AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 10, 1997
REGISTRATION NO. 333-18725
===========================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------
INITIAL ACQUISITION CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6778 (A BLANK CHECK COMPANY) 13-3197002
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION)
810 SEVENTH AVENUE
NEW YORK, NEW YORK 10019
(212) 333-2620
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SALVATORE J. ZIZZA
CHAIRMAN AND PRESIDENT
INITIAL ACQUISITION CORP.
810 SEVENTH AVENUE
NEW YORK, NEW YORK 10019
(212) 333-2620
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
WITH A COPY TO:
LEONARD GUBAR, ESQ.
REID & PRIEST LLP
40 WEST 57TH STREET
NEW YORK, NEW YORK 10019-4097
(212) 603-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the Registration Statement becomes effective and
the consummation of the Merger (as defined below).
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
===========================================================================
Title of
Each Class Proposed Proposed
of Maximum Maximum Amount of
Securities Offering Aggregate Regis-
to be Amount to be Price Offering tration
Registered Registered Per Share Price Fee
-------------------------------------------------------------------------
Common Stock,
$.01 par
value
per share .7,190,654 shares(1) $10.190(1) $73,272,764(1) $22,203(1)
2,400,000 shares $ 9.875(2) $23,700,000(2) $ 7,182(2)
---------------------------------------------------------------------------
Total . . . .9,590,654 shares $29,385
===========================================================================
(1) Shares of Common Stock initially registered by this Registration
Statement. Proposed maximum offering price per share, proposed maximum
aggregate offering price and amount of registration fee (previously
paid), calculated in accordance with Rules 457(f)(1) and (c) as of
December 20, 1996.
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rules 457(f)(1) and (c), based upon the average of the
closing bid and asked prices per share of the Registrant's Common Stock
on the OTC Electronic Bulletin Board of the National Association of
Securities Dealers, Inc. as of January 31, 1997. Pursuant to Rule
457(a), an additional filing fee of $7,182 is paid herewith for the
additional 2,400,000 shares of Registrant's Common Stock registered by
this Amendment No. 1.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND
EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
===========================================================================
<PAGE>
CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY
PRELIMINARY COPIES
INITIAL ACQUISITION CORP.
810 SEVENTH AVENUE
NEW YORK, NEW YORK 10019
. , 1997
Dear Stockholder:
You are cordially invited to attend an Annual and Special Meeting of
Stockholders of Initial Acquisition Corp., a Delaware corporation ("IAC"),
to be held on Friday, March 14, 1997 at 10:00 a.m., local time, at the law
offices of Reid & Priest LLP, 40 West 57th Street, 26th Floor, New York,
New York 10019 (the "Meeting").
At this important Meeting, you will be asked to consider and vote upon
proposals to:
(1) Approve and adopt a certain Agreement and Plan of Merger (the
"Merger Agreement"), dated as of November 1, 1996, among IAC, Hollis-
Eden, Inc., a Delaware corporation ("Hollis-Eden"), Mr. Salvatore J.
Zizza and Mr. Richard B. Hollis, providing for, among other things,
(i) the merger of Hollis-Eden with and into IAC, with IAC being the
surviving corporation (the "Surviving Corporation") to the merger (the
"Merger") and (ii) the issuance to the stockholders of Hollis-Eden and
to the holders of warrants and options to acquire Hollis-Eden capital
stock as a result of the Merger of (a) an aggregate of 4,911,004
shares of common stock, $.01 par value per share, of the Surviving
Corporation (the "Surviving Corporation Common Stock"), subject to
possible adjustment, (b) warrants to purchase an aggregate of
1,501,603 shares of Surviving Corporation Common Stock upon the same
terms as currently outstanding Hollis-Eden warrants and (c) options to
purchase an aggregate of 3,178,047 shares of Surviving Corporation
Common Stock upon the same terms as currently outstanding Hollis-Eden
options, in exchange for all of the issued and outstanding capital
stock of Hollis-Eden;
(2) Elect seven directors to hold office effective upon the
consummation of the Merger; and
(3) Approve and adopt IAC's 1997 Incentive Stock Option Plan.
Upon the consummation of the Merger, the Surviving Corporation will
change its name to Hollis-Eden Pharmaceuticals, Inc. and the business of
the Surviving Corporation will be that of Hollis-Eden immediately prior to
the Merger.
Stockholders have certain redemption and appraisal rights in
connection with the Merger. A detailed description of the Merger and such
rights is set forth in the accompanying Joint Proxy Statement/Prospectus
(the "Joint Proxy Statement/Prospectus"). Please review the Joint Proxy
Statement/Prospectus carefully with respect to your choices.
THE BOARD OF DIRECTORS OF IAC HAS UNANIMOUSLY APPROVED THE MERGER AND
THE OTHER PROPOSALS TO BE VOTED UPON AT THE MEETING AND UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER AND SUCH OTHER
PROPOSALS. THE BOARD OF DIRECTORS OF IAC BELIEVES THAT THE MERGER IS FAIR
TO, AND IN THE BEST INTERESTS OF, IAC AND IAC'S STOCKHOLDERS.
Whether or not you are able to attend the Meeting, please complete,
sign and date the enclosed proxy and return it in the enclosed envelope as
soon as possible. Proxies are revocable, either in writing at any time
prior to the Meeting or at the Meeting prior to voting, or by voting at the
Meeting. Your prompt cooperation is greatly appreciated. Regardless of
the number of shares of IAC Common Stock you own, your vote is important.
Very truly yours,
Salvatore J. Zizza
Chairman of the Board and President
<PAGE>
INITIAL ACQUISITION CORP. PRELIMINARY COPIES
810 SEVENTH AVENUE
NEW YORK, NEW YORK 10019
NOTICE OF ANNUAL AND SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 14, 1997
NOTICE IS HEREBY GIVEN that an Annual and Special Meeting of the
stockholders of Initial Acquisition Corp. a Delaware corporation ("IAC"),
will be held at 10:00 a.m., local time, on Friday, March 14, 1997 at the
law offices of Reid & Priest LLP, 40 West 57th Street, 26th Floor, New
York, New York 10019 (the "Meeting") for the following purposes:
(1) To approve and adopt a certain Agreement and Plan of Merger (the
"Merger Agreement"), dated as of November 1, 1996, among IAC,
Hollis-Eden, Inc., a Delaware corporation ("Hollis-Eden"), Mr.
Salvatore J. Zizza and Mr. Richard B. Hollis, providing for, among
other things, (i) the merger of Hollis-Eden with and into IAC, with
IAC being the surviving corporation (the "Surviving Corporation")
to the merger (the "Merger") and (ii) the issuance to the
stockholders of Hollis-Eden and to the holders of warrants and
options to acquire Hollis-Eden capital stock as a result of the
Merger of (a) an aggregate of 4,911,004 shares of common stock,
$.01 par value per share, of the Surviving Corporation (the
"Surviving Corporation Common Stock"), subject to possible
adjustment, (b) warrants to purchase an aggregate of 1,501,603
shares of Surviving Corporation Common Stock upon the same terms as
currently outstanding Hollis-Eden warrants and (c) options to
purchase an aggregate of 3,178,047 shares of Surviving Corporation
Common Stock upon the same terms as currently outstanding Hollis-
Eden options, in exchange for all of the issued and outstanding
capital stock of Hollis-Eden;
(2) To elect seven directors to hold office effective upon the
consummation of the Merger;
(3) To approve and adopt IAC's 1997 Incentive Stock Option Plan; and
(4) To transact such further or other business as may properly come
before the Meeting or any adjournments or postponements thereof.
Upon the consummation of the Merger, the Surviving Corporation will
change its name to Hollis-Eden Pharmaceuticals, Inc. and the business of
the Surviving Corporation will be that of Hollis-Eden immediately prior to
the Merger.
A copy of the Merger Agreement is attached to the accompanying Joint
Proxy Statement/Prospectus as Appendix A and is incorporated herein by
reference. STOCKHOLDER APPROVAL AND ADOPTION OF THE MERGER AGREEMENT WILL
RESULT IN A CHANGE OF BOTH THE MAJORITY EQUITY OWNERSHIP AND MANAGEMENT OF
IAC AS WELL AS THE BUSINESS OF IAC.
Only IAC stockholders of record at the close of business on January
29, 1997 (the "Record Date") are entitled to receive notice of and to vote
at the Meeting and any adjournments or postponements thereof. Holders of
shares of IAC common stock, $.01 par value per share (the "IAC Common
Stock"), are entitled to one vote on each matter considered and voted on at
the Meeting for each share of IAC Common Stock held of record as of the
close of business on the Record Date.
The affirmative vote of two-thirds of the outstanding shares of IAC
Common Stock voting at the Meeting, either in person or by proxy, is
necessary to approve and adopt the Merger Agreement and the transactions
contemplated thereby. All holders of IAC Common Stock prior to IAC's
<PAGE>
initial public offering (the "IPO") in May 1995 (the "Initial IAC
Stockholders") are obligated to vote their respective shares of IAC Common
Stock in accordance with the vote of the majority in interest of all shares
voted by all other holders of IAC Common Stock (the "IAC Non-Affiliate
Stockholders") with respect to the Merger Agreement. The affirmative vote
of the holders of a plurality of the outstanding shares of IAC Common Stock
voting is required for the election of each director. The affirmative vote
of a majority of the outstanding shares of IAC Common Stock voting is
required for the approval and adoption of the IAC 1997 Incentive Stock
Option Plan.
IF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE
NOT APPROVED BY THE REQUISITE VOTE, THE MERGER AGREEMENT WILL BE TERMINATED
AND THE MERGER WILL BE ABANDONED. IN SUCH EVENT, THE PROPOSAL TO ADOPT THE
IAC 1997 INCENTIVE STOCK OPTION PLAN WILL NOT BE IMPLEMENTED EVEN IF SUCH
PROPOSAL IS APPROVED BY THE REQUISITE VOTE.
Each of the IAC Non-Affiliate Stockholders (and each Initial IAC
Stockholder who (i) participated in the February 1993 private placement of
IAC securities and (ii) purchased shares of IAC Common Stock in the open
market after the IPO (the "After Acquired Stock"), but only to the extent
of the After Acquired Stock) has the right (the "Redemption Right") to
elect to have any or all of his or her shares of IAC Common Stock redeemed
for approximately $11.00 per share (the "Redemption Value"), by indicating
such election on his or her proxy card and depositing such proxy card in
the United States mail postmarked within 30 calendar days of the mailing of
this Joint Proxy Statement/Prospectus (such 30 calendar day period being
hereinafter referred to as the "Redemption Period"). The Redemption Value
has been calculated by dividing (a) the amount of the proceeds of IAC held
in the escrow account (including interest thereon) established in
connection with the IPO as of the Record Date by (b) the number of shares
of IAC Common Stock held by the IAC Non-Affiliate Stockholders as of the
Record Date. If IAC Non-Affiliate Stockholders elect to redeem 15% or more
of their shares of IAC Common Stock within the Redemption Period, IAC will
not proceed with the Merger and will not redeem such shares. If IAC Non-
Affiliate Stockholders elect to redeem less than 15% of their shares of IAC
Common Stock within the Redemption Period, and assuming that IAC otherwise
satisfies the required conditions for the Merger, IAC may proceed with the
Merger, but will be required to redeem the shares of IAC Common Stock
requested by the IAC Non-Affiliate Stockholders at their Redemption Value
upon the consummation of the Merger. An IAC Non-Affiliate Stockholder may
exercise his or her Redemption Right only if he or she expressly votes
against the Merger within the Redemption Period. IAC Non-Affiliate
Stockholders may not exercise their Redemption Rights if they are seeking
their appraisal rights. An IAC Non-Affiliate Stockholder who votes against
the Merger after the Redemption Period will not be entitled to have any of
his or her shares redeemed. Any IAC Non-Affiliate Stockholder returning a
proxy card which expressly votes for the Merger or returning an executed
proxy card which fails to indicate how his or her shares should be voted,
shall be deemed to have waived his or her Redemption Right. A proxy card
which indicates that an IAC Non-Affiliate Stockholder expressly abstains
from voting on the proposal to approve the Merger shall not be deemed an
exercise of such IAC Non-Affiliate Stockholder's Redemption Rights. AN IAC
NON-AFFILIATE STOCKHOLDER WHO SELLS ANY OF HIS OR HER SHARES OF IAC COMMON
STOCK AFTER ELECTING TO HAVE SUCH SHARES REDEEMED SHALL FORFEIT THE RIGHT
TO RECEIVE THE REDEMPTION VALUE WITH RESPECT TO SUCH SHARES.
A holder of IAC Common Stock may dissent from the Merger and, if the
Merger is consummated, such holder shall receive payment of the fair value
of his or her shares in cash if the holder files with IAC a written demand
for appraisal prior to the vote with respect to the Merger being taken at
the Meeting and does not vote his or her shares of IAC Common Stock in
favor of the Merger. Holders of IAC Common Stock are also entitled to
certain redemption rights as described in the Joint Proxy
Statement/Prospectus. For further discussion of both appraisal rights and
redemption rights, see "GENERAL INFORMATION -- IAC Special Meeting;
Redemption Rights" and " -- Appraisal Rights" in the accompanying Joint
Proxy Statement/Prospectus.
A complete list of the stockholders entitled to vote at the Meeting
shall be open to the examination of any stockholder, for any purpose
germane to the Meeting, at the offices of IAC, during ordinary business
hours, for a period of ten days prior to the Meeting.
Whether or not you plan to attend the Meeting, please complete, date
and sign the accompanying proxy card and mail it promptly in the enclosed
pre-addressed envelope, which requires no postage if mailed in the United
States. Any holder of IAC Common Stock who executes and returns a proxy
(ii)
<PAGE>
card may revoke such proxy at any time before it is voted by (i) notifying
in writing the Secretary of IAC at 810 Seventh Avenue, New York, New York
10019, (ii) granting a subsequent proxy or (iii) appearing in person and
voting at the Meeting. Attendance at the Meeting will not in and of itself
constitute revocation of a proxy.
THE BOARD OF DIRECTORS OF IAC UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS
VOTE "FOR" THE ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
BY ORDER OF THE BOARD OF DIRECTORS
SALVATORE J. ZIZZA
Chairman of the Board and President
New York, New York
. , 1997
(iii)
<PAGE>
HOLLIS-EDEN, INC. PRELIMINARY COPIES
808 SW THIRD AVENUE, SUITE 540
PORTLAND, OREGON 97204
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 14, 1997
NOTICE IS HEREBY GIVEN that a Special Meeting of the stockholders of
Hollis-Eden, Inc., a Delaware corporation ("Hollis-Eden"), will be held at
8:00 a.m., local time, on Friday, March 14, 1997 at the offices of Hollis-
Eden, 808 SW Third Avenue, Suite 540, Portland, Oregon 97204 (the
"Meeting") for the following purposes:
(1) To approve and adopt a certain Agreement and Plan of Merger (the
"Merger Agreement"), dated as of November 1, 1996, among Initial
Acquisition Corp., a Delaware corporation ("IAC"), Hollis-Eden,
Mr. Salvatore J. Zizza and Mr. Richard B. Hollis, providing for,
among other things (i) the merger of Hollis-Eden with and into IAC,
with IAC being the surviving corporation (the "Surviving
Corporation") to the merger (the "Merger") and (ii) the issuance to
the stockholders of Hollis-Eden and to the holders of warrants and
options to acquire Hollis-Eden capital stock as a result of the
Merger of (a) an aggregate of 4,911,004 shares of common stock,
$.01 par value per share, of the Surviving Corporation (the
"Surviving Corporation Common Stock"), subject to possible
adjustment, (b) warrants to purchase an aggregate of 1,501,603
shares of Surviving Corporation Common Stock upon the same terms as
currently outstanding Hollis-Eden warrants and (c) options to
purchase an aggregate of 3,178,047 shares of Surviving Corporation
Common Stock upon the same terms as currently outstanding Hollis-
Eden options, in exchange for all of the issued and outstanding
capital stock of Hollis-Eden; and
(2) To transact such further or other business as may properly come
before the Meeting or any adjournments or postponements thereof.
Upon the consummation of the Merger, the Surviving Corporation will
change its name to Hollis-Eden Pharmaceuticals, Inc. and the business of
the Surviving Corporation will be that of Hollis-Eden immediately prior to
the Merger.
A copy of the Merger Agreement is attached to the accompanying Joint
Proxy Statement/Prospectus as Appendix A and is incorporated herein by
reference.
Only Hollis-Eden stockholders of record at the close of business on
January 29, 1997 (the "Record Date") are entitled to receive notice of and
to vote at the Meeting and any adjournments or postponements thereof.
Holders of shares of Hollis-Eden common stock, $.0001 par value per share
(the "Hollis-Eden Common Stock"), are entitled to one vote on each matter
considered and voted on at the Meeting for each share of Hollis-Eden Common
Stock held of record as of the close of business on the Record Date.
The affirmative vote of a majority of the outstanding shares of
Hollis-Eden Common Stock voting at the Meeting, either in person or by
proxy, is necessary to approve and adopt the Merger Agreement and the
transactions contemplated thereby.
A holder of Hollis-Eden Common Stock may dissent from the Merger and,
if the Merger is consummated, such holder shall receive payment of the fair
value of his or her shares in cash if the holder files with Hollis-Eden a
written demand for appraisal prior to the vote with respect to the Merger
being taken at the Meeting and does not vote his or her shares of Hollis-
Eden Common Stock in favor of the Merger. For further discussion of
appraisal rights, see "GENERAL INFORMATION -- Appraisal Rights" in the
accompanying Joint Proxy Statement/Prospectus.
<PAGE>
Whether or not you plan to attend the Meeting, please complete, date
and sign the accompanying proxy card and mail it promptly in the enclosed
pre-addressed envelope, which requires no postage if mailed in the United
States. Any holder of Hollis-Eden Common Stock who executes and returns a
proxy card may revoke such proxy at any time before it is voted by (i)
notifying in writing the Secretary of Hollis-Eden at 808 SW Third Avenue,
Suite 540, Portland, Oregon 97204, (ii) granting a subsequent proxy or
(iii) appearing in person and voting at the Meeting. Attendance at the
Meeting will not in and of itself constitute revocation of a proxy.
THE BOARD OF DIRECTORS OF HOLLIS-EDEN UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" THE ADOPTION OF THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY.
BY ORDER OF THE BOARD OF DIRECTORS
RICHARD B. HOLLIS
Chairman of the Board and
Chief Executive Officer
Portland, Oregon
. , 1997
(ii)
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 10, 1997
PRELIMINARY COPIES
PROSPECTUS
----------
INITIAL ACQUISITION CORP.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
JOINT PROXY STATEMENT
---------------------
INITIAL ACQUISITION CORP. HOLLIS-EDEN, INC.
ANNUAL AND SPECIAL MEETING SPECIAL MEETING OF STOCKHOLDERS
OF STOCKHOLDERS TO BE HELD ON MARCH 14, 1997
TO BE HELD ON MARCH 14, 1997
---------------------
This Joint Proxy Statement/Prospectus is being furnished to holders
(the "IAC Stockholders") of common stock, par value $.01 per share (the
"IAC Common Stock"), of Initial Acquisition Corp., a Delaware corporation
("IAC"), in connection with the solicitation of proxies by the IAC Board of
Directors for use at an Annual and Special Meeting of Stockholders of IAC
to be held at 10:00 a.m., local time, on Friday, March 14, 1997 at the law
offices of Reid & Priest LLP, 40 West 57th Street, 26th Floor, New York,
New York 10019, and at any adjournments or postponements thereof (the "IAC
Special Meeting"). The principal purpose of the IAC Special Meeting is to
consider and vote upon a proposal to approve the Agreement and Plan of
Merger, dated as of November 1, 1996 (the "Merger Agreement"), by and among
IAC, Hollis-Eden, Inc., a Delaware corporation ("Hollis-Eden"), Mr.
Salvatore J. Zizza and Mr. Richard B. Hollis, which provides for, among
other things, the merger of Hollis-Eden with and into IAC, with IAC being
the surviving corporation (the "Surviving Corporation") to the Merger (the
"Merger"). Upon the consummation of the Merger, Hollis-Eden will cease to
exist as a separate corporation. At the time the Merger becomes effective,
each outstanding share of Hollis-Eden common stock, $.0001 par value per
share (the "Hollis-Eden Common Stock"), shall cease to be outstanding and
shall be converted into the right to receive one share of IAC Common Stock.
In addition, all outstanding warrants and options to acquire shares of
Hollis-Eden Common Stock (collectively, the "Hollis-Eden Warrants and
Options") shall cease to be outstanding and shall be converted into the
right to receive warrants and options, as the case may be, to acquire the
same number of shares of Surviving Corporation Common Stock (collectively,
the "Merger Warrants and Options") upon the same terms as the corresponding
Hollis-Eden Warrants and Options. Upon the consummation of the Merger, the
Surviving Corporation will change its name to Hollis-Eden Pharmaceuticals,
Inc. and the business of the Surviving Corporation will be that of Hollis-
Eden immediately prior to the Merger. See "SUMMARY," "THE MERGER," and
ANNEX A to this Joint Proxy Statement/Prospectus.
This Joint Proxy Statement/Prospectus is also being furnished to
holders of Hollis-Eden Common Stock (the "Hollis-Eden Stockholders") in
connection with the solicitation of proxies by the Hollis-Eden Board of
Directors for use at the Special Meeting of Stockholders of Hollis-Eden to
be held at 8:00 a.m., local time, on Friday, March 14, 1997 at the offices
of Hollis-Eden, 808 SW Third Avenue, Suite 540, Portland, Oregon 97204, and
at any adjournments or postponements thereof (the "Hollis-Eden Special
Meeting"). The purpose of the Hollis-Eden Special Meeting is to consider
and vote upon a proposal to approve the Merger and the Merger Agreement.
See "SUMMARY," "THE MERGER," and ANNEX A to this Joint Proxy
Statement/Prospectus.
This Joint Proxy Statement/Prospectus also constitutes the prospectus
of IAC relating to IAC's issuance of the 4,911,004 shares of Surviving
Corporation Common Stock to the Hollis-Eden Stockholders upon the
consummation of the Merger (and the 4,679,650 shares of Surviving
Corporation Common Stock underlying the Merger Warrants and Options
issuable in connection with the Merger).
Upon the consummation of the Merger, the Hollis-Eden Stockholders will
collectively acquire approximately 85% of the outstanding Surviving
Corporation Common Stock (without giving effect to the exercise of any
Merger Warrants and Options, outstanding warrants and options to acquire
shares of IAC Common Stock (the "IAC Warrants and Options") or options
granted under IAC's or Hollis-Eden's respective option plans (collectively,
the "Plan Options"), and their designees will comprise six of the seven
members of the Surviving Corporation's newly-elected Board of Directors.
Assuming the exercise of all of the outstanding Merger Warrants and Options
and IAC Warrants and Options (but not any Plan Options), the Hollis-Eden
Stockholders would collectively own approximately 79% of the then
outstanding shares of Surviving Corporation Common Stock upon the
consummation of the Merger.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
<PAGE>
If the Merger Agreement is approved at each of the IAC and Hollis-Eden
Special Meetings and all of the other conditions to the obligations of the
parties to consummate the Merger are either satisfied or waived,the Merger
will be consummated. A copy of the Merger Agreement is set forth in Annex
A to this Joint Proxy Statement/Prospectus.
It is expected that shares of Surviving Corporation Common Stock will
be accepted for trading, subject to consummation of the Merger, on the
American Stock Exchange (the "AMEX").
ANY HOLDER OF IAC COMMON STOCK OR HOLLIS-EDEN COMMON STOCK WHO: (i)
FILES WITH IAC OR HOLLIS-EDEN, AS THE CASE MAY BE, A WRITTEN DEMAND FOR
APPRAISAL OF HIS OR HER SHARES OF IAC COMMON STOCK OR HOLLIS-EDEN COMMON
STOCK, AS THE CASE MAY BE, PRIOR TO THE VOTE WITH RESPECT TO THE MERGER
AGREEMENT BEING TAKEN AT THE IAC SPECIAL MEETING OR THE HOLLIS-EDEN SPECIAL
MEETING, AS THE CASE MAY BE, AND (ii) DOES NOT VOTE FOR THE APPROVAL OF THE
MERGER AGREEMENT, SHALL BE ENTITLED TO THE PAYMENT OF FAIR VALUE OF SUCH
SHARES UNDER THE APPLICABLE PROVISIONS OF THE GENERAL CORPORATION LAW OF
THE STATE OF DELAWARE (THE "DGCL"), AS SET FORTH IN ANNEX E TO THIS JOINT
PROXY STATEMENT/PROSPECTUS. HOLDERS OF IAC COMMON STOCK ARE ALSO ENTITLED
TO CERTAIN REDEMPTION RIGHTS AS DESCRIBED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. FOR FURTHER DISCUSSION OF BOTH APPRAISAL RIGHTS AND
REDEMPTION RIGHTS, SEE "GENERAL INFORMATION -- IAC SPECIAL MEETING;
REDEMPTION RIGHTS" AND "--APPRAISAL RIGHTS."
No person is authorized to give any information or to make any
representation other than those contained in this Joint Proxy
Statement/Prospectus, and if given or made, such information or
representation should not be relied upon as having been authorized. This
Joint Proxy Statement/Prospectus does not constitute an offer to sell or a
solicitation of an offer to purchase, the securities offered by this Joint
Proxy Statement/Prospectus, or the solicitation of a proxy, in any
jurisdiction to or from any person to whom or from whom it is unlawful to
make such offer, solicitation of an offer or proxy solicitation in such
jurisdiction. Neither the delivery of this Joint Proxy
Statement/Prospectus nor any distribution of securities pursuant to this
Joint Proxy Statement/Prospectus shall, under any circumstances, create any
implication that there has been no change in the information set forth
herein or in the affairs of IAC or Hollis-Eden since the date of this Joint
Proxy Statement/Prospectus or that the information herein is correct as of
any time subsequent to its date. However, if any material change occurs
during the period that this Joint Proxy Statement/Prospectus is required to
be delivered, this Joint Proxy Statement/Prospectus will be amended or
supplemented as required. All information regarding IAC in this Joint
Proxy Statement/Prospectus has been supplied by IAC, and all information
regarding Hollis-Eden has been supplied by Hollis-Eden.
OWNERSHIP OF SURVIVING CORPORATION COMMON STOCK AND THE BUSINESS TO BE
CONDUCTED BY THE SURVIVING CORPORATION SUBSEQUENT TO THE CONSUMMATION OF
THE MERGER INVOLVE CERTAIN ELEMENTS OF RISK DISCUSSED UNDER "RISK FACTORS"
LOCATED ON PAGE 17 OF THIS JOINT PROXY STATEMENT/PROSPECTUS.
THE SECURITIES TO WHICH THIS JOINT PROXY STATEMENT/PROSPECTUS RELATE HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
BOARD PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------------------
The closing sales price of IAC Common Stock on the OTC Electronic
Bulletin Board of the National Association of Securities Dealers, Inc. (the
"NASD") on February . , 1997 was $ . per share.
The date of this Joint Proxy Statement/Prospectus is February . ,
1997, and it is first being mailed or otherwise delivered to IAC
Stockholders and Hollis-Eden Stockholders on or about February . , 1997.
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<PAGE>
AVAILABLE INFORMATION
IAC is subject to the reporting and informational requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder (the "Exchange Act"), and, in accordance therewith, files
reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy and
information statements, and other information filed by IAC with the
Commission may be inspected and copied at the principal office of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and should be available at the Commission's
Regional Offices at 7 World Trade Center, New York, New York 10048, and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the Commission
maintains a site on the World Wide Web at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
This Joint Proxy Statement/Prospectus constitutes a part of a
Registration Statement on Form S-4 (together with any amendments thereto,
the "Registration Statement"), which has been filed by IAC with the
Commission under the Securities Act of 1933, as amended, and the rules and
regulations thereunder (the "Securities Act"). This Joint Proxy
Statement/Prospectus omits certain information contained in the
Registration Statement, and reference is hereby made to the Registration
Statement and to the exhibits thereto for further information with respect
to IAC and the securities to which this Joint Proxy Statement/Prospectus
relates. Statements contained in this Joint Proxy Statement/Prospectus
concerning the provisions of certain documents filed as exhibits to the
Registration Statement are necessarily brief descriptions thereof, and are
not necessarily complete, and each such statement is qualified in its
entirety by reference to the full text of such document.
FORWARD LOOKING STATEMENTS
THIS JOINT PROXY STATEMENT/PROSPECTUS CONTAINS AND INCORPORATES BY
REFERENCE CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO THE
RESULTS OF OPERATIONS AND BUSINESS OF IAC, HOLLIS-EDEN AND THE SURVIVING
CORPORATION. THESE FORWARD LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND
UNCERTAINTIES. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE CONTEMPLATED, PROJECTED, FORECAST, ESTIMATED OR BUDGETED IN SUCH
FORWARD LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE FOLLOWING
POSSIBILITIES: (i) FAILURE TO SUCCESSFULLY DEVELOP COMMERCIALLY ACCEPTABLE
PRODUCTS; (ii) INABILITY TO CARRY OUT RESEARCH AND DEVELOPMENT PLANS; (iii)
LOSS OF KEY EXECUTIVES; (iv) HEIGHTENED COMPETITION, INCLUDING
SPECIFICALLY, THE INTENSIFICATION OF PRICE COMPETITION, THE ENTRY OF NEW
COMPETITORS AND THE DEVELOPMENT OF NEW PRODUCTS BY NEW AND EXISTING
COMPETITORS; (v) GENERAL ECONOMIC AND BUSINESS CONDITIONS WHICH ARE LESS
FAVORABLE THAN EXPECTED; AND (vi) UNANTICIPATED CHANGES IN PHARMACEUTICAL
INDUSTRY TRENDS. SEE "RISK FACTORS," "HOLLIS-EDEN'S MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
AND "HOLLIS-EDEN'S BUSINESS."
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<PAGE>
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . -3-
FORWARD LOOKING STATEMENTS . . . . . . . . . . . . . . . . . -3-
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . -5-
COMPARATIVE PER SHARE DATA . . . . . . . . . . . . . . . . -14-
SELECTED HISTORICAL FINANCIAL INFORMATION . . . . . . . . . -15-
SELECTED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION . . . . . . . . . . . . .. . . . . -16-
RISK FACTORS . . . . . . . . . . . . . . . . . . .. . . . . -17-
GENERAL INFORMATION . . . . . . . . . . . . . . . .. . . . . -24-
MARKET PRICE OF IAC'S SECURITIES AND
DIVIDEND INFORMATION . . . . . . . . . . . . . .. . . . . -30-
THE MERGER . . . . . . . . . . . . . . . . . . . .. . . . . -33-
IAC SELECTED HISTORICAL FINANCIAL INFORMATION . . .. . . . . -46-
HOLLIS-EDEN SELECTED HISTORICAL
FINANCIAL INFORMATION . . . . . . . . . . . . .. . . . . -47-
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
OF INITIAL ACQUISITION CORP. AND HOLLIS-EDEN . .. . . . . -48-
HOLLIS-EDEN'S MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . -52-
IAC'S MANAGEMENT S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . -54-
HOLLIS-EDEN'S BUSINESS . . . . . . . . . . . . . . . . . . -55-
IAC'S BUSINESS . . . . . . . . . . . . . . . . . . . . . . -65-
MANAGEMENT OF IAC . . . . . . . . . . . . . . . . . . . . . -67-
PERFORMANCE GRAPH . . . . . . . . . . . . . . . . . . . . . -68-
PROPOSAL TO ELECT DIRECTORS OF
THE SURVIVING CORPORATION . . . . . . . . . . . . . . . -69-
SECURITY OWNERSHIP OF IAC PRIOR TO THE MERGER . . . . . . . -72-
SECURITY OWNERSHIP OF THE SURVIVING
CORPORATION AFTER THE MERGER . . . . . . . . . . . . . . -72-
PROPOSED MANAGEMENT OF
THE SURVIVING CORPORATION . . . . . . . . . . . . . . . -74-
PROPOSAL TO APPROVE AND ADOPT
THE 1997 IAC INCENTIVE STOCK OPTION PLAN . . . . . . . . -78-
DESCRIPTION OF IAC'S SECURITIES . . . . . . . . . . . . . . -82-
COMPARISON OF STOCKHOLDERS' RIGHTS . . . . . . . . . . . . -83-
TRANSFER AGENTS AND REGISTRARS . . . . . . . . . . . . . . -84-
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . -84-
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . -84-
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . F-1
ANNEX A
Agreement and Plan of Merger . . . . . . . . . . . . . . . . F-6
ANNEX B
Form of Certificate of Merger
(which includes the form of
Certificate of Incorporation
of the Surviving Corporation) . . . . . . . . . . . . . . . . F-7
ANNEX C
Form of By-Laws of the Surviving Corporation . . . . . . . . F-8
ANNEX D
IAC 1997 Incentive Stock Option Plan . . . . . . . . . . . . F-9
ANNEX E
Appraisal Rights Provisions of the
Delaware General Corporation Law . . . . . . . . . . . . . F-10
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<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere
in this Joint Proxy Statement/Prospectus. This summary is not intended to
be a complete description of the matters covered in this Joint Proxy
Statement/Prospectus and is subject to and qualified in its entirety by
reference to the more detailed information contained elsewhere in this
Joint Proxy Statement/Prospectus, including the Annexes hereto, and in the
documents incorporated by reference in this Joint Proxy
Statement/Prospectus. The Merger Agreement is set forth in ANNEX A to this
Joint Proxy Statement/Prospectus and reference is made thereto for a
complete description of the terms of the Merger. Stockholders are urged to
read carefully the entire Joint Proxy Statement/Prospectus, including the
Annexes.
PARTIES TO THE MERGER
Hollis-Eden. Hollis-Eden is a development stage pharmaceutical
company engaged in developing therapeutic and/or preventative
pharmaceutical agents for the treatment of a number of targeted disease
states caused by viral, bacterial, parasitic or fungal infections,
including HIV and AIDS. Hollis-Eden believes that certain of its products
may provide the first long-term treatment for HIV without the development
of viral strain resistance to the drugs' effectiveness, significant
toxicity or severe side effects.
Hollis-Eden's development efforts are centered around four proprietary
products (the "Products") developed by and licensed from Patrick T.
Prendergast, Ph.D., and are based upon his research in the area of viral-
caused disorders and therapies. Hollis-Eden is the beneficiary of more than
10 years of extensive research and development with respect to the Products
undertaken by Dr. Prendergast and his affiliates prior to the license of
the Products to Hollis-Eden. Hollis-Eden is currently pursuing approval of
two of the Products, INACTIVIN and REVERSIONEX, with the United States Food
and Drug Administration ("FDA"). Each of these drugs has a different
mechanism of action and Hollis-Eden believes that each may be effectively
used alone. Hollis-Eden believes that INACTIVIN and REVERSIONEX may be
combined to increase their effectiveness to inhibit HIV replication,
strengthen and preserve the immune system, and reduce the viral load in the
infected patients.
Hollis-Eden believes that certain of its Products under development
may produce more effective treatments for HIV and AIDS than drugs currently
being used. The principal drugs currently used to treat HIV and AIDS (e.g.,
AZT, ddl, ddc, d4T and 3TC) are nucleoside analog reverse transcriptase
drugs. Additionally, newer drugs being developed and recently being
introduced are protease inhibitors (e.g., Invirase (saquinavir), Crixivan
(indinavir sulfate) and Novir (ritonavir)). Hollis-Eden believes that the
effectiveness of these types of drugs may prove to be short-lived since HIV
rapidly mutates and develops resistance to the effectiveness of drugs.
Development of drug resistance occurs when the virus can mutate its coat
protein or enzyme structure so that its interaction with the drug is
altered. Because INACTIVIN's antiviral effectiveness is not reliant on a
direct structural interaction with the virus itself, Hollis-Eden believes
that INACTIVIN will inhibit replication of the virus regardless of its
mutation rates. By decreasing the syntheses of viral raw materials in the
cell, INACTIVIN effectively slows and eventually stops the virus production
line. Hollis-Eden further expects that INACTIVIN will decrease the energy
supply for viral synthesis regardless of viral type or strain. Another
disadvantage of currently used drugs is that nucleoside analogs and
protease inhibitors are toxic and may cause severe side effects. INACTIVIN
and REVERSIONEX are not nucleoside analog reverse transcriptase or protease
inhibitors, are derived from naturally occurring substances, and have been
shown in preliminary tests to date to be well-tolerated by humans with
minimal side effects. Furthermore, Hollis-Eden believes that INACTIVIN and
REVERSIONEX will have a longer duration of effectiveness, be more
affordable and require smaller doses and fewer pills to be taken than the
drugs and "cocktails" currently being used.
Hollis-Eden believes that its Products may also be effective in the
treatment of (i) other viral-caused disorders such as hepatitis-C, (ii)
auto-immune diseases such as multiple sclerosis, psoriasis and rheumatoid
arthritis and (iii) bacterial and parasitic diseases such as tuberculosis,
malaria, toxoplasmosis and leishmania.
When and if INACTIVIN or any of the other Products have been approved
for commercial sale, Hollis-Eden plans to market them in the United States.
For international markets, Hollis-Eden intends to develop strategic
alliances with major pharmaceutical companies that have foreign regulatory
expertise and established distribution channels, and will also consider
corporate strategic partnerships and co-marketing agreements. No assurances
can be given that any of the Products will be approved for commercial sale
or that any of the foregoing proposed arrangements will be implemented or
prove to be successful.
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<PAGE>
Hollis-Eden is a Delaware corporation which was formed in August 1994,
with executive offices located at 808 SW Third Avenue, Suite 540, Portland,
Oregon 97204, and its telephone number is (503) 226-1277. For additional
information regarding Hollis-Eden, see "--Selected Historical Financial
Information; Hollis-Eden" and "HOLLIS-EDEN'S BUSINESS."
IAC. IAC has been formed to serve as a vehicle to effect a merger,
exchange of capital stock, asset acquisition or other business combination
(a "Business Combination") with an operating business (a "Target
Business"). IAC's business objective has been to effect a Business
Combination with a Target Business which IAC believes has significant
growth potential.
In May 1995, IAC consummated an initial public offering of its equity
securities (the "IPO") from which it derived net proceeds of approximately
$6,300,000. Of the net proceeds from the IPO, $6,000,000 (representing the
gross proceeds received from the sale in the IPO of Units (each Unit
comprised of one share of IAC Common Stock and one Class A Warrant to
purchase one share of IAC Common Stock)) together with interest earned
thereon, are currently held in an interest-bearing escrow account (the
"Escrowed Funds") and will be released upon the earlier of the consummation
of a Business Combination in which at least 50% of the Escrowed Funds are
committed to a specific line of business as a result of such consummation
of a Business Combination (including any redemption payments) or the
liquidation of IAC. At the Effective Time of the Merger, the Escrowed
Funds will be released to IAC and all voting agreements previously in
effect with respect to the IAC Common Stock (including those relating to
the approval of a Business Combination by IAC Stockholders) will terminate.
IAC is a Delaware corporation which was formed in November 1992, with
executive offices located at 810 Seventh Avenue, 27th Floor, New York, New
York 10019, and its telephone number is (212) 333-2620. For additional
information regarding IAC, see "AVAILABLE INFORMATION," "-- Selected
Historical Financial Information; IAC" and "IAC'S BUSINESS."
THE IAC ANNUAL AND SPECIAL MEETING; IAC RECORD DATE; VOTE REQUIRED;
RECOMMENDATION
The IAC Special Meeting is scheduled to be held at 10:00 a.m., local
time, on Friday, March 14, 1997 at the law offices of Reid & Priest LLP, 40
West 57th Street, 26th Floor, New York, New York 10019. At the IAC Special
Meeting, IAC Stockholders will be asked to consider and vote upon the
proposal to approve and adopt the Merger Agreement and the transactions
contemplated thereby, to elect a new slate of seven directors as of the
Effective Time, and a proposal to approve and adopt the IAC 1997 Incentive
Stock Option Plan. The Board of Directors of IAC (the "IAC Board") has
fixed the close of business on January 29, 1997 as the record date (the
"IAC Record Date") for the determination of IAC Stockholders entitled to
notice of and to vote at the IAC Special Meeting. As of the close of
business on the IAC Record Date, there were 833,250 shares of IAC Common
Stock outstanding and entitled to be voted at the IAC Special Meeting. IAC
Stockholders are entitled to one vote on each matter considered and voted
on at the IAC Special Meeting for each share of IAC Common Stock held of
record as of the close of business on the IAC Record Date. See "GENERAL
INFORMATION -- IAC Special Meeting."
Vote Required. The presence, either in person or by proxy, of the
holders of a majority of the outstanding shares of IAC Common Stock
entitled to vote at the IAC Special Meeting is necessary to constitute a
quorum at the IAC Special Meeting. The affirmative vote of two-thirds of
the outstanding shares of IAC Common Stock voting at the IAC Special
Meeting, either in person or by proxy, is necessary to approve and adopt
the Merger Agreement and the transactions contemplated thereby. The
affirmative vote of the holders of a plurality of the outstanding shares of
IAC Common Stock voting is required for the election of each director. The
affirmative vote of a majority of the outstanding shares of IAC Common
Stock voting is required for the approval and adoption of the IAC 1997
Incentive Stock Option Plan.
All holders of IAC Common Stock prior to IAC's IPO in May 1995 (the
"Initial IAC Stockholders"), which include IAC's directors and executive
officer, collectively holding an aggregate of approximately 28% of the
outstanding shares of IAC Common Stock before giving effect to the Merger
(and without giving effect to the exercise of any Merger Warrants and
Options, IAC Warrants and Options or Plan Options), by reason of their
prior agreement with IAC, will vote their respective shares of IAC Common
Stock with respect to the Merger Agreement in accordance with the vote of
the majority in interest of all other holders of IAC Common Stock (the "IAC
Non-Affiliate Stockholders"). Consequently, if a majority of the
outstanding shares of IAC Common Stock held and voted by IAC Non-Affiliate
Stockholders is voted in favor of the Merger Agreement and the transactions
-6-
<PAGE>
contemplated thereby, the Initial IAC Stockholders will vote their shares
of IAC Common Stock in favor of the Merger Agreement and the transactions
contemplated thereby. If the Merger Agreement and the transactions
contemplated thereby are not approved by the requisite vote, the Merger
Agreement will be terminated and the proposed Merger will be abandoned. In
such event, the proposal to approve and adopt the IAC 1997 Incentive Stock
Option Plan will not be implemented, even if such proposal is approved by
the requisite vote. As of the IAC Record Date, Hollis-Eden, its directors
and executive officers, and their affiliates (except as set forth below),
held no shares of IAC Common Stock. Mr. James D. Bowyer, however, an
employee of Laidlaw Equities, Inc. ("Laidlaw Equities"), and one of the
persons who introduced Hollis-Eden to IAC, beneficially owns, to IAC's
knowledge, 58,800 shares of IAC Common Stock. Laidlaw Equities, which
currently owns warrants to purchase up to 134,100 shares of Hollis-Eden
Common Stock and is entitled to receive warrants to purchase up to an
additional 452,830 shares of Surviving Corporation Common Stock upon the
consummation of the Merger, serves as Hollis-Eden's investment banker.
Mr. J. Paul Bagley, one of Hollis-Eden's directors and a proposed director
of the Surviving Corporation following the Merger, was the Chief Executive
Officer of Laidlaw Equities' parent company until November 1996. See "THE
MERGER -- Interests of Certain Persons in the Merger."
In addition, if 15% (approximately 90,000 shares) or more of the
shares of IAC Common Stock held by IAC Non-Affiliate Stockholders
(including After Acquired Stock held by Initial IAC Stockholders) are voted
against the Merger and such holders elect, within the applicable redemption
period, to have at least such number of shares redeemed by IAC, IAC will
not proceed with the Merger or redeem such shares. See "GENERAL
INFORMATION -- IAC Special Meeting; Redemption Rights."
Recommendation of the IAC Board of Directors. The Board of Directors
of IAC believes that the Merger is in the best interests of IAC and its
stockholders and has unanimously approved the Merger Agreement and the
consummation of the transactions contemplated thereby. The IAC Board of
Directors unanimously recommends that IAC Stockholders vote FOR adoption of
the Merger Agreement and the consummation of the transactions contemplated
thereby, FOR the election of the new slate of directors and FOR the
proposal to approve and adopt the IAC 1997 Incentive Stock Option Plan. In
deciding to approve the Merger Agreement and the consummation of the
transactions contemplated thereby, IAC's Board of Directors considered a
number of factors, including the terms of the Merger, the future prospects
of Hollis-Eden and relevant business, legal and market factors. See "THE
MERGER -- Recommendations of the Boards of Directors and Reasons for the
Merger; IAC."
THE HOLLIS-EDEN SPECIAL MEETING; HOLLIS-EDEN RECORD DATE; VOTE REQUIRED;
RECOMMENDATION
The Hollis-Eden Special Meeting is scheduled to be held at 8:00 a.m.,
local time, on Friday, March 14, 1997 at the offices of Hollis-Eden, 808 SW
Third Avenue, Suite 540, Portland, Oregon 97204. At the Hollis-Eden Special
Meeting, Hollis-Eden Stockholders will be asked to consider and vote upon
the proposal to approve and adopt the Merger Agreement and the transactions
contemplated thereby. The Board of Directors of Hollis-Eden (the "Hollis-
Eden Board") has fixed the close of business on January 29, 1997 as the
record date (the "Hollis-Eden Record Date") for the determination of
Hollis-Eden Stockholders entitled to notice of and to vote at the Hollis-
Eden Special Meeting. As of the close of business on the Hollis-Eden
Record Date, there were 4,911,004 shares of Hollis-Eden Common Stock
outstanding and entitled to be voted at the Hollis-Eden Special Meeting.
Hollis-Eden Stockholders are entitled to one vote on each matter considered
and voted on at the Hollis-Eden Special Meeting for each share of Hollis-
Eden Common Stock held of record as of the close of business on the Hollis-
Eden Record Date. See "GENERAL INFORMATION -- Hollis-Eden Special
Meeting."
Vote Required. The presence, either in person or by proxy, of the
holders of a majority of the outstanding shares of Hollis-Eden Common Stock
entitled to vote at the Hollis-Eden Special Meeting is necessary to
constitute a quorum at the Hollis-Eden Special Meeting. The affirmative
vote of a majority of the outstanding shares of Hollis-Eden Common Stock
voting at the Hollis-Eden Special Meeting, either in person or by proxy, is
necessary to approve and adopt the Merger Agreement and the transactions
contemplated thereby. As of the Hollis-Eden Record Date, Hollis-Eden's
directors and executive officers and their affiliates held approximately
71% of the outstanding shares of Hollis-Eden Common Stock entitled to vote
at the Hollis-Eden Special Meeting. In addition, Mr. Richard B. Hollis,
Chairman of the Board of Hollis-Eden and the beneficial owner of
approximately 58% of the outstanding shares of Hollis-Eden Common Stock,
has agreed with IAC to vote all shares of Hollis-Eden Common Stock which he
is entitled to vote at the Hollis-Eden Special Meeting in favor of the
Merger Agreement and the transactions contemplated thereby. As of the
Hollis-Eden Record Date, IAC, its directors and executive officer, and
their affiliates, held no shares of Hollis-Eden Common Stock.
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<PAGE>
Recommendation of the Hollis-Eden Board of Directors. The Board of
Directors of Hollis-Eden believes that the Merger is in the best interests
of Hollis-Eden and its stockholders and has unanimously approved the Merger
Agreement and the consummation of the transactions contemplated thereby.
The Hollis-Eden Board of Directors unanimously recommends that Hollis-Eden
Stockholders vote FOR adoption of the Merger Agreement and the consummation
of the transactions contemplated thereby. In deciding to approve the
Merger Agreement and the consummation of the transactions contemplated
thereby, Hollis-Eden's Board of Directors considered a number of factors,
including the terms of the Merger, the financial condition of IAC and
Hollis-Eden, the future prospects and capital requirements of Hollis-Eden
and relevant business, legal and market factors. See "THE MERGER--
Recommendations of the Boards of Directors and Reasons for the Merger;
Hollis-Eden."
THE MERGER
General. The Merger Agreement provides that Hollis-Eden shall merge
with and into IAC, with IAC being the Surviving Corporation to the Merger.
Upon the consummation of the Merger, Hollis-Eden will cease to exist as a
separate corporation. At the time the Merger becomes effective, each
outstanding share of Hollis-Eden Common Stock shall cease to be outstanding
and shall be converted into the right to receive one share of Surviving
Corporation Common Stock. In addition, all outstanding Hollis-Eden
Warrants and Options shall cease to be outstanding and shall be converted
into the right to receive the same number of Merger Warrants and Options
upon the same terms as the corresponding Hollis-Eden Warrants and Options.
As of the Hollis-Eden Record Date, 4,911,004 shares of Hollis-Eden Common
Stock were outstanding and an aggregate of 4,679,650 shares of Hollis-Eden
Common Stock were underlying the Hollis-Eden Warrants and Options.
Consequently, upon the consummation of the Merger, the Surviving
Corporation will issue an aggregate of 4,911,004 shares of Surviving
Corporation Common Stock to the Hollis-Eden Stockholders and Merger
Warrants and Options entitling the holders thereof to acquire an aggregate
of 4,679,650 shares of Surviving Corporation Common Stock. None of the
outstanding shares of IAC Common Stock will be converted or otherwise
modified in the Merger and all of such shares will continue to be
outstanding capital stock of the Surviving Corporation after the Effective
Time.
Upon the consummation of the Merger, the Surviving Corporation will
change its name to Hollis-Eden Pharmaceuticals, Inc. and the business of
the Surviving Corporation will be that of Hollis-Eden immediately prior to
the Merger.
Upon the consummation of the Merger, the Hollis-Eden Stockholders will
collectively acquire approximately 85% of the outstanding Surviving
Corporation Common Stock, without giving effect to the exercise of any
Merger Warrants and Options, IAC Warrants and Options or Plan Options, and
their designees will comprise six of the seven members of the Surviving
Corporation's newly-elected Board of Directors. Assuming the exercise of
all of the outstanding Merger Warrants and Options and IAC Warrants and
Options (but not any Plan Options), the Hollis-Eden Stockholders would
collectively own approximately 79% of the then outstanding shares of
Surviving Corporation Common Stock upon the consummation of the Merger.
