST INCOME . . $345,484 $224,305 $ -- $569,789
GENERAL AND
ADMINISTRATIVE
EXPENSES . . . . (160,309) (71,782) (7,000) (246,277)
PROVISION FOR TAXES (71,000) (52,000) -- (123,000)
-------- -------- -------- --------
$114,175 $100,523 $ (7,000) $200,512
NET INCOME (LOSS) . ======== ======== ======== ========
EARNINGS (LOSS) PER $ .14 $ .16 $ (.03)
SHARE . . . . . . . ======== ======== ========
WEIGHTED AVERAGE
COMMON SHARES 833,250 608,250 233,250
OUTSTANDING . . . . ======== ======= ========
See accompanying notes to financial statements.
F-3
<PAGE>
INITIAL ACQUISITION CORP.
(A CORPORATION IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
--------------
DECEMBER 31,
ASSETS 1996 1995
------ ---------- ---------
CURRENT ASSETS:
Cash and cash equivalents . . . . $ 146,863 $ 305,171
Investment in U.S. Treasury Bills 6,546,693 6,213,588
---------- ---------
Total current assets . . . . 6,693,556 6,518,759
136,974 --
Deferred acquisition costs . . . . ---------- ---------
Total . . . . . . . . . . . $6,830,530 $6,518,759
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Accrued expenses . . . . . . . . . $164,236 $37,640
Income taxes payable . . . . . . . 123,000 52,000
Common stock, subject to possible
redemption, 89,940 shares at
conversion value . . . . . . . . 981,349 932,316
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) . 7,434 7,434
Additional paid-in capital . . . . 5,436,065 5,436,065
Earnings accumulated during 118,446 53,304
development stage . . . . . . . --------- -----------
COMMITMENTS . . . . . . . . . . . . .
$6,830,530 $6,518,759
Total . . . . . . . . . . . ========== ==========
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
PERIOD JANUARY 1, 1993 TO DECEMBER 31, 1996
-------------------------------------------
COMMON STOCK
--------------
SHARES AMOUNT
------ -----
BALANCE AT JANUARY 1, 1993 . . . . -- $ --
Issuance of founder's 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
Net income . . . . . . . . . . . -- --
Accretion to redemption value -- --
of common stock . . . . . . . ------- ------
BALANCE AT DECEMBER 31, 1995 . . . 743,310 7,434
------- ------
Net income . . . . . . . . . . . -- --
Accretion to redemption value of -- --
common stock . . . . . . . . . ------- ------
BALANCE AT DECEMBER 31, 1996 . . . 743,310 $7,434
======= ======
COMMON STOCK SUBJECT
TO EARNINGS
POSSIBLE REDEMPTION ACCUMULATED
-------------------- ADDITIONAL DURING THE
PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE
------ ------ --------- ----------
BALANCE AT JANUARY 1, 1993 -- $ -- $ -- $ --
Issuance of founder's
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 . . . . . . . . 89,940 899,283 5,356,073 --
Net income . . . . . . -- -- -- 100,523
Accretion to redemption -- 33,033 -- (33,033)
value of common stock ------ -------- ---------- --------
BALANCE AT DECEMBER 31, 1995 89,940 932,316 5,436,065 53,304
------ -------- ---------- --------
Net income . . . . . . -- -- -- 114,175
Accretion to redemption -- 49,033 -- (49,033)
value of common stock ------ -------- ---------- --------
BALANCE AT DECEMBER 31, 1996 89,940 $981,349 $5,436,065 $118,446
====== ======== ========== ========
See accompanying notes to financial statements.
F-5
<PAGE>
INITIAL ACQUISITION CORP.
(A CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
------------------------
YEAR ENDED PERIOD
DECEMBER 31, JANUARY 1,
-------------------------------- 1993 TO
DECEMBER 31,
1996 1995 1994 1996
---- ---- ---- ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income
(loss) . . . . $114,175 $100,523 $(7,000) $200,512
Adjustments to
reconcile net
income (loss) to
net cash used in
operating activities:
Accrued interest
income . . (333,105) (214,370) -- (547,475)
Change in assets
and liabilities:
Accrued
expenses. 126,596 31,640 -- 164,236
Income
taxes 71,000 52,000 -- 123,000
payable . --------- --------- -------- ----------
Net cash
used in
operating (21,334) (30,207) (7,000) (59,727)
activities --------- --------- -------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of
U.S. Treasury
Bills (25,859,849) (5,999,218) -- (31,859,067)
Proceeds from
U.S.
Treasury 25,859,849 -- -- 25,859,849
Bills . . . . . ---------- ---------- --------- ----------
Net cash
used in
investing -- (5,999,218) -- (5,999,218)
activities -------- ----------- -------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Deferred
acquisition
costs (136,974) -- -- (136,974)
Proceeds from
sale of common
stock . . . . . -- -- -- 82,325
Net proceeds from
public offering -- 6,260,457 -- 6,260,457
Deferred
registration -- 63,043 (10,821) --
costs --------- --------- --------- ---------
Net cash
provided
by (used
in)
financing (136,974) 6,323,500 (10,821) 6,205,808
activities --------- ---------- -------- ---------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS . . (158,308) 294,075 (17,821) 146,863
CASH AND CASH
EQUIVALENTS, 305,171 11,096 28,917 --
beginning of year -------- -------- ------- --------
CASH AND CASH
EQUIVALENTS, end $146,863 $305,171 $11,096 $146,863
of year . . . . ======== ======== ======= ========
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 (the "Trust Fund") 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.