If the Merger Agreement is approved at each of the IAC and Hollis-Eden
Special Meetings and all of the other conditions to the obligations of the
parties to consummate the Merger are either satisfied or waived, the Merger
will be consummated. A copy of the Merger Agreement is set forth as Annex
A to this Joint Proxy Statement/Prospectus. See "THE MERGER."
Background. Since its IPO in May 1995, IAC has conducted a search for
a Target Company with which it would consummate a Business Combination.
Hollis-Eden was one of two companies extensively evaluated by IAC. Hollis-
Eden was introduced to IAC in March 1996. On November 1, 1996, IAC and
Hollis-Eden entered into the Merger Agreement. See "THE MERGER --
Background of the Merger."
Additional Merger Shares. In connection with the Merger, IAC will
offer all IAC Non-Affiliate Stockholders the opportunity to exchange their
respective Redemption Rights for the right to receive additional shares of
Surviving Corporation Common Stock (the "Additional Merger Shares") if, at
no time during the 24-month period immediately following the Effective Time
(as defined below) of the Merger (the "Holding Period"), the average
closing price per share of Surviving Corporation Common Stock over a period
of 20 consecutive trading days equals or exceeds $20.00 per share (subject
to adjustment). See "THE MERGER -- Additional Merger Shares."
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<PAGE>
Effective Time. If the Merger Agreement is approved by the requisite
vote of the holders of IAC and Hollis-Eden Common Stock, and the other
conditions to the obligations of the parties to consummate the Merger are
either satisfied or waived, the Merger will be consummated and will become
effective on the date and at the time that a Certificate of Merger,
reflecting the Merger (the "Certificate of Merger"), is duly filed with the
Secretary of State of the State of Delaware (the "Effective Time"). The
form of Certificate of Merger is attached as Annex B to this Joint Proxy
Statement/Prospectus. Such filing will be made simultaneously with or as
soon as practicable after the closing of the transactions contemplated by
the Merger Agreement. Assuming satisfaction or waiver of all conditions to
consummation, the Merger is expected to become effective during the first
quarter of 1997. See "THE MERGER -- Effective Time."
Delivery of Certificates Representing Shares of Surviving Corporation
Common Stock and Merger Warrants and Options. Promptly after the
Effective Time, each holder of record of shares of Hollis-Eden Common Stock
and Hollis-Eden Warrants and Options outstanding at the Effective Time will
be mailed a transmittal letter (with instructions) to use in effecting the
surrender and cancellation of Hollis-Eden Common Stock certificates and
Hollis-Eden Warrants and Options in exchange for certificates representing
shares of Surviving Corporation Common Stock and Merger Warrants and
Options, as the case may be. The Surviving Corporation shall not be
obligated to deliver the consideration to which any former holder of
Hollis-Eden Common Stock or Hollis-Eden Warrants and Options is entitled
until such holder surrenders such holder's certificate or certificates
representing such holder's shares of Hollis-Eden Common Stock or Hollis-
Eden Warrants and Options, as the case may be, for exchange. The
certificate or certificates so surrendered shall be duly endorsed as the
exchange agent may require. See "THE MERGER--Distribution of Merger
Consideration."
IAC STOCKHOLDERS WILL NOT BE REQUIRED TO SURRENDER CERTIFICATES
EVIDENCING SHARES OF IAC COMMON STOCK OR IAC WARRANTS AND OPTIONS FOLLOWING
THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE SUBSEQUENT
CONSUMMATION OF THE MERGER. ALL IAC COMMON STOCK AND IAC WARRANTS AND
OPTIONS CURRENTLY ISSUED AND OUTSTANDING ARE UNAFFECTED BY THE MERGER AND
WILL CONTINUE TO REPRESENT SHARES OF SURVIVING CORPORATION COMMON STOCK AND
WARRANTS AND OPTIONS TO ACQUIRE SHARES OF SURVIVING CORPORATION COMMON
STOCK AFTER THE MERGER.
Certain Federal Income Tax Consequences. The Merger is intended to be
a tax-free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"). Generally, no gain
or loss will be recognized by the Hollis-Eden Stockholders on the exchange
of Hollis-Eden Common Stock solely for Surviving Corporation Common Stock,
except to the extent that Hollis-Eden Stockholders or IAC Stockholders
receive cash for dissenting shares. In addition, neither IAC nor Hollis-
Eden should recognize any gain with respect to the Merger. See "THE MERGER
-- Certain Federal Income Tax Consequences."
BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON
THE PARTICULAR CIRCUMSTANCES OF EACH HOLLIS-EDEN STOCKHOLDER AND IAC
STOCKHOLDER, EACH SUCH HOLDER IS URGED TO CONSULT SUCH HOLDER'S OWN TAX
ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE
MERGER (INCLUDING THE APPLICATION AND EFFECT OF FOREIGN, STATE AND LOCAL
INCOME AND OTHER TAX LAWS).
Conditions to Consummation. The obligations of IAC and Hollis-Eden to
consummate the Merger are subject to the satisfaction or waiver of
conditions, including among others: (i) the Merger Agreement and the
transactions contemplated thereby shall have been approved and adopted by
the IAC Stockholders and the Hollis-Eden Stockholders as described in this
Joint Proxy Statement/Prospectus and the IAC Non-Affiliate Stockholders
shall not have elected to have 15% or more of their shares of IAC Common
Stock redeemed at the Redemption Value; (ii) as of the Effective Time, IAC
shall have cash on hand (net of liabilities) of not less than $6.5 million;
(iii) the Registration Statement shall have been declared effective; (iv)
no action or proceeding shall have been instituted or threatened which is
likely to have a material adverse effect on IAC or Hollis-Eden or could
enjoin, restrain or prohibit, or could result in substantial damages in
respect of, any provision of the Merger Agreement or the consummation of
the transactions contemplated thereby; (v) all consents and approvals
required for the consummation of the Merger and the transactions
contemplated thereby shall have been obtained, and all required filings
shall have been made; (vi) IAC and Hollis-Eden each shall have performed
and complied with all covenants, obligations and agreements applicable to
it contained in the Merger Agreement and all representations and warranties
of each of IAC and Hollis-Eden shall be true and correct in all material
respects on and as of the date made and the Effective Time; (vii) the
patent infringement and, if necessary, the patent validity analyses by
IAC's counsel, and, if given in accordance with the terms of the Merger
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Agreement, the final opinion of independent patent counsel, shall not have
resulted in an opinion of a patent infringement which will have an
"unavoidable" material adverse effect upon certain of Hollis-Eden's
Products (a "Patent Infringement"); and (viii) the receipt of written
opinions of counsel to IAC and Hollis-Eden as to certain matters. In
addition to the conditions set forth above, the obligations of IAC and
Hollis-Eden to consummate the Merger are subject to the absence, since the
date of the Merger Agreement, of any material adverse change in the
business, operations, assets, liabilities, results of operations, cash
flows, condition (financial or otherwise) or prospects of IAC and Hollis-
Eden, which is materially adverse to IAC or Hollis-Eden, as the case may
be. See "THE MERGER -- Conditions to Consummation."
Termination. The Merger Agreement may be terminated, and the Merger
abandoned, at any time prior to the Effective Time, by mutual consent of
all parties to the Merger Agreement. In addition, the Merger Agreement may
be terminated, and the Merger abandoned, generally, (i) prior to, but not
after, the approval of the Merger Agreement by the stockholders of each of
Hollis-Eden and IAC, by Hollis-Eden or IAC, as the case may be, if the
Merger shall not have become effective by March 31, 1997 (or such later
date as permitted by the Merger Agreement to allow the parties to complete
their patent analyses within the permitted time parameters), provided,
however, that such termination right shall not be available to any party
whose failure to fulfill any obligation under the Merger Agreement has been
the cause of or resulted in the failure of the Merger to become effective
by such date; (ii) by any party to the Merger Agreement if any court of
competent jurisdiction in the United States or other United States
governmental body shall have issued an order, decree or ruling or taken any
other action restraining, enjoining or otherwise prohibiting the Merger or
any of the other transactions contemplated by the Merger Agreement and such
order, decree, ruling or other action shall have become final and non
appealable; (iii) By IAC, if IAC Non-Affiliate Stockholders holding 15% or
more of the shares of IAC Common Stock shall have exercised their
Redemption Rights or (iv) by IAC, if its patent infringement and, if
necessary, patent validity analyses, and, if given in accordance with the
terms of the Merger Agreement, the final opinion of independent patent
counsel, shall have resulted in an opinion of a Patent Infringement which
will have an "unavoidable" material adverse effect upon certain of Hollis-
Eden's Products. See "THE MERGER -- Termination."
Expenses and Fees. The Merger Agreement provides that each party
shall bear its own expenses with respect to the transactions contemplated
by the Merger Agreement.
In addition, Hollis-Eden has agreed to pay IAC a fee of $100,000 (the
"Fee"), which has been placed into escrow, in the event Hollis-Eden
terminates the Merger Agreement and abandons the Merger for any reason
other than those reasons permitted under the Merger Agreement. Moreover,
in the event IAC terminates the Merger Agreement and abandons the Merger as
a result of a Patent Infringement, IAC shall be entitled to such portion of
the Fee as may be necessary to reimburse IAC for its costs and expenses in
connection with the Merger Agreement and the proposed Merger. See "THE
MERGER -- Expenses and Fees."
Accounting Treatment. For accounting and financial reporting
purposes, the Merger will be treated as a recapitalization of Hollis-Eden
by an exchange of Hollis-Eden Common Stock for the net assets of IAC,
consisting primarily of cash. Since IAC has had no business operations
other than the search for a suitable Target Business, IAC's assets will be
recorded in the balance sheet of the combined company (i.e., the Surviving
Corporation) at book value. The unaudited pro forma financial information
contained in this Joint Proxy Statement/Prospectus has been prepared on
this basis. See "THE MERGER -- Accounting Treatment."
Regulatory Approvals. No governmental regulatory approvals are
required with respect to the Merger except for the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware
and the filing with the Commission of the Registration Statement and this
Joint Proxy Statement/Prospectus. See "THE MERGER --Regulatory Approvals."
Interests of Certain Persons in the Merger. In considering the
recommendation of the Hollis-Eden Board of Directors with respect to the
Merger Agreement and the transactions contemplated thereby, Hollis-Eden
Stockholders should be aware that certain members of Hollis-Eden's
management and the Hollis-Eden Board of Directors have certain interests in
the Merger that are in addition to the interests of Hollis-Eden
Stockholders generally. See "THE MERGER -- Interests of Certain Persons in
the Merger" and "PROPOSED MANAGEMENT OF THE SURVIVING CORPORATION --
Employment Agreements."
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Conduct of Business Pending the Merger. Each of IAC and Hollis-Eden
has agreed in the Merger Agreement to, among other things, operate its
business only in the ordinary and usual course consistent with past
practice and to use reasonable commercial efforts to preserve intact its
present business organization, preserve its goodwill and advantageous
relationships with employees and other persons material to its operations
and business and not permit any action or omission within its control which
would cause any of its representations or warranties to become inaccurate
in any material respect or any of its covenants to be breached in any
material respect. In addition, each of IAC and Hollis-Eden has agreed not
to take certain actions relating to its operations pending consummation of
the Merger without the prior written consent of the other. See "THE MERGER
-- Conduct of Business Pending the Merger and Covenants of the Parties."
Restriction on Sales of Shares by Hollis-Eden Stockholders. In
connection with the Merger Agreement, Hollis-Eden has agreed to use its
reasonable commercial efforts to obtain signed letters from as many Hollis-
Eden Stockholders as possible, which letters shall acknowledge such Hollis-
Eden Stockholders' agreement not to sell any shares of the Surviving
Corporation Common Stock to be issued, directly or indirectly, to them in,
and as a result of, the Merger, for the nine-month period immediately
following the Effective Time. In addition, Mr. Richard B. Hollis and Dr.
Patrick T. Prendergast, the owners of approximately 71% of the outstanding
Hollis-Eden Common Stock, agreed with Hollis-Eden not to sell more than an
aggregate of 1,000,000 shares of Surviving Corporation Common Stock to be
received by them as a result of the Merger for the two-year period
commencing upon the Effective Time of the Merger. See "THE MERGER --
Conduct of Business Pending The Merger and Covenants of the Parties."
Comparison of Stockholder Rights. The rights of IAC's Stockholders
currently are determined by reference to the DGCL and IAC's Certificate of
Incorporation ("IAC's Charter") and Bylaws ("IAC's Bylaws"). The rights of
Hollis-Eden's Stockholders are currently determined by reference to the
DGCL and Hollis-Eden's Certificate of Incorporation, as amended, and
Bylaws. Following the Effective Time, and pursuant to the terms of the
Merger Agreement, the Hollis-Eden charter and Hollis-Eden Bylaws in effect
immediately prior to the Effective Time will become the charter and bylaws
of the Surviving Corporation, notwithstanding the fact that IAC will be the
Surviving Corporation to the Merger. Copies of the form of Hollis-Eden's
Certificate of Incorporation and Bylaws to be in effect immediately prior
to the Effective Time are attached to this Joint Proxy Statement/Prospectus
as Annexes B and C, respectively. In addition, IAC Non-Affiliate
Stockholders shall no longer have any Redemption Rights or other benefits
or protections described in the IAC Prospectus (as defined below) and,
other than as provided by the DGCL, no right to unilaterally approve
subsequent Business Combinations. See "COMPARISON OF STOCKHOLDER RIGHTS"
for a summary of the material differences between the rights of holders of
IAC Common Stock and Hollis-Eden Common Stock.
IAC STOCKHOLDERS' APPROVAL AND ADOPTION OF THE MERGER AGREEMENT WILL
RESULT IN A CHANGE OF BOTH THE MAJORITY EQUITY OWNERSHIP AND MANAGEMENT OF
IAC AS WELL AS A CHANGE IN THE BUSINESS OF IAC.
RISK FACTORS
Ownership of Surviving Corporation Common Stock and the business to be
conducted by the Surviving Corporation subsequent to the consummation of
the Merger involve certain elements of risk discussed under "Risk Factors"
located on page 17 of this Joint Proxy Statement/Prospectus. These risk
factors include, among others, risks relating to the Surviving
Corporation's failure to successfully develop commercially acceptable
products or carry out its research and development plans, the loss of key
executives, competition, including specifically, the intensification of
price competition, the entry of new competitors and the development of new
products by new and existing competitors, general economic and business
conditions and unanticipated changes in pharmaceutical industry trends.
See "RISK FACTORS."
APPRAISAL RIGHTS
Under the DGCL, holders of IAC and Hollis-Eden Common Stock may
dissent from the Merger and receive payment of the "fair value" of his or
her shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may
be, in cash, if the Merger is consummated by following certain procedures
set forth in Section 262 of the DGCL, the text of which is attached to this
Joint Proxy Statement/Prospectus as Annex E. Any IAC or Hollis-Eden
Stockholder wishing to dissent from the Merger and obtain cash payment of
the fair value of his or her shares of IAC Common Stock or Hollis-Eden
Common Stock, as the case may be, must: (i) deliver to IAC or Hollis-Eden,
as the case may be, before the vote is taken at the IAC or Hollis-Eden
Special Meeting, as the case may be, a written demand for appraisal of his
or her shares; (ii) not vote his or her shares of IAC or Hollis-Eden Common
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Stock, as the case may be, in favor of the Merger; and (iii) follow the
other procedures set forth in the DGCL as more fully described in this
Joint Proxy Statement/Prospectus. See also Annex E to this Joint Proxy
Statement/Prospectus. Failure to follow such procedures may result in a
loss of such appraisal rights. A proxy card which expressly votes in favor
of the Merger or which fails to indicate how the shares should be voted
will constitute a waiver by such IAC Stockholder or Hollis-Eden
Stockholder, as the case may be, of such Stockholder's right to seek
appraisal. Consequently, any IAC or Hollis-Eden Stockholder who desires to
preserve his or her rights of appraisal should either refrain from
returning a proxy card or expressly indicate on such proxy card that such
IAC Stockholder or Hollis-Eden Stockholder, as the case may be, votes
against the Merger or expressly abstains from voting on the approval of the
Merger. For a more complete discussion of the procedures to be followed by
an IAC or Hollis-Eden Stockholder who desires to perfect his or her
appraisal rights, see "GENERAL INFORMATION -- Appraisal Rights."
REDEMPTION RIGHTS
Each of the IAC Non-Affiliate Stockholders (and each Initial IAC
Stockholder who (i) participated in the February 1993 private placement of
IAC securities and (ii) purchased shares of IAC Common Stock in the open
market after the IPO (the "After Acquired Stock"), but only to the extent
of the After Acquired Stock)) has the right (the "Redemption Right"),
pursuant to IAC's prospectus dated May 15, 1995 (the "IAC Prospectus"), to
elect to have any or all of his or her shares of IAC Common Stock redeemed
for approximately $11.00 per share (the "Redemption Value"), by indicating
such election on his or her proxy card and depositing such proxy card in
the United States mail postmarked within 20 calendar days of the mailing of
this Joint Proxy Statement/Prospectus (such 20 calendar day period being
hereinafter referred to as the "Redemption Period"). The proxy card
containing the exercise of Redemption Rights must be received by IAC prior
to the IAC Special Meeting. The Redemption Value has been calculated by
dividing (a) the amount of the Escrowed Funds as of the IAC Record Date by
(b) the number of shares of IAC Common Stock held by the IAC Non-Affiliate
Stockholders as of the Record Date. If IAC Non-Affiliate Stockholders
elect to redeem 15% or more of their shares of IAC Common Stock within the
Redemption Period, IAC will not proceed with the Merger and will not redeem
such shares. If IAC Non-Affiliate Stockholders elect to redeem less than
15% of their shares of IAC Common Stock within the Redemption Period, and
assuming that IAC otherwise satisfies the required conditions for the
Merger, IAC may proceed with the Merger, but will be required to redeem the
shares of IAC Common Stock requested by the IAC Non-Affiliate Stockholders
at their Redemption Value upon the consummation of the Merger. An IAC Non-
Affiliate Stockholder may exercise his or her Redemption Right only if he
or she expressly votes against the Merger within the Redemption Period.
IAC Non-Affiliate Stockholders may not exercise their Redemption Rights if
they are seeking appraisal rights. An IAC Non-Affiliate Stockholder who
votes against the Merger after the Redemption Period will not be entitled
to have any of his or her shares redeemed. Any IAC Non-Affiliate
Stockholder returning a proxy card which expressly votes for the Merger or
returning an executed proxy card which fails to indicate how his or her
shares should be voted, shall be deemed to have waived his or her
Redemption Right. A proxy card which indicates that an IAC Non-Affiliate
Stockholder expressly abstains from voting on the proposal to approve the
Merger shall not be deemed an exercise of such IAC Non-Affiliate
Stockholder's Redemption Rights. AN IAC NON-AFFILIATE STOCKHOLDER WHO
SELLS ANY OF HIS OR HER SHARES OF IAC COMMON STOCK AFTER ELECTING TO HAVE
SUCH SHARES REDEEMED SHALL FORFEIT THE RIGHT TO RECEIVE THE REDEMPTION
VALUE WITH RESPECT TO SUCH SHARES. IN ADDITION, AN IAC NON-AFFILIATE
STOCKHOLDER WHO EXERCISES HIS OR HER REDEMPTION RIGHTS SHALL FORFEIT THE
RIGHT TO RECEIVE ADDITIONAL MERGER SHARES, IF ANY ARE ISSUED.
IAC NON-AFFILIATE STOCKHOLDERS MAY NOT EXERCISE THEIR REDEMPTION
RIGHTS IF THEY ARE EXERCISING THEIR APPRAISAL RIGHTS AND, CONVERSELY, IAC
NON-AFFILIATE STOCKHOLDERS WHO SEEK REDEMPTION RIGHTS MAY NOT EXERCISE
THEIR APPRAISAL RIGHTS.
MARKET PRICES OF IAC'S SECURITIES
Shares of IAC Common Stock, as well as IAC Class A Common Stock
Purchase Warrants ("Class A Warrants"), IAC Class B Unit Purchase Warrants
("Class B Warrants") and IAC Units are quoted and traded on the OTC
Electronic Bulletin Board of the NASD under the symbols "IACQ," "IACQW,"
"IACQZ" and "IACQU," respectively. Each Class A Warrant entitles the
holder thereof to purchase one share of IAC Common Stock at a price of
$9.00 commencing upon the consummation of a Business Combination and
expiring on May 15, 2000. Each Class B Warrant entitles the holder thereof
to purchase one Unit at a price of $.25 commencing upon the consummation of
a Business Combination and expiring on the first anniversary of the
Business Combination. Each Unit consists of one share of IAC Common Stock
and one Class A Warrant.
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On November 5, 1996 (the last trading day prior to the public
announcement of the execution of the Merger Agreement), the closing sales
prices for shares of IAC Common Stock, Class A Warrants, Class B Warrants
and Units were $9.250, $0.625, $4.000 and $9.500, respectively.
On February . , 1997 (the last day before the printing of this Joint
Proxy Statement/Prospectus), such closing sales prices were $ . , $ . , $ .
and $ . , respectively.
IAC has never paid any cash dividends with respect to its shares of
Common Stock. It is presently intended that all available cash will be
utilized to further the growth of the Surviving Corporation's business
subsequent to the Effective Time and for the foreseeable future thereafter,
including the funding of Hollis-Eden's (and consequently, the Surviving
Corporation's) working capital and capital expenditure requirements. The
payment of any cash dividends will be in the discretion of the Surviving
Corporation's Board of Directors and will be dependent upon the Surviving
Corporation's results of operations, financial condition and other factors
deemed relevant by the Surviving Corporation's Board of Directors.
It is expected that shares of Surviving Corporation Common Stock will
be accepted for trading, subject to the consummation of the Merger, on the
AMEX. See "MARKET PRICES OF IAC'S SECURITIES AND DIVIDEND INFORMATION" and
"DESCRIPTION OF IAC'S SECURITIES."
OPERATIONS AFTER THE MERGER
As a result of the Merger, Hollis-Eden will be merged with and into
IAC, with IAC being the Surviving Corporation to the Merger. Upon the
consummation of the Merger, Hollis-Eden will cease to exist as a separate
corporation and the Surviving Corporation will change its name to Hollis-
Eden Pharmaceuticals, Inc. The business of the Surviving Corporation will
be that of Hollis-Eden immediately prior to the Merger.
In accordance with the Merger Agreement, at the Effective Time, and
subject to their election by the IAC Stockholders, the Board of Directors
of the Surviving Corporation will consist of seven directors, six of whom
shall be Hollis-Eden's designees. In addition, all of the current officers
of IAC will resign effective at the Effective Time, to be replaced by the
current officers of Hollis-Eden designated by the Surviving Corporation's
Board of Directors as detailed in the Merger Agreement. See "THE MERGER --
Operations After the Merger."
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COMPARATIVE PER SHARE DATA
The following table sets forth (i) net income per share of IAC Common
Stock for the year ended December 31, 1996, (ii) net income (loss) per
share of IAC Common Stock and Hollis-Eden Common Stock for the year ended
December 31, 1995 and the nine months ended September 30, 1996 on an
historical basis, (iii) book value per common share of IAC Common Stock as
of December 31, 1996 and (iv) book value per common share of IAC Common
Stock and Hollis-Eden Common Stock as of December 31, 1995 and September
30, 1996 on a historical basis. The information presented in this
tabulation should be read in conjunction with the pro forma combined
condensed financial information and the separate financial statements and
information of the respective companies and notes thereto appearing
elsewhere herein.
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1995 1996
------------ ------------ -------------
HISTORICAL - IAC
Net income per
common share . . . . . $0.14 $ 0.16 $ 0.12
Book value per common
share at period end . . $6.67 $ 6.60 $ 6.67
HISTORICAL - HOLLIS-EDEN
Net loss per common share -- $(0.17) $(0.10)
Book value per common
share at period end . . -- $(0.37) $(0.07)
COMBINED PRO FORMA
Net loss per common share -- $(1.22) $(0.07)
Book value per common
share at period end . . -- N/A $ 0.77
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SELECTED HISTORICAL FINANCIAL INFORMATION
IAC
The selected historical financial information of IAC set forth below
should be read in conjunction with the audited financial statements of IAC
and notes thereto contained elsewhere in this Joint Proxy
Statement/Prospectus.
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 IAC which are included elsewhere in this Joint Proxy
Statement/Prospectus. 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 IAC not included
herein. No cash dividends have ever been declared or paid on IAC 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
expenses . . . . . $ 160,309 $ 71,782 $ 7,000 $ 7,186
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 outstanding. . 833,250 608,250 233,250 233,250
BALANCE SHEET DATA:
Total assets . . . . $6,830,530 $6,518,759 $ 74,139 $ 81,139
Redeemable common
stock . . . . . . . . $ 981,349 $ 932,316 $ -0- $ -0-
Stockholders' equity $5,561,945 $5,496,803 $ 68,139 $ 75,139
HOLLIS-EDEN
The following data, insofar as it relates to each of the periods 1995
and 1994, has been derived from audited financial statements, including the
balance sheet at December 31, 1995 and 1994 and the related statements of
operations, of stockholders' equity and of cash flows for the year ended
December 31, 1995 and the period from inception (August 15, 1994) to
December 31, 1994 and notes thereto appearing elsewhere herein. The data
for the nine months ended September 30, 1996 and 1995 and the period from
inception (August 15, 1994) to September 30, 1996 has been derived from
unaudited financial statements also appearing herein and which, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for
the unaudited interim periods. The interim results of operations are not
necessarily indicative of results which may occur for the full fiscal year.
No cash dividends have ever been declared or paid on Hollis-Eden Common
Stock.
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(AUGUST 15, (AUGUST 15,
YEAR ENDED 1994) TO 1994) TO
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
------------ ------------ -------------
STATEMENT OF OPERATIONS 1995 1994 1996
DATA: ---- ---- ----
Research and
development . . . . . $ 463,000 $ 1,166,762 $ 1,753,855
General and
administrative
expenses . . . . . . $ 170,929 $ 103,564 $ 620,722
Total operating
expenses . . . . . . $ 633,929 $ 1,270,326 $ 2,374,577
Other income (expense),
net . . . . . . . . . $ (37,762) $ (6,720) $ (44,416)
Net loss . . . . . . . $ (671,691) $(1,277,046) $(2,418,993)
Net loss per share . . $ (0.17) $ (0.38) $ (0.61)
Weighted average number
of common shares
outstanding . . . . . 3,867,924 3,396,226 3,945,783
BALANCE SHEET DATA:
Total assets . . . . . $ -0- $ -0- $ 344,191
Notes and accounts
payable and accrued
interest to related
party . . . . . . . . $ 367,522 $ 216,720 $ -0-
License fees payable . $ 928,000 $ 927,000 $ 600,000
Stockholders' deficit . $(1,537,633) $(1,143,720) $ (368,264)
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
STATEMENT OF OPERATIONS 1996 1995
DATA: ---- ----
Research and
development . . . . . $ 124,093 $ 463,000
General and
administrative
expenses . . . . . . $ 346,229 $ 138,429
Total operating
expenses . . . . . . $ 470,322 $ 601,429
Other income (expense),
net . . . . . . . . . $ 66 $ (28,322)
Net loss . . . . . . . $(470,256) $ (629,751)
Net loss per share . . $ (0.10) $ (0.17)
Weighted average number
of common shares
outstanding . . . . . 4,573,199 3,773,585
BALANCE SHEET DATA:
Total assets . . . . . $ 344,191 $ 0
Notes and accounts
payable and accrued
interest to related
party . . . . . . . . $ 0 $ 335,582
License fees payable . $ 600,000 $ 943,000
Stockholders' deficit . $ (368,264) $(1,495,693)
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SELECTED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The selected pro forma combined condensed balance sheet as of
September 30, 1996 gives effect to (i) the Merger and the assumed use of
$1,973,500 in IAC net cash (assuming no payments are required in connection
with the exercise of Redemption Rights), less expenses of IAC and Hollis-
Eden incurred in connection with the Merger, with the balance to be used
for Surviving Corporation working capital purposes. The selected pro forma
adjustments are described in the "Notes to Unaudited Pro Forma Combined
Balance Sheet". Stockholders are urged to read such Notes carefully. The
Unaudited Pro Forma Combined Balance Sheet is not necessarily indicative of
the financial position that would have occurred had the events referred to
above been consummated on the dates for which the consummation of such
events is being given effect, nor is it necessarily indicative of the
future financial position. See "UNAUDITED PRO FORMA FINANCIAL STATEMENTS
OF INITIAL ACQUISITION CORP. AND HOLLIS-EDEN - Unaudited Pro Forma Combined
Balance Sheet".
SEPTEMBER 30, 1996
------------------
BALANCE SHEET INFORMATION:
Total assets . . . . . . . . $5,041,856
Total liabilities . . . . . . $ 551,416
Stockholders' equity . . . . $4,490,440
Book value per share . . . . $ 0.77
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RISK FACTORS
The following risk factors, together with the other information set
forth in this Joint Proxy Statement/Prospectus, should be considered
carefully by Stockholders in evaluating whether to approve the transactions
contemplated by the Merger. This Joint Proxy Statement/Prospectus contains
forward-looking statements that involve risks and uncertainties. The
Surviving Corporation's actual results could differ materially from those
discussed in these forward-looking statements. Factors that could cause or
contribute to such differences, include, but are not limited to, those
discussed in the following section and in "Hollis-Eden's Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Hollis-Eden's Business."
DEPENDENCE ON NEW PRODUCTS AND FDA APPROVAL
Hollis-Eden's principal development efforts are currently centered
around two of four new Products licensed by Hollis-Eden which Hollis-Eden
management believes show promise for the treatment and prevention of
HIV/AIDS. Neither INACTIVIN nor any other of the Products has been approved
for commercial sale and no assurance can be given that approvals will be
obtained. Hollis-Eden's current primary focus is on INACTIVIN, which has a
current and open Investigational New Drug (IND) file open with the FDA and
which has completed Phase I of its approval process. While limited
clinical trials of INACTIVIN have to date produced favorable results,
significant additional trials are required, and no assurance can be given
that the drug will ultimately be demonstrated to be safe or efficacious.
Hollis-Eden has never commercially introduced a product, and no assurance
can be given that commercialization of any of the Products in any country
in which any of them may be approved will be financially successful. See
"HOLLIS-EDEN'S BUSINESS."
EARLY STAGE OF PRODUCT DEVELOPMENT; SUBSTANTIAL OPERATING LOSSES; MERGER
Hollis-Eden has not yet generated any operating revenues. Hollis-Eden
cannot predict when marketing approvals for any of its Products will be
obtained, if ever. Even if such approvals are obtained, there can be no
assurance that the Products will be successfully commercialized. Hollis-
Eden has experienced significant operating losses due to substantial
expenses incurred to acquire and fund development of the Products, and, as
of September 30, 1996, had an accumulated deficit of $2,418,993. Hollis-
Eden expects its operating expenses to increase over the next several years
as it funds development, clinical testing and other expenses of seeking FDA
approval. Hollis-Eden's (and consequently, the Surviving Corporation's)
ability to achieve a profitable level of operations is dependent in large
part on obtaining regulatory approvals for its Products, entering into
agreements for product development and commercialization, and expanding
from development into successful marketing, all of which will require
significant amounts of capital. There can be no assurance that Hollis-Eden
(or the Surviving Corporation) will ever achieve a profitable level of
operations. Concurrently with the Merger, the Surviving Corporation will
incur significant non-recurring charges to operations that will be recorded
and evidenced in its first Quarterly Report to be filed with the Commission
subsequent to the Effective Time of the Merger. In particular, there will
be (i) a $1,500,000 payment for research and development fees and (ii) a
$500,000 charge relating to the issuance of warrants to a certain officer.
See "HOLLIS-EDEN'S BUSINESS" and "HOLLIS-EDEN'S MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
PATENTS AND PROPRIETARY RIGHTS
Although certain of the Products are patented, patents are not a
guarantee of protection from competitors, especially in an area
characterized by rapid advances, and enforcement of patents and proprietary
rights in many countries can be expected to be problematic or
unpredictable. There can be no assurance that any patents issued or
licensed to Hollis-Eden will not be challenged, invalidated, infringed
upon, or designed around by others or that the claims contained in such
patents will not infringe the patent claims of others. Furthermore, there
can be no assurance that others will not independently develop similar
products. Hollis-Eden's (and consequently, the Surviving Corporation's)
business may be adversely affected by competitors who develop substantially
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equivalent technology. Patent litigation can be extremely expensive, and
Hollis-Eden (and the Surviving Corporation) may find that it is unable to
fund litigation necessary to defend its rights. See "HOLLIS-EDEN'S
BUSINESS - Patents."
GOVERNMENT REGULATION AND PRODUCT APPROVALS
The research, preclinical development, clinical trial, manufacturing,
marketing and sale of pharmaceuticals are subject to extensive regulation
by governmental authorities. Products developed by Hollis-Eden cannot be
marketed commercially in any jurisdiction in which they have not been
approved. The process of obtaining regulatory approvals is lengthy and
extremely expensive. Approval by United States authorities does not
guarantee, nor at times even facilitate or expedite, approval in other
countries. Further, government regulations are subject to change and it is
possible that additional criteria may be established or imposed which could
prevent or delay regulatory approval of any Products. Additionally, the
facilities that manufacture the Products will need to adhere to regulatory
guidelines. There can be no assurance that Hollis-Eden (or the Surviving
Corporation) will not be required to incur significant costs to comply with
laws and regulations in the future or that laws and regulations will not
have a material adverse effect on Hollis-Eden's (or the Surviving
Corporation's) business, financial condition or results of operations. See
"HOLLIS-EDEN'S BUSINESS.
POSSIBLE INABILITY TO MEET CASH OBLIGATIONS
Hollis-Eden (and consequently, the Surviving Corporation) is likely to
experience cash flow difficulties due to its substantial capital needs.
For the foreseeable future following the expenditure of the cash to be
infused into the Surviving Corporation as a result of the Merger, the
Surviving Corporation's ability to meet its cash obligations as they become
due and payable will substantially depend on its ability to sell its
securities and borrow funds. There can be no assurance that the Surviving
Corporation will be able to raise capital when needed to sustain or expand
its operations. See "-- Substantial Capital Needs" and "HOLLIS-EDEN'S
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
SUBSTANTIAL CAPITAL NEEDS
Hollis-Eden's operations to date have consumed substantial capital
without generating any revenues, and Hollis-Eden (and consequently, the
Surviving Corporation) will continue to require substantial and increasing
amounts of funds to conduct necessary research and development and
preclinical and clinical testing of its Products, and to market any
Products that receive regulatory approval. Hollis-Eden (and consequently,
the Surviving Corporation) does not expect to generate revenue from
operations for the foreseeable future, and Hollis-Eden's (and consequently,
the Surviving Corporation's) ability to meet its cash obligations as they
become due and payable is expected to depend for at least the next several
years on its ability to sell securities, borrow funds or some combination
thereof. Based upon its current plans, Hollis-Eden management believes
that the cash to be infused into the Surviving Corporation as a result of
the Merger, together with interest thereon, will be sufficient to meet the
Surviving Corporation's operating expenses and capital requirements through
at least the end of 1997. There can be no assurance, however, that changes
in the Surviving Corporation's research and development plans or other
events affecting the Surviving Corporation's operating expenses will not
result in the expenditure of such cash before that time. No assurance can
be given that the Surviving Corporation will be successful in raising
necessary funds. The Surviving Corporation's future capital requirements
will depend upon many factors, including progress with preclinical testing
and clinical trials, the time and costs involved in obtaining regulatory
approvals, competing technological and market developments, the ability of
the Surviving Corporation to establish collaborative arrangements and
effective commercialization and marketing activities and other
arrangements. In any event, Hollis-Eden (and consequently, the Surviving
Corporation) will continue to incur increasing negative cash flows and net
losses for the foreseeable future. See "HOLLIS-EDEN'S MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
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TECHNOLOGICAL CHANGE AND COMPETITION
The pharmaceutical industry is characterized by intense competition and
is subject to rapid and significant technological change. Rapid
technological development may cause the Products to become obsolete before
Hollis-Eden (and consequently, the Surviving Corporation) recoups all or
any portion of the related expenses. Hollis-Eden's (and consequently, the
Surviving Corporation's) competitors include major pharmaceutical
companies, biotechnology firms and universities and other research
institutions, both in the United States and abroad, which are actively
engaged in research and development of products in the therapeutic areas
being pursued by Hollis-Eden. Most of Hollis-Eden's (and consequently, the
Surviving Corporation's) competitors have substantially greater financial,
technical, manufacturing, marketing, distribution and human resource
capabilities than Hollis-Eden (or the Surviving Corporation). Recently,
Hoffman-LaRoche and Abbot Laboratories announced a new family of antiviral
AIDS drugs that block the production of protease, an enzyme critical to the
virus' survival. In addition, many of Hollis-Eden's (and consequently, the
Surviving Corporation's) competitors have significantly greater experience
in testing new or improved therapeutic products and obtaining regulatory
approvals of products. Accordingly, Hollis-Eden's (and consequently, the
Surviving Corporation's) competitors may succeed in obtaining regulatory
approval for products more rapidly than Hollis-Eden (or the Surviving
Corporation). If Hollis-Eden (or the Surviving Corporation) commences
significant commercial sales of its products, it will also be competing
with respect to manufacturing efficiencies and marketing and distribution
capabilities, areas in which it has little experience. See "HOLLIS-EDEN'S
BUSINESS -- Manufacturing."
NO SALES AND MARKETING EXPERIENCE
Hollis-Eden's efforts to date have focused on the development and
evaluation of the Products. As Hollis-Eden continues clinical studies and
prepares for commercialization of the Products, it must build a sales and
marketing infrastructure. Hollis-Eden (and consequently, the Surviving
Corporation) has no experience in the sales and marketing of its Products.
It is possible that Hollis-Eden (and consequently, the Surviving
Corporation) will not be able to attract and retain the skilled personnel
necessary to develop the infrastructure to effectively market the Products.
See "HOLLIS-EDEN'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and "-- Dependence on Officers and
Future Employees."
DEPENDENCE ON LICENSE AGREEMENTS
Hollis-Eden licenses the Products from Dr. Patrick T. Prendergast and
from Edenland, Inc. ("Edenland") and Colthurst Limited., two organizations
Dr. Prendergast controls. See "Certain Relationships and Related
Transactions." Hollis-Eden is obligated to make license payments and
provide certain funding, including funding for the development and testing
of the Products, at specified times. There can be no assurance that
Hollis-Eden (and consequently, the Surviving Corporation) will be able to
meet future payment or funding obligations, in which event Hollis-Eden (and
consequently, the Surviving Corporation) could lose all rights to one or
more of the Products, which would have a material adverse effect on Hollis-
Eden (and consequently, the Surviving Corporation). See "HOLLIS-EDEN'S
BUSINESS -- License Agreements."
DEPENDENCE ON OFFICERS AND FUTURE EMPLOYEES
Hollis-Eden (and the Surviving Corporation) is (and will be) highly
dependent upon its Chief Executive Officer, Richard B. Hollis, and its
Chief Scientific Officer, Dr. Patrick T. Prendergast, the loss of either of
whose services would adversely affect Hollis-Eden (and the Surviving
Corporation) and impede the achievement of Hollis-Eden's (and consequently,
the Surviving Corporation's) research and development objectives.
Recruiting and retaining additional management personnel, as well as
qualified scientific personnel to perform research and development work in
the future, will also be critical to Hollis-Eden's (and consequently, the
Surviving Corporation's) success. Because competition for experienced
scientific personnel among numerous pharmaceutical and biotechnology
companies and research and academic institutions is intense, there can be
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no assurance that Hollis-Eden (or the Surviving Corporation) will be able
to attract and retain such personnel. See "PROPOSED MANAGEMENT OF THE
SURVIVING CORPORATION" and "HOLLIS-EDEN'S BUSINESS."
TECHNOLOGICAL UNCERTAINTIES
All of Hollis-Eden's product development efforts are based upon
technologies and therapeutic approaches that have not been widely used in
humans for therapeutic purposes. There is, therefore, significant risk that
these approaches will not prove to be successful. While Hollis-Eden
believes that the positive results obtained to date in preclinical and
limited clinical human studies support further research and development,
those positive results are not necessarily indicative of results that will
be obtained in further human clinical testing. See "HOLLIS-EDEN'S
BUSINESS."
PHARMACEUTICAL PRICING; PENDING HEALTH CARE REFORMS
Government health administration authorities, together with private
health insurers, increasingly are attempting to contain health care costs
by limiting the price or reimbursement levels for medical products and
services. In certain foreign markets, pricing or profitability of
prescriptive pharmaceuticals is subject to government control. In the
United States, there have been a number of federal and state proposals to
implement similar government controls or otherwise significantly reform the
existing health care system. Due to uncertainties as to the ultimate
features of this or any other reform initiatives that may be enacted,
Hollis-Eden cannot predict which, if any, of such reform proposals will be
adopted, when they may be adopted, or what impact they may have on Hollis-
Eden (and consequently, the Surviving Corporation). It is possible that
any legislation that is enacted will include provisions resulting in price
limits, utilization controls or other consequences that may adversely
affect Hollis-Eden (and consequently, the Surviving Corporation).
MANUFACTURING LIMITATIONS AND UNCERTAINTIES
Hollis-Eden currently relies on outside manufacturers for the production
of INACTIVIN and the other Products to supply sufficient quantities of
compounds to conduct clinical trials on the Products. If Hollis-Eden (or
the Surviving Corporation) is unable to contract on acceptable terms or to
obtain a sufficient supply of the Products or such supplies are delayed or
contaminated, Hollis-Eden (and consequently, the Surviving Corporation)
could experience significant delays in bringing INACTIVIN and the other
Products to market as well as delays in human clinical testing schedules
and delays in submissions of the Products for regulatory approval and
initiation of further development progress, any of which could have a
material adverse effect on Hollis-Eden's (and consequently, the Surviving
Corporation's) business and results of operations. If Hollis-Eden (and
consequently, the Surviving Corporation) should encounter delays or
difficulties in establishing relationships with manufacturers to produce,
package and distribute its finished pharmaceutical products, market
introduction and subsequent sales of such products would be adversely
affected. Moreover, contract manufacturers that Hollis-Eden (or the
Surviving Corporation) may use must adhere to current Good Manufacturing
Practices ("GMP") regulations enforced by the FDA through its facilities
inspection program. These facilities must pass a pre-approval plant
inspection before the FDA will issue a pre-market approval of the Products.
If Hollis-Eden (or the Surviving Corporation) is unable to obtain or retain
third party manufacturing on commercially acceptable terms, it may not be
able to commercialize pharmaceutical products as planned. Hollis-Eden's
(and consequently, the Surviving Corporation's) dependence upon third
parties for the manufacture of pharmaceutical products may adversely affect
Hollis-Eden's (and consequently, the Surviving Corporation's) profit
margins and its ability to develop and deliver pharmaceutical products on a
timely and competitive basis.
Even if Hollis-Eden (and consequently, the Surviving Corporation) is
successful in raising the substantial amounts of capital it requires (as to
which there can be no assurance), Hollis-Eden (and consequently, the
Surviving Corporation) does not intend to manufacture any pharmaceutical
products itself, although it may choose to do so in the future. Hollis-
Eden has no experience in manufacturing pharmaceutical products in clinical
quantities or for commercial purposes. Hollis-Eden believes that its
strategy of outsourcing manufacturing is cost effective since it avoids the
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high fixed costs of plant, equipment and large manufacturing staff and
thereby enables Hollis-Eden to conserve its resources. Should Hollis-Eden
(and consequently, the Surviving Corporation) determine to manufacture
products itself, Hollis-Eden (and consequently, the Surviving Corporation)
would be subject to the regulatory requirements described above, would be
subject to similar risks regarding delays or difficulties encountered in
manufacturing any such pharmaceutical products and would require
substantial additional capital. In addition, there can be no assurance
that Hollis-Eden (or the Surviving Corporation) would be able to
manufacture any such products successfully and in a cost-effective manner.
See "HOLLIS-EDEN'S BUSINESS -- Manufacturing."
MANAGEMENT OF GROWTH
Hollis-Eden's (and consequently, the Surviving Corporation's) ability to
manage its growth, if any, will require it to continue to improve and
expand its management, operational and financial systems and controls. If
Hollis-Eden's (and consequently, the Surviving Corporation's) management is
unable to manage growth effectively, Hollis-Eden's (and consequently, the
Surviving Corporation's) business and results of operations will be
adversely affected.
PRODUCT LIABILITY; LACK OF INSURANCE
Hollis-Eden's (and consequently, the Surviving Corporation's) business
will expose it to potential product liability risks which are inherent in
the testing, manufacturing, marketing and sale of pharmaceutical products,
and product liability claims may be asserted against Hollis-Eden (and
consequently, the Surviving Corporation). Product liability insurance for
the pharmaceutical industry generally is expensive to the extent that it is
available at all. Hollis-Eden currently does not have product liability
insurance. There can be no assurance that adequate insurance coverage will
be available at acceptable costs, if at all, or that a product liability
claim would not adversely affect the business or financial condition of
Hollis-Eden (and consequently, the Surviving Corporation).
FEDERAL INCOME TAX CONSEQUENCES TO THE HOLLIS-EDEN STOCKHOLDERS AND TO THE
SURVIVING CORPORATION
The Merger is intended to be a tax-free reorganization within the
meaning of Section 368(a) of the Code. However, neither IAC nor Hollis-
Eden has requested, or will request, a ruling from the Internal Revenue
Service (the "IRS") with regard to the federal income tax consequences of
the Merger. A successful IRS challenge to the reorganization status of the
Merger would result in the Hollis-Eden Stockholders recognizing taxable
gain on the receipt of shares of Surviving Corporation Common Stock as a
result of the Merger and the Surviving Corporation incurring a significant
corporate level tax which could have a material adverse effect on the
Surviving Corporation. See "THE MERGER -- Certain Federal Income Tax
Consequences."
POTENTIAL CONFLICTS OF INTEREST
Dr. Patrick T. Prendergast, Chief Scientific Officer, a director and a
principal stockholder of Hollis-Eden, and two organizations controlled by
him, have licensed the rights to the Products to Hollis-Eden. The Products
currently represent all pharmaceutical products owned or licensed by
Hollis-Eden. Dr. Prendergast will continue as a director and Chief
Scientific Officer of the Surviving Corporation following the consummation
of the Merger. See "HOLLIS-EDEN'S BUSINESS - License Agreements,"
"SECURITY OWNERSHIP OF THE SURVIVING CORPORATION" and "PROPOSED MANAGEMENT
OF THE SURVIVING CORPORATION."
AUTHORIZED PREFERRED STOCK
The Surviving Corporation's Board of Directors will be authorized,
without further action required on the part of stockholders, to issue one
or more classes of preferred stock and to designate the rights, preferences
and privileges of such preferred stock, including voting, dividend and
liquidation rights which may be superior to those of the holders of
Surviving Corporation Common Stock. The issuance of one or more classes of
preferred stock could materially adversely affect the rights of holders of
Surviving Corporation Common Stock. See "COMPARISON OF STOCKHOLDERS'
RIGHTS."
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INDEMNIFICATION AND LIMITED MONETARY DAMAGES
The Surviving Corporation's Certificate of Incorporation will provide
that the Surviving Corporation's directors shall not be liable for monetary
damages to the Surviving Corporation's stockholders except as required by
law. In addition, the Surviving Corporation's Bylaws will provide
indemnification of the Surviving Corporation's officers and directors to
the fullest extent permitted by the DGCL. To the extent that stockholders
are unable to prevail in actions for monetary damages against the Surviving
Corporation's directors, such stockholders' rights in this regard are
limited in comparison to rights of stockholders of a corporation that has
not adopted such provisions. In addition, to the extent that the Surviving
Corporation's officers and directors may obtain indemnification from the
Surviving Corporation, the Surviving Corporation may incur substantial
financial losses.
DIVIDENDS UNLIKELY
Neither IAC nor Hollis-Eden has ever paid dividends on its shares of
Common Stock. The payment of dividends after the Merger, if any, will be
contingent upon the Surviving Corporation's revenues and earnings (i.e.,
Hollis-Eden's revenues and earnings), if any, capital requirements and
general financial condition subsequent to consummation of the Merger. The
payment of any dividends subsequent to the Merger will be within the
discretion of the Surviving Corporation's Board of Directors. IAC, Hollis-
Eden and the Surviving Corporation intend to retain all earnings, if any,
for use in Hollis-Eden's business operations and, accordingly, the boards
of directors for such companies do not anticipate declaring any dividends
in the foreseeable future. See "DESCRIPTION OF IAC'S SECURITIES --
Dividends."
IMMEDIATE SUBSTANTIAL DILUTION
Upon the issuance of shares of Surviving Corporation Common Stock in the
Merger to Hollis-Eden Stockholders, IAC Stockholders will suffer an
immediate and substantial dilution of their ownership interests in IAC.
Upon the exercise, if ever, of the Merger Warrants and Options, the IAC
Stockholders would suffer further dilution of their ownership interests in
IAC and, as a result of the Merger, the Surviving Corporation.
CONCENTRATION OF OWNERSHIP
Following the Merger, Hollis-Eden Stockholders will own approximately
85% of the then outstanding shares of Surviving Corporation Common Stock
(without giving effect to the exercise of any Merger Warrants and Options,
IAC Warrants and Options or Plan Options). Accordingly, the Hollis-Eden
Stockholders will be able to elect the members of the Surviving
Corporation's Board of Directors and control the business, policies and
affairs of the Surviving Corporation. Assuming the exercise of the Merger
Warrants and Options and the IAC Warrants and Options (but not any Plan
Options), the Hollis-Eden Stockholders would collectively own approximately
79% of the then outstanding shares of Surviving Corporation Common Stock,
with Mr. Richard B. Hollis, Chairman of the Board and Chief Executive
Officer of Hollis-Eden, owning approximately 29% and Mr. Terren S. Peizer,
President and a Director of Hollis-Eden, owning approximately 20%.
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON PRICE OF
SURVIVING CORPORATION COMMON STOCK
Future sales of Surviving Corporation Common Stock by current IAC and
Hollis-Eden Stockholders, option holders and warrant holders could
adversely affect the market price of the Surviving Corporation's Common
Stock. All of the shares of Surviving Corporation Common Stock issuable in
the Merger, other than to affiliates (generally including, without
limitation, directors, certain executive officers and beneficial owners of
10% or more of any class of common stock) of Hollis-Eden, will be eligible
for sale under Rules 144 and 145 promulgated under the Securities Act
immediately upon consummation of the Merger. In addition, the shares of
Surviving Corporation Common Stock issuable in the Merger, other than to
affiliates of Hollis-Eden, can be resold pursuant to this Proxy
Statement/Prospectus. However, pursuant to the Merger Agreement, Hollis-
Eden is using its best efforts to secure the agreement of each Hollis-Eden
Stockholder to such Stockholder's not selling any shares of Surviving
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Corporation Common Stock issuable in the Merger for the nine-month period
(and in the case of Mr. Hollis and Dr. Prendergast, no more than an
aggregate of 1,000,000 shares in the two-year period) immediately following
the consummation of the Merger. In addition, all of the Surviving
Corporation Common Stock owned by the Initial IAC Stockholders are
"restricted securities" as that term is defined in Rule 144 promulgated
under the Securities Act. Under such rule, once two years have elapsed
from the date of the acquisition, an affiliate of an issuer may, every
three months, sell in ordinary brokerage transactions or in transactions
directly with a market maker an amount equal to the greater of one percent
of the issuer's outstanding common stock or the average weekly trading
volume during the four calendar weeks prior to the sale. Once three years
have elapsed, a person who has not been an affiliate of an issuer for 90
days immediately prior to the proposed sale may sell his shares without
restriction. As of the date of this Joint Proxy Statement/Prospectus, all
of the shares of Surviving Corporation Common Stock held by IAC
Stockholders are eligible for sale without restriction, except that Mr.
Salvatore J. Zizza, Chairman of the Board of IAC and a proposed member of
the Surviving Corporation's Board of Directors following the Merger
(beneficially owning 220,000 shares), will continue to be restricted
pursuant to Rule 144. See "THE MERGER -- Resales of Surviving Corporation
Common Stock."
The shares of Surviving Corporation Common Stock issuable upon exercise
of the Merger Warrants and Options are also being registered pursuant to
the Registration Statement of which this Joint Proxy Statement/Prospectus
forms a part, for permitted resale following their issuance.
EXERCISE OF REDEMPTION RIGHTS; 15% IAC NON-AFFILIATE STOCKHOLDER REDEMPTION
CAP
In the event that the Merger is approved at the IAC Special Meeting and
IAC Non-Affiliate Stockholders elect to redeem less than 15% of the shares
of IAC Common Stock held by such IAC Non-Affiliate Stockholders, IAC may
proceed with the Merger and redeem such shares at their Redemption Value
upon consummation of the Merger. Payments made to redeem such shares will
reduce the cash available for satisfying outstanding obligations and
planned capital expenditures of Hollis-Eden and, consequently, will reduce
cash available after the Merger for capital spending.
IN ADDITION, IF 15% (APPROXIMATELY 90,000 SHARES) OR MORE OF THE SHARES
OF IAC COMMON STOCK HELD BY IAC NON-AFFILIATE STOCKHOLDERS ARE VOTED
AGAINST THE MERGER, AND SUCH IAC NON-AFFILIATE STOCKHOLDERS ELECT, WITHIN
THE REDEMPTION PERIOD, TO HAVE AT LEAST SUCH NUMBER OF SHARES REDEEMED BY
IAC, IAC WILL NOT PROCEED WITH THE MERGER OR REDEEM SUCH SHARES. See
"GENERAL INFORMATION -- IAC Special Meeting; Redemption Rights."
CLASSIFIED BOARD OF DIRECTORS;
POSSIBLE DETERRENT TO TAKEOVERS, CHANGES IN BOARD AND OTHER CHANGES IN
CONTROL
The Surviving Corporation's Board of Directors will be a "classified
board," with approximately one-third of its directors coming up for
election each year. This provision is applicable to every election of
directors. As a result of having a classified board, two annual meetings
will be necessary to change a majority of the directors. The existence of
a classified board may, in certain circumstances, deter or delay mergers,
tender offers, other possible takeover attempts or changes in management of
the Board of Directors which may be favored by some or a majority of the
Surviving Corporation's stockholders.
POSSIBLE VOLATILITY IN STOCK PRICE
Although it is anticipated that shares of Surviving Corporation Common
Stock will be accepted for trading on the AMEX upon the consummation of the
Merger, there is no assurance that a market for securities of the Surviving
Corporation will continue to exist. The prices at which the Surviving
Corporation Common Stock trades after the Merger will depend on many
factors, including prevailing interest rates, markets for similar
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securities, industry conditions, and the performance of, and investor
expectations for, Hollis-Eden's (and consequently, the Surviving
Corporation's) prospects.
GENERAL INFORMATION
IAC SPECIAL MEETING
The IAC Special Meeting will be held at 10:00 a.m., local time, on
Friday, March 14, 1997 at the law offices of Reid & Priest LLP, 40 West
57th Street, 26th Floor, New York, New York 10019. At the IAC Special
Meeting, IAC Stockholders will be asked to consider and vote upon the
proposal to approve and adopt the Merger Agreement and the transactions
contemplated thereby, to elect a new slate of seven directors as of the
Effective Time, and a proposal to approve and adopt the IAC 1997 Incentive
Stock Option Plan.
The Board of Directors of IAC has fixed the close of business on January
29, 1997 as the IAC Record Date. Only holders of record of IAC Common
Stock as of the IAC Record Date are entitled to notice of and to vote at
the IAC Special Meeting. As of the close of business on the IAC Record
Date, there were 833,250 shares of IAC Common Stock issued and outstanding
and held by 38 holders of record. IAC Stockholders are entitled to one
vote on each matter considered and voted on at the IAC Special Meeting for
each share of IAC Common Stock held of record at the close of business on
the IAC Record Date. The presence, in person or by properly executed
proxy, of the holders of a majority of the outstanding shares of IAC Common
Stock entitled to vote at the IAC Special Meeting is necessary to
constitute a quorum of the holders of IAC Common Stock at the IAC Special
Meeting. Abstentions will be counted as shares present for purposes of
determining the presence of a quorum. Abstentions will not be counted as
votes cast for purposes of determining whether a proposal has received
sufficient votes for adoption. Consequently, abstentions will have the
effect of a vote against the adoption of the Merger Agreement and the
transactions contemplated thereby.
Proxies in the form enclosed are solicited by the IAC Board of
Directors. Shares of IAC Common Stock represented by properly executed
proxies, if such proxies are received in time and are not revoked, will be
voted in accordance with the instructions indicated on the proxies. IF NO
INSTRUCTIONS ARE INDICATED, SUCH PROXIES WILL BE VOTED FOR ADOPTION OF THE
MERGER AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED
THEREBY, FOR THE ELECTION OF EACH OF THE SEVEN NOMINATED DIRECTORS, FOR
ADOPTION OF THE IAC 1997 INCENTIVE STOCK OPTION PLAN, AND AS DETERMINED BY
A MAJORITY OF THE MEMBERS OF THE IAC BOARD OF DIRECTORS AS TO ANY OTHER
MATTER THAT MAY PROPERLY COME BEFORE THE IAC SPECIAL MEETING. ANY HOLDER
OF IAC COMMON STOCK WHO RETURNS A SIGNED PROXY BUT FAILS TO PROVIDE
INSTRUCTIONS AS TO THE MANNER IN WHICH SUCH HOLDER'S SHARES ARE TO BE VOTED
WILL BE DEEMED TO HAVE VOTE FOR THE ADOPTION OF THE MERGER AGREEMENT AND
THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY, FOR THE ELECTION
OF EACH OF THE SEVEN NOMINATED DIRECTORS AND FOR ADOPTION OF THE IAC 1997
INCENTIVE STOCK OPTION PLAN.
An IAC Stockholder who has given a proxy may revoke it at any time prior
to its exercise at the IAC Special Meeting or prior to the receipt by IAC
of proxies of stockholders, by (i) giving written notice of revocation to
the Secretary of IAC, (ii) properly submitting to IAC a duly executed proxy
bearing a later date, or (iii) voting in person at the IAC Special Meeting.
All written notices of revocation and other communications with respect to
revocation of proxies should be addressed to IAC as follows: Initial
Acquisition Corp., 810 Seventh Avenue, New York, New York 10019, Attention:
President. A proxy appointment will not be revoked by death or supervening
incapacity of the stockholder executing the proxy unless, before the shares
are voted, notice of such death or incapacity is filed with IAC's Secretary
or other person responsible for tabulating votes on behalf of IAC.
The expense of soliciting proxies for the IAC Special Meeting will be
borne by IAC, although Hollis-Eden has paid one-half of the cost of the
filing, printing and mailing fees and expenses of this Joint Proxy
Statement/Prospectus. In addition to the solicitation of stockholders of
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record by mail, telephone or personal contact, IAC will be contacting
brokers, dealers, banks or voting trustees or their nominees who can be
identified as record holders of IAC Common Stock. Such holders, after
inquiry by IAC, will provide information concerning quantity of proxy and
other materials needed to supply such materials to beneficial owners, and
IAC will reimburse them for the expense of mailing the proxy materials to
such persons.
The affirmative vote of two-thirds of the outstanding shares of IAC
Common Stock voting at the IAC Special Meeting, either in person or by
proxy, is necessary to approve and adopt the Merger Agreement and the
transactions contemplated thereby. The affirmative vote of the holders of
a plurality of the outstanding shares of IAC Common Stock voting is
required for the election of each director. The affirmative vote of a
majority of the outstanding shares of IAC Common Stock voting is required
for the approval and adoption of the IAC 1997 Incentive Stock Option Plan.
Mr. Salvatore J. Zizza, Chairman of the Board of IAC and the owner of
approximately 8.4% of the outstanding shares of IAC Common Stock (without
giving effect to the exercise of any IAC Warrants and Options), has agreed
with Hollis-Eden to vote all shares of IAC Common Stock owned by him in
favor of the Merger Agreement. As an Initial IAC Stockholder, however, Mr.
Zizza is required (as set forth in the IAC Prospectus) to vote his shares
with respect to the Merger Agreement in accordance with the vote of the
majority in interest of all IAC Non-Affiliate Stockholders.
The Initial IAC Stockholders, which include IAC's directors and
executive officer, collectively holding an aggregate of approximately 28%
of the outstanding shares of IAC Common Stock before giving effect to the
Merger (and without giving effect to the exercise of any Merger Warrants
and Options or IAC Warrants and Options), by reason of their prior
agreement with IAC, will vote their respective shares of IAC Common Stock
in accordance with the vote of the majority in interest of all IAC Non-
Affiliate Stockholders. Consequently, if a majority of the outstanding
shares of IAC Common Stock held and voted by IAC Non-Affiliate Stockholders
is voted in favor of the Merger Agreement and the transactions contemplated
thereby, the Initial IAC Stockholders will vote their shares of IAC Common
Stock in favor of the Merger Agreement and the transactions contemplated
thereby. If the Merger Agreement and the transactions contemplated thereby
are not approved by the requisite vote, the Merger Agreement will be
terminated and the proposed Merger will be abandoned. In such event, the
proposal to approve and adopt the IAC 1997 Incentive Stock Option Plan will
not be implemented, even if such proposal is approved by the requisite
vote. As of the IAC Record Date, Hollis-Eden, its directors and executive
officers, and their affiliates (except as set forth below), held no shares
of IAC Common Stock. Mr. James D. Bowyer, an employee of Laidlaw Equities
and one of the persons who introduced Hollis-Eden to the Company, however,
to IAC's knowledge, beneficially owns 58,800 shares of IAC Common Stock.
Laidlaw Equities, which currently owns warrants to purchase up to 134,100
shares of Hollis-Eden Common Stock and is entitled to receive warrants to
purchase up to an additional 452,830 shares of Surviving Corporation Common
Stock upon the consummation of the Merger, serves as Hollis-Eden's
investment banker. Mr. J. Paul Bagley, one of Hollis-Eden's directors and
a proposed director of the Surviving Corporation following the Merger, was
the Chief Executive Officer of Laidlaw Equities' parent company until
November 1996.
Redemption Rights. Each of the IAC Non-Affiliate Stockholders (and each
Initial IAC Stockholder who holds After Acquired Stock, but only to the
extent of the After Acquired Stock) has the right, pursuant to IAC's
Prospectus, to elect to have any or all of his or her shares of IAC Common
Stock redeemed for approximately $11.00 per share (the Redemption Value) by
exercise of such right in accordance with the procedure set forth below
within 20 calendar days of the mailing of this Joint Proxy
Statement/Prospectus (the Redemption Period). The Redemption Value has
been calculated by dividing (i) the amount of the Escrowed Funds as of the
Record Date by (ii) the number of shares of IAC Common Stock held by IAC
Non-Affiliate Stockholders as of the IAC Record Date. If IAC Non-Affiliate
Stockholders elect to redeem 15% or more of such shares of IAC Common Stock
within the Redemption Period, IAC will not proceed with the Merger and will
not redeem such shares. If IAC Non-Affiliate Stockholders elect to redeem
less than 15% of such IAC Common Stock within the Redemption Period,
assuming that IAC otherwise satisfies the required conditions of the
Merger, IAC may proceed with the Merger but will be required to redeem such
shares at their Redemption Value upon consummation of the Merger.
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Each IAC Non-Affiliate Stockholder that desires to exercise his or her
Redemption Right should, prior to expiration of the Redemption Period, (i)
complete and sign the proxy card (or request that his or her broker, dealer
or other nominee do so on his or her behalf) in accordance with the
instructions set forth therein, (ii) expressly vote "AGAINST" the Merger,
(iii) expressly indicate on the proxy card that such Stockholder is
exercising his or her Redemption Right and specify the number of shares to
be redeemed and (iv) deposit such proxy card in the United States mail
postmarked on or prior to the last day of the Redemption Period. The proxy
card containing the exercise of Redemption Rights must be received by IAC
prior to the IAC Special Meeting. A proxy card which indicates that an IAC
Non-Affiliate Stockholder expressly abstains from voting on the proposal to
approve the Merger shall not be deemed an exercise of such IAC Non-
Affiliate Stockholder's Redemption Rights. An IAC Non-Affiliate
Stockholder may exercise Redemption Rights only if he or she votes
"AGAINST" the Merger within the Redemption Period. Any IAC Non-Affiliate
Stockholder who returns a signed proxy card which either expressly votes
"FOR" the Merger or fails to indicate how his or her shares should be
voted, shall be deemed to have waived his or her Redemption Right. If a
proxy, which constitutes exercise of the Redemption Rights, is revoked
before it is voted, such revocation shall also constitute an election by
such IAC Non-Affiliate Stockholder to forfeit all Redemption Rights. An
IAC Non-Affiliate Stockholder having shares registered in the name of a
broker, dealer, commercial bank, trust company or other nominee must notify
such person if he or she desires to exercise his or her Redemption Rights.
Redemption Rights shall be forfeited by an IAC Non-Affiliate Stockholder if
not exercised in accordance with the foregoing procedures on or prior to
the last day of the Redemption Period. An IAC Non-Affiliate Stockholder
who sells any of his or her shares of IAC Common Stock after electing to
have such shares redeemed shall forfeit the right to receive the Redemption
Value with respect to such shares. In addition, an IAC Non-Affiliate
Stockholder who exercises his or her Redemption Right shall forfeit the
right to receive Additional Merger Shares, if any are issued.
Upon consummation of the Merger, IAC Non-Affiliate Stockholders who have
exercised their right to redemption within the Redemption Period will be
required to tender to American Stock Transfer & Trust Company, as transfer
agent, certificates for such number of shares of IAC Common Stock to be
redeemed, together with properly executed stock powers and any required
signature guarantees. Upon receipt of such certificates, IAC shall
promptly make payment of the aggregate Redemption Value for such number of
shares of IAC Common Stock as have been properly tendered for redemption.
All questions as to the form of all documents and the validity and
eligibility for redemption under the rules set forth herein of any exercise
of Redemption Rights and tender of IAC Common Stock shall be determined by
IAC, in its sole discretion. IAC will not accept any IAC Common Stock
tendered for redemption until after the IAC Special Meeting.
IAC will use a portion of the Escrowed Funds to pay for the redemption
of all shares of IAC Common Stock which IAC is required to redeem pursuant
to the above-described procedure. Any shares of IAC Common Stock which are
redeemed shall be canceled.
IAC NON-AFFILIATE STOCKHOLDERS MAY NOT EXERCISE THEIR REDEMPTION RIGHTS
IF THEY ARE SEEKING THEIR APPRAISAL RIGHTS AND, CONVERSELY, IAC NON-
AFFILIATE STOCKHOLDERS WHO SEEK REDEMPTION RIGHTS MAY NOT EXERCISE THEIR
APPRAISAL RIGHTS. SEE "-- APPRAISAL RIGHTS."
IAC STOCKHOLDERS SHOULD OBTAIN CURRENT PRICE QUOTES FOR IAC COMMON STOCK
TO DETERMINE WHETHER SUCH STOCKHOLDER WOULD OBTAIN A HIGHER PRICE FOR HIS
OR HER SHARES BY SELLING THEM INTO THE PUBLIC MARKET RATHER THAN ELECTING
TO HAVE HIS OR HER SHARES REDEEMED. SEE "MARKET PRICE OF IAC'S SECURITIES
AND DIVIDEND INFORMATION."
THE REDEMPTION VALUE IS APPROXIMATELY $11.00 PER SHARE.
Recommendation of the IAC Board of Directors. The Board of Directors of
IAC believes that the Merger is in the best interests of IAC and its
stockholders and has unanimously approved the Merger Agreement and the
consummation of the transactions contemplated thereby. The IAC Board of
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Directors unanimously recommends that IAC Stockholders vote FOR adoption of
the Merger Agreement and the consummation of the transactions contemplated
thereby, FOR the election of the new slate of seven directors and FOR the
proposal to approve and adopt the IAC 1997 Incentive Stock Option Plan. In
deciding to approve the Merger Agreement and the consummation of the
transactions contemplated thereby, IAC's Board of Directors considered a
number of factors, including the terms of the Merger, the future prospects
of Hollis-Eden and relevant business, legal and market factors.
HOLLIS-EDEN SPECIAL MEETING
The Hollis-Eden Special Meeting will be held at 8:00 a.m., local time,
on Friday, March 14, 1997 at the offices of Hollis-Eden, 808 SW Third
Avenue, Suite 540, Portland, Oregon 97204. At the Hollis-Eden Special
Meeting, Hollis-Eden Stockholders will consider and vote upon the proposal
to approve and adopt the Merger Agreement and the transactions contemplated
thereby.
The Board of Directors of Hollis-Eden has fixed the close of business on
January 29, 1997 as the Hollis-Eden Record Date. Only holders of record of
Hollis-Eden Common Stock as of the Hollis-Eden Record Date are entitled to
notice of and to vote at the Hollis-Eden Special Meeting. As of the close
of business on the Hollis-Eden Record Date, there were 4,911,004 shares of
Hollis-Eden Common Stock issued and outstanding and held by 50 holders of
record. Holders of Hollis-Eden Common Stock are entitled to one vote on
each matter considered and voted on at the Hollis-Eden Special Meeting for
each share of Hollis-Eden Common Stock held of record at the close of
business on the Hollis-Eden Record Date. The presence, in person or by
properly executed proxy, of the holders of a majority of the outstanding
shares of Hollis-Eden Common Stock entitled to vote at the Hollis-Eden
Special Meeting is necessary to constitute a quorum of the holders of
Hollis-Eden Common Stock at the Hollis-Eden Special Meeting. Abstentions
will be counted as shares present for purposes of determining the presence
of a quorum but will not be counted as votes cast for purposes of
determining whether a proposal has received sufficient votes for adoption.
Consequently, abstentions will have the effect of a vote against the
adoption of the Merger Agreement and the transactions contemplated thereby.
Proxies in the form enclosed are solicited by the Hollis-Eden Board of
Directors. Shares of Hollis-Eden Common Stock represented by properly
executed proxies, if such proxies are received in time and are not revoked,
will be voted in accordance with the instructions indicated on the proxies.
IF NO INSTRUCTIONS ARE INDICATED, SUCH PROXIES WILL BE VOTED FOR ADOPTION
OF THE MERGER AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED THEREBY, AND AS DETERMINED BY A MAJORITY OF THE MEMBERS OF THE
HOLLIS-EDEN BOARD OF DIRECTORS AS TO ANY OTHER MATTER THAT MAY PROPERLY
COME BEFORE THE HOLLIS-EDEN SPECIAL MEETING. ANY HOLDER OF HOLLIS-EDEN
COMMON STOCK WHO RETURNS A SIGNED PROXY BUT FAILS TO PROVIDE INSTRUCTIONS
AS TO THE MANNER IN WHICH SUCH HOLDER'S SHARES ARE TO BE VOTED WILL BE
DEEMED TO HAVE VOTED FOR ADOPTION OF THE MERGER AGREEMENT AND THE
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY.
A Hollis-Eden Stockholder who has given a proxy may revoke it at any
time prior to its exercise at the Hollis-Eden Special Meeting or prior to
the receipt by Hollis-Eden of proxies voting in favor of the Merger
Agreement by all Hollis-Eden Stockholders, by (i) giving written notice of
revocation to the Corporate Secretary of Hollis-Eden, (ii) properly
submitting to Hollis-Eden a duly executed proxy bearing a later date, or
(iii) voting in person at the Hollis-Eden Special Meeting. All written
notices of revocation and other communications with respect to revocation
of proxies should be addressed to Hollis-Eden as follows: Hollis-Eden,
Inc., 808 S.W. Third Avenue, Suite 540, Portland, Oregon 97204, Attention:
Corporate Secretary. A proxy appointment will not be revoked by death or
supervening incapacity of the stockholder executing the proxy unless,
before the shares are voted, notice of death or incapacity is filed with
Hollis-Eden's Corporate Secretary or other person responsible for
tabulating votes on behalf of Hollis-Eden.
The expense of soliciting proxies for the Hollis-Eden Special Meeting
will be paid by Hollis-Eden, although IAC has paid the cost of the filing
and a portion of the cost of the printing and mailing fees and expenses of
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this Joint Proxy Statement/Prospectus. In addition to the solicitation of
stockholders of record by mail, telephone or personal contact, Hollis-Eden
will be contacting brokers, dealers, banks or voting trustees or their
nominees who can be identified as record holders of Hollis-Eden Common
Stock. Such holders, after inquiry by Hollis-Eden, will provide
information concerning quantity of proxy and other materials needed to
supply such materials to beneficial owners, and Hollis-Eden will reimburse
them for the expense of mailing the proxy materials to such persons.
The affirmative vote of a majority of the outstanding shares of Hollis-
Eden Common Stock voting at the Hollis-Eden Special Meeting, either in
person or by proxy, is necessary to approve and adopt the Merger Agreement
and the transactions contemplated thereby. As of the Hollis-Eden Record
Date, Hollis-Eden's directors and executive officers and their affiliates
held approximately 71% of the outstanding shares of Hollis-Eden Common
Stock entitled to vote at the Hollis-Eden Special Meeting. In addition,
Mr. Richard B. Hollis, Chairman of the Board of Hollis-Eden and the owner
of approximately 58% of the outstanding shares of Hollis-Eden Common Stock,
has agreed with IAC to vote all shares of Hollis-Eden Common Stock which he
is entitled to vote at the Hollis-Eden Special Meeting in favor of the
Merger Agreement and the transactions contemplated thereby. As of the
Hollis-Eden Record Date, IAC, its directors and executive officer, and
their affiliates, held no shares of Hollis-Eden Common Stock.
Recommendation of the Hollis-Eden Board of Directors. The Board of
Directors of Hollis-Eden believes that the Merger is in the best interests
of Hollis-Eden and its stockholders and has unanimously approved the Merger
Agreement and the consummation of the transactions contemplated thereby.
The Hollis-Eden Board of Directors unanimously recommends that Hollis-Eden
Stockholders vote FOR adoption of the Merger Agreement and the consummation
of the transactions contemplated thereby. In deciding to approve the
Merger Agreement and the consummation of the transactions contemplated
thereby, Hollis-Eden's Board of Directors considered a number of factors,
including the terms of the Merger, the financial condition of IAC and
Hollis-Eden, the future prospects and capital requirements of Hollis-Eden
and relevant business, legal and market factors.
HOLDERS OF HOLLIS-EDEN COMMON STOCK OR HOLLIS-EDEN WARRANTS OR OPTIONS
SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A LETTER OF
TRANSMITTAL.
APPRAISAL RIGHTS
Pursuant to the provisions of Section 262 of the DGCL, any holder of
record of IAC or Hollis-Eden Common Stock is entitled to dissent from the
Merger and obtain payment of the "fair value" of his or her shares of IAC
Common Stock or Hollis-Eden Common Stock, as the case may be, in cash if
the Merger is effected by complying with the provisions of Section 262 of
the DGCL. Generally, a stockholder must dissent with respect to all the
shares he or she owns or over which he or she has the power to direct the
vote. The failure of a stockholder to follow the statutory provisions set
forth in Section 262 of the DGCL may result in the termination or waiver of
such stockholder's appraisal rights.
Holders of record of shares of IAC Common Stock or Hollis-Eden Common
Stock, as the case may be, who desire to exercise their appraisal rights
must fully satisfy all of the following conditions. A written demand for
appraisal of the shares of IAC Common Stock or Hollis-Eden Common Stock, as
the case may be, owned by such IAC or Hollis-Eden Stockholder, as the case
may be, must be delivered to the Secretary of IAC or Hollis-Eden, as the
case may be, before the taking of the vote on the approval and adoption of
the Merger Agreement. This written demand for appraisal must be in
addition to and separate from any proxy or vote abstaining from or voting
against the approval and adoption of the Merger Agreement. Neither voting
against, abstaining from voting, nor failing to vote on the proposal to
approve and adopt the Merger Agreement will constitute a demand for
appraisal within the meaning of Section 262 of the DGCL. Any IAC
Stockholder or Hollis-Eden Stockholder, as the case may be, seeking
appraisal rights must hold the shares of IAC Common Stock or Hollis-Eden
Common Stock, as the case may be, for which appraisal is sought on the date
of the making of the demand, continuously through the Effective Time and
otherwise comply with the provisions of Section 262 of the DGCL.
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Holders of shares of IAC Common Stock or Hollis-Eden Common Stock, as
the case may be, electing to exercise their appraisal rights under Section
262 of the DGCL must not vote for the approval and adoption of the Merger
Agreement or consent thereto in writing. Voting in favor of the approval
and adoption of the Merger Agreement, or delivering a proxy in connection
with the IAC or Hollis-Eden, as the case may be, Special Meeting or
delivering an executed unmarked proxy (unless the proxy votes against, or
expressly abstains from voting on the approval and adoption of the Merger
Agreement) will constitute a waiver of such stockholder's right of
appraisal and will nullify any written demand for appraisal submitted by
the stockholder. Consequently, an IAC Stockholder or Hollis-Eden
Stockholder, as the case may be, who desires to exercise his or rights of
appraisal should not vote in favor of approval and adoption of the Merger
Agreement. Any such IAC Stockholder or Hollis-Eden Stockholder, as the
case may be, who desires to preserve his or her rights of appraisal should
either refrain from returning a proxy card or, if such IAC Stockholder or
Hollis-Eden Stockholder, as the case may be, returns a proxy card, such
proxy card should expressly indicate that such IAC Stockholder or Hollis-
Eden Stockholder, as the case may be, votes against or expressly abstains
from voting on such approval and adoption.
A demand for appraisal must be executed by or for the stockholder of
record, fully and correctly, as such stockholder's name appears on the
stock certificates. If shares of IAC Common Stock or Hollis-Eden Common
Stock, as the case may be, are owned of record in a fiduciary capacity,
such as by a trustee or guardian, such demand must be executed by the
fiduciary. If shares of IAC Common Stock or Hollis-Eden Common Stock, as
the case may be, are owned of record by more than one person, as in a joint
tenancy or tenancy in common, such demand must be executed by all joint
owners. An authorized agent, including an agent for two or more joint
owners, may execute the demand for appraisal for a stockholder of record;
however, the agent must identify the record owner and expressly disclose
the fact that, in exercising the demand, he is acting as agent for the
record owner.
A record owner, such as a broker who holds shares of IAC Common Stock or
Hollis-Eden Common Stock, as the case may be, as a nominee for others, may
exercise appraisal rights with respect to such shares held for all or less
than all beneficial owners of shares of IAC Common Stock or Hollis-Eden
Common Stock, as the case may be, as to which the holder is the record
owner. In such case, the written demand must set forth the number of
shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may be,
covered by the demand. Where the number is not expressly stated, the
demand will be presumed to cover all shares of IAC Common Stock or Hollis-
Eden Common Stock, as the case may be, outstanding in the name of such
record owner. Beneficial owners who are not record owners and who intend to
exercise appraisal rights should instruct the record owner to comply
strictly with the statutory requirements with respect to exercise of
appraisal rights before the date of the IAC or Hollis-Eden, as the case may
be, Special Meeting.
IAC Stockholders who elect to exercise appraisal rights must mail or
deliver their written demand to: Secretary, Initial Acquisition Corp., 810
Seventh Avenue, New York, New York 10019. Hollis-Eden Stockholders who
elect to exercise appraisal rights must mail or deliver their written
demand to: Secretary, Hollis-Eden, Inc., 808 S.W. Third Avenue, Suite 540,
Portland, Oregon 97204. The written demand for appraisal should specify
the stockholder's name and mailing address, the number of shares of IAC
Common Stock or Hollis-Eden Common Stock, as the case may be, covered by
the demand and that such stockholder is thereby demanding appraisal of such
shares. Within ten days after the Effective Time, the Surviving Corporation
must provide notice of the Effective Time to all stockholders who have
complied with Section 262 of the DGCL and have not voted for approval and
adoption of the Merger Agreement.
Within ten days after the Effective Time, the Surviving Corporation will
notify each stockholder who has satisfied the foregoing conditions that the
Merger was effective as of a given date. Within 120 days after the
Effective Time, the Surviving Corporation, or any stockholder who has
complied with the required conditions of Section 262 of the DGCL and who is
otherwise entitled to appraisal rights, may file a petition in the Delaware
Court of Chancery demanding a determination of the fair value of the shares
of IAC Common Stock or Hollis-Eden Common Stock, as the case may be, held
by the IAC Stockholders or Hollis-Eden Stockholders, as the case may be,
who have demanded appraisal. If a petition for an appraisal is timely
filed, after a hearing on such petition, the Delaware Court of Chancery
will determine which stockholders are entitled to appraisal rights and
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thereafter will appraise the shares of IAC Common Stock or Hollis-Eden
Common Stock, as the case may be, owned by such stockholders, determining
the fair value of such shares, exclusive of any element of value arising
from the accomplishment or expectation of the Merger, together with a fair
rate of interest to be paid, if any, upon the amount determined to be the
fair value. In determining the fair value, the Delaware Court of Chancery
is to take into account all relevant factors.
The cost of the appraisal proceeding may be determined by the Delaware
Court of Chancery and taxed upon the parties as the Delaware Court of
Chancery deems equitable in the circumstances. Upon application of a
stockholder who has demanded appraisal in accordance with Section 262 of
the DGCL, the Delaware Court of Chancery may order that all or a portion of
the expenses incurred by such stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys' fees and
the fees and expenses of experts, be charged pro rata against the value of
all shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may
be, entitled to appraisal. In the absence of such a determination or
assessment, each party bears its own expenses.
Any IAC or Hollis-Eden Stockholder who has duly demanded appraisal in
compliance with Section 262 of the DGCL will not, after the Effective Time,
be entitled to vote for any purpose the shares of IAC Common Stock or
Hollis-Eden Common Stock, as the case may be, subject to such demand or to
receive payment of dividends or other distributions on such shares, except
for dividends or other distributions payable to stockholders of record at a
date prior to the Effective Time.
At any time after 60 days after the Effective Time, any former holder of
shares of IAC Common Stock or Hollis-Eden Common Stock, as the case may be,
shall have the right to withdraw his or her demand for appraisal and to
accept the terms offered in the Merger. After this period, such holder may
withdraw his or her demand for appraisal only with the consent of the
Surviving Corporation. If no petition for appraisal is filed with the
Delaware Court of Chancery within 120 days after the Effective Time,
stockholders' rights to appraisal shall cease and all stockholders shall
continue to hold their shares of IAC Common Stock or Hollis-Eden Common
Stock, as the case may be, as if they had not made any demand for
appraisal. Inasmuch as the Surviving Corporation has no obligation to file
a petition, and has no present intention to do so, any stockholder who
desires such a petition to be filed is advised to file it on a timely
basis. However, no petition timely filed in the Delaware Court of Chancery
demanding appraisal shall be dismissed as to any stockholder without the
approval of the Delaware Court of Chancery and such approval may be
conditioned upon such terms as the Delaware Court of Chancery deems just.
FAILURE TO TAKE ANY REQUIRED ACTION IN CONNECTION WITH THE EXERCISE OF
APPRAISAL RIGHTS MAY RESULT IN THE TERMINATION OR WAIVER OF SUCH RIGHTS.
IN VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF THE DGCL, IAC AND HOLLIS-
EDEN STOCKHOLDERS WHO ARE CONSIDERING EXERCISING THEIR APPRAISAL RIGHTS
UNDER SECTION 262 OF THE DGCL SHOULD CONSULT THEIR LEGAL ADVISORS.
The foregoing does not purport to be a complete statement of the DGCL
relating to appraisal rights and is qualified in its entirety by reference
to the relevant provision of the statute itself, which is included as Annex
E to this Joint Proxy Statement/Prospectus. Annex E should be reviewed
carefully by any IAC or Hollis-Eden Stockholder who wishes to exercise
statutory appraisal rights or who wishes to preserve the right to do so.
MARKET PRICE OF IAC'S SECURITIES AND DIVIDEND INFORMATION
Since May and June 1995, IAC's Common Stock, Class A Warrants, Class B
Warrants and Units have been quoted and traded on the OTC Electronic
Bulletin Board under the symbols "IACQ", "IACQW", "IACQZ" and "IACQU",
respectively.
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The following table sets forth the quarterly high and low closing sales
prices on the OTC Electronic Bulletin Board for the securities of IAC set
forth above for the periods indicated below. These quotations represent
prices between dealers and do not include retail mark-up, mark-down or
commissions or necessarily represent actual transactions.
COMMON STOCK
------------- HIGH LOW
---- ---
1995
----
June 28 through June 30 $8.875 $8.750
July 1 through September 30 9.000 8.500
October 1 through December 31 8.875 8.625
1996
----
January 1 through March 31 $10.125 $8.875
April 1 through June 30 10.625 9.250
July 1 through September 30 9.875 9.250
October 1 through December 31 11.250 8.875
1997
----
January 1 through February 4 $10.500 $9.000
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
1997
----
January 1 through February 4 $0.875 $0.875
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
1997
----
January 1 through February 4 $4.250 $3.250
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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
1997
----
January 1 through February 4 $10.500 $9.750
As of the IAC Record Date, there were 38 holders of record of IAC 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 IAC Common
Stock and Class A and B Warrants 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. IAC believes that after the consummation
of the Merger, the Surviving Corporation will have in excess of .
beneficial owners of shares of Surviving Corporation Common Stock.
On February . , 1997 (the last day before the printing of this Joint
Proxy Statement/Prospectus), the closing sales prices for shares of IAC
Common Stock, Class A and B Warrants and Units were $ . , $ . , $ . and $
. , respectively.
On November 5, 1996 (the day preceding public announcement of the
Merger), the closing sales prices for shares of IAC Common Stock, Class A
and B Warrants and Units were $9.250, $0.625, $4.000 and $9.500,
respectively.
IAC has never declared any cash dividends with respect to its shares of
Common Stock and does not anticipate that dividends will be declared in the
foreseeable future as all available cash will be utilized to further the
growth of Hollis-Eden's (and consequently, the Surviving Corporation's)
business subsequent to the Effective Time.
It is anticipated that shares of Surviving Corporation Common Stock will
be accepted for trading, subject to the consummation of the Merger, on the
AMEX.
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THE MERGER
The following information describes certain information pertaining to
the Merger. This description does not purport to be complete and is
qualified in its entirety by reference to the Annexes hereto, including the
Merger Agreement, a copy of which is set forth in ANNEX A to this Joint
Proxy Statement/Prospectus and incorporated herein by reference. All IAC
and Hollis-Eden Stockholders are urged to read the Annexes in their
entirety.
GENERAL
Subject to the terms and conditions of the Merger Agreement, Hollis-Eden
shall merge with and into IAC, with IAC being the Surviving Corporation to
the Merger. Upon the consummation of the Merger, Hollis-Eden will cease to
exist as a separate corporation. At the time the Merger becomes effective,
each outstanding share of Hollis-Eden Common Stock shall cease to be
outstanding and shall be converted into the right to receive one share of
Surviving Corporation Common Stock. In addition, all outstanding Hollis-
Eden Warrants and Options shall cease to be outstanding and shall be
converted into the right to receive the same number of Merger Warrants and
Options upon the same terms as the corresponding Hollis-Eden Warrants and
Options, as the case may be. As of the Hollis-Eden Record Date, there were
4,911,004 shares of Hollis-Eden Common Stock outstanding and an aggregate
of 4,679,650 shares of Hollis-Eden Common Stock were underlying the Hollis-
Eden Warrants and Options. Consequently, upon the consummation of the
Merger, the Surviving Corporation will issue an aggregate of 4,911,004
shares of Surviving Corporation Common Stock to the Hollis-Eden
Stockholders and Merger Warrants and Options entitling the holders thereof
to acquire an aggregate of 4,679,650 shares of Surviving Corporation Common
Stock. The foregoing exchange ratios were established through arms-length
negotiations between IAC and Hollis-Eden. None of the outstanding shares
of IAC Common Stock will be converted or otherwise modified in the Merger
and all of such shares will continue to be outstanding capital stock of the
Surviving Corporation after the Effective Time.
Upon the consummation of the Merger, the Surviving Corporation will
change its name to Hollis-Eden Pharmaceuticals, Inc. and the business of
the Surviving Corporation will be that of Hollis-Eden immediately prior to
the Merger. Upon consummation of the Merger, the Surviving Corporation
will assume all of Hollis-Eden's liabilities and obligations.
Upon the consummation of the Merger, the Hollis-Eden Stockholders will
collectively acquire approximately 85% of the outstanding Surviving
Corporation Common Stock, without giving effect to the exercise of any
Merger Warrants and Options, IAC Warrants and Options or Plan Options, and
their designees will comprise six of the seven members of the Surviving
Corporation's newly-elected Board of Directors. Assuming the exercise of
all of the outstanding Merger Warrants and Options and IAC Warrants and
Options (but not any Plan Options), the Hollis-Eden Stockholders would
collectively own approximately 79% of the then outstanding shares of
Surviving Corporation Common Stock upon the consummation of the Merger.
ADDITIONAL MERGER SHARES
In connection with the Merger, IAC will offer each IAC Non-Affiliate
Stockholder the opportunity to exchange his or her Redemption Right for the
right to receive Additional Merger Shares, should any be issued. In order
to perfect the right to receive Additional Merger Shares, if any, an IAC
Non-Affiliate Stockholder must (i) not exercise his or her Redemption Right
in connection with the Merger and (ii) within 60 days following the
Effective Time, take whatever action that may be necessary to cause such
IAC Non-Affiliate Stockholder to become the registered owner of his shares
of Surviving Corporation Common Stock (each, a "Rights Share" and,
collectively, the "Rights Shares"). By not exercising his or her
Redemption Right in connection with the Merger, an IAC Non-Affiliate
Stockholder shall be deemed to have waived his or her Redemption Right and
accepted IAC's offer to receive the right to receive Additional Merger
Shares, if any are issued (provided such IAC Non-Affiliate Stockholder is
not a dissenting stockholder and becomes the registered owner of his or her
shares of Surviving Corporation Common Stock as provided above). As soon
as practicable following the 60th day following the Effective Time, the
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Surviving Corporation will cause to be issued to each IAC Non-Affiliate
Stockholder who shall have perfected his or her right to receive Additional
Merger Shares, if any, certificates evidencing one right (each, a "Right"
and, collectively, the "Rights") for each Rights Share held by such IAC
Non-Affiliate Stockholder (the "Rights Certificates"). The Rights
Certificates shall not be transferable, assignable, subject to pledge or
otherwise alienable, and the registered holder of such Rights Certificates
shall forfeit the number of Rights (the "Forfeited Rights") equal to the
number of shares of Surviving Corporation Common Stock sold or otherwise
transferred by such holder during the period commencing at the Effective
Time and ending on the date that a final determination of whether any
Additional Merger Shares will be issued is made (i.e., the second
anniversary of the Effective Time) (the "Holding Period"). The Forfeited
Rights, at the moment of such sale or transfer, shall be null and void and
have no further force or effect.
Additional Merger Shares, if any, shall be issued to the holders of
Rights Certificates who have not otherwise forfeited their Rights as a
result of their selling or otherwise transferring shares of Surviving
Corporation Common Stock during the Holding Period if, at no time during
the 24-month period immediately following the Effective Time, the average
closing price per share of Surviving Corporation Common Stock over a period
of 20 consecutive trading days equals or exceeds $20.00 per share (subject
to adjustment as set forth below). The Additional Merger Shares shall be
issued in accordance with the records of the Surviving Corporation as
promptly as practicable following the second anniversary of the Effective
Time to those holders of Rights Certificates who have not otherwise
forfeited their Rights. The number of Additional Merger Shares, if any, to
be issued to the holders of the Rights Certificates shall be calculated as
follows: each outstanding Right (i.e., any Right other than a Forfeited
Right) shall entitle the holder thereof to the number of Additional Merger
Shares equal to (a) the difference between (i) $20.00 (subject to
adjustment as set forth below) and (ii) the average of the highest 60
closing prices per share of Surviving Corporation Common Stock during the
one-year period immediately prior to the second anniversary of the
Effective Time (the "Sixty Day Average Price"), divided by (b) the Sixty
----------
Day Average Price. No fractional Additional Merger Shares shall be issued.
In lieu thereof, any fractional shares shall be rounded to the nearest
whole share of Surviving Corporation Common Stock. The amount of
Additional Merger Shares, if any, to be issued shall be computed by the
Surviving Corporation's independent public accountants as soon as
practicable following the second anniversary of the Effective Time. The
determination by such independent public accountants shall be final and
binding on the Surviving Corporation and the holders of the Rights.
Notwithstanding the foregoing, the Sixty Day Average Price shall in no
event be less than $5.00 per share (subject to adjustment as set forth
below).
In the event of a stock dividend, stock split, share combination,
exchange of shares, recapitalization, merger, consolidation, acquisition or
disposition of property or shares, reorganization, liquidation or other
similar change or transaction of or by the Surviving Corporation following
the Effective Time, the closing price per share of Surviving Corporation
Common Stock and the Sixty Day Average Price shall be adjusted as
appropriate to give proper effect to the event.
Notwithstanding the foregoing, the Surviving Corporation shall have the
unilateral right to redeem and cancel all, but not less than all, of the
Rights evidenced by the Rights Certificates, at a redemption price of $.001
per Right, if the Surviving Corporation, at any time during the Holding
Period, closes an equity offering pursuant to which the Surviving
Corporation (i) issues shares of Surviving Corporation Common Stock at a
per share price of not less than $15.00 per share and (ii) raises net
proceeds to the Surviving Corporation of not less than $10 million.
EFFECTIVE TIME
If the Merger Agreement is approved by the requisite vote of the holders
of IAC and Hollis-Eden Common Stock, and the other conditions to the
obligations of the parties to consummate the Merger are either satisfied or
waived, the Merger will be consummated and will become effective at the
Effective Time, i.e., the time that a Certificate of Merger, reflecting the
Merger, is duly filed with the Secretary of State of the State of Delaware.
Such filing will be made simultaneously with or as soon as practicable
after the closing of the transactions contemplated by the Merger Agreement.
Assuming satisfaction or waiver of all conditions to consummation, the
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Merger is expected to become effective during the first quarter of 1997.
See "-- Conditions to Consummation" and "-- Termination."
BACKGROUND OF THE MERGER
As discussed under "IAC's Business" elsewhere herein, IAC was formed to
serve as a vehicle to effect a Business Combination with a Target Business.
IAC's business objective has been to seek to effect a Business Combination
with a Target Business which IAC believes has significant growth potential.
Following the consummation of IAC's IPO of equity securities in May
1995, from which IAC derived net proceeds of approximately $6,300,000,
IAC's executive officer, together with Gruntal & Co., Incorporated, IAC's
investment banker ("Gruntal"), commenced an active search for a prospective
Target Business. Of the net proceeds from the IPO, $6,000,000
(representing the gross proceeds received from the sale in the IPO of
Units), together with interest earned thereon, is currently held in an
interest-bearing escrow account and will be released upon the earlier of
the consummation of a Business Combination in which at least 50% of the
Escrowed Funds are committed to a specific line of business as a result of
such consummation of a Business Combination (including any redemption
payments) or the liquidation of IAC. At the Effective Time of the Merger,
the Escrowed Funds will be released to IAC and all voting agreements
previously in effect with respect to the IAC Common Stock (including those
relating to the approval of a Business Combination by the Initial IAC
Stockholders) will terminate.
During the period from May 1995 through November 1996, IAC's executive
officer and Gruntal reviewed approximately six prospective Target
Businesses and carefully evaluated one other prospective Target Business
(in addition to Hollis-Eden) in the field of kidney dialysis treatment.
In evaluating each prospective Target Business, IAC's executive officer
and Gruntal considered, among other factors, all or a majority of the
following:
. Valuation of business and cost of acquisition
. Management and control of the Target Business
. Market share of the Target Business and barriers to entry into the
industry
. Capital structure and capital needs for the Target Business
. Industry growth and growth characteristics for the Target Business
. Probability of, and costs associated with, a Business Combination
. Technological factors in the Target Business's market segment
The factors which were considered most important in IAC's decision to
focus on certain of the prospective Target Businesses included:
(1) consideration of whether the prospective business demonstrated
historical or the potential for future revenue and profitability;
(2) consideration of growth characteristics of the prospective
business, considering the infusion of IAC's cash; and
(3) consideration of whether the amount of consideration which the
owners of a prospective business requested would result in an
attractive capital structure for IAC after the merger.
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The non-successful candidates were eliminated because they failed to
meet, in IAC's judgment, one or more of the above tests.
The nature of the contacts with the one other prospective Target
Businesses which IAC more carefully evaluated varied from having several
meetings/conferences to having certain financial and due diligence
procedures performed and reviewed. This candidate was not ultimately
pursued because IAC was not satisfied with the results of its due diligence
investigations.
IAC was introduced to Hollis-Eden by Messrs. Christopher A. Marlett and
James D. Bowyer of Laidlaw Equities in March 1996. Laidlaw Equities had
previously been engaged by Hollis-Eden to serve as Hollis-Eden's investment
banker and had recently served as Hollis-Eden's placement agent in
connection with a private financing. In addition, Mr. Bowyer was, at the
time of the introduction, and remains (to IAC's knowledge), the beneficial
owner of 58,800 shares of IAC Common Stock. In response to this
introduction, on March 20, 1996, Mr. Salvatore J. Zizza, Chairman of the
Board of IAC, and Mr. Richard B. Hollis, Chairman of the Board of Hollis-
Eden, first met at IAC's offices to discuss, generally, among other things,
the business and affairs of Hollis-Eden and a possible business combination
involving IAC and Hollis-Eden. At this initial meeting, Mr. Zizza informed
Mr. Hollis that IAC was then in detailed negotiations with another business
combination candidate and close to finalizing an arrangement.
Consequently, Mr. Zizza advised Mr. Hollis that IAC would not then be
interested in pursuing discussions pending the outcome of IAC's
negotiations with the other business combination candidate.
IAC's negotiations with this other business combination candidate
terminated in their entirety during July 1996. At that time, Mr. Zizza
contacted Mr. Hollis inquiring as to whether Hollis-Eden remained
interested in discussing a possible business combination with IAC. Mr.
Hollis responded favorably to Mr. Zizza's inquiry, and in response thereto,
Mr. Zizza, on August 13, 1996, met in California with, among others,
Messrs. Hollis, Marlett and Bowyer, Drs. Patrick T. Prendergast and Charles
Merigan, Jr., directors of Hollis-Eden, and Mr. Robert Weber, Vice
President and Controller of Hollis-Eden, to once again review Hollis-Eden's
business and affairs.
Following this meeting, representatives of IAC and Hollis-Eden developed
a term sheet outlining the basic structure of the Merger which was agreed
upon by all parties during the first week of September 1996. Thereafter,
each of IAC and Hollis-Eden commenced extensive due diligence
investigations of the other and counsel to the companies began drafting the
Merger Agreement.
During the latter half of September and throughout October 1996, there
were numerous telephone conversations among Messrs. Zizza and Hollis and
counsel to IAC and Hollis-Eden. During these conversations, discussions
were held relating to various aspects of the potential Merger, including
in-depth discussions concerning the type and amount of consideration to be
received in the Merger, conditions precedent to the Merger, and the status
of Hollis-Eden's licensed patent rights.
On October 31, 1996, Messrs. Zizza and Hollis, along with IAC's and
Hollis-Eden's respective counsel, held numerous telephone conference calls
to negotiate the final terms of the proposed Merger. After having reached
resolution on all open issues, IAC and Hollis-Eden, on November 1, 1996,
convened Special Meetings of their respective Boards of Directors at which
time the Merger Agreement, the Merger and the other transactions
contemplated thereby were discussed and reviewed. Thereafter, the Board of
Directors of each of IAC and Hollis-Eden unanimously adopted and approved
the Merger Agreement, the Merger and the transactions contemplated thereby.