On November 1, 1996, the Company signed a definitive agreement for
the acquisition of a Target Business and will submit such transaction for
stockholder approval (see Note 7). All of the Company's stockholders prior
to the Offering, including all of the officers and directors of the Company
(the "Initial Stockholders") have agreed to vote the shares of common stock
owned by them immediately prior to the effective date of the Offering in
accordance with the vote of the majority of all other shares of common
stock (the "Public Shares") voted on in any Business Combination. The
holders of the Public Shares are referred to herein as the "Public
Stockholders". After consummation of the Company's first Business
Combination, this voting safeguard will no longer be applicable.
With respect to the Business Combination, any Public Stockholder who
votes against the Business Combination may demand that the Company convert
his shares into cash. The per share conversion price will equal the amount
in the Trust Fund as of the record date for determination of stockholders
entitled to vote on the Business Combination divided by the number of
shares held by Public Stockholders. The Company will not consummate a
Business Combination if 15% or more in interest of the Public Stockholders
exercise their conversion rights. 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 Trust Fund 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 Trust Fund) has been classified
as common stock subject to possible redemption in the accompanying balance
sheet at the redemption value.
The Company's Certificate of Incorporation provides for mandatory
liquidation of the Company in the event that the Company does not
consummate a Business Combination within 18 months from the date of
F-7
<PAGE>
INITIAL ACQUISITION CORP.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
----------------------------------
consummation of the Offering, or 24 months from the consummation of the
Offering if certain extension criteria have been satisfied. Upon the
signing of the definitive merger agreement (see Note 7), such extension
criteria were satisfied. In the event of liquidation, it is likely that
the per share value of the residual assets remaining available for
distribution (including Trust Fund assets) will be less than the initial
public offering price per share in the Offering (assuming no value is
attributed to the Warrants contained in the Units offered in the Offering.)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
Deferred Acquisition Costs
The Company has deferred acquisition costs relating to a proposed
merger (Note 7). The deferred acquisition costs will be charged to equity
upon completion of the proposed merger. Should the proposed merger prove
to be unsuccessful, the deferred costs, as well as additional expenses to
be incurred, will be charged to operations.
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, 1996 are $125,000.
Net Earnings Per Common Share
Net earnings per common share for the years ended December 31, 1996,
1995 and 1994 are computed by dividing net earnings 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 the reported amount of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
F-8
<PAGE>
INITIAL ACQUISITION CORP.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
----------------------------------------
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 January 1997.
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.
Provision for income taxes consist of the following:
1996 1995 1994
-------- -------- --------
Current:
Federal $45,000 $40,000 $ --
State 26,000 12,000 --
------- ------- -------
Current tax expense $71,000 $52,000 $ --
======= ======= =======
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 $30,000, $20,000 and $6,000 for the years ended December 31,
1996, 1995 and 1994, 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
F-9
<PAGE>
INITIAL ACQUISITION CORP.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
----------------------------------------
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.
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 - PROPOSED MERGER
------------------------
On November 1, 1996, the Company entered into a definitive merger
agreement with Hollis-Eden, Inc., a development stage pharmaceutical
company engaged in developing therapeutic and/or preventive pharmaceutical
agents for the treatment of a number of diseases.
The merger will be treated as a recapitalization of Hollis-Eden by an
exchange of Hollis-Eden common stock for the net assets of the Company
since the Hollis - Eden stockholders will receive new Company shares of
stock representing approximately 85% of the Company's total outstanding
shares.
The merger is subject to a number of conditions, including approval by
the stockholders of the Company.
F-10
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized on
the 19th day of February, 1997.
INITIAL ACQUISITION CORP.
By: /s/ Salvatore J. Zizza
------------------------------------
Salvatore J. Zizza, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
/s/Salvatore J. Zizza President, Chairman of the February 19, 1997
--------------------- Board of Directors, Treasurer
Salvatore J. Zizza and Director (Principal
Executive, Financial and
Accounting Officer)
--------------------- Director February 19, 1997
Sidney Dworkin
--------------------- Director February 19, 1997
Herbert M. Paul
/s/Richard L. Bready Director February 19, 1997
---------------------
Richard L. Bready
/s/Alan P. Donenfeld Director February 19, 1997
---------------------
Alan P. Donenfeld
F-11
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
STATEMENTS OF OPERATIONS, BALANCE SHEETS, STATEMENTS OF STOCKHOLDERS'
EQUITY AND STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 146,863
<SECURITIES> 6,546,693
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,693,556
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,830,530
<CURRENT-LIABILITIES> 164,236
<BONDS> 0
0
0
<COMMON> 7,434
<OTHER-SE> 6,535,860
<TOTAL-LIABILITY-AND-EQUITY> 6,830,530
<SALES> 0
<TOTAL-REVENUES> 345,484
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 160,309
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 185,175
<INCOME-TAX> 71,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 114,175
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