Later on November 1, 1996, the Merger Agreement was executed and delivered
by each of the parties thereto. On November 6, 1996, IAC and Hollis-Eden
issued a joint press release announcing the execution of the Merger
Agreement.
Neither IAC nor Hollis-Eden nor the respective Boards of Directors of
IAC or Hollis-Eden requested or received, or will receive, an opinion of an
independent investment banker as to whether the Merger is fair, from a
financial point of view, to IAC and its stockholders, on the one hand, or
Hollis-Eden and its stockholders, on the other hand.
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Pursuant to the IAC Prospectus, in the event that IAC had not entered
into a letter of intent or a definitive agreement to effect a Business
Combination by November 15, 1996, IAC would have submitted for
consideration by its stockholders a proposal to liquidate and distribute to
IAC's Non-Affiliate Stockholders all of the assets of IAC available for
distribution after payment of liabilities.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
AND REASONS FOR THE MERGER
IAC. IAC believes that for the several reasons set forth in the
immediately following paragraph, the Merger offers the IAC Stockholders the
opportunity to participate in any future growth and profitability of
Hollis-Eden. Further, IAC has determined that, based upon standards
generally accepted by the financial community and its analysis of Hollis-
Eden's projections and planned operations, the fair market value of Hollis-
Eden as of the date of this Joint Proxy Statement/Prospectus is greater
than 80% of the net assets of IAC. Consequently, the IAC Board of
Directors has determined that the Merger is fair to, and in the best
interests of, IAC and the IAC Stockholders. In addition, the IAC Board of
Directors has unanimously approved and adopted the Merger Agreement and the
transactions contemplated thereby and recommends that IAC Stockholders vote
for approval and adoption of the Merger Agreement and the transactions
contemplated thereby.
In considering the Merger, the IAC Board of Directors took note of the
criteria for evaluating a prospective Target Business set forth under
"Background of the Merger" above. The Board of Directors also took into
account the significant experience of Hollis-Eden's management and Hollis-
Eden's perceived growth and profit potential. See "HOLLIS-EDEN'S
BUSINESS."
Hollis-Eden. The Board of Directors of Hollis-Eden has determined that
the Merger is fair to, and in the best interests of, Hollis-Eden and the
Hollis-Eden Stockholders. In addition, the Hollis-Eden Board of Directors
has unanimously approved and adopted the Merger Agreement and the
transactions contemplated thereby and recommends that Hollis-Eden
Stockholders vote for approval and adoption of the Merger Agreement and the
transactions contemplated thereby.
In considering the Merger, Hollis-Eden's Board of Directors noted that
the combination of Hollis-Eden with IAC, which has a strong capital
position, would enhance Hollis-Eden's capital base for Product development
and commercialization and enable Hollis-Eden (and consequently, the
Surviving Corporation) to satisfy certain upcoming license obligations with
respect to the Products. In this regard, Hollis-Eden's Board of Directors
noted that IAC, at the Effective Time, was expected to have approximately
$6.5 million in working capital. In addition, Hollis-Eden's Board of
Directors noted that IAC's status as a company whose securities are
publicly traded would increase the visibility of the Surviving
Corporation's business, which could be helpful in further developing and
commercializing Hollis-Eden's (and consequently, the Surviving
Corporation's) Products.
DISTRIBUTION OF MERGER CONSIDERATION
Immediately prior to the Effective Time, the Surviving Corporation shall
deposit with American Stock Transfer & Trust Company (the "Exchange Agent")
certificates representing the maximum number of shares of Surviving
Corporation Common Stock and Merger Warrants and Options to be delivered to
holders of Hollis-Eden Common Stock and Hollis-Eden Warrants and Options as
a result of the Merger. Promptly after the Effective Time, the Surviving
Corporation shall cause the Exchange Agent to mail to each holder of record
of a certificate or certificates which represented shares of Hollis-Eden
Common Stock or Hollis-Eden Warrants or Options immediately prior to the
Effective Time (the "Certificates") (i) a form of letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and
title to the Certificates shall pass, only upon proper delivery of such
Certificates to the Exchange Agent) and (ii) instructions for use in
effecting the surrender of Certificates in exchange for certificates
representing shares of Surviving Corporation Common Stock and/or Merger
Warrants and Options.
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HOLLIS-EDEN STOCKHOLDERS AND HOLDERS OF HOLLIS-EDEN WARRANTS AND OPTIONS
SHOULD NOT SURRENDER THEIR CERTIFICATES FOR EXCHANGE UNTIL
THEY RECEIVE SUCH LETTER OF TRANSMITTAL AND INSTRUCTIONS
After the Effective Time, each holder of shares of Hollis-Eden Common
Stock and Hollis-Eden Warrants and Options issued and outstanding at the
Effective Time shall surrender the Certificates to the Exchange Agent and
shall promptly upon surrender thereof receive in exchange therefor shares
of Surviving Corporation Common Stock and/or Merger Warrants and Options,
as the case may be, to which such holder is entitled. The Surviving
Corporation shall not be obligated to deliver the consideration to which
any former holder of Hollis-Eden Common Stock or Hollis-Eden Warrants or
Options is entitled as a result of the Merger until such holder surrenders
such holder's Certificates for exchange as provided in the Merger
Agreement. The Exchange Agent may establish reasonable and customary rules
and procedures in connection with its duties.
Unless otherwise designated by a Hollis-Eden Stockholder on the
transmittal letter, certificates representing shares of Surviving
Corporation Common Stock and Hollis-Eden Warrants and Options issued to
Hollis-Eden Stockholders and holders of Hollis-Eden Warrants and Options in
connection with the Merger will be issued and delivered to the tendering
Hollis-Eden Stockholder and/or warrant or option holder at the address on
record with Hollis-Eden. In the event of a transfer of ownership of shares
of Hollis-Eden Common Stock or Hollis-Eden Warrants or Options represented
by Certificates that are not registered in the transfer records of Hollis-
Eden, the Merger consideration may be issued to a transferee if the
Certificates are delivered to the Exchange Agent, accompanied by all
documents required to evidence such transfer and by evidence satisfactory
to the Exchange Agent that any applicable stock transfer taxes have been
paid. If any Certificate shall have been lost, stolen, mislaid or
destroyed, upon receipt of (i) an affidavit of that fact from the holder
claiming such Certificate to be lost, mislaid or destroyed, (ii) such bond,
security or indemnity as the Surviving Corporation and the Exchange Agent
may reasonably require and (iii) any other documents necessary to evidence
and effect the bona fide exchange thereof, the Exchange Agent shall issue
to such holder the Merger consideration into which the shares (or warrants
or options) represented by such lost, stolen, mislaid or destroyed
Certificate shall have been converted. Any other provision of the Merger
Agreement notwithstanding, neither IAC, Hollis-Eden, the Surviving
Corporation nor the Exchange Agent shall be liable to a holder of Hollis-
Eden Common Stock or Hollis-Eden Warrants or Options for any amounts paid
or property delivered in good faith to a public official pursuant to any
applicable abandoned property law. Adoption of the Merger Agreement by the
Hollis-Eden Stockholders shall constitute ratification of the appointment
of the Exchange Agent.
After the Effective Time, holders of Certificates will have no rights
with respect to the shares of Hollis-Eden Common Stock or Hollis-Eden
Warrants or Options represented thereby other than the right to surrender
such Certificates and receive in exchange therefor the shares of Surviving
Corporation Common Stock or Hollis-Eden Warrants or Options to which such
holders are entitled, as described above.
No dividends or distributions that are declared on shares of Surviving
Corporation Common Stock or Merger Warrants and Options will be paid to
persons entitled to receive certificates representing shares of Surviving
Corporation Common Stock or Merger Warrants and Options until such persons
surrender their Certificates. Upon such surrender, there will be paid to
the person in whose name the certificate representing such shares of
Surviving Corporation Common Stock or Merger Warrants and Options will be
issued, any dividends or distributions with respect to such shares of
Surviving Corporation Common Stock or Merger Warrants and Options which
have a record date on or after the Effective Time and have become payable
between the Effective Time and the time of such surrender. In no event
will the person entitled to receive such dividends or distributions be
entitled to receive interest thereon.
IAC Stockholders will not be required to surrender certificates
evidencing shares of IAC Common Stock or IAC Warrants and Options following
the approval and adoption of the Merger Agreement and the subsequent
consummation of the Merger. All IAC Common Stock and IAC Warrants and
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Options currently issued and outstanding are unaffected by the Merger and
will continue to represent shares of Surviving Corporation Common Stock and
warrants and options to acquire shares of Surviving Corporation Common
Stock after the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Directors and Management. As contemplated by the Merger Agreement, a
new Board of Directors consisting of seven persons has been nominated and,
subject to election by the IAC Stockholders at the IAC Special Meeting, the
nominees will begin their term of office as directors of the Surviving
Corporation immediately following the Effective Time. Six of the nominees
are considered to be designees of Hollis-Eden, while one nominee is the
designee of IAC. Consequently, the Hollis-Eden nominees, if they act
together, will have effective control of the business and affairs of the
Surviving Corporation.
Mr. J. Paul Bagley, a current director of Hollis-Eden and one of the
nominees for director of the Surviving Corporation, was the Chief Executive
Officer of Laidlaw Equities' parent company until November 1996. Laidlaw
Equities, which serves as Hollis-Eden's investment banker, currently owns
warrants to purchase up to 134,100 shares of Hollis-Eden Common Stock and
is entitled to receive warrants to purchase additional shares of Surviving
Corporation Common Stock upon the consummation of the Merger, as set forth
below. In addition, Mr. James D. Bowyer, an employee of Laidlaw Equities
and one of the persons who introduced Hollis-Eden to IAC, currently owns,
to IAC's knowledge, 58,800 shares of IAC Common Stock. See "PROPOSAL TO
ELECT DIRECTORS OF THE SURVIVING CORPORATION" and "PROPOSED MANAGEMENT OF
THE SURVIVING CORPORATION."
Stock Options and Warrants. Hollis-Eden's executive officers and
directors hold options and warrants to acquire shares of Hollis-Eden Common
Stock. At the Effective Time, all such options and warrants, whether or
not exercisable, shall be converted into and become rights with respect to
Surviving Corporation Common Stock, and the Surviving Corporation shall
assume each such option and warrant in accordance with its terms and the
stock option or warrant agreement by which it is evidenced. At February 5,
1997, the directors and executive officers and affiliates of Hollis-Eden
collectively held options and warrants, whether or not then exercisable, to
acquire a total of 3,543,774 shares of Hollis-Eden Common Stock at a
weighted average exercise price of $5.66 per share, plus options to acquire
an additional 169,811 shares of Surviving Corporation Common Stock at the
then fair market value when certain products reach $200 million in
revenues.
As a fee for financial advisory services rendered to Hollis-Eden in
connection with the Merger, Laidlaw Equities, upon the consummation of the
Merger, will be issued warrants to purchase an aggregate of up to 452,830
additional shares of Surviving Corporation Common Stock at an exercise
price of $2.48 per share.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
consequences of the Merger that are generally applicable to holders of
Hollis-Eden Common Stock. This discussion is based on currently existing
provisions of the Code, existing and proposed Treasury Regulations
thereunder and current administrative rulings and court decisions, all of
which are subject to change. Any such change, which may or may not be
retroactive, could alter the tax consequences to IAC, the IAC Stockholders,
Hollis-Eden or the Hollis-Eden Stockholders, as described herein.
Stockholders should be aware that this discussion does not deal with all
federal income tax considerations that may be relevant to particular
stockholders in light of their particular circumstances, such as
stockholders who are dealers in securities, are subject to the alternative
minimum tax provisions of the Code, are foreign persons, are tax-exempt
entities, taxpayers holding stock as part of a conversion or straddle
transaction, or who acquired their shares in connection with stock option
or stock purchase plans or in other compensatory transactions. In
addition, the following discussion does not address the tax consequences of
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the Merger under foreign, state or local tax laws or the tax consequences
of transactions effectuated prior to, concurrently with or after the Merger
(whether or not such transactions are in connection with the Merger),
including the exchange of Hollis-Eden Warrants and Options and the issuance
to the IAC Stockholders of the Additional Merger Shares. ACCORDINGLY, ALL
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
CONSEQUENCES OF THE MERGER TO THEM, INCLUDING THE APPLICABLE FEDERAL,
STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER IN THEIR PARTICULAR
CIRCUMSTANCES.
Neither IAC nor Hollis-Eden has requested, or will request, a ruling
from the IRS with regard to any of the federal income tax consequences of
the Merger. Cooley Godward LLP, counsel to Hollis-Eden ("Cooley Godward"),
will render an opinion (the "Tax Opinion") to the Hollis-Eden Stockholders,
that the Merger will constitute a tax-free reorganization under Section
368(a)(1)(A) of the Code (a "Reorganization"). The Tax Opinion will be
based on certain assumptions, as well as representations received and to be
received from IAC, Hollis-Eden and certain Hollis-Eden Stockholders and
will be subject to the limitations discussed below. Moreover, the Tax
Opinion will not be binding on the IRS nor preclude the IRS from adopting a
contrary position. The discussion below assumes that the Merger will
qualify as a Reorganization, based upon the Tax Opinion.
Subject to the limitations and qualifications referred to herein and in
the Tax Opinion, and as a result of the Merger's qualifying as a
Reorganization, the following federal income tax consequences should, under
currently applicable law, result:
. No gain or loss will be recognized for federal income tax purposes
by the holders of Hollis-Eden Common Stock upon the receipt of
Surviving Corporation Common Stock solely in exchange for such
Hollis-Eden Common Stock in the Merger (except to the extent that
cash is received in lieu of fractional shares).
. The aggregate tax basis of the Surviving Corporation Common Stock
so received by Hollis-Eden Stockholders in the Merger (including
any fractional shares of Surviving Corporation Common Stock not
actually received) will be the same as the aggregate tax basis of
the Hollis-Eden Common Stock surrendered in exchange therefor.
. The holding period of the Surviving Corporation Common Stock so
received by each Hollis-Eden Stockholder in the Merger will include
the period for which the Hollis-Eden Common Stock surrendered in
exchange therefor was considered to be held, provided that the
Hollis-Eden Common Stock so surrendered is held as a capital asset
at the Effective Date of the Merger.
. Cash payments received by holders of Hollis-Eden Common Stock in
lieu of fractional shares will be treated as if such fractional
shares of Surviving Corporation Common Stock had been issued in the
Merger and then redeemed by IAC. Hollis-Eden Stockholders
receiving such cash will recognize gain or loss upon such payment,
measured by the difference (if any) between the amount of cash
received and the basis in such fractional shares. The gain or loss
should be capital gain or loss, provided that each such fractional
share of Surviving Corporation Common Stock was held as a capital
asset at the Effective Date of the Merger.
. A holder of Hollis-Eden Common Stock or a holder of IAC Common
Stock who exercises appraisal rights with respect to a share of
Hollis-Eden Common Stock or IAC Common Stock and receives a cash
payment for such share generally should recognize capital gain or
loss (if such share was held as a capital asset at the Effective
Date of the Merger) measured by the difference between the
stockholder's basis in such share and the amount of cash received,
provided that such payment is not a dividend equivalent
transaction. A sale of shares pursuant to an exercise of appraisal
rights generally will not be a dividend equivalent transaction if,
as a result of such exercise, the stockholder exercising appraisal
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rights owns no shares of capital stock of the Surviving Corporation
(either actually or constructively within the meaning of
Section 318 of the Code) immediately after the Merger.
. Neither IAC nor Hollis-Eden will recognize gain solely as a result
of the Merger.
The Tax Opinion will be subject to certain assumptions and
qualifications and will be based on the truth and accuracy of certain
representations of IAC, Hollis-Eden and certain Hollis-Eden Stockholders.
One key assumption is that the "continuity of interest" requirement will
be satisfied in the Merger. In order for this requirement to be met,
stockholders of Hollis-Eden must not, pursuant to a plan or intent existing
at or prior to the Effective Date of the Merger, dispose of so much of (i)
their Hollis-Eden Common Stock in anticipation of the Merger, plus (ii) the
Surviving Corporation Common Stock received in the Merger (collectively,
the "Planned Dispositions") such that the Hollis-Eden Stockholders, as a
group, would no longer have a "significant equity interest" in the Hollis-
Eden business being conducted by the Surviving Corporation after the
Merger. Hollis-Eden Stockholders will generally be regarded as having a
significant equity interest as long as the Surviving Corporation Common
Stock received in the Merger (after taking into account Planned
Dispositions), in the aggregate, represents a "substantial portion" of the
entire consideration received by the Hollis-Eden Stockholders in the
Merger. This requirement is frequently referred to as the "continuity of
interest" requirement. If the continuity of interest requirement is not
satisfied, the Merger would not be treated as a Reorganization. The law is
unclear as to what constitutes a "significant equity interest" or a
"substantial portion." The IRS ruling guidelines require 50% continuity
(although such guidelines do not purport to represent the applicable
substantive law). The continuity of interest certificates obtained from
certain of the Hollis-Eden Stockholders contemplate that the fifty percent
(50%) standard will be applied. No assurance, however, can be made that
the "continuity of interest" requirement will be satisfied, and if such
requirement is not satisfied, the Merger will not be treated as a
Reorganization.
A successful IRS challenge to the Reorganization status of the Merger
would result in significant tax consequences. Hollis-Eden Stockholders
would recognize gain or loss with respect to each share of Hollis-Eden
Common Stock surrendered equal to the difference between the stockholder's
basis in such share and the fair market value, as of the Effective Time, of
the Surviving Corporation Common Stock received in exchange therefor. In
such event, a stockholder's aggregate basis in the Surviving Corporation
Common Stock so received would equal its fair market value and the
stockholder's holding period for such stock would begin the day after the
Merger is consummated. In addition, the transfer of all of Hollis-Eden's
assets to IAC would be treated as a taxable sale of such assets. The
corporate level gain Hollis-Eden would recognize upon such a taxable sale
of its assets would be equal to the difference between Hollis-Eden's
adjusted tax basis in such assets and the fair market value of all of the
merger consideration transferred by IAC as of the Effective Time of the
Merger plus the liabilities of Hollis-Eden assumed by IAC as a result of
the Merger. Hollis-Eden's tax liability associated with such recognized
gain would be assumed by IAC as part of the Merger.
Even if the Merger qualifies as a Reorganization, a recipient of
Surviving Corporation Common Stock would recognize income to the extent
that, for example, any such shares were determined to have been received in
exchange for services to satisfy obligations or in consideration for
anything other that the Hollis-Eden Common Stock surrendered. Generally,
such income is taxable as ordinary income upon receipt. In addition, to
the extent that Hollis-Eden Stockholders were treated as receiving
(directly or indirectly) consideration other than Surviving Corporation
Common Stock in exchange for such stockholder's Common Stock, gain or loss
would have to be recognized.
THIS DISCUSSION SPECIFICALLY DOES NOT ADDRESS THE TAX CONSEQUENCES OF
THE MERGER TO HOLDERS OF THE HOLLIS-EDEN WARRANTS AND OPTIONS, WHO, AS A
RESULT OF THE MERGER, WILL RECEIVE THE MERGER WARRANTS AND OPTIONS, NOR
DOES IT ADDRESS TAX CONSEQUENCES TO THE IAC STOCKHOLDERS OF THE ISSUANCE OF
THE ADDITIONAL MERGER SHARES. HOLDERS OF SUCH SECURITIES SHOULD CONSULT
THEIR TAX ADVISORS WITH RESPECT TO SUCH CONSEQUENCES.
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CONDITIONS TO CONSUMMATION
The obligations of IAC and Hollis-Eden to consummate the Merger are
subject to the satisfaction or waiver of the following conditions: (i) the
Merger Agreement and the transactions contemplated thereby shall have been
approved and adopted by the IAC Stockholders and the Hollis-Eden
Stockholders as described in this Joint Proxy Statement/Prospectus and the
IAC Non-Affiliate Stockholders shall not have elected to have 15% or more
of their shares of IAC Common Stock redeemed at the Redemption Value; (ii)
as of the Effective Time, IAC shall have cash on hand (net of liabilities)
of not less than $6.5 million; (iii) the Registration Statement shall have
been declared effective; (iv) no action or proceeding shall have been
instituted or threatened which is likely to have a material adverse effect
on IAC or Hollis-Eden or could enjoin, restrain or prohibit, or could
result in substantial damages in respect of, any provision of the Merger
Agreement or the consummation of the transactions contemplated thereby; (v)
all consents and approvals required for the consummation of the Merger and
the transactions contemplated thereby shall have been obtained, and all
required filings shall have been made; (vi) IAC and Hollis-Eden each shall
have performed and complied with all covenants, obligations and agreements
applicable to it contained in the Merger Agreement and all representations
and warranties of each of IAC and Hollis-Eden shall be true and correct in
all material respects on and as of the date made and the Effective Time;
(vii) the patent infringement and, if necessary, the patent validity,
analyses by IAC's counsel, and, if given in accordance with the terms of
the Merger Agreement, the final opinion of independent patent counsel,
shall not have resulted in an opinion of a patent infringement which will
have an "unavoidable" material adverse effect upon certain of Hollis-Eden's
Products; (viii) the receipt of written opinions of counsel to IAC and
Hollis-Eden as to certain matters; and (ix) Mr. Salvatore J. Zizza shall
have been elected a director of the Surviving Corporation. In addition to
the conditions set forth above, the obligations of IAC and Hollis-Eden to
consummate the Merger are subject to the absence, since the date of the
Merger Agreement, of any material adverse change in the business,
operations, assets, liabilities, results of operations, cash flows,
condition (financial or otherwise) or prospects of IAC and Hollis-Eden,
which is materially adverse to IAC or Hollis-Eden, as the case may be.
TERMINATION
The Merger Agreement may be terminated, and the Merger abandoned, at any
time prior to the Effective Time, by mutual consent of all parties to the
Merger Agreement. In addition, the Merger Agreement may be terminated, and
the Merger abandoned, generally, (i) prior to, but not after, the approval
of the Merger Agreement by the stockholders of each of Hollis-Eden and IAC,
by Hollis-Eden or IAC, as the case may be, if the Merger shall not have
become effective by March 31, 1997 (or such later date as permitted by the
Merger Agreement to allow the parties to complete their patent analyses
within the permitted time parameters), provided, however, that such
termination right shall not be available to any party whose failure to
fulfill any obligation under the Merger Agreement has been the cause of or
resulted in the failure of the Merger to become effective by such date;
(ii) by any party to the Merger Agreement if any court of competent
jurisdiction in the United States or other United States governmental body
shall have issued an order, decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the Merger or any of the
other transactions contemplated by the Merger Agreement and such order,
decree, ruling or other action shall have become final and non appealable;
(iii) By IAC, if IAC Non-Affiliate Stockholders holding 15% or more of the
shares of IAC Common Stock shall have exercised their Redemption Rights or
(iv) by IAC, if its Patent Infringement and, if necessary, patent validity
analyses, and, if given in accordance with the terms of the Merger
Agreement, the final opinion of independent patent counsel, shall have
resulted in an opinion of a Patent Infringement which will have an
"unavoidable" material adverse effect upon certain of Hollis-Eden's
Products.
EXPENSES AND FEES
The Merger Agreement provides that each party shall bear its own
expenses with respect to the transactions contemplated by the Merger
Agreement.
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In addition, Hollis-Eden has agreed to pay IAC the $100,000 Fee, which
Fee has been placed into escrow, in the event Hollis-Eden terminates the
Merger Agreement and abandons the Merger for any reason other than those
reasons permitted under the Merger Agreement. Moreover, in the event IAC
terminates the Merger Agreement and abandons the Merger as a result of a
Patent Infringement, IAC shall be entitled to such portion of the Fee as
may be necessary to reimburse IAC for its costs and expenses in connection
with the Merger Agreement and the proposed Merger.
ACCOUNTING TREATMENT
For accounting and financial reporting purposes, the Merger will be
treated as a recapitalization of Hollis-Eden by an exchange of Hollis-Eden
Common Stock for the net assets of IAC, consisting primarily of cash.
Since IAC has had no business operations other than the search for a
suitable Target Business, IAC's assets will be recorded in the balance
sheet of the combined company (i.e., the Surviving Corporation) at book
value. The unaudited pro forma financial information contained in this
Joint Proxy Statement/Prospectus has been prepared on this basis.
REGULATORY APPROVALS
No governmental regulatory approvals are required with respect to the
Merger except for the filing of the Certificate of Merger with the
Secretary of State for the State of Delaware and the filing with the
Commission of the Registration Statement and this Joint Proxy
Statement/Prospectus.
CONDUCT OF BUSINESS PENDING THE MERGER AND COVENANTS OF THE PARTIES
Each of IAC and Hollis-Eden has agreed in the Merger Agreement to, among
other things, operate its business only in the ordinary and usual course
consistent with past practice and to use reasonable commercial efforts to
preserve intact its present business organization, preserve its good will
and advantageous relationships with employees and other persons material to
its operations and business and not permit any action or omission within
its control which would cause any of its representations or warranties to
become inaccurate in any material respect or any of its covenants to be
breached in any material respect. In addition, each of IAC and Hollis-Eden
has agreed not to take certain actions relating to its operations pending
consummation of the Merger without the prior written consent of the other.
These actions generally include, without limitation, (i) incurring any
obligation or entering into any contract which either (a) requires a
payment by any party in excess of, or a series of payments which in the
aggregate exceed, $10,000, or provides for the delivery of goods or
performance of services, or any combination thereof, having a value in
excess of $10,000, or (b) has a term of, or requires the performance of any
obligations by Hollis-Eden or IAC, as the case may be, over a period in
excess of, six months; (ii) taking any action, or entering into or
authorizing any contract or transaction other than in the ordinary course
of business and consistent with past practice; (iii) selling, transferring,
conveying, assigning or otherwise disposing of any of its assets or
properties, except in the ordinary course of business; (iv) making any new
loans, advances or capital contributions to, or new investments in, any
other person other than to a subsidiary consistent with normal business
practice; (v) waiving, releasing or canceling any claims against third
parties or debts owing to it, or any rights which have any value in an
amount greater than $10,000 other than actions taken consistent with normal
past business practices; (vi) making any changes in its accounting systems,
policies, principles or practices; (vii) authorizing for issuance, issuing,
selling, delivering or agreeing or committing to issue, sell or deliver
(whether through the issuance or granting of options, warrants, convertible
or exchangeable securities, commitments, subscriptions, rights to purchase
or otherwise) any shares of its capital stock or any other securities, or
amending any of the terms of any such securities; (viii) splitting,
combining, or reclassifying any shares of its capital stock, declaring,
setting aside or paying any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock, or redeeming or otherwise acquiring any of its securities;
(ix) making any borrowings, incurring any debt (other than trade payables
in the ordinary course of business or equipment leases entered into in the
ordinary course of business), or assuming, endorsing or otherwise becoming
liable or the guarantor of (whether directly, contingently or otherwise)
the obligations of any other person other than a subsidiary, or making any
unscheduled payment or repayment of principal in respect of any long term
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debt; (x) entering into, amending or terminating any bonus, compensation,
stock option, employment, severance or other employee benefit agreement or
increasing in any manner the compensation or benefits thereunder; (xi)
leasing or encumbering, generally, any assets which are material to its
operations; (xii) authorizing or making any capital expenditures which
individually or in the aggregate are in excess of $10,000, other than
planned expenditures; (xiii) making any tax election or settling or
compromising any federal, state, local or foreign income tax liability, or
waiving or extending the statute of limitations in respect of any such
taxes; and (xiv) paying or agreeing to pay any amount in settlement or
compromise of any suits or claims of liability against it or its directors,
officers, employees or agents in an amount more than $10,000.
In addition, Mr. Salvatore J. Zizza, Chairman of the Board of IAC and
the owner of approximately 8.4% of the outstanding shares of IAC Common
Stock (without giving effect to the exercise of any IAC Warrants and
Options), has agreed with Hollis-Eden to vote all shares of IAC Common
Stock owned by him in favor of the Merger Agreement and to use his best
efforts to cause the other IAC Stockholders to vote in favor of the Merger
Agreement. As an Initial IAC Stockholder, however, Mr. Zizza is required
to vote his shares with respect to the Merger Agreement in accordance with
the vote of the majority in interest of all IAC Non-Affiliate Stockholders.
Mr. Richard B. Hollis, Chairman of the Board of Hollis-Eden and the
beneficial owner of approximately 58% of the outstanding Hollis-Eden Common
Stock (without giving effect to the exercise of any Hollis-Eden Warrants
and Options), has agreed to vote all shares of Hollis-Eden Common Stock
owned by him in favor of the Merger Agreement and to use his best efforts
to cause the other Hollis-Eden Stockholders to vote in favor of the Merger
Agreement.
Hollis-Eden has also agreed to use its reasonable commercial efforts to
obtain signed letters from as many Hollis-Eden Stockholders as possible,
which letters shall acknowledge such Hollis-Eden Stockholders' agreement
not to sell any shares of Surviving Corporation Common Stock to be issued,
directly or indirectly, to them in, and as a result of, the Merger, for the
nine-month period immediately following the Effective Time. In addition,
Messrs. Hollis and Prendergast, the owners of approximately 71% of the
outstanding Hollis-Eden Common Stock, have agreed with Hollis-Eden not to
sell more than an aggregate of 1,000,000 shares of Surviving Corporation
Common Stock to be received by them as a result of the Merger for the two-
year period commencing upon the Effective Time of the Merger.
The Merger Agreement further provides that until either the Effective
Time or a permitted termination of the Merger Agreement, neither Hollis-
Eden nor any of its affiliates shall solicit, initiate, encourage, continue
or enter into negotiations or discussions of any type, directly or
indirectly, with any other person, with respect to an offer for the sale of
Hollis-Eden, or any substantial portion of Hollis-Eden's assets, or Hollis-
Eden's capital stock, directly by merger, consolidation or any other form
of purchase, provided, however, that Hollis-Eden and its affiliates may
solicit, initiate, encourage, continue or enter into negotiations or
discussions for the limited purpose of raising capital for Hollis-Eden.
RESALES OF SURVIVING CORPORATION COMMON STOCK
Future sales of Surviving Corporation Common Stock by current IAC and
Hollis-Eden Stockholders, option holders and warrantholders could adversely
affect the market price of the Surviving Corporation's Common Stock. All
of the shares of Surviving Corporation Common Stock issuable in the Merger,
other than to affiliates of Hollis-Eden, will be eligible for sale under
Rules 144 and 145 promulgated under the Securities Act immediately upon
consummation of the Merger. In addition, the shares of Surviving
Corporation Common Stock issuable in the Merger, other than to affiliates
of Hollis-Eden, can be resold pursuant to this Proxy Statement/Prospectus.
However, pursuant to the Merger Agreement, Hollis-Eden is using its best
efforts to secure the agreement of each Hollis-Eden Stockholder to such
Stockholder's not selling any shares of Surviving Corporation Common Stock
issuable in the Merger for the nine-month period (and in the case of Mr.
Hollis and Dr. Prendergast, no more than an aggregate of 1,000,000 shares
in the two-year period) immediately following the consummation of the
Merger. In addition, all of the Surviving Corporation Common Stock owned
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by the Initial IAC Stockholders are "restricted securities" as that term is
defined in Rule 144 promulgated under the Securities Act. Under such rule,
once two years have elapsed from the date of the acquisition, an affiliate
of an issuer may, every three months, sell in ordinary brokerage
transactions or in transactions directly with a market maker an amount
equal to the greater of one percent of the issuer's outstanding common
stock or the average weekly trading volume during the four calendar weeks
prior to the sale. Once three years have elapsed, a person who has not
been an affiliate of an issuer for 90 days immediately prior to the
proposed sale may sell his shares without restriction. As of the date of
this Joint Proxy Statement/Prospectus, all of the shares of Surviving
Corporation Common Stock held by IAC Stockholders are eligible for sale
without restriction, except that Mr. Salvatore J. Zizza, Chairman of the
Board of IAC and a proposed member of the Surviving Corporation's Board of
Directors following the Merger (beneficially owning 220,000 shares), will
continue to be restricted pursuant to Rule 144.
The shares of Surviving Corporation Common Stock issuable upon exercise
of the Merger Warrants and Options are also being registered pursuant to
the Registration Statement of which this Joint Proxy Statement/Prospectus
forms a part, for permitted resale following their issuance.
OPERATIONS AFTER THE MERGER
As a result of the Merger, Hollis-Eden will be merged with and into
IAC, with IAC being the Surviving Corporation to the Merger. Upon the
consummation of the Merger, Hollis-Eden will cease to exist as a separate
corporation and the Surviving Corporation will change its name to Hollis-
Eden Pharmaceuticals, Inc. The business of the Surviving Corporation will
be that of Hollis-Eden immediately prior to the Merger.
In accordance with the Merger Agreement, at the Effective Time, and
subject to their election by the IAC Stockholders, the Board of Directors
of the Surviving Corporation will consist of seven directors, six of whom
(Messrs. Hollis, Peizer, Merigan, Bagley and McDonnell and Dr. Prendergast)
shall be Hollis-Eden's designees, and one of whom (Mr. Zizza) shall be
IAC's designee. In addition, all of the current officers of IAC will
resign effective at the Effective Time, to be replaced by the current
officers of Hollis-Eden designated by the Surviving Corporation's Board of
Directors as detailed in the Merger Agreement.
IAC does not presently intend to pay any cash dividends, as all
available cash will be utilized to further the growth of the Surviving
Corporation's business subsequent to the Effective Time for the foreseeable
future thereafter, including the funding of Hollis-Eden's (and
consequently, the Surviving Corporation's) working capital and capital
expenditure requirements. The payment of any cash dividends will be in the
discretion of the Surviving Corporation's Board of Directors and will be
dependent upon the Surviving Corporation's results of operations, financial
conditions and other factors deemed relevant by the Surviving Corporation's
Board of Directors.
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IAC SELECTED HISTORICAL FINANCIAL INFORMATION
The selected historical financial information of IAC set forth below
should be read in conjunction with the audited financial statements of IAC
and notes thereto contained elsewhere in this Joint Proxy
Statement/Prospectus.
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 IAC which are included elsewhere in this Joint Proxy
Statement/Prospectus. 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 IAC not included
herein. No cash dividends have ever been declared or paid on IAC Common
Stock.
YEAR ENDED DECEMBER 31,
------------------------------------------
STATEMENT OF OPERATIONS 1996 1995 1994 1993
DATA: ---- ---- ---- ----
Interest income . . . . . $ 345,484 $ 224,305 $ -0- $ -0-
General and administrative
expenses . . . . . . . $ 160,309 $ 71,782 $ 7,000 $ 7,186
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
outstanding . . . . . . 833,250 608,250 233,250 233,250
BALANCE SHEET DATA:
Total assets . . . . . . $6,830,530 $6,518,759 $ 74,139 $ 81,139
Redeemable common stock . $ 981,349 $ 932,316 $ -0- $ -0-
Stockholders' equity . . $5,561,945 $5,496,803 $ 68,139 $ 75,139
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HOLLIS-EDEN SELECTED HISTORICAL FINANCIAL INFORMATION
The following data, insofar as it relates to each of the
periods 1995 and 1994, has been derived from audited financial
statements, including the balance sheet at December 31, 1995 and
1994 and the related statements of operations, of stockholders'
deficit and of cash flows for the year ended December 31, 1995
and the period from inception (August 15, 1994) to December 31,
1994 and notes thereto appearing elsewhere herein. The data for
the nine months ended September 30, 1996 and 1995 and the period
from inception (August 15, 1994) to September 30, 1996 has been
derived from unaudited financial statements also appearing herein
and which, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a
fair presentation of the results for the unaudited interim
periods. The interim results of operations are not necessarily
indicative of results which may occur for the full fiscal year.
No cash dividends have ever been declared or paid on Hollis-Eden
Common Stock.
PERIOD
FROM
INCEPTION
PERIOD FROM (AUGUST
INCEPTION 15, 1994)
YEAR ENDED (AUGUST 15, TO
DECEMBER 1994) TO SEPTEMBER
31, DECEMBER 31, 30,
---------- ------------ ---------
STATEMENT OF 1995 1994 1996
OPERATIONS DATA: ---- ---- ----
Research and
development . . . . . $ 463,000 $ 1,166,762 $ 1,753,855
General and
administrative
expenses . . . . . . $ 170,929 $ 103,564 $ 620,722
Total operating
expenses . . . . . . $ 633,929 $ 1,270,326 $ 2,374,577
Other income
(expense), net . . . $ (37,762) $ (6,720) $ (44,416)
Net loss . . . . . . $ (671,691) $(1,277,046) $(2,418,993)
Net loss per share . $ (0.17) $ (0.38) $ (0.61)
Weighted average
number of
common shares
outstanding . . . . . 3,867,924 3,396,226 3,945,783
BALANCE SHEET DATA:
Total assets . . . . $ -0- $ -0- $ 344,191
Notes and accounts
payable and accrued
interest to related
party . . . . . . . . $ 367,522 $ 216,720 $ -0-
License fees payable $ 928,000 $ 927,000 $ 600,000
Stockholders' deficit $(1,537,633) $(1,143,720) $ (368,264)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
STATEMENT OF 1996 1995
OPERATIONS DATA: ---- ----
Research and
development . . . . . $ 124,093 $ 463,000
General and
administrative
expenses . . . . . . $ 346,229 $ 138,429
Total operating
expenses . . . . . . $ 470,322 $ 601,429
Other income
(expense), net . . . $ 66 $ (28,322)
Net loss . . . . . . $ (470,256) $ (629,751)
Net loss per share . $ (0.10) $ (0.17)
Weighted average
number of
common shares
outstanding . . . . . 4,573,199 3,773,585
BALANCE SHEET DATA:
Total assets . . . . $ 344,191 $ -0-
Notes and accounts
payable and accrued
interest to related
party . . . . . . . . $ -0- $ 335,582
License fees payable $ 600,000 $ 943,000
Stockholders' deficit $ (368,264) $(1,495,693)
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UNAUDITED PRO FORMA FINANCIAL STATEMENTS
OF INITIAL ACQUISITION CORP. AND HOLLIS-EDEN
The following Unaudited Pro Forma Combined Balance Sheet is
based upon the financial statements of Initial Acquisition Corp.
and Hollis-Eden, combined and adjusted to give effect to the
Merger. The Merger Agreement provides that all of the
outstanding shares of Hollis-Eden Common Stock will be converted
into shares of IAC (Surviving Corporation) Common Stock. The
Unaudited Pro Forma Combined Balance Sheet reflects a
recapitalization of Hollis-Eden for the net assets of IAC
consisting primarily of cash. The Unaudited Pro Forma Combined
Balance Sheet was derived by adjusting the unaudited historical
financial statements of IAC and Hollis-Eden for certain
transactions pursuant to the Merger described in the accompanying
notes to the Unaudited Pro Forma Combined Balance Sheet.
The unaudited pro forma combined balance sheet at
September 30, 1996 gives effect to the Merger as if it had
occurred on such date. The Unaudited Pro Forma Combined Balance
Sheet is derived from unaudited historical financial statements
of Hollis-Eden and unaudited historical financial statements of
IAC and should be read in conjunction with Hollis-Eden's and
IAC's unaudited historical financial statements included
elsewhere in this Joint Proxy Statement/Prospectus. The Pro
Forma Combined Balance Sheet as of September 30, 1996 has been
prepared on the same basis as the historical information derived
from the audited financial statements included elsewhere in the
Joint Proxy Statement/Prospectus. In the opinion of Hollis-
Eden's and IAC's management, the Unaudited Combined Pro Forma
Balance Sheet of Hollis-Eden and IAC referred to above include
all adjustments, consisting only of normal recurring accruals,
necessary for fair presentation of the financial position as of
September 30, 1996.
As the Merger is recorded as a recapitalization of Hollis-
Eden for the net assets of IAC, a pro forma statement of
operations is not deemed to be meaningful and, as such, has not
been included in this Joint Proxy Statement/ Prospectus.
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<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1996
INITIAL
ACQUISITION
HOLLIS-EDEN CORP.
----------------------------------
ASSETS
------
CURRENT ASSETS
Cash . . . . . . . . . . . . $ 227,657 $ 202,165
Investment in U.S.
Treasury Bills . . . . . . 0 6,469,000
Other receivables . . . . . . 90,300 0
Prepaid expenses . . . . . . 19,572 0
----------- ----------
Total current assets . . . 337,529 6,671,165
Net property and equipment . 6,662 0
Deferred acquisition costs . 0 21,099
----------- ----------
Total assets . . . . . . . 344,191 6,692,264
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accrued expenses . . . . . . 97,119 78,311
Account payable . . . . . . . 15,336 0
Income taxes payable . . . . 0 84,150
License fees payable . . . . 600,000 0
----------- ----------
Total liabilities . . . . 712,455 162,461
----------- ----------
Common Stock, subject to possible
redemption . . . . . . . . 0 969,703
----------- ----------
STOCKHOLDERS EQUITY (DEFICIT)
Preferred stock . . . . . . . 0 0
Common stock . . . . . . . . 491 7,434
Additional paid-in capital . 2,050,238 5,436,065
Earnings (deficit) accumulated
during development stage . . (2,418,993) 116,601
----------- ----------
Total stockholders' equity
(deficit) . . . . . . . . (368,264) 5,560,100
----------- ----------
Total liabilities and
stockholders' equity . . . $ 344,191 $6,692,264
=========== ==========
PRO FORMA
ADJUSTMENTS
DR. CR.
-------------------------------------
ASSETS
------
CURRENT ASSETS
Cash . . . . . . . . . . . . . . $6,469,000(2) $1,973,500(3)(4)(8)
Investment in U.S. Treasury Bills 6,469,000(2)
Other receivables . . . . . . . .
Prepaid expenses . . . . . . . .
Total current assets . . . . .
Net property and equipment . . .
Deferred acquisition costs . . . 21,099(3)
Total assets . . . . . . . . .
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accrued expenses . . . . . . . .
Account payable . . . . . . . . .
Income taxes payable . . . . . .
License fees payable . . . . . . 323,500(4)
Total liabilities . . . . . .
Common Stock, subject to possible
redemption . . . . . . . . . . 969,703(5)
STOCKHOLDERS EQUITY (DEFICIT)
Preferred stock . . . . . . . . .
Common stock . . . . . . . . . . 491(6) 49,110(6)
900(5)
500(9)
Additional paid-in capital . . . 171,099(3) 968,803(5)
48,619(6) 116,601(7)
3,970,650(9) 500,000(10)
3,970,150(9)
Earnings (deficit) accumulated
during development stage . . . . 1,500,000(8)
500,000(10)
116,601(7)
Total stockholders' equity
(deficit) . . . . . . . . . . 6,307,460 5,606,064
Total liabilities and
stockholders' equity . . . . . $14,069,663 $14,069,663
=========== ===========
PRO FORMA PRO FORMA
ASSUMING ASSUMING
NO MAXIMUM
REDEMPTION(1) REDEMPTION(1)
-------------------------------
ASSETS
------
CURRENT ASSETS
Cash . . . . . . . . . . . . . . $4,925,322 $3,955,619
Investment in U.S. Treasury Bills 0 0
Other receivables . . . . . . . . 90,300 90,300
Prepaid expenses . . . . . . . . 19,572 19,572
---------- ----------
Total current assets . . . . . 5,035,194 4,065,491
Net property and equipment . . . 6,662 6,662
Deferred acquisition costs . . . 0 0
---------- ----------
Total assets . . . . . . . . . 5,041,856 4,072,153
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accrued expenses . . . . . . . . 175,430 175,430
Account payable . . . . . . . . . 15,336 15,336
Income taxes payable . . . . . . 84,150 84,150
License fees payable . . . . . . 276,500 276,500
---------- ----------
Total liabilities . . . . . . 551,416 551,416
---------- ----------
Common Stock, subject to possible
redemption . . . . . . . . . . 0 0
---------- ----------
STOCKHOLDERS EQUITY (DEFICIT)
Preferred stock . . . . . . . . . 0 0
Common stock . . . . . . . . . . 57,944 57,044
Additional paid-in capital . . . 8,851,489 7,882,686
0
Earnings (deficit) accumulated
during development stage . . . . (4,418,993) (4,418,993)
---------- ----------
Total stockholders' equity
(deficit) . . . . . . . . . . 4,490,440 3,520,737
---------- ----------
Total liabilities and
stockholders' equity . . . . . $5,041,856 $4,072,153
========== ==========
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<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
1. The unaudited pro forma combined balance sheet is
presented, in the first instance, assuming that no IAC
Stockholder exercises Redemption Rights (see "GENERAL INFORMATION
-- IAC Special Meeting; Redemption Rights" and "-- Appraisal
Rights") and, in the second instance, assuming that holders of
89,940 shares of IAC Common Stock exercise redemption rights
(representing the maximum number of shares with respect to which
redemption can be effected pursuant to the IAC Prospectus).
Pursuant to the IAC Prospectus, IAC may not consummate a Business
Combination if holders with respect to 15% or more in interest of
the IAC Common Stock vote against the Business Combination and
request redemption of such shares.
There were 4,911,004 shares of Hollis-Eden Common Stock
outstanding as of September 30, 1996. On a pro forma basis after
the Merger, assuming no redemption of shares of IAC Common Stock,
5,794,254 shares of Surviving Corporation Common Stock will be
outstanding, which assumes 833,250 of previously outstanding
shares, 4,911,004 shares issued in exchange for outstanding
shares of Hollis-Eden, and an aggregate of 50,000 shares to be
issued to Gruntal & Co. and Reid & Priest LLP. Where the maximum
redemption of 89,940 shares of IAC Common Stock as permitted by
the IAC Prospectus is assumed, 5,704,314 shares of IAC Common
Stock would be outstanding as of September 30, 1996, on a pro
forma basis.
2. Represents relief of restricted cash from the trust as a
result of the Merger.
3. Represents payment of $150,000 and the application of
deferred acquisition costs for total estimated expenses of
$171,099 to be incurred by IAC and Hollis-Eden related to the
Merger.
4. Represents the reduction of license fees payable due to
cash acquired in connection with the Merger. Pursuant to the
license agreement, five percent of all net proceeds, as defined
in the agreement, becomes immediately due and payable.
5. Represents the reclassification of IAC Common Stock
subject to possible redemption on the basis of the Unaudited Pro
Forma Combined Balance Sheet assuming that no IAC Stockholder
will exercise their Redemption Rights.
6. Represents the recapitalization of Stockholders' Equity
based upon the issuance of IAC Common Stock in exchange for
Hollis-Eden Common Stock.
7. Represents the reclassification of IAC Retained Earnings
prior to the Merger to Additional Paid-In Capital.
8. Represents payment of research and development fees which
are required to be paid upon the successful closure of the Merger
pursuant to the research and development agreement which become
due and payable upon closure.
9. Represents a charge for (i) warrants to purchase an
aggregate of 452,830 shares of the surviving company's common
stock at an exercise price of $2.48 to be issued upon the
successful closure of the merger pursuant to an agreement and
(ii) 50,000 shares of the surviving company's common stock to be
issued to Gruntal & Co. and Reid & Priest LLP upon the successful
closure of the Merger. An estimate of $10.13 per share was used
to calculate the charges which approximates fair market value.
These charges constitute transaction fees and accordingly have
been recorded as a charge to additional paid in capital.
10. Represents a charge for IAC warrants to be issued to a
certain officer to purchase an aggregate of 50,000 shares of the
surviving company's common stock at an exercise price of $0.10
per share to be issued upon the successful closure of the Merger.
An estimate of $10.10 per share was used to calculate the charges
which approximates fair market value.
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<PAGE>
Non-recurring Charges
---------------------
The pro forma adjustments outlined in numbers 8, 9 and 10
(discussed above) represent non-recurring charges and as such
would not be presented in a pro forma statement of operations.
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<PAGE>
HOLLIS-EDEN'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the
following contains forward-looking statements that involve risks
and uncertainties. Hollis-Eden's (and consequently, the
Surviving Corporation's) actual results could differ materially
from those discussed here. Factors that could cause or contribute
to such differences, include, but are not limited to, those
discussed in "Hollis-Eden's Business" and "Risk Factors," as well
as those discussed elsewhere in this Joint Proxy
Statement/Prospectus and any document incorporated herein by
reference. Also see Hollis-Eden's Financial Statements included
herein.
RESULTS OF OPERATIONS
Hollis-Eden is a development stage pharmaceutical company
and has not generated any revenues for the period from August 15,
1994 (inception) through September 30, 1996. Hollis-Eden has
devoted substantially all its resources to the payment of
licensing fees (including research and development fees) and
expenses related to the startup of its business. From inception
until December 31, 1994, Hollis-Eden incurred expenses of
$1,166,762 in research and development fees, $103,564 in general
and administrative expenses and $6,720 in interest resulting in a
loss of $1,277,046 for the period from inception (August 15,
1994) to December 31, 1994. For the year ended December 31,
1995, Hollis-Eden incurred $463,000 in research and development
fees, $170,929 in general and administrative expenses and $37,762
in interest expense, resulting in a loss of $671,691. For the
nine months ended September 30, 1996, Hollis-Eden incurred
expenses of $124,093 in research and development fees, $346,229
in general and administrative expenses and received $66 in net
interest income, resulting in a loss of $470,256.
Hollis-Eden has been unprofitable since inception and
expects to incur substantial additional operating losses for at
least the next few years as it increases expenditures on research
and development and begins to allocate significant and increasing
resources to its clinical testing and other activities. In
addition, during the next few years, Hollis-Eden will have to
meet the substantial new challenge of developing the capability
to market products. Accordingly, Hollis-Eden's activities to date
are not as broad in depth or scope as the activities it must
undertake in the future, and Hollis-Eden's historical operations
and financial information included in this Joint Proxy
Statement/Prospectus are not indicative of Hollis-Eden's future
operating results or financial condition or its ability to
operate profitably as a commercial enterprise when and if it
succeeds in bringing any product to market.
LIQUIDITY AND CAPITAL RESOURCES
Hollis-Eden has financed its operations since inception
through the sale of shares of Hollis-Eden Common Stock and with
loans from Hollis-Eden's founder, Richard B. Hollis. At December
31, 1994, amounts borrowed from Mr. Hollis totaled $210,000 and
were evidenced by an unsecured promissory note bearing interest
at the rate of 15% per annum. During the year ended December 31,
1995, Mr. Hollis advanced Hollis-Eden an additional $40,000 for
Hollis-Eden's license fee obligations and also loaned $73,040 to
pay business expenses of Hollis-Eden. As a result of these
transactions, Hollis-Eden, at December 31, 1995, owed Mr. Hollis
$323,040 plus accrued interest of $44,482, or a total of $367,522
(the "Hollis Debt"). In January 1996, Hollis-Eden borrowed
$367,522 from a group of private investors, including the brother
of Mr. Hollis (the "Bridge Lenders"). Hollis-Eden repaid the
Hollis Debt from these proceeds.
During the year ended December 31, 1995, Hollis-Eden
received cash proceeds of $250,000 from the sale of its
securities. In May 1996, Hollis-Eden completed a private
placement of shares of Hollis-Eden Common Stock, from which it
received aggregate gross proceeds of $1,305,011. Concurrent with
the closing of such private placement, the notes held by the
Bridge Lenders were converted into 164,962 shares of Hollis-Eden
Common Stock.
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<PAGE>
Under agreements with Dr. Patrick T. Prendergast, Colthurst
Limited and Edenland, Hollis-Eden is obligated to pay certain
minimum license fees to maintain its rights to the Products.
Under these licensing agreements, Hollis-Eden is obligated to pay
$600,000 by April 28, 1998. The $600,000 is a minimum fee
payable by way of a five percent payment of the first $12,000,000
of net proceeds or funds or investments required by or expended
on behalf of Hollis-Eden by way of equity sale, partnership
agreement, loan, or other means. Following payment of the
$600,000 fee, Hollis-Eden is obligated to pay the licensors an
aggregate of two and one-half percent of all such proceeds raised
through April 28, 1998. An annual renewal license fee of
$500,000 is due when one of the following events occur: Hollis-
Eden raises a predetermined amount of capital occurring after May
18, 1994; Hollis-Eden sublicenses the technology received under
the Colthurst license agreement; Hollis-Eden generates sales;
Hollis-Eden licenses or funds new technologies not covered under
the existing agreements; or a predetermined date in the future.
If the Merger is effected, an additional license fee of $10,000
per month is payable beginning November 5, 1996 through the
earlier of the Effective Time of the Merger or May 5, 1997.
Under an existing Research, Development, and Option
Agreement with Edenland and Dr. Patrick T. Prendergast, the
agreement commits Hollis-Eden to pay for the development costs
related to the anti-serum up to the amount of $3,000,000 to be
paid from funds realized by way of equity sale, sublicense,
partnership agreements, loans, private placements, and public
offerings. An amount of $1,500,000 is due upon successful
closure of the Merger and the balance is due from future funding
events by allocating a percentage of the funds raised to the
Research, Development, and Option agreement until the $3,000,000
has been paid in full. Under the existing agreement, Hollis-Eden
was obligated to fund $2,000,000 per year for research. This
obligation will not commence until Hollis-Eden raises an
aggregate of $10 million in capital occurring after May 18, 1994.
Payments made towards the $3,000,000 anti-serum development costs
are deductible from the amount due for the $2,000,000 per year of
research.
The Surviving Corporation intends to utilize the cash to be
infused into the Surviving Corporation as a result of the Merger
to meet its licensing obligations, pay accrued expenses, fund its
research and product development activities, and for working
capital and general corporate purposes. The amount and timing of
expenditures for each purpose will depend on a number of factors,
including progress of the Surviving Corporation's research and
development programs, the number and breadth of these programs
and the progress of the development and commercialization efforts
of the Surviving Corporation, the costs involved in preparing,
filing, prosecuting, maintaining, and enforcing patent claims and
other proprietary rights, progress in the regulatory process, and
other factors. Hollis-Eden (and consequently, the Surviving
Corporation) believes that the cash to be infused into the
Surviving Corporation as a result of the Merger, together with
interest thereon, will be sufficient to fund the Surviving
Corporation's capital requirements at least through 1997. See
"HOLLIS-EDEN'S BUSINESS."
On February 5, 1997, as part of an employment agreement,
Hollis-Eden granted a non-statutory stock option to its newly
elected President, Terren S. Peizer, to purchase 2,400,000 shares
of Hollis-Eden Common Stock at a price of $5.00 per share. This
stock option vests ratably over a six-year period and Hollis-Eden
(or the Surviving Corporation following the Merger) will record
approximately $2 million per year for six years as deferred
compensation expense. (See "Additional Subsequent Events
(unaudited) page F-22).
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<PAGE>
IAC'S MANAGEMENT S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In reviewing the following discussion, reference is made to
IAC's financial statements included elsewhere herein.
IAC is a development stage company, and to date its efforts
have been limited to organizational activities, consummating its
IPO and seeking a Business Combination. IAC has not yet
consummated a Business Combination. Accordingly, IAC has not,
and will not, achieve any operating revenues (other than
investment income) until, at the earliest, the consummation of a
Business Combination.
IAC has used, and will continue to use the net proceeds from
the IPO, together with the income and interest earned thereon,
principally in connection with effecting a Business Combination,
including selecting and evaluating potential Target Businesses
and structuring and consummating a Business Combination
(including possible payment of finder's fees or other
compensation to persons or entities which provide assistance or
services to IAC). IAC does not have discretionary access to the
income on the monies in the escrow account and IAC Stockholders
will not receive any distribution of the income (except in
connection with a liquidation of IAC) or have any ability to
direct the use or distribution of such income. Thus, such income
will cause the amount in escrow to increase. IAC cannot use the
Escrowed Funds to pay the costs of evaluating potential Business
Combinations and has used the proceeds from the sale of the Class
B Warrants in the IPO to cover all of its expenses to date, to
pay the Escrowed Funds Escrow Agent and to pay the costs of
evaluating potential Business Combinations, including investment
banking fees and the costs of business, legal and accounting due
diligence on prospective Target Businesses. In addition, such
funds will be used for the general and administrative expenses of
IAC, including legal and accounting fees and administrative
support expenses in connection with IAC's reporting obligations
to the Commission. IAC does not anticipate such fees and
administrative expenses will exceed $100,000 per year.
IAC also has retained Gruntal, for the 18 month period
commencing as of May 15, 1995 (the "Engagement Period"), to aid
in structuring and negotiating Business Combinations. Gruntal
has been and will continue to be paid an engagement fee of $3,500
per month during the Engagement Period, with maximum compensation
payable thereunder to Gruntal limited to $63,000 for such 18-
month period, or $84,000 if certain extension criteria are
satisfied and the agreement with Gruntal is extended for six
additional months. Gruntal was issued 15,000 shares of IAC
Common Stock at a price of $.10 per share as additional
compensation for its agreement to act as IAC's investment banker.
As a result of the IPO, IAC has sufficient available funds,
assuming that a Business Combination is not consummated, to
operate until at least May 15, 1997. To the extent that shares
of IAC Common Stock are used as consideration to effect a
Business Combination, the balance of the net proceeds of the IPO
not theretofore expended will be used to finance the operations
of the Target Business. IAC has not incurred any debt in
connection with its organizational activities.
In the event that IAC does not effect a Business Combination
by May 15, 1997, IAC will submit for stockholder consideration a
proposal to liquidate IAC and distribute to the IAC Non-Affiliate
Stockholders the Escrowed Funds. Thereafter, all remaining
assets available for distribution will be distributed to all
holders of IAC's Common Stock after payment of liabilities and
after appropriate provision has been made for the payment of
liquidation distributions upon each class of stock, if any,
having preference over the IAC Common Stock. To the extent that
a Business Combination is not effected in the time allowed and
IAC's Stockholders determine not to liquidate IAC, IAC believes
that income from the escrow account may be sufficient to defray
continuing expenses for a period of several additional years
until IAC consummates a Business Combination. Since the Initial
IAC Stockholders have agreed to waive their respective rights to
participate in a liquidation distribution occurring prior to the
first Business Combination, all of the assets of IAC, including
all Escrowed Funds, which may be distributed upon such
liquidation would be distributed to IAC Non-Affiliate
Stockholders.
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<PAGE>
HOLLIS-EDEN'S BUSINESS
OVERVIEW
Hollis-Eden is a development stage pharmaceutical company
engaged in developing therapeutic and/or preventative
pharmaceutical agents for the treatment of a number of targeted
disease states caused by viral, bacterial, parasitic or fungal
infections, including HIV and AIDS. Hollis-Eden believes that
certain of its products may provide the first long-term treatment
for HIV without the development of viral strain resistance to the
drugs' effectiveness, significant toxicity or severe side
effects.
Hollis-Eden's development efforts are centered around four
proprietary Products developed by and licensed from Patrick T.
Prendergast, Ph.D., and are based upon his research in the area
of viral-caused disorders and therapies. Hollis-Eden is the
beneficiary of more than 10 years of extensive research and
development with respect to the Products undertaken by Dr.
Prendergast and his affiliates prior to the license of the
Products to Hollis-Eden. Hollis-Eden is currently pursuing
approval of two of the Products, INACTIVIN and REVERSIONEX, with
the FDA. Each of these drugs has a different mechanism of action
and Hollis-Eden believes that each may be effectively used alone.
Hollis-Eden believes that INACTIVIN and REVERSIONEX may be
combined to increase their effectiveness to inhibit HIV
replication, strengthen and preserve the immune system, and
reduce the viral load in the infected patients.
Hollis-Eden believes that certain of its Products under
development may produce more effective treatments for HIV and
AIDS than drugs currently being used. The principal drugs
currently used to treat HIV and AIDS (e.g., AZT, ddl, ddc, d4T
and 3TC) are nucleoside analog reverse transcriptase drugs.
Additionally, newer drugs being developed and recently being
introduced are protease inhibitors (e.g., Invirase (saquinavir),
Crixivan (indinavir sulfate) and Novir (ritonavir)). Hollis-Eden
believes that the effectiveness of these types of drugs may prove
to be short-lived since HIV rapidly mutates and develops
resistance to the effectiveness of drugs. Development of drug
resistance occurs when the virus can mutate its coat protein or
enzyme structure so that its interaction with the drug is
altered. Because INACTIVIN's antiviral effectiveness is not
reliant on a direct structural interaction with the virus itself,
Hollis-Eden believes that INACTIVIN will inhibit replication of
the virus regardless of its mutation rates. By decreasing the
syntheses of viral raw materials in the cell, INACTIVIN
effectively slows and eventually stops the virus production line.
Hollis-Eden further expects that INACTIVIN will decrease the
energy supply for viral synthesis regardless of viral type or
strain. Another disadvantage of currently used drugs is that
nucleoside analogs and protease inhibitors are toxic and may
cause severe side effects. INACTIVIN and REVERSIONEX are not
nucleoside analog reverse transcriptase or protease inhibitors,
are derived from naturally occurring substances, and have been
shown in preliminary tests to date to be well-tolerated by humans
with minimal side effects. Furthermore, Hollis-Eden believes
that INACTIVIN and REVERSIONEX will have a longer duration of
effectiveness, be more affordable and require smaller doses and
fewer pills to be taken than the drugs and "cocktails" currently
being used.
Hollis-Eden believes that its Products may also be effective
in the treatment of (i) other viral-caused disorders such as
hepatitis-C, (ii) auto-immune diseases such as multiple
sclerosis, psoriasis and rheumatoid arthritis and (iii) bacterial
and parasitic diseases such as tuberculosis, malaria,
toxoplasmosis and leishmania.
When and if INACTIVIN or any of the other Products have been
approved for commercial sale, Hollis-Eden plans to market them in
the United States. For international markets, Hollis-Eden intends
to develop strategic alliances with major pharmaceutical
companies that have foreign regulatory expertise and established
distribution channels, and will also consider corporate strategic
partnerships and co-marketing agreements. No assurances can be
given that any of the Products will be approved for commercial
sale or that any of the foregoing proposed arrangements will be
implemented or prove to be successful.
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<PAGE>
THE PRODUCTS
All of Hollis-Eden's product development efforts are based
upon technologies and therapeutic approaches that have not been
widely used in humans for therapeutic purposes. There is,
therefore, significant risk that these approaches will not prove
to be successful. While Hollis-Eden believes that the positive
results obtained to date in preclinical and limited clinical
human studies support further research and development, those
positive results are not necessarily indicative of results that
will be obtained in further human clinical testing.
INACTIVIN: ANTI-VIRAL FORMULATION OF DEHYDROEPIANDROSTERONE
(DHEA)
Background. In 1987, Colthurst Limited ("Colthurst")
originally licensed DHEA to Elan Pharmaceutical Ltd. ("Elan").
Elan obtained a clinical Investigational New Drug ("IND") with
the FDA and conducted a Phase I escalation study. The results of
this study showed no toxicity and found that patients tolerated
the drug with no side effects. However, Elan chose to use its own
formulation of DHEA instead of the pharmaceutical preparation
advanced by Dr. Prendergast. Subsequently, this Phase I study did
not demonstrate clinical efficacy. In 1992, Colthurst and Elan
ended their five-year agreement. Colthurst continued work on
refining DHEA's pharmaceutical formulation and relicensed the
drug in 1994 to Hollis-Eden. Dr. Prendergast discovered that his
formulation of DHEA (INACTIVIN) was critical to the drug's
ability to penetrate into the cytoplasm of the cell to show its
antiviral effectiveness. As described more fully below, the human
clinical pilot study conducted in 1995 in Houston, Texas
demonstrated that INACTIVIN monotherapy clinically and
statistically significantly reduces viral load in plasma of HIV-1
infected patients with CD4 counts between 50 and 300 cells/mm.
Research Studies. Although the precise functions of DHEA
are not known, its effects on certain enzymes have been
established. Due to these characteristics, Dr. Prendergast began
researching DHEA specifically as an anti-viral treatment for HIV
infection in 1985-86 when he documented that those succumbing to
the infection most rapidly were the population groups with the
lowest endogenous levels of DHEA. From 1986 on, his work focused
exclusively on DHEA and HIV. The first approach was to ascertain
if DHEA could inhibit HIV virus production in T-cell and
macrophage culture. This was indeed the result in certain
laboratory tests conducted by Dr. Michael McGrath at San
Francisco General Hospital in 1987 at the request of Dr.
Prendergast. Dr. McGrath had unsuccessfully tried AZT and other
drugs to inhibit HIV in macrophages. DHEA was the first drug he
had used that was able to inhibit HIV in both cell lines
(macrophage and T-cell). Another important finding was that there
was no toxicity in tissue culture when using DHEA. After
demonstrating in vitro inhibition of HIV in these tests at San
Francisco General Hospital, Dr. Prendergast confirmed the results
by having the experiments repeated at Veterans Hospital in
Atlanta, Georgia in 1986 and 1987 by Dr. Raymond Schinazi. These
tests produced similar results.
Dr. Prendergast postulated that DHEA levels in the human
body should decrease as AIDS patients progressed to chronic
disease and death. A study undertaken by Dr. Mark A. Jacobson at
San Francisco General Hospital concluded that the decline of DHEA
was a better indicator of disease progression than the decline of
T4 cells, previously recognized as an indicator. This study
demonstrated that DHEA-S was strikingly higher in serum from high
risk HIV-sero-negative men as compared to age-matched healthy
blood donors. It also demonstrated that DHEA levels decrease
below normal values immediately upon sero-conversion as HIV
positive patients progress to AIDS. The conclusion was that DHEA
and/or DHEA-S may protect individuals from infection with HIV in
vivo. This was subsequently demonstrated by another retrospective
study carried out by a Dr. Jan W. Mulder in Holland and published
in June 1991.
In June 1993, an additional critical publication evidencing
that DHEA levels were important to enable HIV patients to
maintain a competent immune system was published by Dr. Ted
Wisniewski, who conducted studies in New Orleans in 1991. This
report indicates that in all 67 HIV positive patients tested
there was a positive relationship between the immune status and
DHEA levels.
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Dr. Prendergast also sought approval from the British
Hartford Hospital/Pasteur Institute in Paris, France, for small
studies of HIV positive patents to be conducted there in
1987-1988. Dr. Prendergast brought 12 patients from San Francisco
to Paris to participate in the study because these AIDS patients
were better documented with extensive blood analysis readings and
clinician reports than any similar group of European HIV patients
at that time. The patients treated in Paris in collaboration with
Dr. Wilson ranged in disease progression from full-blown AIDS
with Kaposi Sarcoma lesions to asymptomatic patients whose only
evidence of HIV was inversion of their T4/T8 ratio. The initial
finding was that no toxicity occurred, weight gain was recorded
in all patients and, in one subject, p24 levels (a marker of HIV
viral presence) declined.
DHEA's anti-retroviral effectiveness was shown both at San
Francisco General Hospital and at Veterans Hospital in Atlanta in
1991 through experiments which demonstrated in tissue culture
that DHEA inhibited HIV replication. Although DHEA was effective
in these experiments as an anti-viral agent, the sulphated form,
DHEA-S, was not effective. The important aspect of DHEA's direct
anti-viral action was that it did not produce its effect by
interference with the viral enzyme reverse transcriptase or the
protease inhibitor as do other anti-viral drugs currently used.
Due to this fact, Dr. Prendergast believes that HIV will not
develop resistance to DHEA's effectiveness.
In November 1993, in an AIDS research publication, detailed
results of findings by Drs. Yang, Schwartz and Henderson were
reported demonstrating that DHEA could prevent latent
reactivation of HIV infected cells and that no other drugs or
therapy available can provide this protection against this
characteristic of HIV. This study suggests that DHEA therapy for
HIV infected patients may prevent secondary infection from
activating additional replication of the HIV virus. The study
further suggests that DHEA may retard the increase in HIV viral
loads.
In a clinical study of 12 patients at Houston Immuno
Institute in Texas in 1994 by Dr. Patricia Salvato, the results
of which were presented in July 1994 at the AIDS Conference in
Yokohama, Japan, researchers concluded that the majority of
patients on DHEA adjunct therapy experienced an increase in both
CD4 and CD8 cell counts. The greater than 25% increase in CD4
cell counts over the eight-month study is considered clinically
significant. Certain research findings by Dr. Jay Levy of the
University of San Francisco, and other researchers, have
indicated that increasing CD8 cell counts early in the disease
progression is directly linked to long term survival. The Houston
researchers concluded that DHEA warranted a randomized clinical
trial.
From August through December 1995, patients were enrolled
for treatment and monitored for up to 30 days in a human clinical
pilot study under a Physician IND conducted in Houston, Texas by
Dr. Patricia Salvato. The pilot study sought to determine the
safety and tolerance of INACTIVIN, which was orally administered
to persons with advanced HIV/AIDS as a monotherapy. The study's
objective was to also determine the effect of INACTIVIN on
reducing HIV viral load in patients.
The study included 18 males and 2 females whose CD4 cell
count ranged from 50 to 300. At the study's initiation, 17
subjects reported no history of prior therapy with other anti-
viral drugs. Over a ten-week period of time, levels of DHEA-S,
DHEA, HIV and PCR RNA cultures were monitored. Each of the
patients underwent a 30-day washout period for use of anti-virals
before commencing therapy with INACTIVIN. Subjects were randomly
assigned to one of two treatment programs of 300 mg. twice daily
or 600 mg. twice daily. At the end of 30 days, the analysis
revealed significant reductions in viral load in PCR RNA levels.
This trial demonstrated that INACTIVIN monotherapy
clinically and statistically significantly reduces viral load in
plasma of HIV-1 infected patients with CD4 counts between 50 and
300 cells/mm. This small trial also showed that treatment with
INACTIVIN was safe and well tolerated. No adverse events were
reported during the trial.
The study also concluded that the safety profile and
antiretroviral activity of INACTIVIN support continued efforts to
evaluate the drug. The results of the study suggest that
INACTIVIN, due to its mechanism of action, expected lack of viral
resistance and lack of toxicity would have a long-term effect on
viral suppression.
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DHEA and AZT. A currently used HIV therapy, AZT, works by
inhibiting HIV reverse transcriptase, yet also has certain
significant toxic side effects. AZT is useful in HIV therapy at
certain dose inhibition ranges between 0.005 to 0.2 Um. However,
at certain levels within this range, AZT also interferes with
normal DNA functioning of human cells. A DHEA/AZT synergy report
conducted in 1992 by Advanced Biotechnologies, Inc. demonstrated
that, by combining AZT at its minimal toxicity level of .016 Um
with the non-toxic dose of 37 Um DHEA, the same inhibition of the
HIV virus will be achieved as when the higher, more toxic, doses
of AZT are used. This reduces the level of toxic damage that is
inflicted on other enzymes and may allow for much more
comprehensive inhibition of the HIV virus, with subsequent immune
improvement and the maintenance of dormancy.
DHEA Pharmacology. DHEA is a natural hormone secreted by the
adrenal cortex in an amount of approximately 15-30 mg. per day.
The exact role of DHEA under normal conditions has yet to be
fully determined. DHEA is an intermediate substance in the
transformation of cholesterol to estrogen in females and
testosterone in males. The predominant type of DHEA present in
the blood is DHEA-S. DHEA-S is the sulphated form of DHEA; DHEA-S
is not known to have any effect on virus inhibition. Hollis-Eden
believes its anti-viral formulation of DHEA is the active
compound which inhibits HIV replication. When the lymph system
needs active DHEA, DHEA-S in the plasma is converted to DHEA. The
conversion of DHEA-S to DHEA is facilitated by an enzyme in the
cell membrane called DHEA sulfatase. The conversion of DHEA-S to
DHEA is inhibited by stress factors in the organism, such as
viral infection (ACTH (adrenocorticotropic hormone) and
cortisol). This inhibition leads to the increased levels of
DHEA-S which are seen before HIV-negative patients seroconvert to
an HIV-positive status. Increased DHEA-S also leads to a
decreased availability of the essential anti-viral compound,
DHEA, within the cell cytoplasm.
REVERSIONEX: ALPHA-FETOPROTEIN IMMUNOGLOBULIN (AFP)
AFP is a protein synthesized by the liver. During pregnancy,
the function of AFP in the fetus is to suppress the immunological
response of the mother and thereby protect the fetus from
rejection by the maternal immune system.
Research Studies. The observation that initially brought Dr.
Prendergast to consider antibodies to AFP as an anti-viral and
up-regulator of the immune system was AFP's ability to bind to
substrate acid similar to specific HIV coat glycoproteins. This
work was confirmed in 1990 by Professor Agrege Nunez in Paris.
Following this confirmation, Dr. Prendergast tested anti-serum to
human AFP, which showed significant inhibition of HIV in tissue
culture against three standard strains of HIV in T-cell culture
and against HIV in macrophage cells. These results in tissue
culture demonstrated no toxicity.
Subsequently, in 1993, a study of 13 patients was commenced
under the direction of Dr. David Hart in his clinic in Los
Angeles. The patients who were seropositive for HIV were treated
with REVERSIONEX . An average of 25% increase in T4 cell number
over the initial 120-day period was found. At 11 months, all 13
patients were at or above their baseline T4 levels. In addition
to the in vitro results, the in vivo data demonstrated that when
AFP-IgG was introduced into the blood stream of HIV patients at
differing stages of infection and immunosuppression, the
anti-serum bound to the HIV infected cells and resulted in their
removal from circulation. Such removal lowered the viral load of
the HIV virus and thereby allowed the patient's immune system to
improve.
Minimal Side Effects. General adverse reactions to AFP-IgG
are minimal and include the following relatively minor side
effects: flushing of the face, feelings of tightness in the
chest, chills, fever, dizziness, nausea, diaphoresis and
hypotension. The three clinical studies (conducted by Dr. David
Hart in 1995, Dr. Nobuko Ishii in the early 1980's and Dr.
Stanley Orders in 1986) involving the administration of AFP-IgG
have indicated the lack of any overt toxicity with these
preparations.
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PROHIVITAC HIV VACCINE
The data generated in the development of REVERSIONEX created
for Dr. Prendergast the opportunity for the development of a
vaccine candidate for HIV based upon the same logic. If certain
peptides from the HIV virus have already been presented to the
patient's immune system as a vaccine in such a manner that it
generates an immune recognition of its foreign nature, then, upon
infection the HIV virus will be met with an enhanced neutralizing
antibody response. The antibody response may prevent HIV
tolerance from being established in the thymus or lymph system.
After infection, HIV must replicate rapidly and gain entry
to the thymus and lymph system where it can begin to undermine
the immune system by having itself accepted as a self protein by
the immune system. A large number of research publications have
demonstrated that, upon initial infection, HIV is met with a
substantial immune attack and is very rapidly reduced by the
patient's own immune system. However, the viral load is never
reduced to zero levels. Within four weeks after infection, the
virus has gained a substantial hold by infecting the thymus.
After this point the level of antibody production against HIV and
immune attack diminishes with time and disease progression
commences.
Therefore, because the proposed vaccine will not utilize
individual HIV proteins, but selected portions of the AFP-like
molecule that are proprietary to Hollis-Eden, it may allow
concentration of antibodies cross-reactive to HIV to be formed in
the vaccinated patient and prime T and B memory cells, so that a
vaccinated patient who becomes exposed to HIV will mount a more
rapid, complete and extensive immune response, allowing for the
rapid clearance of the virus early in the course of infection and
preventing the virus from taking hold of the host organism.
TOXONOX
Hollis-Eden has an option to license and to further develop
an additional anti-viral pharmaceutical compound for which Dr.
Prendergast was awarded domestic and foreign patents in 1994.
This compound, PP-29, brand name TOXONOX, has preliminarily shown
effectiveness in the treatment of AIDS-related opportunistic
infections such as toxic plasmosis and leishmania. No FDA
application has yet been filed with respect to this Product and
no assurance can be given that Hollis-Eden can or will be able to
license TOXONOX.
FDA OVERVIEW
GENERAL
The manufacturing and marketing of Hollis-Eden's proposed
products and its research and development activities are and will
continue to be subject to regulation by federal, state and local
governmental authorities in the United States and other
countries. In the United States, pharmaceuticals are subject to
rigorous regulation by the FDA's Center for Drug Evaluation and
Research, which reviews and approves marketing of drugs. The
Federal Food, Drug and Cosmetic Act, the regulations promulgated
thereunder, and other federal and state statutes and regulations
govern, among other things, the testing, manufacture, labeling,
storage, record keeping, advertising and promotion of Hollis-
Eden's potential products.
APPROVAL PROCESS
The process of obtaining FDA approval for a new drug may
take several years and generally involves the expenditure of
substantial resources. Hollis-Eden will try to accelerate the
drug approval process because of the priority status of HIV/AIDS
drugs. See "Proposed Accelerated Drug Approval." The steps
required before a new drug can be produced and marketed for human
use include clinical trials and the approval of the New Drug
Application.
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Pre-clinical Testing. The promising compound is subjected to
extensive laboratory and animal testing to determine if the
compound is biologically active and safe.
Investigational New Drug (IND). Before human tests can
start, the drug sponsor must file an IND application with the
FDA, showing how the drug is made and the results of animal
testing. If the FDA does not reject the application within 30
days, IND status allows experimental therapies to be distributed
to humans with life threatening diseases such as AIDS prior to
FDA marketing approval.
Human Testing (Clinical). The human clinical testing program
usually involves three phases which generally are conducted
sequentially, but which, particularly in the case of anti-cancer
and other life saving drugs, may overlap or be combined. Clinical
trials are conducted in accordance with protocols that detail the
objectives of the study, the parameters to be used to monitor
safety and the efficacy criteria to be evaluated. Each protocol
is submitted to the FDA as part of the IND filing. Each clinical
study is conducted under the auspices of an independent
Institutional Review Board ("IRB") for each institution at which
the study will be conducted. The IRB will consider, among other
things, all existing pharmacology and toxicology information on
the product, ethical factors, the risk to human subjects, and the
potential benefits of therapy relative to risk.
In Phase I clinical trials, studies usually are conducted on
healthy volunteers but, in the case of certain terminal illnesses
such as AIDS, are conducted on patients with disease which
usually has failed to respond to other treatment to determine the
maximum tolerated dose, side effects and pharmacokinetics of a
product. Phase II studies are conducted on a small number of
patients having a specific disease to determine initial efficacy
in humans for that specific disease, the most effective doses and
schedules of administration, and possible adverse effects and
safety risks. Phase II/III differs from Phase II in that the
trials involved may include more patients and, at the sole
discretion of the FDA, be considered the pivotal trial or trials
for FDA approval (see below). Phase III normally involves the
pivotal trials of a drug, consisting of wide-scale studies on
patients with the same disease, in order to evaluate the overall
benefits and risks of the drug for the treated disease compared
with other available therapies. At least two such studies
demonstrating safety and efficacy are normally required for FDA
approval. The FDA continually reviews the clinical trial plans
and results and may suggest design changes or may discontinue the
trials at any time if significant safety or other issues arise.
New Drug Application (NDA). Upon completion of Phase III,
the drug sponsor must file an NDA containing all information that
has been gathered. The information must include the chemical
structure of the drug, scientific rationale, purpose, animal and
laboratory studies, results of human tests, formation and
production details, and proposed labeling.
Approval. Once an NDA is approved, the manufacturer is
required to submit reports periodically to the FDA containing
adverse reactions, production, quality control and distribution
records. The FDA may also require post-marketing testing to
support the conclusion of efficacy and safety of the product,
which can involve significant expense. After FDA approval is
obtained for initial indications, further clinical trials may be
necessary to gain approval for the use of the product for
additional indications.
The testing and approval process is likely to require
substantial time and effort, and there can be no assurance that
any FDA approval will be granted on a timely basis, if at all.
The approval process is affected by a number of factors,
primarily the side effects of the drug (safety) and its
therapeutic benefits (efficacy). Additional preclinical or
clinical trials may be required during the FDA review period and
may delay marketing approval. A task force established by the FDA
has recently proposed significant changes in the design, analysis
and reporting of clinical studies conducted under INDs, in
response to the results of a Phase III trial of a drug by another
company in which severe complications and death occurred. The
task force recommended increased requirements for reporting
adverse effects and new, more stringent rules that would require
clinical trial investigators to assume that toxicities reported
by patients are drug-related. If these recommendations are
implemented, the length of time and costs associated with
obtaining market approval by the FDA are likely to be
significantly increased.
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Outside the United States, Hollis-Eden will be subject to
foreign regulatory requirements governing human clinical trials
and marketing approval for its products. The requirements
governing the conduct of clinical trials, product licensing,
pricing and reimbursements vary widely from country to country.
PROPOSED ACCELERATED DRUG APPROVAL
The White House Council on Competitiveness, a committee
established to help foster initiatives to increase the
competitiveness of industry in the United States, has made
certain proposals to improve the nation's drug approval process.
One of the goals of the proposed reforms is to allow patients
with serious and life-threatening diseases to benefit from
earlier access to important new drugs through an "accelerated
drug approval" program. The FDA published proposed procedures for
this program in the Federal Register in April 15, 1992. To be
eligible for this program, the products must treat serious or
life-threatening illnesses and provide meaningful therapeutic
benefits beyond existing treatments. Under this proposal, a
significant new therapy could be approved for marketing at the
earliest possible point at which safety and effectiveness are
reasonably established under existing law. For example, the
approval of a drug could be accelerated by demonstrating a
favorable effect on a well-documented surrogate endpoint to
predict clinical benefit, instead of requiring that the drug
demonstrate actual clinical benefit.
An important and unique element of these proposed
regulations is that approval would be granted only if the sponsor
agrees to conduct additional post-marketing studies to confirm
the product's effectiveness and/or agrees to restrict
distribution of the product. In addition, if the further clinical
trials do not bear out the product's effectiveness or if
restricted distribution is inadequate to assure safe use,
approval of the product would be withdrawn.
FDA STATUS/PROPOSED RESEARCH AND DEVELOPMENT PLAN
Hollis-Eden believes that the 10-year research and
development effort invested in the Products undertaken by Dr.
Prendergast and his affiliated companies has produced an existing
base of data which, in the view of management, may reduce the
time, risk and cost associated with commercializing the Products.
With the FDA's current accelerated drug approval program, Hollis-
Eden believes that the approval process for INACTIVIN and
REVERSIONEX may be accelerated.
INACTIVIN
With the results from two small trials under the Phase I/II
IND with crystalline DHEA in AIDS patients completed in Amsterdam
and San Francisco, both having shown no toxicity, combined with
data generated from the Houston human clinical pilot study, upon
the consummation of the Merger, Hollis-Eden intends to
immediately commence clinical trials at Phase II/III levels,
although it is possible that the FDA may ask for additional Phase
I information.
REVERSIONEX
In December 1993, the initial IND package application was
submitted to the FDA, which requested additional data on
manufacturing of the anti-serum to AFP. The proposed
manufacturing agreement must be clarified to the FDA's
satisfaction to answer those particular questions that relate to
manufacturing processes. Hollis-Eden is currently in negotiations
with potential contract manufacturers and, upon the consummation
of the Merger, Hollis-Eden expects to select its contract
manufacturer in order to complete its IND filing. The planned
route of development will involve securing a manufacturing source
and proceeding with the Phase I study, most likely at a contract
facility.
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PROHIVITAC
If and when Hollis-Eden obtains substantial additional
funding, Hollis-Eden plans to carry out a preliminary vaccine
trial in which selective portions of human AFP molecules will be
administered intra-muscularly to healthy HIV-negative volunteers.
Hollis-Eden believes that this research may demonstrate that
PROHIVITAC therapy may be able to generate an HIV immune reaction
in HIV negative patients without exposing them to any components
of the actual HIV virus and therefore offer a protective vaccine
therapy that is safer and effective against all known strains of
HIV.
MANUFACTURING
Hollis-Eden does not have, and does not intend to establish,
manufacturing facilities to produce its Products. Hollis-Eden
plans to control its initial capital expenditures by using
contract manufacturers to make its Products. Hollis-Eden
believes that there are a sufficient number of high quality FDA-
approved contract manufacturers available, and management has had
discussions with several of them, to fulfill its near-term
production needs for both clinical and commercial use.
The manufacture of Hollis-Eden's Products, whether done by
outside contractors (as planned) or Hollis-Eden, will be subject
to rigorous regulations, including the need to comply with the
FDA's current Good Manufacturing Practice standards. As part of
obtaining FDA approved for each product, each of the
manufacturing facilities must be inspected, approved by and
registered with the FDA. In addition to obtaining FDA approval
of the prospective manufacturer's quality control and
manufacturing procedures, domestic and foreign manufacturing
facilities are subject to periodic inspection by the FDA and/or
foreign regulatory authorities.
PATENTS
Hollis-Eden considers the protection of its Products,
whether owned or licensed, to the exclusion of use by others, to
be vital to its business. While Hollis-Eden intends to focus
primarily on patented or patentable technology, it may also rely
on trade secrets, unpatented property know-how, regulatory
exclusivity, patent extensions and continuing technological
innovation to develop its competitive position. In the United
States and certain foreign countries, the exclusivity period
provided by patents covering pharmaceutical products may be
extended by a portion of the time required to obtain regulatory
approval for a product.
In certain countries, pharmaceuticals are not patentable or
only recently have become patentable, and enforcement of
intellectual property rights in many countries has been limited
or non-existent. Future enforcement of patents and proprietary
rights in many countries can be expected to be problematic or
unpredictable. There can be no assurance that any patents issued
or licensed to Hollis-Eden will provide it with competitive
advantages or will not be challenged by others. Furthermore,
there can be no assurance that others will not independently
develop similar products or will not design around patents issued
or licensed to Hollis-Eden.
Patent applications in the United States are maintained in
secrecy until patents issue. Publication of discoveries in the
scientific or patent literature, if made, tends to lag behind
actual discoveries by several months. Consequently, Hollis-Eden
cannot be certain that its licensor was the first to invest
certain technology or compounds covered by pending patent
applications or issued patents or that it was the first to file
patent applications for such inventions. In addition, the patent
positions of pharmaceutical firms, including those of Hollis-
Eden, are generally uncertain, partly because they involve
complex legal and factual questions.
In addition to the considerations discussed above, companies
that obtain patents claiming products, uses or processes that are
necessary for or useful to the development of Hollis-Eden's
products could bring legal actions against Hollis-Eden claiming
infringement. Patent litigation is typically costly and time-
consuming, and if such an action were brought against Hollis-Eden
it could result in significant cost and diversion of management
time. Hollis-Eden may be required to obtain licenses to other
patents or proprietary rights and there can be no assurance that
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licenses would be made available on terms acceptable to Hollis-
Eden. If Hollis-Eden does not obtain such licenses, it could
encounter delays in product market introductions while it
attempts to license technology designed around such patents or
could find that the development, manufacture or sale of products
requiring such licenses is foreclosed.
Further, there can be no assurance that patents that are
issued will not be challenged, invalidated or infringed upon or
designed around by others, or that the claims contained in such
patents will not infringe the patent claims of others, or provide
Hollis-Eden with significant protection against competitive
products, or otherwise be commercially valuable. There can be no
assurance that Hollis-Eden will not need to acquire licenses
under patents belonging to others for technology potentially
useful or necessary to Hollis-Eden or, if any such licenses are
required, that they will be available on terms acceptable to
Hollis-Eden, if at all. To the extent that Hollis-Eden is unable
to obtain patent protection for its products or technology,
Hollis-Eden's business may be adversely affected by competitors
who develop substantially equivalent technology.
LICENSE AGREEMENTS
Certain provisions of agreements relating to the Products
have been renegotiated and amended from time to time, primarily
to defer cash payments due under the agreements. The amendments
have streamlined Hollis-Eden's commitments and contingencies.
The discussion below reflects the nature of its agreements as in
effect at the current time. Although Hollis-Eden believes the
following summaries to be accurate, such summaries are qualified
in their entirety by reference to their original documents.
DHEA LICENSE AGREEMENT
In May 1994, Hollis-Eden entered into a license agreement,
as amended in August 1995 and October 1996 (the "DHEA License
Agreement"), with Colthurst Limited ("Colthurst") and Patrick T.
Prendergast, Ph.D., pursuant to which Hollis-Eden was granted
exclusive worldwide rights to all present and future patent
rights, know-how and background technology of Colthurst and Dr.
Prendergast relating to the treatment of retroviral infections
for all uses thereunder to develop and commercialize products
based on the licensed rights. Hollis-Eden also has the right to
sublicense any such rights.
Hollis-Eden paid a license fee of $100,000 to Colthurst upon
execution of the agreement and was required to pay an additional
license fee of $250,000, of which Hollis-Eden paid $125,000 to
Colthurst in March 1995. The remainder of such fee becomes due
according to the terms of the DHEA License Agreement. Upon full
payment of such fee, Hollis-Eden will be granted a first
perfected security interest in such patent rights and know-how.
Hollis-Eden issued 37,736 shares of Hollis-Eden Common Stock to
Colthurst and, beginning August 1995, Hollis-Eden agreed to make
monthly payments of $5,000 to the licensors. Hollis-Eden is also
obligated to pay to Colthurst royalties on revenues from products
covered by the licensed rights and on revenues received by
Hollis-Eden in connection with sublicenses granted by Hollis-Eden
to third parties. Hollis-Eden must pay a renewable annual
license fee, which fee is deductible from royalty fees due to
Colthurst during a certain period following renewal of the
license. There can be no assurance that Hollis-Eden will be able
to pay such annual fees in the future, in which event the
termination of the agreement and the licensing of such rights to
a third party would have a material adverse effect on Hollis-
Eden's business.
ANTI-SERUM LICENSE AGREEMENT
In August 1994, Hollis-Eden entered into a license
agreement, as amended in August 1995 (the "Anti-Serum License
Agreement"), with Edenland and Dr. Prendergast pursuant to which
Hollis-Eden was granted exclusive worldwide rights to all present
and future patent rights, know-how and background technology of
Edenland and Dr. Prendergast relating to the AFP anti-
serum/vaccine for all uses thereunder to develop and
commercialize products based on the licensed rights. Hollis-Eden
also has the right to sublicense any such rights.
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Hollis-Eden paid a license fee of $25,000 upon execution of
the agreement and an additional license fee in the aggregate of
$100,000 over a six-month period ending February 28, 1995.
Hollis-Eden issued to Edenland and Dr. Prendergast an aggregate
of 543,396 shares of Hollis-Eden's Common Stock and agreed that
either Dr. Prendergast or his brother, Leo Prendergast, at
Edenland's election, has the right to serve on Hollis-Eden's
Board of Directors for three years. Hollis-Eden is also
obligated to pay Edenland a license fee of $572,000, of which
Hollis-Eden paid $125,000 to Edenland in March 1995. The
remainder of such fee becomes due according to the terms of the
Anti-Serum License Agreement. Upon full payment of such fee,
Hollis-Eden will be granted a first perfected security interest
in such patent rights and know-how. Hollis-Eden issued to
Edenland a warrant to purchase 37,736 shares of Common Stock at
an exercise price of $15.90 per share, 37,736 shares of Common
Stock and registration rights pari passu with certain other
investors of Hollis-Eden. In addition, beginning August 1995,
Hollis-Eden agreed to make monthly payments of $5,000 to the
licensors. Hollis-Eden is obligated to pay to Edenland royalties
on revenues from products covered by the licensed rights and on
revenues received by Hollis-Eden in connection with sublicenses
granted by Hollis-Eden to third parties. Pursuant to the terms
of the Anti-Serum License Agreement, with certain limitations,
Edenland has the option to receive such royalties in the form of
Hollis-Eden Common Stock. Furthermore, as a condition to Hollis-
Eden's commercialization rights to any product for which
regulatory approval is obtained and a certain revenue milestone
is achieved. Hollis-Eden is obligated to pay Edenland a
renewable annual license fee for such product for a period of six
years. Such annual fee, however, is deductible from royalty fees
due to Edenland, including royalty payments due to Edenland in
connection with sublicenses granted by Hollis-Eden, during the
term of the agreement. The anti-serum will cease to be a product
covered by the license agreement if Hollis-Eden has not
contribute a certain amount of funding to the development of the
anti-serum in accordance with the terms and conditions of the
related Research and Development Agreement (described below).
There can be no assurance that Hollis-Eden will be able to pay
such annual fees in the future, in which event the termination of
certain rights and the licensing of such rights to a third party
would have a material adverse effect on Hollis-Eden's business.
DEVELOPMENT AGREEMENT
In August 1994, Hollis-Eden entered into a research,
development and option agreement, as amended in August 1995 and
October 1996 (the "Research and Development Agreement"), with
Edenland and Dr. Prendergast pursuant to which Edenland agreed to
obtain an open IND for the anti-serum from the FDA and to
commence a patient Phase I IND study under the guidelines and
regulations of the FDA. Hollis-Eden is obligated to pay Edenland
the development costs associated with such Phase I study, for
which Hollis-Eden has agreed to commit a certain minimum amount
from its annual research and development budget. After the
payment of such development costs and upon the determination that
the new product will not meet regulatory approval, Hollis-Eden
has the right to terminate its obligation to pay any further
development costs of the anti-serum.
Edenland granted Hollis-Eden the exclusive option to acquire
exclusive worldwide rights to all new products of Edenland
relating to the AFP anti-serum/vaccine and all patent rights,
know-how and background technology from which such new products
were derived, which rights, upon exercise of the option by
Hollis-Eden, are governed by the terms and conditions of the
Anti-Serum License Agreement. The Research and Development
Agreement terminates concurrently with the termination of the
Anti-Serum License Agreement.
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IAC'S BUSINESS
GENERAL
IAC is a "blank check" or "blind pool" company formed on
November 18, 1992 to serve as a vehicle to effect a Business
Combination with a Target Business.
IAC is seeking to acquire a Target Business primarily
located in the United States, but its efforts have not been
limited to a particular industry. In seeking a Target Business,
IAC has considered without limitation, businesses which (i) offer
or provide services or develop, manufacture or distribute goods
in the United States or abroad, including, without limitation, in
the following areas: health care and health products,
educational services, environmental services, consumer related
products and services (including amusement and/or recreational
services), personal care services, voice and data information
processing and transmission and related technology development or
(ii) are engaged in wholesale or retail distribution. IAC will
not acquire a Target Business unless the fair market value of
such business, as determined by IAC based upon standards
generally accepted by the financial community, including
revenues, earnings, cash flow and book value, is at least 80% of
the net assets of IAC at the time of the consummation of a
Business Combination. On November 1, 1996, IAC entered into the
Merger Agreement with Hollis-Eden and Messrs. Zizza and Hollis.
IAC has engaged Gruntal to aid, if requested, in structuring
and negotiating a Business Combination.
On May 23, 1995, IAC consummated its IPO of (i) 600,000
Units and (ii) 255,000 Class B Warrants in consideration for net
proceeds of approximately $6,300,000 (the "Net Proceeds"), after
giving effect to the payment of all underwriting discounts, the
underwriters' non-accountable expense allowance and offering
expenses. Pursuant to the terms of the IPO, $6 million of the
net proceeds, representing an amount equal to the gross proceeds
from the sale of the Units, was placed in escrow with the
Escrowed Funds Escrow Agent, subject to release upon the earlier
of written notification by IAC to the Escrowed Funds Escrow Agent
(i) of IAC's completion of a transaction or series of
transactions in which at least 50% of the gross proceeds from the
IPO are committed to a specific line of business as a result of a
consummation of a Business Combination (including any redemption
payments), or (ii) to distribute the Escrowed Funds, in
connection with a liquidation of IAC, to the holders of IAC
Common Stock purchased as part of the Units sold in the IPO or in
the open market thereafter. The Escrowed Funds have been
invested in United States treasury bills and commercial paper.
COMPETITION
IAC encounters intense competition from other entities
having business objectives similar to those of IAC. Many of
these entities, including venture capital partnerships and
corporations, other blind pool companies, large industrial and
financial institutions, small business investment companies and
wealthy individuals, are well-established and have extensive
experience in connection with identifying and effecting Business
Combinations directly or through affiliates. Many of these
competitors possess greater financial, technical, human and other
resources than IAC and there can be no assurance that IAC will
have the ability to compete successfully. IAC's financial
resources will be limited in comparison to those of many of its
competitors. This inherent competitive limitation may compel IAC
to select certain less attractive Business Combination prospects.
In the event that IAC succeeds in effecting a Business
Combination, IAC will, in all likelihood, become subject to
intense competition from competitors of the Target Business. In
particular, certain industries which experience rapid growth
frequently attract an increasingly larger number of competitors,
including competitors with greater financial, marketing,
technical, human and other resources than the initial competitors
in the industry. The degree of competition characterizing the
industry of any prospective Target Business cannot presently be
ascertained. There can be no assurance that, subsequent to a
consummation of a Business Combination, IAC will have the
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resources to compete in the industry of the Target Business
effectively, especially to the extent that the Target Business is
in a high-growth industry.
EMPLOYEES
IAC, at February 3, 1997, employed only one person, Mr.
Salvatore J. Zizza, IAC's Chairman, President and Treasurer, on a
part-time basis.
PROPERTIES
IAC's principal office is located in New York, New York,
where it occupies the offices of Zizza & Company ("Zizza
Corporation"), a corporation controlled by Mr. Zizza. IAC leases
this space pursuant to an oral agreement. IAC intends to occupy
this space until it effects a Business Combination. IAC pays
Zizza Corporation a monthly payment of $2,500 for rent, office
and secretarial services.
IAC believes that this facility is well maintained and
adequate to meet its needs in the foreseeable future pending the
consummation of a Business Combination.
LEGAL PROCEEDINGS
At this time, IAC is not involved in any pending or
threatened legal proceedings involving it or any of its assets.
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MANAGEMENT OF IAC
DIRECTORS AND EXECUTIVE OFFICER
The current directors and sole executive officer of IAC
are as follows (only Salvatore J. Zizza will be a nominee for
election as a director of the Surviving Corporation; IAC's other
four directors intend to resign as directors of IAC effective as
of the Effective Time of the Merger):
NAME AGE POSITION
---- --- --------
Salvatore J. Zizza . . . . 50 Chairman,
President,
Treasurer and
Director
Sidney Dworkin . . . . . . 76 Director
Herbert Paul . . . . . . . 59 Director
Richard Bready . . . . . . 50 Director
Alan P. Donenfeld . . . . . 40 Director
Salvatore J. Zizza has served as Chairman of the Board,
President, Treasurer and a director of IAC since its inception in
November 1992. Mr. Zizza has also been Chairman of the Board of
Directors of The Lehigh Group Inc. (f/k/a The LVI Group Inc.)
since 1991 and was President and Chief Financial Officer of The
Lehigh Group Inc. from 1985 to 1991. The Lehigh Group Inc., a
New York Stock Exchange listed company, is engaged, through its
subsidiary, in the distribution of electrical products, and from
1985 until 1991 was one of the largest interior construction and
asbestos abatement firms in the United States. Mr. Zizza was
Chief Operating and Chief Financial Officer of NICO, Inc. from
1978 until its acquisition in 1985 by Lehigh Valley Industries,
Inc. (currently The Lehigh Group Inc.). NICO Inc. was an
interior construction firm. Mr. Zizza is a director of The
Gabelli Equity Trust, The Gabelli Asset Fund, The Gabelli Growth
Fund and The Gabelli Convertible Securities Fund. In accordance
with the terms of Mr. Zizza's employment by The Lehigh Group
Inc., Mr. Zizza may introduce potential Target Businesses
identified directly by him to IAC, but only after such potential
Target Businesses have been first presented to The Lehigh Group
Inc. and its subsidiaries and determined by them to be
inappropriate. Mr. Zizza's employment agreement with The Lehigh
Group Inc. further provides that Mr. Zizza may consider and
approve in the ordinary course of business of IAC investment and
business opportunities introduced to IAC by Gruntal or others and
shall not be under any obligation to introduce such investment
and business opportunities to The Lehigh Group Inc. and its
subsidiaries.
Sidney Dworkin has served as a director of IAC since 1995.
Mr. Dworkin has also been Chairman of Advanced Modular Systems,
Inc., a Florida based seller and lessor of modular buildings
since 1988. In addition, since 1993, Mr. Dworkin has been
Chairman of Global International Inc., an Ohio based company
engaged in the selling or leasing of modular buildings to
hospitals and radiology groups. Since 1987, Mr. Dworkin has also
been Chairman of Stonegate Trading, Inc., an importer and
exporter of health and beauty products. Mr. Dworkin was a co-
founder and former Chairman of the Board, President and Chief
Executive Officer of Revco Discount Drug Centers. Mr. Dworkin is
Chairman of the Board of Comtrex Systems, Inc., a New Jersey
based manufacturer of cash registers, and a director of each of
Northern Technologies International, a manufacturer of anti-
corrosives located in Minnesota, CCA Industries, Inc., a
manufacturer of health and beauty aids located in New Jersey,
Interactive Technologies, Inc., a Florida based manufacturer of
dog bones, Viragen Inc., a Florida based manufacturer of natural
interferons, and Paragon Mortgage Corporation, a Georgia based
mortgage broker.
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Herbert M. Paul has served as a director of IAC since
November 1992. Mr. Paul is an attorney and certified public
accountant in private practice specializing in tax and business
law. From 1957 until 1982, Mr. Paul was a partner in the
accounting firm of Touche Ross & Co. and served as Associate
National Director of Taxes at that firm.
Richard L. Bready has served as a director of IAC since
November 1992. Mr. Bready also has been Chairman of the Board
and Chief Executive Officer of Nortek, Inc. since 1991, having
served as its President since 1979. Nortek Inc., a New York
Stock Exchange listed company, manufactures and markets
residential, commercial and industrial building products.
Mr. Bready is also a director of CCX Corporation, a manufacturer
of metal and fiberglass screening products, and of The Lehigh
Group Inc.
Alan P. Donenfeld has served as a director of IAC since
1995. Mr. Donenfeld also has been President of Bristol Capital
Management, Inc. since 1990, which specializes in locating,
structuring, and arranging financing for investments in
telecommunications and other industries. From 1987 to 1990,
Mr. Donenfeld was a Vice President in the Mergers and
Acquisitions Group at Bear, Stearns & Co. Inc. in New York where
he worked on numerous leveraged buyouts, corporate mergers,
valuations, and fairness opinions. Mr. Donenfeld worked in the
Leveraged Buyout and Mergers and Acquisitions Groups at E.F.
Hutton & Company, Inc. from 1985 to 1987. Mr. Donenfeld was a
founder of Quadrex Securities Corporation, where, from 1982 to
1985, he assisted in raising a leveraged buyout fund which made
an equity investment in a number of companies.
All directors hold office until the next annual meeting of
stockholders and the election and qualification of their
successors. Directors receive no compensation for serving on the
Board of Directors other than the reimbursement of reasonable
expenses incurred in attending meetings. Officers are elected
annually by the Board of Directors and serve at the discretion of
the Board. The Company has not entered into any employment
agreements or other understandings with its directors or
executive officer concerning compensation. No cash compensation
has been paid to any officer or director of IAC to date.
No family relationships exist among any of the named
directors or IAC's executive officer. No arrangement or
understanding exists between any such director or officer and any
other person pursuant to which any director or officer was
elected as a director or officer of IAC.
In connection with any IAC Stockholder vote relating either
to approval of a Business Combination or the liquidation of IAC
due to the failure of IAC to effect a Business Combination within
the time allowed, each of IAC's directors and its executive
officer has agreed to vote his respective shares of IAC Common
Stock in accordance with the vote of the majority of the shares
voted by all IAC Non-Affiliate Stockholders with respect to such
Business Combination or liquidation.
EXECUTIVE COMPENSATION
Since IAC's inception in November 1992, Mr. Salvatore J.
Zizza, IAC's Chairman of the Board, President and sole executive
officer, has not received any compensation from IAC, been issued
any options or stock appreciation rights in IAC, nor has Mr.
Zizza or any other person entered into any employment agreement
with IAC.
PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative
stockholder return of IAC Common Stock, based on its market
price, with the cumulative total return of companies on the
NASDAQ National Market Composite Index. Because of the nature of
IAC's business, IAC has been unable to identify a peer group of
companies in a similar line of business, and instead, has
provided a comparison with companies with a similar market
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capitalization. Such peer group is comprised of 110 companies,
each being a company with a market capitalization ranging from $6
million to $8 million.
The IAC Common Stock commenced trading on the OTC Electronic
Bulletin Board on June 28, 1995 and the closing bid price on such
date was $8.875. This price has been used as the initial share
price. This graph was prepared by Media General Financial
Services.
-------------------------------------------------
CALENDAR QUARTER ENDING
-------------------------------------------------
COMPANY 6/28/95 6/30/95 9/29/95 12/29/95
------------------------------------------------
Initial
Acquisition 100.00 100.00 90.14 100.00
Corp.
------------------------------------------------
Peer Group 100.00 100.20 107.01 84.30
------------------------------------------------
Broad 100.00 100.00 111.42 110.52
Market
------------------------------------------------
-------------------------------------------------
CALENDAR QUARTER ENDING
-------------------------------------------------
COMPANY 3/29/96 6/28/96 9/30/96 12/31/96
-------------------------------------------------
Initial
Acquisition 107.04 104.23 100.00 112.68
Corp.
------------------------------------------------
Peer Group 90.69 88.96 74.31 55.97
------------------------------------------------
Broad 115.63 124.20 127.62 133.69
Market
------------------------------------------------
PROPOSAL TO ELECT DIRECTORS OF THE SURVIVING CORPORATION
The Board of Directors of IAC has nominated the six persons named
below and Mr. Salvatore J. Zizza for election to the Board of
Directors of the Surviving Corporation. One of the nominees (Mr.
Zizza) is currently a director of IAC and the other six nominees are
currently directors of Hollis-Eden. For biographical information on
Mr. Zizza, see "MANAGEMENT OF IAC -- Directors and Executive Officer."
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The Surviving Corporation's Board of Directors will be a "classified
board," with only one-third of its directors coming up for election
each year. All of the nominees have consented to serve as directors.
Messrs. Zizza, Bagley and Peizer have been nominated to serve as
Class I directors, whose term shall expire at the first annual meeting
of stockholders held after the Effective Time of the Merger. Dr.
Merigan and Mr. McDonnell have been nominated to serve as Class II
directors whose term shall expire at the second annual meeting of
stockholders held after the Effective Time of the Merger and Dr.
Prendergast and Mr. Hollis have been nominated to serve as Class III
Directors. The term of the Class III directors shall expire at the
third annual meeting of stockholders held after the Effective Time of
the Merger.
Each proxy received will be voted "FOR" the election of the
nominees named below unless otherwise specified in the proxy. At this
time, the Board of Directors of IAC knows of no reason why any nominee
might be unable to serve. If the Merger is not consummated, the
current directors of IAC will continue to serve.
Richard B. Hollis, age 44, is the founder of Hollis-Eden and has
served as Hollis-Eden's Chairman and Chief Executive Officer since
August 1994. Mr. Hollis also served as Hollis-Eden's President from
August 1994 to February 1997. Mr. Hollis has over 20 years experience
in the health care industry in positions ranging from sales to Chief
Executive Officer. Mr. Hollis served as Chief Operating Officer of
Bioject Medical from 1991 to 1994, and as Vice President Marketing and
Sales/General Manager for Instromedix from 1989 to 1991. From 1986 to
1989, Mr. Hollis served as a general manager of the Western business
unit of Genentech, Inc., a manufacturer of biopharmaceuticals. From
1977 to 1986, Mr. Hollis served as a division general manager of Imed
Corporation, Inc., a manufacturer of intravenous infusion pumps. Mr.
Hollis began his career in the health care industry with Baxter
Travenol from 1974 to 1977. Mr. Hollis devotes full time to the
affairs of Hollis-Eden. Mr. Hollis received his B.A. in Psychology
from San Francisco State University in 1974.
Terren S. Peizer, age 37, became President and a director of
Hollis-Eden in February 1997. Since 1993, Mr. Peizer has served as
Chairman and Chief Executive Officer of Beachwood Financial Company,
Inc., an investment holding company. From 1990 to 1993, he served
as Chairman and Chief Executive Officer of Financial Group Holdings,
Inc., an investment holding company. From 1985 to 1990, Mr. Peizer
served as a senior member of the investment banking firm of Drexel
Burnham Lambert, Inc's High Yield Department. Mr. Peizer held
investment banking positions from 1981 to 1985 at Goldman, Sachs &
Co.'s Risk and International Arbitrage Division as well as the First
Boston Corp.'s High Yield Securities Department. Mr. Peizer received
his B.S. in Economics from The Wharton School of Finance and Commerce
in 1981.
Patrick T. Prendergast, PhD., age 40, Chief Scientific Officer
and a director of Hollis-Eden since August 1994, developed the
Products licensed to Hollis-Eden. Dr. Prendergast's specialty is in
anti-viral drug screening and assessment. His research interests are
virology, molecular immunological, and genetic analysis of animal and
human lentiviruses, human herpes virology and immunology, anti-viral
agent isolation and retroviral diagnostics. Dr. Prendergast has been
primarily engaged in medical research and development activities
through two research and development companies controlled by him,
Colthurst Limited and Edenland, Inc., since 1985 and 1987,
respectively. These companies investigated and screened human hormone
DHEA and human protein AFP as anti-HIV drugs. Dr. Prendergast filed
foreign patents on the use of these agents for the treatment of
HIV/AIDS, and also has several patents pending on unique and novel
composition of matter pharmaceutical agents for the treatment of viral
caused immune disorders. Dr. Prendergast received his Ph.D. in
microbiology from the University College of Galway, Ireland in 1982.
Thomas Charles Merigan, Jr., M.D., age 62, became Chairman of the
Scientific Advisory Board and a director of Hollis-Eden in March 1996.
Dr. Merigan has been George E. and Lucy Becker Professor of Medicine
at Stanford University School of Medicine from 1980 to the present.
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Dr. Merigan has also been the Principal Investigator, NIAID Sponsored
AIDS Clinical Trials Unit, from 1986 to the present and has been
Director of Stanford University's Center For AIDS Research from 1988
to the present. Dr. Merigan is a member of various medical and
honorary societies, has lectured extensively within and outside the
United States, and authored numerous books and articles and has
chaired and edited symposia relating to viruses, infectious diseases,
anti-viral agents, HIV and other retroviruses and AIDS. From 1990 to
the present, Dr. Merigan has been Chairman, Editorial Board of "HIV:
Advances in Research and Therapy" and is also a member of the
editorial boards of "Aids Research and Human Retroviruses" (since
1983), "International Journal of Anti-microbial Agents" (since 1990),
and "The Aids Reader" (since 1991), among others. He is a co-recipient
of six patents which, among other things, relate to synthetic
polynucleotides, modification of hepatitus B virus infection, purified
cytomegalovirus protein and composition and treatment for herpes
simplex. Dr. Merigan has been Chair, Immunology Advisory Board,
Bristol Myers Squibb Corporation (1989-1995) and Chair, Scientific
Advisory Board, Sequel Corp (1993 - present). In 1994, Stanford
University School of Medicine honored him with the establishment of
the Annual Thomas C. Merigan Jr. Endowed Lectureship in Infectious
Diseases and, in 1996, Dr. Merigan was elected Fellow, American
Association for the Advancement of Science. From 1966 to 1992, Dr.
Merigan was Head, Division of Infectious Diseases, at Stanford
University School of Medicine. Dr. Merigan received his B.A. (with
honors) from the University of California at Berkeley in 1955 and his
M.D. from the University of California at San Francisco in 1958.
J. Paul Bagley III, age 52, became a director of Hollis-Eden in
March 1996. Mr. Bagley was Chief Executive Officer of Laidlaw
Holdings, Inc., an investment services company, from January 1995
until November 1996. Mr. Bagley is a founding principal of Stone Pine
Capital Ltd., a group that provides mezzanine capital to fund
acquisitions, buyouts, growth and recapitalizations and is also
associated with Stone Pine China L.L.C., Stone Pine Mezzanine L.L.C.
and Stone Pine Financial Services L.L.C. For more than twenty years
prior to October 1988, Mr. Bagley was engaged in investment banking
activities with Shearson Lehman Hutton Inc. and its predecessor, E.F.
Hutton & Company, Inc. Mr. Bagley served in various capacities with
Shearson and E.F. Hutton, including Executive Vice President and
Director, Managing Director, Head of Direct Investment Origination and
Manager of Corporate Finance. Mr. Bagley controls a United States
registered investment advisor which provides advisory services to two
United States business development companies. Mr. Bagley serves as
Chairman of the Board of Directors of Silver Screen Management, Inc.
and International Film Investors, Inc., which manage film portfolios
with aggregate assets under management of approximately $1 billion.
Mr. Bagley is also a director of Logan Machinery Corporation, a
manufacturer of all-terrain vehicles, EurekaBank, a federal savings
bank and America First Financial Corporation, a Nasdaq Stock Market
listed company. Mr. Bagley graduated from the University of California
at Berkeley in 1965 with a B.S.c in Business and Economics and from
Harvard Business School in 1968 with an M.B.A. in Finance.
Brendan R. McDonnell, age 34, is a partner at Lane Powell Spears
Lubersky, a large Northwest-based law firm, and is Chairman of the
Corporate Securities and Finance Group in the firm's Portland, Oregon
office. Mr. McDonnell specializes in representing both private and
public emerging growth companies, with focus on the high technology
industry. Mr. McDonnell joined Lane Powell Spears Lubersky in 1990
after working for approximately three years for Brobeck, Phleger &
Harrison, another law firm, in California. Mr. McDonnell holds a B.S.
in accounting from Loyola Marymount University and a J.D. from the
University of California at Davis.
All directors will be reimbursed for their expenses of attending
Board meetings and will be eligible to receive options under the 1997
IAC Incentive Stock Option Plan, if adopted and approved at the IAC
Special Meeting.
All members of the Surviving Corporation's Board of Directors
will hold office until their respective terms expire and the election
and qualification of their successors.
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No family relationships exist among Hollis-Eden's directors.
Pursuant to the Anti-Serum License Agreement, Dr. Prendergast or, at
the option of Edenland, Leo Prendergast, the brother of Dr.
Prendergast, has the right to serve as a director of Hollis-Eden until
August 25, 1997.
SECURITY OWNERSHIP OF IAC PRIOR TO THE MERGER
The following table sets forth information as of February 5,
1997, based on information obtained from the persons named below, with
respect to the beneficial ownership (as defined under the applicable
rules of the Commission) of shares of IAC Common Stock by (i) each
person known by IAC to be the owner of more than 5% of the outstanding
shares of IAC Common Stock, (ii) each director and (iii) all directors
and the executive officer of IAC as a group:
AMOUNT
AND
NATURE OF PERCENTAGE OF
BENEFICIAL OUTSTANDING
OWNERSHIP SHARES OF COMMON
NAME OR GROUP(1) (2)(3) STOCK
-------------------------------- ----------- -----------------
Salvatore J. Zizza(4) . . . . . . 220,000 22.37%
Richard Bready . . . . . . . . . 35,000 4.10
Herbert Paul . . . . . . . . . . 35,000 4.10
Sidney Dworkin . . . . . . . . . 35,000 4.10
Alan P. Donenfeld . . . . . . . . 35,000 4.10
Gruntal & Co., Incorporated . . . 75,000 8.40
James D. Bowyer(5)
1117 Chantilly Road
Los Angeles, California 90077 . . 58,800 7.06
All executive officers and
directors as a group
a group (five persons)(4) . . . 360,000 33.86%
-----------------------------
(1) Each of the persons listed, unless otherwise noted, has an
address in care of IAC.
(2) Unless otherwise noted, IAC believes that all persons named in
the table have sole voting and investment power with respect to
all shares of IAC Common Stock beneficially owned by them.
(3) Includes warrants to purchase units, each unit comprised of one
share of IAC Common Stock and one Class A Warrant to purchase,
upon consummation of a Business Combination, one share of IAC
Common Stock at a price of $9.00, as follows: (i) Salvatore J.
Zizza, 50,000 units; (ii) each of Messrs. Bready, Paul, Dworkin
and Donenfeld, 10,000 units; (iii) Gruntal, 30,000 units and
(iv) all executive officers and directors, as a group, 90,000
units.
(4) Includes 50,000 shares of IAC Common Stock underlying certain
other warrants owned by Mr. Zizza which shall become exercisable
upon the consummation of the Merger.
(5) Based solely on information set forth in Amendment No. 1 to
Schedule 13D, dated January 8, 1996, filed by Mr. Bowyer with the
Commission.
SECURITY OWNERSHIP OF THE SURVIVING CORPORATION AFTER THE MERGER
The following table sets forth, on a pro forma basis as if the
Merger had been consummated, based on ownership of shares of Common
Stock in IAC and Hollis-Eden as of November 30, 1996, the beneficial
ownership (as defined under the applicable rules of the Commission) of
(i) each person known by IAC and Hollis-Eden who will become, as a
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result of the Merger, the owner of more than 5% of the outstanding
shares of Surviving Corporation Common Stock , (ii) each proposed
director of the Surviving Corporation, and (iii) all proposed
directors and executive officers of the Surviving Corporation as a
group:
PERCENTAGE OF
AMOUNT AND OUTSTANDING
NATURE OF SHARES
BENEFICIAL OF COMMON
NAME OR GROUP(1) OWNERSHIP(2) STOCK
------------- ------------ ------------
Richard B. Hollis (3) . 3,328,302 53.51%
Edenland, Inc. (4) . . 713,208 12.14
Baybush, Straffan
County Kildare, Ireland
Dr. Patrick T. 747,170 12.65
Prendergast (5) . . . .
Gary McAdam (6) . . . . 566,038 9.48
4 West Dry Creek Circle
Suite 140
Littleton, CO 80120
Thomas C. Merigan (7) . 47,222 *
J. Paul Bagley (7) . . 25,000 *
Brendan R. McDonnell . -0- -0-
Terren S. Peizer (8) . -0- -0-
Salvatore J. Zizza (9) 220,000 3.73
Laidlaw Equities, Inc.
(10) . . . . . . . . . 586,930 9.27
100 Park Avenue
New York, NY 10017
All Officers and
Directors as a group (9
persons) (3)(4)(5) 4,387,694 66.78%
(7)(8)(9) . . . . . .
* Less than one percent
-----------------------------------
(1) Unless otherwise noted, each of the persons listed has an address
in care of the Surviving Corporation.
(2) Unless otherwise noted, IAC and Hollis-Eden believe that all
persons named in the table will have sole voting and investment
power with respect to all shares of Surviving Corporation Common
Stock to be beneficially owned by them after the Merger.
(3) Includes warrants to purchase up to 475,472 shares of Surviving
Corporation Common Stock at $11.02 per share for a period of
three years following the Effective Time of the Merger.
(4) Of these shares, 584,906 shares represent shares to be owned of
record by Edenland, 37,736 shares represent shares underlying
certain warrants exercisable at $15.90 per share until February
5, 2000 and 90,566 shares represent shares underlying certain
warrants exercisable at $11.02 per share for a period of three
years following the Effective Time of the Merger. Excludes
Edenland's option to purchase up to 169,811 shares of Surviving
Corporation Common Stock if and when revenues from the AFP anti-
serum and/or a vaccine developed therefrom generate revenues of
$200 million, valued at market price, in payment of royalties.
(5) Dr. Prendergast is the president, a director and the controlling
stockholder of Edenland. As such, Dr. Prendergast may be deemed
to beneficially own all securities owned by Edenland.
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(6) Includes 226,416 shares underlying certain warrants exercisable
at $11.02 per share, which warrants are owned by Creative
Investment Services, Inc. Pension Plan and Trust, of which Mr.
McAdams is the Trustee.
(7) Represents shares of Surviving Corporation Common Stock
underlying certain outstanding options.
(8) Mr. Peizer was granted options to purchase up to 2,400,000 shares
of Hollis-Eden Common Stock on February 5, 1997. None of these
options are currently exercisable. These options vest in annual
one-sixth increments commencing on February 5, 1998. See
"PROPOSED MANAGEMENT OF THE SURVIVING CORPORATION - Employment
Agreements."
(9) Includes warrants to purchase up to 150,000 shares of Surviving
Corporation Common Stock exercisable upon the Effective Time of
the Merger.
(10) Represents shares of Surviving Corporation Common Stock
underlying certain outstanding warrants. Warrants to purchase up
to 452,830 of these shares are issuable upon consummation of the
Merger.
PROPOSED MANAGEMENT OF THE SURVIVING CORPORATION
Following the Merger, it is contemplated that the following
individuals will serve the Surviving Corporation in the capacities set
forth below:
NAME AGE POSITION(S)
---- --- -----------
Richard B. Hollis . . 44 Chairman of the Board, Chief
Executive Officer and
Director
Terren S. Peizer . . 37 President and Director
Patrick T. 40 Chief Scientific Officer and
Prendergast, Ph.D. . Director
Thomas Charles 62 Chairman of the Scientific
Merigan, Jr., M.D. . Advisory Board and Director
Robert W. Weber . . . 46 Vice President-Controller
Lois Rezler, Ph.D. . 46 Vice President-Regulatory
Affairs
J. Paul Bagley III . 52 Director
Salvatore J. Zizza . 50 Director
Brendan R. McDonnell 34 Director
For biographical information on each of the above persons
(with the exception of Mr. Weber and Dr. Rezler, whose biographies
appear below), see "MANAGEMENT OF IAC" and "PROPOSAL TO ELECT
DIRECTORS OF THE SURVIVING CORPORATION." At the Effective Time of the
Merger, the Board of Directors will designate an Audit Committee. The
members of the Audit Committee will be Messrs. McDonnell and Zizza,
each an independent director. The Audit Committee will review and
evaluate the results and scope of the audit and other services
provided by the Surviving Corporation's independent accountants, as
well as the Surviving Corporation's accounting principles and system
of internal accounting controls.
Robert W. Weber, age 46, has served as Vice President-Controller
of Hollis-Eden since March 1996. From October 1994 to March 1996, Mr.
Weber was Chief Financial Officer and Vice President Finance of
Prometheus Products, a subsidiary of Sierra Semiconductor, a company
that designs and markets computer modems and software. From August
1993 to October 1994, Mr. Weber was Chief Financial Officer and Vice
President Finance of Amercom, a company that designs, publishes and
markets personal computer telecommunications software for the small
office, home office and personal communications marketplace. Mr. Weber
was also Vice President Finance and Chief Financial Officer of
Instromedix from February 1988 to August 1993. Instromedix is engaged
in designing, manufacturing and marketing medical electronics devices
and software. Prior thereto, Mr. Weber held various financial
management positions with Metheus Corporation, a company engaged in
designing, manufacturing and marketing computer graphics hardware and
software, International Paper Company and General Motors Corporation.
Mr. Weber received his B.S. from GMI Institute of Technology in 1975
and his MBA from Stanford Graduate School of Business in 1977.
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Lois Rezler, Ph.D., age 46, became Vice President of Regulatory
Affairs of Hollis-Eden in March 1996. For more than ten years, Dr.
Rezler has been engaged in consulting for various pharmaceutical and
biotechnology corporations including Smith Kline, Smith & Nephew,
Cheesborough Ponds, CIBA, Merck Sharpe Dome, Baxter Travenol and
others. Dr. Rezler currently acts as a regulatory consultant for
Westem Center for Clinical Studies (since January 1996), Inglewood
Medical and Mental Health Services (since November 1995), Santa
Clarita Medical Center (since January 1995), Interactive Medical
Technologies (since August 1993), Puretek Corporation (since November
1993) and Bioremediation Incorporated (since February 1993). From July
1986 to February 1993, Dr. Rezler was sequential quality assurance
(SQA) consultant to Xerox Incorporated. On behalf of her various
clients, Dr. Rezler's duties and responsibilities have included
working at bench level to assist in drug design and development,
preparing and submitting grant applications to various government
agencies, consulting in all aspects of preparing IND and NDA
submissions to the FDA, including biologics devices, new drugs,
priority drugs and orphan drugs. Dr. Rezler's duties also include
responsibility for developing time lines and budgets for each project.
Dr. Rezler received her B.A., B.S.c and M.A. from London University
and her Ph.D. in Public Health from Edinburgh University.
MEDICAL ADVISORY BOARD
Hollis-Eden, through Dr. Merigan, Hollis-Eden's Chairman of
the Scientific Advisory Board, has established relationships with a
group of scientific advisors with expertise in their respective fields
that align with Hollis-Eden sponsored programs. Dr. Merigan plans to
assemble the Surviving Corporation's Scientific Advisory Board from
among these advisors. The Surviving Corporation intends to hold formal
semi-annual scientific advisory board meetings to review ongoing
studies and exchange ideas. The Surviving Corporation expects that its
scientific advisors will consult with management of the Surviving
Corporation regarding the status of the Surviving Corporation's work
in progress and the evaluation of prospective opportunities for the
Surviving Corporation.
The Surviving Corporation intends to pay certain of its
scientific advisors' consulting fees or salaries and expects to
provide reimbursement for expenses incurred in connection with service
to the Surviving Corporation.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Surviving Corporation's Bylaws will provide that the
Surviving Corporation shall indemnify its directors and executive
officers and may indemnify its other officers, employees and other
agents to the fullest extent permitted by Delaware law. The Surviving
Corporation will also be empowered under its Bylaws to enter into
indemnification contracts with its directors and officers and to
purchase insurance on behalf of any person whom it is required or
permitted to indemnify. Pursuant to this provision, the Surviving
Corporation intends to enter into indemnity agreements with each of
its directors and officers. In addition, the Surviving Corporation
will be required, subject to certain exceptions, to advance all
expenses incurred by any director or executive officer in connection
with a completed, pending or threatened action, suit or proceeding
upon receipt of an undertaking by such director or executive officer
to repay all amounts advanced by the Surviving Corporation on such
persons behalf if it is ultimately determined that such person is not
entitled to be indemnified under the Bylaws or otherwise.
The Surviving Corporation's Certificate of Incorporation
will also provide that to the fullest extent permitted by Delaware
law, the Surviving Corporation's directors will not be personally
liable to the Surviving Corporation and its stockholders for monetary
damages for any breach of a director's fiduciary duty. The Certificate
of Incorporation will not, however, eliminate the duty of care, and in
appropriate circumstances, equitable remedies such as an injunction or
other forms of non-monetary relief would remain available under
Delaware law. Each director will be subject to liability for breach of
the director's duty of loyalty to the Surviving Corporation, for acts
or omissions not in good faith or involving intentional misconduct or
knowing violations of law, for acts or omissions that the director
believes to be contrary to the best interests of the Surviving
Corporation or its stockholders, for any transaction from which the
director derived an improper personal benefit, for acts or omissions
involving a reckless disregard for the director's duty to the
Surviving Corporation or its stockholders when the director was aware
or should have been aware of a risk of serious injury to the Surviving
Corporation or its stockholders, for acts or omissions that constitute
an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the Surviving Corporation or its stockholders,
for improper transactions between the director and the Surviving
Corporation and for improper distributions to stockholders and loans
to directors and officers. This provision also will not affect a
director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
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Upon or promptly after the consummation of the Merger, the
Surviving Corporation will seek to acquire and maintain directors' and
officers' liability insurance.
EXECUTIVE COMPENSATION
From Hollis-Eden's inception in August 1994 through December
31, 1995, no officer of Hollis-Eden (including its Chief Executive
Officer) received any salaried compensation for services rendered.
EMPLOYMENT AGREEMENTS
Pursuant to an employment agreement between Hollis-Eden and
Mr. Richard B. Hollis entered into in November 1996 (the "Hollis
Employment Agreement"), Mr. Hollis currently receives from Hollis-Eden
an annual base salary of not less than $195,000 and bonuses and equity
compensation as determined by the Hollis-Eden Board of Directors. Mr.
Hollis' annual base salary will be increased to not less than $225,000
upon the consummation of the Merger. If Mr. Hollis' employment is
terminated "without cause," "for insufficient reason" or pursuant to a
"change in control" (as such terms are defined in the Hollis
Employment Agreement), Mr. Hollis will receive as severance (i) an
amount equal to five times his then current annual base salary plus
five times the amount of the bonus awarded to him in the prior
calendar year, (ii) immediate vesting of all unvested stock options of
Hollis-Eden (or the Surviving Corporation, if applicable) held by him
and (iii) continued benefits under all employee benefit plans and
programs for a period of three years. All of such payments are to be
made in one lump sum within 30 days of termination. If Mr. Hollis'
employment is terminated "with cause" or if Mr. Hollis resigns other
than for "sufficient reason," Mr. Hollis' compensation and benefits
will cease immediately and Mr. Hollis will not be entitled to
severance benefits. The Hollis Employment Agreement will continue in
effect after the consummation of the Merger, with the Surviving
Corporation being the obligor thereunder.
Pursuant to an employment agreement between Hollis-Eden and
Mr. Terren S. Peizer entered into on February 5, 1997 (the "Peizer
Employment Agreement"), Mr. Peizer will receive from Hollis-Eden, upon
consummation of the Merger, an annual base salary of $175,000 and
bonuses as determined by the Hollis-Eden Board of Directors. In
addition, Hollis-Eden has granted Mr. Peizer a nonstatutory stock
option to purchase up to 2,400,000 shares of Hollis-Eden Common Stock,
at $5.00 per share, with 400,000 shares vesting on February 5, 1998
and each successive February 5 thereafter. If Mr. Peizer's employment
is terminated "without cause" (as defined in the Peizer Employment
Agreement), Mr. Peizer will receive as severance (i) continuation of
his then current base salary for one year from the date of termination
and (ii)(A) in the event the date of termination is on or after
February 5, 1999, in addition to the shares already vested under his
option, vesting for an additional 400,000 shares shall be accelerated
and (B) in the event the date of termination is prior to February 5,
1999, (x) his option's vesting will be accelerated to the extent
necessary to entitle Mr. Peizer to an aggregate of 800,000 shares upon
exercise of his option and (y) Mr. Peizer will have the right to
purchase up to 200,000 shares of Hollis-Eden Common Stock from Mr.
Hollis at $5.00 per share. If Mr. Peizer's employment is terminated
"with cause" (as defined in the Peizer Employment Agreement) or if Mr.
Peizer resigns, Mr. Peizer's compensation will cease immediately and
Mr. Peizer will not be entitled to any severance benefits. The Peizer
Employment Agreement will continue in effect after the consummation of
the Merger, with the Surviving Corporation being the obligor
thereunder.
EMPLOYEE BENEFIT PLANS
1996 Stock Option Plan. In August 1996, Hollis-Eden adopted
a Stock Option Plan (the "Plan") which provides for the granting to
employees of incentive stock options within the meaning of Section 422
of the Code and non- statutory stock options which are not intended to
qualify as incentive stock options. The Plan will terminate
automatically in August 2006 unless terminated sooner. The Plan allows
the Board of Directors of Hollis-Eden to amend, suspend or terminate
the Plan, provided that no such action may affect any share of Hollis-
Eden Common Stock previously issued and sold or any option previously
granted under the Plan. A total of 500,000 shares of Hollis-Eden
Common Stock have been reserved for issuance pursuant to the Plan.
The Plan is administered by the Board of Directors of
Hollis-Eden (the "Administrator"), which Administrator is constituted
to comply with Section 16(b) of the Exchange Act and applicable laws.
The Administrator has the power to determine the terms of the options,
including the exercise price, the number of shares subject to each
option and the exercisability thereof, and the form of consideration
payable upon exercise. Options granted under the Plan are not
generally transferable by the optionee, and each option is exercisable
during the lifetime of the optionee only by such optionee. Options
granted under the Plan must be exercised within three months following
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the end of the optionee's status as an employee, director or
consultant of Hollis-Eden, or within 12 months after the optionee's
termination as a result of disability or within 18 months of such
optionee's death, but in no event later than the expiration of the
option's 10-year term. The exercise price of any incentive stock
option granted under the Plan must be at least equal to the fair
market value of the Hollis-Eden Common Stock on the date of grant. The
exercise price of any nonstatutory stock option granted under the Plan
is determined by the Administrator. With respect to any participant
who owns stock possessing more than 10% of the voting power of all
classes of Hollis-Eden's outstanding capital stock, the exercise price
of any incentive stock option granted must equal at least 110% of the
fair market value on the grant date and the term of such incentive
stock option must not exceed five years. The term of all other options
which may be granted under the Plan may not exceed 10 years.
The Plan provides that in the event of a merger of Hollis-
Eden into another corporation or a sale of all or substantially all of
the assets or like transaction involving Hollis-Eden, each option will
be assumed or an equivalent option substituted by the successor
corporation. If the outstanding options are not assumed or substituted
as described in the preceding sentence, the vesting period for options
held by persons then performing services as employees, directors or
consultants shall be accelerated prior to such event; such options
will terminate if not exercised after such acceleration and at or
prior to such event. In connection with the Merger, all outstanding
options granted under the Plan will be substituted for equivalent
options of the Surviving Corporation. See "PROPOSAL TO APPROVE AND
ADOPT THE IAC 1996 INCENTIVE STOCK OPTION PLAN."
The following table sets forth information, as of December
31, 1996, concerning individual grants of stock options, exercises of
stock options, and aggregate stock options held for each of the
proposed executive officers and directors of the Surviving
Corporation, other than Mr. Peizer. Mr. Salvatore J. Zizza does not
hold any such stock options. All of these stock options were granted
on March 29, 1996, at which time the Board of Directors of Hollis-Eden
determined that the per share fair market value for Hollis-Eden Common
Stock was $2.25 per share. None of these stock options has been
exercised. During 1996 and through the date of this Joint Proxy
Statement/Prospectus, Hollis-Eden did not grant any other stock
options, except for (i) an incentive stock option under the Plan to
purchase 500 shares of Hollis-Eden Common Stock granted in November
1996 to an employee of Hollis-Eden, (ii) non-qualified stock options
under the Plan to purchase up to an aggregate of 30,000 shares of
Hollis-Eden Common Stock granted to various consultants and (iii) a
non-qualified stock option to purchase up to 2,400,000 shares of
Hollis-Eden Common Stock granted in February 1997 to Mr. Peizer in
connection with the Peizer Employment Agreement.
OPTION GRANTS IN 1996
INDIVIDUAL GRANTS
-------------------------------------------
PERCENTAGE
OF
TOTAL
NUMBERED OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES PRICE
OPTIONS IN PER
NAME GRANTED 1996(4) SHARE
---------------- ---------------------- ----------- --------
Richard Hollis 200,000(1) 37.0% $2.25
Patrick 50,000(1) 9.3% $2.25
Prendergast
Thomas C. Merigan 125,000(2) 23.1% $2.25
Robert Weber 40,000(1) 7.4% $2.25
25,000(1) 4.6% $2.25
Lois Rezler 50,000(1) 9.3% $2.25
J. Paul Bagley 25,000(3) 4.6% $2.25
Brendan McDonnell 25,000(1) 4.6% $2.25
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PRICE APPRECIATION
FOR OPTION TERM (5)
EXPIRATION -----------------------------------
NAME DATE 5% 10%
------------ ---------- -----------------------------------
Richard Hollis 3/15/06 $283,000 $717,400
Patrick 3/15/06 $ 70,750 $179,350
Prendergast
Thomas C. Merigan 3/15/03 $114,500 $266,875
Robert Weber 3/15/03 $ 36,640 $ 85,400
3/15/06 $ 35,375 $ 89,675
Lois Rezler 3/15/03 $ 45,800 $106,750
J. Paul Bagley 3/15/03 $ 22,900 $ 53,375
Brendan McDonnell 3/15/06 $ 35,375 $ 89,675
--------------------------------
(1) One-third of the shares subject to such option shall vest and
become exercisable on the first anniversary of the date of grant, and
the remaining shares shall vest in 24 equal monthly installments
thereafter based on continued employment and/or service with Hollis-
Eden (or its successor).
(2) Options to purchase 25,000 shares are vested and are currently
exercisable, and the remaining shares subject to this option will vest
and be exercisable in equal monthly installments over a three-year
period based on continued service as a director of Hollis-Eden (or its
successor) and Chairman of the Scientific Advisory Board.
(3) All options are vested and may be exercised immediately.
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(4) Based on options to purchase an aggregate of 540,500 shares granted to
employees and directors.
(5) The potential realizable value is calculated based on the term of the
option at its date of grant (7 years and 10 years). It is calculated
assuming that the stock price on the date of grant appreciates at the
indicated annual rate, compounded annually for the entire term of the
option and that the option is exercised and sold on the last day of its
term for the appreciated stock price. These amounts represent certain
assumed rates of appreciation only, in accordance with the rules of the
Commission, and do not reflect Hollis-Eden's estimate or projection of
future stock price performance. Actual gains, if any, are dependent on the
actual future performance of Hollis-Eden's (and consequently, the Surviving
Corporation's) Common Stock and no gain to the optionee is possible unless
the stock price increases over the option term, which will benefit all
Hollis-Eden (and consequently, Surviving Corporation) Stockholders.
PROPOSAL TO APPROVE AND ADOPT
THE 1997 IAC INCENTIVE STOCK OPTION PLAN
GENERAL
The following description of the 1997 IAC Incentive Stock Option Plan
(the "IAC Plan") is a summary and is qualified in its entirety by reference
to the IAC Plan, as proposed to be adopted, which is attached hereto as
Annex D. The IAC Plan will continue as the Incentive Stock Option Plan of
the Surviving Corporation following the consummation of the Merger and, at
the Effective Time, all outstanding options granted under Hollis-Eden's
Plan will be substituted for equivalent options under the IAC Plan.
On February 5, 1997, the IAC Board of Directors adopted the IAC Plan,
subject to approval of the IAC Stockholders at the IAC Special Meeting.
PURPOSE OF THE GRANT OF OPTIONS
The purpose of the IAC Plan is to encourage selected management, key
employees, directors and certain other persons associated with IAC
(including any successor) to acquire an investment in IAC's business,
thereby strengthening their commitment to remain with, or join, IAC. The
IAC Plan contemplates the grant to such persons of "incentive stock
options" under Section 422 of the Code ("ISOs") and nonqualified stock
options ("NSOs").
The IAC Plan is not subject to any of the requirements of the Employee
Retirement Income Security Act of 1974, as amended, nor is it qualified or
intended to be qualified under Section 401(a) of the Code.
SECURITIES TO BE OFFERED
An aggregate of 1,000,000 shares of IAC Common Stock have been
reserved for issuance upon the exercise of options granted pursuant to the
IAC Plan (subject to adjustment as provided in the IAC Plan upon the
occurrence of certain changes in the capitalization of IAC and certain
other corporate transactions). To date, no options under the IAC Plan have
been granted.
ADMINISTRATION
The Incentive Plan is to be administered by the Incentive Stock Option
Committee (the "Option Committee"). Following the consummation of the
Merger, it is anticipated that Mr. McDonnell and Dr. Merigan will comprise
the Surviving Corporation's Option Committee. Subject to the terms of the
IAC Plan and such limitations as the IAC Board of Directors may impose, the
Option Committee shall be responsible for the overall management and
administration of the IAC Plan and shall have such authority as may be
necessary or appropriate to carry out its responsibilities, including,
without limitation, the authority to (i) determine the persons to whom, and
the time or times at which, grants shall be made as well as the terms of
ISOs and NSOs, (ii) interpret and construe the terms of the IAC Plan and
any instrument thereunder, and (iii) adopt rules and regulations, prescribe
forms and take any other actions not inconsistent with the IAC Plan as it
may deem necessary or appropriate.
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PERSONS WHO MAY PARTICIPATE
Officers, key employees and directors of IAC, as well as certain
consultants, advisors and other persons who provide services to IAC, are
eligible to participate in the IAC Plan without regard to length of
employment or service. Any such person who is not an "employee" of IAC,
within the meaning of Section 422 of the Code, is not eligible to receive
ISOs.
No options will be granted after February 5, 2007, the date upon which
the IAC Plan will terminate if it is not terminated earlier by the IAC
Board.
DESCRIPTION OF OPTIONS
The exercise price of an option granted under the IAC Plan and the
period during which it may be exercised will be determined by the Option
Committee at the time of grant, subject to the terms and conditions of the
IAC Plan. The exercise price of an ISO, however, shall not be less than
the fair market value of the shares subject to such ISO on the date of
grant (or 110% of such fair market value in the case of ISOs granted to an
individual who is a 10% or greater stockholder).
In no event will options expire later than the expiration of ten years
from the date of grant (or five years from the date of grant in the case of
ISOs granted to an individual who is a 10% or greater stockholder).
Options that are otherwise exercisable may be exercised in whole or in
part.
Upon (i) the merger or consolidation of IAC with or into another
corporation (pursuant to which the IAC Stockholders immediately prior to
such merger or consolidation will not, as of the date of such merger or
consolidation, own a beneficial interest in shares of voting securities of
the corporation surviving such merger or consolidation having at least a
majority of the combined voting power of such corporation's then
outstanding securities), if the agreement of merger or consolidation does
not provide for (a) the continuance of the options granted under the IAC
Plan or (2) the substitution of new options for options granted under the
IAC Plan, or for the assumption of such options by the surviving
corporation, (ii) the dissolution, liquidation, or sale of all or
substantially all the assets of IAC to a person unrelated to IAC or to a
direct or indirect owner of a majority of the voting power of IAC's then
outstanding voting securities (such sale of assets being referred to as an
"Asset Sale") or (iii) the "change in control" of IAC, the holder of any
such option theretofore granted and still outstanding (and not otherwise
expired) shall have the right immediately prior to the effective date of
such merger, consolidation, dissolution, liquidation, Asset Sale or change
in control of IAC to exercise such option(s) in whole or in part without
regard to any installment provision that may have been made part of the
terms and conditions of such option(s); provided that any conditions
precedent to the exercise of such option(s), other than the passage of
time, have occurred.
As used herein, a "change in control of IAC" shall be deemed to have
occurred if any person (including any individual, firm, partnership or
other entity) together with all affiliates and associates (as defined under
Rule 12b-2 promulgated under the Exchange Act) of such person (but
excluding (i) a trustee or other fiduciary holding securities under an
employee benefit plan of IAC or any subsidiary of IAC, (ii) a corporation
owned, directly or indirectly, by the stockholders of IAC in substantially
the same proportions as their ownership of IAC, (iii) IAC or any subsidiary
of IAC or (iv) a participant together with all affiliates and associates of
such participant) is or becomes the beneficial owner (as defined in Rule
13d-3 promulgated under the Exchange Act), directly or indirectly, of
securities of IAC representing 40% or more of the combined voting power of
IAC's then outstanding securities.
If the optionee's employment with IAC terminates or if the optionee's
association with IAC terminates (in the case of a consultant, advisor or
other service provider) "without good cause," options that are exercisable
on his termination date shall remain exercisable until the expiration of
three months from such termination date (extended to 12 months if such
termination occurs due to the optionee's disability).
To the extent that the aggregate fair market value (determined at the
time an ISO is granted) of shares of IAC Common Stock subject to ISOs are
exercisable for the first time by an optionee during a calendar year (under
all stock option plans of IAC) exceeds $100,000, such ISOs shall be treated
as NSOs.
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PAYMENT FOR SHARES
Payment for shares of IAC Common Stock purchased upon exercise of an
option must be made in full upon exercise, either in cash or check or in
shares of outstanding IAC Common Stock, as determined by the Stock Option
Committee. The proceeds received by IAC from the sale of shares of IAC
Common Stock pursuant to the IAC Plan shall be used for general corporate
purposes.
AMENDMENT AND TERMINATION
The IAC Board may amend or terminate the IAC Plan at any time or from
time to time; provided, however, that unless all required approvals have
been received, no amendment will be made that would (i) increase the
maximum number of shares as to which options may be granted, or (ii)
materially modify the requirements as to eligibility for participation. No
amendment is permitted which would adversely affect the rights of any
optionee under an option granted prior to such amendment, unless the
optionee consents thereto. In addition, no amendment will be made that
would result in the disqualification of any ISO as an "incentive stock
option" within the meaning of Section 422 of the Code.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the federal income tax
consequences to an optionee and IAC of the grant and exercise of an option
pursuant to the IAC Plan and the disposition of stock acquired upon
exercise of any option. Because the consequences will vary for any one of
a number of reasons, IAC urges each optionee to consult his own tax advisor
with respect to the tax consequences of such transactions. The following
summary does not purport to be complete and does not take into account
state or local tax implications.
General
The grant of an option under the IAC Plan, whether or not an ISO, does
not result in any tax consequences to IAC or the optionee. The tax
consequences of exercising an option or disposing of IAC Common Stock
purchased by an optionee upon exercise of an option ("option stock") depend
upon whether the option is an ISO or an NSO.
Nonqualified Stock Options
An optionee, if he is not a director, officer or beneficial owner of
more than ten percent of the outstanding shares of IAC Common Stock
(hereinafter, a "director, officer or principal stockholder"), will realize
income as compensation, at the time he exercises an NSO, in an amount equal
to the amount by which the then fair market value of the IAC Common Stock
acquired pursuant to the exercise of the NSO exceeds the price paid for
such IAC Common Stock. Section 83 of the Code provides generally that, if
a director, officer or principal stockholder receives shares pursuant to
the exercise of such an option, he will realize ordinary income only when
he can sell such shares at a profit without being subject to liability
under section 16(b) of the Exchange Act, at which time he will be subject
to tax on the difference between the then fair market value of the shares
and the price paid for them. Alternatively, a director, officer or
stockholder who would not otherwise be subject to tax on the value of his
shares as of the date they were acquired can file a written election with
the Internal Revenue Service, no more than 30 days after the shares are
transferred to him, to be taxed as of the date of the transfer. The
optionee then will realize income, as compensation, in a total amount equal
to the amount by which the fair market value of the shares, as of the date
he acquired them, exceeds the price paid for such shares.
Shares of IAC Common Stock issued pursuant to the exercise of an NSO
generally will constitute a capital asset in the hands of an optionee
(including a director, officer or principal stockholder) and will be
eligible for capital gain or loss treatment upon any subsequent
disposition. The holding period of an optionee (including a director,
officer or principal stockholder) will commence upon the date he recognizes
income with respect to the issuance of such shares, as described above.
The optionee's basis in the shares will be equal to the greater of their
fair market value as of that date or the amount paid for such shares.
Incentive Stock Options
If an optionee exercises an ISO, the optionee does not recognize
income upon exercise, provided that the optionee was an employee of IAC at
all times from the date when the option was granted until not less than
three months before
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exercise. (This three-month period is extended to one year if the
optionee's employment terminates as a result of permanent and total
disability, and is waived in the case of the optionee's death while
employed by IAC). However, the excess of the fair market value of
Common Stock acquired upon exercise of an ISO (determined at the time
of such exercise) over the exercise price generally constitutes an item
of adjustment for purposes of determining the optionee's alternative
minimum tax liability for the taxable year of the exercise.
If an optionee exercises an ISO and fails to satisfy the three-month
(one-year in the case of permanent and total disability) employment period
requirement, the optionee must include in gross income, as compensation for
the taxable year of exercise, an amount equal to the excess of the fair
market value of the option stock at the time of exercise over the exercise
price. If an optionee subsequently disposes of option stock which, when
exercised, did not satisfy the employment period requirement, the optionee
must include in gross income as capital gain (or loss) for the taxable
year, the difference between amount realized by the optionee upon such
disposition and the fair market value of the option stock at the time of
exercise.
If (i) an optionee satisfied the employment period requirement set
forth above at the time the ISO was exercised, (ii) disposes of option
stock that was acquired by the optionee pursuant to an ISO more than one
year prior to the disposition, (iii) such ISO was granted to the optionee
more than two years prior to the disposition, and (iv) the amount realized
in the disposition exceeds the exercise price, then the optionee must
include in gross income, as capital gain for the taxable year of the
disposition an amount equal to the excess of the amount realized in the
disposition over the exercise price. (If, instead, the exercise price
exceeds the amount realized in the disposition, the optionee is allowed to
deduct an amount equal to such excess as a capital loss for such year.)
If (i) an optionee satisfied the employment period requirement set
forth above, at the time the ISO was exercised, (ii) disposes of option
stock within two years after the related ISO is granted or within one year
after the option stock was acquired by the optionee, and (iii) the amount
realized in the disposition exceeds both the exercise price and the fair
market value of the option stock on the date of exercise, then the optionee
must include in gross income, as compensation for the taxable year of the
disposition, an amount equal to the excess of such fair market value over
the exercise price, and must include in gross income as gain an amount
equal to the excess of the amount realized in the disposition over such
fair market value. Such gain is generally treated as capital gain,
long-term or short-term, depending upon the length of time elapsed between
the time when the option stock was acquired and the time of the
disposition. If, instead, the amount realized in the disposition exceeds
the exercise price, but is less than the fair market value of the option
stock on the date of exercise, the optionee must include in gross income,
as compensation for the taxable year of the disposition, an amount equal to
the excess of the amount realized over the exercise price. If the exercise
price exceeds the amount realized in the disposition, the optionee is
allowed to deduct an amount equal to such excess as a loss for the taxable
year of the disposition. Such loss is generally treated as capital loss,
long-term or short term, depending upon the length of time elapsed between
the time the option stock was acquired and the time of the disposition.
Tax Consequences to IAC
If an optionee includes an amount in gross income as compensation for
a taxable year under the foregoing rules, IAC is generally entitled to a
corresponding deduction for its taxable year that includes the last day of
the affected taxable year of the optionee.
Section 280G of the Code
In addition to the Federal income tax consequences discussed above,
Section 280G of the Code provides that if an officer, stockholder or highly
compensated individual receives a payment which is in the nature of
compensation and which is contingent upon a change in control of the
employer, and such payment equals or exceeds three times his "base salary"
(as hereinafter defined), then any amount received in excess of base salary
shall be considered an "excess parachute payment." An individual's "base
salary" is equal to his average annual compensation over the five-year
period (or period of employment, if shorter) ending with the close of the
individual's taxable year immediately preceding the taxable year in which
the change in control occurs. If the taxpayer establishes, by clear and
convincing evidence, that such payment is reasonable compensation for past
or future services, then all or a portion of such payment may be deemed not
to be a parachute payment. Under certain circumstances, options may give
rise to excess parachute payments. If so, then in
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<PAGE>
addition to any income tax which would otherwise be owed in connection
with such payment, the optionee will be subject to an excise tax equal
to 20% of such excess payment, and IAC will not be entitled to any tax
deduction to which it would have been entitled with respect to such
excess parachute payment.
REQUIRED VOTE
Under the DGCL and IAC's Charter, the IAC Board of Directors has the
authority to grant stock options to officers, key employees, consultants
and advisors providing goods or services to IAC without stockholder
approval. Under the rules of the Exchange Act, however, stockholder
approval is required with respect to the IAC Plan to be exempt from the
provisions of Section 16(b) of the Exchange Act. Accordingly, the IAC
Board of Directors approved the IAC Plan upon the condition that the IAC
Plan would not be effective unless ratified and approved by the IAC
Stockholders at the IAC Special Meeting. The affirmative vote of a
majority of the outstanding shares of IAC Common Stock voting in person or
by proxy at the IAC Special Meeting is required for ratification and
approval of the IAC Plan.
RECOMMENDATION AND VOTE
THE IAC BOARD OF DIRECTORS RECOMMENDS THAT IAC STOCKHOLDERS VOTE "FOR"
THE PROPOSAL TO APPROVE AND ADOPT THE IAC PLAN.
Each properly executed proxy received will be voted "FOR" the approval
and adoption of the IAC Plan unless otherwise specified in the proxy.
DESCRIPTION OF IAC'S SECURITIES
COMMON STOCK
IAC is authorized to issue 10,000,000 shares of IAC Common Stock. As
of the date of this Joint Proxy Statement/Prospectus, 833,250 shares of IAC
Common Stock were outstanding, held of record by 38 persons. The holders
of Common Stock are entitled to one vote for each share held of record on
all matters to be voted on by stockholders. There is no cumulative voting
with respect to the election of directors, with the result that the holders
of more than 50% of the shares voting for the election of directors can
elect all of the directors. The holders of IAC Common Stock are entitled
to receive dividends when, as and if declared by the Board of Directors of
IAC out of funds legally available therefor. In the event of the
liquidation, dissolution or winding up of IAC, the holders of IAC Common
Stock will be entitled to share ratably in all assets remaining available
for distribution after payment of liabilities and after provision has been
made for each class of stock, if any, having preference over the IAC Common
Stock. The Initial IAC Stockholders have agreed to waive their respective
rights to participate in a liquidation distribution prior to the
consummation of the first Business Combination. Holders of shares of IAC
Common Stock, as such, have no conversion, preemptive or other subscription
rights, and there are no redemption provisions applicable to the IAC Common
Stock. All of the outstanding shares of IAC Common Stock are, and the
shares of Surviving Corporation Common Stock to be issued in connection
with the Merger, when issued, will be validly authorized and issued, fully
paid and nonassessable.
PREFERRED STOCK
IAC's Charter authorizes the issuance of 5,000 shares of "blank check"
preferred stock, par value $.01 per share (the "Preferred Stock"), with
such designations, powers, preferences, rights, qualifications, limitations
and restrictions of such series as the Board of Directors, subject to the
laws of the State of Delaware, may determine from time to time.
Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or
other rights of the holders of IAC Common Stock. Such Preferred Stock
could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of IAC. No shares
of Preferred Stock are currently outstanding.
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<PAGE>
WARRANTS
Each Class A Warrant entitles the holder thereof to purchase one share
of Surviving Corporation Common Stock at a price of $9.00 per share,
subject to adjustment in certain circumstances. The Class A Warrants will
be initially exercisable upon the consummation of the Merger and expire at
5:00 p.m., New York City time, on May 15, 2000.
Each Class B Warrant entitles the holder thereof to purchase one Unit
(i.e., one share of Surviving Corporation Common Stock and one Class A
Warrant) at a price of $.25 per Unit, subject to adjustment in certain
circumstances. The Class B Warrants will be initially exercisable upon the
consummation of the Merger and expire at 5:00 p.m., New York City time, on
the first anniversary of the date of the Merger.
The Surviving Corporation may call the Warrants for redemption, each
as a class, in whole and not in part, at the option of the Surviving
Corporation, at a price of $.05 per Warrant at any time after the
consummation of the Merger, upon not less than 30 days' prior written
notice, provided that the last sale price of Surviving Corporation Common
Stock, if Surviving Corporation Common Stock is listed for trading on an
exchange or interdealer quotation system which provides last sale prices,
or, the average of the closing bid and asked quotes, if Surviving
Corporation Common Stock is listed for trading on an interdealer quotation
system which does not provide last sale prices, on all 10 of the trading
days ending on the day immediately prior to the day on which the Surviving
Corporation gives notice of redemption, has been $11.00 or higher. The
warrantholders shall have exercise rights until the close of business on
the date fixed for redemption.
The exercise price and number of shares of Surviving Corporation
Common Stock issuable on exercise of the Class A Warrants are subject to
adjustments under certain circumstances, including in the event of a stock
dividend, recapitalization, reorganization, merger or consolidation of IAC
(or the Surviving Corporation). The Warrants, however, are not subject to
adjustment for issuance of shares of IAC (or Surviving Corporation) Common
Stock at prices below their respective exercise prices.
IAC (and the Surviving Corporation) each has the right, in its sole
discretion, to decrease the exercise price of the Warrants for a period of
not less than 30 days on not less than 30 days' prior written notice to the
warrantholders, subject to compliance with applicable laws. In addition,
IAC (and the Surviving Corporation) has the right, in its sole discretion,
to extend the expiration date of the Warrants on five business days' prior
written notice to the warrantholders.
COMPARISON OF STOCKHOLDERS' RIGHTS
The following is a summary of material differences between the rights
of holders of Hollis-Eden Common Stock and the rights of holders of IAC
Common Stock. As each of Hollis-Eden and IAC is organized under and
subject to the laws of the State of Delaware, these differences arise from
various provisions of Hollis-Eden's and IAC's respective charter and
bylaws. Additionally, after the Effective Time, the Hollis-Eden Charter and
Bylaws will operate as the charter and bylaws of the Surviving Corporation.
NUMBER, ELECTION AND REMOVAL OF DIRECTORS
Subject to the rights of the holders of any series of preferred stock,
the Board of Directors of Hollis-Eden is divided into three classes
designated as Class I, Class II and Class III, with directors assigned to
each class in accordance with resolutions adopted by the Board of
Directors. At the first annual meeting of stockholders following the
Effective Time, the term of office of the Class I directors shall expire
and Class I directors shall be elected for a full term of three years. At
the second annual meeting of stockholders following the Effective Time, the
term of office of the Class II directors shall expire and Class II
directors shall be elected for a full term of three years. At the third
annual meeting of stockholders following the Effective Time, the term of
office of the Class III directors shall expire and Class III directors
shall be elected for a full term of three years. At each succeeding annual
meeting of stockholders, directors shall be elected for a full term of
three years to succeed the directors of the class whose terms expire at
such annual meeting. Also subject to the rights of the holders of any
series of preferred stock, no director shall be removed without cause.
The Board of Directors of IAC is comprised of one class of directors
made of up not more than eight directors, each of whom is elected annually
at the annual meeting of IAC Stockholders. Directors of IAC may be removed
with or without cause.
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<PAGE>
AMENDMENTS TO THE BYLAWS
The Hollis-Eden Bylaws may be amended by either the majority vote of
the Board of Directors or the affirmative vote of at least 66 2/3% of the
voting power of all of the then outstanding shares of voting stock of
Hollis-Eden.
The IAC Bylaws may be amended by either the majority vote of the Board
Directors or the affirmative vote of the holders of a majority of the
outstanding stock of IAC entitled to vote.
WRITTEN ACTION BY STOCKHOLDERS
No action shall be taken by Hollis-Eden Stockholders except at an
annual or special meeting of such stockholders.
IAC Stockholders may take any action required or permitted to be taken
at any annual or special meeting of stockholders without a meeting, without
prior notice and without a vote, if a consent in writing, setting forth the
action so taken, is signed by the holders of all of the outstanding shares
entitled to vote thereon.
SPECIAL MEETINGS OF STOCKHOLDERS
Special meetings of Hollis-Eden Stockholders may be called for any
purpose or purposes by (i) the Chairman of the Board of Directors, (ii) the
Chief Executive Officer or (iii) the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized
directors .
Special meetings of IAC Stockholders may be called for any purpose or
purposes at any time by (i) the President or by the Board of Directors or
(ii) the President or a Vice President or the Secretary whenever IAC
Stockholders holding not less than a majority of all of the outstanding
stock entitled to vote at such meeting shall make a written application
therefor stating the purpose or purposes for such a meeting.
ADVANCE NOTICE REQUIREMENTS IN CONNECTION WITH STOCKHOLDER PROPOSALS AND
DIRECTOR NOMINATIONS AT ANNUAL MEETINGS
For business to be properly brought before an annual meeting by a
Hollis-Eden Stockholder, such stockholder must have given timely notice
thereof in writing to the Secretary of Hollis-Eden. To be timely, such
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of Hollis-Eden not later than the close of
business on the 60th day nor earlier than the close of business on the 90th
day prior to the first anniversary of Hollis-Eden's preceding year's annual
meeting. Such notice shall set forth as to each general matter such
stockholder proposes to bring a brief description of the business desired
to be brought, the reasons for conducting such business at the annual
meeting and all other information relating to such matter as is required to
be disclosed to stockholders under the Exchange Act.
IAC does not have similar advance notice provisions.
TRANSFER AGENTS AND REGISTRARS
The transfer agent and registrar for shares of IAC Common Stock is
American Stock Transfer & Trust Company, 40 Wall Street, 46th Floor, New
York, New York 10005.
LEGAL MATTERS
The validity of the shares of IAC Common Stock being offered by this
Joint Proxy Statement/Prospectus is being passed upon for IAC by Reid &
Priest LLP, 40 West 57th Street, New York, New York 10019.
EXPERTS
The financial statements of IAC as of December 31, 1996 and 1995 and
for each of the years ended December 31, 1996, 1995, and 1994 and for the
period January 1, 1993 (inception) to December 31, 1996 have been included
herein and
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<PAGE>
in the Registration Statement in reliance upon the report of BDO Seidman,
LLP, independent certified public accountants, appearing elsewhere
herein and upon the authority of said firm as experts in accounting and
auditing.
The financial statements of Hollis-Eden as of December 31, 1995 and
1994 and for the year ended December 31, 1995, the period from inception
(August 15, 1994) to December 31, 1994 and the period from inception
(August 15, 1994) to December 31, 1995 included in this Prospectus have
been so included in reliance upon the report (which contains an explanatory
paragraph relating to the Company's ability to continue as a going concern
as described in Note 1 to the financial statements) of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
It is expected that representatives of BDO Seidman, LLP, and Price
Waterhouse LLP will be present at the Special Meetings of IAC and Hollis-
Eden, respectively, to respond to questions. They will be given an
opportunity to make a statement should they so desire.
-85-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
IAC
---
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
HOLLIS-EDEN
-----------
Report of Independent Accountants . . . . . . . . . . . . . . . . . F-12
Balance Sheet - December 31, 1995, 1994 and September 30, 1996 . . F-13
Statement of Operations for the year ended December 31, 1995, for the
period from inception (August 15, 1994) to December 31, 1994, for the
period from inception (August 15, 1994) to December 31, 1995,
for the nine months ended September 30, 1996 and 1995
and for the period from inception (August 15, 1994) to
September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . F-14
Statement of Stockholders' Deficit . . . . . . . . . . . . . . . . F-15
Statement of Cash Flows for the year ended December 31, 1995, for the
period from inception (August 15, 1994) to December 31, 1994, for the
period from inception (August 15, 1994) to December 31, 1995,
for the nine months ended September 30, 1996 and 1995
and for the period from inception (August 15, 1994) to
September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . F-16
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . F-18
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders of
Initial Acquisition Corp.
(a corporation in the development stage)
New York, New York
We have audited the accompanying balance sheets of Initial Acquisition
Corp. (a corporation in the development stage), as of December 31, 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
------------------------
PERIOD
YEAR ENDED
JANUARY 1,
DECEMBER 31,
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)
-------- -------- ------- --------
NET INCOME (LOSS) . . . . . $114,175 $100,523 $(7,000) $200,512
======== ======== ======= ========
EARNINGS (LOSS) PER SHARE . $ .14 $ .16 $ (.03)
======== ======== =======
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING . . . 833,250 608,250 233,250
======== ======== =======
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)
and 233,250, respectively . . . . 7,434 7,434
Additional paid-in capital . . . . 5,436,065 5,436,065
Earnings accumulated during
development stage . . . . . . . 118,446 53,304
COMMITMENTS . . . . . . . . . . . . .
Total . . . . . . . . . . . . $6,830,530 $6,518,759
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
SUBJECT TO
POSSIBLE
COMMON STOCK REDEMPTION
------------ ----------
SHARES AMOUNT SHARES
------ ------ ------
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 89,940
Net income . . . . . . . . . . . . -- -- --
Accretion to redemption value -- -- --
of common stock . . . . . . . . . ------- ----- ------
BALANCE AT DECEMBER 31, 1995 . . . . 743,310 7,434 89,940
------- ----- ------
Net income . . . . . . . . . . . . -- -- --
Accretion to redemption value of -- -- --
common stock . . . . . . . . . . ------- ----- ------
BALANCE AT DECEMBER 31, 1996 . . . . 743,310 $7,434 89,940
======= ====== ======
COMMON STOCK
SUBJECT TO
POSSIBLE
REDEMPTION
EARNINGS
------------
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN DEVELOPMENT
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 . . . . 899,283 5,356,073 --
Net income . . . . . . . -- -- 100,523
Accretion to
redemption value
of common stock . . . . 33,033 -- (33,033)
-------- ---------- --------
BALANCE AT DECEMBER 31,
1995 . . . . . . . . . . . 932,316 5,436,065 53,304
-------- ---------- --------
Net income . . . . . . . -- -- 114,175
Accretion to
redemption value of
common stock . . . . . 49,033 -- (49,033)
-------- ---------- --------
BALANCE AT DECEMBER 31,
1996 . . . . . . . . . . . $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
payable . . . . . 71,000 52,000 -- 123,000
----------- ---------- --------- ----------
Net cash used
in operating
activities . .(21,334) (30,207) (7,000) (59,727)
----------- ---------- --------- ----------
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
Bills . . . . 25,859,849 -- -- 25,859,849
----------- ---------- --------- ----------
Net cash used
in investing
activities . . . -- (5,999,218) -- (5,999,218)
----------- ----------- --------- ----------
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
costs . . . . . . . . -- 63,043 (10,821) --
----------- ----------- ---------- ---------
Net cash
provided by
(used in)
financing
activities . . (136,974) 6,323,500 (10,821) 6,205,808
----------- ------------ ---------- ---------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS . . . . (158,308) 294,075 (17,821) 146,863
CASH AND CASH
EQUIVALENTS,
beginning of year . . .305,171 11,096 28,917 --
----------- ------------ ---------- --------
CASH AND CASH
EQUIVALENTS,
end of year . . $ 146,863 $ 305,171 $11,096 $146,863
=========== ============ ========== ========
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.
The Company has 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
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.)
F-7
<PAGE>
INITIAL ACQUISITION CORP.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
----------------------------------------------
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 revenues and expenses during the reporting period.
Actual results could differ from these estimates.
NOTE 3 - INVESTMENTS
--------------------
The Company had invested the majority of the proceeds from the
Offering in United States Treasury Bills. These Treasury Bills, which were
purchased at a discount, are presented at their accreted cost, which
approximates market. The Treasury Bills mature in 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
F-8
<PAGE>
INITIAL ACQUISITION CORP.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTS TO FINANCIAL STATEMENTS
(CONTINUED)
-----------
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 full six months. In addition, in 1993, the Company issued
15,000 shares of common stock at a price $.10 per share for its agreement
to act as the Company's investment banker.
NOTE 6 - WARRANTS
-----------------
In April 1994, the Company issued warrants to purchase 160,000 units at
$10.00 per unit, each unit to be identical to the Units issued in the
Offering, exercisable until the fifth anniversary of the date of the
Prospectus.
In April 1994, the Company issued warrants to purchase up to 50,000
shares of Common Stock, at an exercisable price of $.10 per share, to an
executive of the Company. These warrants are exercisable for the one-year
period following the consummation of a Business Combination. At the time
of a Business Combination, a compensation charge will be incurred for the
difference between the exercise price and the fair market value of the
shares purchased.
F-9
<PAGE>
INITIAL ACQUISITION CORP.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
----------------------------------------------
NOTE 6 - WARRANTS (continued)
-----------------------------
In connection with the Offering, the Company issued warrants to the
underwriters for 60,000 units at an exercise price of $11.00 per unit and
24,000 Class B warrants at an exercise price of $5.775 per unit. These
warrants are exercisable for a period of four years commencing one year
from the date of the Prospectus.
NOTE 7 - 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>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Hollis-Eden, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' deficit, and of cash flows present fairly,
in all material respects, the financial position of Hollis-Eden, Inc. (a
development stage company) at December 31, 1995 and 1994, and the results
of its operations and its cash flows for the year ended December 31, 1995,
the period from inception (August 15, 1994) to December 31, 1994, and the
period from inception (August 15, 1994) to December 31, 1995, in conformity
with generally accepted accounting principles. These financial statements
are the responsibility of Hollis-Eden's management; our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
As discussed in Note 1 to the financial statements, the Company is a
development stage enterprise which has not yet commenced business
operations, has no operating history to date, and is dependent upon
additional debt or equity financing. In addition, the Company has a
stockholders' deficit of $1,537,633 at December 31, 1995. Such factors,
among others, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
/s/ Price Waterhouse LLP
-------------------------
Price Waterhouse LLP
Portland, Oregon
April 19, 1996
F-11
<PAGE>
HOLLIS-EDEN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, SEPTEMBER 30,
------------------------- ---------------
1995 1994 1996
---------- ------------ ----------
(UNAUDITED)
ASSETS
Current Assets
Cash $ 0 $ 0 $ 227,657
Other receivables 0 0 90,300
Prepaid expenses 0 0 19,572
--------- ---------- ----------
Total current assets 0 0 337,529
Property and Equipment, net
of accumulated
depreciation of $339 0 0 6,662
--------- ---------- ----------
Total Assets $ 0 $ 0 $ 344,191
========= ========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current Liabilities
Accrued expenses $ 92,111 $ 0 $ 37,641
Accrued expenses for
clinical trials 150,000 0 0
Wages payable 0 0 59,478
Accounts payable 0 0 15,336
Accounts payable to
related party (Note 8) 73,040 0 0
Note payable to related
party (Notes 3 and 8) 250,000 210,000 0
License fees payable to
related party (Note 6) 928,000 927,000 600,000
Accrued interest (Notes 3
and 8) 44,482 6,720 0
--------- ---------- ----------
Total liabilities 1,537,633 1,143,720 712,455
--------- ---------- ----------
Commitments and
contingencies (Note 6)
Stockholders' (deficit)
(Note 5)
Preferred Stock, no par
value, 10,000,000
shares authorized; no
shares issued or
outstanding 0 0 0
Common Stock, $.0001 par
value, 30,000,000
shares authorized;
4,150,943 and 3,396,226
and 4,911,004 shares
issued and outstanding 415 340 491
Additional Paid-in capital 410,689 132,986 2,050,238
Deficit accumulated during
development stage (1,948,737) (1,277,046) (2,418,993)
---------- ----------- ----------
Total stockholders'
(deficit) (1,537,633) (1,143,720) (368,264)
---------- ----------- ----------
Total liabilities and
stockholders'
equity (deficit) $ 0 $ 0 $ 344,191
=========== =========== ===========
The accompanying notes are an integral part of this statement.
F-12
<PAGE>
HOLLIS-EDEN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
FOR THE (AUGUST 15, (AUGUST 15,
YEAR ENDED 1994) TO 1994) TO
DECEMBER DECEMBER 31, DECEMBER 31,
31, 1995 1994 1995
---------- ---------------- --------------
Operating expenses:
Research and
development $ 463,000 $ 1,166,762 $1,629,762
General and
administrative 170,929 103,564 274,493
---------- ----------- -----------
Total operating
expenses 633,929 1,270,326 1,904,255
---------- ----------- -----------
Other income (expense):
Interest income 0 0 0
Interest expense (37,762) (6,720) (44,482)
---------- ----------- -----------
Total other income
(expense) (37,762) (6,720) (44,482)
---------- ----------- -----------
Net loss $ (671,691) $ (1,277,046) $(1,948,737)
=========== ============ ===========
Net loss per share $ (0.17) $ (0.38) $(0.54)
Weighted average
number of common
shares outstanding 3,867,924 3,396,228 3,632,075
PERIOD FROM
INCEPTION
FOR THE (AUGUST 15,
NINE MONTHS ENDED 1994) TO
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------
1996 1995 1996
---- ---- ----
(UNAUDITED) (UNAUDITED)
Operating expenses:
Research and development $ 124,093 $ 463,000 $ 1,753,855
General and administrative 346,229 138,429 620,722
-------- ----------
Total operating expenses 470,322 601,429 2,374,577
-------- -------- ----------
Other income (expense):
Interest income 3,208 0 3,208
Interest expense (3,142) (28,322) (47,624)
-------- --------- ----------
Total other income 66 (28,322) (44,416)
(expense) -------- --------- ----------
Net loss $(470,256) $(629,751) $(2,418,993)
========= ========== ===========
Net loss per share $ (0.10) $ (0.17) $ (0.61)
Weighted average
number of common
shares outstanding
4,573,199 3,773,585 3,945,783
The accompanying notes are an integral part of this statement.
F-13
<PAGE>
HOLLIS-EDEN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' DEFICIT
COMMON STOCK
$.0001 PAR
VALUE ADDITIONAL
-------------- PAID-IN
Shares Amount CAPITAL
-------- -------- -------------
Contribution by stockholder . . . 0 $0 $103,564
Common stock issued for cash . . 2,852,830 285 24,715
Common stock issued as
consideration
for amendments to the license
agreements (Note 6) . . . . . 543,396 55 4,707
Net Loss . . . . . . . . . . . . 0 0 0
--------- -------- -----------
Balance at Dec. 31, 1994 . . . . 3,396,226 340 132,986
Common stock issued for cash . . 679,245 68 249,932
Common stock issued as
consideration
for amendments to the license
agreements (Note 6) . . . . . . 75,472 7 27,771
Net Loss . . . . . . . . . . . . 0 0 0
-------- -------- ----------
Balance at Dec. 31, 1995 . . . . 4,150,943 415 $410,689
Common stock issued in conversion
of debt (unaudited) . . . . . . . 164,962 16 371,148
Common stock issued for cash,
net of issuance costs of
$70,512 (unaudited) . . . . . 580,005 58 1,234,441
Common stock issued as
consideration
for termination of a
financing agreement (unaudited)
15,094 2 33,960
Net Loss (unaudited) . . . . . . 0 0 0
--------- -------- ---------
Balance at September 30, 1996 4,911,004 $491 $2,050,238
(unaudited) . . . . . . . . . ========== ========= ==========
Deficit
accumulated during
development
stage Total
------------ --------
Contribution by stockholder . . . . . . $ 0 $103,564
Common stock issued for cash . . . . . 0 25,000
Common stock issued as consideration
for amendments to the license
agreements (Note 6) . . . . . . . . 0 4,762
Net Loss . . . . . . . . . . . . . . . (1,277,046) (1,277,046)
----------- ----------
Balance at Dec. 31, 1994 . . . . . . . (1,277,046) (1,143,720)
Common stock issued for cash . . . . . 0 250,000
Common stock issued as consideration
for amendments to the license
agreements (Note 6) . . . . . . . . . 0 27,778
Net Loss . . . . . . . . . . . . . . . (671,691) (671,691)
----------- -----------
Balance at Dec. 31, 1995 . . . . . . . $(1,948,737) $(1,537,633)
Common stock issued in conversion of
debt (unaudited) . . . . . . . . . . 0 371,164
Common stock issued for cash,
net of issuance costs of $70,512
(unaudited) . . . . . . . . . . . . 0 1,234,499
Common stock issued as consideration
for termination of a
financing agreement (unaudited) . . 0 33,962
Net Loss (unaudited) . . . . . . . . . (470,256) (470,256)
--------- --------
Balance at September 30, 1996 $(2,418,993) $(368,264)
(unaudited) . . . . . . . . . . . . =========== ==========
The accompanying notes are an integral part of this statement.
F-14
<PAGE>
HOLLIS-EDEN, INC.
(A Development Stage Company)
Statement of Cash Flows
Period from
inception Period from
(August 15, inception
For the 1994) (August 15,
year ended to December 1994) to
December 31, 31, December 31,
1995 1994 1995
----------- ---------- ---------
Cash flows from operating
activities:
Net Loss . . . . . . . . . . . $(671,691) $(1,277,046) $(1,948,737)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation . . . . . . . . 0 0 0
Common stock issued as
consideration for amendments
to the license agreements . 27,778 4,762 32,540
Common Stock issued as
consideration for termination
of a finance agreement . . . 0 0 0
Increase in other receivables 0 0 0
Increase in prepaid expenses 0 0 0
Increase (decrease) in accrued
expenses . . . . . . . . . . 92,111 0 92,111
Increase (decrease) in accrued
expenses for clinical trials 150,000 0 150,000
Increase in wages payable . . 0 0 0
Increase in accounts payable 0 0 0
Increase (decrease) in
accounts payable to related
party . . . . . . . . . . . 73,040 0 73,040
Increase (decrease) in license
fees payable to related
party . . . . . . . . . . . 1,000 927,000 928,000
Increase (decrease) in accrued 37,762 6,720 44,482
interest . . . . . . . . . . ------ ------ ------
Net cash used in operating (290,000) (338,564) (628,564)
activities . . . . . . . ------ ------ ------
Cash flow provided by investing
activities:
Purchase of property and 0 0 0
equipment . . . . . . . . . ------ ------ -----
Net cash used in investing 0 0 0
activities . . . . . . . ------ ------ -----
Cash flows from financing
activities:
Borrowings from related party . 40,000 210,000 250,000
Payments to related party . . . 0 0 0
Period from
inception
For the (August 15,
nine months ended 1994) to
September 30, September 30,
1996 1995 1996
(Unaudited) (Unaudited)
--------------- ------------
Cash flows from
operating activities:
Net Loss . . . . . . $(470,256) $(629,751) $(2,418,993)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation . . . 339 0 339
Common stock issued
as consideration for
amendments to the
license agreements . . 0 27,778 32,540
Common Stock issued
as consideration for
termination of a
finance agreement . . . 33,962 0 33,962
Increase in other
receivables . . . . . . (90,300) 0 (90,300)
Increase in prepaid
expenses . . . . . . . (19,572) 0 (19,572)
Increase (decrease)
in accrued expenses . . (54,470) 67,111 37,641
Increase (decrease)
in accrued expenses for
clinical trials . . . . (150,000) 150,000 0
Increase in wages
payable . . . . . . . . 59,478 0 59,478
Increase in
accounts payable . . . 15,336 0 15,336
Increase (decrease)
in accounts payable to
related party . . . . . (73,040) 50,540 0
Increase (decrease)
in license fees payable
to related party . . . (328,000) 16,000 600,000
Increase (decrease) (44,482) 28,322 0
in accrued interest . . ----------- ---------- ----------
Net cash used in (1,121,005) (290,000) (1,749,569)
operating activities . ----------- ---------- ----------
Cash flow provided by
investing activities:
Purchase of property
and equipment . . . . . (7,001) 0 (7,001)
Net cash used in
investing activities . (7,001) 0 (7,001)
Cash flows from
financing activities:
Borrowings from
related party . . . . . 0 40,000 250,000
Payments to related
party . . . . . . . . . (250,000) 0 (250,000)
The accompanying notes are an integral part of this statement.
F-15
<PAGE>
HOLLIS-EDEN, INC.
(A Development Stage Company)
Statement of Cash Flows
(CONTINUED)
Period from
inception Period from
(August 15, inception
For the 1994) (August 15,
year ended to December 1994) to
December 31, 31, December 31,
1995 1994 1995
----------- ---------- ---------
Contributions from
stockholder . . . . . . . . $ 0 $103,564 $103,564
Net proceeds from sale of
common stock . . . . . . . 250,000 25,000 275,000
Proceeds from issuance of 0 0 0
debt . . . . . . . . . . . ------- ------ -------
Net cash provided by 290,000 338,564 628,564
financing activities . . ------- ------ -------
Net increase in cash . . . . . . 0 0 0
Cash at beginning of period . . . 0 0 0
------- ------ ------
Cash at end of period . . . . . . $ 0 $ 0 $ 0
======= ======= =======
Supplemental disclosure of cash
flow information:
Interest paid . . . . . . . $ 0 $ 0 $ 0
Conversion of debt to
equity . . . . . . . . . . $ 0 $ 0 $ 0
Period from
inception
For the (August 15,
nine months ended 1994) to
September 30, September 30,
1996 1995 1996
(Unaudited) (Unaudited)
--------------- ------------
Contributions from $ 0 $ 0 $103,564
stockholder . . . --------- -------- --------
Net proceeds from
sale of common stock . 1,234,499 250,000 1,509,499
Proceeds from
issuance of debt . . . 371,164 0 371,164
--------- ------- ----------
Net cash
provided by financing
activities . . . . . . 1,355,663 290,000 1,984,227
---------- --------- -----------
Net increase in cash . 227,657 0 227,657
Cash at beginning of
period . . . . . . . . 0 0 0
--------- -------- ----------
Cash at end of period . . $227,657 $ 0 $227,657
======== ======== =========
Supplemental disclosure of
cash flow information:
Interest paid . . . . $ 44,482 $ 0 $ 44,482
Conversion of debt
to equity . . . . . $ 371,164 $ 0 $371,164
The accompanying notes are an integral part of this statement.
F-16
<PAGE>
[PAGE BREAK]
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, 1995. The Company has a
current and open Investigational New Drug (IND) with the Food and Drug
Administration (FDA) and has completed Phase I of testing for purposes of
obtaining FDA approval. Continued development of these products will
require the Company to renew its licenses with related parties and fund a
development contract with such related parties that are discussed in Note
6. No liability has been recorded for the renewal and execution of such
executory obligations. Management plans include performing additional
clinical trials and, depending upon the success of those trials, raising
additional funds through private placement offerings and/or an initial
public offering. However, there can be no assurance that the Company will
successfully raise additional funds to sustain operations.
2. SUMMARY OF ACCOUNTING POLICIES
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets (five years) using the straight-line method.
RESEARCH AND DEVELOPMENT
Research and development costs consist of license fee expenses related to
license agreements with related parties as well as clinical trial expenses.
Such amounts paid to related parties aggregated $313,000, $1,166,762,
$1,479,762 and $1,479,762 for the year ended December 31, 1995 and for the
periods from inception (August 15, 1994) to December 31, 1994, 1995 and
September 30, 1996, respectively. Such expenses are recognized as research
and development, as incurred.
INCOME TAXES
The Company provides for income taxes under the principles of Statement of
Financial Accounting Standards No. 109 (SFAS 109) which requires that
provision be made for taxes currently due and for the expected future tax
effects of temporary differences between book and tax bases of assets and
liabilities.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
payable, accrued expenses, note payable to related party, and license fees
payable. These financial instruments are stated at their respective
carrying values in the December 31, 1995 and 1994 financial statements,
which approximate their fair values.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NET LOSS PER SHARE
Net loss per share is based upon the weighted average number of common
shares. Common stock equivalents have been excluded from the computation
as their effect is anti-dilutive.
F-17
<PAGE>
HOLLIS-EDEN, INC.
(A Development Stage Company)
Notes to Financial Statements
(continued)
RECENT ACCOUNTING PRONOUNCEMENT
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123).
SFAS 123 allows companies to choose whether to account for stock-based
compensation on a fair value method or to continue to account for stock-
based compensation under the current intrinsic value method as prescribed
by APB Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company plans to adopt the disclosure alternative under SFAS 123 during
1996 and will continue to follow the provisions of APB Opinion No. 25.
Accordingly, management of the Company believes that the impact of adoption
will not have a significant effect on the Company's financial position,
results of operations or liquidity.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The information presented as of September 30, 1996, for the period from
inception (August 15, 1994) to September 30, 1996, and nine months ended
September 30, 1996 and 1995 has not been audited. In the opinion of
management, the unaudited interim financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the Company's financial position as of September 30, 1996
and the results of its operations and cash flows for the period from
inception (August 15, 1994) to September 30, 1996, and nine months ended
September 30, 1996 and 1995. The interim results of operations are not
necessarily indicative of results which may occur for the full fiscal year.
3. NOTE PAYABLE TO RELATED PARTY
At December 31, 1995 and 1994, the Company had an unsecured note payable to
a stockholder/officer in the amount of $250,000 and $210,000, respectively.
This note payable is due on demand, with interest at 15%. This note was
paid in full during April 1996. See further discussion in Note 8.
4. INCOME TAXES
The Company has available a net operating loss carryforward of $150,000 at
December 31, 1995 which may be carried forward as an offset to taxable
income, if any, in future years through its expiration in 2009 to 2010.
The Company has a net deferred tax asset comprised of capitalized start-up
costs of $1,754,255, deferred interest deduction to a related party of
$44,482 and the net operating loss carryforward. The net deferred tax
asset has been fully reserved due to the uncertainty of the Company being
able to generate net operating income under the more likely than not
criteria of SFAS 109.
5. REVERSE STOCK SPLITS
In March 1996, a 1 for 2.65 split of the Company's common stock was
effected. Also, on February 13, 1995 there was a 3 for 5 split of the
Company's common stock. All stock splits have been retroactively restated
for all periods presented.
6. RELATED PARTY LICENSES AND OTHER AGREEMENTS AND COMMITMENTS AND
CONTINGENCIES
The Company entered into two license agreements and one research,
development and option agreement as discussed in the following paragraphs.
Pursuant to a license agreement dated May 18, 1994 (Original License
Agreement) with related parties Patrick T. Prendergast, chief scientific
officer and a significant stockholder, and with Colthurst Limited, a
company controlled by Patrick T. Prendergast, the Company acquired the
exclusive worldwide rights of Patrick T. Prendergast's patent rights, know-
how and background technology relating to the treatment of human/animal
immunodeficiency as disclosed in U.S. patent No. 4,956,355 entitled "Agents
for the Arrest and Therapy of Retroviral Infections." Upon execution of
this agreement, the Company paid a license fee of $100,000 and was
contractually obligated to pay $250,000 no later than November 18, 1994.
The payment of this obligation was delinquent at December 31, 1994
F-18
<PAGE>
HOLLIS-EDEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
-------------
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 four,
is paid. (See Note 9). Also, the Company had agreed to pay royalties of
6% on product revenues. In the event of a sale of sublicenses or any
other third-party agreements, 25% of any fees are payable to Colthurst
Limited.
On August 25, 1994, the Company entered into a license agreement (Original
License Agreement) with a related party, Edenland Inc., a company
controlled by Patrick T. Prendergast for the exclusive worldwide rights of
Patrick T. Prendergast's patent rights, know-how and background technology
related to the anti-serum and to any other pharmaceutical product that
becomes subject to the license agreement under the research, development
and option agreement discussed below. Upon execution of this agreement,
the Company paid a license fee of $25,000. The agreement was amended in
August 1994 and required the Company to pay a license fee of $572,000 as
follows: $150,000 payable no later than February 28, 1995, $300,000 on
February 28, 1995, and $122,000 payable no later than March 31, 1995.
These amounts were included in license fees payable on the balance sheet at
December 31, 1994. The agreement was again amended on August 11, 1995 to
change the license fee payment terms as discussed below in paragraph four.
Per the Original License Agreement, the Company has agreed to pay royalties
of 4% of product revenues. In the event of a sale of sublicenses or any
other third-party agreements, 25% of any fees are payable to Edenland, Inc.
Additionally, the Company granted Edenland, Inc. the option to receive
payment of its royalties under the license agreement in the form of shares
of the Company's stock. The option is limited to a maximum of 5% of the
Company's outstanding shares at August 25, 1994. The option is subject to
the anti-serum and/or vaccine developed therefrom receiving product
approval and generating product revenues to the Company of at least
$200,000,000. The option exercise price per share is the fair market value
on the date when and if such revenue milestone is achieved, and the option
has a term of five years beginning from such date.
Effective August 11, 1995, Edenland, Inc., Colthurst Limited and the
Company entered into amendments concerning the license fee payment terms to
the two agreements described above. Under the August 11, 1995 amendment,
the Company is obligated to pay $350,000 by April 28, 1996 and up to an
additional $600,000 within 24 months of the $350,000 payment. The $600,000
fee will be payable by way of a five percent payment of the first
$12,000,000 of net proceeds or funds or investments acquired by or expended
on behalf of the Company by way of equity sale, partnership agreement, loan
or other means. At the end of the 24 month period, any unpaid portion of
the $600,000 fee is due immediately. If during the 24 month period the net
proceeds exceed $12,000,000, then an additional fee is due by way of two
and one-half percent of all such proceeds. As of December 31, 1995, the
Company has paid $22,000 of the $350,000 fee, and the remaining $328,000
and the $600,000 fee have been included in license fees payable as of
December 31, 1995 on the balance sheet. During April 1996, the $328,000
balance was paid in full. As consideration for entering into certain
amendments, the Company issued 75,472 shares of the Company's common stock
at fair market value to Edenland, Inc. and Colthurst Limited. Such
valuation was determined by the Board of Directors and was charged to G&A
for the year ended December 31, 1995.
In August 1994, the Company entered into a contingent research development
and option agreement, as amended, with Edenland, Inc. and Patrick T.
Prendergast. The agreement provides for the development of the anti-serum
to a stage of development that demonstrates the toxicity and safety profile
and also indicates potential efficacy in Phase II (FDA) patient studies,
and grants the Company the right of first option on new products developed
by Edenland, Inc. The agreement commits the Company to pay for the
development costs related to the anti-serum up to the amount of $3,000,000
contingent upon the Company's receipt of funds realized by way of equity
sale, sublicense, partnership agreements, loans, private placements and
public offerings which take place following April 28, 1996 but not later
than 24 months from 7 days following a private offering. Additionally, the
Company has agreed to pay
F-19
<PAGE>
HOLLIS-EDEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
-----------
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.
7. COMMON STOCK PURCHASE WARRANTS AND OPTIONS
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 12-
month period ending July 1, 1996, Hollis-Eden issued to Coffin
Communications Group an option, exercisable until July 12, 2000, to
purchase 18,868 shares of common stock at a price of $2.65 per share, 9,434
shares at a price of $5.30 per share, and 9,434 shares at a price of $7.95
per share. In addition, the Company agreed to register the shares
underlying the options for public sale as soon as is practicable.
PLACEMENT AGENT WARRANTS
The Company has agreed to issue to the Placement Agent, upon completion of
the Offering in April 1996 (See Note 8), a warrant to purchase an aggregate
of up to 445,000 shares of common stock, at an exercise price of $2.48 per
share. If the Placement Agent is successful in arranging certain
financings on behalf of the Company, additional warrants to purchase an
aggregate of up to 452,830 shares of common stock, at an exercise price of
$2,48 per share will be issued.
8. SUBSEQUENT EVENTS
On January 21, 1996, the Company completed a $367,522 round of debt
financing with a group of private investors (Bridge Finance Offering).
These new notes are due on or before the earlier of (i) January 21, 1997 or
(ii) the closing of a private or public offering of securities. These
notes bear interest at 8% per annum. The Company may at its option repay
these notes with common stock of the Company valued at a price of $2.25 per
share or such price at which shares are sold to investors in the Bridge
Finance Offering. Proceeds from this debt financing were used to repay the
note and accounts payable to related party, and accrued interest totaling
$367,522. During April 1996, these notes, plus accrued interest, were
converted into 164,962 shares of common stock at a price of $2.25 per
share.
From March 19, 1996 through April 19, 1996, the Company privately issued
580,005 shares of the Company's common stock (the Offering) at an offering
price of $2.25 per share. Total proceeds from this offering aggregated
$1,305,011.
Upon the completion of the Offering in April 1996, the Company was
committed to issue 570,000 nonqualified stock options to certain employees,
directors and consultants at an exercise price of $2.25 per share as
approved by the Company's Board of Directors. The options vest at various
times over a three-year period. An aggregate of 240,000 stock options will
expire on March 15, 2003 and the remaining 330,000 stock options expire on
March 15, 2006.
F-20
<PAGE>
HOLLIS-EDEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
-----------
9. ADDITIONAL SUBSEQUENT EVENTS (UNAUDITED)
During 1996, the board of directors approved a stock option plan for
officers, directors, employees, and consultants of the company and
authorized 500,000 shares to be reserved for the plan of which 330,500
shares have been granted to date at fair market value.
The Company has entered into an agreement to merge with Initial Acquisition
Corp. ("IAC"), a blank check company. IAC will be the surviving company
and will provide approximately $6.5 million of cash to the merged entity in
addition to registering the common stock of the merged entity. The merger
is expected to be effective during the first quarter of 1997.
In October 1996, the Company and Colthurst Limited, entered into an
amendment to the existing agreement (see note 6). The amendment changes
the due date of the renewable annual license of $500,000 from October 1997
to the first date that one of the following events occurs: the Company
raises a predetermined amount of capital occurring after May 18, 1994; the
Company sublicenses the technology received under the Colthurst License
Agreement; the Company generates sales; the Company licenses or funds new
technologies not covered under the existing agreements; or, February 10,
1999. The amendment also requires an additional license fee of $10,000 per
month beginning November 5, 1996 through the earlier of the effective date
of the merger or May 5, 1997. This amendment is contingent upon the
successful closure of the merger with Initial Acquisition Corp.
In October 1996, the Company and Edenland, Inc. entered into an amendment
to the existing Research, Development and Option agreement (see note 6).
This amendment accelerates the date that the $3,000,000 payment for anti-
serum development costs is to be made. A payment of $1,500,000 is payable
upon the closure of the merger and the balance is contingent upon future
funding events by allocating 22% of the funds raised to the Research,
Development and Option agreement until the $3,000,000 has been paid in
full. Under the existing agreement, the Company was obligated to fund
$2,000,000 per year for research with the first payment due in April, 1997.
This obligation will not commence until the Company raises an aggregate of
$10 million in capital occurring after May 18, 1994. Payments made toward
the $3,000,000 anti-serum development costs are deductible from the amounts
due for the $2,000,000 per year of research. This amendment is contingent
upon the successful closure of the merger with Initial Acquisition Corp.
On February 5, 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 vest 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.
F-21
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(i) IAC's Charter includes a provision that eliminates the personal
liability of IAC's directors to IAC's stockholders for monetary damages for
breach of fiduciary duty as a director to the maximum extent permitted by
the DGCL. The DGCL does not permit liability to be eliminated (a) for any
breach of a director's duty of loyalty to IAC or IAC's stockholders, (b)
for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, (c) for unlawful payments of
dividends or unlawful stock repurchases or redemptions, as provided in
Section 174 of the DGCL, or (d) for any transaction for which the director
derived an improper personal benefit.
(ii) Article X of IAC's By-Laws provides generally for indemnification
of all officers and directors to the fullest extent permitted under the
above-referenced Delaware statute. Section 145 of the DGCL provides that a
corporation may indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a director, officer, employee or agent
of the corporation or is or was serving at its request in such capacity in
another corporation or business association, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit
No. Description
-------- ------------
2* Agreement and Plan of Merger by and among the
Registrant, Hollis-Eden, Inc., Mr. Salvatore J.
Zizza and Mr. Richard B. Hollis, dated as of
November 1, 1996.
3.1* Certificate of Incorporation of the Registrant
[incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1
(Commission File No. 33-60134) filed on April 13,
1995].
3.2* By-laws of the Registrant [incorporated by reference
to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1 (Commission File No. 33-60134)
filed on April 13, 1995].
4.1* Form of Amended and Restated Certificate of
Incorporation of Hollis-Eden, Inc.(1)
4.2* Form of Bylaws of Hollis-Eden, Inc.(2)
4.3* Form of Common Stock Certificate of the Registrant
[incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-1
(Commission File No. 33-60134) filed on April 13,
1995].
4.4* Warrant Agency Agreement between American Stock
Transfer & Company and the Registrant [incorporated
by reference to Exhibit 4.2 to the Registrant's
Registration Statement on Form S-1 (Commission File
No. 33-60134) filed on April 13, 1995].
4.5* Form of Class A Common Stock Purchase Warrant of the
Registrant [incorporated by reference to Exhibit 4.3
to the Registrant's Registration Statement on Form
S-1 (Commission File No. 33-60134) filed on April
13, 1995].
4.6* Form of Class B Unit Purchase Warrant of the
Registrant [incorporated by reference to Exhibit 4.4
to the Registrant's Registration Statement on Form
S-1 (Commission File No. 33-60134) filed on April
13, 1995].
4.7* Representative's Warrant of the Registrant
[incorporated by reference to Exhibit 4.5 to the
Registrant's Registration Statement on Form S-1
(Commission File No. 33-60134) filed on April 13,
1995].
II-1
<PAGE>
Exhibit
No. Description
------ -------------
4.8* Representative's Warrant Agreement [incorporated by
reference to Exhibit 4.6 to the Registrant's
Registration Statement on Form S-1 (Commission File
No. 33-60134) filed on April 13, 1995].
5 Opinion of Reid and Priest LLP.
8* Tax Opinion of Cooley Godward LLP.
10.1* Form of Escrow Agreement for outstanding Common
Stock of the Registrant [incorporated by reference
to Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1 (Commission File No. 33-60134)
filed on April 13, 1995].
10.2* Engagement Letter, dated March 23, 1993, between
Gruntal & Co. and the Registrant, [incorporated by
reference to Exhibit 10.3 to the Registrant's
Registration Statement on Form S-1 (Commission File
No. 33-60134) filed on April 13, 1995].
10.3 The Registrant's 1997 Incentive Stock Option Plan.
10.4* Hollis-Eden, Inc.'s 1996 Stock Option Plan (the
"Option Plan").
10.5* Forms of Incentive Stock Options and Nonstatutory
Stock Options under the Option Plan.
10.6* Employment Agreement by and between Hollis-Eden,
Inc. and Richard B. Hollis dated November 1,1996.
10.7* License Agreement by and among Hollis-Eden, Inc.,
Colthurst Limited and Patrick T. Prendergast, Ph.D.
dated May 18, 1994, including all amendments
thereto.
10.8* License Agreement by and among Hollis-Eden, Inc.,
Edenland, Inc. and Patrick T. Prendergast, Ph.D.
dated August 25, 1994, including all amendments
thereto.
10.9* Research, Development and Option Agreement by and
among Hollis-Eden, Inc., Edenland, Inc. and Patrick
T. Prendergast, Ph.D. dated August 25, 1994,
including all amendments thereto.
10.10* Warrant Agreement with Laidlow Equities, Inc.
covering 452,830 shares of Common Stock (included
within Placement Agent Agreement dated January 26,
1996 between Laidlaw Equities, Inc. and Hollis-Eden,
Inc.).
10.11 Employment Agreement by and between Hollis-Eden,
Inc. and Terren S. Peizer, dated February 5, 1997.
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Price Waterhouse LLP.
24.1* Power of Attorney.
27 Financial Data Schedule
------------------------
* Previously filed.
(1) To be filed by Hollis-Eden and to become the Certificate of
Incorporation of the Surviving Corporation.
(2) To be adopted by the Hollis-Eden and to become the Bylaws of the
Surviving Corporation.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE>
The undersigned Registrant hereby undertakes:
(1) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or
13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of
the Registration Statement through the date of responding to the
request;
(2) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in the
registration statement when it became effective;
(3) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(4) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(5) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering;
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
New York, State of New York, on February 7, 1997.
INITIAL ACQUISITION CORP.
By: /s/ Salvatore J. Zizza
---------------------------------------------
Salvatore J. Zizza
President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
President, Chairman of
/s/ Salvatore J. Zizza the Board of
------------------------- Directors, Treasurer
Salvatore J. Zizza and Director February 7,
(Principal Executive, 1997
Financial and
Accounting Officer)
Director February 7,
/s/ * 1997
-------------------------
Sidney Dworkin
Director February 7,
/s/ * 1997
-------------------------
Herbert M. Paul
Director February 7,
/s/ * 1997
------------------------
Richard L. Bready
Director February 7,
/s/ * 1997
------------------------
Alan P. Donenfeld
*By: Salvatore J. Zizza, as
Attorney-In-Fact
II-4
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- ------------
2* Agreement and Plan of Merger by and among the
Registrant, Hollis-Eden, Inc., Mr. Salvatore J.
Zizza and Mr. Richard B. Hollis, dated as of
November 1, 1996.
4.1* Form of Amended and Restated Certificate of
Incorporation of Hollis-Eden, Inc.(1)
4.2* Form of Bylaws of Hollis-Eden, Inc.(2)
5 Opinion of Reid and Priest LLP.
8* Tax Opinion of Cooley Godward LLP.
10.3 The Registrant's 1997 Incentive Stock Option Plan.
10.4* Hollis-Eden, Inc.'s 1996 Stock Option Plan (the
"Option Plan").
10.5* Forms of Incentive Stock Options and Nonstatutory
Stock Options under the Option Plan.
10.6* Employment Agreement by and between Hollis-Eden,
Inc. and Richard B. Hollis dated November 1,1996.
10.7* License Agreement by and among Hollis-Eden, Inc.,
Colthurst Limited and Patrick T. Prendergast, Ph.D.
dated May 18, 1994, including all amendments
thereto.
10.8* License Agreement by and among Hollis-Eden, Inc.,
Edenland, Inc. and Patrick T. Prendergast, Ph.D.
dated August 25, 1994, including all amendments
thereto.
10.9* Research, Development and Option Agreement by and
among Hollis-Eden, Inc., Edenland, Inc. and Patrick
T. Prendergast, Ph.D. dated August 25, 1994,
including all amendments thereto.
10.10* Warrant Agreement with Laidlow Equities, Inc.
covering 452,830 shares of Common Stock (included
within Placement Agent Agreement dated January 26,
1996 between Laidlaw Equities, Inc. and Hollis-Eden,
Inc.).
10.11 Employment Agreement by and between Hollis-Eden,
Inc. and Terren S. Peizer, dated February 5, 1997.
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Price Waterhouse LLP.
24.1* Power of Attorney.
27 Financial Data Schedule
------------------------
* Previously filed.
(1) To be filed by Hollis-Eden and to become the Certificate of
Incorporation of the Surviving Corporation.
(2) To be adopted by the Hollis-Eden and to become the Bylaws of the
Surviving Corporation.
REID & PRIEST LLP
40 WEST 57TH STREET
NEW YORK, N.Y. 10019-4097
TELEPHONE 212 603-2000
FAX 212 603-2001
New York, New York
January 30, 1997
Initial Acquisition Corp.
810 Seventh Avenue
New York, New York 10019
Re: Initial Acquisition Corp.
Registration Statement on Form S-4
----------------------------------
Ladies and Gentlemen:
We have acted as counsel to Initial Acquisition Corp., a Delaware
corporation (the "Registrant"), in connection with the preparation and
filing by the Registrant with the Securities and Exchange Commission (the
"Commission") of a Registration Statement on Form S-4 (the Registration
Statement") relating to (i) the proposed merger (the "Merger") of Hollis-
Eden, Inc., a Delaware corporation ("Hollis-Eden"), with and into the
Registrant, with the Registrant being the surviving corporation to the
Merger (the "Surviving Corporation") and (ii) the registration under the
Securities Act of 1933, as amended (the "Act"), of (a) 4,911,004 shares of
common stock, par value $.01 per share, of the Surviving Corporation (the
"Common Stock"), (b) 1,501,603 shares of Common Stock underlying warrants
to purchase shares of the Surviving Corporation and (c) 778,047 shares of
Common Stock underlying options to purchase shares of the Surviving
Corporation (collectively, the "Shares"), all of which are issuable in
connection with the Merger.
With respect to the proposed offering and the Merger, we have
examined the Certificate of Incorporation, as amended, and the By-Laws of
the Registrant, resolutions of the Board of Directors of the Registrant,
and the Registration Statement. We have also made such inquiries and have
examined originals, certified copies or copies of other instruments as we
have deemed necessary or appropriate for the purpose of this opinion. For
purposes of such examination, we have assumed the genuineness of all
signatures on and the authenticity of all documents submitted to us as
originals, and the conformity to the originals of all documents submitted
to us as certified or photostatic copies.
Based upon the foregoing, we are of the opinion that the Shares
covered by the Registration Statement, when issued as provided for in the
Registration Statement, will be duly authorized, validly issued, fully paid
and non-assessable shares of Common Stock of the Registrant (or the
Surviving Corporation following the Merger).
We hereby consent to the filing of this opinion as Exhibit 5 to
the Registration Statement and to the reference therein to our firm under
the caption "Legal Matters."
Very truly yours,
/s/ Reid & Priest LLP
----------------------
REID & PRIEST LLP
INITIAL ACQUISITION CORP.
1997 INCENTIVE STOCK OPTION PLAN
_______________
EFFECTIVE AS OF FEBRUARY 5, 1997
<PAGE>
INITIAL ACQUISITION CORP.
1997 INCENTIVE STOCK OPTION PLAN
INTRODUCTION
Initial Acquisition Corp., a Delaware corporation
(hereinafter referred to as the "Corporation"), hereby
establishes an incentive compensation plan to be known as the
"INITIAL ACQUISITION CORP. 1997 INCENTIVE STOCK OPTION PLAN"
(hereinafter referred to as the "Plan"), as set forth in this
document. The Plan permits the grant of Non-Qualified Stock
Options and Incentive Stock Options.
The Plan shall become effective on February 5, 1997.
However, it shall be rendered null and void and have no effect,
and all Plan Awards granted hereunder shall be canceled, if the
Plan is not approved by a majority vote of the Corporation's
stockholders within twelve (12) months of the effective date of
the Plan.
The purpose of the Plan is to promote the success and
enhance the value of the Corporation by linking the personal
interests of Participants to those of the Corporation's
stockholders by providing Participants with an incentive for
outstanding performance. The Plan is further intended to assist
the Corporation in its ability to motivate, and retain the
services of, Participants upon whose judgment, interest and
special effort the successful conduct of its operations is
largely dependent.
<PAGE>
DEFINITIONS
For purposes of this Plan, the following terms shall be
defined as follows unless the context clearly indicates
otherwise:
(a) "Award Agreement" shall mean the written
---------------
agreement, executed by an appropriate officer of the Corporation,
pursuant to which a Plan Award is granted.
(b) "Board of Directors" shall mean the Board of
------------------
Directors of the Corporation.
(c) "Code" shall mean the Internal Revenue Code of 1986,
----
as amended, and the rules and regulations thereunder.
(d) "Committee" shall mean the Committee hereinafter
---------
described in Section I.
(e) "Common Stock" shall mean the common stock, par
------------
value $.01 per share, of the Corporation.
(f) "Consultant" shall mean an individual who is in a
----------
Consulting Relationship with the Corporation or any Parent or
Subsidiary.
(g) "Consulting Relationship" shall mean the
-----------------------
relationship that exists between an individual and the
Corporation (or any Parent or Subsidiary) if (i) such individual
or (ii) any entity of which such individual is an executive
officer or owns a substantial equity interest has entered into a
written consulting contract with the Corporation or any Parent or
Subsidiary.
(h) "Corporation" shall mean Initial Acquisition Corp.
-----------
a Delaware corporation.
(i) "Disability" shall have the same meaning as the tem
----------
"permanent and total disability" under Section 22(e)(3) of the
Code.
(j) "Employee" shall mean a common-law employee of the
--------
Company or of any Parent or Subsidiary.
(k) "Exchange Act" shall mean the Securities Exchange
------------
Act of 1934, as amended, and the rules and regulations
thereunder.
(l) "Executive" means an employee of the Corporation or
---------
of any Parent or Subsidiary whose compensation is subject to the
deduction limitations set forth under Code Section 162(m).
(m) "Fair Market Value" of the Corporation's Common
-----------------
Stock on a Trading Day shall mean the last reported sale price
for Common Stock or, in case no such reported sale takes place on
such Trading Day, the average of the closing bid and asked prices
for the Common Stock for such Trading Day, in either case on the
principal national securities exchange on which the Common Stock
is listed or admitted to trading, or if the Common Stock is not
listed or admitted to trading on any national securities
exchange, but is traded in the over-the-counter market, the
closing sale price of the Common Stock or, if no sale is publicly
reported, the average of the closing bid and asked quotations for
the Common Stock, as reported by the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") or any
comparable system or, if the Common Stock is not listed on NASDAQ
or a comparable system, the closing sale price of the Common
Stock or, if no sale is publicly reported, the average of the
closing bid and asked prices, as furnished by two members of the
National Association of Securities Dealers, Inc. who make a
market in the Common Stock selected from time to time by the
Corporation for that purpose. In addition, for purposes of this
definition, a "Trading Day" shall mean, if the Common Stock is
listed on any national securities exchange, a business day during
which such exchange was open for trading and at least one trade
of Common Stock was effected on such exchange on such business
day, or, if the Common Stock is not listed on any national
securities exchange but is traded in the over-the-counter market,
a business day during which the over-the-counter market was open
for trading and at least one "eligible dealer" quoted both a bid
and asked price for the Common Stock. An "eligible dealer" for
any day shall include any broker-dealer who quoted both a bid and
asked price for such day, but shall not include any broker-dealer
who quoted only a bid or only an asked price for such day. In
the event the Corporation's Common Stock is not publicly traded,
the Fair Market Value of such Common Stock shall be determined by
the Committee in good faith.
(n) "Good Cause" shall mean (i) a Participant's wilful
----------
or gross misconduct or willful or gross negligence in the
performance of his duties for the Corporation or for any Parent
or Subsidiary after prior written notice of such misconduct or
negligence and the continuance thereof for a period of 30 days
after receipt by such Participant of such notice, (ii) a
Participant's intentional or habitual neglect of his duties for
the Corporation or for any Parent or Subsidiary after prior
written notice of such neglect, (iii) a Participant's theft or
misappropriation of funds of the Corporation or of any Parent or
Subsidiary or commission of a felony or (iv) the direct or
indirect breach by the Participant of the terms of a related
consulting contract with the Corporation or any Parent or
Subsidiary.
(o) "Incentive Stock Option" shall mean a stock option
----------------------
satisfying the requirements for tax-favored treatment under
Section 422 of the Code.
(p) "Non-Qualified Option" shall mean a stock option
--------------------
which does not satisfy the requirements for, or which is not
intended to be eligible for, tax-favored treatment under Section
422 of the Code.
(q) "Option" shall mean an Incentive Stock Option or a
------
Non-Qualified Stock Option granted pursuant to the provisions of
Section V hereof.
(r) "Optionee" shall mean a Participant who is granted
--------
an Option under the terms of this Plan.
(s) "Outside Directors" shall mean members of the Board
-----------------
of Directors of the Corporation who are classified as "outside
directors" under Section 162(m) of the Code.
(t) "Parent" shall mean a parent corporation of the
------
Corporation within the meaning of Section 424(e) of the Code.
(u) "Participant" shall mean any Employee or other
-----------
person participating under the Plan.
(v) "Plan Award" shall mean an Option granted pursuant
----------
to the terms of this Plan.
(w) "Securities Act" shall mean the Securities Act of
--------------
1933, as amended, and the rules and regulations thereunder.
(x) "Subsidiary" shall mean a subsidiary corporation of
----------
the Corporation within the meaning of Section 424(f) of the Code.
(y) "Termination of Consulting Relationship" shall mean
--------------------------------------
the cessation, abridgement or termination of a Consultant's
Consulting Relationship with the Corporation or any Parent or
Subsidiary as a result of (i) the Consultant's death or
Disability (ii) the cancellation, annulment, expiration,
termination or breach of the written consulting contract between
the Corporation (or any Parent or Subsidiary) and the Consultant
(or any other entity) giving rise to the Consulting Relationship
or (iii) if the written consulting contract is not directly
between the Corporation (or any Parent or Subsidiary) and the
Consultant, the Consultant's termination of service with, or sale
of all or substantially all of his equity interest in, the entity
which has entered into the written consulting contract with the
Corporation, Parent or Subsidiary.
SECTION I
ADMINISTRATION
The Plan shall be administered by the Committee, which
shall be composed solely of at least two Non-Employee Directors,
as defined in Rule 16b-3(b)(3) promulgated under the Exchange
Act, and who also qualify as "Outside Directors". Subject to the
provisions of the Plan, the Committee may establish from time to
time such regulations, provisions, proceedings and conditions of
awards which, in its sole opinion, may be advisable in the
administration of the Plan. A majority of the Committee shall
constitute a quorum, and, subject to the provisions of Section IV
of the Plan, the acts of a majority of the members present at any
meeting at which a quorum is present, or acts approved in writing
by a majority of the Committee, shall be the acts of the
Committee as a whole.
SECTION II
SHARES AVAILABLE
Subject to the adjustments provided in Section VI of
the Plan, the aggregate number of shares of the Common Stock
which may be granted for all purposes under the Plan shall be
1,000,000 shares. Shares of Common Stock underlying awards of
securities (derivative or not) and shares of Common Stock awarded
hereunder (whether or not on a restricted basis) shall be counted
against the limitation set forth in the immediately preceding
sentence and may be reused to the extent that the related Plan
Award to any individual is settled in cash, expires, is
terminated unexercised, or is forfeited. Common Stock granted to
satisfy Plan Awards under the Plan may be authorized and unissued
shares of the Common Stock, issued shares of such Common Stock
held in the Corporation's treasury or shares of Common Stock
acquired on the open market.
SECTION III
ELIGIBILITY
Officers and key employees of the Corporation, or of
any Parent or Subsidiary, who are regularly employed on a
salaried basis as common law employees, Consultants, and
directors of the Corporation or of any Parent or Subsidiary who
are not Employees, shall be eligible to participate in the Plan.
Where appropriate under this Plan, directors who are not
Employees shall be referred to as "employees" and their service
as directors as "employment".
SECTION IV
AUTHORITY OF COMMITTEE
The Plan shall be administered by, or under the
direction of, the Committee, which shall administer the Plan so
as to comply at all times with Section 16 of the Exchange Act and
the rules and regulations promulgated thereunder, to the extent
such compliance is required, and shall otherwise have plenary
authority to interpret the Plan and to make all determinations
specified in or permitted by the Plan or deemed necessary or
desirable for its administration or for the conduct of the
Committee's business. Subject to the provisions of Section X
hereof, all interpretations and determinations of the Committee
may be made on an individual or group basis and shall be final,
conclusive and binding on all interested parties. Subject to the
express provisions of the Plan, the Committee shall have
authority, in its discretion, to determine the persons to whom
Plan Awards shall be granted, the times when such Plan Awards
shall be granted, the number of Plan Awards, the exercise price
of each Plan Award, the period(s) during which a Plan Award shall
be exercisable (whether in whole or in part), the restrictions to
be applicable to Plan Awards and the other terms and provisions
thereof (which need not be identical). In addition, the
authority of the Committee shall include, without limitation, the
following:
(a) Financing. The arrangement of temporary financing
---------
for an Optionee by registered broker-dealers, under the rules and
regulations of the Federal Reserve Board, for the purpose of
assisting an Optionee in the exercise of an Option, such
authority to include the payment by the Corporation of the
commissions of the broker-dealer;
(b) Procedures for Exercise of Option. The
---------------------------------
establishment of procedures for an Optionee (i) to exercise an
Option by payment of cash, (ii) to have withheld from the total
number of shares of Common Stock to be acquired upon the exercise
of an Option that number of shares having a Fair Market Value,
which, together with such cash as shall be paid in respect of
fractional shares, shall equal the Option exercise price of the
total number of shares of Common Stock to be acquired, (iii) to
exercise all or a portion of an Option by delivering that number
of shares of Common Stock already owned by him having a Fair
Market Value which shall equal the Option exercise price for the
portion exercised and, in cases where an Option is not exercised
in its entirety, and subject to the requirements of the Code, to
permit the Optionee to deliver the shares of Common Stock thus
acquired by him in payment of shares of Common Stock to be
received pursuant to the exercise of additional portions of such
Option, the effect of which shall be that an Optionee can in
sequence utilize such newly acquired shares of Common Stock in
payment of the exercise price of the entire Option, together with
such cash as shall be paid in respect of fractional shares and
(iv) to engage in any form of "cashless" exercise.
(c) Withholding. The establishment of a procedure
-----------
whereby a number of shares of Common Stock or other securities
may be withheld from the total number of shares of Common Stock
or other securities to be issued upon exercise of an Option or
for the tender of shares of Common Stock owned by any Participant
to meet any obligation of withholding for taxes incurred by the
Participant upon such exercise.
SECTION V
STOCK OPTIONS
The Committee shall have the authority, in its
discretion, to grant Incentive Stock Options or to grant
Non-Qualified Stock Options or to grant both types of Options.
Notwithstanding anything contained herein to the contrary, an
Incentive Stock Option may be granted only to common law
employees of the Corporation or of any Parent or Subsidiary now
existing or hereafter formed or acquired, and not to any director
or officer who is not also such a common law employee. In order
for an Option grant to satisfy the "performance-based
compensation" exemption to the deduction limitation under Code
Section 162(m), the maximum number of shares of Common Stock
subject to Options which may be granted to any single Executive
during any one calendar year is 250,000. The terms and
conditions of the Options shall be determined from time to time
by the Committee; provided, however, that the Options granted
-------- --------
under the Plan shall be subject to the following:
(a) Exercise Price. The Committee shall establish the
--------------
exercise price at the time any Option is granted at such amount
as the Committee shall determine; provided, however, that the exercise
-------- -------
price for each share of Common Stock purchasable under any
Incentive Stock Option granted hereunder shall be such amount as
the Committee shall, in its best judgment, determine to be not
less than one hundred percent (100%) of the Fair Market Value per
share of Common Stock at the date the Option is granted; and
provided, further, that in the case of an Incentive Stock Option
granted to a person who, at the time such Incentive Stock Option
is granted, owns shares of stock of the Corporation or of any
Parent or Subsidiary which possess more than ten percent (10%) of
the total combined voting power of all classes of shares of stock
of the Corporation or of any Parent or Subsidiary, the exercise
price for each share of Common Stock shall be such amount as the
Committee, in its best judgment, shall determine to be not less
than one hundred ten percent (110%) of the Fair Market Value per
share of Common Stock at the date the Option is granted. The
exercise price will be subject to adjustment in accordance with
the provisions of Section VI of the Plan.
(b) Payment of Exercise Price. The price per share of
-------------------------
Common Stock with respect to each Option shall be payable at the
time the Option is exercised. Such price shall be payable in
cash or pursuant to any of the methods set forth in Sections
IV(a) or (b) hereof, as determined by the Participant. Shares of
Common Stock delivered to the Corporation in payment of the
exercise price shall be valued at the Fair Market Value of the
Common Stock on the date preceding the date of the exercise of
the Option.
(c) Exercisability of Options. Except as provided in
-------------------------
Section V(e) hereof, each Option shall be exercisable in whole or
in installments, and at such time(s), and subject to the
fulfillment of any conditions on, and to any limitations on,
exercisability as may be determined by the Committee at the time
of the grant of such Options. The right to purchase shares of
Common Stock shall be cumulative so that when the right to
purchase any shares of Common Stock has accrued such shares of
Common Stock or any part thereof may be purchased at any time
thereafter until the expiration or termination of the Option.
(d) Expiration of Options. No Incentive Stock Option by
---------------------
its terms shall be exercisable after the expiration of ten (10)
years from the date of grant of the Option; provided, however, in
-------- -------
the case of an Incentive Stock Option granted to a person who, at
the time such Option is granted, owns shares of stock of the
Corporation or of any Parent or Subsidiary possessing more than
ten percent (10%) of the total combined voting power of all
classes of shares of stock of the Corporation or of any Parent or
Subsidiary, such Option shall not be exercisable after the
expiration of five (5) years from the date such Option is
granted.
(e) Exercise Upon Optionee's Termination of Employment
--------------------------------------------------
or Termination of Consulting Relationship. If the employment of an
-----------------------------------------
Optionee by the Corporation or by any Parent or Subsidiary is
terminated for any reason other than death, any Incentive Stock
Option granted to such Optionee may not be exercised later than
three (3) months (one (1) year in the case of termination due to
Disability) after the date of such termination of employment. For
purposes of determining whether any Optionee has incurred a
termination of employment (or a Termination of Consulting
Relationship), an Optionee who is both an employee (or a
Consultant) and a director of the Corporation and/or any Parent
or Subsidiary shall (with respect to any Non-Qualified Option
that may have been granted to him) be considered to have incurred
a termination of employment (or a Termination of Consulting
Relationship) only upon his termination of service both as an
employee (or as a Consultant) and as a director. Furthermore, (i)
if an Optionee's employment (or Consulting Relationship) is
terminated by the Corporation or by any Parent or Subsidiary for
Good Cause or (ii) if an Optionee voluntarily terminates his
employment other than for Disability (or incurs a voluntary
Termination of Consulting Relationship other than for Disability)
with the Corporation or with any Parent or Subsidiary without the
written consent of the Committee, regardless of whether such
Optionee continues to serve as a director of the Corporation or
of any Parent or Subsidiary, then the Optionee shall, at the time
of such termination of employment (or Termination of Consulting
Relationship), forfeit his rights to exercise any and all of the
outstanding Option(s) theretofore granted to him.
(f) Maximum Amount of Incentive Stock Options. Each
-----------------------------------------
Plan Award under which Incentive Stock Options are granted shall
provide that to the extent the aggregate of the (i) Fair Market
Value of the shares of Common Stock (determined as of the time of
the grant of the Option) subject to such Incentive Stock Option
and (ii) the fair market values (determined as of the date(s) of
grant of the option(s) of all other shares of Common Stock
subject to incentive stock options granted to an Optionee by the
Corporation or any Parent or Subsidiary, which are exercisable
for the first time by any person during any calendar year,
exceed(s) one hundred thousand dollars ($100,000), such excess
shares of Common Stock shall not be deemed to be purchased
pursuant to Incentive Stock Options. The terms of the
immediately preceding sentence shall be applied by taking all
options, whether or not granted under this Plan, into account in
the order in which they are granted.
SECTION VI
ADJUSTMENT OF SHARES; MERGER OR
CONSOLIDATION, ETC. OF THE CORPORATION
(a) Recapitalization, Etc. In the event there is any
----------------------
change in the Common Stock of the Corporation by reason of any
reorganization, recapitalization, stock split, stock dividend or
otherwise, there shall be substituted for or added to each share
of Common Stock theretofore appropriated or thereafter subject,
or which may become subject, to any Option, the number and kind
of shares of stock or other securities into which each
outstanding share of Common Stock shall be so changed or for
which each such share shall be exchanged, or to which each such
share be entitled, as the case may be, and the per share price
thereof also shall be appropriately adjusted. Notwithstanding
the foregoing, (i) each such adjustment with respect to an
Incentive Stock Option shall comply with the rules of Section
424(a) of the Code and (ii) in no event shall any adjustment be
made which would render any Incentive Stock Option granted
hereunder to be other than an incentive stock option for purposes
of Section 422 of the Code.
(b) Merger, Consolidation or Change in Control of
---------------------------------------------
Corporation. Upon (i) the merger or consolidation of the
-----------
Corporation with or into another corporation (pursuant to which
the stockholders of the Corporation immediately prior to such
merger or consolidation will not, as of the date of such merger
or consolidation, own a beneficial interest in shares of voting
securities of the corporation surviving such merger or
consolidation having at least a majority of the combined voting
power of such corporation's then outstanding securities), if the
agreement of merger or consolidation does not provide for (1) the
continuance of the Options granted hereunder or (2) the
substitution of new options for Options granted hereunder, or for
the assumption of such Options by the surviving corporation, (ii)
the dissolution, liquidation, or sale of all or substantially all
the assets of the Corporation to a person unrelated to the
Corporation or to a direct or indirect owner of a majority of the
voting power of the Corporation's then outstanding voting
securities (such sale of assets being referred to as an "Asset
Sale") or (iii) the Change in Control of the Corporation, the
holder of any such Option theretofore granted and still
outstanding (and not otherwise expired) shall have the right
immediately prior to the effective date of such merger,
consolidation, dissolution, liquidation, Asset Sale or Change in
Control of the Corporation to exercise such Option(s) in whole or
in part without regard to any installment provision that may have
been made part of the terms and conditions of such Option(s);
provided that any conditions precedent to the exercise of such
Option(s), other than the passage of time, have occurred. The
Corporation, to the extent practicable, shall give advance notice
to affected Optionees of such merger, consolidation, dissolution,
liquidation, Asset Sale or Change in Control of the Corporation.
All such Options which are not so exercised shall be forfeited as
of the effective time of such merger, consolidation, dissolution,
liquidation or Asset Sale (but not in the case of a Change in
Control of the Corporation).
(c) Definition of Change in Control of the Corporation.
--------------------------------------------------
As used herein, a "Change in Control of the Corporation" shall be
deemed to have occurred if any person (including any individual,
firm, partnership or other entity) together with all Affiliates
and Associates (as defined under Rule 12b-2 of the General Rules
and Regulations promulgated under the Exchange Act) of such
person (but excluding (i) a trustee or other fiduciary holding
securities under an employee benefit plan of the Corporation or
any subsidiary of the Corporation, (ii) a corporation owned,
directly or indirectly, by the stockholders of the Corporation in
substantially the same proportions as their ownership of the
Corporation, (iii) the Corporation or any subsidiary of the
Corporation or (iv) only as provided in the immediately following
sentence, a Participant together with all Affiliates and
Associates of the Participant) is or becomes the Beneficial Owner
(as defined in Rule 13d-3 promulgated under the Exchange Act),
directly or indirectly, of securities of the Corporation
representing 40% of more of the combined voting power of the
Corporation's then outstanding securities. The provisions of
clause (iv) of the immediately preceding sentence shall apply
only with respect to the Option(s) held by the Participant who,
together with his Affiliates or Associates, if any, is or becomes
the direct or indirect Beneficial Owner of the percentage of
securities set forth in such clause.
SECTION VII
MISCELLANEOUS PROVISIONS
(a) Administrative Procedures. The Committee may
-------------------------
establish any procedures determined by it to be appropriate in
discharging its responsibilities under the Plan. Subject to the
provisions of Section X hereof, all actions and decisions of the
Committee shall be final.
(b) Assignment or Transfer. No grant or award of any
----------------------
Plan Award (other than a Non-Qualified Option) or any rights or
interests therein shall be assignable or transferable by a
Participant except by will or the laws of descent and
distribution or pursuant to a domestic relations order. During
the lifetime of a Participant, Incentive Stock Options granted
hereunder shall be exercisable only by the Participant.
(c) Investment Representation. With respect to shares
-------------------------
of Common Stock received pursuant to the exercise of an Option,
the Committee may require, as a condition of receiving such
securities, that the Participant furnish to the Corporation such
written representations and information as the Committee deems
appropriate to permit the Corporation, in light of the existence
or nonexistence of an effective registration statement under the
Securities Act to deliver such securities in compliance with the
provisions of the Securities Act.
(d) Withholding Taxes. In the case of the issuance or
-----------------
distribution of Common Stock or other securities hereunder upon
the exercise of any Plan Award, the Corporation, as a condition
of such issuance or distribution, may require the payment
(through withholding from the Participant's salary, reduction of
the number of shares of Common Stock or other securities to be
issued, or otherwise) of any such taxes. Each Participant may
satisfy the withholding obligations by paying to the Corporation
a cash amount equal to the amount required to be withheld or by
tendering to the Corporation a number of shares of Common Stock
having a value equivalent to such cash amount, or by use of any
available procedure as described under Section IV(c) hereof.
(e) Costs and Expenses. The costs and expenses of
------------------
administering the Plan shall be borne by the Corporation and
shall not be charged against any award nor to any employee
receiving a Plan Award.
(f) Other Incentive Plans. The adoption of the Plan
---------------------
does not preclude the adoption by appropriate means of any other
incentive plan for employees.
(g) Plurals and Gender. Where appearing in the Plan,
------------------
masculine gender shall include the feminine and neuter genders,
and the singular shall include the plural, and vice versa, unless
the context clearly indicates a different meaning.
(h) Headings. The headings and sub-headings in this
--------
Plan are inserted for the convenience of reference only and are
to be ignored in any construction of the provisions hereof.
(i) Severability. In case any provision of this Plan
------------
shall be held illegal or void, such illegality or invalidity
shall not affect the remaining provisions of this Plan, but shall
be fully severable, and the Plan shall be construed and enforced
as if said illegal or invalid provisions had never been inserted
herein.
(j) Payments Due Missing Persons. The Corporation shall
----------------------------
make a reasonable effort to locate all persons entitled to
benefits under the Plan; however, notwithstanding any provisions
of this Plan to the contrary, if, after a period of one (1) year
from the date such benefits shall be due, any such persons
entitled to benefits have not been located, their rights under
the Plan shall stand suspended. Before this provision becomes
operative, the Corporation shall send a certified letter to all
such persons at their last known addresses advising them that
their rights under the Plan shall be suspended. Subject to all
applicable state laws, any such suspended amounts shall be held
by the Corporation for a period of one (1) additional year and
thereafter such amounts shall be forfeited and thereafter remain
the property of the Corporation.
(k) Liability and Indemnification. (i) Neither the
-----------------------------
Corporation nor any Parent or Subsidiary shall be responsible in
any way for any action or omission of the Committee, or any other
fiduciaries in the performance of their duties and obligations as
set forth in this Plan. Furthermore, neither the Corporation nor
any Parent or Subsidiary shall be responsible for any act or
omission of any of their agents, or with respect to reliance upon
advice of their counsel provided that the Corporation and/or the
appropriate Parent or Subsidiary relied in good faith upon the
action of such agent or the advice of such counsel.
(ii) Except for their own gross negligence or
willful misconduct regarding the performance of the duties
specifically assigned to them under, or their willful breach of
the terms of, this Plan, the Corporation, each Parent and
Subsidiary and the Committee shall be held harmless by the
Participants, former Participants, beneficiaries and their
representatives against liability or losses occurring by reason
of any act or omission. Neither the Corporation, any Parent or
Subsidiary, the Committee, nor any agents, employees, officers,
directors or shareholders of any of them, nor any other person
shall have any liability or responsibility with respect to this
Plan, except as expressly provided herein.
(l) Incapacity. If the Committee shall receive evidence
----------
satisfactory to it that a person entitled to receive payment of
any Plan Award is, at the time when such benefit becomes
payable, a minor, or is physically or mentally incompetent to
receive such Plan Award and to give a valid release thereof, and
that another person or an institution is then maintaining or has
custody of such person and that no guardian, committee or other
representative of the estate of such person shall have been duly
appointed, the Committee may make payment of such Plan Award
otherwise payable to such person to such other person or
institution, including a custodian under a Uniform Gifts to
Minors Act, or corresponding legislation (who shall be an adult,
a guardian of the minor or a trust company), and the release by
such other person or institution shall be a valid and complete
discharge for the payment of such Plan Award.
(m) Cooperation of Parties. All parties to this Plan
----------------------
and any person claiming any interest hereunder agree to perform
any and all acts and execute any and all documents and papers
which are necessary or desirable for carrying out this Plan or
any of its provisions.
(n) Governing Law. All questions pertaining to the
-------------
validity, construction and administration of the Plan shall be
determined in accordance with the laws of the State of New York.
(o) Nonguarantee of Employment or Consulting
----------------------------------------
Relationship. Nothing contained in this Plan shall be construed as
------------
a contract of employment (or as a consulting contract) between
the Corporation (or any Parent or Subsidiary), and any employee
or Participant, as a right of any employee or Participant to be
continued in the employment of or in a Consulting Relationship
with) the Corporation (or any Parent or Subsidiary), or as a
limitation on the right of the Corporation or any Parent or
Subsidiary to discharge any of its employees (or Consultants), at
any time, with or without cause.
(p) Notices. Each notice relating to this Plan shall be
-------
in writing and delivered in person or by certified mail to the
proper address. All notices to the Corporation or the Committee
shall be addressed to it at the Corporation's then principal
executive offices, Attn: Corporate Secretary. All notices to
Participants, former Participants, beneficiaries or other persons
acting for or on behalf of such persons shall be addressed to
such person at the last address for such person maintained in the
Committee's records.
(q) Written Agreements. Each Plan Award shall be
------------------
evidenced by a signed written agreement (the "Award Agreements")
between the Corporation and the Participant containing the terms
and conditions of the award.
SECTION VIII
AMENDMENT OR TERMINATION OF PLAN
The Board of Directors of the Corporation shall have
the right to amend, suspend or terminate the Plan at any time,
provided that no amendment shall be made which shall increase
the total number of shares of the Common Stock of the Corporation
which may be issued and sold pursuant to Incentive Stock Options,
reduce the minimum exercise price in the case of an Incentive
Stock Option or modify the provisions of the Plan relating to
eligibility with respect to Incentive Stock Options unless such
amendment is made by or with the approval of the stockholders
within 12 months of the effective date of such amendment, but
only if such approval is required by any applicable provision of
law. The Board of Directors of the Corporation shall also be
authorized to amend the Plan and the Options granted thereunder
to maintain qualification as "incentive stock options" within the
meaning of Section 422 of the Code, if applicable. Except as
otherwise provided herein, no amendment, suspension or
termination of the Plan shall alter or impair any Plan Awards
previously granted under the Plan without the consent of the
holder thereof.
SECTION IX
TERM OF PLAN
The Plan shall automatically terminate on the day
immediately preceding the tenth anniversary of the date the Plan
was adopted by the Board of Directors of the Corporation, unless
sooner terminated by such Board of Directors. No Plan Awards may
be granted under the Plan subsequent to the termination of the
Plan.
SECTION X
CLAIMS PROCEDURES
(a) Denial. If any Participant, former Participant or
------
beneficiary is denied any vested benefit to which he is, or
reasonably believes he is, entitled under this Plan, either in
total or in an amount less than the full vested benefit to which
he would normally be entitled, the Committee shall advise such
person in writing the specific reasons for the denial. The
Committee shall also furnish such person at the time with a
written notice containing (i) a specific reference to pertinent
Plan provisions, (ii) a description of any additional material or
information necessary for such person to perfect his claim, if
possible, and an explanation of why such material or information
is needed and (iii) an explanation of the Plan's claim review
procedure.
(b) Written Request for Review. Within 60 days of
--------------------------
receipt of the information stated in subsection (a) above, such
person shall, if he desires further review, file a written
request for reconsideration with the Committee.
(c) Review of Document. So long as such person's
------------------
request for review is pending (including the 60 day period in
subsection (b) above), such person or his duly authorized
representative may review pertinent Plan documents and may submit
issues and comments in writing to the Committee.
(d) Committee's Final and Binding Decision. A final and
--------------------------------------
binding decision shall be made by the Committee within 60 days of
the filing by such person of this request for reconsideration;
provided, however, that if the Committee, in its discretion,
------- -------
feels that a hearing with such person or his representative is
necessary or desirable, this period shall be extended for an
additional 60 days.
(e) Transmittal of Decision. The Committee's decision
-----------------------
shall be conveyed to such person in writing and shall (i) include
specific reasons for the decision, (ii) be written in a manner
calculated to be understood by such person and (iii) set forth
the specific references to the pertinent Plan provisions on which
the decision is based.
(f) Limitation on Claims. Notwithstanding any
--------------------
provisions of this Plan to the contrary, no Participant (nor the
estate or other beneficiary of a Participant) shall be entitled
to assert a claim against the Corporation (or against any Parent
or Subsidiary) more than three years after the date the
Participant (or his estate or other beneficiary) initially is
entitled to receive benefits hereunder.
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and
entered into effective as of February 6, 1997, by and between
Hollis-Eden, Inc., a Delaware corporation (the "Company"), and
Terren S. Peizer ("Executive"), and, for purposes of Section 6.3
only, Richard B. Hollis. The Company and Executive are
hereinafter collectively referred to as the "Parties," and may
individually be referred to as a "Party."
RECITALS
A. The Company desires assurance of the association and
services of Executive in order to retain Executive's experience,
skills, abilities, background and knowledge, and is willing to
engage Executive's services on the terms and conditions set forth
in this Agreement; and
B. Executive desires to be in the employ of the Company
and is willing to accept such an employment on the terms and
conditions set forth in this Agreement.
AGREEMENT
In consideration of the foregoing premises and the mutual
covenants herein contained, and for other good and valuable
consideration, the Parties, intending to be legally bound, agree
as follows:
1. EMPLOYMENT.
1.1 The Company hereby agrees to continue to employ
Executive, and Executive hereby accepts employment by the
Company, upon the terms and conditions set forth in this
Agreement, effective as of the date first set forth above
("Effective Date"), and terminating six (6) years from the
Effective Date.
1.2 Executive shall be the President and a director on the
Board of Directors ("Board") and shall serve in such other
capacity or capacities as the Board may from time to time
prescribe. Executive shall report directly to the Chairman of
the Board and Chief Executive Officer ("Chairman/CEO").
1.3 Executive shall do and perform all services, acts or
things necessary or advisable to manage and conduct the business
of the Company, provided, however, that at all times during his
employment Executive shall be subject to the direction and
policies from time to time established by the Board. Executive's
duties shall include, but not be limited to, overall management
of corporate finance assisting the Company with the closing of
the current merger, investor relations, management of corporate
financial assets, financial planning and influence on corporate
operations, corporate development and strategic planning,
assisting the company in commercializing the Company's core
technology, and assisting the Chairman of the Board in
strengthening and building a strong active Board of Directors.
1.4 Unless the Parties otherwise agree in writing, prior to
Executive's termination in accordance with this Agreement,
Executive shall perform the services he is required to perform
pursuant to this Agreement, reporting to the Company's offices
located at 808 S.W. Third Avenue, Suite 540, Portland, Oregon
97204, or, with the consent of the Executive, at any other place
at which the Company maintains an office; provided, however, that
the Company may from time to time reasonably require Executive to
travel temporarily to other locations in connection with the
Company's business. Executive will not be required to relocate to
Portland, Oregon.
2. LOYAL AND CONSCIENTIOUS PERFORMANCE; NONCOMPETITION.
2.1 During his employment by the Company, Executive shall
devote his full business employment , interest, abilities and
productive time to the proper and efficient performance of his
duties under this Agreement. Executive shall not be employed by
another company or receive compensation for employment from any
other sources.
2.2 During his employment by the Company, Executive shall
not engage in competition with the Company, either directly or
indirectly, in any manner or capacity, as adviser, principal,
agent, partner, officer, director, employee, member of any
association or otherwise, in any phase of the business of
developing, manufacturing and marketing of products which are in
the same field of use or which otherwise directly compete with
the products or proposed products of the Company; provided,
however, that ownership by Executive, as a passive investment, of
less than one percent (1%) of the outstanding shares of capital
stock of any corporation with one or more classes of its capital
stock listed on a national securities exchange or publicly traded
in the over-the-counter market shall not constitute a breach of
this paragraph.
2.3 The Executive will assist the Company to raise an
additional $10,000,000 within twelve (12) months of the Date of
the Initial Financing (as defined in Section 3.1 hereof), or
develop other financial strategies that are consistent with the
Company's best interest.
2.4 Executive and the Chairman/CEO shall jointly establish
Executive's annual goals and objectives for each fiscal year.
3. COMPENSATION OF EXECUTIVE.
3.1 At such time as the Company obtains additional
financing of an aggregate of at least Six Million Dollars
($6,000,000.00) from one or more transactions (the "Initial
Financing"), the Company shall pay Executive a minimum salary of
One Hundred and Seventy Five Thousand Dollars ($175,000.00) per
year ("Base Salary")beginning from the date such financing is
completed, payable in regular periodic payments in accordance
with Company policy. Such salary shall be prorated for any
partial year of employment on the basis of a 365-day fiscal year.
3.2 Executive's compensation may be changed from time to
time by mutual agreement of Executive and the Board.
3.3 All of Executive's compensation shall be subject to
customary withholding taxes and any other employment taxes as are
commonly required to be collected or withheld by the Company.
3.4 Executive shall, in the discretion of the Board and in
accordance with Company policy, be entitled to participate in
benefits under any employee benefit plan or arrangement made
available by the Company now or in the future to its executives
and key management employees.
3.5 Executive's performance shall be reviewed by the
Chairman/CEO and the Board on a periodic basis (not less than
once each fiscal year) and Chairman/CEO and the Board may, in
their sole discretion, award such bonuses to Executive as shall
be appropriate or desirable based on Executive's performance.
The Company agrees that Executive shall be reviewed within twelve
months of commencing employment hereunder.
3.6 The parties intend and agree that Executive will be
granted options to purchase capital stock of the Company. The
number of options to be granted has been determined by the
parties and shall be set forth in a separate stock option
agreement, attached as Exhibit A. As of the Effective Date of
this Agreement, the Company agrees to grant Executive two million
four hundred thousand (2,400,000) shares of the Company's common
stock. The exercise price per share of this option (the "Option")
shall be equal to $5.00 per share. Each option shall vest as to
four hundred thousand (400,000) shares following twelve (12)
continuous months of service with the Company beginning on the
date of grant and each consecutive year thereafter.
3.7 Executive shall be entitled to receive prompt
reimbursement of all reasonable expenses incurred by Executive in
performing Company services, including expenses related to
relocation, travel, entertainment, parking and business meetings.
Such expenses shall be accounted for in accordance with the
policies and procedures established by the Company.
4. TERMINATION BY COMPANY. Executive's employment with the
Company may be terminated by the Company under the following
conditions:
4.1 TERMINATION ON DEATH OR DISABILITY. This Agreement
shall terminate without notice upon the date of Executive's death
or the date when Executive becomes completely disabled as defined
in Section 4.1.1.
4.1.1 The term "completely disabled" as used in
this Agreement shall mean the inability of Executive to perform
the essential functions of his position under this Agreement by
reason of any incapacity, physical or mental, for a period of 180
continuous days, which the Board, based upon medical advice or an
opinion provided by a licensed physician acceptable to the Board,
determines that Executive is prevented from satisfactorily
performing the essential functions of his position for the
Company during a period of 180 continuous days.
4.2 TERMINATION FOR CAUSE. The Company may terminate
Executive's employment under this Agreement "for cause" ("For
Cause") by delivery of written notice to Executive specifying the
cause or causes relied upon for such termination, and by
providing Executive with ten (10) business days to cure.
Termination shall occur for purposes of this Section 4.2 on the
last day Executive fails to cure.
Grounds for the Company to terminate this Agreement For
Cause shall be limited to the occurrence of any of the following
events:
4.2.1 Executive is in material breach of Sections
2.1, 2.2, 7.1 and 7.2 of this Agreement;
4.2.2 Executive's engaging or in any manner
participating in any activity which is directly competitive with
or intentionally injurious to the Company or which violates any
provision of Section 7 of this Agreement;
4.2.3 Executive's commission of any fraud against
the Company or use or appropriation for his personal use or
benefit of any funds or properties of the Company not authorized
by the Board to be so used or appropriated; or
4.2.4 Executive's conviction of any crime involving
dishonesty or moral turpitude.
4.3 TERMINATION WITHOUT CAUSE. The Company may terminate
the Executive's employment without cause ("Without Cause") upon
delivery of written notice to the Executive at any time, which
shall specify the effective date of termination. Any notice of
termination given pursuant to this Section 4.3 shall effect
termination as of the date specified in such notice or, in the
event no such date is specified, on the last day of the month on
which such notice is delivered or deemed deliverable as provided
in Section 10 below.
5. VOLUNTARY TERMINATION BY EXECUTIVE.
5.1 The executive may terminate his employment voluntarily
by giving the Company 30 days advance notice in writing, at which
time the provisions of Section 6.2 shall apply.
6. COMPENSATION UPON TERMINATION.
6.1 DEATH OR DISABILITY. Upon termination of Executive's
employment pursuant to Section 4.1, Executive or his estate or
personal representative, as the case may be, shall be entitled to
receive Executive's base salary for a period of one (1) year
following the date of death or the date when Executive becomes
completely disabled.
6.2 FOR CAUSE OR VOLUNTARY TERMINATION BY EXECUTIVE. If
Executive's employment shall be terminated by the Company For
Cause or voluntarily by Executive, the Company shall pay
Executive his base salary through the date of termination at the
rate in effect at the time of the notice of termination, and the
Company shall thereafter have no further obligations to Executive
under this Agreement.
6.3 WITHOUT CAUSE. If the Company shall terminate
Executive's employment Without Cause, Executive shall be entitled
to continuation of his base salary for one year from the date of
termination with such base salary continuation to be at the rate
set forth in Section 3.1 or, as the case may be, at the rate of
Executive's then current base salary in effect as of the date of
termination. In addition, (A) in the event the date of
termination is on or after February 6, 1999, in addition to the
shares already vested, vesting for an additional 400,000 shares
shall be accelerated and (B) in the event the date of termination
is prior to February 6, 1999, (i) the Option's vesting shall be
accelerated to the extent necessary to entitle Executive to an
aggregate of 800,000 shares upon exercise of the Option, in the
manner and to the extent provided in the stock option agreement
attached hereto as Exhibit A, and (ii) Executive shall have the
right to purchase up to 200,000 shares from Richard B. Hollis at
a price of $5.00 per share.
7. CONFIDENTIAL INFORMATION; NONSOLICITATION.
7.1 Executive recognizes that his employment with the
Company will involve contact with information of substantial
value to the Company, which is not old and generally known in the
trade, and which gives the Company an advantage over its
competitors who do not know or use it, including but not limited
to, techniques, designs, drawings, processes, inventions,
developments, equipment, prototypes, sales and customer
information, and business and financial information relating to
the business, products, practices and techniques of the Company
(hereinafter referred to as "Confidential Information").
Executive will at all times regard and preserve as confidential
such Confidential Information obtained by Executive from whatever
source and will not, either during his employment with the
Company or thereafter, publish or disclose any part of such
Confidential Information in any manner at any time, or use the
same except on behalf of the Company, without the prior written
consent of the Company; provided, however, that Executive may
disclose Confidential Information in the best interest of the
Company with properly executed Company confidentiality or secrecy
agreements with the third party. As a condition of this
Agreement, Executive will sign and return a copy of the Company's
Secrecy Agreement, attached as Exhibit B.
7.2 While employed by the Company and for one (1) year
thereafter, the Executive agrees that, in order to protect the
Company's confidential and proprietary information from
unauthorized use, Executive will not, either directly or through
others, solicit or attempt to solicit (i) any employee,
consultant or independent contractor of the Company to terminate
his or her relationship with the Company in order to become an
employee, consultant or independent contractor to or for any
other person or business entity; or (ii) the business of any
customer, vendor or distributor of the Company which, at the time
of termination or one (1) year immediately prior thereto, was
listed on the Company's customer, vendor or distributor list.
8. SUCCESSORS. The Company shall require any successor
(whether direct or indirect, by purchase, merger, or
consolidation) to all or substantially all of the business and/or
assets of the Company, by agreement in form and substance
reasonably satisfactory to the Executive, to expressly assume and
agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if
no such succession had taken place.
9. ASSIGNMENT AND BINDING EFFECT. This Agreement shall be
binding upon and inure to the benefit of Executive and
Executive's heirs, executors, personal representatives, assigns,
administrators and legal representatives. Because of the unique
and personal nature of Executive's duties under this Agreement,
neither this Agreement nor any rights or obligations under this
Agreement shall be assignable by Executive. This Agreement shall
be binding upon and inure to the benefit of the Company and its
successors, assigns and legal representatives.
10. NOTICES. All notices or demands of any kind required or
permitted to be given by the Company or Executive under this
Agreement shall be given in writing and shall be personally
delivered (and receipted for) or mailed by certified mail, return
receipt requested, postage prepaid, addressed as follows:
If to the Company: Hollis-Eden, Inc.
808 S.W. Third Avenue, Suite 540
Portland, Oregon 97204.
With a copy to: Eric J. Loumeau, Esq.
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, California 92121
If to Executive: Terren S. Peizer
723 Pacific Coast Highway, Suite 322
Santa Monica, California 90402
With a copy to: Robert H. Platt, Esq.
Manatt, Phelps & Phillips, LLP
11355 W. Olympic Boulevard
Los Angeles, California 90064
Any such written notice shall be deemed received when personally
delivered or three (3) days after its deposit in the United
States mail as specified above. Either Party may change its
address for notices by giving notice to the other Party in the
manner specified in this section.
11. CHOICE OF LAW. This Agreement shall be construed and
interpreted in accordance with the laws of the State of
California, without regard to the conflict of laws provision
thereof.
12. INTEGRATION. This Agreement contains the complete, final
and exclusive agreement of the Parties relating to the subject
matter of this Agreement, and supersedes all prior oral and
written employment agreements or arrangements between the
Parties.
13. AMENDMENT. This Agreement cannot be amended or modified
except by a written agreement signed by Executive and the
Company.
14. WAIVER. No term, covenant or condition of this Agreement or
any breach thereof shall be deemed waived, except with the
written consent of the Party against whom the wavier in claimed,
and any waiver or any such term, covenant, condition or breach
shall not be deemed to be a waiver of any preceding or succeeding
breach of the same or any other term, covenant, condition or breach.
15. SEVERABILITY. The finding by a court of competent
jurisdiction of the unenforceability, invalidity or illegality of
any provision of this Agreement shall not render any other
provision of this Agreement unenforceable, invalid or illegal.
Such court shall have the authority to modify or replace the
invalid or unenforceable term or provision with a valid and
enforceable term or provision which most accurately represents
the parties' intention with respect to the invalid or
unenforceable term or provision.
16. INTERPRETATION; CONSTRUCTION. The headings set forth in
this Agreement are for convenience of reference only and shall
not be used in interpreting this Agreement. This Agreement has
been drafted by legal counsel representing the Company, but
Executive has been encouraged, and has consulted with, his own
independent counsel and tax advisors with respect to the terms of
this Agreement. The Parties acknowledge that each Party and its
counsel has reviewed and revised, or had an opportunity to review
and revise, this Agreement, and the normal rule of construction
to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of
this Agreement.
17. REPRESENTATIONS AND WARRANTIES. Executive represents and
warrants that, to the best of Executive's knowledge, he is not
restricted or prohibited, contractually or otherwise, from
entering into and performing each of the terms and covenants
contained in this Agreement, and that his execution and
performance of this Agreement will not violate or breach any
other agreements between Executive and any other person or
entity.
18. COUNTERPARTS. This Agreement may be executed in two
counterparts, each of which shall be deemed an original, all of
which together shall contribute one and the same instrument.
19. ARBITRATION. If any dispute arises regarding the
application, interpretation, or enforcement of this Agreement,
including fraud in the inducement, such dispute shall be resolved
by final and binding arbitration before one arbitrator at the
Judicial Artibration and Mediation Service in San Diego,
California.
20. ATTORNEYS' FEES AND COSTS. The prevailing party in any
dispute arising out of this Agreement, shall be entitled to
reimbursement by the losing party of all of its or his attorneys'
fees and costs including, but not limited to, arbitrator's fees
and expert's fees.
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement as
of the date first above written.
THE COMPANY:
HOLLIS-EDEN, INC.
By:
-------------------------------
RICHARD B. HOLLIS
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
EXECUTIVE:
---------------------------------
TERREN S. PEIZER
(FOR PURPOSES OF SECTION 6.3 ONLY):
---------------------------------
RICHARD B. HOLLIS
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Initial Acquisition Corp.
New York, New York
We hereby consent to the use in the Prospectus constituting
part of this Registration Statement of our report dated January
10, 1997, for the periods stated therein, relating to the
financial statements of Initial Acquisition Corp., which is
contained in that Prospectus.
We also consent to the reference to us under the caption
"Experts" in the Prospectus.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
New York, New York
February 10, 1997
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part
of this Amendment No. 1 to the Registration Statement on Form S-4
of Initial Acquisition Corp. of our report dated April 19, 1996
relating to the financial statements of Hollis-Eden, Inc., which
appears in such Prospectus. We also consent to the reference to
us under the heading "Experts" in such Prospectus.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Portland, Oregon
February 7, 1997
<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>
